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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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FORM 10-K
(X) Annual Report Pursuant to Section 13 or 15(d) of the
Securities Exchange Act of 1934
For the fiscal year ended October 31, 1997
( ) Transition Report Pursuant to Section 13 or 15(d)
of the Securities Exchange Act of 1934
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Commission File Number: 0-19508
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STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction 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
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SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, No Par Value
(Title of Class)
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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
--- ---
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Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
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The aggregate market value of the voting stock held by nonaffiliates
(affiliates being, for these purposes only, directors, executive officers and
holders of more than 5% of the Company's Class A Common Stock) of the
Registrant as of January 21, 1998 was approximately $1,472,000,000.
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The number of shares of the Registrant's Class A Common Stock, no par
value per share, and Class B Common Stock, no par value per share, outstanding
as of January 21, 1998 was 46,959,367 and 1,777,510, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 1998 annual meeting of
shareholders, incorporated in Part III of this Report.
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Cautionary Note
This Annual Report of Stewart Enterprises, Inc. (the "Company") on Form
10-K contains forward-looking statements in which the Company's management
discusses factors it believes may affect the Company's performance in the
future. Such statements typically are identified by terms expressing future
expectations or projections of revenues, earnings, earnings per share, capital
expenditures, gross profit margin and other financial items. All forward-
looking statements, although made in good faith, are based on assumptions
about future events and are therefore inherently uncertain, and actual results
may differ materially from those expected or projected. Important factors
that may cause the Company's actual results in the future to differ materially
from expectations or projections in forward-looking statements include those
described under the heading "Cautionary Statements" in Item 7. Forward-
looking statements speak only as of the date of this report, and the Company
undertakes no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur.
PART 1
Item 1. Business
General
Stewart Enterprises, Inc. is the third largest provider of products and
services in the death care industry in North America. Through its
subsidiaries, the Company owns and operates 419 funeral homes and 131
cemeteries in 25 states within the United States, and in Puerto Rico, Mexico,
Australia, New Zealand, Canada, Spain, Portugal and the Netherlands. The
Company is a leader in the industry's trend toward consolidation and has
acquired most of its current operations through acquisitions.
The Company provides a complete range of death care products and services
both at and prior to the time of need. The Company's funeral homes and
cemeteries are located primarily in metropolitan areas and are generally
organized in "clusters," which are groups of integrated funeral homes and
cemeteries. The Company also develops combined cemetery and funeral home
facilities, whereby the funeral home is located at and operated in conjunction
with the cemetery. The Company believes that it owns and operates one or more
of the premier death care facilities in each of its principal markets. The
Company also believes that it is an industry leader in the marketing and sale
of prearranged funeral and cemetery services and products.
The Company has an experienced management team and a decentralized
organizational structure that allows local funeral home directors and cemetery
managers to best serve their location's particular needs. The Company has
three principal objectives: (i) to provide the highest level of quality,
service and value to each family it serves; (ii) to attract, retain and reward
highly qualified individuals to operate its businesses; and (iii) to pursue a
strategy of disciplined internal and external growth, with the ultimate goal
of enhancing shareholder value.
The Company's business was founded by the Stewart family in 1910, and the
Company was incorporated as a Louisiana corporation in 1970. The Company's
principal executive offices are located at 110 Veterans Memorial Boulevard,
Metairie, Louisiana 70005, and its telephone number is 504-837-5880.
The Death Care Industry
The Company's management believes that the death care industry has several
attractive fundamental characteristics. The industry is relatively stable and
business failures are uncommon. Death care businesses in the United States
traditionally have been relatively small family-owned enterprises transferred
to successive generations within the family; however, the industry in the
United States and in certain foreign countries is undergoing a transition in
which family-owned firms are consolidating with larger organizations such as
the Company. Management believes this trend results primarily from the desire
of owners to address management succession and estate planning issues and to
achieve liquidity and diversification of their investments. Management
believes this trend also results from the willingness of consolidators to
offer attractive prices due to the consolidators' belief that they can improve
the profit margins of the acquired firms mainly through enhanced marketing and
sales initiatives and economies of scale. In addition, management believes it
can be difficult for new competitors to successfully enter existing markets by
opening new cemeteries and funeral homes due to several factors, including the
importance to families of reputation and goodwill developed over time,
regulatory compliance complexities, zoning restrictions and the existence of
an adequate number of facilities serving mature markets.
According to the United States Bureau of the Census, the number of deaths
in the United States is expected to increase by approximately 1% per year
through 2010. In addition, industry studies indicate that while the death
rate is declining slightly, the average age of the population in the United
States is increasing. The aging of the population, particularly the "baby
boomers" who have only recently begun to turn 50, represents a significant
opportunity for firms such as the Company to expand their customer base and
secure a portion of their future market share by actively marketing
prearranged property, merchandise and services. Management believes that its
principal target market for sales of prearranged cemetery property,
merchandise and services is those age 50 and above, while those most inclined
to prearrange their funeral service are typically age 60 and above.
Operations
Premier Facilities. The Company believes that it operates one or more of
the premier death care facilities in each of its principal markets. The
Company considers a facility to be "premier" if, when measured by such factors
as tradition, heritage, reputation, physical size, volume of business,
available inventory, name recognition, aesthetics and potential for
development or expansion, it is one of the most highly regarded facilities in
its market area.
Clustering. The Company operates most of its funeral homes and cemeteries
in "clusters." Clusters are groups of funeral homes and cemeteries located in
close enough proximity to each other that their operations can be integrated
to achieve economies of scale. For example, clustered facilities can share
vehicles and employees, centralized embalming services and inventories of
caskets and other merchandise, thus decreasing the Company's cost to operate
each location. Furthermore, by virtue of their proximity to each other,
clustered facilities create opportunities for more integrated, sophisticated
management and oversight of their operations.
Funeral Operations. Funeral operations accounted for approximately 55% of
the Company's revenues for the fiscal year ended October 31, 1997. The
Company's funeral homes offer a complete range of services and products to
meet families' funeral needs, including consultation on a prearranged basis
or at the time of need, removal and preparation of remains, the use of funeral
home facilities for visitation, worship and funeral services, transportation
services, flowers and caskets. In addition to traditional funeral services,
all of the Company's funeral homes offer cremation products and services.
Most of the Company's funeral homes have a non-denominational chapel on the
premises, thereby permitting family visitation and religious services to take
place at one location. As of October 31, 1997, the Company operated 401
funeral homes, 86 of which were leased.
Cemetery Operations. Cemetery operations accounted for approximately 45%
of the Company's revenues for the fiscal year ended October 31, 1997. The
Company's cemetery operations involve the sale of cemetery property and
related merchandise, including lots, lawn crypts, family and community
mausoleums, monuments, memorials and burial vaults, along with the sale of
burial site openings and closings. Cemetery property and merchandise sales are
made at the time of need or on a prearranged basis. The Company also
maintains cemetery grounds pursuant to perpetual care contracts or laws.
Although profit margins of cemetery operations typically are lower than those
of funeral operations, the Company believes that its cemetery properties help
it to maintain market share, as families often return to a cemetery location
where their ancestors are buried. In addition, the Company's clustering and
combined facilities strategies help to improve the profitability of individual
cemetery locations. As of October 31, 1997, the Company owned and operated
129 cemeteries.
Combined Funeral Home and Cemetery Operations. Approximately 44% of the
Company's cemeteries have a Company funeral home on site that is operated in
conjunction with the cemetery. Many of these facilities are in the Company's
key markets, including, among others, New Orleans, Louisiana; Dallas, Fort
Worth and Houston, Texas; and Miami, Orlando, Tampa and St. Petersburg,
Florida. The Company plans to construct approximately three funeral homes per
fiscal year on a Company cemetery location. Although it generally takes
several years before a newly constructed funeral home becomes profitable, the
Company's experience with combined facilities has demonstrated that the
combination of a funeral home with a cemetery can increase significantly the
market share and profitability of both. The enhanced purchasing power, more
sophisticated management systems and sharing of facilities, personnel and
equipment made possible by combined facilities results in lower average
operating costs to the Company and helps to increase market share by allowing
the Company to offer families the convenience of complete funeral home and
cemetery planning and services from a single location at a competitive price.
Cremation. For the year ended October 31, 1997, cremations accounted for
approximately 28% of funeral services performed by the Company in the United
States and Puerto Rico. In Australia, New Zealand, Mexico, Canada and Spain,
cremations accounted for approximately 62%, 64%, 49%, 55% and 10%,
respectively, of funeral services performed by the Company during fiscal year
1997. In September 1997, the Company entered Portugal, where cremations
accounted for approximately 14% of the funeral services performed by the firms
acquired. Additionally, in fiscal year 1998, the Company has entered the
Netherlands, where cremations accounted for approximately 70% of the funeral
services performed by the firm acquired by the Company.
While cremations in the United States often result in lower average
revenue than traditional funeral services, they generally produce higher gross
profit margins. In the Company's foreign markets, cremations generally
produce revenues comparable to those of traditional funeral services in those
markets. The cremation rate in the United States has been increasing and by
2000, cremations are expected to represent 24% of the United States burial
market, according to industry estimates. The Company has been addressing this
trend by providing cremation products and services at all of its funeral
homes, including traditional funeral services and memorialization options for
those choosing cremation. Additionally, the Company has plans to expand on
the model developed by Sentinel Cremation Societies, Inc., which was acquired
by the Company in fiscal year 1997 and is discussed below under the heading
"Internal Growth Strategies."
Prearrangements. The Company markets death care products and services on
a prearranged basis through a staff of approximately 3,300 commission sales
counselors. Prearranged plans enable families to establish in advance and
prepay for the type of service to be performed, the products to be used and
the cost of such products and services at prices prevailing at the time the
agreement is signed, rather than when the products and services are delivered.
Prearranged plans also permit families to eliminate the emotional strain of
making death care decisions at the time of need. The Company believes that
extensive marketing of prearranged products and services produces a backlog of
future business and builds current and future market share. On average, over
the past five years, the Company has sold nearly three prearranged funeral
services for every one it has delivered out of the backlog. During the fiscal
year ended October 31, 1997, the Company sold 48,676 prearranged funeral
services, and as of October 31, 1997, had a backlog of 350,031 prearranged
funeral services expected to be delivered some time in the future.
Trust Funds and Escrow Accounts. Prearranged funeral plans are funded
either through trust funds or escrow accounts established by the Company, or
to a lesser extent through insurance, depending on the regulatory requirements
in the relevant jurisdiction. When trust or escrow funding is used, a
percentage of the sale price (the amount varies among jurisdictions), which is
often paid in installments, is placed in a trust fund or escrow account and
the remainder is retained by the Company to defray costs related to the sale.
When insurance funding is used, payments received by the Company are used to
pay premiums on insurance policies designed to cover the cost of providing the
funeral service in the future.
Principal and earnings (including interest, dividends and net realized
capital gains) on the trust funds and escrow accounts, and amounts funded
through insurance, generally are available to the Company only when the
funeral service is performed. In limited circumstances, the Company receives
principal amounts deposited in trust funds or escrow accounts upon
cancellation of the contract by the customer. Additionally, the Company is
permitted to withdraw earnings on a current basis in certain jurisdictions
where trust funds are used and in unregulated jurisdictions where escrow
accounts are used. As of October 31, 1997, the Company's prearranged funeral
trust funds and escrow accounts totaled approximately $422 million.
Prearranged cemetery merchandise is funded through trust funds and escrow
accounts established by the Company, and the related principal and earnings
generally are available to the Company only when the merchandise is delivered
or contracts are cancelled. As of October 31, 1997, the Company's merchandise
trust funds and escrow accounts totaled approximately $150 million.
The Company funds its obligation to provide maintenance of cemetery
grounds by placing a portion, generally 10%, of the proceeds from cemetery
property sales into perpetual care trust funds or escrow accounts. Income
from these funds is withdrawn and used for maintenance of the cemeteries, but
principal, including in some jurisdictions net realized capital gains,
generally must be held in perpetuity. As of October 31, 1997, the Company's
perpetual care trust funds and escrow accounts totaled approximately $152
million.
The accounting methods used to reflect the Company's prearranged funeral,
merchandise and perpetual care trust funds and escrow accounts are complex and
are described in the notes to the Company's consolidated financial statements
included in Item 8. Management believes that balances in the Company's trust
funds and escrow accounts, and amounts funded by insurance, along with
installment payments due under contracts, will be sufficient to cover the
Company's estimated cost of providing the prearranged services and products
currently under contract. For additional information, see Notes 5 and 6 to
the Company's consolidated financial statements included in Item 8.
Investment Management. The Company's prearranged funeral, merchandise and
perpetual care trust funds and escrow accounts generally are administered by
the Company's wholly-owned subsidiary, Investors Trust, Inc. ("ITI"), a Texas
corporation with trust powers. ITI also provides investment advisory services
to the Stewart Enterprises Employees' Retirement Trust ("SEERT") and currently
manages the Company's investment portfolio. ITI is registered with the
Securities and Exchange Commission under the Investment Advisers Act of 1940.
As of October 31, 1997, ITI had approximately $669 million in assets under
management on behalf of the Company's trust funds and escrow accounts, SEERT
and the Company. Lawrence B. Hawkins, an executive officer of the Company and
a professional investment manager, serves as President of ITI. Mr. Hawkins
joined ITI in 1989 after serving for six years as the manager of ITI's
accounts for one of its prior investment advisers. ITI operates pursuant to a
formal investment policy established by the Investment Committee of the
Company's Board of Directors, with the assistance of third party professional
financial consultants, that emphasizes conservation, diversification and
preservation of principal while seeking appropriate levels of current income
and capital appreciation. For additional information, see Management's
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7.
Management. The Company has an experienced team of managers, many of whom
joined the Company through acquisitions. The Company's management structure
is designed to allow local funeral home directors and cemetery managers
substantial flexibility in deciding how their firms will be managed and their
products and services will be priced and merchandised. At the same time, the
Company establishes financial goals at the corporate level and maintains
centralized supervisory controls. Finally, the Company provides centralized
and standardized business support services primarily through its Shared
Services Center described below.
Currently, the Company is divided into four operating divisions in North
America, each of which is managed by a division president and chief financial
officer. These divisions are further divided into regions, each of which is
managed by a regional chief operating officer. The Company's operations in
Europe and Australasia are not considered separate operating divisions, but
they are managed by local regional executives who report to certain of the
Company's executive officers. From time to time, the Company may increase or
realign the divisions and regions to accommodate expansion of the Company's
operations. The Company also has a Corporate Development Division, which
manages the Company's acquisition program, and a Corporate Division, which
manages the Company's corporate services, accounting and financial operations
and strategic planning. The Company has a Shared Services Center that provides
centralized and standardized accounting, payroll, contract processing,
collection and other services for all of the Company's domestic facilities,
including those in Puerto Rico.
In order to align the interests of the Company's managers with the long-
term interests of its shareholders, the Company has granted options to
purchase Company stock to approximately 150 managers. Approximately two-
thirds of the stock options are performance-based, with the remaining one-
third vesting over time, generally at the rate of 20% per year over five
years, except for grants issued since the initial grant date which options
vest over the remainder of the original five-year period. The exercisability
of the performance-based options depends solely upon the attainment of a stock
price objective. Specifically, the options become exercisable only if the
average of the closing sale prices of a share of Company stock over 20
consecutive trading days equals or exceeds $52.87 by August 31, 2000;
otherwise, the options will be forfeited. The target price of $52.87 was
calculated to represent an average of 20% growth per year over five years over
the stock price at the time the Company's 1995 Incentive Compensation
Plan was adopted in August 1995. The exercise price of the options is equal to
the market price of the Company's stock at the date of grant. Additional
information with respect to the Company's stock options is contained in
the notes to the Company's consolidated financial statements included in
Item 8 and in the Company's proxy statements. Generally accepted accounting
principles require that a charge to earnings of approximately $68 million be
recorded for the performance-based options for the difference between the
exercise price and the then-current stock price when achievement of the
performance objective become probable.
Foreign Operations. The Company first entered foreign markets in fiscal
year 1994 and through January 20, 1998 has acquired a total of 180 properties
outside the United States and Puerto Rico. For the fiscal year ended
October 31, 1997, properties in foreign countries generated approximately 15%
of consolidated total revenues and, as of October 31, 1997, accounted for
approximately 33% of the Company's funeral home and cemetery locations and 19%
of consolidated total assets.
Financial Information about Industry and Geographic Segments. For
financial information about the Company's industry and geographic segments,
see Note 16 to the Company's consolidated financial statements included in
Item 8.
Internal Growth Strategies. The Company plans to increase market share by
extensive marketing of prearranged services and products and by continuing to
offer high quality services and products to families at competitive prices.
The Company's strategy calls for it to increase the profitability of its
funeral homes and cemetery operations primarily by continuing to achieve
economies of scale through clustering and the development of combined
facilities, through improved merchandising (by adjusting the mix of products
and services offered to achieve higher sales and profits), selective price
increases, obtaining volume discounts from suppliers and controlling costs.
The Shared Services Center is a key component of the Company's plan to control
costs.
The Company expects to gain market share and improve profitability in the
longer term partly through operating partnerships with third parties and by
establishing a network of alternative services firms. In fiscal year 1997,
the Company announced an agreement with the Archdiocese of Los Angeles whereby
the Company will construct and operate six funeral homes on land leased by the
Company from the Archdiocese at the site of six cemeteries owned and operated
by the Archdiocese. Management believes that this partnership will allow the
Company to enjoy the benefits of operating a funeral home on the grounds of a
cemetery, without the capital investment of purchasing the cemetery. The
Company also believes that partnerships such as this one also benefit the
third parties by allowing them to compete with other cemeteries in their
market that have funeral homes on their properties. To further expand upon
this strategy, the Company is pursuing similar partnership opportunities with
other cemetery operators. The construction of funeral homes is capital
intensive, and newly-constructed funeral homes often do not yield profits for
several years. No assurance can be given about whether, when or to what
extent this strategy will contribute in any material respect to the Company's
profits.
During fiscal year 1997 the Company acquired Sentinel Cremation Societies,
Inc. of California ("Sentinel"). Sentinel owns and operates thirteen service
centers offering cremations and related products and services. Sentinel also
sponsors two cremation societies, which together have more than 104,000
members. Members in the cremation society pay a small membership fee and
receive a membership card indicating their wish to be cremated. Because
Sentinel's offices generally operate from leased locations with a small staff,
they have lower overhead than traditional funeral homes. The cost to the
family for death care arrangements at a Sentinel location generally is less
than at a traditional funeral home. The expansion of the Sentinel model is
an example of the Company's effort to address the growing cremation market,
and it offers a cost-saving alternative to the construction of a traditional
funeral home. The Company plans to open additional service centers similar
to the Sentinel model, although management expects this expansion to occur
slowly while the Company further develops and tests the concept in new markets.
