SERVICE CORPORATION INTERNATIONAL - 10-K Annual Report

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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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FORM 10-K
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[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE FISCAL YEAR ENDED DECEMBER 31, 2001

OR

[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
SECURITIES EXCHANGE ACT OF 1934

FOR THE TRANSITION PERIOD FROM TO

COMMISSION FILE NUMBER 1-6402-1

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SERVICE CORPORATION INTERNATIONAL
(Exact name of registrant as specified in its charter)

TEXAS 74-1488375
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)

1929 ALLEN PARKWAY 77019
HOUSTON, TEXAS (Zip Code)
(Address of principal executive offices)

REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE:
713/522-5141

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
NONE

Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes [X] No [ ]

Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. [ ]

The aggregate market value of the common, stock held by non-affiliates of
the registrant (assuming that the registrant's only affiliates are its officers
and directors) is $1,581,052,618 based upon a closing market price of $5.47 on
March 21, 2002 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 21, 2002 was 293,156,506 (net of treasury shares).

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the registrant's Proxy Statement in connection with its 2002
Annual Meeting of Shareholders (Part III)

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SERVICE CORPORATION INTERNATIONAL

INDEX

1

PART I

ITEM 1. BUSINESS

(DOLLARS IN THOUSANDS)

Service Corporation International is the largest funeral and cemetery
company in the world. The terms SCI or the Company includes the registrant and
its subsidiaries, unless the context indicates otherwise. As of December 31,
2001, the Company operated 3,099 funeral service locations, 475 cemeteries and
177 crematoria located in 11 countries. The Company also has minority interest
investments in funeral and cemetery operations in three countries outside of
North America. As of December 31, 2001, the Company's North America operations
represented approximately 71% of the Company's consolidated revenues, 78% of
consolidated operating income before non-recurring items and 53% of the
Company's total operating locations. For financial information about the
Company's reportable segments, see note thirteen to the consolidated financial
statements in Item 8 of this Form 10-K. For further information about the
Company's non-recurring financial items for all periods presented in this Form
10-K, see the Non-recurring Items and Definitions and Descriptions of Pro Forma
Financial Information section included in Item 7 of this Form 10-K.

The Company's operations consist of funeral service locations, cemeteries,
crematoria and related businesses. The Company's funeral service locations
provide all professional services related to funerals, including the use of
funeral facilities and motor vehicles. Funeral service locations sell caskets,
coffins, burial vaults, cremation receptacles, flowers, burial garments and
other ancillary products and services. The Company's cemeteries sell interment
rights associated with cemetery property (including mausoleum spaces, lots and
lawn crypts) and cemetery merchandise (including stone and bronze memorials,
burial vaults, caskets and cremation memorialization products). The Company's
cemeteries also perform interment services and provide management and
maintenance of cemetery grounds. Certain cemeteries operate crematoria and
certain cemeteries contain gardens specifically for the purpose of cremation
memorialization. The Company also owns 188 funeral service/cemetery combination
locations and 46 flower shops engaged principally in the design and sale of
funeral floral arrangements.

The Company was incorporated in Texas in July of 1962. The Company's
principal corporate offices are located at 1929 Allen Parkway, Houston, Texas
77019 and its telephone number is (713) 522-5141.

FUNERAL AND CEMETERY OPERATIONS

The funeral and cemetery operations consist of the Company's funeral
service locations, cemeteries, crematoria and related businesses. As of December
31, 2001, the operations are organized into a North America division covering
the United States and Canada, a European division responsible for all operations
in Europe, and an Other Foreign division relating to operations managed in the
Pacific Rim and South America. Each division is under the direction of
divisional executive management with substantial industry experience. Local
funeral service location and cemetery managers, under the direction of the
divisional management, receive support and resources from the Company's
headquarters in Houston, Texas and have substantial autonomy with respect to the
manner in which services are conducted.

The majority of the Company's funeral service locations and cemeteries are
managed in groups called "clusters". Clusters are geographical groups of funeral
service locations and cemeteries that lower their individual overhead costs by
sharing common resources such as operating personnel, preparation services,
clerical and accounting staff, limousines, hearses and preneed sales activities.
Personnel costs, the largest operating expense for the Company, is the cost
component most beneficially affected by clustering. The sharing of employees, as
well as the other costs mentioned, allows the Company to more efficiently
utilize its operating facilities due to the traditional fluctuation in the
number of funeral services and cemetery interments performed in a given period.

The Company has multiple funeral service locations and cemeteries in a
number of metropolitan areas. Within individual metropolitan areas, the funeral
service locations and cemeteries operate under various names because most
operations were acquired as existing businesses. Some of the Company's funeral
service

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locations in its international operations operate under certain brand names
specific for a general area or country. The Company has branded its funeral
operations in North America under the name Dignity Memorial(TM). While this
process is intended to emphasize the Company's seamless national network of
funeral service locations and cemeteries in North America, the original names
associated with acquired operations with their inherent goodwill and heritage
will generally remain the same.

FUNERAL SERVICE LOCATIONS

The Company's 3,099 funeral service locations provide all professional
services relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral service locations sell caskets, coffins, burial vaults,
cremation receptacles, flowers, burial garments, and other ancillary products
and services. The Company's funeral service locations generally experience a
greater demand for their services in the winter months primarily related to
higher incidents of deaths from pneumonia and influenza.

In addition to selling its products and services to client families at the
time of need, the Company also sells prearranged funeral services in most of its
service markets. Funeral prearrangement is a means through which a customer
contractually agrees to the terms of a funeral to be performed in the future.
All or a portion of the funds collected from prearranged funeral contracts are
placed in trust accounts, pursuant to applicable law, or are used to pay
premiums on life insurance policies from third party insurers. In certain
situations pursuant to applicable laws, the Company will post a surety bond as
financial assurance for a certain amount of the preneed funeral contract in lieu
of placing certain funds in trust accounts. See the Financial Assurances section
included in Financial Condition, Liquidity and Capital Resources in Item 7 of
this Form 10-K for further details on the Company's practice of posting such
surety bonds. At December 31, 2001, the Company's Deferred prearranged funeral
contract revenues amounted to approximately $4.6 billion. For additional
information regarding prearranged funeral activities, see the Prearranged
Funeral and Cemetery Activities section in Financial Condition, Liquidity and
Capital Resources in Item 7 and notes two, three and four to the consolidated
financial statements in Item 8 of this Form 10-K.

CEMETERIES

The Company's cemeteries sell interment rights associated with cemetery
property such as mausoleum spaces, lots and lawn crypts, and sells cemetery
merchandise such as stone and bronze memorials, burial vaults, caskets and
cremation memorialization products. The Company's cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries operate crematoria and certain cemeteries contain gardens
specifically for the purpose of cremation memorialization.

Cemetery sales are often made on a preneed basis pursuant to installment
contracts providing for monthly payments. A portion of the proceeds from
cemetery contracts is generally required by law to be paid into perpetual care
trust funds. Earnings from perpetual care trust funds are used to defray the
maintenance costs of cemeteries. Additionally, all or a portion of the proceeds
from the sale of preneed cemetery merchandise and services may be required by
law to be paid into merchandise and services trusts until the merchandise is
purchased or the service is provided. In certain situations pursuant to
applicable laws, the Company will post a surety bond as financial assurance for
a certain amount of the preneed cemetery contract in lieu of placing certain
funds into trust accounts. See the Financial Assurances section included in
Financial Condition, Liquidity and Capital Resources in Item 7 of this Form 10-K
for further details on the Company's practice of posting such surety bonds. At
December 31, 2001, the Company's Deferred preneed cemetery contract revenue
amounted to approximately $1.8 billion. For additional information regarding
cemetery preneed activities, see the Prearranged Funeral and Cemetery Activities
section in Financial Condition, Liquidity and Capital Resources in Item 7 and
notes two, three and five to the consolidated financial statements in Item 8 of
this Form 10-K.

COMBINED FUNERAL SERVICE LOCATIONS AND CEMETERIES

The Company currently owns 188 funeral service/cemetery combination
locations in North America in which a funeral service location is physically
located within or adjoining a Company cemetery. Combination

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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.

DEATH CARE INDUSTRY

In North America and in most international markets in which the Company
currently operates, the funeral and cemetery industry is characterized by a
large number of locally owned, independent operations. Since the Company's
inception in the 1960's, the Company had been focused on the acquisition and
consolidation of independent funeral homes and cemeteries in the very fragmented
death care industry. During the 1990's, the Company also expanded its operations
through acquisitions in Europe, Australia, South America and the Pacific Rim.

In 1999, the Company, as well as other consolidators in the death care
industry, significantly reduced the level of acquisition activity. The Company
is now focused on a series of growth initiatives designed to organically
increase revenues as well as to identify and address underperforming businesses.
During 2001, the Company completed joint ventures of its operations in
Australia, Spain and Portugal and divested of its operations in the Netherlands,
Norway and Belgium. The Company also implemented a plan in 2000 to sell over 500
funeral service locations and cemeteries in North America as going concerns or
as real estate. In February 2002, the Company announced the completion of a
joint venture transaction with its United Kingdom operations. The Company is
currently in discussions with various third parties concerning the joint
venturing of its remaining international operations and intends to operate a
core business of high quality funeral service locations and cemeteries in North
America.

