e10vkza
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-K/A
(Amendment No. 2)
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2004
Or
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission file number 1-6402-1
Service Corporation International
(Exact name of registrant as specified in its charter)
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Texas
(State or other jurisdiction of
incorporation or organization)
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74-1488375
(I.R.S. employer
identification no.) |
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1929 Allen Parkway
Houston, Texas
(Address of principal executive offices)
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77019
(Zip code) |
Registrant’s telephone number, including area code: 713/522-5141
Securities registered pursuant to Section 12(b) of the Act:
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| Title of each class
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Name of each exchange on which registered |
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Common Stock ($1 par value)
Preferred Share Purchase Rights
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New York Stock Exchange
New York Stock Exchange |
Securities registered pursuant to Section 12(g) of the Act: None
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes
o No þ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation
S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. o
Indicate by check mark whether the registrant is an accelerated filer (as defined in the
Securities Exchange Act of 1934 Rule 12b-2). Yes þ No o
The aggregate market value of the common stock held by non-affiliates of the registrant
(assuming that the registrant’s only affiliates are its officers and directors) was $2,070,760,397
based upon a closing market price of $7.37 on June 30, 2004 of a share of common stock as reported
on the New York Stock Exchange — Composite Transactions Tape.
The number of shares outstanding of the registrant’s common stock as of March 7, 2005 was
309,972,343 (net of treasury shares).
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the registrant’s Proxy Statement in connection with its 2005 Annual Meeting of Shareholders (Part III)
Explanatory Note:
The Company has amended and
restated its 2004 Form 10-K/A (Amendment No. 1) filed April 7,
2005 to restate its consolidated financial statements as of December 31, 2004 and 2003 and for each
of the three years in the period ended December 31, 2004. In addition, the Company has restated
its selected financial data as of December 31, 2002, 2001 and 2000, and for each of the two years
in the period ended December 31, 2001, as included in Item 6. Selected Financial Data. The Company
has also restated its unaudited quarterly financial data for each of the interim periods of 2004
and 2003, as included in Note twenty-two of the consolidated financial statements. Included in
this Form 10-K/A (Amendment No. 2) are certain adjustments
to correct errors related to
(1) the Company’s recognition of income related to its preneed
funeral and cemetery trust accounts, (2) preneed funeral trust income that was previously
understated as a result of a point-of-sale system error, and
(3) the computation of gains and losses on certain asset
divestiture activities, including the write-off of certain
covenant-not-to-compete agreements which
should have been recognized in the Company’s 2002 consolidated financial statements. All
applicable amounts relating to this restatement have been reflected in the consolidated financial
statements and disclosed in the notes to the consolidated financial statements in this Form
10-K/A (Amendment No. 2). This Form 10-K/A (Amendment
No. 2) includes amounts related to the Company’s prior restatement
of its consolidated financial statements and financial statement
schedule which was contained in the Company’s 2004 Form 10-K filing, as
amended on April 7, 2005 (Amendment No. 1).
2
SERVICE CORPORATION INTERNATIONAL
INDEX
3
PART I
ITEM 1. Business.
General
At December 31, 2004, Service Corporation International (SCI or the Company) owned and
operated 1,216 funeral service locations and 400 cemeteries. Complementary to our funeral
operations, we own and operate Kenyon International Emergency Services, a disaster response company
that engages in mass fatality and emergency response services.
Our 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 at need funerals, including the use of funeral facilities and
motor vehicles, and preparation and embalming services. Funeral related merchandise (including
caskets, burial vaults, cremation receptacles, flowers and other ancillary products and services)
is sold at funeral service locations. Certain funeral service locations contain crematoria. We sell
preneed funeral services whereby a customer contractually agrees to the terms of a funeral to be
performed in the future. Our 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.
During the first quarter of 2004, we sold our funeral operations in France and subsequently
purchased a 25% equity interest in the acquiring entity. We sold our minority interest investment
in our United Kingdom operations in the second quarter of 2004. For additional information
regarding these transactions, see note twenty to the consolidated financial statements in Item 8 of
this amended Form 10-K/A. During the first quarter of 2005, we disposed of our operations in
Argentina and Uruguay, which were accounted for as discontinued operations at December 31, 2004.
See note twenty-one to the consolidated financial statements in Item 8 of this amended Form 10-K/A
for additional information related to discontinued operations.
SCI was incorporated in Texas in July of 1962. Our principal corporate offices are located at
1929 Allen Parkway, Houston, Texas 77019 and our telephone number is (713) 522-5141. Our website
is http://www.sci-corp.com. We make available free of charge, on or through our website,
our annual, quarterly and current reports and any amendments to those reports, as soon as
reasonably practicable after electronically filing such reports with the Securities and Exchange
Commission.
Each of our Board’s standing committee charters, our Corporate Governance Guidelines, our Code
of Ethics for Board Members, and our Code of Conduct for Officers and Employees are available, free
of charge, through our website or, upon request, in print. We will post on our internet website all
waivers to or amendments of our Code of Conduct for Officers and Employees, which are required to
be disclosed by applicable law and rules of the New York Stock Exchange listing standards.
Information contained on our website is not part of this report.
Funeral and Cemetery Operations
General
The funeral and cemetery operations consist of our funeral service locations, cemeteries,
crematoria and related businesses. In 2004, our operations were organized into a North America
division, which represents the United States and Canada, a European division primarily consisting
of operations in France and Germany and an Other Foreign division relating to operations in South
America and Singapore. See note seventeen to the consolidated financial statements in Item 8 of
this Form 10-K/A (Amendment No. 2) for financial information about our business segments.
Our operations in North America are organized into 32 major markets and 42 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 communication between the field and corporate offices, and serve as liaisons
for implementation of policies and procedures.
4
The death care industry in North America is characterized by a large number of locally owned,
independent operations. In order to be successful, we believe our funeral service locations and
cemeteries must maintain good reputations and high professional standards in the industry, as well
as offer attractive products and services at competitive prices. We believe we have an unparalleled
network of funeral service locations and cemeteries that offer high quality products and services
at prices that are competitive with local competing funeral homes, cemeteries, and retail
locations.
We have multiple funeral service locations and cemeteries in a number of metropolitan areas.
Within individual metropolitan areas, the funeral service locations and cemeteries operate under
various names as most operations were acquired as existing businesses. Some of our international
funeral service locations operate under certain brand names specific for a general area or country.
We have branded our funeral operations in North America under the name Dignity
Memorial®. A national brand name is unique to the death care industry in North
America and we believe this gives us a strategic advantage in the industry. While this branding
process is intended to emphasize our seamless national network of funeral service locations and
cemeteries, the original names associated with acquired operations, and their inherent goodwill and
heritage, will generally remain the same. For example, Geo. H. Lewis & Sons Funeral Directors is
now Geo. H. Lewis & Sons Funeral Directors, a Dignity Memorial® provider.
In the death care industry, there has been a growing trend in the number of cremations
performed in North America as an alternative to traditional funeral service dispositions. The west
coast of the United States, Florida and Arizona have the highest concentration of cremation
consumers in North America. Cremation services usually result in lower revenue and gross profit
dollars than traditional funeral services. In North America during 2004, 40.0% of all funeral
services we performed were cremation cases, compared to 39.0% performed in 2003. We have expanded
our cremation memorialization products and services in several North America markets, which has
resulted in higher average sales for cremation cases compared to historical levels. We also
continue to own and operate National Cremation® Service (NCS), our nationally
branded cremation company with multiple locations in 16 states and Ontario, Canada at December 31,
2004.
Prior to 1999, we focused on the acquisition and consolidation of independent funeral homes
and cemeteries in the fragmented death care industry in North America. During the 1990’s, we also
expanded our operations through acquisitions in Europe, Australia, South America and the Pacific
Rim. At one time, our network consisted of more than 4,500 businesses in 20 countries on 5
continents. During the mid to late 1990’s, the acquisition market became extremely competitive
resulting in increased prices for acquisitions and substantially reduced returns on invested
capital. In 1999, we significantly reduced the level of acquisition activity and focused on
identifying and addressing non-strategic or underperforming businesses. This focus resulted in the
divestiture of several North America and international operations. During 2002 and 2001, we
completed joint ventures of operations in Australia, United Kingdom, Spain and Portugal. In 2003,
we sold our equity investment in our operations in Australia, Spain and Portugal. During the first
quarter of 2004, we completed a joint venture of our funeral operations in France. We sold our
minority interest equity investment in the United Kingdom in the second quarter of 2004. During the
first quarter of 2005, we divested of all of our operations in Argentina and Uruguay. We may pursue
discussions with various third parties concerning the sale or joint venture of our remaining
international operations as we intend to focus our efforts on operating a core business of high
quality funeral service locations and cemeteries in North America.
Funeral Service Locations
Our 1,216 funeral service locations provide all professional services relating to funerals,
including the use of funeral facilities, motor vehicles, and preparation and embalming services.
Funeral service locations sell caskets, burial vaults, cremation receptacles, flowers, burial
garments, and other ancillary products and services. Primary costs associated with our funeral
service locations include labor, facility costs, vehicle costs and cost of merchandise. Our funeral
service locations generally experience a greater demand for services in the winter months primarily
related to higher incidents of deaths from pneumonia and influenza.
In addition to selling products and services to client families at the time of need, we also
sell preneed funeral services in most of our service markets. A preneed funeral arrangement is a
means through which a customer agrees to the terms of a funeral to be performed in the future. All
or a portion of the funds collected from preneed funeral contracts are placed into trust accounts,
pursuant to applicable law. Alternatively, where allowed, customers may choose to purchase a life
insurance or annuity policy from third party insurance companies to fund their preneed funerals. In
certain situations and pursuant to applicable laws, we will post a surety bond as financial
assurance for a certain amount of the preneed funeral contract in lieu of placing certain funds in
trust accounts. See the Financial Assurances section included in Financial Condition, Liquidity and
Capital Resources in Item 7 of this amended Form 10-K/A for further details on our practice of
posting such surety bonds. For additional information regarding preneed funeral activities, see the
Preneed Funeral and Cemetery Activities section in Financial Condition, Liquidity and Capital
Resources in Item 7 and notes three, four and five to the consolidated financial statements in Item
8 of this amended Form 10-K/A.
5
Cemeteries
Our 400 cemeteries sell interment rights associated with cemetery properties such as mausoleum
spaces, lots and lawn crypts, and sell cemetery merchandise such as stone and bronze memorials,
burial vaults, caskets and cremation memorialization products. Our 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. Primary costs associated with our cemetery operations include labor costs, selling
costs, cost of merchandise (including cemetery property), and maintenance costs.
Cemetery sales are often made on a preneed basis pursuant to installment contracts providing
for monthly payments. A portion of the proceeds from cemetery contracts is generally required by
law to be paid into perpetual care trust funds. Earnings from perpetual care trust funds are used
to defray the maintenance costs of cemeteries. Additionally, all or a portion of the proceeds from
the sale of preneed cemetery merchandise and services may be required by various state laws to be
paid into merchandise and services trusts until the merchandise is delivered or the service is
provided. In certain situations and pursuant to applicable laws, we will post a surety bond as
financial assurance for a certain amount of the preneed cemetery contract in lieu of placing
certain funds into trust accounts. See the Financial Assurances section included in Financial
Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K/A (Amendment No. 2) for further
details on the practice of posting such surety bonds. For additional information regarding cemetery
preneed activities, see the Preneed Funeral and Cemetery Activities section in Financial Condition,
Liquidity and Capital Resources in Item 7 of this Form 10-K/A (Amendment No. 2) and notes three, four and six
to the consolidated financial statements in Item 8 of this Form 10-K/A (Amendment No. 2).
Combined Funeral Service Locations and Cemeteries
We own 189 funeral service/cemetery combination locations in which a funeral service location
is physically located within or adjoining an SCI owned cemetery. Combination locations allow
certain facility, personnel, and equipment costs to be shared between the funeral service location
and cemetery and typically have a higher gross margin than if the funeral and cemetery operations
were operated separately. Combination locations also create synergies between funeral and cemetery
sales force personnel and give consumers added convenience to purchase both funeral and cemetery
products and services at a single location.
Employees
At December 31, 2004, we employed 13,939 (12,535 in North America) individuals on a full time
basis and 6,659 (6,637 in North America) individuals on a part time basis. Of the full time
employees, 13,410 were employed in the funeral and cemetery operations and 529 were employed in
corporate or other overhead activities and services. All eligible employees in the United States
who so elect are covered by SCI’s group health and life insurance plans. Eligible employees in the
United States are participants in retirement plans of SCI or various subsidiaries, while
international employees are covered by other SCI (or SCI subsidiary) defined or government mandated
benefit plans. Approximately 5% of our employees in North America are represented by unions.
Although labor disputes are experienced from time to time, relations with employees are generally
considered favorable.
Regulation
Our operations are subject to regulations, supervision and licensing under numerous foreign,
federal, state and local laws, ordinances and regulations, including extensive regulations
concerning trust funds, preneed sales of funeral and cemetery products and services and various
other aspects of our business. We comply in all material respects with the provisions of such laws,
ordinances and regulations. Since 1984, we have operated in the United States under the Federal
Trade Commission (FTC) comprehensive trade regulation rule for the funeral industry. The rule
contains requirements for funeral industry practices, including extensive price and other
affirmative disclosures and imposes mandatory itemization of funeral goods and services. From time
to time in connection with our former strategy of growth through acquisitions, we entered into
consent orders with the FTC that required us to dispose of certain operations in order to proceed
with such acquisitions, or limited our ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a material adverse effect on our
operations.
ITEM 2. Properties.
Our corporate headquarters are located at 1929 Allen Parkway, Houston, Texas 77019. A
wholly-owned subsidiary of SCI owns an undivided one-half interest in the building and parking
garage. The other undivided one-half interest is owned by an unrelated third party. We plan to
acquire the other one-half interest in the building at the end of the lease in July 2005 for $2
million. The property consists of approximately 127,000 square feet of office space and 185,000
square feet of parking space. We lease all of the office space in the building for $59,000 per
month and pay all operating expenses. One half of the rent is paid to the wholly-owned subsidiary
and the other half is paid to the owners of the remaining undivided one-half interest. We own and
utilize two additional buildings located in Houston, Texas for corporate activities containing a
total of approximately 207,000 square feet of office space.
6
At December 31, 2004, we owned approximately 82% of the real estate and buildings used by our
1,216 funeral service locations, 400 cemeteries and 145 crematoria, and 18% of such facilities were
leased. In addition, we leased two aircraft pursuant to cancelable operating leases. At December
31, 2004, we operated 6,066 vehicles, of which 15% were owned and 85% were leased. For additional
information regarding leases, see the Contractual, Commercial and Contingent Commitments section in
Financial Condition, Liquidity and Capital Resources in Item 7 and note fourteen to the
consolidated financial statements in Item 8 of this Form 10-K/A (Amendment No. 2).
At December 31, 2004, our 400 cemeteries contained a total of approximately 28,563 acres, of
which approximately 57% was developed.
The specialized nature of our businesses requires that our facilities be well-maintained and
kept in good condition and we believe that these standards are being met.
The following table provides the number of SCI funeral homes and cemeteries by state
and country as of December 31, 2004:
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Number of |
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Number of |
| Country |
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funeral homes |
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cemeteries |
United States
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Alabama |
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31 |
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16 |
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Alaska |
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7 |
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2 |
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Arizona |
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27 |
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10 |
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Arkansas |
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8 |
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5 |
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California |
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110 |
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35 |
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Colorado |
|
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29 |
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11 |
|
Connecticut |
|
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17 |
|
|
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0 |
|
District of Columbia |
|
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1 |
|
|
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0 |
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Florida |
|
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124 |
|
|
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43 |
|
Georgia |
|
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24 |
|
|
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12 |
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Hawaii |
|
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2 |
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|
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2 |
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Illinois |
|
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57 |
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17 |
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Indiana |
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25 |
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9 |
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Iowa |
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7 |
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4 |
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Kansas |
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9 |
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4 |
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Kentucky |
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16 |
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5 |
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Louisiana |
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27 |
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5 |
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Maine |
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17 |
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0 |
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Maryland |
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13 |
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11 |
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Massachusetts |
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31 |
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0 |
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Michigan |
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17 |
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12 |
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Minnesota |
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7 |
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4 |
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Mississippi |
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11 |
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2 |
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Missouri |
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25 |
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8 |
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Nebraska |
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4 |
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0 |
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New Hampshire |
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3 |
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0 |
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New Jersey |
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23 |
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0 |
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New Mexico |
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5 |
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1 |
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New York |
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62 |
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0 |
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North Carolina |
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28 |
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15 |
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Ohio |
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18 |
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14 |
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Oklahoma |
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15 |
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8 |
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Oregon |
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24 |
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12 |
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Pennsylvania |
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17 |
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25 |
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Rhode Island |
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1 |
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0 |
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South Carolina |
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2 |
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4 |
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South Dakota |
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2 |
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0 |
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Tennessee |
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20 |
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12 |
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Texas |
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132 |
|
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45 |
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Utah |
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5 |
|
|
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3 |
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Vermont |
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1 |
|
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0 |
|
Virginia |
|
|
17 |
|
|
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12 |
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Washington |
|
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23 |
|
|
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9 |
|
West Virginia |
|
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4 |
|
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6 |
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Wisconsin |
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12 |
|
|
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0 |
|
7
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Number of |
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Number of |
| Country |
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funeral homes |
|
cemeteries |
Canada
|
|
|
|
|
|
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|
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Alberta |
|
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15 |
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1 |
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British Columbia |
|
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23 |
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|
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5 |
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New Brunswick |
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5 |
|
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0 |
|
Nova Scotia |
|
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5 |
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0 |
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Ontario |
|
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29 |
|
|
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0 |
|
Quebec |
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|
49 |
|
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0 |
|
Saskatchawan |
|
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4 |
|
|
|
1 |
|
|
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|
|
|
|
|
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|
Argentina |
|
|
5 |
(1) |
|
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5 |
(1) |
Chile |
|
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0 |
|
|
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3 |
|
Germany |
|
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17 |
|
|
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0 |
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Singapore |
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4 |
|
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0 |
|
Uruguay |
|
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0 |
|
|
|
2 |
(1) |
|
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Total |
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1,216 |
|
|
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400 |
|
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|
|
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| (1) |
|
These businesses were sold in February 2005. |
ITEM 3. Legal Proceedings.
Information regarding legal proceedings is set forth in note fourteen to the consolidated
financial statements in Item 8 of this Form 10-K/A (Amendment No. 2).
ITEM 4. Submission of Matters to a Vote of Security Holders.
None.
EXECUTIVE OFFICERS OF THE COMPANY
Pursuant to General Instruction G to Form 10-K, the information regarding executive officers
of the Company called for by Item 401 of Regulation S-K is hereby included in Part I of this
report.
The following table sets forth as of March 14, 2005 the name and age of each executive officer
of the Company, the office held, and the date first elected an officer.
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Year First |
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Became |
| Officer Name |
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Age |
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Position |
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Officer(1) |
R. L. Waltrip |
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74 |
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Chairman of the Board |
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1962 |
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Thomas L. Ryan |
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39 |
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President and Chief Executive Officer |
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1999 |
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Michael R. Webb |
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46 |
|
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Executive Vice President and Chief Operating Officer |
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1998 |
|
Jeffrey E. Curtiss |
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56 |
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Senior Vice President Chief Financial Officer and Treasurer |
|
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2000 |
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J. Daniel Garrison |
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53 |
|
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Senior Vice President Operations Support |
|
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1998 |
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Stephen M. Mack |
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53 |
|
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Senior Vice President Middle Market Operations |
|
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1998 |
|
James M. Shelger |
|
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55 |
|
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Senior Vice President General Counsel and Secretary |
|
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1987 |
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Christopher H. Cruger |
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30 |
|
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Vice President Business Development |
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2005 |
|
W. Cardon Gerner |
|
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50 |
|
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Vice President Accounting |
|
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1999 |
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Jane Jones |
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49 |
|
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Vice President Human Resources |
|
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2005 |
|
Albert R. Lohse |
|
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44 |
|
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Vice President Corporate Governance |
|
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2004 |
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Elisabeth G. Nash |
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44 |
|
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Vice President Continuous Process Improvement |
|
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2004 |
|
Donald R. Robinson |
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47 |
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Vice President Supply Chain Management |
|
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2005 |
|
Eric D. Tanzberger |
|
|
36 |
|
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Vice President and Corporate Controller |
|
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2000 |
|
Sumner J. Waring, III |
|
|
36 |
|
|
Vice President Major Market Operations |
|
|
2002 |
|
|
|
|
| (1) |
|
Indicates the year a person was first elected as an officer although there
were subsequent periods when certain persons ceased being officers of the Company. |
8
Unless otherwise indicated below, the persons listed above have been executive officers or
employees for more than five years.
Mr. Waltrip is the founder, Chairman of the Company, and a licensed funeral director. He grew
up in his family’s funeral business and assumed management of the firm in the 1950s after earning a
Bachelor’s degree in Business Administration from the University of Houston. He began buying
additional funeral homes in the 1960s, achieving cost efficiencies by pooling their resources. At
the end of 2004, the network he began had grown to include more than 1,700 funeral service
locations, cemeteries and crematoria. Mr. Waltrip took the Company public in 1969. He has provided
leadership to the Company for over 40 years.
Mr. Ryan joined the Company in June 1996 and served in a variety of financial management roles
within the Company. In February 1999, Mr. Ryan was promoted to Vice President International
Finance. In November 2000, he was promoted to Chief Executive Officer of European Operations based
in Paris, France. In July 2002, Mr. Ryan was appointed President and Chief Operating Officer. In
February 2005, he was promoted to Chief Executive Officer. Prior to joining the Company, Mr. Ryan
was a Certified Public Accountant with Coopers & Lybrand L.L.P. for more than five years. Mr. Ryan
is a Certified Public Accountant and holds a Bachelor of Business Administration degree from the
University of Texas-Austin.
Mr. Webb joined the Company in 1991 when it acquired Arlington Corporation, a regional funeral
and cemetery consolidator, where he was then Chief Financial Officer. Prior to joining Arlington
Corporation, Mr. Webb held various executive financial and development roles at Days Inns of
America and Telemundo Group, Inc. In 1993, Mr. Webb joined the Company’s corporate development
group, which he later led on a global basis before accepting operational responsibility for the
Company’s Australian and Hispanic businesses. Most recently, Mr. Webb has led the efforts to reduce
overhead costs and improve business and financial processes. Mr. Webb was named Executive Vice
President in July 2002. In February 2005, he was promoted to Chief Operating Officer. He is a
graduate of the University of Georgia, where he earned a Bachelor of Business Administration
degree.
Mr. Curtiss joined the Company as Senior Vice President and Chief Financial Officer in January
2000. In August 2002, Mr. Curtiss’ responsibilities changed to include the responsibilities of
Treasurer of the Company. From January 1992 until July 1999, Mr. Curtiss served as Senior Vice
President and Chief Financial Officer of Browning-Ferris Industries, a waste services company. Mr.
Curtiss attended the University of Nebraska, Lincoln, where he earned Bachelor of Science in
Business Administration and Doctor of Jurisprudence degrees. He also holds a Master of Legal
Letters degree in taxation from Washington University in St. Louis, Missouri. Mr. Curtiss is also a
Certified Public Accountant.
Mr. Garrison joined the Company in 1978 and worked in a series of management positions until
he was promoted to President of the Southeastern Region in 1992. In 1998, Mr. Garrison was promoted
to Corporate Vice President in charge of operations outside North America. In 2000, Mr. Garrison
was promoted to Vice President North American Cemetery Operations. Mr. Garrison was promoted to
Vice President Operations Services in August 2002. He served in this position until assuming his
current position as Senior Vice President Operations Support in February 2005. Mr. Garrison is an
Administrative Management graduate of Clemson University.
Mr. Mack joined the Company in 1973 as a resident director after graduating from Farmingdale
State University of New York. He became Vice President of the Eastern Region in 1987 and Regional
President in 1992. Mr. Mack was appointed Corporate Vice President in 1998 and then promoted to
Senior Vice President in 2002. Mr. Mack was promoted to Senior Vice President Eastern Operations in
August 2002 and assumed the office of Senior Vice President Middle Market Operations in November
2003.
Mr. Shelger joined the Company in 1981 when it acquired IFS Industries, a regional funeral and
cemetery consolidator, where he was then General Counsel. Mr. Shelger subsequently served as
counsel for the cemetery division until 1991, when he was appointed General Counsel. Mr. Shelger
earned a Bachelor of Science degree in Business Administration from the University of Southern
California in Los Angeles and a Juris Doctor from the California Western School of Law in San
Diego.
Mr. Cruger oversees Corporate Development and the Dignity Memorial®
affiliate network of independent funeral homes. He initially served SCI as a financial analyst in
the corporate development department from 1996 until 1999, when he left to become Manager of
Financial Analysis for R. H. Donnelley Corporation. During 2000, he became Vice President of
BestHalf.com, an internet company dedicated to senior citizen issues, before returning to SCI as
Director of European Corporate Development in France. Since 2003, he served as Managing Director of
Corporate Development. In February 2005, he was promoted to Vice President of Business Development.
Mr. Cruger graduated from Lehigh University with a Bachelor of Science in Finance.
Mr. Gerner joined the Company in January 1999 in connection with the acquisition of Equity
Corporation International (ECI) and in March 1999 was promoted to Vice President Corporate
Controller. In August 2002, Mr. Gerner’s responsibilities and position changed to Vice President
Accounting. Before the acquisition, Mr. Gerner had been Senior Vice President and Chief Financial
Officer of ECI since March 1995. Prior thereto, Mr. Gerner was a partner with Ernst & Young LLP.
Mr. Gerner graduated with honors from the University of Texas-Austin, with a Bachelor of Business
Administration in Accounting. Mr. Gerner is also a Certified Public Accountant.
9
Mrs. Jones joined SCI in 2003 from Dynegy, Inc., where she served as Vice President of Total
Rewards. She oversees human resources, training and education, and payroll and commission services
– activities that assist approximately 20,000 employees in North America. Mrs. Jones was promoted
to Vice President Human Resources in February 2005. A native of Bonham, Texas, she holds a
Bachelors of Business Administration degree in Accounting with a minor in Finance from Southern
Methodist University. She is a Certified Compensation Professional and is active in professional
organizations that include World at Work and the Society for Human Resources Management.
Mr. Lohse joined SCI in 2000 as Managing Director of litigation and has been involved in the
resolution of major litigation issues for the Company. In 2004, Mr. Lohse was promoted to Vice
President of Corporate Governance. Before joining the Company, Mr. Lohse was Managing Partner at
McDade, Fogler, Maines & Lohse where he conducted a general civil trial practice. Prior to that, he
practiced tort and commercial litigation at Fulbright & Jaworski. Mr. Lohse received a Bachelor of
Business Administration degree from the University of Texas and a Juris Doctor from the University
of Houston Law Center.
Ms. Nash joined SCI in 2002 as Managing Director of Strategic Planning and Process
Improvement. Her primary responsibilities include improving operating systems; reducing overhead
costs; and identifying and assisting in the implementation of initiatives to improve operating
profit margins and cash flow. In 2004, Ms. Nash was promoted to Vice President of Continuous
Process Improvement. Prior to joining SCI, Ms. Nash worked for the Pennzoil Corporation and held
various senior management accounting and financial positions. She is a graduate of Texas A&M
University where she received a Bachelor of Business Administration degree in Accounting.
Mr. Robinson joined SCI in 1996 as Director of Procurement from Marathon Oil Company, where he
spent 16 years in a variety of procurement, logistics and information technology positions. Most
recently, he has been Managing Director of Business Support Services, a position in which he has
overseen fleet management and office services; voice services, travel and shipping services; and
supply chain and purchasing activities. In February 2005, he was promoted to Vice President of
Supply Chain Management. Mr. Robinson holds a Bachelors of Science degree in Business
Administration with a minor in Computer Service from Taylor University in Upland, Indiana.
Mr. Tanzberger joined the Company in August 1996 as Manager of Budgets & Financial Analysis.
Since then, Mr. Tanzberger has served as Vice President of Operations/Western Division, Director of
Investor Relations and Assistant Corporate Controller. Mr. Tanzberger was promoted to Vice
President Investor Relations and Assistant Corporate Controller in January 2000, and to Corporate
Controller in August 2002. Prior to joining the Company, Mr. Tanzberger was Assistant Corporate
Controller at Kirby Marine Transportation Corporation, an inland waterway barge and tanker company,
from January through August 1996. Prior thereto, he was a Certified Public Accountant with Coopers
& Lybrand L.L.P. for more than five years. Mr. Tanzberger is a Certified Public Accountant and a
graduate of the University of Notre Dame, where he earned a Bachelor of Business Administration
degree.
Mr. Waring, a licensed funeral director, joined the Company as an Area Vice President in 1996
when the Company merged with his family’s funeral business. Mr. Waring was appointed Regional
President of the Northeast Region in 1999 and was promoted to Regional President of the Pacific
Region in September 2001. Mr. Waring was promoted to Vice President Western Operations in August
2002 and assumed the office of Vice President Major Market Operations in November 2003. Mr. Waring
holds a Bachelor’s degree in Business Administration from Stetson University in Deland, Florida, a
degree in Mortuary Science from Mt. Ida College and a Masters of Business Administration degree
from the University of Massachusetts Dartmouth.
Each officer of the Company is elected by the Board of Directors and holds their office until
a successor is elected and qualified or until earlier death, resignation or removal in the manner
prescribed in the Bylaws of the Company. Each officer of a subsidiary of the Company is elected by
the subsidiary’s board of directors and holds their office until a successor is elected and
qualified or until earlier death, resignation or removal in the manner prescribed in the Bylaws of
the Subsidiary.
PART II
ITEM 5. Market for the Company’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities.
Our common stock has been traded on the New York Stock Exchange since May 14, 1974. On
December 31, 2004, there were 6,105 holders of record of our common stock. At December 31, 2004, we
had 323,225,352 shares outstanding, net of treasury shares.
In October 1999, we suspended payment of regular quarterly cash dividends on our outstanding
common stock in order to focus on improving cash flow and reducing existing debt. On February 10,
2005, our Board of Directors approved the initiation of a quarterly cash dividend of $.025 per
common share. The first dividend is payable on April 29, 2005 to shareholders of record at April
15, 2005. While we intend to pay regular quarterly cash dividends for the foreseeable future, all
subsequent dividends are subject to final determination by the Board of Directors of SCI each
quarter after its review of our financial performance.
10
The table below shows our quarterly high and low common stock prices for the two years ended
December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
High |
|
|
Low |
|
|
High |
|
|
Low |
|
First quarter |
|
$ |
7.64 |
|
|
$ |
5.48 |
|
|
$ |
3.82 |
|
|
$ |
2.78 |
|
Second quarter |
|
|
7.69 |
|
|
|
7.03 |
|
|
|
4.24 |
|
|
|
2.67 |
|
Third quarter |
|
|
7.30 |
|
|
|
5.90 |
|
|
|
4.95 |
|
|
|
3.75 |
|
Fourth quarter |
|
|
7.45 |
|
|
|
6.18 |
|
|
|
5.58 |
|
|
|
4.45 |
|
On August 27, 2004, we changed our New York Stock Exchange ticker symbol for our common stock
from SRV to SCI. Options in our common stock are traded on the Philadelphia Stock Exchange under
the symbol SCI.
For equity compensation plan information, see Part III of this report.
On August 16, 2004, we announced a share repurchase program authorizing the investment of up
to $100 million to repurchase our common stock. On November 10, 2004, we announced an increase in
the share repurchase program authorizing the investment of up to an additional $100 million to
repurchase our common stock. Pursuant to the program, we have repurchased shares of our common
stock as set forth in the table below. As of December 31, 2004, these purchases totaled $110.3
million.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Issuer purchases of equity securities |
|
| |
|
(a) |
|
|
(b) |
|
|
(c) |
|
|
(d) |
|
| |
|
|
|
|
|
|
|
|
|
Total number |
|
|
Dollar value of |
|
| |
|
|
|
|
|
|
|
|
|
of shares |
|
|
shares that |
|
| |
|
Total |
|
|
|
|
|
|
purchased as |
|
|
may yet be |
|
| |
|
number of |
|
|
Average |
|
|
part of publicly |
|
|
purchased |
|
| |
|
shares |
|
|
price paid |
|
|
announced |
|
|
under the |
|
| Period |
|
purchased |
|
|
per share |
|
|
programs |
|
|
programs |
|
October 1, 2004 – October 31, 2004 |
|
|
3,908,400 |
|
|
$ |
6.3029 |
|
|
|
3,908,400 |
|
|
$ |
40,554,201 |
|
November 1, 2004 – November 30, 2004 |
|
|
1,130,760 |
|
|
$ |
6.8384 |
|
|
|
1,130,760 |
|
|
$ |
132,821,585 |
|
December 1, 2004 – December 31, 2004 |
|
|
6,074,712 |
|
|
$ |
7.0916 |
|
|
|
6,074,712 |
|
|
$ |
89,741,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
11,113,872 |
|
|
$ |
6.7885 |
|
|
|
11,113,872 |
|
|
$ |
89,741,915 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsequent to December 31, 2004, we announced an increase in the share repurchase program
authorizing the investment of up to an additional $100 million to repurchase our common stock for
an aggregate of $300 million. From January 1, 2005 to March 31, 2005, we repurchased 14.7 million
shares for a total cost of $103.5 million. As of March 31, 2005, the remaining dollar value of
shares that may yet be purchased under our share repurchase programs was approximately $86 million.
ITEM 6. Selected Financial Data.
The table below contains selected consolidated financial data for the years ended December 31,
2000 through December 31, 2004.
We have amended and restated herein our previously filed
2004 Form 10-K/A (Amendment No. 1) filed on April 7,
2005 to correct errors related to (1) the recognition
of income related to preneed funeral and cemetery trust accounts,
(2) preneed funeral trust income that was previously understated
as a result of a point-of-sale system error, and (3) the
computation of gains and losses on certain asset divestiture
activities, including the write-off of certain
covenant-not-to-compete agreements which should have been recognized
in the Company’s 2002 consolidated financial statements. In
connection with this restatement, we restated our
previously reported financial statements and selected financial data for each of the five fiscal years ended December 31,
2004. All applicable amounts related to these restatements are reflected in the selected
consolidated financial data below. See Item 7 Management’s Discussion and Analysis of Financial
Condition and Results of Operations and notes two and twenty-two to the consolidated financial
statements in Item 8 of Form 10-K/A (Amendment
No. 2) for details of these restatements. The statement of
operations
data also includes reclassifications of certain other items to conform to current period presentations with no impact on net
income or financial position. In the second quarter of 2004, we committed to a plan to divest our
existing funeral and cemetery operations in Argentina and Uruguay. Subsequent to December 31, 2004,
we sold our businesses in Argentina and Uruguay. These operations are classified as
discontinued operations for all periods presented. In the first quarter of 2004, 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 of the Company. Therefore, we have removed
from our consolidated balance sheet amounts relating to insurance funded preneed funeral contracts
for all periods presented. The data set forth should be read in conjunction with our consolidated
financial statements and accompanying notes to the consolidated financial statements included in
this Form 10-K/A (Amendment No. 2). This historical information is not necessarily indicative of the results
to be expected in the future.
In 2002, we adopted Statement of Financial Accounting Standards (SFAS) No. 142, “Goodwill and
Other Intangible Assets” (SFAS 142). SFAS 142 addresses accounting for goodwill and other
intangible assets and redefines useful lives, amortization periods and impairment of goodwill.
Under the pronouncement, goodwill is no longer amortized, but is tested for impairment annually by
assessing the fair value of reporting units, generally one level below reportable segments. As a
result of the adoption of SFAS 142, we
11
recognized a non-cash charge in 2002 reflected as a cumulative effect of accounting change of
$135.6 million, net of applicable taxes, related to the impairment of goodwill in our North America
cemetery reporting unit. For more information regarding goodwill, see note nine to the consolidated
financial statements in Item 8 of this Form 10-K/A (Amendment
No. 2).
In 2000, we implemented Staff Accounting Bulletin No. 101, “Revenue Recognition in Financial
Statements” (SAB 101). As a result of this implementation, we changed certain of our accounting
policies regarding preneed sales activities. We recorded the charge as a
cumulative effect of accounting change of $870.4 million (as restated), net of applicable taxes, as
of January 1, 2000.
Selected Consolidated Financial Information
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year ended December 31, |
|
| (Dollars in millions, except per share amounts) |
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
|
2000 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
Selected Consolidated Statements of
Operations Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue |
|
$ |
1,860.9 |
|
|
$ |
2,338.1 |
|
|
$ |
2,310.9 |
|
|
$ |
2,489.1 |
|
|
$ |
2,571.6 |
|
Income (loss) from continuing operations before
cumulative effects of accounting changes |
|
$ |
117.9 |
|
|
$ |
82.5 |
|
|
$ |
(84.3 |
) |
|
$ |
(462.7 |
) |
|
$ |
(387.4 |
) |
Net income (loss) |
|
$ |
114.1 |
|
|
$ |
85.1 |
|
|
$ |
(234.6 |
) |
|
$ |
(622.2 |
) |
|
$ |
(1,293.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before
cumulative effects of accounting changes |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.37 |
|
|
$ |
0.28 |
|
|
$ |
(0.29 |
) |
|
$ |
(1.62 |
) |
|
$ |
(1.42 |
) |
Diluted |
|
$ |
.36 |
|
|
$ |
0.27 |
|
|
$ |
(0.29 |
) |
|
$ |
(1.62 |
) |
|
$ |
(1.42 |
) |
Net income (loss) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.36 |
|
|
$ |
0.28 |
|
|
$ |
(0.80 |
) |
|
$ |
(2.18 |
) |
|
$ |
(4.75 |
) |
Diluted |
|
$ |
.35 |
|
|
$ |
0.28 |
|
|
$ |
(0.80 |
) |
|
$ |
(2.18 |
) |
|
$ |
(4.75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Selected Consolidated Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,205.7 |
|
|
$ |
7,562.9 |
|
|
$ |
7,793.1 |
|
|
$ |
9,020.5 |
|
|
$ |
10,518.9 |
|
Long-term debt, less current maturities |
|
$ |
1,178.9 |
|
|
$ |
1,519.2 |
|
|
$ |
1,874.1 |
|
|
$ |
2,301.4 |
|
|
$ |
3,078.7 |
|
Stockholders’ equity |
|
$ |
1,848.7 |
|
|
$ |
1,521.6 |
|
|
$ |
1,321.3 |
|
|
$ |
1,453.2 |
|
|
$ |
2,020.5 |
|
ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
Restatement of Financial Statements
Overview
We have restated our previously issued consolidated financial statements as of December 31,
2004 and 2003 and for each of the three years in the period ended December 31, 2004 and our unaudited quarterly financial data
for each of the interim periods of 2004 and 2003. This restatement
corrects errors
related to (1) our recognition of income related
to our
preneed funeral and cemetery trust accounts, (2) preneed funeral trust income that was previously
understated as a result of a point-of-sale
system error, and (3) the computation of gains and losses on
certain asset
divestiture activities, including the write-off of certain
covenant-not-to-compete agreements which
should have been recognized in our 2002 consolidated financial statements.
We
had previously restated our unaudited quarterly
financial data for the first three quarters of 2004 by including such restated financial
statements in our initial 2004 Form 10-K. Such errors related to (1) the recognition of deferred preneed
cemetery contract revenues, (2) certain reconciliations of our preneed funeral and
cemetery trust assets and deferred revenues, and (3) operating leases and other account reconciliations. At that time,
we concluded that the net aggregate impact of such errors related to
periods prior to January 1, 2004 was not material to our consolidated
financial statements or to the first quarter of 2004, nor for any quarterly or annual period prior to January 1, 2004, and as a result,
we recorded the net aggregate impact of such errors (a $0.4 million increase to pre-tax
income) in Other operating (expense) income as a correction of an immaterial error in the first
quarter of 2004. However, in light of the material impact of the
errors identified in the second quarter of 2005, as described in the
previous paragraph, we have concluded that the Current Period
Restatement should reflect the $0.4 million net impact of these errors,
previously reported as Other operating (expense) income, in
the restatement of our prior period financial statements for the
fiscal years ended 2004, 2003, and 2002, and the restatement of our
unaudited quarterly financial data for each of the interim periods of
2004 and 2003.
12
Current Period Restatement
Preneed Funeral and Cemetery Trust Verification and Reconciliation Project
During 2003, we began the implementation of the revised Financial Accounting Standards Board
(FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of
Accounting Research Bulletin (ARB) No. 51” (FIN 46R), the preparation for the implementation of
Section 404 of the Sarbanes Oxley Act, and the implementation of our new funeral and cemetery
point-of-sale system. As a result of these events, we began a project to reconcile our preneed
funeral and cemetery trust accounts and verify our preneed funeral and preneed cemetery contracts.
The preneed funeral and cemetery trust verification and reconciliation project included three
primary components: (1) the reconciliation of assets and deferred revenue related to preneed
cemetery merchandise and service trusts; preneed funeral merchandise and service trusts; and
cemetery perpetual care trusts, (2) the verification of approximately 430,000 preneed funeral
contracts to determine if those contracts were appropriately included in our new point-of-sale
system, and (3) the verification of each individual item on each preneed cemetery contract
(approximately 3.6 million contract items) to determine if revenue was appropriately recognized at
the time of delivery or at the time of service.
As these projects progressed, we assessed their status and adjusted the applicable general
ledger accounts accordingly. At December 31, 2003, June 30,
2004 and December 31, 2004, we made certain adjustments
to our consolidated financial statements based on our best estimates
at that time. These adjustments
were based on statistical sampling methods which were influenced by
the percentage of reconciliations and verifications completed at a
location level and the expected error rate
of such uncompleted verifications and reconciliations.
By March 2005,
we completed our examination of the 430,000 preneed funeral contracts and had
also implemented the reconciliation procedures described above, which resulted in the
identification of a significant number of reconciling items. In light of these reconciling items,
we reevaluated previous adjustments related to these projects and the impact to previously issued
financial statements. We determined that these adjustments had a material
impact on our
consolidated financial data for the first three interim periods of 2004. As a result, we restated
our unaudited quarterly financial statements for the first three interim
periods of 2004 in our
original Form 10-K. We evaluated the materiality of these adjustments on our consolidated
financial statements issued prior to January 1, 2004 and concluded that the impact of these
adjustments was not material to the fiscal period ended 2004 or to any quarterly or annual period prior to January 1, 2004. As a
result, we recorded the net aggregate effect of these adjustments ($0.4 million increase to pretax
income) in Other operating income (expense) in our restated first quarter 2004 financial statements
as a correction of an error.
During the first and second quarters of 2005, we continued to find and record these reconciling items
to our trust asset and deferred revenue detailed records. During the second quarter of 2005, we
determined that certain of the reconciling items had been reflected improperly in our initial
reconciliation process at December 31, 2004, which resulted in
the identification of additional errors to our
consolidated financial statements. We recorded a $1.6 million charge in our first quarter 2005
consolidated financial statements for similar prior period adjustments
arising from the aforementioned
reconciliation process.
Also during the second quarter of 2005, we identified other adjustments, one of which
related to a point-of-sale system error that caused preneed funeral trust income accounts to be
understated in the fourth quarter of 2004 by $1.6 million, and another of which related to improper
computation of gains and losses on asset divestiture activities. In
connection with the asset divestitures we failed to write off certain covenant-not-to-compete agreements,
which should have been recorded in our 2002
consolidated financial statements.
Operating
Leases and Other Account Reconciliations
We
initiated a review of our accounting practices and determined that we
should adjust our method of accounting for certain types of operating leases related primarily to
our funeral home properties.
Historically,
we have recorded operating lease expense, related primarily to funeral
home properties, over the initial lease term without regard to reasonably assured renewal options
or fixed escalation provisions. We will now calculate our straight-line operating lease
expense over the lease term (including certain renewals options and fixed escalation
provisions, to the extent necessary) in accordance with SFAS 13, “Accounting for Leases”.
During 2004, we also performed various other reconciliations. These reconciliations primarily
resulted from the conversion of our point-of-sale system.
Materiality Assessment
We evaluated the materiality of these adjustments (including the $1.6
million charge recorded in the first quarter 2005 and the
adjustments aggregating to $0.4 million associated with the restatement of the first three interim
periods of 2004 described above) as of December 31, 2004 and 2003 and for each of the three years
in the period ended December 31, 2004. We determined that the net effect of these adjustments ($7.0 million charge to pretax
income), which primarily related to periods prior to 2000, was not
material to our
previously reported consolidated financial statements for the periods described above; however, we
determined that such impact was material to our second quarter 2005 consolidated financial
statements. As a result, we have restated our 2004, 2003 and 2002
consolidated financial statements as well as our quarterly financial
data for the first quarter of 2005 and all quarters of 2004 and 2003.
The effect of each of these restatement items is
individually immaterial to net income and earnings per share for
periods presented.
13
Effect
on Annual Periods
The
effect of these adjustments on our consolidated statement of operations
for the years ended December 31, 2004, 2003 and 2002 is detailed as follows:
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
For the year ended |
|
| |
|
December
31, 2004 |
|
| |
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Revenues
|
|
$ |
1,859,308 |
|
|
$ |
1,860,862 |
|
|
Costs and expenses
|
|
|
1,524,810 |
|
|
|
1,524,652 |
|
|
Gross profits
|
|
|
334,498 |
|
|
|
336,210 |
|
|
Gains and impairment
(losses) on dispositions, net
|
|
|
25,628 |
|
|
|
25,797 |
|
|
Operating income
|
|
|
229,646 |
|
|
|
231,111 |
|
|
Income from continuing
operations before income taxes and cumulative effects of accounting
changes
|
|
|
110,798 |
|
|
|
112,263 |
|
|
Benefit for income
taxes
|
|
|
(6,213 |
) |
|
|
(5,659 |
) |
|
Cumulative effect of
accounting changes, net
|
|
|
(47,074 |
) |
|
|
(47,556 |
) |
|
Net income
|
|
$ |
113,699 |
|
|
$ |
114,128 |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic — EPS
|
|
$ |
.36 |
|
|
$ |
.36 |
|
|
Diluted — EPS
|
|
$ |
.35 |
|
|
$ |
.35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended |
|
|
For the year ended |
|
| |
|
December
31, 2003 |
|
|
December
31, 2002 |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
|
Revenues
|
|
$ |
2,328,425 |
|
|
$ |
2,338,062 |
|
|
$ |
2,312,439 |
|
|
$ |
2,310,880 |
|
|
Costs and expenses
|
|
|
1,966,460 |
|
|
|
1,976,503 |
|
|
|
1,950,430 |
|
|
|
1,950,681 |
|
|
Gross profits
|
|
|
361,965 |
|
|
|
361,559 |
|
|
|
362,009 |
|
|
|
360,199 |
|
|
Gains and impairment
(losses) on dispositions, net
|
|
|
49,366 |
|
|
|
49,727 |
|
|
|
(161,510 |
) |
|
|
(163,152 |
) |
|
Operating income
|
|
|
224,222 |
|
|
|
224,177 |
|
|
|
15,837 |
|
|
|
12,385 |
|
|
Income (loss) from
continuing operations before income taxes and cumulative effects of
accounting changes
|
|
|
111,219 |
|
|
|
111,174 |
|
|
|
(119,850 |
) |
|
|
(123,302 |
) |
|
Provision (benefit) for
income taxes
|
|
|
28,666 |
|
|
|
28,638 |
|
|
|
(37,692 |
) |
|
|
(38,992 |
) |
|
Net income (loss)
|
|
$ |
85,082 |
|
|
$ |
85,065 |
|
|
$ |
(232,486 |
) |
|
$ |
(234,638 |
) |
|
Earnings (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS
|
|
$ |
.28 |
|
|
$ |
.28 |
|
|
$ |
(.79 |
) |
|
$ |
(.80 |
) |
|
Diluted — EPS
|
|
$ |
.28 |
|
|
$ |
.28 |
|
|
$ |
(.79 |
) |
|
$ |
(.80 |
) |
The
effect of the restatement on our previously reported consolidated balance sheet as of
December 31, 2004 and 2003 is as follows:
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 |
|
|
December 31, 2003 |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Selected consolidated balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net of allowances |
|
$ |
102,156 |
|
|
$ |
102,622 |
|
|
$ |
229,839 |
|
|
$ |
229,839 |
|
Total current assets |
|
|
533,497 |
|
|
|
533,963 |
|
|
|
673,324 |
|
|
|
673,277 |
|
Preneed funeral receivables and trust investments |
|
|
1,264,600 |
|
|
|
1,267,784 |
|
|
|
1,229,765 |
|
|
|
1,080,108 |
|
Preneed cemetery receivables and trust investments |
|
|
1,402,750 |
|
|
|
1,399,778 |
|
|
|
1,083,035 |
|
|
|
1,068,216 |
|
Deferred charges and other assets |
|
|
618,565 |
|
|
|
621,561 |
|
|
|
738,011 |
|
|
|
742,160 |
|
Total assets |
|
|
8,199,196 |
|
|
|
8,205,687 |
|
|
|
7,725,204 |
|
|
|
7,562,903 |
|
Deferred preneed funeral revenues |
|
|
486,191 |
|
|
|
498,571 |
|
|
|
1,612,347 |
|
|
|
1,464,218 |
|
Deferred preneed cemetery revenues |
|
|
801,065 |
|
|
|
803,144 |
|
|
|
1,575,352 |
|
|
|
1,551,187 |
|
Deferred income taxes |
|
|
279,474 |
|
|
|
276,572 |
|
|
|
418,375 |
|
|
|
415,208 |
|
Non-controlling interest in funeral and cemetery trusts |
|
|
2,095,852 |
|
|
|
2,092,881 |
|
|
|
— |
|
|
|
— |
|
Accumulated deficit |
|
|
824,364 |
|
|
|
829,244 |
|
|
|
938,063 |
|
|
|
943,372 |
|
Total stockholders’ equity |
|
|
1,853,576 |
|
|
|
1,848,667 |
|
|
|
1,526,958 |
|
|
|
1,521,620 |
|
Total liabilities and stockholders’ equity |
|
|
8,199,196 |
|
|
|
8,205,687 |
|
|
|
7,725,204 |
|
|
|
7,562,903 |
|
14
Effect
of Restatement on Quarterly Information
The
effect of these adjustments on our quarterly financial data for each
of the four quarters in both 2004 and 2003 are presented below. As discussed in
Current Period Restatement, the quarterly financial data
for the first three interim periods of 2004 has been further restated
in connection with this restatement.
