-----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, JSNZrbOXMCprDLgZ+GjN1MpPQpJi6tD5jjmzTY1IyWhxxbpe4qBhS0LtyMtzxyCC gCsIBMsKFFuNd0rLEdHb1w== 0000906280-00-000024.txt : 20000203 0000906280-00-000024.hdr.sgml : 20000203 ACCESSION NUMBER: 0000906280-00-000024 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 9 CONFORMED PERIOD OF REPORT: 19991031 FILED AS OF DATE: 20000127 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-K SEC ACT: SEC FILE NUMBER: 001-15449 FILM NUMBER: 514452 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-K 1 =============================================================================== UNITED STATES SECURITIES AND EXCHANGE COMMISSION WASHINGTON, D.C. 20549 FORM 10-K (X) ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D)OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE FISCAL YEAR ENDED OCTOBER 31, 1999 ( ) TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 ----------------- 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. incorporation or organization) Employer 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 ----------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT: None SECURITIES REGISTERED PURSUANT TO SECTION 12(G) OF THE ACT: Class A Common Stock, No Par Value Preferred Stock Purchase Rights (Title of Class) ----------------- 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 __ ----------------- Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ----------------- The aggregate market value of the voting stock held by nonaffiliates (affiliates being, for this purpose only, directors, executive officers and holders of more than 5 percent of the Company's Class A Common Stock) of the Registrant as of January 18, 2000, was approximately $434,000,000. ----------------- 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 January 17, 2000, was 102,823,717 and 3,555,020 respectively. DOCUMENTS INCORPORATED BY REFERENCE Proxy Statement in connection with the 2000 annual meeting of shareholders, incorporated in Part III of this Report. =============================================================================== CAUTIONARY NOTE This Annual Report of Stewart Enterprises, Inc. (the "Company") on Form 10-K contains forward-looking statements in which the Company's management discusses factors it believes may affect the Company's performance in the future. Such statements typically are identified by terms expressing future expectations or projections of revenues, earnings, earnings per share, cash flow, capital expenditures, acquisition expenditures, internal growth initiatives, gross profit margin and other financial items. All forward- looking statements, although made in good faith, are based on assumptions about future events and are therefore inherently uncertain, and actual results may differ materially from those expected or projected. Important factors that may cause the Company's actual results in the future to differ materially from expectations or projections in forward-looking statements include those described under the heading "Cautionary Statements" in Item 7. Forward-looking statements speak only as of the date of this report, and the Company undertakes no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur. PART 1 ITEM 1. BUSINESS GENERAL Stewart Enterprises, Inc. is the third largest provider of funeral and cemetery products and services in the death care industry in North America. Through its subsidiaries, the Company owns and operates 633 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, France, Belgium and Argentina. The Company has been a leader in the industry's trend toward consolidation. Historically, the Company's growth in terms of number of properties has been principally through acquisitions; however, beginning in late fiscal year 1999, the Company began modifying its growth strategy to focus on internal growth rather than acquisitions. The Company provides a complete range of death care products and services both at and prior to the time of need. The Company's funeral homes and cemeteries are located primarily in metropolitan areas and frequently are organized in "clusters," which are integrated groups of funeral homes and cemeteries that share certain assets, personnel and services. The Company also creates combined operations by building funeral homes on cemetery properties and operating the facilities together. The Company believes that it owns and operates one or more of the premier death care facilities in each of its principal markets. The Company also believes that it is an industry leader in the marketing and sale of prearranged funeral and cemetery services and products. The Company has an experienced management team and a decentralized organizational structure that allows its local funeral home directors and cemetery managers to best serve their locations' particular needs. The Company's ultimate goal is to enhance shareholder value. To achieve this goal, it has three principal objectives: * Provide the highest level of quality, service and value to each family it serves * Attract, retain and reward highly qualified individuals to operate its businesses * Provide a reasonable and sustainable return to its shareholders. The Company's business was founded by the Stewart family in 1910, and the Company was incorporated as a Louisiana corporation in 1970. The Company's principal executive offices are located at 110 Veterans Memorial Boulevard, Metairie, Louisiana 70005, and its telephone number is 504-837-5880. THE DEATH CARE INDUSTRY The Company's management believes that the death care industry has several attractive fundamental characteristics. According to the United States Bureau of the Census, the number of deaths in the United States is expected to increase by approximately 1 percent per year from 2.4 million in 1999 to 2.6 million in 2010. In addition, industry studies indicate that while the death rate is declining slightly, the average age of the population in the United States is increasing. The aging of the population, particularly the "baby boomers" who have recently begun to turn 50, represents a significant opportunity for firms such as the Company to expand their customer base and secure a portion of their future market share by actively marketing prearranged property, merchandise and services. According to the Bureau of the Census, the United States population over 50 years of age will increase from 74.2 million in 1999 to 96.4 million in 2010. The Company's principal target market for sales of prearranged cemetery property, merchandise and services is customers who are age 50 and above. Traditionally, death care businesses in the United States have been relatively small, family-owned enterprises that have passed through successive generations within the family. During the last decade, however, the industry in the United States and in certain foreign countries has undergone a transition in which family-owned firms were consolidating with larger organizations such as the Company. 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. During the first quarter of 1999, Service Corporation International, one of the Company's primary competitors for acquisitions, announced plans to significantly reduce 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. Throughout fiscal year 1999, the Company continually reduced its target acquisition multiples. There were some regional consolidators, however, who continued to pay the old, higher prices. In the third quarter of fiscal year 1999, the Company's acquisition activity began to decrease substantially from prior quarters, as many potential sellers were not willing to sell their businesses at the lower prices. The Company believes that many non-price factors continue to exist that make selling a business to a public consolidator very attractive to independents, such as the desire of owners to address management succession and estate planning issues and to achieve liquidity and diversification of their investments. Accordingly, while the Company believes that it may be able to consummate acquisitions in the future at lower multiples than it has paid historically, there can be no assurance that this will be the case, and the lower prices are likely to continue to cause some potential sellers to refrain from selling their businesses, at least for some period of time. As a result, the Company's growth expectations for fiscal year 2000 and beyond include no acquisitions. Management believes it can be difficult for new competitors to enter existing markets and achieve success over the long-term by opening new funeral homes and cemeteries. Several factors make it difficult for new facilities to compete successfully, including the importance to families of reputation and goodwill developed over time, regulatory complexities, zoning restrictions and the existence of an adequate number of facilities serving mature markets. However, in the current environment, low-cost funeral service and merchandise providers have emerged in some markets and, in some instances, have caused funeral pricing pressure. OPERATIONS PREMIER FACILITIES. The Company believes that it operates one or more of the premier death care facilities in each of its principal markets. In the Company's view, a "premier" facility is one that is among the most highly regarded facilities in its market area in terms of tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and potential for development or expansion. CLUSTERING. The Company operates most of its funeral homes and cemeteries in "clusters." Clusters are groups of funeral homes and cemeteries located close enough to each other that their operations can be integrated to achieve economies of scale. For example, clustered facilities can share vehicles, embalming services, inventories of caskets and other merchandise and, most significantly, personnel, including the Company's prearrangement sales force; thus, the Company is able to decrease its costs and expand its marketing and sales efforts at each location. By virtue of their proximity to each other, clustered facilities also create opportunities for more integrated and sophisticated management of their operations. FUNERAL OPERATIONS. Funeral operations accounted for approximately 59 percent of the Company's revenues for the fiscal year ended October 31, 1999. The Company's funeral homes offer a complete range of funeral services and products at the time of need or on a prearranged basis. The Company's services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of the Company's funeral homes offer cremation products and services. Most of the Company's funeral homes have a non-denominational chapel on the premises, which allows family visitation and religious services to take place at the same location. As of October 31, 1999, the Company operated 635 funeral homes, 140 of which were leased. CEMETERY OPERATIONS. Cemetery operations accounted for approximately 41 percent of the Company's revenues for the fiscal year ended October 31, 1999. The Company's cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, memorials and burial vaults, along with the sale of burial site openings and closings. Cemetery property and merchandise sales are made at the time of need or on a prearranged basis. Prearranged sales represented approximately 70 percent of cemetery revenue during the fiscal year ended October 31, 1999. The Company also maintains cemetery grounds under perpetual care contracts and local laws. As of October 31, 1999, the Company owned and operated 157 cemeteries. COMBINED FUNERAL HOME AND CEMETERY OPERATIONS. A combined operation is a funeral home located on a cemetery site where both are operated together. Combined operations help to increase market share by allowing the Company to offer families the convenience of complete funeral home and cemetery planning and services from a single location at a competitive price at the time of need or on a prearranged basis. In addition, combined operations enhance the Company's purchasing power, enable it to employ more sophisticated management systems, and allow it to share facilities, equipment, personnel and a prearrangement sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. Approximately 44 percent of the Company's cemeteries have a funeral home on site that is operated in conjunction with that cemetery. Many of these facilities are in the Company's key markets, including New Orleans, Louisiana; Dallas, Fort Worth and Houston, Texas; Miami, Orlando, Tampa and St. Petersburg, Florida; and San Diego, California. The Company has developed several internal growth strategies that employ the use of combined operations. One such strategy is to create combined operations by constructing funeral homes on the grounds of the Company's cemeteries. Another is to enter into operating partnerships in which the Company constructs funeral homes on the grounds of unaffiliated cemeteries, which allows the Company to enjoy the benefits of a combined operation without the capital investment of purchasing the cemetery. Although it generally takes several years before a newly constructed funeral home becomes profitable, the Company's experience with combined operations has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both. CREMATION. In fiscal year 1999, 36 percent of the funeral services the Company performed in the United States and Puerto Rico were cremations. Cremation rates at the Company's foreign funeral homes are higher on average than those at its domestic funeral homes, although they vary substantially from country to country. For fiscal year 1999, the cremation rates at the Company's foreign funeral homes varied from 7 percent in Portugal and Spain to 69 percent in Australia. While cremations in the United States often result in lower average revenue than traditional funeral services, they generally produce higher gross profit margins. In the foreign markets in which the Company operates, cremations generally produce revenues and gross profit margins comparable to those of traditional funeral services in those countries. The cremation rate in the United States has been increasing, and by the year 2010 cremations are expected to represent 38 percent of the United States burial market, according to industry estimates. The Company has been addressing this trend by providing cremation products and services at all of its funeral homes, including traditional funeral services and memorialization options for families choosing cremation. Additionally, as part of the internal growth initiatives it anticipates undertaking in fiscal year 2000, the Company may expand on the model developed by Sentinel Cremation Societies, Inc., which it acquired in fiscal year 1997. See below under the heading "Internal Growth - New Initiatives" for further discussion. PREARRANGEMENTS. The Company markets death care products and services on a prearranged basis through a staff of more than 3,500 commission sales counselors. Prearranged plans enable families to establish in advance and prepay for the type of service to be performed and the products to be used. The cost of such products and services is set at prices prevailing at the time the agreement is signed, rather than when the products and services are delivered. Prearranged plans also allow families to eliminate the emotional strain of making death care decisions at the time of need. The Company believes that extensive marketing of prearranged products and services produces a backlog of future business and builds current and future market share. On average, over the past five years, the Company has sold approximately 2 1/2 prearranged funeral services for every one it has delivered from its backlog. During the fiscal year ended October 31, 1999, the Company sold approximately 58,400 prearranged funeral services, and as of October 31, 1999, had a backlog of approximately 436,500 prearranged funeral services to be delivered in the future. TRUST FUNDS AND ESCROW ACCOUNTS. Generally, prearranged funeral plans are funded either through trust funds or escrow accounts established by the Company, or (to a lesser extent) through insurance, depending on the regulatory requirements in the relevant jurisdiction. When trust or escrow funding is used, the Company places into a trust fund or escrow account a percentage (which varies by jurisdiction) of the sale price, which is often paid in installments. It retains the remainder of the sale price to defray costs related to the sale. The Company withdraws the amount placed in the trust fund or escrow account when the service is performed to cover the cost of providing the funeral service. When insurance funding is used, the Company applies the customers' payments to pay premiums on insurance policies designed to cover the cost of providing the funeral service in the future. Generally, principal and earnings (including interest, dividends and net realized capital gains) on the trust funds and escrow accounts, and insurance proceeds, are paid to the Company only when the funeral service is performed. In limited circumstances, the Company receives principal amounts from prearranged funeral trust funds or escrow accounts upon cancellation of the contract by the customer. In certain jurisdictions, the Company is permitted to withdraw earnings on a current basis from prearranged funeral trust funds and escrow accounts. As of October 31,1999, the Company's prearranged funeral trust funds and escrow accounts totaled approximately $610.7 million. The Company also establishes trust funds to fund the cost of delivering prearranged cemetery merchandise. Generally, the Company withdraws the principal and earnings from these funds only when the merchandise is delivered or contracts are canceled. As of October 31, 1999, the Company's cemetery merchandise trust funds and escrow accounts totaled approximately $199.3 million. The Company funds its obligations to maintain cemetery grounds by placing a portion, generally 10 percent, of the proceeds from cemetery property sales into perpetual care trust funds or escrow accounts. Income from these funds is withdrawn and used for maintenance of the cemeteries, but principal, including in some jurisdictions net realized capital gains, generally must be held in perpetuity. As of October 31, 1999, the Company's perpetual care trust funds and escrow accounts totaled approximately $201.0 million. The accounting methods used to reflect the Company's prearranged funeral, merchandise and perpetual care trust funds and escrow accounts are complex and are described in the notes to the Company's consolidated financial statements included in Item 8. Management believes that balances in the Company's trust funds and escrow accounts, along with insurance proceeds and installment payments due under contracts, will be sufficient to cover its estimated cost of providing the related prearranged services and products in the future. INVESTMENT MANAGEMENT. Generally, the Company's wholly-owned subsidiary, Investors Trust, Inc. ("ITI"), a Texas corporation with trust powers, serves as investment adviser on the Company's investment portfolio, and its prearranged funeral, merchandise and perpetual care trust funds and escrow accounts. ITI also provides investment advisory services exclusively to the Company. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. As of October 31, 1999, ITI had approximately $1.1 billion in assets under management. Lawrence B. Hawkins, an executive officer of the Company and a professional investment manager, serves as President of ITI. ITI operates with the assistance of third-party professional financial consultants pursuant to a formal investment policy established by the Investment Committee of the Company's Board of Directors. The policy emphasizes conservation, diversification and preservation of principal while seeking appropriate levels of current income and capital appreciation. For additional information, see Management's Discussion and Analysis of Financial Condition and Results of Operations included in Item 7. MANAGEMENT. The Company has an experienced management team, many of whom joined the Company through acquisitions. The Company's management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in deciding how their firms will be managed and how their products and services will be priced and merchandised. At the same time, financial goals are established by management at the corporate level, and the Company maintains centralized supervisory controls. The Company provides business support services primarily through its Shared Services Center, which provides centralized and standardized accounting, payroll, contract processing, collection and other services for all of its domestic facilities, including those in Puerto Rico. Currently, the Company is divided into four operating divisions in North America, each of which is managed by a division executive and chief financial officer. These divisions are further divided into regions, each of which is managed by a regional operating officer. The Company's operations in Europe, South America and Australasia are not considered separate operating divisions, but are managed by local regional executives who report to certain of the Company's executive officers. In fiscal year 1998, in order to meet the needs of the Company's growing European operations and to enable it to take advantage of other long-term opportunities in Europe, the Company established its European headquarters in Amsterdam, Holland. From time to time, the Company may increase, reduce or realign the divisions and regions. The Company also has a Corporate Division, which manages the Company's corporate services, accounting and financial operations and strategic planning. The Company uses two types of stock options to align the interests of its managers with the long-term interests of its shareholders. The Company's more traditional options vest over time. The Company's performance-based options vest only if it achieves a stock price objective, which has generally been a 20 percent compounded annual growth rate in the stock price over a five-year period. In April 1998, the Company achieved the stock price objective applicable to the performance-based options granted in 1995. Accordingly, those options vested and, with the Company's encouragement, were exercised by the optionees. From July 1998 to February 1999, the Company granted new options to 190 managers. Two-thirds of those options are performance-based, and one-third vest over time at the rate of 20 percent per year over five years. The performance-based options become exercisable only if the average of the closing sale prices of a share of Class A Common Stock over 20 consecutive trading days prior to July 17, 2003 equals or exceeds $67.81; otherwise the options will be forfeited. Generally accepted accounting principles require that a charge to earnings be recorded for the performance-based options for the difference between the exercise price and the then current stock price when achievement of the performance objective becomes probable. All of these options expire on July 31, 2004. FOREIGN OPERATIONS. The Company first entered foreign markets in fiscal year 1994 and, through January 17, 2000, has acquired a total of 312 properties outside the United States and Puerto Rico. For the fiscal year ended October 31, 1999, the Company's properties in foreign countries generated approximately 20 percent of consolidated total revenues and represented 20 percent of consolidated total assets. FINANCIAL INFORMATION ABOUT INDUSTRY AND GEOGRAPHIC SEGMENTS. For financial information about the Company's industry and geographic segments, see Note 17 to the Company's consolidated financial statements included in Item 8. GROWTH GENERAL Historically, the Company's growth has been primarily from acquisitions. Due to changes in the acquisition market discussed under the heading "The Death Care Industry," the Company's growth expectations for fiscal year 2000 and beyond include no acquisition activity. In addition, the Company's existing operations in fiscal year 1999 were adversely affected by (1) intense and growing price competition from low-cost funeral providers and casket stores in some markets, (2) the continuing and accelerating trend toward cremation, and (3) a shift by customers to lower-priced services and merchandise. The Company is responding by developing and implementing strategies to (1) enhance its revenues, profits and cash flow at its currently existing operations and (2) grow its business through means other than acquisitions. The Company will also continue to focus on improving the margins of previously acquired firms. Management has determined that fiscal year 2000 will be a transition year for the Company. In subsequent years, management anticipates growth in earnings per share of 10 percent primarily through the Company's internal growth and cost management initiatives. Furthermore, the Company strives to achieve improved operational results through improvement in both revenues and costs at existing and recently acquired operations. To supplement this anticipated improvement, the Company has set forth various cash flow and operating initiatives to be implemented in fiscal year 2000 and beyond. INTERNAL GROWTH - EXISTING OPERATIONS PREARRANGED SERVICES. The Company believes that it can be distinguished from its competitors through its strong emphasis on, and its more than 50- year history of success with, prearranged sales. The Company also believes that it is an industry leader in marketing prearranged funeral and cemetery services and products through highly qualified commission sales counselors. Extensive prearranged marketing produces current cemetery revenues and a significant backlog of future funeral business and builds current and future market share. The Company's backlog of prearranged funeral services has grown at a compounded annual rate of 18 percent over the last four years and represents approximately $1.5 billion in future revenues at October 31,1999. IMPROVED MERCHANDISING. The Company frequently expands its product and service offerings, adjusts the mix of products and services offered in individual markets, takes advantage of enhanced pricing opportunities, and implements selective marketing programs to increase revenue and improve profit margins. OPERATING INITIATIVES. The Company plans to implement the following operating initiatives: * Leverage goodwill in local markets by expanding market-wide regional branding * Centralize training and develop a formal training policy * Automate all of its businesses with real-time and standardized information * Implement programs based on the results of Project 2000, which is a comprehensive study of consumer preferences related to the death care industry. The results are expected to assist the Company in evaluating the changing trends in consumer preferences and to provide detailed information on pricing, merchandising and services. COST CONTROL. In addition to its strategies for increasing revenues, the Company plans to continue to improve its operating margins by achieving economies of scale, improving efficiencies and controlling costs through a variety of measures including the following: * Obtaining volume discounts from suppliers * Leveraging operating costs through clustering and the development of combined operations * Improving the utilization of its sales force * Centralizing control for capital expenditures at the corporate level INTERNAL GROWTH - NEW INITIATIVES Management has limited the amount it will spend on internal growth initiatives to $25 million in fiscal year 2000, approximately $15 million of which is earmarked for the construction of the Archdiocese of Los Angeles funeral homes. These internal growth initiatives are anticipated to include construction of funeral homes on some of the Company's cemeteries and development of third party relationships and alternative service firms. Although it generally takes several years before a newly constructed funeral home becomes profitable, the Company's experience with combined operations has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both. NEW FUNERAL HOME AND CEMETERY CONSTRUCTION. The Company creates combined operations by building funeral homes on its cemetery properties and operating both facilities together. Combined operations help to increase market share by allowing the Company to offer families the convenience of complete funeral home and cemetery planning and services from a single location at a competitive price at the time of need or on a prearranged basis. In addition, combined operations enhance the Company's purchasing power, enable it to employ more sophisticated management systems, and allow it to share facilities, equipment, personnel and a prearrangement sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. OPERATING PARTNERSHIPS. The Company expects to gain market share and improve profitability through operating partnerships with unaffiliated parties. Through an operating partnership with the Catholic Archdiocese of New Orleans, the Company constructed a mausoleum for the Catholic Church on the grounds of its combined operation in New Orleans. The Company owns the mausoleum and manages the sales relating to the mausoleum for the Church. Additionally, through an operating partnership with the Firemen's Charitable and Benevolent Association, a non-profit organization, the Company constructed a funeral home and mausoleum on the grounds of their cemetery in New Orleans. The Company owns and operates the funeral home in combination with that cemetery, and manages sales for the mausoleum. The Company entered into an agreement with the Archdiocese of Los Angeles to construct and operate funeral homes on land leased by the Company from the Archdiocese at the site of nine cemeteries owned and operated by the Archdiocese. Over the last 50 years, through its mausoleum construction business, the Company has developed relationships with the Catholic Church in approximately 70 dioceses in 39 states. The Company anticipates building on those relationships as it expands its use of operating partnerships. The Company also plans to develop operating partnerships with non-profit secular entities as it did in fiscal year 1998 when it entered into an agreement with the Wyuka Cemetery Board of Trustees. Under that agreement, the Company will manage the cemetery sales and operate a funeral home it constructed on the grounds of that state-owned cemetery in Lincoln, Nebraska. Management believes that these partnerships allow the Company to enjoy the benefits of operating a funeral home on the grounds of a cemetery without the capital investment of purchasing the cemetery. The Company also believes that partnerships such as these benefit the third parties by allowing them to compete with other cemeteries in their market that have funeral homes on their properties. The Company is pursuing similar partnership opportunities with other cemetery operators. ALTERNATIVE SERVICE FIRMS. During fiscal year 1997, the Company acquired Sentinel Cremation Societies, Inc. of California ("Sentinel") which owned and operated thirteen service centers offering cremations and related products and services. Sentinel's cremation societies, Neptune and Telophase, have more than 110,000 members. Members in the cremation society pay a small membership fee and indicate their wish to be cremated. Because Sentinel's offices generally operate from leased locations with a small staff, they have lower overhead than traditional funeral homes, thereby generating a greater return on invested capital. The cost to the family for death care arrangements at a Sentinel location generally is less than the cost at a traditional funeral home, although these services typically generate higher operating margins for the Company than services at a traditional funeral home. During fiscal year 1998, the Company acquired Desert Memorial Cremation and Burial Society in Las Vegas, Nevada, a state with one of the highest cremation rates in the United States. This acquisition complements its alternative services strategy and provides an additional vehicle for expansion, particularly in the high cremation markets of the western United States. EXTERNAL GROWTH ACQUISITIONS. From November 1, 1991 through January 17, 2000, the Company has grown from 43 funeral homes and 29 cemeteries in six states to 633 funeral homes and 161 cemeteries in 30 states, Puerto Rico and 10 foreign countries. The Company's growth in terms of number of properties has been principally through acquisitions. At the time of the Company's initial public offering in October 1991, the Company owned funeral homes and cemeteries in Louisiana, Texas, Florida, Virginia, West Virginia and Maryland. Since that time, the Company has expanded domestically, primarily in the Southern, Mid-Atlantic, Midwest and Pacific states and in Puerto Rico. In addition, the Company expanded internationally by entering Mexico in fiscal year 1994, Australia, New Zealand and Canada in fiscal years 1995 and 1996, Spain and Portugal in fiscal year 1997 and the Netherlands, Argentina, France and Belgium in fiscal year 1998. Since 1994, the Company has acquired a total of 312 funeral homes and cemeteries outside the United States and Puerto Rico. The following table sets forth certain information with respect to the Company's completed and pending acquisition activity:
NUMBER OF AGGREGATE FUNERAL HOMES PURCHASE PRICE AND CEMETERIES (IN MILLIONS) -------------- -------------- Properties owned as of October 31, 1991........ 72 $ - Completed acquisitions(1): Fiscal year 1992............................. 11 30.0 Fiscal year 1993............................. 49 94.6 Fiscal year 1994............................. 60 177.6 Fiscal year 1995............................. 70 154.4 Fiscal year 1996............................. 149 179.0 Fiscal year 1997............................. 114 184.5 Fiscal year 1998............................. 162 266.3 Fiscal year 1999............................. 100 156.4 November 1, 1999 - January 17, 2000.......... 4 5.4 Pending acquisitions, as of January 17, 2000... 4 3.5
- ----------------------------- (1) Excludes funeral homes and cemeteries constructed by the Company. ACQUISITION STRATEGY. Historically, the Company has actively pursued acquisition opportunities both domestically and internationally. The Company sought and acquired premier firms that could be integrated with existing clusters or serve as a base for the formation of new clusters, and firms with strong managers willing to remain with the Company. In evaluating potential acquisitions, the Company has always considered factors such as the size of the communities the properties serve and the potential for increasing profitability through increased prearranged marketing efforts and other means. In response to the market changes described above, the Company expects to suspend its acquisition activity in fiscal year 2000 and to focus primarily on internal growth initiatives and improving operations. In limited instances, however, the Company may consider acquiring firms that present an unusually attractive investment opportunity. More than 85 percent of the approximately 22,000 funeral homes and 9,000 cemeteries in the United States are privately or family owned. Management believes that a substantial number of these businesses are suitable candidates for acquisition. CASH FLOW INITIATIVES The Company plans to implement the following cash flow initiatives: * Suspend acquisition activity unless an acquisition is unusually attractive and generates positive cash flow * Limit spending on internal growth initiatives in fiscal year 2000 to $25 million, some of which has already been earmarked for construction of the Archdiocese of Los Angeles funeral homes * Centralize control at the corporate office for all capital expenditures * Establish a program to analyze and possibly re-deploy excess cemetery property, under-performing assets and real estate that would be more valuable if converted to another use COMPETITION The Company's funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral home and cemetery firms. The Company also competes with monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of limited services or products. Because the market for death care services is relatively stable, competition usually focuses on increasing market share and selling prearranged products and services. Market share is largely a function of goodwill and tradition, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. Because of the significant role played by goodwill and tradition, market share increases are usually gained over a long period of time. Extensive marketing through media advertising, direct mailings and personal sales calls has increased in recent years, especially with respect to the sale of prearranged funeral services. The Company's traditional burial and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has increased throughout the 1980s and that cremation will represent approximately 38 percent of the United States burial market by the year 2010, compared with 14 percent in 1986. All of the Company's funeral homes in the United States offer cremation, and the Company believes that it will be able to maintain its competitive position by marketing full service cremations in combination with traditional funeral services and memorialization. Additionally, development of the Alternative Service Firms concept by the Company represents another opportunity for the Company to serve cremation customers. Additional information on the development of the Alternative Service Firms concept can be found under the heading "Internal Growth - New Initiatives" discussed earlier in Item 1. The Company would also face competition for acquisitions, should the Company decide to participate in the acquisition market. For information about the current status of the acquisition market, see "The Death Care Industry." REGULATION The Company's funeral home operations are regulated by the Federal Trade Commission (the "FTC") under the FTC's Trade Regulation Rule on Funeral Industry Practices, 16 CFR Part 453 (the "Funeral Rule"), which went into effect on April 30, 1984, and was revised effective July 19, 1994. The FTC is reviewing the Funeral Rule and has conducted hearings to receive input from industry and consumer groups. As of this time, the FTC has not issued any proposed changes to the regulation. The Funeral Rule defines certain acts or practices as unfair or deceptive, and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral goods and services, and prohibit a funeral provider from: (i) misrepresenting legal, crematory and cemetery requirements; (ii) embalming for a fee without permission; (iii) requiring the purchase of a casket for direct cremation; and (iv) requiring consumers to buy certain funeral goods or services as a condition for furnishing other funeral goods or services. The Company's operations are also subject to extensive regulation, supervision and licensing under numerous federal, state and local laws and regulations. The Company believes that it is in substantial compliance with the Funeral Rule and all such laws and regulations. Federal, state and local legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which, if enacted as proposed, could have a material effect on the Company's operations and on the death care industry in general. The Company cannot predict the outcome of any proposed legislation or regulation, or the effect that any such legislation or regulation might have on the Company. EMPLOYEES The Company and its subsidiaries employ approximately 11,200 persons, and management believes that its relationship with its employees is good. Approximately 941 of its employees who are employed in Maryland, Pennsylvania, Puerto Rico, Mexico, Australia, Canada and the Netherlands are represented by the Laborers' International Union of North America-AFL-CIO, the International Association of Machinists and Aerospace Workers-AFL-CIO, the International Brotherhood of Teamsters of Puerto Rico, the Sindicato de Trabajadores y Empleados de Establecimientos Comerciales, Tiendas de Ropa y Almacenes en General del Distrito Federal, the Miscellaneous Workers Union, Association des Travailleurs du Parc Commemoratif de Montreal Inc., Syndicat Canadien (SCEP), and AWVN (Catholic Union CNC). No other employees of the Company or its subsidiaries are members of a collective bargaining unit. ITEM 2. PROPERTIES As of October 31, 1999, all but 140 of the Company's 635 funeral home locations were owned by subsidiaries of the Company. The leases with respect to the 140 leased properties have terms ranging from one to 24 years, except for five leases that expire between 2032 and 2072. Generally, the Company has a right of first refusal and an option to purchase the leased premises. An aggregate of $2.9 million of the Company's term notes are secured by mortgages on some of the Company's funeral homes; these notes were either assumed by the Company upon its acquisition of the property or represent seller financing of the acquired property. As of October 31, 1999, the Company owned 157 cemeteries covering a total of approximately 10,700 acres. Approximately 4,500 acres, or 42 percent of the total acreage, are available for future development. The Company's corporate headquarters occupy approximately 40,600 square feet of office space in a building in suburban New Orleans that is leased from an affiliate of the Company. In addition, the Company owns a 92,000 square foot building in suburban New Orleans of which it uses a portion for its Shared Services Center, Human Resource Department and Information Systems Department. See "Certain Transactions," which is incorporated by reference herein from the Company's definitive proxy statement relating to its 2000 annual meeting of shareholders. ITEM 3. 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. By February 25, 2000, the Company expects to move 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. OSIRIS HOLDING CO., S.A. DE C.V. ET AL. VS. JAIME ARRANGOIZ GAYOSSO ET AL., Ordinary Mercantile Proceedings in the Superior Court of Justice of the Federal District of Mexico, United Mexican States, Thirteenth Civil Court. This suit was brought in September 1994 by The Loewen Group Inc. and a Mexican affiliate (collectively, "Loewen") against the Company, the Mexican corporations acquired by the Company in August 1994, and the shareholders of those corporations. The suit alleges that the sale of those corporations to the Company violated a previous option granted by the shareholders to Loewen. The suit originally requested a judicial declaration that Loewen properly exercised its option prior to the purchase by the Company and that Loewen thereby acquired title to the corporations. The suit also sought unspecified damages. The Company believes the suit is without merit and intends to defend it vigorously. The Company was advised by its Mexican counsel that Loewen has dismissed the Company from the suit and has relinquished its claim of ownership to the stock of the corporations, thereby limiting itself to a claim for damages. Although the corporations, which are now subsidiaries of the Company, remain defendants, the Company does not believe that they have any liability for damages as the former owners have agreed to indemnify the Company. There has been no significant activity regarding this suit since 1996, and the Company assumes it has been abandoned. Unless there are new developments, the Company will no longer report on this suit. OTHER. The Company and certain of its subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company. The Company carries insurance with coverages and coverage limits that it believes to be adequate. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company's operations. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS None. ITEM 4(A). EXECUTIVE OFFICERS OF THE REGISTRANT The following table sets forth certain information with respect to the executive officers of the Company. Executive officers are appointed by and serve at the pleasure of the Board of Directors, subject in all cases other than Mr. Stewart, to rights under employment agreements. Each of the following has served the Company in the capacity indicated for more than five years, except as indicated below.
NAME AGE POSITION Frank B. Stewart, Jr. ........ 64 Chairman of the Board(1) William E. Rowe .............. 53 President, Chief Executive Officer and Director(2) Brian J. Marlowe ............. 53 Executive Vice President and Chief Operating Officer(3) Kenneth C. Budde ............. 52 Executive Vice President, President-Corporate Division, Chief Financial Officer and Director (4) Brent F. Heffron ............. 50 Executive Vice President and President-Southern Division (5) Raymond C. Knopke, Jr. ....... 44 Executive Vice President and President-Western Division (6) Charles L. Tilis ............. 44 Executive Vice President and President-Central Division (7) Ronald H. Patron ............. 55 Executive Vice President and Chief Administrative Officer(8) Gerard C. Alexander .......... 60 Executive Vice President-Special Corporate Projects (9) Lawrence B. Hawkins .......... 51 Senior Vice President and President-Investors Trust, Inc.
