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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED OCTOBER 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
________________
COMMISSION FILE NUMBER: 0-19508
________________
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 VETERANS MEMORIAL BOULEVARD
METAIRIE, LOUISIANA 70005
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 837-5880
________________
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)
________________
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes X No
________________
Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to
the best of Registrant's knowledge, in definitive proxy or information
statements incorporated by reference in Part III of this Form 10-K or any
amendment to this Form 10-K.
The aggregate market value of the voting stock held by nonaffiliates
(affiliates being, for 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 15, 1999 was approximately $1,330,000,000.
________________
The number of shares of the Registrant's Class A Common Stock, no par value
per share, and Class B Common Stock, no par value per share, outstanding as of
January 15, 1999 was 94,522,739 and 3,555,020 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 1999 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,
acquisition 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 funeral and
cemetery products and services in the death care industry in North America.
Through its subsidiaries, the Company owns and operates 575 funeral homes and
143 cemeteries in 29 states within the United States, and in Puerto Rico,
Mexico, Australia, New Zealand, Canada, Spain, Portugal, the Netherlands,
France, Belgium and Argentina. The Company is a leader in the industry's
trend toward consolidation. The Company's growth in terms of number of
properties has been principally 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 generally are
organized in "clusters," which are integrated groups of funeral homes and
cemeteries that share certain assets, personnel and services. The Company also
creates combined operations by building funeral homes on cemetery properties
and operating the facilities together. The Company believes that it owns and
operates one or more of the premier death care facilities in each of its
principal markets. The Company also believes that it is an industry leader in
the marketing and sale of prearranged funeral and cemetery services and
products.
The Company has an experienced management team and a decentralized
organizational structure that allows its local funeral home directors and
cemetery managers to best serve their locations' particular needs. The
Company's ultimate goal is to enhance shareholder value. To achieve this goal,
it has three principal objectives:
* Provide the highest level of quality, service and
value to each family it serves
* Attract, retain and reward highly qualified individuals
to operate its businesses
* Provide an above average and sustainable return to its
shareholders
The Company's business was founded by the Stewart family in 1910, and the
Company was incorporated as a Louisiana corporation in 1970. The Company's
principal executive offices are located at 110 Veterans Memorial Boulevard,
Metairie, Louisiana 70005, and its telephone number is 504-837-5880.
THE DEATH CARE INDUSTRY
The Company's management believes that the death care industry has several
attractive fundamental characteristics. The industry is relatively stable,
business failures are uncommon and the market served by death care providers is
expanding. 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 from 2.38 million in 1998 to 2.64 million in 2010. In addition, industry
studies indicate that while the death rate is declining slightly, the average
age of the population in the United States is increasing. The aging of the
population, particularly the "baby boomers" who have 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. According
to the Bureau of the Census, the United States population over 50 years of age
will increase from 72.7 million in 1998 to 96.4 million in 2010. The Company's
principal target market for sales of prearranged cemetery property, merchandise
and services is customers who are age 50 and above.
Traditionally, death care businesses in the United States have been
relatively small, family-owned enterprises that have passed through successive
generations within the family. Currently, 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 primarily results 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 consolidators offering attractive prices
under the belief that they can improve profit margins through improved
marketing and sales initiatives and economies of scale.
Management believes it can be difficult for new competitors to successfully
enter existing markets by opening new funeral homes and cemeteries. Several
factors make it difficult for new facilities to compete successfully, including
the importance to families of reputation and goodwill developed over time,
regulatory complexities, zoning restrictions and the existence of an adequate
number of facilities serving mature markets.
OPERATIONS
Premier Facilities. The Company believes that it operates one or more of
the premier death care facilities in each of its principal markets. In the
Company's view, a "premier" facility is one that is among the most highly
regarded facilities in its market area in terms of tradition, heritage,
reputation, physical size, volume of business, available inventory, name
recognition, aesthetics and potential for development or expansion.
Clustering. The Company operates most of its funeral homes and cemeteries
in "clusters." Clusters are groups of funeral homes and cemeteries located
close enough to each other that their operations can be integrated to achieve
economies of scale. For example, clustered facilities can share vehicles,
embalming services, inventories of caskets and other merchandise and, most
significantly, personnel, including the Company's prearrangement sales force;
thus, the Company is able to decrease its costs and expand its marketing and
sales efforts at each location. By virtue of their proximity to each other,
clustered facilities also create opportunities for more integrated and
sophisticated management of their operations.
Funeral Operations. Funeral operations accounted for approximately 58% of
the Company's revenues for the fiscal year ended October 31, 1998. The
Company's funeral homes offer a complete range of funeral services and products
at the time of need or on a prearranged basis. The Company's services and
products include family consultation, removal and preparation of remains, the
use of funeral home facilities for visitation, worship and funeral services,
transportation services, flowers and caskets. In addition to traditional
funeral services, all of the Company's funeral homes offer cremation products
and services. Most of the Company's funeral homes have a non-denominational
chapel on the premises, which permits family visitation and religious services
to take place at the same location. As of October 31, 1998, the Company
operated 558 funeral homes, 131 of which were leased.
Cemetery Operations. Cemetery operations accounted for approximately 42% of
the Company's revenues for the fiscal year ended October 31, 1998. The
Company's cemetery operations involve the sale of cemetery property and related
merchandise, including lots, lawn crypts, family and community mausoleums,
monuments, memorials and burial vaults, along with the sale of burial site
openings and closings. Cemetery property and merchandise sales are made at the
time of need or on a prearranged basis. Prearranged sales represented
approximately 69% of cemetery revenue during the fiscal year ended October 31,
1998. The Company also maintains cemetery grounds under perpetual care
contracts and local laws.
Although profit margins of cemetery operations typically are slightly lower
than those of funeral home 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 operations strategies help to improve the profitability
of its individual cemetery locations. As of October 31, 1998, the Company
owned and operated 140 cemeteries.
Combined Funeral Home and Cemetery Operations. A combined operation is a
funeral home located on a cemetery site where both are operated together.
Combined operations help to increase market share by allowing the Company to
offer families the convenience of complete funeral home and cemetery planning
and services from a single location at a competitive price at the time of need
or on a prearranged basis. In addition, combined operations enhance the
Company's purchasing power, enabling it to employ more sophisticated management
systems, and allowing it to share facilities, equipment, personnel and a
prearrangement sales force, resulting in lower average operating costs and
expanded marketing and sales opportunities.
Approximately 45% of the Company's cemeteries have a funeral home on site
that is operated in conjunction with that cemetery. Many of these facilities
are in the Company's key markets, including New Orleans, Louisiana; Dallas,
Fort Worth and Houston, Texas; Miami, Orlando, Tampa and St. Petersburg,
Florida; and San Diego, California.
In addition to pursuing combined operations as part of its acquisition
strategy, the Company has developed several internal growth strategies that
employ the use of combined operations. One such strategy is to create combined
operations by constructing funeral homes on the grounds of the Company's
cemeteries, and the Company plans to construct approximately three funeral
homes per fiscal year on its cemetery locations. Another such strategy is to
enter into operating partnerships in which the Company constructs funeral homes
on the grounds of unaffiliated cemeteries, which allows the Company to enjoy
the benefits of a combined operation without the capital investment of
purchasing the cemetery.
Although it generally takes several years before a newly constructed funeral
home becomes profitable, the Company's experience with combined operations has
demonstrated that the combination of a funeral home with a cemetery can
significantly increase the market share and profitability of both.
Cremation. In fiscal year 1998, 35% of the funeral services the Company
performed in the United States and Puerto Rico were cremations. Cremation
rates at the Company's foreign funeral homes are higher on average than those
at its domestic funeral homes, although they vary substantially from country to
country. For fiscal year 1998, the cremation rates at the Company's foreign
funeral homes varied from 6% in Portugal to 64% in New Zealand. While
cremations in the United States often result in lower average revenue than
traditional funeral services, they generally produce higher gross profit
margins. In the foreign markets in which the Company operates, cremations
generally produce revenues and gross profit margins comparable to those of
traditional funeral services in those countries.
The cremation rate in the United States has been increasing, and by the year
2000 cremations are expected to represent 25% of the United States burial
market, according to industry estimates. The Company has been addressing this
trend by providing cremation products and services at all of its funeral homes,
including traditional funeral services and memorialization options for families
choosing cremation. Additionally, the Company plans to expand on the model
developed by Sentinel Cremation Societies, Inc., which it acquired in fiscal
year 1997 and is discussed below under the heading "Internal Growth."
Prearrangements. The Company markets death care products and services on a
prearranged basis through a staff of approximately 3,500 commission sales
counselors. Prearranged plans enable families to establish in advance and
prepay for the type of service to be performed and the products to be used.
The cost of such products and services is set at prices prevailing at the time
the agreement is signed, rather than when the products and services are
delivered. Prearranged plans also 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 from its
backlog. During the fiscal year ended October 31, 1998, the Company sold
approximately 66,500 prearranged funeral services, and as of October 31, 1998,
had a backlog of approximately 400,000 prearranged funeral services to be
delivered 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, the Company places into a trust fund or escrow account a percentage
(which varies by jurisdiction) of the sale price, which is often paid in
installments. It retains the remainder of the sale price to defray costs
related to the sale. The Company withdraws the amount placed in the trust fund
or escrow account when the service is performed to cover the cost of providing
the funeral service. When insurance funding is used, the Company applies the
customers' payments to pay premiums on insurance policies designed to cover the
cost of providing the funeral service in the future.
Generally, principal and earnings (including interest, dividends and net
realized capital gains) on the trust funds and escrow accounts, and insurance
proceeds, are paid to the Company only when the funeral service is performed.
In limited circumstances, the Company receives principal amounts from
prearranged funeral trust funds or escrow accounts upon cancellation of the
contract by the customer. In certain jurisdictions, the Company is permitted
to withdraw earnings on a current basis from prearranged funeral trust funds
and escrow accounts. As of October 31,1998, the Company's prearranged funeral
trust funds and escrow accounts totaled approximately $525.9 million.
The Company also establishes trust funds and escrow accounts to fund the
cost of delivering prearranged cemetery merchandise. Generally, the Company
withdraws the principal and earnings from these funds and accounts only when
the merchandise is delivered or contracts are canceled. As of October 31,
1998, the Company's cemetery merchandise trust funds and escrow accounts
totaled approximately $188.5 million.
The Company funds its obligations to maintain 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, 1998, the Company's perpetual care trust funds
and escrow accounts totaled approximately $167.5 million.
The accounting methods used to reflect the Company's prearranged funeral,
merchandise and perpetual care trust funds and escrow accounts are complex and
are described in the notes to the Company's consolidated financial statements
included in Item 8.
Management believes that balances in the Company's trust funds and escrow
accounts, along with insurance proceeds and installment payments due under
contracts, will be sufficient to cover its estimated cost of providing the
related prearranged services and products in the future.
Investment Management. Generally, the Company's wholly-owned subsidiary,
Investors Trust, Inc. ("ITI"), a Texas corporation with trust powers, serves as
investment adviser on the Company's investment portfolio, and its prearranged
funeral, merchandise and perpetual care trust funds and escrow accounts. ITI
also provides investment advisory services exclusively to the company and the
Stewart Enterprises Employees' Retirement Trust ("SEERT"). ITI is registered
with the Securities and Exchange Commission under the Investment Advisers Act
of 1940.
As of October 31, 1998, ITI had approximately $900 million in assets.
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 management team, many of whom
joined the Company through acquisitions. The Company's management structure is
designed to allow local funeral home directors and cemetery managers
substantial flexibility in deciding how their firms will be managed and their
products and services will be priced and merchandised. At the same time,
financial goals are established by management at the corporate level, and the
Company maintains centralized supervisory controls. Finally, the Company
provides business support services primarily through its Shared Services
Center, which provides centralized and standardized accounting, payroll,
contract processing, collection and other services for all of its domestic
facilities, including those in Puerto Rico.
Currently, the Company is divided into four operating divisions in North
America, each of which is managed by a division 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, South America and Australasia are not considered separate operating
divisions, but are managed by local regional executives who report to certain
of the Company's executive officers. In fiscal year 1998, in order to meet the
needs of the Company's growing European operations and to enable it to take
advantage of other long-term opportunities in Europe, the Company established
its European headquarters in Amsterdam, Holland. From time to time, the
Company may increase or realign the divisions and regions to accommodate
expansion of its 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 uses two types of stock options to align the interests of its
managers with the long-term interests of its shareholders. The Company's
more traditional options vest over time. The Company's performance-based
options vest only if it achieves a stock price objective, which has generally
been a 20% compounded annual growth rate in the stock price over a five-year
period. In April 1998, the Company achieved the stock price objective
applicable to the performance-based options granted in 1995. Accordingly,
those options vested and, with the Company's encouragement, were exercised by
the optionees. In July and August 1998, the Company granted new options to
190 managers. Two-thirds of those options are performance-based, and one-third
vest over time at the rate of 20% per year over five years. The performance-
based options become exercisable only if the average of the closing sale prices
of a share of Class A Common Stock over 20 consecutive trading days prior to
July 17, 2003 equals or exceeds $67.81; otherwise the options will be
forfeited. Generally accepted accounting principles require that a charge
to earnings be recorded for the performance-based options for the difference
between the exercise price and the then current stock price when achievement
of the performance objective becomes probable. All of these options expire on
July 31, 2004.
Foreign Operations. The Company first entered foreign markets in fiscal
year 1994 and, through January 15, 1999, has acquired a total of 277 properties
outside the United States and Puerto Rico. For the fiscal year ended
October 31, 1998, the Company's properties in foreign countries generated
approximately 18% of consolidated total revenues and represented 20% 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.
GROWTH STRATEGY
General
In pursuit of the Company's ultimate goal of enhancing shareholder value, it
plans to continue to increase earnings per share at an annual rate of 20% each
year through a balanced strategy of internal and external growth. The internal
growth strategy involves consistent improvement in both revenues and costs at
existing and acquired operations, construction of new funeral homes and
cemeteries, and innovative initiatives such as the use of operating
partnerships and alternative service firms as described below. The external
growth strategy involves an aggressive, but disciplined, domestic and
international acquisition program and the rapid and effective assimilation of
the businesses the Company acquires.
Internal Growth
PREARRANGED SERVICES. The Company believes that it can be distinguished
from its competitors through its strong emphasis on, and its more than 50-year
history of success with, prearranged sales. The Company also believes that it
is an industry leader in marketing prearranged funeral and cemetery services
and products through highly qualified commission sales counselors. Extensive
prearranged marketing produces current revenues and a significant backlog of
future funeral business and builds current and future market share. The
Company's backlog of prearranged funeral services has grown at a compounded
annual rate of 21% over the last four years and represents over $1.3 billion in
future revenues at October 31,1998.
IMPROVED MERCHANDISING. The Company frequently expands its product and
service offerings, adjusts the mix of products and services offered in
individual markets, takes advantage of enhanced pricing opportunities, and
implements selective marketing programs to increase revenue and improve profit
margins.
NEW FUNERAL HOME AND CEMETERY CONSTRUCTION. The Company creates combined
operations by building funeral homes on its cemetery properties and operating
both facilities together. In fiscal year 1998, the Company completed the
construction of funeral homes on three of its cemetery properties.
Additionally, in limited instances, such as in newly developed and rapidly
growing communities, the Company may construct new funeral homes and create new
cemeteries as stand-alone facilities. In fiscal year 1998, the Company opened
two stand-alone funeral homes and one stand-alone cemetery.
OPERATING PARTNERSHIPS. The Company expects to gain market share and
improve profitability through operating partnerships with unaffiliated parties.
Through an operating partnership with the Catholic Archdiocese of New
Orleans, the Company constructed a mausoleum for the Catholic Church on the
grounds of its combined operation in New Orleans. The Company owns the
mausoleum and manages the sales relating to the mausoleum for the church.
Additionally, through an operating partnership with the Firemen's Charitable
and Benevolent Association, a non-profit organization, the Company constructed
a funeral home and mausoleum on the grounds of their cemetery in New Orleans.
The Company owns and operates the funeral home in combination with that
cemetery, and manages sales for the mausoleum.
