UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
(X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JULY 31, 1998
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER: 0-19508
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction of (I.R.S. Employer
incorporation or organization) Identification No.)
110 VETERANS MEMORIAL BOULEVARD
METAIRIE, LOUISIANA 70005
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 837-5880
Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.
Yes X No
The number of shares of the Registrant's Class A Common Stock, no par value
per share, and Class B Common Stock, no par value per share, outstanding as of
September 10, 1998 was 94,470,900 and 3,555,020, respectively.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX
PART I. FINANCIAL INFORMATION PAGE
Item 1. Financial Statements
Consolidated Statements of Earnings -
Three Months Ended July 31, 1998 and 1997 3
Consolidated Statements of Earnings -
Nine Months Ended July 31, 1998 and 1997 4
Consolidated Balance Sheets -
July 31, 1998 and October 31, 1997 5
Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 1998 and 1997 7
Notes to Consolidated Financial Statements 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations 15
PART II. OTHER INFORMATION
Item 1. Legal Proceedings 22
Item 5. Other Information 22
Item 6. Exhibits and Reports on Form 8-K 25
SIGNATURES 26
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
THREE MONTHS ENDED JULY 31,
-----------------------------
1998 1997
------- -------
Revenues:
Funeral $ 96,561 $ 75,350
Cemetery 72,527 64,196
------- -------
169,088 139,546
------- -------
Costs and expenses:
Funeral 66,191 52,559
Cemetery 51,566 45,481
------- -------
117,757 98,040
------- -------
Gross profit 51,331 41,506
Corporate general and administrative expenses 4,139 3,423
------- -------
Operating earnings 47,192 38,083
Interest expense (11,309) (10,132)
Investment and other income 1,539 756
------- -------
Earnings before income taxes 37,422 28,707
Income taxes 13,098 9,656
------- -------
Net earnings $ 24,324 $ 19,051
======= =======
Net earnings per share:
Basic $ .25 $ .21
======= =======
Diluted $ .25 $ .21
======= =======
Weighted average shares outstanding (in thousands):
Basic 97,784 89,651
======= =======
Diluted 98,616 90,480
======= =======
Dividends per share $ .02 $ .01
======= =======
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
NINE MONTHS ENDED JULY 31,
----------------------------
1998 1997
------- -------
Revenues:
Funeral $ 275,231 $ 211,539
Cemetery 197,744 178,841
------- -------
472,975 390,380
------- -------
Costs and expenses:
Funeral 186,261 146,334
Cemetery 139,720 128,383
------- -------
325,981 274,717
------- -------
Gross profit 146,994 115,663
Corporate general and administrative expenses 12,307 10,459
------- -------
Operating earnings before
performance-based stock options 134,687 105,204
Performance-based stock options 76,762 -
------- -------
Operating earnings 57,925 105,204
Interest expense (31,336) (29,165)
Investment and other income 4,573 2,322
------- -------
Earnings before income taxes and cumulative
effect of change in accounting principles 31,162 78,361
Income taxes 10,938 27,035
------- -------
Earnings before cumulative effect of change
in accounting principles 20,224 51,326
Cumulative effect of change in accounting principles
(net of $2,230 income tax benefit) (Note 2) - (2,324)
------- -------
Net earnings $ 20,224 $ 49,002
======= =======
Basic earnings per share:
Earnings before cumulative effect of change in
accounting principles $ .21 $ .60
Cumulative effect of change in accounting
principles - (.03)
------- -------
Net earnings $ .21 $ .57
======= =======
Diluted earnings per share:
Earnings before cumulative effect of change in
accounting principles $ .21 $ .59
Cumulative effect of change in accounting
principles - (.03)
------- -------
Net earnings $ .21 $ .56
======= =======
Weighted average shares outstanding (in thousands):
Basic 97,578 85,911
======= =======
Diluted 98,368 86,858
======= =======
Dividends per share $ .04 $ .03
======= =======
See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
JULY 31, OCTOBER 31,
ASSETS 1998 1997
--------- ---------
Current assets:
Cash and cash equivalent investments $ 19,164 $ 31,640
Marketable securities 13,651 4,615
Receivables, net of allowances 161,587 140,291
Inventories 45,972 43,044
Prepaid expenses 7,145 7,111
--------- ---------
Total current assets 247,519 226,701
Receivables due beyond one year, net of allowances 240,138 200,285
Intangible assets 521,257 415,723
Deferred charges 82,232 75,353
Cemetery property, at cost 329,224 310,628
Property and equipment, at cost:
Land 69,785 67,579
Buildings 268,288 244,421
Equipment and other 118,345 102,592
--------- ---------
456,418 414,592
Less accumulated depreciation 100,643 85,188
--------- ---------
Net property and equipment 355,775 329,404
Long-term investments 66,999 57,345
Other assets 43,002 21,799
--------- ---------
$ 1,886,146 $ 1,637,238
========= =========
(continued)
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
JULY 31, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1998 1997
--------- ----------
Current liabilities:
Current maturities of long-term debt $ 12,117 $ 33,973
Accounts payable 21,740 16,705
