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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K/A
(Amendment No. 3)
| þ | Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended October 31, 2004
OR
OR
| o | Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 1-15449
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
| LOUISIANA (State or other jurisdiction of incorporation or organization) | 72-0693290 (I.R.S. Employer Identification No.) | |
| 1333 South Clearview Parkway Jefferson, Louisiana (Address of principal executive offices) | 70121 (Zip Code) |
Registrant’s telephone number, including area code: (504) 729-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, No Par Value
Preferred Stock Purchase Rights
(Title of Class)
Class A Common Stock, No Par Value
Preferred Stock Purchase Rights
(Title of Class)
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. Yeso Noþ
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.o
Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yesþ Noo
Yesþ Noo
The aggregate market value of the voting stock held by non-affiliates (affiliates being, for this purpose only, directors, executive officers and holders of more than 5 percent of the Company’s Class A common stock) of the Registrant as of April 30, 2004, was approximately $558,000,000.
The number of shares of the Registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of January 3, 2005, was 106,151,920 and 3,555,020, respectively.
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EXPLANATORY NOTE
The Form 10-K/A Amendment No. 2 for the year ended October 31, 2004 filed on October 24, 2005 was not complete because it was filed without the effects of potential adjustments that may have resulted from the completion of our deferred revenue project described below. This Amendment No. 3 to the Form 10-K for the year ended October 31, 2004 reflects all adjustments related to the deferred revenue project and other miscellaneous adjustments including adjustments for lease-related accounting practices. See Note 2 to the consolidated financial statements included in Item 8.
Our Form 10-K/A Amendment No. 2 included restatements of the statements of earnings for fiscal years 2002 through 2004 and consolidated balance sheets as of October 31, 2004 and 2003 to correct for errors in our previous presentation of operating and reportable segments as defined by SFAS No. 131 as well as a restatement of our reporting units for purposes of goodwill impairment reviews under FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), retroactive to the November 1, 2001 adoption date of SFAS No. 142. Further, the restatement of goodwill on our consolidated balance sheet had the effect of changing the net book value of the assets we sold as part of our plan to sell a number of our businesses and the net book value of assets held for sale on our balance sheet. For further discussion of the restatements related to these matters, see Note 2 to the consolidated financial statements included in Item 8. See also Item 9A included herein for a discussion of the material weakness related to our controls over the determination of operating and reportable segments in our internal control over financial reporting as of October 31, 2004.
Deferred Revenue Project
In connection with our internal control assessment under Section 404 of Sarbanes-Oxley, we undertook a project (the “deferred revenue project”) in 2005 to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by reviewing substantially all of the preneed cemetery and funeral service and merchandise contracts included in our backlog. This process involved the review of nearly 700,000 preneed contracts. The deferred revenue project resulted in our assessment that deferred revenue and revenue associated with cemetery merchandise contracts were misstated and therefore we needed to correct and restate our prior period financial statements for fiscal years 2001 through 2004, including the quarters therein, and the first three quarters of 2005. We also identified errors in the amounts of recorded realized trust earnings and deferred realized trust earnings for these periods and fiscal year 2000. Deferred realized trust earnings are included in deferred preneed funeral revenue and deferred preneed cemetery revenue prior to recognition as revenues. The adjustments impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2000 through 2004 and the first three quarters of 2005.
The errors to deferred preneed revenues discussed above also resulted in restatements to the amount of preneed selling costs recorded upon the adoption of SAB No. 101, and in subsequent years and also the charge for the 2005 cumulative effect of change in accounting principle related to preneed selling costs adopted effective November 1, 2004. See Note 28 to the consolidated financial statements included in Item 8 for a discussion of the 2005 change in accounting principle related to preneed selling costs.
The overall impact of the deferred revenue project on net earnings and earnings per share for the first three quarters of 2005 and fiscal years 2004, 2003, 2002, 2001 and 2000 was a decrease in net earnings of $18.2 million (including $11.9 million, or $.11 per share, related to the cumulative effect of change in accounting principle for preneed selling costs), $12.0 million, $13.2 million, $19.2 million, $18.1 million and $8.5 million, respectively, and a decrease in earnings per share of $.16, $.11, $.12, $.18, $.17 and $.08, respectively. The 2005 amount reflects the adjustment to the previously reported unaudited results through July 31, 2005. The deferred revenue project also resulted in changes to our consolidated balance sheet as described in footnote 11 to the Selected Financial Data table included in Item 6 and Note 2 to the consolidated financial statements included in Item 8. See also Item 9A included herein for a discussion of the material weaknesses related to our controls over revenue recognition associated with preneed cemetery merchandise and service contracts and recognition of realized trust earnings on preneed cemetery and funeral contracts in our internal control over financial reporting as of October 31, 2004.
Other Adjustments
As previously disclosed in our Form 10-Q for the second quarter of fiscal year 2005, we reviewed our lease-
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related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1.8 million ($1.1 million after tax, or $.01 per share). We evaluated the materiality of these operating lease adjustments on our financial statements and concluded that the impact of these adjustments was not material. As a result, we recorded the cumulative effect of these prior period adjustments of $1.8 million as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because we are amending our Form 10-K for the year ended October 31, 2004 for the restatements discussed above, we have recorded the lease adjustments in the periods they were actually incurred and removed the cumulative effect of this prior period adjustment of $1.8 million. We also recorded other immaterial miscellaneous adjustments. The effects of these adjustments are included in Note 2 to the consolidated financial statements included in Item 8.
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PART I
Item 1. Business
General
Founded in 1910, we are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. Through our subsidiaries, we provide a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of October 31, 2004, our operations included 242 funeral homes and 147 cemeteries in 27 states within the United States and in Puerto Rico.
For fiscal year 2004 funeral operations accounted for approximately 55 percent of our total revenues, and cemetery operations accounted for the remaining 45 percent. Our funeral homes offer a wide range of services and products including funeral services, cremation, transportation services, removal and preparation of remains, caskets and flowers. Our cemetery operations sell cemetery property, merchandise and services. Cemetery property includes lots, lawn crypts and family and community mausoleums. Cemetery merchandise includes vaults, monuments and markers. Cemetery services include burial site openings and closings and inscriptions.
We believe that we operate one or more of the premier death care facilities in each of our principal markets. Our funeral homes and cemeteries are located primarily in the Southern, Western, Mid-Atlantic and Mid-Western states, generally in large metropolitan areas such as Miami, Orlando, Tampa and St. Petersburg, Florida; Dallas, Fort Worth and Houston, Texas; Los Angeles, San Diego and San Francisco, California; New Orleans, Louisiana; Baltimore, Maryland and the District of Columbia. According to the United States Bureau of the Census, many of these areas have a large population over age 65, which represents a principal target market for our preneed sales program as well as at-need sales. We believe that we are an industry leader in marketing preneed cemetery property and preneed funeral and cemetery merchandise and services, and we consider preneed sales to be an integral part of our long-term business strategy.
Cemetery operations account for a significantly larger percentage of our total revenues than those of our three largest public competitors. We believe cemeteries provide the best foundation for securing long-term market share in our industry. The sale of cemetery property to a family creates a relationship that builds heritage over time, as family members are buried in a plot or mausoleum and as other family members purchase additional cemetery property in order to be buried in the same cemetery. Our relationships with our cemetery property customers allow us to offer related products and services, such as cemetery merchandise and funeral services, at one of our businesses located on the cemetery grounds or nearby.
Our business has 11 operating segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. All Other consists of our operations in Puerto Rico in 2004 and 2003 and our operations in Puerto Rico, Spain, Portugal, France, Canada and Argentina in 2002. We sold our operations in Spain, Portugal, France, Canada and Argentina in 2002. Additional information on our segments can be found in Note 24 to the consolidated financial statements included in Item 8.
We believe that our combination operations help to increase market share. By building new funeral homes on existing cemetery property, we are able to offer families the convenience of complete funeral home and cemetery planning, services and merchandise from a single location at a competitive price at the time of need or on a preneed basis. Approximately 49 percent of our cemeteries have a funeral home onsite that we operate in conjunction with the cemetery. In addition to our combination operations, approximately 37 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes. We frequently organize our operating units in “clusters,” which are geographically integrated groups of funeral homes and cemeteries, allowing us to cost-effectively pool resources, such as assets, personnel and services, and generate higher margins.
Our business was founded by the Stewart family in 1910, and was incorporated as a Louisiana corporation in 1970. Our principal executive offices are located at 1333 South Clearview Parkway, Jefferson, Louisiana 70121, and our telephone number is 504-729-1400. Our website address is www.stewartenterprises.com, where all of our
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public filings are available free of charge on the same day they are filed with the Securities and Exchange Commission (“SEC”). The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov. The public may also read and copy materials filed by us at the SEC’s Public Reference Room at 450 Fifth Street, N.W., Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling 1-800-SEC-0330.
The Death Care Industry
Industry consolidation.Death care businesses in the United States have traditionally been relatively small, family-owned enterprises that have passed through successive generations within the family. The decade of the 1990s witnessed a trend of family-owned firms consolidating with larger organizations, but this trend slowed dramatically in 1999. As the number of consolidators participating in the acquisition market declined, those that remained generally applied significantly tighter pricing criteria, and many potential sellers withdrew their businesses from the market rather than pursuing transactions at lower prices.
During 1999, Service Corporation International, one of our primary competitors for acquisitions, announced plans to significantly reduce the level of its acquisition activity. The Loewen Group, Inc., now reorganized as Alderwoods Group, Inc., previously a primary competitor for acquisitions, entered into bankruptcy proceedings during 1999, after announcing that it had terminated its acquisition activity and was offering a number of its own properties for sale. In addition, Equity Corporation International, previously the fourth largest public death care company and another of our competitors for acquisitions, was acquired by Service Corporation International in 1999.
Throughout fiscal year 1999, we continually reduced our acquisition pricing multiples. In the third quarter of fiscal year 1999, our acquisition activity began to decrease substantially from prior quarters as many potential sellers were not willing to sell their businesses at the lower prices. As the business model shifted, death care consolidators experienced diminishing access to capital. In response to these changes, we ceased our acquisition activity and developed strategies for improving our cash flow and reducing and restructuring debt. During fiscal year 2000 through fiscal year 2003, we completed our transitional strategies of improving our cash flow, restructuring and reducing our debt and selling our foreign assets. In fiscal year 2004, we focused on the operating initiatives we announced in September 2003: increased cemetery property sales volume, growth in the number of funeral events performed, cost improvements and employee development initiatives. See “Business Strategy” below for a discussion of our current operating initiatives.
We estimate that our industry, which consists of approximately 22,000 funeral homes and 10,500 cemeteries in the United States, collectively generates approximately $15 billion in annual revenue. On April 3, 2006, Service Corporation International announced that it had entered into an agreement to acquire Alderwoods Group, Inc. Despite the consolidation among some of the larger death care companies, our industry continues to be characterized by a large number of locally-owned, independent operations, with approximately 80 percent of industry revenue being generated by independently-owned operations. At current stock prices, stock repurchases, debt reduction and constructing funeral homes on our cemeteries or those of unaffiliated third parties continue to be more attractive uses of our cash flow than acquisitions. However, we believe that growing our organization through acquisitions will continue to be a good business strategy, as we enjoy the important synergies and economies of scale from our infrastructure.
Importance of tradition; barriers to entry.We believe it is difficult for new competitors to enter existing markets successfully by opening new cemeteries and funeral homes. Entry into the cemetery market can be difficult due to several factors. Because families tend to return to the same cemetery for multiple generations to bury family members, it is difficult for new cemeteries to attract families. Additionally, mature markets, including many of the metropolitan areas where our cemeteries are located, are often served by an adequate number of existing cemeteries with sufficient land for additional plots, whereas land for new cemetery development is often scarce and expensive. Regulatory complexities and zoning restrictions also make entry into the cemetery market difficult. Finally, development of a new cemetery usually requires a significant capital investment that takes several years to produce a return. Entry into the funeral home market can be difficult for many of the same reasons. Families are often willing to move from an existing funeral home to a newer facility developed on the grounds of their preferred cemetery; however, absent that connection, families tend to choose the funeral home that previously served their family. Families also choose a funeral home because of its reputation, which can only be developed over time.
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Continuing need for products and services; increasing number of deaths. There is an inevitable need for our products and services. Although the number of deaths in the United States will reflect short-term fluctuations, deaths in the United States are expected to increase at a steady, moderate pace over the long-term. According to the United States Bureau of the Census, the number of deaths in the United States is expected to increase by approximately 1 percent per year, from 2.4 million in 2000 to 2.6 million in 2010. Furthermore, the average age of the population in the United States is increasing. According to the United States Bureau of the Census, the United States population over 50 years of age is expected to increase by approximately 2 percent per year, from 76.1 million in 2000 to 97.1 million in 2010. We believe the aging of the population is particularly important because it expands our target market for preneed sales, as persons over the age of 50 are the most likely group to make preneed funeral and cemetery arrangements.
Growing demand for cremation.Consumer preferences in the death care industry tend to change slowly. One significant trend in the United States is an increasing preference of consumers for cremations. Industry research indicates that the percentage of cremations has increased steadily and that cremations will represent approximately 35 percent of deaths in the United States by the year 2010, compared to 28 percent in 2002. The trend toward cremations has been a significant concern for traditional funeral home and cemetery operators because cremations have typically included few, if any, additional products or services other than the cremation itself. However, industry research has shown that consumers most commonly choose cremation over traditional funerals for reasons other than cost, and we believe that cremations also provide our company with an opportunity to offer families an array of additional products and services with an emphasis on customization.
Growing demand for customization.Our market research and operational experience indicate a growing demand for increased personalization of death care products and services, presenting us with an opportunity for enhancing our customers’ satisfaction and increasing our revenue per sale through our custom funeral planning program. For additional information, see below under the heading “Competitive Strengths – Emphasis on customization and personalization.”
Competitive Strengths
Leading market positions. We are the third largest provider of funeral and cemetery products and services in the United States and have been in business for more than 90 years. We believe that we operate one or more of the premier death care facilities in each of our principal markets, which are primarily in larger metropolitan areas in the Southern, Western, Mid-Atlantic and Mid-Western states. In our view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion. While funeral homes and cemeteries in the United States perform an average of approximately 100 funerals and 165 burials per year, our facilities perform an average of approximately 265 funerals and 375 burials per year. In addition, more than 40 percent of our properties are located in California, Florida and Texas, which are three of the four states with the highest populations over age 65, an age group that represents a large portion of our target market.
Strong cemetery operations.Our cemetery operations account for approximately 45 percent of our total revenues, which is a significantly larger percentage than any of our three largest competitors. We believe this is a competitive advantage because families generally return to the same cemetery for multiple generations to bury family members. Cemetery property often becomes an important part of a family’s heritage, and family members who relocate are often returned to their home cemetery to be buried. We build on our relationships with our cemetery customers by offering additional cemetery property to related family members and by offering related products and services such as cemetery merchandise and funeral services at one of our funeral homes located on the cemetery grounds or nearby. Approximately 39 percent of our total cemetery acreage is available for future development.
Emphasis on combination operations.Approximately 49 percent of our cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which we refer to as a combination operation. This is a higher percentage of combination operations than any of our three largest competitors. We believe combination operations represent a competitive advantage because they offer families the convenience of complete death care services at a single location. A family that is planning a burial in one of our cemeteries often perceives our onsite funeral home
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to be a more desirable location for funeral services than an unaffiliated offsite funeral home. Thus, the call volume of the funeral home is enhanced by the heritage of the cemetery, and, over time, the volume of cemetery events increases as well. In addition, combination operations enhance our purchasing power, enable us to employ more sophisticated management systems and allow us to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. As a result, our combination operations usually generate higher operating margins compared to our stand-alone funeral homes and cemeteries. In addition to our combination operations, approximately 37 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes.
Expertise in preneed sales; strong backlog.We believe that we are distinguished from our competitors by our strong emphasis on, and more than 60-year history of experience with, preneed sales. Preneed plans enable families to specify in advance and prepay for cemetery property and funeral and cemetery services and products. We market our preneed properties, services and products domestically through a full-time staff of approximately 1,100 commissioned sales counselors. We estimate that as of October 31, 2004, the future value of our preneed backlog of funeral and cemetery products and services (including estimated future earnings on funds held in trust and build-up in the face value of third-party insurance contracts, in each case using projected returns) represented approximately $2.0 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. Our expertise in preneed sales has historically developed out of, and now complements, our strong cemetery operations. This is because cemetery property, such as a burial plot, is usually the first purchase a family will make when considering preneed arrangements. We build on our relationships with our preneed cemetery property customers by offering them additional preneed products and services such as cemetery merchandise and funeral services. Our focus on preneed cemetery property sales is also important because these sales generate current revenues and higher current cash flows than other types of preneed sales.
Emphasis on customization and personalization.During 1999 we took steps to gain a competitive advantage by placing our company at the forefront of product offerings based on consumer preferences. We hired a major consulting firm to assist us in conducting an extensive market study evaluating changing trends in consumer preferences. With more than 2,400 interviews conducted, we believe this to be the most exhaustive recent study of consumer preferences in our industry. This project provided us with the consumer’s perspective on our operations and facilities. We gained valuable insight into how our employees, business practices and facilities can better meet consumer preferences. Our implementation of new products and services based on the findings of this project continue to be positive drivers for our funeral business.
Among other important findings, our market research indicates that consumer preferences are shifting towards more personalized memorial services and merchandise in the context of both traditional burials and cremations. We have responded to these changing preferences by, among other things, training our funeral arrangers to offer our customers a broad range of options, such as designing a funeral service to reflect the special interests or accomplishments of the deceased. We developed a custom funeral planning program and have implemented this program in over 100 of our funeral homes through the end of fiscal year 2004. By the end of fiscal year 2005, we expect to have implemented this program in an additional 60 of our funeral homes. We are also changing the way our product offerings are displayed at our locations, making it easier for our customers to appreciate our wider selection. In our markets where these new business practices have been implemented, we believe that our product and service offerings have enhanced the experiences provided to families at our funeral homes and have contributed to increased revenues per sale.
Expertise in enhanced cremation and alternative service offerings.Our alternative service firms are generally located in leased premises and have lower overhead than traditional funeral homes. Although death care arrangements at these locations are typically more cost-effective for the consumer than services at a traditional funeral home, it is not our goal to be the low-price leader in these markets. While the average revenue for a cremation service is generally lower than that of a traditional full-service funeral, we have found that these revenues can be substantially enhanced by our emphasis on customization. For example, in addition to a personalized memorial service to celebrate the life of the deceased, an enhanced cremation may include a casket, an urn and a niche in a mausoleum or columbarium in which to place the remains. We continue to market our products and services to address the rising demand for cremations.
Centralized support services; cost controls.Our Shared Services Center, which we opened in 1997, was
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developed for the standardization and centralization of all of our facilities’ administrative and support processes such as accounting, management reporting, payroll, trust administration, contract processing, accounts receivable collection and other services. It allows us to decrease our costs without diminishing service by creating significant savings on items such as trust administration fees, travel expenses, office supplies, overnight delivery and long distance telephone services. As we look at our opportunities for growth, we expect to leverage the efficiencies that we have achieved through our Shared Services Center and expect to manage much of our growth with our existing infrastructure. Additionally, at the beginning of fiscal year 2000 we developed our centralized formal training strategy and began implementation of standardized marketing programs to enhance sales effectiveness. While our centralization of resources and standardization of processes represent a competitive advantage, our management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in their operations and service to families in an effort to maintain the traditional structure and culture of an individually-owned operation. We believe that this is important in order to maintain the level of caring, personalized service expected by the families we serve.
Experienced management.We have an experienced management team, many of whom owned and operated their own funeral homes and cemeteries and joined us when we acquired their businesses. Our eight top executives have an average of 28 years of experience in the death care industry and have served our company for an average of 15 years.
Business Strategy
Implement operating initiatives.In fiscal year 2003, our executive management team pinpointed the key strategies that we believe will improve the future growth of our business. This led to our announcement in September 2003 of a set of operating initiatives, which resulted in the creation of four task forces to address the following key areas: increased cemetery property sales volume, growth in the number of funeral events performed, cost improvements and employee development initiatives.
Our preneed cemetery property task force is strategically targeting locations with maximum potential and developing specific plans to increase preneed property sales and attract new customers at each of the targeted locations. We view preneed property sales as the catalyst for growth in our cemetery segment as they create a new customer base for our businesses. These sales also result in high margins and produce positive cash flow. Recommendations from our preneed cemetery property task force were implemented in the third and fourth quarters of fiscal year 2003. We have transitioned to personalized selling, and in addition to requests generated by our media marketing campaigns, our salespeople have been successful in obtaining referrals from their existing customer base to assist new customers with their cemetery and funeral needs. For fiscal year 2004, we achieved a 9 percent increase in cemetery property sales, which was in line with our stated goal of 5 percent to 10 percent for 2004.
We continue to develop and implement strategies to drive at-need and preneed funeral growth throughout our organization. We have developed an at-need task force and a cremation task force, implemented a funeral call incentive compensation program and continue to proceed with full implementation of our custom funeral planning program, additional advertising and employee training. Our funeral call volume task force is also using the most successful tactics of our top performing funeral homes to develop strategies to drive funeral call growth throughout our organization with an increased focus on preneed funeral sales. We believe that the continuous addition of preneed funeral contracts to our backlog is a primary driver of sustainable long-term growth in the number of families served by our funeral homes. For fiscal year 2004, we achieved a 9 percent increase in preneed funeral sales, which was in line with our goal of 5 percent to 10 percent for 2004.
To improve margins and reduce costs, our task force identified opportunities where we could reduce costs without sacrificing long-term results. These individuals conducted in-depth reviews of cost centers outside of their areas of responsibility to assure effective utilization of all resources. In December 2003, we restructured certain management functions and reduced our employee headcount by approximately 300 throughout the organization. In the markets in which we operate, declining deaths in recent years have resulted in reduced activity in many of our businesses, requiring fewer employees. Additionally, we restructured for a flatter organization to bring leadership closer to those individuals who have the greatest potential to improve the performance of each location. There were no reductions in the number of commissioned sales counselors. We believe the workforce reduction and the other cost reductions did not reduce the quality, service and value consistently provided to families through our funeral homes and cemeteries. We recorded a charge in fiscal year 2004 for severance and other costs associated with the
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workforce reductions of $2.4 million ($1.5 million after tax, or $.01 per share). These cost reduction initiatives were expected to reduce costs by $16 million to $20 million annually, partially offset by approximately $8 million to $10 million in normal inflation of costs remaining in the business. During fiscal year 2004, we experienced a $9.6 million decrease in funeral, cemetery and corporate general and administrative expenses, which is in line with our forecasts. While we intend to continue controlling costs and growing revenues, we do not anticipate further significant cost cuts and expect margins to stabilize in fiscal year 2005.
The fourth initiative is to enhance employee satisfaction through professional growth, which includes the implementation of a mentoring program and succession plan for all key employee positions. We continue to invest in the professional growth of our employees through numerous programs and career development opportunities.
In December 2003, we announced a plan to close or sell a number of small businesses, primarily funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit our operating profile. We have worked hard over the past few years to improve the performance of all our businesses in order to meet changing consumer needs and to manage costs in a difficult operating environment, and for the most part, these efforts have been successful. However, for various reasons — such as size, location or competitive environment — a number of our businesses did not demonstrate a capacity for improving performance through our operating strategies, and in fact, have contributed very little to our profitability. Many of these are key-man businesses, and many are subject to volatile swings in market share. As of October 31, 2004, we had received $22.6 million from our divestitures representing the sale of 56 businesses. As of October 31, 2005, we have received an additional $6.8 million in proceeds from the sale of 15 businesses and have six additional businesses and parcels of real estate we will continue to market. We believe that the closing or sale of these businesses is enabling management to focus on our most productive operations where our operating initiatives may bring about the greatest benefits in increased revenues and cash flow.
Maintain backlog through preneed marketing.As part of the operating initiatives described above, we have increased our focus on preneed sales. We consider maintaining our backlog through preneed marketing to be an integral part of our long-term business strategy. Our primary objective is to balance our preneed sales levels and our cash investment while maintaining a sustainable and predictable level of growth in our backlog. The aging of the population represents a significant opportunity for us to expand our customer base through preneed marketing, as persons over 50 years of age are most likely to make these purchases.
Focus on cash flow.In addition to controlling our costs, we plan to continue to focus on our cash flow through initiatives begun in fiscal year 2000. In fiscal year 2000, we restructured our preneed sales program to focus on increasing cash flow. We improved the quality of our preneed sales and the associated receivables by increasing finance charges, requiring larger down payments and shortening installment payment terms, although this resulted in a decrease in the overall level of preneed sales. We also suspended dividends and implemented a more rigorous internal process for reviewing capital expenditures. We plan to continue our focus on cash flow and continue controlling our costs by, among other things, obtaining volume discounts from suppliers and leveraging our operating costs through clustering and combination operations. Additionally, we have been incentivizing local managers to control costs by tying their compensation more closely to the profitability of the locations they manage.
Deploy cash flow.We plan to continue to evaluate options for deployment of our cash flow as opportunities arise. In June 2003, we announced that our Board of Directors approved a stock repurchase program allowing us to invest up to $25.0 million in repurchases of our Class A common stock. In June 2004, our Board of Directors increased the program limit by an additional $3.0 million to $28.0 million. As of January 3, 2005, we had repurchased 3,500,000 shares of our Class A common stock at an average price of $6.35 per share. At current stock prices, stock repurchases, debt reduction and constructing funeral homes on our cemeteries or those of unaffiliated third parties continue to be more attractive uses of our cash flow than acquisitions. However, we believe that growing our organization through acquisitions will continue to be a good business strategy, as we enjoy the important synergies and economies of scale from our infrastructure.
Increase enhanced cremation products and services.In fiscal years 2004, 2003 and 2002, 37 percent, 36 percent and 35 percent, respectively, of the funeral services we performed in our continuing operations were cremations. The cremation rate in the United States has been increasing. According to industry estimates, 28 percent of deaths in the United States during 2002 resulted in cremations, and cremations are expected to represent35 percent of deaths in the United States by the year 2010. As described above in “Competitive Strengths -
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Expertise in enhanced cremation and alternative service offerings,” we have been addressing this trend by providing enhanced cremation products and services at all of our funeral homes.
Operations
General.We believe that we operate one or more of the premier death care facilities in each of our principal markets. In our view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion.
We operate most of our funeral homes and cemeteries in “clusters.” Clusters are groups of funeral homes and cemeteries located close enough to one another that their operations can be integrated to achieve economies of scale. For example, clustered facilities can share vehicles, embalming services, inventories of caskets and other merchandise and, most significantly, personnel, including prearrangement sales personnel; thus, we are able to decrease our costs and expand our sales and marketing effectiveness at each location. By virtue of their proximity to one another, clustered facilities also create opportunities for more integrated and sophisticated management of operations.
Funeral operations. Funeral operations accounted for approximately 55 percent of our revenues for fiscal year 2004. Our funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. Our services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of our funeral homes offer cremation products and services. Most of our funeral homes have a non-denominational chapel on the premises, which allows family visitation and religious services to take place at the same location. As of October 31, 2004, we operated 242 funeral homes.
Cemetery operations.Cemetery operations accounted for approximately 45 percent of our revenues for fiscal year 2004. Our cemetery operations sell cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, markers and burial vaults, and also provide burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis. We also maintain cemetery grounds under cemetery perpetual care contracts and local laws. As of October 31, 2004, we operated 147 cemeteries.
Combination funeral home and cemetery operations.Approximately 49 percent of our cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which is a higher percentage of combination operations than any of our three largest competitors. Many of these facilities are in our key markets, including New Orleans, Louisiana; Dallas, Fort Worth and Houston, Texas; Miami, Orlando, Tampa and St. Petersburg, Florida; and Los Angeles and San Diego, California.
Combination operations help to increase market share by allowing us to offer families the convenience of complete funeral and cemetery planning and services from a single location at a competitive price at the time of need or on a preneed basis. Our experience demonstrates that a family planning a burial in our cemetery often views our associated funeral home as a more desirable location for funeral services than an unaffiliated offsite funeral home. Thus, the funeral home’s sales benefit from the heritage of the cemetery, and over time, the cemetery’s activity increases as well. In addition, combination operations enhance our purchasing power, enable us to employ more sophisticated management systems and allow us to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded sales and marketing opportunities. Although it generally takes several years before a newly constructed funeral home becomes profitable, our experience with combination operations has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both.
We have three primary strategies for growth through the use of combination operations. One strategy is to create combination operations by constructing funeral homes on the grounds of our cemeteries. Another is to enter into agreements in which we construct funeral homes on the grounds of unaffiliated cemeteries, which allows us to enjoy many of the benefits of a combination operation without the capital investment of purchasing the cemetery. The cemetery revenue of the unaffiliated cemetery is enhanced as it benefits by being able to compete more
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effectively with other cemeteries or combination operations in the market and by providing a better service to their parishioners or other constituencies. The third strategy is to acquire combination operations.
In 1987, we entered into an agreement with the Catholic Archdiocese of New Orleans pursuant to which we constructed and own a mausoleum on one of our cemeteries, and the Archdiocese of New Orleans assists in the promotion of the sale of crypts in the mausoleum to Catholic parishioners of the Archdiocese of New Orleans. The Company pays the Archdiocese of New Orleans a percentage of the revenue from the sale of all crypts in the mausoleum. Additionally, in fiscal year 1994, we constructed a funeral home and mausoleum on the grounds of the New Orleans Cemetery of the Firemen’s Charitable and Benevolent Association, a non-profit organization. We own and operate the funeral home and mausoleum.
In 1997, we entered into lease agreements with the Archdiocese of Los Angeles whereby we have the right to construct and operate funeral homes on the sites of up to nine cemeteries owned and operated by the Archdiocese. As of October 31, 2004, five of these funeral homes were operating, and construction had begun on the sixth funeral home. The leases expire in 2039, and we do not have an option to renew. We account for these leases as operating leases.
Over the last 50 years, through our mausoleum construction business, we have developed relationships with the Catholic Church in approximately 70 dioceses in 39 states. We plan to pursue more of these agreements with the Catholic Church, other faith-based organizations and non-profit entities. We also plan to develop additional combination operations on our own cemetery properties as well as pursuing the acquisition of privately-owned combination operations.
Cremation.In fiscal year 2004, 37 percent of the funeral services we performed in our continuing operations were cremations. The increasing preference of consumers for cremations is a significant trend in the United States. Industry research indicates that the percentage of cremations has steadily increased and that cremations will represent approximately 35 percent of deaths in the United States by the year 2010, compared to 28 percent in 2002. We have been addressing this trend by providing enhanced cremation products and services at all of our funeral homes, including funeral services and memorialization for families choosing cremation. We are also addressing this trend through our alternative service firm strategy as discussed above in “Competitive Strengths — Expertise in enhanced cremation and alternative service offerings.”
Preneed arrangements.We market death care products and services domestically on a preneed basis through a full-time staff of approximately 1,100 commissioned sales counselors. Preneed plans enable families to specify in advance and prepay for funeral and cemetery arrangements. Prearrangements spare families the emotional strain of making death care decisions at the time of need. The products and services included in preneed contracts are set at prices prevailing at the time the agreement is signed rather than when the products and services are delivered. As described in Note 3 to the consolidated financial statements included in Item 8, customer payments related to these contracts are generally placed in trusts and invested or are used to purchase insurance policies to cover the cost of the future delivery of products and services. When the service or merchandise is delivered, we realize the full contract amount plus all accumulated trust earnings associated with that contract or the buildup in the face value of the insurance contract, generally offsetting increases in our costs due to inflation.
We estimate that as of October 31, 2004, the future value of our preneed backlog (including estimated earnings on funds held in trust and build-up in the face value of third-party insurance contracts, in each case using projected returns) represented approximately $1.9 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.
Trusts and escrow accounts.We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. For further discussion of these trusts and escrow accounts, see Notes 5, 6 and 7 to the consolidated financial statements included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. As of October 31, 2004, the market value of our preneed funeral merchandise and services trust and escrow accounts totaled approximately $439.7 million, the market value of our preneed cemetery merchandise and services trust and escrow accounts totaled approximately $194.2 million, and the market value of our cemetery perpetual care trusts totaled approximately $209.3 million.
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We believe that the balances in our trusts and escrow accounts, along with insurance proceeds, installment payments due under contracts and future earnings on the balances, will be sufficient to cover our estimated cost of providing the related preneed services and products in the future.
Generally, our wholly-owned subsidiary, Investors Trust, Inc. (“ITI”), a Texas corporation with trust powers, serves as investment advisor on our investment portfolio and our prearranged funeral, merchandise and cemetery perpetual care trusts and escrow accounts. ITI provides investment advisory services exclusively to our trusts for a fee. Under state trust laws, we are allowed to charge the trusts a fee for managing the investment of the trust assets. We have elected to perform these services in-house, and the fees are recognized as income as the services are performed. For additional information, see Note 24 to the consolidated financial statements included in Item 8. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. As of October 31, 2004, ITI managed assets with a market value of $806.5 million. Lawrence B. Hawkins, one of our executive officers and a professional investment manager, serves as President of ITI. ITI operates within the guidelines of a formal investment policy established by the Investment Committee of our Board of Directors. The policy emphasizes conservation, diversification and preservation of principal while seeking appropriate levels of current income and capital appreciation.
Management.We have an experienced management team, many of whom joined us through acquisitions. Our management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in deciding how their businesses will be managed and how their products and services will be priced and merchandised. At the same time, financial and strategic goals are established by management at the corporate level. We provide business support services primarily through our Shared Services Center, which opened in 1997 and provides centralized and standardized accounting, management reporting, payroll, contract processing, accounts receivable collection and other services for all of our facilities. In December 2003, we restructured certain management functions and reduced our employee headcount by approximately 300 employees throughout the organization as discussed above in “Business Strategy.”
As of October 31, 2004, we were divided into four geographic operating divisions in the United States, each of which was managed by a division president and chief financial officer: Central, Western, Eastern and Southern. For additional information on our segments, see Note 24 to the consolidated financial statements included in Item 8. For a discussion of the changes made to our operating divisions in fiscal year 2005, see Note 28 to the consolidated financial statements included in Item 8. Our operating divisions are further divided into regions, each of which is managed by an area vice president. We also have a Corporate Division, which manages our corporate services, accounting, financial operations and strategic planning. Early in fiscal year 2000, we formed a Sales and Marketing Division to centralize responsibility for sales teams in all operating divisions and to allow for more comprehensive training and sharing of information. From time to time, we may increase, reduce or realign our divisions and regions.
In June 2004, William E. Rowe stepped down from his position as President and Chief Executive Officer but continues in his role as Chairman. At that time, Kenneth C. Budde, Executive Vice President and Chief Financial Officer, was selected as interim Chief Executive Officer. In September 2004, our Board of Directors appointed Mr. Budde as President and Chief Executive Officer on a permanent basis, and in December 2004, Thomas M. Kitchen, a member of our Board of Directors, was named Executive Vice President and Chief Financial Officer.
Foreign operations.In fiscal year 2001, we began to sell our foreign operations as part of our strategy to reduce debt and focus on our core businesses. During fiscal year 2001, we sold our Mexican, Australian, New Zealand, Belgian and Dutch operations comprised of 94 funeral homes and 2 cemeteries. During fiscal year 2002, we sold our remaining foreign operations located in Spain, Portugal, France, Canada and Argentina, which consisted of 196 funeral homes and 8 cemeteries.
Financial information about industry and geographic segments.For financial information about our industry and geographic segments for fiscal years 2004, 2003 and 2002, see Note 24 to our consolidated financial statements included in Item 8.
Competition
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Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral home and cemetery firms. We also compete with monument dealers, casket retailers, low-cost funeral providers and crematories, and other non-traditional providers of limited services or products. Discount retailers have begun marketing caskets at prices sometimes lower than what we offer. Consumers can now buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet, and recently, the first large general merchandise company has entered the market for low-cost caskets. Market share for funeral services and cemetery property is largely a function of goodwill, family heritage and tradition, although competitive pricing, professional service and attractive, well-maintained and conveniently-located facilities are also important, and price can be especially important for funeral and cemetery merchandise. Because of the significant role of goodwill and tradition, market share increases for funeral services and cemetery property are usually gained over a long period of time. Extensive marketing through media advertising, direct mailings and personal sales calls has increased in recent years, especially with respect to the sales of preneed funeral services. Information about our sales and marketing approach can be found above under the heading “Business Strategy.” Traditional cemetery and funeral service operators face competition from the increasing number of cremations in the United States. Additional information about the trend toward cremation and our strategies to address that trend can be found under the headings “The Death Care Industry,” “Competitive Strengths” and “Business Strategy.”
Regulation
Our funeral home operations are regulated by the Federal Trade Commission (the “FTC”) under the FTC’s Trade Regulation Rule on Funeral Industry Practices, 16 CFR Part 453 (the “Funeral Rule”), which went into effect on April 30, 1984, and was revised effective July 19, 1994. The FTC began reviewing the Funeral Rule in 1999 at which time it conducted hearings to receive input from industry and consumer groups. At this time, the FTC has not issued any proposed changes to the regulation nor are any anticipated in the immediate future. Senator Dodd has proposed a bill in Congress to codify the Funeral Rule, but it is too late in this session to move forward. He is expected to re-introduce his bill in the 2005 session.
The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (1) misrepresenting legal, crematory and cemetery requirements; (2) embalming for a fee without permission; (3) requiring the purchase of a casket for direct cremation; and (4) requiring consumers to buy certain funeral goods or services as a condition for furnishing other funeral goods or services.
Our operations are also subject to extensive regulation, supervision and licensing under numerous federal, state and local laws and regulations. For example, state laws impose licensing requirements for funeral homes and funeral directors and regulate preneed sales. Our embalming facilities are subject to stringent environmental and health regulations. We have a department that monitors compliance, and we believe that we are in substantial compliance with the Funeral Rule and all such laws and regulations. Federal, state and local legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material effect on our operations and on the death care industry in general. We cannot predict the outcome of any proposed legislation or regulation or the effect that any such legislation or regulation might have on us.
Employees
As of October 31, 2004, we employed approximately 5,600 persons, and we believe that we maintain a good relationship with our employees. Approximately 124 of our employees are represented by labor unions or collective bargaining units. In December 2003, we announced a reduction and restructuring of our workforce, which reduced the number of our employees by approximately 300. Additional information about our restructuring and workforce reduction can be found under the heading “Business Strategy.”
Item 2. Properties
The following table shows the number of funeral homes and cemeteries we operated in each of our geographic operating segments as of October 31, 2004:
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| Number | ||||||||||
| of | ||||||||||
| Funeral | Number of | |||||||||
| Operating Segment | Homes | Cemeteries | Geographic Areas | |||||||
| Central Division - Funeral | 73 | Alabama, Arkansas, Illinois, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Tennessee, Texas | ||||||||
| Central Division – Cemetery | 46 | Alabama, Arkansas, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Tennessee, Texas, Wisconsin | ||||||||
| Western Division – Funeral | 59 | California, Nevada, Oregon, Washington | ||||||||
| Western Division – Cemetery | 8 | California, Oregon, Washington | ||||||||
| Eastern Division – Funeral. | 49 | Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia | ||||||||
| Eastern Division – Cemetery | 64 | Georgia, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia | ||||||||
| Southern Division – Florida – Funeral | 44 | Florida | ||||||||
| Southern Division – Florida – Cemetery | 21 | Florida | ||||||||
| All other – Funeral | 17 | Puerto Rico | ||||||||
| All other – Cemetery | 8 | Puerto Rico | ||||||||
| 242 | 147 | |||||||||
As of October 31, 2004, approximately 74 percent of our 242 funeral home locations were owned by our subsidiaries, and approximately 26 percent were held under operating leases. The leases have terms ranging from 1 to 15 years, except for one lease that expires in 2032 and five leases with the Archdiocese of Los Angeles that expire in 2039. An aggregate of $1.3 million of our term notes are secured by mortgages on some of our funeral homes; these notes were either assumed by us upon our acquisition of the property or represent seller financing for the acquired property.
As of October 31, 2004, we owned 147 cemeteries covering a total of approximately 10,100 acres. Approximately 39 percent of the total acreage is available for future development.
We own a 98,200 square-foot building in suburban New Orleans that we use for our corporate headquarters, shared services center, human resources, communications, internal audit and information systems departments.
As of October 31, 2002, we had sold all of our foreign operations. See the section above entitled “Operations — Foreign operations.”
Item 3. Legal Proceedings
This item is not being amended by this Amendment.
For a discussion of legal proceedings in fiscal year 2005, see Note 28 to the consolidated financial statements included in Item 8.
Item 4. Submission of Matters to a Vote of Security Holders
This item is not being amended by this Amendment.
Item 4(a). Executive Officers of the Registrant
This item is not being amended by this Amendment. For fiscal year 2005 changes, see Note 28 to the consolidated financial statements included in Item 8.
PART II
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Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities.
This item is not being amended by this Amendment. For fiscal year 2005 changes, see Note 28 to the consolidated financial statements included in Item 8.
Item 6. Selected Financial Data
Restatements and Reclassifications
The following selected consolidated financial data for the fiscal years ended October 31, 2000 through October 31, 2004 are derived from our consolidated financial statements, as restated and reclassified. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and in Note 2 to the consolidated financial statements included in Item 8, the financial statements for the fiscal years ended October 31, 2000, 2001, 2002, 2003, 2004 and the first three quarters of 2005 have been restated to correct for certain accounting errors. All applicable amounts relating to these restatements have been reflected in the following selected financial data.
The data for fiscal years 2000 through 2004 have also been reclassified to reflect certain businesses as discontinued operations under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as discussed in footnote 1 to the table below and in Note 3(s) to the consolidated financial statements included in Item 8. The data set forth below should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.
A summary of the effect of these restatements on our consolidated statements of earnings for fiscal years 2002, 2003 and 2004 and consolidated balance sheets for fiscal years 2004 and 2003 can be found in Note 2 to the consolidated financial statements included in Item 8. A summary of the effects on the consolidated statements of earnings for fiscal years 2001 and 2000 and on the consolidated balance sheets of fiscal years 2000, 2001 and 2002 are presented in footnote 11 to the Selected Financial Data table below.