No assurance can be given about whether, when or to what extent this
strategy will contribute in any material respect to the Company's profits.
Subsidiaries. Substantially all of the Company's operations are conducted
through subsidiaries.
Acquisitions
Background. From October 31, 1991 through January 20, 1998, the Company
has grown from 72 funeral homes and cemeteries in six states to 550 funeral
homes and cemeteries in 25 states and eight foreign countries, almost
entirely as a result of acquisitions. At the time of the Company's initial
public offering in October 1991, the Company owned funeral homes and
cemeteries in Louisiana, Texas, Florida, Virginia, West Virginia and Maryland.
Since that time, the Company has expanded in the United States, primarily in
the Southern and Mid-Atlantic states, and more recently in the Midwest and
Pacific states. The Company entered Puerto Rico and Mexico in fiscal years
1993 and 1994, Australia, New Zealand and Canada in fiscal years 1995 and 1996,
and Spain and Portugal in fiscal year 1997. The Company also has entered the
Netherlands in fiscal year 1998. The Company has acquired a total of 180
funeral homes and cemeteries in Mexico, Australia, New Zealand, Canada, and
Europe since it first entered those markets, and it believes that attractive
expansion opportunities exist in those and other foreign countries. The
following table sets forth certain information with respect to the Company's
completed and pending acquisition activity:
Number of Aggregate
Funeral Homes Purchase Price
and Cemeteries (in millions)
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Properties owned as of
October 31, 1991........................ 72 $ -
Acquisitions(1):
Fiscal year 1992....................... 11 30.0
Fiscal year 1993....................... 49 94.6
Fiscal year 1994....................... 60 177.6
Fiscal year 1995....................... 70 154.4
Fiscal year 1996....................... 149 179.0
Fiscal year 1997....................... 114 184.5
November 1, 1997 - January 20, 1998.... 19 39.5
Pending acquisitions, as of
January 20, 1998...................... 44 39.2
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(1) Excludes funeral homes constructed by the Company.
External Growth Strategy. Management believes that only a relatively
small part of the death care industry has been consolidated and that
additional consolidation opportunities exist. The Company actively pursues
acquisition opportunities both domestically and internationally and plans to
continue to do so. Where feasible, the Company seeks to acquire premier firms
that either may be integrated with an existing cluster or that may serve as a
base for the formation of a new cluster, and that have strong management
willing to remain with the Company. In evaluating a potential acquisition,
the Company also considers factors such as the size of the community the
property serves and the potential for increasing the property's profitability
through increased prearranged marketing efforts and other means. The Company
expects most of its expansion to continue to occur domestically, although it
continues to pursue international acquisitions, primarily in Europe, Latin
America and the Pacific Rim.
Management believes it follows a disciplined approach to acquisitions.
Currently, the Company's objective is to pay no more than eight times
management's estimate of what the acquired firm's EBIT (earnings before
interest and taxes) will be for the first twelve months after the acquisition.
Management prices each acquisition so that the acquired firm is expected to be
additive to Company earnings per share in the first twelve months after its
acquisition.
The Company created its Corporate Development Division in fiscal year 1995
to further coordinate the Company's acquisition activities. The Division was
expanded in fiscal year 1997 to include, in addition to its six full-time
employees, six field representatives focusing on domestic candidates and three
representatives focusing on European candidates. These representatives devote
their full time to identifying and developing candidates and assisting in
negotiations, and they are paid on a commission basis. Divisional and
regional management of the Company also work with the Corporate Development
Division in identifying and developing candidates and assisting in
negotiations.
Assimilation. The Company seeks to retain key managers of acquired
companies in order to assure the continuation of the acquired firm's goodwill,
and frequently enters into management or consulting agreements and
non-compete agreements with owners and key managers of acquired firms. In
addition, the Company generally continues to operate acquired businesses under
their existing names. Acquired firms initially, however, generally have lower
gross profit margins than the Company's existing businesses. The Company
strives to improve the margins of acquired businesses primarily by increasing
prearranged sales, integrating the firm into the Company's marketing program,
assisting local managers in evaluating merchandising and pricing strategies,
and standardizing and centralizing certain business support functions through
the Shared Services Center. Management believes that the Company has been
improving its ability to assimilate acquired firms and improve their margins.
Competition
The Company's funeral home and cemetery operations generally face intense
competition in local markets that typically are served by numerous funeral
home and cemetery firms. To a lesser degree, the Company also competes with
monument dealers, casket retailers and other non-traditional providers of
limited services or products. Because the market for death care services is
relatively stable, competition usually focuses on increasing market share and
selling prearranged products and services. Market share is largely a function
of goodwill and tradition, although competitive pricing, professional service
and attractive, well-maintained and conveniently located facilities are also
important. Because of the significant role played by goodwill and tradition,
market share increases are usually gained over a long period of time.
Extensive marketing through media advertising, direct mailings and personal
sales calls has increased in recent years, especially with respect to the sale
of prearranged funeral services.
The Company's traditional burial and funeral service operations face
competition from the increasing number of cremations in the United States.
Industry studies indicate that the percentage of cremations has increased
throughout the 1980s and that cremation will represent approximately 24% of
the United States burial market by the year 2000, compared with 14% in 1986.
All of the Company's funeral homes in the United States offer cremation, and
the Company believes that it will be able to maintain its competitive position
by marketing full service cremations in combination with traditional funeral
services and memorialization. Additionally, development of the Sentinel
concept by the Company represents another opportunity for the Company to serve
cremation customers.
The Company also faces intense competition in its acquisition program,
principally from the other publicly-traded death care firms, Service
Corporation International, The Loewen Group Inc., Equity Corporation
International and Carriage Services, Inc., although a number of smaller
companies also participate in the market. Much acquisition activity appears
to be concentrated on firms in metropolitan regions, which are the areas of
primary interest to the Company. Furthermore, in the United States, prices
for funeral home and cemetery properties have increased in recent years. Some
of the more attractive properties in some metropolitan markets have already
been acquired by competitors, and certain other markets are unattractive
because of such factors as size, demographics and the local regulatory
environment. Only a small portion of this highly fragmented industry has
been consolidated, and the Company believes that opportunities for significant
growth through acquisitions continue to exist. However, no assurance can be
given that the Company will be successful in expanding its operations through
acquisitions.
Regulation
The Company's funeral home operations are regulated by the Federal Trade
Commission (the "FTC") under the FTC's Trade Regulation Rule on Funeral
Industry Practices, 16 CFR Part 453 (the "Funeral Rule"), which went into
effect on April 30, 1984, and was revised effective July 19, 1994.
The Funeral Rule defines certain acts or practices as unfair or deceptive,
and contains certain requirements to prevent these unfair or deceptive acts or
practices. The preventive requirements require a funeral provider to give
consumers accurate, itemized price information and various other disclosures
about funeral goods and services. In addition, the preventive requirements
prohibit a funeral provider from: (i) misrepresenting legal, crematory and
cemetery requirements; (ii) embalming for a fee without permission; (iii)
requiring the purchase of a casket for direct cremation; and (iv) requiring
consumers to buy certain funeral goods or services as a condition for
furnishing other funeral goods or services.
The Company's operations are also subject to extensive regulation,
supervision, and licensing under numerous federal, state and local laws and
regulations. The Company believes that it is in substantial compliance with
the Funeral Rule and all such laws and regulations. State legislatures and
regulatory agencies frequently propose new laws and regulations, some of
which, if enacted as proposed, could have a material effect on the Company's
operations and on the death care industry in general. The Company cannot
predict the outcome of any proposed legislation or regulation, or the effect
that any such legislation or regulation might have on the Company.
Employees
The Company and its subsidiaries employ approximately 9,300 persons, and
management believes that its relationship with its employees is good.
Approximately 330 of its employees who are employed in Maryland, Pennsylvania,
Puerto Rico, Mexico, Australia and Canada are represented by the Laborers'
International Union of North America-AFL-CIO, the International Association of
Machinists and Aerospace Workers, the International Brotherhood of Teamsters
of Puerto Rico, the Sindicato de Trabajadores y Empleados de Establecimientos
Comerciales and Tiendas de Ropa y Almacenes en General del Distrito Federal,
the Miscellaneous Workers Union and Association des Travailleurs du Parc
Commemoratif de Montreal Inc. Syndicat Canadien (SCEP), respectively. No
other employees of the Company or its subsidiaries are members of a collective
bargaining unit.
Item 2. Properties
As of October 31, 1997, all but 86 of the Company's 401 funeral home
locations were owned by subsidiaries of the Company. The leases with respect
to the 86 properties have terms ranging from two to 44 years. Generally, the
Company has a right of first refusal and an option to purchase the leased
premises. An aggregate of $1.7 million of the Company's term notes are
secured by mortgages on some of the Company's funeral homes; these notes were
either assumed by the Company upon its acquisition of the property or
represent seller financing of the acquired property.
As of October 31, 1997, the Company owned 129 cemeteries covering a total
of approximately 8900 acres. Approximately 4,000 acres, or 45% of the total
acreage, is available for future development.
The Company's corporate headquarters occupy approximately 49,200 square
feet of office space in a building in suburban New Orleans that is leased from
an affiliate of the Company. See "Certain Transactions," which is
incorporated by reference herein from the Company's definitive proxy statement
relating to its 1998 annual meeting of shareholders.
Item 3. Legal Proceedings
Osiris Holding Co., S.A. de C.V. et al. vs. Jaime Arrangoiz Gayosso et
al., Ordinary Mercantile Proceedings in the Superior Court of Justice of the
Federal District of Mexico, United Mexican States, Thirteenth Civil Court.
This suit was brought in September 1994 by The Loewen Group Inc. and a Mexican
affiliate (collectively, "Loewen") against the Company, the Mexican
corporations acquired by the Company in August 1994, and the shareholders of
those corporations. The suit alleges that the sale of those corporations to
the Company violated a previous option granted by the shareholders to Loewen.
The suit originally requested a judicial declaration that Loewen properly
exercised its option prior to the purchase by the Company and that Loewen
thereby acquired title to the corporations. The suit also sought unspecified
damages. The Company believes the suit is without merit and intends to defend
it vigorously. The Company was advised by its Mexican counsel that Loewen has
dismissed the Company from the suit and has relinquished its claim of
ownership to the stock of the corporations, thereby limiting itself to a claim
for damages. Although the corporations, which are now subsidiaries of the
Company, remain defendants, the Company does not believe that they have any
liability for damages and believes that they are entitled to indemnity from
the sellers to the extent that they are held liable.
Other. The Company and certain of its subsidiaries are parties to a
number of other legal proceedings that have arisen in the ordinary course of
business. While the outcome of these proceedings cannot be predicted with
certainty, management does not expect these matters to have a material adverse
effect on the consolidated financial position, results of operations or cash
flows of the Company.
The Company carries insurance with coverages and coverage limits that it
believes to be adequate in the death care industry. Although there can be no
assurance that such insurance is sufficient to protect the Company against all
contingencies, management believes that its insurance protection is reasonable
in view of the nature and scope of the Company's operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Item 4(a). Executive Officers of the Registrant
The following table sets forth certain information with respect to the
executive officers of the Company. Executive officers are appointed by and
serve at the pleasure of the Board of Directors, subject in all cases, except
in Mr. Stewart's case, to rights under existing employment agreements. Each
of the following has served the Company in the capacity indicated for more
than five years, except as indicated below.
Name Age Position
---- --- --------
Frank B. Stewart, Jr........ 62 Chairman of the Board(1)
Joseph P. Henican, III...... 49 Vice Chairman of the Board and Chief Executive Officer(2)
William E. Rowe............. 51 President, Chief Operating Officer and Director(3)
Ronald H. Patron............ 53 Executive Vice President, President-Corporate Division,
Chief Financial Officer and Director
Gerard C. Alexander......... 58 Executive Vice President and President-Central Division(4)
Richard O. Baldwin, Jr...... 51 Executive Vice President and President-Corporate Development Division(5)
Brian J. Marlowe............ 51 Executive Vice President and President-Eastern Division(6)
Lawrence B. Hawkins......... 49 Senior Vice President and President-Investors Trust, Inc.
Brent F. Heffron............ 48 Senior Vice President and President-Southern Division(7)
Raymond C. Knopke, Jr....... 42 Senior Vice President and President-Western Division(8)
Kenneth C. Budde............ 50 Senior Vice President-Finance, Chief Accounting Officer,
Secretary and Treasurer
- ---------------------
(1) Mr. Stewart served as interim Chief Executive Officer from November 1,
1994, upon the resignation of Lawrence M. Berner as President and Chief
Executive Officer, until February 1, 1995, when Joseph P. Henican, III
assumed the office of Chief Executive Officer.
(2) Mr. Henican has served as Vice Chairman of the Board since May 1991, and
as Chief Executive Officer since February 1, 1995. Prior to that time, he
was a partner in the law firm Henican, James & Cleveland, where he served
as general counsel to the Company for more than 13 years.
(3) Mr. Rowe assumed the office of President on November 1, 1994 upon the
resignation of Lawrence M. Berner as President and Chief Executive
Officer. He became Senior Executive Vice President and Chief Operating
Officer in April 1994. Prior to that time, he served as President of the
Company's former Mid-Atlantic Division since 1987 and as Executive Vice
President and President of the former Mid-Atlantic Division since May
1991. He became a director of the Company in April 1994.
(4) Mr. Alexander has served as Executive Vice President and President of the
Company's Central Division since August 1, 1995. Prior to that time, he
served as Executive Vice President and President of the Company's former
South Central Division.
(5) Mr. Baldwin has served as Executive Vice President and President of the
Company's Corporate Development Division since August 1, 1995. Prior to
that time, he served as Executive Vice President and President of the
Company's former Southeast Division.
(6) Mr. Marlowe has served as Executive Vice President and President of the
Company's Eastern Division since August 1, 1995. From April 1994 to July
1995, he served as Executive Vice President and President of the Company's
former Mid-Atlantic Division. From November 1992 to April 1994 he served
as Chief Operating Officer of the Company's former Mid-Atlantic Division's
Northern Region.
(7) Mr. Heffron has served as Senior Vice President and President of the
Company's Southern Division since January 1, 1997. From November 1992 to
December 1996, he served as President and Chief Operating Officer of the
Central Region of the Company's Eastern Division and Vice President of the
Company's former Mid-Atlantic Division.
(8) Mr. Knopke has served as Senior Vice President and President of the
Company's Western Division since January 1, 1997. From December 1993 to
December 1996, he served as President and Chief Operating Officer of the
South Atlantic Region of the Company's Eastern Division. Prior to that
time, he served as President of Baldwin Fairchild Cemeteries and Funeral
Homes, which was acquired by the Company in 1983.
PART II
Item 5. Market for Registrant's Common Equity and Related Shareholder Matters
Market Information
The Company's Class A Common Stock trades on the Nasdaq National Market
tier of the Nasdaq Stock Market under the symbol STEI. The following table
sets forth, for the periods indicated, the range of high and low sales prices,
as reported by the Nasdaq National Market. Prices for the first three
quarters of fiscal year 1996 have been adjusted to reflect a three-for-two
stock split effected in the form of a 50% stock dividend on June 21, 1996. As
of January 6, 1998, there were 1,469 record holders of the Company's Class A
Common Stock.
High Low
---- ---
Fiscal Year 1997
Fourth Quarter ............................. 45 7/8 36 3/8
Third Quarter ............................. 46 32 1/4
Second Quarter ............................. 38 32
First Quarter ............................. 39 3/4 32 3/4
Fiscal Year 1996
Fourth Quarter ............................. 37 26 1/4
Third Quarter ............................. 33 24 1/2
Second Quarter ............................. 31 27/64 24 43/64
First Quarter ............................. 26 43/64 21 11/64
Dividends
The Company declared quarterly dividends of $.013 per share on its Class
A and Class B Common Stock during the first two quarters of fiscal year 1996,
and $.02 per share during the last two quarters of fiscal year 1996 and each
quarter of fiscal year 1997. The Company intends to continue its current
policy of declaring quarterly cash dividends on the Class A and Class B Common
Stock in the amount of $.02 per share. The declaration and payment of
dividends is at the discretion of the Company's Board of Directors and will
depend on the Company's results of operations, financial condition, cash
requirements, future prospects and other factors deemed relevant by the Board.
The most restrictive of the Company's credit agreements limits the payment of
dividends to 50% of the Company's consolidated net earnings for the previous
four fiscal quarters.
Sales of Unregistered Equity Securities
During fiscal year 1997, the Company did not sell any unregistered equity
securities.
Item 6. Selected Financial Data
The following selected consolidated financial data for the fiscal years
ended October 31, 1993 through 1997 are derived from the Company's audited
consolidated financial statements. The data set forth below should be read in
conjunction with the consolidated financial statements of the Company and the
notes thereto and "Management's Discussion and Analysis of Financial Condition
and Results of Operations" appearing elsewhere herein.
