Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Registrant’s telephone number, including area code: (504) 837-5880

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, No Par Value
Preferred Stock Purchase Rights
(Title of Class)

     The aggregate market value of the voting stock held by nonaffiliates (affiliates being, for this purpose only, directors, executive officers and holders of more than 5 percent of the Company’s Class A common stock) of the Registrant as of January 16, 2002, was approximately $546,000,000.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the proxy statement in connection with the 2002 annual meeting of shareholders are incorporated in Part III of this Report.

Table of Contents

Cautionary Note

     This Annual Report of Stewart Enterprises, Inc. (the “Company”) on Form 10-K contains forward-looking statements in which the Company’s management discusses factors it believes may affect the Company’s performance in the future. Such statements typically are identified by terms expressing future expectations or projections of revenues, earnings, earnings per share, cash flow, capital expenditures, acquisition expenditures, internal growth initiatives, gross profit margin, debt levels, asset sales 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 I

Item 1. Business

General

     Founded in 1910, the Company is the third largest provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company provides a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of October 31, 2001, domestic operations included 319 funeral homes and 151 cemeteries in 30 states within the United States and Puerto Rico, and foreign operations included 197 funeral homes and 8 cemeteries in five foreign countries.

     During fiscal year 2001, the Company focused on restructuring and reducing its debt, pursuing the sale of its foreign operations, improving cash flow and operating its core businesses. On June 29, 2001, the Company completed the refinancing of substantially all of its long-term debt, significantly extending its long-term debt maturities. In addition, during fiscal year 2001, the Company decided to pursue the sale of all of its foreign operations. As of October 31, 2001, the Company had completed the sale of all of its foreign operations other than those in Southern Europe (France, Spain and Portugal), Canada and Argentina. The Company also sold some domestic assets, primarily excess cemetery property and funeral home real estate. The Company used the proceeds from these transactions, along with free cash flow, to reduce debt from $950.5 million at fiscal year-end 2000 to $690.9 million as of October 31, 2001. Subsequent to October 31, 2001, the Company signed a binding contract for the sale of its operations in Southern Europe and will use the net proceeds from the sale to reduce its debt. Also during fiscal year 2001, the Company implemented the Securities and Exchange Commission’s Staff Accounting Bulletin No. 101 (“SAB No. 101”), “Revenue Recognition in Financial Statements.” SAB No. 101 was directed to companies in all industries but had the effect of standardizing accounting for preneed sales for the death care industry and, the Company believes, better matches revenue recognition and cash receipts. During fiscal year 2002, the Company plans to continue its focus on debt reduction and to position itself for business expansion in fiscal year 2003.

     For fiscal year 2001, funeral operations accounted for approximately 62 percent of the Company’s total revenues, and cemetery operations accounted for the remaining 38 percent. The Company’s funeral homes offer a wide range of services and products including funeral services, cremation, transportation services, removal and preparation of remains, caskets and flowers. Its cemetery operations sell cemetery property, merchandise and services. Cemetery property includes lots, lawn crypts and family and community mausoleums. Cemetery merchandise includes vaults, monuments and markers. Cemetery services include burial site openings and closings and inscriptions.

-2-

Table of Contents

     The Company believes that it operates one or more of the premier death care facilities in each of its principal markets. Its funeral homes and cemeteries in the United States are located primarily in the Southern, Western, Mid-Atlantic, and Mid-Western states, generally in large metropolitan areas such as Miami, Orlando, Tampa and St. Petersburg, Florida; Dallas, Fort Worth and Houston, Texas; Los Angeles, San Diego and San Francisco, California; New Orleans, Louisiana; Baltimore, Maryland and the District of Columbia. According to the United States Bureau of the Census, many of these areas have a large population over age 65, which represents a principal target market for the Company’s preneed sales program as well as at-need sales. The Company believes that it is an industry leader in marketing preneed cemetery property and preneed funeral and cemetery merchandise and services, and it considers preneed sales to be an integral part of its long-term business strategy.

