===============================================================================
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 APRIL 30, 1999
( ) 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
June 9, 1999 was 108,171,623 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 April 30, 1999 and 1998 .................. 3
Consolidated Statements of Earnings -
Six Months Ended April 30, 1999 and 1998 .................... 4
Consolidated Balance Sheets -
April 30, 1999 and October 31, 1998 ......................... 5
Consolidated Statement of Shareholders' Equity -
Six Months Ended April 30, 1999 ............................. 7
Consolidated Statements of Cash Flows -
Six Months Ended April 30, 1999 and 1998 .................... 8
Notes to Consolidated Financial Statements ................... 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations ....... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk ................................... 24
PART II. OTHER INFORMATION
Item 1. Legal Proceedings .................................... 26
Item 4. Submission of Matters to a Vote of Security Holders .. 26
Item 5. Other Information .................................... 26
Item 6. Exhibits and Reports on Form 8-K ..................... 29
SIGNATURES .................................................... 30
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
THREE MONTHS ENDED APRIL 30,
----------------------------
1999 1998
--------- ---------
Revenues:
Funeral ................................ $ 121,158 $ 91,752
Cemetery ............................... 81,099 62,826
--------- ---------
202,257 154,578
--------- ---------
Costs and expenses:
Funeral ................................ 80,114 61,209
Cemetery ............................... 56,515 43,823
--------- ---------
136,629 105,032
Gross profit ........................... 65,628 49,546
Corporate general and administrative
expenses ................................. 4,333 4,144
--------- ---------
Operating earnings before performance-
based stock options ................... 61,295 45,402
Performance-based stock options ........... -- 76,762
--------- ---------
Operating earnings (loss) .............. 61,295 (31,360)
Interest expense .......................... (12,795) (10,081)
Investment and other income ............... 2,150 1,676
--------- ---------
Earnings (loss) before income taxes .... 50,650 (39,765)
Income taxes (benefit) .................... 18,487 (13,719)
--------- ---------
Net earnings(loss) ..................... $ 32,163 $ (26,046)
========= =========
Net earnings (loss) per share:
Basic: ................................. $ .29 $ (.27)
========= =========
Diluted ............................... $ .29 $ (.27)
========= =========
Weighted average shares outstanding
(in thousands):
Basic .................................. 111,707 97,547
========= ========
Diluted ................................ 112,192 97,547
========= ========
Dividends per share ....................... $ .02 $ .01
========= ========
See accompanying notes to consolidated financial statements.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30,
----------------------------
1999 1998
--------- ---------
Revenues:
Funeral ................................ $ 232,641 $ 178,670
Cemetery ............................... 152,537 125,217
--------- ---------
385,178 303,887
--------- ---------
Costs and expenses:
Funeral ................................ 153,372 120,070
Cemetery ............................... 107,188 88,154
--------- ---------
260,560 208,224
--------- ---------
Gross profit ........................... 124,618 95,663
Corporate general and administrative
expenses ................................. 8,348 8,168
--------- ---------
Operating earnings before performance-
based stock options ................... 116,270 87,495
Performance-based stock options ........... -- 76,762
--------- ---------
Operating earnings ..................... 116,270 10,733
Interest expense .......................... (27,195) (20,027)
Investment and other income ............... 3,334 3,034
--------- ---------
Earnings (loss) before income taxes .... 92,409 (6,260)
Income taxes (benefit) .................... 33,729 (2,160)
--------- ---------
Net earnings (loss) .................... $ 58,680 $ (4,100)
========= =========
Net earnings (loss) per share:
Basic .................................. $ .56 $ (.04)
========= =========
Diluted ................................ $ .56 $ (.04)
========= =========
Weighted average shares outstanding
(in thousands):
Basic .................................. 104,687 97,473
========= =========
Diluted ................................ 105,286 97,473
========= =========
Dividends per share ....................... $ .04 $ .02
========= =========
See accompanying notes to consolidated financial statements.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C>
APRIL 30, OCTOBER 31,
ASSETS 1999 1998
------ ---------- ----------
Current assets:
Cash and cash equivalent investments ................ $ 34,923 $ 30,733
Marketable securities ............................... 7,890 6,120
Receivables, net of allowances ...................... 211,349 171,849
Inventories ......................................... 52,679 48,833
Prepaid expenses .................................... 7,077 3,870
---------- ----------
Total current assets .............................. 313,918 261,405
Receivables due beyond one year, net of allowances ...... 315,910 257,773
Intangible assets ....................................... 641,621 573,006
Deferred charges ....................................... 110,248 100,432
Cemetery property, at cost .............................. 437,379 382,972
Property and equipment, at cost:
Land ................................................. 82,409 75,032
Buildings ............................................ 305,555 284,590
Equipment and other .................................. 144,655 127,951
---------- ----------
532,619 487,573
Less accumulated depreciation ........................ 117,436 105,834
---------- ----------
Net property and equipment ........................... 415,183 381,739
Long-term investments ................................... 80,675 68,014
Merchandise trust, less estimated cost to deliver ....... 62,743 41,160
Other assets ............................................ 7,514 5,301
---------- ----------
$2,385,191 $2,071,802
========== ==========
(continued)
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
<S> <C> <C>
APRIL 30, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
------------------------------------ ---------- ----------
Current liabilities:
Current maturities of long-term debt ............. $ 10,630 $ 11,219
Accounts payable ................................. 19,198 19,048
Accrued payroll .................................. 17,969 21,074
Accrued insurance ................................ 14,000 12,420
Accrued interest ................................. 14,056 13,440
Accrued other .................................... 26,292 19,369
Income taxes payable ............................. 16,045 8,245
Deferred income taxes ............................ 14,348 13,967
---------- ----------
Total current liabilities .................... 132,538 118,782