Selected Consolidated Financial Data
(Dollars in thousands, except per share data)
Year Ended October 31, (1)
----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- --------
Statement of Earnings Data:
Revenues:
Funeral........................... $ 291,649 $ 225,461 $ 188,991 $ 116,266 $ 75,348
Cemetery.......................... 240,937 207,926 179,831 138,092 107,315
--------- --------- --------- --------- --------
Total revenues.................... 532,586 433,387 368,822 254,358 182,663
Gross profit:
Funeral........................... 89,235 72,239 55,309 31,785 22,398
Cemetery.......................... 67,937 45,879 34,434 25,812 19,032
--------- --------- --------- --------- --------
Total gross profit................ 157,172 118,118 89,743 57,597 41,430
Corporate general and administrative
expenses........................... (15,402) (14,096) (11,113) (8,157) (7,223)
--------- --------- --------- --------- --------
Operating earnings before performance-
based stock options................ 141,770 104,022 78,630 49,440 34,207
Performance-based stock options..... - - (17,252) - -
--------- --------- --------- --------- --------
Operating earnings.................. 141,770 104,022 61,378 49,440 34,207
Interest expense.................... (38,031) (26,051) (22,815) (8,877) (6,540)
Investment and other income......... 2,738 4,104 2,937 1,635 1,902
--------- --------- --------- --------- --------
Earnings from continuing operations
before income taxes and cumulative
effect of change in accounting
principles......................... $ 106,477 $ 82,075 $ 41,500(2) $ 42,198 $ 29,569
========= ========= ========= ======== ========
Earnings before cumulative effect of
change in accounting principles.... $ 69,742 $ 51,297 $ 26,145(2) $ 27,253 $ 18,839
Cumulative effect of change in
accounting principles
(net of $2,230 income tax
benefit)........................... $ (2,324)(1) - - - -
--------- --------- ---------- -------- --------
Earnings from continuing
operations......................... $ 67,418 $ 51,297 $ 26,145(2) $ 27,253 $ 18,839
========= ========= ========== ======== ========
Earnings per common share from
continuing operations(3):
Earnings before cumulative
effect of change in accounting
principles........................ $ 1.57 $ 1.24 $ .72(2) $ .85 $ .71
Cumulative effect of change in
accounting principles............. (.05)(1) --- --- --- ---
--------- --------- --------- -------- --------
Net earnings....................... $ 1.52 $ 1.24 $ .72(2) $ .85 $ .71
========= ========= ========= ======== ========
Weighted average common shares
outstanding (in thousands)(3)....... 44,389 41,410 36,386 31,910 26,535
========= ========= ========= ======== ========
Dividends declared per
common share(3)..................... $ .08 $ .066 $ .033 $ .027 $ .018
========= ========= ========= ======== ========
(continued)
Selected Consolidated Financial Data
(Dollars in thousands, except per share data)
Year Ended October 31, (1)
-----------------------------------------------------
1997 1996 1995 1994 1993
--------- --------- --------- --------- ---------
Pro forma amounts assuming change
in accounting principles was
applied retroactively(1):
Earnings from continuing
operations....................... $ 69,742 $ 49,959 $ 30,671(2) $ 28,649 $ 17,753
========== ========= ========== ======== =========
Earnings per common share from
continuing operations(3)......... $ 1.57 $ 1.21 $ .84(2) $ .90 $ .67
========== ========= ========== ======== =========
October 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
Balance Sheet Data:
Assets.............................. $1,626,851 $1,360,913 $1,072,435 $ 759,390 $ 455,942
Long-term debt, less current
maturities......................... 524,351 515,901 317,451 260,913 122,517
Shareholders' equity................ 819,570 547,447 483,978 325,671 232,006
Selected Consolidated Operating Data
Year Ended October 31,
--------------------------------------------------------
1997 1996 1995 1994 1993
---------- ---------- ---------- --------- ---------
Operating Data:
Funeral homes in operation at end
of period.......................... 401 298 161 105 76
At-need funerals performed.......... 61,682 38,351 37,263 23,539 14,588
Prearranged funerals performed...... 18,970 15,422 9,225 7,571 6,320
---------- --------- -------- --------- --------
Total funerals performed........... 80,652 53,773 46,488 31,110 20,908
Prearranged funerals sold........... 48,676 37,545 33,787 26,637 17,859
Backlog of prearranged funerals
at end of period................... 350,031 294,829 222,532 183,886 130,610
Cemeteries in operation at end
of period.......................... 129 120 105 90 57
Interments performed................ 53,266 46,007 42,480 33,118 26,557
- -----------------------
(1)Effective November 1, 1996, the Company changed accounting principles for
prearranged funeral and cemetery sales. For further details, see Note 3 to
the Company's consolidated financial statements included in Item 8.
Information presented for fiscal year 1997 reflects the change in accounting
principles; whereas, information presented for fiscal years 1993 through
1996 reflects results as originally reported under the accounting methods
then in effect.
(2)Includes a non-recurring, non-cash charge of $17.3 million ($10.9 million,
or $.30 per share, after-tax) recorded during the third quarter of fiscal
year 1995 in connection with the vesting of the Company's performance-based
stock options.
(3)Fiscal year 1993 reflects the Company's three-for-two split of its Class A
and Class B Common Stock effected December 1, 1993 by means of a 50% stock
dividend. Additionally, fiscal years 1993 to 1996 reflect the Company's
three-for-two split effected June 21, 1996 by means of a 50% stock dividend.
Item 7. Management's Discussion and Analysis of Financial Condition and
Results of Operations
Introduction
Death care businesses in the United States traditionally have been
relatively small family-owned enterprises transferred to successive generations
within the family. The industry in the United States, and in certain foreign
countries, is undergoing a transition in which family-owned firms are
consolidating with larger organizations, such as the Company. Although the
Company's future participation in this consolidation cannot be guaranteed, the
Company believes that it has been successful in identifying and acquiring firms
that have enhanced shareholder value, and it will continue to explore expansion
opportunities, both domestically and internationally, although it expects most
of its expansion to continue to occur within the United States.
Two other trends affecting the death care industry are the death rate and
average age of the population. Industry studies indicate that while the death
rate is declining slightly, the average age of the population is increasing.
This is expected to result in a long-term, small, though stable, increase in
the number of deaths, despite short-term deviations. More importantly, because
of the Company's emphasis on prearranged sales, management anticipates that the
aging of the population will create additional opportunities for the Company
to expand its customer base and secure a portion of its future market share,
since the principal market for these prearranged services is the more mature
and fastest growing segment of the population.
Certain statements made herein that are not historical facts are intended
to be forward-looking statements within the meaning of the safe harbor
provisions of the Private Securities Litigation Reform Act of 1995. Forward-
looking statements are based on assumptions about future events and therefore
are inherently uncertain; actual results may differ materially from those
projected. See "Cautionary Statements." The discussion herein should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto.
Change in Accounting Principles
Effective November 1, 1996, the Company changed accounting principles for
prearranged funeral and cemetery sales, as follows: (i) the Company now defers
a portion of the earnings realized by irrevocable prearranged funeral trust
funds and escrow accounts in order to offset the estimated effects of inflation
on the future cost of performing prearranged funeral services; (ii) the Company
now records all revenues and costs attributable to prearranged sales of
cemetery interment rights and related products at the time the contract is
signed; and (iii) the Company now records revenue and related costs
attributable to cemetery burial site openings and closings at the time of sale.
The accounting changes were made principally to provide a better matching of
revenues and expenses in the appropriate periods and to more accurately reflect
the Company's operations. See Note 3 to the consolidated financial statements
included in Item 8.
These changes generally will result in reduced near-term funeral revenue
and gross profit, due to the deferral of a portion of the earnings from funeral
trust funds and escrow accounts until the funeral is performed. These changes
also will result in higher near-term cemetery revenue and gross profit, due to
the recognition under the accrual basis of accounting of certain cemetery
sales. The net effect is expected to result in increased revenues and gross
profit from amounts that would have been reported under the Company's previous
accounting methods.
Trust and Escrow Investments
The Company's funeral and cemetery business includes prearranged sales
funded through trust and escrow arrangements, as well as maintenance of
cemetery grounds funded through perpetual care funds. The Company's investment
strategy for these funds is, among other criteria, partially dependent on the
ability to withdraw net realized capital gains from these funds. However,
withdrawal of capital gains is not permitted for perpetual care funds in
certain jurisdictions in which the Company operates. Accordingly, funds for
which net capital gains are permitted to be withdrawn typically are invested
in a diversified portfolio consisting principally of U.S. government securities,
other interest-bearing securities and preferred stocks rated A or better,
publicly-traded common stocks, money market funds and other short-term
investments.
The Company generally recognizes as revenue on a current basis from
trust funds and escrow accounts all dividends, interest and net realized
capital gains in excess of the amount to be deferred to offset expected
increases in the future costs of performing prearranged funeral services. The
composition of trust and escrow income from funds, especially those including
common stock, can be materially affected by prevailing interest rates and the
performance of the stock market. In managing its North American funds,
including those in Puerto Rico and excluding those in Mexico, which include
investments in common stock, the Company seeks an overall annual rate of return
of approximately 9.0%. In the past three years, such funds have generated
overall annual rates of return that approximate that amount. However, no
assurance can be given that the Company will be successful in achieving any
particular rate of return.
Results of Operations
For purposes of the following discussion, funeral homes and cemeteries
owned and operated for the entirety of both periods being compared are referred
to as "Existing Operations." Correspondingly, funeral homes and cemeteries
acquired or opened during either period being compared are referred to as
"Acquired Operations."
Comparisons between fiscal years 1997 and 1996 reflect the pro forma
effects of applying the new accounting principles as if the change had
occurred on November 1, 1995; whereas, comparisons between fiscal years 1996
and 1995 are presented as originally reported. The following table presents
the pro forma results for the year ended October 31, 1996:
Year Ended October 31,
----------------------------------
1997 1996
-------------- ------------
(As Reported) (Pro Forma)
(In millions)
Revenues:
Funeral .................................... $ 291.6 $ 219.1
Cemetery.................................... 240.9 213.1
-------------- ------------
532.5 432.2
-------------- ------------
Costs and expenses:
Funeral..................................... 202.4 153.2
Cemetery.................................... 173.0 163.3
-------------- ------------
375.4 316.5
-------------- ------------
Gross profit................................ 157.1 115.7
Corporate general and administrative
expenses...................................... 15.4 14.1
-------------- ------------
Operating earnings.......................... 141.7 101.6
Interest expense............................... (38.0) (26.0)
Investment and other income.................... 2.7 4.1
-------------- ------------
Earnings before income taxes and
cumulative effect of change in
accounting principles...................... 106.4 79.7
Income taxes................................... 36.7 29.7
-------------- ------------
Earnings before cumulative effect
of change in accounting principles......... $ 69.7 $ 50.0
============== ============
Year Ended October 31, 1997 Compared to Year Ended October 31, 1996
Funeral Segment
Year Ended
October 31,
------------------------ Increase
1997 1996 (Decrease)
---------- ---------- ----------
(In millions)
Funeral Revenue
- ---------------
Existing Operations........................ $ 191.0 $ 184.7 $ 6.3
Acquired Operations........................ 75.9 16.6 59.3
Revenue from prearranged funeral
trust funds and escrow accounts........... 24.7 17.8 6.9
---------- ---------- ----------
$ 291.6 $ 219.1 $ 72.5
========== ========== ==========
Funeral Costs
- -------------
Existing Operations........................ $ 139.4 $ 140.8 $ (1.4)
Acquired Operations........................ 63.0 12.4 50.6
---------- ---------- ----------
$ 202.4 $ 153.2 $ 49.2
========== ========== ==========
Funeral Segment Profit..................... $ 89.2 $ 65.9 $ 23.3
========== ========== ==========
Funeral revenue increased $72.5 million, or 33%, in fiscal year 1997, as
compared with the prior fiscal year. The Company experienced a $6.3 million
increase in revenue from Existing Operations as result of an increase in sales
of certain prearranged funeral merchandise, coupled with a 5% overall increase
in the average revenue per funeral service performed by Existing Operations
(4% increase domestically), due to price increases and improved merchan-
dising.
The $1.4 million, or 1%, decrease in funeral costs from Existing
Operations resulted principally from the implementation of certain cost control
measures, including contract negotiations with certain vendors. Existing
Operations achieved improved profit margins resulting primarily from the
increased cost control measures, including the Company's centralization and
standardization of certain financial and administrative functions in connection
with the Company's Shared Services Center, and the increased average revenue
per funeral service mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes in
fiscal year 1997 which is not reflected in the 1996 period presented above.
The $6.9 million increase in revenue from prearranged funeral trust funds
and escrow accounts was attributable to a 23% growth in the average balance in
such trust funds and escrow accounts, resulting primarily from current year
customer payments deposited into the funds and funds added through
acquisitions, coupled with a slight increase in the yield on the North American
funds (excluding those in Mexico), which yield is in line with the Company's
goal of approximately 9%. The return of the peso-denominated investments of
the Company's Mexican subsidiaries, which comprise less than 10% of the
Company's total funeral trust portfolio, averaged 20% for the fiscal year ended
October 31, 1997. The return on the Mexican funds partially offset the approx-
imate 18% inflation experienced during the year.
Cemetery Segment
Year Ended
October 31,
---------------------
1997 1996 Increase
--------- ---------- ----------
(In millions)
Cemetery Revenue
- ----------------
Existing Operations........................... $ 211.3 $ 194.6 $ 16.7
Acquired Operations........................... 17.4 9.4 8.0
Revenue from merchandise trust funds
and escrow accounts.......................... 12.2 9.1 3.1
--------- ---------- ----------
$ 240.9 $ 213.1 $ 27.8
========= ========== ==========
Cemetery Costs
- --------------
Existing Operations........................... $ 159.9 $ 157.1 $ 2.8
Acquired Operations........................... 13.1 6.2 6.9
--------- ---------- ----------
$ 173.0 $ 163.3 $ 9.7
========= ========== ==========
Cemetery Segment Profit....................... $ 67.9 $ 49.8 $ 18.1
========= ========== ==========
Cemetery revenue increased $27.8 million, or 13%, in fiscal year 1997, as
compared to fiscal year 1996, due principally to a $16.7 million increase in
revenue from Existing Operations, resulting principally from an increase in
cemetery sales.
Costs increased during this same period by $9.7 million, of which $6.9
million was attributable to Acquired Operations. The improved profit margin
achieved by Existing Operations was attributable principally to a 9% increase
in cemetery sales by Existing Operations, the implementation of certain cost
control measures, including the Company's undertaking to centralize and
standardize certain financial and administrative functions in connection with
the Company's Shared Services Center, and the inclusion of burial site openings
and closings in both periods.
The increase in revenues and costs associated with Acquired Operations
resulted primarily from the acquisition or construction of cemeteries during
fiscal year 1997 which is not reflected in the 1996 period presented above.
The $3.1 million increase in revenue from merchandise trust funds and
escrow accounts was attributable principally to a 24% growth in the average
balance in the merchandise trust funds and escrow accounts, resulting primarily
from current year payments deposited into the funds, along with funds added
through acquisitions, and a slight increase in the yield on the merchandise
trust funds and escrow accounts, which return slightly exceeded the Company's
goal of approximately 9%.
Other
Corporate general and administrative expenses increased $1.3 million in
fiscal year 1997, to 2.9% of revenue, as compared to 3.3% in fiscal year 1996.
The increase in these expenses is the result of activities to support the
Company's growth.
Interest expense increased $12.0 million during fiscal year 1997 when
compared to fiscal year 1996. The increase resulted from an increase in average
borrowings, which was partially offset by a slight decrease in average interest
rates from 6.7% in 1996 to 6.6% in 1997. Approximately $312.0 million, or 56%,
of the $558.3 million borrowings outstanding as of October 31, 1997 was subject
to short-term variable interest rates averaging approximately 6.3%.
Investment and other income decreased $1.4 million during fiscal year 1997
when compared to the prior year, due principally to a $1.6 million gain in
fiscal year 1996 on the sale of land that was condemned.
The Company experienced a decrease in its effective tax rate from 37.3% in
fiscal year 1996 to 34.5% in fiscal year 1997, principally as a result of the
elimination of the Puerto Rican interest withholding tax and strategic state
tax planning.
Year Ended October 31, 1996 Compared to Year Ended October 31, 1995
Funeral Segment
Year Ended
October 31,
--------------------- Increase
1996 1995 (Decrease)
--------- ---------- ----------
(In millions)
Funeral Revenue
- ---------------
Existing Operations........................... $ 144.6 $ 146.5 $ (1.9)
Acquired Operations........................... 52.2 19.5 32.7
Revenue from prearranged funeral trust
funds and escrow accounts.................... 28.7 23.0 5.7
--------- ------- ---------
$ 225.5 $ 189.0 $ 36.5
========= ======= =========
Funeral Costs
- -------------
Existing Operations........................... $ 112.7 $ 118.7 $ (6.0)
Acquired Operations........................... 40.5 15.0 25.5
--------- ------- ---------
$ 153.2 $ 133.7 $ 19.5
========= ======= =========
Funeral Segment Profit........................ $ 72.3 $ 55.3 $ 17.0
========= ======= =========
Funeral revenue increased $36.5 million, or 19%, in fiscal year 1996, as
compared with the prior fiscal year. The Company experienced a $1.9 million
decrease in revenue from Existing Operations as a result of a decline in sales
of certain prearranged funeral merchandise from fiscal year 1995 to fiscal year
1996, and a $4.9 million decline in funeral revenue from the Company's Mexican
operations due to a 26% devaluation of the Mexican peso from fiscal year 1995
to fiscal year 1996. Additionally, there was a 5.5% decrease in the number
of domestic funeral services performed by Existing Operations (6.7% total).
The decline in revenue was offset partially by a 7% increase in 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 $6.0 million, or 5%, decrease in funeral costs from Existing Operations
resulted principally from the implementation of certain cost control measures,
including contract negotiations with certain vendors, a $3.6 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 noted above. Existing Operations achieved improved profit margins
resulting primarily from the increased cost controls and the increased
average revenue per funeral service mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes in
fiscal year 1996 which is not reflected in the 1995 period presented above.
The $5.7 million increase in revenue from prearranged funeral trust fund
and escrow accounts was attributable to a 22% growth in the average balance in
such trust funds and escrow accounts, resulting primarily from current year
customer payments deposited into the funds and funds added through acquisitions,
coupled with 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
approximately 10% of the Company's total funeral trust portfolio, averaged 23%
for the fiscal year ended October 31, 1996. The return on the Mexican funds
partially offset the 26% devaluation and associated decline in funeral revenue
discussed above and the approximate 29% inflation experienced during the year.
Cemetery Segment
Year Ended
October 31,
---------------------
1996 1995 Increase
--------- ---------- --------
(In millions)
Cemetery Revenue
- ----------------
Existing Operations.......................... $ 179.1 $ 168.8 $ 10.3
Acquired Operations.......................... 19.7 5.5 14.2
Revenue from merchandise trust
funds and escrow accounts................... 9.1 5.5 3.6
-------- -------- -------
$ 207.9 $ 179.8 $ 28.1
======== ======== =======
Cemetery Costs
- --------------
Existing Operations.......................... $ 145.4 $ 140.5 $ 4.9
Acquired Operations.......................... 16.6 4.9 11.7
-------- -------- -------
$ 162.0 $ 145.4 $ 16.6
======== ======== =======
Cemetery Segment Profit...................... $ 45.9 $ 34.4 $ 11.5
======== ======== =======
Cemetery revenue increased $28.1 million, or 16%, in fiscal year 1996, as
compared to fiscal year 1995, due principally to a $14.2 million increase in
revenue from Acquired Operations and a $10.3 million increase in revenue from
Existing Operations. Costs increased during this same period by $16.6 million,
of which $11.7 million was attributable to Acquired Operations. The $10.3
million, or 6%, increase in revenue from Existing Operations, and the $4.9
million, or 3.5%, increase in costs from Existing Operations were due
principally to the significant decrease in fiscal year 1996, as compared to
fiscal year 1995, in the revenue and direct cost deferral required by the
accounting principles prescribed for sales of real estate. These factors and
others, including certain cost control measures implemented by the Company,
contributed to an increase in the profit margin of Existing Operations. The
increase in revenues and costs associated with Acquired Operations resulted
primarily from the acquisition of cemeteries during fiscal year 1996 which is
not reflected in the 1995 period presented above.
