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, 1996
( )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
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
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 12, 1996 was
39,863,335 and 1,777,510, respectively.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX
Part I. Financial Information Page
Item 1. Financial Statements:
Consolidated Statements of Earnings -
Three Months Ended July 31, 1996 and 1995 3
Consolidated Statements of Earnings -
Nine Months Ended July 31, 1996 and 1995 4
Consolidated Balance Sheets -
July 31, 1996 and October 31, 1995 5
Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 1996 and 1995 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of
Operations 12
Part II. Other Information
Item 1. Legal Proceedings 17
Item 5. Other Information 17
Item 6. Exhibits and Reports on Form 8-K 19
Signatures 20
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Three Months Ended July 31,
____________________________
1996 1995
Revenues:
Funeral . . . . . . . . . . . . . . . . $ 56,971 $ 45,979
Cemetery . . . . . . . . . . . . . . . . 50,813 44,690
Construction and sales contracts . . . . 1,150 855
____________ _____________
108,934 91,524
____________ _____________
Costs and expenses:
Funeral. . . . . . . . . . . . . . . . . 37,908 32,688
Cemetery . . . . . . . . . . . . . . . . 40,294 35,281
Construction and sales contracts . . . . 1,009 851
____________ _____________
79,211 68,820
____________ _____________
29,723 22,704
Corporate general and administrative
expenses. . . . . . . . . . . . . . . . 2,884 2,839
____________ _____________
Operating earnings before performance-based
stock options. . . . . . . . . . . . . 26,839 19,865
Performance-based stock options. . . . . . _ 17,252
____________ _____________
Operating earnings . . . . . . . . . . . 26,839 2,613
Interest expense . . . . . . . . . . . . . (6,558) (5,608)
Investment and other income. . . . . . . . 397 802
____________ _____________
Earnings (loss) before income taxes. . . 20,678 (2,193)
Income taxes . . . . . . . . . . . . . . . 7,754 (810)
____________ _____________
Net earnings (loss). . . . . . . . . . . $ 12,924 $ (1,383)
============ =============
Earnings (loss) per common share . . . . $ .31 $ (.04)
============ =============
Weighted average common shares
outstanding (in thousands). . . . . . . 41,551 38,879
============ =============
Dividends per common share . . . . . . . . $ .02 $ .007
============ =============
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended July 31,
__________________________
1996 1995
_________ __________
Revenues:
Funeral . . . . . . . . . . . . . . . . $ 164,974 $ 137,352
Cemetery . . . . . . . . . . . . . . . . 150,802 132,591
Construction and sales contracts . . . . 4,338 3,448
____________ _____________
320,114 273,391
Costs and expenses:
Funeral. . . . . . . . . . . . . . . . . 111,610 97,885
Cemetery . . . . . . . . . . . . . . . . 116,596 105,659
Construction and sales contracts . . . . 3,863 3,018
____________ _____________
232,069 206,562
____________ _____________
88,045 66,829
Corporate general and administrative
expenses. . . . . . . . . . . . . . . . . 9,149 7,796
____________ _____________
Operating earnings before performance-based
stock options. . . . . . . . . . . . . . 78,896 59,033
Performance-based stock options. . . . . . -- 17,252
____________ _____________
Operating earnings . . . . . . . . . . . 78,896 41,781
Interest expense . . . . . . . . . . . . . (18,580) (17,249)
Investment and other income. . . . . . . . 1,804 1,505
____________ _____________
Earnings before income taxes . . . . . . 62,120 26,037
Income taxes . . . . . . . . . . . . . . . 23,295 9,635
____________ _____________
Net earnings . . . . . . . . . . . . . . $ 38,825 $ 16,402
============ =============
Earnings per common share. . . . . . . . $ .94 $ .47
============ =============
Weighted average common shares
outstanding (in thousands) . . . . . . . 41,315 34,995
============ ============
Dividends per common share . . . . . . . . $ .046 $ .02
============ ============
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
July 31, October 31,
ASSETS 1996 1995
______ _________ ___________
Current assets:
Cash and cash equivalent investments . .$ 17,907 $ 18,226
Marketable securities . . . . . . . . . 2,038 1,346
Receivables, net of allowances . . . . . 95,487 101,331
Inventories. . . . . . . . . . . . . . . 32,707 31,912
Prepaid expenses . . . . . . . . . . . . 3,711 2,980
___________ __________
Total current assets . . . . . . . . . 151,850 155,795
Receivables due beyond one year, net
of allowances . . . . . . . . . . . . . 164,338 129,385
Intangible assets. . . . . . . . . . . . . 247,768 220,108
Deferred charges . . . . . . . . . . . . . 68,013 65,332
Cemetery property, at cost . . . . . . . . 282,405 248,930
Property and equipment, at cost:
Land . . . . . . . . . . . . . . . . . . 46,441 36,654