     Cemetery operations account for a significantly larger percentage of the Company’s total revenues than those of its three largest competitors. The Company emphasizes cemetery operations because it believes cemeteries provide the best foundation for securing long-term market share in its industry. The sale of cemetery property to a family creates a relationship that builds heritage over time, as family members are buried in a plot or mausoleum and as other family members purchase additional cemetery property in order to be buried in the same cemetery. The Company’s relationships with its cemetery property customers allow it to more easily offer related products and services, such as cemetery merchandise or a funeral service at one of its funeral homes located on the cemetery grounds or nearby.

     The Company has been focused on creating combination operations by building new funeral homes on existing cemetery property and operating the facilities together. Combination operations help to increase market share by allowing it 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 preneed basis. Approximately 47 percent of its cemeteries have a funeral home onsite that the Company operates in conjunction with the cemetery. In addition to its combination operations, another approximately 39 percent of the Company’s cemeteries are located within the same market as, and operated in conjunction with, one of its funeral homes. The Company frequently organizes its operating units in “clusters,” which are integrated groups of funeral homes and cemeteries that allow the Company to cost-effectively pool assets, personnel and services and to generate higher margins.

     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

     Highly fragmented industry. Death care businesses in the United States have traditionally been relatively small, family-owned enterprises that have passed through successive generations within the family. The last decade witnessed a trend of family-owned firms consolidating with larger organizations such as the Company. However, this trend slowed in 1999. As industry conditions reduced the number of major consolidators participating in the acquisition market, those that remained generally applied significantly tighter pricing criteria, and many potential sellers withdrew their businesses from the market rather than pursuing transactions at lower prices.

     During the first quarter of 1999, Service Corporation International, one of the Company’s primary competitors for acquisitions, announced plans to significantly reduce the level of its acquisition activity. The Loewen Group, Inc., now reorganized as Alderwoods Group, Inc., previously a primary competitor for acquisitions, entered into bankruptcy proceedings on June 1, 1999, after announcing that it had terminated its acquisition activity and was offering a number of its own properties for sale. In addition, Equity Corporation International, previously the fourth largest public death care company and another of the Company’s competitors for acquisitions, merged with Service Corporation International.

-3-

Table of Contents

     Throughout fiscal year 1999, the Company continually reduced its target acquisition multiples. In the third quarter of fiscal year 1999, the Company’s acquisition activity began to decrease substantially from prior quarters as many potential sellers were not willing to sell their businesses at the lower prices.

     As the business model shifted, death care consolidators experienced diminishing access to capital. In response to these changes, the Company developed strategies for improving cash flow and reducing and restructuring debt. Throughout fiscal year 2000 and 2001, the Company focused on liquidity, leverage and cash flow. Additional information can be found below under the heading “Business Strategy — Focus On Improving Cash Flow.”

     Currently, acquisition activity remains dormant, and the Company continues to focus on reducing debt. However, in fiscal year 2002 the Company expects to position itself for potential acquisitions in 2003. The Company’s current strategies are described below in the section entitled “Business Strategy.”

     The industry continues to be characterized by a large number of locally-owned, independent operations. More than 85 percent of the approximately 22,000 funeral homes and 10,500 cemeteries in the United States are independently owned.

     Continuing need for products and services; increasing number of deaths. There is an inevitable need for the products and services the industry offers. In addition, the number of deaths in the United States is expected to increase at a steady, moderate pace. According to the United States Bureau of the Census, the number of deaths in the United States is expected to increase by approximately 1 percent per year, from 2.4 million in 2000 to 2.6 million in 2010. Furthermore, the average age of the population in the United States is increasing. According to the United States Bureau of the Census, the United States population over 50 years of age is expected to increase by approximately 2 percent per year, from 76.1 million in 2000 to 97.1 million in 2010. The Company believes the aging of the population is particularly important because it expands the Company’s target market for preneed sales, as older persons, especially those over 50, are most likely to make preneed funeral and cemetery arrangements.