Accrued payroll 14,905 16,241
Accrued insurance 11,845 10,428
Accrued interest 7,454 7,581
Accrued other 16,254 16,283
Deferred income taxes 13,159 9,720
--------- ----------
Total current liabilities 97,474 110,931
Long-term debt, less current maturities 793,609 524,351
Deferred income taxes 77,052 85,454
Deferred revenue 84,468 88,088
Other long-term liabilities 9,453 8,844
--------- ----------
Total liabilities 1,062,056 817,668
--------- ----------
Commitments and contingencies (Notes 4 and 8)
Preferred stock, $1.00 par value, 5,000,000 shares
authorized; no shares issued - -
Shareholders' equity:
Common stock, $1.00 stated value:
Class A authorized 150,000,000 shares; issued
and outstanding 94,470,068 and 93,807,568
shares at July 31, 1998 and October 31,
1997, respectively 94,470 93,808
Class B authorized 5,000,000 shares; issued
and outstanding 3,555,020 shares at July
31, 1998 and October 31, 1997; 10 votes
per share; convertible into an equal
number of Class A shares 3,555 3,555
Additional paid-in capital 492,145 477,499
Retained earnings 295,423 279,104
Cumulative foreign translation adjustment (63,228) (36,609)
Unrealized appreciation of investments 1,725 2,213
--------- ---------
Total shareholders' equity 824,090 819,570
--------- ---------
$ 1,886,146 $ 1,637,238
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
1998 1997
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings $ 20,224 $ 49,002
Adjustments to reconcile net earnings to net cash
used in operating activities:
Performance-based stock options 76,762 -
Depreciation and amortization 22,131 19,435
Provision for doubtful accounts 18,313 15,791
Cumulative effect of change in accounting principles - 2,324
Net gains on sales of marketable securities (2,727) (615)
Provision (benefit) for deferred income taxes (1,887) 214
Changes in assets and liabilities net of effects from
acquisitions:
Increase in prearranged funeral trust receivables (12,571) (21,628)
Increase in other receivables (59,673) (44,878)
Increase in deferred charges and intangible assets (13,882) (15,394)
Increase in inventories and cemetery property (9,817) (8,454)
Decrease in accounts payable and accrued expenses (12,227) (2,450)
Decrease in estimated costs to complete
mausoleums and to deliver merchandise (17,355) (11,213)
Increase (decrease) in deferred revenue (8,835) 1,254
Increase (decrease) in other (1,905) 252
-------- --------
Net cash used in operating activities (3,449) (16,360)
-------- --------
Cash flows from investing activities:
Proceeds from sales of marketable securities 21,496 8,546
Purchases of marketable securities and long-term
investments (36,885) (14,321)
Purchases of subsidiaries, net of cash, seller financing
and stock issued (119,483) (120,472)
Additions to property and equipment (29,958) (27,492)
Other 2,285 1,015
-------- --------
Net cash used in investing activities (162,545) (152,724)
-------- --------
</TABLE>
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
NINE MONTHS ENDED JULY 31,
--------------------------
1998 1997
--------- ---------
Cash flows from financing activities:
Proceeds from long-term debt $ 492,440 $ 310,682
Repayments of long-term debt (265,768) (350,125)
Retirement of performance-based stock options (69,431) -
Issuance of common stock 11,706 219,654
Purchase and retirement of common stock (9,101) (11,943)
Dividends (3,905) (2,655)
------- -------
Net cash provided by financing activities 155,941 165,613
------- -------
Effect of exchange rates on cash and cash equivalents (2,423) (1,023)
------- -------
Net decrease in cash (12,476) (4,494)
Cash and cash equivalents, beginning of period 31,640 24,580
------- -------
Cash and cash equivalents, end of period $ 19,164 $ 20,086
======= =======
Supplemental cash flow information:
Cash paid during the period for:
Income taxes $ 11,500 $ 23,900
Interest $ 31,500 $ 30,500
Noncash investing and financing activity:
Subsidiaries acquired with common stock $ 7,705 $ 12,426
See accompanying notes to consolidated financial statements.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(1) BASIS OF PRESENTATION
(a) The Company
Stewart Enterprises, Inc. (the "Company") is the third largest provider of
products and services in the death care industry in North America. Through its
subsidiaries, the Company offers a complete line of funeral merchandise and
services, along with cemetery property, merchandise and services.
As of July 31, 1998, the Company owned and operated 534 funeral homes and
135 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. For the nine months ended July 31, 1998,
foreign operations contributed approximately 16% of total revenue and, as of
July 31, 1998, represented approximately 22% of total assets.
(b) Principles of Consolidation
The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated.
(c) Interim Disclosures
The information as of July 31, 1998, and for the three and nine months ended
July 31, 1998 and 1997, is unaudited, but, in the opinion of management,
reflects all adjustments, which are of a normal recurring nature, necessary for
a fair presentation of financial position and results of operations for the
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Company's Annual Report on Form 10-K for the fiscal
year ended October 31, 1997.