Comparability of Information in Selected Consolidated Financial Data Table
As discussed in more detail in the footnotes to the table below and in the related footnotes to the consolidated financial statements included in Item 8, the following are the main factors that materially affect the comparability of the revenues, gross profits and assets reflected in the selected financial data:
| • | SAB No. 101 was implemented in fiscal year 2001. | ||
| • | SFAS No. 142 was implemented in fiscal year 2002. | ||
| • | In fiscal year 2004, we adopted FIN 46R. | ||
| • | Fiscal years 2000, 2001 and 2002 include the results of our foreign operations in continuing operations. The sale of our foreign operations was completed in fiscal year 2002. | ||
| • | All businesses sold in fiscal years 2003, 2004 and 2005 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented. |
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Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Year Ended October 31,(1)(11) | ||||||||||||||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||||||||||||||
| Statement of Earnings Data: | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||
| Revenues: | ||||||||||||||||||||
| Funeral | $ | 271,239 | $ | 269,109 | $ | 311,301 | $ | 375,578 | $ | 416,944 | ||||||||||
| Cemetery | 222,827 | 209,374 | 214,989 | 233,082 | 282,119 | |||||||||||||||
| Total revenues | 494,066 | 478,483 | 526,290 | 608,660 | 699,063 | |||||||||||||||
| Gross profit: | ||||||||||||||||||||
| Funeral | 68,741 | 58,820 | 71,577 | 76,632 | 100,756 | |||||||||||||||
| Cemetery | 46,271 | 39,823 | 40,460 | 42,571 | 62,325 | |||||||||||||||
| Total gross profit | 115,012 | 98,643 | 112,037 | 119,203 | 163,081 | |||||||||||||||
| Corporate general and administrative expenses | (17,097 | ) | (17,733 | ) | (17,261 | ) | (18,020 | ) | (19,763 | ) | ||||||||||
| Separation charges | (3,435 | )(2) | (2,450 | )(2) | — | — | — | |||||||||||||
| Gains on dispositions and impairment (losses), net | (204 | )(3) | (10,206 | )(3) | (18,500 | )(5) | (269,158 | )(6) | — | |||||||||||
| Other operating income, net | 2,112 | 2,083 | 2,535 | 6,967 | 1,927 | |||||||||||||||
| Operating earnings (loss) | 96,388 | (2)(3) | 70,337 | (2)(3) | 78,811 | (5) | (161,008 | )(6) | 145,245 | |||||||||||
| Interest expense | (47,335 | ) | (53,643 | ) | (61,980 | ) | (63,572 | ) | (61,394 | ) | ||||||||||
| Loss on early extinguishment of debt | — | (11,289 | )(4) | — | (9,120 | )(7) | — | |||||||||||||
| Investment and other income (expense), net | 178 | (749 | ) | 794 | 4,438 | 5,501 | ||||||||||||||
| Earnings (loss) from continuing operations before income taxes | $ | 49,231 | (2)(3) | $ | 4,656 | (2)(3)(4) | $ | 17,625 | (5) | $ | (229,262 | )(6)(7) | $ | 89,352 | ||||||
| Earnings (loss) from continuing operations | $ | 31,022 | (2)(3) | $ | 1,065 | (2)(3)(4) | $ | 11,101 | (5) | $ | (179,213 | )(6)(7) | $ | 56,884 | ||||||
| Earnings (loss) from discontinued operations | 5,670 | (3) | (19,097 | )(3) | 1,192 | 1,005 | 1,305 | |||||||||||||
| Cumulative effect of change in accounting principles (net of $16,310 and $ 167,562 income tax benefit in 2002 and 2001, respectively) | — | — | (193,090 | )(1) | (248,666 | )(1) | — | |||||||||||||
| Net earnings (loss) | $ | 36,692 | (2)(3) | $ | (18,032 | )(2)(3)(4) | $ | (180,797 | )(1)(5) | $ | (426,874 | )(1)(6)(7) | $ | 58,189 | ||||||
| Per Share Data: | ||||||||||||||||||||
| Basic earnings (loss) per common share: | ||||||||||||||||||||
| Earnings (loss) from continuing operations | $ | .29 | (2)(3) | $ | .01 | (2)(3)(4) | $ | .10 | (5) | $ | (1.67 | )(6)(7) | $ | .53 | ||||||
| Earnings (loss) from discontinued operations | .05 | (3) | (.18 | )(3) | .01 | .01 | .01 | |||||||||||||
| Cumulative effect of change in accounting principles | — | — | (1.79 | )(1) | (2.32 | )(1) | — | |||||||||||||
| Net earnings (loss) | $ | .34 | (2)(3) | $ | (.17 | )(2)(3)(4) | $ | (1.68 | )(1)(5) | $ | (3.98 | )(1)(6)(7) | $ | .54 | ||||||
| Diluted earnings (loss) per common share: | ||||||||||||||||||||
| Earnings (loss) from continuing operations | $ | .29 | (2)(3) | $ | .01 | ( 2)(3)(4) | $ | .10 | (5) | $ | (1.67 | )(6)(7) | $ | .53 | ||||||
| Earnings (loss) from discontinued operations | .05 | (3) | (.18 | )(3) | .01 | .01 | .01 | |||||||||||||
| Cumulative effect of change in accounting principles | — | — | (1.78 | )(1) | (2.32 | )(1) | — | |||||||||||||
| Net earnings (loss) | $ | .34 | (2)(3) | $ | (.17 | )(2)(3)(4) | $ | (1.67 | )(1)(5) | $ | (3.98 | )(1)(6)(7) | $ | .54 | ||||||
| Weighted average common shares outstanding | ||||||||||||||||||||
| (in thousands): | ||||||||||||||||||||
| Basic | 107,522 | 108,220 | 107,861 | 107,355 | 106,600 | |||||||||||||||
| Diluted | 108,159 | 108,230 | 108,299 | 107,355 | 106,603 | |||||||||||||||
| Dividends declared per common share | $ | — | $ | — | $ | — | $ | — | $ | .06 | ||||||||||
(continued)
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Selected Consolidated Financial Data
(Unaudited)
(Dollars in thousands, except per share amounts)
(Unaudited)
(Dollars in thousands, except per share amounts)
| Year Ended October 31,(8) | ||||||||
| 2001 | 2000 | |||||||
| Pro forma amounts assuming 2002 and 2001 change in accounting principles was applied retroactively: | ||||||||
| Net earnings (loss) | $ | (409,415 | ) | $ | 56,401 | |||
| Basic earnings (loss) per common share | $ | (3.81 | ) | $ | .53 | |||
| Diluted earnings (loss) per common share | $ | (3.81 | ) | $ | .53 | |||
| October 31, | ||||||||||||||||||||
| 2004(1)(3) | 2003 | 2002(9) | 2001(1)(10) | 2000 | ||||||||||||||||
| Balance Sheet Data: | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||
| Assets | $ | 2,511,508 | $ | 2,511,998 | $ | 2,565,047 | $ | 2,993,367 | $ | 2,475,275 | ||||||||||
| Long-term debt, less current maturities | 415,080 | 488,180 | 542,548 | 684,036 | 920,670 | |||||||||||||||
| Shareholders’ equity | 587,978 | 552,731 | 570,017 | 722,477 | 1,063,289 | |||||||||||||||
Selected Consolidated Operating Data
| Year Ended October 31, | ||||||||||||||||||||
| 2004(3) | 2003 | 2002(9) | 2001(10) | 2000 | ||||||||||||||||
Operating Data: | ||||||||||||||||||||
| Funeral homes in operation at end of period | 242 | 299 | 307 | 516 | 627 | |||||||||||||||
| At-need funerals performed | 42,542 | 48,544 | 71,017 | 102,944 | 110,113 | |||||||||||||||
| Prearranged funerals performed | 23,891 | 22,538 | 24,314 | 26,682 | 27,042 | |||||||||||||||
| Total funerals performed | 66,433 | 71,082 | 95,331 | 129,626 | 137,155 | |||||||||||||||
| Prearranged funerals sold | 29,296 | 28,563 | 31,270 | 36,417 | 48,844 | |||||||||||||||
| Backlog of prearranged funerals at end of period | 337,879 | 347,785 | 349,110 | 392,986 | 446,158 | |||||||||||||||
| Cemeteries in operation at end of period | 147 | 148 | 150 | 159 | 163 | |||||||||||||||
| Interments performed | 53,149 | 53,830 | 57,405 | 60,347 | 60,636 | |||||||||||||||
| (1) | Effective November 1, 2000, we changed our methods of accounting for prearranged sales activities in accordance with Staff Accounting Bulletin (“SAB”) No. 101, which resulted in a $416.2 million ($248.7 million after tax, or $2.32 per share) charge for the cumulative effect of the change in accounting principles. Effective November 1, 2001, we implemented Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets” which eliminated the amortization of goodwill and resulted in a $209.4 million ($193.1 million after tax, or $1.78 per diluted share) charge for the cumulative effect of the change in accounting principles. For additional information, see Note 3(h) to the consolidated financial statements included in Item 8. | |
| Effective April 30, 2004, we implemented FIN 46R which resulted in the consolidation of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts. Our financial statements were not restated to reflect the implementation of FIN 46R. Accordingly, the implementation of FIN 46R is reflected in our fiscal year 2004 financial statements, but not in our financial statements for fiscal years 2003, 2002, 2001 or 2000. The implementation of FIN 46R affects classifications within the balance sheet, statement of earnings and statement of cash flows, but has no nominal effect on shareholders’ equity, net cash flow or the recognition and reporting of revenues or net earnings. For a more detailed discussion, see Notes 4(a) and 5 through 8 to the consolidated financial statements included in Item 8. | ||
| All businesses sold in fiscal year 2003 (the year of initial adoption of SFAS No. 144), fiscal year 2004 and fiscal year 2005 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented. See Note 3(s) to the consolidated financial statements included in Item 8. | ||
| For a discussion of the change in accounting for our preneed selling costs and the resulting cumulative effect of change in |
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| accounting principle recorded in fiscal year 2005, see Note 28 to the consolidated financial statements included in Item 8. | ||
| (2) | During fiscal years 2004 and 2003, we incurred $3.4 million ($2.1 million after tax, or $.02 per share) and $2.5 million ($1.5 million after tax, or $.01 per share), respectively, in separation charges related to severance and other costs associated with workforce reductions announced in December 2003 and related to separation pay for former executive officers. See Note 17 to the consolidated financial statements included in Item 8. | |
| (3) | In fiscal year 2003, we incurred noncash charges for the impairment of certain long-lived assets related to our divestiture plan of $10.2 million ($8.4 million after tax, or $.08 per share) in continuing operations and $21.6 million ($19.6 million after tax, or $.18 per share) in discontinued operations. In fiscal year 2004, we recorded impairment charges of $0.8 million and sold several assets that we held for sale at a net gain of $0.6 million. The net effect was that we recorded gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations. We also recorded gains on dispositions, net of impairment losses, of $2.4 million ($4.8 million after tax, or $.04 per share) in discontinued operations. As of October 31, 2004, we had closed on the sale of 56 businesses for $22.6 million in proceeds, the majority of which were used to reduce our long-term debt. See Note 16 to the consolidated financial statements included in Item 8. | |
| (4) | In the third quarter of 2003, we incurred an $11.3 million ($7.3 million after tax, or $.07 per share) charge related to the redemption of our Remarketable Or Redeemable Securities (“ROARS”). See Note 18 to the consolidated financial statements included in Item 8. | |
| (5) | In the third quarter of 2002, primarily as a result of the significant devaluation of the Argentine peso and the depressed economic conditions in Argentina, we re-evaluated the expected loss on the disposition of assets held for sale, and we incurred a noncash charge of $18.5 million ($11.2 million after tax, or $.11 per share). See notes 10 and 11 below, and see Note 16 to the consolidated financial statements included in Item 8. | |
| (6) | In the third quarter of 2001, we incurred a noncash charge of $269.2 million ($205.1 million after tax, or $1.91 per share) primarily related to the write-down of assets held for sale to their estimated fair values. See notes 10 and 11 below, and see Note 16 to the consolidated financial statements included in Item 8. | |
| (7) | During the third quarter of fiscal year 2001, we incurred a charge for the loss on early extinguishment of debt in connection with our debt refinancing that occurred in June 2001. | |
| (8) | The pro forma data presented for fiscal year 2000 is reported as if the fiscal year 2001 and 2002 change in accounting principles had occurred at the beginning of that year. The proforma data presented for fiscal year 2001 is reported as if the fiscal year 2002 change in accounting principles had occurred at the beginning of that year. | |
| (9) | During fiscal year 2002, we sold our operations in Spain, Portugal, France, Canada and Argentina, which consisted of 196 funeral homes and 8 cemeteries. As of October 31, 2002, the sale of all of our foreign operations had been completed. This resulted in a decrease in assets, the number of funerals and interments performed and the backlog. We used the proceeds from the sales along with cash flow to reduce our long-term debt. | |
| (10) | As of October 31, 2001, assets increased and shareholders’ equity decreased as compared to October 31, 2000 due in part to the fiscal year 2001 change in accounting principles and the write-down of assets held for sale to their estimated fair values. See Note 16 to the consolidated financial statements. Offsetting the increase to assets from the change in accounting principles was the sale of our operations in Mexico, Australia, New Zealand, Belgium and the Netherlands, which consisted of 94 funeral homes and 2 cemeteries. We used these proceeds, along with cash flow and the proceeds from the sale of some domestic assets, to reduce our long-term debt. The October 31, 2001 long-term debt, less current maturities, balance excludes $2.6 million of debt associated with assets held for sale. | |
| (11) | As discussed in Note 2 to the consolidated financial statements included in Item 8, the annual financial statements for fiscal years 2000 through 2004 and the first three quarters of 2005 have been restated to reflect changes in reporting units for goodwill impairment analysis, corrections due to the deferred revenue project and other adjustments including lease-related accounting practices. A summary of the effects on the consolidated statements of earnings for fiscal years 2001 and 2000 and on the consolidated balance sheets of fiscal years 2002, 2001 and 2000 are presented below. |
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| Effect of | As Restated | |||||||||||||||||||
| As Previously | restating to | and | ||||||||||||||||||
| Reported for | correct for the | As Restated | Reclassified | |||||||||||||||||
| the Year | impact of the | for the Year | For the Year | |||||||||||||||||
| Consolidated Statements of Earnings | Ended | deferred | Ended | Ended | ||||||||||||||||
| (Dollars in thousands, except per share | October 31, | revenue | Other | October 31, | October 31, | |||||||||||||||
| amounts) | 2001(1) | project | adjustments(2) | 2001 | 2001(3) | |||||||||||||||
| Revenues: | ||||||||||||||||||||
| Funeral | $ | 389,497 | $ | (13,931 | ) | $ | — | $ | 375,566 | $ | 375,578 | |||||||||
| Cemetery | 256,493 | (22,610 | ) | (157 | ) | 233,726 | 233,082 | |||||||||||||
| 645,990 | (36,541 | ) | (157 | ) | 609,292 | 608,660 | ||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Funeral | 299,230 | — | (287 | ) | 298,943 | 298,946 | ||||||||||||||
| Cemetery | 197,002 | (5,313 | ) | (500 | ) | 191,189 | 190,511 | |||||||||||||
| 496,232 | (5,313 | ) | (787 | ) | 490,132 | 489,457 | ||||||||||||||
| Gross profit | 149,758 | (31,228 | ) | 630 | 119,160 | 119,203 | ||||||||||||||
| Corporate general and administrative expense | (18,020 | ) | — | — | (18,020 | ) | (18,020 | ) | ||||||||||||
| Gains on dispositions and impairment (losses), net | (269,158 | ) | — | — | (269,158 | ) | (269,158 | ) | ||||||||||||
| Other operating income, net | 6,997 | — | — | 6,997 | 6,967 | |||||||||||||||
| Operating loss | (130,423 | ) | (31,228 | ) | 630 | (161,021 | ) | (161,008 | ) | |||||||||||
| Interest expense | (63,572 | ) | — | — | (63,572 | ) | (63,572 | ) | ||||||||||||
| Loss on early extinguishment of debt | (9,120 | ) | — | — | (9,120 | ) | (9,120 | ) | ||||||||||||
| Investment and other income, net | 5,212 | — | (774 | ) | 4,438 | 4,438 | ||||||||||||||
| Loss from continuing operations before income taxes | (197,903 | ) | (31,228 | ) | (144 | ) | (229,275 | ) | (229,262 | ) | ||||||||||
| Income tax benefit | (38,233 | ) | (11,764 | ) | (56 | ) | (50,053 | ) | (50,049 | ) | ||||||||||
| Loss from continuing operations | (159,670 | ) | (19,464 | ) | (88 | ) | (179,222 | ) | (179,213 | ) | ||||||||||
| Earnings from discontinued operations before income taxes | 1,602 | — | — | 1,602 | 1,589 | |||||||||||||||
| Income taxes | 588 | — | — | 588 | 584 | |||||||||||||||
| Earnings from discontinued operations | 1,014 | — | — | 1,014 | 1,005 | |||||||||||||||
| Net loss before cumulative effect of change in accounting principle | (158,656 | ) | (19,464 | ) | (88 | ) | (178,208 | ) | (178,208 | ) | ||||||||||
| Cumulative effect of change in accounting principle | (250,004 | ) | 1,338 | — | (248,666 | ) | (248,666 | ) | ||||||||||||
| Net loss | $ | (408,660 | ) | $ | (18,126 | ) | $ | (88 | ) | $ | (426,874 | ) | $ | (426,874 | ) | |||||
| Basic earnings (loss) per common share: | ||||||||||||||||||||
| Loss from continuing operations | $ | (1.49 | ) | $ | (.18 | ) | $ | — | $ | (1.67 | ) | $ | (1.67 | ) | ||||||
| Earnings from discontinued operations | .01 | — | — | .01 | .01 | |||||||||||||||
| Cumulative effect of change in accounting principle | (2.33 | ) | .01 | — | (2.32 | ) | (2.32 | ) | ||||||||||||
| Net loss per share | $ | (3.81 | ) | $ | (.17 | ) | $ | — | $ | (3.98 | ) | $ | (3.98 | ) | ||||||
| Diluted earnings (loss) per common share: | ||||||||||||||||||||
| Loss from continuing operations | $ | (1.49 | ) | $ | (.18 | ) | $ | — | $ | (1.67 | ) | $ | (1.67 | ) | ||||||
| Earnings from discontinued operations | .01 | — | — | .01 | .01 | |||||||||||||||
| Cumulative effect of change in accounting principle | (2.33 | ) | .01 | — | (2.32 | ) | (2.32 | ) | ||||||||||||
| Net loss per share | $ | (3.81 | ) | $ | (.17 | ) | $ | — | $ | (3.98 | ) | $ | (3.98 | ) | ||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | |
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | |
| (3) | Represents the October 2005 classification of continuing and discontinued operations. |
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| Effect of | ||||||||||||||||||||
| As Previously | restating to | As Restated | ||||||||||||||||||
| Reported for | correct for the | As Restated | and | |||||||||||||||||
| the Year | impact of the | For the Year | Reclassified | |||||||||||||||||
| Consolidated Statements of Earnings | Ended | deferred | Ended | for the Year Ended | ||||||||||||||||
| (Dollars in thousands, except per share | October 31, | revenue | Other | October 31, | October 31, | |||||||||||||||
| amounts) | 2000(1) | project | adjustments(2) | 2000 | 2000(3) | |||||||||||||||
| Revenues: | ||||||||||||||||||||
| Funeral | $ | 430,570 | $ | (13,569 | ) | $ | — | $ | 417,001 | $ | 416,944 | |||||||||
| Cemetery | 282,728 | — | — | 282,728 | 282,119 | |||||||||||||||
| 713,298 | (13,569 | ) | — | 699,729 | 699,063 | |||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Funeral | 315,840 | — | 209 | 316,049 | 316,188 | |||||||||||||||
| Cemetery | 220,436 | — | — | 220,436 | 219,794 | |||||||||||||||
| 536,276 | — | 209 | 536,485 | 535,982 | ||||||||||||||||
| Gross profit | 177,022 | (13,569 | ) | (209 | ) | 163,244 | 163,081 | |||||||||||||
| Corporate general and administrative expense | (19,763 | ) | — | — | (19,763 | ) | (19,763 | ) | ||||||||||||
| Other operating income, net | 1,953 | — | — | 1,953 | 1,927 | |||||||||||||||
| Operating earnings | 159,212 | (13,569 | ) | (209 | ) | 145,434 | 145,245 | |||||||||||||
| Interest expense | (61,394 | ) | — | — | (61,394 | ) | (61,394 | ) | ||||||||||||
| Investment and other income, net | 5,501 | — | — | 5,501 | 5,501 | |||||||||||||||
| Earnings from continuing operations before income taxes | 103,319 | (13,569 | ) | (209 | ) | 89,541 | 89,352 | |||||||||||||
| Income taxes | 37,711 | (5,094 | ) | (79 | ) | 32,538 | 32,468 | |||||||||||||
| Earnings from continuing operations | 65,608 | (8,475 | ) | (130 | ) | 57,003 | 56,884 | |||||||||||||
| Earnings from discontinued operations before income taxes | 1,868 | — | — | 1,868 | 2,057 | |||||||||||||||
| Income taxes | 682 | — | — | 682 | 752 | |||||||||||||||
| Earnings from discontinued operations | 1,186 | — | — | 1,186 | 1,305 | |||||||||||||||
| Net earnings | $ | 66,794 | $ | (8,475 | ) | $ | (130 | ) | $ | 58,189 | $ | 58,189 | ||||||||
| Basic earnings per common share: | ||||||||||||||||||||
| Earnings from continuing operations | $ | .62 | $ | (.08 | ) | $ | (.01 | ) | $ | .53 | $ | .53 | ||||||||
| Earnings from discontinued operations | .01 | — | — | .01 | .01 | |||||||||||||||
| Net earnings per share | $ | .63 | $ | (.08 | ) | $ | (.01 | ) | $ | .54 | $ | .54 | ||||||||
| Diluted earnings per common share: | ||||||||||||||||||||
| Earnings from continuing operations | $ | .62 | $ | (.08 | ) | $ | (.01 | ) | $ | .53 | $ | .53 | ||||||||
| Earnings from discontinued operations | .01 | — | — | .01 | .01 | |||||||||||||||
| Net earnings per share | $ | .63 | $ | (.08 | ) | $ | (.01 | ) | $ | .54 | $ | .54 | ||||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | |
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | |
| (3) | Represents the October 2005 classification of continuing and discontinued operations. |
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| Consolidated Balance Sheets | ||||||||||||
| (Amounts in thousands) | 2002 | 2001 | 2000 | |||||||||
Assets as previously reported(1) | $ | 3,015,584 | $ | 3,238,407 | $ | 2,476,191 | ||||||
| Effect of restatement of goodwill | (193,090 | ) | — | — | ||||||||
| Effect of restatements due to deferred revenue project | 48,174 | 33,407 | 1,847 | |||||||||
Effect of change in accounting for insurance-funded preneed funeral contracts(2) | (302,159 | ) | (274,759 | ) | — | |||||||
Effect of other adjustments(3) | (3,462 | ) | (3,688 | ) | (2,763 | ) | ||||||
| Assets as restated and reclassified | $ | 2,565,047 | $ | 2,993,367 | $ | 2,475,275 | ||||||
Shareholders’ equity as previously reported(1) | $ | 812,263 | $ | 752,060 | $ | 1,074,657 | ||||||
| Effect of restatement of goodwill | (193,090 | ) | — | — | ||||||||
| Effect of restatements due to deferred revenue project | (46,267 | ) | (27,035 | ) | (8,910 | ) | ||||||
Effect of other adjustments(3) | (2,889 | ) | (2,548 | ) | (2,458 | ) | ||||||
| Total shareholders’ equity | $ | 570,017 | $ | 722,477 | $ | 1,063,289 | ||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | |
| (2) | Represents the removal of amounts related to insurance-funded preneed funeral contracts from the 2002 and 2001 consolidated balance sheets. During fiscal year 2004, we changed our method of accounting for insurance-funded preneed funeral contracts after concluding that these contracts are not assets and liabilities as defined by Statement of Financial Accounting Concepts No. 6, “Elements in Financial Statements.” We removed from our fiscal year 2002 and 2001 consolidated balance sheets amounts relating to insurance- funded preneed funeral contracts previously recorded in prearranged receivables, net and prearranged deferred revenue, net, which at October 31, 2002 and 2001 totaled $302.2 million and $274.8 million, respectively. The removal of the insurance-funded preneed funeral contract amounts did not affect our consolidated shareholders’ equity, results of operations or cash flows. Prior to the adoption of SAB No. 101 in fiscal year 2001, insurance-funded preneed funeral contracts were not included as assets in our consolidated balance sheet. | |
| (3) | Represents reclassifications and other adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. |
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations (Restated)
Restatement of Historical Financial Statements
We have restated our consolidated financial statements for fiscal years 2004, 2003, 2002, 2001, 2000, all the quarters therein and the first three quarters of fiscal year 2005. The restatements are primarily the result of:
| (A) | The incorrect determination of operating and reportable segments and reporting units related to the application of FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), which also had the effect of changing the charges recorded for the assets sold as part of our plan initiated in December 2003 to sell a number of businesses, and the net book value of assets held for sale on our balance sheet. | ||
| (B) | Errors identified in revenue recognition of preneed cemetery merchandise and services contracts and recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts. | ||
| (C) | Other miscellaneous adjustments, including adjustments for lease-related accounting practices. |
The restatement for these errors is discussed in more detail below.
Segments and Reporting Units
We re-evaluated our application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and determined that we had incorrectly identified our operating and reportable segments for all prior periods. We concluded that we had eleven operating and reportable segments, which consisted of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. Our historical presentation of segment data had consisted of two operating and reportable segments, funeral and cemetery. For further discussion of our operating and reportable segments, see Note 24 to the consolidated financial statements included in Item 8.
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The correction of our operating segments had the related effect of requiring changes in our reporting units for purposes of goodwill impairment reviews under SFAS No. 142, retroactive to the November 1, 2001 adoption date of SFAS No. 142. Our evaluation of goodwill should have been performed to include 13 reporting units as opposed to the two reporting units historically identified. For further discussion of our reporting units, see Note 3(h).
The restatement of our operating segments and reporting units resulted in the need to correct our goodwill impairment reviews as of November 1, 2001 (the date we adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. Consequently, we recorded a $209.4 million ($193.1 million after tax, or $1.78 per diluted share) charge on November 1, 2001 as a cumulative effect of change in accounting principle for the adoption of SFAS No. 142. Our previously reported financial statements did not include a goodwill impairment charge upon the initial adoption of SFAS No. 142 on November 1, 2001 or during our annual assessment in the fourth quarter of fiscal year 2002. We also restated our previously reported fiscal year 2003 goodwill impairment charge of $73.0 million ($66.9 million after tax, or $.62 per share) because based on our revised reporting units, no goodwill impairment charge for the year ended October 31, 2003 was necessary.
Further, the restatement of goodwill on our balance sheet had the effect of changing the net book value of the assets we sold as part of our plan to sell a number of our businesses and the net book value of assets held for sale on our balance sheet. Due to these changes and changes in the classification of certain businesses between continuing operations and discontinued operations, the gain or loss on those sales has been re-evaluated and restated. In 2003, this resulted in an additional net gain of $2.1 million, representing a gain of $1.3 million related to continuing operations as originally reported and a gain of $0.8 million related to discontinued operations. In 2004, this resulted in an additional net gain of $0.6 million, representing a loss of $0.5 million related to continuing operations as originally reported and a gain of $1.1 million related to discontinued operations.
Deferred Revenue Project
In connection with our internal control assessment under Section 404 of Sarbanes-Oxley, we undertook a project (the “deferred revenue project”) in 2005 to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by reviewing substantially all of the preneed cemetery and funeral service and merchandise contracts included in our backlog. This process involved the review of nearly 700,000 preneed contracts. The deferred revenue project resulted in our assessment that deferred revenue and revenue associated with cemetery merchandise contracts were misstated and therefore we needed to correct and restate our prior period financial statements for fiscal years 2001 through 2004, including the quarters therein, and the first three quarters of 2005. We also identified errors in the amounts of recorded realized trust earnings and deferred realized trust earnings for these periods and fiscal year 2000. Deferred realized trust earnings are included in deferred preneed funeral revenue and deferred preneed cemetery revenue prior to recognition as revenues. The adjustments impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2000 through 2004 and the first three quarters of 2005.
The errors to deferred preneed revenues discussed above also resulted in restatements to the amount of preneed selling costs recorded upon the adoption of SAB No. 101, and in subsequent years and also the charge for the 2005 cumulative effect of change in accounting principle related to preneed selling costs adopted effective November 1, 2004. See Note 28 to the consolidated financial statements included in Item 8 for a discussion of the 2005 change in accounting principle related to preneed selling costs.
The overall impact of the deferred revenue project on net earnings and earnings per share for the first three quarters of 2005 and fiscal years 2004, 2003, 2002, 2001 and 2000 was a decrease in net earnings of $18.2 million (including $11.9 million, or $.11 per share, related to the cumulative effect of change in accounting principle for preneed selling costs), $12.0 million, $13.2 million, $19.2 million, $18.1 million and $8.5 million, respectively, and a decrease in earnings per share of $.16, $.11, $.12, $.18, $.17 and $.08, respectively. The 2005 amount reflects the adjustment to the previously reported unaudited results through July 31, 2005. The deferred revenue project also resulted in changes to our consolidated balance sheet as described in footnote 11 to the Selected Financial Data table included in Item 6 and Note 2 to the consolidated financial statements included in Item 8.
Other Adjustments
As previously disclosed in our Form 10-Q for the second quarter of fiscal year 2005, we reviewed our lease-
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related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1.8 million ($1.1 million after tax, or $.01 per share). We evaluated the materiality of these operating lease adjustments on our financial statements and concluded that the impact of these adjustments was not material. As a result, we recorded the cumulative effect of these prior period adjustments of $1.8 million as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because we are amending our Form 10-K for the year ended October 31, 2004 for the restatements discussed above under the heading “Restatement of Financial Statements,” we have recorded the lease adjustments in the periods they were actually incurred and removed the cumulative effect of this prior period adjustment of $1.8 million. We also recorded other immaterial miscellaneous adjustments.
The information included in “Results of Operations” below reflects the restated amounts. A summary of the effects of these restatements on our financial statements can be found in Note 2 to the consolidated financial statements included in Item 8.
Overview of Fiscal Year 2004
We are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of January 3, 2005, we owned and operated 238 funeral homes and 147 cemeteries in 27 states within the United States and Puerto Rico.
In September 2003, we announced a set of operating initiatives and created four task forces to address the following key areas: increased cemetery property sales volume, growth in the number of funeral events performed, cost improvements and employee development. As part of our cost reduction initiatives, in December 2003 we announced plans to restructure and reduce our workforce by approximately 300 employees. In fiscal year 2004, we achieved the operating and financial goals announced in December 2003 reflecting the successful execution of our key operating initiatives.
| • | We projected cash flow from operations to be between $77 million and $86 million, including the tax refund received in December 2003 due to a change in the tax accounting methods for cemetery merchandise revenue. We achieved cash flow from operations of $93.6 million, including the $33 million tax refund received in December 2003. | |
| • | Our goal was to increase preneed sales by 5 percent to 10 percent in fiscal year 2004. We experienced increases of 9 percent in both cemetery property and preneed funeral sales for the year. | |
| • | Our fiscal year 2004 forecast included an increase in the average revenue per funeral service performed of approximately 2 percent to 3 percent, excluding any impact from trust earnings. We attained this goal with an increase in average revenue of 3.6 percent per traditional service and 4.9 percent per cremation service. | |
| • | The upper end of our 2004 forecast range assumed flat same-store funeral calls in 2004 compared to 2003, and the lower end assumed a possible reduction in same-store funeral calls of up to 3 percent. Our same-store funeral calls decreased 1.0 percent. | |
| • | Our cost-reduction initiatives resulted in a $9.6 million decrease in funeral, cemetery and corporate general and administrative expenses, which was in line with our expectations for the year. |
We recorded charges in fiscal year 2004 for severance and other costs associated with the workforce reductions announced in December 2003 and separation payments related to a former executive officer totaling $3.4 million ($2.1 million after tax, or $.02 per share). During the fourth quarter of 2003, we identified a number of small businesses to close or sell, most of which were acquired as part of a group of facilities that were performing below acceptable levels or no longer fit our operating profile. As a result, we recorded a $31.8 million noncash impairment charge in fiscal year 2003, of which $10.2 million ($8.4 million after tax, or $.08 per share) was included in continuing operations in the 2003 consolidated statement of earnings. Collectively, these businesses generated revenue of approximately $23.0 million and very little gross profit during fiscal year 2003. The closing or sale of these businesses has enabled management to focus on our most productive operations where our operating initiatives have the potential to bring about the greatest benefits in increased earnings and cash flow. For fiscal year 2004, we recorded impairment charges of $0.8 million and sold several assets that were held for sale at a net gain of $0.6 million. The net effect was that we recorded gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations. As of October 31, 2004, we had closed on the sale of 56 businesses for $22.6 million in proceeds.
On November 19, 2004, we completed the refinancing of our senior secured credit facility with a $125.0
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million five-year revolving credit facility and a $100.0 million seven-year Term Loan B. During the first quarter of fiscal year 2005, we incurred a charge for early extinguishment of debt of $2.7 million ($1.8 million after tax, or $.02 per share) to write off the remaining unamortized fees related to the prior agreement. For additional information, see Note 18 to the consolidated financial statements included in Item 8.
We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. In June 2003, we announced that our Board of Directors approved a stock repurchase program allowing us to invest up to $25.0 million in repurchases of our Class A common stock. In June 2004, our Board of Directors increased the program limit by an additional $3.0 million to $28.0 million. As of January 3, 2005, we had repurchased 3,500,000 shares of our Class A common stock at an average price of $6.35 per share. At current stock prices, stock repurchases, debt reduction and construction of funeral homes on our cemeteries or those of unaffiliated third parties continue to be more attractive uses of our cash flow than acquisitions. However, we believe that growing our organization through acquisitions will continue to be a good business strategy, as we enjoy important synergies and economies of scale from our infrastructure.
Preneed — Backlog, Trust Portfolio and Cash Impact of Sales
Overview
We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust fund earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings and finance charges.
We believe that preneed funeral and cemetery property sales are two of the primary drivers of sustainable long-term growth in the number of families served by our funeral homes and cemeteries. Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise sales are deferred into our backlog while our preneed cemetery property sales are recognized currently in accordance with SFAS No. 66. For a detailed discussion of our revenue recognition policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes 3(k), 3(l), 4(a), and Notes 5 through 8 to the consolidated financial statements included in Item 8.
Backlog
We estimate that as of October 31, 2004 the future value of our preneed funeral and cemetery services and merchandise backlog represented approximately $1.9 billion of revenue to be recognized in the future as these prepaid products and services are delivered. This represents the face value of the backlog plus the earnings that are projected on the funds held in trust and the estimated build-up in the face value of insurance contracts. It assumes no future preneed sales and assumes maturities each year consistent with our experience, with the majority of existing contracts expected to mature over the next 15 years. As of October 31, 2004, the value of the preneed backlog, excluding any future earnings on the funds held in trust and any build-up in the face value of insurance contracts, but including unrealized earnings and losses on the funds held in trust and realized earnings and losses on the funds held in trust not yet recognized as revenue, was approximately $1.6 billion.
Trust Portfolio
We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Because a portion of the funds we receive from preneed sales are deposited into the trusts and invested in a variety of debt and equity securities and other investments, the performance of the trusts’ investments can affect our current and future revenue streams. From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0 percent in our domestic trusts. However, the average realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8 percent and 2.6 percent for fiscal years 2000, 2001, 2002, 2003 and 2004, respectively. These returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses. We defer recognition of all earnings and losses realized by preneed funeral and cemetery merchandise and services trusts until the underlying products and services are delivered. Consequently, the lower investment returns realized during previous years reduced the trust earnings recognized as revenue in 2004 and will likely do so again in fiscal year 2005. We recognize all earnings and losses realized by our cemetery perpetual care trusts currently, including
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capital gains and losses in those jurisdictions where capital gains can be withdrawn and used for cemetery maintenance. As a result, depressed stock prices and low returns on fixed-income investments put pressure on perpetual care trust earnings recognized in fiscal year 2004 and may do so again in fiscal year 2005. Because approximately 60 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we would generally expect our portfolio performance to improve if the performance of the overall stock market improves, but we would also expect its performance to deteriorate over time if the overall stock market declines.
We mark our trust portfolio to market value each quarter. Changes in the market value of the trusts are recorded by increasing or decreasing trust assets included in the preneed funeral and cemetery receivables and trust investments line items on the balance sheet, with a corresponding increase or decrease in the non-controlling interest line item on the balance sheet. Therefore, there is no effect on net income. We determine whether or not the investment portfolio has an other than temporary impairment on a security-by-security basis. A loss is considered other than temporary if the security has a reduction in market value compared with its cost basis of 20 percent or more for a period of six months or longer. In addition, we periodically review our investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily impaired due to changes in market condition or concerns specific to the issuer of the securities. If a loss is other than temporary, the cost basis of the security is adjusted downward to its market value. This affects our footnote disclosure but does not have an effect on our financial statements, since the trust portfolio is already marked to market value each quarter. The footnotes disclose the adjusted cost basis and how much of the losses are considered other than temporary. Accordingly, unrealized gains and losses reflected in the tables in Notes 5, 6 and 7 to the consolidated financial statements included in Item 8 are temporary as the cost basis in these tables have already been adjusted to reflect the other than temporary unrealized losses. Our preneed funeral and cemetery merchandise and services trusts and escrow accounts had other than temporary declines of $76.1 million and $42.5 million, respectively, as of October 31, 2004, from their original cost basis. They had net unrealized depreciation of $5.7 million and $1.6 million, respectively, as of October 31, 2004 resulting from temporary unrealized gains and losses. See Notes 5 and 6 to the consolidated financial statements included in Item 8.
Our cemetery perpetual care trust accounts had other than temporary declines of $30.5 million as of October 31, 2004, from their original cost basis. They had net unrealized appreciation of $8.0 million as of October 31, 2004 resulting from temporary unrealized gains and losses. See Note 7 to the consolidated financial statements included in Item 8. Unrealized gains and losses in the cemetery perpetual care trusts and escrow accounts do not affect current earnings but unrealized losses could limit the capital gains available to us and could eventually result in lower returns and lower revenues than we have historically achieved from these trusts.
Aggregate unrealized losses for twelve months or longer for temporarily impaired investments totaled $15.9 million at October 31, 2004. Of that amount, approximately 94 percent, or $14.9 million, were generated by common stock investments in 45 large companies that are included in the S&P 500 Index. These securities represent less than 9 percent of the securities in our portfolio. We believe the decline in the value of these stocks is primarily due to the general decline in the S&P 500 Index over the 2002 to 2003 timeframe. Since early 2003, the S&P 500 Index has risen significantly. Although we cannot predict future stock prices, our management expects that the S&P 500 Index will continue to recover and that these stocks will recover along with the overall Index. We also have the ability and intent to hold these investments for the forecasted recovery period.
Whether or not we classify an investment as temporarily impaired or other than temporarily impaired has no effect on our basic consolidated financial statements (i.e., balance sheet, statement of earnings, statement of cash flows and statement of shareholders’ equity) because the investments are marked to market each quarter and are included in the financial statements at current market value in accordance with our accounting under FASB Interpretation No. 46 (“FIN 46R”). The classification only affects the footnote presentation. The cost basis of investments classified as other than temporarily impaired is reduced to market value in the “Adjusted Cost Basis” column in Notes 5, 6 and 7, whereas other investments are included in that column at their actual cost basis.
We perform a separate analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, we determine which trusts are in a net loss position by comparing the aggregate market value of the trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost basis exceeds the aggregate market value of the investments, the trust is considered to be in a net loss position. For trusts in a net loss position, we add the sales prices of the underlying contracts and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds for contracts associated with the trusts in question as of that particular balance sheet date. We look at unrealized gains
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and losses based on current market prices quoted for the investments, but we do not include future expected returns on the investments in our analysis. We compare the amount of proceeds to the estimated costs to deliver the contracts. The estimated costs to deliver preneed funeral and cemetery service and merchandise contracts consist primarily of funeral and cemetery merchandise costs, and salaries, supplies and equipment related to the delivery of preneed funerals. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts from our backlog. Due to the margins of our preneed contracts and the relatively high trust portfolio returns we enjoyed prior to fiscal year 2000, there is currently substantial capacity for additional market depreciation before a contract loss would result.
Cash Impact of Preneed Sales
The impact of preneed sales on near-term cash flow depends primarily on the commissions paid on the sale, the portion of the sale required to be placed into trust and the terms of the particular contract (such as the size of the down payment required and the length of the contract). We generally pay commissions to our preneed sales counselors based on a percentage of the total preneed contract price, but only to the extent cash is paid by the customer. If the initial cash installment paid by the customer is not sufficient to cover the entire commission, the remaining commission is paid from subsequent customer installments. However, because we are required to place a portion of each cash installment paid by the customer into trust, we may be required to use our own cash to cover a portion of the commission due on the installment from the customer. Accordingly, preneed sales are generally cash flow negative initially but become cash flow positive at varying times over the life of the contract, depending upon the trusting requirements and the terms of the particular contract.
Cash expended for preneed funeral and preneed cemetery services and merchandise sales, principally sales compensation, is capitalized in deferred charges on the balance sheet and amortized and expensed as cost of sales as the contracts are delivered. See Note 28 to the consolidated financial statements included in Item 8 for a discussion of the change in accounting for preneed selling costs in fiscal year 2005.
Overview of Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 3(b) to the consolidated financial statements included in Item 8). We believe that of our significant accounting policies (discussed in Note 3 to the consolidated financial statements included in Item 8), the following are both most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgment.
Revenue Recognition
Funeral revenue is recognized when funeral services are performed. Our funeral receivables included in current receivables primarily consist of amounts due for funeral services already performed. We sell price-guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Revenues associated with sales of prearranged funeral contracts, which include accumulated trust earnings and increasing insurance benefits, are deferred until such time that the funeral services are performed (see Note 3(k) to the consolidated financial statements included in Item 8).
Revenue associated with cemetery merchandise and services is recognized when the service is performed or merchandise is delivered. Revenue associated with preneed cemetery property interment rights is recognized in accordance with the retail land sales provision of SFAS No. 66, “Accounting for the Sales of Real Estate” (SFAS No. 66). Under SFAS No. 66, revenue from constructed cemetery property is not recognized until a minimum percentage (10 percent) of the sales price has been collected. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting. Revenue associated with sales of preneed merchandise and services is not recognized until the merchandise is delivered or the services are performed (see Note 3(l) to the consolidated financial statements included in Item 8).
We defer all dividends and interest earned and net capital gains and losses realized by preneed funeral trust and preneed cemetery merchandise trust accounts until the underlying service or the merchandise is delivered.
In February 2006, we completed our reconciliation of deferred revenue to the underlying preneed contracts, which resulted in the identification of a significant number of reconciling items. Our reconciliation of these items led
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to the restatements described above under “Restatement of Historical Financial Statements” and in Note 2 to the consolidated financial statements included in Item 8. In connection with the deferred revenue project, we also identified material weaknesses in our internal control over financial reporting as of October 31, 2004, as described in Item 9A.
Variable Interest Entities
In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (“FIN 46R”).
We implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts. This implementation was as of April 30, 2004 and only affected our consolidated balance sheet and had no impact on our second quarter 2004 results of operations or cash flows. In subsequent periods, the implementation of FIN 46R, as it relates to the consolidation of trusts, affects classifications within the balance sheet, statement of earnings and statement of cash flows, but has no effect on shareholders’ equity, net cash flow or the recognition and reporting of revenues or net earnings. For a more detailed discussion of our accounting policies after the implementation of FIN 46R, see Notes 4(a) and 5 through 8 to the consolidated financial statements included in Item 8.
Allowance for Doubtful Accounts
Management must make estimates of the uncollectibility of our accounts receivable. We establish a reserve for uncollectible installment contracts and trade accounts based on a range of percentages applied to accounts receivable aging categories. These percentages are based on an analysis of historical collection and write-off experience. These estimates are impacted by a number of factors, including changes in the economy and demographic or competitive changes in our areas of operation. If circumstances change, our estimates of the recoverability of amounts due to us could change by a material amount.
Depreciation of Long-Lived Assets
Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 10 to 40 years and from 3 to 10 years, respectively, primarily using the straight-line method. These estimates of the useful lives may be affected by such factors as changes in regulatory requirements or changing market conditions.
Valuation of Long-Lived Assets
We review for continued appropriateness the carrying value of our long-lived assets whenever events or circumstances indicate a potential impairment. This review is based on our projections of anticipated undiscounted future cash flows. If indicators of impairment were present, we would evaluate the undiscounted future cash flows estimated to be generated by those assets compared to the carrying amount of those assets. The net carrying value of assets not recoverable would be reduced to fair value. While we believe that our estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and comparable sales values could materially affect our evaluations.
In the fourth quarter of 2003, we identified a number of small businesses to close or sell in fiscal year 2004. Based on our review of the carrying amount of these businesses compared to their fair value, we recorded a noncash charge of $31.8 million related to the impairment of these long-lived assets. Of this amount, $10.2 million was included in continuing operations and $21.6 million was included in discontinued operations in the 2003 consolidated statement of earnings. Fair value was established based on our best estimate and is subject to revision in future periods as properties are actually sold or closed. For fiscal year 2004, we recorded impairment charges of $0.8 million and sold several assets that we held for sale at a net gain of $0.6 million. The net effect was that we reported gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations. We also recorded gains on dispositions, net of impairment losses, of $2.4 million in discontinued operations. See Note 16 to the consolidated financial statements included in Item 8.
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Valuation of Goodwill
Our historical evaluation of goodwill was performed at the funeral and cemetery segment levels, which we previously reported as our reporting units. However, this evaluation was incorrect and our operating segments, as defined by SFAS No. 131, and reporting units, as defined in SFAS No. 142, were required to be restated as discussed in Note 2 to the consolidated financial statements included in Item 8. This restatement of reporting units resulted in the need to correct our goodwill impairment reviews as of November 1, 2001 (the date we adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. For further discussion of the resulting charges, see Note 2 to the consolidated financial statements included in Item 8.
Goodwill of a reporting unit must be tested for impairment on at least an annual basis. We conduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business and significant negative industry or economic trends.
In reviewing goodwill for impairment, we first compare the fair value of each of our reporting units with their carrying amounts (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, we then measure the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value.
Our goodwill impairment test involves estimates and management judgment using a discounted cash flow valuation methodology. Step two of our impairment test involves determining estimates of the fair values of our assets and liabilities. We may obtain assistance from third parties in assessing the fair value of certain of our assets, primarily real estate, in performing our step two analysis. If these estimates or their related assumptions change in the future, we may be required to record further impairment charges for these assets. Goodwill amounted to $272.7 million and $273.0 million as of October 31, 2004 and 2003, respectively.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from the different treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the statement of earnings.
Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change our allowance, which could materially impact our financial condition and results of operations.
Estimated Insurance Loss Liabilities
We purchase comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the
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extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. We continually evaluate the receivables due from our insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from our primary insurer.
With respect to health insurance that covers substantially all of our employees, we purchase individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims are based on actuarial estimates; actual claims may differ from those estimates. We continually evaluate our claims experience related to this coverage with information obtained from our insurer.
Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of our insurance loss liability.
The estimated liability on the uninsured legal and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.
Deferred Selling Costs
Our policy is to defer selling costs that vary with and are primarily related to the acquisition of preneed funeral and preneed cemetery contracts, and to expense such costs in proportion to the revenue as it is recognized. This capitalization and amortization model follows the provisions of SFAS No. 60, “Accounting and Reporting by Insurance Enterprises.” We track accumulated deferred selling costs separately for each type of deferred revenue: (1) preneed funeral, (2) preneed cemetery merchandise and (3) preneed cemetery services. Deferred selling costs are expensed as follows. At the beginning of each fiscal year the deferred charges account related to each type of deferred revenue is compared to that deferred revenue balance and a percentage is calculated. That percentage is then applied to the preneed revenue associated with merchandise and services delivered in the current period. See Note 28 to the consolidated financial statements included in Item 8 for a discussion of the change in accounting for preneed selling costs in fiscal year 2005.
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Results of Operations
Year Ended October 31, 2004 Compared to Year Ended October 31, 2003—Continuing Operations
Funeral Operations
| Year Ended | ||||||||||||
| October 31, | Increase | |||||||||||
| 2004 | 2003 | (Decrease) | ||||||||||
| (Restated) | (Restated) | |||||||||||
| (In millions) | ||||||||||||
| Funeral Revenue: | ||||||||||||
| Central Division | $ | 83.7 | $ | 84.3 | $ | (.6 | ) | |||||
| Western Division | 60.2 | 58.3 | 1.9 | |||||||||
| Eastern Division | 51.6 | 52.4 | (.8 | ) | ||||||||
| Southern Division – Florida | 43.7 | 43.0 | .7 | |||||||||
All Other(1) | 13.3 | 13.3 | — | |||||||||
Corporate Trust Management(2) | 18.7 | 17.8 | .9 | |||||||||
| Total Funeral Revenue | $ | 271.2 | $ | 269.1 | $ | 2.1 | ||||||
| Funeral Costs: | ||||||||||||
| Central Division | $ | 61.2 | $ | 64.7 | $ | (3.5 | ) | |||||
| Western Division | 51.4 | 51.0 | .4 | |||||||||
| Eastern Division | 41.1 | 42.5 | (1.4 | ) | ||||||||
| Southern Division – Florida | 37.0 | 40.0 | (3.0 | ) | ||||||||
All Other(1) | 11.3 | 11.7 | (.4 | ) | ||||||||
Corporate Trust Management(2) | .5 | .4 | .1 | |||||||||
| Total Funeral Costs | $ | 202.5 | $ | 210.3 | $ | (7.8 | ) | |||||
| Funeral Gross Profit: | ||||||||||||
| Central Division | $ | 22.5 | $ | 19.6 | $ | 2.9 | ||||||
| Western Division | 8.8 | 7.3 | 1.5 | |||||||||
| Eastern Division | 10.5 | 9.9 | .6 | |||||||||
| Southern Division – Florida | 6.7 | 3.0 | 3.7 | |||||||||
All Other(1) | 2.0 | 1.6 | .4 | |||||||||
Corporate Trust Management(2) | 18.2 | 17.4 | .8 | |||||||||
| Total Funeral Gross Profit | $ | 68.7 | $ | 58.8 | $ | 9.9 | ||||||
| Same-Store | ||||||||||||||||
| Change in Average | Change in Same-Store | Cremation Rate | ||||||||||||||
| Same-Store Analysis | Revenue Per Call | Funeral Services | 2004 | 2003 | ||||||||||||
| Central Division | 1.4 | % | (1.7 | %) | 21.3 | % | 20.1 | % | ||||||||
| Western Division | 4.4 | % | (.3 | %) | 57.8 | % | 58.5 | % | ||||||||
| Eastern Division | 2.7 | % | (3.8 | %) | 26.0 | % | 24.6 | % | ||||||||
| Southern Division - Florida | 1.4 | % | 1.2 | % | 39.7 | % | 38.8 | % | ||||||||
All Other(1) | 2.8 | % | (1.3 | %) | 14.4 | % | 13.7 | % | ||||||||
| Total | 2.3 | % | (1.0 | %) | 36.6 | % | 35.9 | % | ||||||||
| (1) | All Other represents our operations in Puerto Rico. | |
| (2) | Corporate trust management consists of the trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for 2004 and 2003 were $5.5 million and $5.2 million, |
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| respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for 2004 and 2003 were $13.2 million and $12.6 million, respectively. |
Consolidated Operations — Funeral
Total funeral revenue from continuing operations increased $2.1 million for the year ended October 31, 2004, compared to the corresponding period in 2003. Our same-store businesses achieved a 3.6 percent increase in the average revenue per traditional funeral service and a 4.9 percent increase in the average revenue per cremation service. There was also an increase in trust earnings recognized upon the delivery of preneed funerals. This resulted in an overall 2.3 percent increase in the average revenue per funeral service for our same-store businesses. That increase was offset by a 1.0 percent decline in the number of funeral services performed by our same-store businesses, or 633 events out of the 60,792 total same-store events performed. We believe a number of factors contributed to the increases in our average revenue per traditional and cremation service. We believe the primary factors were normal inflationary price increases, more effective merchandising and packaging, our focus on training, customized funeral planning and personalization and a new program for arranger incentives.
Funeral gross profit margin from continuing operations increased from 21.8 percent in the year ended October 31, 2003 to 25.3 percent in the year ended October 31, 2004. This improvement was due primarily to increased revenue and to reduced general and administrative costs in the funeral segment resulting from our cost reduction initiatives as discussed in “Business Strategy” included in Item 1. In addition, direct funeral costs (which primarily include salaries and wages, merchandise costs, selling costs and maintenance) declined slightly. The cremation rate for our same-store operations was 36.6 percent for the year ended October 31, 2004 compared to 35.9 percent for the year ended October 31, 2003.
Segment Discussion — Funeral
Funeral revenue in the Central and Eastern division funeral segments decreased primarily due to a decline in the number of funeral services performed by the same-store businesses in those segments of 1.7 percent and 3.8 percent, respectively, partially offset by an increase in the average revenue per funeral services in the same-store businesses of 1.4 percent and 2.7 percent, respectively. Funeral revenue in the Western division segment increased primarily due to an increase in the average revenue per funeral service in the same-store businesses of 4.4 percent partially offset by a slight decrease in the number of funeral services performed by the same-store businesses of 0.3 percent. Funeral revenue in the Southern division- Florida segment increased primarily due to an increase in the average revenue per funeral service in the same-store businesses of 1.4 percent coupled with an increase in the number of funeral services performed by the same-store businesses of 1.2 percent. Funeral revenue in the corporate trust management segment increased due primarily to an increase in trust earnings recognized upon the delivery of preneed funerals of $0.6 million and an increase in trust management fees of $0.3 million.