Long-term debt, less current maturities ............. 900,897 913,215
Deferred income taxes ............................... 94,743 92,231
Deferred revenue ................................... 118,164 98,775
Other long-term liabilities ......................... 12,742 9,509
---------- ----------
Total liabilities ............................ 1,259,084 1,232,512
---------- ----------
Commitments and contingencies (Notes 3 and 8)
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 108,152,625 and 94,472,844
shares at April 30, 1999 and October 31, 1998,
respectively ................................. 108,153 94,473
Class B authorized 5,000,000 shares; issued
and outstanding 3,555,020 shares at
April 30, 1999 and October 31, 1998;
10 votes per share; convertible into an equal
number of Class A shares ..................... 3,555 3,555
Additional paid-in capital ....................... 698,152 492,177
Retained earnings ................................ 369,624 315,140
Cumulative foreign translation adjustment ........ (57,399) (64,887)
Unrealized appreciation (depreciation) of
investments .................................... 4,022 (1,168)
---------- ----------
Total shareholders' equity .................... 1,126,107 839,290
---------- ----------
$2,385,191 $2,071,802
========== ==========
See accompanying notes to consolidated financial statements.
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
UNREALIZED
COMMON STOCK CUMULATIVE APPRECIATION
---------------------------- ADDITIONAL FOREIGN (DEPRECIATION) TOTAL
SHARES - PAID-IN RETAINED TRANSLATION OF SHAREHOLDERS'
CLASSES A AND B(1) AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS EQUITY
------------------ --------- ----------- -------- ------------- -------------- -------------
(IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C>
Balance October 31, 1998...... 98,028 $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290
Comprehensive income:
Net earnings................. 58,680 58,680
Other comprehensive income:
Foreign translation
adjustment................ 7,488 7,488
Unrealized appreciation of
investments............... 8,173 8,173
Deferred income tax expense
on unrealized appreciation
of investments............ (2,983) (2,983)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total other comprehensive
income.................... 7,488 5,190 12,678
---------- ---------- ---------- ---------- ---------- ---------- ----------
Total comprehensive income... 58,680 7,488 5,190 71,358
Sales of common stock......... 13,680 13,680 205,975 219,655
Dividends ($.04 per share).... (4,196) (4,196)
---------- ---------- ---------- ---------- ---------- ---------- ----------
Balance April 30, 1999........ 111,708 $ 111,708 $ 698,152 $ 369,624 $ (57,399) $ 4,022 $1,126,107
========== ========== ========== ========== ========== ========== ==========
</TABLE>
(1) Includes 3,555 shares (in thousands) of Class B Common Stock.
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>
SIX MONTHS ENDED APRIL 30,
----------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)................................................ $ 58,680 $ (4,100)
Adjustments to reconcile net earnings (loss) to net
cash provided by (used in) operating activities:
Performance-based stock options................................. - 76,762
Depreciation and amortization................................... 21,470 15,115
Provision for doubtful accounts................................. 15,058 12,327
Net gains on sales of marketable securities..................... (2,259) (1,632)
Benefit for deferred income taxes............................... (731) (3,549)
Changes in assets and liabilities net of effects from
acquisitions:
Increase in prearranged funeral trust receivables............. (17,978) (10,002)
Increase in other receivables................................. (70,230) (41,074)
Increase in deferred charges and intangible assets............ (9,244) (9,533)
(Increase) decrease in inventories and cemetery property...... 3,376 (4,855)
Increase in merchandise trust, less estimated cost
to deliver merchandise...................................... (20,335) (13,597)
Increase (decrease) in accounts payable and accrued expenses.. 7,886 (9,907)
Increase (decrease) in deferred revenue....................... 11,807 (4,300)
(Increase) decrease in other.................................. (6,606) 262
---------- ----------
Net cash provided by (used in) operating activities........... (9,106) 1,917
---------- ----------
Cash flows from investing activities:
Proceeds from sales of marketable securities....................... 10,647 11,082
Purchases of marketable securities and long-term investments....... (18,025) (12,877)
Purchases of subsidiaries, net of cash, seller financing
and stock issued................................................. (152,016) (47,997)
Additions to property and equipment................................ (22,348) (19,099)
Other.............................................................. 479 1,837
---------- ----------
Net cash used in investing activities......................... (181,263) (67,054)
---------- ----------
(continued)
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30,
------------------------------
1999 1998
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt....................................... $ 200,847 $ 380,741
Repayments of long-term debt....................................... (221,970) (251,685)
Retirement of performance-based stock options...................... - (69,431)
Issuance of common stock........................................... 219,655 11,009
Dividends.......................................................... (4,196) (1,950)
Purchase and retirement of common stock............................ - (9,101)
--------- ---------
Net cash provided by financing activities....................... 194,336 59,583
--------- ---------
Effect of exchange rates on cash and cash equivalents................. 223 (1,145)
--------- ---------
Net increase (decrease) in cash....................................... 4,190 (6,699)
Cash and cash equivalents, beginning of period........................ 30,733 31,640
--------- ---------
Cash and cash equivalents, end of period.............................. $ 34,923 $ 24,941
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes.................................................... $ 25,200 $ 5,700
Interest........................................................ $ 26,600 $ 17,900
Noncash investing and financing activity:
Subsidiaries acquired with common stock......................... $ - $ 200
</TABLE>
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 April 30, 1999, the Company owned and operated 619 funeral homes and
157 cemeteries in 30 states within the United States, and in Puerto Rico,
Mexico, Australia, New Zealand, Canada, Spain, Portugal, the Netherlands,
Argentina, France and Belgium. For the six months ended April 30, 1999,
foreign operations contributed approximately 20% of total revenue and, as of
April 30, 1999, represented approximately 20% 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 April 30, 1999, and for the three and six months ended
April 30, 1999 and 1998, 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, 1998.