     Importance of tradition; barriers to entry. The Company believes it is difficult for new competitors to enter existing markets successfully by opening new cemeteries and funeral homes. Entry into the cemetery market can be difficult due to several factors. Families tend to return to the same cemetery for generations to bury their family members making it difficult for new cemeteries to attract families. Additionally, mature markets, including many of the metropolitan areas where its cemeteries are located, are often already served by an adequate number of cemeteries, and land for new cemetery development is scarce. Regulatory complexities and zoning restrictions also make entry into the cemetery market difficult. Finally, development of a new cemetery requires a significant capital investment that usually takes several years to produce a return. Entry into the funeral home market can be difficult for many of the same reasons. Families tend to choose a funeral home because it previously served their family, and because of the funeral home’s reputation, which must be developed over time, although families are often willing to move from a stand-alone funeral home to a newer one developed on the grounds of their preferred cemetery.

     Growing demand for cremation. Consumer preferences in the death care industry tend to change slowly. One significant trend in the United States is an increase in the preference for cremations. Industry research indicates that the percentage of cremations has steadily increased and that cremations will represent approximately 40 percent of the United States market by the year 2010, compared to 25 percent in 1999. Although the percentage represented by cremations is expected to grow, the Company believes this growth will come primarily from the expected growth in the number of deaths over time, and that the number of traditional funerals performed each year should remain relatively constant. Because cremations have typically included few, if any, additional products or services for the family beyond the cremation itself, the trend towards cremation has been a concern to traditional funeral home and cemetery operators. However, industry research has shown that the consumer chooses cremation frequently for reasons other than cost, and the Company believes this increasing consumer interest in cremation will provide it with an opportunity to better serve families by offering an array of additional products and services.

-4-

Table of Contents

Competitive Strengths

     Leading market positions. The Company is the third largest provider of funeral and cemetery products and services in the United States and has been in business for more than 90 years. In addition, the Company believes that it operates one or more of the premier death care facilities in each of its principal markets, which are primarily in larger metropolitan areas in the Southern, Western, Mid-Atlantic and Mid-Western states. In its view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a variety of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion. For example, while funeral homes and cemeteries in the United States perform an average of approximately 100 funerals and 165 burials per year, the Company’s facilities perform an average of approximately 250 funerals and 375 burials per year. In addition, more than 40 percent of its domestic properties are located in California, Florida and Texas, which are three of the four states with the highest population over age 65, an age group that represents a large portion of the Company’s target market.

     Strong cemetery operations. The Company’s cemetery operations account for approximately 38 percent of its total revenues, which is a significantly larger percentage than any of its three largest competitors. The Company believes this is a competitive advantage because families generally return to the same cemetery for generations to bury their family members. Cemetery property often becomes an important part of a family’s heritage, and family members who move away will often return to their home cemetery to be buried. The Company builds on its relationships with its cemetery customers by offering additional cemetery property to related family members and by offering related products and services such as cemetery merchandise or a funeral service at one of its funeral homes located on the cemetery grounds or nearby. Approximately 40 percent of its total cemetery acreage is available for future development.

     Emphasis on combination operations. Approximately 47 percent of the Company’s cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which the Company refers to as a combination operation. This is a significantly higher percentage of combination operations than any of its three largest competitors. The Company believes combination operations are a competitive advantage because they offer families the convenience of complete death care services at a single location. Its experience demonstrates that a family planning a burial in its cemetery often views its onsite funeral home as a more desirable location for a funeral service than an unaffiliated offsite funeral home. Thus, the funeral home’s call volume benefits from the heritage of the cemetery, and, over time, the cemetery’s activity increases as well. In addition, combination operations enhance the Company’s purchasing power, enable it to employ more sophisticated management systems and allow it to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. As a result, its combination operations usually generate higher operating margins compared to its stand-alone funeral homes and cemeteries. In addition to its combination operations, approximately 39 percent of the Company’s cemeteries are located within the same market as, and operated in conjunction with, one or more of its funeral homes.