- ---------------------------- (1) Mr. Stewart served as interim Chief Executive Officer from November 1, 1994, upon the retirement of Lawrence M. Berner as President and Chief Executive Officer, until February 1, 1995, when Joseph P. Henican, III became Chief Executive Officer. (2) Mr. Rowe has served as Chief Executive Officer since November 17, 1999, prior to which he had served as President and Chief Operating Officer since November 1, 1994. He became Senior Executive Vice President and Chief Operating Officer in April 1994. Prior to that time, he served as President of the Company's former Mid-Atlantic Division since 1987 and as Executive Vice President and President of the former Mid-Atlantic Division since May 1991. He became a director of the Company in April 1994. (3) Mr. Marlowe became Chief Operating Officer on December 10, 1999. Prior to that time, he had served as Executive Vice President and President of the Company's Eastern Division since August 1, 1995. From April 1994 to July 1995, he served as Executive Vice President and President of the Company's former Mid-Atlantic Division. From November 1992 to April 1994 he served as Chief Operating Officer of the Northern Region of the Company's former Mid-Atlantic Division. (4) Mr. Budde has served as President-Corporate Division and Chief Financial Officer since May 1998 and as a Director since June 1998. From August 1989 to May 1998, he served as Senior Vice President of Finance, Secretary and Treasurer. (5) Mr. Heffron has served as Executive Vice President and President of the Company's Southern Division since November 1, 1998. From January 1, 1997 to October 31, 1998, he served as Senior Vice President and President of the Company's Southern Division. From November 1992 to December 1996, he served as President and Chief Operating Officer of the Central Region of the Company's Eastern Division and Vice President of the Company's former Mid-Atlantic Division. (6) Mr. Knopke has served as Executive Vice President and President of the Company's Western Division since November 1, 1998. From January 1, 1997 to October 31, 1998, he served as Senior Vice President and President of the Company's Western Division. From December 1993 to December 1996, he served as President and Chief Operating Officer of the South Atlantic Region of the Company's Eastern Division. (7) Mr. Tilis has served as Executive Vice President and President of the Company's Central Division since November 1, 1999. From November 1, 1998 to October 31, 1999, he served as Senior Vice President and President of the Company's Central Division. From November 1, 1997 to October 31, 1998, he served as Chief Operating Officer of the Western Region of the Central Division. Prior to that time, he was a partner in the firm of Coopers & Lybrand L.L.P., the predecessor firm of PricewaterhouseCoopers LLP, the Company's independent accountants. (8) Mr. Patron has served as Chief Administrative Officer since May 1998. Prior to that time, he served as Chief Financial Officer, President- Corporate Division and Director. (9) Mr. Alexander has served as Executive Vice President-Special Corporate Projects since November 1, 1998. From August 1, 1995 to October 31, 1998, he served as Executive Vice President and President of the Company's Central Division. Prior to that time, he served as Executive Vice President and President of the Company's former South Central Division. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED SHAREHOLDER MATTERS MARKET INFORMATION The Company's Class A Common Stock trades in the Nasdaq National Market under the symbol STEI. The following table sets forth, for the periods indicated, the range of high and low sales prices, as reported by the Nasdaq National Market. Prices for the first two quarters of fiscal year 1998 have been adjusted to reflect a two-for-one stock split effected in the form of a 100 percent stock dividend on April 24, 1998. As of January 7, 2000, there were 1,553 record holders of the Company's Class A Common Stock.
HIGH LOW ---- --- Fiscal Year 1999 Fourth Quarter .......................... 12 5/8 3 13/16 Third Quarter ........................... 20 3/4 12 Second Quarter .......................... 20 3/4 12 11/16 First Quarter ........................... 24 3/4 16 1/4 Fiscal Year 1998 Fourth Quarter .......................... 24 5/8 15 7/8 Third Quarter ........................... 28 5/8 22 1/4 Second Quarter .......................... 29 21 First Quarter ........................... 24 1/4 19 1/2
DIVIDENDS The Company declared quarterly dividends of $.01 per share on its Class A and Class B Common Stock during the first two quarters of fiscal year 1998 and $.02 per share during the last two quarters of fiscal year 1998 and during each quarter of fiscal year 1999. The Company intends to continue its current policy of declaring quarterly cash dividends on the Class A and Class B Common Stock in the amount of $.02 per share. The declaration and payment of dividends is at the discretion of the Company's Board of Directors and will depend on the Company's results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board. The most restrictive of the Company's debt agreements limits the declaration and payment of dividends within any period of four consecutive quarters to 50 percent of the Company's consolidated net earnings for those four fiscal quarters. The same agreement limits purchase, redemption or retirement of any shares of the Company's capital stock to 5 percent of its consolidated net worth on the payment date. SALES OF UNREGISTERED EQUITY SECURITIES During fiscal year 1999, the Company did not sell any unregistered equity securities. ITEM 6. SELECTED FINANCIAL DATA The following selected consolidated financial data for the fiscal years ended October 31, 1995 through 1999 are derived from the Company's audited consolidated financial statements. The data set forth below should be read in conjunction with the consolidated financial statements of the Company and the notes thereto and "Management's Discussion and Analysis of Financial Condition and Results of Operations" appearing elsewhere herein. SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31, (1) ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- STATEMENT OF EARNINGS DATA: Revenues: Funeral ............................ $ 445,877 $ 379,095 $ 291,649 $ 225,461 $ 188,991 Cemetery ........................... 310,231 269,270 240,937 207,926 179,831 ---------- ---------- ---------- ---------- ---------- Total revenues ..................... 756,108 648,365 532,586 433,387 368,822 Gross profit: Funeral ............................ 126,875 118,426 89,235 72,239 55,309 Cemetery ........................... 83,526 77,558 67,937 45,879 34,434 ---------- ---------- ---------- ---------- ---------- Total gross profit ................. 210,401 195,984 157,172 118,118 89,743 Corporate general and administrative expenses .............................. (19,161) (16,621) (15,402) (14,096) (11,113) ---------- ---------- ---------- ---------- ---------- Operating earnings before performance- based stock options ................... 191,240 179,363 141,770 104,022 78,630 Performance-based stock options - (76,762) - - (17,252) ---------- ---------- ---------- ---------- ---------- Operating earnings ...................... 191,240 102,601(2) 141,770 104,022 61,378(3) Interest expense, net ................... (52,174) (41,792) (36,425) (24,435) (21,460) Other income ............................ 3,485 4,155 1,132 2,488 1,582 ---------- ---------- ---------- ---------- ---------- Earnings before income taxes and cumulative effect of change in accounting principles ................. $ 142,551 $ 64,964(2) $ 106,477 $ 82,075 $ 41,500(3) ========== ========== ========== =========== ========== Earnings before cumulative effect of change in accounting principles ....... $ 90,520 $ 41,902(2) $ 69,742 $ 51,297 $ 26,145(3) Cumulative effect of change in accounting principles (net of $28,798 and $2,230 income tax benefit in 1999 and 1997, respectively) ......................... (50,101)(1) - (2,324)(1) - - ---------- ---------- ---------- ----------- ---------- Net earnings ............................ $ 40,419 $ 41,902(2) $ 67,418 $ 51,297 $ 26,145(3) ========== ========== ========== =========== ========== Per Share Data: (4) Basic earnings per share: Earnings before cumulative effect of change in accounting principles ....... $ .84 $ .43(2) $ .79 $ .62 $ .36(3) Cumulative effect of change in accounting principles ................. (.47)(1) - (.03)(1) - - ---------- ---------- ---------- ---------- ---------- Net earnings ........................... $ .37 $ .43(2) $ .76 $ .62 $ .36(3) ========== ========== ========== ========== ========== Diluted earnings per share: Earnings before cumulative effect of change in accounting principles ...... $ .84 $ .43(2) $ .78 $ .61 $ .35(3) Cumulative effect of change in accounting principles ................ (.47)(1) - (.03)(1) - - ---------- ---------- ---------- ---------- ---------- Net earnings ........................... $ .37 $ .43(2) $ .75 $ .61 $ .35(3) ========== ========== ========== ========== ========== Weighted average common shares outstanding (in thousands): Basic ................................. 107,452 97,691 88,778 82,821 72,772 ========== ========== ========== ========== ========== Diluted ............................... 107,834 98,444 89,675 83,959 73,698 ========== ========== ========== ========== ========== Dividends declared per common share ..... $ .08 $ .06 $ .04 $ .033 $ .017 ========== ========== ========== ========== ==========
(continued) SELECTED CONSOLIDATED FINANCIAL DATA (DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
YEAR ENDED OCTOBER 31, (1) ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Pro forma amounts assuming 1999 and 1997 changes in accounting principles were applied retroactively:(1) Net earnings .................................... $ 33,199(2) $ 59,616 $ 42,616 $ 23,939(3) ========== ========== =========== ======== Basic earnings per common share (4) ............. $ .34(2) $ .67 $ .51 $ .33(3) ========== ========== =========== ======== Diluted earnings per common share(4) ............ $ .34(2) $ .66 $ .51 $ .32(3) ========== ========== =========== ========
OCTOBER 31, ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- Balance Sheet Data: Assets ........................................ $2,283,880 $2,048,938 $1,637,238 $1,360,913 $1,072,435 Long-term debt, less current maturities ....... 938,831 913,215 524,351 515,901 317,451 Shareholders' equity .......................... 1,056,612 839,290 819,570 547,447 483,978
SELECTED CONSOLIDATED OPERATING DATA
YEAR ENDED OCTOBER 31, ---------------------------------------------------------------------------- 1999 1998 1997 1996 1995 ---------- ---------- ---------- ---------- ---------- OPERATING DATA: Funeral homes in operation at end of period ..... 635 558 401 298 161 At-need funerals performed ...................... 111,250 87,653 61,682 38,351 37,263 Prearranged funerals performed .................. 26,490 23,563 18,970 15,422 9,225 ---------- ---------- ---------- ---------- ---------- Total funerals performed ...................... 137,740 111,216 80,652 53,773 46,488 Prearranged funerals sold ....................... 58,430 59,112 48,676 37,545 33,787 Backlog of prearranged funerals at end of period ................................ 436,499 391,226 350,031 294,829 222,532 Cemeteries in operation at end of period ........ 157 140 129 120 105 Interments performed ............................ 57,759 50,201 46,782 43,129 39,662
- -------------------------- (1) Effective November 1, 1998, the Company changed its method of accounting for earnings realized on its irrevocable prearranged funeral trust funds and escrow accounts. Effective November 1, 1996, the Company changed its method of accounting for its irrevocable prearranged funeral trust funds and escrow accounts and cemetery sales. For further details, see Note 3 to the Company's consolidated financial statements included in Item 8. Information presented for fiscal year 1999 reflects the 1999 change in accounting principle; information presented for fiscal years 1998 and 1997 reflects the 1997 change in accounting principles; information presented for fiscal years 1996 and 1995 reflects results as originally reported under the accounting methods then in effect. (2) Includes a nonrecurring, noncash charge of $76.8 million ($50.3 million, or $.51 per share, after-tax) recorded during the second quarter of fiscal year 1998 in connection with the vesting of the Company's performance-based stock options. (3) Includes a nonrecurring, noncash charge of $17.3 million ($10.9 million, or $.15 per share, after-tax) recorded during the third quarter of fiscal year 1995 in connection with the vesting of the Company's performance -based stock options. (4) Adjusted to reflect a three-for-two common stock split effected June 21, 1996 and a two-for-one common stock split effected April 24, 1998. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS INTRODUCTION Death care businesses in the United States traditionally have been relatively small, family-owned enterprises that have been passed down through successive generations within a family. During the last decade, however, the industry in the United States, and in certain foreign countries, has undergone a transition in which family-owned firms were consolidating with larger organizations, such as the Company. This trend began to change in fiscal year 1999. For further discussion of this trend, see "Business - The Death Care Industry." As a result, although the Company's historical growth has been primarily from acquisitions, the Company is currently focusing on growth through internal strategies. Two other trends affecting the death care industry are the expected increase in the number of deaths and the average age of the population. According to the United States Bureau of the Census, the number of deaths in the United States is expected to increase by approximately 1 percent per year from 2.4 million in 1999 to 2.6 million in 2010. In addition, industry studies indicate that while the death rate is declining slightly, the average age of the population in the United States is increasing. The aging of the population, particularly the "baby boomers" who have recently begun to turn 50, represents a significant opportunity for firms such as the Company to expand their customer base and secure a portion of their future market share by actively marketing prearranged property, merchandise and services. According to the Bureau of the Census, the United States population over 50 years of age will increase from 74.2 million in 1999 to 96.4 million in 2010. The Company's principal target market for sales of prearranged cemetery property, merchandise and services is customers who are age 50 and above. Certain statements made herein 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. Forward-looking statements are based on assumptions about future events and therefore are inherently uncertain; actual results may differ materially from those projected. See "Cautionary Statements." The discussion herein should be read in conjunction with the Company's consolidated financial statements and the notes thereto. CHANGE IN ACCOUNTING PRINCIPLE Effective November 1, 1998, the Company changed its method of accounting for earnings realized by 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 these 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 its earnings with those of its principal competitors. The new method will allow the Company to take a longer-term view and increase its flexibility in managing the funeral trust funds. See Note 3 to the consolidated financial statements included in Item 8. This change generally will result in reduced near-term funeral revenue and gross profit, due to the deferral of all of the earnings from funeral trust funds and escrow accounts until the funeral is performed. TRUST AND ESCROW INVESTMENTS 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 excluding those in Mexico), which include investments in common stock, the Company seeks an overall annual yield of approximately 8.5 percent to 9.0 percent. In the past three years, such funds have generated overall annual yields in that range. However, no assurance can be given that the Company will be successful in achieving any particular yield. RESULTS OF OPERATIONS 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." Comparisons between fiscal years 1999 and 1998 reflect the pro forma effects of applying the new accounting principle as if the change had occurred on November 1, 1997; whereas, comparisons between fiscal years 1998 and 1997 are presented as originally reported. The following table presents the results as reported for the fiscal year ended October 31, 1999 and the pro forma results for the year ended October 31, 1998:
YEAR ENDED OCTOBER 31, 1999 1998 ------- ------- (As Reported) (Pro Forma) (IN MILLIONS) Revenues: Funeral ......................................... $ 445.9 $ 365.6 Cemetery ........................................ 310.2 269.3 ------- ------- 756.1 634.9 ------- ------- Costs and expenses: Funeral ......................................... 319.0 260.7 Cemetery ........................................ 226.7 191.7 ------- ------- 545.7 452.4 ------- ------- Gross profit .................................... 210.4 182.5 Corporate general and administrative expenses .... 19.2 16.6 ------- ------- Operating earnings before performance-based stock options .................................. 191.2 165.9 Performance-based stock options .................. - 76.8 ------- ------- Operating earnings .............................. 191.2 89.1(1) Interest expense, net ............................ (52.2) (41.8) Other income ..................................... 3.5 4.2 ------- ------- Earnings before income taxes and cumulative effect of change in accounting principle ............. 142.5 51.5(1) Income taxes ..................................... 52.0 18.3 ------- ------- Earnings before cumulative effect of change in accounting principle ........................... $ 90.5 $ 33.2(1) ======= =======
(1) Includes a nonrecurring, noncash charge of $76.8 million ($50.3 million, after tax) recorded during the second quarter of fiscal year 1998 in connection with the vesting of performance-based stock options. Excluding that charge, for fiscal year 1998: (a) earnings before income taxes and cumulative effect of change in accounting principle would have been $128.3 million; and (b) earnings before cumulative effect of change in accounting principle would have been $83.5 million. YEAR ENDED OCTOBER 31, 1999 COMPARED TO YEAR ENDED OCTOBER 31, 1998 FUNERAL SEGMENT
YEAR ENDED OCTOBER 31, ---------------------- 1999 1998 INCREASE -------- -------- -------- (As Reported) (Pro Forma) (IN MILLIONS) FUNERAL REVENUE --------------- Existing Operations .................. $ 342.9 $ 331.1 $ 11.8 Acquired Operations .................. 103.0 34.5 68.5 -------- -------- -------- $ 445.9 $ 365.6 $ 80.3 ======== ======== ======== FUNERAL COSTS ------------- Existing Operations .................. $ 232.0 $ 226.8 $ 5.2 Acquired Operations .................. 87.0 33.9 53.1 -------- -------- -------- $ 319.0 $ 260.7 $ 58.3 ======== ======== ======== Funeral Segment Profit ............... $ 126.9 $ 104.9 $ 22.0 ======== ======== ========
Funeral revenue increased $80.3 million, or 22 percent, for the year ended October 31, 1999, compared to the corresponding period in 1998. The Company experienced an $11.8 million, or 4 percent, increase in revenue from Existing Operations as a result of an increase in sales of certain prearranged funeral merchandise, coupled with a 0.7 percent increase in the average revenue per domestic funeral service performed by Existing Operations (3.1 percent increase worldwide, excluding the effect of foreign currency translation), primarily due to price increases and improved merchandising. Partially offsetting this increase was a 2.2 percent (1,306 events) decrease in the number of domestic funeral services performed by Existing Operations (2.5 percent (2,358 events) decrease worldwide). Funeral profit margin from Existing Operations increased from 31.5 percent in 1998 to 32.3 percent in 1999. This improvement resulted primarily from the increase in funeral revenue from Existing Operations discussed above, coupled with increased cost control measures, including contract negotiations with certain vendors and the Company's centralization and standardization of certain financial and administrative functions through its Shared Services Center. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition of funeral homes during fiscal year 1999 which is not reflected in the 1998 period presented above. The Company believes that at-need funeral revenues in some key markets were negatively affected in fiscal year 1999 by (1) intense and growing price competition from low-cost funeral providers and casket stores in some markets, (2) the continuing and accelerating trend toward cremation, and (3) a shift by customers to lower-priced services and merchandise. The Company plans to respond to these trends by (1) reducing prices where appropriate in order to gain market share, (2) reducing costs by moving to smaller funeral buildings and consolidating funeral facilities where appropriate, and (3) transitioning some of its funeral businesses to emphasize alternative services. The Company is testing new marketing and merchandising programs to enhance revenues without raising prices. In addition to focusing on increasing margins at existing businesses, the Company is also focusing on increasing revenues and profits from internal growth strategies such as increasing operating partnerships with third parties, increasing alternative service firms, and building new funeral homes on the Company's cemetery properties. See "Business - Growth Strategies." Historically, one of the Company's goals has been to achieve a 5 percent to 7 percent increase 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 were below this objective. Because of intense and growing competition from low-cost funeral service and merchandise providers in certain key markets, the Company has revised its goals for increases in the average revenue per funeral service performed worldwide to 2 to 3 percent annually. See "Forward-Looking Statements." CEMETERY SEGMENT
YEAR ENDED OCTOBER 31, ---------------------- 1999 1998 INCREASE -------- -------- -------- (As Reported) (In millions) CEMETERY REVENUE ---------------- Existing Operations ................... $ 272.6 $ 259.5 $ 13.1 Acquired Operations ................... 37.6 9.8 27.8 -------- -------- -------- $ 310.2 $ 269.3 $ 40.9 ======== ======== ======== CEMETERY COSTS -------------- Existing Operations ................... $ 194.9 $ 184.8 $ 10.1 Acquired Operations ................... 31.8 6.9 24.9 -------- -------- -------- $ 226.7 $ 191.7 $ 35.0 ======== ======== ======== Cemetery Segment Profit ............... $ 83.5 $ 77.6 $ 5.9 ======== ======== ========
Cemetery revenue increased $40.9 million, or 15 percent, for the year ended October 31, 1999, compared to the corresponding period in 1998. The $13.1 million, or 5 percent, increase in revenue from Existing Operations resulted primarily from an increase in preneed cemetery sales, price increases and improved merchandising, coupled with an increase in the revenue realized from the Company's cemetery trust funds and escrow accounts. The revenue from the cemetery trust funds and escrow accounts increased $3.6 million, or 14 percent, to $29.4 million due to a 20 percent growth in the average balance in the funds, resulting from current year customer payments deposited into the funds and funds added through acquisitions, coupled with an increase in the average yield on the funds. The yield was in line with the Company's goal of 8.5 percent to 9.0 percent. Cemetery profit margin from Existing Operations decreased from 28.8 percent in 1998 to 28.5 percent in 1999. This decline was attributable principally to a savings rebate received by the Company from contract negotiations with a primary vendor in 1998 which was not obtained in 1999. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition of cemeteries during fiscal year 1999, which are not reflected in the 1998 period presented above. 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. The repurchase of options by the Company and the exercise of the remaining options resulted in a net cash outlay of approximately $69.4 million. Corporate general and administrative expenses declined to 2.5 percent of revenue in fiscal year 1999, as compared to 2.6 percent in fiscal year 1998, despite an aggregate increase of $2.5 million for the current year. The increase in these expenses is primarily the result of increasing activities to support the Company's growth, including a $.9 million increase in professional and consulting fees. Net interest expense increased $10.4 million during fiscal year 1999 compared to fiscal year 1998, resulting from an increase in average borrowings due principally to acquisition expenditures, partially offset by a decrease in average interest rates from 6.4 percent in 1998 to 6.0 percent in 1999 and an increase in the investment earnings on excess cash for fiscal year 1999 as compared to 1998. 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 October 31, 1999, the Company's outstanding borrowings totaled $951.4 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 5.9 percent. The Company experienced an increase in its effective tax rate from 35.5 percent in fiscal year 1998 to 36.5 percent in fiscal year 1999 due to an increase in income from jurisdictions with higher effective tax rates. YEAR ENDED OCTOBER 31, 1998 COMPARED TO YEAR ENDED OCTOBER 31, 1997 FUNERAL SEGMENT
YEAR ENDED OCTOBER 31, ---------------------- INCREASE 1998 1997 (DECREASE) -------- -------- -------- (IN MILLIONS) FUNERAL REVENUE --------------- Existing Operations ................... $ 281.1 $ 264.1 $ 17.0 Acquired Operations ................... 98.0 27.5 70.5 ------- -------- -------- $ 379.1 $ 291.6 $ 87.5 ======= ======== ======== FUNERAL COSTS ------------- Existing Operations ................... $ 174.6 $ 181.6 $ (7.0) Acquired Operations ................... 86.1 20.8 65.3 ------- -------- -------- $ 260.7 $ 202.4 $ 58.3 ======= ======== ======== Funeral Segment Profit ................ $ 118.4 $ 89.2 $ 29.2 ======= ======== ========
Funeral revenue increased $87.5 million, or 30 percent, in fiscal year 1998, as compared with the prior fiscal year. The Company experienced a $17.0 million, or 6 percent, increase in revenue from Existing Operations as a result of a 6.0 percent increase in the average revenue per domestic funeral service performed by Existing Operations (10.1 percent increase worldwide, excluding the effect of foreign currency translation), due primarily to price increases and improved merchandising. Also contributing to the increase in revenue from Existing Operations was a $1.8 million increase in the revenue recognized from prearranged funeral trust funds and escrow accounts. This increase was attributable to a 21 percent growth in the average balance in such trust funds and escrow accounts, resulting primarily from current year customer payments deposited into the funds and funds added through acquisitions, offset by a decrease in the yield on the funds, which yield remained in line with the Company's goal of 8.5 percent to 9.0 percent. Slightly offsetting the increase in revenue from Existing Operations was a 2.1 percent (897 events) decrease in the number of domestic funeral services performed by Existing Operations (3.9 percent (2,579 events) decrease worldwide). Funeral profit margin from Existing Operations increased from 31.2 percent in 1997 to 37.9 percent in 1998. The $7.0 million, or 4 percent, decrease in funeral costs from Existing Operations resulted principally from the implementation of certain cost control measures, including contract negotiations with certain vendors and the Company's centralization and standardization of certain financial and administrative functions through its Shared Services Center. Existing Operations achieved improved profit margins resulting primarily from these improved cost control measures and the increased average revenue per funeral service mentioned above. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition or construction of funeral homes during fiscal year 1998 which is not reflected in the 1997 period presented above. CEMETERY SEGMENT
YEAR ENDED OCTOBER 31, ---------------------- 1998 1997 INCREASE -------- -------- -------- (In millions) CEMETERY REVENUE ---------------- Existing Operations .................... $ 253.1 $ 237.9 $ 15.2 Acquired Operations .................... 16.2 3.0 13.2 -------- -------- -------- $ 269.3 $ 240.9 $ 28.4 ======== ======== ======== CEMETERY COSTS -------------- Existing Operations .................... $ 179.0 $ 171.1 $ 7.9 Acquired Operations .................... 12.7 1.9 10.8 -------- -------- -------- $ 191.7 $ 173.0 $ 18.7 ======== ======== ======== Cemetery Segment Profit ................ $ 77.6 $ 67.9 $ 9.7 ======== ======== ========
Cemetery revenue increased $28.4 million, or 12 percent, in fiscal year 1998, as compared to fiscal year 1997. The Company experienced a $15.2 million, or 6 percent, increase in revenue from Existing Operations. The increase in revenue from Existing Operations resulted principally from an increase in cemetery sales, including burial site openings and closings, coupled with an increase in the revenue realized from the Company's cemetery trust funds and escrow accounts. The revenue from the cemetery trust funds and escrow accounts increased $1.0 million, or 4 percent, to $25.7 million due to a 13 percent growth in the average balance in the funds, resulting primarily from current year customer payments deposited into the funds, along with funds added through acquisitions, offset by a decrease in the yield on the funds, which yield remained in line with the Company's goal of 8.5 percent to 9.0 percent. Cemetery profit margin from Existing Operations increased from 28.1 percent in 1997 to 29.3 percent in 1998. This improvement was attributable principally to the increase in cemetery sales discussed above, the implementation of certain cost control measures, including the centralization and standardization of certain financial and administrative functions at the Shared Services Center, and the increase in burial site openings and closings. The increase in revenues and costs associated with Acquired Operations resulted from the acquisition or construction of cemeteries during fiscal year 1998 which is not reflected in the 1997 period presented above. 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. The repurchase of certain of the options by the Company and the exercise of the remaining options resulted in a net cash outlay of approximately $69.4 million. In July and August 1998, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 3,592,250 shares of Class A Common Stock at exercise prices equal to the fair market value on the grant dates, which ranged from $21.38 to $27.25 per share. One-third of the options become exercisable in 20 percent annual increments beginning on July 17, 1999. The remaining two-thirds of the options become exercisable in full on the first day between the grant date and July 17, 2003 that the average of the closing sale prices of a share of Class A Common Stock over the 20 preceding consecutive trading days equals or exceeds $67.81, which represents a 20 percent annual compounded growth in the price of a share of Class A Common Stock over five years. Generally accepted accounting principles require that a charge to earnings be recorded for the performance-based options for the difference between the exercise price and the then current stock price when achievement of the performance objective becomes probable. All of the options expire on July 31, 2004. Corporate general and administrative expenses declined to 2.6 percent of revenue in fiscal year 1998, as compared to 2.9 percent in fiscal year 1997, despite an aggregate increase of $1.2 million for the current year. The increase in these expenses is the result of activities to support the Company's growth. Net interest expense increased $5.4 million during fiscal year 1998 when compared to fiscal year 1997, resulting from an increase in average borrowings, which was partially offset by a decrease in average interest rates from 6.6 percent in 1997 to 6.4 percent in 1998 and an increase in the investment earnings on excess cash in fiscal year 1998 as compared to 1997. Approximately $492.0 million, or 53 percent, of the $924.4 million borrowings outstanding as of October 31, 1998 was subject to short-term variable interest rates averaging approximately 5.7 percent. 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. Other income increased $3.0 million during fiscal year 1998 when compared to the prior year, due principally to an approximate $2.3 million gain on the sale of non-essential assets. The Company experienced an increase in its effective tax rate from 34.5 percent in fiscal year 1997 to 35.5 percent in fiscal year 1998. The increase in the effective tax rate was due to an increase in income from jurisdictions with higher effective tax rates. LIQUIDITY AND CAPITAL RESOURCES Cash and marketable securities of the Company were $77.4 million as of October 31, 1999, an increase of $40.5 million from October 31, 1998. This increase was the result of the reclassification of certain voluntary escrow funds from long-term investments to marketable securities. The reclassification was made as these funds are all expected to be converted to cash by October 31, 2000, providing the Company with additional cash for general operating purposes. The Company provided cash of $16.4 million from its operations for the year ended October 31, 1999, compared to providing cash of $46.4 million for fiscal year 1998, due principally to an increase in other receivables and merchandise trust, less estimated cost to deliver merchandise and other working capital changes. Long-term debt as of October 31, 1999, amounted to $951.4 million, compared to $924.4 million as of October 31, 1998. The Company's long-term debt consisted of $529.0 million under the Company's revolving credit facilities, $400.9 million of long-term notes including the Remarketable Or Redeemable Securities (ROARS) discussed below, and $21.5 million of term notes incurred principally in connection with the acquisition of funeral home and cemetery properties. All of the Company's debt is unsecured, except for approximately $2.9 million of term notes incurred principally in connection with acquisitions. In April 1998, the Company issued $200 million of 6.40 percent ROARS due May 1, 2013 (remarketing date May 1, 2003). The ROARS were priced to the public at 99.677 percent to yield 6.476 percent. Net proceeds were approximately $203.6 million, including the remarketing payment made to the Company by the remarketing dealer for the right to remarket the securities after five years. The proceeds were used to reduce balances outstanding under the Company's existing revolving credit facilities. The net effective rate to the Company, assuming the securities are redeemed by the Company after five years, is 5.77 percent. If the securities are remarketed after five years, the net effective rate for the remaining terms will be 5.44 percent (10-year Treasury rate, fixed upon initial issuance of the ROARS) plus the Company's then current credit spread. The most restrictive of the Company's credit agreements require it to maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has managed its capitalization within that limit, with a ratio of total debt to equity of .9 and 1.1 to 1.0 as of October 31, 1999 and 1998, respectively. In February 1999, the Company completed the sale of 13.6 million shares of Class A Common Stock. This resulted in approximately $219 million in net proceeds, which were used principally to repay balances outstanding under its revolving credit facilities. These amounts then became available to fund the Company's acquisition program and for general corporate purposes. As of January 17, 2000, the Company had a debt-to-equity ratio of approximately .9 to 1.0 and $362.5 million of additional borrowing capacity within this parameter, of which $75.8 million was available under its revolving credit facilities. On August 18, 1999, the Company announced that its Board of Directors had authorized the repurchase of up to 5 percent of its then outstanding common stock, or approximately 5.6 million shares. The repurchase was limited to the Company's Class A Common Stock and was made in the open market at such times and in such amounts as management deemed appropriate, depending on market conditions and other factors. During the fourth quarter of 1999, the Company completed this program with the repurchase of approximately 5.6 million shares of Class A Common Stock for approximately $33.0 million, or $5.91 per share. The Company's ratio of earnings to fixed charges was as follows:
YEARS ENDED OCTOBER 31, --------------------------------------------- 1995 1996 1997 1998 1999 ---- ---- ---- ---- ---- 2.72(1) 3.98 3.65(2) 2.38(3) 3.43(2)