The results of operations for the three and six months ended April 30, 1999
are not necessarily indicative of the results to be expected for the fiscal
year ending October 31, 1999.
(d) Foreign Currency Translation
All assets and liabilities of the Company's foreign subsidiaries are
translated into U.S. dollars at the exchange rate in effect at the end of the
period, and revenues and expenses are translated at average exchange rates
prevailing during the period. The resulting translation adjustments are
reflected in a separate component of shareholders' equity, 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. As of January 1, 1999, the
Mexican economy was no longer considered highly inflationary by the SEC staff.
Accordingly, subsequent to January 1, 1999, gains and losses resulting from
translation of the financial statements of the Company's Mexican operations are
reflected in shareholders' equity, and the functional currency used by the
Company's Mexican operations returned to the Mexican peso. These changes did
not have a material effect on the Company's results of operations for fiscal
year 1998 or the first six months of fiscal year 1999.
<PAGE>
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 5.
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.
(2) ACQUISITIONS
During the six months ended April 30, 1999, the Company purchased 68 funeral
homes and 17 cemeteries, compared to 41 funeral homes and two cemeteries
purchased during the six months ended April 30, 1998.
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 six months
ended April 30, 1999, 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.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(2) ACQUISITIONS--(CONTINUED)
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30,
------------------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Revenues..................................................... $ 402,324 $ 328,009
========= =========
Operating earnings before performance-based stock options.... $ 117,285 $ 88,598
========= =========
Net earnings (loss).......................................... $ 56,887 $ (6,827)
========= =========
Basic earnings (loss) per share.............................. $ .54 $ (.07)
========= =========
Diluted earnings (loss) per share............................ $ .54 $ (.07)
========= =========
Weighted average shares outstanding (in thousands):
Basic..................................................... 104,687 97,473
========= =========
Diluted................................................... 105,286 97,473
========= =========
</TABLE>
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
<TABLE>
<CAPTION>
SIX MONTHS ENDED APRIL 30,
------------------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Current assets............................................... $ 22,591 $ 5,345
Receivables due beyond one year.............................. 2 -
Cemetery property............................................ 59,105 7,902
Property and equipment, net.................................. 20,212 7,792
Deferred charges and other assets............................ 745 25
Intangible assets, net....................................... 78,019 46,977
Current liabilities.......................................... (6,191) (3,660)
Long-term debt............................................... (10,449) (15,279)
Other long-term liabilities.................................. (12,018) (905)
--------- ---------
152,016 48,197
Common stock used for acquisitions........................... - 200
--------- ---------
Cash used for acquisitions................................... $ 152,016 $ 47,997
========= =========
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(3) 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.
(4) RECENT ACCOUNTING STANDARDS
Effective November 1, 1998, the Company adopted Statement of Financial
Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." 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 2001. The effect of these pronouncements on the
Company's consolidated financial condition and results of operations is not
expected to be material.
(5) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
------------- --------------- -----------
THREE MONTHS ENDED APRIL 30, 1999
-------------------------------------
<S> <C> <C> <C>
Net earnings.......................................... $ 32,163
=========
Basic earnings per share:
Net earnings available to common shareholders...... $ 32,163 111,707 $ .29
=========
Effect of dilutive securities:
Time-vest stock options assumed exercised.......... - 485
--------- ---------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised.. $ 32,163 112,192 $ .29
========= ========= ========
</TABLE>
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
------------- --------------- -----------
SIX MONTHS ENDED APRIL 30, 1999
-------------------------------------
<S> <C> <C> <C>
Net earnings.......................................... $ 58,680
=========
Basic earnings per share:
Net earnings available to common shareholders...... $ 58,680 104,687 $ .56
========
Effect of dilutive securities:
Time-vest stock options assumed exercised.......... - 599
--------- ---------
Diluted earnings per share:
Net earnings available to common shareholders......
plus time-vest stock options assumed exercised.. $ 58,680 105,286 $ .56
========= ========= ========
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(5) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA--(CONTINUED)
Options to purchase 1,602,974 and 1,468,866 shares of common stock at prices
ranging from $17.13 to $27.25 were outstanding during the three and six months
ended April 30, 1999, respectively, but were not included in the computation of
diluted earnings per share because the exercise prices of the options were
greater than the average market price of the common shares. The options, which
expire on January 2, 2001, October 31, 2001 and July 31, 2004, were still
outstanding at April 30, 1999.
