===========================================================================
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 JANUARY 31, 2000
( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________ TO _______
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COMMISSION FILE NUMBER: 0-19508
----------------------------------
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
LOUISIANA 72-0693290
(State or other jurisdiction (I.R.S. Employer
of 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 March 13, 2000, was 103,132,826 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 January 31, 2000 and 1999............. 3
Consolidated Balance Sheets -
January 31, 2000 and October 31, 1999.................... 4
Consolidated Statement of Shareholders' Equity -
Three Months Ended January 31, 2000...................... 6
Consolidated Statements of Cash Flows -
Three Months Ended January 31, 2000 and 1999............. 7
Notes to Consolidated Financial Statements................. 9
Item 2. Management's Discussion and Analysis of
Financial Condition and Results of Operations...... 15
Item 3. Quantitative and Qualitative Disclosures
About Market Risk.................................. 20
PART II. OTHER INFORMATION
Item 1. Legal Proceedings.................................. 22
Item 5. Other Information.................................. 22
Item 6. Exhibits and Reports on Form 8-K................... 26
SIGNATURES................................................. 28
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Revenues:
Funeral....................................... $ 122,646 $ 106,734
Cemetery...................................... 70,314 71,438
--------- ---------
192,960 178,172
--------- ---------
Costs and expenses:
Funeral....................................... 87,913 73,258
Cemetery...................................... 56,339 50,673
--------- ---------
144,252 123,931
--------- ---------
Gross profit.................................. 48,708 54,241
Corporate general and administrative expenses.... 5,260 4,015
--------- ---------
Operating earnings............................ 43,448 50,226
Interest expense, net............................ (14,583) (13,806)
Other income..................................... 806 590
--------- ---------
Earnings before income taxes and cumulative
effect of change in accounting principle.... 29,671 37,010
Income taxes..................................... 10,830 13,509
--------- ---------
Earnings before cumulative effect of change in
accounting principle........................ 18,841 23,501
Cumulative effect of change in accounting
principle (net of $28,798 income tax
benefit) (Note 2)........................... - (50,101)
--------- ---------
Net earnings (loss)........................... $ 18,841 $ (26,600)
========= =========
Basic earnings per common share:
Earnings before cumulative effect of change in
accounting principle........................ $ .18 $ .24
Cumulative effect of change in accounting
principle................................... - (.51)
--------- ---------
Net earnings (loss)........................... $ .18 $ (.27)
========= =========
Diluted earnings per common share:
Earnings before cumulative effect of change in
accounting principle........................ $ .18 $ .24
Cumulative effect of change in accounting
principle................................... - (.51)
--------- ---------
Net earnings (loss)........................... $ .18 $ (.27)
========= =========
Weighted average common shares outstanding
(in thousands):
Basic......................................... 106,273 98,045
========= =========
Diluted....................................... 106,273 98,721
========= =========
Dividends declared per common share.............. $ .02 $ .02
========= =========
</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>
JANUARY 31, OCTOBER 31,
ASSETS 2000 1999
------ ------------ -----------
<S> <C> <C>
Current assets:
Cash and cash equivalent investments...... $ 36,421 $ 30,877
Marketable securities..................... 10,629 46,549
Receivables, net of allowances............ 179,179 176,215
Inventories............................... 52,945 51,431
Prepaid expenses.......................... 5,326 5,997
---------- ----------
Total current assets.................... 284,500 311,069
Receivables due beyond one year, net of
allowances................................. 240,342 237,578
Intangible assets............................ 686,140 673,361
Deferred charges............................. 118,608 109,436
Cemetery property, at cost................... 442,026 424,032
Property and equipment, at cost:
Land...................................... 83,256 83,237
Buildings................................. 337,451 329,721
Equipment and other....................... 159,741 158,722
---------- ----------
580,448 571,680
Less accumulated depreciation............. 131,169 124,635
---------- ----------
Net property and equipment................ 449,279 447,045
Long-term investments........................ 18,382 16,812
Merchandise trust, less estimated cost to
deliver.................................... 61,606 58,999
Other assets................................. 7,431 5,548
---------- ----------
$2,308,314 $2,283,880
========== ==========
</TABLE>
(continued)
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
JANUARY 31, OCTOBER 31,
LIABILITIES AND SHAREHOLDERS' EQUITY 2000 1999
- ------------------------------------ ------------ -----------
<S> <C> <C>
Current liabilities:
Current maturities of long-term debt...... $ 32,384 $ 12,582
Accounts payable.......................... 22,653 21,802
Accrued payroll........................... 20,589 21,784
Accrued insurance......................... 12,950 11,535
Accrued interest.......................... 6,332 16,757
Accrued other............................. 20,993 26,328
Income taxes payable...................... 4,604 5,495
Deferred income taxes..................... 17,203 17,193
---------- ----------
Total current liabilities............... 137,708 133,476
Long-term debt, less current maturities...... 933,190 938,831
Deferred income taxes........................ 63,462 81,434
Deferred revenue............................. 97,286 64,961
Other long-term liabilities.................. 9,114 8,566
---------- ----------
Total liabilities....................... 1,240,760 1,227,268
---------- ----------
Commitments and contingencies (Note 4)
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 102,823,717
and 102,664,572 shares at January
31, 2000, and October 31, 1999,
respectively......................... 102,824 102,664
Class B authorized 5,000,000 shares;
issued and outstanding 3,555,020
shares at January 31, 2000, and
October 31, 1999; 10 votes per
share; convertible into an equal
number of Class A shares............. 3,555 3,555
Additional paid-in capital................ 672,384 671,891