Buildings. . . . . . . . . . . . . . . . 169,545 142,767
Equipment and other. . . . . . . . . . . 76,004 68,115
___________ __________
291,990 247,536
Less accumulated depreciation. . . . . . 63,351 54,543
___________ __________
Net property and equipment . . . . . . . 228,639 192,993
Long-term investments. . . . . . . . . . . 42,424 40,191
Other assets . . . . . . . . . . . . . . . 3,148 3,379
___________ ___________
$ 1,188,585 $1,056,113
=========== ===========
(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 1996 1995
_____________________________________ ___________ ____________
Current liabilities:
Current maturities of long-term debt . . $4,693 $5,016
Accounts payable . . . . . . . . . . . . 9,528 16,659
Accrued payroll. . . . . . . . . . . . . 8,645 10,618
Accrued insurance. . . . . . . . . . . . 7,577 5,980
Accrued interest . . . . . . . . . . . . 2,252 4,215
Accrued other. . . . . . . . . . . . . . 14,726 13,444
Estimated costs to complete mausoleums
and lawn crypts, and to deliver
merchandise . . . . . . . . . . . . . 4,694 6,494
Construction and sales contract
liabilities . . . . . . . . . . . . . 849 1,552
Income taxes payable . . . . . . . . . . 7,963 4,015
Deferred income taxes. . . . . . . . . . 4,768 4,458
___________ __________
Total current liabilities. . . . . . . 65,695 72,451
Long-term debt, less current maturities. . 395,302 317,451
Estimated costs to deliver merchandise,
less current portion . . . . . . . . . . 7,641 8,188
Deferred income taxes. . . . . . . . . . . 58,711 51,524
Deferred revenue . . . . . . . . . . . . . 129,150 122,521
___________ __________
Total liabilities. . . . . . . . . . . 656,499 572,135
___________ __________
Commitments and contingencies (Notes 3 and 6)
Preferred stock, $1.00 par value, 5,000,000
shares authorized; no shares issued. . . . -- --
Shareholders equity:
Common stock, $1.00 stated value:
Class A authorized 150,000,000 shares;
issued and outstanding 39,830,323 and
39,235,639 shares at July 31, 1996
and October 31, 1995, respectively . . . 39,830 39,236
Class B authorized 5,000,000 shares;
issued and outstanding 1,777,510 shares
at July 31, 1996 and October 31, 1995;
10 votes per share; convertible into
Class A . . . . . . . . . . . . . . . 1,778 1,778
Additional paid-in capital . . . . . . . 305,095 291,946
Retained earnings. . . . . . . . . . . . 203,678 166,785
Cumulative foreign translation adjustment (19,449) (19,123)
Unrealized appreciation of investments . 1,154 3,356
__________ __________
Total shareholders equity . . . . . . 532,086 483,978
__________ __________
$1,188,585 $1,056,113
========== ==========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended July 31,
1996 1995
__________ ___________
Cash flows from operating activities:
Net earnings . . . . . . . . . . . . . . $ 38,825 $ 16,402
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization. . . . . 15,865 11,470
Performance-based stock options. . . . -- 17,252
Provision for doubtful accounts. . . . 12,314 11,639
Gain on sales of marketable securities (1,438) --
Benefit for deferred income taxes. . . (728) (3,430)
Changes in assets and liabilities net
of effects from acquisitions:
Increase in prearranged funeral
trust receivables. . . . . . . . . (13,619) (9,333)
Increase in other receivables. . . . (24,193) (48,576)
Increase in prepaid expenses . . . . (501) (141)
Increase in deferred charges . . . . (4,326) (11,298)
Increase in inventories and cemetery
property. . . . . . . . . . . . . (5,418) (2,959)
Decrease in accounts payable and
accrued expenses. . . . . . . . . (6,257) (6,242)
Decrease in estimated costs to
complete mausoleums and lawn crypts,
and to deliver merchandise. . . . (5,214) (931)
Increase in deferred revenue . . . . 5,912 14,222
Decrease in other. . . . . . . . . . (550) (236)
____________ _____________
Net cash provided by (used in) operating
activities. . . . . . . . . . . . . . 10,672 (12,161)
____________ _____________
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)
Nine Months Ended July 31,
1996 1995
__________ __________
Cash flows from investing activities:
Proceeds from sale of marketable
securities . . . . . . . . . . . . . . $ 5,756 $ 7,039
Purchases of marketable securities and
long-term investments. . . . . . . . . (9,242) (7,511)
Purchases of subsidiaries, net of cash,
seller financing and stock issued . . (52,958) (84,389)
Additions to property and equipment. . . (23,099) (15,400)
Dispositions of property and equipment . 627 388
Additions to cemetery property . . . . . -- (355)
___________ ____________
Net cash used in investing activities. (78,916) (100,228)
___________ ____________
Cash flows from financing activities:
Proceeds from long-term debt . . . . . . 82,194 170,486
Repayments of long-term debt . . . . . . (14,032) (160,985)
Issuance of common stock . . . . . . . . 2,107 104,647
Dividends. . . . . . . . . . . . . . . . (1,932) (702)
___________ ____________
Net cash provided by financing
