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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
----------------------
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE QUARTERLY PERIOD ENDED APRIL 30, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _________
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COMMISSION FILE NUMBER: 0-19508
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STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction (I.R.S. Employer
of incorporation or organization) 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
----------------------
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 ___
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 June 8, 2000, was 103,132,826 and 3,555,020,
respectively.
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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Earnings -
Three Months Ended April 30, 2000 and 1999 .............. 3
Consolidated Statements of Earnings -
Six Months Ended April 30, 2000 and 1999 ................ 4
Consolidated Balance Sheets -
April 30, 2000 and October 31, 1999 ..................... 5
Consolidated Statement of Shareholders' Equity -
Six Months Ended April 30, 2000 ......................... 7
Consolidated Statements of Cash Flows -
Six Months Ended April 30, 2000 and 1999 ................ 8
Notes to Consolidated Financial Statements ................ 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk .................................. 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings ................................. 27
Item 4. Submission of Matters to a Vote of
Security Holders .................................. 27
Item 5. Other Information ................................. 27
Item 6. Exhibits and Reports on Form 8-K .................. 31
SIGNATURES ............................................... 32
2
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED APRIL 30,
------------------------------
2000 1999
----------- -----------
Revenues:
Funeral ..................................... $ 115,741 $ 113,198
Cemetery .................................... 73,120 81,099
----------- -----------
188,861 194,297
----------- -----------
Costs and expenses:
Funeral ..................................... 84,936 80,114
Cemetery .................................... 54,141 56,515
----------- -----------
139,077 136,629
----------- -----------
Gross profit ............................... 49,784 57,668
Corporate general and administrative expenses... 4,883 4,333
----------- -----------
Operating earnings .......................... 44,901 53,335
Interest expense, net .......................... (14,447) (11,688)
Other income (expense), net .................... (10) 1,043
----------- -----------
Earnings before income taxes ................ 30,444 42,690
Income taxes ................................... 11,112 15,582
----------- -----------
Net earnings ................................ $ 19,332 $ 27,108
=========== ===========
Net earnings per common share:
Basic ....................................... $ .18 $ .24
=========== ===========
Diluted ..................................... $ .18 $ .24
=========== ===========
Weighted average common shares outstanding (in thousands):
Basic ....................................... 106,557 111,707
=========== ===========
Diluted ..................................... 106,596 112,192
=========== ===========
Dividends declared per common share ............ $ .02 $ .02
=========== ===========
See accompanying notes to consolidated financial statements.
3
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30,
-------------------------------
2000 1999
----------- -----------
Revenues:
Funeral .............................................. $ 238,387 $ 219,932
Cemetery ............................................. 143,434 152,537
----------- -----------
381,821 372,469
----------- -----------
Costs and expenses:
Funeral .............................................. 172,849 153,372
Cemetery ............................................. 110,480 107,188
----------- -----------
283,329 260,560
----------- -----------
Gross profit ......................................... 98,492 111,909
Corporate general and administrative expenses ........... 10,143 8,348
----------- -----------
Operating earnings ................................... 88,349 103,561
Interest expense, net .................................. (29,030) (25,494)
Other income, net ...................................... 796 1,633
----------- -----------
Earnings before income taxes and cumulative
effect of change in accounting principle ........... 60,115 79,700
Income taxes ............................................ 21,942 29,091
----------- -----------
Earnings before cumulative effect of change in
accounting principle .............................. 38,173 50,609
Cumulative effect of change in accounting principle
(net of $28,798 income tax benefit) (Note 2) ....... - (50,101)
----------- -----------
Net earnings ......................................... $ 38,173 $ 508
=========== ===========
Basic earnings per common share:
Earnings before cumulative effect of change in
accounting principle ............................... $ .36 $ .48
Cumulative effect of change in accounting principle .. - (.48)
----------- -----------
Net earnings ......................................... $ .36 $ -
=========== ===========
Diluted earnings per common share:
Earnings before cumulative effect of change in
accounting principle ............................... $ .36 $ .48
Cumulative effect of change in accounting principle... - (.48)
----------- -----------
Net earnings ......................................... $ .36 $ -
=========== ===========
Weighted average common shares outstanding (in thousands):
Basic ................................................ 106,414 104,687
=========== ===========
Diluted .............................................. 106,432 105,286
=========== ===========
Dividends declared per common share ..................... $ .04 $ .04
=========== ===========
See accompanying notes to consolidated financial statements.
