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, 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
September 8, 1999, was 105,044,572 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, 1999 and 1998................. 3
Consolidated Statements of Earnings -
Nine Months Ended July 31, 1999 and 1998.................. 4
Consolidated Balance Sheets -
July 31, 1999 and October 31, 1998........................ 5
Consolidated Statement of Shareholders' Equity -
Nine Months Ended July 31, 1999........................... 7
Consolidated Statements of Cash Flows -
Nine Months Ended July 31, 1999 and 1998.................. 8
Notes to Consolidated Financial Statements.................. 10
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations....... 18
Item 3. Quantitative and Qualitative Disclosures
About Market Risk................................... 26
PART II. OTHER INFORMATION
Item 1. Legal Proceedings................................... 28
Item 5. Other Information................................... 28
Item 6. Exhibits and Reports on Form 8-K.................... 32
SIGNATURES.................................................. 33
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JULY 31,
---------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Funeral.................................... $ 120,844 $ 96,561
Cemetery................................... 81,622 72,527
--------- ---------
202,466 169,088
--------- ---------
Costs and expenses:
Funeral.................................... 80,668 66,191
Cemetery................................... 59,379 51,566
--------- ---------
140,047 117,757
--------- ---------
Gross profit............................... 62,419 51,331
Corporate general and administrative expenses. 5,012 4,139
--------- ---------
Operating earnings......................... 57,407 47,192
Interest expense, net......................... (13,224) (10,827)
Other income.................................. 1,328 1,057
--------- ---------
Earnings before income taxes............... 45,511 37,422
Income taxes.................................. 16,612 13,098
--------- ---------
Net earnings............................... $ 28,899 $ 24,324
========= =========
Net earnings per share:
Basic...................................... $ .26 $ .25
========= =========
Diluted.................................... $ .26 $ .25
========= =========
Weighted average shares outstanding
(in thousands):
Basic...................................... 111,752 97,784
========= =========
Diluted.................................... 112,196 98,616
========= =========
Dividends per share........................... $ .02 $ .02
========= =========
</TABLE>
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)
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
----------------------------
1999 1998
------------ ------------
<S> <C> <C>
Revenues:
Funeral.................................... $ 353,485 $ 275,231
Cemetery................................... 234,159 197,744
--------- ---------
587,644 472,975
--------- ---------
Costs and expenses:
Funeral.................................... 234,040 186,261
Cemetery................................... 166,567 139,720
--------- ---------
400,607 325,981
--------- ---------
Gross profit............................... 187,037 146,994
Corporate general and administrative expenses. 13,360 12,307
--------- ---------
Operating earnings before performance-
based stock options....................... 173,677 134,687
Performance-based stock options............... - 76,762
--------- ---------
Operating earnings......................... 173,677 57,925
Interest expense, net......................... (38,718) (29,527)
Other income.................................. 2,961 2,764
--------- ---------
Earnings before income taxes............... 137,920 31,162
Income taxes.................................. 50,341 10,938
--------- ---------
Net earnings............................... $ 87,579 $ 20,224
========= =========
Net earnings per share:
Basic...................................... $ .82 $ .21
========= =========
Diluted.................................... $ .81 $ .21
========= =========
Weighted average shares outstanding
(in thousands):
Basic...................................... 107,068 97,578
========= =========
Diluted.................................... 107,604 98,368
========= =========
Dividends per share........................... $ .06 $ .04
========= =========
</TABLE>
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>
JULY 31, OCTOBER 31,
ASSETS 1999 1998
---------- -------- --------
<S> <C> <C>
Current assets:
Cash and cash equivalent investments............ $ 22,224 $ 30,733
Marketable securities........................... 47,678 6,120
Receivables, net of allowances.................. 206,792 158,461
Inventories..................................... 50,416 43,846
Prepaid expenses................................ 7,407 3,870
---------- ----------
Total current assets......................... 334,517 243,030
Receivables due beyond one year, net of allowances. 315,449 257,773
Intangible assets.................................. 643,632 573,006
Deferred charges................................... 114,773 100,432
Cemetery property, at cost......................... 438,154 382,972
Property and equipment, at cost:
Land............................................ 82,077 75,032
Buildings....................................... 312,203 284,590
Equipment and other............................. 151,079 127,951
---------- ----------
545,359 487,573
Less accumulated depreciation................... 121,511 105,834
---------- ----------
Net property and equipment...................... 423,848 381,739
Long-term investments.............................. 42,905 68,014
Merchandise trust, less estimated cost to deliver.. 57,282 36,671
Other assets....................................... 8,846 5,301
---------- ----------
$2,379,406 $2,048,938
========== ==========
</TABLE>
(continued)
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
JULY 31, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998
-------------------------------------- -------- --------
<S>
Current liabilities: <C> <C>
Current maturities of long-term debt........... $ 12,078 $ 11,219
Accounts payable............................... 16,943 14,253
Accrued payroll................................ 19,007 20,847
Accrued insurance.............................. 11,437 12,420
Accrued interest............................... 6,137 13,440
Accrued other.................................. 16,777 18,931
Income taxes payable........................... 21,466 8,245
Deferred income taxes.......................... 14,134 13,967
---------- ----------
Total current liabilities................... 117,979 113,322
Long-term debt, less current maturities........... 921,350 913,215
Deferred income taxes............................. 97,131 92,231
Deferred revenue.................................. 89,339 81,371
Other long-term liabilities....................... 11,638 9,509
---------- ----------
Total liabilities........................... 1,237,437 1,209,648
---------- ----------
Commitments and contingencies (Notes 3 and 7)
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 108,244,572 and
94,472,844 shares at July 31, 1999,
and October 31, 1998, respectively....... 108,245 94,473
Class B authorized 5,000,000 shares; issued
and outstanding 3,555,020 shares at July
31, 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..................... 699,261 492,177
Retained earnings.............................. 396,287 315,140
Cumulative foreign translation adjustment...... (63,559) (64,887)
Unrealized depreciation of investments......... (1,820) (1,168)
---------- ----------
Total shareholders' equity.................. 1,141,969 839,290