- --------------- (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 that were in effect at that time. During fiscal year 1999, the Company completed the acquisition of 83 funeral homes and 17 cemeteries for purchase prices aggregating approximately $156.4 million, which includes the issuance of approximately 19,000 shares of Class A Common Stock and $2.2 million of seller-financed acquisition indebtedness. The cash portion of the purchase price of these acquisitions was funded primarily with advances under the Company's revolving credit facilities. Subsequent to October 31, 1999, and through January 17, 2000, the Company acquired or had outstanding letters of intent or definitive agreements to acquire eight businesses for an aggregate purchase price of approximately $8.9 million. The Company plans to finance the purchase price of pending acquisitions primarily through seller financing or cash generated from the Company's operations. Historically, the Company has required significant capital resources to finance its acquisition program. In response to changes in the acquisition market described under the heading "Business - The Death Care Industry" above, the Company expects to suspend its acquisition strategy in fiscal 2000, although the Company may consider acquiring firms that present an unusually attractive investment opportunity. In addition, the Company plans to implement the other cash flow initiatives described above under the heading "Business - Cash Flow Initiatives." 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 approximately $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 through a combination of internally-generated cash and amounts available under its revolving credit facilities. In addition, the Company monitors its mix of fixed- and floating-rate debt obligations in light of changing market conditions and may from time to time decide to alter that mix by, for example, refinancing balances outstanding under its floating-rate revolving credit facility with public or private fixed-rate debt, or by entering into interest rate swaps or similar interest rate hedging transactions. On December 8, 1999, Moody's Investors Service ("Moody's") announced that it had lowered the Company's credit rating from Baa3 to Ba2, and on December 15, 1999, Standard & Poor's ("S&P") announced that it had placed the Company on credit watch with negative implications. 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. While the outcome of the S&P review cannot be predicted at this time, neither it nor the Moody's downgrade is expected to have a material effect on the Company's results of operations. INFLATION Inflation has not had a significant impact on the Company's United States operations over the past three years, nor is it expected to have a significant impact in the foreseeable future. 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 is the Mexican peso. These changes did not have a material effect on the Company's results of operations for fiscal year 1998 or 1999. However, no assurance can be given that a material change will not occur in the future due to events within Mexico beyond the Company's control. OTHER YEAR 2000 ISSUES During 1999, all phases of the Company's compliance plan were completed for all critical and non-critical systems. Thorough testing was done on all critical systems, globally, after the rollover to the Year 2000, and all results were favorable. As anticipated, the Company did not experience any problems resulting from the century change in any of its domestic or international operations. 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 devised and completed 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. The Company 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 was 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 THE COSTS INVOLVED. Due to the fact that 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 $150,000 for external consultants and software and hardware applications in implementing its compliance plan. The Company did 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. RISKS. If the Company has not been 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. However, to date, no problems have been identified. The Company has no guarantee that the systems of third parties were 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 was adequate to achieve full system compliance on a timely basis, the Company did develop contingency plans to address the possibility of the Company's and third parties' non-compliance. The Company, to date, has not had the need to implement these or any other contingency plans. RECENT ACCOUNTING STANDARDS Statement of Financial Accounting Standards (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 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" and does not expect the effect of the pronouncement on its consolidated financial condition and results of operations to be material. 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 October 31, 1999, was 6.1 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 discussed above under the heading "Business - The Death Care Industry," 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 services 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. (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 over 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 will 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. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK 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 October 31, 1999 and 1998, 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 $447.9 million and $308.5 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 $44.8 million and $30.9 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 Item 8. 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 fiscal years ended October 31, 1999 and 1998, each 10 percent change in the average exchange rate between such currencies and the U.S. dollar would result in changes of approximately $3.1 million and $2.7 million, respectively, 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 Item 8. As of October 31, 1999 and 1998, 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 $435.0 million and $445.2 million, respectively, compared to fair values of $372.6 million and $447.7 million, respectively. Fair values were determined using quoted market prices, where applicable, or future cash flow discounted at market rates for similar types of borrowing arrangements. Each approximate 10 percent change in the average interest rates applicable to such debt, 125 and 50 basis points for 1999 and 1998, respectively, would result in changes of approximately $12.0 million and $7.5 million, respectively, in the fair values of these instruments. If these instruments are held to maturity, no change in fair value will be realized. 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 converted $200 million of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 4.915 percent. The estimated fair value of the interest rate swap based on quoted market prices was $6.1 million as of October 31, 1999. A hypothetical 100 basis point increase in the average interest rates applicable to such debt would result in a change of approximately $4.7 million in the fair value of this instrument. As of October 31, 1999, the carrying value of the Company's borrowings outstanding under its revolving credit facilities, including accrued interest, was $533.1 million compared to a fair value of $524.9 million. Fair value was determined using future cash flows discounted based on market rates for similar types of borrowing arrangements. 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 the average interest rate applicable to this debt would result in a change of approximately $1.2 million in the Company's annualized pre-tax earnings. As of October 31, 1998, the carrying value and fair value of the Company's variable-rate debt was $492.0 million. Each approximate 10 percent, or 50 basis points, 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. As of October 31, 1999 and 1998, the Company's fixed-income securities subject to market risk consisted principally of investments in its prearranged funeral, merchandise and perpetual care trust and escrow accounts and had aggregate quoted market values of $254.9 million and $267.6 million, respectively. Each 10 percent change in interest rates on these fixed income securities would result in changes of approximately $8.6 million and $8.0 million, respectively, in the fair values of such securities based on discounted expected future cash flows. If these securities are held to maturity, no change in fair value will be realized. As of October 31, 1999 and 1998, the Company's money market and other short-term investments subject to market risk had fair values of $359.4 million and $323.9 million, respectively. The Company's prearranged funeral trust funds contained $250.2 million and $216.8 million of these money market and other short-term investments as of October 31, 1999 and 1998, respectively. Under the Company's current accounting methods adopted in fiscal year 1999 as described in Note 3 to the Company's consolidated financial statements included in Item 8, a change in the average interest rate earned by the Company's prearranged funeral trust funds would not result in a change in the Company's current pre-tax earnings. As such, as of October 31, 1999, only $109.2 million of these short-term investments were subject to the change in interest rates. Under the accounting methods in effect in 1998, approximately two-thirds of the $216.8 million were subject to interest rate risk. Each 10 percent, or 50 basis point, change in average interest rates applicable to such investments would result in changes of approximately $.5 million and $1.3 million, as of October 31, 1999 and 1998, respectively, in the Company's pre-tax earnings. The fixed-income securities, money market and other short-term investments owned by the Company are principally invested in its prearranged funeral, merchandise and perpetual care trust and escrow accounts which are managed by ITI. ITI operates pursuant to a formal investment policy as discussed above. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements PAGE ---- Report of Independent Accountants .............................................. 33 Consolidated Statements of Earnings for the Years Ended October 31, 1999, 1998 and 1997 ..................................................................... 34 Consolidated Balance Sheets as of October 31, 1999 and 1998 .................... 35 Consolidated Statements of Shareholders' Equity for the Years Ended October 31, 1999, 1998 and 1997 .............................................. 37 Consolidated Statements of Cash Flows for the Years Ended October 31, 1999, 1998, and 1997 ........................................................ 39 Notes to Consolidated Financial Statements ..................................... 41
REPORT OF INDEPENDENT ACCOUNTANTS To the Board of Directors and Shareholders of Stewart Enterprises, Inc.: In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of earnings, shareholders' equity and cash flows present fairly, in all material respects, the financial position of Stewart Enterprises, Inc. and Subsidiaries at October 31, 1999 and 1998, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 1999, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. As described in Note 3 to the financial statements, the Company changed its method of accounting for funeral services investment trust fund earnings in 1999 and its method of accounting for cemetery sales and funeral services investment trust fund earnings in 1997. PricewaterhouseCoopers LLP New Orleans, Louisiana December 15, 1999 STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31, -------------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Revenues: Funeral .......................................... $ 445,877 $ 379,095 $ 291,649 Cemetery ......................................... 310,231 269,270 240,937 ---------- ---------- ---------- 756,108 648,365 532,586 ---------- ---------- ---------- Costs and expenses: Funeral .......................................... 319,002 260,669 202,414 Cemetery ......................................... 226,705 191,712 173,000 ---------- ---------- ---------- 545,707 452,381 375,414 ---------- ---------- ---------- Gross profit ..................................... 210,401 195,984 157,172 Corporate general and administrative expenses ...... 19,161 16,621 15,402 ---------- ---------- ---------- Operating earnings before performance-based stock options .................................. 191,240 179,363 141,770 Performance-based stock options .................... - 76,762 - ---------- ---------- ---------- Operating earnings ............................... 191,240 102,601 141,770 Interest expense, net .............................. (52,174) (41,792) (36,425) Other income ....................................... 3,485 4,155 1,132 ---------- ---------- ---------- Earnings before income taxes and cumulative effect of change in accounting principles ...... 142,551 64,964 106,477 Income taxes ....................................... 52,031 23,062 36,735 ---------- ---------- ---------- Earnings before cumulative effect of change in accounting principles ................. 90,520 41,902 69,742 Cumulative effect of change in accounting principles (net of $28,798 and $2,230 income tax benefit in 1999 and 1997, respectively) (Note 3) ............ (50,101) - (2,324) ---------- ---------- ---------- Net earnings ..................................... $ 40,419 $ 41,902 $ 67,418 ========== ========== ========== Basic earnings per common share: Earnings before cumulative effect of change in accounting principles .......................... $ .84 $ .43 $ .79 Cumulative effect of change in accounting principles ..................................... (.47) - (.03) ---------- ---------- ---------- Net earnings ..................................... $ .37 $ .43 $ .76 ========== ========== ========== Diluted earnings per common share: Earnings before cumulative effect of change in accounting principles .......................... $ .84 $ .43 $ .78 Cumulative effect of change in accounting principles ..................................... (.47) - (.03) ---------- ---------- ---------- Net earnings ..................................... $ .37 $ .43 $ .75 ========== ========== ========== Weighted average common shares outstanding (in thousands) Basic ............................................ 107,452 97,691 88,778 ========== ========== ========== Diluted .......................................... 107,834 98,444 89,675 ========== ========== ========== Pro forma amounts assuming change in accounting principles was applied retroactively: Net earnings ..................................... $ 33,199 $ 59,616 ========== ========== Basic earnings per common share .................. $ .34 $ .67 ========== ========== Diluted earnings per common share ................ $ .34 $ .66 ========== ========== See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OCTOBER 31, ---------------------- ASSETS 1999 1998 ------ ---------- ---------- Current assets: Cash and cash equivalent investments ............. $ 30,877 $ 30,733 Marketable securities ............................ 46,549 6,120 Receivables, net of allowances ................... 176,215 158,461 Inventories ...................................... 51,431 43,846 Prepaid expenses ................................. 5,997 3,870 ---------- ---------- Total current assets ............................ 311,069 243,030 Receivables due beyond one year, net of allowances.. 237,578 257,773 Intangible assets .................................. 673,361 573,006 Deferred charges ................................... 109,436 96,346 Cemetery property, at cost ......................... 424,032 382,972 Property and equipment, at cost: Land ............................................. 83,237 75,032 Buildings ........................................ 329,991 288,676 Equipment and other .............................. 163,110 127,951 ---------- ---------- 576,338 491,659 Less accumulated depreciation .................... 129,293 105,834 ---------- ---------- Net property and equipment ....................... 447,045 385,825 Long-term investments .............................. 16,812 68,014 Merchandise trust, less estimated cost to deliver .. 58,999 36,671 Other assets ....................................... 5,548 5,301 ---------- ---------- $2,283,880 $2,048,938 ========== ==========
(continued) STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
OCTOBER 31, ---------------------- LIABILITIES AND SHAREHOLDERS' EQUITY 1999 1998 - ------------------------------------ ---------- ---------- Current liabilities: Current maturities of long-term debt ........................... $ 12,582 $ 11,219 Accounts payable ............................................... 21,802 14,253 Accrued payroll ................................................ 21,784 20,847 Accrued insurance .............................................. 11,535 12,420 Accrued interest ............................................... 16,757 13,440 Accrued other .................................................. 26,328 18,931 Income taxes payable ........................................... 5,495 8,245 Deferred income taxes .......................................... 17,193 13,967 ---------- ---------- Total current liabilities ..................................... 133,476 113,322 Long-term debt, less current maturities .......................... 938,831 913,215 Deferred income taxes ............................................ 81,434 92,231 Deferred revenue ................................................. 64,961 81,371 Other long-term liabilities ...................................... 8,566 9,509 ---------- ---------- Total liabilities ............................................. 1,227,268 1,209,648 ---------- ---------- Commitments and contingencies (Note 16) 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 102,664,572 and 94,472,844 shares at October 31, 1999 and 1998, respectively .......................................... 102,664 94,473 Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at October 31, 1999 and 1998; 10 votes per share; convertible into an equal number of Class A shares .............................................. 3,555 3,555 Additional paid-in capital ..................................... 671,891 492,177 Retained earnings .............................................. 347,002 315,140 Cumulative foreign translation adjustment ...................... (65,152) (64,887) Unrealized depreciation of investments ......................... (3,348) (1,168) ---------- ---------- Total shareholders' equity .................................... 1,056,612 839,290 ---------- ---------- $2,283,880 $2,048,938 ========== ==========
See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (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, 1996 ........ 83,599(2) $ 83,599 $ 264,907 $ 215,314 $ (19,058) $ 2,685 $ 547,447 Comprehensive income: Net earnings .................. 67,418 67,418 Other comprehensive income: Foreign translation adjustment ................ (17,551) (17,551) Unrealized depreciation of investments ............... (721) (721) Deferred income tax benefit on unrealized depreciation of investments ............ 249 249 -------- --------- --------- --------- --------- -------- --------- Total other comprehensive income .................... (17,551) (472) (18,023) -------- --------- --------- --------- --------- -------- --------- Total comprehensive income .... 67,418 (17,551) (472) 49,395 Sales of common stock ........... 12,190 12,190 199,513 211,703 Subsidiaries acquired with common stock .................. 688 688 11,738 12,426 Stock options exercised ......... 1,574 1,574 14,064 15,638 Purchase and retirement of common stock ......................... (688) (688) (12,723) (13,411) Dividends ($.04 per share)(1) ... (3,628) (3,628) -------- --------- --------- --------- --------- -------- --------- Balance October 31, 1997 ........ 97,363(2) $ 97,363 $ 477,499 $ 279,104 $ (36,609) $ 2,213 $ 819,570 Comprehensive income: Net earnings .................. 41,902 41,902 Other comprehensive income: Foreign translation adjustment ................ (28,278) (28,278) Unrealized depreciation of investments ............... (5,242) (5,242) Deferred income tax benefit on unrealized depreciation of investments ............ 1,861 1,861 -------- --------- --------- --------- --------- -------- --------- Total other comprehensive income .................... (28,278) (3,381) (31,659) -------- --------- --------- --------- --------- -------- --------- Total comprehensive income .... 41,902 (28,278) (3,381) 10,243 Sales of common stock ........... 68 68 1,320 1,388 Subsidiaries acquired with common stock .................. 294 294 7,411 7,705 Stock options exercised ......... 637 637 14,714 15,351 Purchase and retirement of common stock ......................... (334) (334) (8,767) (9,101) Dividends ($.06 per share)(1) ... (5,866) (5,866) -------- --------- --------- --------- --------- -------- --------- Balance October 31, 1998 ..... 98,028(2) $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290 ======== ========= ========= ========= ========= ======== =========
(continued) STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
COMMON STOCK CUMULATIVE UNREALIZED --------------------------- ADDITIONAL FOREIGN DEPRECIATION TOTAL SHARES - PAID-IN RETAINED TRANSLATION OF SHAREHOLDERS' CLASSES A AND B AMOUNT CAPITAL EARNINGS ADJUSTMENT INVESTMENTS EQUITY --------------- -------- --------- ---------- ------------ ------------- ------------- (IN THOUSANDS) Balance October 31, 1998 ........ 98,028(2) $ 98,028 $ 492,177 $ 315,140 $ (64,887) $ (1,168) $ 839,290 Comprehensive income: Net earnings .................. 40,419 40,419 Other comprehensive income: Foreign translation adjustment ................ (265) (265) Unrealized depreciation of investments ............... (3,433) (3,433) Deferred income tax benefit on unrealized depreciation of investments ............ 1,253 1,253 -------- --------- --------- --------- --------- -------- ---------- Total other comprehensive income .................... (265) (2,180) (2,445) -------- --------- --------- --------- --------- -------- ---------- Total comprehensive income .... 40,419 (265) (2,180) 37,974 Sales of common stock ........... 13,741 13,741 206,713 220,454 Subsidiaries acquired with common stock .................. 19 19 281 300 Stock options exercised ......... 11 11 91 102 Purchase and retirement of common stock ......................... (5,580) (5,580) (27,371) (32,951) Dividends ($.08 per share) ...... (8,557) (8,557) -------- --------- --------- --------- --------- -------- ---------- Balance October 31, 1999 ...... 106,219(2) $ 106,219 $ 671,891 $ 347,002 $ (65,152) $ (3,348) $1,056,612 ======== ========= ========= ========= ========= ======== ==========
- --------------------------- (1) Share and per share information has been adjusted to give effect to a two-for-one common stock split effective April 24, 1998. (2) 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 (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash flows from operating activities: Net earnings ........................................... $ 40,419 $ 41,902 $ 67,418 Adjustments to reconcile net earnings to net cash provided by (used in) operating activities: Performance-based stock options ....................... - 76,762 - Depreciation and amortization ......................... 50,620 38,742 30,049 Provision for doubtful accounts ....................... 33,914 28,325 21,351 Cumulative effect of change in accounting principles... 50,101 - 2,324 Net gains on sales of marketable securities ........... (4,221) (2,727) (370) Provision for deferred income taxes ................... 11,139 532 11,360 Changes in assets and liabilities, net of effects from acquisitions: Increase in prearranged funeral trust receivables ... - (8,252) (9,550) Increase in other receivables ....................... (108,610) (90,997) (71,988) Increase in deferred charges and intangible assets.. (7,987) (11,306) (8,241) Increase in inventories and cemetery property ..... (18,831) (15,343) (8,394) Increase (decrease) in accounts payable and accrued expenses .......................................... 683 6,517 (9,641) Increase in merchandise trust, less estimated cost to deliver merchandise ............................... (28,761) (20,641) (24,874) Increase (decrease) in other ........................ (2,041) 2,916 (105) ---------- ---------- ---------- Net cash provided by (used in) operating activities ... 16,425 46,430 (661) ---------- ---------- ---------- Cash flows from investing activities: Changes in prearranged funeral contracts, net .......... (10,807) (24,026) (14,582) Proceeds from sale of marketable securities ............ 42,240 19,039 11,297 Purchases of marketable securities and long-term investments ................................ (26,185) (30,438) (19,771) Purchases of subsidiaries, net of cash, seller financing and stock issued ........................... (162,032) (223,414) (154,013) Additions to property and equipment .................... (54,883) (44,805) (44,405) Other .................................................. 3,111 2 1,037 ---------- ---------- ---------- Net cash used in investing activities ................. (208,556) (303,642) (220,437) ---------- ---------- ----------
(continued) STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF CASH FLOWS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
YEAR ENDED OCTOBER 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Cash flows from financing activities: Proceeds from long-term debt .......................... 247,579 602,782 367,725 Repayments of long-term debt .......................... (232,775) (270,682) (348,782) Retirement of performance-based stock options ......... - (69,431) - Issuance of common stock .............................. 220,556 11,738 227,341 Purchase and retirement of common stock ............... (32,951) (9,101) (13,411) Dividends ............................................. (8,557) (5,866) (3,628) ---------- ---------- ---------- Net cash provided by financing activities ............ 193,852 259,440 229,245 ---------- ---------- ---------- Effect of exchange rates on cash and cash equivalents ... (1,577) (3,135) (1,087) ---------- ---------- ---------- Net increase (decrease) in cash ......................... 144 (907) 7,060 Cash and cash equivalents, beginning of year ............ 30,733 31,640 24,580 ---------- ---------- ---------- Cash and cash equivalents, end of year .................. $ 30,877 $ 30,733 $ 31,640 ========== ========== ========== Supplemental cash flow information: Cash paid during the year for: Income taxes ......................................... $ 49,500 $ 12,000 $ 30,600 Interest ............................................. $ 51,400 $ 38,000 $ 35,100 Noncash investing and financing activities: Subsidiaries acquired with common stock ............... $ 300 $ 7,705 $ 12,426
See accompanying notes to consolidated financial statements. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (1) 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. For the year ended October 31, 1999, the funeral and cemetery segments contributed approximately 59 percent and 41 percent, respectively, of total revenues, and 60 percent and 40 percent, respectively, of consolidated gross profit. As of October 31, 1999, the Company owned and operated 635 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. The Company commenced its international operations in Mexico in fiscal year 1994, and entered Australia in fiscal year 1995, New Zealand and Canada in fiscal year 1996, Spain and Portugal in fiscal year 1997, and the Netherlands, Argentina, France and Belgium in fiscal year 1998. For fiscal year 1999, foreign operations contributed approximately 20 percent of total revenue and, as of October 31, 1999, represented approximately 20 percent of total assets. (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (a) PRINCIPLES OF CONSOLIDATION The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. (b) 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. (c) FAIR VALUE OF FINANCIAL INSTRUMENTS Estimated fair value amounts have been determined using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts the Company could realize in a current market. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of cash and cash equivalents and current receivables approximate fair value due to the short-term nature of these instruments. The carrying amount of receivables due beyond one year approximates fair value because they bear interest at rates currently offered by the Company for receivables with similar STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) terms and maturities. The carrying amounts of marketable securities and long-term investments are stated at fair value as they are classified as available for sale under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The fair value of the Company's long-term floating rate debt is estimated using future cash flows discounted at market rates for similar types of borrowing arrangements. The fair value of the Company's long-term fixed rate debt is estimated using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements. See Note 11. (d) INVENTORIES Inventories are stated at the lower of cost (specific identification and first-in, first-out methods) or net realizable value. (e) DEPRECIATION AND AMORTIZATION Buildings and equipment are depreciated over their estimated useful lives, ranging from 19 to 45 years and from three to 10 years, respectively, primarily using the straight-line method. For the fiscal years ended October 31, 1999, 1998 and 1997, depreciation expense totaled approximately $25,418, $21,094 and $17,972, respectively. Goodwill, or costs in excess of net assets of companies acquired, totaled approximately $669,790 and $567,432 as of October 31, 1999 and 1998, respectively, and is amortized principally over 40 years by the straight-line method. The Company continually evaluates the recoverability of this intangible asset by assessing whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted expected future cash flows. Other intangible assets are amortized over five years by the straight-line method. Accumulated amortization was $63,300 and $43,831 as of October 31, 1999 and 1998, respectively. (f) FOREIGN CURRENCY TRANSLATION In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," all assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of shareholders' equity, except for translation adjustments arising from operations in highly inflationary economies. During the first quarter of fiscal year 1997, the Company changed its method of reporting foreign currency translation adjustments for its Mexican operations to the method prescribed for highly inflationary economies. Under that method, foreign currency translation adjustments are reflected in results of operations, instead of in shareholders' equity. This change did not have a material effect on the Company's results of operations for fiscal year 1997 or 1998. As of January 1, 1999, the Mexican economy was no longer considered highly inflationary according to 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 our 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 fiscal year 1999. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (g) FUNERAL REVENUE The Company sells prearranged funeral services and funeral merchandise under contracts that provide for delivery of the services and merchandise at the time of death. Prearranged funeral services are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral merchandise is recognized as revenue upon delivery in jurisdictions where such sales are included in funeral and insurance contracts. The Company considers prearranged funeral contracts to be investments in future funeral revenue made to retain and expand future market share. Accordingly, the cash flow item related to prearranged funeral contracts "changes in prearranged funeral contracts, net" has been reclassified from cash flows from operating activities to cash flows from investing activities. For comparative purposes, reclassification was also made to the 1998 and 1997 consolidated statements of cash flows. Commissions and direct marketing costs relating to prearranged funeral services and prearranged funeral merchandise sales are accounted for in the same manner as the revenue to which they relate. Where revenue is deferred, the related commissions and direct marketing costs are deferred and amortized as the funeral contracts are fulfilled. Conversely, where revenues are recognized currently, the related costs are expensed as incurred. Indirect costs of marketing prearranged funeral services are expensed in the period in which incurred. Prearranged funeral services and merchandise generally are funded either through trust funds or escrow accounts established by the Company, or through insurance. Principal amounts deposited in the trust funds or escrow accounts are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser's option to cancel the contract. Certain jurisdictions provide for non-refundable trust funds or escrow accounts where the Company receives such amounts upon cancellation by the customer. Earnings are withdrawn only as funeral services and merchandise are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Under prearranged funeral services and merchandise funded through insurance purchased by customers from third party insurance companies, the Company earns a commission on the sale of the policies. Commissions, net of related expenses, are recognized at the point at which the commission is no longer subject to refund. Policy proceeds are available to the Company as funeral services and merchandise are delivered. Effective November 1, 1998 and November 1, 1996, the Company changed its method of accounting for prearranged funeral trust earnings. See Note 3. Funeral services sold at the time of need are recorded as funeral revenue in the period the funeral is performed. (h) CEMETERY REVENUE Effective November 1, 1996, the Company changed its method of accounting for prearranged sales of cemetery interment rights, related products and burial site openings and closings. See Note 3. The Company recognizes income currently from unconstructed mausoleum crypts sold to the extent it has available inventory. Costs of mausoleum and lawn crypts sold but not yet constructed are based upon management's estimated cost to construct those items. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of prearranged cemetery merchandise be placed in trust funds or escrow accounts. The Company recognizes as revenue on a current basis all dividends and interest earned, and net capital gains realized, by prearranged merchandise trust funds or escrow accounts. At the same time, the liability for the estimated cost to deliver merchandise is adjusted through a charge to earnings to reflect inflationary merchandise cost increases. Principal and earnings are withdrawn only as the merchandise is delivered or contracts are cancelled. Pursuant to perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trust funds or escrow accounts. In addition, in those jurisdictions where trust or escrow arrangements are neither statutorily nor contractually required, the Company typically deposits on a voluntary basis a portion, generally 10 percent, of the sale price into escrow accounts. The income from these funds, which have been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. Accordingly, the trust fund corpus is not reflected in the consolidated financial statements, except for voluntary escrow funds established by the Company, which are classified as long-term investments. The Company recognizes and withdraws currently all dividend and interest income earned and, where permitted, capital gains realized by perpetual care funds. A portion of the sales of cemetery property and merchandise is made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables. (i) INCOME TAXES The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. The Company has not provided for possible United States federal income taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. (j) EARNINGS PER COMMON 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 12. The Company's share and per share amounts have been adjusted for a two-for-one common stock split effective April 24, 1998. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (2) SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES--(CONTINUED) (k) RECENT ACCOUNTING STANDARDS SFAS No. 130, "Reporting Comprehensive Income," was implemented in the first quarter of the Company's fiscal year 1999. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," was 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 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" and does not expect the effect of the pronouncement on its consolidated financial condition and results of operations to be material. (l) RECLASSIFICATIONS Certain reclassifications have been made to the 1997 and 1998 consolidated financial statements to conform to the presentation used in the 1999 consolidated financial statements. These reclassifications had no effect on net earnings or shareholders' equity. (3) CHANGE IN ACCOUNTING PRINCIPLES The Company changed the following accounting principle effective November 1, 1998 (the fiscal year 1999 accounting change): 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. See the fiscal year 1997 accounting changes below. 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. The new method will allow the Company to take a longer-term view and increase its flexibility in managing the funeral trust funds. The cumulative effect of this change on prior years resulted in a decrease in net earnings for the year ended October 31, 1999, of $50,101 (net of a $28,798 income tax benefit), or $.47 per share. The current year effect of the change in accounting principle was a decrease in net earnings of $16.2 million, or $.15 per share, for the year ended October 31, 1999. The Company changed the following accounting principles effective November 1, 1996 (the fiscal year 1997 accounting changes): (a) Under the fiscal year 1997 accounting changes, the Company deferred a portion of the earnings realized by irrevocable prearranged funeral trust funds and escrow accounts in order to offset the estimated effects of inflation on the future cost of performing prearranged funeral services. Earnings realized in excess of those deferred were recognized on a current basis, except in those jurisdictions where earnings revert to a customer if a prearranged funeral service contract is cancelled. Previously, all such earnings were recognized as realized. (b) The Company now records all revenues and costs attributable to prearranged sales of cemetery interment rights and related products when customer contracts are signed. Allowances for customer cancellations and refunds STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (3) CHANGE IN ACCOUNTING PRINCIPLES--(CONTINUED) are provided at the date of sale based upon historical experience. Previously, such sales generally were deferred under the accounting principles prescribed for sales of real estate. Under the Company's application of this method of accounting for sales of real estate, revenues and costs were deferred until 20 percent of the contract amount had been collected. (c) The Company now records revenue and related costs attributable to cemetery burial site openings and closings at the time of sale. Previously, such sales were deferred until delivery. The fiscal year 1997 accounting changes were made principally for the following reasons: (a) A portion of funeral trust earnings and increasing benefits under insurance contracts were intended to cover increases in the future costs of providing price-guaranteed funeral services. The Company's rationale was that deferring such earnings to the extent of the increased costs of the services to be provided would better match revenues and costs because the total funds available to satisfy the contract (principal and deferred earnings) would be included in revenues with concurrent recognition of all costs related to performance of the service when the funeral service is performed. (b) The cemetery accounting methods have been adopted because all significant obligations of the Company, including delivery of products and opening and closing the burial site, have been satisfied in the period the contract is signed. Related costs are provided based on actual costs incurred, firm commitments or reliable estimates. Historical experience is the basis for making appropriate allowances for customer cancellations and will be adjusted when required. The cumulative effect of these changes on prior years resulted in a decrease in net earnings for the year ended October 31, 1997, of $2,324 (net of a $2,230 income tax benefit), or $.03 per share. (4) ACQUISITION OF SUBSIDIARIES The following table reflects the Company's acquisition activity during the past three fiscal years.
BUSINESS ACQUIRED AGGREGATE CLASS A ------------------------------- PURCHASE COMMON SHARES FUNERAL HOMES CEMETERIES PRICE ISSUED ------------- ------------- ------------- ------------- Fiscal year 1999.... 83 17 $156,400 19,000 Fiscal year 1998.... 153 9 266,300 294,000 Fiscal year 1997.... 104 10 184,500 688,000
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. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (4) ACQUISITION OF SUBSIDIARIES -- (CONTINUED) The following table reflects, on an unaudited pro forma basis, the combined operations of the Company and the businesses acquired during fiscal year 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.
YEAR ENDED OCTOBER 31, ----------------------- 1999 1998 --------- ---------- (Unaudited) Revenues $ 776,345 $ 701,318 ========= ========== Operating earnings before performance-based stock options $ 192,561 $ 182,091 ========= ========== Earnings before cumulative effect of change in accounting principles $ 88,718 $ 36,501 ========= ========== Net earnings $ 38,618 $ 36,501 ========= ========== Basic earnings per share: Earnings before cumulative effect of change in accounting principles $ .83 $ .37 ========= ========== Net earnings $ .36 $ .37 ========= ========== Diluted earnings per share: Earnings before cumulative effect of change in accounting principles $ .82 $ .37 ========= ========== Net earnings $ .36 $ .37 ========= ========== Weighted average shares outstanding (in thousands) Basic 107,462 97,710 ========= ========== Diluted 107,844 98,463 ========= ==========
The effect of acquisitions at dates of purchase on the consolidated financial statements was as follows:
YEAR ENDED OCTOBER 31, -------------------------------------- 1999 1998 1997 ---------- ---------- ---------- Current assets ........................... $ 30,738 $ 35,561 $ 8,537 Receivables due beyond one year .......... 70 91 - Cemetery property ........................ 25,131 47,987 7,572 Property and equipment, net .............. 33,751 42,247 38,653 Deferred charges and other assets ........ 2,076 2,242 549 Intangible assets, net ................... 122,109 177,708 142,484 Current liabilities ...................... (18,450) (9,128) (10,683) Long-term debt ........................... (14,249) (33,872) (19,315) Deferred income taxes .................... (7,510) (20,107) (841) Deferred revenue and other liabilities ... (11,334) (11,610) (517) ---------- ---------- ---------- 162,332 231,119 166,439 Common stock used for acquisitions ....... 300 7,705 12,426 ---------- ---------- ---------- Cash used for acquisitions ............... $ 162,032 $ 223,414 $ 154,013 ========== ========== ==========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (5) PREARRANGED FUNERAL SERVICES The following summary reflects prearranged funeral services sold, but not yet delivered, which are funded with trusts, escrow accounts and insurance, and related prearranged funeral trust fund and escrow account balances. The trust- and insurance-funded balances are not reflected in the accompanying consolidated financial statements. Amounts which represent the Company's voluntary deposits into escrow accounts in those jurisdictions where trust or escrow arrangements are neither statutorily nor contractually required aggregated $14,347 and $40,832 as of October 31, 1999 and 1998, respectively, and are classified as long-term investments. As of October 31, 1999, the voluntary escrow accounts that the Company intends to liquidate in fiscal year 2000 are classified as marketable securities. See Note 8 for further discussion. Amounts deposited in the trust funds and escrow accounts and funded through insurance are available to the Company when the services are performed. Funds held in trust or escrow are invested, and earnings (including net realized capital gains) realized on irrevocable trust funds and escrow accounts are deferred until the underlying funeral service is delivered, in accordance with the Company's change in accounting method effective November 1, 1998. Under the Company's previous accounting method, earnings of $26,463 and $24,682 were included in funeral revenue for fiscal years 1998 and 1997, respectively.