Retained earnings......................... 363,715 347,002
Cumulative foreign translation adjustment. (70,345) (65,152)
Unrealized depreciation of investments.... (4,579) (3,348)
---------- ----------
Total shareholders' equity.............. 1,067,554 1,056,612
---------- ----------
$2,308,314 $2,283,880
========== ==========
</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, 1999....... 106,219 $ 106,219 $ 671,891 $ 347,002 $ (65,152) $ (3,348) $ 1,056,612
Comprehensive income:
Net earnings................. 18,841 18,841
Other comprehensive income:
Foreign translation
adjustment............... (5,193) (5,193)
Unrealized depreciation of
investments.............. (1,939) (1,939)
Deferred income tax benefit
on unrealized
depreciation of
investments.............. 708 708
------- --------- --------- --------- --------- --------- -----------
Total other comprehensive
income................... (5,193) (1,231) (6,424)
------- --------- --------- --------- --------- --------- -----------
Total comprehensive income... 18,841 (5,193) (1,231) 12,417
Sales of common stock.......... 160 160 493 653
Dividends ($.02 per share)..... (2,128) (2,128)
------- --------- --------- --------- --------- --------- -----------
Balance January 31, 2000...... 106,379 $ 106,379 $ 672,384 $ 363,715 $ (70,345) $ (4,579) $ 1,067,554
======= ========= ========= ========= ========= ========= ===========
</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>
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from operating activities:
Net earnings (loss)............................. $ 18,841 $ (26,600)
Adjustments to reconcile net earnings (loss) to
net cash provided by (used in) operating
activities:
Depreciation and amortization................. 15,172 11,332
Provision for doubtful accounts............... 11,575 7,653
Cumulative effect of change in accounting
principle.................................... - 50,101
Net gains on sales of marketable securities... (780) (1,129)
Benefit for deferred income taxes............. (1,233) (2,676)
Changes in assets and liabilities net of effects
from acquisitions:
Increase in other receivables............... (17,692) (28,279)
Increase in other deferred charges and
intangible assets.......................... (2,385) (950)
Increase in inventories and cemetery
property................................... (3,372) (578)
Increase (decrease) in accounts payable and
accrued expenses........................... (9,936) 1,786
Increase in merchandise trust, less
estimated cost to deliver merchandise...... (5,872) (13,929)
Decrease in other........................... (1,576) (3,424)
-------- ---------
Net cash provided by (used in) operating
activities................................. 2,742 (6,693)
-------- ---------
Cash flows from investing activities:
Changes in prearranged funeral contracts, net... (17,293) (3,939)
Proceeds from sales of marketable securities.... 42,432 6,883
Purchases of marketable securities and
long-term investments........................ (7,331) (9,429)
Purchases of subsidiaries, net of cash, seller
financing and stock issued.................... - (31,186)
Additions to property and equipment............. (11,691) (10,785)
Other........................................... 141 309
-------- ---------
Net cash provided by (used in) investing
activities................................. 6,258 (48,147)
-------- ---------
</TABLE>
(continued)
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2000 1999
-------- --------
<S> <C> <C>
Cash flows from financing activities:
Proceeds from long-term debt................... $ 8,366 $ 58,562
Repayments of long-term debt................... (8,103) (11,319)
Issuance of common stock....................... 653 936
Dividends...................................... (2,128) (1,962)
-------- ---------
Net cash provided by (used in) financing
activities.................................. (1,212) 46,217
-------- ---------
Effect of exchange rates on cash and cash
equivalents...................................... (2,244) (757)
-------- ---------
Net increase (decrease) in cash................... 5,544 (9,380)
Cash and cash equivalents, beginning of period.... 30,877 30,733
-------- ---------
Cash and cash equivalents, end of period.......... $ 36,421 $ 21,353
======== =========
Supplemental cash flow information:
Cash paid during the period for:
Income taxes................................. $ 1,300 $ 8,200
Interest..................................... $ 25,300 $ 21,500
Noncash investing and financing activity:
Subsidiaries acquired through seller
financing................................... $ 13,900 $ 700
</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 January 31, 2000, the Company owned and operated 632 funeral homes
and 161 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 three months ended
January 31, 2000, foreign operations contributed approximately 21 percent
of total revenue and, as of January 31, 2000, 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 January 31, 2000, and for the three months ended
January 31, 2000 and 1999, 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, 1999.
The results of operations for the three months ended January 31, 2000,
are not necessarily indicative of the results to be expected for the fiscal
year ending October 31, 2000.
(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.
(e) 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.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(1) BASIS OF PRESENTATION--(CONTINUED)
(f) RECLASSIFICATIONS
Certain reclassifications have been made to the 1999 consolidated
financial statements to conform to the presentation used in the 2000
consolidated financial statements. These reclassifications had no effect
on net earnings or shareholders' equity.
(2) CHANGE IN ACCOUNTING PRINCIPLE
Effective November 1, 1998, the Company changed its accounting method
with respect to earnings realized by its irrevocable prearranged funeral
trust funds and escrow accounts. The Company now defers all of the
earnings realized by irrevocable prearranged funeral trust funds and escrow
accounts until the underlying funeral service is delivered. Previously,
the Company recognized a portion of those earnings and deferred the
remainder to offset the estimated future effects of inflation. The
accounting change was made principally to match revenue recognition more
closely with cash receipts and also to improve the comparability of the
Company's earnings with those of its principal competitors. For further
details, refer to the Company's Annual Report on Form 10-K for the year
ended October 31, 1999.
(3) ACQUISITIONS
During the three months ended January 31, 2000, the Company purchased
four cemeteries, compared to twenty funeral homes and three cemeteries
purchased during the three months ended January 31, 1999.