---------- ----------
$2,379,406 $2,048,938
========== ==========
</TABLE>
See accompanying notes to consolidated financial statements.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
<TABLE>
<CAPTION>
COMMON STOCK CUMULATIVE UNREALIZED
-------------------------------- 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................... 87,579 87,579
Other comprehensive income:
Foreign translation
adjustment................. 1,328 1,328
Unrealized depreciation of
investments................ (1,026) (1,026)
Deferred income tax benefit
on unrealized depreciation
of investments............. 374 374
-------- --------- --------- --------- --------- -------- ----------
Total other comprehensive
income..................... 1,328 (652) 676
-------- --------- --------- --------- --------- -------- ----------
Total comprehensive income..... 87,579 1,328 (652) 88,255
Sales of common stock............ 13,742 13,742 206,712 220,454
Subsidiaries acquired with
common stock................... 19 19 281 300
Stock options exercised.......... 11 11 91 102
Dividends ($.06 per share)....... (6,432) (6,432)
-------- --------- --------- --------- --------- -------- ----------
Balance July 31, 1999............ 111,800 $ 111,800 $ 699,261 $ 396,287 $ (63,559) $ (1,820) $1,141,969
======== ========= ========= ========= ========= ======== ==========
</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>
NINE MONTHS ENDED JULY 31,
--------------------------
1999 1998
--------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings....................................... $ 87,579 $ 20,224
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Performance-based stock options................. - 76,762
Depreciation and amortization................... 37,325 24,431
Provision for doubtful accounts................. 20,096 18,313
Net gains on sales of marketable securities..... (5,005) (2,727)
Benefit for deferred income taxes............... (484) (1,887)
Changes in assets and liabilities net of effects
from acquisitions:
Increase in prearranged funeral trust
receivables.................................. (15,295) (8,779)
Increase in other receivables................. (70,714) (59,673)
Increase in other deferred charges and
intangible assets............................ (8,270) (11,013)
Increase in inventories and cemetery property. (4,648) (9,817)
Increase in merchandise trust, less estimated
cost to deliver merchandise.................. (26,720) (17,355)
Decrease in accounts payable and accrued
expenses..................................... (4,508) (12,227)
Decrease in other............................. (6,101) (1,905)
--------- ---------
Net cash provided by operating activities..... 3,255 14,347
--------- ---------
Cash flows from investing activities:
Changes in prearranged funeral contracts, net...... (23,822) (17,796)
Proceeds from sales of marketable securities....... 16,371 21,496
Purchases of marketable securities and long-term
investments...................................... (23,914) (36,885)
Purchases of subsidiaries, net of cash, seller
financing and stock issued....................... (158,637) (119,483)
Additions to property and equipment................ (33,525) (29,958)
Other.............................................. 581 2,285
--------- ---------
Net cash used in investing activities......... (222,946) (180,341)
--------- ---------
</TABLE>
(continued)
<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,
-------------------------
1999 1998
---------- ---------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt......................... $ 228,465 $ 492,440
Repayments of long-term debt......................... (230,696) (265,768)
Retirement of performance-based stock options........ - (69,431)
Issuance of common stock............................. 220,556 11,706
Dividends............................................ (6,432) (3,905)
Purchase and retirement of common stock.............. - (9,101)
--------- ---------
Net cash provided by financing activities......... 211,893 155,941
--------- ---------
Effect of exchange rates on cash and cash equivalents... (711) (2,423)
--------- ---------
Net decrease in cash.................................... (8,509) (12,476)
Cash and cash equivalents, beginning of period.......... 30,733 31,640
--------- ---------
Cash and cash equivalents, end of period................ $ 22,224 $ 19,164
========= =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes...................................... $ 34,700 $ 11,500
Interest.......................................... $ 46,000 $ 29,700
Noncash investing and financing activity:
Subsidiaries acquired with common stock........... $ 300 $ 7,705
</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 July 31, 1999, the Company owned and operated 629 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 nine months ended July 31, 1999,
foreign operations contributed approximately 20 percent of total revenue and,
as of July 31, 1999, represented approximately 20 percent 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, 1999, and for the three and nine months ended
July 31, 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 nine months ended July 31, 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 nine 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) Funeral Revenue
The company sells prearranged funeral services and funeral merchandise under
contracts that provide for delivery of the services and merchandise at the time
of death. Prearranged funeral services are recorded as funeral revenue in the
period the funeral is performed. Prearranged funeral merchandise is recognized
as revenue upon delivery in jurisdictions where such sales are included in
funeral and insurance contracts. The Company considers prearranged funeral
contracts to be investments in future funeral revenue made to retain and expand
future market share. Accordingly, the cash flow item related to prearranged
funeral contracts "changes in prearranged funeral contracts, net" has been
reclassified from cash flows from operating activities to cash flows from
investing activities. For comparative purposes, reclassification was also made
to the 1998 consolidated statement of cash flows.
Commissions and direct marketing costs relating to prearranged funeral
services and prearranged funeral merchandise sales are accounted for in the
same manner as the revenue to which they relate. Where revenue is deferred,
the related commissions and direct marketing costs are deferred and amortized
as the funeral contracts are fulfilled. Conversely, where revenues are
recognized currently, the related costs are expensed as incurred. Indirect
costs of marketing prearranged funeral services are expensed in the period in
which incurred.
Prearranged funeral services and merchandise generally are funded either
through trust funds or escrow accounts established by the Company or through
insurance. Principal amounts deposited in the trust funds or escrow accounts
are available to the Company as funeral services and merchandise are delivered
and are refundable to the customer in those situations where state law provides
for the return of those amounts under the purchaser's option to cancel the
contract. Certain jurisdictions provide for non-refundable trust funds or
escrow accounts, allowing the Company to receive such amounts upon cancellation
by the customer. Under prearranged funeral services and merchandise funded
through insurance purchased by customers from third party insurance companies,
the Company earns a commission on the sale of the policies. Commissions, net
of related expenses, are recognized at the point at which the commission is no
longer subject to refund. Policy proceeds are available to the Company as
funeral services and merchandise are delivered.