The Company recently entered into an agreement with the Archdiocese of Los
Angeles under which it 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. Subsequently, during fiscal year 1998, the
Company entered into similar agreements with the Archdiocese of Los Angeles
for the construction and operation of three additional funeral homes. Over the
last 50 years, through its mausoleum construction business, the Company has
developed relationships with the Catholic Church in approximately 70 dioceses
in 39 states. The Company anticipates building on those relationships as it
expands its use of operating partnerships.
The Company also plans to develop operating partnerships with non-profit
secular entities as it did in fiscal year 1998 when it entered into an
agreement with the Wyuka Cemetery Board of Trustees. Under that agreement, the
Company will manage the cemetery sales and construct and operate a funeral home
on the grounds of that state-owned cemetery in Lincoln, Nebraska.
Management believes that these partnerships allow the Company to enjoy the
benefits of operating a funeral home on the grounds of a cemetery without the
capital investment of purchasing the cemetery. The Company also believes that
partnerships such as these benefit the third parties by allowing them to
compete with other cemeteries in their market that have funeral homes on their
properties. The Company is pursuing similar partnership opportunities with
other cemetery operators.
Although it generally takes several years before a newly constructed funeral
home becomes profitable, the Company's experience with combined operations has
demonstrated that the combination of a funeral home with a cemetery can
significantly increase the market share and profitability of both.
ALTERNATIVE SERVICE FIRMS. During fiscal year 1997, the Company acquired
Sentinel Cremation Societies, Inc., of California ("Sentinel") which owned and
operated thirteen service centers offering cremations and related products and
services. At the time of its acquisition, Sentinel's cremation societies,
Neptune and Telophase, had 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 the cost at a traditional funeral
home.
Since the Sentinel acquisition was completed in March 1997, the Company has
opened four additional service center locations. 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 it further develops and tests the concept in new markets.
Results from the four locations opened have exceeded the Company's initial
expectations.
During fiscal year 1998, the Company acquired Desert Memorial Cremation and
Burial Society in Las Vegas, Nevada, the state with the highest cremation rate
in the United States. This acquisition complements its alternative services
strategy and provides an additional vehicle for expansion, particularly in the
high cremation markets of the western United States.
COST CONTROL. In addition to its strategies for increasing revenues, the
Company plans to continue to improve its operating margins by achieving
economies of scale, improving efficiencies and controlling costs through a
variety of measures including the following:
* Obtaining volume discounts from suppliers
* Leveraging operating costs through clustering and the
development of combined operations
* Consolidating its United States back office operations at the
Shared Services Center
* Improving the utilization of its sales force
The Company believes that its internal growth strategies, including its cost
control efforts, have been major contributors to its increased operating
earnings (before stock option charges) over the last five years.
External Growth
ACQUISITIONS. From November 1, 1991 through January 15, 1999, the Company
has grown from 43 funeral homes and 29 cemeteries in six states to 575 funeral
homes and 143 cemeteries in 29 states, Puerto Rico and 10 foreign countries.
The Company's growth in terms of number of properties has been principally
through acquisitions.
At the time of the Company's initial public offering in October 1991, the
Company owned funeral homes and cemeteries in Louisiana, Texas, Florida,
Virginia, West Virginia and Maryland. Since that time, the Company has
expanded domestically, primarily in the Southern, Mid-Atlantic, Midwest and
Pacific states and in Puerto Rico. In addition, the Company expanded
internationally by entering Mexico in fiscal year 1994, Australia, New Zealand
and Canada in fiscal years 1995 and 1996, Spain and Portugal in fiscal year
1997 and the Netherlands, Argentina, France and Belgium in fiscal year 1998.
Since 1994, the Company has acquired a total of 277 funeral homes and
cemeteries outside the United States and Puerto Rico, 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)
-------------- -------------
Properties owned as of October 31, 1991 ....... 72 $ -
Completed acquisitions(1): ....................
Fiscal year 1992 ............................ 11 30.0
Fiscal year 1993 ............................ 49 94.6
Fiscal year 1994 ............................ 60 177.6
Fiscal year 1995 ............................ 70 154.4
Fiscal year 1996 ............................ 149 179.0
Fiscal year 1997 ............................ 114 184.5
Fiscal year 1998 ............................ 162 266.3
November 1, 1998 - January 15, 1999 ......... 21 34.1
Pending acquisitions, as of January 15, 1999 .. 59 162.5
___________________________
(1) Excludes funeral homes and cemeteries constructed by the Company.
ACQUISITION STRATEGY. More than 85% of the approximately 22,000 funeral
homes and 9,600 cemeteries in the United States are privately or family
owned, and those funeral homes and cemeteries generate approximately 75% of
domestic funeral home and cemetery revenues. Management believes that a
substantial number of these businesses are suitable acquisition candidates.
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 may be integrated with an existing
cluster or serve as a base for the formation of a new cluster. The Company
also seeks firms that have strong managers who are 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 strongly in 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,
although the Company sometimes pays somewhat higher prices for strategic
reasons. Management's objective is for the acquired firm to be additive to the
Company's 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. In 1997, the
Company expanded this division to include, in addition to its full-time
corporate employees, commissioned field representatives to focus on domestic
and foreign acquisition candidates. These representatives devote their full
time to identifying and developing acquisition candidates and assisting in
negotiations. Divisional and regional management also work with the Corporate
Development Division in identifying and developing acquisition candidates and
assisting in negotiations.
ASSIMILATION OF ACQUIRED COMPANIES. The Company frequently enters into
management or consulting agreements and non-compete agreements with owners and
key managers of acquired companies in order to assure the continuation of the
acquired firm's goodwill. In addition, the Company generally continues to
operate acquired businesses under their existing names. In general, acquired
firms initially 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
* Standardizing and centralizing certain
business support functions through the
Shared Services Center
Management believes that the Company has been improving its ability to
rapidly and effectively 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 25% 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 Alternative
Service Firms' concept by the Company represents another opportunity for the
Company to serve cremation customers. Additional information on the
development of the Alternative Service Firms' concept can be found under the
heading "Internal Growth" discussed earlier in Item 1.
The Company also faces intense competition in its acquisition program,
principally from the other publicly-traded death care firms, Service
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. 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 measures require a funeral provider to give
consumers accurate, itemized price information and various other disclosures
about funeral goods and services, and prohibit a funeral provider from: (i)
misrepresenting legal, crematory and cemetery requirements; (ii) embalming for
a fee without permission; (iii) requiring the purchase of a casket for direct
cremation; and (iv) requiring consumers to buy certain funeral goods or
services as a condition for furnishing other funeral goods or services.
The Company's operations are also subject to extensive regulation,
supervision and licensing under numerous federal, state and local laws and
regulations. The Company believes that it is in substantial compliance with
the Funeral Rule and all such laws and regulations. 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 10,600 persons, and
management believes that its relationship with its employees is good.
Approximately 334 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-AFL-CIO, the International Brotherhood of
Teamsters of Puerto Rico, the Sindicato de Trabajadores y Empleados de
Establecimientos Comerciales, Tiendas de Ropa y Almacenes en General del
Distrito Federal, the Miscellaneous Workers Union and Association des
Travailleurs du Parc Commemoratif de Montreal Inc. and 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, 1998, all but 131 of the Company's 558 funeral home
locations were owned by subsidiaries of the Company. The leases with respect
to the 131 leased properties have terms ranging from one to 19 years, except
for two leases which expire in 2032 and 2040. Generally, the Company has a
right of first refusal and an option to purchase the leased premises. An
aggregate of $3.0 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, 1998, the Company owned 140 cemeteries covering a total of
approximately 9,300 acres. Approximately 4,300 acres, or 46% of the total
acreage, are available for future development.
The Company's corporate headquarters occupy approximately 40,600 square feet
of office space in a building in suburban New Orleans that is leased from an
affiliate of the Company. In addition, the Company owns a 92,000 square foot
building in suburban New Orleans which it uses for its Shared Services Center,
Human Resource Department and Information Systems Department. See "Certain
Transactions," which is incorporated by reference herein from the Company's
definitive proxy statement relating to its 1999 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 as the
former owners have agreed to indemnify the Company.
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 other
than Mr. Stewart, to rights under employment agreements. Each of the following
has served the Company in the capacity indicated for more than five years,
except as indicated below.
NAME AGE POSITION
------ ----- -----------
Frank B. Stewart, Jr. ...... 63 Chairman of the Board(1)
Joseph P. Henican, III ..... 50 Vice Chairman of the Board and Chief Executive
Officer(2)
William E. Rowe ............ 52 President, Chief Operating Officer and Director(3)
Kenneth C. Budde ........... 51 Executive Vice President, President-Corporate
Division, Chief Financial Officer and Director(4)
Richard O. Baldwin, Jr. .... 52 Executive Vice President and President-Corporate
Development Division(5)
Brian J. Marlowe ........... 52 Executive Vice President and President-Eastern
Division(6)
Brent F. Heffron ........... 49 Executive Vice President and President-Southern
Division(7)
Raymond C. Knopke, Jr. ..... 43 Executive Vice President and President-Western
Division(8)
Ronald H. Patron ........... 54 Executive Vice President and Chief Administrative
Officer(9)
Gerard C. Alexander ........ 59 Executive Vice President-Special Corporate
Projects(10)
Charles L. Tilis ........... 43 Senior Vice President and President-Central
Division(11)
Lawrence B. Hawkins ........ 50 Senior Vice President and President-Investors Trust, Inc.
- -----------------------
(1) Mr. Stewart served as interim Chief Executive Officer from November 1,
1994, upon the retirement of Lawrence M. Berner as President and Chief
Executive Officer, until February 1, 1995, when Joseph P. Henican, III
became Chief Executive Officer.
(2) Mr. 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 became President on November 1, 1994 upon the retirement 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. Budde has served as President-Corporate Division and Chief Financial
Officer since May 1998 and Director since June 1998. From August 1989 to
May 1998, he served as Senior Vice President of Finance, Secretary and
Treasurer.
(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 Executive Vice President and President of the
Company's Southern Division since November 1, 1998. From January 1, 1997
to October 31, 1998, he served as Senior Vice President and President of
the Company's Southern Division. From November 1992 to December 1996, he
served as President and Chief Operating Officer of the Central Region of
the Company's Eastern Division and Vice President of the Company's former
Mid-Atlantic Division.
(8) Mr. Knopke has served as Executive Vice President and President of the
Company's Western Division since November 1, 1998. From January 1, 1997 to
October 31, 1998, he served as Senior Vice President and President of the
Company's Western Division. From December 1993 to December 1996, he served
as President and Chief Operating Officer of the South Atlantic Region of
the Company's Eastern Division.
(9) Mr. Patron has served as Chief Administrative Officer since May 1998.
Prior to that time, he served as Chief Financial Officer, President-
Corporate Division and Director.
(10) Mr. Alexander has served as Executive Vice President-Special Corporate
Projects since November 1, 1998. From August 1, 1995 to October 31, 1998,
he served as Executive Vice President and President of the Company's
Central Division. Prior to that time, he served as Executive Vice
President and President of the Company's former South Central Division.
(11) Mr. Tilis has served as Senior Vice President and President of the
Company's Central Division since November 1, 1998. From November 1, 1997
to October 31, 1998, he served as Chief Operating Officer of the Western
Region of the Central Division. Prior to that time, he was a partner in
the firm of Coopers & Lybrand L.L.P., the predecessor firm of
PricewaterhouseCoopers LLP, the Company's independent accountants.
PART II
ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS
Market Information
The Company's Class A Common Stock trades in the Nasdaq National Market
under the symbol STEI. The following table sets forth, for the periods
indicated, the range of high and low sales prices, as reported by the Nasdaq
National Market. Prices for fiscal year 1997 and the first two quarters of
fiscal year 1998 have been adjusted to reflect a two-for-one stock split
effected in the form of a 100% stock dividend on April 24, 1998. As of
January 8, 1999, there were 1,403 record holders of the Company's Class A
Common Stock.
HIGH LOW
-------- -------
Fiscal Year 1998
Fourth Quarter ................. 24 5/8 15 7/8
Third Quarter ................. 28 5/8 22 1/4
Second Quarter ................. 29 21
First Quarter ................. 24 1/4 19 1/2
Fiscal Year 1997
Fourth Quarter ................. 22 15/16 18 3/16
Third Quarter ................. 23 16 1/8
Second Quarter ................. 19 16
First Quarter ................. 19 7/8 16 3/8
Dividends
The Company declared quarterly dividends of $.01 per share on its Class A
and Class B Common Stock during each quarter of fiscal year 1997 and the first
two quarters of fiscal year 1998, and $.02 per share during the last two
quarters of fiscal year 1998. The Company intends to continue its current
policy of declaring quarterly cash dividends on the Class A and Class B Common
Stock in the amount of $.02 per share. The declaration and payment of
dividends is at the discretion of the Company's Board of Directors and will
depend on the Company's results of operations, financial condition, cash
requirements, future prospects and other factors deemed relevant by the Board.
The most restrictive of the Company's debt agreements restricts the declaration
and payment of dividends within any period of four consecutive quarters to 50%
or less of the Company's consolidated net earnings for those four fiscal
quarters. The same debt agreement limits the purchases, redemption or
retirement of any shares of the Company's capital stock to 5% or less of its
consolidated net worth on the payment date.
Sales of Unregistered Equity Securities
During fiscal year 1998, 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, 1994 through 1998 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)
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
STATEMENT OF EARNINGS DATA:
Revenues:
Funeral ............................ $ 379,095 $ 291,649 $ 225,461 $ 188,991 $ 116,266
Cemetery ........................... 269,270 240,937 207,926 179,831 138,092
--------- --------- --------- --------- ---------
Total revenues ..................... 648,365 532,586 433,387 368,822 254,358
Gross profit:
Funeral ............................ 118,426 89,235 72,239 55,309 31,785
Cemetery ........................... 77,558 67,937 45,879 34,434 25,812
--------- --------- --------- --------- ---------
Total gross profit ................. 195,984 157,172 118,118 89,743 57,597
Corporate general and administrative
expenses .............................. (16,621) (15,402) (14,096) (11,113) (8,157)
--------- --------- --------- --------- ---------
Operating earnings before performance-
based stock options ................... 179,363 141,770 104,022 78,630 49,440
Performance-based stock options ......... (76,762) - - (17,252) -
--------- --------- --------- --------- ---------
Operating earnings ...................... 102,601(2) 141,770 104,022 61,378(3) 49,440
Interest expense ........................ (43,821) (38,031) (26,051) (22,815) (8,877)
Investment and other income ............. 6,184 2,738 4,104 2,937 1,635
--------- --------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principles ................. $ 64,964(2) $ 106,477 $ 82,075 $ 41,500(3) $ 42,198
========= ========= ========= ========= =========
Earnings before cumulative effect of
change in accounting principles ....... $ 41,902(2) $ 69,742 $ 51,297 $ 26,145(3) $ 27,253
Cumulative effect of change in accounting
principles (net of $2,230 income tax
benefit) .............................. - (2,324)(1) - - -
--------- --------- --------- --------- ---------
Net earnings ........................... $ 41,902(2) $ 67,418 $ 51,297 $ 26,145(3) $ 27,253
========= ========= ========= ========= =========
Per Share Data:(4)
Basic earnings per share:
Earnings before cumulative effect of
change in accounting principles .... $ .43(2) $ .79 $ .62 $ .36(3) $ .43
Cumulative effect of change in
accounting principles .............. - (.03)(1) - - -
--------- --------- --------- --------- ---------
Net earnings .......................... $ .43(2) $ .76 $ .62 $ .36(3) $ .43
========= ========= ========= ========= =========
Diluted earnings per share:
Earnings before cumulative effect of
change in accounting principles .... $ .43(2) $ .78 $ .61 $ .35(3) $ .42
Cumulative effect of change in
accounting principles .............. - (.03)(1) - - -
--------- --------- -------- --------- ---------
Net earnings .......................... $ .43(2) $ .75 $ .61 $ .35(3) $ .42
========= ========= ======== ========= =========
Weighted average common shares
outstanding (in thousands):
Basic ................................ 97,691 88,778 82,821 72,772 63,820
========= ========= ======== ========= =========
Diluted .............................. 98,444 89,675 83,959 73,698 64,463
========= ========= ======== ========= =========
Dividends declared per common share ... $ .06 $ .04 $ .033 $ .017 $ .014
========= ========= ======== ========= =========
(continued)
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended October 31, (1)
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
Pro forma amounts assuming change in accounting
principles was applied retroactively: (1)
Net earnings .................................... $ 69,742 $ 49,959 $ 30,671(3) $ 28,649
=========== =========== =========== ==========
Basic earnings per common share (4) ............. $ .79 $ .60 $ .42(3) $ .45
=========== =========== =========== ==========
Diluted earnings per common share (4) ........... $ .78 $ .60 $ .42(3) $ .44
=========== =========== =========== ==========
October 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
Balance Sheet Data:
Assets........................................... $ 2,071,802 $ 1,637,238 $ 1,360,913 $ 1,072,435 $ 759,390
Long-term debt, less current maturities ......... 913,215 524,351 515,901 317,451 260,913
Shareholders' equity ............................ 839,290 819,570 547,447 483,978 325,671
SELECTED CONSOLIDATED OPERATING DATA
Year Ended October 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
OPERATING DATA:
Funeral homes in operation at end of period .. 558 401 298 161 105
At-need funerals performed ................... 87,653 61,682 38,351 37,263 23,539
Prearranged funerals performed ............... 23,563 18,970 15,422 9,225 7,571
------- ------- ------- ------- -------
Total funerals performed ................... 111,216 80,652 53,773 46,488 31,110
Prearranged funerals sold .................... 66,368 48,676 37,545 33,787 26,637
Backlog of prearranged funerals at
end of period ............................. 397,025 350,031 294,829 222,532 183,886
Cemeteries in operation at end of period ..... 140 129 120 105 90
Interments performed ......................... 50,201 46,782 43,129 39,662 30,415
- ----------------------
(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 years 1997 and 1998 reflects the change in
accounting principles; information presented for fiscal years 1994
through 1996 reflects results as originally reported under the accounting
methods then in effect.
