-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, F8q/y8rOz5ucpXX0GoJkWstQb+m1sQB3FlDg1/QGUqiTpJEst0dk1y1lD/Keema8 k4VxDHguu9JWAr6frfC8SQ== 0000906280-99-000147.txt : 19990615 0000906280-99-000147.hdr.sgml : 19990615 ACCESSION NUMBER: 0000906280-99-000147 CONFORMED SUBMISSION TYPE: 10-Q PUBLIC DOCUMENT COUNT: 3 CONFORMED PERIOD OF REPORT: 19990430 FILED AS OF DATE: 19990614 FILER: COMPANY DATA: COMPANY CONFORMED NAME: STEWART ENTERPRISES INC CENTRAL INDEX KEY: 0000878522 STANDARD INDUSTRIAL CLASSIFICATION: SERVICES-PERSONAL SERVICES [7200] IRS NUMBER: 720693290 STATE OF INCORPORATION: LA FISCAL YEAR END: 1031 FILING VALUES: FORM TYPE: 10-Q SEC ACT: SEC FILE NUMBER: 000-19508 FILM NUMBER: 99645855 BUSINESS ADDRESS: STREET 1: 110 VETERANS MEMORIAL BLVD CITY: METAIRIE STATE: LA ZIP: 70005 BUSINESS PHONE: 5048375880 MAIL ADDRESS: STREET 1: 110 VETERANS MEMORIAL BLVD CITY: METARIE STATE: LA ZIP: 70005 10-Q 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-Q (X) QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED APRIL 30, 1999 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _______TO______ ____________ COMMISSION FILE NUMBER: 0-19508 ____________ STEWART ENTERPRISES, INC. (Exact name of registrant as specified in its charter) LOUISIANA 72-0693290 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.) 110 VETERANS MEMORIAL BOULEVARD METAIRIE, LOUISIANA 70005 (Address of principal executive offices) (Zip Code) REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 837-5880 ____________ Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes X No __ The number of shares of the Registrant's Class A Common Stock, no par value per share, and Class B Common Stock, no par value per share, outstanding as of June 9, 1999 was 108,171,623 and 3,555,020 respectively. =============================================================================== STEWART ENTERPRISES, INC. AND SUBSIDIARIES INDEX PART I. FINANCIAL INFORMATION PAGE Item 1. Financial Statements Consolidated Statements of Earnings - Three Months Ended April 30, 1999 and 1998 .................. 3 Consolidated Statements of Earnings - Six Months Ended April 30, 1999 and 1998 .................... 4 Consolidated Balance Sheets - April 30, 1999 and October 31, 1998 ......................... 5 Consolidated Statement of Shareholders' Equity - Six Months Ended April 30, 1999 ............................. 7 Consolidated Statements of Cash Flows - Six Months Ended April 30, 1999 and 1998 .................... 8 Notes to Consolidated Financial Statements ................... 10 Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations ....... 15 Item 3. Quantitative and Qualitative Disclosures About Market Risk ................................... 24 PART II. OTHER INFORMATION Item 1. Legal Proceedings .................................... 26 Item 4. Submission of Matters to a Vote of Security Holders .. 26 Item 5. Other Information .................................... 26 Item 6. Exhibits and Reports on Form 8-K ..................... 29 SIGNATURES .................................................... 30 STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) THREE MONTHS ENDED APRIL 30, ---------------------------- 1999 1998 --------- --------- Revenues: Funeral ................................ $ 121,158 $ 91,752 Cemetery ............................... 81,099 62,826 --------- --------- 202,257 154,578 --------- --------- Costs and expenses: Funeral ................................ 80,114 61,209 Cemetery ............................... 56,515 43,823 --------- --------- 136,629 105,032 Gross profit ........................... 65,628 49,546 Corporate general and administrative expenses ................................. 4,333 4,144 --------- --------- Operating earnings before performance- based stock options ................... 61,295 45,402 Performance-based stock options ........... -- 76,762 --------- --------- Operating earnings (loss) .............. 61,295 (31,360) Interest expense .......................... (12,795) (10,081) Investment and other income ............... 2,150 1,676 --------- --------- Earnings (loss) before income taxes .... 50,650 (39,765) Income taxes (benefit) .................... 18,487 (13,719) --------- --------- Net earnings(loss) ..................... $ 32,163 $ (26,046) ========= ========= Net earnings (loss) per share: Basic: ................................. $ .29 $ (.27) ========= ========= Diluted ............................... $ .29 $ (.27) ========= ========= Weighted average shares outstanding (in thousands): Basic .................................. 111,707 97,547 ========= ======== Diluted ................................ 112,192 97,547 ========= ======== Dividends per share ....................... $ .02 $ .01 ========= ======== See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) SIX MONTHS ENDED APRIL 30, ---------------------------- 1999 1998 --------- --------- Revenues: Funeral ................................ $ 232,641 $ 178,670 Cemetery ............................... 152,537 125,217 --------- --------- 385,178 303,887 --------- --------- Costs and expenses: Funeral ................................ 153,372 120,070 Cemetery ............................... 107,188 88,154 --------- --------- 260,560 208,224 --------- --------- Gross profit ........................... 124,618 95,663 Corporate general and administrative expenses ................................. 8,348 8,168 --------- --------- Operating earnings before performance- based stock options ................... 116,270 87,495 Performance-based stock options ........... -- 76,762 --------- --------- Operating earnings ..................... 116,270 10,733 Interest expense .......................... (27,195) (20,027) Investment and other income ............... 3,334 3,034 --------- --------- Earnings (loss) before income taxes .... 92,409 (6,260) Income taxes (benefit) .................... 33,729 (2,160) --------- --------- Net earnings (loss) .................... $ 58,680 $ (4,100) ========= ========= Net earnings (loss) per share: Basic .................................. $ .56 $ (.04) ========= ========= Diluted ................................ $ .56 $ (.04) ========= ========= Weighted average shares outstanding (in thousands): Basic .................................. 104,687 97,473 ========= ========= Diluted ................................ 105,286 97,473 ========= ========= Dividends per share ....................... $ .04 $ .02 ========= ========= See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
APRIL 30, OCTOBER 31, ASSETS 1999 1998 ------ ---------- ---------- Current assets: Cash and cash equivalent investments ................ $ 34,923 $ 30,733 Marketable securities ............................... 7,890 6,120 Receivables, net of allowances ...................... 211,349 171,849 Inventories ......................................... 52,679 48,833 Prepaid expenses .................................... 7,077 3,870 ---------- ---------- Total current assets .............................. 313,918 261,405 Receivables due beyond one year, net of allowances ...... 315,910 257,773 Intangible assets ....................................... 641,621 573,006 Deferred charges ....................................... 110,248 100,432 Cemetery property, at cost .............................. 437,379 382,972 Property and equipment, at cost: Land ................................................. 82,409 75,032 Buildings ............................................ 305,555 284,590 Equipment and other .................................. 144,655 127,951 ---------- ---------- 532,619 487,573 Less accumulated depreciation ........................ 117,436 105,834 ---------- ---------- Net property and equipment ........................... 415,183 381,739 Long-term investments ................................... 80,675 68,014 Merchandise trust, less estimated cost to deliver ....... 62,743 41,160 Other assets ............................................ 7,514 5,301 ---------- ---------- $2,385,191 $2,071,802 ========== ========== (continued)
STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
APRIL 30, OCTOBER 31, LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 ------------------------------------ ---------- ---------- Current liabilities: Current maturities of long-term debt ............. $ 10,630 $ 11,219 Accounts payable ................................. 19,198 19,048 Accrued payroll .................................. 17,969 21,074 Accrued insurance ................................ 14,000 12,420 Accrued interest ................................. 14,056 13,440 Accrued other .................................... 26,292 19,369 Income taxes payable ............................. 16,045 8,245 Deferred income taxes ............................ 14,348 13,967 ---------- ---------- Total current liabilities .................... 132,538 118,782 Long-term debt, less current maturities ............. 900,897 913,215 Deferred income taxes ............................... 94,743 92,231 Deferred revenue ................................... 118,164 98,775 Other long-term liabilities ......................... 12,742 9,509 ---------- ---------- Total liabilities ............................ 1,259,084 1,232,512 ---------- ---------- Commitments and contingencies (Notes 3 and 8) Shareholders' equity: Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued ............. -- -- Common stock, $1.00 stated value: Class A authorized 150,000,000 shares; issued and outstanding 108,152,625 and 94,472,844 shares at April 30, 1999 and October 31, 1998, respectively ................................. 108,153 94,473 Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at April 30, 1999 and October 31, 1998; 10 votes per share; convertible into an equal number of Class A shares ..................... 3,555 3,555 Additional paid-in capital ....................... 698,152 492,177 Retained earnings ................................ 369,624 315,140 Cumulative foreign translation adjustment ........ (57,399) (64,887) Unrealized appreciation (depreciation) of investments .................................... 4,022 (1,168) ---------- ---------- Total shareholders' equity .................... 1,126,107 839,290 ---------- ---------- $2,385,191 $2,071,802 ========== ========== See accompanying notes to consolidated financial statements.
STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
UNREALIZED COMMON STOCK CUMULATIVE APPRECIATION ---------------------------- ADDITIONAL FOREIGN (DEPRECIATION) TOTAL SHARES - PAID-IN RETAINED TRANSLATION OF SHAREHOLDERS' CLASSES A AND B(1) AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS EQUITY ------------------ --------- ----------- -------- ------------- -------------- ------------- (IN THOUSANDS) Balance October 31, 1998...... 98,028 $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290 Comprehensive income: Net earnings................. 58,680 58,680 Other comprehensive income: Foreign translation adjustment................ 7,488 7,488 Unrealized appreciation of investments............... 8,173 8,173 Deferred income tax expense on unrealized appreciation of investments............ (2,983) (2,983) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total other comprehensive income.................... 7,488 5,190 12,678 ---------- ---------- ---------- ---------- ---------- ---------- ---------- Total comprehensive income... 58,680 7,488 5,190 71,358 Sales of common stock......... 13,680 13,680 205,975 219,655 Dividends ($.04 per share).... (4,196) (4,196) ---------- ---------- ---------- ---------- ---------- ---------- ---------- Balance April 30, 1999........ 111,708 $ 111,708 $ 698,152 $ 369,624 $ (57,399) $ 4,022 $1,126,107 ========== ========== ========== ========== ========== ========== ==========
(1) Includes 3,555 shares (in thousands) of Class B Common Stock. See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30, ---------------------------- 1999 1998 -------- -------- Cash flows from operating activities: Net earnings (loss)................................................ $ 58,680 $ (4,100) Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities: Performance-based stock options................................. - 76,762 Depreciation and amortization................................... 21,470 15,115 Provision for doubtful accounts................................. 15,058 12,327 Net gains on sales of marketable securities..................... (2,259) (1,632) Benefit for deferred income taxes............................... (731) (3,549) Changes in assets and liabilities net of effects from acquisitions: Increase in prearranged funeral trust receivables............. (17,978) (10,002) Increase in other receivables................................. (70,230) (41,074) Increase in deferred charges and intangible assets............ (9,244) (9,533) (Increase) decrease in inventories and cemetery property...... 3,376 (4,855) Increase in merchandise trust, less estimated cost to deliver merchandise...................................... (20,335) (13,597) Increase (decrease) in accounts payable and accrued expenses.. 7,886 (9,907) Increase (decrease) in deferred revenue....................... 11,807 (4,300) (Increase) decrease in other.................................. (6,606) 262 ---------- ---------- Net cash provided by (used in) operating activities........... (9,106) 1,917 ---------- ---------- Cash flows from investing activities: Proceeds from sales of marketable securities....................... 10,647 11,082 Purchases of marketable securities and long-term investments....... (18,025) (12,877) Purchases of subsidiaries, net of cash, seller financing and stock issued................................................. (152,016) (47,997) Additions to property and equipment................................ (22,348) (19,099) Other.............................................................. 479 1,837 ---------- ---------- Net cash used in investing activities......................... (181,263) (67,054) ---------- ---------- (continued)
STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS)
SIX MONTHS ENDED APRIL 30, ------------------------------ 1999 1998 -------- -------- Cash flows from financing activities: Proceeds from long-term debt....................................... $ 200,847 $ 380,741 Repayments of long-term debt....................................... (221,970) (251,685) Retirement of performance-based stock options...................... - (69,431) Issuance of common stock........................................... 219,655 11,009 Dividends.......................................................... (4,196) (1,950) Purchase and retirement of common stock............................ - (9,101) --------- --------- Net cash provided by financing activities....................... 194,336 59,583 --------- --------- Effect of exchange rates on cash and cash equivalents................. 223 (1,145) --------- --------- Net increase (decrease) in cash....................................... 4,190 (6,699) Cash and cash equivalents, beginning of period........................ 30,733 31,640 --------- --------- Cash and cash equivalents, end of period.............................. $ 34,923 $ 24,941 ========= ========= Supplemental cash flow information: Cash paid during the period for: Income taxes.................................................... $ 25,200 $ 5,700 Interest........................................................ $ 26,600 $ 17,900 Noncash investing and financing activity: Subsidiaries acquired with common stock......................... $ - $ 200
See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) (1) BASIS OF PRESENTATION (a) The Company Stewart Enterprises, Inc. (the "Company") is the third largest provider of products and services in the death care industry in North America. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services. As of April 30, 1999, the Company owned and operated 619 funeral homes and 157 cemeteries in 30 states within the United States, and in Puerto Rico, Mexico, Australia, New Zealand, Canada, Spain, Portugal, the Netherlands, Argentina, France and Belgium. For the six months ended April 30, 1999, foreign operations contributed approximately 20% of total revenue and, as of April 30, 1999, represented approximately 20% of total assets. (b) Principles of Consolidation The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. (c) Interim Disclosures The information as of April 30, 1999, and for the three and six months ended April 30, 1999 and 1998, is unaudited, but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998. The results of operations for the three and six months ended April 30, 1999 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 1999. (d) Foreign Currency Translation All assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of shareholders' equity, except for translation adjustments arising from operations in highly inflationary economies. During the first quarter of fiscal year 1997, the Company changed its method of reporting foreign currency translation adjustments for its Mexican operations to the method prescribed for highly inflationary economies. Under that method, foreign currency translation adjustments are reflected in results of operations, instead of in shareholders' equity. As of January 1, 1999, the Mexican economy was no longer considered highly inflationary by the SEC staff. Accordingly, subsequent to January 1, 1999, gains and losses resulting from translation of the financial statements of the Company's Mexican operations are reflected in shareholders' equity, and the functional currency used by the Company's Mexican operations returned to the Mexican peso. These changes did not have a material effect on the Company's results of operations for fiscal year 1998 or the first six months of fiscal year 1999. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) (1) BASIS OF PRESENTATION--(CONTINUED) (e) Per-Share Data Effective November 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share," which requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company's time-vest stock options) had been issued during each period. See Note 5. All share and per-share data have been adjusted for the Company's two-for- one common stock split effected April 24, 1998. (f) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. (2) ACQUISITIONS During the six months ended April 30, 1999, the Company purchased 68 funeral homes and 17 cemeteries, compared to 41 funeral homes and two cemeteries purchased during the six months ended April 30, 1998. These acquisitions have been accounted for by the purchase method, and their results of operations are included in the accompanying consolidated financial statements from the dates of acquisition. The purchase price allocations for certain of these acquisitions are based on preliminary information. The following table reflects, on an unaudited pro forma basis, the combined operations of the Company and the businesses acquired during the six months ended April 30, 1999, as if such acquisitions had taken place at the beginning of the respective periods presented. Appropriate adjustments have been made to reflect the accounting basis used in recording the acquisitions. These pro forma results have been prepared for comparative purposes only and do not purport to be indicative of the results of operations that would have resulted had the combinations been in effect on the dates indicated, that have resulted since the dates of acquisition, or that may result in the future. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) (2) ACQUISITIONS--(CONTINUED)
