===============================================================================
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
-----------------
COMMISSION FILE NUMBER: 0-19508
-----------------
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction of (I.R.S.
incorporation or organization) Employer Identification No.)
110 VETERANS MEMORIAL BOULEVARD
METAIRIE, LOUISIANA 70005
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 837-5880
-----------------
SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
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)
-----------------
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act
of 1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to
such filing requirements for the past 90 days. Yes _X_ No __
-----------------
Indicate by check mark if disclosure of delinquent filers pursuant to
Item 405 of Regulation S-K is not contained herein, and will not be
contained, to the best of Registrant's knowledge, in definitive proxy or
information statements incorporated by reference in Part III of this Form
10-K or any amendment to this Form 10-K.
-----------------
The aggregate market value of the voting stock held by nonaffiliates
(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 January 18, 2000, was approximately $434,000,000.
-----------------
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 17, 2000, was 102,823,717 and 3,555,020
respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 2000 annual meeting of
shareholders, incorporated in Part III of this Report.
===============================================================================
CAUTIONARY NOTE
This Annual Report of Stewart Enterprises, Inc. (the "Company") on Form
10-K contains forward-looking statements in which the Company's management
discusses factors it believes may affect the Company's performance in the
future. Such statements typically are identified by terms expressing future
expectations or projections of revenues, earnings, earnings per share, cash
flow, capital expenditures, acquisition expenditures, internal growth
initiatives, gross profit margin and other financial items. All forward-
looking statements, although made in good faith, are based on assumptions
about future events and are therefore inherently uncertain, and actual
results may differ materially from those expected or projected. Important
factors that may cause the Company's actual results in the future to differ
materially from expectations or projections in forward-looking statements
include those described under the heading "Cautionary Statements" in Item 7.
Forward-looking statements speak only as of the date of this report, and the
Company undertakes no obligation to update or revise such statements to
reflect new circumstances or unanticipated events as they occur.
PART 1
ITEM 1. BUSINESS
GENERAL
Stewart Enterprises, Inc. is the third largest provider of funeral and
cemetery products and services in the death care industry in North America.
Through its subsidiaries, the Company owns and operates 633 funeral homes
and 161 cemeteries in 30 states within the United States, and in Puerto
Rico, Mexico, Australia, New Zealand, Canada, Spain, Portugal, the
Netherlands, France, Belgium and Argentina. The Company has been a leader
in the industry's trend toward consolidation. Historically, the Company's
growth in terms of number of properties has been principally through
acquisitions; however, beginning in late fiscal year 1999, the Company began
modifying its growth strategy to focus on internal growth rather than
acquisitions.
The Company provides a complete range of death care products and services
both at and prior to the time of need. The Company's funeral homes and
cemeteries are located primarily in metropolitan areas and frequently are
organized in "clusters," which are integrated groups of funeral homes and
cemeteries that share certain assets, personnel and services. The Company
also creates combined operations by building funeral homes on cemetery
properties and operating the facilities together. The Company believes that
it owns and operates one or more of the premier death care facilities in
each of its principal markets. The Company also believes that it is an
industry leader in the marketing and sale of prearranged funeral and
cemetery services and products.
The Company has an experienced management team and a decentralized
organizational structure that allows its local funeral home directors and
cemetery managers to best serve their locations' particular needs. The
Company's ultimate goal is to enhance shareholder value. To achieve this
goal, it has three principal objectives:
* Provide the highest level of quality, service and value to each family
it serves
* Attract, retain and reward highly qualified individuals to operate its
businesses
* Provide a reasonable and sustainable return to its shareholders.
The Company's business was founded by the Stewart family in 1910, and the
Company was incorporated as a Louisiana corporation in 1970. The Company's
principal executive offices are located at 110 Veterans Memorial Boulevard,
Metairie, Louisiana 70005, and its telephone number is 504-837-5880.
THE DEATH CARE INDUSTRY
The Company's management believes that the death care industry has
several attractive fundamental characteristics. 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
1999 to 2.6 million in 2010. In addition, industry studies indicate that
while the death rate is declining slightly, the average age of the
population in the United States is increasing. The aging of the population,
particularly the "baby boomers" who have recently begun to turn 50,
represents a significant opportunity for firms such as the Company to expand
their customer base and secure a portion of their future market share by
actively marketing prearranged property, merchandise and services.
According to the Bureau of the Census, the United States population over 50
years of age will increase from 74.2 million in 1999 to 96.4 million in
2010. The Company's principal target market for sales of prearranged
cemetery property, merchandise and services is customers who are age 50 and
above.
Traditionally, death care businesses in the United States have been
relatively small, family-owned enterprises that have passed through
successive generations within the family. During the last decade, however,
the industry in the United States and in certain foreign countries has
undergone a transition in which family-owned firms were consolidating with
larger organizations such as the Company. This trend began to change in
late fiscal year 1999. As industry conditions reduced the number of major
consolidators participating in the acquisition market, 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 the first quarter of 1999, Service Corporation International, one
of the Company's primary competitors for acquisitions, announced plans to
significantly reduce the level of its acquisition activity. The Loewen
Group Inc., previously a primary competitor for acquisitions, entered into
bankruptcy proceedings on June 1, 1999, after announcing that it had
terminated its acquisition activity and was offering a number of its own
properties for sale. In addition, the fourth largest public death care
company and another of the Company's competitors for acquisitions, Equity
Corporation International, merged with Service Corporation International.
Throughout fiscal year 1999, the Company continually reduced its target
acquisition multiples. There were some regional consolidators, however, who
continued to pay the old, higher prices. In the third quarter of fiscal
year 1999, the Company's acquisition activity began to decrease
substantially from prior quarters, as many potential sellers were not
willing to sell their businesses at the lower prices. The Company believes
that many non-price factors continue to exist that make selling a business
to a public consolidator very attractive to independents, such as the desire
of owners to address management succession and estate planning issues and to
achieve liquidity and diversification of their investments. Accordingly,
while the Company believes that it may be able to consummate acquisitions in
the future at lower multiples than it has paid historically, there can be no
assurance that this will be the case, and the lower prices are likely to
continue to cause some potential sellers to refrain from selling their
businesses, at least for some period of time. As a result, the Company's
growth expectations for fiscal year 2000 and beyond include no acquisitions.
Management believes it can be difficult for new competitors to enter
existing markets and achieve success over the long-term by opening new
funeral homes and cemeteries. Several factors make it difficult for new
facilities to compete successfully, including the importance to families of
reputation and goodwill developed over time, regulatory complexities, zoning
restrictions and the existence of an adequate number of facilities serving
mature markets. However, in the current environment, low-cost funeral
service and merchandise providers have emerged in some markets and, in some
instances, have caused funeral pricing pressure.
OPERATIONS
PREMIER FACILITIES. The Company believes that it operates one or more of
the premier death care facilities in each of its principal markets. In the
Company's view, a "premier" facility is one that is among the most highly
regarded facilities in its market area in terms of tradition, heritage,
reputation, physical size, volume of business, available inventory, name
recognition, aesthetics and potential for development or expansion.
CLUSTERING. The Company operates most of its funeral homes and
cemeteries in "clusters." Clusters are groups of funeral homes and
cemeteries located close enough to each other 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 the Company's
prearrangement sales force; thus, the Company is able to decrease its costs
and expand its marketing and sales efforts at each location. By virtue of
their proximity to each other, clustered facilities also create
opportunities for more integrated and sophisticated management of their
operations.
FUNERAL OPERATIONS. Funeral operations accounted for approximately 59
percent of the Company's revenues for the fiscal year ended October 31,
1999. The Company's funeral homes offer a complete range of funeral
services and products at the time of need or on a prearranged 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. Most of the Company's 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, 1999, the Company operated 635 funeral homes, 140 of which were
leased.
CEMETERY OPERATIONS. Cemetery operations accounted for approximately 41
percent of the Company's revenues for the fiscal year ended October 31,
1999. 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. Cemetery property and
merchandise sales are made at the time of need or on a prearranged basis.
Prearranged sales represented approximately 70 percent of cemetery revenue
during the fiscal year ended October 31, 1999. The Company also maintains
cemetery grounds under perpetual care contracts and local laws. As of
October 31, 1999, the Company owned and operated 157 cemeteries.
COMBINED FUNERAL HOME AND CEMETERY OPERATIONS. A combined operation is a
funeral home located on a cemetery site where both are operated together.
Combined operations help to increase market share by allowing the Company to
offer families the convenience of complete funeral home and cemetery
planning and services from a single location at a competitive price at the
time of need or on a prearranged basis. In addition, combined operations
enhance the Company's purchasing power, enable it to employ more
sophisticated management systems, and allow it to share facilities,
equipment, personnel and a prearrangement sales force, resulting in lower
average operating costs and expanded marketing and sales opportunities.
Approximately 44 percent of the Company's cemeteries have a funeral home
on site that is operated in conjunction with that cemetery. Many of these
facilities are in the Company's key markets, including New Orleans,
Louisiana; Dallas, Fort Worth and Houston, Texas; Miami, Orlando, Tampa and
St. Petersburg, Florida; and San Diego, California.
The Company has developed several internal growth strategies that employ
the use of combined operations. One such strategy is to create combined
operations by constructing funeral homes on the grounds of the Company's
cemeteries. Another is to enter into operating partnerships in which the
Company constructs funeral homes on the grounds of unaffiliated cemeteries,
which allows the Company to enjoy the benefits of a combined operation
without the capital investment of purchasing the cemetery.
Although it generally takes several years before a newly constructed
funeral home becomes profitable, the Company's experience with combined
operations has demonstrated that the combination of a funeral home with a
cemetery can significantly increase the market share and profitability of
both.
CREMATION. In fiscal year 1999, 36 percent of the funeral services the
Company performed in the United States and Puerto Rico were cremations.
Cremation rates at the Company's foreign funeral homes are higher on average
than those at its domestic funeral homes, although they vary substantially
from country to country. For fiscal year 1999, the cremation rates at the
Company's foreign funeral homes varied from 7 percent in Portugal and Spain
to 69 percent in Australia. While cremations in the United States often
result in lower average revenue than traditional funeral services, they
generally produce higher gross profit margins. In the foreign markets in
which the Company operates, cremations generally produce revenues and gross
profit margins comparable to those of traditional funeral services in those
countries.
The cremation rate in the United States has been increasing, and by the
year 2010 cremations are expected to represent 38 percent of the United
States burial market, according to industry estimates. The Company has been
addressing this trend by providing cremation products and services at all of
its funeral homes, including traditional funeral services and
memorialization options for families choosing cremation. Additionally, as
part of the internal growth initiatives it anticipates undertaking in fiscal
year 2000, the Company may expand on the model developed by Sentinel
Cremation Societies, Inc., which it acquired in fiscal year 1997. See below
under the heading "Internal Growth - New Initiatives" for further
discussion.
PREARRANGEMENTS. The Company markets death care products and services on
a prearranged basis through a staff of more than 3,500 commission sales
counselors. Prearranged plans enable families to establish in advance and
prepay for the type of service to be performed and the products to be used.
The cost of such products and services is set at prices prevailing at the
time the agreement is signed, rather than when the products and services are
delivered. Prearranged plans also allow families to eliminate the
emotional strain of making death care decisions at the time of need.
The Company believes that extensive marketing of prearranged products and
services produces a backlog of future business and builds current and future
market share. On average, over the past five years, the Company has sold
approximately 2 1/2 prearranged funeral services for every one it has
delivered from its backlog. During the fiscal year ended October 31, 1999,
the Company sold approximately 58,400 prearranged funeral services, and as
of October 31, 1999, had a backlog of approximately 436,500 prearranged
funeral services to be delivered in the future.
TRUST FUNDS AND ESCROW ACCOUNTS. Generally, prearranged funeral plans
are funded either through trust funds or escrow accounts established by the
Company, or (to a lesser extent) through insurance, depending on the
regulatory requirements in the relevant jurisdiction. When trust or escrow
funding is used, the Company places into a trust fund or escrow account a
percentage (which varies by jurisdiction) of the sale price, which is often
paid in installments. It retains the remainder of the sale price to defray
costs related to the sale. The Company withdraws the amount placed in the
trust fund or escrow account when the service is performed to cover the cost
of providing the funeral service. When insurance funding is used, the
Company applies the customers' payments to pay premiums on insurance
policies designed to cover the cost of providing the funeral service in the
future.
Generally, principal and earnings (including interest, dividends and net
realized capital gains) on the trust funds and escrow accounts, and
insurance proceeds, are paid to the Company only when the funeral service is
performed. In limited circumstances, the Company receives principal amounts
from prearranged funeral trust funds or escrow accounts upon cancellation of
the contract by the customer. In certain jurisdictions, the Company is
permitted to withdraw earnings on a current basis from prearranged funeral
trust funds and escrow accounts. As of October 31,1999, the Company's
prearranged funeral trust funds and escrow accounts totaled approximately
$610.7 million.
The Company also establishes trust funds to fund the cost of delivering
prearranged cemetery merchandise. Generally, the Company withdraws the
principal and earnings from these funds only when the merchandise is
delivered or contracts are canceled. As of October 31, 1999, the Company's
cemetery merchandise trust funds and escrow accounts totaled approximately
$199.3 million.
The Company funds its obligations to maintain cemetery grounds by placing
a portion, generally 10 percent, of the proceeds from cemetery property
sales into perpetual care trust funds or escrow accounts. Income from these
funds is withdrawn and used for maintenance of the cemeteries, but
principal, including in some jurisdictions net realized capital gains,
generally must be held in perpetuity. As of October 31, 1999, the Company's
perpetual care trust funds and escrow accounts totaled approximately $201.0
million.
The accounting methods used to reflect the Company's prearranged
funeral, merchandise and perpetual care trust funds and escrow accounts are
complex and are described in the notes to the Company's consolidated
financial statements included in Item 8.
Management believes that balances in the Company's trust funds and escrow
accounts, along with insurance proceeds and installment payments due under
contracts, will be sufficient to cover its estimated cost of providing the
related prearranged services and products in the future.
INVESTMENT MANAGEMENT. Generally, the Company's wholly-owned subsidiary,
Investors Trust, Inc. ("ITI"), a Texas corporation with trust powers, serves
as investment adviser on the Company's investment portfolio, and its
prearranged funeral, merchandise and perpetual care trust funds and escrow
accounts. ITI also provides investment advisory services exclusively to the
Company. ITI is registered with the Securities and Exchange Commission
under the Investment Advisers Act of 1940.
As of October 31, 1999, ITI had approximately $1.1 billion in assets
under management. Lawrence B. Hawkins, an executive officer of the Company
and a professional investment manager, serves as President of ITI. ITI
operates with the assistance of third-party professional financial
consultants pursuant to a formal investment policy established by the
Investment Committee of the Company's Board of Directors. The policy
emphasizes conservation, diversification and preservation of principal while
seeking appropriate levels of current income and capital appreciation. For
additional information, see Management's Discussion and Analysis of
Financial Condition and Results of Operations included in Item 7.
MANAGEMENT. The Company has an experienced management team, many of whom
joined the Company through acquisitions. The Company's management structure
is designed to allow local funeral home directors and cemetery managers
substantial flexibility in deciding how their firms will be managed and how
their products and services will be priced and merchandised. At the same
time, financial goals are established by management at the corporate level,
and the Company maintains centralized supervisory controls. The Company
provides business support services primarily through its Shared Services
Center, which provides centralized and standardized accounting, payroll,
contract processing, collection and other services for all of its domestic
facilities, including those in Puerto Rico.
Currently, the Company is divided into four operating divisions in North
America, each of which is managed by a division executive and chief
financial officer. These divisions are further divided into regions, each
of which is managed by a regional operating officer. The Company's
operations in Europe, South America and Australasia are not considered
separate operating divisions, but are managed by local regional executives
who report to certain of the Company's executive officers. In fiscal year
1998, in order to meet the needs of the Company's growing European
operations and to enable it to take advantage of other long-term
opportunities in Europe, the Company established its European headquarters
in Amsterdam, Holland. From time to time, the Company may increase, reduce
or realign the divisions and regions. The Company also has a Corporate
Division, which manages the Company's corporate services, accounting and
financial operations and strategic planning.
The Company uses two types of stock options to align the interests of its
managers with the long-term interests of its shareholders. The Company's
more traditional options vest over time. The Company's performance-based
options vest only if it achieves a stock price objective, which has
generally been a 20 percent compounded annual growth rate in the stock price
over a five-year period. In April 1998, the Company achieved the stock
price objective applicable to the performance-based options granted in 1995.
Accordingly, those options vested and, with the Company's encouragement,
were exercised by the optionees. From July 1998 to February 1999, the
Company granted new options to 190 managers. Two-thirds of those options
are performance-based, and one-third vest over time at the rate of 20
percent per year over five years. The performance-based options become
exercisable only if the average of the closing sale prices of a share of
Class A Common Stock over 20 consecutive trading days prior to July 17, 2003
equals or exceeds $67.81; otherwise the options will be forfeited.
Generally accepted accounting principles require that a charge to earnings
be recorded for the performance-based options for the difference between the
exercise price and the then current stock price when achievement of the
performance objective becomes probable. All of these options expire on
July 31, 2004.
FOREIGN OPERATIONS. The Company first entered foreign markets in fiscal
year 1994 and, through January 17, 2000, has acquired a total of 312
properties outside the United States and Puerto Rico. For the fiscal year
ended October 31, 1999, the Company's properties in foreign countries
generated approximately 20 percent of consolidated total revenues and
represented 20 percent of consolidated total assets.
FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS. For
financial information about the Company's industry and geographic segments,
see Note 17 to the Company's consolidated financial statements included in
Item 8.
GROWTH
GENERAL
Historically, the Company's growth has been primarily from acquisitions.
Due to changes in the acquisition market discussed under the heading "The
Death Care Industry," the Company's growth expectations for fiscal year 2000
and beyond include no acquisition activity. In addition, the Company's
existing operations in fiscal year 1999 were adversely affected by (1)
intense and growing price competition from low-cost funeral providers and
casket stores in some markets, (2) the continuing and accelerating trend
toward cremation, and (3) a shift by customers to lower-priced services and
merchandise. The Company is responding by developing and implementing
strategies to (1) enhance its revenues, profits and cash flow at its
currently existing operations and (2) grow its business through means other
than acquisitions. The Company will also continue to focus on improving the
margins of previously acquired firms.
Management has determined that fiscal year 2000 will be a transition year
for the Company. In subsequent years, management anticipates growth in
earnings per share of 10 percent primarily through the Company's internal
growth and cost management initiatives. Furthermore, the Company strives to
achieve improved operational results through improvement in both revenues
and costs at existing and recently acquired operations. To supplement this
anticipated improvement, the Company has set forth various cash flow and
operating initiatives to be implemented in fiscal year 2000 and beyond.
INTERNAL GROWTH - EXISTING OPERATIONS
PREARRANGED SERVICES. The Company believes that it can be distinguished
from its competitors through its strong emphasis on, and its more than 50-
year history of success with, prearranged sales. The Company also believes
that it is an industry leader in marketing prearranged funeral and cemetery
services and products through highly qualified commission sales counselors.
Extensive prearranged marketing produces current cemetery revenues and a
significant backlog of future funeral business and builds current and
future market share. The Company's backlog of prearranged funeral services
has grown at a compounded annual rate of 18 percent over the last four years
and represents approximately $1.5 billion in future revenues at October
31,1999.
IMPROVED MERCHANDISING. The Company frequently expands its product and
service offerings, adjusts the mix of products and services offered in
individual markets, takes advantage of enhanced pricing opportunities, and
implements selective marketing programs to increase revenue and improve
profit margins.
OPERATING INITIATIVES. The Company plans to implement the following
operating initiatives:
* Leverage goodwill in local markets by expanding market-wide
regional branding
* Centralize training and develop a formal training policy
* Automate all of its businesses with real-time and standardized
information
* Implement programs based on the results of Project 2000, which is
a comprehensive study of consumer preferences related to the death
care industry. The results are expected to assist the Company in
evaluating the changing trends in consumer preferences and to
provide detailed information on pricing, merchandising and
services.
COST CONTROL. In addition to its strategies for increasing revenues, the
Company plans to continue to improve its operating margins by achieving
economies of scale, improving efficiencies and controlling costs through a
variety of measures including the following:
* Obtaining volume discounts from suppliers
* Leveraging operating costs through clustering and the development
of combined operations
* Improving the utilization of its sales force
* Centralizing control for capital expenditures at the corporate
level
INTERNAL GROWTH - NEW INITIATIVES
Management has limited the amount it will spend on internal growth
initiatives to $25 million in fiscal year 2000, approximately $15 million of
which is earmarked for the construction of the Archdiocese of Los Angeles
funeral homes. These internal growth initiatives are anticipated to include
construction of funeral homes on some of the Company's cemeteries and
development of third party relationships and alternative service firms.
Although it generally takes several years before a newly constructed
funeral home becomes profitable, the Company's experience with combined
operations has demonstrated that the combination of a funeral home with a
cemetery can significantly increase the market share and profitability of
both.
NEW FUNERAL HOME AND CEMETERY CONSTRUCTION. The Company creates combined
operations by building funeral homes on its cemetery properties and
operating both facilities together. Combined operations help to increase
market share by allowing the Company to offer families the convenience of
complete funeral home and cemetery planning and services from a single
location at a competitive price at the time of need or on a prearranged
basis. In addition, combined operations enhance the Company's purchasing
power, enable it to employ more sophisticated management systems, and allow
it to share facilities, equipment, personnel and a prearrangement sales
force, resulting in lower average operating costs and expanded marketing and
sales opportunities.
OPERATING PARTNERSHIPS. The Company expects to gain market share and
improve profitability through operating partnerships with unaffiliated
parties.
Through an operating partnership with the Catholic Archdiocese of New
Orleans, the Company constructed a mausoleum for the Catholic Church on the
grounds of its combined operation in New Orleans. The Company owns the
mausoleum and manages the sales relating to the mausoleum for the Church.
Additionally, through an operating partnership with the Firemen's Charitable
and Benevolent Association, a non-profit organization, the Company
constructed a funeral home and mausoleum on the grounds of their cemetery in
New Orleans. The Company owns and operates the funeral home in combination
with that cemetery, and manages sales for the mausoleum.