(2) Includes a non-recurring, non-cash charge of $76.8 million ($50.3 million,
or $.51 per share, after-tax) recorded during the second quarter of fiscal
year 1998 in connection with the vesting of the Company's performance-based
stock options.
(3) Includes a non-recurring, non-cash charge of $17.3 million ($10.9 million,
or $.15 per share, after-tax) recorded during the third quarter of fiscal
year 1995 in connection with the vesting of the Company's performance-based
stock options.
(4) Adjusted to reflect a three-for-two common stock split effected June 21,
1996 and a two-for-one common stock split effected April 24, 1998.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND
RESULTS OF OPERATIONS
INTRODUCTION
Death care businesses in the United States traditionally have been
relatively small family-owned enterprises that have been passed down through
successive generations within a family. 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 expected increase
in the number of deaths and the average age of the population. According to
the United States Bureau of the Census, the number of deaths in the United
States is expected to increase by approximately 1% per year from 2.38 million
in 1998 to 2.64 million in 2010. In addition, 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. According
to the Bureau of the Census, the United States population over 50 years of age
will increase from 72.7 million in 1998 to 96.4 million in 2010. The Company's
principal target market for sales of prearranged cemetery property, merchandise
and services is customers who are age 50 and above.
Certain statements made herein that are not historical facts are intended to
be forward-looking statements within the meaning of the safe harbor provisions
of the Private Securities Litigation Reform Act of 1995. Forward-looking
statements are based on assumptions about future events and therefore are
inherently uncertain; actual results may differ materially from those
projected. See "Cautionary Statements." The discussion herein should be read
in conjunction with the Company's consolidated financial statements and the
notes thereto.
CHANGE IN ACCOUNTING 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, "blue
chip" 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. Income from
funds, especially those invested partially in common stock, can be materially
affected by prevailing interest rates and the performance of the stock market.
In managing its North American funds, including those in Puerto Rico and
excluding those in Mexico, which include investments in common stock, the
Company seeks an overall annual rate of return of approximately 8.5% to 9.0%.
In the past three years, such funds have generated overall annual rates of
return in that range. However, no assurance can be given that the Company will
be successful in achieving any particular rate of return.
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."
Fiscal years 1998 and 1997 reflect the current accounting methods as
reported; comparisons between 1997 and 1996 reflect the pro forma effects of
applying the new accounting principles as if the change had occurred on
November 1, 1995. The following table presents the results as reported for the
fiscal years ended October 31, 1998 and 1997 and the pro forma results for the
year ended October 31, 1996:
Year Ended October 31,
--------------------------------------------
1998 1997 1996
------------ ----------- -----------
(As Reported) (As Reported) (Pro Forma)
(In Millions)
Revenues:
Funeral ........................ $ 379.1 $ 291.6 $ 219.1
Cemetery ....................... 269.3 240.9 213.1
------- ------- -------
648.4 532.5 432.2
------- ------- -------
Costs and expenses:
Funeral ......................... 260.7 202.4 153.2
Cemetery ........................ 191.7 173.0 163.3
------- ------- -------
452.4 375.4 316.5
------- ------- -------
Gross profit ..................... 196.0 157.1 115.7
Corporate general and administrative
expenses .......................... 16.6 15.4 14.1
------- ------- -------
Operating earnings before
performance-based stock options . 179.4 141.7 101.6
Performance-based stock options ..... 76.8 - -
------- ------- -------
Operating earnings ................ 102.6(1) 141.7 101.6
------- ------- -------
Interest expense .................... (43.8) (38.0) (26.0)
Investment and other income ......... 6.2 2.7 4.1
------- ------- -------
Earnings before income taxes and
cumulative effect of change in
accounting principles ........... 65.0(1) 106.4 79.7
Income taxes ........................ 23.1 36.7 29.7
------- ------- ------
Earnings before cumulative effect of
change in accounting principles .. $ 41.9(1) $ 69.7 $ 50.0
======= ======= =======
(1) Includes a non-recurring, non-cash charge of $76.8 million ($50.3
million, after tax) recorded during the second quarter of fiscal year 1998
in connection with the vesting of performance-based stock options.
Excluding that charge, for fiscal year 1998:
(a) earnings before income taxes and cumulative effect of change in
accounting principles were $141.7 million; and
(b) earnings before cumulative effect of change in accounting principles
were $92.2 million.
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
Funeral Segment
Year Ended
October 31, Increase
--------------------- (Decrease)
1998 1997 ----------
------- -------
(In Millions)
FUNERAL REVENUE
Existing Operations ............................. $ 256.1 $ 240.2 $ 15.9
Acquired Operations ............................. 96.5 26.7 69.8
Revenue from prearranged funeral trust funds and
escrow accounts .............................. 26.5 24.7 1.8
------- ------- ------
$ 379.1 $ 291.6 $ 87.5
======= ======= ======
FUNERAL COSTS
Existing Operations .............................. $ 174.6 $ 181.6 $ (7.0)
Acquired Operations .............................. 86.1 20.8 65.3
------- ------- ------
$ 260.7 $ 202.4 $ 58.3
======= ======= ======
Funeral Segment Profit ........................... $ 118.4 $ 89.2 $ 29.2
======= ======= ======
Funeral revenue increased $87.5 million, or 30%, in fiscal year 1998, as
compared with the prior fiscal year. The Company experienced a $15.9 million
increase in revenue from Existing Operations as a result of a 6% increase in
the average revenue per domestic funeral service performed by Existing
Operations (10% increase in total, excluding the effect of foreign currency
translation), due primarily to price increases and improved merchandising.
Slightly offsetting this increase in revenue was a 2% decrease in the number of
domestic funeral services performed by Existing Operations (4% decrease in
total).
The $7.0 million, or 4%, 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 improved cost control
measures, including the Company's centralization and standardization of certain
financial and administrative functions at its 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
during fiscal year 1998 which is not reflected in the 1997 period presented
above.
The $1.8 million increase in revenue from prearranged funeral trust funds
and escrow accounts was attributable to a 21% growth in the average balance in
such trust funds and escrow accounts, resulting primarily from current year
customer payments deposited into the funds and funds added through
acquisitions, offset by a modest decrease in the yield on the funds, which
yield remained in line with the Company's goal.
Cemetery Segment
Year Ended
October 31,
------------------------------------
1998 1997 Increase
---- ------- --------
(In millions)
CEMETERY REVENUE
Existing Operations ...................... $ 239.9 $ 225.7 $ 14.2
Acquired Operations ...................... 16.2 3.0 13.2
Revenue from merchandise trust funds and
escrow accounts ........................ 13.2 12.2 1.0
------- ------- -------
$ 269.3 $ 240.9 $ 28.4
======= ======= =======
CEMETERY COSTS
Existing Operations ....................... $ 179.0 $ 171.1 $ 7.9
Acquired Operations ....................... 12.7 1.9 10.8
------- ------- -------
$ 191.7 $ 173.0 $ 18.7
======= ======= =======
Cemetery Segment Profit ................... $ 77.6 $ 67.9 $ 9.7
======= ======= =======
Cemetery revenue increased $28.4 million, or 12%, in fiscal year 1998, as
compared to fiscal year 1997. The Company experienced a $14.2 million or 6%
increase in revenue from Existing Operations resulting principally from an
increase in cemetery sales, including burial site openings and closings.
The improved profit margin achieved by Existing Operations was attributable
principally to the increase in cemetery sales discussed above, the
implementation of certain cost control measures, including the centralization
and standardization of certain financial and administrative functions at the
Shared Services Center, and the increase in burial site openings and closings.
The increase in revenues and costs associated with Acquired Operations
resulted from the acquisition or construction of cemeteries during fiscal year
1998 which is not reflected in the 1997 period presented above.
The $1.0 million increase in revenue from merchandise trust funds and escrow
accounts was attributable principally to a 22% 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 offset by a slight decrease in the yield on the merchandise
trust funds and escrow accounts, which yield remained in line with the
Company's goal.
Other
In April 1998, the Company achieved the performance goal for the
performance-based stock options granted under the Company's 1995 Incentive
Compensation Plan. As a result, the options vested and the Company was
required to record a non-recurring, non-cash charge to earnings of
approximately $76.8 million (approximately $50.3 million, or $.51 per share,
after-tax) in April 1998. There will be no impact on future periods.
Additionally, to encourage optionees to exercise their options immediately
in order to renew the performance-based option program and to reduce potential
dilution from additional shares in the market, the Company offered to
repurchase the options for the difference between $27.31, the closing price on
the date on which the options vested, and the exercise price of the options.
The repurchase of certain of the options by the Company and the exercise of the
remaining options resulted in a net cash outlay of approximately $69.4 million.
In July and August 1998, the Company granted new options under the 1995
Incentive Compensation Plan to officers and employees for the purchase of
3,592,250 shares of Class A Common Stock at exercise prices equal to the fair
market value on the grant dates, which ranged from $21.38 to $27.25 per share.
One third of the options become exercisable in 20% annual increments beginning
on July 17, 1999. The remaining two-thirds of the options become exercisable
in full on the first day between the grant date and July 17, 2003 that the
average of the closing sale prices of a share of Class A Common Stock over the
20 preceding consecutive trading days equals or exceeds $67.81, which
represents a 20% annual compounded growth in the price of a share of Class A
Common Stock over five years. Generally accepted accounting principles require
that a charge to earnings be recorded for the performance-based options for the
difference between the exercise price and the then current stock price when
achievement of the performance objective becomes probable. All of the options
expire on July 31, 2004.
Corporate general and administrative expenses declined to 2.6% of revenue in
fiscal year 1998, as compared to 2.9% in fiscal year 1997, despite an aggregate
increase of $1.2 million for the current year. The increase in these expenses
is the result of activities to support the Company's growth.
Interest expense increased $5.8 million during fiscal year 1998 when
compared to fiscal year 1997. The increase resulted from an increase in
average borrowings, which was partially offset by a decrease in average
interest rates from 6.6% in 1997 to 6.4% in 1998. Approximately $492.0
million, or 53%, of the $924.4 million borrowings outstanding as of
October 31, 1998 was subject to short-term variable interest rates averaging
approximately 5.7%.
In December 1998, the Company entered into an interest rate swap agreement
on a notional amount of $200 million. Under the terms of the agreement,
effective March 4, 1999, the Company will pay a fixed rate of 4.915% and
receive 3-month LIBOR. The swap expires on March 4, 2002.
Investment and other income increased $3.5 million during fiscal year 1998
when compared to the prior year, due principally to an approximately $2.3
million gain on the sale of non-essential assets.
The Company experienced an increase in its effective tax rate from 34.5% in
fiscal year 1997 to 35.5% in fiscal year 1998. The increase in the effective
tax rate was due to an increase in income from jurisdictions with higher
effective tax rates.
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 a result of a 5% overall
increase in the average revenue per funeral service performed by Existing
Operations (4% increase domestically), due to price increases and improved
merchandising.
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. 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 approximate 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 increase in burial site openings
and closings.
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
elimination of the Puerto Rican interest withholding tax and strategic state
tax planning.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $36.9 million as of
October 31, 1998, an increase of $.6 million from October 31, 1997. The
Company provided cash of $18.3 million from its operations for the year ended
October 31, 1998, compared to using cash of $15.2 million for fiscal year 1997,
due principally to an increase in earnings (excluding the charge for the
performance-based stock options) and an increase in accounts payable and
accrued expenses offset by an increase in other receivables and other working
capital changes.
Long-term debt as of October 31, 1998 amounted to $924.4 million, compared
to $558.3 million as of October 31, 1997. The Company's long-term debt
consisted of $492.0 million under the Company's revolving credit facilities,
$408.4 million of long-term notes including the Remarketable or Redeemable
Securities (ROARS) discussed below, and $24.0 million of term notes incurred
principally in connection with the acquisition of funeral home and cemetery
properties. All of the Company's debt is unsecured, except for approximately
$3.0 million of term notes incurred principally in connection with
acquisitions.
In April 1998, the Company issued $200 million of 6.40% ROARS due May 1,
2013 (remarketing date May 1, 2003). The ROARS were priced to the public at
99.677% to yield 6.476%. Net proceeds were approximately $203.6 million,
including the remarketing payment made to the Company by the remarketing dealer
for the right to remarket the securities after five years. The proceeds were
used to reduce balances outstanding under the Company's existing revolving
credit facilities. The net effective rate to the Company, assuming the
securities are redeemed by the Company after five years, is 5.77%. If the
securities are remarketed after five years, the net effective rate is expected
to be approximately 6.14% over 15 years.
The most restrictive of the Company's credit agreements require it to
maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has
managed its capitalization within that limit, with a ratio of total debt to
equity of 1.1 and .7 to 1.0 as of October 31, 1998 and 1997, respectively. As
of October 31, 1998, the Company had $124.7 million of additional borrowing
capacity within this parameter, of which $114.1 million was available under its
revolving credit facilities.
In July and December 1998, the Company filed shelf registration statements
with the Securities and Exchange Commission covering an aggregate of up to $750
million of Class A Common Stock, Preferred Stock, and Debt Securities,
including up to 2,000,000 shares of the Company's Class A Common stock which
Frank B. Stewart, Jr., the Chairman of the Board of Directors of the Company,
and his transferees and successors in interest, may offer and sell from time to
time.
In January 1999, the Company filed a prospectus supplement for the proposed
sale of 12,500,000 shares of Class A Common Stock (excluding the underwriters'
over-allotment option covering 1,875,000 shares), of which 650,000 shares are
being offered by the Stewart Revocable Trust, a trust established by Mr.
Stewart and his wife. The offering, scheduled to close near the end of
January, is expected to generate net proceeds to the Company of approximately
$268 million (excluding the over-allotment option) to be used to fund the
Company's continuing acquisition program and for general corporate purposes.
Pending such use, the Company will use the net proceeds to reduce the balances
outstanding on its revolving credit facilities or to invest in short-term
interest-bearing securities.
