SERVICE CORPORATION INTERNATIONAL - 10-Q Quarterly Report

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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.

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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 increased $1,169 to $19,592 in the
second quarter of 2002 compared to the same quarter of 2001. The increase is
primarily related to the Company's decision to implement new information
systems, including a new North America point of sale system and an upgraded
general ledger system. As a result of this decision, the Company began
accelerating the amortization of existing capitalized system costs and recorded
$4,500 of additional amortization in the second quarter of 2002. The increase in
general and administrative expenses is partially offset by reductions in other
informational technology costs and decreases in international general and
administrative expenses due to the joint venturing of certain international
businesses. Expressed as a percentage of revenue, general and administrative
expenses were 3.5% in the second quarter of 2002 compared to 3.0% in the second
quarter of 2001.
Interest expense decreased $12,746 or 23.5% to $41,406 in the second
quarter of 2002 compared to the second quarter of 2001. The decrease in interest
expense reflects the decline in the Company's long-term debt balance. For the
three months ended June 30, 2002, the average outstanding debt was $2,300,000
compared to $2,900,000 for the three months ended June 30, 2001.
Other income was $2,385 in the quarter ended June 30, 2002 compared to
$4,218 in the same period of 2001. Other income primarily consists of interest
income from various investments, prearranged funeral overrides received from
insurance companies, mark-to-market income or expense related to hedge
transactions and transactional foreign currency gains and losses. Other income
decreased in the period as a result of transactional foreign currency net losses
being approximately $3,000 greater in the current period versus the same period
in the prior year.
The provision for income taxes before non-recurring items reflects an
effective tax rate of 21.7% for the three months ended June 30, 2002 compared to
37.7% for the comparable period of 2001. The lower rate in 2002 is the result of
the elimination of non-deductible goodwill expense and the reversal of valuation
allowances related to net operating loss carryforwards utilized by the Company
in conjunction with its international operations. Valuation allowances were
required to be recorded at December 31, 2001 as a result of the decision to hold
for sale the assets of the Company's remaining international jurisdictions. In
2001, restructuring and non-recurring charges consisted of recognizing into
earnings the cumulative foreign currency translation effect for the Australian
operations previously included as a separate component of the Company's
consolidated stockholders' equity. Because no tax benefit was associated with
this change, the final provision for income taxes reflected an unusually high
effective tax rate in the second quarter of 2001. The consolidated benefit for
income taxes reflects a 28.4% effective rate for the second quarter of 2002
compared to 610.3% effective tax rate for 2001.
The Company expects the effective tax rate before non-recurring and
restructuring charges to be approximately 24% for the remainder of 2002.

Cremations
There has been a growing trend over the last several years in the number of
cremations performed in North America as an alternative to traditional funeral
service dispositions. Outside of North America, the cremation rate is more
stable. 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 to the Company. In North
America, for the second quarter of 2002, 38.2% of comparable funeral services
performed by the Company were cremation cases, compared to 37.4% in the same
period of 2001. The Company's strategy for cremation trends in North America is
to continue the movement towards performing cremations with memorialization
services as well as to offer enhanced and additional cremation products and
services to North American cremation consumers. This is being accomplished
through programs such as the Company's Dignity Memorial(TM) cremation packaged
funeral plans, which offer the

26

consumer a broad array of choices of products and services for memorialization.
The Company is considering expanding National Cremation(TM) Service, the
Company-owned largest single provider of cremation services in North America, to
nineteen states by the end of 2003.

Restructuring and Non-Recurring Charges
In the second quarter of 2002, the Company recorded a charge of $231,674
primarily related to an impairment charge of $158,481 for certain funeral and
cemetery operations being held for sale, $39,327 as a result of relieving
certain individuals from their consulting and/or covenant-not-to-compete
contractual obligations, $16,238 related to additional estimated reductions in
value of the Company's businesses in Argentina due to the continued economic
decline and $16,873 related to the reduction in the value of equity investments
in North America companies.
In the second quarter of 2001, the Company recorded a non-cash charge of
$26,223 primarily related to the recognition into earnings of the cumulative
foreign currency translation effect from the Australian operations, which was
previously included as a separate component of Accumulated other comprehensive
loss in the Company's stockholders' equity.
(See note eight to the consolidated financial statements in Item 1 of this
Form 10-Q.)

27

The following factors contributed to the results for the six months ended
June 30, 2002.
o Comparable funeral revenues increased in the six months ended June 30, 2002
over the same period of 2001 as a result of increases in the average
revenue per funeral service. 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 in the first six months of 2002
compared to 2001 as a result of the completion of cemetery development
projects offset by reductions in changes in estimates of deferred cemetery
contract revenues.
o The Company experienced a negative effect of foreign currency translation
of approximately $11,800 on comparable revenues and $1,200 on comparable
gross profits in the six months ended June 30, 2002 compared to the six
months ended June 30, 2001 as a result of the decline in value of the
Argentine peso.

Funeral

In the six months ended June 30, 2002, comparable North America funeral
revenues and gross profits margin percentage remained consistent, despite a
decline in the number of funeral services performed, as a result of an increase
in the average revenue per funeral service. The average revenue per funeral
service increased $54 to $4,017 in 2002 compared to the same period of the prior
year as a result of the revenue growth initiatives particularly Dignity
Memorial(TM) packaged funeral plans partially offset by an increase in the mix
of cremations. Cremation sales carry a lower average revenue per funeral service
than traditional funeral services.