The results of operations for the three and nine months ended July 31, 1998
are not necessarily indicative of the results to be expected for the fiscal
year ending October 31, 1998.
(d) 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
the first nine months of fiscal year 1998. However, no assurance can be given
that a material change will not occur in the future due to events within Mexico
beyond the Company's control.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(1) BASIS OF PRESENTATION--(CONTINUED)
(e) Per-Share Data
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 6.
All share and per-share data have been adjusted for the Company's two-for-
one common stock split effected April 24, 1998.
(f) 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.
(g) Reclassifications
Certain reclassifications have been made to the 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.
(2) CHANGE IN ACCOUNTING PRINCIPLES
Effective November 1, 1996, the Company changed certain of its accounting
methods with respect to prearranged funeral and cemetery sales in order to
provide a better matching of revenues and costs. For further details, refer to
the Company's Annual Report on Form 10-K for the year ended October 31, 1997.
(3) ACQUISITIONS
During the nine months ended July 31, 1998, the Company purchased 127
funeral homes and four cemeteries, compared to 69 funeral homes and seven
cemeteries purchased during the nine months ended July 31, 1997.
These acquisitions have been accounted for by the purchase method, and their
results of operations are included in the accompanying consolidated financial
statements from the dates of acquisition. The purchase price allocations for
certain of these acquisitions are based on preliminary information.
The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during the nine months
ended July 31, 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
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(3) ACQUISITIONS--(CONTINUED)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
1998 1997
---------- ----------
(Unaudited)
<S> <C> <C>
Revenues $ 501,916 $ 437,156
Operating earnings before performance-based ======= =======
stock options $ 139,358 $ 111,950
======= =======
Earnings before cumulative effect of change in
accounting principles $ 20,167 $ 50,707
======= =======
Net earnings $ 20,167 $ 48,383
======= =======
Basic earnings per share:
Earnings before cumulative effect of change in
accounting principles $ .21 $ .59
======= =======
Net earnings $ .21 $ .56
======= =======
Diluted earnings per share:
Earnings before cumulative effect of change in
accounting principles $ .20 $ .58
======= =======
Net earnings $ .20 $ .55
======= =======
Weighted average shares outstanding (in thousands):
Basic 97,843 86,205
======= =======
Diluted 98,633 87,152
======= =======
</TABLE>
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
NINE MONTHS ENDED JULY 31,
--------------------------
1998 1997
---------- ---------
(UNAUDITED)
Current assets $ 12,407 $ 5,632
Receivables due beyond one year 1,615 1,707
Cemetery property 9,138 2,953
Property and equipment, net 20,486 34,514
Deferred charges and other assets 911 722
Intangible assets, net 120,653 105,722
Current liabilities (11,382) (7,078)
Long-term debt (24,733) (9,915)
Other long-term liabilities (1,907) (1,359)
------- -------
127,188 132,898
Common stock used for acquisitions 7,705 12,426
------- -------
Cash used for acquisitions $ 119,483 $ 120,472
======= =======
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(4) CONTINGENCIES
The Company was notified in September 1994 that a suit was brought by a
competitor regarding the Company's acquisition of certain corporations in
Mexico. The suit alleges that this acquisition violated the competitor's
previous option to acquire the same corporations. The suit seeks unspecified
damages. The Company believes that the suit is without merit and intends to
defend it vigorously. The Company believes it is entitled to indemnification
from the previous owners of these corporations should an unfavorable outcome
result. Management does not believe this matter will have a material adverse
effect on the financial position, net earnings or cash flows of the Company.
(5) RECENT ACCOUNTING STANDARDS
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," No. 131, "Disclosure about Segments of an Enterprise and
Related Information," and No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," are required to be implemented during the
Company's fiscal year ending October 31, 1999. The effect of these
pronouncements on the Company's consolidated financial condition and results of
operations is not expected to be material.
(6) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
THREE MONTHS ENDED JULY 31, 1998 ----------- ------------- ---------
- --------------------------------
<S> <C> <C> <C>
Net earnings $ 24,324
Basic earnings per share: ======
Net earnings available to common shareholders $ 24,324 97,784 $ .25
======
Effect of dilutive securities:
Time-vest stock options assumed exercised - 832
------ ------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised $ 24,324 98,616 $ .25
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
NINE MONTHS ENDED JULY 31, 1998
- -------------------------------
<S> <C> <C> <C>
Net earnings $ 20,224
======
Basic earnings per share:
Net earnings available to common shareholders $ 20,224 97,578 $ .21
======
Effect of dilutive securities:
Time-vest stock options assumed exercised - 790
------ ------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised $ 20,224 98,368 $ .21
====== ====== ======
</TABLE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(6) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA--(CONTINUED)
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
THREE MONTHS ENDED JULY 31, 1997
- --------------------------------
<S> <C> <C> <C>
Net earnings $ 19,051
======
Basic earnings per share:
Net earnings available to common shareholders $ 19,051 89,651 $ .21
======
Effect of dilutive securities:
Time-vest stock options assumed exercised - 829
------ ------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised $ 19,051 90,480 $ .21
====== ====== ======
</TABLE>
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
----------- ------------- ---------
NINE MONTHS ENDED JULY 31, 1997
- -------------------------------
<S> <C> <C> <C>
Earnings before cumulative effect of change in
accounting principles $ 51,326
======
Basic earnings per share:
Earnings available to common shareholders $ 51,326 85,911 $ .60
======
Effect of dilutive securities:
Time-vest stock options assumed exercised - 947
------ ------
Diluted earnings per share:
Earnings available to common shareholders
plus time-vest stock options assumed exercised $ 51,326 86,858 $ .59
====== ====== ======
</TABLE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(7) PERFORMANCE-BASED STOCK OPTIONS
The Company's performance-based stock options granted under the Company's
1995 Incentive Compensation Plan and covering 4,855,886 shares, vested on
April 7, 1998 when the performance goal set in 1995 was met. The options, held
by 119 persons, vested when the average of the closing sale prices of a share
of the Company's Class A Common Stock equaled or exceeded $26.44 for 20
consecutive trading days, which goal represented a five-year 20% compounded
annual growth in the price per share of the stock from the Plan's inception.