The Company entered into an agreement with the Archdiocese of Los Angeles
to construct and operate funeral homes on land leased by the Company from
the Archdiocese at the site of nine cemeteries owned and operated by the
Archdiocese. Over the last 50 years, through its mausoleum construction
business, the Company has developed relationships with the Catholic Church
in approximately 70 dioceses in 39 states. The Company anticipates building
on those relationships as it expands its use of operating partnerships.
The Company also plans to develop operating partnerships with non-profit
secular entities as it did in fiscal year 1998 when it entered into an
agreement with the Wyuka Cemetery Board of Trustees. Under that agreement,
the Company will manage the cemetery sales and operate a funeral home it
constructed on the grounds of that state-owned cemetery in Lincoln,
Nebraska.
Management believes that these partnerships allow the Company to enjoy
the benefits of operating a funeral home on the grounds of a cemetery
without the capital investment of purchasing the cemetery. The Company also
believes that partnerships such as these benefit the third parties by
allowing them to compete with other cemeteries in their market that have
funeral homes on their properties. The Company is pursuing similar
partnership opportunities with other cemetery operators.
ALTERNATIVE SERVICE FIRMS. During fiscal year 1997, the Company acquired
Sentinel Cremation Societies, Inc. of California ("Sentinel") which owned
and operated thirteen service centers offering cremations and related
products and services. Sentinel's cremation societies, Neptune and
Telophase, have more than 110,000 members. Members in the cremation society
pay a small membership fee and indicate their wish to be cremated. Because
Sentinel's offices generally operate from leased locations with a small
staff, they have lower overhead than traditional funeral homes, thereby
generating a greater return on invested capital. The cost to the family for
death care arrangements at a Sentinel location generally is less than the
cost at a traditional funeral home, although these services typically
generate higher operating margins for the Company than services at a
traditional funeral home.
During fiscal year 1998, the Company acquired Desert Memorial Cremation
and Burial Society in Las Vegas, Nevada, a state with one of the highest
cremation rates in the United States. This acquisition complements its
alternative services strategy and provides an additional vehicle for
expansion, particularly in the high cremation markets of the western United
States.
EXTERNAL GROWTH
ACQUISITIONS. From November 1, 1991 through January 17, 2000, the
Company has grown from 43 funeral homes and 29 cemeteries in six states to
633 funeral homes and 161 cemeteries in 30 states, Puerto Rico and 10
foreign countries. The Company's growth in terms of number of properties
has been principally through acquisitions.
At the time of the Company's initial public offering in October 1991, the
Company owned funeral homes and cemeteries in Louisiana, Texas, Florida,
Virginia, West Virginia and Maryland. Since that time, the Company has
expanded domestically, primarily in the Southern, Mid-Atlantic, Midwest and
Pacific states and in Puerto Rico. In addition, the Company expanded
internationally by entering Mexico in fiscal year 1994, Australia, New
Zealand and Canada in fiscal years 1995 and 1996, Spain and Portugal in
fiscal year 1997 and the Netherlands, Argentina, France and Belgium in
fiscal year 1998. Since 1994, the Company has acquired a total of 312
funeral homes and cemeteries outside the United States and Puerto Rico.
The following table sets forth certain information with respect to the
Company's completed and pending acquisition activity:
NUMBER OF AGGREGATE
FUNERAL HOMES PURCHASE PRICE
AND CEMETERIES (IN MILLIONS)
-------------- --------------
Properties owned as of October 31, 1991........ 72 $ -
Completed acquisitions(1):
Fiscal year 1992............................. 11 30.0
Fiscal year 1993............................. 49 94.6
Fiscal year 1994............................. 60 177.6
Fiscal year 1995............................. 70 154.4
Fiscal year 1996............................. 149 179.0
Fiscal year 1997............................. 114 184.5
Fiscal year 1998............................. 162 266.3
Fiscal year 1999............................. 100 156.4
November 1, 1999 - January 17, 2000.......... 4 5.4
Pending acquisitions, as of January 17, 2000... 4 3.5
- -----------------------------
(1) Excludes funeral homes and cemeteries constructed by the Company.
ACQUISITION STRATEGY. Historically, the Company has actively pursued
acquisition opportunities both domestically and internationally. The
Company sought and acquired premier firms that could be integrated with
existing clusters or serve as a base for the formation of new clusters, and
firms with strong managers willing to remain with the Company. In
evaluating potential acquisitions, the Company has always considered factors
such as the size of the communities the properties serve and the potential
for increasing profitability through increased prearranged marketing efforts
and other means.
In response to the market changes described above, the Company expects to
suspend its acquisition activity in fiscal year 2000 and to focus primarily
on internal growth initiatives and improving operations. In limited
instances, however, the Company may consider acquiring firms that present an
unusually attractive investment opportunity. More than 85 percent of the
approximately 22,000 funeral homes and 9,000 cemeteries in the United States
are privately or family owned. Management believes that a substantial
number of these businesses are suitable candidates for acquisition.
CASH FLOW INITIATIVES
The Company plans to implement the following cash flow initiatives:
* Suspend acquisition activity unless an acquisition is unusually
attractive and generates positive cash flow
* Limit spending on internal growth initiatives in fiscal year 2000
to $25 million, some of which has already been earmarked for
construction of the Archdiocese of Los Angeles funeral homes
* Centralize control at the corporate office for all capital
expenditures
* Establish a program to analyze and possibly re-deploy excess
cemetery property, under-performing assets and real estate that
would be more valuable if converted to another use
COMPETITION
The Company's funeral home and cemetery operations generally face intense
competition in local markets that typically are served by numerous funeral
home and cemetery firms. The Company also competes with monument dealers,
casket retailers, low-cost funeral providers and other non-traditional
providers of limited services or products. Because the market for death
care services is relatively stable, competition usually focuses on
increasing market share and selling prearranged products and services.
Market share is largely a function of goodwill and tradition, although
competitive pricing, professional service and attractive, well-maintained
and conveniently located facilities are also important. Because of the
significant role played by goodwill and tradition, market share increases
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 sale of prearranged funeral
services.
The Company's traditional burial and funeral service operations face
competition from the increasing number of cremations in the United States.
Industry studies indicate that the percentage of cremations has increased
throughout the 1980s and that cremation will represent approximately 38
percent of the United States burial market by the year 2010, compared with
14 percent in 1986. All of the Company's funeral homes in the United States
offer cremation, and the Company believes that it will be able to maintain
its competitive position by marketing full service cremations in combination
with traditional funeral services and memorialization. Additionally,
development of the Alternative Service Firms concept by the Company
represents another opportunity for the Company to serve cremation customers.
Additional information on the development of the Alternative Service Firms
concept can be found under the heading "Internal Growth - New Initiatives"
discussed earlier in Item 1.
The Company would also face competition for acquisitions, should the
Company decide to participate in the acquisition market. For information
about the current status of the acquisition market, see "The Death Care
Industry."
REGULATION
The Company's 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
is reviewing the Funeral Rule and has conducted hearings to receive input
from industry and consumer groups. As of this time, the FTC has not issued
any proposed changes to the regulation.
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:
(i) misrepresenting legal, crematory and cemetery requirements; (ii)
embalming for a fee without permission; (iii) requiring the purchase of a
casket for direct cremation; and (iv) requiring consumers to buy certain
funeral goods or services as a condition for furnishing other funeral goods
or services.
The Company's operations are also subject to extensive regulation,
supervision and licensing under numerous federal, state and local laws and
regulations. The Company believes that it is 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, if enacted as proposed, could have a
material effect on the Company's operations and on the death care industry
in general. The Company cannot predict the outcome of any proposed
legislation or regulation, or the effect that any such legislation or
regulation might have on the Company.
EMPLOYEES
The Company and its subsidiaries employ approximately 11,200 persons, and
management believes that its relationship with its employees is good.
Approximately 941 of its employees who are employed in Maryland,
Pennsylvania, Puerto Rico, Mexico, Australia, Canada and the Netherlands are
represented by the Laborers' International Union of North America-AFL-CIO,
the International Association of Machinists and Aerospace Workers-AFL-CIO,
the International Brotherhood of Teamsters of Puerto Rico, the Sindicato de
Trabajadores y Empleados de Establecimientos Comerciales, Tiendas de Ropa y
Almacenes en General del Distrito Federal, the Miscellaneous Workers Union,
Association des Travailleurs du Parc Commemoratif de Montreal Inc., Syndicat
Canadien (SCEP), and AWVN (Catholic Union CNC). No other employees of the
Company or its subsidiaries are members of a collective bargaining unit.
ITEM 2. PROPERTIES
As of October 31, 1999, all but 140 of the Company's 635 funeral home
locations were owned by subsidiaries of the Company. The leases with
respect to the 140 leased properties have terms ranging from one to 24
years, except for five leases that expire between 2032 and 2072. Generally,
the Company has a right of first refusal and an option to purchase the
leased premises. An aggregate of $2.9 million of the Company's term notes
are secured by mortgages on some of the Company's funeral homes; these notes
were either assumed by the Company upon its acquisition of the property or
represent seller financing of the acquired property.
As of October 31, 1999, the Company owned 157 cemeteries covering a total
of approximately 10,700 acres. Approximately 4,500 acres, or 42 percent of
the total acreage, are available for future development.
The Company's corporate headquarters occupy approximately 40,600 square
feet of office space in a building in suburban New Orleans that is leased
from an affiliate of the Company. In addition, the Company owns a 92,000
square foot building in suburban New Orleans of which it uses a portion for
its Shared Services Center, Human Resource Department and Information
Systems Department. See "Certain Transactions," which is incorporated by
reference herein from the Company's definitive proxy statement relating to
its 2000 annual meeting of shareholders.
ITEM 3. LEGAL PROCEEDINGS
IN RE STEWART ENTERPRISES, INC. SECURITIES LITIGATION, United States
District Court for the Eastern District of Louisiana. During the fall of
1999, 16 putative securities class action lawsuits were filed against the
Company, certain of its directors and officers and the Company's
underwriters in its January 1999 common stock offering. The suits have been
consolidated and the court has appointed lead plaintiffs as well as lead and
liaison counsel for the plaintiffs.
The consolidated amended complaint alleges violations of Section 11,
12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
on behalf of purchasers of the Company's common stock during the period
October 1, 1998 through August 12, 1999. Plaintiffs generally allege that
the defendants made false and misleading statements and failed to disclose
allegedly material information in the prospectus relating to the January
1999 common stock offering and in certain of the Company's other public
filings and announcements. The plaintiffs also allege that these allegedly
false and misleading statements and omissions permitted the Chairman of the
Company to sell Company common stock during the class period at inflated
market prices. The plaintiffs seek remedies including certification of the
putative class, unspecified damages, attorneys' fees and costs, rescission
to the extent any members of the class still hold the Company's common
stock, and such other relief as the court may deem proper. By February 25,
2000, the Company expects to move to dismiss the complaint.
This action is in its earliest stages and the outcome of the action and
costs of defending it cannot be predicted at this time. The Company
believes that the claims are without merit and intends to defend itself
vigorously.
OSIRIS HOLDING CO., S.A. DE C.V. ET AL. VS. JAIME ARRANGOIZ GAYOSSO ET
AL., Ordinary Mercantile Proceedings in the Superior Court of Justice of the
Federal District of Mexico, United Mexican States, Thirteenth Civil Court.
This suit was brought in September 1994 by The Loewen Group Inc. and a
Mexican affiliate (collectively, "Loewen") against the Company, the Mexican
corporations acquired by the Company in August 1994, and the shareholders of
those corporations. The suit alleges that the sale of those corporations to
the Company violated a previous option granted by the shareholders to
Loewen. The suit originally requested a judicial declaration that Loewen
properly exercised its option prior to the purchase by the Company and that
Loewen thereby acquired title to the corporations. The suit also sought
unspecified damages. The Company believes the suit is without merit and
intends to defend it vigorously. The Company was advised by its Mexican
counsel that Loewen has dismissed the Company from the suit and has
relinquished its claim of ownership to the stock of the corporations,
thereby limiting itself to a claim for damages. Although the corporations,
which are now subsidiaries of the Company, remain defendants, the Company
does not believe that they have any liability for damages as the former
owners have agreed to indemnify the Company. There has been no significant
activity regarding this suit since 1996, and the Company assumes it has been
abandoned. Unless there are new developments, the Company will no longer
report on this suit.
OTHER. The Company and certain of its subsidiaries are parties to a
number of other 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 adequate. 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
None.
ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT
The following table sets forth certain information with respect to the
executive officers of the Company. Executive officers are appointed by and
serve at the pleasure of the Board of Directors, subject in all cases other
than Mr. Stewart, to rights under employment agreements. Each of the
following has served the Company in the capacity indicated for more than
five years, except as indicated below.
NAME AGE POSITION
Frank B. Stewart, Jr. ........ 64 Chairman of the Board(1)
William E. Rowe .............. 53 President, Chief Executive Officer and Director(2)
Brian J. Marlowe ............. 53 Executive Vice President and Chief Operating Officer(3)
Kenneth C. Budde ............. 52 Executive Vice President, President-Corporate Division, Chief Financial
Officer and Director (4)
Brent F. Heffron ............. 50 Executive Vice President and President-Southern Division (5)
Raymond C. Knopke, Jr. ....... 44 Executive Vice President and President-Western Division (6)
Charles L. Tilis ............. 44 Executive Vice President and President-Central Division (7)
Ronald H. Patron ............. 55 Executive Vice President and Chief Administrative Officer(8)
Gerard C. Alexander .......... 60 Executive Vice President-Special Corporate Projects (9)
Lawrence B. Hawkins .......... 51 Senior Vice President and President-Investors Trust, Inc.
- ----------------------------
(1) Mr. Stewart served as interim Chief Executive Officer from November 1,
1994, upon the retirement of Lawrence M. Berner as President and Chief
Executive Officer, until February 1, 1995, when Joseph P. Henican, III
became Chief Executive Officer.
(2) Mr. Rowe has served as Chief Executive Officer since November 17, 1999,
prior to which he had served as President and Chief Operating Officer
since November 1, 1994. He became Senior Executive Vice President and
Chief Operating Officer in April 1994. Prior to that time, he served as
President of the Company's former Mid-Atlantic Division since 1987 and as
Executive Vice President and President of the former Mid-Atlantic
Division since May 1991. He became a director of the Company in April
1994.
(3) Mr. Marlowe became Chief Operating Officer on December 10, 1999. Prior
to that time, he had served as Executive Vice President and President of
the Company's Eastern Division since August 1, 1995. From April 1994 to
July 1995, he served as Executive Vice President and President of the
Company's former Mid-Atlantic Division. From November 1992 to April 1994
he served as Chief Operating Officer of the Northern Region of the
Company's former Mid-Atlantic Division.
(4) Mr. Budde has served as President-Corporate Division and Chief Financial
Officer since May 1998 and as a Director since June 1998. From August
1989 to May 1998, he served as Senior Vice President of Finance,
Secretary and Treasurer.
(5) Mr. Heffron has served as Executive Vice President and President of the
Company's Southern Division since November 1, 1998. From January 1, 1997
to October 31, 1998, he served as Senior Vice President and President of
the Company's Southern Division. From November 1992 to December 1996, he
served as President and Chief Operating Officer of the Central Region of
the Company's Eastern Division and Vice President of the Company's former
Mid-Atlantic Division.
(6) Mr. Knopke has served as Executive Vice President and President of the
Company's Western Division since November 1, 1998. From January 1, 1997
to October 31, 1998, he served as Senior Vice President and President of
the Company's Western Division. From December 1993 to December 1996, he
served as President and Chief Operating Officer of the South Atlantic
Region of the Company's Eastern Division.
(7) Mr. Tilis has served as Executive Vice President and President of the
Company's Central Division since November 1, 1999. From November 1, 1998
to October 31, 1999, he served as Senior Vice President and President of
the Company's Central Division. From November 1, 1997 to October 31,
1998, he served as Chief Operating Officer of the Western Region of the
Central Division. Prior to that time, he was a partner in the firm of
Coopers & Lybrand L.L.P., the predecessor firm of PricewaterhouseCoopers
LLP, the Company's independent accountants.
(8) Mr. Patron has served as Chief Administrative Officer since May 1998.
Prior to that time, he served as Chief Financial Officer, President-
Corporate Division and Director.
(9) Mr. Alexander has served as Executive Vice President-Special Corporate
Projects since November 1, 1998. From August 1, 1995 to October 31,
1998, he served as Executive Vice President and President of the
Company's Central Division. Prior to that time, he served as Executive
Vice President and President of the Company's former South Central
Division.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER
MATTERS
MARKET INFORMATION
The Company's Class A Common Stock trades in the Nasdaq National Market
under the symbol STEI. The following table sets forth, for the periods
indicated, the range of high and low sales prices, as reported by the Nasdaq
National Market. Prices for the first two quarters of fiscal year 1998 have
been adjusted to reflect a two-for-one stock split effected in the form of a
100 percent stock dividend on April 24, 1998. As of January 7, 2000, there
were 1,553 record holders of the Company's Class A Common Stock.
HIGH LOW
---- ---
Fiscal Year 1999
Fourth Quarter .......................... 12 5/8 3 13/16
Third Quarter ........................... 20 3/4 12
Second Quarter .......................... 20 3/4 12 11/16
First Quarter ........................... 24 3/4 16 1/4
Fiscal Year 1998
Fourth Quarter .......................... 24 5/8 15 7/8
Third Quarter ........................... 28 5/8 22 1/4
Second Quarter .......................... 29 21
First Quarter ........................... 24 1/4 19 1/2
DIVIDENDS
The Company declared quarterly dividends of $.01 per share on its Class
A and Class B Common Stock during the first two quarters of fiscal year 1998
and $.02 per share during the last two quarters of fiscal year 1998 and
during each quarter of fiscal year 1999. The Company intends to continue
its current policy of declaring quarterly cash dividends on the Class A and
Class B Common Stock in the amount of $.02 per share. The declaration and
payment of dividends is at the discretion of the Company's Board of
Directors and will depend on the Company's results of operations, financial
condition, cash requirements, future prospects and other factors deemed
relevant by the Board. The most restrictive of the Company's debt
agreements limits the declaration and payment of dividends within any period
of four consecutive quarters to 50 percent of the Company's consolidated net
earnings for those four fiscal quarters. The same agreement limits
purchase, redemption or retirement of any shares of the Company's capital
stock to 5 percent of its consolidated net worth on the payment date.
SALES OF UNREGISTERED EQUITY SECURITIES
During fiscal year 1999, the Company did not sell any unregistered equity
securities.
ITEM 6. SELECTED FINANCIAL DATA
The following selected consolidated financial data for the fiscal years
ended October 31, 1995 through 1999 are derived from the Company's audited
consolidated financial statements. The data set forth below should be read
in conjunction with the consolidated financial statements of the Company and
the notes thereto and "Management's Discussion and Analysis of Financial
Condition and Results of Operations" appearing elsewhere herein.
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31, (1)
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
STATEMENT OF EARNINGS DATA:
Revenues:
Funeral ............................ $ 445,877 $ 379,095 $ 291,649 $ 225,461 $ 188,991
Cemetery ........................... 310,231 269,270 240,937 207,926 179,831
---------- ---------- ---------- ---------- ----------
Total revenues ..................... 756,108 648,365 532,586 433,387 368,822
Gross profit:
Funeral ............................ 126,875 118,426 89,235 72,239 55,309
Cemetery ........................... 83,526 77,558 67,937 45,879 34,434
---------- ---------- ---------- ---------- ----------
Total gross profit ................. 210,401 195,984 157,172 118,118 89,743
Corporate general and administrative
expenses .............................. (19,161) (16,621) (15,402) (14,096) (11,113)
---------- ---------- ---------- ---------- ----------
Operating earnings before performance-
based stock options ................... 191,240 179,363 141,770 104,022 78,630
Performance-based stock options - (76,762) - - (17,252)
---------- ---------- ---------- ---------- ----------
Operating earnings ...................... 191,240 102,601(2) 141,770 104,022 61,378(3)
Interest expense, net ................... (52,174) (41,792) (36,425) (24,435) (21,460)
Other income ............................ 3,485 4,155 1,132 2,488 1,582
---------- ---------- ---------- ---------- ----------
Earnings before income taxes and
cumulative effect of change in
accounting principles ................. $ 142,551 $ 64,964(2) $ 106,477 $ 82,075 $ 41,500(3)
========== ========== ========== =========== ==========
Earnings before cumulative effect of
change in accounting principles ....... $ 90,520 $ 41,902(2) $ 69,742 $ 51,297 $ 26,145(3)
Cumulative effect of change in accounting
principles (net of $28,798 and $2,230
income tax benefit in 1999 and 1997,
respectively) ......................... (50,101)(1) - (2,324)(1) - -
---------- ---------- ---------- ----------- ----------
Net earnings ............................ $ 40,419 $ 41,902(2) $ 67,418 $ 51,297 $ 26,145(3)
========== ========== ========== =========== ==========
Per Share Data: (4)
Basic earnings per share:
Earnings before cumulative effect of
change in accounting principles ....... $ .84 $ .43(2) $ .79 $ .62 $ .36(3)
Cumulative effect of change in
accounting principles ................. (.47)(1) - (.03)(1) - -
---------- ---------- ---------- ---------- ----------
Net earnings ........................... $ .37 $ .43(2) $ .76 $ .62 $ .36(3)
========== ========== ========== ========== ==========
Diluted earnings per share:
Earnings before cumulative effect of
change in accounting principles ...... $ .84 $ .43(2) $ .78 $ .61 $ .35(3)
Cumulative effect of change in
accounting principles ................ (.47)(1) - (.03)(1) - -
---------- ---------- ---------- ---------- ----------
Net earnings ........................... $ .37 $ .43(2) $ .75 $ .61 $ .35(3)
========== ========== ========== ========== ==========
Weighted average common shares
outstanding (in thousands):
Basic ................................. 107,452 97,691 88,778 82,821 72,772
========== ========== ========== ========== ==========
Diluted ............................... 107,834 98,444 89,675 83,959 73,698
========== ========== ========== ========== ==========
Dividends declared per common share ..... $ .08 $ .06 $ .04 $ .033 $ .017
========== ========== ========== ========== ==========
(continued)
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31, (1)
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Pro forma amounts assuming 1999 and 1997 changes
in accounting principles were applied
retroactively:(1)
Net earnings .................................... $ 33,199(2) $ 59,616 $ 42,616 $ 23,939(3)
========== ========== =========== ========
Basic earnings per common share (4) ............. $ .34(2) $ .67 $ .51 $ .33(3)
========== ========== =========== ========
Diluted earnings per common share(4) ............ $ .34(2) $ .66 $ .51 $ .32(3)
========== ========== =========== ========
OCTOBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
Balance Sheet Data:
Assets ........................................ $2,283,880 $2,048,938 $1,637,238 $1,360,913 $1,072,435
Long-term debt, less current maturities ....... 938,831 913,215 524,351 515,901 317,451
Shareholders' equity .......................... 1,056,612 839,290 819,570 547,447 483,978
SELECTED CONSOLIDATED OPERATING DATA
YEAR ENDED OCTOBER 31,
----------------------------------------------------------------------------
1999 1998 1997 1996 1995
---------- ---------- ---------- ---------- ----------
OPERATING DATA:
Funeral homes in operation at end of period ..... 635 558 401 298 161
At-need funerals performed ...................... 111,250 87,653 61,682 38,351 37,263
Prearranged funerals performed .................. 26,490 23,563 18,970 15,422 9,225
---------- ---------- ---------- ---------- ----------
Total funerals performed ...................... 137,740 111,216 80,652 53,773 46,488
Prearranged funerals sold ....................... 58,430 59,112 48,676 37,545 33,787
Backlog of prearranged funerals at
end of period ................................ 436,499 391,226 350,031 294,829 222,532
Cemeteries in operation at end of period ........ 157 140 129 120 105
Interments performed ............................ 57,759 50,201 46,782 43,129 39,662
- --------------------------
(1) Effective November 1, 1998, the Company changed its method of accounting
for earnings realized on its irrevocable prearranged funeral trust funds
and escrow accounts. Effective November 1, 1996, the Company changed its
method of accounting for its irrevocable prearranged funeral trust funds
and escrow accounts and cemetery sales. For further details, see Note
3 to the Company's consolidated financial statements included in Item 8.