Comparable international funeral revenues, gross profit and margin
percentage increased in the six months ended June 30, 2002 compared to the same
period in 2001 as a result of increases in the average revenue per funeral
service, the number of funeral services performed and an increase in the
delivery of burial monuments in France.

Cemetery
Comparable North America cemetery revenues increased in the six months ended
June 30, 2002 compared to the same period of 2001 as a result of revenue
recognized upon completion of cemetery property development projects. Preneed
cemetery property revenues are recognized upon completion of the development of
the property coupled with customer payment of at least ten percent of the total
contract amount.
Comparable North America gross profit and margin percentage declined in the
six months ending June 30, 2002 compared to the same period of the prior year as
a result of reductions in changes in estimates of deferred cemetery contract
revenues. In 2001, the Company focused on reviewing its obligations to deliver
cemetery merchandise and services to customers. As a result of this initiative,
the Company recognized revenue related to changes in estimates of previously
deferred preneed cemetery contract revenues. In the six months ended June 30,
2002, the change in estimate recognized in revenue and gross profit was $10,300
and $6,000, respectively, compared to $27,400 and $21,000, respectively, in the
first six months of 2001. If the Company had not recorded these changes in
estimates, the gross margin percentages would have been 11.3% and 9.0% for the
six months ending June 30, 2002 and 2001, respectively. 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 and gross profit declined in the
first six months of 2002 compared to the same period of the prior year as a
result of the negative effect of foreign currency translation of approximately
$9,600 on revenue and $700 on gross profit. In January 2002, the Argentine peso,
which was 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.

28

Other Income and Expense
Corporate general and administrative expenses decreased $1,079 to $35,323 as a
result of general corporate cost reductions and reductions in international
general and administrative expenses due to the joint venturing of certain
international businesses. Expressed as a percentage of revenue, general and
administrative expenses were 3.1% in the first six months of 2002 compared to
2.8% in the same period of 2001.
In the second quarter of 2002, the Company decided to implement new
information systems including a North America point of sale system and an
upgraded general ledger system. As a result of this decision, the Company began
accelerating the amortization of existing capitalized system costs and recorded
$4,500 of additional amortization in the first six months of 2002. If the
accelerated amortization had not been recorded, general and administrative
expenses would have been 15.3% below prior year.
Interest expense decreased $30,166 or 26.2% to $84,792 in the six months
ended June 30, 2002 compared to the same period of 2001. The decrease in
interest expense reflects the decline in the Company's long-term debt balance.
For the six months ended June 30, 2002, the average outstanding debt was
$2,400,000 compared to $3,000,000 for the six months ended June 30, 2001.
Other income was $9,623 in the first six months of 2002 compared to $7,681
in the same period of the prior year. Other income primarily consists of
interest income from various investments, prearranged funeral sales overrides
received from insurance companies, mark-to-market income or expense related to
hedge transactions and transactional foreign currency losses. The increase is
the result of higher levels of interest income on cash investments from the
increased cash balance in 2002 compared to 2001.
The provision for income taxes before restructuring and non-recurring
charges represents an effective tax rate of 26.0% for the six months ended June
30, 2002 compared to an effective rate of 38.4% in the prior year. The lower
rate in 2002 is the result of the elimination of non-deductible goodwill expense
and the reversal of valuation allowances related to net operating loss
carryforwards utilized by the Company in conjunction with its international
operations. Valuation allowances were required to be recorded at December 31,
2001 as a result of the decision to hold for sale the assets of the Company's
remaining international jurisdictions. Included in restructuring and
non-recurring charges in 2001 was a charge as a result of the Company completing
the joint venture of its Australian operations. Because the effective tax
benefit associated with this charge was 13.9% and, therefore, lower than the
current tax expense on continuing operations, the consolidated effective tax
rate was 186.0% for the six months ended June 30, 2001. The effective rate on
restructuring and non-recurring charges in the six months ended June 30, 2002
was a benefit of 27.4%, therefore, the calculated consolidated effective rate
for the six months ended June 30, 2002 was a benefit of 28.5%.
The Company expects the effective tax rate before non-recurring and
restructuring charges to be approximately 24% for the remainder of 2002.

Restructuring and Non-Recurring Charges
In the six months ended June 30, 2002, the Company recorded restructuring and
non-recurring charges of $236,568 primarily related to an impairment charge of
$158,481 for certain funeral and cemetery operations being held for sale,
$39,327 as a result of relieving certain individuals from their consulting
and/or covenant-not-to-compete contractual obligations, $16,238 related to
additional estimated reductions in value of the Company's businesses in
Argentina due to the continued economic decline, $16,873 related to the
reduction in the value of equity investments in North America companies, and
$5,649 related primarily to changes in estimates of previously recorded charges.
In the six months ended June 30, 2001, the Company recorded a non-cash
charge of $51,246 primarily related to the joint venturing of its Australian
operations. An impairment charge totaling $30,338 was recorded as a result of
joint venturing its Australian operations. Further, the Company recognized into
earnings $20,830 relating to the accumulative effect from Australian operations,
which was previously included as a separate component of Accumulated other
comprehensive loss in the Company's stockholders' equity.
(See note eight to the consolidated financial statements in Item 1 of this
Form 10-Q.)

