SERVICE CORPORATION INTERNATIONAL - 10-Q Quarterly Report

Back to GetFilings.com

FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D. C. 20549

(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002

or

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

FOR THE TRANSITION PERIOD FROM ________ TO ________

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

COMMISSION FILE NUMBER 1-6402-1

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

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

TEXAS 74-1488375
(State or other jurisdiction of (I. R. S. employer
incorporation or organization) identification number)

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

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

Indicate by check mark whether the registrant (1) has filed all reports required
to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934
during the preceding 12 months and (2) has been subject to the filing
requirements for the past 90 days.
YES X NO
---------- ----------

The number of shares outstanding of the registrant's common stock as of August
12, 2002 was 295,142,000 (net of treasury shares).

SERVICE CORPORATION INTERNATIONAL

INDEX

Page
----

Part I. Financial Information
Item 1. Financial Statements
Consolidated Statement of Operations - 3
Three and Six Months Ended June 30, 2002 and 2001

Consolidated Balance Sheet - 4
June 30, 2002 and December 31, 2001

Consolidated Statement of Cash Flows - 5
Six Months Ended June 30, 2002 and 2001

Consolidated Statement of Stockholders' Equity - 6
Six Months Ended June 30, 2002

Notes to Consolidated Financial Statements 7 - 17

Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations 17 - 40

Overview 17 - 18

Strategic Initiatives 18 - 22

Critical Accounting Policies, Accounting Changes and New Accounting Pronouncements 22 - 23

Results of Operations 23 - 30

Financial Condition, Liquidity and Capital Resources 30 - 34

Prearranged Funeral and Preneed Cemetery Activities 34 - 37

Non-recurring Items and Pro Forma Financial Information 37 - 39

Cautionary Statement on Forward-Looking Statements 39 - 40

Item 3. Quantitative and Qualitative Disclosures about Market Risk 40

Part II. Other Information

Item 1. Legal Proceedings 41 - 43

Item 4. Submission of Matters to a Vote of Security Holders 44

Item 6. Exhibits and Reports on Form 8-K 44 - 45

Signature 45

2

PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF OPERATIONS

(See notes to consolidated financial statements)

3

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED BALANCE SHEET

June 30, December 31,
(In thousands, except share amounts) 2002 2001
- ------------------------------------ ------------ ------------

ASSETS
Current assets:
Cash and cash equivalents .......................................... $ 162,429 $ 29,292
Receivables, net of allowances ..................................... 338,738 386,479
Inventories ........................................................ 164,656 168,975
Other .............................................................. 56,500 245,207
------------ ------------
Total current assets ............................................. 722,323 829,953
------------ ------------

Prearranged funeral contracts ........................................... 4,086,324 4,109,195
Long-term receivables, net of allowances ................................ 1,226,039 1,249,492
Cemetery property, at cost .............................................. 1,566,645 1,924,773
Property, plant and equipment, at cost (net) ............................ 1,171,484 1,357,410
Deferred charges and other assets ....................................... 728,697 699,805
Goodwill (net) .......................................................... 1,196,813 1,409,309
------------ ------------
$ 10,698,325 $ 11,579,937
============ ============
LIABILITIES & STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable and accrued liabilities ........................... $ 415,680 $ 484,150
Current maturities of long-term debt ............................... 190,889 220,640
Income taxes ....................................................... 11,688 5,812
------------ ------------
Total current liabilities ........................................ 618,257 710,602
------------ ------------

Long-term debt .......................................................... 1,978,989 2,313,973
Deferred prearranged funeral contract revenues .......................... 4,501,775 4,596,116
Deferred preneed cemetery contract revenues ............................. 1,719,278 1,756,041
Deferred income taxes ................................................... 408,101 546,747
Other liabilities ....................................................... 199,552 223,597
Stockholders' equity:
Common stock, $1 per share par value, 500,000,000 shares authorized,
294,496,953 and 292,153,765, issued and outstanding
(net of 2,516,163 and 2,502,190 treasury shares, at par) .... 294,497 292,154
Capital in excess of par value ..................................... 2,254,317 2,246,055
Accumulated deficit ................................................ (1,045,875) (814,149)
Accumulated other comprehensive loss ............................... (230,566) (291,199)
------------ ------------
Total stockholders' equity ...................................... 1,272,373 1,432,861
------------ ------------
$ 10,698,325 $ 11,579,937
============ ============

(See notes to consolidated financial statements)

4

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF CASH FLOWS

Six months ended
June 30,
(In thousands) 2002 2001
- -------------- --------- ---------

CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss ................................................................................ $(231,726) $ (10,320)
Adjustments to reconcile net loss to net cash provided by operating activities:
Extraordinary losses (gains) on early extinguishments of debt, net of taxes ........ 2,174 (4,618)
Cumulative effect of accounting changes, net of taxes .............................. 135,560 7,601
Depreciation and amortization ...................................................... 58,224 100,202
Benefit for deferred income taxes .................................................. (50,902) (20,420)
Restructuring and non-recurring charges ............................................ 236,568 51,246
Payments on restructuring and non-recurring charges ................................ (5,807) (13,412)
Gains from dispositions ............................................................ (5,140) (6,000)
Changes in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease in receivables .......................................................... 13,445 29,658
Decrease in other assets ......................................................... 45,366 78,418
(Decrease) increase in payables and other liabilities ............................ (48,871) 31,619
Other ............................................................................ (3,545) 1,309
Net effect of prearranged funeral production and maturities ........................ 13,029 27,072
--------- ---------
Net cash provided by operating activities ............................................... 158,375 272,355

CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures ............................................................... (39,999) (36,547)
Proceeds from sales of property and equipment ...................................... 34,724 46,952
Proceeds from joint ventures and sales of equity investments, net of cash retained . 266,704 106,900
Deposits of restricted funds, net .................................................. (34,188) (10,717)
Other .............................................................................. 848 --
--------- ---------
Net cash provided by investing activities ............................................... 228,089 106,588

CASH FLOWS FROM FINANCING ACTIVITIES:
Net decrease in borrowings under revolving credit agreements ....................... (29,061) (459,022)
Proceeds from long-term debt issued ................................................ -- 345,000
Payments of debt ................................................................... (67,549) (156,647)
Early extinguishments of debt ...................................................... (156,308) (99,925)
Bank overdrafts and other .......................................................... 204 452
--------- ---------
Net cash used in financing activities ................................................... (252,714) (370,142)
Effect of foreign currency .............................................................. (613) (9,965)
--------- ---------
Net increase (decrease) in cash and cash equivalents .................................... 133,137 (1,164)
Cash and cash equivalents at beginning of period ........................................ 29,292 47,909
--------- ---------
Cash and cash equivalents at end of period .............................................. $ 162,429 $ 46,745
========= =========

(See notes to consolidated financial statements)

5

SERVICE CORPORATION INTERNATIONAL
CONSOLIDATED STATEMENT OF STOCKHOLDERS' EQUITY

The Company's comprehensive loss for the six months ended June 30, 2001 of
$51,818 consisted of a net loss of $10,320, a foreign currency translation loss
adjustment of $62,328 and a reclassification adjustment for realized loss on
foreign currency translation of $20,830.