The Company's ratio of earnings to fixed charges was 2.39 (which includes
the $76.8 million non-recurring, non-cash performance-based stock option
charge), 3.65 (which excludes the cumulative effect of the change in accounting
principles), 3.98, 2.72 (which includes the $17.3 million non-recurring, non-
cash performance-based stock option charge) and 5.30 for the fiscal years ended
October 31, 1998, 1997, 1996, 1995 and 1994, respectively. Excluding the stock
option charge, the Company's ratio of earnings to fixed charges would have been
4.02 for fiscal year 1998 and 3.43 for fiscal year 1995. 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 1998, the Company completed the acquisition of 153
funeral homes and nine cemeteries for purchase prices aggregating approximately
$266.3 million, including the issuance of approximately 294,000 shares of
Class A Common Stock and $16.2 million of seller-financed acquisition
indebtedness. The cash portion of the purchase price of these acquisitions was
funded primarily with advances under the Company's revolving credit facilities.
Subsequent to fiscal year-end, the Company completed the acquisition of 18
funeral homes and 3 cemeteries for approximately $34.1 million. As of January
15, 1999, the Company also had agreements in principle or letters of intent to
purchase 59 funeral homes and cemeteries for purchase prices aggregating
approximately $162.5 million.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $45 million for the fiscal year ending October 31, 1999, 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 the common stock offering referenced to above, 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.
In December 1998, the Company entered into an interest rate swap agreement
on a notional amount of $200 million. Under the terms of the agreement,
effective March 4, 1999, the Company will pay a fixed rate of 4.915% and
receive 3-month LIBOR. The swap expires on March 4, 2002.
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, has been 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 or 1998.
As of January 1, 1999, the Mexican economy is no longer considered highly
inflationary according to the SEC staff. The functional currency which will be
used by the Company's Mexican operations is the Mexican peso. This change is
not expected to have a material effect on the Company's operations,
consolidated financial condition or results of operations.
OTHER
Year 2000 Issues
OVERVIEW. As the Year 2000 approaches, all companies that use computers
must address "Year 2000" issues. Year 2000 issues result from the past
practice in the computer industry of using two digits rather than four to
identify the applicable year. This practice can create breakdowns or erroneous
results when computers perform operations involving years later than 1999.
THE COMPANY'S STATE OF READINESS. The Company has devised and commenced an
extensive compliance plan with the objective of bringing all of the Company's
information technology (IT) systems and non-IT systems into Year 2000
compliance by the end of the second quarter of fiscal year 1999. The Company
has divided its systems into (i) critical systems, consisting of IT systems,
and (ii) non-critical systems, consisting of a mixture of IT and non-IT
systems. Each system will be evaluated and brought into compliance in five
phases:
* Phase I: Awareness - Prepare and present comprehensive report to
management
* Phase II: Assessment - Identify and evaluate all systems for Year
2000 compliance
* Phase III: Compliance - Complete necessary Year 2000
modifications
* Phase IV: Testing - Test all modified systems for Year 2000
compliance
* Phase V: Implementation - Return Year 2000 compliant systems to
daily operation
Phase I has been completed. Additionally, all of the Company's critical
systems have completed Phase II and 60% were found to be compliant or made to
be compliant by completing Phases III through V. The remaining 40% of the
Company's critical systems have commenced Phase III through Phase V and the
Company anticipates that these systems will be brought into compliance by the
end of the second quarter of fiscal 1999.
Fifty percent of the Company's non-critical systems have completed Phase II
and were either found to be compliant or were brought into compliance by
completing Phases III through V. The Company anticipates that the remaining
non-critical systems will be evaluated and brought into compliance by the end
of the second quarter of fiscal 1999.
In addition, the Company has distributed surveys to all of its significant
vendors, financial institutions and insurers to determine the extent to which
their failure to resolve their Year 2000 issues could affect the Company's
operations. The Company has received 68% of the surveys, none of which
indicated significant problems. The Company expects to complete its evaluation
of third parties' compliance by the end of February 1999.
THE COSTS INVOLVED. Because many of the Company's computer systems have been
replaced in recent years as part of the Company's on-going goal to maintain
state of the art technology, the Company's Year 2000 compliance costs have been
relatively low. To date, the Company has incurred expenses of approximately
$75,000 for external consultants, software and hardware applications in
implementing its compliance plan. The Company does not separately track the
internal costs incurred for the year 2000 project. Such costs are principally
payroll-related costs for the Company's information technology group.
Management estimates that the total external cost to be incurred by the Company
to complete its compliance plan will be approximately $175,000. All costs
related to the Year 2000 compliance plan are included in the Information
Systems budget and are based on management's best estimates. There can be no
guarantee that actual results will not differ from those estimated or that
such difference will not be material.
RISKS. If the Company is not successful in its efforts to bring its systems
into Year 2000 compliance:
* The Company's ability to procure merchandise in a timely and cost-
effective manner may be impaired
* Daily business procedures may be delayed due to the use of manual
procedures
* Some business procedures may be interrupted if no alternative
methodology is available
Each of these items could have a material adverse effect on the Company's
operations.
The Company has no guarantee that the systems of third parties will be brought
into compliance on a timely basis. The non-compliance of a third party's
system could have a material adverse effect on the Company's operations.
THE COMPANY'S CONTINGENCY PLAN. Although the Company believes that its Year
2000 compliance plan is adequate to achieve full system operation on a timely
basis, the Company is in the process of developing a contingency plan to
address the possibility of the Company's and third parties' non-compliance.
The Company anticipates completing its contingency plan by the end of June
1999.
Recent Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," is required to be implemented in the first quarter of
the Company's fiscal year 1999. SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," is required to be implemented during the
Company's fiscal year ending October 31, 1999 and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
in the first quarter of the Company's fiscal year 2000. 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 1999 include: (i) revenue growth of at
least 20%, and (ii) earnings per share growth of 20%. The Company also plans
to complete at least $250 million in acquisitions, which is in line with the
$266 million achieved in fiscal year 1998, but above the $185 million and
$179 million in acquisitions achieved in fiscal years 1997 and 1996,
respectively. For fiscal year 1999, the Company also plans to improve its gross
margin by approximately 50 to 100 basis points over its fiscal year 1998 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 goals and
expectations expressed in the forward-looking statements above and in any other
forward-looking statements made by or on behalf of the Company.
(1) 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 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 aggressiveness of the Company's competitors in pricing
acquisitions affects the Company's ability to complete
acquisitions at prices it finds attractive.
(c) Achieving the Company's projected acquisition activity depends on
the Company's ability to enter new markets, 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) Achieving the Company's revenue goals 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 depends primarily on 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 first entered foreign markets in the fourth quarter of
fiscal year 1994, and no assurance can be given that the Company will continue
to be successful in expanding in foreign markets, or that any expansion in
foreign markets will yield results comparable to those realized through the
Company's expansion in the United States.
(6) 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
implementing internal controls and information gathering systems,
and retaining or attracting key personnel, among other things.
(d) The amount and rate of growth in the Company's general and
administrative expenses.
(e) Changes in interest rates, 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 their
effects on corporate structure.
(i) Changes in inflation and other general economic conditions, both
domestically and internationally, affecting financial markets
(e.g. marketable security values as well as exchange rate
fluctuations).
(j) Unanticipated legal proceedings and unanticipated outcomes of
legal proceedings.
(k) Changes in accounting policies and practices adopted voluntarily
or required to be adopted by generally accepted accounting
principles.
(l) The ability of the Company and its significant vendors, financial
institutions and insurers to achieve Year 2000 compliance on a
timely basis.
The Company also cautions readers that it assumes no obligation to update or
publicly release any revisions to forward-looking statements made herein or any
other forward-looking statements made by or on behalf of the Company.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential change arising from increases or decreases in
the prices of marketable equity securities, foreign currency exchange rates,
and interest rates as discussed below. Generally, the Company's market risk
sensitive instruments and positions are characterized as "other than trading."
The Company's exposure to market risk as discussed below includes "forward-
looking statements" and represents an estimate of possible changes in fair
value or future earnings that would occur assuming hypothetical future
movements in equity markets, foreign currency exchange rates or interest rates.
The Company's views on market risk are not necessarily indicative of actual
results that may occur and do not represent the maximum possible gains and
losses that may occur, since actual gains and losses will differ from those
estimated, based upon actual fluctuations in equity markets, foreign currency
exchange rates, interest rates and the timing of transactions.
MARKETABLE EQUITY SECURITIES
As of October 31, 1998, the Company held marketable equity securities,
consisting principally of investments in its prearranged funeral, merchandise
and perpetual care trust and escrow accounts, with a fair value of $308.5
million determined using final sale prices quoted on stock exchanges. Each 10%
change in the average market prices of the equity securities held in such
accounts would result in a change of approximately $30.9 million in the fair
value of such accounts.
The Company's prearranged funeral, merchandise and perpetual care trust
funds and escrow accounts are detailed in Notes 5 and 6 to the Company's
consolidated financial statements included in Item 8. Generally, the Company's
wholly-owned subsidiary, Investors Trust, Inc. ("ITI") serves as investment
adviser on these trust and escrow accounts. ITI manages the mix of equities
and fixed-income securities in accordance with an investment policy established
by the Investment Committee of the Company's Board of Directors with the
assistance of third party professional financial consultants. The policy
emphasizes conservation, diversification and preservation of principal while
seeking appropriate levels of current income and capital appreciation. ITI is
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940.
FOREIGN CURRENCY
The Company's foreign subsidiaries receive revenues and pay expenses in a
number of foreign currencies. For the fiscal year ended October 31, 1998, each
10% change in the average exchange rate between such currencies and the U.S.
dollar would result in a change of approximately $2.7 million in the
Company's pre-tax earnings.
The Company does not currently hedge its investments in foreign
subsidiaries; however, the Company continually monitors the exchange rates of
its foreign currencies and may, if deemed appropriate, enter into hedging
transactions.
INTEREST
The Company has entered into various fixed and variable rate debt
obligations, which are detailed in Note 11 to the Company's consolidated
financial statements included in Item 8.
As of October 31, 1998, the carrying value of the Company's long-term fixed-
rate debt, including accrued interest and the unamortized portion of the ROARS
option premium, was approximately $445.2 million, compared to fair value of
$447.7 million. Fair value was determined using quoted market prices, where
applicable, or discounted future cash flows based on the Company's current
incremental borrowing rates for similar types of borrowing arrangements. Each
0.5% change in average interest rates applicable to such debt would result in a
change of approximately $7.5 million in the fair value of these instruments.
If these instruments are held to maturity, no change in fair value will be
realized.
As of October 31, 1998, the Company had $492.0 million in variable-rate
debt. Each 0.5% change in average interest rates applicable to such debt would
result in a change of approximately $1.2 million in the Company's pre-tax
earnings.
The Company monitors its mix of fixed and variable rate debt obligations in
light of changing market conditions and from time to time may alter that mix
by, for example, refinancing balances outstanding under its variable rate
revolving credit facilities with fixed-rate debt, or by entering into interest
rate swaps or other interest rate hedging transactions.
As of October 31, 1998, the Company held fixed-income securities with
aggregate quoted market values of $267.6 million, consisting principally of
investments in our prearranged funeral, merchandise and perpetual care trust
and escrow accounts. Each 10% change in interest rates on these fixed income
securities would result in a change of approximately $8.0 million in the fair
value of such securities based on discounted expected future cash flows. If
these securities are held to maturity, no change in fair value will be
realized.
As of October 31, 1998, the Company owned money market and other short-term
investments with a fair value of $323.9 million. Each 0.5% change in average
interest rates applicable to such investments would result in a change of
approximately $1.4 million in the Company's pre-tax earnings.
The fixed-income securities, money market and other short-term investments
owned by the Company are principally invested in its prearranged funeral,
merchandise and perpetual care trust and escrow accounts which are managed by
ITI. ITI operates pursuant to a formal investment policy as discussed above.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Page
----
Report of Independent Accountants ............................ 33
Consolidated Statements of Earnings for the Years
Ended October 31, 1998, 1997 and 1996 ...................... 34
Consolidated Balance Sheets as of October 31, 1998 and
1997 ....................................................... 35
Consolidated Statements of Shareholders' Equity for the
Years Ended October 31, 1998, 1997 and 1996 ................. 37
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1998, 1997 and 1996 ............................. 38
Notes to Consolidated Financial Statements .................... 40
REPORT OF INDEPENDENT ACCOUNTANTS
To the Board of Directors and
Shareholders of Stewart Enterprises, Inc.:
In our opinion, the accompanying consolidated balance sheets and the
related consolidated statements of earnings, shareholders' equity and cash
flows present fairly, in all material respects, the financial position of
Stewart Enterprises, Inc. and Subsidiaries at October 31, 1998 and 1997, and
the results of their operations and their cash flows for each of the three
years in the period ended October 31, 1998, in conformity with generally
accepted accounting principles. These financial statements are the
responsibility of the Company's management; our responsibility is to express an
opinion on these financial statements based on our audits. We conducted our
audits of these statements in accordance with generally accepted auditing
standards which require that we plan and perform the audit to obtain reasonable
assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management,
and evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for the opinion expressed above.
As described in Note 3 to the 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.