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
December 31, 2004 |
|
|
September 30, 2004 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
433,226 |
|
|
$ |
435,064 |
|
|
$ |
404,557 |
|
|
$ |
404,731 |
|
Costs and expenses |
|
|
358,180 |
|
|
|
358,141 |
|
|
|
334,463 |
|
|
|
334,422 |
|
Gross profits |
|
|
75,046 |
|
|
|
76,923 |
|
|
|
70,094 |
|
|
|
70,309 |
|
Gains and impairment (losses) on dispositions, net |
|
|
(7,390 |
) |
|
|
(7,224 |
) |
|
|
(3,281 |
) |
|
|
(3,281 |
) |
Operating income |
|
|
37,107 |
|
|
|
39,150 |
|
|
|
41,515 |
|
|
|
41,730 |
|
Income from continuing operations before income
taxes |
|
|
16,939 |
|
|
|
18,982 |
|
|
|
18,196 |
|
|
|
18,411 |
|
(Benefit) provision for income taxes |
|
|
(560 |
) |
|
|
205 |
|
|
|
4,739 |
|
|
|
4,819 |
|
Net income |
|
$ |
25,886 |
|
|
$ |
27,164 |
|
|
$ |
13,741 |
|
|
$ |
13,876 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.08 |
|
|
$ |
.08 |
|
|
$ |
.04 |
|
|
$ |
.04 |
|
Diluted — EPS |
|
$ |
.08 |
|
|
$ |
.08 |
|
|
$ |
.04 |
|
|
$ |
.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
June 30, 2004 |
|
|
March 31, 2004 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
432,103 |
|
|
$ |
432,368 |
|
|
$ |
589,422 |
|
|
$ |
588,699 |
|
Costs and expenses |
|
|
359,058 |
|
|
|
359,019 |
|
|
|
473,109 |
|
|
|
473,070 |
|
Gross profits |
|
|
73,045 |
|
|
|
73,349 |
|
|
|
116,313 |
|
|
|
115,629 |
|
Gains and impairment (losses) on dispositions, net |
|
|
1,517 |
|
|
|
1,517 |
|
|
|
34,782 |
|
|
|
34,785 |
|
Operating income |
|
|
50,534 |
|
|
|
50,838 |
|
|
|
100,490 |
|
|
|
99,393 |
|
Income from continuing operations before income
taxes and cumulative effects of accounting changes |
|
|
1,407 |
|
|
|
1,711 |
|
|
|
74,256 |
|
|
|
73,159 |
|
Benefit for income taxes |
|
|
(7,017 |
) |
|
|
(6,904 |
) |
|
|
(3,375 |
) |
|
|
(3,779 |
) |
Net income |
|
$ |
42,761 |
|
|
$ |
42,952 |
|
|
$ |
31,311 |
|
|
$ |
30,136 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.14 |
|
|
$ |
.14 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
Diluted — EPS |
|
$ |
.14 |
|
|
$ |
.14 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
December 31, 2003 |
|
|
September 30, 2003 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
599,088 |
|
|
$ |
604,780 |
|
|
$ |
566,461 |
|
|
$ |
568,853 |
|
Costs and expenses |
|
|
515,659 |
|
|
|
522,419 |
|
|
|
497,515 |
|
|
|
498,910 |
|
Gross profits |
|
|
83,429 |
|
|
|
82,361 |
|
|
|
68,946 |
|
|
|
69,943 |
|
Gains and impairment (losses) on dispositions, net |
|
|
43,953 |
|
|
|
43,690 |
|
|
|
(1,452 |
) |
|
|
524 |
|
Operating income |
|
|
52,451 |
|
|
|
51,120 |
|
|
|
14,719 |
|
|
|
17,692 |
|
(Loss) income from continuing operations before income taxes |
|
|
28,747 |
|
|
|
27,416 |
|
|
|
(8,722 |
) |
|
|
(5,749 |
) |
Benefit for income taxes |
|
|
(1,149 |
) |
|
|
(1,650 |
) |
|
|
(3,331 |
) |
|
|
(2,209 |
) |
Net income (loss) |
|
$ |
30,420 |
|
|
$ |
29,590 |
|
|
$ |
(4,732 |
) |
|
$ |
(2,881 |
) |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
(.02 |
) |
|
$ |
(.01 |
) |
Diluted —EPS |
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
(.02 |
) |
|
$ |
(.01 |
) |
15
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
June 30, 2003 |
|
|
March 31, 2003 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
584,050 |
|
|
$ |
584,553 |
|
|
$ |
578,826 |
|
|
$ |
579,876 |
|
Costs and expenses |
|
|
489,418 |
|
|
|
489,839 |
|
|
|
463,868 |
|
|
|
465,335 |
|
Gross profits |
|
|
94,632 |
|
|
|
94,714 |
|
|
|
114,958 |
|
|
|
114,541 |
|
Gains and impairment (losses) on dispositions, net |
|
|
(2,469 |
) |
|
|
(3,884 |
) |
|
|
9,334 |
|
|
|
9,397 |
|
Operating income |
|
|
54,171 |
|
|
|
52,838 |
|
|
|
102,881 |
|
|
|
102,527 |
|
Income from continuing operations before income
taxes and cumulative effects of accounting
changes |
|
|
21,082 |
|
|
|
19,749 |
|
|
|
70,112 |
|
|
|
69,758 |
|
Provision for income taxes |
|
|
7,008 |
|
|
|
6,494 |
|
|
|
26,138 |
|
|
|
26,003 |
|
Net income |
|
$ |
15,308 |
|
|
$ |
14,489 |
|
|
$ |
44,086 |
|
|
$ |
43,867 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.05 |
|
|
$ |
.05 |
|
|
$ |
.15 |
|
|
$ |
.15 |
|
Diluted — EPS |
|
$ |
.05 |
|
|
$ |
.05 |
|
|
$ |
.14 |
|
|
$ |
.14 |
|
16
Our Company
At December 31, 2004, Service Corporation International (SCI or the Company) operated 1,216
funeral service locations and 400 cemeteries. We also had a 25% minority interest equity
investment in our former funeral operations in France. In addition to our funeral and cemetery operations, we
own Kenyon International Emergency Services (Kenyon), a company that engages in mass fatality and
emergency response services.
Our funeral and cemetery operations are organized into a North American division covering the
United States and Canada, a European division primarily consisting of operations in France and
Germany, and an Other Foreign division including operations in South America and Singapore. At
December 31, 2004, we also owned businesses in Argentina and Uruguay that were classified as
discontinued operations. In February 2005, we sold our businesses in Argentina and Uruguay. See
note twenty-one to the financial statements in Item 8 of this amended Form 10-K/A.
For the year ended December 31, 2004, our North American funeral and cemetery operations
represented 90.8% of our consolidated revenues and 93.8% of our consolidated gross profits. At
December 31, 2004, we owned and operated 1,190 funeral service locations and 390 cemeteries in
North America.
Our operations in North America are organized into 32 major markets and 42 middle markets.
Major markets are characterized by areas with large populations such as Houston, New York, and
Chicago. Middle markets have relatively smaller populations and include areas such as Southern
Louisiana; Memphis, Tennessee; and Lynchburg, Virginia. Each major and middle market is led by a
market director with responsibility for funeral and cemetery operations as well as 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 major and middle market
directors with financial, administrative and human resource needs. These support centers are
located in Houston, New York and Los Angeles. The market support centers 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.
Our Competitive Strengths
Industry leader. SCI is the leading provider of funeral, cremation and cemetery services in
North America. There are six other major publicly-traded companies that operate in our industry in
North America (Alderwoods Group, Stewart Enterprises, Arbor Memorial Services, Carriage Services,
StoneMor Group, and Keystone North America). Our revenues in North America are more than twice the
size of our next largest competitor (Alderwoods Group) and are approximately equal to the combined
revenues of these six other public companies. Despite some consolidation, the industry remains
fragmented. We estimate that the public companies mentioned above and SCI combined generate
approximately 20% of total industry revenue in North America. The other 80% is generated by
independent funeral and cemetery operators.
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Geographically diverse network. We operate businesses in North America in 44 states and seven
Canadian provinces. We believe we are able to provide funeral services to more than 70% of the
households in the United States. We believe this comprehensive national coverage enables us to be
the only company in our industry to successfully implement a national branding strategy and to
develop alliances with national strategic partners. Both of these initiatives are discussed below
as part of our long-term revenue growth opportunities.
National branding strategy. 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. The Dignity® brand name is a co-brand to the existing name of
the business. Signage, advertising and promotional efforts emphasize both names. We believe that a
national brand gives us a competitive advantage. This is discussed as part of our long-term revenue
growth opportunities described below.
Favorable demographics over the long term. The population is aging at an unprecedented rate.
According to the U.S. Census Bureau, the number of persons 65 years or older totaled 36 million in
2003. They represented 12.3% of the population, or about one in every eight Americans. The number
of Americans aged 65 and older is expected to climb to approximately 16% of the total population by
2020, and to approximately 20% by 2030. Approximately 75% of all deaths in the United States are at
ages 65 and older. We believe these demographic trends will provide a growing demand in the future
for our services on both an atneed and preneed basis.
Stable revenues and cash flows. Our core business can be described as stable, with relatively
predictable revenue and cash flows on an annual basis. We believe our ability to consistently
generate strong cash flows sets us apart from others in the industry. This stability is enhanced by
a large backlog of future revenues associated with preneed funeral and cemetery sales. In North
America, our backlog of preneed funeral and cemetery sales consists of more than $5 billion of
revenues that will be recognized in future periods. These unfulfilled preneed funeral and cemetery
contracts are primarily supported by investments in trust funds or third party insurance policies.
Financial flexibility. We believe we have significant opportunities to grow shareholder value
due to our strong cash flows and liquidity, and modest debt maturities in the near term. For a
further discussion about our financial flexibility, please see Financial Condition, Liquidity and
Capital Resources in Item 7 of this Form 10-K/A (Amendment No. 2).
Business Challenges
No meaningful near-term increase in the numbers of deaths. The numbers of deaths in the United
States are not expected to increase meaningfully in the near term. Modern advances in medicine and
healthier lifestyles are contributing to record levels of life expectancy in the United States. In
2003, life expectancy in the United States reached 77.6 years according to the Centers for Disease
Control and Prevention. The Baby Boom generation is expected to have an impact on the numbers of
deaths in the future; however, the first Baby Boomers do not reach age 65 until the year 2011.
Increasing
trend toward cremation. In North America, social trends, (such as a mobile, less
rooted society), religious changes, environmental issues and cultural preferences are driving an
increasing preference for cremation. Cremation rates in the United States have grown from
approximately 3.6% in 1960 to approximately 28.6% in 2003 according to the Cremation Association of
North America. Cremation rates in Canada during this same period have grown from approximately 3.3%
to approximately 47.3%. SCI is the largest provider of cremation services in North America where
approximately 40% of the total funeral services we perform are cremation services. Our cremation
mix is greater than the national average due to the high concentration of properties we own in high
cremation states including California, Florida, and Arizona where cremation rates exceed 47%.
The mix of cremation in our business 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 that involve
burials. Additionally, the cremation consumer may choose not to purchase cemetery property or
merchandise. Industry research has shown that most consumers choose cremation for reasons other
than cost, which we believe provides us significant opportunities to better serve the cremation
consumer. 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 a further discussion regarding
initiatives to address cremation as part of our long-term revenue growth opportunities described
below.
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Increasing competition from low cost retailers. In recent years there has been an influx of
retail outlets and internet websites specializing in the sale of funeral and cemetery products,
particularly caskets, vaults and markers. While these types of businesses have grown in numbers and
have caused pricing pressure in certain markets, we do not believe they are having a material
impact on our consolidated financial results at this time. As we continue to develop strategies
that are centered on creating a meaningful experience for the consumer with a greater focus on
innovative service offerings and less emphasis on traditional product offerings, we expect the
influence of these types of businesses will be even less.
Regulatory and litigation exposure. Our industry is heavily regulated at the federal and state
levels. Although we believe we are in compliance in all material respects with these regulations,
there is a continuous movement toward a stricter regulatory environment. Our compliance department
strives to keep our businesses up-to-date on changes in regulation and to develop programs to
monitor our compliance with various regulations. From time-to-time, we are also exposed to matters
that result in litigation. We work diligently to investigate and resolve such litigation as quickly
and thoroughly as possible and have placed a great deal of focus throughout the Company on
litigation avoidance practices and programs. Lastly, as a public company, compliance with
regulations such as the Sarbanes-Oxley Act has become increasingly costly and time-consuming for
our company.
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 is now on initiatives that will grow revenues and earnings. We believe strategies centered on
our national brand, Dignity Memorial®, and other revenue growth initiatives,
along with a focus on cost management, can provide the framework for sustainable growth over the
longer term.
Improving the Infrastructure
Historically, our infrastructure did not allow us to fully realize the inherent efficiencies
of our business organization. As a result, we were unable to capitalize on all of the benefits of
standardization, technology, and process improvement. Beginning in late 2002 and continuing through
2003, we moved to capture more fully 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. In 2003 and continuing through 2004, we also
implemented a new information system in our field locations. This new system replaced three
separate contract entry systems and integrated these functions into one. At December 31, 2004, the
new information system is fully implemented and functioning as intended.
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.
Building the Brand
SCI has implemented the first national brand in the funeral service industry. This brand is
called Dignity Memorial®. We believe that a national brand name will provide us
access to new customers over the long term given the increasingly mobile nature of families in
North America. We believe consumers are less likely to know a funeral director personally or live
in the same area as past generations who may have used funeral home services before. A favorable
experience with Dignity Memorial® through one of our national advertising or
community outreach programs, attending a funeral service at a Dignity®
location, or through previous use of a Dignity® provider may influence a
consumer to choose one of our funeral homes.
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. Through our national brand we are also the sponsor of
several nationally recognized community programs including Dignity Memorial Escape
School® (www.escapeschool.com), which provides parents and their
children with critical abduction prevention and escape techniques; Dignity Memorial Smart and Safe
Seniors (www.smartandsafe.com), which educates seniors about consumer fraud, cons and
scams, travel safety and other topics; and The Vietnam Wall Experience
(www.vietnamwallexperience.com), a traveling, three-quarter sized replica of the Vietnam
Veterans Memorial in Washington, D.C.
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In 2004, we rolled out a marketing campaign to promote awareness of our national brand name
throughout North America. The campaign focused on the distinct benefits and values that set Dignity
Memorial® apart from other providers. The marketing approach utilized response
driven communications executed through television, print, radio, direct mail, point of purchase
collateral materials, the internet and yellow pages. Those requesting additional information are
directed to a local Dignity® provider. In 2004, the campaign reached 113
designated market areas, or more than 80% of all households in the United States, according to
Nielsen Media Research.
Growing Our Revenues
We have made significant improvements to our cost structure in the last two years; however, we
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 focusing on our customers’ concerns and satisfaction.
The world of funeral service is changing. As aging Baby Boomers begin to contemplate and deal
with the realities of death, they bring with them new attitudes, ideas, requirements and
preferences when it comes to observing the final stage of life. Traditional rituals associated with
funerals are transitioning to new and modern ways to personalize and create a meaningful
experience.
Through our Dignity® brand we are developing more contemporary and
comprehensive products and services that we believe will help the consumer create a personal
experience as well as help them with the administrative and legal challenges that occur when a
loved one dies. Some of the exclusive items offered through Dignity® providers
include grief counseling services offered 24-hours a day, 365 days a year; a legal services
membership; and internet memorial archive capabilities through Making Everlasting
Memories®, or MeM® (www.mem.com).
MeM® publishes written biographies, photos, memories and tributes shared by
loved ones around the world that capture the essence of one’s life. A product that is particularly
helpful to our consumers is the Aftercare® Planner — a comprehensive
organization 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 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 focused on offering consumers new ways to personalize funeral services and create
value in the experience. Examples include creating movies from pictures that span the person’s life
and important events; displaying items that were special to the individual or that reflect a hobby;
having a dove, butterfly or balloon release; or holding a memorial service in a favorite place such
as a park, marina or sports venue.
Near-Term Revenue Growth Opportunities
Dignity® packaged plans. Our national brand name 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 above that have traditionally been unavailable
through funeral service locations. The plans also offer the security of a 100% service guarantee
and national transferability of preneed services to any of more than 1,300 Dignity
Memorial® providers in North America. In 2004, we continued to achieve high
customer satisfaction ratings, as measured by independent surveys completed by consumers three
weeks following a funeral. We believe this is largely attributable to the value consumers receive
when they select a Dignity® package. When Dignity® packages
are sold, it results in significant incremental revenue and gross profit margin per funeral service
compared to non-Dignity sales due to the comprehensive product and service offerings they provide.
In early 2005, we began to develop Dignity Memorial® packaged cemetery plans. These plans are
being tested in a limited number of locations. After completing a successful test, we intend to
begin the roll-out of this packaged plan initiative to our cemeteries in mid-2005.
Contemporary funeral merchandising strategies. In 2004, approximately 17% of the total funeral
consumers we served selected a Dignity® packaged plan. On a preneed basis,
approximately 24% of funeral preneed contracts sold were Dignity® plans. We
believe we can increase the selection rate of the Dignity® 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. In late 2004, we began to roll-out enhanced merchandise
displays and other presentation models in our funeral homes that offer personalization options. In
addition, funeral personnel at each of these locations have completed a comprehensive training and
certification program to ensure their effectiveness and optimal customer satisfaction.
Contemporary cemetery marketing strategies. We are beginning to use more contemporary marketing
techniques within our cemetery segment. We have begun to employ a tiered-product model that
emphasizes a wide range of product and service offerings, including a variety of grave spaces at
various price levels, cremation gardens, mausoleums, lawn crypts and niches. We are particularly
focused on the development of high-end cemetery property such as private family estates.
20
In late 2004, we also developed and began to implement a standardized pricing methodology for
each of our cemeteries. This approach incorporates marketplace demographic information and data
about competitive cemeteries in the market, as well as historical retail and wholesale prices. This
new pricing methodology complements our tiered-product strategy and ensures that we are capturing
appropriate values for the different levels of our products.
Improved management structure. 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, this new structure is intended to have our strongest business managers focused on
producing favorable financial results in each of our markets. Under the old structure, multiple
persons shared accountability and responsibility for financial results in multiple markets. Now
accountability rests solely in the market director in charge of the geographical area that he or
she manages. Under the new structure, many of the administrative and financial functions are now
handled by market support centers. We believe this new structure allows for greater focus on
developing people, growing market share, and improving profitability.
Preneed sales. At December 31, 2004, the backlog of revenues associated with unfulfilled preneed
contracts sold for funeral and cemetery merchandise and services in North America totaled more than
$5 billion. We believe that the sale of preneed goods and services is a primary driver of
maintaining and growing market share. It also provides a level of predictability and stability to
our revenues and cash flows. Over the last two years, we have redesigned our sales organization to
tailor our approach to emerging customer preferences, to reduce costs, and to increase our
effectiveness. We eliminated certain lead generation programs and incentive travel programs and
moved to an approach that is based on personal referrals and standardized professional
certification. We also shifted from a compensation model that was solely based on commissions to
one where sales counselors can receive a portion of sales compensation through a draw with the
opportunity to earn a bonus if certain sales targets are achieved. We are continuing to invest in
our sales organization in 2005 through continued training and certification programs.
An important advantage of SCI preneed sales for consumers, besides protecting them from having
to make important decisions at a difficult time and locking in prices at today’s level, is the
ability to transfer preneed contracts to funeral homes and cemeteries throughout our geographically
diverse network of properties.
Long-Term Revenue Growth Opportunities
Enhancing cremation opportunities. 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 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. We also own and operate National Cremation®, which specifically
targets the cremation consumer. 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.
Developing access to new customers. We believe that SCI has opportunities to grow market share due
to its size and geographic diversity. As discussed earlier, we believe that a national brand name
will provide us access to new customers over the long term.
Our centralized marketing effort will utilize information from our broad customer databases to
identify geographic, demographic and lifestyle information about our consumers in order to promote
awareness of the Dignity Memorial® brand name, our local names and our provider
network in the most efficient and effective manner.
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.
We continue to develop marketing strategies that target specific ethnic groups. As an example,
we are developing a brand of businesses that specifically appeal to the Hispanic population. This
brand is called Funeraria del ángel (Funeral Home of the Angel). According to the United States
Census Bureau, the Hispanic population reached 39.9 million in 2003, accounting for about one-half
of the 9.4 million residents added to the nation’s population since Census 2000. We currently
operate Funeraria del ángel in 12 California locations, three Chicago locations and six affiliated
locations in Miami.
Expanding through acquisition, construction, or franchise. 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. In areas with large populations,
the businesses are more institutional and less dependent on an individual; it is more conducive to
have multiple businesses and realize
21
economies of scale through clustering; we can benefit more from using contemporary marketing
strategies; and it is easier to attract quality management. In states where allowed, we intend to
focus construction efforts on developing more combination operations by building funeral homes on
our existing cemeteries. Combination operations create synergies between funeral and cemetery
functions and provide consumers the convenience of making all arrangements at a single location.
Over the longer term, the potential for a franchising opportunity exists for further expansion
in the smaller markets. In a franchise relationship we could recruit independent funeral providers
to join the Dignity Memorial® network and earn fees for a comprehensive range
of services that we could provide to the franchisee – all at very little or no capital cost to us.
Developing our people. A key objective that we believe will have a favorable impact on our future
growth and success is building a “best in class” workforce. We have developed a comprehensive
education strategy in an online campus format called Dignity University™. Dignity University™
features job-focused curriculum for each position in the company. Upon completion of coursework,
participants are required to pass examinations to be certified in their individual jobs. Dignity
University™ uses a blended approach to learning using a combination of traditional classroom,
web-based courses, virtual classroom and on-the-job training for the approximately 20,000
individuals that we employ in North America.
In conjunction with Dignity University™, we use an online performance management tool that
employees use to document their annual key objectives. Objectives are balanced between financial,
operations, customer/market, and leadership/employee development. These objectives are then
weighted by management and linked to incentive compensation. During the year, managers monitor and
provide regular feedback on progress towards these objectives. Training and development courses are
assigned as needed.
Focusing on customer loyalty. We began to track customer satisfaction in our funeral segment in
2000 through the use of independent surveys mailed to every consumer three weeks following the
funeral. On average, we receive more than 40% of the surveys back. Through statistically weighted
questions, we are able to track satisfaction scores at the funeral home, region, and company
levels. Results are used to share best practices and develop training programs in areas where
weaknesses are identified. During 2004, over 98% of the respondents in North America indicated that
they were likely to recommend our services.
In 2005, we moved to a new program with J.D. Power and Associates, one of the world’s premier
marketing firms specializing in customer satisfaction. Our new survey to client families utilizes a
combined approach – measuring satisfaction and loyalty and the relationship between the two. The
new survey will be used for both funeral and cemetery consumers and will be available in three
different languages. After completing a successful test of the new measurement tool, the new survey
was launched on a national basis in March 2005.
Becoming the preplanning experts. As the Baby Boom generation ages, many are becoming more aware of
their own mortality or facing their parents’ approaching need for funeral and burial arrangements.
While research indicates high public approval of the pre-planning concept, the percentage of North
Americans who have actually completed such arrangements is quite small.
Historically we have focused on preplanning and prefunding funeral arrangements. Our focus for
the long-term is developing a comprehensive marketing strategy to give consumers the opportunity to
make the decisions about their funeral and to choose a Dignity Memorial®
funeral provider – without paying in advance if they choose not to do so. Based on research and
testing with members of the Veterans of Foreign Wars in seminars conducted in 2003 and 2004, we
have found initial success in creating a commitment pattern on behalf of the consumer without
funding.
Critical Accounting Policies, New Accounting Pronouncements 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 is a discussion of our critical accounting policies pertaining to
revenue recognition, the impairment or disposal of long-lived assets, and the use of estimates.
Revenue Recognition
Funeral revenue is recognized when funeral services are performed. Our trade receivables
primarily consist of amounts due for funeral services already performed. We sell price guaranteed
preneed funeral contracts through various programs providing for future funeral services at prices
prevailing when the agreements are signed. Revenues associated with sales of preneed funeral
contracts, including accumulated trust earnings, are deferred until such time that the funeral
services are performed (see notes three, four, and five to the consolidated financial statements in
Item 8 of this Form 10-K/A (Amendment No. 2).
Revenue associated with cemetery merchandise and services is recognized when the service is
performed or merchandise is delivered. Revenue associated with cemetery property interment rights
is recognized in accordance with the retail land sales provision
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of SFAS No. 66, “Accounting for the Sales of Real Estate” (SFAS 66). Under SFAS 66, revenue from
constructed cemetery property is not recognized until a minimum percentage (10%) of the sales price
has been collected. Revenue related to the preneed sale of unconstructed cemetery property is
deferred until it is constructed and 10% of the sales price is collected. Revenue associated with
sales of preneed merchandise and services is not recognized until the merchandise is delivered or
the services are performed (see notes three, four, and six to the consolidated financial statements
in Item 8 of this 10-K/A (Amendment No. 2).
Impairment or Disposal of Long-Lived Assets
We test for impairment of goodwill using a two-step approach as prescribed in SFAS No. 142,
“Goodwill and Other Intangible Assets” (SFAS 142). The first step of our goodwill impairment test
compares the fair value of a reporting unit with its carrying amount, including goodwill. We do not
record an impairment of goodwill in instances where the fair value of a reporting unit exceeds its
carrying amount. The second step of our goodwill impairment test is required only in situations
where the carrying amount of the reporting unit exceeds its fair value as determined in the first
step. In such instances, we compare the implied fair value of goodwill (as defined in SFAS 142) to
its carrying amount of goodwill. If the carrying amount of reporting unit goodwill exceeds the
implied fair value of that goodwill, an impairment loss is recognized in an amount equal to that
excess. Fair market value of a reporting until is determined using a calculation based on multiples
of revenue and multiples of EBITDA of both SCI and its competitors. Based on our tests at September
30, 2004 and September 30, 2003, we concluded that there was no impairment of goodwill in
accordance with SFAS 142.
We apply SFAS No. 60 “Accounting and Reporting by Insurance Enterprises” (SFAS 60) to test for
impairment of our deferred selling costs as prescribed by the AICPA Industry Guide, “Life and
Health Insurance Entities”. Accordingly, when circumstances indicate that actual experience for a
portfolio of contracts, regardless of the year of origin, may result in losses, we assess whether
the expected gross contract revenues for each portfolio of preneed funeral contracts or preneed
cemetery contracts less all related expected contract costs is sufficient to cover the current
unamortized deferred selling costs associated with each portfolio. For purposes of applying this
policy, a portfolio of preneed funeral contracts or preneed cemetery contracts is comprised of all
such contracts executed within a given market (i.e. an area of operation). If deferred selling
costs for a portfolio of contracts exceeds the related gross contract revenue less expected
contract costs, the excess is charged to expense. We believe this is the most appropriate way to
evaluate impairment because it is consistent with the manner in which we acquire, service, and
measure the profitability of our preneed funeral and cemetery contracts. Our sales organization is
organized by market, and the selling costs incurred and deferred specifically relate to the preneed
funeral and cemetery deferred revenues recorded in the operating market. The Company is addressing
loss contracts in its impairment review of deferred selling costs because we are including all
related expected costs in the contract analysis. The application of the requirements under SFAS No.
5 “Accounting for Contingencies” is comparable with the Company’s current application of the
requirements under SFAS 60. In 2004, the Company performed an impairment test for cemetery and
funeral deferred selling costs with no impairment indicated.
We
do not track cash flow at the individual contract level as defined by
SFAS No. 144 for preneed funeral and cemetery contracts. Further, we do not believe that evaluation for
impairment at the individual contract level is required by SFAS 60 or SFAS 5. We believe the lowest
level of identifiable cash flows associated with our preneed funeral and cemetery activities is at
our market level of operations. The contracts are homogenous at this level. Therefore, the
assumptions at this level would be the same as on an individual contract level.
We review our remaining long-lived assets for impairment when changes in circumstances
indicate that the carrying amount of the asset may not be recoverable, in accordance with SFAS No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 requires
that long-lived assets to be held and used be reported at the lower of their carrying amount or
fair value. Assets to be disposed of and assets not expected to provide any future service
potential to us are recorded at the lower of their carrying amount or fair value less estimated
cost to sell.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make
certain estimates and assumptions. These estimates and assumptions affect the carrying values of
assets and liabilities and disclosures of contingent assets and liabilities at the balance sheet
date. Actual results could differ from such estimates due to uncertainties associated with the
methods and assumptions underlying our critical accounting measurements. Key estimates used by
management, among others, include:
Allowances — We provide various allowances and/or cancellation
reserves for our funeral and cemetery preneed and at need receivables,
our preneed funeral and preneed cemetery deferred revenues, as well as
for our funeral and cemetery deferred selling costs. These allowances
are based on an analysis of historical trends and include, where
applicable, collection and cancellation activity. These estimates are
impacted by a number of factors, including changes in economy,
relocation, and demographic or competitive changes in our areas of
operation.
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Valuation of trust investments — With the implementation of revised
FASB Interpretation No. 46, “Consolidation of Variable Interest
Entities, an Interpretation of Accounting Research Bulletin No. 51”
(FIN 46R), as of March 31, 2004, we replaced receivables due from
trust assets at cost with the actual trust investments recorded at
market value. The trust investments include marketable securities that
are classified as available-for-sale in accordance with Statement of
Financial Accounting Standards No. 115, “Accounting for Certain
Investments in Debt and Equity Securities.” Where quoted market prices
are not available, we obtain estimates of fair value from the managers
of the private equity funds, which are based on the market value of
the underlying real estate and private equity investments. These
market values are based on contract offers for the real estate or the
managers’ appraisals of the venture capital funds.
Depreciation of long-lived assets — We depreciate our long-lived
assets over their estimated useful lives. These estimates of useful
lives may be affected by such factors as changing market conditions or
changes in regulatory requirements. In 2002, we changed the estimated
useful life of our existing information technology systems as a result
of the decision to implement a new North America point of sale system
and an upgraded general ledger system. We recognized approximately
$13.8 million of additional amortization expense related to this
change in estimate in 2003 and did not recognize any additional
amortization expense in 2004 as the system was fully amortized in
2003.
Deferred selling costs — Our policy is to defer selling costs that
vary with and are primarily related to the acquisition of preneed
funeral (trust funded only) and preneed cemetery contracts, and to
expense such costs in proportion to the revenue recognized. This
deferral, which is calculated based on deferral rates discussed below,
and amortization model follows the provisions of SFAS 60, “Accounting
and Reporting by Insurance Enterprises” (SFAS 60). The selling costs
subject to deferral are the pool of compensation expense and related
fringe costs incurred by our sales counselors and sales managers.
Other selling costs associated with the sales and marketing of preneed
funeral and cemetery contracts (e.g., lead procurement costs,
brochures and marketing materials, advertising and general
administrative costs) are expensed as incurred.
Deferral rates are determined for the following:
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|
Preneed funeral contracts |
| |
| |
• |
|
Preneed cemetery contract items: |
| |
• |
|
Interment rights (burial property) |
| |
| |
• |
|
Merchandise |
| |
| |
• |
|
Services |
These deferral rates are based on the ratio of the selling
compensation and fringe costs to preneed funeral and cemetery
production (in dollars) weighted accordingly in the manner for
which the counselor is compensated (with interment rights, or
burial property, being the highest and preneed cemetery services
being the lowest compensation to the counselor). In developing the
deferral rates, we review various rate scenarios to ensure the
finalized rates, when applied to forecasted production dollars,
are reasonable compared to forecasted selling compensation.
Additionally, the developed deferral rates are reviewed annually
for reasonableness compared to current and historical commission
rates used by the Company.
As preneed funeral and cemetery contracts are processed, the rates are applied systematically to
the production dollars and the resulting amount is deferred. As a result, the funeral and cemetery
deferred selling costs are only generated when preneed funeral and cemetery contract production is
recorded. Therefore, these deferred selling costs vary with and relate primarily to the production
of the business. We have separate deferred selling cost accounts related to preneed funeral,
preneed cemetery interment rights, preneed cemetery merchandise, and preneed cemetery services. The
deferred preneed funeral and cemetery revenue accounts are recorded similarly.
Periodically, the selling costs deferred are compared to the actual costs incurred to ensure there
is not a significant variance between the two.
The deferred selling costs are expensed in proportion to the revenue when recognized (proportionate
method). This is determined annually by the ratio of the unamortized deferred selling costs
(funeral, cemetery interment rights, cemetery merchandise and cemetery services) to the associated
deferred revenue, and systematically applying this ratio against the deferred selling cost accounts
as the applicable revenues are recognized.
24
We do not attribute deferred selling costs to each individual contract (or each item in the case of
cemetery deferred selling costs) because our systems do not currently have the complete
functionality to defer and amortize the costs and we have no other cost effective means by which to
do so. We believe using the proportionate method of amortization and the homogenous nature of the
430,000 preneed funeral contracts and 3.6 million of preneed cemetery contract items (as separated
by interment rights, merchandise and services) allow for a systematic match of costs with related
revenues.
Income taxes — Our ability to realize the benefit of deferred tax assets requires us to achieve
certain future earnings levels. We have established a valuation allowance against a portion of
deferred tax assets and could be required to further adjust that valuation allowance if market
conditions change materially and future earnings are, or are projected to be, significantly
different from our current estimates. We intend to permanently reinvest the unremitted earnings of
certain of our foreign subsidiaries in those businesses outside the United States and, therefore,
have not provided for deferred federal income taxes on such unremitted foreign earnings.
Pension cost — 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. In 2003 and prior years, it was our policy to use a discount
rate for return on assets comparable to rates of return on high-quality fixed income investments
available and expected to be available during the period to maturity of the Company’s pension
benefits. Actuarial gains and losses resulting from changes in the assumptions, or experience
differences from those assumptions, were amortized over the remaining service period of active
employees expected to receive benefits under the plans. In 2004, we changed our method of
accounting for gains and losses on pension assets and obligations to recognize such gains and
losses in our consolidated statement of operations during the year in which they occur. We recorded
net pension expense reflecting estimated returns on plan assets and obligations for our interim
financial statements. Under the new accounting policy, upon the review of our annual remeasurement,
we recognized actual gains and losses on plan assets and obligations. See notes four and sixteen to
the consolidated financial statements in Item 8 of this Form 10-K/A (Amendment No. 2) for more
information related to pensions.
We used a 9.0% assumed rate of return on plan assets in 2003 as a result of a high allocation of
equity securities within the plan assets. In 2004, the rate of return on plan assets is not
applicable as we recognize gains and losses on plan assets during the year in which they occur. At
December 31, 2004, 55% of the plan assets were invested in core diversified and market neutral
hedge funds, 33% of the plan assets were equity securities and the remaining 12% of plan assets
were fixed income securities. As of December 31, 2004, the equity securities were invested
approximately 57% in U.S. “Large Cap” investments, 22% in international equities and 21% in U.S.
“Small Cap” investments.
In connection with the $20 million infusion of funds into the plan in early 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 hedge funds. We believe that over time this
reallocation will reduce the volatility with limited reduction of returns.
Insurance
loss reserves — We purchase comprehensive general liability, morticians and cemetery
professional liability, automobile liability and workers compensation insurance coverages
structured with high deductibles. This high deductible insurance program results in the Company
being primarily self-insured for claims and associated costs and losses covered by these policies.
Historical insurance industry experience indicates a high degree of inherent variability in
assessing the ultimate amount of losses associated with casualty insurance claims. This is
especially true with respect to liability and workers compensation exposures due to the extended
period of time that transpires between when the claim might occur and the full settlement of such
claim, often many years. We continually evaluate loss estimates associated with claims and losses
related to these insurance coverages and falling within the deductible of each coverage through the
use of qualified and independent actuaries. Assumptions based on factors such as claim settlement
patterns, claim development trends, claim frequency and severity patterns, inflationary trends and
data reasonableness will generally effect the analysis and determination of the “best estimate” of
the projected ultimate claim losses. The results of these actuarial evaluations are used to both
analyze and adjust our insurance loss reserves.
Our independent actuaries used five actuarial methods generally accepted by the Casualty Actuarial
Society to arrive at an estimate of a range that we refer to as “reasonably possible”. The
Actuarial Standard of Practice No. 36 (ASOP 36 published by the American Academy of Actuaries)
states: “A range of reasonable estimates is a range of estimates that could be produced by
appropriate actuarial methods or alternative sets of assumptions that the actuary judges to be
reasonable.” Methods used to determine the Company’s reasonably possible range are: paid and
incurred loss development methods; frequency-severity methods; and paid and incurred
Bornhuetter-Ferguson methods. All of these methods were used to determine our reasonably possible
range of insurance loss reserves for the years ended December 31, 2004, 2003 and 2002.
We have not changed our methodologies for determining the reasonably possible range; however, there
are changes made to the assumptions as the loss development factors are updated. These loss
development factors are determined based on our historical loss development
data(1) and are updated annually as new data becomes available. As a result,
the loss development factors used in the
25
December 31, 2004 analysis could be different from the
loss development factors used in the December 31, 2005 analysis. We consider these changes in loss
development factors synonymous to “changes in assumptions”. The final loss estimate is not
determined by weighting the methodologies, but instead is subjectively arrived at by our
independent actuary considering the relative merits of the various methods and the truncated
average of the various methods.
For each loss type (workers compensation, general liability, and auto liability) “loss triangles”
are generated, which show the cumulative valuation of each loss period over time. The loss
components evaluated include incurred losses, paid losses, reported claim counts, and average
incurred loss. The actuarial analysis of losses uses this data to estimate future loss development
or settlement value of the losses. Since these loss development factors are an estimate about
future loss development, the calculation of ultimate losses is also an estimate. The actual
ultimate loss value may not be known for many years, and may differ significantly from the
estimated value of the ultimate losses.
As of December 31, 2004, reported losses within our retention for workers compensation, general
liability and auto liability incurred during the period May 1, 1987 through December 31, 2004 were
approximately $188.1 million. The selected fully developed ultimate settlement value estimated by
our independent actuary was $222.5 million. Paid losses were $175.9 million indicating a reserve requirement of $46.7 million. After considering matters discussed with
our independent actuary related to this calculation, we estimated the reserve to be $47.3 million
as of December 31, 2004.
At December 31, 2004 and 2003, the balances in the reserve and the related activity were as follows:
| |
|
|
|
|
| (Dollars in millions) |
|
|
|
|
Balance at December 31, 2002 |
|
$ |
(39.0 |
) |
Additions |
|
|
(31.6 |
) |
Payments |
|
|
23.8 |
|
|
|
|
|
Balance at December 31, 2003 |
|
$ |
(46.8 |
) |
Additions |
|
|
(38.3 |
) |
Payments |
|
|
37.8 |
|
|
|
|
|
Balance at December 31, 2004 |
|
$ |
(47.3 |
) |
|
|
|
|
Our independent actuary performed a sensitivity analysis that was modeled to
assess the impact of changes to the reserve pertaining to workers compensation,
general liability, and auto liability. The sensitivity analysis assumes an
instantaneous 5% adverse change to the loss development factors as summarized
below.
| |
|
|
|
|
| |
|
Sensitivity |
|
| (Dollars in millions) |
|
Analysis |
|
Workers Compensation |
|
$ |
1.30 |
|
General Liability |
|
$ |
0.82 |
|
Auto Liability |
|
$ |
.24 |
|
|
|
|
|
Total Sensitivity |
|
$ |
2.36 |
|
|
|
|
|
|
|
|
| (1) |
|
The loss development factors used in the December 31, 2004 calculation
are based on the Company’s actual claim history by policy year for the
period beginning May 1, 1991 — May 1, 2004. |
New Accounting Pronouncements and Accounting Changes
Other Than Temporary Impairments
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. We adopted the disclosure
provisions of EITF 03-1 during the period ended June 30, 2004. The adoption of the measurement and
recognition provisions are not expected to have a material impact on our consolidated financial
statements, results of operations, financial position, or cash flows.
26
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs – an amendment of ARB 43,
Chapter 4” (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,”
to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs
and wasted material. SFAS 151 requires that those items be recognized as current-period charges,
rather than as a portion of the inventory cost. In addition, SFAS 151 requires that allocation of
fixed production overhead to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. We do not expect this statement to have a material impact on our
consolidated financial statements, results of operations, or cash flows.
Income Taxes
In December 2004, the FASB issued Staff Position No. FAS 109-1 “Application of FASB Statement
No. 109, Accounting for Income Taxes, to the Tax Deduction on Qualified Production Activities
provided by the American Jobs Creation Act of 2004” (FAS 109-1). The American Jobs Creation Act of
2004, enacted on October 22, 2004, provides for a deduction for certain qualified production
activities. FAS 109-1 provides guidance for the application of FASB Statement No. 109, Accounting
for Income Taxes, to the deduction for certain qualified production activities, and was effective
immediately upon issuance. We do not believe that the adoption of FAS 109-1 will have a significant
effect, if any, on our consolidated financial statements, results of operations, or cash flows.
In December 2004, the FASB issued Staff Position No. FAS 109-2 “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004” (FAS 109-2). The American Jobs Creation Act of 2004 (Jobs Act), enacted on October 22, 2004,
provides for a temporary 85% dividends-received deduction on certain foreign earnings repatriated
to a U.S. taxpayer, provided certain criteria are met. FAS 109-2 provides accounting and disclosure
guidance for the repatriation provision, and was effective immediately upon issuance. We are in the
process of evaluating whether we will repatriate earnings under the repatriation provisions of the
Jobs Act, and if so, the amount that will be repatriated; therefore, as provided for in FAS 109-2,
deferred tax liabilities have not been adjusted. We estimate the range of possible amounts of
unremitted earnings under consideration is between $0 and $2.3 million. If the maximum amount of
$2.3 million were to be repatriated, we would accrue tax expense of approximately $0.4 million.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R
is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB 25.
Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the financial
statements. The effective date of SFAS 123R is the first reporting period beginning after June 15,
2005, which is third quarter 2005 for our Company. SFAS 123R permits companies to adopt its
requirements using either a “modified prospective” method, or a “modified retrospective” method.
We currently utilize a standard option pricing model (i.e., Black-Scholes) to measure the fair
value of stock options granted to employees. While SFAS 123R permits entities to continue to use
such a model, the standard also permits the use of a “lattice” model. We performed a cost-benefit
analysis comparing option pricing models. Based on this analysis, we will continue to utilize the
Black-Scholes option pricing model to measure the fair value of our stock options.
We expect to adopt SFAS 123R effective July 1, 2005. We are currently evaluating the impact
that this adoption will have on our results of operations. See note fifteen to the consolidated
financial statements in Item 8 of this Form 10-K/A (Amendment
No. 2) for further information related to our
stock-based compensation plans.
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).
Under the provisions of FIN 46R, we are 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 us
to consolidate merchandise and service trusts and cemetery perpetual care trusts for which
27
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 trust assets and our
cemetery perpetual care trusts. No cumulative effect of an accounting change was recognized 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 our 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 our consolidated statement of cash flows; however, it does
require certain financing and investing activities to be disclosed. For additional information, see
notes five through eight to the consolidated financial statements in Item 8 of this Form
10-K/A (Amendment No. 2).
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, SCI 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 our
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 is payable to the trust, but not yet required to
be deposited in the trusts as restricted cash in Deferred charges and other assets in our
consolidated balance sheet. At December 31, 2004, these pending deposits totaled $11.2 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 offsets the net realized earnings
of such trusts also recognized within Other income, net. Accordingly, our 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, funds 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 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 funds associated with the
preneed contracts 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 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 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
28
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 fifteen of the consolidated financial statements in item 8 of this Form
10-K/A (Amendment No. 2). 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 five through eight to the consolidated financial statements in Item 8 of this Form
10-K/A (Amendment No. 2).
Consolidation of Certain Cemeteries: Prior to December 31, 2003, we operated certain
cemeteries that we managed but did not own. During our evaluation of FIN 46R, we evaluated these
cemeteries to determine whether such cemeteries were within the scope of FIN 46R. The investment
capital of these cemeteries was financed by the Company in exchange for a long-term sales,
accounting, and cash management agreement. In accordance with this agreement, we received the
majority of the cash flows from these cemeteries. Additionally, we absorb the majority of these
cemeteries expected losses and receive a majority of the cemeteries residual returns. As a result,
the Company determined itself to be the primary beneficiary of these cemeteries and determined the
long-term sales, accounting, and cash management agreement to be a variable interest as defined by
FIN 46R. Given the circumstances above, the Company consolidated such cemeteries at March 31, 2004.
We recognized an after tax charge of $14.0 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 impact on our reported results of
operations.
Insurance Funded Preneed Funeral 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 December 31, 2003, were $3.5 billion. The removal
of these amounts did not have an impact on our consolidated stockholders’ equity, results of
operations or cash flows. See note five to the consolidated financial
statements in Item 8 of this Form 10-K/A (Amendment No. 2) for additional information on insurance related preneed funeral balances.
Goodwill and Other Intangible Assets
In accordance with SFAS 142, effective January 1, 2002, we recognized a charge reflected as a
cumulative effect of an accounting change of $135.6 million (net of applicable taxes) or $.46 per
diluted share related to the impairment of goodwill in our North America cemetery reporting unit.
See note nine to the consolidated financial statements in Item 8
of this Form 10-K/A (Amendment No. 2) for
additional information on goodwill.
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. We have adopted the revised disclosure requirements.
Our pension plans are frozen with no cost benefits accreting to participants except interest.
Effective January 1, 2004, we changed our accounting for gains and losses on our pension plan
assets and obligations. We now recognize such gains and losses in our consolidated statement of
operations as such gains and losses are incurred under pension accounting. 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 new method of accounting better reflects the economic nature
of our pension plans and recognize gains and losses on the pension plan assets and obligations in
the year the gains or losses occur. As a result of this accounting change, we recognized a charge
for the cumulative effect of an accounting change of $33.6 million (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, we record net pension expense or income
reflecting estimated returns on plan assets and obligations. We will recognize actual gains and
losses on plan assets and obligations as actuarial information becomes available upon review of the
annual remeasurement. See note sixteen to the consolidated financial statements in Item 8 of this
Form 10-K/A (Amendment No. 2) for additional information on pensions.
Deferred Selling Costs
We have made an accounting policy election to begin expensing these selling costs as of
January 1, 2005 in the period incurred rather than deferred as this method is the preferable of the
two acceptable methods. Associated with this accounting policy election,
29
we will file a preferability letter with the Securities and Exchange Commission in connection with
our Quarterly Report on Form 10-Q for the period ended March 31, 2005. We will incur a non-cash
charge of approximately $312 million before tax representing the write-off of deferred selling
costs recorded on our balance sheet as of January 1, 2005. Additionally, if we had expensed these
selling costs in 2004 and 2003, our pretax income would have been reduced by approximately $14
million, or $.03 per diluted share and $11 million, or $.02 per diluted share, respectively. A
change in the treatment of deferred preneed selling costs would have no impact on our cash position
or net cash provided by operating activities.
Results
of Operations — Twelve Months Ended December 31, 2004, 2003 and 2002
In 2004 we restated our unaudited quarterly financial data for the first three interim periods
of 2004. Additionally, we are amending this Form 10-K/A (Amendment
No. 2) to restate results for the years ended
2004, 2003, and 2002. For details relating to these restatements, see notes two and twenty-two to
the consolidated financial statements in Item 8 of this Form 10-K/A (Amendment No. 2).
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 results of operations, financial position or cash flows.
Net income for fiscal 2004 was
$114.1 million or $.35 per diluted share compared to net income
of $85.1 million or $.28 per diluted share in the same period of 2003 and a net loss of $234.6
million or $.80 per diluted share in 2002. These results include cumulative effects of accounting
changes, litigation expenses, gains and losses on dispositions, gains and losses on early
extinguishments of debt, income tax benefits, earnings from discontinued operations, and other
income and expenses as further described below. Additionally, our former funeral operations in
France (which were sold in March 2004) contributed $.02 of earnings per share in 2004 compared to
$.14 per share in the full year of 2003 and $.14 per share in 2002.
Net income in the years presented was affected by the following items, which are presented on
an after-tax basis:
Twelve Months Ended December 31, 2004:
| |
• |
|
A charge of $47.6 million or $.14 per diluted share for the cumulative effects of accounting changes primarily
related to the implementation of FIN 46R and a change in our pension accounting. |
| |
| |
• |
|
Expenses of $38.7 million or $.11 per diluted share associated with the settlement of certain litigation matters. |
| |
| |
• |
|
Net gain on dispositions of $53.2 million or $.16 per diluted share (including tax benefits realized from the
dispositions of our French operations and our minority interest in a United Kingdom company). |
| |
| |
• |
|
Net 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. |
| |
| |
• |
|
Income tax benefit of $7.9 million or $.02 per diluted share related to state net operating losses. |
| |
| |
• |
|
Foreign currency transactional loss of $2.3 million or $.01 per diluted share associated with the payment of a
contingent purchase obligation in Chile. |
| |
| |
• |
|
Interest income of $2.7 million or $.01 per diluted share related to interest income on a note receivable from
our former United Kingdom company. |
| |
| |
• |
|
Discontinued operations contributed net earnings of $43.8 million or $.13 per diluted share. |
Twelve Months Ended December 31, 2003:
| |
• |
|
Expenses of $61.0 million or $.21 per diluted share related to outstanding litigation matters. |
| |
| |
• |
|
Net gain on dispositions of $32.7 million or $.11 per diluted share primarily related to the
sale of our equity and debt holdings in our former Australian company. |
| |
| |
• |
|
Net gain on corporate investments of $2.6 million or $.01 per diluted share. |
| |
| |
• |
|
Other operating expense of $5.9 million or $.02 per diluted share related to severance costs and
the termination of a lease contract. |
| |
| |
• |
|
Net gain on the early extinguishment of debt of $0.7 million or less than $.01 per diluted share. |
30
| |
• |
|
Discontinued operations contributed net earnings of $2.5 million or $.01 per diluted share. |
Twelve Months Ended December 31, 2002:
| |
• |
|
A charge of $135.6 million or $.46 per diluted share for the cumulative effects of
accounting changes related to the impairment of goodwill in our North America cemetery
segment. |
| |
| |
• |
|
Net loss on dispositions of $116.2 million or $.40 per diluted share primarily related
to an impairment charge for several funeral and cemetery operations held for sale in
North America. |
| |
| |
• |
|
Other operating expenses of $67.3 million or $.23 per diluted share related to market
value adjustments of certain options associated with our 6.3% notes due 2003,
severance costs of former employees, and expenses related to the termination of
certain consulting and non-compete contractual obligations. |
| |
| |
• |
|
Net gain on the early extinguishment of debt of $4.9 million or $.02 per diluted share. |
| |
| |
• |
|
Discontinued operations reported a net loss of $14.8 million or $.05 per diluted share. |
The consolidated effective tax rate in 2004 was a benefit
of 5.0% compared to an
expense of 25.8% in 2003 and a benefit of 31.6% in 2002. The tax rate in 2004 was favorably
impacted by tax benefits realized from the disposition of our operations in France and the United
Kingdom and state net operating losses realized in 2004. The tax benefits from dispositions result
from differences between book and tax basis and the reversal of tax liabilities that were then
recorded as warranty indemnification liabilities. In 2005, we expect the consolidated effective tax
rate for continuing operations to be approximately 35%.
