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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 JULY 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM ____ TO ____
--------------------
COMMISSION FILE NUMBER: 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.
of 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
--------------------
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 September 8, 2000, was 103,277,329 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 July 31, 2000 and 1999 ................ 3
Consolidated Statements of Earnings -
Nine Months Ended July 31, 2000 and 1999 ................. 4
Consolidated Balance Sheets -
July 31, 2000 and October 31, 1999 ...................... 5
Consolidated Statement of Shareholders' Equity -
Nine Months Ended July 31, 2000 .......................... 7
Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 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 ................................... 27
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................. 29
Item 5. Other Information .................................. 29
Item 6. Exhibits and Reports on Form 8-K ................... 34
SIGNATURES ................................................. 36
2
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
THREE MONTHS ENDED JULY 31,
---------------------------
2000 1999
------------ -----------
Revenues:
Funeral .............................................. $ 108,448 $ 112,099
Cemetery ............................................. 73,375 81,622
------------ -----------
181,823 193,721
------------ -----------
Costs and expenses:
Funeral .............................................. 81,024 80,668
Cemetery ............................................. 54,864 59,379
------------ -----------
135,888 140,047
------------ -----------
Gross profit ......................................... 45,935 53,674
Corporate general and administrative expenses ........... 4,796 5,012
------------ -----------
Operating earnings ................................... 41,139 48,662
Interest expense, net ................................... (14,410) (13,224)
Other income ............................................ 1,738 1,328
------------ -----------
Earnings before income taxes ......................... 28,467 36,766
Income taxes ............................................ 10,390 13,419
------------ -----------
Net earnings ......................................... $ 18,077 $ 23,347
============ ===========
Net earnings per common share:
Basic ................................................ $ .17 $ .21
============ ===========
Diluted .............................................. $ .17 $ .21
============ ===========
Weighted average common shares outstanding (in thousands):
Basic ................................................ 106,737 111,752
============ ===========
Diluted .............................................. 106,737 112,196
============ ===========
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)
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
------------ ----------
Revenues:
Funeral ................................................ $ 346,835 $ 332,031
Cemetery ............................................... 216,809 234,159
------------ ----------
563,644 566,190
Costs and expenses:
Funeral ................................................ 253,873 234,040
Cemetery ............................................... 165,344 166,567
------------ ----------
419,217 400,607
------------ ----------
Gross profit ........................................... 144,427 165,583
Corporate general and administrative expenses ............. 14,939 13,360
------------ ----------
Operating earnings ..................................... 129,488 152,223
Interest expense, net ..................................... (43,440) (38,718)
Other income, net ......................................... 2,534 2,961
------------ ----------
Earnings before income taxes and cumulative
effect of change in accounting principle ............. 88,582 116,466
Income taxes .............................................. 32,332 42,510
------------ ----------
Earnings before cumulative effect of change in
accounting principle ................................. 56,250 73,956
Cumulative effect of change in accounting principle
(net of $28,798 income tax benefit)(Note 2) .......... - (50,101)
------------ ----------
Net earnings ........................................... $ 56,250 $ 23,855
============ ==========
Basic earnings per common share:
Earnings before cumulative effect of change in
accounting principle ................................. $ .53 $ .69
Cumulative effect of change in accounting principle .... - (.47)
------------ ----------
Net earnings ........................................... $ .53 $ .22
============ ==========
Diluted earnings per common share:
Earnings before cumulative effect of change in
accounting principle ................................. $ .53 $ .69
Cumulative effect of change in accounting principle .... - (.47)
------------ ----------
Net earnings ........................................... $ .53 $ .22
============ ==========
Weighted average common shares outstanding (in thousands):
Basic .................................................. 106,522 107,068
============ ==========
Diluted ................................................ 106,540 107,604
============ ==========
Dividends declared per common share ....................... $ .06 $ .06
============ ==========
See accompanying notes to consolidated financial statements.
4
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 31, OCTOBER 31,
ASSETS 2000 1999
------ ------------ -----------
Current assets:
Cash and cash equivalent investments ............. $ 82,686 $ 30,877
Marketable securities ............................ 8,734 46,549
Receivables, net of allowances ................... 174,436 176,215
Inventories ...................................... 59,204 51,431
Prepaid expenses ................................. 6,358 5,997
------------ -----------
Total current assets ........................... 331,418 311,069
Receivables due beyond one year, net of allowances .. 233,486 237,578
Intangible assets ................................... 673,853 673,361
Deferred charges .................................... 124,238 109,436
Cemetery property, at cost .......................... 440,351 424,032
Property and equipment, at cost:
Land ............................................. 81,081 83,237
Buildings ........................................ 347,470 329,721
Equipment and other .............................. 162,194 158,722
------------ -----------
590,745 571,680
Less accumulated depreciation .................... 140,544 124,635
------------ -----------
Net property and equipment ....................... 450,201 447,045
Long-term investments ............................... 4,144 16,812
Merchandise trust, less estimated cost to deliver ... 71,786 58,999
Other assets ........................................ 5,554 5,548
------------ -----------
$ 2,335,031 $ 2,283,880
============ ===========
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
JULY 31, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
------------------------------------ ------------ -----------
Current liabilities:
Current maturities of long-term debt ............................ $ 31,126 $ 12,582
Accounts payable ................................................ 16,776 21,802
Accrued payroll ................................................. 20,401 21,784
Accrued insurance ............................................... 13,544 11,535
Accrued interest ................................................ 6,932 16,757
Accrued other ................................................... 22,247 26,328
Income taxes payable ............................................ 7,694 5,495
