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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
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Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the fiscal year ended October 31, 2009
OR
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 1-15449
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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LOUISIANA
(State or other jurisdiction of incorporation or organization)
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72-0693290
(I.R.S. Employer Identification No.) |
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1333 South Clearview Parkway
Jefferson, Louisiana
(Address of principal executive offices)
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70121
(Zip Code) |
Registrants telephone number, including area code: (504) 729-1400
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of each Class
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Name of each Exchange on which registered |
Class A Common Stock, No Par Value
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The NASDAQ Stock Market LLC |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in
Rule 405 of the Securities Act. Yes o No þ
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
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 þ No o
Indicate by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be submitted and posted
pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period
that the registrant was required to submit and post such files). Yes o No o
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 registrants 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. þ
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated
filer, a non-accelerated filer or a smaller reporting company. See the definitions of large
accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the
Exchange Act.
Large accelerated filer o |
Accelerated filer þ |
Non-accelerated filer o (Do not check if a smaller reporting company) |
Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting and non-voting common equity held by non-affiliates
of the registrant as of April 30, 2009, was approximately $281,000,000.
The number of shares of the registrants Class A common stock, no par value per share, and
Class B common stock, no par value per share, outstanding as of November 30, 2009, was 89,223,486
and 3,555,020, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement in connection with the 2010 annual meeting of shareholders are incorporated in Part III of this Report.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
Index
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Cautionary Note
This annual report contains forward-looking statements that are generally identifiable through
the use of words such as believe, expect, intend, plan, estimate, anticipate,
project, will and similar expressions. These forward-looking statements rely on assumptions,
estimates and predictions that could be inaccurate and that are subject to risks and uncertainties
that could cause actual results to differ materially. Important factors that may cause our actual
results to differ materially from expectations reflected in our forward-looking statements include
those described in Item 1A. Risk Factors. Forward-looking statements speak only as of the date
of this report, and we undertake no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur.
PART I
Item 1. Business
Operations
Founded in 1910, Stewart Enterprises, Inc. (the Company) is the second largest provider of
funeral and cemetery products and services in the death care industry in the United States.
Through our subsidiaries, we provide 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, 2009, our operations included 218 funeral homes and 140 cemeteries in 24 states
within the United States and in Puerto Rico.
General. We believe that we operate one or more of the premier death care facilities in each
of our principal markets, which are primarily in larger metropolitan areas in the Southern,
Western, Mid-Atlantic and Mid-Western states. In our view, a premier facility is one that is
among the most highly regarded facilities in its market area in terms of a number of factors such
as tradition, heritage, reputation, physical size, volume of business, available inventory, name
recognition, aesthetics and/or potential for development or expansion. While funeral homes and
cemeteries in the United States perform an average of approximately 110 funerals and 150 burials
per year, our facilities perform an average of approximately 265 funerals and 320 burials per year.
In addition, approximately 41 percent of our properties are located in California, Florida and
Texas, which are three of the four states with the highest populations over age 65, an age group
that represents a large portion of our target market.
We operate most of our 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 merchandise and, most significantly, personnel, including
prearrangement sales personnel; thus, we are able to reduce our costs and expand our sales and
marketing effectiveness at each location. By virtue of their proximity to one another, clustered
facilities also create opportunities for more integrated and sophisticated management of
operations.
Funeral operations. Our funeral homes offer a complete range of funeral services and products
both at the time of need and on a preneed basis. Our 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 our funeral homes offer cremation products and
services. Most of our funeral homes have a non-denominational chapel on the premises, which allows
family visitation and religious services to take place at the same location. We also earn
commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life
insurance or annuity contracts issued by third party insurers when we act as an agent on the sale
of the policies. Funeral operations accounted for 57 percent of our revenues for fiscal year 2009.
Cemetery operations. Our cemetery operations sell cemetery property and related merchandise,
including lots, lawn crypts, family and community mausoleums, monuments, markers and burial vaults,
and also provide burial site openings and closings and inscriptions. We also provide cremation
memorialization options including columbariums, cremation niches and cremation gardens. Cemetery
property and merchandise sales are made both at the time of need and on a preneed basis. We also
maintain cemetery grounds under cemetery perpetual care
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contracts and local laws. Cemetery operations accounted for approximately 43 percent of our
revenues for fiscal year 2009, which is a significantly larger percentage than either of our two
largest competitors. We believe this is a competitive advantage because families generally return
to the same cemetery for multiple generations to bury family members, and the barriers to entry for
cemeteries are significant. Cemetery property often becomes an important part of a familys
heritage, and family members who relocate are often returned to their home cemetery to be buried.
We build on our relationships with our cemetery customers by offering additional cemetery property
to related family members and by offering related products and services such as cemetery
merchandise and funeral services at one of our funeral homes located on the cemetery grounds or
nearby. Approximately 38 percent of our total cemetery acreage is available for future
development.
Combination funeral home and cemetery operations. Approximately 46 percent of our cemeteries
have a funeral home onsite that is operated in conjunction with the cemetery, which we refer to as
a combination operation. We believe combination operations represent a competitive advantage
because they offer families the convenience of complete death care services at a single location.
A family that is planning a burial in one of our cemeteries often perceives our onsite funeral home
to be a more desirable location for funeral services than an unaffiliated offsite funeral home
nearby. Thus, the call volume of the funeral home is enhanced by the heritage of the cemetery,
and, over time, the volume of cemetery events increases as well. In addition, combination
operations enhance our purchasing power, enable us to employ more sophisticated management systems
and allow us to share facilities, equipment and personnel, including a preneed sales force,
resulting in lower average operating costs and expanded marketing and sales opportunities. As a
result, our combination operations usually generate higher operating margins compared to our
stand-alone funeral homes and cemeteries. In addition to our combination operations, approximately
38 percent of our cemeteries are located within the same market as, and operated in conjunction
with, one or more of our nearby funeral homes.
Third-party affiliations. We have entered into various agreements with faith-based
organizations, other non-profit entities and municipalities and plan to pursue more of these types
of affiliations. In 1987, we entered into an agreement with the Catholic Archdiocese of New
Orleans pursuant to which we constructed and own a mausoleum on one of our cemeteries, and the
Archdiocese of New Orleans assists in the promotion of the sale of crypts in the mausoleum to
Catholic parishioners of the Archdiocese of New Orleans. The Company pays the Archdiocese of New
Orleans a percentage of the revenue from the sale of all crypts in the mausoleum. Additionally, in
fiscal year 1994, we constructed a funeral home and mausoleum on the grounds of the New Orleans
Cemetery of the Firemens Charitable and Benevolent Association, a non-profit organization. We own
and operate the funeral home and mausoleum.
In 1997, we entered into lease agreements with the Archdiocese of Los Angeles whereby we have
the right to construct and operate funeral homes on the sites of up to nine cemeteries owned and
operated by the Archdiocese. As of October 31, 2009, six of these funeral homes were operating.
The leases expire in 2039, and we do not have an option to renew. We account for these leases as
operating leases. In October 2007, we further expanded our relationship with the Archdiocese of
Los Angeles and entered into a contract to manage the preneed sales at eleven of the Archdiocese of
Los Angeles cemeteries.
During fiscal year 2009, we entered into a new third-party agreement and 30 year lease, with
no option to renew, with a municipality in Texas where we constructed and operate a funeral home on
the municipally-owned cemetery. This agreement and the other third-party agreements provide us
with many of the benefits of a combination operation without the capital outlay and business risks
associated with purchasing or developing a new cemetery.
We have a mausoleum construction and sales business, Acme Mausoleum Corporation (ACME),
which constructs community mausoleums on third-party cemetery property and assists in the selling
efforts for these crypts, primarily in Louisiana and Texas. In return for these services, ACME
receives construction revenue and a sales commission for the crypts sold. Over the last 50 years,
ACME has developed relationships with the Catholic Church in approximately 70 dioceses in 39
states.
Preneed arrangements. We believe that we are distinguished from our competitors by our 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. Some of these preneed
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sales are funded by insurance arrangements and some by trust and escrow accounts. We market
our preneed properties, services and products domestically through a full-time staff of
approximately 1,100 commissioned sales counselors. We estimate that as of October 31, 2009 and
October 31, 2008, the future value of our preneed backlog of funeral and cemetery products and
services (including estimated future earnings on funds held in trust and build-up in the face value
of third-party insurance contracts, in each case using a weighted annual projected return of 4.3
percent and 5.0 percent from our trusts for fiscal years 2009 and 2008, respectively, and a 2.0
percent build-up from the insurance contracts for fiscal years 2009 and 2008) represented
approximately $1.7 billion of revenue to be recognized in the future as these prepaid products and
services are delivered. Our methods for calculating the future value of our preneed backlog are
discussed in Managements Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7. Our expertise in preneed sales has historically developed out of,
and now complements, our 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. We build on our relationships with our preneed cemetery property customers by
offering them additional preneed products and services such as cemetery merchandise and funeral
services. Our focus on preneed cemetery property sales is also important because these sales
generate current revenues and higher current cash flows than other types of preneed sales.
Trusts and escrow accounts. Because preneed services or merchandise will not be provided until
the future, most states require that all or a portion of the customer payments under preneed
contracts be placed into trust accounts. Generally, the earnings on and principal of the amounts
placed in trust are not withdrawn until the underlying service or merchandise is delivered. In
addition, pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent,
of the proceeds from cemetery property sales (interment rights) is deposited into perpetual care
trusts. The income from these trusts is used to defray the cost of maintenance of those
cemeteries, but principal, including in some jurisdictions net realized capital gains, must
generally be held in perpetuity. Accordingly, we maintain three types of trusts and escrow
accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and
services and (3) cemetery perpetual care. Differing state laws govern preneed sales, including
matters such as required deposits, permitted withdrawals and customers rights regarding contract
cancellation, and generally require prudent investment of fund assets. Because of our focus on
preneed sales and related trusting activities that accompany selling preneed, our business is
impacted by changes in financial markets. For a discussion of the impact of recent financial
market conditions on our trusts and related financial results, see Item 1A. Risk Factors. In
addition, see Notes 4, 5 and 6 to the consolidated financial statements included in Item 8 and
Managements Discussion and Analysis of Financial Condition and Results of Operations included in
Item 7.
Notwithstanding the decline in the value of our trust portfolio during fiscal year 2008 and
the first quarter of fiscal year 2009, we believe that the balances in our trusts and escrow
accounts, along with expected future earnings on the balances, insurance proceeds and installment
payments under contracts will be sufficient to cover our estimated cost of providing the related
preneed services and products in the future. For additional information, see Item 1A. Risk
Factors and Item 7. Managements Discussion and Analysis of Financial Condition and Results of
Operations.
Generally, our wholly-owned subsidiary, Investors Trust, Inc. (ITI), a Texas corporation
with trust powers, serves as investment advisor for our investment portfolio and for our preneed
funeral and cemetery merchandise and services trust and escrow accounts and our cemetery perpetual
care trusts and escrow accounts. ITI provides investment advisory services for a fee based on the
market value of the assets in the trust. Under state trust laws, we are allowed to charge the
trusts a fee for managing the investment of the trust assets. We have elected to perform these
services in-house, and the fees are recognized as income as the services are performed. For
additional information, see Note 21 to the consolidated financial statements included in Item 8.
ITI is registered with the Securities and Exchange Commission (SEC) under the Investment Advisers
Act of 1940. As of October 31, 2009, ITI managed assets with a market value of approximately
$710.4 million. Lawrence B. Hawkins, one of our executive officers and a professional investment
manager, serves as President of ITI. The Investment Committee of our Board of Directors has
adopted an investment policy statement that provides guidance on security selection, emphasizes
diversification and balances long-term growth objectives with the need for current income. The
long-term objectives are to preserve principal while seeking appropriate levels of current income
and capital appreciation in order to provide returns that match or exceed inflation. For
additional information, see Managements Discussion and Analysis of Financial Condition and
Results of Operations in Item 7.
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Personalization. Our market research indicates that consumer preferences are shifting
towards more personalized memorial services and merchandise for traditional burials as well as
cremations. In response to these changing preferences, we trained our funeral arrangers and sales
counselors company-wide to be more proficient in their ability to offer our customers a broad range
of options, stressing our ability to design a personalized service that reflects the special
interests and accomplishments of the deceased. We also changed the way our product offerings are
displayed at our locations, making it easier for our customers to appreciate the many options
available to them. We implemented this custom funeral planning program in all of our funeral homes
and have begun the process of refreshing the training in order to keep our professionals up-to-date
on our wider selection of merchandise and services. We hope through this program to provide
greater value to our families, leading to higher revenue per event and improved customer
satisfaction.
Enhanced cremation offerings. A significant trend in the United States is an increasing
preference of consumers for cremation. In fiscal years 2009, 2008 and 2007, 41 percent, 40 percent
and 39 percent, respectively, of the funeral services we performed in our operations were
cremations. According to industry estimates, 35 percent of funeral services in the United States
during 2007 resulted in cremations, and cremations are expected to represent 46 percent of funeral
services in the United States by the year 2015. All of our funeral homes offer cremation products
and services. While the average revenue for a cremation service is generally lower than that of a
traditional full-service funeral, we have found that these revenues can be substantially enhanced
by our emphasis on customization. For example, in addition to a personalized memorial service to
celebrate the life of the deceased, an enhanced cremation may include a casket, an urn and a niche
in a mausoleum or columbarium in which to place the remains. We continue to market our products
and services to address the rising demand for cremations. In late fiscal year 2009, we hired a
vice president of cremation and in early fiscal year 2010, we hired a senior vice president of
cremation, both with extensive industry and cremation experience, to support our current operations
and sales teams in growing cremation revenue and profits. We hope to improve our ability to
satisfy the needs of those interested in cremation, for example by making them aware of
memorialization options in our cremation gardens and columbariums.
We have 23 alternative service firms, generally located on the West Coast, that serve
primarily cremation customers. These firms are generally located in leased premises and have lower
overhead than traditional funeral homes. These firms primarily offer direct cremations with
limited additional products and services. Although death care arrangements at these locations are
typically less expensive than services at a traditional funeral home, it is not our goal to be the
low-price leader in these markets.
E-commerce. We have also begun using the Internet to create new sales channels and new
consumer relationships. While we did not earn significant revenue from this activity in 2009, we
anticipate that our revenue and profits from this activity will increase. During fiscal year 2009,
we improved the internet websites of our funeral home and cemetery locations. Many people access
our websites to obtain information about services for a deceased relative or friend, and often read
an obituary or sign a guest book. We have added to our websites products and services that can be
purchased to support the family of the deceased, including sending meals and flowers, making
personal photobooks, and creating permanent online memorials. Visitors to the websites can also
make travel arrangements online and buy books on grief management and related topics. We earn a
commission from third-party vendors for any sales made on our websites.
Management. We have an experienced management team. Many of our regional managers owned and
operated their own funeral homes and cemeteries and joined us when we acquired their business. In
addition, we have a senior management team with experience both in the industry and outside of the
industry, which we believe allows us to introduce innovations effectively and improve the
efficiencies of our existing businesses.
Centralized support services. Our shared services center, which we opened in 1997, was
developed for the standardization and centralization of all of our facilities administrative and
support processes such as accounting, management reporting, payroll, trust administration, contract
processing, accounts payable processing, accounts receivable collection and other services. It
allows us to decrease our costs without diminishing service by creating significant savings on
items such as trust administration fees, travel expenses, office supplies, overnight delivery and
long distance telephone services.
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Continuous improvement. We have taken steps over the last four years to improve our
purchasing and processing efficiencies. For example in 2005, we had four geographic operating
divisions, including four division presidents, four divisional chief financial officers and four
divisional offices. In 2006, we instituted a companywide centralized purchasing department to
leverage our size and negotiate more favorable supplier and vendor contracts. During 2007, we
implemented a new companywide financial software system and in 2008 a new payroll system. In 2009,
we eliminated our separate geographic operating divisions. We implemented a companywide image
scanning system, and a new contract processing industry-specific software system, that will serve
as a platform for a new point of sale system to be implemented in fiscal years 2010 and 2011. Also
in fiscal year 2009, we piloted a new supplier invoice processing system that will improve the way
we route, code and approve invoices for payment. Full implementation companywide is expected in
fiscal year 2010. During 2008, we established a Continuous Improvement department to work solely
on these efforts. We expect that these new systems and processes will improve productivity over
time, and, as we look at our opportunities for growth, we expect to leverage the efficiencies that
we have achieved.
Financial information about industry and geographic segments. For financial information about
our industry segments for fiscal years 2009, 2008 and 2007, see Note 21 to our consolidated
financial statements included in Item 8.
Business Strategy
Our business strategy aims to improve our revenues, profitability and cash flow by
implementing our long-term strategic plan, which has three components: our Best in Class
initiative, our New Invention initiative and our Acquisition initiative. We also aim to
improve our operating efficiencies, increase our cremation revenues and effectively deploy our cash
flow.
Improve rooftop performance through our Best in Class initiative. During fiscal year 2009,
we completed the initial implementation of the Best in Class component of our strategic plan.
The initiative is designed to improve the performance of all of our rooftop locations, by
repositioning us from more decentralized practices to more standardized Best in Class practices.
We have given all managers the same key metrics by which they can measure their performance, and
have provided tools to facilitate the sharing of best practices by key metrics across the
organization. For example, one of the key metrics is the change in the number of funeral calls.
If funeral calls are below expectations at a particular location, our program provides suggestions
taken from our best performing locations that the manager can use to help grow funeral calls. We
are also looking at locations that are not producing acceptable levels of profitability to
determine if changes can be made to achieve Best in Class results or if divestiture is the more
prudent option.
Introduce new related revenue sources through our New Invention initiative. The New
Invention component of our strategic plan seeks to generate new tangential growth opportunities
not tied to the growth of our base business. An example of our progress with this initiative is
our investment, along with other industry participants, in an internet start-up company called
Tributes.com. Tributes.com offers consumers a means to create meaningful and lasting remembrances
that either complement or substitute for traditional newspaper obituary notices. Previously, our
locations incurred labor costs for preparing obituary notices, but did not receive any compensation
from the publications that receive a fee for publishing the notice. Tributes.com is intended to
allow us to capture market share in the existing obituary notice revenue stream in each of the
communities in which we operate, and to increase that revenue stream by offering additional
memorialization options. While Tributes, Inc. is still a start-up company, we believe it will have
significant benefits to both our company and the industry. Additionally, during fiscal year 2009,
we began using the websites of our businesses to create new sales channels. For additional
information, see OperationsE-Commerce.
Acquire businesses through our Acquisition initiative. The Acquisition component of our
strategic plan is to acquire businesses and implement our Best in Class practices in them. Our
Acquisition initiative is ongoing. During fiscal year 2009, we acquired one business for $1.6
million. Now that our Best in Class initiative has been implemented, we plan to focus more
attention on this initiative in fiscal year 2010 and beyond. We will evaluate acquisition
opportunities that make sense for our business strategy at prices we believe will result in
satisfactory returns to our shareholders.
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Improve operating efficiencies. During 2008, we established a Continuous Improvement
department to coordinate our increased focus on improving our processes. This effort aims to
eliminate waste and inefficiency, produce more timely and accurate information for management, and
improve productivity over time. For examples of improvements in our operating efficiencies, see
Operations Continuous improvement.
Increase cremation revenues. We are focused intently on improving our revenues from cremation
customers. We have hired new management devoted solely to this effort and intend to continue to
devote significant management resources to it. For additional information, see Operations
Enhanced cremation offerings.
Deploy cash flow to improve shareholder returns. During the last five fiscal years, we have
generated more than $50 million each year in cash flow from operations. As an indication of our
boards confidence in our companys solid balance sheet and ability to continue to generate cash
flow, in September 2009 our board increased our annual cash dividend by 20 percent to $0.12 per
share. During fiscal year 2009, we repurchased $82.6 million principal amount of our outstanding
senior convertible notes at a significant discount to their par value. In addition to investing in
the initiatives discussed above in this section, during fiscal year 2009 we constructed and are
operating a funeral home on a municipally-owned cemetery in Texas, and we constructed a new
stand-alone funeral home. During fiscal year 2010, we plan to construct one additional stand-alone
funeral home and one funeral home which is part of a combination operation. We will continue to
evaluate the use of our cash to pay dividends, repurchase debt and stock, invest in our strategic
initiatives, construct funeral homes on cemeteries of unaffiliated third parties or in strategic
locations and make acquisitions of or investments in death care or related business, with a view
towards choosing the best opportunities to enhance long-term shareholder returns.
The Death Care Industry
Industry consolidation. 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 decade of the 1990s witnessed a trend of family-owned firms consolidating with
larger organizations, but this trend slowed dramatically in 1999. As the number of consolidators
participating in the acquisition market declined, 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. Our industry continues to be
characterized by a large number of locally-owned, independent operations, with approximately 80
percent of industry revenue being generated by independently-owned operations. We estimate that
our industry, which consists of approximately 22,000 funeral homes and 10,500 cemeteries in the
United States, collectively generates approximately $15 billion in annual revenue.
Large public death care companies have also experienced consolidation. Equity Corporation
International, previously the fourth largest public death care company, merged with Service
Corporation International (SCI) in 1999. Also in 1999, The Loewen Group, Inc., at the time the
second largest death care company, entered into bankruptcy proceedings. Loewen emerged from
bankruptcy as Alderwoods Group, Inc. in 2002 and was subsequently acquired by SCI in November 2006.
In October 2009, SCI announced that it had entered into an agreement to acquire Keystone North
America, Inc., the fifth largest death care company in North America.
During the 1990s, we grew rapidly primarily through acquisitions of funeral homes and
cemeteries both domestically and abroad, financed by new equity and debt. We ceased our
acquisition activity in 1999 and developed strategies for improving our cash flow and
reducing/restructuring debt. During fiscal year 2000 through fiscal year 2003, we completed our
transitional strategies of improving our cash flow, restructuring and reducing our debt and selling
our foreign assets. During fiscal years 2004 through 2007, we sold underperforming assets,
refinanced and further reduced our debt and implemented new strategies to improve operations.
During fiscal years 2008 and 2009, we focused on our new long-term strategic plan and on
implementing new systems to further improve operations. We believe, at the appropriate pricing,
that growing our organization through acquisitions can again be a good business strategy, as it
will enable us to enjoy the important synergies and economies of scale from our existing
infrastructure.
Importance of tradition; barriers to entry. We believe it is difficult for new competitors to
enter existing markets successfully by opening new cemeteries. The barriers to entry are lower in
the funeral business. Entry into the cemetery market can be difficult due to several factors.
Because families tend to return to the same cemetery for
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multiple generations to bury family members, it is difficult for new cemeteries to attract
families. Additionally, mature markets, including many of the metropolitan areas where our
cemeteries are located, are often served by an adequate number of existing cemeteries with
sufficient land for additional plots, whereas land for new cemetery development is often scarce and
expensive. Regulatory complexities and zoning restrictions also make entry into the cemetery
market difficult. Finally, development of a new cemetery usually requires a significant capital
investment that takes several years to produce a return.
Continuing need for products and services; increasing number of deaths. There is an
inevitable need for our products and services. Although the number of deaths in the United States
will reflect short-term fluctuations, deaths in the United States are expected to increase at a
steady, moderate pace over the long-term. 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 2007 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 76.8 million in 2000 to 118.1 million in 2020. We believe the aging of the population is
particularly important because it expands our target market for preneed sales, as persons over the
age of 50 are the most likely group to make preneed funeral and cemetery arrangements.
Growing demand for cremation. A significant trend in the United States is an increasing
preference of consumers for cremations. The trend toward cremations has been a significant concern
for traditional funeral home and cemetery operators because cremations have typically included few,
if any, additional products or services other than the cremation itself. We are focused intently
on improving our revenues from cremations. We have hired new management devoted solely to this
effort and intend to continue to devote significant management resources to it. For additional
information, including information about our strategies to address this trend, see
OperationsEnhanced cremation offerings above.
Competition
Our funeral home and cemetery operations generally face intense competition in local markets
that typically are served by numerous funeral home and cemetery firms. We also compete with
monument dealers, casket retailers, low-cost funeral providers and crematories, and other
non-traditional providers of limited services or products. Discount retailers have begun marketing
caskets at prices that are sometimes substantially lower than what we offer. Consumers also can now
buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet.
Market share for funeral services and cemetery property is largely a function of goodwill, family
heritage and tradition, although competitive pricing, professional service and attractive,
well-maintained and conveniently located facilities are also important. Market share for funeral
and cemetery merchandise is largely a function of price. Extensive marketing through media
advertising, direct mailings and personal sales calls has increased in recent years, especially
with respect to the sale of preneed funeral services.
Regulation
Our funeral home operations are regulated by the Federal Trade Commission (the FTC) under
the FTCs 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
began reviewing the Funeral Rule in 1999 at which time it conducted hearings to receive input from
industry and consumer groups. The FTC has concluded its review and determined that no revisions to
the existing regulation are required.
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. On September 29, 2009,
Representative Bobby L. Rush (D.-Ill.) introduced H.R. 3655 to direct the FTC to draft regulations
to extend the Funeral Rule to cemeteries, crematories and sellers of caskets and other funeral
merchandise and to require certain
disclosures with respect to preneed sales of funeral services or funeral goods. The bill has
been referred to the Committee on Energy and Commerce.
9
Our 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 including our
preneed trust activities. Our embalming facilities are subject to stringent environmental and
health regulations. We have a department that monitors compliance, and we believe that we are 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 our operations and on the death care industry in general.
We cannot predict the outcome of any proposed legislation or regulation or the effect that any such
legislation or regulation might have on us.
Employees
As of October 31, 2009, we employed approximately 5,400 persons (including approximately 4,100
full-time employees), and we believe that we maintain a good relationship with our employees.
Approximately 140 of our employees are represented by labor unions or collective bargaining units.
Additional Information
Our business was incorporated as a Louisiana corporation in 1970. Our principal executive
offices are located at 1333 South Clearview Parkway, Jefferson, Louisiana 70121, and our telephone
number is 504-729-1400. Our website address is www.stewartenterprises.com, where all of our public
filings are available free of charge on the same day they are filed with the SEC. Information on
our website is not part of this report. The SEC also maintains an internet site that contains
reports, proxy and information statements, and other information regarding issuers that file
electronically with the SEC. The SECs website address is www.sec.gov.
Item 1A. Risk Factors
Cautionary Statements
Our business is subject to significant risks. We caution readers that the following important
factors, among others, in some cases have affected, and in the future, could affect, our actual
consolidated results and could cause our actual consolidated results in the future to differ
materially from the goals and expectations expressed in the forward-looking statements in this
report and in any other forward-looking statements made by us or on our behalf.
Risks Related to our Business
Our earnings from our trusts can be reduced by declines in stock and bond prices and interest and
dividend rates, which can have a significant adverse effect on our gross profit, net earnings and
cash flows.
Because of our preneed sales activities and the related state trusting requirements that
accompany preneed sales, our business is impacted by changes in financial markets. We maintain
three types of trusts: (1) preneed funeral merchandise and services, (2) preneed cemetery
merchandise and services and (3) cemetery perpetual care. Our trust assets are generally invested
in a mix of equity and fixed-income securities, and dividend and interest earnings and investment
gains and losses are affected by financial market conditions that are not within our control.
Generally, declines in market performance reduce the earnings in our trusts and reduce our earnings
and cash flow. In addition, any significant or sustained investment losses could result in there
being insufficient funds in the trusts to cover the cost of delivering services and merchandise in
the future and result in there being less funds available to defray the costs of cemetery
maintenance. Any such deficiency would have to be covered by operating cash flow, which could have
a material adverse effect on our financial position and results of operations. In addition, our
subsidiary ITI earns trust management fees based on the fair market value of the trusts managed;
therefore, declines in the fair market value of the assets in the trusts decrease the amount of
fees we collect and record for trust management.
10
In fiscal years 2009, 2008 and 2007, cemetery perpetual care trust earnings, funeral and
cemetery merchandise and services trust earnings and ITI trust management fees comprised 6 percent,
7 percent and 7 percent of our revenue, respectively, and 31 percent, 36 percent and 33 percent of
our gross profit, for each respective year. During fiscal year 2008 and the first quarter of fiscal
year 2009, we experienced significant declines in the market value of our trust portfolio, in line
with overall market declines during that time period. During fiscal year 2009, our preneed funeral
and cemetery merchandise and services trusts experienced a total return of 15.4 percent, and our
cemetery perpetual care trust experienced a total return of 19.9 percent. However, these improved
returns did not restore all of the market value lost during fiscal year 2008. Declines in our
perpetual care trust earnings and in revenue for fees we earn for managing our trusts impact
current revenue, while earnings on preneed funeral merchandise and services and preneed cemetery
merchandise and services are allocated to the underlying contracts and recognized as revenue when
the underlying products or services are delivered. During fiscal year 2009, we recognized
approximately $8.8 million less in revenue than we did in fiscal year 2008 from trust-related
activities, or $29.3 million in fiscal year 2009 compared to $38.1 million in fiscal year 2008.
Based on current market conditions and realized losses as of October 31, 2009, we believe the
revenue from trust earnings recognized on delivery of preneed services and merchandise, cemetery
perpetual care earnings and trust management fees for fiscal year 2010 would be about the same as
for fiscal year 2009. If market conditions further deteriorate or we experience additional
realized losses, trust-related revenue would likely decrease. The preneed contracts we manage are
long-term in nature, and we believe the trust investments will appreciate in value over the
long-term. However, whether they will appreciate and over what time period are unknown.
Additional information regarding our trusts and related risks are described in the risk factors
that follow.
Earnings in preneed funeral and cemetery merchandise and services trusts may be reduced by declines
in stock and bond prices and will be reduced by declines in interest and dividend rates, resulting
in lower future revenues and cash flows, and potential contract impairment charges.
Declines in earnings in our preneed funeral and cemetery merchandise and services trusts can
cause a decline in our reported future revenues and cash flows. With respect to these trusts, we
defer recognition and generally withdrawal of dividends, interest income and realized earnings
until the underlying product or service is delivered. Realized gains and losses generally have no
immediate impact on our revenues, margins, earnings or cash flow, except to the extent there are
tax consequences as described later in these risk factors. Dividends, interest income and realized
gains and losses are allocated to the underlying contracts and will affect the amount of future
revenue recognized, and cash withdrawn, at the time the specific contract is performed. In our
preneed funeral and cemetery merchandise and services trusts, at October 31, 2009, the fair market
value of the investments in the trusts of $520.9 million was $192.9 million lower than our original
cost basis of $713.8 million. Unrealized gains and losses are not allocated to individual
contracts; however, as gains and losses are realized, they are allocated to the underlying
contracts and will affect the amount of earnings we recognize and cash we withdraw at the time the
contracts are ultimately performed. As of October 31, 2009, we had $220.7 million in earnings that
have been realized and allocated to contracts that we will recognize in the future when the
underlying contracts are performed. Therefore, significant unrealized losses in these trusts, if
they do not recover over time, can limit future earnings available to us. For fiscal years 2009
and 2008, funeral trust earnings included in our reported revenue amounted to $11.3 million and
$13.2 million, respectively, and cemetery merchandise and service trust earnings amounted to $3.2
million and $4.2 million, respectively.
If the fair market value of these trusts were to decline below the estimated costs to deliver
the underlying products and services, we would record a charge to earnings to record a liability
for the expected losses on the delivery of the associated contract. As of October 31, 2009, no
such charge was required. For additional information, see Note 2(m) to the consolidated financial
statements included in Item 8.
