UNITED STATES SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D. C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2006

or

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

For the transition period from                      to                     

Commission file number 1-6402-1

SERVICE CORPORATION INTERNATIONAL

(Exact name of registrant as specified in its charter)

Texas		74-1488375
(State or other jurisdiction of		(I. R. S. employer identification
incorporation or organization)		number)
1929 Allen Parkway, Houston, Texas		77019
(Address of principal executive offices)		(Zip code)

713-522-5141
(Registrant’s telephone number, including area code)

None
(Former name, former address, or former fiscal year, if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

YES þ                                          NO o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer” and “large accelerated filer” in Rule 12b-2 of the Exchange Act (check one).

Large Accelerated Filer þ                      Accelerated Filer o                      Non-accelerated Filer o

Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).

YES o                                          NO þ

The number of shares outstanding of the registrant’s common stock as of November 3, 2006 was 292,753,227 (net of treasury shares).

 

 

SERVICE CORPORATION INTERNATIONAL

INDEX

			Page
Glossary			3
Part I. Financial Information			4
Item 1. Financial Statements			4
Unaudited Condensed Consolidated Statement of Operations — Three and Nine Months Ended September 30, 2006 and 2005			4
Unaudited Condensed Consolidated Balance Sheet — September 30, 2006 and December 31, 2005			5
Unaudited Condensed Consolidated Statement of Cash Flows — Nine Months Ended September 30, 2006 and 2005			6
Unaudited Condensed Consolidated Statement of Stockholders’ Equity — Nine Months Ended September 30, 2006			7
Notes to Unaudited Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			27
General			27
Competitive Strengths			27
Opportunity for Growth			28
Key Performance Indicators			29
Other Matters			31
Critical Accounting Policies			32
Accounting Changes			32
Recently Issued Accounting Standards			32
Results of Operations — Three Months Ended September 30, 2006 and 2005			33
Results of Operations — Nine Months Ended September 30, 2006 and 2005			38
Financial Condition, Liquidity and Capital Resources			43
Cautionary Statement on Forward-Looking Statements			45
Item 3. Quantitative and Qualitative Disclosures About Market Risk			46
Item 4. Controls and Procedures			47
Part II. Other Information			48
Item 1. Legal Proceedings			48
Item 1A. Risk Factors			48
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			49
Item 5. Other Information			49
Item 6. Exhibits			50
Signature			51
Bylaws, as amended
Ratio of Earnings to Fixed Charges
Certification of CEO Pursuant to Section 302
Certification of PFO Pursuant to Section 302
Certification of CEO Pursuant to Section 906
Certification of PFO Pursuant to Section 906

GLOSSARY

The following terms are common to the deathcare industry, are used throughout this report, and have the following meanings:

Atneed – Funeral and cemetery arrangements after the death has occurred.

Burial Vaults – A reinforced outer burial container intended to protect the casket against the weight of the earth.

Cash Overrides – Funds received based on achieving certain dollar volume targets of life insurance policies.

Cremation – The reduction of human remains to bone fragments by intense heat.

General Agency (GA) Revenues – Commissions paid to the General Agency (GA) for life insurance policies or annuities sold to preneed customers for the purpose of funding preneed funeral arrangements. The commission rate paid is determined based on the product type sold, the length of payment terms, and the age of the insured/annuitant. The commission rate is applied to the face amount of the policy purchased to determine the commission amount payable to the GA. GA revenues are recognized as funeral revenues when the insurance purchase transaction between the customer and third party insurance provider is completed.

Interment – The burial or final placement of human remains in the ground.

Lawn Crypt – An outer burial receptacle constructed of concrete and reinforced steel, which is usually pre-installed in predetermined designated areas.

Marker – A method of identifying the remains in a particular burial space, crypt, or niche. Permanent burial markers are usually made of bronze, granite, or stone.

Maturity – At the time of death. This is the point at which preneed contracts are converted to atneed contracts.

Mausoleum – An above ground structure that is designed to house caskets and cremation urns.

Perpetual Care or Endowment Care Fund – A trust fund used for the maintenance and upkeep of burial spaces within a cemetery.

Preneed – Funeral and cemetery arrangements made prior to the time of death.

Preneed Backlog – Future revenues from unfulfilled preneed funeral and cemetery contractual arrangements.

Production – Sales of preneed funeral and preneed or atneed cemetery contracts.

PART I. FINANCIAL INFORMATION

SERVICE CORPORATION INTERNATIONAL

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues		$	400,334			$	406,369			$	1,273,477			$	1,285,653
Costs and expenses			(328,308	)			(347,526	)			(1,030,707	)			(1,055,966	)
Gross profit			72,026				58,843				242,770				229,687
General and administrative expenses			(20,956	)			(19,744	)			(63,885	)			(61,936	)
Gains (losses) on dispositions and impairment charges, net			(30,750	)			(27,446	)			(38,141	)			(28,659	)
Operating income			20,320				11,653				140,744				139,092
Interest expense			(33,330	)			(26,170	)			(86,667	)			(77,399	)
Loss on early extinguishment of debt			—				—				—				(14,258	)
Interest income			8,259				3,268				21,022				11,218
Other income, net			12,776				1,175				16,822				538
			(12,295	)			(21,727	)			(48,823	)			(79,901	)
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change			8,025				(10,074	)			91,921				59,191
(Provision) benefit for income taxes			(4,628	)			885				(35,910	)			(26,188	)
Income (loss) from continuing operations before cumulative effect of accounting change			3,397				(9,189	)			56,011				33,003
(Loss) income from discontinued operations (net of income tax benefit (provision) of $32, $(2,606), $182, and $(4,587), respectively)			(32	)			(463	)			(270	)			3,825
Cumulative effect of accounting change (net of income tax benefit of $117,428)			—				—				—				(187,538	)
Net income (loss)		$	3,365			$	(9,652	)		$	55,741			$	(150,710	)
Basic earnings (loss) per share:
Income (loss) from continuing operations before cumulative effect of accounting change		$	.01			$	(.03	)		$	.19			$	.11
Income from discontinued operations, net of tax			—				—				—				.01
Cumulative effect of accounting change, net of tax			—				—				—				(.62	)
Net income (loss)		$	.01			$	(.03	)		$	.19			$	(.50	)
Diluted earnings (loss) per share:
Income (loss) from continuing operations before cumulative effect of accounting change		$	.01			$	(.03	)		$	.19			$	.11
Income from discontinued operations, net of tax			—				—				—				.01
Cumulative effect of accounting change, net of tax			—				—				—				(.61	)
Net income (loss)		$	.01			$	(.03	)		$	.19			$	(.49	)
Basic weighted average number of shares			291,662				297,421				293,117				304,366
Diluted weighted average number of shares			295,918				297,421				297,353				308,807
Dividends declared per share		$	.025			$	.025			$	.075			$	.075