The diluted weighted average number of shares increased to 344.7 million in 2004 compared to
300.8 million in 2003 and 294.5 million in 2002. This increase is mainly due to the conversion in
June 2004 of our convertible senior notes which resulted in the issuance of approximately 32
million shares, which were anti-dilutive in 2003 and 2002. The remaining share increase is related
to dilutive outstanding stock options and the contribution of common stock to our 401(k) retirement
plan, which was partially offset by share repurchases. In 2005, we intend to reduce the number of
shares outstanding through our previously announced share repurchase programs. Also effective
January 1, 2005, we began to contribute cash to fund the Company’s matching contribution to its
401(k) retirement plan and discontinued funding through the use of common stock.
Consolidated Funeral Results
Funeral revenues in 2004 declined $479.9 million from 2003 primarily due to a decline of
$457.3 million in revenues associated with our French funeral operations, which were sold on March
11, 2004. In 2003, revenues from funeral operations in France were $584.6 million compared to
$127.3 million for the partial period of our ownership from January 1, 2004 through March 11, 2004.
North America funeral revenue declined $23.7 million primarily as a result of divestitures and an
$8.5 million decline in revenues from Kenyon, our subsidiary that engages in mass fatality and
emergency response services. Kenyon revenues were higher in 2003 than in 2004 primarily due to
activity associated with the World Trade Center disaster.
Funeral gross profits decreased $46.8 million in 2004 compared to 2003 primarily as a result
of a $56.7 million decline in gross profits related to our former French operations which were sold
in March 2004. Gross profits from our French funeral operations were $11.6 million in our partial
period of ownership in 2004 compared to $68.3 million in the full year of 2003. North America
funeral gross profits increased $11.3 million despite a decline in revenues. This improvement is
mainly a result of reduced overhead costs and lower pension expenses benefited by a change in
pension accounting, which were partially offset by declines in Kenyon revenue.
Funeral revenues increased $59.8 million in 2003 compared to 2002 as a result of a $97.3
million increase in foreign revenues, partially offset by a decline of $37.5 million in North
America funeral revenues. The increase in foreign revenues is predominantly related to our French
operations and is due to increases in funeral services performed and in the average revenue per
funeral, as well as favorable currency effects. North America funeral revenues declined primarily
as a result of divestitures and declines in General Agency (“GA”) revenues. GA revenues are
commissions we receive from third-party insurance companies when customers purchase insurance
contracts from such third-party insurance companies to fund funeral services and merchandise at a
future date.
Funeral gross profits declined $10.8 million in 2003 compared to 2002. Declines in North
America funeral operations due to decreased revenues described above and increases in employee
benefit and insurance costs were partially offset by improvements in French funeral operations
which benefited from increased revenues described above and reduced depreciation expense.
31
Consolidated Cemetery Results
Cemetery revenues increased $2.7 million in 2004 compared to 2003; however, North America
cemetery revenues decreased $2.1 million. Foreign cemetery revenues (consisting of cemetery
operations in Chile) increased $4.8 million reflective of improved economic conditions in the
region and favorable currency effects. Cemetery gross profits increased $21.4 million in 2004
compared to 2003 and benefited from an increase in revenues described above and reductions in North
America overhead costs, pension expenses and maintenance expenses.
Cemetery revenues declined $32.6 million in 2003 compared to 2002 primarily as a result of a
$37.5 million decrease in North America cemetery revenues, partially offset by improvements in
foreign cemetery revenues. This decline in North America cemetery revenues was due to divestitures
and also due to the significant changes made to the sales organization in 2003. Although we
expected cemetery revenues to decline in 2003 from these strategic changes, we also anticipated,
and realized, higher gross margins as a result. Cemetery gross profits in 2003 improved $12.1
million from 2002 due primarily to reductions in preneed selling costs from a number of changes
made to the sales organization to increase our effectiveness.
General and Administrative Expenses
General and administrative expenses were $130.9 million in 2004 compared to $178.1 million in
2003 and $89.8 million in 2002. Included in all periods are expenses associated with the settlement
of certain litigation matters. We recognized litigation expenses (net of insurance recoveries of
$1.6 million in 2004, $25.0 million in 2003 and $0 in 2002) of $61.1 million in 2004 compared to
$95.2 million in 2003 and $10.0 million in 2002. Additionally, in both 2003 and 2002 we recognized
approximately $14 million of accelerated system amortization expense that is not included in 2004.
During 2002, we made the decision to implement new information technology 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.
Excluding litigation expenses and accelerated system amortization costs in all periods,
general and administrative expenses in 2004 were $69.8 million compared to $69.1 million in 2003
and $66.3 million in 2002. Increased costs associated with Sarbanes-Oxley compliance efforts were
offset by reductions in information technology and other overhead expenses. General and
administrative expenses excluding litigation expenses and accelerated system amortization costs is
a non-GAAP financial measure; however, we believe this non-GAAP measure is useful to investors as
it provides a consistent basis for comparison between periods and better reflects the performance
of our core operations, as it is not influenced by certain non-recurring expenses.
Other
In 2004, we recognized a net pretax gain from dispositions of $25.8 million consisting of a
$41.2 million gain from the sale of our equity and debt holdings in our former United Kingdom
company and a $6.4 million gain from the sale of our French funeral operations, partially offset by
net losses associated with various dispositions in North America. In 2003, we recognized a net
pretax gain of $49.7 million primarily related to the sale of our equity holdings in our former
operations in Australia and Spain. In 2002, we recognized a net pretax loss of $163.2 million
primarily related to an impairment charge for certain funeral and cemetery operations held for sale
in North America. For further information regarding gains and impairment losses on dispositions see
note twenty to the consolidated financial statements in this Form 10-K/A (Amendment No. 2).
In 2003, we recognized other operating expenses of $9.0 million related to severance costs and
the termination of a lease contract. In 2002, we recognized other operating expenses of $94.9
million related to market value adjustments of certain options associated with our 6.3% notes due
2003, severance costs of former employees, and expenses related to the termination of certain
consulting and non-compete contractual obligations.
Interest expense decreased to $118.2 million in 2004 compared to $138.6 million in 2003 and
$158.0 million in 2002. Between 2002 and 2004, interest expense declined by $39.8 million or 25.2%,
reflecting the success we have had in improving our balance sheet. During this same period, total
debt was reduced by more than $700 million as a result of strong operating cash flows and a
successful asset divestiture and joint venture program that produced more than $500 million of net
cash proceeds.
Other income was $16.1 million in 2004 compared to $24.3 million in 2003 and $14.5 million in
2002. The components of other income for the years presented were as follows:
| |
• |
|
Interest income was $13.5 million in 2004 compared to $14.4 million in 2003 and $7.1 million in 2002. |
| |
| |
• |
|
Cash overrides received from a third party insurance provider related to the sale of insurance funded preneed
funeral contracts were $6.3 million in 2004 compared to $5.6 million in 2003 and $9.5 million in 2002. For a
further description of these cash overrides, see Insurance Funded Preneed Funeral Contracts in Item 7 of this
Form 10-K/A (Amendment No. 2). |
32
| |
• |
|
In 2004, we recognized a $2.8 million foreign currency transactional loss associated with the payment of a
contingent purchase obligation in Chile. |
| |
| |
• |
|
Surety bond premium costs were $4.0 million in 2004 compared to $4.1 million in 2003 and $2.9 million in 2002. |
| |
| |
• |
|
The remaining income of $3.1 million in 2004, $8.4 million in 2003, and $1.9 million in 2002, is primarily
attributable to net gains related to foreign currency transactions. |
Actual Versus Comparable Results of Operations – Twelve Months Ended December 31, 2004, 2003 and 2002
The table below reconciles our actual results to our comparable or “same store” results for
the periods ended December 31, 2004, 2003 and 2002. We regard “same store” results of operations as
analogous to our comparable results of operations. We consider comparable operations as operations
that were not acquired or constructed after January 1, 2002 or divested prior to December 31, 2004.
Therefore, in the following three-year presentation, we are providing results of operations for the
same funeral and cemetery locations. Comparable results are a non-GAAP financial measure; however,
we believe this non-GAAP measure is useful to investors as it provides a consistent basis for
comparison between periods and better reflects the performance of our core operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Activity |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
associated |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
with |
|
|
Activity |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
acquisition / |
|
|
associated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
new |
|
|
with |
|
|
|
|
|
|
% |
|
| (Dollars in thousands) |
|
Actual |
|
|
construction |
|
|
dispositions |
|
|
Comparable |
|
|
Variance |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral revenue |
|
$ |
1,120,128 |
|
|
$ |
1,370 |
|
|
$ |
11,714 |
|
|
$ |
1,107,044 |
|
|
|
1.2 |
% |
Cemetery revenue |
|
|
570,135 |
|
|
|
— |
|
|
|
4,250 |
|
|
|
565,885 |
|
|
|
0.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,690,263 |
|
|
|
1,370 |
|
|
|
15,964 |
|
|
|
1,672,929 |
|
|
|
1.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral revenue |
|
|
139,693 |
|
|
|
— |
|
|
|
127,282 |
|
|
|
12,411 |
|
|
|
91.1 |
% |
Cemetery revenue |
|
|
30,906 |
|
|
|
— |
|
|
|
— |
|
|
|
30,906 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,599 |
|
|
|
— |
|
|
|
127,282 |
|
|
|
43,317 |
|
|
|
74.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
1,860,862 |
|
|
$ |
1,370 |
|
|
$ |
143,246 |
|
|
$ |
1,716,246 |
|
|
|
7.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profits |
|
$ |
213,290 |
|
|
$ |
332 |
|
|
$ |
(2,842 |
) |
|
$ |
215,800 |
|
|
|
(1.2 |
)% |
Cemetery gross profits |
|
|
101,997 |
|
|
|
— |
|
|
|
(5,154 |
) |
|
|
107,151 |
|
|
|
(5.1 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
315,287 |
|
|
|
332 |
|
|
|
(7,996 |
) |
|
|
322,951 |
|
|
|
(2.4 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profits |
|
|
13,117 |
|
|
|
— |
|
|
|
11,572 |
|
|
|
1,545 |
|
|
|
88.2 |
% |
Cemetery gross profits |
|
|
7,806 |
|
|
|
— |
|
|
|
— |
|
|
|
7,806 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,923 |
|
|
|
— |
|
|
|
11,572 |
|
|
|
9,351 |
|
|
|
55.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
336,210 |
|
|
$ |
332 |
|
|
$ |
3,576 |
|
|
$ |
332,302 |
|
|
|
1.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Activity |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
associated |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
with |
|
|
Activity |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
acquisition / |
|
|
associated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
new |
|
|
with |
|
|
|
|
|
|
% |
|
| (Dollars in thousands) |
|
Actual |
|
|
construction |
|
|
dispositions |
|
|
Comparable |
|
|
Variance |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral revenue |
|
$ |
1,143,831 |
|
|
$ |
480 |
|
|
$ |
33,547 |
|
|
$ |
1,109,804 |
|
|
|
3.0 |
% |
Cemetery revenue |
|
|
572,219 |
|
|
|
— |
|
|
|
10,461 |
|
|
|
561,758 |
|
|
|
1.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,716,050 |
|
|
|
480 |
|
|
|
44,008 |
|
|
|
1,671,562 |
|
|
|
2.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral revenue |
|
|
595,937 |
|
|
|
— |
|
|
|
584,636 |
|
|
|
11,301 |
|
|
|
98.1 |
% |
Cemetery revenue |
|
|
26,075 |
|
|
|
— |
|
|
|
— |
|
|
|
26,075 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
622,012 |
|
|
|
— |
|
|
|
584,636 |
|
|
|
37,376 |
|
|
|
94.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,338,062 |
|
|
$ |
480 |
|
|
$ |
628,644 |
|
|
$ |
1,708,938 |
|
|
|
26.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profits |
|
$ |
202,000 |
|
|
$ |
59 |
|
|
$ |
(1,624 |
) |
|
$ |
203,565 |
|
|
|
(0.8 |
)% |
Cemetery gross profits |
|
|
82,565 |
|
|
|
— |
|
|
|
(555 |
) |
|
|
83,120 |
|
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
284,565 |
|
|
|
59 |
|
|
|
(2,179 |
) |
|
|
286,685 |
|
|
|
(0.7 |
)% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profits |
|
|
71,165 |
|
|
|
— |
|
|
|
68,275 |
|
|
|
2,890 |
|
|
|
95.9 |
% |
Cemetery gross profits |
|
|
5,829 |
|
|
|
— |
|
|
|
— |
|
|
|
5,829 |
|
|
|
0.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
76,994 |
|
|
|
— |
|
|
|
68,275 |
|
|
|
8,719 |
|
|
|
88.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
361,559 |
|
|
$ |
59 |
|
|
$ |
66,096 |
|
|
$ |
295,404 |
|
|
|
18.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Activity |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
associated |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
with |
|
|
Activity |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
acquisition / |
|
|
associated |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
new |
|
|
with |
|
|
|
|
|
|
% |
|
| (Dollars in thousands) |
|
Actual |
|
|
construction |
|
|
dispositions |
|
|
Comparable |
|
|
Variance |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral revenue |
|
$ |
1,181,295 |
|
|
$ |
— |
|
|
$ |
65,444 |
|
|
$ |
1,115,851 |
|
|
|
5.5 |
% |
Cemetery revenue |
|
|
609,724 |
|
|
|
— |
|
|
|
26,363 |
|
|
|
583,361 |
|
|
|
4.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,791,019 |
|
|
|
— |
|
|
|
91,807 |
|
|
|
1,699,212 |
|
|
|
5.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral revenue |
|
|
498,671 |
|
|
|
— |
|
|
|
487,926 |
|
|
|
10,745 |
|
|
|
97.8 |
% |
Cemetery revenue |
|
|
21,190 |
|
|
|
— |
|
|
|
2,190 |
|
|
|
19,000 |
|
|
|
10.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
519,861 |
|
|
|
— |
|
|
|
490,116 |
|
|
|
29,745 |
|
|
|
94.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
2,310,880 |
|
|
$ |
— |
|
|
$ |
581,923 |
|
|
$ |
1,728,957 |
|
|
|
25.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profits |
|
$ |
230,980 |
|
|
$ |
— |
|
|
$ |
3,118 |
|
|
$ |
227,862 |
|
|
|
1.3 |
% |
Cemetery gross profits |
|
|
71,078 |
|
|
|
— |
|
|
|
3,416 |
|
|
|
67,662 |
|
|
|
4.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
302,058 |
|
|
|
— |
|
|
|
6,534 |
|
|
|
295,524 |
|
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other foreign |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profits |
|
|
52,955 |
|
|
|
— |
|
|
|
50,217 |
|
|
|
2,738 |
|
|
|
94.8 |
% |
Cemetery gross profits |
|
|
5,186 |
|
|
|
— |
|
|
|
740 |
|
|
|
4,446 |
|
|
|
14.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
58,141 |
|
|
|
— |
|
|
|
50,957 |
|
|
|
7,184 |
|
|
|
87.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross profit |
|
$ |
360,199 |
|
|
$ |
— |
|
|
$ |
57,491 |
|
|
$ |
302,708 |
|
|
|
16.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
34
The following table provides the components to calculate our comparable average revenue per
funeral service in North America for the periods ended December 31, 2004, 2003 and 2002. We
calculate average revenue per funeral service as adjusted comparable North America funeral revenue
divided by the comparable number of funeral services performed in North America during the
applicable period. In the calculation of average revenue per funeral service, General Agency (“GA”)
revenues and Kenyon revenues are excluded from comparable North America funeral revenue to avoid
distorting our averages of normal funeral case volume.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands, except average revenue per funeral service) |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
Comparable North America funeral revenue |
|
$ |
1,107,044 |
|
|
$ |
1,109,804 |
|
|
$ |
1,115,851 |
|
Less: GA revenues (1) |
|
|
28,888 |
|
|
|
27,612 |
|
|
|
45,971 |
|
Kenyon revenues (2) |
|
|
3,442 |
|
|
|
11,945 |
|
|
|
4,996 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Adjusted Comparable North America funeral revenue |
|
$ |
1,074,714 |
|
|
$ |
1,070,247 |
|
|
$ |
1,064,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comparable North America funeral services performed |
|
|
252,232 |
|
|
|
257,591 |
|
|
|
261,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
North America average revenue per funeral service |
|
$ |
4,261 |
|
|
$ |
4,155 |
|
|
$ |
4,074 |
|
|
|
|
| (1) |
|
General Agency (“GA”) revenues are commissions we
receive from third-party insurance companies when
customers purchase insurance contracts from such
third-party insurance companies to fund funeral services
and merchandise at a future date. |
| |
| (2) |
|
Kenyon International Emergency Services (“Kenyon”) is
our disaster response subsidiary that engages in mass
fatality and emergency response services. Revenues and
gross profits associated with Kenyon are subject to
significant variation due to the nature of their
operations. |
North America Comparable Results of Operations
Other foreign revenues and gross profits shown above are primarily related to our funeral
operations in France which were sold in March 2004. Since we did not own these businesses for the
full year of 2004, they are not considered comparable or “same store” locations.
In 2004, comparable North America operations represented 90% of consolidated revenues and
approximately 96% of consolidated gross profits. The following discussion of results of operations
pertains to comparable North America operations only.
Comparable North America Funeral
Comparable North America funeral revenues in 2004 declined $2.8 million or less than 1% from
2003 primarily due to an $8.5 million decrease in revenues from Kenyon and a decline in funeral
volume, which was partially offset by an increase in the average revenue per funeral service and an
increase in GA revenue. Comparable North America funeral revenues declined $6.0 million in 2003
compared to 2002 primarily as a result of an $18.4 million decline in GA revenue and a decline in
funeral volume, which was partially offset by a $6.9 million increase in Kenyon revenue and an
increase in the average revenue per funeral service. GA revenue declined during 2003 as a result of
an anticipated decrease in the sale of insurance funded preneed funeral contracts due to
significant changes made to the sales organization in 2003 which impacted our sales effectiveness.
The number of funeral services performed declined 2.1% in 2004 compared to 2003 which in turn
was down 1.5% from 2002. We believe these declines are consistent with trends reported by other
companies in the funeral service and casket manufacturing industries and that these declines are
primarily related to a decrease in the number of deaths in our relevant markets. Our review of
various sources of industry data indicates that market share has increased in certain of our
markets and decreased in others; however, we believe that there has not been a substantial loss of
market share in our total North America business segment. We believe that over time, the decline in
our North America comparable funeral services performed will be curtailed as a result of the aging
of the population and the number of initiatives we have in place to grow market share. For a
further description of our initiatives to grow revenues, see The Path to Growth earlier in this
Item of this Form 10-K/A (Amendment No. 2).
The comparable average revenue per funeral service increased 2.6% in 2004 over 2003 and
increased 2.0% in 2003 over 2002. The fourth quarter of 2004 represents the eighteenth consecutive
quarter that we have reported an increase in our average revenue per funeral service. This
consistent growth in average revenue is largely a result of the success of our nationally branded
Dignity Memorial® packaged funeral and cremation plan initiative. 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
35
comprehensive value-added offerings, the packages generate significant incremental revenue per
funeral service compared to non-Dignity sales. The percentage of consumers selecting a Dignity
Memorial® plan has grown from approximately 14% of the total funeral services
performed in 2002 to approximately 17% in 2004. We believe we can increase the selection rate of
Dignity Memorial® plans in 2005 by continuing to utilize technology and
contemporary marketing techniques to enhance our sales opportunities.
We have been able to generate increases in the average revenue per funeral despite an increase
in the rate of cremation. Of the total comparable funeral services performed in 2004, 40.0% were
cremation services versus 39.0% in the same period of 2003 and 37.9% in 2002. In North America,
there continues to be a growing trend in the number of cremations performed as an alternative to
traditional funeral service dispositions. Cremation services historically have generated less
revenue and gross profit dollars than traditional funeral services that involve burials. Industry
research has shown that most consumers choose cremation for reasons other than cost, which we
believe provides us significant opportunities to better serve the cremation consumer. Our Dignity
Memorial® packaged cremation plans have been successful in expanding the
products and services that cremation consumers select. Of the total cremation services performed
during 2004, approximately 12% were Dignity Memorial® cremation plans.
Despite a decline in funeral revenues in 2004, funeral gross profits improved 6.0% and the
funeral gross margin percentage improved to 19.5% in 2004 compared to 18.3% in 2003. This
improvement is mainly a result of reduced overhead and pension expenses which were partially offset
by declines in Kenyon revenue described above. North America funeral gross profits and gross margin
percentage declined in 2003 compared to 2002 primarily due to increased employee benefit costs and
insurance costs, which were partially offset by reductions in selling and other overhead costs.
Comparable North America Cemetery
We demonstrated significant progress in 2004 in our cemetery segment. North America cemetery
revenue increased $4.1 million or 1% from 2003 to $565.9 million. This exceeded our original
expectations and was primarily a result of increased recognition of undeveloped property that was
sold in 2004 and then subsequently constructed during 2004. This is mainly attributable to the
success of our focus on developing and selling high-end cemetery property such as private family
estates. Revenues from the sale of cemetery property are recognized only when the property is fully
developed and when customer payments are at least 10% of the total contract amount. Historically,
the sale of undeveloped property preceded the period of final construction and revenue recognition
by as much as five years. We are shifting our strategy to focus on shortening the time between when
property is sold and when it is constructed.
Cemetery revenues declined $21.6 million in 2003 compared to 2002 primarily as a result of the
anticipated decrease in preneed revenues due to significant changes made to the sales organization
in 2003. Although we expected revenues to decline in 2003, we also anticipated, and realized,
higher gross margins as a result of those strategic changes.
Cemetery gross profits increased 28.9% or $24.0 million in 2004 compared to 2003 and benefited
from an increase in revenues and reductions in overhead costs, pension expenses and maintenance
expenses. Cemetery gross profits in 2003 improved $15.5 million from 2002 due primarily to
reductions in preneed selling costs from a number of changes made to the sales organization to
increase effectiveness. The cemetery gross margin percentage grew to 18.9% in 2004 from 14.8% in
2003 and 11.6% in 2002.
Overhead and Pension Expenses
The improvement in funeral and cemetery gross profits in 2004 compared to 2003 and 2002 is
largely a result of a reduction in overhead expenses and pension expenses. Overhead expenses from
our field management and support offices and our home office are allocated to funeral and cemetery
operations in North America. In 2004, these overhead expenses totaled $112.6 million compared to
$152.7 million in 2003 and $162.9 million in 2002, representing a decline of $50.3 million from
2002 to 2004.
Beginning in late 2002 and continuing through 2003, we moved to reduce our fixed costs by
reformulating our infrastructure. We redesigned our sales organization, improved business and
financial processes, and outsourced certain of our accounting functions. In 2003 and continuing
through 2004, we implemented a new information system in our field locations. 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, this new structure now
has our strongest business managers focused on producing favorable financial results in each of our
markets.
Pension income and expense, of which a portion is included in funeral and cemetery expenses
and a portion in general and administrative expenses, is related to our frozen cash
balance pension plan and its supplemental retirement plans for certain current and former
employees. We recognized pension income of $0.3 million in 2004 compared to pension expense of
$17.6 million and pension expense of $6.7 million in 2002. The reduction in net pension expense in
2004 compared to 2003 and 2002 is primarily related to a change in accounting. Effective January 1,
2004, we changed the accounting for gains and losses on our pension plan assets and obligations to
recognize such gains and losses as they are incurred. 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
36
settlements with employees required earlier recognition). We believe the new method of accounting
better reflects the economic nature of our pension plans and recognizes gains and losses
on the pension plan assets and liabilities in the year the gains or losses occur. For further
information regarding our pension plans, see note sixteen in Item 8 of this Form 10-K/A (Amendment No. 2).
Financial Condition, Liquidity and Capital Resources
Overview
Our primary financial objectives are to capitalize on our financial flexibility and to
continue generating strong operating cash flows. We believe that we have adequate resources 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. As of December 31, 2004, our
cash balance was approximately $288 million. We also have a $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 $67.0 million of letters of credit as of December 31, 2004.
Internally generated cash flows are a significant source of liquidity for us. Cash flow from
operating activities in 2004 was $107.8 million. Included in 2004 was the payment of $131.1 million
related to the resolution of certain legal matters, a $20.0 million voluntary cash contribution to
our pension plan, and the payment of $11.4 million to retire life insurance policy loans related to
our SERP and Senior SERP retirement programs. Excluding these items, cash flow from operating
activities was $270.3 million. Cash flows from operating activities that exclude the items
described above is a non-GAAP financial measure; however, we believe this non-GAAP measure is
useful to investors as it better reflects the performance of our core operations, as it is not
influenced by certain non-recurring expenses.
We are continuing our program to divest of our operations outside of North America. In
February 2005, we sold our operations in Argentina and Uruguay for net cash proceeds of $21.6
million. We currently own funeral businesses in Germany and Singapore and cemetery businesses in
Chile, all of which we would consider holding for sale if we believe appropriate values could be
obtained; however, these businesses are not currently being held for sale. We expect these future
international asset sales could generate $60 to $80 million of net cash proceeds if and when sold.
In March 2005, we received a tax refund of $29.0 million resulting from certain federal tax
carry-back losses.
Total debt at December 31, 2004 was $1.25 billion. We currently have about $75 million of debt
maturing in 2005 and approximately $164 million in 2006. We have a credit rating of “BB” with
Standard and Poor’s (S&P) and “Ba3” with Moody’s Investors Service (Moody’s). In addition, Moody’s
upgraded SCI during 2004 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.
Capital Allocation Considerations
We believe that our financial flexibility coupled with our liquidity allows us to consider
investments or capital structure related transactions that will enhance shareholder value. In
February 2005, we initiated a quarterly cash dividend of two and one-half cents per share of common
stock. While we intend to pay regular quarterly cash dividends for the foreseeable future, all
subsequent dividends are subject to final determination by the Board of Directors of SCI each
quarter after its review of our financial performance. We intend to continue to buy back our common
stock as discussed further below. We will continue to evaluate internal opportunities such as the
construction of new funeral homes and development of high-end cemetery property. We will look at
acquisitions that meet the strategic needs of our core business, if such acquisitions are available
at reasonable market prices. These investment decisions will require projected returns at a premium
to our weighted average cost of capital. Finally, we could consider additional debt reductions
depending on acceptable market conditions.
In August 2004, we announced our initial share repurchase program authorizing the investment
of up to $100 million to repurchase our common stock. In November 2004, we announced the
authorization of an additional $100 million. In February 2005, the authorization was increased by
another $100 million for an aggregate of $300 million. As of March 31, 2005, we had repurchased
approximately 31.4 million shares at a total cost of approximately $213.8 million under these
programs. We have made and intend to make purchases from time to time in the open market or through
privately negotiated transactions, subject to acceptable market conditions and normal trading
restrictions. There can be no assurance that we will continue to buy our common stock under our
share repurchase programs. Important factors that could cause us not to continue to repurchase our
shares include, among others, unfavorable market conditions, the market price of our common stock,
the nature of other investment opportunities presented to us from time to time, and the
availability of funds necessary to continue purchasing common stock.
37
During the third quarter of 2004, we made our first strategic acquisition since 1999 for $1.8
million in cash plus other consideration. 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.
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 year ended December 31, 2004 compared to the same period of
2003 are as follows:
Operating Activities — Cash flows from operating activities declined by $266.3 million to
$107.8 million in 2004 compared to 2003. Included in 2004 was the payment of $131.1 million related
to the resolution of certain litigation matters, a $20.0 million voluntary cash contribution to our
pension plan, and the payment of $11.4 million to retire life insurance policy loans related to our
SERP and Senior SERP retirement programs. Included in 2003 was a tax refund of $94.5 million and
disbursements of $27.1 million (net of insurance recoveries) related to the resolution of certain
litigation matters. Excluding the items described above in both periods, cash flows from operating
activities declined $36.4 million. Cash flows from operating activities that exclude the items
described above is a non-GAAP financial measure; however, we believe this non-GAAP measure is
useful to investors as it provides a consistent basis for comparison between periods and better
reflects the performance of our core operations, as it is not influenced by certain non-recurring
expenses.
A portion of this $36.4 million decline is attributable to our French business which was
divested in March 2004. Cash flow from operating activities in France declined $14.7 million from
$33.0 million in 2003 to $18.3 million for the period January 1, 2004 through March 11, 2004. The
remaining decline of $21.7 million is primarily a result of decreases associated with an extra cash
payroll payment of $19.2 million in 2004, the replacement of bonding with trust funding for new
preneed sales in Florida and working capital increases primarily associated with decreases in
accounts receivable collections. These declines were partially offset by reductions in interest and
tax payments.
We incurred an extra bi-weekly cash payroll payment of $19.2 million in 2004 that did not
occur in 2003. This extra bi-weekly cash payroll payment occurs every eleven years and is not
expected to recur until the year 2015.
In February 2004, we began making net trust deposits in Florida for our new preneed funeral
and cemetery 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
$15.4 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
in 2003.
Cash interest payments declined $25.6 million to $111.0 million in 2004 compared to $136.6
million in the same period of 2003 due to significant debt reductions during 2004. We did not pay
federal income taxes in 2003 or 2004. Because of our significant net operating loss carry-forwards
and future tax losses anticipated from proposed international asset sales, we do not expect to pay
federal income taxes until 2007. Foreign, state and local income tax payments declined $3.7 million
in 2004 to $10.8 million from $14.5 million in 2003 primarily as a result of less foreign taxes
paid due to the disposition of our French operations. These reductions in interest and tax payments
were offset by working capital increases primarily associated with decreases in accounts receivable
collections and expenses associated with Sarbanes-Oxley compliance.
Investing Activities — Cash flows from investing activities improved by $326.9 million
primarily due to an increase in proceeds from sales of international businesses and equity
investments (described below) and net withdrawals from restricted funds primarily related to
various commercial commitments (described below). Partially offsetting these increases was the
payment of $51.7 million to satisfy a contingent purchase obligation associated with the 1998
acquisition of our operations in Chile. Capital spending declined $19.6 million and was offset by
$18.8 million in reduced proceeds from divestitures and sales of property and equipment.
In March 2004, we sold 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
$281.7 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 and the remaining balance was reported in Other income, net in
the consolidated statement of operations as of March 31, 2004.
In 2003, we made certain restricted cash deposits as a result of our decision to replace
certain letters of credit with cash collateral for various commercial commitments (primarily surety
obligations). Our improved financial condition and credit profile in 2004 allowed us to receive
$74.9 million of this cash collateral back. In early 2005, we received an additional $9.2 million
of cash collateral back and have no further deposits outstanding for cash collateral with surety
companies.
38
Financing Activities — Cash used for financing activities increased $49.5 million and is
primarily due to debt extinguishments and stock repurchases.
In 2004, we 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 (these notes were subsequently exchanged for publicly-traded notes) 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. 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 $94.6 million in cash, including interest and a premium. Also in
2004, as required by the terms of the agreements, we repaid the remaining $111.2 million of our
7.375% notes due April 2004 and $50.8 million of our 8.375% notes due December 2004. With these
transactions in 2004, we have significantly extended our debt maturity schedule, reduced our future
interest payments and increased our financial flexibility, continuing the progress we have made on
improving our balance sheet.
During the period August 16, 2004 to December 31, 2004, we repurchased 16.7 million shares of
common stock for $110.3 million. Between January 1 and March 31, 2005, we repurchased an additional
14.7 million shares for $103.5 million. As of March 31, 2005, the remaining dollar value of shares
that may yet be purchased under our share repurchase programs was approximately $86 million.
Taxes
We had tax receivables of $30.5 million and long-term tax liabilities of $105.0 million at
December 31, 2004. Current refundable income taxes and current deferred tax assets are included in
Other current assets, while long-term deferred tax assets are included in Deferred charges and
other assets in the consolidated balance sheet. Current taxes payable and current deferred tax
liabilities are reflected as Income taxes in the consolidated balance sheet and long-term tax
liabilities are included in Other liabilities in the consolidated balance sheet. We maintain
accruals for tax liabilities that relate to uncertain tax matters in numerous countries. If these
tax matters are unfavorably resolved, we will make any required payments to tax authorities or
adjust the deferred tax asset. If these tax matters are favorably resolved, the accruals maintained
by the Company will no longer be required and these amounts will be reversed through the tax
provision as a non-cash credit at the time of resolution.
Debt
Our financial condition continues to improve as demonstrated by the following trend in our
cash and debt balances at December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| (In millions) |
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
2001 |
|
Total debt |
|
$ |
1,254.0 |
|
|
$ |
1,701.9 |
|
|
$ |
1,974.4 |
|
|
$ |
2,522.0 |
|
Cash and cash equivalents |
|
|
287.8 |
|
|
|
239.4 |
|
|
|
200.6 |
|
|
|
29.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total debt less cash and cash equivalents |
|
$ |
966.2 |
|
|
$ |
1,462.5 |
|
|
$ |
1,773.8 |
|
|
$ |
2,492.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2004, we continued to increase our cash balance while simultaneously reducing our total
debt. Total debt less cash and cash equivalents (or net debt) at December 31, 2004 was $966.2
million, representing the lowest levels in our company since 1992. Net debt has been reduced by
approximately $1.5 billion or more than 60% since December 31, 2001. This reduction is a result of
strong operating cash flows and a successful asset divestiture and joint venture program that
produced over $900 million of net cash proceeds.
Contractual, Commercial and Contingent Commitments
We have assumed various financial obligations and commitments in the ordinary course of
conducting our business. We have contractual obligations requiring future cash payments under
existing contractual arrangements, such as management, consulting and non-competition agreements.
We also have commercial and contingent obligations that result in cash payments only if certain
contingent events occur requiring our performance pursuant to a funding commitment.
39
The following table details our known future cash payments (on an undiscounted basis) related
to various contractual obligations as of December 31, 2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
Payments Due By Period |
|
| Contractual Obligations |
|
2005 |
|
|
2006 - 2007 |
|
|
2008 - 2009 |
|
|
Thereafter |
|
|
Total |
|
Current
maturities of long-term debt (1) |
|
$ |
75,075 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
75,075 |
|
Long-term debt (1) |
|
|
— |
|
|
|
313,944 |
|
|
|
559,829 |
|
|
|
305,112 |
|
|
|
1,178,885 |
|
Interest obligation on long-term debt |
|
|
94,998 |
|
|
|
157,984 |
|
|
|
89,213 |
|
|
|
156,405 |
|
|
|
498,600 |
|
Casket purchase agreement (2) |
|
|
121,707 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121,707 |
|
Operating lease agreements (3) |
|
|
36,002 |
|
|
|
54,867 |
|
|
|
34,921 |
|
|
|
86,907 |
|
|
|
212,697 |
|
Management, consulting and non-competition
agreements (4) |
|
|
30,866 |
|
|
|
29,015 |
|
|
|
6,462 |
|
|
|
4,360 |
|
|
|
70,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total contractual obligations |
|
$ |
358,648 |
|
|
$ |
555,810 |
|
|
$ |
690,425 |
|
|
$ |
552,784 |
|
|
$ |
2,157,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Our outstanding indebtedness contains standard
provisions, such as payment delinquency default clauses
and change of control clauses. In addition, our bank
credit agreement contains a maximum leverage ratio and a
minimum interest coverage ratio. |
| |
| (2) |
|
We have executed a purchase agreement with a major
casket manufacturer for our North America operations
with an original minimum commitment of $750 million,
covering a six-year period, that expired in 2004. The
agreement contained provisions for annual price
adjustments and provided for a one-year extension to
December 31, 2005 in which we are allowed to satisfy any
remaining commitment that exists at the end of the
original term. We elected to extend the contract to
December 31, 2005 in order to satisfy its minimum
commitment. In January 2005, we amended our original
purchase agreement. This amendment allows us to continue
purchasing caskets through 2006, subject to price
increase limitations. At December 31, 2004, our
remaining commitment under the purchase agreement was
$121.7 million. |
| |
| (3) |
|
The majority of our operating leases contain options to (i) purchase
the property at fair value on the exercise date, (ii) purchase the
property for a value determined at the inception of the leases, or
(iii) renew for the fair rental value at the end of the primary lease
term. Our operating leases primarily relate to funeral service
locations, automobiles, limousines, hearses, cemetery operating and
maintenance equipment and two aircraft. We have residual value
exposures related to certain operating leases of approximately $7.8
million. We believe it is unlikely that we will have to make future
cash payments related to these residual value exposures. |
| |
| (4) |
|
We have entered into management employment, consulting and
non-competition agreements which contractually require us to make cash
payments over the contractual period. The agreements have been
primarily entered into with certain officers and employees of the
Company and former owners of businesses acquired. The contractual
obligation amounts pertain to the total commitment outstanding under
these agreements and may not be indicative of future expenses to be
incurred related to these agreements due to cost rationalization
programs completed by the Company. |
We have not included amounts in this table for payments of pension contributions and payments
for various postretirement welfare plans and postemployment benefit plans, as such amounts have not
been determined beyond 2005. Furthermore, we have not presented the amounts associated with these
obligations for 2005 since we are not required to make any payments to the plans.
The following table details our known potential or possible future cash payments (on an
undiscounted basis) related to various commercial and contingent obligations as of December 31,
2004.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (Dollars in thousands) |
|
Expiration By Period |
|
| Commercial and Contingent Obligations |
|
2005 |
|
|
2006 - 2007 |
|
|
2008 - 2009 |
|
|
Thereafter |
|
|
Total |
|
Surety obligations (1) |
|
$ |
258,349 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
258,349 |
|
Letters of credit (2) |
|
|
66,985 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
66,985 |
|
Representations and warranties (3) |
|
|
19,836 |
|
|
|
36,480 |
|
|
|
— |
|
|
|
— |
|
|
|
56,316 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total commercial and contingent obligations |
|
$ |
345,170 |
|
|
$ |
36,480 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
381,650 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
To support our operations, we have engaged certain
surety companies to issue surety bonds on our behalf for
customer financial assurance or as required by state and
local regulations. The surety bonds are primarily
obtained to provide assurance for our preneed funeral
and preneed cemetery obligations, which are
appropriately presented as liabilities in the
consolidated balance sheet as Deferred preneed funeral
contract revenues and Deferred cemetery contract
revenues. The total outstanding surety bonds at December
31, 2004 were $353 million. Of this amount, $342 million
was related to preneed funeral and preneed cemetery
obligations. When we use surety bonds for preneed
funeral and cemetery obligations, the bond amount |
40
|
|
|
| |
|
required is based on the trusting requirements
calculated as if the contract was paid in full at the
time of sale. When we deposit funds into state-mandated
trust funds, however, the amount deposited is generally
based on the amount of cash received and payment
application rules in the state trust requirements.
Therefore, in the event all of the surety companies
canceled or did not renew our outstanding surety bonds,
which are generally renewed for twelve-month periods, we
would be required to either obtain replacement assurance
or fund approximately $258 million, as of December 31,
2004, primarily into state-mandated trust accounts. At
this time, we do not believe we will be required to fund
material future amounts related to these surety bonds. |
| |
| (2) |
|
We are occasionally required to post letters of credit,
issued by a financial institution, to secure certain
insurance programs or other obligations. Letters of
credit generally authorize the financial institution to
make a payment to the beneficiary upon the satisfaction
of a certain event or the failure to satisfy an
obligation. The letters of credit are generally posted
for 1-year terms and are usually automatically renewed
upon maturity until such time as we have satisfied the
commitment secured by the letter of credit. We are
obligated to reimburse the issuer only if the
beneficiary collects on the letter of credit. We believe
that it is unlikely we will be required to fund a claim
under our outstanding letters of credit. In 2004, the
full amount of the letters of credit was supported by
our credit facility which expires August 2007. |
| |
| (3) |
|
In addition to the letters of credit described above, we
currently have contingent obligations of $56.3 million
related to our asset sale and joint venture
transactions. We have agreed to guarantee certain
representations and warranties associated with such
disposition transactions with letters of credit or
interest bearing cash investments. We have interest
bearing cash investments of $11.8 million included in
Deferred charges and other assets pledged as collateral
for certain of these contingent obligations. We do not
believe we will ultimately be required to fund to third
parties claims against these representations and
warranties above the carrying value of the liability.
During the year ended December 31, 2004, we agreed to
certain representations and warranties associated with
the disposition of our funeral operation in France. The
fair value of the representations and warranties
associated with the sale was approximately $33 million
and included indemnifications related to taxes and other
obligations at December 31, 2004. This amount is
recorded in Other liabilities in our consolidated
balance sheet. |
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
state or provincial 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 preneed funeral receivable is then decreased by the cash received from the
customer at the time of sale. The funeral revenues are deferred and will not be recognized in the
consolidated statement of operations until the 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 10%. Historically, the
majority of our preneed funeral trust contracts have not included a finance charge. However, we
began test marketing of a finance charge program for preneed funeral trust contracts during the
fourth quarter of 2004. We may plan a phased rollout during 2005 to the states where such finance
charges are allowed.
41
Trust Funded Preneed Funeral Contracts: Where the state or provincial 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 the Investment Committee of our Board of Directors. 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. State or provincial 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-K/A (Amendment
No. 2) for additional information regarding
the implementation of FIN 46R.
Direct selling costs (which consist of direct compensation costs and related payroll expenses
directly attributable to selling preneed funeral trust funded contracts) 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, state or provincial 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 December 31, 2004, 2003 or
2002.
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 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 state or provincial 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 the
expected costs were to exceed the deferred revenues, we would be required to record a loss
provision in our consolidated statement of operations.
If a customer cancels the trust funded preneed funeral contract that has been bonded prior to
death maturity, state or provincial 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
42
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.
Increasing insurance benefits or death benefits payable by third party insurance companies increase
annually pursuant to the terms of the life insurance policies purchased in advance of need by our
customers to fund their funerals. 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 68% of our
2004 North America preneed funeral production is insurance funded preneed funeral contracts.
We receive general agency commissions from third party insurance companies when customers
purchase insurance contracts from such third party insurance companies to fund funeral services and
merchandise at a future date. These general agency commissions are based on a percentage per
contract sold and 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.
Because insurance funded preneed funeral contracts are not reflected in our consolidated
balance sheet, the cash flow activity associated with these contracts generally occurs only at the
time of sale and at death maturity or cancellation and is recorded as cash flows from operating
activities within our funeral segment. At the time of sale, the GA revenues and overrides received
net of the direct selling costs provide a net source of cash flow. If the insurance contract
cancels within one year following the date of sale, our cash flow is reduced by the chargeback of
GA revenues and overrides. At death maturity, the insurance funded preneed funeral contracts are
included 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
insurance proceeds (which include the increasing death benefit) less the funds used to provide the
funeral goods and services provide a net source of cash flow.
The table below details the North America results of trust and insurance funded preneed
funeral production for the twelve months ended December 31, 2004 and 2003, the number of contracts
associated with that net production, 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 year ended December 31, 2004 and 2003.
43
| |
|
|
|
|
|
|
|
|
| |
|
North America |
|
| |
|
Funeral |
|
| |
|
Twelve months ended |
|
| |
|
December 31, |
|
| (Dollars in millions) |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
Preneed Production: |
|
|
|
|
|
|
|
|
Trust (including bonded) |
|
$ |
113.9 |
|
|
$ |
99.7 |
|
Insurance (1) |
|
|
238.6 |
|
|
|
237.7 |
|
|
|
|
|
|
|
|
Total |
|
$ |
352.5 |
|
|
$ |
337.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preneed Production (number of contracts): |
|
|
|
|
|
|
|
|
Trust (including bonded) |
|
|
33,286 |
|
|
|
30,107 |
|
Insurance (1) |
|
|
51,533 |
|
|
|
54,622 |
|
|
|
|
|
|
|
|
Total |
|
|
84,819 |
|
|
|
84,729 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust funded preneed funeral deferred selling costs |
|
$ |
15.1 |
|
|
$ |
13.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Insurance funded preneed funeral selling activity: |
|
|
|
|
|
|
|
|
GA revenue |
|
$ |
28.3 |
|
|
$ |
27.7 |
|
Direct expenses |
|
|
26.7 |
|
|
|
23.9 |
|
|
|
|
|
|
|
|
Net activity |
|
$ |
1.6 |
|
|
$ |
3.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Death Maturity: |
|
|
|
|
|
|
|
|
Previous preneed production included in current
period revenues: |
|
|
|
|
|
|
|
|
Trust |
|
$ |
161.7 |
|
|
$ |
173.7 |
|
Insurance |
|
|
197.2 |
|
|
|
165.8 |
|
|
|
|
|
|
|
|
|
|
$ |
358.9 |
|
|
$ |
339.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization/recognition of trust funded preneed
funeral deferred selling costs in current period |
|
$ |
9.3 |
|
|
$ |
9.2 |
|
|
|
|
|
|
|
|
|
|
|
| (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 (market and cost basis) including amounts related to Non-controlling
interest in funeral and cemetery trusts at December 31, 2004 and 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 December 31, 2004 and 2003. The backlog amounts presented are reduced by an amount that we
believe will cancel before maturity.
The table also reflects the North America trust funded preneed funeral receivables and trust
investments (investments at market and cost basis) associated with the backlog of trust funded
deferred preneed funeral contract revenues, net of an estimated cancellation allowance. The
difference between the backlog and asset amounts represents the contracts for which we have posted
surety bonds as financial assurance in lieu of trusting and the amounts collected from customers
that were not required to be deposited to trust. The table also reflects the amounts expected to be
received from insurance companies from the assignment of policy proceeds related to insurance
funded contracts. 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.
44
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North America |
|
| |
|
Funeral |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| (Dollars in millions) |
|
Market |
|
|
Cost |
|
|
Market |
|
|
Cost |
|
Backlog of trust funded deferred preneed funeral revenues (1) |
|
$ |
1,475.9 |
|
|
$ |
1,440.8 |
|
|
$ |
1,491.4 |
|
|
$ |
1,474.3 |
|
Backlog of insurance funded preneed funeral revenues (2) |
|
$ |
2,202.6 |
|
|
$ |
2,202.6 |
|
|
$ |
2,018.4 |
|
|
$ |
2,018.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total backlog of preneed funeral revenues |
|
$ |
3,678.5 |
|
|
$ |
3,643.4 |
|
|
$ |
3,509.8 |
|
|
$ |
3,492.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets associated with backlog of trust funded deferred preneed
funeral revenues, net of estimated allowance for cancellation |
|
$ |
1,165.8 |
|
|
$ |
1,130.6 |
|
|
$ |
1,146.0 |
|
|
$ |
1,128.9 |
|
Insurance policies associated with insurance funded deferred preneed
funeral revenues, net of estimated allowance for cancellation(2) |
|
$ |
2,202.6 |
|
|
$ |
2,202.6 |
|
|
$ |
2,018.4 |
|
|
$ |
2,018.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets associated with backlog of preneed funeral revenues |
|
$ |
3,368.4 |
|
|
$ |
3,333.2 |
|
|
$ |
3,164.4 |
|
|
$ |
3,147.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred selling costs associated with trust funded deferred preneed
funeral revenues |
|
|
|
|
|
$ |
99.4 |
|
|
|
|
|
|
$ |
95.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Includes amounts reflected as Non-controlling interest in funeral and cemetery trusts in the
consolidated balance sheet, net of estimated cancellation allowance. |
| |
| (2) |
|
Insurance funded preneed funeral contracts are not included in the consolidated balance sheet. |
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 customer’s 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 the Investment Committee of our Board of Directors. 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
selling and administrative costs of the preneed programs. State or provincial 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 state or
provincial 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. As we deposit the funds into trust, a corresponding amount is
reclassified from Deferred cemetery contract revenues into Non-controlling interest in funeral and
cemetery trusts. 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
45
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. See Critical Accounting Policies and Accounting
Changes in Item 2 of this Form 10-K/A (Amendment No. 2) for additional information regarding the implementation of FIN 46R.
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, state or provincial law
determines the amount of the refund owed to the customer, if any, including the amount of the
attributed investment earnings. 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. Upon
cancellation, we receive the amount of principal deposited to trust and previously undistributed
investment earnings and pay the customer any required refund. We retain any excess funds and
recognize the amounts as cemetery revenues in our consolidated statement of operations. If we
posted a surety bond in lieu of trusting for the cemetery merchandise and service items, any refund
due to the customer is paid out of working capital cash flow from operating activities. 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
preneed cemetery contracts being underfunded, we will assess these contracts to determine whether a
loss provision should be recorded. We have not been required to recognize any loss amounts at
December 31, 2004 or 2003.
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 twelve months ended December 31, 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 twelve months ended December 31, 2004 and 2003.