To compete successfully, the Company's funeral service locations and
cemeteries must maintain good reputations and high professional standards in the
industry, as well as offer attractive products and services at competitive
prices. The Company believes it has an unparalleled network of funeral service
locations and cemeteries that offer high quality products and services at prices
that are competitive with competing funeral homes, cemeteries and retail
locations. Some of the Company's international funeral service locations operate
under certain brand names specific to a general area or country. The Company has
also branded its network of funeral service locations in North America under the
Dignity Memorial(TM) brand name. A national brand name is new and unique to the
death care industry in North America and will provide many advantages to the
Company, as discussed in more detail in the Future Revenue Growth section in
Management's Discussion and Analysis of Financial Condition and Results of
Operations in Item 7 of this Form 10-K.

In the death care industry in recent years, there has been a growing trend
in the number of cremations performed in North America as an alternative to
traditional funeral service dispositions. The west coast of the United States
and the State of Florida have the highest concentration of cremation consumers
in North America. While cremations performed by the Company in North America
typically have higher gross profit margins than traditional funeral services,
cremations usually result in lower revenue and gross profit dollars to the
Company than traditional funeral services. In North America during 2001, 37.0%
of all funeral services performed by the Company were cremation cases, compared
to 36.3% performed in 2000. The Company has expanded its cremation
memorialization products and services in several North American markets, which
has resulted in higher average sales for cremation cases compared to historical
levels. The Company also continues to expand its nationally branded cremation
service locations called National Cremation Service(TM) (NCS). NCS currently
operates in fourteen high cremation states and has plans to expand to nineteen
states by the end of 2003. The Company believes that the NCS consumer would not
have chosen traditional funeral service locations as an alternative to NCS, and
therefore is considered an incremental customer to the Company.

With the aging of the population in North America, the Company continues to
believe the death care industry possesses attractive characteristics, and the
Company is uniquely positioned, with its unparalleled network of funeral service
locations and cemeteries, to benefit from these demographic trends.

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DISCONTINUED OPERATIONS

The Company formerly owned two insurance companies a French life insurance
company (Auxia) and a U.S. life insurance company (American Memorial Life
Insurance Company or AMLIC). These insurance operations assisted in the funding
of prearranged funeral contracts sold by Company-owned or affiliated funeral
service locations. During 2000, the Company completed the sales of both
insurance companies. Accordingly, the consolidated financial statements in this
Form 10-K have been reclassified to reflect these operations as discontinued.
Operating results from Auxia have been included through August 31, 2000 and the
operating results from AMLIC have been included through September 30, 2000, the
disposition dates of the respective companies.

EMPLOYEES

At December 31, 2001, the Company employed 24,006 (15,275 in the United
States) individuals on a full time basis and 9,424 (7,543 in the United States)
individuals on a part time basis. Of the full time employees, 23,296 were in the
funeral and cemetery operations and 710 were in corporate or other overhead
activities and services. All of the Company's eligible United States employees
who so elect are covered by the Company's group health and life insurance plans.
Eligible United States employees are participants in retirement plans of the
Company or various subsidiaries, while foreign employees are covered by other
Company defined or government mandated benefit plans. Although labor disputes
are experienced from time to time, relations with employees are generally
considered favorable.

REGULATION

The Company's operations are subject to regulations, supervision and
licensing under various U.S. federal, state, local and foreign statutes,
ordinances and regulations. The Company believes that it is in substantial
compliance with the significant provisions of such statutes, ordinances and
regulations. Since 1984, the Company has operated in the United States under the
Federal Trade Commission (FTC) comprehensive trade regulation rule for the
funeral industry. The rule contains requirements for funeral industry practices,
including extensive price and other affirmative disclosures and imposes
mandatory itemization of funeral goods and services. From time to time in
connection with the Company's former strategy of growth through acquisitions,
the Company entered into consent orders with the FTC that required the Company
to dispose of certain operations in order to proceed with such acquisitions, or
limited the Company's ability to make acquisitions in specified areas. The trade
regulation rule and the various consent orders have not had a material adverse
effect on the Company's operations.

The French funeral services industry has undergone significant regulatory
change in recent years. Historically, the French funeral services industry has
been controlled, as provided by national legislation, either (i) directly by
municipalities through municipality-operated funeral establishments (Municipal
Monopoly), or (ii) indirectly by the remaining municipalities that have
contracted for funeral service activities with third party providers, such as
the Company's French funeral operations (Exclusive Municipal Authority).
Legislation was passed that has generally ended municipal control of the French
funeral service business and has allowed free competition among funeral service
providers. Under such legislation, the Exclusive Municipal Authority was
abolished in January 1996, and the Municipal Monopoly was eliminated in January
1998. Cemeteries in France are currently controlled by municipalities and
religious organizations. The Company sells cemetery merchandise such as markers
and monuments to consumers for use in these cemeteries.

ITEM 2. PROPERTIES

(DOLLARS IN THOUSANDS)

The Company's executive headquarters are located at 1929 Allen Parkway,
Houston, Texas 77019, in a 12-story office building. A wholly owned subsidiary
of the Company owns an undivided one-half interest in the building and parking
garage. The other undivided one-half interest is owned by an unrelated third
party. The Company will acquire the building at the end of the lease in July
2005 for $2,000. The property consists of

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approximately 127,000 square feet of office space and 185,000 square feet of
parking space. The Company leases all of the office space in the building for
$59 per month. The Company pays all operating expenses. One half of the rent is
paid to the wholly owned subsidiary and the other half is paid to the owners of
the remaining undivided one-half interest. The Company owns and utilizes two
additional buildings located in Houston, Texas for corporate activities
containing a total of approximately 167,000 square feet of office space.

At December 31, 2001, the Company owned approximately 64% of the real
estate and buildings used by its 3,751 funeral service locations, cemeteries and
crematoria, and 36% of such facilities are leased. In addition, the Company
leased two aircraft pursuant to cancelable operating leases. At December 31,
2001, the Company operated 12,076 vehicles, of which 23% were owned and 77% 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 ten to the consolidated financial
statements in Item 8 of this Form 10-K.

At December 31, 2001, the Company's 475 cemeteries contained a total of
approximately 30,290 acres, of which approximately 53% was developed.

The specialized nature of the Company's businesses requires that its
facilities be well-maintained and kept in good condition and management of the
Company believes that these standards are met.

ITEM 3. LEGAL PROCEEDINGS

The following discussion describes certain litigation and proceedings as of
March 21, 2002.

In Re Service Corporation International; Cause No. H-99-0280; In the United
States District Court for the Southern District of Texas, Houston Division (the
Consolidated Lawsuit). The Consolidated Lawsuit was filed in January 1999 and
includes numerous separate lawsuits that were filed in various United States
District Courts in Texas. The Consolidated Lawsuit has been certified as a class
action and names as defendants the Company and three of the Company's current or
former executive officers or directors (the Individual Defendants).

The Consolidated Lawsuit has been brought on behalf of all persons and
entities who (i) acquired shares of Company common stock in the merger of a
wholly-owned subsidiary of the Company into Equity Corporation International
(ECI); (ii) purchased shares of Company common stock in the open market during
the period from July 17, 1998 through January 26, 1999 (the Class Period); (iii)
purchased Company call options in the open market during the Class Period; (iv)
sold Company put options in the open market during the Class Period; (v) held
employee stock options in ECI that became options to purchase Company common
stock pursuant to the merger; and (vi) held Company employee stock options to
purchase Company common stock under a stock plan during the Class Period.
Excluded from the class definition categories are the Individual Defendants, the
members of their immediate families and all other persons who were directors or
executive officers of the Company or its affiliated entities at any time during
the Class Period (with one amendment by the Court to include James P. Hunter,
III as a class member). Mr. Hunter was the Chairman, President and Chief
Executive Officer of ECI at the time of its merger with a wholly-owned
subsidiary of the Company.

The plaintiffs in the Consolidated Lawsuit allege that defendants violated
federal securities laws by making materially false and misleading statements and
failing to disclose material information concerning the Company's prearranged
funeral business. The Consolidated Lawsuit seeks to recover an unspecified
amount of monetary damages. Since the litigation is in its preliminary stages
and no discovery has occurred, the Company cannot quantify its ultimate
liability, if any, for the payment of damages or predict the outcome of the
litigation. However, the Company believes that the allegations in the
Consolidated Lawsuit do not provide a basis for the recovery of damages because
the Company made all required disclosures on a timely basis. The Company intends
to aggressively defend this lawsuit. At the Court's direction, meetings were
held in 2001 between the parties and their insurers to discuss possible
resolution of the case, but no progress was made. A Motion to Dismiss the
Consolidated Lawsuit filed by the Company and the Individual Defendants is
pending before the Court.

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Several other lawsuits have been filed against the Company, the Individual
Defendants and other defendants, including, in the second and third lawsuits
listed below, the Company's independent accountants, PricewaterhouseCoopers,
LLP, in Texas state courts by former ECI shareholders, officers and directors.
These lawsuits include the following matters:

No. 32548-99-11; James P. Hunter, III, et al. v. Service Corporation
International, et al.; In the District Court of Angelina County, Texas
("Hunter" matter);

No. 2000-63917; Jack T. Hammer v. Service Corporation International,
et al.; In the 165th Judicial District Court of Harris County, Texas
("Hammer" matter);

No. 33701-01-01; Jack D. Rottman v. Service Corporation International,
et al.; In the District Court of Angelina County, Texas ("Rottman" matter);
and

No. 31820-99-2; Charles Fredrick, Individually, and as a
Representative of the Class v. Service Corp. International; In the District
Court of Angelina County, Texas.