For the three and six months ended April 30, 1998, there is no difference
between basic and diluted loss per share as reported in the accompanying
consolidated financial statements. Since the Company reported losses in both
periods, the effect of any potential common shares that would have been issued
during the periods would have been antidilutive. Had the company reported
earnings in both periods, approximately 819,000 and 774,000 shares would have
been added to the diluted share count for time-vest stock options assumed
exercised for the three and six months ended April 30, 1998, respectively.
(6) EQUITY OFFERING
On February 2, 1999, the Company completed the sale of 13,627,500 shares of
Class A Common Stock, resulting in approximately $219,000 in net proceeds,
which were used principally to repay balances outstanding under its revolving
credit facilities, which amounts then became available to fund the Company's
continuing acquisition program and for general corporate purposes.
(7) INTEREST RATE SWAP
In order to hedge a portion of the interest rate risk associated with its
variable-rate debt, during the first quarter of 1999, the Company entered into
a three-year interest rate swap agreement involving a notional amount of $200
million. This agreement, which became effective March 4, 1999, effectively
converts $200 million of variable-rate debt bearing interest based on three-
month LIBOR to a fixed rate of 4.915%. The net amount to be paid or received
at the end of each 90-day settlement period under the swap agreement is
recorded as an adjustment to interest expense. The estimated fair value, based
on quoted market prices, of the interest rate swap as of April 30, 1999 was
$3,305.
(8) SUBSEQUENT EVENTS
Subsequent to April 30, 1999, the Company acquired or entered into letters
of intent or definitive agreements to acquire 11 funeral homes and four
cemeteries for purchase prices aggregating approximately $19,127.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
For purposes of the following discussion, funeral homes and cemeteries owned
and operated for the entirety of 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."
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
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 Canada
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
Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998
Funeral Segment
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
---------------------
1999 1998 INCREASE
-------- -------- ------------
(In millions)
FUNERAL REVENUE
-----------------
<S> <C> <C> <C>
Existing Operations....................................... $ 88.9 $ 83.4 $ 5.5
Acquired Operations....................................... 20.2 0.7 19.5
Revenue from prearranged funeral trust funds and
escrow accounts.......................................... 12.1 7.7 4.4
------- ------- -------
$ 121.2 $ 91.8 $ 29.4
======= ======= =======
FUNERAL COSTS
---------------
Existing Operations....................................... $ 63.6 $ 60.6 $ 3.0
Acquired Operations....................................... 16.5 0.6 15.9
------- ------- -------
$ 80.1 $ 61.2 $ 18.9
======= ======= =======
Funeral Segment Profit.................................... $ 41.1 $ 30.6 $ 10.5
======= ======= =======
</TABLE>
Funeral revenue increased $29.4 million, or 32%, for the three months ended
April 30, 1999, compared to the corresponding period in 1998. The Company
experienced a $5.5 million, or 6.6%, increase in revenue from Existing
Operations as a result of a 2.0% increase in the number of domestic funeral
services performed by Existing Operations (1.0% increase worldwide) coupled
with a 0.5% increase in the average revenue per domestic funeral service
performed by Existing Operations (4.4% increase worldwide, excluding the effect
of foreign currency translation). The increase in average revenue per funeral
service was primarily due to price increases and improved merchandising.
The Company strives to maintain an appropriate balance between its
funeral and cemetery operations, its domestic and international operations
and its atneed and preneed sales. In this regard, one of the Company's
strategies is to achieve annual increases of 5% to 7% in worldwide revenue per
funeral service performed by Existing Operations and to achieve that
growth primarily through improved pricing and merchandising.
For the three months ended April 30, 1999, the average revenue per funeral
service performed by existing funeral homes increased 4.4% worldwide, excluding
the effect of foreign currency translation which was slightly below this
objective; however, for the six months ended April 30, 1999, the Company
experienced a 5.3% worldwide increase, excluding the effect of foreign currency
translation, in the average revenue per funeral service performed by its
existing funeral homes. Moreover, the Company achieved a $9.8 million, or
16.6%, increase and a $12.0 million, or 10.2%, increase in revenue from its
existing cemeteries for the three and six months ended April 30, 1999,
respectively, thus demonstrating the earnings stability derived from the
Company's balanced strategy.
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 through the Company's Shared Services Center, the increased
average revenue per funeral service and the increase in funeral services
performed mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition and construction of funeral homes from
May 1998 through April 1999 which are not reflected in the 1998 period
presented above.
The $4.4 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 average yield on the North
American funds (excluding those in Mexico). 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 27% for the
current quarter on an annualized basis. The return on the Mexican funds
partially offset the approximate 18% inflation experienced over the last 12
months.