Information presented for fiscal year 1999 reflects the 1999 change
in accounting principle; information presented for fiscal years 1998 and
1997 reflects the 1997 change in accounting principles; information
presented for fiscal years 1996 and 1995 reflects results as originally
reported under the accounting methods then in effect.
(2) Includes a nonrecurring, noncash charge of $76.8 million ($50.3 million,
or $.51 per share, after-tax) recorded during the second quarter of
fiscal year 1998 in connection with the vesting of the Company's
performance-based stock options.
(3) Includes a nonrecurring, noncash charge of $17.3 million ($10.9 million,
or $.15 per share, after-tax) recorded during the third quarter of fiscal
year 1995 in connection with the vesting of the Company's performance
-based stock options.
(4) Adjusted to reflect a three-for-two common stock split effected June 21,
1996 and a two-for-one common stock split effected April 24, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Death care businesses in the United States traditionally have been
relatively small, family-owned enterprises that have been passed down
through successive generations within a family. During the last decade,
however, the industry in the United States, and in certain foreign
countries, has undergone a transition in which family-owned firms were
consolidating with larger organizations, such as the Company. This trend
began to change in fiscal year 1999. For further discussion of this trend,
see "Business - The Death Care Industry." As a result, although the
Company's historical growth has been primarily from acquisitions, the
Company is currently focusing on growth through internal strategies.
Two other trends affecting the death care industry are the expected
increase in the number of deaths and the average age of the population.
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 1999 to 2.6 million in 2010. In addition,
industry studies indicate that while the death rate is declining slightly,
the average age of the population in the United States is increasing. The
aging of the population, particularly the "baby boomers" who have recently
begun to turn 50, represents a significant opportunity for firms such as
the Company to expand their customer base and secure a portion of their
future market share by actively marketing prearranged property, merchandise
and services. According to the Bureau of the Census, the United States
population over 50 years of age will increase from 74.2 million in 1999 to
96.4 million in 2010. The Company's principal target market for sales of
prearranged cemetery property, merchandise and services is customers who
are age 50 and above.
Certain statements made herein that are not historical facts are
intended to be forward-looking statements within the meaning of the safe
harbor provisions of the Private Securities Litigation Reform Act of 1995.
Forward-looking statements are based on assumptions about future events and
therefore are inherently uncertain; actual results may differ materially
from those projected. See "Cautionary Statements." The discussion herein
should be read in conjunction with the Company's consolidated financial
statements and the notes thereto.
CHANGE IN ACCOUNTING PRINCIPLE
Effective November 1, 1998, the Company changed its method of accounting
for earnings realized by irrevocable prearranged funeral trust funds and
escrow accounts. The Company now defers all of the earnings realized by
irrevocable prearranged funeral trust funds and escrow accounts until the
underlying funeral service is delivered. Previously, the Company
recognized a portion of these earnings and deferred the remainder to offset
the estimated future effects of inflation. The accounting change was made
principally to match revenue recognition more closely with cash receipts
and also to improve the comparability of its earnings with those of its
principal competitors. The new method will allow the Company to take a
longer-term view and increase its flexibility in managing the funeral trust
funds. See Note 3 to the consolidated financial statements included in
Item 8.
This change generally will result in reduced near-term funeral revenue
and gross profit, due to the deferral of all of the earnings from funeral
trust funds and escrow accounts until the funeral is performed.
TRUST AND ESCROW INVESTMENTS
The Company's funeral and cemetery business includes prearranged sales
funded through trust and escrow arrangements, as well as maintenance of
cemetery grounds funded through perpetual care funds. The Company's
investment strategy for these funds is, among other criteria, partially
dependent on the ability to withdraw net realized capital gains from these
funds. However, withdrawal of capital gains is not permitted for perpetual
care funds in certain jurisdictions in which the Company operates.
Accordingly, funds for which net capital gains are permitted to be withdrawn
typically are invested in a diversified portfolio consisting principally of
U.S. government securities, other interest-bearing securities and preferred
stocks rated A or better, "blue chip" publicly-traded common stocks, money
market funds and other short-term investments.
Income from funds, especially those invested partially in common stock,
can be materially affected by prevailing interest rates and the performance
of the stock market. In managing its North American funds (including those
in Puerto Rico and excluding those in Mexico), which include investments in
common stock, the Company seeks an overall annual yield of approximately 8.5
percent to 9.0 percent. In the past three years, such funds have generated
overall annual yields in that range. However, no assurance can be given
that the Company will be successful in achieving any particular yield.
RESULTS OF OPERATIONS
For purposes of the following discussion, funeral homes and cemeteries
owned and operated for the entirety of both periods being compared are
referred to as "Existing Operations." Correspondingly, funeral homes and
cemeteries acquired or opened during either period being compared are
referred to as "Acquired Operations."
Comparisons between fiscal years 1999 and 1998 reflect the pro forma
effects of applying the new accounting principle as if the change had
occurred on November 1, 1997; whereas, comparisons between fiscal years 1998
and 1997 are presented as originally reported. The following table presents
the results as reported for the fiscal year ended October 31, 1999 and the
pro forma results for the year ended October 31, 1998:
YEAR ENDED OCTOBER 31,
1999 1998
------- -------
(As Reported) (Pro Forma)
(IN MILLIONS)
Revenues:
Funeral ......................................... $ 445.9 $ 365.6
Cemetery ........................................ 310.2 269.3
------- -------
756.1 634.9
------- -------
Costs and expenses:
Funeral ......................................... 319.0 260.7
Cemetery ........................................ 226.7 191.7
------- -------
545.7 452.4
------- -------
Gross profit .................................... 210.4 182.5
Corporate general and administrative expenses .... 19.2 16.6
------- -------
Operating earnings before performance-based
stock options .................................. 191.2 165.9
Performance-based stock options .................. - 76.8
------- -------
Operating earnings .............................. 191.2 89.1(1)
Interest expense, net ............................ (52.2) (41.8)
Other income ..................................... 3.5 4.2
------- -------
Earnings before income taxes and cumulative effect
of change in accounting principle ............. 142.5 51.5(1)
Income taxes ..................................... 52.0 18.3
------- -------
Earnings before cumulative effect of change in
accounting principle ........................... $ 90.5 $ 33.2(1)
======= =======
(1) Includes a nonrecurring, noncash charge of $76.8 million ($50.3 million,
after tax) recorded during the second quarter of fiscal year 1998 in
connection with the vesting of performance-based stock options. Excluding
that charge, for fiscal year 1998:
(a) earnings before income taxes and cumulative effect of change in
accounting principle would have been $128.3 million; and
(b) earnings before cumulative effect of change in accounting principle
would have been $83.5 million.
YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998
FUNERAL SEGMENT
YEAR ENDED
OCTOBER 31,
----------------------
1999 1998 INCREASE
-------- -------- --------
(As Reported) (Pro Forma)
(IN MILLIONS)
FUNERAL REVENUE
---------------
Existing Operations .................. $ 342.9 $ 331.1 $ 11.8
Acquired Operations .................. 103.0 34.5 68.5
-------- -------- --------
$ 445.9 $ 365.6 $ 80.3
======== ======== ========
FUNERAL COSTS
-------------
Existing Operations .................. $ 232.0 $ 226.8 $ 5.2
Acquired Operations .................. 87.0 33.9 53.1
-------- -------- --------
$ 319.0 $ 260.7 $ 58.3
======== ======== ========
Funeral Segment Profit ............... $ 126.9 $ 104.9 $ 22.0
======== ======== ========
Funeral revenue increased $80.3 million, or 22 percent, for the year
ended October 31, 1999, compared to the corresponding period in 1998. The
Company experienced an $11.8 million, or 4 percent, increase in revenue from
Existing Operations as a result of an increase in sales of certain
prearranged funeral merchandise, coupled with a 0.7 percent increase in the
average revenue per domestic funeral service performed by Existing
Operations (3.1 percent increase worldwide, excluding the effect of foreign
currency translation), primarily due to price increases and improved
merchandising. Partially offsetting this increase was a 2.2 percent (1,306
events) decrease in the number of domestic funeral services performed by
Existing Operations (2.5 percent (2,358 events) decrease worldwide).
Funeral profit margin from Existing Operations increased from 31.5
percent in 1998 to 32.3 percent in 1999. This improvement resulted
primarily from the increase in funeral revenue from Existing Operations
discussed above, coupled with increased cost control measures, including
contract negotiations with certain vendors and the Company's centralization
and standardization of certain financial and administrative functions
through its Shared Services Center.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of funeral homes during fiscal year
1999 which is not reflected in the 1998 period presented above.
The Company believes that at-need funeral revenues in some key markets
were negatively affected in fiscal year 1999 by (1) intense and growing
price competition from low-cost funeral providers and casket stores in some
markets, (2) the continuing and accelerating trend toward cremation, and (3)
a shift by customers to lower-priced services and merchandise.
The Company plans to respond to these trends by (1) reducing prices where
appropriate in order to gain market share, (2) reducing costs by moving to
smaller funeral buildings and consolidating funeral facilities where
appropriate, and (3) transitioning some of its funeral businesses to
emphasize alternative services. The Company is testing new marketing and
merchandising programs to enhance revenues without raising prices. In
addition to focusing on increasing margins at existing businesses, the
Company is also focusing on increasing revenues and profits from internal
growth strategies such as increasing operating partnerships with third
parties, increasing alternative service firms, and building new funeral
homes on the Company's cemetery properties. See "Business - Growth
Strategies."
Historically, one of the Company's goals has been to achieve a 5 percent
to 7 percent increase annually in the average revenue per funeral service
performed by Existing Operations through a combination of price increases
and improvements in merchandising. For the year ended October 31, 1999, the
average revenue per funeral service performed by existing funeral homes
increased 0.7 percent domestically and 3.1 percent worldwide, excluding the
effect of foreign currency translation, which were below this objective.
Because of intense and growing competition from low-cost funeral service and
merchandise providers in certain key markets, the Company has revised its
goals for increases in the average revenue per funeral service performed
worldwide to 2 to 3 percent annually. See "Forward-Looking Statements."
CEMETERY SEGMENT
YEAR ENDED
OCTOBER 31,
----------------------
1999 1998 INCREASE
-------- -------- --------
(As Reported)
(In millions)
CEMETERY REVENUE
----------------
Existing Operations ................... $ 272.6 $ 259.5 $ 13.1
Acquired Operations ................... 37.6 9.8 27.8
-------- -------- --------
$ 310.2 $ 269.3 $ 40.9
======== ======== ========
CEMETERY COSTS
--------------
Existing Operations ................... $ 194.9 $ 184.8 $ 10.1
Acquired Operations ................... 31.8 6.9 24.9
-------- -------- --------
$ 226.7 $ 191.7 $ 35.0
======== ======== ========
Cemetery Segment Profit ............... $ 83.5 $ 77.6 $ 5.9
======== ======== ========
Cemetery revenue increased $40.9 million, or 15 percent, for the year
ended October 31, 1999, compared to the corresponding period in 1998. The
$13.1 million, or 5 percent, increase in revenue from Existing Operations
resulted primarily from an increase in preneed cemetery sales, price
increases and improved merchandising, coupled with an increase in the
revenue realized from the Company's cemetery trust funds and escrow
accounts. The revenue from the cemetery trust funds and escrow accounts
increased $3.6 million, or 14 percent, to $29.4 million due to a 20 percent
growth in the average balance in the funds, resulting from current year
customer payments deposited into the funds and funds added through
acquisitions, coupled with an increase in the average yield on the funds.
The yield was in line with the Company's goal of 8.5 percent to 9.0 percent.
Cemetery profit margin from Existing Operations decreased from 28.8
percent in 1998 to 28.5 percent in 1999. This decline was attributable
principally to a savings rebate received by the Company from contract
negotiations with a primary vendor in 1998 which was not obtained in 1999.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of cemeteries during fiscal year
1999, which are not reflected in the 1998 period presented above.
OTHER
In April 1998, the Company achieved the performance goal for the
performance-based stock options granted under the Company's 1995 Incentive
Compensation Plan. As a result, the Company was required to record a
nonrecurring, noncash charge to earnings of approximately $76.8 million
(approximately $50.3 million, or $.51 per share, after-tax) in April 1998.
The repurchase of options by the Company and the exercise of the remaining
options resulted in a net cash outlay of approximately $69.4 million.
Corporate general and administrative expenses declined to 2.5 percent of
revenue in fiscal year 1999, as compared to 2.6 percent in fiscal year 1998,
despite an aggregate increase of $2.5 million for the current year. The
increase in these expenses is primarily the result of increasing activities
to support the Company's growth, including a $.9 million increase in
professional and consulting fees.
Net interest expense increased $10.4 million during fiscal year 1999
compared to fiscal year 1998, resulting from an increase in average
borrowings due principally to acquisition expenditures, partially offset by
a decrease in average interest rates from 6.4 percent in 1998 to 6.0 percent
in 1999 and an increase in the investment earnings on excess cash for fiscal
year 1999 as compared to 1998.
In December 1998, the Company entered into an interest rate swap
agreement on a notional amount of $200 million. Under the terms of the
agreement, effective March 4, 1999, the Company pays a fixed rate of 4.915
percent and receives three-month LIBOR. The swap expires on March 4, 2002.
As of October 31, 1999, the Company's outstanding borrowings totaled
$951.4 million. Of the total amount outstanding, including the portion
subject to the interest rate swap agreement, approximately 65 percent was
fixed-rate debt, with the remaining 35 percent subject to short-term
variable interest rates averaging approximately 5.9 percent.
The Company experienced an increase in its effective tax rate from 35.5
percent in fiscal year 1998 to 36.5 percent in fiscal year 1999 due to an
increase in income from jurisdictions with higher effective tax rates.
YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997
FUNERAL SEGMENT
YEAR ENDED
OCTOBER 31,
---------------------- INCREASE
1998 1997 (DECREASE)
-------- -------- --------
(IN MILLIONS)
FUNERAL REVENUE
---------------
Existing Operations ................... $ 281.1 $ 264.1 $ 17.0
Acquired Operations ................... 98.0 27.5 70.5
------- -------- --------
$ 379.1 $ 291.6 $ 87.5
======= ======== ========
FUNERAL COSTS
-------------
Existing Operations ................... $ 174.6 $ 181.6 $ (7.0)
Acquired Operations ................... 86.1 20.8 65.3
------- -------- --------
$ 260.7 $ 202.4 $ 58.3
======= ======== ========
Funeral Segment Profit ................ $ 118.4 $ 89.2 $ 29.2
======= ======== ========
Funeral revenue increased $87.5 million, or 30 percent, in fiscal year
1998, as compared with the prior fiscal year. The Company experienced a
$17.0 million, or 6 percent, increase in revenue from Existing Operations as
a result of a 6.0 percent increase in the average revenue per domestic
funeral service performed by Existing Operations (10.1 percent increase
worldwide, excluding the effect of foreign currency translation), due
primarily to price increases and improved merchandising. Also contributing
to the increase in revenue from Existing Operations was a $1.8 million
increase in the revenue recognized from prearranged funeral trust funds and
escrow accounts. This increase was attributable to a 21 percent growth in
the average balance in such trust funds and escrow accounts, resulting
primarily from current year customer payments deposited into the funds and
funds added through acquisitions, offset by a decrease in the yield on the
funds, which yield remained in line with the Company's goal of 8.5 percent
to 9.0 percent. Slightly offsetting the increase in revenue from Existing
Operations was a 2.1 percent (897 events) decrease in the number of domestic
funeral services performed by Existing Operations (3.9 percent (2,579
events) decrease worldwide).
Funeral profit margin from Existing Operations increased from 31.2
percent in 1997 to 37.9 percent in 1998. The $7.0 million, or 4 percent,
decrease in funeral costs from Existing Operations resulted principally from
the implementation of certain cost control measures, including contract
negotiations with certain vendors and the Company's centralization and
standardization of certain financial and administrative functions through
its Shared Services Center. Existing Operations achieved improved profit
margins resulting primarily from these improved cost control measures and
the increased average revenue per funeral service mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes
during fiscal year 1998 which is not reflected in the 1997 period presented
above.
CEMETERY SEGMENT
YEAR ENDED
OCTOBER 31,
----------------------
1998 1997 INCREASE
-------- -------- --------
(In millions)
CEMETERY REVENUE
----------------
Existing Operations .................... $ 253.1 $ 237.9 $ 15.2
Acquired Operations .................... 16.2 3.0 13.2
-------- -------- --------
$ 269.3 $ 240.9 $ 28.4
======== ======== ========
CEMETERY COSTS
--------------
Existing Operations .................... $ 179.0 $ 171.1 $ 7.9
Acquired Operations .................... 12.7 1.9 10.8
-------- -------- --------
$ 191.7 $ 173.0 $ 18.7
======== ======== ========
Cemetery Segment Profit ................ $ 77.6 $ 67.9 $ 9.7
======== ======== ========
Cemetery revenue increased $28.4 million, or 12 percent, in fiscal year
1998, as compared to fiscal year 1997. The Company experienced a $15.2
million, or 6 percent, increase in revenue from Existing Operations. The
increase in revenue from Existing Operations resulted principally from an
increase in cemetery sales, including burial site openings and closings,
coupled with an increase in the revenue realized from the Company's cemetery
trust funds and escrow accounts. The revenue from the cemetery trust funds
and escrow accounts increased $1.0 million, or 4 percent, to $25.7 million
due to a 13 percent growth in the average balance in the funds, resulting
primarily from current year customer payments deposited into the funds,
along with funds added through acquisitions, offset by a decrease in the
yield on the funds, which yield remained in line with the Company's goal of
8.5 percent to 9.0 percent.
Cemetery profit margin from Existing Operations increased from 28.1
percent in 1997 to 29.3 percent in 1998. This improvement was attributable
principally to the increase in cemetery sales discussed above, the
implementation of certain cost control measures, including the
centralization and standardization of certain financial and administrative
functions at the Shared Services Center, and the increase in burial site
openings and closings.
The increase in revenues and costs associated with Acquired Operations
resulted from the acquisition or construction of cemeteries during fiscal
year 1998 which is not reflected in the 1997 period presented above.
OTHER
In April 1998, the Company achieved the performance goal for the
performance-based stock options granted under the Company's 1995 Incentive
Compensation Plan. As a result, the Company was required to record a
nonrecurring, noncash charge to earnings of approximately $76.8 million
(approximately $50.3 million, or $.51 per share, after-tax) in April 1998.
The repurchase of certain of the options by the Company and the exercise of
the remaining options resulted in a net cash outlay of approximately $69.4
million.
In July and August 1998, the Company granted new options under the 1995
Incentive Compensation Plan to officers and employees for the purchase of
3,592,250 shares of Class A Common Stock at exercise prices equal to the
fair market value on the grant dates, which ranged from $21.38 to $27.25 per
share. One-third of the options become exercisable in 20 percent annual
increments beginning on July 17, 1999. The remaining two-thirds of the
options 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. Generally
accepted accounting principles require that a charge to earnings be recorded
for the performance-based options for the difference between the exercise
price and the then current stock price when achievement of the performance
objective becomes probable. All of the options expire on July 31, 2004.
Corporate general and administrative expenses declined to 2.6 percent of
revenue in fiscal year 1998, as compared to 2.9 percent in fiscal year
1997, despite an aggregate increase of $1.2 million for the current year.
The increase in these expenses is the result of activities to support the
Company's growth.
Net interest expense increased $5.4 million during fiscal year 1998 when
compared to fiscal year 1997, resulting from an increase in average
borrowings, which was partially offset by a decrease in average interest
rates from 6.6 percent in 1997 to 6.4 percent in 1998 and an increase in the
investment earnings on excess cash in fiscal year 1998 as compared to 1997.
Approximately $492.0 million, or 53 percent, of the $924.4 million
borrowings outstanding as of October 31, 1998 was subject to short-term
variable interest rates averaging approximately 5.7 percent.
In December 1998, the Company entered into an interest rate swap
agreement on a notional amount of $200 million. Under the terms of the
agreement, effective March 4, 1999, the Company pays a fixed rate of 4.915
percent and receives three-month LIBOR. The swap expires on March 4, 2002.