4
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 30, OCTOBER 31,
ASSETS 2000 1999
------ ----------- -----------
Current assets:
Cash and cash equivalent investments ............... $ 74,174 $ 30,877
Marketable securities .............................. 26,608 46,549
Receivables, net of allowances ..................... 175,344 176,215
Inventories ........................................ 56,291 51,431
Prepaid expenses ................................... 7,174 5,997
----------- -----------
Total current assets ............................. 339,591 311,069
Receivables due beyond one year, net of allowances .... 235,100 237,578
Intangible assets ..................................... 675,833 673,361
Deferred charges ...................................... 120,165 109,436
Cemetery property, at cost ............................ 438,551 424,032
Property and equipment, at cost:
Land .............................................. 81,238 83,237
Buildings .......................................... 343,005 329,721
Equipment and other ................................ 160,758 158,722
----------- -----------
585,001 571,680
Less accumulated depreciation ..................... 137,122 124,635
----------- -----------
Net property and equipment ......................... 447,879 447,045
Long-term investments ................................ 4,926 16,812
Merchandise trust, less estimated cost to deliver ..... 73,769 58,999
Other assets .......................................... 5,593 5,548
----------- -----------
$ 2,341,407 $ 2,283,880
=========== ===========
(continued)
5
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
APRIL 30, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 2000
------------------------------------ ----------- -----------
Current liabilities:
Current maturities of long-term debt ......................... $ 32,040 $ 12,582
Accounts payable ............................................. 18,118 21,802
Accrued payroll .............................................. 18,040 21,784
Accrued insurance ............................................ 12,850 11,535
Accrued interest ............................................. 13,238 16,757
Accrued other ................................................ 23,581 26,328
Income taxes payable ......................................... 8,069 5,495
Deferred income taxes ........................................ 15,629 17,193
----------- -----------
Total current liabilities .................................. 141,565 133,476
Long-term debt, less current maturities ......................... 931,613 938,831
Deferred income taxes ........................................... 62,999 81,434
Deferred revenue ................................................ 125,253 64,961
Other long-term liabilities ..................................... 8,999 8,566
----------- -----------
Total liabilities .......................................... 1,270,429 1,227,268
----------- -----------
Commitments and contingencies (Note 5)
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
103,132,826 and 102,664,572 shares at April 30, 2000
and October 31, 1999, respectively ...................... 103,133 102,664
Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at April 30, 2000 and October 31, 1999;
10 votes per share; convertible into an equal number of
Class A shares .......................................... 3,555 3,555
Additional paid-in capital ................................... 673,345 671,891
Retained earnings ............................................ 380,914 347,002
Cumulative foreign translation adjustment .................... (83,226) (65,152)
Unrealized depreciation of investments ....................... (6,743) (3,348)
----------- -----------
Total shareholders' equity ................................. 1,070,978 1,056,612
----------- -----------
$ 2,341,407 $ 2,283,880
=========== ===========
See accompanying notes to consolidated financial statements.
6
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK
--------------------- CUMULATIVE UNREALIZED
SHARES- ADDITIONAL FOREIGN DEPRECIATION TOTAL
CLASSES A PAID-IN RETAINED TRANSLATION OF SHAREHOLDERS'
AND B(1) AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS EQUITY
--------- --------- --------- ---------- ---------- ----------- -----------
(IN THOUSANDS)
Balance October 31, 1999 ....... 106,219 $ 106,219 $ 671,891 $ 347,002 $ (65,152) $ (3,348) $ 1,056,612
Comprehensive income:
Net earnings ................. 38,173 38,173
Other comprehensive income:
Foreign translation
adjustment ............... (18,074) (18,074)
Unrealized depreciation of
investments .............. (5,346) (5,346)
Deferred income tax benefit
on unrealized depreciation
of investments ........... 1,951 1,951
------- --------- --------- --------- --------- --------- -----------
Total other comprehensive
income ................... (18,074) (3,395) (21,469)
------- --------- --------- --------- --------- --------- -----------
Total comprehensive income ... 38,173 (18,074) (3,395) 16,704
Issuance of common stock ....... 469 469 1,454 1,923
Dividends ($.04 per share) ..... (4,261) (4,261)
------- --------- --------- --------- --------- --------- -----------
Balance April 30, 2000 ......... 106,688 $ 106,688 $ 673,345 $ 380,914 $ (83,226) $ (6,743) $ 1,070,978
======= ========= ========= ========= ========= ========= ===========
- ----------------------
(1) Includes 3,555 shares (in thousands) of Class B Common Stock.
See accompanying notes to consolidated financial statements.
7
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30,
--------------------------
2000 1999
------------ ----------
Cash flows from operating activities:
Net earnings ...................................................... $ 38,173 $ 508
Adjustments to reconcile net earnings to net cash provided by
operating activities:
Depreciation and amortization .................................. 28,707 24,070
Provision for doubtful accounts ................................ 17,584 15,058
Cumulative effect of change in accounting principle ............ - 50,101
Net gains on sales of marketable securities .................... (780) (2,259)
Benefit for deferred income taxes .............................. (1,747) (5,370)
Changes in assets and liabilities net of effects from acquisitions:
Increase in other receivables ................................ (15,006) (55,230)
Increase in other deferred charges and intangible assets .. (3,751) (4,596)
Increase in inventories and cemetery property ................ (4,060) (1,625)
Increase (decrease) in accounts payable and accrued expenses.. (3,106) 7,886
Increase in merchandise trust, less estimated cost
to deliver merchandise .................................... (14,084) (20,335)
Decrease in other ............................................ (3,545) (6,606)
------------ ----------
Net cash provided by operating activities .................... 38,385 1,602
------------ ----------
Cash flows from investing activities:
Changes in prearranged funeral contracts, net ..................... 57 (10,708)
Proceeds from sales of marketable securities ...................... 45,816 10,647
Purchases of marketable securities and long-term investments ...... (12,946) (18,025)
Purchases of subsidiaries, net of cash, seller financing
and stock issued ................................................ - (152,016)
Additions to property and equipment ............................... (23,627) (22,348)
Other ............................................................. 1,208 479
------------ ----------
Net cash provided by (used in) investing activities .......... 10,508 (191,971)
------------ ----------
(continued)
8
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30,
--------------------------
2000 1999
------------ ----------
Cash flows from financing activities:
Proceeds from long-term debt .................................. $ 8,366 $ 200,847
Repayments of long-term debt .................................. (9,574) (221,970)
Issuance of common stock ...................................... 1,923 219,655
Dividends ..................................................... (4,261) (4,196)
------------ ----------
Net cash provided by (used in) financing activities ...... (3,546) 194,336
------------ ----------
Effect of exchange rates on cash and cash equivalents ............ (2,050) 223
------------ ----------
Net increase in cash ............................................. 43,297 4,190
Cash and cash equivalents, beginning of period ................... 30,877 30,733
------------ ----------
Cash and cash equivalents, end of period ......................... $ 74,174 $ 34,923
============ ==========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes ................................................ $ 10,800 $ 25,200
Interest .................................................... $ 33,600 $ 26,600
Noncash investing and financing activity:
Subsidiaries acquired through seller financing .............. $ 13,900 $ 1,500
See accompanying notes to consolidated financial statements.