The $3.6 million increase in revenue from merchandise trust funds and
escrow accounts was attributable principally to a 30% growth in the average
balance in the merchandise trust funds and escrow accounts, resulting primarily
from current year payments deposited into the funds, along with funds added
through acquisitions, coupled with an increase in the return on the funds, which
return is still within the Company's goal of 8.5-9.0%.
Other
Corporate general and administrative expenses increased $3.0 million in
fiscal year 1996, to 3.3% of revenue, as compared to 3.0% in fiscal year 1995.
The increase in these expenses is the result of activities to support the
Company's growth, including approximately $2.0 million expensed in an
undertaking to centralize and standardize certain financial and administrative
functions. Management expects to incur additional costs in fiscal year 1997
related to the continuous improvement process, which costs are not expected to
be material.
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, thereby
establishing the total charge to earnings.
Interest expense increased $3.2 million during fiscal year 1996 when
compared to fiscal year 1995. The increase resulted from an increase in average
borrowings, which was partially offset by a decrease in average interest rates
from 7.2% to 6.7%. Approximately $378.8 million, or 73%, of the $520.1 million
borrowings outstanding at October 31, 1996 was subject to short-term variable
interest rates averaging approximately 6.2%.
Investment and other income increased $1.2 million during fiscal year 1996
when compared to fiscal year 1995, due principally to a $1.6 million gain in
fiscal year 1996 on the sale of land that was condemned.
The Company experienced an increase in its effective tax rate from 37.0% in
fiscal year 1995 to 37.5% in fiscal year 1996. For fiscal year 1997, the
Company anticipates that its effective tax rate will decline slightly as a
result of reducing the costs of foreign taxes.
Liquidity and Capital Resources
Cash and marketable securities of the Company were $36.3 million as of
October 31, 1997, an increase of approximately $9.2 million from October 31,
1996. The Company used cash of $15.2 million in its operations for the year
ended October 31, 1997, compared to providing cash of $11.6 million for fiscal
year 1996, due principally to an increase in the growth of receivables, offset
by an increase in net earnings and other working capital changes.
In October 1996, the Company filed a shelf registration statement with the
Securities and Exchange Commission covering $300 million of unsecured,
unsubordinated debt securities. In December 1996, the Company issued $100
million of those debt securities in the form of 6.70% Notes due 2003. Net
proceeds were approximately $99.4 million, of which $96.8 million was used to
reduce balances outstanding under the Company's revolving credit facilities,
with the remaining $2.6 million used for acquisitions and general corporate
purposes.
In April 1997, the Company completed the syndication of a new $600 million
revolving credit facility, which replaced its existing $262 million, $88 million
and $75 million revolving credit facilities. As of October 31, 1997, $312.0
million was outstanding under this facility, with an average interest rate of
6.3%.
Long-term debt as of October 31, 1997 amounted to $558.3 million, compared
to $520.1 million as of October 31, 1996. The Company's long-term debt consisted
of $312.0 million under the Company's revolving credit facilities, $225.0 mill-
ion of long-term notes and $21.3 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 $1.7 million of
term notes incurred principally in connection with acquisitions.
During the third quarter of fiscal year 1997, the Company completed the
sale of 6,055,000 shares of Class A Common Stock, resulting in approximately
$211 million in net proceeds, which was used for acquisitions and general
corporate purposes.
The most restrictive of the Company's credit agreements requires it to
maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has
managed its capitalization within that limit, with a ratio of total debt to
equity of .7, 1.0, and .7 to 1.0 as of October 31, 1997, 1996 and 1995,
respectively. As of October 31, 1997, the Company had $463.5 million of
additional borrowing capacity within this parameter, of which $295.4 million was
available under its revolving credit facilities.
The Company's ratio of earnings to fixed charges was 3.65 (which excludes
the cumulative effect of change in accounting principles), 3.98, 2.72 (which
includes the $17.3 million non-recurring, non-cash performance-based stock
option charge), 5.30 and 5.15 for the fiscal years ended October 31, 1997, 1996,
1995, 1994 and 1993, respectively. Excluding the stock option charge, the
Company's ratio of earnings to fixed charges for fiscal year 1995 would have
been 3.43. For purposes of computing the ratio of earnings to fixed charges,
earnings consist of pretax earnings plus fixed charges (excluding interest
capitalized during the period). Fixed charges consist of interest expense,
capitalized interest, amortization of debt expense and discount or premium
relating to any indebtedness, and the portion of rental expense that management
believes to be representative of the interest component of rental expense.
Fiscal year 1996 and prior amounts reflect the Company's previous accounting
methods which were in effect at the time.
During fiscal year 1997, the Company completed the acquisition of 104
funeral homes and ten cemeteries for purchase prices aggregating approximately
$184.5 million, including the issuance of approximately 344,000 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 primarily with advances under the Company's revolving credit facilities.
Subsequent to fiscal year-end, the Company completed the acquisition of 17
funeral homes and two cemeteries for approximately $39.5 million. As of January
20, 1998, the Company also had agreements in principle or letters of intent to
purchase 44 funeral homes for purchase prices aggregating approximately $39.2
million. If these purchases are consummated, the amounts to be paid will be
satisfied principally by borrowings under the Company's revolving credit
facilities.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $40 million for the fiscal year ending October 31, 1998, which
includes 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 facilities. Additional debt and equity financing may
be required in connection with future acquisitions. In addition, the Company
monitors its mix of fixed and floating rate debt obligations in light of
changing market conditions and may from time to time decide to alter that mix
by, for example, refinancing balances outstanding under its floating rate
revolving credit facility with public or private fixed rate debt, or by entering
into interest rate swaps or similar interest rate hedging transactions.
Inflation
Inflation has not had a significant impact on the Company's United States
operations over the past three years, nor is it expected to have a significant
impact in the foreseeable future. The Mexican economy, however, currently is
experiencing inflation rates substantially in excess of those in the United
States.
During the first quarter of fiscal year 1997, the Company changed its
method of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies. Under
that method, foreign currency translation adjustments are reflected in results
of operations, instead of in shareholders' equity. This change did not have a
material effect on the Company's results of operations for fiscal year 1997.
Other
In 1997, the Company began to modify its computer software programs to
enable them to correctly process dates for the year 2000. Project completion is
planned for early spring 1999 at an estimated cost of $100,000, using both
internal and external resources. The Company presently believes that, with
modifications to existing software, the Year 2000 issue will not pose
significant operational issues for the Company's computer systems.
Statements of Financial Accounting Standards No. 128, "Earnings Per Share,"
and No. 129, "Disclosure of Information about Capital Structure," are required
to be implemented during the first quarter of the Company's fiscal year ending
October 31, 1998. Statements of Financial Accounting Standards No. 130,
"Reporting Comprehensive Income," and No. 131, "Disclosure about Segments of an
Enterprise and Related Information," are required to be implemented during the
Company's fiscal year ending October 31, 1999. The effect of these
pronouncements on the Company's consolidated financial condition and results of
operations is not expected to be material.
Forward-Looking Statements
Certain statements made herein or elsewhere by, or on behalf of, the
Company that are not historical facts are intended to be forward-looking
statements within the meaning of the safe harbor provisions of the Private
Securities Litigation Reform Act of 1995.
The Company's goals for fiscal year 1998 include: (i) revenue growth of at
least 20%; and (ii) earnings per share growth of 20%. The Company also projects
approximately $200-$225 million in acquisitions, which represents a slight
increase over the $185 million, $179 million, and $154 million achieved in
fiscal years 1997, 1996, and 1995, respectively. For fiscal year 1998, the
Company projects gross margin improvement of approximately 50 to 60 basis
points over its fiscal year 1997 gross margin.
The Company's strategic plan for the future includes the following goals:
(i) achievement of $1 billion in revenue by fiscal year 2001, and (ii) earnings
per share growth of 20% annually.
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 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 in part upon sustaining the
level of acquisition activity experienced by the Company in the last three
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, including
foreign markets, that the Company desires to enter, the Company
competes for acquisitions with the other publicly-traded death care
firms. 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 aggress-
iveness 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, 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.
(2) The level of revenues also is affected by the volume and prices of the
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 the 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 also is 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) The Company cannot predict whether or when a non-cash charge to
earnings of approximately $68 million may be required in connection with its
performance-based stock options. See "1995 Incentive Compensation Plan" in Note
13 to the Company's consolidated financial statements included in Item 8.
(6) The Company first entered foreign markets in the fourth quarter of
fiscal year 1994, and no assurance can be given that the Company will
continue to be successful in expanding in foreign markets, or that any
expansion in foreign markets will yield results comparable to those
realized as a result of the Company's expansion in the United States.
(7) 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 and whether, and the rate at
which, management is able to increase the profitability of acquired
businesses.
(c) The ability of the Company to manage its growth in terms of imple-
menting 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-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
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.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
Page
Report of Independent Accountants........................................... 27
Consolidated Statements of Earnings for the Years Ended
October 31, 1997,1996 and 1995............................................. 28
Consolidated Balance Sheets as of October 31, 1997 and 1996................. 29
Consolidated Statements of Shareholders' Equity for the Years Ended
October 31, 1997, 1996 and 1995............................................ 31
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1997, 1996 and 1995............................................ 32
Notes to Consolidated Financial Statements.................................. 34
REPORT OF INDEPENDENT ACCOUNTANTS
The Board of Directors
Stewart Enterprises, Inc.:
We have audited the accompanying consolidated balance sheets of Stewart
Enterprises, Inc. and Subsidiaries as of October 31, 1997 and 1996 and the
related consolidated statements of earnings, shareholders' equity and cash
flows for each of the three years in the period ended October 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
on our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to
obtain reasonable assurance about whether the financial statements are free of
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial
statement presentation. We believe that our audits provide a reasonable
basis for our opinion.
In our opinion, the consolidated financial statements referred to above
present fairly, in all material respects, the financial position of Stewart
Enterprises, Inc. and Subsidiaries as of October 31, 1997 and 1996, and the
results of their operations and their cash flows for each of the three years in
the period ended October 31, 1997 in conformity with generally accepted
accounting principles.
As described in Note 3 to the consolidated financial statements, the
Company changed its method of accounting for cemetery sales and its method of
accounting for funeral services investment trust fund earnings in 1997.
COOPERS & LYBRAND L.L.P.
New Orleans, Louisiana
December 16, 1997
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
Year Ended October 31,
-------------------------------------------
1997 1996 1995
---- ---- ----
Revenues:
Funeral ............................................ $291,649 $225,461 $188,991
Cemetery ........................................... 240,937 207,926 179,831
------- -------- -------
532,586 433,387 368,822
------- -------- -------
Costs and expenses:
Funeral ............................................ 202,414 153,222 133,682
Cemetery ........................................... 173,000 162,047 145,397
------- -------- -------
375,414 315,269 279,079
------- -------- -------
Gross profit........................................ 157,172 118,118 89,743
Corporate general and administrative expenses ......... 15,402 14,096 11,113
------- -------- -------
Operating earnings before performance-based
stock options ................................... 141,770 104,022 78,630
Performance-based stock options ....................... - - 17,252
------- -------- -------
Operating earnings ................................. 141,770 104,022 61,378
Interest expense ...................................... (38,031) (26,051) (22,815)
Investment and other income ........................... 2,738 4,104 2,937
------- -------- -------
Earnings before income taxes and cumulative
effect of change in accounting principles ....... 106,477 82,075 41,500
Income taxes .......................................... 36,735 30,778 15,355
------- -------- -------
Earnings before cumulative effect of
change in accounting principles ................. 69,742 51,297 26,145
Cumulative effect of change in accounting principles
(net of $2,230 income tax benefit)(Note 3) ......... (2,324) - -
-------- -------- -------
Net earnings .................................... $ 67,418 $ 51,297 $ 26,145
======== ======== ========
Earnings per common share:
Earnings before cumulative effect of change in
accounting principles ........................... $ 1.57 $ 1.24 $ .72
Cumulative effect of change in
accounting principles ........................... (.05) - -
-------- -------- --------
Net earnings ....................................... $ 1.52 $ 1.24 $ .72
======== ======== ========
Weighted average common shares outstanding
(in thousands) ..................................... 44,389 41,410 36,386
======== ======== ========
Pro forma amounts assuming change in accounting
principles was applied retroactively:
Net earnings ................................... $ 69,742 $ 49,959 $ 30,671
======== ======== ========
Earnings per common share ...................... $ 1.57 $ 1.21 $ .84
======== ======== ========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
October 31,
------------------------
ASSETS 1997 1996
------ --------- ----------
Current assets:
Cash and cash equivalent investments............... $ 31,640 $ 24,580
Marketable securities.............................. 4,615 2,514
Receivables, net of allowances..................... 129,760 109,129
Inventories........................................ 43,044 31,044
Prepaid expenses................................... 4,692 4,275
--------- ---------
Total current assets............................ 213,751 171,542
Receivables due beyond one year, net of allowances ... 200,285 147,961
Intangible assets..................................... 415,723 301,309
Deferred charges...................................... 77,371 101,073
Cemetery property, at cost............................ 307,494 314,377
Property and equipment, at cost:
Land............................................... 67,579 63,653
Buildings.......................................... 244,421 197,553
Equipment and other................................ 102,592 80,626
--------- ---------
414,592 341,832
Less accumulated depreciation...................... 85,188 69,088
--------- ---------
Net property and equipment......................... 329,404 272,744
Long-term investments................................. 57,345 48,407
Other assets.......................................... 25,478 3,500
--------- ---------
$1,626,851 $1,360,913
========= =========
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
October 31,
-------------------------
LIABILITIES AND SHAREHOLDERS' EQUITY 1997 1996
------------------------------------ ---------- ----------
Current liabilities:
Current maturities of long-term debt ..................................... $ 33,973 $ 4,240
Accounts payable ......................................................... 16,705 11,889
Accrued payroll .......................................................... 16,241 12,612
Accrued insurance ........................................................ 8,009 8,341
Accrued interest ......................................................... 7,581 4,621
Accrued other ............................................................ 14,284 14,479
Estimated costs to complete mausoleums and lawn crypts,
and to deliver merchandise ............................................ 624 3,552
Income taxes payable ..................................................... - 10,154
Deferred income taxes .................................................... 9,720 3,594
---------- ----------
Total current liabilities ............................................. 107,137 73,482
Long-term debt, less current maturities ..................................... 524,351 515,901
Deferred income taxes ....................................................... 85,454 70,388
Deferred revenue ............................................................ 79,494 137,874
Other long-term liabilities ................................................. 10,845 15,821
---------- ----------
Total liabilities ..................................................... 807,281 813,466
---------- ----------
Commitments and contingencies (Note 14)
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
46,903,784 and 40,022,483 shares at October 31, 1997 and
1996, respectively ................................................. 46,904 40,022
Class B authorized 5,000,000 shares; issued and outstanding
1,777,510 shares at October 31, 1997 and 1996; 10 votes
per share; convertible into an equal number of Class A shares ...... 1,778 1,778
Additional paid-in capital ............................................ 526,180 306,706
Retained earnings ..................................................... 279,104 215,314
Cumulative foreign translation adjustment ............................. (36,609) (19,058)
Unrealized appreciation of investments ................................ 2,213 2,685
---------- ----------
Total shareholders' equity 819,570 547,447
---------- ----------
$1,626,851 $1,360,913
========== ==========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(Dollars in thousands, except per share amounts)
Unrealized
Common Stock Appreciation
-------------------------- Additional Foreign (Depreciation) Total
Shares - Paid-In Retained Translation of Unearned Shareholders'
Classes A and B(1) Amount Capital Earnings Adjustment Investments Compensation Equity
------------------ ------- ---------- -------- ----------- ------------- ------------ -------------
(in thousands)
Balance
October 31, 1994 .......... 32,839 (2) $ 32,839 $151,690 $141,885 $ (490) $ - $ (253) $325,671
Net earnings ............. 26,145 26,145
Unearned compensation .... 253 253
Sales of common stock .... 6,081 6,081 97,854 103,935
Subsidiaries acquired
with common stock ..... 1,460 1,460 30,203 31,663
Stock options exercised .. 1,866 1,866 37,244 39,110
Purchase and retirement
of common stock ....... (1,232) (1,232) (25,045) (26,277)
Foreign translation
adjustment ............ (18,633) (18,633)
Unrealized appreciation
of investments ........ 3,356 3,356
Dividends ($.033 per
share)(1) ............. (1,245) (1,245)
------------------ -------- ---------- -------- ----------- ------------- ------------ -------------
Balance
October 31, 1995 .......... 41,014 (2) 41,014 291,946 166,785 (19,123) 3,356 - 483,978
Net earnings ............. 51,297 51,297
Sales of common stock .... 38 38 841 879
Subsidiaries acquired with
common stock .......... 466 466 11,785 12,251
Stock options exercised... 526 526 10,061 10,587
Purchase and retirement of
common stock .......... (244) (244) (7,927) (8,171)
Foreign translation
adjustment ............ 65 65
Unrealized depreciation of
investments ........... (671) (671)
Dividends ($.066 per
share)(1) ............. (2,768) (2,768)
------------------ -------- ---------- -------- ----------- ------------- ------------ -------------
Balance
October 31, 1996 .......... 41,800 (2) 41,800 306,706 215,314 (19,058) 2,685 - 547,447
Net earnings ............. 67,418 67,418
Sales of common stock .... 6,095 6,095 205,608 211,703
Subsidiaries acquired with
common stock ............ 344 344 12,082 12,426
Stock options exercised .... 787 787 14,851 15,638
Purchase and retirement of
common stock ............ (344) (344) (13,067) (13,411)
Foreign translation
adjustment .............. (17,551) (17,551)
Unrealized depreciation of
investments ............. (472) (472)
Dividends ($.08 per
share) .................. (3,628) (3,628)
------------------ -------- ---------- -------- ----------- ------------- ------------ -------------
Balance
October 31, 1997 ............ 48,682 (2) $ 48,682 $526,180 $279,104 $(36,609) $ 2,213 $ - $819,570
================== ======== ========== ======== =========== ============= ============ =============
(1) Share and per share information has been adjusted to give effect to
a three-for-two common stock split effective June 21, 1996.