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
three months ended January 31, 2000, as if such acquisitions had taken
place at the beginning of the respective periods presented. Appropriate
adjustments have been made to reflect the accounting basis used in
recording the acquisitions. These pro forma results have been prepared for
comparative purposes only and do not purport to be indicative of the
results of operations that would have resulted had the combinations been in
effect on the dates indicated, that have resulted since the dates of
acquisition, or that may result in the future.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(3) ACQUISITIONS--(CONTINUED)
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
2000 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
Revenues................................... $ 193,224 $ 179,268
========= =========
Operating earnings......................... $ 43,487 $ 50,389
========= =========
Earnings before cumulative effect of change
in accounting principle.................. $ 18,862 $ 23,589
========= =========
Net earnings (loss)........................ $ 18,862 $ (26,512)
========= =========
Basic earnings per share:
Earnings before cumulative effect of change
in accounting principle................ $ .18 $ .24
========= =========
Net earnings (loss)...................... $ .18 $ (.27)
========= =========
Diluted earnings per share:
Earnings before cumulative effect of change
in accounting principle................ $ .18 $ .24
========= =========
Net earnings (loss)...................... $ .18 $ (.27)
========= =========
Weighted average shares outstanding
(in thousands):
Basic.................................... 106,273 98,045
========= =========
Diluted.................................. 106,273 98,721
========= =========
</TABLE>
The effect of acquisitions at dates of purchase on the consolidated
financial statements was as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
------------------------------
2000 1999
--------------- -------------
(Unaudited)
<S> <C> <C>
Current assets............................. $ - $ 575
Cemetery property.......................... 15,898 15,507
Property and equipment, net................ - 1,602
Deferred charges and other assets.......... 5,569 -
Intangible assets, net..................... 21,143 15,514
Deferred tax asset......................... 16,489 -
Current liabilities........................ - (1,166)
Long-term debt............................. (13,898) (743)
Deferred revenue........................... (45,201) -
Other long-term liabilities................ - (103)
--------- ---------
Cash used for acquisitions................. $ - $ 31,186
========= =========
</TABLE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(4) CONTINGENCIES
During the fall of 1999, 16 putative securities class action lawsuits
were filed against the Company, certain of its directors and officers and
the Company's underwriters in relation to its January 1999 common stock
offering. The suits have been consolidated, and the court has appointed
lead plaintiffs as well as lead and liaison counsel for the plaintiffs.
The consolidated amended complaint alleges violations of Section 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 the
period 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 to sell Company common stock during the class
period at inflated market prices. The plaintiffs seek remedies including
certification of the putative class, unspecified damages, attorneys' 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 may deem proper.
On February 25, 2000, the Company and the other defendants filed motions to
dismiss the complaint.
This action is in its earliest stages, and the outcome of the action and
costs of defending it cannot be predicted at this time. The Company
believes that the claims are without merit and intends to defend itself
vigorously.
(5) RECENT ACCOUNTING STANDARDS
Statement of Financial Accounting Standards SFAS No. 133, "Accounting
for Derivative Instruments and Hedging Activities," establishes accounting
and reporting standards for derivative instruments and is required to be
implemented in the first quarter of the Company's fiscal year 2001. The
Company has begun its analysis of the impact of SFAS No. 133 on its
consolidated financial condition and results of operations, and the effect
is not expected to be material. The Company is reviewing SEC Staff
Accounting Bulletin (SAB) No. 101, "Revenue Recognition in Financial
Statements." However, at this time, the effect of the bulletin on the
Company's consolidated financial condition and results of operations has
not been determined, and it is not known if the impact, if any, would be
material.
Effective November 1, 1999, the Company implemented Statement of
Position 98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5),
which requires costs of start-up activities and organization costs to be
expensed as incurred. The implementation of SOP 98-5 did not have a
material impact on the Company's financial position or results of
operations.
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA
<TABLE>
<CAPTION>
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
THREE MONTHS ENDED JANUARY 31, 2000 ----------- ------------- ---------
-----------------------------------
<S> <C> <C> <C>
Net earnings.................................... $ 18,841
========
Basic earnings per share:
Net earnings available to common shareholders. $ 18,841 106,273 $ .18
=====
Effect of dilutive securities:
Time-vest stock options assumed exercised..... - -
-------- -------
Diluted earnings per share:
Net earnings available to common shareholders
plus time-vest stock options assumed exercised $ 18,841 106,273 $ .18
======== ======= =====
EARNINGS SHARES PER SHARE
(NUMERATOR) (DENOMINATOR) DATA
THREE MONTHS ENDED JANUARY 31, 1999 ----------- ------------- ---------
-----------------------------------
Earnings before cumulative effect of change in
accounting principle.......................... $ 23,501
========
Basic earnings per share:
Earnings available to common shareholders..... $ 23,501 98,045 $ .24
=====
Effect of dilutive securities:
Time-vest stock options assumed exercised..... - 676
-------- ------
Diluted earnings per share:
Earnings available to common shareholders
plus time-vest stock options assumed
exercised................................... $ 23,501 98,721 $ .24
======== ====== =====
</TABLE>
As of January 31, 2000, the Company has options outstanding under the
1995 Incentive Compensation Plan (1995 Plan) and the 1996 Directors' Plan
with respect to 9,020,640 shares. Included in that number are options to
purchase a total of 4,018,168 shares of Class A common stock under the 1995
Plan and 72,000 shares of Class A common stock under the 1996 Directors'
Plan, all of which were granted since the end of the last fiscal year. All
of the options granted since the end of the last fiscal year under the
1995 Plan vest at the rate of 25 percent per year over four years, have an
exercise price of $5.50 and must be exercised by January 21, 2005. All of
the options granted under the 1996 Directors' Plan vest immediately, have
an exercise price of $6.00 and must be exercised by January 31, 2005.