Once the stock price performance target was achieved, 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)
in the second quarter of fiscal year 1998.
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 1998, the Company granted new options under the 1995 Incentive
Compensation Plan to officers and employees for the purchase of 3,590,750
shares of Class A Common Stock at exercise prices equal to the fair market
value at the grant dates, which ranged from $25.81 to $27.25 per share. 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 for 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. The remaining options become exercisable in 20% annual
increments beginning on July 17, 1999. All of the options expire on July 31,
2004.
(8) SUBSEQUENT EVENTS
Subsequent to July 31, 1998, the Company acquired or committed to acquire
53 funeral homes and eight cemeteries for purchase prices aggregating
approximately $148,414.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Effective November 1, 1996, the Company changed certain of its accounting
methods for prearranged funeral and cemetery sales in order to provide a better
matching of revenues and costs. For further details, refer to the Company's
Annual Report on Form 10-K for the year ended October 31, 1997.
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."
RESULTS OF OPERATIONS
Three Months Ended July 31, 1998 Compared to Three Months Ended July 31, 1997
Funeral Segment
THREE MONTHS ENDED
JULY 31,
------------------ INCREASE
1998 1997 (DECREASE)
---- ---- ----------
(In millions)
FUNERAL REVENUE
---------------
Existing Operations $ 69.9 $ 67.1 $ 2.8
Acquired Operations 18.9 1.2 17.7
Revenue from prearranged funeral
trust funds and escrow accounts 7.8 7.1 .7
---- ---- ----
$ 96.6 $ 75.4 $ 21.2
==== ==== ====
FUNERAL COSTS
-------------
Existing Operations $ 49.4 $ 51.4 $ (2.0)
Acquired Operations 16.8 1.2 15.6
---- ---- ----
$ 66.2 $ 52.6 $ 13.6
==== ==== ====
Funeral Segment Profit $ 30.4 $ 22.8 $ 7.6
==== ==== ====
Funeral revenue increased $21.2 million, or 28%, for the three months ended
July 31, 1998, compared to the corresponding period in 1997. The Company
experienced a $2.8 million increase in revenue from Existing Operations as a
result of a 6.6% increase in the average revenue per domestic funeral service
performed by Existing Operations (8.6% increase in total, excluding the effect
of foreign currency translation), primarily due to price increases and improved
merchandising. Partially offsetting this increase in revenue was a 4.9%
decrease in the number of domestic funeral services performed by Existing
Operations (5.8% decrease in total).
The improved profit margin achieved by Existing Operations resulted
principally from the increased average revenue per funeral service mentioned
above, implementation of certain cost control measures, including contract
negotiations with certain vendors, and the Company's centralization and
standardization of certain financial and administrative functions through its
Shared Services Center.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes from
August 1997 through July 1998 which are not reflected in the 1997 period
presented above.
The increase in revenue from prearranged funeral trust funds and escrow
accounts was attributable to a 19% 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 decline in the average yield on such funds.
Cemetery Segment
THREE MONTHS ENDED
JULY 31,
------------------
1998 1997 INCREASE
---- ---- --------
(In millions)
CEMETERY REVENUE
----------------
Existing Operations $ 64.0 $ 61.5 $ 2.5
Acquired Operations 4.1 .1 4.0
Revenue from merchandise trust funds
and escrow accounts 4.4 2.6 1.8
---- ---- ----
$ 72.5 $ 64.2 $ 8.3
==== ==== ====
CEMETERY COSTS
--------------
Existing Operations $ 48.0 $ 45.4 $ 2.6
Acquired Operations 3.6 .1 3.5
---- ---- ----
$ 51.6 $ 45.5 $ 6.1
==== ==== ====
Cemetery Segment Profit $ 20.9 $ 18.7 $ 2.2
==== ==== ====
Cemetery revenue increased $8.3 million, or 13%, for the three months ended
July 31, 1998, compared to the corresponding period in 1997. The Company
experienced a $2.5 million increase in revenue from Existing Operations
resulting primarily from an increase in cemetery sales, including burial site
openings and closings.