29

Cremations
There has been a growing trend over the last several years in the number of
cremations performed in North America as an alternative to traditional funeral
service dispositions. Outside of North America, the cremation rate is more
stable. 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 to the Company. In North
America, for the first six months of 2002, 38.0% of comparable funeral services
performed by the Company were cremation cases, compared to 37.2% in the same
period of 2001. The Company's strategy for cremation trends in North America is
to continue the movement towards performing cremations with memorialization
services as well as to offer enhanced and additional cremation products and
services to North American cremation consumers. This is being accomplished
through programs such as the Company's Dignity Memorial(TM) cremation
memorialization packaged funeral plans, which offer the consumer a broad array
of choices of products and services for memorialization. The Company is
considering expanding National Cremation(TM) Service, the Company-owned largest
single provider of cremation services in North America, to nineteen states by
the end of 2003.

FINANCIAL CONDITION, LIQUIDITY AND CAPITAL RESOURCES

31

An income statement approach calculating the Company's recurring and total
operating free cash flow for the three and six months ended June 30, 2002 and
2001 is detailed below.

(1) Net non-recurring receipts for the first six months of 2002 consisted
of $21,770 of non-recurring tax refunds, $11,886 of growth capital
expenditures and $4,098 of various other net non-recurring receipts.
Net non-recurring receipts for the first six months of 2001 consisted
of an approximate $116,000 non-recurring tax refunds, $24,741 of
non-recurring trust receipts, $3,500 of growth capital expenditures and
$6,548 of various other net non-recurring payments.

(2) Adjusted changes in working capital is defined as consolidated changes
in working capital from the consolidated statement of cash flows
adjusted for changes in interest and tax accruals and net
non-recurring cash receipts or payments (included in cash flows
provided by operating activities) which are of a non-recurring
operational nature.

- ---------------------
(1) Changes in working capital from the consolidated statement of cash flows is
comprised of Changes in assets and liabilities and the net effect of
prearranged funeral production and maturities included in Cash flows from
operating activities.

Recurring operating free cash flow of $110,201 for the first six months was
primarily used for debt reduction and requirements for cash collateral to
provide security for various credit instruments. In the second quarter of 2002,
approximately $45,000 of the Company's $59,246 of recurring operating free cash
flow was deposited as cash collateral for various credit instruments with the
remaining free cash flow primarily used for debt reduction. Subsequent to the
second quarter of 2002, the Company utilized its new $185,000 credit facility to
issue letters of credit and reduce cash collateral. As of August 5, 2002, the
Company has released approximately $72,000, net, of cash collateral by means of
issuing such letters of credit.
Adjusted changes in working capital for the six months ended June 30, 2002
reflects a use of cash of $18,174 which is comprised of a use of cash of $55,420
in the first quarter of 2002 offset by a source of cash of $37,246 in the second
quarter of 2002. The use of cash in the first quarter was primarily related to
customer cash receipts and timing of cash payments to vendors. The source of
cash in the second quarter was primarily the result of improvements in cash flow
from customer receivables and sources of cash from prearranged funeral
activities.
For further discussion and details related to the Company's operating free
cash flow in the second quarter and first six months of 2002, see Operating Free
Cash Flow included in Strategic Initiatives in this Management's Discussion and
Analysis of Financial Condition and Results of Operations.
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. As of June 30,
2002, the Company had total debt of $2,169,878 and current maturities of
long-term debt of $190,889. The current maturities of long-term debt primarily
consist of $175,704 of 6.3% senior notes due in 2020 (putable in 2003).
Based on the Company's current cash balances, its expectations of
additional asset sales proceeds previously discussed and the Company's new
$185,000 credit facility, the Company believes it has adequate means to meet
current maturities of long-term debt.

32

Subsequent to June 30, 2002, the Company purchased in the open market
approximately $76,800 of 6.3% senior notes due in 2020 (putable in 2003) and
approximately $26,120 of 7.375% senior notes due in 2004. As of August 5, 2002,
the Company's maturity schedule for certain of its outstanding senior public
notes due in the near term is as follows:

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. This offer is being made by the Company
to defer a significant amount of debt maturities to 2009, while still retaining
the existing and favorable debt structure and terms at a reasonable cost to the
Company. There is no assurance that the Company will proceed with or consummate
this exchange.

EBITDA Before Non-Recurring Items
The Company calculates EBITDA before non-recurring items for each period
presented by adding interest, tax, depreciation and amortization expenses back
to net income before non-recurring items and then deducting gains from
dispositions. Descriptions of non-recurring items for both periods are discussed
in 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. Reductions in EBITDA before non-recurring items in 2002 compared to
2001 are primarily related to the Company's asset divestiture and joint venture
transactions that have occurred. Calculations for EBITDA before non-recurring
items for the three and six months of 2002 and 2001 are as follows:

(1) 2001 Depreciation and amortization and Net income before non-recurring
items is presented in these tables on a pro forma basis. See Non-recurring
Items and Pro Forma Financial Information in this Management's Discussion
and Analysis of Financial Condition and Results of Operation in this Form
10-Q for further discussion.

Sources and Uses of Cash
Net cash provided by operating activities was $158,375 for the six months ended
June 30, 2002 compared to $272,355 for the same period of 2001, a decrease of
$113,980. The decrease is primarily the result of lower income tax refunds of
approximately $94,500; reduced cash from certain cemetery and funeral trust
funds; and reductions in the Company's working capital resources from customer
receivables and timing of payables. Included in net cash provided by operating
activities is approximately $48,300 and $44,600 for the six months ended June
30, 2002 and 2001, respectively, of cash receipts associated with the Company's
surety bonding program and $9,800 and $24,700 of special trust funds received
from the collection of receivables from certain funeral and cemetery trust
funds.