Funeral gross profit margin for the Central division, Eastern division, and Southern division- Florida funeral segments increased primarily due to reduced general and administrative costs resulting from our cost reduction initiatives as discussed in “Business Strategy” included in Item 1. In addition, direct funeral costs (which primarily include salaries and wages, merchandise costs, selling costs and maintenance) declined. Funeral gross profit margin in the Western division segment increased primarily due to an increase in revenue as discussed above.
As demonstrated in the table above, the same-store cremation rate increased for the Central division, Eastern division and Southern division-Florida funeral segments and decreased for the Western division funeral segment.
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Cemetery Operations
| Year Ended | ||||||||||||
| October 31, | Increase | |||||||||||
| 2004 | 2003 | (Decrease) | ||||||||||
| (Restated) | ||||||||||||
| (Restated) | (In millions) | |||||||||||
| Cemetery Revenue: | ||||||||||||
| Central Division | $ | 77.1 | $ | 71.7 | $ | 5.4 | ||||||
| Western Division | 13.0 | 10.4 | 2.6 | |||||||||
| Eastern Division | 65.6 | 61.1 | 4.5 | |||||||||
| Southern Division – Florida | 41.7 | 38.4 | 3.3 | |||||||||
All Other(1) | 14.8 | 17.2 | (2.4 | ) | ||||||||
Corporate Trust Management(2) | 10.6 | 10.6 | — | |||||||||
| Total Cemetery Revenue | $ | 222.8 | $ | 209.4 | $ | 13.4 | ||||||
| Cemetery Costs: | ||||||||||||
| Central Division | $ | 60.2 | $ | 57.3 | $ | 2.9 | ||||||
| Western Division | 10.6 | 10.3 | .3 | |||||||||
| Eastern Division | 56.2 | 53.4 | 2.8 | |||||||||
| Southern Division – Florida | 34.5 | 33.1 | 1.4 | |||||||||
All Other(1) | 14.4 | 14.9 | (.5 | ) | ||||||||
Corporate Trust Management(2) | .6 | .5 | .1 | |||||||||
| Total Cemetery Costs | $ | 176.5 | $ | 169.5 | $ | 7.0 | ||||||
| Cemetery Gross Profit: | ||||||||||||
| Central Division | $ | 16.9 | $ | 14.4 | $ | 2.5 | ||||||
| Western Division | 2.4 | .1 | 2.3 | |||||||||
| Eastern Division | 9.4 | 7.7 | 1.7 | |||||||||
| Southern Division – Florida | 7.2 | 5.3 | 1.9 | |||||||||
All Other(1) | .4 | 2.3 | (1.9 | ) | ||||||||
Corporate Trust Management(2) | 10.0 | 10.1 | (.1 | ) | ||||||||
| Total Cemetery Gross Profit | $ | 46.3 | $ | 39.9 | $ | 6.4 | ||||||
| (1) | All Other represents our operations in Puerto Rico. | |
| (2) | Corporate trust management consists of the trust management fees and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 6 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for 2004 and 2003 were $4.7 million and $4.4 million, respectively, and cemetery trust earnings recognized for 2004 and 2003 were $5.9 million and $6.2 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment. |
Consolidated Operations — Cemetery
Cemetery revenue from continuing operations increased $13.4 million, or 6.4 percent, for the year ended October 31, 2004, compared to the corresponding period in 2003, primarily due to an increase in cemetery property sales, construction during the year on various cemetery development projects and an improvement in our bad debt experience. Our sales organization was very successful with our preneed cemetery property sales initiative. Gross cemetery property sales increased 8.9 percent for the year ended October 31, 2004 compared to the year ended October 31, 2003 from $91.1 million to $99.2 million, which was in line with our stated goal of 5 percent to 10 percent. The remaining increase in cemetery revenue is due primarily to progress on the construction of various cemetery property sold prior to construction and the improvement in our bad debt experience. Revenue related to
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cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs.
We experienced an annualized average return, excluding unrealized gains and losses, of 3.1 percent in our perpetual care trusts for the year ended October 31, 2004 resulting in revenue of $6.4 million, compared to 4.2 percent for the corresponding period in 2003 resulting in revenue of $7.9 million. Perpetual care trust earnings are included in the Western division and Eastern division segments’ revenue and gross profit. See Note 7 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of those trust assets and the current performance of the trusts (i.e. current realized gains and losses, interest income and dividends).
Cemetery gross profit margin from continuing operations increased from 19.1 percent in the year ended October 31, 2003 to 20.8 percent in the year ended October 31, 2004. This improvement resulted from increased cemetery revenue as discussed above, combined with reduced general and administrative costs in the cemetery segment resulting primarily from our cost reduction initiatives as discussed in “Business Strategy” included in Item 1. Direct cemetery costs (which primarily include cemetery property costs, merchandise costs, selling costs, salaries and wages and maintenance) increased as a result of the increased revenue.
Segment Discussion — Cemetery
Cemetery revenue in the Western division, Eastern division and Southern division-Florida cemetery segments increased primarily due to an increase in cemetery property sales. For further discussion on our preneed cemetery property sales initiative, see “Consolidated Operations - Cemetery.” These segments also benefited from an improvement in bad debt experience. Cemetery revenue in the Central division segment increased primarily due to an increase in construction during the year on various cemetery development projects. For further discussion, see “Consolidated Operations — Cemetery.” The Central division segment also had increased cemetery property sales and an improvement in bad debt experience. All Other cemetery revenue decreased primarily due to a decrease in cemetery property sales in Puerto Rico. The Puerto Rican operations have been through several management changes at the regional and roof-top level, and a number of changes have been made in their preneed sales organization. As a result of these changes, preneed sales suffered.
Cemetery gross profit margin for the Central division, Western division, Eastern division and Southern division- Florida cemetery segments increased primarily due to increased cemetery revenue as discussed above, combined with reduced general and administrative costs resulting from our cost reduction initiatives as discussed in “Business Strategy” included in Item 1. Direct cemetery costs (which primarily include cemetery property costs, merchandise costs, selling costs, salaries and wages and maintenance) increased as a result of the increased revenue. All Other cemetery gross profit margin decreased primarily due to a decrease in cemetery revenue in Puerto Rico as discussed above.
Discontinued Operations
In December 2003, we announced plans to close or sell a number of small businesses, primarily small funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit our operating profile. The operating results of those businesses that were sold in fiscal years 2003, 2004 and 2005 are reported in the discontinued operations section of the consolidated statements of earnings. We determined that the carrying value of these businesses exceeded their fair market value and recorded a noncash impairment charge in the fourth quarter of fiscal year 2003. Fair value was established based on our best estimate and is subject to revision in future periods as properties are actually closed or sold. Included in discontinued operations for the year ended October 31, 2004 were gains on dispositions, net of impairment losses, of approximately $2.4 million compared to an impairment loss of $21.6 million that was recognized for the year ended October 31, 2003. Revenues for fiscal year 2004 were $12.7 million compared to $19.3 million in fiscal year 2003. The effective tax rate for our discontinued operations for the year ended October 31, 2004 was a 47.9 percent benefit compared to an 8.3 percent benefit for the same period in 2003. A benefit was recorded for the discontinued operations in fiscal year 2004 because we determined that certain tax benefits on asset sales would be realized. For additional information, see Notes 16 and 21 to the consolidated financial statements included in Item 8.
Other
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Corporate general and administrative expenses for the year ended October 31, 2004 decreased $.6 million compared to the same period in 2003 primarily due to decreases in salaries and legal fees.
In accordance with SFAS No. 142, we performed our annual goodwill impairment review during the fourth quarters of fiscal years 2004 and 2003. There was no impairment charge during 2004 or 2003 related to goodwill. For additional information on goodwill, see Notes 2 and 3(h) to the consolidated financial statements included in Item 8.
In December 2003, we announced a reduction and restructuring of our workforce. We recorded $2.4 million in related charges during the year ended October 31, 2004. We also recorded charges of $1.0 million and $2.5 million for the years ended October 31, 2004 and 2003, respectively, for separation pay related to former executive officers. The charges are presented in the “Separation charges” line item in the consolidated statements of earnings.
During the fourth quarter of fiscal year 2003, we identified a number of small businesses to close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair values. In accordance with SFAS No. 144, we recorded a noncash impairment charge of $31.8 million during the fourth quarter of fiscal year 2003, of which $10.2 million was included in continuing operations. For fiscal year 2004, we evaluated our long-lived assets, recorded impairment charges of $0.8 million and sold several assets that we held for sale at a net gain of $0.6 million. The net effect was that we reported gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations. For additional information, see Note 16 to the consolidated financial statements included in Item 8. The charge is presented in the “Gains on dispositions and impairment (losses), net” line item in the consolidated statement of earnings.
Total depreciation and amortization was $48.4 million for the year ended October 31, 2004 compared to $49.2 million for the same period in 2003. Depreciation and amortization from continuing operations was $47.8 million for the year ended October 31, 2004 compared to $47.5 million for the same period in 2003.
Interest expense decreased $6.3 million to $47.3 million for the year ended October 31, 2004 compared to $53.6 million for the same period in 2003 due to a $79.5 million decrease in average debt outstanding, partially offset by a 32 basis-point increase in the average interest rate.
On May 1, 2003, we exercised our right to redeem our outstanding $99.9 million Remarketable Or Redeemable Securities (“ROARS”) rather than allowing them to be remarketed and recorded a loss on early extinguishment of debt of $11.3 million in fiscal year 2003.
Other operating income, net, was $2.1 million for the years ended October 31, 2004 and 2003 and primarily included net gains on the sale of assets which were not included in our businesses classified as held for sale.
Investment and other income (expense), net, increased $.9 million to $.2 million for the year ended October 31, 2004. A write-down of certain marketable securities occurred in 2003, which had market value losses that were deemed to be other than temporary.
The effective tax rate for our continuing operations for the year ended October 31, 2004 was 37.0 percent compared to 77.1 percent for the year ended October 31, 2003. For the year ended October 31, 2003, we recorded a valuation allowance on the impairment of long-lived assets which significantly increased the rate. For a discussion on the increase in the valuation allowance, see Note 21 to the consolidated financial statements included in Item 8. The effective tax rate was also impacted by the reduced book income in 2003 compared to 2004 and the increase in state taxes for 2003. We operate in many different states through over 200 entities. Therefore, the mix of income by location can have an impact on state taxes.
As of October 31, 2004 and January 3, 2005, our outstanding debt totaled $416.8 million and $413.0 million, respectively. Of the total debt outstanding as of October 31, 2004, including the portion subject to the interest rate swap agreement in effect as of October 31, 2004, approximately 85 percent was subject to fixed rates averaging 10.1 percent, and 15 percent was subject to short-term variable rates averaging approximately 4.0 percent. In order to hedge a portion of the interest rate risk associated with our variable-rate debt, effective March 11, 2002, we entered into two interest rate swap agreements, each involving a notional amount of $50.0 million. One of the agreements expired on March 11, 2004, and the other expires on March 11, 2005. As of October 31, 2004, the effective rate of the debt hedged by the remaining interest rate swap was 6.765 percent. On November 19, 2004, we
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completed the refinancing of our senior secured credit facility. No amounts under the new senior secured credit facility are hedged by the remaining interest rate swap. See Note 18 to the consolidated financial statements included in Item 8 for additional information.
Preneed Sales into and Deliveries out of the Backlog
In the third quarter of fiscal year 2003, we increased our focus on preneed sales as part of our operating initiatives, and that effort helped us achieve a 9.4 percent increase in preneed funeral sales for the year ended October 31, 2004 compared to the same period in 2003.
The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We added $165.7 million in gross preneed sales to our funeral and cemetery merchandise and services backlog (including $67.3 million related to insurance-funded preneed funeral contracts) during the year ended October 31, 2004 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to gross sales of $159.9 million (including $65.5 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2003. Deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $148.1 million for the year ended October 31, 2004, compared to $148.6 million for the corresponding period in 2003, resulting in a net increases in the backlog of $17.6 million and $11.3 million for the years ended October 31, 2004 and 2003, respectively.
Year Ended October 31, 2003 Compared to Year Ended October 31, 2002—Continuing Operations
Funeral Operations
| Year Ended | ||||||||||||
| October 31, | Increase | |||||||||||
| 2003 | 2002 | (Decrease) | ||||||||||
| (Restated) | ||||||||||||
| (Restated) | In millions | |||||||||||
| Funeral Revenue: | ||||||||||||
| Central Division | $ | 84.3 | $ | 87.3 | $ | (3.0 | ) | |||||
| Western Division | 58.3 | 58.1 | .2 | |||||||||
| Eastern Division | 52.4 | 51.5 | .9 | |||||||||
| Southern Division - Florida | 43.0 | 44.1 | (1.1 | ) | ||||||||
All Other(1) | 13.3 | 52.1 | (38.8 | ) | ||||||||
Corporate Trust Management(2) | 17.8 | 18.2 | (.4 | ) | ||||||||
| Total Funeral Revenue | $ | 269.1 | $ | 311.3 | $ | (42.2 | ) | |||||
| Funeral Costs: | ||||||||||||
| Central Division | $ | 64.7 | $ | 63.5 | $ | 1.2 | ||||||
| Western Division | 51.0 | 50.4 | .6 | |||||||||
| Eastern Division | 42.5 | 41.6 | .9 | |||||||||
| Southern Division - Florida | 40.0 | 39.0 | 1.0 | |||||||||
All Other(1) | 11.7 | 44.8 | (33.1 | ) | ||||||||
Corporate Trust Management(2) | .4 | .4 | — | |||||||||
| Total Funeral Costs | $ | 210.3 | $ | 239.7 | $ | (29.4 | ) | |||||
| Funeral Gross Profit: | ||||||||||||
| Central Division | $ | 19.6 | $ | 23.8 | $ | (4.2 | ) | |||||
| Western Division | 7.3 | 7.7 | (.4 | ) | ||||||||
| Eastern Division | 9.9 | 9.9 | — | |||||||||
| Southern Division - Florida | 3.0 | 5.1 | (2.1 | ) | ||||||||
All Other(1) | 1.6 | 7.3 | (5.7 | ) | ||||||||
Corporate Trust Management(2) | 17.4 | 17.8 | (.4 | ) | ||||||||
| Total Funeral Gross Profit | $ | 58.8 | $ | 71.6 | $ | (12.8 | ) | |||||
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| Same-Store | ||||||||||||||||
| Change in Average | Change in Same-Store | Cremation Rate | ||||||||||||||
| Same-Store Analysis | Revenue Per Call | Funeral Services | 2003 | 2002 | ||||||||||||
| Central Division | 2.5 | % | (4.1 | %) | 20.1 | % | 19.1 | % | ||||||||
| Western Division | 4.6 | % | (3.0 | %) | 58.5 | % | 58.5 | % | ||||||||
| Eastern Division | .4 | % | 2.3 | % | 24.6 | % | 22.8 | % | ||||||||
| Southern Division - Florida | 1.8 | % | (1.8 | %) | 38.8 | % | 38.1 | % | ||||||||
All Other(3) | 1.8 | % | (2.5 | %) | 13.7 | % | 12.1 | % | ||||||||
| Total | 2.4 | % | (2.6 | %) | 35.9 | % | 35.1 | % | ||||||||
| (1) | All Other represents our operations in Puerto Rico in fiscal year 2003 and our operations in Puerto Rico, Spain, Portugal, France, Canada and Argentina in fiscal year 2002. We sold our operations in Spain, Portugal, France, Canada and Argentina during fiscal year 2002. | |
| (2) | Corporate trust management consists of the trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for 2003 and 2002 were $5.2 million and $4.7 million, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for 2003 and 2002 were $12.6 million and $13.5 million, respectively. | |
| (3) | All Other represents our operations in Puerto Rico only. |
Consolidated Operations — Funeral
Funeral revenue from continuing operations decreased $42.2 million for the year ended October 31, 2003 compared to the corresponding period in 2002 primarily due to a decrease in revenue of $38.6 million (included in All Other segment) resulting from the completion of the sale of our foreign operations in 2002. The decline is also due to a reduction in the number of domestic funeral services performed coupled with a $0.5 million reduction in trust earnings (included in the corporate trust management segment) due to the sale of our foreign operations in 2002.
We experienced a 2.6 percent decline (1,596 events) in the number of funeral services performed by our same- store businesses, partially offset by a 2.4 percent increase in the average revenue per funeral service performed by these businesses. We track our at-need sales by market and regularly compare our performance with data from a variety of sources to gauge changes in market share. Our analysis of this data indicates to us that approximately 75 percent of the decline in the number of funeral services performed was due to a decline in the number of deaths in our markets for fiscal year 2003 and approximately 25 percent of the decline was due to a loss in market share.
Funeral gross profit margin from domestic continuing operations decreased from 24.1 percent for the year ended October 31, 2002 to 21.8 percent for the corresponding period in 2003. The decline is primarily due to an increase in insurance costs coupled with the reduction in funeral revenue as discussed above. The cremation rate for our same-store operations was 35.9 percent for fiscal year 2003 compared to 35.1 percent for fiscal year 2002.
Segment Discussion — Funeral
Funeral revenue in the Central and Southern division- Florida funeral segments decreased primarily due to a decline in the number of funeral services performed by the same-store businesses of 4.1 percent and 1.8 percent, respectively, partially offset by an increase in the average revenue per funeral service in the same-store businesses of 2.5 percent and 1.8 percent, respectively. Funeral revenue in the Western division segment increased primarily due to an increase in the average revenue per funeral service in the same-store businesses of 4.6 percent partially offset by a decrease in the number of funeral services performed by the same-store businesses of 3.0 percent. Funeral revenue in the Eastern division segment increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 2.3 percent coupled with an increase in the average revenue per funeral service in the same-store businesses of 0.4 percent. Funeral revenue in the corporate trust management segment declined due primarily to a reduction in trust earnings of $0.5 million due to the sale of our foreign operations in 2002, partially offset by an increase in trust management fees of $0.5 million. All Other funeral revenue declined
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primarily due to the sale of the Company’s foreign operations in Spain, Portugal, France, Canada and Argentina in 2002, which resulted in a $38.6 million reduction in revenue.
Funeral gross profit margin for the Central division and Southern division- Florida funeral segments decreased primarily due to the decrease in revenue discussed above coupled with an increase in insurance costs. Funeral gross profit margin in the Eastern division funeral segment decreased primarily due to an increase in insurance costs.
As demonstrated in the table above, the same store cremation rate increased for the Central division, Eastern division and Southern division-Florida funeral segments and remained flat for the Western division funeral segment.
Cemetery Operations
| Year Ended | ||||||||||||
| October 31, | Increase | |||||||||||
| 2003 | 2002 | (Decrease) | ||||||||||
| (Restated) | ||||||||||||
| (Restated | (In millions) | |||||||||||
| Cemetery Revenue: | ||||||||||||
| Central Division | $ | 71.7 | $ | 77.4 | $ | (5.7 | ) | |||||
| Western Division | 10.4 | 11.0 | (.6 | ) | ||||||||
| Eastern Division | 61.1 | 61.0 | .1 | |||||||||
| Southern Division – Florida | 38.4 | 36.3 | 2.1 | |||||||||
All Other(1) | 17.2 | 19.7 | (2.5 | ) | ||||||||
Corporate Trust Management(2) | 10.6 | 9.6 | 1.0 | |||||||||
| Total Cemetery Revenue | $ | 209.4 | $ | 215.0 | $ | (5.6 | ) | |||||
| Cemetery Costs: | ||||||||||||
| Central Division | $ | 57.3 | $ | 58.8 | $ | (1.5 | ) | |||||
| Western Division | 10.3 | 10.9 | (.6 | ) | ||||||||
| Eastern Division | 53.4 | 53.0 | .4 | |||||||||
| Southern Division – Florida | 33.1 | 31.6 | 1.5 | |||||||||
All Other(1) | 14.9 | 19.7 | (4.8 | ) | ||||||||
Corporate Trust Management(2) | .5 | .5 | — | |||||||||
| Total Cemetery Costs | $ | 169.5 | $ | 174.5 | $ | (5.0 | ) | |||||
| Cemetery Gross Profit: | ||||||||||||
| Central Division | $ | 14.4 | $ | 18.6 | $ | (4.2 | ) | |||||
| Western Division | .1 | .1 | — | |||||||||
| Eastern Division | 7.7 | 8.0 | (.3 | ) | ||||||||
| Southern Division – Florida | 5.3 | 4.7 | .6 | |||||||||
All Other (1) | 2.3 | — | 2.3 | |||||||||
Corporate Trust Management(2) | 10.1 | 9.1 | 1.0 | |||||||||
| Total Cemetery Gross Profit | $ | 39.9 | $ | 40.5 | $ | (.6 | ) | |||||
| (1) | All Other represents our operations in Puerto Rico in fiscal year 2003 and our operations in Puerto Rico, Spain, Portugal, France, Canada and Argentina in fiscal year 2002. We sold our operations in Spain, Portugal, France, Canada and Argentina during fiscal year 2002. | |
| (2) | Corporate trust management consists of the trust management fees and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 6 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for 2003 and 2002 were $4.4 million and $3.6 million, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for 2003 and 2002 were $6.2 million and $6.0 million, respectively. Perpetual care trusts earnings are included in the revenues and gross profit of the related geographic segment. |
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Consolidated Operations — Cemetery
Cemetery revenue from continuing operations decreased $5.6 million, or 2.6 percent, for the year ended October 31, 2003, compared to the corresponding period in 2002 primarily due to a decline in revenue associated with the construction of cemetery projects, reduced perpetual care trust earnings and the completion of the sale of our foreign operations in 2002, offset by an improvement in our bad debt experience. Revenue related to the sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs.
We experienced an annualized average return, excluding unrealized gains and losses, of 4.2 percent in our perpetual care trusts for the year ended October 31, 2003 resulting in revenue of $7.9 million, compared to 6.0 percent for the corresponding period in 2002 resulting in revenue of $11.3 million. Perpetual care trust earnings are included in the Central, Western, Eastern and Southern division – Florida segments’ revenue and gross profit. See Notes 7 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of those trust assets and the current performance of the trusts (i.e. current realized gains and losses, interest income and dividends).
Cemetery gross profit margin from domestic continuing operations decreased from 19.5 percent for the year ended October 31, 2002 to 19.1 percent for the corresponding period in 2003. The decline is due to increased insurance costs coupled with the reduction in cemetery revenue as discussed above.
Segment Discussion — Cemetery
Cemetery revenue in the Central division cemetery segment declined primarily due to a reduction in preneed cemetery property sales and reduced perpetual care trust earnings. For further discussion related to the decline in perpetual care trust earnings, see “Consolidated Operations — Cemetery.” Cemetery revenue in the Western division segment declined primarily due to a reduction in preneed cemetery property sales. Cemetery revenue in the Southern division-Florida segment increased primarily due to an increase in cemetery property sales. All Other cemetery segment revenue declined primarily due to the sale of the Company’s foreign operations in 2002 resulting in a $3.4 million reduction in cemetery revenue partially offset by an increase in cemetery property sales in Puerto Rico. Cemetery revenue in the corporate trust management segment increased due to a $0.8 million increase in trust management fees and a $0.2 million increase in cemetery trust earnings.
Cemetery gross profit margin decreased in the Central division and Western division cemetery segments primarily due to the decrease in revenue discussed above coupled with an increase in insurance costs. Cemetery gross profit margin increased in the Southern division-Florida cemetery segment due to the increase in revenue discussed above offset by increased insurance costs. Cemetery gross profit in the Eastern division segment decreased primarily due to an increase in insurance costs. All Other cemetery gross profit margin increased due primarily to the increase in cemetery property sales in Puerto Rico coupled with the sale of the foreign operations.
Discontinued Operations
In December 2003, we announced plans to close or sell a number of small businesses, primarily small funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit our operating profile. The operating results of those businesses that were sold in fiscal years 2003, 2004 and 2005 are reported in the discontinued operations section of the consolidated statements of earnings. We had determined that the carrying value of these businesses exceeded their fair market value and recorded a noncash impairment charge in the fourth quarter of fiscal year 2003 of $31.8 million related to the impairment of these long-lived assets, of which $10.2 million is included in continuing operations and $21.6 million is included in discontinued operations in the 2003 consolidated statement of earnings. Fair value was established based on our best estimate and is subject to revision in future periods as properties are actually closed or sold. Revenues for fiscal year 2003 were $19.3 million compared to $20.9 million in fiscal year 2002. For additional information, see Note 16 to the consolidated financial statements included in Item 8. The charge related to continuing operations is presented in the “Gains on dispositions and impairment (losses), net” line item in the consolidated statement of earnings.
Other
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Primarily as a result of the significant devaluation of the Argentine peso and the depressed economic conditions in Argentina, we re-evaluated the expected loss on the disposition of the assets held for sale and recorded a noncash charge of $18.5 million in fiscal year 2002, which is reflected in the “Gains on dispositions and impairment (losses), net” line item in the 2002 consolidated statement of earnings.
A noncash goodwill impairment charge of $209.4 million ($193.1 million after tax, or $1.78 per diluted share) was recorded as a cumulative effect of change in accounting principle in 2002 for the adoption of SFAS No. 142. There were no impairment charges for fiscal year 2002 or 2003, resulting from our annual goodwill impairment review. For additional information on goodwill, see Notes 2 and 3(h) to the consolidated financial statements included in Item 8.
We recorded charges of $2.5 million for the year ended October 31, 2003 for separation pay related to former executive officers. These charges are presented in the “Separation charges” line item in the consolidated statements of earnings.
Corporate general and administrative expenses for the year ended October 31, 2003 increased $.4 million compared to the same period in 2002. The increase is due to increased legal fees and increased expenses related to the Stewart Enterprises, Inc. Supplemental Executive Retirement Plan (the “SERP”). The SERP, which became effective April 30, 2002, provides retirement benefits to certain executive officers that are intended to supplement the benefits available under our 401(k) Plan and in part replace other benefits previously available under the executive officers’ employment agreements.
Depreciation and amortization was $49.2 million for the year ended October 31, 2003 compared to $50.1 million for the same period in 2002. The decrease is due to the sale of our remaining foreign operations in fiscal year 2002.
Interest expense decreased $8.4 million to $53.6 million for the year ended October 31, 2003 compared to $62.0 million for the same period in 2002. The decrease is due to a $113.2 million decrease in the average debt outstanding during the fiscal year ended October 31, 2003, partially offset by an approximate 30 basis point increase in our average interest rate.
Other operating income, net, decreased from $2.5 million for the year ended October 31, 2002 to $2.1 million in the year ended October 31, 2003 and includes net gains on the sale of assets which were not included in our businesses classified as held for sale.
Investment and other income (expense), net, was ($.7) million for the year ended October 31, 2003, compared to $0.8 million for the same period in 2002. A write-down of certain marketable securities occurred in 2003, which had market value losses that were deemed to be other than temporary.
The effective tax rate for our continuing operations for the year ended October 31, 2003 was 77.1 percent compared to 37.0 percent for the year ended October 31, 2002. The change in the effective rate was primarily due to the tax benefit on asset sales recorded in 2003, which was calculated at 18.4 percent due to the basis adjustments on the assets sold and the recording of a valuation allowance on the portion of the assets sold and classified as capital loss. For additional information, see Note 21 to the consolidated financial statements included in Item 8.
As of October 31, 2003, our outstanding debt totaled $502.1 million. On May 1, 2003, we exercised our right to redeem our outstanding $99.9 million ROARS rather than allowing them to be remarketed and recorded a loss on early extinguishment of debt of $11.3 million. In order to redeem the ROARS, we used $50.0 million of additional Term Loan B financing and $50.0 million from our revolving credit facility. For additional information, see Note 18 to the consolidated financial statements included in Item 8. Of the total amount of debt outstanding, including the portion subject to the interest rate swap agreements in effect as of October 31, 2003, approximately 81 percent was fixed-rate debt, with the remaining 19 percent subject to short-term variable interest rates averaging approximately 4.0 percent.
In order to hedge a portion of the interest rate risk associated with our variable-rate debt, effective March 11, 2002, we entered into two interest rate swap agreements, expiring on March 11, 2004 and March 11, 2005, each involving a notional amount of $50.0 million. The agreements effectively convert variable-rate debt bearing interest based on three-month LIBOR plus the applicable margin specified under our senior secured credit facility to fixed-rate debt bearing interest at the fixed swap rate plus such applicable margin. As of October 31, 2003, the effective
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rate of the debt hedged by the interest rate swaps was 7.025 percent and 7.64 percent on each $50.0 million swapped.
Preneed Sales and Deliveries
The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results above. We added $159.9 million in gross preneed sales to our funeral and cemetery merchandise and services backlog during the year ended October 31, 2003 to be recognized in the future, net of cancellations, as these prepaid products and services are delivered, compared to gross sales of $168.2 million for the corresponding period in 2002. Deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust fund earnings related to these preneed deliveries, amounted to $148.6 million for the year ended October 31, 2003, compared to $145.0 million for the year ended October 31, 2002 resulting in net increases in the backlog of $11.3 million and $23.2 million for the years ended October 31, 2003 and 2002, respectively.
Liquidity and Capital Resources
Cash Flow
Comparison of Fiscal Year 2004 to Fiscal Year 2003
Our operations provided cash of $93.6 million for the year ended October 31, 2004 compared to $57.1 million for the comparable period in 2003. The 2004 amount included a $33.2 million tax refund received during the first quarter of 2004 resulting from a change in tax accounting methods for cemetery merchandise revenue and a cash outflow of $2.1 million for separation pay. The 2003 amount included a $23.3 million tax refund received related to the sale of our foreign operations and a cash outflow of $0.4 million for separation pay. The increase in operating cash flow was also due in part to the increase in earnings. In fiscal year 2003, we also paid $12.7 million to avoid a remarketing right in connection with the redemption of our $99.9 million Remarketable Or Redeemable Securities.
Our investing activities resulted in a net cash inflow of $0.5 million for the year ended October 31, 2004, compared to a net cash outflow of $15.4 million for fiscal year 2003. The change was primarily due to $19.8 million in proceeds from asset sales in fiscal year 2004 compared to $2.3 million in fiscal year 2003.
Our financing activities resulted in a net cash outflow of $91.3 million for the year ended October 31, 2004, compared to a net cash outflow of $51.4 million for the comparable period in 2003. The change was due primarily to repayments of long-term debt of $85.3 million in fiscal year 2004 compared to net repayments of $48.2 million ($203.2 million in repayments, net of $155.0 million in proceeds) in fiscal year 2003. We used the $33.2 million tax refund included in operating cash flow to reduce our outstanding Term Loan B in the first quarter of fiscal year 2004. The $155.0 million in proceeds from long-term debt received in 2003 was incurred in connection with the redemption of our $99.9 million Remarketable Or Redeemable Securities. We also used $19.3 million in fiscal year 2004 compared to $3.0 million in fiscal year 2003 to repurchase stock under our stock repurchase program.
Comparison of Fiscal Year 2003 to Fiscal Year 2002
Our operations provided cash of $57.1 million for the year ended October 31, 2003 compared to $90.5 million for the comparable period in 2002. The decrease in operating cash flow is due primarily to a reduction in earnings before taxes and cumulative effect of change in accounting principle, a decrease in the cash provided from the net effect of preneed funeral and cemetery production and maturities and an increase in cash used to pay income taxes. The decrease was partially offset by a $23.3 million tax refund received related to the sale of our foreign operations in fiscal year 2003 compared to an $11.1 million tax refund received in fiscal year 2002 related to the sale of our foreign operations. Included in the provision for deferred income taxes and the increase in receivables as of October 31, 2003 is a $33.2 million change relating to a tax accounting change which defers revenues that had been previously includable in taxable income and for which we had a tax refund receivable as of October 31, 2003. We received the $33.2 million refund in December 2003. In fiscal year 2003, we also paid $12.7 million to avoid a remarketing right in connection with the redemption of our $99.9 million Remarketable Or Redeemable Securities.
Our investing activities resulted in a net cash outflow of $15.4 million for the year ended October 31, 2003, compared to a net cash inflow of $53.4 million for fiscal year 2002. The change is due primarily to $69.8 million in proceeds from the sale of our foreign operations, domestic funeral home real estate and small domestic operations we received in fiscal year 2002 compared to $2.3 million received in fiscal year 2003.
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Our financing activities resulted in a net cash outflow of $51.4 million for the year ended October 31, 2003, compared to a net cash outflow of $138.6 million for the comparable period in 2002. The change is primarily due to $48.2 million in net repayments of long-term debt in the year ended October 31, 2003, compared to repayments of $139.5 million in the comparable period of 2002.
Contractual Obligations and Commercial Commitments
On November 19, 2004, we refinanced our senior secured credit facility with an amended and restated $225.0 million senior secured credit facility. The new facility consists of a five-year $125 million revolving credit facility and a seven-year $100 million Term Loan B. As a result of the refinancing, the leverage-based grid pricing for the interest rate on our revolving credit facility was reduced to LIBOR plus 150.0 basis points at closing, representing a 50 basis-point reduction, and the interest rate on our Term Loan B was reduced to LIBOR plus 175.0 basis points, which is 75 basis points below the prior agreement. The new facility has substantially the same collateral and guarantees as the prior agreement and is subject to similar but somewhat less restrictive financial and other covenants. The Term Loan B matures on November 19, 2011 with 94 percent of the principal due in 2011, and the revolving credit facility matures on November 19, 2009, although they both will terminate six months prior to the maturity date of our 10.75 percent senior subordinated notes due July 1, 2008 unless at least 75 percent of the principal amount of those notes are refinanced prior to that time. During the first quarter of fiscal year 2005, we will incur a charge for early extinguishment of debt of $2.7 million ($1.8 million after tax, or $.02 per share) to write off the remaining fees on the prior facility. The fees incurred for the new facility will be approximately $1.7 million and will be amortized over the life of the new debt. For additional information on the refinancing, see Note 18 to the consolidated financial statements included in Item 8.
As of October 31, 2004 and January 3, 2005, our outstanding debt balance totaled $416.8 million and $413.0 million, respectively. The following table details our known future cash payments (in millions) related to various contractual obligations as of October 31, 2004.
| Payments Due by Period | ||||||||||||||||||||
| Fiscal Year | Fiscal Years | Fiscal Years | ||||||||||||||||||
| Contractual Obligations | Total | 2005 | 2006 - 2007 | 2008 – 2009 | Thereafter | |||||||||||||||
Current maturities of long-term debt(1) | $ | 1.7 | $ | 1.7 | $ | — | $ | — | $ | — | ||||||||||
Long-term debt(1) | 415.1 | 113.0 | 1.3 | 300.2 | .6 | |||||||||||||||
Operating lease agreements(2) | 39.0 | 4.7 | 7.9 | 6.8 | 19.6 | |||||||||||||||
Non-competition and other agreements(3) | 10.3 | 4.2 | 4.0 | 1.5 | .6 | |||||||||||||||
| $ | 466.1 | $ | 123.6 | $ | 13.2 | $ | 308.5 | $ | 20.8 | |||||||||||
| (1) | As described above, on November 19, 2004, we refinanced our senior secured credit facility with a five-year $125 million revolving credit facility and a seven-year $100 million Term Loan B. As of October 31, 2004, our revolving credit facility was set to mature in June of 2005, and our Term Loan B debt was set to mature in October of 2005. Thus in the October 31, 2004 balance sheet, these amounts have been classified as long-term debt but are shown in the table above with their maturities occurring in fiscal year 2005, as they were as of October 31, 2004. See below for a breakdown of our future scheduled principal payments and maturities of long-term debt by type as of January 3, 2005. | |
| (2) | Our noncancellable operating leases are primarily for land and buildings and expire over the next 1 to 15 years, except for six leases that expire between 2032 and 2039. Our future minimum lease payments as of October 31, 2004 were $4.7 million, $4.2 million, $3.7 million, $2.9 million, $3.9 million and $19.6 million for the years ending October 31, 2005, 2006, 2007, 2008, 2009 and later years, respectively. | |
| (3) | We have entered into non-competition agreements with prior owners and key employees of acquired subsidiaries that expire at various times through 2012. During fiscal year 2001, we decided to relieve some of the prior owners and key employees of their obligations not to compete; however, we will continue to make the payments in accordance with the contract terms. This category also includes separation pay related to three former executive officers. |
We expect to be able to reduce our debt with approximately $12 million of remaining income tax benefits related to the sale of our foreign operations which we expect to receive by the end of fiscal year 2007.
As of October 31, 2004, our revolving credit facility was set to mature in June of 2005, and our Term Loan B
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debt was set to mature in October of 2005. As described above, on November 19, 2004, we refinanced our senior secured credit facility with a five-year $125 million revolving credit facility and a seven-year $100 million Term Loan B. The following table details our future payments and maturities of long-term debt as of January 3, 2005.
| Other, | ||||||||||||||||||||
| Principally | ||||||||||||||||||||
| Seller | ||||||||||||||||||||
| Fiscal | Revolving | Senior | Financing of | |||||||||||||||||
| Year Ending | Credit | Term | Subordinated | Acquired | ||||||||||||||||
| October 31, | Facility | Loan B | Notes | Operations | Total | |||||||||||||||
| 2005 | $ | — | $ | 1.0 | $ | — | $ | .9 | $ | 1.9 | ||||||||||
| 2006 | — | 1.0 | — | .8 | 1.8 | |||||||||||||||
| 2007 | — | 1.0 | — | .5 | 1.5 | |||||||||||||||
| 2008 | — | 1.0 | 300.0 | .2 | 301.2 | |||||||||||||||
| 2009 | — | 1.0 | — | — | 1.0 | |||||||||||||||
| Thereafter | 10.0 | 95.0 | — | .6 | 105.6 | |||||||||||||||
| Total long-term debt | $ | 10.0 | $ | 100.0 | $ | 300.0 | $ | 3.0 | $ | 413.0 | ||||||||||
We also had $15.0 million of outstanding letters of credit as of October 31, 2004, and we are required to maintain a bond to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida. We substituted a bond to guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. As of October 31, 2004, the balance of the Florida bond was $41.1 million. We believe that cash flow from operations will be sufficient to cover our estimated cost of providing the related prearranged services and products in the future.
As of October 31, 2004, there was $59.0 million drawn on our $175.0 million revolving credit facility. As of January 3, 2005, there was $10.0 million drawn on our new $125.0 million revolving credit facility. As of October 31, 2004 and January 3, 2005, our availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit and bond obligation, was $60.0 million and $58.3 million, respectively.
The first call date on our senior subordinated notes is in July 2005 at a price of 105.375 percent of the notes’ principal amount. If we call these notes at that time, we would record a charge of early extinguishment of debt of approximately $20.2 million including the call premium of $16.1 million and write-off of the unamortized fees of $4.1 million. As the senior subordinated notes represent over 70 percent of our total debt outstanding, the call right may present a significant opportunity to refinance this debt at more attractive interest rates. We may also decide to tender for these notes prior to their call date, and if we do so, we could pay a premium larger than the call premium. Additionally, the write-off of the unamortized fees would be higher, and we would incur significant transaction expenses. Our ability to refinance our senior subordinated notes will depend primarily on the condition of U.S. financial markets and our credit profile at the time of refinancing. Because we have limited control over our credit profile and no control over the condition of financial markets, there is a risk that we will not be able to successfully refinance this debt.
Capital Expenditures
For fiscal year 2004, capital expenditures amounted to $20.4 million, which included $18.6 million for maintenance capital expenditures and $1.8 million for new growth initiatives. For fiscal year 2005, we anticipate maintenance capital expenditures to be in the range of $16 million to $18 million and new growth initiatives of up to $10 million, including the construction of the Los Angeles funeral homes. We have no material commitments for capital expenditures in fiscal year 2005 other than approximately $6 million related to the Archdiocese of Los Angeles funeral homes.
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of October 31, 2004 consist of the following two items:
| (1) | the $41.1 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed in Note 23 to the consolidated financial statements included in Item 8; and |
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| (2) | the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our consolidated balance sheets, and are discussed in Notes 4 and 5 to the consolidated financial statements included in Item 8. |
Ratio of Earnings to Fixed Charges
Our ratio of earnings to fixed charges was as follows:
| Years ended October 31, | ||||||||
| 2004 | 2003 | 2002 | 2001 | 2000 | ||||
| Restated(1) | Restated(1) | Restated(1) | Restated(1) | Restated(1) | ||||
| 1.98(2) | 1.08(3) | 1.27(4)(5) | —(5)(6) | 2.33 | ||||
| (1) | See Note 2 to the consolidated financial statements included in Item 8 for a discussion of the restatements. | |
| (2) | Pretax earnings for fiscal year 2004 include charges of $3.4 million for severance and other costs relating to the workforce reductions announced in December 2003 and separation payments to a former executive officer and ($0.2) million in gains on dispositions, net of impairment losses. | |
| (3) | Pretax earnings for fiscal year 2003 include a charge of $11.3 million for the loss on early extinguishment of debt in connection with redemption of the ROARS, a noncash charge of $10.2 million for long-lived asset impairment and a charge of $2.5 million for separation payments to former executive officers. | |
| (4) | Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million in connection with the write-down of assets held for sale. | |
| (5) | Excludes the cumulative effect of change in accounting principles. | |
| (6) | Pretax earnings for fiscal year 2001 include a noncash charge of $269.2 million in connection with the write-down of assets held for sale and other charges and a charge of $9.1 million for the loss on early extinguishment of debt. As a result of these charges, our earnings for the fiscal year ended October 31, 2001 were insufficient to cover our fixed charges, and an additional $229.9 million in pretax earnings would have been required to eliminate the coverage deficiency. |
For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings from continuing operations plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness, and the portion of rental expense that management believes to be representative of the interest component of rental expense.
Effect of Recent Accounting Standards
For additional information on changes in accounting principles and new accounting principles, see Note 4 to the consolidated financial statements included in Item 8.
Effective April 30, 2004, we implemented FIN 46R which resulted in the consolidation of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts. The implementation of FIN 46R affected certain line items in the consolidated balance sheet as of October 31, 2004, but did not result in a restatement of the consolidated balance sheet as of October 31, 2003. For a more detailed discussion, see Notes 4 through 8 to the consolidated financial statements included in Item 8.
FIN 46R did not allow for earlier adoption or retroactive restatement of the October 31, 2003 balance sheet. The table below reconciles the current period presentation for the October 31, 2003 consolidated balance sheet as presented in the 2004 Form 10-K/A to a presentation that shows the impact as if FIN 46R were to have been adopted as of October 31, 2003. The pro forma adjustments for FIN 46R involve the consolidation of the preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts at their respective fair market values as of October 31, 2003 coupled with the removal of the trust receivables and deferred revenue as disclosed in Note 9 to the consolidated financial statements included in Item 8.
Unaudited Adjusted Pro Forma Condensed Consolidated Balance Sheet as of October 31, 2003
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| October 31, 2003 | ||||||||||||
| pro forma balance | ||||||||||||
| October 31, | sheet as reported in | |||||||||||
| 2003 balance | the 2004 Form 10-K/A | |||||||||||
| sheet as | Pro forma | (Restated) adjusted as if FIN | ||||||||||
| reported in the | adjustments for | 46R had been adopted at | ||||||||||
| 2004 Form 10-K/A | FIN 46R | October 31, 2003 | ||||||||||
| Restated)(1) | (Restated) | |||||||||||
| ASSETS | ||||||||||||
| Total current assets | $ | 214,182 | $ | (4,371 | ) | $ | 209,811 | |||||
| Receivables due beyond one year, net of allowances | 76,176 | — | 76,176 | |||||||||
| Preneed funeral receivables and trust investments | — | 516,501 | 516,501 | |||||||||
| Preneed cemetery receivables and trust investments | — | 254,875 | 254,875 | |||||||||
| Prearranged receivables, net | 891,647 | (891,647 | ) | — | ||||||||
| Goodwill | 272,950 | — | 272,950 | |||||||||
| Deferred preneed selling costs | 243,261 | — | 243,261 | |||||||||
| Cemetery property, at cost | 369,727 | — | 369,727 | |||||||||
| Net property and equipment | 309,750 | — | 309,750 | |||||||||
| Deferred income taxes, net | 104,160 | — | 104,160 | |||||||||
| Cemetery perpetual care trust investments | — | 202,076 | 202,076 | |||||||||
| Other assets | 30,145 | — | 30,145 | |||||||||
| Total assets | $ | 2,511,998 | $ | 77,434 | $ | 2,589,432 | ||||||
| Total current liabilities | $ | 107,481 | $ | (1,551 | ) | $ | 105,930 | |||||
| Long-term debt, less current maturities | 488,180 | — | 488,180 | |||||||||
| Deferred preneed funeral revenue | — | 314,858 | 314,858 | |||||||||
| Deferred preneed cemetery revenue | — | 278,791 | 278,791 | |||||||||
| Non-controlling interest in funeral and cemetery trusts | — | 632,643 | 632,643 | |||||||||
| Prearranged deferred revenue, net | 1,347,325 | (1,347,325 | ) | — | ||||||||
| Other long-term liabilities | 16,281 | — | 16,281 | |||||||||
| Total liabilities | 1,959,267 | (122,584 | ) | 1,836,683 | ||||||||
| Non-controlling interest in perpetual care trusts | — | 200,018 | 200,018 | |||||||||
| Total shareholders’ equity | 552,731 | — | 552,731 | |||||||||
| Total liabilities and shareholders’ equity | $ | 2,511,998 | $ | 77,434 | $ | 2,589,432 | ||||||
(1) See Note 2 to the consolidated financial statements included in Item 8 for a discussion of the restatements.
Inflation
Inflation has not had a significant impact on our operations over the past three years, nor is it expected to have a significant impact in the foreseeable future.
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Item 7A. Quantitative and Qualitative Disclosures About Market Risk
This item is not being amended by this Amendment.
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Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
| Page | ||||
| Consolidated Statements of Earnings for the Years Ended October 31, 2004, 2003 and 2002 | 48 | |||
| Consolidated Balance Sheets as of October 31, 2004 and 2003 | 49 | |||
| Consolidated Statements of Shareholders’ Equity for the Years Ended October 31, 2004, 2003 and 2002 | 51 | |||
| Consolidated Statements of Cash Flows for the Years Ended October 31, 2004, 2003 and 2002 | 53 | |||
| Notes to Consolidated Financial Statements | 55 | |||
| Exhibit Index | 135 | |||
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Shareholders of Stewart Enterprises, Inc.:
Shareholders of Stewart Enterprises, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders’ equity and cash flows present fairly, in all material respects, the financial position of Stewart Enterprises, Inc. and Subsidiaries at October 31, 2004 and 2003, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2004, in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company’s management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2004, 2003 and 2002 consolidated financial statements.
As discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for the Company’s preneed funeral and cemetery merchandise and services trusts and the Company’s cemetery perpetual care trusts in 2004. Also, as discussed in Note 4 to the consolidated financial statements, the Company changed its method of accounting for insurance-funded preneed funeral contracts in 2004. As discussed in Note 16 to the consolidated financial statements, the Company adopted the provisions of Statement of Financial Accounting Standards No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” in 2003.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
January 5, 2005, except for Notes 2, 3(s) and 16, for which the date is April 4, 2006
New Orleans, Louisiana
January 5, 2005, except for Notes 2, 3(s) and 16, for which the date is April 4, 2006
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Revenues: | ||||||||||||
| Funeral | $ | 271,239 | $ | 269,109 | $ | 311,301 | ||||||
| Cemetery | 222,827 | 209,374 | 214,989 | |||||||||
| 494,066 | 478,483 | 526,290 | ||||||||||
| Costs and expenses: | ||||||||||||
| Funeral | 202,498 | 210,289 | 239,724 | |||||||||
| Cemetery | 176,556 | 169,551 | 174,529 | |||||||||
| 379,054 | 379,840 | 414,253 | ||||||||||
| Gross profit | 115,012 | 98,643 | 112,037 | |||||||||
| Corporate general and administrative expenses | (17,097 | ) | (17,733 | ) | (17,261 | ) | ||||||
| Separation charges (Note 17) | (3,435 | ) | (2,450 | ) | — | |||||||
| Gains on dispositions and impairment (losses), net (Note 16) | (204 | ) | (10,206 | ) | (18,500 | ) | ||||||
| Other operating income, net | 2,112 | 2,083 | 2,535 | |||||||||
| Operating earnings | 96,388 | 70,337 | 78,811 | |||||||||
| Interest expense | (47,335 | ) | (53,643 | ) | (61,980 | ) | ||||||
| Loss on early extinguishment of debt (Note 18) | — | (11,289 | ) | — | ||||||||
| Investment and other income (expense), net | 178 | (749 | ) | 794 | ||||||||
| Earnings from continuing operations before income taxes and cumulative effect of change in accounting principles | 49,231 | 4,656 | 17,625 | |||||||||
| Income taxes | 18,209 | 3,591 | 6,524 | |||||||||
| Earnings from continuing operations before cumulative effect of change in accounting principle | 31,022 | 1,065 | 11,101 | |||||||||
| Discontinued operations: | ||||||||||||
| Earnings (loss) from discontinued operations before income taxes | 3,834 | (20,818 | ) | 1,879 | ||||||||
| Income tax expense (benefit) | (1,836 | ) | (1,721 | ) | 687 | |||||||
| Earnings (loss) from discontinued operations | 5,670 | (19,097 | ) | 1,192 | ||||||||
| Earnings (loss) before cumulative effect of change in accounting principle | 36,692 | (18,032 | ) | 12,293 | ||||||||
| Cumulative effect of change in accounting principle (net of $16,310 income tax benefit) | — | — | (193,090 | ) | ||||||||
| Net earnings (loss) | $ | 36,692 | $ | (18,032 | ) | $ | (180,797 | ) | ||||
| Basic earnings (loss) per common share: | ||||||||||||
| Earnings from continuing operations before cumulative effect of change in accounting principle | $ | .29 | $ | .01 | $ | .10 | ||||||
| Earnings (loss) from discontinued operations | .05 | (.18 | ) | .01 | ||||||||
| Cumulative effect of change in accounting principle | — | — | (1.79 | ) | ||||||||
| Net earnings (loss) | $ | .34 | $ | (.17 | ) | $ | (1.68 | ) | ||||
| Diluted earnings (loss) per common share: | ||||||||||||
| Earnings from continuing operations before cumulative effect of change in accounting principle | $ | .29 | $ | .01 | $ | .10 | ||||||
| Earnings (loss) from discontinued operations | .05 | (.18 | ) | .01 | ||||||||
| Cumulative effect of change in accounting principle | — | — | (1.78 | ) | ||||||||
| Net earnings (loss) | $ | .34 | $ | (.17 | ) | $ | (1.67 | ) | ||||
| Weighted average common shares outstanding (in thousands): | ||||||||||||
| Basic | 107,522 | 108,220 | 107,861 | |||||||||
| Diluted | 108,159 | 108,230 | 108,299 | |||||||||
See accompanying notes to consolidated financial statements.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| (Restated) | (Restated) | |||||||
| (Note 2) | (Note 2) | |||||||
ASSETS | ||||||||
| Current assets: | ||||||||
| Cash and cash equivalents | $ | 21,514 | $ | 18,585 | ||||
| Marketable securities | 1,297 | 2,346 | ||||||
| Receivables, net of allowances | 69,133 | 105,529 | ||||||
| Inventories | 36,174 | 37,573 | ||||||
| Prepaid expenses | 2,953 | 2,891 | ||||||
| Deferred income taxes, net | 7,674 | 5,842 | ||||||
| Assets held for sale (Note 16) | 10,493 | 41,416 | ||||||
| Total current assets | 149,238 | 214,182 | ||||||
| Receivables due beyond one year, net of allowances | 78,692 | 76,176 | ||||||
| Preneed funeral receivables and trust investments | 503,808 | — | ||||||
| Preneed cemetery receivables and trust investments | 258,176 | — | ||||||
| Prearranged receivables, net | — | 891,647 | ||||||
| Goodwill (Notes 2 and 3(h)) | 272,729 | 272,950 | ||||||
| Deferred preneed selling costs | 253,360 | 243,261 | ||||||
| Cemetery property, at cost | 366,874 | 369,727 | ||||||
| Property and equipment, at cost: | ||||||||
| Land | 39,527 | 39,449 | ||||||
| Buildings | 295,567 | 296,475 | ||||||
| Equipment and other | 156,205 | 150,204 | ||||||
| 491,299 | 486,128 | |||||||
| Less accumulated depreciation | 189,552 | 176,378 | ||||||
| Net property and equipment | 301,747 | 309,750 | ||||||
| Deferred income taxes, net | 93,014 | 104,160 | ||||||
| Cemetery perpetual care trust investments | 210,267 | — | ||||||
| Other assets | 23,603 | 30,145 | ||||||
| Total assets | $ | 2,511,508 | $ | 2,511,998 | ||||
(continued)
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| (Restated) | (Restated) | |||||||
| (Note2) | (Note 2) | |||||||
LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||
| Current liabilities: | ||||||||
| Current maturities of long-term debt | $ | 1,725 | $ | 13,935 | ||||
| Accounts payable | 9,865 | 8,064 | ||||||
| Accrued payroll | 13,005 | 8,596 | ||||||
| Accrued insurance | 21,430 | 19,243 | ||||||
| Accrued interest | 11,315 | 11,428 | ||||||
| Other current liabilities | 17,889 | 22,149 | ||||||
| Income taxes payable | 130 | 978 | ||||||
| Liabilities associated with assets held for sale (Note 16) | 6,491 | 23,088 | ||||||
| Total current liabilities | 81,850 | 107,481 | ||||||
| Long-term debt, less current maturities | 415,080 | 488,180 | ||||||
| Deferred preneed funeral revenue | 297,328 | — | ||||||
| Deferred preneed cemetery revenue | 280,570 | — | ||||||
| Non-controlling interest in funeral and cemetery trusts | 627,344 | — | ||||||
| Prearranged deferred revenue, net | — | 1,347,325 | ||||||
| Other long-term liabilities | 12,465 | 16,281 | ||||||
| Total liabilities | 1,714,637 | 1,959,267 | ||||||
| Commitments and contingencies (Note 23) | — | — | ||||||
| Non-controlling interest in perpetual care trusts | 208,893 | — | ||||||
| Shareholders’ equity: | ||||||||
| Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued | — | — | ||||||
| Common stock, $1.00 stated value: | ||||||||
| Class A authorized 150,000,000 shares; issued and outstanding 104,330,101 and 104,172,151 shares at October 31, 2004 and 2003, respectively | 104,330 | 104,172 | ||||||
| Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at October 31, 2004 and 2003; 10 votes per share; convertible into an equal number of Class A shares | 3,555 | 3,555 | ||||||
| Additional paid-in capital | 673,630 | 676,439 | ||||||
| Accumulated deficit | (192,982 | ) | (229,674 | ) | ||||
| Unearned restricted stock compensation | (222 | ) | — | |||||
| Accumulated other comprehensive loss: | ||||||||
| Unrealized depreciation of investments | — | (115 | ) | |||||
| Derivative financial instrument losses | (333 | ) | (1,646 | ) | ||||
| Total accumulated other comprehensive loss | (333 | ) | (1,761 | ) | ||||
| Total shareholders’ equity | 587,978 | 552,731 | ||||||
| Total liabilities and shareholders’ equity | $ | 2,511,508 | $ | 2,511,998 | ||||
See accompanying notes to consolidated financial statements.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Retained | Cumulative | Unrealized | Derivative | |||||||||||||||||||||||||
| Additional | Earnings | Foreign | Appreciation | Financial | Total | |||||||||||||||||||||||
| Common | Paid-In | (Accumulated | Translation | (Depreciation) | Instrument | Shareholders’ | ||||||||||||||||||||||
| Stock(1) | Capital | Deficit) | Adjustment | of Investments | Gains (Losses) | Equity | ||||||||||||||||||||||
| (Restated) | (Restated) | |||||||||||||||||||||||||||
| (Note 2) | (Note 2) | |||||||||||||||||||||||||||
| Balance October 31, 2001 as previously reported | $ | 107,626 | $ | 675,310 | $ | (1,262 | ) | $ | (26,957 | ) | $ | (1,310 | ) | $ | (1,347 | ) | $ | 752,060 | ||||||||||
| Prior period adjustments | — | — | (29,583 | ) | — | — | — | (29,583 | ) | |||||||||||||||||||
| Balance October 31, 2001—Restated | $ | 107,626 | $ | 675,310 | $ | (30,845 | ) | $ | (26,957 | ) | $ | (1,310 | ) | $ | (1,347 | ) | $ | 722,477 | ||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||
| Net loss - Restated | (180,797 | ) | (180,797 | ) | ||||||||||||||||||||||||
| Other comprehensive income (loss): | ||||||||||||||||||||||||||||
| Reclassification adjustment for realized loss on foreign translation | 35,902 | 35,902 | ||||||||||||||||||||||||||
| Foreign translation adjustment | (8,945 | ) | (8,945 | ) | ||||||||||||||||||||||||
| Unrealized appreciation of investments, net of deferred tax expense of ($167) | 345 | 345 | ||||||||||||||||||||||||||
| Expiration of derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($781) | 1,347 | 1,347 | ||||||||||||||||||||||||||
| Unrealized depreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax benefit of $1,524 | (2,488 | ) | (2,488 | ) | ||||||||||||||||||||||||
| Total other comprehensive income (loss) | — | — | — | 26,957 | 345 | (1,141 | ) | 26,161 | ||||||||||||||||||||
| Total comprehensive income (loss) - - Restated | — | — | (180,797 | ) | 26,957 | 345 | (1,141 | ) | (154,636 | ) | ||||||||||||||||||
| Issuance of common stock | 399 | 1,777 | 2,176 | |||||||||||||||||||||||||
| Balance October 31, 2002 – Restated | $ | 108,025 | $ | 677,087 | $ | (211,642 | ) | $ | — | $ | (965 | ) | $ | (2,488 | ) | $ | 570,017 | |||||||||||
| Balance October 31, 2002 – Restated. | $ | 108,025 | $ | 677,087 | $ | (211,642 | ) | $ | — | $ | (965 | ) | $ | (2,488 | ) | $ | 570,017 | |||||||||||
| Comprehensive income (loss): | ||||||||||||||||||||||||||||
| Net loss – Restated | (18,032 | ) | (18,032 | ) | ||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Reclassification adjustment for realized loss on investments, net of deferred tax expense of ($418) | 682 | 682 | ||||||||||||||||||||||||||
| Unrealized appreciation of investments, net of deferred tax expense of ($124) | 168 | 168 | ||||||||||||||||||||||||||
| Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($558) | 842 | 842 | ||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 850 | 842 | 1,692 | |||||||||||||||||||||
| Total comprehensive income (loss) – Restated | — | — | (18,032 | ) | — | 850 | 842 | (16,340 | ) | |||||||||||||||||||
| Issuance of common stock | 441 | 1,586 | 2,027 | |||||||||||||||||||||||||
| Purchase and retirement of common stock | (739 | ) | (2,234 | ) | (2,973 | ) | ||||||||||||||||||||||
| Balance October 31, 2003 - Restated | $ | 107,727 | $ | 676,439 | $ | (229,674 | ) | $ | — | $ | (115 | ) | $ | (1,646 | ) | $ | 552,731 | |||||||||||
(continued)
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Retained | Unearned | Unrealized | Derivative | |||||||||||||||||||||||||
| Additional | Earnings | Restricted | Appreciation | Financial | Total | |||||||||||||||||||||||
| Common | Paid-In | (Accumulated | Stock | (Depreciation) | Instrument | Shareholders | ||||||||||||||||||||||
| Stock(1) | Capital | Deficit) | Compensation | of Investments | Gains (Losses) | Equity | ||||||||||||||||||||||
| (Restated) | (Restated) | |||||||||||||||||||||||||||
| (Note 2) | (Note 2) | |||||||||||||||||||||||||||
| Balance October 31, 2003 – Restated | $ | 107,727 | $ | 676,439 | $ | (229,674 | ) | $ | — | $ | (115 | ) | $ | (1,646 | ) | $ | 552,731 | |||||||||||
| Comprehensive income: | ||||||||||||||||||||||||||||
| Net earnings – Restated | 36,692 | 36,692 | ||||||||||||||||||||||||||
| Other comprehensive income: | ||||||||||||||||||||||||||||
| Unrealized appreciation of investments, net of deferred tax expense of ($50) | 115 | 115 | ||||||||||||||||||||||||||
| Termination of derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($119) | 194 | 194 | ||||||||||||||||||||||||||
| Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($643) | 1,119 | 1,119 | ||||||||||||||||||||||||||
| Total other comprehensive income | — | — | — | — | 115 | 1,313 | 1,428 | |||||||||||||||||||||
| Total comprehensive income — Restated | — | — | 36,692 | — | 115 | 1,313 | 38,120 | |||||||||||||||||||||
| Restricted stock activity | 132 | 541 | (222 | ) | 451 | |||||||||||||||||||||||
| Issuance of common stock | 74 | 347 | 421 | |||||||||||||||||||||||||
| Stock options exercised | 2,713 | 10,279 | 12,992 | |||||||||||||||||||||||||
| Tax benefit associated with stock options exercised | 2,612 | 2,612 | ||||||||||||||||||||||||||
| Purchase and retirement of common stock | (2,761 | ) | (16,588 | ) | (19,349 | ) | ||||||||||||||||||||||
| Balance October 31, 2004 - Restated | $ | 107,885 | $ | 673,630 | $ | (192,982 | ) | $ | (222 | ) | $ | — | $ | (333 | ) | $ | 587,978 | |||||||||||
| (1) | Amount includes shares of Class A common stock with a stated value of $1 per share and includes 3,555 shares (in thousands) of Class B common stock. |
See accompanying notes to consolidated financial statements.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net earnings (loss) | $ | 36,692 | $ | (18,032 | ) | $ | (180,797 | ) | ||||
| Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: | ||||||||||||
| Cumulative effect of change in accounting principle | — | — | 193,090 | |||||||||
| (Gains) on dispositions and impairment losses, net | (2,222 | ) | 31,830 | 18,500 | ||||||||
| Loss on early extinguishment of debt | — | 11,289 | — | |||||||||
| Premiums paid on early extinguishment of debt | — | (12,691 | ) | — | ||||||||
| Depreciation and amortization | 23,469 | 25,274 | 26,276 | |||||||||
| Amortization of preneed selling costs | 24,952 | 23,932 | 23,818 | |||||||||
| Amortization of deferred financing costs | 5,298 | 4,840 | 4,685 | |||||||||
| Provision for doubtful accounts | 7,107 | 8,027 | 11,499 | |||||||||
| Tax benefit on stock options exercised | 2,612 | — | — | |||||||||
| Net losses realized on marketable securities | 101 | 1,100 | — | |||||||||
| Provision for deferred income taxes | 8,768 | 33,038 | 3,504 | |||||||||
| Other | 258 | (795 | ) | (808 | ) | |||||||
| Changes in assets and liabilities: | ||||||||||||
| (Increase) decrease in other receivables | 21,871 | (26,805 | ) | 7,962 | ||||||||
| (Increase) decrease in inventories and cemetery property | 2,081 | 769 | (1,881 | ) | ||||||||
| Increase (decrease) in accounts payable and accrued expenses | 4,669 | (983 | ) | (5,086 | ) | |||||||
| Net effect of preneed funeral production and maturities | (14,284 | ) | (4,492 | ) | 2,195 | |||||||
| Net effect of preneed cemetery production and deliveries | 6,421 | 10,341 | 18,008 | |||||||||
| Change in deferred preneed selling costs | (34,553 | ) | (34,685 | ) | (32,736 | ) | ||||||
| Increase in other | 416 | 5,172 | 2,260 | |||||||||
| Net cash provided by operating activities | 93,656 | 57,129 | 90,489 | |||||||||
| Cash flows from investing activities: | ||||||||||||
| Proceeds from sales of marketable securities | 1,121 | 550 | 169 | |||||||||
| Proceeds from sale of assets, net | 19,775 | 2,341 | 69,803 | |||||||||
| Additions to property and equipment | (20,423 | ) | (18,439 | ) | (18,630 | ) | ||||||
| Other | 54 | 185 | 2,085 | |||||||||
| Net cash provided by (used in) investing activities | 527 | (15,363 | ) | 53,427 | ||||||||
(continued)
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from long-term debt | — | 155,000 | — | |||||||||
| Repayments of long-term debt | (85,310 | ) | (203,164 | ) | (139,502 | ) | ||||||
| Debt issue costs | — | (816 | ) | — | ||||||||
| Issuance of common stock | 13,413 | 582 | 858 | |||||||||
| Purchase and retirement of common stock | (19,349 | ) | (2,973 | ) | — | |||||||
| Other | (8 | ) | — | — | ||||||||
| Net cash used in financing activities | (91,254 | ) | (51,371 | ) | (138,644 | ) | ||||||
| Effect of exchange rates on cash and cash equivalents | — | — | (205 | ) | ||||||||
| Net increase (decrease) in cash | 2,929 | (9,605 | ) | 5,067 | ||||||||
| Cash and cash equivalents, beginning of year | 18,585 | 28,190 | 23,123 | |||||||||
| Cash and cash equivalents, end of year | $ | 21,514 | $ | 18,585 | $ | 28,190 | ||||||
| Supplemental cash flow information: | ||||||||||||
| Cash paid (received) during the year for: | ||||||||||||
| Income taxes | $ | (26,400 | ) | $ | (17,500 | ) | $ | (12,700 | ) | |||
| Interest | $ | 41,100 | $ | 50,500 | $ | 57,400 | ||||||
| Noncash investing and financing activities: | ||||||||||||
| Issuance of common stock to fund employee benefit plan | $ | — | $ | 1,445 | $ | 1,318 | ||||||
See accompanying notes to consolidated financial statements.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (1) | The Company |
Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of October 31, 2004, the Company operated 242 funeral homes and 147 cemeteries in 27 states within the United States and Puerto Rico. The Company has 11 operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern — Florida and All Other. All Other consists of the Company’s operations in Puerto Rico in 2004 and 2003 and its operations in Puerto Rico, Spain, Portugal, France, Canada and Argentina in 2002. The Company sold its operations in Spain, Portugal, France, Canada and Argentina in 2002. Additional information on segments can be found in Note 24.
| (2) | Restatement |
The Company has restated its consolidated financial statements for fiscal years 2004, 2003 and 2002 and all the quarters therein. The restatements are primarily the result of:
| (A) | The incorrect determination of operating and reportable segments and reporting units related to the application of FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), which also had the effect of changing the charges recorded for the assets sold as part of its plan initiated in December 2003 (see Note 16) to sell a number of businesses, and the net book value of assets held for sale on its balance sheet. | ||
| (B) | Errors identified in revenue recognition of preneed cemetery merchandise and services contracts and recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts. | ||
| (C) | Other miscellaneous adjustments, including adjustments for lease-related accounting practices. |
The restatement for these errors is discussed in more detail below.
Segments and Reporting Units
The Company re-evaluated its application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and determined that it had incorrectly identified its operating and reportable segments for all prior periods. The Company concluded that it had eleven operating and reportable segments, which consisted of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern — Florida and All Other. The Company’s historical presentation of segment data had consisted of two operating and reportable segments, funeral and cemetery. For further discussion of the Company’s operating and reportable segments, see Note 24.
The correction of the Company’s operating segments had the related effect of requiring changes in the Company’s reporting units for purposes of goodwill impairment reviews under SFAS No. 142, retroactive to the November 1, 2001 adoption date of SFAS No. 142. The Company’s evaluation of goodwill should have been performed to include 13 reporting units as opposed to the two reporting units historically identified. For further discussion of the Company’s reporting units, see Note 3(h).
The restatement of the Company’s operating segments and reporting units resulted in the need to correct its goodwill impairment reviews as of November 1, 2001 (the date the Company adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. Consequently, the Company recorded a $209,400 ($193,090 after tax, or $1.78 per diluted share) charge on November 1, 2001 as a cumulative effect of change in accounting principle for the adoption of SFAS No. 142. The Company’s previously reported financial statements did not include a goodwill impairment charge upon the initial adoption of SFAS No. 142 on November 1, 2001 or during its annual assessment in the fourth quarter of fiscal year 2002. The Company also restated its previously reported fiscal year 2003 goodwill impairment charge of $73,000 ($66,900 after tax, or $.62 per share) because based on its revised reporting units, no goodwill impairment charge for the year ended October 31, 2003 was necessary.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (2) | Restatement—(Continued) |
Further, the restatement of goodwill on the Company’s balance sheet had the effect of changing the net book value of the assets the Company sold as part of the Company’s plan to sell a number of its businesses and the net book value of assets held for sale on the Company’s balance sheet. Due to these changes, the gain or loss on those sales has been corrected. In 2003, this resulted in an additional net gain of $2,170, representing a gain of $1,334 related to continuing operations as originally reported and a gain of $836 related to discontinued operations. In 2004, this resulted in an additional net gain of $579, representing a loss of $523 related to continuing operations as originally reported and a gain of $1,102 related to discontinued operations.
Deferred Revenue Project
In connection with the Company’s internal control assessment under Section 404 of Sarbanes-Oxley, it undertook a project (the “deferred revenue project”) in 2005 to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by reviewing substantially all of the preneed cemetery and funeral service and merchandise contracts included in its backlog. This process involved the review of nearly 700,000 preneed contracts. The deferred revenue project resulted in the Company’s assessment that the recorded amount of deferred revenue and revenue associated with cemetery merchandise contracts were misstated and therefore the Company needed to correct and restate its prior period financial statements for fiscal years 2001 through 2004, including the quarters therein, and the first three quarters of 2005. The Company also identified errors in the amounts of recorded realized trust earnings and deferred realized trust earnings for these periods and fiscal year 2000. Deferred realized trust earnings are included in deferred preneed funeral revenue and deferred preneed cemetery revenue prior to recognition as revenues. The adjustments impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2000 through 2004 and the first three quarters of 2005.
The errors to deferred preneed revenues discussed above also resulted in restatements to the amount of preneed selling costs recorded upon the adoption of SAB No. 101, and in subsequent years and also the charge for the 2005 cumulative effect of change in accounting principle related to preneed selling costs adopted effective November 1, 2004. See Note 28 for a discussion of the 2005 change in accounting principle related to preneed selling costs.
The overall impact of the deferred revenue project on net earnings and earnings per share for the first three quarters of 2005 and fiscal years 2004, 2003 and 2002 was a decrease in net earnings of $18,211 (including $11,862, or $.11 per share, related to the cumulative effect of change in accounting principle for preneed selling costs), $11,989, $13,191 and $19,230, respectively, and a decrease in earnings per share of $.16, $.11, $.12 and $.18, respectively. The 2005 amount reflects the adjustment to the previously reported unaudited results through July 31, 2005.
Other Adjustments
As previously disclosed in the Company’s Form 10-Q for the second quarter of fiscal year 2005, the Company reviewed its lease-related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1,839 ($1,149 after tax, or $.01 per share). The Company evaluated the materiality of these operating lease adjustments on its financial statements and concluded that the impact of these adjustments was not material. As a result, the Company recorded the cumulative effect of these prior period adjustments of $1,839 as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because the Company is amending its Form 10-K for the year ended October 31, 2004 for the restatements discussed above, the Company has recorded the lease adjustments in the periods they were actually incurred and removed the effect of the prior period adjustment of $1,839. The Company also recorded other miscellaneous immaterial adjustments.
A summary of the effects of the restatements described above on the Company’s financial statements for the years ended October 31, 2004, 2003 and 2002 and as of October 31, 2004 and 2003 is presented below.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (2) | Restatement—(Continued) |
| Effect of | ||||||||||||||||||||||||
| Effect of | restating to | As Restated | ||||||||||||||||||||||
| As Previously | restating to | correct for | As Restated | and | ||||||||||||||||||||
| Reported for | correct for | the impact | for the | Reclassified | ||||||||||||||||||||
| the Year | goodwill | of the | Year | for the Year | ||||||||||||||||||||
| Ended | reporting | deferred | Ended | Ended | ||||||||||||||||||||
| October 31, | unit | revenue | Other | October 31, | October 31, | |||||||||||||||||||
| Consolidated Statements of Earnings: | 2004(1) | errors | project | adjustments(2) | 2004 | 2004(3) | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Funeral | $ | 280,045 | $ | — | $ | (8,826 | ) | $ | — | $ | 271,219 | $ | 271,239 | |||||||||||
| Cemetery | 236,837 | — | (12,867 | ) | — | 223,970 | 222,827 | |||||||||||||||||
| 516,882 | — | (21,693 | ) | — | 495,189 | 494,066 | ||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Funeral | 201,795 | — | — | 463 | 202,258 | 202,498 | ||||||||||||||||||
| Cemetery | 180,304 | — | (3,048 | ) | — | 177,256 | 176,556 | |||||||||||||||||
| 382,099 | — | (3,048 | ) | 463 | 379,514 | 379,054 | ||||||||||||||||||
| Gross profit | 134,783 | — | (18,645 | ) | (463 | ) | 115,675 | 115,012 | ||||||||||||||||
| Corporate general and administrative expenses | (17,097 | ) | — | — | — | (17,097 | ) | (17,097 | ) | |||||||||||||||
| Separation charges | (3,435 | ) | — | — | — | (3,435 | ) | (3,435 | ) | |||||||||||||||
| Gains on dispositions and impairment (losses), net | 564 | (523 | ) | — | (300 | ) | (259 | ) | (204 | ) | ||||||||||||||
| Other operating income, net | 2,122 | — | — | — | 2,122 | 2,112 | ||||||||||||||||||
| Operating earnings | 116,937 | (523 | ) | (18,645 | ) | (763 | ) | 97,006 | 96,388 | |||||||||||||||
| Interest expense | (47,335 | ) | — | — | — | (47,335 | ) | (47,335 | ) | |||||||||||||||
| Investment and other income (expense), net | (922 | ) | — | — | 1,100 | 178 | 178 | |||||||||||||||||
| Earnings from continuing operations before income taxes | 68,680 | (523 | ) | (18,645 | ) | 337 | 49,849 | 49,231 | ||||||||||||||||
| Income taxes | 25,195 | (202 | ) | (6,656 | ) | 128 | 18,465 | 18,209 | ||||||||||||||||
| Earnings from continuing operations | 43,485 | (321 | ) | (11,989 | ) | 209 | 31,384 | 31,022 | ||||||||||||||||
| Earnings from discontinued operations before income taxes | 2,114 | 1,102 | — | — | 3,216 | 3,834 | ||||||||||||||||||
| Income tax benefit | (563 | ) | (1,529 | ) | — | — | (2,092 | ) | (1,836 | ) | ||||||||||||||
| Earnings from discontinued operations | 2,677 | 2,631 | — | — | 5,308 | 5,670 | ||||||||||||||||||
| Net earnings | $ | 46,162 | $ | 2,310 | $ | (11,989 | ) | $ | 209 | $ | 36,692 | $ | 36,692 | |||||||||||
| Basic earnings per common share: | ||||||||||||||||||||||||
| Earnings from continuing operations | $ | .40 | $ | — | $ | (.11 | ) | $ | — | $ | .29 | $ | .29 | |||||||||||
| Earnings from discontinued operations | .03 | .02 | — | — | .05 | .05 | ||||||||||||||||||
| Net earnings per share | $ | .43 | $ | .02 | $ | (.11 | ) | $ | — | $ | .34 | $ | .34 | |||||||||||
| Diluted earnings per common share: | ||||||||||||||||||||||||
| Earnings from continuing operations | $ | .40 | $ | — | $ | (.11 | ) | $ | — | $ | .29 | $ | .29 | |||||||||||
| Earnings from discontinued operations | .03 | .02 | — | — | .05 | .05 | ||||||||||||||||||
| Net earnings per share | $ | .43 | $ | .02 | $ | (.11 | ) | $ | — | $ | .34 | $ | .34 | |||||||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | ||
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | ||
| (3) | Represents the October 2005 classification of continuing and discontinued operations. |
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (2) | Restatement—(Continued) |
| Effect of | ||||||||||||||||||||||||
| Effect of | restating to | As Restated | ||||||||||||||||||||||
| As Previously | restating to | correct for | As Restated | and | ||||||||||||||||||||
| Reported for | correct for | the impact | for the | Reclassified | ||||||||||||||||||||
| the Year | goodwill | of the | Year | for the Year | ||||||||||||||||||||
| Ended | reporting | deferred | Ended | Ended | ||||||||||||||||||||
| October 31, | unit | revenue | Other | October 31, | October 31, | |||||||||||||||||||
| Consolidated Statements of Earnings: | 2003(1) | errors | project | adjustments(2) | 2003 | 2003(3) | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Funeral | $ | 280,329 | $ | — | $ | (11,129 | ) | $ | — | $ | 269,200 | $ | 269,109 | |||||||||||
| Cemetery | 223,384 | — | (13,410 | ) | 300 | 210,274 | 209,374 | |||||||||||||||||
| 503,713 | — | (24,539 | ) | 300 | 479,474 | 478,483 | ||||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Funeral | 210,235 | — | — | (250 | ) | 209,985 | 210,289 | |||||||||||||||||
| Cemetery | 173,678 | — | (3,155 | ) | (131 | ) | 170,392 | 169,551 | ||||||||||||||||
| 383,913 | — | (3,155 | ) | (381 | ) | 380,377 | 379,840 | |||||||||||||||||
| Gross profit | 119,800 | — | (21,384 | ) | 681 | 99,097 | 98,643 | |||||||||||||||||
| Corporate general and administrative expenses | (17,733 | ) | — | — | — | (17,733 | ) | (17,733 | ) | |||||||||||||||
| Impairment of goodwill | (73,000 | ) | 73,000 | — | — | — | — | |||||||||||||||||
| Separation charges | (2,450 | ) | — | — | — | (2,450 | ) | (2,450 | ) | |||||||||||||||
| Gains on dispositions and impairment (losses), net | (18,972 | ) | 1,334 | — | 300 | (17,338 | ) | (10,206 | ) | |||||||||||||||
| Other operating income, net | 2,093 | — | — | — | 2,093 | 2,083 | ||||||||||||||||||
| Operating earnings | 9,738 | 74,334 | (21,384 | ) | 981 | 63,669 | 70,337 | |||||||||||||||||
| Interest expense | (53,478 | ) | — | — | (165 | ) | (53,643 | ) | (53,643 | ) | ||||||||||||||
| Loss on early extinguishment of debt | (11,289 | ) | — | — | — | (11,289 | ) | (11,289 | ) | |||||||||||||||
| Investment and other income (expense), net | 545 | — | — | (1,294 | ) | (749 | ) | (749 | ) | |||||||||||||||
| Earnings (loss) from continuing operations before income taxes | (54,484 | ) | 74,334 | (21,384 | ) | (478 | ) | (2,012 | ) | 4,656 | ||||||||||||||
| Income taxes | 5,256 | 6,247 | (8,193 | ) | (182 | ) | 3,128 | 3,591 | ||||||||||||||||
| Earnings (loss) from continuing operations | (59,740 | ) | 68,087 | (13,191 | ) | (296 | ) | (5,140 | ) | 1,065 | ||||||||||||||
| Loss from discontinued operations before income taxes | (14,986 | ) | 836 | — | — | (14,150 | ) | (20,818 | ) | |||||||||||||||
| Income tax benefit | (1,258 | ) | — | — | — | (1,258 | ) | (1,721 | ) | |||||||||||||||
| Loss from discontinued operations | (13,728 | ) | 836 | — | — | (12,892 | ) | (19,097 | ) | |||||||||||||||
| Net loss | $ | (73,468 | ) | $ | 68,923 | $ | (13,191 | ) | $ | (296 | ) | $ | (18,032 | ) | $ | (18,032 | ) | |||||||
| Basic earnings (loss) per common share: | ||||||||||||||||||||||||
| Earnings (loss) from continuing operations | $ | (.55 | ) | $ | .63 | $ | (.12 | ) | $ | (.01 | ) | $ | (.05 | ) | $ | .01 | ||||||||
| Loss from discontinued operations | (.13 | ) | .01 | — | — | (.12 | ) | (.18 | ) | |||||||||||||||
| Net loss per share | $ | (.68 | ) | $ | .64 | $ | (.12 | ) | $ | (.01 | ) | $ | (.17 | ) | $ | (.17 | ) | |||||||
| Diluted earnings (loss) per common share: | ||||||||||||||||||||||||
| Earnings (loss) from continuing operations | $ | (.55 | ) | $ | .63 | $ | (.12 | ) | $ | (.01 | ) | $ | (.05 | ) | $ | .01 | ||||||||
| Loss from discontinued operations | (.13 | ) | .01 | — | — | (.12 | ) | (.18 | ) | |||||||||||||||
| Net loss per share | $ | (.68 | ) | $ | .64 | $ | (.12 | ) | $ | (.01 | ) | $ | (.17 | ) | $ | (.17 | ) | |||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | ||
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | ||
| (3) | Represents the October 2005 classification of continuing and discontinued operations. |
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (2) | Restatement—(Continued) |
| Effect of | ||||||||||||||||||||||||
| Effect of | restating to | As Restated | ||||||||||||||||||||||
| As Previously | restating to | correct for | As Restated | and | ||||||||||||||||||||
| Reported for | correct for | the impact | for the | Reclassified | ||||||||||||||||||||
| the Year | goodwill | of the | Year | for the Year | ||||||||||||||||||||
| Consolidated Statements of Earnings: | Ended | reporting | deferred | Ended | Ended | |||||||||||||||||||
| (Dollars in thousands, except per | October 31, | unit | revenue | Other | October 31, | October 31, | ||||||||||||||||||
| share amounts) | 2002(1) | errors | project | adjustments(2) | 2002 | 2002(3) | ||||||||||||||||||
| Revenues: | ||||||||||||||||||||||||
| Funeral | $ | 325,240 | $ | — | $ | (13,925 | ) | $ | — | $ | 311,315 | $ | 311,301 | |||||||||||
| Cemetery | 235,908 | — | (20,073 | ) | (143 | ) | 215,692 | 214,989 | ||||||||||||||||
| 561,148 | — | (33,998 | ) | (143 | ) | 527,007 | 526,290 | |||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||||||
| Funeral | 238,827 | — | — | 911 | 239,738 | 239,724 | ||||||||||||||||||
| Cemetery | 179,324 | — | (4,733 | ) | 631 | 175,222 | 174,529 | |||||||||||||||||
| 418,151 | — | (4,733 | ) | 1,542 | 414,960 | 414,253 | ||||||||||||||||||
| Gross profit | 142,997 | — | (29,265 | ) | (1,685 | ) | 112,047 | 112,037 | ||||||||||||||||
| Corporate general and administrative expense | (17,261 | ) | — | — | — | (17,261 | ) | (17,261 | ) | |||||||||||||||
| Gains on dispositions and impairment (losses), net | (18,500 | ) | — | — | — | (18,500 | ) | (18,500 | ) | |||||||||||||||
| Other operating income, net | 2,544 | — | — | — | 2,544 | 2,535 | ||||||||||||||||||
| Operating earnings | 109,780 | — | (29,265 | ) | (1,685 | ) | 78,830 | 78,811 | ||||||||||||||||
| Interest expense | (62,339 | ) | — | — | 359 | (61,980 | ) | (61,980 | ) | |||||||||||||||
| Investment and other income (expense), net | 20 | — | — | 774 | 794 | 794 | ||||||||||||||||||
| Earnings from continuing operations before income taxes | 47,461 | — | (29,265 | ) | (552 | ) | 17,644 | 17,625 | ||||||||||||||||
| Income taxes | 16,776 | — | (10,035 | ) | (209 | ) | 6,532 | 6,524 | ||||||||||||||||
| Earnings from continuing operations | 30,685 | — | (19,230 | ) | (343 | ) | 11,112 | 11,101 | ||||||||||||||||
| Earnings from discontinued operations before income taxes | 1,860 | — | — | — | 1,860 | 1,879 | ||||||||||||||||||
| Income taxes | 679 | — | — | — | 679 | 687 | ||||||||||||||||||
| Earnings from discontinued operations | 1,181 | — | — | — | 1,181 | 1,192 | ||||||||||||||||||
| Earnings before cumulative effect of change in accounting principle | 31,866 | — | (19,230 | ) | (343 | ) | 12,293 | 12,293 | ||||||||||||||||
| Cumulative effect of change in accounting principle | — | (193,090 | ) | — | — | (193,090 | ) | (193,090 | ) | |||||||||||||||
| Net earnings (loss) | $ | 31,866 | $ | (193,090 | ) | $ | (19,230 | ) | $ | (343 | ) | $ | (180,797 | ) | $ | (180,797 | ) | |||||||
| Basic earnings (loss) per common share: | ||||||||||||||||||||||||
| Earnings from continuing operations | $ | .29 | $ | — | $ | (.18 | ) | $ | (.01 | ) | $ | .10 | $ | .10 | ||||||||||
| Earnings from discontinued operations | .01 | — | — | — | .01 | .01 | ||||||||||||||||||
| Cumulative effect of change in accounting principle | — | (1.79 | ) | — | — | (1.79 | ) | (1.79 | ) | |||||||||||||||
| Net earnings (loss) per share | $ | .30 | (1.79 | ) | $ | (.18 | ) | $ | (.01 | ) | $ | (1.68 | ) | $ | (1.68 | ) | ||||||||
| Diluted earnings (loss) per common share: | ||||||||||||||||||||||||
| Earnings from continuing operations | $ | .28 | $ | — | $ | (.18 | ) | $ | — | $ | .10 | $ | .10 | |||||||||||
| Earnings from discontinued operations | .01 | — | — | — | .01 | .01 | ||||||||||||||||||
| Cumulative effect of change in accounting principle | — | (1.78 | ) | — | $ | — | (1.78 | ) | (1.78 | ) | ||||||||||||||
| Net earnings (loss) per share | $ | .29 | $ | (1.78 | ) | $ | (.18 | ) | $ | — | $ | (1.67 | ) | $ | (1.67 | ) | ||||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | ||
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | ||
| (3) | Represents the October 2005 classification of continuing and discontinued operations. |
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (2) | Restatement—(Continued) |
| Effect of | ||||||||||||||||||||||||
| Effect of | restating to | |||||||||||||||||||||||
| restating to | correct for | |||||||||||||||||||||||
| As Previously | correct for | the impact of | As Restated and | |||||||||||||||||||||
| Reported | goodwill | the deferred | As Restated | Reclassified | ||||||||||||||||||||
| October 31, | reporting | revenue | Other | October 31, | October 31, | |||||||||||||||||||
| Consolidated Balance Sheets: | 2004(1) | unit errors | project | adjustments(2) | 2004 | 2004(3) | ||||||||||||||||||
| Assets held for sale | $ | 3,590 | $ | (15 | ) | $ | — | $ | — | $ | 3,575 | $ | 10,493 | |||||||||||
| Total current assets | 134,491 | (15 | ) | 8,966 | (1,597 | ) | 141,845 | 149,238 | ||||||||||||||||
| Deferred income taxes | 43,124 | 11,794 | 37,593 | �� | 481 | 92,992 | 93,014 | |||||||||||||||||
| Goodwill | 404,169 | (131,400 | ) | 2,980 | (2,976 | ) | 272,773 | 272,729 | ||||||||||||||||
| Total assets | 2,565,198 | (121,857 | ) | 69,226 | (1,081 | ) | 2,511,486 | 2,511,508 | ||||||||||||||||
| Liabilities associated with assets held for sale | 2,388 | — | — | — | 2,388 | 6,491 | ||||||||||||||||||
| Total current liabilities | 71,781 | — | 790 | 5,176 | 77,747 | 81,850 | ||||||||||||||||||
| Deferred preneed funeral revenue | 156,164 | — | 145,161 | (2,653 | ) | 298,672 | 297,328 | |||||||||||||||||
| Deferred preneed cemetery revenue | 288,516 | — | (5,278 | ) | (1,963 | ) | 281,275 | 280,570 | ||||||||||||||||
| Retained earnings (accumulated deficit) | 3,298 | (121,857 | ) | (71,447 | ) | (2,976 | ) | (192,982 | ) | (192,982 | ) | |||||||||||||
| Total shareholders’ equity | 784,258 | (121,857 | ) | (71,447 | ) | (2,976 | ) | 587,978 | 587,978 | |||||||||||||||
| Total liabilities and shareholders’ equity | 2,565,198 | (121,857 | ) | 69,226 | (1,081 | ) | 2,511,486 | 2,511,508 | ||||||||||||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | ||
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | ||
| (3) | Represents the October 2005 classification of continuing and discontinued operations. See Note 3(s) for further discussion. |
| Effect of | ||||||||||||||||||||||||
| Effect of | restating to | |||||||||||||||||||||||
| restating to | correct for | |||||||||||||||||||||||
| As Previously | correct for | the impact of | As Restated and | |||||||||||||||||||||
| Reported | goodwill | the deferred | As Restated | Reclassified | ||||||||||||||||||||
| October 31, | reporting | revenue | Other | October 31, | October 31, | |||||||||||||||||||
| Consolidated Balance Sheets: | 2003(1) | unit errors | project | adjustments(2) | 2003 | 2003(3) | ||||||||||||||||||
| Assets held for sale | $ | 40,296 | $ | (634 | ) | $ | — | $ | — | $ | 39,662 | $ | 41,416 | |||||||||||
| Total current assets | 207,856 | (634 | ) | 6,372 | (2,636 | ) | 210,958 | 214,182 | ||||||||||||||||
| Deferred income taxes | 60,218 | 10,063 | 33,531 | 700 | 104,512 | 104,160 | ||||||||||||||||||
| Goodwill | 404,482 | (131,576 | ) | 2,979 | (2,822 | ) | 273,063 | 272,950 | ||||||||||||||||
| Total assets | 2,573,175 | (124,167 | ) | 59,522 | 3,820 | 2,512,350 | 2,511,998 | |||||||||||||||||
| Liabilities associated with assets held for sale | 22,132 | — | — | — | 22,132 | 23,088 | ||||||||||||||||||
| Total current liabilities | 100,650 | — | 790 | 5,085 | 106,525 | 107,481 | ||||||||||||||||||
| Prearranged deferred revenue, net | 1,230,377 | — | 118,190 | 66 | 1,348,633 | 1,347,325 | ||||||||||||||||||
| Accumulated deficit | (42,864 | ) | (124,167 | ) | (59,458 | ) | (3,185 | ) | (229,674 | ) | (229,674 | ) | ||||||||||||
| Total shareholders’ equity | 738,859 | (124,167 | ) | (59,458 | ) | (2,503 | ) | 552,731 | 552,731 | |||||||||||||||
| Total liabilities and shareholders’ equity | 2,573,175 | (124,167 | ) | 59,522 | 3,820 | 2,512,350 | 2,511,998 | |||||||||||||||||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | ||
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. | ||
| (3) | Represents the October 2005 classification of continuing and discontinued operations. See Note 3(s) for further discussion. |
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (2) | Restatement—(Continued) |
| Consolidated Balance Sheet | 2001 | |||
Shareholders’ equity as previously reported(1) | $ | 752,060 | ||
| Effect of restatements due to deferred revenue project | (27,035 | ) | ||
Effect of other adjustments(2) | (2,548 | ) | ||
| Total shareholders’ equity | $ | 722,477 | ||
| (1) | The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K. | ||
| (2) | Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments. |
| (3) | Summary of Significant Accounting Policies |
| (a) | Principles of Consolidation |
The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. See Note 16 for a discussion of discontinued operations, assets held for sale and liabilities associated with assets held for sale.
| (b) | Use of Estimates |
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates and these differences could be material.
| (c) | Fair Value of Financial Instruments |
Estimated fair value amounts have been determined using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts the Company could realize in a current market. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents and current receivables approximate fair value due to the short-term nature of these instruments. The carrying amount of receivables due beyond one year approximates fair value because they bear interest at rates currently offered by the Company for receivables with similar terms and maturities. The carrying amounts of marketable securities and marketable securities included in preneed funeral trust investments, preneed cemetery trust investments and cemetery perpetual care trust investments are stated at fair value as they are classified as available for sale under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The fair value of the Company’s long-term variable- and fixed-rate debt is estimated using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements as discussed in Note 18.
Any investment with a fair market value that has been less than its cost basis by 20 percent or greater for more than six months as of the respective balance sheet reporting date is considered to be other than temporarily impaired. The Company periodically reviews its investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily impaired. This evaluation includes determining if the Company has the ability and intent to hold these investments for its forecasted recovery period and determining if there have been any changes in market conditions or concerns specific to the issuer of the securities. Otherwise, an investment with a fair market value that is less than its cost basis is considered to be temporarily impaired. This evaluation of impairment with respect to the Company’s trust portfolio is performed each quarter using quoted market prices. If a
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (3) | Summary of Significant Accounting Policies—(Continued) |
loss is other than temporary, the cost basis of the security is adjusted downward to its market value. This affects the Company’s footnote disclosure, but does not otherwise have an effect on the financial statements, since the trust portfolio amount as reported in the consolidated balance sheet is already marked to market value each quarter.
| (d) | Prearranged Trust Receivable |
The Company adopted FIN 46R effective April 30, 2004, as described in Note 4(a). The following discussion describes the Company’s accounting prior to the adoption of FIN 46R. The Company evaluated the collectibility of the prearranged trust receivable for impairment when the fair market value of the trust assets was below the recorded prearranged receivable balance. A prearranged trust receivable was deemed to be impaired when, based on current information and events, it was probable that the Company would be unable to collect all amounts from the trust at the time the receivables were due. In those instances that a receivable was deemed to be impaired, a valuation allowance was provided on the trust receivable to reduce it to the currently estimated recoverable amount with a corresponding reduction to the associated deferred revenue balance. There was no income statement impact as long as the deferred revenue was not below the estimated costs to deliver the underlying products or services. If the deferred revenue was below the estimated cost to deliver the underlying products or services, the Company would record a charge to earnings. The valuation allowance as of October 31, 2003 was $4,500.
| (e) | Inventories |
Inventories are stated at the lower of cost (specific identification and first-in, first-out methods) or net realizable value. The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. Such estimates are based on the Company’s historical experience or results.
| (f) | Depreciation and Amortization |
Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 10 to 40 years and from 3 to 10 years, respectively, primarily using the straight-line method. For the fiscal years ended October 31, 2004, 2003 and 2002, depreciation expense totaled $23,469, $25,274 and $26,276, respectively.
The direct selling costs that relate to the Company’s preneed funeral and cemetery merchandise and services contracts are included in deferred charges until the underlying products and services are delivered. When the underlying products and services are delivered and recognized as revenue, the associated direct selling costs are amortized in expense in the consolidated statement of earnings and included in depreciation and amortization in the consolidated statement of cash flows. For the fiscal years ended October 31, 2004, 2003 and 2002, the amortization of deferred charges totaled $24,952, $23,932, and $23,818, respectively. See Note 28 for a discussion of the 2005 change in accounting principle related to preneed selling costs.
| (g) | Long-lived Assets |
The Company reviews for continued appropriateness the carrying value of its long-lived assets whenever events and circumstances indicate a potential impairment. This review is based on its projections of anticipated undiscounted future cash flows. If indicators of impairment were present, the Company would evaluate the undiscounted future cash flows estimated to be generated by those assets compared to the carrying amount of those assets. The net carrying value of assets not recoverable would be reduced to fair value. While the Company believes that its estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and comparable sales values could materially affect its evaluations.
| (h) | Goodwill (Restated) |
The Company’s historical evaluation of goodwill was performed at the funeral and cemetery segment levels, which the Company previously reported as its reporting units. As discussed in Note 2, the Company’s evaluation of
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (3) | Summary of Significant Accounting Policies—(Continued) |
the goodwill of its operations will now consist of 13 reporting units. Those reporting units include nine reporting units that are consistent with nine of the Company’s 11 operating and reportable segments and an additional four reporting units which are a further breakdown of its two operating and reportable segments in its Western division. These reporting units include the Archdiocese of Los Angeles Funeral operations, Southern Regional Cemetery operations, Other Cemetery operations and Other Funeral operations.