PricewaterhouseCoopers LLP
December 15, 1998
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended October 31,
-----------------------------------
1998 1997 1996
--------- --------- ---------
Revenues:
Funeral ............................. $ 379,095 $ 291,649 $ 225,461
Cemetery ............................ 269,270 240,937 207,926
--------- --------- ---------
648,365 532,586 433,387
--------- --------- ---------
Costs and expenses:
Funeral ............................ 260,669 202,414 153,222
Cemetery ........................... 191,712 173,000 162,047
--------- --------- ---------
452,381 375,414 315,269
--------- --------- ---------
Gross profit ...................... 195,984 157,172 118,118
Corporate general and administrative
expenses ............................ 16,621 15,402 14,096
--------- --------- ---------
Operating earnings before
performance-based stock options .... 179,363 141,770 104,022
Performance-based stock options ........ 76,762 - -
--------- --------- ---------
Operating earnings ................... 102,601 141,770 104,022
Interest expense ....................... (43,821) (38,031) (26,051)
Investment and other income ............ 6,184 2,738 4,104
--------- --------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principles ............. 64,964 106,477 82,075
Income taxes .......................... 23,062 36,735 30,778
--------- --------- ---------
Earnings before cumulative effect of
change in accounting principles ... 41,902 69,742 51,297
Cumulative effect of change in accounting
principles (net of $2,230 income tax
benefit) (Note 3) .................... - (2,324) -
--------- --------- ---------
Net earnings ......................... $ 41,902 $ 67,418 $ 51,297
========= ========= =========
Basic earnings per common share:
Earnings before cumulative effect of
change in accounting principles .... $ .43 $ .79 $ .62
Cumulative effect of change in
accounting principles ............. - (.03) -
--------- --------- ---------
Net earnings ......................... $ .43 $ .76 $ .62
========= ========= =========
Diluted earnings per common share:
Earnings before cumulative effect of
change in accounting principles ....... $ .43 $ .78 $ .61
Cumulative effect of change in
accounting principles ................ - (.03) -
--------- --------- ---------
Net earnings .......................... $ .43 $ .75 $ .61
========= ========= =========
Weighted average common shares outstanding
(in thousands)
Basic ................................. 97,691 88,778 82,821
========= ========= =========
Diluted ............................... 98,444 89,675 83,959
========= ========= =========
Pro forma amounts assuming change in
accounting principles was applied
retroactively:
Net earnings .......................... $ 69,742 $ 49,959
========= =========
Basic earnings per common share ....... $ .79 $ .60
========= =========
Diluted earnings per common share ..... $ .78 $ .60
========= =========
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 1998 1997
------ ----------- -----------
Current assets:
Cash and cash equivalent investments ...... $ 30,733 $ 31,640
Marketable securities ..................... 6,120 4,615
Receivables, net of allowances ............ 171,849 140,291
Inventories ............................... 48,833 43,044
Prepaid expenses .......................... 3,870 7,111
----------- -----------
Total current assets .................... 261,405 226,701
Receivables due beyond one year, net of
allowances ................................ 257,773 200,285
Intangible assets ........................... 573,006 415,723
Deferred charges ............................ 100,432 75,353
Cemetery property, at cost .................. 382,972 310,628
Property and equipment, at cost:
Land ...................................... 75,032 67,579
Buildings ................................. 284,590 244,421
Equipment and other ....................... 127,951 102,592
----------- -----------
487,573 414,592
Less accumulated depreciation ............. 105,834 85,188
----------- -----------
Net property and equipment ................ 381,739 329,404
Long-term investments ....................... 68,014 57,345
Merchandise trust, less estimated cost to
deliver.................................... 41,160 20,787
Other assets ................................ 5,301 1,012
----------- -----------
$ 2,071,802 $ 1,637,238
=========== ===========
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
LIABILITIES AND SHAREHOLDERS' EQUITY
October 31,
--------------------------
1998 1997
---------- -----------
Current maturities of long-term debt ............ $ 11,219 $ 33,973
Accounts payable ................................ 19,048 16,705
Accrued payroll ................................ 21,074 16,241
Accrued insurance ............................... 12,420 10,428
Accrued interest ............................... 13,440 7,581
Accrued other ................................... 19,369 16,283
Income taxes payable ............................ 8,245 -
Deferred income taxes ........................... 13,967 9,720
---------- -----------
Total current liabilities ..................... 118,782 110,931
Long-term debt, less current maturities ........... 913,215 524,351
Deferred income taxes ............................. 92,231 85,454
Deferred revenue .................................. 98,775 88,088
Other long-term liabilities ....................... 9,509 8,844
---------- -----------
Total liabilities ............................. 1,232,512 817,668
---------- -----------
Commitments and contingencies (Note 15)
Shareholders' equity:
Preferred stock, $1.00 par value, 5,000,000
shares authorized;
no shares issued ............................ - -
Common stock, $1.00 stated value:
Class A authorized 150,000,000 shares; issued
and outstanding 94,472,844 and 93,807,568
shares at October 31, 1998 and 1997,
respectively ................................ 94,473 93,808
Class B authorized 5,000,000 shares; issued and
outstanding 3,555,020 shares at October 31,
1998 and 1997; 10 votes per share; convertible
into an equal number of Class A shares ...... 3,555 3,555
Additional paid-in capital ...................... 492,177 477,499
Retained earnings ............................... 315,140 279,104
Cumulative foreign translation adjustment ....... (64,887) (36,609)
Unrealized appreciation (depreciation) of
investments ................................... (1,168) 2,213
----------- -----------
Total shareholders' equity ................... 839,290 819,570
----------- -----------
$ 2,071,802 $ 1,637,238
=========== ===========
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Unrealized
Common Stock Cumulative Appreciation
---------------------------- Additional Foreign (Depreciation) Total
Shares - Paid-In Retained Translation Of Shareholders'
Classes A and B(1) Amount Captial Earnings Adjustment Investments Equity
------------------ -------- --------- -------- ----------- ------------ ------------
(IN THOUSANDS)
Balance October 31, 1995 ......... 82,027(2) $ 82,027 $ 250,933 $ 166,785 $ (19,123) $ 3,356 $ 483,978
Net earnings ................... 51,297 51,297
Sales of common stock .......... 76 76 803 879
Subsidiaries acquired
with common stock ........... 932 932 11,319 12,251
Stock options exercised ........ 1,052 1,052 9,535 10,587
Purchase and retirement
of common stock .............. (488) (488) (7,683) (8,171)
Foreign translation
adjustment .................. 65 65
Unrealized depreciation
of investments ............... (671) (671)
Dividends ($.033 per
share)(1) .................... (2,768) (2,768)
------ -------- --------- -------- -------- -------- ---------
Balance October 31, 1996 ......... 83,599(2) 83,599 264,907 215,314 (19,058) 2,685 547,447
Net earnings ................... 67,418 67,418
Sales of common stock .......... 12,190 12,190 199,513 211,703
Subsidiaries acquired with
common stock ................ 688 688 11,738 12,426
Stock options exercised ........ 1,574 1,574 14,064 15,638
Purchase and retirement of
common stock ................. (688) (688) (12,723) (13,411)
Foreign translation
adjustment ................. (17,551) (17,551)
Unrealized depreciation of
investments ................. (472) (472)
Dividends ($.04 per
share)(1)..................... (3,628) (3,628)
------ -------- --------- -------- -------- -------- ---------
Balance October 31, 1997 ......... 97,363(2) 97,363 477,499 279,104 (36,609) 2,213 819,570
Net earnings ................... 41,902 41,902
Sales of common stock .......... 68 68 1,320 1,388
Subsidiaries acquired with
common stock ................ 294 294 7,411 7,705
Stock options exercised ........ 637 637 14,714 15,351
Purchase and retirement of
common stock ................. (334) (334) (8,767) (9,101)
Foreign translation
adjustment .................. (28,278) (28,278)
Unrealized depreciation of
investments ................. (3,381) (3,381)
Dividends ($.06 per share)(1) .. (5,866) (5,866)
------ -------- --------- --------- ---------- --------- ---------
Balance October 31, 1998 ......... 98,028(2) $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290
====== ======== ========= ========= ========== ========== =========
- -------------------------
(1) Share and per share information has been adjusted to give effect to a
three-for-two common stock split effective June 21, 1996 and a two-for-one
stock split effective April 24, 1998.
(2) Includes 3,555 shares (in thousands) of Class B Common Stock.
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended October 31,
-------------------------------------
1998 1997 1996
-------- -------- --------
Cash flows from operating activities:
Net earnings ................................... $ 41,902 $ 67,418 $ 51,297
Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:
Performance-based stock options .............. 76,762 - -
Depreciation and amortization ................ 35,542 27,849 21,701
Provision for doubtful accounts .............. 28,325 21,351 23,156
Cumulative effect of change in accounting
principles ................................. - 2,324 -
Net gains on sales of marketable securities .. (2,727) (370) (2,098)
Provision (benefit) for deferred income
taxes ...................................... 532 11,360 (4,676)
Changes in assets and liabilities net of
effects from acquisitions:
Increase in prearranged funeral trust
receivables ............................. (17,015) (17,933) (17,265)
Increase in other receivables .............. (90,997) (71,988) (35,918)
Increase in deferred charges and
intangible assets ....................... (28,233) (14,018) (7,385)
Increase in inventories and cemetery
property ................................. (15,343) (8,394) (8,812)
Increase (decrease) in accounts payable and
accrued expenses ........................ 6,517 (9,641) 2,682
Decrease in estimated costs to complete
mausoleums and lawn crypts, and to deliver
merchandise .............................. (20,641) (24,874) (10,256)
Increase in deferred revenue ............... 778 1,778 250
Increase (decrease) in other ............... 2,916 (105) (1,037)
Net cash provided by (used in) operating -------- -------- --------
activities ................................. 18,318 (15,243) 11,639
-------- -------- --------
Cash flows from investing activities:
Proceeds from sale of marketable securities .... 19,039 11,297 8,648
Purchases of marketable securities and
long-term investments ........................ (30,438) (19,771) (16,317)
Purchases of subsidiaries, net of cash, seller
financing and stock issued ................... (223,414) (154,013) (158,359)
Additions to property and equipment ............ (40,719) (44,405) (26,332)
Other .......................................... 2 1,037 471
-------- -------- --------
Net cash used in investing activities ........ (275,530) (205,855) (191,889)
-------- -------- --------
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
Year Ended October 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Cash flows from financing activities:
Proceeds from long-term debt ................... 602,782 367,725 277,259
Repayments of long-term debt ................... (270,682) (348,782) (90,691)
Retirement of performance-based stock options .. (69,431) - -
Issuance of common stock ....................... 11,738 227,341 11,466
Purchase and retirement of common stock ........ (9,101) (13,411) (8,171)
Dividends ...................................... (5,866) (3,628) (2,768)
--------- --------- ---------
Net cash provided by financing activities .... 259,440 229,245 187,095
--------- --------- ---------
Effect of exchange rates on cash and cash
equivalents .................................... (3,135) (1,087) (491)
--------- --------- ---------
Net increase (decrease) in cash .................. (907) 7,060 6,354
Cash and cash equivalents, beginning of year ..... 31,640 24,580 18,226
--------- --------- ---------
Cash and cash equivalents, end of year ........... $ 30,733 $ 31,640 $ 24,580
========= ========= =========
Supplemental cash flow information:
Cash paid during the year for:
Income taxes ................................. $ 12,000 $ 30,600 $ 25,100
Interest ..................................... $ 38,000 $ 35,100 $ 26,100
Non cash investing and financing activities:
Subsidiaries acquired with common stock ....... $ 7,705 $ 12,426 $ 12,251
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, 1998, the funeral and cemetery segments contributed
approximately 58% and 42%, respectively, of total revenues, and 60% and 40%,
respectively, of consolidated gross profit.
As of October 31, 1998, the Company owned and operated 558 funeral homes and
140 cemeteries in 28 states within the United States, and in Puerto Rico,
Mexico, Australia, New Zealand, Canada, Spain, Portugal, the Netherlands,
Argentina, France and Belgium. The Company commenced its international
operations in Mexico in fiscal year 1994, and entered Australia in fiscal year
1995, New Zealand and Canada in fiscal year 1996, Spain and Portugal in fiscal
year 1997, and the Netherlands, Argentina, France and Belgium in fiscal year
1998. For fiscal year 1998, foreign operations contributed approximately 18%
of total revenue and, as of October 31, 1998, represented approximately 20% 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
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
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 using quoted market prices,
where applicable, or discounted future cash flows based on the Company's
current incremental borrowing rates for similar types of borrowing
arrangements. See Note 11.
(d) Inventories
Inventories are stated at the lower of cost (specific identification and
first-in, first-out methods) or net realizable value.
(e) Depreciation and Amortization
Buildings and equipment are depreciated over their estimated useful lives,
ranging from 19 to 45 years and from three to 10 years, respectively, primarily
using the straight-line method. For the fiscal years ended October 31, 1998,
1997 and 1996, depreciation expense totaled approximately $21,094, $17,972 and
$13,938, respectively.
Goodwill, or costs in excess of net assets of companies acquired, totaled
approximately $567,432 and $411,564 as of October 31, 1998 and 1997,
respectively, and is amortized principally over 40 years by the straight-line
method. The Company continually evaluates the recoverability of this
intangible asset by assessing whether the amortization of the goodwill balance
over its remaining life can be recovered through undiscounted expected future
cash flows. Other intangible assets are amortized over five years by the
straight-line method. Accumulated amortization was approximately $43,831 and
$29,383 as of October 31, 1998 and 1997, respectively.
(f) Foreign Currency Translation
In accordance with Statement of Financial Accounting Standards No. 52,
"Foreign Currency Translation," all assets and liabilities of the Company's
foreign subsidiaries are translated into U.S. dollars at the exchange rate in
effect at the end of the period, and revenues and expenses are translated at
average exchange rates prevailing during the period. The resulting translation
adjustments are reflected in a separate component of shareholders' equity,
except for translation adjustments arising from operations in highly
inflationary economies.
During the first quarter of fiscal year 1997, the Company changed its method
of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies. Under
that method, foreign currency translation adjustments are reflected in results
of operations, instead of in shareholders' equity. This change did not have a
material effect on the Company's results of operations for fiscal year 1997 or
1998.
As of January 1, 1999, the Mexican economy is no longer considered highly
inflationary. The functional currency which will be used by our Mexican
operations will be the Mexican peso. This change is not expected to have a
material effect on the Company's operations or consolidated financial condition
and results of operations.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(g) Funeral Revenue
The Company sells prearranged funeral services and funeral merchandise under
contracts that provide for delivery of the services and merchandise at the time
of death. Prearranged funeral services are recorded as funeral revenue in the
period the funeral is performed. Prearranged funeral merchandise is recognized
as revenue upon delivery in jurisdictions where such sales are included in
funeral and insurance contracts.
Commissions and direct marketing costs relating to prearranged funeral
services and prearranged funeral merchandise sales are accounted for in the
same manner as the revenue to which they relate. Where revenue is deferred,
the related commissions and direct marketing costs are deferred and amortized
as the funeral contracts are fulfilled. Conversely, where revenues are
recognized currently, the related costs are expensed as incurred. Indirect
costs of marketing prearranged funeral services are expensed in the period in
which incurred.
Prearranged funeral services and merchandise generally are funded either
through trust funds or escrow accounts established by the Company, or through
insurance. Principal amounts deposited in the trust funds or escrow accounts
are available to the Company as funeral services and merchandise are delivered
and are refundable to the customer in those situations where state law provides
for the return of those amounts under the purchaser's option to cancel the
contract. Certain jurisdictions provide for non-refundable trust funds or
escrow accounts where the Company receives such amounts upon cancellation by
the customer. Under prearranged funeral services and merchandise funded
through insurance purchased by customers from third party insurance companies,
the Company earns a commission on the sale of the policies. Commissions, net
of related expenses, are recognized at the point at which the commission is no
longer subject to refund. Policy proceeds are available to the Company as
funeral services and merchandise are delivered.
Effective November 1, 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.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
In certain jurisdictions in which the Company operates, local law or
contracts with customers generally require that a portion of the sale price of
prearranged cemetery merchandise be placed in trust funds or escrow accounts.
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
canceled.
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.
(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
Effective November 1, 1997, the Company adopted Statement of Financial
Accounting Standards No. 128 "Earnings Per Share" which requires the
presentation of basic and diluted earnings per share. Basic earnings per share
is computed by dividing net earnings by the weighted average number of common
shares outstanding during each period. Diluted earnings per share is computed
by dividing net earnings by the weighted average number of common shares
outstanding plus the number of additional common shares that would have been
outstanding if the dilutive potential common shares (in this case, exercise of
the Company's time-vest stock options) had been issued during each period. See
Note 12. The Company's share and per share amounts have been adjusted for a
three-for-two common stock split effective June 21, 1996, and a two-for-one
common stock split effective April 24, 1998.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED)
(k) Recent Accounting Standards
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 14.
Statement of Financial Accounting Standard (SFAS) No. 129, "Disclosure of
Information about Capital Structure," was adopted during the first quarter of
the Company's fiscal year ending October 31, 1998. SFAS No. 130, "Reporting
Comprehensive Income," is required to be implemented in the first quarter of
the Company's fiscal year 1999. SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," is required to be implemented during the
Company's fiscal year ending October 31, 1999 and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
in the first quarter of the Company's fiscal year 2000. 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 1997 consolidated
financial statements to conform to the presentation used in the 1998
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.
(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.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) CHANGE IN ACCOUNTING PRINCIPLES--(CONTINUED)
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 $.03 per share.
(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 1998 .... 153 9 $266,300 294,000
Fiscal year 1997 .... 104 10 184,500 688,000
Fiscal year 1996 .... 134 15 179,000 932,000
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.
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during fiscal year 1998
as if such acquisitions had taken place at the beginning of the respective
periods presented. Appropriate adjustments have been made to reflect the
accounting basis used in recording the acquisitions. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations that would have resulted had the
combinations been in effect on the dates indicated, that have resulted since
the dates of acquisition or that may result in the future.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) ACQUISITION OF SUBSIDIARIES -- (CONTINUED)
Year Ended October 31,
----------------------
1998 1997
--------- ---------
(Unaudited)
Revenues ................................................... $ 698,403 $ 618,480
Operating earnings before performance-based stock options .. $ 185,720 $ 152,711
Earnings before cumulative effect of change in accounting
principles ............................................... $ 39,516 $ 65,539
Net earnings ............................................... $ 39,516 $ 63,214
Basic earnings per share:
Earnings before cumulative effect of change in
accounting principles ................................. $ .40 $ .74
Net earnings ............................................ $ .40 $ .71
Diluted Earnings per share:
Earnings before cumulative effect of change in
accounting principles ................................. $ .40 $ .73
Net earnings ............................................ $ .40 $ .70
Weighted average shares outstanding (in thousands)
Basic ................................................... 97,889 89,073
Diluted ................................................. 98,642 89,969
The effect of acquisitions at dates of purchase on the consolidated financial
statements was as follows:
Year Ended October 31,
---------------------------------
1998 1997 1996
--------- --------- ---------
Current assets .......................... $ 35,561 $ 8,537 $ 21,380
Receivables due beyond one year ......... 91 - 1,973
Cemetery property ....................... 47,987 7,572 25,260
Property and equipment, net ............. 42,247 38,653 72,949
Deferred charges and other assets ....... 2,242 549 9,889
Intangible assets, net .................. 177,708 142,484 98,230
Current liabilities ..................... (9,128) (10,683) (10,396)
Long-term debt .......................... (33,872) (19,315) (10,388)
Deferred income taxes ................... (20,107) (841) (15,640)
Deferred revenue and other liabilities .. (11,610) (517) (22,647)
--------- --------- ---------
231,119 166,439 170,610
Common stock used for acquisitions ...... 7,705 12,426 12,251
--------- --------- ---------
Cash used for acquisitions .............. $ 223,414 $ 154,013 $ 158,359
========= ========= =========
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 $40,832 and $34,599 as of October 31, 1998 and 1997, 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. Earnings of $26,463 and $24,682 were included in
funeral revenue for fiscal year 1998 and 1997, respectively. 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
for 1996.