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

		September 30,				December 31,
		2006				2005
		(Unaudited)
Assets
Current assets:
Cash and cash equivalents		$	636,633			$	446,782
Receivables, net			59,114				97,747
Inventories			47,747				68,327
Current assets held for sale			3,657				—
Other			29,664				37,527
Total current assets			776,815				650,383
Preneed funeral receivables and trust investments			1,198,324				1,226,192
Preneed cemetery receivables and trust investments			1,245,726				1,288,515
Cemetery property, at cost			1,316,934				1,355,654
Property and equipment, at cost, net			1,014,161				950,174
Goodwill			1,083,563				1,123,888
Non-current assets held for sale			68,188				—
Deferred charges and other assets			258,203				249,581
Cemetery perpetual care trust investments			681,924				700,382
		$	7,643,838			$	7,544,769
Liabilities & Stockholders’ Equity
Current liabilities:
Accounts payable and accrued liabilities		$	241,853			$	231,693
Current maturities of long-term debt			30,629				20,716
Current liabilities held for sale			336				—
Income taxes			22,491				20,359
Total current liabilities			295,309				272,768
Long-term debt			1,265,213				1,186,485
Deferred preneed funeral revenues			517,341				535,384
Deferred preneed cemetery revenues			726,125				792,485
Deferred income taxes			167,497				138,677
Non-current liabilities held for sale			43,523				—
Other liabilities			319,155				326,985
Non-controlling interest in funeral and cemetery trusts			2,026,258				2,015,811
Non-controlling interest in cemetery perpetual care trusts			676,832				694,619
Commitments and contingencies (note 10)
Stockholders’ equity:
Common stock, $1 per share par value, 500,000,000 shares authorized, 292,725,527 and 294,808,872, issued and outstanding (net of 51,952,439 and 48,962,063 treasury shares, at par)			292,726				294,809
Capital in excess of par value			2,140,795				2,182,745
Unearned compensation			—				(3,593	)
Accumulated deficit			(907,164	)			(962,905	)
Accumulated other comprehensive income			80,228				70,499
Total stockholders’ equity			1,606,585				1,581,555
		$	7,643,838			$	7,544,769

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

		Nine months ended September 30,
		2006				2005
Cash flows from operating activities:
Net income (loss)		$	55,741			$	(150,710	)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Net loss (income) from discontinued operations, net of tax			270				(3,825	)
Loss on early extinguishment of debt			—				14,258
Premiums paid on early extinguishment of debt			—				(12,186	)
Cumulative effect of accounting change, net of tax			—				187,538
Depreciation and amortization			69,601				55,862
Provision for doubtful accounts			6,688				6,460
Provision for deferred income taxes			23,583				24,528
Losses on dispositions and impairment charges, net			38,141				28,659
Share-based compensation			5,487				1,545
Loan cost amortization			13,902				7,715
Change in assets and liabilities, net of effects from acquisitions and dispositions:
Decrease in receivables			18,502				18,452
(Increase) decrease in other assets			(2,109	)			33,212
(Decrease) increase in payables and other liabilities			(7,839	)			8,901
Net effect of preneed funeral production and maturities			6,261				(3,797	)
Net effect of cemetery production and deliveries			37,053				46,932
Other			51				337
Net cash provided by operating activities from continuing operations			265,332				263,881
Net cash used in operating activities from discontinued operations			—				(5,344	)
Net cash provided by operating activities			265,332				258,537
Cash flows from investing activities:
Capital expenditures			(63,213	)			(72,241	)
Proceeds from divestitures, net of cash retained and sales of property and equipment			55,150				170,140
Proceeds from equity investments			—				39,674
Indemnity payments related to the sale of former funeral operations in France			(590	)			(1,834	)
Acquisitions, net of cash acquired			(14,637	)			—
Net withdrawals of restricted funds and other			11,025				13,944
Net cash (used in) provided by investing activities from continuing operations			(12,265	)			149,683
Net cash provided by (used in) investing activities from discontinued operations			10,958				(212	)
Net cash (used in) provided by investing activities			(1,307	)			149,471
Cash flows from financing activities:
Proceeds from issuance of long-term debt			—				291,472
Payments of debt			(14,287	)			(7,972	)
Principal payments on capital leases			(15,968	)			(237	)
Early extinguishment of debt			—				(286,215	)
Proceeds from exercise of stock options			3,614				5,145
Purchase of Company common stock			(27,870	)			(191,221	)
Payments of dividends			(22,113	)			(15,184	)
Purchase of subsidiary stock			—				(844	)
Net cash used in financing activities			(76,624	)			(205,056	)
Effect of foreign currency			2,450				1,322
Net increase in cash and cash equivalents			189,851				204,274
Cash and cash equivalents at beginning of period			446,782				287,785
Cash and cash equivalents at end of period		$	636,633			$	492,059

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

																											Accumulated
											Treasury				Capital in												other
		Outstanding					Common				stock, par				excess of				Unearned				Accumulated				comprehensive
		shares					stock				value				par value				compensation				deficit				income				Total
Balance at December 31, 2005			294,809				$	343,771			$	(48,962	)		$	2,182,745			$	(3,593	)		$	(962,905	)		$	70,499			$	1,581,555
Net income																								55,741								55,741
Dividends declared on common stock ($.075 per share)																(21,969	)															(21,969	)
Total other comprehensive income																												9,729				9,729
Employee share based compensation earned																5,487																5,487
Reclassification of unearned compensation for restricted stock																(3,593	)			3,593												—
Stock option exercises and other			977					907				70				2,935																3,912
Restricted stock awards, net of forfeitures			360									360				(360	)															—
Purchase of Company stock			(3,420	)								(3,420	)			(24,450	)															(27,870	)
Balance at September 30, 2006			292,726				$	344,678			$	(51,952	)		$	2,140,795			$	—			$	(907,164	)		$	80,228			$	1,606,585

(See notes to unaudited condensed consolidated financial statements)

SERVICE CORPORATION INTERNATIONAL

1. Nature of Operations

Service Corporation International (SCI or the Company) is a provider of deathcare products and services, with a network of funeral service locations and cemeteries primarily operating in the United States and Canada. The Company also owns a 25 percent equity interest in funeral operations of an entity in France. Additionally, the Company owns Kenyon International Emergency Services (Kenyon), a wholly-owned subsidiary that specializes in providing disaster management services in mass fatality incidents. Kenyon’s results are included in the Company’s funeral operations segment.

     Funeral and cemetery operations consist of funeral service locations, cemeteries, funeral service/cemetery combination locations, crematoria, and related businesses.

     Funeral service locations provide all professional services relating to funerals, including the use of funeral facilities and motor vehicles and preparation and embalming services. Funeral related merchandise, including caskets, burial vaults, cremation receptacles, flowers, and other ancillary products and services, is sold at funeral service locations. Certain funeral service locations contain crematoria. The Company’s cemeteries provide cemetery property interment rights, including mausoleum spaces, lots, and lawn crypts, and sell cemetery related merchandise and services, including stone, granite, and bronze memorials, markers, and cremation memorialization products, merchandise installations, and burial openings and closings. Personnel at cemeteries perform interment services and provide management and maintenance of cemetery grounds. Certain cemeteries operate crematoria, and certain cemeteries contain gardens specifically for the purpose of cremation memorialization. The Company also sells preneed funeral and cemetery products and services whereby a customer contractually agrees to the terms of certain products and services to be provided in the future.

2. Summary of Significant Accounting Policies

Principles of Consolidation and Basis of Presentation

The condensed consolidated financial statements for the three and nine months ended September 30, 2006 and 2005 include the accounts of SCI and all majority-owned subsidiaries. These statements also include the accounts of the funeral trusts, cemetery merchandise and services trusts, and perpetual care trusts in which the Company has a variable interest and is the primary beneficiary. The interim condensed consolidated financial statements 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 condensed consolidated financial statements have been prepared in a manner consistent with the accounting policies described in the Company’s annual report on Form 10-K, as amended for the year ended December 31, 2005, unless otherwise disclosed herein, and should be read in conjunction therewith. The accompanying year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by accounting principles generally accepted in the United States of America. Operating results for interim periods are not necessarily indicative of the results that may be expected for the full year period.

     The Company has reclassified certain prior period amounts to conform to the current period financial statement presentation with no effect on previously reported results of operations, financial condition, or net cash flows.

Use of Estimates

The preparation of the condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions as described in the Company’s Form 10-K, as amended that may affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. As a result, actual results could differ from these estimates.