The revision of the Company’s operating segments and reporting units resulted in the need to perform goodwill impairment reviews of the revised reporting units as of November 1, 2001 (the date the Company adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. Consequently, the Company recorded a $209,400 ($193,090 after tax, or $1.78 per diluted share) charge for the year ended October 31, 2002, which is reflected as a cumulative effect of change in accounting principle for the adoption of SFAS No. 142. The cumulative effect of $209,400 is comprised of the following: $71,831 related to the Other Funeral operations reporting unit of the Western division, $42,666 related to the Southern Regional Cemetery operations reporting unit of the Western division, $1,259 related to the Other Cemetery operations reporting unit of the Western division, $47,516 related to the Eastern division funeral reporting unit, $35,222 related to the Southern division — Florida cemetery reporting unit and $10,906 related to the All Other cemetery reporting unit. The Company’s previously reported financial statements did not include a goodwill impairment charge upon the initial adoption of SFAS No. 142 on November 1, 2001 or during its annual assessment in the fourth quarter of fiscal year 2002. The Company also restated its previously reported fiscal year 2003 goodwill impairment charge of $73,000 ($66,900 after tax, or $.62 per share) to reflect its revised reporting units which resulted in no goodwill impairment charge for the year ended October 31, 2003. The Company’s annual goodwill assessment for the year end October 31, 2004, applying the revised reporting units, resulted in no goodwill impairment charge for fiscal year 2004. This was consistent with the previous reporting for fiscal year 2004.
The goodwill impairment charges related to the Eastern division funeral reporting unit and the Other Funeral operations reporting unit of the Western division were primarily the result of a reduction of the projected financial results used in the valuation of these reporting units compared to those used during the acquisition process including a decline in number of families served and a change in accounting for preneed funeral merchandise sales and trust earnings that was not contemplated at the time of acquisition. The lower valuation was also affected by the decline in the economy generally, as well as the decline in industry-specific market values.
The goodwill impairment charges related to the Southern Regional Cemetery operations reporting unit of the Western division, the Other Cemetery operations reporting unit of the Western division, the Southern division — Florida cemetery reporting unit and the All Other division cemetery reporting unit were primarily the result of a reduction of the projected financial results used in the valuation of these reporting units compared to those used during the acquisition process, primarily as a result of a change in accounting for preneed cemetery merchandise and service sales and trust earnings that was not contemplated at the time of acquisition. The Company also made changes in its preneed sales effort in 2000 which resulted in a reduction in preneed property sales that were not contemplated at the date of acquisition. In fiscal year 2000 the Company adjusted terms and conditions of preneed contracts including increasing average finance charges, shortening contract lengths and requiring larger down payments to improve cash flow and the quality of receivables. The Company implemented a new standardized compensation structure, which reemphasized the Company’s focus on property sales and thereby enhanced new customer growth. This new structure was intended to enhance profitability by aligning commissions with the profit on each sale. The Company also significantly reduced the commissions paid on preneed cemetery services and preneed funeral merchandise sales. These changes considerably reduced preneed sales overall, including preneed cemetery property sales. The lower valuation was also affected by the decline in the economy generally, as well as the decline in industry-specific market values.
The Company’s goodwill impairment test involves estimates and management judgment and was performed using a discounted cash flow valuation methodology. Step two of the impairment test involves determining estimates of fair values of the Company’s assets and liabilities. The Company may obtain assistance from third parties in assessing the fair value of certain of its assets, primarily real estate, in performing the step two analysis.
Goodwill of a reporting unit must be tested for impairment on at least an annual basis. The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, the
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (3) | Summary of Significant Accounting Policies—(Continued) |
Company assesses the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of the Company’s assets or the strategy for its overall business and significant negative industry or economic trends.
In reviewing goodwill for impairment, the Company first compares the fair value of each of its reporting units with its carrying amount (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, the Company then measures the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value.
Restated goodwill in excess of net assets of companies acquired, totaled approximately $272,729 and $272,950 as of October 31, 2004 and 2003, respectively. Accumulated amortization in goodwill was $62,767 and $62,767 as of October 31, 2004 and 2003. Goodwill and changes in goodwill by operating segment from October 31, 2002 to October 31, 2003 and from October 31, 2003 to October 31, 2004 are presented below.
| Goodwill | Changes due to | Goodwill at | ||||||||||
| October 31, | assets | October 31, 2003-Restated | ||||||||||
| 2002-Restated (Note 2) | held for sale | (Note 2) | ||||||||||
| Central Division — Funeral | $ | 117,726 | $ | (734 | ) | $ | 116,992 | |||||
| Western Division — Funeral | — | — | — | |||||||||
| Eastern Division — Funeral | 20,000 | (2,086 | ) | 17,914 | ||||||||
| Southern Division Florida — Funeral | 48,533 | (2,644 | ) | 45,889 | ||||||||
All Other-Funeral(1) | 19,954 | (2,825 | ) | 17,129 | ||||||||
| Total Funeral Goodwill | $ | 206,213 | $ | (8,289 | ) | $ | 197,924 | |||||
| Central Division — Cemetery | $ | 49,846 | $ | (59 | ) | $ | 49,787 | |||||
| Western Division — Cemetery | — | — | — | |||||||||
| Eastern Division — Cemetery | 25,557 | (318 | ) | 25,239 | ||||||||
| Southern Division Florida — Cemetery | — | — | — | |||||||||
All Other-Cemetery(1) | — | — | — | |||||||||
| Total Cemetery Goodwill | $ | 75,403 | $ | (377 | ) | $ | 75,026 | |||||
| Total Goodwill | $ | 281,616 | $ | (8,666 | ) | $ | 272,950 | |||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (3) | Summary of Significant Accounting Policies—(Continued) |
| Goodwill | Goodwill at | |||||||||||
| October 31, | Reclass to assets | October 31, 2004-Restated | ||||||||||
| 2003-Restated (Note 2) | held for sale | (Note 2) | ||||||||||
| Central Division — Funeral | $ | 116,992 | $ | (111 | ) | $ | 116,881 | |||||
| Western Division — Funeral | — | — | — | |||||||||
| Eastern Division — Funeral | 17,914 | (862 | ) | 17,052 | ||||||||
| Southern Division Florida — Funeral | 45,889 | 310 | 46,199 | |||||||||
All Other-Funeral(1) | 17,129 | 442 | 17,571 | |||||||||
| Total Funeral Goodwill | $ | 197,924 | $ | (221 | ) | $ | 197,703 | |||||
| Central Division — Cemetery | $ | 49,787 | $ | — | $ | 49,787 | ||||||
| Western Division — Cemetery | — | — | — | |||||||||
| Eastern Division — Cemetery | 25,239 | — | 25,239 | |||||||||
| Southern Division Florida — Cemetery | — | — | — | |||||||||
All Other-Cemetery(1) | — | — | — | |||||||||
| Total Cemetery Goodwill | $ | 75,026 | $ | — | $ | 75,026 | ||||||
| Total Goodwill | $ | 272,950 | $ | (221 | ) | $ | 272,729 | |||||
| (1) All other includes the Company’s operations in Puerto Rico. |
| (i) | Foreign Currency Translation |
In accordance with SFAS No. 52, “Foreign Currency Translation,” all revenues and expenses of the Company’s foreign subsidiaries were translated at average exchange rates prevailing during the period. The resulting translation adjustments were reflected in a separate component of shareholders’ equity. As discussed in Note 16, at the time of sale the Company realized comprehensive income and an increase to shareholders’ equity for the cumulative foreign currency translation adjustments related to the sale of the Company’s operations in Mexico, Australia, New Zealand, Belgium and the Netherlands in 2001 and Spain, Portugal, France, Canada and Argentina in 2002.
In the first quarter of 2002, the Company recorded a $6,215 cumulative foreign translation adjustment related to its operations in Argentina. In previous years, the Argentine peso was valued at a one-to-one ratio with the U.S. dollar, and no foreign currency translation adjustment related to the Company’s operations in Argentina was necessary. Due to the depressed economic conditions existing in Argentina, the Argentine peso had significantly devalued, which necessitated the need for an adjustment.
| (j) | Stock-Based Compensation (Restated) |
At October 31, 2004, the Company had five stock-based employee compensation plans, which are described in more detail in Note 22. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123.” No compensation cost related to stock options is reflected in net earnings, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. The expense related to the restricted stock granted in fiscal year 2004 is reflected in earnings and amounted to $650 for the year ended October 31, 2004. See Note 3(o) for further discussion on the Company’s restricted stock. The FASB issued SFAS No. 123R in December 2004, which is effective for the Company in the first quarter of fiscal year 2006. The Company is evaluating the impact of its adoption of its adoption on its financial statements. See Note 4 for additional information. The following table illustrates the effect on net earnings (loss) and net earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Summary of Significant Accounting Policies—(Continued)
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Net earnings (loss) | $ | 36,692 | $ | (18,032 | ) | $ | (180,797 | ) | ||||
| Stock-based employee compensation expense included in reported net earnings, net of tax | 403 | — | — | |||||||||
| Stock-based employee compensation expense determined under fair value-based method, net of tax | (1,870 | ) | (2,932 | ) | (4,527 | ) | ||||||
| Pro forma net earnings (loss) | $ | 35,225 | $ | (20,964 | ) | $ | (185,324 | ) | ||||
| Net earnings (loss) per common share: | ||||||||||||
| Basic — as reported | $ | .34 | $ | (.17 | ) | $ | (1.68 | ) | ||||
| Basic — pro forma | $ | .33 | $ | (.19 | ) | $ | (1.72 | ) | ||||
| Diluted — as reported | $ | .34 | $ | (.17 | ) | $ | (1.67 | ) | ||||
| Diluted — pro forma | $ | .33 | $ | (.19 | ) | $ | (1.71 | ) | ||||
(k) Funeral Revenue
The Company sells price-guaranteed prearranged funeral services and merchandise under contracts that provide for delivery of the services and merchandise at the time of death. Prearranged funeral services are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral merchandise is recognized as revenue upon delivery. Prior to performing the funeral or delivering of the merchandise, such sales are deferred.
Commissions and other direct costs that vary with and are primarily related to the acquisition of new prearranged funeral service sales and prearranged funeral merchandise sales are deferred and amortized as the contracts are delivered in accordance with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” Indirect costs of marketing prearranged funeral services are expensed in the period in which incurred. See Note 28 for a discussion of the 2005 change in accounting principle related to preneed selling costs.
Prearranged funeral services and merchandise generally are funded either through trust or escrow accounts established by the Company or through third-party insurance companies. Principal amounts deposited in the trust or escrow accounts generally range from 70 percent to 90 percent of each installment received. The sale of caskets is treated in some jurisdictions in the same manner as the sale of cemetery merchandise and in some jurisdictions as the sale of funeral services for trusting purposes. Amounts deposited are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser’s option to cancel the contract. Certain jurisdictions provide for non-refundable trust or escrow accounts where the Company receives such amounts upon cancellation by the customer. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts until the underlying service or merchandise is delivered.
Earnings are withdrawn from trust or escrow accounts only as funeral services and merchandise are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Even so, such withdrawn earnings are not recognized as revenue until the related funeral services are performed or merchandise delivered.
When prearranged funeral services and merchandise are funded through insurance policies purchased by customers from third-party insurance companies, the Company earns a commission if it acts as agent on the sale of the policies. Customer payments of premiums on the insurance policies are sent directly to the insurance company, and the insurance premium receivables and related customer payments are not recorded on the Company’s financial statements. Insurance commissions are recognized as revenue at the point at which the commission is no longer subject to refund. The costs related to the commissions are expensed at the same time. Nothing more is recorded
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Summary of Significant Accounting Policies—(Continued)
until the contracted service or merchandise is delivered. At that time, the face amount of the contract and the build-up in the face value of the contract (i.e., the policy proceeds) are recorded as funeral revenue, and the related expenses are recorded. A receivable from the insurance company for the policy proceeds is recorded as a funeral receivable.
Funeral services and merchandise sold at the time of need are recorded as funeral revenue in the period the funeral is performed or the merchandise is delivered.
(l) Cemetery Revenue
The Company sells preneed cemetery merchandise and services under contracts that provide for delivery of the merchandise and services at the time of need. Preneed cemetery merchandise and service sales are recorded as cemetery revenue in the period the merchandise is delivered or service is performed.
Commissions and other direct costs that vary with and are primarily related to the acquisition of new prearranged cemetery service sales and prearranged cemetery merchandise sales are deferred and amortized as the contracts are delivered in accordance with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” Indirect costs of marketing prearranged cemetery merchandise and services are expensed in the period in which incurred. See Note 28 for a discussion of the 2005 change in accounting principle related to preneed selling costs.
In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of preneed cemetery merchandise and services be placed in trust or escrow accounts. With respect to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30 percent to 50 percent of each installment received. With respect to the preneed sale of cemetery services, the Company is generally required to place in trust 70 percent to 90 percent of each installment received. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed cemetery merchandise and services trust or escrow accounts until the underlying merchandise or service is delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Withdrawals from preneed funeral and cemetery merchandise and service trusts are made when state laws allow the Company to withdraw such funds. Based on various state statutes, the Company is sometimes allowed to withdraw a portion of the trust assets prior to the service or merchandise being delivered. Although the Company is allowed to withdraw cash prior to the delivery, the Company defers the revenue associated with such early withdrawals until the underlying contracts are delivered.
For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sale price has been collected. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs. The Company measures the percentage of completion by taking the costs incurred to date and dividing that number by the total projected cost of the project.
Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from these trusts, which have been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are received, the Company generally funds the perpetual care trust in the same proportion as the payment bears to the contract amount. For example, if the Company receives 20 percent of the contract price, it places in trust 20 percent of the total amount to be placed in trust for that contract. The Company currently recognizes and withdraws all dividend and interest income earned and, where permitted, capital gains realized by cemetery perpetual care funds. Earnings from perpetual care trust funds are recognized as cemetery revenue when the earnings are distributable from the trusts based on state laws. Investment earnings are considered realized in the perpetual care trusts when dividends are received on common stocks, when investment income is received on fixed income securities and when capital gains and losses are realized through sale of securities.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Summary of Significant Accounting Policies—(Continued)
Some of the Company’s sales of cemetery property and merchandise are made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables.
(m) Allowance for Doubtful Accounts
The Company establishes a reserve based on a range of percentages applied to accounts receivable aging categories. These percentages are based on historical collection and write-off experience.
(n) Income Taxes
Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Management provides a valuation allowance against the deferred tax asset for amounts which are not considered more likely than not to be realized. The valuation allowance is attributed primarily to capital losses and tax basis in unliquidated subsidiaries for which the Company does not expect to receive a benefit. For additional information, see Note 21.
For the purpose of calculating income taxes for discontinued operations, earnings (loss) from discontinued operations is segregated into two categories: operating results and gain or loss on dispositions. Operating results are tax effected in the ordinary manner (i.e., income tax expense on net operating income, income tax benefit on net operating loss).
For calculating the gain or loss on dispositions, businesses held for sale are grouped by sale type (i.e., stock sale or asset sale). Those classified as asset sales are netted, and any losses are characterized as “ordinary.” An income tax benefit is calculated on these losses. Those classified as stock sales are netted, and any losses are characterized as “capital.” An income tax benefit is calculated on these losses. The Company’s current policy is to provide a valuation allowance for this benefit because capital losses are deductible only against capital gains, and the Company cannot at this time predict with certainty its ability to generate sufficient capital gains in future periods to absorb the losses before the carry-forward expiration given the significant amount of capital losses that were incurred in prior years.
As sales are finalized, the Company adjusts the gain or loss for changes in actual sales proceeds as compared to estimates, and for basis differences at the time of sale, as well as any changes in the type of sale. Sales originally anticipated to be stock sales but consummated as asset sales will generate ordinary losses. The Company records a tax benefit and adjusts the valuation allowance for the respective amount resulting from the changes in circumstances surrounding the finalized sale. This adjustment is allocated to continuing operations or discontinued operations according to its original sourcing of the income or loss.
The Company received a $33,222 income tax refund in first quarter of 2004 due to a change in the tax accounting methods for cemetery merchandise revenue. At the end of fiscal year 2003, the Company had decreased its deferred tax asset and increased receivables by $33,222. When the refund was received in the first quarter of 2004, the Company increased cash and decreased the corresponding receivable. During the third quarter of 2003, the Company received a tax refund of $23,334 related to the sale of its foreign operations. The Company used these refunds to reduce its outstanding debt balance.
(o) Earnings Per Common Share
Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding plus the number of additional common
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Summary of Significant Accounting Policies—(Continued)
shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s time-vest stock options and non-vested restricted stock awards) had been issued during each period as discussed in Note 20.
On June 26, 2003, the Company announced that its Board of Directors had approved a new stock repurchase program allowing the Company to invest up to $25,000 in repurchases of its Class A common stock. In June 2004, the Board of Directors approved an additional $3,000 in stock repurchases, which increased the stock repurchase program limit from $25,000 to $28,000. The repurchases are limited to the Company’s Class A common stock and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending on market conditions and other factors. These repurchases reduce the weighted average number of common shares outstanding during each period. Since the inception of the program through October 31, 2004, the Company had repurchased 3,500,000 shares of its Class A common stock at an average price of $6.35 per share.
On December 22, 2003, the Company granted 271,000 shares of restricted stock to its executive officers (of which 110,666 shares have been cancelled as of October 31, 2004 and 27,972 shares were withheld to cover the tax obligation related to the vested restricted stock as of October 31, 2004). The restricted stock vests in equal one-third portions at October 31, 2004, October 31, 2005 and October 31, 2006. On November 18, 2004, the Company granted 72,000 shares of restricted stock to an executive officer, which vests 25 percent on November 18, 2005, 25 percent on November 18, 2006 and 50 percent on November 18, 2007. On December 20, 2004, the Company granted 58,000 shares of restricted stock to executive officers, which vests 25 percent on December 20, 2005, 25 percent on December 20, 2006 and 50 percent on December 20, 2007. On December 20, 2004, the Company also granted 36,500 shares of restricted stock to executive officers, which vest in equal 25 percent portions on December 20, 2005, 2006, 2007 and 2008. Once granted, the restricted stock is included in total shares outstanding but is not included in the weighted average number of common shares outstanding in each period used to calculate basic earnings per common share until the shares vest.
(p) Derivatives
The Company accounts for its derivative financial instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” The notional amounts of derivative financial instruments do not represent amounts exchanged between parties and, therefore, are not a measure of the Company’s exposure resulting from its use of derivatives. The amounts exchanged are calculated based upon the notional amounts as well as other terms of the instruments, such as interest rates, exchange rates or other indices. In accordance with SFAS No. 133, the Company accounts for its $50,000 interest rate swap as a cash flow hedge whereby the fair value of the interest rate swap is reflected as a liability in the accompanying consolidated balance sheet with the offset recorded to other comprehensive income. As of October 31, 2004, the fair value of the interest rate swap, net of taxes, was $333. For further information regarding the Company’s interest rate swap, see Note 18.
(q) Estimated Insurance Loss Liabilities
The Company purchases comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. The Company continually evaluates the receivables due from its insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from its primary insurer.
With respect to health insurance that covers substantially all of the Company’s employees, the Company
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(3) Summary of Significant Accounting Policies—(Continued)
purchases individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims are based on actuarial estimates; actual claims may differ from those estimates. The Company continually evaluates its claims experience related to this coverage with information obtained from its insurer.
Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of the Company’s insurance loss liability.
The estimated liability on the uninsured legal and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.
(r) Leases
The Company has noncancellable operating leases, primarily for land and buildings, that expire over the next 1 to 15 years, except for six leases that expire between 2032 and 2039. As of October 31, 2004, approximately 74 percent of the Company’s 242 funeral locations were owned by the Company’s subsidiaries and approximately 26 percent were held under operating leases. The Company records operating lease expense for leases with escalating rents on a straight-line basis over the life of the lease, including reasonably assured lease renewals. The Company amortizes leasehold improvements in an operating lease over the shorter of their economic lives or the lease term, including reasonably assured lease renewals.
(s) Reclassifications
Certain reclassifications have been made to the 2004 and 2003 consolidated financial statements. All businesses sold in fiscal year 2003 (the year of initial adoption of SFAS No. 144), fiscal year 2004 and fiscal year 2005 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented. Results associated with real estate sold or intended to be sold as part of the divestiture plan have been included in continuing operations for all periods. See Note 16 for a discussion of discontinued operations.
Premiums paid on early extinguishment of debt previously reported in cash flows from financing activities are now reported in cash flows from operating activities.
The foregoing reclassifications in themselves had no effect on the Company’s total net income or loss, total shareholders’ equity or the net increase or decrease in cash.
(4) Change in Accounting Principles and New Accounting Principles
(a) FASB Interpretation No. 46 (“FIN 46” and “FIN 46R”), “Consolidation of Variable Interest Entities”
In January 2003, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (“FIN 46R”).
The Company implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of the Company’s preneed funeral and cemetery merchandise and services trusts and the Company’s cemetery perpetual care trusts.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(4) Change in Accounting Principles and New Accounting Principles—(Continued)
The implementation of FIN 46R affected certain line items in the consolidated balance sheet and statement of earnings as described below, but had no impact on net earnings. Also, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows, but does require disclosure of certain financing and investing activities. See Notes 5, 6, 7 and 8.
Although FIN 46R requires consolidation of the preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of preneed funeral and cemetery merchandise and services trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, the Company does not have a legal right to the cemetery perpetual care trust assets. For these reasons, upon consolidation of the trusts, the Company recognized non-controlling interests in its financial statements to reflect third-party interests in these trusts in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The Company classifies deposits to the funeral and cemetery merchandise and service trusts as non-controlling liability interests and classifies deposits to the cemetery perpetual care trusts as non-controlling interests outside of liabilities.
All of these trusts hold investments in marketable securities, which have been classified as available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and initially reported as a separate component of accumulated other comprehensive income or loss in the Company’s consolidated balance sheet pursuant to the provisions of SFAS No. 115. Unrealized gains and losses attributable to the non-controlling interest holders are reclassified from accumulated other comprehensive income or loss to non-controlling interest in funeral and cemetery trusts and cemetery perpetual care trusts in the Company’s consolidated balance sheet. Unrealized gains and losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise are reclassified from accumulated other comprehensive income or loss to deferred revenues.
Beginning April 30, 2004, the Company recognizes realized earnings of the preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts within investment and other income, net (with a corresponding debit to the related trust asset). The Company then recognizes a corresponding expense within investment and other income, net, representing the realized earnings of these trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts or non-controlling interest in cemetery perpetual care trusts, as the case may be). The Company also simultaneously recognizes a similar expense for realized earnings of the trusts attributable to the Company (with a corresponding credit to deferred preneed funeral or cemetery revenue), when such earnings have not been earned by the Company through the performance of services or delivery of merchandise (see Note 8). The net effect is an increase by the amount of the realized earnings in both the trust asset and the related non-controlling interest and deferred revenue; there is no effect on net income. In the case of preneed funeral and cemetery merchandise and services trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company upon the performance of services and delivery of merchandise, including realized earnings accumulated in these trusts (with corresponding debits to non-controlling interest in funeral and cemetery trusts and to deferred preneed funeral revenues or deferred preneed cemetery revenues, as the case may be). In the case of cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and permitted to be legally withdrawn by the Company (with a corresponding debit to non-controlling interest in cemetery perpetual care trusts). These earnings and related funds are intended to defray cemetery maintenance costs.
The end result of FIN 46R is that the Company’s trust assets are now recorded on the consolidated balance sheet at their market value and included in preneed receivables and trust investments with corresponding credits to deferred preneed revenue and non-controlling interest in the trusts, as opposed to being recorded at their original cost as prearranged receivables and prearranged deferred revenue prior to adoption of FIN 46R. The realized earnings on these trust assets under FIN 46R flow into and out of the statement of earnings through investment and other income, net with no net effect on revenue or net earnings. Both prior to and after the adoption of FIN 46R, accumulated trust earnings from the preneed funeral and cemetery merchandise and services trusts are recognized as revenue when the related merchandise and services are delivered, and cemetery perpetual care trust earnings are recognized as revenue as they are realized in the trust and permitted to be legally withdrawn by the Company. In summary, the adoption of FIN 46R had no effect on revenues, net earnings, cash flows or shareholders’ equity.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(4) Change in Accounting Principles and New Accounting Principles—(Continued)
For more detailed discussions of the Company’s accounting policies after the implementation of FIN 46R, see Notes 5 through 8.
(b) Insurance-Funded Preneed Funeral Contracts
The Company has changed its method of accounting for insurance-funded preneed funeral contracts as the Company has concluded that these contracts are not assets and liabilities as defined by Statement of Financial Accounting Concepts No. 6, “Elements in Financial Statements.” Therefore, the Company has removed from its consolidated balance sheet amounts relating to insurance-funded preneed funeral contracts previously recorded in prearranged receivables, net and prearranged deferred revenue, net, which at October 31, 2003 totaled $327,708 (of which $8,649 related to the Company’s assets held for sale). The removal of these amounts did not affect the Company’s consolidated shareholders’ equity, results of operations or cash flows. See Note 5 for additional information on insurance-related preneed funeral balances.
(c) Other Changes
In December 2003, the FASB issued revised SFAS No. 132, “Employers’ Disclosures about Pensions and Other Postretirement Benefits — an amendment of FASB Statements No. 87, 88, and 106.” This statement revises employers’ disclosures about pension plans and other postretirement benefit plans. It does not change the measurement or recognition of those plans required by SFAS No. 87, “Employers’ Accounting for Pensions,” SFAS No. 88, “Employers’ Accounting for Settlements and Curtailments of Defined Benefit Pension Plans and for Termination Benefits” and SFAS No. 106, “Employers’ Accounting for Postretirement Benefits Other Than Pensions.” Except as noted, this statement was effective for financial statements with fiscal years ending after December 15, 2003. The adoption of revised SFAS No. 132 had no impact on the Company’s financial condition or results of operations.
In November 2004, the FASB issued SFAS No. 151, “Inventory Costs.” The statement amends Accounting Research Bulletin (“ARB”) No. 43, “Inventory Pricing,” to clarify the accounting for abnormal amounts of idle facility expense, freight, handling costs, and wasted material. ARB No. 43 previously stated that these costs must be “so abnormal as to require treatment as current-period charges.” SFAS No. 151 requires that those items be recognized as current-period charges regardless of whether they meet the criterion of “so abnormal.” In addition, this statement requires that allocation of fixed production overhead to the costs of conversion be based on the normal capacity of the production facilities. The statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005, with earlier application permitted for fiscal years beginning after the issue date of the statement. The adoption of SFAS No. 151 is not expected to have any impact on the Company’s current financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 152, “Accounting for Real Estate Time-Sharing Transactions — An Amendment of FASB Statements No. 66 and 67,” which states that the guidance for incidental operations and costs incurred to sell real estate projects does not apply to real estate time-sharing transactions. The adoption of SFAS No. 152 is not expected to have any impact on the Company’s current financial condition or results of operations.
In December 2004, the FASB issued SFAS No. 153, “Exchanges of Nonmonetary Assets — An Amendment of APB Opinion No. 29.” APB Opinion No. 29, “Accounting For Nonmonetary Transactions,” is based on the opinion that exchanges of nonmonetary assets should be measured based on the fair value of the assets exchanged. SFAS No. 153 amends Opinion No. 29 to eliminate the exception for nonmonetary exchanges of similar productive assets and replaces it with a general exception for exchanges of nonmonetary assets whose results are not expected to significantly change the future cash flows of the entity. The adoption of SFAS No. 153 is not expected to have any impact on the Company’s current financial condition or results of operations.
In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”), “Accounting for Stock Based Compensation.” The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(4) Change in Accounting Principles and New Accounting Principles—(Continued)
share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during the requisite service period are to be recognized as compensation cost over that period. In addition, the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of taxes paid. The provisions of the revised statement are effective for financial statements issued for the first interim reporting period of the first fiscal year that begins on or after June 15, 2005. The Company is adopting this statement in the first quarter of fiscal year 2006.
(5) Preneed Funeral Activities
The Company sells price-guaranteed preneed funeral contracts through various programs. Because the services or merchandise will not be provided until the future, most states require that all or a portion of the customer payments under these contracts be protected for the benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be placed into trust accounts (“trust-funded preneed funeral contracts”). Alternatively, where allowed, customers may purchase a life insurance or annuity policy from third-party insurance companies to fund their preneed funeral contracts (“insurance-funded preneed funeral contracts”). The funeral goods and services selected at the time of contract origination will be funded by the insurance policy proceeds, which include increasing insurance benefits. Under either customer funding option, the Company enters into a preneed funeral contract with the customer to provide funeral services in the future.
Effective April 30, 2004, the Company changed certain aspects of its accounting for preneed funeral contracts and related trust investments in connection with the implementation of FIN 46R. See Note 4(a) for additional information. The Company also changed its accounting for insurance-funded preneed funeral contracts. See Note 4(b) for additional information. The contract amounts associated with unfulfilled insurance-funded preneed funeral contracts are not reflected on the consolidated balance sheet. However, when a trust-funded preneed funeral contract is entered into, the Company records an asset (included in preneed funeral receivables and trust investments) and a corresponding liability (included in deferred preneed funeral revenue) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed funeral revenue into non-controlling interest in funeral and cemetery trusts.
Funeral revenues are recognized in the consolidated statement of earnings on preneed funeral contracts (trust- funded and insurance-funded) at the time the funeral service is performed. Through April 30, 2004, trust investment earnings, net of taxes and certain other expenses paid by the trust, were accrued and deferred when realized. When the services were performed, those net investment earnings were recognized in funeral revenues. These amounts were intended to cover future increases in the cost of providing a price-guaranteed funeral service. Beginning with the third quarter of 2004, the Company now recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to preneed funeral receivables and trust investments) when such earnings have not been earned by the Company through the performance of services or delivery of merchandise. The Company recognizes a corresponding expense within investment and other income, net, equal to the realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to deferred preneed funeral revenue). The net effect is an increase by the amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred preneed funeral revenue line items; there is no effect on net earnings. As of April 30, 2004, the cumulative undistributed net trust investment earnings of the funeral merchandise and service trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred preneed funeral revenues. Upon performance of the funeral services, the Company recognizes as revenues amounts attributed to the non-controlling interest holders or included in deferred preneed funeral revenue, including realized trust earnings.
Preneed Funeral Receivables and Trust Investments
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(5) Preneed Funeral Activities—(Continued)
Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the consolidated balance sheet as of October 31, 2004 are as follows:
| October 31, 2004 | ||||
| Trust assets | $ | 439,625 | ||
| Receivables from customers | 64,183 | |||
| Preneed funeral receivables and trust investments | $ | $503,808 | ||
Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled to receive a refund of the funds held in trust. In many jurisdictions, the Company may be obligated to fund any shortfall if the amounts initially deposited by the customer exceed the funds in trust including investment income at the time of cancellation. If the fair market value of the trusts were to decline below the estimated costs to deliver the underlying products and services, the Company would record a charge to earnings to record a liability for the expected loss on the delivery of contracts in the Company’s backlog. Based upon this assessment, no loss amounts have been required to be recognized as of October 31, 2004.
Preneed funeral receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. These amounts are reflected in deferred preneed funeral revenues until the underlying service is performed or merchandise is delivered.
The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2004 are detailed below. The adjusted cost basis of the funeral merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $76,135 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $13,735 related to trust investments are temporary in nature.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(5) Preneed Funeral Activities—(Continued)
| Adjusted | Unrealized | Unrealized | ||||||||||||||
| Cost Basis | Gains | Losses | Market | |||||||||||||
| Cash, money market and other short-term investments | $ | 133,205 | $ | 9 | $ | — | $ | 133,214 | ||||||||
| U.S. Government, agencies and municipalities | 1,971 | 115 | (26 | ) | 2,060 | |||||||||||
| Corporate bonds | 22,826 | 1,938 | — | 24,764 | ||||||||||||
| Preferred stocks | 62,947 | 1,703 | (422 | ) | 64,228 | |||||||||||
| Common stocks | 188,298 | 3,692 | (13,214 | ) | 178,776 | |||||||||||
| Mutual funds | 12,431 | 322 | (73 | ) | 12,680 | |||||||||||
| Insurance contracts and other long- term investments | 23,631 | 298 | — | 23,929 | ||||||||||||
| Trust investments | $ | 445,309 | $ | 8,077 | $ | (13,735 | ) | $ | 439,651 | |||||||
| Market value as a percentage of cost | 98.7 | % | ||||||||||||||
| Accrued investment income | 2,002 | |||||||||||||||
| Less trust investments of assets held for sale | (2,028 | ) | ||||||||||||||
| Trust assets | $ | 439,625 | ||||||||||||||
The estimated maturities and market values of debt securities included above are as follows:
| October 31, 2004 | ||||
| Due in one year or less | $ | 3,640 | ||
| Due in one to five years | 12,756 | |||
| Due in five to ten years | 10,016 | |||
| Thereafter | 412 | |||
| $ | 26,824 | |||
During the six months ended October 31, 2004 (as FIN 46R became effective on April 30, 2004), purchases and sales of available for sale securities included in trust investments were $28,871 and $110,433, respectively. These sales resulted in realized gains and losses of $10,159 and $11,215, respectively. Reflected in other comprehensive income for the year ended October 31, 2004 was a $5,658 increase in net unrealized losses associated with the available for sale securities of the funeral trust and a corresponding ($5,658) reclassified to non-controlling interest.
The following table shows the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 31, 2004. A loss is considered other than temporary if the security has a reduction in market value, compared with its cost basis, of 20 percent or more for a period of six months or longer.
| Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| U.S. Government, agencies and municipalities | $ | 77 | $ | (1 | ) | $ | 284 | $ | (25 | ) | $ | 361 | $ | (26 | ) | |||||||||
| Preferred stocks | 12,075 | (174 | ) | 3,443 | (248 | ) | 15,518 | (422 | ) | |||||||||||||||
| Common stocks | 54,944 | (4,569 | ) | 44,943 | (8,645 | ) | 99,887 | (13,214 | ) | |||||||||||||||
| Mutual funds | — | — | 4,098 | (73 | ) | 4,098 | (73 | ) | ||||||||||||||||
| Total | $ | 67,096 | $ | (4,744 | ) | $ | 52,768 | $ | (8,991 | ) | $ | 119,864 | $ | (13,735 | ) | |||||||||
Deferred Preneed Funeral Revenue
As of October 31, 2004, deferred preneed funeral revenue represents future funeral contract revenues. In addition to amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed trust-funded preneed funeral contracts where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future funeral contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts. As of October 31, 2003 (prior to implementation of FIN 46R), prearranged deferred revenue, net included the original price of a trust-funded preneed funeral contract plus the net trust investment earnings associated with the deferred items.
Insurance-Funded Preneed Funeral Contracts
Insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected above or in the consolidated balance sheets. The net amount of these contracts
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(5) Preneed Funeral Activities—(Continued)
that have not been fulfilled as of October 31, 2004 and October 31, 2003 was $352,092 and $327,708, respectively, of which $71 and $8,649 related to the Company’s assets held for sale as of October 31, 2004 and October 31, 2003, respectively. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenues as these funerals are performed by the Company.
(6) Preneed Cemetery Merchandise and Service Activities
The Company sells price-guaranteed preneed cemetery contracts providing for merchandise or services to be delivered in the future at prices prevailing when the agreements are signed. Some or all of the funds received under these contracts for merchandise or services may be required to be placed into trust accounts, pursuant to applicable state law. Effective April 30, 2004, the Company changed certain aspects of its accounting for preneed cemetery contracts upon implementation of FIN 46R. For additional information, see Note 4(a). When a trust-funded preneed cemetery contract is entered into, the Company records an asset (included in preneed cemetery receivables and trust investments) and a corresponding liability (included in deferred preneed cemetery revenues) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed cemetery revenue into non-controlling interest in funeral and cemetery trusts.
Beginning with the third quarter of 2004, the Company recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to preneed cemetery receivables and trust investments). The Company recognizes a corresponding expense within investment and other income, net, equal to the realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to deferred preneed cemetery revenue) when such earnings have not been earned by the Company through the performance of services or delivery of merchandise. The net effect is an increase by the amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred preneed cemetery revenue line items; there is no effect on net earnings. As of April 30, 2004, the cumulative undistributed net trust investment earnings of the cemetery merchandise and services trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred preneed cemetery revenue. Upon performance of services or delivery of merchandise, the Company recognizes as revenues amounts attributed to the non-controlling interest holders or included in deferred preneed cemetery revenue, including realized trust earnings.
Preneed Cemetery Receivables and Trust Investments
Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables discussed in Note 13. The components of preneed cemetery receivables and trust investments in the consolidated balance sheet as of October 31, 2004 are as follows:
| October 31, 2004 | ||||
| Trust assets | $ | 194,008 | ||
| Receivables from customers | 64,168 | |||
| Preneed cemetery receivables and trust investments | $ | 258,176 | ||
The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $42,537 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $6,098 related to trust investments are temporary in nature.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(6) Preneed Cemetery Merchandise and Service Activities—(Continued)
| Adjusted | Unrealized | Unrealized | ||||||||||||||
| Cost Basis | Gains | Losses | Market | |||||||||||||
| Cash, money market and other short-term investments | $ | 50,646 | $ | 4 | $ | — | $ | 50,650 | ||||||||
| U.S. Government, agencies and municipalities | 1,050 | 21 | (4 | ) | 1,067 | |||||||||||
| Corporate bonds | 10,690 | 1,086 | — | 11,776 | ||||||||||||
| Preferred stocks | 24,287 | 869 | (158 | ) | 24,998 | |||||||||||
| Common stocks | 104,788 | 2,482 | (5,934 | ) | 101,336 | |||||||||||
| Mutual funds | 3,774 | 70 | (2 | ) | 3,842 | |||||||||||
| Insurance contracts and other long-term investments | 569 | — | — | 569 | ||||||||||||
| Trust investments | $ | 195,804 | $ | 4,532 | $ | (6,098 | ) | $ | 194,238 | |||||||
| Market value as a percentage of cost | 99.2 | % | ||||||||||||||
| Accrued investment income | 956 | |||||||||||||||
| Less trust investments of assets held for sale | (1,186 | ) | ||||||||||||||
| Trust assets | $ | 194,008 | ||||||||||||||
The estimated maturities and market values of debt securities included above are as follows:
| October 31, 2004 | ||||
| Due in one year or less | $ | 2,385 | ||
| Due in one to five years | 6,117 | |||
| Due in five to ten years | 3,737 | |||
| Thereafter | 604 | |||
| $ | 12,843 | |||
During the six months ended October 31, 2004 (as FIN 46R became effective on April 30, 2004), purchases and sales of available for sale securities included in trust investments were $31,930 and $52,704, respectively. These sales resulted in realized gains and losses of $5,074 and $4,401, respectively. Reflected in other comprehensive income for the year ended October 31, 2004 was a $1,566 increase in net unrealized losses associated with the available for sale securities of the cemetery merchandise trust and a corresponding ($1,566) reclassified to non-controlling interest.
The following table shows the gross unrealized losses and fair value of the preneed cemetery merchandise and services trust investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 31, 2004. A loss is considered other than temporary if the security has a reduction in market value, compared with its cost basis, of 20 percent or more for a period of six months or longer.
| Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| U.S. Government, agencies and municipalities | $ | 123 | $ | (1 | ) | $ | 127 | $ | (3 | ) | $ | 250 | $ | (4 | ) | |||||||||
| Preferred stocks | 1,991 | (59 | ) | 1,353 | (99 | ) | 3,344 | (158 | ) | |||||||||||||||
| Common stocks | 31,197 | (2,795 | ) | 18,600 | (3,139 | ) | 49,797 | (5,934 | ) | |||||||||||||||
| Mutual funds | 435 | (1 | ) | 18 | (1 | ) | 453 | (2 | ) | |||||||||||||||
| Total | $ | 33,746 | $ | (2,856 | ) | $ | 20,098 | $ | (3,242 | ) | $ | 53,844 | $ | (6,098 | ) | |||||||||
Deferred Preneed Cemetery Revenue
As of October 31, 2004, deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized upon delivery of merchandise or performance of services. In addition to the amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed preneed cemetery services or undelivered preneed cemetery merchandise where the
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(6) Preneed Cemetery Merchandise and Service Activities—(Continued)
related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts. As of October 31, 2003 (prior to implementation of FIN 46R), prearranged deferred revenue, net represents the original contract price for the preneed cemetery items deferred plus net investment earnings associated with the deferred items.
(7) Cemetery Interment Rights and Perpetual Care Trusts
The Company sells price-guaranteed preneed cemetery contracts providing for property interment rights. For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with SFAS No. 66, “Accounting For Sales of Real Estate.” Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sale price has been collected. The Company is required by state law to pay into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property interment rights. As a result of the implementation of FIN 46R, the Company has consolidated the cemetery perpetual care trusts, including investments accounted for under SFAS No. 115, resulting in such funds being reflected in cemetery perpetual care trust investments within total assets, with a corresponding amount reflected as non-controlling interest in perpetual care trusts.
Beginning April 30, 2004, the Company recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to cemetery perpetual care trust investments). The Company recognizes a corresponding expense within investment and other income, net for the amount of realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in perpetual care trusts). The net effect is an increase by the amount of the realized earnings of the trusts in both the trust asset and the related non-controlling interest; there is no effect on net earnings.
Earnings realized from these cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $6,396, $7,887, and $11,255 for the years ended October 31, 2004, 2003 and 2002, respectively.
The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery perpetual care trusts below reflect an other than temporary decline in the trust assets of $30,524 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $6,017 related to trust investments are temporary in nature.
| Adjusted | Unrealized | Unrealized | ||||||||||||||
| Cost Basis | Gains | Losses | Market | |||||||||||||
| Cash, money market and other short-term investments | $ | 29,154 | $ | — | $ | (3 | ) | $ | 29,151 | |||||||
| U.S. Government, agencies and municipalities | 3,173 | 62 | (97 | ) | 3,138 | |||||||||||
| Corporate bonds | 19,368 | 2,731 | (23 | ) | 22,076 | |||||||||||
| Preferred stocks | 65,176 | 2,571 | (46 | ) | 67,701 | |||||||||||
| Common stocks | 78,531 | 8,406 | (5,797 | ) | 81,140 | |||||||||||
| Mutual funds | 5,072 | 193 | (51 | ) | 5,214 | |||||||||||
| Insurance contracts and other long-term investments | 841 | 43 | — | 884 | ||||||||||||
| Trust investments | $ | 201,315 | $ | 14,006 | $ | (6,017 | ) | $ | 209,304 | |||||||
| Market value as a percentage of cost | 104.0 | % | ||||||||||||||
| Accrued investment income | 963 | |||||||||||||||
| Trust assets | $ | 210,267 | ||||||||||||||
The estimated maturities and market values of debt securities included above are as follows:
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| October 31, 2004 | ||||
| Due in one year or less | $ | 1,256 | ||
| Due in one to five years | 5,770 | |||
| Due in five to ten years | 15,950 | |||
| Thereafter | 2,238 | |||
| $ | 25,214 | |||
During the six months ended October 31, 2004 (as FIN 46R became effective on April 30, 2004), purchases and sales of available for sale securities were $24,525 and $25,544, respectively. These sales resulted in realized gains and losses of $1,165 and $2,411, respectively. Reflected in other comprehensive income for the year ended October 31, 2004 was a $7,989 decrease in net unrealized losses associated with the available for sale securities of the cemetery perpetual care trust and a corresponding ($7,989) reclassified to non-controlling interest.
The following table shows the gross unrealized losses and fair value of the cemetery perpetual care trust investments with unrealized losses that are not deemed to be other-than-temporarily impaired, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 31, 2004. A loss is considered other than temporary if the security has a reduction in market value, compared with its cost basis, of 20 percent or more for a period of six months or longer.
| Less than 12 Months | 12 Months or Greater | Total | ||||||||||||||||||||||
| Unrealized | Unrealized | Unrealized | ||||||||||||||||||||||
| Fair Value | Losses | Fair Value | Losses | Fair Value | Losses | |||||||||||||||||||
| Cash, money market and other short-term investments | $ | 90 | $ | (3 | ) | $ | — | $ | — | $ | 90 | $ | (3 | ) | ||||||||||
| U.S. Government, agencies and municipalities | 1,081 | (10 | ) | 708 | (87 | ) | 1,789 | (97 | ) | |||||||||||||||
| Corporate bonds | 374 | (6 | ) | 663 | (17 | ) | 1,037 | (23 | ) | |||||||||||||||
| Preferred stocks | 4,113 | (46 | ) | — | — | 4,113 | (46 | ) | ||||||||||||||||
| Common stocks | 22,311 | (2,230 | ) | 22,466 | (3,567 | ) | 44,777 | (5,797 | ) | |||||||||||||||
| Mutual funds | 718 | (20 | ) | 645 | (31 | ) | 1,363 | (51 | ) | |||||||||||||||
| Total | $ | 28,687 | $ | (2,315 | ) | $ | 24,482 | $ | (3,702 | ) | $ | 53,169 | $ | (6,017 | ) | |||||||||
(8) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts
Non-Controlling Interest in Funeral and Cemetery Trusts
Effective April 30, 2004, the Company consolidated the preneed funeral and cemetery merchandise and services trusts associated with its preneed funeral and cemetery activities as a result of the implementation of FIN 46R. Although FIN 46R requires the consolidation of the preneed funeral and cemetery merchandise and service trusts, it does not change the legal relationships among the trusts, the Company and its customers. The customers are the legal beneficiaries of these funeral and cemetery merchandise and service trusts, and therefore, their interests in these trusts represent a non-controlling interest in subsidiaries. For additional information, see Note 4(a).
Non-Controlling Interest in Perpetual Care Trusts
The non-controlling interest in perpetual care trusts reflected in the consolidated balance sheet represents the cemetery perpetual care trusts in accordance with SFAS No. 115, net of the accrued expenses and other long-term liabilities of the perpetual care trusts. For additional information, see Note 4(a).
The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at October 31, 2004 are as follows:
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| Non-controlling Interest | ||||||||||||||||
| Non-controlling | ||||||||||||||||
| Interest in | ||||||||||||||||
| Preneed | Preneed | Perpetual | ||||||||||||||
| Funeral | Cemetery | Total | Care Trusts | |||||||||||||
| Trust assets at market value | $ | 439,625 | $ | 194,008 | $ | 633,633 | $ | 210,267 | ||||||||
| Less: | ||||||||||||||||
| Pending withdrawals | (6,847 | ) | (2,797 | ) | (9,644 | ) | (1,951 | ) | ||||||||
| Pending deposits | 1,788 | 1,567 | 3,355 | 577 | ||||||||||||
| Non-controlling interest | $ | 434,566 | $ | 192,778 | $ | 627,344 | $ | 208,893 | ||||||||
Investment and other income (expense), net
The components of investment and other income (expense), net in the consolidated statement of earnings for the year ended October 31, 2004 are detailed below.
| Year Ended | ||||
| October 31, 2004 | ||||
| Non-controlling interest: | ||||
| Realized gains | $ | 16,398 | ||
| Realized losses | (18,027 | ) | ||
| Interest income, dividends and other ordinary income | 11,827 | |||
| Trust expenses and income taxes | (5,887 | ) | ||
| Net trust investment income | 4,311 | |||
| Interest expense related to non-controlling interest in funeral and cemetery trust investments | (3,206 | ) | ||
| Interest expense related to non-controlling interest in perpetual care trust investments | (1,105 | ) | ||
| Total non-controlling interest | — | |||
Investment and other income, net(1) | 178 | |||
| Total investment and other income, net | $ | 178 | ||
| (1) | Investment and other income, net is comprised of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust. |
(9) Prearranged Receivables and Prearranged Deferred Revenue
The Company implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of the Company’s preneed funeral and cemetery merchandise and services trusts (see Notes 4(a), 5, 6 and 8). The following information reflects the Company’s preneed funeral and cemetery merchandise and services trusts as of October 31, 2003 (prior to the implementation of FIN 46R).
Prearranged receivables was comprised of funds owed to the Company for the preneed sale of funeral and cemetery merchandise and services (1) from preneed funeral merchandise and services trusts and from preneed cemetery merchandise and services trusts, which represent amounts already paid by customers, as well as realized earnings on those amounts and (2) from customers.