These lawsuits allege, among other things, violations of Texas securities
law and statutory and common law fraud, and seek unspecified compensatory and
exemplary damages. Since these lawsuits are in their preliminary stages and no
discovery has occurred, the Company cannot quantify its ultimate liability, if
any, for the payment of damages or predict the outcome of these lawsuits.
However, the Company believes the allegations in these lawsuits, like those in
the Consolidated Lawsuit, do not provide a basis for the recovery of damages
because all required disclosures were made on a timely basis. The Company
intends to aggressively defend this litigation. The Company is seeking
arbitration in the Hunter, Hammer, and Rottman matters.

In the Hunter matter, the Texas state district court denied the motion to
compel arbitration filed by the Company and the Individual Defendants. This
decision is currently on appeal to the Texas Supreme Court (Cause No. 01-0650;
In re Service Corporation International, et al.). In the Hammer matter, the
Texas state district court ordered the case to arbitration.

Copies of certain pleadings in these cases are filed as exhibits to this
Form 10-K.

Certain insurance policies held by the Company to cover potential director
and officer liability may reduce cash outflows with respect to an adverse
outcome of these lawsuits. If an adverse decision in these matters exceeds the
insurance coverage or if the insurance coverage is deemed not to apply to these
matters, an adverse decision could have a material adverse effect on the
Company, its financial condition, its results of operations and its future
prospects.

Shareholder Derivative Demand; The Company received a letter dated January
14, 2002, addressed to the Board of Directors, from a law firm stating that it
represented a shareholder of the Company. The letter asserts a shareholder
derivative demand that the Company take legal action against its directors and
officers based upon alleged conduct that is the subject of:

(1) a putative class action lawsuit filed on December 19, 2001, in
Broward Country, Florida against the Company and one of its subsidiaries;

(2) a lawsuit filed against the Company by former employees of the
Company in Atlanta, Georgia; and

(3) certain events described in newspaper articles referred to in the
plaintiffs' consolidated complaint in the Consolidated Lawsuit (described
above).

The Board of Directors has responded to the letter by forming a committee
of certain independent directors to conduct an inquiry into the allegations in
the letter. The committee has retained independent counsel to assist it in its
inquiry. The letter does not seek a specified amount of legal damages. Since the
inquiry is in its preliminary stages, the Company cannot quantify its ultimate
liability, if any, for the payment of damages or predict the outcome of the
inquiry.

Joan Light, Shirley Eisenbert and Carol Prisco v. SCI Funeral Services of
Florida, Inc. d/b/a Menorah Gardens & Funeral Chapels, and Service Corporation
International; Case No. 01-21376 CA 08; In the Circuit
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Court of the 17th Judicial Circuit in and for Broward County, Florida, General
Jurisdiction Division (the Consumer Lawsuit). The Consumer Lawsuit was filed
December 19, 2001 and names the Company and a subsidiary as defendants. It is a
putative class action which has not been certified. A hearing on the Motion for
Class Certification is currently scheduled to be heard on May 28, 2002.

The Consumer Lawsuit has been brought on behalf of all persons with burial
plots or family members buried at Menorah Gardens & Funeral Chapels in Florida.
Excluded from the class definition are persons whose claims have been reduced to
judgment or have been settled as of the date of class certification.

The plaintiffs allege that defendants have failed to exercise reasonable
care in handling remains by secretly: (i) dumping remains in a wooded area; (ii)
burying remains in locations other than the ones purchased; (iii) crushing
vaults to make room for other vaults; (iv) burying remains on top of the other
or head to foot rather than side-by-side; (v) moving remains; and (vi)
co-mingling remains.

The plaintiffs in the Consumer Lawsuit allege that the above conduct
constitutes negligence, tortious interference with the handling of dead bodies,
infliction of emotional distress, and violation of industry specific state
statutes, as well as the state's Deceptive and Unfair Trade Practices Act. The
plaintiffs seek an unspecified amount of compensatory and punitive damages. They
also seek equitable/injunctive relief in the form of a permanent injunction
requiring defendants to fund a court supervised program that provides for
monitoring and studying of the cemetery and any disturbed remains to insure
their proper disposition.

Since the litigation is in its preliminary stages and discovery has just
commenced, the Company cannot quantify its ultimate liability, if any, for the
payment of damages or predict the outcome of the litigation. The Company intends
to continue its investigation and to aggressively defend itself in this lawsuit
as well as continue to cooperate with state officials in resolving the issues
presented.

In addition to the Consumer Lawsuit described above, the Florida Attorney
General and State Comptroller filed an action against the Company on March 1,
2002 styled Office of the Attorney General, Department of Legal Affairs, State
of Florida and Office of the Comptroller, Department of Banking and Finance,
State of Florida v. Service Corporation International, a Texas Corporation and
S.C.I. Funeral Services of Florida, Inc., a Florida Corporation doing business
as Menorah Gardens & Funeral Chapels; Case No. CA 02-02666AG; In the Circuit
Court of the 15th Judicial Circuit in and for Palm Beach County, Florida (the AG
Lawsuit).

The AG Lawsuit alleges similar claims as the Consumer Lawsuit including
that defendants conducted their business through the willful use of false and
deceptive representations regarding: (i) the certainty of plot location and
size; (ii) the permanence of interment; and (iii) the nature and quality of the
care that defendants intended to provide.

The AG Lawsuit alleges that defendants violated Florida statutes by
engaging in the above referenced conduct. The AG Lawsuit seeks: (i) the
appointment of a receiver or administrator to manage and correct the operations
of the defendants' Florida Menorah Gardens facilities; (ii) a full accounting of
all plots sold and offered for sale by defendants at their Florida Menorah
Gardens facilities; (iii) an award of unspecified actual damages sustained by
consumers; (iv) an award of unspecified punitive damages pursuant to Florida
statue; (v) imposition of civil penalties for each violation of the Florida
statutes; (vi) an award of attorneys' fees and costs; and (vii) a permanent
injunction against the defendants prohibiting them from (a) engaging in the
funeral and/or cemetery business at their Florida Menorah Gardens facilities;
(b) using false or misleading representations in their advertising and sales
materials directed to the State of Florida; and (c) violating the Florida
Statutes.

As with the Consumer Lawsuit, since the litigation is in its preliminary
stages, the Company cannot quantify its ultimate liability, if any, for the
payment of damages or predict the outcome of the litigation. The Company has
insurance policies which are intended to limit the Company's outflows in the
event of a decision adverse to the Company in the Consumer Lawsuit and the AG
Lawsuit. If an adverse decision in these matters exceeds the Company's insurance
coverage or if the insurance coverage is deemed not to apply to these matters,
an adverse decision could have a material adverse effect on the Company, its
financial condition, its results of operations and its future prospects.
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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 25, 2002 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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(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.

Unless otherwise indicated below, the persons listed above have been
executive officers or employees for more than five years.

Mr. Hunter was appointed Vice Chairman of the Board in January 2000. For
more than five years, Mr. Hunter has been the Chairman of Huntco, Inc., an
intermediate steel processor, and was also its Chief Executive Officer prior to
May 2000. In February 2002, Huntco, Inc., filed a petition for bankruptcy under
Chapter 11 of the United States Bankruptcy Code. Mr. Hunter has been a director
of the Company since 1986 and also served as Vice Chairman of the Board of the
Company from September 1986 to May 1989.

Mr. Curtiss joined the Company as Senior Vice President and Chief Financial
Officer in January 2000. From January 1992 until July 1999, Mr. Curtiss served
as Senior Vice President and Chief Financial Officer of Browning-Ferris
Industries, Inc., a waste services company.

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Mr. Gerner joined the Company in January 1999 in connection with the
acquisition of ECI and in March 1999 was promoted to Vice President Corporate
Controller. Before the acquisition, Mr. Gerner had been Senior Vice President
and Chief Financial Officer of ECI since March 1995. Prior thereto, Mr. Gerner
was a partner with Ernst & Young LLP.

Mr. Hundley joined the Company as Vice President Treasurer in March 2000.
Prior thereto, Mr. Hundley served for more than five years in various capacities
at Banc of America Securities, LLC, its predecessors and affiliates, including
as Managing Director.

Mr. Uthoff joined the Company as Vice President Chief Information Officer
in January 2000. From June 1994 through July 1999, Mr. Uthoff served as Vice
President-Planning & Analysis of Browning-Ferris Industries, Inc., a waste
services company.

Each officer of the Company is elected by the Board of Directors and holds
his office until his successor is elected and qualified or until his earlier
death, resignation or removal in the manner prescribed in the Bylaws of the
Company. Each officer of a subsidiary of the Company is elected by the
subsidiary's board of directors and holds his office until his successor is
elected and qualified or until his earlier death, resignation or removal in the
manner prescribed in the bylaws of the subsidiary.

PART II

ITEM 5. MARKET FOR THE COMPANY'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

The Company's common stock has been traded on the New York Stock Exchange
since May 14, 1974. On December 31, 2001, there were 7,136 holders of record of
the Company's common stock.