Income Taxes

The consolidated effective tax rates were a provision of 57.7% and 39.1% for the three and nine months ended September 30, 2006 and a benefit of 8.8% and a provision of 44.2% for the three and nine months ended September 30, 2005. The tax rates were negatively impacted by the disposal of assets that have a lower tax cost than book cost, thus triggering a larger income tax upon disposal. This permanent cost basis difference was mainly a result of certain goodwill-related assets, previously acquired, and accounted for under purchase accounting at the time of acquisition. These assets were sold and the effect of taxes were recognized this quarter in our North American operations.

3. Recently Issued Accounting Standards

In September 2006, the Financial Accounting Standards Board (FASB) issued Statement of Financial Accounting Standards (SFAS) No. 158, “Employers’ Accounting for Defined Benefit Pension and Other Postretirement Plans—an amendment of FASB Statements No. 87, 88, 106, and 132(R)” (SFAS 158), which requires recognition of the funded status of a benefit plan in the balance sheet. SFAS 158 also requires recognition, in other comprehensive income, of certain gains and losses that arise during the period but which are deferred under pension accounting rules. SFAS 158 also modifies the requirements for the timing of reports and disclosures. SFAS 158 provides recognition and disclosure elements that will be effective for the fiscal year ended December 31, 2006 for SCI and measurement date elements that will be effective for the fiscal year ended December 31, 2008 for SCI. The Company has initiated the process to terminate its cash balance plan. Due to the prior accounting policy change for pensions adopted on January 1, 2004, SCI does not expect a significant impact to its consolidated financial statements upon adoption of SFAS 158.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (SFAS 157), which defines fair value, establishes a framework for measuring fair value in accordance with generally accepted accounting principles, and expands disclosures about fair value measurements. The provisions of SFAS 157 are effective beginning January 1, 2008 for SCI. The Company is currently evaluating the impact of adopting SFAS 157 on its consolidated financial statements.

     In September 2006, the FASB ratified the Emerging Issues Task Force (EITF) Issue No. 06-5, “Accounting for Purchases of Life Insurance – Determining the Amount that Could be Realized in Accordance with FASB Technical Bulletin 85-4” (EITF 06-5). The EITF concluded that a policyholder should consider any additional amounts included in the contractual terms of the life insurance policy in determining the “amount that could be realized under the insurance contract.” For group policies with multiple certificates or multiple policies with a group rider, the EITF also tentatively concluded that the amount that could be realized should be determined at the individual policy or certificate level, (i.e., amounts that would be realized only upon surrendering all of the policies or certificates would not be included when measuring the assets). The provisions of EITF 06-5 are effective beginning January 1, 2007 for SCI. The Company is currently evaluating the impact of adopting EITF 06-5 on its consolidated financial statements.

     In September 2006, the SEC released SAB No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements” (SAB 108), which provides interpretive guidance on how the effects of the carryover or reversal of prior year misstatements should be considered in quantifying a current year misstatement. The SEC staff believes that registrants should quantify errors using both a balance sheet and an income statement approach and evaluate whether either approach results in quantifying a misstatement that, when all relevant quantitative and qualitative factors are considered, is material. The provisions of SAB 108 are effective beginning November 15, 2006 for SCI. The Company does not expect any significant impact to its consolidated financial statements upon adoption of SAB 108.

     In June 2006, the FASB issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (FIN 48), which clarifies the accounting for uncertainty of income tax positions recognized in an enterprise’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes”. FIN 48 prescribes a comprehensive model for how a company should recognize, measure, present, and disclose in its financial statements uncertain tax positions that the company has taken or expects to take. It presumes the taxing authorities’ full knowledge of the position, including all relevant facts. The provisions of FIN 48 are effective beginning January 1, 2007 for SCI, with any potential cumulative effect of change in accounting principle recorded as an adjustment to beginning retained earnings. The Company is currently evaluating the impact of adopting FIN 48 on its consolidated financial statements.

4. Share-Based Compensation

(All shares reported in whole numbers and not in thousands)

Share-Based Payment

In December 2004, the FASB issued SFAS No. 123R, “Share-Based Payment” (SFAS 123R). SFAS 123R is a revision of SFAS No. 123, “Accounting for Stock-Based Compensation”, and supersedes Accounting Principles Board Opinion No. 25, “Accounting for Stock Issued to Employees” (APB 25). Among other items, SFAS 123R eliminates the use of the intrinsic value method of accounting and requires companies to recognize in the statement of operations the cost of employee services received in exchange for awards of equity instruments based on the grant-date fair value of those awards. The Company adopted SFAS 123R on January 1, 2006 utilizing the modified-prospective transition method.

     Prior to January 1, 2006, the Company accounted for share-based payments using the intrinsic value recognition method prescribed by APB 25. Because all of the Company’s stock options were granted at market value on the date of each grant, no stock-based compensation expense related to stock options was reflected in net income prior to adopting SFAS 123R.

     Under the modified-prospective transition method, the Company recognizes compensation expense on a straight-line basis in its condensed consolidated financial statements issued subsequent to the date of adoption for all share-based payments granted, modified or settled after December 31, 2005, as well as for any awards that were granted prior to December 31, 2005 for which requisite service will be provided after December 31, 2005. The compensation expense on awards granted prior to December 31, 2005 is recognized using the fair values determined for the pro forma disclosures on stock-based compensation included in prior filings. The amount of compensation expense recognized on awards that were not fully vested at the date of SFAS 123R adoption excludes the compensation expense cumulatively recognized in the pro forma disclosures on stock-based compensation. Further, the Company assumed no forfeitures on restricted shares granted prior to the adoption of SFAS 123R due to the nature of the employees to whom the shares were granted; thus, the Company recorded no cumulative effect of accounting change upon the adoption of SFAS 123R.

Stock Benefit Plans

     The Company maintains benefit plans whereby shares of its common stock may be issued pursuant to the exercise of stock options or restricted stock granted to officers and key employees. The Company’s Amended 1996 Incentive Plan reserves 24,000,000 shares of common stock for outstanding and future awards of stock options, restricted stock, and other stock based awards to officers and key employees of the Company. The Company’s 1996 Non-qualified Incentive Plan reserves 8,700,000 shares of common stock for outstanding and future awards of nonqualified stock options to employees who are not officers of the Company.

     The benefit plans allow for options to be granted as either non-qualified or incentive stock options. The options historically have been granted only once each year, or upon hire, as approved by the appropriate committee of the Board of Directors. The options are granted with an exercise price equal to the market price of the Company’s common stock on the date the grant is approved by the appropriate committee of the Board of Directors. The options are generally exercisable at a rate of 33-1/3% each year unless alternative vesting methods are approved by the appropriate committee of the Board of Directors. Restricted stock awards are generally expensed to income ratably over the average period during which the restrictions lapse. At September 30, 2006 and December 31, 2005, 4,084,423 and 4,856,459 shares, respectively, were reserved for future option and restricted stock grants under these stock benefit plans.

     At the adoption of SFAS 123R, 1,959,283 options were outstanding with alternative vesting methods. These shares were fully vested prior to the implementation of SFAS 123R and, as such, compensation expense for these options is not included in the Company’s condensed consolidated statement of operations for the three or nine months ended September 30, 2006. As of September 30, 2006, 1,868,163 of these options remain outstanding. No additional options with alternative vesting methods were granted during the three and nine months ended September 30, 2006.