(2) Includes 1,778 shares (in thousands) of Class B Common Stock.
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
Year Ended October 31,
----------------------------------
1997 1996 1995
--------- --------- ----------
Cash flows from operating activities:
Net earnings............................................. $ 67,418 $ 51,297 $ 26,145
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Depreciation and amortization......................... 27,849 21,701 16,792
Provision for doubtful accounts....................... 21,351 23,156 15,698
Cumulative effect of change in accounting principles.. 2,324 - -
Performance-based stock options....................... - - 17,252
Net gains on sales of marketable securities........... (370) (2,098) (269)
Provision (benefit) for deferred income taxes......... 11,360 (4,676) 1,761
Changes in assets and liabilities net of effects
from acquisitions:
Increase in prearranged funeral trust
receivables........................................ (17,933) (17,265) (15,207)
Increase in other receivables........................ (71,988) (35,918) (60,684)
Increase in deferred charges and intangible assets... (14,018) (7,385) (19,290)
Increase in inventories and cemetery property........ (8,394) (8,812) (4,603)
Increase (decrease) in accounts payable and accrued
expenses........................................... ( 9,641) 2,682 7,675
Decrease in estimated costs to complete
mausoleums and lawn crypts, and to deliver
merchandise........................................ (24,874) (10,256) (7,306)
Increase in deferred revenue......................... 1,778 250 19,877
Increase (decrease) in other......................... (105) (1,037) 349
--------- --------- ----------
Net cash provided by (used in) operating activities... (15,243) 11,639 (1,810)
--------- --------- ----------
Cash flows from investing activities:
Proceeds from sale of marketable securities .............. 11,297 8,648 7,010
Purchases of marketable securities and
long-term investments.................................... (19,771) (16,317) (10,276)
Purchases of subsidiaries, net of cash, seller
financing and stock issued............................... (154,013) (158,359) (99,691)
Additions to property and equipment....................... (44,405) (26,332) (20,676)
Other .................................................... 1,037 471 2,770
--------- --------- ----------
Net cash used in investing activites .................... (205,855) (191,889) (120,863)
--------- --------- ----------
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
Year Ended October 31,
----------------------------------
1997 1996 1995
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt............................... 367,725 277,259 202,700
Repayments of long-term debt............................... (348,782) (90,691) (165,310)
Issuance of common stock................................... 227,341 11,466 123,122
Purchase and retirement of common stock.................... (13,411) (8,171) (26,277)
Dividends.................................................. (3,628) (2,768) (1,245)
--------- --------- ---------
Net cash provided by financing activities................ 229,245 187,095 132,990
--------- --------- ---------
Effect of exchange rates on cash and cash equivalents....... (1,087) (491) (1,305)
--------- --------- ---------
Net increase in cash........................................ 7,060 6,354 9,012
Cash and cash equivalents, beginning of year................ 24,580 18,226 9,214
--------- --------- ---------
Cash and cash equivalents, end of year...................... $ 31,640 $ 24,580 $ 18,226
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes.............................................. $ 30,600 $ 25,100 $ 16,900
Interest.................................................. $ 35,100 $ 26,100 $ 22,800
Non cash investing and financing activities:
Subsidiaries acquired with common stock.................. $ 12,426 $ 12,251 $ 31,663
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(1) The Company
Stewart Enterprises, Inc. (the "Company") is the third largest provider of
products and services in the death care industry in North America. Through
its subsidiaries, the Company offers a complete line of funeral merchandise
and services, along with cemetery property, merchandise and services. For the
year ended October 31, 1997, the funeral and cemetery segments contributed
approximately 55% and 45%, respectively, of total revenues, and 57% and 43%,
respectively, of consolidated gross profit.
As of October 31, 1997, the Company owned and operated 401 funeral homes
and 129 cemeteries in 24 states within the United States, and in Puerto Rico,
Mexico, Australia, New Zealand, Canada, Spain and Portugal. The Company
commenced its international operations in Mexico in fiscal year 1994, and
entered Australia in fiscal year 1995, New Zealand and Canada in fiscal year
1996, and Spain and Portugal in fiscal year 1997. For fiscal year 1997,
foreign operations contributed approximately 15% of total revenue and, as of
October 31, 1997, represented approximately 19% of total assets.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(b) Use of Estimates
The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.
(c) Fair Value of Financial Instruments
Estimated fair value amounts have been determined using available market
information and the valuation methodologies described below. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein may not
be indicative of the amounts the Company could realize in a current market.
The use of different market assumptions or valuation methodologies may have a
material effect on the estimated fair value amounts.
The carrying amounts of cash and cash equivalents, marketable securities
and current receivables approximate fair value due to the short-term nature of
these instruments. The carrying amount of receivables due beyond one year
approximates fair value because they bear interest at rates currently offered
by the Company for receivables with similar terms and maturities. The
carrying amount of long-term investments is stated at fair value as they are
classified as available for sale under the provisions of Statement of
Financial Accounting Standards No. 115, "Accounting for Certain Investments in
Debt and Equity Securities." The carrying value of the Company's long-term
floating rate debt approximates fair value as it bears interest at rates
currently available to the Company for debt with similar terms and maturities.
The fair value of the Company's long-term fixed rate debt is estimated based
upon a discounted present value analysis of future cash flows using current
rates obtainable by the Company for debt with similar maturities. See Note
11.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies--(Continued)
(d) Inventories
Inventories are stated at the lower of cost (specific identification and
first-in, first-out methods) or net realizable value.
(e) Depreciation and Amortization
Buildings and equipment are depreciated over their estimated useful lives,
ranging from 19 to 45 years and from three to ten years, respectively, primarily
using the straight-line method. For the fiscal years ended October 31, 1997,
1996 and 1995, depreciation expense totalled approximately $17,972, $13,938 and
$11,131, respectively.
Goodwill, or costs in excess of net assets of companies acquired, totalled
approximately $411,564 and $296,473 as of October 31, 1997 and 1996, re-
spectively, and is amortized principally over 40 years by the straight-line
method. The Company continually evaluates the recoverability of this intangible
asset by assessing whether the amortization of the goodwill balance over its
remaining life can be recovered through undiscounted expected future cash flows.
Other intangible assets are amortized over five years by the straight-line
method. Accumulated amortization was approximately $29,383 and $19,506 as of
October 31, 1997 and 1996, respectively.
(f) Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," all assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rate in
effect at the end of the period, and revenues and expenses are translated at
average exchange rates prevailing during the period. The resulting translation
adjustments are reflected in a separate component of shareholders' equity,
except for translation adjustments arising from operations in highly
inflationary economies.
During the first quarter of fiscal year 1997, the Company changed its
method of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies. Under
that method, foreign currency translation adjustments are reflected in results
of operations, instead of in shareholders' equity. This change did not have a
material effect on the Company's results of operations for fiscal year 1997.
(g) Funeral Revenue
The Company sells prearranged funeral services and funeral merchandise
under contracts that provide for delivery of the services and merchandise at the
time of death. Prearranged funeral services are recorded as funeral revenue in
the period the funeral is performed. Prearranged funeral merchandise is
recognized as revenue upon delivery in jurisdictions where such sales are
included in funeral and insurance contracts and where such sales are refundable
to the customer; otherwise, revenue is recognized currently.
Commissions and direct marketing costs relating to prearranged funeral
services and prearranged funeral merchandise sales are accounted for in the same
manner as the revenue to which they relate. Where revenue is deferred, the
related commissions and direct marketing costs are deferred and amortized as the
funeral contracts are fulfilled. Conversely, where revenues are recognized
currently, the related costs are expensed as incurred. Indirect costs of
marketing prearranged funeral services are expensed in the period in which
incurred.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies--(Continued)
Prearranged funeral services and merchandise generally are funded either
through trust funds or escrow accounts established by the Company, or through
insurance. Principal amounts deposited in the trust funds or escrow accounts
are available to the Company as funeral services and merchandise are delivered
and are refundable to the customer in those situations where state law provides
for the return of those amounts under the purchaser's option to cancel the
contract. Certain jurisdictions provide for non-refundable trust funds or
escrow accounts where the Company receives such amounts upon cancellation by the
customer.
Effective November 1, 1996, the Company changed its method of accounting
for prearranged funeral trust earnings. See Note 3. Earnings are withdrawn
only as funeral services and merchandise are delivered or contracts are
canceled, except in jurisdictions that permit earnings to be withdrawn currently
and in unregulated jurisdictions where escrow accounts are used.
Funeral services sold at the time of need are recorded as funeral revenue
in the period the funeral is performed.
(h) Cemetery Revenue
Effective November 1, 1996, the Company changed its method of accounting
for prearranged sales of cemetery interment rights, related products and burial
site openings and closings. See Note 3. The Company recognizes income
currently from unconstructed mausoleum crypts sold to the extent it has
available inventory. Costs of mausoleum and lawn crypts sold but not yet
constructed are based upon management's estimated cost to construct those items.
In certain jurisdictions in which the Company operates, local law or
contracts with customers generally require that a portion of the sale price of
prearranged cemetery merchandise be placed in trust funds or escrow accounts.
In those jurisdictions where trust or escrow arrangements are neither
statutorily nor contractually required, the Company typically deposits on a
voluntary basis approximately 110% of the cost of the cemetery merchandise into
escrow accounts. The Company recognizes as revenue on a current basis all
dividends and interest earned, and net capital gains realized, by prearranged
merchandise trust funds or escrow accounts. At the same time, the liability for
the estimated cost to deliver merchandise is adjusted through a charge to
earnings to reflect inflationary merchandise cost increases. Principal and
earnings are withdrawn only as the merchandise is delivered or contracts are
cancelled.
Pursuant to perpetual care contracts and laws, a portion, generally 10%, of
the proceeds from cemetery property sales is deposited into perpetual care trust
funds or escrow accounts. In addition, in those jurisdictions where trust or
escrow arrangements are neither statutorily nor contractually required, the
Company typically deposits on a voluntary basis a portion, generally 10%, of the
sale price into escrow accounts. The income from these funds, which have been
established in most jurisdictions in which the Company operates cemeteries, is
used for maintenance of those cemeteries, but principal, including in some
jurisdictions net realized capital gains, must generally be held in perpetuity.
Accordingly, the trust fund corpus is not reflected in the consolidated
financial statements, except for voluntary escrow funds established by the
Company, which are classified as long-term investments. The Company recognizes
and withdraws currently all dividend and interest income earned and, where
permitted, capital gains realized by perpetual care funds.
A portion of the sales of cemetery property and merchandise is made under
installment contracts bearing interest at prevailing rates. Finance charges are
recognized as cemetery revenue under the effective interest method over the
terms of the related installment receivables.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies--(Continued)
(i) Income Taxes
The Company recognizes deferred tax assets and liabilities for the
expected future tax consequences of temporary differences between tax bases
and financial reporting bases of assets and liabilities. The Company has not
provided for possible United States federal income taxes on the undistributed
earnings of foreign subsidiaries that are considered to be reinvested
indefinitely.
(j) Earnings Per Common Share
Earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding during each period. The
weighted average number of common shares outstanding for fiscal years 1995 and
1996 has been adjusted for the Company's three-for-two common stock split
effective June 21, 1996.
(k) Recent Accounting Standards
The Company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," and continues to apply Accounting Principles Board Opinion No.
25 and related interpretations in accounting for its stock-based compensation
plans. See Note 13.
Statements of Financial Accounting Standards No. 128, "Earnings Per
Share," and No. 129, "Disclosure of Information about Capital Structure," are
required to be implemented during the first quarter of the Company's fiscal
year ending October 31, 1998. Statements of Financial Accounting Standards
No. 130, "Reporting Comprehensive Income," and No. 131, "Disclosure about
Segments of an Enterprise and Related Information," are required to be
implemented during the Company's fiscal year ending October 31, 1999. The
effect of these pronouncements on the Company's consolidated financial
condition and results of operations is not expected to be material.
(l) Reclassifications
Certain reclassifications have been made to the 1996 and 1995 consolidated
financial statements to conform to the presentation used in the 1997
consolidated financial statements. These reclassifications had no effect on
net earnings or shareholders' equity.
(3) Change in Accounting Principles
The Company changed the following accounting principles effective November
1, 1996:
(a) The Company now defers a portion of the earnings realized by
irrevocable prearranged funeral trust funds and escrow accounts in order to
offset the estimated effects of inflation on the future cost of performing
prearranged funeral services. Earnings realized in excess of those deferred
are recognized on a current basis, except in those jurisdictions where
earnings revert to a customer if a prearranged funeral service contract is
canceled. Previously, all such earnings were recognized as realized.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Change in Accounting Principles--(Continued)
(b) The Company now records all revenues and costs attributable to
prearranged sales of cemetery interment rights and related products when
customer contracts are signed. Allowances for customer cancellations and
refunds are provided at the date of sale based upon historical experience.
Previously, such sales generally were deferred under the accounting principles
prescribed for sales of real estate. Under the Company's application of this
method of accounting for sales of real estate, revenues and costs were
deferred until 20% of the contract amount had been collected.
(c) The Company now records revenue and related costs attributable to
cemetery burial site openings and closings at the time of sale. Previously,
such sales were deferred until delivery.
The accounting changes were made principally for the following reasons:
(a) A portion of funeral trust earnings and increasing benefits under
insurance contracts is intended to cover increases in the future costs of
providing price guaranteed funeral services. The Company believes that
deferring such earnings to the extent of the increased costs of the services
to be provided will better match revenues and costs because the total funds
available to satisfy the contract (principal and deferred earnings) will be
included in revenues with concurrent recognition of all costs related to
performance of the service when the funeral service is performed.
(b) The cemetery accounting methods have been adopted because all
significant obligations of the Company, including delivery of products and
opening and closing the burial site, have been satisfied in the period the
contract is signed. Related costs are provided based on actual costs
incurred, firm commitments or reliable estimates. Historical experience is
the basis for making appropriate allowances for customer cancellations and
will be adjusted when required.
The cumulative effect of these changes on prior years resulted in a
decrease in net earnings for the year ended October 31, 1997 of $2,324 (net of
a $2,230 income tax benefit), or $.05 per share. The current year effect of
the change in accounting principles was an increase in net earnings of $3,337,
or $.07 per share, for the year ended October 31, 1997.
(4) Acquisition of Subsidiaries
The following table reflects the Company's acquisition activity during the
past three fiscal years.
Businesses Acquired Aggregate Class A
--------------------------- Purchase Common Shares
Funeral Homes Cemeteries Price Issued
------------- ---------- -------- -------------
Fiscal year 1997 104 10 $184,500 344,000
Fiscal year 1996 134 15 179,000 466,000
Fiscal year 1995 55 15 154,400 1,460,000
These acquisitions have been accounted for by the purchase method, and
their results of operations are included in the accompanying consolidated
financial statements from the dates of acquisition. The purchase price
allocations for certain of these acquisitions are based on preliminary
information.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Acquisition of Subsidiaries--(Continued)
The following table reflects, on an unaudited pro forma basis, the
combined operations of the Company and the businesses acquired during fiscal
year 1997 as if such acquisitions had taken place at the beginning of the
respective periods presented. Appropriate adjustments have been made to
reflect the accounting basis used in recording the acquisitions. These pro
forma results have been prepared for comparative purposes only and do not
purport to be indicative of the results of operations that would have resulted
had the combinations been in effect on the dates indicated, that have resulted
since the dates of acquisition or that may result in the future.
Year Ended October 31,
--------------------------------
1997 1996
----------- ------------
(Unaudited)
Revenues............................ $ 570,325 $ 501,090
=========== ============
Earnings before cumulative effect of
change in accounting principles.... $ 67,272 $ 46,462
=========== ============
Net earnings........................ $ 64,947 $ 46,462
=========== ============
Earnings per common share before
cumulative effect of change in
accounting principles.............. $ 1.51 $ 1.11
=========== ============
Earnings per common share........... $ 1.46 $ 1.11
=========== ============
Weighted average common shares
outstanding (in thousands) 44,543 41,755
=========== ============
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
Year Ended October 31,
--------------------------------------
1997 1996 1995
---------- --------- ----------
Current assets........................ $ 8,537 $ 21,380 $ 8,991
Receivables due beyond one year....... - 1,973 3,832
Cemetery property..................... 7,572 25,260 46,482
Property and equipment, net........... 38,653 72,949 52,552
Deferred charges and other assets..... 549 9,889 3,787
Intangible assets, net................ 142,484 98,230 92,291
Current liabilities................... (10,683) (10,396) (22,990)
Long-term debt........................ (19,315) (10,388) (10,767)
Deferred income taxes................. (841) (15,640) (11,460)
Deferred revenue and other
liabilities.......................... (517) (22,647) (31,364)
---------- --------- ----------
166,439 170,610 131,354
Common stock used for acquisitions.... 12,426 12,251 31,663
---------- --------- ----------
Cash used for acquisitions............ $ 154,013 $158,359 $ 99,691
========== ========= ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Prearranged Funeral Services
The following summary reflects prearranged funeral services sold, but not
yet delivered, which are funded with trusts, escrow accounts and insurance, and
related prearranged funeral trust fund and escrow account balances. The trust-
and insurance-funded balances are not reflected in the accompanying consolidated
financial statements. Amounts which represent the Company's voluntary deposits
into escrow accounts in those jurisdictions where trust or escrow arrangements
are neither statutorily nor contractually required aggregated $34,599 and
$29,953 as of October 31, 1997 and 1996, respectively, and are classified as
long-term investments.
Amounts deposited in the trust funds and escrow accounts and funded through
insurance are available to the Company when the services are performed. Funds
held in trust or escrow are invested, and earnings (including net realized
capital gains) realized on irrevocable trust funds and escrow accounts in excess
of the amount deferred to offset the estimated effects of inflation on the
future cost of performing prearranged funeral services are recognized on a
current basis, in accordance with the Company's change in accounting methods
effective November 1, 1996. For fiscal year 1997, earnings of $24,682 were
included in funeral revenue. Had the Company's new accounting methods been in
effect in prior years, the amount of funeral trust and escrow earnings included
in funeral revenue would have been $17,829 and $14,715 for 1996 and 1995,
respectively.