activities . . . . . . . . . . . . . 68,337 113,446
___________ ____________
Effect of exchange rates on cash and cash
equivalents. . . . . . . . . . . . . . . (412) (1,309)
___________ ____________
Net decrease in cash . . . . . . . . . . . (319) (252)
Cash and cash equivalents, beginning of period 18,226 9,214
___________ ____________
Cash and cash equivalents, end of period . $ 17,907 $ 8,962
=========== ============
Supplemental cash flow information:
Cash paid during the period for:
Income taxes . . . . . . . . . . . . . $ 16,600 $ 15,800
Interest . . . . . . . . . . . . . . . $ 18,600 $ 17,200
Noncash investing and financing activity:
Subsidiaries acquired with common stock $ 11,636 $ 3,014
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(1) Basis of Presentation
(a) Principles of Consolidation
The accompanying consolidated financial statements include
Stewart Enterprises, Inc. and its subsidiaries (the "Company").
All significant intercompany balances and transactions have been
eliminated.
(b) Interim Disclosures
The information as of July 31, 1996 and for the three and
nine months ended July 31, 1996 and 1995 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, 1995.
The results of operations for the three and nine months ended
July 31, 1996 are not necessarily indicative of the results to be
expected for the fiscal year ending October 31, 1996.
(2) Acquisition of Subsidiaries
During the nine months ended July 31, 1996, the Company
purchased 37 funeral homes and nine cemeteries, compared to 38
funeral homes and 11 cemeteries purchased during the nine months
ended July 31, 1995.
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, 1996, 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.
STEWART ENTERPRISES, INC.
AND SUSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) Acquisition of Subsidiaries--(continued)
Nine Months Ended July 31,
__________________________
1996 1995
_____ _____
(Unaudited)
Revenues . . . . . . . . . . . . . . . . $ 328,878 $ 292,000
========== ==========
Net earnings . . . . . . . . . . . . . . $ 38,432 $ 15,385
========== ==========
Earnings per common share. . . . . . . . $ .93 $ .43
========== ==========
Weighted average common shares
outstanding (in thousands) . . . . . . 41,532 35,443
========== ==========
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
Nine Months Ended July 31,
__________________________
1996 1995
________ ________
Current assets . . . . . . . . . . . . . $ 7,438 $ 4,019
Receivables due beyond one year. . . . . 407 560
Cemetery property. . . . . . . . . . . . 24,540 49,890
Property and equipment . . . . . . . . . 22,812 37,650
Deferred charges and other assets. . . . 963 918
Intangible assets. . . . . . . . . . . . 32,867 44,665
Current liabilities. . . . . . . . . . . (4,849) (18,182)
Long-term debt . . . . . . . . . . . . . (8,593) (1,442)
Deferred income taxes. . . . . . . . . . (8,943) (7,967)
Deferred revenue and other liabilities . (2,048) (22,708)
___________ ___________
64,594 87,403
Common stock used for acquisitions . . . 11,636 3,014
___________ ___________
Cash used for acquisitions . . . . . . . $ 52,958 $ 84,389
=========== ===========
(3) Contingencies
In December 1991, the United States Department of Justice
("Justice Department"), on behalf of the Federal Trade Commission
("FTC"), filed a complaint against five of the Company's Texas
funeral home subsidiaries. The FTC originally sought unspecified
civil penalties and injunctive and other relief from each of the
five subsidiaries. In July 1993, the Justice Department filed a
motion requesting civil penalties of $2 million. In August 1994,
the United States District Court for the Northern District of
Texas dismissed the complaint with regard to all alleged
violations by the funeral home subsidiaries; however, on May 2,
1995, the Fifth Circuit Court of Appeals reversed the District
Court's dismissal. The case was returned to the District Court
and a trial date was set for September 3, 1996. On September 5,
1996, the parties announced to the court an agreement in
principle to settle the case, which agreement is subject to FTC
approval. The court has ordered the parties to submit the final
judgment or dismissal on or before September 23, 1996. Pending
final approval, the terms of the proposed settlement are
confidential.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(3) Contingencies--(continued)
The Company was notified in September 1994 that a suit was
brought by a competitor regarding the Company's acquisition of
certain corporations in Mexico. The suit alleges that this
acquisition violated the competitor's previous option to acquire
the same corporations. The suit seeks unspecified damages. The
Company believes that the suit is without merit and intends to
defend it vigorously. The Company believes it is entitled to
indemnification from the previous owners of these corporations
should an unfavorable outcome result.