33

Net cash provided by investing activities was $228,089 for the six months
ended June 30, 2002 compared to $106,588 in the same period prior year, an
increase of $121,501. The increases primarily related to proceeds from the joint
venturing of the Company's United Kingdom operations in the first quarter of
2002, offset by increased levels of restricted cash as a result of collateral
requirements for various credit instruments and other letters of credit, and
higher capital expenditures from growth initiatives begun in 2002.
Net cash used in financing activities was $252,714 for the six months ended
June 30, 2002 compared to $370,142 in the same period of 2001. The net cash used
in financing activities in both periods is related to the Company's continued
debt reduction initiatives.

Financial Assurances
In support of operations, the Company has entered into arrangements with certain
high quality surety companies whereby such companies agree to issue surety bonds
on behalf of the Company as financial assurance and/or as required by existing
state and local regulations. The surety bonds are used for various business
purposes; however, the majority of the surety bonds issued and outstanding have
been used to support the Company's prearranged funeral and preneed cemetery
activities. The underlying obligations these surety bonds assure are recorded on
the Company's consolidated balance sheet as Deferred prearranged funeral
contract revenues and Deferred preneed cemetery contract revenues. The Company
has approximately $296,000 and $290,000 of surety bonds outstanding attributable
to prearranged funeral and cemetery activities at June 30, 2002 and December 31,
2001, respectively.
As the Company sells prearranged funeral contracts and preneed cemetery
contracts, the Company intends to post surety bonds where allowed by applicable
law. The Company posts the surety bond in lieu of trusting a certain amount of
funds received from the customer. The amount of the bond posted is determined by
the total amount of the prearranged contract that would otherwise be required to
be trusted, in accordance with applicable state law. For the six months ended
June 30, 2002 and 2001, the Company had $48,300 and $44,600, respectively, of
cash receipts attributable to bonded sales. These amounts do not consider
reductions associated with taxes, obtaining costs, or other costs.
Bond premiums are paid annually and are automatically renewable until
maturity of the underlying prearranged contracts. Except for cemetery
preconstruction bonds (which are irrevocable), the surety companies generally
have the right to cancel the surety bonds at any time with appropriate notice.
In the event a surety company were to cancel the surety bond, the Company would
be required to obtain replacement assurance or fund a trust for an amount
generally less than the posted bond amount, unless the customer's prearranged
contract has been paid in full. The Company does not believe it will be required
to fund material future amounts related to these surety bonds.
The applicable Florida law which allows posting of surety bonds for
prearranged contracts will expire December 31, 2004. Unless the law is otherwise
amended, the Company plans to shift from bonding to either trust or insurance
funding for prearranged funeral and cemetery programs in the state of Florida in
the year 2005. Prearranged contracts entered into prior to December 31, 2004
where the Company posted surety bonds will be allowed to continue the bonding
for the remaining life of those contracts. Of the total bonding proceeds
received by the Company for the six months ended June 30, 2002 and 2001,
approximately $35,200 and $35,600, respectively, were attributable to the state
of Florida. Assuming the Company's prearranged funeral and cemetery sales
production in Florida in 2005 is consistent with production for the full year of
2001, the pre-tax forecasted cash flow impact of shifting to trusting is
expected to be approximately $20,000 to $25,000 lower in that year before
considering the cash flow impact of contracts going atneed. This forecast
reduction in pre-tax cash flow involves assumptions about the mix of preneed
sales among property, merchandise and services and the appropriate levels of
trusting required by Florida law. Using the same general assumptions, there
would also be expected an estimated cash flow decrease in years 2006 through
2009 of approximately $2,000 to $6,000 per year.

PREARRANGED FUNERAL AND PRENEED CEMETERY ACTIVITIES
The Company believes an active funeral and cemetery prearrangement program can
increase future market share in the markets in which the Company operates, and
is one of the Company's important revenue growth initiatives in North America.
For purposes of discussion in this section, the use of the term
"prearranged" or "prearrangement" refers to funeral programs specifically or
funeral and cemetery programs generally. The use of the term "preneed" refers to
cemetery programs specifically.

34

Prearrangement is a means through which a customer contractually agrees to the
terms of a funeral and/or cemetery burial to be performed or provided in the
future. Revenues associated with prearranged contracts are deferred until such
time that the funeral or cemetery services are performed or merchandise is
delivered. Preneed sales of cemetery interment rights (cemetery burial property)
are not recognized until a minimum percentage (10%) of the sales price has been
collected and the property has been constructed. The Company incurs sales and
marketing costs to procure these prearrangement contracts. These costs include
compensation associated with maintaining a sales force, telemarketing and lead
procurement costs, brochures and marketing materials, advertising and
administrative costs. Those costs incurred that vary with and are primarily
related to the acquisition of new prearranged contracts (net obtaining costs)
are deferred (principally commissions and related fringe benefits). The
remaining costs are expensed as incurred. When the Company sells a prearranged
funeral contract to be funded by life insurance, the Company receives a general
agency commission from the insurance company, which is also deferred against the
net obtaining costs. To the extent the general agency commission exceeds the net
obtaining costs incurred and deferred, the excess is recorded as a reduction to
the sales and marketing costs expensed. Additionally, the Company may receive
cash overrides related to prearranged funeral contracts to be funded by life
insurance as a result of marketing agreements entered in connection with the
sale of its insurance subsidiaries in 2000. These overrides are recorded in
Other income in the consolidated statement of operations. Funeral net obtaining
costs are amortized over a period representing the estimated life of prearranged
funeral contracts. Prior to 2002, the amortization period was 20 years. As of
January 1, 2002, the Company changed the estimated period to 12 years to more
accurately reflect current trends regarding the timeframe from selling a preneed
contract to when it is serviced atneed. The amount of funeral net obtaining
costs amortized in the consolidated statement of operations was approximately
$7,362 in the six months ended June 30, 2002 and $3,317 in the six months ended
June 30, 2001 (pro forma of $6,048 in the six months ended June 30, 2001).
Cemetery net obtaining costs are expensed as the specific revenue is recognized.
For purposes of determining EBITDA, funeral net obtaining costs included in the
consolidated statement of operations are included in the amortization add back
whereas cemetery net obtaining costs are not considered amortization since they
are specifically identifiable expenses associated with the revenue recognized.
The amount of cemetery net obtaining costs expensed in the consolidated
statement of operations was approximately $20,650 and $18,200 for the six months
ended June 30, 2002 and 2001, respectively.
The table below details the North America results of funeral and cemetery
prearranged production for the six months ended June 30, 2002 and 2001,
including production from previously owned insurance companies and the related
deferred net obtaining costs incurred to procure the prearrangements (i.e.
origination). Additionally, the table reflects revenues recognized and
previously deferred net obtaining costs recognized in the consolidated statement
of operations associated with previously prearranged production for the six
months ended June 30, 2002 and 2001 (i.e. maturities).