     The Company utilizes the Black-Scholes option valuation model for estimating the fair value of its stock options. This model allows the use of a range of assumptions related to volatility, the risk-free interest rate, the expected life, and the dividend yield. The expected volatility utilized in the valuation model is based on implied volatilities from traded options on the Company’s stock and the historical volatility of the Company’s stock price. The decrease in expected volatility from the nine months ended September 30, 2005 to the nine months ended September 30, 2006 is primarily the result of a lower implied volatility. The dividend yield and the expected holding period are both based on historical experience and management’s estimate of future events. The risk-free interest rate is derived from the U.S. Treasury yield curve based on the expected life of the option in effect at the time of grant. The fair values of the Company’s stock options are calculated using the following weighted average assumptions based on the methods described above for the three months ended September 30, 2006 and the nine months ended September 30, 2006 and 2005 (no options were granted during the three months ended September 30, 2005):

		Three months ended				Nine months ended
		September 30,				September 30,
Assumptions		2006				2006				2005
Dividend yield			1.2	%			1.3	%			1.5	%
Expected volatility			42.3	%			37.9	%			43.3	%
Risk-free interest rate			5.1	%			4.5	%			3.7	%
Expected holding period		6.0 years				5.6 years				5.5 years

     As a result of the adoption of SFAS 123R, Income from continuing operations before income taxes was reduced by $791, Income from continuing operations and Net income were both reduced by $514, and basic and diluted earnings per share were both reduced by less than $.01 for the three months ended September 30, 2006. For the nine months ended September 30, 2006, Income from continuing operations before income taxes was reduced by $3,252, Income from continuing operations and Net income were both reduced by $2,114, and basic and diluted earnings per share were both reduced by $.01.

     Results for the three and nine months ended September 30, 2005 have not been further restated to reflect the impact of compensation expense for the Company’s stock option plans. If, prior to January 1, 2006, the Company had elected to recognize compensation expense for its stock option plans, based on the fair value of awards at the grant dates, Net loss and Loss per share would have changed for the three and nine months ended September 30, 2005 by the following pro forma amounts:

		Three months ended				Nine months ended
		September 30, 2005				September 30, 2005
Net loss, as reported		$	(9,652	)		$	(150,710	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax benefit			(391	)			(1,174	)
Pro forma net loss		$	(10,043	)		$	(151,884	)
Basic loss per share:
Net loss, as reported		$	(.03	)		$	(.50	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax benefit			—				—
Pro forma basic loss per share		$	(.03	)		$	(.50	)
Diluted loss per share:
Net loss, as reported		$	(.03	)		$	(.49	)
Deduct: Total pro forma stock-based employee compensation expense determined under fair value based method, net of related tax benefit			—				—
Pro forma diluted loss per share		$	(.03	)		$	(.49	)

     The tax benefit associated with this additional compensation expense would have been $211 and $632 for the three and nine months ended September 30, 2005.

     Prior to the implementation of SFAS 123R, the Company amortized stock-based compensation cost for employees eligible to retire over the three-year standard vesting period of the grants. Upon adoption of SFAS 123R, the Company recognizes costs on new option

grants to such retirement-eligible employees immediately upon grant, consistent with the retirement vesting acceleration provisions of these grants. If the Company had historically computed stock-based compensation cost for these employees under this accelerated method, $549 or less than $.01 per diluted share of after-tax compensation cost would have been accelerated and cumulatively included in the pro forma expense above through September 30, 2005.

     The following table shows a summary of information with respect to stock option and restricted share compensation for the 2006 periods and restricted share compensation for the 2005 periods, which are included in the Company’s condensed consolidated statement of operations for those respective periods:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Total pretax share-based compensation expense included in net income (loss)		$	1,631			$	549			$	5,487			$	1,545
Income tax benefit related to share-based compensation included in net income (loss)		$	727			$	193			$	2,215			$	541

Stock Options

The following table sets forth stock option activity for the nine months ended September 30, 2006:

(Shares reported in whole numbers and not in thousands)

						Weighted-average
		Options				exercise price
Outstanding at December 31, 2005			24,250,429			$	9.21
Granted			1,614,650				8.24
Exercised			(938,122	)			3.94
Forfeited			(22,300	)			6.88
Expired			(1,839,831	)			29.25
Outstanding at September 30, 2006			23,064,826			$	7.76
Exercisable at September 30, 2006			20,518,441			$	7.76

     As of September 30, 2006, the aggregate intrinsic value for stock options outstanding and exercisable was $74,760 and $70,692, respectively. Set forth below is certain information related to stock options outstanding and exercisable at September 30, 2006:

(Shares reported in whole numbers and not in thousands)

		Options outstanding												Options exercisable
						Weighted-
		Number				average				Weighted-				Number				Weighted-
Range of		outstanding at				remaining				average				exercisable at				average
exercise price		September 30, 2006				contractual life				exercise price				September 30, 2006				exercise price
$0.00 — 3.00			1,952,851				1.9			$	2.60				1,952,851			$	2.60
3.01 — 4.00			5,221,734				2.4				3.74				5,221,734				3.74
4.01 — 6.00			4,160,000				3.3				4.99				4,160,000				4.99
6.01 — 9.00			6,395,517				4.1				7.11				3,849,132				6.70
9.01 — 15.00			2,898,003				0.8				13.73				2,898,003				13.73
15.01 — 21.00			2,285,160				0.9				19.18				2,285,160				19.18
21.01 — 38.00			151,561				0.7				29.64				151,561				29.64
$ 0.00 — 38.00			23,064,826				2.6			$	7.76				20,518,441			$	7.76

     Other information pertaining to option activity during the three and nine months ended September 30 was as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Weighted average grant-date fair value of stock options granted (valued using Black-Scholes model)		$	3.51				n/a			$	3.11			$	2.71
Total fair value of stock options vested			n/a				n/a			$	1,987			$	6,003
Total intrinsic value of stock options exercised		$	1,655			$	647			$	4,111			$	4,375

     The Company calculated its historical pool of windfall tax benefits by comparing the book expense for individual stock grants and the related tax deduction for options granted after January 1, 1995. Adjustments were made to exclude windfall tax benefits that were not realized due to the Company’s net operating loss position. Upon completion of this calculation, the Company determined an additional paid in capital pool of $2,140.

     For the three and nine months ended September 30, 2006, cash received from the exercise of stock options was $1,212 and $3,614, respectively. As of September 30, 2006, the unrecognized compensation expense related to stock options of $4,691 is expected to be recognized over a weighted average period of 1.7 years.

Restricted Shares

     Restricted shares awarded under the Amended 1996 Incentive Plan were 359,900 in the first nine months of 2006 and 498,800 in the first nine months of 2005. The weighted average fair market value per share at the date of grant for shares granted during the first nine months of 2006 and 2005 was $8.24 and $6.90, respectively. The fair market value of the stock, as determined on the grant date, is being amortized and charged to income (with an offsetting credit to capital in excess of par value) generally over the average period during which the restrictions lapse. At September 30, 2006, unrecognized compensation expense of $4,072 related to restricted shares, which is recorded in Capital in excess of par value on the balance sheet, is expected to be recognized over a weighted average period of 1.3 years. Prior to the implementation of SFAS 123R, the Company recorded this compensation as Unrecognized compensation on the balance sheet. The Company recognized compensation cost of $840 and $2,235 in the three and nine months ended September 30, 2006 related to the restricted shares of this Plan. During the three and nine months ended September 30, 2005, the Company recognized compensation cost of $549 and $1,545 related to the restricted shares of this Plan.