Cemetery Segment
<TABLE>
<CAPTION>
THREE MONTHS ENDED
APRIL 30,
----------------------
1999 1998 INCREASE
-------- -------- ------------
(In millions)
CEMETERY REVENUE
------------------
<S> <C> <C> <C>
Existing Operations.......................................... $ 68.7 $ 58.9 $ 9.8
Acquired Operations.......................................... 6.8 0.6 6.2
Revenue from merchandise trust funds and
escrow accounts............................................. 5.6 3.3 2.3
------- ------- -------
$ 81.1 $ 62.8 $ 18.3
======= ======= =======
CEMETERY COSTS
----------------
Existing Operations.......................................... $ 50.6 $ 43.5 $ 7.1
Acquired Operations.......................................... 5.9 0.3 5.6
------- ------- -------
$ 56.5 $ 43.8 $ 12.7
======= ======= =======
Cemetery Segment Profit...................................... $ 24.6 $ 19.0 $ 5.6
======= ======= =======
</TABLE>
Cemetery revenue increased $18.3 million, or 29%, for the three months ended
April 30, 1999, compared to the corresponding period in 1998. The Company
experienced a $9.8 million, or 16.6%, increase in revenue from Existing
Operations resulting primarily from an increase in preneed cemetery sales,
price increases and improved merchandising.
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 the centralization
and standardization of certain financial and administrative functions at the
Shared Services Center.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of cemeteries from May 1998 through
April 1999 which are not reflected in the 1998 period presented above.
The $2.3 million increase in revenue from merchandise trust funds and escrow
accounts was attributable to a 27% 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
During the quarter ended April 30, 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 Company was
required to record a nonrecurring, noncash charge to earnings of
approximately $76.8 million (approximately $50.3 million 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 approximately $69.4 million.
Interest expense increased $2.7 million during the second quarter of fiscal
year 1999 compared to the same period in 1998, as the result of an increase in
average borrowings due principally to acquisition expenditures, partially
offset by a decrease in average interest rates from 6.3% in 1998 to 6.0% in
1999.
Other income increased $.5 million during the second quarter of fiscal year
1999 compared to the same period in 1998 primarily due to investment earnings
from cash balances. Funds set aside for growth prospects were not deployed as
quickly as anticipated and were temporarily invested resulting in
approximately $1 million of investment earnings included in other income. The
increase in other income was offset by a corresponding increase in interest
expense incurred as these funds were not used to pay down the Company's
revolving credit line.
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 three-month LIBOR. The swap expires on March 4, 2002.
As of April 30, 1999, the Company's outstanding borrowings totaled $911.5
million. Of the total amount outstanding, including the portion subject to
the interest rate swap agreement, approximately 69% was fixed-rate debt, with
the remaining 31% subject to short-term variable interest rates averaging
approximately 5.2%.
Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998
Funeral Segment
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
-------------------- INCREASE
1999 1998 (DECREASE)
-------- -------- ------------
(In millions)
FUNERAL REVENUE
-----------------
<S> <C> <C> <C>
Existing Operations.......................................... $ 165.9 $ 161.3 $ 4.6
Acquired Operations.......................................... 45.7 4.7 41.0
Revenue from prearranged funeral trust funds and
escrow accounts............................................. 21.0 12.7 8.3
------- ------- -------
$ 232.6 $ 178.7 $ 53.9
======= ======= =======
FUNERAL COSTS
---------------
Existing Operations.......................................... $ 115.8 $ 116.1 $ (0.3)
Acquired Operations.......................................... 37.6 4.0 33.6
------- ------- -------
$ 153.4 $ 120.1 $ 33.3
======= ======= =======
Funeral Segment Profit....................................... $ 79.2 $ 58.6 $ 20.6
======= ======= =======
</TABLE>
Funeral revenue increased $53.9 million, or 30%, for the six months ended
April 30, 1999, compared to the corresponding period in 1998. The Company
experienced a $4.6 million, or 2.9%, increase in revenue from Existing
Operations as a result of a 2.5% increase in the average revenue per domestic
funeral service performed by Existing Operations (5.3% increase worldwide,
excluding the effect of foreign currency translation), primarily due to price
increases and improved merchandising. Slightly offsetting this increase in
revenue was a 2.4% decrease in the number of domestic funeral services
performed by Existing Operations (2.8% decrease worldwide).
The $.3 million, or .3%, 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 and construction of funeral homes from
May 1998 through April 1999 which are not reflected in the 1998 period
presented above.
The 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 an increase in the average yield on the North American funds (excluding
those in Mexico). 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 23% for the six months ended on April
30, 1999 on an annualized basis. The return on the Mexican funds partially
offset the approximate 18% inflation experienced over the last 12 months.
Cemetery Segment
<TABLE>
<CAPTION>
SIX MONTHS ENDED
APRIL 30,
--------------------
1999 1998 INCREASE
-------- -------- --------
(In millions)
CEMETERY REVENUE
------------------
<S> <C> <C> <C>
Existing Operations.......................................... $ 129.8 $ 117.8 $ 12.0
Acquired Operations.......................................... 13.3 1.3 12.0
Revenue from merchandise trust funds and
escrow accounts............................................. 9.4 6.1 3.3
------- ------- ------
$ 152.5 $ 125.2 $ 27.3
======= ======= ======
CEMETERY COSTS
----------------
Existing Operations.......................................... $ 95.7 $ 87.3 $ 8.4
Acquired Operations.......................................... 11.5 0.9 10.6
------- ------- ------
$ 107.2 $ 88.2 $ 19.0
======= ======= ======
Cemetery Segment Profit...................................... $ 45.3 $ 37.0 $ 8.3
======= ======= ======
</TABLE>
Cemetery revenue increased $27.3 million, or 21.8%, for the six months ended
April 30, 1999, compared to the corresponding period in 1998, due principally
to a $12.0 million, or 10.2%, increase in revenue from Existing Operations. The
increase in revenue from Existing Operations resulted primarily from an
increase in preneed cemetery sales, price increases and improved merchandising.