     Expertise in preneed sales; strong backlog. The Company believes that it is distinguished from its competitors by its strong emphasis on, and more than 60-year history of experience with, preneed sales. Preneed plans enable families to specify in advance and prepay for cemetery property and funeral and cemetery services and products. The Company markets these properties, services and products domestically through its full-time staff of approximately 1,300 sales counselors. Its expertise in preneed sales has historically developed out of, and now complements, its strong cemetery operations. This is because cemetery property, such as a burial plot, is usually the first purchase a family will make when considering preneed arrangements. The Company builds on its relationships with its preneed cemetery property customers by offering them additional preneed products and services such as cemetery merchandise or funeral services. Its focus on preneed cemetery property sales is also important because these sales generate current revenues and higher current cash flow than other types of preneed sales. The Company estimates that as of October 31, 2001, the future value of its domestic preneed backlog (including earnings on funds held in trust and build-up in the face value of third-party insurance contracts, in each case at assumed rates) represented approximately $2.2 billion to $2.3 billion of revenue to

-5-

Table of Contents

be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

     Experienced management. The Company has an experienced management team, many of whom owned and operated their own funeral homes and cemeteries and joined the Company when it acquired their businesses. Its 10 top executives have an average of 29 years of experience in the death care industry and have been with the Company for an average of 16 years.

Business Strategy

     The Company’s business strategy is to improve and expand its operations internally and to strengthen its financial performance by improving cash flow and profitability and deleveraging its balance sheet. Key elements of its business strategy are as follows:

     Maintain backlog through preneed marketing. The Company considers maintaining its backlog through preneed marketing to be an integral part of its long-term business strategy. Its primary objective is to moderate preneed sales levels to balance its cash investment while maintaining a sustainable and predictable level of growth in its backlog. The aging of the population represents a significant opportunity for the Company to expand its customer base through preneed marketing as older customers, especially those over 50 years old, are most likely to make these purchases.

     Develop additional combination operations. The Company creates combination operations by (1) building funeral homes on cemetery properties that it owns and (2) entering into operating partnerships with third parties in which the Company constructs, owns and operates a funeral home and/or mausoleum on the grounds of a cemetery owned by the third party. Partnerships allow the Company to enjoy the benefits of operating a funeral home in a combination operation, without the capital investment of purchasing the cemetery. The Company’s partner benefits from being better able to compete with other cemeteries or combination operations in its market, increase cemetery revenues and provide a better service to its parishioners or other constituencies. In 1997, the Company entered into an operating partnership with the Archdiocese of Los Angeles to construct and operate funeral homes at the site of nine cemeteries owned and operated by the Archdiocese. As of October 31, 2001, five of these funeral homes had been completed. 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 plans to pursue more of these partnerships with the Catholic Church, other faith-based organizations and non-profit entities.

     Increase enhanced cremation products and services. In fiscal year 2001, 38 percent of the funeral services the Company performed in the United States and Puerto Rico were cremations, compared to 36 percent in fiscal year 2000. The cremation rate in the United States has been increasing and by the year 2010 cremations are expected to represent 40 percent of the United States burial market, according to industry estimates. The Company has been addressing this trend by providing enhanced cremation products and services at all of its funeral homes. An enhanced cremation may include a memorial service, an urn and a niche in a mausoleum or columbarium in which to place the remains. The Company is also responding to the growing preference for cremations with its alternative service firm strategy. The Company currently operates 30 alternative service locations, which primarily offer value-priced cremation services and are located principally in California, Oregon and Nevada, states with among the highest cremation rates in the United States. Although these locations do not offer the lowest-cost basic cremations in their markets, the costs to the family for death care arrangements at these locations are typically less than at a traditional funeral home. These locations are generally leased, have lower overhead than traditional funeral homes and generate higher operating margins than traditional funeral homes, although the average revenue per service is lower. Additionally, the Company has found that families value personalized services and products such as a personalized memorial service designed to reflect the special interests or hobbies of the consumer. The Company is training its funeral arrangers to offer and arrange these new personalized options.

-6-

Table of Contents

     Reduce debt through asset sales. The Company has actively pursued the sale of its foreign assets and, as of October 31, 2001, had sold all of its foreign operations except those in Southern Europe (France, Spain and Portugal), Canada and Argentina. The Company has used the proceeds from these sales, along with free cash flow and approximately $21 million in proceeds from the sale of other domestic assets, primarily excess cemetery property and funeral home real estate, to reduce debt by more than $250 million during fiscal year 2001 to approximately $691 million as of October 31, 2001, excluding approximately $3 million of debt associated with assets held for sale. The Company’s goal is to reduce its debt to approximately $500 million and to achieve a debt to domestic earnings before interest, taxes, depreciation and amortization (EBITDA) ratio of approximately 2.5 times by the second quarter of 2003. The Company plans to achieve this goal by further reducing debt in an amount of approximately $140 million to $150 million with the estimated proceeds from the sale of operations in Southern Europe (France, Spain and Portugal), Canada and Argentina, plus future tax benefits associated with closed and prospective sales and with an additional amount of approximately $50 million to $55 million per year in free cash flow. Subsequent to October 31, 2001, the Company signed a binding contract for the sale of its operations in Southern Europe and will use the net proceeds from the sale to reduce its debt.