SIX MONTHS ENDED APRIL 30, ------------------------------ 1999 1998 -------- -------- (Unaudited) Revenues..................................................... $ 402,324 $ 328,009 ========= ========= Operating earnings before performance-based stock options.... $ 117,285 $ 88,598 ========= ========= Net earnings (loss).......................................... $ 56,887 $ (6,827) ========= ========= Basic earnings (loss) per share.............................. $ .54 $ (.07) ========= ========= Diluted earnings (loss) per share............................ $ .54 $ (.07) ========= ========= Weighted average shares outstanding (in thousands): Basic..................................................... 104,687 97,473 ========= ========= Diluted................................................... 105,286 97,473 ========= =========
The effect of acquisitions at dates of purchase on the consolidated financial statements was as follows:
SIX MONTHS ENDED APRIL 30, ------------------------------ 1999 1998 -------- -------- (Unaudited) Current assets............................................... $ 22,591 $ 5,345 Receivables due beyond one year.............................. 2 - Cemetery property............................................ 59,105 7,902 Property and equipment, net.................................. 20,212 7,792 Deferred charges and other assets............................ 745 25 Intangible assets, net....................................... 78,019 46,977 Current liabilities.......................................... (6,191) (3,660) Long-term debt............................................... (10,449) (15,279) Other long-term liabilities.................................. (12,018) (905) --------- --------- 152,016 48,197 Common stock used for acquisitions........................... - 200 --------- --------- Cash used for acquisitions................................... $ 152,016 $ 47,997 ========= =========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) (3) CONTINGENCIES The Company was notified in September 1994 that a suit was brought by a competitor regarding the Company's acquisition of certain corporations in Mexico. The suit alleges that this acquisition violated the competitor's previous option to acquire the same corporations. The suit seeks unspecified damages. The Company believes that the suit is without merit and intends to defend it vigorously. The Company believes it is entitled to indemnification from the previous owners of these corporations should an unfavorable outcome result. Management does not believe this matter will have a material adverse effect on the financial position, net earnings or cash flows of the Company. (4) RECENT ACCOUNTING STANDARDS Effective November 1, 1998, the Company adopted Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting Comprehensive Income." SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," is required to be implemented during the Company's fiscal year ending October 31, 1999, and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is required to be implemented in the first quarter of the Company's fiscal year 2001. The effect of these pronouncements on the Company's consolidated financial condition and results of operations is not expected to be material. (5) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA
EARNINGS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) DATA ------------- --------------- ----------- THREE MONTHS ENDED APRIL 30, 1999 ------------------------------------- Net earnings.......................................... $ 32,163 ========= Basic earnings per share: Net earnings available to common shareholders...... $ 32,163 111,707 $ .29 ========= Effect of dilutive securities: Time-vest stock options assumed exercised.......... - 485 --------- --------- Diluted earnings per share: Net earnings available to common shareholders plus time-vest stock options assumed exercised.. $ 32,163 112,192 $ .29 ========= ========= ========
EARNINGS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) DATA ------------- --------------- ----------- SIX MONTHS ENDED APRIL 30, 1999 ------------------------------------- Net earnings.......................................... $ 58,680 ========= Basic earnings per share: Net earnings available to common shareholders...... $ 58,680 104,687 $ .56 ======== Effect of dilutive securities: Time-vest stock options assumed exercised.......... - 599 --------- --------- Diluted earnings per share: Net earnings available to common shareholders...... plus time-vest stock options assumed exercised.. $ 58,680 105,286 $ .56 ========= ========= ========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED) (DOLLARS IN THOUSANDS, EXCEPT PER-SHARE AMOUNTS) (5) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA--(CONTINUED) Options to purchase 1,602,974 and 1,468,866 shares of common stock at prices ranging from $17.13 to $27.25 were outstanding during the three and six months ended April 30, 1999, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. The options, which expire on January 2, 2001, October 31, 2001 and July 31, 2004, were still outstanding at April 30, 1999. For the three and six months ended April 30, 1998, there is no difference between basic and diluted loss per share as reported in the accompanying consolidated financial statements. Since the Company reported losses in both periods, the effect of any potential common shares that would have been issued during the periods would have been antidilutive. Had the company reported earnings in both periods, approximately 819,000 and 774,000 shares would have been added to the diluted share count for time-vest stock options assumed exercised for the three and six months ended April 30, 1998, respectively. (6) EQUITY OFFERING On February 2, 1999, the Company completed the sale of 13,627,500 shares of Class A Common Stock, resulting in approximately $219,000 in net proceeds, which were used principally to repay balances outstanding under its revolving credit facilities, which amounts then became available to fund the Company's continuing acquisition program and for general corporate purposes. (7) INTEREST RATE SWAP In order to hedge a portion of the interest rate risk associated with its variable-rate debt, during the first quarter of 1999, the Company entered into a three-year interest rate swap agreement involving a notional amount of $200 million. This agreement, which became effective March 4, 1999, effectively converts $200 million of variable-rate debt bearing interest based on three- month LIBOR to a fixed rate of 4.915%. The net amount to be paid or received at the end of each 90-day settlement period under the swap agreement is recorded as an adjustment to interest expense. The estimated fair value, based on quoted market prices, of the interest rate swap as of April 30, 1999 was $3,305. (8) SUBSEQUENT EVENTS Subsequent to April 30, 1999, the Company acquired or entered into letters of intent or definitive agreements to acquire 11 funeral homes and four cemeteries for purchase prices aggregating approximately $19,127. STEWART ENTERPRISES, INC. AND SUBSIDIARIES MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION For purposes of the following discussion, funeral homes and cemeteries owned and operated for the entirety of both periods being compared are referred to as "Existing Operations." Correspondingly, funeral homes and cemeteries acquired or opened during either period being compared are referred to as "Acquired Operations." The Company's funeral and cemetery business includes prearranged sales funded through trust and escrow arrangements, as well as maintenance of cemetery grounds funded through perpetual care funds. The Company's investment strategy for these funds is, among other criteria, partially dependent on the ability to withdraw net realized capital gains from these funds. However, withdrawal of capital gains is not permitted for perpetual care funds in certain jurisdictions in which the Company operates. Accordingly, funds for which net capital gains are permitted to be withdrawn typically are invested in a diversified portfolio consisting principally of U.S. government securities, other interest-bearing securities and preferred stocks rated A or better, "blue chip" publicly-traded common stocks, money market funds and other short-term investments. The Company generally recognizes as revenue on a current basis from trust funds and escrow accounts all dividends, interest and net realized capital gains in excess of the amount to be deferred to offset expected increases in future costs of performing prearranged funeral services. Income from funds, especially those invested partially in common stock, can be materially affected by prevailing interest rates and the performance of the stock market. In managing its North American funds, including those in Puerto Rico and Canada and excluding those in Mexico, which include investments in common stock, the Company seeks an overall annual rate of return of approximately 8.5% to 9.0%. In the past three years, such funds have generated overall annual rates of return in that range. However, no assurance can be given that the Company will be successful in achieving any particular rate of return. RESULTS OF OPERATIONS Three Months Ended April 30, 1999 Compared to Three Months Ended April 30, 1998 Funeral Segment