Although the cemetery profit margins for the current quarter achieved by
Existing Operations have declined from the corresponding period in 1997,
management believes this decline is not indicative of a trend as the year-to-
date profit margins achieved by Existing Operations have improved.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of cemeteries from
August 1997 through July 1998 which are not reflected in the 1997 period
presented above.
The $1.8 million increase in revenue from merchandise trust funds and escrow
accounts was attributable to a 25% growth in the average balance in the
merchandise trust funds and escrow accounts, resulting from current year
customer payments deposited into the funds, coupled with an increase in the
average yield on the merchandise funds.
Other
Interest expense increased $1.2 million during the third quarter of fiscal
year 1998 compared to the same period in 1997, as the result of an increase in
average borrowings, offset by a slight decrease in average interest rates from
6.6% in 1997 to 6.4% in 1998. Approximately $377.8 million of the $805.7
million outstanding borrowings at July 31, 1998 was subject to short-term
variable interest rates averaging approximately 6.1%.
Nine Months Ended July 31, 1998 Compared to Nine Months Ended July 31, 1997
Funeral Segment
NINE MONTHS ENDED
JULY 31,
------------------ INCREASE
1998 1997 (DECREASE)
----- ----- ----------
(In millions)
FUNERAL REVENUE
---------------
Existing Operations $ 192.2 $ 180.7 $ 11.5
Acquired Operations 62.5 14.3 48.2
Revenue from prearranged funeral trust
funds and escrow accounts 20.5 16.5 4.0
----- ----- -----
$ 275.2 $ 211.5 $ 63.7
===== ===== =====
FUNERAL COSTS
-------------
Existing Operations $ 132.1 $ 135.0 $ (2.9)
Acquired Operations 54.2 11.3 42.9
----- ----- -----
$ 186.3 $ 146.3 $ 40.0
===== ===== =====
Funeral Segment Profit $ 88.9 $ 65.2 $ 23.7
===== ===== =====
Funeral revenue increased $63.7 million, or 30%, for the nine months ended
July 31, 1998, compared to the corresponding period in 1997. The Company
experienced an $11.5 million increase in revenue from Existing Operations as a
result of a 5.6% increase in the average revenue per domestic funeral service
performed by Existing Operations (9.6% increase in total, excluding the effect
of foreign currency translation), primarily due to price increases and improved
merchandising. Slightly offsetting this increase in revenue was a 1.6%
decrease in the number of domestic funeral services performed by Existing
Operations (3.5% decrease in total).
The $2.9 million, or 2%, decrease in funeral costs from Existing
Operations resulted principally from the implementation of certain cost control
measures, including contract negotiations with certain vendors and the
Company's centralization and standardization of certain financial and
administrative functions through its Shared Services Center. Existing
Operations achieved improved profit margins resulting primarily from these
increased cost control measures 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 from
August 1997 through July 1998 which are not reflected in the 1997 period
presented above.
The 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 slight decline in the average yield on such funds.
Cemetery Segment
NINE MONTHS ENDED
JULY 31,
-----------------
1998 1997 INCREASE
---- ---- --------
(In millions)
CEMETERY REVENUE
----------------
Existing Operations $ 178.2 $ 169.1 $ 9.1
Acquired Operations 9.0 .7 8.3
Revenue from merchandise trust
funds and escrow accounts 10.5 9.0 1.5
----- ----- -----
$ 197.7 $ 178.8 $ 18.9
===== ===== =====
CEMETERY COSTS
--------------
Existing Operations $ 131.4 $ 127.9 $ 3.5
Acquired Operations 8.3 .5 7.8
----- ----- -----
$ 139.7 $ 128.4 $ 11.3
===== ===== =====
Cemetery Segment Profit $ 58.0 $ 50.4 $ 7.6
===== ===== =====
Cemetery revenue increased $18.9 million, or 11%, for the nine months ended
July 31, 1998, compared to the corresponding period in 1997, due principally to
a $9.1 million increase in revenue from Existing Operations and an $8.3 million
increase in revenue from Acquired Operations. The increase in revenue from
Existing Operations resulted primarily 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 and the
implementation of certain cost control measures, including contract
negotiations with certain vendors and the Company's centralization and
standardization of certain financial and administrative functions through its
Shared Services Center.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of cemeteries from
August 1997 through July 1998 which are not reflected in the 1997 period
presented above.
The $1.5 million increase in revenue from merchandise trust funds and escrow
accounts was attributable to a 23% growth in the average balance in the
merchandise trust funds and escrow accounts, resulting from current year
customer payments deposited into the funds, offset by a slight decline in the
average yield on the merchandise funds.
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 cash outlay of approximately $69.4 million.
In July 1998, the Company granted new options under the 1995 Incentive
Compensation Plan to officers and employees for the purchase of 3,590,750
shares of Class A Common Stock at exercise prices equal to the fair market
value at the grant dates, which ranged from $25.81 to $27.25 per share. 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 for 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. The remaining options become exercisable in 20% annual
increments beginning on July 17, 1999. All of the options expire on July 31,
2004.