October 31,
------------------------
1998 1997
--------- ---------
Trust or escrow funded:
Prearranged funeral services sold, but not delivered ... $ 555,742 $ 505,970
========= =========
Investments at market value ............................ $ 525,909 $ 422,336
Receivables to be collected on prearranged funeral
service contracts .................................... 97,410 93,747
--------- ---------
$ 623,319 $ 516,083
========= =========
Insurance-funded and other prearranged funeral services .. $ 214,464 $ 184,111
========= =========
Investments consist of:
U.S. Government, agencies and municipalities ........... $ 37,223 $ 56,121
Canadian Government, agencies and municipalities ....... 23,040 27,508
Corporate bonds ........................................ 74,102 81,393
Preferred stocks ....................................... 48,484 31,871
Common stocks .......................................... 133,431 54,938
Money market funds and other short-term investments .... 167,457 118,315
Short-term fixed income foreign investments ............ 42,867 41,766
--------- ---------
Total value at cost .................................... 526,604 411,912
Net unrealized appreciation (depreciation) ............. (695) 10,424
--------- ---------
Total value at market .................................. $ 525,909 $ 422,336
========= =========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) CEMETERY TRUST FUNDS AND ESCROW ACCOUNTS
The following summary reflects the Company's merchandise trust fund and
escrow account balances, as well as merchandise sold, but undelivered, at
current cost. Merchandise sold, but undelivered, is reflected at current cost
in the accompanying consolidated balance sheets net of the related merchandise
trust fund and escrow account balances and accumulated earnings, except for
$24,990 and $20,833 classified as long-term investments as of October 31, 1998
and 1997, 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 $13,157, $12,237, and
$9,082 is reflected in cemetery revenue for 1998, 1997 and 1996, respectively.
Amounts deposited in merchandise trust funds and escrow accounts that are
invested in debt securities as of October 31, 1998 totaled $63,621 and are
scheduled to mature as follows: $1,624 in less than one year; $31,475 in one
through five years; $29,781 in five through ten years; and $741 in more than
ten years.
October 31,
----------------------
1998 1997
--------- ---------
Merchandise trust funds and escrow accounts:
Merchandise sold, but not delivered, at current cost ... $ 122,388 $ 108,644
========= =========
Investments at market value ............................ $ 188,538 $ 150,264
Amounts to be collected on merchandise contracts ....... 55,336 50,044
--------- ---------
$ 243,874 $ 200,308
========= =========
Investments consist of:
U.S. Government, agencies and municipalities .......... $ 19,626 $ 30,067
Corporate bonds ....................................... 42,225 43,648
Preferred stocks ...................................... 17,541 13,802
Common stocks ......................................... 61,106 24,452
Money market funds and other short-term investments ... 49,787 36,109
-------- --------
Total value at cost ................................... 190,285 148,078
Net unrealized appreciation (depreciation) ............ (1,747) 2,186
---------- ---------
Total value at market ................................. $ 188,538 $ 150,264
========= =========
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 perpetual care trust fund and
escrow account balances. Since principal cannot be withdrawn, these balances
are not reflected in the accompanying financial statements, except for $2,192
and $1,913, classified as long-term investments as of October 31, 1998 and
1997, 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, 1998, 1997 and 1996, such withdrawals, included in cemetery
revenue, totaled $12,615, $12,497, and $15,056, respectively.
October 31,
-----------------------
1998 1997
--------- ---------
Perpetual care trust funds and escrow accounts:
Investments at market value .......................... $ 167,508 $ 152,137
Amounts to be collected under existing agreements .... 10,815 9,447
--------- ---------
$ 178,323 $ 161,584
========= =========
Investments consist of:
U.S. Government, agencies and municipalities ......... $ 20,747 $ 28,829
Corporate bonds ...................................... 38,424 45,274
Preferred stocks ..................................... 12,744 7,467
Common stocks ........................................ 43,718 25,266
Money market funds and other short-term investments .. 46,331 37,023
Other long-term investments .......................... 408 520
--------- ---------
Total value at cost .................................. 162,372 144,379
Net unrealized appreciation .......................... 5,136 7,758
--------- ---------
Total value at market ................................ $ 167,508 $ 152,137
========= =========
(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,
----------------------
1998 1997
-------- --------
Cash ............................. $ 20,847 $ 18,118
Cash equivalent investments ...... 9,886 13,522
------- --------
$ 30,733 $ 31,640
======== ========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(8) MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS
Marketable securities consist of investments in fixed maturities and equity
securities. The market value as of October 31, 1998 was $6,120 and
approximated cost. The market value as of October 31, 1997 was $4,615, which
included gross unrealized gains of $1,027. The Company realized net gains on
the sales of securities of $2,727, $370 and $2,098 for the years ended October
31, 1998, 1997 and 1996, respectively. The cost of securities sold was
determined by using the average cost method.
The market value of long-term investments as of October 31, 1998 and 1997
was $68,014 and $57,345 which included gross unrealized gains of $2,573 and
$1,877, and gross unrealized losses of $2,654 and $968, respectively. Amounts
classified as long-term investments and invested in debt securities as of
October 31, 1998 totaled $13,586 and are scheduled to mature as follows: $0 in
less than one year; $7,583 in one through five years; $5,504 in five through
ten years; and $499 in more than ten years. See Notes 5 and 6 which include
details of the Company's long-term investments.
(9) RECEIVABLES
October 31,
-----------------------
1998 1997
--------- ---------
Current receivables are summarized as follows:
Installment contracts due within one year ................ $ 90,716 $ 77,332
Trade accounts, notes and other .......................... 44,860 34,642
Allowance for sales cancellations and doubtful accounts .. (10,813) (6,869)
Amount to be collected for perpetual care funds .......... (5,815) (4,017)
118,948 101,088
Funeral receivables ...................................... 40,950 25,332
Prearranged funeral trust receivable ..................... 11,951 13,871
Net current receivables ............................. $ 171,849 $ 140,291
Long-term receivables are summarized as follows:
Installment contracts due beyond one year ................ $ 199,836 $ 154,710
Allowance for sales cancellations and doubtful accounts .. (12,063) (9,696)
Amount to be collected for perpetual care funds .......... (5,000) (5,430)
182,773 139,584
Prearranged funeral trust receivable ..................... 75,000 60,701
Net long-term receivables ........................... $ 257,773 $ 200,285
The Company's receivables as of October 31, 1998 are expected to mature as
follows:
Years ending October 31,
1999 ...................................................... $ 171,849
2000 ...................................................... 51,555
2001 ...................................................... 42,962
2002 ...................................................... 38,666
2003 ...................................................... 30,073
Later years ............................................... 94,517
---------
$ 429,622
=========
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,
------------------------
1998 1997
--------- ---------
Developed cemetery property ..................... $ 18,888 $ 22,172
Merchandise and supplies ........................ 29,945 20,872
--------- ---------
$ 48,833 $ 43,044
========= =========
Cemetery property is comprised of the following:
October 31,
------------------------
1998 1997
--------- ---------
Developed cemetery property ..................... $ 93,061 $ 68,217
Undeveloped cemetery property.................... 289,911 242,411
--------- ---------
$ 382,972 $ 310,628
========= =========
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,
----------------------
1998 1997
--------- ---------
Revolving Credit Facilities (see "Revolving Credit Facility"
and "Revolving Line of Credit Note" below) ................... $ 492,000 $ 312,000
Senior Notes ...................................................... 102,857 125,000
6.70% Notes ....................................................... 100,000 100,000
6.40% Notes ....................................................... 205,546 -
Other, principally seller financing of acquired
operations or assumption upon acquisition, weighted
average interest rate of 5.1% as of October 31, 1998,
partially secured by assets of subsidiaries, with
maturities through 2022 ...................................... 24,031 21,324
-------- --------
924,434 558,324
Less current maturities ............................................ 11,219 33,973
-------- --------
$ 913,215 $ 524,351
========= =========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(11) LONG-TERM DEBT--(CONTINUED)
In April 1997, the Company completed the syndication of a $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. Under this agreement
$492,000 and $312,000 were outstanding with weighted average interest rates of
5.70% and 6.26% as of October 31, 1998 and 1997, respectively.
Additionally, the Company has available with a separate financial
institution an uncollateralized revolving line of credit ("Revolving Line of
Credit Note") used to support the interim cash funding for advances to be made
under the Revolving Credit Facility in amounts less than $5,000. Borrowings
under the Revolving Line of Credit Note are limited to $10,000, bear interest
at the lending bank's cost of funds rate or certain optional rates at the
Company's election, and mature on March 31, 1999. 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, 1998 and 1997.
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; the first such payment was made
on November 30, 1997, and the final payment is due on November 30, 2003. On
November 7, 1994, the Company issued $75,000 of uncollateralized senior notes
with an average maturity of seven years and a weighted average interest rate of
8.44%. A principal payment of $15,000 was made on May 1, 1998. The remaining
notes have a weighted average interest rate of 8.49%, and principal payments
are due as follows: $16,667 on each of November 1, 2000, 2001 and 2002, and
$10,000 on November 1, 2006. As of October 31, 1998 and 1997, the carrying
value of the Company's senior notes, including accrued interest, was $106,468
and $129,381, respectively, whereas the fair value was $110,420 and $132,464,
respectively.
In December 1996, the Company issued $100,000 of unsecured, unsubordinated
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, 1998 and 1997,
the carrying value of these notes, including accrued interest, was $102,792,
whereas the fair value was $103,197 and $104,337, respectively.
In April 1998, the Company issued $200,000 of 6.40% Remarketable Or
Redeemable Securities (ROARS) due May 1, 2013 (remarketing date May 1, 2003).
The ROARS were priced to the public at 99.677% to yield 6.476%. Net proceeds
were approximately $203,631, including the payment made to the Company by the
remarketing dealer for the right to remarket the securities after five years.
The proceeds were used to reduce balances outstanding under the Company's
revolving credit facilities. The net effective rate to the Company, assuming
the securities are redeemed by the Company after five years, is 5.77%. If the
securities are remarketed after five years, the net effective rate is expected
to be approximately 6.14% over 15 years. If the ROARS are redeemed by the
Company on May 1, 2003, a principal payment of $200,000 will be required. As
of October 31, 1998, the carrying value of these notes, including accrued
interest and the unamortized portion of the option premium, was $211,911,
whereas the fair value was $210,010.
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 for the fiscal years ending
October 31, 1999 through October 31, 2003, excluding the Revolving Credit
Facility and assuming the ROARS are redeemed by the Company on May 1, 2003, are
approximately $10,836 in 1999, $12,207 in 2000, $26,380 in 2001, $25,739 in
2002, and $225,758 in 2003. Current maturities of long-term debt of $11,219 as
of October 31, 1998, as reported in the Company's consolidated balance sheets,
includes $383 relating to the unamortized ROARS option premium.
(12) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA
Earnings Shares Per-Share
(Numerator) (Denominator) Data
----------- ------------ ----------
YEAR ENDED OCTOBER 31, 1998
Net earnings .......................................... $ 41,902
Basic earnings per share: =========
Net earnings available to common shareholders ...... $ 41,902 97,691 $ .43
======
Effect of dilutive securities:
Time-vest stock options assumed exercised .......... - 753
--------- ------
Diluted earnings per share:
Net earnings available to common shareholders ......
plus time-vest stock options assumed exercised .. $ 41,902 98,444 $ .43
========= ======= ======
Earnings Shares Per-Share
(Numerator) (Denominator) Data
----------- ------------- ---------
YEAR ENDED OCTOBER 31, 1997
Earnings before cumulative effect of change
in accounting principles ........................... $ 69,742
Basic earnings per share: =========
Earnings available to common shareholders ......... $ 69,742 88,778 $ .79
======
Effect of dilutive securities:
Time-vest stock options assumed exercised ......... - 897
--------- ------
Diluted earnings per share:
Earnings available to common shareholders
plus time-vest stock options assumed exercised.. $ 69,742 89,675 $ .78
========= ====== =======
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(12) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA--(CONTINUED)
Options to purchase 319,210 shares of common stock at $25.81 and 895,560
shares of common stock at $27.25 were outstanding during the third and fourth
quarters of fiscal year 1998 but were not included in the computation of
diluted earnings per share because the options' exercise prices were greater
than the average market price of the common shares. The options, which expire
on July 31, 2004, were still outstanding at the end of 1998.
(13) INCOME TAXES
Income tax expense (benefit) is comprised of the following components:
U.S. And
Possessions State Foreign Total
----------- --------- --------- ---------
YEAR ENDED OCTOBER 31,
1998:
Current tax expense ............... $ 13,871 $ 3,918 $ 4,741 $ 22,530
Deferred tax expense (benefit) .... (2,075) 617 1,990 532
--------- --------- --------- ---------
$ 11,796 $ 4,535 $ 6,731 $ 23,062
========= ========= ========= =========
1997:
Current tax expense ............... $ 21,174 $ 1,238 $ 2,963 $ 25,375
Deferred tax expense .............. 5,760 3,000 2,600 11,360
--------- --------- --------- ---------
$ 26,934 $ 4,238 $ 5,563 $ 36,735
========= ========= ========= =========
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
========= ========= ========= =========
The reconciliation of the statutory tax rate to the effective tax rate is
as follows:
Year Ended October 31,
------------------------------
1998 1997 1996
------ ------ ------
Statutory tax rate .................................. 35.00% 35.00% 35.00%
Increases (reductions) in tax rate resulting from:
State and U.S. possessions ......................... 6.21 2.82 6.21
Goodwill and other ................................. 3.86 .31 2.52
Dividend exclusion ................................. (2.21) ( .78) (1.03)
Foreign tax rate differential ...................... (5.57) (2.50) (2.88)
Foreign tax credit ................................. (1.79) ( .35) (2.32)
------ ------ ------
Effective tax rate .................................. 35.50% 34.50% 37.50%
====== ====== ======
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(13) INCOME TAXES--(CONTINUED)
Deferred tax assets and liabilities consist of the following:
October 31,
----------------------
1998 1997
--------- --------
Deferred tax assets:
Domestic trust earnings ................................... $ 7,375 $ 9,708
Estimated cost to deliver merchandise ..................... 3,292 3,366
Allowance for sales cancellations and doubtful accounts ... 7,940 4,707
Deferred preneed sales and expenses ....................... 23,922 20,564
Unrealized depreciation of investments .................... 629 -
Deferred compensation ..................................... 556 328
Foreign tax credit ........................................ 4,374 2,444
Other ..................................................... 2,653 -
--------- --------
50,741 41,117
--------- --------
October 31,
----------------------
1998 1997
--------- --------
Deferred tax liabilities:
Purchase accounting adjustments .......................... 122,065 103,422
Foreign trust earnings .................................... 10,513 7,741
Deferred revenue on cemetery property and merchandise
sales ................................................... 11,277 7,866
State income taxes ........................................ 1,726 3,663
Percentage of completion on long-term contracts ........... 2,618 3,845
Equity method investments ................................. 2,240 2,005
Goodwill .................................................. 2,733 1,634
Unrealized appreciation of investments .................... - 1,170
Non-compete amortization ................................. 3,485 3,234
Depreciation .............................................. - 737
Other ..................................................... 282 974
--------- --------
156,939 136,291
--------- --------
$ 106,198 $ 95,174
========= ========
Current net deferred liability ............................... $ 13,967 $ 9,720
Long-term net deferred liability ............................. 92,231 85,454
--------- --------
$ 106,198 $ 95,174
========= ========
For the years ended October 31, 1998, 1997 and 1996, approximately 5%, 6%,
and 12%, respectively, of the Company's earnings before performance based stock
options and income taxes were generated from properties in foreign
jurisdictions. The Company has recorded a benefit for foreign tax credits in
the amount of $4,374 which are expected to be utilized prior to their
expiration at the end of fiscal year 2003.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS
Stewart Enterprises Employees' Retirement Trust
The Company has a defined contribution retirement plan, the "Stewart
Enterprises Employees' Retirement Trust (A Profit-Sharing Plan) ("SEERT")."