The Company's comprehensive loss for the three months ended June 30,
2002 of $131,378 consisted of a net loss of $143,015 and a foreign currency
translation gain adjustment of $11,637. The Company's comprehensive income for
the three months ended June 30, 2001 of $28,966 consisted of a net loss of
$10,585, a foreign currency translation gain adjustment of $18,721 and a
reclassification adjustment for realized loss on foreign currency translation of
$20,830.

(See notes to consolidated financial statements)

6

SERVICE CORPORATION INTERNATIONAL
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. NATURE OF OPERATIONS
Service Corporation International (SCI or the Company) is the largest provider
of funeral and cemetery services in the world through its funeral service and
cemetery operations. At June 30, 2002, the Company operated 2,466 funeral
service locations, 459 cemeteries and 154 crematoria located in eight countries.
The Company also has minority interest investments in funeral and cemetery
operations in four countries outside of North America.
The funeral service and cemetery operations consist of the Company's
funeral service locations, cemeteries, crematoria and related businesses.
Company personnel at the funeral service locations provide all professional
services relating to funerals, including the use of funeral facilities and motor
vehicles. Funeral related merchandise is sold at funeral service locations and
certain funeral service locations contain crematoria. The Company sells
prearranged funeral services whereby a customer contractually agrees to the
terms of a funeral to be performed in the future. The Company's cemeteries
provide cemetery interment rights (including mausoleum spaces, lots and lawn
crypts) and sell cemetery related merchandise. Cemetery items are sold on an
atneed or preneed basis. Company personnel at cemeteries perform interment
services and provide management and maintenance of cemetery grounds. Certain
cemeteries also operate crematoria. There are 186 combination locations that
contain a funeral service location within a Company owned cemetery.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation: The consolidated financial statements for the three
and six months ended June 30, 2002 and 2001 include the accounts of the Company
and all majority-owned subsidiaries and are unaudited but include all
adjustments, consisting of normal recurring accruals and any other adjustments
which management considers necessary for a fair presentation of the results for
these periods. These consolidated financial statements have been prepared in a
manner consistent with the accounting policies described in the annual report on
Form 10-K filed with the U. S. Securities and Exchange Commission for the year
ended December 31, 2001, unless otherwise disclosed herein, and should be read
in conjunction therewith. The accompanying year-end consolidated balance sheet
was derived from the audited consolidated financial statements but does not
include all disclosures required by accounting principles generally accepted in
the United States of America. Operating results for interim periods are not
necessarily indicative of the results that may be expected for the full year
period.
In 2002, the Company began recognizing revenues associated with
delivered caskets previously prearranged on cemetery contracts as part of
funeral operations; previously, such casket revenue was recognized in cemetery
operations. The Company has reclassified the prior year operating results to
conform to the current period presentation with no effect on previously reported
results of operations, financial condition or cash flows.

Use of Estimates in the Preparation of Financial Statements: The preparation of
the consolidated financial statements in conformity with accounting principles
generally accepted in the United States of America requires management to make
estimates and assumptions that may affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts of revenues and
expenses during the reporting period. As a result, actual results could differ
from these estimates.
Several of the Company's strategic initiatives are focused on increasing
cash flows. These initiatives include reviewing obligations to deliver cemetery
merchandise and services to customers in order to collect funds due to the
Company from the applicable cemetery trust funds and improving collection of
trade receivables. In connection with the review of obligations to deliver
cemetery merchandise and services, the Company recognized a change in estimate
which had the effect of increasing revenues and gross profit during the second
quarter of 2002 by $5,200 and $3,900, respectively, compared to $15,000 and
$10,900, respectively, in the second quarter of 2001. For the six months ended
June 30, 2002, the change in estimate increased revenues and gross profit of
$10,300 and $6,000, respectively, compared to $27,400 and $21,000, respectively,
in the six months ended June 30, 2001. Previously, these

7

amounts had been deferred as part of Deferred preneed cemetery contract
revenues. The Company intends to continue the review of these obligations;
however, the impact recognized in future periods will depend on the outcome of
such reviews.
In the first quarter of 2002, the Company changed the amortization period
related to deferred prearranged funeral obtaining costs from 20 years to 12
years. This change in estimate was made in order to more accurately reflect
current trends regarding the timeframe from when a prearranged funeral contract
is sold to when it is serviced atneed. This change in estimate reduced funeral
gross profit by approximately $1,600 and $3,300 and net income by approximately
$1,000 and $2,100 for the three and six months ended June 30, 2002,
respectively.
In addition, in the first quarter of 2002, the Company changed its
allocation methodology of overhead costs in North America to be based on funeral
and cemetery reporting unit revenues. The change in overhead allocation has not
impacted the Company's reported results of operations, financial condition or
cash flows.
During the second quarter of 2002, the Company decided to implement new
information technology systems, including a new North America point of sale
system and an upgraded general ledger system. As a result of this decision, the
Company accelerated amortization of its existing capitalized systems costs
beginning in the second quarter of 2002 in order to reflect the estimated
remaining useful lives of these systems. The Company recognized approximately
$4,500 of additional amortization related to this change in estimate in the
second quarter of 2002.

3. ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
In June 2001, the Financial Accounting Standards Board (FASB) issued Statement
of Financial Accounting Standards (SFAS) No. 141, "Business Combinations" and
SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 addresses
financial accounting and reporting for business combinations and establishes one
method - the purchase method - for accounting for such transactions. SFAS No.
142 addresses goodwill and other intangible assets and redefines useful lives,
amortization periods and impairment of goodwill. Under the new pronouncement,
goodwill will no longer be amortized, but will be tested for impairment
annually. SFAS No. 142 requires goodwill to be tested for impairment by
assessing the fair value of reporting units, generally one level below
reportable segments. The Company has identified North America, France, Germany,
Singapore and Argentina as reporting units for its funeral operations and North
America, Argentina, Chile and Uruguay as reporting units for its cemetery
operations. Prior to disposition, the Company also identified United Kingdom
Funeral, United Kingdom Cemetery and Italy Funeral as reporting units. In order
to assess impairment of goodwill, the Company determined the fair value of its
reporting units based on a combination of present value of expected future cash
flows and multiples of revenues and operating earnings. As a result of the
adoption of SFAS No. 142 in the first quarter of 2002, the Company recognized a
charge reflected as a cumulative effect of accounting change of $135,560 (net of
a tax benefit of $11,234) related to the write-off of goodwill in its North
America cemetery reporting unit.
The following table shows the historical results compared to unaudited pro
forma effects of SFAS No. 142 for the three and six months ended June 30, 2001
had goodwill not been amortized during that period.

THREE MONTHS ENDED SIX MONTHS ENDED
JUNE 30, 2001 JUNE 30, 2001
-------------------------- ------------------------------
PRO FORMA HISTORICAL PRO FORMA HISTORICAL
--------- ----------- ----------- ------------

Income (loss) before extraordinary items and
cumulative effects of accounting changes ............ $ 365 $ (10,656) $ 15,668 $ (7,337)
Basic earnings (loss) per share before extraordinary
items and cumulative effects of accounting changes .. $ .00 $ (.04) $ .06 $ (.03)
Diluted earnings (loss) per share before extraordinary
items and cumulative effects of accounting changes .. $ .00 $ (.04) $ .06 $ (.03)

8

The changes in the carrying amounts of goodwill for the six months ended
June 30, 2002 are as follows:

In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset
Retirement Obligations." SFAS No. 143 addresses obligations associated with the
retirement of tangible long-lived assets and associated asset retirement costs.
Under the provisions of SFAS No. 143, the fair value of a liability for an asset
retirement obligation should be recognized in the period in which it is
incurred, if a reasonable estimate can be made. The associated costs are
capitalized as part of the carrying amount of the long-lived asset and are
allocated to expense over the useful life of the asset. The Company does not
expect the adoption of SFAS No. 143 to have a significant effect on the
Company's results of operations, financial condition or cash flows. The Company
is required to adopt SFAS No. 143 during the first quarter of the year ending
December 31, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, and addresses impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 during the first quarter of 2002 with no impact on the
current results of operations, financial condition or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and classified as extraordinary items
as well as certain other items. The Company is currently assessing the impact of
this statement on its results of operations, financial condition and cash flows.
The Company is required to adopt SFAS No. 145 for the year ending December 31,
2003 as it relates to the classification of extinguishments of debt. The other
provisions of SFAS No. 145 are generally effective for transactions occurring
after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (Including
Certain Costs Incurred in a Restructuring)." The principal difference between
this pronouncement and Issue 94-3 is that the statement follows FASB Concepts
Statement No. 6 in that a liability for a cost associated with an exit or
disposal activity is recognized when the liability is incurred, not at the
entity's commitment to an exit plan. The Company is required to adopt SFAS No.
146 for exit or disposal activities that are initiated after December 31, 2002.
During the first quarter of 2001, the Company adopted SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities" and SFAS No. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging Activities:
An Amendment of FASB Statement No. 133." In accordance with these
pronouncements, the Company recognized a cumulative effect of a change in
accounting principle, net of applicable taxes, of $7,601.

9

4. DEBT
Debt consists of the following:

The Company's consolidated debt had a weighted average interest rate of
6.71% at June 30, 2002, compared to 6.72% at December 31, 2001.
At December 31, 2001, the Company had two primary bank credit agreements,
which were used for general corporate purposes: a 5-year multi-currency revolver
and a 2-year term loan. At December 31, 2001, the 5-year multi-currency revolver
allowed for borrowings up to $400,000 of which $285,714 could be denominated in
foreign currencies. No borrowings were outstanding under the 5-year revolver at
December 31, 2001. The 2-year term loan had an outstanding balance of $29,061 at
December 31, 2001. In February 2002, the Company repaid its 2-year term loan and
in June 2002, the Company's bank credit agreement matured with no borrowings
outstanding.
Interest rates for the multi-currency revolver and the term loan were based
on various indices as determined by the Company. The weighted average rate of
these borrowings at December 31, 2001, was 4.75%. A quarterly fee was paid on
the total commitment amount, ranging from 0.25% and 0.50%, which was based on
the Company's senior unsecured credit rating and was 0.50% at December 31, 2001.
At December 31, 2001, total debt included approximately $110,000 of debt
maturing in the second quarter of 2002 associated with the financial
restructuring of the Company's French subsidiary. In May 2002, the Company's
French subsidiary satisfied this debt with non-cash French financial assets.
On June 1, 2002, substantially all of the holders of the 7.00% senior notes
due 2015 (putable 2002) presented the notes for payment pursuant to their terms.
The Company paid the holders in compliance with the terms satisfying the put
option.
During the six months ended June 30, 2002, the Company purchased the
following notes in the open market: $2,775 of the 7.00% senior notes due 2015
(putable 2002); $75,580 of the 6.30% senior notes due 2020 (putable 2003);
$72,800 of the 7.375% senior notes