Earnings are withdrawn only as funeral services and merchandise are
delivered or contracts are cancelled, except in jurisdictions that permit
earnings to be withdrawn currently and in unregulated jurisdictions where
escrow accounts are used.
Funeral services sold at the time of need are recorded as funeral revenue in
the period the funeral is performed.
(f) Cemetery Revenue
The Company recognizes income currently from unconstructed mausoleum crypts
sold to the extent it has available inventory. Costs of mausoleum and lawn
crypts sold but not yet constructed are based upon management's estimated cost
to construct those items.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(1) BASIS OF PRESENTATION--(CONTINUED)
In certain jurisdictions in which the Company operates, local law or
contracts with customers generally require that a portion of the sale price of
prearranged cemetery merchandise be placed in trust funds or escrow accounts.
In those jurisdictions where trust or escrow arrangements are neither
statutorily nor contractually required, the Company typically deposits on a
voluntary basis approximately 110 percent of the cost of the cemetery
merchandise into escrow accounts. The Company recognizes as revenue on a
current basis all dividends and interest earned, and net capital gains
realized, by prearranged merchandise trust funds or escrow accounts. At the
same time, the liability for the estimated cost to deliver merchandise is
adjusted through a charge to earnings to reflect inflationary merchandise cost
increases. Principal and earnings are withdrawn only as the merchandise is
delivered or contracts are cancelled.
Pursuant to perpetual care contracts and laws, a portion, generally 10
percent, of the proceeds from cemetery property sales is deposited into
perpetual care trust funds or escrow accounts. In addition, in those
jurisdictions where trust or escrow arrangements are neither statutorily nor
contractually required, the Company typically deposits on a voluntary basis a
portion, generally 10 percent, of the sale price into escrow accounts. The
income from these funds, which have been established in most jurisdictions in
which the Company operates cemeteries, is used for maintenance of those
cemeteries; but principal, including in some jurisdictions net realized capital
gains, must generally be held in perpetuity. Accordingly, the trust fund
corpus is not reflected in the Company's consolidated financial statements,
except for voluntary escrow funds established by the Company, which are
classified as long-term investments. The Company recognizes and withdraws
currently all dividend and interest income earned and, where permitted, capital
gains realized by perpetual care funds.
A portion of the sales of cemetery property and merchandise is made under
installment contracts bearing interest at prevailing rates. Finance charges
are recognized as cemetery revenue under the effective interest method over the
terms of the related installment receivables.
(g) 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.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(1) BASIS OF PRESENTATION--(CONTINUED)
(h) 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.
(i) Reclassifications
Certain reclassifications have been made to the 1998 consolidated financial
statements to conform to the presentation used in the 1999 consolidated
financial statements. These reclassifications had no effect on net earnings or
shareholders' equity.
(2) ACQUISITIONS
During the nine months ended July 31, 1999, the Company purchased 78 funeral
homes and 17 cemeteries, compared to 127 funeral homes and four cemeteries
purchased during the nine months ended July 31, 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 nine months
ended July 31, 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.
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
1999 1998
-------- --------
(Unaudited)
<S> <C> <C>
Revenues........................................ $ 606,784 $ 511,683
========= =========
Operating earnings before performance-based
stock options................................. $ 174,911 $ 136,640
========= =========
Net earnings.................................... $ 85,820 $ 16,206
========= =========
Basic earnings per share........................ $ .80 $ .17
========= =========
Diluted earnings per share...................... $ .80 $ .16
========= =========
Weighted average shares outstanding
(in thousands):
Basic........................................ 107,078 97,597
========= =========
Diluted...................................... 107,613 98,387
========= =========
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(2) ACQUISITIONS--(CONTINUED)
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
<TABLE>
<CAPTION>
NINE MONTHS ENDED JULY 31,
--------------------------
1999 1998
------------- ------------
(Unaudited)
<S> <C> <C>
Current assets.................................. $ 27,726 $ 12,407
Receivables due beyond one year................. 70 1,615
Cemetery property............................... 54,386 9,138
Property and equipment, net..................... 25,820 20,486
Deferred charges and other assets............... 862 911
Intangible assets, net.......................... 87,980 120,653
Current liabilities............................. (12,854) (11,382)
Long-term debt.................................. (12,873) (24,733)
Other long-term liabilities..................... (12,180) (1,907)
--------- ---------
158,937 127,188
Common stock used for acquisitions.............. 300 7,705
--------- ---------
Cash used for acquisitions...................... $ 158,637 $ 119,483
========= =========
</TABLE>
(3) CONTINGENCIES
Subsequent to the close of the third quarter, a number of purported
securities class action lawsuits were filed in the United States District Court
for the Eastern District of Louisiana against the Company, certain of its
directors and officers and, in certain lawsuits, the Company's lead underwriter
in its January 1999 common stock offering. The purported class actions are Jim
A. Darby v. Stewart Enterprises, Inc., Joseph P. Henican, III, William E. Rowe,
Frank B. Stewart, Jr. and Bear Stearns & Co., Inc., C.A. No. 99-2601 (filed
August 25, 1999); Richard Eizenga v. Stewart Enterprises, Inc., Frank B.
Stewart, Jr., William E. Rowe and Joseph P. Henican, III, C.A. No. 99-2572
(filed August 23, 1999); Steven Eline v. Stewart Enterprises, Inc., Joseph P.
Henican, III, William E. Rowe, Frank B. Stewart, Jr. and Bear Stearns & Co.,
Inc., C.A. No. 99-2663 (filed August 30, 1999); Jacob Weiss v. Stewart
Enterprises, Inc., Frank B. Stewart, Jr., William E. Rowe and Joseph P.