     Focus on improving cash flow. The Company plans to continue to improve its cash flow through a number of revenue enhancements, cost controls and continued moderation in its preneed sales activities. In fiscal year 2000, the Company restructured its preneed sales program to focus on increasing cash flow. For example, the Company increased finance charges, required larger down payments and shortened installment payment terms, and it decreased the overall level of preneed sales activities. The Company is also increasing cash flow and reducing its credit risk by encouraging families purchasing at-need merchandise and services to pay at the time of delivery or to use a third-party financing program the Company developed. In the past, the Company typically financed credit sales internally on a short-term basis. The Company also plans to continue its suspension of its dividend and to limit capital expenditures. The Company plans to continue to seek to reduce its costs by, among other things, obtaining volume discounts from suppliers, leveraging its operating costs through clustering and combination operations, and identifying facilities with overlapping market share and consolidating them as appropriate. As part of these efforts, the Company is incentivizing local managers to decrease costs by tying their compensation more closely to the profitability of the locations they manage. This strategy contributed to its increased cemetery margins for fiscal year 2001.

     Position for growth. In fiscal year 2002, the Company plans to position itself for business expansion in fiscal year 2003. The Company plans to explore several growth opportunities which will be funded with future free cash flow, including additional combination funeral homes, operating partnerships, alternative service firms and other freestanding funeral home businesses. In addition, the Company believes that, once its debt target of $500 million is achieved, it will be in a position to consider purchasing high-quality firms with free cash flow.

Operations

     General. The Company believes that it operates one or more of the premier death care facilities in each of its principal markets. In its view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a variety of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion.

     The Company operates most of its funeral homes and cemeteries in “clusters.” Clusters are groups of funeral homes and cemeteries located close enough to one another 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 its 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 one another, clustered facilities also create opportunities for more integrated and sophisticated management of their operations.

     Funeral operations. Funeral operations accounted for approximately 62 percent of the Company’s revenues for fiscal year 2001. Its funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. Its services and products include family consultation, removal and preparation of remains, the use

-7-

Table of Contents

of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of its funeral homes offer cremation products and services. Most of its funeral homes have a non-denominational chapel on the premises, which allows family visitation and religious services to take place at the same location. As of October 31, 2001, the Company operated 516 funeral homes.

     Cemetery operations. Cemetery operations accounted for approximately 38 percent of the Company’s revenues for fiscal year 2001. Its cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, markers and burial vaults, along with the sale of burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis. The Company also maintains cemetery grounds under perpetual care contracts and local laws. As of October 31, 2001, the Company owned and operated 159 cemeteries.

     Combination funeral home and cemetery operations. Approximately 47 percent of the Company’s cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which is a higher percentage of combination operations than any of its three largest competitors. Many of these facilities are in its key markets, including New Orleans, Louisiana; Dallas, Fort Worth and Houston, Texas; Miami, Orlando, Tampa and St. Petersburg, Florida; and Los Angeles and San Diego, California.

     Combination 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 preneed basis. Its experience demonstrates that a family planning a burial in the Company’s cemetery often views its associated funeral home as a more desirable location for a funeral service than an unaffiliated offsite funeral home. Thus, the funeral home’s sales benefit from the heritage of the cemetery, and, over time, the cemetery’s activity increases as well. In addition, combination operations enhance the Company’s purchasing power, enable it to employ more sophisticated management systems and allow it to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. Although it generally takes several years before a newly constructed funeral home becomes profitable, the Company’s experience with combination operations has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both.