(1) The amortization for funeral net obtaining costs reflects the historical
amount recorded in 2001. If the amortization period was changed from 20 to
12 years as of January 1, 2001, the amortization would have been $6,048.

35

Prearranged contracts can be funded through several alternatives. With
regards to either prearranged funeral or preneed cemetery contracts, all or a
certain portion of the funds collected are generally required to be placed in
trust accounts pursuant to applicable law. In certain situations, the Company
can post a surety bond as financial assurance pursuant to applicable law in an
amount that would otherwise be required to be trusted. Finally, the funds
collected from prearranged funeral contracts can be used to pay premiums on life
insurance or annuity contracts. Realized investment earnings on funds placed in
trust accounts and increasing death benefits associated with life insurance
contracts are accumulated and deferred until the maturity of each prearranged
contract.
The funds collected on the prearranged contracts that are not required to
be placed in trust accounts or where the Company has posted a surety bond may be
retained by the Company, creating a source of working capital cash flow
generated from operating activities during the period of time before the
prearranged contract matures. Additionally, the Company is allowed in certain
states to distribute a portion of the realized investment earnings which
accumulate in the trust accounts before the prearranged contract matures. When a
prearranged contract matures, the Company receives the funds from trust
(principal and previously undistributed trust income) and any remaining
receivable due from the customer, or the proceeds from the third party insurance
companies (original contract amount and increasing death benefits). The deferred
prearranged funeral or cemetery contract revenue is recognized in the
consolidated statement of operations. For trust or bonded contracts, the revenue
recognized is generally greater than the cash received by the Company at the
time a prearranged contract matures, and creates a negative effect on working
capital cash flow generated from operating activities.
The cash flow activity from originating funeral production until the
maturity of a prearranged funeral contract is captured in the line item Net
effect of prearranged funeral production and maturities in the consolidated
statement of cash flows. Cash flow is provided by funds collected from the
customer which is retained by the Company, and distributed trust fund earnings.
This is reduced by the payment of deferred net obtaining costs and the negative
effect of contract maturities.
The cash flow activity from originating the preneed cemetery contract
until recognition of the deferred revenue is reflected through Changes in
receivables and Changes in other assets in the consolidated statement of cash
flows. Changes in receivables is affected by cash flow provided by funds
collected from the customer which is retained by the Company and distributed
trust earnings, reduced by the negative effect of preneed cemetery contract
revenue recognition. Changes in other assets is affected by the cash use
associated with the payment of deferred net obtaining costs when the preneed
cemetery contracts are originated, offset by the reduction in deferred net
obtaining costs associated with recognition of the preneed cemetery revenue.
The following table reflects the total North American backlog of deferred
prearranged contract revenues and the prearranged assets associated with the
contracts at June 30, 2002 and December 31, 2001:

The deferred prearranged contract revenue associated with prearranged
funeral contracts and preneed cemetery contracts are reflected separately in the
consolidated balance sheet. Both funeral and cemetery deferred net obtaining
costs (net of an estimated allowance for cancellation) are included as a
component of Deferred charges and other assets. Prearranged assets associated
with prearranged funeral contracts, which consist of amounts due from trusts,
customer receivables or third party insurance receivables (net

36

of an estimated allowance for cancellations), are reflected as Prearranged
funeral contracts separately in the consolidated balance sheet. Prearranged
assets associated with preneed cemetery contracts, which consist of amounts due
from trusts and customer receivables (net of an estimated allowance for
cancellation) are reflected in Current and Long term receivables in the
consolidated balance sheet.

NON-RECURRING ITEMS AND PRO FORMA FINANCIAL INFORMATION
Non-recurring items are excluded from certain financial information in this Form
10-Q to enhance the comparability of financial information from period to
period. Non-recurring items are a component of the reconciling differences
between generally accepted accounting principles and pro forma financial
information that the Company considers to be outside the scope of its recurring
operating activities. In 2002 and 2001, such non-recurring items are charges
primarily related to sales of businesses, joint venture transactions and the
termination of certain contractual agreements; extraordinary gains and losses on
early extinguishments of debt; and cumulative effect of accounting changes. The
cumulative effect of accounting changes in 2002 primarily relate to the adoption
of Statement of Financial Accounting Standards No. 142, "Goodwill and Other
Intangible Assets" (SFAS No. 142). This standard requires goodwill to no longer
be amortized but instead tested for impairment annually. As a result of the
adoption of SFAS No. 142, the Company has recognized a charge in the first
quarter of 2002 reflected as a cumulative effect of accounting change of
$146,794 on a pretax basis and $135,560 on an after tax basis.
The Company reported in the first quarter of 2002 it had (1) ceased
amortization of goodwill pursuant to new accounting standards, (2) changed the
amortization period related to deferred prearranged funeral obtaining costs, (3)
revised its estimated allocation of overhead costs between the funeral and
cemetery segments, (4) begun recognizing, as part of funeral operations instead
of cemetery operations, those revenues associated with delivered caskets
previously prearranged on cemetery contracts, and (5) ceased depreciation of
certain operating assets as a result of the Company's plan to sell or joint
venture these operations.