Henican, III, C.A. No. 99-2672 (filed August 31, 1999); Leon Kramer v. Stewart
Enterprises, Inc., Frank B. Stewart, Jr., William E. Rowe and Joseph P.
Henican, III, C.A. No. 99-2687 (filed September 1, 1999); Creciente Oceanica
Armadora S.A. v. Frank B. Stewart, Jr., William E. Rowe, Joseph P. Henican,
III and Stewart Enterprises, Inc., C.A. No. 99-2716 (filed September 3, 1999);
Harris Blackman v. Stewart Enterprises, Inc., Frank B. Stewart, Jr., William E.
Rowe and Joseph P. Henican, III, C.A. No. 99-2773 (filed September 10, 1999);
and Thomas J. Aubrey v. Stewart Enterprises, Inc., Joseph P. Henican, III,
William E. Rowe and Frank B. Stewart, Jr., C.A. No. 99-2753 (filed September 9,
1999).
The complaints allege violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder on behalf of purchasers of
the Company's common stock during varying periods beginning on October 1, 1998,
through August 12, 1999. Plaintiffs generally allege that the defendants
made false and misleading statements and failed to disclose allegedly
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(3) CONTINGENCIES--(CONTINUED)
material information in the prospectus relating to the January 1999 common
stock offering and in certain of the Company's other public filings and
announcements. The plaintiffs also allege that these allegedly false and
misleading statements and omissions permitted the Chairman of the Company's
Board of Directors to sell Company common stock during the class period at
inflated market prices. The remedies sought by the plaintiffs include
designation of the actions as class actions, unspecified damages, attorneys'
and experts' fees and costs, rescission to the extent any members of the class
still hold the Company's common stock, and such other relief as the court deems
proper.
Although the outcome of these actions and the cost of defending them cannot
be predicted at this time, the Company believes that the claims are without
merit and intends to defend itself vigorously.
(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
----------- ------------- ----------
<S> <C> <C> <C>
THREE MONTHS ENDED JULY 31, 1999
- --------------------------------
Net earnings.......................................... $ 28,899
========
Basic earnings per share:
Net earnings available to common shareholders...... $ 28,899 111,752 $ .26
=====
Effect of dilutive securities:
Time-vest stock options assumed exercised.......... - 444
-------- -------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised.. $ 28,899 112,196 $ .26
======== ======= =====
</TABLE>
<TABLE>
<CAPTION>
EARNINGS SHARES PER-SHARE
(NUMERATOR) (DENOMINATOR) DATA
------------ ------------- ---------
<S> <C> <C> <C>
NINE MONTHS ENDED JULY 31, 1999
- -------------------------------
Net earnings.......................................... $ 87,579
========
Basic earnings per share:
Net earnings available to common shareholders...... $ 87,579 107,068 $ .82
=====
Effect of dilutive securities:
Time-vest stock options assumed exercised.......... - 536
-------- -------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised.. $ 87,579 107,604 $ .81
======== ======= =====
</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)
<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>
Options to purchase 1,738,834 and 1,516,036 shares of common stock at prices
ranging from $16.50 to $27.25 were outstanding during the three and nine
months ended July 31, 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 as of July 31, 1999.
(6) 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
$200,000. This agreement, which became effective March 4, 1999, effectively
converts $200,000 of variable-rate debt bearing interest based on three-month
LIBOR to a fixed rate based on the swap rate of 4.915 percent. 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 July 31, 1999, was $6,410.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
(7) SUBSEQUENT EVENTS
Subsequent to July 31, 1999, the Company acquired or entered into letters of
intent or definitive agreements to acquire 10 funeral homes and 6 cemeteries
for purchase prices aggregating approximately $14,928.
On August 18, 1999, the Company announced that the Board of Directors had
authorized the repurchase of up to 5 percent of its then outstanding common
stock, or approximately 5.6 million shares. The repurchase is limited to the
Company's Class A Common Stock and will be made in the open market or in
privately negotiated transactions at such times and in such amounts as
management deems appropriate, depending on market conditions and other factors.
As of September 10, 1999, the Company had purchased approximately 3.6 million
shares for $20,982, or $5.83 per share.
<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 that is deferred to offset estimated increases in
the future costs of performing prearranged funeral services. Income from
funds, especially those invested partially in common stock, can be materially
affected by prevailing interest rates and the performance of the stock market.
In managing its North American funds (including those in Puerto Rico and Canada
but excluding those in Mexico), which include investments in common stock, the
Company seeks an overall annual rate of return of approximately 8.5 percent to
9.0 percent. 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 July 31, 1999 Compared to Three Months Ended July 31, 1998
Funeral Segment
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
------------------
1999 1998 INCREASE
-------- -------- --------
(In millions)
<S> <C> <C> <C>
FUNERAL REVENUE
------------------
Existing Operations................................ $ 86.2 $ 83.3 $ 2.9
Acquired Operations............................... 21.7 5.5 16.2
Revenue from prearranged funeral trust funds and
escrow accounts................................... 12.9 7.8 5.1
------ ------ ------
$120.8 $ 96.6 $ 24.2
====== ====== ======
FUNERAL COSTS
----------------
Existing Operations................................ $ 63.4 $ 61.7 $ 1.7
Acquired Operations................................ 17.3 4.5 12.8
------ ------ ------
$ 80.7 $ 66.2 $ 14.5
====== ====== ======
Funeral Segment Profit............................. $ 40.1 $ 30.4 $ 9.7
====== ====== ======
</TABLE>
Funeral revenue increased $24.2 million, or 25 percent, for the three months
ended July 31, 1999, compared to the corresponding period in 1998. The Company
experienced a $2.9 million, or 3.5 percent, increase in revenue from Existing
Operations as a result of a 3.1 percent increase in the average revenue per
domestic funeral service performed by Existing Operations (5.0 percent 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. This increase was partially offset by a 3.8 percent
(582 events) decrease in the number of domestic funeral services performed by
Existing Operations (4.1 percent (1,094 events) decrease worldwide).