THREE MONTHS ENDED APRIL 30, --------------------- 1999 1998 INCREASE -------- -------- ------------ (In millions) FUNERAL REVENUE ----------------- Existing Operations....................................... $ 88.9 $ 83.4 $ 5.5 Acquired Operations....................................... 20.2 0.7 19.5 Revenue from prearranged funeral trust funds and escrow accounts.......................................... 12.1 7.7 4.4 ------- ------- ------- $ 121.2 $ 91.8 $ 29.4 ======= ======= ======= FUNERAL COSTS --------------- Existing Operations....................................... $ 63.6 $ 60.6 $ 3.0 Acquired Operations....................................... 16.5 0.6 15.9 ------- ------- ------- $ 80.1 $ 61.2 $ 18.9 ======= ======= ======= Funeral Segment Profit.................................... $ 41.1 $ 30.6 $ 10.5 ======= ======= =======
Funeral revenue increased $29.4 million, or 32%, for the three months ended April 30, 1999, compared to the corresponding period in 1998. The Company experienced a $5.5 million, or 6.6%, increase in revenue from Existing Operations as a result of a 2.0% increase in the number of domestic funeral services performed by Existing Operations (1.0% increase worldwide) coupled with a 0.5% increase in the average revenue per domestic funeral service performed by Existing Operations (4.4% increase worldwide, excluding the effect of foreign currency translation). The increase in average revenue per funeral service was primarily due to price increases and improved merchandising. The Company strives to maintain an appropriate balance between its funeral and cemetery operations, its domestic and international operations and its atneed and preneed sales. In this regard, one of the Company's strategies is to achieve annual increases of 5% to 7% in worldwide revenue per funeral service performed by Existing Operations and to achieve that growth primarily through improved pricing and merchandising. For the three months ended April 30, 1999, the average revenue per funeral service performed by existing funeral homes increased 4.4% worldwide, excluding the effect of foreign currency translation which was slightly below this objective; however, for the six months ended April 30, 1999, the Company experienced a 5.3% worldwide increase, excluding the effect of foreign currency translation, in the average revenue per funeral service performed by its existing funeral homes. Moreover, the Company achieved a $9.8 million, or 16.6%, increase and a $12.0 million, or 10.2%, increase in revenue from its existing cemeteries for the three and six months ended April 30, 1999, respectively, thus demonstrating the earnings stability derived from the Company's balanced strategy. Existing Operations achieved improved profit margins resulting primarily from the increased cost control measures, including the Company's centralization and standardization of certain financial and administrative functions through the Company's Shared Services Center, the increased average revenue per funeral service and the increase in funeral services performed mentioned above. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition and construction of funeral homes from May 1998 through April 1999 which are not reflected in the 1998 period presented above. The $4.4 million increase in revenue from prearranged funeral trust funds and escrow accounts was attributable to a 23% growth in the average balance in such trust funds and escrow accounts, resulting primarily from current year customer payments deposited into the funds and funds added through acquisitions, coupled with a slight increase in the average yield on the North American funds (excluding those in Mexico). The return of the peso-denominated investments of the Company's Mexican subsidiaries, which comprise less than 10% of the Company's total funeral trust portfolio, averaged 27% for the current quarter on an annualized basis. The return on the Mexican funds partially offset the approximate 18% inflation experienced over the last 12 months. Cemetery Segment
THREE MONTHS ENDED APRIL 30, ---------------------- 1999 1998 INCREASE -------- -------- ------------ (In millions) CEMETERY REVENUE ------------------ Existing Operations.......................................... $ 68.7 $ 58.9 $ 9.8 Acquired Operations.......................................... 6.8 0.6 6.2 Revenue from merchandise trust funds and escrow accounts............................................. 5.6 3.3 2.3 ------- ------- ------- $ 81.1 $ 62.8 $ 18.3 ======= ======= ======= CEMETERY COSTS ---------------- Existing Operations.......................................... $ 50.6 $ 43.5 $ 7.1 Acquired Operations.......................................... 5.9 0.3 5.6 ------- ------- ------- $ 56.5 $ 43.8 $ 12.7 ======= ======= ======= Cemetery Segment Profit...................................... $ 24.6 $ 19.0 $ 5.6 ======= ======= =======
Cemetery revenue increased $18.3 million, or 29%, for the three months ended April 30, 1999, compared to the corresponding period in 1998. The Company experienced a $9.8 million, or 16.6%, increase in revenue from Existing Operations resulting primarily from an increase in preneed cemetery sales, price increases and improved merchandising. The improved profit margin achieved by Existing Operations was attributable principally to the increase in cemetery sales discussed above and the implementation of certain cost control measures, including the centralization and standardization of certain financial and administrative functions at the Shared Services Center. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition of cemeteries from May 1998 through April 1999 which are not reflected in the 1998 period presented above. The $2.3 million increase in revenue from merchandise trust funds and escrow accounts was attributable to a 27% growth in the average balance in the merchandise trust funds and escrow accounts, resulting from current year customer payments deposited into the funds, coupled with an increase in the average yield on the merchandise funds. Other During the quarter ended April 30, 1998, the Company achieved the performance goal for the performance-based stock options granted under the Company's 1995 Incentive Compensation Plan. As a result, the Company was required to record a nonrecurring, noncash charge to earnings of approximately $76.8 million (approximately $50.3 million or $.51 per share, after-tax) in the second quarter of fiscal year 1998. Additionally, to encourage optionees to exercise their options immediately in order to renew the performance-based option program and to reduce potential dilution from additional shares in the market, the Company offered to repurchase the options for the difference between $27.31, the closing price on the date on which the options vested, and the exercise price of the options. The repurchase of certain of the options by the Company and the exercise of the remaining options resulted in a cash outlay of approximately $69.4 million. Interest expense increased $2.7 million during the second quarter of fiscal year 1999 compared to the same period in 1998, as the result of an increase in average borrowings due principally to acquisition expenditures, partially offset by a decrease in average interest rates from 6.3% in 1998 to 6.0% in 1999. Other income increased $.5 million during the second quarter of fiscal year 1999 compared to the same period in 1998 primarily due to investment earnings from cash balances. Funds set aside for growth prospects were not deployed as quickly as anticipated and were temporarily invested resulting in approximately $1 million of investment earnings included in other income. The increase in other income was offset by a corresponding increase in interest expense incurred as these funds were not used to pay down the Company's revolving credit line. In December 1998, the Company entered into an interest rate swap agreement on a notional amount of $200 million. Under the terms of the agreement, effective March 4, 1999, the Company will pay a fixed rate of 4.915% and receive three-month LIBOR. The swap expires on March 4, 2002. As of April 30, 1999, the Company's outstanding borrowings totaled $911.5 million. Of the total amount outstanding, including the portion subject to the interest rate swap agreement, approximately 69% was fixed-rate debt, with the remaining 31% subject to short-term variable interest rates averaging approximately 5.2%. Six Months Ended April 30, 1999 Compared to Six Months Ended April 30, 1998 Funeral Segment