In October 1999, the Company suspended payment of regular quarterly cash
dividends on its outstanding common stock in order to focus on improving cash
flow and reducing existing debt. For the year ended December 31, 1999 dividends
per share were $.27.

The table below shows the Company's quarterly high and low common stock
prices for the two years ended December 31, 2001:

SRV is the New York Stock Exchange ticker symbol for the common stock of
the Company. Options in the Company's common stock are traded on the
Philadelphia Stock Exchange under the symbol SRV.

ITEM 6. SELECTED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

The following selected consolidated financial data for the years December
31, 1997 through 2001 is derived from the Company's audited consolidated
financial statements. This data should be read in conjunction with the Company's
consolidated financial statements and accompanying notes to the consolidated
financial statements included in Item 8 of this Form 10-K.

In 2000, the Company implemented Staff Accounting Bulletin No. 101,
"Revenue Recognition in Financial Statements" (SAB No. 101). See note three to
the consolidated financial statements in Item 8 of this Form 10-K for more
details on the implementation of SAB No. 101. As a result of this
implementation, the Company changed certain of its accounting policies regarding
prearranged sales activities. The Company recorded a one time, non-cash charge
of $909,315 as of January 1, 2000 representing the cumulative effect of this
accounting change. The selected consolidated financial data presented below for
2000 reflects the
10

implementation of SAB No. 101 on January 1, 2000. The selected consolidated
statement of operations data presented below for 1999 and 1998 are reported on a
pro forma basis to reflect the application of SAB No. 101 to the financial data
for those years. The selected consolidated statement of operations data
presented below for 1997 is reported on a historical basis, as it was
impractical for the Company to obtain the amounts on a pro forma basis prior to
1998. Further, results of operations have been reclassified for all periods
presented to separately reflect results of discontinued operations. See note
seventeen to the consolidated financial statements of Item 8 of this Form 10-K
for further discussion of discontinued operations.

SELECTED CONSOLIDATED FINANCIAL DATA

11

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

(DOLLARS IN THOUSANDS, EXCEPT AVERAGE SALES PRICES AND PER SHARE DATA)

INTRODUCTION

The Company is the largest provider of funeral and cemetery services in the
world. As of December 31, 2001, the Company operated 3,099 funeral service
locations, 475 cemeteries and 177 crematoria located in 11 countries. The
Company also has minority interest investments in funeral and cemetery
operations in three countries outside of North America. As of December 31, 2001,
the Company's largest markets were North America and France, which, when
combined, represented approximately 88% of the Company's consolidated revenues,
87% of consolidated income from operations before non-recurring items and 84% of
the Company's total operating locations.

As of December 31, 2001, the funeral and cemetery operations are organized
into a North America division covering the United States and Canada, a European
division responsible for all operations in Europe and an Other Foreign division
relating to operations in the Pacific Rim and South America. The majority of the
Company's operations throughout the world are managed in groups called clusters.
Clusters are geographical groups of funeral service locations and cemeteries
that lower their individual overhead costs by sharing common resources such as
operating personnel, preparation services, clerical staff, limousines, hearses
and preneed sales personnel. Personnel costs, the largest operating expense of
the Company, are the cost components most beneficially affected by clustering.
The sharing of employees, as well as the other costs mentioned, allow the
Company to more efficiently utilize its operating facilities. Additionally, the
Company implemented Central Processing Centers throughout North America to
further gain accounting and back-office efficiencies.

STRATEGIC INITIATIVES

Historically, the Company's growth has been largely attributable to
acquiring funeral and cemetery businesses. This acquisition program created the
world's largest network of funeral service locations and cemeteries. During the
mid-1990s, the funeral and cemetery acquisition market became extremely
competitive resulting in increased acquisition prices and substantially reduced
returns on invested capital. In early 1999, the Company announced plans to
significantly reduce the level of its acquisition activity and pursue other
means to create growth from its existing operations. As a result, the Company's
strategic plan in 2000 and 2001 was focused on reducing overhead costs,
increasing cash flow and reducing debt, while at the same time developing key
revenue initiatives designed to drive future organic growth in the Company's
core funeral and cemetery operations.

The Company's objectives in 2002 remain consistent with those established
in 1999 and focus on continued stabilization of the Company's capital structure
through continued cash flow improvement, asset divestitures and debt reduction.
The Company believes its goal of stabilizing its capital structure will be
achieved by having a debt to recurring operating free cash flow ratio of 10:1 or
less. Management believes this ratio is consistent with a stable "BB" credit
rating from Standard & Poor's and "Ba2" from Moody's, with general access to the
capital markets. To achieve these goals, the Company will continue to
concentrate on cost reduction initiatives and will use its total operating free
cash flow and proceeds from assets sales/joint ventures to reduce debt.
Management's incentive compensation plan is aligned with the execution of these
elements of its strategic plan.

The Company intends to operate a core business of high quality funeral
service locations and cemeteries in North America. During 2000, the Company sold
its wholly owned insurance operations in France and in the United States. During
2001, the Company completed joint ventures of its operations in Australia, Spain
and Portugal and divested of its operations in the Netherlands, Norway and
Belgium. The Company also implemented a plan in 2000 to sell over 500 funeral
service locations or cemeteries in North America. In February 2002, the Company
announced the completion of a joint venture transaction with its United Kingdom
operations. The Company is currently in discussions with various third parties
concerning the sales or joint ventures of its remaining international operations
outside of North America. The timing of the

12

completion of international and certain North America asset sales/joint ventures
to achieve the Company's core North America businesses strategy is not easily
predictable. The Company does believe the execution of asset sales/joint
ventures for certain North America and European businesses is probable in 2002,
but believes the completion of the marketing program for the disposition of its
South America operations could be of a longer duration.

Cost Reductions

The Company's overhead costs include corporate general and administrative
expenses, regional field overhead costs and other home office costs related to
functions directly supporting field operations. As a result of the Company's
continued focus on overhead reduction, total overhead costs for 2001 decreased
approximately 9.7% compared to 2000. The Company's corporate general and
administrative expenses decreased approximately 12.0% in 2001 compared to 2000
as a result of general cost reductions at the corporate level and the completion
of the implementation of its North America proprietary point of sale systems in
2000.

Operating Free Cash Flow

Recurring operating free cash flow is calculated by adjusting cash flows
provided by operating activities to exclude (i) cash payments associated with
the Company's restructuring and non-recurring charges and (ii) other cash
receipts or payments (included in cash flows provided by operating activities)
which are of a non-recurring operational nature, and then subtracting
maintenance capital expenditures. Total operating free cash flow is calculated
in the same manner as above except the amount includes all non-recurring cash
payments and receipts and non-recurring or growth capital expenditures. The
Company's total operating free cash flow does not include proceeds from business
sales or joint ventures. Maintenance capital expenditures are considered
expenditures reasonably necessary to maintain the Company's funeral service
locations, cemeteries, crematoria and other facilities in a condition conducive
for normal business practices. Non-recurring or growth capital expenditures are
considered expenditures made for the purpose of generating additional or
incremental revenues (i.e. building combination facilities).

Included in total operating free cash flow of $331,965 for the year ended
2001 is $161,495 of net non-recurring funds comprised of an approximate $116,300
income tax refund and the collection of receivables from funeral and cemetery
trust funds of approximately $79,800, offset by non-recurring payments of
approximately $27,900 related to the Company's curtailed pension plans and
$6,705 of other non-recurring cash payments. The improvement in recurring
operating free cash flow in 2001 of $108,445 is primarily a result of (i)
working capital improvement, (ii) reductions in capital expenditures, (iii)
decreases in cash interest, (iv) reductions in net cash taxes, and (v) the
acceleration of customer cash receipts as a result of expanding the Company's
surety bonding programs for prearranged funeral and preneed cemetery activities.
The Company's surety bonding programs increased recurring operating free cash
flow by $34,700 in 2001 compared to 2000 by accelerating customer cash receipts
to the Company in which a portion would have otherwise been required to be
placed into trust funds until the related merchandise is delivered or service is
performed.

The Company's operating free cash flow goals for 2002 relate to the
Company's businesses it expects to retain in 2002, namely its core North America
businesses and its current South America businesses. These retained businesses
are expected to generate recurring operating free cash flow in 2002 that is
comparable with 2001 levels, despite increases in expected cash tax payments of
$50,000-$60,000 and the net loss of recurring operating free cash flow from
actual and potential sales/joint ventures of international operations over and
above assumed cash interest savings. The Company's goal is to produce recurring
operating free cash flow of $200,000 in 2003. These recurring operating free
cash flow targets assume the Company is successful in executing its business
plan creating revenue and earnings growth. These targets also assume the Company

13

continues to access the surety market to procure bonds for prearranged funeral
and preneed cemetery activities in those states that allow such bonds. If such
access to the surety markets is curtailed or interrupted, the Company might have
to reassess its recurring operating free cash flow targets. See further
discussion of the Company's use of surety bonds in the Financial Assurances
section included in Financial Condition, Liquidity and Capital Resources in this
Form 10-K.