     Restricted share activity for the nine months ended September 30, 2006 was as follows:

(Shares reported in whole numbers)

						Weighted-average
		Restricted				grant-date
		shares				fair value
Nonvested restricted shares at December 31, 2005			779,850			$	6.87
Granted			359,900				8.24
Vested			(344,574	)			6.85
Nonvested restricted shares at September 30, 2006			795,176			$	7.50

Share Purchase Rights Plan

     The Company’s preferred share purchase rights plan declares a dividend of one preferred share purchase right for each share of common stock outstanding. The rights are exercisable in the event certain investors attempt to acquire 20% or more of the common stock of the Company and entitle the rights holders to purchase certain securities of the Company or the acquiring company. The rights, which are redeemable by the Company for $.01 per right, expire in July 2008 unless otherwise extended.

5. Debt

Debt as of September 30, 2006 and December 31, 2005 was as follows:

		September 30, 2006				December 31, 2005
7.2% notes due June 2006		$	—			$	10,698
6.875% notes due October 2007			13,497				13,497
6.5% notes due March 2008			195,000				195,000
7.7% notes due April 2009			341,635				341,635
7.875% debentures due February 2013			55,627				55,627
6.75% notes due April 2016			250,000				250,000
7.0% notes due June 2017			300,000				300,000
Convertible debentures, maturities through 2013, fixed interest rates from 4.75% to 5.25%, conversion prices from $13.02 to $50.00 per share			21,213				22,213
Obligations under capital leases			108,877				11,425
Mortgage notes and other debt, maturities through 2050			27,237				29,588
Unamortized pricing discounts and other			(17,244	)			(22,482	)
Total debt			1,295,842				1,207,201
Less current maturities			(30,629	)			(20,716	)
Total long-term debt		$	1,265,213			$	1,186,485

     Current maturities of debt at September 30, 2006 were comprised primarily of convertible debentures and capital leases. The Company’s consolidated debt had a weighted average interest rate of 7.24% at September 30, 2006 and 7.11% at December 31, 2005. Approximately 95% and 99% of the total debt had a fixed interest rate at September 30, 2006 and December 31, 2005, respectively.

Capital Leases

In the first nine months of 2006, the Company acquired $114,574 of transportation equipment utilizing capital leases, of which $102,322 were classified as operating leases in prior periods. See additional information regarding these leases in note ten to these condensed consolidated financial statements.

Bank Credit Agreements

The Company’s bank credit facility matures in August 2007 and provides a total lending commitment of $200,000, including a sub-limit of $175,000 for letters of credit. As of September 30, 2006, the Company has no cash borrowings under the current credit facility, but has used the facility to support $42,209 of letters of credit. The credit facility provides the Company with flexibility for acquisitions, dividends, and share repurchases. It is secured by the stock of the Company’s domestic subsidiaries, and these domestic subsidiaries have guaranteed the Company’s indebtedness associated with this credit facility. The subsidiary guarantee is a guarantee of payment of the outstanding amount of the total lending commitment. It covers the term of the credit facility, including extensions of our letters of credit, and totaled a maximum potential amount of $42,209 and $54,727 at September 30, 2006 and December 31, 2005, respectively. The credit facility contains certain financial covenants, including a minimum interest coverage ratio, a maximum leverage ratio, maximum capital expenditure limitations, minimum net worth requirements, and certain cash distribution restrictions. As of September 30, 2006, the Company was in compliance with all of its debt covenants. Interest rates for the outstanding borrowings are based on various indices as determined by the Company. The Company also pays a quarterly fee on the unused commitment that ranges from 0.25% to 0.50%.

     In connection with the expected closing of the Alderwoods acquisition (see note 14), the Company will enter into a new credit facility. The new senior credit facility will provide financing of $450,000, consisting of a $150,000 three-year term loan and a $300,000 five-year revolving credit facility. The term loan will be used to fund the Alderwoods acquisition and for working capital and general corporate purposes. The revolving credit facility will provide the Company with flexibility for dividends, share repurchases and other general corporate purposes.

Debt Retirement

In the third quarter of 2006, the Company commenced a tender offer to purchase $144,500 aggregate principal amount of its outstanding 7.7% notes due 2009. The tender offer has been extended in order to coordinate the closing of the tender offer with the closing of the expected acquisition of Alderwoods. As of November 3, 2006, approximately $139,000 in aggregate principal amount of these notes had been validly tendered. The Company expects to record a loss on early extinguishment of debt related to these notes of approximately $18,000 in the fourth quarter of 2006.

     During the second quarter of 2006, the Company’s 7.2% notes matured, and the Company made a payment consisting of $10,698 in principal and $385 in interest to the debtholders.

     In the first quarter of 2005, the Company purchased $7,131 aggregate principal amount of its 7.70% notes due 2009 in the open market. As a result of this transaction, the Company recognized a loss of $1,207 recorded in Loss on early extinguishment of debt in its condensed consolidated statement of operations. In the second quarter of 2005, the Company purchased an additional $9,500 aggregate principal amount of its 7.70% notes due 2009, and $304 aggregate principal amount of its 6.00% notes due 2005 in the open market. Also in the second quarter of 2005, the Company redeemed $129,978 aggregate principal amount of its 6.875% notes due 2007 and $139,302 aggregate principal amount of its 7.20% notes due 2006 pursuant to a tender offer for such notes. These transactions resulted in a recognized loss of $13,051 recorded in Loss on early extinguishment of debt in the Company’s condensed consolidated statement of operations.

Debt Additions

Subsequent to September 30, 2006, the Company issued $250,000 of senior unsecured 7.375% notes due 2014 and $250,000 of senior unsecured 7.625% notes due 2018. Pending the consummation of the Alderwoods acquisition and the related financing transactions, the net proceeds of these notes are held in escrow accounts. The Company is entitled to redeem the notes at any time by paying a make-whole premium. The notes are subject to the provisions of the Company’s Senior Indenture dated as of February 1, 1993, as amended, which includes certain covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions. Under the terms of the issuance of the unregistered notes, the Company has an obligation to register the notes with the Securities and Exchange Commission (SEC). Subsequent to September 30, 2006, the Company filed a registration statement and commenced an exchange offer for the unregistered notes. These notes are subject to special mandatory redemption in the event the Alderwoods acquisition is not completed.

     In connection with the closing of the Alderwoods acquisition, the Company will issue $200 million of privately placed debt securities that will mature in October 2011. Interest on these privately placed debt securities will accrue at the rate of LIBOR plus 2.0% and will be payable semiannually in arrears.

     On June 15, 2005, the Company issued $300,000 of senior unsecured 7.0% notes due 2017, which pay interest semiannually beginning December 15, 2005. The Company used the net proceeds, together with available cash, to purchase existing indebtedness pursuant to the tender offer described in the previous section. The Company is entitled to redeem the notes at any time by paying a make-whole premium. The notes are subject to the provisions of the Company’s Senior Indenture dated as of February 1, 1993, as amended, which includes certain covenants limiting, among other things, the creation of liens securing indebtedness and sale-leaseback transactions. Under the terms of the issuance of the unregistered notes, the Company has an obligation to register the notes with the Securities and Exchange Commission (SEC). As these terms have not been met in a timely manner, the Company incurred an aggregate incremental interest expense of $750 and $2,185 during the three and nine months ended September 30, 2006, respectively. Subsequent to September 30, 2006, the Company filed the required registration statement and commenced an exchange offer for the unregistered notes. The additional interest expense will continue to accrue until this exchange offer is consummated, which is expected to be on or about November 20, 2006.

6. Retirement Plans

The components of net periodic pension plan benefit cost for the three and nine months ended September 30 were as follows:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Interest cost on projected benefit obligation		$	1,973			$	2,028			$	5,919			$	6,083
Actual return on plan assets			(1,556	)			(1,807	)			(4,183	)			(5,420	)
Actuarial loss			—				1,078				—				3,593
Amortization of prior service cost			45				46				137				138
		$	462			$	1,345			$	1,873			$	4,394

The Company has initiated the process to terminate its cash balance plan.