SIX MONTHS ENDED APRIL 30, -------------------- INCREASE 1999 1998 (DECREASE) -------- -------- ------------ (In millions) FUNERAL REVENUE ----------------- Existing Operations.......................................... $ 165.9 $ 161.3 $ 4.6 Acquired Operations.......................................... 45.7 4.7 41.0 Revenue from prearranged funeral trust funds and escrow accounts............................................. 21.0 12.7 8.3 ------- ------- ------- $ 232.6 $ 178.7 $ 53.9 ======= ======= ======= FUNERAL COSTS --------------- Existing Operations.......................................... $ 115.8 $ 116.1 $ (0.3) Acquired Operations.......................................... 37.6 4.0 33.6 ------- ------- ------- $ 153.4 $ 120.1 $ 33.3 ======= ======= ======= Funeral Segment Profit....................................... $ 79.2 $ 58.6 $ 20.6 ======= ======= =======
Funeral revenue increased $53.9 million, or 30%, for the six months ended April 30, 1999, compared to the corresponding period in 1998. The Company experienced a $4.6 million, or 2.9%, increase in revenue from Existing Operations as a result of a 2.5% increase in the average revenue per domestic funeral service performed by Existing Operations (5.3% increase worldwide, excluding the effect of foreign currency translation), primarily due to price increases and improved merchandising. Slightly offsetting this increase in revenue was a 2.4% decrease in the number of domestic funeral services performed by Existing Operations (2.8% decrease worldwide). The $.3 million, or .3%, decrease in funeral costs from Existing Operations resulted principally from the implementation of certain cost control measures, including contract negotiations with certain vendors and the Company's centralization and standardization of certain financial and administrative functions through its Shared Services Center. Existing Operations achieved improved profit margins resulting primarily from these increased cost control measures and the increased average revenue per funeral service mentioned above. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition and construction of funeral homes from May 1998 through April 1999 which are not reflected in the 1998 period presented above. The increase in revenue from prearranged funeral trust funds and escrow accounts was attributable to a 23% growth in the average balance in such trust funds and escrow accounts, resulting primarily from current year customer payments deposited into the funds and funds added through acquisitions, coupled with an increase in the average yield on the North American funds (excluding those in Mexico). The return of the peso-denominated investments of the Company's Mexican subsidiaries, which comprise less than 10% of the Company's total funeral trust portfolio, averaged 23% for the six months ended on April 30, 1999 on an annualized basis. The return on the Mexican funds partially offset the approximate 18% inflation experienced over the last 12 months. Cemetery Segment
SIX MONTHS ENDED APRIL 30, -------------------- 1999 1998 INCREASE -------- -------- -------- (In millions) CEMETERY REVENUE ------------------ Existing Operations.......................................... $ 129.8 $ 117.8 $ 12.0 Acquired Operations.......................................... 13.3 1.3 12.0 Revenue from merchandise trust funds and escrow accounts............................................. 9.4 6.1 3.3 ------- ------- ------ $ 152.5 $ 125.2 $ 27.3 ======= ======= ====== CEMETERY COSTS ---------------- Existing Operations.......................................... $ 95.7 $ 87.3 $ 8.4 Acquired Operations.......................................... 11.5 0.9 10.6 ------- ------- ------ $ 107.2 $ 88.2 $ 19.0 ======= ======= ====== Cemetery Segment Profit...................................... $ 45.3 $ 37.0 $ 8.3 ======= ======= ======
Cemetery revenue increased $27.3 million, or 21.8%, for the six months ended April 30, 1999, compared to the corresponding period in 1998, due principally to a $12.0 million, or 10.2%, increase in revenue from Existing Operations. The increase in revenue from Existing Operations resulted primarily from an increase in preneed cemetery sales, price increases and improved merchandising. The improved profit margin achieved by Existing Operations was attributable principally to the increase in cemetery sales discussed above and the implementation of certain cost control measures including the centralization and standardization of certain financial and administrative functions at the Shared Services Center. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition of cemeteries from May 1998 through April 1999 which are not reflected in the 1998 period presented above. The $3.3 million increase in revenue from merchandise trust funds and escrow accounts was attributable to a 25% growth in the average balance in the merchandise trust funds and escrow accounts, resulting from current year customer payments deposited into the funds, coupled with an increase in the average yield on the merchandise funds. Other In April 1998, the Company achieved the performance goal for the performance-based stock options granted under the Company's 1995 Incentive Compensation Plan. As a result, the Company was required to record a nonrecurring, noncash charge to earnings of approximately $76.8 million (approximately $50.3 million, or $.51 per share, after-tax) in April 1998. Additionally, to encourage optionees to exercise their options immediately in order to renew the performance-based option program and to reduce potential dilution from additional shares in the market, the Company offered to repurchase the options for the difference between $27.31, the closing price on the date on which the options vested, and the exercise price of the options. The repurchase of certain of the options by the Company and the exercise of the remaining options resulted in a cash outlay of approximately $69.4 million. Interest expense increased $7.2 million during the first six months of fiscal year 1999 compared to the same period in 1998, resulting from an increase in average borrowings due principally to acquisition expenditures, partially offset by a decrease in average interest rates from 6.5% in 1998 to 6.2% in 1999. Other income increased $.3 million during the first six months of fiscal year 1999 compared to the comparable period in 1998 primarily due to investment earnings from cash balances. Funds set aside for growth prospects were not deployed as quickly as anticipated and were temporarily invested resulting in approximately $1 million of investment earnings included in other income. The increase in other income was offset by a corresponding increase in interest expense incurred as these funds were not used to pay down the Company's revolving credit line. In December 1998, the Company entered into an interest rate swap agreement on a notional amount of $200 million. Under the terms of the agreement, effective March 4, 1999, the Company will pay a fixed rate of 4.915% and receive three-month LIBOR. The swap expires on March 4, 2002. As of April 30, 1999, the Company's outstanding borrowings totaled $911.5 million. Of the total amount outstanding, including the portion subject to the interest rate swap agreement, approximately 69% was fixed-rate debt, with the remaining 31% subject to short-term variable interest rates averaging approximately 5.2%. LIQUIDITY AND CAPITAL RESOURCES Cash and marketable securities of the Company were $42.8 million at April 30, 1999, an increase of approximately $6.0 million from October 31, 1998. The Company used cash of $9.1 million in its operations for the six months ended April 30, 1999, compared to $1.9 million provided by operations for the corresponding period in 1998, due principally to an increase in receivables partially offset by an increase in net earnings and other working capital changes. Long-term debt at April 30, 1999 amounted to $911.5 million, compared to $924.4 million at October 31, 1998. The Company's long-term debt consisted of $486.0 million under the Company's revolving credit facilities, $401.1 million of long-term notes and $24.4 million of term notes incurred principally in connection with the acquisition of funeral home and cemetery properties. All of the Company's debt is uncollateralized, except for approximately $3.4 million of term notes incurred principally in connection with acquisitions. The most restrictive of the Company's credit agreements require it to maintain a debt-to-equity ratio no higher than 1.25 to 1.00. The Company has managed its capitalization within that limit and had a ratio of total debt-to- equity of .8 to 1.0 and 1.1 to 1.0 as of April 30, 1999 and October 31, 1998, respectively. In February 1999, the Company completed the sale of 13.6 million shares of Class A Common Stock, resulting in approximately $219 million in net proceeds, which was used principally to repay balances outstanding under its revolving credit facilities, which amounts then became available to fund the Company's continuing acquisition program and for general corporate purposes. As of June 