This plan covers substantially all employees with more than one year of service
who have attained the age of 21. Contributions are made to the plan at the
discretion of the Company's Board of Directors. Additionally, employees who
participate may contribute up to 15% 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, 1998, 1997 and 1996 was
approximately $3,550, $2,900, and $2,550, 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, 1998, 1997 and 1996 was approximately $300, $164, and $116,
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 2,905,876 shares of Class A Common Stock at exercise
prices equal to the fair market value at the grant date, which ranged from
$4.45 to $8.00 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, 1998, there were no outstanding options under this
Plan.
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 3,300,000 shares of Class A Common Stock at exercise
prices equal to the fair market value at the grant date, which ranged from
$4.78 to $8.00 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
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
Common Stock over five consecutive trading days equaled or exceeded $9.89, 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 $.15 per share,
after-tax) for the difference between the option exercise prices and $10.79,
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, 1998, all performance-based options granted under the 1991
Incentive Compensation Plan had been exercised.
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 11,250 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, 1998,
243,750 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 April 7, 1998, the Company granted options to
officers and other employees for the purchase of a total of 7,424,536 shares of
Class A Common Stock at exercise prices equal to the fair market value at the
grant dates, which ranged from $10.50 to $21.50 per share. In general, two-
thirds of the options became exercisable in full on the first day between the
date of grant and August 31, 2000 that the average of the closing sale prices
of a share of the Company's Class A Common Stock for the 20 preceding
consecutive trading days equaled or exceeded $26.44, which represented a 20%
annual compounded growth in the price of a share of the Company's Class A
Common Stock over five years. The remaining options generally become
exercisable in 20% annual increments beginning on September 7, 1996, except for
grants issued since
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
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 these options expire on October 31, 2001. As of October 31,
1998, 4,968,506 options had been exercised under this plan, and 130,190 options
had been forfeited.
During April 1998, the stock price performance target was achieved, and the
Company's performance-based stock options granted under the Company's 1995
Incentive Compensation Plan and covering 4,855,886 shares vested. Accordingly,
during the second quarter of fiscal year 1998, the Company was required by
generally accepted accounting principles to record a non-recurring, non-cash
charge to earnings of $76,762 ($50,279, or $.51 per share, after-tax).
Additionally, to encourage optionees to exercise their options immediately
in order to renew the performance-based option program and to reduce potential
dilution from additional shares in the market, the Company offered to
repurchase the options for the difference between $27.31, the closing price on
the date on which the options vested, and the exercise price of the options.
The repurchase of certain of the options by the Company and the exercise of the
remaining options resulted in a cash outlay of $69,431.
In July and August 1998, the Company granted new options under the 1995
Incentive Compensation Plan to officers and employees for the purchase of
3,592,250 shares of Class A Common Stock at exercise prices equal to the fair
market value at the grant dates, which ranged from $21.38 to $27.25 per share.
One-third of the options become exercisable in 20% annual increments beginning
on July 17, 1999. The remaining two-thirds of the options become exercisable
in full on the first day between the grant date and July 17, 2003 that the
average of the closing sale prices of a share of Class A Common Stock over the
20 preceding consecutive trading days equals or exceeds $67.81, which
represents a 20% annual compounded growth in the price of a share of Class A
Common Stock over five years. Generally accepted accounting principles require
that a charge to earnings be recorded for the performance-based options for the
difference between the exercise price and the then current stock price when
achievement of the performance objective becomes probable. All of the options
expire on July 31, 2004.
Directors' Stock Option Plan
Effective January 2, 1996, the Board of Directors adopted, and in December
1996 amended, the Directors' Stock Option Plan, pursuant to which each director
of the Company who is not an employee of the Company was granted an option to
purchase 72,000 shares of the Company's Class A Common Stock. From January 2,
1996 through October 31, 1997, the Company granted a total of 360,000 options
at exercise prices equal to the fair market value at the grant dates, which
ranged from $12.34 to $18.25 per share. The options generally become
exercisable in 25% 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
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
control of the Company, as defined in the plan. All of the options expire on
January 2, 2001. As of October 31, 1998, 91,052 options had been exercised
under this plan.
Employee Stock Purchase Plan
On July 1, 1992, the Company adopted an "Employee Stock Purchase Plan" and
reserved 2,250,000 shares of Class A Common Stock for purchase by eligible
employees, as defined. The plan provides to eligible employees the opportunity
to purchase Company Class A Common Stock semi-annually on June 30 and December
31. The purchase price is established at a 15% discount from fair market
value, as defined. As of October 31, 1998, 477,033 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, 1998 and 1997, and the changes that
occurred during fiscal years 1998 and 1997.
1998 1997
----------------------- ----------------------
Number of Weighted Number of Weighted
Shares Average Shares Average
Underlying Exercise Underlying Exercise
Options Prices Options Prices
---------- ---------- ---------- ---------
Outstanding at beginning of year .... 6,993,710 $ 11.38 7,911,020 $ 9.69
Granted ............................. 4,268,250 $ 25.98 763,124 $ 17.37
Exercised ........................... (4,991,580) $ 12.24 (1,573,586) $ 5.92
Forfeited ........................... (83,342) $ 10.70 (106,848) $ 9.11
--------- ---------
Outstanding at end of year .......... 6,187,038 $ 20.77 6,993,710 $ 11.38
========= =========
Exercisable at end of year .......... 1,349,651 $ 11.76 836,034 $ 11.12
========= =========
Weighted-average fair value of
options granted .................... $ 7.11 $ 3.99
The following table further describes the Company's stock options
outstanding as of October 31, 1998:
Options Outstanding Options Exercisable
-------------------------------------------------- ---------------------------------
Number Weighted Average Number
Range of Outstanding Remaining Weighted Average Exercisable Weighted Average
Exercise Prices at 10/31/98 Contractual Life Exercise Price at 10/31/98 Exercise Price
- ------------------ ----------- ----------------- ------------------ ------------ ------------------
$ 10.50 to $ 15.00 2,095,348 2.91 years $ 10.69 1,163,548 $ 10.62
$ 15.01 to $ 20.00 272,504 2.85 years $ 17.41 110,186 $ 17.22
$ 20.01 to $ 25.00 228,436 3.02 years $ 21.29 75,917 $ 21.29
$ 25.01 to $ 27.25 3,590,750 5.75 years $ 26.87 - -
--------- ---------
$ 10.50 to $ 27.25 6,187,038 4.56 years $ 20.77 1,349,651 $ 11.76
========= =========
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(14) BENEFIT PLANS--(CONTINUED)
SFAS 123 applies only to options granted, and shares acquired under the
Company's Employee Stock Purchase Plan, since the beginning of the Company's
1996 fiscal year. Consequently, the pro forma amounts disclosed below do not
reflect any compensation cost for the 7.8 million stock options outstanding as
of the beginning of fiscal year 1996. If the Company had elected to recognize
compensation cost for its stock option and employee stock purchase plans based
on the fair value at the grant dates for awards under those plans, in
accordance with SFAS 123, net earnings and earnings per share would have been
as follows:
Year Ended October 31,
-----------------------
1998 1997
-------- --------
(UNAUDITED)
Net earnings - as reported .... $ 41,902 $ 67,418
- pro forma ...... 40,027 66,412
Basic earnings per common share - as reported .... $ .43 $ .76
- pro forma ...... .41 .75
Diluted earnings per common share - as reported .... $ .43 $ .75
- pro forma ...... .41 .74
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 1998 and 1997, respectively:
expected dividend yield of .3% and .2%; expected volatility of 20.9% and 19.6%;
risk-free interest rate of 5.5% and 6.1%; and an expected term of 4.7 and 3.3
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 1998 and 1997, respectively: expected dividend yield of .2%
for both years; expected volatility of 20.5% and 19.6%; risk-free interest rate
of 5.3% and 5.2%; and an expected term of .5 years, for both years.
(15) 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 former owners of these corporations have agreed to
indemnify the Company 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.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(15) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS--(CONTINUED)
As of October 31, 1998, the Company had advanced approximately $1,014,
including accrued interest, to fund premiums on a split-dollar, "second-to-die"
life insurance policy on behalf of the Company's Chairman, Mr. Frank B.
Stewart, Jr., and Mrs. Stewart. The advances are collateralized by the
assignment of other insurance policies and the pledge of Class A Common Stock
of the Company. In 1992, the Company agreed to continue to advance such
premiums for a twelve-year period and will be repaid at the earliest of (a) the
surrender of the policy, (b) the deaths of Mr. and Mrs. Stewart, or (c) 60 days
following payment in full of all premiums on the policy.
The Company has noncancellable operating leases, primarily for land and
buildings, that expire over the next one to 19 years, except for two leases
which expire in 2032 and 2040. Rent expense under these leases was $8,616,
$6,025 and $3,997 for the years ended October 31, 1998, 1997 and 1996,
respectively. The Company's future minimum lease payments as of October 31,
1998 are $8,002, $6,379, $4,761, $4,075, $3,058 and $30,513 for the years
ending October 31, 1999, 2000, 2001, 2002, 2003 and later years, respectively.
Additionally, the Company has entered into non-compete agreements with prior
owners of acquired subsidiaries that expire through 2012. The Company's future
non-compete payments as of October 31, 1998 for the same periods are $7,030,
$6,233, $5,847, $5,223, $4,562 and $8,874, respectively.
The Company leases office space from an affiliated company. Rental payments
were approximately $636, $602, and $559 for the years ended October 31, 1998,
1997, and 1996, respectively.
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, Australia and Argentina. The
Company conducts funeral operations in Mexico, New Zealand, Spain, Portugal,
the Netherlands, Belgium and France.
Corporate,
Performance-Based
Stock Options And
Funeral Cemetery Eliminations Consolidated
----------- -------- -------------- ------------
Revenues
October 31, 1998 ............. $ 379,095 269,270 - $ 648,365
October 31, 1997 ............. $ 291,649 240,937 - $ 532,586
October 31, 1996 ............. $ 225,461 207,926 - $ 433,387
Operating earnings or loss
October 31, 1998 ............. $ 118,426 77,558 (93,383)(1) $ 102,601(1)
October 31, 1997 ............. $ 89,235 67,937 (15,402) $ 141,770
October 31, 1996 ............. $ 72,239 45,879 (14,096) $ 104,022
Identifiable assets
October 31, 1998 ............. $ 1,282,670 752,916 36,216 $ 2,071,802
October 31, 1997 ............. $ 940,340 667,932 28,966 $ 1,637,238
October 31, 1996 ............. $ 764,539 585,884 10,490 $ 1,360,913
Depreciation and amortization
October 31, 1998 ............. $ 25,099 8,546 1,897 $ 35,542
October 31, 1997 ............. $ 19,016 7,966 867 $ 27,849
October 31, 1996 ............. $ 12,960 7,830 911 $ 21,701
Capital expenditures
October 31, 1998 ............. $ 64,344 8,118 10,504 $ 82,966
October 31, 1997 ............. $ 58,644 13,051 11,363 $ 83,058
October 31, 1996 ............. $ 81,450 16,442 1,389 $ 99,281
- ----------------------------
(1)Includes a non-recurring non-cash charge of $76,762 recorded in fiscal year
1998 in connection with the vesting of the Company's performance-based stock
options.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(16) SEGMENT DATA--(CONTINUED)
U.S. And Performance-Based
Possessions(1) Foreign(2) Stock Options Consolidated
-------------- ---------- ------------------ ------------
Revenues
October 31, 1998 ............... $ 534,427 113,938 - $ 648,365
October 31, 1997 ............... $ 455,076 77,510 - $ 532,586
October 31, 1996 ............... $ 391,437 41,950 - $ 433,387
Operating earnings or loss
October 31, 1998 ............... $ 153,794 25,569 (76,762)(3) $ 102,601(3)
October 31, 1997 ............... $ 120,803 20,967 - $ 141,770
October 31, 1996 ............... $ 88,812 15,210 - $ 104,022
Identifiable assets
October 31, 1998 ............... $ 1,658,152 413,650 - $ 2,071,802
October 31, 1997 ............... $ 1,320,041 317,197 - $ 1,637,238
October 31, 1996 ............... $ 1,109,424 251,489 - $ 1,360,913
- ----------------------
(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; Portugal - September 1997; the Netherlands -
December 1997; Argentina - April 1998; France and Belgium - May 1998.
(3) Includes a non-recurring non-cash charge of $76,762 recorded in fiscal
year 1998 in connection with the vesting of the Company's performance-based
stock options.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(17) QUARTERLY FINANCIAL DATA (UNAUDITED)
First(1) Second Third Fourth
--------- --------- ---------- ---------
YEAR ENDED OCTOBER 31, 1998
Revenues ............................. $ 149,309 $ 154,578 $ 169,088 $ 175,390
Gross profit .......................... 46,117 49,546 51,331 48,990
Net earnings (loss) ................... 21,946 (26,046) 24,324 21,678
Earnings per common share:
Basic .............................. .23 (.27) .25 .22
Diluted ............................. .22 (.27) .25 .22
First Second Third Fourth
--------- --------- --------- ---------
YEAR ENDED OCTOBER 31, 1997 (1) (2)
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 - basic ........ .18 .20 .21 .19
- diluted ...... .18 .20 .21 .19
Net earnings ........................... 12,683 17,268 19,051 18,416
Earnings per common share:
Basic ................................ .15 .20 .21 .19
Diluted .............................. .15 .20 .21 .19
- -----------------------
(1) Restated to reflect the Company's two-for-one stock split effective April
24, 1998.
(2) 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 less than
$.01 per share (basic and diluted), 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 $.03 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 $.01 per share, as a
result of the accounting changes. See Note 3.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(18) SUBSEQUENT EVENTS (UNAUDITED)
Subsequent to year-end, the Company has acquired or committed to acquire 54
funeral homes and 26 cemeteries for approximately $196,638.
In January 1999, the Company filed a prospectus supplement for the proposed
sale of 12,500,000 shares of Class A Common Stock (excluding the underwriters'
over-allotment option covering 1,875,000 shares), of which 650,000 shares are
being offered by the Stewart Revocable Trust, a trust established by Mr.
Stewart and his wife. The offering, scheduled to close near the end of
January, is expected to generate net proceeds to the Company of approximately
$268 million (excluding the over-allotment option) to be used to fund the
Company's continuing acquisition program and for general corporate purposes.
Pending such use, the Company will use the net proceeds to reduce the balances
outstanding on its revolving credit facilities or to invest in short-term
interest-bearing securities.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND
FINANCIAL DISCLOSURE.
None.
PART III
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
The information regarding executive officers required by Item 10 may be
found under Item 4(a) of this report.
The information regarding directors and compliance with Section 16(a) of the
Securities Exchange Act of 1934, as amended, required by Item 10 is
incorporated by reference to the Registrant's definitive proxy statement
relating to its 1999 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 1999 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 1999 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 1999 annual meeting of
shareholders, which proxy statement will be filed pursuant to Regulation 14A
within 120 days after the end of the last fiscal year.
PART IV
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K
(A) DOCUMENTS FILED AS PART OF THIS REPORT:
(1) Financial Statements
The Company's consolidated financial statements listed below have been
filed as part of this report:
Page
Report of Independent Accountants .................................. 33
Consolidated Statements of Earnings for the Years Ended
October 31, 1998, 1997 and 1996 .................................. 34
Consolidated Balance Sheets as of October 31, 1998 and 1997 ........ 35
Consolidated Statements of Shareholders' Equity for the Years
Ended October 31, 1998, 1997 and 1996 ............................ 37
Consolidated Statements of Cash Flows for the Years Ended
October 31, 1998, 1997 and 1996 .................................. 38
Notes to Consolidated Financial Statements ......................... 40
(2) Financial Statement Schedule for the years ended October 31,
1998, 1997 and 1996
Report of Independent Accountants on Financial Statement Schedule .. 68
Schedule II-Valuation and Qualifying Accounts ...................... 69
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.