     The Company has developed two primary internal growth strategies that employ the use of combination operations. One strategy is to create combination operations by constructing funeral homes on the grounds of its cemeteries. Another 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 many of the benefits of a combination operation without the capital investment of purchasing the cemetery. The Company’s partners benefit by being better able to compete with other cemeteries or combination operations in its market, by increased cemetery revenues, and by providing a better service to its parishioners or other constituencies.

     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 combination operation in New Orleans in fiscal year 1987. 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, in fiscal year 1994 the Company constructed a funeral home and mausoleum on the grounds of a cemetery owned by a third party in New Orleans. The Company owns and operates the funeral home in combination with the cemetery and manages sales for the mausoleum. In 1997, the Company entered into an agreement with the Archdiocese of Los Angeles to construct and operate funeral homes on land the Company leases from the Archdiocese at the site of nine cemeteries owned and operated by the Archdiocese. As of October 31, 2001, five of these funeral homes have been completed.

-8-

Table of Contents

     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 plans to pursue more of these partnerships with the Catholic Church, other faith-based organizations and non-profit entities. The Company also plans to develop additional combination operations on its own cemetery properties.

     Cremation. In fiscal year 2001, 38 percent of the funeral services the Company performed in the United States and Puerto Rico were cremations. The cremation rate in the United States has been increasing, and by the year 2010 cremations are expected to represent 40 percent of the United States burial market according to industry estimates. The Company has been addressing this trend by providing enhanced cremation products and services at all of its funeral homes, including funeral services and memorialization for families choosing cremation. An enhanced cremation may include a memorial service, an urn and a niche in a mausoleum or columbarium in which to place the remains.

     The Company is also addressing this trend through its alternative services firm strategy. Its alternative services locations offer an alternative to customers who are not interested in making arrangements at a traditional funeral home. These locations primarily offer value-priced cremation services and are located principally in California, Oregon and Nevada, states with among the highest cremation rates in the United States. Although these locations do not offer the lowest-cost basic cremations in their markets, the costs to the family for death care arrangements at these locations are typically less than at a traditional funeral home. These locations are generally leased, have lower overhead than traditional funeral homes and generate higher operating margins than traditional funeral homes, although the average revenue per service is lower.

     During fiscal year 1997, the Company acquired Sentinel Cremation Societies, Inc. of California which operated thirteen service centers offering cremations and related products and services. Members in the cremation society pay a small membership fee and indicate their wish to be cremated. During fiscal year 1998, the Company acquired Desert Memorial Cremation and Burial Society in Las Vegas, Nevada. During fiscal years 2000 and 2001, the Company opened several additional alternative service firms in the western United States. The Company currently operates 30 alternative service locations.

     Preneed arrangements. The Company markets death care products and services domestically on a preneed basis through a full-time staff of approximately 1,300 commissioned sales counselors. Preneed plans enable families to specify in advance and prepay for funeral and cemetery arrangements. The cost of products and services is set at prices prevailing at the time the agreement is signed rather than when the products and services are delivered. Preneed plans also spare families the emotional strain of making death care decisions at the time of need.

     The Company estimates that as of October 31, 2001, the future value of its domestic preneed backlog (including earnings on funds held in trust and build-up in the face value of insurance contracts, in each case at assumed rates) represented approximately $2.2 billion to $2.3 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

     Trust funds and escrow accounts. The Company maintains three types of trust funds and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) perpetual care. For further discussion of these trust funds and escrow accounts, see Notes 5, 6, and 7 to the consolidated financial statements and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” As of October 31, 2001, excluding assets held for sale, its preneed funeral merchandise and services trust funds and escrow accounts totaled approximately $439.2 million, its preneed cemetery merchandise and services trust funds and escrow accounts totaled approximately $180.3 million, and its perpetual care trust funds totaled approximately $195.0 million.

     The Company believes that balances in its 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 preneed services and products in the future.

-9-

Table of Contents

     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 provides investment advisory services exclusively to the Company. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

     As of October 31, 2001, ITI had approximately $947.2 million in assets under management. Lawrence B. Hawkins, an executive officer of the Company and a professional investment manager, serves as President of ITI. ITI operates with the assistance of third-party professional financial consultants pursuant to a formal investment policy established by the Investment Committee of the Company’s Board of Directors. The policy emphasizes conservation, diversification and preservation of principal while seeking appropriate levels of current income and capital appreciation.