October 31,
-----------------------------
1997 1996
------------- -----------
Trust or escrow funded:
Prearranged funeral services sold,
but not delivered.......................... $ 505,970 $ 445,301
============= ===========
Investments at market value................. $ 422,336 $ 353,366
Receivables to be collected on
prearranged funeral service contracts...... 102,154 97,053
------------- -----------
$ 524,490 $ 450,419
============= ===========
Insurance-funded and other prearranged
funeral services............................ $ 184,111 $ 141,725
============= ===========
Investments consist of:
U.S. Government, U.S. agencies
and municipalities...................... $ 54,568 $ 67,852
Corporate bonds.......................... 76,944 63,720
Preferred stocks......................... 31,871 29,906
Common stocks............................ 54,938 38,511
Money market funds and other
short-term investments.................. 151,825 110,540
Short-term fixed income foreign
investments............................. 41,766 37,536
------------- -----------
Total value at cost...................... 411,912 348,065
Net unrealized appreciation.............. 10,424 5,301
------------- -----------
Total value at market....................... $ 422,336 $ 353,366
============= ===========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Trust Funds and Escrow Accounts
The following summary reflects the Company's merchandise trust fund and
escrow account balances, as well as merchandise sold, but undelivered, at
current cost. Merchandise sold, but undelivered, is reflected at current cost
in the accompanying consolidated balance sheets net of the related merchandise
trust fund and escrow account balances and accumulated earnings, except for
$20,833 and $17,339 classified as long-term investments as of October 31, 1997
and 1996, respectively. These amounts represent the Company's voluntary deposits
into escrow accounts in those jurisdictions where trust or escrow arrangements
are neither statutorily nor contractually required. Amounts deposited in the
trust funds and escrow accounts are invested, and the revenue on the funds
(including net realized capital gains) of $12,237, $9,082 and $5,471 is
reflected in cemetery revenue for 1997, 1996 and 1995, respectively. Amounts
deposited in merchandise trust funds and escrow accounts that are invested in
debt securities as of October 31, 1997 totalled $74,637 and are scheduled to
mature as follows: $3,941 in less than one year; $25,787 in one through five
years; $42,524 in five through ten years; and $2,385 in more than ten years.
October 31,
----------------------------
1997 1996
------------ -----------
Merchandise trust funds and escrow accounts:
Merchandise sold, but not delivered,
at current cost................................ $ 108,643 $ 101,834
============ ===========
Investments at market value..................... $ 150,264 $ 113,530
Amounts to be collected
on merchandise contracts....................... 50,044 37,290
------------ -----------
$ 200,308 $ 150,820
============ ===========
Investments consist of:
U.S. Government, U.S. agencies
and municipalities............................. $ 29,141 $ 25,194
Corporate bonds................................. 43,506 27,140
Preferred stocks................................ 13,802 7,126
Common stocks................................... 24,452 16,107
Money market funds and other
short-term investments......................... 37,177 34,934
------------ -----------
Total value at cost............................. 148,078 110,501
Net unrealized appreciation..................... 2,186 3,029
------------ -----------
Total value at market........................... $ 150,264 $ 113,530
============ ===========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Trust Funds and Escrow Accounts--(Continued)
The following summary reflects the Company's perpetual care trust fund and
escrow account balances. Since principal cannot be withdrawn, these balances
are not reflected in the accompanying financial statements, except for $1,913
and $1,115, classified as long-term investments as of October 31, 1997 and 1996,
respectively, which represent the Company's voluntary deposits into escrow
accounts in those jurisdictions where trust or escrow arrangements are neither
statutorily nor contractually required. Funds held in trust or escrow are
invested, and the earnings withdrawn from the trust funds and escrow accounts
are used for the maintenance of cemetery grounds. For the years ended October
31, 1997, 1996 and 1995, such withdrawals, included in cemetery revenue,
totalled $12,497, $15,056 and $13,265, respectively.
October 31,
------------------------------
1997 1996
----------- ------------
Perpetual care trust funds and escrow accounts:
Investments at market value...................... $ 152,137 $ 144,916
Amounts to be collected under
existing agreements............................. 9,447 7,341
----------- ------------
$ 161,584 $ 152,257
=========== ============
Investments consist of:
U.S. Government, U.S. agencies
and municipalities............................. $ 28,829 $ 29,400
Corporate bonds................................. 45,274 44,215
Preferred stocks................................ 7,467 2,352
Common stocks................................... 25,266 24,573
Money market funds and other
short-term investments......................... 37,023 34,859
Other long-term investments..................... 520 129
----------- ------------
Total value at cost............................. 144,379 135,528
Net unrealized appreciation..................... 7,758 9,388
----------- ------------
Total value at market........................... $ 152,137 $ 144,916
=========== ============
(7) Cash and Cash Equivalent Investments
The Company considers all highly liquid investments with an original
maturity of three months or less to be a cash equivalent. The Company deposits
its cash and cash equivalent investments with high quality credit institutions.
Such balances typically exceed applicable FDIC insurance limits.
October 31,
------------------------------
1997 1996
----------- ------------
Cash...................................... $ 18,118 $ 19,790
Cash equivalent investments............... 13,522 4,790
----------- ------------
$ 31,640 $ 24,580
=========== ============
(8) Marketable Securities and Long-term Investments
Marketable securities consist of investments in fixed maturities and equity
securities. The market value as of October 31, 1997 and 1996 was $4,615 and
$2,514, which included gross unrealized gains of $1,027 and $345, respectively.
The Company realized net gains on the sales of securities of $370, $2,098 and
$269 for the years ended October 31, 1997, 1996 and 1995, respectively. The
cost of securities sold was determined by using the average cost method.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(8) Marketable Securities and Long-term Investments--(Continued)
The market value of long-term investments as of October 31, 1997 and 1996
was $57,345 and $48,407, which included gross unrealized gains of $1,877 and
$1,409, and gross unrealized losses of $968 and $437, respectively. Amounts
classified as long-term investments and invested in debt securities as of
October 31, 1997 totalled $15,137 and are scheduled to mature as follows: $0
in less than one year; $5,145 in one through five years; $9,494 in five
through ten years; and $498 in more than ten years. See Notes 5 and 6 which
include details of the Company's long-term investments.
(9) Receivables
October 31,
------------------------
1997 1996
--------- ---------
Current receivables are summarized as follows:
Installment contracts due within
one year....................................... $ 77,332 $ 64,937
Trade accounts, notes and other................. 29,642 10,610
Allowance for sales cancellations
and doubtful accounts.......................... (6,869) (2,996)
Amount to be collected for perpetual
care funds..................................... (4,017) (2,401)
--------- ---------
96,088 70,150
Funeral receivables............................. 25,332 36,032
Prearranged funeral trust receivable............ 8,340 2,947
--------- ---------
Net current receivables...................... $129,760 $109,129
========= =========
Long-term receivables are summarized as follows:
Installment contracts due beyond one year....... $154,710 $107,682
Allowance for sales cancellations and
doubtful accounts............................. (9,696) (3,236)
Amount to be collected for
perpetual care funds........................... (5,430) (4,940)
--------- ---------
139,584 99,506
Prearranged funeral trust receivable............ 60,701 48,408
Other........................................... ---- 47
--------- ---------
Net long-term receivables.................. $200,285 $147,961
========= =========
The Company's receivables as of October 31, 1997 are expected to mature
as follows:
Years ending October 31,
1998........................................................... $ 129,760
1999........................................................... 43,807
2000........................................................... 34,162
2001........................................................... 26,897
2002........................................................... 20,117
Later years.................................................... 75,302
----------
$ 330,045
==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(10) Inventories and Cemetery Property
Inventories are comprised of the following:
October 31,
-------------------------
1997 1996
---------- ----------
Developed cemetery property.................. $ 22,172 $ 15,837
Merchandise and supplies..................... 20,872 15,207
---------- -----------
$ 43,044 $ 31,044
========== ===========
Cemetery property is comprised of the following:
October 31,
-------------------------
1997 1996
---------- ----------
Developed cemetery property................... $ 65,083 $ 67,541
Undeveloped cemetery property................. 242,411 246,836
---------- ----------
$307,494 $314,377
========== ==========
The Company evaluates the recoverability of the cost of undeveloped
cemetery property through comparison with undiscounted expected future cash
flows.
(11) Long-term Debt
The following is a summary of long-term debt:
October 31,
-------------------------
1997 1996
---------- ----------
Revolving Credit Facilities (see "Credit Facility,"
"Revolving Credit Facility" and "Revolving
Line of Credit Note" below)..................... $312,000 $303,811
Senior Notes.................................... 125,000 125,000
6.70% Notes..................................... 100,000 -
Bridge Loan .................................... - 75,000
Other, principally seller financing of
acquired operations or assumption upon
acquisition, weighted average interest rate
of 5.9% as of October 31, 1997, partially
collateralized by assets of subsidiaries,
with maturities through 2022................... 21,324 16,330
---------- ----------
558,324 520,141
Less current maturities......................... 33,973 4,240
---------- ----------
$524,351 $515,901
========== ===========
In December 1995, the Company entered into an Amended and Restated Loan
Agreement with a group of banks that increased the aggregate amount available
under its uncollateralized revolving credit facility ("Credit Facility") from
$250,000 to $350,000. The number of participating banks increased from six to
eight, and the maturity date was extended to October 31, 2000. Interest was
payable at a lending bank's prime rate, LIBOR plus a specified spread or a
certificate of deposit rate plus a specified spread, at the Company's election.
The Credit Facility provided for a commitment fee of .20% on the average daily
amount of the unadvanced portion. In February 1996, the commitment fee was
reduced to .18% as a result of the Company's debt rating.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) Long-term Debt--(Continued)
On October 31, 1996, the Company and the lenders under the $350,000 Credit
Facility entered into an agreement whereby the $350,000 facility was replaced
with a $262,000 facility between the lenders and the Company, and an $88,000
facility between the lenders and two of the Company's subsidiaries which is
guaranteed by the Company. The terms and conditions of the new facilities
were identical to those contained in the Credit Facility. As of October 31,
1996, $215,811 was outstanding under the $262,000 facility, with a weighted
average interest rate of 6.04%, and $88,000 was outstanding under the $88,000
facility, with a weighted average rate of 6.48%. In April 1997, the Credit
Facility was replaced with a new revolving credit facility as discussed below.
In September 1996, the Company entered into a Bridge Loan Agreement
("Bridge Loan") with the lead bank in the Company's Credit Facility in the
amount of $75,000 to facilitate the Company's acquisition of a foreign
subsidiary. Borrowings under this facility bear interest at the lending
bank's prime rate, LIBOR plus a specified spread or a certificate of deposit
rate plus a specified spread, at the Company's election, mature on January 17,
1997 and have other terms and conditions that are identical to those contained
in the Credit Facility. As of October 31, 1996, $75,000 was outstanding under
this agreement and the weighted average interest rate was 6.01%. The loan was
repaid during fiscal year 1997.
In April 1997, the Company completed the syndication of a new $600,000
revolving credit facility ("Revolving Credit Facility"), which replaced its
existing $262,000, $88,000, and $75,000 revolving credit facilities. The
Revolving Credit Facility matures on April 30, 2002, contains a facility fee
of 12.5 basis points, and borrowings bear interest at the lead lending bank's
prime rate, or certain optional rates at the Company's election. As of
October 31, 1997, $312,000 was outstanding under this agreement with a
weighted average interest rate of 6.26%.
Additionally, the Company has available with a separate financial
institution an uncollateralized revolving line of credit ("Revolving Line of
Credit Note") used to support the interim cash funding for advances to be made
under the Revolving Credit Facility in amounts less than $5,000. Borrowings
under the Revolving Line of Credit Note are limited to $10,000, bear interest
at the lending bank's prime rate or certain optional rates at the Company's
election, and mature on March 31, 1998. Periodically, the Company will pay
down the Revolving Line of Credit Note using funds drawn on the Revolving
Credit Facility. There were no amounts outstanding under the Revolving Line
of Credit Note as of October 31, 1997 and 1996.
On December 21, 1993, the Company issued $50,000 of uncollateralized
senior notes, bearing interest at a rate of 6.04% and maturing on November 30,
2003. Principal payments of $7,143 are due each year commencing
November 30, 1997, with the final payment due on November 30, 2003. On
November 7, 1994, the Company issued $75,000 of uncollateralized senior notes
with an average maturity of seven years and a weighted average interest rate
of 8.44%. Principal payments are due as follows: $15,000 on May 1, 1998,
$16,667 on each of November 1, 2000, 2001 and 2002, and $10,000 on November 1,
2006. As of October 31, 1997 and 1996, the carrying value of the Company's
senior notes, including accrued interest, was $129,381, whereas the fair value
was $132,464 and $131,034, respectively.
In October 1996, the Company filed a shelf registration statement with the
Securities and Exchange Commission covering $300 million of unsecured,
unsubordinated debt securities. In December 1996, the Company issued $100,000
of those debt securities in the form of 6.70% Notes due 2003. Net proceeds
were approximately $99,400, of which $96,800 was used to reduce balances
outstanding under the Company's bank facilities, with the remaining $2,600
used for acquisitions and general corporate purposes. As of October 31, 1997,
the carrying value of these notes, including accrued interest, was $102,792,
whereas the fair value was $104,337.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) Long-term Debt--(Continued)
The bank loan agreements and senior note agreements contain various
restrictive covenants that limit consolidated funded indebtedness,
indebtedness of subsidiaries, the sale of assets to entities outside the
consolidated group and the payment of dividends on, and repurchases of,
the capital stock of the Company, and the bank loan agreements contain change
of control provisions. The Company also is required to maintain specified
financial ratios related to cash flow, net worth and fixed charges.
Principal payments due on the long-term debt, excluding the Revolving
Credit Facility, for the fiscal years ending October 31, 1998 through October
31, 2002 are approximately $33,973 in 1998, $8,585 in 1999, $8,480 in 2000,
$25,070 in 2001 and $24,998 in 2002.
(12) Income Taxes
Income tax expense (benefit) is comprised of the following components:
U.S. and
Possessions State Foreign Total
----------- ------- ------- --------
Year Ended October 31,
1997:
Current tax expense........... $ 21,174 $ 1,238 $ 2,963 $ 25,375
Deferred tax expense.......... 5,760 3,000 2,600 11,360
----------- ------- ------- --------
$ 26,934 $ 4,238 $ 5,563 $ 36,735
=========== ======= ======= ========
1996:
Current tax expense........... $ 31,128 $ 3,249 $ 1,077 $ 35,454
Deferred tax expense
(benefit).................... (6,720) (307) 2,351 (4,676)
----------- ------- ------- --------
$ 24,408 $ 2,942 $ 3,428 $ 30,778
=========== ======= ======= ========
1995:
Current tax expense........... $ 10,610 $ 2,106 $ 878 $ 13,594
Deferred tax expense
(benefit).................... (521) (509) 2,791 1,761
----------- ------- ------- --------
$ 10,089 $ 1,597 $ 3,669 $ 15,355
=========== ======= ======= ========
The reconciliation of the statutory tax rate to the effective tax rate is
as follows:
Year Ended October 31,
----------------------------------------
1997 1996 1995
----------- ---------- ----------
Statutory tax rate.................. 35.00% 35.00% 35.00%
Increases (reductions) in
tax rate resulting from:
State and U.S. possessions....... 2.82 6.21 7.45
Goodwill and other............... .31 2.52 1.35
Dividend exclusion............... (.78) (1.03) (2.26)
Foreign tax rate differential....... (2.50) (2.88) (2.77)
Foreign tax credit.................. (.35) (2.32) (1.77)
----------- ---------- ----------
Effective tax rate.................. 34.50% 37.50% 37.00%
=========== ========== ==========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(12) Income Taxes--(Continued)
Deferred tax assets and liabilities consist of the following:
October 31,
------------------------
1997 1996
---------- ----------
Deferred tax assets:
Domestic trust earnings............................. $ 13,975 $ ---
Estimated cost to deliver merchandise............... 3,360 3,293
Allowance for sales cancellations
and doubtful accounts.............................. 1,911 1,131
Deferred preneed sales and expenses................. 1,479 5,252
Deferred revenue on cemetery property
and merchandise sales.............................. --- 18,466
State income taxes.................................. --- 991
Stock compensation.................................. --- 947
Other............................................... 328 ---
---------- ----------
21,053 30,080
---------- ----------
Deferred tax liabilities:
Purchase accounting adjustments..................... 88,295 85,504
Foreign trust earnings.............................. 7,741 5,142
Deferred revenue on cemetery property
and merchandise sales.............................. 5,438 ---
State income taxes.................................. 3,839 ---
Percentage of completion on long-term contracts..... 3,733 4,480
Equity method investments........................... 2,005 2,005
Goodwill............................................ 1,634 2,288
Unrealized appreciation of investments.............. 1,170 1,597
Non-compete amortization............................ 805 308
Depreciation........................................ 737 737
Other............................................... 830 2,001
---------- ---------
116,227 104,062
---------- ---------
$ 95,174 $ 73,982
========== =========
Current net deferred liability....................... $ 9,720 $ 3,594
Long-term net deferred liability..................... 85,454 70,388
---------- ---------
$ 95,174 $ 73,982
========== =========
For the years ended October 31, 1997, 1996 and 1995, approximately 6%, 12%
and 14%, respectively, of the Company's earnings before income taxes
(excluding the performance-based stock option charge in fiscal year 1995),
were generated from properties in foreign jurisdictions.
(13) Benefit Plans
Stewart Enterprises Employees' Retirement Trust
The Company has a defined contribution retirement plan, the "Stewart
Enterprises Employees' Retirement Trust (A Profit-Sharing Plan) ("SEERT")."
This plan covers substantially all employees with more than one year of
service who have attained the age of 21. Contributions are made to the plan
at the discretion of the Company's Board of Directors. Additionally,
employees who participate may contribute up to 15% of their earnings.
Effective January 1, 1997, the first 5% of such employee contributions are
eligible for Company matching contributions at the rate of $.50 for each $1.00
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(13) Benefit Plans--(Continued)
contributed. Prior to January 1, 1997, Company matching contributions were
$.25 for each $1.00 contributed. The Company's expense, including the
Company's matching contributions, for the fiscal years ended October 31, 1997,
1996 and 1995 was approximately $2,900, $2,550 and $2,250, respectively.