9
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
(a) 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.
As of April 30, 2000, the Company owned and operated 628 funeral homes
and 162 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. For the six months ended April
30, 2000, foreign operations contributed approximately 20 percent of total
revenue and, as of April 30, 2000, represented approximately 19 percent of
total assets.
(b) PRINCIPLES OF CONSOLIDATION
The accompanying consolidated financial statements include the Company
and its subsidiaries. All significant intercompany balances and
transactions have been eliminated.
(c) INTERIM DISCLOSURES
The information as of April 30, 2000, and for the three and six months
ended April 30, 2000 and 1999, is unaudited, but, in the opinion of
management, reflects all adjustments, which are of a normal recurring
nature, necessary for a fair presentation of financial position and results
of operations for the interim periods. The accompanying consolidated
financial statements should be read in conjunction with the consolidated
financial statements and notes thereto contained in the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1999.
The results of operations for the three and six months ended April 30,
2000, are not necessarily indicative of the results to be expected for the
fiscal year ending October 31, 2000.
(d) 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.
10
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION--(CONTINUED)
(e) 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.
(f) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 consolidated
financial statements to conform to the presentation used in the 2000
consolidated financial statements. These reclassifications had no effect
on net earnings or shareholders' equity.
(2) CHANGE IN ACCOUNTING PRINCIPLE
Effective November 1, 1998, the Company changed its accounting method
with respect to earnings realized by its 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 those 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 the
Company's earnings with those of its principal competitors. For further
details, refer to the Company's Annual Report on Form 10-K for the year
ended October 31, 1999.
(3) ACQUISITIONS
During the six months ended April 30, 2000, the Company purchased 4
cemeteries, compared to 68 funeral homes and 17 cemeteries purchased during
the six months ended April 30, 1999.
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.
The following table reflects, on an unaudited pro forma basis, the
combined operations of the Company and the businesses acquired during the
six months ended April 30, 2000, 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.
11
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITIONS--(CONTINUED)
SIX MONTHS ENDED APRIL 30,
--------------------------
2000 1999
------------ ----------
(Unaudited)
Revenues ................................................. $ 382,085 $ 374,661
============ ==========
Operating earnings ....................................... $ 88,388 $ 103,885
============ ==========
Earnings before cumulative effect of change
in accounting principle ................................ $ 38,194 $ 50,788
============ ==========
Net earnings ............................................. $ 38,194 $ 687
============ ==========
Basic earnings per common share: .........................
Earnings before cumulative effect of change
in accounting principle ............................. $ .36 $ .49
============ ==========
Net earnings ........................................... $ .36 $ .01
============ ==========
Diluted earnings per common share:
Earnings before cumulative effect of change
in accounting principle ............................. $ .36 $ .48
============ ==========
Net earnings ........................................... $ .36 $ .01
============ ==========
Weighted average common shares outstanding (in thousands):
Basic .................................................. 106,414 104,687
============ ==========
Diluted ................................................ 106,432 105,286
============ ==========
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
SIX MONTHS ENDED APRIL 30,
--------------------------
2000 1999
------------ ----------
(Unaudited)
Current assets $ - $ 16,627
Receivables due beyond one year - 2
Cemetery property 15,898 59,105
Property and equipment, net - 20,212
Deferred charges and other assets 5,569 745
Intangible assets, net 21,143 81,806
Deferred tax asset 16,489 2,177
Current liabilities - (6,191)
Long-term debt (13,898) (10,449)
Deferred revenue (45,201) (8,369)
Other long-term liabilities - (3,649)
------------ ----------
Cash used for acquisitions $ - $ 152,016
============ ==========
12
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) BENEFIT PLANS
As of April 30, 2000, the Company had options outstanding under the
1995 Incentive Compensation Plan (1995 Plan) and the 1996 Directors' Plan
with respect to 8,615,350 shares. Included in that number are options to
purchase a total of 4,018,168 shares of Class A Common Stock under the 1995
Plan and 72,000 shares of Class A Common Stock under the 1996 Directors'
Plan, all of which were granted since the end of the last fiscal year. All
of the options granted since the end of the last fiscal year under the 1995
Plan vest at the rate of 25 percent per year over four years, have exercise
prices of $5.50 or $6.00 per share and must be exercised by January 21,
2005. All of the options granted under the 1996 Directors' Plan vest
immediately, have an exercise price of $6.00 per share and must be
exercised by January 31, 2005.
The Board of Directors adopted and in April 2000 the shareholders
approved the 2000 Incentive Compensation Plan pursuant to which officers
and other employees of the Company may be granted stock options, restricted
stock or other stock-based awards by the Compensation Committee of the
Board of Directors. As of April 30, 2000, the Company had granted options
to officers and other employees for the purchase of a total of 2,093,732
shares of Class A Common Stock at exercise prices equal to the fair market
value at the grant dates, which were $4.28 and $4.16 per share. The
options generally become exercisable in 25 percent annual increments
beginning on April 12, 2001. The Compensation Committee may accelerate the
exercisability of any option at any time at its discretion, and the options
become immediately exercisable in the event of a change of control of the
Company, as defined in the plan. All of these options expire on April 12,
2005.
The Board of Directors adopted and in April 2000 the shareholders
approved the 2000 Directors' Stock Option Plan pursuant to which each
director of the Company who is not an employee of the Company may be
granted an option to purchase 50,000 shares of the Company's Class A Common
Stock. As of April 30, 2000, the Company had granted a total of 200,000
options at an exercise price equal to the fair market value at the grant
date, which was $4.30 per share. The options generally become exercisable
in 25 percent annual increments beginning on April 13, 2001, except for
options issued since the initial grant date, which options vest in a manner
that will cause all options to be fully exercisable on January 31, 2004.
The Compensation Committee may accelerate the exercisability of any option
at any time at its discretion, and the options become immediately
exercisable in the event of a change of control of the Company, as defined
in the plan. All of these options expire on January 31, 2005.