46
| |
|
|
|
|
|
|
|
|
| |
|
North America |
|
| |
|
Cemetery |
|
| |
|
Twelve months ended |
|
| |
|
December 31, |
|
| (Dollars in millions) |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
Deferral: |
|
|
|
|
|
|
|
|
Total preneed cemetery production |
|
$ |
303.4 |
|
|
$ |
327.9 |
|
Total atneed cemetery production |
|
|
197.7 |
|
|
|
165.0 |
|
|
|
|
|
|
|
|
|
Total cemetery sales production |
|
|
501.1 |
|
|
|
492.9 |
|
Less: Preneed property revenue recognized at date of sale (constructed
cemetery
interment rights where down payment was at least 10% of the sales price) |
|
|
(104.5 |
) |
|
|
(100.2 |
) |
Less: Preneed property revenue accounted for as deposits held (cemetery
interment rights where the down payment was less than 10%) |
|
|
(36.9 |
) |
|
|
(35.3 |
) |
Less: Atneed property, merchandise and service revenue recognized at time
of sale or service |
|
|
(140.0 |
) |
|
|
(141.7 |
) |
|
|
|
|
|
|
|
Deferred preneed cemetery revenues |
|
$ |
219.7 |
|
|
$ |
215.7 |
|
|
|
|
|
|
|
|
Deferred selling costs |
|
$ |
40.8 |
|
|
$ |
42.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Recognition: |
|
|
|
|
|
|
|
|
Previously deferred preneed revenue included in current period revenues |
|
$ |
212.1 |
|
|
$ |
221.3 |
|
|
|
|
|
|
|
|
Amortization/recognition of deferred selling costs in current period |
|
$ |
35.6 |
|
|
$ |
36.4 |
|
|
|
|
|
|
|
|
The following table reflects the total North America backlog of Deferred cemetery contract
revenues (market and cost basis) 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 December 31, 2004 and 2003. The backlog amount presented is reduced
by an amount that we believe will cancel before maturity. The table also reflects the North America
preneed cemetery receivables and trust investments (investments at market and cost basis)
associated with the backlog of deferred cemetery revenues, net of an estimated cancellation
allowance. The difference between the backlog and asset amounts represents the contracts for which
we have posted surety bonds as financial assurance in lieu of trusting and the amounts collected
from customers that were not required to be deposited to trust. 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North America |
|
| |
|
Cemetery |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| (Dollars in millions) |
|
Market |
|
|
Cost |
|
|
Market |
|
|
Cost |
|
Backlog of deferred cemetery revenues (1) |
|
$ |
1,682.3 |
|
|
$ |
1,605.4 |
|
|
$ |
1,630.1 |
|
|
$ |
1,581.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets associated with backlog of deferred cemetery revenues,
net of estimated allowance for cancellation |
|
$ |
1,237.4 |
|
|
$ |
1,170.8 |
|
|
$ |
1,093.1 |
|
|
$ |
1,044.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Selling costs |
|
|
|
|
|
$ |
209.3 |
|
|
|
|
|
|
$ |
205.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Includes amounts reflected as Non-controlling interest in funeral and
cemetery trusts in the consolidated balance sheet. 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. |
Financial Assurances
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
47
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).
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| (Dollars in millions) |
|
2004 |
|
|
2003 |
|
Preneed funeral |
|
$ |
146.7 |
|
|
$ |
125.6 |
|
Preneed cemetery: |
|
|
|
|
|
|
|
|
Merchandise and services |
|
|
186.7 |
|
|
|
179.6 |
|
Preconstruction |
|
|
8.3 |
|
|
|
18.1 |
|
|
|
|
|
|
|
|
Bonds supporting preneed funeral and cemetery obligations |
|
|
341.7 |
|
|
|
323.3 |
|
|
|
|
|
|
|
|
Bonds supporting preneed business permits |
|
|
5.3 |
|
|
|
4.8 |
|
Other bonds |
|
|
5.5 |
|
|
|
4.7 |
|
|
|
|
|
|
|
|
Total surety bonds outstanding |
|
$ |
352.5 |
|
|
$ |
332.8 |
|
|
|
|
|
|
|
|
When selling preneed funeral and cemetery contracts, we intend to post surety bonds where
allowed by state 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 twelve months ended December 31,
2004 and 2003, we had $102.7 million and $90.8 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 expired
December 31, 2004; however, it allowed 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 twelve months ended December 31, 2004 and 2003, approximately
$63.0 million and $67.1 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 required in 2004 for these eleven months of new Florida sales were
$15.4 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-K/A (Amendment No. 2) 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 indicate 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 consolidated results in the
future to differ materially from the forward-looking statements made herein and in any other
documents or oral presentations made by, or on behalf of, the Company. These factors are discussed
below. We assume no obligation to publicly update or revise any forward-looking statements made
herein or any other forward-looking statements made by the Company, whether as a result of new
information, future events or otherwise.
Our ability to execute our business plan depends on many factors, many of which are beyond our
control.
Our strategic plan is focused on cost management and the development of key revenue
initiatives designed to generate future internal growth in our core funeral and cemetery operations
without the outlay of significant additional capital. Many of the factors necessary for the
execution of our strategic plan are beyond our control. We cannot give assurance that we will be
able to execute any or all of our strategic plan. Failure to execute any or all of the strategic
plan could have a material adverse effect on us, our financial condition, results of operations, or
cash flows.
48
We could be required to make further changes to our accounting method related to preneed deferred
selling costs.
We are in discussions with the Staff of the Securities and Exchange Commission related to our
accounting policies for preneed deferred selling costs. We have made an accounting policy election
to begin expensing these selling costs as of January 1, 2005 in the period incurred rather than
deferring the expenses as this method is the preferable of the two acceptable methods. Associated
with this accounting policy election, the Company will file a preferability letter with the
Securities and Exchange Commission in connection with the Company’s Quarterly Report on Form 10-Q
for the period ended March 31, 2005. Although we believe that our application and the timing of the
application of this accounting method is correct, it is possible that the Securities and Exchange
Commission may disagree and require us to reclassify or possibly restate prior period financial
statements.
Our indebtedness limits funds available for our operations.
As of December 31, 2004, we had approximately $1.25 billion in indebtedness. Our indebtedness
may limit our ability to obtain additional financing and require the dedication of more cash flow
to service our debt than we desire. Furthermore, it may require the sale of assets or limit our
flexibility in planning for, or reacting to, changes in our markets. Our ability to satisfy our
indebtedness in a timely manner will be dependent on the successful execution of our long-term
business plan and the resulting improvements in our operating performance.
Our existing credit agreements and indentures contain covenants that may prevent us from engaging
in certain transactions.
Our existing credit agreements and indentures contain, among other things, various affirmative
and negative covenants that may prevent us from engaging in certain transactions that might
otherwise be considered beneficial to us. These covenants limit, among other things, our and our
subsidiaries’ ability to:
| |
• |
|
Borrow money; |
| |
| |
• |
|
Make investments; |
| |
| |
• |
|
Engage in transactions with affiliates; |
| |
| |
• |
|
Engage in sale-leaseback transactions; and |
| |
| |
• |
|
Consummate certain liens on assets. |
The credit agreement also requires us to maintain certain financial ratios and
satisfy other financial condition tests. During 2004, we executed a bank credit agreement replacing
the previous agreement due to expire July 2005. The new bank credit facility provides us with
greater flexibility in terms of acquisitions, dividends, and share repurchases. See note eleven to
the consolidated financial statements in Item 8 of this Form 10-K/A (Amendment No. 2) for further
information related to our bank credit facility.
If we lost the ability to use surety bonding to support our preneed funeral and preneed cemetery
activities, we could have to make material cash payments to fund certain trust funds.
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 issued to support our preneed funeral and
cemetery activities. In the event all of the surety companies cancelled or did not renew our surety
bonds, which are generally renewed for twelve-month periods, we would be required to either obtain
replacement coverage or fund approximately $258 million as of December 31, 2004 into state-mandated
trust accounts. At this time, we do not believe we will be required to fund material future amounts
related to these surety bonds.
The funeral home and cemetery industry is becoming increasingly competitive.
In North America and most international markets in which we operate, the funeral and cemetery
industry is characterized by a large number of locally owned, independent operations. To compete
successfully, our funeral service locations and cemeteries must maintain good reputations and high
professional standards in the industry, as well as offer attractive products and services at
competitive prices. In addition, we must market our company in such a manner as to distinguish us
from our competitors. If we are unable to successfully compete, our company, our financial
condition, results of operations and cash flows could be materially adversely affected.
49
Our affiliated funeral and cemetery trust funds own investments in equity securities and mutual
funds, which are affected by financial market conditions that are beyond our control.
In connection with our preneed funeral operations and preneed cemetery merchandise and service
sales, most affiliated funeral and cemetery trust funds own investments in equity securities and
mutual funds. Our earnings and investment gains and losses on these equity securities and mutual
funds are affected by financial market conditions that are beyond our control. If our earnings from
our trust funds decline, we would likely experience a decline in future revenues. In addition, if
the trust funds experienced significant investment losses, there would likely be insufficient funds
in the trusts to cover the costs of delivering services and merchandise or maintaining cemeteries
in the future. We would have to cover any such shortfall with cash flows, which could have a
material adverse effect on us, our financial condition, results of operations, or cash flows.
As of December 31, 2004, net unrealized appreciation in the preneed funeral and cemetery
merchandise and services trust funds amounted to $38.6 million and $76.9 million, respectively. The
perpetual care trust funds had net unrealized appreciation of $35.2 million as of December 31,
2004. The following table summarizes the investment returns excluding fees on our trust funds for
the last three years.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Preneed funeral trust funds |
|
|
7.1 |
% |
|
|
17.9 |
% |
|
|
(7.6 |
)% |
Cemetery merchandise services trust funds |
|
|
6.7 |
% |
|
|
17.1 |
% |
|
|
(5.5 |
)% |
Perpetual care trust funds |
|
|
8.6 |
% |
|
|
12.6 |
% |
|
|
5.3 |
% |
Increasing insurance benefits related to preneed funeral contracts funded through life insurance or
annuity contracts may not cover future increases in the cost of providing a price guaranteed
funeral service.
We sell price guaranteed preneed funeral contracts through various programs providing for
future funeral services at prices prevailing when the agreements are signed. For preneed funeral
contracts funded through life insurance or annuity contracts, we receive in cash a general agency
commission that typically ranges between 11% and 16% of the total sale from the third party
insurance company. Additionally, there is an increasing insurance benefit associated with the
contract of approximately 1% per year to be received in cash by us at the time the funeral is
performed. There is no guarantee that the increasing insurance benefit will cover future increases
in the cost of providing a price guaranteed funeral service, which could materially adversely
affect our future cash flows, revenues and profit margins.
Unfavorable results of litigation could have a material adverse impact on our financial statements.
As discussed in note fourteen, we are subject to a variety of claims and lawsuits. Adverse
outcomes in some or all of the pending cases may result in significant monetary damages or
injunctive relief against us. We are also subject to a variety of other claims and suits that arise
from time to time in the ordinary course of our business. While management currently believes that
resolving all of these matters, individually or in the aggregate, will not have a material adverse
impact on our financial position or results of operations, the litigation and other claims noted
above are subject to inherent uncertainties and management’s view of these matters may change in
the future. There exists the possibility of a material adverse impact on our financial position and
the results of operations for the period in which the effect of an unfavorable final outcome
becomes probable and reasonably estimable.
If the number of deaths in our markets declines, our cash flows and revenues may decrease.
The United States Bureau of the Census estimates that the number of deaths in the United
States will increase up to one percent per year from 2000 to 2010. However, longer life spans could
reduce the number of deaths during this period. If the number of deaths declines, the number of
funeral services and interments performed by us could decrease and our financial condition, results
of operations and cash flows may be materially adversely affected.
The continuing upward trend in the number of cremations performed in North America could
result in lower revenue and gross profit dollars.
In the death care industry, there has been a growing trend in the number of cremations
performed in North America as an alternative to traditional funeral service dispositions. In North
America during 2004, 40% of the comparable funeral services performed by us were cremation cases
compared to 39% and 37.9% performed in 2003 and 2002, respectively. We continue to expand our
cremation memorialization products and services, which has resulted in higher average sales for
cremation services. If we are unable to successfully expand our cremation memorialization products
and services to meet the continuing trends, our financial condition, results of operations, and
cash flows could be materially adversely affected.
50
The funeral home and cemetery businesses are high fixed-cost businesses.
The majority of our operations throughout the world are managed in groups called “markets”.
Markets are geographical groups of funeral service locations and cemeteries that share common
resources such as operating personnel, preparation services, clerical staff, motor vehicles and
preneed sales personnel. Personnel costs, the largest of our operating expenses, are the cost
components most beneficially affected by this grouping. We must incur many of these costs
regardless of the number of funeral services or interments performed. Because we cannot necessarily
decrease these costs when we experience lower sales volumes, the sales decline may cause margin
percentages to decline at a greater rate than the decline in revenues.
The funeral home and cemetery industry is highly regulated.
Our operations are subject to regulation, supervision, and licensing under numerous foreign,
federal, state and local laws, ordinances and regulations, including extensive regulations
concerning trust funds, preneed sales of funeral and cemetery products and services, and various
other aspects of our business. The impact of such regulations varies depending on the location of
our funeral and cemetery operations. Violations of applicable laws could result in fines or their
sanctions to us.
In addition, from time to time, governments and agencies propose to amend or add regulations,
which would increase costs and decrease cash flows. For example, foreign, federal, state, local and
other regulatory agencies have considered and may enact additional legislation or regulations that
could affect the death care industry. Some states and regulatory agencies have considered or are
considering regulations that could require more liberal refund and cancellation policies for
preneed sales of products and services, limit or eliminate our ability to use surety bonding,
increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in
the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate,
these and other possible proposals could have a material adverse effect on us, our financial
condition, results of operations and cash flows.
We may not be able to joint venture or sell our international operations on acceptable terms
or at all.
Our long-term strategic plan includes the joint venture or sale of our remaining international
operations outside of North America in order to create cash proceeds to reduce debt. Subsequent to
December 31, 2004, we completed the disposition of our operations in Argentina and Uruguay.
However, if we are unable to joint venture or sell our remaining international operations on
acceptable terms or otherwise, it could adversely affect our ability to achieve our strategic plan.
Our foreign operations and investments involve special risks.
Our activities in areas outside the United States are subject to risks inherent in foreign
operations, including the following:
| |
• |
|
Loss of revenue, property and equipment as a result of
hazards such as expropriation, nationalization, wars,
insurrection and other political risks; |
| |
| |
• |
|
The effects of currency fluctuations and exchange controls,
such as devaluation of foreign currencies and other economic
problems; and |
| |
| |
• |
|
Changes in laws, regulations, and policies of foreign
governments, including those associated with changes in the
governing parties. |
ITEM 7A. Quantitative and Qualitative Disclosures About Market Risk.
The information presented below should be read in conjunction with notes twelve and thirteen
to the consolidated financial statements in Item 8 of this Form
10-K/A (Amendment No. 2).
We have historically used derivatives primarily in the form of interest rate swaps,
cross-currency interest rate swaps, and forward exchange contracts in combination with local
currency borrowings in order to manage our mix of fixed and floating rate debt and to hedge our net
investment in foreign assets. We generally do not participate in derivative transactions that are
leveraged or considered speculative in nature. We were not a party to any derivative transactions
at December 31, 2004 or 2003. None of our market risk sensitive instruments are entered into for
trading purposes. All of the instruments described below are entered into for other than trading
purposes.
At December 31, 2004 and 2003, 99% of our total debt consisted of fixed rate debt at a
weighted average rate of 7.02% and 6.95%, respectively.
At December 31, 2004, approximately 2% of our net investment and 23% of our operating income
excluding Gains and impairment (losses) on dispositions, net, and Other operating expenses were
denominated in foreign currencies. Approximately 13% of our net investment and 52% of our operating
income, excluding Gains impairment (losses) on dispositions, net, and Other
51
operating expenses, are denominated in foreign currencies, primarily the euro, at December 31, 2003. We do not have a
significant investment in foreign operations that are in highly inflationary economies.
Marketable Equity and Debt Securities — Price Risk
In connection with our preneed funeral operations and preneed cemetery merchandise and service
sales, the related funeral and cemetery trust funds own investments in equity securities and mutual
funds, which are sensitive to current market prices. Cost and market values as of December 31, 2004
are presented in notes five, six and seven to the consolidated financial statements in Item 8 of
this Form 10-K/A (Amendment No. 2).
Market-Rate Sensitive Instruments — Interest Rate and Currency Risk
We perform a sensitivity analysis to assess the impact of interest rate and exchange rate
risks on earnings. This analysis determines the effect of a hypothetical 10% adverse change in
market rates. In actuality, market rate volatility is dependent on many factors that are impossible
to forecast. Therefore, the adverse changes described below could differ substantially from the
hypothetical 10% change.
A sensitivity analysis of debt instruments with variable interest rate components was modeled
to assess the impact that changing interest rates could have on pretax earnings. The sensitivity
analysis assumes an instantaneous 10% adverse change to the then prevailing interest rates with all
other variables held constant. Given this model, our pretax earnings, on an annual basis, would not
change at either December 31, 2004 or 2003 because 99% of our debt is fixed rate. The fair market
value of our debt was approximately $101.0 million more than its carrying value at December 31,
2004.
A similar model was used to assess the impact of changes in exchange rates for foreign
currencies on interest expense. At December 31, 2004 and 2003, our debt exposure was primarily
associated with the Chilean peso and the euro, respectively. A 10% adverse change in the strength
of the U.S. dollar would have negatively affected our interest expense, on an annual basis, by less
than $0.1 million on December 31, 2004 and by approximately $0.2 million on December 31, 2003.
ITEM 8. Financial Statements and Supplementary Data.
INDEX TO FINANCIAL STATEMENTS AND RELATED SCHEDULE
| |
|
|
|
|
| |
|
Page |
|
Financial Statements: |
|
|
|
|
|
|
|
53 |
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
61 |
|
Financial Statement Schedule: |
|
|
|
|
|
|
|
113 |
|
All other schedules have been omitted because the required information is not applicable or is
not present in amounts sufficient to require submission or because the information required is
included in the consolidated financial statements or the related notes thereto.
52
Report of Independent Registered Public Accounting Firm
To the Stockholders and Board of Directors of Service Corporation International:
We have completed an integrated audit of Service Corporation International’s 2004 consolidated
financial statements and of its internal control over financial reporting as of December 31, 2004
and audits of its 2003 and 2002 consolidated financial statements in accordance with the standards
of the Public Company Accounting Oversight Board (United States). Our opinions, based on our
audits, are presented below.
Consolidated financial statements and financial statement schedule
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Service Corporation International and
its subsidiaries (“the Company”) at December 31, 2004 and 2003, and the results of their operations
and their cash flows for each of the three years in the period ended December 31, 2004 in
conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule listed in the accompanying index
presents fairly, in all material respects, the information set forth therein when read in
conjunction with the related consolidated financial statements. These financial statements and
financial statement schedule are the responsibility of the Company’s management. Our responsibility
is to express an opinion on these financial statements and financial statement schedule based on
our audits. We conducted our audits of these statements in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit of financial statements includes examining, on a test basis,
evidence supporting the amounts and disclosures in the financial statements, assessing the
accounting principles used and significant estimates made by management, and evaluating the overall
financial statement presentation. We believe that our audits provide a reasonable basis for our
opinion.
As discussed in Note four to the consolidated financial statements, the Company changed its method
of accounting for variable interest entities on March 31, 2004, the Company changed its method of
accounting for gains and losses on pension plan assets and obligations effective January 1, 2004,
and the Company changed its method of accounting for goodwill on January 1, 2002.
As discussed in Note two to the consolidated financial statements and Note three on the financial statement schedule, the Company restated its
previously issued consolidated financial statements and financial
statement schedule for the years ended December 31, 2004, 2003
and 2002.
Internal control over financial reporting
Also, we have audited management’s assessment, included in Management’s Report on Internal Control
Over Financial Reporting appearing under Item 9A, that Service Corporation International did not
maintain effective internal control over financial reporting as of December 31, 2004, because of
the effect of material weaknesses relating to (A) revenue recognition on preneed cemetery
contracts; (B) reconciliations of preneed funeral and cemetery detailed records to trust fund
assets and corresponding deferred revenue and non-controlling interest accounts related to preneed
funeral and cemetery activities, and of cemetery deferred selling costs; (C) lease accounting; (D)
revenue recognition and deferred revenue from preneed and atneed funeral and cemetery contracts;
(E) use and control of pre-numbered manual contracts; (F) cash receipts; (G) approval of
adjustments to and review of collectability of atneed funeral and cemetery accounts receivable; (H)
cash disbursements at the funeral and cemetery locations; (I) merchandise inventory; (J)
the application of generally accepted accounting principles related
to asset impairments and divestiture activities; (K) certain information technology program changes;
(L) accretion revenue recorded upon maturity of certain
preneed funeral contracts; and (M) communication and evaluation of information related to
legal claims, based on criteria established in Internal Control
— Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway
Commission (COSO). The Company’s management is responsible for maintaining effective internal
control over financial reporting and for its assessment of the effectiveness of internal control
over financial reporting. Our responsibility is to express opinions on management’s assessment and
on the effectiveness of the Company’s internal control over financial reporting based on our audit.
We conducted our audit of internal control over financial reporting in accordance with the
standards of the Public Company Accounting Oversight Board (United States). Those standards require
that we plan and perform the audit to obtain reasonable assurance about whether effective internal
control over financial reporting was maintained in all material respects. An audit of internal
control over financial reporting includes obtaining an understanding of internal control over
financial reporting, evaluating management’s assessment, testing and evaluating the design and
operating effectiveness of internal control, and performing such other procedures as we consider
necessary in the circumstances. We believe that our audit provides a reasonable basis for our
opinions.
53
A company’s internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
company’s internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company’s assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
A material weakness is a control deficiency, or combination of control deficiencies, that results
in more than a remote likelihood that a material misstatement of the annual or interim financial
statements will not be prevented or detected. The following material weaknesses have been
identified and included in management’s assessment of the
effectiveness of internal control over financial reporting as of
December 31, 2004:
| A. |
|
The Company did not maintain effective controls over the
completeness of revenue recognition on preneed cemetery contracts.
Specifically, the Company did not maintain effective controls over
revenue recognition transactions associated with the timely
recording of the physical delivery and performance of cemetery
goods and services sold on a preneed basis. This control
deficiency resulted in the restatement of the Company’s 2004,
2003 and 2002 consolidated financial statements as well as its
quarterly financial data for all quarters of both 2004 and
2003. Additionally, this control deficiency could result in the
misstatement of cemetery merchandise and service revenues and of
deferred revenues and assets associated with cemetery goods and
services sold on a preneed basis that would result in a material
misstatement to annual or interim financial statements that would
not be prevented or detected. Accordingly, management determined
that this control deficiency represents a material weakness. |
| |
| B. |
|
The Company did not maintain effective controls over the
reconciliations of preneed funeral and cemetery detailed records
to trust fund assets and corresponding deferred revenue and
non-controlling interest accounts related to preneed funeral and
cemetery activities, and of cemetery deferred selling costs. This
control deficiency resulted in the restatement of the Company’s 2004,
2003 and 2002 consolidated financial statements as well as its
quarterly financial data for all quarters of both 2004 and
2003. Additionally, this control deficiency could result in
the misstatement of funeral and cemetery revenues and of assets
and liabilities associated with preneed funeral and cemetery
activities that would result in a material misstatement to annual
or interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control
deficiency represents a material weakness. |
| |
| C. |
|
The Company did not maintain effective controls over its
application and monitoring of the appropriate accounting policies
related to certain lease accounting. Specifically, the Company did
not maintain effective controls over the application and
monitoring of its accounting policies relating to lease renewal
options and rent escalation provisions. This control deficiency
resulted in the restatement of the Company’s 2004,
2003 and 2002 consolidated financial statements as well as its
quarterly financial data for all quarters of both 2004 and
2003. Additionally, this control deficiency could result in the misstatement of
accrued rental liability and related operating rental expense that
would result in a material misstatement to annual or interim
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency represents
a material weakness. |
| |
| D. |
|
The Company did not maintain effective controls over the validity,
accuracy and completeness over revenue recognition and deferred
revenue from preneed and atneed funeral and cemetery contracts.
Specifically, the Company did not maintain effective controls over
the proper review of preneed and atneed funeral and cemetery
contracts by location management, the proper review by location
management for customer and authorized Company signatures and
proper completion of customer contracts. This control deficiency
did not result in an adjustment to the 2004 annual or interim
financial statements. However, this control deficiency could
result in a misstatement of revenues, accounts receivable and
deferred revenue that would result in a material misstatement to
annual or interim financial statements that would not be prevented
or detected. Accordingly, management determined that this
control deficiency represents a material weakness. |
| |
| E. |
|
The Company did not maintain effective controls over the use and
control of pre-numbered manual contracts, and the accuracy of
information pertaining to manual contracts entered into the
Company’s point-of-sale system over revenue and deferred revenue
from preneed and atneed funeral and cemetery contracts.
Specifically, manual contracts are not consistently controlled to
ensure that revenues related to preneed and atneed funeral and
cemetery manual |
54
| |
|
contracts are reflected in the financial
statements in the appropriate time period. Additionally, sales
detail reports for atneed funeral and cemetery and preneed
cemetery manual contracts are not consistently being reviewed by
location personnel to ensure agreement between manual contract
information and information entered into the point-of-sale system.
This control deficiency did not result in an adjustment to the
2004 annual or interim financial statements. However, this control
deficiency could result in a misstatement of revenue, accounts
receivable and deferred revenues that would result in a material
misstatement to annual or interim financial statements that would
not be prevented or detected. Accordingly, management determined
that this control deficiency represents a material weakness. |
| |
| F. |
|
The Company did not maintain effective controls over the accuracy,
completeness and safeguarding of cash receipts. Specifically,
individual cash receipt documentation is not consistently prepared
for all cash or check payments made by the customer, daily
reconciliations of cash are not consistently reviewed by location
personnel, and customer payments are not consistently secured at
all times prior to deposit. This control deficiency did not result
in an adjustment to the 2004 annual or interim financial
statements. However, this control deficiency could result in
misappropriation of Company assets and a misstatement of cash and
accounts receivable that would result in a material misstatement
to annual or interim financial statements that would not be
prevented or detected. Accordingly, management determined that
this control deficiency represents a material weakness. |
| |
| G. |
|
The Company did not maintain effective controls over the approval
of adjustments to and review of collectability of atneed funeral
and cemetery accounts receivable. Client families commonly request
changes to items or services after the initial contract has been
signed which requires adjustments to their contract and requires
an adjustment to revenue and accounts receivable. The Company did
not have effective controls over proper review by location
management of adjustments to the customer revenue and accounts
receivable related to such items or services or proper review of
accounts receivable balances for reasonableness or collectability.
Additionally, the Company did not have effective controls over
review by location management of the outstanding account balances
at period-end to ensure appropriate follow up is performed or
write-off of account balance is performed. This control deficiency
did not result in an adjustment to the 2004 annual or interim
financial statements. However, this control deficiency could
result in a misstatement of accounts receivable and revenues that
would result in a material misstatement to annual or interim
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency represents
a material weakness. |
| |
| H. |
|
The Company did not maintain effective controls over the review of
cash disbursements at the funeral and cemetery locations.
Specifically, the Company did not maintain effective controls over
the review by location management of disbursements made at those
locations and by the corporate office in Houston on behalf of such
locations in order to verify that all expenditures are accurate
and reasonable. This control deficiency did not result in an
adjustment to the 2004 annual or interim financial statements.
However, this control deficiency could result in expenditures
being made that are erroneous or not for legitimate business
purposes or could result in a misstatement of accounts payable or
expenses that would result in a material misstatement to annual or
interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control
deficiency represents a material weakness. |
| |
| I. |
|
The Company did not maintain effective controls over the
existence, completeness and accuracy of merchandise inventory.
Specifically, the Company did maintain effective controls over
physical inventory counts at the funeral and cemetery locations.
Inventory count sheets were not signed by individuals who
performed and verified the counts. Also, in some instances,
inventory counts were not conducted on a timely basis or the
inventory counts by location personnel were not accurate. This
control deficiency did not result in an adjustment to the 2004
annual or interim financial statements. However, this control
deficiency could result in the misstatement of inventory and cost
of sales that would result in a material misstatement to annual or
interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control
deficiency represents a material weakness. |
| |
| J. |
|
The Company did not maintain effective controls over the accounting for capitalized
covenant-not-to-compete agreements and the recording of asset impairments and divestitures related
to the sale or disposition of locations in accordance with generally accepted accounting
principles. Specifically, the Company failed to write off certain previously capitalized
covenant-not-to-compete assets resulting in a misstatement of the gain or loss upon exiting
locations and the ongoing amortization expense. Additionally, the Company did not maintain
effective controls over the impairment or disposition of assets related to the sale of certain
locations in the proper period. This control deficiency resulted in the restatement of the
Company’s 2004, 2003 and 2002 consolidated financial statements, as well as its quarterly financial
data for all quarters of both 2004 and 2003. Furthermore, this control deficiency could result in
the misstatement of gains and impairment (losses) on dispositions, property, plant and equipment
and deferred charges and other assets that would result in a material misstatement to annual or
interim financial statements that would not be prevented or detected. Accordingly, management
determined that this control deficiency represents a material weakness. |
| |
| K. |
|
The Company did not maintain effective controls over its information technology program change
control procedures with respect to the Company’s point-of-sale system (HMIS) and associated
interfaces. Specifically, the Company did not maintain effective controls to assess the impact of
HMIS program changes to related interfaces and to adequately test the accuracy and performance of
such program changes. This control deficiency contributed to the material weaknesses and
restatement described in (B) and (L) herein. Additionally, this control deficiency could result in the misstatement of funeral revenues
and of assets and liabilities associated with preneed funeral activities that would result in a
material misstatement to annual or interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control deficiency represents a material
weakness. |
55
| L. |
|
The Company did not maintain effective controls over the accuracy of preneed funeral trust income
recorded upon the maturity of certain preneed funeral contracts. Specifically, the Company did not
maintain effective controls over the posting of automated journal entries to the general ledger
resulting in the entries being posted to the incorrect account. This control deficiency resulted
in the restatement of the Company’s 2004 consolidated financial statements including an adjustment to the fourth
quarter 2004 financial data. Additionally, this control deficiency could result in the
misstatement of funeral revenues and of assets and liabilities associated with preneed funeral
activities that would result in a material misstatement to annual or interim financial statements
that would not be prevented or detected. Accordingly, management determined that this control
deficiency represents a material weakness. |
| |
| M. |
|
The Company did not maintain effective controls over the
communication and evaluation by the legal department of information
related to legal claims. Specifically, the legal department did not
communicate information relevant to the complete and accurate
recording of legal accruals in the proper period in accordance with
generally accepted accounting principles. This control deficiency
did not result in an adjustment to the Company’s 2004 annual or
interim financial statements. However, this control deficiency did
result in an adjustment detected by the auditor to the second
quarter 2005 condensed consolidated financial statements.
Additionally, this control deficiency could result in
the misstatement of general and administrative expenses and accrued
liabilities that would result in a misstatement to annual or interim
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
represents a material weakness. |
These material weaknesses were considered in determining the nature, timing, and extent of audit
tests applied in our audit of the 2004 consolidated financial statements, and our opinion regarding
the effectiveness of the Company’s internal control over financial reporting does not affect our
opinion on those consolidated financial statements.
In our opinion, management’s assessment that Service Corporation International did not maintain
effective internal control over financial reporting as of December 31, 2004 is fairly stated, in
all material respects, based on criteria established in Internal
Control — Integrated Framework
issued by the COSO. Also, in our opinion, because of the effects of the material weaknesses
described above on the achievement of the objectives of the control criteria, Service Corporation
International has not maintained effective internal control over financial reporting as of December
31, 2004, based on criteria established in Internal Control — Integrated Framework issued by the
COSO.
Management and we previously concluded that the Company did not maintain effective internal
controls over financial reporting as of December 31, 2004 because of the material weaknesses
described in (A) – (I) above. In connection with the restatement of the Company’s consolidated
financial statements described in the seventh paragraph of Note two to the consolidated financial
statements, management has determined that the restatement was an additional effect of the material
weakness described in (B) above. Additionally, in connection with the restatement of the
consolidated financial statements described in the eighth paragraph of
Note two to the consolidated
financial statements, management has determined that the material weaknesses described in (J) – (L)
above also existed as of December 31, 2004. Further, management has also determined that the
material weakness described in (M) above existed as of December 31, 2004. Accordingly, management and we have restated our
respective reports on internal control over financial reporting to include these material
weaknesses.
PricewaterhouseCoopers LLP
Houston, Texas
March 31,
2005, except for the current period restatement described in Note two to
the consolidated financial statements and the matter described in the penultimate paragraph of Management’s Report on
Internal Control Over Financial Reporting, as to which the date is
October 27, 2005, and except for the restatement described in Note three on the financial
statement schedule, as to which the date is April 7, 2005.
56
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS
(In thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Revenues |
|
$ |
1,860,862 |
|
|
$ |
2,338,062 |
|
|
$ |
2,310,880 |
|
Costs and expenses |
|
|
1,524,652 |
|
|
|
1,976,503 |
|
|
|
1,950,681 |
|
|
|
|
|
|
|
|
|
|
|
Gross profits |
|
|
336,210 |
|
|
|
361,559 |
|
|
|
360,199 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative expenses |
|
|
(130,896 |
) |
|
|
(178,105 |
) |
|
|
(89,752 |
) |
Gains and impairment (losses) on dispositions, net |
|
|
25,797 |
|
|
|
49,727 |
|
|
|
(163,152 |
) |
Other operating expense |
|
|
— |
|
|
|
(9,004 |
) |
|
|
(94,910 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
231,111 |
|
|
|
224,177 |
|
|
|
12,385 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(118,188 |
) |
|
|
(138,625 |
) |
|
|
(157,973 |
) |
(Loss) gain on early extinguishment of debt |
|
|
(16,770 |
) |
|
|
1,315 |
|
|
|
7,783 |
|
Other income, net |
|
|
16,110 |
|
|
|
24,307 |
|
|
|
14,503 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
cumulative effects of accounting changes |
|
|
112,263 |
|
|
|
111,174 |
|
|
|
(123,302 |
) |
(Benefit) provision for income taxes |
|
|
(5,659 |
) |
|
|
28,638 |
|
|
|
(38,992 |
) |
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative effects of
accounting changes |
|
|
117,922 |
|
|
|
82,536 |
|
|
|
(84,310 |
) |
Income (loss) from discontinued operations (net of income tax benefit
(provision) of $51,710, ($585) and ($448), respectively) |
|
|
43,762 |
|
|
|
2,529 |
|
|
|
(14,768 |
) |
Cumulative effects of accounting changes (net of income tax benefit of
$20,983, $0 and $11,234, respectively) |
|
|
(47,556 |
) |
|
|
— |
|
|
|
(135,560 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
114,128 |
|
|
$ |
85,065 |
|
|
$ |
(234,638 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative effects of
accounting changes |
|
$ |
.37 |
|
|
$ |
.28 |
|
|
$ |
(.29 |
) |
Income (loss) from discontinued operations |
|
|
.14 |
|
|
|
— |
|
|
|
(.05 |
) |
Cumulative effects of accounting changes |
|
|
(.15 |
) |
|
|
— |
|
|
|
(.46 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
.36 |
|
|
$ |
.28 |
|
|
$ |
(.80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic weighted average number of shares |
|
|
318,737 |
|
|
|
299,801 |
|
|
|
294,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative effects of
accounting changes |
|
$ |
.36 |
|
|
$ |
.27 |
|
|
$ |
(.29 |
) |
Income (loss) from discontinued operations |
|
|
.13 |
|
|
|
.01 |
|
|
|
(.05 |
) |
Cumulative effects of accounting changes |
|
|
(.14 |
) |
|
|
— |
|
|
|
(.46 |
) |
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
.35 |
|
|
$ |
.28 |
|
|
$ |
(.80 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted weighted average number of shares |
|
|
344,675 |
|
|
|
300,790 |
|
|
|
294,533 |
|
|
|
|
|
|
|
|
|
|
|
(See notes to consolidated financial statements)
57
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET
(In thousands, except share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
287,785 |
|
|
$ |
239,431 |
|
Receivables, net |
|
|
102,622 |
|
|
|
229,839 |
|
Inventories |
|
|
81,526 |
|
|
|
136,760 |
|
Current assets of discontinued operations |
|
|
11,085 |
|
|
|
6,101 |
|
Other |
|
|
50,945 |
|
|
|
61,146 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
533,963 |
|
|
|
673,277 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preneed funeral receivables and trust investments |
|
|
1,267,784 |
|
|
|
1,080,108 |
|
Preneed cemetery receivables and trust investments |
|
|
1,399,778 |
|
|
|
1,068,216 |
|
Cemetery property, at cost |
|
|
1,509,599 |
|
|
|
1,523,114 |
|
Property and equipment, at cost, net |
|
|
970,547 |
|
|
|
1,277,389 |
|
Non-current assets of discontinued operations |
|
|
4,367 |
|
|
|
3,217 |
|
Deferred charges and other assets |
|
|
621,561 |
|
|
|
742,160 |
|
Goodwill |
|
|
1,169,040 |
|
|
|
1,195,422 |
|
Cemetery perpetual care trust investments |
|
|
729,048 |
|
|
|
— |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
8,205,687 |
|
|
$ |
7,562,903 |
|
|
|
|
|
|
|
|
LIABILITIES & STOCKHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities |
|
$ |
221,877 |
|
|
$ |
453,081 |
|
Current maturities of long-term debt |
|
|
75,075 |
|
|
|
182,682 |
|
Current liabilities of discontinued operations |
|
|
7,111 |
|
|
|
7,600 |
|
Income taxes |
|
|
7,850 |
|
|
|
29,576 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
311,913 |
|
|
|
672,939 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
1,178,885 |
|
|
|
1,519,189 |
|
Deferred preneed funeral revenues |
|
|
498,571 |
|
|
|
1,464,218 |
|
Deferred preneed cemetery revenues |
|
|
803,144 |
|
|
|
1,551,187 |
|
Deferred income taxes |
|
|
276,572 |
|
|
|
415,208 |
|
Non-current liabilities of discontinued operations |
|
|
58,225 |
|
|
|
53,930 |
|
Other liabilities |
|
|
431,917 |
|
|
|
364,612 |
|
Non-controlling interest in funeral and cemetery trusts |
|
|
2,092,881 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in perpetual care trusts |
|
|
704,912 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (note 14) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ equity: |
|
|
|
|
|
|
|
|
Common stock, $1 per share par value, 500,000,000 shares authorized, 323,225,352 and
302,039,871 issued and outstanding (net of 18,502,478 and 2,469,445 treasury shares at par) |
|
|
323,225 |
|
|
|
302,040 |
|
Capital in excess of par value |
|
|
2,395,057 |
|
|
|
2,274,664 |
|
Unearned compensation |
|
|
(2,022 |
) |
|
|
— |
|
Accumulated deficit |
|
|
(829,244 |
) |
|
|
(943,372 |
) |
Accumulated other comprehensive loss |
|
|
(38,349 |
) |
|
|
(111,712 |
) |
|
|
|
|
|
|
|
Total stockholders’ equity |
|
|
1,848,667 |
|
|
|
1,521,620 |
|
|
|
|
|
|
|
|
Total
liabilities and stockholders’ equity |
|
$ |
8,205,687 |
|
|
$ |
7,562,903 |
|
|
|
|
|
|
|
|
(See notes to consolidated financial statements)
58
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
114,128 |
|
|
$ |
85,065 |
|
|
$ |
(234,638 |
) |
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Income) loss from discontinued operations, net of tax |
|
|
(43,762 |
) |
|
|
(2,529 |
) |
|
|
14,768 |
|
(Gains) loss on early extinguishments of debt |
|
|
16,770 |
|
|
|
(1,315 |
) |
|
|
(7,783 |
) |
Cumulative effects of accounting changes, net of tax |
|
|
47,556 |
|
|
|
— |
|
|
|
135,560 |
|
Depreciation and amortization |
|
|
145,136 |
|
|
|
161,316 |
|
|
|
179,551 |
|
Provision for deferred income taxes |
|
|
19,786 |
|
|
|
4,039 |
|
|
|
105,093 |
|
(Gains) and impairment losses on dispositions, net |
|
|
(25,797 |
) |
|
|
(49,727 |
) |
|
|
163,152 |
|
Other operating expense |
|
|
— |
|
|
|
9,004 |
|
|
|
94,910 |
|
Payments on restructuring charges |
|
|
(14,000 |
) |
|
|
(14,155 |
) |
|
|
(12,806 |
) |
Litigation payments, net of recoveries |
|
|
(164,566 |
) |
|
|
(30,782 |
) |
|
|
(13,014 |
) |
Other non-cash adjustments |
|
|
(1,555 |
) |
|
|
148 |
|
|
|
1,990 |
|
Change in assets and liabilities, net of effects from acquisitions and dispositions: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease (increase) in receivables |
|
|
46,014 |
|
|
|
(53,630 |
) |
|
|
3,022 |
|
Decrease (increase) in other assets |
|
|
10,119 |
|
|
|
67,726 |
|
|
|
(31,920 |
) |
Increase in litigation accrual |
|
|
60,800 |
|
|
|
99,420 |
|
|
|
7,512 |
|
(Decrease) increase in payables and other liabilities |
|
|
(58,700 |
) |
|
|
94,683 |
|
|
|
(77,168 |
) |
Net effect of preneed funeral production and maturities |
|
|
(20,989 |
) |
|
|
4,061 |
|
|
|
26,743 |
|
Net effect of preneed cemetery production and deliveries |
|
|
(26,217 |
) |
|
|
986 |
|
|
|
(7,827 |
) |
Other |
|
|
1,378 |
|
|
|
(3,163 |
) |
|
|
3,742 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities from continuing operations |
|
|
106,101 |
|
|
|
371,147 |
|
|
|
350,887 |
|
Net cash provided by operating activities from discontinued operations |
|
|
1,704 |
|
|
|
2,961 |
|
|
|
1,285 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
107,805 |
|
|
|
374,108 |
|
|
|
352,172 |
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Capital expenditures |
|
|
(96,007 |
) |
|
|
(115,563 |
) |
|
|
(99,875 |
) |
Proceeds from divestitures and sales of property and equipment |
|
|
57,749 |
|
|
|
76,577 |
|
|
|
76,292 |
|
Proceeds and distributions from joint ventures and equity investments, net of cash retained |
|
|
328,428 |
|
|
|
73,940 |
|
|
|
291,794 |
|
Acquisitions, net of cash acquired |
|
|
(1,807 |
) |
|
|
— |
|
|
|
— |
|
Payment of contingent obligations to former owners of acquired business |
|
|
(51,749 |
) |
|
|
— |
|
|
|
— |
|
Net withdrawals (deposits) of restricted funds and other |
|
|
53,185 |
|
|
|
(71,939 |
) |
|
|
58,883 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities from continuing operations |
|
|
289,799 |
|
|
|
(36,985 |
) |
|
|
327,094 |
|
Net cash used in investing activities from discontinued operations |
|
|
(275 |
) |
|
|
(437 |
) |
|
|
(169 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) investing activities |
|
|
289,524 |
|
|
|
(37,422 |
) |
|
|
326,925 |
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in borrowings under credit agreements |
|
|
— |
|
|
|
— |
|
|
|
(29,061 |
) |
Payments of debt |
|
|
(177,648 |
) |
|
|
(90,980 |
) |
|
|
(74,234 |
) |
Proceeds from long-term debt issued |
|
|
241,444 |
|
|
|
— |
|
|
|
— |
|
Early extinguishments of debt |
|
|
(313,778 |
) |
|
|
(200,349 |
) |
|
|
(307,232 |
) |
Settlement of debt-related options |
|
|
— |
|
|
|
— |
|
|
|
(57,000 |
) |
Proceeds from exercise of stock options |
|
|
10,605 |
|
|
|
— |
|
|
|
— |
|
Purchase of Company common stock |
|
|
(110,258 |
) |
|
|
— |
|
|
|
— |
|
Bank overdrafts and other |
|
|
— |
|
|
|
(8,820 |
) |
|
|
(36,332 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities from continuing operations |
|
|
(349,635 |
) |
|
|
(300,149 |
) |
|
|
(503,859 |
) |
Net cash used in financing activities from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
(1,623 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(349,635 |
) |
|
|
(300,149 |
) |
|
|
(505,482 |
) |
Effect of foreign currency |
|
|
660 |
|
|
|
2,269 |
|
|
|
(2,282 |
) |
Net increase in cash and cash equivalents |
|
|
48,354 |
|
|
|
38,806 |
|
|
|
171,333 |
|
Cash and cash equivalents at beginning of period |
|
|
239,431 |
|
|
|
200,625 |
|
|
|
29,292 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at end of period |
|
$ |
287,785 |
|
|
$ |
239,431 |
|
|
$ |
200,625 |
|
|
|
|
|
|
|
|
|
|
|
(See notes to consolidated financial statements)
59
SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
Treasury |
|
|
Capital in |
|
|
|
|
|
|
|
|
|
|
other |
|
|
|
|
| |
|
Outstanding |
|
|
|
Common |
|
|
stock, |
|
|
excess of |
|
|
Unearned |
|
|
Accumulated |
|
|
comprehensive |
|
|
|
|
| |
|
shares |
|
|
|
stock |
|
|
par value |
|
|
par value |
|
|
compensation |
|
|
deficit |
|
|
loss |
|
|
Total |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Balance at December 31, 2001 |
|
|
292,154 |
|
|
|
$ |
294,656 |
|
|
$ |
(2,502 |
) |
|
$ |
2,246,055 |
|
|
$ |
— |
|
|
$ |
(793,799 |
) |
|
$ |
(291,221 |
) |
|
$ |
1,453,189 |
|
Comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(234,638 |
) |
|
|
|
|
|
|
(234,638 |
) |
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,772 |
|
|
|
43,772 |
|
Minimum pension liability
adjustment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7,202 |
) |
|
|
(7,202 |
) |
Reclassification for
translation adjustments
realized in net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,479 |
|
|
|
47,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84,049 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(150,589 |
) |
Common Stock issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises and
other |
|
|
173 |
|
|
|
|
187 |
|
|
|
(14 |
) |
|
|
414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
587 |
|
Contributions to employee
401(k) |
|
|
4,683 |
|
|
|
|
4,683 |
|
|
|
|
|
|
|
13,467 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,150 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 |
|
|
297,010 |
|
|
|
|
299,526 |
|
|
|
(2,516 |
) |
|
|
2,259,936 |
|
|
|
— |
|
|
|
(1,028,437 |
) |
|
|
(207,172 |
) |
|
|
1,321,337 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85,065 |
|
|
|
|
|
|
|
85,065 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92,504 |
|
|
|
92,504 |
|
Minimum pension liability
adjustment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,956 |
|
|
|
2,956 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180,525 |
|
Common Stock issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises and
other |
|
|
471 |
|
|
|
|
424 |
|
|
|
47 |
|
|
|
1,909 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,380 |
|
Contributions to employee
401(k) |
|
|
4,559 |
|
|
|
|
4,559 |
|
|
|
|
|
|
|
12,819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
17,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
|
302,040 |
|
|
|
|
304,509 |
|
|
|
(2,469 |
) |
|
|
2,274,664 |
|
|
|
— |
|
|
|
(943,372 |
) |
|
|
(111,712 |
) |
|
|
1,521,620 |
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
114,128 |
|
|
|
|
|
|
|
114,128 |
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,242 |
) |
|
|
(9,242 |
) |
Minimum pension liability
adjustment, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
33,599 |
|
|
|
33,599 |
|
Reclassification for
translation adjustments
realized in net income, net |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49,006 |
|
|
|
49,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive
income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73,363 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
187,491 |
|
Common Stock issued: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock option exercises and
other |
|
|
2,756 |
|
|
|
|
2,756 |
|
|
|
|
|
|
|
10,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
13,644 |
|
Contributions to employee
401(k) |
|
|
2,692 |
|
|
|
|
2,000 |
|
|
|
692 |
|
|
|
15,435 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
18,127 |
|
Debenture conversions |
|
|
32,034 |
|
|
|
|
32,034 |
|
|
|
|
|
|
|
185,120 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
217,154 |
|
Restricted stock award |
|
|
428 |
|
|
|
|
428 |
|
|
|
|
|
|
|
2,483 |
|
|
|
(2,911 |
) |
|
|
|
|
|
|
|
|
|
|
— |
|
Restricted stock amortization |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
889 |
|
|
|
|
|
|
|
|
|
|
|
889 |
|
Purchase of Company common
stock |
|
|
(16,725 |
) |
|
|
|
|
|
|
|
(16,725 |
) |
|
|
(93,533 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(110,258 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
|
323,225 |
|
|
|
$ |
341,727 |
|
|
$ |
(18,502 |
) |
|
$ |
2,395,057 |
|
|
$ |
(2,022 |
) |
|
$ |
(829,244 |
) |
|
$ |
(38,349 |
) |
|
$ |
1,848,667 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(See notes to consolidated financial statements)
60
SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
NOTE ONE
Nature of Operations
Service Corporation International (SCI or the Company) owns and operates funeral service
locations and cemeteries worldwide. 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, which is included in the Company’s funeral segment.
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 atneed funerals, including the use of funeral facilities and
motor vehicles, and preparation and embalming services. Funeral related merchandise (including
caskets, 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 Company’s 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.
NOTE TWO
Restatement of Financial Statements
Overview
The Company has restated herein its previously issued consolidated financial statements as of
December 31, 2004 and 2003 and for each of the three years in the period ended December 31, 2004 and its unaudited
quarterly financial data for each of the interim periods of 2004 and 2003. This restatement
corrects errors related to (1) the
Company’s recognition of income related to its preneed funeral and cemetery trust accounts, (2) preneed funeral trust
income that was previously understated as a result of a point-of-sale
system error, and (3) the computation of gains and losses on
certain asset divestiture activities, including the write-off of certain covenant-not-to-compete agreements which should have been recognized in the Company’s 2002
consolidated financial statements.
The Company previously restated its unaudited quarterly
financial data for the first three quarters of 2004 by including such restated financial statements in its initial 2004 Form 10-K. Such errors related to (1) the recognition of deferred preneed
cemetery contract revenues, (2) certain reconciliations of the Company’s preneed funeral and
cemetery trust assets and deferred revenues, and (3) operating leases and other account reconciliations. At that time,
the Company concluded that the net aggregate impact of such errors related to periods prior to January 1, 2004 was not material to its
consolidated financial statements or to the first quarter of 2004, nor for any quarterly or annual period prior to January 1, 2004, and
as a result, the Company recorded the net aggregate impact of such errors (a $416 increase to
pre-tax income) in Other operating (expense) income as a correction of an immaterial error in the
first quarter of 2004. However, in
light of the material impact of the errors identified in the second
quarter of 2005, as described in the previous paragraph, the
Company has concluded that the Current Period Restatement should reflect the $416 net impact of these errors, previously reported as
Other operating (expense) income, in the restatement of its prior period financial statements for the fiscal years ended
2004, 2003 and 2002, and the restatement of its unaudited quarterly financial data for each of the interim periods of 2004 and 2003.