Existing Operations achieved improved profit margins resulting primarily
from increased cost control measures, including the Company's centralization
and standardization of certain financial and administrative functions through
the Company's Shared Services Center and the increased average revenue per
funeral service mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of funeral homes from August 1998
through July 1999 which are not reflected in the 1998 period presented above.
The $5.1 million increase in revenue from prearranged funeral trust funds
and escrow accounts was primarily attributable to a 28 percent growth in the
average balance in the Company's North American trust funds and escrow accounts
(excluding those in Mexico), resulting principally from current year customer
payments deposited into the funds and funds added through acquisitions, coupled
with an increase in the average yield on those funds. The remainder of the
increase is primarily due to an increase in the return on the peso-denominated
investments of the Company's Mexican subsidiaries. The return on these
investments, which comprise less than 10 percent of the Company's total funeral
trust portfolio, averaged 22 percent for the current quarter on an annualized
basis. The high rate of return on the Mexican funds was partially offset by
the approximate 17 percent inflation experienced in Mexico over the last 12
months.
Historically, one of the Company's goals has been to achieve 5 percent to 7
percent increases annually in the average revenue per funeral service performed
by Existing Operations through a combination of price increases and
improvements in merchandising. For the three months ended July 31, 1999, the
average revenue per funeral service performed by existing funeral homes
increased 3.1 percent domestically and 5.0 percent worldwide, excluding the
effect of foreign currency translation, which are below and at the low end of
this objective, respectively. Because of intense and growing competition from
low-cost funeral service and merchandise providers in certain key markets, the
Company has recently lowered its goals for increases in the average revenue per
funeral service performed to 2 to 3 percent annually. See the Company's
forward-looking statements in Part II, Item 5.
For the three months ended July 31, 1999, the Company experienced a
shortfall in expected funeral revenue of approximately $11.0 million due to the
following: a $4.5 million shortfall from Existing Operations due to the
decline in the number of funeral services performed and an average revenue per
funeral service performed below expectations; a $2.5 million shortfall from
Acquired Operations due to the decline in the number of funeral services
performed and an average revenue per funeral service performed below
expectations; a $7.0 million shortfall from anticipated acquisitions that were
not completed; partially offset by approximately $3.0 million in trust earnings
above expectations.
Cemetery Segment
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JULY 31,
------------------ INCREASE
1999 1998 (DECREASE)
------ ------ ----------
(In millions)
<S> <C> <C> <C>
CEMETERY REVENUE
- ---------------------
Existing Operations.................................... $ 66.2 $ 66.5 $ (0.3)
Acquired Operations.................................... 10.5 1.6 8.9
Revenue from merchandise trust funds and
escrow accounts....................................... 4.9 4.4 0.5
------- ------- ------
$ 81.6 $ 72.5 $ 9.1
======= ======= ======
CEMETERY COSTS
- ---------------------
Existing Operations.................................... $ 50.1 $ 50.9 $ (0.8)
Acquired Operations.................................... 9.3 0.7 8.6
------- ------- ------
$ 59.4 $ 51.6 $ 7.8
======= ======= ======
Cemetery Segment Profit................................ $ 22.2 $ 20.9 $ 1.3
======= ======= ======
</TABLE>
<PAGE>
Cemetery revenue increased $9.1 million, or 12.6 percent, for the three
months ended July 31, 1999, compared to the corresponding period in 1998. The
Company experienced a $0.3 million, or 0.5 percent, decrease in revenue from
Existing Operations resulting primarily from lower than anticipated preneed
sales in certain key markets and a lower yield on its perpetual care trust
funds.
The improved profit margin achieved by Existing Operations was attributable
principally to 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 August 1998 through
July 1999, which are not reflected in the 1998 period presented above.
The $0.5 million increase in revenue from merchandise trust funds and escrow
accounts was attributable to a 24 percent growth in the average balance in the
merchandise trust funds and escrow accounts, resulting from current year
customer payments deposited into the funds and funds added through
acquisitions, offset by a decrease in the average yield on the funds.
The Company experienced a shortfall in expected cemetery revenue during the
quarter of approximately $5.0 million due principally to the lower than
anticipated preneed cemetery sales in certain key markets as discussed above.
Other
Net interest expense increased $2.4 million during the third 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 6.4 percent in
1998 to 5.9 percent in 1999 and an increase in the investment earnings on
excess cash.
Nine Months Ended July 31, 1999 Compared to Nine Months Ended July 31, 1998
Funeral Segment
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
------------------ INCREASE
1999 1998 (DECREASE)
------ ------ ----------
(In millions)
<S> <C> <C> <C>
FUNERAL REVENUE
- ---------------------
Existing Operations.................................. $ 245.2 $ 238.6 $ 6.6
Acquired Operations.................................. 74.4 16.1 58.3
Revenue from prearranged funeral trust funds and
escrow accounts..................................... 33.9 20.5 13.4
------- ------- ------
$ 353.5 $ 275.2 $ 78.3
======= ======= ======
FUNERAL COSTS
- -------------------
Existing Operations.................................. $ 172.3 $ 172.4 $ (0.1)
Acquired Operations.................................. 61.7 13.9 47.8
------- ------- ------
$ 234.0 $ 186.3 $ 47.7
======= ======= ======
Funeral Segment Profit............................... $ 119.5 $ 88.9 $ 30.6
======= ======= ======
</TABLE>
Funeral revenue increased $78.3 million, or 28.5 percent, for the nine
months ended July 31, 1999, compared to the corresponding period in 1998. The
Company experienced a $6.6 million, or 2.8 percent, increase in revenue from
Existing Operations as a result of a 2.9 percent increase in the average
revenue per domestic funeral service performed by Existing Operations (5.3
percent increase worldwide, excluding the effect of foreign currency
translation), primarily due to price increases and improved merchandising.