Prearranged receivables was comprised of the following as of October 31, 2003:
| October 31, | ||||
| 2003 | ||||
| Amounts due from preneed funeral trust and escrow accounts | $ | 529,695 | ||
| Amounts due from preneed cemetery merchandise trust and escrow accounts | 232,329 | |||
| Amounts due from customers | 134,123 | |||
| Valuation allowance for amounts due from trust accounts | (4,500 | ) | ||
| Net prearranged receivables | $ | 891,647 | ||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(9) Prearranged Receivables and Prearranged Deferred Revenue—(Continued)
Amounts due from preneed funeral trust and escrow accounts as of October 31, 2003 were comprised of the following investments:
| October 31, | ||||
| 2003 | ||||
| U.S. Government, agencies and municipalities | $ | 3,205 | ||
| Corporate bonds | 27,108 | |||
| Preferred stocks | 65,918 | |||
| Common stocks | 235,298 | |||
| Money market funds and other short-term investments | 186,085 | |||
| Mutual funds | 21,264 | |||
| Insurance contracts | 6,279 | |||
| Less trust investments of assets held for sale | (15,462 | ) | ||
| Total value at cost | 529,695 | |||
| Net unrealized depreciation | (79,912 | ) | ||
| Total value at market | $ | 449,783 | ||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(9) Prearranged Receivables and Prearranged Deferred Revenue—(Continued)
Amounts due from preneed cemetery merchandise trust and escrow accounts were comprised of the following investments:
| October 31, | ||||
| 2003 | ||||
| U.S. Government, agencies and municipalities | $ | 676 | ||
| Corporate bonds | 14,057 | |||
| Preferred stocks | 31,510 | |||
| Common stocks | 113,323 | |||
| Money market funds and other short-term investments | 69,714 | |||
| Mutual funds | 4,111 | |||
| Insurance contracts | 142 | |||
| Less trust investments of assets held for sale | (1,204 | ) | ||
| Total value at cost | 232,329 | |||
| Net unrealized depreciation | (44,859 | ) | ||
| Total value at market | $ | 187,470 | ||
The total finance charges earned related to preneed funeral and cemetery merchandise and services, as well as preneed cemetery property, amounted to $16,944 and $17,881 for fiscal years 2003 and 2002, respectively. Finance charges earned are included in funeral and cemetery revenue.
Prearranged Deferred Revenue
Prearranged deferred revenue was comprised of the following:
| October 31, | ||||
| 2003 | ||||
| (Restated) | ||||
| (Note 2) | ||||
| Prearranged deferred funeral service and merchandise revenue | $ | 841,299 | ||
| Prearranged deferred cemetery property, merchandise and service revenue | 510,526 | |||
| Valuation allowance | (4,500 | ) | ||
| Net prearranged deferred revenue | $ | 1,347,325 | ||
(10) Cemetery Perpetual Care Trusts
The Company implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of the Company’s cemetery perpetual care trusts (see Notes 4(a), 7 and 8). The following summary reflects the Company’s cemetery perpetual care trust account balances as of October 31, 2003 prior to the implementation of FIN 46R. Funds held in trust are invested, and the earnings withdrawn from the trust accounts are used for the maintenance of cemetery grounds. For the years ended October 31, 2003 and 2002, such withdrawals included in cemetery revenue totaled $7,887 and $11,255, respectively.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(10) Cemetery Perpetual Care Trusts—(Continued)
| October 31, | ||||
| 2003 | ||||
| Cemetery perpetual care trusts: | ||||
| Investments at market value | $ | 202,076 | ||
| Amounts to be collected under existing agreements | 9,040 | |||
| $ | 211,116 | |||
| Investments consist of: | ||||
| U.S. Government, agencies and municipalities | $ | 3,375 | ||
| Corporate bonds | 24,215 | |||
| Preferred stocks | 56,494 | |||
| Common stocks | 99,624 | |||
| Money market funds and other short-term investments | 33,528 | |||
| Mutual funds | 8,301 | |||
| Other long-term investments | 213 | |||
| Total value at cost | 225,750 | |||
| Net unrealized depreciation | (23,674 | ) | ||
| Total value at market | $ | 202,076 | ||
(11) Cash and Cash Equivalents
The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company deposits its cash and cash equivalents with high quality credit institutions. Such balances typically exceed applicable FDIC insurance limits. The October 31, 2004 and 2003 balances below include $2 and $14 of cash and cash equivalent investments of assets held for sale, respectively.
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| Cash | $ | 21,511 | $ | 18,574 | ||||
| Cash equivalents | 3 | 11 | ||||||
| $ | 21,514 | $ | 18,585 | |||||
(12) Marketable Securities
The market value of marketable securities as of October 31, 2004 and 2003 was $1,297 and $2,346, respectively, which included gross unrealized gains of $0 and $13 and gross unrealized losses of $0 and $1,277, respectively, for fiscal years 2004 and 2003. The Company realized net losses on marketable securities of $101, $1,100 and $0 for the years ended October 31, 2004, 2003 and 2002, respectively. The cost of securities sold was determined by using the average cost method.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(13) Receivables
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| Current receivables are summarized as follows: | ||||||||
| Installment contracts due within one year | $ | 37,261 | $ | 35,703 | ||||
| Income tax receivables | 15,224 | 49,096 | ||||||
| Trade and other receivables | 16,349 | 17,297 | ||||||
| Allowance for sales cancellations and doubtful accounts | (5,523 | ) | (4,534 | ) | ||||
| Amounts to be collected for cemetery perpetual care trusts | (2,952 | ) | (2,671 | ) | ||||
| 60,359 | 94,891 | |||||||
| Funeral receivables | 8,774 | 10,638 | ||||||
| Net current receivables | $ | 69,133 | $ | 105,529 | ||||
| Long-term receivables are summarized as follows: | ||||||||
| Installment contracts due beyond one year | $ | 93,759 | $ | 88,135 | ||||
| Allowance for sales cancellations and doubtful accounts | (8,022 | ) | (5,590 | ) | ||||
| Amounts to be collected for cemetery perpetual care trusts | (7,045 | ) | (6,369 | ) | ||||
| Net long-term receivables | $ | 78,692 | $ | 76,176 | ||||
Installment contracts due within one year and due beyond one year include receivables in the Company’s preneed cemetery property sales only. Receivables for preneed funeral and cemetery merchandise and services sales are included in preneed funeral receivables and trust investments and preneed cemetery receivables and trust investments as of October 31, 2004 and in prearranged receivables before the implementation of FIN 46R as discussed in Notes 4, 5, 6 and 9.
The Company’s receivables as of October 31, 2004 are expected to mature as follows:
| Years ending October 31, | ||||
| 2005 | $ | 69,133 | ||
| 2006 | 12,661 | |||
| 2007 | 11,263 | |||
| 2008 | 12,743 | |||
| 2009 | 10,593 | |||
| Thereafter | 31,432 | |||
| $ | 147,825 | |||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(14) Inventories and Cemetery Property
Inventories are comprised of the following:
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| Developed cemetery property | $ | 12,437 | $ | 12,348 | ||||
| Merchandise and supplies | 23,737 | 25,225 | ||||||
| $ | 36,174 | $ | 37,573 | |||||
Cemetery property is comprised of the following:
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| Developed cemetery property | $ | 94,065 | $ | 97,057 | ||||
| Undeveloped cemetery property | 272,809 | 272,670 | ||||||
| $ | 366,874 | $ | 369,727 | |||||
The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. The Company evaluates the recoverability of the cost of undeveloped cemetery property based on undiscounted expected future cash flows.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(15) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated)
The following tables present the condensed consolidating historical financial statements as of October 31, 2004 and 2003, and for the three fiscal years ended October 31, 2004, 2003 and 2002, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the senior subordinated notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries which are prohibited by law from guaranteeing the senior subordinated notes. The guarantor subsidiaries are each wholly-owned directly or indirectly by the Company, except that the Company owned 99.5 percent and 98.4 percent of two immaterial guarantor subsidiaries.
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
| Year Ended October 31, 2004 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Funeral | $ | — | $ | 250,548 | $ | 20,691 | $ | — | $ | 271,239 | ||||||||||
| Cemetery | — | 199,023 | 23,804 | — | 222,827 | |||||||||||||||
| — | 449,571 | 44,495 | — | 494,066 | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Funeral | — | 189,495 | 13,003 | — | 202,498 | |||||||||||||||
| Cemetery | — | 158,516 | 18,040 | — | 176,556 | |||||||||||||||
| — | 348,011 | 31,043 | — | 379,054 | ||||||||||||||||
| Gross profit | — | 101,560 | 13,452 | — | 115,012 | |||||||||||||||
| Corporate general and administrative expenses | (17,097 | ) | — | — | — | (17,097 | ) | |||||||||||||
| Separation charges | (1,853 | ) | (1,560 | ) | (22 | ) | — | (3,435 | ) | |||||||||||
| Gains on dispositions and impairment (losses), net | (300 | ) | (1,523 | ) | 1,619 | — | (204 | ) | ||||||||||||
| Other operating income, net | 160 | 1,729 | 223 | — | 2,112 | |||||||||||||||
| Operating earnings (loss) | (19,090 | ) | 100,206 | 15,272 | — | 96,388 | ||||||||||||||
| Interest income (expense) | 34,097 | (78,807 | ) | (2,625 | ) | — | (47,335 | ) | ||||||||||||
| Investment and other income, net | 178 | — | — | — | 178 | |||||||||||||||
| Equity in subsidiaries | 26,880 | — | — | (26,880 | ) | — | ||||||||||||||
| Earnings from continuing operations before income taxes | 42,065 | 21,399 | 12,647 | (26,880 | ) | 49,231 | ||||||||||||||
| Income taxes | 5,373 | 8,548 | 4,288 | — | 18,209 | |||||||||||||||
| Earnings from continuing operations | 36,692 | 12,851 | 8,359 | (26,880 | ) | 31,022 | ||||||||||||||
| Discontinued operations: | ||||||||||||||||||||
| Earnings from discontinued operations before income taxes | — | 3,213 | 621 | — | 3,834 | |||||||||||||||
| Income tax benefit | — | (1,836 | ) | — | — | (1,836 | ) | |||||||||||||
| Earnings from discontinued operations | — | 5,049 | 621 | — | 5,670 | |||||||||||||||
| Net earnings | 36,692 | 17,900 | 8,980 | (26,880 | ) | 36,692 | ||||||||||||||
| Other comprehensive income, net | 1,428 | — | — | — | 1,428 | |||||||||||||||
| Comprehensive income | $ | 38,120 | $ | 17,900 | $ | 8,980 | $ | (26,880 | ) | $ | 38,120 | |||||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (15) | Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated) — (Continued) |
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
| Year Ended October 31, 2003 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Funeral | $ | — | $ | 249,027 | $ | 20,082 | $ | — | $ | 269,109 | ||||||||||
| Cemetery | — | 183,889 | 25,485 | — | 209,374 | |||||||||||||||
| — | 432,916 | 45,567 | — | 478,483 | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Funeral | — | 197,411 | 12,878 | — | 210,289 | |||||||||||||||
| Cemetery | — | 151,250 | 18,301 | — | 169,551 | |||||||||||||||
| — | 348,661 | 31,179 | — | 379,840 | ||||||||||||||||
| Gross profit | — | 84,255 | 14,388 | — | 98,643 | |||||||||||||||
| Corporate general and administrative expenses | (17,733 | ) | — | — | — | (17,733 | ) | |||||||||||||
| Separation charges | (2,450 | ) | — | — | — | (2,450 | ) | |||||||||||||
| Gains on dispositions and impairment (losses), net | 300 | (6,913 | ) | (3,593 | ) | — | (10,206 | ) | ||||||||||||
| Other operating income, net | 161 | 1,615 | 307 | — | 2,083 | |||||||||||||||
| Operating earnings (loss) | (19,722 | ) | 78,957 | 11,102 | — | 70,337 | ||||||||||||||
| Interest income (expense) | 24,203 | (75,192 | ) | (2,654 | ) | — | (53,643 | ) | ||||||||||||
| Loss on early extinguishment of debt | (11,289 | ) | — | — | — | (11,289 | ) | |||||||||||||
| Investment and other income (expense), net | (814 | ) | 65 | — | — | (749 | ) | |||||||||||||
| Equity loss in subsidiaries | (13,056 | ) | — | — | 13,056 | — | ||||||||||||||
| Earnings (loss) from continuing operations before income taxes. | (20,678 | ) | 3,830 | 8,448 | 13,056 | 4,656 | ||||||||||||||
| Income tax expense (benefit) | (2,646 | ) | 1,754 | 4,483 | — | 3,591 | ||||||||||||||
| Earnings (loss) from continuing operations | (18,032 | ) | 2,076 | 3,965 | 13,056 | 1,065 | ||||||||||||||
| Discontinued operations: | ||||||||||||||||||||
| Loss from discontinued operations before income taxes | — | (18,246 | ) | (2,572 | ) | — | (20,818 | ) | ||||||||||||
| Income tax benefit | — | (1,721 | ) | — | — | (1,721 | ) | |||||||||||||
| Loss from discontinued operations | — | (16,525 | ) | (2,572 | ) | — | (19,097 | ) | ||||||||||||
| Net earnings (loss) | (18,032 | ) | (14,449 | ) | 1,393 | 13,056 | (18,032 | ) | ||||||||||||
| Other comprehensive income, net | 1,692 | — | — | — | 1,692 | |||||||||||||||
| Comprehensive income (loss) | $ | (16,340 | ) | $ | (14,449 | ) | $ | 1,393 | $ | 13,056 | $ | (16,340 | ) | |||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (15) | Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated) — (Continued) |
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
| Year Ended October 31, 2002 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| Revenues: | ||||||||||||||||||||
| Funeral | $ | — | $ | 252,533 | $ | 58,768 | $ | — | $ | 311,301 | ||||||||||
| Cemetery | — | 189,643 | 25,346 | — | 214,989 | |||||||||||||||
| — | 442,176 | 84,114 | — | 526,290 | ||||||||||||||||
| Costs and expenses: | ||||||||||||||||||||
| Funeral | — | 193,429 | 46,295 | — | 239,724 | |||||||||||||||
| Cemetery | — | 151,234 | 23,295 | — | 174,529 | |||||||||||||||
| — | 344,663 | 69,590 | — | 414,253 | ||||||||||||||||
| Gross profit | — | 97,513 | 14,524 | — | 112,037 | |||||||||||||||
| Corporate general and administrative expenses | (17,261 | ) | — | — | — | (17,261 | ) | |||||||||||||
| Gains on dispositions and impairment (losses), net | — | (688 | ) | (17,812 | ) | — | (18,500 | ) | ||||||||||||
| Other operating income, net | 1,223 | 857 | 455 | — | 2,535 | |||||||||||||||
| Operating earnings (loss) | (16,038 | ) | 97,682 | (2,833 | ) | — | 78,811 | |||||||||||||
| Interest income (expense) | 52,306 | (86,959 | ) | (27,327 | ) | — | (61,980 | ) | ||||||||||||
| Investment and other income, net | 485 | 290 | 19 | — | 794 | |||||||||||||||
| Equity loss in subsidiaries | (208,390 | ) | — | — | 208,390 | — | ||||||||||||||
| Earnings (loss) from continuing operations before income taxes | (171,637 | ) | 11,013 | (30,141 | ) | 208,390 | 17,625 | |||||||||||||
| Income tax expense (benefit) | 9,160 | (5,962 | ) | 3,326 | — | 6,524 | ||||||||||||||
| Earnings (loss) from continuing operations | (180,797 | ) | 16,975 | (33,467 | ) | 208,390 | 11,101 | |||||||||||||
| Discontinued operations: | ||||||||||||||||||||
| Earnings (loss) from discontinued operations before income taxes | — | 1,973 | (94 | ) | — | 1,879 | ||||||||||||||
| Income taxes | — | 687 | — | — | 687 | |||||||||||||||
| Earnings (loss) from discontinued operations | — | 1,286 | (94 | ) | — | 1,192 | ||||||||||||||
| Earnings (loss) before cumulative effect of change in accounting principle | (180,797 | ) | 18,261 | (33,561 | ) | 208,390 | 12,293 | |||||||||||||
| Cumulative effect of change in accounting principle | — | (184,539 | ) | (8,551 | ) | — | (193,090 | ) | ||||||||||||
| Net loss | (180,797 | ) | (166,278 | ) | (42,112 | ) | 208,390 | (180,797 | ) | |||||||||||
| Other comprehensive income, net | 26,161 | 1,310 | 26,957 | (28,267 | ) | 26,161 | ||||||||||||||
| Comprehensive loss | $ | (154,636 | ) | $ | (164,968 | ) | $ | (15,155 | ) | $ | 180,123 | $ | (154,636 | ) | ||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (15) | Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated) — (Continued) |
| Condensed Consolidating Balance Sheets | ||||||||||||||||||||
| October 31, 2004 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 13,553 | $ | 7,625 | $ | 336 | $ | — | $ | 21,514 | ||||||||||
| Marketable securities | — | 16 | 1,281 | — | 1,297 | |||||||||||||||
| Receivables, net of allowances | 19,207 | 42,450 | 7,476 | — | 69,133 | |||||||||||||||
| Inventories | 389 | 29,362 | 6,423 | — | 36,174 | |||||||||||||||
| Prepaid expenses | 822 | 2,117 | 14 | — | 2,953 | |||||||||||||||
| Deferred income taxes, net | 2,263 | 5,411 | — | — | 7,674 | |||||||||||||||
| Assets held for sale | — | 7,393 | 3,100 | — | 10,493 | |||||||||||||||
| Total current assets | 36,234 | 94,374 | 18,630 | — | 149,238 | |||||||||||||||
| Receivables due beyond one year, net of allowances | 98 | 57,086 | 21,508 | — | 78,692 | |||||||||||||||
| Preneed funeral receivables and trust investments | — | 487,840 | 15,968 | — | 503,808 | |||||||||||||||
| Preneed cemetery receivables and trust investments | — | 232,493 | 25,683 | — | 258,176 | |||||||||||||||
| Goodwill | — | 247,567 | 25,162 | — | 272,729 | |||||||||||||||
| Deferred preneed selling costs | — | 237,825 | 15,535 | — | 253,360 | |||||||||||||||
| Cemetery property, at cost | — | 341,233 | 25,641 | — | 366,874 | |||||||||||||||
| Property and equipment, at cost | 31,845 | 426,969 | 32,485 | — | 491,299 | |||||||||||||||
| Less accumulated depreciation | 17,273 | 162,434 | 9,845 | — | 189,552 | |||||||||||||||
| Net property and equipment | 14,572 | 264,535 | 22,640 | — | 301,747 | |||||||||||||||
| Deferred income taxes, net | 12,808 | 67,198 | 13,008 | — | 93,014 | |||||||||||||||
| Cemetery perpetual care trust investments. | — | 210,267 | — | — | 210,267 | |||||||||||||||
| Other assets | 8,835 | 13,560 | 1,208 | — | 23,603 | |||||||||||||||
| Equity in subsidiaries | 11,761 | 5,353 | — | (17,114 | ) | — | ||||||||||||||
| Total assets | $ | 84,308 | $ | 2,259,331 | $ | 184,983 | $ | (17,114 | ) | $ | 2,511,508 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Current maturities of long-term debt | $ | 1,725 | $ | — | $ | — | $ | — | $ | 1,725 | ||||||||||
| Accounts payable | 1,090 | 8,452 | 323 | — | 9,865 | |||||||||||||||
| Accrued expenses and other current liabilities | 17,992 | 39,680 | 6,097 | — | 63,769 | |||||||||||||||
| Liabilities associated with assets held for sale | — | 4,777 | 1,714 | — | 6,491 | |||||||||||||||
| Total current liabilities | 20,807 | 52,909 | 8,134 | — | 81,850 | |||||||||||||||
| Long-term debt, less current maturities | 385,080 | — | 30,000 | — | 415,080 | |||||||||||||||
| Intercompany payables, net | (1,022,830 | ) | 973,226 | 49,604 | — | — | ||||||||||||||
| Deferred preneed funeral revenue | — | 250,556 | 46,772 | — | 297,328 | |||||||||||||||
| Deferred preneed cemetery revenue | — | 247,211 | 33,359 | — | 280,570 | |||||||||||||||
| Non-controlling interest in funeral and cemetery trusts | — | 627,344 | — | — | 627,344 | |||||||||||||||
| Other long-term liabilities | 10,269 | 2,196 | — | — | 12,465 | |||||||||||||||
| Negative equity in subsidiaries | 103,004 | — | — | (103,004 | ) | — | ||||||||||||||
| Total liabilities | (503,670 | ) | 2,153,442 | 167,869 | (103,004 | ) | 1,714,637 | |||||||||||||
| Non-controlling interest in perpetual care trusts | — | 208,893 | — | — | 208,893 | |||||||||||||||
| Common stock | 107,885 | 426 | 52 | (478 | ) | 107,885 | ||||||||||||||
| Other | 480,426 | (103,430 | ) | 17,062 | 86,368 | 480,426 | ||||||||||||||
| Accumulated other comprehensive loss | (333 | ) | — | — | — | (333 | ) | |||||||||||||
| Total shareholders’ equity | 587,978 | (103,004 | ) | 17,114 | 85,890 | 587,978 | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | 84,308 | $ | 2,259,331 | $ | 184,983 | $ | (17,114 | ) | $ | 2,511,508 | |||||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
| (15) | Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated) — (Continued) |
Condensed Consolidating Balance Sheets
| October 31, 2003 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| ASSETS | ||||||||||||||||||||
| Current assets: | ||||||||||||||||||||
| Cash and cash equivalents | $ | 18,975 | $ | (478 | ) | $ | 88 | $ | — | $ | 18,585 | |||||||||
| Marketable securities | 1,048 | 26 | 1,272 | — | 2,346 | |||||||||||||||
| Receivables, net of allowances | 41,826 | 57,728 | 5,975 | — | 105,529 | |||||||||||||||
| Inventories | 325 | 30,814 | 6,434 | — | 37,573 | |||||||||||||||
| Prepaid expenses | 713 | 2,141 | 37 | — | 2,891 | |||||||||||||||
| Deferred income taxes, net | 1,434 | 4,408 | — | — | 5,842 | |||||||||||||||
| Assets held for sale | — | 39,812 | 1,604 | — | 41,416 | |||||||||||||||
| Total current assets | 64,321 | 134,451 | 15,410 | — | 214,182 | |||||||||||||||
| Receivables due beyond one year, net of allowances | 147 | 51,569 | 24,460 | — | 76,176 | |||||||||||||||
| Prearranged receivables, net | — | 849,505 | 42,142 | — | 891,647 | |||||||||||||||
| Goodwill | — | 246,116 | 26,834 | — | 272,950 | |||||||||||||||
| Deferred preneed selling costs | — | 226,476 | 16,785 | — | 243,261 | |||||||||||||||
| Cemetery property, at cost | — | 346,494 | 23,233 | — | 369,727 | |||||||||||||||
| Property and equipment, at cost | 31,697 | 418,958 | 35,473 | — | 486,128 | |||||||||||||||
| Less accumulated depreciation | 16,942 | 148,856 | 10,580 | — | 176,378 | |||||||||||||||
| Net property and equipment | 14,755 | 270,102 | 24,893 | — | 309,750 | |||||||||||||||
| Deferred income taxes, net | 17,653 | 71,970 | 14,537 | — | 104,160 | |||||||||||||||
| Other assets | 14,097 | 15,576 | 472 | — | 30,145 | |||||||||||||||
| Equity in subsidiaries | 2,781 | 5,353 | — | (8,134 | ) | — | ||||||||||||||
| Total assets | $ | 113,754 | $ | 2,217,612 | $ | 188,766 | $ | (8,134 | ) | $ | 2,511,998 | |||||||||
| LIABILITIES AND SHAREHOLDERS’ EQUITY | ||||||||||||||||||||
| Current liabilities: | ||||||||||||||||||||
| Current maturities of long-term debt | $ | 13,935 | $ | — | $ | — | $ | — | $ | 13,935 | ||||||||||
| Accounts payable | 348 | 7,333 | 383 | — | 8,064 | |||||||||||||||
| Accrued expenses and other current liabilities | 20,565 | 37,928 | 3,901 | — | 62,394 | |||||||||||||||
| Liabilities associated with assets held for sale | — | 21,140 | 1,948 | — | 23,088 | |||||||||||||||
| Total current liabilities | 34,848 | 66,401 | 6,232 | — | 107,481 | |||||||||||||||
| Long-term debt, less current maturities | 458,180 | — | 30,000 | — | 488,180 | |||||||||||||||
| Intercompany payables, net | (1,064,019 | ) | 998,193 | 65,826 | — | — | ||||||||||||||
| Prearranged deferred revenue, net | — | 1,268,751 | 78,574 | — | 1,347,325 | |||||||||||||||
| Other long-term liabilities | 11,110 | 5,171 | — | — | 16,281 | |||||||||||||||
| Equity in subsidiaries | 120,904 | — | — | (120,904 | ) | — | ||||||||||||||
| Total liabilities | (438,977 | ) | 2,338,516 | 180,632 | (120,904 | ) | 1,959,267 | |||||||||||||
| Common stock | 107,727 | 426 | 52 | (478 | ) | 107,727 | ||||||||||||||
| Other | 446,765 | (121,330 | ) | 8,082 | 113,248 | 446,765 | ||||||||||||||
| Accumulated other comprehensive loss | (1,761 | ) | — | — | — | (1,761 | ) | |||||||||||||
| Total shareholders’ equity | 552,731 | (120,904 | ) | 8,134 | 112,770 | 552,731 | ||||||||||||||
| Total liabilities and shareholders’ equity | $ | 113,754 | $ | 2,217,612 | $ | 188,766 | $ | (8,134 | ) | $ | 2,511,998 | |||||||||
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(15) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated)—(Continued)
Condensed Consolidating Statements of Cash Flows
| Year Ended October 31, 2004 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| Net cash provided by operating activities | $ | 56,549 | $ | 17,668 | $ | 19,439 | $ | — | $ | 93,656 | ||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Proceeds from sales of marketable securities | 1,121 | — | — | — | 1,121 | |||||||||||||||
| Proceeds from sale of assets, net | (1,474 | ) | 20,549 | 700 | — | 19,775 | ||||||||||||||
| Additions to property and equipment | (4,256 | ) | (15,489 | ) | (678 | ) | — | (20,423 | ) | |||||||||||
| Other | — | 85 | (31 | ) | — | 54 | ||||||||||||||
| Net cash provided by (used in) investing activities | (4,609 | ) | 5,145 | (9 | ) | — | 527 | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Repayments of long-term debt | (85,310 | ) | — | — | — | (85,310 | ) | |||||||||||||
| Intercompany receivables (payables) | 33,892 | (14,710 | ) | (19,182 | ) | — | — | |||||||||||||
| Issuance of common stock | 13,413 | — | — | — | 13,413 | |||||||||||||||
| Purchase and retirement of common stock | (19,349 | ) | — | — | — | (19,349 | ) | |||||||||||||
| Other | (8 | ) | — | — | — | (8 | ) | |||||||||||||
| Net cash used in financing activities | (57,362 | ) | (14,710 | ) | (19,182 | ) | — | (91,254 | ) | |||||||||||
| Net increase (decrease) in cash | (5,422 | ) | 8,103 | 248 | — | 2,929 | ||||||||||||||
| Cash and cash equivalents, beginning of period | 18,975 | (478 | ) | 88 | — | 18,585 | ||||||||||||||
| Cash and cash equivalents, end of period | $ | 13,553 | $ | 7,625 | $ | 336 | $ | — | $ | 21,514 | ||||||||||
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(15) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated)—(Continued)
Condensed Consolidating Statements of Cash Flows
| Year Ended October 31, 2003 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| Net cash provided by (used in) operating activities | $ | (1,768 | ) | $ | 44,795 | $ | 14,102 | $ | — | $ | 57,129 | |||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Proceeds from sales of marketable securities | — | — | 550 | — | 550 | |||||||||||||||
| Proceeds from sale of assets, net | (1,070 | ) | 3,411 | — | — | 2,341 | ||||||||||||||
| Additions to property and equipment | (2,783 | ) | (14,967 | ) | (689 | ) | — | (18,439 | ) | |||||||||||
| Other | — | 199 | (14 | ) | — | 185 | ||||||||||||||
| Net cash used in investing activities | (3,853 | ) | (11,357 | ) | (153 | ) | — | (15,363 | ) | |||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Proceeds from long-term debt | 155,000 | — | — | — | 155,000 | |||||||||||||||
| Repayments of long-term debt | (203,164 | ) | — | — | — | (203,164 | ) | |||||||||||||
| Intercompany receivables (payables) | 51,215 | (37,125 | ) | (14,090 | ) | — | — | |||||||||||||
| Debt issue costs | (816 | ) | — | — | — | (816 | ) | |||||||||||||
| Issuance of common stock | 582 | — | — | — | 582 | |||||||||||||||
| Purchase and retirement of common stock | (2,973 | ) | — | — | — | (2,973 | ) | |||||||||||||
| Net cash used in financing activities | (156 | ) | (37,125 | ) | (14,090 | ) | — | (51,371 | ) | |||||||||||
| Net decrease in cash | (5,777 | ) | (3,687 | ) | (141 | ) | — | (9,605 | ) | |||||||||||
| Cash and cash equivalents, beginning of period | 24,752 | 3,209 | 229 | — | 28,190 | |||||||||||||||
| Cash and cash equivalents, end of period | $ | 18,975 | $ | (478 | ) | $ | 88 | $ | — | $ | 18,585 | |||||||||
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(15) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes (Restated)—(Continued)
Condensed Consolidating Statements of Cash Flows
| Year Ended October 31, 2002 | ||||||||||||||||||||
| Guarantor | Non-Guarantor | |||||||||||||||||||
| Parent | Subsidiaries | Subsidiaries | Eliminations | Consolidated | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||
| Net cash provided by operating activities | $ | 56,082 | $ | 32,498 | $ | 1,909 | $ | — | $ | 90,489 | ||||||||||
| Cash flows from investing activities: | ||||||||||||||||||||
| Proceeds from sales of marketable securities | — | — | 169 | — | 169 | |||||||||||||||
| Proceeds from sale of assets, net | 61,887 | 7,916 | — | — | 69,803 | |||||||||||||||
| Additions to property and equipment | (2,552 | ) | (15,197 | ) | (881 | ) | — | (18,630 | ) | |||||||||||
| Other | 1,391 | 378 | 316 | — | 2,085 | |||||||||||||||
| Net cash provided by (used in) investing activities | 60,726 | (6,903 | ) | (396 | ) | — | 53,427 | |||||||||||||
| Cash flows from financing activities: | ||||||||||||||||||||
| Repayments of long-term debt | (138,390 | ) | — | (1,112 | ) | — | (139,502 | ) | ||||||||||||
| Intercompany receivables (payables) | 22,939 | (16,750 | ) | (6,189 | ) | — | — | |||||||||||||
| Issuance of common stock | 858 | — | — | — | 858 | |||||||||||||||
| Net cash used in financing activities | (114,593 | ) | (16,750 | ) | (7,301 | ) | — | (138,644 | ) | |||||||||||
| Effect of exchange rates on cash and cash equivalents | — | — | (205 | ) | — | (205 | ) | |||||||||||||
| Net increase (decrease) in cash | 2,215 | 8,845 | (5,993 | ) | — | 5,067 | ||||||||||||||
| Cash and cash equivalents, beginning of period | 22,537 | (5,636 | ) | 6,222 | — | 23,123 | ||||||||||||||
| Cash and cash equivalents, end of period | $ | 24,752 | $ | 3,209 | $ | 229 | $ | — | $ | 28,190 | ||||||||||
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(16) Discontinued Operations, Assets Held for Sale and Impairment Charges (Restated)
During the third quarter of fiscal year 2001, the Company adopted a formal plan to sell its foreign operations and certain domestic assets, primarily funeral home real estate and excess cemetery property. In addition, it reviewed non-competition agreements that it had entered into with sellers, key employees and others in connection with previous acquisitions, and it decided to relieve some of these individuals from the obligations not to compete, although payments would continue to be made in accordance with the contract terms.
Based on its progress at that time and management’s and the Board of Directors’ decision to proceed with the sales of its foreign operations and certain domestic assets if acceptable prices and terms could be obtained, pursuant to SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of,” in the third quarter of 2001 the Company wrote down the aggregate value of these assets to their estimated fair value, which was based upon then current offers from interested parties or market prices of comparable properties, less cost to sell. As a result, the Company incurred an aggregate pretax noncash charge to earnings of $269,158 ($205,089 after tax, of which $187,329 related to foreign operations) in the third quarter of 2001. Primarily as a result of the significant devaluation of the Argentine peso and the depressed economic conditions in Argentina, the Company re-evaluated the expected loss on the disposition of the assets held for sale and recorded an aggregate pretax noncash charge to earnings of $18,500 ($11,200 after tax) in the third quarter of 2002.
The portion of the charge to equity in the third quarter of fiscal year 2001 that related to foreign operations was equal to the entire foreign-related after-tax charge to earnings of $187,329. However, the Company had already reduced equity for the cumulative foreign translation adjustment incurred in each period that it had owned these businesses. Therefore, in the periods in which the sale of each of the foreign operations was consummated, the cumulative foreign translation adjustment relating to the operation sold was reversed and included in comprehensive income, resulting in a corresponding increase in equity. During the fourth quarter of fiscal year 2001, the Company sold its Mexican, Australian, New Zealand, Belgian and Dutch operations and realized comprehensive income and an increase in shareholders’ equity for the cumulative foreign currency translation related to these operations, which equaled $74,754. During fiscal year 2002, the Company sold its remaining foreign operations in Spain, Portugal, France, Canada and Argentina and realized comprehensive income and an increase in shareholders’ equity for the cumulative foreign translation adjustments related to these operations, which amounted to $35,902.
In fiscal year 2003, SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” was adopted by the Company. In accordance with SFAS No. 144, the Company reviews its long-lived assets for impairment when changes in circumstances indicate that the carrying amount of the asset may not be recoverable. SFAS No. 144 requires that long-lived assets to be held and used be recorded at the lower of carrying amount or fair value. Long-lived assets to be disposed of are to be recorded at the lower of carrying amount or fair value, less cost to sell. In December 2003, the Company announced plans to close or sell a number of small businesses, primarily small funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit the Company’s operating profile. Although the Company identified these businesses during the fourth quarter of fiscal year 2003, it did not meet all of the criteria in SFAS No. 144 for classification as discontinued operations or assets held for sale until the first quarter of fiscal year 2004. As discussed in Note 3(s), all businesses sold in fiscal year 2003 (the year of initial adoption of SFAS No. 144), fiscal year 2004 and fiscal year 2005 have been classified as discontinued operations in fiscal years 2000 through 2004 in this Form 10-K/A Amendment No. 3. Results associated with real estate sold or intended to be sold as part of the divestiture plan have been included in continuing operations for all periods. As required by the Company’s previous credit agreement, the Company has used substantially all of the proceeds from the sale of assets and businesses, which was approximately $22,617 in fiscal year 2004, to reduce its debt.
During the fourth quarter of fiscal year 2003, the Company determined that the carrying value of a number of these assets and businesses exceeded their fair value. As required by SFAS No. 144, the Company recorded an impairment charge of $31,830 during the fourth quarter of fiscal year 2003 of which $10,206 ($8,387 after tax, or $.08 per share) is included in continuing operations and $21,624 ($19,604 after tax, or $.18 per share) is included in discontinued operations. The fair market value was determined by specific offer or bid, or an estimate based on a multiple or percentage of historical results.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(16) Discontinued Operations, Assets Held for Sale and Impairment Charges (Restated)—(Continued)
During fiscal year 2004, the Company evaluated its long-lived assets, recorded impairment charges of $849 and sold several assets that it held for sale at a net gain of $645. The net effect was that the Company recorded gains on dispositions, net of impairment losses, of ($204) for year ended October 31, 2004 in continuing operations, which is included in “Gains on dispositions and impairment (losses), net” in the consolidated statement of earnings. The Company also recorded gains on dispositions, net of impairment losses related to discontinued operations for the year ended October 31, 2004 of $2,426, which is reflected in discontinued operations in the consolidated statement of earnings and in “Gains on dispositions and impairment (losses), net” in the table below.
A tax benefit was recorded for the discontinued operations during the year ended October 31, 2004 because the Company determined that certain tax benefits on asset sales would be realized. For additional information, see Note 21.
In the consolidated statements of earnings, the impairment charges related to the write-down of these long-lived assets occurring in 2002, 2003 and 2004 are reflected in the “Gains on dispositions and impairment (losses), net” line item. The related assets and liabilities associated with assets held for sale are shown in separate line items in the consolidated balance sheet titled “assets held for sale” and “liabilities associated with assets held for sale.” As of October 31, 2004 and 2003, the assets held for sale (excluding $2 and $14 of cash and cash equivalent investments of the operations held for sale as of October 31, 2004 and 2003, respectively) and the liabilities associated with assets held for sale line items in the balance sheet represent the assets and liabilities, respectively, of certain domestic assets, primarily funeral homes and real estate.
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(16) Discontinued Operations, Assets Held for Sale and Impairment Charges (Restated)—(Continued)
A summary of the assets and liabilities included in the “assets held for sale” and “liabilities associated with assets held for sale” line items at October 31, 2004 and 2003 and the operating results of the discontinued operations for the years ended October 31, 2004, 2003 and 2002, respectively, are as follows:
| October 31, | ||||||||
| 2004 | 2003 | |||||||
| (Restated) | (Restated) | |||||||
| (Note 2) | (Note 2) | |||||||
| Assets | ||||||||
| Receivables, net of allowances | $ | 519 | $ | 662 | ||||
| Inventories and other current assets | 1,093 | 2,594 | ||||||
| Net property and equipment | 3,851 | 12,812 | ||||||
| Preneed funeral receivables and trust investments | 2,433 | — | ||||||
| Preneed cemetery receivables and trust investments | 1,283 | — | ||||||
| Prearranged receivables, net | — | 18,457 | ||||||
| Deferred charges and other assets | 1,314 | 6,854 | ||||||
| Cemetery property | — | 37 | ||||||
| Assets held for sale | $ | 10,493 | $ | 41,416 | ||||
| Liabilities | ||||||||
| Deferred income taxes, net | $ | 188 | $ | 1,843 | ||||
| Deferred preneed funeral revenue | 2,384 | — | ||||||
| Deferred preneed cemetery revenue | 705 | — | ||||||
| Non-controlling interest in funeral and cemetery trusts | 3,214 | — | ||||||
| Prearranged deferred revenue, net | — | 21,245 | ||||||
| Liabilities associated with assets held for sale | $ | 6,491 | $ | 23,088 | ||||
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2)) | ||||||||||
| Revenue: | ||||||||||||
| Funeral | $ | 11,471 | $ | 18,331 | $ | 19,974 | ||||||
| Cemetery | 1,235 | 1,005 | 916 | |||||||||
| $ | 12,706 | $ | 19,336 | $ | 20,890 | |||||||
| Gross profit: | ||||||||||||
| Funeral | $ | 783 | $ | 983 | $ | 1,738 | ||||||
| Cemetery | 445 | 42 | 59 | |||||||||
| 1,228 | 1,025 | 1,797 | ||||||||||
| Gains on dispositions and impairment (losses), net | 2,426 | (21,624 | ) | — | ||||||||
| Other operating income (expense), net | 180 | (219 | ) | 82 | ||||||||
| Earnings (loss) from discontinued operations before income taxes | $ | 3,834 | $ | (20,818 | ) | $ | 1,879 | |||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(17) Separation Charges
In December 2003, the Company announced plans to restructure and reduce its workforce by approximately 300 employees throughout the organization. During fiscal year 2004, the Company recorded a charge for severance and other costs associated with the workforce reductions of $2,435 ($1,510 after tax, or $.01 per share). There are no remaining costs under the workforce reduction plan. The plan was completed June 1, 2004.
In the third quarter of fiscal years 2004 and 2003, the Company recorded charges of $1,000 and $2,450, respectively, related to separation pay of former executive officers. For additional information, see Note 23.
(18) Long-term Debt
| October 31, | October 31, | |||||||
| 2004 | 2003 | |||||||
| Long-term debt: | ||||||||
| Senior secured credit facility: | ||||||||
| Revolving credit facility | $ | 59,000 | $ | 79,000 | ||||
| Term Loan B | 54,005 | 115,380 | ||||||
| 6.70% Notes | — | 100 | ||||||
| 10.75% senior subordinated notes due 2008 | 300,000 | 300,000 | ||||||
| Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rates of 4.6% and 5.9% as of October 31, 2004 and 2003, respectively, partially secured by assets of subsidiaries, with maturities through 2022 | 3,800 | 7,635 | ||||||
| Total long-term debt | 416,805 | 502,115 | ||||||
| Less current maturities | 1,725 | 13,935 | ||||||
| $ | 415,080 | $ | 488,180 | |||||
On June 29, 2001, the Company entered into a $550,000 senior secured credit facility (“the prior facility”), and on November 19, 2004, the Company entered into an amended and restated $225,000 senior secured credit facility (“the new facility”). The prior facility consisted of (1) a $175,000 four-year revolving credit facility, (2) a $75,000 18-month asset sale term loan and (3) a $300,000 five-year Term Loan B. The $75,000 18-month asset sale term loan was repaid in full in August 2001. In May 2003 in connection with the redemption of the ROARS discussed below, the Company borrowed an additional $50,000 in Term Loan B and $50,000 from its revolving credit facility and amended the senior secured credit facility to provide further financial flexibility to the Company.
The applicable margins for Eurodollar rate loans under the prior facility were generally subject to quarterly adjustments based upon the Company’s consolidated leverage ratio. The applicable margins ranged from 200.0 to 275.0 basis points for revolving loans and were fixed at 250.0 basis points for Term Loan B. In addition, the Company paid a commitment fee of 50.0 to 62.5 basis points, based on the Company’s consolidated leverage ratio, on the unused portion of the revolving credit facility. On March 5, 2002, the Company entered into two interest rate swap agreements which became effective on March 11, 2002, each involving a notional amount of $50,000. The first agreement effectively converted $50,000 of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 3.65 percent and expired on March 11, 2004. The second agreement effectively converts $50,000 of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 4.265 percent and expires on March 11, 2005. The effective rate to the Company of the debt hedged by the remaining interest rate swap includes the fixed swap rate of 4.265 percent plus the applicable margin under the Company’s prior facility relative to the underlying debt, which margin is based upon the Company’s consolidated leverage ratio, as defined in the prior facility. As of October 31, 2004, that margin was 250.0 basis points, resulting in an effective rate of 6.765 percent on $50,000 swapped. As of October 31, 2004, the Company had $113,005 outstanding under its revolving credit facility and Term Loan B, $63,005 of which was not hedged by the interest rate swap agreement and was subject to a short-term variable interest rate of approximately 4.0 percent.
As of October 31, 2004, the Company’s revolving credit facility was set to mature in June of 2005, and the Company’s Term Loan B was set to mature in October of 2005. As discussed below, on November 19, 2004, the
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(18) Long-term Debt-(Continued)
Company entered into an amended and restated senior secured credit facility consisting of a $125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. Thus, in the October 31, 2004 balance sheet, the $59,000 outstanding balance of the revolving credit facility and the $54,005 outstanding balance of the Term Loan B have been classified as long-term debt.
The new facility consists of a $125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. As a result of the refinancing, the leverage-based grid pricing for the interest rate on the Company’s new revolving credit facility was reduced to LIBOR plus 150.0 basis points at closing, representing a 50 basis-point reduction. The grid for the new revolving credit facility ranges from 137.5 to 200.0 basis points. The interest rate on the Company’s Term Loan B was reduced to LIBOR plus 175.0 basis points, which is 75 basis points below the prior facility and is not subject to grid pricing. The Company will pay a commitment fee of 37.5 to 50.0 basis points, based on the Company’s consolidated leverage ratio. No amounts under the new facility are hedged by the Company’s remaining interest rate swap. The new facility has substantially the same collateral and guarantees as the prior agreement and is subject to similar but somewhat less restrictive financial and other covenants.
The new Term Loan B matures on November 19, 2011 with 94 percent of the principal due in 2011, and the new revolving credit facility matures on November 19, 2009, although they both will terminate six months prior to the maturity date of the Company’s 10.75 percent senior subordinated notes due July 1, 2008 unless at least 75 percent of the principal amount of those notes are refinanced prior to that time.
During the first quarter of fiscal year 2005, the Company expects to incur a charge for early extinguishment of debt of $2,650 ($1,723 after tax, or $.02 per share) to write off the remaining unamortized book value of fees on the prior facility. The fees incurred for the new facility will be approximately $1,700 and will be amortized over the life of the new debt.
The new facility is governed by three financial covenants:
| • | Maintenance on a rolling four quarter basis of a maximum consolidated leverage ratio (funded debt (net of domestic cash, cash equivalents and marketable securities) divided by EBITDA (as defined)) – Maximum 3.50x, | ||
| • | Maintenance on a rolling four quarter basis of a minimum consolidated interest coverage ratio (EBITDA (as defined) divided by interest expense) – Minimum 2.50x, and | ||
| • | Maintenance on a rolling four quarter basis of a maximum consolidated senior secured leverage ratio (total funded senior secured debt divided by EBITDA (as defined)) – Maximum 3.00x with step-downs. |
The covenants include required mandatory prepayments from the proceeds of certain asset sales and debt and equity offerings (with the first $25,000 per year of asset sale proceeds considered to be an optional prepayment), limitations on liens, limitations on mergers, consolidations and asset sales, limitations on incurrence of debt, limitations on dividends, stock redemptions and the redemption and/or prepayment of other debt, limitations on investments and acquisitions and limitations on transactions with affiliates. If there is no default or event of default, the Company may pay cash dividends and repurchase its stock, provided that the aggregate amount of the dividends and stock repurchased plus other types of restricted payments in any fiscal year does not exceed $30,000 plus any positive amounts in the discretionary basket. The discretionary basket is the sum of the Company’s cash and cash equivalents as of October 31, 2004 plus a percentage of equity proceeds as defined in the agreement plus the first $25,000 of asset sale proceeds plus 100 percent of net cash from operating activities minus cash used or committed to be used for capital expenditures, investments and acquisitions. The agreement also limits capital expenditures in any fiscal year to $40,000, with a provision for the carryover of permitted but unused amounts. The cost of acquisitions is unlimited if the consolidated leverage ratio is less than or equal to 3.00 to 1.00 and the consolidated senior secured leverage ratio is less than or equal to 1.75 to 1.00, after giving proforma effect to the acquisition; otherwise, the limit is $75,000 in any fiscal year, with a provision for the carryover of permitted but unused amounts.
Obligations under the new facility are guaranteed by substantially all existing and future direct and indirect domestic subsidiaries of the Company formed under the laws of any one of the states or the District of Columbia of
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(18) Long-term Debt-(Continued)
the United States of America (“SEI Guarantors”).
The lenders under the new facility have received a first priority perfected security interest in (i) all of the capital stock or other equity interests of each of the domestic subsidiaries of the Company and 65 percent of the voting capital stock of all direct foreign subsidiaries and (ii) all other present and future assets and properties of the Company and the SEI Guarantors except (a) real property, (b) vehicles, (c) assets to which applicable law prohibits security interest therein or requires the consent of a third party, (d) contract rights in which a security interest without the approval of the other party to the contract would constitute a default thereunder and (e) any assets with respect to which a security interest cannot be perfected.
In December 1996, the Company issued $100,000 of 6.70 percent Notes due 2003. In connection with the Company’s June 2001 refinancing, the Company repurchased $99,900 of these Notes on June 29, 2001. As of October 31, 2003, the carrying value, including accrued interest, and the fair value of these notes was $103. The remaining balance of the 6.70 percent Notes was paid in full in December 2003.
In April 1998, the Company issued $200,000 of 6.40 percent Remarketable Or Redeemable Securities (“ROARS”) due May 1, 2013 (remarketing date May 1, 2003). In connection with the Company’s June 2001 refinancing transactions, the Company repurchased $100,103 of the ROARS on June 29, 2001. Outstanding 6.40 percent ROARS were required to be redeemed by the Company or remarketed by the remarketing dealer on May 1, 2003. On May 1, 2003, when the remarketing dealer elected to remarket the ROARS, the Company exercised its right to redeem the ROARS rather than allow them to be remarketed. The Company paid the remarketing dealer $12,691, the contractually specified value of the remarketing right, which was based on the 10-year Treasury rate of 3.894 percent. Net of the $1,532 unamortized ROARS option premium and $130 in costs, the Company recorded a charge of $11,289 ($7,338 after tax, or $.07 per share) in the third quarter of fiscal year 2003.