61
Current Period Restatement
Preneed Funeral and Cemetery Trust Verification and Reconciliation Project
During 2003, the Company began implementation of the revised Financial Accounting Standards
Board (FASB) Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation
of Accounting Research Bulletin (ARB) No. 51” (FIN 46R), the preparation for the implementation of
Section 404 of the Sarbanes Oxley Act, and the implementation of its new funeral and cemetery
point-of-sale system. As a result of these events, the Company began a project to reconcile its
preneed funeral and cemetery trust accounts and verify its preneed funeral and preneed cemetery
contracts.
The preneed funeral and cemetery trust verification and reconciliation project included three
primary components: (1) the reconciliation of assets and deferred revenue related to preneed
cemetery merchandise and service trusts; preneed funeral merchandise and service trusts; and
cemetery perpetual care trusts, (2) the verification of approximately 430,000 preneed funeral
contracts to determine if those contracts were appropriately included in the Company’s new
point-of-sale system, and (3) the verification of each individual item on each preneed cemetery
contract (approximately 3.6 million contract items) to determine if revenue was appropriately
recognized at the time of delivery or at the time of service.
As these projects progressed, the Company assessed their status and adjusted the applicable
general ledger accounts accordingly. At December 31, 2003, June 30, 2004 and December 31, 2004, the Company made
certain adjustments to its consolidated financial statements based on its best estimates at the
time. These adjustments were based on statistical sampling methods which were influenced by the percentage of reconciliations and
verifications completed at the location level and the expected error rate of such uncompleted verifications and reconciliations.
By March 2005, the Company completed its examination of the 430,000 preneed funeral contracts
and had also implemented the reconciliation procedures described above, which resulted in the
identification of a significant number of reconciling items. In light of these reconciling items,
the Company reevaluated previous adjustments related to these projects and the impact to previously
issued financial statements. The Company determined that these adjustments had a material impact
on its consolidated financial statements for the first three interim periods of 2004. As a result,
the Company restated its unaudited quarterly financial data for the first three interim periods of
2004 in its original Form 10-K. The Company evaluated the materiality of these adjustments on its
consolidated financial statements issued prior to January 1, 2004 and concluded that the impact of
these adjustments was not material to the fiscal period ended 2004 or to any quarterly or annual period prior to January 1, 2004. As
a result, the Company recorded the net aggregate effect of these adjustments ($416 increase to
pretax income) in Other operating income (expense) in its restated first quarter 2004 financial
statements as a correction of an error.
During
the first and second quarters of 2005, the Company continued to find
and record reconciling items to its trust asset and deferred revenue detailed records. During the second
quarter of 2005, the Company determined that certain of the reconciling items had been reflected
improperly in its initial reconciliation process at December 31,
2004, which resulted in the
identification of additional errors to the Company’s consolidated financial
statements. The Company recorded a $1,600 charge in its first quarter 2005 consolidated financial statements for similar
prior period adjustments arising from the aforementioned reconciliation process.
Also during the second quarter of 2005,
the Company identified other adjustments, one of which related to a point-of-sale system error
that caused preneed funeral trust income accounts to be understated in the fourth quarter of 2004
by $1,570, and another of which related to improper computation of
gains and losses on asset divestiture activities. In connection with
the asset divestitures, the Company failed to write off certain covenant-not-to-compete
agreements, which should have been recorded in the Company’s 2002 consolidated financial statements.
Operating Leases and Other Account Reconciliations
The Company initiated a review of our accounting practices and determined that the Company
should adjust its method of accounting for certain types of operating leases related primarily to
the Company’s funeral home properties.
Historically, the Company has recorded operating lease expense, related primarily to funeral
home properties, over the initial lease term without regard to reasonably assured renewal options
or fixed escalation provisions. The Company will now calculate its straight-line operating lease
expense over the lease term (including certain renewal options and fixed escalation
provisions, to the extent necessary) in accordance with SFAS 13, “Accounting for Leases”.
During 2004, we also performed various other reconciliations. These reconciliations primarily
resulted from the conversion of our point-of-sale system.
Materiality Assessment
The Company evaluated the materiality of these adjustments (including
the $1,600 charge recorded in the first quarter 2005 and the adjustments aggregating to
$416 associated with the restatement of the first three interim periods of 2004 described above) as
of December 31, 2004 and 2003 and for each of the three years in the period ended December 31,
2004. The Company
determined that the net effect of these adjustments ($7,000 charge to pretax income), which
primarily related to periods prior to 2000, was not material to the Company’s previously reported
consolidated financial statements for the periods described above; however, the Company determined
that such impact was material to its second quarter 2005 consolidated financial statements. As a
result, the Company has restated its 2004, 2003 and 2002 consolidated
financial statements as well as its quarterly financial data for the
first quarter of 2005 and all quarters of both 2004 and 2003. The effect
of each of these restatement
items is individually immaterial to net income and earnings per
share for all periods presented.
62
Effect
on Annual Periods
The effect of these adjustments on the Company’s consolidated statement of operations
for the years ended December 31, 2004, 2003 and 2002 is detailed
below. We have also reflected the effects of this restatement in notes
three, four, five, six, eight, ten, fifteen, seventeen, eighteen, nineteen, twenty
and twenty-two.
(In thousands)
| |
|
|
|
|
|
|
|
|
| |
|
For the year ended |
|
| |
|
December
31, 2004 |
|
| |
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Revenues
|
|
$ |
1,859,308 |
|
|
$ |
1,860,862 |
|
|
Costs and expenses
|
|
|
1,524,810 |
|
|
|
1,524,652 |
|
|
Gross profits
|
|
|
334,498 |
|
|
|
336,210 |
|
|
Gains and impairment
(losses) on dispositions, net
|
|
|
25,628 |
|
|
|
25,797 |
|
|
Operating income
|
|
|
229,646 |
|
|
|
231,111 |
|
|
Income from continuing
operations before income taxes and cumulative effects of accounting
changes
|
|
|
110,798 |
|
|
|
112,263 |
|
|
Benefit for income
taxes
|
|
|
(6,213 |
) |
|
|
(5,659 |
) |
|
Cumulative effect of
accounting changes, net
|
|
|
(47,074 |
) |
|
|
(47,556 |
) |
|
Net income
|
|
$ |
113,699 |
|
|
$ |
114,128 |
|
|
Earnings per share:
|
|
|
|
|
|
|
|
|
|
Basic — EPS
|
|
$ |
.36 |
|
|
$ |
.36 |
|
|
Diluted — EPS
|
|
$ |
.35 |
|
|
$ |
.35 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
For the year ended |
|
|
For the year ended |
|
| |
|
December
31, 2003 |
|
|
December
31, 2002 |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
|
Revenues
|
|
$ |
2,328,425 |
|
|
$ |
2,338,062 |
|
|
$ |
2,312,439 |
|
|
$ |
2,310,880 |
|
|
Costs and expenses
|
|
|
1,966,460 |
|
|
|
1,976,503 |
|
|
|
1,950,430 |
|
|
|
1,950,681 |
|
|
Gross profits
|
|
|
361,965 |
|
|
|
361,559 |
|
|
|
362,009 |
|
|
|
360,199 |
|
|
Gains and impairment
(losses) on dispositions, net
|
|
|
49,366 |
|
|
|
49,727 |
|
|
|
(161,510 |
) |
|
|
(163,152 |
) |
|
Operating income
|
|
|
224,222 |
|
|
|
224,177 |
|
|
|
15,837 |
|
|
|
12,385 |
|
|
Income (loss) from
continuing operations before income taxes and cumulative effects of
accounting changes
|
|
|
111,219 |
|
|
|
111,174 |
|
|
|
(119,850 |
) |
|
|
(123,302 |
) |
|
Provision (benefit) for
income taxes
|
|
|
28,666 |
|
|
|
28,638 |
|
|
|
(37,692 |
) |
|
|
(38,992 |
) |
|
Net income (loss)
|
|
$ |
85,082 |
|
|
$ |
85,065 |
|
|
$ |
(232,486 |
) |
|
$ |
(234,638 |
) |
|
Earnings (loss) per
share:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS
|
|
$ |
.28 |
|
|
$ |
.28 |
|
|
$ |
(.79 |
) |
|
$ |
(.80 |
) |
|
Diluted — EPS
|
|
$ |
.28 |
|
|
$ |
.28 |
|
|
$ |
(.79 |
) |
|
$ |
(.80 |
) |
The effect of the restatement of our previously reported consolidated balance sheet as of
December 31, 2004 and 2003 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 |
|
December 31, 2003 |
| |
|
As |
|
As |
|
As |
|
As |
| |
|
Reported |
|
Restated |
|
Reported |
|
Restated |
Selected consolidated balance sheet data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Receivables, net of allowances |
|
$ |
102,156 |
|
|
$ |
102,622 |
|
|
$ |
229,839 |
|
|
$ |
229,839 |
|
Total current assets |
|
|
533,497 |
|
|
|
533,963 |
|
|
|
673,324 |
|
|
|
673,277 |
|
Preneed funeral receivables and trust investments |
|
|
1,264,600 |
|
|
|
1,267,784 |
|
|
|
1,229,765 |
|
|
|
1,080,108 |
|
Preneed cemetery receivables and trust investments |
|
|
1,402,750 |
|
|
|
1,399,778 |
|
|
|
1,083,035 |
|
|
|
1,068,216 |
|
Deferred charges and other assets |
|
|
618,565 |
|
|
|
621,561 |
|
|
|
738,011 |
|
|
|
742,160 |
|
Total assets |
|
|
8,199,196 |
|
|
|
8,205,687 |
|
|
|
7,725,204 |
|
|
|
7,562,903 |
|
Deferred preneed funeral revenues |
|
|
486,191 |
|
|
|
498,571 |
|
|
|
1,612,347 |
|
|
|
1,464,218 |
|
Deferred preneed cemetery revenues |
|
|
801,065 |
|
|
|
803,144 |
|
|
|
1,575,352 |
|
|
|
1,551,187 |
|
Deferred income taxes |
|
|
279,474 |
|
|
|
276,572 |
|
|
|
418,375 |
|
|
|
415,208 |
|
Non-controlling interest in funeral and cemetery trusts |
|
|
2,095,852 |
|
|
|
2,092,881 |
|
|
|
— |
|
|
|
— |
|
Accumulated deficit |
|
|
824,364 |
|
|
|
829,244 |
|
|
|
938,063 |
|
|
|
943,372 |
|
Total stockholders’ equity |
|
|
1,853,576 |
|
|
|
1,848,667 |
|
|
|
1,526,958 |
|
|
|
1,521,620 |
|
Total liabilities and stockholders’ equity |
|
|
8,199,196 |
|
|
|
8,205,687 |
|
|
|
7,725,204 |
|
|
|
7,562,903 |
|
63
Effect
of Restatement on Quarterly Information
The
effect of these adjustments on the Company’s quarterly financial
data for each of the four quarters in both 2004 and 2003 is presented
below. As discussed above, the quarterly financial data
for the first three interim periods of 2004 has been further restated
in connection with this restatement.
(In thousands)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
December 31, 2004 |
|
|
September 30, 2004 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
433,226 |
|
|
$ |
435,064 |
|
|
$ |
404,557 |
|
|
$ |
404,731 |
|
Costs and expenses |
|
|
358,180 |
|
|
|
358,141 |
|
|
|
334,463 |
|
|
|
334,422 |
|
Gross profits |
|
|
75,046 |
|
|
|
76,923 |
|
|
|
70,094 |
|
|
|
70,309 |
|
Gains and impairment (losses) on dispositions, net |
|
|
(7,390 |
) |
|
|
(7,224 |
) |
|
|
(3,281 |
) |
|
|
(3,281 |
) |
Operating income |
|
|
37,107 |
|
|
|
39,150 |
|
|
|
41,515 |
|
|
|
41,730 |
|
Income from continuing operations before income
taxes |
|
|
16,939 |
|
|
|
18,982 |
|
|
|
18,196 |
|
|
|
18,411 |
|
(Benefit) provision for income taxes |
|
|
(560 |
) |
|
|
205 |
|
|
|
4,739 |
|
|
|
4,819 |
|
Net income |
|
$ |
25,886 |
|
|
$ |
27,164 |
|
|
$ |
13,741 |
|
|
$ |
13,876 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.08 |
|
|
$ |
.08 |
|
|
$ |
.04 |
|
|
$ |
.04 |
|
Diluted — EPS |
|
$ |
.08 |
|
|
$ |
.08 |
|
|
$ |
.04 |
|
|
$ |
.04 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
June 30, 2004 |
|
|
March 31, 2004 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
432,103 |
|
|
$ |
432,368 |
|
|
$ |
589,422 |
|
|
$ |
588,699 |
|
Costs and expenses |
|
|
359,058 |
|
|
|
359,019 |
|
|
|
473,109 |
|
|
|
473,070 |
|
Gross profits |
|
|
73,045 |
|
|
|
73,349 |
|
|
|
116,313 |
|
|
|
115,629 |
|
Gains and impairment (losses) on dispositions, net |
|
|
1,517 |
|
|
|
1,517 |
|
|
|
34,782 |
|
|
|
34,785 |
|
Operating income |
|
|
50,534 |
|
|
|
50,838 |
|
|
|
100,490 |
|
|
|
99,393 |
|
Income from continuing operations before income
taxes and cumulative effects of accounting changes |
|
|
1,407 |
|
|
|
1,711 |
|
|
|
74,256 |
|
|
|
73,159 |
|
Benefit for income taxes |
|
|
(7,017 |
) |
|
|
(6,904 |
) |
|
|
(3,375 |
) |
|
|
(3,779 |
) |
Net income |
|
$ |
42,761 |
|
|
$ |
42,952 |
|
|
$ |
31,311 |
|
|
$ |
30,136 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.14 |
|
|
$ |
.14 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
Diluted — EPS |
|
$ |
.14 |
|
|
$ |
.14 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
December 31, 2003 |
|
|
September 30, 2003 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
599,088 |
|
|
$ |
604,780 |
|
|
$ |
566,461 |
|
|
$ |
568,853 |
|
Costs and expenses |
|
|
515,659 |
|
|
|
522,419 |
|
|
|
497,515 |
|
|
|
498,910 |
|
Gross profits |
|
|
83,429 |
|
|
|
82,361 |
|
|
|
68,946 |
|
|
|
69,943 |
|
Gains and impairment (losses) on dispositions, net |
|
|
43,953 |
|
|
|
43,690 |
|
|
|
(1,452 |
) |
|
|
524 |
|
Operating income |
|
|
52,451 |
|
|
|
51,120 |
|
|
|
14,719 |
|
|
|
17,692 |
|
(Loss) income from continuing operations before income taxes |
|
|
28,747 |
|
|
|
27,416 |
|
|
|
(8,722 |
) |
|
|
(5,749 |
) |
Benefit for income taxes |
|
|
(1,149 |
) |
|
|
(1,650 |
) |
|
|
(3,331 |
) |
|
|
(2,209 |
) |
Net income (loss) |
|
$ |
30,420 |
|
|
$ |
29,590 |
|
|
$ |
(4,732 |
) |
|
$ |
(2,881 |
) |
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS
Diluted — |
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
(.02 |
) |
|
$ |
(.01 |
) |
EPS |
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
(.02 |
) |
|
$ |
(.01 |
) |
64
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Three months ended |
|
|
Three months ended |
|
| |
|
June 30, 2003 |
|
|
March 31, 2003 |
|
| |
|
(Unaudited) |
|
|
(Unaudited) |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
Revenues |
|
$ |
584,050 |
|
|
$ |
584,553 |
|
|
$ |
578,826 |
|
|
$ |
579,876 |
|
Costs and expenses |
|
|
489,418 |
|
|
|
489,839 |
|
|
|
463,868 |
|
|
|
465,335 |
|
Gross profits |
|
|
94,632 |
|
|
|
94,714 |
|
|
|
114,958 |
|
|
|
114,541 |
|
Gains and impairment (losses) on dispositions, net |
|
|
(2,469 |
) |
|
|
(3,884 |
) |
|
|
9,334 |
|
|
|
9,397 |
|
Operating income |
|
|
54,171 |
|
|
|
52,838 |
|
|
|
102,881 |
|
|
|
102,527 |
|
Income from continuing operations before income
taxes and cumulative effects of accounting
changes |
|
|
21,082 |
|
|
|
19,749 |
|
|
|
70,112 |
|
|
|
69,758 |
|
Provision for income taxes |
|
|
7,008 |
|
|
|
6,494 |
|
|
|
26,138 |
|
|
|
26,003 |
|
Net income |
|
$ |
15,308 |
|
|
$ |
14,489 |
|
|
$ |
44,086 |
|
|
$ |
43,867 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
$ |
.05 |
|
|
$ |
.05 |
|
|
$ |
.15 |
|
|
$ |
.15 |
|
Diluted — EPS |
|
$ |
.05 |
|
|
$ |
.05 |
|
|
$ |
.14 |
|
|
$ |
.14 |
|
65
NOTE THREE
Summary of Significant Accounting Policies
Principles of Consolidation and Basis of Presentation
The consolidated financial statements include the accounts of SCI and all majority-owned
subsidiaries. Intercompany balances and transactions have been eliminated in consolidation.
General agency revenues. The Company has reported general agency (GA) revenues as funeral
revenues for all periods presented. GA revenues are commissions the Company receives from third
party insurance companies when customers purchase insurance contracts from such third party
insurance companies to fund funeral services and merchandise at a future date. These insurance
commissions are based on a percentage per contract sold and are recognized when the insurance
purchase transaction between the customer and third party insurance provider has been completed.
Historically, the Company recognized GA revenues as a reduction to selling expense in the
consolidated statement of operations based on the view that it was being reimbursed for the
expenses it incurred in connection with the sale of life insurance policies used to fund preneed
funerals. The Company determined GA revenues are more appropriately reflected as revenues than as a
reduction of expenses based on the guidance set forth in EITF 01-14, “Reimbursement of “Out of
Pocket” Expenses” as the Company has the primary obligation to pay its sales counselors and has the
discretion to select its sales counselors. Therefore, the Company reclassified these GA revenues as
revenues in 2003.
Reclassifications
Additionally, certain other reclassifications have been made to prior years to conform to
current period presentation with no effect on the Company’s consolidated financial position,
results of operations 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.
In 2002, the Company changed its allocation methodology of overhead costs in North America to
be based on funeral and cemetery reporting unit revenues. The change in overhead allocation has not
impacted the Company’s reported results of operations, financial position or cash flows.
During the second quarter of 2002, the Company decided to implement new information technology
systems, including a new North America point of sale system and an upgraded general ledger system.
As a result of this decision, the Company accelerated amortization of its existing capitalized
systems costs beginning in the second quarter of 2002 to reflect the remaining estimated useful
66
lives of these existing systems. These existing systems were fully amortized by the conclusion of
the third quarter of 2003. The Company capitalized application development stage costs associated
with the new system implementation in accordance with SOP 98-1, “Accounting for the Costs of
Computer Software Developed or Obtained for Internal Use” (SOP 98-1). The new point of sale system
replaced three separate contract entry systems between the fourth quarter of 2003 and the third
quarter of 2004. At December 31, 2004 the new point of sale system is fully implemented and
functioning as intended. The Company began amortizing such costs upon implementation of this new
system in the fourth quarter of 2003 at which time the old systems were fully amortized. The
Company recognized additional amortization related to this change in estimate of approximately
$13,800 and $13,500 in the years ended December 31, 2003 and 2002, respectively. This change in
estimate impacted net income by approximately $8,694, or diluted income per share of $.03 in 2003
and impacted net loss by approximately $8,500, or diluted loss per share of $.03 in 2002.
Cash Equivalents
The Company considers all highly liquid investments purchased with an original maturity of
three months or less to be cash equivalents.
Inventories and Cemetery Property
Funeral merchandise and cemetery burial property and merchandise are stated at the lower of
average cost or market. Inventory costs are primarily relieved using specific identification.
Property and Equipment, net
Property and equipment, net are recorded at cost. Maintenance and repairs are charged to
expense whereas renewals and major replacements that extend the assets useful lives are
capitalized. Depreciation is provided using the straight line method over the estimated useful
lives of the various classes of assets. Property is depreciated over a period ranging from seven to
forty years, equipment is depreciated over a period from three to eight years and leasehold
improvements are depreciated over the shorter of the lease term or ten years. Depreciation expense
related to property, plant and equipment totaled $60,647, $80,214 and $90,082 for the twelve months
ended December 31, 2004, 2003 and 2002, respectively. When property is sold or retired, the cost
and related accumulated depreciation are removed from the consolidated balance sheet; resulting
gains and losses are included in the consolidated statement of operations.
Operating Leases
The Company operates in leased facilities primarily related to funeral home properties. Lease
terms generally range from one to 35 years with options to renew at varying terms. The Company
calculates operating lease expense using the straight line method prescribed by generally accepted
accounting principles. The Company considers reasonably assured renewal options and fixed
escalation provisions in its calculation. For more information related to operating leases, see
footnote fourteen to these consolidated financial statements.
Goodwill
The excess of purchase price over the fair value of identifiable net assets acquired in
business combinations accounted for as purchases is recorded as goodwill. Prior to 2002, goodwill
was amortized over its estimated life. Since then, goodwill is no longer amortized but is tested
annually for impairment by assessing the fair value of each of the Company’s reporting units (which
is generally one level below the Company’s reportable segments). As of December 31, 2004, the
Company’s funeral segment reporting units are North America, Germany and Singapore. The Company’s
cemetery segment reporting units are North America and Chile.
The Company’s policy is to test for impairment of goodwill in accordance with SFAS 142
“Goodwill and Other Intangible Assets” (SFAS 142) annually as of September 30 each year. For the
current year, the Company performed such test on September 30, 2004.
The Company tests for impairment of its goodwill using a two-step approach as prescribed in
SFAS 142. The first step of the Company’s goodwill impairment test compares the fair value of a
reporting unit with its carrying amount, including goodwill. The Company does not record an
impairment of goodwill in instances where the fair value of a reporting unit exceeds its carrying
amount. The second step of the Company’s goodwill impairment test is required only in situations
where the carrying amount of the reporting unit exceeds its fair value as determined in the first
step. In such instances, the Company compares the implied fair value of goodwill (as defined in
SFAS 142) to its carrying amount of goodwill. If the carrying amount of reporting unit goodwill
exceeds the implied fair value of that goodwill, an impairment loss is recognized in an amount
equal to that excess. Fair market value of a reporting unit is determined using a calculation based
on multiples of revenue and multiples of EBITDA of both the Company and its competitors. Based on
our tests at September 30, 2004 and September 30, 2003, the Company concluded that there was no
impairment of goodwill in accordance with SFAS 142.
67
Deferred Selling Costs
The Company defers selling costs that vary with and are primarily related to the acquisition
of preneed funeral (trust funded only) and preneed cemetery contracts, and to expense such costs in
proportion to the revenue recognized. This deferral, which is calculated based on deferral rates
discussed below, and amortization model follows the provisions of SFAS 60, “Accounting and
Reporting by Insurance Enterprises” (SFAS 60). The selling costs subject to deferral are the pool
of compensation expense and related fringe costs incurred by the Company’s sales counselors and
sales managers. Other selling costs associated with the sales and marketing of preneed funeral and
cemetery contracts (e.g., lead procurement costs, brochures and marketing materials, advertising
and general administrative costs) are expensed as incurred.
Deferral rates are determined for the following:
| |
• |
|
Preneed funeral contracts |
| |
| |
• |
|
Preneed cemetery contract items: |
| |
• |
|
interment rights (burial property) |
| |
| |
• |
|
merchandise |
| |
| |
• |
|
services |
These deferral rates are based on the ratio of the selling compensation and fringe
costs to preneed funeral and cemetery production (in dollars) weighted accordingly in the manner
for which the counselor is compensated (with interment rights, or burial property, being the
highest and preneed cemetery services being the lowest compensation to the counselor). In
developing the deferral rates, the Company reviews various rate scenarios to ensure the finalized
rates, when applied to forecasted production dollars, are reasonable compared to forecasted selling
compensation. Additionally, the developed deferral rates are reviewed annually for reasonableness
compared to current and historical commission rates used by the Company.
As preneed funeral and cemetery contracts are processed, the rates are applied systematically
to the production dollars and the resulting amount is deferred. As a result, the funeral and
cemetery deferred selling costs are only generated when preneed funeral and cemetery contract
production is recorded. Therefore, these deferred selling costs vary with and relate primarily to
the production of the business. The Company has separate deferred selling cost accounts related to
preneed funeral, preneed cemetery interment rights, preneed cemetery merchandise, and preneed
cemetery services. The deferred preneed funeral and cemetery revenue accounts are recorded
similarly.
Periodically, the selling costs deferred are compared to the actual costs incurred to ensure
there is not a significant variance between the two.
The deferred selling costs are expensed in proportion to the revenue when recognized
(proportionate method). This is determined annually by the ratio of the unamortized deferred
selling costs (funeral, cemetery interment rights, cemetery merchandise and cemetery services) to
the associated deferred revenue, and systematically applying this ratio against the deferred
selling cost accounts as the applicable revenues are recognized.
The Company does not attribute deferred selling costs to each individual contract (or each
item in the case of cemetery deferred selling costs) because our systems do not currently have the
complete functionality to defer and amortize the costs and we have no other cost effective means by
which to do so. We believe using the proportionate method of amortization and the homogenous nature
of the 430,000 preneed funeral contracts and 3.6 million of preneed cemetery contract items (as
separated by interment rights, merchandise and services) allows for a systematic match of costs
with related revenues.
The Company applies the requirements of SFAS No. 60 “Accounting and Reporting by Insurance
Enterprises” (SFAS 60) to test for impairment of our deferred selling costs as prescribed by the
AICPA Industry Guide, “Life and Health Insurance Entities.” Accordingly, when circumstances
indicate that actual experience for a portfolio of contracts, regardless of the year of origin, may
result in losses, the Company assesses whether the expected gross contract revenues for each
portfolio of preneed funeral contracts or preneed cemetery contracts less all related expected
contract costs is sufficient to cover the current unamortized deferred selling costs associated
with each portfolio. For purposes of applying this policy, a portfolio of preneed funeral contracts
or preneed cemetery contracts is comprised of all such contracts executed within a given market
(i.e., an area of operation). If deferred selling costs for a portfolio of contracts exceeds the
related gross contract revenue less expected contract costs, the excess is charged to expense. If
there is an indication of further excess cost over the deferred revenue balance, a loss contract
liability would be recorded. The Company believes this is the most appropriate way to evaluate
impairment because it is consistent with the manner in which it acquires, services,
68
and measures the profitability of its preneed funeral and cemetery contracts. The sales
organization is organized by market, and the selling costs incurred and deferred specifically
relate to the preneed funeral and cemetery deferred revenues recorded in the operating market.
An allowance is provided against the deferred selling costs associated with contract
cancellations, with a corresponding charge to the consolidated statement of operations. The
allowance for cancellations is determined from the Company’s historical experience and is based on
the amount of unrecoverable deferred selling costs in relation to the associated deferred revenue.
The following table depicts the activity in the allowance for deferred selling costs for the
years ended December 31, 2004 and 2003.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Beginning |
|
Change in |
|
Change for |
|
Ending |
| |
|
Balance |
|
Allowance |
|
Divestitures |
|
Balance |
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for funeral deferred selling costs |
|
$ |
(8,742 |
) |
|
$ |
(1,202 |
) |
|
$ |
117 |
|
|
$ |
(9,827 |
) |
Allowance for cemetery deferred selling costs |
|
|
(15,044 |
) |
|
|
(874 |
) |
|
|
(6 |
) |
|
|
(15,924 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for funeral deferred selling costs |
|
$ |
(8,911 |
) |
|
$ |
83 |
|
|
$ |
86 |
|
|
$ |
(8,742 |
) |
Allowance for cemetery deferred selling costs |
|
|
(14,020 |
) |
|
|
(1,135 |
) |
|
|
111 |
|
|
|
(15,044 |
) |
The change in the allowance account relates to 1) the periodic adjustment based on the
Company’s historical cancellations and 2) reductions associated with the effects of divestitures.
Impairment or Disposal of Long-Lived Assets
Except as noted for goodwill and deferred selling costs, the Company reviews its long-lived
assets for impairment when changes in circumstances indicate that the carrying amount of the asset
may not be recoverable in accordance with Statement of Financial Accounting Standards (SFAS) No.
144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (SFAS 144). SFAS 144 requires
that long-lived assets to be held and used be reported at the lower of carrying amount or fair
value. Assets to be disposed of and assets not expected to provide any future service potential to
the Company are recorded at the lower of carrying amount or fair value less estimated cost to sell.
During the second quarter of 2004, the Company committed to a plan to divest its funeral and
cemetery operations in Argentina and Uruguay. Upon this triggering event, in June 2004, the Company
tested these operations for impairment in accordance with SFAS 144. As a result of this impairment
test, the Company recorded an impairment charge of $15,189 in its second quarter 2004 consolidated
financial statements. At December 31, 2003, the Company had no recorded goodwill associated with
Argentina and Uruguay. As a result, the Company did not perform a SFAS 142 test in 2003 for these
operations.
In January 2002, the Company ceased depreciation of certain operating assets held for sale
(which primarily included assets in France and Chile). The Company later determined that
transactions to sell or joint venture these assets would be delayed. As a result, the Company
resumed normal depreciation of those assets held in France and Chile in the third quarter of 2002.
In January 2003, the Company once again classified the France operating assets held for sale and
ceased depreciation. In 2004, the Company sold its funeral operations in France and then purchased
a 25% equity interest in the acquiring company.
Stock Options
The Company accounts for employee stock-based compensation expense under the intrinsic value
method. Under the intrinsic value method, no compensation expense is recognized on stock options if
the grant price equals the market value on the date of grant. All of the Company stock option
grants have been at market value on the dates of each grant.
69
If the Company had elected to recognize compensation expense for its stock option plans, based
on the fair value of awards at their grant dates, net income (loss) and earnings (loss) per share
would have changed for the years ended December 31 to the following pro forma amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
|
note 2 |
|
Net income (loss) |
|
$ |
114,128 |
|
|
$ |
85,065 |
|
|
$ |
(234,638 |
) |
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax expense |
|
|
(3,220 |
) |
|
|
(6,720 |
) |
|
|
(13,537 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma net income (loss) |
|
$ |
110,908 |
|
|
$ |
78,345 |
|
|
$ |
(248,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic net earnings (loss) per share |
|
$ |
.36 |
|
|
$ |
.28 |
|
|
$ |
(.80 |
) |
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax expense |
|
|
(.01 |
) |
|
|
(.02 |
) |
|
|
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma basic net earnings (loss) per share |
|
$ |
.35 |
|
|
$ |
.26 |
|
|
$ |
(.84 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted net earnings (loss) per share |
|
$ |
.35 |
|
|
$ |
.28 |
|
|
$ |
(.80 |
) |
Deduct: Total stock-based employee compensation expense determined
under fair value based method for all awards, net of related tax expense |
|
|
(.01 |
) |
|
|
(.02 |
) |
|
|
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
Pro forma diluted net earnings (loss) per share |
|
$ |
.34 |
|
|
$ |
.26 |
|
|
$ |
(.84 |
) |
|
|
|
|
|
|
|
|
|
|
The fair values of the Company’s stock options used to calculate the pro forma net income
(loss) and earnings (loss) per share disclosures are calculated as of the grant date using the
Black-Scholes option-pricing model with the following weighted average assumptions:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| Assumptions |
|
2004 |
|
2003 (1) |
|
2002 |
Dividend yield |
|
|
0.0 |
% |
|
|
n/a |
|
|
|
0.0 |
% |
Expected volatility |
|
|
63.8 |
% |
|
|
n/a |
|
|
|
66.3 |
% |
Risk-free interest rate |
|
|
4.0 |
% |
|
|
n/a |
|
|
|
3.6 |
% |
Expected holding period |
|
8.0 years |
|
|
n/a |
|
|
6.1 years |
Weighted average fair value |
|
$ |
4.68 |
|
|
|
n/a |
|
|
$ |
2.90 |
|
|
|
|
| (1) |
|
The assumptions are not applicable for 2003, since the Company did not issue stock options during the year. |
The Black-Scholes option-pricing model is generally intended for use in estimating the fair
value of traded options, which have no vesting restrictions and are fully transferable.
Furthermore, option-pricing models require highly subjective variable assumptions, such as the
expected stock price volatility. Therefore, the fair values of the Company’s stock options
presented in the pro forma calculations are not necessarily representations of the actual fair
values of those stock options since the granted options have characteristics significantly
different from those of traded options, and the variables used, under alternative assumptions,
could cause the calculations to vary from those presented.
Treasury Stock
The Company recently announced a share repurchase program authorizing the investment of up to
$300,000 to purchase its common stock in order to reduce dilution from shares issued previously and
to assist the Company in maintaining an appropriate capital structure. The Company makes treasury
stock 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.
70
Foreign Currency Translation
All assets and liabilities of the Company’s foreign subsidiaries are translated into U.S.
dollars at exchange rates in effect as of the end of the reporting period. Revenue and expense
items are translated at the average exchange rates for the reporting period. The resulting
translation adjustments are included in stockholders’ equity as a component of Accumulated other
comprehensive loss in the consolidated statement of stockholders’ equity.
The functional currency of the Company and its subsidiaries is the local currency. The
transactional currency gains and losses that arise from transactions denominated in currencies
other than the functional currencies of our operations are recorded in Other income, net in the
consolidated statement of operations. The Company does not operate in countries which would be
considered to have hyperinflationary economies.
Funeral Operations
Revenue is recognized when the funeral services are performed and funeral merchandise is
delivered. The Company’s funeral trade receivables consist of amounts due for services already
performed and merchandise delivered. An allowance for doubtful accounts has been provided based on
historical experience. The Company sells price guaranteed preneed funeral contracts through various
programs providing for future funeral services at prices prevailing when the agreements are signed.
Revenues associated with sales of preneed funeral contracts, which include accumulated trust
earnings, are deferred until such time that the funeral services are performed. Allowances for
customer cancellations are based upon historical experience. See note five to the consolidated
financial statements regarding preneed funeral activities.
Pursuant to state or provincial law, all or a portion of the proceeds from funeral merchandise
or services sold on a preneed basis may be required to be paid into trust funds. The Company defers
investment earnings related to these merchandise and services trusts until the associated
merchandise is delivered or services are performed.
Cemetery Operations
Revenue associated with sales of cemetery merchandise and services is recognized when the
service is performed or merchandise is delivered. The Company’s cemetery trade receivables consist
of amounts due for services already performed and merchandise already delivered. An allowance for
doubtful accounts has been provided based on historical experience. Revenue associated with sales
of preneed cemetery interment rights is recognized in accordance with the retail land sales
provisions of SFAS No. 66, “Accounting for the Sales of Real Estate” (SFAS 66). Under SFAS 66,
revenue from constructed cemetery property is not recognized until a minimum percentage (10%) of
the sales price has been collected. Revenue related to the preneed sale of unconstructed cemetery
property is deferred until it is constructed and 10% of the sales price is collected. Revenue
associated with sales of preneed merchandise and services is not recognized until the merchandise
is delivered or the services are performed. Allowances for customer cancellations for preneed
cemetery contracts are based upon historical experience.
Costs related to the sale of property interment rights include the property and development
costs specifically identified by project. At the completion of the project, costs are charged to
operations as revenue is recognized. Costs related to sales of merchandise and services are based
on actual costs incurred.
Pursuant to state or provincial law, all or a portion of the proceeds from cemetery
merchandise or services sold on a preneed basis may be required to be paid into trust funds. The
Company defers investment earnings related to these merchandise and services trusts until the
associated merchandise is delivered or services are performed.
A portion of the proceeds from the sale of cemetery property interment rights is required by
state or provincial law to be paid into perpetual care trust funds. Investment earnings from these
trusts are distributed regularly, are recognized in current cemetery revenues and are intended to
defray cemetery maintenance costs, which are expensed as incurred. The principal of such perpetual
care trust funds generally cannot be withdrawn by the Company.
See note six to the consolidated financial statements regarding preneed cemetery activities.
Income Taxes
Income taxes are computed using the liability method. Deferred taxes are provided on all
temporary differences between the financial basis and the tax basis of assets and liabilities. The
Company records a valuation allowance to reduce its deferred tax assets when uncertainty regarding
their realization exists. The Company intends to permanently reinvest the unremitted earnings of
certain of its foreign subsidiaries in those businesses outside the United States and, therefore,
has not provided for deferred federal income taxes on such unremitted foreign earnings. For more
information related to taxes, see note ten to the consolidated financial statements.
71
Equity Investments
The Company maintains certain equity interests in international operations as a result of its
strategy to dispose of all or a majority interest of all our international operations outside of
North America. At December 31, 2004, the Company had a minority investment in certain funeral
operations in France. At December 31, 2003, the Company had a minority interest equity investment
in operations in the United Kingdom and at December 31, 2002 had minority interest equity
investments in operations in the United Kingdom, Australia and Spain. The Company accounts for its
minority interest equity investments in accordance with Accounting Principles Board Opinion No. 18,
“The Equity Method of Accounting for Investments in Common
Stock”. The Company has not presented
summarized financial information of the investees as they are not material to the Company’s
financial position or results of operations or cash flow.
The names of the Company’s investees and the percentage of ownership are set forth in the
table below.
| |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Investment |
|
|
| |
|
|
|
Ownership |
|
Method |
|
|
| |
|
Investee Name |
|
Percentage |
|
Accounting |
|
Date Sold |
Investments held at 12/31/2004 |
|
|
|
|
|
|
|
|
|
|
France
|
|
AKH Luxco S.C.A.
|
|
|
25 |
% |
|
Equity
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Investments held at 12/31/2003 |
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
Dignity Limited
|
|
|
20 |
% |
|
Equity
|
|
June 2004 |
|
|
|
|
|
|
|
|
|
|
|
Investments held at 12/31/2002 |
|
|
|
|
|
|
|
|
|
|
United Kingdom
|
|
Dignity Limited
|
|
|
20 |
% |
|
Equity
|
|
June 2004 |
Australia
|
|
SCIA Holdings Pty
Limited
|
|
|
20 |
% |
|
Equity
|
|
December 2003 |
Spain
|
|
SCI Spain, S.L.
|
|
|
15 |
% |
|
Cost
|
|
May 2003 |
NOTE FOUR
New Accounting Pronouncements and Accounting Changes
Other Than Temporary Impairments
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 are not expected to have a material impact on the
consolidated financial statements, results of operations, financial position, or cash flows of the
Company.
Inventory Costs
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs — an amendment of ARB 43,
Chapter 4” (SFAS 151). SFAS 151 amends the guidance in ARB No. 43, Chapter 4, “Inventory Pricing,”
to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs
and wasted material. SFAS 151 requires that those items be recognized as current-period charges,
rather than as a portion of the inventory cost. In addition, SFAS 151 requires that allocation of
fixed production overhead to the costs of conversion be based on the normal capacity of the
production facilities. SFAS 151 will be effective for inventory costs incurred during fiscal years
beginning after June 15, 2005. The Company does not expect this statement to have a material impact
on the Company’s consolidated financial statements, results of operations, financial position, or
cash flows.
Income Taxes
In December 2004, the FASB issued Staff Position No. FAS 109-1 “Application of FASB Statement
No. 109, Accounting for
Income Taxes, to the Tax Deduction on Qualified Production Activities provided by the American Jobs
Creation Act of 2004” (FAS
72
109-1). The American Jobs Creation Act of 2004, enacted on October 22,
2004, provides for a deduction for certain qualified production activities. FAS 109-1 provides
guidance for the application of FASB Statement No. 109, Accounting for Income Taxes, to the
deduction for certain qualified production activities, and was effective immediately upon issuance.
The Company does not believe that the adoption of FAS 109-1 will have a significant impact on its
consolidated financial statements, results of operations, financial position, or cash flows.
In December 2004, the FASB issued Staff Position No. FAS 109-2 “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004” (FAS 109-2). The American Jobs Creation Act of 2004 (Jobs Act), enacted on October 22, 2004,
provides for a temporary 85% dividends-received deduction on certain foreign earnings repatriated
to a U.S. taxpayer, provided certain criteria are met. FAS 109-2 provides accounting and disclosure
guidance for the repatriation provision, and was effective immediately upon issuance. The Company
is in the process of evaluating whether it will repatriate earnings under the repatriation
provisions of the Jobs Act, and if so, the amount that will be repatriated; therefore, as provided
for in FAS 109-2, deferred tax liabilities have not been adjusted. The Company estimates the range
of possible amounts of unremitted earnings under consideration is between $0 and $2,276. If the
maximum amount of $2,276 were to be repatriated, the Company would accrue tax expense of
approximately $434.
Share-Based Payment
In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R
is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes APB 25.
Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting, and
requires companies to recognize the cost of employee services received in exchange for awards of
equity instruments, based on the grant date fair value of those awards, in the financial
statements. The effective date of SFAS 123R is the first reporting period beginning after June 15,
2005, which is third quarter 2005 for calendar year companies. SFAS 123R permits companies to adopt
its requirements using either a “modified prospective” method, or a “modified retrospective”
method.
The Company currently utilizes a standard option pricing model (i.e., Black-Scholes) to
measure the fair value of stock options granted to employees. While SFAS 123R permits entities to
continue to use such a model, the standard also permits the use of a “lattice” model. The Company
will continue to utilize the Black-Scholes option pricing model to measure the fair value of its
stock options.
The Company expects to adopt SFAS 123R effective July 1, 2005. The Company is currently
evaluating the impact that this adoption will have on the Company’s results of operations. See note
sixteen to the consolidated financial statements for further information on the Company’s
stock-based compensation plans.
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).
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 Company’s preneed funeral and cemetery merchandise and service trust
assets and the Company’s 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
Company’s 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 Company’s
consolidated statement of cash flows; however, it does require certain financing and investing
activities to be disclosed. See notes five
through seven to the consolidated financial statements.
73
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, that is payable to the trusts but not yet
required to be deposited in the trusts, as restricted cash in Deferred charges and other assets in
its consolidated balance sheet. At December 31, 2004, these pending deposits totaled $11,218. 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 Company’s 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
offsets the net realized earnings of such trusts also recognized within Other income, net.
Accordingly, the Company’s 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 amounts previously attributed to non-controlling interests and
deferred revenues as 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 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 contracts 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 Company’s 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 Company’s
Accumulated other comprehensive income (loss) is disclosed in note fifteen of the consolidated
financial statements. However, the Company’s Accumulated other comprehensive income (loss) on the
face of the balance sheet is ultimately not affected by consolidation of the trusts.
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 Perpetual
care investments have indirect interests in real estate partnerships. These partnerships have
incurred indebtedness of $76,926 that has been included in the market and cost value of the trust
investments (see notes five, six and seven to the consolidated financial statements) and in Other
liabilities in the consolidated balance sheet. See note eight to the consolidated balance sheet for
further information concerning the debt associated with certain trusts.
74
For additional discussion of the Company’s accounting policies after the implementation of FIN
46R, see notes five through eight to the consolidated financial statements.
Consolidation of Certain Cemeteries: Prior to December 31, 2003, the Company operated certain
cemeteries in Michigan which the Company managed but did not own. During the Company’s evaluation
of FIN 46R, the Company evaluated these cemeteries to determine whether such cemeteries were within
the scope of FIN 46R. The investment capital of these cemeteries was financed by the Company in
exchange for a long-term sales, accounting, and cash management agreement. In accordance with this
agreement, the Company receives the majority of the cash flows from these cemeteries. Additionally,
the Company absorbs the majority of these cemeteries’ expected losses and receives a majority of
the cemeteries’ residual returns. As a result, the Company determined itself to be the primary
beneficiary of these cemeteries and determined the long-term sales, accounting, and cash management
agreement to be a variable interest as defined by FIN 46R. Given the circumstances above, the
Company consolidated such cemeteries at March 31, 2004. The Company recognized an after tax charge
of $13,957, 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 Company’s 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 Company’s reported results of operations.
Insurance Funded Preneed Funeral 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
Company’s consolidated stockholders’ equity, results of operations or cash flows. See note five to
the consolidated financial statements for additional information on insurance related preneed
funeral balances.
Goodwill and Other Intangible Assets
In accordance with SFAS No. 142, “Goodwill and Other Intangible Assets” (SFAS 142), the
Company recognized a charge, effective January 1, 2002, reflected as a cumulative effect of an
accounting change of $135,560 (net of applicable taxes) or $.46 per diluted share related to the
impairment of goodwill in its North America cemetery reporting unit. See note nine to the
consolidated financial statements for additional information on goodwill.
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 Company’s pension plans are frozen with no benefits accruing to participants
except interest.
Effective January 1, 2004, the Company changed its accounting for gains and losses on its
pension plan assets and obligations. The Company now recognizes such gains and losses in its
consolidated statement of operations as 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). The Company believes the new method of accounting better reflects
the economic nature of the Company’s 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 sixteen
to the consolidated financial statements for additional information on pensions.
75
The twelve months ended December 31, 2003 and 2002 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.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve months ended |
|
Twelve months ended |
| |
|
December 31, 2003 |
|
December 31, 2002 |
| |
|
|
|
|
|
Net |
|
|
|
|
|
|
|
|
|
Net |
|
|
| |
|
|
|
|
|
pension |
|
|
|
|
|
|
|
|
|
pension |
|
|
| |
|
|
|
|
|
gains |
|
|
|
|
|
|
|
|
|
losses |
|
|
| |
|
Historical |
|
(1) |
|
Pro forma |
|
Historical |
|
(1) |
|
Pro forma |
| |
|
(Restated) |
|
|
|
|
|
(Restated) |
|
(Restated) |
|
|
|
|
|
(Restated) |
| |
|
Note 2 |
|
|
|
|
|
Note 2 |
|
Note 2 |
|
|
|
|
|
Note 2 |
Income (loss) from
continuing operations
before cumulative effect
of accounting change |
|
$ |
82,536 |
|
|
$ |
12,719 |
|
|
$ |
95,255 |
|
|
$ |
(84,310 |
) |
|
$ |
(4,619 |
) |
|
$ |
(88,929 |
) |
Net income (loss) |
|
$ |
85,065 |
|
|
$ |
12,719 |
|
|
$ |
97,784 |
|
|
$ |
(234,638 |
) |
|
$ |
(4,619 |
) |
|
$ |
(239,257 |
) |
Amounts per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) — basic |
|
$ |
.28 |
|
|
$ |
.05 |
|
|
$ |
.33 |
|
|
$ |
(.80 |
) |
|
$ |
(.01 |
) |
|
$ |
(.81 |
) |
Net income (loss) — diluted |
|
$ |
.28 |
|
|
$ |
.05 |
|
|
$ |
.33 |
|
|
$ |
(.80 |
) |
|
$ |
(.01 |
) |
|
$ |
(.81 |
) |
|
|
|
| (1) |
|
This represents pension gains and losses that would have been
recognized under the new method of pension accounting adopted on
January 1, 2004. As a result of this change in accounting, the Company
now recognizes actual gains and losses in plan assets and obligations
in its consolidated statement of operations as such gains and losses
are incurred as disclosed in our filings |
NOTE FIVE
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 four 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. The preneed funeral
receivable is then decreased by the cash received from the customer at the time of sale. 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 $46,822 into and
withdrew $65,208 from trusts during the nine months ended December 31, 2004 (subsequent to the
adoption of FIN 46R).
Direct selling costs related to trust funded preneed funeral contracts are deferred and
included in Deferred charges and other assets in the Company’s 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 $99,371 and $100,317 at December 31, 2004 and 2003, respectively. Direct
selling costs incurred pursuant to the sales of insurance funded preneed funeral contracts are
expensed as incurred.
76
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 Company’s consolidated balance sheet at December 31 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Receivables due from trust assets, at cost |
|
$ |
— |
|
|
$ |
1,062,696 |
|
Trust investments, at market |
|
|
1,128,000 |
|
|
|
— |
|
Receivables from customers |
|
|
154,016 |
|
|
|
179,038 |
|
|
|
|
|
|
|
|
|
|
|
1,282,016 |
|
|
|
1,241,734 |
|
Allowance for cancellation |
|
|
(14,232 |
) |
|
|
(161,626 |
) |
|
|
|
|
|
|
|
Preneed funeral receivables and trust investments |
|
$ |
1,267,784 |
|
|
$ |
1,080,108 |
|
|
|
|
|
|
|
|
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 December 31, 2004 or 2003.