Realized capital losses in preneed funeral and cemetery merchandise and services trusts for which
we are the grantor, if we have or expect insufficient offsetting capital gains, can cause increases
in our current period effective tax rate and a reduction of our current period reported net
earnings and a reduction in operating cash flows in future periods.
Approximately one-half of the October 31, 2009 fair market value of our preneed funeral and
cemetery merchandise and services trusts are trusts for which we are the grantor. For these trusts
(unlike the remaining trusts for which the customers are the grantors), we retain the income tax
characteristics of all earnings as realized in the
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trust. For example, capital gains and losses in the trusts are capital gains and losses on
our tax returns. In addition, we must recognize these earnings currently for tax purposes, while
for book purposes they are deferred until the contract is performed. For fiscal years 2009 and
2008, the trusts for which we are the grantor realized net losses of $5.1 million and $23.5
million, respectively.
Realized capital losses in the trusts for which we are the grantor, if we have or expect
insufficient offsetting capital gains, can require us to record a valuation allowance against the
related deferred tax asset (capital loss carryforward), which increases our current period
effective tax rate and reduces our current period reported net earnings. During fiscal year 2008,
we recorded a tax valuation allowance of $7.4 million related to capital losses realized in our
preneed funeral and cemetery merchandise and services trusts for which we are the grantor for tax
purposes. We recorded an additional $0.4 million tax valuation allowance in fiscal year 2009.
Essentially, the current period valuation allowance reflects the fact that, if we cannot generate
capital gains in the future against which to use the tax benefit of the capital loss (which is
limited to five years), when we perform the contract, we will recognize more income and pay higher
taxes for tax purposes than we will for book purposes. This tax relationship does not occur with
respect to trusts for which the customer is the grantor, because all of their earnings are service
revenue and thus ordinary income to us, and we do not recognize the revenue for either tax or book
purposes until the underlying contract is performed.
As of October 31, 2009, we have approximately $123.4 million remaining in unrealized losses in
trusts for which we are the grantor; hypothetically, if all of these losses were realized at once,
this would have resulted in an additional valuation allowance of approximately $49.4 million,
assuming a projected tax rate of 40 percent. We currently have only a limited amount of embedded
capital gains in our trusts. Also, we have utilized all previous capital gains recorded in tax
year 2008 and prior tax years to offset capital losses carried forward from earlier years.
Accordingly, if we experience additional realized losses in these trusts and do not have or expect
to have future capital gains available (within or outside the trusts) to offset these losses, we
would record additional valuation allowances and related reductions of net income.
Earnings in cemetery perpetual care trusts may be reduced by declines in stock and bond prices and
will be reduced by declines in interest and dividend rates, resulting in lower current and
potentially future revenues and cash flows. In addition, we may be required to fund realized net
capital losses in these trusts, which would have a negative effect on our earnings and cash flow.
Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of
the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from
these trusts, which have been established in most jurisdictions in which we operate cemeteries, is
used for maintenance of those cemeteries, but principal must generally be held by the trust in
perpetuity. The statutory provisions that create and regulate these trusts differ from state to
state, as do the regulatory interpretations of the provisions. The trusts are reviewed regularly
by the state regulatory authorities.
We currently recognize all dividend and interest income earned and, in states where it is
permitted, realized net capital gains generated by cemetery perpetual care trusts. We are
currently utilizing some of the cash that could be withdrawn from the trusts to satisfy our $14.0
million funding obligation resulting from realized capital losses recorded in the fourth quarter of
2008 and fiscal year 2009. The remaining cash withdrawn is used to defray the costs of cemetery
maintenance. Therefore, declines in these eligible distributable earnings in cemetery perpetual
care trusts would cause a decline in cash flows. Likewise, sustained declines in these earnings
would reduce future revenues and cash flows. As a result, we would need to devote more of our cash
flow from other sources to continue to maintain our cemeteries at the same level. For fiscal 2009,
earnings in these trusts contributed $6.8 million to cemetery revenue, which includes less than
$0.1 million in capital gains. Unless current market conditions improve substantially, we expect
to report earnings from the trusts in the future consistent with fiscal year 2009 or lower than we
have historically earned.
In our cemetery perpetual care trusts, at October 31, 2009, the fair market value of our
investments of $204.7 million was $56.7 million lower than our original cost basis of $261.4
million. If we realize losses in our cemetery perpetual care trusts and the fair market value of
the trust assets is less than the aggregate amounts required to be contributed to the trust, some
states may require us to make cash deposits to the trust to cover the net realized loss or may
require us to stop withdrawing earnings until future earnings cover the net realized loss.
12
In those states where we have withdrawn realized net capital gains in the past, regulators may
seek replenishment of the realized net capital losses either by requiring a cash deposit to the
trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss.
As of October 31, 2008, we recorded a $13.3 million estimated probable funding obligation as an
increase in cemetery costs in fiscal year 2008, and we recorded an additional $3.4 million in
fiscal year 2009. As of October 31, 2009, we had unrealized losses of $48.2 million in the trusts
in these states. Because all of these trusts currently have assets with a fair market value less
than the aggregate amounts required to be contributed to the trust, any additional realized net
capital losses in these trusts may result in a corresponding funding liability and increase in
cemetery costs.
In those states where realized net capital gains have not been withdrawn, due to the different
laws and our practices in those states, we do not believe that we will be required to replenish the
realized net capital loss, and have not recorded a funding obligation; however, it is possible that
regulators may disagree with our conclusion, and future funding obligations may exist. As of
October 31, 2009, the realized net capital loss in these trusts was $3.5 million, and the
unrealized capital loss was $19.8 million.
Our distributions from cemetery perpetual care trusts include net realized capital gains on
investment sales in states where permitted. If regulations in these states are changed to no
longer permit withdrawal of realized capital gains, our cemetery perpetual care trust eligible
distributable earnings may be reduced in the future, which would reduce our earnings and cash
flows.
In states where permitted, we withdraw and recognize as revenue net realized capital gains on
investment sales in cemetery perpetual care trusts. During fiscal year 2009, we recognized and
withdrew less than $0.1 million of net realized capital gains in cemetery perpetual care trusts.
Our portfolio mix in these states is more heavily weighted to investments that potentially generate
capital gains, such as equities. In states where we do not withdraw capital gains, our portfolio
mix is more heavily weighted to fixed income type securities. If states where capital gains are
currently permitted to be withdrawn make changes in legislation or regulations to not allow capital
gains to be withdrawn, our future revenues and cash flow may be reduced from historical levels
until we are able to replace some or all of the investments that potentially generate capital gains
with ones that generate more ordinary income such as fixed income securities. Given current
economic conditions and market values, we may not be able to make that shift quickly without
triggering capital losses that could require funding obligations.
Reduced market values of preneed funeral and cemetery merchandise and services trusts and cemetery
perpetual care trusts will also reduce our trust management fees.
The fees that our subsidiary, ITI, collects for managing the trusts are based on the fair
market value of the trusts as determined by quoted market prices. Thus as market values decline,
the earnings ITI collects and the cash we withdraw for managing the trusts is also reduced. To the
extent market values do not improve, we will earn less in ITI fees than we have historically
earned. During fiscal years 2009, 2008 and 2007, ITI trust management fees collected were
approximately $8.0 million, $10.0 million and $11.2 million, respectively.
Our trust portfolio is invested in various sectors, some of which may be more susceptible to
additional adverse impact from the current economic crisis.
As of October 31, 2009, approximately 21 percent of our preneed funeral and cemetery
merchandise and services trust portfolios and 37 percent of our cemetery perpetual care trust
portfolios are invested in the financials sector. However, only seven percent of the total common
stocks in our trust portfolios are in the financials sector. In addition, as of October 31, 2009,
approximately 11 percent of our preneed funeral and cemetery merchandise and services trust
portfolios and 7 percent of our cemetery perpetual care trust portfolios are invested in the
information technology sector. The current economic crisis may result in greater declines to the
fair market value of our investments in these and other sectors as compared to the performance of
our overall trust portfolio and/or market benchmarks, including the S&P 500 Index. Each sector has
particular risks associated with it, and depending on our asset allocation, sector mix,
company-specific information and future economic events, our portfolio could be at risk for further
decline. For additional information on the various sectors comprising our trust portfolio and
related risks, see the section titled Preneed-Backlog, Trust Portfolio and Cash Impact of Sales
included in Managements Discussion and Analysis of Financial Condition and Results of Operations
in Item 7.
13
A weakening economy could decrease preneed sales. A reduction in discretionary spending could also
decrease amounts at-need customers are willing to pay, and could cause third-party insurance
providers that fund our insurance-funded preneed funeral contracts to experience financial
difficulties.
A weakening economy that causes customers to reduce discretionary spending could cause, and we
believe has caused in the past, a decline in preneed sales, and could also decrease the amounts
at-need customers are willing to pay. Declines in preneed cemetery property sales and average
revenue per at-need event would reduce current revenue. Declines in preneed funeral and cemetery
service and merchandise sales would reduce our backlog and could reduce our future revenues and
market share.
A weakening economy could also impact our customers ability to pay, causing increased
delinquencies, increased bad debt and decreased finance charge revenue which would reduce future
earnings and cash flow. A weakening economy could also increase costs related to sales force
turnover and commissions we are unable to recoup as contract cancellation rates increase. If a
contract is cancelled before collecting a specified amount, the related commission is charged back
to the sales counselor. If the sales counselor is no longer employed by us when the contract is
cancelled, we are often unable to recoup that commission.
Some of the preneed funeral contracts we sell are funded by life insurance or annuity
contracts issued by third-party insurers. The net amount of these contracts that have not been
fulfilled as of October 31, 2009 was $507.3 million. These contracts are not reflected in our
consolidated balance sheet, but we include them when we discuss our anticipated backlog or
anticipated future revenue from preneed funeral sales. Approximately 60 percent of these contracts
have been funded by Forethought Life Insurance Company. If Forethought or other insurance
companies that have issued policies to our customers experience financial difficulties, our
potential future revenue associated with these contracts, and commissions we would receive from
selling these types of contracts in the future, could be at risk. For a discussion of our revenue
recognition policies for insurance-funded preneed funeral contracts, see Note 2(i) to our
consolidated financial statements included in Item 8.
Continued economic crisis and financial and stock market declines could reduce future potential
earnings and cash flows and could result in future goodwill impairments.
In the fourth quarter of fiscal year 2008, we recorded a goodwill impairment charge of $26.0
million. As of October 31, 2009, goodwill amounted to $247.2 million, consisting of $198.5 million
in the funeral segment and $48.7 million in the cemetery segment. Cemetery segments tend to be
more sensitive to goodwill impairments with a heavier reliance on preneed sales which are impacted
by changes in consumer sentiment and customer discretionary income. If current economic conditions
worsen causing decreased revenues and increased costs or if the current economic conditions result
in additional companies in which the trust portfolio is invested in filing for bankruptcy, we may
have a triggering event which could result in further goodwill impairments.
Servicing our debt will require a significant amount of cash and our ability to generate sufficient
cash depends on many factors, some of which are beyond our control.
Our ability to make payments on and to refinance our debt depends on our ability to generate
cash flow. We have a senior secured revolving credit facility due 2012, on which no amounts were
drawn as of October 31, 2009, and $367.5 million in fixed-rate long-term debt becoming due in 2013
through 2016. We believe that our current level of cash on hand, projected cash flows from
operations and available capacity under our senior secured revolving credit facility will be
sufficient to meet our debt service and other cash requirements for the foreseeable future,
although we will need to refinance the senior secured revolving credit facility and other long-term
debt as they become due. Our ability to generate cash, to a significant extent, is subject to
general economic, financial, competitive, legislative, regulatory and other factors that are beyond
our control. In addition, our ability to borrow funds in the future to make payments on our debt
will depend on our meeting the financial covenants in our debt agreements. Our business may not
generate cash flow from operations, and future borrowings may not be available to us under our
senior secured revolving credit facility or otherwise in an amount sufficient to enable us to pay
our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion
of our debt on or before maturity. We may not be able to refinance any of our debt on favorable
terms, or at all. Any inability to generate sufficient cash flow or refinance our debt on
favorable terms could have a material adverse effect on our financial
condition.
14
Our same-store funeral call volumes have not increased significantly or have decreased for a number
of years due to many factors, such as the number of deaths and competition in our markets, our
ability to identify changing consumer preferences and various other factors, some of which are
beyond our control.
Our same-store funeral call volumes have not increased significantly or have decreased for a
number of years due to many factors described elsewhere in this report including the number of
deaths and intense competition in our markets, and our ability to identify changing consumer
preferences. From fiscal years 2005 to 2009, we experienced same-store funeral call volume changes
of 0.4 percent, (0.2) percent, (2.2) percent, 0 percent and (5.9) percent, respectively. We can
give no assurance that we will be able to increase same-store funeral call volumes over the long
term. Declines in same-store funeral calls can adversely affect revenues and profits if not offset
by increases in average revenue per call or alternative sources of revenue.
Price competition could reduce market share or cause us to reduce prices to retain or recapture
market share, either of which could reduce revenues and margins.
Our funeral home and cemetery operations generally face intense competition in local markets
that typically are served by numerous funeral homes and cemetery firms. We have historically
experienced price competition primarily from independent funeral home and cemetery operators, and
from monument dealers, casket retailers, low-cost funeral providers and other non-traditional
providers of services or products including, in recent years, internet providers. From time to
time, this price competition has caused us to lose market share in some markets. In other markets,
we have had to reduce prices, thereby reducing profit margins in order to retain or recapture
market share. Increased price competition in the future could further reduce revenues, profit
margins and backlog and potentially impact our annual goodwill impairment analysis.
Discount retailers sell caskets at prices substantially lower than prices we offer. Consumers
also can now buy caskets in funeral supply stores and directly from manufacturers, as well as over
the Internet. Competition from these sources could reduce our casket sales, which could adversely
affect funeral revenues and margins.
Increased advertising and better marketing by competitors, as well as increased offering of
products or services over the Internet, could cause us to lose market share and revenues or cause
us to incur increased costs or to decrease prices in order to retain or recapture market share.
In recent years, the marketing of preneed funeral services through television, radio and print
advertising, direct mailings and personal sales calls has increased. Extensive advertising or
effective marketing by competitors in local markets could cause us to lose market share and
revenues or cause us to incur increased marketing costs. In addition, competitors may change the
types or mix of products or services offered. These changes may attract customers, causing us to
lose market share and revenue or to incur costs necessary to respond to competition by varying the
types or mix of products or services offered by us. Also, increased use of the Internet by
customers to research and/or purchase products and services could cause us to lose market share to
competitors offering to sell products or services over the Internet.
If we are not able to respond effectively to changing consumer preferences, our market share,
revenues and profitability could decrease.
Future market share, revenues and profits will depend in part on our ability to anticipate,
identify and respond to changing consumer preferences. We may not correctly anticipate or identify
trends in consumer preferences, or we may identify them later than our competitors do. In
addition, any strategies we may implement to address these trends may prove incorrect or
ineffective.
Increased preneed sales may have a negative impact on current cash flow and earnings.
Preneed sales of cemetery property and funeral and cemetery products and services, which are
generally paid on an installment basis, are generally cash flow negative initially, primarily due
to the commissions and other costs to acquire the sale and the fact that a portion of the sales
proceeds is required to be placed into trusts or escrow
15
accounts. We will continue to invest a significant portion of cash flow in preneed
acquisition costs, which reduces cash flow available for other activities, and, to the extent
preneed activities are increased, cash flow would be further reduced, and our ability to service
debt could be adversely affected.
Increased costs, including potential increased health care costs, may have a negative impact on
earnings and cash flows.
We may not be successful in maintaining our margins and may incur additional costs. For
example, in the past we have experienced increased property and casualty insurance costs primarily
as a result of hurricanes and natural disasters and are currently experiencing increased health
care costs. Pending health care reform legislation could further increase our health care costs.
We have also incurred significant legal costs related to the unanticipated class action litigation.
We incurred additional costs in fiscal year 2009 in conjunction with improving our business
systems. Some of the costs impacting our business are largely beyond our control. To the extent
that we are unable to pass these cost increases on to our customers, they will have a negative
impact on our earnings and cash flows.
Our business is subject to the risk of losses due to hurricanes and other natural disasters.
Our Company is headquartered in the New Orleans metropolitan area, and approximately 75 of our
funeral homes and 45 of our cemeteries, along with our mausoleum construction and sales business,
ACME Mausoleum, are located near the Gulf Coast in southern Texas, Louisiana, Mississippi, Alabama
and Florida, along the eastern coasts of Florida, and North and South Carolina and in Puerto Rico.
These areas are periodically threatened by hurricanes, which can damage our properties, interrupt
our business and disrupt the lives of our customers and employees. We are also at risk for
tornadoes at our locations in the midwestern United States and for earthquakes at our locations
along the west coast of the United States. In fiscal year 2005, our business was adversely
affected by Hurricanes Katrina, Wilma and Rita. In fiscal year 2008, Hurricane Ike impacted our
Houston operations. Our insurance may not protect us from all material losses or expenses incurred
in connection with a natural disaster.
We have an estimate included in our deferred revenue liability of approximately $3 million, and we
may become aware of new information that would require us to increase that estimated liability.
From time to time, unidentified contracts are presented to us primarily relating to contracts
sold prior to the time we acquired certain businesses. In addition, from time to time, we have
identified in our backlog, certain contracts in which services or merchandise have already been
delivered. Using historical trends, and statistical analyses, we have recorded an estimated
liability for these items of approximately $3 million as of October 31, 2009. To the extent we
are made aware of contracts that exceed the estimated liability recorded, or cause us to conclude
that we should increase the estimated liability recorded, we would have to record a charge to
earnings for the estimated cost to deliver the products and services.
Our Chairman may have a significant and disproportionate influence on the outcome of election of
directors and other matters presented for a vote of shareholders and this control may be exercised
in a manner that may conflict with the interests of other shareholders.
As of October 31, 2009, our Chairman, Frank B. Stewart, Jr., held 7,273,201 shares (or
approximately 8.2 percent) of our outstanding Class A common stock and all of the 3,555,020
outstanding shares of our Class B common stock. There is no established public trading market for
our Class B common stock. Because each share of Class B common stock is entitled to 10 votes on
all matters presented for a vote by our shareholders, Mr. Stewart controls approximately 34 percent
of our total voting power, while holding approximately 12 percent of our outstanding equity.
Accordingly, Mr. Stewart may have a significant and disproportionate influence over the election of
directors and other matters requiring the affirmative vote of our shareholders and this control may
be exercised in a manner that may conflict with the interest of other shareholders. Additionally,
because Louisiana law and our articles of incorporation require the affirmative vote of two-thirds
of the voting power present to approve certain major transactions such as mergers and any
amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent the
consummation of such actions, even if they are recommended by our Board of Directors and favored by
a substantial majority of our shareholders.
16
We may be unable to repurchase our 6.25 percent senior notes and our senior convertible notes
when required by the holders, or to pay the cash portion of the conversion value upon conversion of
our senior convertible notes. In addition, we are subject to counterparty risk on the call options
relating to our senior convertible notes.
Upon a change of control of our company as defined in the relevant indenture, holders of our
6.25 percent senior notes will have the right to require us to repurchase all or any part of their
notes for cash at a price equal to 101 percent of the principal amount of the notes repurchased,
plus any accrued and unpaid interest. In addition, upon fundamental change events specified in the
relevant indenture, holders of our senior convertible notes may require us to purchase for cash all
or a portion of their notes at a price equal to 100 percent of the principal amount of the notes
plus accrued and unpaid interest. Also, upon conversion of our senior convertible notes, we will
be required to deliver to the holders a cash payment equal to the lesser of the principal amount of
the notes being converted or the conversion value of the notes. As a result, we may be required to
pay significant amounts of cash to holders of the senior convertible notes upon conversion. We
cannot assure you that we will have sufficient financial resources to make these payments when due.
Any inability to make these payments would constitute an event of default under the indentures
governing these notes and would also cause cross-defaults under the terms of our other debt
agreements.
Concurrently with the sale of our senior convertible notes, we purchased call options with
respect to our Class A common stock from Bank of America/Merrill Lynch International and sold
warrants to Bank of America/Merrill Lynch Financial Markets, Inc. The counterparties obligations
to us under the call options and warrants are guaranteed by Bank of America/Merrill Lynch & Co.,
Inc. By simultaneously purchasing the call options and selling the warrants, we have effectively
increased the conversion premium on the senior convertible notes to 55-65 percent above the market
price of the Class A common stock at the time of the offering. The call options are expected to
offset our exposure to dilution from conversion of the senior convertible notes because any shares
we would be obligated to deliver to holders upon conversion would be delivered to us by the
counterparty to the call options. This obligation is dependent upon the financial viability of the
counterparty and guarantor. With the uncertainty in the United States financial markets, there are
risks that the counterparty and guarantor may not remain financially viable or may seek bankruptcy
protection. If the counterparty and guarantor are relieved of or cannot perform this obligation,
then at the time of conversion, we may be required to issue additional shares based upon the
initial conversion price of the notes and cause further dilution to our shareholders.
The call options we purchased and the warrants we sold contemporaneously with the sale of our
senior convertible notes may affect the trading price of our Class A common stock and the value of
the senior convertible notes.
The counterparties to the call options we purchased and the warrants we sold may engage in
hedging activities and modify their hedge positions from time to time prior to the conversion or
maturity of our senior convertible notes, and particularly around the time of any conversion of the
notes. These hedging activities may include purchasing and selling shares of our Class A common
stock, or other of our securities, or other instruments, including over-the-counter derivative
instruments. The effect, if any, of these activities on the trading price of our Class A common
stock or the senior convertible notes will depend in part on market conditions at the time and
cannot be reasonably predicted at this time. Any of these activities could adversely affect the
trading price of our Class A common stock and the value of the senior convertible notes. For
additional information about the call options we purchased and the warrants we sold, see Note 15 to
our consolidated financial statements included in Item 8.
Exercise of the outstanding warrants could dilute the ownership interests of our existing
stockholders.
Concurrently with the sale of our senior convertible notes, we sold warrants expiring in 2014
to purchase approximately 11.3 million shares of Class A common stock at $12.93 per share and
warrants expiring in 2016 to purchase approximately 11.3 million shares of Class A common stock at
$13.76 per share. The warrants expiring in 2014 may not be exercised prior to the maturity of the
senior convertible notes due in 2014, and the warrants expiring in 2016 may not be exercised prior
to the maturity of the senior convertible notes due in 2016. The warrants may be settled in cash
at our election. Exercise of the warrants could dilute the ownership interests of our existing
stockholders. In connection with the fiscal year 2009 repurchases of our senior convertible notes,
the
number of shares of Class A common stock subject to the warrants was reduced to 7.0 million related
to the senior
17
convertible notes due in 2014 and 6.4 million related to the senior convertible notes
due in 2016. For additional information, see Notes 15 and 17 to our consolidated financial
statements included in Item 8.
The accounting method for our senior convertible notes will change beginning in fiscal year 2010
and will substantially increase our reported interest expense relating to the senior convertible
notes, but will have no impact on cash interest paid or net reported cash flows.
In May 2008, the Financial Accounting Standards Board (FASB) issued new guidance regarding
the accounting for convertible debt instruments that may be settled in cash upon conversion. The
new accounting guidance affects our senior convertible notes, will be effective for us beginning
November 1, 2009 and must be applied retrospectively to all periods presented. This guidance will
substantially increase our reported interest expense relating to the senior convertible notes. The
retrospective application of this guidance will decrease our previously reported net earnings by
$1.2 million, $3.6 million and $12.4 million for fiscal years 2007, 2008 and 2009, respectively.
Included in the $12.4 million decrease for fiscal year 2009 is a decrease of the previously
recorded pre-tax gain on the repurchase of the senior convertible notes of approximately $14.0
million. The impact as of November 1, 2009 is expected to result in a decrease in deferred tax
assets totaling approximately $10.0 million, a decrease in long-term debt of approximately $27.8
million, an increase to additional paid-in capital of approximately $35.0 million and a decrease to
retained earnings of approximately $17.2 million. It is estimated that annual earnings after taxes
will be reduced between $1.0 million and $4.0 million over the remaining life of the convertible
debt as a result of the required increase in non-cash interest expense from accretion of the debt
discount under the effective interest rate method. The new accounting rules will have no impact on
cash interest paid or net reported cash flows.
Increases in interest rates would increase interest costs on any variable-rate long-term debt
and could have a material adverse effect on our net income and earnings per share.
We have no variable-rate long-term debt agreements besides our senior secured revolving credit
facility. Although we have no amounts currently drawn under the credit facility, any amounts
borrowed in the future are subject to variable interest rates. Any significant increase in
interest rates could increase our interest costs on our variable-rate long-term debt or
indebtedness incurred in the future, which could decrease our net income and earnings per share
materially.
Our ability to maintain compliance with our covenants under our senior secured revolving credit
facility and 6.25 percent senior notes is dependent upon many factors. Covenant restrictions may
also limit our ability to operate our business.
Our senior secured revolving credit facility and the indenture governing the 6.25 percent
senior notes contain, among other things, covenants that restrict our and our subsidiaries
activities. Our senior secured revolving credit facility limits, among other things, our and the
guarantors ability to: borrow money; pay dividends or distributions; purchase or redeem stock;
make investments; engage in transactions with affiliates; engage in sale and leaseback
transactions; consummate specified asset sales; effect a consolidation or merger or sell, transfer,
lease, or otherwise dispose of all or substantially all of our assets; and create liens on our
assets. In addition, our senior secured revolving credit facility contains specific limits on
capital expenditures. Furthermore, our senior secured revolving credit facility requires us to
maintain specified financial ratios and satisfy periodic financial condition tests. The indenture
governing the 6.25 percent senior notes restricts our and the guarantors ability to create liens
on assets, enter into sale and leaseback transactions and merge or consolidate with other
companies. Our and our subsidiaries future indebtedness may contain similar or even more
restrictive covenants. See Note 15 to the consolidated financial statements included in Item 8 for
additional information on our debt covenants.
These covenants may require that we take action to reduce our debt or to act in a manner
contrary to our business objectives. In addition, events beyond our control, including changes in
general economic and business conditions, may affect our ability to satisfy these covenants. We
might not meet those covenants, and the lenders might not waive any failure to meet those
covenants. A breach of any of those covenants could result in a default under such indebtedness.
If an event of default under our senior secured credit facility occurs, the lenders could elect to
declare all amounts outstanding thereunder, together with accrued interest, to be immediately due
and payable. Any such declaration would also result in an event of default under the indenture
governing the 6.25 percent senior notes. For additional information, see Liquidity and Capital
Resources included in Item 7.
18
The payment of dividends on our common stock in the future is subject to uncertainties.
The declaration of dividends on our common stock in the future is subject to the discretion of
our Board of Directors each quarter after its review of our financial performance. Our ability to
pay dividends is restricted under our senior secured revolving credit facility. See Note 15 to the
consolidated financial statements included in Item 8.
Unanticipated litigation or negative developments in pending litigation could have a material
adverse effect on our financial statements.
We are a defendant in the litigation described in Note 20 to the consolidated financial
statements included in Item 8 and other litigation in the ordinary course of business. The outcome
of litigation is inherently uncertain and adverse developments or outcomes can result in
significant monetary damages, penalties or injunctive relief against us.
We may not be able to consummate significant acquisitions of or investments in death care or
related businesses successfully.
Although we have not made any significant acquisitions in recent years, we may in the future.
Also, our New Invention initiative calls for us to seek to generate new tangential growth
opportunities not tied to the growth of our base business. Any such acquisitions and investments
have risks. We may fail to identify suitable candidates, and even if we do, we may not be able to
successfully complete the transaction or integrate the new business into our existing business. We
may not be able to find businesses for sale at prices we are willing to pay. Acquisition activity,
if any, will also depend on our ability to enter new markets. Due in part to our lack of
experience operating or investing in new areas and to the presence of competitors who have been in
certain markets longer than we have, such acquisitions or investments may be more difficult or
expensive than we anticipate.
The application of generally accepted accounting principles to our business is complex, and we have
had significant changes in the application of generally accepted accounting principles to our
business. No assurances can be given that we will not face similar issues in the future.
Our industry is unusual because we often sell products and services many years prior to the
time they are required to be delivered, and we are required by varying state laws to hold customer
funds related to these sales in trust until the products and services are ultimately delivered.
The accounting for these unusual features is complex, and in prior years there have been periodic
changes in the application of generally accepted accounting principles to our business. Some of
these changes have made it difficult to compare results from one period to the next. Such changes
have also increased our administrative costs. We can give no assurances that we will not face
similar issues in the future.
Risks Related to the Death Care Industry
Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the
number of deaths are not predictable from market to market or over the short term, and reliable
statistics on deaths in particular markets can be difficult to obtain.
Declines in the number of deaths could cause at-need sales of funeral and cemetery services,
property and merchandise to decline and could cause a decline in the number of preneed sales being
delivered, both of which could decrease revenues. Although the United States Bureau of the Census
estimates that the number of deaths in the United States will increase by approximately 1 percent
per year from 2000 to 2010, longer life spans could reduce the rate of deaths. Changes in the
number of deaths can vary among local markets and from quarter to quarter, and variations in the
number of deaths in our markets or from quarter to quarter are not predictable. However, generally
the number of deaths fluctuates with the seasons with more deaths occurring during the winter
months primarily resulting from pneumonia and influenza. These variations can cause revenues to
fluctuate.
19
Our comparisons of the change in the number of families served to the change in the number of
deaths reported by the Centers for Disease Control and Prevention (CDC) from time to time may not
necessarily be meaningful. The CDC receives weekly mortality reports from 122 cities and
metropolitan areas in the United States within two to three weeks from the date of death and
reports the total number of deaths occurring in these areas each week based on the reports received
from state health departments. The comparability of our funeral calls to the CDC data is limited,
as reports from the state health departments are often delayed, and the 122 cities reporting to the
CDC are not necessarily comparable with the markets in which we operate.
We have experienced an increase in the proportion of lower-priced, non-traditional funeral services
and direct cremations, which we believe is part of the continuing national trend toward increased
cremation.
Our traditional cemetery 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 steadily increased and that cremations will represent approximately 46 percent of
deaths in the United States by the year 2015, compared to 35 percent in 2007. In fiscal years 2007,
2008 and 2009, 39 percent, 40 percent and 41 percent, respectively, of the funeral services we
performed in our operations were cremations, and 56 percent of those were direct cremations. A
full service cremation, which includes a funeral service, merchandise and memorialization of the
remains in a mausoleum or columbarium niche or a burial of the remains, can result in funeral and
cemetery revenue and profit margins similar to those of traditional funeral services and burials,
although the cemetery property sale revenue would generally be lower. In contrast, a basic or
direct cremation, with no funeral service or casket and no memorialization of the remains, produces
no revenues for cemetery operations and lower revenues and profit margins for funeral operations
when delivered through a traditional funeral home. During fiscal years 2007 through 2009, we
experienced a reduction in the proportion of full service traditional funeral services and
cremations and an increase in the proportion of lower-priced, non-traditional funeral services and
direct cremations. A continuation of this trend would adversely affect the revenues and gross
profits of our funeral and cemetery businesses. To address this trend, we have been intensifying
our efforts to market full service cremations. In addition, the increasing trend towards
cremations in the United States could cause us to lose market share to firms specializing in
cremations.
Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative
changes in revenue can have a disproportionately large effect on cash flow and profits.
Funeral homes and cemetery businesses must incur many of the costs of operating and
maintaining facilities, land and equipment regardless of the level of sales in any given period.
For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes
and maintain the grounds of cemeteries regardless of the number of funeral services or interments
performed. Because we cannot decrease these costs significantly or rapidly when we experience
declines in sales, declines in sales can cause margins, profits and cash flow to decline at a
greater rate than the decline in revenues.
Changes or increases in, or failure to comply with, regulations applicable to our business could
increase costs or decrease cash flows.
The death care industry is subject to extensive regulation and licensing requirements under
federal, state and local laws. For example, the funeral home industry is regulated by the FTC,
which requires funeral homes to take actions designed to protect consumers. State laws impose
licensing requirements and regulate preneed sales including our preneed trust activities.
Embalming facilities are subject to stringent environmental and health regulations. Compliance
with these regulations is burdensome, and we are always at risk of not complying with the
regulations.
In addition, from time to time, governments and agencies propose to amend or add regulations,
which could increase costs or decrease cash flows. For example, federal, state, Puerto Rican and
other regulatory agencies have considered and may enact additional legislation or regulations that
could affect the death care industry. Several jurisdictions and regulatory agencies have
considered or are considering regulations that could require more liberal refund and cancellation
policies for preneed sales of products and services, limit or eliminate our ability to use surety
bonding, impose or increase trust requirements and prohibit the common ownership of funeral homes
and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions
in which we operate,
these and other possible proposals could have a material adverse effect on us, our financial
condition, our results of
20
operations, our cash flows and our future prospects. On September 29,
2009, Representative Bobby L. Rush (D.-Ill.) introduced H.R. 3655 to direct the FTC to draft
regulations to extend the Funeral Rule to cemeteries, crematories and sellers of caskets and other
funeral merchandise and to require certain disclosures with respect to preneed sales of funeral
services or funeral goods. The bill has been referred to the Committee on Energy and Commerce.
Item 1B. Unresolved Staff Comments
None.
Item 2. Properties
The following table shows the number of funeral homes and cemeteries we operated in each of
our operating segments as of October 31, 2009:
|
|
|
|
|
|
|
|
|
Number of |
|
|
Operating Segment |
|
Locations |
|
Geographic Areas |
|
|
|
|
|
|
|
Funeral
|
|
|
218 |
|
|
Alabama, Arkansas, California,
Florida, Georgia, Illinois,
Kansas, Louisiana, Maryland,
Mississippi, Missouri, Nebraska,
North Carolina, Oregon,
Pennsylvania, South Carolina,
Tennessee, Texas, Virginia,
Washington, West Virginia and
Puerto Rico |
|
|
|
|
|
|
|
Cemetery
|
|
|
140 |
|
|
Alabama, Arkansas, California,
Florida, Georgia, Kansas,
Kentucky, Louisiana, Maryland,
Mississippi, Missouri, Nebraska,
North Carolina, Ohio, Oregon,
Pennsylvania, South Carolina,
Tennessee, Texas, Virginia,
Washington, West Virginia,
Wisconsin and Puerto Rico |
|
|
|
|
|
|
|
|
|
|
358 |
|
|
|
|
|
|
|
|
|
|
As of October 31, 2009, approximately 77 percent of our 218 funeral home locations were owned
by our subsidiaries, and approximately 23 percent were held under operating leases. The leases
have terms ranging from one to 14 years, except for one lease that expires in 2032 and seven leases
that expire in 2039 (six of which are with the Archdiocese of Los Angeles). An aggregate of $0.1
million of our term notes are secured by mortgages on some of our funeral homes; these notes were
either assumed by us upon our acquisition of the property or represent seller financing for the
acquired property.
As of October 31, 2009, we owned 140 cemeteries covering a total of approximately 9,900 acres.
Although approximately 38 percent of the total acreage is available for future development, life
spans of our cemeteries can be extended by different types of cemetery development such as the
construction of mausoleums, columbariums, niche spaces and cremation gardens.
We own a 98,200 square-foot building in suburban New Orleans that we use for our corporate
headquarters, shared services center, human resources, communications, internal audit and
information systems departments.
Item 3. Legal Proceedings
For a discussion of our current litigation, see Note 20 to the consolidated financial
statements included in Item 8.
In addition to the matters described in Note 20, we and certain of our 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, we do not expect these matters to have a material effect on our
consolidated financial position, results of operations or cash flows.
21
We carry insurance with coverages and coverage limits that we believe to be adequate.
Although there can be no assurance that such insurance is sufficient to protect us against all
contingencies, we believe that our insurance protection is reasonable in view of the nature and
scope of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table sets forth certain information with respect to our executive officers.
Each of the following has served in the capacity indicated for more than five years, except as
indicated below.
|
|
|
|
|
|
|
Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Thomas J. Crawford
|
|
|
56 |
|
|
President, Chief Executive Officer and Director(1) |
|
|
|
|
|
|
|
Thomas M. Kitchen
|
|
|
62 |
|
|
Senior Executive Vice President, Chief Financial Officer and
Director(2) |
|
|
|
|
|
|
|
Lawrence B. Hawkins
|
|
|
61 |
|
|
Executive Vice President and PresidentInvestors Trust, Inc. |
|
|
|
|
|
|
|
Martin de Laurèal
|
|
|
58 |
|
|
Senior Vice President of Corporate Development and Investor
Relations(3) |
|
|
|
|
|
|
|
Lewis J. Derbes, Jr.
|
|
|
38 |
|
|
Senior Vice President of Finance, Treasurer and Secretary(4) |
|
|
|
|
|
|
|
Christine Hunsaker
|
|
|
43 |
|
|
Senior Vice President of Cremation(5) |
|
|
|
|
|
|
|
Larry Merington
|
|
|
55 |
|
|
Senior Vice President of Marketing(6) |
|
|
|
|
|
|
|
Kenneth G. Myers, Jr.
|
|
|
52 |
|
|
Senior Vice President of Operations(7) |
|
|
|
|
|
|
|
G. Kenneth Stephens, Jr.
|
|
|
48 |
|
|
Senior Vice President of Sales(8) |
|
|
|
|
|
|
|
Lisa T. Winningkoff
|
|
|
42 |
|
|
Vice President and Senior Administrative Officer(9) |
|
|
|
|
|
|
|
Angela M. Lacour
|
|
|
37 |
|
|
Vice President, Corporate Controller and Chief Accounting
Officer(10) |
|
|
|
(1) |
|
Mr. Crawford has served as our President, Chief Executive Officer and a Director
since March 31, 2007. Prior to that, he served on behalf of Sorenson Capital Partners, a
private equity group, as Chief Executive Officer of Erickson Companies, a regional residential
framing company with manufacturing operations in Arizona, California and Nevada. From 2003 to
2004, he was a Senior Consultant to Carew, International, a sales process consulting and
training company. He was Chairman, Chief Executive Officer and President of publicly-traded
The York Group, Inc., one of the largest casket manufacturers in the United States, from 2000
until its merger with Matthews International Corporation in 2002. From 1997 to 1999, he was
Executive Vice President of Sales and Marketing of Lozier Corporation, a manufacturer of
retail display fixtures and systems. From 1979 to 1997, he served in various positions with
the Batesville Casket Company, a leading manufacturer and supplier of caskets, including Vice
President and General Manager Hardwood Products Group, Vice President of New Business
Development, Vice President of Marketing and Vice President of Logistics. Additionally, he
held the positions of Director of Corporate Development for both the Batesville Casket Company
and its parent
company, Hillenbrand Industries. |
22
|
|
|
(2) |
|
Mr. Kitchen has served as Senior Executive Vice President since March 31, 2007 and
as Chief Financial Officer since December 2, 2004. He has also served as a director since
February 18, 2004. From June 30, 2006 until Mr. Crawfords appointment as President and Chief
Executive Officer on March 31, 2007, Mr. Kitchen served as acting Chief Executive Officer.
From July 2003 until he became our Chief Financial Officer, he served as an investment
management consultant with Equitas Capital Advisors, LLC. From 1987 to 1999, he was Chief
Financial Officer of Avondale Industries, Inc., a publicly-traded company engaged in the
design, construction, system integration and repair of large, complex ships for commercial and
government customers. He served as President of Avondale from 1999 to 2002, after Avondales
acquisition by Litton Industries, which was subsequently acquired by Northrop Grumman
Corporation. |
|
(3) |
|
On November 1, 2007, Mr. de Laurèal was appointed Senior Vice President of Corporate
Development and Investor Relations. He joined the Company in 1977 and has held numerous
management positions. Mr. de Laurèal has also served as President of Acme Mausoleum
Corporation since January 2007. From December 1995 to December 2003, he was Vice President of
Investor Relations, and from December 2003 to November 2007, he was Senior Vice President of
Investor and Corporate Relations. |
|
(4) |
|
On July 1, 2008, Mr. Derbes was appointed Senior Vice President of Finance, and
continues his positions as Secretary and Treasurer. Prior to that time, he served as Vice
President, Secretary and Treasurer of the Company since May 2005. Prior to joining the
Company, Mr. Derbes served as Chief Financial Officer of Conrad Industries, a publicly-traded
company engaged in the construction and repair of government and commercial marine vessels,
from 2002 through 2004 and as Operations Manager of Kirschmans LLC, a furniture retailer,
from late 2004 until joining the Company. |
|
(5) |
|
On December 1, 2009, Ms. Hunsaker was appointed Senior Vice President of Cremation.
From March 2009 through November 2009, she was a consultant to the Company in evaluating its
cremation business and helping to identify targets for growth. From 2004 to the present, she
owns and operates Paws, Whiskers & Wags, Your Pet Crematory, a pet cremation company in
Atlanta helping over 3,000 clients annually. She worked for Service Corporation International
twice in the past in various senior management positions addressing cremation revenue and
growth. During her last assignment at SCI from 2002 to 2004, she was President of Cremation
Services/Cremation Operations, North America, and led the expansion of National Cremation
Society, SCIs largest cremation brand. Prior to her employment at SCI, Ms. Hunsaker worked
for the Batesville Casket Company and was part of the team that launched Options, Batesvilles
cremation company. |
|
(6) |
|
On March 3, 2009, Mr. Merington was appointed Senior Vice President of Marketing.
Prior to that time, he served as Senior Vice President of Sales and Marketing since September
17, 2007. From 2005 to 2007, he was the Chief Operating Officer of Ace Bayou, a furniture and
pet products corporation in Kenner, Louisiana. From 2003 to 2005, Mr. Merington was the Vice
President of Business Development at New York Environmental Services, a medical waste company.
After the terrorist attack on the United States on September 11, 2001, he was called to
active duty for one year as a commander in the United States Air Force in Afghanistan. From
1996-2001, he served in various senior management roles at Browning-Ferris Industries before
becoming president of its Gas Services Division. |
|
(7) |
|
On June 26, 2008, Mr. Myers was appointed Senior Vice President of Operations.
Prior to that time, he served as Senior Vice President of Finance of the Company since
February 20, 2006. He has also served as a consultant to the Company from February 2005 to
February 2006. From July 2004 through February 2006, he provided consulting services
specializing in Sarbanes-Oxley compliance. From 2001 to 2004, he was the Chief Executive
Officer, President and Director of Conrad Industries, a publicly-traded company engaged in the
construction and repair of government and commercial marine vessels. From 1992 to 2001, he
served as Vice President of Avondale Industries, Inc., a publicly-traded company engaged in
the design, construction, system integration and repair of large, complex ships for commercial
and government customers, which was subsequently acquired by Northrop Grumman Corporation. |
|
(8) |
|
On March 3, 2009, Mr. Stephens was appointed Senior Vice President of Sales. Prior
to that time, he served as Executive Vice President and President of our former Western
Division since July 14, 2005. From January 31,
2000 to July 13, 2005, he served as Senior Vice President and President of our former Eastern
Division. |
23
|
|
|
(9) |
|
Since December 2005, Ms. Winningkoff has served as Vice President and Senior
Administrative Officer. From December 2004 to December 2005, she served as the Companys
Compensation and Benefits Director. From July 2002 through December 2004, she served as the
Director of Compliance. She joined the Company in June 1991 and held several financial and
accounting positions, including Assistant Treasurer and Director of Financial Reporting. |
|
(10) |
|
On July 10, 2006, Ms. Lacour was appointed Vice President, Corporate Controller and
Chief Accounting Officer. She joined the Company in February 1997, and has served in a
variety of financial and accounting positions including Director of Financial Reporting and,
most recently, as Assistant Corporate Controller since March 2001. Prior to joining the
Company, Ms. Lacour was an auditor with KPMG LLP for four years. |
PART II
Item 5. Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of
Equity Securities
Market Information
Our Class A common stock trades on the NASDAQ Global Select Market under the symbol STEI. On
November 30, 2009, the closing sale price as reported by the NASDAQ Stock Market was $4.68. The
following table sets forth, for the periods indicated, the range of high and low sale prices, as
reported by the NASDAQ Stock Market. As of November 30, 2009, there were 984 record holders of our
Class A common stock. Record holders include persons holding Class A common stock on behalf of one
or more beneficial owners who are not holders of record.
|
|
|
|
|
|
|
|
|
|
|
High |
|
Low |
Fiscal Year 2009 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
5.73 |
|
|
$ |
4.57 |
|
Third Quarter |
|
|
5.10 |
|
|
|
3.42 |
|
Second Quarter |
|
|
3.98 |
|
|
|
1.67 |
|
First Quarter |
|
|
5.30 |
|
|
|
2.55 |
|
|
|
|
|
|
|
|
|
|
Fiscal Year 2008 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
10.00 |
|
|
$ |
4.07 |
|
Third Quarter |
|
|
9.46 |
|
|
|
6.61 |
|
Second Quarter |
|
|
7.20 |
|
|
|
5.37 |
|
First Quarter |
|
|
9.08 |
|
|
|
6.82 |
|
There is no established public trading market for our Class B common stock. As of October 31,
2009, our Chairman, Frank B. Stewart, Jr., was the record holder of all of our shares of Class B
common stock. Our Class A and Class B common stock are substantially identical, except that
holders of Class A common stock are entitled to one vote per share, and holders of Class B common
stock are entitled to ten votes per share. Each share of Class B common stock is automatically
converted into one share of Class A common stock upon transfer to persons other than certain
affiliates of Frank B. Stewart, Jr. As of October 31, 2009, by virtue of his beneficial ownership
of outstanding Class A and Class B common shares, Mr. Stewart controlled approximately 34 percent
of our total voting power and held approximately 12 percent of our outstanding equity.
Dividends
The Company has paid a quarterly cash dividend of two and one-half cents per share for its
Class A and Class B common stock since April 2005, and in September 2009, the quarterly cash
dividend was increased to three cents per share. Although we intend to pay regular quarterly cash
dividends for the foreseeable future, the
declaration and payment of future dividends are discretionary and will be subject to determination
by the Board of Directors each quarter after its review of our financial performance. Our ability
to pay dividends is subject to
24
restrictions contained in our senior secured revolving credit
facility. See Note 15 to the consolidated financial statements included in Item 8.
Equity Plan Information
For information regarding compensation plans under which equity securities of the Company are
authorized for issuance, see Part III, Item 12.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
The table below shows purchases made by or on behalf of us, or of any affiliated purchaser
as defined in SEC rules, of our equity securities registered pursuant to Section 12 of the Exchange
Act, during the fourth quarter of fiscal year 2009.
Issuer Purchases of Equity Securities
|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total number of |
|
|
Maximum approximate |
|
|
|
|
|
|
|
|
|
|
|
shares purchased as |
|
|
dollar value of shares |
|
|
|
Total number |
|
|
|
|
|
|
part of publicly |
|
|
that may yet be |
|
|
|
of shares |
|
|
Average price paid |
|
|
announced |
|
|
purchased under the |
|
Period |
|
purchased |
|
|
per share |
|
|
plans or programs(2) |
|
|
plans or programs(2) |
|
August 1, 2009
through August 31,
2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
26,519,479 |
|
September 1, 2009
through September
30, 2009 |
|
|
4,471 |
(1) |
|
$ |
5.32 |
|
|
|
4,471 |
|
|
$ |
26,495,706 |
|
October 1, 2009
through October 31,
2009 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
26,495,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
4,471 |
|
|
$ |
5.32 |
|
|
|
4,471 |
|
|
$ |
26,495,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
As described in Note 15 to the consolidated financial statements, we acquired 15,936
shares of our Class A common stock during fiscal year 2009 (of which 4,471 were acquired
during the fourth quarter) related to the settlement of call options and common stock warrants
corresponding to senior convertible notes we purchased in the open market. |
|
(2) |
|
We announced a $25.0 million stock repurchase program on September 19, 2007, which
was increased by $25.0 million in December 2007 and June 2008, resulting in a $75.0 million
program. As of October 31, 2009, we had repurchased 6.6 million shares for $48.5 million at
an average price of $7.31 per share and have $26.5 million remaining under this program. |
Item 6. Selected Financial Data
The tables below contain selected consolidated financial data as of and for the years ended
October 31, 2005 through October 31, 2009. The tables should be read in conjunction with our
consolidated financial statements and the notes thereto included in Item 8 and Managements
Discussion and Analysis of Financial Condition and Results of Operations included in Item 7.
25
Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
|
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31,(1) |
|
|
|
2009(2) |
|
|
2008(3) |
|
|
2007(4) |
|
|
2006(5) |
|
|
2005(6) |
|
Statement of Earnings Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
487,807 |
|
|
$ |
527,883 |
|
|
$ |
522,817 |
|
|
$ |
514,230 |
|
|
$ |
488,909 |
|
Total gross profit |
|
|
87,740 |
|
|
|
100,817 |
|
|
|
112,430 |
|
|
|
114,613 |
|
|
|
101,479 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
35,653 |
|
|
$ |
(3,693 |
) |
|
$ |
39,314 |
|
|
$ |
37,580 |
|
|
$ |
8,303 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
499 |
|
|
|
13 |
|
|
|
1,551 |
|
Cumulative effect of change in accounting
principle (net of $101,061 income tax
benefit in 2005) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(153,180 |
) (1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
35,653 |
|
|
$ |
(3,693 |
) |
|
$ |
39,813 |
|
|
$ |
37,593 |
|
|
$ |
(143,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before cumulative effect of
change in accounting principle |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.38 |
|
|
$ |
.35 |
|
|
$ |
.08 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
.01 |
|
|
|
|
|
|
|
.01 |
|
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.39 |
|
|
$ |
.35 |
|
|
$ |
(1.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before cumulative effect of
change in accounting principle |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.38 |
|
|
$ |
.35 |
|
|
$ |
.08 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
.01 |
|
|
|
|
|
|
|
.01 |
|
Cumulative effect of change in
accounting principle |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1.40 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.39 |
|
|
$ |
.35 |
|
|
$ |
(1.31 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
.105 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
.075 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,109,001 |
|
|
$ |
2,104,515 |
|
|
$ |
2,438,974 |
|
|
$ |
2,380,577 |
|
|
$ |
2,335,609 |
|
Long-term debt, less current maturities |
|
|
367,491 |
|
|
|
450,095 |
|
|
|
450,115 |
|
|
|
374,020 |
|
|
|
406,859 |
|
Shareholders equity |
|
|
390,884 |
|
|
|
365,637 |
|
|
|
423,318 |
|
|
|
446,893 |
|
|
|
439,453 |
|
Selected Consolidated Operating Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral homes in operation at end of period |
|
|
218 |
|
|
|
221 |
|
|
|
221 |
|
|
|
229 |
|
|
|
231 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At-need funerals performed |
|
|
35,581 |
|
|
|
37,589 |
|
|
|
38,072 |
|
|
|
38,937 |
|
|
|
39,264 |
|
Prearranged funerals performed |
|
|
19,984 |
|
|
|
21,436 |
|
|
|
21,275 |
|
|
|
21,799 |
|
|
|
22,076 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funerals performed |
|
|
55,565 |
|
|
|
59,025 |
|
|
|
59,347 |
|
|
|
60,736 |
|
|
|
61,340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prearranged funerals sold |
|
|
26,966 |
|
|
|
28,390 |
|
|
|
29,953 |
|
|
|
30,738 |
|
|
|
28,967 |
|
Backlog of prearranged funerals at end of
period |
|
|
331,041 |
(7) |
|
|
329,085 |
|
|
|
329,617 |
|
|
|
333,592 |
|
|
|
326,672 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries in operation at end of period |
|
|
140 |
|
|
|
139 |
|
|
|
139 |
|
|
|
143 |
|
|
|
144 |
|
Interments and inurnments performed |
|
|
45,068 |
|
|
|
47,953 |
|
|
|
49,283 |
|
|
|
52,255 |
|
|
|
52,436 |
|
26
|
|
|
(1) |
|
Effective November 1, 2004, we changed our method of accounting for selling
costs incurred related to new preneed funeral and cemetery service and merchandise sales to
expense them as incurred, which resulted in a $254.2 million ($153.2 million after tax, or
$1.40 per diluted share) charge for the cumulative effect of the change in accounting
principle. |
|
|
|
|
|
Effective November 1, 2005, we began recording share-based compensation costs using the modified
prospective application transition method. Our financial statements were not retrospectively
adjusted to reflect this implementation. Accordingly, this implementation is reflected in our
fiscal year 2009, 2008, 2007 and 2006 financial statements but not in our financial statements
for fiscal year 2005. |
|
|
|
Effective November 1, 2007, we implemented the required guidance related to uncertain tax
positions and recognized a $1.0 million charge to the November 1, 2007 accumulated deficit
balance. For additional information, see Note 18 to the consolidated financial statements
included in Item 8. |
|
|
|
All businesses sold that met the criteria for discontinued operations under applicable
accounting guidance have been classified as discontinued operations for all periods presented.
The operating data presented represents activity related to our total operations for the
respective year. |
|
|
|
In May 2008, the FASB issued guidance related to the accounting for convertible debt instruments
that may be settled in cash. This guidance applies to our senior convertible notes and is
effective as of the beginning of an entitys first fiscal year beginning after December 15,
2008, which corresponds to our fiscal year beginning November 1, 2009, and must be applied
retrospectively to all periods presented. While there will be no impact on our cash interest
paid or net reported cash flows, we will record higher interest expense in fiscal year 2010 as a
result of the adoption of this guidance. The retrospective application will decrease our
previously reported net earnings by $1.2 million, $3.6 million and $12.4 million for fiscal
years 2007, 2008 and 2009, respectively. Included in the $12.4 million decrease for fiscal year
2009 is a decrease of the previously recorded pre-tax gain on the repurchase of the senior
convertible notes of approximately $14.0 million. The impact as of November 1, 2009 is expected
to result in a decrease in deferred tax assets totaling approximately $10.0 million, a decrease
in long-term debt of approximately $27.8 million, an increase to additional paid-in capital of
approximately $35.0 million and a decrease to retained earnings of approximately $17.2 million.
It is estimated that annual earnings after taxes will be reduced between $1.0 million and $4.0
million over the remaining life of the convertible debt as a result of the required increase in
non-cash interest expense from accretion of the debt discount under the effective interest rate
method. For additional information, see Note 3 to the consolidated financial statements. |
(2) |
|
During fiscal year 2009, we recorded the following items: |
|
|
|
$20.1 million in gains on early extinguishment of debt due to open market purchases of
our senior convertible notes (see Note 15 to the consolidated financial statements for
additional information). |
|
|
|
|
$3.4 million in charges related to our estimated probable obligation to fund the
cemetery perpetual care trust investment losses (see Note 6 to the consolidated financial
statements). |
|
|
|
|
$0.4 million in net hurricane related expenses primarily related to the lawsuit we filed
against our insurance carriers related to our Hurricane Katrina claim (see Note 23 to the
consolidated financial statements). |
|
|
|
|
$0.3 million in separation charges related to the separation pay of a former executive
officer and costs related to the reorganization of our operating structure (see Note 14 to
the consolidated financial statements). |
(3) |
|
During fiscal year 2008, we recorded the following items: |
|
|
|
$26.0 million charge for goodwill impairment (see Note 13 to the consolidated financial
statements). |
|
|
|
|
$13.3 million in charges related to our estimated probable obligation to fund the
cemetery perpetual care trust investment losses (see Note 6 to the consolidated financial
statements) and a $7.4 million tax valuation allowance as a result of realized trust
investment losses (see Note 18 to the consolidated financial statements). |
|
|
|
|
$2.3 million in net hurricane related expenses related to Hurricanes Ike and Katrina
(see Note 23 to the consolidated financial statements). |
27
(4) |
|
During fiscal year 2007, we recorded the following items: |
|
|
|
A charge for the loss on early extinguishment of debt of $0.7 million as a result of our
senior convertible debt transaction (see Note 15 to the consolidated financial statements). |
|
|
|
|
$2.5 million in net hurricane related expenses related to Hurricane Katrina (see Note 23
to the consolidated financial statements). |
|
|
|
|
$0.6 million in separation charges related to separation pay of former executive
officers and additional reorganization costs for the 2005 restructuring of the divisions
(see Note 14 to the consolidated financial statements). |
(5) |
|
During fiscal year 2006, we recorded the following items: |
|
|
|
$1.6 million in net hurricane related recoveries and $3.2 million in business
interruption insurance proceeds related to Hurricane Katrina. |
|
|
|
|
$1.0 million in separation charges related to separation pay of former executive
officers and additional reorganization costs for the 2005 restructuring of the divisions. |
(6) |
|
During fiscal year 2005, we recorded the following items: |
|
|
|
$9.4 million in net hurricane related expenses related to Hurricane Katrina. |
|
|
|
|
$1.5 million in severance charges related to the restructuring of our operating
divisions. |
|
|
|
|
$32.8 million in charges for the loss on early extinguishment of debt related to the
refinancing of the senior secured credit facility and the completion of the private
offering of our 6.25 percent senior notes. |
(7) |
|
Our backlog of preneed funerals is comprised of trust-funded contracts and
insurance-funded contracts. As described in Note 2(i) to the consolidated financial
statements included in Item 8, insurance-funded preneed funeral contracts are not reflected in
our consolidated balance sheets. As of October 31, 2009, our preneed funeral backlog is
comprised of 193,637 trust-funded contracts and 137,404 insurance-funded contracts. |
Item 7. Managements Discussion and Analysis of Financial Condition and Results of Operations
Overview
We are the second largest provider of funeral and cemetery products and services in the death
care industry in the United States. As of October 31, 2009, we owned and operated 218 funeral
homes and 140 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery
property and funeral and cemetery products and services both at the time of need and on a preneed
basis. Our revenues in each period are derived primarily from at-need sales, preneed sales
delivered out of our backlog during the period (including the accumulated trust earnings or
build-up in the face value of insurance contracts related to these preneed deliveries), preneed
cemetery property sales and other items such as perpetual care trust earnings, finance charges and
trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral
contracts that will be funded by life insurance or annuity contracts issued by third-party insurers
when we act as an agent on the sale.
General
During fiscal year 2009, we focused on improving our business and effectively deploying our
cash, despite the challenges of the current economic environment, to position our Company for
future growth as the economy improves. During the year, we reported net earnings of $35.7 million,
or $.39 per diluted share and generated $84.9 million in operating cash flow. We increased our
common stock dividend rate by 20 percent and repurchased $82.6 million aggregate principal amount
of our senior convertible notes in the open market for an aggregate purchase price of $60.8
million, a substantial discount. Our tax planning strategies yielded a combination of refunds and
reductions of income tax payments totaling approximately $31.6 million utilized in 2009.
We successfully refinanced our revolving credit facility, which was set to mature in November 2009.
At $304.7 million as of October 31, 2009, our net debt is at its lowest level in more than 10
years.
Like many other businesses, our operating results were negatively affected by current economic
conditions. In particular, our cemetery property sales decreased significantly; however,
approximately 40 percent of the decline
occurred in Florida where the current economic environment is having the largest impact. These
purchases are often
28
made by families prior to the time of need and are thus often discretionary; we
are optimistic that these sales will improve as the overall economy improves. During the fourth
quarter of 2009, we achieved the highest quarterly cemetery property sales for fiscal year 2009.
Net preneed funeral sales declined substantially during the first quarter of 2009, but improved as
the year progressed, and increased 0.3 percent in fiscal year 2009 compared to fiscal year 2008.
Adverse financial market conditions in the latter part of 2008 and early part of 2009 caused a
decrease in our revenue from trust-related activities. During fiscal year 2009, we recognized
approximately $8.8 million less in revenue than we did in fiscal year 2008 from trust-related
activities, or $29.3 million in fiscal year 2009 compared to $38.1 million in fiscal year 2008.
Based on current market conditions and realized losses as of October 31, 2009, we believe our
revenue from trust-related activities for fiscal year 2010 would be about the same as for fiscal
year 2009. With the improvements in the financial markets during 2009, the total return on our
trust portfolios improved also with a total return of 15.4 percent in our preneed funeral and
cemetery merchandise and services trusts and a 19.9 percent return in our cemetery perpetual care
trust. During late fiscal 2008, the Company engaged a new investment consultant to review the
portfolio. We reviewed alternative asset allocation models and selected a new asset allocation
that is more heavily weighted toward fixed income securities. As a result, we have taken advantage
of the rebound in the financial markets to rebalance the trust portfolio. We have reduced our
exposure to common equities and have increased our investment in fixed income securities where we
intend to generate a reasonable rate of return with a lower overall volatility for the investments.
We plan to continue to reduce the volatility of our investment portfolio by adjusting our asset
allocation as the financial markets improve.
During fiscal year 2009, we completed the initial implementation of the Best in Class
component of our strategic plan, and began to generate new revenue from our e-commerce initiatives.
We constructed one funeral home on a third-party cemetery and one stand-alone funeral home, and in
fiscal year 2010, we plan to construct one stand-alone funeral home and one combination funeral
home. We also acquired one business for $1.6 million in fiscal year 2009. We completed the
implementation of a new industry-specific contract processing software system, which will serve as
a platform for a new point of sale system to be implemented in fiscal years 2010 and 2011. Also in
fiscal year 2009, we implemented a companywide image scanning system and piloted a new supplier
invoice processing system. We expect that these new systems and processes will improve productivity
over time, and, as we look at our opportunities for growth, we expect to leverage the efficiencies
that we have achieved.
During fiscal year 2009 compared to fiscal year 2008, same-store funeral services performed
declined 5.9 percent, which reflects a decline in deaths in our markets and a decrease in low-end
cremation events in our West Coast operations. However, we began to experience positive trends in
the fourth quarter of 2009. Same-store calls were essentially equal to the prior year quarter, a
significant improvement from each of the previous quarters of this fiscal year. We also face
challenges from customers increasing preference for cremation, which has been a significant
concern for traditional funeral home and cemetery operators like us because cremations have
typically included few, if any, additional products or services other than the cremation itself,
and can result in lower revenue and profits than traditional services. We are addressing funeral
service volumes and increases in cremations through our Best in Class initiative, enhanced sales
and marketing efforts and our emphasis on personalization. We are intensifying our efforts to
market full service cremations, including better marketing of our memorialization options for our
cremation consumers. In addition, in late fiscal year 2009, we hired a vice-president of cremation
and in early fiscal year 2010, we hired a senior vice-president of cremation, both with extensive
industry and cremation experience, to support our current operations and sales teams in growing
cremation revenue and profits. For the year ended October 31, 2009, we achieved a 3.1 percent
increase in our average revenue per traditional funeral service and a 5.7 percent increase in our
average revenue per cremation service. Additional information about our business and strategies
can be found in Item 1. Business.