10

due 2004; and $2,151 of the 6.00% senior notes due 2005. As a result of these
transactions, the Company recognized extraordinary losses on early
extinguishments of debt totaling $2,174 (net of $1,249 tax benefit).
In connection with the purchase of the 6.30% senior notes due 2020 (putable
2003), the Company terminated the options embedded in the extinguished
securities by exchanging them for new options with economically equivalent
terms. These new options represent a liability of $6,732 at June 30, 2002,
recorded in Accounts payable and accrued liabilities and are adjusted to fair
value with a corresponding entry to Other income and expense in the consolidated
statement of operations.
The Company had deposited $115,815 and $81,627 in restricted
interest-bearing accounts that were held as security for various credit
instruments included in Deferred charges and other assets in the consolidated
balance sheet at June 30, 2002 and December 31, 2001, respectively.
Subsequent to June 30, 2002, the Company executed a new bank credit
agreement that will mature in July 2005. The new credit facility provides a
total commitment of $185,000, including a sublimit of $125,000 to support
letters of credit, and it is secured by the stock, inventory and receivables of
certain of the Company's domestic subsidiaries. In addition, these same domestic
subsidiaries have guaranteed the Company's debt. The new credit facility
contains certain financial covenants, including a minimum interest coverage
ratio, a maximum leverage ratio and limits on capital expenditures.
Additionally, the Company is restricted from paying dividends and making other
distributions, as defined.
The execution of this credit facility allowed the Company to reissue
letters of credit that previously required cash security, thereby releasing
restricted cash deposited with third parties. As of August 5, 2002, the Company
had reissued letters of credit allowing the Company to release approximately
$72,000, net, of cash collateral into cash accounts to be used for general
corporate purposes. This had the effect of reducing the availability under the
new credit facility to approximately $100,000.
Also subsequent to June 30, 2002, the Company purchased in the open market
$76,803 of the 6.30% senior notes due 2020 (putable 2003) and $26,120 of the
7.375% senior notes due 2004. Similar to the transactions above, the Company
terminated the options embedded in the extinguished 6.30% senior securities by
exchanging them for new options with economically equivalent terms. These new
options represent an additional liability of $8,520 and will be adjusted to fair
value through Other income and expense in the consolidated statement of
operations.
In August 2002, the Company announced that it intends to offer to exchange,
in a private placement, up to $300,000 aggregate principal amount of new 7.7%
senior notes due 2009 for an equivalent aggregate principal amount of its
outstanding 6.0% senior notes due 2005.

5. SEGMENT REPORTING
The Company's operations are both product and geographically based and the
reportable operating segments presented below include funeral and cemetery
operations. The Company's geographic segments include North America, Europe and
Other Foreign. As of June 30, 2002, the Company conducts funeral and cemetery
operations in its North America and Other Foreign segments and conducts funeral
operations in its European segment. In the first quarter of 2002, the Company
completed a joint venture with its United Kingdom operations (see note eight to
the consolidated financial statements), which conducted both funeral and
cemetery operations in its European segment.
In 2002, the Company began recognizing revenues associated with delivered
caskets previously prearranged on cemetery contracts as part of funeral
operations; previously, such casket revenue was recognized in cemetery
operations. The Company has reclassified the prior year operating results to
conform to the current period presentation with no effect on previously reported
results of operations, financial condition or cash flows.
In addition, in the first quarter of 2002, the Company changed its
allocation methodology of overhead costs in North America to be based on funeral
and cemetery reporting unit revenues. The change in overhead allocation has not
impacted the Company's consolidated results of operations, financial condition
or cash flows.

11

The Company's reportable segment information was as follows:

The following table reconciles gross profit from reportable segments to the
Company's consolidated income before income taxes, extraordinary items and
cumulative effect of accounting changes:

12

The Company's geographic segment information was as follows:

(1) Long-lived assets are not depreciated or amortized when assets are
classified as held for sale.

Included in the North America figures above are the following United States
amounts:

13

Included in the European figures above are the following French amounts:

During the six months ended June 30, 2002 and throughout 2001, the Company has
divested of certain North America and international funeral service locations
and cemeteries not considered part of its core operations. These divested
operations were impaired prior to 2002 in accordance with SFAS No. 121,
"Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to
be Disposed Of," and therefore have not been classified as discontinued
operations under more recent accounting pronouncements. Summary operating
results of the Company's divested operations for the three and six months ended
June 30, have been included below:

14

The net assets of the United Kingdom at December 31, 2001, were as follows:

6. CONTINGENCIES
The Company is a party to various litigation matters, investigations and
proceedings. The Company reserves for estimated losses relating to the
contingencies if amounts can be reasonably estimated and are probable to occur.
While litigation can contain a high degree of uncertainty and the risk of an
unfavorable outcome, management believes the eventual outcome of these
contingencies is not expected to have a material adverse effect on the Company's
financial position, cash flows or results of operations.

15

7. EARNINGS PER SHARE
A reconciliation of the numerators and denominators of the basic and diluted
earnings per share computations is presented below:

The computation of diluted earnings per share excludes outstanding stock
options and convertible debentures because the inclusion of such options and
debentures would be antidilutive in the periods presented. Total options and
convertible debentures, along with their conversion prices, that could impact
dilutive earnings per share are as follows:

8. RESTRUCTURING AND NON-RECURRING CHARGES
The Company has recorded restructuring and non-recurring charges in 2002, 2001,
2000 and 1999. As actual dispositions occur or better estimates become
available, the Company adjusts existing charges.
The activity related to restructuring and non-recurring charges during the
six months ended June 30, 2002 was as follows:

16

The Company's 2002 charges total $217,523 and relate primarily to $158,481
for certain funeral and cemetery operations being held for sale, $39,327 from
relieving certain individuals from their consulting and/or
covenant-not-to-compete contractual obligations, $16,873 as a reduction in the
value of certain equity investments and $2,842 as realized disposal losses for
long-lived assets. The Company also recorded $19,045 as changes in estimates of
previously recorded charges, of which $16,238 was related to additional
estimated reductions in the value of the Company's Argentina business due to
continued economic decline. The remaining 2002 reserve is related to the
terminated consulting and/or covenant-not-to-compete contractual obligations
which will be paid out according to the terms of the agreements, the majority of
which will be paid by 2012.
The $158,481 for certain funeral and cemetery operations being held for sale
in North America represent 80 funeral service locations, 38 cemeteries and 22
businesses being sold for their real estate values.
The Company's 2001 charges relate primarily to impairment charges associated
with international businesses sold or held for sale. In the first quarter of
2002, the Company joint ventured its United Kingdom operations, receiving pretax
proceeds of approximately $273,000 (which included approximately $9,000 in
retained cash) and securities with a face value of $21,600, which includes a 20%
equity interest in the United Kingdom operations and a 12% subordinated note.
The Fourth Quarter 2000 charges relate primarily to planned divestitures of
certain North America funeral service and cemetery locations, the reduction of
the carrying value of an equity investment in North America and certain
additional changes to estimates in the Company's restructuring and non-recurring
charges recorded in 1999.
The First Quarter 1999 Charge totaled $89,884 relating to a cost
rationalization program initiated in 1999. The remaining reserve relates to
severance costs associated with terminated executive contractual relationships
which will be paid out according to the terms of the respective agreements and
will extend through 2005.
The Fourth Quarter 1999 Charge totaled $272,544 relating to additional cost
rationalization programs, as well as initiatives required to enhance cash flow
and reduce debt. The remaining reserve is related to severance costs associated
with terminated contractual relationships of former owners and other executive
officers and will be paid in accordance with the terms of the respective
agreements, the majority of which will be paid by 2007.
The majority of the remaining reserve relates to terminated contractual
relationships and will be paid out according to the terms of the respective
agreements through 2012. In addition, of the $98,454 remaining liability at June
30, 2002, $39,089 is included in Accounts payable and accrued liabilities and
$59,365 is included in Other liabilities in the consolidated balance sheet based
on the expected timing of payments.
In July 2002, the Company announced its decision to defer the joint venture
transaction of its funeral operations in France until after 2002. As a result of
this decision, the Company will resume normal depreciation of assets associated
with these funeral operations in the third quarter of 2002, which is expected to
amount to approximately $3,000 to $4,000 per quarter.