Accumulated investment earnings from trust investments have been included to the extent that
they have been accrued through December 31, 2004 and 2003, respectively. 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 death 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 activity in Preneed funeral receivables and trust investments for the years ended December
31 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Beginning balance — Preneed funeral receivables and trust investments |
|
$ |
1,080,108 |
|
|
$ |
1,340,518 |
|
Net sales |
|
|
104,259 |
|
|
|
94,942 |
|
Cash receipts from customers |
|
|
(94,522 |
) |
|
|
(107,424 |
) |
Deposits to trust |
|
|
67,527 |
|
|
|
41,646 |
|
Dispositions of businesses |
|
|
(9,323 |
) |
|
|
(12,932 |
) |
Net undistributed investment earnings (losses) |
|
|
39,479 |
|
|
|
(16,206 |
) |
Maturities and distributed earnings |
|
|
(122,212 |
) |
|
|
(150,496 |
) |
Change in cancellation allowance |
|
|
2,593 |
|
|
|
(11,923 |
) |
Adoption of FIN 46R: |
|
|
|
|
|
|
|
|
Change in cancellation allowance |
|
|
144,801 |
|
|
|
— |
|
Record trust investments at market |
|
|
49,054 |
|
|
|
— |
|
Reclassification of debt associated with certain trust investments |
|
|
32,109 |
|
|
|
— |
|
Trust
reconciliations adjustments |
|
|
(2,280 |
) |
|
|
(50,991 |
) |
Effect of foreign currency and other |
|
|
(23,809 |
) |
|
|
(47,026 |
) |
|
|
|
|
|
|
|
Ending balance — Preneed funeral receivables and trust investments |
|
$ |
1,267,784 |
|
|
$ |
1,080,108 |
|
|
|
|
|
|
|
|
The cost and market values associated with funeral trust investments at December 31, 2004 are
detailed below. Cost reflects the
investment (net of redemptions) of control holders in common trust funds, mutual funds and private
equity investments. Market
77
reflects the fair market value of securities or cash held by the common
trust funds, mutual funds at published values and the estimated market value of private equity
investments (including debt as well as the estimated fair value related to the contract holders’
equity in majority-owned real estate investments). The market value of funeral trust investments
was based primarily on quoted market prices at December 31, 2004. The Company periodically
evaluates investments for other-than-temporary impairment. As a result of its most recent review at
December 31, 2004, the Company recorded an adjustment to cost of $15,176 for the unrealized losses
related to certain private equity and other investments. The adjustment to cost is included in
realized losses included in Other income, net and is offset by a corresponding amount in the
interest expense related to non-controlling interest in funeral trust investments, which is also
included in Other income, net. See note eight to the consolidated financial statements for further
information related to non-controlling interest in funeral trust investments. The Company believes
the remaining unrealized losses of $2,118 related to trust investments are temporary in nature.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
| |
|
note 2 |
|
|
|
|
|
|
|
|
|
|
note 2 |
|
Cash and cash equivalents |
|
$ |
57,730 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
57,730 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
86,694 |
|
|
|
2,883 |
|
|
|
(191 |
) |
|
|
89,386 |
|
Foreign government |
|
|
73,073 |
|
|
|
1,238 |
|
|
|
(37 |
) |
|
|
74,274 |
|
Corporate |
|
|
9,585 |
|
|
|
490 |
|
|
|
(21 |
) |
|
|
10,054 |
|
Mortgage-backed |
|
|
125,144 |
|
|
|
5,740 |
|
|
|
(414 |
) |
|
|
130,470 |
|
Insurance-backed |
|
|
238,204 |
|
|
|
— |
|
|
|
— |
|
|
|
238,204 |
|
Asset-backed and other |
|
|
3,179 |
|
|
|
150 |
|
|
|
(9 |
) |
|
|
3,320 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
275,569 |
|
|
|
13,510 |
|
|
|
(1,003 |
) |
|
|
288,076 |
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
112,332 |
|
|
|
12,195 |
|
|
|
(287 |
) |
|
|
124,240 |
|
Fixed income |
|
|
50,237 |
|
|
|
432 |
|
|
|
(156 |
) |
|
|
50,513 |
|
Private equity and other |
|
|
57,633 |
|
|
|
4,100 |
|
|
|
— |
|
|
|
61,733 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
1,089,380 |
|
|
$ |
40,738 |
|
|
$ |
(2,118 |
) |
|
$ |
1,128,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as of a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
104 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity dates of the fixed income securities range from 2005 to 2041. Maturities of fixed
income securities at December 31, 2004 are estimated as follows:
| |
|
|
|
|
| |
|
Market |
|
Due in one year or less |
|
$ |
72,722 |
|
Due in one to five years |
|
|
141,930 |
|
Due in five to ten years |
|
|
59,670 |
|
Thereafter |
|
|
271,386 |
|
|
|
|
|
|
|
$ |
545,708 |
|
|
|
|
|
During the nine months ended December 31, 2004 (subsequent to the adoption of FIN 46R),
purchases and sales of available-for-sale securities included in trust investments were $951,663
and $1,019,075, respectively. These transactions resulted in $89,500 and $56,852 of realized gains
and realized losses, respectively for the nine months ended December 31, 2004. The Company uses the
first in, first out (FIFO) method to determine the cost of funeral trust available-for-sale
securities sold during the period.
Earnings from these trust investments are recognized in current funeral revenues when the
service is performed, merchandise is delivered, or upon cancellation for the amount the Company is
entitled to retain. Recognized earnings related to these trust investments were $35,477, $25,487,
and $35,318 for the twelve months ended December 31, 2004, 2003, and 2002, respectively.
78
Deferred Preneed Funeral Revenues
At December 31, 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 represented the
original price of a trust funded preneed funeral contract plus the net trust investment earnings.
The following table summarizes the activity in Deferred preneed funeral revenues for the years
ended December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Beginning balance — Deferred preneed funeral revenues |
|
$ |
1,464,218 |
|
|
$ |
1,711,319 |
|
Net sales |
|
|
97,611 |
|
|
|
63,301 |
|
Dispositions of businesses |
|
|
(19,014 |
) |
|
|
(15,836 |
) |
Net investment earnings |
|
|
37,219 |
|
|
|
(15,975 |
) |
Maturities and associated earnings |
|
|
(138,820 |
) |
|
|
(173,697 |
) |
Change in cancellation allowance |
|
|
(6,179 |
) |
|
|
(11,923 |
) |
Change in non-controlling interest |
|
|
137,236 |
|
|
|
— |
|
Effect of foreign currency and other |
|
|
(28,547 |
) |
|
|
(49,533 |
) |
Adoption of FIN 46R: |
|
|
|
|
|
|
|
|
Change in cancellation allowance |
|
|
135,313 |
|
|
|
— |
|
Record trust investments at market |
|
|
49,054 |
|
|
|
— |
|
Reclassification of non-controlling interest |
|
|
(1,229,520 |
) |
|
|
— |
|
Trust
reconciliation adjustments |
|
|
— |
|
|
|
(43,438 |
) |
|
|
|
|
|
|
|
Ending balance — Deferred preneed funeral revenues |
|
$ |
498,571 |
|
|
$ |
1,464,218 |
|
|
|
|
|
|
|
|
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 was 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.
NOTE SIX
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 four 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 $104,250 into and
withdrew $90,864 from the trusts during the nine months ended December 31, 2004 (subsequent to the
adoption of FIN 46R).
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 $212,397 and $211,025 as of December 31, 2004 and 2003,
respectively.
79
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 December 31, 2004 and 2003 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, 2004 |
|
|
December 31, 2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Receivables due from trust assets, at cost |
|
$ |
— |
|
|
$ |
847,446 |
|
Trust investments, at market |
|
|
1,030,429 |
|
|
|
— |
|
Receivables from customers |
|
|
483,945 |
|
|
|
522,079 |
|
Unearned finance charges |
|
|
(75,488 |
) |
|
|
(75,785 |
) |
|
|
|
|
|
|
|
|
|
|
1,438,886 |
|
|
|
1,293,740 |
|
Allowance for cancellation |
|
|
(39,108 |
) |
|
|
(225,524 |
) |
|
|
|
|
|
|
|
Preneed cemetery receivables and trust investments |
|
$ |
1,399,778 |
|
|
$ |
1,068,216 |
|
|
|
|
|
|
|
|
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 5.0 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 activity in Preneed cemetery receivables and trust investments for the years ended
December 31 is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Beginning balance — Preneed cemetery receivables and trust investments, net |
|
$ |
1,068,216 |
|
|
$ |
1,149,861 |
|
Net sales including deferred and recognized revenue |
|
|
337,710 |
|
|
|
364,913 |
|
Dispositions of businesses |
|
|
(21,531 |
) |
|
|
(10,806 |
) |
Net investment earnings |
|
|
32,869 |
|
|
|
5,468 |
|
Cash receipts from customers, net of refunds |
|
|
(385,350 |
) |
|
|
(455,043 |
) |
Deposits to trust |
|
|
128,536 |
|
|
|
127,249 |
|
Maturities, deliveries and associated earnings |
|
|
(120,216 |
) |
|
|
(117,605 |
) |
Change in cancellation allowance |
|
|
17,772 |
|
|
|
(17,466 |
) |
Adoption of FIN 46R: |
|
|
|
|
|
|
|
|
Change in cancellation allowance |
|
|
169,728 |
|
|
|
— |
|
Record trust investments at market |
|
|
77,169 |
|
|
|
— |
|
Reclassification of debt associated with certain trust investments |
|
|
27,680 |
|
|
|
— |
|
Consolidation of not-for-profit cemeteries |
|
|
49,226 |
|
|
|
— |
|
Effect of foreign currency and other |
|
|
17,969 |
|
|
|
21,645 |
|
|
|
|
|
|
|
|
Ending balance — Preneed cemetery receivables and trust investments, net |
|
$ |
1,399,778 |
|
|
$ |
1,068,216 |
|
|
|
|
|
|
|
|
The cost and market values associated with the cemetery merchandise and service trust
investments at December 31, 2004 are detailed below. Cost reflects the investment (net of
redemptions) of control holders in common trust funds, mutual funds and private equity investments.
Market reflects the fair market value of securities or cash held by the common trust funds, mutual
funds at published values and the estimated market value of private equity investments (including
debt as well as the estimated fair value related to the contract holders’ equity in majority-owned
real estate alternative investments). The market value of cemetery trust investments was based
primarily on quoted market prices at December 31, 2004. The Company periodically evaluates
investments for other-than-temporary impairment. As a result of the Company’s most recent review at
December 31, 2004, the Company recorded an adjustment to cost of $11,928 for the unrealized losses
related to certain private equity and other investments. The adjustment to cost is included in
realized losses included in Other income, net and is offset by a corresponding amount in the
interest expense related to non-controlling interest in cemetery trust investments, which is also
included in Other income, net. See note eight to the consolidated financial statements for further
information related to non-controlling interest in cemetery trust investments. The Company believes
the remaining unrealized losses of $1,087 related to trust investments are temporary in nature.
80
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
| |
|
note 2 |
|
|
|
|
|
|
|
|
|
|
note 2 |
|
Cash and cash equivalents |
|
$ |
123,311 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
123,311 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
91,189 |
|
|
|
7,944 |
|
|
|
(93 |
) |
|
|
99,040 |
|
Foreign government |
|
|
14,970 |
|
|
|
893 |
|
|
|
— |
|
|
|
15,863 |
|
Corporate |
|
|
13,072 |
|
|
|
1,076 |
|
|
|
(13 |
) |
|
|
14,135 |
|
Mortgage-backed |
|
|
191,283 |
|
|
|
16,732 |
|
|
|
(215 |
) |
|
|
207,800 |
|
Asset-backed and other |
|
|
20,320 |
|
|
|
1,806 |
|
|
|
(21 |
) |
|
|
22,105 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
253,340 |
|
|
|
24,048 |
|
|
|
(322 |
) |
|
|
277,066 |
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
153,364 |
|
|
|
20,886 |
|
|
|
(107 |
) |
|
|
174,143 |
|
Fixed income |
|
|
46,525 |
|
|
|
1,278 |
|
|
|
(316 |
) |
|
|
47,487 |
|
Private equity and other |
|
|
46,125 |
|
|
|
3,354 |
|
|
|
— |
|
|
|
49,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
953,499 |
|
|
$ |
78,017 |
|
|
$ |
(1,087 |
) |
|
$ |
1,030,429 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
108 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity dates of the fixed income securities range from 2005 to 2041. Maturities of fixed
income securities at December 31, 2004 are estimated as follows:
| |
|
|
|
|
| |
|
Market |
|
| |
|
(Restated) |
|
| |
|
note 2 |
|
Due in one year or less |
|
$ |
34,553 |
|
Due in one to five years |
|
|
61,312 |
|
Due in five to ten years |
|
|
80,842 |
|
Thereafter |
|
|
182,236 |
|
|
|
|
|
|
|
$ |
358,943 |
|
|
|
|
|
During the nine months ended December 31, 2004 (subsequent to the adoption of FIN 46R),
purchases and sales of available-for-sale securities included in trust investments were $837,867
and $829,290, respectively. These sale transactions resulted in $80,987 and $62,368 of realized
gains and realized losses, respectively for the nine months ended December 31, 2004. The Company
uses the FIFO method to determine the cost of cemetery trust available-for-sale securities sold
during the period.
Earnings from these trust investments are recognized in current cemetery revenues when the
service is performed or the merchandise is delivered or upon cancellation for the amount the
Company is entitled to retain. Recognized earnings related to these trust investments were $7,949,
$9,358 and $7,617 for the twelve months ended December 31, 2004, 2003 and 2002, respectively.
Deferred Preneed Cemetery Revenues
At December 31, 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.
81
The following table summarizes the activity in Deferred preneed cemetery revenues for the
years ended December 31:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Beginning balance — Deferred preneed cemetery revenues, net |
|
$ |
1,551,187 |
|
|
$ |
1,617,594 |
|
Net preneed and atneed deferred sales |
|
|
256,635 |
|
|
|
215,660 |
|
Dispositions of businesses |
|
|
(17,636 |
) |
|
|
(43,106 |
) |
Net investment earnings |
|
|
35,748 |
|
|
|
14,688 |
|
Maturities, deliveries and associated earnings |
|
|
(269,771 |
) |
|
|
(232,335 |
) |
Change in cancellation allowance |
|
|
(12,946 |
) |
|
|
(18,718 |
) |
Change in non-controlling interest |
|
|
(74,902 |
) |
|
|
— |
|
Effect of foreign currency and other |
|
|
(29 |
) |
|
|
(2,596 |
) |
Adoption of FIN 46R: |
|
|
|
|
|
|
|
|
Change in cancellation allowance |
|
|
141,502 |
|
|
|
— |
|
Record trust investments at market |
|
|
75,590 |
|
|
|
— |
|
Reclassification to non-controlling interest |
|
|
(925,685 |
) |
|
|
— |
|
Consolidation of not-for-profit cemeteries |
|
|
43,451 |
|
|
|
— |
|
|
|
|
|
|
|
|
Ending balance — Deferred preneed cemetery revenues, net |
|
$ |
803,144 |
|
|
$ |
1,551,187 |
|
|
|
|
|
|
|
|
An allowance for contract cancellation is provided based on historical experience. As a result
of the implementation of FIN 46R, the Company no longer provides an allowance for the deferred
preneed cemetery revenues now included in Non-controlling interest in funeral and cemetery trusts.
NOTE SEVEN
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 $16,118 into and withdrew $24,506 from trusts during the nine months ended December 31,
2004 (subsequent to the adoption of FIN 46R).
The cost and market values associated with trust investments held in perpetual care trusts at
December 31, 2004 are detailed below. Cost reflects the investment (net of redemptions) of control
holders in common trust funds, mutual funds and private equity investments. Market reflects the
fair market value of securities or cash held by the common trust funds, mutual funds at published
values and the estimated market value of private equity investments (including debt as well as the
estimated fair value related to the contract holders’ equity in majority-owned real estate
investments). The market value of perpetual care trusts was based primarily on quoted market prices
at December 31, 2004. The Company periodically evaluates investments for other-than-temporary
impairments. As a result of its most recent review at December 31, 2004, the Company recorded an
adjustment to cost of $1,072 for the unrealized losses related to certain private equity and other
investments. The adjustment to cost is included in realized losses included in Other income, net
and is offset by a corresponding amount in the interest expense related to non-controlling interest
in perpetual care trust investments, which is also included in Other income, net. See note eight to
the consolidated financial statements for further information related to non-controlling interest
in perpetual care trust investments. The Company believes the remaining unrealized losses of $1,241
related to trust investments are temporary in nature.
82
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
| |
|
Cost |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
Cash and cash equivalents |
|
$ |
33,444 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
33,444 |
|
Fixed income securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
U.S. Treasury |
|
|
25,688 |
|
|
|
1,764 |
|
|
|
(1 |
) |
|
|
27,451 |
|
Foreign government |
|
|
30,265 |
|
|
|
1,666 |
|
|
|
(5 |
) |
|
|
31,926 |
|
Corporate |
|
|
87,425 |
|
|
|
4,592 |
|
|
|
(2 |
) |
|
|
92,015 |
|
Mortgage-backed |
|
|
131,541 |
|
|
|
6,988 |
|
|
|
(2 |
) |
|
|
138,527 |
|
Asset-backed |
|
|
40,757 |
|
|
|
2,166 |
|
|
|
(1 |
) |
|
|
42,922 |
|
Equity securities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Preferred stock |
|
|
13,208 |
|
|
|
1,210 |
|
|
|
(43 |
) |
|
|
14,375 |
|
Common stock |
|
|
93,748 |
|
|
|
6,544 |
|
|
|
(171 |
) |
|
|
100,121 |
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
43,843 |
|
|
|
3,088 |
|
|
|
(159 |
) |
|
|
46,772 |
|
Fixed income |
|
|
145,428 |
|
|
|
6,266 |
|
|
|
(448 |
) |
|
|
151,246 |
|
Private equity and other |
|
|
48,542 |
|
|
|
2,116 |
|
|
|
(409 |
) |
|
|
50,249 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual care trust investments |
|
$ |
693,889 |
|
|
$ |
36,400 |
|
|
$ |
(1,241 |
) |
|
$ |
729,048 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Maturity dates of the fixed income securities range from 2005 to 2041. Maturities of fixed
income securities at December 31, 2004 are estimated as follows:
| |
|
|
|
|
| |
|
Market |
|
Due in one year or less |
|
$ |
3,443 |
|
Due in one to five years |
|
|
77,567 |
|
Due in five to ten years |
|
|
64,648 |
|
Thereafter |
|
|
187,183 |
|
|
|
|
|
|
|
$ |
332,841 |
|
|
|
|
|
During the nine months ended December 31, 2004 (subsequent to the adoption of FIN 46R),
purchases and sales of available-for-sale securities in the perpetual care trusts were $754,446 and
$771,791, respectively. These sales transactions resulted in $34,430 and $9,092 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 $32,519, $31,018, and $24,676 for the twelve
months ended December 31, 2004, 2003, and 2002, respectively.
NOTE EIGHT
Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts
Non-Controlling Interest in Funeral and Cemetery Trusts
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 four to
the consolidated financial statements.
83
The components of Non-controlling interest in funeral and cemetery trusts and Non-controlling
interest in perpetual care trusts in the Company’s consolidated balance sheet at December 31, 2004
are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery |
|
| |
|
Preneed |
|
|
Preneed |
|
|
|
|
|
|
perpetual |
|
| |
|
funeral |
|
|
cemetery |
|
|
Total |
|
|
care |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
|
|
|
|
| |
|
note 2 |
|
|
note 2 |
|
|
note 2 |
|
|
|
|
|
Trust investments, at market value |
|
$ |
1,128,000 |
|
|
$ |
1,030,429 |
|
|
$ |
2,158,429 |
|
|
$ |
729,048 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Debt associated with certain trust investments |
|
|
31,800 |
|
|
|
27,367 |
|
|
|
59,167 |
|
|
|
17,759 |
|
Accrued trust operating payables, deferred taxes
and other |
|
|
3,906 |
|
|
|
2,475 |
|
|
|
6,381 |
|
|
|
6,377 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35,706 |
|
|
|
29,842 |
|
|
|
65,548 |
|
|
|
24,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest |
|
$ |
1,092,294 |
|
|
$ |
1,000,587 |
|
|
$ |
2,092,881 |
|
|
$ |
704,912 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 $76,926 that is included in Other liabilities in the
consolidated balance sheet at December 31, 2004. The trusts’ obligation on this indebtedness is
limited to their investment in the respective partnerships. The debt has interest rates ranging
from 4.9% to 8.5% and maturities between 2011 and 2015.
Other Income, Net
The components of Other income, net in the Company’s consolidated statement of operations for
the twelve months ended December 31, 2004 are detailed below. See notes four through seven to the
consolidated financial statements for further discussion of the amounts related to the funeral,
cemetery and perpetual care trusts.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Cemetery |
|
|
|
|
|
|
|
| |
|
Funeral |
|
|
Cemetery |
|
|
perpetual |
|
|
|
|
|
|
|
| |
|
trusts |
|
|
trusts |
|
|
care trusts |
|
|
Other, net |
|
|
Total |
|
Realized gains |
|
$ |
89,500 |
|
|
$ |
80,987 |
|
|
$ |
34,430 |
|
|
$ |
— |
|
|
$ |
204,917 |
|
Realized losses |
|
|
(56,852 |
) |
|
|
(62,368 |
) |
|
|
(9,092 |
) |
|
|
— |
|
|
|
(128,312 |
) |
Interest, dividend and other ordinary income |
|
|
13,709 |
|
|
|
18,622 |
|
|
|
26,456 |
|
|
|
— |
|
|
|
58,787 |
|
Trust expenses and income taxes |
|
|
(5,775 |
) |
|
|
(7,422 |
) |
|
|
(7,282 |
) |
|
|
— |
|
|
|
(20,479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net trust investment income |
|
|
40,582 |
|
|
|
29,819 |
|
|
|
44,512 |
|
|
|
— |
|
|
|
114,913 |
|
Interest expense related to non- controlling interest in
funeral and cemetery trust investments |
|
|
(40,582 |
) |
|
|
(29,819 |
) |
|
|
— |
|
|
|
— |
|
|
|
(70,401 |
) |
Interest expense related to non- controlling interest in
perpetual care trust investments |
|
|
— |
|
|
|
— |
|
|
|
(44,512 |
) |
|
|
— |
|
|
|
(44,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Other income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
16,110 |
|
|
|
16,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other income, net |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
16,110 |
|
|
$ |
16,110 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amounts included in other income within Other income, net primarily relate to foreign currency
gains and losses, interest income on notes receivable and override commissions from a third party
insurance company.
84
NOTE NINE
Goodwill
The changes in the carrying amounts of goodwill for the Company’s funeral and cemetery
segments are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Funeral |
|
|
Cemetery |
|
|
|
|
| |
|
Segment |
|
|
Segment |
|
|
Total |
|
Balance as of December 31, 2002 |
|
$ |
1,182,271 |
|
|
$ |
1,907 |
|
|
$ |
1,184,178 |
|
Goodwill reduction related to disposition programs |
|
|
(11,663 |
) |
|
|
— |
|
|
|
(11,663 |
) |
Effect of foreign currency and other |
|
|
22,530 |
|
|
|
377 |
|
|
|
22,907 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2003 |
|
$ |
1,193,138 |
|
|
$ |
2,284 |
|
|
$ |
1,195,422 |
|
Goodwill increase related to acquisitions |
|
|
1,842 |
|
|
|
— |
|
|
|
1,842 |
|
Goodwill reduction related to disposition programs |
|
|
(34,887 |
) |
|
|
(127 |
) |
|
|
(35,014 |
) |
Effect of foreign currency and other |
|
|
6,564 |
|
|
|
226 |
|
|
|
6,790 |
|
|
|
|
|
|
|
|
|
|
|
Balance as of December 31, 2004 |
|
$ |
1,166,657 |
|
|
$ |
2,383 |
|
|
$ |
1,169,040 |
|
|
|
|
|
|
|
|
|
|
|
In accordance with SFAS 142, the Company, effective January 1, 2002, recognized a charge
reflected as a cumulative effect of an accounting change of $135,560 (net of applicable taxes) or
$.46 per diluted share related to the impairment of goodwill in its North America cemetery
reporting unit.
NOTE TEN
Income Taxes
The provision or benefit for income taxes includes United States federal income taxes,
determined on a consolidated return basis, foreign, state and local income taxes.
Income (loss) from continuing operations before income taxes and cumulative effects of
accounting changes for the years ended December 31 is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
United States |
|
$ |
66,041 |
|
|
$ |
5,765 |
|
|
$ |
(195,567 |
) |
Foreign |
|
|
46,222 |
|
|
|
105,409 |
|
|
|
72,265 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
112,263 |
|
|
$ |
111,174 |
|
|
$ |
(123,302 |
) |
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) for the years ended December 31 consisted of the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
(27,916 |
) |
|
$ |
2,050 |
|
|
$ |
(127,426 |
) |
Foreign |
|
|
3,257 |
|
|
|
18,243 |
|
|
|
(15,161 |
) |
State and local |
|
|
(786 |
) |
|
|
4,306 |
|
|
|
(1,498 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(25,445 |
) |
|
$ |
24,599 |
|
|
$ |
(144,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
United States |
|
$ |
10,124 |
|
|
$ |
1,224 |
|
|
$ |
85,434 |
|
Foreign |
|
|
12,358 |
|
|
|
7,865 |
|
|
|
21,744 |
|
State and local |
|
|
(2,696 |
) |
|
|
(5,050 |
) |
|
|
(2,085 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
19,786 |
|
|
$ |
4,039 |
|
|
$ |
105,093 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(5,659 |
) |
|
$ |
28,638 |
|
|
$ |
(38,992 |
) |
|
|
|
|
|
|
|
|
|
|
The Company made income tax payments on continuing operations of approximately $10,761,
$14,462 and $8,920 excluding income tax refunds of $2,566, $97,724 and $63,547 for the years ended
December 31, 2004, 2003 and 2002, respectively. Net tax (payments) refunds of $(8,195), $83,262 and
$54,627 include refunds of approximately $1,372, $950 and $21,962 related to losses on sales of
investments and refunds of approximately $0, $93,569 and $35,306 related to approval of a change in
tax accounting method for years 2004, 2003 and 2002, respectively.
85
The differences between the U.S. federal statutory income tax rate and the Company’s effective
tax rate for the years ended December 31 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
|
note 2 |
|
Computed tax provision (benefit) at the applicable federal statutory
income tax rate |
|
$ |
39,292 |
|
|
$ |
38,911 |
|
|
$ |
(43,156 |
) |
State and local taxes, net of federal income tax benefits |
|
|
(2,263 |
) |
|
|
(484 |
) |
|
|
(2,329 |
) |
Dividends received deduction and tax exempt interest |
|
|
(588 |
) |
|
|
(471 |
) |
|
|
(638 |
) |
Foreign
jurisdiction tax differences |
|
|
564 |
|
|
|
(5,905 |
) |
|
|
(8,332 |
) |
Foreign net operating loss utilization |
|
|
— |
|
|
|
— |
|
|
|
(9,811 |
) |
Write down of assets and other losses with no tax benefit |
|
|
(6,915 |
) |
|
|
119 |
|
|
|
28,554 |
|
Tax benefit associated with dispositions |
|
|
(34,297 |
) |
|
|
(3,350 |
) |
|
|
— |
|
Other |
|
|
(1,452 |
) |
|
|
(182 |
) |
|
|
(3,280 |
) |
|
|
|
|
|
|
|
|
|
|
(Benefit) provision for income taxes |
|
$ |
(5,659 |
) |
|
$ |
28,638 |
|
|
$ |
(38,992 |
) |
|
|
|
|
|
|
|
|
|
|
Total effective tax rate |
|
|
(5.0 |
)% |
|
|
25.8 |
% |
|
|
31.6 |
% |
|
|
|
|
|
|
|
|
|
|
Deferred taxes are determined based on differences between the financial reporting and tax
basis of assets and liabilities and are measured using the enacted marginal tax rates. The tax
effects of temporary differences and carry-forwards that give rise to significant portions of
deferred tax assets and liabilities as of December 31 consisted of the following:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Inventories and cemetery property, principally due to purchase accounting adjustments |
|
$ |
403,008 |
|
|
$ |
420,996 |
|
Property, plant and equipment, principally due to depreciation and to purchase
accounting adjustments |
|
|
27,418 |
|
|
|
96,674 |
|
Goodwill, principally due to amortization |
|
|
38,566 |
|
|
|
24,026 |
|
Receivables, principally due to sales of cemetery interment rights and related products |
|
|
66,229 |
|
|
|
1,482 |
|
Deferred taxes in other comprehensive income |
|
|
— |
|
|
|
38,388 |
|
Other |
|
|
50,128 |
|
|
|
105,274 |
|
|
|
|
|
|
|
|
Deferred tax liabilities |
|
|
585,349 |
|
|
|
686,840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred revenue on preneed funeral and cemetery contracts, principally due to earnings
from trust funds |
|
|
(110,939 |
) |
|
|
(112,558 |
) |
Accrued liabilities |
|
|
(68,604 |
) |
|
|
(119,174 |
) |
Loss and tax credit carry-forwards |
|
|
(180,122 |
) |
|
|
(109,113 |
) |
|
|
|
|
|
|
|
Deferred tax assets |
|
|
(359,665 |
) |
|
|
(340,845 |
) |
|
|
|
|
|
|
|
Valuation allowance |
|
|
43,908 |
|
|
|
35,859 |
|
|
|
|
|
|
|
|
Net deferred income taxes |
|
$ |
269,592 |
|
|
$ |
381,854 |
|
|
|
|
|
|
|
|
Reclassifications have been made between the 2003 components of deferred taxes to more clearly
reflect the significant components of deferred tax assets and liabilities. The 2004 increase in
valuation allowance is due to a $3,059 valuation allowance set up in 2004 on tax losses in foreign
jurisdictions, a $3,541 valuation on federal losses, and an increase of $1,448 valuation allowance
on state operating losses.
Current refundable income taxes and current deferred tax assets are included in Other current
assets, while long-term deferred tax assets are included in Deferred charges and other assets in
the consolidated balance sheet. Current taxes payable and current deferred tax liabilities are
reflected as Income taxes in the consolidated balance sheet and long-term tax liabilities are
included in Other liabilities in the consolidated balance sheet. The Company has tax receivables of
$30,461 and $3,844 at December 31, 2004 and 2003, respectively. The Company has long-term tax
liabilities of $104,981 and $92,585 at December 31, 2004 and 2003, respectively.
At December 31, 2004 and 2003, United States income taxes had not been provided on $77,112 and
$147,720, respectively, of the remaining undistributed earnings of foreign subsidiaries since it is
the Company’s intent not to remit these earnings. The Company intends to permanently reinvest these
undistributed foreign earnings in those businesses outside the United States and, therefore, has
not provided for U.S. income taxes on such earnings. The amount at December 31, 2003 included
$102,864 of undistributed earnings of the French operations that were sold in March 2004.
86
In December 2004, the FASB issued Staff Position No. FAS 109-2, “Accounting and Disclosure
Guidance for the Foreign Earnings Repatriation Provision within the American Jobs Creation Act of
2004” (FAS 109-2). The American Jobs Creation Act of 2004 (the “Jobs Act”), enacted on October 22,
2004, provides for a temporary 85% dividends received deduction on certain foreign earnings and
disclosure guidance for the repatriation provision, and was effective immediately upon issuance.
The Company is in the process of evaluating whether it will repatriate earnings under the
repatriation provisions of the Jobs Act, and if so, the amount that will be repatriated; therefore,
as provided for in FAS 109-2, deferred tax liabilities have not been adjusted. The Company
estimates the range of possible amounts of unremitted earnings under consideration is between $0
and $2,276. If the maximum amount of $2,276 were to be repatriated, the Company would accrue tax
expense of approximately $434.
The Company maintains accruals for tax liabilities that relate to uncertain potential tax
matters in numerous countries. If these tax matters are unfavorably resolved, the Company will make
any required payments to tax authorities or adjust the deferred tax asset. If these tax matters are
favorably resolved, the accruals maintained by the Company will no longer be required and these
amounts will be reversed through the tax provision as a non-cash credit at the time of resolution.
Various subsidiaries have foreign, federal and state carry-forwards of $1,225,951 with
expiration dates through 2024. The Company has tax credits of $8,686 with expiration dates through
2024. The Company believes that some uncertainty exists with respect to future realization of
certain state, federal, and foreign loss carry-forwards; therefore, a valuation allowance has been
established for those carry-forwards where uncertainty exists. The valuation allowance is primarily
attributable to state net operating losses and is due to complexities of the various state laws
restricting state net operating loss utilization.
The loss carry-forwards will expire as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Federal |
|
|
State |
|
|
Foreign |
|
|
Total |
|
2005 |
|
$ |
2,367 |
|
|
$ |
3,402 |
|
|
$ |
333 |
|
|
$ |
6,102 |
|
2006 |
|
|
2,218 |
|
|
|
19,920 |
|
|
|
2,525 |
|
|
|
24,663 |
|
2007 |
|
|
1,929 |
|
|
|
7,264 |
|
|
|
7,706 |
|
|
|
16,899 |
|
2008 |
|
|
— |
|
|
|
11,400 |
|
|
|
140 |
|
|
|
11,540 |
|
2009 |
|
|
1,959 |
|
|
|
652 |
|
|
|
1 |
|
|
|
2,612 |
|
Thereafter |
|
|
271,075 |
|
|
|
878,771 |
|
|
|
14,289 |
|
|
|
1,164,135 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
279,548 |
|
|
$ |
921,409 |
|
|
$ |
24,994 |
|
|
$ |
1,225,951 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE ELEVEN
Debt
Debt as of December 31, 2004 and 2003 was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
|
December 31, |
|
| (Dollars in thousands) |
|
2004 |
|
|
2003 |
|
7.375% notes due April 2004 |
|
$ |
— |
|
|
$ |
111,190 |
|
8.375% notes due December 2004 |
|
|
— |
|
|
|
50,797 |
|
6.0% notes due December 2005 |
|
|
63,801 |
|
|
|
272,451 |
|
7.2% notes due June 2006 |
|
|
150,000 |
|
|
|
150,000 |
|
6.875% notes due October 2007 |
|
|
143,475 |
|
|
|
143,475 |
|
6.5% notes due March 2008 |
|
|
195,000 |
|
|
|
195,000 |
|
6.75% convertible subordinated notes due 2008, conversion price of $6.92 per share |
|
|
— |
|
|
|
312,694 |
|
7.7% notes due April 2009 |
|
|
358,266 |
|
|
|
358,266 |
|
7.875% debentures due February 2013 |
|
|
55,627 |
|
|
|
55,627 |
|
6.75% notes due April 2016 |
|
|
250,000 |
|
|
|
— |
|
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.5%,
conversion prices from $13.02 to $50.00 per share |
|
|
30,853 |
|
|
|
38,368 |
|
Mortgage notes and other debt, maturities through 2050 |
|
|
48,194 |
|
|
|
63,597 |
|
Deferred charges |
|
|
(41,256 |
) |
|
|
(49,594 |
) |
|
|
|
|
|
|
|
Total debt |
|
|
1,253,960 |
|
|
|
1,701,871 |
|
Less current maturities |
|
|
(75,075 |
) |
|
|
(182,682 |
) |
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
1,178,885 |
|
|
$ |
1,519,189 |
|
|
|
|
|
|
|
|
87
The Company’s consolidated debt had a weighted average interest rate of 7.02% and 6.95% at
December 31, 2004 and December 31, 2003, respectively. Approximately 99% of the total debt had a
fixed interest rate at December 31, 2004 and December 31, 2003.
The aggregate maturities of debt for the five years subsequent to December 31, 2004 are as
follows:
| |
|
|
|
|
2005 |
|
$ |
75,075 |
|
2006 |
|
|
163,792 |
|
2007 |
|
|
150,152 |
|
2008 |
|
|
200,810 |
|
2009 |
|
|
359,019 |
|
2010 and thereafter |
|
|
305,112 |
|
|
|
|
|
|
|
$ |
1,253,960 |
|
|
|
|
|
Bank Credit Agreements
The Company’s bank credit agreement, which was executed on August 11, 2004, provides a total
lending commitment of $200,000, including a sub-limit of $175,000 for letters of credit. The
agreement, which matures August 2007, replaces a $185,000 facility that was scheduled to expire in
July 2005. 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 Company’s domestic
subsidiaries and these domestic subsidiaries have guaranteed the Company’s indebtedness associated
with this facility. The subsidiary guaranty is a guaranty of payment of the outstanding amount of
the total lending commitment. It covers the term of the agreement, including extensions, and
totaled a maximum potential amount of $66,985 at December 31, 2004, as noted below. 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%. The Company had no borrowings under the bank
credit agreement at either December 31, 2004 or December 31, 2003; however, the Company used the
credit agreement sublimit to issue letters of credit in the amounts of $66,985 and $69,815 at
December 31, 2004 and December 31, 2003, respectively.
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.
Debt Extinguishments and Reductions
In connection with the classification of the Company’s Argentina operations as discontinued
operations, approximately $9,694 at December 31, 2003 was reclassified from mortgage notes and
other debt to Noncurrent liabilities of discontinued operations in the consolidated balance sheet.
As a result of terms and conditions from the sale transaction entered into in 2005, the notes,
approximating $9,000, will survive the sale and are recorded as mortgage notes and other debt at
December 31, 2004. For additional information regarding this matter, see note twenty-one 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.
88
The holders of $221,633 of the Company’s 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.
Additional Debt Disclosures
At December 31, 2004 and December 31, 2003, the Company had deposited $26,707 and $95,325,
respectively, in restricted, interest-bearing accounts that were pledged as collateral for various
credit instruments and commercial commitments. They are included in Deferred charges and other
assets in the consolidated balance sheet. As of March 10, 2005, the Company had approximately
$12,500 deposited in these restricted, interest-bearing accounts. During the year certain
litigation was settled with the escrow amounts of $135,000. Included in Deferred charges are the
unamortized pricing discounts, totaling to $15,467 and $18,195 at December 31, 2004 and 2003,
respectively and relate to the September 2002 exchange offering of the 7.7% notes due in 2009.
The Company had assets of approximately $24,580 and $35,205 pledged as collateral for the
mortgage notes and other debt at December 31, 2004 and 2003, respectively. Included in mortgage
notes and other debt, the Company had capital lease obligations totaling $1,120 and $25,438 at
December 31, 2004 and 2003. Approximately $24,194 of the capital lease obligations reported at
December 31, 2003 were related to vehicles in the Company’s France operations.
Cash interest payments for the three years ended December 31 were as follows:
| |
|
|
|
|
2004 |
|
$ |
111,016 |
|
2003 |
|
$ |
136,691 |
|
2002 |
|
$ |
158,585 |
|
Cash interest payments forecasted for the five years subsequent to December 31, 2004 are as follows:
| |
|
|
|
|
2005 |
|
$ |
94,998 |
|
2006 |
|
$ |
83,150 |
|
2007 |
|
$ |
74,834 |
|
2008 |
|
$ |
55,467 |
|
2009 |
|
$ |
33,746 |
|
2010 and thereafter |
|
$ |
156,405 |
|
NOTE TWELVE
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
transactions 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 Company’s 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 twelve months ended December 31, 2004.
The Company was not a party to any derivative instruments at December 31, 2004 or 2003.
89
NOTE THIRTEEN
Credit Risk and Fair Value of Financial Instruments
Fair Value Estimates
The fair value estimates of the following financial instruments have been determined using
available market information and appropriate valuation methodologies. The carrying values of cash
and cash equivalents, trade receivables and trade payables approximate the fair values of those
instruments due to the short-term nature of the instruments. The fair values of receivables on
preneed funeral contracts and cemetery contracts are impracticable to estimate because of the lack
of a trading market and the diverse number of individual contracts with varying terms. The carrying
value of other notes receivable approximates the fair value. At December 31, 2004 and 2003, other
notes receivable, net, included in Receivables, net totaled $3,339 and $6,855, respectively and
included in Deferred charges and other assets in the consolidated balance sheet, totaled $41,302
and $50,546, respectively.
The fair values of the Company’s debt at December 31 were as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
7.375% notes due April 2004 |
|
$ |
— |
|
|
$ |
112,858 |
|
8.375% notes due December 2004 |
|
|
— |
|
|
|
52,194 |
|
6.0% notes due 2005 |
|
|
64,997 |
|
|
|
277,900 |
|
7.2% notes due 2006 |
|
|
156,188 |
|
|
|
157,125 |
|
6.875% notes due 2007 |
|
|
149,752 |
|
|
|
149,573 |
|
6.5% notes due 2008 |
|
|
200,850 |
|
|
|
202,800 |
|
6.75% convertible subordinated notes due 2008, conversion price of $6.92 |
|
|
— |
|
|
|
329,892 |
|
7.7% notes due 2009 |
|
|
385,136 |
|
|
|
387,823 |
|
6.95% amortizing notes due 2010 |
|
|
2,708 |
|
|
|
3,577 |
|
7.875% debentures due 2013 |
|
|
60,494 |
|
|
|
57,157 |
|
6.75% notes due 2016 |
|
|
255,000 |
|
|
|
— |
|
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.5%,
conversion prices from $13.02 to $50.00 per share |
|
|
30,223 |
|
|
|
38,176 |
|
Mortgage notes and other debt, maturities through 2050 |
|
|
49,123 |
|
|
|
60,040 |
|
|
|
|
|
|
|
|
Total fair value of debt |
|
$ |
1,354,471 |
|
|
$ |
1,829,115 |
|
|
|
|
|
|
|
|
The fair values of the Company’s long-term, fixed rate and convertible debt securities were
estimated using market conditions for those securities or for other securities having similar terms
and maturities. Mortgage notes and other debt have been reported at face value because of the
diverse terms and conditions and non-trading nature of these notes.
Credit Risk Exposure
The Company’s cash deposits, some of which exceed insured limits, were distributed among
various regional and national banks in the jurisdictions in which the Company operates. In
addition, the Company regularly invests excess cash in financial instruments, which are not
insured, such as money-market funds and Eurodollar time deposits, that are offered by a variety of
reputable financial institutions and commercial paper that is offered by corporations with high
quality credit ratings. The Company believes that the credit risk associated with such instruments
is minimal.
The Company grants credit to customers in the normal course of business. The credit risk
associated with funeral, cemetery and preneed funeral and preneed cemetery receivables due from
customers is generally considered minimal because of the diversification of the customers served.
Furthermore, bad debts have not been significant relative to the volume of deferred revenues.
Customer payments on preneed funeral or preneed cemetery contracts that are either placed into
state regulated trusts or used to pay premiums on life insurance contracts generally do not subject
the Company to collection risk. Insurance funded contracts are subject to supervision by state
insurance departments and are protected in the majority of states by insurance guaranty acts.
NOTE FOURTEEN
Commitments and Contingencies
Leases
The Company’s leases principally relate to funeral home facilities and transportation
equipment. The majority of the Company’s operating leases contain options to (i) purchase the
property at fair value on the exercise date, (ii) purchase the property for a value
determined at the inception of the leases, or (iii) renew for the fair rental value at the end of
the primary lease term. Rental expense for
90
these leases was $69,279, $77,133 and $89,291 for the
years ended December 31, 2004, 2003, and 2002, respectively. Included in 2004 is $3,929 expense
related to cumulative effect of prior period adjustments due to to the restatement of operating
leases. See note two to the consolidated financial statements for additional information. As of
December 31, 2004, future minimum lease payments for operating and capital leases exceeding one
year are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Operating |
|
|
Capital |
|
2005 |
|
$ |
36,002 |
|
|
$ |
1,116 |
|
2006 |
|
|
29,495 |
|
|
|
215 |
|
2007 |
|
|
25,372 |
|
|
|
34 |
|
2008 |
|
|
19,843 |
|
|
|
9 |
|
2009 |
|
|
15,078 |
|
|
|
— |
|
2010 and thereafter |
|
|
86,907 |
|
|
|
— |
|
|
|
|
|
|
|
|
Subtotal |
|
|
212,697 |
|
|
|
1,374 |
|
Less: Subleases |
|
|
(2,556 |
) |
|
|
— |
|
|
|
|
|
|
|
|
Total |
|
$ |
210,141 |
|
|
$ |
1,374 |
|
|
|
|
|
|
|
|
Less: interest on capital leases |
|
|
|
|
|
|
(58 |
) |
|
|
|
|
|
|
|
|
Total principal payable on capital leases |
|
|
|
|
|
$ |
1,316 |
|
|
|
|
|
|
|
|
|
Purchase Commitments
The Company entered into a purchase agreement for its North America operations with a major
casket manufacturer, having an original minimum commitment of $750,000 for a six-year period that
expired at the end of 2004. The agreement contained provisions for annual price adjustments and
provided for a one-year extension period to December 31, 2005 in which the Company is allowed to
satisfy any remaining commitment that exists at the end of the original term. The Company elected
to extend the contract to December 31, 2005 in order to satisfy its minimum commitment. In January
2005, the Company amended its original purchase agreement. This amendment allows the Company to
continue purchasing caskets through 2006 subject to price increase limitations. During 2004, the
Company made minimum purchases of approximately $106,275 under this purchase agreement, and at
December 31, 2004, the remaining commitment was $121,707.
Management, Consulting and Non-Competition Agreements
The Company has entered into management, employment, consulting and non-competition
agreements, generally for five to ten years, with certain officers and employees of the Company and
former owners of businesses acquired. The Company has modified several of the above agreements as
part of cost rationalization programs (see note twenty to the consolidated financial statements).
During the years ended December 31, 2004, 2003, and 2002, the Company recognized expense of
$40,448, $45,766 and $56,878, respectively, related to these agreements. At December 31, 2004, the
maximum estimated future cash commitment under agreements with remaining commitment terms was as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Management |
|
|
|
|
|
|
|
|
|
|
|
| |
|
and |
|
|
|
|
|
|
Non- |
|
|
|
|
| |
|
employment |
|
|
Consulting |
|
|
competition |
|
|
Total |
|
2005 |
|
$ |
7,918 |
|
|
$ |
1,464 |
|
|
$ |
21,484 |
|
|
$ |
30,866 |
|
2006 |
|
|
2,220 |
|
|
|
1,340 |
|
|
|
15,439 |
|
|
|
18,999 |
|
2007 |
|
|
977 |
|
|
|
363 |
|
|
|
8,676 |
|
|
|
10,016 |
|
2008 |
|
|
431 |
|
|
|
357 |
|
|
|
3,413 |
|
|
|
4,201 |
|
2009 |
|
|
56 |
|
|
|
264 |
|
|
|
1,941 |
|
|
|
2,261 |
|
2010 and thereafter |
|
|
112 |
|
|
|
198 |
|
|
|
4,050 |
|
|
|
4,360 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
11,714 |
|
|
$ |
3,986 |
|
|
$ |
55,003 |
|
|
$ |
70,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Contingent Purchase Obligations
In connection with certain acquisitions made by the Company’s South America operations, the
Company entered into contingent purchase obligations with certain former owners of those
businesses. According to the agreements, the Company was required to pay additional consideration
between 2003 and 2005, based on the results of operations, as defined. At December 31, 2003, the
estimated $53,000 obligation was recorded in Other liabilities in the consolidated balance sheet.
In 2004, the Company paid $51,749 to satisfy this obligation.
91
Representations and Warranties
The Company has contingent obligations of $56,316 resulting from the Company’s international
asset sales and joint venture transactions. In some cases, the Company has agreed to guarantee
certain representations and warranties with such disposition transactions with letters of credit or
interest bearing cash investments. The Company has interest bearing cash investments of $11,836
included in Deferred charges and other assets collateralizing certain of these contingent
obligations. The Company believes it is not probable that it will ultimately be required to fund to
third parties claims against these representations and warranties above the carrying value of the
liability.
In March 2004, the Company sold its funeral operations in France to a newly formed, third
party company. As a result of this sale, the Company recognized $35,768 of contractual obligations
related to representations, warranties, and other indemnifications in accordance with the
provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including
Indirect Guarantees of Indebtedness of Others.” This $35,768 represents the following:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
Maximum Potential |
|
Carrying |
|
| |
|
Contractual |
|
|
|
|
Amount of Future |
|
Value of |
|
| |
|
Obligation |
|
|
Time Limit |
|
Payments |
|
December 31, 2004 |
|
Tax reserve liability |
|
$ |
18,610 |
|
|
December 31, 2007 |
|
2004 €125 Million |
|
$ |
17,200 |
|
|
|
|
|
|
|
|
|
2005 €100 Million |
|
|
|
|
|
|
|
|
|
|
|
|
2006
€30
Million |
|
|
|
|
Litigation provision |
|
|
7,765 |
|
|
Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor |
|
(1) |
|
|
6,775 |
|
Employee litigation provision |
|
|
6,512 |
|
|
December 31, 2006 (for all claims other than those relating to tax and
social security matters) one month after expiration of the statutory period of limitations for tax and social security matters. |
|
(2) |
|
|
6,512 |
|
VAT taxes |
|
|
3,882 |
|
|
One month after the expiration of statutory period of limitations |
|
(1) |
|
|
3,882 |
|
Other |
|
|
3,381 |
|
|
Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the
purchaser at the request of the vendor |
|
(2) |
|
|
3,381 |
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
40,150 |
|
|
|
|
|
|
$ |
37,750 |
|
|
|
|
|
|
|
|
|
|
|
|
Less: Deductible of
majority equity owner |
|
|
(4,382 |
) |
|
|
|
|
|
|
(4,382 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
35,768 |
|
|
|
|
|
|
$ |
33,368 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The potential maximum exposure for these two items combined is €20 million. |
| |
| (2) |
|
The potential maximum exposure for these two items combined is €40 million. |
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 March 11, 2005.
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
92
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 several of the Company’s current and former executive officers or directors. The 2003
Securities Lawsuit is a purported class action alleging that the defendants failed to disclose the
unlawful treatment of human remains and gravesites at two cemeteries in Fort Lauderdale and West
Palm Beach, Florida. 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 state-wide
class action brought on behalf of all persons, entities and organizations who purchased funeral
services from the Company or its subsidiaries in Texas 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.
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.
Mary Louise Baudino, et al v. Service Corporation International, et al; The plaintiffs’
counsel in the Hijar Lawsuit initiated an arbitration claim raising similar issues in California
and filed in November 2004 a case styled Mary Louise Baudino, et al v. Service Corporation
International, et al; in Los Angeles County Superior Court; Case No. BC324007 (Baundino Lawsuit).
The Baundino Lawsuit makes claims similar to those made in the Hijar lawsuit. However, the Baundino
Lawsuit seeks a nation-wide class of plaintiffs. The Baundino Lawsuit is in its early stages and no
discovery has been conducted. The ultimate outcome of the Baudino Lawsuit cannot be determined at
this time. However, the Company intends to aggressively defend this lawsuit.
T. Rowe Price Balanced Fund, Inc., et al v. Service Corporation International, et al; No.
2004-629637; In the 270 th Judicial District Court, Harris County, Texas, filed
June 7, 2004. On December 20, 2004, the Company announced that it had reached a settlement of the
securities lawsuit filed by T. Rowe Price and various of its related entities pending against the
Company and certain of its current and former officers. T. Rowe Price had opted out of the
previously announced settlement of the securities class action lawsuit that had been pending
against the Company since January 1999. T. Rowe Price filed a separate lawsuit in Texas state court
in June 2004.
Under the terms of the settlement, the Company paid a total of $14.8 million, of which $2.0
million had already been recognized and paid into escrow in conjunction with the class action
settlement. As a result, the Company paid and recognized litigation expenses of $12.8 million on a
pretax basis in the fourth quarter of 2004. This settlement brings to a close all material
litigation related to the Company’s 1999 securities class action lawsuit.
NOTE FIFTEEN
Stockholders’ Equity
(All shares reported in whole numbers)
Share Authorization
The Company is authorized to issue 1,000,000 shares of preferred stock, $1 per share par
value. No preferred shares were issued as of December 31, 2004 and 2003. At December 31, 2004 and
2003, respectively, 500,000,000 common shares of $1 par value were authorized. The Company had
323,225,352 and 302,039,871 shares issued and outstanding, net of 18,502,478 and 2,469,445 shares
held in treasury at par.
93
Share Purchase Rights Plan
The Board of Directors has adopted a preferred share purchase rights plan and has declared a
dividend of one preferred share purchase right for each share of common stock outstanding. The
rights are exercisable in the event certain investors attempt to acquire 20% or more of the common
stock of the Company and entitle the rights holders to purchase certain securities of the Company
or the acquiring company. The rights, which are redeemable by the Company for $.01 per right,
expire in July 2008 unless extended.