Financial Summary for Fiscal Year 2009
For fiscal year 2009, net earnings were $35.7 million compared to a net loss of $3.7 million
for fiscal year 2008. Net earnings for fiscal year 2009 included a $20.1 million pre-tax gain on
the early extinguishment of debt related to our open market repurchases of $82.6 million aggregate
principal amount of our senior convertible notes during fiscal year 2009. The net loss for fiscal
year 2008 included a $26.0 million goodwill impairment charge.
Revenue decreased $40.1 million to $487.8 million for fiscal year 2009. Funeral revenue
decreased $10.3 million to $276.3 million primarily due to a $3.1 million decline in funeral
revenue related to trust activities and a
5.9 percent decrease in our same-store funeral
services performed. During fiscal year 2009, our
same-store funeral
29
operations experienced an increase in average revenue per traditional funeral
service of 3.1 percent and an increase in average revenue per cremation service of 5.7 percent.
These increases were partially offset by a shift in mix to lower-priced cremation services and a
decrease in trust earnings which resulted in an overall increase of 2.6 percent in the same-store
average revenue per funeral service. For the year ended October 31, 2009, we had a 0.3 percent
increase in net preneed funeral sales. Cemetery revenue decreased $29.8 million to $211.5 million
primarily due to a $13.7 million, or 13.2 percent, decrease in cemetery property sales, net of
discounts, a $5.8 million decrease in cemetery merchandise delivered and services performed and a
$5.7 million decrease in cemetery revenue related to trust activities, of which $3.9 million of the
decrease relates to cemetery perpetual care earnings. Consolidated gross profit decreased $13.1
million to $87.7 million due to a $3.2 million decrease in funeral gross profit and a $9.9 million
decrease in cemetery gross profit. Funeral gross profit decreased due to the decrease in
trust-related revenue, as noted above. Cemetery gross profit decreased primarily due to the
decrease in revenue, as noted above, partially offset by a decrease in charges associated with the
estimated probable funding obligation to restore the net realized losses in certain of our cemetery
perpetual care trusts which declined from the $13.3 million charge recorded during fiscal year 2008
to a $3.4 million charge recorded during fiscal year 2009.
Corporate general and administrative expenses decreased $1.9 million to $30.7 million for
fiscal year 2009 primarily due to fiscal year 2008 charges for professional services related to the
Boards evaluation of strategic alternatives to maximize shareholder value in connection with our
response to an unsolicited acquisition proposal. We incurred $0.4 million in hurricane related
charges in fiscal year 2009 compared to $2.3 million in hurricane related charges for fiscal year
2008 related to Hurricanes Katrina and Ike. During 2009, Hurricane Katrina charges consisted of
litigation expenses incurred as the Company pursues its claim against its insurer. Interest
expense for the period decreased $1.8 million to $22.3 million for fiscal year 2009 due to the
repurchase of our senior convertible notes in the open market. Investment and other income, net
decreased $2.3 million to $0.1 million primarily due to a decrease in the average rate earned on
our cash balances.
Cash flow provided by operating activities for the year ended October 31, 2009 was $84.9
million compared to $84.5 million for fiscal year 2008. The increase in operating cash flow is
primarily due to a combination of tax refunds and reductions of income tax payments in
fiscal year 2009 amounting to $31.6 million compared to $21.8 million
in tax refunds and reductions of income tax payments
in fiscal year 2008. The
increase in net cash flows from tax refunds and reductions of income tax payments was
partially offset by the funding of $2.7 million of the estimated probable funding obligation
related to our cemetery perpetual care trust in 2009, $1.7 million of cash outflows related to
Hurricanes Katrina and Ike in 2009, coupled with the timing of payments to vendors and payroll
payments.
Preneed-Backlog, Trust Portfolio and Cash Impact of Sales
Overview
We believe that preneed funeral and cemetery property sales are two of the primary drivers of
sustainable long-term growth in the number of families served by our funeral homes and cemeteries.
Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise
sales are deferred into our backlog while our preneed cemetery property sales are recognized
currently in accordance with the retail land sale provisions of ASC 360-Property, Plant and
Equipment. For a detailed discussion of our revenue recognition policies and how we account for
our at-need sales, preneed sales and trust earnings, see Notes 2(i), 2(j), 2(k), and Notes 4
through 7 to the consolidated financial statements included in Item 8.
Backlog
We estimate that as of October 31, 2009 and 2008 the future value of our preneed funeral and
cemetery services and merchandise backlog represented approximately $1.7 billion of revenue to be
recognized in the future as these prepaid products and services are delivered. This is made up of
approximately $1.1 billion from trust and $0.6 billion from insurance. This represents the face
value of the backlog taking into account current realized earnings not yet recognized and current
unrealized gains and losses plus the earnings that are projected on the funds held in trust and the
estimated build-up in the face value of insurance contracts. It assumes no future preneed sales
and assumes maturities each year consistent with our experience, with the majority of existing
contracts expected to mature over the next 15 years. In addition, in fiscal years 2009 and 2008,
the analysis assumes a weighted annual
return of 4.3 percent and 5.0 percent, respectively, projected from our trusts over the expected
life of the contracts
30
and a 2 percent build-up from the insurance contracts. Actual results could
differ from our assumptions used in the calculation. Proceeds of these insurance policies may be
used by customers for other purposes and are portable to other funeral service providers or for
completely separate purposes. As of October 31, 2009 and October 31, 2008, the value of the
preneed backlog, excluding any future earnings on the funds held in trust and any build-up in the
face value of insurance contracts, but including unrealized earnings and losses on the funds held
in trust and realized earnings and losses on the funds held in trust not yet recognized as revenue,
was approximately $1.5 billion.
Supplemental Trust Portfolio Information
We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and
services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The size
of the trusts depends primarily upon the level of preneed sales and maturities, the amount of
dividend and interest income and investment gains or losses and funds added through acquisitions,
if any.
As of October 31, 2009, approximately 9 percent of our portfolio was invested in cash, 30
percent in fixed-income securities, 14 percent in preferred stocks, 44 percent in equities and 3
percent in other investments. Because approximately 44 percent of our total trust portfolio is
currently invested in equities, we would generally expect our portfolio performance to improve if
the performance of the overall stock market improves, but we would also expect its performance to
deteriorate if the overall stock market declines.
During late fiscal 2008, the Company engaged a new investment consultant to review the
portfolio. We reviewed alternative asset allocation models and selected a new asset allocation
that is more heavily weighted toward fixed income securities. As a result, we have taken advantage
of the rebound in the financial markets to rebalance the trust portfolio. We have reduced our
exposure to common equities and have increased our investment in fixed income securities where we
intend to generate a reasonable rate of return with a lower overall volatility for the investments.
We plan to continue to reduce the volatility of our investment portfolio by adjusting our asset
allocation as the financial markets improve.
The following table presents the overall annual realized return in our domestic trusts for the
years 1991 to 2009. The returns represent interest, dividends and realized capital gains or losses
but not unrealized capital gains or losses.
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|
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1991-1999 |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
8-9%
|
|
|
5.8 |
% |
|
|
6.3 |
% |
|
|
4.3 |
% |
|
|
4.8 |
% |
|
|
2.6 |
% |
|
|
4.3 |
% |
|
|
5.1 |
% |
|
|
4.8 |
% |
|
|
(3.3 |
)% |
|
|
(.4 |
)% |
During fiscal year 2009, we experienced positive trends in the overall market and in our
preneed and perpetual care trusts. For the year ended October 31, 2009, our preneed funeral and
cemetery merchandise and services trusts experienced a total return, including both realized and
unrealized losses, of 15.4 percent, and our cemetery perpetual care trusts experienced a total
return, including both realized and unrealized losses, of 19.9 percent.
The table below presents the total returns of our trusts including realized and unrealized
gains and losses.
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|
|
|
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|
|
|
|
Funeral and Cemetery |
|
|
|
|
Merchandise and |
|
Cemetery Perpetual |
|
|
Services Trusts |
|
Care Trusts |
For the year ended October 31, 2009 |
|
|
15.4 |
% |
|
|
19.9 |
% |
For the last three years ended October 31, 2009 |
|
|
(4.1 |
)% |
|
|
(1.8 |
)% |
For the last five years ended October 31, 2009 |
|
|
1.2 |
% |
|
|
1.7 |
% |
For the last ten years ended October 31, 2009 |
|
|
1.8 |
% |
|
|
2.4 |
% |
In our preneed funeral and cemetery merchandise and services trusts, as of October 31, 2009
and October 31, 2008, the fair market value of the investments in the trusts were $192.9 million
and $253.6 million, respectively, lower than our cost basis. We review our investment portfolio
quarterly, and as part of that review during fiscal year 2009, we determined that we no longer had
the intent to hold certain securities until they recovered their value. In addition, there were
certain securities that we deemed were practically worthless as of October 31, 2008 that further
declined in value during fiscal year 2009. As a result, for fiscal year 2009, we realized
additional losses of $12.1
31
million in our funeral and cemetery merchandise and services trusts.
These losses were allocated to the underlying contracts and will affect the amount of future
revenue recognized, and cash withdrawn, at the time the specific contract is performed.
The preneed contracts we manage are long-term in nature, and we believe that the trust
investments will appreciate in value over the long-term. We continue to monitor our investment
portfolio closely. As of October 31, 2009 and October 31, 2008, we had $220.7 million and $240.9
million, respectively, in earnings that have been realized and allocated to contracts that will be
recognized in the future as the underlying contracts are performed.
In our cemetery perpetual care trusts, as of October 31, 2009 and October 31, 2008, the fair
market value of our investments were $56.7 million and $81.0 million, respectively, lower than our
cost basis. In addition, during fiscal year 2009, we realized losses of $3.4 million in our
cemetery perpetual care trusts. This loss resulted in the recording of an additional funding
obligation of $3.4 million included in cemetery costs in the statement of earnings for fiscal year
2009. See Note 6 to the consolidated financial statements for further information on the estimated
probable funding obligation.
Securities representing unrealized losses totaling $258.8 million were also in a loss position
at October 31, 2008, up from $254.8 million at the end of last year. Based upon our review of the
specific underlying securities, we continue to believe we have the ability and intent to hold these
investments for the forecasted recovery period, and therefore, do not believe the losses on these
securities should be realized. For each of these securities, we evaluate consensus analyst
recommendations, ratings from established ratings agencies and overall market performance. Most of
our common stocks are part of the S&P 500 Index, and all preferred stocks and corporate bonds had a
rating of A or better at the time of purchase. We believe that we have sufficient cash and cash
equivalents within the trusts, from cash deposits of future preneed sales and cash received from
ordinary income to fund future services and allow us to hold these investments until they recover
in value. Of the $258.8 million, approximately 12 percent, or $31.9 million, were generated by
preferred stock investments and 78 percent, or $202.6 million, were generated by common stock
investments. The market value of these securities represents approximately 49 percent of the
market value of the securities in our trust portfolio. The preferred stocks are primarily in the
financial services sector which has experienced a significant decline in market value due to the
current economic crisis. The vast majority of these companies were rated A or better at the time
of purchase by S&P, Moodys or Fitch, and most continue to pay dividends. Although we cannot
predict future stock prices, our management expects that the financial services sector, in
particular, and the overall S&P 500 will recover and that these stocks may recover along with them.
The table below presents the sectors in which our trust portfolio is invested and the
percentage of each sector in the total trust portfolio as of October 31, 2009.
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|
Funeral and Cemetery |
|
|
|
|
Merchandise and |
|
Cemetery Perpetual |
|
|
Services Trusts |
|
Care Trusts |
Sector |
|
Percentage of Portfolio |
|
Percentage of Portfolio |
Financials |
|
|
21 |
% |
|
|
37 |
% |
Mutual Funds Fixed Income |
|
|
14 |
% |
|
|
16 |
% |
Cash |
|
|
10 |
% |
|
|
9 |
% |
Information Technology |
|
|
11 |
% |
|
|
7 |
% |
Mutual Funds Equity |
|
|
8 |
% |
|
|
3 |
% |
Healthcare |
|
|
7 |
% |
|
|
5 |
% |
Consumer Discretionary |
|
|
6 |
% |
|
|
8 |
% |
Energy |
|
|
5 |
% |
|
|
3 |
% |
Consumer Staples |
|
|
5 |
% |
|
|
4 |
% |
Industrials |
|
|
4 |
% |
|
|
3 |
% |
Telecommunications |
|
|
3 |
% |
|
|
3 |
% |
Government |
|
|
2 |
% |
|
|
2 |
% |
Utilities |
|
|
1 |
% |
|
|
|
|
Materials |
|
|
1 |
% |
|
|
|
|
Mortgage Securities |
|
|
|
|
|
|
|
|
Miscellaneous |
|
|
2 |
% |
|
|
|
|
32
Investments in the financials sector represented 21 percent, or $107.3 million of fair market
value, of our preneed funeral and cemetery merchandise and services portfolios; however, only seven
percent, or $17.2 million, of the common stock within the preneed funeral and cemetery merchandise
and services trust portfolio is invested in the financials sector. Investments in the financials
sector represent 37 percent, or $75.9 million, of our cemetery perpetual care portfolio as of
October 31, 2009, with only eight percent or $4.9 million of the common stock within the cemetery
perpetual care trust portfolio invested in the financials sector. This sector has unrealized losses
of $69.8 million as of October 31, 2009 in our preneed funeral and cemetery merchandise and
services trusts, $23.3 million of which relate to preferred stock investments. With respect to our
cemetery perpetual care trust portfolio, the financials sector has unrealized losses of $29.2
million as of October 31, 2009, $18.8 million of which relate to preferred stock investments.
Risks associated with the financials sector include risk of failure of various large financial
institutions, government regulation, interest rates, cost of capital funds, credit losses and
volatility in financial markets.
We also have concentrations in other sectors that may be more susceptible to additional
adverse impact from the economic crisis, primarily the information technology sector. The
information technology sector has unrealized losses of $42.3 million as of October 31, 2009 in our
preneed funeral and cemetery merchandise and services trusts and unrealized losses of $10.7 million
as of October 31, 2009 in our cemetery perpetual care trusts. The information technology sector
risks include overall economic conditions, short product cycles, rapid obsolescence of products,
competition and government regulation.
We perform a separate analysis to determine whether our preneed contracts are in a loss
position. None were in a loss position in fiscal year 2009. For additional information, see Note
2(m) to the consolidated financial statements and Overview of Critical Accounting Policies
herein.
We generate revenue related to the trusts from investment management fees earned by our
subsidiary, ITI. In fiscal year 2009, these fees amounted to $8.0 million. These fees are based
on the fair market value of the investments in the funeral and cemetery merchandise and services
trust portfolio and cemetery perpetual care trusts, and significant changes in the fair market
value of the portfolio impact the fees earned. To the extent the fair market values of our trust
assets are less than those values prevailing during 2009, we would recognize less revenue from
management fees than we earned in 2009 and than we have historically earned.
Impact of Preneed Sales on Near-Term Cash
The impact of preneed sales on near-term cash flow depends primarily on the commissions paid
on the sale, the timing of the tax payments on the sale, the portion of the sale required to be
placed into trust and the terms of the particular contracts such as the size of the down payment
required and the length of the contract. We generally pay commissions to our preneed sales
counselors based on a percentage of the total preneed contract price, but only to the extent cash
is paid by the customer. If the initial cash installment paid by the customer is not sufficient to
cover the entire commission, the remaining commission is paid from subsequent customer
installments. However, because we are required to place a portion of each cash installment paid by
the customer into trust, we may be required to use our own cash to cover a portion of the
commission due on the installment from the customer. Accordingly, preneed sales are generally cash
flow negative initially, but may become cash flow positive at varying times over the life of the
contract, depending upon the trusting requirements and the terms of the particular contract.
Commissions related to preneed funeral and preneed cemetery services and merchandise sales are
expensed as incurred.
Cash flows related to earnings in our trusts, deposits and withdrawals and related matters and
our cemetery perpetual care funding obligations are described in Notes 4, 5 and 6 of the
consolidated financial statements.
Overview of Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make estimates and
assumptions. See Note 2(b) to the consolidated financial statements included in Item 8. We
believe that of our significant accounting policies, the following are both most important to the
portrayal of our financial condition and results of operations and require managements most
difficult, subjective or complex judgment. See Note 2 to the consolidated financial statements
included in Item 8.
33
Deferred Revenue and Revenue Recognition
Funeral revenue is recognized when funeral services are ultimately performed. Our funeral
receivables included in current receivables primarily consist of amounts due for funeral services
already performed. We sell price-guaranteed prearranged funeral contracts through various programs
providing for future funeral services at prices prevailing when the agreements are signed. Revenues
associated with sales of prearranged funeral contracts, which include accumulated trust earnings,
are deferred until such time that the funeral services are ultimately performed. See Note 2(i) to
the consolidated financial statements included in Item 8.
Revenue associated with cemetery merchandise and services is recognized when the service is
performed or merchandise is delivered. Revenue associated with preneed cemetery property interment
rights is recognized in accordance with the retail land sales provision of ASC 360-Property, Plant
and Equipment. Under this guidance, revenue from constructed cemetery property is not recognized
until 10 percent of the sales price has been collected. Revenue related to the preneed sale of
cemetery property prior to completion of its construction is recognized on a percentage of
completion method of accounting. Revenue associated with sales of preneed merchandise and services
is not recognized until the merchandise is delivered or the services are ultimately performed. See
Note 2(j) to the consolidated financial statements included in Item 8.
We defer all dividends and interest earned and net capital gains and losses realized by
preneed funeral trust and preneed cemetery merchandise trust accounts until the underlying service
or the merchandise is delivered. Unrealized capital gains and losses are not allocated to specific
contracts.
From time to time, unidentified contracts are presented to us primarily relating to contracts
sold prior to the time we acquired certain businesses. In addition, from time to time, we have
identified in our backlog, certain contracts in which services or merchandise have already been
delivered. Using historical trends and statistical analysis, we record an estimated net liability
for these items.
Perpetual Care Funding Obligation
Certain states allow us to withdraw realized capital gains from cemetery perpetual care
trusts, and other states prohibit these withdrawals. These earnings and related funds are intended
to defray cemetery maintenance costs and are recorded as revenue. In the event that we have been
allowed to withdraw realized gains and there are realized losses in the trust, we may determine we
have a funding obligation to restore the net realized losses of the trust. A charge is recorded in
the statement of earnings at the time it is considered probable that we will be required to restore
the realized losses.
Loss Contract Analysis
Each quarter we perform an analysis to determine whether our preneed contracts are in a loss
position, which would necessitate a charge to earnings. For this analysis, we add the sales prices
of the underlying contracts and realized earnings, then subtract realized losses to derive the net
amount of proceeds for contracts as of that particular balance sheet date. We then consider
unrealized gains and losses based on current market prices quoted for the investments, but we do
not include future expected returns on the investments in our analysis. We compare the amount of
adjusted proceeds after considering net unrealized gains and losses to the estimated direct costs
to deliver the contracts, which consist primarily of funeral and cemetery merchandise costs and
salaries, supplies and equipment related to the delivery of a preneed contract. If a deficiency
were to exist, we would record a charge to earnings and a corresponding liability for the expected
loss on the delivery of those contracts from our deferred revenue. Due to the positive margins of
our preneed contracts and the trust portfolio returns we have experienced in prior years, there is
currently capacity for additional market depreciation before a contract loss would occur.
Variable Interest Entities
We consolidate our preneed funeral and cemetery merchandise and services trusts and our
cemetery perpetual care trusts. For a more detailed discussion of our accounting policies
including our policy for determining
34
whether a loss in an investment in our trust portfolio should
be considered realized and for determining whether
impairments in debt securities are temporary or other than temporary, see Notes 2(k) and 4 through
7 to the consolidated financial statements included in Item 8. Insurance-funded preneed funeral
contracts are not recorded on our balance sheet, as described in Note 2(i) to the consolidated
financial statements included in Item 8.
Allowance for Doubtful Accounts and Sales Cancellations
Management must make estimates of the uncollectibility of our accounts receivable. We
establish a reserve for uncollectible installment contracts and trade accounts based on a range of
percentages applied to accounts receivable aging categories. These percentages are based on an
analysis of our historical collection and write-off experience. In addition, we establish a
reserve for sales cancellations for cemetery property sales based on historical cancellations and
recent write-off activity. This reserve is recorded as a reduction in cemetery revenue. We also
establish an allowance for cancellations of insurance and third-party commissions based on
historical experience for cancellations of insurance contracts within the period of refundability.
These estimates are impacted by a number of factors, including changes in the economy and
demographic or competitive changes in our areas of operation. If circumstances change, our
estimates of the recoverability of amounts due to us could change by a material amount.
Depreciation of Long-Lived Assets
Buildings and equipment are recorded at cost and are depreciated over their estimated useful
lives, primarily using the straight-line method. Buildings and building improvement items are
generally depreciated over a period ranging from 10 to 40 years. Equipment is generally
depreciated over the following ranges: light equipment, 5 to 10 years; heavy equipment, 10 years;
computer equipment, 3 to 4 years; and crematory equipment, 5 to 20 years. Vehicles are generally
depreciated over 5 to 7 years. Leasehold improvements are depreciated over the shorter of the term
of the lease or the life of the asset. These estimates of the useful lives may be affected by such
factors as changes in regulatory requirements or changing market conditions.
Valuation of Long-Lived Assets
We review the carrying value of our long-lived assets whenever events or circumstances
indicate that the carrying amount may not be recoverable. This review is based on our projections
of anticipated undiscounted future cash flows and compares the estimated undiscounted future cash
flows expected to be generated by those assets to the carrying amount of those assets. The net
carrying value of any assets not fully recoverable would be reduced to fair value. While we
believe that our estimates of undiscounted future cash flows are reasonable, different assumptions
regarding such cash flows and comparable sales values could materially affect our evaluations.
Valuation of Goodwill
In our determination of reporting units for goodwill impairment testing purposes, both
qualitative and quantitative characteristics are evaluated. Gross margins are analyzed for
purposes of determining whether or not our operating regions are considered economically similar.
Qualitative factors include the nature of our products and services, consistency of products and
services and the delivery of those products and services in our funeral homes and cemeteries, the
similarity of class of customers across all locations and regulations in different jurisdictions.
Based on our evaluation, we have eight reporting units. Because goodwill impairment tests are
applied at the reporting unit level, a change in reporting unit can have a material effect on the
outcome of the test. See Note 2(g) to the consolidated financial statements included in Item 8 for
additional information.
Goodwill of a reporting unit must be tested for impairment on at least an annual basis. We
conduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. In
addition to an annual review, we assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value of goodwill may be greater than its fair value.
Factors we consider important that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results, significant changes
in the manner of the use of our assets or the strategy for our overall business and significant
negative industry or economic trends.
Goodwill was allocated to these reporting units based on the implied fair value of goodwill.
The implied fair value of a reporting units goodwill is determined in a manner similar to the
amount of goodwill determined in a
35
business combination. That is, we allocate the fair value of
the reporting unit to all of the assets and liabilities of
that unit as if the reporting unit had been acquired in a business combination and the fair value
of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair
value of the reporting unit over the amounts assigned to its assets and liabilities is the implied
fair value of goodwill. We calculated the fair value, or enterprise value, for each of the
reporting units based on a discounted cash flow analysis.
In reviewing goodwill for impairment, we first compare the fair value of each of our reporting
units with their carrying amounts (including goodwill). If the carrying amount of a reporting unit
(including goodwill) exceeds its fair value, we then measure the amount of impairment of the
reporting units goodwill by comparing the implied fair value of the reporting units goodwill with
the carrying amount of that goodwill. An impairment charge is recorded when the carrying amount of
goodwill exceeds its implied fair value. This step of our impairment test involves determining
estimates of the fair values of our assets and liabilities. If these estimates or their related
assumptions change in the future, including if we project lower cash flow in the future for a
reporting unit than we projected when we performed our fiscal 2009 impairment test, we may be
required to record an impairment charge.
Our goodwill impairment test involves estimates and management judgment. The discounted cash
flow valuation uses projections of future cash flows and includes assumptions concerning future
operating performance and economic conditions and may differ from actual future cash flows. We
test our results by comparing them to the trading multiples of companies in our industry and
supplier industries calculated as enterprise value divided by EBITDA. We also reviewed multiples
used in recent acquisition transactions within the industry. In projecting our cash flows, we used
growth rates of three to five percent. We adjusted the results for our estimate of the impact of
the realized losses in our trusts on our cash flows. For the discount rate, we used 9.1 percent,
which reflected our weighted average cost of capital determined based on our industry and our
supplier industries and capital structure as adjusted for equity risk premiums and size risk
premiums based on our market capitalization. Fair value is calculated as the sum of the projected
discounted cash flows of the reporting units over the next five years and terminal value at the end
of those five years. The terminal value is calculated as the projected EBITDA at the end of the
five year period divided by the discount rate minus terminal growth rates ranging from 2 to 3.5
percent. We considered a sensitivity analysis of the terminal values and used the midpoint
enterprise value as our best estimate.
Accounting for Income Taxes
As part of the process of preparing our consolidated financial statements, we are required to
estimate our income taxes in each of the jurisdictions in which we operate. This process involves
estimating our actual current tax expense together with assessing temporary differences resulting
from the different treatment of items, such as deferred revenue, for tax and accounting purposes.
These differences result in deferred tax assets and liabilities, which are included in our
consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will
be recovered from future taxable income, and to the extent we believe that recovery is not likely,
we establish a valuation allowance. The following items are reviewed to determine if a valuation
allowance is required: net operating losses (federal, state and United States possessions), capital
loss carry forwards and deferred tax assets (federal, state and United States possessions). To the
extent we establish a valuation allowance or increase this allowance in a period, we include an
expense within the tax provision in the statement of earnings.
Approximately one-half of the October 31, 2009 fair market value of our preneed funeral and
cemetery merchandise and services trusts are in trusts for which we are the grantor. For these
trusts (unlike the remaining trusts for which the customers are the grantors), we retain the income
tax characteristics of all earnings as realized in the trust. For example, capital gains and
losses in the trusts are capital gains and losses on our tax returns. In addition, we must
recognize these earnings currently for tax purposes, while for book purposes they are deferred.
Realized capital losses in the trusts for which we are the grantor, if we have or expect
insufficient offsetting capital gains, can require us to record a valuation allowance against the
related deferred tax asset (capital loss carryforward), which increases our current period
effective tax rate and reduces our current period reported net earnings. Essentially, the current
period valuation allowance reflects the fact that, if we cannot generate capital gains in the
future against which to use the tax benefit of the capital loss (which is limited to five years),
when we perform the contract, we will recognize more income and pay higher taxes for tax purposes
than we will for book purposes. This tax relationship does not occur with respect to trusts for
which the customer is the grantor, because
36
all of their earnings are service revenue and thus
ordinary income to us, and we do not recognize the revenue for either tax or book purposes until
the underlying contract is performed.
During the first quarter of fiscal year 2008, we adopted the guidance on uncertain tax
positions in ASC 740-Income Taxes. This guidance prescribes a recognition threshold and
measurement attribute for a tax position taken or expected to be taken in a tax return and also
provides guidance on derecognition, classification, interest and penalties, accounting in interim
periods, disclosure and transition. We have reviewed our income tax positions and identified
certain tax deductions or revenue deferrals that are not certain.
With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S.
income tax examinations by tax authorities for fiscal years before 2006. To the extent tax,
interest and penalties are not assessed with respect to uncertain tax positions in the future,
amounts accrued will be reduced and reflected as a reduction of tax expense, interest expense or
other expense.
Significant management judgment is required in determining our provision for income taxes,
deferred tax assets and liabilities and any valuation allowance recorded against our net deferred
tax assets. In the event that actual results differ from these estimates or we adjust these
estimates in future periods, we may need to change our allowance, which could materially impact our
financial condition and results of operations.
Estimated Insurance Loss Liabilities
We purchase comprehensive general liability, automobile liability and workers compensation
insurance coverages structured within a large deductible/self-insured retention premium rating
program. This program results in the Company being primarily self-insured for claims and
associated costs and losses covered by these policies but below our deductible. With respect to
health insurance, we purchase individual and aggregate stop loss coverage with a large deductible.
This program results in the Company being primarily self-insured for claims and associated costs up
to the amount of the deductible, with claims in excess of the deductible amount being covered by
insurance. We also have insurance coverage related to property damage, incremental costs and
property operating expenses we incurred due to damage caused by hurricanes and other natural
disasters. Our policy is to record such amounts when recovery is probable, which generally means
we have reached an agreement with the insurance company. For additional information, see Note 23
to the consolidated financial statements included in Item 8. We accrue for legal costs related to
loss contingencies as the services are provided. If a settlement is determined to be probable,
then an estimate is recorded for the settlement at that time. For additional information, see Note
2(t) to the consolidated financial statements included in Item 8.
Results of Operations
The following discussion segregates the financial results of our operations into our three
segments, grouped by our funeral and cemetery operations. Effective as of the second quarter of
fiscal year 2009, we have three operating and reportable segments consisting of a funeral segment,
cemetery segment and a corporate trust management segment. For a discussion of our segments, see
Note 21 to the consolidated financial statements included in Item 8. Prior period data has been
retrospectively adjusted to conform to the new segment presentation. As there have been no
material acquisitions or construction of new locations in fiscal years 2009 and 2008, results from
continuing operations reflect those of same-store locations.
37
Comparison of Fiscal Year 2009 to Fiscal Year 2008
Year Ended October 31, 2009 Compared to Year Ended October 31, 2008
Funeral Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
|
(In millions) |
|
Funeral Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
261.1 |
|
|
$ |
268.3 |
|
|
$ |
(7.2 |
) |
Corporate Trust Management (1) |
|
|
15.2 |
|
|
|
18.3 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Revenue |
|
$ |
276.3 |
|
|
$ |
286.6 |
|
|
$ |
(10.3 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
210.3 |
|
|
$ |
217.5 |
|
|
$ |
(7.2 |
) |
Corporate Trust Management (1) |
|
|
.9 |
|
|
|
.8 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Costs |
|
$ |
211.2 |
|
|
$ |
218.3 |
|
|
$ |
(7.1 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
50.8 |
|
|
$ |
50.8 |
|
|
$ |
|
|
Corporate Trust Management (1) |
|
|
14.3 |
|
|
|
17.5 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Gross Profit |
|
$ |
65.1 |
|
|
$ |
68.3 |
|
|
$ |
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
Same-Store Analysis for the Years Ended October 31, 2009 and 2008
|
|
|
|
|
|
|
Change in Average Revenue |
|
Change in Same-Store |
|
Same-Store Cremation Rate |
Per Funeral Service |
|
Funeral Services |
|
2009 |
|
2008 |
2.6%(1)
|
|
(5.9)%
|
|
41.0%
|
|
40.0% |
|
|
|
(1) |
|
Corporate trust management consists of trust management fees and funeral
merchandise and service trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by the Company at rates consistent
with industry norms based on the fair market value of assets managed and are paid by the
trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of
earnings realized by the trusts over the life of the preneed contracts and allocated to those
products and services delivered during the relevant periods. See Notes 3 and 6 to the
consolidated financial statements included herein for information regarding the cost basis and
market value of the trust assets and current performance of the trusts (i.e., current realized
gains and losses, interest income and dividends). Trust management fees included in funeral
revenue for fiscal years 2009 and 2008 were $3.9 million and $5.1 million, respectively.