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 the
centralization and standardization of certain financial and administrative
functions at the Shared Services Center.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of cemeteries from May 1998 through
April 1999 which are not reflected in the 1998 period presented above.
The $3.3 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
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 Company was required to record a
nonrecurring, noncash charge to earnings of approximately $76.8 million
(approximately $50.3 million, or $.51 per share, after-tax) in April 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 approximately $69.4 million.
Interest expense increased $7.2 million during the first six months of
fiscal year 1999 compared to the same period in 1998, resulting from an
increase in average borrowings due principally to acquisition expenditures,
partially offset by a decrease in average interest rates from 6.5% in 1998 to
6.2% in 1999.
Other income increased $.3 million during the first six months of fiscal
year 1999 compared to the comparable period in 1998 primarily due to investment
earnings from cash balances. Funds set aside for growth prospects were not
deployed as quickly as anticipated and were temporarily invested resulting
in approximately $1 million of investment earnings included in other income.
The increase in other income was offset by a corresponding increase in
interest expense incurred as these funds were not used to pay down the
Company's revolving credit line.
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 three-month LIBOR. The swap expires on March 4, 2002.
As of April 30, 1999, the Company's outstanding borrowings totaled $911.5
million. Of the total amount outstanding, including the portion subject to
the interest rate swap agreement, approximately 69% was fixed-rate debt, with
the remaining 31% subject to short-term variable interest rates averaging
approximately 5.2%.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $42.8 million at April
30, 1999, an increase of approximately $6.0 million from October 31, 1998. The
Company used cash of $9.1 million in its operations for the six months ended
April 30, 1999, compared to $1.9 million provided by operations for the
corresponding period in 1998, due principally to an increase in receivables
partially offset by an increase in net earnings and other working capital
changes.
Long-term debt at April 30, 1999 amounted to $911.5 million, compared to
$924.4 million at October 31, 1998. The Company's long-term debt consisted of
$486.0 million under the Company's revolving credit facilities, $401.1 million
of long-term notes and $24.4 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 $3.4
million of term notes incurred principally in connection with acquisitions.
The most restrictive of the Company's credit agreements require it to
maintain a debt-to-equity ratio no higher than 1.25 to 1.00. The Company has
managed its capitalization within that limit and had a ratio of total debt-to-
equity of .8 to 1.0 and 1.1 to 1.0 as of April 30, 1999 and October 31, 1998,
respectively. In February 1999, the Company completed the sale of 13.6
million shares of Class A Common Stock, resulting in approximately $219 million
in net proceeds, which was used principally to repay balances outstanding under
its revolving credit facilities, which amounts then became available to fund
the Company's continuing acquisition program and for general corporate
purposes. As of June 9, 1999, the Company had a debt-to-equity ratio of
approximately .8 to 1.0 and $486.1 million of additional borrowing capacity
within the 1.25 to 1.0 debt-to-equity parameter, $109.6 million of which was
available under its revolving credit facilities.
The Company's ratio of earnings to fixed charges was as follows for the
years and period indicated:
YEARS ENDED OCTOBER 31, SIX MONTHS
ENDED
-------------------------------------------------------- APRIL 30,
1994 1995 1996 1997 1998 1999
-------- -------- -------- -------- -------- -----------
5.30 2.72(1) 3.98 3.65(2) 2.39(3) 4.23
______________________
(1) Pretax earnings for fiscal year 1995 includes a nonrecurring, noncash
charge of $17.3 million in connection with the vesting of performance-
based stock options. Excluding the charge, the Company's ratio of earnings
to fixed charges for fiscal year 1995 would have been 3.43.
(2) Excludes the cumulative effect of change in accounting principles.
(3) Pretax earnings for fiscal year 1998 includes a nonrecurring, noncash
charge of $76.8 million in connection with the vesting of performance-
based stock options. Excluding the charge, the Company's ratio of earnings
to fixed charges for fiscal year 1998 would have been 4.02.
<PAGE>
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 six months ended April 30, 1999, the Company completed
acquisitions of 68 funeral homes and 17 cemeteries for purchase prices
aggregating approximately $148.4 million, which was funded primarily with
advances under the Company's revolving credit facilities. From the beginning
of this fiscal year through June 9, 1999, the Company has acquired or entered
into letters of intent or definitive agreements to acquire 100 businesses for
an aggregate purchase price of approximately $167.5 million, compared to $196.6
million reported by the Company as of January 15, 1999. During February and
March of 1999, the Company renegotiated several pending acquisitions to better
reflect current pricing and market conditions, resulting in purchase price
reductions. Further, the Company terminated negotiations with respect to one
large transaction and added a number of additional commitments at lower
pricing. The Company plans to finance the purchase price of pending
acquisitions primarily by borrowings under its revolving credit facilities.
After application of the proceeds from the above-mentioned equity offering,
additional capacity became available under the revolving credit facilities.