7. Stockholders’ Equity

The components of Accumulated other comprehensive income are as follows:

		Foreign								Accumulated
		currency				Unrealized				other
		translation				gains and				comprehensive
		adjustment				losses				income
Balance at December 31, 2005		$	70,499			$	—			$	70,499
Activity in 2006			9,729				—				9,729
Increase in net unrealized gains associated with available-for-sale securities of the trusts			—				8,572				8,572
Reclassification of net unrealized gains activity attributable to the non-controlling interest holders			—				(8,572	)			(8,572	)
Balance at September 30, 2006		$	80,228			$	—			$	80,228

     The assets and liabilities of foreign operations are translated into U.S. dollars using the current exchange rate. The U.S. dollar amount that arises from such translation, as well as exchange gains and losses on intercompany balances of a long-term investment nature, are included in the cumulative currency translation adjustments in Accumulated other comprehensive income. Income taxes are generally not provided for foreign currency translation. The activity in 2006 primarily reflects fluctuations in the exchange rate of the Canadian and US dollars.

     The components of Comprehensive income (loss) are as follows for the three and nine months ended September 30, 2006 and 2005:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Comprehensive income (loss):
Net income (loss)		$	3,365			$	(9,652	)		$	55,741			$	(150,710	)
Total other comprehensive (loss) income			(1,232	)			43,771				9,729				107,644
Comprehensive income (loss)		$	2,133			$	34,119			$	65,470			$	(43,066	)

     Total other comprehensive income for the nine months ended September 30, 2005 includes $71,770 related to the sale of the Company’s operations in Argentina and Uruguay and $29,818 related to the sale of its cemetery businesses in Chile.

Share Authorization

     The Company is authorized to issue 1,000,000 shares of preferred stock, $1 per share par value. No preferred shares were issued as of September 30, 2006. At September 30, 2006 and December 31, 2005, 500,000,000 common shares of $1 par value were authorized. The Company had 292,725,527 and 294,808,872 common shares issued and outstanding, net of 51,952,439 and 48,962,063 common shares held in treasury at par at September 30, 2006 and December 31, 2005, respectively.

Share Repurchase Program

The Company, subject to market conditions and normal trading restrictions, makes purchases in the open market or through privately negotiated transactions under its stock repurchase program. During the nine months ended September 30, 2006, the Company repurchased 3.4 million shares of common stock at an aggregate cost of $27,870. No share repurchases were made during the three months ended September 30, 2006. During the three and nine months ended September 30, 2005, the Company repurchased 0.2 million and 26.9 million, respectively, shares of common stock at an aggregate cost of $1,412 and $191,221, respectively. As of September 30, 2006, the remaining dollar value of shares authorized to be purchased under the share repurchase program was approximately $36,720.

Cash Dividends

During the three months ended September 30, 2006, the Company’s Board of Directors approved a cash dividend of $.025 per common share. At September 30, 2006, this dividend totaling $7,228 was recorded in Accounts payable and accrued liabilities and Capital in excess of par value in the condensed consolidated balance sheet. Subsequent to September 30, 2006, this dividend was paid.

8. Segment Reporting

The Company’s operations are both product based and geographically based. The Company’s reportable segments include its funeral operations and its cemetery operations and collectively represent 100% of the Company’s revenues.

     The Company’s reportable segment information is as follows:

										Reportable
		Funeral				Cemetery				segments
Revenues from external customers:
Three months ended September 30,
2006		$	263,880			$	136,454			$	400,334
2005		$	262,665			$	143,704			$	406,369
Nine months ended September 30,
2006		$	846,498			$	426,979			$	1,273,477
2005		$	866,705			$	418,948			$	1,285,653
Gross profit:
Three months ended September 30,
2006		$	52,586			$	19,440			$	72,026
2005		$	36,043			$	22,800			$	58,843
Nine months ended September 30,
2006		$	170,412			$	72,358			$	242,770
2005		$	166,878			$	62,809			$	229,687

     The following table reconciles gross profit from reportable segments to the Company’s consolidated income from continuing operations before income taxes and cumulative effect of accounting change:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Gross profit from reportable segments		$	72,026			$	58,843			$	242,770			$	229,687
General and administrative expenses			(20,956	)			(19,744	)			(63,885	)			(61,936	)
Gains (losses) on dispositions and impairment charges, net			(30,750	)			(27,446	)			(38,141	)			(28,659	)
Operating income			20,320				11,653				140,744				139,092
Interest expense			(33,330	)			(26,170	)			(86,667	)			(77,399	)
Loss on early extinguishment of debt, net			—				—				—				(14,258	)
Interest income			8,259				3,268				21,022				11,218
Other income, net			12,776				1,175				16,822				538
Income (loss) from continuing operations before income taxes and cumulative effect of accounting change		$	8,025			$	(10,074	)		$	91,921			$	59,191

     The Company’s geographic areas include North America and Other Foreign. North America includes funeral and cemetery operations in the United States and Canada. Other Foreign consists of the Company’s operations in Singapore and Germany. Subsequent to September 30, 2006, the Company’s operations in Singapore were sold. For additional information on this transaction, see note 13 to these condensed consolidated financial statements. Results from the Company’s funeral and cemetery businesses in Argentina, Uruguay, and Chile, which were sold in 2005, are classified as discontinued operations for all periods presented. The Company conducts both funeral and cemetery operations in North America and funeral operations in Other Foreign geographic areas.

     The Company’s geographic area information is as follows:

		North
		America				Other Foreign				Total
Revenues from external customers:
Three months ended September 30,
2006		$	397,242			$	3,092			$	400,334
2005		$	403,579			$	2,790			$	406,369
Nine months ended September 30,
2006		$	1,264,423			$	9,054			$	1,273,477
2005		$	1,276,832			$	8,821			$	1,285,653
Gains (losses) on dispositions and impairment charges, net:
Three months ended September 30,
2006		$	(30,750	)		$	—			$	(30,750	)
2005		$	(27,446	)		$	—			$	(27,446	)
Nine months ended September 30,
2006		$	(38,141	)		$	—			$	(38,141	)
2005		$	(28,659	)		$	—			$	(28,659	)
Operating income:
Three months ended September 30,
2006		$	19,804			$	516			$	20,320
2005		$	11,588			$	65			$	11,653
Nine months ended September 30,
2006		$	138,951			$	1,793			$	140,744
2005		$	138,303			$	789			$	139,092
Depreciation and amortization:
Three months ended September 30,
2006		$	23,910			$	21			$	23,931
2005		$	19,207			$	130			$	19,337
Nine months ended September 30,
2006		$	69,541			$	60			$	69,601
2005		$	55,546			$	316			$	55,862

     Depreciation expense related to property, plant, and equipment totaled $20,820 and $60,251 for the three and nine months ended September 30, 2006, respectively, and $16,091 and $46,022 for the three and nine months ended September 30, 2005, respectively.

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

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Revenues from external customers		$	371,417			$	376,530			$	1,181,895			$	1,196,374
Operating income		$	14,683			$	6,471			$	124,152			$	120,198
Depreciation and amortization		$	22,276			$	18,006			$	64,657			$	51,991

9. Supplementary Information

Prior to the fourth quarter of 2005, certain costs, specifically salaries and facility costs, were allocated to the Company’s reportable segments based on each of the respective segments’ revenue components within products and services.