OCTOBER 31, ----------------------- 1999 1998 --------- ---------- Trust or escrow funded: Prearranged funeral services sold, but not delivered ..... $ 617,365 $ 551,523 ========= ========== Investments at market value .............................. $ 610,701 $ 525,909 Receivables to be collected on prearranged funeral service contracts ............................................... 106,605 97,410 --------- ---------- $ 717,306 $ 623,319 ========= ========== Insurance-funded and other prearranged funeral services ... $ 241,860 $ 214,464 ========= ========== Investments consist of: U.S. Government, agencies and municipalities ............. $ 27,189 $ 37,223 Canadian Government, agencies and municipalities ......... 30,937 23,040 Corporate bonds .......................................... 80,644 74,102 Preferred stocks ......................................... 60,577 48,484 Common stocks ............................................ 177,163 133,431 Money market funds and other short-term investments ...... 183,029 167,457 Short-term fixed income foreign investments .............. 57,270 42,867 --------- ---------- Total value at cost ...................................... 616,809 526,604 Net unrealized depreciation .............................. (6,108) (695) --------- ---------- Total value at market .................................... $ 610,701 $ 525,909 ========= ==========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (6) CEMETERY TRUST FUNDS AND ESCROW ACCOUNTS The following summary reflects the Company's merchandise trust fund and escrow account balances, as well as merchandise sold, but undelivered, at current cost. Merchandise sold, but undelivered, is reflected at current cost in the accompanying consolidated balance sheets net of the related merchandise trust fund and escrow account balances and accumulated earnings, except for $24,990 classified as long-term investments as of October 31, 1998. These amounts represent the Company's voluntary deposits into escrow accounts in those jurisdictions where trust or escrow arrangements are neither statutorily nor contractually required. As of October 31, 1999, there were no merchandise trust fund and escrow account balances classified as long-term investments. As of October 31, 1999, these balances were classified as marketable securities as the Company began liquidation of these accounts in early fiscal year 2000. The Company anticipates liquidating the remainder of the marketable securities by October 31, 2000. See Note 8 for further discussion. Amounts deposited in the trust funds and escrow accounts are invested, and the revenue on the funds (including net realized capital gains) of $17,371, $13,157, and $12,237 is reflected in cemetery revenue for 1999, 1998 and 1997, respectively. Amounts deposited in merchandise trust funds and escrow accounts that are invested in debt securities as of October 31, 1999 totaled $54,419 and are scheduled to mature as follows: $915 in less than one year; $26,489 in one through five years; $26,393 in five through ten years; and $622 in more than ten years.
OCTOBER 31, ----------------------- 1999 1998 --------- ---------- Merchandise trust funds and escrow accounts: Merchandise sold, but not delivered, at current cost ... $ 140,270 $ 126,877 ========= ========== Investments at market value ............................ $ 199,269 $ 188,538 Amounts to be collected on merchandise contracts ....... 66,624 55,336 --------- ---------- $ 265,893 $ 243,874 ========= ========== Investments consist of: U.S. Government, agencies and municipalities ........... $ 10,213 $ 19,626 Corporate bonds ........................................ 44,588 42,225 Preferred stocks ....................................... 23,737 17,541 Common stocks .......................................... 78,952 61,106 Money market funds and other short-term investments .... 46,287 49,787 --------- ---------- Total value at cost .................................... 203,777 190,285 Net unrealized depreciation ............................ (4,508) (1,747) --------- ---------- Total value at market .................................. $ 199,269 $ 188,538 ========= ==========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (6) CEMETERY TRUST FUNDS AND ESCROW ACCOUNTS--(CONTINUED) The following summary reflects the Company's perpetual care trust fund and escrow account balances. Since principal cannot be withdrawn, these balances are not reflected in the accompanying financial statements, except for $2,465 and $2,192, classified as long-term investments as of October 31, 1999 and 1998, respectively, which represent the Company's voluntary deposits into escrow accounts in those jurisdictions where trust or escrow arrangements are neither statutorily nor contractually required. Funds held in trust or escrow are invested, and the earnings withdrawn from the trust funds and escrow accounts are used for the maintenance of cemetery grounds. For the years ended October 31, 1999, 1998 and 1997, such withdrawals, included in cemetery revenue, totaled $14,470, $12,615, and $12,497, respectively.
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Perpetual care trust funds and escrow accounts: Investments at market value ............................... $ 201,021 $ 167,508 Amounts to be collected under existing agreements ......... 10,328 10,815 --------- --------- $ 211,349 $ 178,323 ========= ========== Investments consist of: U.S. Government, agencies and municipalities .............. $ 15,516 $ 20,747 Corporate bonds ........................................... 41,723 38,424 Preferred stocks .......................................... 17,676 12,744 Common stocks ............................................. 63,370 43,718 Money market funds and other short-term investments ....... 53,441 46,331 Other long-term investments ............................... - 408 --------- --------- Total value at cost ....................................... 191,726 162,372 Net unrealized appreciation ............................... 9,295 5,136 --------- --------- Total value at market ..................................... $ 201,021 $ 167,508 ========= ==========
(7) CASH AND CASH EQUIVALENT INVESTMENTS The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company deposits its cash and cash equivalent investments with high quality credit institutions. Such balances typically exceed applicable FDIC insurance limits.
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Cash ..................................................... $ 26,268 $ 20,847 Cash equivalent investments .............................. 4,609 9,886 --------- --------- $ 30,877 $ 30,733 ========= ==========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (8) MARKETABLE SECURITIES AND LONG-TERM INVESTMENTS Marketable securities consist of investments in fixed maturities and equity securities. The market value as of October 31, 1999 was $46,549 which included gross unrealized gains of $2,040 and gross unrealized losses of $3,287. The market value as of October 31, 1998 was $6,120 which approximated cost. The Company realized net gains on the sales of securities of $4,221, $2,727 and $370 for the years ended October 31, 1999, 1998 and 1997, respectively. The cost of securities sold was determined by using the average cost method. As of October 31, 1999, $39,677 of voluntary escrow funds, $6,608 of which related to debt securities, were reclassed from long-term investments to marketable securities as they are all expected to be liquidated by October 31, 2000. The contractual maturities of the debt securities were as follows: $500 in less than one year; $2,741 in one through five years; $2,919 in five through ten years; and $448 in more than ten years. Subsequent to October 31, 1999, the Company began liquidating these voluntary escrow funds, all of which are expected to be liquidated within the next 12 months. The market value of long-term investments as of October 31, 1999 and 1998 was $16,812 and $68,014 which included gross unrealized gains of $341 and $2,573, and gross unrealized losses of $109 and $2,654, respectively. Amounts classified as long-term investments and invested in debt securities as of October 31, 1999 totaled $384 and are scheduled to mature in five through ten years. See Notes 5 and 6 which include details of the Company's long-term investments. (9) RECEIVABLES
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Current receivables are summarized as follows: Installment contracts due within one year .............. $ 88,673 $ 83,899 Trade accounts, notes and other ........................ 41,334 31,045 Allowance for sales cancellations and doubtful accounts (11,432) (10,738) Amounts to be collected for perpetual care funds ....... (5,628) (5,815) --------- --------- 112,947 98,391 Funeral receivables .................................... 63,268 39,377 Prearranged funeral trust receivable ................... - (1) 20,693 --------- --------- Net current receivables ........................... $ 176,215 $ 158,461 ========= ========= Long-term receivables are summarized as follows: Installment contracts due beyond one year .............. $ 256,835 $ 199,836 Allowance for sales cancellations and doubtful accounts (14,557) (12,063) Amounts to be collected for perpetual care funds ....... (4,700) (5,000) --------- --------- 237,578 182,773 Prearranged funeral trust receivable ................... - (1) 75,000 --------- --------- Net long-term receivables ......................... $ 237,578 $ 257,773 ========= =========
(1) See the fiscal year 1999 accounting change described in Note 3. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (9) RECEIVABLES--(CONTINUED) The Company's receivables as of October 31, 1999 are expected to mature as follows:
Years ending October 31, 2000 ................................................... $ 176,215 2001 ................................................... 43,489 2002 ................................................... 39,672 2003 ................................................... 27,629 2004 ................................................... 20,495 Later years ............................................ 106,293 --------- $ 413,793 =========
(10) INVENTORIES AND CEMETERY PROPERTY Inventories are comprised of the following:
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Developed cemetery property .............................. $ 15,850 $ 13,901 Merchandise and supplies ................................. 35,581 29,945 --------- --------- $ 51,431 $ 43,846 ========= =========
Cemetery property is comprised of the following:
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Developed cemetery property .............................. $ 94,221 $ 93,061 Undeveloped cemetery property ............................ 329,811 289,911 --------- --------- $ 424,032 $ 382,972 ========= =========
The Company evaluates the recoverability of the cost of undeveloped cemetery property through comparison with undiscounted expected future cash flows. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (11) LONG-TERM DEBT The following is a summary of long-term debt:
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Revolving Credit Facilities (see "Revolving Credit Facility" and "Revolving Line of Credit Note" below) ................ $ 529,000 $ 492,000 Senior Notes ................................................ 95,714 102,857 6.70% Notes ................................................. 100,000 100,000 6.40% Notes ................................................. 205,164 205,546 Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rate of 5.2% as of October 31, 1999, partially secured by assets of subsidiaries, with maturities through 2022 ...... 21,535 24,031 --------- --------- 951,413 924,434 Less current maturities ..................................... 12,582 11,219 --------- --------- $ 938,831 $ 913,215 ========= =========
In April 1997, the Company completed the syndication of a $600,000 revolving credit facility ("Revolving Credit Facility"). The Revolving Credit Facility matures on April 30, 2002 and contains a facility fee which was 12.5 basis points on October 31, 1999. Borrowings bear interest at the lead lending bank's prime rate or certain optional rates at the Company's election. Under this agreement $529,000 and $492,000 were outstanding with weighted average interest rates of 5.63 percent and 5.70 percent as of October 31, 1999 and 1998, respectively. As of October 31, 1999 and 1998, the carrying value of these borrowings, including accrued interest, was $533,086 and $492,000, respectively, whereas the fair value was $524,924 and $492,000, respectively. In order to hedge a portion of the interest rate risk associated with its variable-rate debt, during the first quarter of 1999 the Company entered into a three-year interest rate swap agreement involving a notional amount of $200,000. This agreement which became effective March 4, 1999, effectively converted $200,000 of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 4.915 percent. The estimated fair value of the interest rate swap as of October 31, 1999, based on quoted market prices, was $6,090. As of October 31, 1999, the Company had $529,000 of outstanding borrowings under its $600,000 Revolving Credit Facility, $329,000 of which was not hedged by the interest rate swap agreement and was subject to a weighted average short- term variable interest rate of 5.92 percent as of October 31, 1999. Additionally, the Company has available with a separate financial institution an uncollateralized revolving line of credit ("Revolving Line of Credit Note") used to support the interim cash funding for advances to be made under the Revolving Credit Facility in amounts less than $5,000. Borrowings under the Revolving Line of Credit Note are limited to $10,000, bear interest at the lending bank's cost of funds rate or certain optional rates at the Company's election, and mature on March 31, 2000. Periodically, the Company will pay down the Revolving Line of Credit Note using funds drawn on the Revolving Credit Facility. There were no amounts outstanding under the Revolving Line of Credit Note as of October 31, 1999 and 1998. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (11) LONG-TERM DEBT--(CONTINUED) On December 21, 1993, the Company issued $50,000 of uncollateralized senior notes, bearing interest at a rate of 6.04 percent and maturing on November 30, 2003. Principal payments of $7,143 are due each year; the first such payment was made on November 30, 1997, and the final payment is due on November 30, 2003. On November 7, 1994, the Company issued $75,000 of uncollateralized senior notes with an average maturity of seven years and a weighted average interest rate of 8.44 percent. A principal payment of $15,000 was made on May 1, 1998. The remaining notes have a weighted average interest rate of 8.49 percent, and principal payments are due as follows: $16,667 on each of November 1, 2000, 2001 and 2002, and $10,000 on November 1, 2006. As of October 31, 1999 and 1998, the carrying value of the Company's senior notes, including accrued interest, was $99,145 and $106,468, respectively, whereas the fair value was $91,137 and $110,420, respectively. In December 1996, the Company issued $100,000 of unsecured, unsubordinated debt securities in the form of 6.70 percent Notes due 2003. Net proceeds were approximately $99,400, of which $96,800 was used to reduce balances outstanding under the Company's revolving credit facilities, with the remaining $2,600 used for acquisitions and general corporate purposes. As of October 31, 1999 and 1998, the carrying value of these notes, including accrued interest, was $102,773 and $102,792, whereas the fair value was $84,553 and $103,197, respectively. In April 1998, the Company issued $200,000 of 6.40 percent Remarketable Or Redeemable Securities (ROARS) due May 1, 2013 (remarketing date May 1, 2003). The ROARS were priced to the public at 99.677 percent to yield 6.476 percent. Net proceeds were approximately $203,631, including the payment made to the Company by the remarketing dealer for the right to remarket the securities after five years. The proceeds were used to reduce balances outstanding under the Company's revolving credit facilities. The net effective rate to the Company, assuming the securities are redeemed by the Company after five years, is 5.77 percent. If the securities are remarketed after five years, the net effective rate for the remaining term will be 5.44 percent (10-year Treasury rate, fixed upon initial issuance of the ROARS) plus the Company's then current credit spread. If the ROARS are redeemed by the Company on May 1, 2003, a principal payment of $200,000 will be required. As of October 31, 1999 and 1998, the carrying value of these notes, including accrued interest and the unamortized portion of the option premium, was $211,528 and $211,911, whereas the fair value was $175,366 and $210,010, respectively. The bank loan agreements and senior note agreements contain various restrictive covenants that limit consolidated funded indebtedness, indebtedness of subsidiaries, the sale of assets to entities outside the consolidated group and the payment of dividends on, and repurchases of, the capital stock of the Company. Additionally, the bank loan agreements contain change of control provisions. The Company is also required to maintain specified financial ratios related to net worth and fixed charges. Principal payments due on the long-term debt for the fiscal years ending October 31, 2000 through October 31, 2004, excluding the Revolving Credit Facility and assuming the ROARS are redeemed by the Company on May 1, 2003, are approximately $12,199 in 2000, $26,880 in 2001, $25,735 in 2002, $225,772 in 2003 and $109,923 in 2004. Current maturities of long-term debt of $12,582 as of October 31, 1999, as reported in the Company's consolidated balance sheets, include $383 relating to the unamortized ROARS option premium. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (12) RECONCILIATION OF BASIC AND DILUTED PER-SHARE DATA
EARNINGS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) DATA ----------- ------------- --------- YEAR ENDED OCTOBER 31, 1999 --------------------------- Earnings before cumulative effect of change in accounting principles ............................... $ 90,520 ========== Basic earnings per share: Earnings available to common shareholders .............. $ 90,520 107,452 $ .84 ========= Effect of dilutive securities: Time-vest stock options assumed exercised .............. - 382 ---------- ------------- Diluted earnings per share: Earnings available to common shareholders plus time-vest stock options assumed exercised ..... $ 90,520 107,834 $.84 ========== ============= =========
EARNINGS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) DATA ----------- ------------- --------- YEAR ENDED OCTOBER 31, 1998 --------------------------- Net earnings ............................................. $ 41,902 ========== Basic earnings per share: Net earnings available to common shareholders .......... $ 41,902 97,691 $ .43 ========= Effect of dilutive securities: Time-vest stock options assumed exercised .............. - 753 ---------- ------------- Diluted earnings per share: Net earnings available to common shareholders plus time-vest stock options assumed exercised ...... $ 41,902 98,444 $ .43 ========== ============= =========
EARNINGS SHARES PER-SHARE (NUMERATOR) (DENOMINATOR) DATA ----------- ------------- --------- YEAR ENDED OCTOBER 31, 1997 --------------------------- Earnings before cumulative effect of change in accounting principles .............................. $ 69,742 ======== Basic earnings per share: Earnings available to common shareholders .............. $ 69,742 88,778 $ .79 ========= Effect of dilutive securities: Time-vest stock options assumed exercised .............. - 897 -------- ------------- Diluted earnings per share: Earnings available to common shareholders plus time-vest stock options assumed exercised ...... $ 69,742 89,675 $ .78 ========= ============= =========
Options to purchase 1,733,504 shares of common stock at prices ranging from $16.00 to $27.25 were outstanding but were not included in the computation of diluted earnings per share because the options' exercise prices 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 the end of fiscal year 1999. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (13) INCOME TAXES Income tax expense (benefit) is comprised of the following components:
U.S. AND POSSESSIONS STATE FOREIGN TOTAL ----------- ----------- ----------- ----------- YEAR ENDED OCTOBER 31, ---------------------- 1999: Current tax expense ............. $ 27,869 $ 4,783 $ 8,240 $ 40,892 Deferred tax expense ............ 4,628 2,923 3,588 11,139 ----------- ----------- ----------- ----------- $ 32,497 $ 7,706 $ 11,828 $ 52,031 =========== =========== =========== =========== 1998: Current tax expense ............. $ 13,871 $ 3,918 $ 4,741 $ 22,530 Deferred tax expense (benefit) .. (2,075) 617 1,990 532 ----------- ----------- ----------- ----------- $ 11,796 $ 4,535 $ 6,731 $ 23,062 =========== =========== =========== =========== 1997: Current tax expense ............. $ 21,174 $ 1,238 $ 2,963 $ 25,375 Deferred tax expense ............ 5,760 3,000 2,600 11,360 ----------- ----------- ----------- ----------- $ 26,934 $ 4,238 $ 5,563 $ 36,735 =========== =========== =========== ===========
The reconciliation of the statutory tax rate to the effective tax rate is as follows:
YEAR ENDED OCTOBER 31, ----------------------------- 1999 1998 1997 -------- --------- --------- Statutory tax rate .................................. 35.00% 35.00% 35.00% Increases (reductions) in tax rate resulting from: State and U.S. possessions ........................ 4.03 6.21 2.82 Goodwill and other ................................ 2.17 3.86 .31 Dividend exclusion ................................ (1.56) (2.21) ( .78) Foreign tax rate differential ..................... (1.86) (5.57) (2.50) Foreign tax credit ................................ (1.28) ( 1.79) ( .35) -------- --------- --------- Effective tax rate .................................. 36.50% 35.50% 34.50% ======== ========= =========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (13) INCOME TAXES--(CONTINUED) Deferred tax assets and liabilities consist of the following:
OCTOBER 31, ----------------------- 1999 1998 --------- --------- Deferred tax assets: Domestic trust earnings ................................... $ 44,653 $ 7,375 Estimated cost to deliver merchandise ..................... 4,206 3,292 Allowance for sales cancellations and doubtful accounts ... 8,483 7,940 Deferred preneed sales and expenses ....................... 17,806 22,068 Unrealized depreciation of investments .................... 1,925 629 Deferred compensation ..................................... 795 556 Foreign tax credit ........................................ - 4,374 Other ..................................................... 2,966 2,653 --------- --------- 80,834 48,887 ========= ========= Deferred tax liabilities: Purchase accounting adjustments ........................... 130,778 122,065 Foreign trust earnings .................................... 14,101 10,513 Deferred revenue on cemetery property and merchandise sales 20,051 11,277 State income taxes ........................................ 5,102 1,726 Percentage of completion on long-term contracts ........... 605 2,618 Equity method investments ................................. 2,118 2,240 Goodwill .................................................. 4,133 2,733 Non-compete amortization .................................. 1,914 1,631 Depreciation .............................................. 343 - Other ..................................................... 316 282 --------- --------- 179,461 155,085 --------- --------- $ 98,627 $106,198 ========= ========= Current net deferred liability .............................. $ 17,193 $ 13,967 Long-term net deferred liability ............................ 81,434 92,231 --------- --------- $ 98,627 $106,198 ========= =========
For the years ended October 31, 1999, 1998, and 1997, approximately 10 percent, 5 percent and 6 percent, respectively, of the Company's earnings before performance-based stock options and income taxes were generated from properties in foreign jurisdictions. The Company has not recognized a deferred tax liability of approximately $14,000 for the undistributed earnings of non-U.S. subsidiaries because the Company currently considers these earnings to be reinvested indefinitely. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (14) BENEFIT PLANS STEWART ENTERPRISES EMPLOYEES' RETIREMENT TRUST The Company has a defined contribution retirement plan, the "Stewart Enterprises Employees' Retirement Trust (A Profit-Sharing Plan) ("SEERT")." This plan covers substantially all employees with more than one year of service who have attained the age of 21. Contributions are made to the plan at the discretion of the Company's Board of Directors. Additionally, employees who participate may contribute up to 15 percent of their earnings. Effective January 1, 1997, the first 5 percent of such employee contributions are eligible for Company matching contributions at the rate of $.50 for each $1.00 contributed. Prior to January 1, 1997, Company matching contributions were $.25 for each $1.00 contributed. The Company's expense, including the Company's matching contributions, for the fiscal years ended October 31, 1999, 1998 and 1997 was approximately $3,700, $3,550 and $2,900, respectively. NON-QUALIFIED SUPPLEMENTAL RETIREMENT AND DEFERRED COMPENSATION PLAN In January 1994, the Company developed a non-qualified key employee defined contribution supplemental retirement plan, which provides certain highly compensated employees the opportunity to accumulate deferred compensation which cannot be accumulated under SEERT due to certain limitations. Contributions are made to the plan at the discretion of the Company's Board of Directors. Additionally, employees who participate may contribute up to 15 percent of their earnings. Effective January 1, 1997, the first 5 percent of such employee contributions are eligible for Company matching contributions at the rate of $.50 for each $1.00 contributed. Prior to January 1, 1997, Company matching contributions were $.25 for each $1.00 contributed. The Company's expense, including the Company's matching contributions, for the fiscal years ended October 31, 1999, 1998, and 1997 was approximately $300, $300, and $164, respectively. 1991 INCENTIVE COMPENSATION PLAN In May 1991, the Company adopted the 1991 Incentive Compensation Plan, pursuant to which directors, former directors, officers and other employees of the Company could be granted stock options, stock awards, restricted stock, performance share awards or cash awards by the Compensation Committee of the Board of Directors. As of October 31, 1999, all performance-based options granted under the 1991 Incentive Compensation Plan have expired or have been exercised. 1995 INCENTIVE COMPENSATION PLAN In August 1995, the Board of Directors adopted, and in December 1995 and December 1996 amended, the 1995 Incentive Compensation Plan, pursuant to which officers and other employees of the Company may be granted stock options, stock awards, restricted stock, stock appreciation rights, performance share awards or cash awards by the Compensation Committee of the Board of Directors. From September 7, 1995 through April 7, 1998, the Company granted options to officers and other employees for the purchase of a total of 7,424,536 shares of Class A Common Stock at exercise prices equal to the fair market value at the grant dates, which ranged from $10.50 to $21.50 per share. In general, two-thirds of the options became exercisable in full on the first day between the date of grant and August 31, 2000 that the average of the closing sale prices of a share of the Company's Class A Common Stock for the 20 preceding consecutive trading days equaled or exceeded $26.44, which represented a 20 percent annual compounded growth in the price of a share of the Company's Class A Common Stock over five years. The remaining options generally become exercisable in 20 percent annual increments beginning on September 7, 1996, except for grants issued since the initial grant date, which options vest over the remainder of the original five-year period. The Compensation Committee may STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (14) BENEFIT PLANS--(CONTINUED) accelerate the exercisability of any option at any time at its discretion and the options become immediately exercisable in the event of a change of control of the Company, as defined in the plan. All of these options expire on October 31, 2001. As of October 31, 1999, 4,983,230 options had been repurchased or exercised under this plan, and 138,882 options had been forfeited. During April 1998, the stock price performance target was achieved, and the Company's performance-based stock options granted under the Company's 1995 Incentive Compensation Plan and covering 4,855,886 shares vested. Accordingly, during the second quarter of fiscal year 1998, the Company was required by generally accepted accounting principles to record a nonrecurring, noncash charge to earnings of $76,762 ($50,279, or $.51 per share, after-tax). Additionally, to encourage optionees to exercise their options immediately in order to renew the performance-based option program and to reduce potential dilution from additional shares in the market, the Company offered to repurchase the options for the difference between $27.31, the closing price on the date on which the options vested, and the exercise price of the options. The repurchase of certain of the options by the Company and the exercise of the remaining options resulted in a cash outlay of $69,431. From July 1998 to February 1999, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 3,682,250 shares of Class A Common Stock at exercise prices equal to the fair market value at the grant dates, which ranged from $16.00 to $27.25 per share. One-third of the options become exercisable in 20 percent annual increments beginning on July 17, 1999. The remaining two- thirds of the options become exercisable in full on the first day between the grant date and July 17, 2003 that the average of the closing sale prices of a share of Class A Common Stock over the 20 preceding consecutive trading days equals or exceeds $67.81, which represents a 20 percent annual compounded growth in the price of a share of Class A Common Stock over five years. Generally accepted accounting principles require that a charge to earnings be recorded for the performance-based options for the difference between the exercise price and the then current stock price when achievement of the performance objective becomes probable. All of the options expire on July 31, 2004. As of October 31, 1999, none of these options had been exercised, and 12,500 options had been forfeited. DIRECTORS' STOCK OPTION PLAN Effective January 2, 1996, the Board of Directors adopted, and in December 1996 amended, the Directors' Stock Option Plan, pursuant to which each director of the Company who is not an employee of the Company was granted an option to purchase 72,000 shares of the Company's Class A Common Stock. From January 2, 1996 through October 31, 1997, the Company granted a total of 360,000 options at exercise prices equal to the fair market value at the grant dates, which ranged from $12.34 to $18.25 per share. The options generally become exercisable in 25 percent annual increments beginning January 2, 1997, except for grants issued since the initial grant date, which options vest over the remainder of the original four-year period. The Compensation Committee may accelerate the exercisability of any option at any time at its discretion and the options become immediately exercisable in the event of a change of control of the Company, as defined in the plan. All of the options expire on January 2, 2001. As of October 31, 1999, 91,052 options had been exercised under this plan. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (14) BENEFIT PLANS--(CONTINUED) EMPLOYEE STOCK PURCHASE PLAN On July 1, 1992, the Company adopted an "Employee Stock Purchase Plan" and reserved 2,250,000 shares of Class A Common Stock for purchase by eligible employees, as defined. The plan provides to eligible employees the opportunity to purchase Company Class A Common Stock semi-annually on June 30 and December 31. The purchase price is established at a 15 percent discount from fair market value, as defined. As of October 31, 1999, 590,877 shares had been acquired under this plan. STATEMENT OF FINANCIAL ACCOUNTING STANDARDS NO. 123 The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," (SFAS 123) and continues to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. The following table is a summary of the Company's stock options outstanding as of October 31, 1999 and 1998, and the changes that occurred during fiscal years 1999 and 1998.