Other income increased $3.0 million during fiscal year 1998 when compared
to the prior year, due principally to an approximate $2.3 million gain on
the sale of non-essential assets.
The Company experienced an increase in its effective tax rate from 34.5
percent in fiscal year 1997 to 35.5 percent in fiscal year 1998. The
increase in the effective tax rate was due to an increase in income from
jurisdictions with higher effective tax rates.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $77.4 million as of
October 31, 1999, an increase of $40.5 million from October 31, 1998. This
increase was the result of the reclassification of certain voluntary escrow
funds from long-term investments to marketable securities. The
reclassification was made as these funds are all expected to be converted
to cash by October 31, 2000, providing the Company with additional cash for
general operating purposes. The Company provided cash of $16.4 million
from its operations for the year ended October 31, 1999, compared to
providing cash of $46.4 million for fiscal year 1998, due principally
to an increase in other receivables and merchandise trust, less estimated
cost to deliver merchandise and other working capital changes.
Long-term debt as of October 31, 1999, amounted to $951.4 million,
compared to $924.4 million as of October 31, 1998. The Company's long-term
debt consisted of $529.0 million under the Company's revolving credit
facilities, $400.9 million of long-term notes including the Remarketable Or
Redeemable Securities (ROARS) discussed below, and $21.5 million of term
notes incurred principally in connection with the acquisition of funeral
home and cemetery properties. All of the Company's debt is unsecured,
except for approximately $2.9 million of term notes incurred principally in
connection with acquisitions.
In April 1998, the Company issued $200 million of 6.40 percent ROARS due
May 1, 2013 (remarketing date May 1, 2003). The ROARS were priced to the
public at 99.677 percent to yield 6.476 percent. Net proceeds were
approximately $203.6 million, including the remarketing payment made to the
Company by the remarketing dealer for the right to remarket the securities
after five years. The proceeds were used to reduce balances outstanding
under the Company's existing revolving credit facilities. The net effective
rate to the Company, assuming the securities are redeemed by the Company
after five years, is 5.77 percent. If the securities are remarketed after
five years, the net effective rate for the remaining terms will be 5.44
percent (10-year Treasury rate, fixed upon initial issuance of the ROARS)
plus the Company's then current credit spread.
The most restrictive of the Company's credit agreements require it to
maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has
managed its capitalization within that limit, with a ratio of total debt to
equity of .9 and 1.1 to 1.0 as of October 31, 1999 and 1998, respectively.
In February 1999, the Company completed the sale of 13.6 million shares of
Class A Common Stock. This resulted in approximately $219 million in net
proceeds, which were used principally to repay balances outstanding under
its revolving credit facilities. These amounts then became available to
fund the Company's acquisition program and for general corporate purposes.
As of January 17, 2000, the Company had a debt-to-equity ratio of
approximately .9 to 1.0 and $362.5 million of additional borrowing capacity
within this parameter, of which $75.8 million was available under its
revolving credit facilities.
On August 18, 1999, the Company announced that its Board of Directors had
authorized the repurchase of up to 5 percent of its then outstanding common
stock, or approximately 5.6 million shares. The repurchase was limited to
the Company's Class A Common Stock and was made in the open market at such
times and in such amounts as management deemed appropriate, depending on
market conditions and other factors. During the fourth quarter of 1999, the
Company completed this program with the repurchase of approximately 5.6
million shares of Class A Common Stock for approximately $33.0 million, or
$5.91 per share.
The Company's ratio of earnings to fixed charges was as follows:
YEARS ENDED OCTOBER 31,
---------------------------------------------
1995 1996 1997 1998 1999
---- ---- ---- ---- ----
2.72(1) 3.98 3.65(2) 2.38(3) 3.43(2)
- ---------------
(1) Pretax earnings for fiscal year 1995 include a nonrecurring, noncash
charge of $17.3 million in connection with the vesting of performance-
based stock options. Excluding the charge, the Company's ratio of
earnings to fixed charges for fiscal year 1995 would have been 3.43.
(2) Excludes the cumulative effect of change in accounting principles.
(3) Pretax earnings for fiscal year 1998 include a nonrecurring, noncash
charge of $76.8 million in connection with the vesting of performance-
based stock options. Excluding the charge, the Company's ratio of
earnings to fixed charges for fiscal year 1998 would have been 4.01.
-----------------
For purposes of computing the ratio of earnings to fixed charges,
earnings consist of pretax earnings 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. Fiscal year 1999 reflects the 1999 change in accounting principle;
fiscal years 1998 and 1997 reflect the 1997 change in accounting principles;
fiscal years 1996 and 1995 reflect the Company's previous accounting methods
that were in effect at that time.
During fiscal year 1999, the Company completed the acquisition of 83
funeral homes and 17 cemeteries for purchase prices aggregating
approximately $156.4 million, which includes the issuance of approximately
19,000 shares of Class A Common Stock and $2.2 million of seller-financed
acquisition indebtedness. The cash portion of the purchase price of these
acquisitions was funded primarily with advances under the Company's
revolving credit facilities.
Subsequent to October 31, 1999, and through January 17, 2000, the Company
acquired or had outstanding letters of intent or definitive agreements to
acquire eight businesses for an aggregate purchase price of approximately
$8.9 million. The Company plans to finance the purchase price of pending
acquisitions primarily through seller financing or cash generated from the
Company's operations.
Historically, the Company has required significant capital resources to
finance its acquisition program. In response to changes in the acquisition
market described under the heading "Business - The Death Care Industry"
above, the Company expects to suspend its acquisition strategy in fiscal
2000, although the Company may consider acquiring firms that present an
unusually attractive investment opportunity. In addition, the Company plans
to implement the other cash flow initiatives described above under the
heading "Business - Cash Flow Initiatives."
Although the Company has no material commitments for capital expenditures
(other than approximately $15 million in commitments related to construction
of the Archdiocese of Los Angeles funeral homes), the Company contemplates
capital expenditures of approximately $43.5 million for the fiscal year
ending October 31, 2000, which includes approximately $25 million in
internal growth initiatives (including the construction of the Los Angeles
funeral homes) and approximately $18.5 million for maintenance capital
expenditures.
Management expects that future capital requirements will be satisfied
through a combination of internally-generated cash and amounts available
under its revolving credit facilities. In addition, the Company monitors
its mix of fixed- and floating-rate debt obligations in light of changing
market conditions and may from time to time decide to alter that mix by, for
example, refinancing balances outstanding under its floating-rate revolving
credit facility with public or private fixed-rate debt, or by entering into
interest rate swaps or similar interest rate hedging transactions.
On December 8, 1999, Moody's Investors Service ("Moody's") announced that
it had lowered the Company's credit rating from Baa3 to Ba2, and on December
15, 1999, Standard & Poor's ("S&P") announced that it had placed the Company
on credit watch with negative implications. Interest paid by the Company on
its revolving line of credit is based in part on its credit ratings from
Moody's and S&P. While the outcome of the S&P review cannot be predicted at
this time, neither it nor the Moody's downgrade is expected to have a
material effect on the Company's results of operations.
INFLATION
Inflation has not had a significant impact on the Company's United States
operations over the past three years, nor is it expected to have a
significant impact in the foreseeable future.
During the first quarter of fiscal year 1997, the Company changed its
method of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies.
Under that method, foreign currency translation adjustments are reflected in
results of operations, instead of in shareholders' equity. As of January 1,
1999, the Mexican economy was no longer considered highly inflationary by
the SEC staff. Accordingly, subsequent to January 1, 1999, gains and losses
resulting from translation of the financial statements of the Company's
Mexican operations are reflected in shareholders' equity, and the functional
currency used by the Company's Mexican operations is the Mexican peso.
These changes did not have a material effect on the Company's results of
operations for fiscal year 1998 or 1999. However, no assurance can be given
that a material change will not occur in the future due to events within
Mexico beyond the Company's control.
OTHER
YEAR 2000 ISSUES
During 1999, all phases of the Company's compliance plan were completed
for all critical and non-critical systems. Thorough testing was done on all
critical systems, globally, after the rollover to the Year 2000, and all
results were favorable. As anticipated, the Company did not experience any
problems resulting from the century change in any of its domestic or
international operations.
OVERVIEW. Year 2000 issues result from the past practice in the computer
industry of using two digits rather than four to identify the applicable
year. This practice can create breakdowns or erroneous results when
computers perform operations involving years later than 1999.
THE COMPANY'S STATE OF READINESS. The Company devised and completed an
extensive compliance plan with the objective of bringing all of the
Company's information technology (IT) systems and non-IT systems into Year
2000 compliance. The Company divided its systems into (i) critical systems,
consisting of IT systems, and (ii) non-critical systems, consisting of a
mixture of IT and non-IT systems. Each system was evaluated and brought
into compliance in five phases:
* Phase I: Awareness - Prepare and present comprehensive report to
management
* Phase II: Assessment - Identify and evaluate all systems for Year
2000 compliance
* Phase III: Compliance - Complete necessary Year 2000 modifications
* Phase IV: Testing - Test all modified systems for Year 2000
compliance
* Phase V: Implementation - Return Year 2000 compliant systems to
daily operation
THE COSTS INVOLVED. Due to the fact that many of the Company's computer
systems have been replaced in recent years as part of the Company's on-going
goal to maintain state of the art technology, the Company's Year 2000
compliance costs have been relatively low. To date, the Company has
incurred expenses of approximately $150,000 for external consultants and
software and hardware applications in implementing its compliance plan. The
Company did not separately track the internal costs incurred for the Year
2000 project. Such costs are principally payroll-related costs for the
Company's information technology group.
RISKS. If the Company has not been successful in its efforts to bring its
systems into Year 2000 compliance:
* The Company's ability to procure merchandise in a timely and cost-
effective manner may be impaired,
* Daily business procedures may be delayed due to the use of manual
procedures, and
* Some business procedures may be interrupted if no alternative
methodology is available.
Each of these items could have a material adverse effect on the
Company's operations. However, to date, no problems have been identified.
The Company has no guarantee that the systems of third parties were
brought into compliance on a timely basis. The non-compliance of a third-
party's system could have a material adverse effect on the Company's
operations.
THE COMPANY'S CONTINGENCY PLAN. Although the Company believes that its
Year 2000 plan was adequate to achieve full system compliance on a timely
basis, the Company did develop contingency plans to address the possibility
of the Company's and third parties' non-compliance. The Company, to date,
has not had the need to implement these or any other contingency plans.
RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," is required to be
implemented in the first quarter of the Company's fiscal year 2001. The
Company has begun its analysis of the impact of SFAS No. 133 on its
consolidated financial condition and results of operations, and the effect
of the pronouncement is not expected to be material. The Company is
reviewing SEC Staff Accounting Bulletin (SAB) No. 101, "Revenue Recognition
in Financial Statements" and does not expect the effect of the pronouncement
on its consolidated financial condition and results of operations to be
material.
FORWARD-LOOKING STATEMENTS
Certain statements made herein or elsewhere by or on behalf of the
Company that are not historical facts are intended to be forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
As previously announced, the Company recently revised its short- and
medium-term outlook and goals. The Company currently anticipates that
fiscal year 2000 will be a year of transition, from a period of rapid
growth, fueled primarily by acquisitions, to a period of moderate growth,
driven primarily by internal growth strategies and a more intense focus
on improving the operations of businesses acquired. In this regard,
management's current goal is to grow revenue in fiscal year 2000 at about 1
percent from 1999 amounts with relatively flat, to slightly down, earnings
before interest, taxes, depreciation and amortization (EBITDA) from 1999
amounts. Management's current earnings per share goal for fiscal year 2000
is in the $.68 - $.72 range. Fiscal year 2000 goals also include spending
$25 million on internal growth initiatives. The current tax rate
anticipated for fiscal year 2000 is 36.5 percent, and the Company's weighted
average cost of debt as of October 31, 1999, was 6.1 percent.
The Company's current goal for annual earnings per share growth after
fiscal year 2000 is 10 percent. The Company's goal is to attain that growth
primarily by achieving 2 percent to 4 percent growth in revenues, keeping
cost increases in the 1 percent to 3 percent range and improving cash flow
to reduce debt. The Company's cash flow from operations is expected to
improve, as its fiscal year 2000 estimates include only $25 million in
internal growth initiatives, and cemetery revenue, which is the principal
driver for increases in installment receivables, is anticipated to be
relatively flat.
The Company anticipates implementing cash flow initiatives for 2000 which
include analysis and possible re-deployment of excess cemetery property,
under-performing assets and real estate that would be more valuable if
converted to another use.
In response to changes in the acquisition market discussed above under
the heading "Business - The Death Care Industry," the Company has not
included acquisitions in its growth expectations for fiscal year 2000 and
beyond.
Forward-looking statements are based on assumptions about future events
and are therefore inherently uncertain; actual results may differ materially
from those projected. See "Cautionary Statements" below.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed in the forward-looking statements above and in any
other forward-looking statements made by or on behalf of the Company.
(1) The Company's ability to achieve its revenue goals and the
corresponding cash flows from operations are affected by the volume, mix and
prices of the properties, products and services sold. The annual sales
targets set by the Company are aggressive, and the inability of the Company
to achieve planned levels in volume, mix or prices could cause the Company
not to meet anticipated revenue goals. The ability of the Company to
achieve planned volume, mix or price levels at any location depends on
numerous factors, including the local economy, the local death rate,
competition and consumer preferences. Furthermore, the Company is adapting
to pricing pressures from low-cost funeral services and merchandise
providers, which may result in reducing funeral service and merchandise
prices in order to recapture market share where appropriate.
(2) Preneed cemetery sales are a significant component of the Company's
cemetery revenue. The Company sets very aggressive preneed sales targets.
The inability of the Company to achieve the planned level of sales could
cause a shortfall in anticipated levels of revenue.
(3) Morale is a key ingredient in any sales organization, and morale can
be adversely affected by aggressive sales targets that make it difficult for
the Company's over 3,500 commission sales counselors to achieve their goals.
(4) When acquiring a business, the Company sets pro forma levels at which
it expects those businesses to perform based on the mix of traditional
services and cremation services the business has historically delivered and
how the Company expects that business to perform over the next 12 months.
As the Company typically charges a higher price for a traditional service
than a cremation service, material changes in the types of service delivered
from those assumed in the pro forma could affect the level of anticipated
revenue generated by those businesses. Additionally, although a cremation
service can yield a higher margin than a traditional service, it generally
produces lower revenue and a lower total gross profit.
(5) The ability of the Company to increase or sustain current price
levels and retain market share is affected by local competition in the
Company's markets, including competition from low-cost funeral providers and
casket stores, as well as consumer preferences.
(6) Another important component of revenue is earnings from the Company's
cemetery trust funds and escrow accounts, which are determined by the size
of, and returns (which include dividends, interest and realized capital
gains) on, the funds. The returns on the Company's prearranged funeral
trust funds and escrow accounts affect the Company's future revenue. The
performance of the funds depends primarily on market conditions that are not
within the Company's control. Additionally, the performance of the funds is
affected by the mix of fixed-income and equity securities. The size of the
funds depends on the level of sales, funds added through acquisitions, if
any, and the amount of returns that are reinvested.
(7) Future revenue is also affected by the level of prearranged sales in
prior periods. The level of prearranged sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individuals to have less discretionary income.
(8) The deathcare business is a highly fixed cost business. Positive or
negative changes in revenue can have a disproportionately large effect on
net earnings.
(9) The Company's planned cash flow initiatives for 2000 include analysis
and possible re-deployment of excess cemetery property, under-performing
assets and real estate that would be more valuable if converted to another
use. No assurance can be given, however, that any significant portion of
the Company's assets can be sold, re-deployed or converted on a profitable
basis or that doing so will not result, at least initially, in charges to
earnings.
(10) Revenue growth goals for fiscal year 2000 and beyond do not include
acquisition activity. The actual level of acquisition activity, if any,
will depend not only on the number of properties acquired, but also on the
size of the acquisitions; for example, one large acquisition could increase
substantially the level of acquisition activity and, consequently, revenues.
Several important factors, among others, affect the Company's ability to
consummate acquisitions:
(a)The Company may be unable to find a sufficient number of businesses
for sale at prices the Company is willing to pay, particularly in
view of the Company's recently adjusted pricing parameters and cash
flow criteria.
(b)In most of its existing markets and in many new markets, including
foreign markets, that the Company may seek to enter, the Company
will compete for acquisitions with the other publicly-traded death
care firms and regional consolidators. These competitors, and
others, may be willing to pay higher prices for businesses than the
Company is willing to pay or may cause the Company to pay more to
acquire a business than the Company would have to pay in the absence
of such competition or may cause potential sellers to reject the
Company's lower prices. Thus, the aggressiveness of the Company's
competitors in pricing acquisitions, may affect the Company's
ability to complete acquisitions at prices it finds attractive.
(c)Acquisition activity, if any, will also depend on the Company's
ability to enter new markets, including foreign markets. Due in
part to the Company's lack of experience operating in new areas and
to the presence of competitors who have been in certain markets
longer than the Company, such entry may be more difficult or
expensive than anticipated by the Company.
(11) The Company first entered foreign markets in the fourth quarter of
fiscal year 1994, and no assurance can be given that the Company will
continue to be successful in expanding in foreign markets, or that any
expansion in foreign markets will yield results comparable to those realized
through the Company's expansion in the United States.
(12) Historically, in order to support its rapid growth, the Company has
periodically accessed the secondary equity and debt markets, and the Company
may need to continue to do so in order to support future growth or to meet
existing operating and debt service requirements even in the absence of
significant future growth. The Company's ability to access these capital
markets successfully in the future will depend on numerous factors,
including the Company's financial performance, stock market performance,
changes in interest rates, any changes in the Company's credit ratings and
perceptions in the capital markets regarding the death care industry and the
Company's performance and future prospects.
(13) In addition to the factors discussed above, earnings per share may
be affected by other important factors, including the following:
(a)The ability of the Company to achieve projected economies of scale
in markets where it has "clusters" or combined facilities.
(b)Whether recently acquired businesses perform at pro forma levels
used by management in the valuation process and whether, and the
rate at which, management is able to increase the profitability of
these recently acquired businesses.
(c)The ability of the Company to manage its growth in terms of
implementing internal controls and information gathering systems,
and retaining or attracting key personnel, among other things.
(d)The amount and rate of growth in the Company's general and
administrative expenses.
(e)Changes in interest rates and the Company's credit ratings, which
can increase or decrease the interest rates the Company pays on
borrowings with variable rates of interest and the rates it will be
required to pay on new fixed- or variable-rate debt.
(f)The Company's debt-to-equity ratio, the number of shares of common
stock outstanding and the portion of the Company's debt that has
fixed- or variable-interest rates.
(g)The impact on the Company's financial statements of nonrecurring
accounting charges that may result from the Company's ongoing
evaluation of its business strategies, asset valuations and
organizational structures.
(h)Changes in government regulation, including tax rates and their
effects on corporate structure.
(i)Changes in inflation and other general economic conditions both
domestically and internationally, affecting financial markets (e.g.
marketable security values as well as exchange rate fluctuations).
(j)Unanticipated legal proceedings and unanticipated outcomes of legal
proceedings.
(k)Changes in accounting policies and practices adopted voluntarily or
required to be adopted by generally accepted accounting principles.
The Company also cautions readers that it assumes no obligation to update
or publicly release any revisions to forward-looking statements made herein
or any other forward-looking statements made by or on behalf of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's market risk sensitive
instruments and positions is the potential change arising from increases or
decreases in the prices of marketable equity securities, foreign currency
exchange rates, and interest rates as discussed below. Generally, the
Company's market risk sensitive instruments and positions are characterized
as "other than trading." The Company's exposure to market risk as discussed
below includes "forward-looking statements" and represents an estimate of
possible changes in fair value or future earnings that would occur assuming
hypothetical future movements in equity markets, foreign currency exchange
rates or interest rates. The Company's views on market risk are not
necessarily indicative of actual results that may occur and do not represent
the maximum possible gains and losses that may occur, since actual gains and
losses will differ from those estimated, based on actual fluctuations in
equity markets, foreign currency exchange rates, interest rates and the
timing of transactions.
MARKETABLE EQUITY SECURITIES
As of October 31, 1999 and 1998, the Company's marketable equity
securities subject to market risk consist principally of investments held by
its prearranged funeral, merchandise and perpetual care trust and escrow
accounts, and had fair values of $447.9 million and $308.5 million,
respectively, determined using final sale prices quoted on stock exchanges.
Each 10 percent change in the average market prices of the equity securities
held in such accounts would result in a change of approximately $44.8
million and $30.9 million, respectively, in the fair value of such accounts.
The Company's prearranged funeral, merchandise and perpetual care trust
funds and escrow accounts are detailed in Notes 5 and 6 to the Company's
consolidated financial statements included in Item 8. Generally, the
Company's wholly-owned subsidiary, Investors Trust, Inc. ("ITI") serves as
investment adviser on these trust and escrow accounts. ITI manages the mix
of equities and fixed-income securities in accordance with an investment
policy established by the Investment Committee of the Company's Board of
Directors with the assistance of third-party professional financial
consultants. The policy emphasizes conservation, diversification and
preservation of principal, while seeking appropriate levels of current
income and capital appreciation. ITI is registered with the Securities and
Exchange Commission under the Investment Advisers Act of 1940.
FOREIGN CURRENCY
The Company's foreign subsidiaries receive revenues and pay expenses in a
number of foreign currencies. For the fiscal years ended October 31, 1999
and 1998, each 10 percent change in the average exchange rate between such
currencies and the U.S. dollar would result in changes of approximately $3.1
million and $2.7 million, respectively, in the Company's pre-tax earnings.
The Company does not currently hedge its investments in foreign
subsidiaries; however, the Company continually monitors the exchange rates
of its foreign currencies to determine whether hedging transactions would be
appropriate.
INTEREST
The Company has entered into various fixed- and variable-rate debt
obligations, which are detailed in Note 11 to the Company's consolidated
financial statements included in Item 8.