     Beginning in the fourth quarter of 2005, the Company refined its allocation of the costs described above to more accurately reflect the cost of products and services for its funeral and cemetery segments. Such costs are now allocated based on an hourly factor, which represents the average amount of time spent by employees when selling or providing products and services to a consumer. The Company has made appropriate disclosure reclassifications to prior periods to conform to the current period presentation and make them comparable. The disclosure reclassifications made to these prior periods to conform to the current period presentation have no effect on the Company’s condensed consolidated financial position, results of operations, or statement of cash flows.

     The detail of revenues and costs and expenses as presented in the statement of operations is as follows for the three and nine months ended September 30:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
North America products and services revenues
Products
Funeral		$	90,146			$	113,965			$	313,505			$	380,149
Cemetery			90,715				97,351				277,491				283,508
Total products			180,861				211,316				590,996				663,657
Services
Funeral			162,744				138,899				499,295				456,369
Cemetery			39,516				37,797				127,262				108,785
Total services			202,260				176,696				626,557				565,154
North America products and services revenues			383,121				388,012				1,217,553				1,228,811
Other foreign revenues			3,092				2,790				9,054				8,821
Other revenues			14,121				15,567				46,870				48,021
Total revenues		$	400,334			$	406,369			$	1,273,477			$	1,285,653
North America products and services costs
Products
Funeral		$	41,900			$	44,788			$	145,583			$	146,716
Cemetery			37,717				41,138				116,674				120,418
Total cost of products			79,617				85,926				262,257				267,134
Services
Funeral			78,331				89,468				255,360				277,275
Cemetery			23,546				23,395				71,159				73,438
Total cost of services			101,877				112,863				326,519				350,713
North America products and services costs			181,494				198,789				588,776				617,847
Other foreign costs and expenses			2,576				2,725				7,261				8,032
Overhead and other expenses			144,238				146,012				434,670				430,087
Total costs and expenses		$	328,308			$	347,526			$	1,030,707			$	1,055,966

10. Commitments and Contingencies

Leases

The Company’s leases principally relate to funeral home facilities and transportation equipment. Rental expense for operating leases was $5,846 and $12,853 for the three months ended September 30, 2006 and 2005, respectively, and $19,049 and $40,750 for the nine months ended September 30, 2006 and 2005, respectively. As of September 30, 2006, future minimum lease payments for non-cancelable operating and capital leases exceeding one year are as follows:

		Operating				Capital
Remainder of 2006		$	2,099			$	7,168
2007			7,485				26,354
2008			6,980				21,948
2009			6,653				17,317
2010			5,513				38,923
2011 and thereafter			46,845				30,722
Subtotal			75,575				142,432
Less: Subleases			(1,278	)			—
Total		$	74,297			$	142,432
Less: Interest on capital leases							(33,555	)
Total principal payable on capital leases						$	108,877

     To eliminate the variable interest rate risk in the Company’s operating margins and improve the transparency of our financial statements, we amended certain of our transportation lease agreements in the first quarter of 2006. Based on the amended terms, these leases are classified as capital leases beginning in the first quarter of 2006 and are presented as such in the table above. For additional information, see note five to these condensed consolidated financial statements.

Representations and Warranties

As of September 30, 2006, the Company has contingent obligations for up to $34,375 resulting from the Company’s international asset sales and joint venture transactions. In some cases, the Company has guaranteed certain representations and warranties made in such disposition transactions with letters of credit or interest-bearing cash investments. The Company has a $26,160 liability included in Other long-term liabilities related to these guarantees and interest-bearing cash investments of $8,215 included in Deferred charges and other assets collateralizing certain of these contingent obligations as of September 30, 2006. The Company believes it is remote that it will ultimately be required to fund to third parties claims against these representations and warranties above the carrying value of the liability.

     In 2004, the Company disposed of its funeral operations in France to a newly formed third party company. As a result of this sale, the Company recognized $35,768 of contractual obligations related to representations, warranties, and other indemnifications in accordance with the provisions of FIN 45, “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others.” As of December 31, 2005, the remaining obligation was $24,138. During the first nine months of 2006, the Company paid $590 to settle certain tax and litigation matters. The remaining obligation of $23,548 at September 30, 2006 represents the following:

								Maximum
		Original						potential amount				Carrying
		contractual						of future				value as of
		obligation				Time limit		payments				September 30, 2006
Tax reserve liability		$	18,610			December 31, 2007		€30 Million				$	10,000
Litigation provision			7,765			Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor			(1	)			4,155
Employee litigation provision			6,512			December 31, 2006 (for all claims other than those relating to tax and social security matters); one month after expiration of the statutory period of limitations for tax and social security matters.			(2	)			6,512
VAT taxes			3,882			One month after the expiration of statutory period of limitations			(1	)			3,882
Other			3,381			Until entire resolution of (i) the relevant claims or (ii) settlement of the claim by the purchaser at the request of the vendor			(2	)			3,381
Total		$	40,150									$	27,930
Less: Deductible of majority equity owner			(4,382	)									(4,382	)
		$	35,768									$	23,548

Litigation

SCI is a party to various litigation matters, investigations and proceedings. For each of its outstanding legal matters, SCI evaluates the merits of the case, its exposure to the matter, possible legal or settlement strategies and the likelihood of an unfavorable outcome. SCI intends to defend itself in the lawsuits described herein; however, if SCI determines that an unfavorable outcome is probable and can be reasonably estimated, it establishes the necessary accruals. Certain insurance policies held by SCI may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters. SCI accrues such insurance recoveries when they become probable of being collected and can be reasonably estimated.

     Conley Investment Counsel v. Service Corporation International, et al; Civil Action 04-MD-1609; In the United States District Court for the Southern District of Texas, Houston Division (the “2003 Securities Lawsuit”). The 2003 Securities Lawsuit resulted from the transfer and consolidation by the Judicial Panel on Multidistrict Litigation of three lawsuits—Edgar Neufeld v. Service Corporation International, et al; Cause No. CV-S-03-1561-HDM-PAL; In the United States District Court for the District of Nevada; Rujira Srisythemp v. Service Corporation International, et. al.; Cause No. CV-S-03-1392-LDG-LRL; In the United States District Court for the District of Nevada; and Joshua Ackerman v. Service Corporation International, et al; Cause No. 04-CV-20114; In the United States District Court for the Southern District of Florida. The 2003 Securities Lawsuit names as defendants SCI and several of SCI’s current and former executive officers or directors. The 2003 Securities Lawsuit is a purported class action alleging that the defendants failed to disclose the unlawful treatment of human remains and gravesites at two cemeteries in Fort Lauderdale and West Palm Beach, Florida. Since the action is in its preliminary stages, no discovery has occurred, and SCI cannot quantify its ultimate liability, if any, for the payment of damages.

     Maria Valls, Pedro Valls and Roberto Valls, on behalf of themselves and all other similarly situated v. SCI Funeral Services of Florida, Inc. d/b/a Memorial Plan a/k/a Flagler Memorial Park, John Does and Jane Does; Case No. 23693CA08; In the Circuit Court of the 11th Judicial Circuit in and for Miami-Dade County, Florida (“Valls Lawsuit”). The Valls Lawsuit was filed December 5, 2005, and named a subsidiary of SCI as a defendant. An amended complaint was filed on May 31, 2006. Plaintiffs have requested that the Court certify this matter as a class action. The plaintiffs allege the defendants improperly handled remains, did not keep adequate records of interments, and engaged in various other improprieties in connection with the operation of the cemetery. The plaintiffs seek to certify as a class all family members of persons buried at the cemetery. The plaintiffs are seeking monetary damages and have reserved the right to seek leave from the Court to claim punitive damages. The plaintiffs are also seeking injunctive relief. Since the action is in its preliminary stages, SCI cannot quantify its ultimate liability, if any, for the payment of any damages. The

defendant has also been contacted by representatives of other families who may pursue burial practices claims related to this and other cemeteries.