     Management. The Company has an experienced management team, many of whom joined it through acquisitions. Its management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in deciding how their businesses will be managed and how their products and services will be priced and merchandised. At the same time, financial and strategic goals are established by management at the corporate level. The Company provides business support services primarily through its Shared Services Center, which opened in 1997 and provides centralized and standardized accounting, management reporting, payroll, contract processing, accounts receivable 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. Its remaining operation in Argentina is not considered a separate operating division but is managed by a local executive who reports to the Company’s executive officers. The Company also has a Corporate Division, which manages its corporate services, accounting and financial operations and strategic planning. Early in fiscal year 2000, the Company formed a Sales and Marketing Division to centralize responsibility for sales teams and to allow for more comprehensive training and sharing of information. From time to time, the Company may increase, reduce or realign its divisions and regions.

     Foreign operations. In fiscal year 2001, the Company began to sell its foreign operations as part of its strategy to reduce debt and focus on its core businesses. During fiscal year 2001, the Company sold its Mexican, Australian, New Zealand, Belgian and Dutch operations comprised of 94 funeral homes and 2 cemeteries. As of October 31, 2001, the Company owned and operated a total of 197 funeral homes and 8 cemeteries in Argentina, Canada, France, Portugal, and Spain; however, it signed a binding contract for the sale of its operations in Southern Europe (France, Portugal and Spain) subsequent to October 31, 2001 and expects to sell the remaining businesses in Argentina and Canada by the end of 2002. For fiscal year 2001, the Company’s revenues from foreign operations were $115.4 million, or 17 percent of its total revenues; its gross profit from foreign operations was $16.1 million, or 11 percent of its total gross profit; and its EBITDA from foreign operations was $28.9 million, or 13 percent of its total EBITDA.

     Financial information about industry and geographic segments. For financial information about the Company’s industry and geographic segments, see Note 20 to its consolidated financial statements for fiscal years 2001, 2000 and 1999 included in Item 8.

Competition

     The Company’s funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral home and cemetery firms. The Company also competes with monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of limited services or products. 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 of 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 sales of preneed funeral services. Traditional cemetery and funeral service operators face competition from the

-10-

Table of Contents

increasing number of cremations in the United States. Additional information about the trend towards cremation and the Company’s strategies to address this can be found above under the headings “The Death Care Industry” and “Business Strategy.”

Regulation

     The Company’s funeral home operations are regulated by the Federal Trade Commission (the “FTC”) under the FTC’s Trade Regulation Rule on Funeral Industry Practices, 16 CFR Part 453 (the “Funeral Rule”), which went into effect on April 30, 1984, and was revised effective July 19, 1994. The FTC is reviewing the Funeral Rule and has conducted hearings to receive input from industry and consumer groups. At this time, the FTC has not issued any proposed changes to the regulation.

     The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (1) misrepresenting legal, crematory and cemetery requirements; (2) embalming for a fee without permission; (3) requiring the purchase of a casket for direct cremation and (4) 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. For example, state laws impose licensing requirements for funeral homes and funeral directors and regulate preneed sales. The Company’s embalming facilities are subject to stringent environmental and health regulations. The Company has a department that monitors compliance and believes that it is in substantial compliance with the Funeral Rule and all such laws and regulations. Federal, state and local legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which 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 it.

Employees

     The Company and its subsidiaries employ approximately 8,100 persons, and the Company believes that it maintains a good relationship with its employees. Approximately 101 of its employees who are employed by its domestic operations and 338 of its employees who are employed by its foreign operations are represented by labor unions or collective bargaining units.

Item 2. Properties

     As of October 31, 2001, approximately 66 percent of the Company’s 516 funeral home locations were owned by its subsidiaries, and approximately 34 percent were held under operating leases. The leased properties have terms ranging from 1 to 18 years, except for nine leases that expire between 2032 and 2072. Generally, the Company has a right of first refusal and an option to purchase the leased premises. An aggregate of $9.7 million of its term notes are secured by mortgages on some of its funeral homes; these notes were either assumed by the Company upon its acquisition of the property or represent seller financing for the acquired property.