Debt Reduction

Peak debt at September 30, 1999............................. $4,200,023
Debt at December 31, 1999................................... $4,060,016
Debt at December 31, 2000................................... $3,268,102
Debt at December 31, 2001................................... $2,534,613
Targeted debt balance at December 31, 2002.................. $1,800,000

Debt at December 31, 2001 included approximately $113,500 of currently
maturing debt associated with the financial restructuring of the Company's
French subsidiary, which is expected to be satisfied with non-cash French assets
in 2002. Funds available to achieve the Company's debt reduction in 2001 were
primarily generated from (i) the Company's total operating free cash flow, (ii)
proceeds from joint ventures of Australia, Spain and Portugal operations, (iii)
proceeds from the sale of the Company's operations in Norway, the Netherlands
and Belgium, (iv) proceeds from the sale of the Company's equity interest in a
Canadian funeral and cemetery company, and (v) proceeds from sales of certain
non-strategic funeral and cemetery operations in North America.

Future Revenue Growth

The Company intends to operate a core business of high quality funeral
services locations and cemeteries in North America. The Company and its Dignity
Memorial(TM) affiliates currently have the largest network of funeral service
locations and cemeteries in North America with estimated coverage of
approximately 70% of the major population areas. This network forms the
foundation of the Company's business strategy to generate revenue growth without
the outlay of significant additional capital.

The following details events that can positively affect revenues. The
Company refers to these events as revenue drivers to its funeral and cemetery
businesses.

REVENUE DRIVERS

FUNERAL

- Funeral services performed.

- Average revenue per funeral service.

CEMETERY

- Interments performed.

- Delivery of cemetery property and merchandise.

- Development of cemetery inventory.

- Cash receipts and down payments on preneed cemetery property sales.

The Company has several revenue growth initiatives, which are designed to
positively affect these revenue drivers and increase revenues. Some of the
Company's most important revenue growth initiatives are listed and described
below.

- Creation of a seamless, national brand of funeral service locations under
the Dignity Memorial(TM) brand name.

14

- Increase in the population coverage of the Dignity Memorial(TM) branded
network through third party franchise relationships.

- Establishment of exclusive, national, branded affinity relationships with
employers, social, fraternal and charitable groups or institutions.

- Implementation of Dignity Memorial(TM) funeral and cremation packages.

- Improvement of standards in customer service.

- Continued commitment to funeral and cemetery prearrangement.

- Expansion of cremation marketing, merchandising and services.

- Modification of sales commission and incentive compensation structures.

- Focus on sales of deliverable cemetery property and merchandise.

- Growth capital expenditures.

The development of the Dignity Memorial(TM) brand name is a unique
opportunity the Company believes only it can pursue because of its size and
geographic diversity. This opportunity creates the first national brand in the
death care industry in North America that is recognized and portable on a
national basis and can potentially affect the Company's funeral services
performed revenue driver. A national network with national portability of
products and services is important to the Company's current and prospective
affinity partners. The Dignity Memorial(TM) provider network will also be
developed through a franchise program by offering non-SCI funeral service
locations, primarily in markets where the Company does not currently have
coverage, the opportunity to join the Dignity Memorial(TM) provider network and
have access to the Dignity Memorial(TM) branded products and services, marketing
and referral programs, training programs, prearranged funeral funding services
and merchandising expertise.

The Company is continuing its efforts to execute agreements with affinity
partners on national, regional and local levels which provide exclusive, direct
access through mail or other agreed upon media to large groups of individuals
who meet the Company's ideal customer profile. The company believes the ability
to enter into these national relationships due to the expansive network coverage
the Company enjoys is one of its most compelling competitive advantages in the
death care industry. The Company believes this is one of its most powerful
revenue initiatives that can positively affect its funeral services performed
revenue driver. This program is focused on local relationships in a community as
well as on national relationships (i.e., Veterans of Foreign Wars).

The Company completed the implementation of Dignity Memorial(TM) branded
funeral and cremation packages in North America in 2001. The Dignity
Memorial(TM) funeral and cremation packages are designed to simplify customer
decision making and include new products and services which have traditionally
not been available through funeral service locations. Examples of these new
products and services include legal services, estate organizing and planning,
grief counseling, bereavement discounted airfares and virtual family archiving
services on the Internet. These new products and services are designed to
increase customer satisfaction while also positively affecting the Company's
average revenue per funeral service revenue driver.

The Company has implemented comprehensive continuous customer surveys in
North America to provide valuable feedback from consumers in order to enhance
customer service and provide insight into consumer preferences for additional
products and services. The Company received responses from 45% of all families
serviced in 2001 in North America funeral service locations, which is considered
to be a very high survey return rate. The customer surveys give the Company a
98.7% approval rating which is a key indicator of customer satisfaction
affecting the Company's funeral services and cemetery interments performed
revenue drivers.

The Company remains committed to prearrangement programs with consumers for
funeral and cemetery products and services. The Company believes these programs
can increase future market share in its funeral and cemetery markets. Funeral
and cemetery prerrangment is one of the most important revenue growth

15

initiatives of the Company as this initiative can positively affect several
revenue drivers such as funeral services and cemetery interments performed,
average revenue per funeral service, delivery of cemetery products and services
and cash receipts and down payments on preneed cemetery property sales. With the
reduction of marketing costs, the refinement of the sales commission structure,
the shift to insurance funding of prearranged funeral sales creating general
agency commissions and cash overrides, the use of direct-to-consumer prearranged
marketing and the use of surety bonding programs, the Company has greatly
improved the cash flow characteristics and economics of this important revenue
growth initiative. The Company also initiated sales of Dignity Memorial(TM)
packaged funeral and cremation plans in late 2001 on a prearranged basis which
can positively affect the average revenue per funeral service revenue driver at
the time the contract matures and the service is performed.

The Company currently has a backlog of prearranged funeral contracts of
approximately $4.6 billion and of preneed cemetery contracts of approximately
$1.8 billion. These backlogs represent future revenues to the Company. For a
complete discussion of these activities, see the Prearranged Funeral and
Cemetery Activities section included in Financial Condition, Liquidity and
Capital Resources and notes four and five to the consolidated financial
statements in Item 8 of this Form 10-K. Additionally, see the Financial
Assurance section included in Financial Condition, Liquidity and Capital
Resources for a complete discussion on the Company's use of surety bonds in its
funeral and cemetery prearrangement activities.

The Company believes there are significant opportunities to increase market
share in the cremation segment of its business through more effective marketing
of cremation products and services. While the Company will continue to expand
cremation memorialization products and services at its traditional funeral
service locations and cemeteries, the Company also plans to expand its National
Cremation Service(TM) operations, the largest single provider of cremation
services in North America, from its existing base in fourteen states into five
additional states by the end of 2003.

The Company has modified the sales commission and incentive compensation
structures to focus on cash collections and receipts. While this is one of the
Company's key cash flow initiatives, cash receipts and down payments are also
key revenue drivers that can generate revenue recognition for preneed cemetery
sales of constructed cemetery property. The Company has also incented its
preneed cemetery sales force to focus on sales of deliverable cemetery property
and merchandise. While this can avoid funds being trusted under applicable state
laws and is also a key cash flow initiative, revenues are recognized upon
evidence of delivery of cemetery property and merchandise.

The Company has plans in 2002 to invest $25,000 to $35,000 of free cash
flow in growth capital expenditures mainly comprising of the construction of
funeral service locations and additional development of cemetery inventory. The
Company believes construction of certain funeral service locations, including
combination facilities, can meet the Company's requirement of a cash return
exceeding its weighted average cost of capital. With a cash receipt or down
payment of 10% or more, the development or construction of cemetery property can
generate revenue recognition from preneed cemetery property sales.

Outlook for 2002

The Company's objectives in 2002 remain consistent with those established
in prior years and focus on continued stabilization of the Company's capital
structure through continued cash flow improvement, asset divestitures and debt
reduction. The Company believes its goal of stabilizing its capital structure
will be achieved by having a debt to recurring operating free cash flow ratio of
10:1 or less, which management believes is consistent with a stable "BB" credit
rating from Standard & Poor's and "Ba2" from Moody's, with general access to the
capital markets. To achieve these goals, the Company will continue to use its
total operating free cash flow and proceeds from asset sales/joint ventures to
reduce debt. The Company's targeted debt balance is $1,800,000 or less by the
end of 2002.

As previously disclosed, the Company intends to operate a core business of
high quality funeral service locations and cemeteries in North America. The
timing of the completion of international and certain North America asset
sales/joint ventures to achieve the Company's core North America business
strategy is not easily predictable. The Company does believe execution of asset
sales/joint ventures for its European
16

businesses is probable in 2002, but believes the completion of the marketing
program for the disposition of its South America operations could be of a longer
duration. The Company's outlook for 2002 for operating free cash flow is made
with the assumption the Company's 2002 financial results will contain only the
core North America network and current South America businesses (currently owned
European businesses are excluded in their entirety for 2002 guidance).

The retained businesses of 2002 are expected to generate recurring
operating free cash flow between $160,000 and $180,000 in 2002, which is
comparable with $170,470 generated in 2001, despite increases in expected cash
tax payments of $50,000 to $60,000 and the net loss of recurring operating free
cash flow from actual and potential sales/joint ventures of international
operations over and above assumed cash interest savings. The Company's goal is
to produce recurring operating free cash flow of $200,000 in 2003.