Pro Forma Reconciliations
The following two tables reconcile net loss and diluted loss per share under
generally accepted accounting principles to pro forma earnings before
non-recurring items and pro forma diluted EPS before non-recurring items

Comparable Revenues
Comparable revenues for 2002 and 2001 represent revenues excluding operations
that have been acquired or constructed after January 1, 2001 or operations that
have been divested by the Company prior to June 30, 2002.

38

2001 Pro Forma Revenues And Gross Profits
The following tables reconcile funeral and cemetery revenues and gross profits
previously reported in 2001 to pro forma amounts used in this Form 10-Q for
comparison purposes, including the accounting changes and changes in estimates
discussed on the previous page.

Revenues

Gross Profits

CAUTIONARY STATEMENT ON FORWARD-LOOKING STATEMENTS
The statements in this Form 10-Q that are not historical facts are
forward-looking statements made in reliance on the "safe harbor" protections
provided under the Private Securities Litigation Reform Act of 1995. These
statements may be accompanied by words such as "believe," "estimate," "project,"
"expect," "anticipate" or "predict," that convey the uncertainty of future
events or outcomes, and include guidance, projections and other estimates given
by the Company regarding its financial and other performance targets and
measures. These statements are based on assumptions that the Company believes
are reasonable; however, many important factors could cause the Company's actual
results in the future to differ materially from the forward-looking statements
made herein and in any other documents or oral presentations made by, or on
behalf of, the Company. Important factors which could cause actual results of
the Company to differ materially from those in forward-looking statements
include, among others, the following:

1) Changes in general economic conditions, both domestically and
internationally, impacting financial markets (e.g., marketable securities
values, as well as currency and interest rate fluctuations) that could
negatively affect the Company, particularly, but not limited to, levels of
interest expense and negative currency translation effects.

39

2) Changes in credit relationships impacting the availability of credit and
the general availability of credit in the marketplace.

3) The Company's ability to successfully implement its strategic plan as
defined in the Company's Form 10-K for the year ended December 31, 2001,
including:

o the interest of third parties to enter into and consummate alliances
and joint ventures with the Company, including with respect to its
operations in France,

o the continuation of cost reduction initiatives,

o the continuation of actions to improve operating free cash flow,

o the continuation of debt reduction initiatives, including the sale of
certain funeral and cemetery operations,

o the implementation of strategic revenue and marketing initiatives
resulting in increased volume through its existing facilities, and

o the continuation of operating improvements in France.

4) Changes in consumer demand and/or pricing for the Company's products and
services caused by several factors, such as changes in local death rates,
cremation rates, competitive pressures and local economic conditions.

5) Changes in domestic and international political and/or regulatory
environments in which the Company operates, including potential changes in
tax and accounting policies.

6) The Company's ability to successfully access the surety market to procure
bonds for prearranged funeral and preneed cemetery activities.

7) The Company's ability to successfully exploit its substantial purchasing
power with certain of the Company's vendors.

8) The outcomes of pending lawsuits against the Company involving alleged
violations of securities laws.

9) The outcomes of pending lawsuits in Florida involving certain cemetery
locations, including the possibility of criminal charges or other civil
claims being filed against the Company, its subsidiaries or its employees.

For further information on these and other risks and uncertainties, see the
Company's Securities and Exchange Commission filings, including the Company's
2001 Annual Report on Form 10-K. The Company assumes no obligation to publicly
update or revise any forward-looking statements made herein or any other
forward-looking statements made by the Company, whether as a result of new
information, future events or otherwise.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
For information regarding the Company's exposure to certain market risks, see
Item 7A. Quantitative and Qualitative Disclosures about Market Risk in the
Company's Form 10-K for the year ended December 31, 2001. Except as noted below,
there have been no material changes to the disclosure on this matter in such
Form 10-K.
In connection with the Company's prearranged funeral operations and preneed
cemetery merchandise and service sales, the related funeral and cemetery trust
funds own investments in equity securities and mutual funds, which are sensitive
to current market prices. As a result of recent volatility in the stock market,
the market value of prearranged funeral assets held in trust funds was
approximately 94.3% of the cost basis and the market value of cemetery
merchandise and service assets held in trust funds was approximately 95.5% of
the cost basis, as of June 30, 2002. Subsequent to the end of the quarter, the
Company experienced further devaluation in trust assets; the market value of
prearranged funeral assets held in trust was approximately 92.2% of the cost
basis and the market value of cemetery merchandise and service assets held in
trust funds was approximately 89.9% of the cost basis, as of July 31, 2002.
For further information regarding the Company's debt exposure see note four
to the consolidated financial statements in Item 1 of this Form 10-Q.