Options to purchase 4,117,777 shares of common stock at prices ranging
from $5.50 to $27.25 were outstanding during the first quarter of 2000 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 between October 31,
2001, and January 31, 2005, were still outstanding as of January 31, 2000.
Options to purchase 1,410,536 shares of common stock at prices ranging
from $21.375 to $27.25 were outstanding during the first quarter of 1999,
but were not included in the computation of diluted earnings per share
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(6) RECONCILIATION OF BASIC AND DILUTED PER SHARE DATA--(CONTINUED)
because the exercise prices of the options were greater than the average
market price of the common shares. The options, which expire on October
31, 2001, and July 31, 2004, were still outstanding at January 31, 1999.
(7) SEGMENT DATA
The table below presents information about reported segments for the
three months ended:
<TABLE>
<CAPTION> CONSOLIDATED
FUNERAL CEMETERY TOTALS
------- -------- ------------
<S> <C> <C> <C>
Revenues from external customers
January 31, 2000.......................... $ 122,646 70,314 $ 192,960
January 31, 1999.......................... $ 106,734 71,438 $ 178,172
Gross profit
January 31, 2000.......................... $ 34,733 13,975 $ 48,708
January 31, 1999.......................... $ 33,476 20,765 $ 54,241
</TABLE>
A reconciliation of total segment gross profit to total earnings before
income taxes and cumulative effect of change in accounting principle for
the three months ended January 31, 2000 and 1999, is as follows:
<TABLE>
<CAPTION>
THREE MONTHS ENDED JANUARY 31,
-------------------------------
2000 1999
------------- -----------
<S> <C> <C>
Gross profit for reportable segments......... $ 48,708 $ 54,241
Corporate general and administrative expenses (5,260) (4,015)
Interest expense, net........................ (14,583) (13,806)
Other income................................. 806 590
------------- -----------
Earnings before income taxes and cumulative
effect of change in accounting principle $ 29,671 $ 37,010
============= ===========
</TABLE>
<PAGE>
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS
INTRODUCTION
Effective November 1, 1998, the Company changed its accounting method with
respect to earnings realized by its irrevocable prearranged funeral trust
funds and escrow accounts. The Company now defers all of the earnings
realized by irrevocable prearranged funeral trust funds and escrow accounts
until the underlying funeral service is delivered. Previously, the Company
recognized a portion of those earnings and deferred the remainder to offset
the estimated future effects of inflation. The accounting change was made
principally to match revenue recognition more closely with cash receipts and
also to improve the comparability of the Company's earnings with those of its
principal competitors. For further details, refer to the Company's Annual
Report on Form 10-K for the year ended October 31, 1999.
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.
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 JANUARY 31, 2000 COMPARED TO THREE MONTHS ENDED JANUARY
31, 1999
FUNERAL SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
---------------------
2000 1999 INCREASE
--------- -------- --------
(In millions)
FUNERAL REVENUE
---------------
<S> <C> <C> <C>
Existing Operations................................ $ 112.0 $ 105.7 $ 6.3
Acquired Operations................................ 10.6 1.0 9.6
------- ------- ------
$ 122.6 $ 106.7 $ 15.9
======= ======= ======
FUNERAL COSTS
-------------
Existing Operations................................ $ 79.5 $ 72.3 $ 7.2
Acquired Operations................................ 8.4 1.0 7.4
------ ------ ------
$ 87.9 $ 73.3 $ 14.6
====== ====== ======
Funeral Segment Profit............................. $ 34.7 $ 33.4 $ 1.3
====== ====== ======
</TABLE>
Funeral revenue increased $15.9 million, or 15 percent, for the three
months ended January 31, 2000, compared to the corresponding period in 1999.
The Company experienced a $6.3 million, or 6 percent, increase in revenue
from Existing Operations primarily as a result of a 5.2 percent increase in
the average revenue per domestic funeral service performed by Existing
Operations (5.5 percent increase worldwide, excluding the effect of foreign
currency translation) and a 3.9 percent (725 events) increase in the number
of domestic funeral services performed by Existing Operations (2.7 percent
(900 events) increase worldwide). The increase in average revenue per
funeral service was primarily due to price increases and improved
merchandising.
Funeral profit margin from Existing Operations decreased from 31.6 percent
in 1999 to 29.0 percent in 2000 due in part to excessive costs incurred, such
as overtime, part-time help and removal fees, as a result of the increased
number of funeral services performed by the Company's businesses as described
above. Consequently, the Company did not capitalize on its cluster synergies
as effectively as it believes is possible. Additionally, there was to a
rebate received by the Company from contract negotiations with a primary
vendor in 1999 not received in 2000. The Company is continually evaluating
the costs to run its businesses and looking for ways to improve in those
areas where it sees opportunities.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of funeral homes from February 1999
through January 2000 which are not reflected in the 1999 period presented
above.
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 year ended October 31, 1999, the
average revenue per funeral service performed by existing funeral homes
increased 0.7 percent domestically and 3.1 percent worldwide, excluding the
effect of foreign currency translation, which was below this objective.
Because of intense and growing competition from low-cost funeral service and
merchandise providers in certain key markets, the Company lowered its goals
for increases in the average revenue per funeral service performed to 2 to 3
percent annually. For the three months ended January 31, 2000, the average
revenue per funeral service performed by existing funeral homes increased 5.2
percent domestically and 5.5 percent worldwide, excluding the effect of
foreign currency translation. Although these results exceed current
expectations, the Company still anticipates increases in average revenue per
funeral service performed of 2 to 3 percent for the fiscal year 2000.