Deferred income taxes ........................................... 15,899 17,193
------------ -----------
Total current liabilities ..................................... 134,619 133,476
Long-term debt, less current maturities ............................ 921,757 938,831
Deferred income taxes .............................................. 60,784 81,434
Deferred revenue ................................................... 124,094 64,961
Other long-term liabilities ........................................ 9,019 8,566
------------ -----------
Total liabilities ............................................. 1,250,273 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
103,277,329 and 102,664,572 shares at July 31, 2000
and October 31, 1999, respectively ......................... 103,277 102,664
Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at July 31, 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 ...................................... 673,658 671,891
Retained earnings ............................................... 396,854 347,002
Cumulative foreign translation adjustment ....................... (83,825) (65,152)
Unrealized depreciation of investments .......................... (8,761) (3,348)
------------ -----------
Total shareholders' equity .................................... 1,084,758 1,056,612
------------ -----------
$ 2,335,031 $ 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 CUMMULATIVE UNREALIZED
---------------------------- 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, 1999........ 106,219 $ 106,219 $ 671,891 $ 347,002 $ (65,152) $ (3,348) $ 1,056,612
Comprehensive income:
Net earnings ................. 56,250 56,250
Other comprehensive income
(loss):
Foreign translation
adjustment ............... (18,673) (18,673)
Unrealized depreciation of
investments .............. (8,524) (8,524)
Deferred income tax benefit
on unrealized depreciation
of investments ........... 3,111 3,111
----------------- --------- ---------- ---------- ----------- ------------ -------------
Total other comprehensive
income (loss) ............ (18,673) (5,413) (24,086)
----------------- --------- ---------- ---------- ----------- ------------ -------------
Total comprehensive income
(loss) .................... 56,250 (18,673) (5,413) 32,164
Issuance of common stock ....... 613 613 1,767 2,380
Dividends ($.06 per share) ..... (6,398) (6,398)
----------------- --------- ---------- ---------- ----------- ------------ -------------
Balance July 31, 2000 .......... 106,832 $ 106,832 $ 673,658 $ 396,854 $ (83,825) $ (8,761) $ 1,084,758
================= ========= ========== ========== =========== ============ =============
- ------------------------
(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)
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
------------ -----------
Cash flows from operating activities:
Net earnings ......................................................... $ 56,250 $ 23,855
Adjustments to reconcile net earnings to net cash provided by (used in)
operating activities:
Depreciation and amortization ...................................... 40,608 37,325
Provision for doubtful accounts .................................... 26,092 20,096
Cumulative effect of change in accounting principle ................ - 50,101
Net gains on sales of marketable securities ........................ (1,079) (5,005)
Benefit for deferred income taxes .................................. (2,386) (8,315)
Changes in assets and liabilities net of effects from acquisitions:
Increase in other receivables ................................... (21,640) (70,714)
Increase in other deferred charges and intangible assets ......... (3,493) (8,270)
Increase in inventories and cemetery property .................... (4,597) (4,648)
Decrease in accounts payable and accrued expenses ................ (11,652) (4,508)
Increase in merchandise trust, less estimated cost
to deliver merchandise ......................................... (20,895) (26,720)
Decrease in other ................................................ (1,965) (6,101)
------------ -----------
Net cash provided by (used in) operating activities .............. 55,243 (2,904)
------------ -----------
Cash flows from investing activities:
Changes in prearranged funeral contracts, net ........................ (3,782) (17,663)
Proceeds from sales of marketable securities ......................... 63,088 16,371
Purchases of marketable securities and long-term investments ......... (13,058) (23,914)
Purchases of subsidiaries, net of cash, seller financing
and stock issued ................................................... - (158,637)
Additions to property and equipment .................................. (31,977) (33,525)
Other ................................................................ 1,679 581
------------ -----------
Net cash provided by (used in) investing activities .............. 15,950 (216,787)
------------ -----------
(continued)
8
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
------------ ------------
Cash flows from financing activities:
Proceeds from long-term debt ............................. $ 8,366 $ 228,465
Repayments of long-term debt ............................. (21,223) (230,696)
Issuance of common stock ................................. 2,380 220,556
Dividends ................................................ (6,398) (6,432)
------------ ------------
Net cash provided by (used in) financing activities .... (16,875) 211,893
------------ ------------
Effect of exchange rates on cash and cash equivalents ....... (2,509) (711)
------------ ------------
Net increase (decrease) in cash ............................. 51,809 (8,509)
Cash and cash equivalents, beginning of period .............. 30,877 30,733
------------ ------------
Cash and cash equivalents, end of period .................... $ 82,686 $ 22,224
=========== ============
Supplemental cash flow information:
Cash paid during the period for:
Income taxes ........................................... $ 21,600 $ 34,700
Interest ............................................... $ 55,900 $ 46,000
Noncash investing and financing activities:
Subsidiaries acquired through seller financing ......... $ 13,900 $ 1,500
Subsidiaries acquired with common stock ................ $ - $ 300
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 July 31, 2000, the Company owned and operated 625 funeral homes
and 163 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 nine months ended July
31, 2000, foreign operations contributed approximately 20 percent of total
revenue and, as of July 31, 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 July 31, 2000, and for the three and nine months
ended July 31, 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 nine months ended July 31,
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 accounting
principles generally accepted in the United States 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 nine months ended July 31, 2000, the Company purchased 4
cemeteries, compared to 78 funeral homes and 17 cemeteries purchased during
the nine months ended July 31, 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
nine months ended July 31, 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)
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
------------ ------------
Revenues ................................................. $ 563,908 $ 569,478
============ ============
Operating earnings ....................................... $ 129,528 $ 152,709
============ ============
Earnings before cumulative effect of change
in accounting principle ................................ $ 56,270 $ 74,231
============ ============
Net earnings $ 56,270 $ 24,130
============ ============
Basic earnings per common share:
Earnings before cumulative effect of change ............