(5) CONTINGENCIES
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 relation to 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
13
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) CONTINGENCIES--(CONTINUED)
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. On February 25, 2000, the Company and the other
defendants filed motions to dismiss the complaint. The plaintiff filed
briefs in support of their opposition to those motions on April 19, 2000,
and the defendants filed reply briefs on May 26, 2000.
This litigation is in the earliest stages, and its outcome and the 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.
(6) RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards (SFAS) No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting
and reporting standards for derivative instruments. SFAS No. 137,
"Accounting for Derivative Instruments and Hedging Activities - Deferral of
the Effective Date of FASB Statement No. 133," defers the effective date of
SFAS No. 133 to fiscal years beginning after June 15, 2000. SFAS No. 133
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, together with other members of the industry, is currently
discussing directly with the staff of the Securities and Exchange
Commission the application of its recently issued Staff Accounting Bulletin
No. 101 - "Revenue Recognition in Financial Statements." Based on the
currently available information, the Company believes that final resolution
of these discussions may have a material impact on the Company's reported
consolidated earnings and financial condition and on the manner in which
certain preneed sales activities are recorded by the Company and the
industry, although the Company does not believe that the final resolution
will have a material impact on the Company's consolidated cash flows. The
Company has not reached a final resolution of these discussions but
anticipates these discussions to be finalized by the end of its third
fiscal quarter of 2000. The Company is not required to implement the new
accounting guidance until the first fiscal quarter of 2001.
Effective November 1, 1999, the Company implemented Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5),
which requires costs of start-up activities and organization costs to be
expensed as incurred. The implementation of SOP 98-5 did not have a
material impact on the Company's financial condition or results of
operations.
14
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
THREE MONTHS ENDED APRIL 30, 2000 --------- ----------- ---------
---------------------------------
Net earnings .......................................... $ 19,332
=========
Basic earnings per common share:
Net earnings available to common shareholders ....... $ 19,332 106,557 $ .18
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ........... - 39
--------- -----------
Diluted earnings per common share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised ... $ 19,332 106,596 $ .18
========= =========== =========
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
SIX MONTHS ENDED APRIL 30, 2000 --------- ----------- ---------
-------------------------------
Net earnings .......................................... $ 38,173
=========
Basic earnings per common share:
Net earnings available to common shareholders ....... $ 38,173 106,414 $ .36
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ........... - 18
--------- -----------
Diluted earnings per common share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised .. $ 38,173 106,432 $ .36
========= =========== =========
15
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(7) RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA--(CONTINUED)
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
THREE MONTHS ENDED APRIL 30, 1999 --------- ----------- ---------
---------------------------------
Net earnings .......................................... $ 27,108
=========
Basic earnings per common share:
Net earnings available to common shareholders ....... $ 27,108 111,707 $ .24
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ........... - 485
--------- -----------
Diluted earnings per common share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised .. $ 27,108 112,192 $ .24
========= =========== =========
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
SIX MONTHS ENDED APRIL 30, 1999 --------- ----------- ---------
-------------------------------
Earnings before cumulative effect of change in
accounting principle ................................ $ 50,609
=========
Basic earnings per common share:
Earnings available to common shareholders ........... $ 50,609 104,687 $ .48
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ........... - 599
--------- -----------
Diluted earnings per common share:
Earnings available to common shareholders
plus time-vest stock options assumed exercised ... $ 50,609 105,286 $ .48
========= =========== =========
Options to purchase 7,005,126 and 5,528,180 shares of common stock at
prices ranging from $5.50 to $27.25 per share were outstanding during the
three and six months ended April 30, 2000, but were not included in the
computation of diluted earnings per share because the exercise prices of
the options were greater than the average market price of the common
shares. The options, which expire between January 2, 2001 and January 31,
2005, were still outstanding as of April 30, 2000.
Options to purchase 1,602,974 and 1,468,866 shares of common stock at
prices ranging from $17.13 to $27.25 per share were outstanding during the
three and six months ended April 30, 1999, but were not included in the
computation of diluted earnings per share because the exercise prices of
the options were greater than the average market price of the common
shares. The options, which expire between January 2, 2001 and July 31,
2004, were still outstanding as of April 30, 1999.
16
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) SEGMENT DATA
The Company's reportable segment information was as follows:
CONSOLIDATED
FUNERAL CEMETERY TOTALS
----------- ------------ ------------
Revenues from external customers:
Three months ended April 30,
2000 ........................... $ 115,741 73,120 $ 188,861
1999 ........................... $ 113,198 81,099 $ 194,297
Six months ended April 30,
2000 ........................... $ 238,387 143,434 $ 381,821
1999 ........................... $ 219,932 152,537 $ 372,469
Gross profit:
Three months ended April 30,
2000 ........................... $ 30,805 18,979 $ 49,784
1999 ........................... $ 33,084 24,584 $ 57,668
Six months ended April 30,
2000 ........................... $ 65,538 32,954 $ 98,492
1999 ........................... $ 66,560 45,349 $ 111,909
A reconciliation of total segment gross profit to total earnings before
income taxes and cumulative effect of change in accounting principle for
the three and six months ended April 30, 2000 and 1999, is as follows:
THREE MONTHS ENDED SIX MONTHS ENDED
APRIL 30, APRIL 30,
-------------------- --------------------
2000 1999 2000 1999
--------- --------- --------- ---------
Gross profit for reportable segments ............ $ 49,784 $ 57,668 $ 98,492 $ 111,909
Corporate general and administrative expenses ... (4,883) (4,333) (10,143) (8,348)
Interest expense, net ........................... (14,447) (11,688) (29,030) (25,494)
Other income (expense), net ..................... (10) 1,043 796 1,633
--------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principle ......................... $ 30,444 $ 42,690 $ 60,115 $ 79,700
======== ========= ========= =========
17
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Effective November 1, 1998, the Company changed its accounting method
with respect to earnings realized by its 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 those 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 to improve the comparability of the
Company's earnings with those of its principal competitors. For further
details, refer to the Company's Annual Report on Form 10-K for the year
ended October 31, 1999.