9, 1999, the Company had a debt-to-equity ratio of approximately .8 to 1.0 and $486.1 million of additional borrowing capacity within the 1.25 to 1.0 debt-to-equity parameter, $109.6 million of which was available under its revolving credit facilities. The Company's ratio of earnings to fixed charges was as follows for the years and period indicated: YEARS ENDED OCTOBER 31, SIX MONTHS ENDED -------------------------------------------------------- APRIL 30, 1994 1995 1996 1997 1998 1999 -------- -------- -------- -------- -------- ----------- 5.30 2.72(1) 3.98 3.65(2) 2.39(3) 4.23 ______________________ (1) Pretax earnings for fiscal year 1995 includes a nonrecurring, noncash charge of $17.3 million in connection with the vesting of performance- based stock options. Excluding the charge, the Company's ratio of earnings to fixed charges for fiscal year 1995 would have been 3.43. (2) Excludes the cumulative effect of change in accounting principles. (3) Pretax earnings for fiscal year 1998 includes a nonrecurring, noncash charge of $76.8 million in connection with the vesting of performance- based stock options. Excluding the charge, the Company's ratio of earnings to fixed charges for fiscal year 1998 would have been 4.02. For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness, and the portion of rental expense that management believes to be representative of the interest component of rental expense. Fiscal year 1996 and prior amounts reflect the Company's previous accounting methods which were in effect at that time. During the six months ended April 30, 1999, the Company completed acquisitions of 68 funeral homes and 17 cemeteries for purchase prices aggregating approximately $148.4 million, which was funded primarily with advances under the Company's revolving credit facilities. From the beginning of this fiscal year through June 9, 1999, the Company has acquired or entered into letters of intent or definitive agreements to acquire 100 businesses for an aggregate purchase price of approximately $167.5 million, compared to $196.6 million reported by the Company as of January 15, 1999. During February and March of 1999, the Company renegotiated several pending acquisitions to better reflect current pricing and market conditions, resulting in purchase price reductions. Further, the Company terminated negotiations with respect to one large transaction and added a number of additional commitments at lower pricing. The Company plans to finance the purchase price of pending acquisitions primarily by borrowings under its revolving credit facilities. After application of the proceeds from the above-mentioned equity offering, additional capacity became available under the revolving credit facilities. During the first quarter of 1999, Service Corporation International, one of the Company's primary competitors for acquisitions, announced that it planned to reduce significantly the level of its acquisition activity. The Loewen Group Inc., previously a primary competitor for acquisitions, entered into bankruptcy proceedings on June 1, 1999, after announcing that it had terminated its acquisition activity and was offering a number of its own properties for sale. In addition, the fourth largest public death care company and another of the Company's competitors for acquisitions, Equity Corporation International, merged with Service Corporation International. The Company believes that the resulting decline in competition for acquisitions has allowed it to negotiate prices for acquisitions at lower multiples than those paid by the Company during fiscal year 1998 and prior years. Previously, the Company's objective was to pay no more than eight times management's estimate of what an acquired firm's EBIT (earnings before interest and taxes) would be for the first twelve months after the acquisition, although the Company sometimes paid somewhat higher prices for strategic reasons. In any case, management's objective was for the acquired firm to be additive to the Company's earnings per share in the first twelve months after its acquisition. Under its new pricing parameters, the Company's objective is to pay six to eight times management's estimate of what the acquired firm's EBIT would be for the first twelve months after the acquisition and within eight times EBIT overall, including strategic acquisitions. In any case, management's objective is still for the acquired firm to be additive to the Company's earnings per share in the first twelve months after its acquisition. While the Company believes that it may be able to consummate acquisitions during the remainder of fiscal year 1999 at lower multiples than it has paid historically, there can be no assurance that this will be the case, and the lower prices may cause some potential sellers to decide not to sell their businesses. Although the Company has no material commitments for capital expenditures, the Company contemplates capital expenditures, excluding acquisitions, of approximately $45 million for the fiscal year ending October 31, 1999, including construction of new funeral homes and refurbishing of funeral homes recently acquired. Management expects that future capital requirements will be satisfied through a combination of internally generated cash flow and amounts available under its revolving credit facilities. Additional debt and equity financing may be required in connection with future acquisitions. INFLATION Inflation has not had a significant impact on the Company's operations over the past three years, nor is it expected to have a significant impact in the foreseeable future. For a discussion of the impact of inflation in the Mexican economy on the Company's financial statements, see Note (1)(d) to the Company's consolidated financial statements in Item 1. OTHER Year 2000 Issues OVERVIEW. Year 2000 issues result from the past practice in the computer industry of using two digits rather than four to identify the applicable year. This practice can create breakdowns or erroneous results when computers perform operations involving years later than 1999. THE COMPANY'S STATE OF READINESS. The Company has devised and commenced an extensive compliance plan with the objective of bringing all of the Company's information technology (IT) systems and non-IT systems into Year 2000 compliance by the end of the third quarter of fiscal year 1999. The Company has divided its systems into (i) critical systems, consisting of IT systems, and (ii) non-critical systems, consisting of a mixture of IT and non-IT systems. Each system will be evaluated and brought into compliance in five phases: * Phase I: Awareness - Prepare and present comprehensive report to management * Phase II: Assessment - Identify and evaluate all systems for Year 2000 compliance * Phase III: Compliance - Complete necessary Year 2000 modifications * Phase IV: Testing - Test all modified systems for Year 2000 compliance * Phase V: Implementation - Return Year 2000 compliant systems to daily operation Phase I has been completed. Additionally, all of the Company's critical systems have completed Phase II and 95% were found to be compliant or made to be compliant by completing Phases III through V. The remaining 5% of the Company's critical systems have commenced Phase III through Phase V, and the Company anticipates that these systems will be brought into compliance by the end of the third quarter of fiscal year 1999. Seventy percent of the Company's non-critical systems have completed Phase II and were either found to be compliant or were brought into compliance by completing Phases III through V. The Company anticipates that the remaining noncritical systems will be evaluated and brought into compliance by the end of the third quarter of fiscal year 1999. In addition, the Company has distributed surveys to all of its significant vendors, financial institutions and insurers regarding their Year 2000 compliance. The Company has received responses from all of those third parties whose non-compliance could have a material adverse effect on the Company's operations. None of their responses have indicated significant problems. THE COSTS INVOLVED. Because many of the Company's computer systems have been replaced in recent years as part of the Company's on-going goal to maintain state of the art technology, the Company's Year 2000 compliance costs have been relatively low. To date, the Company has incurred expenses of approximately $80,000 for external consultants, software and hardware applications in implementing its compliance plan. The Company does not separately track the internal costs incurred for the year 2000 project. Such costs are principally payroll-related costs for the Company's information technology group. Management estimates that the total external cost to be incurred by the Company to complete its compliance plan will be approximately $175,000. All costs related to the Year 2000 compliance plan are included in the Information Systems budget and are based on management's best estimates. There can be no guarantee that actual results will not differ from