PricewaterhouseCoopers LLP
December 15, 1998
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,
1998 .......................... $ 6,869 16,191 1,950 14,197 $ 10,813
1997 .......................... $ 2,996 8,586 2,386 7,099 $ 6,869
1996 .......................... $ 2,847 13,580 445 13,876 $ 2,996
Due after one year-Allowance for
contract cancellations and
doubtful accounts:
Year ended October 31,
1998 .......................... $ 9,696 12,134 728 10,495 $ 12,063
1997 .......................... $ 3,236 12,765 7,215 13,520 $ 9,696
1996 .......................... $ 3,307 9,576 797 10,444 $ 3,236
Accumulated amortization of
intangible assets:
Year ended October 31,
1998 .......................... $ 29,383 14,448 - - $ 43,831
1997 .......................... $ 19,506 9,877 - - $ 29,383
1996 .......................... $ 11,743 7,763 - - $ 19,506
- ---------------------------
(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 (incorporated by reference to Exhibit
3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1997)
4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's Amended and
Restated Articles of Incorporation, as amended and By-laws, as amended,
defining the rights of holders of Class A and Class B Common Stock
4.2 Specimen of Class A Common Stock certificate (incorporated by reference
to Exhibit 4.2 to Amendment No. 3 to the Company's Registration Statement
on Form S-1 (Registration No. 33-42336) filed with the Commission on
October 7, 1991)
4.3 Indenture dated as of December 1, 1996 by and between the Company and
Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to
the Company's Current Report on Form 8-K dated December 5, 1996) and
Supplemental Indenture dated April 24, 1998 (incorporated by reference to
Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 21,
1998)
4.4 Form of 6.70% Note due 2003 (incorporated by reference to Exhibit 4.2 to
the Company's Current Report on Form 8-K dated December 5, 1996)
4.5 Form of 6.40% Remarketable Or Redeemable Securities (ROARS) due May 1,
2013 (Remarketing date May 1, 2003) (incorporated by reference to Exhibit
4.2 to the Company's Current Report on Form 8-K dated April 21, 1998)
4.6 Credit Agreement by and among the Company, its subsidiaries and Citicorp
USA, Inc., Bank of America Illinois, and NationsBank of Texas, N.A. dated
April 14, 1997 (incorporated by reference to Exhibit 4.2 to the Company's
Registration Statement on Form S-3 (Registration No. 333-27771) filed
with the Commission on May 23, 1997)
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 Employment Agreement dated August 1, 1995, between the Company and Joseph
P. Henican, III (incorporated by reference to Exhibit 10.16 to the
Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1995 (the "1995 10-K")) and Amendment No. 1 to Employment
Agreement dated October 31, 1998
10.9 Change of Control Agreement dated December 5, 1995, between the Company
and Joseph P. Henican, III (incorporated by reference to Exhibit 10.20
to the 1995 10-K)
10.10 Stock Option Agreements dated February 1, 1995, between the Company and
Joseph P. Henican, III (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended July 31,
1995)
10.11 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Joseph P. Henican, III (incorporated by reference to Exhibit
10.17 to the 1995 10-K)
10.12 Employment Agreement dated August 1, 1995, between the Company and
William E. Rowe (incorporated by reference to Exhibit 10.25 to the 1995
10-K) and Amendment No. 1 to Employment Agreement dated October 31, 1998
10.13 Change of Control Agreement dated December 5, 1995, between the Company
and William E. Rowe (incorporated by reference to Exhibit 10.29 to the
1995 10-K)
10.14 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and William E. Rowe (incorporated by reference to Exhibit 10.26
to the 1995 10-K)
10.15 Employment Agreement dated August 1, 1995, between the Company and Ronald
H. Patron (incorporated by reference to Exhibit 10.32 to the 1995 10-K);
Amendment No. 1 to Employment Agreement dated May 1, 1998; and Amendment
No. 2 to Employment Agreement dated October 31, 1998
10.16 Change of Control Agreement dated December 5, 1995, between the Company
and Ronald H. Patron (incorporated by reference to Exhibit 10.36 to the
1995 10-K) and Amendment No. 1 to Change of Control Agreement dated May
1, 1998
10.17 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Ronald H. Patron (incorporated by reference to Exhibit 10.33
to the 1995 10-K)
10.18 Employment Agreement dated August 1, 1995, between the Company and Gerard
C. Alexander (incorporated by reference to Exhibit 10.39 to the 1995 10-
K) and Amendment No. 1 to Employment Agreement dated October 31, 1998
10.19 Change of Control Agreement dated December 5, 1995, between the Company
and Gerard C. Alexander (incorporated by reference to Exhibit 10.43 to
the 1995 10-K)
10.20 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Gerard C. Alexander (incorporated by reference to Exhibit
10.40 to the 1995 10-K)
10.21 Employment Agreement dated August 1, 1995, between the Company and
Richard O. Baldwin, Jr. (incorporated by reference to Exhibit 10.23 to
the 1996 10-K); Amendment No. 1 to Employment Agreement dated August 1,
1997 (incorporated by reference to Exhibit 10.27 to the 1997 10-K); and
Amendment No. 2 to Employment Agreement dated October 31, 1998
10.22 Change of Control Agreement dated December 5, 1995, between the Company
and Richard O. Baldwin, Jr. (incorporated by reference to Exhibit 10.27
to the 1996 10-K) and Amendment No. 1 to Change of Control Agreement
dated August 1, 1997 (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended April 30,
1998)
10.23 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Richard O. Baldwin, Jr. (incorporated by reference to Exhibit
10.24 to the 1996 10-K)
10.24 Employment Agreement dated August 1, 1995, between the Company and Brian
J. Marlowe (incorporated by reference to Exhibit 10.47 to the 1995 10-K)
and Amendment No. 1 to Employment Agreement dated October 31, 1998
10.25 Change of Control Agreement dated December 5, 1995, between the Company
and Brian J. Marlowe (incorporated by reference to Exhibit 10.51 to the
1995 10-K)
10.26 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Brian J. Marlowe (incorporated by reference to Exhibit 10.48
to the 1995 10-K)
10.27 Employment Agreement dated August 1, 1995, between the Company and
Kenneth C. Budde (incorporated by reference to Exhibit 10.35 to the 1996
10-K); Amendment No. 1 to Employment Agreement dated January 1, 1997
(incorporated by reference to Exhibit 10.2 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended April 30, 1997); Amendment No.
2 to Employment Agreement dated May 1, 1998; and Amendment No. 3 to
Employment Agreement dated October 31, 1998
10.28 Change of Control Agreement dated December 5, 1995, between the Company
and Kenneth C. Budde (incorporated by reference to Exhibit 10.39 to the
1996 10-K) and Amendment No. 1 to Change of Control Agreement dated May
1, 1998
10.29 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Kenneth C. Budde (incorporated by reference to Exhibit 10.36
to the 1996 10-K)
10.30 Employment Agreement dated August 1, 1995, between the Company and
Lawrence B. Hawkins (incorporated by reference to Exhibit 10.41 to the
1996 10-K); Amendment No. 1 to Employment Agreement dated January 1, 1997
(incorporated by reference to Exhibit 10.3 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended April 30, 1997); and Amendment
No. 2 to Employment Agreement dated October 31, 1998
10.31 Change of Control Agreement dated December 5, 1995, between the Company
and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.45 to
the 1996 10-K) and Amendment No. 1 to Change of Control Agreement dated
January 1, 1997 (incorporated by reference to Exhibit 10.1 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended April 30,
1998)
10.32 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Lawrence B. Hawkins (incorporated by reference to Exhibit
10.42 to the 1996 10-K)
10.33 Employment Agreement dated January 1, 1997, between the Company and Brent
F. Heffron (incorporated by reference to Exhibit 10.1 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997);
Amendment No. 1 to Employment Agreement dated January 1, 1997
(incorporated by reference to Exhibit 10.5 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended April 30, 1997); Amendment No.
2 to Employment Agreement dated November 1, 1997 (incorporated by
reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for the Quarter ended January 31, 1998) and Amendment No. 3 to Employment
Agreement dated October 31, 1998.
10.34 Change of Control Agreement dated January 1, 1997, between the Company
and Brent F. Heffron (incorporated by reference to Exhibit 10.2 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended January 31,
1997) and Amendment No. 1 to Change of Control Agreement dated November
1, 1997 (incorporated by reference to Exhibit 10.3 to Company's Quarterly
Report on Form 10-Q for the Quarter ended April 30, 1998)
10.35 Stock Option Agreement dated September 7, 1995 (time-vest) between the
Company and Brent F. Heffron (incorporated by reference to Exhibit 10.47
to the 1996 10-K)
10.36 Stock Option Agreement dated January 1, 1997 (time-vest), between the
Company and Brent F. Heffron (incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1997)
10.37 Stock Option Agreement dated December 23, 1997 (time-vest), between the
Company and Brent F. Heffron (incorporated by reference to Exhibit 10.2
to the Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1998)
10.38 Employment Agreement dated January 1, 1997, between the Company and
Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.5 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended January 31,
1997); Amendment No. 1 to Employment Agreement dated January 1, 1997
(incorporated by reference to Exhibit 10.4 to the Company's Quarterly
Report on Form 10-Q for the Quarter ended April 30, 1997); Amendment No.
2 to Employment Agreement dated November 1, 1997 (incorporated by
reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q
for the Quarter ended January 31, 1998); and Amendment No. 3 to
Employment Agreement dated October 31, 1998
10.39 Change of Control Agreement dated January 1, 1997, between the Company
and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.6 to
the Company's Quarterly Report on Form 10-Q for the Quarter ended January
31, 1997) and Amendment No. 1 to Change of Control Agreement dated
November 1, 1997 (incorporated by reference to Exhibit 10.4 to the
Company's Quarterly Report on Form 10-Q for the Quarter ended April 30,
1998)
10.40 Stock Option Agreement dated September 7, 1995 (time-vest), between the
Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit
10.51 to the 1996 10-K)
10.41 Stock Option Agreement dated January 1, 1997 (time-vest), between the
Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit
10.7 to the Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1997)
10.42 Stock Option Agreement dated December 23, 1997 (time-vest), between the
Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit
10.4 to the Company's Quarterly Report on Form 10-Q for the Quarter ended
January 31, 1998)
10.43 Employment Agreement dated November 1, 1997, between the Company and
Charles L. Tilis and Amendment No. 1 to Employment Agreement dated
October 31, 1998
10.44 Change of Control Agreement dated November 1, 1997, between the Company
and Charles L. Tilis
10.45 Form of Stock Option Agreement (time-vest), between the Company and its
Executive Officers
10.46 Form of Stock Option Agreement (performance-based), between the Company
and its Executive Officers
10.47 The Stewart Enterprises Employees' Retirement Trust (incorporated by
reference to Exhibit 10.20 the 1991 Registration Statement) and amendment
thereto dated January 1, 1994 (incorporated by reference to Exhibit 10.28
to the 1994 10-K)
10.48 The Stewart Enterprises Supplemental Retirement and Deferred Compensation
Plan (incorporated by reference to Exhibit 10.29 to the 1994 10-K)
10.49 Amended and Restated Stewart Enterprises, Inc. 1995 Incentive
Compensation Plan (incorporated by reference to Exhibit 10.57 to the 1996
10-K)
10.50 Amended and Restated Directors' Stock Option Plan (incorporated by
reference to Exhibit 10.58 to the 1996 10-K)
10.51 Amended and Restated Stewart Enterprises, Inc. Employee Stock Purchase
Plan (incorporated by reference to Exhibit 10.61 to the Company's Annual
Report on Form 10-K for the fiscal year ended October 31, 1997)
------------------------------------------
12 Calculation of Ratio of Earnings to Fixed Charges
18 Letter from PricewaterhouseCoopers LLP regarding change in accounting
principles (incorporated by reference to Exhibit 18 to the Company's
Quarterly Report on Form 10-Q for the Quarter ended July 31, 1997)
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule
(B) REPORTS ON FORM 8-K
The Company filed a Form 8-K on September 11, 1998 reporting under "Item
5. Other Events," the earnings release for the Quarter ended July 31, 1998.
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 _____,
1999 .
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 20, 1999
Frank B. Stewart, Jr.
/s/ JOSEPH P. HENICAN, III
- ---------------------------- Vice Chairman of the Board January 20, 1999
Joseph P. Henican, III and Chief Executive Officer
(Principal Executive Officer)
/s/ WILLIAM E. ROWE
- ---------------------------- President, Chief Operating Officer January 20, 1999
William E. Rowe and a Director
/s/ KENNETH C. BUDDE
- ---------------------------- Executive Vice President, January 20, 1999
Kenneth C. Budde Chief Financial Officer
(Principal Financial Officer) and a Director
/s/ MICHAEL G. HYMEL
- ----------------------------- Vice President- January 20, 1999
Michael G. Hymel Corporate Controller and
(Principal Accounting Officer) Chief Accounting Officer
/s/ DARWIN C. FENNER
- ------------------------------ Director January 20, 1999
Darwin C. Fenner
/s/ DWIGHT A. HOLDER
- ------------------------------ Director January 20, 1999
Dwight A. Holder
/s/ JOHN P. LABORDE
- ------------------------------ Director January 20, 1999
John P. Laborde
/s/ JAMES W. McFARLAND
- ------------------------------ Director January 20, 1999
James W. McFarland
/s/ MICHAEL O. READ
- ------------------------------- Director January 20, 1999
Michael O. Read
EXHIBIT INDEX
10.8 Amendment No. 1 to Employment Agreement dated October 31, 1998, between
the Company and Joseph P. Henican, III
10.12 Amendment No. 1 to Employment Agreement dated October 31, 1998, between
the Company and William E. Rowe
10.15.1 Amendment No. 1 to Employment Agreement dated May 1, 1998, between the
Company and Ronald H. Patron
10.15.2 Amendment No. 2 to Employment Agreement dated October 31, 1998, between
the Company and Ronald H. Patron
10.16 Amendment No. 1 to Change of Control Agreement dated May 1, 1998,
between the Company and Ronald H. Patron
10.18 Amendment No. 1 to Employment Agreement dated October 31, 1998, between
the Company and Gerard C. Alexander
10.21 Amendment No. 2 to Employment Agreement dated October 31, 1998, between
the Company and Richard O. Baldwin, Jr.
10.24 Amendment No. 1 to Employment Agreement dated October 31, 1998, between
the Company and Brian J. Marlowe
10.27.1 Amendment No. 2 to Employment Agreement dated May 1, 1998, between the
Company and Kenneth C. Budde
10.27.2 Amendment No. 3 to Employment Agreement dated October 31, 1998, between
the Company and Kenneth C. Budde
10.28 Amendment No. 1 to Change of Control Agreement dated May 1, 1998,
between the Company and Kenneth C. Budde
10.30 Amendment No. 2 to Employment Agreement dated October 31, 1998, between
the Company and Lawrence B. Hawkins
10.33 Amendment No. 3 to Employment Agreement dated October 31, 1998, between
the Company and Brent F. Heffron
10.38 Amendment No. 3 to Employment Agreement dated October 31, 1998, between
the Company and Raymond C. Knopke, Jr.
10.43.1 Employment Agreement dated November 1, 1997, between the Company and
Charles L. Tilis
10.43.2 Amendment No. 1 to Employment Agreement dated October 31, 1998, between
the Company and Charles L. Tilis
10.44 Change of Control Agreement dated November 1, 1997, between the Company
and Charles L. Tilis
10.45 Form of Stock Option Agreement (time-vest), between the Company and its
Executive Officers
10.46 Form of Stock Option Agreement (performance-based), between the Company
and its Executive Officers
12 Calculation of Ratio of Earnings to Fixed Charges
21 Subsidiaries of the Company
23 Consent of PricewaterhouseCoopers LLP
27 Financial Data Schedule