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION
AND RESULTS OF OPERATIONS (DOLLARS IN THOUSANDS, EXCEPT AVERAGE
SALES PRICES AND PER SHARE DATA)

OVERVIEW
The Company is the largest provider of funeral and cemetery services in the
world. As of June 30, 2002, the Company operated 2,466 funeral service
locations, 459 cemeteries and 154 crematoria located in eight countries. The
Company also has minority interest investments in funeral and cemetery
operations in four countries outside of North America. For the six months ended
June 30, 2002, the Company's largest markets were North America and France,
which, when combined, represented approximately 97% of the Company's
consolidated revenues, 95% of consolidated operating income before non-recurring
items and 99% of the Company's total operating locations.
The funeral and cemetery operations are organized into a North American
division covering the United States and Canada, a European division primarily
responsible for operations in France and an Other Foreign division relating to
operations in the Pacific Rim and South America. The majority of the Company's
operations 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 prearranged sales
personnel. Personnel costs, the largest operating expense of the Company, are
the cost components most beneficially affected by clustering. The sharing of

17

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.
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 it is in compliance in all
material respects with the significant provisions of such statutes, ordinances
and regulations.

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 cost reductions, 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 in 2002 to concentrate on cost reduction initiatives and will use its
total operating free cash flow and proceeds from asset sales and 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 the United States. During
2001, the Company completed joint ventures of its operations in Australia, Spain
and Portugal and divested 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. These divestitures of certain North
America funeral service locations are approximately 87% completed as of July
2002. In February 2002, the Company announced the completion of a joint venture
transaction with its United Kingdom operations.
In the second quarter of 2002, the Company announced a plan to sell an
additional 140 funeral service locations and cemeteries in North America. The
Company expects to receive net pretax cash proceeds of approximately $50,000 to
$60,000 from the sale of these funeral and cemetery operations over the next 12
months. These North America operations being held for sale represent 80 funeral
service locations, 38 cemeteries and 22 businesses being sold for their real
estate values which collectively represent in aggregate annual EBITDA before
non-recurring items of approximately $8,000.
The timing of the completion of international and certain North America
asset sales and joint ventures to achieve the Company's core North America
business strategy is not easily predictable. The Company does not expect the
completion of the marketing program for the disposition of its South America
operations to be completed in 2002. In July 2002, the Company announced its
decision to defer the joint venture transaction of its funeral operations in
France until after 2002. While the Company believes it could complete this joint
venture transaction in 2002, the Company also believes it is more valuable to
its shareholders at this time to benefit from the strong improvements in cash
flows and EBITDA from France's operations in 2002. The Company believes the
continued improvement of these operations will result in the execution of a
joint venture transaction at a future date on more favorable terms than are
currently available, ultimately delivering more value to its shareholders.

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. In the second quarter of 2002,
the Company announced its decision to implement new information technology
systems in North America. As a result of this decision, the Company will

18

accelerate amortization of existing capitalized systems costs to reflect the
estimated remaining useful lives of these systems. Approximately $4,500 of
general and administrative expenses relates to this acceleration of non-cash
amortization expenses for the first six months of 2002. Excluding this
additional amortization, the Company's corporate general and administrative
component of total overhead expenses for the second quarter of 2002 decreased
approximately 18.0% compared to the same period of 2001 as a result of decreases
in other information technology costs and reductions in international overhead
due to the joint venturing of certain international businesses. See discussion
in Future Revenue Growth and Outlook for 2002 for further information regarding
increases in general and administrative costs throughout the remainder of 2002
as a result of the Company's decision to implement new information technology
systems.

Operating Free Cash Flow
The Company's strategic plan includes the execution of several cash flow
initiatives that are designed to increase the Company's operating free cash
flow. The Company considers operating free cash flow to be cash funds that
generally can be used to reduce the Company's debt or be reinvested in the
Company's business and is defined more specifically in the Financial Condition,
Liquidity and Capital Resources section in this Management's Discussion and
Analysis of Financial Condition and Results of Operations. The Company's
recurring and total operating free cash flow is summarized below.

Recurring operating free cash flow increased 2.6% or $1,498 in the second
quarter of 2002 compared to the same period of 2001. Comparing the second
quarter of 2002 to the same period of 2001, recurring operating free cash flow
included reductions in cash interest and cash taxes paid and improvements in
sources of cash from working capital; which were offset by increases in
maintenance capital expenditures, uses of cash for prearranged funeral
activities and a reduction in EBITDA primarily related to the sale and joint
venture of businesses. For the six months ended June 30, 2002, recurring
operating free cash flow was $8,326 or 7.0% below the same period of 2001.
Comparing the first six months of 2002 to 2001, recurring operating free cash
flow included reductions in cash interest and cash taxes paid and maintenance
capital expenditures; which were offset by increases in uses of cash for working
capital and prearranged funeral activities and a reduction in EBITDA primarily
related to the sale and joint venture of businesses. The decrease in total
operating free cash flow for the first six months of 2002 compared to 2001 is
primarily a result of approximately $94,500 less non-recurring cash tax refunds
and approximately $15,000 less non-recurring trust receipts received compared to
the first six months of 2001.