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 U.S. and Canadian funds, which
include investments in common stock, the Company seeks an overall annual
rate of return of approximately 8.5 percent to 9.0 percent. In the
past three years, such funds have generated overall annual rates of return
in that range. However, no assurance can be given that the Company will be
successful in achieving any particular rate of return.
For purposes of the following discussion, funeral homes and cemeteries
owned and operated for the entirety of fiscal year 1999 and through the
second quarter of fiscal year 2000 are referred to as "Existing
Operations." Correspondingly, funeral homes and cemeteries acquired or
opened during either fiscal year being compared are referred to as
"Acquired/Opened Operations." Acquired is defined as those purchased,
and opened is defined as those constructed or developed through the
implementation of the alternative services firm concept.
In order to provide more comparable information on a quarterly basis,
during the quarter ended April 30, 2000, the Company changed its
methodology for classifying "Existing Operations." Previously, "Existing
Operations" consisted of funeral homes and cemeteries owned and operated
for the entirety of both periods being compared. Under that methodology,
the group of businesses that constituted "Existing Operations" in the
three-month period was different from the group of businesses that
constituted "Existing Operations" in the six-, nine- or twelve-month
periods. In addition, each quarter in the fiscal year had a different
group of businesses that comprised "Existing Operations." Under the new
methodology, funeral homes and cemeteries will be classified as "Existing
Operations" only if the properties have been owned from the beginning of
the first fiscal year being compared through the end of the most current
fiscal period being compared. As a result, the same group of businesses
will be considered "Existing Operations" in the three-, six-, nine- and
twelve-month periods of both fiscal years, as well as in each quarter of
both fiscal years, thus enhancing consistency and comparability.
18
RESULTS OF OPERATIONS
THREE MONTHS ENDED APRIL 30, 2000 COMPARED TO THREE MONTHS
ENDED APRIL 30, 1999
FUNERAL SEGMENT
THREE MONTHS ENDED
APRIL 30,
------------------ INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(In millions)
FUNERAL REVENUE
---------------
Existing Operations ..................... $ 104.6 $ 109.3 $ (4.7)
Acquired/Opened Operations .............. 11.1 3.9 7.2
-------- -------- ----------
$ 115.7 $ 113.2 $ 2.5
======== ======== ==========
FUNERAL COSTS
-------------
Existing Operations ..................... $ 76.2 $ 76.9 $ (0.7)
Acquired/Opened Operations .............. 8.7 3.2 5.5
-------- -------- ----------
$ 84.9 $ 80.1 $ 4.8
======== ======== ==========
Funeral Segment Profit .................. $ 30.8 $ 33.1 $ (2.3)
======== ======== ==========
Funeral revenue increased $2.5 million, or 2 percent, for the three
months ended April 30, 2000, compared to the corresponding period in 1999,
due to Acquired/Opened Operations. The Company experienced a $4.7 million,
or 4 percent, decrease in revenue from Existing Operations primarily as a
result of a reduction in prearranged funeral merchandise sales, coupled
with a $1.2 million reduction in revenue from changes in foreign currency
exchange rates (principally the Euro). Excluding the foreign currency
effect, service revenue from Existing Operations was essentially flat, with
increases in average revenue and offsetting decreases in funeral volumes.
The average revenue per domestic funeral service performed by Existing
Operations increased 7.5 percent (6.8 percent increase worldwide, excluding
the effect of foreign currency translation), partially offset by a 6.0
percent (1,155 events) decrease in the number of domestic funeral services
performed by Existing Operations (7.2 percent (2,413 events) decrease
worldwide). The increase in average revenue per funeral service was due
primarily to improved merchandising, personalization of services and
product offerings and enhanced funeral arranger training.
The Company anticipated the reduced prearranged funeral merchandise
sales mentioned above as the sales force adapted to adjustments made to the
terms and conditions of preneed contracts. These adjustments, which are
designed to improve cash flow and the quality of receivables, include
increased average finance charges, shortened contract lengths and larger
down payment requirements. The Company is committed to improving its
preneed sales and has developed a new Sales and Marketing Division to
enhance its sales effectiveness and to create consistency in its marketing
programs, sales and training.
Funeral profit margin from Existing Operations decreased from 29.6
percent in 1999 to 27.2 percent in 2000 primarily due to the reduction in
sales of prearranged funeral merchandise as described above.
The increase in revenue and costs from Acquired/Opened Operations
resulted primarily from the Company's acquisition and construction of
funeral homes from May 1999 through April 2000, which are not reflected in
the 1999 period presented above.
Historically, one of the Company's goals has been to achieve 5 percent
to 7 percent increases 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
19
effect of foreign currency translation, which was below this objective.
Because of intense and growing competition from low-cost funeral service
and merchandise providers in certain key markets, the Company lowered
its goals for increases in the average revenue per funeral service
performed to 2 to 3 percent annually. For the three months ended April 30,
2000, the average revenue per funeral service performed by existing funeral
homes increased 7.5 percent domestically and 6.8 percent worldwide,
excluding the effect of foreign currency translation. Although these
results exceeded current expectations, the Company still anticipates
increases in average revenue per funeral service performed of 2 to 3
percent for fiscal year 2000, as it is too soon to determine if these
results are indicative of a trend. See the Company's forward-looking
statements in Part II, Item 5.