Partially offsetting this increase was a 2.8 percent (1,290 events) decrease in
the number of domestic funeral services performed by Existing Operations (3.3
percent (2,386 events) decrease worldwide).
<PAGE>
The $0.1 million, or 0.1 percent, 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 of funeral homes from August 1998
through July 1999 which are not reflected in the 1998 period presented above.
The $13.4 million increase in revenue from prearranged funeral trust funds
and escrow accounts was attributable to a 28 percent growth in the average
balance in the Company's North American trust funds and escrow accounts
(excluding those in Mexico), resulting principally from current year customer
payments deposited into the funds and funds added through acquisitions, coupled
with an increase in the average yield on those funds. The remainder of the
increase is primarily due to an increase in the return on the peso-denominated
investments of the Company's Mexican subsidiaries. The return on these
investments, which comprise less than 10 percent of the Company's total funeral
trust portfolio, averaged 23 percent for the nine months ended July 31, 1999,
on an annualized basis. The high rate of return on the Mexican funds was
partially offset by the approximate 17 percent inflation experienced in Mexico
over the last 12 months.
Historically, one of the Company's goals has been to achieve 5 percent to 7
percent increases annually in the average revenue per funeral service performed
by Existing Operations through a combination of price increases and
improvements in merchandising. For the nine months ended July 31, 1999, the
average revenue per funeral service performed by existing funeral homes
increased 2.9 percent domestically and 5.3 percent worldwide, excluding the
effect of foreign currency translation, which are below and at the low end of
this objective, respectively. Because of intense and growing competition from
low-cost funeral service and merchandise providers in certain key markets, the
Company has revised its goals for increases in the average revenue per funeral
service performed to 2 to 3 percent annually. See the Company's forward-
looking statements in Part II, Item 5.
Cemetery Segment
<TABLE>
<CAPTION>
NINE MONTHS ENDED
JULY 31,
------------------
1999 1998 INCREASE
-------- -------- --------
(In millions)
<S> <C> <C> <C>
CEMETERY REVENUE
- ------------------------
Existing Operations.................................... $ 194.9 $ 183.1 $ 11.8
Acquired Operations.................................... 25.0 4.1 20.9
Revenue from merchandise trust funds and
escrow accounts....................................... 14.3 10.5 3.8
-------- -------- ------
$ 234.2 $ 197.7 $ 36.5
======== ======== ======
CEMETERY COSTS
- --------------------
Existing Operations.................................... $ 144.5 $ 136.9 $ 7.6
Acquired Operations.................................... 22.1 2.8 19.3
-------- -------- ------
$ 166.6 $ 139.7 $ 26.9
======== ======== ======
Cemetery Segment Profit................................ $ 67.6 $ 58.0 $ 9.6
======== ======== ======
</TABLE>
Cemetery revenue increased $36.5 million, or 18.5 percent, for the nine
months ended July 31, 1999, compared to the corresponding period in 1998, due
principally to an $11.8 million, or 6.4 percent, 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.
<PAGE>
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of cemeteries from August 1998 through
July 1999, which are not reflected in the 1998 period presented above.
The $3.8 million increase in revenue from merchandise trust funds and escrow
accounts was attributable to a 23 percent growth in the average balance in the
merchandise trust funds and escrow accounts, resulting from current year
customer payments deposited into the funds and funds added through
acquisitions, coupled with an increase in the average yield on the 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 stock 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.
Net interest expense increased $9.2 million during the first nine 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 percent in
1998 to 6.0 percent in 1999 and an increase in the investment earnings on
excess cash.
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 percent and
receive three-month LIBOR. The swap expires on March 4, 2002.
As of July 31, 1999, the Company's outstanding borrowings totaled $933.4
million. Of the total amount outstanding, including the portion subject to the
interest rate swap agreement, approximately 67 percent was fixed-rate debt,
with the remaining 33 percent subject to short-term variable interest rates
averaging approximately 5.3 percent.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $69.9 million at July 31,
1999, an increase of approximately $33.0 million from October 31, 1998. The
Company provided cash of $3.3 million in its operations for the nine months
ended July 31, 1999, compared to $14.3 million in its operations for the
corresponding period in 1998, due principally to an increase in net earnings,
partially offset by an increase in receivables and other working capital
changes.
Long-term debt at July 31, 1999, amounted to $933.4 million, compared to
$924.4 million at October 31, 1998. The Company's long-term debt consisted of
$509.0 million under the Company's revolving credit facilities, $401.0 million
of long-term notes and $23.4 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 $2.9
million of term notes incurred principally in connection with acquisitions.
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 and had a ratio of total debt-to-
equity of 0.8 to 1.0 and 1.1 to 1.0 as of July 31, 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 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.
As of September 8, 1999, the Company had a debt-to-equity ratio of
approximately .8 to 1.0 and $490.4 million of additional borrowing capacity
within the 1.25 to 1.0 debt-to-equity parameter, $92.7 million of which was
available under its revolving credit facilities.
Subsequent to July 31, 1999 and through September 10, 1999, the Company has
repurchased approximately 3.6 million shares of Class A Common Stock for
approximately $21.0 million, or $5.83 per share (see Note 7 to the Consolidated
Financial Statements).
The Company's ratio of earnings to fixed charges was as follows for the
years and period indicated:
NINE MONTHS
YEARS ENDED OCTOBER 31, ENDED
------------------------------------------------------- JULY 31,
1994 1995 1996 1997 1998 1999
---- ---- ---- ---- ---- -----------
5.30 2.72(1) 3.98 3.65(2) 2.38(3) 4.16
- ---------------------
(1)Pretax earnings for fiscal year 1995 include 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 include 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 4.00.
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, 1999, the Company completed
acquisitions of 78 funeral homes and 17 cemeteries for purchase prices
aggregating approximately $154.0 million, which was funded primarily with
advances under the Company's revolving credit facilities. From the beginning
of this fiscal year through September 8, 1999, the Company has acquired or
entered into letters of intent or definitive agreements to acquire 111
businesses for an aggregate purchase price of approximately $168.9 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.