in accounting principle .............................. $ .53 $ .69
============ ============
Net earnings ........................................... $ .53 $ .23
============ ============
Diluted earnings per common share:
Earnings before cumulative effect of change
in accounting principle .............................. $ .53 $ .69
============ ============
Net earnings ........................................... $ .53 $ .22
============ ============
Weighted average common shares outstanding (in thousands):
Basic .................................................. 106,522 107,068
============ ============
Diluted ................................................ 106,540 107,604
============ ============
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
NINE MONTHS ENDED JULY 31,
--------------------------
2000 1999
------------ ------------
Current assets .......................................... $ - $ 21,762
Receivables due beyond one year ......................... - 70
Cemetery property ....................................... 15,898 54,386
Property and equipment, net ............................. - 25,820
Deferred charges and other assets ....................... 5,569 862
Intangible assets, net .................................. 21,143 91,767
Deferred tax asset ...................................... 16,489 2,177
Current liabilities ..................................... - (12,854)
Long-term debt .......................................... (13,898) (12,873)
Deferred revenue ........................................ (45,201) (8,439)
Other long-term liabilities ............................. - (3,741)
------------ ------------
- 158,937
Common stock used for acquisitions ...................... - 300
------------ ------------
Cash used for acquisitions .............................. $ - $ 158,637
============ ============
12
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) BENEFIT PLANS
As of July 31, 2000, the Company had options outstanding under the 1995
Incentive Compensation Plan (1995 Plan) and the 1996 Directors' Plan with
respect to 7,372,714 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 since the end of the last fiscal year
under the 1996 Directors' Plan vested 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 July 31, 2000, the Company had granted options
to officers and other employees for the purchase of a total of 1,996,372
shares of Class A Common Stock at exercise prices equal to the fair market
value at the grant dates, which ranged from $2.22 to $4.41 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 July 31, 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. 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 lead underwriters of the Company's 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
13
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(5) CONTINGENCIES--(CONTINUED)
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.
(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. 138,
"Accounting for Certain Derivative Instruments and Certain Hedging
Activities," amends the accounting and reporting standards of SFAS No. 133
for certain derivative instruments and certain hedging activities, and
shall be adopted concurrently with SFAS No. 133. 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 Nos.
133 and 138 on its consolidated financial condition and results of
operations, and the effect of the pronouncement is not expected to be
material.
The Company and other industry participants continue to discuss directly
with the staff of the Securities and Exchange Commission the application of
its recently issued Staff Accounting Bulletin (SAB) No. 101 - "Revenue
Recognition in Financial Statements" as it relates to prearranged sales
activities. SAB 101, which applies to all companies and was not directed
at the death care industry, emphasizes among other matters the importance
of physical delivery of a product or service to justify the recognition of
revenue. Based on the currently available information, the Company
believes that the implementation of SAB 101 will require a deferral of
previously recorded revenue associated with prearranged sales that will
result in a material, one-time, noncash, cumulative adjustment to earnings,
although amounts deferred will be recognized in future years as the
products and services that have been bought and paid for ultimately are
delivered. Based on the currently available information, the Company
believes that final resolution of these discussions will have a material
impact on the Company's reported consolidated earnings and financial
condition and on the manner in which certain prearranged sales activities
are recorded by the Company and the industry. The Company believes that the
implementation of SAB 101 will not have a material impact on the Company's
consolidated cash flows and, based on what the Company currently knows,
will not cause a violation of any financial covenants in its debt
agreements. The Commission and the industry have not reached a final
resolution of these discussions, but the Company anticipates that they will
be finalized by the end of its fourth fiscal quarter of 2000. The Company
is not required to implement the new accounting guidance until the fourth
fiscal quarter of 2001 but may choose to implement the guidance earlier.
14
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) RECENT ACCOUNTING STANDARDS--(CONTINUED)
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.
(7) RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
THREE MONTHS ENDED JULY 31, 2000
--------------------------------
Net earnings ....................................... $ 18,077
===========
Basic earnings per common share:
Net earnings available to common shareholders .... $ 18,077 106,737 $ .17
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ........ - -
----------- -------------
Diluted earnings per common share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised... $ 18,077 106,737 $ .17
=========== ============= =========
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
NINE MONTHS ENDED JULY 31, 2000
-------------------------------
Net earnings ....................................... $ 56,250
===========
Basic earnings per common share:
Net earnings available to common shareholders .... $ 56,250 106,522 $ .53
=========
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... $ 56,250 106,540 $ .53
=========== ============= =========
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 JULY 31, 1999
--------------------------------
Net earnings .......................................... $ 23,347
===========
Basic earnings per common share:
Net earnings available to common shareholders ....... $ 23,347 111,752 $ .21
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ........... - 444
----------- -------------
Diluted earnings per common share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised... $ 23,347 112,196 $ .21
=========== ============= =========
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
NINE MONTHS ENDED JULY 31, 1999
-------------------------------
Earnings before cumulative effect of change in
accounting principle ................................. $ 73,956
===========
Basic earnings per common share:
Earnings available to common shareholders ............ $ 73,956 107,068 $ .69
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised ............ - 536
----------- -------------
Diluted earnings per common share:
Earnings available to common shareholders
plus time-vest stock options assumed exercised..... $ 73,956 107,604 $ .69
=========== ============= =========
Options to purchase 8,667,587 and 5,820,042 shares of common stock at
prices ranging from $3.78 to $27.25 per share were outstanding during the
three and nine months ended July 31, 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 April
12, 2005, were still outstanding as of July 31, 2000.