As of October 31, 1999 and 1998, the carrying values of the Company's
long-term fixed-rate debt, including accrued interest and the unamortized
portion of the ROARS option premium, was approximately $435.0 million and
$445.2 million, respectively, compared to fair values of $372.6 million and
$447.7 million, respectively. Fair values were determined using quoted
market prices, where applicable, or future cash flow discounted at market
rates for similar types of borrowing arrangements. Each approximate 10
percent change in the average interest rates applicable to such debt, 125
and 50 basis points for 1999 and 1998, respectively, would result in changes
of approximately $12.0 million and $7.5 million, respectively, in the fair
values of these instruments. If these instruments are held to maturity,
no change in fair value will be realized.
In order to hedge a portion of the interest rate risk associated with its
variable-rate debt, during the first quarter of 1999, the Company entered
into a three-year interest rate swap agreement involving a notional amount
of $200 million. This agreement which became effective March 4, 1999,
effectively converted $200 million of variable-rate debt bearing interest
based on three-month LIBOR to a fixed rate based on the swap rate of 4.915
percent. The estimated fair value of the interest rate swap based on
quoted market prices was $6.1 million as of October 31, 1999. A
hypothetical 100 basis point increase in the average interest rates
applicable to such debt would result in a change of approximately $4.7
million in the fair value of this instrument.
As of October 31, 1999, the carrying value of the Company's borrowings
outstanding under its revolving credit facilities, including accrued
interest, was $533.1 million compared to a fair value of $524.9 million.
Fair value was determined using future cash flows discounted based on market
rates for similar types of borrowing arrangements. Of the borrowings
outstanding under the revolving credit facilities, $329.0 million was not
hedged by the interest rate swap and was subject to short-term variable
interest rates. Each approximate 10 percent, or 75 basis point, change in
the average interest rate applicable to this debt would result in a change
of approximately $1.2 million in the Company's annualized pre-tax earnings.
As of October 31, 1998, the carrying value and fair value of the Company's
variable-rate debt was $492.0 million. Each approximate 10 percent, or 50
basis points, change in average interest rates applicable to such debt would
have resulted in a change of approximately $1.2 million in the Company's
pre-tax earnings.
The Company monitors its mix of fixed- and variable-rate debt obligations
in light of changing market conditions and from time to time may alter that
mix by, for example, refinancing balances outstanding under its variable-
rate revolving credit facilities with fixed-rate debt or by entering into
interest rate swaps.
As of October 31, 1999 and 1998, the Company's fixed-income securities
subject to market risk consisted principally of investments in its
prearranged funeral, merchandise and perpetual care trust and escrow
accounts and had aggregate quoted market values of $254.9 million and $267.6
million, respectively. Each 10 percent change in interest rates on these
fixed income securities would result in changes of approximately $8.6
million and $8.0 million, respectively, in the fair values of such
securities based on discounted expected future cash flows. If these
securities are held to maturity, no change in fair value will be realized.
As of October 31, 1999 and 1998, the Company's money market and other
short-term investments subject to market risk had fair values of $359.4
million and $323.9 million, respectively. The Company's prearranged funeral
trust funds contained $250.2 million and $216.8 million of these money
market and other short-term investments as of October 31, 1999 and 1998,
respectively. Under the Company's current accounting methods adopted in
fiscal year 1999 as described in Note 3 to the Company's consolidated
financial statements included in Item 8, a change in the average interest
rate earned by the Company's prearranged funeral trust funds would not
result in a change in the Company's current pre-tax earnings. As such, as
of October 31, 1999, only $109.2 million of these short-term investments
were subject to the change in interest rates. Under the accounting methods
in effect in 1998, approximately two-thirds of the $216.8 million were
subject to interest rate risk. Each 10 percent, or 50 basis point, change
in average interest rates applicable to such investments would result in
changes of approximately $.5 million and $1.3 million, as of October 31,
1999 and 1998, respectively, in the Company's pre-tax earnings.
The fixed-income securities, money market and other short-term investments
owned by the Company are principally invested in its prearranged funeral,
merchandise and perpetual care trust and escrow accounts which are managed
by ITI. ITI operates pursuant to a formal investment policy as discussed
above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
PAGE
----
Report of Independent Accountants .............................................. 33
Consolidated Statements of Earnings for the Years Ended October 31, 1999, 1998
and 1997 ..................................................................... 34
Consolidated Balance Sheets as of October 31, 1999 and 1998 .................... 35
Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1999, 1998 and 1997 .............................................. 37
Consolidated Statements of Cash Flows for the Years Ended October 31,
1999, 1998, and 1997 ........................................................ 39
Notes to Consolidated Financial Statements ..................................... 41
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
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, 1999 and 1998, and the
results of their operations and their cash flows for each of the three years
in the period ended October 31, 1999, in conformity with accounting
principles generally accepted in the United States. 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 auditing standards generally accepted in the United States, which
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 the opinion expressed
above.
As described in Note 3 to the financial statements, the Company changed its
method of accounting for funeral services investment trust fund earnings in
1999 and its method of accounting for cemetery sales and funeral services
investment trust fund earnings in 1997.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
December 15, 1999
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
--------------------------------------------
1999 1998 1997
---------- ---------- ----------
Revenues:
Funeral .......................................... $ 445,877 $ 379,095 $ 291,649
Cemetery ......................................... 310,231 269,270 240,937
---------- ---------- ----------
756,108 648,365 532,586
---------- ---------- ----------
Costs and expenses:
Funeral .......................................... 319,002 260,669 202,414
Cemetery ......................................... 226,705 191,712 173,000
---------- ---------- ----------
545,707 452,381 375,414
---------- ---------- ----------
Gross profit ..................................... 210,401 195,984 157,172
Corporate general and administrative expenses ...... 19,161 16,621 15,402
---------- ---------- ----------
Operating earnings before performance-based
stock options .................................. 191,240 179,363 141,770
Performance-based stock options .................... - 76,762 -
---------- ---------- ----------
Operating earnings ............................... 191,240 102,601 141,770
Interest expense, net .............................. (52,174) (41,792) (36,425)
Other income ....................................... 3,485 4,155 1,132
---------- ---------- ----------
Earnings before income taxes and cumulative
effect of change in accounting principles ...... 142,551 64,964 106,477
Income taxes ....................................... 52,031 23,062 36,735
---------- ---------- ----------
Earnings before cumulative effect of
change in accounting principles ................. 90,520 41,902 69,742
Cumulative effect of change in accounting principles
(net of $28,798 and $2,230 income tax benefit in
1999 and 1997, respectively) (Note 3) ............ (50,101) - (2,324)
---------- ---------- ----------
Net earnings ..................................... $ 40,419 $ 41,902 $ 67,418
========== ========== ==========
Basic earnings per common share:
Earnings before cumulative effect of change in
accounting principles .......................... $ .84 $ .43 $ .79
Cumulative effect of change in accounting
principles ..................................... (.47) - (.03)
---------- ---------- ----------
Net earnings ..................................... $ .37 $ .43 $ .76
========== ========== ==========
Diluted earnings per common share:
Earnings before cumulative effect of change in
accounting principles .......................... $ .84 $ .43 $ .78
Cumulative effect of change in accounting
principles ..................................... (.47) - (.03)
---------- ---------- ----------
Net earnings ..................................... $ .37 $ .43 $ .75
========== ========== ==========
Weighted average common shares outstanding
(in thousands)
Basic ............................................ 107,452 97,691 88,778
========== ========== ==========
Diluted .......................................... 107,834 98,444 89,675
========== ========== ==========
Pro forma amounts assuming change in accounting
principles was applied retroactively:
Net earnings ..................................... $ 33,199 $ 59,616
========== ==========
Basic earnings per common share .................. $ .34 $ .67
========== ==========
Diluted earnings per common share ................ $ .34 $ .66
========== ==========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OCTOBER 31,
----------------------
ASSETS 1999 1998
------ ---------- ----------
Current assets:
Cash and cash equivalent investments ............. $ 30,877 $ 30,733
Marketable securities ............................ 46,549 6,120
Receivables, net of allowances ................... 176,215 158,461
Inventories ...................................... 51,431 43,846
Prepaid expenses ................................. 5,997 3,870
---------- ----------
Total current assets ............................ 311,069 243,030
Receivables due beyond one year, net of allowances.. 237,578 257,773
Intangible assets .................................. 673,361 573,006
Deferred charges ................................... 109,436 96,346
Cemetery property, at cost ......................... 424,032 382,972
Property and equipment, at cost:
Land ............................................. 83,237 75,032
Buildings ........................................ 329,991 288,676
Equipment and other .............................. 163,110 127,951
---------- ----------
576,338 491,659
Less accumulated depreciation .................... 129,293 105,834
---------- ----------
Net property and equipment ....................... 447,045 385,825
Long-term investments .............................. 16,812 68,014
Merchandise trust, less estimated cost to deliver .. 58,999 36,671
Other assets ....................................... 5,548 5,301
---------- ----------
$2,283,880 $2,048,938
========== ==========
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OCTOBER 31,
----------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
- ------------------------------------ ---------- ----------
Current liabilities:
Current maturities of long-term debt ........................... $ 12,582 $ 11,219
Accounts payable ............................................... 21,802 14,253
Accrued payroll ................................................ 21,784 20,847
Accrued insurance .............................................. 11,535 12,420
Accrued interest ............................................... 16,757 13,440
Accrued other .................................................. 26,328 18,931
Income taxes payable ........................................... 5,495 8,245
Deferred income taxes .......................................... 17,193 13,967
---------- ----------
Total current liabilities ..................................... 133,476 113,322
Long-term debt, less current maturities .......................... 938,831 913,215
Deferred income taxes ............................................ 81,434 92,231
Deferred revenue ................................................. 64,961 81,371
Other long-term liabilities ...................................... 8,566 9,509
---------- ----------
Total liabilities ............................................. 1,227,268 1,209,648
---------- ----------
Commitments and contingencies (Note 16)
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
102,664,572 and 94,472,844 shares at October 31, 1999 and
1998, respectively .......................................... 102,664 94,473
Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at October 31, 1999 and 1998;
10 votes per share; convertible into an equal number of
Class A shares .............................................. 3,555 3,555
Additional paid-in capital ..................................... 671,891 492,177
Retained earnings .............................................. 347,002 315,140
Cumulative foreign translation adjustment ...................... (65,152) (64,887)
Unrealized depreciation of investments ......................... (3,348) (1,168)
---------- ----------
Total shareholders' equity .................................... 1,056,612 839,290
---------- ----------
$2,283,880 $2,048,938
========== ==========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNREALIZED
COMMON STOCK CUMULATIVE APPRECIATION,
--------------------------- ADDITIONAL FOREIGN (DEPRECIATION) TOTAL
SHARES - PAID-IN RETAINED TRANSLATION OF SHAREHOLDERS'
CLASSES A AND B(1) AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS EQUITY
----------------- -------- --------- ---------- ------------ ------------- -------------
(IN THOUSANDS)
Balance October 31, 1996 ........ 83,599(2) $ 83,599 $ 264,907 $ 215,314 $ (19,058) $ 2,685 $ 547,447
Comprehensive income:
Net earnings .................. 67,418 67,418
Other comprehensive income:
Foreign translation
adjustment ................ (17,551) (17,551)
Unrealized depreciation of
investments ............... (721) (721)
Deferred income tax benefit
on unrealized depreciation
of investments ............ 249 249
-------- --------- --------- --------- --------- -------- ---------
Total other comprehensive
income .................... (17,551) (472) (18,023)
-------- --------- --------- --------- --------- -------- ---------
Total comprehensive income .... 67,418 (17,551) (472) 49,395
Sales of common stock ........... 12,190 12,190 199,513 211,703
Subsidiaries acquired with
common stock .................. 688 688 11,738 12,426
Stock options exercised ......... 1,574 1,574 14,064 15,638
Purchase and retirement of common
stock ......................... (688) (688) (12,723) (13,411)
Dividends ($.04 per share)(1) ... (3,628) (3,628)
-------- --------- --------- --------- --------- -------- ---------
Balance October 31, 1997 ........ 97,363(2) $ 97,363 $ 477,499 $ 279,104 $ (36,609) $ 2,213 $ 819,570
Comprehensive income:
Net earnings .................. 41,902 41,902
Other comprehensive income:
Foreign translation
adjustment ................ (28,278) (28,278)
Unrealized depreciation of
investments ............... (5,242) (5,242)
Deferred income tax benefit
on unrealized depreciation
of investments ............ 1,861 1,861
-------- --------- --------- --------- --------- -------- ---------
Total other comprehensive
income .................... (28,278) (3,381) (31,659)
-------- --------- --------- --------- --------- -------- ---------
Total comprehensive income .... 41,902 (28,278) (3,381) 10,243
Sales of common stock ........... 68 68 1,320 1,388
Subsidiaries acquired with
common stock .................. 294 294 7,411 7,705
Stock options exercised ......... 637 637 14,714 15,351
Purchase and retirement of common
stock ......................... (334) (334) (8,767) (9,101)
Dividends ($.06 per share)(1) ... (5,866) (5,866)
-------- --------- --------- --------- --------- -------- ---------
Balance October 31, 1998 ..... 98,028(2) $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290
======== ========= ========= ========= ========= ======== =========
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK CUMULATIVE UNREALIZED
--------------------------- ADDITIONAL FOREIGN DEPRECIATION TOTAL
SHARES - PAID-IN RETAINED TRANSLATION OF SHAREHOLDERS'
CLASSES A AND B AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS EQUITY
--------------- -------- --------- ---------- ------------ ------------- -------------
(IN THOUSANDS)
Balance October 31, 1998 ........ 98,028(2) $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290
Comprehensive income:
Net earnings .................. 40,419 40,419
Other comprehensive income:
Foreign translation
adjustment ................ (265) (265)
Unrealized depreciation of
investments ............... (3,433) (3,433)
Deferred income tax benefit
on unrealized depreciation
of investments ............ 1,253 1,253
-------- --------- --------- --------- --------- -------- ----------
Total other comprehensive
income .................... (265) (2,180) (2,445)
-------- --------- --------- --------- --------- -------- ----------
Total comprehensive income .... 40,419 (265) (2,180) 37,974
Sales of common stock ........... 13,741 13,741 206,713 220,454
Subsidiaries acquired with
common stock .................. 19 19 281 300
Stock options exercised ......... 11 11 91 102
Purchase and retirement of common
stock ......................... (5,580) (5,580) (27,371) (32,951)
Dividends ($.08 per share) ...... (8,557) (8,557)
-------- --------- --------- --------- --------- -------- ----------
Balance October 31, 1999 ...... 106,219(2) $ 106,219 $ 671,891 $ 347,002 $ (65,152) $ (3,348) $1,056,612
======== ========= ========= ========= ========= ======== ==========
- ---------------------------
(1) Share and per share information has been adjusted to give effect to a
two-for-one common stock split effective April 24, 1998.
(2) Includes 3,555 shares (in thousands) of Class B Common Stock.
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from operating activities:
Net earnings ........................................... $ 40,419 $ 41,902 $ 67,418
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Performance-based stock options ....................... - 76,762 -
Depreciation and amortization ......................... 50,620 38,742 30,049
Provision for doubtful accounts ....................... 33,914 28,325 21,351
Cumulative effect of change in accounting principles... 50,101 - 2,324
Net gains on sales of marketable securities ........... (4,221) (2,727) (370)
Provision for deferred income taxes ................... 11,139 532 11,360
Changes in assets and liabilities, net of effects
from acquisitions:
Increase in prearranged funeral trust receivables ... - (8,252) (9,550)
Increase in other receivables ....................... (108,610) (90,997) (71,988)
Increase in deferred charges and intangible assets.. (7,987) (11,306) (8,241)
Increase in inventories and cemetery property ..... (18,831) (15,343) (8,394)
Increase (decrease) in accounts payable and accrued
expenses .......................................... 683 6,517 (9,641)
Increase in merchandise trust, less estimated cost to
deliver merchandise ............................... (28,761) (20,641) (24,874)
Increase (decrease) in other ........................ (2,041) 2,916 (105)
---------- ---------- ----------
Net cash provided by (used in) operating activities ... 16,425 46,430 (661)
---------- ---------- ----------
Cash flows from investing activities:
Changes in prearranged funeral contracts, net .......... (10,807) (24,026) (14,582)
Proceeds from sale of marketable securities ............ 42,240 19,039 11,297
Purchases of marketable securities and
long-term investments ................................ (26,185) (30,438) (19,771)
Purchases of subsidiaries, net of cash, seller
financing and stock issued ........................... (162,032) (223,414) (154,013)
Additions to property and equipment .................... (54,883) (44,805) (44,405)
Other .................................................. 3,111 2 1,037
---------- ---------- ----------
Net cash used in investing activities ................. (208,556) (303,642) (220,437)
---------- ---------- ----------
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Cash flows from financing activities:
Proceeds from long-term debt .......................... 247,579 602,782 367,725
Repayments of long-term debt .......................... (232,775) (270,682) (348,782)
Retirement of performance-based stock options ......... - (69,431) -
Issuance of common stock .............................. 220,556 11,738 227,341
Purchase and retirement of common stock ............... (32,951) (9,101) (13,411)
Dividends ............................................. (8,557) (5,866) (3,628)
---------- ---------- ----------
Net cash provided by financing activities ............ 193,852 259,440 229,245
---------- ---------- ----------
Effect of exchange rates on cash and cash equivalents ... (1,577) (3,135) (1,087)
---------- ---------- ----------
Net increase (decrease) in cash ......................... 144 (907) 7,060
Cash and cash equivalents, beginning of year ............ 30,733 31,640 24,580
---------- ---------- ----------
Cash and cash equivalents, end of year .................. $ 30,877 $ 30,733 $ 31,640
========== ========== ==========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes ......................................... $ 49,500 $ 12,000 $ 30,600
Interest ............................................. $ 51,400 $ 38,000 $ 35,100
Noncash investing and financing activities:
Subsidiaries acquired with common stock ............... $ 300 $ 7,705 $ 12,426
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) THE COMPANY
Stewart Enterprises, Inc. (the "Company") is the third largest provider
of products and services in the death care industry in North America.
Through its subsidiaries, the Company offers a complete line of funeral
merchandise and services, along with cemetery property, merchandise and
services. For the year ended October 31, 1999, the funeral and cemetery
segments contributed approximately 59 percent and 41 percent, respectively,
of total revenues, and 60 percent and 40 percent, respectively, of
consolidated gross profit.
As of October 31, 1999, the Company owned and operated 635 funeral homes
and 157 cemeteries in 30 states within the United States, and in Puerto
Rico, Mexico, Australia, New Zealand, Canada, Spain, Portugal, the
Netherlands, Argentina, France and Belgium. The Company commenced its
international operations in Mexico in fiscal year 1994, and entered
Australia in fiscal year 1995, New Zealand and Canada in fiscal year 1996,
Spain and Portugal in fiscal year 1997, and the Netherlands, Argentina,
France and Belgium in fiscal year 1998. For fiscal year 1999, foreign
operations contributed approximately 20 percent of total revenue and, as of
October 31, 1999, represented approximately 20 percent of total assets.
(2) 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.
(b) USE OF ESTIMATES
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
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.
(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
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
terms and maturities. The carrying amounts of marketable securities and
long-term investments are stated at fair value as they are classified as
available for sale under the provisions of Statement of Financial
Accounting Standards No. 115, "Accounting for Certain Investments in Debt
and Equity Securities." The fair value of the Company's long-term floating
rate debt is estimated using future cash flows discounted at market rates
for similar types of borrowing arrangements. The fair value of the
Company's long-term fixed rate debt is estimated using quoted market
prices, where applicable, or future cash flows discounted at rates for
similar types of borrowing arrangements. See Note 11.
(d) INVENTORIES
Inventories are stated at the lower of cost (specific identification and
first-in, first-out methods) or net realizable value.
(e) DEPRECIATION AND AMORTIZATION
Buildings and equipment are depreciated over their estimated useful
lives, ranging from 19 to 45 years and from three to 10 years,
respectively, primarily using the straight-line method. For the fiscal
years ended October 31, 1999, 1998 and 1997, depreciation expense totaled
approximately $25,418, $21,094 and $17,972, respectively.
Goodwill, or costs in excess of net assets of companies acquired,
totaled approximately $669,790 and $567,432 as of October 31, 1999 and
1998, respectively, and is amortized principally over 40 years by the
straight-line method. The Company continually evaluates the recoverability
of this intangible asset by assessing whether the amortization of the
goodwill balance over its remaining life can be recovered through
undiscounted expected future cash flows. Other intangible assets are
amortized over five years by the straight-line method. Accumulated
amortization was $63,300 and $43,831 as of October 31, 1999 and 1998,
respectively.
(f) FOREIGN CURRENCY TRANSLATION
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," all assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rate
in effect at the end of the period, and revenues and expenses are
translated at average exchange rates prevailing during the period. The
resulting translation adjustments are reflected in a separate component of
shareholders' equity, except for translation adjustments arising from
operations in highly inflationary economies.
During the first quarter of fiscal year 1997, the Company changed its
method of reporting foreign currency translation adjustments for its
Mexican operations to the method prescribed for highly inflationary
economies. Under that method, foreign currency translation adjustments are
reflected in results of operations, instead of in shareholders' equity.
This change did not have a material effect on the Company's results of
operations for fiscal year 1997 or 1998.
As of January 1, 1999, the Mexican economy was no longer considered
highly inflationary according to the SEC Staff. Accordingly, subsequent to
January 1, 1999, gains and losses resulting from translation of the
financial statements of the Company's Mexican operations are reflected in
shareholders' equity and the functional currency used by our Mexican
operations returned to the Mexican peso. These changes did not have a
material effect on the Company's results of operations for fiscal year 1998
or fiscal year 1999.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(g) FUNERAL REVENUE
The Company sells prearranged funeral services and funeral 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 in jurisdictions where
such sales are included in funeral and insurance contracts. The Company
considers prearranged funeral contracts to be investments in future funeral
revenue made to retain and expand future market share. Accordingly, the
cash flow item related to prearranged funeral contracts "changes in
prearranged funeral contracts, net" has been reclassified from cash flows
from operating activities to cash flows from investing activities. For
comparative purposes, reclassification was also made to the 1998 and 1997
consolidated statements of cash flows.
Commissions and direct marketing costs relating to prearranged funeral
services and prearranged funeral merchandise sales are accounted for in the
same manner as the revenue to which they relate. Where revenue is
deferred, the related commissions and direct marketing costs are deferred
and amortized as the funeral contracts are fulfilled. Conversely, where
revenues are recognized currently, the related costs are expensed as
incurred. Indirect costs of marketing prearranged funeral services are
expensed in the period in which incurred.