Funeral trust earnings recognized in funeral revenue for fiscal years 2009 and 2008 with
respect to preneed contracts delivered were $11.3 million and $13.2 million, respectively. |
Funeral revenue decreased $10.3 million, or 3.6 percent, from $286.6 million for the year
ended October 31, 2008 to $276.3 million for the year ended October 31, 2009. The decrease in
funeral revenue is primarily due to a $3.1 million decline in funeral revenue related to trust
activities and a 5.9 percent, or 3,479 event, decrease in our same-store funeral services
performed, to 55,545 events. We believe the decline is primarily due to a reduced number of deaths
in our markets, when compared with the comparable prior year period. An additional 39 percent of
the total decline is due to a 1,342 call decline in our West Coast operations, resulting from a
decrease in low-end cremation events. Finally, we experienced a 222 call decline, or 6 percent of
the total decline, in funeral services due to an additional day in the second quarter of 2008
associated with leap year. These revenue decreases were partially offset by an increase in average
revenue per traditional funeral service of 3.1 percent and an increase in average revenue per
cremation service of 5.7 percent. These average revenue increases were partially offset by a shift
in mix to lower-priced cremation services and a decrease in funeral trust earnings resulting in an
overall
increase in our same-store average revenue per funeral service of 2.6 percent. The cremation
rate for our same-store operations was 41.0 percent for the year ended October 31, 2009 compared to
40.0 percent for fiscal year 2008.
38
Funeral gross profit decreased $3.2 million to $65.1 million for the year ended October 31,
2009 compared to $68.3 million for the same period of 2008, due to the decrease in trust-related
revenue as noted above.
Cemetery Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
|
|
(In millions) |
|
Cemetery Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
204.2 |
|
|
$ |
232.2 |
|
|
$ |
(28.0 |
) |
Corporate Trust Management (1) |
|
|
7.3 |
|
|
|
9.1 |
|
|
|
(1.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Revenue |
|
$ |
211.5 |
|
|
$ |
241.3 |
|
|
$ |
(29.8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
187.9 |
|
|
$ |
207.9 |
|
|
$ |
(20.0 |
) |
Corporate Trust Management (1) |
|
|
1.0 |
|
|
|
.9 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Costs |
|
$ |
188.9 |
|
|
$ |
208.8 |
|
|
$ |
(19.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
16.3 |
|
|
$ |
24.3 |
|
|
$ |
(8.0 |
) |
Corporate Trust Management (1) |
|
|
6.3 |
|
|
|
8.2 |
|
|
|
(1.9 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Gross Profit |
|
$ |
22.6 |
|
|
$ |
32.5 |
|
|
$ |
(9.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Corporate trust management consists of trust management fees and cemetery
merchandise and service trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by the Company at rates consistent
with industry norms based on the fair market value of assets managed and are paid by the
trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of
earnings realized by the trusts over the life of the preneed contracts and allocated to those
products and services delivered during the relevant periods. See Notes 4 and 6 to the
consolidated financial statements included herein for information regarding the cost basis and
market value of the trust assets and current performance of the trusts (i.e., current realized
gains and losses, interest income and dividends). Trust management fees included in cemetery
revenue for fiscal years 2009 and 2008 were $4.1 million and $4.9 million, respectively, and
cemetery trust earnings included in cemetery revenue for fiscal years 2009 and 2008 recognized
with respect to preneed contracts delivered were $3.2 million and $4.2 million, respectively.
Perpetual care trust earnings of $6.8 million and $10.7 million, respectively, for fiscal
years 2009 and 2008 are included in the revenues and gross profit of the cemetery segment.
See Notes 5 and 6 to the consolidated financial statements included herein for information
regarding the cemetery perpetual care trusts. |
Cemetery revenue decreased $29.8 million from $241.3 million for the year ended October 31,
2008 to $211.5 million for the year ended October 31, 2009. This decrease is primarily due to a
$13.7 million, or 13.2 percent, decrease in cemetery property sales, net of discounts, due
primarily to current economic conditions. Approximately 40 percent of the decline in cemetery
property sales occurred in Florida where the current economic environment is having the largest
impact. We also experienced a $5.8 million decrease in cemetery merchandise delivered and services
performed primarily due to a decline in deaths in our markets. Merchandise delivered was also
impacted by a decline in merchandise sales due in part to the current economy. In addition, we
experienced a $5.7 million decrease in cemetery revenue related to trust activities, of which $3.9
million of the decrease relates to cemetery perpetual care trust earnings.
Cemetery gross profit decreased $9.9 million to $22.6 million for the year ended October 31,
2009 compared to $32.5 million for the same period of 2008. The decrease in gross profit is
primarily due to the decrease in revenue, as noted above, partially offset by a decrease in the
estimated probable funding obligation to restore the
net realized losses in certain of our cemetery perpetual care trusts which declined from a
$13.3 million charge recorded during fiscal year 2008 to a $3.4 million charge recorded during
fiscal year 2009.
39
Other
Corporate general and administrative expenses decreased $1.9 million to $30.7 million for the
year ended October 31, 2009 primarily due to $1.8 million in fiscal year 2008 charges for
professional services related to the Boards evaluation of strategic alternatives to maximize
shareholder value in connection with our response to an unsolicited acquisition proposal.
We incurred $0.4 million in net hurricane related charges in fiscal year 2009 compared to $2.3
million in fiscal year 2008 related to Hurricanes Katrina and Ike. The net expenses in fiscal
years 2009 and 2008 associated with Hurricane Katrina primarily relate to the lawsuit we filed
against our insurance carriers related to our Hurricane Katrina claim.
Interest expense decreased $1.8 million to $22.3 million for the year ended October 31, 2009
primarily due to the repurchase of our senior convertible notes in the open market.
Investment and other income, net decreased $2.3 million to $0.1 million due primarily to an
approximate 150 basis-point decrease in the average rate earned on our cash balances. In light of
economic and market conditions, we decided to seek stable investments in money-market funds
invested in United States treasury securities. These investments realize a lower return.
During fiscal year 2008, we recorded a noncash goodwill impairment charge of $26.0 million
related to the cemetery operating segment.
In fiscal year 2009, we purchased $37.6 million aggregate principal amount of our 3.125
percent senior convertible notes due 2014 and $45.0 million aggregate principal amount of our 3.375
percent senior convertible notes due 2016 in the open market, for an aggregate purchase price of
$60.8 million, a substantial discount. As a result, we recorded a $20.1 million pre-tax net gain
on the early extinguishment of debt during the year ended October 31, 2009.
The effective tax rate for the year ended October 31, 2009 was 35.5 percent compared to 119.7
percent for the same period in 2008. The increased rate in fiscal year 2008 was primarily due to
the $26.0 million goodwill impairment charge, of which $25.0 million was non-deductible for tax
purposes. This increase was coupled with a $7.4 million valuation allowance on the unrealized
capital loss carryforward of approximately $18.8 million, net of capital gains, attributable to the
realized losses associated with investments of certain trusts which are recognized for tax purposes
and deferred for book purposes.
Long-term receivables decreased $7.7 million from October 31, 2008 to October 31, 2009
primarily due to the decline in current year cemetery property sales of 13.2 percent and
collections of prior period sales exceeding receivables for new sales. Cemetery property increased
$8.7 million primarily due to a cemetery acquisition in the first quarter of fiscal 2009. Current
deferred income taxes increased $12.9 million due in large part to an increase in the net operating
loss resulting from the change in tax accounting policy, discussed in Note 18 to the consolidated
financial statements. Long-term deferred income taxes decreased $56.1 million from October 31,
2008 to October 31, 2009 primarily due to the change in tax accounting policy, discussed in Note 18
to the consolidated financial statements. Preneed funeral receivables and trust investments,
preneed cemetery receivables and trust investments, cemetery perpetual care trust investments,
deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts corpus were
all positively impacted by the recent improvement in the market value of our trust assets. For
additional information, see Notes 4, 5 and 6 to our consolidated financial statements included
herein.
Accounts payable and accrued expenses decreased $4.7 million from October 31, 2008 to October
31, 2009 primarily due to the timing of payables related to professional fees and vendor payments.
We automated payments to one of our major vendors which impacted the timing of payments. The
estimated probable funding obligation to restore the net realized losses in certain of our cemetery
perpetual care trusts increased $0.7 million from October 31, 2008 to October 31, 2009 primarily
due to the $3.4 million charge in fiscal year 2009 to fund the perpetual care
trusts, partially offset by the funding of $2.7 million of the estimated probable funding
obligation. We purchased $82.6 million aggregate principal amount of our senior convertible notes
during the year ended October 31, 2009 resulting in a decrease in long-term debt.
40
Preneed Sales into the Backlog
Net preneed funeral sales increased 0.3 percent during the year ended October 31, 2009
compared to the corresponding period in 2008.
The revenues from our preneed funeral and cemetery merchandise and service sales are deferred
into our backlog and are not included in our operating results presented above. We had $146.2
million in net preneed funeral and cemetery merchandise and service sales (including $77.4 million
related to insurance-funded preneed funeral contracts) during the year ended October 31, 2009 to be
recognized in the future as these prepaid products and services are delivered, compared to net
sales of $151.0 million (including $76.5 million related to insurance-funded preneed funeral
contracts) for the corresponding period in 2008. Insurance-funded preneed funeral contracts which
will be funded by life insurance or annuity contracts issued by third-party insurers are not
reflected in the condensed consolidated balance sheets.
Comparison of Fiscal Year 2008 to Fiscal Year 2007
Year Ended October 31, 2008 Compared to Year Ended October 31, 2007
Funeral Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
|
(In millions) |
|
Funeral Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
268.3 |
|
|
$ |
260.9 |
|
|
$ |
7.4 |
|
Corporate Trust Management (1) |
|
|
18.3 |
|
|
|
18.4 |
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Revenue |
|
$ |
286.6 |
|
|
$ |
279.3 |
|
|
$ |
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
217.5 |
|
|
$ |
215.7 |
|
|
$ |
1.8 |
|
Corporate Trust Management (1) |
|
|
.8 |
|
|
|
.7 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Costs |
|
$ |
218.3 |
|
|
$ |
216.4 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
50.8 |
|
|
$ |
45.2 |
|
|
$ |
5.6 |
|
Corporate Trust Management (1) |
|
|
17.5 |
|
|
|
17.7 |
|
|
|
(.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Gross Profit |
|
$ |
68.3 |
|
|
$ |
62.9 |
|
|
$ |
5.4 |
|
|
|
|
|
|
|
|
|
|
|
Same-Store Analysis for the Years Ended October 31, 2008 and 2007
|
|
|
|
|
|
|
Change in Average Revenue |
|
Change in Same-Store |
|
Same-Store Cremation Rate |
Per Funeral Service |
|
Funeral Services |
|
2008 |
|
2007 |
3.0%(1)
|
|
%
|
|
39.8%
|
|
39.3% |
|
|
|
(1) |
|
Corporate trust management consists of the trust management fees and funeral
merchandise and services trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by us at rates consistent with
industry norms based on the fair market value of assets managed and are paid by the trusts to
our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings
realized by the trusts over the life of the preneed contracts and allocated to those products
and services delivered during the relevant periods. See Notes 4 and 7 to the consolidated
financial statements included in Item 8 for information regarding the cost basis and market
value of the trust assets and current performance of the trusts (i.e. current realized gains
and losses, interest income and dividends). Trust management fees included in funeral revenue
for 2008 and 2007 were $5.1 million and $5.9 million, respectively. Funeral trust earnings
recognized in funeral revenue for 2008 and 2007 with respect to preneed contracts delivered were
$13.2 million and $12.5 million, respectively. |
41
Funeral revenue increased $7.3 million, or 2.6 percent, from $279.3 million for the year
ended October 31, 2007 to $286.6 million for the year ended October 31, 2008. Our same-store
funeral services performed remained flat with a 15 event decrease to 58,462 events. Our same-store
funeral operations achieved a 2.7 percent increase in the average revenue per traditional funeral
service and a 4.1 percent increase in the average revenue per cremation service due primarily to
the continued refinement of new funeral packages and pricing. These increases along with a
year-over-year increase in funeral trust earnings resulted in an overall increase in our same-store
average revenue per funeral service of 3.0 percent. The cremation rate for our same-store
operations was 39.8 percent for the year ended October 31, 2008 compared to 39.3 percent for the
corresponding period in 2007.
Funeral gross profit increased $5.4 million to $68.3 million for fiscal year 2008 compared to
$62.9 million for fiscal year 2007 primarily due to the increase in revenue, as noted above.
Funeral gross profit margin increased 130 basis points to 23.8 percent for fiscal year 2008 from
22.5 percent for the same period in 2007.
Cemetery Operations
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
Increase |
|
|
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
|
|
(In millions) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
232.2 |
|
|
$ |
233.6 |
|
|
$ |
(1.4 |
) |
Corporate Trust Management (1) |
|
|
9.1 |
|
|
|
9.9 |
|
|
|
(.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Revenue |
|
$ |
241.3 |
|
|
$ |
243.5 |
|
|
$ |
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
207.9 |
|
|
$ |
193.4 |
|
|
$ |
14.5 |
|
Corporate Trust Management (1) |
|
|
.9 |
|
|
|
.6 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Costs |
|
$ |
208.8 |
|
|
$ |
194.0 |
|
|
$ |
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
24.3 |
|
|
$ |
40.2 |
|
|
$ |
(15.9 |
) |
Corporate Trust Management (1) |
|
|
8.2 |
|
|
|
9.3 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Gross Profit |
|
$ |
32.5 |
|
|
$ |
49.5 |
|
|
$ |
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Corporate trust management consists of the trust management fees and cemetery
merchandise and services trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by us at rates consistent with
industry norms based on the fair market value of the assets managed and are paid by the trusts
to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings
realized by the trust over the life of the preneed contracts and allocated to those products
and services delivered during the relevant periods. See Notes 5 and 7 to the consolidated
financial statements included in Item 8 for information regarding the cost basis and market
value of the trust assets and current performance of the trusts (i.e. current realized gains
and losses, interest income and dividends). Trust management fees included in cemetery
revenue for 2008 and 2007 were $4.9 million and $5.3 million and cemetery trust earnings
recognized in cemetery revenue for 2008 and 2007 with respect to preneed contracts delivered
were $4.2 million and $4.6 million, respectively. Perpetual care trust earnings of $10.7
million and $10.2 million for fiscal years 2008 and 2007, respectively, are included in the
revenues and gross profit of the cemetery segment. |
Cemetery revenue decreased $2.2 million, or 0.9 percent, from $243.5 million for the year
ended October 31, 2007 to $241.3 million for the year ended October 31, 2008. The decrease is due
primarily to an $8.2 million, or 7.3 percent, decrease in cemetery property sales, net of
discounts, due to current economic conditions. In addition, we experienced a $3.6 million decrease
in construction on various cemetery projects. In the prior year, we experienced growth due to
focused efforts to reduce the production backlog in existing cemetery projects. These decreases
were partially offset by a $3.2 million, or 3.5 percent, increase in cemetery merchandise delivered
and services performed, a $2.8 million increase in cemetery commission income related to a new
program to manage the cemetery sales at eleven Archdiocese of Los Angeles cemeteries and a $2.1
million increase related to the leasing of our mineral rights at one of our cemeteries to an
outside third party.
42
Cemetery gross profit decreased $17.0 million from $49.5 million in fiscal year 2007 to $32.5
million in fiscal year 2008. The decrease in cemetery gross profit is primarily due to a $13.3
million charge recorded in the fourth quarter of 2008 for our estimated probable funding obligation
to restore the net realized losses in certain of our cemetery perpetual care trusts, included in
cemetery costs. See Note 6 to the consolidated financial statements for additional information.
Other
Corporate general and administrative expenses increased $1.5 million to $32.6 million for
fiscal year 2008. The increase was primarily due to a $2.3 million increase in information
technology costs due in part to the implementation of new business systems and a web development
project in the current year, a $1.8 million increase in costs related to our evaluation of the
unsolicited acquisition proposal received from Service Corporation International in the third
quarter of 2008 and a $1.5 million increase in costs related to the continuous improvement
initiative that began in the first quarter of 2008. The increases were partially offset by a $2.0
million decrease in professional fees primarily due to a decrease in litigation expense and a $1.0
million decrease in depreciation expense for the year ended October 31, 2008 due to the accelerated
depreciation in the prior year of our previous computer software systems associated with the
implementation of the new business systems in the prior year.
We recorded $0.6 million in separation charges during the year ended October 31, 2007
primarily related to separation pay of a former executive officer who retired in the first quarter
of 2007.
As a result of the annual goodwill impairment evaluation performed in the fourth quarter of
2008, we recorded a goodwill impairment charge of $26.0 million for the year ended October 31,
2008. For additional information, see Note 13 to the consolidated financial statements included in
Item 8.
We incurred $2.3 million in hurricane related charges in fiscal 2008 primarily related to
Hurricane Ike and Hurricane Katrina. In September 2008, Hurricane Ike struck the Texas Gulf Coast
and our facilities in that area were affected resulting in a $1.2 million charge primarily for
debris cleanup and repairs. The $1.1 million charge in fiscal year 2008 in relation to Hurricane
Katrina primarily relates to legal costs associated with ongoing insurance claims. We incurred
$2.5 million in hurricane related charges for the same period of 2007 primarily due to repairs at
locations damaged by Hurricane Katrina. We are continuing to pursue claims with our insurance
carriers as described in Note 23 to the consolidated financial statements.
Interest expense decreased $1.0 million to $24.1 million for the year ended October 31, 2008
primarily due to a 123 basis-point decrease in the average rate, partially offset by a $52.7
million increase in the average debt outstanding.
Other operating income, net decreased $0.8 million to $0.9 million for the year ended October
31, 2008. The decrease is primarily due to the sale of excess cemetery property in the second
quarter of fiscal year 2007 and proceeds related to the sale of an investment during fiscal year
2007.
Investment and other income, net decreased $1.0 million to $2.4 million due primarily to a
decrease in the average rate earned on our cash balances from 4.75 percent in fiscal year 2007 to
1.67 percent in fiscal year 2008. In light of economic and market conditions, we decided to seek
stable investments in money-market funds invested in United States treasury securities. These
investments realize a lower average rate on cash.
As a result of the $250.0 million senior convertible note transaction in June 2007, we
recorded a $0.7 million charge for the loss on early extinguishment of debt during fiscal year
2007.
The effective tax rate for continuing operations for the year ended October 31, 2008 was 119.7
percent compared to 31.5 percent for the same period in 2007. The increased rate in 2008 was
primarily due to the $26.0 million goodwill impairment charge recorded in the fourth quarter of
fiscal year 2008, of which $25.0 million was non-deductible for tax purposes. This increase was
coupled with a $7.4 million valuation allowance recorded on the unrealized capital loss
carryforward of approximately $18.8 million, net of capital gains, attributable to the write-down
of investments of certain trusts which are recognized for tax purposes and deferred for book
purposes. We concluded a valuation allowance for the capital loss carryforward was necessary
because it was uncertain whether
43
we could generate any taxable capital gains within the carryforward period. The reduced rate
in 2007 was primarily caused by a tax benefit of $3.4 million attributable to the utilization of a
capital loss carryforward, coupled with a tax benefit of $0.8 million attributable to the
completion and settlement of an audit by the Commonwealth of Puerto Rico for tax periods 1999, 2000
and 2001.
As of November 1, 2007, we adopted the required accounting guidance related to uncertain tax
positions. We have reviewed our income tax positions and identified certain tax deductions or
revenue deferrals that are not certain. The cumulative effect of adopting this guidance has been
recorded as a $1.0 million increase to the November 1, 2007 opening balance of accumulated deficit,
a $3.4 million increase in deferred tax assets and a $4.4 million increase in other long-term
liabilities. For additional information, see Note 18 to the consolidated financial statements
included herein.
Our weighted average diluted shares outstanding decreased to 93.8 million shares for the year
ended October 31, 2008 compared to 102.7 million shares for the same period in 2007. The decrease
is primarily due to our $75.0 million stock repurchase program in which we had repurchased as of
October 31, 2008, $48.4 million, or 6.6 million shares, of our Class A common stock, yielding a
positive impact on earnings per share.
Preneed Sales into the Backlog
Preneed funeral sales decreased 5.2 percent for the year ended October 31, 2008 compared to
the same period in 2007 due in part to economic conditions.
The revenues from our preneed funeral and cemetery merchandise and service sales are deferred
into our backlog and are not included in our operating results presented above. We had $151.0
million in net preneed funeral and cemetery merchandise and services sales (including $76.5 million
related to insurance-funded preneed funeral contracts) during the year ended October 31, 2008 to be
recognized in the future as these prepaid products and services are delivered, compared to net
sales of $158.4 million (including $76.9 million related to insurance-funded preneed funeral
contracts) for the corresponding period in 2007.
Liquidity and Capital Resources
General
We generate cash in our operations primarily from at-need sales, preneed sales that turn
at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn
at-need, monies collected on preneed sales that are not required to be trusted and cemetery
perpetual care trust earnings. Over the last five years, we have generated annually over $50
million in cash flow from operations. We have historically satisfied our working capital
requirements with cash flows from operations. We believe that our current level of cash on hand,
projected cash flows from operations and available capacity under our $95.0 million senior secured
revolving credit facility will be sufficient to meet our cash requirements for the foreseeable
future, although we will need to refinance the senior secured revolving credit facility in 2012 and
long-term debt becoming due in 2013 through 2016, as described below.
On June 2, 2009, we entered into a new $95.0 million senior secured revolving credit facility
that replaced our previous $125.0 million revolving credit facility which was set to mature in
November 2009. As a result, we recorded a $0.1 million charge for the loss on early extinguishment
of debt in the third quarter of 2009. As of October 31, 2009, we had no amounts drawn on the new
senior secured revolving credit facility, and our availability under the senior secured revolving
credit facility, after giving consideration to $11.2 million outstanding letters of credit and the
$27.1 million Florida bond, was $56.7 million. We may also request the addition of a new tranche
of term loans, an increase in the commitments to the senior secured revolving credit facility or a
combination thereof not to exceed $30.0 million. Our $200.0 million senior notes mature on
February 15, 2013 and are currently redeemable at the redemption prices set forth in the indenture
and described in Note 15 to the consolidated financial statements. We also have $167.4 million in
senior convertible notes outstanding as of October 31, 2009 which mature in 2014 and in 2016. See
the table below under Contractual Obligations and Commercial Commitments for further information
on our long-term debt obligations.
44
We plan to continue to evaluate our options for deployment of cash flow as opportunities
arise. We believe that the use of our cash to pay dividends, repurchase debt and stock, construct
funeral homes on cemeteries of unaffiliated third parties or in strategic locations and make
acquisitions of or investments in death care or related businesses are all attractive options. We
believe that growing our organization through acquisitions and investments is a good business
strategy, as it will enable us to enjoy the important synergies and economies of scale from our
existing infrastructure. We have also redesigned our websites to support e-commerce initiatives
that will provide new revenue opportunities in the future and have invested in improving our
business processes. We regularly review acquisition and other strategic opportunities, which may
require us to draw on our senior secured revolving credit facility or pursue additional debt or
equity financing. We plan to spend approximately $6 million in fiscal year 2010 for the
construction of two funeral homes, one of which is a stand-alone funeral home and one of which is
part of a combination operation.
Beginning in the fourth quarter of 2009, we increased our quarterly cash dividend on our Class
A and B common stock from two and one-half cents per share to three cents per share. Dividends
paid amounted to $9.7 million for fiscal year 2009. The declaration and payment of future
dividends are discretionary and will be subject to determination by the Board of Directors each
quarter after its review of our financial performance. In addition, during the year ended October
31, 2009, we purchased $37.6 million aggregate principal amount of our 3.125 percent senior
convertible notes due 2014 and $45.0 million aggregate principal amount of our 3.375 percent senior
convertible notes due 2016 in the open market at significant discounts. As a result of these
transactions, we recorded $20.2 million in pre-tax gains on early extinguishment of debt during the
year ended October 31, 2009. The annual cash interest savings from the debt purchased during the
year ended October 31, 2009 is $2.7 million. We also have a $75.0 million stock repurchase
program, of which $26.5 million remains available as of October 31, 2009. Repurchases under the
program are limited to our Class A common stock, and are made in the open market or in privately
negotiated transactions at such times and in such amounts as management deems appropriate,
depending upon market conditions and other factors.
During the third quarter of 2009, the Internal Revenue Service approved a change in one of our
tax accounting policies that will result in a combination of refunds and reductions of federal
income tax payments totaling approximately $32.0 million. Of that amount, $17.9 million was
received as a refund in fiscal year 2009, approximately $1.6 million is expected to be received as
a refund by the end of the first quarter of 2010, approximately $8.0 million was used to offset
estimated tax payments during fiscal 2009, and the remaining approximately $4.5 million is expected
to be used to offset future federal income tax payments. The change relates to our tax accounting
policy for preneed contracts in one state. For those contracts, we were recognizing income for tax
purposes (and paying taxes) relating to amounts received from customers and placed in trust at the
time the cash was received from the customers. This policy related to approximately $89.4 million
of income that was taxed prior to the actual delivery of the merchandise or services. The change
permits us to defer recognition of income for tax purposes (and pay taxes) with respect to those
amounts until the time the service is actually performed or the merchandise is actually delivered
and cash is withdrawn from the trust, which generally aligns our book and tax accounting for these
amounts and is consistent with our approach in the other states. The change essentially allowed us
to apply the approximately $89.4 million reversal of previously reported taxable income to reduce
taxable income for fiscal years 2006, 2007, 2008, 2009 and potentially part of 2010. We will
eventually have to pay federal income taxes with respect to the $89.4 million as the related
preneed contracts are performed in the future.
We are continuing to review all of our tax accounting policies to determine opportunities to
improve our current tax position. Several possible changes are being considered that could result
in potential tax refunds or reductions in future tax payments. At this time, we cannot predict
with certainty what, if any, additional refunds or reduced payments we will obtain.
Cash Flow
Comparison of Fiscal Year 2009 to Fiscal Year 2008
Our operations provided cash of $84.9 million for the year ended October 31, 2009, compared to
$84.5 million for the corresponding period in 2008. The increase in operating cash flow is
primarily due to a combination of tax refunds and reductions of income tax payments in
fiscal year 2009 amounting to $31.6 million compared to
$21.8 million in tax refunds and reductions of income tax
payments in fiscal year 2008. The
increase in net cash flows from tax refunds and reductions of
45
income tax payments was partially offset by the funding of $2.7 million of the estimated
probable funding obligation related to our cemetery perpetual care trust in 2009, $1.7 million of
cash outflows related to Hurricanes Katrina and Ike in 2009, coupled with the timing of payments to
vendors and payroll payments.
Our investing activities resulted in a net cash outflow of $22.3 million for the year ended
October 31, 2009, compared to a net cash outflow of $27.4 million for the comparable period in
2008. The change is due in part to a decline in capital expenditures due to a change in our policy
to expand our fleet leasing program. For the year ended October 31, 2009, capital expenditures
amounted to $21.2 million, which included $13.1 million for maintenance capital expenditures, $5.9
million for growth initiatives and $2.2 million related to the implementation of new business
systems. For the year ended October 31, 2008, capital expenditures were $27.0 million, which
included $17.4 million for maintenance capital expenditures, $1.0 million for growth initiatives,
$2.9 million related to Hurricane Katrina and $5.7 million related to the implementation of new
business systems. We also purchased a cemetery business in the first quarter of fiscal year 2009
resulting in a net cash outflow of $1.6 million.
Our financing activities resulted in a net cash outflow of $72.3 million for the year ended
October 31, 2009, compared to a net cash outflow of $56.1 million for the comparable period in
2008. We had $60.9 million in repayments of long-term debt in 2009 due primarily to the purchases
of our senior convertible notes, compared to $0.2 million in repayments in 2008. In fiscal year
2008, we made $48.6 million in stock repurchases under our current stock repurchase plan, compared
to less than $0.1 million in stock repurchases during 2009.
Comparison of Fiscal Year 2008 to Fiscal Year 2007
Our operations provided cash of $84.5 million for the year ended October 31, 2008, compared to
$81.9 million for the corresponding period in 2007. The increase in operating cash flow is
primarily due to $9.3 million in net tax payments made in fiscal year 2007 compared to $4.0 million
in net tax refunds received in fiscal year 2008, which included approximately $21.8 million in tax
refunds in 2008 compared to $5.8 million in refunds in 2007. These increases are partially offset
by $3.2 million of business interruption insurance proceeds and $1.3 million of insurance proceeds,
net of expenses, related to Hurricane Katrina, received in fiscal year 2007. In addition, in
fiscal year 2007, we withdrew $2.1 million of unusual trust withdrawals related to the deferred
revenue project and received $2.1 million due to the execution of a lease of our mineral rights at
one of our cemeteries to an outside third party.
Our investing activities resulted in a net cash outflow of $27.4 million for the year ended
October 31, 2008, compared to a net cash outflow of $34.2 million for the comparable period in
2007. The change is primarily due to the fact that we purchased several properties in 2007
resulting in a net cash outflow of $5.2 million compared to $1.4 million in 2008 and due to a
decline in capital expenditures related to Hurricane Katrina. For the year ended October 31, 2008,
capital expenditures amounted to $27.0 million, which included $17.4 million for maintenance
capital expenditures, $1.0 million for growth initiatives, $2.9 million related to Hurricane
Katrina and $5.7 million related to the implementation of new business systems. For the year ended
October 31, 2007, capital expenditures were $35.3 million, which included $18.9 million for
maintenance capital expenditures, $3.5 million for growth initiatives, $8.4 million related to
Hurricane Katrina and $4.5 million related to the implementation of new business systems. In the
year ended October 31, 2008, there were no insurance proceeds related to hurricane damaged
properties compared to $2.5 million in the same period in 2007.
Our financing activities resulted in a net cash outflow of $56.1 million for the year ended
October 31, 2008, compared to a net cash outflow of $20.1 million for the comparable period in
2007. This change is primarily due to net debt proceeds of $73.5 million ($250.0 million in
proceeds of long-term debt and $176.5 million in repayments of long-term debt) in 2007. There were
$0.2 million in debt repayments in 2008. In June 2007, we issued $250.0 million in senior
convertible notes. As part of this debt transaction, we prepaid the remaining balance of our Term
Loan B for $164.0 million, sold common stock warrants and purchased call options resulting in a net
cash outflow of $16.2 million and recorded debt issuance costs of $6.2 million. Also, as part of
this debt transaction, we repurchased approximately 7.7 million shares of our Class A common stock
for $64.2 million, compared to $48.6 million in cash outflows related to our stock repurchase
program in 2008.
46
Contractual Obligations and Commercial Commitments
As of October 31, 2009, our outstanding debt balance totaled $367.5 million. We have
contractual obligations requiring future cash payments under existing contractual arrangements.