1998 1999 ------------------------ ----------------------- NUMBER OF WEIGHTED NUMBER OF WEIGHTED SHARES AVERAGE SHARES AVERAGE UNDERLYING EXERCISE UNDERLYING EXERCISE OPTIONS PRICES OPTIONS PRICES ---------- -------- ---------- -------- Outstanding at beginning of year .... 6,187,038 $ 20.77 6,993,710 $ 11.38 Granted ............................. 90,000 $ 22.67 4,268,250 $ 25.98 Exercised/Repurchased ............... (14,724) $ 10.50 (4,991,580) $ 12.24 Forfeited ........................... (21,192) $ 22.58 (83,342) $ 10.70 --------- ---------- Outstanding at end of year .......... 6,241,122 $ 20.81 6,187,038 $ 20.77 ========= ========== Exercisable at end of year .......... 2,199,099 $ 13.78 1,349,651 $ 11.76 ========= ========== Weighted-average fair value of options granted .................... $ 10.28 $ 7.11
The following table further describes the Company's stock options outstanding as of October 31, 1999:
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------ -------------------------------- NUMBER WEIGHTED AVERAGE NUMBER RANGE OF OUTSTANDING REMAINING WEIGHTED AVERAGE EXERCISABLE WEIGHTED AVERAGE EXERCISE PRICE AT 10/31/99 CONTRACTUAL LIFE EXERCISE PRICE AT 10/31/99 EXERCISE PRICE ------------------ ------------ ---------------- ----------------- ------------ ---------------- $ 10.50 to $ 15.00 2,078,968 1.91 years $ 10.70 1,613,896 $ 10.67 $ 15.01 to $ 20.00 274,132 1.91 years $ 17.38 188,334 $ 17.35 $ 20.01 to $ 25.00 309,772 2.77 years $ 21.78 154,749 $ 21.35 $ 25.01 to $ 27.25 3,578,250 4.75 years $ 26.87 242,120 $ 26.88 ----------- ----------- $ 10.50 to $ 27.25 6,241,122 3.58 years $ 20.81 2,199,099 $ 13.78 =========== ===========
STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (14) BENEFIT PLANS--(CONTINUED) SFAS 123 applies only to options granted, and shares acquired under the Company's Employee Stock Purchase Plan, since the beginning of the Company's 1996 fiscal year. Consequently, the pro forma amounts disclosed below do not reflect any compensation cost for the 7.8 million stock options outstanding as of the beginning of fiscal year 1996. If the Company had elected to recognize compensation cost for its stock option and employee stock purchase plans based on the fair value at the grant dates for awards under those plans, in accordance with SFAS 123, net earnings and earnings per share would have been as follows:
YEAR ENDED OCTOBER 31, -------------------------- 1999 1998 ------------ ----------- (UNAUDITED) Net earnings - as reported ........... $ 40,419 $ 41,902 - pro forma ............. 35,735 40,027 Basic earnings per common share - as reported ........... $ .37 $ .43 - pro forma ............. .33 .41 Diluted earnings per common share - as reported ........... $ .37 $ .43 - pro forma ............. .33 .41
The fair value of the Company's stock options used to compute pro forma net earnings and earnings per share disclosures is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for fiscal years 1999 and 1998, respectively: expected dividend yield of .3 percent and .3 percent; expected volatility of 21.3 percent and 20.9 percent; risk-free interest rate of 5.5 percent and 5.5 percent; and an expected term of 4.8 years and 4.7 years. Likewise, the fair value of shares acquired through the Employee Stock Purchase Plan is estimated on each semi-annual grant date using the Black- Scholes option pricing model with the following weighted average assumptions for fiscal years 1999 and 1998, respectively: expected dividend yield of .4 percent and .2 percent; expected volatility of 38.1 percent and 20.5 percent; risk-free interest rate of 4.9 percent and 5.3 percent; and an expected term of .5 years, for both years. (15) SHAREHOLDER RIGHTS PLAN On November 3, 1999, the Company's Board of Directors adopted a rights plan intended to protect shareholder interests in the event the Company becomes the subject of a takeover initiative that the Company's Board of Directors believes could deny the Company's shareholders the full value of their investment. This plan does not prohibit the Board from considering any offer that it deems advantageous to its shareholders. The Company has no knowledge that anyone is considering a takeover. The rights were issued to each common shareholder of record on October 28, 1999, and they will be exercisable only if a person acquires, or announces a tender offer that would result in ownership of, 15 percent or more of the Company's outstanding Class A and Class B Common Stock. The initial exercise price will be $24.00 per right. The rights will expire on October 28, 2009, unless redeemed or exchanged at an earlier date. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (16) COMMITMENTS, CONTINGENCIES AND RELATED PARTY TRANSACTIONS 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. By February 25, 2000, the Company expects to move 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. 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 former owners of these corporations have agreed to indemnify the Company should an unfavorable outcome result. There has been no significant activity regarding this suit since 1996, and the Company assumes it has been abandoned. Unless there are new developments, the Company will no longer report on this suit. The Company is a party to certain other legal proceedings in the ordinary course of its business but does not regard any such proceedings as material. As of October 31, 1999, the Company had advanced approximately $1,205, including accrued interest, to fund premiums on a split-dollar, "second-to- die" life insurance policy on behalf of the Company's Chairman, Mr. Frank B. Stewart, Jr., and Mrs. Stewart. The advances are collateralized by the assignment of other insurance policies and the pledge of Class A Common Stock of the Company. In 1992, the Company agreed to continue to advance such premiums for a twelve-year period and will be repaid at the earliest of (a) the surrender of the policy, (b) the deaths of Mr. and Mrs. Stewart, or (c) 60 days following payment in full of all premiums on the policy. The Company has noncancellable operating leases, primarily for land and buildings, that expire over the next one to 24 years, except for five leases that expire between 2032 and 2072. Rent expense under these leases was $8,042, $7,805 and $6,025 for the years ended October 31, 1999, 1998 and 1997, respectively. The Company's future minimum lease payments as of October 31, 1999 are $7,755, $6,378, $5,492, $4,642, $3,930 and $39,428 for the years ending October 31, 2000, 2001, 2002, 2003, 2004 and later years, respectively. Additionally, the Company has entered into non-compete agreements with prior owners of acquired subsidiaries that expire through 2012. The Company's future non-compete payments as of October 31, 1999 for the same periods are $7,345, $6,949, $6,302, $5,634, $4,452 and $8,987, respectively. The Company leases office space from an affiliated company. Rental payments were approximately $534, $636, and $602 for the years ended October 31, 1999, 1998, and 1997, respectively. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (17) SEGMENT DATA In fiscal year 1999, the Company adopted FAS No. 131, "Disclosures about Segments of an Enterprise and Related Information." The accounting policies of the segments are the same as those described in the "Summary of Significant Accounting Policies." The Company evaluates the performance of its segments and allocates resources to them based on gross profit. The Company's operations are product based and geographically based. As such, the Company's primary reportable operating segments presented below are based on products and services and include funeral and cemetery operations. The Company's funeral homes offer a complete range of funeral services and products at the time of need or on a prearranged basis. The Company's services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of the Company's funeral homes offer cremation products and services. The Company's cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, memorials and burial vaults, along with the sale of burial site openings and closings. Cemetery property and merchandise sales are made at the time of need or on a prearranged basis. The Company conducts both funeral and cemetery operations in the United States, including Puerto Rico, and in Mexico, Canada, Australia and Argentina. The Company conducts funeral operations in New Zealand, Spain, Portugal, the Netherlands, Belgium and France. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (17) SEGMENT DATA--(CONTINUED) The table below presents information about reported segments for fiscal years ended:
RECONCILING CONSOLIDATED FUNERAL CEMETERY ITEMS(1) TOTALS ----------- ----------- ----------- ----------- Revenues from external customers October 31, 1999 ................... $ 445,877 310,231 - $ 756,108 October 31, 1998 ................... $ 379,095 269,270 - $ 648,365 October 31, 1997 ................... $ 291,649 240,937 - $ 532,586 Gross profit October 31, 1999 ................... $ 126,875 83,526 - $ 210,401 October 31, 1998 ................... $ 118,426 77,558 - $ 195,984 October 31, 1997 ................... $ 89,235 67,937 - $ 157,172 Total assets October 31, 1999 ................... $ 1,242,119 996,282 45,479 $ 2,283,880 October 31, 1998 ................... $ 1,265,237 746,569 37,132 $ 2,048,938 October 31, 1997 ................... $ 940,340 667,932 28,966 $ 1,637,238 Depreciation and amortization October 31, 1999 ................... $ 36,373 11,850 2,397 $ 50,620 October 31, 1998 ................... $ 28,299 8,546 1,897 $ 38,742 October 31, 1997 ................... $ 21,216 7,966 867 $ 30,049 Additions to long-lived assets(2) October 31, 1999 ................... $ 62,926 61,827 11,919 $ 136,672 October 31, 1998 ................... $ 64,344 68,606 10,504 $ 143,454 October 31, 1997 ................... $ 58,644 31,998 11,363 $ 102,005
- --------------------- (1) Reconciling items consist of unallocated corporate assets, depreciation and amortization on unallocated corporate assets and additions to corporate long-lived assets. (2) Long-lived assets include cemetery property and net property and equipment. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (17) SEGMENT DATA--(CONTINUED) A reconciliation of total segment gross profit to total earnings before income taxes and cumulative effect of change in accounting principles for fiscal years ended October 31, 1999, 1998 and 1997, is as follows:
1999 1998 1997 ------------ ------------ ------------ Gross profit for reportable segments $ 210,401 $ 195,984 $ 157,172 Corporate general and administrative expenses (19,161) (16,621) (15,402) Performance-based stock options - (76,762) - Interest expense, net (52,174) (41,792) (36,425) Other income 3,485 4,155 1,132 ------------ ------------ ------------ Earnings before income taxes and cumulative effect of change in accounting principles $ 142,551 $ 64,964 $ 106,477 ============ ============ ============
U.S. AND POSSESSIONS(1) FOREIGN(2) CONSOLIDATED ------------ ------------ ------------ Revenues from external customers October 31, 1999 $ 603,530 152,578 $ 756,108 October 31, 1998 $ 534,427 113,938 $ 648,365 October 31, 1997 $ 455,076 77,510 $ 532,586 Gross profit October 31, 1999 $ 180,693 29,708 $ 210,401 October 31, 1998 $ 170,415 25,569 $ 195,984 October 31, 1997 $ 136,205 20,967 $ 157,172 Long-lived assets(3) October 31, 1999 $ 735,649 135,428 $ 871,077 October 31, 1998 $ 647,350 121,447 $ 768,797 October 31, 1997 $ 524,894 115,137 $ 640,031
- ------------------- (1) Includes the Company's operations in the United States and the Commonwealth of Puerto Rico. (2) Foreign revenue is based on the country in which the sales originate. The Company commenced its foreign operations as follows: Mexico - August 1994; Australia - December 1994; New Zealand - April 1996; Canada - October 1996; Spain - April 1997; Portugal - September 1997; the Netherlands - December 1997; Argentina - April 1998; France and Belgium - May 1998. (3) Long-lived assets include cemetery property and net property and equipment. STEWART ENTERPRISES, INC. AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS) (18) QUARTERLY FINANCIAL DATA (UNAUDITED)
FIRST SECOND THIRD FOURTH ----------- ----------- ----------- ----------- YEAR ENDED OCTOBER 31, 1999(1) - ------------------------------ Revenues ..................................... $ 178,172 $ 194,297 $ 193,721 $ 189,918 Gross profit ................................. 54,241 57,668 53,674 44,818 Earnings before cumulative effect of change in accounting principle ..................... 23,501 27,108 23,347 16,564 Earnings per common share before cumulative effect of change in accounting principle: Basic ..................................... .24 .24 .21 .15 Diluted ................................... .24 .24 .21 .15 Net earnings (loss) .......................... (26,600) 27,108 23,347 16,564 Earnings per common share: Basic ..................................... (.27) .24 .21 .15 Diluted ................................... (.27) .24 .21 .15
FIRST(2) SECOND THIRD FOURTH ----------- ----------- ----------- ----------- YEAR ENDED OCTOBER 31, 1998 - --------------------------- Revenues ..................................... $ 149,309 $ 154,578 $ 169,088 $ 175,390 Gross profit ................................. 46,117 49,546 51,331 48,990 Net earnings (loss) .......................... 21,946 (26,046) 24,324 21,678 Earnings per common share: ................... Basic ....................................... .23 (.27) .25 .22 Diluted ..................................... .22 (.27) .25 .22
- --------------- (1) The first, second and third quarters of fiscal year 1999 have been restated from the Company's respective Quarterly Reports on Form 10-Q to reflect the Company's change in accounting principle effective November 1, 1998. As a result, first quarter reflects a $3,016 decrease in earnings, $.03 per share (basic and diluted), before the cumulative effect of the change in accounting principle. In addition, the first quarter as presented above includes a $50,101 decrease in net earnings (net of a $28,798 income tax benefit), or $.51 per share (basic and diluted), for the cumulative effect of the change in accounting principle. Second quarter as presented above reflects a decrease in net earnings of $5,055, or $.05 per share (basic and diluted), as a result of the accounting change. Third quarter as presented above reflects a decrease in net earnings of $5,552, or $.05 per share (basic and diluted), as a result of the accounting change. See Note 3. (2) Restated to reflect the Company's two-for-one stock split effective April 24, 1998. (19) SUBSEQUENT EVENTS (UNAUDITED) Subsequent to year-end, the Company has acquired or has outstanding definitive agreements or letters of intent to acquire four funeral homes and four cemeteries for approximately $8,861. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS IN ACCOUNTING AND FINANCIAL DISCLOSURE. None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT The information regarding executive officers required by Item 10 may be found under Item 4(a) of this report. The information regarding directors and compliance with Section 16(a) of the Securities Exchange Act of 1934, as amended, required by Item 10 is incorporated by reference to the Registrant's definitive proxy statement relating to its 2000 annual meeting of shareholders, which proxy statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 11. EXECUTIVE COMPENSATION The information required by Item 11 is incorporated by reference to the Registrant's definitive proxy statement relating to its 2000 annual meeting of shareholders, which proxy statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT The information required by Item 12 is incorporated by reference to the Registrant's definitive proxy statement relating to its 2000 annual meeting of shareholders, which proxy statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS The information required by Item 13 is incorporated by reference to the Registrant's definitive proxy statement relating to its 2000 annual meeting of shareholders, which proxy statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal year. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K (A) DOCUMENTS FILED AS PART OF THIS REPORT: (1) Financial Statements The Company's consolidated financial statements listed below have been filed as part of this report:
PAGE ---- Report of Independent Accountants ..................................................... 33 Consolidated Statements of Earnings for the Years Ended October 31, 1999, 1998 and 1997 ...................................................................... 34 Consolidated Balance Sheets as of October 31, 1999 and 1998 ........................... 35 Consolidated Statements of Shareholders' Equity for the Years Ended October 31, 1999, 1998 and 1997 ..................................................... 37 Consolidated Statements of Cash Flows for the Years Ended October 31, 1999, 1998 and 1997 ....................................................................... 39 Notes to Consolidated Financial Statements ............................................ 41 (2) Financial Statement Schedule for the years ended October 31, 1999, 1998 and 1997 Report of Independent Accountants on Financial Statement Schedule ..................... 69 Schedule II-Valuation and Qualifying Accounts ......................................... 70
All other schedules are omitted because they are not applicable or not required, or the information appears in the financial statements or notes thereto. REPORT OF INDEPENDENT ACCOUNTANTS ON FINANCIAL STATEMENT SCHEDULE The Board of Directors Stewart Enterprises, Inc.: Our report on the consolidated financial statements of Stewart Enterprises, Inc. and Subsidiaries, which includes an emphasis paragraph related to changes in the Company's method of accounting for funeral services investment trust fund earnings in 1999 and its method of accounting for cemetery sales and funeral services investment trust fund earnings in 1997, is included in Item 8 of this Form 10-K. In connection with our audits of such financial statements, we have also audited the related financial statement schedule listed in Item 14(a) of this Form 10-K. This financial statement schedule is the responsibility of the Company's management. In our opinion, the financial statement schedule referred to above, when considered in relation to the basic financial statements taken as a whole, presents fairly, in all material respects, the information required to be included therein. PricewaterhouseCoopers LLP New Orleans, Louisiana December 15, 1999 STEWART ENTERPRISES, INC. AND SUBSIDIARIES SCHEDULE II-VALUATION AND QUALIFYING ACCOUNTS (DOLLARS IN THOUSANDS)
COLUMN A COLUMN B COLUMN C COLUMN D COLUMN E ---------- ---------- ----------------------- ---------- ---------- ADDITIONS ----------------------- BALANCE AT CHARGED TO CHARGED TO BEGINNING COSTS AND OTHER DEDUCTIONS BALANCE AT END DESCRIPTION OF PERIOD EXPENSES ACCOUNTS(1) -WRITE-OFFS OF PERIOD ----------- ---------- ---------- ----------- ---------- ---------- Current-Allowance for contract cancellations and doubtful accounts: Year ended October 31, 1999 ............................... $ 10,738 14,050 2,223 15,579 $ 11,432 1998 ............................... $ 6,869 16,191 1,875 14,197 $ 10,738 1997 ............................... $ 2,996 8,586 2,386 7,099 $ 6,869 Due after one year-Allowance for contract cancellations and doubtful accounts: Year ended October 31, 1999 ............................... $ 12,063 19,864 - 17,370 $ 14,557 1998 ............................... $ 9,696 12,134 728 10,495 $ 12,063 1997 ............................... $ 3,236 12,765 7,215 13,520 $ 9,696 Accumulated amortization of intangible assets: Year ended October 31, 1999 ............................... $ 43,831 19,469 - - $ 63,300 1998 ............................... $ 29,383 14,448 - - $ 43,831 1997 ............................... $ 19,506 9,877 - - $ 29,383
(1) Amounts charged to other accounts represent principally the opening balance in the allowance for contract cancellations and doubtful accounts for acquired companies and, for fiscal year 1997, the effect of the Company's change in accounting principles effective November 1, 1996. ITEM 14(A)(3) EXHIBITS 3.1 Amended and Restated Articles of Incorporation of the Company, as amended and restated as of November 5, 1999 3.2 By-laws of the Company, as amended and restated as of October 28, 1999 4.1 See Exhibits 3.1 and 3.2 for provisions of the Company's Amended and Restated Articles of Incorporation, as amended and By-laws, as amended, defining the rights of holders of Class A and Class B Common Stock 4.2 Specimen of Class A Common Stock certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991) 4.3 Indenture dated as of December 1, 1996 by and between the Company and Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 5, 1996) and Supplemental Indenture dated April 24, 1998 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 21, 1998) 4.4 Form of 6.70 percent Note due 2003 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated December 5, 1996) 4.5 Form of 6.40 percent Remarketable Or Redeemable Securities (ROARS) due May 1, 2013 (Remarketing date May 1, 2003) (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated April 21, 1998) 4.6 Credit Agreement by and among the Company, its subsidiaries and Citicorp USA, Inc., Bank of America Illinois, and NationsBank of Texas, N.A. dated April 14, 1997 (incorporated by reference to Exhibit 4.2 to the Company's Registration Statement on Form S-3 (Registration No. 333- 27771) filed with the Commission on May 23, 1997) 4.7 Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company's Form 8-A dated November 3, 1999) The Company hereby agrees to furnish to the Commission, upon request, a copy of the instruments which define the rights of holders of the Company's long- term debt. None of such instruments (other than those included as exhibits herein) represent long-term debt in excess of 10 percent of the Company's consolidated total assets. 10.1 Lease Agreement dated September 1, 1983 between Stewart Building Enterprise and Stewart Enterprises, Inc. and amendments thereto dated June 18, 1990 and May 23, 1991 (incorporated by reference to Exhibit 10.1 to the Company's Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on August 21, 1991 (the "1991 Registration Statement")); dated June 1, 1992 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1992 (the "1992 10-K")); dated June 1, 1993 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1993 (the "1993 10-K")); dated October 28, 1994 and dated November 30, 1994 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1994 (the "1994 10-K")); dated May 27, 1996 (incorporated by reference to Exhibit 10.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1996 (the "1996 10-K")); and dated April 30, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997) 10.2 Split-Dollar Agreement dated January 10, 1992 between the Company, Roy A. Perrin, Jr., Trustee, on behalf of all Trustees of the Elisabeth Felder Stewart 1988 Trust and of the Frank B. Stewart, III 1988 Trust, and Frank B. Stewart, Jr. (incorporated by reference to Exhibit 10.39 to the 1992 10-K) ----------------------- Management Contracts and Compensatory Plans or Arrangements 10.3 Form of Indemnity Agreement between the Company and its directors and executive officers (incorporated by reference to Exhibit 10.25 to the 1991 Registration Statement), and amendment dated September 18, 1996 (incorporated by reference to Exhibit 10.6 to the 1996 10-K) 10.4 Employment Agreement dated August 1, 1995, between the Company and Joseph P. Henican, III (incorporated by reference to Exhibit 10.16 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1995 (the "1995 10-K")) and Amendment No. 1 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.8 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1998 (the "1998 10-K")) 10.5 Change of Control Agreement dated December 5, 1995, between the Company and Joseph P. Henican, III (incorporated by reference to Exhibit 10.20 to the 1995 10-K) 10.6 Stock Option Agreements dated February 1, 1995, between the Company and Joseph P. Henican, III (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended July 31, 1995) 10.7 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Joseph P. Henican, III (incorporated by reference to Exhibit 10.17 to the 1995 10-K) 10.8 Termination Agreement between Stewart Enterprises, Inc., a Louisiana corporation and Joseph P. Henican, III dated as of November 15, 1999 10.9 Employment Agreement dated August 1, 1995, between the Company and William E. Rowe (incorporated by reference to Exhibit 10.25 to the 1995 10-K) and Amendment No. 1 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.12 to the 1998 10-K) 10.10 Change of Control Agreement dated December 5, 1995, between the Company and William E. Rowe (incorporated by reference to Exhibit 10.29 to the 1995 10-K) 10.11 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and William E. Rowe (incorporated by reference to Exhibit 10.26 to the 1995 10-K) 10.12 Employment Agreement dated August 1, 1995, between the Company and Ronald H. Patron (incorporated by reference to Exhibit 10.32 to the 1995 10-K); Amendment No. 1 to Employment Agreement dated May 1, 1998 and Amendment No. 2 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.15 to the 1998 10-K) 10.13 Change of Control Agreement dated December 5, 1995, between the Company and Ronald H. Patron (incorporated by reference to Exhibit 10.36 to the 1995 10-K) and Amendment No. 1 to Change of Control Agreement dated May 1, 1998 (incorporated by reference to Exhibit 10.16 to the 1998 10-K) 10.14 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Ronald H. Patron (incorporated by reference to Exhibit 10.33 to the 1995 10-K) 10.15 Employment Agreement dated August 1, 1995, between the Company and Gerard C. Alexander (incorporated by reference to Exhibit 10.39 to the 1995 10-K) and Amendment No. 1 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.18 to the 1998 10-K) 10.16 Change of Control Agreement dated December 5, 1995, between the Company and Gerard C. Alexander (incorporated by reference to Exhibit 10.43 to the 1995 10-K) 10.17 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Gerard C. Alexander (incorporated by reference to Exhibit 10.40 to the 1995 10-K) 10.18 Employment Agreement dated August 1, 1995, between the Company and Brian J. Marlowe (incorporated by reference to Exhibit 10.47 to the 1995 10-K) and Amendment No. 1 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.24 to the 1998 10-K) 10.19 Change of Control Agreement dated December 5, 1995, between the Company and Brian J. Marlowe (incorporated by reference to Exhibit 10.51 to the 1995 10-K) 10.20 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Brian J. Marlowe (incorporated by reference to Exhibit 10.48 to the 1995 10-K) 10.21 Employment Agreement dated August 1, 1995, between the Company and Kenneth C. Budde (incorporated by reference to Exhibit 10.35 to the 1996 10-K); Amendment No. 1 to Employment Agreement dated January 1, 1997 (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997); Amendment No. 2 to Employment Agreement dated May 1, 1998 and Amendment No. 3 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.27 to the 1998 10-K) 10.22 Change of Control Agreement dated December 5, 1995, between the Company and Kenneth C. Budde (incorporated by reference to Exhibit 10.39 to the 1996 10-K) and Amendment No. 1 to Change of Control Agreement dated May 1, 1998 (incorporated by reference to Exhibit 10.28 to the 1998 10-K) 10.23 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Kenneth C. Budde (incorporated by reference to Exhibit 10.36 to the 1996 10-K) 10.24 Employment Agreement dated August 1, 1995, between the Company and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.41 to the 1996 10-K); Amendment No. 1 to Employment Agreement dated January 1, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997); and Amendment No. 2 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.30 to the 1998 10-K) 10.25 Change of Control Agreement dated December 5, 1995, between the Company and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.45 to the 1996 10-K) and Amendment No. 1 to Change of Control Agreement dated January 1, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1998) 10.26 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Lawrence B. Hawkins (incorporated by reference to Exhibit 10.42 to the 1996 10-K) 10.27 Employment Agreement dated January 1, 1997, between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997); Amendment No. 1 to Employment Agreement dated January 1, 1997 (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997); Amendment No. 2 to Employment Agreement dated November 1, 1997 (incorporated by reference to Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998) and Amendment No. 3 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.33 to the 1998 10-K). 10.28 Change of Control Agreement dated January 1, 1997, between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997) and Amendment No. 1 to Change of Control Agreement dated November 1, 1997 (incorporated by reference to Exhibit 10.3 to Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1998) 10.29 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.47 to the 1996 10-K) 10.30 Stock Option Agreement dated January 1, 1997 (time-vest), between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997) 10.31 Stock Option Agreement dated December 23, 1997 (time-vest), between the Company and Brent F. Heffron (incorporated by reference to Exhibit 10.2 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998) 10.32 Employment Agreement dated January 1, 1997, between the Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.5 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997); Amendment No. 1 to Employment Agreement dated January 1, 1997 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1997); Amendment No. 2 to Employment Agreement dated November 1, 1997 (incorporated by reference to Exhibit 10.3 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998); and Amendment No. 3 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.38 to the 1998 10-K) 10.33 Change of Control Agreement dated January 1, 1997, between the Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.6 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1997) and Amendment No. 1 to Change of Control Agreement dated November 1, 1997 (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the Quarter ended April 30, 1998) 10.34 Stock Option Agreement dated September 7, 1995 (time-vest), between the Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.51 to the 1996 10-K) 10.35 Stock Option Agreement dated January 1, 1997 (time-vest), 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, 1997) 10.36 Stock Option Agreement dated December 23, 1997 (time-vest), between the Company and Raymond C. Knopke, Jr. (incorporated by reference to Exhibit 10.4 to the Company's Quarterly Report on Form 10-Q for the Quarter ended January 31, 1998) 10.37 Employment Agreement dated November 1, 1997, between the Company and Charles L. Tilis and Amendment No. 1 to Employment Agreement dated October 31, 1998 (incorporated by reference to Exhibit 10.43 to the 1998 10-K) 10.38 Change of Control Agreement dated November 1, 1997, between the Company and Charles L. Tilis (incorporated by reference to Exhibit 10.44 to the 1998 10-K) 10.39 Form of Stock Option Agreement (time-vest), between the Company and its Executive Officers (incorporated by reference to Exhibit 10.45 to the 1998 10-K) 10.40 Form of Stock Option Agreement (performance-based), between the Company and its Executive Officers (incorporated by reference to Exhibit 10.46 to the 1998 10-K) 10.41 The Stewart Enterprises Employees' Retirement Trust (incorporated by reference to Exhibit 10.20 the 1991 Registration Statement) and amendment thereto dated January 1, 1994 (incorporated by reference to Exhibit 10.28 to the 1994 10-K) 10.42 The Stewart Enterprises Supplemental Retirement and Deferred Compensation Plan (incorporated by reference to Exhibit 10.29 to the 1994 10-K) 10.43 Amended and Restated Stewart Enterprises, Inc. 1995 Incentive Compensation Plan (incorporated by reference to Exhibit 10.57 to the 1996 10-K) 10.44 Amended and Restated Directors' Stock Option Plan (incorporated by reference to Exhibit 10.58 to the 1996 10-K) 10.45 Amended and Restated Stewart Enterprises, Inc. Employee Stock Purchase Plan (incorporated by reference to Exhibit 10.61 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 18 Letter from PricewaterhouseCoopers LLP regarding 1999 change in accounting principle 18.1 Letter from PricewaterhouseCoopers LLP regarding 1997 change in accounting principles (incorporated by reference to Exhibit 18 to the Company's Quarterly Report on Form 10-Q for the Quarter ended July 31, 1997) 21 Subsidiaries of the Company 23 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule -------------------- (B) REPORTS ON FORM 8-K The Company filed a Form 8-K on August 12, 1999, reporting under "Item 5. Other Events," earnings revisions for the third and fourth quarters of 1999. The Company filed a Form 8-K on August 18, 1999, reporting under "Item 5. Other Events," announcement of the Company's stock repurchase program. The Company filed a Form 8-K on September 8, 1999, reporting under "Item 5. Other Events," the earnings release for the Quarter ended July 31, 1999. SIGNATURES Pursuant to the requirements of Section 13 or 15(d) 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 on January 27, 2000. STEWART ENTERPRISES, INC. By: /S/ WILLIAM E. ROWE ------------------------- William E. Rowe PRESIDENT AND CHIEF EXECUTIVE OFFICER Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the Registrant and on the dates indicated.
SIGNATURE TITLE DATE --------- ----- ---- /s/ FRANK B. STEWART, JR. Chairman of the Board January 27, 2000 - ----------------------------- Frank B. Stewart, Jr. /s/ WILLIAM E. ROWE President, Chief Executive Officer January 27, 2000 - ----------------------------- and a Director William E. Rowe (PRINCIPAL EXECUTIVE OFFICER) /s/ KENNETH C. BUDDE Executive Vice President, January 27, 2000 - ----------------------------- Chief Financial Officer Kenneth C. Budde and a Director (PRINCIPAL FINANCIAL OFFICER) /s/ MICHAEL G. HYMEL Vice President- January 27, 2000 - ----------------------------- Corporate Controller and Michael G. Hymel Chief Accounting Officer (PRINCIPAL ACCOUNTING OFFICER) /s/ DARWIN C. FENNER Director January 27, 2000 - ----------------------------- Darwin C. Fenner /s/ DWIGHT A. HOLDER Director January 27, 2000 - ----------------------------- Dwight A. Holder /s/ JOHN P. LABORDE Director January 27, 2000 - ----------------------------- John P. Laborde /s/ JAMES W. McFARLAND Director January 27, 2000 - ----------------------------- James W. McFarland /s/ MICHAEL O. READ Director January 27, 2000 - ----------------------------- Michael O. Read