Interest expense increased $2.2 million during the first nine months of
fiscal year 1998 compared to the same period in 1997, resulting principally
from an increase in average borrowings. Approximately $377.8 million of the
$805.7 million outstanding borrowings at July 31, 1998 was subject to short-
term variable interest rates averaging approximately 6.1%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $32.8 million at July 31,
1998, a decrease of approximately $3.4 million from October 31, 1997. The
Company used cash of $3.4 million in its operations for the nine months ended
July 31, 1998, compared to $16.4 million for the corresponding period in
1997, due principally to an increase in net earnings excluding the effect of
the non-cash performance-base stock option charge, offset by a decrease in
deferred revenue, accounts payable and accrued expenses and other working
capital changes.
Long-term debt at July 31, 1998 amounted to $805.7 million, compared to
$558.3 million at October 31, 1997. The Company's long-term debt consisted of
$377.8 million under the Company's revolving credit facilities, $408.5 million
of long-term notes, including the Remarketable or Redeemable Securities (ROARS)
discussed below, and $19.4 million of term notes incurred principally in
connection with the acquisition of funeral home and cemetery properties. All
of the Company's debt is uncollateralized, except for approximately $3.3
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 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 requires it to
maintain a debt-to-equity ratio no higher than 1.25 to 1.00. The Company has
managed its capitalization within that limit, with a ratio of total debt to
equity of 1.0 and .7 to 1.0 as of July 31, 1998 and October 31, 1997,
respectively. As of July 31, 1998, the Company had $226.4 million of
additional borrowing capacity within this parameter, all of which was available
under its revolving credit facilities.
The Company's ratio of earnings to fixed charges was 1.94 for the nine
months ended July 31, 1998. Excluding the $76.8 million non-recurring,
non-cash performance-based stock option charge, the Company's ratio of earnings
to fixed charges was 4.26.
For the fiscal years ended October 31, 1997, 1996, 1995, 1994 and 1993, the
Company's ratio of earnings to fixed charges was as follows: 3.65 (excluding
the cumulative effect of the change in accounting principles), 3.98, 2.72
(including the $17.3 million non-recurring, non-cash performance-based stock
option charge), 5.30 and 5.15, respectively. Excluding the stock option charge
in fiscal year 1995, the Company's ratio of earnings to fixed charges would
have been 3.43. For purposes of computing the ratio of earnings to fixed
charges, earnings consist of pretax earnings plus fixed charges (excluding
interest capitalized during the period). Fixed charges consist of interest
expense, capitalized interest, amortization of debt expense and discount or
premium relating to any indebtedness, and the portion of rental expense that
management believes to be representative of the interest component of rental
expense. Fiscal year 1996 and prior amounts reflect the Company's previous
accounting methods which were in effect at that time.
During the nine months ended July 31, 1998, the Company completed
acquisitions of 127 funeral homes and four cemeteries for purchase prices
aggregating approximately $156 million, including the issuance of approximately
294,000 shares of Class A Common Stock and $9.2 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 July 31, 1998, the Company acquired or committed to acquire
53 funeral homes and eight cemeteries for purchase prices aggregating
approximately $148.4 million. If these purchases are consummated, the amounts
to be paid will be satisfied by borrowings under the Company's revolving credit
facilities.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $40.0 million for the fiscal year ending October 31, 1998,
including construction of new funeral homes and refurbishing of funeral homes
recently acquired.
Management expects that future capital requirements will be satisfied
through a combination of internally generated cash flow and amounts available
under its revolving credit facilities. Additional debt and equity financing
may be required in connection with future acquisitions. In addition, the
Company monitors its mix of fixed and floating rate debt obligations in light
of changing market conditions and may from time to time decide to alter that
mix by, for example, refinancing balances outstanding under its floating rate
revolving credit facility with public or private fixed rate debt, or by
entering into interest rate swaps or similar interest rate hedging
transactions.
INFLATION
Inflation has not had a significant impact on the Company's United States
operations over the past three years, nor is it expected to have a significant
impact in the foreseeable future. The Mexican economy, however, currently is
experiencing inflation rates substantially in excess of those in the United
States.
During the first quarter of fiscal year 1997, the Company changed its method
of reporting foreign currency translation adjustments for its Mexican
operations to the method prescribed for highly inflationary economies. Under
that method, foreign currency translation adjustments are reflected in results
of operations, instead of in shareholders' equity. This change did not have a
material effect on the Company's results of operations for fiscal year 1997 or
the nine months ended July 31, 1998. However, no assurance can be given that a
material change will not occur in the future due to events within Mexico beyond
the Company's control.