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 earnings before interest and taxes (pro forma EBIT) 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.
In response to changing conditions in the acquisition market, the Company
revised its pricing parameters in early 1999 and established an objective of
paying six to eight times pro forma EBIT for individual acquisitions and
remaining within eight times pro forma EBIT overall, including strategic
acquisitions. Management's objective that the acquired firm be additive to the
Company's earnings per share in the first twelve months after its acquisition
remained unchanged.
<PAGE>
During the third quarter, the Company further reduced its target acquisition
multiples to six to seven times pro forma EBIT for domestic acquisitions and
five to six times pro forma EBIT for international acquisitions. There are
some regional consolidators, however, who have continued to pay the old and
higher prices. As a result, the Company's acquisition activity has decreased
substantially from prior quarters, as many potential sellers have not been
willing to sell their businesses at the lower prices. The Company believes
there are many non-price factors that make selling a business to a public
consolidator very attractive to independents, and those factors still exist.
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 are likely to cause some potential sellers to refrain from selling
their businesses, at least for some period of time.
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 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.
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 October 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 percent were found to be compliant or
made to be compliant by completing Phases III through V. The remaining 5
percent 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 October 1999.
Eighty 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
October 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
$100,000 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 October 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 percent 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 July 31, 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 $447.3 million
determined using final sale prices quoted on stock exchanges. Each 10 percent
change in the average market prices of the equity securities held in such
accounts would result in a change of approximately $44.7 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 nine months ended July 31, 1999, each 10
percent 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.
As of July 31,1999, 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 $430.3 million, compared to fair value of
$418.3 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 percent change in average interest rates applicable to such debt would
result in a change of approximately $6.1 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 based on the swap rate of 4.915 percent.
The estimated fair value of the interest rate swap as of July 31, 1999, based
on quoted market prices, was $6.4 million. A hypothetical 1 percent increase
in the pay rate would result in an increase in interest expense of
approximately $2.0 million. A hypothetical 1 percent 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 rate 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 September 8, 1999, the
Company had $937.1 million of outstanding borrowings, $312.7 million of which
was not hedged by the interest rate swap agreement and was subject to short-
term variable interest rates. Each 0.5 percent change in the average interest
rate applicable to the Company's unhedged variable-rate debt would result in a
change of approximately $1.6 million in the Company's annualized 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
Subsequent to the close of the third quarter, a number of purported
securities class action lawsuits were filed in the United States District Court
for the Eastern District of Louisiana against the Company, certain of its
directors and officers and, in certain lawsuits, the Company's lead underwriter
in its January 1999 common stock offering. The purported class actions are Jim
A. Darby v. Stewart Enterprises, Inc., Joseph P. Henican, III, William E. Rowe,
Frank B. Stewart, Jr. and Bear Stearns & Co., Inc., C.A. No. 99-2601 (filed
August 25, 1999); Richard Eizenga v. Stewart Enterprises, Inc., Frank B.
Stewart, Jr., William E. Rowe and Joseph P. Henican, III, C.A. No. 99-2572
(filed August 23, 1999); Steven Eline v. Stewart Enterprises, Inc., Joseph P.
Henican, III, William E. Rowe, Frank B. Stewart, Jr. and Bear Stearns & Co.,
Inc., C.A. No. 99-2663 (filed August 30, 1999); Jacob Weiss v. Stewart
Enterprises, Inc., Frank B. Stewart, Jr., William E. Rowe and Joseph P.
Henican, III, C.A. No. 99-2672 (filed August 31, 1999); Leon Kramer v. Stewart
Enterprises, Inc., Frank B. Stewart, Jr., William E. Rowe and Joseph P.
Henican, III, C.A. No. 99-2687 (filed September 1, 1999); Creciente Oceanica
Armadora S.A. v. Frank B. Stewart, Jr., William E. Rowe, Joseph P. Henican,
III and Stewart Enterprises, Inc., C.A. No. 99-2716 (filed September 3, 1999);
Harris Blackman v. Stewart Enterprises, Inc., Frank B. Stewart, Jr., William E.
Rowe and Joseph P. Henican, III, C.A. No. 99-2773 (filed September 10, 1999);
and Thomas J. Aubrey v. Stewart Enterprises, Inc., Joseph P. Henican, III,
William E. Rowe and Frank B. Stewart, Jr., C.A. No. 99-2753 (filed September 9,
1999).
The complaints allege violations of Sections 11, 12(a)(2) and 15 of the
Securities Act of 1933 and Sections 10(b) and 20(a) of the Securities Exchange
Act of 1934 and Rule 10b-5 promulgated thereunder on behalf of purchasers of
the Company's common stock during varying periods beginning on October 1, 1998
through August 12, 1999. Plaintiffs generally allege that the defendants made
false and misleading statements and failed to disclose allegedly material
information in the prospectus relating to the January 1999 common stock
offering and in certain of the Company's other public filings and
announcements. The plaintiffs also allege that these allegedly false and
misleading statements and omissions permitted the Chairman of the Company's
Board of Directors to sell Company common stock during the class period at
inflated market prices. The remedies sought by the plaintiffs include
designation of the actions as class actions, unspecified damages, attorneys'
and experts' fees and costs, rescission to the extent any members of the class
still hold the Company's common stock, and such other relief as the court deems
proper.
Although the outcome of these actions and the cost of defending them cannot
be predicted at this time, the Company believes that the claims are without
merit and intends to defend itself vigorously.
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 recently revised its short- and medium-term outlook and goals.
The Company's revised goals for fiscal year 1999 include revenue growth of 20
percent, operating margin improvement of 20 to 50 basis points and earnings per
share growth of 5 percent over comparable 1998 amounts. For fiscal year 2000,
the Company's current goal is to achieve revenue growth of 5 to 10 percent,
operating margin improvement of 50 to 100 basis points and earnings per share
growth of 5 percent over comparable 1999 amounts. Fiscal year 2000 goals do
not include acquisitions or internal growth strategies. The current tax rate
anticipated for fiscal years 1999 and 2000 is 36.5 percent and our current cost
of funds rate is 5.9 percent.