During the first quarter of 1999, Service Corporation International, one of
the Company's primary competitors for acquisitions, announced that it planned
to reduce significantly the level of its acquisition activity. The Loewen
Group Inc., previously a primary competitor for acquisitions, entered into
bankruptcy proceedings on June 1, 1999, after announcing that it had terminated
its acquisition activity and was offering a number of its own properties for
sale. In addition, the fourth largest public death care company and another of
the Company's competitors for acquisitions, Equity Corporation International,
merged with Service Corporation International. The Company believes that the
resulting decline in competition for acquisitions has allowed it to negotiate
prices for acquisitions at lower multiples than those paid by the Company
during fiscal year 1998 and prior years. Previously, the Company's objective
was to pay no more than eight times management's estimate of what an acquired
firm's EBIT (earnings before interest and taxes) would be for the first
twelve months after the acquisition, although the Company sometimes paid
somewhat higher prices for strategic reasons. In any case, management's
objective was for the acquired firm to be additive to the Company's earnings
per share in the first twelve months after its acquisition.
Under its new pricing parameters, the Company's objective is to pay six to
eight times management's estimate of what the acquired firm's EBIT would be for
the first twelve months after the acquisition and within eight times EBIT
overall, including strategic acquisitions. In any case, management's
objective is still for the acquired firm to be additive to the Company's
earnings per share in the first twelve months after its acquisition.
While the Company believes that it may be able to consummate acquisitions
during the remainder of fiscal year 1999 at lower multiples than it has paid
historically, there can be no assurance that this will be the case, and the
lower prices may cause some potential sellers to decide not to sell their
businesses.
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,
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.
INFLATION
Inflation has not had a significant impact on the Company's operations over
the past three years, nor is it expected to have a significant impact in the
foreseeable future. For a discussion of the impact of inflation in the Mexican
economy on the Company's financial statements, see Note (1)(d) to the Company's
consolidated financial statements in Item 1.
<PAGE>
OTHER
Year 2000 Issues
OVERVIEW. 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 third 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 95% were found to be compliant or made to
be compliant by completing Phases III through V. The remaining 5% 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 third quarter of fiscal year 1999.
Seventy 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
noncritical systems will be evaluated and brought into compliance by the end of
the third quarter of fiscal year 1999.
In addition, the Company has distributed surveys to all of its significant
vendors, financial institutions and insurers regarding their Year 2000
compliance. The Company has received responses from all of those third parties
whose non-compliance could have a material adverse effect on the Company's
operations. None of their responses have indicated significant problems.
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
$80,000 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, and
* 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 plan is adequate to achieve full system compliance 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' noncompliance. The Company
anticipates completing its contingency plan by the end of the third quarter of
fiscal year 1999.
Recent Accounting Standards
Statements of Financial Accounting Standards (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. 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 2001. The
effect of these pronouncements on the Company's consolidated financial
condition and results of operations is not expected to be material.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Quantitative and qualitative disclosure about market risk is presented in
Item 7A to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1998, filed with the Securities and Exchange Commission on January
21, 1999. The following disclosure discusses only those instances in which the
market risk has changed by more than 10% from the annual disclosure.
The market risk inherent in the Company's market risk sensitive instruments
and positions is the potential change arising from increases or decreases in
the prices of marketable equity securities, foreign currency exchange rates,
and interest rates as discussed below. Generally, the Company's market risk
sensitive instruments and positions are characterized as "other than trading."
The Company's exposure to market risk as discussed below includes "forward-
looking statements" and represents an estimate of possible changes in fair
value or future earnings that would occur assuming hypothetical future
movements in equity markets, foreign currency exchange rates or interest rates.
The Company's views on market risk are not necessarily indicative of actual
results that may occur and do not represent the maximum possible gains and
losses that may occur, since actual gains and losses will differ from those
estimated, based upon actual fluctuations in equity markets, foreign currency
exchange rates, interest rates and the timing of transactions.
MARKETABLE EQUITY SECURITIES
As of April 30, 1999, the Company's marketable equity securities consisted
principally of investments in its prearranged funeral, merchandise and
perpetual care trust and escrow accounts and had a fair value of $417.0 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 $41.7 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 the Company's Annual Report on
Form 10-K for the fiscal year ended October 31, 1998. 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 six months ended April 30, 1999, each 10%
change in the average exchange rate between such currencies and the U.S. dollar
would result in a change of approximately $3.8 million on an annualized basis
in the Company's pre-tax earnings.
The Company does not currently hedge its investments in foreign
subsidiaries; however, the Company continually monitors the exchange rates of
its foreign currencies to determine whether hedging transactions would be
appropriate.
INTEREST
The Company has entered into various fixed and variable rate debt
obligations, which are detailed in Note 11 to the Company's consolidated
financial statements included in the Company's Annual Report on Form 10-K for
the fiscal year ended October 31, 1998.
<PAGE>
As of April 30,1999, 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 $438.1 million, compared to fair value of
$432.7 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 $6.6 million in the fair value of these instruments.
If these instruments are held to maturity, the Company will not realize any
changes in fair value.
In order to hedge a portion of the interest rate risk associated with its
variable-rate debt, during the first quarter of 1999 the Company entered into a
three-year interest rate swap agreement involving a notional amount of $200
million. This agreement, which became effective March 4, 1999, effectively
converts $200 million of variable-rate debt bearing interest based on three-
month LIBOR to a fixed rate of 4.915%. The estimated fair value of the
interest rate swap as of April 30, 1999, based on quoted market prices, was
$3.3 million. A hypothetical 1% increase in the pay rate would result in an
increase in interest expense of approximately $2.0 million. A hypothetical 1%
increase in the receive rate would decrease interest expense by a corresponding
amount. Any fluctuations in the receive rate would be offset by a decrease
in interest expense on the Company's variable-rate debt, to the extent the
variable-rate debt is hedged by the interest swap. Also, in February 1999,
the Company applied approximately $215 million of the proceeds of its
public equity offering to the repayment of variable-rate debt. As of June 9,
1999, the Company had $921.5 million of outstanding borrowings, $296.0 million
of which was not hedged by the interest rate swap agreement and was subject
to short-term variable interest rates. Each 0.5% change in the average interest
rate applicable to the Company's unhedged variable-rate debt would result
in a change of approximately $0.1 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.