Stock Benefit Plans
The Company has benefit plans whereby shares of the Company’s common stock may be issued
pursuant to the exercise of stock options granted to officers and key employees. The Company’s
Amended 1996 Incentive Plan reserves 24,000,000 shares of common stock for outstanding and future
awards of stock options, restricted stock and other stock based awards to officers and key
employees of the Company. The Company’s 1996 Non-qualified Incentive Plan reserves 8,700,000 shares
of common stock for outstanding and future awards of nonqualified stock options to employees who
are not officers of the Company.
The benefit plans allow for options to be granted as either non-qualified or incentive stock
options. The options are granted with an exercise price equal to the then current market price of
the Company’s common stock. The options are generally exercisable at a rate of 33 1/3% each year
unless alternative vesting methods are approved by the Company’s Compensation Committee of the
Board of Directors.
At December 31, 2004 and 2003, respectively, 4,034,123 and 4,499,123 options were outstanding
with alternative vesting methods. Under the alternative vesting methods, partial or full
accelerated vesting will occur when the price of Company common stock reaches pre-determined
prices. If the pre-determined stock prices are not met in the required time period, the options
will fully vest in periods ranging from eight to ten years from grant date. At December 31, 2004
and 2003, 3,748,668 and 4,623,605, respectively, were reserved for future option grants under all
stock option plans.
The following tables set forth certain stock option information:
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted |
|
| |
|
|
|
|
|
average |
|
| |
|
Options |
|
|
exercise price |
|
Outstanding at December 31, 2001 |
|
|
29,949,264 |
|
|
$ |
13.18 |
|
Granted |
|
|
5,699,100 |
|
|
|
4.32 |
|
Exercised |
|
|
(42,633 |
) |
|
|
4.38 |
|
Canceled |
|
|
(2,820,584 |
) |
|
|
12.51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2002 |
|
|
32,785,147 |
|
|
$ |
11.63 |
|
Granted |
|
|
— |
|
|
|
— |
|
Exercised |
|
|
(382,295 |
) |
|
|
3.70 |
|
Canceled |
|
|
(1,303,735 |
) |
|
|
25.67 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2003 |
|
|
31,099,117 |
|
|
$ |
10.77 |
|
Granted |
|
|
655,650 |
|
|
|
6.81 |
|
Exercised |
|
|
(2,556,573 |
) |
|
|
4.06 |
|
Canceled |
|
|
(1,526,678 |
) |
|
|
15.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2004 |
|
|
27,671,516 |
|
|
$ |
10.77 |
|
|
|
|
|
|
|
|
Exercisable at December 31, 2002 |
|
|
18,978,664 |
|
|
$ |
14.81 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2003 |
|
|
23,629,825 |
|
|
$ |
10.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2004 |
|
|
25,423,111 |
|
|
$ |
11.14 |
|
|
|
|
|
|
|
|
94
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options outstanding |
|
|
Options exercisable |
|
| |
|
|
|
|
Weighted- |
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number |
|
|
average |
|
|
|
|
|
Number |
|
|
|
|
| |
|
outstanding at |
|
|
remaining |
|
|
Weighted- |
|
|
Exercisable at |
|
|
Weighted- |
|
| Range of |
|
December 31, |
|
|
contractual |
|
|
average |
|
|
December 31, |
|
|
average |
|
| Exercise price |
|
2004 |
|
|
life |
|
|
Exercise price |
|
|
2004 |
|
|
Exercise price |
|
$0.00 —
4.00 |
|
|
8,559,568 |
|
|
|
3.9 |
|
|
$ |
3.39 |
|
|
|
8,052,619 |
|
|
$ |
3.42 |
|
4.01
— 6.00 |
|
|
5,776,247 |
|
|
|
3.9 |
|
|
|
4.83 |
|
|
|
4,781,241 |
|
|
|
4.78 |
|
6.01
— 9.00 |
|
|
3,778,400 |
|
|
|
3.7 |
|
|
|
6.68 |
|
|
|
3,136,950 |
|
|
|
6.66 |
|
9.01 — 15.00 |
|
|
2,961,388 |
|
|
|
2.5 |
|
|
|
13.75 |
|
|
|
2,961,388 |
|
|
|
13.75 |
|
15.01 — 21.00 |
|
|
2,554,078 |
|
|
|
2.5 |
|
|
|
18.94 |
|
|
|
2,554,078 |
|
|
|
18.94 |
|
21.01 — 38.00 |
|
|
4,041,835 |
|
|
|
0.9 |
|
|
|
31.35 |
|
|
|
3,936,835 |
|
|
|
31.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$0.00 — 38.00 |
|
|
27,671,516 |
|
|
|
3.2 |
|
|
$ |
10.77 |
|
|
|
25,423,111 |
|
|
$ |
11.14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Since all of the Company’s option grants have been at market value on the dates of each grant,
the Company has not recognized compensation expense on stock options under its accounting policy
using the intrinsic value method. On July 1, 2005, the Company will adopt SFAS 123R, which requires
the use of the fair value method of valuing stock options.
Restricted shares awarded under the Amended 1996 Incentive Plan were 427,800 in 2004. The
weighted average fair market value per share at the date of grant of shares granted was $6.81. No
restricted shares were issued during 2003 and 2002. The fair market value of the stock, on the date
of issuance, is being amortized and charged to income (with similar credits to paid-in capital and
excess of par value) generally over the average period during which the restrictions lapse. At
December 31, 2004, the unamortized amount was $2,022. The Company recognized compensation costs of
$889 in 2004 and $0 in 2003 and 2002.
Under the Company’s 2001 Stock Plan for Non-Employee Directors, non-employee directors may
elect to receive an award of restricted stock annually through the year 2005. The annual award
cannot exceed 15,000 shares of common stock per director and vests after one year of service. No
shares were issued under this stock plan in 2004 or 2003. In 2002, each non-employee director was
awarded 10,000 shares of common stock. A total of 100,000 shares of restricted stock were awarded
at a fair value of $4.25.
The Company’s Director Fee Plan allows for compensation to non-employee directors to be
partially paid in common stock. In 2004, 2003, and 2002, respectively, 68,586; 155,560; and 45,108
shares of common stock were granted under the Director Fee Plan. Certain directors, as permitted in
the plan agreement, have elected to defer the issuance of stock granted under this plan. In 2004,
2003, and 2002, respectively, 39,192; 60,614; and 21,724 shares were reserved for future issuance
under this plan. In 2004, 5,012 previously deferred shares were issued. The Company recognized
compensation costs of $770, $565 and $252 during the twelve months ended December 31, 2004, 2003
and 2002, respectively.
95
Accumulated Other Comprehensive Loss
The Company’s components of accumulated other comprehensive loss at December 31 are as
follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Foreign |
|
|
|
|
|
|
|
|
|
|
Accumulated |
|
| |
|
currency |
|
|
Minimum |
|
|
Unrealized |
|
|
other |
|
| |
|
translation |
|
|
pension liability |
|
|
gains and |
|
|
comprehensive |
|
| |
|
adjustment |
|
|
adjustment |
|
|
losses |
|
|
loss |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
| |
|
note 2 |
|
|
|
|
|
|
|
|
|
|
note 2 |
|
Balance at December 31, 2001 |
|
$ |
(261,868 |
) |
|
$ |
(29,353 |
) |
|
$ |
— |
|
|
$ |
(291,221 |
) |
Activity in 2002 |
|
|
43,772 |
|
|
|
(7,202 |
) |
|
|
— |
|
|
|
36,570 |
|
Reclassification for translation adjustment realized in net
loss |
|
|
47,479 |
|
|
|
— |
|
|
|
— |
|
|
|
47,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2002 |
|
$ |
(170,617 |
) |
|
$ |
(36,555 |
) |
|
|
— |
|
|
$ |
(207,172 |
) |
Activity in 2003 |
|
|
92,504 |
|
|
|
2,956 |
|
|
$ |
— |
|
|
|
95,460 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2003 |
|
$ |
(78,113 |
) |
|
$ |
(33,599 |
) |
|
|
— |
|
|
$ |
(111,712 |
) |
Activity in 2004 |
|
|
(9,242 |
) |
|
|
33,599 |
|
|
|
— |
|
|
|
24,357 |
|
Reduction in net unrealized gains associated with available-for-sale securities of the trusts |
|
|
— |
|
|
|
— |
|
|
|
(9,370 |
) |
|
|
(9,370 |
) |
Reclassification of net unrealized gains activity
attributable to
the non-controlling interest holders |
|
|
— |
|
|
|
— |
|
|
|
9,370 |
|
|
|
9,370 |
|
Reclassification for translation adjustment realized in net
income |
|
|
49,006 |
|
|
|
— |
|
|
|
— |
|
|
|
49,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2004 |
|
$ |
(38,349 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(38,349 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
The reclassification adjustment of $49,006 during the year ended December 31, 2004 relates to
the sale of the Company’s interest in its French operations and includes an associated deferred tax
asset of $59,662. Included in the Foreign currency translation adjustment of December 31, 2004 are
net currency losses of $67,213 related to discontinued operations of the Company’s Argentina
operations held for sale at December 31, 2004. The reclassification adjustment of $47,479 during
the year ended December 31, 2002 relates to the sale of the Company’s interest in its United
Kingdom operations.
The assets and liabilities of foreign operations are translated into U.S. dollars using the
current exchange rate. The U.S. dollar amount that arises from such translation, as well as
exchange gains and losses on intercompany balances of a long-term investment nature, are included
in the cumulative currency translation adjustments in Accumulated other comprehensive loss. Income
taxes are generally not provided for foreign currency translation.
The minimum pension liability adjustment for the year ended December 31, 2004 of $33,599 is
net of deferred taxes of $21,274. The minimum pension liability adjustment for the year ended
December 31, 2003 of $2,956 is net of deferred taxes of $1,872. The minimum pension liability
adjustment for the year ended December 31, 2002 of $7,202 is net of deferred taxes of $4,560.
Share Repurchase Program
During 2004, the Company announced a share repurchase program authorizing the investment of up
to $200,000 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 2004, the Company repurchased 16,725,372 shares of common stock at a cost of
$110,258.
Subsequent to December 31, 2004, the Company announced the authorization of an additional
investment of up to $100,000 to repurchase its common stock.
NOTE SIXTEEN
Retirement Plans
The Company has a non-contributory, defined benefit pension plan covering approximately 36% of
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 established a 401(k) employee savings plan.
96
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 subsequent to
2000.
Retirement benefits for the US Pension Plan are generally based on years of service and
compensation. This contribution is an actuarially determined amount. Assets of the pension plan
consist of core diversified and market neutral hedge funds, fixed income investments and marketable
equity securities, which complies with the funding requirements of the Employee Retirement Income
Security Act of 1974.
Retirement benefits under the SERP are based on years of service and average monthly
compensation, reduced by benefits under the pension plan and Social Security. The Senior SERP
provides retirement benefits based on years of service and position. The Directors’ Plan provides
for an annual benefit to directors following their retirement, based on a vesting schedule.
Most foreign employees are covered by their respective foreign government mandated or defined
contribution plans which are adequately funded and are not considered significant to the financial
condition or results of operations of the Company. The plans’ liabilities and their related costs
are computed in accordance with the laws of the individual countries and appropriate actuarial
practices.
The components of net periodic benefit cost for the years ended December 31 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Service cost — benefits earned during the period |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Interest cost on projected benefit obligation |
|
|
8,826 |
|
|
|
9,897 |
|
|
|
9,824 |
|
Return on plan assets |
|
|
(10,690 |
) |
|
|
(6,808 |
) |
|
|
(8,539 |
) |
Settlement/curtailment charge |
|
|
— |
|
|
|
352 |
|
|
|
— |
|
Amortization of prior service cost |
|
|
183 |
|
|
|
183 |
|
|
|
197 |
|
Recognized net actuarial loss |
|
|
1,359 |
|
|
|
7,586 |
|
|
|
4,834 |
|
|
|
|
|
|
| |
|
|
|
|
|
$ |
(322 |
) |
|
$ |
11,210 |
|
|
$ |
6,316 |
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of accounting change |
|
|
54,873 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
54,551 |
|
|
$ |
11,210 |
|
|
$ |
6,316 |
|
|
|
|
|
|
|
|
|
|
|
97
The plans’ funded status at December 31 were as follows (based on valuations as of September
30):
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
Change in Benefit Obligation: |
|
|
|
|
|
|
|
|
Benefit obligation at beginning of year |
|
$ |
144,413 |
|
|
$ |
142,842 |
|
Interest cost |
|
|
8,825 |
|
|
|
9,897 |
|
Settlement charge |
|
|
— |
|
|
|
(16,145 |
) |
Actuarial loss |
|
|
739 |
|
|
|
14,796 |
|
Benefits paid |
|
|
(19,615 |
) |
|
|
(6,977 |
) |
|
|
|
|
|
|
|
Benefit obligation at end of year |
|
$ |
134,362 |
|
|
$ |
144,413 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Change in Plan Assets: |
|
|
|
|
|
|
|
|
Fair value of plan assets at beginning of year |
|
$ |
74,309 |
|
|
$ |
77,461 |
|
Actual return on plan assets |
|
|
10,689 |
|
|
|
13,263 |
|
Employer contributions |
|
|
23,787 |
|
|
|
6,989 |
|
Settlement charge |
|
|
— |
|
|
|
(12,692 |
) |
Benefits paid |
|
|
(20,235 |
) |
|
|
(10,712 |
) |
|
|
|
|
|
|
|
Fair value of plan assets at end of year |
|
$ |
88,550 |
|
|
$ |
74,309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funded status of plan |
|
$ |
(45,812 |
) |
|
$ |
(70,105 |
) |
Unrecognized actuarial loss |
|
|
— |
|
|
|
54,873 |
|
Unrecognized prior service cost |
|
|
990 |
|
|
|
1,173 |
|
|
|
|
|
|
|
|
Net amount recognized in the Consolidated Balance
sheet |
|
$ |
(44,822 |
) |
|
$ |
(14,059 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funding Summary: |
|
|
|
|
|
|
|
|
Projected benefit obligations |
|
$ |
134,362 |
|
|
$ |
144,413 |
|
Accumulated benefit obligation |
|
$ |
134,362 |
|
|
$ |
144,413 |
|
Fair value of plan assets |
|
$ |
88,550 |
|
|
$ |
74,309 |
|
|
|
|
|
|
|
|
|
|
Amounts recognized in the Consolidated Balance
Sheet: |
|
|
|
|
|
|
|
|
Prepaid benefit cost |
|
$ |
— |
|
|
$ |
— |
|
Accrued benefit liability |
|
|
(45,812 |
) |
|
|
(70,105 |
) |
Intangible asset |
|
|
990 |
|
|
|
1,173 |
|
Accumulated other comprehensive loss |
|
|
— |
|
|
|
54,873 |
|
|
|
|
|
|
|
|
Net amount recognized in the Consolidated Balance
sheet |
|
$ |
(44,822 |
) |
|
$ |
(14,059 |
) |
|
|
|
|
|
|
|
The retirement benefits under the SERP, Senior SERP and Directors’ Plan are unfunded
obligations of the Company. As of December 31, 2004, the benefit obligation of the SERP, Senior
SERP and Directors’ Plan is $32,272; however, the Company purchased various life insurance policies
on the participants in the Senior SERP 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 plan’s
funding requirements. The face value of these insurance policies was $50,718 and the cash surrender
value was $33,734 as of December 31, 2004.
Due to the Company’s change in accounting for gains and losses on pension plan assets and
obligations, the change in minimum liability included in Accumulated other comprehensive loss was a
decrease of $54,873 in 2004. The change in minimum liability included in Accumulated other
comprehensive loss was a decrease of $4,828 in 2003. The Company recorded net pension income
(expense) of $322, ($17,635) and ($6,788) for the twelve months ended December 31, 2004, 2003 and
2002, respectively.
The plans’ weighted-average assumptions used to determine the benefit obligation and net
benefit cost were as follows. In 2004, the rate of return was not applicable as the Company now
recognizes gains and losses on plan assets during the year in which they occur. Due to the
curtailment of the plans, the assumed rate of compensation increase is zero. In March 2004, the
Company voluntarily contributed $20,000 to the frozen U.S. Pension Plan.
98
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Discount rate used to determine obligations |
|
|
6.00 |
% |
|
|
6.25 |
% |
|
|
7.00 |
% |
Assumed rate of return on plan assets |
|
|
N/A |
|
|
|
9.00 |
% |
|
|
9.00 |
% |
Discount rate used to determine net periodic pension cost |
|
|
6.25 |
% |
|
|
7.00 |
% |
|
|
6.97 |
% |
The plans’ weighted-average asset allocations at December 31 by asset category are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
Core diversified and market neutral hedge funds |
|
|
55 |
% |
|
|
— |
|
Fixed income investments |
|
|
12 |
% |
|
|
26 |
% |
Equity securities |
|
|
33 |
% |
|
|
74 |
% |
Total |
|
|
100 |
% |
|
|
100 |
% |
Equity securities include shares of Company common stock in the amounts of $0 and $7,138 (9.0
percent of plan assets) at December 31, 2004 and 2003, respectively. The 9.0% assumed rate of
return on plan assets during 2003 was a result of a high allocation of equity securities within the
plan assets.
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. Allocations within the equity asset class are divided among large
capitalization domestic equity (value and growth styles), small capitalization domestic equity
(value and growth styles) and international equity. The large capitalization domestic equity may be
further diversified between active and passive (index) management styles. The fixed income
allocation is divided between cash and an intermediate-term investment grade bond portfolio. The
investment strategy is managed within ranges that are centered at specific allocation targets. The
specific allocations within the strategy, as well as the individual asset class ranges are as
follows:
| |
|
|
| |
|
Ranges |
Large cap equity (value and growth)
|
|
10% — 25% |
Small gap growth
|
|
5% — 10% |
International equity
|
|
5% — 10% |
Fixed income core bond
|
|
0% — 25% |
Hedge funds: |
|
|
Core diversified
|
|
15% — 35% |
Market neutral
|
|
15% — 35% |
Money market
|
|
0% — 1% |
Benefit payments are expected to be paid by the plan as follows:
| |
|
|
|
|
2005 |
|
$ |
4,296 |
|
2006 |
|
|
4,570 |
|
2007 |
|
|
4,886 |
|
2008 |
|
|
5,309 |
|
2009 |
|
|
5,584 |
|
Years 2010 thru 2014 |
|
$ |
32,389 |
|
Discount rates for the U.S. plans were 6.00% and 6.25% in 2004 and 2003, respectively. All
plans subject to this disclosure were curtailed effective January 1, 2001.
99
Effective January 1, 2004, the Company changed the accounting for gains and losses on its
pension plan assets and obligations. The Company will recognize such gains and losses in our
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). The Company believes this change in accounting is
preferable as the new method of accounting better reflects the economic nature of the Company’s
pension plans and recognizes gains and losses on the pension plan assets and obligations in the
year the gains and 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 of $21,274, as of
January 1, 2004. This amount represents accumulated unrecognized net losses related to the pension
plan assets and obligations.
The Company has an employee savings plan that qualifies under section 401(k) of the Internal
Revenue Code for the exclusive benefit of its United States employees. Under the plan,
participating employees may contribute a portion of their pretax and/or after tax income in
accordance with specified guidelines up to a maximum of 50%. The Company then matches a percentage
of the employee contributions through contributions of the Company’s common stock. For 2004 and
2003, the Company’s matching contribution was based upon the following:
| |
|
|
| Years of vesting service |
|
Percentage of deferred compensation |
0 – 5 years
|
|
75% of the first 6% of deferred compensation |
6 – 10 years
|
|
110% of the first 6% of deferred compensation |
11 or more years
|
|
135% of the first 6% of deferred compensation |
The amount of the Company’s matched common stock contributions in 2004, 2003 and 2002 was
$18,127, $17,378 and $18,150, respectively.
NOTE SEVENTEEN
Segment Reporting
The Company’s operations are product based and geographically based, and the reportable
operating segments presented below include funeral and cemetery operations. The Company’s
geographic areas include North America, Europe and Other Foreign. The Company conducts funeral and
cemetery operations in its North America and Other foreign areas and conducts funeral operations in
its European area. The Company has reclassified certain prior period amounts to conform to the
current period presentation with no effect on previously reported results of operations, financial
condition or cash flows. In the first quarter of 2002, the Company completed a joint venture of its
United Kingdom operations, which conducted both funeral and cemetery operations in this European
area.
In 2002, the Company changed its allocation methodology of overhead costs in North America to
be based on funeral and cemetery reporting unit revenues. The change in overhead allocation has not
impacted the Company’s consolidated results of operations, financial position or cash flows.
100
The Company’s reportable segment information is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Reportable |
|
| |
|
Funeral |
|
|
Cemetery |
|
|
Segments |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,259,821 |
|
|
$ |
601,041 |
|
|
$ |
1,860,862 |
|
Depreciation and amortization |
|
|
59,231 |
|
|
|
66,868 |
|
|
|
126,099 |
|
Gross profit |
|
|
226,407 |
|
|
|
109,803 |
|
|
|
336,210 |
|
Total assets |
|
|
3,513,198 |
|
|
|
4,219,900 |
|
|
|
7,733,098 |
|
Capital expenditures |
|
$ |
36,155 |
|
|
$ |
40,568 |
|
|
$ |
76,723 |
|
Operating locations at year end (unaudited) |
|
|
1,310 |
|
|
|
451 |
|
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,739,768 |
|
|
$ |
598,294 |
|
|
$ |
2,338,062 |
|
Depreciation and amortization |
|
|
84,202 |
|
|
|
65,227 |
|
|
|
149,429 |
|
Gross profit |
|
|
273,165 |
|
|
|
88,394 |
|
|
|
361,559 |
|
Total assets |
|
|
3,707,249 |
|
|
|
3,382,975 |
|
|
|
7,090,224 |
|
Capital expenditures |
|
$ |
69,622 |
|
|
$ |
43,964 |
|
|
$ |
113,586 |
|
Operating locations at year end (unaudited) |
|
|
2,356 |
|
|
|
469 |
|
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,679,966 |
|
|
$ |
630,914 |
|
|
$ |
2,310,880 |
|
Depreciation and amortization |
|
|
70,687 |
|
|
|
74,152 |
|
|
|
144,839 |
|
Gross profit |
|
|
283,935 |
|
|
|
76,264 |
|
|
|
360,199 |
|
Total assets |
|
|
4,027,293 |
|
|
|
3,259,479 |
|
|
|
7,286,772 |
|
Capital expenditures |
|
$ |
69,940 |
|
|
$ |
17,011 |
|
|
$ |
86,951 |
|
Operating locations at year end (unaudited) |
|
|
2,526 |
|
|
|
507 |
|
|
|
3,033 |
|
The following table reconciles certain reportable segment amounts to the Company’s
corresponding consolidated amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Reportable |
|
|
|
|
|
|
Discontinued |
|
|
|
|
| |
|
Segments |
|
|
Corporate |
|
|
Operations |
|
|
Consolidated |
|
| |
|
(Restated) |
|
|
|
|
|
|
|
|
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
|
|
|
|
|
|
|
|
Note 2 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
1,860,862 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
1,860,862 |
|
Depreciation and amortization |
|
|
126,099 |
|
|
|
19,037 |
|
|
|
— |
|
|
|
145,136 |
|
Total assets |
|
|
7,733,098 |
|
|
|
457,137 |
|
|
|
15,452 |
|
|
|
8,205,687 |
|
Capital expenditures(1) |
|
$ |
76,723 |
|
|
$ |
19,284 |
|
|
$ |
— |
|
|
$ |
96,007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
2,338,062 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,338,062 |
|
Depreciation and amortization |
|
|
149,429 |
|
|
|
11,887 |
|
|
|
— |
|
|
|
161,316 |
|
Total assets |
|
|
7,090,224 |
|
|
|
463,361 |
|
|
|
9,318 |
|
|
|
7,562,903 |
|
Capital expenditures(1) |
|
$ |
113,586 |
|
|
$ |
1,977 |
|
|
$ |
— |
|
|
$ |
115,563 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenue from external customers |
|
$ |
2,310,880 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2,310,880 |
|
Depreciation and amortization |
|
|
144,839 |
|
|
|
34,712 |
|
|
|
— |
|
|
|
179,551 |
|
Total assets |
|
|
7,286,772 |
|
|
|
499,130 |
|
|
|
7,165 |
|
|
|
7,793,067 |
|
Capital expenditures(1) |
|
$ |
86,951 |
|
|
$ |
12,924 |
|
|
$ |
— |
|
|
$ |
99,875 |
|
|
|
|
| (1) |
|
Consolidated capital expenditures include $649, $0 and $27,090 for the
years ended December 31, 2004, 2003, and 2002, respectively, for
capital leases and purchases of property, plant and equipment,
cemetery property, and goodwill of acquired businesses. Excluding
these capital expenditures related to acquired businesses the Company
had consolidated capital expenditures of $95,358, $115,563 and $72,785
for the years ended December 31, 2004, 2003, and 2002, respectively. |
101
The following table reconciles gross profits from reportable segments shown above to the
Company’s consolidated income (loss) from continuing operations before income taxes and cumulative
effects of accounting changes:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
|
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
|
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Gross profit from reportable segments |
|
$ |
336,210 |
|
|
$ |
361,559 |
|
|
|
360,199 |
|
General and administrative expenses |
|
|
(130,896 |
) |
|
|
(178,105 |
) |
|
|
(89,752 |
) |
Gains and impairment (losses) on dispositions, net |
|
|
25,797 |
|
|
|
49,727 |
|
|
|
(163,152 |
) |
Other operating expense |
|
|
— |
|
|
|
(9,004 |
) |
|
|
(94,910 |
) |
|
|
|
|
|
|
|
|
|
|
Operating income |
|
|
231,111 |
|
|
|
224,177 |
|
|
|
12,385 |
|
Interest expense |
|
|
(118,188 |
) |
|
|
(138,625 |
) |
|
|
(157,973 |
) |
(Loss) gain on early extinguishment of debt |
|
|
(16,770 |
) |
|
|
1,315 |
|
|
|
7,783 |
|
Other income |
|
|
16,110 |
|
|
|
24,307 |
|
|
|
14,503 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes and
cumulative effects of accounting changes |
|
$ |
112,263 |
|
|
$ |
111,174 |
|
|
$ |
(123,302 |
) |
|
|
|
|
|
|
|
|
|
|
The Company’s geographic information was as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North |
|
|
|
|
|
Other |
|
|
|
|
| |
|
America |
|
|
Europe |
|
|
Foreign |
|
|
Total |
|
| |
|
Restated
Note 2 |
|
|
|
|
|
|
|
|
Restated
Note 2 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,690,263 |
|
|
$ |
134,211 |
|
|
$ |
36,388 |
|
|
$ |
1,860,862 |
|
Depreciation and amortization |
|
|
143,903 |
|
|
|
45 |
|
|
|
1,188 |
|
|
|
145,136 |
|
Operating income |
|
|
210,096 |
|
|
|
11,542 |
|
|
|
9,473 |
|
|
|
231,111 |
|
Gains and impairment (losses) on dispositions, net |
|
|
25,705 |
|
|
|
92 |
|
|
|
— |
|
|
|
25,797 |
|
Long-lived assets |
|
$ |
4,179,347 |
|
|
$ |
2,265 |
|
|
$ |
89,135 |
|
|
$ |
4,270,747 |
|
Operating locations at year end (unaudited) |
|
|
1,722 |
|
|
|
17 |
|
|
|
22 |
|
|
|
1,761 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,716,050 |
|
|
$ |
591,704 |
|
|
$ |
30,308 |
|
|
$ |
2,338,062 |
|
Depreciation and amortization |
|
|
160,616 |
|
|
|
170 |
|
|
|
530 |
|
|
|
161,316 |
|
Operating income |
|
|
147,524 |
|
|
|
69,858 |
|
|
|
6,795 |
|
|
|
224,177 |
|
Gains and impairment (losses) on dispositions, net |
|
|
51,411 |
|
|
|
(734 |
) |
|
|
(950 |
) |
|
|
49,727 |
|
Other operating expenses |
|
|
(9,004 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,004 |
) |
Long-lived assets |
|
$ |
4,281,203 |
|
|
$ |
367,405 |
|
|
$ |
89,477 |
|
|
$ |
4,738,085 |
|
Operating locations at year end (unaudited) |
|
|
1,786 |
|
|
|
1,016 |
|
|
|
23 |
|
|
|
2,825 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2002
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues from external customers |
|
$ |
1,791,019 |
|
|
$ |
496,409 |
|
|
$ |
23,452 |
|
|
$ |
2,310,880 |
|
Depreciation and amortization |
|
|
170,065 |
|
|
|
8,943 |
|
|
|
543 |
|
|
|
179,551 |
|
Operating (loss) income |
|
|
(46,876 |
) |
|
|
52,206 |
|
|
|
7,055 |
|
|
|
12,385 |
|
Gains and impairment (losses) on dispositions, net |
|
|
(164,512 |
) |
|
|
941 |
|
|
|
419 |
|
|
|
(163,152 |
) |
Other operating expenses |
|
|
(94,910 |
) |
|
|
— |
|
|
|
— |
|
|
|
(94,910 |
) |
Long-lived assets |
|
$ |
4,353,048 |
|
|
$ |
255,096 |
|
|
$ |
73,120 |
|
|
$ |
4,681,264 |
|
Operating locations at year end (unaudited) |
|
|
1,866 |
|
|
|
1,143 |
|
|
|
24 |
|
|
|
3,033 |
|
Included in the North American figures above are the following United States amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Revenues from external customers |
|
$ |
1,583,979 |
|
|
$ |
1,633,221 |
|
|
$ |
1,714,830 |
|
Operating income (loss)(1) |
|
|
182,680 |
|
|
|
130,378 |
|
|
|
(60,342 |
) |
Long-lived assets |
|
$ |
3,933,264 |
|
|
$ |
4,121,888 |
|
|
$ |
4,233,543 |
|
Operating locations at year end (unaudited) |
|
|
1,596 |
|
|
|
1,632 |
|
|
|
1,714 |
|
102
Included in the European figures above are the following French amounts:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Revenues from external customers |
|
$ |
127,282 |
|
|
$ |
584,636 |
|
|
$ |
473,643 |
|
Operating income (1) |
|
|
11,664 |
|
|
|
68,884 |
|
|
|
49,207 |
|
Long-lived assets |
|
$ |
— |
|
|
$ |
364,570 |
|
|
$ |
265,415 |
|
Operating locations at year end (unaudited) |
|
|
— |
|
|
|
1,002 |
|
|
|
1,125 |
|
|
|
|
| (1) |
|
Operating income (loss) includes $24,625, $41,397 and ($259,549) in
Gains and impairment (losses) on dispositions, net and Other operating
expenses in the United States and $92, ($734) and $2,347 in France for
the years ended December 31, 2004, 2003, and 2002, respectively. |
In 2004, the Company sold its funeral operations in France and retained a 25% minority
interest equity investment in the acquiring entity. The Company now accounts for its 25% ownership
of France using the equity method of accounting.
During 2004 and 2003, the Company divested of certain North America and international funeral
service locations and cemeteries. These divested operations do not qualify as discontinued
operations under SFAS 144 because either the divested operations were held for sale in accordance
with previous accounting pronouncements related to dispositions or they do not meet the criteria as
defined in SFAS 144. Summary operating results of the Company’s divested operations are as follows.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
North America |
|
|
Europe |
|
| |
|
2004 |
|
|
2003 |
|
|
2004 |
|
|
2003 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
11,714 |
|
|
$ |
33,547 |
|
|
$ |
127,282 |
|
|
$ |
584,636 |
|
Cemetery |
|
|
4,250 |
|
|
|
10,461 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,964 |
|
|
$ |
44,008 |
|
|
$ |
127,282 |
|
|
$ |
584,636 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross (loss) profits: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
(2,842 |
) |
|
$ |
(1,624 |
) |
|
$ |
11,572 |
|
|
$ |
68,275 |
|
Cemetery |
|
|
(5,154 |
) |
|
|
(555 |
) |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(7,996 |
) |
|
$ |
(2,179 |
) |
|
$ |
11,572 |
|
|
$ |
68,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Total |
|
| |
|
2004 |
|
|
2003 |
|
Revenues: |
|
|
|
|
|
|
|
|
Funeral |
|
$ |
138,996 |
|
|
$ |
618,183 |
|
Cemetery |
|
|
4,250 |
|
|
|
10,461 |
|
|
|
|
|
|
|
|
|
|
$ |
143,246 |
|
|
$ |
628,644 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss): |
|
|
|
|
|
|
|
|
Funeral |
|
$ |
8,730 |
|
|
$ |
66,651 |
|
Cemetery |
|
|
(5,154 |
) |
|
|
(555 |
) |
|
|
|
|
|
|
|
|
|
$ |
3,576 |
|
|
$ |
66,096 |
|
|
|
|
|
|
|
|
103
NOTE EIGHTEEN
Supplementary Information
The detail of certain balance sheet accounts was as follows:
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Cash and cash equivalents: |
|
|
|
|
|
|
|
|
Cash |
|
$ |
4,692 |
|
|
$ |
41,153 |
|
Commercial paper and temporary investments |
|
|
283,093 |
|
|
|
198,278 |
|
|
|
|
|
|
|
|
|
|
$ |
287,785 |
|
|
$ |
239,431 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other current assets: |
|
|
|
|
|
|
|
|
Deferred tax asset and income tax receivable |
|
$ |
40,438 |
|
|
$ |
37,200 |
|
Prepaid insurance |
|
|
3,720 |
|
|
|
14,983 |
|
Other |
|
|
6,787 |
|
|
|
8,963 |
|
|
|
|
|
|
|
|
|
|
$ |
50,945 |
|
|
$ |
61,146 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inventories: |
|
|
|
|
|
|
|
|
Caskets, vaults, urns, markers and bases |
|
$ |
31,898 |
|
|
$ |
95,452 |
|
Developed land, lawn crypts and mausoleums |
|
|
49,628 |
|
|
|
41,308 |
|
|
|
|
|
|
|
|
|
|
$ |
81,526 |
|
|
$ |
136,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery property: |
|
|
|
|
|
|
|
|
Undeveloped land |
|
$ |
1,260,859 |
|
|
$ |
1,265,320 |
|
Developed land, lawn crypts and mausoleums |
|
|
248,740 |
|
|
|
257,794 |
|
|
|
|
|
|
|
|
|
|
$ |
1,509,599 |
|
|
$ |
1,523,114 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property, plant and equipment: |
|
|
|
|
|
|
|
|
Land |
|
$ |
293,961 |
|
|
$ |
305,756 |
|
Buildings and improvements |
|
|
1,001,515 |
|
|
|
1,232,109 |
|
Operating equipment |
|
|
249,023 |
|
|
|
410,190 |
|
Leasehold improvements |
|
|
28,354 |
|
|
|
21,278 |
|
|
|
|
|
|
|
|
|
|
|
1,572,853 |
|
|
|
1,969,333 |
|
Less: accumulated depreciation |
|
|
(602,306 |
) |
|
|
(691,944 |
) |
|
|
|
|
|
|
|
|
|
$ |
970,547 |
|
|
$ |
1,277,389 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred charges and other assets: |
|
|
|
|
|
|
|
|
Covenants-not-to-compete, net |
|
$ |
77,549 |
|
|
$ |
77,663 |
|
Cemetery deferred selling expense, net |
|
|
212,397 |
|
|
|
211,840 |
|
Funeral deferred selling expense, net |
|
|
99,371 |
|
|
|
100,317 |
|
Investments, net |
|
|
35,752 |
|
|
|
21,872 |
|
Restricted cash |
|
|
26,707 |
|
|
|
95,325 |
|
Notes receivable, net |
|
|
41,302 |
|
|
|
50,712 |
|
Other |
|
|
128,483 |
|
|
|
184,431 |
|
|
|
|
|
|
|
|
|
|
$ |
621,561 |
|
|
$ |
742,160 |
|
|
|
|
|
|
|
|
Included in Receivables, net on the Company’s consolidated balance sheet is funeral and
cemetery atneed allowances for doubtful accounts of approximately $12,572 and $15,348 at December
31, 2004 and 2003, respectively.
Included in Notes receivable, net in the consolidated balance sheet is $138 and $179 of notes
with employees, former officers of
the Company, and other related parties at December 31, 2004 and 2003, respectively. Interest rates
on notes receivable range from 5% to 15% as of December 31, 2004 and 2003.
104
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Accounts payable and accrued liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
46,271 |
|
|
$ |
137,716 |
|
Accrued payroll |
|
|
31,296 |
|
|
|
63,763 |
|
Special litigation matters |
|
|
4,280 |
|
|
|
103,150 |
|
Restructuring liability |
|
|
10,663 |
|
|
|
23,157 |
|
Interest payable |
|
|
19,883 |
|
|
|
18,934 |
|
Self insurance |
|
|
47,480 |
|
|
|
46,898 |
|
Other accrued liabilities |
|
|
62,004 |
|
|
|
59,463 |
|
|
|
|
|
|
|
|
|
|
$ |
221,877 |
|
|
$ |
453,081 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
December 31, |
|
| |
|
2004 |
|
|
2003 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
Other liabilities: |
|
|
|
|
|
|
|
|
Accrued pension |
|
$ |
45,175 |
|
|
$ |
87,298 |
|
Deferred compensation |
|
|
17,729 |
|
|
|
9,765 |
|
Contingent purchase obligation |
|
|
— |
|
|
|
53,000 |
|
Refund obligation reserve |
|
|
74,410 |
|
|
|
— |
|
Trust related debt |
|
|
76,926 |
|
|
|
— |
|
Tax liability |
|
|
104,981 |
|
|
|
92,585 |
|
Indemnification liability |
|
|
44,480 |
|
|
|
3,350 |
|
Other |
|
|
68,216 |
|
|
|
118,614 |
|
|
|
|
|
|
|
|
|
|
$ |
431,917 |
|
|
$ |
364,612 |
|
|
|
|
|
|
|
|
The detail of certain income statement accounts is as follows for the years ended December 31,
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
North America Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
Goods |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
505,170 |
|
|
$ |
488,987 |
|
|
$ |
507,511 |
|
Cemetery |
|
|
388,683 |
|
|
|
381,381 |
|
|
|
388,472 |
|
|
|
|
|
|
|
|
|
|
|
Total Goods |
|
|
893,853 |
|
|
|
870,368 |
|
|
|
895,983 |
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
585,854 |
|
|
|
626,487 |
|
|
|
626,087 |
|
Cemetery |
|
|
141,934 |
|
|
|
146,574 |
|
|
|
145,159 |
|
|
|
|
|
|
|
|
|
|
|
Total Services |
|
|
727,788 |
|
|
|
773,061 |
|
|
|
771,246 |
|
|
|
|
|
|
|
|
|
|
|
International Revenues |
|
|
170,599 |
|
|
|
622,012 |
|
|
|
519,861 |
|
Other Revenues |
|
|
68,622 |
|
|
|
72,621 |
|
|
|
123,790 |
|
|
|
|
|
|
|
|
|
|
|
Total Revenues |
|
$ |
1,860,862 |
|
|
$ |
2,338,062 |
|
|
$ |
2,310,880 |
|
|
|
|
|
|
|
|
|
|
|
North America Costs |
|
|
|
|
|
|
|
|
|
|
|
|
Goods |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
295,265 |
|
|
$ |
292,937 |
|
|
$ |
297,210 |
|
Cemetery |
|
|
162,797 |
|
|
|
169,207 |
|
|
|
211,494 |
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Goods |
|
|
458,062 |
|
|
|
462,144 |
|
|
|
508,704 |
|
|
|
|
|
|
|
|
|
|
|
Services |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
247,180 |
|
|
|
253,349 |
|
|
|
261,177 |
|
Cemetery |
|
|
150,427 |
|
|
|
157,855 |
|
|
|
158,900 |
|
|
|
|
|
|
|
|
|
|
|
Total Cost of Services |
|
|
397,607 |
|
|
|
411,204 |
|
|
|
420,077 |
|
|
|
|
|
|
|
|
|
|
|
International cost of goods and services |
|
|
149,676 |
|
|
|
545,019 |
|
|
|
461,720 |
|
Overhead and other expenses |
|
|
519,307 |
|
|
|
558,136 |
|
|
|
560,180 |
|
|
|
|
|
|
|
|
|
|
|
Total cost and expenses |
|
$ |
1,524,652 |
|
|
$ |
1,976,503 |
|
|
$ |
1,950,681 |
|
|
|
|
|
|
|
|
|
|
|
105
Certain Non-Cash Transactions
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Years ended December 31, |
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Changes to minimum liability under retirement plans |
|
$ |
(33,599 |
) |
|
$ |
(2,956 |
) |
|
$ |
(7,202 |
) |
Debenture conversions to common stock |
|
$ |
217,154 |
|
|
$ |
— |
|
|
$ |
— |
|
Common stock contributions to employee 401(k) |
|
$ |
18,127 |
|
|
$ |
17,378 |
|
|
$ |
18,150 |
|
106
NOTE NINETEEN
Earnings Per Share
Basic earnings (loss) per common share (EPS) excludes dilution and is computed by dividing net
income (loss) 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 (losses). Because the Company reported a net loss
in 2002, all potentially dilutive securities were antidilutive and basic and diluted weighted
average number of common shares outstanding were the same.
A reconciliation of the numerators and denominators of the basic and diluted EPS for the three
years ended December 31 is presented below:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In thousands, except per share amounts) |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
Note 2 |
|
|
Note 2 |
|
|
Note 2 |
|
Income (loss) from continuing operations before cumulative effect of accounting
changes (numerator): |
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before cumulative effects of accounting
changes — basic |
|
$ |
117,922 |
|
|
$ |
82,536 |
|
|
$ |
(84,310 |
) |
After tax interest on convertible debt |
|
|
6,400 |
|
|
|
— |
|
|
|
— |
|
Income (loss) from continuing operations before cumulative effects of accounting
changes — diluted |
|
$ |
124,322 |
|
|
$ |
82,536 |
|
|
$ |
(84,310 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) (numerator): |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) — basic |
|
$ |
114,128 |
|
|
$ |
85,065 |
|
|
$ |
(234,638 |
) |
After tax interest on convertible debt |
|
|
6,400 |
|
|
|
— |
|
|
|
— |
|
Net income (loss) — diluted |
|
$ |
120,528 |
|
|
$ |
85,065 |
|
|
$ |
(234,638 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares (denominator): |
|
|
|
|
|
|
|
|
|
|
|
|
Shares — basic |
|
|
318,737 |
|
|
|
299,801 |
|
|
|
294,533 |
|
Stock options |
|
|
4,091 |
|
|
|
989 |
|
|
|
— |
|
Convertible debt |
|
|
21,776 |
|
|
|
— |
|
|
|
— |
|
Restricted stock |
|
|
71 |
|
|
|
— |
|
|
|
— |
|
| |
|
|
|
|
|
|
|
|
|
Shares — diluted |
|
|
344,675 |
|
|
|
300,790 |
|
|
|
294,533 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) per share from continuing operations before cumulative effects of
accounting changes: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.37 |
|
|
$ |
.28 |
|
|
$ |
(.29 |
) |
Diluted |
|
$ |
.36 |
|
|
$ |
.27 |
|
|
$ |
(.29 |
) |
| |
| |
Income (loss) per share from discontinued operations, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.14 |
|
|
$ |
— |
|
|
$ |
(.05 |
) |
Diluted |
|
$ |
.13 |
|
|
$ |
.01 |
|
|
$ |
(.05 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effects of accounting changes per share, net of tax: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
(.15 |
) |
|
$ |
— |
|
|
$ |
(.46 |
) |
Diluted |
|
$ |
(.14 |
) |
|
$ |
— |
|
|
$ |
(.46 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
$ |
.36 |
|
|
$ |
.28 |
|
|
$ |
(.80 |
) |
Diluted |
|
$ |
.35 |
|
|
$ |
.28 |
|
|
$ |
(.80 |
) |
107
The computation of diluted earnings per share excludes outstanding stock options and
convertible debt in certain periods in which the inclusion of such options and debt would be
antidilutive in the periods presented. Total options and convertible debentures that could impact
dilutive earnings per share are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Antidilutive options |
|
|
9,559 |
|
|
|
22,097 |
|
|
|
30,001 |
|
Antidilutive convertible debentures |
|
|
859 |
|
|
|
47,096 |
|
|
|
51,408 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total common stock equivalents excluded from computation |
|
|
10,418 |
|
|
|
69,193 |
|
|
|
81,409 |
|
|
|
|
|
|
|
|
|
|
|
NOTE TWENTY
Gains and Impairment (Losses) on Dispositions, Net and Other Operating Expense
The Company has incurred various charges related to impairment losses and other operating
expenses from 1999 through 2002. Charges included in Gains and impairment (losses) on dispositions,
net consist of losses associated with planned divestitures of certain North America and
international funeral service and cemetery businesses and reductions in the carrying values of
equity investments. As dispositions occur in the normal course of business, gains or losses on the
sale of such businesses are recognized in this line item. Additionally, as dispositions occur
related to the Company’s ongoing asset sale programs, adjustments are made through this line item
to reflect the difference between actual proceeds received from the sale compared to the original
estimates.
Gains and impairments (losses) on dispositions, net consists of the following for the years
ended December 31:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
| |
|
(Restated) |
|
|
(Restated) |
|
|
(Restated) |
|
| |
|
note 2 |
|
|
note 2 |
|
|
note 2 |
|
Gains on dispositions |
|
$ |
66,966 |
|
|
$ |
75,188 |
|
|
$ |
16,396 |
|
Impairment losses for assets held for sale |
|
|
(49,970 |
) |
|
|
(39,197 |
) |
|
|
(199,711 |
) |
Changes to previously estimated impairment losses |
|
|
8,801 |
|
|
|
13,736 |
|
|
|
20,163 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
25,797 |
|
|
$ |
49,727 |
|
|
$ |
(163,152 |
) |
|
|
|
|
|
|
|
|
|
|
The impairment losses for assets held for sale in 2004 are primarily related to losses on the
sale of excess land.
Sale of French Operations
During 2004, the Company sold 100% of the stock of its French subsidiary to a newly formed
company (NEWCO). In connection with this sale, the Company acquired a 25% share of the total equity
capital of the newly formed entity, received cash proceeds of $281,667, net of transaction costs,
and received a note receivable in the amount of EUR 10,000. The Company accounted for the sale of
its French subsidiary in accordance with the guidance set forth in EITF 01-2, “Interpretations of
APB Opinion No. 29”, Issues 8(a) and 8(b). Consequently, the Company deferred approximately 25% of
the gain associated with the sale of its French subsidiary representing the economic interest it
retained in that subsidiary through its ownership of approximately 25% of NEWCO.
The sale of stock of its French subsidiary in March 2004, resulted in a pretax gain of $12,639
and a non-cash tax benefit of $24,929 (described below) resulting in an after tax gain of $37,568.
In July 2004, the Company paid $6,219 pursuant to the joint venture agreement, as a purchase price
adjustment, which reduced the pretax gain to $6,420 and reduced the after tax gain to $33,624 as
summarized below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Original |
|
|
|
|
|
|
|
| |
|
Calculation |
|
|
Adjustment in |
|
|
|
|
| |
|
Q1 2004 |
|
|
Q2 2004 |
|
|
Total |
|
Pretax gain (loss) |
|
$ |
12,639 |
|
|
$ |
(6,219 |
) |
|
$ |
6,420 |
|
Tax (benefit) provision |
|
|
(24,929 |
) |
|
|
(2,275 |
) |
|
|
(27,204 |
) |
|
|
|
|
|
|
|
|
|
|
After tax gain (loss) |
|
$ |
37,568 |
|
|
$ |
(3,944 |
) |
|
$ |
33,624 |
|
|
|
|
|
|
|
|
|
|
|
The $24,929 non-cash tax benefit associated with the sale of the Company’s French subsidiary
is primarily attributable to the reduction of $18,610 of tax accruals, which were accrued as an
indemnification liability upon the sale of the Company’s French subsidiary. The remaining amount of
$6,319 was a non-cash tax benefit associated with the difference between book and tax basis.
108
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. During 2004, $2,400 in charges were applied to the indemnification and related primarily
to foreign taxes and legal expenses. For more information regarding these representations and
warranties and other indemnifications, see footnote fourteen. Goodwill in the amount of $23,467 was
removed from the Company’s consolidated balance sheet as a result of this transaction.
Proceeds from Investment in United Kingdom Company and Others
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 $41,163, recorded in Gains and impairment (losses) on
disposition, net, in the consolidated statement of operations, $27,179 to adjust the carrying
amount of the receivable to its realizable value and $13,984 as a pretax gain as a result of the
sale. In addition, the Company recognized interest income on the receivable, in the amount of
$4,478 and a foreign currency gain of $198 recorded in Other income, net in the consolidated
statement of operations and recognized a non-cash tax benefit of $8,000 on the sale.
The most significant items in 2003 related to the Company selling its equity investments in
Australia and Spain for gains of $45,776 and $8,090, respectively. The $163,152 net loss (as
restated) reported in 2002 primarily related to an impairment charge for several funeral and
cemetery operations held for sale in North America.
Other Operating Expense
For the year ended December 31, 2003, the Company recorded other operating expenses of $9,004,
primarily consisting of $6,859 of severance costs for former employees. The charges related to 350
employees involuntarily terminated in North America, were in accordance with the Company’s post
employment severance policies. For the year ended December 31, 2002, the Company recorded an
expense of $94,910 in Other operating expense, primarily related to the termination of certain
consulting and covenants-not-to-compete contractual obligations and market value adjustments of
certain options associated with the Company’s 6.3% notes due 2003.