those estimated or that such difference will not be material. RISKS. If the Company is not successful in its efforts to bring its systems into Year 2000 compliance: * The Company's ability to procure merchandise in a timely and cost-effective manner may be impaired, * Daily business procedures may be delayed due to the use of manual procedures, and * Some business procedures may be interrupted if no alternative methodology is available. Each of these items could have a material adverse effect on the Company's operations. The Company has no guarantee that the systems of third parties will be brought into compliance on a timely basis. The non-compliance of a third party's system could have a material adverse effect on the Company's operations. THE COMPANY'S CONTINGENCY PLAN. Although the Company believes that its Year 2000 plan is adequate to achieve full system compliance on a timely basis, the Company is in the process of developing a contingency plan to address the possibility of the Company's and third parties' noncompliance. The Company anticipates completing its contingency plan by the end of the third quarter of fiscal year 1999. Recent Accounting Standards Statements of Financial Accounting Standards (SFAS) No. 131, "Disclosure about Segments of an Enterprise and Related Information," is required to be implemented during the Company's fiscal year ending October 31, 1999. SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities," is required to be implemented in the first quarter of the Company's fiscal year 2001. The effect of these pronouncements on the Company's consolidated financial condition and results of operations is not expected to be material. STEWART ENTERPRISES, INC. AND SUBSIDIARIES ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Quantitative and qualitative disclosure about market risk is presented in Item 7A to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998, filed with the Securities and Exchange Commission on January 21, 1999. The following disclosure discusses only those instances in which the market risk has changed by more than 10% from the annual disclosure. The market risk inherent in the Company's market risk sensitive instruments and positions is the potential change arising from increases or decreases in the prices of marketable equity securities, foreign currency exchange rates, and interest rates as discussed below. Generally, the Company's market risk sensitive instruments and positions are characterized as "other than trading." The Company's exposure to market risk as discussed below includes "forward- looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in equity markets, foreign currency exchange rates or interest rates. The Company's views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based upon actual fluctuations in equity markets, foreign currency exchange rates, interest rates and the timing of transactions. MARKETABLE EQUITY SECURITIES As of April 30, 1999, the Company's marketable equity securities consisted principally of investments in its prearranged funeral, merchandise and perpetual care trust and escrow accounts and had a fair value of $417.0 million determined using final sale prices quoted on stock exchanges. Each 10% change in the average market prices of the equity securities held in such accounts would result in a change of approximately $41.7 million in the fair value of such accounts. The Company's prearranged funeral, merchandise and perpetual care trust funds and escrow accounts are detailed in Notes 5 and 6 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998. Generally, the Company's wholly-owned subsidiary, Investors Trust, Inc. ("ITI"), serves as investment adviser on these trust and escrow accounts. ITI manages the mix of equities and fixed-income securities in accordance with an investment policy established by the Investment Committee of the Company's Board of Directors with the assistance of third party professional financial consultants. The policy emphasizes conservation, diversification and preservation of principal while seeking appropriate levels of current income and capital appreciation. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. FOREIGN CURRENCY The Company's foreign subsidiaries receive revenues and pay expenses in a number of foreign currencies. For the six months ended April 30, 1999, each 10% change in the average exchange rate between such currencies and the U.S. dollar would result in a change of approximately $3.8 million on an annualized basis in the Company's pre-tax earnings. The Company does not currently hedge its investments in foreign subsidiaries; however, the Company continually monitors the exchange rates of its foreign currencies to determine whether hedging transactions would be appropriate. INTEREST The Company has entered into various fixed and variable rate debt obligations, which are detailed in Note 11 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998. As of April 30,1999, the carrying value of the Company's long-term fixed- rate debt, including accrued interest and the unamortized portion of the ROARS option premium, was approximately $438.1 million, compared to fair value of $432.7 million. Fair value was determined using quoted market prices, where applicable, or discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. Each 0.5% change in average interest rates applicable to such debt would result in a change of approximately $6.6 million in the fair value of these instruments. If these instruments are held to maturity, the Company will not realize any changes in fair value. In order to hedge a portion of the interest rate risk associated with its variable-rate debt, during the first quarter of 1999 the Company entered into a three-year interest rate swap agreement involving a notional amount of $200 million. This agreement, which became effective March 4, 1999, effectively converts $200 million of variable-rate debt bearing interest based on three- month LIBOR to a fixed rate of 4.915%. The estimated fair value of the interest rate swap as of April 30, 1999, based on quoted market prices, was $3.3 million. A hypothetical 1% increase in the pay rate would result in an increase in interest expense of approximately $2.0 million. A hypothetical 1% increase in the receive rate would decrease interest expense by a corresponding amount. Any fluctuations in the receive rate would be offset by a decrease in interest expense on the Company's variable-rate debt, to the extent the variable-rate debt is hedged by the interest swap. Also, in February 1999, the Company applied approximately $215 million of the proceeds of its public equity offering to the repayment of variable-rate debt. As of June 9, 1999, the Company had $921.5 million of outstanding borrowings, $296.0 million of which was not hedged by the interest rate swap agreement and was subject to short-term variable interest rates. Each 0.5% change in the average interest rate applicable to the Company's unhedged variable-rate debt would result in a change of approximately $0.1 million in the Company's pre-tax earnings. The Company monitors its mix of fixed and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix by, for example, refinancing balances outstanding under its variable rate revolving credit facilities with fixed-rate debt, or by entering into interest rate swaps. PART II. OTHER INFORMATION ITEM 1. LEGAL PROCEEDINGS There has been no change in the status of the Company's material legal proceedings during the quarter ended April 30, 1999. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS The Company's 1999 annual meeting of shareholders was held on April 9, 1999. All director nominees were elected. The voting tabulation was as follows: William E. Rowe: 130,727,126 votes for; 959,243 votes withheld; James W. McFarland: 130,816,838 votes for; 869,531 votes withheld; Kenneth C. Budde: 130,748,316 votes for; 938,053 votes withheld. The proposal to ratify the appointment of PricewaterhouseCoopers LLP, certified public accountants, as independent auditors for the fiscal year ending October 31, 1999 was approved. The voting tabulation was as follows: 131,324,926 votes for; 176,447 votes against; and 184,996 abstentions. ITEM 5. OTHER INFORMATION FORWARD-LOOKING STATEMENTS Certain statements made herein or elsewhere by, or on behalf of, the Company that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. The Company's strategic plan for the future includes the following goals: (i) achievement of annual revenues of $1 billion which the Company expects to accomplish by fiscal year 2000; and (ii) earnings per share growth of 20% annually. The Company's goals for fiscal year 1999 include revenue growth of at least 20%. Although the Company has a goal for earnings per share growth of 20% for the future, the Company currently estimates earnings per share growth of 17% for fiscal year 1999 and 19% for fiscal year 2000 due to the dilutive effect on earnings per share of the sale of 13.6 million shares of Class A Common Stock in February 1999. Such shares were sold at a