Options to purchase 1,738,834 and 1,516,036 shares of common stock at
prices ranging from $16.50 to $27.25 per share were outstanding during the
three and nine months ended July 31, 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 July 31, 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 July 31,
2000 ................................... $ 108,448 73,375 $ 181,823
1999 ................................... $ 112,099 81,622 $ 193,721
Nine months ended July 31,
2000 ................................... $ 346,835 216,809 $ 563,644
1999 ................................... $ 332,031 234,159 $ 566,190
Gross profit:
Three months ended July 31,
2000 ................................... $ 27,424 18,511 $ 45,935
1999 ................................... $ 31,431 22,243 $ 53,674
Nine months ended July 31,
2000 ................................... $ 92,962 51,465 $ 144,427
1999 ................................... $ 97,991 67,592 $ 165,583
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 nine months ended July 31, 2000 and 1999, is as follows:
THREE MONTHS ENDED NINE MONTHS ENDED
JULY 31, JULY 31,
------------------ ------------------
2000 1999 2000 1999
--------- -------- -------- --------
Gross profit for reportable segments .......... $ 45,935 $ 53,674 $144,427 $165,583
Corporate general and administrative expenses... (4,796) (5,012) (14,939) (13,360)
Interest expense, net .......................... (14,410) (13,224) (43,440) (38,718)
Other income, net .............................. 1,738 1,328 2,534 2,961
--------- -------- -------- --------
Earnings before income taxes and
cumulative effect of change in
accounting principle ........................ $ 28,467 $ 36,766 $ 88,582 $116,466
========= ========= ======== ========
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 at the beginning of fiscal year 1999 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 were owned at the beginning of the first
fiscal year 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 JULY 31, 2000 COMPARED TO THREE MONTHS ENDED JULY 31, 1999
FUNERAL SEGMENT
THREE MONTHS ENDED
JULY 31,
------------------ INCREASE
2000 1999 (DECREASE)
--------- ------- ----------
(IN MILLIONS)
FUNERAL REVENUE
---------------
Existing Operations ...................... $ 98.4 $ 103.2 $ (4.8)
Acquired/Opened Operations ............... 10.0 8.9 1.1
--------- ------- ----------
$ 108.4 $ 112.1 $ (3.7)
========= ======= ==========
FUNERAL COSTS
-------------
Existing Operations ..................... $ 72.2 $ 74.4 $ (2.2)
Acquired/Opened Operations .............. 8.8 6.3 2.5
--------- ------- ----------
$ 81.0 $ 80.7 $ 0.3
========= ======= ==========
Funeral Segment Profit .................. $ 27.4 $ 31.4 $ (4.0)
========= ======= ==========
Funeral revenue decreased $3.7 million, or 3 percent, for the three
months ended July 31, 2000, compared to the corresponding period in 1999.
The Company experienced a $4.8 million, or 5 percent, decrease in revenue
from Existing Operations as a result of several factors. First, the
average revenue per domestic funeral service performed by Existing
Operations increased 6.0 percent (7.8 percent increase worldwide, excluding
the effect of foreign currency translation). The increase in average
revenue per funeral service was due in part to improved merchandising,
personalization of services and product offerings and enhanced funeral
arranger training, implemented in response to the findings of the Company's
extensive consumer market study. Offsetting this increase was a 3.9
percent decrease (646 events) in the number of domestic funeral services
performed by Existing Operations (5.9 percent decrease (1,845 events)
worldwide), a $3.7 million reduction in prearranged funeral merchandise
sales and a $1.9 million reduction in revenue from changes in foreign
currency exchange rates (principally the Euro).
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. Further impacting preneed sales is the
uncertainty surrounding operational changes being considered in
conjunction with the implementation of SAB 101 and how those changes may
impact the mix of products and services that the Company sells and
promotes. The Company recently developed a new Sales and Marketing
Division to enhance its sales effectiveness and to create consistency in
its marketing programs, sales and training. The Sales and Marketing
Division is transitioning the sales force to perform under the new terms
and conditions of sales as well as focusing them on the optimal product mix
due to changes anticipated with the implementation of SAB 101.
Funeral profit margin from Existing Operations decreased from 27.9
percent in 1999 to 26.6 percent in 2000 primarily due to the reduction in
sales of prearranged funeral merchandise as described above and, to a
lesser extent, to the effect of changes in foreign currency exchange
rates.
The increase in revenue and costs from Acquired/Opened Operations
resulted primarily from the Company's acquisition and construction of
funeral homes from August 1999 through July 2000, which are not reflected
in the 1999 period presented above.
19
Historically, one of the Company's goals has been to achieve 5 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 three months ended July 31, 2000, the
average revenue per funeral service performed by existing funeral homes
increased 6.0 percent domestically and 7.8 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 going
forward, 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
JULY 31,
------------------ INCREASE
2000 1999 (DECREASE)
--------- ------- ----------
(IN MILLIONS)
CEMETERY REVENUE
----------------
Existing Operations ...................... $ 64.0 $ 75.1 $ (11.1)
Acquired/Opened Operations ............... 9.4 6.5 2.9
--------- ------- ----------
$ 73.4 $ 81.6 $ (8.2)
========= ======= ==========
CEMETERY COSTS
--------------
Existing Operations ...................... $ 48.4 $ 53.8 $ (5.4)
Acquired/Opened Operations ............... 6.5 5.6 0.9
--------- ------- ----------
$ 54.9 $ 59.4 $ (4.5)
========= ======= ==========
Cemetery Segment Profit .................. $ 18.5 $ 22.2 $ (3.7)
========= ======= ==========
Cemetery revenue decreased $8.2 million, or 10 percent, for the three
months ended July 31, 2000, compared to the corresponding period in 1999.
The Company experienced an $11.1 million, or 15 percent, decrease in
revenue from Existing Operations, resulting primarily from reduced preneed
sales. Slightly offsetting this decrease was an approximate $700,000 or 9
percent increase in revenue from cemetery trust funds and escrow accounts
to $8.8 million. This increase was due primarily to an increase in the
average yield on the funds. The yield for the quarter was higher than the
Company's annual goal of 8.5 percent to 9.0 percent; however, the year-to-
date yield was just slightly higher than the Company's goal.