CEMETERY SEGMENT
THREE MONTHS ENDED
APRIL 30,
------------------ INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(In millions)
CEMETERY REVENUE
----------------
Existing Operations ..................... $ 65.4 $ 78.7 $ (13.3)
Acquired/Opened Operations .............. 7.7 2.4 5.3
-------- -------- ----------
$ 73.1 $ 81.1 $ (8.0)
======== ======== ==========
CEMETERY COSTS
--------------
Existing Operations ..................... $ 47.7 $ 54.7 $ (7.0)
Acquired/Opened Operations .............. 6.4 1.8 4.6
-------- -------- ----------
$ 54.1 $ 56.5 $ (2.4)
======== ======== ==========
Cemetery Segment Profit ................. $ 19.0 $ 24.6 $ (5.6)
======== ======== ==========
Cemetery revenue decreased $8.0 million, or 10 percent, for the three
months ended April 30, 2000, compared to the corresponding period in 1999.
The Company experienced a $13.3 million, or 17 percent, decrease in revenue
from Existing Operations, resulting primarily from reduced preneed property
and merchandise sales. In addition, there was a $1.2 million, or 12
percent, decrease in revenue from cemetery trust funds and escrow accounts
to $8.7 million. This decrease was due primarily to a decrease in the
average yield on the funds, partially offset by growth in the average
balance in the funds resulting from current year customer payments
deposited into the funds. The yield for the quarter was in line with the
Company's goal of 8.5 percent to 9.0 percent.
The Company anticipated the reduced preneed property and merchandise
sales mentioned above as the sales force adapted to adjustments made to the
terms and conditions of preneed contracts as described above in the
discussion of the funeral segment.
Cemetery profit margin from Existing Operations decreased from 30.5
percent in 1999 to 27.1 percent in 2000. The decline was attributable
principally to the reduced preneed property and merchandise sales mentioned
above, coupled with the high fixed-cost nature of the cemetery business.
The increase in revenue and costs from Acquired/Opened Operations
resulted primarily from the Company's acquisition and construction of
cemeteries from May 1999 through April 2000, which are not reflected in the
1999 period presented above.
OTHER
Corporate general and administrative expenses increased $550,000 to 2.6
percent of revenue in the three months ended April 30, 2000, as compared to
2.2 percent in the same period in 1999. The increase in these expenses is
primarily the result of approximately $500,000 in consulting fees related
to the Company's extensive consumer market research project.
20
Net interest expense increased $2.8 million during the second quarter of
fiscal year 2000 compared to the same period in 1999, as a result of an
increase in outstanding debt resulting from acquisitions that closed in
late April 1999 and an increase in average interest rates from 6.0 percent
in 1999 to 6.3 percent in 2000.
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.
During the second quarter of fiscal year 2000, the Company expensed
approximately $1.0 million of previously capitalized costs, resulting in
other expense of $10,000 as compared to other income of $1.0 million for
the same period in 1999.
SIX MONTHS ENDED APRIL 30, 2000 COMPARED TO SIX MONTHS
ENDED APRIL 30, 1999
FUNERAL SEGMENT
SIX MONTHS ENDED
APRIL 30,
------------------ INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(In millions)
FUNERAL REVENUE
---------------
Existing Operations ...................... $ 216.6 $ 215.0 $ 1.6
Acquired/Opened Operations ............... 21.8 4.9 16.9
-------- -------- ----------
$ 238.4 $ 219.9 $ 18.5
======== ======== ==========
FUNERAL COSTS
Existing Operations ...................... $ 155.7 $ 149.2 $ 6.5
Acquired/Opened Operations ............... 17.1 4.2 12.9
-------- -------- ----------
$ 172.8 $ 153.4 $ 19.4
======== ======== ==========
Funeral Segment Profit ................... $ 65.6 $ 66.5 $ (0.9)
======== ======== ==========
Funeral revenue increased $18.5 million, or 8 percent, for the six
months ended April 30, 2000, compared to the corresponding period in 1999,
primarily due to Acquired/Opened Operations. The Company experienced a
$1.6 million, or 1 percent, increase in revenue from Existing Operations
as a result of several factors. First, the Company experienced a 6.4
percent increase in the average revenue per domestic funeral service
performed by Existing Operations (6.1 percent increase worldwide, excluding
the effect of foreign currency translation). The increase in average
revenue per funeral service was due principally to improved merchandising,
personalization of services and product offerings and enhanced funeral
arranger training. Offsetting this increase was a reduction in prearranged
funeral merchandise sales, a $2.1 million reduction in revenue from changes
in foreign currency exchange rates (principally the Euro) and a 1.3 percent
(484 events) decrease in the number of domestic funeral services performed
by Existing Operations (2.3 percent (1,567 events) decrease worldwide).
During the first six months of 2000, the Company discontinued
offering low-margin, $300 direct cremations that were previously sold by
certain of its West Coast alternative service firms. These sales were
purely price sensitive and generally not profitable. As a result
of the Company's decision to stop selling these lowest-end cremations,
approximately 300 events were forfeited, representing less than $100,000
in revenue, with a minimal effect on gross profit. However, the
forfeiture of these events did affect the calculation of the number of
domestic funeral services performed by Existing Operations. When these
300 events are taken out of the 484-event decrease discussed above,
the number of domestic funeral services performed by Existing Operations
declined less than half a percent from the prior year.
21
The Company anticipated the reduced prearranged funeral merchandise
sales mentioned above as the sales force adapted to adjustments made to the
terms and conditions of preneed contracts as described in the three-month
funeral segment discussion.
Funeral profit margin from Existing Operations decreased from 30.6
percent in 1999 to 28.1 percent in 2000 due primarily to the reduction in
sales of prearranged funeral merchandise as described above.
The increase in revenue and costs from Acquired/Opened Operations
resulted primarily from the Company's acquisition and construction of
funeral homes from May 1999 through April 2000 which are not reflected in
the 1999 period presented above.
Historically, one of the Company's goals has been to achieve 5 percent
to 7 percent increases 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 was below this objective.