EXHIBIT INDEX 3.1 Amended and Restated Articles of Incorporation of the Company, as amended and restated as of November 5, 1999 3.2 By-laws of the Company, as amended and restated as of October 28, 1999 10.8 Termination Agreement between Stewart Enterprises, Inc., a Louisiana corporation and Joseph P. Henican, III dated as of November 15, 1999 12 Calculation of Ratio of Earnings to Fixed Charges 18 Letter from PricewaterhouseCoopers LLP regarding 1999 change in accounting principle 21 Subsidiaries of the Company 23 Consent of PricewaterhouseCoopers LLP 27 Financial Data Schedule EX-3.1 2 Exhibit 3.1 AMENDED AND RESTATED ARTICLES OF INCORPORATION OF STEWART ENTERPRISES, INC. (as amended and restated as of November 5, 1999) ARTICLE I Name The name of this Corporation shall be Stewart Enterprises, Inc. ARTICLE II Purpose The Corporation's purpose is to engage in any lawful activity for which corporations may be formed under the Business Corporation Law of Louisiana. ARTICLE III Capital A. AUTHORIZED STOCK. The Corporation shall have the authority to issue an aggregate of 160 million shares of capital stock, of which 150 million shares shall be Class A Common Stock, no par value per share, five million shares shall be Class B Common Stock, no par value per share, and five million shares shall be Preferred Stock, $1.00 par value per share. B. PREFERRED STOCK. Shares of Preferred Stock may be issued from time to time in one or more series. Authority is hereby vested in the Board of Directors of the Corporation to amend these Articles of Incorporation from time to time to fix the preferences, limitations and relative rights as between the Preferred Stock and the Class A and Class B Common Stock, and to fix variations in the preferences, limitations and relative rights as between different series of Preferred Stock. [On October 28, 1999, the Board of Directors adopted amendments to the Articles of Incorporation to create a series of Preferred Stock in the amount and having the designation, voting powers, preferences and relative, participating, optional and other special rights and qualifications, limitations and restrictions thereof as follows:] 1. DESIGNATION AND NUMBER OF SHARES. The shares of such series shall be designated as "Series A Participating Cumulative Preferred Stock" (the "Series A Preferred Stock"), and the number of shares constituting such series shall be 1,500,000. Such number of shares of the Series A Preferred Stock may be increased or decreased by resolution of the Board of Directors; PROVIDED that no decrease shall reduce the number of shares of Series A Preferred Stock to a number less than the number of shares then outstanding plus the number of shares issuable upon exercise or conversion of outstanding rights, options or other securities issued by the Corporation. 2. DIVIDENDS AND DISTRIBUTIONS. --------------------------- (a) The holders of shares of Series A Preferred Stock shall be entitled to receive, when, as and if declared by the Board of Directors out of funds legally available for the purpose, quarterly dividends payable on October 31, January 31, April 30 and July 31 of each year (each such date being referred to herein as a "Quarterly Dividend Payment Date"), commencing on the first Quarterly Dividend Payment Date after the first issuance of any share or fraction of a share of Series A Preferred Stock, in an amount per share (rounded to the nearest cent) equal to the greater of $1.00 and subject to the provision for adjustment hereinafter set forth, 100 times the aggregate per share amount of all cash dividends or other distributions and 100 times the aggregate per share amount of all non-cash dividends or other distributions (other than a dividend payable in shares of Common Stock of the Corporation, no par value, (any such Common Stock, the "Common Stock") or a subdivision of the outstanding shares of Common Stock (by reclassification or otherwise)), declared on the Common Stock since the immediately preceding Quarterly Dividend Payment Date, or, with respect to the first Quarterly Dividend Payment Date, since the first issuance of any share or fraction of a share of Series A Preferred Stock. If the Corporation shall at any time after October 28, 1999 (the "Rights Declaration Date") pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under clause (ii) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) The Corporation shall declare a dividend or distribution on the Series A Preferred Stock as provided in paragraph (a) above immediately after it declares a dividend or distribution on the Common Stock (other than as described in clauses (a)(ii)(A) and (a)(ii)(B) above); PROVIDED that if no dividend or distribution shall have been declared on the Common Stock during the period between any Quarterly Dividend Payment Date and the next subsequent Quarterly Dividend Payment Date (or, with respect to the first Quarterly Dividend Payment Date, the period between the first issuance of any share or fraction of a share of Series A Preferred Stock and such first Quarterly Dividend Payment Date), a dividend of $1.00 per share on the Series A Preferred Stock shall nevertheless be payable on such subsequent Quarterly Dividend Payment Date. (c) Dividends shall begin to accrue and be cumulative on outstanding shares of Series A Preferred Stock from the Quarterly Dividend Payment Date next preceding the date of issue of such shares of Series A Preferred Stock, unless the date of issue of such shares is on or before the record date for the first Quarterly Dividend Payment Date, in which case dividends on such shares shall begin to accrue and be cumulative from the date of issue of such shares, or unless the date of issue is a date after the record date for the determination of holders of shares of Series A Preferred Stock entitled to receive a quarterly dividend and on or before such Quarterly Dividend Payment Date, in which case dividends shall begin to accrue and be cumulative from such Quarterly Dividend Payment Date. Accrued but unpaid dividends shall not bear interest. Dividends paid on shares of Series A Preferred Stock in an amount less than the total amount of such dividends at the time accrued and payable on such shares shall be allocated pro rata on a share-by-share basis among all such shares at the time outstanding. The Board of Directors may fix a record date for the determination of holders of shares of Series A Preferred Stock entitled to receive payment of a dividend or distribution declared thereon, which record date shall not be more than 60 days prior to the date fixed for the payment thereof. 3. VOTING RIGHTS. In addition to any other voting rights required by law, the holders of shares of Series A Preferred Stock shall have the following voting rights: (a) Subject to the provision for adjustment hereinafter set forth, each share of Series A Preferred Stock shall entitle the holder thereof to 100 votes on all matters submitted to a vote of shareholders of the Corporation; provided, however that, each share of Series A Preferred Stock that is initially issued by the Corporation to a holder of the Corporation's Class B Common Stock in respect of shares of Class B Common Stock shall, for as long as such share is held by Frank B. Stewart, Jr. or any of his Permitted Transferees (as defined in Article III(C)(5) of the Articles of Incorporation), entitle such holder to 1,000 votes on all matters submitted to a vote of shareholders of the Corporation. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the number of votes per share to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event shall be adjusted by multiplying such number by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. (b) Except as otherwise provided herein or by law, the holders of shares of Series A Preferred Stock and the holders of shares of Common Stock shall vote together as a single class on all matters submitted to a vote of shareholders of the Corporation. (c) (i) If at any time dividends on any Series A Preferred Stock shall be in arrears in an amount equal to six quarterly dividends thereon, the occurrence of such contingency shall mark the beginning of a period (herein called a "default period") which shall extend until such time as all accrued and unpaid dividends for all previous quarterly dividend periods and for the current quarterly dividend period on all shares of Series A Preferred Stock then outstanding shall have been declared and paid or set apart for payment. During each default period, all holders of Preferred Stock and any other series of Preferred Stock then entitled as a class to elect directors, voting together as a single class, irrespective of series, shall have the right to elect two Directors. (ii) During any default period, such voting right of the holders of Series A Preferred Stock may be exercised initially at a special meeting called pursuant to subparagraph (c)(iii) hereof or at any annual meeting of shareholders, and thereafter at annual meetings of shareholders; PROVIDED that neither such voting right nor the right of the holders of any other series of Preferred Stock, if any, to increase, in certain cases, the authorized number of Directors shall be exercised unless the holders of 10% in number of shares of Preferred Stock outstanding shall be present in person or by proxy. The absence of a quorum of holders of Common Stock shall not affect the exercise by holders of Preferred Stock of such voting right. At any meeting at which holders of Preferred Stock shall exercise such voting right initially during an existing default period, they shall have the right, voting as a class, to elect Directors to fill such vacancies, if any, in the Board of Directors as may then exist up to two Directors or, if such right is exercised at an annual meeting, to elect two Directors. If the number that may be so elected at any special meeting does not amount to the required number, the holders of the Preferred Stock shall have the right to make such increase in the number of Directors as shall be necessary to permit the election by them of the required number. After the holders of the Preferred Stock shall have exercised their right to elect Directors in any default period and during the continuance of such period, the number of Directors shall not be increased or decreased except by vote of the holders of Preferred Stock as herein provided or pursuant to the rights of any equity securities ranking senior to or PARI PASSU with the Series A Preferred Stock. (iii) Unless the holders of Preferred Stock shall, during an existing default period, have previously exercised their right to elect Directors, the Board of Directors may order, or any shareholder or shareholders owning in the aggregate not less than 10% of the total number of shares of Preferred Stock outstanding, irrespective of series, may request, the calling of a special meeting of holders of Preferred Stock, which meeting shall thereupon be called by the President and Chief Executive Officer or the Secretary of the Corporation. Notice of such meeting and of any annual meeting at which holders of Preferred Stock are entitled to vote pursuant to this paragraph (c)(iii) shall be given to each holder of record of Preferred Stock by mailing a copy of such notice to such holder's last address as the same appears on the books of the Corporation. Such meeting shall be called for a time not earlier than 20 days and not later than 60 days after such order or request or in default of the calling of such meeting within 60 days after such order or request, such meeting may be called on similar notice by any shareholder or shareholders owning in the aggregate not less than 10% of the total number of shares of Preferred Stock outstanding, irrespective of series. Notwithstanding the provisions of this paragraph (c)(iii), no such special meeting shall be called during the period within 60 days immediately preceding the date fixed for the next annual meeting of shareholders. (iv) In any default period, the holders of Common Stock, and other classes of stock of the Corporation if applicable, shall continue to be entitled to elect the whole number of Directors until the holders of Preferred Stock shall have exercised their right to elect two Directors voting as a class, after the exercise of which right (x) the Directors so elected by the holders of Preferred Stock shall continue in office until their successors shall have been elected by such holders or until the expiration of the default period, and (y) any vacancy in the Board of Directors may (except as provided in paragraph (c)(ii) hereof) be filled by vote of a majority of the remaining Directors theretofore elected by the holders of the class of stock that elected the Director whose office shall have become vacant. References in this paragraph (c) to Directors elected by the holders of a particular class of stock shall include Directors elected by such Directors to fill vacancies as provided in clause (y) of the foregoing sentence. (v) Immediately upon the expiration of a default period, (x) the right of the holders of Preferred Stock as a class to elect Directors shall cease, (y) the term of any Directors elected by the holders of Preferred Stock as a class shall terminate, and (z) the number of Directors shall be such number as may be provided for in the articles of incorporation or bylaws irrespective of any increase made pursuant to the provisions of paragraph (c)(ii) hereof (such number being subject, however, to change thereafter in any manner provided by law or in the articles of incorporation or bylaws). Any vacancies in the Board of Directors effected by the provisions of clauses (y) and (z) in the preceding sentence may be filled by a majority of the remaining Directors. (d) The Articles of Incorporation of the Corporation shall not be amended in any manner (whether by merger or otherwise) so as to adversely affect the powers, preferences or special rights of the Series A Preferred Stock without the affirmative vote of the holders of a majority of the outstanding shares of Series A Preferred Stock, voting separately as a class. (e) Except as otherwise provided herein, holders of Series A Preferred Stock shall have no special voting rights, and their consent shall not be required for taking any corporate action. 4. CERTAIN RESTRICTIONS. -------------------- (a) Whenever quarterly dividends or other dividends or distributions payable on the Series A Preferred Stock as provided in Section are in arrears, thereafter and until all accrued and unpaid dividends and distributions, whether or not declared, on outstanding shares of Series A Preferred Stock shall have been paid in full, the Corporation shall not: (i) declare or pay dividends on, or make any other distributions on, any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; (ii) declare or pay dividends on, or make any other distributions on, any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except dividends paid ratably on the Series A Preferred Stock and all such other parity stock on which dividends are payable or in arrears in proportion to the total amounts to which the holders of all such shares are then entitled; (iii) redeem, purchase or otherwise acquire for value any shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock; PROVIDED that the Corporation may at any time redeem, purchase or otherwise acquire shares of any such junior stock in exchange for shares of stock of the Corporation ranking junior (as to dividends and upon dissolution, liquidation or winding up) to the Series A Preferred Stock; or (iv) redeem, purchase or otherwise acquire for value any shares of Series A Preferred Stock, or any shares of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except in accordance with a purchase offer made in writing or by publication (as determined by the Board of Directors) to all holders of Series A Preferred Stock and all such other parity stock upon such terms as the Board of Directors, after consideration of the respective annual dividend rates and other relative rights and preferences of the respective series and classes, shall determine in good faith will result in fair and equitable treatment among the respective series or classes. (b) The Corporation shall not permit any subsidiary of the Corporation to purchase or otherwise acquire for value any shares of stock of the Corporation unless the Corporation could, under paragraph (a), purchase or otherwise acquire such shares at such time and in such manner. 5. REACQUIRED SHARES. Any shares of Series A Preferred Stock redeemed, purchased or otherwise acquired by the Corporation in any manner whatsoever shall be retired and canceled promptly after the acquisition thereof. All such shares shall upon their cancellation become authorized but unissued shares of Preferred Stock without designation as to series and may be reissued as part of a new series of Preferred Stock to be created by resolution or resolutions of the Board of Directors as permitted by the Articles of Incorporation or as otherwise permitted under Louisiana Law. 6. LIQUIDATION, DISSOLUTION AND WINDING UP. Upon any liquidation, dissolution or winding up of the Corporation, no distribution shall be made (1) to the holders of shares of stock ranking junior (either as to dividends or upon liquidation, dissolution or winding up) to the Series A Preferred Stock unless, prior thereto, the holders of shares of Series A Preferred Stock shall have received $0.01 per share, plus an amount equal to accrued and unpaid dividends and distributions thereon, whether or not declared, to the date of such payment; PROVIDED that the holders of shares of Series A Preferred Stock shall be entitled to receive an aggregate amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount to be distributed per share to holders of Common Stock, or (2) to the holders of stock ranking on a parity (either as to dividends or upon liquidation, dissolution or winding up) with the Series A Preferred Stock, except distributions made ratably on the Series A Preferred Stock and all such other parity stock in proportion to the total amounts to which the holders of all such shares are entitled upon such liquidation, dissolution or winding up. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the aggregate amount to which holders of shares of Series A Preferred Stock were entitled immediately prior to such event under the proviso in clause (1) of the preceding sentence shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 7. CONSOLIDATION, MERGER, ETC. If the Corporation shall enter into any consolidation, merger, combination or other transaction in which the shares of Common Stock are exchanged for or changed into other stock or securities, cash or any other property, then in any such case the shares of Series A Preferred Stock shall at the same time be similarly exchanged for or changed into an amount per share, subject to the provision for adjustment hereinafter set forth, equal to 100 times the aggregate amount of stock, securities, cash or any other property, as the case may be, into which or for which each share of Common Stock is changed or exchanged. If the Corporation shall at any time after the Rights Declaration Date pay any dividend on Common Stock payable in shares of Common Stock or effect a subdivision or combination of the outstanding shares of Common Stock (by reclassification or otherwise) into a greater or lesser number of shares of Common Stock, then in each such case the amount set forth in the preceding sentence with respect to the exchange or change of shares of Series A Preferred Stock shall be adjusted by multiplying such amount by a fraction the numerator of which is the number of shares of Common Stock outstanding immediately after such event and the denominator of which is the number of shares of Common Stock that were outstanding immediately prior to such event. 8. NO REDEMPTION. The Series A Preferred Stock shall not be redeemable. 9. RANK. The Series A Preferred Stock shall rank junior (as to dividends and upon liquidation, dissolution and winding up) to all other series of the Corporation's preferred stock except any series that specifically provides that such series shall rank junior to the Series A Preferred Stock. 10. FRACTIONAL SHARES. Series A Preferred Stock may be issued in fractions of a share which shall entitle the holder, in proportion to such holder's fractional shares, to exercise voting rights, receive dividends, participate in distributions and to have the benefit of all other rights of holders C. CLASS A AND CLASS B COMMON STOCK. The voting powers, designations, preferences, and relative, participating, optional and other special rights of the Class A and Class B Common Stock, and the qualifications, limitations or restrictions thereof, shall be fixed as provided below: 1. VOTING RIGHTS. (a) Except as may otherwise be expressly required by the Business Corporation Law of Louisiana or these Articles of Incorporation, the holders of shares of Class A Common Stock shall vote together with the holders of shares of Class B Common Stock as a single voting group, provided, however, that, with respect to each matter properly brought before the shareholders for their consideration and vote, each record holder of shares of Class A Common Stock shall have one vote for each such share held of record in his name on the stock transfer records of the Corporation and each record holder of shares of Class B Common Stock shall have ten votes for each such share held of record in his name on the stock transfer records of the Corporation. (b) In the case of each share of Class B Common Stock held of record by a bank, voting trustee, broker, dealer, clearing agency, or any nominee thereof, or by any other nominee of the beneficial owner of such share, the record holder shall be entitled to only one vote, provided, however, that the record holder of any such shares will be entitled, notwithstanding the foregoing limitation, to cast ten votes per share if such holder shall establish to the satisfaction of the Corporation that each such share has been beneficially owned continuously from the date of issuance by the original beneficial owner (whose name and address must be specified to the Corporation), or by a Permitted Transferee (as defined in Article III(C)(5) hereof) of such original beneficial owner. Any such record holder who wishes to cast ten votes per share shall file with the transfer agent for the Class B Common Stock a certificate, on a form that will be mailed to such holder by such transfer agent on request, certifying as to the information specified in the preceding sentence and specifying the date on which he desires to exercise his voting rights (the "Voting Date"). Any such certificate shall be deemed filed only if received by the transfer agent not less than ten nor more than 30 days prior to the Voting Date. If such certificate shall not establish to the satisfaction of the Corporation that the record holder is entitled to cast ten votes per share, then, within five business days after the receipt thereof by the transfer agent, the Corporation shall mail to the person filing such certificate a notice that describes the deficiency and, unless the Corporation determines that such person has a reasonable opportunity to cure such deficiency prior to the Voting Date, notifies him that he shall be entitled to only one vote per share on the Voting Date. 2. CONVERSION. (a) Each share of Class B Common Stock shall be convertible at any time, at the option of the record holder thereof, into one fully paid and nonassessable share of Class A Common Stock of the Corporation. (b) No fractional shares of Class A Common Stock shall be issued upon such conversion, but in lieu thereof the Corporation shall pay to the holder an amount in cash equal to the fair market value of such fractional share. (c) To convert shares of Class B Common Stock under this Article III(C)(2), the record holder thereof shall surrender the certificate or certificates representing such shares, duly endorsed to the Corporation or in blank (which endorsement shall correspond exactly with the name or names of the record holder or holders set forth on the face of the certificates and on the stock transfer records of the Corporation), at the office of the transfer agent for the shares of Class B Common Stock (which may be either the Corporation or any third party retained by it for such purpose), and shall give written notice to the transfer agent and the Corporation that such holder elects to convert all or part of the shares represented thereby, stating therein the name or names (with the address or addresses) in which the certificate or certificates for shares of Class A Common Stock are to be issued. (d) If the record shareholder fully complies with paragraph (c), the Corporation shall, as soon as practicable thereafter, instruct the transfer agent to deliver to such holder, or to such holder's nominee or nominees, a certificate or certificates for the number of shares of Class A Common Stock to which such holder shall be entitled, rounded to the nearest whole number of shares, and a check for any amount payable hereunder in lieu of a fractional share, along with a certificate representing any shares of Class B Common Stock that the holder has not elected to convert hereunder but which constituted part of the shares of Class B Common Stock represented by the certificate or certificates surrendered. (e) Shares of Class B Common Stock shall be deemed to have been converted as of the close of business on the date of the due surrender of the certificates representing the shares to be converted as provided above, and the person or persons entitled to receive the shares of Class A Common Stock issuable upon such conversion shall be treated for all purposes as the record holder or holders of such shares of Class A Common Stock at such time. (f) If the Corporation shall in any manner split or subdivide the outstanding shares of Class A Common Stock or Class B Common Stock, the outstanding shares of the other such class of stock shall be split or subdivided in the same manner, proportionately and on the same basis per share. (g) When shares of Class B Common Stock have been converted pursuant to any paragraph of this Article III(C), they shall be irrevocably canceled and not reissued. 3. DIVIDENDS. The record holders of shares of Class A Common Stock and Class B Common Stock shall be entitled to receive such dividends and distributions, payable in cash or otherwise, as may be declared thereon by the Board of Directors from time to time out of the assets or funds of the Corporation legally available therefor, provided, however, that no such dividend or distribution shall be declared or paid unless the holders of both classes receive the same per share dividend, payable in the same amount and type of consideration, as if such classes constituted a single class, except that in the event that any dividend is declared that is payable in shares of Class A Common Stock or Class B Common Stock, such dividend shall be declared and paid at the same rate per share with respect to the Class A Common Stock and Class B Common Stock, and the dividend payable on shares of Class A Common Stock shall be payable only in shares of Class A Common Stock and the dividend payable on Class B Common Stock shall be payable only in shares of Class B Common Stock. 4. LIQUIDATION. (a) In the event of a liquidation, dissolution or winding up of the affairs of the Corporation, whether voluntary or involuntary, following the payment of all indebtedness and any applicable preferential distribution to the holders of outstanding shares of any class or series of stock senior to the Class A and Class B Common Stock with respect to amounts payable upon the occurrence of any such event, all of the remaining assets of the Corporation available for distribution shall be distributed in equal amounts per share to the record holders of the Class A Common Stock and Class B Common Stock, as if such classes constituted a single class. (b) For purposes of paragraph (a) above, neither (i) the merger or consolidation of the Corporation into or with any other corporation or entity, (ii) the sale, transfer or lease of all or substantially all of the assets of the Corporation or (iii) a share exchange between the Corporation and any other corporation or entity shall be deemed to be a liquidation, dissolution or winding up of the Corporation. 5. TRANSFERS OF CLASS B COMMON STOCK. No person holding any share of Class B Common Stock shall transfer, and the Corporation shall not register (nor permit the transfer agent for the Class B Common Stock to register) the transfer of, any shares of Class B Common Stock or any interest therein, whether by sale, assignment, gift, bequest, pledge, hypothecation, encumbrance, or any other disposition, except to a "Permitted Transferee" of such person (as defined below in this paragraph). If a holder of shares of Class B Common Stock transfers any such shares to any person or entity other than a "Permitted Transferee," such transfer, without any further action of the parties or the Corporation, shall automatically and irrevocably convert such shares into an equal number of shares of Class A Common Stock and the transferee shall be deemed a holder of such shares of Class A Common Stock from the date of such transfer. The term "Permitted Transferee" shall mean only: (a) the spouse and any lineal descendant (including adopted children) of any person duly holding shares of Class B Common Stock (a "qualified holder"), and any spouse of any such lineal descendant (all such spouses and lineal descendants being hereinafter referred to as "such holder's family members"); (b) the trustee of an trust for the sole benefit of a qualified holder or such holder's family members; (c) a partnership made up exclusively of qualified holders or such holders' family members or a corporation wholly-owned by qualified holders or such holder's family members, provided, however, that as of the date that such partnership or corporation is no longer comprised of or owned exclusively by qualified holders or such holders' family members, such partnership or corporation will no longer be a Permitted Transferee and any Class B Common Stock held by it shall be automatically and irrevocably converted into Class A Common Stock without any further action of the parties or the Corporation; or (d) the executor, administrator or personal representative of the estate of a qualified holder or any of such holder's family members, or the guardian or conservator of a qualified holder or any of such holder's family members who has been adjudged disabled by a court of competent jurisdiction. 6. ISSUANCES OF CLASS B COMMON STOCK. Except for the 790,005 shares of Class B Common Stock to be issued by operation of Article III(E) hereof, no shares of Class B Common Stock may be issued, other than issuances pursuant to stock splits, stock subdivisions or stock dividends duly effected in accordance with the terms and conditions of this Article. Notwithstanding any other provision in these Articles of Incorporation to the contrary or any other vote that may be required by law, this Article III(C)(6) may be amended or repealed only by the holders of two-thirds of the Class A Common Stock present or represented at any duly convened shareholders' meeting. D. TOTAL VOTING POWER. For purposes of these Articles of Incorporation, "Total Voting Power" means the total number of votes that shareholders and holders of any bonds, debentures or other obligations granted voting rights by the Corporation pursuant to La. R.S. 12:75H are generally entitled to cast with respect to the election of a majority of the directors or, if such term is used in reference to any other particular matter properly brought before the shareholders for their consideration and vote, means the total number of such votes that are entitled to be cast with respect to such matter. E. RECLASSIFICATION. From and after the effective date of the amendment and restatement of these Articles of Incorporation effected hereby, each issued and outstanding share of Common Stock, no par value per share, of the Corporation shall be reclassified into 30 shares of Class A Common Stock, except for 26,333.5 shares of Common Stock held by Frank B. Stewart, Jr., which shall be reclassified into an aggregate of 790,005 shares of Class B Common Stock. ARTICLE IV Directors A. NUMBER OF DIRECTORS. The Board of Directors shall consist of such number of persons as shall be designated from time to time in the by- laws of the Corporation, or, if not so designated, as may be designated from time to time by resolution of the Board of Directors, provided that no decrease in the number of directors shall shorten the term of any incumbent director. B. CLASSIFICATION. The Board of Directors, other than those who may be elected by the holders of any class or series of stock having preference over the Class A and Class B Common Stock as to dividends or upon liquidation, shall be divided, with respect to the time during which they shall hold office, into three classes as nearly equal in number as possible, with the initial term of office of the Class I directors expiring at the annual meeting of shareholders to be held in 1993, of the Class II directors expiring at the next succeeding annual meeting of shareholders, and of the Class III directors expiring at the second succeeding annual meeting, with all such directors to hold office until their successors are elected and qualified. Any increase or decrease in the number of directors shall be apportioned by the Board of Directors so that all classes of directors shall be as nearly equal in number as possible. At each annual meeting of shareholders, directors chosen to succeed those whose terms then expire shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election and until their successors are duly elected and qualified. C. VACANCIES. Except as provided in Article IV(H) hereof, any vacancy on the Board (including any vacancy resulting from an increase in the authorized number of directors or from a failure of the shareholders to elect the full number of authorized directors) may, notwithstanding any resulting absence of a quorum of directors, be filled by a two-thirds vote of the Board of Directors remaining in office, provided that the shareholders shall have the right to fill the vacancy at any special meeting called for such purpose prior to any such action by the Board. D. REMOVAL. Except as provided in Article IV(H) hereof, (i) any director may be removed, with or without cause, by a two-thirds vote of the Board of Directors and (ii) any director or the entire Board of Directors may be removed at any time, with or without cause, by the affirmative vote of the holders of not less than two-thirds of that portion of the Total Voting Power (as defined in Article III(D) hereof) that is present or represented at a special meeting of shareholders called for such purpose, voting together as a single class. At the same meeting in which the Board of Directors or the shareholders remove one or more directors, a successor or successors may be elected for the unexpired term of the director or directors removed. Except as set forth in this Article IV(D), directors shall not be subject to removal. E. DIRECTOR PROXIES. Any director absent from a meeting of the Board of Directors or any committee thereof may be represented by any other director, who may cast the vote of the absent director according to the written instructions, general or special, of the absent director. F. TENDER OFFERS AND OTHER EXTRAORDINARY TRANSACTIONS. The Board of Directors, when evaluating a tender offer or an offer to make a tender or exchange offer or to effect a merger, consolidation or share exchange may, in exercising its judgment in determining what is in the best interests of the Corporation and its shareholders, consider the following factors and any other factors that it deems relevant: (1) not only the consideration being offered in the proposed transaction, in relation to the then current market price for the outstanding capital stock of the Corporation, but also the market price for the capital stock of the Corporation over a period of years, the estimated price that might be achieved in a negotiated sale of the Corporation as a whole or in part or through orderly liquidation, the premiums over market price for the securities of other corporations in similar transactions, current political, economic and other factors bearing on securities prices and the Corporation's financial condition and future prospects; (2) the social and economic effects of such transaction on the Corporation, its subsidiaries, or their employees, customers, creditors and the communities in which the Corporation and its subsidiaries do business; (3) the business and financial condition and earnings prospects of the acquiring party or parties, including, but not limited to, debt service and other existing or likely financial obligations of the acquiring party or parties, and the possible effect of such condition upon the Corporation and its subsidiaries and the communities in which the Corporation and its subsidiaries do business; and (4) the competence, experience, and integrity of the acquiring party or parties and its or their management. Notwithstanding any provision of this Article IV(F), this Article is not intended to confer any rights on any subsidiary of the Corporation, or on any of the Corporation's or its subsidiaries' employees, customers, creditors or other members of the communities in which it or they do business. G. BOARD NOMINATIONS. Except as provided in Article IV(H) hereof, only persons who are nominated in accordance with the procedures set forth in this Article IV(G) shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of record of the Corporation entitled to vote at such meeting for the election of directors who complies with the notice procedures set forth in this Article IV(G). Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice shall be delivered to or mailed and received at the principal office of the Corporation not less than 45 days nor more than 90 days prior to the meeting, provided, however, that in the event that less than 55 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be so received at the principal executive offices of the Corporation no later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth or include the following: 1. as to each person whom the shareholder proposes to nominate for election or re-election as a director, (a) the name, age, business address and residential address of such person, (b) the principal occupation or employment of such person, (c) the class and number of shares of capital stock of the Corporation of which such person is the beneficial owner (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934), (d) such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected and (e) any other information relating to such person that would be required to be disclosed in solicitations of proxies for the election of directors, or would be otherwise required, in each case pursuant to Regulation 14A promulgated under the Securities Exchange Act of 1934; and 2. as to the shareholder of record giving the notice, (a) the name and address of such shareholder and (b) the class and number of shares of capital stock of the Corporation of which such shareholder is the beneficial owner (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934). If requested in writing by the Secretary of the Corporation at least 15 days in advance of the meeting, such shareholder shall disclose to the Secretary, within ten days of such request, whether such person is the sole beneficial owner of the shares held of record by him, and, if not, the name and address of each other person known by the shareholder of record to claim or have a beneficial interest in such shares. At the request of the Board of Directors, any person nominated by the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. If a shareholder seeks to nominate one or more directors, the Secretary shall appoint two inspectors, who shall not be affiliated with the Corporation, to determine whether the shareholder has complied with this Article IV(G). If the inspectors shall determine that the shareholder has not complied with this Article IV(G), the defective nomination shall be disregarded and the inspectors shall direct the Chairman of the meeting to declare at the meeting that such nomination was not made in accordance with the procedures prescribed by the Articles of Incorporation. H. DIRECTORS ELECTED BY PREFERRED SHAREHOLDERS. Notwithstanding anything in these Articles of Incorporation to the contrary, whenever the holders of any one or more classes or series of stock having a preference over the Class A and Class B Common Stock as to dividends or upon liquidation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the provisions of these Articles of Incorporation (as they may be duly amended from time to time) fixing the rights and preferences of such preferred stock shall govern with respect to the nomination, election, term, removal, vacancies or other related matters with respect to such directors. ARTICLE V By-laws A. ADOPTION, AMENDMENT AND REPEAL. By-laws of the Corporation may be adopted only by a majority vote of the Board of Directors. By-laws may be amended or repealed only by a majority vote of the Board of Directors (unless a higher vote is specified in the By-laws) or the affirmative vote of the holders of at least two-thirds of that portion of the Total Voting Power (as defined in Article III(D) hereof), voting together as a single class, that is present or represented at any regular or special meeting of shareholders, the notice of which expressly states that the proposed amendment or repeal is to be considered at the meeting. B. NEW MATTERS. Any purported amendment to the By-laws which would add thereto a matter not covered in the By-laws prior to such purported amendment shall be deemed to constitute the adoption of a By-law provision and not an amendment to the By-laws. ARTICLE VI Limitation of Liability and Indemnification A. LIMITATION OF LIABILITY. No director or officer of the Corporation shall be liable to the Corporation or to its shareholders for monetary damages for breach of his fiduciary duty as a director or officer, provided that the foregoing provision shall not eliminate or limit the liability of a director or officer for (1) any breach of his duty of loyalty to the Corporation or its shareholders; (2) acts or omissions not in good faith or which involve intentional misconduct or a knowing violation of law; (3) liability for unlawful distributions of the Corporation's assets to, or redemptions or repurchases of the Corporation's shares from, shareholders of the Corporation, under and to the extent provided in La. R.S. 12:92D; or (4) any transaction from which he derived an improper personal benefit. B. AUTHORIZATION OF FURTHER ACTIONS. The Board of Directors may (1) cause the Corporation to enter into contracts with its directors and officers providing for the limitation of liability set forth in this Article to the fullest extent permitted by law, (2) adopt By-laws or resolutions, or cause the Corporation to enter into contracts, providing for indemnification of directors and officers of the Corporation and other persons (including but not limited to directors and officers of the Corporation's direct and indirect subsidiaries) to the fullest extent permitted by law and (3) cause the Corporation to exercise the powers set forth in La. R.S. 12:83F, notwithstanding that some or all of the members of the Board of Directors acting with respect to the foregoing may be parties to such contracts or beneficiaries of such By-laws or resolutions or the exercise of such powers. No repeal or amendment of any such By-laws or resolutions limiting the right to indemnification thereunder shall affect the entitlement of any person to indemnification whose claim thereto results from conduct occurring prior to the date of such repeal or amendment. C. SUBSIDIARIES. The Board of Directors may cause the Corporation to approve for its direct and indirect subsidiaries limitation of liability and indemnification provisions comparable to the foregoing. D. AMENDMENT OF ARTICLE VI. In addition to any other votes required by law or these Articles of Incorporation (and notwithstanding the fact that a lesser percentage may be specified by law or these Articles of Incorporation), the affirmative vote of the holders of at least 80% of the Total Voting Power (as defined in Article III(D) hereof), voting together as a single class, shall be required to amend or repeal this Article, and any amendment or repeal of this Article shall not adversely affect any elimination or limitation of liability of a director or officer of the Corporation under this Article with respect to any action or inaction occurring prior to the time of such amendment or repeal. ARTICLE VII Reversion Cash, property or share dividends, shares issuable to shareholders in connection with a reclassification of stock, and the redemption price of redeemed shares, that are not claimed by the shareholders entitled thereto within one year after the dividend or redemption price became payable or the shares became issuable, despite reasonable efforts by the Corporation to pay the dividend or redemption price or deliver the certificates for the shares to such shareholders within such time, shall, at the expiration of such time, revert in full ownership to the Corporation, and the Corporation's obligation to pay such dividend or redemption price or issue such shares, as the case may be, shall thereupon cease, provided, however, that the Board of Directors may, at any time, for any reason satisfactory to it, but need not, authorize (1) payment of the amount of any cash or property dividend or redemption price or (2) issuance of any shares, ownership of which has reverted to the Corporation pursuant to this Article, to the person or entity who or which would be entitled thereto had such reversion not occurred. ARTICLE VIII Special Meetings of Shareholders Special meetings of shareholders, for any purpose or purposes, may be called in any manner set forth in the By-laws. In addition, at any time, upon the written request of any shareholder or group of shareholders holding in the aggregate at least 25% of the Total Voting Power (as defined in Article III(D) hereof), the Secretary of the Corporation shall call a special meeting of shareholders to be held at the registered office of the Corporation at such time as the Secretary may fix, not less than 15 nor more than 60 days after the receipt of said request, and if the Secretary shall neglect or refuse to fix such time or to give notice of the meeting, the shareholder or shareholders making the request may do so. Such requests must state the specific purpose or purposes of the proposed special meeting, and the business to be conducted thereat shall be limited to such purpose or purposes. These Amended and Restated Articles of Incorporation reflect all amendments made through March 14, 1996. EX-3.2 3 Exhibit 3.2 BY-LAWS OF STEWART ENTERPRISES, INC. (as amended and restated as of October 28, 1999) SECTION 1 OFFICES 1.1 PRINCIPAL OFFICE. The principal office of the Corporation shall be located at 110 Veterans Memorial Boulevard, Metairie, Louisiana 70005. 