Furthermore, it is too soon to tell if the increases in average revenue per
call for the first quarter are indicative of a trend. See the Company's
forward-looking statements in Part II, Item 5.
CEMETERY SEGMENT
<TABLE>
<CAPTION>
THREE MONTHS ENDED
JANUARY 31,
--------------------- INCREASE
2000 1999 (DECREASE)
--------- -------- ----------
(In millions)
CEMETERY REVENUE
----------------
<S> <C> <C> <C>
Existing Operations.............................. $ 63.5 $ 69.5 $ (6.0)
Acquired Operations.............................. 6.8 1.9 4.9
------ ------ ------
$ 70.3 $ 71.4 $ (1.1)
------ ------ ------
CEMETERY COSTS
--------------
Existing Operations.............................. $ 50.5 $ 49.4 $ 1.1
Acquired Operations.............................. 5.8 1.3 4.5
------ ------ ------
$ 56.3 $ 50.7 $ 5.6
------ ------ ------
Cemetery Segment Profit.......................... $ 14.0 $ 20.7 $ (6.7)
====== ====== ======
</TABLE>
Cemetery revenue decreased $1.1 million, or 2 percent, for the three
months ended January 31, 2000, compared to the corresponding period in 1999.
The Company experienced a $6.0 million, or 9 percent, decrease in revenue
from Existing Operations resulting primarily from reduced preneed property
and merchandise sales. Partially offsetting this decrease was a $1.3
million, or 19 percent, increase in revenue from cemetery trust funds and
escrow accounts to $8.3 million. This increase was due to a 14 percent
growth in the average balance in the funds, resulting from current year
customer payments deposited into the funds, coupled with a slight increase in
the average yield on the funds. The yield for the quarter was slightly below
the Company's goal of 8.5 percent to 9.0 percent.
During the first quarter of 2000, the Company made adjustments to the
terms and conditions of its preneed cemetery contracts to improve cash flow
and the quality of its receivables. The Company anticipated the resulting
decline in preneed sales mentioned above as the sales force adjusted to the
changes. The Company is committed to improving its preneed sales and has
developed a new division, the Sales and Marketing Division, to enhance its
sales effectiveness and to create consistency in its marketing programs,
sales and management training.
Cemetery profit margin from Existing Operations decreased from 28.9
percent in 1999 to 20.5 percent in 2000. The decline was attributable
principally to the reduced preneed property and merchandise sales mentioned
above, coupled with the high fixed-cost nature of the cemetery business.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition of cemeteries from February 1999
through January 2000, which are not reflected in the 1999 period presented
above.
OTHER
Corporate general and administrative expenses increased $1.2 million to
2.7 percent of revenue in the three months ended January 31, 2000, as
compared to 2.3 percent in the same period in 1999. The increase in these
expenses is primarily the result of a $750,000 increase in consulting fees
related to the Company's consumer market research project.
Net interest expense increased $.8 million during the first quarter of
fiscal year 2000 compared to the same period in 1999, as the result of a
slight increase in average borrowings and a slight increase in average
interest rates from 6.1 percent in 1999 to 6.2 percent in 2000.
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 pays a fixed rate of 4.915 percent and
receives three-month LIBOR. The swap expires on March 4, 2002.
As of January 31, 2000, the Company's outstanding borrowings totaled
$965.6 million. Of the total amount outstanding, including the portion
subject to the interest rate swap agreement, approximately 65 percent was
fixed-rate debt, with the remaining 35 percent subject to short-term variable
interest rates averaging approximately 6.2 percent.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $47.1 million at
January 31, 2000, a decrease of approximately $30.4 million from October 31,
1999. The Company provided cash of $2.7 million in its operations for the
three months ended January 31, 2000, compared to using cash of $6.7 million
in its operations for the corresponding period in 1999, due principally to an
increase in net earnings and a smaller increase in receivables, offset by a
decrease in accounts payable and accrued expenses and other working capital
changes. Furthermore, the Company's cash flow from operations of $2.7
million reflects several unusual items including a $3.3 million increase in
receivables due to cemetery acquisitions made after October 31, 1998, and
$4.0 million of 1999 interest payments made in the first quarter of 2000
because October 31, 1999, was on a Sunday. Without these unusual items, the
Company would have provided cash of $10.0 million in its operations for the
three months ended January 31, 2000.
Long-term debt at January 31, 2000, increased to $965.6 million compared
to $951.4 million at October 31, 1999, as a result of one seller-financed
acquisition which closed in the first quarter of 2000, although it had been
completed in 1999. The Company's long-term debt consisted of $537.4 million
under the Company's revolving credit facilities, $393.6 million of long-term
notes and $34.6 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 $16.5 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 .9 to 1.0 as of January 31, 2000, and October 31, 1999. As of
March 10, 2000, the Company had a debt-to-equity ratio of approximately .9 to
1.0 and $369.2 million of additional borrowing capacity within the 1.25 to
1.0 debt-to-equity parameter, $67.9 million of which was available under its
revolving credit facilities.
The Company's ratio of earnings to fixed charges was as follows for the
years and period indicated:
THREE MONTHS
YEARS ENDED OCTOBER 31, ENDED
-------------------------------------------- JANUARY 31,
1995 1996 1997 1998 1999 2000
---- ---- ---- ---- ---- -----------
2.72(1) 3.98 3.65(2) 2.38(3) 3.43(2) 2.85
(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 4.01.
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 1999
reflects the 1999 change in accounting principle; fiscal years 1998 and 1997
reflect the 1997 change in accounting principles; fiscal years 1996 and 1995
reflect the Company's previous accounting methods which were in effect at that
time.