The retained businesses discussed above currently have an annual run-rate
of EBITDA (excluding gains from dispositions) of approximately $400,000,
consisting of $390,000 from the core North America network and $10,000 from
South America operations. The Company calculates EBITDA for each period by
adding interest, tax, depreciation and amortization expense to net income before
non-recurring items. In 2002, the Company will exclude gains from dispositions
from EBITDA. The Company has several revenue growth initiatives in place
designed to organically grow funeral and cemetery revenues as well as EBITDA.
These initiatives are designed to affect revenue drivers for both the funeral
and cemetery businesses resulting in increases in revenues. See the Future
Revenue Growth section included in Strategic Initiatives for a detailed
discussion of these revenue initiatives designed to positively affect funeral
and cemetery revenue drivers.

Comparable North America funeral revenues are expected to grow in the low
single digit percentage range in 2002 based on equivalent funeral services
performed and low single digit percentage growth in the average revenue per
funeral service. Comparable North America cemetery revenues in 2002 are expected
to be similar to 2001. Increases in the sales of deliverable cemetery property
and merchandise and the development of cemetery property inventory in 2002 will
be offset by less revenues in 2002 compared to 2001 levels from changes in
estimates of the Company's deferred preneed cemetery contract revenues. The
Company has an ongoing review program of its obligations for delivery of
cemetery merchandise and services to customers in order to collect funds from
applicable cemetery trust funds. Revenue recognition is triggered upon evidence
of delivery of such merchandise and services.

Comparable North America gross margin percentages are expected to improve
for funeral and cemetery operations in 2002 as a result of the execution of the
Company's business plan and the elimination of approximately $41,800 ($37,500
after tax) of amortization of North America goodwill under new accounting
standards. Comparable North America funeral gross margin percentages are
expected to be in the 18%-23% range for the full year of 2002 and comparable
North America cemetery gross margin percentages are expected to be in the
11%-16% range for the full year of 2002.

The Company needs to execute its strategic plan and accomplish several
important and challenging tasks to meet its financial goals for 2002. Some of
these are listed below and are not intended to be an all inclusive listing.

- The Company must complete is assets sales/joint ventures programs both
internationally and in North America creating cash proceeds for the
reduction of debt.

- Continue to manage operating and overhead costs.

- Continue to assess asset rationalization programs in needed areas.

- Successfully execute revenue growth initiatives to create revenue and
EBITDA growth.

- Retain key relationships with client families, vendors and regulators to
allow the Company's operations to operate in the ordinary course of
business for the benefit of the Company's shareholders.

- Retain key relationships with surety bonding companies. The Company's
recurring operating free cash flow targets assume the Company continues
to access the surety market to procure bonds for prearranged funeral and
preneed cemetery activities in those states that allow such bonds. If
such

17

access to the surety markets is curtailed or interrupted, the Company might
have to reassess its future recurring operating free cash flow targets.

CRITICAL ACCOUNTING POLICIES AND ACCOUNTING CHANGES

The Company's consolidated financial statements are impacted by the
accounting policies used and the estimates and assumptions made by management
during their preparation. The following is a discussion of the Company's
critical accounting policies pertaining to revenue recognition, the impairment
of long-lived assets and for long-lived assets to be disposed of, and the use of
estimates.

REVENUE RECOGNITION

Funeral revenue is recognized when funeral services are performed. The
Company's trade receivables primarily consist of funeral services already
performed. The Company sells price guaranteed prearranged funeral contracts
through various programs providing for future funeral services at prices
prevailing when the agreements are signed. Revenues associated with sales of
prearranged funeral contracts, which include accumulated trust earnings and
increasing insurance benefits, are deferred until such time that the funeral
services are performed (see note four to the consolidated financial statements
in Item 8 of this Form 10-K).

Sales of atneed cemetery interment rights, merchandise and services are
recognized when the service is performed or merchandise delivered. Preneed
cemetery interment sales of constructed cemetery burial property are not
recognized until a minimum percentage (10%) of the sales price has been
collected. Once 10% of the sales price is collected, all of the constructed
interment sale revenue is recognized. Revenues related to the preneed sale of
unconstructed cemetery burial property will be deferred until such property is
constructed and the minimum percentage of the sales price has been collected.
Further, the Company defers certain direct obtaining costs (selling and
commissions incurred to obtain preneed contracts) associated with these sales
which are expensed when revenue is recognized (see notes three and five to the
consolidated financial statements in Item 8 of this Form 10-K).

Costs related to the sales of interment rights are the accumulation of
property costs and development costs specifically identified by project. At the
completion of the project, costs are charged to operations as revenue is
recognized. Costs related to sales of merchandise and services are based on
actual costs incurred.

IMPAIRMENT OF LONG-LIVED ASSETS AND FOR LONG-LIVED ASSETS TO BE DISPOSED OF

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. 121, "Accounting for the Impairment of Long-lived Assets and for
Long-lived Assets to be Disposed of." SFAS No. 121 requires that long-lived
assets and certain intangibles to be held and used be reported at the lower of
their carrying amount or fair value. Assets to be disposed of and assets not
expected to provide any future service potential to the Company are recorded at
the lower of their carrying amount or fair value less estimated cost to sell.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make certain estimates and
assumptions. These estimates and assumptions affect the carrying values of
assets and liabilities and disclosures of contingent assets and liabilities at
the balance sheet date and the amounts of revenues and expenses recognized
during the period. Actual results could differ from such estimates. Key
estimates used by management, among others, include:

Allowance for doubtful accounts -- The Company estimates its allowance
for doubtful accounts based on analysis of historical collection activity.
These estimates could be impacted by changes in the economy, among other
things.

18

Depreciation of long-lived assets -- The Company depreciates its
long-lived assets over their remaining estimated useful lives. These
estimates of the remaining useful lives may be affected by such factors as
changing market conditions or changes in regulatory requirements.

Amortization of deferred funeral obtaining costs -- The Company
amortizes its prearranged funeral obtaining costs over 20 years, a period
representing the estimated life of the prearranged funeral contracts. This
estimate could be impacted by changes in mortality rates and changes in the
demographics of the Company's customers. Preneed cemetery obtaining costs
are not amortized and are expensed at the time the applicable contract
revenues are recognized.

Taxes -- The Company's ability to realize the benefit of its deferred
tax assets requires the Company to achieve certain future earnings levels.
The Company has established a valuation allowance against a portion of its
deferred tax assets and could be required to further adjust that valuation
allowance if market conditions change materially and future earnings are,
or are projected to be, significantly different from its current estimates.

Preneed cemetery revenues -- The Company recognizes revenues
associated with preneed cemetery merchandise and services upon evidence of
delivery of such merchandise and services. The Company has an ongoing
review program of its obligations for delivery of cemetery merchandise and
services. Included in the Company's backlog of preneed cemetery contract
revenues of approximately $1.8 billion are estimates made by management
related to the status of delivery of cemetery merchandise and services. Any
changes in these estimates in future periods and resulting revenue
recognition of these obligations will vary and depend upon the outcome of
such obligation reviews.

ACCOUNTING CHANGES

In 2000, the Company implemented SAB No. 101 which changed the Company's
accounting policies regarding the manner in which the Company records
prearranged sales activities. The implementation of SAB No. 101 had no effect on
the consolidated cash flows of the Company. The accounting change, which
occurred as a result of the required implementation of SAB No. 101, has been
treated as a change in accounting principle effective as of the beginning of
2000. For a more detailed discussion of these changes, see note three to the
consolidated financial statements in Item 8 of this Form 10-K. The cumulative
effect of these changes resulted in an after tax charge of $909,315 or $3.34 per
diluted share.

In 2001, the Company adopted SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities" and SFAS No. 138, "Accounting for Certain
Derivatives Instruments and Certain Hedging Activities: An Amendment of FASB
Statement No. 133." In accordance with these pronouncements, the Company
recognized a cumulative effect of a change in accounting principles, net of
applicable taxes, of $7,601. The charge primarily relates to the recognition of
net deferred charges from interest rate gains and losses realized in the
termination of swap agreements designated as cash flow hedges. These charges
were previously amortized into interest expense over the terms of the swap
agreements, whereas the new standards require recognition as the derivative
gains and losses are incurred.

RESULTS OF OPERATIONS

The following is a discussion of the Company's results of operations for
the years ended December 31, 2001, 2000 and 1999. Most of the financial analysis
in this section relates to comparable financial information, which the Company
believes provides a more meaningful discussion of results of operations.
Comparable results in all periods represent financial results excluding
operations that have been acquired or constructed after January 1, 2000 or
operations that have been divested by the Company prior to December 31, 2001. As
a result, some acquisitions entered into in 1999 may not be included for the
full year, depending on the timing of the acquisition. As previously disclosed,
the Company implemented SAB No. 101 in 2000, which primarily changed the
Company's accounting policies regarding the manner in which it records preneed
cemetery sales activities. For purposes of the following discussion, 1999
financial information is presented on a pro forma basis as if SAB No. 101 had
been implemented at the beginning of 1999. All comparisons in this results of
operations section will be discussed using the pro forma 1999 amounts. The
Company has excluded the results
19

of its discontinued insurance operations from the following discussions for all
years presented. During 2000, the Company completed the sale of its discontinued
insurance operations to third parties. For further discussion see Non-recurring
items and Definitions and Descriptions of Pro Forma Financial Information in
this Form 10-K.