1.2. ADDITIONAL OFFICES. The Corporation may have such offices at such other places as the Board of Directors may from time to time determine or the business of the Corporation may require. SECTION 2 SHAREHOLDERS MEETINGS 2.1 PLACE OF MEETINGS. Unless otherwise required by law or these By-laws, all meetings of the shareholders shall be held at the principal office of the Corporation or at such other place, within or without the State of Louisiana, as may be designated by the Board of Directors. 2.2 ANNUAL MEETINGS; NOTICE THEREOF. An annual meeting of the shareholders shall be held each year on the date and at the time as the Board of Directors shall designate, for the purpose of electing directors and for the transaction of such other business as may be properly brought before the meeting. If no annual shareholders' meeting is held for a period of eighteen months, any shareholder may call such meeting to be held at the registered office of the Corporation as shown on the records of the Secretary of State of the State of Louisiana. 2.3 SPECIAL MEETINGS. Special meetings of the shareholders, for any purpose or purposes, may be called by the Board of Directors, the Chairman of the Board, or the President. At any time, upon the written request of any shareholder or group of shareholders holding in the aggregate at least 25% of the Total Voting Power (as defined in Article III(D) of the Articles of Incorporation), the Secretary shall call a special meeting of shareholders to be held at the registered office of the Corporation at such time as the Secretary may fix, not less than 15 nor more than 60 days after the receipt of such request, and if the Secretary shall neglect or refuse to fix such time or to give notice of the meeting, the shareholder or shareholders making the request may do so. Such request must state the specific purpose or purposes of the proposed special meeting and the business to be conducted thereat shall be limited to such purpose or purposes. 2.4 NOTICE OF MEETINGS. Except as otherwise provided by law, the authorized person or persons calling a shareholders' meeting shall cause written notice of the time, place and purpose of the meeting to be given to all shareholders entitled to vote at such meeting, at least 10 days and not more than 60 days prior to the day fixed for the meeting. Notice of the annual meeting need not state the purpose or purposes thereof, unless action is to be taken at the meeting as to which notice is required by law or the By-laws. Notice of a special meeting shall state the purpose or purposes thereof, and the business conducted at any special meeting shall be limited to the purpose or purposes stated in the notice. 2.5 LIST OF SHAREHOLDERS. At every meeting of shareholders, a list of shareholders entitled to vote, arranged alphabetically and certified by the Secretary or by the agent of the Corporation having charge of transfers of shares, showing the number and class of shares held by each such shareholder on the record date for the meeting and confirming the number of votes per share as to which each such shareholder is entitled, shall be produced on the request of any shareholder. 2.6 QUORUM. At all meetings of shareholders, the holders of a majority of the Total Voting Power (as defined in Article III(D) of the Articles of Incorporation) shall constitute a quorum, provided, however, that this subsection shall not have the effect of reducing the vote required to approve any matter that may be established by law, the Articles of Incorporation or these By-laws. 2.7 VOTING. When a quorum is present at any shareholders' meeting, the vote of the holders of a majority of that portion of the Total Voting Power (as defined in Article III(D) of the Articles of Incorporation) that is present in person or represented by proxy, voting together as a single class, shall decide each question brought before such meeting, unless the resolution of the question requires, by express provision of law, the Articles of Incorporation or these By-laws, a different vote or one or more separate votes by the holders of a class or series of capital stock, in which case such express provision shall apply and control the decision of such question. Directors shall be elected by plurality vote. 2.8 PROXIES. At any meeting of the shareholders, every shareholder having the right to vote shall be entitled to vote in person or by proxy appointed by an instrument in writing executed by such shareholder and bearing a date not more than eleven months prior to the meeting, unless the instrument provides for a longer period, but in no case will an outstanding proxy be valid for longer than three years from the date of its execution, provided, however, that in no event may a proxy be voted at a meeting called pursuant to La. R.S. 12:138 unless it is executed and dated by the shareholder within 30 days of the date of such meeting. The person appointed as proxy need not be a shareholder of the Corporation. 2.9 ADJOURNMENTS. Adjournments of any annual or special meeting of shareholders may be taken without new notice being given unless a new record date is fixed for the adjourned meeting, but any meeting at which directors are to be elected shall be adjourned only from day to day until such directors shall have been elected. 2.10 WITHDRAWAL. If a quorum is present or represented at a duly organized shareholders' meeting, such meeting may continue to do business until adjournment, notwithstanding the withdrawal of enough shareholders to leave less than a quorum as fixed in Section 2.6 of these By-laws, or the refusal of any shareholders to vote. 2.11 LACK OF QUORUM. If a meeting cannot be organized because a quorum has not attended, those present may adjourn the meeting to such time and place as they may determine, subject, however, to the provisions of Section 2.9 hereof. In the case of any meeting called for the election of directors, those who attend the second of such adjourned meetings, although less than a quorum as fixed in Section 2.6 hereof, shall nevertheless be deemed to constitute a quorum for the purpose of electing directors. 2.12 PRESIDING OFFICER. The Chairman of the Board or the Chief Executive Officer, or in their absence a chairman designated by the Board of Directors, shall preside at all shareholders' meetings. 2.13 DEFINITION OF SHAREHOLDER. As used in these By-laws, and unless the context otherwise requires, the term shareholder shall mean a person who is (i) the record holder of shares of the Corporation's capital stock or (ii) a registered holder of any bonds, debentures or similar obligations granted voting rights by the Corporation pursuant to La. R.S. 12:75H. 2.14 BUSINESS TO BE CONDUCTED AT ANNUAL AND SPECIAL MEETINGS OF SHAREHOLDERS. (a) At any annual meeting of shareholders, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, or (ii) by any shareholder of record entitled to vote at such meeting who complies with the procedures set forth in this Section 2.14. (b) At any special meeting of shareholders called at the request of a shareholder, or group of shareholders, of record in accordance with the Corporation's Articles of Incorporation and these By-laws, only such business shall be conducted as shall have been (i) submitted by the shareholder, or group of shareholders of record requesting the meeting, (ii) described in the request for the meeting, and (iii) described in the notice of the meeting. (c) At any special meeting of shareholders called at the request of the Board of Directors, the Chairman of the Board or the President of the Corporation, only such business shall be conducted as shall have been brought before the meeting (i) by or at the direction of the Board of Directors, the Chairman of the Board or the President or (ii) by any shareholder of record entitled to vote at such meeting who complies with the procedures set forth in this Section 2.14. (d) No proposal by a shareholder, or group of shareholders, of record of the Corporation shall be considered at an annual shareholders' meeting unless Sufficient Notice (as described in subparagraph (f) hereof) of the proposal is received by the Secretary of the Corporation not less than 120 calendar days in advance of the date in the current year that corresponds to the date on which proxy materials were first mailed by the Corporation in connection with the previous year's annual meeting. If the date of the annual meeting is changed to a date that is 30 calendar days earlier or later than the date in the current year that corresponds to the date on which the annual meeting was held in the previous year, or if no annual meeting was held in the previous year, Sufficient Notice of the proposal must be received by the Secretary of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event less than 70 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, Sufficient Notice of the proposal must be received by the Secretary of the Corporation no later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. (e) No proposal by a shareholder, or group of shareholders, of record of the Corporation shall be considered at a special meeting of shareholders called by the Board of Directors, the Chairman of the Board or the President unless Sufficient Notice (as described in subparagraph (f) hereof) of the proposal is received by the Secretary of the Corporation not less than 60 days nor more than 90 days prior to the meeting; provided, however, that in the event less than 70 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, Sufficient Notice of the proposal must be received by the Secretary of the Corporation no later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. (f) Notice of a proposal shall constitute Sufficient Notice only if it contains (i) a complete and accurate description of the proposal; (ii) a statement that the shareholder (or the shareholder's legal representative) intends to attend the meeting and present the proposal and that the shareholder intends to hold of record securities of the Corporation entitled to vote at the meeting through the meeting date; (iii) the shareholder's name and address and the number of shares of the Corporation's voting securities that the shareholder holds of record and beneficially as of the notice date; and (iv) a complete and accurate description of any material interest of such shareholder in such proposal. (g) Notwithstanding compliance with this Section 2.14, no shareholder proposal shall be deemed to be properly brought before a shareholders' meeting if it is not a proper subject for action by shareholders under Louisiana law or the Articles of Incorporation. (h) Any shareholder proposal failing to comply with this Section 2.14 shall not be considered at the meeting and, if introduced at the meeting, shall be ruled out of order. (i) Nothing in this Section 2.14 is intended to confer any rights to have any proposal included in the notice of any meeting or in proxy materials related to such meeting. (j) Notwithstanding the requirement in this Section 2.14 that a shareholder be a shareholder of record in order to present a shareholder proposal at a shareholders' meeting, a beneficial owner of shares entitled to vote at the meeting shall be entitled to present a proposal at a meeting if such beneficial owner complies with Rule 14a-8 promulgated under the Securities Exchange Act of 1934 and the proposal has been included in the Corporation's proxy statement for the meeting pursuant to Rule 14a-8. SECTION 3 DIRECTORS 3.1 NUMBER. All of the corporate powers shall be vested in, and the business and affairs of the Corporation shall be managed by, a Board of Directors. Except as otherwise fixed by or pursuant to Article III of the Articles of Incorporation (as it may be duly amended from time to time) relating to the rights of the holders of any class or series of stock having a preference over the Class A and Class B Common Stock as to dividends or upon liquidation to elect additional directors by class vote, the Board of Directors shall consist of up to 12 natural persons, the exact number of which shall be fixed each year by resolution of the Board of Directors, provided that, if after proxy materials for any meeting of shareholders at which directors are to be elected are mailed to shareholders any person or persons named therein to be nominated at the direction of the Board of Directors become unable or unwilling to serve, the number of directors fixed by the Board or Directors for such year shall be automatically reduced by a number equal to the number of such persons unless the Board of Directors selects an additional nominee or nominees to replace such persons. No director need be a shareholder. The Secretary shall have the power to certify at any time as to the number of directors authorized and as to the class to which each director has been elected or assigned. 3.2 POWERS. The Board may exercise all such powers of the Corporation and do all such lawful acts and things which are not by law, the Articles of Incorporation or these By-laws directed or required to be done by the shareholders. 3.3 CLASSES. The Board of Directors, other than those directors who may be elected by the holders of any class or series of stock having preference over the Class A and Class B Common Stock as to dividends or upon liquidation, shall be divided, with respect to the time during which they shall hold office, into three classes as nearly equal in number as possible, with the initial term of office of Class I directors expiring at the annual meeting of shareholders to be held in 1993, of Class II directors expiring at the next succeeding annual meeting of shareholders and of Class III directors expiring at the second succeeding annual meeting of shareholders, with all such directors to hold office until their successors are elected and qualified. Any increase or decrease in the number of directors shall be apportioned by the Board of Directors so that all classes of directors shall be as nearly equal in number as possible. At each annual meeting of shareholders, directors chosen to succeed those whose terms then expire shall be elected to hold office for a term expiring at the annual meeting of shareholders held in the third year following the year of their election and until their successors are duly elected and qualified. 3.4 GENERAL ELECTION. At each annual meeting of shareholders, directors shall be elected to succeed those directors whose terms then expire. No decrease in the number of directors constituting the Board of Directors shall shorten the term of any incumbent director. 3.5 VACANCIES. Except as otherwise provided in the Articles of Incorporation or these By-laws, (a) the office of a director shall become vacant if he dies, resigns or is duly removed from office and (b) the Board of Directors may declare vacant the office of a director if he (i) is interdicted or adjudicated an incompetent, (ii) is adjudicated a bankrupt, (iii) in the sole opinion of the Board of Directors becomes incapacitated by illness or other infirmity so that he is unable to perform his duties for a period of six months or longer, or (iv) ceases at any time to have the qualifications required by law, the Articles of Incorporation or these By-laws. 3.6 FILLING VACANCIES. Except as otherwise provided in Section 3.8 of these By-laws, any vacancy on the Board (including any vacancy resulting from an increase in the authorized number of directors or from failure of the shareholders to elect the full number of authorized directors) may, notwithstanding any resulting absence of a quorum of directors, be filled by a two-thirds vote of the Board of Directors remaining in office, provided that the shareholders shall have the right, at any special meeting called for such purpose prior to any such action by the Board, to fill the vacancy. A director elected pursuant to this section shall serve until the next shareholders' meeting held for the election of directors of the class to which he shall have been appointed and until his successor is elected and qualified. 3.7 NOTICE OF SHAREHOLDER NOMINEES. Except as otherwise provided in Section 3.8 of these By-laws, only persons who are nominated in accordance with the procedures set forth in this section shall be eligible for election as directors. Nominations of persons for election to the Board of Directors of the Corporation may be made at a meeting of shareholders by or at the direction of the Board of Directors or by any shareholder of record of the Corporation entitled to vote for the election of directors at the meeting who complies with the notice procedures set forth in this section. Such nominations, other than those made by or at the direction of the Board of Directors, shall be made pursuant to timely notice in writing to the Secretary of the Corporation. To be timely, a shareholder's notice must be delivered or mailed and received at the principal office of the Corporation not less than 45 days nor more than 90 days prior to the meeting, provided, however, that in the event that less than 55 days notice or prior public disclosure of the date of the meeting is given or made to shareholders, notice by the shareholder to be timely must be received no later than the close of business on the tenth day following the day on which such notice of the date of the meeting was mailed or such public disclosure was made. Such shareholder's notice shall set forth or include the following: a. as to each person whom the shareholder proposes to nominate for election or re-election as a director (i) the name, age, business address and residential address of such person, (ii) the principal occupation or employment of such person, (iii) the class and number of shares of capital stock of the Corporation of which such person is the beneficial owner (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934), (iv) such person's written consent to being named in the proxy statement as a nominee and to serve as a director if elected and (v) any other information relating to such person that would be required to be disclosed in solicitations of proxies for election of directors, or would be otherwise required, in each case pursuant to Regulation 14A under the Securities Exchange Act of 1934; and b. as to the shareholder of record giving the notice, (i) the name and address of such shareholder and (b) the class and number of shares of capital stock of the Corporation of which such shareholder is the beneficial owner (as defined in Rule 13d-3 promulgated under the Securities Exchange Act of 1934). If requested in writing by the Secretary the Corporation at least 15 days in advance of the meeting, such shareholder shall disclose to the Secretary, within ten days of such request, whether such person is the sole beneficial owner of the shares held of record by him, and, if not, the name and address of each other person known by the shareholder of record to claim or have a beneficial interest in such shares. At the request of the Board of Directors, any person nominated by or at the direction of the Board of Directors for election as a director shall furnish to the Secretary of the Corporation that information required to be set forth in a shareholder's notice of nomination which pertains to the nominee. If a shareholder seeks to nominate one or more persons as directors, the Secretary shall appoint two inspectors, who shall not be affiliated with the Corporation, to determine whether the shareholder has complied with this section. If the inspectors shall determine that the shareholder has not complied with this section, the defective nomination shall be disregarded and the inspectors shall direct the Chairman of the meeting to declare at the meeting that such nomination was not made in accordance with the procedures prescribed by the Articles of Incorporation and these By-laws. 3.8 DIRECTORS ELECTED BY PREFERRED SHAREHOLDERS. Notwithstanding anything in these By-laws to the contrary, whenever the holders of any one or more classes or series of stock having a preference over the Class A and Class B Common Stock as to dividends or upon liquidation shall have the right, voting separately as a class, to elect one or more directors of the Corporation, the provisions of the Articles of Incorporation (as they may be duly amended from time to time) fixing the rights and preferences of such preferred stock shall govern with respect to the nomination, election, term, removal, vacancies or other related matters with respect to such directors. 3.9 COMPENSATION OF DIRECTORS. Directors shall receive such compensation for their services, in their capacity as directors, as may be fixed by resolution of the Board of Directors, provided, however, that nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity and receiving compensation therefor. 3.10 VICE CHAIRMAN OF THE BOARD. The Board of Directors may appoint a Vice Chairman of the Board, who shall perform such duties as the Chairman of the Board or the Board of Directors shall prescribe. SECTION 4 MEETINGS OF THE BOARD 4.1 PLACE OF MEETINGS. The meetings of the Board of Directors may be held at such place within or without the State of Louisiana as a majority of the directors may from time to time appoint. 4.2 INITIAL MEETINGS. The first meeting of each newly-elected Board shall be held immediately following the shareholders' meeting at which the Board, or any class thereof, is elected and at the same place as such meeting, and no notice of such first meeting shall be necessary for the newly-elected directors in order legally to constitute the meeting. 4.3 REGULAR MEETINGS; NOTICE. Regular meetings of the Board may be held at such times as the Board may from time to time determine. Notice of regular meetings of the Board of Directors shall be required, but no special form of notice or time of notice shall be necessary. 4.4 SPECIAL MEETINGS; NOTICE. Special meetings of the Board may be called by the Chairman of the Board or the President on reasonable notice given to each director, either personally or by telephone, mail, telex, telecopy or any other comparable form of facsimile communication. Special meetings shall be called by the Secretary in like manner and on like notice on the written request of a majority of the directors and if such officer fails or refuses, or is unable within 24 hours to call a meeting when requested, then the directors making the request may call the meeting on two days' written notice given to each director. The notice of a special meeting of directors need not state its purpose or purposes, but if the notice states a purpose or purposes and does not state a further purpose to consider such other business as may properly come before the meeting, the business to be conducted at the special meeting shall be limited to the purpose or purposes stated in the notice. 4.5 WAIVER OF NOTICE. Directors present at any regular or special meeting shall be deemed to have received due, or to have waived, notice thereof, provided that a director who participates in a meeting by telephone (as permitted by Section 4.9 hereof) shall not be deemed to have received or waived due notice if, at the beginning of the meeting, he objects to the transaction of any business because the meeting is not lawfully called. 4.6 QUORUM. A majority of the Board shall be necessary to constitute a quorum for the transaction of business, and except as otherwise provided by law, the Articles of Incorporation or these By-laws, the acts of a majority of the directors present at a duly-called meeting at which a quorum is present shall be the acts of the Board. If a quorum is not present at any meeting of the Board of Directors, the directors present may adjourn the meeting from time to time without notice other than announcement at the meeting, until a quorum is present. 4.7 WITHDRAWAL. If a quorum is present when the meeting convened, the directors present may continue to do business, taking action by vote of a majority of a quorum as fixed in Section 4.6 hereof, until adjournment, notwithstanding the withdrawal of enough directors to leave less than a quorum as fixed in Section 4.6 hereof or the refusal of any director present to vote. 4.8 ACTION BY CONSENT. Any action that may be taken at a meeting of the Board, or any committee thereof, may be taken by a consent in writing signed by all of the directors or by all members of the committee, as the case may be, and filed with the records of proceedings of the Board or committee. 4.9 MEETINGS BY TELEPHONE OR SIMILAR COMMUNICATION. Members of the Board may participate at and be present at any meeting of the Board or any committee thereof by means of conference telephone or similar communications equipment if all persons participating in such meeting can hear and communicate with each other. SECTION 5 COMMITTEES OF THE BOARD 5.1 GENERAL. The Board may designate one or more committees, each committee to consist of two or more of the directors of the Corporation (and one or more directors may be named as alternate members to replace any absent or disqualified regular members), which, to the extent provided by resolution of the Board or these By-laws, shall have and may exercise the powers of the Board in the management of the business and affairs of the Corporation, and may have power to authorize the seal of the Corporation to be affixed to documents, but no such committee shall have power or authority to amend the Articles of Incorporation, adopt an agreement of merger, consolidation or share exchange, recommend to the shareholders the sale, lease or exchange of all or substantially all of the Corporation's assets, recommend to the shareholders a dissolution of the Corporation or a revocation of dissolution, remove or indemnify directors, or amend these By-laws; and unless the resolution expressly so provides, no such committee shall have the power or authority to declare a dividend or authorize the issuance of stock. Such committee or committees shall have such name or names as may be stated in these By-laws, or as may be determined, from time to time, by the Board. Any vacancy occurring in any such committee shall be filled by the Board, but the President may designate another director to serve on the committee pending action by the Board. Each such member of a committee shall hold office during the term designated by the Board. 5.2 COMPENSATION COMMITTEE. The Board shall establish and maintain a Compensation Committee consisting of two or more directors, each of whom shall (i) meet the requirements specified in Rule 16b-3 promulgated under the Securities Exchange Act of 1934, as amended, to qualify as a member of a committee of the board of directors able to approve the transactions described therein, (ii) meet the requirements specified in Internal Revenue Code
162(m) and the regulations promulgated thereunder relating to members of compensation committees, and (iii) meet any further requirements designated by the Board. The Compensation Committee shall perform such services as may be designated by the Board. 5.3 AUDIT COMMITTEE. The Board shall establish an Audit Committee consisting of at least three directors, a majority of whom are not officers or employees of the Corporation or any of its affiliates. The Audit Committee shall (i) serve as a focal point for communication between the Corporation's directors, management, independent accountants and internal auditing personnel, as their duties relate to financial accounting, reporting and controls, (ii) assist the Board of Directors in fulfilling its fiduciary responsibilities as to accounting policies and reporting practices of the Corporation and all subsidiaries and the sufficiency of auditing practices with respect thereto, in part, by reviewing the scope of audit coverage, including consideration of the Corporation's accounting practices and procedures and system of internal accounting controls and reporting to the Board with respect thereto, (iii) operate as the Board's principal agent in ensuring the independence of the Corporation's independent accountants, the integrity of management and the adequacy of disclosure to shareholders, and (iv) recommend to the Board the appointment of the Corporation's independent auditors, and (v) perform such other services as may be designated by the Board. SECTION 6 REMOVAL OF BOARD MEMBERS Except as may be otherwise provided in Section 3.8 of these By-laws, (i) any director may be removed, with or without cause, by a two-thirds vote of the Board of Directors and (ii) any director or the entire Board of Directors may be removed at any time, with or without cause, by the affirmative vote of the holders of not less than two-thirds of that portion of the Total Voting Power (as defined in Article III(D) of the Articles of Incorporation) that is present or represented at a special shareholders' meeting called for that purpose, voting together as a single class. At the same meeting in which the Board of Directors or the shareholders remove one or more directors, a successor or successors may be elected for the unexpired term of the director or directors removed. Except as provided in the Articles of Incorporation and in this Section 6, directors shall not be subject to removal. SECTION 7 NOTICES 7.1 FORM OF DELIVERY. Whenever under the provisions of law, the Articles of Incorporation or these By-laws notice is required to be given to any shareholder or director, it shall not be construed to mean personal notice unless otherwise specifically provided in the Articles of Incorporation or these By-laws, but such notice may be given by mail, addressed to such shareholder or director at his address as it appears on the records of the Corporation, with postage thereon prepaid, or in such other manner as may be specified in these By-laws. Notices given by mail shall be deemed to have been given at the time they are deposited in the United States mail, and all other notices shall be deemed to have been given upon receipt. 7.2 WAIVER. Whenever any notice is required to be given by law, the Articles of Incorporation or these By-laws, a waiver thereof in writing signed by the person or persons entitled to such notice, whether before or after the time stated therein, shall be deemed equivalent thereto. In addition, notice shall be deemed to have been given to, or waived by, any shareholder or director who attends a meeting of shareholders or directors in person, or is represented at such meeting by proxy, without protesting at the commencement of the meeting the transaction of any business because the meeting is not lawfully called or convened. SECTION 8 OFFICERS 8.1 DESIGNATIONS. The officers of the corporation shall be elected by the directors and shall be the Chairman of the Board, President, Secretary and Treasurer. The Board of Directors may appoint a Chief Executive Officer, one or more Vice Presidents and such other officers as it shall deem necessary, who shall hold their offices for such terms and shall exercise such powers and perform such duties as shall be determined from time to time by the Board. More than one office may be held by one person, provided that no person holding more than one office may sign, in more than one capacity, any certificate or other instrument required by law to be signed by two officers. 8.2 TERM OF OFFICE. The officers of the Corporation shall hold office at the pleasure of the Board of Directors. Except as otherwise provided in the resolution of the Board of Directors electing any officer, each officer shall hold office until the first meeting of the Board of Directors after the annual meeting of shareholders next succeeding his or her election, and until his or her successor is elected and qualified or until his or her earlier resignation or removal. Any officer may resign at any time upon written notice to the Board, Chairman of the Board, President or Secretary of the Corporation. Such resignation shall take effect at the time specified therein and acceptance of such resignation shall not be necessary to make it effective. The Board may remove any officer with or without cause at any time. Any such removal shall be without prejudice to the contractual rights of such officers, if any, with the Corporation, but the election of an officer shall not in and of itself create contractual rights. Any vacancy occurring in any office of the Corporation by death, resignation, removal or otherwise may be filled for the unexpired portion of the term by the Board at any regular or special meeting. 8.3 THE CHAIRMAN OF THE BOARD. The Chairman of the Board shall preside at meetings of the Board of Directors and the shareholders and perform such other duties as may be designated by the Board of Directors or these By-laws. He shall be an EX-OFFICIO member of all committees of the Board of Directors, except that he shall be a full member entitled to all the rights and privileges appertaining thereto with respect to committees on which he is named a full member. 8.4 THE PRESIDENT. The President shall, subject to the powers of the Chairman of the Board, have general and active responsibility for the management of the business of the Corporation, shall, unless otherwise provided by the Board, be the chief executive and chief operating officer of the Corporation, shall supervise the daily operations of the business of the Corporation and shall ensure that all orders, policies and resolutions of the Board are carried out. 8.5 THE VICE PRESIDENTS. The Vice Presidents (if any) shall perform such duties as the President or the Board of Directors shall prescribe. 8.6 THE SECRETARY. The Secretary shall attend all meetings of the Board of Directors and all meetings of the shareholders and record all votes and the minutes of all proceedings in a book to be kept for that purpose. He shall give, or cause to be given, notice of all meetings of the shareholders and regular and special meetings of the Board, and shall perform such other duties as may be prescribed by the Board or President. He shall keep in safe custody the seal of the Corporation, if any, and affix such seal to any instrument requiring it. 8.7 THE TREASURER. The Treasurer shall have the custody of the corporate funds and shall keep or cause to be kept full and accurate accounts of receipts and disbursements in books belonging to the Corporation and shall deposit all monies and other valuable effects in the name and to the credit of the Corporation in such depositories as may be designated by the Board of Directors. He shall keep a proper accounting of all receipts and disbursements and shall disburse the funds of the Corporation only for proper corporate purposes or as may be ordered by the Board and shall render to the President and the Board at the regular meetings of the Board, or whenever they may require it, an account of all his transactions as Treasurer and of the financial condition and results of operations of the Corporation. SECTION 9 STOCK 9.1 CERTIFICATES. Every holder of stock in the Corporation shall be entitled to have a certificate signed by the President or a Vice President and the Secretary or an Assistant Secretary evidencing the number and class (and series, if any) of shares owned by him, containing such information as required by law and bearing the seal of the Corporation. If any stock certificate is manually signed by a transfer agent or registrar other than the Corporation itself or an employee of the Corporation, the signature of any such officer may be a facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate shall have ceased to be an officer, transfer agent or registrar of the Corporation before such certificate is issued, it may be issued by the Corporation with the same effect as if such person or entity were an officer, transfer agent or registrar of the Corporation on the date of issue. 9.2 MISSING CERTIFICATES. The President or any Vice President may direct a new certificate or certificates to be issued in place of any certificate or certificates theretofore issued by the Corporation alleged to have been lost, stolen or destroyed, upon the Corporation's receipt of an affidavit of that fact from the person claiming the certificate of stock to be lost, stolen or destroyed. As a condition precedent to the issuance of a new certificate or certificates, the officers of the Corporation shall, unless dispensed with by the President, require the owner of such lost, stolen or destroyed certificate or certificates, or his legal representative, to (i) give the Corporation a bond or (ii) enter into a written indemnity agreement, in each case in an amount appropriate to indemnify the Corporation against any claim that may be made against the Corporation with respect to the certificate alleged to have been lost, stolen or destroyed. 9.3 TRANSFERS. Upon surrender to the Corporation or the transfer agent of the Corporation of a certificate for shares duly endorsed or accompanied by proper evidence of succession, assignment or authority to transfer, it shall be the duty of the Corporation to issue a new certificate to the person entitled thereto, cancel the old certificate and record the transaction upon its books. SECTION 10 DETERMINATION OF SHAREHOLDERS 10.1 RECORD DATE. For the purpose of determining shareholders entitled to notice of and to vote at a meeting, or to receive a dividend, or to receive or exercise subscription or other rights, or to participate in a reclassification of stock, or in order to make a determination of shareholders for any other proper purpose, the Board of Directors may fix in advance a record date for determination of shareholders for such purpose, such date to be not more than 60 days and, if fixed for the purpose of determining shareholders entitled to notice of and to vote at a meeting, not less than 10 days, prior to the date on which the action requiring the determination of shareholder is to be taken. 10.2 REGISTERED SHAREHOLDERS. Except as otherwise provided by law, the Corporation and its directors, officers and agents may recognize and treat a person registered on its records as the owner of shares as the owner in fact thereof for all purposes, and as the person exclusively entitled to have and to exercise all rights and privileges incident to the ownership of such shares, and the Corporation's rights under this section shall not be affected by any actual or constructive notice that the Corporation, or any of its directors, officers or agents, may have to the contrary. SECTION 11 INDEMNIFICATION 11.1 DEFINITIONS. As used in this section the following terms shall have the meanings set forth below: (a) "Board" - the Board of Directors of the Corporation. (b) "Claim" - any threatened, pending or completed claim, action, suit, or proceeding, whether civil, criminal, administrative or investigative and whether made judicially or extra-judicially, or any separate issue or matter therein, as the context requires. (c) "Determining Body" - (i) those members of the Board who are not named as parties to the Claim for which indemnification is being sought ("Impartial Directors"), if there are at least three Impartial Directors, (ii) a committee of at least three Impartial Directors appointed by the Board (regardless whether the members of the Board of Directors voting on such appointment are Impartial Directors) or (iii) if there are fewer than three Impartial Directors or if the Board of Directors or the committee appointed pursuant to clause (ii) of this paragraph so directs (regardless whether the members thereof are Impartial Directors), independent legal counsel, which may be the regular outside counsel of the Corporation. (d) "Disbursing Officer" - the President of the Corporation or, if the President is a party to the Claim for which indemnification is being sought, any officer not a party to such Claim who is designated by the President to be the Disbursing Officer with respect to indemnification requests related to the Claim, which designation shall be made promptly after receipt of the initial request for indemnification with respect to such Claim. (e) "Expenses" - any expenses or costs (including, without limitation, attorney's fees, judgments, punitive or exemplary damages, fines and amounts paid in settlement). (f) "Indemnitee" - each person who is or was a director or officer of the Corporation. 