Management does not believe these matters will have a
material adverse effect on the financial position, results of
operations or cash flows of the Company.
(4) Recent Accounting Standards
Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties," is required to be
implemented in the Company's annual financial statements for the
fiscal year ending October 31, 1996. Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and SFAS No. 123, "Accounting for Stock Based Compensation," are
required to be implemented during the Company's fiscal year
ending October 31, 1997. The effect of these pronouncements on
the Company's consolidated financial condition and results of
operations is not expected to be material.
(5) Stock Split
On May 17, 1996, the Board of Directors of the Company
declared a three-for-two split of the Company's Class A and Class
B Common Stock. The split was accomplished by way of a dividend
paid on June 21, 1996 to shareholders of record on May 28, 1996.
The Board also confirmed its intention to maintain the quarterly
cash dividend of $.02 per share on the increased number of shares
outstanding. All share and per share information in the
accompanying consolidated financial statements reflect the stock
split.
(6) Subsequent Events
Subsequent to July 31, 1996, the Company has acquired or
committed to acquire 96 funeral homes and seven cemeteries for
approximately $107,891.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Introduction
For purposes of the following discussion, funeral homes and
cemeteries owned and operated for the entirety of each period
being compared are referred to as "Existing Operations."
Correspondingly, funeral homes and cemeteries acquired or funeral
homes opened during either period being compared are referred to
as "Acquired Operations."
Results of Operations
Three Months Ended July 31, 1996 Compared to Three Months
Ended July 31, 1995
Funeral Segment Three Months Ended
July 31,
___________________ Increase
1996 1995 (Decrease)
______ ________ __________
(In millions)
Funeral Revenue
Existing Operations. . . . . . . . . . . $ 41.1 $ 39.6 $1.5
Acquired Operations. . . . . . . . . . . 8.8 .3 8.5
Revenue from prearranged funeral trust
funds and escrow accounts . . . . . . 7.1 6.1 1.0
________ _______ _______
$ 57.0 $ 46.0 $11.0
======== ======= =======
Funeral Costs
Existing Operations. . . . . . . . . . . $ 31.2 $ 32.4 $(1.2)
Acquired Operations. . . . . . . . . . . 6.7 .3 6.4
________ _______ _______
$ 37.9 $ 32.7 $ 5.2
======== ======= =======
Funeral Segment Profit . . . . . . . . . $ 19.1 $ 13.3 $ 5.8
======== ======= =======
Funeral revenue increased $11.0 million, or 24%, for the
three-month period ended July 31, 1996, compared to the same
period in 1995. The Company experienced a $1.5 million increase
in revenue from Existing Operations as a result of a 13% increase
in the average revenue per funeral service performed, due
principally to price increases and improved merchandising.
Partially offsetting this increase in revenue were a decline in
sales of certain prearranged funeral merchandise from the third
quarter of fiscal 1995 to the third quarter of fiscal 1996, and a
$.9 million decline in funeral revenue from the Company's Mexican
operations due to a 19% devaluation of the peso from the third
quarter of fiscal 1995 to the comparable period in fiscal 1996.
Additionally, there was a 5.5% domestic decrease (6.6% total) in
the number of funeral services performed by Existing Operations.
The Company believes that the decline in the number of funeral
services performed is attributable to a decline in the number of
deaths in certain of the Company's markets and increased
competition from low-cost funeral service providers in certain
markets. The Company does not expect this decline to continue
over the long term.
The $1.2 million, or 4%, decrease in funeral costs for
Existing Operations resulted principally from the implementation
of certain cost control measures, including contract negotiations
with certain vendors, a $.6 million decrease in costs
attributable to the Company's Mexican operations due to the
devaluation of the Mexican peso noted above, and the decline in
funeral services discussed above.