Consolidated Results

For the year ended December 31, 2001, the Company reported total revenues
from continuing operations of $2,510,343, representing a 2.1% decrease compared
to total revenues from continuing operations for 2000 of $2,564,730. Gross
profit from continuing operations improved 9.7% to $359,386 and the gross margin
percentage increased in 2001 to 14.3% from 12.8% in 2000. The decline in
revenues is primarily attributable to operations disposed in 2001, while the
improvement in gross profit and margin percentage is the result of the cost
reduction initiatives and changes in estimates of previously deferred cemetery
revenue during the year. See note two to the consolidated financial statements
in Item 8 of this Form 10-K.

Results for the Company's comparable, continuing operations by geographic
segment are detailed in the following tables:

Funeral

Comparable North America funeral revenues remained relatively flat in 2001
compared to 2000 despite a slight decline in the comparable number of funeral
services performed over the same period. This decline in the number of funeral
services performed was offset by an increase in the average revenue per funeral
service to $3,934 in 2001 from $3,898 in 2000. The average revenue per funeral
service continues to increase as a result of the Company's growth initiatives,
such as Dignity Memorial TM packaged funeral plans.

Comparable international funeral revenues remained stable in 2001 despite a
3.2% decline in the number of funeral services performed. Increases in monument
sales and the average revenue per funeral service in the Company's French
operations had the effect of offsetting the decline in the number of funeral
services performed. Monument sales, which are not a component of the number of
funeral services performed, were a significant factor attributing to the
stabilized revenues. Additionally, the average revenue per funeral service
increased as a result of additional products and services and inflationary
adjustments. This growth was offset by the negative effect of foreign currency
translation of $21,400 resulting from the weakened euro relative to the U.S.
dollar during the year.

Comparable North America gross profit and margin percentage declined in
2001 compared to 2000 as the result of increased costs related to training,
compensation and facilities. The Company has committed to expanding personnel
training programs and improving customer satisfaction, and as a result of this
commitment, has experienced increased personnel costs in 2001 compared to 2000.
These training initiatives are targeted at expanding market share and future
revenue growth from the Company's North America funeral operations. Facility
costs increased as a result of higher utility and building maintenance costs.
These increased costs were offset in the fourth quarter of 2001 by an
approximate $4,000 reduction in the Company's allowance for doubtful accounts
and approximately $4,500 recognized in general agency commissions. The reduction
in the allowance for doubtful accounts is due to ongoing successful cash flow
initiatives, which have resulted in improved collection of trade receivables.
The recognition of general agency commissions is the result of commissions paid
to the Company for insurance funded prearranged funeral contracts in excess of
prearranged funeral deferred net obtaining costs.

Comparable international gross profit and margin percentage improved in
2001 compared to 2000 as a result of improved margins in the Company's European
segment. The European segment has been positively

21

impacted in 2001 from cost rationalization programs. Additionally, revenue
enhancement initiatives have resulted in an increase in the average revenue per
funeral service in 2001 over 2000.

Comparable North America funeral revenues in 2000 increased compared to pro
forma 1999 as a result of an increase in the average revenue per funeral service
to $3,898 in 2000 from $3,859 in 1999. This increase is attributable to the
Company's ongoing revenue growth initiatives, such as the introduction of
Dignity Memorial(TM) funeral package plans.

Comparable international funeral revenue in 2000 compared to pro forma 1999
decreased as a result of a 7.0% decrease in volume as well as a $93,000 negative
impact of foreign currency translation. The decline in volume is primarily
attributable to a reduction in the number of deaths in the Company's European
market and from losses in market share in the Company's French funeral service
locations as a result of increased and new competition from the deregulation of
the funeral industry in France. For further information on the deregulation of
the funeral industry in France, see the section Regulation in Item 1 of this
Form 10-K.

Funeral gross profits decreased 5.5% in 2000 compared to pro forma 1999.
The decrease is related to a reduction in the number of deaths in Europe in 2000
as discussed above. North America gross profit and margin percentage remained
stable in 2000 compared to pro forma 1999.

Cemetery

Comparable North America cemetery revenues increased 16.5% in 2001 compared
to 2000 as a result of increases in completed, cemetery property development
projects; increases in the amount of cash receipts and down payments received
from preneed property sales; and changes in estimates of deferred preneed
cemetery revenues. In connection with the Company's ongoing review of
obligations to deliver cemetery merchandise and services to customers in order
to collect funds due to the Company from applicable cemetery trust funds, the
Company recognized revenues of approximately $68,500 in 2001 as a change in
estimate of previously deferred preneed cemetery contract revenues. As part of
its ongoing cash flow initiatives, the Company intends to continue the review of
these obligations; however, the impact recognized in 2002 is expected to be less
than 2001.

Comparable international cemetery revenues increased 11.9% in 2001 compared
to 2000 as a result of improvements in preneed sales in the Company's United
Kingdom operations and lower cancellations in the Company's South America
operations in 2001, offset by the negative effect of foreign currency on
comparable cemetery results of $5,800 in 2001.

Comparable North America cemetery gross profit and margin percentage
increased in 2001 compared to 2000 as a result of recognition of previously
deferred preneed cemetery contract revenues discussed above that could be
delivered to customers under applicable laws. This change in estimate increased
comparable North America gross profit by $54,900 in 2001.

Comparable international cemetery gross profit and margin percentage
increased in 2001 compared to 2000 as a result of improved preneed sales in the
Company's United Kingdom operations and lower cancellations in the Company's
South America operations.

Comparable cemetery revenues in the Company's North America cemetery
segment decreased 9.2% in 2000 compared to pro forma 1999 results due to
significant changes to cemetery employee compensation plans, which began to be
implemented in late 1999. The Company changed the cemetery employee compensation
plans in 2000 to focus on cemetery property sales, which are more difficult to
sell and had the effect of adversely impacting cemetery revenues in 2000
compared to 1999.

Comparable international cemetery revenues decreased 18.3% in 2000 compared
to pro forma 1999 as a result of lower revenue from higher cancellations in the
Company's Argentina operations. Argentina had increased cancellations as a
result of a weakened economy over the last several years.

Comparable North America cemetery gross profit increased in 2000 compared
to pro forma 1999 as a result of changes in the Company's cemetery employee
compensation plans; which, although adversely affecting cemetery revenues,
positively impacted gross margin in 2000 compared to 1999.
22

Comparable international cemetery gross profit and margin percentage
decreased in 2000 compared to 1999 as a result of lower sales in the Company's
Argentina operations coupled with higher cancellations from the deterioration of
the Argentina economy.

Other Income and Expenses

The Company's general and administrative expenses decreased to $70,309 in
2001 from $79,932 in 2000. The decrease in general and administrative expenses
was the result of the reduction in costs after implementing the Company's North
America proprietary point of sale systems as well as completing the initial roll
out of the Company's Central Processing Centers in its North America operating
clusters in 2000. General and administrative expenses in 2000 were lower than
1999 as a result of year 2000 (Y2K) preparation, implementation of EVA(R) base
incentive compensation models, and increased costs related to the proprietary
point of sale systems. Expressed as a percentage of revenue from continuing
operations, general and administrative expenses were 2.8%, 3.1%, and 2.7% for
the years ended December 31, 2001, 2000, and 1999, respectively.

Interest expense decreased to $211,626 in 2001 compared to $281,548 in 2000
and $238,185 in 1999. The decrease reflects lower financing costs as the Company
successfully reduced outstanding debt. The Company has also experienced improved
interest rates in 2001 with a weighted average interest rate of 6.72% at
December 31, 2001, compared to 7.08% and 6.97% at December 31, 2000 and 1999,
respectively.

Other income was $15,044 in 2001 compared to $17,455 in 2000 and $12,007 in
1999. Other income primarily consists of income from various notes receivable
and cash investments, equity from earnings of investments in certain companies
and cash overrides from prearranged funeral sales with the Company's divested
insurance operations in North America and France (see Discontinued Operations
discussion in Item 1 of this Form 10-K).

Gains from dispositions were $16,224 in 2001 compared to $17,181 in 2000
and $19,752 in 1999. Included in gains from dispositions are asset sales not
associated with previously recognized impairment charges. Also included in gains
from dispositions is a $2,062 gain recognized on the sale of 85% of the
Company's Spain and Portugal operations in August 2001.

Restructuring and Non-Recurring Charges

Restructuring and non-recurring charges recorded in 2001 were $644,147 and
consisted of $663,548 in charges related to (i) the loss on joint venturing the
Company's Australian operations, (ii) losses from the disposition of operations
in the Netherlands, Norway and Belgium, and (iii) international operations held
for sale. These charges were offset by $19,401 consisting of favorable changes
in estimates of previously recorded charges of certain divested North America
funeral homes and cemeteries and the Company's equity investment in a Canadian
funeral home and cemetery company. In 2000, the Company recorded restructuring
and non-recurring charges of $461,072 which consisted of (i) $351,159 related to
the planned divestitures of certain North America businesses, (ii) $83,256
related to the reduction in the carrying value of the Company's equity
investment in a Canadian funeral and cemetery company, and (iii) $26,657 in
changes in estimates of previously recorded charges. In 1999, the Company
recorded restructuring and non-recurring charges totaling $362,428 which
consisted of (i) $207,432 in severance costs, (ii) $73,728 impairment for assets
held for sale, (iii) $18,245 impairment for loans made by the Company's lending
subsidiary, and (iv) $63,023 in other cost initiative programs. For further
information detailing these non-recurring items, see note sixteen to the
consolidated financial statements in Item 8 of this Form 10-K.