Because of intense and growing competition from low-cost funeral service
and merchandise providers in certain key markets, the Company lowered its
goals for increases in the average revenue per funeral service performed to
2 to 3 percent annually. For the six months ended April 30, 2000, the
average revenue per funeral service performed by existing funeral homes
increased 6.4 percent domestically and 6.1 percent worldwide, excluding the
effect of foreign currency translation. Although these results exceeded
current expectations, the Company still anticipates increases in average
revenue per funeral service performed of 2 to 3 percent for fiscal year
2000, as it is too soon to determine if these results are indicative of a
trend. See the Company's forward-looking statements in Part II, Item 5.
CEMETERY SEGMENT
SIX MONTHS ENDED
APRIL 30,
------------------ INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(In millions)
CEMETERY REVENUE
----------------
Existing Operations ..................... $ 128.9 $ 148.2 $ (19.3)
Acquired/Opened Operations .............. 14.5 4.3 10.2
-------- -------- ----------
$ 143.4 $ 152.5 $ (9.1)
======== ======== ==========
CEMETERY COSTS
--------------
Existing Operations .................... $ 98.2 $ 104.1 $ (5.9)
Acquired/Opened Operations ............. 12.3 3.1 9.2
-------- -------- ----------
$ 110.5 $ 107.2 $ 3.3
======== ======== ==========
Cemetery Segment Profit ................ $ 32.9 $ 45.3 $ (12.4)
======== ======== ==========
Cemetery revenue decreased $9.1 million, or 6 percent, for the six
months ended April 30, 2000, compared to the corresponding period in 1999.
The Company experienced a $19.3 million, or 13 percent, decrease in revenue
from Existing Operations resulting primarily from reduced preneed property
and merchandise sales.
The Company anticipated the reduced preneed property and merchandise
sales mentioned above as the sales force adapted to adjustments made to the
terms and conditions of preneed contracts as described in the three-month
funeral segment discussion.
Cemetery profit margin from Existing Operations decreased from 29.8
percent in 1999 to 23.8 percent in 2000. The decline was attributable
principally to the reduced preneed property and merchandise sales mentioned
above, coupled with the high fixed-cost nature of the cemetery business.
22
The increase in revenue and costs from Acquired/Opened Operations
resulted primarily from the Company's acquisition and construction of
cemeteries from May 1999 through April 2000, which are not reflected
in the 1999 period presented above.
OTHER
Corporate general and administrative expenses increased $1.8 million to
2.7 percent of revenue in the six months ended April 30, 2000, as compared
to 2.2 percent in the same period in 1999. The increase in these expenses
is primarily the result of a $1.2 million increase in consulting fees
related to the Company's extensive consumer market research project.
Net interest expense increased $3.5 million during the first six months
of fiscal year 2000 compared to the same period in 1999, as the result of
an increase in outstanding debt resulting from acquisitions that closed in
late April 1999.
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 April 30, 2000, the Company's outstanding borrowings totaled
$963.7 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 6.7 percent.
Other income, net decreased approximately $800,000 during the first six
months of fiscal year 2000 compared to the same period in 1999 due
principally to approximately $1.0 million of previously capitalized costs
that were expensed during the period.
LIQUIDITY AND CAPITAL RESOURCES
Early in fiscal year 2000, the Company's management resolved to improve
cash flow and build cash reserves in order to de-leverage the Company's
balance sheet. The Company has accumulated $100.8 million in cash and
marketable securities as of April 30, 2000, an increase of approximately
$23.4 million from October 31, 1999. In addition, the Company provided
cash of $38.4 million in its operations for the six months ended April 30,
2000, compared to $1.6 million for the corresponding period in 1999, due
principally to a smaller increase in receivables, offset by other working
capital changes.
Long-term debt at April 30, 2000, increased to $963.7 million compared
to $951.4 million at October 31, 1999, as a result of one seller-financed
acquisition which closed in the first quarter of 2000, although it had been
completed in 1999. The Company's long-term debt consisted of $537.0
million under the Company's revolving credit facilities, $393.6 million of
long-term notes and $33.1 million of term notes incurred principally in
connection with the acquisition of funeral home and cemetery properties.
All of the Company's debt is uncollateralized, except for approximately
$15.7 million of term notes incurred principally in connection with
acquisitions.
Principal payments due on the long-term debt during the remainder of
fiscal year 2000 and fiscal year 2001 are $4.9 million and $29.6 million,
respectively. The Company's revolving credit facility matures on April 30,
2002.
The most restrictive of the Company's credit agreements require
it to maintain a debt-to-equity ratio no higher than 1.25 to 1.00. The
Company has managed its capitalization within that limit and had a
ratio of total debt-to-equity of .9 to 1.0 as of April 30, 2000
and October 31, 1999. As of June 8, 2000, the Company had a debt-to-
23
equity ratio of approximately .9 to 1.0 and $375.1 million of additional
borrowing capacity within the 1.25 to 1.0 debt-to-equity parameter, $67.7
million of which was available under its revolving credit facilities.
The Company's ratio of earnings to fixed charges was as follows for the
years and period indicated:
SIX MONTHS
YEARS ENDED OCTOBER 31, ENDED
---------------------------------------------- APRIL 30,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- ----------
2.72(1) 3.98 3.65(2) 2.38(3) 3.43(2) 2.86
- ------------------
(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 which were in effect at that time.
As detailed in Note 3 of the Company's consolidated financial
statements, during the six months ended April 30, 2000, the Company
completed the acquisition of four cemeteries through seller financing at a
net purchase price of $5.3 million.
Historically, the Company's growth has been primarily from acquisitions.
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. As a result, the Company's acquisition activity has ceased, and,
as of June 8, 2000, the Company has no pending acquisitions. The Company's
growth expectations for fiscal year 2000 and beyond include no
acquisitions.
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 $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
with internally generated cash. Additional debt and equity financing may
be required in connection with future growth strategies.