The Company anticipated the reduced preneed sales mentioned above as the
sales force adapted to adjustments made to the terms and conditions of
preneed contracts as described in the discussion of the funeral segment.
Additionally, preneed sales were affected by uncertainty surrounding the
operational changes being considered in conjunction with the implementation
of SAB 101 and how those changes may impact the mix of products and
services that the Company sells and promotes.
Cemetery profit margin from Existing Operations decreased from 28.4
percent in 1999 to 24.4 percent in 2000. The decline was attributable
principally to the reduced preneed 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 from cemeteries not owned for the entirety of both periods being
presented, and the Company's acquisition and construction of cemeteries
from August 1999 through July 2000, which are not reflected in the 1999
period presented above.
20
OTHER
Net interest expense, which is comprised of gross interest expense of
$15.9 million, netted with investment income of $1.5 million, increased
$1.2 million during the third quarter of fiscal year 2000 compared to the
same period in 1999. This is due principally to an increase in average
interest rates from 5.9 percent in 1999 to 6.5 percent in 2000, coupled
with an increase in the average outstanding debt resulting from
acquisitions that closed in late 1999. The increase in gross interest
expense was partially offset by an approximate $800,000 increase in
investment income generated from increased cash and cash equivalents.
Other income increased approximately $400,000 during the third quarter
of fiscal year 2000 compared to the same period in 1999 due principally to
capital gains realized from the liquidation of certain of the Company's
voluntary escrow funds in the third quarter of fiscal year 2000.
NINE MONTHS ENDED JULY 31, 2000 COMPARED TO NINE MONTHS ENDED JULY 31, 1999
FUNERAL SEGMENT
NINE MONTHS ENDED
JULY 31,
----------------- INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(IN MILLIONS)
FUNERAL REVENUE
---------------
Existing Operations ....................... $ 315.0 $ 318.2 $ (3.2)
Acquired/Opened Operations ................ 31.8 13.8 18.0
-------- -------- ---------
$ 346.8 $ 332.0 $ 14.8
======== ======== =========
FUNERAL COSTS
-------------
Existing Operations ....................... $ 228.0 $ 223.6 $ 4.4
Acquired/Opened Operations ................ 25.9 10.4 15.5
-------- -------- ---------
$ 253.9 $ 234.0 $ 19.9
======== ======== =========
Funeral Segment Profit .................... $ 92.9 $ 98.0 $ (5.1)
======== ======== =========
Funeral revenue increased $14.8 million, or 4 percent, for the nine
months ended July 31, 2000, compared to the corresponding period in 1999.
The Company experienced a $3.2 million, or 1 percent, decrease in revenue
from Existing Operations as a result of several factors. First, the
Company experienced a 6.2 percent increase in the average revenue per
domestic funeral service performed by Existing Operations (6.7 percent
increase worldwide, excluding the effect of foreign currency translation).
The increase in average revenue per funeral service was due in part to
improved merchandising, personalization of services and product offerings
and enhanced funeral arranger training, implemented in response to the
findings of the Company's extensive consumer market study. Offsetting this
increase was a $7.0 million reduction in prearranged funeral merchandise
sales, a $4.0 million reduction in revenue from changes in foreign currency
exchange rates (principally the Euro) and a 1.9 percent decrease (1,033
events) in the number of domestic funeral services performed by Existing
Operations (3.4 percent decrease (3,315 events) worldwide).
During the first nine months of 2000, the Company forfeited 600 low-
margin, direct cremation events at several of its West Coast alternative
service firms as the Company was not willing to perform these cremations
for prices being offered by its competitors. These direct cremations were
purely price-sensitive and generally not profitable. As a result, although
approximately 600 events were forfeited, the Company lost less than
$200,000 in revenue, with a minimal effect on gross profit. However, the
forfeiture of these events reduced the number of domestic funeral services
performed by Existing Operations. When these 600 events are taken out of
the 1,033-event decrease discussed above, the number of domestic funeral
services performed by Existing Operations declined less than one 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. Additionally, preneed sales were affected by
uncertainty surrounding operational changes being considered in conjunction
with the implementation of SAB 101 and how those changes may impact the mix
of products and services the Company sells and promotes.
Funeral profit margin from Existing Operations decreased from 29.7
percent in 1999 to 27.6 percent in 2000 due primarily to the reduction in
sales of prearranged funeral merchandise as described above and, to a
lesser extent, to the effect of changes in foreign currency exchange
rates.
The increase in revenue and costs from Acquired/Opened Operations
resulted primarily from funeral homes not owned for the entirety of both
periods being presented, coupled with the Company's acquisition and
construction of funeral homes from August 1999 through July 2000 which are
not reflected in the 1999 period presented above.
Historically, one of the Company's goals has been to achieve 5 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 nine months ended July 31, 2000, the
average revenue per funeral service performed by existing funeral homes
increased 6.2 percent domestically and 6.7 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 going forward, 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
NINE MONTHS ENDED
JULY 31,
----------------- INCREASE
2000 1999 (DECREASE)
-------- -------- ----------
(IN MILLIONS)
CEMETERY REVENUE
----------------
Existing Operations ....................... $ 193.0 $ 223.4 $ (30.4)
Acquired/Opened Operations ................ 23.8 10.8 13.0
-------- ------- ----------
$ 216.8 $ 234.2 $ (17.4)
======== ======= ==========
CEMETERY COSTS
--------------
Existing Operations ....................... $ 146.6 $ 157.9 $ (11.3)
Acquired/Opened Operations ................ 18.7 8.7 10.0
-------- ------- ----------
$ 165.3 $ 166.6 $ (1.3)
======== ======= ==========
Cemetery Segment Profit ................... $ 51.5 $ 67.6 $ (16.1)
======== ======= ==========
Cemetery revenue decreased $17.4 million, or 7 percent, for the nine
months ended July 31, 2000, compared to the corresponding period in 1999.