lower price than had been anticipated because of adverse market conditions caused primarily by Service Corporation's announcement of declining earnings. In addition, the Company is currently comfortable with expectations of $225 million in acquisition commitments in fiscal year 1999, although part of these acquisitions may not close until fiscal year 2000. For additional information regarding factors affecting the Company's acquisition program, see "Liquidity and Capital Resources" in Item 2. For fiscal year 1999, the Company's gross margin improvement goal is approximately 50 to 100 basis points over its fiscal year 1998 gross margin. Forward-looking statements are based on assumptions about future events and are therefore inherently uncertain; actual results may differ materially from those projected. See "Cautionary Statements" below. CAUTIONARY STATEMENTS The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual consolidated results and could cause the Company's actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements above and in any other forward-looking statements made by or on behalf of the Company. (1) Achieving projected revenue growth depends in part upon sustaining the level of acquisition activity experienced by the Company in the last three fiscal years. Higher levels of acquisition activity will increase anticipated revenues, and lower levels will decrease anticipated revenues. The level of acquisition activity depends not only on the number of properties acquired, but also on the size of the acquisitions; for example, one large acquisition could increase substantially the level of acquisition activity and, consequently, revenues. Several important factors, among others, affect the Company's ability to consummate acquisitions: (a)The Company may be unable to find a sufficient number of businesses for sale at prices the Company is willing to pay. (b)In most of its existing markets and in many new markets, including foreign markets, that the Company desires to enter, the Company competes for acquisitions with the other publicly-traded death care firms. These competitors, and others, may be willing to pay higher prices for businesses than the Company or may cause the Company to pay more to acquire a business than the Company would otherwise have to pay in the absence of such competition. Thus, the aggressiveness of the Company's competitors in pricing acquisitions affects the Company's ability to complete acquisitions at prices it finds attractive. (c)Achieving the Company's projected acquisition activity depends on the Company's ability to enter new markets, including foreign markets. Due in part to the Company's lack of experience operating in new areas and to the presence of competitors who have been in certain markets longer than the Company, such entry may be more difficult or expensive than anticipated by the Company. (2) Achieving the Company's revenue goals also is affected by the volume and prices of the properties, products and services sold. The annual sales targets set by the Company are very aggressive, and the inability of the Company to achieve planned increases in volume or prices could cause the Company not to meet anticipated levels of revenue. The ability of the Company to achieve volume or price increases at any location depends on numerous factors, including the local economy, the local death rate and competition. (3) Another important component of revenue is earnings from the Company's trust funds and escrow accounts, which are determined by the size of, and returns (which include dividends, interest and realized capital gains) on, the funds. The performance of the funds depends primarily on market conditions that are not within the Company's control. The size of the funds depends on the level of sales, funds added through acquisitions and the amount of returns that may be reinvested. (4) Future revenue also is affected by the level of prearranged sales in prior periods. The level of prearranged sales may be adversely affected by numerous factors, including deterioration in the economy, which causes individuals to have less discretionary income. (5) The Company first entered foreign markets in the fourth quarter of fiscal year 1994, and no assurance can be given that the Company will continue to be successful in expanding in foreign markets, or that any expansion in foreign markets will yield results comparable to those realized through the Company's expansion in the United States. (6) In addition to the factors discussed above, earnings per share may be affected by other important factors, including the following: (a)The ability of the Company to achieve projected economies of scale in markets where it has "clusters" or combined facilities. (b)Whether acquired businesses perform at pro forma levels used by management in the valuation process and whether, and the rate at which, management is able to increase the profitability of acquired businesses. (c)The ability of the Company to manage its growth in terms of implementing internal controls and information gathering systems, and retaining or attracting key personnel, among other things. (d)The amount and rate of growth in the Company's general and administrative expenses. (e)Changes in interest rates, which can increase or decrease the amount the Company pays on borrowings with variable rates of interest. (f)The Company's debt-to-equity ratio, the number of shares of common stock outstanding and the portion of the Company's debt that has fixed or variable interest rates. (g)The impact on the Company's financial statements of nonrecurring accounting charges that may result from the Company's ongoing evaluation of its business strategies, asset valuations and organizational structures. (h)Changes in government regulation, including tax rates and their effects on corporate structure. (i)Changes in inflation and other general economic conditions both domestically and internationally, affecting financial markets (e.g. marketable security values as well as exchange rate fluctuations). (j)Unanticipated legal proceedings and unanticipated outcomes of legal proceedings. (k)Changes in accounting policies and practices adopted voluntarily or required to be adopted by generally accepted accounting principles. (l)The ability of the Company and its significant vendors, financial institutions and insurers to achieve Year 2000 compliance on a timely basis. The Company also cautions readers that it assumes no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by, or on behalf of, the Company. ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K (a) Exhibits 3.1 Amended and Restated Articles of Incorporation of the Company, as amended (incorporated by reference to Exhibit 3.1 to the Company's Quarterly Report on Form 10-Q for the quarter ended January 31, 1996) 3.2 By-laws of the Company, as amended (incorporated by reference to Exhibit 3.2 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1997) 12 Calculation of Ratio of Earnings to Fixed Charges 27 Financial Data Schedule (b) Reports on Form 8-K The Company filed a Form 8-K on March 10, 1999, reporting, under "Item 5. Other Events," the earnings release for the quarter ended January 31, 1999. STEWART ENTERPRISES, INC. AND SUBSIDIARIES SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized. STEWART ENTERPRISES, INC. June 14, 1999 /s/ KENNETH C. BUDDE ---------------------------- Kenneth C. Budde Executive Vice President Chief Financial Officer June 14, 1999 /s/ MICHAEL G. HYMEL ---------------------------- Michael G. Hymel Vice President Corporate Controller Chief Accounting Officer EX-12 2 Exhibit 12
STEWART ENTERPRISES, INC. AND SUBSIDIARIES CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS) (UNAUDITED) YEARS ENDED OCTOBER 31, SIX MONTHS -------------------------------------------------------------- ENDED 1994 1995 1996 1997 1998 APRIL 30, 1999 -------- -------- -------- -------- -------- ------------------ Earnings before income taxes................... $ 42,198 $ 41,500(1) $ 82,075 $ 106,477(2) $ 64,964(3) $ 92,409 Fixed charges: Interest expense............................. 8,877 22,815 26,051 38,031 43,821 27,195 Interest portion of lease expense............ 935 1,343 1,522 2,181 3,084 1,440 --------- --------- --------- --------- --------- --------- Total fixed charges............................ 9,812 24,158 27,573 40,212 46,905 28,635 Earnings before income taxes and fixed charges. $ 52,010 $ 65,658(1) $ 109,648 $ 146,689(2) $ 111,869(3) $ 121,044 ========= ========= ========= ========= ========= ========= Ratio of earnings to fixed charges............. 5.30 2.72(1) 3.98 3.65(2) 2.39(3) 4.23 ========= ========= ========= ========= ========= =========
_____________________________ (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. EX-27 3
5 6-MOS OCT-31-1998 APR-30-1999 34,923 7,890 211,349 0 52,679 313,918 532,619 117,436 2,385,191 132,538 900,897 111,708 0 0 1,014,399 2,385,191 385,178 385,178 260,560 260,560 0 0 27,195 92,409 33,729 58,680 0 0 0 58,680 .56 .56
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