The Company's annual guidance for 2002 for recurring operating free cash flow
is $160,000 to $180,000. The Company's goal is to produce recurring operating
free cash flow of $200,000 in 2003. The Company has the following adjustments to
the components of the 2002 targeted range. First, the Company recently received
approval from the Internal Revenue Service to change its tax accounting methods.
The Company requested this change after adopting Staff Accounting Bulletin No.
101 in 2000 related to the Company's financial reporting revenue policies. This
approval is expected to defer cash taxes by approximately $115,000 over several
years. The Company originally expected to pay cash taxes of approximately
$65,000 to $75,000 in 2002, but now expects to pay $25,000 to $35,000 in cash
taxes for the full year of 2002. Second, the Company now expects to have a
recurring operating free cash flow benefit for the year of approximately $15,000
from the inclusion of recurring operating free cash flow from the Company's
French operations over and above the cash interest savings previously
anticipated due to the Company's decision announced in July 2002 to defer the
joint venture of its funeral operations in France until after 2002. Third, the
Company originally expected to incur approximately $60,000 in maintenance
capital expenditures in 2002. With the decision to defer the French joint
venture transaction, the Company now expects to incur maintenance capital
expenditures of approximately $70,000 to $75,000 in 2002. This additional
$10,000 to $15,000 in maintenance capital expenditures has been considered when
calculating the overall cash flow benefit of keeping the French operations
described above. Offsetting these net positive changes are potential lower
levels, when compared to the Company's

19

expectations, from the EBITDA and working capital components of recurring
operating free cash flow primarily in North America. As a consequence, the
Company remains comfortable with its annual 2002 recurring operating free cash
flow targeted range of $160,000 to $180,000.
These recurring operating free cash flow targets also 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
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-Q.

Debt Reductions

The Company's debt balance at December 31, 2001 included approximately
$110,000 of debt associated with the financial restructuring of the Company's
French subsidiary, which was satisfied with non-cash French financial assets in
the second quarter of 2002. The Company completed a joint venture transaction
relating to its operations in the United Kingdom during the first quarter of
2002, which generated approximately $273,000 in net pretax cash proceeds and
resulted in a substantial cash balance that has been primarily used to
repurchase public debt in the open markets. Subsequent to the second quarter of
2002, the Company announced the completion of a new $185,000 credit facility
that, when coupled with current cash balances, gives the Company substantial
liquidity. The Company's goals remain to continue using current cash balances,
asset sales proceeds and operating free cash flow to reduce the Company's net
debt to a range between $1,800,000 and $1,900,000 by December 31, 2002.
The Company originally expected proceeds from asset sales and joint venture
transactions to be approximately $550,000 in 2002 and total debt to be
approximately $1,800,000 at December 31, 2002. In July 2002, the Company
announced its decision to defer the joint venture transaction of its funeral
operations in France until after 2002. Approximately $225,000 of net pretax cash
proceeds was originally anticipated in 2002 from its French joint venture
transaction. In the second quarter of 2002, the Company announced 140 additional
funeral and cemetery operations in North America being held for sale. The
Company expects to receive net pretax cash proceeds of $50,000 to $60,000 from
the sale of these funeral and cemetery operations over the next twelve months.
As a result of the above, the Company now expects net pretax cash proceeds from
asset sales and joint venture transactions to be between $300,000 and $400,000
in 2002 and net debt (total debt less cash on hand) to be in the range of
$1,800,000 to $1,900,000 at December 31, 2002.

Future Revenue Growth and Outlook for 2002
The Company intends to operate a core business of high quality funeral
service 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. The success of the Company's
initiative to increase the population coverage of its North America funeral and
cemetery network through third party franchise relationships has increased the
Company's estimated coverage of major North America population areas, based on
certain geographical areas surrounding its network-owned funeral service
providers and third party franchise relationships, from 65% to 74%. 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
o Funeral services performed.
o Average revenue per funeral service.

20

CEMETERY
o Interments performed.
o Delivery of cemetery property and merchandise.
o Development of cemetery inventory.
o 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. These revenue
growth initiatives are discussed in more detail in the Company's Form 10-K for
the year ended December 31, 2001. Some of the Company's most important revenue
growth initiatives are listed below.
o Creation of a seamless, national brand of funeral service
locations under the Dignity Memorial(TM) brand name.
o Increase in the population coverage of the Dignity Memorial(TM)
branded network through third party franchise relationships.
o Establishment of exclusive, national, branded affinity
relationships with employers, social, fraternal and charitable
groups or institutions.
o Implementation and penetration of Dignity Memorial(TM) funeral and
cremation packages.
o Improvement of standards in customer service.
o Continued commitment to funeral and cemetery prearrangement.
o Expansion of cremation marketing, merchandising and services.
o Modification of sales commission and incentive compensation
structures.
o Focus on sales of deliverable cemetery property and merchandise.
o Growth capital expenditures.

On an annual basis, comparable North America funeral revenues are
expected to grow in the low single digit percentage rate in 2002 based on
equivalent funeral services performed and low single digit percentage growth in
the average revenue per funeral service (the term comparable is defined as
locations excluding operations that were acquired or constructed after January
1, 2001 or divested by the Company prior to June 30, 2002). Through the six
months ended June 30, 2002, the Company has experienced a decrease of 0.8% in
funeral services performed offset by an increase of 1.4% in the average revenue
per funeral service in comparable North America funeral service locations. For
the full year of 2002, the Company remains comfortable with its original 2002
outlook for comparable North America funeral revenues.
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 is recognized upon evidence of delivery
of such merchandise and services. Through the six months ended June 30, 2002,
the Company has experienced an increase of 3.5% in comparable North America
cemetery revenues. For the full year of 2002, the Company remains comfortable
with its original 2002 outlook for comparable North America cemetery revenues.
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. Through June 30, 2002, the Company has
experienced a comparable North America funeral gross margin percentage of 23.5%,
slightly exceeding the Company's full year of 2002 targeted range. However, due
to the historically lower number of deaths in the third quarter of a year, the
Company remains comfortable with the annual 2002 comparable North America
funeral gross margin percentage targeted range. Through June 30, 2002, the
Company has experienced a comparable North America cemetery gross margin
percentage of 12.9%. This gross margin percentage is within the Company's 2002
targeted range and the Company remains comfortable with its annual 2002
comparable North America cemetery gross margin percentage targeted range. See
Results of Operations included in this Management's Discussion and Analysis of