<PAGE>
The Company's current goal for annual earnings per share growth after fiscal
year 2000 is 10 to 12 percent. The Company's goal is to achieve that growth
primarily by achieving 2 to 4 percent growth in revenues, keeping cost
increases in the 1 to 3 percent range and improving cash flow to reduce debt.
The Company's cash flow from operations is expected to improve as its fiscal
year 2000 estimates do not include acquisitions or internal growth strategies.
During the third quarter, the Company's acquisition activity decreased from
prior periods. A number of potential sellers are not willing to sell their
business at the reduced prices the Company is willing to pay, and there
have been some regional consolidators who have continued to pay the old and
higher prices. The Company believes there are many non-price factors that make
selling a business to a public consolidator very attractive to independents,
and those factors still exist. While the Company believes that it may be
able to consummate acquisitions during the remainder of fiscal year 1999 and
into fiscal year 2000 at lower multiples than it has paid historically, there
can be no assurance that this will be the case, and the lower prices are likely
to cause some potential sellers not to sell their businesses, or at least for
some period of time. Therefore, the Company has not included acquisitions in
its growth expectations for fiscal year 2000 and beyond.
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 herein or elsewhere by or on behalf of the
Company.
(1) Revenue growth goals for fiscal year 2000 and beyond do not
include acquisition activity. The actual level of acquisition activity, if
any, will depend 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, partially in view of
the Company's recently adjusted pricing parameters.
(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 and regional consolidators. These competitors, and others, may
be willing to pay higher prices for businesses than the Company is
willing to pay 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 or may cause potential sellers to reject the
Company's lower prices. 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)Acquisition activity, if any, will also depend 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,
mix and prices of the properties, products and services sold. The annual sales
targets set by the Company are aggressive, and the inability of the Company to
achieve planned increases in volume, mix or prices could cause the Company not
to meet anticipated levels of revenue. The ability of the Company to achieve
volume, mix or price increases at any location depends on numerous factors,
including the local economy, the local death rate, competition and consumer
preferences.
(3) Preneed cemetery sales are a significant component of the Company's
cemetery revenue. The Company sets very aggressive preneed sales targets. The
inability of the Company to achieve the planned level of sales could cause a
shortfall from the anticipated levels of revenue.
(4) When acquiring a business, the Company sets pro forma levels at which it
expects those businesses to perform based on the mix of traditional services
and cremation services the business has historically delivered and how the
Company expects that business to perform over the next 12 months. As the
Company typically charges a higher price for a traditional service than a
cremation service, material changes in the types of service delivered from
those assumed in the pro forma could affect the level of anticipated revenue
generated by those businesses. Additionally, although a cremation service can
yield a higher margin than a traditional service, it generally produces lower
revenue.
(5) The ability of the Company to increase prices and retain market share is
affected by the local competition in the Company's markets, including
competition from low cost funeral providers and casket stores.
(6) 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 portion of returns
that are reinvested.
(7) 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.
(8) 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.
(9) In order to support its rapid growth, the Company has periodically
accessed the secondary equity and debt markets, and the Company must continue
to do so in order to support future growth and to meet existing operating and
debt service requirements even in the absence of significant future growth.
The Company's ability to access these capital markets successfully in the
future will depend on numerous factors, including the Company's financial
performance, stock market performance, changes in interest rates, any changes
in the Company's investment grade ratings and perceptions in the capital
markets regarding the death care industry and the Company's performance and
future prospects.
(10) 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 June 11, 1999, reporting, under "Item 5.
Other Events," the earnings release for the quarter ended April 30, 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.
September 14, 1999 /s/ KENNETH C. BUDDE
Kenneth C. Budde
Executive Vice President
Chief Financial Officer
September 14, 1999 /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>
NINE
YEARS ENDED OCTOBER 31, MONTHS
-------------------------------------------------------- ENDED
1994 1995 1996 1997 1998 JULY 31, 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) $ 137,920
Fixed charges:
Interest expense.............. 8,877 22,815 26,051 38,031 44,107 41,500
Interest portion of lease
expense..................... 935 1,343 1,522 2,181 3,084 2,160
-------- -------- -------- --------- --------- ---------
Total fixed charges............. 9,812 24,158 27,573 40,212 47,191 43,660
Earnings before income taxes and
fixed charges................. $ 52,010 $ 65,658(1) 109,648 $ 146,689(2) $ 112,155(3) $ 181,580
======== ======== ======== ========= ========= =========
Ratio of earnings to fixed
charges....................... 5.30 2.72(1) 3.98 3.65(2) 2.38(3) 4.16
======== ======== ======== ========= ========= =========
</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
<MULTIPLIER> 1,000
<S> <C>
<PERIOD-TYPE> 9-MOS
<FISCAL-YEAR-END> OCT-31-1999
<PERIOD-END> JUL-31-1999
<CASH> 22,224
<SECURITIES> 47,678
<RECEIVABLES> 206,792
<ALLOWANCES> 0
<INVENTORY> 50,416
<CURRENT-ASSETS> 334,517
<PP&E> 545,359
<DEPRECIATION> 121,511
<TOTAL-ASSETS> 2,379,406
<CURRENT-LIABILITIES> 117,979
<BONDS> 921,350
0
0
<COMMON> 111,800
<OTHER-SE> 1,030,169
<TOTAL-LIABILITY-AND-EQUITY> 2,379,406
<SALES> 587,644
<TOTAL-REVENUES> 587,644
<CGS> 400,607
<TOTAL-COSTS> 400,607
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 38,718
<INCOME-PRETAX> 137,920
<INCOME-TAX> 50,341
<INCOME-CONTINUING> 87,579
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 87,579
<EPS-BASIC> .82
<EPS-DILUTED> .81
</TABLE>