Non-qualified Supplemental Retirement and Deferred Compensation Plan
In January 1994, the Company developed a non-qualified key employee
defined contribution supplemental retirement plan, which provides certain
highly compensated employees the opportunity to accumulate deferred
compensation which cannot be accumulated under SEERT due to certain
limitations. Contributions are made to the plan at the discretion of the
Company's Board of Directors. Additionally, employees who participate may
contribute up to 15% of their earnings. Effective January 1, 1997, the first
5% of such employee contributions are eligible for Company matching
contributions at the rate of $.50 for each $1.00 contributed. Prior to
January 1, 1997, Company matching contributions were $.25 for each $1.00
contributed. The Company's expense, including the Company's matching
contributions, for the fiscal years ended October 31, 1997, 1996 and 1995 was
approximately $164, $116 and $53, respectively.
1991 Incentive Compensation Plan
In May 1991, the Company adopted the 1991 Incentive Compensation Plan,
pursuant to which officers and other employees of the Company could be granted
stock options, stock awards, restricted stock, performance share awards or
cash awards by the Compensation Committee of the Board of Directors. From
September 25, 1992 through October 31, 1995, the Company granted options that
become exercisable based upon the passage of time to officers and other
employees for the purchase of a total of 1,452,938 shares of Class A Common
Stock at exercise prices equal to the fair market value at the grant date,
which ranged from $8.89 to $16.00 per share. The options generally were
exercisable in 25% annual increments over the four years following their
grant, except that options granted during fiscal year 1995 were exercisable
50% per year over the next two years. On July 25, 1995, the Compensation
Committee accelerated by two months the exercisability of options scheduled to
become exercisable September 25, 1995. As of October 31, 1997, all except
15,000 options scheduled to become exercisable based upon the passage of time
had been exercised.
From November 1, 1992 through October 31, 1995, the Company granted
performance-based options to certain officers and other employees for the
purchase of a total of 1,650,000 shares of Class A Common Stock at exercise
prices equal to the fair market value at the grant date, which ranged from
$9.55 to $16.00 per share. The agreements under which the options were
granted provided that the options were to become exercisable on December 1,
1996 only if, at any time prior to November 1, 1996, the average of the
closing sale prices of a share of the Company's Class A Common Stock over five
consecutive trading days equaled or exceeded $19.78, and the average annual
compounded increase in the Company's earnings per share for the four fiscal
years ending October 31, 1996 was at least 15%. Generally accepted accounting
principles require that a charge to earnings be recorded for these
performance-based options for the difference between the exercise price and
the then-current stock price when achievement of the performance objectives
becomes probable.
During May 1995, the stock price objective was achieved, and in July 1995,
management determined that the achievement of the earnings objective was
probable. Accordingly, during the third quarter of fiscal year 1995, the
Company recorded a non-cash charge of $17,252 ($10,869, or $.30 per share,
after-tax) for the difference between the option exercise prices and $21.58,
the then-market price of the Company's Class A Common Stock. Additionally, in
July 1995 the Compensation Committee accelerated the exercisability of the
performance-based options, thereby establishing the total charge to earnings.
As of October 31, 1997, all performance-based options granted under the 1991
Incentive Compensation Plan had been exercised.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(13) Benefit Plans--(Continued)
Pursuant to the Company's 1991 Incentive Compensation Plan, each director
and certain former directors of the Company who are not employees of the
Company were granted options to purchase 5,625 shares of the Company's Class A
Common Stock on each of February 16, 1993, and November 1, 1993, 1994 and
1995. Persons who are not employees of the Company who joined the Board
between option grant dates and certain former directors received a reduced
number of options based on the number of months of service on the Board prior
to the next grant date. The options became exercisable on October 31
following the date of grant, but may be exercised earlier if the director
dies, retires from the Board on or after reaching age 65 or becomes disabled.
The options expired on October 31, 1997. The exercise price of the options
was 80% of the fair market value of the Class A Common Stock on the date of
grant. As of October 31, 1997, 121,875 options had been granted pursuant to
these provisions of the Plan, and all had been exercised.
1995 Incentive Compensation Plan
In August 1995, the Board of Directors adopted, and in December 1995 and
December 1996 amended, the 1995 Incentive Compensation Plan, pursuant to which
officers and other employees of the Company may be granted stock options,
stock awards, restricted stock, stock appreciation rights, performance share
awards or cash awards by the Compensation Committee of the Board of Directors.
From September 7, 1995 through October 31, 1997, the Company granted options
to officers and other employees for the purchase of a total of 3,374,268
shares of Class A Common Stock at exercise prices equal to the fair market
value at the grant dates, which ranged from $21.00 to $43.00 per share. In
general, two-thirds of the options become exercisable in full on the first day
between the date of grant and August 31, 2000 that the average of the closing
sale prices of a share of the Company's Class A Common Stock for the 20
preceding consecutive trading days equals or exceeds $52.87, which represents
a 20% annual compounded growth in the price of a share of the Company's Class
A Common Stock over five years. Generally accepted accounting principles
require that a charge to earnings of approximately $68 million be recorded for
the performance-based options for the difference between the exercise price
and the then-current stock price when achievement of the performance objective
becomes probable. The remaining options generally become exercisable in 20%
annual increments beginning on September 7, 1996, except for grants issued
since the initial grant date, which options vest over the remainder of the
original five-year period. The Compensation Committee may accelerate the
exercisability of any option at any time at its discretion and the options
become immediately exercisable in the event of a change of control of the
Company, as defined in the plan. All of the options expire on October 31,
2001. As of October 31, 1997, 48,989 options had been exercised under this
plan, and 23,424 options had been forfeited.
Directors' Stock Option Plan
Effective January 2, 1996, the Board of Directors adopted, and in December
1996 amended, the Directors' Stock Option Plan, pursuant to which each
director of the Company who is not an employee of the Company was granted an
option to purchase 36,000 shares of the Company's Class A Common Stock. From
January 2, 1996 through October 31, 1997, the Company granted a total of
180,000 options at exercise prices equal to the fair market value at the grant
dates, which ranged from $24.67 to $36.50 per share. The options generally
become exercisable in 25% annual increments beginning January 2, 1997, except
for grants issued since the initial grant date, which options vest over the
remainder of the original four-year period. The Compensation Committee may
accelerate the exercisability of any option at any time at its discretion and
the options become immediately exercisable in the event of a change of control
of the Company, as defined in the plan. All of the options expire on January
2, 2001. As of October 31, 1997, no options had been exercised under this plan.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(13) Benefit Plans--(Continued)
Employee Stock Purchase Plan
On July 1, 1992, the Company adopted an "Employee Stock Purchase Plan" and
reserved 1,125,000 shares of Class A Common Stock for purchase by eligible
employees, as defined. The plan provides to eligible employees the
opportunity to purchase Company Class A Common Stock semi-annually on June 30
and December 31. The purchase price is established at a 15% discount from
fair market value, as defined. As of October 31, 1997, 204,766 shares had
been acquired under this plan.
Statement of Financial Accounting Standards No. 123
The company has adopted the disclosure-only provisions of Statement of
Financial Accounting Standards No. 123, "Accounting for Stock-Based
Compensation," ("SFAS 123") and continues to apply Accounting Principles Board
Opinion No. 25 and related interpretations in accounting for its stock-based
compensation plans. The following table is a summary of the Company's stock
options outstanding as of October 31, 1996 and 1997, and the changes that
occurred during fiscal years 1996 and 1997.
1997 1996
-------------------- -------------------
Number of Weighted Number of Weighted
Shares Average Shares Average
Underlying Exercise Underlying Exercise
Options Prices Options Prices
---------- --------- ---------- --------
Outstanding at beginning of
the year...................................... 3,955,510 $19.37 3,895,517 $18.16
Granted........................................ 381,562 $34.73 586,596 $22.55
Exercised...................................... (786,793) $11.83 (526,603) $13.95
Forfeited...................................... (53,424) $18.22 ---- ----
---------- ----------
Outstanding at end of year..................... 3,496,855 $22.76 3,955,510 $19.37
Exercisable at end of year..................... 418,017 $22.23 924,758 $13.27
Weighted-average fair value of
options granted............................... $ 7.97 $ 5.35
The following table further describes the Company's stock options
outstanding as of October 31, 1997:
Options Outstanding Options Exercisable
------------------------------------------------ -----------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 10/31/97 Contractual Life Exercise Price at 10/31/97 Exercise Price
- ---------------- ------------ ---------------- ---------------- ----------- ----------------
$15.92 to $25.00 3,115,715 3.97 years $21.30 389,853 $21.34
$25.01 to $35.00 232,562 4.00 years $34.01 19,383 $34.01
$35.01 to $43.00 148,578 3.80 years $35.85 8,781 $35.66
------------ -----------
$15.92 to $43.00 3,496,855 3.96 years $22.76 418,017 $22.23
============ ===========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(13) Benefit Plans--(Continued)
SFAS 123 applies only to options granted, and shares acquired under the
Company's Employee Stock Purchase Plan, since the beginning of the Company's
1996 fiscal year. Consequently, the pro forma amounts disclosed below do not
reflect any compensation cost for the 3.9 million stock options outstanding as
of the beginning of fiscal year 1996. If the Company had elected to recognize
compensation cost for its stock option and employee stock purchase plans based
on the fair value at the grant dates for awards under those plans, in
accordance with SFAS 123, net earnings and earnings per share would have been
as follows:
Year Ended October 31,
-----------------------------
1997 1996
----------- -----------
(Unaudited)
Net earnings - as reported.............. $ 67,418 $ 51,297
- pro forma................ 66,412 50,726
Earnings per common share - as reported.............. $ 1.52 $ 1.24
- pro forma................ 1.50 1.22
The fair value of the Company's stock options used to compute pro forma
net earnings and earnings per share disclosures is the estimated present value
at grant date using the Black-Scholes option pricing model with the following
weighted average assumptions for fiscal years 1997 and 1996, respectively:
expected dividend yield of .2% and .4%; expected volatility of 19.6% for both
years; risk-free interest rate of 6.1% and 5.4%; and an expected term of 3.3
and 3.8 years, respectively.
Likewise, the fair value of shares acquired through the Employee Stock
Purchase Plan is estimated on each semi-annual grant date using the Black-
Scholes option pricing model with the following weighted average assumptions
for fiscal years 1997 and 1996, respectively: expected dividend yield of .2%
for both years; expected volatility of 19.6% for both years; risk-free
interest rate of 5.2% for both years; and an expected term of .5 years for
both years.
14) Commitments, Contingencies and Related Party Transactions
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.
The Company is a party to certain other legal proceedings in the ordinary
course of its business but does not regard any such proceedings as material.
As of October 31, 1997, the Company had advanced approximately $835,
including accrued interest, to fund premiums on a split-dollar, "second-to-
die" life insurance policy on behalf of the Company's Chairman, Mr. Frank B.
Stewart, Jr., and Mrs. Stewart. The advances are collateralized by the
assignment of other insurance policies and the pledge of Class A Common Stock
of the Company. In 1992, the Company agreed to continue to advance such
premiums for a twelve-year period and will be repaid at the earlier of (a) the
surrender of the policy, (b) the deaths of Mr. and Mrs. Stewart, or (c) 60
days following payment in full of all premiums on the policy.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(14) Commitments, Contingencies and Related Party Transactions--(Continued)
The Company has noncancellable operating leases, primarily for land and
buildings, that expire over the next one to 20 years, except for two leases
which expire in 2032 and 2040. Rent expense under these leases was $6,542,
$4,565 and $4,029 for the years ended October 31, 1997, 1996 and 1995,
respectively. The Company's future minimum lease payments as of October 31,
1997 are $6,521, $5,447, $4,514, $3,592, $2,806 and $21,869 for the years
ending October 31, 1998, 1999, 2000, 2001, 2002 and later years, respectively.
Additionally, the Company has entered into non-compete agreements with prior
owners of acquired subsidiaries that expire through 2007. The Company's
future non-compete payments as of October 31, 1997 for the same periods are
$6,070, $5,388, $4,786, $4,454, $4,013 and $7,551, respectively.
(15) Equity Offering
During the third quarter of fiscal year 1997, the Company completed the
sale of 6,055,000 shares of Class A Common Stock, resulting in approximately
$211,000 in net proceeds, which was used for acquisitions and general
corporate purposes.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(16) Segment Data
The Company conducts both funeral and cemetery operations in the United
States, including Puerto Rico, and in Canada and Australia. The Company
conducts funeral operations in Mexico, New Zealand, Spain and Portugal.
Corporate
and
Funeral Cemetery(1) Eliminations Consolidated
---------- ---------- ------------ ------------
Revenues
October 31, 1997.............. $ 291,649 240,937 - $ 532,586
October 31, 1996.............. $ 225,461 207,926 - $ 433,387
October 31, 1995.............. $ 188,991 179,831 - $ 368,822
Operating earnings or loss before
performance-based stock options
October 31, 1997.............. $ 89,235 67,937 (15,402) $ 141,770
October 31, 1996.............. $ 72,239 45,879 (14,096) $ 104,022
October 31, 1995.............. $ 55,309 34,434 (11,113) $ 78,630
Identifiable assets
October 31, 1997.............. $ 930,955 666,930 28,966 $1,626,851
October 31, 1996.............. $ 764,539 585,884 10,490 $1,360,913
October 31, 1995.............. $ 506,994 548,668 16,773 $1,072,435
Depreciation and amortization
October 31, 1997.............. $ 19,016 7,966 867 $ 27,849
October 31, 1996.............. $ 12,960 7,830 911 $ 21,701
October 31, 1995.............. $ 10,257 5,765 770 $ 16,792
Capital expenditures
October 31, 1997.............. $ 58,644 13,051 11,363 $ 83,058
October 31, 1996.............. $ 81,450 16,442 1,389 $ 99,281
October 31, 1995.............. $ 58,758 13,548 922 $ 73,228
- -------------------------
(1)Includes the Company's construction and sales operations, which previously
were classified as a separate industry segment.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(16) Segment Data--(Continued)
U.S. and
Possessions(1) Foreign(2) Consolidated
Revenues -------------- ---------- ------------
October 31, 1997.................. $ 455,076 77,510 $ 532,586
October 31, 1996.................. $ 391,437 41,950 $ 433,387
October 31, 1995.................. $ 333,558 35,264 $ 368,822
Operating earnings before performance-
based stock options
October 31, 1997.................. $ 120,803 20,967 $ 141,770
October 31, 1996.................. $ 88,812 15,210 $ 104,022
October 31, 1995.................. $ 66,213 12,417 $ 78,630
Identifiable assets
October 31, 1997.................. $1,309,654 317,197 $1,626,851
October 31, 1996.................. $1,109,424 251,489 $1,360,913
October 31, 1995................... $ 980,510 91,925 $1,072,435
- ------------------------
(1) Includes the Company's operations in the United States and the
Commonwealth of Puerto Rico.
(2) The Company commenced its foreign operations as follows: Mexico - August
1994; Australia - December 1994; New Zealand - April 1996; Canada -
October 1996; Spain - April 1997; and Portugal - September 1997.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(17) Quarterly Financial Data (Unaudited)
First Second Third Fourth
--------- --------- --------- ---------
Year Ended October 31, 1997(1)
- -------------------------------
Revenues....................... $ 122,712 $ 128,122 $ 139,546 $ 142,206
Gross profit................... 35,297 38,860 41,506 41,509
Earnings before cumulative
effect of change in accounting
principles.................... 15,007 17,268 19,051 18,416
Earnings per common share
before cumulative effect
of change in accounting
principles.................... .36 .41 .42 .38
Net earnings................... 12,683 17,268 19,051 18,416
Earnings per common share...... .30 .41 .42 .38
Year Ended October 31, 1996
- ---------------------------
Revenues....................... $ 102,757 $ 108,423 $ 108,934 $ 113,273
Gross profit................... 28,599 29,723 29,723 30,073
Net earnings................... 12,498 13,403 12,924 12,472
Earnings per common share...... .30(2) .32(2) .31 .30
- ------------------------
(1) The first and second quarters of fiscal year 1997 have been restated from
the Company's respective Quarterly Reports on Form 10-Q to reflect the
Company's change in accounting principles effective November 1, 1996. As
a result, first quarter reflects a $369 decrease in earnings, or $.01 per
share, before the cumulative effect of the change in accounting
principles. In addition, the first quarter as presented above includes a
$2,324 decrease in net earnings (net of a $2,230 income tax benefit), or
$.06 per share, for the cumulative effect of the change in accounting
principles. Second quarter as presented above reflects an increase in net
earnings of $766, or $.02 per share, as a result of the accounting
changes. See Note 3.
(2) Restated to reflect the Company's three-for-two stock split effective
June 21, 1996.
(18) Subsequent Events (Unaudited)
Subsequent to year-end, the Company has acquired or committed to acquire
61 funeral homes and two cemeteries for approximately $78,680.
Item 9. Changes in and Disagreements with Accountants on Accounting and
Financial Disclosure
None.
PART III
Item 10. Directors and Executive Officers of the Registrant
The information regarding executive officers required by Item 10 may be
found under Item 4(a) of this report.
The information regarding directors and compliance with Section 16(a) of
the Securities Exchange Act of 1934, as amended, required by Item 10 is
incorporated by reference to the Registrant's definitive proxy statement
relating to its 1998 annual meeting of shareholders, which proxy statement
will be filed pursuant to Regulation 14A within 120 days after the end of the
last fiscal year.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
Item 12. Security Ownership of Certain Beneficial Owners and Management
The information required by Item 12 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
Item 13. Certain Relationships and Related Transactions
The information required by Item 13 is incorporated by reference to the
Registrant's definitive proxy statement relating to its 1998 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
PART IV
Item 14. Exhibits, Financial Statement Schedules and Reports on Form 8-K
(a) Documents filed as part of this report:
(1) Financial Statements
The Company's consolidated financial statements listed below
have been filed as part of this report:
Page
------
Report of Independent Accountants............................. 27
Consolidated Statements of Earnings
for the Years Ended October 31, 1997, 1996 and 1995.......... 28
Consolidated Balance Sheets as of
October 31, 1997 and 1996.................................... 29
Consolidated Statements of Shareholders' Equity
for the Years Ended October 31, 1997, 1996 and 1995.......... 31
Consolidated Statements of Cash Flows for
the Years Ended October 31, 1997, 1996 and 1995.............. 32
Notes to Consolidated Financial Statements.................... 34
(2) Financial Statement Schedule for the years ended
October 31, 1997, 1996 and 1995
Report of Independent Accountants on Financial
Statement Schedule............................................. 58
Schedule II-Valuation and Qualifying Accounts................... 59
All other schedules are omitted because they are not applicable or not
required, or the information appears in the financial statements or notes
thereto.