40

PART II. OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS
The following discussion describes certain litigation and proceedings
as of August 12, 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.
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

41

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
report.
Certain insurance policies held by the Company to cover potential director
and officer liability may reduce cash outflows with respect to an adverse
outcome of the above lawsuits. If an adverse decision in these matters exceeds
the insurance coverage or if the insurance coverage is deemed not to apply to
these matters, an adverse decision could have a material adverse effect on the
Company, its financial condition, results of operations or cash flows.
Thomas G. Conway et al v. Service Corporation International, et al; Cause
No. CV-02-2818; In the United States District Court for the Eastern District of
New York, filed May 10, 2002 ("Conway" action). The Conway action was filed
against the Company and two former officers of the Company who were also former
officers of ECI, James P. Hunter III ("Hunter") and Jack D. Rottman ("Rottman").
The plaintiffs in the Conway action owned funeral homes in Queens County and
Suffolk County, New York, which were sold and merged into a subsidiary of ECI in
January, 1998. The plaintiffs are also included in the definition of class
members in the Consolidated Lawsuit described above. In the Conway action,
plaintiffs assert that ECI, Hunter, and Rottman failed to disclose that ECI was
negotiating the merger with the Company in breach of covenants in the agreements
between ECI and the plaintiffs. ECI purchased the plaintiffs' funeral homes with
ECI stock and cash, and the Plaintiffs' ECI stock was exchanged for stock in the
Company in the merger of January 1999. Plaintiffs allege damages from the loss
in value of the Company's stock from 1999 to the present. The plaintiffs seek to
recover compensatory damages alleged at a minimum of $7 million and punitive
damages alleged at a minimum of $14 million.
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 Conway action do not provide a
basis for recovery of damages on several legal grounds. The Company intends to
aggressively defend this lawsuit.
Shareholder Derivative Demand; The Company received a letter dated January
14, 2002, addressed to the Board of Directors, from a law firm stating that it
represented a shareholder of the Company. The letter asserts a shareholder
derivative demand that the Company 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 County, Florida against the Company and one of its subsidiaries;
(2) a lawsuit filed against the Company by former employees of the
Company in Atlanta, Georgia; and
(3) certain events described in newspaper articles referred to in the
plaintiffs' consolidated complaint in the Consolidated Lawsuit (described
above).
The Board of Directors 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 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 August 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.

42

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.
On April 21, 2002, additional plaintiffs filed a lawsuit styled Sol
Guralnick, Linda Weiner, Joan Nix, Gilda Schwartz, Paul Schwartz, Ann Ferrante,
Steve Schwartz, Nancy Backlund, Jamie Osit, Corey King, Marc King, Barbara
Feinberg Clark v. SCI Funeral Services of Florida, Inc. d/b/a Menorah Gardens
and Funeral Chapels and Service Corporation International; In the Circuit Court
in the 15th Judicial Circuit, Palm Beach County, Florida; Case number CA024815AE
(the Guralnick Lawsuit), making essentially the same allegations as the Consumer
Lawsuit with the exception that it does not contain class allegations.
Since the Consumer and Guralnick Lawsuits are in 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 the litigation as well as continue to cooperate
with state officials in resolving the issues presented.
In addition to the litigation described above, the Florida Attorney General
and State Comptroller filed an action against the Company on March 1, 2002
styled Office of the Attorney General, Department of Legal Affairs, State of
Florida and Office of the Comptroller, Department of Banking and Finance, State
of Florida v. Service Corporation International, a Texas Corporation and 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 statute; (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
agreed to the appointment of an examiner who is charged with overseeing the
remapping and burial processes at the cemeteries. The Company has insurance
policies which are intended to limit the Company's outflows in the event of a
decision adverse to the Company in the Consumer Lawsuit, the Guralnick Lawsuit
and 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.
In connection with the allegations in the Consumer and AG Lawsuits, the
Florida Department of Law Enforcement caused a search warrant to be issued to
investigate possible criminal activity. The Company is continuing to fully
cooperate in the investigation.

43

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
On May 9, 2002, the Company held its annual meeting of shareholders and
elected four directors. The shares voting on the director nominees were cast as
follows:

Abstentions or
Nominee Votes for votes withheld
---------------------------- -------------- -----------------
Jack Finkelstein 253,122,097 7,151,771
James H. Greer 253,252,452 7,021,416
Clifton H. Morris, Jr. 253,234,836 7,039,032
W. Blair Waltrip 252,372,759 7,901,109

In addition, the shareholders approved the selection of
PricewaterhouseCoopers LLP as the Company's independent accountants for 2002.
The shares voting were cast as follows:

Abstentions or Broker
Votes for Votes against votes withheld non-votes
----------------- --------------- ---------------- ---------
255,774,618 4,157,305 341,945 0

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
12.1 Ratio of earnings to fixed charges for the six months
ended June 30, 2002 and 2001.
99.1 Consolidated Class Action Complaint filed September 3,
1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to
Exhibit 99.1 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.2 Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.3 Defendants' motion to Dismiss the Consolidated Class
Action Complaint filed October 8, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss
the Consolidated Class Action Complaint filed November 5,
1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to
Exhibit 99.4 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.5 Defendant's Reply to Plaintiffs' Opposition to
Defendants' Motion to Dismiss the Consolidated Class
Action Complaint filed November 24, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.12 to Form 10-K
for the fiscal year ended December 31, 1999).
99.6 Plaintiffs' Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James
P.Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers LLP; in the
Judicial District Court of Angelina County, Texas.
(Incorporated by reference to Exhibit 99.5 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.7 Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.6. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal
year ended December 31, 1999).
99.8 Plaintiff's Original Petition filed December 28, 2000 in
Cause No. 33701-01-01, Jack D. Rottman vs. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers
LLP; in the __________ Judicial District Court of
Angelina County, Texas. (Incorporated by reference to
Exhibit 99.16 to Form 10-K for the fiscal year ended
December 31, 2000).