21

Financial Condition and Results of Operations for discussion of the Company's
operating results for the three and six months ended June 30, 2002.
The Company had expected corporate general and administrative expenses in
2002 to be modestly below 2001 corporate general and administrative expenses.
However, in the second quarter of 2002, the Company decided to implement new
information technology systems including a new North America point of sale
system and an upgraded general ledger system. Through the third quarter of 2003,
the Company is expected to capitalize approximately $15,000 to $20,000 of cash
flows related to these new information technology systems. This decision was not
included in the Company's 2002 original target for corporate general and
administrative expenses. As a result of this decision, the Company accelerated
amortization of existing capitalized systems costs to reflect the estimated
remaining useful lives of these systems and began to incur process engineering
costs in the second quarter of 2002. The accelerated non-cash amortization of
existing capitalized systems costs is expected to be approximately $4,500 per
quarter through the third quarter of 2003.
In the first quarter of 2002, the Company ceased depreciating certain
operating assets as a result of the Company's plan to sell or joint venture
these operations. In July 2002, the Company announced its decision to defer the
joint venture transaction of its funeral operations in France until after 2002.
As a result of this decision, the Company will resume normal depreciation of
assets associated with these funeral operations in the third quarter of 2002,
which is expected to amount to approximately $3,000 to $4,000 per quarter.

CRITICAL ACCOUNTING POLICIES, ACCOUNTING CHANGES AND NEW ACCOUNTING
PRONOUNCEMENTS
The Company's consolidated financial statements are impacted by
the accounting policies used and the estimates and assumptions made by
management during their preparation. These critical accounting policies should
be read in conjunction with the annual report filed on Form 10-K for the year
ended December 31, 2001. In 2002, the Company has changed certain of its
critical accounting policies as follows:

IMPAIRMENT OR DISPOSAL OF LONG-LIVED ASSETS
Effective January 1, 2002, the Company reviews long-lived assets for impairment
when changes in circumstances indicate that the carrying amount of the asset or
asset group may not be recoverable, in accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, "Accounting for the Impairment or Disposal
of Long-Lived Assets." SFAS No. 144 requires that long-lived assets to be held
and used be written down to fair value when it is concluded that the carrying
value of such assets is not recoverable on an undiscounted cash flow basis.
Assets to be disposed of by sale are required to be recorded at the lower of
their carrying amount or fair value less estimated cost to sell.

USE OF ESTIMATES
Amortization of Deferred Obtaining Costs
In the first quarter of 2002, the Company changed its amortization period for
prearranged funeral obtaining costs from 20 years to 12 years, a period that the
Company believes more accurately reflects current trends regarding the timeframe
from selling a prearranged funeral contract to when it is serviced atneed. This
change in estimate reduced funeral gross profit by approximately $1,600 and
$3,300 and net income by approximately $1,000 and $2,100 in the three and six
months ended June 30, 2002, respectively. The Company expects amortization
expense to increase by approximately $6,800 in 2002 as a result of changing the
amortization period. 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.

Overhead Allocations
The Company changed its allocation methodology of overhead costs in North
America to be based on funeral and cemetery reporting unit revenues. The Company
believes this new methodology better reflects results of operations at the North
America reporting unit level. The change in overhead allocation has not impacted
the Company's consolidated results of operations, financial condition or cash
flows.

22

ACCOUNTING CHANGES AND NEW ACCOUNTING PRONOUNCEMENTS
Goodwill
In the first quarter of 2002, the Company adopted SFAS No. 142, "Goodwill and
Other Intangible Assets." SFAS No. 142 addresses goodwill and other intangible
assets and redefines useful lives, amortization periods and impairment of
goodwill. Under the new standard, goodwill will no longer be amortized, but will
be tested for impairment annually. SFAS No. 142 requires goodwill to be tested
for impairment by assessing the fair value of reporting units, generally one
level below reportable segments. As a result of the adoption of SFAS No. 142 in
the first quarter of 2002, the Company recognized a cumulative effect of
accounting change of $135,560 (net of a tax benefit of $11,234) related to the
write-off of goodwill in its North America cemetery segment. Had goodwill not
been amortized during 2001, net income before extraordinary items and cumulative
effects of accounting changes would have been $365 and $15,668 and diluted
earnings per share before extraordinary items and cumulative effects of
accounting changes would have been $.00 ($.00 basic) and $.06 ($.06 basic) in
the three and six months ended June 30, 2001, respectively.

New Accounting Pronouncements
In June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement
Obligations." SFAS No. 143 addresses obligations associated with the retirement
of tangible long-lived assets and associated asset retirement costs. Under the
provisions of SFAS No. 143, the fair value of a liability for an asset
retirement obligation should be recognized in the period in which it is
incurred, if a reasonable estimate can be made. The associated costs are
capitalized as part of the carrying amount of the long-lived asset and are
allocated to expense over the useful life of the asset. The Company does not
expect the adoption of SFAS No. 143 to have a significant effect on the
Company's results of operations, financial condition or cash flows. The Company
is required to adopt SFAS No. 143 during the first quarter of the year ending
December 31, 2003.
In August 2001, the FASB issued SFAS No. 144, "Accounting for the
Impairment or Disposal of Long-Lived Assets." SFAS No. 144 supercedes SFAS No.
121, and addresses impairment or disposal of long-lived assets. The Company
adopted SFAS No. 144 during the first quarter of 2002 with no impact on the
current results of operations, financial condition or cash flows.
In April 2002, the FASB issued SFAS No. 145, "Rescission of FASB Statements
No. 4, 44 and 64, Amendment of FASB Statement No. 13, and Technical
Corrections." SFAS No. 145 eliminates the requirement that gains and losses from
the extinguishment of debt be aggregated and classified as extraordinary items.
The Company is currently assessing the impact of this statement on its results
of operations, financial condition and cash flows. The Company is required to
adopt SFAS No. 145 for the year ending December 31, 2003 as it relates to the
classification of extinguishments of debt. The other provisions of SFAS No. 145
are generally effective for transactions occurring after May 15, 2002.
In June 2002, the FASB issued SFAS No. 146, "Accounting for Costs
Associated with Exit or Disposal Activities." SFAS No. 146 nullifies Emerging
Issues Task Force (EITF) Issue No. 94-3, "Liability Recognition for Certain
Employee Termination Benefits and Other Costs to Exit and Activity (Including
Certain Costs Incurred in a Restructuring)." The principal difference between
this pronouncement and EITF Issue 94-3 is that the statement follows FASB
Concepts Statement No. 6 in that a liability for a cost associated with an exit
or disposal activity is recognized when the liability is incurred not at the
entity's commitment to an exit plan. The Company is required to adopt SFAS No.
146 for exit or disposal activities that are initiated after December 31, 2002.