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 four
phases:
Phase I -- Evaluate and assess compliance of the system
Phase II -- Identify whether a non-compliant system needs to be retired,
replaced or outsourced and estimate the costs involved
Phase III -- Commit and assign resources needed to implement compliance plan
Phase IV -- Modify or replace non-compliant system
The Company's systems used to maintain financial records were either
found to be compliant or have completed Phases I through IV. As a result, 100%
of these critical systems are currently compliant. One hundred percent of the
Company's other critical systems have completed Phase I, and fifty percent were
found to be compliant. The remaining non-compliant critical systems have
completed Phases II and III and commenced Phase IV, with a scheduled completion
of the second quarter of fiscal year 1999.
Seventy-five percent of the Company's non-critical systems have completed
Phase I and were either found to be compliant or made compliant by completing
Phases II through IV. 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 year 1999.
In addition, the Company has distributed surveys to all of its
significant vendors, financial institutions and insurers to determine the
extent to which these third parties' failure to resolve their Year 2000 issues
could affect the Company's operations. The Company has received 43% of the
surveys, none of which indicated significant problems. The Company expects
to complete its evaluation of third parties' compliance by the end of the
second quarter of fiscal year 1999.
The Costs Involved. Because many of the Company's computer systems have
been replaced in recent years as part of the Company's ongoing 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 implementing its compliance plan. Management estimates
that the total cost to be incurred by the Company to complete its compliance
plan will be $175,000. This estimate includes the use of both internal
and external resources. 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.
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, and some
business procedures may be interrupted if no alternative methodology is
available, which 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 the second quarter of fiscal year 1999.
Recent Accounting Standards
Statements of Financial Accounting Standards No. 130, "Reporting
Comprehensive Income," No. 131, "Disclosure about Segments of an Enterprise and
Related Information," and No. 132, "Employers' Disclosures about Pensions and
Other Postretirement Benefits," are required to be implemented during the
Company's fiscal year ending October 31, 1999. The effect of these
pronouncements on the Company's consolidated financial condition and results of
operations is not expected to be material.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
There has been no change in the status of the Company's material legal
proceedings during the quarter ended July 31, 1998.
ITEM 5. OTHER INFORMATION
FORWARD-LOOKING STATEMENTS
Certain statements made herein or elsewhere by, or on behalf of, the Company
that are not historical facts are intended to be forward-looking statements
within the meaning of the safe harbor provisions of the Private Securities
Litigation Reform Act of 1995.
The Company's goals for fiscal year 1998 include: (i) revenue growth of at
least 20%; and (ii) earnings per share growth of 20% excluding the performance
based stock option change recorded in fiscal year 1998. The Company also
projects approximately $250-$275 million in acquisitions, which represents an
increase over the $185 million, $179 million, and $154 million achieved
in fiscal years 1997, 1996 and 1995, respectively. For fiscal year 1998, the
Company projects gross margin improvement of approximately 150 to 160 basis
points over its fiscal year 1997 gross margin.
The Company's strategic plan for the future includes the following goals:
(i) achievement of $1 billion in revenue by fiscal year 2001; and (ii) earnings
per share growth of 20% annually.
Forward-looking statements are based on assumptions about future events and
are therefore inherently uncertain; actual results may differ materially from
those projected. See "Cautionary Statements" below.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the projections
made in the forward-looking statements above and in any other forward-looking
statements made by, or on behalf of, the Company.
(1) Achieving projected revenue growth depends upon sustaining the level of
acquisition activity experienced by the Company in the last three fiscal years.
Higher levels of acquisition activity will increase anticipated revenues, and
lower levels of acquisition activity will decrease anticipated revenues. The
level of acquisition activity depends not only on the number of properties
acquired, but also on the size of the acquisitions; for example, one large
acquisition could increase substantially the level of acquisition activity and,
consequently, revenues. Several important factors, among others, affect the
Company's ability to consummate acquisitions:
(a)The Company may be unable to find a sufficient number of businesses
for sale at prices the Company is willing to pay.
(b)In most of its existing markets and in many new markets, including
foreign markets, that the Company desires to enter, the Company
competes for acquisitions with the other publicly-traded death care
firms. These competitors, and others, may be willing to pay higher
prices for businesses than the Company or may cause the Company to pay
more to acquire a business than the Company would otherwise have to
pay in the absence of such competition. Thus, the 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) The level of revenues also is affected by the volume and prices of the
properties, products and services sold. The annual sales targets set by the
Company are very aggressive, and the inability of the Company to achieve
planned increases in volume or prices could cause the Company not to meet
anticipated levels of revenue. The ability of the Company to achieve volume or
price increases at any location depends on numerous factors, including the
local economy, the local death rate and competition.
(3) Another important component of revenue is earnings from the Company's
trust funds and escrow accounts, which are determined by the size of, and
returns (which include dividends, interest and realized capital gains) on, the
funds. The performance of the funds is related primarily to market conditions
that are not within the Company's control. The size of the funds depends on
the level of sales, funds added through acquisitions and the amount of returns
that may be reinvested.
(4) Future revenue also is affected by the level of prearranged sales in
prior periods. The level of prearranged sales may be adversely affected by
numerous factors, including deterioration in the economy, which causes
individuals to have less discretionary income.