The 10.75 percent senior subordinated notes due in 2008 are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior debt of the Company and arepari passuin right of payment with any future senior subordinated indebtedness of the Company. The notes are guaranteed by all of the domestic subsidiaries of the Company, other than certain specified subsidiaries (see Note 15). Interest on the notes accrues at the rate of 10.75 percent per annum and is payable semi-annually in arrears on January 1 and July 1. As of October 31, 2003, the carrying value, including accrued interest, and fair value of the senior subordinated notes were $310,750 and $349,894, respectively. As of October 31, 2004, the carrying value, including accrued interest, and fair value of the senior subordinated notes were $310,750 and $340,922, respectively.
The indenture governing the 10.75 percent senior subordinated notes limits the Company’s and its subsidiaries’ ability to borrow money, create liens, pay dividends on or redeem or repurchase stock, make investments, sell stock in subsidiaries, restrict dividends or other payments from subsidiaries, enter into transactions with affiliates and sell assets or merge with other companies. On or after July 1, 2005, the Company may redeem the notes in whole or in part at the following redemption prices (expressed as percentages of principal amount) plus accrued and unpaid interest: if redeemed during the twelve-month period beginning July 1, 2005, 105.3750 percent; if redeemed during the twelve-month period beginning July 1, 2006, 102.6875 percent; if redeemed July 1, 2007 and thereafter, 100.0000 percent. If the Company calls these notes at the first call date, it would record a charge for early extinguishment of debt of approximately $20,225 including the call premium of $16,125 and write-off of the unamortized fees of $4,100. The Company may also decide to tender for these notes prior to their call date, and if it does so, it could pay a premium larger than the call premium. Additionally, the write-off of the unamortized fees would be higher, and the Company would incur significant transaction expenses. The Company must offer to purchase the notes at 101 percent of their face amount, plus accrued interest, if the Company experiences specific kinds of changes in control. The indenture permits the payment of dividends if the aggregate dividends and other restricted payments since the issuance of the notes are less than the sum of, generally, 50 percent of the Company’s consolidated net income plus 100 percent of net cash proceeds from the sale of any equity interests, in each case since the issuance of the notes, plus $15,000; provided that the Company is able to incur at least one dollar of additional indebtedness under the fixed charge coverage ratio covenant and there is no default or event of default.
Under the dividend and stock repurchase restrictions in the new facility and the indenture governing the 10.75
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(18) Long-term Debt-(Continued)
percent senior subordinated notes, and based on the Company’s leverage ratio as of October 31, 2004, the Company could use up to $33,730 to pay dividends or repurchase its stock during fiscal year 2005. The Company was in compliance with its debt covenants as of October 31, 2004 and 2003.
As of October 31, 2004, the Company’s subsidiaries had approximately $3,800 of long-term debt that represents notes the subsidiaries issued as part of the purchase price of acquired businesses or debt the subsidiaries assumed in connection with acquisitions. Approximately $1,263 of this debt is secured by liens on the stock or assets of the related subsidiaries.
Scheduled principal payments of the Company’s long-term debt for the fiscal years ending October 31, 2005 through October 31, 2009, are approximately $114,730 in 2005 (including $113,005 related to the revolving credit facility and Term Loan B which are classified as long-term debt in the October 31, 2004 balance sheet as discussed above), $770 in 2006, $542 in 2007, $300,198 in 2008 and $20 in 2009. Scheduled principal payments thereafter are $545.
(19) Guarantees
The Company’s obligations under both its prior and its new senior secured credit facilities are guaranteed by all of its existing and future direct and indirect subsidiaries formed under the laws of the United States, any state thereof or the District of Columbia, except for specified excluded subsidiaries. The senior subordinated notes are guaranteed by all of the domestic subsidiaries of the Company, other than certain specified subsidiaries including the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries. For additional information regarding the senior secured credit facility and senior subordinated notes, see Note 18.
All obligations under both the prior and new senior secured credit facilities, including the guarantees and any interest rate protection and other hedging agreements with any lender or its affiliates, are secured by a first priority perfected security interest in (1) all capital stock and other equity interests of the Company’s existing and future direct and indirect domestic subsidiaries, other than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of the voting equity interests and 100 percent of all other equity interests (other than qualifying shares of directors) of all direct existing and future foreign subsidiaries, and (3) all other existing and future assets and properties of the Company and the guarantors, except for real property, vehicles and other specified exclusions.
Louisiana law gives Louisiana corporations broad powers to indemnify their present and former directors and officers and those of affiliated corporations against expenses incurred in the defense of any lawsuit to which they are made parties by reason of their positions. The Company’s By-laws make mandatory the indemnification of directors and officers permitted by Louisiana law. The Company has in effect a directors’ and officers’ liability insurance policy that provides for indemnification of its officers and directors against losses arising from claims asserted against them in their capacities as officers and directors, subject to limitations and conditions set forth in such policy. The Company has also entered into indemnity agreements with each director and executive officer, pursuant to which the Company has agreed, subject to certain exceptions, to purchase and maintain directors’ and officers’ liability insurance. The agreements also provide that the Company will indemnify each director and executive officer against any costs and expenses, judgments, settlements and fines incurred in connection with any claim involving him or her by reason of his or her position as director or officer, provided that the director or executive officer meets certain standards of conduct.
As of October 31, 2004, the Company has guaranteed long-term debt of its subsidiaries of approximately $1,773 that represents notes the subsidiaries issued as part of the purchase price of acquired businesses or debt the subsidiaries assumed in connection with acquisitions.
(20) Reconciliation of Basic and Diluted Per Share Data
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(20) Reconciliation of Basic and Diluted Per Share Data (Restated)—(Continued)
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Data | ||||||||||
Year Ended October 31, 2004—Restated (Note 2) | ||||||||||||
| Earnings from continuing operations | $ | 31,022 | ||||||||||
| Basic earnings per common share: | ||||||||||||
| Earnings from continuing operations available to common shareholders | $ | 31,022 | 107,522 | $ | .29 | |||||||
| Effect of dilutive securities: | ||||||||||||
| Time-vest stock options assumed exercised and restricted stock | — | 637 | ||||||||||
| Diluted earnings per common share: | ||||||||||||
| Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock | $ | 31,022 | 108,159 | $ | .29 | |||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Data | ||||||||||
Year Ended October 31, 2003—Restated (Note 2) | ||||||||||||
| Earnings from continuing operations | $ | 1,065 | ||||||||||
| Basic earnings per common share: | ||||||||||||
| Earnings from continuing operations available to common shareholders | $ | 1,065 | 108,220 | $ | .01 | |||||||
| Effect of dilutive securities: | ||||||||||||
| Time-vest stock options assumed exercised | — | 10 | ||||||||||
| Diluted earnings per common share: | ||||||||||||
| Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised | $ | 1,065 | 108,230 | $ | .01 | |||||||
| Earnings | Shares | Per Share | ||||||||||
| (Numerator) | (Denominator) | Data | ||||||||||
Year Ended October 31, 2002—Restated (Note 2) | ||||||||||||
| Earnings from continuing operations before cumulative effect of change in accounting principle | $ | 11,101 | ||||||||||
| Basic earnings per common share: | ||||||||||||
| Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders | $ | 11,101 | 107,861 | $ | .10 | |||||||
| Effect of dilutive securities: | ||||||||||||
| Time-vest stock options assumed exercised | — | 438 | ||||||||||
| Diluted earnings per common share: | ||||||||||||
| Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders plus time-vest stock options assumed exercised | $ | 11,101 | 108,299 | $ | .10 | |||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(20) Reconciliation of Basic and Diluted Per Share Data (Restated)—(Continued)
Options to purchase 100,247 shares of common stock at a price of $6.96 per share were outstanding during the year ended October 31, 2004 but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. These options expire on April 12, 2005. Options to purchase 437,656 shares at prices ranging from $16.00 to $27.25 per share were outstanding during the year ended October 31, 2004, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. These options expired on July 31, 2004.
Options to purchase 6,626,621 shares of common stock at prices ranging from $4.28 to $27.25 were outstanding during the year ended October 31, 2003 but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares.
Options to purchase 1,356,286 shares of common stock at prices ranging from $5.90 to $27.25 were outstanding but were not included in the computation of diluted earnings per share for the fiscal year ended October 31, 2002 because the options’ exercise prices were greater than the average market price of the common shares.
The Company includes Class A and Class B common stock in its diluted shares calculation. As of October 31, 2004, the Company’s Chairman Emeritus, Frank B. Stewart, Jr., was the record holder of all of the Company’s shares of Class B common stock. The Company’s Class A and B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr.
(21) Income Taxes (Restated)
Income tax expense (benefit) is comprised of the following components:
| Continuing Operations | ||||||||||||||||
| U.S. and | ||||||||||||||||
| Year Ended October 31, | Possessions | State | Foreign | Totals | ||||||||||||
| 2004: | ||||||||||||||||
| Current tax expense–Restated (Note 2) | $ | 4,477 | $ | 2,593 | $ | — | $ | 7,070 | ||||||||
| Deferred tax expense–Restated (Note 2) | 10,787 | 352 | — | 11,139 | ||||||||||||
| $ | 15,264 | $ | 2,945 | $ | — | $ | 18,209 | |||||||||
| 2003: | ||||||||||||||||
| Current tax expense (benefit)–Restated (Note 2) | $ | (33,486 | ) | $ | 2,012 | $ | — | $ | (31,474 | ) | ||||||
| Deferred tax expense (benefit)–Restated (Note 2) | 35,132 | (67 | ) | — | 35,065 | |||||||||||
| $ | 1,646 | $ | 1,945 | $ | — | $ | 3,591 | |||||||||
| 2002: | ||||||||||||||||
| Current tax expense–Restated (Note 2) | $ | 1,020 | $ | 2,000 | $ | — | $ | 3,020 | ||||||||
| Deferred tax expense–Restated (Note 2) | 1,680 | 1,824 | — | 3,504 | ||||||||||||
| $ | 2,700 | $ | 3,824 | $ | — | $ | 6,524 | |||||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(21) Income Taxes (Restated)—(Continued)
| Discontinued Operations | ||||||||||||||||
| U.S. and | ||||||||||||||||
| Year Ended October 31, | Possessions | State | Foreign | Totals | ||||||||||||
| 2004: | ||||||||||||||||
| Current tax expense-Restated (Note 2) | $ | 513 | $ | 22 | $ | — | $ | 535 | ||||||||
| Deferred tax expense (benefit)-Restated (Note 2) | (2,391 | ) | 20 | — | (2,371 | ) | ||||||||||
| $ | (1,878 | ) | $ | 42 | $ | — | $ | (1,836 | ) | |||||||
| 2003: | ||||||||||||||||
| Current tax expense- Restated (Note 2) | $ | 282 | $ | 24 | $ | — | $ | 306 | ||||||||
| Deferred tax benefit-Restated (Note 2) | (2,027 | ) | — | — | (2,027 | ) | ||||||||||
| $ | (1,745 | ) | $ | 24 | $ | — | $ | (1,721 | ) | |||||||
| 2002: | ||||||||||||||||
| Current tax expense-Restated (Note 2) | $ | 631 | $ | 56 | $ | — | $ | 687 | ||||||||
| Deferred tax expense-Restated (Note 2) | — | — | — | — | ||||||||||||
| $ | 631 | $ | 56 | $ | — | $ | 687 | |||||||||
The reconciliation of the statutory tax rate to the effective tax rate is as follows for continuing operations:
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Statutory tax rate | 35.00 | % | 35.00 | % | 35.00 | % | ||||||
| Increases (reductions) in tax rate resulting from: | �� | |||||||||||
| State income tax | 3.89 | 27.16 | 18.45 | |||||||||
| U. S. possession income tax | 1.77 | 10.44 | .88 | |||||||||
| Foreign tax rate differential | — | — | (4.11 | ) | ||||||||
| Nondeductible expenses and other | .59 | 7.30 | 1.17 | |||||||||
| Dividend exclusion | (2.38 | ) | (40.22 | ) | (11.06 | ) | ||||||
| Basis adjustment on sale of businesses | .11 | (13.42 | ) | (3.31 | ) | |||||||
| Valuation allowance | (1.99 | ) | 50.90 | — | ||||||||
| Effective tax rate | 36.99 | % | 77.16 | % | 37.02 | % | ||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(21) Income Taxes (Restated)—(Continued)
Deferred tax assets and liabilities consist of the following:
| October 31, | ||||||||
| 2004 | (2003) | |||||||
| (Restated) | (Restated) | |||||||
| (Note 2) | (Note 2) | |||||||
| Deferred tax assets: | ||||||||
| Accrued expenses | $ | 2,414 | $ | 276 | ||||
| Allowance for sales cancellations and doubtful accounts | 3,765 | 2,593 | ||||||
| Capital loss carryover | 9,484 | 11,920 | ||||||
| Deductible foreign taxes | 2,542 | 2,542 | ||||||
| Deferred preneed sales and expenses | 107,703 | 111,407 | ||||||
| Deferred compensation | 3,324 | 2,832 | ||||||
| Foreign tax credit | 1,778 | 1,385 | ||||||
| Inventory writedown | 1,068 | 1,068 | ||||||
| Lease obligations | 557 | 866 | ||||||
| Loss on worthless stock | 3,542 | — | ||||||
| Loss on impairment of assets held for sale | 9,161 | 18,247 | ||||||
| Net operating loss carryover | 4,013 | 2,762 | ||||||
| Non compete amortization | 5,377 | 6,349 | ||||||
| Other | 2,659 | 3,247 | ||||||
| State income taxes | 24,383 | 24,265 | ||||||
| U.S. possession income tax | 10,182 | 11,534 | ||||||
| 191,952 | 201,293 | |||||||
| Valuation allowance | (9,744 | ) | (11,985 | ) | ||||
| 182,208 | 189,308 | |||||||
| Deferred tax liabilities: | ||||||||
| Depreciation | 2,808 | 1,366 | ||||||
| Goodwill amortization | 10,259 | 9,119 | ||||||
| Partnership interest | 2,037 | 2,037 | ||||||
| Purchase accounting adjustments | 66,604 | 68,627 | ||||||
| 81,708 | 81,149 | |||||||
| $ | 100,500 | $ | 108,159 | |||||
| Deferred tax liability included in liabilities associated with assets held for sale | 188 | 1,843 | ||||||
| $ | 100,688 | $ | 110,002 | |||||
| Current net deferred asset | $ | 7,674 | $ | 5,842 | ||||
| Long-term net deferred asset | 93,014 | 104,160 | ||||||
| $ | 100,688 | $ | 110,002 | |||||
For the year ended October 31, 2002, the Company’s loss before income taxes generated from properties in foreign jurisdictions was $31,007. The Company has a capital loss carryforward of $27,096 that is available until the end of fiscal year 2007.
As discussed in Note 16, in the fourth quarter of fiscal year 2003, the Company recorded an impairment of long-lived assets. Based on its assessment of the probability of realizing the $15,938 in tax benefits associated with the potential losses generated from the impairment, the Company determined that an $11,985 tax valuation allowance was appropriate. The $11,985 valuation allowance was required because the Company anticipated the majority of sales would generate capital losses due to the expected nature of the sales transactions. The Company believed it would likely not generate sufficient capital gains over the relevant time period against which it could offset these future capital losses given the existing capital loss carryforwards it already has available to it. Sales completed in 2004 generated primarily ordinary losses based on the type of sale transaction (asset sale). A tax benefit was recorded in 2004 for these sales. Upon completion of the asset sales, the entire book basis was removed, but there remained a tax basis in the stock of the unliquidated subsidiary. Therefore, the Company has recorded a full
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amount
(Dollars in thousands, except per share amount
(21) Income Taxes (Restated)—(Continued)
valuation allowance against the associated tax benefit of the remaining tax basis in these subsidiaries because it is not likely that it will realize a tax benefit upon the liquidation of the subsidiaries. Accordingly, the valuation allowance as of October 31, 2004 was reduced to $9,744.
(22) Benefit Plans
Stewart Enterprises Employees’ Retirement Trust
The Company has a defined contribution retirement plan, the “Stewart Enterprises Employees’ Retirement Trust (A Profit-Sharing Plan) (“SEERT”).” This plan covers substantially all employees with more than one year of service who have attained the age of 21. Contributions are made to the plan at the discretion of the Company’s Board of Directors. Additionally, employees who participate may contribute 100 percent of their earnings, up to the limit set by the Internal Revenue Code. The first 5 percent of such employee contributions are eligible for Company matching contributions at the rate of $.50 for each $1.00 contributed. The Company’s expense, including the Company’s matching contributions, for the fiscal years ended October 31, 2004, 2003 and 2002 was approximately $2,091, $2,152 and $3,050, respectively.
Stewart Enterprises Puerto Rico Employees’ Retirement Trust
On January 1, 2003, the Stewart Enterprises Puerto Rico Employees’ Retirement Trust, a defined contribution retirement plan, became effective when the Company adopted the Banco Popular de Puerto Rico Master Defined Contribution Retirement Plan. Individuals employed in Puerto Rico by the Company or certain of its subsidiaries and affiliates are eligible to participate in this plan upon reaching the age of 21 and the completion of one year of service. Employees in Puerto Rico who were formerly participating in the Stewart Enterprises Employees’ Retirement Trust had their account balances transferred to this plan in February 2003. Eligible employees may contribute up to 10 percent of their earnings. Employee contributions are eligible for Company matching contributions at the rate of $0.50 for each $1.00 contributed. Additional contributions may also be made to this plan at the discretion of the Company’s Board of Directors. The Company’s expense, including the Company’s matching contributions, for the fiscal years ended October 31, 2004 and 2003 was $109 and $108, respectively.
Non-qualified Supplemental Retirement and Deferred Compensation Plan
The Company has a non-qualified key employee defined contribution supplemental retirement plan, which provides certain highly compensated employees the opportunity to accumulate deferred compensation which cannot be accumulated under the SEERT due to certain limitations. Contributions are made to the plan at the discretion of the Company’s Board of Directors. Additionally, employees who participate may contribute up to 15 percent of their earnings. The first 5 percent of such employee contributions are eligible for Company matching contributions at the rate of $.50 for each $1.00 contributed. The Company’s expense, including the Company’s matching contributions, for the fiscal years ended October 31, 2004, 2003 and 2002 was approximately $386, $525 and $275, respectively.
Supplemental Executive Retirement Plan
On April 1, 2002, the Company adopted an unfunded, non-qualified defined benefit supplemental retirement plan, the “Stewart Enterprises, Inc. Supplemental Executive Retirement Plan (“SERP”)” to provide for the payment of pension benefits to a select group of highly-compensated management employees. The retirement plan is non-contributory and provides retirement benefits based on final average compensation, position and the participant’s age, years of service or years of participation in the SERP. The plan is construed in accordance with and governed by the laws of the State of Louisiana, except to the extent that the plan is governed by the Employee Retirement Income Security Act of 1974, as amended. The Company’s expense for the fiscal years ended October 31, 2004, 2003 and 2002 was $1,800, $1,960 and $1,091, respectively. The Company’s liability as of October 31, 2004 and 2003 was $4,712 and $3,021, respectively.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(22) Benefit Plans-(Continued)
1995 Incentive Compensation Plan
In August 1995, the Board of Directors adopted, and in December 1995 and December 1996 amended, the 1995 Incentive Compensation Plan, which has been approved by the Company’s shareholders, pursuant to which officers and other employees of the Company may be granted stock options, stock awards, restricted stock, stock appreciation rights, performance share awards or cash awards by the Compensation Committee of the Board of Directors. Under the plan, the Compensation Committee may accelerate the exercisability of any option at any time at its discretion, and the options become immediately exercisable in the event of a change of control of the Company, as defined in the plan.
Under the plan from September 7, 1995 through January 12, 1998, the Company granted options to officers and other employees for the purchase of a total of 7,424,536 shares of Class A common stock at exercise prices equal to the fair market value at the grant dates, which ranged from $10.50 to $21.50 per share. As of October 31, 2001, 4,983,230 of these options had been repurchased or exercised and 2,441,306 either were forfeited or expired. There were no outstanding options remaining from these grants as of October 31, 2002.
From July 1998 to February 1999, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 3,682,250 shares of Class A common stock at exercise prices equal to the fair market value at the grant dates, which ranged from $16.00 to $27.25 per share. One-third of the options became exercisable in 20 percent annual increments beginning on July 17, 1999. The remaining two-thirds of the options would become exercisable in full on the first day between the grant date and July 17, 2003 that the average of the closing sale prices of a share of Class A common stock over the 20 preceding consecutive trading days equals or exceeds $67.81, which represents a 20 percent annual compounded growth in the price of a share of Class A common stock over five years. All of the options expired on July 31, 2004.
In January 2000, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 4,018,168 shares of Class A common stock at exercise prices equal to the fair market value at the grant dates, which ranged from $5.50 to $6.00 per share. The options became exercisable in 25 percent annual increments beginning January 21, 2001. All of these options expire on January 21, 2005. As of October 31, 2004, 1,714,357 of these options had been exercised, and 1,280,564 options had been forfeited.
From February 2003 to June 2003, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 200,000 shares of Class A common stock at an exercise price of $5.16. The options became exercisable in 50 percent annual increments beginning February 14, 2004. All of these options expire on April 12, 2005. As of October 31, 2004, 15,062 of these options had been exercised, and none had been forfeited.
From November 2003 to March 2004, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 141,000 shares of Class A common stock at exercise prices equal to the fair market value at the grant dates, which ranged from $5.16 to $6.96 per share. The options vested immediately. All of these options expire on January 31, 2005 or April 12, 2005. As of October 31, 2004, 38,041 of these options had been exercised and 3,333 options had been forfeited. On December 22, 2003, the Company granted new options to its executive officers for the purchase of 780,000 shares of Class A common stock at an exercise price of $5.44. These options became exercisable in one-third increments beginning October 31, 2004. All of these options expire on December 22, 2013. As of October 31, 2004, none of these options had been exercised, and 286,666 had been forfeited.
2000 Incentive Compensation Plan
The Board of Directors adopted, and in April 2000 the shareholders approved, the 2000 Incentive Compensation Plan pursuant to which officers and other employees of the Company may be granted stock options,
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(22) Benefit Plans-(Continued)
restricted stock or other stock-based awards by the Compensation Committee of the Board of Directors. From April 2000 through June 2003, the Company had granted options to officers and other employees for the purchase of a total of 3,389,532 shares of Class A common stock at exercise prices equal to the fair market value at the grant dates, which ranged from $2.22 to $6.96 per share. The options generally became exercisable in 25 percent annual increments beginning on April 12, 2001. The Compensation Committee may accelerate the exercisability of any option at any time at its discretion, and the options become immediately exercisable in the event of a change of control of the Company, as defined in the plan. All of these options expire on April 12, 2005. As of October 31, 2004, 1,238,939 of these options had been exercised, and 626,172 options had been forfeited.
Directors’ Stock Option Plan
Effective January 2, 1996, the Board of Directors adopted, and in December 1996 amended, the Directors’ Stock Option Plan, which has been approved by the Company’s shareholders, pursuant to which each director of the Company who is not an employee of the Company was granted an option to purchase 72,000 shares of the Company’s Class A common stock. From January 2, 1996 through October 31, 1997, the Company granted a total of 360,000 options at exercise prices equal to the fair market value at the grant dates, which ranged from $12.34 to $18.25 per share. The options generally became exercisable in 25 percent annual increments beginning January 2, 1997, except for grants issued since the initial grant date, which options vested over the remainder of the original four-year period. As of January 2, 2001, 91,052 of these options had been exercised and 268,948 either were forfeited or expired. There were no outstanding options remaining from this grant as of October 31, 2002.
In January 2000, the Company granted 14,400 new options to purchase shares of Class A common stock under the Directors’ Stock Option Plan to each director of the Company who is not an employee of the Company. A total of 72,000 options were granted at an exercise price of $6.00 per share. The options vested immediately. All of these options expire on January 31, 2005. As of October 31, 2004, none of these options had been exercised, and 14,400 options had been forfeited.
2000 Directors’ Stock Option Plan
The Board of Directors adopted, and in April 2000 the shareholders approved, the 2000 Directors’ Stock Option Plan pursuant to which each director of the Company who is not an employee of the Company was granted an option to purchase 50,000 shares of the Company’s Class A common stock on April 13, 2000. The Company granted a total of 200,000 options at an exercise price equal to the fair market value at the grant date, which was $4.30 per share. On December 18, 2001, the Company granted 58,334 options at an exercise price equal to fair market value at grant date, which was $6.05 per share. The options generally became exercisable in 25 percent annual increments beginning on April 13, 2001. On February 18, 2004, the Company granted 2,083 options at an exercise price equal to the fair market value at the grant date, which was $6.25 per share. The Compensation Committee may accelerate the exercisability of any option at any time at its discretion, and the options become immediately exercisable in the event of a change of control of the Company, as defined in the plan. All of these options expire on January 31, 2005. As of October 31, 2004, 72,190 of these options had been exercised, and 50,000 options had been forfeited.
Employee Stock Purchase Plan
On July 1, 1992, the Company adopted an Employee Stock Purchase Plan. This plan was terminated and replaced by the 2003 Employee Stock Purchase Plan (the “Plan”), which was approved by the Company’s shareholders at its 2003 annual meeting. The Company authorized 1,000,000 shares for issuance under the Plan. The Plan provides to eligible employees the opportunity to purchase the Company’s Class A common stock semi-annually on June 30 and December 31. The purchase price is established at a 15 percent discount from fair market value, as defined in the Plan. As of October 31, 2004, 148,576 shares had been acquired under this Plan.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(22) Benefit Plans-(Continued)
Statement of Financial Accounting Standards No. 123
The Company has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation,” and continues to apply APB Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The following table is a summary of the Company’s stock options outstanding as of October 31, 2004, 2003 and 2002, and the changes that occurred during fiscal years 2004, 2003 and 2002.
| 2004 | 2003 | 2002 | ||||||||||||||||||||||
| Number of | Weighted | Number of | Weighted | Number of | Weighted | |||||||||||||||||||
| Shares | Average | Shares | Average | Shares | Average | |||||||||||||||||||
| Underlying | Exercise | Underlying | Exercise | Underlying | Exercise | |||||||||||||||||||
| Options | Prices | Options | Prices | Options | Prices | |||||||||||||||||||
| Outstanding at beginning of year | 6,787,624 | $ | 7.09 | 8,062,406 | $ | 10.22 | 8,216,572 | $ | 10.66 | |||||||||||||||
| Granted | 923,083 | $ | 5.48 | 254,000 | $ | 5.16 | 347,334 | $ | 6.01 | |||||||||||||||
| Exercised/Repurchased | (2,974,461 | ) | $ | 5.07 | (5,000 | ) | $ | 5.16 | (45,050 | ) | $ | 4.27 | ||||||||||||
| Forfeited | (1,214,853 | ) | $ | 16.08 | (1,523,782 | ) | $ | 23.34 | (456,450 | ) | $ | 15.57 | ||||||||||||
| Outstanding at end of year | 3,521,393 | $ | 5.26 | 6,787,624 | $ | 7.09 | 8,062,406 | $ | 10.22 | |||||||||||||||
| Exercisable at end of year | 3,288,062 | $ | 5.25 | 4,957,194 | $ | 7.79 | 3,361,888 | $ | 8.39 | |||||||||||||||
| Weighted-average fair value of options granted | $ | 2.22 | $ | 1.80 | $ | 2.52 | ||||||||||||||||||
The following table further describes the Company’s stock options outstanding as of October 31, 2004.
| Options Outstanding | Options Exercisable | |||||||||||||||||||
| Number | Weighted Average | Number | ||||||||||||||||||
| Range of | Outstanding | Remaining | Weighted Average | Exercisable | WeightedAverage | |||||||||||||||
| Exercise Prices | at 10/31/2004 | Contractual Life | Exercise Price | at 10/31/2004 | Exercise Price | |||||||||||||||
| $3.78 | 3,719 | .45 years | $ | 3.78 | 3,719 | $ | 3.78 | |||||||||||||
| $4.16 to $4.41 | 804,000 | .43 years | $ | 4.28 | 804,000 | $ | 4.28 | |||||||||||||
| $5.16 to $6.00 | 2,412,908 | 2.13 years | $ | 5.45 | 2,179,577 | $ | 5.45 | |||||||||||||
| $6.01 to $6.96 | 300,766 | .42 years | $ | 6.40 | 300,766 | $ | 6.40 | |||||||||||||
| $3.78 to $6.96 | 3,521,393 | 1.59 years | $ | 5.26 | 3,288,062 | $ | 5.25 | |||||||||||||
SFAS No. 123 applies only to options granted under the Company’s incentive plans and shares acquired under the Company’s Employee Stock Purchase Plan since the beginning of the Company’s 1996 fiscal year. Consequently, the pro forma amounts disclosed below do not reflect any compensation cost for the 7,791,034 stock options outstanding as of the beginning of fiscal year 1996 which have all since expired. If the Company had elected to recognize compensation cost for its stock option and employee stock purchase plans based on the fair value at the grant dates for awards under those plans, in accordance with SFAS No. 123, net earnings (loss) and earnings (loss) per share would have been as follows:
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(22) Benefit Plans-(Continued)
| Year Ended October 31, | ||||||||||||||||
| 2004 | 2003 | (2002) | ||||||||||||||
| (Restated) | (Restated | (Restated) | ||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||||||
| (Unaudited) | ||||||||||||||||
| Net earnings (loss) | - as reported | $ | 36,692 | $ | (18,032 | ) | $ | (180,797 | ) | |||||||
| - pro forma | 35,225 | (20,964 | ) | (185,324 | ) | |||||||||||
| Basic earnings (loss) per common share | - as reported | $ | .34 | $ | (.17 | ) | $ | (1.68 | ) | |||||||
| - pro forma | .33 | (.19 | ) | (1.72 | ) | |||||||||||
| Diluted earnings (loss) per common share | - as reported | $ | .34 | $ | (.17 | ) | $ | (1.67 | ) | |||||||
| - pro forma | .33 | (.19 | ) | (1.71 | ) | |||||||||||
The fair value of the Company’s stock options used to compute pro forma net earnings (loss) and earnings (loss) per share disclosures is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal years 2004, 2003 and 2002, respectively: expected dividend yield of zero percent, zero percent and .1 percent; expected volatility of 38.9 percent, 38.7 percent and 32.5 percent; risk-free interest rate of 4.4 percent, 4.8 percent and 4.5 percent; and an expected term of 3.9 years, 3.8 years and 3.6 years.
Likewise, the fair value of shares acquired through the Employee Stock Purchase Plan is estimated on each semi-annual grant date using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal years 2004, 2003 and 2002, respectively: expected dividend yield of zero percent for all years; expected volatility of 62.7 percent, 59.7 percent and 57.8 percent; risk-free interest rate of 1.1 percent, 1.3 percent and 2.3 percent; and an expected term of .5 years for all years.
(23) Commitments, Contingencies and Related Party Transactions
The Company and certain of its subsidiaries are parties to a number of legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.
The Company carries insurance with coverages and coverage limits that it believes to be appropriate for the business. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company’s operations.
The Company has noncancellable operating leases, primarily for land and buildings, that expire over the next 1 to 15 years, except for six leases that expire between 2032 and 2039. Rent expense under these leases was $5,755, $5,799 and $6,451 for the years ended October 31, 2004, 2003 and 2002, respectively. The Company leased office space from a non-affiliated company through September 30, 2004. Rental payments to the non-affiliated company were $295 for the year ended October 31, 2004, and $322 per year for the years ended October 31, 2003 and 2002.
The Company’s future minimum lease payments as of October 31, 2004 are $4,702, $4,210, $3,731, $2,950, $3,889 and $19,603 for the years ending October 31, 2005, 2006, 2007, 2008, 2009 and later years, respectively. Additionally, the Company has entered into non-compete agreements with prior owners of acquired subsidiaries that expire through 2012. During fiscal year 2001, the Company decided to relieve some of the prior owners and key employees of their obligations not to compete; however, the payments will continue to be made in accordance with the contract terms. The Company’s future non-compete payments as of October 31, 2004 for the same periods are $2,915, $1,929, $1,538, $1,209, $328 and $552, respectively.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(23) Commitments, Contingencies and Related Party Transactions—(Continued)
The Company is required to maintain a bond ($41,061 as of October 31, 2004) to guarantee its obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. This amount would become senior debt if the Company was to borrow funds under the revolving credit facility to extinguish the bond obligation by returning to the trusts the amounts it previously withdrew that relate to the remaining preneed contracts.
On June 8, 2004, the Company announced that William E. Rowe, Chairman of the Board, Chief Executive Officer and President, had decided to retire effective October 31, 2004. He stepped down from his position as President and Chief Executive Officer and has continued in his role as Chairman of the Board. As part of Mr. Rowe’s separation agreement, the Company will pay Mr. Rowe $1,000 in equal installments over a two year period, effective October 31, 2004. The Company recorded the $1,000 charge in the third quarter of fiscal year 2004 but will make the payments in accordance with the terms of the agreement.
On July 15, 2003, the Company announced that Frank B. Stewart, Jr., Chairman of the Board, had elected to retire and become Chairman Emeritus of the Company. As part of Mr. Stewart’s retirement benefits agreement, the Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550 each. The first payment was made within five days after the announcement of his retirement. The second payment was made on June 20, 2004, and the final payment will be made on June 20, 2005. The Company recorded the $1,650 charge in the third quarter of 2003 but will continue to make the payments in accordance with the terms of the agreement.
On June 10, 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had stepped down to pursue other interests. According to the terms of his employment agreement, he is entitled to receive an amount equal to two years of salary, or $800, over two years. The Company recorded the $800 charge in the third quarter of 2003 and has paid $560 of the $800 commitment as of October 31, 2004. The remaining amount will be fully paid by June 17, 2005.
In January 1998, the Company discontinued an insurance policy on the life of Mr. Frank B. Stewart, Jr., Chairman Emeritus of the Company. In order to purchase a replacement policy, The Stewart Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180 days after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the Company’s cost of borrowing under its revolving credit facility and is payable when the principal becomes due. The amount of the loan was equal to the cash value received by the Company upon the discontinuance of the prior insurance policy. The loan proceeds were used by the trust to purchase a single premium policy on the life of Mr. Stewart. Certain of the beneficiaries of The Stewart Family Special Trust are members of Mr. Stewart’s family. The loan was approved by all of the disinterested members of the Board of Directors. The outstanding balance of the loan at October 31, 2004, including accrued interest, was approximately $1,006.
The father of G. Kenneth Stephens, Jr., Senior Vice President and President of the Company’s Eastern Division, has an 81 percent ownership interest in Cemetery Funeral Supply, Inc., a vendor of the Company. For the years ended October 31, 2004, 2003 and 2002, the Company paid Cemetery Funeral Supply, Inc. $252, $281 and $257, respectively.
(24) Segment Data (Restated)
The Company has re-evaluated its application of SFAS No. 131 and has revised its operating and reportable segments. The Company’s historical presentation of segment data consisted of two operating and reportable segments, funeral and cemetery. The Company’s restated presentation of segment data reflects 11 operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. All Other consists of the Company’s operations in Puerto Rico in 2004 and 2003 and its operations in Puerto Rico, Spain, Portugal, France, Canada and Argentina in 2002. The Company sold its operations in Spain, Portugal, France, Canada and Argentina in 2002. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(24) Segment Data (Restated)—(Continued)
the same.
As of October 31, 2004, the Company operated four geographic divisions each with a division president: Central division, Western division, Eastern division and Southern division. The Company’s chief executive officer, who is the chief operating decision maker (“CODM”), reviewed the Southern division’s operations separately for Florida and Puerto Rico. Thus, the five geographic areas are the Central division, Western division, Eastern division, Southern division-Florida and Southern division-Puerto Rico. The Company’s funeral operations and cemetery operations in each of those geographic areas are further reviewed separately, resulting in 10 segments. The Central division consists of 73 funeral homes and 46 cemeteries in Alabama, Arkansas, Illinois, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Tennessee, Texas and Wisconsin. The Western division consists of 59 funeral homes and 8 cemeteries in California, Nevada, Oregon and Washington. The Eastern division consists of 49 funeral homes and 64 cemeteries in Georgia, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. The Southern division consists of 44 funeral homes and 21 cemeteries in Florida and 17 funeral homes and 8 cemeteries in Puerto Rico.
The eleventh operating segment is the corporate trust management segment. The corporate trust management segment includes (i) the funeral and cemetery service and merchandise trust earnings recognized for GAAP purposes, which are further described below, and (ii) fee income related to the Company’s wholly-owned subsidiary, Investor’sTrust, Inc., “ITI.” Trust assets and the earnings on those assets are associated exclusively with preneed sales. Because preneed services and merchandise will not be provided until an unknown future date, most states require that all or a portion of the customer payments under preneed contracts be placed in trust or escrow accounts for the benefit of the customers. These trust assets and the earnings on the trust assets are described in detail in Notes 5, 6, 7, and 8.
ITI serves as investment advisor exclusively to the Company’s trust funds. ITI provides investment advisory services to the trusts for a fee. The Company has elected to perform these services in-house, and the fees are recognized as income as earned.
The corporate trust management segment revenues reflect (1) investment management fees earned and (2) the realized earnings related to preneed contracts delivered, which are the earnings realized over the life of the contracts delivered during the relevant period. Earnings recognition in this segment is unrelated to investment results in the current period. Current investment results of the funeral and cemetery merchandise and service trusts are deferred and are not reflected in the statement of earnings but are disclosed in Notes 5, 6, and 8 along with the cost and market value of the trust assets. The Company’s fee income related to management of its trust assets, the investment income recognized on preneed contracts delivered and the trust assets are referred to as “corporate trust management” for the benefit of the divisions.
Perpetual care trust earnings are reported in the geographic segments, as these revenues are recognized currently and are used to maintain the cemeteries. Perpetual care trust earnings and the cost and market values of the perpetual care trust assets are presented in Note 7.
The accounting policies of the Company’s segments are the same as those described in Note 3. The Company evaluates the performance of its segments and allocates resources to them using a variety of profitability metrics. The most comprehensive of these measures is gross profit.
The Company also measures its preneed sales growth year-over-year. Preneed sales and the accounting for these sales are discussed in Notes 3(k) and 3(l), and Notes 4 through 8. Although the Company does not consider its preneed selling activities to be a separate segment, the Company is providing additional disclosure of preneed funeral and cemetery merchandise and service sales in its segment footnote as preneed sales are reviewed monthly by the Company’s CODM to assess performance and allocate resources. Preneed sales are strategically significant to the Company as those sales are one of the primary drivers of market share protection and growth. That is because preneed selling not only adds to the Company’s backlog but also strengthens at-need performance in the near-term. As such, the CODM reviews the preneed sales data in addition to revenue and gross profit.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(24) Segment Data (Restated)—(Continued)
Goodwill is allocated by specific identification by the reporting unit level aggregated to the operating and reportable segment level.
The Company’s operations are product-based and geographically-based. As such, the Company’s primary reportable segments presented in the following table are based on products and services and their geographical orientation.
The Company’s funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. The Company’s services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of the Company’s funeral homes offer cremation products and services. The Company’s cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, memorials and burial vaults, along with the sale of burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis.
The Company incurs certain costs at the divisional or regional level that benefit all of the funeral homes and cemeteries in the division or region, such as division management compensation, divisional and regional headquarters overhead, insurance costs and legal and professional fees. These costs are allocated to the facilities in the regions or divisions using various methods including their proportionate share of sales (which can include preneed sales) or payroll. These costs are included in funeral and cemetery costs.
The Company incurs certain other costs at its Shared Services Center that benefit all of the funeral homes and cemeteries, such as the costs to process contracts, make collections, pay vendors, deliver information system services and deliver human resource services. These costs are allocated to the divisions and further allocated to the facilities in the division using various methods including their proportionate share of sales (which can include preneed sales) and the number of employees. These costs are included in funeral and cemetery costs.
As of October 31, 2004, the Company conducted both funeral and cemetery operations in the United States and Puerto Rico. The Company sold its operations in Mexico, Australia, New Zealand, Belgium and the Netherlands during the fourth quarter of fiscal year 2001 and sold its operations in Spain, Portugal, France, Canada and Argentina during fiscal year 2002.
As discussed in Note 28, effective for the fourth quarter of fiscal year 2005, the Company reorganized its operating divisions. The reorganization consolidated operations from four operating divisions to two: Eastern and Western. As a result, the Company revised its operating and reportable segments in the fourth quarter of fiscal year 2005.
For a discussion of discontinued operations, see Note 16. The table below presents information about reported segments for the fiscal years ended October 31, 2004, 2003 and 2002 for the Company’s continuing operations only:
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(24) Segment Data (Restated)—(Continued)
| Funeral Revenue | Cemetery Revenue(1) | Total Revenue | ||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||||||||||||||
| Central Division | $ | 83,745 | $ | 84,374 | $ | 87,301 | $ | 77,121 | $ | 71,670 | $ | 77,356 | $ | 160,866 | $ | 156,044 | $ | 164,657 | ||||||||||||||||||
| Western Division | 60,159 | 58,287 | 58,093 | 12,927 | 10,426 | 10,991 | 73,086 | 68,713 | 69,084 | |||||||||||||||||||||||||||
| Eastern Division | 51,599 | 52,418 | 51,501 | 65,636 | 61,070 | 61,010 | 117,235 | 113,488 | 112,511 | |||||||||||||||||||||||||||
| Southern Division — Florida | 43,754 | 42,964 | 44,050 | 41,701 | 38,416 | 36,278 | 85,455 | 81,380 | 80,328 | |||||||||||||||||||||||||||
All Other(2) | 13,293 | 13,281 | 52,134 | 14,810 | 17,215 | 19,712 | 28,103 | 30,496 | 71,846 | |||||||||||||||||||||||||||
Corporate Trust Management(3) | 18,689 | 17,785 | 18,222 | 10,632 | 10,577 | 9,642 | 29,321 | 28,362 | 27,864 | |||||||||||||||||||||||||||
| Total | $ | 271,239 | $ | 269,109 | $ | 311,301 | $ | 222,827 | $ | 209,374 | $ | 214,989 | $ | 494,066 | $ | 478,483 | $ | 526,290 | ||||||||||||||||||
| Funeral Gross Profit | Cemetery Gross Profit(1) | Total Gross Profit | ||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||||||||||||||
| Central Division | $ | 22,536 | $ | 19,642 | $ | 23,806 | $ | 16,920 | $ | 14,390 | $ | 18,569 | $ | 39,456 | $ | 34,032 | $ | 42,375 | ||||||||||||||||||
| Western Division | 8,808 | 7,331 | 7,665 | 2,298 | 57 | 112 | 11,106 | 7,388 | 7,777 | |||||||||||||||||||||||||||
| Eastern Division | 10,533 | 9,931 | 9,919 | 9,414 | 7,643 | 7,977 | 19,947 | 17,574 | 17,896 | |||||||||||||||||||||||||||
| Southern Division — Florida | 6,706 | 3,013 | 5,058 | 7,178 | 5,376 | 4,681 | 13,884 | 8,389 | 9,739 | |||||||||||||||||||||||||||
All Other(2) | 2,008 | 1,565 | 7,331 | 414 | 2,329 | 38 | 2,422 | 3,894 | 7,369 | |||||||||||||||||||||||||||
Corporate Trust Management(3) | 18,150 | 17,338 | 17,798 | 10,047 | 10,028 | 9,083 | 28,197 | 27,366 | 26,881 | |||||||||||||||||||||||||||
| Total | $ | 68,741 | $ | 58,820 | $ | 71,577 | $ | 46,271 | $ | 39,823 | $ | 40,460 | $ | 115,012 | $ | 98,643 | $ | 112,037 | ||||||||||||||||||
| Net Preneed Funeral Merchandise | Net Preneed Cemetery Merchandise | Net Total Preneed Merchandise | ||||||||||||||||||||||||||||||||||
| and Service Sales(4) | and Service Sales(4) | and Service Sales(4) | ||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||||||||||||||
| Central Division | $ | 21,550 | $ | 21,130 | $ | 16,592 | $ | 14,307 | $ | 14,307 | $ | 15,860 | $ | 35,857 | $ | 35,437 | $ | 32,452 | ||||||||||||||||||
| Western Division | 26,643 | 24,172 | 24,216 | 3,755 | 3,592 | 3,130 | 30,398 | 27,764 | 27,346 | |||||||||||||||||||||||||||
| Eastern Division | 17,338 | 15,741 | 18,490 | 27,778 | 26,772 | 27,307 | 45,116 | 42,513 | 45,797 | |||||||||||||||||||||||||||
| Southern Division — Florida | 18,482 | 15,385 | 12,160 | 12,802 | 13,026 | 12,000 | 31,284 | 28,411 | 24,160 | |||||||||||||||||||||||||||
All Other(2) | 4,304 | 4,292 | 4,319 | 3,747 | 4,264 | 4,086 | 8,051 | 8,556 | 8,405 | |||||||||||||||||||||||||||
| Total | $ | 88,317 | $ | 80,720 | $ | 75,777 | $ | 62,389 | $ | 61,961 | $ | 62,383 | $ | 150,706 | $ | 142,681 | $ | 138,160 | ||||||||||||||||||
| Depreciation and Amortization- | Depreciation and Amortization- | Depreciation and Amortization- | ||||||||||||||||||||||||||||||||||
| Funeral | Cemetery | Total | ||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||||||||||||||
| Central Division | $ | 7,210 | $ | 7,879 | $ | 7,732 | $ | 6,167 | $ | 6,164 | $ | 6,271 | $ | 13,377 | $ | 14,043 | $ | 14,003 | ||||||||||||||||||
| Western Division | 5,641 | 6,012 | 5,778 | 1,645 | 1,525 | 1,367 | 7,286 | 7,537 | 7,145 | |||||||||||||||||||||||||||
| Eastern Division | 4,085 | 4,191 | 3,835 | 7,353 | 7,111 | 6,937 | 11,438 | 11,302 | 10,772 | |||||||||||||||||||||||||||
| Southern Division — Florida | 5,588 | 5,629 | 5,581 | 3,497 | 3,766 | 3,858 | 9,085 | 9,395 | 9,439 | |||||||||||||||||||||||||||
All Other(2) | 1,250 | 1,579 | 3,093 | 1,163 | 1,137 | 1,450 | 2,413 | 2,716 | 4,543 | |||||||||||||||||||||||||||
Reconciling Items(5) | 4,822 | 4,213 | 4,192 | |||||||||||||||||||||||||||||||||
| Total | $ | 48,421 | $ | 49,206 | $ | 50,094 | ||||||||||||||||||||||||||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(24) Segment Data (Restated)—(Continued)
| Additions to Long-Lived Assets- | Additions to Long-Lived Assets- | Additions to Long-Lived Assets- | ||||||||||||||||||||||||||||||||||
| Funeral(6) | Cemetery(6) | Total(6) | ||||||||||||||||||||||||||||||||||
| 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | 2004 | 2003 | 2002 | ||||||||||||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | ||||||||||||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||||||||||||||
| Central Division | $ | 2,585 | $ | 2,485 | $ | 2,650 | $ | 5,298 | $ | 4,911 | $ | 5,751 | $ | 7,883 | $ | 7,396 | $ | 8,401 | ||||||||||||||||||
| Western Division | 2,664 | 1,971 | 2,142 | 1,229 | 2,365 | 1,140 | 3,893 | 4,336 | 3,282 | |||||||||||||||||||||||||||
| Eastern Division | 2,907 | 2,643 | 2,445 | �� | 3,638 | 2,698 | 3,751 | 6,545 | 5,341 | 6,196 | ||||||||||||||||||||||||||
| Southern Division — Florida | 1,146 | 1,525 | 1,252 | 3,382 | 2,705 | 1,814 | 4,528 | 4,230 | 3,066 | |||||||||||||||||||||||||||
All Other(2) | 327 | 354 | 619 | 2,133 | 2,157 | 1,764 | 2,460 | 2,511 | 2,383 | |||||||||||||||||||||||||||
Reconciling Items(5) | 5,405 | 4,390 | 4,670 | |||||||||||||||||||||||||||||||||
| Total | $ | 30,714 | $ | 28,204 | $ | 27,998 | ||||||||||||||||||||||||||||||
| Total Funeral Assets | Total Cemetery Assets | Total Assets | ||||||||||||||||||||||
| 2004 | 2003(7) | 2004 | 2003(7) | 2004 | 2003(7) | |||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | |||||||||||||||||||
| Central Division | $ | 274,029 | $ | 282,584 | $ | 340,994 | $ | 257,791 | $ | 615,023 | $ | 540,375 | ||||||||||||
| Western Division | 91,579 | 113,084 | 56,837 | 49,132 | 148,416 | 162,216 | ||||||||||||||||||
| Eastern Division | 78,333 | 75,298 | 347,286 | 289,775 | 425,619 | 365,073 | ||||||||||||||||||
| Southern Division — Florida | 158,725 | 166,932 | 297,157 | 262,462 | 455,882 | 429,394 | ||||||||||||||||||
All Other(2) | 60,921 | 64,432 | 75,318 | 83,520 | 136,239 | 147,952 | ||||||||||||||||||
| Corporate Trust Management | 439,625 | 529,695 | 194,008 | 232,329 | 633,633 | 762,024 | ||||||||||||||||||
Reconciling Items(5) | 96,696 | 104,964 | ||||||||||||||||||||||
| Total | $ | 2,511,508 | $ | 2,511,998 | ||||||||||||||||||||
| Funeral Goodwill | Cemetery Goodwill | Total Goodwill | ||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | |||||||||||||||||||
| Central Division | $ | 116,881 | $ | 116,992 | $ | 49,787 | $ | 49,787 | $ | 166,668 | $ | 166,779 | ||||||||||||
| Western Division | — | — | — | — | — | — | ||||||||||||||||||
| Eastern Division | 17,052 | 17,914 | 25,239 | 25,239 | 42,291 | 43,153 | ||||||||||||||||||
| Southern Division - Florida | 46,199 | 45,889 | — | — | 46,199 | 45,889 | ||||||||||||||||||
All Other(2) | 17,571 | 17,129 | — | — | 17,571 | 17,129 | ||||||||||||||||||
| Total | $ | 197,703 | $ | 197,924 | $ | 75,026 | $ | 75,026 | $ | 272,729 | $ | 272,950 | ||||||||||||
| Assets held for Sale-Funeral | Assets held for Sale-Cemetery | Assets held for Sale-Total | ||||||||||||||||||||||
| 2004 | 2003 | 2004 | 2003 | 2004 | 2003 | |||||||||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | |||||||||||||||||||
| Central Division | $ | 300 | $ | 4,641 | $ | — | $ | — | $ | 300 | $ | 4,641 | ||||||||||||
| Western Division | 162 | 8,181 | — | 785 | 162 | 8,966 | ||||||||||||||||||
| Eastern Division | — | 3,811 | 1,661 | 875 | 1,661 | 4,686 | ||||||||||||||||||
| Southern Division - Florida | 1,959 | 3,827 | 97 | 133 | 2,056 | 3,960 | ||||||||||||||||||
All Other(2) | 3,100 | 2,497 | — | — | 3,100 | 2,497 | ||||||||||||||||||
| Corporate Trust Management | 2,028 | 15,462 | 1,186 | 1,204 | 3,214 | 16,666 | ||||||||||||||||||
| Total | $ | 7,549 | $ | 38,419 | $ | 2,944 | $ | 2,997 | $ | 10,493 | $ | 41,416 | ||||||||||||
(1) Perpetual care trust earnings are included in the revenue and gross profit data of the related geographic segment and amounted to $6,396, $7,887 and $11,255 for fiscal years 2004, 2003 and 2002, respectively. |
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(24) Segment Data (Restated)—(Continued)
| 2) | All Other represents the Company’s operations in Puerto Rico in fiscal years 2004 and 2003 and its operations in Puerto Rico, Spain, Portugal, France, Canada and Argentina in fiscal year 2002. The Company sold its operations in Spain, Portugal, France, Canada and Argentina during fiscal year 2002. | |
| (3) | Corporate trust management consists of the trust management fees and funeral and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms and are paid by the trusts to the Company’s subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. Trust management fees included in funeral revenue for 2004, 2003 and 2002 were $5,543, $5,218 and $4,745, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for 2004, 2003 and 2002 were $13,146, $12,567 and $13,477, respectively. Trust management fees included in cemetery revenue for 2004, 2003 and 2002 were $4,731, $4,369 and $3,594, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for 2004, 2003 and 2002 were $5,901, $6,208 and $6,048, respectively. | |
| (4) | Preneed sales amounts represent total preneed funeral and cemetery service and merchandise sales generated in the applicable period, net of cancellations. | |
| (5) | Reconciling items consist of unallocated corporate assets, depreciation and amortization on unallocated corporate assets and additions to corporate long-lived assets. | |
| (6) | Long-lived assets include cemetery property and net property and equipment. | |
| (7) | In fiscal year 2003, the Company recorded a charge of $31,830 for the impairment of certain long-lived assets related to its December 2003 divestiture plan. This impairment charge was reflected in the following operating and reportable segments: Central division funeral, Central division cemetery, Western division funeral, Eastern division funeral, Eastern division cemetery, Southern division-Florida funeral, Southern division-Florida cemetery, All Other division funeral and corporate assets. |
A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes and cumulative effect of change in accounting principle for the fiscal years ended October 31, 2004, 2003 and 2002, is as follows:
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Gross profit for reportable segments | $ | 115,012 | $ | 98,643 | $ | 112,037 | ||||||
| Corporate general and administrative expenses | (17,097 | ) | (17,733 | ) | (17,261 | ) | ||||||
| Separation charges | (3,435 | ) | (2,450 | ) | — | |||||||
| Gains on dispositions and impairment (losses), net | (204 | ) | (10,206 | ) | (18,500 | ) | ||||||
| Other operating income, net | 2,112 | 2,083 | 2,535 | |||||||||
| Interest expense | (47,335 | ) | (53,643 | ) | (61,980 | ) | ||||||
| Loss on early extinguishment of debt | — | (11,289 | ) | — | ||||||||
| Investment and other income (expense), net | 178 | (749 | ) | 794 | ||||||||
| Earnings from continuing operations before income taxes and cumulative effect of change in accounting principle | $ | 49,231 | $ | 4,656 | $ | 17,625 | ||||||
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(24) Segment Data (Restated)—(Continued)
| U.S. and | ||||||||||||
| Possessions(1) | Foreign(2) | Consolidated | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Revenues from external customers | ||||||||||||
| October 31, 2004 | $ | 494,066 | — | $ | 494,066 | |||||||
| October 31, 2003 | $ | 478,483 | — | $ | 478,483 | |||||||
| October 31, 2002 | $ | 483,795 | 42,495 | $ | 526,290 | |||||||
| Gross profit | ||||||||||||
| October 31, 2004 | $ | 115,012 | — | $ | 115,012 | |||||||
| October 31, 2003 | $ | 98,643 | — | $ | 98,643 | |||||||
| October 31, 2002 | $ | 106,789 | 5,248 | $ | 112,037 | |||||||
| (1) | Includes the Company’s operations in the United States and Puerto Rico. | |
| (2) | Foreign revenue is based on the country in which the sales originate. The Company sold its operations in Mexico, Australia, New Zealand, Belgium and the Netherlands in fiscal year 2001 and sold its operations in Spain, Portugal, France, Canada and Argentina during fiscal year 2002. |
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(25) Supplementary Information
The detail of certain income statement accounts is as follows for the fiscal years ended October 31, 2004, 2003 and 2002.