The Company recorded certain additional non-recurring items during 2001,
2000 and 1999, related to extraordinary gains on early extinguishments of debt,
net losses associated with the sales of the Company's discontinued operations
and cumulative effects of accounting changes. For a detailed discussion of these
and other non-recurring items, see Non-recurring Items and Definitions and
Description of Pro forma Financial Information included in this Management's
Discussion and Analysis of Financial Condition and Results of Operations of this
Form 10-K.

23

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

In February 2002, the Company completed a joint venture transaction related
to its funeral, cemetery and crematoria operations in the United Kingdom. This
transaction resulted in the Company purchasing a 20% minority interest in the
joint venture and receiving cash proceeds of approximately $273,000 on a pretax
basis. These cash proceeds have resulted in the Company having a cash balance of
approximately $300,000 as of February 28, 2002. The Company's debt balances at
February 28, 2002 and December 31, 2001 also included approximately $110,900 and
$113,500, respectively, of current maturing debt associated with the financial
restructuring of the Company's French subsidiary, which is expected to be
satisfied with non-cash French assets in 2002. The Company's objectives in 2002
remain consistent with those established in prior years and focus on continued
stabilization of the Company's capital structure through continued cash flow
improvement, asset divestitures and debt reduction. The Company believes its
goal of stabilizing its capital structure will be achieved by having a debt to
recurring operating free cash flow ratio of 10:1 or less. Management believes
this ratio is consistent with a stable "BB" credit rating from Standard & Poor's
and "Ba2" from Moody's with general access to the capital markets. The Company's
financial goals in 2002 are to complete asset sales/joint venture transactions
to produce approximately $550,000 in net pretax cash proceeds, produce recurring
operating free cash flow of $160,000 to $180,000 and to use these funds to
reduce the Company's outstanding debt to $1,800,000 by December 31, 2002.

The Company calculates recurring operating free cash flow by adjusting cash
flows provided by operating activities to exclude (i) cash payments associated
with the Company's restructuring and non-recurring charges and (ii) other cash
receipts or payments (included in cash flows provided by operating activities)
which are of a non-recurring operational nature, and then subtracting
maintenance capital expenditures. Total operating free cash flow is calculated
in the same manner as above except the amount includes all non-recurring cash
payments and receipts and non-recurring or growth capital expenditures. The
Company's total operating free cash flow does not include proceeds from business
sales or joint ventures. Maintenance capital expenditures are considered
expenditures reasonably necessary to maintain the Company's funeral service
locations, cemeteries, crematoria and other facilities in a condition conducive
for normal business practices. Non-recurring or growth capital expenditures are
considered expenditures made for the purpose of generating additional or
incremental revenues (i.e. building combination facilities). The following table
details the calculation described above for the Company's total and recurring
operating free cash for 2001.

24

An income statement approach calculating the Company's recurring and total
operating free cash flow for the twelve months ended December 31, 2001 is
detailed below.

The $161,495 of net non-recurring cash receipts includes an approximate
$116,300 income tax refund and the collection of receivables from funeral and
cemetery trust funds of approximately $79,800, offset by non-recurring payments
of approximately $27,900 related to the Company's curtailed pension plans and
$6,705 of other non-recurring cash payments. For further discussions and details
related to the Company's operating free cash flow in 2001 and in prior periods,
see Operating Free Cash Flow included in Strategic Initiatives in this
Management's Discussion and Analysis of Financial Condition and Results of
Operations of this Form 10-K.

As has occurred in recent years, the Company substantially reduced its
total debt in 2001.

Peak debt at September 30, 1999............................. $4,200,023
Debt at December 31, 1999................................... $4,060,016
Debt at December 31, 2000................................... $3,268,102
Debt at December 31, 2001................................... $2,534,613
Target debt range at December 31, 2002...................... $1,800,000

Funds available to achieve the Company's debt reduction in 2001 were
primarily generated from (i) the Company's total operating free cash flow, (ii)
proceeds from joint ventures of Australia, Spain and Portugal operations, (iii)
proceeds from the sale of the Company's operations in Norway, the Netherlands
and Belgium, (iv) proceeds from the sale of the Company's equity interest in a
Canadian funeral and cemetery company, and (v) proceeds from sales of certain
non-strategic funeral and cemetery operations in North America.

At December 31, 2001, the Company had current maturities of long-term debt
of $220,640 and $181,343 at February 28, 2002. Current maturities of long-term
debt at December 31, 2001 and February 28, 2002 include approximately $113,500
and $110,900, respectively, of currently maturing debt associated with the
financial restructuring of the Company's French subsidiary, which is expected to
be satisfied with non-cash French assets in 2002. The Company had a cash balance
of approximately $300,000 at February 28, 2002, and will use these funds to
retire the cash portion of its currently maturing debt in 2002.

At December 31, 2001 the Company had primary bank credit agreements
consisting of two committed facilities -- a 2-year term loan and a 5-year,
multi-currency revolving credit agreement. Both of these bank credit agreements
are primarily used for general corporate purposes and will mature in June 2002.
The 2-year term loan allowed for borrowings up to $29,061 and the 5-year,
multi-currency revolving credit agreement allowed for borrowings up to $400,000
as of December 31, 2001. The amount outstanding under these bank credit
agreements was $29,061 at December 31, 2001 and was borrowed under the 2-year
term loan. This amount outstanding was paid off by February 28, 2002,
eliminating any credit availability to the Company from the 2-year term loan.

25

The bank credit agreements include terms requiring the Company to reduce
commitment amounts on these bank credit agreements based upon net cash proceeds
generated from asset sales/joint ventures completed after November 2000. Under
these terms, the availability of borrowings under the 5-year, multi-currency
revolving credit agreement has been reduced from $400,000 at December 31, 2001
to approximately $250,000 at February 28, 2002, primarily as a result of the
completion of the joint venture transaction in February 2002 related to the
Company's United Kingdom operations. In March 2002, the Company amended the
terms of the 5-year multi-currency revolving credit agreement, which, among
other things, reduced the borrowing availability to $150,000 (see Exhibits
included in this Form 10-K).

The Company is currently in discussions with various parties concerning a
new bank credit facility to replace the current 5-year, multi-currency revolving
credit agreement expiring in June 2002. In all likelihood, a new bank credit
facility would be secured by Company assets and would range from $200,000 to
$300,000 in credit availability.

CONTRACTUAL, COMMERCIAL AND CONTINGENT COMMITMENTS

The Company has assumed various financial obligations and commitments in
the ordinary course of conducting its business. The Company has contractual
obligations requiring future cash payments under existing contractual
arrangements, such as management, consultative and non-competition agreements.
The Company also has commercial and contingent obligations which result in cash
payments only if certain contingent events occur requiring the Company's
performance pursuant to a funding commitment.

The following table details the Company's known future cash payments (on an
undiscounted basis) related to various contractual obligations as of December
31, 2001.

- ---------------

(1) The Company's outstanding indebtedness contains standard provisions
including defaults on scheduled principal and interest payments and changes
of control clauses. In addition, the Company's bank credit agreements
contain a maximum leverage ratio, a minimum fixed-charge ratio, and a
minimum net worth requirement. At December 31, 2001, approximately $29,061
was outstanding under the Company's bank credit agreements, which was paid
off subsequent to year end. For further information see note seven to the
consolidated financial statements in Item 8 of this Form 10-K. Current
maturities of long-term debt also include $113,500 associated with the
financial restructuring of the Company's French subsidiary, which is
expected to be satisfied with non-cash French assets during 2002.

(2) The Company has a purchase agreement with a major casket manufacturer for
its North American operations with an original minimum commitment of
$750,000 over a six-year period expiring in 2004. The agreement contains
provisions to increase the minimum annual purchase commitment for normal
price increases. Additionally, the contract provides for a one-year
extension period to 2005 in which the Company is allowed to purchase any
remaining commitment that exists at the end of the original term. Currently,
the amount that would be due in 2005 is estimated to be $30,000.

26

(3) The majority of the Company's operating leases contain options to (i)
purchase the property at fair value on the exercise date, (ii) purchase the
property for a value determined at the inception of the leases, or (iii)
renew for the fair rental value at the end of the primary lease term. The
Company's operating leases primarily relate to funeral service locations,
automobiles, limousines, hearses, cemetery operating and maintenance
equipment and two aircraft. The Company has residual value exposures related
to certain operating leases of approximately $7,500. The Company believes it
is unlikely that it will have to make future cash payments related to these
residual value exposures.

(4) In connection with certain acquisitions related to the Company's South
America operations, the Company entered into contingent purchase obligations
with certain former owners of those businesses. These obligations require
the Company to pay additional consideration if cumulative EBIT thresholds,
as defined in such agreements, are met between 2003 and 2005. As of December
31, 2001, the contingent consideration is estimated to be approximately
$50,000. This additional consideration can be paid partially in stock at the
discretion of the former owners.

(5) The Company has entered into forward exchange con