The increase in revenue and costs from Acquired Operations
resulted primarily from the Company's acquisition or construction
of funeral homes from August 1995 through July 1996 which are not
reflected in the 1995 period presented above.
The $1.0 million increase in revenue from prearranged funeral
trust funds and escrow accounts was attributable to a 25% growth
in the average balance in such trust funds and escrow accounts,
resulting primarily from current year customer payments deposited
into the funds, funds added through acquisitions, and an increase
in the return on the Company's domestic funds, which return is
still within the Company's goal of 8.5-9.0%. The return on the
peso-denominated investments of the Mexican subsidiaries, which
comprise 11% of the Company's total funeral trust portfolio,
averaged 21% on an annualized basis for the quarter, and
partially offsets the 19% devaluation discussed above and 20%
annualized inflation experienced in Mexico during the quarter.
Cemetery Segment
Three Months Ended
July 31,
___________________
1996 1995 Increase
________ _________ ________
Cemetery Revenue (In millions)
Existing Operations. . . . . . . . . . . $ 45.4 $ 43.1 $ 2.3
Acquired Operations. . . . . . . . . . . 3.8 .2 3.6
Revenue from merchandise trust funds and
escrow accounts . . . . . . . . . . . . 1.6 1.4 .2
________ ________ __________
$ 50.8 $ 44.7 $ 6.1
======== ======== ==========
Cemetery Costs
Existing Operations. . . . . . . . . . . $ 37.2 $ 35.1 $ 2.1
Acquired Operations. . . . . . . . . . . 3.1 .2 2.9
_______ ________ _______
$ 40.3 $ 35.3 $ 5.0
======= ======== =======
Cemetery Segment Profit. . . . . . . . . $ 10.5 $ 9.4 $ 1.1
======= ======== =======
Cemetery revenue increased $6.1 million, or 14%, for the
three-month period ended July 31, 1996, compared to the same
period in 1995, due principally to revenue from Acquired
Operations. The increase in revenue and costs from Acquired
Operations resulted primarily from the Company's acquisition of
cemeteries from August 1995 through July 1996 which are not
reflected in the 1995 period presented above.
Other
During the quarter ended July 31, 1995, the Company
determined that achievement of the objectives of its performance-
based stock option plan had become probable. In connection with
this determination, the Company recorded a non-cash charge of
$17.3 million, or $10.9 million after-tax, in July 1995.
Additionally, the Company accelerated the exercisability of the
options, allowing it to record the charge in a single accounting
period.
Interest expense increased $1.0 million during the third
quarter of fiscal 1996 when compared to the same period in 1995.
The increase in interest expense resulted from an increase in
average borrowings, offset by a decrease in average interest
rates from 7.6% to 6.4%. Approximately $258.6 million of the
outstanding borrowings at July 31, 1996 was subject to short-term
variable interest rates averaging approximately 6.0%.
Nine Months Ended July 31, 1996 Compared to Nine Months Ended July 31, 1995
Funeral Segment
Nine Months Ended
July 31,
______________________ Increase
1996 1995 (Decrease)
_________ _________ __________
(In millions)
Funeral Revenue
_________________
Existing Operations. . . . . . . . . . . $108.8 $110.2 $ (1.4)
Acquired Operations. . . . . . . . . . . 35.1 12.1 23.0
Revenue from prearranged funeral trust
funds and escrow accounts . . . . . . 21.1 15.1 6.0
_________ _________ ____________
$165.0 $137.4 $ 27.6
========= ========= ============
Funeral Costs
Existing Operations. . . . . . . . . . . $84.5 $ 88.6 $ (4.1)
Acquired Operations. . . . . . . . . . . 27.1 9.3 17.8
_________ __________ ____________
$111.6 $ 97.9 $ 13.7
========= ========== ============
Funeral Segment Profit . . . . . . . . . $ 53.4 $ 39.5 $ 13.9
========= ========== ============
Funeral revenue increased $27.6 million, or 20%, for the
nine-month period ended July 31, 1996, compared to the same
period in 1995. The Company experienced a $1.4 million decrease
in revenue from Existing Operations as a result of sales of
certain prearranged funeral merchandise being down from the first
nine months of fiscal 1995 to the first nine months of fiscal
1996, and a $4.0 million decline in funeral revenue from the
Company's Mexican operations due to a 28% devaluation of the
Mexican peso from the first nine months of 1995 to the comparable
period in 1996. Additionally, there was a 5.6% domestic decrease
(6.7% total) in the number of funeral services performed by
Existing Operations. The decline in revenue was offset partially
by an 8% increase in the average revenue per funeral service
performed due principally to price increases and improved
merchandising. The Company believes that the decline in the
number of funeral services performed is attributable to a decline
in the number of deaths in certain of the Company's markets and
increased competition from low-cost funeral service providers in
certain markets. The Company does not expect this decline to
continue over the long term.