As detailed in Note 3 of the Company's consolidated financial statements,
during the three months ended January 31, 2000, the Company completed the
acquisition of four cemeteries through seller financing at a net purchase
price of $5.3 million.
Historically, the Company's growth has been primarily from acquisitions.
This trend began to change in late fiscal year 1999. As industry conditions
reduced the number of major consolidators participating in the acquisition
market, those that remained generally applied significantly tighter pricing
criteria, and many potential sellers withdrew their businesses from the market
rather than pursuing transactions at lower prices.
As a result, the Company's acquisition activity has decreased substantially
from prior quarters, and, as of March 13, 2000, the Company had no pending
acquisitions. The Company's growth expectations for fiscal year 2000 and
beyond include no acquisitions.
Although the Company has no material commitments for capital expenditures
(other than approximately $15 million in commitments related to construction
of the archdiocese of Los Angeles funeral homes), the Company contemplates
capital expenditures of approximately $43.5 million for the fiscal year ending
October 31, 2000, which includes $25 million in internal growth initiatives
(including the construction of the Los Angeles funeral homes) and
approximately $18.5 million for maintenance capital expenditures.
Management expects that future capital requirements will be satisfied
with internally generated cash. Additional debt and equity financing may be
required in connection with future growth strategies.
On December 8, 1999, Moody's Investors Service ("Moody's") announced that
it had lowered the Company's credit rating to Ba2, and on February 22, 2000,
Standard & Poor's ("S&P") announced that it had lowered the Company's credit
rating to BB+. Previously, the Company's credit ratings from Moody's and S&P
were Baa3 and BBB, respectively. Interest paid by the Company on its
revolving line of credit is based in part on its credit ratings from Moody's
and S&P; however, the downgrades are not expected to have a material effect,
less than $1 million, on the Company's net earnings.
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.
OTHER
RECENT ACCOUNTING STANDARDS
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," establishes accounting and reporting standards for derivative
instruments and is required to be implemented in the first quarter of the
Company's fiscal year 2001. The Company has begun its analysis of the impact
of SFAS No. 133 on its consolidated financial condition and results of
operations, and the effect of the pronouncement is not expected to be
material.
The Company is reviewing SEC Staff Accounting Bulletin (SAB) No. 101,
"Revenue Recognition in Financial Statements." However, at this time, the
effect of the bulletin on the Company's consolidated financial condition and
results of operations has not been determined, and it is not known if the
impact, if any, would be material.
Effective November 1, 1999, the Company implemented Statement of Position
98-5, "Reporting on the Costs of Start-Up Activities" (SOP 98-5), which
requires costs of start-up activities and organization costs to be expensed as
incurred. The implementation of SOP 98-5 did not have a material impact on
the Company's financial position or results of operations.
<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, 1999, filed with the Securities and Exchange Commission on January
27, 2000. 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 on actual fluctuations in equity markets, foreign
currency exchange rates, interest rates and the timing of transactions.
MARKETABLE EQUITY SECURITIES
As of January 31, 2000, and October 31, 1999, the Company's marketable
equity securities subject to market risk consist principally of investments
held by its prearranged funeral, merchandise and perpetual care trust and
escrow accounts, and had fair values of $404.9 million and $447.9 million,
respectively, 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 $40.5 million
and $44.8 million, respectively, 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, 1999. 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.
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, 1999.
As of January 31, 2000, and October 31, 1999, the carrying values of the
Company's long-term fixed-rate debt, including accrued interest and the
unamortized portion of the ROARS option premium, was approximately $434.0
million and $435.0 million, respectively, compared to fair values of $344.9
million and $372.6 million, respectively. Fair values were determined using
quoted market prices, where applicable, or future cash flows discounted at
market rates for similar types of borrowing arrangements. Each approximate 10
percent change in the average interest rates applicable to such debt, 165 and
125 basis points for January 31, 2000, and October 31, 1999, respectively,
would result in changes of approximately $13.3 million and $12.0 million,
respectively, in the fair values of these instruments. If these instruments
are held to maturity, no change in fair value will be realized.
As of January 31, 2000, the carrying value of the Company's borrowings
outstanding under its revolving credit facilities, including accrued interest,
was $537.0 million compared to a fair value of $528.2 million. Fair value was
determined using future cash flows discounted at market rates for similar
types of borrowing arrangements. Of the borrowings outstanding under the
revolving credit facilities, $337.0 million was not hedged by the interest
rate swap and was subject to short-term variable interest rates. Each
approximate 10 percent, or 75 basis point, change in the average interest rate
applicable to this debt would result in a change of approximately $.6 million
in the Company's pre-tax earnings. As of October 31, 1999, the carrying value
of the Company's variable-rate debt, including accrued interest, was $533.1
million compared to a fair value of $524.9 million. Of the borrowings
outstanding under the revolving credit facilities, $329.0 million was not
hedged by the interest rate swap and was subject to short-term variable
interest rates. Each approximate 10 percent, or 75 basis point, change in
average interest rates applicable to such debt would have resulted in a change
of approximately $1.2 million in the Company's pre-tax earnings.
The Company monitors its mix of fixed- and variable-rate debt obligations
in light of changing market conditions and from time to time may alter that
mix by, for example, refinancing balances outstanding under its variable-rate
revolving credit facilities with fixed-rate debt or by entering into interest
rate swaps.
<PAGE>
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
IN RE STEWART ENTERPRISES, INC. SECURITIES LITIGATION, United States
District Court for the Eastern District of Louisiana. During the fall of
1999, 16 putative securities class action lawsuits were filed against the
Company, certain of its directors and officers and the Company's underwriters
in its January 1999 common stock offering. The suits have been consolidated,
and the court has appointed lead plaintiffs as well as lead and liaison
counsel for the plaintiffs.