The following table details our known future cash payments (in millions) related to various
contractual obligations as of October 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payments Due by Period |
|
|
|
|
|
|
|
Fiscal Year |
|
|
Fiscal Years |
|
|
Fiscal Years |
|
|
|
|
Contractual Obligations |
|
Total |
|
|
2010 |
|
|
2011-2012 |
|
|
2013-2014 |
|
|
Thereafter |
|
Long-term debt obligations (1) |
|
$ |
367.5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
287.4 |
|
|
$ |
80.1 |
|
Interest on long-term debt (2) |
|
|
76.4 |
|
|
|
17.9 |
|
|
|
35.9 |
|
|
|
17.1 |
|
|
|
5.5 |
|
Operating lease agreements (3) |
|
|
31.0 |
|
|
|
4.5 |
|
|
|
6.0 |
|
|
|
3.8 |
|
|
|
16.7 |
|
Purchase obligations (4) |
|
|
2.7 |
|
|
|
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-competition and other agreements (5) |
|
|
1.5 |
|
|
|
.4 |
|
|
|
.5 |
|
|
|
.2 |
|
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
479.1 |
|
|
$ |
25.5 |
|
|
$ |
42.4 |
|
|
$ |
308.5 |
|
|
$ |
102.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
See below for a breakdown of future scheduled principal payments and maturities of
our long-term debt by type as of October 31, 2009. |
|
(2) |
|
Includes contractual interest payments for our senior convertible notes, senior
notes and third-party debt. |
|
(3) |
|
Our noncancellable operating leases are primarily for land and buildings and expire
over the next 1 to 14 years, except for eight leases that expire between 2032 and 2039. Our
future minimum lease payments for all operating leases as of October 31, 2009 were $4.5
million, $3.3 million, $2.7 million, $2.1 million, $1.7 million and $16.7 million for the
years ending October 31, 2010, 2011, 2012, 2013, 2014 and later years, respectively. |
|
(4) |
|
Represents a construction contract for a funeral home. |
|
(5) |
|
This category includes payments pursuant to non-competition agreements with prior
owners and key employees of acquired businesses and separation pay related to former executive
officers. |
The following table details our known potential or possible future cash payments related to
the specified contingent obligations as of October 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expiration by Period |
|
|
|
|
|
|
|
Fiscal Year |
|
|
Fiscal Years |
|
|
Fiscal Years |
|
|
|
|
Contingent Obligations |
|
Total |
|
|
2010 |
|
|
2011-2012 |
|
|
2013-2014 |
|
|
Thereafter |
|
Cemetery perpetual care
trust funding
obligation(1) |
|
$ |
14.0 |
|
|
$ |
14.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Long-term obligations
related to uncertain tax
positions(2) |
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
17.5 |
|
|
$ |
14.0 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
3.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
In those states where we have withdrawn realized net capital gains in the past from
our cemetery perpetual care trusts, regulators may seek replenishment of the realized net
capital losses either by requiring a cash deposit to the trust or by prohibiting or
restricting withdrawals of future earnings until they cover the loss. The estimated probable
funding obligation in the cemetery perpetual care trusts in these states was $14.0 million as
of October 31, 2009, and we recorded this as an increase in cemetery costs in fiscal years
2009 and 2008. As of October 31, 2009, we had unrealized losses of $48.2 million in the
trusts in these states. Because some of these trusts currently have assets with a fair market
value less than the aggregate amounts required to be contributed to the trust, any additional
realized net capital losses in these trusts may result in a corresponding funding liability
and increase in cemetery costs. In those states where realized net capital gains have not
been withdrawn, we believe it is reasonably possible that additional funding obligations may
exist with an estimated amount of approximately $3.5 million. |
|
(2) |
|
As discussed in Note 18 to the consolidated financial statements included in Item 8,
we adopted the required |
47
|
|
|
|
|
accounting guidance related to uncertain tax positions on November 1, 2007. In accordance with
this guidance, as of October 31, 2009, we recorded $3.5 million of unrecognized tax benefits and
related interest and penalties. Due to the uncertainty regarding the timing and completion of
audits and possible outcomes, it is not possible to estimate the range of increase and decrease
and the timing thereof of any potential cash payments. |
As of October 31, 2009, our outstanding debt balance was $367.5 million, consisting of $167.4
million in senior convertible notes, $200.0 million of 6.25 percent senior notes and $0.1 million
of other debt. There were no amounts drawn on the senior secured revolving credit facility. The
following table reflects future scheduled principal payments and maturities of our long-term debt
(in millions) as of October 31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
|
|
Senior |
|
|
|
|
|
|
|
|
|
|
Principally |
|
|
|
|
|
|
Secured |
|
|
|
|
|
|
|
|
|
|
Seller |
|
|
|
|
|
|
Revolving |
|
|
Senior |
|
|
|
|
|
|
Financing of |
|
|
|
|
Fiscal Year Ending |
|
Credit |
|
|
Convertible |
|
|
|
|
|
|
Acquired |
|
|
|
|
October 31, |
|
Facility |
|
|
Notes |
|
|
Senior Notes |
|
|
Operations |
|
|
Total |
|
2010 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
2011 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2013 |
|
|
|
|
|
|
|
|
|
|
200.0 |
|
|
|
|
|
|
|
200.0 |
|
2014 |
|
|
|
|
|
|
87.4 |
|
|
|
|
|
|
|
|
|
|
|
87.4 |
|
Thereafter |
|
|
|
|
|
|
80.0 |
|
|
|
|
|
|
|
.1 |
|
|
|
80.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
|
|
|
$ |
167.4 |
|
|
$ |
200.0 |
|
|
$ |
.1 |
|
|
$ |
367.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of October 31, 2009 consist of the following two items:
(1) |
|
the $27.1 million bond we are required to maintain to guarantee our obligations
relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in
Florida, which is discussed in Note 20 to the consolidated financial statements included in
Item 8; and |
(2) |
|
the insurance-funded preneed funeral contracts, which will be funded by life insurance
or annuity contracts issued by third-party insurers, are not reflected in our consolidated
balance sheets, and are discussed in Note 2(i) to the consolidated financial statements
included in Item 8. |
Ratio of Earnings to Fixed Charges
Our ratio of earnings to fixed charges was as follows:
|
|
|
|
|
|
|
|
|
Years ended October 31, |
2009 |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
3.29 (1)
|
|
1.72 (2)
|
|
3.05 (3)
|
|
2.83 (4)
|
|
1.34 (5)(6) |
|
|
|
(1) |
|
Pre-tax earnings for fiscal year 2009 include a $20.1 million pre-tax net gain on
the early extinguishment of debt due to fiscal year 2009 debt repurchases, a $3.4 million
charge related to the estimated probable funding obligation to fund the cemetery perpetual
care trust net realized losses, a $0.4 million charge for hurricane related expenses, a $0.3
million charge for separation charges primarily related to the retirement of an executive
officer and gains on dispositions, net of impairment losses of ($0.2) million. |
|
(2) |
|
Pre-tax earnings for fiscal year 2008 include a charge of $2.3 million related to
Hurricanes Katrina and Ike, a charge of $26.0 million for impairment of goodwill, a $13.3
million charge related to the estimated probable obligation to fund the cemetery perpetual
care trust net realized losses and gains on dispositions, net of impairment losses of ($0.4)
million. |
|
(3) |
|
Pre-tax earnings for fiscal year 2007 include a charge of $2.5 million related to
Hurricane Katrina, a charge of |
48
|
|
|
|
|
$0.6 million for separation charges primarily related to separation pay of a former executive
officer who retired in the first quarter of 2007 and $0.7 million for the loss on early
extinguishment of debt related to the June 2007 senior convertible debt transaction. |
|
(4) |
|
Pre-tax earnings for fiscal year 2006 includes a net recovery of $1.6 million
related to Hurricane Katrina, business interruption proceeds of $3.2 million related to
Hurricane Katrina, a charge of $1.0 million for separation charges related to July 2005
restructuring of our divisions and the retirement of an executive officer and gains on
dispositions, net of impairment losses of ($0.2) million. |
|
(5) |
|
Pre-tax earnings for fiscal year 2005 include a charge of $9.4 million for expenses
related to Hurricane Katrina, a charge of $1.5 million for separation charges related to the
July 2005 restructuring of our divisions, $1.3 million of gains on disposition, net of
impairment losses and $32.8 million for the loss on early extinguishment of debt related to
the 2005 debt refinancings. |
|
(6) |
|
Excludes the cumulative effect of change in accounting principles. |
For purposes of computing the ratio of earnings to fixed charges, earnings consist of pre-tax
earnings from continuing operations 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.
Effect of Recent Accounting Standards
For additional information on changes in accounting principles and new accounting principles,
see Note 3 to the consolidated financial statements included in Item 8.
Inflation
Inflation has not had a significant impact on our operations over the past three years, nor is
it expected to have a significant impact in the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our market risk sensitive instruments and positions is the
potential change arising from increases or decreases in the prices of marketable equity securities
and interest rates as discussed below. Generally, our market risk sensitive instruments and
positions are characterized as other than trading. Our exposure to market risk as discussed
below includes forward-looking statements and represents an estimate of possible changes in fair
value or future earnings that would occur assuming hypothetical future movements in equity markets
or interest rates. Our views on market risk are not necessarily indicative of actual results that
may occur, and do not represent the maximum possible gains and losses that may occur. Actual gains
and losses, fluctuations in equity markets, interest rates and the timing of transactions, may
differ from those estimated.
Marketable Equity Securities
As of October 31, 2009 and 2008, our marketable equity securities subject to market risk
consisted principally of investments held by our preneed funeral and cemetery merchandise and
services trusts and our cemetery perpetual care trusts and escrow accounts and had fair values of
$378.2 million and $387.4 million, respectively, which were determined using final sale prices
quoted on stock exchanges. Each 10 percent change in the average market prices of the equity
securities held in our preneed funeral and cemetery merchandise and services trusts and our
cemetery perpetual care trusts would result in a change of approximately $37.8 million and $38.7
million, respectively, in the fair value of such accounts.
Our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual
care trusts and escrow accounts, all of which are managed by ITI, are further discussed in
Managements Discussion and Analysis of Financial Condition and Results of Operations in Item 7,
and in Notes 4, 5 and 6 to our consolidated
49
financial statements included in Item 8. ITI operates pursuant to a formal investment policy as
discussed in Operations included in Item 1.
Interest
We have entered into various fixed- and variable-rate debt obligations, which are detailed in
Note 15 to our consolidated financial statements included in Item 8.
As of October 31, 2009, our long-term fixed-rate debt consists of our $200.0 million 6.25
percent senior notes, $87.4 million 3.125 percent senior convertible notes, $80.0 million 3.375
percent senior convertible notes and our third-party debt. There was nothing drawn on our $95.0
million senior secured revolving credit facility. As of October 31, 2009 and 2008, the carrying
values of our long-term fixed-rate debt, including accrued interest, were approximately $371.7
million and $455.1 million, respectively, compared to fair values of $339.4 million and $331.6
million, respectively. Fair values were determined using quoted market prices. Each approximate
10 percent change in the average interest rates applicable to determine the fair value of such
debt, 70 basis points for 2009 and 115 basis points for 2008, would result in changes of
approximately $9.0 million and $17.6 million, respectively, in the fair values of these
instruments. If these instruments are held to maturity, no change in fair value will be realized.
We monitor our mix of fixed- and variable-rate debt obligations in light of changing market
conditions and from time to time may alter that mix by, for example, entering into interest rate
swaps or refinancing any balances outstanding under our variable-rate senior secured revolving
credit facility with fixed-rate debt.
As of October 31, 2009 and 2008, our fixed-income securities subject to market risk consisted
principally of investments in our preneed funeral and cemetery merchandise and services trusts and
our cemetery perpetual care trusts and escrow accounts and had aggregate quoted market values of
$112.9 million and $131.5 million, respectively. Each 10 percent change in interest rates on these
fixed-income securities would result in changes of approximately $2.3 million and $3.1 million,
respectively, in the fair values of such securities based on discounted expected future cash flows.
If these securities are held to maturity, no change in fair value will be realized.
As of October 31, 2009 and 2008, our mutual funds, money market and other short-term
investments subject to market risk, including amounts held in preneed funeral and cemetery
merchandise and services trusts, and in our cemetery perpetual care trusts, had carrying values
approximating their fair values of $236.1 million and $138.6 million, respectively. Under our
current accounting methods, a change in the average interest rate earned by our preneed funeral and
cemetery merchandise and services trusts would not result in a change in our current pre-tax
earnings. As such, as of October 31, 2009 and 2008, only $58.8 million and $25.3 million,
respectively, of these short-term investments, which includes amounts in the cemetery perpetual
care trusts and other short-term investments not held in trust, were subject to changes in interest
rates. Each 10 percent change in average interest rates applicable to such investments, 10 basis
points for 2009 and 2008, would result in changes of less than $0.1 million for 2009 and 2008 in
our pre-tax earnings.
The fixed-income securities, mutual funds, money market and other short-term investments owned
by us are principally invested in our preneed funeral and cemetery merchandise and services trusts
and our cemetery perpetual care trusts and escrow accounts, which are managed by ITI. ITI operates
pursuant to a formal investment policy approved by the Investment Committee of our Board of
Directors as discussed above.
50
|
|
|
Item 8. |
|
Financial Statements and Supplementary Data |
Index to Consolidated Financial Statements
51
Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Stewart Enterprises, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present
fairly, in all material respects, the financial position of Stewart Enterprises, Inc. and its
subsidiaries at October 31, 2009 and 2008, and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 2009 in conformity with accounting
principles generally accepted in the United States of America. In addition, in our opinion, the
financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in
all material respects, the information set forth therein when read in conjunction with the related
consolidated financial statements. Also in our opinion, the Company maintained, in all material
respects, effective internal control over financial reporting as of October 31, 2009, based on
criteria established in Internal Control Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Companys management is
responsible for these financial statements and financial statement schedule, for maintaining
effective internal control over financial reporting and for its assessment of the effectiveness of
internal control over financial reporting, included in Managements Report on Internal Control Over
Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these
financial statements, on the financial statement schedule, and on the Companys internal control
over financial reporting based on our integrated audits. We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those
standards require that we plan and perform the audits to obtain reasonable assurance about whether
the financial statements are free of material misstatement and whether effective internal control
over financial reporting was maintained in all material respects. Our audits of the financial
statements included examining, on a test basis, evidence supporting the amounts and disclosures in
the financial statements, assessing the accounting principles used and significant estimates made
by management, and evaluating the overall financial statement presentation. Our audit of internal
control over financial reporting included obtaining an understanding of internal control over
financial reporting, assessing the risk that a material weakness exists, and testing and evaluating
the design and operating effectiveness of internal control based on the assessed risk. Our audits
also included performing such other procedures as we considered necessary in the circumstances. We
believe that our audits provide a reasonable basis for our opinions.
A companys internal control over financial reporting is a process designed to provide reasonable
assurance regarding the reliability of financial reporting and the preparation of financial
statements for external purposes in accordance with generally accepted accounting principles. A
companys internal control over financial reporting includes those policies and procedures that (i)
pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the
transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance
with generally accepted accounting principles, and that receipts and expenditures of the company
are being made only in accordance with authorizations of management and directors of the company;
and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the companys assets that could have a material effect on the
financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or
detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
December 17, 2009
52
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
276,330 |
|
|
$ |
286,607 |
|
|
$ |
279,330 |
|
Cemetery |
|
|
211,477 |
|
|
|
241,276 |
|
|
|
243,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
487,807 |
|
|
|
527,883 |
|
|
|
522,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
211,201 |
|
|
|
218,228 |
|
|
|
216,375 |
|
Cemetery |
|
|
188,866 |
|
|
|
208,838 |
|
|
|
194,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
400,067 |
|
|
|
427,066 |
|
|
|
410,387 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
87,740 |
|
|
|
100,817 |
|
|
|
112,430 |
|
Corporate general and administrative expenses |
|
|
(30,670 |
) |
|
|
(32,611 |
) |
|
|
(31,143 |
) |
Impairment of goodwill |
|
|
|
|
|
|
(25,952 |
) |
|
|
|
|
Hurricane related charges, net |
|
|
(380 |
) |
|
|
(2,297 |
) |
|
|
(2,533 |
) |
Separation charges |
|
|
(275 |
) |
|
|
|
|
|
|
(580 |
) |
Gains on dispositions and impairment (losses), net |
|
|
(218 |
) |
|
|
(353 |
) |
|
|
(44 |
) |
Other operating income, net |
|
|
1,250 |
|
|
|
819 |
|
|
|
1,651 |
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
|
57,447 |
|
|
|
40,423 |
|
|
|
79,781 |
|
Interest expense |
|
|
(22,353 |
) |
|
|
(24,115 |
) |
|
|
(25,065 |
) |
Gain (loss) on early extinguishment of debt |
|
|
20,078 |
|
|
|
|
|
|
|
(677 |
) |
Investment and other income, net |
|
|
92 |
|
|
|
2,406 |
|
|
|
3,374 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
55,264 |
|
|
|
18,714 |
|
|
|
57,413 |
|
Income taxes |
|
|
19,611 |
|
|
|
22,407 |
|
|
|
18,099 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
35,653 |
|
|
|
(3,693 |
) |
|
|
39,314 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations before income taxes |
|
|
|
|
|
|
|
|
|
|
807 |
|
Income taxes |
|
|
|
|
|
|
|
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
35,653 |
|
|
$ |
(3,693 |
) |
|
$ |
39,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.38 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
.01 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.38 |
|
Earnings from discontinued operations |
|
|
|
|
|
|
|
|
|
|
.01 |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.39 |
|
|
$ |
(.04 |
) |
|
$ |
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
91,898 |
|
|
|
93,795 |
|
|
|
102,584 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
91,995 |
|
|
|
93,795 |
|
|
|
102,737 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
.105 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
53
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
62,808 |
|
|
$ |
72,574 |
|
Marketable securities |
|
|
|
|
|
|
55 |
|
Receivables, net of allowances |
|
|
59,439 |
|
|
|
59,129 |
|
Inventories |
|
|
36,156 |
|
|
|
35,870 |
|
Prepaid expenses |
|
|
6,748 |
|
|
|
7,317 |
|
Deferred income taxes, net |
|
|
21,715 |
|
|
|
8,798 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
186,866 |
|
|
|
183,743 |
|
Receivables due beyond one year, net of allowances |
|
|
63,011 |
|
|
|
70,671 |
|
Preneed funeral receivables and trust investments |
|
|
389,512 |
|
|
|
368,412 |
|
Preneed cemetery receivables and trust investments |
|
|
193,417 |
|
|
|
182,141 |
|
Goodwill |
|
|
247,236 |
|
|
|
247,236 |
|
Cemetery property, at cost |
|
|
385,977 |
|
|
|
377,271 |
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Land |
|
|
43,677 |
|
|
|
43,677 |
|
Buildings |
|
|
329,685 |
|
|
|
319,463 |
|
Equipment and other |
|
|
187,100 |
|
|
|
178,534 |
|
|
|
|
|
|
|
|
|
|
|
560,462 |
|
|
|
541,674 |
|
Less accumulated depreciation |
|
|
261,005 |
|
|
|
236,066 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
299,457 |
|
|
|
305,608 |
|
Deferred income taxes, net |
|
|
123,395 |
|
|
|
179,515 |
|
Cemetery perpetual care trust investments |
|
|
205,476 |
|
|
|
173,090 |
|
Non-current assets held for sale |
|
|
|
|
|
|
354 |
|
Other assets |
|
|
14,654 |
|
|
|
16,474 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,109,001 |
|
|
$ |
2,104,515 |
|
|
|
|
|
|
|
|
(continued)
54
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
5 |
|
|
$ |
20 |
|
Accounts payable and accrued expenses |
|
|
25,604 |
|
|
|
30,279 |
|
Accrued payroll and other benefits |
|
|
15,200 |
|
|
|
14,133 |
|
Accrued insurance |
|
|
20,504 |
|
|
|
21,287 |
|
Accrued interest |
|
|
4,561 |
|
|
|
5,864 |
|
Estimated obligation to fund cemetery perpetual care trust |
|
|
14,010 |
|
|
|
13,281 |
|
Other current liabilities |
|
|
14,099 |
|
|
|
13,571 |
|
Income taxes payable |
|
|
2,028 |
|
|
|
2,061 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
96,011 |
|
|
|
100,496 |
|
Long-term debt, less current maturities |
|
|
367,491 |
|
|
|
450,095 |
|
Deferred preneed funeral revenue |
|
|
247,825 |
|
|
|
245,182 |
|
Deferred preneed cemetery revenue |
|
|
266,964 |
|
|
|
275,835 |
|
Deferred preneed funeral and cemetery receipts held in trust |
|
|
514,787 |
|
|
|
475,420 |
|
Perpetual care trusts corpus |
|
|
204,168 |
|
|
|
171,371 |
|
Other long-term liabilities |
|
|
20,871 |
|
|
|
20,479 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,718,117 |
|
|
|
1,738,878 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 20) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shareholders equity: |
|
|
|
|
|
|
|
|
Preferred stock, $1.00 par value, 5,000,000 shares
authorized; no shares issued |
|
|
|
|
|
|
|
|
Common stock, $1.00 stated value: |
|
|
|
|
|
|
|
|
Class A authorized 200,000,000 shares; issued and
outstanding 89,128,700 and 88,693,127 shares at
October 31, 2009 and 2008, respectively |
|
|
89,129 |
|
|
|
88,693 |
|
Class B authorized 5,000,000 shares; issued and
outstanding 3,555,020 shares at October 31, 2009 and
2008; 10 votes per share convertible into an equal
number of Class A shares |
|
|
3,555 |
|
|
|
3,555 |
|
Additional paid-in capital |
|
|
526,062 |
|
|
|
536,902 |
|
Accumulated deficit |
|
|
(227,897 |
) |
|
|
(263,550 |
) |
Accumulated other comprehensive income : |
|
|
|
|
|
|
|
|
Unrealized appreciation of investments |
|
|
35 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
|
35 |
|
|
|
37 |
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
390,884 |
|
|
|
365,637 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
2,109,001 |
|
|
$ |
2,104,515 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
55
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation |
|
|
Total |
|
|
|
Common |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
(Depreciation) |
|
|
Shareholders |
|
|
|
Stock(1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2006 |
|
$ |
104,963 |
|
|
$ |
640,648 |
|
|
$ |
(298,715 |
) |
|
$ |
(3 |
) |
|
$ |
446,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
39,813 |
|
|
|
|
|
|
|
39,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of
investments, net of deferred
tax expense of ($8) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
|
|
|
|
|
|
|
|
39,813 |
|
|
|
14 |
|
|
|
39,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity |
|
|
531 |
|
|
|
(144 |
) |
|
|
|
|
|
|
|
|
|
|
387 |
|
Issuance of common stock |
|
|
213 |
|
|
|
1,249 |
|
|
|
|
|
|
|
|
|
|
|
1,462 |
|
Stock options exercised |
|
|
411 |
|
|
|
2,221 |
|
|
|
|
|
|
|
|
|
|
|
2,632 |
|
Stock option expense |
|
|
|
|
|
|
1,576 |
|
|
|
|
|
|
|
|
|
|
|
1,576 |
|
Tax benefit associated with
stock options exercised |
|
|
|
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
76 |
|
Purchase and retirement of
common stock |
|
|
(7,698 |
) |
|
|
(56,503 |
) |
|
|
|
|
|
|
|
|
|
|
(64,201 |
) |
Purchase of call options, net of
tax benefit of $21,000 |
|
|
|
|
|
|
(39,000 |
) |
|
|
|
|
|
|
|
|
|
|
(39,000 |
) |
Sale of common stock warrants |
|
|
|
|
|
|
43,850 |
|
|
|
|
|
|
|
|
|
|
|
43,850 |
|
Dividends ($.10 per share) |
|
|
|
|
|
|
(10,184 |
) |
|
|
|
|
|
|
|
|
|
|
(10,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2007 |
|
$ |
98,420 |
|
|
$ |
583,789 |
|
|
$ |
(258,902 |
) |
|
$ |
11 |
|
|
$ |
423,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
56
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS EQUITY
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Total |
|
|
|
Common |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
Appreciation |
|
|
Shareholders |
|
|
|
Stock(1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2007 |
|
$ |
98,420 |
|
|
$ |
583,789 |
|
|
$ |
(258,902 |
) |
|
$ |
11 |
|
|
$ |
423,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
|
|
|
|
|
|
|
|
(3,693 |
) |
|
|
|
|
|
|
(3,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of
investments, net of deferred
tax expense of ($15) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
(3,693 |
) |
|
|
26 |
|
|
|
(3,667 |
) |
Cumulative effect of adoption of
uncertain tax position guidance
in ASC 740 |
|
|
|
|
|
|
|
|
|
|
(955 |
) |
|
|
|
|
|
|
(955 |
) |
Restricted stock activity |
|
|
9 |
|
|
|
440 |
|
|
|
|
|
|
|
|
|
|
|
449 |
|
Issuance of common stock |
|
|
172 |
|
|
|
1,082 |
|
|
|
|
|
|
|
|
|
|
|
1,254 |
|
Stock options exercised |
|
|
265 |
|
|
|
1,249 |
|
|
|
|
|
|
|
|
|
|
|
1,514 |
|
Stock option expense |
|
|
|
|
|
|
1,544 |
|
|
|
|
|
|
|
|
|
|
|
1,544 |
|
Tax benefit associated with
stock options exercised |
|
|
|
|
|
|
181 |
|
|
|
|
|
|
|
|
|
|
|
181 |
|
Purchase and retirement of
common stock |
|
|
(6,618 |
) |
|
|
(42,009 |
) |
|
|
|
|
|
|
|
|
|
|
(48,627 |
) |
Dividends ($.10 per share) |
|
|
|
|
|
|
(9,374 |
) |
|
|
|
|
|
|
|
|
|
|
(9,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2008 |
|
$ |
92,248 |
|
|
$ |
536,902 |
|
|
$ |
(263,550 |
) |
|
$ |
37 |
|
|
$ |
365,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation |
|
|
Total |
|
|
|
Common |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
(Depreciation) |
|
|
Shareholders |
|
|
|
Stock(1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2008 |
|
$ |
92,248 |
|
|
$ |
536,902 |
|
|
$ |
(263,550 |
) |
|
$ |
37 |
|
|
$ |
365,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
|
|
|
|
|
|
|
|
35,653 |
|
|
|
|
|
|
|
35,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive loss: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized depreciation of
investments, net of deferred
tax benefit of $2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
|
|
|
|
|
|
|
|
35,653 |
|
|
|
(2 |
) |
|
|
35,651 |
|
Restricted stock activity |
|
|
270 |
|
|
|
373 |
|
|
|
|
|
|
|
|
|
|
|
643 |
|
Issuance of common stock |
|
|
182 |
|
|
|
422 |
|
|
|
|
|
|
|
|
|
|
|
604 |
|
Stock option expense |
|
|
|
|
|
|
1,180 |
|
|
|
|
|
|
|
|
|
|
|
1,180 |
|
Tax benefit associated with stock
activity |
|
|
|
|
|
|
(126 |
) |
|
|
|
|
|
|
|
|
|
|
(126 |
) |
Purchase and retirement of common
stock |
|
|
(16 |
) |
|
|
(59 |
) |
|
|
|
|
|
|
|
|
|
|
(75 |
) |
Retirement of call options, net of
tax expense of $3,050 |
|
|
|
|
|
|
5,664 |
|
|
|
|
|
|
|
|
|
|
|
5,664 |
|
Retirement of common stock warrants |
|
|
|
|
|
|
(8,560 |
) |
|
|
|
|
|
|
|
|
|
|
(8,560 |
) |
Dividends ($.105 per share) |
|
|
|
|
|
|
(9,734 |
) |
|
|
|
|
|
|
|
|
|
|
(9,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2009 |
|
$ |
92,684 |
|
|
$ |
526,062 |
|
|
$ |
(227,897 |
) |
|
$ |
35 |
|
|
$ |
390,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Amount includes shares of Class A common stock with a stated value of $1 per share,
and includes 3,555 shares (in thousands) of Class B common stock. |
See accompanying notes to consolidated financial statements.
57
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
35,653 |
|
|
$ |
(3,693 |
) |
|
$ |
39,813 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) on dispositions and impairment losses, net |
|
|
218 |
|
|
|
353 |
|
|
|
(565 |
) |
Impairment of goodwill |
|
|
|
|
|
|
25,952 |
|
|
|
|
|
(Gain) loss on early extinguishment of debt |
|
|
(20,078 |
) |
|
|
|
|
|
|
677 |
|
Depreciation and amortization |
|
|
29,381 |
|
|
|
28,275 |
|
|
|
27,638 |
|
Provision for doubtful accounts |
|
|
7,916 |
|
|
|
7,995 |
|
|
|
9,756 |
|
Share-based compensation |
|
|
2,204 |
|
|
|
2,819 |
|
|
|
2,687 |
|
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
|
(227 |
) |
|
|
(153 |
) |
Provision for deferred income taxes |
|
|
16,914 |
|
|
|
7,174 |
|
|
|
4,337 |
|
Estimated obligation to fund cemetery perpetual care trust |
|
|
3,421 |
|
|
|
13,281 |
|
|
|
|
|
Other |
|
|
158 |
|
|
|
443 |
|
|
|
908 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables |
|
|
4,216 |
|
|
|
(3,058 |
) |
|
|
(10,260 |
) |
(Increase) decrease in prepaid expenses |
|
|
569 |
|
|
|
(1,031 |
) |
|
|
73 |
|
Increase in inventories and cemetery property |
|
|
(553 |
) |
|
|
(2,509 |
) |
|
|
(4,365 |
) |
Federal income tax refunds |
|
|
18,018 |
|
|
|
15,165 |
|
|
|
2,465 |
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
(7,674 |
) |
|
|
2,623 |
|
|
|
1,741 |
|
Net effect of preneed funeral production and maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in preneed funeral receivables and trust investments |
|
|
16,335 |
|
|
|
36,604 |
|
|
|
4,167 |
|
Increase (decrease) in deferred preneed funeral revenue |
|
|
2,642 |
|
|
|
(11,067 |
) |
|
|
(15,435 |
) |
Increase (decrease) in deferred preneed funeral receipts held in trust |
|
|
(13,932 |
) |
|
|
(30,642 |
) |
|
|
10,867 |
|
Net effect of preneed cemetery production and deliveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in preneed cemetery receivables and trust investments |
|
|
12,069 |
|
|
|
15,910 |
|
|
|
5,042 |
|
Decrease in deferred preneed cemetery revenue |
|
|
(16,276 |
) |
|
|
(8,673 |
) |
|
|
(11,807 |
) |
Increase (decrease) in deferred preneed cemetery receipts held in trust |
|
|
(7,482 |
) |
|
|
(9,599 |
) |
|
|
11,681 |
|
Increase (decrease) in other |
|
|
1,176 |
|
|
|
(1,572 |
) |
|
|
2,674 |
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
84,895 |
|
|
|
84,523 |
|
|
|
81,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable securities |
|
|
250 |
|
|
|
20,219 |
|
|
|
|
|
Purchases of marketable securities |
|
|
(197 |
) |
|
|
(19,956 |
) |
|
|
(1 |
) |
Proceeds from sale of assets |
|
|
724 |
|
|
|
599 |
|
|
|
3,750 |
|
Purchase of subsidiaries and other investments, net of cash acquired |
|
|
(1,923 |
) |
|
|
(1,378 |
) |
|
|
(5,203 |
) |
Insurance proceeds related to hurricane damaged properties |
|
|
|
|
|
|
|
|
|
|
2,529 |
|
Additions to property and equipment |
|
|
(21,238 |
) |
|
|
(26,995 |
) |
|
|
(35,310 |
) |
Other |
|
|
49 |
|
|
|
144 |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(22,335 |
) |
|
|
(27,367 |
) |
|
|
(34,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
|
|
|
|
|
|
|
|
250,000 |
|
Repayments of long-term debt |
|
|
(60,860 |
) |
|
|
(198 |
) |
|
|
(176,547 |
) |
Debt issue costs |
|
|
|
|
|
|
|
|
|
|
(6,217 |
) |
Proceeds from sale of common stock warrants |
|
|
|
|
|
|
|
|
|
|
43,850 |
|
Retirement of common stock warrants |
|
|
(8,560 |
) |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
299 |
|
|
|
1,845 |
|
|
|
3,066 |
|
Purchase of call options |
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
Retirement of call options |
|
|
8,714 |
|
|
|
|
|
|
|
|
|
Purchase and retirement of common stock |
|
|
(75 |
) |
|
|
(48,627 |
) |
|
|
(64,201 |
) |
Debt refinancing costs |
|
|
(2,110 |
) |
|
|
|
|
|
|
|
|
Dividends |
|
|
(9,734 |
) |
|
|
(9,374 |
) |
|
|
(10,184 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
|
|
|
|
227 |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(72,326 |
) |
|
|
(56,127 |
) |
|
|
(20,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(9,766 |
) |
|
|
1,029 |
|
|
|
27,675 |
|
Cash and cash equivalents, beginning of year |
|
|
72,574 |
|
|
|
71,545 |
|
|
|
43,870 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
62,808 |
|
|
$ |
72,574 |
|
|
$ |
71,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net |
|
$ |
(14,353 |
) |
|
$ |
(3,980 |
) |
|
$ |
9,276 |
|
Interest |
|
$ |
22,331 |
|
|
$ |
22,120 |
|
|
$ |
24,772 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to executive officers and directors |
|
$ |
305 |
|
|
$ |
923 |
|
|
$ |
1,028 |
|
Issuance of restricted stock, net of forfeitures |
|
$ |
20 |
|
|
$ |
162 |
|
|
$ |
4,136 |
|
See accompanying notes to consolidated financial statements.