The $4.1 million, or 5%, decrease in funeral costs for
Existing Operations resulted principally from the implementation
of certain cost control measures, including contract negotiations
with certain vendors, a $2.5 million decrease in costs
attributable to the Company's Mexican operations due to the
devaluation of the Mexican peso noted above and the decline in
funeral services noted above.
The increase in revenue from Acquired Operations resulted
primarily from the Company's acquisition or construction of
funeral homes from August 1995 through July 1996 which are not
reflected in the 1995 period presented above.
The $6.0 million increase in revenue from prearranged funeral
trust fund and escrow accounts was attributable to a 24% growth
in the average balance in such trust funds and escrow accounts,
resulting primarily from current year customer payments deposited
into the funds, funds added through acquisitions, and an increase
in the return on the Company's domestic funds, which return is
still within the Company's goal of 8.5-9.0%. The return on the
peso-denominated investments of the Mexican subsidiaries, which
comprise 11% of the Company's total funeral trust portfolio,
averaged 23% on an annualized basis for the nine months. The
return on the Mexican funds partially offsets the 28% devaluation
discussed above and 32% annualized inflation experienced in
Mexico during the nine-month period.
Cemetery Segment
Nine Months Ended
July 31,
___________________
1996 1995 Increase
__________ ________ __________
Cemetery Revenue (In millions)
Existing Operations. . . . . . . . . . . $130.9 $126.0 $ 4.9
Acquired Operations. . . . . . . . . . . 13.5 3.1 10.4
Revenue from merchandise trust funds and
escrow accounts . . . . . . . . . . . . 6.4 3.5 2.9
__________ __________ _________
$150.8 $132.6 $18.2
========== ========== =========
Cemetery Costs
Existing Operations. . . . . . . . . . . $105.3 $102.9 $ 2.4
Acquired Operations. . . . . . . . . . . 11.3 2.8 8.5
__________ __________ __________
$116.6 $105.7 $10.9
========== ========== ==========
Cemetery Segment Profit. . . . . . . . . $ 34.2 $ 26.9 $ 7.3
========== ========== ==========
Cemetery revenue increased $18.2 million, or 14%, for the
nine-month period ended July 31, 1996, compared to the same
period in 1995, due principally to revenue from Acquired
Operations. The increase in revenue and costs from Acquired
Operations resulted primarily from the Company's acquisition of
cemeteries from August 1995 through July 1996 which are not
reflected in the 1995 period presented above. The improved
profit margins achieved by Existing Operations were attributable
to certain cost control measures implemented by the Company,
including vendor contract negotiations.
The $2.9 million increase in revenue from merchandise trust
funds and escrow accounts was attributable to a 34% growth in the
average balance in the merchandise trust funds and escrow
accounts, resulting from current year customer payments deposited
into the funds, along with funds added through acquisitions, and
an increase in the return on the trust funds, which return is
still within the Company's goal of 8.5-9.0%.
Other
During the quarter ended July 31, 1995, the Company
determined that achievement of the objectives of its performance-
based stock option plan had become probable. In connection with
this determination, the Company recorded a non-cash charge of
$17.3 million, or $10.9 million after-tax, in July 1995.
Additionally, the Company accelerated the exercisability of the
options, allowing it to record the charge in a single accounting
period.
Interest expense increased $1.3 million during the first nine
months of fiscal 1996 when compared to the same period in 1995.
The increase in interest expense resulted from an increase in
average borrowings, offset by a decrease in average interest
rates from 7.1% to 6.7%. Approximately $258.6 million of the
outstanding borrowings at July 31, 1996 was subject to short-term
variable interest rates averaging approximately 6.0%.
Liquidity and Capital Resources
Cash and marketable securities of the Company were $17.9
million at July 31, 1996, a decrease of approximately $.3 million
from October 31, 1995. The Company provided cash of $10.7
million in its operations for the nine months ended July 31,
1996, compared to using cash of $12.2 million for the
corresponding period in 1995 due principally to an increase in
net earnings and collection of accounts receivable offset by
other working capital changes.
In December 1995, the Company entered into an Amended and
Restated Loan Agreement with a group of banks that increased the
aggregate amount available from $250 million to $350 million.