Prearranged funeral services and merchandise generally are funded either
through trust funds or escrow accounts established by the Company, or
through insurance. Principal amounts deposited in the trust funds or
escrow accounts 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 funds or escrow accounts where the Company
receives such amounts upon cancellation by the customer. Earnings are
withdrawn 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. Under prearranged funeral services and merchandise funded
through insurance purchased by customers from third party insurance
companies, the Company earns a commission on the sale of the policies.
Commissions, net of related expenses, are recognized at the point at which
the commission is no longer subject to refund. Policy proceeds are
available to the Company as funeral services and merchandise are delivered.
Effective November 1, 1998 and November 1, 1996, the Company changed its
method of accounting for prearranged funeral trust earnings. See Note 3.
Funeral services sold at the time of need are recorded as funeral
revenue in the period the funeral is performed.
(h) CEMETERY REVENUE
Effective November 1, 1996, the Company changed its method of accounting
for prearranged sales of cemetery interment rights, related products and
burial site openings and closings. See Note 3. The Company recognizes
income currently from unconstructed mausoleum crypts sold to the extent it
has available inventory. Costs of mausoleum and lawn crypts sold but not
yet constructed are based upon management's estimated cost to construct
those items.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In certain jurisdictions in which the Company operates, local law or
contracts with customers generally require that a portion of the sale price
of prearranged cemetery merchandise be placed in trust funds or escrow
accounts. The Company recognizes as revenue on a current basis all
dividends and interest earned, and net capital gains realized, by
prearranged merchandise trust funds or escrow accounts. At the same time,
the liability for the estimated cost to deliver merchandise is adjusted
through a charge to earnings to reflect inflationary merchandise cost
increases. Principal and earnings are withdrawn only as the merchandise is
delivered or contracts are cancelled.
Pursuant to perpetual care contracts and laws, a portion, generally 10
percent, of the proceeds from cemetery property sales is deposited into
perpetual care trust funds or escrow accounts. In addition, in those
jurisdictions where trust or escrow arrangements are neither statutorily
nor contractually required, the Company typically deposits on a voluntary
basis a portion, generally 10 percent, of the sale price into escrow
accounts. The income from these funds, 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. Accordingly, the trust fund corpus is not reflected in the
consolidated financial statements, except for voluntary escrow funds
established by the Company, which are classified as long-term investments.
The Company recognizes and withdraws currently all dividend and interest
income earned and, where permitted, capital gains realized by perpetual
care funds.
A portion of the sales of cemetery property and merchandise is 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.
(i) INCOME TAXES
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between tax bases
and financial reporting bases of assets and liabilities. The Company has
not provided for possible United States federal income taxes on the
undistributed earnings of foreign subsidiaries that are considered to be
reinvested indefinitely.
(j) EARNINGS PER COMMON SHARE
Basic earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding during each period.
Diluted earnings per share is computed by dividing net earnings by the
weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if the dilutive
potential common shares (in this case, exercise of the Company's time-vest
stock options) had been issued during each period. See Note 12. The
Company's share and per share amounts have been adjusted for a two-for-one
common stock split effective April 24, 1998.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(k) RECENT ACCOUNTING STANDARDS
SFAS No. 130, "Reporting Comprehensive Income," was implemented in the
first quarter of the Company's fiscal year 1999. SFAS No. 131, "Disclosure
about Segments of an Enterprise and Related Information," was implemented
during the Company's fiscal year ending October 31, 1999. SFAS No. 133,
"Accounting for Derivative Instruments and Hedging Activities," is required
to be implemented in the first quarter of the Company's fiscal year 2001.
The Company has begun its analysis of the impact of SFAS No. 133 on its
consolidated financial condition and results of operations, and the effect
is not expected to be material. The Company is reviewing SEC Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements" and does not expect the effect of the pronouncement on its
consolidated financial condition and results of operations to be material.
(l) RECLASSIFICATIONS
Certain reclassifications have been made to the 1997 and 1998
consolidated financial statements to conform to the presentation used in
the 1999 consolidated financial statements. These reclassifications had no
effect on net earnings or shareholders' equity.
(3) CHANGE IN ACCOUNTING PRINCIPLES
The Company changed the following accounting principle effective
November 1, 1998 (the fiscal year 1999 accounting change):
The Company now defers all of the earnings realized by irrevocable
prearranged funeral trust funds and escrow accounts until the underlying
funeral service is delivered. Previously, the Company recognized a portion
of those earnings and deferred the remainder to offset the estimated future
effects of inflation. See the fiscal year 1997 accounting changes below.
The accounting change was made principally to match revenue
recognition more closely with cash receipts and also to improve the
comparability of the Company's earnings with those of its principal
competitors. The new method will allow the Company to take a longer-term
view and increase its flexibility in managing the funeral trust funds.
The cumulative effect of this change on prior years resulted in a
decrease in net earnings for the year ended October 31, 1999, of $50,101
(net of a $28,798 income tax benefit), or $.47 per share. The current year
effect of the change in accounting principle was a decrease in net earnings
of $16.2 million, or $.15 per share, for the year ended October 31, 1999.
The Company changed the following accounting principles effective
November 1, 1996 (the fiscal year 1997 accounting changes):
(a) Under the fiscal year 1997 accounting changes, the Company deferred
a portion of the earnings realized by irrevocable prearranged funeral trust
funds and escrow accounts in order to offset the estimated effects of
inflation on the future cost of performing prearranged funeral services.
Earnings realized in excess of those deferred were recognized on a current
basis, except in those jurisdictions where earnings revert to a customer if
a prearranged funeral service contract is cancelled. Previously, all such
earnings were recognized as realized.
(b) The Company now records all revenues and costs attributable to
prearranged sales of cemetery interment rights and related products when
customer contracts are signed. Allowances for customer cancellations and
refunds
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) CHANGE IN ACCOUNTING PRINCIPLES--(CONTINUED)
are provided at the date of sale based upon historical experience.
Previously, such sales generally were deferred under the accounting
principles prescribed for sales of real estate. Under the Company's
application of this method of accounting for sales of real estate, revenues
and costs were deferred until 20 percent of the contract amount had been
collected.
(c) The Company now records revenue and related costs attributable to
cemetery burial site openings and closings at the time of sale.
Previously, such sales were deferred until delivery.
The fiscal year 1997 accounting changes were made principally for the
following reasons:
(a) A portion of funeral trust earnings and increasing benefits under
insurance contracts were intended to cover increases in the future costs of
providing price-guaranteed funeral services. The Company's rationale was
that deferring such earnings to the extent of the increased costs of the
services to be provided would better match revenues and costs because the
total funds available to satisfy the contract (principal and deferred
earnings) would be included in revenues with concurrent recognition of all
costs related to performance of the service when the funeral service is
performed.
(b) The cemetery accounting methods have been adopted because all
significant obligations of the Company, including delivery of products and
opening and closing the burial site, have been satisfied in the period the
contract is signed. Related costs are provided based on actual costs
incurred, firm commitments or reliable estimates. Historical experience is
the basis for making appropriate allowances for customer cancellations and
will be adjusted when required.
The cumulative effect of these changes on prior years resulted in a
decrease in net earnings for the year ended October 31, 1997, of $2,324
(net of a $2,230 income tax benefit), or $.03 per share.
(4) ACQUISITION OF SUBSIDIARIES
The following table reflects the Company's acquisition activity during
the past three fiscal years.
BUSINESS ACQUIRED AGGREGATE CLASS A
------------------------------- PURCHASE COMMON SHARES
FUNERAL HOMES CEMETERIES PRICE ISSUED
------------- ------------- ------------- -------------
Fiscal year 1999.... 83 17 $156,400 19,000
Fiscal year 1998.... 153 9 266,300 294,000
Fiscal year 1997.... 104 10 184,500 688,000
These acquisitions have been accounted for by the purchase method, and
their results of operations are included in the accompanying consolidated
financial statements from the dates of acquisition. The purchase price
allocations for certain of these acquisitions are based on preliminary
information.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) ACQUISITION OF SUBSIDIARIES -- (CONTINUED)
The following table reflects, on an unaudited pro forma basis, the
combined operations of the Company and the businesses acquired during
fiscal year 1999 as if such acquisitions had taken place at the beginning
of the respective periods presented. Appropriate adjustments have been
made to reflect the accounting basis used in recording the acquisitions.
These pro forma results have been prepared for comparative purposes only
and do not purport to be indicative of the results of operations that would
have resulted had the combinations been in effect on the dates indicated,
that have resulted since the dates of acquisition or that may result in the
future.
YEAR ENDED OCTOBER 31,
-----------------------
1999 1998
--------- ----------
(Unaudited)
Revenues $ 776,345 $ 701,318
========= ==========
Operating earnings before performance-based stock options $ 192,561 $ 182,091
========= ==========
Earnings before cumulative effect of change
in accounting principles $ 88,718 $ 36,501
========= ==========
Net earnings $ 38,618 $ 36,501
========= ==========
Basic earnings per share:
Earnings before cumulative effect of change in
accounting principles $ .83 $ .37
========= ==========
Net earnings $ .36 $ .37
========= ==========
Diluted earnings per share:
Earnings before cumulative effect of change in
accounting principles $ .82 $ .37
========= ==========
Net earnings $ .36 $ .37
========= ==========
Weighted average shares outstanding (in thousands)
Basic 107,462 97,710
========= ==========
Diluted 107,844 98,463
========= ==========
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
YEAR ENDED OCTOBER 31,
--------------------------------------
1999 1998 1997
---------- ---------- ----------
Current assets ........................... $ 30,738 $ 35,561 $ 8,537
Receivables due beyond one year .......... 70 91 -
Cemetery property ........................ 25,131 47,987 7,572
Property and equipment, net .............. 33,751 42,247 38,653
Deferred charges and other assets ........ 2,076 2,242 549
Intangible assets, net ................... 122,109 177,708 142,484
Current liabilities ...................... (18,450) (9,128) (10,683)
Long-term debt ........................... (14,249) (33,872) (19,315)
Deferred income taxes .................... (7,510) (20,107) (841)
Deferred revenue and other liabilities ... (11,334) (11,610) (517)
---------- ---------- ----------
162,332 231,119 166,439
Common stock used for acquisitions ....... 300 7,705 12,426
---------- ---------- ----------
Cash used for acquisitions ............... $ 162,032 $ 223,414 $ 154,013
========== ========== ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) PREARRANGED FUNERAL SERVICES
The following summary reflects prearranged funeral services sold, but
not yet delivered, which are funded with trusts, escrow accounts and
insurance, and related prearranged funeral trust fund and escrow account
balances. The trust- and insurance-funded balances are not reflected in
the accompanying consolidated financial statements. Amounts which
represent the Company's voluntary deposits into escrow accounts in those
jurisdictions where trust or escrow arrangements are neither statutorily
nor contractually required aggregated $14,347 and $40,832 as of October 31,
1999 and 1998, respectively, and are classified as long-term investments.
As of October 31, 1999, the voluntary escrow accounts that the Company
intends to liquidate in fiscal year 2000 are classified as marketable
securities. See Note 8 for further discussion.
Amounts deposited in the trust funds and escrow accounts and funded
through insurance are available to the Company when the services are
performed. Funds held in trust or escrow are invested, and earnings
(including net realized capital gains) realized on irrevocable trust funds
and escrow accounts are deferred until the underlying funeral service is
delivered, in accordance with the Company's change in accounting method
effective November 1, 1998. Under the Company's previous accounting
method, earnings of $26,463 and $24,682 were included in funeral revenue
for fiscal years 1998 and 1997, respectively.
OCTOBER 31,
-----------------------
1999 1998
--------- ----------
Trust or escrow funded:
Prearranged funeral services sold, but not delivered ..... $ 617,365 $ 551,523
========= ==========
Investments at market value .............................. $ 610,701 $ 525,909
Receivables to be collected on prearranged funeral service
contracts ............................................... 106,605 97,410
--------- ----------
$ 717,306 $ 623,319
========= ==========
Insurance-funded and other prearranged funeral services ... $ 241,860 $ 214,464
========= ==========
Investments consist of:
U.S. Government, agencies and municipalities ............. $ 27,189 $ 37,223
Canadian Government, agencies and municipalities ......... 30,937 23,040
Corporate bonds .......................................... 80,644 74,102
Preferred stocks ......................................... 60,577 48,484
Common stocks ............................................ 177,163 133,431
Money market funds and other short-term investments ...... 183,029 167,457
Short-term fixed income foreign investments .............. 57,270 42,867
--------- ----------
Total value at cost ...................................... 616,809 526,604
Net unrealized depreciation .............................. (6,108) (695)
--------- ----------
Total value at market .................................... $ 610,701 $ 525,909
========= ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) CEMETERY TRUST FUNDS AND ESCROW ACCOUNTS
The following summary reflects the Company's merchandise trust fund and
escrow account balances, as well as merchandise sold, but undelivered, at
current cost. Merchandise sold, but undelivered, is reflected at current
cost in the accompanying consolidated balance sheets net of the related
merchandise trust fund and escrow account balances and accumulated
earnings, except for $24,990 classified as long-term investments as of
October 31, 1998. These amounts represent the Company's voluntary deposits
into escrow accounts in those jurisdictions where trust or escrow
arrangements are neither statutorily nor contractually required. As of
October 31, 1999, there were no merchandise trust fund and escrow account
balances classified as long-term investments. As of October 31, 1999,
these balances were classified as marketable securities as the Company
began liquidation of these accounts in early fiscal year 2000. The Company
anticipates liquidating the remainder of the marketable securities by
October 31, 2000. See Note 8 for further discussion.
Amounts deposited in the trust funds and escrow accounts are invested,
and the revenue on the funds (including net realized capital gains) of
$17,371, $13,157, and $12,237 is reflected in cemetery revenue for 1999,
1998 and 1997, respectively. Amounts deposited in merchandise trust funds
and escrow accounts that are invested in debt securities as of October 31,
1999 totaled $54,419 and are scheduled to mature as follows: $915 in less
than one year; $26,489 in one through five years; $26,393 in five through
ten years; and $622 in more than ten years.
OCTOBER 31,
-----------------------
1999 1998
--------- ----------
Merchandise trust funds and escrow accounts:
Merchandise sold, but not delivered, at current cost ... $ 140,270 $ 126,877
========= ==========
Investments at market value ............................ $ 199,269 $ 188,538
Amounts to be collected on merchandise contracts ....... 66,624 55,336
--------- ----------
$ 265,893 $ 243,874
========= ==========
Investments consist of:
U.S. Government, agencies and municipalities ........... $ 10,213 $ 19,626
Corporate bonds ........................................ 44,588 42,225
Preferred stocks ....................................... 23,737 17,541
Common stocks .......................................... 78,952 61,106
Money market funds and other short-term investments .... 46,287 49,787
--------- ----------
Total value at cost .................................... 203,777 190,285
Net unrealized depreciation ............................ (4,508) (1,747)
--------- ----------
Total value at market .................................. $ 199,269 $ 188,538
========= ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) CEMETERY TRUST FUNDS AND ESCROW ACCOUNTS--(CONTINUED)
The following summary reflects the Company's perpetual care trust fund
and escrow account balances. Since principal cannot be withdrawn, these
balances are not reflected in the accompanying financial statements, except
for $2,465 and $2,192, classified as long-term investments as of October
31, 1999 and 1998, respectively, which represent the Company's voluntary
deposits into escrow accounts in those jurisdictions where trust or escrow
arrangements are neither statutorily nor contractually required. Funds
held in trust or escrow are invested, and the earnings withdrawn from the
trust funds and escrow accounts are used for the maintenance of cemetery
grounds. For the years ended October 31, 1999, 1998 and 1997, such
withdrawals, included in cemetery revenue, totaled $14,470, $12,615, and
$12,497, respectively.
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Perpetual care trust funds and escrow accounts:
Investments at market value ............................... $ 201,021 $ 167,508
Amounts to be collected under existing agreements ......... 10,328 10,815
--------- ---------
$ 211,349 $ 178,323
========= ==========
Investments consist of:
U.S. Government, agencies and municipalities .............. $ 15,516 $ 20,747
Corporate bonds ........................................... 41,723 38,424
Preferred stocks .......................................... 17,676 12,744
Common stocks ............................................. 63,370 43,718
Money market funds and other short-term investments ....... 53,441 46,331
Other long-term investments ............................... - 408
--------- ---------
Total value at cost ....................................... 191,726 162,372
Net unrealized appreciation ............................... 9,295 5,136
--------- ---------
Total value at market ..................................... $ 201,021 $ 167,508
========= ==========
(7) CASH AND CASH EQUIVALENT INVESTMENTS
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 equivalent investments with high quality credit
institutions. Such balances typically exceed applicable FDIC insurance
limits.
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Cash ..................................................... $ 26,268 $ 20,847
Cash equivalent investments .............................. 4,609 9,886
--------- ---------
$ 30,877 $ 30,733
========= ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities consist of investments in fixed maturities and
equity securities. The market value as of October 31, 1999 was $46,549
which included gross unrealized gains of $2,040 and gross unrealized losses
of $3,287. The market value as of October 31, 1998 was $6,120 which
approximated cost. The Company realized net gains on the sales of
securities of $4,221, $2,727 and $370 for the years ended October 31, 1999,
1998 and 1997, respectively. The cost of securities sold was determined by
using the average cost method.
As of October 31, 1999, $39,677 of voluntary escrow funds, $6,608 of
which related to debt securities, were reclassed from long-term investments
to marketable securities as they are all expected to be liquidated by
October 31, 2000. The contractual maturities of the debt securities were
as follows: $500 in less than one year; $2,741 in one through five years;
$2,919 in five through ten years; and $448 in more than ten years.
Subsequent to October 31, 1999, the Company began liquidating these
voluntary escrow funds, all of which are expected to be liquidated within
the next 12 months.
The market value of long-term investments as of October 31, 1999 and
1998 was $16,812 and $68,014 which included gross unrealized gains of $341
and $2,573, and gross unrealized losses of $109 and $2,654, respectively.
Amounts classified as long-term investments and invested in debt securities
as of October 31, 1999 totaled $384 and are scheduled to mature in five
through ten years. See Notes 5 and 6 which include details of the
Company's long-term investments.
(9) RECEIVABLES
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Current receivables are summarized as follows:
Installment contracts due within one year .............. $ 88,673 $ 83,899
Trade accounts, notes and other ........................ 41,334 31,045
Allowance for sales cancellations and doubtful accounts (11,432) (10,738)
Amounts to be collected for perpetual care funds ....... (5,628) (5,815)
--------- ---------
112,947 98,391
Funeral receivables .................................... 63,268 39,377
Prearranged funeral trust receivable ................... - (1) 20,693
--------- ---------
Net current receivables ........................... $ 176,215 $ 158,461
========= =========
Long-term receivables are summarized as follows:
Installment contracts due beyond one year .............. $ 256,835 $ 199,836
Allowance for sales cancellations and doubtful accounts (14,557) (12,063)
Amounts to be collected for perpetual care funds ....... (4,700) (5,000)
--------- ---------
237,578 182,773
Prearranged funeral trust receivable ................... - (1) 75,000
--------- ---------
Net long-term receivables ......................... $ 237,578 $ 257,773
========= =========
(1) See the fiscal year 1999 accounting change described in Note 3.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(9) RECEIVABLES--(CONTINUED)
The Company's receivables as of October 31, 1999 are expected to mature
as follows:
Years ending October 31,
2000 ................................................... $ 176,215
2001 ................................................... 43,489
2002 ................................................... 39,672
2003 ................................................... 27,629
2004 ................................................... 20,495
Later years ............................................ 106,293
---------
$ 413,793
=========
(10) INVENTORIES AND CEMETERY PROPERTY
Inventories are comprised of the following:
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Developed cemetery property .............................. $ 15,850 $ 13,901
Merchandise and supplies ................................. 35,581 29,945
--------- ---------
$ 51,431 $ 43,846
========= =========
Cemetery property is comprised of the following:
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Developed cemetery property .............................. $ 94,221 $ 93,061
Undeveloped cemetery property ............................ 329,811 289,911
--------- ---------
$ 424,032 $ 382,972
========= =========
The Company evaluates the recoverability of the cost of undeveloped
cemetery property through comparison with undiscounted expected future cash
flows.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) LONG-TERM DEBT
The following is a summary of long-term debt:
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Revolving Credit Facilities (see "Revolving Credit Facility"
and "Revolving Line of Credit Note" below) ................ $ 529,000 $ 492,000
Senior Notes ................................................ 95,714 102,857
6.70% Notes ................................................. 100,000 100,000
6.40% Notes ................................................. 205,164 205,546
Other, principally seller financing of acquired operations or
assumption upon acquisition, weighted average interest rate
of 5.2% as of October 31, 1999, partially secured by
assets of subsidiaries, with maturities through 2022 ...... 21,535 24,031
--------- ---------
951,413 924,434
Less current maturities ..................................... 12,582 11,219
--------- ---------
$ 938,831 $ 913,215
========= =========
In April 1997, the Company completed the syndication of a $600,000
revolving credit facility ("Revolving Credit Facility"). The Revolving
Credit Facility matures on April 30, 2002 and contains a facility fee
which was 12.5 basis points on October 31, 1999. Borrowings bear interest
at the lead lending bank's prime rate or certain optional rates at the
Company's election. Under this agreement $529,000 and $492,000 were
outstanding with weighted average interest rates of 5.63 percent and 5.70
percent as of October 31, 1999 and 1998, respectively. As of October 31,
1999 and 1998, the carrying value of these borrowings, including accrued
interest, was $533,086 and $492,000, respectively, whereas the fair value
was $524,924 and $492,000, respectively.
In order to hedge a portion of the interest rate risk associated with its
variable-rate debt, during the first quarter of 1999 the Company entered
into a three-year interest rate swap agreement involving a notional amount
of $200,000. This agreement which became effective March 4, 1999,
effectively converted $200,000 of variable-rate debt bearing interest based
on three-month LIBOR to a fixed rate based on the swap rate of 4.915
percent. The estimated fair value of the interest rate swap as of
October 31, 1999, based on quoted market prices, was $6,090. As of October
31, 1999, the Company had $529,000 of outstanding borrowings under its
$600,000 Revolving Credit Facility, $329,000 of which was not hedged by the
interest rate swap agreement and was subject to a weighted average short-
term variable interest rate of 5.92 percent as of October 31, 1999.