11.2 INDEMNITY. (a) To the extent such Expenses exceed the amounts reimbursed or paid pursuant to policies of liability insurance maintained by the Corporation, the Corporation shall indemnify each Indemnitee against any Expenses actually and reasonably incurred by him (as they are incurred) in connection with any Claim either against him or as to which he is involved solely as a witness or person required to give evidence, by reason of his position (i) as a director or officer of the Corporation, (ii) as a director or officer of any subsidiary of the Corporation or as a fiduciary with respect to any employee benefit plan of the Corporation, or (iii) as a director, officer, partner, employee or agent of another Corporation, partnership, joint venture, trust or other for-profit or not-for-profit entity or enterprise, if such position is or was held at the request of the Corporation, whether relating to service in such position before or after the effective date of this Section, if he (i) is successful in his defense of the Claim on the merits or otherwise or (ii) has been found by the Determining Body (acting in good faith) to have met the Standard of Conduct (defined below); provided that (A) the amount otherwise payable by the Corporation may be reduced by the Determining Body to such amount as it deems proper if it determines that the Claim involved the receipt of a personal benefit by Indemnitee, and (B) no indemnification shall be made in respect of any Claim as to which Indemnitee shall have been adjudged by a court of competent jurisdiction, after exhaustion of all appeals therefrom, to be liable for willful or intentional misconduct in the performance of his duty to the Corporation or to have obtained an improper personal benefit, unless, and only to the extent that, a court shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnity for such Expenses as the court deems proper. (b) The Standard of Conduct is met when the conduct by an Indemnitee with respect to which a Claim is asserted was conduct that was in good faith and that he reasonably believed to be in, or not opposed to, the best interest of the Corporation, and, in the case of a criminal action or proceeding, that he had no reasonable cause to believe was unlawful. The termination of any Claim by judgment, order, settlement, conviction, or upon a plea of NOLO CONTENDERE or its equivalent, shall not, of itself, create a presumption that Indemnitee did not meet the Standard of Conduct. (c) Promptly upon becoming aware of the existence of any Claim as to which he may be indemnified hereunder, Indemnitee shall notify the President of the Corporation of the Claim and whether he intends to seek indemnification hereunder. If such notice indicates that Indemnitee does so intend, the President shall promptly advise the Board thereof and notify the Board that the establishment of the Determining Body with respect to the Claim will be a matter presented at the next regularly scheduled meeting of the Board. After the Determining Body has been established the President shall inform the Indemnitee thereof and Indemnitee shall immediately provide the Determining Body with all facts relevant to the Claim known to him. Within 60 days of the receipt of such information, together with such additional information as the Determining Body may request of Indemnitee, the Determining Body shall determine, and shall advise Indemnitee of its determination, whether Indemnitee has met the Standard of Conduct. (d) During such 60-day period, Indemnitee shall promptly inform the Determining Body upon his becoming aware of any relevant facts not therefore provided by him to the Determining Body, unless the Determining Body has obtained such facts by other means. (e) In the case of any Claim not involving a proposed, threatened or pending criminal proceeding, (i) if Indemnitee has, in the good faith judgment of the Determining Body, met the Standard of Conduct, the Corporation may, in its sole discretion after notice to Indemnitee, assume all responsibility for the defense of the Claim, and, in any event, the Corporation and the Indemnitee each shall keep the other informed as to the progress of the defense, including prompt disclosure of any proposals for settlement; provided that if the Corporation is a party to the Claim and Indemnitee reasonably determines that there is a conflict between the positions of the Corporation and Indemnitee with respect to the Claim, then Indemnitee shall be entitled to conduct his defense, with counsel of his choice; and provided further that Indemnitee shall in any event be entitled at his expense to employ counsel chosen by him to participate in the defense of the Claim; and (ii) the Corporation shall fairly consider any proposals by Indemnitee for settlement of the Claim. If the Corporation (A) proposes a settlement acceptable to the person asserting the Claim, or (B) believes a settlement proposed by the person asserting the Claim should be accepted, it shall inform Indemnitee of the terms thereof and shall fix a reasonable date by which Indemnitee shall respond. If Indemnitee agrees to such terms, he shall execute such documents as shall be necessary to effect the settlement. If he does not agree he may proceed with the defense of the Claim in any manner he chooses, but if he is not successful on the merits or otherwise, the Corporation's obligation to indemnify him for any Expenses incurred following his disagreement shall be limited to the lesser of (A) the total Expenses incurred by him following his decision not to agree to such proposed settlement or (B) the amount the Corporation would have paid pursuant to the terms of the proposed settlement. If, however, the proposed settlement would impose upon Indemnitee any requirement to act or refrain from acting that would materially interfere with the conduct of his affairs, Indemnitee may refuse such settlement and proceed with the defense of the Claim, if he so desires, at the Corporation's expense without regard to the limitations imposed by the preceding sentence. In no event, however, shall the Corporation be obligated to indemnify Indemnitee for any amount paid in a settlement that the Corporation has not approved. (f) In the case of a Claim involving a proposed, threatened or pending criminal proceeding, Indemnitee shall be entitled to conduct the defense of the Claim, and to make all decisions with respect thereto, with counsel of his choice, provided, however, that the Corporation shall not be obligated to indemnify Indemnitee for an amount paid in settlement that the Corporation has not approved. (g) After notifying the Corporation of the existence of a Claim, Indemnitee may from time to time request the Corporation to pay the Expenses (other than judgments, fines, penalties or amounts paid in settlement) that he incurs in pursuing a defense of the Claim prior to the time that the Determining Body determines whether the Standard of Conduct has been met. If the Disbursing Officer believes the amount requested to be reasonable, he shall pay to Indemnitee the amount requested (regardless of Indemnitee's apparent ability to repay such amount) upon receipt of an undertaking by or on behalf of Indemnitee to repay such amount if it shall ultimately be determined that he is not entitled to be indemnified by the Corporation under the circumstances. If the Disbursing Officer does not believe such amount to be reasonable, the Corporation shall pay the amount deemed by him to be reasonable and Indemnitee may apply directly to the Determining Body for the remainder of the amount requested. (h) After the Determining Body has determined that the Standard of Conduct was met, for so long as and to the extent that the Corporation is required to indemnify Indemnitee under this Agreement, the provisions of Paragraph (g) shall continue to apply with respect to Expenses incurred after such time except that (i) no undertaking shall be required of Indemnitee and (ii) the Disbursing Officer shall pay to Indemnitee such amount of any fines, penalties or judgments against him which have become final as the Corporation is obligated to indemnify him. (i) Any determination by the Corporation with respect to settlements of a Claim shall be made by the Determining Body. (j) The Corporation and Indemnitee shall keep confidential, to the extent permitted by law and their fiduciary obligations, all facts and determinations provided or made pursuant to or arising out of the operation of this Section, and the Corporation and Indemnitee shall instruct its or his agents and employees to do likewise. 11.3 ENFORCEMENT. (a) The rights provided by this Section shall be enforceable by Indemnitee in any court of competent jurisdiction. (b) If Indemnitee seeks a judicial adjudication of his rights under this Section Indemnitee shall be entitled to recover from the Corporation, and shall be indemnified by the Corporation against, any and all Expenses actually and reasonably incurred by him in connection with such proceeding but only if he prevails therein. If it shall be determined that Indemnitee is entitled to receive part but not all of the relief sought, then the Indemnitee shall be entitled to be reimbursed for all Expenses incurred by him in connection with such judicial adjudication if the amount to which he is determined to be entitled exceeds 50% of the amount of his claim. Otherwise, the Expenses incurred by Indemnitee in connection with such judicial adjudication shall be appropriately prorated. (c) In any judicial proceeding described in this subsection, the Corporation shall bear the burden of proving that Indemnitee is not entitled to any Expenses sought with respect to any Claim. 11.4 SAVING CLAUSE. If any provision of this Section is determined by a court having jurisdiction over the matter to require the Corporation to do or refrain from doing any act that is in violation of applicable law, the court shall be empowered to modify or reform such provision so that, as modified or reformed, such provision provides the maximum indemnification permitted by law, and such provision, as so modified or reformed, and the balance of this Section, shall be applied in accordance with their terms. Without limiting the generality of the foregoing, if any portion of this Section shall be invalidated on any ground, the Corporation shall nevertheless indemnify an Indemnitee to the full extent permitted by any applicable portion of this Section that shall not have been invalidated and to the full extent permitted by law with respect to that portion that has been invalidated. 11.5 NON-EXCLUSIVITY. (a) The indemnification and advancement of Expenses provided by or granted pursuant to this Section shall not be deemed exclusive of any other rights to which Indemnitee is or may become entitled under any statute, article of incorporation, by-law, authorization of shareholders or directors, agreement, or otherwise. (b) It is the intent of the Corporation by this Section to indemnify and hold harmless Indemnitee to the fullest extent permitted by law, so that if applicable law would permit the Corporation to provide broader indemnification rights than are currently permitted, the Corporation shall indemnify and hold harmless Indemnitee to the fullest extent permitted by applicable law notwithstanding that the other terms of this Section would provide for lesser indemnification. 11.6 SUCCESSORS AND ASSIGNS. This Section shall be binding upon the Corporation, its successors and assigns, and shall inure to the benefit of the Indemnitee's heirs, personal representatives, and assigns and to the benefit of the Corporation, its successors and assigns. 11.7 INDEMNIFICATION OF OTHER PERSONS. The Corporation may indemnify any person not covered by Sections 11.1 through 11.6 to the extent provided in a resolution of the Board or a separate section of these By-laws. SECTION 12 AMENDMENTS 12.1 ADOPTION OF BY-LAWS; AMENDMENTS THEREOF. By-laws of the Corporation may be adopted only by a majority vote of the Board of Directors. By-laws may be amended or repealed only by (i) a majority vote of the Board of Directors, except that any amendment to or repeal of Section 6 of these By-laws shall require an affirmative vote of at least three-quarters of the Board, or (ii) the affirmative vote of the holders of at least two-thirds of that portion of the Total Voting Power (as defined in Article III(D) of the Articles of Incorporation), voting together as a single class, that is present in person or by proxy at any regular or special meeting of shareholders, the notice of which expressly states that the proposed amendment or repeal is to be considered at the meeting. 12.2 NEW BY-LAWS; AMENDMENTS. Any purported amendment to these By-laws which would add hereto a matter not covered herein prior to such purported amendment shall be deemed to constitute the adoption of a By-law provision and not an amendment to the By-laws. SECTION 13 MISCELLANEOUS 13.1 DIVIDENDS. Except as otherwise provided by law or the Articles of Incorporation, dividends upon the stock of the Corporation may be declared by the Board of Directors at any regular or special meeting. Dividends may be paid in cash, property, or shares of stock, subject to the limitations specified in the Articles of Incorporation. 13.2 VOTING OF SHARES OWNED BY CORPORATION. Unless otherwise directed by the Board, any shares of capital stock issued by a wholly-owned subsidiary of the Corporation may be voted by the President of the Corporation at any shareholders' meeting of the subsidiary (or in connection with any written consent in lieu thereof). 13.3 CHECKS. All checks or demands for money and notes of the Corporation shall be signed by such officer or officers or such other person or persons as the Board of Directors may from time to time designate. Signatures of the authorized signatories may be by facsimile. 13.4 FISCAL YEAR. The Board of Directors may adopt for and on behalf of the Corporation a fiscal or a calendar year. 13.5 SEAL. The Board of Directors may adopt a corporate seal, which shall have inscribed thereon the name of the Corporation. The seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise. Failure to affix the seal shall not, however, affect the validity of any instrument. 13.6 GENDER. All pronouns and variations thereof used in these By-laws shall be deemed to refer to the masculine, feminine or neuter gender, singular or plural, as the identity of the person, persons, entity or entities referred to may require. 13.7 LOUISIANA'S FAIR PRICE STATUTE. The Company expressly opts into, and accepts the benefits of, La. R.S. 12:132-134, as they may be amended from time to time. 13.8 CONTROL SHARE ACQUISITION STATUTE. The Company expressly waives the benefits of La. R.S. 12:135-140.2, as they may be amended from time to time. EX-10.8 4 Exhibit 10.8 TERMINATION AGREEMENT This Termination Agreement ("Agreement") between Stewart Enterprises, Inc., a Louisiana corporation (the "Company"), and Joseph P. Henican, III ("Henican") is dated and effective as of November 15, 1999, (the "Effective Date"). W I T N E S S E T H: WHEREAS, Henican and the Company entered into an employment agreement (the "Employment Agreement") dated as of August 1, 1995 and amended as of October 31, 1998, pursuant to which, among other things, the Company agreed to make certain payments and provide certain benefits to Henican in the event that he terminated his employment with the Company for Good Reason (as that term is defined in Article III, paragraph 4 of the Employment Agreement); WHEREAS, Henican wishes to resign from his position as Chief Executive Officer of the Company and terminate his employment for Good Reason, effective November 15,1999; WHEREAS, Henican also wishes to resign from the Board of Directors of the Company, effective November 15, 1999; WHEREAS, the Company wishes to accept such resignations and termination; and WHEREAS, the Company has agreed that Henican shall receive all termination benefits provided for in the Employment Agreement in the case of a resignation for Good Reason, as well as certain additional benefits provided for in this Agreement. NOW, THEREFORE, in consideration of the mutual covenants and agreements contained herein, and intending to be legally bound, the parties agree as follows: 1. RESIGNATION AND ACCEPTANCE OF RESIGNATION. Henican hereby resigns from his position as Chief Executive Officer of the Company and from the Board of Directors of the Company and terminates his employment for Good Reason. Henican also hereby resigns from each position he holds as a director and/or officer of any subsidiary of the Company. The Company hereby accepts such resignations and acknowledges that the resignation from the position of Chief Executive Officer of the Company and termination of employment is for Good Reason, as such term is defined in the Employment Agreement. Each of the foregoing resignations is effective as of the Effective Date. 2. WAIVER OF NOTICE REQUIREMENT. The Company waives its right to require strict compliance with the notice requirements of Article III, Paragraph 7 of the Employment Agreement. 3. OTHER COMPENSATION AND BENEFITS. The Company shall provide Henican the following compensation and benefits in addition to those provided for under the Employment Agreement in the case of termination of employment for Good Reason (including without limitation Article IV, Paragraph 3(a)): (a) Through the close of business on the second anniversary of the Effective Date (I.E., November 15, 2001) the Company shall provide to Henican and his eligible dependents the same insurance benefits as were provided to him immediately prior to the Effective Date, subject only to such changes, if any, as are applicable to the Company's most senior executives generally. Henican agrees to comply with any reasonable request of the Company for his assistance in assuring the eligibility of Henican and his dependents to receive such benefits. (b) On or before December 31, 1999, the Company shall pay Henican in cash the incentive bonus earned by him for the fiscal year ended October 31, 1999, which amount is agreed to be $35,467. (c) Henican shall be entitled to make whatever disposition of his 401(k) account as is authorized by the Company's 401(k) Plan. The Company hereby represents and warrants to Henican that he is fully vested in all contributions to the 401(k) Plan made by him or by the Company for his account. (d) The Company hereby conveys to Henican ownership of the IBM ThinkPad 600 notebook computer and accompanying printer previously provided to him by the Company. Henican agrees to maintain the confidentiality of all proprietary information and/or Confidential Information (as defined in the Employment Agreement) that may exist in the computer's memory, hard drive or similar hardware. 4. EFFECT ON EMPLOYMENT AGREEMENT. Except as modified hereby, the Employment Agreement shall remain in full force and effect. IN WITNESS WHEREOF, the parties hereto have caused this Agreement to be executed as of the day and year first above written. STEWART ENTERPRISES, INC. By: /S/ FRANK B. STEWART, JR. ------------------------------------- Frank B. Stewart, Jr. Chairman of the Board /S/ JOSEPH P. HENICAN, III ------------------------------------- Joseph P. Henican, III EX-12 5 Exhibit 12 STEWART ENTERPRISES, INC. AND SUBSIDIARIES CALCULATION OF RATIO OF EARNINGS TO FIXED CHARGES (DOLLARS IN THOUSANDS) (UNAUDITED)
YEARS ENDED OCTOBER 31, --------------------------------------------------------- 1999 1998 1997 1996 1995 -------- -------- -------- -------- -------- Earnings from operations before income taxes ........................ $142,551(1) $ 64,964(2) $106,477(3) $ 82,075 $ 41,500(4) Fixed charges: Interest charges ............................ 55,543 44,107 38,031 26,051 22,815 Interest portion of lease expense ........... 2,859 2,814 2,181 1,522 1,343 -------- -------- -------- -------- -------- Total fixed charges ........................... 58,402 46,921 40,212 27,573 24,158 Earnings from operations before income taxes and fixed charges, less capitalized interest.. $200,118(1) $111,599(2) $146,689(3) $109,648 $ 65,658(4) ======== ======== ======== ======== ======== Ratio of earnings to fixed charges ............. 3.43(1) 2.38(2) 3.65(3) 3.98 2.72(4) -------- -------- -------- -------- --------
- ------------------- (1) Excludes cumulative effect of change in accounting principle of $50,101 (net of $28,798 income tax benefit). (2) Includes a nonrecurring, noncash charge of $76,762 recorded in connection with the vesting of the Company's performance-based stock options. (3) Excludes cumulative effect of change in accounting principles of $2,324 (net of $2,230 income tax benefit). (4) Includes a nonrecurring, noncash charge of $17,252 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-18 6 Exhibit 18 December 15, 1999 Board of Directors Stewart Enterprises, Inc. 110 Veterans Memorial Blvd. Metairie, LA 70005 Dear Directors: We are providing this letter to you for inclusion as an exhibit to your Form 10-K filing pursuant to Item 601 of Regulation S-K. We have audited the consolidated financial statements in the Company's Annual Report on Form 10-K for the year ended October 31, 1999 and issued our report thereon dated December 15, 1999. Note 3 to the financial statements describes a change in accounting principle from recognizing, prior to delivery of service, a portion of earnings realized by irrevocable prearranged funeral trust funds and escrow accounts to deferring 100 percent of earnings realized by irrevocable prearranged funeral trust funds and escrow accounts until the time of delivery of service. It should be understood that the preferability of one acceptable method of accounting over another for funeral services investment trust fund earnings has not been addressed in any authoritative accounting literature, and in expressing our concurrence below we have relied on management's determination that this change in accounting principle is preferable. Based on our reading of management's stated reasons and justification for this change in accounting principle in the Form 10-K, and our discussions with management as to their judgment about the relevant business planning factors relating to the change, we concur with management that such change represents, in the Company's circumstances, the adoption of a preferable accounting principle in conformity with Accounting Principles Board Opinion No. 20. Very truly yours, PricewaterhouseCoopers LLP New Orleans, Louisiana EX-21 7 Exhibit 21 SUBSIDIARIES The following is a list of all direct and indirect subsidiaries of the Company and their jurisdictions of incorporation as of October 31, 1999. The name of each indirect subsidiary is indented under the name of its parent company. JURISDICTION OF STEWART ENTERPRISES, INC. INCORPORATION Acme Mausoleum Corporation LA Carolina Financial Corporation of Pickens SC Hill-Crest Memorial Park SC Oconee Memorial Gardens, Inc. SC Cementerios Stewart (Chile), S.R.L. Chile Cemetery Management, Inc. FL Arlington Memorial Park Cemetery and Funeral Home, Inc. FL Baldwin-Fairchild Funeral Homes, Inc. FL All Faiths Memorial Park, Inc. FL Orlando Funeral Home, Inc. FL The Simplicity Plan, Inc. FL Bay Area Crematory, Inc. FL Beth David Funeral Chapel Tampa, Inc. FL Beth David Memorial Chapel, Inc. FL Bruce Ocala Funeral Home, Inc. FL Chapel Hill Cemetery, Inc. FL Glen Haven Memorial Park, Inc. FL Highland Memory Gardens, Inc. FL Semoran Funeral Home, Inc. FL Cheatham Hill Memorial Park, Inc. GA David C. Gross Funeral Home, Inc. FL Empresas Stewart - Cementerios, Inc. LA Empresas Stewart - Funerarias, Inc. LA Florida Hills Memorial Gardens, Inc. FL Garden of Memories, Inc. FL A.P. Boza Funeral Home, Inc. FL Curry and Son Funeral Home, Inc. FL Woodlawn Memory Gardens, Inc. FL Good Shepherd Memorial Gardens, Inc. FL Hubbell Funeral Home and Crematory, Inc. FL Kent R. Palmer, Inc. FL Kicliter Funeral Home, Inc. FL Madcem of Florida, Inc. FL Memorial Park Cemetery, Inc. FL Oaklawn Park Cemetery and Funeral Home, Inc. FL Ocoee Park Cemetery, Inc. FL Roberts Funeral Home, Inc. FL Royal Palm Memorial Gardens, Inc. FL SEI - DELFL, Inc. DE The Simplicity Plan of Puerto Rico, Inc. LA Sylvan Abbey Memorial Park, Inc. FL Trinity Memorial Gardens of Lakeland, Inc. FL Turner Crematory, Inc. FL Turner Funeral Homes, Inc. FL Walsh & Wood Funeral Home, Inc. FL Woodlawn Park Cemetery Company FL Memorial Sunset Park, Inc. FL National Monument Co., Inc. FL South Dade-Palms Memorial Park, Inc. FL Cole & Garrett Funeral Homes, Inc. TN Cunningham Memorial Park, Inc. WV Victor V. Desrosier, Inc. CA Dilday Brothers Huntington Valley Mortuary CA Dillard Memorial, Inc. SC Eastlawn Corporation GA Griffin Leggett,Inc. AR Forest Hills Cemetery, Inc. AR Griffin Leggett Healey & Roth, Inc. AR Griffin Leggett Insurance Agency, Inc. AR Gross Funeral Home, Inc. AR Rest Hills Memorial Park, Inc. AR Griffin Leggett-Conway, Inc. AR Grupo Stewart de Mexico, S.R.L. MX Agencia Eusebio Gayosso, S.R.L. MX Agencia Funeraria Gayosso, S.R.L. MX Agencia Funeraria Los Angeles, S.R.L. MX Prevision Gayosso, S.R.L. MX Tiempo y Vida, S.R.L. MX Highland Memorial Cemetery, Inc. TN Holly Hill Memorial Park, Inc. GA Holly Hills, Inc. TN Hopson Mortuary, Inc. CA International Stone & Erectors, Inc. LA Investors Trust, Inc. TX Kingsport Cemetery Corp. TN Lake Lawn Metairie Funeral Home, Inc. LA Lake Lawn Metairie Funeral Home (Joint Venture) LA Lake Lawn Park, Inc. LA Lakewood Memorial Park, Inc. MS Lassila Funeral Chapels, Inc. CA Le Groupe Stewart Inc. - Stewart Group Inc. Quebec Feron Funeral Homes, Inc. Quebec Gestion La Souvenance Inc. Quebec La Societe Cooperative de Frais Funeraires Inc. Quebec Lepine - Cloutier Ltee. Quebec Les Jardins Commemoratifs Laurentide Inc./ Laurentide Memorial Gardens Inc. Quebec Les Jardins Quebec Quebec Parc Commemoratif La Souvenance Inc. Quebec Parc du Souvenir (1976) Inc./Remembrance Park(1976) Inc. Quebec Parc Commemoratif de Montreal Inc./ Montreal Memorial Park, Inc. Quebec 2756-5746 Quebec Inc. Quebec Residences Funeraires Associees du Quebec Inc. Quebec Stewart Immobilier (Canada) Inc. - Stewart Real Estate (Canada) Inc. Quebec Quebec Legacy One, Inc. WV Blue Ridge Funeral Home, Inc. WV Blue Ridge Memorial Gardens, Inc. WV C.G.R., Inc. WV Eastern Cemetery Associates, Inc. WV Eastlawn Memorial Gardens, Inc. VA Eternal Light Funerals, Inc. WV Findlay Cemetery, Inc. OH Garden Cemetery Company, Inc. VA Grandview Memory Gardens, Inc. VA Greenhills Memory Gardens, Inc. VA Highland Memory Gardens, Inc. VA Holly Memorial Gardens, Inc. OH Holly Memorial Gardens, Inc. VA Kanawha Plaza Partnership WV Legacy One Service Corporation WV Legacy One Tennessee, Inc. TN LOI Charleston, Inc. WV Monticello Memory Gardens, Inc. VA Mountain View Memory Gardens, Inc. WV National Exchange Trust, Ltd. WV National Funeral Services, Inc. WV Newark Memorial Gardens, Inc. OH Pleasant View Memory Gardens, Inc. WV Sunset Mausoleum, Inc. OH Sunset Memory Gardens, Inc. VA Williams-Blue Ridge Funeral Home, Inc. WV Les Investissements Stewart (Canada) Inc. - Stewart Investments (Canada) Inc. Quebec McDermott - Crockett Mortuary, Inc. CA Memorial Services of Columbia, Inc. MO Lincoln Memorial Mortuary, Inc. NE The Lincoln Memorial Park Cemetery Association, Inc. NE Memorial Funeral Home, Inc. MO Metairie Cemetery Association LA All Faiths Funeral Home, Inc. LA Pine Crest Cemetery, Inc. AL Montlawn Memorial Park, Inc. NC Mount Olivet Cemetery, Inc. LA The Nashville Historic Cemetery Association, Inc. TN Pasadena Funeral Home, Inc. TX Restland Funeral Home, Inc. TX Anderson-Clayton Bros. Funeral Homes, Inc. TX Little Bethel Memorial Park, Inc. TX Roselawn Memorial Gardens, Inc. TX Belew Funeral Home, Inc. TX Bexar County Mortuary Services, Inc. TX Bluebonnet Hills Memorial Park, Inc. TX Bluebonnet Hills Funeral Home, Inc. TX Bright-Holland Funeral Home, Inc. TX Crespo & Sons, Incorporated TX Dalton & Son Funeral Home, Inc. TX Emerald Hills Funeral Corporation TX J.E. Foust & Son Funeral Directors, Inc. TX Guardian Cremation Society, Inc. TX Guardian Funeral Home, Inc. TX Hilltop Memorial Park TX Laurel Land Memorial Park, Inc. TX Laurel Land Funeral Home, Inc. TX Singing Hills Funeral Home, Inc. TX Laurel Land of Fort Worth, Inc. TX Laurel Land Funeral Home of Fort Worth, Inc. TX Lyons Funeral Home, Inc. TX Metrocrest Funeral Home, Inc. TX Restland of Dallas, Inc. TX Abbey Plan of Texas, Inc. TX Highland Memorial Gardens, Inc. TX SEI - DELTX, Inc. DE Simplicity Plan of Texas, Inc. TX Southpark Funeral Home, Inc. TX South Memorial Park, Inc. TX Rocky Mount Memorial Park, Inc. NC Rose Haven Funeral Home & Cemetery, Inc. GA Royal Arms Apartments, Inc. LA St. Bernard Memorial Gardens, Inc. LA St. Bernard Memorial Funeral Home, Inc. LA St. Vincent de Paul Cemetery Association LA S.E. Acquisition of California, Inc. CA All Souls Mortuary, Inc. CA Ashes to Ashes, Inc. CA Assumption Mortuary, Inc. CA Barstow Funeral Homes, Inc. CA Buchheim Family, Inc. CA Calvary Mortuary of Los Angeles, California, Inc. CA Catholic Mortuary Services, Inc. CA N.D. Davis & Associates, Inc. CA DeYoung Memorial Chapel, Inc. CA Holy Cross Mortuary of Culver City, California, Inc. CA Holy Cross Mortuary of Pomona, California, Inc. CA Lombard & Company CA Richard Pierce Funeral Service, Inc. CA Queen of Heaven Mortuary, Inc. CA Resurrection Mortuary, Inc. CA River Cities Funeral Chapel, Inc. CA San Fernando Mission Mortuary, Inc. CA Santa Clara Mortuary, Inc. CA Scovern Mortuary, A California Corporation CA SDCA Holdings, Inc. CA San Diego Cemetery Association CA S.E. Acquisition of Delano, California, Inc. CA S.E. Acquisition of Glendale, California, Inc. CA S.E. Acquisition of Lancaster, California, Inc. CA S.E. Acquisition of Los Osos Mortuary and Memorial Park, Inc. CA S.E. Acquisition of Oakhurst, California, Inc. CA S.E. Acquisition of Oroville, California, Inc. CA S.E. Acquisition of San Diego, California, Inc. CA Sentinel Cremation Societies, Inc. DE Simplicity Plan of California, Inc. CA Stewart Pre-Need Services, Inc. CA Stricklin/Snively Mortuary CA Catalina Channel Cremation Society CA Wallace E. White & Howard J. Callanan, Inc. CA Woodside Chapel of Crippen & Flynn CA S.E. Acquisition of Murietta, California, Inc. CA S.E. Acquisition of Nevada, Inc. NV Desert Memorial, Inc. NV Neptune Society of Nevada, Inc. NV Reno Memorial, Inc. NV S.E. Acquisition of Reno, Nevada, Inc. NV S.E. Acquisition of Oregon, Inc. OR Amling/Schroeder Funeral Service, Inc. OR Cascade Crematory, Inc. OR Chapel of the Roses, Inc. OR Chapel of the Valley Funeral Home, Inc. OR Dutton, Inc. OR J. P. Finley & Son, Inc. OR Sunset Hills Memorial Park OR Greenwood Cemetery, Inc. OR Niswonger & Reynolds, Inc. OR S.E. Acquisition of Myrtle Creek, Oregon, Inc. OR S.E. Acquisition of Reedsport, Oregon, Inc. OR Tabor's Desert Hills Mortuary, Inc. OR S.E. Acquisition of Santa Maria, California, Inc. CA S.E. Acquisition of Washington, Inc. WA E.R. Butterworth & Sons WA Cremation Society Northwest, Inc. WA Evergreen Staples Funeral Chapel, Inc. WA S.E. Australia, Inc. LA Administrators & Managers Limited New Zealand Cemetery & Crematorium Finance Trust Queensland Cemetery & Crematorium Management Services PTY LTD Queensland Nationwide Care Services PTY LTD Queensland South-East Asia and Australasian Services PTY LTD Queensland Stewart Enterprises Australia PTY LTD Queensland Funeral Services of Australasia PTY LTD Queensland Australian Funerals PTY LTD Queensland Metropolitan Funeral Services PTY LTD Queensland Australian Pre-Arranged Funeral Plan PTY LTD New South Wales Dylhost PTY LTD New South Wales Gregory & Carr Holdings PTY LTD New South Wales Crematorium Chapel Funerals of Australasia PTY LTD New South Wales F. Tighe & Co. PTY LTD New South Wales Gregory & Carr PTY LTD New South Wales Gregory & Carr of Sydney PTY LTD New South Wales William Lee & Sons PTY LTD New South Wales Sydney Cremation Services PTY LTD New South Wales Stewart Enterprises New Zealand Holdings Limited New Zealand SEI - DELLA, Inc DE S.E. Mid-Atlantic, Inc. MD C. J. Applegate & Sons, Inc. NY Bartlett-Burdette-Cox Funeral Home, Inc. WV Benjamin Franklin P.M., Inc. PA Blue Ridge Memorial Gardens, Inc. VA Bounds Funeral Home, Inc. MD Brown Memorials, Inc. NC Calfee Funeral Service of Pineville, Inc. WV Casdorph & Curry Funeral Home, Inc. WV Catawba Memorial Park, Inc. NC Cedar Hill Cemetery Company, Inc. MD Central Stone Works, Incorporated NC Clinch Valley Memorial Cemetery, Inc. VA Crest Lawn Memorial Gardens, Inc. MD Harold C. Davis, Inc. NC Dodd-Payne-Hess Funeral Home, Inc. WV Dunbar Funeral Home, Inc. SC Evans Funeral Home, Inc. NC Evans Funeral Home, Inc. WV Evergreen Memorial Gardens, Inc. NC Everly Community Funeral Care, Inc. VA Everly Funeral Homes, Incorporated VA Everly PFP, Inc. VA Fairfax Funeral Home, Inc. VA Fine Finishes, Inc. NC Fort Lincoln Cemetery, Inc. MD Fort Lincoln Funeral Home, Inc. MD Gallery Granite Corporation MD Gardinier Colletti Memorial Home, Inc. NY Garner Family Funeral Home, Inc. GA Garrett-Hillcrest, Inc. NC George Washington Memorial Park, Inc. PA Gorny & Gorny Paterson-Clifton Mortuary NJ Graceland Mausoleum, Inc. WV Haisten Funeral Homes, Inc. GA Haisten Funeral Home of Henry County, Inc. GA Higgins and Son Funeral Home, Inc. GA Highland Memory Gardens of Franklin County, Inc. NC Hillcrest Memorial Cemetery, Inc. MD Hines-Rinaldi Funeral Home, Inc. MD Johnson Funeral Home, Inc. NC Kimes Funeral Home, Inc. WV Kirk & Nice, Inc. PA Kirk & Nice Suburban Chapel, Inc. PA Klingel-Carpenter Mortuary, Inc. WV Lancaster Funeral Homes, Inc. NC Loudon Park Cemetery Company MD Druid Ridge Cemetery Company MD Loudon Park Funeral Home, Inc. MD The Mackey Mortuary, Inc. SC Cannon Funeral Home, Inc. SC MattleGray Nulton Funeral Home, Inc. NY McLaurin's Funeral Home, Inc. NC Miller-Lee, Inc. NC Monte Vista Burial Park, Inc. TN Murphy Funeral Service, Inc. NY Nalley's Funeral Home, Inc. MD The National Harmony Memorial Park, Inc. MD Nulton Funeral Home, Inc. NY Oconee Memorial Funeral Home, Inc. SC Otto Redanz Funeral Home, Inc. NY Cornell & Daggett, Inc. NY Parklawn, Inc. MD Parklawn Memorial Gardens, Inc. NC The Parkwood Cemetery Company MD Parkwood Management Co. MD Pineview, Inc. SC Pollock Wells Funeral Service, Inc. NC Stephen D. Posey Funeral Home, Inc. SC Richmond Memorial Parks, Inc. VA S.E. Acquisition of Charleston, Inc. SC S.E. Acquisition of Clifton, New Jersey, Inc. NJ S.E. Acquisition of Fredonia, New York, Inc. NY S.E. Acquisition of Liberty, South Carolina, Inc. SC S.E. Acquisition of Malden, West Virginia, Inc. WV S.E. Acquisition of Pennsylvania, Inc. PA S.E. Acquisition of Pikeville, Kentucky, Inc. KY S.E. Acquisition of South Carolina, Inc. SC S.E. Cemetery Management of Pennsylvania, Inc. PA Stephens Services, Inc. NC Sunset Memorial Park Company PA Pet Haven, Inc. PA John M. Taylor Funeral Home, Inc. MD Joseph W. Teague Funeral Home, Inc. VA Thomas-Yelverton Co. NC Washington Memorial Cemetery, Inc. VA William W. Chambers, Inc. MD Wilson Funeral Home, Inc. WV Wise Corporation VA 1730 Investment Co., Inc. NC Memorial Parks, Incorporated NC Taylor M. Simpson Co. NC S.E. South-Central, Inc. LA D.W. Newcomer's Sons, Inc. MO DWN Properties, Inc. MO Funeral Security Plans, Inc. MO Ellison Funeral Home, Inc. AL Kilgore - Green Funeral Home, Inc. AL Knutson Funeral Homes, Inc. IA Lathan Funeral Home, Inc. AL Andrew J. McGann & Son Funeral Home, Inc. IL Mt. Juliet Funeral Home, Inc. TN Mt. Juliet Memorial Gardens, Inc. TN Nave Funeral Home of Lebanon, Inc. TN Pauley Funeral Home, Inc. IA Pine Crest Funeral Home, Inc. AL Faith Memorial Park & Mausoleum Company, Inc. AL Valhalla Memory Gardens and Funeral Home, Inc. AL Professional Funeral Services, Inc. LA Rocko's Funeral Homes, Inc. AL Rocko and Son Funeral Home, Inc. AL Runyan Mangold, Inc. KS S.E. Acquisition of Albuquerque, New Mexico, Inc. NM S.E. Acquisition of Blue Island, Illinois, Inc. IL S.E. Acquisition of Boonville, Missouri, Inc. MO S.E. Acquisition of Lithonia, Georgia, Inc. GA S.E. Acquisition of Muskogee, Oklahoma, Inc. OK S.E. Acquisition of Oak Lawn & Orland Park, Illinois, Inc. IL S.E. Acquisition of Santa Fe, New Mexico, Inc. NM S.E. Cemetery Management of Illinois, Inc. IL S.E. Cemetery Management of Wisconsin, Inc. WI Theis-Gorski Funeral Home, Inc. IL West Lawn Cemetery, Inc. NE Wisconsin Memorial Park Company, Inc. WI Time-Lock Insurance Agency, Inc. WI Wyuka Funeral Home, Inc. NE Wyuka Simplicity Plan, Inc. NE S.E. of Tucson, Arizona, Inc. AZ Stewart Enterprises (Europe), Inc. LA S.E. Mexico, Inc. LA Stewart Argentina S.R.L. Argentina Casa Bassi S.R.L. Argentina Casa Canepa S.R.L. Argentina Casa Coehlo-Martins, S.R.L. Argentina Casa LaSalle S.R.L. Argentina Casa Sala de Isidro Sala & Cia S.R.L. Argentina Cementerio Parque Las Praderas S.A. Argentina Cocheria La Italo Argentina S.R.L. Argentina Cocheria Parana, S.A. Argentina Del Lugar S.A. Argentina Hector Garcia y Cia., S.R.L. Argentina Los Abrojos S.C.A. Argentina Parque Ceremonial Cementerio Privado S.A. Argentina Perisse Laffue S.R.L. Argentina Piques S.A. Argentina Sepelios Las Heras S.A. Argentina The Simplicity Plan de Argentina A.C.E. Argentina The Simplicity Plan de Argentina SRL Argentina Stewart Holandesa, S.A. de C.V. MX Stewart Resource Center, Inc. LA Stewart Services, Inc. LA Stewart Worldwide N.V. Netherlands Antilles Stewart International (Netherlands) B.V. Netherlands Euro Stewart Belgium, B.V.B.A. Belgium Begrafenisonderneming D. Bleyaert B.V.B.A. Belgium Ackaert Begrafenissen B.V.B.A. Belgium Begrafenisonderneming Lambrecht Donald B.V.B.A. Belgium Begrafenisonderneming Lambrecht Donald CVA Belgium Begrafenisonderneming Yvan Amys N.V. Belgium Begrafenis-En Crematieonderneming Lucas B.V.B.A. Belgium BVBA Algemene Uitvaartverzorging Marote Belgium BVBA Begrafenisoderneming Johan Borgonjon Belgium BVBA Drukkerij Van Nieuwkerke Belgium BVBA Huis Rommelaere Belgium BVBA Leo Raes Belgium Ceremoniebedrijf Leo BVBA Belgium Vervanco NV Belgium BVBA Vercruysee Belgium Forrier B.V.B.A. Belgium BVBA Begrafenisonderneming Roger Amez Belgium Jacobs NV Belgium Euro Stewart Espana, S.L. Spain Funeraria Fontal, S.A. Spain Funeraria Gasco, S.L. Spain Funeraria La Piedad, S.L. Spain Tanatorio y Funeraria la Tudelana, S.L. Spain Tanatorio y Funeraria Martinez, S.L. Spain Euro Stewart France, SARL France Assistance et Prevoyance Funeraire Sarl France Chasseignaux et Fils SA France Pompes Funebres del'Atlantique SARL France SARL Parthenos France Sa Di Bernardo France Sa Pompes Funebres PLM France Sa SFMOP France SARL Cunault France SARL Marbrerie Coulon France SARL Mistre et Cie France SARL Saint Hilaire France SARL Sept France Euro Stewart Portugal - Actividades Funerarias LDA. Portugal Victor & Joao, S.A. Portugal Agencia Funeraria Borges, LDA Portugal Stewart Cementerios Puerto Rico Holdings II B.V. Netherlands Empresas Stewart Cementerios Puerto Rico Empresas Stewart - Funerarias Puerto Rico Stewart Cemeterios Puerto Rico Holding I B.V. Netherlands Stewart Enterprises New Zealand Unit Trust New Zealand Stewart Enterprises New Zealand New Zealand Stewart Funerarias Puerto Rico Holding II B.V. Netherlands Stewart Funerarias Puerto Rico Holding I B.V. Netherlands Stewart Simplicity Plan of Puerto Rico Holding II B.V. Netherlands Stewart Simplicity Plan of Puerto Rico Holding I B.V. Netherlands The Simplicity Plan of Puerto Rico Puerto Rico Uitvaart Beheer B.V. Netherlands De Associatie Zijlweg Beheer B.V. Netherlands De Associatie Kennemerland B.V. Netherlands Uitvaartcentrum Aula West B.V Netherlands Uitvaartverzorging Heemstede B.V Netherlands Strong & Burns Funeral Home, Inc. NY EX-23 8 Exhibit 23 CONSENT OF INDEPENDENT ACCOUNTANTS We consent to the incorporation by reference in the registration statements of Stewart Enterprises, Inc. on Forms S-3 (File Nos. 333-59339 and 333-68563), S- 4 (File No. 333-360) and S-8 (File Nos. 33-49726, 33-64106 and 33-02374) of our reports, which include an emphasis paragraph related to changes in the Company's method of accounting for funeral services investment trust fund earnings in 1999 and its method of accounting for cemetery sales and funeral services investment trust fund earnings in 1997, dated December 15, 1999, on our audits of the consolidated financial statements and financial statement schedule of Stewart Enterprises, Inc. and Subsidiaries as of October 31, 1999 and 1998 and for the three years in the period ended October 31, 1999, which reports are included in this Annual Report on Form 10-K. PricewaterhouseCoopers LLP New Orleans, Louisiana January 24, 2000 EX-27 9
5 1,000 YEAR OCT-31-1999 OCT-31-1999 30,877 46,549 176,215 0 51,431 311,069 576,338 (129,293) 2,283,880 133,476 938,831 106,219 0 0 950,393 2,283,880 756,108 756,108 545,707 545,707 0 0 52,174 142,551 52,031 90,520 0 0 (50,101) 40,419 .37 .37
-----END PRIVACY-ENHANCED MESSAGE-----