The number of participating banks increased from six to eight,
and the maturity date was extended to October 31, 2000. Interest
is payable at a lending banks's prime rate or certain optional
rates at the Company's election. Additionally, the Company has
available with a separate financial institution an
uncollateralized revolving line of credit under which the
borrowings are limited to $10 million and interest is payable on
terms similar to those mentioned above.
Long-term debt at July 31, 1996 amounted to $400.0 million,
compared to $322.5 million at October 31,1995. The Company's
long-term debt consisted of $258.6 million under the Company's
bank facilities, $125.0 million of senior long-term notes and
$16.4 million of term notes incurred principally in connection
with the acquisition of funeral home and cemetery properties.
The Company's objective is to maintain a debt to equity ratio no
higher than 1.25 to 1.0. As of July 31, 1996, the Company had
$265 million of additional borrowing capacity within this
parameter, of which $99.9 million was available under its bank
facilities. All of the Company's debt is uncollateralized,
except for $2.7 million of term notes incurred principally in
connection with acquisitions.
During the nine months ended July 31, 1996, the Company
completed acquisitions of 37 funeral homes and nine cemeteries
for purchase prices aggregating approximately $74.8 million,
including the issuance of 447,800 shares of Class A Common Stock
and $6.1 million of seller-financed acquisition indebtedness.
The cash portion of the purchase price of these acquisitions was
funded with advances under the Company's revolving credit
facility. Since July 31, 1996, the Company has acquired or
committed to acquire 96 funeral homes and seven cemeteries for
approximately $107.9 million, including the acquisition of 77
funeral homes and five cemeteries from Urgel Bourgie in Canada.
Although the Company has no material commitments for capital
expenditures, the Company contemplates capital expenditures,
excluding acquisitions, of approximately $27.0 million for the
fiscal year ending October 31, 1996, which amount includes $12.9
million for the construction of new funeral homes and
refurbishing of funeral homes recently acquired. Management
expects that future capital requirements will be satisfied
through a combination of internally generated cash flow and
amounts available under its revolving credit agreements.
Additional debt and equity financing may be required in
connection with future acquisitions.
Other
The exchange rate fluctuation in Mexico may cause a reduction
in the U.S. dollar value of future earnings from the Mexican
operations, but this reduction is not expected to have a material
effect on the Company, based on the size of the Mexican
operations relative to the consolidated totals and management's
expectations that these operations will continue to be additive
to earnings per share. In conjunction with the devaluation of
the Mexican peso, the U.S. dollar value of the Company's Mexican
funeral trust funds has declined, but the Company's funeral trust
earnings from these funds have not been adversely affected due to
substantially higher interest rates than originally anticipated.
Statement of Position 94-6, "Disclosure of Certain
Significant Risks and Uncertainties," is required to be
implemented in the Company's annual financial statements for the
fiscal year ending October 31, 1996. Statement of Financial
Accounting Standards No. 121, "Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to Be Disposed Of"
and SFAS No. 123, "Accounting for Stock Based Compensation," are
required to be implemented during the Company's fiscal year ending
October 31, 1997. The effect of these pronouncements on the
Company's consolidated financial condition and results of
operations is not expected to be material.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
United States of America v. Restland Funeral Home, Inc.,
Laurel Land Funeral Home, Inc., Singing Hills Funeral Home, Inc.,
Bluebonnet Hills Funeral Home, Inc., and Laurel Land Funeral Home
of Fort Worth, Inc., United States District Court for the
Northern District of Texas. On December 3, 1991, the United
States Department of Justice (the "Justice Department"), on
behalf of the Federal Trade Commission (the "FTC"), filed a
complaint against five of the Company's Texas funeral home
subsidiaries. The complaint alleged that the funeral home
subsidiaries had violated certain requirements of the Funeral
Rule concerning funeral industry practices, including the
disclosure of price information and the delivery of itemized
written statements for funeral goods and services selected. The
FTC originally sought unspecified civil penalties and injunctive
and other relief from each of the funeral home subsidiaries. In
July 1993, the Justice Department filed a motion requesting civil
penalties of $2 million. In August 1994, the District Court
dismissed the complaint with regard to all alleged violations by
the funeral home subsidiaries; however, on May 2, 1995, the Fifth
Circuit Court of Appeals reversed the District Court's dismissal.
The case was returned to the District Court and a trial date was
set for September 3, 1996. On September 5, 1996, the parties
announced to the court an agreement in principle to settle the
case, which agreement is subject to FTC approval. The court has
ordered the parties to submit the final judgment or dismissal on
or before September 23, 1996. Pending final approval, the terms
of the proposed settlement are confidential. Management does not
believe this matter will have a material adverse effect on the
financial position, results of operations or cash flows of the
Company.