The Company experienced a $30.4 million, or 14 percent, decrease in revenue
from Existing Operations resulting primarily from reduced preneed sales.
Slightly offsetting this decrease was an approximate $900,000 or 3 percent
increase in revenue from cemetery trust funds and escrow accounts to $25.8
million. This increase was due to an increase in the average balance
coupled with an increase in the average yield on the funds. The yield for
the nine months was slightly higher than the Company's goal of 8.5 percent
to 9.0 percent.
22
The Company anticipated the reduced preneed 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. Additionally, preneed sales were affected by uncertainty
surrounding operational changes being considered in conjunction with the
implementation of SAB 101 and how those changes may impact the mix of
products and services the Company sells and promotes.
Cemetery profit margin from Existing Operations decreased from 29.3
percent in 1999 to 24.0 percent in 2000. The decline was attributable
principally to the reduced preneed 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 cemeteries not owned for the entirety of both
periods being presented, coupled with the Company's acquisition and
construction of cemeteries from August 1999 through July 2000, which are
not reflected in the 1999 period presented above.
OTHER
Corporate general and administrative expenses increased $1.6 million to
2.6 percent of revenue for the nine months ended July 31, 2000, as compared
to 2.3 percent of revenue for the same period in 1999. The increase in
these expenses is primarily the result of a $2.0 million increase in
consulting fees related to the Company's extensive consumer market research
project.
Net interest expense, which is comprised of gross interest expense of
$46.0 million, netted with investment income of $2.6 million, increased
$4.7 million during the first nine months of fiscal year 2000 compared to
the same period in 1999. This increase is due principally to 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.
As of July 31, 2000, the Company's outstanding borrowings totaled $952.9
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 7.0 percent.
Other income, net, decreased approximately $400,000 during the first
nine months of fiscal year 2000 compared to the same period in 1999. This
decrease is principally due to approximately $1.0 million of previously
capitalized costs that were expensed during the second quarter of fiscal
year 2000, offset slightly by capital gains realized from the liquidation
of certain of the Company's voluntary escrow funds in the third quarter of
fiscal year 2000.
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 deleverage the Company's
balance sheet. The Company had accumulated $91.4 million in cash and
marketable securities as of July 31, 2000, an increase of approximately
$14.0 million from October 31, 1999, after reducing debt by $12 million
during the quarter. In addition, the Company's operations provided cash of
$55.2 million for the nine months ended July 31, 2000, compared to using
cash of $2.9 million for the corresponding period in 1999, due principally
to a smaller increase in receivables, coupled with other working capital
changes.
23
The Company has implemented various initiatives to generate cash and
reduce debt. One initiative being considered is the possible sale of
certain foreign operations. The Company has engaged an investment banking
firm to assist in this process and is in discussions with several
interested parties. Also, in addition to the Company's regular
communication with the lead bank in its revolving credit facility, the
Company recently met with all the lenders party to that facility to discuss
plans for deleveraging its balance sheet and to develop a workable plan
well in advance of the April 2002 maturity date of the Company's revolving
credit facility. Any amendments, renegotiations or extensions of existing
agreements are likely to result in higher interest costs to the Company.
Furthermore, the sale of certain foreign assets could result in a material
charge to earnings but would generate significant cash for debt reduction.
Principal payments due on the Company's long-term debt during the
remainder of fiscal year 2000 and fiscal year 2001 are $2.3 million and
$29.6 million, respectively. In addition to the maturity of the revolving
credit facility in fiscal year 2002, the Company also has $28.5 million of
other debt due. In fiscal year 2003, $28.6 million of other debt matures,
and the Company could be required to redeem $200 million of its public debt
(ROARS) if the debt is not remarketed, which will depend primarily upon
prevailing interest rates at that time. The remaining $100 million of the
Company's public debt matures in fiscal year 2004 in addition to $12.7
million in other debt maturities. Maturities after fiscal year 2004 are
$17.3 million.
Long-term debt at July 31, 2000 increased to $952.9 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 fiscal year 2000, although
it had been completed in 1999. This increase was partially offset by a
reduction of debt of $12 million in the third quarter of fiscal year 2000.
The Company's long-term debt consisted of $529.0 million under the
Company's revolving credit facility, $393.4 million of long-term notes and
$30.5 million of term notes incurred principally in connection with the
acquisition of funeral home and cemetery properties. All of the Company's
debt is uncollateralized, except for approximately $14.9 million of term
notes incurred principally in connection with acquisitions.
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 July 31, 2000 and October 31, 1999. As
of September 8, 2000, the Company had a debt-to-equity ratio of
approximately .9 to 1.0 and $403.1 million of additional borrowing capacity
within the 1.25 to 1.00 debt-to-equity parameter, $65.4 million of which
was available under its revolving credit facility.
The Company's ratio of earnings to fixed charges was as follows for the
years and period indicated:
NINE MONTHS
YEARS ENDED OCTOBER 31, ENDED
---------------------------------------------- JULY 31,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -----------
2.72(1) 3.98 3.65(2) 2.38(3) 3.43(2) 2.80
- -----------------------
(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
24
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 nine months ended July 31, 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 September 8, 2000, the Company has no pending acquisitions. The
Company's growth expectations for fiscal year 2000 and beyond include no
acquisitions.
The Company's current strategy is to grow through internal means,
including several initiatives to increase revenues, control costs, and
enhance the effectiveness of its operations. One of these initiatives is
the improved merchandising, personalization of services and product
offerings resulting from the Company's extensive market study of consumer
preferences. Another is the enhanced funeral arranger training resulting
from the creation of its Sales and Marketing Division to strengthen sales
effectiveness and to create consistency in marketing programs, sales and
training.