The consolidated amended complaint alleges violations of Section 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 the period 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 to
sell Company common stock during the class period at inflated market prices.
The plaintiffs seek remedies including certification of the putative class,
unspecified damages, attorneys' 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 may deem proper. On February 25, 2000, the Company and
the other defendants filed motions to dismiss the complaint.
This action is in its earliest stages, and the outcome of the action and
costs of defending it 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.
As previously announced, the Company recently revised its short- and
medium-term outlook and goals. The Company currently anticipates that fiscal
year 2000 will be a year of transition, from a period of rapid growth, fueled
primarily by acquisitions, to a period of moderate growth, driven primarily by
internal growth strategies and a more intense focus on improving the
operations of businesses acquired. In this regard, management's current goal
is to grow revenue in fiscal year 2000 at about 1 percent from 1999 amounts
with relatively flat, to slightly down, earnings before interest, taxes,
depreciation and amortization (EBITDA) from 1999 amounts. Management's
current earnings per share goal for fiscal year 2000 is in the $.68 - $.72
range. Fiscal year 2000 goals also include spending $25 million on internal
growth initiatives. The current tax rate anticipated for fiscal year 2000 is
36.5 percent, and the Company's weighted average cost of debt as of January
31, 2000, was 6.3 percent.
The Company's current goal for annual earnings per share growth after
fiscal year 2000 is 10 percent. The Company's goal is to attain that growth
primarily by achieving 2 percent to 4 percent growth in revenues, keeping cost
increases in the 1 percent 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 include only $25 million in internal growth
initiatives, and cemetery revenue, which is the principal driver for increases
in installment receivables, is anticipated to be relatively flat.
The Company anticipates implementing cash flow initiatives for 2000 which
include analysis and possible re-deployment of excess cemetery property,
under-performing assets and real estate that would be more valuable if
converted to another use.
In response to changes in the acquisition market, 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 by or on behalf of the Company.
(1) The Company's ability to achieve its revenue goals and the
corresponding cash flows from operations are 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 levels in volume, mix or prices could cause the Company not to
meet anticipated revenue goals. The ability of the Company to achieve planned
volume, mix or price levels at any location depends on numerous factors,
including the local economy, the local death rate, competition and consumer
preferences. Furthermore, the Company is adapting to pricing pressures from
low-cost funeral service and merchandise providers, which may result in
reducing funeral service and merchandise prices in order to recapture market
share where appropriate.
(2) 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 in anticipated levels of revenue. Changes in the sales
organization, compensation and sales terms and conditions of the Company's
preneed contracts could affect the Company's ability to achieve its preneed
sales targets.
(3) Morale is a key ingredient in any sales organization, and morale can be
adversely affected by aggressive sales targets that make it difficult for the
Company's more than 3,500 commission sales counselors to achieve their goals.
(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 and a lower total gross profit.
(5) The ability of the Company to increase or sustain current price levels
and retain market share is affected by local competition in the Company's
markets, including competition from low-cost funeral providers and casket
stores, as well as consumer preferences.
(6) Another important component of revenue is earnings from the Company's
cemetery 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 returns on the Company's prearranged funeral trust funds and
escrow accounts affect the Company's future revenue. The performance of the
funds depends primarily on market conditions that are not within the Company's
control. Additionally, the performance of the funds is affected by the mix of
fixed-income and equity securities. The size of the funds depends on the
level of sales, funds added through acquisitions, if any, and the amount of
returns that are reinvested.
(7) Future revenue is also 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 deathcare business is a highly fixed cost business. Positive or
negative changes in revenue can have a disproportionately large effect on net
earnings.
(9) The Company's planned cash flow initiatives for 2000 include analysis
and possible re-deployment of excess cemetery property, under-performing
assets and real estate that would be more valuable if converted to another
use. No assurance can be given, however, that any significant portion of the
Company's assets can be sold, re-deployed or converted on a profitable basis
or that doing so will not result, at least initially, in charges to earnings.
(10) 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, particularly in view
of the Company's recently adjusted pricing parameters and cash flow
criteria.
(b)In most of its existing markets and in many new markets, including
foreign markets, that the Company may seek to enter, the Company may
compete 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 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, may affect 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.
(11) 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.
(12) Historically, in order to support its rapid growth, the Company has
periodically accessed the secondary equity and debt markets, and the Company
may need to continue to do so in order to support future growth or 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 credit ratings and perceptions in
the capital markets regarding the death care industry and the Company's
performance and future prospects.
(13) 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 recently 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 these
recently 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 and the Company's credit ratings, which can
increase or decrease the interest rates the Company pays on borrowings
with variable rates of interest and the rates it will be required to
pay on new fixed- or variable-rate debt.
(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.