| Year Ended October 31, | ||||||||||||
| 2004 | 2003 | 2002 | ||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||
| Service revenue | ||||||||||||
| Funeral | $ | 151,651 | $ | 151,049 | $ | 151,018 | ||||||
| Cemetery | 56,671 | 56,212 | 59,279 | |||||||||
| 208,322 | 207,261 | 210,297 | ||||||||||
| Merchandise revenue | ||||||||||||
| Funeral | 110,624 | 109,048 | 111,700 | |||||||||
| Cemetery | 149,028 | 135,644 | 135,725 | |||||||||
| 259,652 | 244,692 | 247,425 | ||||||||||
| Other revenue | ||||||||||||
| Funeral | 8,964 | 9,012 | 9,517 | |||||||||
| Cemetery | 17,128 | 17,518 | 16,556 | |||||||||
| 26,092 | 26,530 | 26,073 | ||||||||||
| Foreign revenue | — | — | 42,495 | |||||||||
| Total revenue | $ | 494,066 | $ | 478,483 | $ | 526,290 | ||||||
| Service costs | ||||||||||||
| Funeral | $ | 46,656 | $ | 48,274 | $ | 47,250 | ||||||
| Cemetery | 39,683 | 39,269 | 39,249 | |||||||||
| 86,339 | 87,543 | 86,499 | ||||||||||
| Merchandise costs | ||||||||||||
| Funeral | 63,003 | 61,898 | 60,283 | |||||||||
| Cemetery | 84,415 | 75,588 | 78,119 | |||||||||
| 147,418 | 137,486 | 138,402 | ||||||||||
| General and administrative expenses | ||||||||||||
| Funeral | 92,839 | 100,117 | 99,209 | |||||||||
| Cemetery | 52,458 | 54,694 | 52,896 | |||||||||
| 145,297 | 154,811 | 152,105 | ||||||||||
| Foreign costs | — | — | 37,247 | |||||||||
| Total costs | $ | 379,054 | $ | 379,840 | $ | 414,253 | ||||||
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Table of Contents
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(26) Quarterly Financial Data (Restated)
As discussed in Notes 2, 3(s) and 16, the Company has restated its operating and reportable segments and its reporting units, has recorded charges related to its deferred revenue project and has reclassified the results of certain businesses previously reported as discontinued operations to continuing operations. The quarterly financial data in the table below has been restated and reclassified for these changes.
| First | Second | Third | Fourth | |||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
| Year Ended October 31, 2004(1) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||
| Revenues, as previously reported | $ | 130,789 | $ | 131,243 | $ | 128,435 | $ | 126,415 | ||||||||
| Revenues, as restated | 125,170 | 124,438 | 122,116 | 122,342 | ||||||||||||
| Gross profit, as previously reported | 37,005 | 36,945 | 31,486 | 29,347 | ||||||||||||
| Gross profit, as restated | 31,934 | 31,184 | 26,066 | 25,828 | ||||||||||||
| Net earnings, as previously reported | 11,728 | 14,757 | 10,483 | 8,834 | ||||||||||||
| Net earnings, as restated | 9,072 | 10,428 | 8,628 | 8,564 | ||||||||||||
| Earnings per common share: | ||||||||||||||||
| Basic, as previously reported | .11 | .14 | .10 | .08 | ||||||||||||
| Basic, as restated | .08 | .10 | .08 | .08 | ||||||||||||
| Diluted, as previously reported | .11 | .14 | .10 | .08 | ||||||||||||
| Diluted, as restated | .08 | .10 | .08 | .08 | ||||||||||||
| First | Second | Third | Fourth | |||||||||||||
| (Restated) | (Restated) | (Restated) | (Restated) | |||||||||||||
| Year Ended October 31, 2003(2) | (Note 2) | (Note 2) | (Note 2) | (Note 2) | ||||||||||||
| Revenues, as previously reported | $ | 126,053 | $ | 128,715 | $ | 124,579 | $ | 124,366 | ||||||||
| Revenues, as restated | 119,460 | 122,296 | 118,952 | 117,775 | ||||||||||||
| Gross profit, as previously reported | 30,995 | 32,700 | 28,013 | 28,092 | ||||||||||||
| Gross profit, as restated | 25,730 | 27,210 | 23,043 | 22,660 | ||||||||||||
| Net earnings (loss), as previously reported | 9,473 | 9,491 | (2,499 | ) | (89,933 | ) | ||||||||||
| Net earnings (loss), as restated | 5,250 | 6,002 | (5,758 | ) | (23,526 | ) | ||||||||||
| Earnings (loss) per common share: | ||||||||||||||||
| Basic, as previously reported | .09 | .09 | (.02 | ) | (.83 | ) | ||||||||||
| Basic, as restated | .05 | .05 | (.05 | ) | (.22 | ) | ||||||||||
| Diluted, as previously reported | .09 | .09 | (.02 | ) | (.83 | ) | ||||||||||
| Diluted, as restated | .05 | .05 | (.05 | ) | (.22 | ) | ||||||||||
| (1) | First quarter of fiscal year 2004 includes a charge of $1,993 ($1,236 after tax, or $.01 per share) for severance costs associated with the workforce reductions the Company announced in December 2003 and $303 in net gains on disposition and impairment (losses) in continuing operations. Second quarter of fiscal year 2004 includes ($853) in net gains on dispositions and impairment (losses) in continuing operations and a charge of $138 for severance costs associated with the December 2003 workforce reductions. Third quarter of fiscal year 2004 includes $304 in net gains on dispositions and impairment (losses) in continuing operations and a charge of $1,085 ($673 after tax, or $.01 per share) relating to the December 2003 workforce reductions and separation pay for a former executive officer. Fourth quarter of fiscal year 2004 includes a charge of $219 for severance costs associated with the December 2003 workforce reductions and $42 in net gains on dispositions and impairment (losses) in continuing operations. | |
| (2) | Third quarter of fiscal year 2003 includes a charge of $11,289 ($7,338 after tax, or $.07 per share) in connection with the redemption of the ROARS and a charge of $2,450 ($1,519 after tax, or $.01 per share) related to separation pay for former executive officers. Fourth quarter of fiscal year 2003 includes long-lived asset impairment charges of $10,206 ($8,387 after tax, or $.08 per share) in continuing operations and $21,624 ($19,604 after tax, or $.18 per share) in discontinued operations. |
Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(26)Quarterly Financial Data (Restated)—(Continued)
the number of deaths in the Company’s markets or from quarter to quarter are not predictable. However, generally the number of deaths fluctuates with the seasons with more deaths occurring during the winter months primarily resulting from pneumonia and influenza. These variations can cause revenues to fluctuate.
(27) Subsequent Events
On November 19, 2004, the Company entered into an amended and restated senior secured credit facility. For additional information, see Note 18.
On December 2, 2004, Thomas M. Kitchen was selected as Executive Vice President and Chief Financial Officer of the Company. On December 14, 2004, Leslie Rosenthal Jacobs resigned from the Company’s Board of Directors. On December 15, 2004, Ashton J. Ryan, Jr. was elected to the Company’s Board of Directors.
(28) Subsequent Events (Unaudited)
Tender Offer
On February 18, 2005, the Company completed its tender offer and consent solicitation for any and all of its $300,000 10.75 percent senior subordinated notes. The Company purchased a total of $298,250 in aggregate principal amount of the notes in the offer. In the second quarter of fiscal year 2005, the Company incurred a charge for early extinguishment of debt of approximately $30,057 ($19,210 after tax, or $.18 per share) representing $25,369 for a tender premium, related fees and expenses and $4,688 for the write-off of the remaining unamortized fees on the senior subordinated notes.
The Company funded the tender offer for the 10.75 percent senior subordinated notes, including related tender premiums, fees, expenses and accrued interest of $28,931, with the net proceeds of $130,000 in additional Term Loan B borrowings that were available under the accordion feature of the Company’s senior secured credit facility, a portion of the Company’s available cash, and the net proceeds of the issuance of $200,000 6.25 percent senior notes due 2013 (the “6.25 percent senior notes”), which were issued on February 11, 2005.
The Company redeemed the remaining $1,750 principal amount of senior subordinated notes on the first call date of July 1, 2005 at the aggregate price of $1,844, which was funded by cash on hand. In the third quarter of fiscal year 2005, the Company incurred a charge for the early extinguishment of debt of $114 including the call premium and write-off of the remaining unamortized fees on the senior subordinated notes.
Quarterly Dividends
On March 28, 2005, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. The first dividend was paid on April 29, 2005. Dividends were also paid on July 29, 2005 to shareholders of record as of July 15, 2005 and on October 18, 2005 to shareholders of record as of October 4, 2005. Although the Company intends to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of the Company’s financial performance.
Stock Repurchase Program
On March 28, 2005, the Company announced a new stock repurchase program, authorizing the investment of up to $30,000 in the repurchase of the Company’s common stock. The Company had previously announced its initial stock repurchase program in June of 2003 of up to $25,000 (which was subsequently increased by $3,000 to a total of $28,000). On March 17, 2005, the Company completed its initial stock repurchase program, having repurchased 4,400,000 shares since its inception. Repurchases under the new program will be limited to the Company’s Class A common stock, and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(28) Subsequent Events (Unaudited)-(Continued)
Change in Board Members
On April 5, 2005 at the Company’s annual shareholders’ meeting, William E. Rowe retired from the Board of Directors and as Chairman of the Board. At the recommendation of the Corporate Governance and Nominating Committee, John P. Laborde, an independent director of the Company since 1995, was appointed Chairman of the Board. Also, at the Company’s annual shareholders’ meeting, John C. McNamara was elected as a director to fill the vacancy left by Mr. Rowe’s retirement. The shareholders also approved the 2005 Directors’ Stock Plan, which authorizes a total of 400,000 shares of Class A common stock to be issued under the Plan to non-employee directors.
Change in Accounting Principle
On May 31, 2005, the Company changed its method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral and cemetery service and merchandise sales. The Company has applied this change in accounting principle effective November 1, 2004. Prior to this change, commissions and other costs that varied with and were primarily related to the acquisition of new prearranged funeral and cemetery service and merchandise sales were deferred and amortized in proportion to preneed revenue recognized during the period in a manner consistent with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” The Company has decided to change its accounting for preneed selling costs to expense such costs as incurred. The Company concluded that expensing these costs as they are incurred would be preferable to the old method because it will make its reported results more comparable with other public death care companies, better align the costs of obtaining preneed contracts with the cash outflows associated with obtaining such contracts and eliminate the burden of maintaining deferred selling cost records. As of November 1, 2004, the Company recorded a cumulative effect of change in accounting principle of $254,241 ($153,180 after tax, or $1.40 per diluted share) during the second quarter of fiscal year 2005, which represents the cumulative balance of deferred preneed selling costs in the deferred charges line on the Company’s condensed consolidated balance sheet at the time of the change.
Litigation Update
During 2005, the Company has been named in the following class action lawsuits:
Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961 on the docket of the Superior Court for the State of California for the County of Los Angeles, Central District. This purported class action was filed on February 17, 2005, on behalf of a nationwide class defined to include all persons, entities and organizations who purchased funeral goods and/or services in the United States from defendants at any time on or after February 17, 2001. The suit named the Company and several of its Southern California affiliates as defendants and also sought to assert claims against a class of all entities located anywhere in the United States whose ultimate parent corporation has been the Company at any time on or after February 17, 2001.
In May, 2005, the court ruled that this case was related to similar actions against Service Corporation International (“SCI”) and Alderwoods Group, Inc., and designated the SCI case as the lead case. The case against the Company effectively has been held in abeyance while the court tests plaintiff’s legal theories in the lead case. Rulings on legal issues in the lead case will apply equally in the case against the Company, and the court has allowed the Company to participate in hearings and briefings in the lead case.
As a result of demurrers, the plaintiff in the lead case has amended her complaint twice. On January 31, 2006, however, the court overruled SCI’s demurrer to the third amended complaint and established a schedule leading to hearing on a motion for summary judgment in early July to test the viability of the named plaintiff’s claim against SCI.
The third amended complaint in the lead case alleges that the SCI defendants violated the “Funeral Rule” promulgated by the Federal Trade Commission by failing to disclose that the prices of certain goods and services
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(28) Subsequent Events (Unaudited)-(Continued)
they obtained from third parties specifically on the plaintiff’s behalf exceeded what the defendants paid for them. The plaintiff alleges that by failing to comply with the Funeral Rule, defendants (i) breached contracts with the plaintiffs, (ii) were unjustly enriched, and (iii) engaged in unfair, unlawful and fraudulent business practices in violation of a provision of California’s Business and Professions Code. The plaintiff seeks restitution damages, disgorgement, interest, costs, and attorneys’ fees.
Although the plaintiffs have amended their complaint against the Company once as a result of a demurrer in the lead case, they have not amended their complaint to correspond with the third amended complaint in the lead case. Because the matter is in its early stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.
In re: Funeral Consumer Antitrust Litigation— On May 2, 2005, a purported class action lawsuit entitledFuneral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.(“FCA Case”) was filed in the Federal District Court for the Northern District of California, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home defendants.
The suit alleges that the defendants acted jointly to reduce competition from independent casket discounters and fix and maintain prices on caskets in violation of the federal antitrust laws and California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees.
Thereafter, five substantially similar lawsuits were filed in the Northern District of California asserting claims under the federal antitrust laws and various state antitrust and consumer protection laws. These five suits were transferred to the division in which theFCA Case was pending and consolidated with the FCA Case (collectively referred to as the “Consolidated Consumer Cases”).
On July 8, 2005, a purported class action was filed in the Northern District of California entitledPioneer Valley Casket Co., Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co. (“Pioneer ValleyCase”). The Pioneer Valley Case involves the same claims asserted in the Consolidated Consumer Cases, except that it was brought on behalf of a nationwide class defined to include only independent casket retailers.
On July 15, 2005, the defendants filed motions to dismiss for failure to plead facts sufficient to establish viable antitrust and unfair competition claims. On September 9, 2005, the Court denied the defendants’ motions to dismiss, without prejudice, but ordered the plaintiffs to file an amended and consolidated complaint that satisfies the objections raised in the motions to dismiss.
At the defendants’ request, the Court also issued orders in late September 2005 transferring the Consolidated Consumer Cases and the Pioneer Valley Case to the United States District Court for the Southern District of Texas. The transferred Consolidated Consumer Cases have been consolidated before a single judge in the Southern District of Texas. The Pioneer Valley Case has been consolidated with these cases for purposes of discovery only.
On October 12, 2005, the consumer plaintiffs filed a first amended consolidated class action complaint.Defendants then filed motions to dismiss the first amended complaint, which are pending. On October 21, 2005, Pioneer Valley filed a first amended complaint. Defendants then filed motions to dismiss, which are pending. Discovery is underway in both cases. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.
A similar action captionedRalph Lee Fancher, on behalf of himself and all others similarly situated v. Service Corporation International, Alderwoods Group, Inc,. Stewart Enterprises, Inc., Hillenbrand Industries, Inc., Aurora Casket Co., York Group, Inc., and Batesville Casket Co.,was filed in the United States District Court for the Eastern District of Tennessee on behalf of consumers in twenty-three states and the District of Columbia who purchased
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(28) Subsequent Events (Unaudited)-(Continued)
caskets. The allegations of fact were essentially the same as those made in the FCA Case,but the plaintiff in this suit alleged that the defendants violated state antitrust, consumer protection and/or unjust enrichment laws. The plaintiff in this purported class action withdrew his complaint on August 2, 2005, and re-filed a nearly identical complaint under Tennessee law and on behalf of only Tennessee consumers in the Northern District of California on September 23, 2005, the same day that the Consolidated Consumer Cases were transferred to the Southern District of Texas. This matter has now been transferred to the Southern District of Texas, and consolidated with the Consolidated Consumer Cases for purposes of discovery. The plaintiff filed a First Amended Complaint expanding the purported class to include “all individuals and entities in the United States who purchased Batesville caskets” and dropping claims made under the Tennessee consumer protection law. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.
State Attorney General Civil Investigative Demands– On August 4, 2005, the Attorney General for the State of Maryland issued a civil investigative demand to the Company seeking documents and information relating to funeral and cemetery goods and services. The Attorney General for the State of Florida issued a similar civil investigative demand to the Company. The Company is cooperating with the attorneys general and has begun providing them with information relevant to their investigations. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.
Commitments
As previously disclosed in Note 23, the Company is required to maintain a bond of $41,061 to guarantee its obligations relating to funds it withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. During the first quarter of 2006, the Company posted an $11,000 letter of credit in order to secure the bond. In addition, as of January 31, 2006, the Company has $12,870 of other outstanding letters of credit posted during the normal course of business.
Reorganization of Operating Divisions
On July 14, 2005, the Company named a new Chief Operating Officer and announced that it was reorganizing its operating divisions, effective for the fourth quarter of fiscal year 2005. The reorganization consolidated operations from four operating divisions to two: Eastern and Western. These changes are a result of the Company’s recent strategic planning process. The total charge for severance and other costs associated with the reorganization is expected to be approximately $1,850, of which $1,507 was incurred in fiscal year 2005 and $154 was incurred in the first quarter of 2006.
Hurricanes
On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. The Company’s executive offices and Shared Services Center are located in a building it owns in the New Orleans metropolitan area, and no significant damage occurred to that building. However, most of the approximately 400 employees who work at this location did not have access to their homes until late September or early October, and many of those homes remain uninhabitable. For the month of September, the Company temporarily housed most of the Shared Services Center functions, such as cash receipts and disbursements, customer service, contract processing and information technology in Orlando, Florida, in newly-leased and existing Company office space, and temporarily housed other functions such as the executive offices, treasury, accounting, trust administration, human resources, training, communications, marketing, tax and compliance in the Dallas, Texas area in newly-leased office space. As of October 31, 2005, the Company had used approximately $2,500 in cash on hand for hurricane related expenses. Beginning in early October, the executive offices and Shared Services Center were open and operating.
Of the Company’s 231 funeral homes and 144 cemeteries, three funeral homes and five cemeteries, which prior
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(28) Subsequent Events (Unaudited)-(Continued)
to the hurricane represented approximately four percent of the Company’s annual revenues and approximately five percent of its annual gross profit, are located in the New Orleans metropolitan area, have suffered substantial damage and are conducting business in temporary facilities until repairs are completed. The Company’s mausoleum construction and sales business, Acme Mausoleum, which primarily operates in southwest Louisiana and Texas, was also negatively impacted by Hurricanes Katrina and Rita. Including Acme Mausoleum, the New Orleans area funeral home and cemetery operations represented approximately six percent of the Company’s annual revenue and gross profit prior to the hurricane. The book value of net property and equipment, receivables, inventory and cemetery property at the affected properties amounted to approximately $24,700 prior to the storms (of which approximately $13,267 was written off as described below).
Hurricanes Katrina, Rita and Wilma also interrupted business in Florida, Alabama, Mississippi and Texas primarily due to evacuations and power-outages. The Company has insurance coverage related to property damage, incremental costs and property operating expenses it incurred due to damage caused by Hurricane Katrina. As of January 31, 2006, the Company had incurred approximately $23,735 (of which $20,897 was incurred as of October 31, 2005) in total expenses related to Hurricane Katrina including the write-off of damaged buildings, equipment and inventory, demolition costs, debris removal, record restoration, general cleanup, temporary living facilities for employees, relocation expenses and other costs. The Company expects insurance proceeds of at least $11,731 currently based on the status of its insurance review, $500 of which had been received as of October 31, 2005 and $10,731 of which was received in the first quarter of 2006. The remaining $500 in insurance proceeds to be received is included in current receivables in the consolidated balance sheet for fiscal year 2006. The net amount of $2,638 ($1,583 after tax, or $.01 per share) is included in the “Hurricane related charges, net” line in the consolidated statement of earnings for fiscal year 2006. A charge of $9,366 in net hurricane related charges was recorded in fiscal year 2005. The Company believes that a significant portion of the loss it experienced may be covered by insurance. When the Company and its insurance carriers agree on the final amount of the insurance proceeds the Company is entitled to, if the proceeds are greater than the loss incurred, then the Company will record any related gain at that time.
Late Filings
The restatements described in Note 2 as well as the Company’s failure to deliver financial statements within the specified deadlines in its senior secured credit facility resulted in a default and potential event of default under the facility. The Company sought and received waivers of the defaults and potential events of default related to the restatements and failure to deliver audited consolidated financial statements by the specified deadline. A waiver granted an extension to deliver the audited consolidated financial statements, and the Company delivered the financial statements within the time period specified in the waiver. The Company believes its incomplete July 31, 2005 Form 10-Q filed with the SEC met the financial statement compliance requirements of its senior secured credit facility. The Company believes it is in compliance with the terms of the senior secured credit facility.
The indenture governing the 6.25 percent notes requires the Company to furnish to the trustee for forwarding to the holders of the notes, within the time periods specified in the SEC’s rules and regulations, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements from our certified independent accountants. In addition, the Company must file a copy with the SEC for public availability within the time periods specified in the SEC’s rules and regulations. An event of default would occur if the Company failed to provide that information within 30 days after receipt of written notice by the trustee or holders of at least 25 percent of the principal amount outstanding. The Company furnished its July 31, 2005 Form 10-Q to the trustee and filed it with the SEC, and believes that doing so complied with the requirements of the indenture. The Company has not received a default notice from the trustee or note holders with respect to the late filing of the Form 10-K for the fiscal year ended October 31, 2005 and has now filed this report with the SEC. The Company believes it is in compliance with the terms of its 6.25 percent notes.
The Company received a Staff Determination Letter from the Nasdaq Listing Qualifications Department on October 25, 2005 notifying the Company that because it filed its third quarter 2005 Form 10-Q prior to completion
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(Dollars in thousands, except per share amounts)
(28) Subsequent Events (Unaudited)-(Continued)
of the review by its independent registered public accounting firm and without the certifications of its Chief Executive Officer and Chief Financial Officer, that the Company is not in compliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c)(14).
On November 17, 2005, the Company appeared before a Nasdaq Listing Qualifications Panel to seek an extension of time to complete the filing and thereby regain compliance with the listing standard. On December 12, 2005, the Company received a response from the Nasdaq Listing Qualifications Panel which granted its request for continued listing on the Nasdaq National Market of its Class A common stock, provided that the Company files its completed Form 10-Q for the quarter ended July 31, 2005 and Form 10-K for the fiscal year ended October 31, 2005 no later than February 15, 2006. On February 3, 2006, Nasdaq notified the Company that the Company’s failure to file the Form 10-K for the fiscal year ended October 31, 2005 by February 1, 2006 was an additional violation of the continued listing requirements, but that the extension of time previously granted by the Panel for the filing was not affected by this notice. The Company was granted an additional extension of time to February 22, 2006. The Company filed its 2005 Form 10-K on February 17, 2006 and filed the Form 10-Q for the quarter ended July 31, 2005 on February 22, 2006.
Nasdaq also notified the Company on January 17, 2006 that the Company’s filing on October 24, 2005 of the Form 10-K/A for the fiscal year ended October 31, 2004 prior to completion of the audit by its independent registered public accounting firm and without the certifications of its Chief Executive Officer and Chief Financial Officer was an additional event of noncompliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c)(14). This matter was previously disclosed to and discussed with the Nasdaq Listing Qualifications Panel. The Company was granted an extension of time in which to file this report to April 7, 2006, and the filing of this Amendment No. 3 to the Form 10-K for the fiscal year ended October 31, 2004 satisfies this requirement.
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Item 9. Changes in and Disagreements with Accountants in Accounting and Financial Disclosure
This item is not being amended by this Amendment.
Item 9A. Controls and Procedures
Restatement
As described in Note 2 to the consolidated financial statements included in Item 8, the Company has restated its consolidated financial statements for fiscal years 2004, 2003 and 2002 and all the quarters therein. These restatements are primarily the result of (a) the incorrect determination of operating and reportable segments and reporting units related to the application of FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), (b) errors identified in revenue recognition of preneed cemetery merchandise and services contracts and (c) errors identified in the recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts.
Evaluation of Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company files under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“SEC”) rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required financial disclosure.
The Company’s management carried out an evaluation under the supervision and with the participation of the Company’s management, including the CEO and CFO, as of October 31, 2004 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act. Based upon, and as of the date of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective because of the material weaknesses discussed below. Notwithstanding the material weakness discussed below, the Company’s management has concluded that the consolidated financial statements included in this Annual Report on Form 10-K fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.
A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. As a result of the restatements described above, the following material weaknesses were identified in the Company’s assessment of the effectiveness of disclosure controls and procedures as of October 31, 2004:
(A) The Company did not maintain effective controls over the determination of operating and reportable segments in accordance with accounting principles generally accepted in the United States of America with regard to identifying its segments and reporting units for purposes of assessing goodwill impairments. This control deficiency resulted in the restatement of the Company’s interim and annual consolidated financial statements for 2004, 2003 and 2002. Additionally, this control deficiency could result in further misstatements to the Company’s goodwill, deferred taxes, equity and disclosures that would result in a material misstatement in the annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness in internal control over financial reporting.
(B) The Company did not maintain effective controls over revenue recognition related to preneed cemetery merchandise and services contracts. Specifically, the Company did not maintain effective controls over the reconciliation of recorded revenues to revenues based on physical delivery of preneed cemetery merchandise to ensure completeness and accuracy of recorded preneed cemetery merchandise revenue and deferred preneed cemetery revenue. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for all annual and interim periods beginning with fiscal year 2001, the period in which the Company adopted Staff Accounting Bulletin No. 101 (“SAB 101”) “Revenue Recognition in Financial Statements”, through fiscal year 2004 and the first three quarters of fiscal year 2005. Prior to the adoption of SAB 101, the Company
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recognized preneed cemetery merchandise revenues at the time a contract was entered into with a customer. This control deficiency could result in the misstatement of cemetery merchandise revenues and of deferred preneed cemetery revenues that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.
(C) The Company did not maintain effective controls over recognition of realized trust earnings on preneed cemetery and funeral contracts. Specifically, the Company did not maintain effective controls to recognize realized net trust earnings upon the delivery of the related preneed cemetery and funeral merchandise and performance of preneed funeral services to ensure accuracy of recorded realized trust earnings and deferred trust earnings. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for all annual and interim periods from fiscal year 2000 through fiscal year 2004 and the first three quarters of fiscal year 2005. This control deficiency could result in the misstatement of cemetery and funeral revenues and of the deferred revenue associated with preneed cemetery and preneed funeral contracts sold on a preneed basis that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly management determined that this control deficiency represents a material weakness.
As a result of the material weaknesses described above, the Company has concluded that our disclosure controls and procedures were not effective as of October 31, 2004.
Management’s Remediation Initiatives
The Company took a series of steps designed to improve the control processes regarding the accounting requirements for determining operating and reportable segments, reporting units and goodwill impairment. These steps included re-assessing the information provided to the Company’s CODM and how that determines the Company’s operating segments as well as assessing the economic similarity for reportable segments and reporting unit determination in the Company’s goodwill impairment analysis using gross profit. As a result of these initiatives, the Company has subsequently concluded that this material weakness was eliminated as of October 31, 2005.
Management, with the oversight of the Audit Committee, is in the process of addressing the material weaknesses related to deferred revenue described above and its impact over disclosure controls and procedures and is committed to effectively remediating these deficiencies as expeditiously as possible. The Company is devoting significant time and resources to the remediation efforts and have completed a detailed review and assessment of nearly 700,000 contracts. Also, the Company is in the process of enhancing its automated delivery systems over cemetery merchandise and is establishing a team to design and implement an improved system for tracking and reporting trust earnings. Further, the Company is undertaking steps to improve its employee training programs at both cemetery and funeral locations which will include reiteration to the appropriate personnel of the importance of performing their responsibilities in accordance with Company policies and procedures.
Changes in Internal Control Over Financial Reporting
Except as described above, there have been no changes in the Company’s internal control over financial reporting that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
Item 9B.Other Information
This item is not being amended by this Amendment.
PART III
No items in Part III are being amended by this Amendment.
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PART IV
Item 15. Exhibits and Financial Statement Schedules
| (a) | Documents filed as part of this report: |
| (1) | Financial Statements |
The Company’s consolidated financial statements listed below have been filed as part of this report:
| Page | ||||
| Consolidated Statements of Earnings for the Years Ended October 31, 2004, 2003 and 2002 | 48 | |||
| Consolidated Balance Sheets as of October 31, 2004 and 2003. | 49 | |||
| Consolidated Statements of Shareholders’ Equity for the Years Ended October 31, 2004, 2003 and 2002 | 51 | |||
| Consolidated Statements of Cash Flows for the Years Ended October 31, 2004, 2003 and 2002 | 53 | |||
| Notes to Consolidated Financial Statements. | 55 | |||
| (2) Financial Statement Schedule for the years ended October 31, 2004, 2003 and 2002 | ||||
| Report of Independent Registered Public Accounting Firm on Financial Statement Schedule | 128 | |||
| Schedule II—Valuation and Qualifying Accounts | 129 | |||
All other schedules are omitted because they are not applicable or not required, or the information appears in the financial statements or notes thereto.
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM ON
FINANCIAL STATEMENT SCHEDULE
FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Shareholders
of Stewart Enterprises, Inc.:
of Stewart Enterprises, Inc.:
Our audits of the consolidated financial statements of Stewart Enterprises, Inc. and Subsidiaries referred to in our report dated January 5, 2005, except for Notes 2, 3(s) and 16 for which the date is April 4, 2006 appearing in Item 8 of this Form 10-K, also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
As discussed in Note 2 to the consolidated financial statements, the Company has restated its 2004, 2003 and 2002 consolidated financial statements.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
January 5, 2005, except for Notes 2, 3(s) and 16 for which the date is April 4, 2006
January 5, 2005, except for Notes 2, 3(s) and 16 for which the date is April 4, 2006
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
AND SUBSIDIARIES
SCHEDULE II—VALUATION AND QUALIFYING ACCOUNTS
(Unaudited)
(Dollars in thousands)
(Unaudited)
(Dollars in thousands)
| COLUMN A | COLUMN B | COLUMN C | COLUMN D | COLUMN E | COLUMN F | |||||||||||||||
| Balance at | Charged to | |||||||||||||||||||
| Description | beginning | costs and | Other | Balance at | ||||||||||||||||
| of period | expenses | Changes | Write-offs | end of period | ||||||||||||||||
| (Restated) | (Restated) | (Restated) | ||||||||||||||||||
| (Note 2) | (Note 2) | (Note 2) | ||||||||||||||||||
| Current—Allowance for doubtful accounts: | ||||||||||||||||||||
| Year ended October 31, | ||||||||||||||||||||
| 2004 | $ | 4,534 | 2,416 | 39 | (1) | (1,466 | ) | $ | 5,523 | |||||||||||
| 2003 | $ | 4,092 | 2,809 | (21 | )(1) | (2,346 | ) | $ | 4,534 | |||||||||||
| 2002 | $ | 7,000 | 5,094 | — | (8,002 | ) | $ | 4,092 | ||||||||||||
| Due after one year—Allowance for doubtful accounts: | ||||||||||||||||||||
| Year ended October 31, | ||||||||||||||||||||
| 2004 | $ | 5,590 | 4,691 | — | (2,259 | ) | $ | 8,022 | ||||||||||||
| 2003 | $ | 5,145 | 5,218 | — | (4,773 | ) | $ | 5,590 | ||||||||||||
| 2002 | $ | 7,223 | 6,405 | — | (8,483 | ) | $ | 5,145 | ||||||||||||
| Deferred tax asset valuation allowance | ||||||||||||||||||||
| Year ended October 31, | ||||||||||||||||||||
| 2004 | $ | 11,985 | (2,241 | ) | — | — | $ | 9,744 | ||||||||||||
| 2003 | $ | — | 11,985 | — | — | $ | 11,985 | |||||||||||||
| 2002 | $ | — | — | — | — | $ | — | |||||||||||||
| (1) | In fiscal year 2003 and 2004, amounts charged to other accounts represent the reduction due to the assets held for sale and the reduction due to asset sales completed. |
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Item 15(a)(3) Exhibits
| 3.1 | Amended and Restated Articles of Incorporation of the Company, as amended and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2003) | |
| 3.2 | By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K dated November 22, 2004) | |
| 4.1 | See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock | |
| 4.2 | Specimen of Class A common stock certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991) | |
| 4.3 | Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form 8-A dated November 3, 1999) | |
| 4.4 | Amended and Restated Credit Agreement dated November 19, 2004 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, and Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The Other Lenders Party Hereto (incorporated by reference to Exhibit 4.1 to the Company’s Form 8-K dated November 22, 2004) | |
| 4.5 | Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender, Deutsche Banc Alex. Brown Inc., as Syndication Agent, Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 1, 2003) and Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004) | |
| 4.6 | Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001) | |
| 4.7 | Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-4 dated August 14, 2001) |
The Company hereby agrees to furnish to the Commission, upon request, a copy of the instruments which define the rights of holders of the Company’s long-term debt. None of such instruments (other than those included as exhibits herein) represent long-term debt in excess of 10 percent of the Company’s consolidated total assets.
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Management Contracts and Compensatory Plans or Arrangements
| 10.3 | Form of Indemnity Agreement between the Company and its Directors and Executive Officers (incorporated by reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2004, filed January 11, 2005) (the “Original 2004 Form 10-K”) | |
| 10.4 | Retirement Benefits Agreement dated June 20, 2003, between the Company and Frank B. Stewart, Jr. (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended July 31, 2003) | |
| 10.5 | Separation Agreement by and between the Company and William E. Rowe dated June 3, 2004 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2004) | |
| 10.6 | Restricted Stock Agreement under the Amended and Restated 1995 Incentive Compensation Plan between the Company and Kenneth C. Budde dated November 18, 2004 (incorporated by reference to Exhibit 10.1 to the Company’s Form 8-K dated November 18, 2004) | |
| 10.7 | Stock Option Agreement under the Amended and Restated 1995 Incentive Compensation Plan between the Company and Kenneth C. Budde dated November 18, 2004 (incorporated by reference to Exhibit 10.2 to the Company’s Form 8-K dated November 18, 2004) | |
| 10.8 | Stock Option Agreement under the 2000 Incentive Compensation Plan between the Company and Kenneth C. Budde dated November 18, 2004 (incorporated by reference to Exhibit 10.3 to the Company’s Form 8-K dated November 18, 2004) | |
| 10.9 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Kenneth C. Budde (incorporated by reference to Exhibit 10.9 to the Original 2004 Form 10-K) | |
| 10.10 | Form of Change of Control Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Kenneth C. Budde and Everett N. Kendrick (incorporated by reference to Exhibit 10.10 to the Original 2004 Form 10-K) | |
| 10.11 | Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Kenneth C. Budde (incorporated by reference to Exhibit 10.36 to the 1996 10-K, Commission File No. 1-15449) | |
| 10.12 | Employment Agreement dated January 7, 2005, effective December 2, 2004, between the Company and Thomas M. Kitchen (incorporated by reference to Exhibit 10.12 to the Original 2004 Form 10-K) | |
| 10.13 | Change of Control Agreement dated January 7, 2005, effective December 2, 2004, between the Company and Thomas M. Kitchen (incorporated by reference to Exhibit 10.13 to the Original 2004 Form 10-K) | |
| 10.14 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.14 to the Original 2004 Form 10-K) | |
| 10.15 | Form of Change of Control Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Lawrence B. Hawkins, Brent F. Heffron, Randall L. Stricklin, G. Kenneth Stephens, Jr. and Michael K. Crane (incorporated by reference to Exhibit 10.15 to the Original 2004 Form 10-K) | |
| 10.16 | Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.42 to the 1996 10-K, Commission File No. 1-15449) | |
| 10.17 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.17 to the Original 2004 Form 10-K) |
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| 10.18 | Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.47 to the 1996 10-K, Commission File No. 1-15449) | |
| 10.19 | Stock Option Agreement dated January 1, 1997 (time-vest), between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997, Commission File No. 1-15449) | |
| 10.20 | Stock Option Agreement dated December 23, 1997 (time-vest), between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998, Commission File No. 1-15449) | |
| 10.21 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Randall L. Stricklin (incorporated by reference to Exhibit 10.21 to the Original 2004 Form 10-K) | |
| 10.22 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and G. Kenneth Stephens, Jr. (incorporated by reference to Exhibit 10.22 to the Original 2004 Form 10-K) | |
| 10.23 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Michael K. Crane (incorporated by reference to Exhibit 10.23 to the Original 2004 Form 10-K) | |
| 10.24 | Employment Agreement dated January 7, 2005, effective November 1, 2004, between the Company and Everett N. Kendrick (incorporated by reference to Exhibit to 10.24 to the Original 2004 Form 10-K) | |
| 10.25 | Form of Stock Option Agreement (time-vest), between the Company and its Executive Officers (incorporated by reference to Exhibit 10.45 to the 1998 10-K, Commission File No. 1-15449) | |
| 10.26 | Form of Stock Option Agreement (performance-based), between the Company and its Executive Officers (incorporated by reference to Exhibit 10.46 to the 1998 10-K, Commission File No. 1-15449) | |
| 10.27 | Form of Stock Option Agreement between the Company and its Executive Officers (incorporated by reference to Exhibit 10.27 to the Original 2004 Form 10-K) | |
| 10.28 | Form of Restricted Stock Agreement between the Company and its Executive Officers (incorporated by reference to Exhibit 10.28 to the Original 2004 Form 10-K) | |
| 10.29 | The Stewart Enterprises Employees’ Retirement Trust (incorporated by reference to Exhibit 10.20 to the 1991 Registration Statement); Amendment thereto dated January 1, 1994 (incorporated by reference to Exhibit 10.28 to the Company Annual Report on Form 10-K for the fiscal year ended October 31, 1994 (the “1994 10-K”)); and Amendment thereto dated January 1, 2002 (incorporated by reference to Exhibit 10.54 to the 2001 10-K); Amendment thereto dated January 1, 2003 (incorporated by reference to Exhibit 10.34 to the 2002 10-K); Amendment thereto dated January 1, 2004; Commission File No. 1-15449 (incorporated by reference to Exhibit 10.29 to the Original 2004 Form 10-K) | |
| 10.30 | The Stewart Enterprises Supplemental Retirement and Deferred Compensation Plan (incorporated by reference to Exhibit 10.29 to the 1994 10-K); Commission File No. 1-15449 | |
| 10.31 | Amended and Restated Stewart Enterprises, Inc. 1995 Incentive Compensation Plan (incorporated by reference to Exhibit 10.57 to the 1996 10-K); Commission File No. 1-15449 | |
| 10.32 | Amended and Restated Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.58 to the 1996 10-K); Commission File No. 1-15449 | |
| 10.33 | 2003 Employee Stock Purchase Plan (incorporated by reference to Exhibit B to the Company’s 2003 definitive proxy statement for the fiscal year ended October 31, 2002) |
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| 10.34 | 2000 Incentive Compensation Plan (incorporated by reference to Exhibit 10.45 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000) | |
| 10.35 | 2000 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.46 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2000); Amended and Restated Stewart Enterprises, Inc. 2000 Directors’ Stock Option Plan (incorporated by reference to Exhibit 10.11 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended April 30, 2002) | |
| 10.36 | Form of Stock Option Agreement (time-vest), between the Company and its Executive Officers, granted in January 2000 under the Amended and Restated 1995 Incentive Compensation Plan (incorporated by reference to Exhibit 10.61 to the 2001 10-K) | |
| 10.37 | Form of Stock Option Agreement (time-vest) between the Company and its Executive Officers, granted under the 2000 Incentive Compensation Plan (incorporated by reference to Exhibit 10.62 to the 2001 10-K) | |
| 10.38 | The Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan for certain highly compensated executives (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended July 31, 2001) | |
| 10.39 | Stewart Enterprises, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended April 30, 2002); Amendment dated September 24, 2003 to the Stewart Enterprises, Inc. Supplemental Executive Retirement Plan (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004) | |
| 12 | Calculation of Ratio of Earnings to Fixed Charges | |
| 21 | Subsidiaries of the Company (incorporated by reference to Exhibit 21 to the Original 2004 Form 10-K) | |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer | |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Executive Vice President and Chief Financial Officer | |
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and Chief Financial Officer |
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Amendment to be signed on its behalf by the undersigned, thereunto duly authorized on April 4, 2006.
| STEWART ENTERPRISES, INC. | ||||||
| By: | /s/ THOMAS M. KITCHEN | |||||
| Thomas M. Kitchen | ||||||
| Executive Vice President, | ||||||
| Chief Financial Officer | ||||||
| and a Director | ||||||
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Exhibit Index
| 12 | Calculation of Ratio of Earnings to Fixed Charges | |
| 31.1 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer | |
| 31.2 | Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Executive Vice President and Chief Financial Officer | |
| 32 | Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and Chief Financial Officer |
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