Additionally, the Company has available with a separate financial
institution an uncollateralized revolving line of credit ("Revolving Line
of Credit Note") used to support the interim cash funding for advances to
be made under the Revolving Credit Facility in amounts less than $5,000.
Borrowings under the Revolving Line of Credit Note are limited to $10,000,
bear interest at the lending bank's cost of funds rate or certain optional
rates at the Company's election, and mature on March 31, 2000.
Periodically, the Company will pay down the Revolving Line of Credit Note
using funds drawn on the Revolving Credit Facility. There were no amounts
outstanding under the Revolving Line of Credit Note as of October 31, 1999
and 1998.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) LONG-TERM DEBT--(CONTINUED)
On December 21, 1993, the Company issued $50,000 of uncollateralized
senior notes, bearing interest at a rate of 6.04 percent and maturing on
November 30, 2003. Principal payments of $7,143 are due each year; the
first such payment was made on November 30, 1997, and the final payment is
due on November 30, 2003. On November 7, 1994, the Company issued $75,000
of uncollateralized senior notes with an average maturity of seven years
and a weighted average interest rate of 8.44 percent. A principal payment
of $15,000 was made on May 1, 1998. The remaining notes have a weighted
average interest rate of 8.49 percent, and principal payments are due as
follows: $16,667 on each of November 1, 2000, 2001 and 2002, and $10,000 on
November 1, 2006. As of October 31, 1999 and 1998, the carrying value of
the Company's senior notes, including accrued interest, was $99,145 and
$106,468, respectively, whereas the fair value was $91,137 and $110,420,
respectively.
In December 1996, the Company issued $100,000 of unsecured,
unsubordinated debt securities in the form of 6.70 percent Notes due 2003.
Net proceeds were approximately $99,400, of which $96,800 was used to
reduce balances outstanding under the Company's revolving credit
facilities, with the remaining $2,600 used for acquisitions and general
corporate purposes. As of October 31, 1999 and 1998, the carrying value of
these notes, including accrued interest, was $102,773 and $102,792, whereas
the fair value was $84,553 and $103,197, respectively.
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). The ROARS were priced to the public at 99.677 percent to yield
6.476 percent. Net proceeds were approximately $203,631, including the
payment made to the Company by the remarketing dealer for the right to
remarket the securities after five years. The proceeds were used to reduce
balances outstanding under the Company's revolving credit facilities. The
net effective rate to the Company, assuming the securities are redeemed by
the Company after five years, is 5.77 percent. If the securities are
remarketed after five years, the net effective rate for the remaining term
will be 5.44 percent (10-year Treasury rate, fixed upon initial issuance of
the ROARS) plus the Company's then current credit spread. If the ROARS
are redeemed by the Company on May 1, 2003, a principal payment of
$200,000 will be required. As of October 31, 1999 and 1998, the carrying
value of these notes, including accrued interest and the unamortized
portion of the option premium, was $211,528 and $211,911, whereas the
fair value was $175,366 and $210,010, respectively.
The bank loan agreements and senior note agreements contain various
restrictive covenants that limit consolidated funded indebtedness,
indebtedness of subsidiaries, the sale of assets to entities outside the
consolidated group and the payment of dividends on, and repurchases of, the
capital stock of the Company. Additionally, the bank loan agreements
contain change of control provisions. The Company is also required to
maintain specified financial ratios related to net worth and fixed charges.
Principal payments due on the long-term debt for the fiscal years ending
October 31, 2000 through October 31, 2004, excluding the Revolving Credit
Facility and assuming the ROARS are redeemed by the Company on May 1, 2003,
are approximately $12,199 in 2000, $26,880 in 2001, $25,735 in 2002,
$225,772 in 2003 and $109,923 in 2004. Current maturities of long-term
debt of $12,582 as of October 31, 1999, as reported in the Company's
consolidated balance sheets, include $383 relating to the unamortized ROARS
option premium.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
YEAR ENDED OCTOBER 31, 1999
---------------------------
Earnings before cumulative effect of change
in accounting principles ............................... $ 90,520
==========
Basic earnings per share:
Earnings available to common shareholders .............. $ 90,520 107,452 $ .84
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised .............. - 382
---------- -------------
Diluted earnings per share:
Earnings available to common shareholders
plus time-vest stock options assumed exercised ..... $ 90,520 107,834 $.84
========== ============= =========
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
YEAR ENDED OCTOBER 31, 1998
---------------------------
Net earnings ............................................. $ 41,902
==========
Basic earnings per share:
Net earnings available to common shareholders .......... $ 41,902 97,691 $ .43
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised .............. - 753
---------- -------------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised ...... $ 41,902 98,444 $ .43
========== ============= =========
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
YEAR ENDED OCTOBER 31, 1997
---------------------------
Earnings before cumulative effect of change
in accounting principles .............................. $ 69,742
========
Basic earnings per share:
Earnings available to common shareholders .............. $ 69,742 88,778 $ .79
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised .............. - 897
-------- -------------
Diluted earnings per share:
Earnings available to common shareholders
plus time-vest stock options assumed exercised ...... $ 69,742 89,675 $ .78
========= ============= =========
Options to purchase 1,733,504 shares of common stock at prices ranging
from $16.00 to $27.25 were outstanding but were not included in the
computation of diluted earnings per share because the options' exercise
prices were greater than the average market price of the common shares. The
options, which expire on January 2, 2001, October 31, 2001, and July 31,
2004, were still outstanding at the end of fiscal year 1999.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) INCOME TAXES
Income tax expense (benefit) is comprised of the following components:
U.S. AND
POSSESSIONS STATE FOREIGN TOTAL
----------- ----------- ----------- -----------
YEAR ENDED OCTOBER 31,
----------------------
1999:
Current tax expense ............. $ 27,869 $ 4,783 $ 8,240 $ 40,892
Deferred tax expense ............ 4,628 2,923 3,588 11,139
----------- ----------- ----------- -----------
$ 32,497 $ 7,706 $ 11,828 $ 52,031
=========== =========== =========== ===========
1998:
Current tax expense ............. $ 13,871 $ 3,918 $ 4,741 $ 22,530
Deferred tax expense (benefit) .. (2,075) 617 1,990 532
----------- ----------- ----------- -----------
$ 11,796 $ 4,535 $ 6,731 $ 23,062
=========== =========== =========== ===========
1997:
Current tax expense ............. $ 21,174 $ 1,238 $ 2,963 $ 25,375
Deferred tax expense ............ 5,760 3,000 2,600 11,360
----------- ----------- ----------- -----------
$ 26,934 $ 4,238 $ 5,563 $ 36,735
=========== =========== =========== ===========
The reconciliation of the statutory tax rate to the effective tax rate is
as follows:
YEAR ENDED OCTOBER 31,
-----------------------------
1999 1998 1997
-------- --------- ---------
Statutory tax rate .................................. 35.00% 35.00% 35.00%
Increases (reductions) in tax rate resulting from:
State and U.S. possessions ........................ 4.03 6.21 2.82
Goodwill and other ................................ 2.17 3.86 .31
Dividend exclusion ................................ (1.56) (2.21) ( .78)
Foreign tax rate differential ..................... (1.86) (5.57) (2.50)
Foreign tax credit ................................ (1.28) ( 1.79) ( .35)
-------- --------- ---------
Effective tax rate .................................. 36.50% 35.50% 34.50%
======== ========= =========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) INCOME TAXES--(CONTINUED)
Deferred tax assets and liabilities consist of the following:
OCTOBER 31,
-----------------------
1999 1998
--------- ---------
Deferred tax assets:
Domestic trust earnings ................................... $ 44,653 $ 7,375
Estimated cost to deliver merchandise ..................... 4,206 3,292
Allowance for sales cancellations and doubtful accounts ... 8,483 7,940
Deferred preneed sales and expenses ....................... 17,806 22,068
Unrealized depreciation of investments .................... 1,925 629
Deferred compensation ..................................... 795 556
Foreign tax credit ........................................ - 4,374
Other ..................................................... 2,966 2,653
--------- ---------
80,834 48,887
========= =========
Deferred tax liabilities:
Purchase accounting adjustments ........................... 130,778 122,065
Foreign trust earnings .................................... 14,101 10,513
Deferred revenue on cemetery property and merchandise sales 20,051 11,277
State income taxes ........................................ 5,102 1,726
Percentage of completion on long-term contracts ........... 605 2,618
Equity method investments ................................. 2,118 2,240
Goodwill .................................................. 4,133 2,733
Non-compete amortization .................................. 1,914 1,631
Depreciation .............................................. 343 -
Other ..................................................... 316 282
--------- ---------
179,461 155,085
--------- ---------
$ 98,627 $106,198
========= =========
Current net deferred liability .............................. $ 17,193 $ 13,967
Long-term net deferred liability ............................ 81,434 92,231
--------- ---------
$ 98,627 $106,198
========= =========
For the years ended October 31, 1999, 1998, and 1997, approximately 10
percent, 5 percent and 6 percent, respectively, of the Company's earnings
before performance-based stock options and income taxes were generated from
properties in foreign jurisdictions.
The Company has not recognized a deferred tax liability of approximately
$14,000 for the undistributed earnings of non-U.S. subsidiaries because the
Company currently considers these earnings to be reinvested indefinitely.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) 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 up to 15 percent of their earnings.
Effective January 1, 1997, the first 5 percent of such employee
contributions are eligible for Company matching contributions at the rate of
$.50 for each $1.00 contributed. Prior to January 1, 1997, Company matching
contributions were $.25 for each $1.00 contributed. The Company's expense,
including the Company's matching contributions, for the fiscal years ended
October 31, 1999, 1998 and 1997 was approximately $3,700, $3,550 and $2,900,
respectively.
NON-QUALIFIED SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN
In January 1994, the Company developed 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 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. Effective January 1, 1997,
the first 5 percent of such employee contributions are eligible for Company
matching contributions at the rate of $.50 for each $1.00 contributed.
Prior to January 1, 1997, Company matching contributions were $.25 for each
$1.00 contributed. The Company's expense, including the Company's matching
contributions, for the fiscal years ended October 31, 1999, 1998, and 1997
was approximately $300, $300, and $164, respectively.
1991 INCENTIVE COMPENSATION PLAN
In May 1991, the Company adopted the 1991 Incentive Compensation Plan,
pursuant to which directors, former directors, officers and other employees
of the Company could be granted stock options, stock awards, restricted
stock, performance share awards or cash awards by the Compensation Committee
of the Board of Directors. As of October 31, 1999, all performance-based
options granted under the 1991 Incentive Compensation Plan have expired or
have been exercised.
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, 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. From September 7, 1995 through April 7, 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. In general, two-thirds of the options became exercisable
in full on the first day between the date of grant and August 31, 2000 that
the average of the closing sale prices of a share of the Company's Class A
Common Stock for the 20 preceding consecutive trading days equaled or
exceeded $26.44, which represented a 20 percent annual compounded growth in
the price of a share of the Company's Class A Common Stock over five years.
The remaining options generally become exercisable in 20 percent annual
increments beginning on September 7, 1996, except for grants issued since
the initial grant date, which options vest over the remainder of the
original five-year period. The Compensation Committee may
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
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 October 31, 2001. As of October 31, 1999, 4,983,230 options had been
repurchased or exercised under this plan, and 138,882 options had been
forfeited.
During April 1998, the stock price performance target was achieved, and
the Company's performance-based stock options granted under the Company's
1995 Incentive Compensation Plan and covering 4,855,886 shares vested.
Accordingly, during the second quarter of fiscal year 1998, the Company was
required by generally accepted accounting principles to record a
nonrecurring, noncash charge to earnings of $76,762 ($50,279, or $.51 per
share, after-tax).
Additionally, to encourage optionees to exercise their options
immediately in order to renew the performance-based option program and to
reduce potential dilution from additional shares in the market, the Company
offered to repurchase the options for the difference between $27.31, the
closing price on the date on which the options vested, and the exercise
price of the options. The repurchase of certain of the options by the
Company and the exercise of the remaining options resulted in a cash outlay
of $69,431.
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 become exercisable in 20
percent annual increments beginning on July 17, 1999. The remaining two-
thirds of the options 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. Generally accepted accounting principles require that a charge to
earnings be recorded for the performance-based options for the difference
between the exercise price and the then current stock price when achievement
of the performance objective becomes probable. All of the options expire on
July 31, 2004. As of October 31, 1999, none of these options had been
exercised, and 12,500 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, 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 become exercisable in 25 percent annual increments
beginning January 2, 1997, except for grants issued since the initial grant
date, which options vest over the remainder of the original four-year
period. 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 the options expire on January 2, 2001. As of October
31, 1999, 91,052 options had been exercised under this plan.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
EMPLOYEE STOCK PURCHASE PLAN
On July 1, 1992, the Company adopted an "Employee Stock Purchase Plan"
and reserved 2,250,000 shares of Class A Common Stock for purchase by
eligible employees, as defined. The plan provides to eligible employees the
opportunity to purchase Company 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. As of October 31, 1999,
590,877 shares had been acquired under this plan.
STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," (SFAS 123) and continues to apply Accounting Principles Board
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, 1999 and 1998, and the changes that
occurred during fiscal years 1999 and 1998.
1998 1999
------------------------ -----------------------
NUMBER OF WEIGHTED NUMBER OF WEIGHTED
SHARES AVERAGE SHARES AVERAGE
UNDERLYING EXERCISE UNDERLYING EXERCISE
OPTIONS PRICES OPTIONS PRICES
---------- -------- ---------- --------
Outstanding at beginning of year .... 6,187,038 $ 20.77 6,993,710 $ 11.38
Granted ............................. 90,000 $ 22.67 4,268,250 $ 25.98
Exercised/Repurchased ............... (14,724) $ 10.50 (4,991,580) $ 12.24
Forfeited ........................... (21,192) $ 22.58 (83,342) $ 10.70
--------- ----------
Outstanding at end of year .......... 6,241,122 $ 20.81 6,187,038 $ 20.77
========= ==========
Exercisable at end of year .......... 2,199,099 $ 13.78 1,349,651 $ 11.76
========= ==========
Weighted-average fair value of
options granted .................... $ 10.28 $ 7.11
The following table further describes the Company's stock options
outstanding as of October 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE
------------------------------------------------------ --------------------------------
NUMBER WEIGHTED AVERAGE NUMBER
RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE
EXERCISE PRICE AT 10/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 10/31/99 EXERCISE PRICE
------------------ ------------ ---------------- ----------------- ------------ ----------------
$ 10.50 to $ 15.00 2,078,968 1.91 years $ 10.70 1,613,896 $ 10.67
$ 15.01 to $ 20.00 274,132 1.91 years $ 17.38 188,334 $ 17.35
$ 20.01 to $ 25.00 309,772 2.77 years $ 21.78 154,749 $ 21.35
$ 25.01 to $ 27.25 3,578,250 4.75 years $ 26.87 242,120 $ 26.88
----------- -----------
$ 10.50 to $ 27.25 6,241,122 3.58 years $ 20.81 2,199,099 $ 13.78
=========== ===========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
SFAS 123 applies only to options granted, 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 7.8 million stock options
outstanding as of the beginning of fiscal year 1996. 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 123, net earnings and earnings
per share would have been as follows:
YEAR ENDED OCTOBER 31,
--------------------------
1999 1998
------------ -----------
(UNAUDITED)
Net earnings - as reported ........... $ 40,419 $ 41,902
- pro forma ............. 35,735 40,027
Basic earnings per common share - as reported ........... $ .37 $ .43
- pro forma ............. .33 .41
Diluted earnings per common share - as reported ........... $ .37 $ .43
- pro forma ............. .33 .41
The fair value of the Company's stock options used to compute pro forma
net earnings and earnings 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 1999 and 1998,
respectively: expected dividend yield of .3 percent and .3 percent; expected
volatility of 21.3 percent and 20.9 percent; risk-free interest rate of 5.5
percent and 5.5 percent; and an expected term of 4.8 years and 4.7 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 1999 and 1998, respectively: expected dividend yield of .4
percent and .2 percent; expected volatility of 38.1 percent and 20.5
percent; risk-free interest rate of 4.9 percent and 5.3 percent; and an
expected term of .5 years, for both years.
(15) SHAREHOLDER RIGHTS PLAN
On November 3, 1999, the Company's Board of Directors adopted a rights
plan intended to protect shareholder interests in the event the Company
becomes the subject of a takeover initiative that the Company's Board of
Directors believes could deny the Company's shareholders the full value of
their investment. This plan does not prohibit the Board from considering
any offer that it deems advantageous to its shareholders. The Company
has no knowledge that anyone is considering a takeover.
The rights were issued to each common shareholder of record on October
28, 1999, and they will be exercisable only if a person acquires, or
announces a tender offer that would result in ownership of, 15 percent or
more of the Company's outstanding Class A and Class B Common Stock. The
initial exercise price will be $24.00 per right. The rights will expire on
October 28, 2009, unless redeemed or exchanged at an earlier date.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS
During the fall of 1999, 16 putative securities class action lawsuits
were filed against the Company, certain of its directors and officers and
the Company's underwriters in its January 1999 common stock offering. The
suits have been consolidated and the court has appointed lead plaintiffs as
well as lead and liaison counsel for the plaintiffs.
The consolidated amended complaint alleges violations of Section 11,
12(a)(2) and 15 of the Securities Act of 1933 and Sections 10(b) and 20(a)
of the Securities Exchange Act of 1934 and Rule 10b-5 promulgated thereunder
on behalf of purchasers of the Company's common stock during the period
October 1, 1998 through August 12, 1999. Plaintiffs generally allege that
the defendants made false and misleading statements and failed to disclose
allegedly material information in the prospectus relating to the January
1999 common stock offering and in certain of the Company's other public
filings and announcements. The plaintiffs also allege that these allegedly
false and misleading statements and omissions permitted the Chairman of the
Company to sell Company common stock during the class period at inflated
market prices. The plaintiffs seek remedies including certification of the
putative class, unspecified damages, attorneys' fees and costs, rescission
to the extent any members of the class still hold the Company's common
stock, and such other relief as the court may deem proper. By February 25,
2000, the Company expects to move to dismiss the complaint.
This action is in its earliest stages and the outcome of the action and
costs of defending it cannot be predicted at this time. The Company
believes that the claims are without merit and intends to defend itself
vigorously.
The Company was notified in September 1994 that a suit was brought by a
competitor regarding the Company's acquisition of certain corporations in
Mexico. The former owners of these corporations have agreed to indemnify
the Company should an unfavorable outcome result. There has been no
significant activity regarding this suit since 1996, and the Company assumes
it has been abandoned. Unless there are new developments, the Company will
no longer report on this suit.
The Company is a party to certain other legal proceedings in the ordinary
course of its business but does not regard any such proceedings as material.
As of October 31, 1999, the Company had advanced approximately $1,205,
including accrued interest, to fund premiums on a split-dollar, "second-to-
die" life insurance policy on behalf of the Company's Chairman, Mr. Frank B.
Stewart, Jr., and Mrs. Stewart. The advances are collateralized by the
assignment of other insurance policies and the pledge of Class A Common
Stock of the Company. In 1992, the Company agreed to continue to advance
such premiums for a twelve-year period and will be repaid at the earliest of
(a) the surrender of the policy, (b) the deaths of Mr. and Mrs. Stewart, or
(c) 60 days following payment in full of all premiums on the policy.
The Company has noncancellable operating leases, primarily for land and
buildings, that expire over the next one to 24 years, except for five leases
that expire between 2032 and 2072. Rent expense under these leases was
$8,042, $7,805 and $6,025 for the years ended October 31, 1999, 1998 and
1997, respectively. The Company's future minimum lease payments as of
October 31, 1999 are $7,755, $6,378, $5,492, $4,642, $3,930 and $39,428 for
the years ending October 31, 2000, 2001, 2002, 2003, 2004 and later years,
respectively. Additionally, the Company has entered into non-compete
agreements with prior owners of acquired subsidiaries that expire through
2012. The Company's future non-compete payments as of October 31, 1999 for
the same periods are $7,345, $6,949, $6,302, $5,634, $4,452 and $8,987,
respectively.
The Company leases office space from an affiliated company. Rental
payments were approximately $534, $636, and $602 for the years ended October
31, 1999, 1998, and 1997, respectively.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) SEGMENT DATA
In fiscal year 1999, the Company adopted FAS No. 131, "Disclosures about
Segments of an Enterprise and Related Information." The accounting policies
of the segments are the same as those described in the "Summary of
Significant Accounting Policies." The Company evaluates the performance of
its segments and allocates resources to them based on gross profit.
The Company's operations are product based and geographically based. As
such, the Company's primary reportable operating segments presented below
are based on products and services and include funeral and cemetery
operations.
The Company's funeral homes offer a complete range of funeral services
and products at the time of need or on a prearranged 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. Cemetery property and merchandise sales
are made at the time of need or on a prearranged basis.
The Company conducts both funeral and cemetery operations in the United
States, including Puerto Rico, and in Mexico, Canada, Australia and
Argentina. The Company conducts funeral operations in New Zealand, Spain,
Portugal, the Netherlands, Belgium and France.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) SEGMENT DATA--(CONTINUED)
The table below presents information about reported segments for fiscal
years ended:
RECONCILING CONSOLIDATED
FUNERAL CEMETERY ITEMS(1) TOTALS
----------- ----------- ----------- -----------
Revenues from external customers
October 31, 1999 ................... $ 445,877 310,231 - $ 756,108
October 31, 1998 ................... $ 379,095 269,270 - $ 648,365
October 31, 1997 ................... $ 291,649 240,937 - $ 532,586
Gross profit
October 31, 1999 ................... $ 126,875 83,526 - $ 210,401
October 31, 1998 ................... $ 118,426 77,558 - $ 195,984
October 31, 1997 ................... $ 89,235 67,937 - $ 157,172
Total assets
October 31, 1999 ................... $ 1,242,119 996,282 45,479 $ 2,283,880
October 31, 1998 ................... $ 1,265,237 746,569 37,132 $ 2,048,938
October 31, 1997 ................... $ 940,340 667,932 28,966 $ 1,637,238
Depreciation and amortization
October 31, 1999 ................... $ 36,373 11,850 2,397 $ 50,620
October 31, 1998 ................... $ 28,299 8,546 1,897 $ 38,742
October 31, 1997 ................... $ 21,216 7,966 867 $ 30,049
Additions to long-lived assets(2)
October 31, 1999 ................... $ 62,926 61,827 11,919 $ 136,672
October 31, 1998 ................... $ 64,344 68,606 10,504 $ 143,454
October 31, 1997 ................... $ 58,644 31,998 11,363 $ 102,005
- ---------------------
(1) Reconciling items consist of unallocated corporate assets, depreciation
and amortization on unallocated corporate assets and additions to
corporate long-lived assets.