     As of October 31, 2001, the Company owned 159 cemeteries covering a total of approximately 10,763 acres. Approximately 40 percent of the total acreage is available for future development.

     The Company’s corporate headquarters occupy approximately 21,500 square feet of leased office space in a building in suburban New Orleans. In addition, the Company owns a 97,300 square foot building in suburban New Orleans that it uses for its Shared Services Center, Human Resources, Communications, Internal Audit and Information Systems Departments.

-11-

Table of Contents

     During fiscal year 2001, the Company sold some excess cemetery property and underperforming assets. The Company also pursued the sale of its foreign operations. As of October 31, 2001, the Company had sold its operations in Mexico, Australia, New Zealand, Belgium and the Netherlands. See the section above entitled “Operations — Foreign Operations.”

Item 3. Legal Proceedings

     The Company and some of its subsidiaries are parties to a number of legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, the Company does not expect these matters to have a material adverse effect on its consolidated financial position, results of operations or cash flows.

     The Company carries insurance with coverages and coverage limits that it believes to be adequate. Although the Company gives no assurance that this insurance is sufficient to protect it against all contingencies, the Company believes that its insurance protection is reasonable in view of the nature and scope of its 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. Each of the following has served the Company in the capacity indicated for more than five years, except as indicated below.

-12-

Table of Contents

(4)		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.
(5)		Mr. Crane has served as Senior Vice President and President of the Company’s Central Division since May 11, 2000. Prior to that time, he served as Chief Operating Officer of the Southern Region of the Company’s Central Division since June 15, 1995.
(6)		Mr. Stephens has served as Senior Vice President and President of the Company’s Eastern Division since January 31, 2000. From January 1, 1997 to January 30, 2000, he served as Chief Operating Officer of the Southern Region of the Company’s Eastern Division. From October 21, 1993 to December 31, 1996, he served as the Vice President of Cemetery Operations for the Southern Region of the Company’s Eastern Division.
(7)		Mr. Stricklin has served as Senior Vice President and President of the Company’s Western Division since April 20, 2000. From August 10, 1999 to April 19, 2000, he served as Chief Operating Officer of the Southern Region of the Company’s Western Division. From November 1, 1998 to August 9, 1999, he served as Chief Operating Officer of the Catholic Mortuaries. From February 5, 1997 to October 31, 1998, he served as Vice President of Management Support and Training. Prior to that time, he served as President of his three Stricklin/Snively Mortuaries and Cremation Society of America, which were acquired by the Company in February 1997.
(8)		Mr. Kendrick has served as Senior Vice President and President of the Company’s Sales and Marketing Division since January 31, 2000. From December 1, 1996 to January 30, 2000, he served as Chief Operating Officer of the Northern Region of the Company’s Eastern Division. Prior to that time, he served as Vice President of Sales and Marketing for the Northern Region of the Company’s Eastern Division since January 1993.

-13-

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

Market Information

     The Company’s Class A common stock trades on the Nasdaq National Market under the symbol STEI. On January 16, 2002, the closing sale price as reported by the Nasdaq National Market was $6.25. The following table sets forth, for the periods indicated, the range of high and low sale prices, as reported by the Nasdaq National Market. As of January 8, 2002, there were 1,465 record holders of the Company’s Class A common stock. Record holders included persons holding Class A common stock on behalf of one or more beneficial owners who are not holders of record.

Dividends

     The Company declared quarterly dividends of $.02 per share on its Class A and Class B common stock during the first three quarters of fiscal year 2000. On October 5, 2000, the Company’s Board of Directors suspended the payment of quarterly dividends on its Class A and Class B common stock. The declaration and payment of dividends in the future is at the discretion of the Company’s Board of Directors and will depend upon the Company’s results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board. The Company’s credit agreement and senior subordinated notes restrict the Company’s ability to pay dividends on its common stock. See Note 14 to the consolidated financial statements included in this report.

Sales of Unregistered Equity Securities

     During fiscal year 2001, 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, 1997 through 2001 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 included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

-14-

Table of Contents

Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)