The reserve activity for the years ended December 31, 2004 and 2003 related to the original
charge amounts generating the impairment losses and other operating expenses are as follows:
2004 Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Utilization for twelve |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
months |
|
|
|
|
| |
|
|
|
|
|
Balance at |
|
|
ended December 31, 2004 |
|
|
Balance at |
|
| |
|
Original |
|
|
December 31, |
|
|
|
|
|
|
|
|
December 31, |
|
| |
|
charge amount |
|
|
2003 |
|
|
Cash |
|
|
Non-cash |
|
|
2004 |
|
First Quarter 1999 Charge |
|
$ |
89,884 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Fourth Quarter 1999 Charge |
|
|
272,544 |
|
|
|
18,282 |
|
|
|
7,286 |
|
|
|
195 |
|
|
|
10,801 |
|
2000 Charges |
|
|
434,415 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2001 Charges |
|
|
663,548 |
|
|
|
3,102 |
|
|
|
509 |
|
|
|
811 |
|
|
|
1,782 |
|
2002 Charges |
|
|
292,979 |
|
|
|
24,395 |
|
|
|
6,205 |
|
|
|
1,736 |
|
|
|
16,454 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,753,370 |
|
|
$ |
45,779 |
|
|
$ |
14,000 |
|
|
$ |
2,742 |
|
|
$ |
29,037 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2003 Activity
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Utilization for twelve
months |
|
|
|
|
| |
|
|
|
|
|
Balance at |
|
|
ended December 31, 2003 |
|
|
Balance at |
|
| |
|
Original |
|
|
December 31, |
|
|
|
|
|
|
|
|
December 31, |
|
| |
|
charge amount |
|
|
2002 |
|
|
Cash |
|
|
Non-cash |
|
|
2003 |
|
First Quarter 1999 Charge |
|
$ |
89,884 |
|
|
$ |
564 |
|
|
$ |
434 |
|
|
$ |
130 |
|
|
$ |
— |
|
Fourth Quarter 1999 Charge |
|
|
272,544 |
|
|
|
48,254 |
|
|
|
7,606 |
|
|
|
22,366 |
|
|
|
18,282 |
|
2000 Charges |
|
|
434,415 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2001 Charges |
|
|
663,548 |
|
|
|
3,385 |
|
|
|
392 |
|
|
|
(109 |
) |
|
|
3,102 |
|
2002 Charges |
|
|
292,979 |
|
|
|
27,990 |
|
|
|
5,723 |
|
|
|
(2,128 |
) |
|
|
24,395 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
1,753,370 |
|
|
$ |
80,193 |
|
|
$ |
14,155 |
|
|
$ |
20,259 |
|
|
$ |
45,779 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
109
The majority of the remaining balance at December 31, 2004 of these original charge amounts
related to actions already taken by the Company associated with severance costs and terminated
consulting and/or covenant-not-to-compete contractual obligations, which will be paid by 2012. Of
the $29,037 remaining liability at December 31, 2004, $9,939 is included in Accounts payable and
accrued liabilities and $19,098 is included in Other liabilities in the consolidated balance sheet
based on the expected timing of payments. The Company continues to adjust the estimates of certain
items included in the original charge amounts as better estimates become available or actual
divestitures occur.
NOTE TWENTY-ONE
Discontinued Operations
The Company committed to a plan during 2004 to divest its existing funeral and cemetery
operations in Argentina and Uruguay. Subsequent to December 31, 2004, the Company disposed of its
operations in Argentina and Uruguay. The Company plans to have no continuing interest in the
operations of the Argentina or Uruguay businesses subsequent to their disposal. Therefore, these
operations were classified as discontinued operations during 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. As a result of the sale of the Argentina
business in 2005, the Company recorded a gain of $2,041 in Income from discontinued operations in
the consolidated statement of operations in December 2004 associated with the revised estimated
fair value. The new carrying amount reflects the 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 second quarter of 2004, which represents the reduction of a
previously recorded valuation allowance. The Company also recognized an additional tax benefit of
$2,629 in discontinued operations during the fourth quarter of 2004, which represents the revised
estimated fair value and differences between book and tax basis.
The results of the Company’s discontinued operations for the years ended December 31, 2004,
2003 and 2002 were as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Twelve months ended December 31, |
|
| |
|
2004 |
|
|
2003 |
|
|
2002 |
|
Revenues |
|
$ |
14,882 |
|
|
$ |
13,226 |
|
|
$ |
11,180 |
|
Gains and impairment (losses) on dispositions, net |
|
|
(13,148 |
) |
|
|
984 |
|
|
|
(16,233 |
) |
Other costs and expenses |
|
|
(9,682 |
) |
|
|
(11,096 |
) |
|
|
(9,267 |
) |
|
|
|
|
|
|
|
|
|
|
(Loss) income from discontinued operations before income taxes |
|
|
(7,948 |
) |
|
|
3,114 |
|
|
|
(14,320 |
) |
(Benefit) provision for income taxes |
|
|
(51,710 |
) |
|
|
585 |
|
|
|
448 |
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from discontinued operations |
|
$ |
43,762 |
|
|
$ |
2,529 |
|
|
$ |
(14,768 |
) |
|
|
|
|
|
|
|
|
|
|
110
Net (liabilities) and assets of discontinued operations at December 31, 2004 and 2003 were as
follows:
| |
|
|
|
|
|
|
|
|
| |
|
2004 |
|
|
2003 |
|
Assets: |
|
|
|
|
|
|
|
|
Receivables, net of allowances |
|
$ |
3,084 |
|
|
$ |
4,096 |
|
Other current assets |
|
|
8,001 |
|
|
|
2,005 |
|
Preneed cemetery receivables and trust investments |
|
|
1,412 |
|
|
|
1,601 |
|
Property, plant and equipment, at cost, net |
|
|
571 |
|
|
|
376 |
|
Deferred charges and other assets |
|
|
2,384 |
|
|
|
1,240 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
15,452 |
|
|
$ |
9,318 |
|
|
|
|
|
|
|
|
|
|
Liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
901 |
|
|
$ |
1,107 |
|
Accrued liabilities and other current liabilities |
|
|
6,210 |
|
|
|
6,493 |
|
Long-term debt |
|
|
— |
|
|
|
9,694 |
|
Deferred income taxes |
|
|
13,190 |
|
|
|
13,026 |
|
Other liabilities and deferred credits |
|
|
45,035 |
|
|
|
31,210 |
|
|
|
|
|
|
|
|
Total liabilities |
|
$ |
65,336 |
|
|
$ |
61,530 |
|
Net liabilities of discontinued operations |
|
|
(49,884 |
) |
|
|
(52,212 |
) |
Foreign currency translation |
|
|
67,213 |
|
|
|
71,001 |
|
|
|
|
|
|
|
|
Net assets of discontinued operations, net of foreign currency translation |
|
$ |
17,329 |
|
|
$ |
18,789 |
|
|
|
|
|
|
|
|
NOTE TWENTY-TWO
Quarterly Financial Data (Unaudited)
At December 31, 2003, the Company restated its unaudited quarterly financial data for each of
the first three interim periods of 2003. At December 31, 2004, the Company restated its unaudited
quarterly financial data for each of the first three interim periods of 2004. In addition, the
Company is further restating herein its unaudited quarterly financial data for each of the first
three interim periods of 2004 and 2003 and is restating herein its unaudited quarterly financial
data for the fourth quarter of both 2004 and 2003. All applicable amounts relating to these
restatements have been reflected in the consolidated financial statements and these notes to the
consolidated financial statements. See note two to the consolidated financial statements for
further information relating to the restatements.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First Quarter |
|
|
Second Quarter |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
| |
|
|
|
|
|
Note 2 |
|
|
|
|
|
|
Note 2 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
589,422 |
|
|
$ |
588,699 |
|
|
$ |
432,103 |
|
|
$ |
432,368 |
|
Costs and expenses |
|
|
473,109 |
|
|
|
473,070 |
|
|
|
359,058 |
|
|
|
359,019 |
|
Gross profits |
|
|
116,313 |
|
|
|
115,629 |
|
|
|
73,045 |
|
|
|
73,349 |
|
Operating income |
|
|
100,490 |
|
|
|
99,393 |
|
|
|
50,534 |
|
|
|
50,838 |
|
Income from continuing
operations before income
taxes and cumulative effect
of accounting changes |
|
|
74,256 |
|
|
|
73,159 |
|
|
|
1,407 |
|
|
|
1,711 |
|
Benefit for income taxes |
|
|
(3,375 |
) |
|
|
(3,779 |
) |
|
|
(7,017 |
) |
|
|
(6,904 |
) |
Income from continuing
operations before cumulative
effect of accounting changes |
|
|
77,631 |
|
|
|
76,938 |
|
|
|
8,424 |
|
|
|
8,615 |
|
Cumulative effect of
accounting changes |
|
|
(47,074 |
) |
|
|
(47,556 |
) |
|
|
— |
|
|
|
— |
|
Net income |
|
|
31,311 |
|
|
|
30,136 |
|
|
|
42,761 |
|
|
|
42,952 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
|
.10 |
|
|
|
.10 |
|
|
|
.14 |
|
|
|
.14 |
|
Diluted — EPS |
|
|
.10 |
|
|
|
.10 |
|
|
|
.14 |
|
|
|
.14 |
|
111
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Fourth Quarter |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
| |
|
|
|
|
|
Note 2 |
|
|
|
|
|
|
Note 2 |
|
2004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ | 404,557 |
|
|
$ | 404,731 |
|
|
$ | 433,226 |
|
|
$ | 435,064 |
|
Costs and expenses |
|
|
334,463 |
|
|
|
334,422 |
|
|
|
358,180 |
|
|
|
358,141 |
|
Gross profits |
|
|
70,094 |
|
|
|
70,309 |
|
|
|
75,046 |
|
|
|
76,923 |
|
Operating income |
|
|
41,515 |
|
|
|
41,730 |
|
|
|
37,107 |
|
|
|
39,150 |
|
Income from continuing
operations before income
taxes |
|
|
18,196 |
|
|
|
18,411 |
|
|
|
16,939 |
|
|
|
18,982 |
|
Provision (benefit) for income
taxes |
|
|
4,739 |
|
|
|
4,819 |
|
|
|
(560 |
) |
|
|
205 |
|
Income from continuing
operations |
|
|
13,457 |
|
|
|
13,592 |
|
|
|
17,499 |
|
|
|
18,777 |
|
Net income |
|
|
13,741 |
|
|
|
13,876 |
|
|
|
25,886 |
|
|
|
27,164 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
|
.04 |
|
|
|
.04 |
|
|
|
.08 |
|
|
|
.08 |
|
Diluted — EPS |
|
|
.04 |
|
|
|
.04 |
|
|
|
.08 |
|
|
|
.08 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First Quarter |
|
|
Second Quarter |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
| |
|
|
|
|
|
Note 2 |
|
|
|
|
|
|
Note 2 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ | 578,826 |
|
|
$ | 579,876 |
|
|
$ | 584,050 |
|
|
|
584,553 |
|
Costs and expenses |
|
|
463,868 |
|
|
|
465,335 |
|
|
|
489,418 |
|
|
|
489,839 |
|
Gross profits |
|
|
114,958 |
|
|
|
114,541 |
|
|
|
94,632 |
|
|
|
94,714 |
|
Operating income |
|
|
102,881 |
|
|
|
102,527 |
|
|
|
54,171 |
|
|
|
52,838 |
|
Income from continuing
operations before income
taxes |
|
|
70,112 |
|
|
|
69,758 |
|
|
|
21,082 |
|
|
|
19,749 |
|
Provision for income taxes |
|
|
26,138 |
|
|
|
26,003 |
|
|
|
7,008 |
|
|
|
6,494 |
|
Income from continuing
operations |
|
|
43,974 |
|
|
|
43,755 |
|
|
|
14,074 |
|
|
|
13,255 |
|
Net income |
|
|
44,086 |
|
|
|
43,867 |
|
|
|
15,308 |
|
|
|
14,489 |
|
Earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
|
.15 |
|
|
|
.15 |
|
|
|
.05 |
|
|
|
.05 |
|
Diluted — EPS |
|
|
.14 |
|
|
|
.14 |
|
|
|
.05 |
|
|
|
.05 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Third Quarter |
|
|
Fourth Quarter |
|
| |
|
As |
|
|
As |
|
|
As |
|
|
As |
|
| |
|
Reported |
|
|
Restated |
|
|
Reported |
|
|
Restated |
|
| |
|
|
|
|
|
Note 2 |
|
|
|
|
|
|
Note 2 |
|
2003 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ | 566,461 |
|
|
$ | 568,853 |
|
|
$ | 599,088 |
|
|
$ | 604,780 |
|
Costs and expenses |
|
|
497,515 |
|
|
|
498,910 |
|
|
|
515,659 |
|
|
|
522,419 |
|
Gross profits |
|
|
68,946 |
|
|
|
69,943 |
|
|
|
83,429 |
|
|
|
82,361 |
|
Operating income |
|
|
14,719 |
|
|
|
17,692 |
|
|
|
52,451 |
|
|
|
51,120 |
|
(Loss) income from
continuing
operations before income
taxes |
|
|
(8,722 |
) |
|
|
(5,749 |
) |
|
|
28,747 |
|
|
|
27,416 |
|
Benefit for income taxes |
|
|
(3,331 |
) |
|
|
(2,209 |
) |
|
|
(1,149 |
) |
|
|
(1,650 |
) |
(Loss) income from
continuing
operations |
|
|
(5,391 |
) |
|
|
(3,540 |
) |
|
|
29,896 |
|
|
|
29,066 |
|
Net (loss) income |
|
|
(4,732 |
) |
|
|
(2,881 |
) |
|
|
30,420 |
|
|
|
29,590 |
|
(Loss) earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic — EPS |
|
|
(.02 |
) |
|
|
(.01 |
) |
|
|
.10 |
|
|
|
.10 |
|
Diluted — EPS |
|
|
(.02 |
) |
|
|
(.01 |
) |
|
|
.10 |
|
|
|
.10 |
|
112
SERVICE CORPORATION INTERNATIONAL
SCHEDULE II — VALUATION AND QUALIFYING ACCOUNTS
Three Years Ended December 31, 2004
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Charged |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
(credited) |
|
|
Charged |
|
|
|
|
|
|
|
|
| |
|
Balance at |
|
|
to Costs |
|
|
(credited) |
|
|
|
|
|
|
Balance |
|
| |
|
beginning |
|
|
and |
|
|
to other |
|
|
|
|
|
|
at end of |
|
| Description |
|
of period |
|
|
Expenses |
|
|
accounts(2) |
|
|
Write Offs(1) |
|
|
Period |
|
Current Provision: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 |
|
$ |
15,348 |
|
|
$ |
(3,376 |
) |
|
$ |
8,757 |
|
|
$ |
(8,157 |
) |
|
$ |
12,572 |
|
Year ended December 31, 2003 |
|
|
22,697 |
|
|
|
7,627 |
|
|
|
(720 |
) |
|
|
(14,256 |
) |
|
|
15,348 |
|
Year ended December 31, 2002 |
|
|
42,439 |
|
|
|
2,710 |
|
|
|
(2,179 |
) |
|
|
(20,273 |
) |
|
|
22,697 |
|
| |
Due After One Year: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for contract cancellation and doubtful
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 |
|
$ |
55,029 |
|
|
$ |
(21,502 |
) |
|
$ |
(165 |
) |
|
$ |
— |
|
|
$ |
33,362 |
|
Year ended December 31, 2003 |
|
|
29,030 |
|
|
|
1,813 |
|
|
|
24,675 |
|
|
|
(489 |
) |
|
|
55,029 |
|
Year ended December 31, 2002 |
|
|
(21,984 |
) |
|
|
45,901 |
|
|
|
7,311 |
|
|
|
(2,198 |
) |
|
|
29,030 |
|
| |
Preneed Funeral and Preneed Cemetery Asset: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for contract cancellation and doubtful
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2004 (restated) |
|
$ |
387,150 |
|
|
$ |
(17,772 |
) |
|
$ |
(316,038 |
) |
|
$ |
— |
|
|
$ |
53,340 |
|
Year ended
December 31, 2003 (restated) |
|
|
357,761 |
|
|
|
17,466 |
|
|
|
11,923 |
|
|
|
— |
|
|
|
387,150 |
|
Year ended
December 31, 2002 (restated) |
|
|
423,630 |
|
|
|
(36,253 |
) |
|
|
(29,616 |
) |
|
|
— |
|
|
|
357,761 |
|
| |
Deferred Preneed Funeral and Cemetery Revenue: (3)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for contract cancellations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended
December 31, 2004 (restated) |
|
$ |
(369,980 |
) |
|
$ |
— |
|
|
$ |
257,690 |
|
|
$ |
— |
|
|
$ |
(112,290 |
) |
Year ended
December 31, 2003 (restated) |
|
|
(339,339 |
) |
|
|
— |
|
|
|
(30,641 |
) |
|
|
— |
|
|
|
(369,980 |
) |
Year ended December 31, 2002 (restated) |
|
|
(368,955 |
) |
|
|
— |
|
|
|
29,616 |
|
|
|
— |
|
|
|
(339,339 |
) |
| |
Deferred Tax Valuation Allowance: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended December 31, 2004 |
|
$ |
35,859 |
|
|
$ |
8,049 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
43,908 |
|
Year ended December 31, 2003 |
|
|
156,372 |
|
|
|
2,966 |
|
|
|
(123,479 |
) |
|
|
— |
|
|
|
35,859 |
|
Year ended December 31, 2002 |
|
|
163,044 |
|
|
|
(6,672 |
) |
|
|
— |
|
|
|
— |
|
|
|
156,372 |
|
|
|
|
| (1) |
|
Uncollected receivables written off, net of recoveries. |
| |
| (2) |
|
Primarily relates to cumulative effect of accounting
change and acquisitions and dispositions of operations.
2003 deferred tax valuation allowance was reclassified
to other deferred tax liabilities with no change to net
deferred income taxes. |
| |
| (3) |
|
Allowances related to the Company’s insurance funded
preneed funeral contracts associated with the Company’s
French funeral operations (disposed of in March 2004)
were removed from this table in the Company's Form 10-K/A (Amendment
No. 1) to
conform with the presentation in the Company’s
consolidated financial statements. |
ITEM 9. Changes In and Disagreements with Accountants on Accounting and Financial Disclosure
None.
ITEM 9A. Controls and Procedures
Disclosure Controls and Procedures.
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and
113
reported within the time periods specified in the SEC’s rules and forms, and
that such information is accumulated and communicated to the Company’s
management, including its Chief Executive Officer and Chief Financial Officer,
as appropriate, to allow timely decisions regarding required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Company’s Disclosure Committee and
management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of the design and operation of our disclosure controls and procedures pursuant to
Exchange Act Rule 13a-15. Based upon, and as of the date of this evaluation, the Chief Executive
Officer and the Chief Financial Officer concluded that the Company’s disclosure controls and
procedures were not effective because of the material weaknesses described below. In light of the
material weaknesses described below, the Company performed additional analysis and other
post-closing procedures to ensure our consolidated financial statements are prepared in accordance
with generally accepted accounting principles. Accordingly, management believes that the
consolidated financial statements included in this report fairly present in all material respects
our financial position, results of operations and cash flows for the periods presented.
Management’s Report on Internal Control over Financial Reporting (As Restated)
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rule 13a-15(f) under the Securities Exchange Act of
1934. The Company’s internal control over financial reporting is a process designed under the
supervision of the Company’s principal executive and principal financial officers to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies and procedures may deteriorate.
Management assessed the effectiveness of the Company’s internal control over financial
reporting as of December 31, 2004. In making this assessment, management used the criteria
described in Internal Control — Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO).
A material weakness is a control deficiency, or combination of control deficiencies, that
results in more than a remote likelihood that a material misstatement of the annual or interim
financial statements will not be prevented or detected. We identified the following material
weaknesses in our assessment of the effectiveness of internal control over financial reporting as
of December 31, 2004:
| A. |
|
The Company did not maintain effective controls over the
completeness of revenue recognition on preneed cemetery contracts.
Specifically, the Company did not maintain effective controls over
revenue recognition transactions associated with the timely
recording of the physical delivery and performance of cemetery
goods and services sold on a preneed basis. This control
deficiency resulted in the restatement of the Company’s 2004,
2003 and 2002 financial statements as well as its quarterly
financial data for all quarters of both 2004 and 2003.
Additionally, this control deficiency could result in the
misstatement of cemetery merchandise and service revenues and of
deferred revenues and assets associated with cemetery goods and
services sold on a preneed basis that would result in a material
misstatement to annual or interim financial statements that would
not be prevented or detected. Accordingly, management determined
that this control deficiency represents a material weakness. |
| |
| B. |
|
The Company did not maintain effective controls over the
reconciliations of preneed funeral and cemetery detailed records
to trust fund assets and corresponding deferred revenue and
non-controlling interest accounts related to preneed funeral and
cemetery activities, and of cemetery deferred selling costs. This
control deficiency resulted in the restatement of the Company’s
2004, 2003, and 2002 financial statements as well as
its quarterly financial data for all quarters of both 2004 and
2003. Additionally, this control deficiency could result in the
misstatement of funeral and cemetery revenues and of assets and
liabilities associated with preneed funeral and cemetery
activities that would result in a material misstatement to annual
or interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control
deficiency
represents a material weakness. |
| |
| C. |
|
The Company did not maintain effective controls over its
application and monitoring of the appropriate accounting policies
related to certain lease accounting. Specifically, the Company did
not maintain effective controls over the application and
monitoring of its accounting policies relating to lease renewal
options and rent escalation provisions. This control deficiency
contributed to the restatement of the Company’s 2004, 2003 and
2002 financial statements as well as its
quarterly financial data for all quarters of both 2004 and 2003.
Additionally, this control deficiency could result in the
misstatement of accrued rental liability and related operating
rental expense that would result in a material misstatement to
annual or interim financial statements that would not be prevented
or detected. Accordingly, management determined that this
control deficiency represents a material weakness. |
114
| D. |
|
The Company did not maintain effective controls over the validity,
accuracy and completeness over revenue recognition and deferred
revenue from preneed and atneed funeral and cemetery contracts.
Specifically, the Company did not maintain effective controls over
the proper review of preneed and atneed funeral and cemetery
contracts by location management, the proper review by location
management for customer and authorized Company signatures and
proper completion of customer contracts. This control deficiency
did not result in an adjustment to the 2004 annual or interim
financial statements. However, this control deficiency could
result in a misstatement of revenues, accounts receivable and
deferred revenue that would result in a material misstatement to
annual or interim financial statements that would not be prevented
or detected. Accordingly, management determined that this
control deficiency represents a material weakness. |
| |
| E. |
|
The Company did not maintain effective controls over the use and
control of pre-numbered manual contracts, and the accuracy of
information pertaining to manual contracts entered into the
Company’s point-of-sale system over revenue and deferred revenue
from preneed and atneed funeral and cemetery contracts.
Specifically, manual contracts are not consistently controlled to
ensure that revenues related to preneed and atneed funeral and
cemetery manual contracts are reflected in the financial
statements in the appropriate time period. Additionally, sales
detail reports for atneed funeral and cemetery and preneed
cemetery manual contracts are not consistently being reviewed by
location personnel to ensure agreement between manual contract
information and information entered into the point-of-sale system.
This control deficiency did not result in an adjustment to the
2004 annual or interim financial statements. However, this control
deficiency could result in a misstatement of revenue, accounts
receivable and deferred revenues that would result in a material
misstatement to annual or interim financial statements that would
not be prevented or detected. Accordingly, management determined
that this control deficiency represents a material weakness. |
| |
| F. |
|
The Company did not maintain effective controls over the accuracy,
completeness and safeguarding of cash receipts. Specifically,
individual cash receipt documentation is not consistently prepared
for all cash or check payments made by the customer, daily
reconciliations of cash are not consistently reviewed by location
personnel, and customer payments are not consistently secured at
all times prior to deposit. This control deficiency did not result
in an adjustment to the 2004 annual or interim financial
statements. However, this control deficiency could result in
misappropriation of Company assets and a misstatement of cash and
accounts receivable that would result in a material misstatement
to annual or interim financial statements that would not be
prevented or detected. Accordingly, management determined that
this control deficiency represents a material weakness. |
| |
| G. |
|
The Company did not maintain effective controls over the approval
of adjustments to and review of collectability of atneed funeral
and cemetery accounts receivable. Client families commonly request
changes to items or services after the initial contract has been
signed which requires adjustments to their contract and requires
an adjustment to revenue and accounts receivable. The Company did
not have effective controls over proper review by location
management of adjustments to the customer revenue and accounts
receivable related to such items or services or proper review of
accounts receivable balances for reasonableness or collectability.
Additionally, the Company did not have effective controls over
review by location management of the outstanding account balances
at period-end to ensure appropriate follow up is performed or
write-off of account balance is performed. This control deficiency
did not result in an adjustment to the 2004 annual or interim
financial statements. However, this control deficiency could
result in a misstatement of accounts receivable and revenues that
would result in a material misstatement to annual or interim
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency represents
a material weakness. |
| |
| H. |
|
The Company did not maintain effective controls over the review of
cash disbursements at the funeral and cemetery locations.
Specifically, the Company did not maintain effective controls over
the review by location management of disbursements made at those
locations and by the corporate office in Houston on behalf of such
locations in order to verify that all expenditures are accurate
and reasonable. This control deficiency did not result in an
adjustment to the 2004 annual or interim financial statements.
However, this control deficiency could result in expenditures
being made that are erroneous or not for legitimate business
purposes or could result in a misstatement of accounts payable or
expenses that would result in a material misstatement to annual or
interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control deficiency
represents a material weakness. |
| |
| I. |
|
The Company did not maintain effective controls over the
existence, completeness and accuracy of merchandise inventory.
Specifically, the Company did not maintain effective controls over
physical inventory counts at the funeral and cemetery locations.
Inventory count sheets were not signed by individuals who
performed and verified the counts. Also, in some instances,
inventory counts were not conducted on a timely basis or the
inventory counts by location personnel were not accurate. This
control deficiency did not result in an adjustment to the 2004
annual or interim financial statements. However, this control
deficiency could result in the misstatement of inventory and cost
of sales that would result in a material misstatement to annual or
interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control deficiency
represents a material weakness. |
115
| J. |
|
The Company did not maintain effective controls over the
accounting for capitalized covenant-not-to-compete agreements and the
recording of asset impairments and divestitures related to the sale
or disposition of locations in accordance with generally accepted
accounting principles. Specifically, the Company failed to write off
certain previously capitalized covenant-not-to-compete assets
resulting in a misstatement of the gain or loss upon exiting locations
and the ongoing amortization expense. Additionally, the Company did
not maintain effective controls over the impairment or disposition of
assets related to the sale of certain locations in the proper period. This
control deficiency resulted in the restatement of the Company’s
2004, 2003 and 2002 consolidated financial statements as well as
its quarterly financial data for all quarters of both 2004 and
2003. Furthermore, this control deficiency could result in a
misstatement of gains and impairment (losses) on dispositions,
property, plant, and equipment, and deferred charges and other assets
that would result in a
material misstatement to annual or interim financial statements
that would not be prevented or detected. Accordingly, management
determined that this control deficiency represents a material weakness. |
| |
| K. |
|
The Company did not maintain effective controls over its
information technology program change control procedures with
respect to the Company’s point-of-sale system (HMIS) and
associated interfaces. Specifically, the Company did not maintain
effective controls to assess the impact of HMIS program changes to
related interfaces and to adequately test the accuracy and
performance of such program changes. This control deficiency
contributed to the material weakness described in (B) and (L)
herein.
Additionally, this control deficiency could result in the misstatement
of funeral revenues and of assets and liabilities associated with
preneed funeral activities that would result in a material
misstatement to annual or interim financial statements that would not be prevented or
detected. Accordingly, management determined that this control
deficiency represents a material weakness. |
| |
| L. |
|
The Company did not maintain effective controls over the
accuracy of preneed funeral trust income recorded upon the maturity
of certain preneed funeral contracts. Specifically, the Company did
not maintain effective controls over the posting of automated journal
entries to the general ledger resulting in the entries being posted
to the incorrect account. This control
deficiency resulted in the restatement of the Company’s 2004
consolidated financial statements including an adjustment to the fourth quarter
2004 financial data. Additionally, this control deficiency could
result in the misstatement of funeral revenue and of assets and
liabilities associated with preneed funeral activities that would
result in a material misstatement to annual or interim financial
statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
represents a material weakness. |
| |
| M. |
|
The Company did not maintain effective controls over the
communication and evaluation by the legal department of information
related to legal claims. Specifically, the legal department did not communicate
information relevant to the complete and accurate recording of legal
accruals in the proper period in accordance with
generally accepted accounting principles. This control deficiency
did not result in an adjustment to the Company’s 2004 annual or interim financial statements. However, this control deficiency did
result in an adjustment detected by the auditor to the second quarter
2005 condensed consolidated financial statements. Additionally, this control deficiency could result in
the misstatement of general and administrative expenses and accrued
liabilities that would result in a misstatement to annual or interim
financial statements that would not be prevented or detected.
Accordingly, management determined that this control deficiency
represents a material weakness. |
Because of these material weaknesses, we have concluded that the Company did not maintain
effective internal control over financial reporting as of December 31, 2004 based on the criteria
in the Internal Control — Integrated Framework issued by the COSO.
Management had previously concluded that the Company did not maintain effective internal
control over financial reporting as of December 31, 2004 because of the material weaknesses
described in (A) — (I) above. In connection with the restatement of the Company’s financial
statements described in the seventh paragraph of note two to the consolidated financial statements, management has
determined that the restatement was an additional effect of the
material weaknesses described in (B) above. Additionally, in
connection with the restatement of the Company’s consolidated
financial statements described in the eighth paragraph of note two to the
consolidated financial statements, management has determined that the
material weaknesses described in (J) — (L) above also
existed as of December 31, 2004. Further, management has also determined that the
material weakness described in (M) above existed as of December 31, 2004.
Accordingly, management has restated this report on internal control over financial
reporting to include these material weaknesses.
Management’s assessment of the effectiveness of internal control over financial reporting as
of December 31, 2004 has been audited by PricewaterhouseCoopers LLP, an independent registered
public accounting firm, as stated in their report which appears herein.
Plan for Remediation
Management, with the oversight of the Audit Committee, has been aggressively addressing all of
the above material weaknesses in our internal control over financial reporting and disclosure
controls and procedures and is committed to effectively remediating them as expeditiously as
possible. We have devoted significant time and resources to the remediation efforts. Formal
training has been implemented at both the funeral and cemetery locations to train the appropriate
personnel on the responsibilities and importance of each location performing the controls to comply
with provisions of the Sarbanes-Oxley Act. Our three market support centers help facilitate the
execution of this remediation effort, and serve as liaisons between field and corporate offices for
reinforcement and implementation of policies and procedures.
We have also implemented a new point-of-sale information system that includes the following
enhancements and improvements for controls related to both preneed and atneed activities in our
funeral home and cemetery locations.
116
| |
• |
|
Improved functionality to help determine the proper accounting period for contracts. |
| |
| |
• |
|
A mechanism to ensure that certain cemetery revenue recognition reflects only those transactions in the
proper accounting period. |
| |
| |
• |
|
Improved security and system access rules to strengthen segregation of duties. |
| |
| |
• |
|
Automated atneed funeral and cemetery contract input. |
| |
| |
• |
|
Transfer functionality for contracts going from preneed to atneed to ensure cancellation of preneed contracts. |
We previously initiated projects to reconcile our preneed backlog detailed records
to trust assets and corresponding liabilities. These reconciliation projects involved examining the
contract details for the individual preneed funeral trust contracts and undelivered cemetery
contracts in our detail accounting system records against the manual contract files in the
individual funeral homes and cemeteries. We then reconciled the adjusted detail accounting system
records to the general ledger balances and recorded any required adjustments. For the related trust
assets, we reconciled the contract detail balances to the related trustee bank statements and the
general ledger balances. The Company has completed these examination projects for the funeral
and cemetery segments. As previously reported, we have improved our disclosure controls
and procedures and internal control over financial reporting with respect to the above underlying
cemetery and funeral business processes and we have further strengthened these internal controls
and procedures in 2004 through Company-wide remediation efforts.
In early 2005 a shared responsibility team was formed, with personnel from funeral and
cemetery locations, the market support centers, and corporate headquarters. The goal of this team
is to review the existing internal control structure and financial reporting processes at the
funeral and cemetery locations and make recommendations to improve the design and operating
effectiveness of those controls and processes in 2005. We currently rely on processes that are
heavily dependent on manual and detective controls and on human intervention. Many of the funeral
and cemetery location controls are widely dispersed across the Company’s network of approximately
1,600 locations making it more difficult to achieve consistent application and operation of
controls. In the short term, we have designed and are in the process of implementing the following
additional redundant, compensating, and monitoring controls at a consolidated level:
| |
• |
|
Review of preneed and atneed funeral and cemetery contracts to verify location management approval. |
| |
| |
• |
|
Review of manual contract control logs at funeral and cemetery locations to verify completeness of contracts issued. |
| |
| |
• |
|
Review of manual contracts to verify the accuracy of data entered into the point-of-sale system. |
| |
| |
• |
|
Review of daily cash receipts and cash report reconciliations at the funeral and cemetery locations to verify
accuracy and performance. |
| |
| |
• |
|
Review of revenue recognition transactions at cemetery locations to verify accuracy of the delivery and performance
of cemetery goods and services which were previously sold on a preneed basis. |
| |
| |
• |
|
Verification of approvals of accounts receivable adjustments at funeral and cemetery locations. |
| |
| |
• |
|
Verification of reviews of cash disbursement reports at funeral and cemetery locations. |
These additional controls and procedures will provide us with greater visibility
over the performance of the controls in the funeral and cemetery locations. We will continue with
formal training at the funeral and cemetery locations and continually assess the effectiveness of
controls. Additionally, we are also planning for longer-term improvements in key business processes
with an emphasis on preventative controls (versus detective controls), and system-based controls
(versus manual controls) wherever possible.
Changes in Internal Control Over Financial Reporting
Except as otherwise discussed herein, there have been no changes in the Company’s internal
control over financial reporting during the most recently completed fiscal quarter, that have
materially affected, or are reasonably likely to materially affect, the Company’s internal control
over financial reporting.
117
ITEM 9B. Other Information
None.
PART III
ITEM 10. Directors and Executive Officers of the Company
ITEM 11. Executive Compensation
ITEM 12. Security Ownership of Certain Beneficial Owners and Management and Related
Stockholder Matters
ITEM 13. Certain Relationships and Related Transactions
ITEM 14. Principal Accountant Fees and Services
Information called for by PART III (Items 10, 11, 12, 13 and 14) has been omitted as the
Company intends to file with the Commission not later than 120 days after the close of its fiscal
year a definitive Proxy Statement pursuant to Regulation 14A. Such information is set forth in such
Proxy Statement (i) with respect to Item 10 under the captions “Proxy Voting: Questions and
Answers,” “Election of Directors,” “Other Matters — Section 16(a) Beneficial Ownership Reporting
Compliance” and “Report of the Audit Committee,” (ii) with respect to Items 11 and 13 under the
captions “Election of Directors — Director Compensation,” “Certain Information with Respect to
Officers and Directors,” “Compensation Committee Interlocks and Insider Participation” and “Certain
Transactions” and (iii) with respect to Item 12 under the caption “Voting Securities and Principal
Holders:, and (iv) with respect of Item 14 under the caption “Proposal to Approve the Selection of
Independent Accountants — Audit Fees and All Other Fees”. The information as specified in the
preceding sentence is incorporated herein by reference; provided however, notwithstanding anything
set forth in this Form 10-K/A (Amendment No. 2), the information under the captions “Compensation Committee Report on
Executive Compensation” and “Performance Graph” in such Proxy Statement, and the information in the
paragraphs under the caption “Report of the Audit Committee” in such Proxy Statement, are not
incorporated by reference into this Form 10-K/A (Amendment
No. 2).
The information regarding the Company’s executive officers called for by Item 401 of
Regulation S-K has been included in PART I of this report.
The information regarding the Company’s equity compensation plan information called for by
Item 201(d) of Regulation S-K is set forth below.
Equity Compensation Plan Information at December 31, 2004:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of securities remaining |
| |
|
Number of securities to be |
|
Weighted-average |
|
available for future issuance |
| |
|
issued upon exercise of |
|
exercise price of |
|
under equity compensation |
| |
|
outstanding options, |
|
outstanding options, |
|
plans (excluding securities |
| |
|
warrants and rights |
|
warrants and rights |
|
reflected in column (a)) |
| Plan Category |
|
(a) |
|
(b) |
|
(c) |
Equity compensation
plans approved by
security holders |
|
|
24,285,923 |
|
|
|
11.38 |
|
|
|
1,619,501 |
|
Equity compensation
plans not approved
by security
holders (1) |
|
|
3,813,393 |
|
|
|
5.68 |
|
|
|
4,310,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
28,099,316 |
|
|
|
10.60 |
|
|
|
5,929,747 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Includes options outstanding under the Equity Corporation International 1994 Long-Term Incentive Plan
which became exercisable to acquire Company common stock
when the Company acquired Equity Corporation
International in January 1999. The outstanding options
cover an aggregate of 252,237 shares at a
weighted-average exercise price of $24.94 per share. No
shares of Company common stock are available for any
future grants under this plan. |
| |
| |
|
Also includes options outstanding under the 1996
Nonqualified Incentive Plan under which nonqualified
stock options may be granted to employees who are not
officers or directors. The exercise price of an option
may not be less than the fair market value of the
underlying stock on the date of grant and no option may
have a term of more than ten years. The terms of the
options, including vesting, are set by a committee
appointed by the Board of Directors. The Board of
Directors may amend, terminate or suspend the plan in
its discretion. The Company has 3,561,156 total options
outstanding under the 1996 Non-qualified Incentive Plan.
The Company has options available for future issuance
under the 1996 Nonqualified Incentive Plan of |
118
|
|
|
| |
|
2,453,119. See note thirteen to the consolidated financial
statements in Item 8 of this Form 10-K/A (Amendment No. 2) for a further
description of 1996 Nonqualified Incentive Plan. These
plans have not been submitted for shareholder approval. |
| |
| (2) |
|
Includes an estimated 1,857,127 shares available under
the Employee Stock Purchase Plan. Under such plan, a
dollar value of shares (not an amount of shares) are
registered. The above estimate was determined by
dividing (i) the remaining unissued dollar value of
registered shares at December 31, 2004, which was
$13,835,596, by (ii) the closing price of $7.45 per
share of common stock at December 31, 2004. |
The Employee Stock Purchase Plan enables Company employees in North America to invest via
payroll deductions up to $500 (or $600 Canadian) per month in Company common stock. Contributions
are utilized to purchase the stock in the open market. With respect to Canadian employees who meet
certain requirements, the Company will provide annually a match equal to 25% of the amount of the
employee’s contribution subject to a maximum contribution per participant of $1,800 Canadian. This
plan has not been submitted for shareholder approval.
PART IV
ITEM 15. Exhibits and Financial Statement Schedules
(a)(1)-(2) Financial Statements and Schedule:
The financial statements and schedule are listed in the accompanying Index to Financial Statements
and Related Schedule on page 52 of this report.
(3) Exhibits:
The
exhibits listed on the accompanying Exhibit Index on pages 122-123 are filed as part of this
report.
(b) Included in (a) above.
(c) Included in (a) above.
119
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant, Service Corporation International, has duly caused this report to be signed on its
behalf by the undersigned, thereunto duly authorized.
| |
|
|
|
|
| |
SERVICE CORPORATION INTERNATIONAL
|
|
| |
By: |
/s/ JAMES M. SHELGER
|
|
| |
|
(James M. Shelger, |
|
| |
|
Senior Vice President, General
Counsel and Secretary) |
|
| |
Dated:
October 27, 2005
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed below by the following persons on behalf of the Registrant and in the capacities and on the
date indicated.
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
R. L. WALTRIP*
|
|
Chairman of the Board
|
|
October 27, 2005 |
| |
|
|
|
|
(R. L. Waltrip) |
|
|
|
|
|
|
|
|
|
THOMAS L. RYAN*
(Thomas L. Ryan)
|
|
President, Chief Executive Officer
and Director (Principal Executive
Officer)
|
|
October 27, 2005
|
| (Jeffrey E. Curtiss) |
|
Senior Vice President Chief
Financial Officer and Treasurer
(Principal Financial Officer)
|
|
October 27, 2005
|
ERIC D. TANZBERGER*
|
|
Vice President Corporate Controller
|
|
October 27, 2005 |
| |
|
|
|
|
(Eric D. Tanzberger) |
|
|
|
|
|
|
|
|
|
ALAN R. BUCKWALTER, III*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(Alan R. Buckwalter, III) |
|
|
|
|
|
|
|
|
|
ANTHONY L. COELHO*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(Anthony L. Coelho) |
|
|
|
|
|
|
|
|
|
JACK FINKELSTEIN*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(Jack Finkelstein) |
|
|
|
|
|
|
|
|
|
A. J. FOYT, JR.*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(A. J. Foyt, Jr.) |
|
|
|
|
|
|
|
|
|
S. MALCOLM GILLIS*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(S. Malcolm Gillis) |
|
|
|
|
|
|
|
|
|
JAMES H. GREER*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(James H. Greer) |
|
|
|
|
|
|
|
|
|
VICTOR L. LUND*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(Victor L. Lund) |
|
|
|
|
120
| |
|
|
|
|
| Signature |
|
Title |
|
Date |
| |
JOHN W. MECOM, JR.*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(John W. Mecom, Jr.) |
|
|
|
|
|
|
|
|
|
CLIFTON H. MORRIS, JR.*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(Clifton H. Morris, Jr.) |
|
|
|
|
|
|
|
|
|
W. BLAIR WALTRIP*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(W. Blair Waltrip) |
|
|
|
|
|
|
|
|
|
EDWARD E. WILLIAMS*
|
|
Director
|
|
October 27, 2005 |
| |
|
|
|
|
(Edward E. Williams) |
|
|
|
|
|
|
|
|
|
*By /s/ JAMES M. SHELGER |
|
|
|
|
| |
|
|
|
|
(James M. Shelger, as
Attorney-In-Fact For
each of the Persons
indicated)
|
|
|
|
October 27, 2005 |
121
EXHIBIT INDEX
PURSUANT TO ITEM 601 OF REG. S-K
| |
|
|
|
|
| Exhibit |
|
|
|
|
| Number |
|
|
|
Description |
3.1
|
|
—
|
|
Restated Articles of Incorporation. (Incorporated by reference to Exhibit 3.1 to Registration
Statement No. 333-10867 on Form S-3). |
|
|
|
|
|
3.2
|
|
—
|
|
Articles of Amendment to Restated Articles of Incorporation. (Incorporated by reference to
Exhibit 3.1 to Form 10-Q for the fiscal quarter ended September 30, 1996). |
|
|
|
|
|
3.3
|
|
—
|
|
Statement of Resolution Establishing Series of Shares of Series D Junior Participating Preferred
Stock, dated July 27, 1998. (Incorporated by reference to Exhibit 3.2 to Form 10-Q for the fiscal
quarter ended June 30, 1998). |
|
|
|
|
|
3.4
|
|
—
|
|
Bylaws, as amended. (Incorporated by reference to Exhibit 3.1 to Form 10-Q for the fiscal quarter
ended June 30, 2004). |
|
|
|
|
|
4.1
|
|
—
|
|
Rights Agreement dated as of May 14, 1998 between the Company and Harris Trust and Savings Bank.
(Incorporated by reference to Exhibit 99.1 to Form 8-K dated May 14, 1998). |
|
|
|
|
|
4.2
|
|
—
|
|
Agreement Appointing a Successor Rights Agent Under Rights Agreement, dated June 1, 1999, by the
Company, Harris Trust and Savings Bank and The Bank of New York. (Incorporated by reference to
Exhibit 4.1 to Form 10-Q for the fiscal quarter ended June 30, 1999). |
|
|
|
|
|
10.1
|
|
—
|
|
Retirement Plan For Non-Employee Directors. (Incorporated by reference to Exhibit 10.1 to Form
10-K for the fiscal year ended December 31, 1991). |
|
|
|
|
|
10.2
|
|
—
|
|
First Amendment to Retirement Plan For Non-Employee Directors. (Incorporated by reference to
Exhibit 10.2 to Form 10-K for the fiscal year ended December 31, 2000). |
|
|
|
|
|
10.3
|
|
—
|
|
Agreement dated May 14, 1992 between the Company, R. L. Waltrip and related parties relating to
life insurance. (Incorporated by reference to Exhibit 10.4 to Form 10-K for the fiscal year ended
December 31, 1992). |
|
|
|
|
|
10.4
|
|
—
|
|
Employment Agreement, dated January 1, 1998, between SCI Executive Services, Inc. and R. L.
Waltrip. (Incorporated by reference to Exhibit 10.3 to Form 10-K for the fiscal year ended
December 31, 1998). |
|
|
|
|
|
10.5
|
|
—
|
|
First Amendment to Employment Agreement, dated February 25, 2003, between SCI Executive Services,
Inc. and R. L. Waltrip. (Incorporated by reference to Exhibit 10.5 to Form 10-K for the fiscal
year ended December 31, 2002). |
|
|
|
|
|
10.6
|
|
—
|
|
Non-Competition Agreement and Amendment to Employment Agreement, dated November 11, 1991, among
the Company, R. L. Waltrip and Claire Waltrip. (Incorporated by reference to Exhibit 10.9 to Form
10-K for the fiscal year ended December 31, 1992). |
|
|
|
|
|
10.7
|
|
—
|
|
Separation and Release Agreement, dated January 18, 2000, among the Company, SCI Executive
Services, Inc. and W. Blair Waltrip. (Incorporated by reference to Exhibit 10.6 to Form 10-K for
the fiscal year ended December 31, 1999). |
|
|
|
|
|
10.8
|
|
—
|
|
Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services,
Inc. and B. D. Hunter. (Incorporated by reference to Exhibit 10.8 to Form 10-K for the fiscal
year ended December 31, 2003). |
|
|
|
|
|
10.9
|
|
—
|
|
Release, Consultative and Noncompetition Agreement by SCI Funeral & Cemetery Purchasing
Cooperative, Inc., SCI Executive Services, Inc., Huntco International, Inc. and B. D. Hunter,
dated February 9, 2005. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal
year ended December 31, 2004). |
|
|
|
|
|
10.10
|
|
—
|
|
Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services,
Inc. and Thomas L. Ryan. (Incorporated by reference to Exhibit 10.9 to Form 10-K for the fiscal
year ended December 31, 2003). |
|
|
|
|
|
10.11
|
|
—
|
|
Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services,
Inc. and Michael R. Webb. (Incorporated by reference to Exhibit 10.10 to Form 10-K for the fiscal
year ended December 31, 2003). |
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|
|
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10.12
|
|
—
|
|
Employment and Noncompetition Agreement, dated January 1, 2004, between SCI Executive Services,
Inc. and Jeffrey E. Curtiss. (Incorporated by reference to Exhibit 10.11 to Form 10-K for the
fiscal year ended December 31, 2003). |
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10.13
|
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—
|
|
Form of Employment and Noncompetition Agreement pertaining to non-senior officers. (Incorporated
by reference to Exhibit 10.12 to Form 10-K for the fiscal year ended December 31, 2003). |
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10.14
|
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—
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1993 Long-Term Incentive Stock Option Plan. (Incorporated by reference to Exhibit 4.12 to
Registration Statement No. 333-00179 on Form S-8). |
| |
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| Exhibit |
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| Number |
|
|
|
Description |
10.43
|
|
—
|
|
Amendment No. 7 to the Employee Stock Purchase Plan. (Incorporated by reference to Exhibit 10.45
to Form 10-K for the fiscal year ended December 31, 2002). |
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10.44
|
|
—
|
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Agreement between Merrill Lynch Canada Inc. and Service Corporation International. (Incorporated
by reference to Exhibit 28.5 to Post-Effective Amendment No. 1 to Registration Statement No.
33-8907 on Form S-8). |
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|
|
|
|
10.45
|
|
—
|
|
First Amendment to Agreement between Merrill Lynch Canada Inc. and Service Corporation
International. (Incorporated by reference to Exhibit 4.2 to Current Report on Form 8-K dated
December 21, 1993). |
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|
|
|
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10.46
|
|
—
|
|
Employee Stock Purchase Plan Administration Agreement dated July 25, 2001 between Service
Corporation International (Canada) Limited and Fastrak Systems Inc. (Incorporated by reference to
Exhibit 10.48 to Form 10-K for the fiscal year ended December 31, 2002). |
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|
|
|
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10.47
|
|
—
|
|
Form of Indemnification Agreement for officers and directors. (Incorporated by reference to
Exhibit 10.1 to Form 10-Q for the quarterly period ended September 30, 2004). |
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|
|
|
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10.48
|
|
—
|
|
Amended and Restated Revolving Credit Agreement dated as of August 11, 2004 among the Company, as
Borrower, the lenders party thereto, JPMorgan Chase Bank, as Administrative Agent, Bank of
America, N.A., as Syndication Agent, and Calyon New York Branch, Southwest Bank of Texas, N.A.
and Merrill Lynch Capital Corporation, as Co-Documentation Agents, J.P. Morgan Securities, Inc.,
and Banc of America Securities LLC, as Joint Bookrunners and Joint Lead Arrangers. (Incorporated
by reference to Exhibit 99.6 to Form 10-Q for the fiscal quarter ended June 30, 2004). |
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|
|
12.1
|
|
—
|
|
Ratio of Earnings to Fixed Charges. |
|
|
|
|
|
21.1
|
|
—
|
|
Subsidiaries of the Company. (Incorporated by reference to Exhibit 21.1 to Form 10-K for the year
ended December 31, 2004). |
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|
|
|
|
23.1
|
|
—
|
|
Consent of Independent Registered Public Accounting Firm (PricewaterhouseCoopers LLP). |
|
|
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|
|
24.1
|
|
—
|
|
Powers of Attorney. (Incorporated by reference to Exhibit 24.1 to Form 10-K for the year ended
December 31, 2004). |
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|
|
|
|
31.1
|
|
—
|
|
Certification of Thomas L. Ryan as Chief Executive Officer in satisfaction of Section 302 of the
Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
31.2
|
|
—
|
|
Certification of Jeffrey E. Curtiss as Principal Financial Officer in satisfaction of Section 302
of the Sarbanes-Oxley Act of 2002. |
|
|
|
|
|
32.1
|
|
—
|
|
Certification of Periodic Financial Reports by Thomas L. Ryan as Chief Executive Officer in
satisfaction of Section 906 of the Sarbanes- Oxley Act of 2002. |
|
|
|
|
|
32.2
|
|
—
|
|
Certification of Periodic Financial Reports by Jeffrey E. Curtiss as Principal Financial Officer
in satisfaction of Section 906 of the Sarbanes-Oxley Act of 2002. |
In the above list, the management contracts or compensatory plans or arrangements are set
forth in Exhibits 10.1 through 10.47.
Pursuant to Item 601(b)(4) of Regulation S-K, there are not filed as exhibits to this report
certain instruments with respect to long-term debt under which the total amount of securities
authorized thereunder does not exceed 10 percent of the total assets of Registrant and its
subsidiaries on a consolidated basis. Registrant agrees to furnish a copy of any such instrument to
the Commission upon request.