(5) The Company first entered foreign markets in the fourth quarter of
fiscal year 1994, and no assurance can be given that the Company will continue
to be successful in expanding in foreign markets, or that any expansion in
foreign markets will yield results comparable to those realized as a result of
the Company's expansion in the United States.
(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 corporate general and
administrative expenses.
(e)Changes in interest rates, which can increase or decrease the amount
the Company pays on borrowings with variable rates of interest.
(f)The Company's debt-to-equity ratio, the number of shares of common
stock outstanding and the portion of the Company's debt that has fixed
or variable interest rates.
(g)The impact on the Company's financial statements of nonrecurring
accounting charges that may result from the Company's ongoing
evaluation of its business strategies, asset valuations and
organizational structures.
(h)Changes in government regulation, including tax rates and structures.
(i)Changes in inflation and other general economic conditions both
domestically and internationally impacting financial markets (e.g.
marketable security values as well as exchange rate fluctuations).
(j) 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 third parties to achieve Year 2000
compliance on a timely basis. For additional information, see "Year
2000 Issues" in Management's Discussion and Analysis of Financial
Condition and Results of Operations.
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.
<PAGE>
ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K
(a) 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)
4.4 Supplemental Indenture dated April 24, 1998 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 April 21, 1998)
4.5 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)
4.6 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)
4.7 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)
12 Calculation of Ratio of Earnings to Fixed Charges
27 Financial Data Schedule
(b) Reports on Form 8-K
The Company filed a Form 8-K on May 15, 1998 reporting, under "Item 5.
Other Events," the basic and diluted earnings per share, and related
reconciliation between the two, for each period in 1997, adjusted for the
Company's two-for-one common stock split effected April 24, 1998.
The Company filed a Form 8-K on June 9, 1998 reporting, under "Item 5.
Other Events," the earnings release for the quarter ended April 30, 1998.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
STEWART ENTERPRISES, INC.
September 14, 1998 /s/ KENNETH C. BUDDE
------------------------
Kenneth C. Budde
Executive Vice President
President-Corporate Division
Chief Financial Officer
September 14, 1998 /s/ MICHAEL G. HYMEL
------------------------
Michael G. Hymel
Vice President
Corporate Controller
Chief Accounting Officer
Exhibit 12
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
<TABLE>
<CAPTION>
YEARS ENDED OCTOBER 31, NINE MONTHS
---------------------------------------------------------- ENDED
1993 1994 1995 1996 1997 JULY 31, 1998
---- ---- ---- ---- ---- -------------
<S> <C> <C> <C> <C> <C> <C>
Earnings from continuing operations
before income taxes $ 29,569 $ 42,198 $ 41,500(1) $ 82,075 $ 106,477(2) $ 31,162(3)
Fixed charges:
Interest expense 6,540 8,877 22,815 26,051 38,031 31,336
Interest portion of lease expense 585 935 1,343 1,522 2,181 1,760
------- ------- ------- ------- ------- -------
Total fixed charges 7,125 9,812 24,158 27,573 40,212 33,096
Earnings from continuing operations
before income taxes and fixed
charges $ 36,694 $ 52,010 $ 65,658(1) $ 109,648 $ 146,689(2) $ 64,258(3)
======= ======= ======= ======= ======= =======
Ratio of earnings to fixed charges 5.15 5.30 2.72(1) 3.98 3.65(2) 1.94(3)
======= ======= ======= ======= ======= =======
</TABLE>
- --------------------------------
(1) Includes a non-recurring, non-cash charge of $17,252 ($10,869 after-tax)
recorded in connection with the vesting of the Company's performance-based
stock options.
(2) Excludes cumulative effect of change in accounting principles of $2,324
(net of $2,230 income tax benefit).
(3) Includes a non-recurring, non-cash charge of $76,762 ($50,279 after-tax)
recorded in connection with the vesting of the Company's performance-based
stock options.
- --------------------------------
During the periods presented the Company had no preferred stock outstanding.
Therefore, the ratio of earnings to combined fixed charges and preference
dividends was the same as the ratio of earnings to fixed charges for each of
the periods presented.
<TABLE> <S> <C>
<ARTICLE> 5
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> JUL-31-1998
<CASH> 19,164
<SECURITIES> 13,651
<RECEIVABLES> 161,587
<ALLOWANCES> 0
<INVENTORY> 45,972
<CURRENT-ASSETS> 247,519
<PP&E> 456,418
<DEPRECIATION> (100,643)
<TOTAL-ASSETS> 1,886,146
<CURRENT-LIABILITIES> 97,474
<BONDS> 793,609
<COMMON> 98,025
0
0
<OTHER-SE> 726,065
<TOTAL-LIABILITY-AND-EQUITY> 1,886,146
<SALES> 472,975
<TOTAL-REVENUES> 472,975
<CGS> 325,981
<TOTAL-COSTS> 325,981
<OTHER-EXPENSES> 76,762
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 31,336
<INCOME-PRETAX> 31,162
<INCOME-TAX> 10,938
<INCOME-CONTINUING> 20,224
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 20,224
<EPS-PRIMARY> .21
<EPS-DILUTED> .21
</TABLE>