REPORT OF INDEPENDENT ACCOUNTANTS ON
FINANCIAL STATEMENT SCHEDULE
The Board of Directors
Stewart Enterprises, Inc.:
Our report on the consolidated financial statements of Stewart Enterprises,
Inc. and Subsidiaries, which includes an emphasis paragraph related to changes
in the Company's method of accounting for cemetery sales and its method of
accounting for funeral services investment trust fund earnings is included in
Item 8 of this Form 10-K. In connection with our audits of such financial
statements, we have also audited the related financial statement schedule
listed in Item 14(a) of this Form 10-K. This financial statement schedule
is the responsibility of the Company's management.
In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.
COOPERS & LYBRAND L.L.P.
New Orleans, Louisiana
December 16 , 1997
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS
(Dollars in thousands)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E
-------- ---------- ------------------------ ----------- --------------
Additions
------------------------
Balance at Charged to Charged to
beginning costs and other Deductions Balance at end
Description of period expenses accounts(1) -write-offs of period
----------- ---------- ---------- ----------- ----------- --------------
Current-Allowance for
contract cancellations
and doubtful accounts:
Year ended October 31,
1997.................... $ 2,996 8,586 2,386 7,099 $ 6,869
1996.................... $ 2,847 13,580 445 13,876 $ 2,996
1995.................... $ 2,800 8,923 1,174 10,050 $ 2,847
Due after one year-Allowance
for contract cancellations
and doubtful accounts:
Year ended October 31,
1997................... $ 3,236 12,765 7,215 13,520 $ 9,696
1996................... $ 3,307 9,576 797 10,444 $ 3,236
1995................... $ 3,803 6,775 1,504 8,775 $ 3,307
Accumulated amortization
of intangible assets:
Year ended October 31,
1997.................... $ 19,506 9,877 - - $29,383
1996.................... $ 11,743 7,763 - - $19,506
1995.................... $ 6,335 5,408 - - $11,743
- ---------------------
(1) Amounts charged to other accounts represent principally the opening balance
in the allowance for contract cancellations and doubtful accounts for
acquired companies and, for fiscal year 1997, the effect of the Company's
change in accounting principles effective November 1, 1996.
Item 14(a)(3) Exhibits
3.1 Amended and Restated Articles of Incorporation of the Company, as
amended (incorporated by reference to Exhibit 3.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1996)
3.2 By-laws of the Company, as amended
4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's Amended and
Restated Articles of Incorporation, as amended and By-laws, as amended,
defining the rights of holders of Class A and Class B Common Stock
4.2 Specimen of Class A Common Stock certificate (incorporated by reference
to Exhibit 4.2 to Amendment No. 3 to the Company's Registration
Statement on Form S-1 (Registration No. 33-42336) filed with the
Commission on October 7, 1991)
4.3 Indenture dated as of December 1, 1996 by and between the Company and
Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated December 5, 1996)
4.4 Form of 6.70% Note due 2003 (incorporated by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K dated December 5, 1996)
4.5 Credit Agreement by and among the Company, its subsidiaries and Citicorp
USA, Inc., Bank of America Illinois, and NationsBank of Texas, N.A.
dated April 14, 1997 (incorporated by reference to Exhibit 4.2 to the
Company's Registration Statement on Form S-3 (Registration No. 333-
27771) filed with the Commission on May 23, 1997)
The Company hereby agrees to furnish to the Commission, upon request, a copy
of the instruments which define the rights of holders of the Company's long-
term debt. None of such instruments (other than those included as exhibits
herein) represents long-term debt in excess of 10% of the Company's
consolidated total assets.
10.1 Lease Agreement dated September 1, 1983 between Stewart Building
Enterprise and Stewart Enterprises, Inc. and amendments thereto dated
June 18, 1990 and May 23, 1991 (incorporated by reference to Exhibit
10.1 to the Company's Registration Statement on Form S-1 (Registration
No. 33-42336) filed with the Commission on August 21, 1991 (the "1991
Registration Statement"); dated June 1, 1992 (incorporated by reference
to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the
fiscal year ended October 31, 1992 (the "1992 10-K")); dated
June 1, 1993 (incorporated by reference to Exhibit 10.1 to the Company's
Annual Report on Form 10-K for the fiscal year ended October 31, 1993,
(the "1993 10-K")); dated October 28, 1994 and dated November 30, 1994
(incorporated by reference to Exhibit 10.1 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1994 (the
"1994 10-K")); dated May 27, 1996 (incorporated by reference to Exhibit
10.1 to the Company's Annual Report on Form 10-K for the fiscal year
ended October 31, 1996 (the "1996 10-K")); and dated April 30, 1997
(incorporated by reference to Exhibit 10.1 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1997)
10.2 Split-Dollar Agreement dated January 10, 1992 between the Company, Roy
A. Perrin, Jr., Trustee, on behalf of all Trustees of the Elisabeth
Felder Stewart 1988 Trust and of the Frank B. Stewart, III 1988 Trust,
and Frank B. Stewart, Jr. (incorporated by reference to Exhibit 10.39 to
the 1992 10-K)
10.3 Promissory Note by the Company to Frank B. Stewart, Jr. in the amount of
$2,590,997 dated November 1, 1992, and amendment thereto dated January
1, 1994 (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1995)
10.4 Lease dated June 29, 1990 between Richard O. Baldwin, Jr. and Baldwin-
Fairchild Funeral Homes, Inc. (incorporated by reference to Exhibit 10.7
to the 1991 Registration Statement)
10.5 Promissory Note by S.E. Mid-Atlantic, Inc. to Brian J. Marlowe in the
amount of $3,797,331 dated January 1, 1994 (incorporated by reference to
Exhibit 10.37 to the 1994 10-K)
10.6 Line of Credit Note by Brent F. Heffron to the Company dated February
27, 1997, in the amount of $250,000 (incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
quarter ended April 30, 1997)
________________________
Management Contracts and Compensatory Plans or Arrangements
10.7 Form of Indemnity Agreement between the Company and its directors and
executive officers (incorporated by reference to Exhibit 10.25 to the
1991 Registration Statement), and amendment dated September 18, 1996
(incorporated by reference to Exhibit 10.6 to the 1996 10-K)
10.8 Stock Option Agreement between the Company and Frank B. Stewart, Jr.
dated September 25, 1992 (incorporated by reference to Exhibit 10.22 to
the 1992 10-K)
10.9 Stock Option Agreements between the Company and Joseph P. Henican, III
dated February 1, 1995 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 31,
1995)
10.10 Employment Agreement dated August 1, 1995, and Change of Control
Agreement dated December 5, 1995, between the Company and Joseph P.
Henican, III (incorporated by reference to Exhibits 10.16 and 10.20,
respectively, to the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1995 (the "1995 10-K"))
10.11 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based), and dated December 5, 1995
(performance-based), between the Company and Joseph P. Henican, III
(incorporated by reference to Exhibits 10.17, 10.18 and 10.19,
respectively, to the 1995 10-K)
10.12 Stock Option Agreement between the Company and William E. Rowe dated
September 25, 1992 (incorporated by reference to Exhibit 10.28 to the
1992 10-K) and addenda thereto dated April 15, 1994 (incorporated by
reference to Exhibit 10.24 to the 1994 10-K)
10.13 Stock Option Agreements between the Company and William E. Rowe dated
April 15, 1994 (incorporated by reference to Exhibit 10.25 to the 1994
10-K)
10.14 Stock Option Agreements between the Company and William E. Rowe dated
November 1, 1994 (incorporated by reference to Exhibit 10.3 to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 31,
1995)
10.15 Employment Agreement dated August 1, 1995, and Change of Control
Agreement dated December 5, 1995, between the Company and William E.
Rowe (incorporated by reference to Exhibits 10.25 and 10.29,
respectively, to the 1995 10-K)
10.16 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based), and dated December 5, 1995
(performance-based) between the Company and William E. Rowe
(incorporated by reference to Exhibits 10.26, 10.27 and 10.28,
respectively, to the 1995 10-K)
10.17 Stock Option Agreement between the Company and Ronald H. Patron dated
September 25, 1992 (incorporated by reference to Exhibit 10.24 to the
1992 10-K)
10.18 Employment Agreement dated August 1, 1995, and Change of Control
Agreement dated December 5, 1995, between the Company and Ronald H.
Patron (incorporated by reference to Exhibits 10.32 and 10.36,
respectively, to the 1995 10-K)
10.19 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Ronald H. Patron
(incorporated by reference to Exhibits 10.33, 10.34 and 10.35,
respectively, to the 1995 10-K)
10.20 Stock Option Agreement between the Company and Gerard C. Alexander dated
September 25, 1992 (incorporated by reference to Exhibit 10.25 to the
1992 10-K)
10.21 Employment Agreement dated August 1, 1995, and Change of Control
Agreement dated December 5, 1995, between the Company and Gerard C.
Alexander (incorporated by reference to Exhibits 10.39 and 10.43,
respectively, to the 1995 10-K)
10.22 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based), and dated December 5, 1995
(performance-based), between the Company and Gerard C. Alexander
(incorporated by reference to Exhibits 10.40, 10.41 and 10.42,
respectively, to the 1995 10-K)
10.23 Stock Option Agreement between the Company and Richard O. Baldwin, Jr.
dated September 25, 1992 (incorporated by reference to Exhibit 10.22 to
the 1996 10-K)
10.24 Employment Agreement between the Company and Richard O. Baldwin, Jr.
dated August 1, 1995 (incorporated by reference to Exhibit 10.23 to the
1996 10-K)
10.25 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Richard O. Baldwin, Jr.
(incorporated by reference to Exhibits 10.24, 10.25 and 10.26,
respectively, to the 1996 10-K)
10.26 Change of Control Agreement between the Company and Richard O. Baldwin,
Jr. dated December 5, 1995 (incorporated by reference to Exhibit 10.27
to the 1996 10-K)
10.27 Amendment No. 1 dated August 1, 1997 to Employment Agreement dated
August 1, 1995 between the Company and Richard O. Baldwin, Jr.
10.28 Stock Option Agreement between the Company and Brian J. Marlowe dated
April 15, 1994 (incorporated by reference to Exhibit 10.26 to the 1994
10-K)
10.29 Stock Option Agreements between the Company and Brian J. Marlowe dated
November 1, 1994 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the quarter ended July 31,
1995)
10.30 Employment Agreement dated August 1, 1995, and Change of Control
Agreement dated December 5, 1995, between the Company and Brian J.
Marlowe (incorporated by reference to Exhibits 10.47 and 10.51,
respectively, to the 1995 10-K)
10.31 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Brian J. Marlowe
(incorporated by reference to Exhibits 10.48, 10.49 and 10.50,
respectively, to the 1995 10-K)
10.32 Employment Agreement between the Company and Andrew H. McEachern dated
December 9, 1994 (incorporated by reference to Exhibit 10.17 to the 1994
10-K)
10.33 Stock Option Agreement between the Company and Andrew H. McEachern dated
December 9, 1994 (incorporated by reference to Exhibit 10.27 to the 1994
10-K)
10.34 Stock Option Agreement between the Company and Kenneth C. Budde dated
September 25, 1992 (incorporated by reference to Exhibit 10.34 to the
1996 10-K)
10.35 Employment Agreement between the Company and Kenneth C. Budde dated
August 1, 1995 (incorporated by reference to Exhibit 10.35 to the 1996
10-K)
10.36 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Kenneth C. Budde
(incorporated by reference to Exhibits 10.36, 10.37 and 10.38,
respectively, to the 1996 10-K)
10.37 Change of Control Agreement between the Company and Kenneth C. Budde
dated December 5, 1995 (incorporated by reference to Exhibit 10.39 to
the 1996 10-K)
10.38 Amendment No. 1 dated January 1, 1997 to Employment Agreement dated
August 1, 1995 between the Company and Kenneth C. Budde (incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1997)
10.39 Stock Option Agreement between the Company and Lawrence B. Hawkins dated
September 25, 1992 (incorporated by reference to Exhibit 10.40 to the
1996 10-K)
10.40 Employment Agreement between the Company and Lawrence B. Hawkins dated
August 1, 1995 (incorporated by reference to Exhibit 10.41 to the 1996
10-K)
10.41 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Lawrence B. Hawkins
(incorporated by reference to Exhibits 10.42, 10.43 and 10.44,
respectively, to the 1996 10-K)
10.42 Change of Control Agreement between the Company and Lawrence B. Hawkins
dated December 5, 1995 (incorporated by reference to Exhibit 10.45 to
the 1996 10-K)
10.43 Amendment No. 1 dated January 1, 1997 to Employment Agreement dated
August 1, 1995 between the Company and Lawrence B. Hawkins (incorporated
by reference to Exhibit 10.3 to the Company's Quarterly Report on Form
10-Q for the quarter ended April 30, 1997)
10.44 Stock Option Agreement between the Company and Brent F. Heffron dated
September 25, 1992 (incorporated by reference to Exhibit 10.46 to the
1996 10-K)
10.45 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Brent F. Heffron
(incorporated by reference to Exhibits 10.47, 10.48 and 10.49,
respectively, to the 1996 10-K)
10.46 Employment Agreement dated January 1, 1997 between the Company and Brent
F. Heffron (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the quarter ended January 31, 1997)
10.47 Change of Control Agreement dated January 1, 1997 between the Company
and Brent F. Heffron (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1997)
10.48 Stock Option Agreement dated January 1, 1997 (time-vest) and dated
January 1, 1997 (performance-based), between the Company and Brent F.
Heffron (incorporated by reference to Exhibits 10.3 and 10.4,
respectively, to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1997)
10.49 Amendment No. 1 dated January 1, 1997 to Employment Agreement dated
January 1, 1997 between the Company and Brent F. Heffron (incorporated by
reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q
for the quarter ended April 30, 1997)
10.50 Stock Option Agreement between the Company and Raymond C. Knopke, Jr.
dated September 25, 1992 (incorporated by reference to Exhibit 10.50 to
the 1996 10-K)
10.51 Stock Option Agreement dated September 7, 1995 (time-vest), dated
September 7, 1995 (performance-based) and dated December 5, 1995
(performance-based), between the Company and Raymond C. Knopke, Jr.
(incorporated by reference to Exhibits 10.51, 10.52 and 10.53,
respectively, to the 1996 10-K)
10.52 Employment Agreement dated January 1, 1997 between the Company and
Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.5 to
the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1997)
10.53 Change of Control Agreement dated January 1, 1997 between the Company
and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.6
to the Company's Quarterly Report on Form 10-Q for the quarter ended
January 31, 1997)
10.54 Stock Option Agreement dated January 1, 1997 (time-vest) and dated
January 1, 1997 (performance-based), between the Company and Raymond C.
Knopke, Jr. (incorporated by reference to Exhibits 10.7 and 10.8,
respectively, to the Company's Quarterly Report on Form 10-Q for the
quarter ended January 31, 1997)
10.55 Amendment No. 1 dated January 1, 1997 to Employment Agreement dated
January 1, 1997 between the Company and Raymond C. Knopke, Jr.
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the quarter ended April 30, 1997)
10.56 The Stewart Enterprises Employees' Retirement Trust (incorporated by
reference to Exhibit 10.20 to the 1991 Registration Statement) and
amendment thereto dated January 1, 1994 (incorporated by reference to
Exhibit 10.28 to the 1994 10-K)
10.57 The Stewart Enterprises Supplemental Retirement and Deferred
Compensation Plan (incorporated by reference to Exhibit 10.29 to the
1994 10-K)
10.58 Amended and Restated Stewart Enterprises, Inc. 1991 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.56 to the
1996 10-K)
10.59 Amended and Restated Stewart Enterprises, Inc. 1995 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.57 to the
1996 10-K)
10.60 Amended and Restated Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.58 to the 1996 10-K)
10.61 Amended and Restated Stewart Enterprises, Inc. Employee Stock Purchase
Plan
________________________
12 Calculation of Ratio of Earnings to Fixed Charges
18 Letter from Coopers & Lybrand L.L.P. regarding change in accounting
principles (incorporated by reference to Exhibit 18 to the Company's
Quarterly Report on Form 10-Q for the quarter ended July 31, 1997)
21 Subsidiaries of the Company
23 Consent of Coopers & Lybrand L.L.P.
27 Financial data schedule
________________________
(b) Reports on Form 8-K
The Company filed a Form 8-K on September 11, 1997 reporting, under
"Item 5. Other Events," the earnings release for the quarter ended July 31,
1997.
The Company filed a Form 8-K on September 27, 1997 reporting, under
"Item 5. Other Events," pro forma consolidated statements of earnings for
fiscal year 1996, for the three months ended January 31, 1997 and April 30,
1997, and for the six months ended April 30, 1997 to reflect the changes in
the Company's accounting methods, as if such methods had been in effect during
all prior periods.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed
on its behalf by the undersigned, thereunto duly authorized on January 27,
1998.
STEWART ENTERPRISES, INC.
By: /s/ JOSEPH P. HENICAN, III
----------------------------------
Joseph P. Henican, III
Vice Chairman of the Board and
Chief Executive Officer
Pursuant to the requirements of the Securities Exchange Act of 1934, this
report has been signed by the following persons on behalf of the Registrant and
on the dates indicated.
Signature Title Date
--------- ----- ----
/s/ FRANK B. STEWART, JR. Chairman of the Board January 27, 1998
- ------------------------------
Frank B. Stewart, Jr.
/s/ JOSEPH P. HENICAN, III Vice Chairman of the Board January 27, 1998
- ------------------------------ and Chief Executive Officer
Joseph P. Henican, III
(Principal Executive Officer)
/s/ WILLIAM E. ROWE President, January 27, 1998
- ------------------------------- Chief Operating Officer
William E. Rowe and a Director
/s/ RONALD H. PATRON Chief Financial Officer, January 27, 1998
- ----------------------------- President-Corporate Division
Ronald H. Patron and a Director
(Principal Financial Officer)
/s/ KENNETH C. BUDDE Senior Vice President- January 27, 1998
- ----------------------------- Corporate Division,
Kenneth C. Budde Treasurer and Secretary
(Principal Accounting Officer)
/s/ DARWIN C. FENNER Director January 27, 1998
- -----------------------------
Darwin C. Fenner
/s/ MICHAEL O. READ Director January 27, 1998
- -----------------------------
Michael O. Read
/s/ JOHN P. LABORDE Director January 27, 1998
- -----------------------------
John P. Laborde
/s/ JAMES W. McFARLAND Director January 27, 1998
- -----------------------------
James W. McFarland
Director January 27, 1998
- -----------------------------
Dwight A. Holder