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
and restated as of November 5, 1999, (incorporated by reference to Exhibit
3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended
October 31, 1999 (the "1999 10-K"))
3.2 By-laws of the Company, as amended and restated as of October 28, 1999,
(incorporated by reference to Exhibit 3.2 to the 1999 10-K)
------------------------------
Management Contracts and Compensatory Plans or Arrangements
10.1 Amendment No. 1 to Change of Control Agreement dated November 1, 1998,
between the Company and Joseph P. Henican, III (incorporated by reference
to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.2 Amendment No. 1 to Change of Control Agreement dated November 1, 1998,
between the Company and William E. Rowe (incorporated by reference to
Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.3 Amendment No. 2 to Change of Control Agreement dated November 1, 1998,
between the Company and Kenneth C. Budde (incorporated by reference to
Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.4 Amendment No. 2 to Change of Control Agreement dated November 1, 1998,
between the Company and Richard O. Baldwin, Jr. (incorporated by reference
to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.5 Amendment No. 1 to Change of Control Agreement dated November 1, 1998,
between the Company and Brian J. Marlowe (incorporated by reference to
Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.6 Amendment No. 2 to Change of Control Agreement dated November 1, 1998,
between the Company and Brent F. Heffron (incorporated by reference to
Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.7 Amendment No. 2 to Change of Control Agreement dated November 1, 1998,
between the Company and Raymond C. Knopke, Jr. (incorporated by reference
to Exhibit 10.7 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.8 Amendment No. 2 to Change of Control Agreement dated November 1, 1998,
between the Company and Ronald H. Patron (incorporated by reference to
Exhibit 10.8 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.9 Amendment No. 1 to Change of Control Agreement dated November 1, 1998,
between the Company and Gerard C. Alexander (incorporated by reference to
Exhibit 10.9 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.10 Amendment No. 1 to Change of Control Agreement dated November 1, 1998,
between the Company and Charles L. Tilis (incorporated by reference to
Exhibit 10.10 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.11 Amendment No. 2 to Change of Control Agreement dated November 1, 1998,
between the Company and Lawrence B. Hawkins (incorporated by reference to
Exhibit 10.11 to the Company's Quarterly Report on Form 10-Q for the
Quarter ended January 31, 1999)
10.12 Amendment No. 3 to Employment Agreement dated September 21, 1999,
between the Company and Lawrence B. Hawkins
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 November 4, 1999, reporting, under "Item 5.
Other Events," the Board of Director's declaration of a dividend of one
preferred stock purchase right for each outstanding share of Class A or
Class B Common Stock and under "Item 7. Financial Statements and Exhibits,"
the Rights Agreement, dated as of October 28, 1999, between Stewart
Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. and press
release, dated November 3, 1999, discussing the adoption of the rights
plan.
The Company filed a Form 8-K on November 19, 1999, reporting, under "Item
5. Other Events," the announcement that Joseph P. Henican, III stepped down
as Vice Chairman and Chief Executive Officer and William E. Rowe had been
elected as President and Chief Executive Officer.
The Company filed a Form 8-K on December 14, 1999, reporting, under "Item
5. Other Events," the announcement that Brian J. Marlowe was named Chief
Operating Officer.
The Company filed a Form 8-K on December 17, 1999, reporting, under "Item
5. Other Events," the earnings release for the year ended October 31, 1999.
The Company filed a Form 8-K on January 6, 2000, reporting, under "Item 5.
Other Events," pro forma consolidated statements of earnings for fiscal
year 1998, for the three months ended January 31, 1999, April 30, 1999, and
July 31, 1999, for the six months ended April 30, 1999, and for the nine
months ended July 31, 1999, to reflect the change in the Company's
accounting method, as if such method had been in effect during all prior
periods.
<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.
/s/ KENNETH C. BUDDE
--------------------
Kenneth C. Budde
Executive Vice President
Chief Financial Officer
/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>
THREE MONTHS
YEARS ENDED OCTOBER 31, ENDED
----------------------------------------------------------------- JANUARY 31,
1995 1996 1997 1998 1999 2000
--------- --------- --------- --------- --------- -----------
<S> <C> <C> <C> <C> <C> <C>
Earnings from operations
before income taxes............... $ 41,500(1) $ 82,075 $ 106,477(2) $ 64,964(3) $ 142,551(4) $ 29,671
Fixed charges:
Interest charges.................. 22,815 26,051 38,031 44,107 55,543 15,207
Interest portion of lease expense 1,343 1,522 2,181 2,814 2,859 691
--------- --------- --------- --------- --------- ---------
Total fixed charges................. 24,158 27,573 40,212 46,921 58,402 15,898
Earnings from operations before
income taxes and fixed charges,
less capitalized interest......... $ 65,658(1) $ 109,648 $ 146,689(2) $ 111,599(3) $ 200,118(4) $ 45,265
========= ========= ========= ========= ========= =========
Ratio of earnings to fixed charges.. 2.72(1) 3.98 3.65(2) 2.38(3) 3.43(4) 2.85
========= ========= ========= ========= ========= =========
</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.
(4) Excludes cumulative effect of change in accounting principle of $50,101
(net of $28,798 income tax benefit).
- ---------------------------
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> 3-MOS
<FISCAL-YEAR-END> OCT-31-2000
<PERIOD-END> JAN-31-2000
<CASH> 36,421
<SECURITIES> 10,629
<RECEIVABLES> 179,179
<ALLOWANCES> 0
<INVENTORY> 52,945
<CURRENT-ASSETS> 284,500
<PP&E> 580,448
<DEPRECIATION> 131,169
<TOTAL-ASSETS> 2,308,314
<CURRENT-LIABILITIES> 137,708
<BONDS> 933,190
0
0
<COMMON> 106,379
<OTHER-SE> 961,175
<TOTAL-LIABILITY-AND-EQUITY> 2,308,314
<SALES> 192,960
<TOTAL-REVENUES> 192,960
<CGS> 144,252
<TOTAL-COSTS> 144,252
<OTHER-EXPENSES> 0
<LOSS-PROVISION> 0
<INTEREST-EXPENSE> 14,583
<INCOME-PRETAX> 29,671
<INCOME-TAX> 10,830
<INCOME-CONTINUING> 18,841
<DISCONTINUED> 0
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 18,841
<EPS-BASIC> .18
<EPS-DILUTED> .18
</TABLE>