<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 April 30, 1999.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
The Company's 1999 annual meeting of shareholders was held on April 9, 1999.
All director nominees were elected. The voting tabulation was as follows:
William E. Rowe: 130,727,126 votes for; 959,243 votes withheld; James W.
McFarland: 130,816,838 votes for; 869,531 votes withheld; Kenneth C. Budde:
130,748,316 votes for; 938,053 votes withheld. The proposal to ratify the
appointment of PricewaterhouseCoopers LLP, certified public accountants, as
independent auditors for the fiscal year ending October 31, 1999 was approved.
The voting tabulation was as follows: 131,324,926 votes for; 176,447 votes
against; and 184,996 abstentions.
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 strategic plan for the future includes the following goals:
(i) achievement of annual revenues of $1 billion which the Company expects to
accomplish by fiscal year 2000; and (ii) earnings per share growth of 20%
annually.
The Company's goals for fiscal year 1999 include revenue growth of at least
20%. Although the Company has a goal for earnings per share growth of 20% for
the future, the Company currently estimates earnings per share growth of 17%
for fiscal year 1999 and 19% for fiscal year 2000 due to the dilutive effect on
earnings per share of the sale of 13.6 million shares of Class A Common Stock
in February 1999. Such shares were sold at a lower price than had been
anticipated because of adverse market conditions caused primarily by Service
Corporation's announcement of declining earnings.
In addition, the Company is currently comfortable with expectations
of $225 million in acquisition commitments in fiscal year 1999, although part
of these acquisitions may not close until fiscal year 2000. For additional
information regarding factors affecting the Company's acquisition program, see
"Liquidity and Capital Resources" in Item 2. For fiscal year 1999, the
Company's gross margin improvement goal is approximately 50 to 100 basis
points over its fiscal year 1998 gross margin.
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.
<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)
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 March 10, 1999, reporting, under "Item 5.
Other Events," the earnings release for the quarter ended January 31, 1999.
<PAGE>
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.
June 14, 1999 /s/ KENNETH C. BUDDE
----------------------------
Kenneth C. Budde
Executive Vice President
Chief Financial Officer
June 14, 1999 /s/ MICHAEL G. HYMEL
----------------------------
Michael G. Hymel
Vice President
Corporate Controller
Chief Accounting Officer
Exhibit 12
<TABLE>
<CAPTION>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES
(DOLLARS IN THOUSANDS)
(UNAUDITED)
YEARS ENDED OCTOBER 31, SIX MONTHS
-------------------------------------------------------------- ENDED
1994 1995 1996 1997 1998 APRIL 30, 1999
-------- -------- -------- -------- -------- ------------------
<S> <C> <C> <C> <C> <C> <C>
Earnings before income taxes................... $ 42,198 $ 41,500(1) $ 82,075 $ 106,477(2) $ 64,964(3) $ 92,409
Fixed charges:
Interest expense............................. 8,877 22,815 26,051 38,031 43,821 27,195
Interest portion of lease expense............ 935 1,343 1,522 2,181 3,084 1,440
--------- --------- --------- --------- --------- ---------
Total fixed charges............................ 9,812 24,158 27,573 40,212 46,905 28,635
Earnings before income taxes and fixed charges. $ 52,010 $ 65,658(1) $ 109,648 $ 146,689(2) $ 111,869(3) $ 121,044
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges............. 5.30 2.72(1) 3.98 3.65(2) 2.39(3) 4.23
========= ========= ========= ========= ========= =========
</TABLE>
_____________________________
(1) Includes a nonrecurring, noncash charge of $17,252 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 nonrecurring, noncash charge of $76,762 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
<S> <C>
<PERIOD-TYPE> 6-MOS
<FISCAL-YEAR-END> OCT-31-1998
<PERIOD-END> APR-30-1999
<CASH> 34,923
<SECURITIES> 7,890
<RECEIVABLES> 211,349
<ALLOWANCES> 0
<INVENTORY> 52,679
<CURRENT-ASSETS> 313,918
<PP&E> 532,619
<DEPRECIATION> 117,436
<TOTAL-ASSETS> 2,385,191
<CURRENT-LIABILITIES> 132,538
<BONDS> 900,897
<COMMON> 111,708
0
0
<OTHER-SE> 1,014,399
<TOTAL-LIABILITY-AND-EQUITY> 2,385,191
<SALES> 385,178
<TOTAL-REVENUES> 385,178
<CGS> 260,560
<TOTAL-COSTS> 260,560
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 27,195
<INCOME-PRETAX> 92,409
<INCOME-TAX> 33,729
<INCOME-CONTINUING> 58,680
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 58,680
<EPS-BASIC> .56
<EPS-DILUTED> .56
</TABLE>