On December 8, 1999, Moody's Investors Service ("Moody's") announced
that it had lowered the Company's credit rating to Ba2 and on
May 17, 2000, announced that it had placed the Company's ratings
under further review for possible downgrade. On February 22, 2000,
Standard & Poor's ("S&P") announced that it had lowered the Company's
24
credit rating to BB+. Previously, the Company's credit ratings from Moody's
and S&P were Baa3 and BBB, respectively. 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, and the downgrades are estimated to have an effect of less
than $1 million on the Company's annual net earnings.
INFLATION
Inflation has not had a significant impact on the Company's operations
over the past three years, nor is it expected to have a significant impact
in the foreseeable future.
OTHER
RECENT ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments. SFAS No. 137, "Accounting for Derivative Instruments and
Hedging Activities - Deferral of the Effective Date of FASB Statement No.
133," defers the effective date of SFAS No. 133 to fiscal years beginning
after June 15, 2000. SFAS No. 133 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, together with other members of the industry, is currently
discussing directly with the staff of the Securities and Exchange
Commission the application of its recently issued Staff Accounting Bulletin
No. 101 - "Revenue Recognition in Financial Statements." Based on the
currently available information, the Company believes that final resolution
of these discussions may have a material impact on the Company's reported
consolidated earnings and financial condition and on the manner in which
certain preneed sales activities are recorded by the Company and the
industry, although the Company does not believe that the final resolution
will have a material impact on the Company's consolidated cash flows. The
Company has not reached a final resolution of these discussions but
anticipates these discussions to be finalized by the end of its third
fiscal quarter of 2000. The Company is not required to implement the new
accounting guidance until the first fiscal quarter of 2001.
Effective November 1, 1999, the Company implemented Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5),
which requires costs of start-up activities and organization costs to be
expensed as incurred. The implementation of SOP 98-5 did not have a
material impact on the Company's financial condition or results of
operations.
25
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented
in Item 7A to the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1999, filed with the Securities and Exchange Commission
on January 27, 2000. The following disclosure discusses only those
instances in which the market risk has changed by more than 10 percent from
the annual disclosure.
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.
FOREIGN CURRENCY
The Company's foreign subsidiaries receive revenues and pay expenses in
a number of foreign currencies. For the six months ended April 30, 2000
and fiscal year ended October 31, 1999, each 10 percent change in the
average exchange rate between such currencies and the U.S. dollar would
result in changes of approximately $2.7 million and $3.1 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 the Company's Annual Report on Form 10-K
for the fiscal year ended October 31, 1999.
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. As of April 30, 2000 and October 31, 1999, the estimated
fair value of the interest rate swap based on quoted market prices was $8.1
million and $6.1 million, respectively. A hypothetical 100 basis point
increase in the average interest rates applicable to such debt would result
in a change of approximately $4.0 million and $4.7 million, respectively,
in the fair value of this instrument.
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.
26
PART II. OTHER INFORMATION
ITEM 1. 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 relation to 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.
On February 25, 2000, the Company and the other defendants filed motions to
dismiss the complaint. The plaintiffs filed briefs in support of their
opposition to those motions on April 19, 2000, and the defendants filed
reply briefs on May 26, 2000.
This litigation is in the earliest stages, and its outcome and the 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.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 2000 annual meeting of shareholders was held on April 12,
2000. All director nominees were elected. The voting tabulation was as
follows: William E. Rowe: 122,320,563 votes for; 1,394,479 votes withheld;
Michael O. Read: 122,179,042 votes for; 1,536,000 votes withheld. The
proposal to approve the adoption of the 2000 Incentive Compensation Plan
was approved. The voting tabulation was as follows: 117,642,425 votes for;
5,446,635 votes against; and 625,982 abstentions. The proposal to approve
the adoption of the 2000 Directors' Stock Option Plan was approved. The
voting tabulation was as follows: 118,359,262 votes for; 4,697,197 votes
against; and 658,583 abstentions. The proposal to ratify the appointment
of PricewaterhouseCoopers LLP, certified public accountants, as independent
auditors for the fiscal year ending October 31, 2000, was approved. The
voting tabulation was as follows: 122,734,084 votes for; 454,914 votes
against; and 526,044 abstentions.
ITEM 5. OTHER INFORMATION
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.
At the end of fiscal year 1999, the Company stated that fiscal year 2000
would 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 stated its
goal 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.
27
Management's 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 April 30, 2000, was 6.5 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.
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,
cremation rates, competition and consumer preferences. Furthermore, the
Company is adapting to pricing pressures from low-cost funeral service 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. Changes in the sales
organization, compensation and sales terms and conditions of the Company's
preneed contracts could affect the Company's ability to achieve its preneed
sales targets.
(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 more than 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.
28
(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 high 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
may 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, also will 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
29
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 market 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.
30
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended and restated as of November 5, 1999,(incorporated by reference
to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1999 (the "1999 10-K"))
3.2 By-laws of the Company, as amended and restated as of January 31, 2000
10.1 Lease Agreement dated February 29, 2000, between Stewart Building
Enterprise, L.L.C. and Stewart Enterprises, Inc.
----------------------
Management Contracts and Compensatory Plans or Arrangements
10.2 Amendment No. 3 to Change of Control Agreement dated September 21,
1999, between the Company and Lawrence B. Hawkins
----------------------
12 Calculation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on March 16, 2000, reporting, under "Item
5. Other Events," the earnings release for the quarter ended January 31,
2000.
31
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEWART ENTERPRISES, INC.
June 13, 2000 /s/ KENNETH C. BUDDE
------------------------
Kenneth C. Budde
Executive Vice President
Chief Financial Officer
June 13, 2000 /s/ MICHAEL G. HYMEL
------------------------
Michael G. Hymel
Vice President
Corporate Controller
Chief Accounting Officer
32