RESULTS OF OPERATIONS
For the quarter ended June 30, 2002, the Company reported revenues of $566,328
compared to $618,711 in the second quarter of 2001. The decrease in revenues was
primarily the result of joint ventures and dispositions of operations during
2002 and 2001. Gross profit in the second quarter of 2002 was $91,273 or 16.1%
compared to $86,570 or 14.0% in the second quarter of 2001. For the three months
ended June 30, 2002, the Company reported a loss before extraordinary items and
cumulative effect of accounting changes of $140,160, net loss of $143,015,
diluted loss per share before extraordinary items and cumulative effect of
accounting changes of $.48 ($.48 basic) and diluted net loss per share of $.49
($.49 basic). The Company reported a loss before extraordinary items and
cumulative effect of accounting changes of $10,656, net loss of $10,585, diluted
loss per share before extraordinary items and cumulative effect of accounting
changes of $.04 ($.04 basic) and diluted net loss per share of $.04 ($.04 basic)
for the second quarter of 2001.

23

In the first quarter of 2002, the Company ceased amortization of goodwill
as required by SFAS No. 142; changed the amortization period of deferred
prearranged funeral obtaining costs from 20 to 12 years; changed the allocation
methodology of overhead costs in North America to be based on funeral and
cemetery reporting unit revenues; began recognizing revenues associated with
delivered caskets previously prearranged on cemetery contracts as part of
funeral operations instead of cemetery operations; and ceased depreciation of
operating assets outside of North America as a result of the Company's plan to
sell or joint venture these operations. For purposes of the following
discussion, the Company has presented the financial information for 2001 on a
pro forma basis as if these changes had been implemented on January 1, 2001.
Further results in all periods presented are representative of the Company's
comparable locations, which exclude operations that were acquired or constructed
after January 1, 2001 or divested by the Company prior to June 30, 2002. For
further information, refer to Non-Recurring Items and Pro Forma Financial
Information in Management's Discussion and Analysis of Financial Condition and
Results of Operations in this Form 10-Q. The following is a discussion of the
Company's results of comparable operations for the three and six months ended
June 30, 2002 compared to the comparable pro forma results for the three and six
months ended June 30, 2001.

24

The following factors contributed to the results for the second quarter of 2002.
o Comparable worldwide funeral revenues increased 2.7% in 2002 compared to
2001 related to increases in the average revenue per funeral service in the
United States and France and growth in monument sales in the Company's
French operations. Total worldwide funeral services performed were below
the same period in the prior year as a result of dispositions and joint
ventures completed by the Company, both domestically and internationally.
o Comparable cemetery revenues increased 8.7% in the second quarter of 2002
compared to the same period of 2001 as a result of the completion of
cemetery development projects. Revenue on cemetery development projects is
deferred until the project is completed and a minimum of 10% of the
contract price has been collected.

Funeral

Comparable North America funeral revenues remained stable in the second
quarter of 2002 as a result of an increase in the average revenue per funeral
service. The comparable average revenue per funeral service increased 2.2% to
$4,042 in the second quarter of 2002 compared to 2001 primarily as a result of
selling Dignity Memorial(TM) packaged funeral plans. The increase in the average
revenue per funeral service was slightly offset by a decline in the number of
funeral services performed of 2.1%. Based on various sources of mortality
information accumulated by the Company, the decline in the number of funeral
services performed is consistent with trends experienced throughout the United
States.
Comparable North America gross profit and margin percentage decreased in
the second quarter of 2002 compared to the second quarter of 2001 as a result of
the effect of the decrease in comparable funeral services performed on the fixed
cost nature of the Company's funeral network.
Comparable international revenues increased in the second quarter of 2002
compared to the second quarter of 2001 as a result of increases in the average
revenue per funeral service and the favorable effect of foreign currency. The
average revenue per funeral service in France increased $77, excluding the
favorable effect of foreign currency, to $1,924 in the second quarter of 2002
compared to 2001. This increase is the result of the expansion of funeral
products and services and the increased number of funeral services performed
from the prearranged funeral backlog, which carries a higher average revenue per
funeral service than France's atneed funeral services. Additionally, an increase
in the delivery of burial monuments, year over year, has contributed to
increased revenue and gross profits in France. Currency translation had a
favorable effect of $4,400 on international funeral revenue in the second
quarter as the euro has continued to strengthen relative to the U.S. dollar,
partially offset by the continued degradation of the Argentine peso. The gross
profit and margin percentage in the second quarter of 2002 remained stable
compared to the second quarter of 2001 as a result of the positive impact of the
above revenue growth initiatives on gross profit.

Cemetery
Comparable North America cemetery revenues increased in the second quarter of
2002 compared to 2001 as a result of an increase in completed cemetery property
development projects. Revenue on cemetery development projects is recognized
when development projects are completed and customer payments are at least 10%
of the total contract amount.
While comparable gross profit increased in the second quarter of 2002
compared to 2001, the margin percentage has declined from 14.9% to 14.2%. This
decline is the result of changes in estimates of deferred preneed cemetery
contract revenues related to obligations to deliver cemetery merchandise and
services to customers. The changes in estimates of deferred preneed cemetery
contract revenues have a high gross margin percentage and amounts recognized in
revenue and gross profit in the second quarter of 2002 were $5,200 and $3,900,
respectively, compared to $15,000 and $10,900, respectively, in the second
quarter of 2001; therefore the gross margin percentages would have been 12.2%
and 8.2% for the second quarter of 2002 and 2001, respectively, if these changes

25

in estimates had not been recorded. The Company will continue to monitor these
obligations to deliver cemetery merchandise and services to customers, however,
the impact recognized in 2002 is expected to be below 2001 levels.
Comparable international cemetery revenue declined in the second quarter of
2002 compared to 2001 as a result of the negative effect of foreign currency
translation of $5,500. In January 2002, the Argentine peso, which previously
exchanged at a rate of one peso to one U.S. dollar, was converted to a free
floating currency. As a result, the Company's South America operations have
experienced significant adjustments in foreign currency translation.

Other Income and Expense
Corporate general and administrative expenses increa