58
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(1) The Company
Stewart Enterprises, Inc. (the Company) is a provider of funeral and cemetery products and
services in the death care industry in the United States. Through its subsidiaries, the Company
offers a complete line 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, 2009,
the Company owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United
States and Puerto Rico. As discussed in Note 21, effective for the second quarter of fiscal year
2009, the Company has three operating and reportable segments consisting of a funeral segment,
cemetery segment and corporate trust management segment.
(2) Summary of Significant Accounting Policies
(a) Principles of Consolidation
The accompanying consolidated financial statements include the Company and its subsidiaries.
All significant intercompany balances and transactions have been eliminated.
(b) Use of Estimates
The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America (GAAP) requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities, the disclosure of
contingent assets and liabilities at the date of the financial statements and the reported amounts
of revenues and expenses during the reporting period. Actual results could differ from those
estimates and these differences could be material.
(c) Fair Value of Financial Instruments
Estimated fair value amounts have been determined using available market information and the
valuation methodologies described below. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. The use of different market
assumptions or valuation methodologies could have a material effect on the estimated fair value
amounts.
The Company considers all highly liquid investments with an original maturity of three
months or less to be cash equivalents. The Company deposits its cash and cash equivalents with
financial institutions. Such balances typically exceed applicable FDIC insurance limits. The
carrying amounts of cash and cash equivalents and current receivables approximate fair value due to
the short-term nature of these instruments. The carrying amount of receivables due beyond one year
approximates fair value because they bear interest at rates currently offered by the Company for
receivables with similar terms and maturities.
The carrying amounts of securities included in preneed funeral trust investments, preneed
cemetery trust investments and cemetery perpetual care trust investments are stated at fair value,
as described in Note 2(k).
The Company records debt at cost, but determines the fair value for disclosure purposes. The
fair value of the Companys long-term variable-rate and fixed-rate debt is estimated using quoted
market prices, where applicable, or future cash flows discounted at rates for similar types of
borrowing arrangements as discussed in Note 15. The senior convertible notes issued in fiscal year
2007 are accounted for as a liability with a carrying amount equal to their principal amount in the
consolidated balance sheet and the embedded conversion option in the senior convertible notes has
not been accounted for as a separate derivative.
The call options purchased and warrants sold contemporaneously with the sale of the senior
convertible notes are equity contracts that meet the scope exception of Financial Accounting
Standards Board (FASB) Accounting Standards Codification (ASC) 815-Derivatives and Hedging
and hence do not need to be marked-to-market through earnings. In addition, since the call
option and warrant transactions are accounted for as equity
59
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
transactions, the payment
associated with the purchase of the call options and the proceeds received from the issuance of the
warrants were recorded in additional paid-in capital in stockholders equity as separate equity
transactions.
(d) Inventories
Inventories are stated at the lower of cost (average cost and first-in, first-out methods) or
net realizable value. The portion of developed cemetery property that management estimates will be
used in the next twelve months is included in inventories. Such estimates are based on the
Companys projected results. Included in inventory are various cemetery construction projects.
The Company allocates costs of these construction projects to the number of units in the respective
project.
(e) Buildings and Equipment
Buildings and equipment are recorded at cost and are depreciated over their estimated useful
lives, primarily using the straight-line method. Building and building improvement items are
generally depreciated over a period ranging from 10 to 40 years. Equipment is generally
depreciated over the following ranges: light equipment, 5 to 10 years; heavy equipment, 10 years;
computer equipment, 3 to 4 years; and crematory equipment, 5 to 20 years. Vehicles are depreciated
over 5 to 7 years. Leasehold improvements are depreciated over the shorter of the term of the
lease or the life of the asset. Maintenance and repairs are charged to expense whereas renewals
and major replacements that extend the assets useful lives are capitalized. For the fiscal years
ended October 31, 2009, 2008 and 2007, depreciation expense totaled $26,662, $25,456 and $25,146,
respectively.
The Company reviews for continued appropriateness the carrying value of its long-lived assets
whenever events and circumstances indicate a potential impairment. This review is based on its
projections of anticipated undiscounted future cash flows. If indicators of impairment are
present, the Company evaluates the undiscounted future cash flows expected to be generated by those
assets compared to the carrying amount of those assets. The net carrying value of assets not
recoverable are reduced to fair value. While the Company believes that its estimates of
undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and
comparable sales values could materially affect its evaluations.
(f) Preneed Selling Costs
Preneed selling costs related to the acquisition of new prearranged funeral and cemetery
service and merchandise sales are charged to expense as incurred. Preneed selling costs related to
the acquisition of new prearranged cemetery property sales are deferred.
(g) Goodwill
The Companys evaluation of the goodwill of its operations previously consisted of 13
reporting units. As discussed in Note 21, in the second quarter of 2009, the Company eliminated
its two geographical divisions of Western and Eastern and the positions of Western and Eastern
division presidents from its organizational structure, which resulted in a change to the Companys
operating and reportable segments from five to three segments. In conjunction with the
reorganization, the Company has re-evaluated its reporting units for its evaluation of goodwill and
has reduced the number of reporting units from 13 to eight reporting units. Those reporting units
are: the funeral operating segment comprised of three reporting units (Southern, Southwestern,
Northern, Midwestern, Western-South and Central regions aggregated; Puerto Rico region; and
Western-North and Southeastern regions aggregated); the cemetery operating segment comprised of
five reporting units (Southwestern and Western-South regions aggregated; Northern, Central and
Southeastern regions aggregated; Southern and Midwestern regions aggregated; Puerto Rico region;
and Western-North region).
60
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
Goodwill of a reporting unit must be tested for impairment on at least an annual basis. The
Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal
year. In addition to an
annual review, the Company assesses the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value may be greater than fair value. Factors the Company
considers important that could trigger an impairment review include significant underperformance
relative to historical or projected future operating results, significant changes in the manner of
the use of the Companys assets or the strategy for its overall business and significant negative
industry or economic trends.
Goodwill was allocated to these reporting units based on the implied fair value of goodwill.
The implied fair value of a reporting units goodwill is determined in a manner similar to the
amount of goodwill determined in a business combination. That is, the Company allocates the fair
value of the reporting unit to all of the assets and liabilities of that unit as if the reporting
unit had been acquired in a business combination and the fair value of the reporting unit was the
price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over
the amounts assigned to its assets and liabilities is the implied fair value of goodwill. The
Company calculated the fair value, or enterprise value, for each of the reporting units based on a
discounted cash flow analysis.
In reviewing goodwill for impairment, the Company first compares the fair value of each of its
reporting units with its carrying amount (including goodwill). If the carrying amount of a
reporting unit (including goodwill) exceeds its fair value, the Company then measures the amount of
impairment of the reporting units goodwill by comparing the implied fair value of the reporting
units goodwill with the carrying amount of that goodwill. An impairment charge is recorded when
the carrying amount of goodwill exceeds its implied fair value. This step of the impairment test
involves determining estimates of fair values of the Companys assets and liabilities.
The Companys goodwill impairment test involves estimates and management judgment. The
Company determines fair value of each reporting unit using a discounted cash flow valuation
methodology. The discounted cash flow valuation uses projections of future cash flows and includes
assumptions concerning future operating performance and economic conditions and may differ from
actual future cash flows. The Company tests its results by comparing them to the trading multiples
of companies in its industry and supplier industries calculated as enterprise value divided by
EBITDA. The Company also reviewed multiples used in recent acquisition transactions within the
industry. In projecting its cash flows, the Company used growth rates of three to five percent.
The Company adjusted the results for its estimate of the impact of the realized losses in its
trusts on its cash flows. For the discount rate, the Company used 9.1 percent, which reflected its
weighted average cost of capital determined based on its industry and supplier industries and
capital structure as adjusted for equity risk premiums and size risk premiums based on its market
capitalization. Fair value is calculated as the sum of the projected discounted cash flows of the
reporting units over the next five years and terminal value at the end of those five years. The
terminal value is calculated as the projected EBITDA at the end of the five year period divided by
the discount rate minus terminal growth rates ranging from 2 to 3.5 percent. The Company
considered a sensitivity analysis of the terminal values and used the midpoint enterprise value as
its best estimate.
(h) Stock-Based Compensation
The Companys stock-based compensation cost for each period is the expense related to all
share-based compensation arrangements vesting in the period based on the estimated grant date fair
value. See Note 19 for additional information.
(i) Funeral Revenue
The Company sells price-guaranteed prearranged funeral services and merchandise under
contracts that provide for delivery of the services and merchandise at the time of death.
Prearranged funeral services are recorded as funeral revenue in the period the funeral is
performed. Prearranged funeral merchandise is recognized as revenue upon delivery. When a
contract turns at-need or the merchandise is delivered, the contract face value along with
61
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
related
trust dividends, interest income and gains and losses allocated to individual contracts as per the
applicable trust agreement are included in revenue. Prior to performing the funeral or delivering
of the merchandise, such sales and related trust earnings are deferred. Funeral services and
merchandise sold at the time of need are recorded as funeral revenue in the period the funeral is
performed or the merchandise is delivered. The Company records
cash advance items such as public transportation arranged on behalf of a customer on a net basis.
Discounts are also recorded on a net basis in revenue. The Company presents all taxes assessed by
governmental authorities on its revenue-producing transactions (i.e., sales taxes) as well as the
recoveries from its customers from these taxes on a net basis in its consolidated financial
statements.
Because preneed services or merchandise will not be provided until the future, most states
require that all or a portion of the customer payments under these contracts be protected for the
benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be
placed into trust accounts (trust-funded preneed funeral contracts). Alternatively, where
allowed, customers may purchase a life insurance or annuity policy from third-party insurance
companies to fund their preneed funeral contracts (insurance-funded preneed funeral contracts).
The funeral goods and services selected at the time of contract origination will be funded by the
insurance policy proceeds, which include increasing insurance benefits. Under either customer
funding option, the Company enters into a preneed funeral contract with the customer to provide
funeral services in the future. See discussion of insurance-funded preneed funeral contracts
below.
When a trust-funded preneed funeral contract is entered into, the Company records an asset
(included in preneed funeral receivables and trust investments) and a corresponding liability
(included in deferred preneed funeral revenues) for the contract price. Principal amounts
deposited in the trust or escrow accounts generally range from 70 percent to 90 percent of each
installment received. The sale of caskets is treated in some jurisdictions in the same manner as
the sale of cemetery merchandise and in some jurisdictions as the sale of funeral services for
trusting purposes. As the customer makes payments on the contract prior to performance by the
Company, the Company deposits into the related trust the required portion of the payment and
reclassifies the corresponding amount from deferred preneed funeral revenues into deferred preneed
funeral and cemetery receipts held in trust.
The Companys policy for recognizing trust income follows the allocation of trust earnings to
individual contracts as stipulated in the Companys respective trust agreements for distributable
income. In substantially all of the Companys trusts, dividends and interest earned and net
capital gains and losses realized by preneed funeral trust or escrow accounts net of fees are
allocated to individual contracts when earned or realized. In these trusts, unrealized gains and
losses are not allocated to contracts. The trust earnings allocated to individual contracts are
recognized as components of revenue along with the original contract sales price when the
underlying service or merchandise is delivered. Principal and earnings are withdrawn only as the
merchandise or services are delivered or contracts are cancelled, except in jurisdictions that
permit trust earnings to be withdrawn currently.
Deferred preneed funeral revenue represents future funeral contract revenues. In addition to
amounts receivable from customers and amounts received from customers that are not required to be
trusted, this includes distributed and distributable trust investment earnings associated with
unperformed trust-funded preneed funeral contracts where the related cash or investments are not
held in trust accounts (generally because the Company was permitted to withdraw the cash from the
trust before performance of the service or delivery of the merchandise). Future funeral contract
revenues and non-distributable net trust investment earnings where the related cash or investments
are held in trust accounts are included in deferred preneed funeral and cemetery receipts held in
trust.
Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled
to receive a refund of the funds held in trust. In many jurisdictions, the Company may be
obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust
including investment income at the time of cancellation. If the fair market value of the trusts
were to decline below the estimated costs to deliver the underlying products and services, the
Company would record a charge to earnings to record a liability for the expected loss on the
delivery of contracts in the Companys backlog. Based upon the analysis described in Note 2(m), no
loss
62
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
amounts have been required to be recognized for the years ended October 31, 2009, 2008 and
2007. See Note 2(m) below.
Insurance-funded price-guaranteed preneed funeral contracts that will be funded by life
insurance or annuity contracts issued by third-party insurers are not reflected in the consolidated
balance sheet. The net amount of these contracts that have not been fulfilled as of October 31,
2009 and 2008 was $507,349 and $477,069,
respectively. With insurance-funded preneed funeral contracts, the Company earns a commission
because it acts as an agent on the sale of the policies. Customer payments of premiums on the
insurance policies are sent directly to the insurance company, and the insurance premium
receivables and related customer payments are not recorded on the Companys financial statements.
Insurance commissions are recognized as revenue as earned, net of an allowance for cancellations.
This allowance amounted to $3,446 and $3,299 for October 31, 2009 and 2008, respectively. The
costs related to the commissions are expensed as incurred. Proceeds of these policies may be used
by customers for other purposes and are portable to other funeral service providers or for
completely separate purposes. As a result, nothing more is recorded until the contracted service
or merchandise is delivered, and these contracts are not included in deferred revenue. At that
time, the face amount of the contract and the build-up in the face value of the contract (i.e., the
policy proceeds) are recorded as funeral revenue, as well as the related costs to deliver the
contract, and a receivable from the insurance company for the policy proceeds is recorded as a
funeral receivable.
(j) Cemetery Revenue
The Company sells price-guaranteed preneed cemetery merchandise and services under contracts
that provide for delivery of the merchandise and services at the time of need. Preneed cemetery
merchandise and service sales are recorded as cemetery revenue in the period the merchandise is
delivered or service is performed. Prior to that time, such sales are deferred. Cemetery
merchandise and services sold at the time of need are recorded as cemetery revenue in the period
the service is performed or the merchandise is delivered. Discounts are recorded on a net basis in
revenue. The Company presents all taxes assessed by governmental authorities on its
revenue-producing transactions (i.e., sales taxes) as well as the recoveries from its customers
from these taxes on a net basis in its consolidated financial statements.
Some or all of the funds received under preneed cemetery contracts for merchandise or services
may be required to be placed into trust accounts, pursuant to applicable state law. With respect
to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30
percent to 50 percent of each installment received. With respect to the preneed sale of cemetery
services, the Company is generally required to place in trust 70 percent to 90 percent of each
installment received. When a trust-funded preneed cemetery contract is entered into, the Company
records an asset (included in preneed cemetery receivables and trust investments) and a
corresponding liability (included in deferred preneed cemetery revenues) for the contract price.
As the customer makes payments on the contract prior to performance by the Company, the Company
deposits into the related trust the required portion of the payment and reclassifies the
corresponding amount from deferred preneed cemetery revenues into deferred preneed funeral and
cemetery receipts held in trust.
Deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized
upon delivery of merchandise or performance of services. In addition to the amounts receivable
from customers and amounts not required to be trusted, this includes distributed and distributable
trust investment earnings associated with unperformed preneed cemetery services or undelivered
preneed cemetery merchandise where the related cash or investments are not held in trust accounts
(generally because the Company was permitted to withdraw the cash from the trust before performance
of the service or delivery of the merchandise). Future contract revenues and non-distributable net
trust investment earnings where the related cash or investments are held in trust accounts are
included in deferred preneed funeral and cemetery receipts held in trust.
63
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
The Companys policy for recognizing trust income follows the allocation of trust earnings to
individual contracts as stipulated in the Companys respective trust agreements for distributable
income. In substantially all of the Companys trusts, dividends and interest earned and net
capital gains and losses realized by preneed cemetery trust or escrow accounts net of fees are
allocated to individual contracts when earned or realized. In these trusts, unrealized gains and
losses are not allocated to contracts. The trust earnings allocated to individual contracts are
recognized as components of revenue along with the original contract sales price when the
underlying service or merchandise is delivered. Principal and earnings are withdrawn only as the
merchandise or services are delivered or contracts are cancelled, except in jurisdictions that
permit trust earnings to be withdrawn currently.
The Company sells price-guaranteed cemetery contracts providing for property interment rights.
For preneed sales of interment rights (cemetery property), the associated revenue and all costs to
acquire the sale are recognized in accordance with the retail land sales provisions of ASC
360-Property, Plant and Equipment. Under this guidance, recognition of revenue and costs must be
deferred until 10 percent of the property sale price has been collected. Until the 10 percent has
been collected, the Company records all payments received as deposits, does not record receivables
and continues to report the inventory in its financial statements. As of October 31, 2009 and
2008, the amount of inventory included in the Companys consolidated balance sheets on which the 10
percent collection requirement has not been met was $1,008 and $1,122, respectively. Revenue
related to the preneed sale of cemetery property prior to the completion of its construction is
recognized on a percentage of completion method of accounting as construction occurs. The Company
measures the percentage of completion by taking the costs incurred to date and dividing that number
by the total projected cost of the project.
Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of
the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from
these trusts, which have been established in most jurisdictions in which the Company operates
cemeteries, is used for maintenance of those cemeteries, but principal, including in some
jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are
received, the Company generally funds the perpetual care trust in the same proportion as the
payment bears to the contract amount. For example, if the Company receives 20 percent of the
contract price, it places in trust 20 percent of the total amount it is required to place in the
cemetery perpetual care trust for that contract. The Company currently recognizes and withdraws
all dividend and interest income earned and, where permitted, capital gains realized by cemetery
perpetual care funds. The Company is currently utilizing some of the cash that could be withdrawn
from the trusts to satisfy its funding obligation resulting from realized capital losses recorded
in the fourth quarter of 2008 and fiscal year 2009.
If the Company realizes net losses in those states that allowed it to withdraw capital gains,
these states may require the Company to make cash deposits to the trust to cover the net loss, or
may require the Company to stop withdrawing earnings until future earnings cover the net losses.
Some of the Companys sales of cemetery property and merchandise are made under installment
contracts bearing interest at prevailing rates. Interest rates on cemetery property contracts
range from 4.9 percent to 15.0 percent and have a weighted average interest rate of 9.0 percent.
Finance charges are recognized as cemetery revenue under the effective interest method over the
terms of the related installment receivables that are 90 days outstanding or less.
(k) Preneed Funeral and Cemetery Merchandise and Services Trusts and Cemetery Perpetual
Care Trusts
As of April 30, 2004, the Company implemented the FASBs applicable guidance on the
consolidation of variable interest entities. This resulted in the consolidation of the Companys
preneed funeral and cemetery merchandise and services trusts and the Companys cemetery perpetual
care trusts. The implementation affected certain line items in the consolidated balance sheet and
statement of earnings as described below, but had no impact on net earnings. Also, the
implementation did not result in any net changes to the Companys consolidated statement of cash
flows, but does require disclosure of certain financing and investing activities. See Notes 4, 5
and 6.
64
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
Although this guidance required consolidation of the preneed funeral and cemetery merchandise and
services trusts and cemetery perpetual care trusts, it did not change the legal relationships among
the trusts, the Company and its customers. In the case of preneed funeral and cemetery merchandise
and services trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual
care trusts, the Company does not have a legal right to the cemetery perpetual care trust assets.
For these reasons, upon consolidation of the trusts, the Company recognized these third-party
interests in the trusts in its financial statements. The Company classifies deposits to the
funeral and cemetery merchandise and services trusts as deferred preneed funeral and cemetery
receipts held in trust and classifies deposits to the cemetery perpetual care trusts as perpetual
care trusts corpus, both within the liabilities section of the balance sheet.
All of these trusts hold investments in cash and marketable equity and debt securities, which
are reported at fair value, with the related realized and unrealized gains and losses excluded
from earnings and initially reported as a separate component of accumulated other comprehensive
income or loss in the Companys consolidated balance sheet. These earnings are then reclassified
to deferred preneed funeral and cemetery receipts held in trust in the Companys consolidated
balance sheet. Distributable income according to the regulatory requirements, which are primarily
dividends, interest income and gains and losses allocated to individual accounts as per the
applicable trust agreement, are included in the determination of revenue in accordance with the
Companys revenue recognition policy.
In order to determine if a loss should be considered realized and included as a component of
future revenue recorded as contracts turn at need, the Company looks at specific changes in market
conditions or concerns specific to the issuer of the securities. In addition, the Company assesses
the likelihood that there is sufficient cash and cash equivalents within the trusts from future
preneed sales and ordinary income to fund future services which would allow the Company to hold
these investments until they are estimated to recover in value. Further, the Company evaluates its
intent at the individual trust level with respect to those securities. This evaluation is
performed each quarter. In conjunction with its quarterly evaluation of the investments in the
preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts,
the Company makes a determination about whether impairments in its debt securities are temporary or
other than temporary in nature. Based on the analysis performed by the Company, it does not
consider any of its debt security investments to be other than temporarily impaired as of October
31, 2009.
In the case of cemetery perpetual care trusts, the Company recognizes investment earnings in
cemetery revenues when such earnings are realized and permitted to be legally withdrawn by the
Company (with a corresponding debit to perpetual care trusts corpus). Certain states allow the
Company to withdraw realized capital gains, and other states prohibit these withdrawals. These
earnings and related funds are intended to defray cemetery maintenance costs and are recorded as
revenue. In the event that the Company has been allowed to withdraw realized gains and there are
realized losses in the trust, the Company may determine it has a funding obligation to restore the
net realized losses of the trust. A charge is recorded in the statement of earnings at the time it
is considered probable that the Company will be required to restore the realized losses.
See Notes 4, 5 and 6 for fair market value information for the Companys preneed funeral trust
investments, preneed cemetery trust investments and cemetery perpetual care trust investments. The
Company has included as realized losses common and preferred stocks issued by companies in
bankruptcy or under a Federal
rescue program where the securities issued have become worthless or practically worthless as
well as certain securities for which it considers the recovery of value to be remote.
Cash flows from preneed funeral and cemetery merchandise and services contracts and cemetery
perpetual care contracts are presented as operating cash flows in the Companys consolidated
statements of cash flows, with related unrealized gains and losses excluded and flow through
accumulated other comprehensive income or loss in the Companys consolidated balance sheet.
65
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
(l) Trust Fee Revenue
Trust management fees related to the preneed funeral and cemetery merchandise and services
trusts and cemetery perpetual care trusts are earned by the Company based on the fair market value
of the investments in the trusts. These fees are established by the Company at rates consistent
with industry norms and are paid by the trusts to the Companys subsidiary, ITI.
(m) Loss Contract Impairment Analysis
Each quarter, the Company performs an analysis to determine whether its preneed contracts are
in a loss position, which would necessitate a charge to earnings. For this analysis, the Company
adds the sales prices of the underlying contracts and realized earnings, then subtracts realized
losses to derive the net amount of proceeds for contracts as of that particular balance sheet date.
The Company then considers unrealized gains and losses based on current market prices quoted for
the investments, but does not include future expected returns on the investments in its analysis.
The Company compares the amount of adjusted proceeds after considering net unrealized gains and
losses to the estimated direct costs to deliver the contracts, which consist primarily of funeral
and cemetery merchandise costs and salaries, supplies and equipment related to the delivery of a
preneed contract. If a deficiency were to exist, the Company would record a charge to earnings and
a corresponding liability for the expected loss on the delivery of those contracts from its
deferred revenue. No amounts were recognized during fiscal years 2009, 2008 or 2007.
(n) Allowance for Doubtful Accounts and Sales Cancellations
The Company establishes an allowance for doubtful accounts based on a range of percentages
applied to accounts receivable aging categories. These percentages are based on historical
collection and write-off experience. The Company establishes a reserve for cancellations for
cemetery property sales based on historical cancellations and recent write-off activity. This
reserve is recorded as a reduction of cemetery revenue. The Company establishes an allowance for
preneed funeral and cemetery merchandise and services trust receivables. This reserve is recorded
as a reduction in preneed receivables and preneed deferred revenue. The Company also establishes
an allowance for cancellations for insurance and third-party commissions based on historical
experience for cancellations of insurance contracts within the period of refundability.
(o) Income Taxes
Income taxes are accounted for using the asset and liability method under which deferred
income taxes are recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that includes the enactment
date. Management provides a valuation allowance against the deferred tax asset for amounts which
are not considered more likely than not to be realized. For additional information see Note 18.
For the purpose of calculating income taxes for discontinued operations, earnings (loss) from
discontinued operations is segregated into two categories: operating results and gain or loss on
dispositions. Operating results are
tax affected in the ordinary manner (i.e., income tax expense on net operating income, income tax
benefit on net operating loss).
66
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
(p) Business Combinations
Tangible and intangible assets acquired and liabilities assumed in a business combination are
recorded at fair value, and goodwill is recognized for any difference between the purchase price
and the fair value of the acquired tangible and intangible assets.
(q) Earnings Per Common Share
Basic earnings per common share is computed by dividing net earnings by the weighted average
number of common shares outstanding during each period. Diluted earnings per common share is
computed by dividing net earnings by the weighted average number of common shares outstanding plus
the number of additional common shares that would have been outstanding if the dilutive potential
common shares had been issued during each period as discussed in Note 17.
For purposes of calculating the effect of the Companys senior convertible notes on diluted
earnings per share, any shares issuable upon conversion are accounted for under the net share
settlement method. The effect of the net share settlement method is that the shares potentially
issuable upon conversion of the senior convertible notes are only included in the calculation of
earnings per share to the extent the conversion value of the senior convertible notes exceeds their
principal amount. In this case, the Company would include in diluted shares the number of shares
of Class A common stock necessary to settle the conversion if it occurred at that time. The
warrants are included in the calculation of diluted earnings per share to the extent the effect is
dilutive using the treasury stock method. The call options are not considered in the diluted
earnings per share calculation.
(r) Purchase and Retirement of Common Stock
Share repurchases are recorded at stated value with the amount in excess of stated value
recorded as a reduction to additional paid-in capital. Share repurchases reduce the weighted
average number of common shares outstanding during each period.
On September 19, 2007, the Company announced a new stock repurchase program, authorizing the
investment of up to $25,000 in the repurchase of the Companys common stock. Repurchases under the
program are limited to the Companys Class A common stock, and can be made in the open market or in
privately negotiated transactions at such times and in such amounts as management deems
appropriate, depending upon market conditions and other factors. On December 20, 2007, the Company
announced a $25,000 increase in this program. On June 19, 2008, the Company announced an
additional $25,000 increase to the program, which increased the program to $75,000. As of October
31, 2009, the Company has repurchased 6,634,136 shares of its Class A common stock for $48,504 at
an average price of $7.31 per share and has $26,496 remaining available under this program.
(s) Derivatives
The Company accounts for derivative financial instruments under ASC 815 Derivatives and
Hedging.
(t) Estimated Insurance Loss Liabilities
The Company purchases comprehensive general liability, automobile liability and workers
compensation insurance coverages structured within a large deductible/self-insured retention
premium rating program. This program results in the Company being primarily self-insured for
claims and associated costs and losses covered by
these policies but below our deductible. Historical insurance industry experience indicates some
degree of inherent variability in assessing the ultimate amount of losses associated with the types
of claims covered by the program. This is especially true due to the extended period of time that
transpires between when the claim might occur and the full settlement of such claim, often many
years. The Company continually evaluates the receivables due from its insurance carriers as well
as loss estimates associated with claims and losses related to these insurance coverages
67
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
with
information obtained from its primary insurer.
With respect to health insurance, the Company purchases individual and aggregate stop loss
coverage with a large deductible. This program results in the Company being primarily self-insured
for claims and associated costs up to the amount of the deductible, with claims in excess of the
deductible amount being covered by insurance. Expected claims are based on actuarial estimates;
actual claims may differ from those estimates. The Company continually evaluates its claims
experience related to this coverage with information obtained from its insurer.
Assumptions used in preparing these estimates are based on factors such as claim settlement
patterns, claim development trends, claim frequency and severity patterns, inflationary trends and
data reasonableness. Together these factors will generally affect the analysis and determination
of the best estimate of the projected ultimate claim losses. The results of these evaluations
are used to assess the reasonableness of the Companys insurance loss liability.
The estimated liability on the uninsured litigation and employment-related claims are
established by management based upon the recommendations of professionals who perform a review of
both reported claims and estimate a liability for incurred but not reported claims. These
liabilities include the estimated settlement costs. Although management believes estimated
liabilities related to uninsured claims are adequately recorded, it is possible that actual results
could significantly differ from the recorded liabilities.
The Company also has insurance coverage related to property damage, incremental costs and
property operating expenses it incurs due to damage caused by hurricanes and other natural
disasters. The Companys policy is to record such amounts when recovery is probable, which
generally means it has reached an agreement with the insurance company.
The Company accrues for legal costs related to loss contingencies as the services are
provided. If a settlement is determined to be probable, then an estimate is recorded for the
settlement at that time.
(u) Dividends
In March 2005, the Company announced that its Board of Directors approved the initiation of a
quarterly cash dividend of two and one-half cents per share of Class A and B common stock. In
September 2009, the Company announced that it had increased the quarterly dividend rate to three
cents per share of Class A and B common stock. Although the Company intends to pay regular
quarterly cash dividends for the foreseeable future, the declaration and payment of future
dividends are discretionary and will be subject to determination by the Board of Directors each
quarter after its review of the Companys financial performance. For the years ended October 31,
2009, 2008 and 2007, the Company paid $9,734, $9,374 and $10,184, respectively, in dividends.
(v) Leases
The Company has noncancellable operating leases, primarily for land and buildings, that expire
over the next one to 14 years, with the exception of eight leases that expire between 2032 and
2039. As of October 31, 2009, approximately 77 percent of the Companys 218 funeral locations were
owned by the Companys subsidiaries and approximately 23 percent were held under operating leases.