Item 5. Other Information
Forward-looking Statements
The Company's goals for fiscal year 1996 include revenue
growth of at least 20%, earnings per share growth of 15-20%, and
completion of $150 million to $200 million in acquisitions, and
the Company currently believes that these goals will be achieved.
This level of acquisition activity is consistent with fiscal year
1995 levels of $154.4 million and fiscal year 1994 levels of
$177.6 million. These projections 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
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. 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 results and could cause
the Company's actual consolidated results in the future to differ
materially from the projections made in the forward-looking
statements above and in any other forward-looking statements made
by, or on behalf of, the Company:
(1) Achieving projected revenue growth depends upon sustaining
the level of acquisition activity experienced by the Company in
the last two fiscal years. Higher levels of acquisition activity
will increase anticipated revenues, and lower levels of
acquisition activity will decrease anticipated revenues. The
level of acquisition activity depends 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.
(b)In most of its existing markets and in many new markets the
Company desires to enter, the Company competes for acquisitions
with two other public companies that are substantially larger
than the Company. These competitors, and others, may be willing
to pay higher prices for businesses than the Company or may cause
the Company to pay more to acquire a business than the Company
would otherwise have to pay in the absence of such competition.
Thus, the aggressiveness of the Company's competitors in pricing
acquisitions affects the Company's ability to complete
acquisitions at prices it finds attractive.
(c)Achieving the Company's projected acquisition activity depends
on the Company's ability to enter new 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.
(2) The level of revenues is also affected by the volume and
prices of properties, products and services sold. The annual
sales targets set by the Company are very aggressive, and the
inability of the Company to achieve planned increases in volume
or prices could cause the Company not to meet anticipated levels
of revenue. The ability of the Company to achieve volume or
price increases at any location depends on numerous factors,
including the local economy, the local death rate and
competition.
(3) Another important component of revenue is earnings from the
Company's 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 performance of
such funds is related primarily to market conditions that are not
within the Company's control. The size of the funds depends on
the level of sales, funds added through acquisitions and the
amount of returns that may be reinvested.
(4) 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.
(5) 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 acquired businesses perform at pro forma levels used
by management in the valuation process.
(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 corporate
general and administrative expenses.
(e)Changes in interest rates, which can increase or decrease the
amount the Company pays on borrowings with variable rates of
interest.
(f)The Company's debt/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
structures.
(i)Unanticipated outcomes of legal proceedings.
(j)Changes in accounting policies and practices adopted
voluntarily or required to be adopted by generally accepted
accounting principles.
The Company also cautions readers that it assumes no
obligation to update, or publicly release any revisions to,
forward-looking statements made herein or any other forward-
looking statements made by or on behalf of the Company.
For additional information about the Company's business, see
the Company's Form 10-K for the fiscal year ended October 31,
1995.
Item 6. Exhibits and Reports on Form 8-K
(a) Exhibits
3.1 Amended and Restated Articles of Incorporation of the
Company, as amended<F1>
3.2 By-laws of the Company, as amended<F2>
4.1 See Exhibits 3.1 and 3.2 for provisions of the
Company's Amended and Restated Articles of Incorporation
and By-laws defining the rights of holders of Class A
and Class B Common Stock
4.2 Specimen of Class A Common Stock certificate<F3>
27 Financial data schedule
_________________________________
<F1> Incorporated by reference from the Company's Quarterly Report
on Form 10-Q for the quarter ended January 31, 1996.
<F2> Incorporated by reference from Exhibit 3.2 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31,
1995.
<F3> Incorporated by reference from the Company's Registration
Statement on Form S-1 (Registration No. 33-42336) filed with the
Commission on August 21, 1991.
(b) Reports on Form 8-K
The Company filed a Form 8-K on June 11, 1996 reporting, under
"Item 5. Other Events," the earnings release for the quarter
ended April 30, 1996.
The Company filed a form 8-K on July 25, 1996 reporting, under
"Item 5. Other Events," a press release announcing an agreement
in principle with Urgel Bourgie in Canada for the purchase of 77
funeral homes and 5 cemeteries.
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 12, 1996 /s/ RONALD H. PATRON
__________________________
Ronald H. Patron
Chief Financial Officer
President-Corporate Division
September 12, 1996 /s/ KENNETH C. BUDDE
__________________________
Kenneth C. Budde
Senior Vice President-Finance
Secretary and Treasurer
(Principal Accounting Officer)