Additionally, among other initiatives discussed in the Company's Annual
Report on Form 10-K for the year ended October 31, 1999, the Company
continues to construct 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.
During fiscal year 2000, the Company opened three new funeral homes in
an operating partnership with the Los Angeles Archdiocese. The fourth Los
Angeles Archdiocese funeral home is expected to open during the first
fiscal quarter of 2001, and a fifth funeral home is currently under
construction.
Although the Company has no material commitments for fiscal year 2000
capital expenditures (other than approximately $15 million 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.
With potential debt maturities of $557.5 million, $228.6 million and
$112.7 million in fiscal years 2002, 2003 and 2004, respectively,
management of the Company's liquidity and capitalization represents a
significant short- and medium-term priority. The Company believes that its
ability to meet its future capital requirements will depend primarily upon
the successful implementation of its strategies to generate cash from
operations, generate cash from other sources such as the sale of certain
foreign operations, and its ability to refinance its revolving credit
facility and public debt prior to or at their maturities. Any refinancing
is likely to be at interest rates substantially higher than those currently
in effect, although the rate increases may be moderated if the Company is
able to substantially reduce its total debt prior to or in connection with
any refinancing.
25
On December 8, 1999, Moody's Investors Service ("Moody's") announced
that it had lowered the Company's credit rating to Ba2 and on August 3,
2000, announced that it had lowered the Company's credit rating to Ba3. On
February 22, 2000, Standard & Poor's ("S&P") announced that it had lowered
the Company's credit rating to BB+ and on July 12, 2000, announced that it
had lowered the Company's 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 is currently at its
maximum pricing under the existing agreement. 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. 138, "Accounting for Certain Derivative Instruments
and Certain Hedging Activities," amends the accounting and reporting
standards of SFAS No. 133 for certain derivative instruments and certain
hedging activities, and shall be adopted concurrently with SFAS No. 133.
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 Nos. 133 and 138 on its consolidated financial condition and
results of operations, and the effect of the pronouncement is not expected
to be material.
The Company and other industry participants continue to discuss 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" as it relates to prearranged sales
activities. SAB 101, which applies to all companies and was not directed
at the death care industry, emphasizes among other matters the importance
of physical delivery of a product or service to justify the recognition of
revenue. Based on currently available information, the Company believes
that the implementation of SAB 101 will require a deferral of previously
recorded revenue associated with prearranged sales that will result in a
material, one-time, noncash, cumulative adjustment to earnings, although
amounts deferred will be recognized in future years as the products and
services that have been bought and paid for ultimately are delivered.
Based on the currently available information, the Company believes that
final resolution of these discussions will have a material impact on the
Company's reported consolidated earnings and financial condition and on the
manner in which certain prearranged sales activities are recorded by the
Company and the industry. The Company believes that the implementation of
SAB 101 will not have a material impact on the Company's consolidated cash
flows and, based on what the Company currently knows, will not cause a
violation of any financial covenants in its debt agreements. The
Commission and the industry have not reached a final resolution of these
discussions, but the Company anticipates that they will be finalized by the
end of its fourth fiscal quarter of 2000. The Company is not required to
implement the new accounting guidance until the fourth fiscal quarter of
2001 but may choose to implement the guidance earlier.
Effective November 1, 1999, the Company implemented Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities", 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.
26
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 nine months ended July 31, 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.
As of July 31, 2000 and October 31, 1999, 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 $429.7
million and $435.0 million, respectively, compared to fair values of $301.1
million and $372.6 million, respectively. Fair values were determined
using quoted market prices, where applicable, or future cash flows
discounted at market rates for similar types of borrowing arrangements.
Each approximate 10 percent change in the average interest rates applicable
to such debt, 245 basis points and 125 basis points for July 31, 2000 and
October 31, 1999, respectively, would result in changes of approximately
$13.8 million and $12.0 million, respectively, in the fair values of these
instruments. If these instruments are held to maturity, no change in fair
value will be realized.
27
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 $200.0 million. This agreement which became effective March 4,
1999, effectively converted $200.0 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 July 31, 2000 and October 31, 1999, the estimated
fair value of the interest rate swap based on quoted market prices was $6.8
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 $3.3 million and $4.7 million, respectively,
in the fair value of this instrument.
As of July 31, 2000, the carrying value of the Company's borrowings
outstanding under its revolving credit facility, including accrued
interest, was $529.0 million compared to a fair value of $517.5 million.
Fair value was determined using future cash flows discounted at market
rates for similar types of borrowing arrangements. Of the borrowings
outstanding under the revolving credit facility, $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 $1.6 million in the Company's annualized pre-tax earnings.
As of October 31, 1999, the carrying value, including accrued interest, and
fair value of the Company's variable-rate debt was $533.1 million and
$524.9 million, respectively. Each approximate 10 percent, or 75 basis
point, 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 facility with fixed-rate debt or by
entering into interest rate swaps.
28
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 lead underwriters of
the Company's 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 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 driven primarily by internal growth
strategies and a more intense focus on improving the operations and cash
flow of its businesses. In this regard, management's revenue goal for
fiscal year 2000 is in the range of $725 million to $740 million, while its
earnings per share goal is in the range of $.68 to $.72, and with nine
months of actual data, the Company has stated its goal is at the lower end
of that range (absent the effect of SAB 101 and the pending strategies for
deleveraging the Company's balance sheet). Additionally, operating cash
flow for fiscal year 2000 is expected to be in the range of $70 million to
$75 million, while free cash flow, which is defined as operating cash flow
adjusted for changes in prearranged funeral activity and maintenance
capital expenditures, is expected to be approximately $40 million for the
fiscal year. 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 July 31, 2000, was 6.6 percent.
Absent the effect of SAB 101 and the pending strategies for deleveraging
the Company's balance sheet, 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
29
operations is expected to improve as cemetery revenue, which is the
principal driver for increases in installment receivables, is anticipated
to be relatively flat.
The Company has implemented various initiatives to generate cash and
reduce debt. One initiative being considered is the possible sale of
certain foreign operations. Such sales could result in a material charge
to earnings but would generate significant cash for debt reduction. Other
initiatives 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 may experience pricing pressures from low-cost funeral service and
merchandise providers, which could result in reduced volume or could result
in reducing funeral service and merchandise prices in order to recapture
market share where appropriate. See also the discussion of SAB 101 in (14)
below.
(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 thereof 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 numerous factors, including aggressive sales
targets that make it difficult for the Company's more than 2,200
commissioned 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 services 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.
30
(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 death care business is a high fixed-cost business. Positive or
negative changes in revenue can have a disproportionately large effect on
net earnings.
(9) In order to address its long-term debt maturities over the next
three to four years, the Company is considering selling certain foreign
operations. Given the current market environment, no assurance can be
given that foreign assets can be sold, and it is likely that sales of
operations in certain markets will be at prices below the carrying values
of those assets and could result in a material charge to earnings but would
generate significant cash for debt reduction. Sales of certain foreign
operations would result in a material reduction in revenue, and to a lesser
extent, net earnings.
(10) 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.
(11) 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.
(12) 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 operating in foreign markets, or that any
operations in foreign markets will yield results comparable to those
realized through the Company's expansion in the United States.
31
(13) Historically, in order to support its rapid growth, the Company has
periodically accessed capital markets including 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. Additionally, any amendments, renegotiations or
extensions of existing agreements are likely to result in higher interest
costs to the Company.
(14) The Company and other industry participants continue to discuss
directly with the staff of the Securities and Exchange Commission the
application of its recently issued SAB 101 as it relates to prearranged
sales activities. Based on the currently available information, the
Company believes that the implementation of SAB 101 will require a deferral
of previously recorded revenue associated with prearranged sales that will
result in a material, one-time, noncash, cumulative adjustment to
earnings, although the amounts deferred will be recognized in future years
as the products and services that have been bought and paid for ultimately
are delivered. The effect of implementation on future earnings is less
clear, as several material issues are still under discussion with the SEC,
but that effect could also be material. The Company is not required to
implement SAB 101 until the fourth fiscal quarter of 2001 but may choose to
do so earlier.
(15) While the Company does not anticipate that a majority of consumers
will make their preneed or at-need purchasing decisions over the Internet,
no assurance can be given of the impact of technological changes on the
Company's business, nor of the effects of market acceptance of advances in
technology by the Company or its primary competitors.
(16) 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.
32
(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.
(l) The effects and timing of possible asset sales.
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.
33
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 June 23, 2000
-------------------
Management Contracts and Compensatory Plans or Arrangements
10.1 Amendment No. 2 dated July 25, 2000 to Employment Agreement, between
the Company and William E. Rowe
10.2 Amendment No. 2 dated July 25, 2000 to Change of Control Agreement,
between the Company and William E. Rowe
10.3 Amendment No. 2 dated July 25, 2000 to Employment Agreement, between
the Company and Brian J. Marlowe
10.4 Amendment No. 2 dated July 25, 2000 to Change of Control Agreement,
between the Company and Brian J. Marlowe
10.5 Amendment No. 4 dated July 25, 2000 to Employment Agreement, between
the Company and Kenneth C. Budde
10.6 Amendment No. 3 dated July 25, 2000 to Change of Control Agreement,
between the Company and Kenneth C. Budde
10.7 Amendment No. 3 dated July 25, 2000 to Employment Agreement, between
the Company and Ronald H. Patron
10.8 Amendment No. 3 dated July 25, 2000 to Change of Control Agreement,
between the Company and Ronald H. Patron
10.9 Amendment No. 4 dated July 25, 2000 to Employment Agreement, between
the Company and Brent F. Heffron
10.10 Amendment No. 3 dated July 25, 2000 to Change of Control Agreement,
between the Company and Brent F. Heffron
10.11 Employment Agreement dated April 20, 2000, between the Company and
Randall L. Stricklin
10.12 Change of Control Agreement dated April 20, 2000, between the Company
and Randall L. Stricklin
10.13 Indemnity Agreement dated April 20, 2000, between the Company and
Randall L. Stricklin
34
10.14 Employment Agreement dated January 31, 2000, between the Company and
G. Kenneth Stephens, Jr.
10.15 Change of Control Agreement dated January 31, 2000, between the
Company and G. Kenneth Stephens, Jr.
10.16 Indemnity Agreement dated January 31, 2000, between the Company and
G. Kenneth Stephens, Jr.
10.17 Employment Agreement dated January 31, 2000, between the Company and
Everett N. Kendrick
10.18 Change of Control Agreement dated January 31 , 2000, between the
Company and Everett N. Kendrick
10.19 Indemnity Agreement dated January 31, 2000, between the Company and
Everett N. Kendrick
10.20 Amendment No. 4 dated July 25, 2000 to Employment Agreement, between
the Company and Lawrence B. Hawkins
10.21 Amendment No. 4 dated July 25, 2000 to Change of Control Agreement,
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 June 8, 2000, reporting, under "Item 5.
Other Events," the earnings release for the quarter ended April 30,
2000.
35
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.
September 14, 2000 /s/ KENNETH C. BUDDE
------------------------
Kenneth C. Budde
Executive Vice President
Chief Financial Officer
September 14, 2000 /s/ MICHAEL G. HYMEL
------------------------
Michael G. Hymel
Vice President
Corporate Controller
Chief Accounting Officer
36