     David Hijar v. SCI Texas Funeral Services, Inc., SCI Funeral Services, Inc., and Service Corporation International; In the County Court of El Paso, County, Texas, County Court at Law Number Three; Cause Number 2002-740, with an interlocutory appeal pending in the El Paso Court of Appeals, No. 08-05-00182-CV, and a mandamus proceeding pending in the Texas Supreme Court, No. 06-0385 (collectively, the “Hijar Lawsuit”). The Hijar Lawsuit involves a state-wide class action brought on behalf of all persons, entities and organizations who purchased funeral services from SCI or its subsidiaries in Texas at any time since March 18, 1998. Plaintiffs allege that federal and Texas funeral-related regulations and/or statutes (“Rules”) required SCI to disclose its markups on all items obtained from third parties in connection with funeral service contracts and that the failure to make certain disclosures of markups resulted in breach of contract and other legal claims. The plaintiffs seek to recover an unspecified amount of monetary damages. The plaintiffs also seek attorneys’ fees, costs of court, pre- and post-judgment interest, and unspecified “injunctive and declaratory relief.” SCI denies that the plaintiffs have standing to sue for violations of the Texas Occupations Code or the Rules, denies that plaintiffs have standing to sue for violations under the relevant regulations and statutes, denies that any breaches of contractual terms occurred, and on other grounds denies liability on all of the plaintiffs’ claims. SCI denies that the Hijar Lawsuit satisfies the requirements for class certification.

     In May 2004, the trial court heard summary judgment cross-motions filed by SCI and Plaintiff Hijar (at that time, the only plaintiff). The trial court granted Hijar’s motion for partial summary judgment and denied SCI’s motion. In its partial summary judgment order, the trial court made certain findings to govern the case, consistent with its summary judgment ruling. SCI’s request for rehearing was denied.

     During the course of the Hijar Lawsuit, the parties have disputed the proper scope and substance of discovery. Following briefing by both parties and evidentiary hearings, the trial court entered three orders against SCI that are the subject of appellate review: (a) a January 2005 discovery sanctions order; (b) an April 2005 discovery sanctions order; and (c) an April 2005 certification order, certifying a class and two subclasses. On April 29, 2005, SCI filed an appeal regarding the certification order and, concurrently with its initial brief in that appeal, filed a separate mandamus proceeding regarding the sanctions orders. In the certification appeal the court of appeals heard oral arguments on April 4, 2006. On July 27, 2006, the court of appeals issued an opinion holding that the plaintiffs do not have a private right of action for monetary damages under the relevant regulations and statutes. The opinion concludes that the plaintiffs do not have standing to assert their claims for monetary damages on behalf of themselves or the class. The court of appeals therefore reversed the trial court’s order certifying a class, rendered judgment against the plaintiffs on their claims for damages, and remanded the remaining general individual claims for injunctive relief back to the trial court (without opining on the merits of those claims) for further handling consistent with the court’s opinion. Plaintiffs have requested that the court of appeals reconsider this decision. In the mandamus proceeding, the court of appeals denied the mandamus petition in January 2006, and denied rehearing on March 15, 2006. SCI filed a petition for writ of mandamus in the Supreme Court of Texas, which on September 11, 2006 requested full briefing on the merits. SCI’s brief on the merits is currently due on November 10, 2006.

     Mary Louise Baudino, et al v. Service Corporation International, et al; the plaintiffs’ counsel in the Hijar Lawsuit initiated an arbitration claim raising similar issues in California and filed in November 2004 a case styled Mary Louise Baudino, et al v. Service Corporation International, et al; in Los Angeles County Superior Court; Case No. BC324007 (“Baudino Lawsuit”). The Baudino Lawsuit makes claims similar to those made in the Hijar lawsuit. However, the Baudino Lawsuit seeks a nation-wide class of plaintiffs. On September 15, 2006, the trial court granted the Company’s motion for summary judgment on the merits of plaintiffs’ claims. Plaintiffs have until December 12, 2006 to appeal the summary judgment.

     SCI is a defendant in two related class action antitrust cases filed in 2005. The first case is Cause No 4:05-CV-03394; Funeral Consumers Alliance, Inc. v. Service Corporation International, et al; In the United States District Court for the Southern District of Texas— Houston (“Funeral Consumers Case”). This is a purported class action on behalf of casket consumers throughout the United States alleging that SCI and several other companies involved in the funeral industry violated federal antitrust laws and state consumer laws by engaging in various anti-competitive conduct associated with the sale of caskets.

     SCI is also a defendant in Cause No. 4:05-CV-03399; Pioneer Valley Casket, et. al. v. Service Corporation International, et al; In the United States District Court for the Southern District of Texas— Houston Division (“Pioneer Valley Case”). This lawsuit makes the same allegations as the Funeral Consumers Case and is also brought against several other companies involved in the funeral industry. Unlike the Funeral Consumers Case, the Pioneer Valley Case is a purported class action on behalf of all independent casket distributors that are in the business or were in the business any time between July 18, 2001 to the present.

     The Funeral Consumers Case and the Pioneer Valley Case seek injunctions, unspecified amounts of monetary damages, and treble damages. Since the litigation is in its preliminary stages, SCI cannot quantify its ultimate liability, if any, for the payment of damages.

     In addition to the Funeral Consumers Case and the Pioneer Valley Case, SCI has received Civil Investigative Demands, dated in August 2005 and February 2006, from the Attorney General of Maryland on behalf of itself and other state attorneys general, who have commenced an investigation of alleged anti-competitive practices in the funeral industry. The Company has also received similar Civil Investigative Demands from the Attorneys General of Florida and Connecticut.

     The ultimate outcome of the matters described above cannot be determined at this time. SCI intends to aggressively defend all of the above lawsuits; however, an adverse decision in one or more of such matters could have a material adverse effect on SCI, its financial condition, results of operations, and cash flows.

11. Earnings Per Share

Basic earnings (loss) per common share (EPS) excludes dilution and is computed by dividing net income (loss) by the weighted average number of common shares outstanding for the period. Diluted EPS reflects the potential dilution that could occur if securities or other obligations to issue common stock were exercised or converted into common stock or resulted in the issuance of common shares that then shared in the Company’s earnings (losses).

     A reconciliation of the numerators and denominators of the basic and diluted EPS computations is presented below:

		Three months ended								Nine months ended
		September 30,								September 30,
		2006				2005				2006				2005
Numerator:
Income (loss) from continuing operations before cumulative effect of accounting change – basic and diluted		$	3,397			$	(9,189	)		$	56,011			$	33,003
Net income (loss) – basic and diluted		$	3,365			$	(9,652	)		$	55,741			$	(150,710	)
Denominator:
Weighted average shares – basic			291,662				297,421				293,117				304,366
Stock options			4,064				—				4,079				4,341
Restricted stock			192				—				157				100
Weighted average shares – diluted			295,918				297,421				297,353				308,807
Income (loss) from continuing operations before cumulative effect of accounting change per share:
Basic		$	.01			$	(.03	)		$	.19			$	.11
Diluted		$	.01			$	(.03	)		$	.19			$	.11
Income from discontinued operations per share, net of tax:
Basic		$	—			$	—			$	—			$	.01
Diluted		$	—			$	—			$	—			$	.01
Cumulative effect of accounting change per share, net of tax:
Basic		$	—			$	—			$	—			$	(.62	)
Diluted		$	—			$	—			$	—			$	(.61	)
Net income (loss) per share:
Basic		$	.01			$	(.03	)		$	.19			$	(.50	)
Diluted		$	.01			$	(.03	)		$	.19			$	(.49	)