(2) Long-lived assets include cemetery property and net property and
equipment.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) SEGMENT DATA--(CONTINUED)
A reconciliation of total segment gross profit to total earnings before
income taxes and cumulative effect of change in accounting principles for
fiscal years ended October 31, 1999, 1998 and 1997, is as follows:
1999 1998 1997
------------ ------------ ------------
Gross profit for reportable segments $ 210,401 $ 195,984 $ 157,172
Corporate general and administrative
expenses (19,161) (16,621) (15,402)
Performance-based stock options - (76,762) -
Interest expense, net (52,174) (41,792) (36,425)
Other income 3,485 4,155 1,132
------------ ------------ ------------
Earnings before income taxes and cumulative
effect of change in accounting principles $ 142,551 $ 64,964 $ 106,477
============ ============ ============
U.S. AND
POSSESSIONS(1) FOREIGN(2) CONSOLIDATED
------------ ------------ ------------
Revenues from external customers
October 31, 1999 $ 603,530 152,578 $ 756,108
October 31, 1998 $ 534,427 113,938 $ 648,365
October 31, 1997 $ 455,076 77,510 $ 532,586
Gross profit
October 31, 1999 $ 180,693 29,708 $ 210,401
October 31, 1998 $ 170,415 25,569 $ 195,984
October 31, 1997 $ 136,205 20,967 $ 157,172
Long-lived assets(3)
October 31, 1999 $ 735,649 135,428 $ 871,077
October 31, 1998 $ 647,350 121,447 $ 768,797
October 31, 1997 $ 524,894 115,137 $ 640,031
- -------------------
(1) Includes the Company's operations in the United States and the
Commonwealth of Puerto Rico.
(2) Foreign revenue is based on the country in which the sales originate.
The Company commenced its foreign operations as follows: Mexico - August
1994; Australia - December 1994; New Zealand - April 1996; Canada -
October 1996; Spain - April 1997; Portugal - September 1997; the
Netherlands - December 1997; Argentina - April 1998; France and Belgium -
May 1998.
(3) Long-lived assets include cemetery property and net property and
equipment.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH
----------- ----------- ----------- -----------
YEAR ENDED OCTOBER 31, 1999(1)
- ------------------------------
Revenues ..................................... $ 178,172 $ 194,297 $ 193,721 $ 189,918
Gross profit ................................. 54,241 57,668 53,674 44,818
Earnings before cumulative effect of change
in accounting principle ..................... 23,501 27,108 23,347 16,564
Earnings per common share before cumulative
effect of change in accounting principle:
Basic ..................................... .24 .24 .21 .15
Diluted ................................... .24 .24 .21 .15
Net earnings (loss) .......................... (26,600) 27,108 23,347 16,564
Earnings per common share:
Basic ..................................... (.27) .24 .21 .15
Diluted ................................... (.27) .24 .21 .15
FIRST(2) SECOND THIRD FOURTH
----------- ----------- ----------- -----------
YEAR ENDED OCTOBER 31, 1998
- ---------------------------
Revenues ..................................... $ 149,309 $ 154,578 $ 169,088 $ 175,390
Gross profit ................................. 46,117 49,546 51,331 48,990
Net earnings (loss) .......................... 21,946 (26,046) 24,324 21,678
Earnings per common share: ...................
Basic ....................................... .23 (.27) .25 .22
Diluted ..................................... .22 (.27) .25 .22
- ---------------
(1) The first, second and third quarters of fiscal year 1999 have been
restated from the Company's respective Quarterly Reports on Form 10-Q
to reflect the Company's change in accounting principle effective
November 1, 1998. As a result, first quarter reflects a $3,016
decrease in earnings, $.03 per share (basic and diluted), before the
cumulative effect of the change in accounting principle. In addition,
the first quarter as presented above includes a $50,101 decrease in net
earnings (net of a $28,798 income tax benefit), or $.51 per share
(basic and diluted), for the cumulative effect of the change in
accounting principle. Second quarter as presented above reflects a
decrease in net earnings of $5,055, or $.05 per share (basic and
diluted), as a result of the accounting change. Third quarter as
presented above reflects a decrease in net earnings of $5,552, or $.05
per share (basic and diluted), as a result of the accounting change.
See Note 3.
(2) Restated to reflect the Company's two-for-one stock split effective
April 24, 1998.
(19) SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to year-end, the Company has acquired or has outstanding
definitive agreements or letters of intent to acquire four funeral homes and
four cemeteries for approximately $8,861.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers required by Item 10 may be
found under Item 4(a) of this report.
The information regarding directors and compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, required by Item 10 is
incorporated by reference to the Registrant's definitive proxy statement
relating to its 2000 annual meeting of shareholders, which proxy statement
will be filed pursuant to Regulation 14A within 120 days after the end of
the last fiscal year.
ITEM 11. EXECUTIVE COMPENSATION
The information required by Item 11 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2000 annual meeting
of shareholders, which proxy statement will be filed pursuant to Regulation
14A within 120 days after the end of the last fiscal year.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
The information required by Item 12 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2000 annual meeting
of shareholders, which proxy statement will be filed pursuant to Regulation
14A within 120 days after the end of the last fiscal year.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
The information required by Item 13 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 2000 annual meeting
of shareholders, which proxy statement will be filed pursuant to Regulation
14A within 120 days after the end of the last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(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
----
Report of Independent Accountants ..................................................... 33
Consolidated Statements of Earnings for the Years Ended October 31, 1999,
1998 and 1997 ...................................................................... 34
Consolidated Balance Sheets as of October 31, 1999 and 1998 ........................... 35
Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1999, 1998 and 1997 ..................................................... 37
Consolidated Statements of Cash Flows for the Years Ended October 31, 1999,
1998 and 1997 ....................................................................... 39
Notes to Consolidated Financial Statements ............................................ 41
(2) Financial Statement Schedule for the years ended October 31, 1999, 1998 and 1997
Report of Independent Accountants on Financial Statement Schedule ..................... 69
Schedule II-Valuation and Qualifying Accounts ......................................... 70
All other schedules are omitted because they are not applicable or not
required, or the information appears in the financial statements or notes
thereto.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Stewart Enterprises, Inc.:
Our report on the consolidated financial statements of Stewart Enterprises,
Inc. and Subsidiaries, which includes an emphasis paragraph related to
changes in the Company's method of accounting for funeral services
investment trust fund earnings in 1999 and its method of accounting for
cemetery sales and funeral services investment trust fund earnings in 1997,
is included in Item 8 of this Form 10-K. In connection with our audits of
such financial statements, we have also audited the related financial
statement schedule listed in Item 14(a) of this Form 10-K. This financial
statement schedule is the responsibility of the Company's management.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
December 15, 1999
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
---------- ---------- ----------------------- ---------- ----------
ADDITIONS
-----------------------
BALANCE AT CHARGED TO CHARGED TO
BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE AT END
DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) -WRITE-OFFS OF PERIOD
----------- ---------- ---------- ----------- ---------- ----------
Current-Allowance for contract
cancellations and doubtful accounts:
Year ended October 31,
1999 ............................... $ 10,738 14,050 2,223 15,579 $ 11,432
1998 ............................... $ 6,869 16,191 1,875 14,197 $ 10,738
1997 ............................... $ 2,996 8,586 2,386 7,099 $ 6,869
Due after one year-Allowance for
contract cancellations and doubtful
accounts:
Year ended October 31,
1999 ............................... $ 12,063 19,864 - 17,370 $ 14,557
1998 ............................... $ 9,696 12,134 728 10,495 $ 12,063
1997 ............................... $ 3,236 12,765 7,215 13,520 $ 9,696
Accumulated amortization of intangible
assets:
Year ended October 31,
1999 ............................... $ 43,831 19,469 - - $ 63,300
1998 ............................... $ 29,383 14,448 - - $ 43,831
1997 ............................... $ 19,506 9,877 - - $ 29,383
(1) Amounts charged to other accounts represent principally the opening
balance in the allowance for contract cancellations and doubtful accounts
for acquired companies and, for fiscal year 1997, the effect of the
Company's change in accounting principles effective November 1, 1996.
ITEM 14(A)(3) EXHIBITS
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended and restated as of November 5, 1999
3.2 By-laws of the Company, as amended and restated as of October 28, 1999
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 Indenture dated as of December 1, 1996 by and between the Company and
Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated December 5, 1996) and
Supplemental Indenture dated April 24, 1998 (incorporated by reference
to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April
21, 1998)
4.4 Form of 6.70 percent Note due 2003 (incorporated by reference to
Exhibit 4.2 to the Company's Current Report on Form 8-K dated December
5, 1996)
4.5 Form of 6.40 percent Remarketable Or Redeemable Securities (ROARS) due
May 1, 2013 (Remarketing date May 1, 2003) (incorporated by reference
to Exhibit 4.2 to the Company's Current Report on Form 8-K dated April
21, 1998)
4.6 Credit Agreement by and among the Company, its subsidiaries and
Citicorp USA, Inc., Bank of America Illinois, and NationsBank of Texas,
N.A. dated April 14, 1997 (incorporated by reference to Exhibit 4.2 to
the Company's Registration Statement on Form S-3 (Registration No. 333-
27771) filed with the Commission on May 23, 1997)
4.7 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)
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.
10.1 Lease Agreement dated September 1, 1983 between Stewart Building
Enterprise and Stewart Enterprises, Inc. and amendments thereto dated
June 18, 1990 and May 23, 1991 (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 (Registration
No. 33-42336) filed with the Commission on August 21, 1991 (the "1991
Registration Statement")); dated June 1, 1992 (incorporated by
reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1992 (the "1992 10-K")); dated
June 1, 1993 (incorporated by reference to Exhibit 10.1 to the
Company's Annual Report on Form 10-K for the fiscal year ended October
31, 1993 (the "1993 10-K")); dated October 28, 1994 and dated November
30, 1994 (incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1994
(the "1994 10-K")); dated May 27, 1996 (incorporated by reference to
Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1996 (the "1996 10-K")); and dated
April 30, 1997 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended April 30,
1997)
10.2 Split-Dollar Agreement dated January 10, 1992 between the Company, Roy
A. Perrin, Jr., Trustee, on behalf of all Trustees of the Elisabeth
Felder Stewart 1988 Trust and of the Frank B. Stewart, III 1988 Trust,
and Frank B. Stewart, Jr. (incorporated by reference to Exhibit 10.39
to the 1992 10-K)
-----------------------
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 10.25 to the
1991 Registration Statement), and amendment dated September 18, 1996
(incorporated by reference to Exhibit 10.6 to the 1996 10-K)
10.4 Employment Agreement dated August 1, 1995, between the Company and
Joseph P. Henican, III (incorporated by reference to Exhibit 10.16 to
the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995 (the "1995 10-K")) and Amendment No. 1 to Employment
Agreement dated October 31, 1998 (incorporated by reference to Exhibit
10.8 to the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1998 (the "1998 10-K"))
10.5 Change of Control Agreement dated December 5, 1995, between the Company
and Joseph P. Henican, III (incorporated by reference to Exhibit 10.20
to the 1995 10-K)
10.6 Stock Option Agreements dated February 1, 1995, between the Company and
Joseph P. Henican, III (incorporated by reference to Exhibit 10.2 to
the Company's Quarterly Report on Form 10-Q for the Quarter ended July
31, 1995)
10.7 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Joseph P. Henican, III (incorporated by reference to
Exhibit 10.17 to the 1995 10-K)
10.8 Termination Agreement between Stewart Enterprises, Inc., a Louisiana
corporation and Joseph P. Henican, III dated as of November 15, 1999
10.9 Employment Agreement dated August 1, 1995, between the Company and
William E. Rowe (incorporated by reference to Exhibit 10.25 to the 1995
10-K) and Amendment No. 1 to Employment Agreement dated October 31,
1998 (incorporated by reference to Exhibit 10.12 to the 1998 10-K)
10.10 Change of Control Agreement dated December 5, 1995, between the Company
and William E. Rowe (incorporated by reference to Exhibit 10.29 to the
1995 10-K)
10.11 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and William E. Rowe (incorporated by reference to Exhibit 10.26
to the 1995 10-K)
10.12 Employment Agreement dated August 1, 1995, between the Company and
Ronald H. Patron (incorporated by reference to Exhibit 10.32 to the
1995 10-K); Amendment No. 1 to Employment Agreement dated May 1, 1998
and Amendment No. 2 to Employment Agreement dated October 31, 1998
(incorporated by reference to Exhibit 10.15 to the 1998 10-K)
10.13 Change of Control Agreement dated December 5, 1995, between the Company
and Ronald H. Patron (incorporated by reference to Exhibit 10.36 to the
1995 10-K) and Amendment No. 1 to Change of Control Agreement dated May
1, 1998 (incorporated by reference to Exhibit 10.16 to the 1998 10-K)
10.14 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Ronald H. Patron (incorporated by reference to Exhibit
10.33 to the 1995 10-K)
10.15 Employment Agreement dated August 1, 1995, between the Company and
Gerard C. Alexander (incorporated by reference to Exhibit 10.39 to the
1995 10-K) and Amendment No. 1 to Employment Agreement dated October
31, 1998 (incorporated by reference to Exhibit 10.18 to the 1998 10-K)
10.16 Change of Control Agreement dated December 5, 1995, between the Company
and Gerard C. Alexander (incorporated by reference to Exhibit 10.43 to
the 1995 10-K)
10.17 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Gerard C. Alexander (incorporated by reference to Exhibit
10.40 to the 1995 10-K)
10.18 Employment Agreement dated August 1, 1995, between the Company and
Brian J. Marlowe (incorporated by reference to Exhibit 10.47 to the
1995 10-K) and Amendment No. 1 to Employment Agreement dated
October 31, 1998 (incorporated by reference to Exhibit 10.24 to the
1998 10-K)
10.19 Change of Control Agreement dated December 5, 1995, between the Company
and Brian J. Marlowe (incorporated by reference to Exhibit 10.51 to the
1995 10-K)
10.20 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Brian J. Marlowe (incorporated by reference to Exhibit
10.48 to the 1995 10-K)
10.21 Employment Agreement dated August 1, 1995, between the Company and
Kenneth C. Budde (incorporated by reference to Exhibit 10.35 to the
1996 10-K); Amendment No. 1 to Employment Agreement dated January 1,
1997 (incorporated by reference to Exhibit 10.2 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997);
Amendment No. 2 to Employment Agreement dated May 1, 1998 and Amendment
No. 3 to Employment Agreement dated October 31, 1998 (incorporated by
reference to Exhibit 10.27 to the 1998 10-K)
10.22 Change of Control Agreement dated December 5, 1995, between the Company
and Kenneth C. Budde (incorporated by reference to Exhibit 10.39 to the
1996 10-K) and Amendment No. 1 to Change of Control Agreement dated May
1, 1998 (incorporated by reference to Exhibit 10.28 to the 1998 10-K)
10.23 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)
10.24 Employment Agreement dated August 1, 1995, between the Company and
Lawrence B. Hawkins (incorporated by reference to Exhibit 10.41 to the
1996 10-K); Amendment No. 1 to Employment Agreement dated January 1,
1997 (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997);
and Amendment No. 2 to Employment Agreement dated October 31, 1998
(incorporated by reference to Exhibit 10.30 to the 1998 10-K)
10.25 Change of Control Agreement dated December 5, 1995, between the Company
and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.45 to
the 1996 10-K) and Amendment No. 1 to Change of Control Agreement dated
January 1, 1997 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended April 30,
1998)
10.26 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)
10.27 Employment Agreement dated January 1, 1997, between the Company and
Brent F. Heffron (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1997); Amendment No. 1 to Employment Agreement dated
January 1, 1997 (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
April 30, 1997); Amendment No. 2 to Employment Agreement dated November
1, 1997 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998)
and Amendment No. 3 to Employment Agreement dated October 31, 1998
(incorporated by reference to Exhibit 10.33 to the 1998 10-K).
10.28 Change of Control Agreement dated January 1, 1997, 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, 1997) and Amendment No. 1 to Change of Control Agreement dated
November 1, 1997 (incorporated by reference to Exhibit 10.3 to
Company's Quarterly Report on Form 10-Q for the Quarter ended April 30,
1998)
10.29 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)
10.30 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)
10.31 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)
10.32 Employment Agreement dated January 1, 1997, between the Company and
Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1997); Amendment No. 1 to Employment Agreement dated
January 1, 1997 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended
April 30, 1997); Amendment No. 2 to Employment Agreement dated November
1, 1997 (incorporated by reference to Exhibit 10.3 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998);
and Amendment No. 3 to Employment Agreement dated October 31, 1998
(incorporated by reference to Exhibit 10.38 to the 1998 10-K)
10.33 Change of Control Agreement dated January 1, 1997, between the Company
and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.6
to the Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1997) and Amendment No. 1 to Change of Control Agreement
dated November 1, 1997 (incorporated by reference to Exhibit 10.4 to
the Company's Quarterly Report on Form 10-Q for the Quarter ended April
30, 1998)
10.34 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Raymond C. Knopke, Jr. (incorporated by reference to
Exhibit 10.51 to the 1996 10-K)
10.35 Stock Option Agreement dated January 1, 1997 (time-vest), between the
Company and Raymond C. Knopke, Jr. (incorporated by reference to
Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1997)
10.36 Stock Option Agreement dated December 23, 1997 (time-vest), between the
Company and Raymond C. Knopke, Jr. (incorporated by reference to
Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1998)
10.37 Employment Agreement dated November 1, 1997, between the Company and
Charles L. Tilis and Amendment No. 1 to Employment Agreement dated
October 31, 1998 (incorporated by reference to Exhibit 10.43 to the
1998 10-K)
10.38 Change of Control Agreement dated November 1, 1997, between the Company
and Charles L. Tilis (incorporated by reference to Exhibit 10.44 to the
1998 10-K)
10.39 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)
10.40 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)
10.41 The Stewart Enterprises Employees' Retirement Trust (incorporated by
reference to Exhibit 10.20 the 1991 Registration Statement) and
amendment thereto dated January 1, 1994 (incorporated by reference to
Exhibit 10.28 to the 1994 10-K)
10.42 The Stewart Enterprises Supplemental Retirement and Deferred
Compensation Plan (incorporated by reference to Exhibit 10.29 to the
1994 10-K)
10.43 Amended and Restated Stewart Enterprises, Inc. 1995 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.57 to the
1996 10-K)
10.44 Amended and Restated Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.58 to the 1996 10-K)
10.45 Amended and Restated Stewart Enterprises, Inc. Employee Stock Purchase
Plan (incorporated by reference to Exhibit 10.61 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31,
1997)
--------------------
12 Calculation of Ratio of Earnings to Fixed Charges
18 Letter from PricewaterhouseCoopers LLP regarding 1999 change in
accounting principle
18.1 Letter from PricewaterhouseCoopers LLP regarding 1997 change in
accounting principles (incorporated by reference to Exhibit 18 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended July 31,
1997)
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
--------------------
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on August 12, 1999, reporting under "Item
5. Other Events," earnings revisions for the third and fourth quarters of
1999.
The Company filed a Form 8-K on August 18, 1999, reporting under "Item
5. Other Events," announcement of the Company's stock repurchase program.
The Company filed a Form 8-K on September 8, 1999, reporting under
"Item 5. Other Events," the earnings release for the Quarter ended July 31,
1999.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be
signed on its behalf by the undersigned, thereunto duly authorized on
January 27, 2000.
STEWART ENTERPRISES, INC.
By: /S/ WILLIAM E. ROWE
-------------------------
William E. Rowe
PRESIDENT AND
CHIEF EXECUTIVE OFFICER
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant
and on the dates indicated.
SIGNATURE TITLE DATE
--------- ----- ----
/s/ FRANK B. STEWART, JR. Chairman of the Board January 27, 2000
- -----------------------------
Frank B. Stewart, Jr.
/s/ WILLIAM E. ROWE President, Chief Executive Officer January 27, 2000
- ----------------------------- and a Director
William E. Rowe
(PRINCIPAL EXECUTIVE OFFICER)
/s/ KENNETH C. BUDDE Executive Vice President, January 27, 2000
- ----------------------------- Chief Financial Officer
Kenneth C. Budde and a Director
(PRINCIPAL FINANCIAL OFFICER)
/s/ MICHAEL G. HYMEL Vice President- January 27, 2000
- ----------------------------- Corporate Controller and
Michael G. Hymel Chief Accounting Officer
(PRINCIPAL ACCOUNTING OFFICER)
/s/ DARWIN C. FENNER Director January 27, 2000
- -----------------------------
Darwin C. Fenner
/s/ DWIGHT A. HOLDER Director January 27, 2000
- -----------------------------
Dwight A. Holder
/s/ JOHN P. LABORDE Director January 27, 2000
- -----------------------------
John P. Laborde
/s/ JAMES W. McFARLAND Director January 27, 2000
- -----------------------------
James W. McFarland
/s/ MICHAEL O. READ Director January 27, 2000
- -----------------------------
Michael O. Read
EXHIBIT INDEX
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended and restated as of November 5, 1999
3.2 By-laws of the Company, as amended and restated as of October 28, 1999
10.8 Termination Agreement between Stewart Enterprises, Inc., a Louisiana
corporation and Joseph P. Henican, III dated as of November 15, 1999
12 Calculation of Ratio of Earnings to Fixed Charges
18 Letter from PricewaterhouseCoopers LLP regarding 1999 change in
accounting principle
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule