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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, 1998
( ) 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. Employer
incorporation or organization) Identification No.)
110 VETERANS MEMORIAL BOULEVARD
METAIRIE, LOUISIANA 70005
(Address of principal executive offices) (Zip Code)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (504) 837-5880
________________
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
(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 these purposes only, directors, executive officers and
holders of more than 5% of the Company's Class A Common Stock) of the
Registrant as of January 15, 1999 was approximately $1,330,000,000.
________________
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 15, 1999 was 94,522,739 and 3,555,020 respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Proxy Statement in connection with the 1999 annual meeting of shareholders,
incorporated in Part III of this Report.
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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, capital expenditures,
acquisition expenditures, 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 575 funeral homes and
143 cemeteries in 29 states within the United States, and in Puerto Rico,
Mexico, Australia, New Zealand, Canada, Spain, Portugal, the Netherlands,
France, Belgium and Argentina. The Company is a leader in the industry's
trend toward consolidation. The Company's growth in terms of number of
properties has been principally through 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 generally 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 an above average 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. The industry is relatively stable,
business failures are uncommon and the market served by death care providers is
expanding. According to the United States Bureau of the Census, the number of
deaths in the United States is expected to increase by approximately 1% per
year from 2.38 million in 1998 to 2.64 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 only 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 72.7 million in 1998 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. Currently, however, the industry in the United
States and in certain foreign countries is undergoing a transition in which
family-owned firms are consolidating with larger organizations such as the
Company. Management believes this trend primarily results from the desire of
owners to address management succession and estate planning issues and to
achieve liquidity and diversification of their investments. Management
believes this trend also results from consolidators offering attractive prices
under the belief that they can improve profit margins through improved
marketing and sales initiatives and economies of scale.
Management believes it can be difficult for new competitors to successfully
enter existing markets 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.
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 58% of
the Company's revenues for the fiscal year ended October 31, 1998. 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 permits family visitation and religious services
to take place at the same location. As of October 31, 1998, the Company
operated 558 funeral homes, 131 of which were leased.
Cemetery Operations. Cemetery operations accounted for approximately 42% of
the Company's revenues for the fiscal year ended October 31, 1998. 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 69% of cemetery revenue during the fiscal year ended October 31,
1998. The Company also maintains cemetery grounds under perpetual care
contracts and local laws.
Although profit margins of cemetery operations typically are slightly lower
than those of funeral home operations, the Company believes that its cemetery
properties help it to maintain market share, as families often return to a
cemetery location where their ancestors are buried. In addition, the Company's
clustering and combined operations strategies help to improve the profitability
of its individual cemetery locations. As of October 31, 1998, the Company
owned and operated 140 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, enabling it to employ more sophisticated management
systems, and allowing it to share facilities, equipment, personnel and a
prearrangement sales force, resulting in lower average operating costs and
expanded marketing and sales opportunities.
Approximately 45% 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.
In addition to pursuing combined operations as part of its acquisition
strategy, 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, and the Company plans to construct approximately three funeral
homes per fiscal year on its cemetery locations. Another such strategy 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 1998, 35% 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 1998, the cremation rates at the Company's foreign
funeral homes varied from 6% in Portugal to 64% in New Zealand. 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
2000 cremations are expected to represent 25% 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, the Company plans to expand on the model
developed by Sentinel Cremation Societies, Inc., which it acquired in fiscal
year 1997 and is discussed below under the heading "Internal Growth."
Prearrangements. The Company markets death care products and services on a
prearranged basis through a staff of approximately 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 permit 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 nearly
three prearranged funeral services for every one it has delivered from its
backlog. During the fiscal year ended October 31, 1998, the Company sold
approximately 66,500 prearranged funeral services, and as of October 31, 1998,
had a backlog of approximately 400,000 prearranged funeral services to be
delivered in the future.
Trust Funds and Escrow Accounts. 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 31,1998, the Company's prearranged funeral
trust funds and escrow accounts totaled approximately $525.9 million.
The Company also establishes trust funds and escrow accounts to fund the
cost of delivering prearranged cemetery merchandise. Generally, the Company
withdraws the principal and earnings from these funds and accounts only when
the merchandise is delivered or contracts are canceled. As of October 31,
1998, the Company's cemetery merchandise trust funds and escrow accounts
totaled approximately $188.5 million.
The Company funds its obligations to maintain cemetery grounds by placing a
portion, generally 10%, 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, 1998, the Company's perpetual care trust funds
and escrow accounts totaled approximately $167.5 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 and the
Stewart Enterprises Employees' Retirement Trust ("SEERT"). ITI is registered
with the Securities and Exchange Commission under the Investment Advisers Act
of 1940.
As of October 31, 1998, ITI had approximately $900 million in assets.
Lawrence B. Hawkins, an executive officer of the Company and a professional
investment manager, serves as President of ITI. Mr. Hawkins joined ITI in 1989
after serving for six years as the manager of ITI's accounts for one of its
prior investment advisers. ITI operates pursuant to a formal investment policy
established by the Investment Committee of the Company's Board of Directors,
with the assistance of third party professional financial consultants, that
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 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. Finally, 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 president and chief financial
officer. These divisions are further divided into regions, each of which is
managed by a regional chief 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 or realign the divisions and regions to accommodate
expansion of its operations. The Company also has a Corporate Development
Division, which manages the Company's acquisition program, and 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% 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. In July and August 1998, 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% 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 15, 1999, has acquired a total of 277 properties
outside the United States and Puerto Rico. For the fiscal year ended
October 31, 1998, the Company's properties in foreign countries generated
approximately 18% of consolidated total revenues and represented 20% of
consolidated total assets.
Financial Information about Industry and Geographic Segments. For financial
information about the Company's industry and geographic segments, see Note 16
to the Company's consolidated financial statements included in Item 8.
GROWTH STRATEGY
General
In pursuit of the Company's ultimate goal of enhancing shareholder value, it
plans to continue to increase earnings per share at an annual rate of 20% each
year through a balanced strategy of internal and external growth. The internal
growth strategy involves consistent improvement in both revenues and costs at
existing and acquired operations, construction of new funeral homes and
cemeteries, and innovative initiatives such as the use of operating
partnerships and alternative service firms as described below. The external
growth strategy involves an aggressive, but disciplined, domestic and
international acquisition program and the rapid and effective assimilation of
the businesses the Company acquires.
Internal Growth
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 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 21% over the last four years and represents over $1.3 billion in
future revenues at October 31,1998.
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.
NEW FUNERAL HOME AND CEMETERY CONSTRUCTION. The Company creates combined
operations by building funeral homes on its cemetery properties and operating
both facilities together. In fiscal year 1998, the Company completed the
construction of funeral homes on three of its cemetery properties.
Additionally, in limited instances, such as in newly developed and rapidly
growing communities, the Company may construct new funeral homes and create new
cemeteries as stand-alone facilities. In fiscal year 1998, the Company opened
two stand-alone funeral homes and one stand-alone cemetery.
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 recently entered into an agreement with the Archdiocese of Los
Angeles under which it will construct and operate six funeral homes on land
leased by the Company from the Archdiocese at the site of six cemeteries owned
and operated by the Archdiocese. Subsequently, during fiscal year 1998, the
Company entered into similar agreements with the Archdiocese of Los Angeles
for the construction and operation of three additional funeral homes. 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 construct and operate a funeral home
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.
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.
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. At the time of its acquisition, Sentinel's cremation societies,
Neptune and Telophase, had more than 104,000 members. Members in the cremation
society pay a small membership fee and receive a membership card indicating
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. The cost to the family for death care arrangements at a
Sentinel location generally is less than the cost at a traditional funeral
home.
Since the Sentinel acquisition was completed in March 1997, the Company has
opened four additional service center locations. The expansion of the Sentinel
model is an example of the Company's effort to address the growing cremation
market, and it offers a cost-saving alternative to the construction of a
traditional funeral home. The Company plans to open additional service centers
similar to the Sentinel model, although management expects this expansion to
occur slowly while it further develops and tests the concept in new markets.
Results from the four locations opened have exceeded the Company's initial
expectations.
During fiscal year 1998, the Company acquired Desert Memorial Cremation and
Burial Society in Las Vegas, Nevada, the state with the highest cremation rate
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.
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
* Consolidating its United States back office operations at the
Shared Services Center
* Improving the utilization of its sales force
The Company believes that its internal growth strategies, including its cost
control efforts, have been major contributors to its increased operating
earnings (before stock option charges) over the last five years.
External Growth
ACQUISITIONS. From November 1, 1991 through January 15, 1999, the Company
has grown from 43 funeral homes and 29 cemeteries in six states to 575 funeral
homes and 143 cemeteries in 29 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 277 funeral homes and
cemeteries outside the United States and Puerto Rico, and it believes that
attractive expansion opportunities exist in those and other foreign countries.
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
November 1, 1998 - January 15, 1999 ......... 21 34.1
Pending acquisitions, as of January 15, 1999 .. 59 162.5
___________________________
(1) Excludes funeral homes and cemeteries constructed by the Company.
ACQUISITION STRATEGY. More than 85% of the approximately 22,000 funeral
homes and 9,600 cemeteries in the United States are privately or family
owned, and those funeral homes and cemeteries generate approximately 75% of
domestic funeral home and cemetery revenues. Management believes that a
substantial number of these businesses are suitable acquisition candidates.
The Company actively pursues acquisition opportunities both domestically and
internationally and plans to continue to do so. Where feasible, the Company
seeks to acquire premier firms that may be integrated with an existing
cluster or serve as a base for the formation of a new cluster. The Company
also seeks firms that have strong managers who are willing to remain with
the Company. In evaluating a potential acquisition, the Company also
considers factors such as the size of the community the property serves and
the potential for increasing the property's profitability through increased
prearranged marketing efforts and other means. The Company expects most of
its expansion to continue to occur domestically, although it continues to
pursue international acquisitions, primarily in Europe, Latin America and
the Pacific Rim.
Management believes strongly in a disciplined approach to acquisitions.
Currently, the Company's objective is to pay no more than eight times
management's estimate of what the acquired firm's EBIT (earnings before
interest and taxes) will be for the first twelve months after the acquisition,
although the Company sometimes pays somewhat higher prices for strategic
reasons. Management's objective is for the acquired firm to be additive to the
Company's earnings per share in the first twelve months after its acquisition.
The Company created its Corporate Development Division in fiscal year 1995
to further coordinate the Company's acquisition activities. In 1997, the
Company expanded this division to include, in addition to its full-time
corporate employees, commissioned field representatives to focus on domestic
and foreign acquisition candidates. These representatives devote their full
time to identifying and developing acquisition candidates and assisting in
negotiations. Divisional and regional management also work with the Corporate
Development Division in identifying and developing acquisition candidates and
assisting in negotiations.
ASSIMILATION OF ACQUIRED COMPANIES. The Company frequently enters into
management or consulting agreements and non-compete agreements with owners and
key managers of acquired companies in order to assure the continuation of the
acquired firm's goodwill. In addition, the Company generally continues to
operate acquired businesses under their existing names. In general, acquired
firms initially have lower gross profit margins than the Company's existing
businesses. The Company strives to improve the margins of acquired businesses
primarily by:
* Increasing prearranged sales
* Integrating the firm into the Company's
marketing program
* Assisting local managers in evaluating
merchandising and pricing strategies
* Standardizing and centralizing certain
business support functions through the
Shared Services Center
Management believes that the Company has been improving its ability to
rapidly and effectively assimilate acquired firms and improve their margins.
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. To a lesser degree, the Company also competes with
monument dealers, casket retailers 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 25% of the
United States burial market by the year 2000, compared with 14% 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" discussed earlier in Item 1.
The Company also faces intense competition in its acquisition program,
principally from the other publicly-traded death care firms, Service
Corporation International and Carriage Services, Inc., although a number of
smaller companies also participate in the market. Much acquisition activity
appears to be concentrated on firms in metropolitan regions, which are the
areas of primary interest to the Company. Some of the more attractive
properties in some metropolitan markets have already been acquired by
competitors, and certain other markets are unattractive because of such factors
as size, demographics and the local regulatory environment. Only a small
portion of this highly fragmented industry has been consolidated, and the
Company believes that opportunities for significant growth through acquisitions
continue to exist. However, no assurance can be given that the Company will be
successful in expanding its operations through acquisitions.
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 Funeral Rule defines certain acts or practices as unfair or deceptive,
and contains certain requirements to prevent these unfair or deceptive 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. State legislatures 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 10,600 persons, and
management believes that its relationship with its employees is good.
Approximately 334 of its employees who are employed in Maryland, Pennsylvania,
Puerto Rico, Mexico, Australia and Canada 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 and Association des
Travailleurs du Parc Commemoratif de Montreal Inc. and Syndicat Canadien
(SCEP), respectively. No other employees of the Company or its subsidiaries
are members of a collective bargaining unit.
ITEM 2. PROPERTIES
As of October 31, 1998, all but 131 of the Company's 558 funeral home
locations were owned by subsidiaries of the Company. The leases with respect
to the 131 leased properties have terms ranging from one to 19 years, except
for two leases which expire in 2032 and 2040. Generally, the Company has a
right of first refusal and an option to purchase the leased premises. An
aggregate of $3.0 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, 1998, the Company owned 140 cemeteries covering a total of
approximately 9,300 acres. Approximately 4,300 acres, or 46% 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 which it uses 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 1999 annual meeting of shareholders.
ITEM 3. LEGAL PROCEEDINGS
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.
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 in the death care industry. 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. ...... 63 Chairman of the Board(1)
Joseph P. Henican, III ..... 50 Vice Chairman of the Board and Chief Executive
Officer(2)
William E. Rowe ............ 52 President, Chief Operating Officer and Director(3)
Kenneth C. Budde ........... 51 Executive Vice President, President-Corporate
Division, Chief Financial Officer and Director(4)
Richard O. Baldwin, Jr. .... 52 Executive Vice President and President-Corporate
Development Division(5)
Brian J. Marlowe ........... 52 Executive Vice President and President-Eastern
Division(6)
Brent F. Heffron ........... 49 Executive Vice President and President-Southern
Division(7)
Raymond C. Knopke, Jr. ..... 43 Executive Vice President and President-Western
Division(8)
Ronald H. Patron ........... 54 Executive Vice President and Chief Administrative
Officer(9)
Gerard C. Alexander ........ 59 Executive Vice President-Special Corporate
Projects(10)
Charles L. Tilis ........... 43 Senior Vice President and President-Central
Division(11)
Lawrence B. Hawkins ........ 50 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. Henican has served as Vice Chairman of the Board since May 1991, and
as Chief Executive Officer since February 1, 1995. Prior to that time, he
was a partner in the law firm Henican, James & Cleveland, where he served
as general counsel to the Company for more than 13 years.
(3) Mr. Rowe became President on November 1, 1994 upon the retirement of
Lawrence M. Berner as President and Chief Executive Officer. 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.
(4) Mr. Budde has served as President-Corporate Division and Chief Financial
Officer since May 1998 and Director since June 1998. From August 1989 to
May 1998, he served as Senior Vice President of Finance, Secretary and
Treasurer.
(5) Mr. Baldwin has served as Executive Vice President and President of the
Company's Corporate Development Division since August 1, 1995. Prior to
that time, he served as Executive Vice President and President of the
Company's former Southeast Division.
(6) Mr. Marlowe has 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 Company's former Mid-Atlantic Division's
Northern Region.
(7) 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.
(8) 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.
(9) 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.
(10) 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.
(11) Mr. Tilis has served as Senior Vice President and President of the
Company's Central Division since November 1, 1998. 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.
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 fiscal year 1997 and 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% stock dividend on April 24, 1998. As of
January 8, 1999, there were 1,403 record holders of the Company's Class A
Common Stock.
HIGH LOW
-------- -------
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
Fiscal Year 1997
Fourth Quarter ................. 22 15/16 18 3/16
Third Quarter ................. 23 16 1/8
Second Quarter ................. 19 16
First Quarter ................. 19 7/8 16 3/8
Dividends
The Company declared quarterly dividends of $.01 per share on its Class A
and Class B Common Stock during each quarter of fiscal year 1997 and the first
two quarters of fiscal year 1998, and $.02 per share during the last two
quarters of fiscal year 1998. 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 restricts the declaration
and payment of dividends within any period of four consecutive quarters to 50%
or less of the Company's consolidated net earnings for those four fiscal
quarters. The same debt agreement limits the purchases, redemption or
retirement of any shares of the Company's capital stock to 5% or less of its
consolidated net worth on the payment date.
Sales of Unregistered Equity Securities
During fiscal year 1998, 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, 1994 through 1998 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)
-----------------------------------------------------------------
1998 1997 1996 1995 1994
--------- --------- --------- --------- ---------
STATEMENT OF EARNINGS DATA:
Revenues:
Funeral ............................ $ 379,095 $ 291,649 $ 225,461 $ 188,991 $ 116,266
Cemetery ........................... 269,270 240,937 207,926 179,831 138,092
--------- --------- --------- --------- ---------
Total revenues ..................... 648,365 532,586 433,387 368,822 254,358
Gross profit:
Funeral ............................ 118,426 89,235 72,239 55,309 31,785
Cemetery ........................... 77,558 67,937 45,879 34,434 25,812
--------- --------- --------- --------- ---------
Total gross profit ................. 195,984 157,172 118,118 89,743 57,597
Corporate general and administrative
expenses .............................. (16,621) (15,402) (14,096) (11,113) (8,157)
--------- --------- --------- --------- ---------
Operating earnings before performance-
based stock options ................... 179,363 141,770 104,022 78,630 49,440
Performance-based stock options ......... (76,762) - - (17,252) -
--------- --------- --------- --------- ---------
Operating earnings ...................... 102,601(2) 141,770 104,022 61,378(3) 49,440
Interest expense ........................ (43,821) (38,031) (26,051) (22,815) (8,877)
Investment and other income ............. 6,184 2,738 4,104 2,937 1,635
--------- --------- --------- --------- ---------
Earnings before income taxes and
cumulative effect of change in
accounting principles ................. $ 64,964(2) $ 106,477 $ 82,075 $ 41,500(3) $ 42,198
========= ========= ========= ========= =========
Earnings before cumulative effect of
change in accounting principles ....... $ 41,902(2) $ 69,742 $ 51,297 $ 26,145(3) $ 27,253
Cumulative effect of change in accounting
principles (net of $2,230 income tax
benefit) .............................. - (2,324)(1) - - -
--------- --------- --------- --------- ---------
Net earnings ........................... $ 41,902(2) $ 67,418 $ 51,297 $ 26,145(3) $ 27,253
========= ========= ========= ========= =========
Per Share Data:(4)
Basic earnings per share:
Earnings before cumulative effect of
change in accounting principles .... $ .43(2) $ .79 $ .62 $ .36(3) $ .43
Cumulative effect of change in
accounting principles .............. - (.03)(1) - - -
--------- --------- --------- --------- ---------
Net earnings .......................... $ .43(2) $ .76 $ .62 $ .36(3) $ .43
========= ========= ========= ========= =========
Diluted earnings per share:
Earnings before cumulative effect of
change in accounting principles .... $ .43(2) $ .78 $ .61 $ .35(3) $ .42
Cumulative effect of change in
accounting principles .............. - (.03)(1) - - -
--------- --------- -------- --------- ---------
Net earnings .......................... $ .43(2) $ .75 $ .61 $ .35(3) $ .42
========= ========= ======== ========= =========
Weighted average common shares
outstanding (in thousands):
Basic ................................ 97,691 88,778 82,821 72,772 63,820
========= ========= ======== ========= =========
Diluted .............................. 98,444 89,675 83,959 73,698 64,463
========= ========= ======== ========= =========
Dividends declared per common share ... $ .06 $ .04 $ .033 $ .017 $ .014
========= ========= ======== ========= =========
(continued)
SELECTED CONSOLIDATED FINANCIAL DATA
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
Year Ended October 31, (1)
--------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
Pro forma amounts assuming change in accounting
principles was applied retroactively: (1)
Net earnings .................................... $ 69,742 $ 49,959 $ 30,671(3) $ 28,649
=========== =========== =========== ==========
Basic earnings per common share (4) ............. $ .79 $ .60 $ .42(3) $ .45
=========== =========== =========== ==========
Diluted earnings per common share (4) ........... $ .78 $ .60 $ .42(3) $ .44
=========== =========== =========== ==========
October 31,
---------------------------------------------------------------------
1998 1997 1996 1995 1994
----------- ----------- ----------- ----------- ----------
Balance Sheet Data:
Assets........................................... $ 2,071,802 $ 1,637,238 $ 1,360,913 $ 1,072,435 $ 759,390
Long-term debt, less current maturities ......... 913,215 524,351 515,901 317,451 260,913
Shareholders' equity ............................ 839,290 819,570 547,447 483,978 325,671
SELECTED CONSOLIDATED OPERATING DATA
Year Ended October 31,
--------------------------------------------------------
1998 1997 1996 1995 1994
------- ------- ------- ------- --------
OPERATING DATA:
Funeral homes in operation at end of period .. 558 401 298 161 105
At-need funerals performed ................... 87,653 61,682 38,351 37,263 23,539
Prearranged funerals performed ............... 23,563 18,970 15,422 9,225 7,571
------- ------- ------- ------- -------
Total funerals performed ................... 111,216 80,652 53,773 46,488 31,110
Prearranged funerals sold .................... 66,368 48,676 37,545 33,787 26,637
Backlog of prearranged funerals at
end of period ............................. 397,025 350,031 294,829 222,532 183,886
Cemeteries in operation at end of period ..... 140 129 120 105 90
Interments performed ......................... 50,201 46,782 43,129 39,662 30,415
- ----------------------
(1) Effective November 1, 1996, the Company changed accounting principles for
prearranged funeral and cemetery sales. For further details, see Note 3
to the Company's consolidated financial statements included in Item 8.
Information presented for fiscal years 1997 and 1998 reflects the change in
accounting principles; information presented for fiscal years 1994
through 1996 reflects results as originally reported under the accounting
methods then in effect.
(2) Includes a non-recurring, non-cash 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 non-recurring, non-cash 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. The industry in the United States, and
in certain foreign countries, is undergoing a transition in which family-owned
firms are consolidating with larger organizations, such as the Company.
Although the Company's future participation in this consolidation cannot be
guaranteed, the Company believes that it has been successful in identifying and
acquiring firms that have enhanced shareholder value, and it will continue to
explore expansion opportunities, both domestically and internationally,
although it expects most of its expansion to continue to occur within the
United States.
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% per year from 2.38 million
in 1998 to 2.64 million in 2010. In addition, the average age of the
population in the United States is increasing. The aging of the population,
particularly the "baby boomers" who have only 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 72.7 million in 1998 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 PRINCIPLES
Effective November 1, 1996, the Company changed accounting principles for
prearranged funeral and cemetery sales as follows: (i) the Company now
defers 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; (ii)
the Company now records all revenues and costs attributable to prearranged
sales of cemetery interment rights and related products at the time the
contract is signed; and (iii) the Company now records revenue and related costs
attributable to cemetery burial site openings and closings at the time of sale.
The accounting changes were made principally to provide a better matching of
revenues and expenses in the appropriate periods and to more accurately reflect
the Company's operations. See Note 3 to the consolidated financial statements
included in Item 8.
These changes generally will result in reduced near-term funeral revenue and
gross profit, due to the deferral of a portion of the earnings from funeral
trust funds and escrow accounts until the funeral is performed. These changes
also will result in higher near-term cemetery revenue and gross profit, due to
the recognition under the accrual basis of accounting of certain cemetery
sales. The net effect is expected to result in increased revenues and gross
profit from amounts that would have been reported under the Company's previous
accounting methods.
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.
The Company generally recognizes as revenue on a current basis from trust
funds and escrow accounts all dividends, interest and net realized capital
gains in excess of the amount to be deferred to offset expected increases in
the future costs of performing prearranged funeral services. Income from
funds, especially those invested partially in common stock, can be materially
affected by prevailing interest rates and the performance of the stock market.
In managing its North American funds, including those in Puerto Rico and
excluding those in Mexico, which include investments in common stock, the
Company seeks an overall annual rate of return of approximately 8.5% to 9.0%.
In the past three years, such funds have generated overall annual rates of
return in that range. However, no assurance can be given that the Company will
be successful in achieving any particular rate of return.
RESULTS OF OPERATIONS
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."
Fiscal years 1998 and 1997 reflect the current accounting methods as
reported; comparisons between 1997 and 1996 reflect the pro forma effects of
applying the new accounting principles as if the change had occurred on
November 1, 1995. The following table presents the results as reported for the
fiscal years ended October 31, 1998 and 1997 and the pro forma results for the
year ended October 31, 1996:
Year Ended October 31,
--------------------------------------------
1998 1997 1996
------------ ----------- -----------
(As Reported) (As Reported) (Pro Forma)
(In Millions)
Revenues:
Funeral ........................ $ 379.1 $ 291.6 $ 219.1
Cemetery ....................... 269.3 240.9 213.1
------- ------- -------
648.4 532.5 432.2
------- ------- -------
Costs and expenses:
Funeral ......................... 260.7 202.4 153.2
Cemetery ........................ 191.7 173.0 163.3
------- ------- -------
452.4 375.4 316.5
------- ------- -------
Gross profit ..................... 196.0 157.1 115.7
Corporate general and administrative
expenses .......................... 16.6 15.4 14.1
------- ------- -------
Operating earnings before
performance-based stock options . 179.4 141.7 101.6
Performance-based stock options ..... 76.8 - -
------- ------- -------
Operating earnings ................ 102.6(1) 141.7 101.6
------- ------- -------
Interest expense .................... (43.8) (38.0) (26.0)
Investment and other income ......... 6.2 2.7 4.1
------- ------- -------
Earnings before income taxes and
cumulative effect of change in
accounting principles ........... 65.0(1) 106.4 79.7
Income taxes ........................ 23.1 36.7 29.7
------- ------- ------
Earnings before cumulative effect of
change in accounting principles .. $ 41.9(1) $ 69.7 $ 50.0
======= ======= =======
(1) Includes a non-recurring, non-cash 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 principles were $141.7 million; and
(b) earnings before cumulative effect of change in accounting principles
were $92.2 million.
Year Ended October 31, 1998 Compared to Year Ended October 31, 1997
Funeral Segment
Year Ended
October 31, Increase
--------------------- (Decrease)
1998 1997 ----------
------- -------
(In Millions)
FUNERAL REVENUE
Existing Operations ............................. $ 256.1 $ 240.2 $ 15.9
Acquired Operations ............................. 96.5 26.7 69.8
Revenue from prearranged funeral trust funds and
escrow accounts .............................. 26.5 24.7 1.8
------- ------- ------
$ 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%, in fiscal year 1998, as
compared with the prior fiscal year. The Company experienced a $15.9 million
increase in revenue from Existing Operations as a result of a 6% increase in
the average revenue per domestic funeral service performed by Existing
Operations (10% increase in total, excluding the effect of foreign currency
translation), due primarily to price increases and improved merchandising.
Slightly offsetting this increase in revenue was a 2% decrease in the number of
domestic funeral services performed by Existing Operations (4% decrease in
total).
The $7.0 million, or 4%, decrease in funeral costs from Existing Operations
resulted principally from the implementation of certain cost control measures,
including contract negotiations with certain vendors. Existing Operations
achieved improved profit margins resulting primarily from improved cost control
measures, including the Company's centralization and standardization of certain
financial and administrative functions at its Shared Services Center, and the
increased average revenue per funeral service mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes
during fiscal year 1998 which is not reflected in the 1997 period presented
above.
The $1.8 million increase in revenue from prearranged funeral trust funds
and escrow accounts was attributable to a 21% 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 modest decrease in the yield on the funds, which
yield remained in line with the Company's goal.
Cemetery Segment
Year Ended
October 31,
------------------------------------
1998 1997 Increase
---- ------- --------
(In millions)
CEMETERY REVENUE
Existing Operations ...................... $ 239.9 $ 225.7 $ 14.2
Acquired Operations ...................... 16.2 3.0 13.2
Revenue from merchandise trust funds and
escrow accounts ........................ 13.2 12.2 1.0
------- ------- -------
$ 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%, in fiscal year 1998, as
compared to fiscal year 1997. The Company experienced a $14.2 million or 6%
increase in revenue from Existing Operations resulting principally from an
increase in cemetery sales, including burial site openings and closings.
The improved profit margin achieved by Existing Operations 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.
The $1.0 million increase in revenue from merchandise trust funds and escrow
accounts was attributable principally to a 22% growth in the average balance in
the merchandise trust funds and escrow accounts, resulting primarily from
current year payments deposited into the funds, along with funds added through
acquisitions, and offset by a slight decrease in the yield on the merchandise
trust funds and escrow accounts, which yield remained in line with the
Company's goal.
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 options vested and the Company was
required to record a non-recurring, non-cash charge to earnings of
approximately $76.8 million (approximately $50.3 million, or $.51 per share,
after-tax) in April 1998. There will be no impact on future periods.
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 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% 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% 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% of revenue in
fiscal year 1998, as compared to 2.9% 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.
Interest expense increased $5.8 million during fiscal year 1998 when
compared to fiscal year 1997. The increase resulted from an increase in
average borrowings, which was partially offset by a decrease in average
interest rates from 6.6% in 1997 to 6.4% in 1998. Approximately $492.0
million, or 53%, of the $924.4 million borrowings outstanding as of
October 31, 1998 was subject to short-term variable interest rates averaging
approximately 5.7%.
In December 1998, the Company entered into an interest rate swap agreement
on a notional amount of $200 million. Under the terms of the agreement,
effective March 4, 1999, the Company will pay a fixed rate of 4.915% and
receive 3-month LIBOR. The swap expires on March 4, 2002.
Investment and other income increased $3.5 million during fiscal year 1998
when compared to the prior year, due principally to an approximately $2.3
million gain on the sale of non-essential assets.
The Company experienced an increase in its effective tax rate from 34.5% in
fiscal year 1997 to 35.5% 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.
Year Ended October 31, 1997 Compared to Year Ended October 31, 1996
Funeral Segment
Year Ended
October 31,
-------------------- Increase
1997 1996 (Decrease)
-------- -------- ----------
(In Millions)
FUNERAL REVENUE
Existing Operations ........................... $ 191.0 $ 184.7 $ 6.3
Acquired Operations ........................... 75.9 16.6 59.3
Revenue from prearranged funeral trust funds
and escrow accounts ......................... 24.7 17.8 6.9
------- ------- --------
$ 291.6 $ 219.1 $ 72.5
======= ======= ========
FUNERAL COSTS
Existing Operations ........................... $ 139.4 $ 140.8 $ (1.4)
Acquired Operations ........................... 63.0 12.4 50.6
------- ------- --------
$ 202.4 $ 153.2 $ 49.2
======= ======= ========
Funeral Segment Profit ........................ $ 89.2 $ 65.9 $ 23.3
======= ======= ========
Funeral revenue increased $72.5 million, or 33%, in fiscal year 1997, as
compared with the prior fiscal year. The Company experienced a $6.3 million
increase in revenue from Existing Operations as a result of a 5% overall
increase in the average revenue per funeral service performed by Existing
Operations (4% increase domestically), due to price increases and improved
merchandising.
The $1.4 million, or 1%, decrease in funeral costs from Existing Operations
resulted principally from the implementation of certain cost control measures,
including contract negotiations with certain vendors. Existing Operations
achieved improved profit margins resulting primarily from the increased cost
control measures, including the Company's centralization and standardization of
certain financial and administrative functions in connection with the Company's
Shared Services Center, and the increased average revenue per funeral service
mentioned above.
The increase in revenue and costs from Acquired Operations resulted
primarily from the Company's acquisition or construction of funeral homes in
fiscal year 1997 which is not reflected in the 1996 period presented above.
The $6.9 million increase in revenue from prearranged funeral trust funds
and escrow accounts was attributable to a 23% growth in the average balance in
such trust funds and escrow accounts, resulting primarily from current year
customer payments deposited into the funds and funds added through
acquisitions, coupled with a slight increase in the yield on the North American
funds (excluding those in Mexico), which yield is in line with the Company's
goal. The return of the peso-denominated investments of the Company's Mexican
subsidiaries, which comprise less than 10% of the Company's total funeral trust
portfolio, averaged 20% for the fiscal year ended October 31, 1997. The
return on the Mexican funds partially offset the approximate 18% inflation
experienced during the year.
Cemetery Segment
Year Ended
October 31,
-------------------
1997 1996 Increase
------- ------- ---------
(In millions)
CEMETERY REVENUE
Existing Operations .................... $ 211.3 $ 194.6 $ 16.7
Acquired Operations .................... 17.4 9.4 8.0
Revenue from merchandise trust funds
and escrow accounts .................. 12.2 9.1 3.1
------ ------ ------
$ 240.9 $ 213.1 $ 27.8
====== ====== ======
CEMETERY COSTS
Existing Operations .................... $ 159.9 $ 157.1 $ 2.8
Acquired Operations 13.1 6.2 6.9
------- ------- ------
$ 173.0 $ 163.3 $ 9.7
======= ======= ======
Cemetery Segment Profit ................ $ 67.9 $ 49.8 $ 18.1
======= ======= ======
Cemetery revenue increased $27.8 million, or 13%, in fiscal year 1997, as
compared to fiscal year 1996, due principally to a $16.7 million increase in
revenue from Existing Operations, resulting principally from an increase in
cemetery sales.
Costs increased during this same period by $9.7 million, of which $6.9
million was attributable to Acquired Operations. The improved profit margin
achieved by Existing Operations was attributable principally to a 9% increase
in cemetery sales by Existing Operations, the implementation of certain cost
control measures, including the Company's undertaking to centralize and
standardize certain financial and administrative functions in connection with
the Company's Shared Services Center, and the increase in burial site openings
and closings.
The increase in revenues and costs associated with Acquired Operations
resulted primarily from the acquisition or construction of cemeteries during
fiscal year 1997 which is not reflected in the 1996 period presented above.
The $3.1 million increase in revenue from merchandise trust funds and escrow
accounts was attributable principally to a 24% growth in the average balance in
the merchandise trust funds and escrow accounts, resulting primarily from
current year payments deposited into the funds, along with funds added through
acquisitions, and a slight increase in the yield on the merchandise trust funds
and escrow accounts, which return slightly exceeded the Company's goal of
approximately 9%.
Other
Corporate general and administrative expenses increased $1.3 million in
fiscal year 1997, to 2.9% of revenue, as compared to 3.3% in fiscal year 1996.
The increase in these expenses is the result of activities to support the
Company's growth.
Interest expense increased $12.0 million during fiscal year 1997 when
compared to fiscal year 1996. The increase resulted from an increase in
average borrowings, which was partially offset by a slight decrease in average
interest rates from 6.7% in 1996 to 6.6% in 1997. Approximately $312.0
million, or 56%, of the $558.3 million borrowings outstanding as of
October 31, 1997 was subject to short-term variable interest rates averaging
approximately 6.3%.
Investment and other income decreased $1.4 million during fiscal year 1997
when compared to the prior year, due principally to a $1.6 million gain in
fiscal year 1996 on the sale of land that was condemned.
The Company experienced a decrease in its effective tax rate from 37.3% in
fiscal year 1996 to 34.5% in fiscal year 1997, principally as a result of
elimination of the Puerto Rican interest withholding tax and strategic state
tax planning.
LIQUIDITY AND CAPITAL RESOURCES
Cash and marketable securities of the Company were $36.9 million as of
October 31, 1998, an increase of $.6 million from October 31, 1997. The
Company provided cash of $18.3 million from its operations for the year ended
October 31, 1998, compared to using cash of $15.2 million for fiscal year 1997,
due principally to an increase in earnings (excluding the charge for the
performance-based stock options) and an increase in accounts payable and
accrued expenses offset by an increase in other receivables and other working
capital changes.
Long-term debt as of October 31, 1998 amounted to $924.4 million, compared
to $558.3 million as of October 31, 1997. The Company's long-term debt
consisted of $492.0 million under the Company's revolving credit facilities,
$408.4 million of long-term notes including the Remarketable or Redeemable
Securities (ROARS) discussed below, and $24.0 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
$3.0 million of term notes incurred principally in connection with
acquisitions.
In April 1998, the Company issued $200 million of 6.40% ROARS due May 1,
2013 (remarketing date May 1, 2003). The ROARS were priced to the public at
99.677% to yield 6.476%. 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%. If the
securities are remarketed after five years, the net effective rate is expected
to be approximately 6.14% over 15 years.
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 1.1 and .7 to 1.0 as of October 31, 1998 and 1997, respectively. As
of October 31, 1998, the Company had $124.7 million of additional borrowing
capacity within this parameter, of which $114.1 million was available under its
revolving credit facilities.
In July and December 1998, the Company filed shelf registration statements
with the Securities and Exchange Commission covering an aggregate of up to $750
million of Class A Common Stock, Preferred Stock, and Debt Securities,
including up to 2,000,000 shares of the Company's Class A Common stock which
Frank B. Stewart, Jr., the Chairman of the Board of Directors of the Company,
and his transferees and successors in interest, may offer and sell from time to
time.
In January 1999, the Company filed a prospectus supplement for the proposed
sale of 12,500,000 shares of Class A Common Stock (excluding the underwriters'
over-allotment option covering 1,875,000 shares), of which 650,000 shares are
being offered by the Stewart Revocable Trust, a trust established by Mr.
Stewart and his wife. The offering, scheduled to close near the end of
January, is expected to generate net proceeds to the Company of approximately
$268 million (excluding the over-allotment option) to be used to fund the
Company's continuing acquisition program and for general corporate purposes.
Pending such use, the Company will use the net proceeds to reduce the balances
outstanding on its revolving credit facilities or to invest in short-term
interest-bearing securities.
The Company's ratio of earnings to fixed charges was 2.39 (which includes
the $76.8 million non-recurring, non-cash performance-based stock option
charge), 3.65 (which excludes the cumulative effect of the change in accounting
principles), 3.98, 2.72 (which includes the $17.3 million non-recurring, non-
cash performance-based stock option charge) and 5.30 for the fiscal years ended
October 31, 1998, 1997, 1996, 1995 and 1994, respectively. Excluding the stock
option charge, the Company's ratio of earnings to fixed charges would have been
4.02 for fiscal year 1998 and 3.43 for fiscal year 1995. For purposes of
computing the ratio of earnings to fixed charges, earnings consist of pretax
earnings plus fixed charges (excluding interest capitalized during the period).
Fixed charges consist of interest expense, capitalized interest, amortization
of debt expense and discount or premium relating to any indebtedness, and the
portion of rental expense that management believes to be representative of the
interest component of rental expense. Fiscal year 1996 and prior amounts
reflect the Company's previous accounting methods which were in effect at the
time.
During fiscal year 1998, the Company completed the acquisition of 153
funeral homes and nine cemeteries for purchase prices aggregating approximately
$266.3 million, including the issuance of approximately 294,000 shares of
Class A Common Stock and $16.2 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 fiscal year-end, the Company completed the acquisition of 18
funeral homes and 3 cemeteries for approximately $34.1 million. As of January
15, 1999, the Company also had agreements in principle or letters of intent to
purchase 59 funeral homes and cemeteries for purchase prices aggregating
approximately $162.5 million.
Although the Company has no material commitments for capital expenditures,
the Company contemplates capital expenditures, excluding acquisitions, of
approximately $45 million for the fiscal year ending October 31, 1999, which
includes the construction of new funeral homes and refurbishing of funeral
homes recently acquired.
Management expects that future capital requirements will be satisfied
through the common stock offering referenced to above, internally generated
cash flow and amounts available under its revolving credit facilities.
Additional debt and equity financing, may be required in connection with future
acquisitions. 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.
In December 1998, the Company entered into an interest rate swap agreement
on a notional amount of $200 million. Under the terms of the agreement,
effective March 4, 1999, the Company will pay a fixed rate of 4.915% and
receive 3-month LIBOR. The swap expires on March 4, 2002.
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.
The Mexican economy, however, has been experiencing inflation rates
substantially in excess of those in the United States. 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 is no longer considered highly
inflationary according to the SEC staff. The functional currency which will be
used by the Company's Mexican operations is the Mexican peso. This change is
not expected to have a material effect on the Company's operations,
consolidated financial condition or results of operations.
OTHER
Year 2000 Issues
OVERVIEW. As the Year 2000 approaches, all companies that use computers
must address "Year 2000" issues. Year 2000 issues result from the past
practice in the computer industry of using two digits rather than four to
identify the applicable year. This practice can create breakdowns or erroneous
results when computers perform operations involving years later than 1999.
THE COMPANY'S STATE OF READINESS. The Company has devised and commenced an
extensive compliance plan with the objective of bringing all of the Company's
information technology (IT) systems and non-IT systems into Year 2000
compliance by the end of the second quarter of fiscal year 1999. The Company
has divided its systems into (i) critical systems, consisting of IT systems,
and (ii) non-critical systems, consisting of a mixture of IT and non-IT
systems. Each system will be evaluated and brought into compliance in five
phases:
* Phase I: Awareness - Prepare and present comprehensive report to
management
* Phase II: Assessment - Identify and evaluate all systems for Year
2000 compliance
* Phase III: Compliance - Complete necessary Year 2000
modifications
* Phase IV: Testing - Test all modified systems for Year 2000
compliance
* Phase V: Implementation - Return Year 2000 compliant systems to
daily operation
Phase I has been completed. Additionally, all of the Company's critical
systems have completed Phase II and 60% were found to be compliant or made to
be compliant by completing Phases III through V. The remaining 40% of the
Company's critical systems have commenced Phase III through Phase V and the
Company anticipates that these systems will be brought into compliance by the
end of the second quarter of fiscal 1999.
Fifty percent of the Company's non-critical systems have completed Phase II
and were either found to be compliant or were brought into compliance by
completing Phases III through V. The Company anticipates that the remaining
non-critical systems will be evaluated and brought into compliance by the end
of the second quarter of fiscal 1999.
In addition, the Company has distributed surveys to all of its significant
vendors, financial institutions and insurers to determine the extent to which
their failure to resolve their Year 2000 issues could affect the Company's
operations. The Company has received 68% of the surveys, none of which
indicated significant problems. The Company expects to complete its evaluation
of third parties' compliance by the end of February 1999.
THE COSTS INVOLVED. Because many of the Company's computer systems have been
replaced in recent years as part of the Company's on-going goal to maintain
state of the art technology, the Company's Year 2000 compliance costs have been
relatively low. To date, the Company has incurred expenses of approximately
$75,000 for external consultants, software and hardware applications in
implementing its compliance plan. The Company does not separately track the
internal costs incurred for the year 2000 project. Such costs are principally
payroll-related costs for the Company's information technology group.
Management estimates that the total external cost to be incurred by the Company
to complete its compliance plan will be approximately $175,000. All costs
related to the Year 2000 compliance plan are included in the Information
Systems budget and are based on management's best estimates. There can be no
guarantee that actual results will not differ from those estimated or that
such difference will not be material.
RISKS. If the Company is not successful in its efforts to bring its systems
into Year 2000 compliance:
* The Company's ability to procure merchandise in a timely and cost-
effective manner may be impaired
* Daily business procedures may be delayed due to the use of manual
procedures
* Some business procedures may be interrupted if no alternative
methodology is available
Each of these items could have a material adverse effect on the Company's
operations.
The Company has no guarantee that the systems of third parties will be brought
into compliance on a timely basis. The non-compliance of a third party's
system could have a material adverse effect on the Company's operations.
THE COMPANY'S CONTINGENCY PLAN. Although the Company believes that its Year
2000 compliance plan is adequate to achieve full system operation on a timely
basis, the Company is in the process of developing a contingency plan to
address the possibility of the Company's and third parties' non-compliance.
The Company anticipates completing its contingency plan by the end of June
1999.
Recent Accounting Standards
Statement of Financial Accounting Standards (SFAS) No. 130, "Reporting
Comprehensive Income," is required to be implemented in the first quarter of
the Company's fiscal year 1999. SFAS No. 131, "Disclosure about Segments of an
Enterprise and Related Information," is required to be implemented during the
Company's fiscal year ending October 31, 1999 and SFAS No. 133, "Accounting for
Derivative Instruments and Hedging Activities," is required to be implemented
in the first quarter of the Company's fiscal year 2000. The effect of these
pronouncements on the Company's consolidated financial condition and results of
operations is not expected 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.
The Company's goals for fiscal year 1999 include: (i) revenue growth of at
least 20%, and (ii) earnings per share growth of 20%. The Company also plans
to complete at least $250 million in acquisitions, which is in line with the
$266 million achieved in fiscal year 1998, but above the $185 million and
$179 million in acquisitions achieved in fiscal years 1997 and 1996,
respectively. For fiscal year 1999, the Company also plans to improve its gross
margin by approximately 50 to 100 basis points over its fiscal year 1998 gross
margin.
The Company's strategic plan for the future includes the following goals: (i)
achievement of $1 billion in revenue by fiscal year 2001 and (ii) earnings per
share growth of 20% annually.
Forward-looking statements are based on assumptions about future events and
are therefore inherently uncertain; actual results may differ materially from
those projected. See "Cautionary Statements" below.
CAUTIONARY STATEMENTS
The Company cautions readers that the following important factors, among
others, in some cases have affected, and in the future could affect, the
Company's actual consolidated results and could cause the Company's actual
consolidated results in the future to differ materially from the goals and
expectations expressed in the forward-looking statements above and in any other
forward-looking statements made by or on behalf of the Company.
(1) Achieving projected revenue growth depends in part upon sustaining the
level of acquisition activity experienced by the Company in the last three
fiscal years. Higher levels of acquisition activity will increase anticipated
revenues, and lower levels will decrease anticipated revenues. The level of
acquisition activity depends not only on the number of properties acquired, but
also on the size of the acquisitions; for example, one large acquisition could
increase substantially the level of acquisition activity and, consequently,
revenues. Several important factors, among others, affect the Company's
ability to consummate acquisitions:
(a) The Company may be unable to find a sufficient number of
businesses for sale at prices the Company is willing to pay.
(b) In most of its existing markets and in many new markets,
including foreign markets, that the Company desires to enter, the
Company competes for acquisitions with the other publicly-traded
death care firms. These competitors, and others, may be willing
to pay higher prices for businesses than the Company or may cause
the Company to pay more to acquire a business than the Company
would otherwise have to pay in the absence of such competition.
Thus, the aggressiveness of the Company's competitors in pricing
acquisitions affects the Company's ability to complete
acquisitions at prices it finds attractive.
(c) Achieving the Company's projected acquisition activity depends on
the Company's ability to enter new markets, including foreign
markets. Due in part to the Company's lack of experience
operating in new areas and to the presence of competitors who
have been in certain markets longer than the Company, such entry
may be mor