44

99.9 Defendants' Motion to Transfer Venue and Original Answer
in response to the Original Petition referred to in
Exhibit 99.8. (Incorporated by reference to Exhibit 99.17
to Form 10-K for the fiscal year ended December 31,
2000).
99.10 Plaintiff's Original Petition filed December 15, 2000, in
Cause No. 2000-63917, Jack T. Hammer v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers
LLP; in the 165th Judicial District Court of Harris
County, Texas. (Incorporated by reference to Exhibit
99.18 to Form 10-K for the fiscal year ended December 31,
2000).
99.11 Defendants' Original Answer to the Original Petition
referred to in Exhibit 99.10. (Incorporated by reference
to Exhibit 99.19 to Form 10-K for the fiscal year ended
December 31, 2000).
99.12 Certification of Periodic Financial Reports by Robert L.
Waltrip in satisfaction of Section 906 of the
Sarbanes-Oxley Act of 2002 (filed as correspondence; not
as part of the periodic report).
99.13 Certification of Periodic Financial Reports by Jeffrey E.
Curtiss in satisfaction of Section 906 of the
Sarbanes-Oxley Act of 2002 (filed as correspondence; not
as part of the periodic report).

(b) Reports on Form 8-K
During the quarter ended June 30, 2002, the Company did not file
any reports on Form 8-K.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the
registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.

August 14, 2002 SERVICE CORPORATION INTERNATIONAL

By: /s/ Jeffrey E. Curtiss
----------------------------------
Jeffrey E. Curtiss
Senior Vice President
Chief Financial Officer
(Principal Financial Officer)

45

EXHIBIT INDEX

12.1 Ratio of earnings to fixed charges for the six months
ended June 30, 2002 and 2001.
99.1 Consolidated Class Action Complaint filed September 3,
1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to
Exhibit 99.1 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.2 Defendants' Answer to the Consolidated Class Action
Complaint filed September 17, 1999 in Civil Action No.
H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.2 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.3 Defendants' motion to Dismiss the Consolidated Class
Action Complaint filed October 8, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.3 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.4 Plaintiffs' Opposition to Defendants' Motion to Dismiss
the Consolidated Class Action Complaint filed November 5,
1999 in Civil Action No. H-99-280, In re Service
Corporation International. (Incorporated by reference to
Exhibit 99.4 to Form 10-Q for the fiscal quarter ended
September 30, 1999).
99.5 Defendant's Reply to Plaintiffs' Opposition to
Defendants' Motion to Dismiss the Consolidated Class
Action Complaint filed November 24, 1999 in Civil Action
No. H-99-280, In re Service Corporation International.
(Incorporated by reference to Exhibit 99.12 to Form 10-K
for the fiscal year ended December 31, 1999).
99.6 Plaintiffs' Original Petition filed November 10, 1999 in
Cause No. 32548-99-11, James P. Hunter, III and James
P.Hunter, III Family Trust v. Service Corporation
International, Robert L. Waltrip, L. William Heiligbrodt,
George R. Champagne, W. Blair Waltrip, James M. Shelger,
Wesley T. McRae and PricewaterhouseCoopers LLP; in the
Judicial District Court of Angelina County, Texas.
(Incorporated by reference to Exhibit 99.5 to Form 10-Q
for the fiscal quarter ended September 30, 1999).
99.7 Defendants' Original Answer in response to the Original
Petition referred to in Exhibit 99.6. (Incorporated by
reference to Exhibit 99.14 to Form 10-K for the fiscal
year ended December 31, 1999).
99.8 Plaintiff's Original Petition filed December 28, 2000 in
Cause No. 33701-01-01, Jack D. Rottman vs. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers
LLP; in the __________ Judicial District Court of
Angelina County, Texas. (Incorporated by reference to
Exhibit 99.16 to Form 10-K for the fiscal year ended
December 31, 2000).
99.9 Defendants' Motion to Transfer Venue and Original Answer
in response to the Original Petition referred to in
Exhibit 99.8. (Incorporated by reference to Exhibit 99.17
to Form 10-K for the fiscal year ended December 31,
2000).
99.10 Plaintiff's Original Petition filed December 15, 2000, in
Cause No. 2000-63917, Jack T. Hammer v. Service
Corporation International, Robert L. Waltrip, L. William
Heiligbrodt, George R. Champagne, W. Blair Waltrip, James
M. Shelger, Wesley T. McRae and PricewaterhouseCoopers
LLP; in the 165th Judicial District Court of Harris
County, Texas. (Incorporated by reference to Exhibit
99.18 to Form 10-K for the fiscal year ended December 31,
2000).
99.11 Defendants' Original Answer to the Original Petition
referred to in Exhibit 99.10. (Incorporated by reference
to Exhibit 99.19 to Form 10-K for the fiscal year ended
December 31, 2000).
99.12 Certification of Periodic Financial Reports by Robert L.
Waltrip in satisfaction of Section 906 of the
Sarbanes-Oxley Act of 2002 (filed as correspondence; not
as part of the periodic report).
99.13 Certification of Periodic Financial Reports by Jeffrey E.
Curtiss in satisfaction of Section 906 of the
Sarbanes-Oxley Act of 2002 (filed as correspondence; not
as part of the periodic report).