The Company records operating lease expense for leases with escalating rents on a straight-line
basis over the life of the lease, including reasonably assured lease renewals. The Company
amortizes leasehold improvements in an operating lease over the shorter of their economic
lives or the lease term, including reasonably assured lease renewals.
(w) Computer Software
The Company capitalizes computer software systems and depreciates them over their useful
lives.
68
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies(Continued)
(x) Out of Period Adjustments
In 2007, the Company discovered adjustments that related to prior accounting periods. The
Company does not believe these adjustments were quantitatively or qualitatively material to its
financial position, results of operations and cash flows for the year ended October 31, 2007 or to
any of its prior annual or quarterly financial statements. As a result, the Company did not
restate any prior period financial statements. The net impact of the adjustments in 2007 is an
increase in gross profit of $1,247 and an increase to net earnings of $843.
(y) Reclassifications
Certain reclassifications have been made to the 2008 and 2007 consolidated financial
statements in order for these periods to be comparable. The reclassifications in themselves had no
effect on the Companys total net income or loss, total shareholders equity or the net increase or
decrease in cash.
Authoritative guidance on noncontrolling interests in consolidated financial statements was
issued in December 2007. During the Companys review of this guidance, the Company determined that
balances historically designated as non-controlling interest in funeral and cemetery trusts and
non-controlling interest in perpetual care trusts in its consolidated balance sheet do not meet
the criteria for noncontrolling interests as prescribed by this guidance, which indicates that only
a financial instrument classified as equity in the trusts financial statements can be a
noncontrolling interest in the consolidated financial statements. The interest related to the
Companys funeral and cemetery merchandise and services trusts is classified as a liability because
the preneed contracts underlying these trusts are unconditionally redeemable upon the occurrence of
an event that is certain to occur. Since the earnings from the Companys cemetery perpetual care
trusts are used to support the maintenance of its cemeteries and the Company cannot access the
initial corpus, the Company believes the interest in these trusts also retains the characteristics
of a liability.
In light of this review, in the first quarter of fiscal year 2009, these line items in the
Companys consolidated balance sheets as of January 31, 2009 and October 31, 2008 were renamed.
The line historically titled non-controlling interest in funeral and cemetery trusts has been
renamed deferred preneed funeral and cemetery receipts held in trust. In addition, the line
historically titled non-controlling interest in perpetual care trusts has been renamed perpetual
care trusts corpus and has been reclassified to be included in total liabilities. These changes
had no effect on total assets or shareholders equity.
(3) Change in Accounting Principles and New Accounting Principles
In September 2006, the FASB issued ASC 820-Fair Value Measurements and Disclosures (ASC
820), which the Company adopted effective November 1, 2008. This guidance defines fair value as
the price that would be received to sell an asset or paid to transfer a liability in an orderly
transaction between willing market participants at the measurement date, establishes a framework
for measuring fair value and expands disclosures about instruments measured at fair value. ASC 820
establishes a three-level valuation hierarchy for disclosure of fair value measurements. The
valuation hierarchy is based upon the transparency of inputs to the valuation of an asset or
liability as of the measurement date. The three levels are defined as follows:
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Level 1inputs to the valuation methodology are quoted prices (unadjusted) for
identical assets or liabilities in active markets; |
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Level 2inputs to the valuation methodology include quoted prices for similar assets or
liabilities in active markets, and inputs that are observable for the asset or liability,
either directly or indirectly, for substantially the full term of the financial instrument;
quoted prices for identical or similar assets or liabilities in markets that are not
active; inputs other than quoted prices that are observable; inputs that are
|
69
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Change in Accounting Principles and New Accounting Principles(Continued)
|
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derived
principally from or corroborated by observable market data by correlation or other means;
and |
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|
Level 3inputs to the valuation methodology are unobservable and significant to the
fair value measurement. |
An assets or liabilitys categorization within the valuation hierarchy is based upon the
lowest level of input that is significant to the fair value measurement.
In February 2008, the FASB issued guidance that amends ASC 820 to exclude ASC 840 Leases
and its related accounting pronouncements that address leasing transactions from its scope. The
FASB also issued guidance in February 2008 which provides a one-year deferral of the effective date
of ASC 820 for non-financial assets and liabilities, except those that are recognized or disclosed
in the financial statements at fair value at least annually. The Company adopted the provisions of
ASC 820 for its financial assets and liabilities that are measured on a recurring basis at fair
value, effective November 1, 2008. These financial assets include the investments of the Companys
preneed funeral merchandise and services trusts, preneed cemetery merchandise and services trusts
and cemetery perpetual care trusts. For additional disclosures required by ASC 820 for these
assets, see Notes 4 through 6 to the Companys consolidated financial statements. The provisions
of ASC 820 have not been applied to the Companys non-financial assets and liabilities. The major
categories of assets and liabilities that are subject to non-recurring fair value measurement for
which the provisions of ASC 820 have not yet been applied are as follows: reporting units measured
at fair value in the goodwill impairment test under ASC 350-IntangiblesGoodwill and Other, and
non-financial assets and liabilities initially measured at fair value in a business combination
under ASC 805-Business Combinations.
In December 2008, the FASB issued guidance regarding disclosures by public entities about
transfers of financial assets and interests in variable interest entities. This guidance requires
public entities to provide additional disclosures about transfers of financial assets and to
provide additional disclosures about their involvement with variable interest entities. This
guidance is effective for reporting periods ending after December 15, 2008, which corresponds to
the Companys first fiscal quarter of 2009. The adoption had no impact on the Companys
consolidated financial statements but requires the Company to add additional disclosures related to
its variable interest entities, which consist of its preneed funeral and cemetery merchandise and
services trusts and cemetery perpetual care trusts investments. The Companys accounting policies
related to its preneed funeral and cemetery merchandise and services trusts and cemetery perpetual
care trusts are discussed in Note 2(k). For further disclosures, see Notes 4, 5 and 6 to the
consolidated financial statements included herein.
In April 2009, the FASB issued authoritative guidance requiring companies to disclose the fair
value of financial instruments within interim financial statements, adding to the current
requirements to provide those disclosures annually. The Company adopted this guidance effective
with the preparation of the Companys condensed consolidated financial statements for the quarter
ended July 31, 2009.
In April 2009, the FASB issued amended guidance that modifies the requirements for recognizing
other than temporary impairment on debt securities and significantly changes the impairment model
for such securities. It also modifies the presentation of other-than-temporary impairment losses
and increases related disclosure requirements. The Company adopted this guidance effective with
the preparation of the Companys condensed consolidated financial statements for the quarter ended
July 31, 2009. The adoption did not have a material impact on the Companys consolidated results
of operations, financial position or cash flows.
In May 2009, the FASB issued ASC 855-Subsequent Events (ASC 855). This guidance does not
apply to subsequent events or transactions that are within the scope of other applicable generally
accepted accounting principles that provide different guidance on the accounting treatment for
subsequent events or transactions. ASC 855 applies to both interim financial statements and annual
financial statements and should not result in significant changes in the subsequent events that are
reported. ASC 855 introduces the concept of financial statements being
70
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Change in Accounting Principles and New Accounting Principles(Continued)
available to be issued. It
requires the disclosure of the date through which a Company has evaluated subsequent events and the
basis for that date, whether that represents the date the financial statements were issued or were
available to be issued. ASC 855 should alert all users of financial statements that an entity has
not evaluated subsequent events after that date in the set of financial statements being presented.
The Company adopted this guidance effective with the preparation of the Companys condensed
consolidated financial statements for the quarter ended July 31, 2009 and has included the required
disclosures in this Form 10-K in Note 25.
In June 2009, the FASB issued ASC 105-Generally Accepted Accounting Principles (ASC 105).
This guidance requires the FASB Accounting Standards Codification to become the source of
authoritative U.S. accounting and reporting standards for nongovernmental entities in addition to
the guidance issued by the Securities and Exchange Commission (SEC). The FASB Accounting
Standards Codificaton significantly changes the way financial statement preparers, auditors and
academics perform accounting research. The Company adopted ASC 105 effective with the preparation
of the Companys consolidated financial statements for the year ended October 31, 2009 and included
the required disclosures. The adoption did not have any impact on the Companys consolidated
results of operations, financial position or cash flows.
Other, not yet adopted
In December 2007, the FASB issued ASC 805-Business Combinations (ASC 805). This guidance
states that all business combinations, whether full, partial or step acquisitions, will result in
all assets and liabilities of an acquired business being recorded at their fair values at the
acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of
their acquisition date fair value or the estimated amounts to be realized. ASC 805 applies to all
transactions or other events in which an entity obtains control of one or more businesses. This
statement is effective as of the beginning of an entitys first fiscal year beginning after
December 15, 2008, which corresponds to the Companys fiscal year beginning November 1, 2009. This
guidance will apply to any future business combinations as of that date.
In December 2007, the FASB amended guidance regarding noncontrolling interests in consolidated
financial statements. This guidance states that accounting and reporting for minority interests
will be recharacterized as noncontrolling interests and classified as a component of shareholders
equity. This guidance applies to all entities that prepare consolidated financial statements,
except not-for-profit organizations, but will affect only those entities that have an outstanding
noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This
guidance is effective as of the beginning of an entitys first fiscal year beginning after December
15, 2008, which corresponds to the Companys fiscal year beginning November 1, 2009. The Company
does not expect this guidance to have any impact on its consolidated financial statements.
However, as described in Note 2(y), in light of the Companys review of this guidance, certain
balances in the condensed consolidated balance sheets were renamed and a line item historically
classified outside of liabilities was moved to be included in total liabilities.
In May 2008, the FASB issued guidance regarding the accounting for convertible debt
instruments that may be settled in cash upon conversion. The guidance applies to the Companys
senior convertible notes and states that issuers of convertible debt instruments that may be
settled in cash upon conversion (including partial cash settlement) should account separately for
the liability and equity components of the instruments in a manner that will reflect the entitys
nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This
guidance is effective as of the beginning of an entitys first fiscal year beginning after December
15, 2008, which corresponds to the Companys fiscal year beginning November 1, 2009, and must be
applied retrospectively to all periods presented. While there will be no impact on the Companys
cash interest paid or net reported cash flows, the Company will record higher interest expense in
fiscal year 2010 as a result. It is estimated that annual earnings after taxes will be reduced
between $1,000 and $4,000 over the remaining life of the convertible debt as a result of the
required increase in non-cash interest expense from accretion of the debt discount under the
effective interest
71
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Change in Accounting Principles and New Accounting Principles(Continued)
rate method. After considering the retrospective treatment, the impact on the
October 31, 2009 consolidated balance sheet is expected to result in the following:
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Increase |
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(Decrease) |
Deferred tax assets |
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$ |
(10,000 |
) |
Long-term debt |
|
|
(27,800 |
) |
Additional paid-in capital |
|
|
35,000 |
|
Retained earnings |
|
|
(17,200 |
) |
The impact on the fiscal year 2009 statement of earnings, as applied retrospectively, is
expected to result in the following:
|
|
|
|
|
Increase to interest expense |
|
$ |
5,400 |
|
Decrease to gain on early extinguishment of debt |
|
|
14,000 |
|
Decrease to income taxes |
|
|
(7,000 |
) |
|
|
|
|
Decrease to net earnings |
|
$ |
12,400 |
|
|
|
|
|
In June 2008, the FASB issued guidance on determining whether instruments granted in
share-based payment transactions are participating securities. This guidance states whether
instruments granted in share-based payment transactions are participating securities prior to
vesting and, therefore, need to be included in the earnings allocation in computing earnings per
share under the two-class method. Unvested share-based payment awards that contain nonforfeitable
rights to dividends are participating securities. Dividends are paid by the Company on shares of
restricted stock, whether vested or nonvested, at the same rate as dividends on normal shares of
the Companys stock. In addition, restricted stockholders are not required to return the dividends
to the Company if their shares of nonvested restricted stock do not vest. Therefore, under this
guidance, the Company must include outstanding nonvested restricted stock in the basic weighted
average share calculation used to calculate basic earnings per share. This is effective for
financial statements issued for fiscal years beginning after December 15, 2008, which corresponds
to the Companys fiscal year beginning November 1, 2009, and must be applied retrospectively to all
periods presented (including interim financial statements, summaries of earnings and selected
financial data). The Company does not expect the adoption of this guidance to have a material
impact on its consolidated financial statements. As of October 31, 2009, the Company had 729,665
shares of nonvested restricted stock which is less than one percent of its total October 31, 2009
outstanding common share balance of 92,683,720.
In June 2009, the FASB issued Statement of Financial Accounting Standards (SFAS) No. 166,
Accounting for Transfers of Financial Assets. It will require more information about transfers
of financial assets, including securitization transactions, and enhanced disclosures when companies
have continuing exposure to the risks related to transferred financial assets. Additionally, it
eliminates the concept of a qualifying special-purpose entity. This statement is effective as of
the beginning of the first annual reporting period that begins after November 15, 2009, which
corresponds to the Companys fiscal year beginning November 1, 2010. The Company is
evaluating the impact the adoption will have on its consolidated financial statements.
In June 2009, FASB issued SFAS No. 167, Amendments to FASB Interpretation No. 46(R). This
guidance amends the consolidation guidance for variable interest entities. Also, it will require
additional disclosures about involvement with variable interest entities and any significant
changes in risk exposure due to that involvement. This guidance is effective as of the beginning
of the first annual reporting period that begins after November 15, 2009, which corresponds to the
Companys fiscal year beginning November 1, 2010. The Company is evaluating the impact the
adoption will have on its consolidated financial statements.
72
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities
Preneed Funeral Receivables and Trust Investments
Preneed funeral receivables and trust investments represent trust assets and customer
receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The
components of preneed funeral receivables and trust investments in the consolidated balance sheets
as of October 31, 2009 and 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
October 31, 2008 |
|
Trust assets |
|
$ |
358,430 |
|
|
$ |
336,782 |
|
Receivables from customers |
|
|
43,225 |
|
|
|
44,796 |
|
|
|
|
|
|
|
|
|
|
|
401,655 |
|
|
|
381,578 |
|
Allowances for cancellations |
|
|
(12,143 |
) |
|
|
(13,166 |
) |
|
|
|
|
|
|
|
Preneed funeral receivables and trust investments |
|
$ |
389,512 |
|
|
$ |
368,412 |
|
|
|
|
|
|
|
|
The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2009 are detailed below. Based on the Companys evaluation, the cost
basis of the funeral merchandise and services trust assets below reflects realized losses for the
year ended October 31, 2009 in the trust assets of approximately $8,668 from their original cost
basis. These realized losses are related to certain investments held that were rendered worthless
or practically worthless and to certain investments that the Company determined it did not have the
intent to hold until they recover in value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other
short-term investments |
|
$ |
28,979 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
28,979 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
6,044 |
|
|
|
214 |
|
|
|
(1 |
) |
|
|
6,257 |
|
|
|
|
|
Corporate bonds |
|
|
39,007 |
|
|
|
1,650 |
|
|
|
(1,458 |
) |
|
|
39,199 |
|
|
|
|
|
Preferred stocks |
|
|
56,885 |
|
|
|
9 |
|
|
|
(10,394 |
) |
|
|
46,500 |
|
|
|
|
|
Common stocks |
|
|
248,750 |
|
|
|
848 |
|
|
|
(106,788 |
) |
|
|
142,810 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
28,841 |
|
|
|
20 |
|
|
|
(7,486 |
) |
|
|
21,375 |
|
|
|
|
|
Fixed income |
|
|
56,193 |
|
|
|
448 |
|
|
|
(916 |
) |
|
|
55,725 |
|
|
|
|
|
Insurance contracts and other
long-term investments |
|
|
19,054 |
|
|
|
112 |
|
|
|
(2,594 |
) |
|
|
16,572 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
483,753 |
|
|
$ |
3,301 |
|
|
$ |
(129,637 |
) |
|
$ |
357,417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
73.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,013 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
358,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2008 are detailed below.
73
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other short-term investments |
|
$ |
35,355 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
35,355 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
11,585 |
|
|
|
157 |
|
|
|
(4 |
) |
|
|
11,738 |
|
|
|
|
|
Corporate bonds |
|
|
56,661 |
|
|
|
67 |
|
|
|
(9,078 |
) |
|
|
47,650 |
|
|
|
|
|
Preferred stocks |
|
|
68,300 |
|
|
|
12 |
|
|
|
(21,906 |
) |
|
|
46,406 |
|
|
|
|
|
Common stocks |
|
|
272,598 |
|
|
|
1,847 |
|
|
|
(124,156 |
) |
|
|
150,289 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
28,972 |
|
|
|
10 |
|
|
|
(9,680 |
) |
|
|
19,302 |
|
|
|
|
|
Fixed income |
|
|
6,256 |
|
|
|
1 |
|
|
|
(1,084 |
) |
|
|
5,173 |
|
|
|
|
|
Insurance contracts and other
long-term investments |
|
|
19,645 |
|
|
|
104 |
|
|
|
(63 |
) |
|
|
19,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
499,372 |
|
|
$ |
2,198 |
|
|
$ |
(165,971 |
) |
|
$ |
335,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
336,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities and market values of debt securities included above are as follows:
|
|
|
|
|
|
|
October 31, 2009 |
|
Due in one year or less |
|
$ |
616 |
|
Due in one to five years |
|
|
31,263 |
|
Due in five to ten years |
|
|
13,551 |
|
Thereafter |
|
|
26 |
|
|
|
|
|
|
|
$ |
45,456 |
|
|
|
|
|
The Company is actively managing a covered call program on its equity securities within the
funeral merchandise and services trust. As of October 31, 2009, the Company has outstanding
covered calls with a market value of $424. These covered calls constitute a hedge on $20,672, or
approximately 14.5 percent, of the common stock portion of the Companys portfolio within the
funeral merchandise and services trust and also provide an opportunity for income. For the year
ended October 31, 2009, the Company realized trust earnings of approximately $464 related to the
covered call program.
Where quoted prices are available in an active market, investments held by the trusts are
classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in ASC
820. The Companys Level 1 investments include cash, money market and other short-term
investments, common stock and mutual funds.
Where quoted market prices are not available for the specific security, then fair values are
estimated by using quoted prices of securities with similar characteristics. These investments are
primarily U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all
of which are classified within Level 2 of the valuation hierarchy.
The Companys Level 3 investments include insurance contracts and partnership investments.
The valuation of insurance contracts and partnership investments requires significant management
judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature
of such assets. The fair market value of the insurance contracts was obtained from the insurance
companies sites showing the current face value of the
contracts which is deemed to approximate fair market value. The fair market value of the
partnership investments
74
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities(Continued)
was determined by using their most recent audited financial statements and assessing the
market value of the underlying securities within the partnership.
The inputs into the fair value of the Companys preneed funeral merchandise and services trust
investments are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
Quoted Market |
|
Significant |
|
|
|
|
|
|
Prices in Active |
|
Other Observable |
|
Significant |
|
|
|
|
Markets |
|
Inputs |
|
Unobservable Inputs |
|
Fair Market |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
Trust investments |
|
$ |
256,799 |
|
|
$ |
91,956 |
|
|
$ |
8,662 |
|
|
$ |
357,417 |
|
The change in the Companys preneed funeral merchandise and services trust investments with
significant unobservable inputs (Level 3) is as follows:
|
|
|
|
|
Fair market value, November 1, 2008 |
|
$ |
11,299 |
|
Total unrealized losses included in other comprehensive income (1) |
|
|
(2,554 |
) |
Purchases, sales, contributions, and distributions, net |
|
|
(83 |
) |
|
|
|
|
Fair market value, October 31, 2009 |
|
$ |
8,662 |
|
|
|
|
|
|
|
|
(1) |
|
All gains (losses) recognized in other comprehensive income for funeral trust
investments are attributable to the Companys preneed customers and are offset by a
corresponding increase (decrease) in deferred preneed funeral receipts held in trust. |
Activity related to preneed funeral trust investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2009 |
|
2008 |
|
2007 |
Purchases |
|
$ |
53,739 |
|
|
$ |
18,839 |
|
|
$ |
152,126 |
|
Sales |
|
|
54,120 |
|
|
|
24,072 |
|
|
|
148,309 |
|
Realized gains from sales of investments |
|
|
2,566 |
|
|
|
2,572 |
|
|
|
13,690 |
|
Realized losses from sales of investments and other |
|
|
(11,167 |
) (1) |
|
|
(24,868 |
) (2) |
|
|
(1,183 |
) |
Interest income, dividend and other ordinary income |
|
|
11,328 |
|
|
|
13,478 |
|
|
|
16,764 |
|
Deposits |
|
|
26,540 |
|
|
|
31,520 |
|
|
|
32,120 |
|
Withdrawals |
|
|
41,085 |
|
|
|
46,403 |
|
|
|
44,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase) in net unrealized losses |
|
|
37,437 |
|
|
|
(109,761 |
) |
|
|
3,753 |
|
Reclassification to deferred preneed funeral
receipts held in trust |
|
|
(37,437 |
) |
|
|
109,761 |
|
|
|
(3,753 |
) |
|
|
|
(1) |
|
Includes $2,499 in losses from the sale of investments and $8,668 in losses related
to certain investments that were rendered worthless or practically worthless and to certain
investments that the Company determined it did not have the intent to hold until they recover
in value. |
|
(2) |
|
Includes $865 in losses from the sale of investments and $24,003 in losses related to
certain investments that were rendered worthless or practically worthless. |
75
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities(Continued)
The following table shows the gross unrealized losses and fair value of the preneed funeral
merchandise and services trust investments with unrealized losses aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position as
of October 31, 2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S.
Government,
agencies and
municipalities |
|
$ |
|
|
|
$ |
|
|
|
$ |
21 |
|
|
$ |
(1 |
) |
|
$ |
21 |
|
|
$ |
(1 |
) |
Corporate bonds |
|
|
|
|
|
|
|
|
|
|
10,154 |
|
|
|
(1,458 |
) |
|
|
10,154 |
|
|
|
(1,458 |
) |
Preferred stocks |
|
|
493 |
|
|
|
(7 |
) |
|
|
43,519 |
|
|
|
(10,387 |
) |
|
|
44,012 |
|
|
|
(10,394 |
) |
Common stocks |
|
|
1,000 |
|
|
|
(276 |
) |
|
|
133,428 |
|
|
|
(106,512 |
) |
|
|
134,428 |
|
|
|
(106,788 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
21,237 |
|
|
|
(7,486 |
) |
|
|
21,237 |
|
|
|
(7,486 |
) |
Fixed income |
|
|
318 |
|
|
|
(1 |
) |
|
|
4,539 |
|
|
|
(915 |
) |
|
|
4,857 |
|
|
|
(916 |
) |
Insurance contracts
and other long-term
investments |
|
|
1,203 |
|
|
|
(1,060 |
) |
|
|
2,016 |
|
|
|
(1,534 |
) |
|
|
3,219 |
|
|
|
(2,594 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
3,014 |
|
|
$ |
(1,344 |
) |
|
$ |
214,914 |
|
|
$ |
(128,293 |
) |
|
$ |
217,928 |
|
|
$ |
(129,637 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S.
Government,
agencies and
municipalities |
|
$ |
1,147 |
|
|
$ |
(3 |
) |
|
$ |
21 |
|
|
$ |
(1 |
) |
|
$ |
1,168 |
|
|
$ |
(4 |
) |
Corporate bonds |
|
|
20,609 |
|
|
|
(2,027 |
) |
|
|
21,258 |
|
|
|
(7,051 |
) |
|
|
41,867 |
|
|
|
(9,078 |
) |
Preferred stocks |
|
|
9,055 |
|
|
|
(6,686 |
) |
|
|
36,445 |
|
|
|
(15,220 |
) |
|
|
45,500 |
|
|
|
(21,906 |
) |
Common stocks |
|
|
51,658 |
|
|
|
(25,033 |
) |
|
|
86,718 |
|
|
|
(99,123 |
) |
|
|
138,376 |
|
|
|
(124,156 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
16,557 |
|
|
|
(8,200 |
) |
|
|
2,628 |
|
|
|
(1,480 |
) |
|
|
19,185 |
|
|
|
(9,680 |
) |
Fixed income |
|
|
67 |
|
|
|
|
|
|
|
5,079 |
|
|
|
(1,084 |
) |
|
|
5,146 |
|
|
|
(1,084 |
) |
Insurance contracts
and other long-term
investments |
|
|
3,510 |
|
|
|
|
|
|
|
58 |
|
|
|
(63 |
) |
|
|
3,568 |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
102,603 |
|
|
$ |
(41,949 |
) |
|
$ |
152,207 |
|
|
$ |
(124,022 |
) |
|
$ |
254,810 |
|
|
$ |
(165,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in the preneed funeral merchandise and services trust portfolio are
not considered to be other than temporary. For each of these securities, the Company evaluates
consensus analyst recommendations, ratings from established ratings agencies, any concerns specific
to the issuer of the securities and overall market performance. Of the total unrealized losses at
October 31, 2009, 90 percent, or $117,182, were generated by common stock and preferred stock
investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred
stocks had a rating of A or better at the time of purchase. Because approximately 40 percent of
the Companys preneed funeral trust portfolio is currently invested in common stock, the Company
generally expects its portfolio performance to improve if the performance of the overall stock
market improves, but would also expect its performance to deteriorate if the overall stock market
declines. The preferred stocks are primarily in the financial services sector which experienced a
significant decline in market value during late 2008 and early 2009 due to the current economic
crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts
and from cash deposits of future preneed sales and cash received from ordinary income to fund
future services and allow the Company to hold these investments until they recover in value.
76
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities
Preneed Cemetery Receivables and Trust Investments
Preneed cemetery receivables and trust investments represent trust assets and customer
receivables for contracts sold in advance of when the merchandise or services are needed. The
receivables related to the sale of preneed property interment rights are included in the Companys
current and long-term receivables discussed in Note 9. The components of preneed cemetery
receivables and trust investments in the consolidated balance sheets as of October 31, 2009 and
2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
October 31, 2008 |
|
Trust assets |
|
$ |
163,938 |
|
|
$ |
148,533 |
|
Receivables from customers |
|
|
35,718 |
|
|
|
39,868 |
|
|
|
|
|
|
|
|
|
|
|
199,656 |
|
|
|
188,401 |
|
Allowance for cancellations |
|
|
(6,239 |
) |
|
|
(6,260 |
) |
|
|
|
|
|
|
|
Preneed cemetery receivables and trust investments |
|
$ |
193,417 |
|
|
$ |
182,141 |
|
|
|
|
|
|
|
|
The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of October 31, 2009 are detailed below. Based on the Companys evaluation, the cost basis
of the cemetery merchandise and services trust assets below reflects realized losses for the year
ended October 31, 2009 in the trust assets of approximately $3,455 from their original cost basis.
These realized losses are related to certain investments held that were rendered worthless or
practically worthless and to certain investments that the Company determined it did not have the
intent to hold until they recover in value.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other
short-term investments |
|
$ |
15,123 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15,123 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
9,259 |
|
|
|
678 |
|
|
|
|
|
|
|
9,937 |
|
|
|
|
|
Corporate bonds |
|
|
7,554 |
|
|
|
552 |
|
|
|
(74 |
) |
|
|
8,032 |
|
|
|
|
|
Preferred stocks |
|
|
20,831 |
|
|
|
46 |
|
|
|
(4,363 |
) |
|
|
16,514 |
|
|
|
|
|
Common stocks |
|
|
127,942 |
|
|
|
714 |
|
|
|
(54,254 |
) |
|
|
74,402 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
30,291 |
|
|
|
15 |
|
|
|
(9,980 |
) |
|
|
20,326 |
|
|
|
|
|
Fixed income |
|
|
18,530 |
|
|
|
125 |
|
|
|
(4 |
) |
|
|
18,651 |
|
|
|
|
|
Other long-term investments |
|
|
562 |
|
|
|
|
|
|
|
(8 |
) |
|
|
554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
230,092 |
|
|
$ |
2,130 |
|
|
$ |
(68,683 |
) |
|
$ |
163,539 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
71.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
399 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
163,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
77
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities(Continued)
The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of October 31, 2008 are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other short-term investments |
|
$ |
15,939 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
15,939 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
12,960 |
|
|
|
647 |
|
|
|
(5 |
) |
|
|
13,602 |
|
|
|
|
|
Corporate bonds |
|
|
12,399 |
|
|
|
15 |
|
|
|
(1,859 |
) |
|
|
10,555 |
|
|
|
|
|
Preferred stocks |
|
|
25,589 |
|
|
|
1 |
|
|
|
(8,828 |
) |
|
|
16,762 |
|
|
|
|
|
Common stocks |
|
|
140,654 |
|
|
|
303 |
|
|
|
(67,576 |
) |
|
|
73,381 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
30,291 |
|
|
|
|
|
|
|
(12,575 |
) |
|
|
17,716 |
|
|
|
|
|
Fixed income |
|
|
19 |
|
|
|
|
|
|
|
(6 |
) |
|
|
13 |
|
|
|
|
|
Other long-term investments |
|
|
107 |
|
|
|
|
|
|
|
(15 |
) |
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
237,958 |
|
|
$ |
966 |
|
|
$ |
(90,864 |
) |
|
$ |
148,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities and market values of debt securities included above are as follows:
|
|
|
|
|
|
|
October 31, 2009 |
|
Due in one year or less |
|
$ |
2,801 |
|
Due in one to five years |
|
|
10,081 |
|
Due in five to ten years |
|
|
4,921 |
|
Thereafter |
|
|
166 |
|
|
|
|
|
|
|
$ |
17,969 |
|
|
|
|
|
The Company is actively managing a covered call program on its equity securities within the
cemetery merchandise and services trust. As of October 31, 2009, the Company has outstanding
covered calls with a market value of $308. These covered calls constitute a hedge on $14,345, or
approximately 19.3 percent, of the common stock portion of the Companys portfolio within the
cemetery merchandise and services trust and also provide an opportunity for income. For the year
ended October 31, 2009, the Company realized trust earnings of approximately $284 related to the
covered call program.
Where quoted prices are available in an active market, investments held by the trusts are
classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in ASC
820. The Companys Level 1 investments include cash, money market and other short-term
investments, common stock and mutual funds.
Where quoted market prices are not available for the specific security, then fair values are
estimated by using quoted prices of securities with similar characteristics. These investments are
U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which
are classified within Level 2 of the valuation hierarchy.
There are no Level 3 investments in the preneed cemetery merchandise and services trust
investment portfolio.
78
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities(Continued)
The inputs into the fair value of the Companys preneed cemetery merchandise and services
trust investments are categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
Quoted Market |
|
Significant |
|
Significant |
|
|
|
|
Prices in Active |
|
Other Observable |
|
Unobservable |
|
|
|
|
Markets |
|
Inputs |
|
Inputs |
|
Fair Market |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
129,032 |
|
|
$ |
34,507 |
|
|
$ |
|
|
|
$ |
163,539 |
|
Activity related to preneed cemetery merchandise and services trust investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Purchases |
|
$ |
24,628 |
|
|
$ |
16,492 |
|
|
$ |
223,437 |
|
Sales |
|
|
23,104 |
|
|
|
12,081 |
|
|
|
218,808 |
|
Realized gains from sales of investments |
|
|
1,131 |
|
|
|
1,460 |
|
|
|
10,697 |
|
Realized losses from sales of investments and other |
|
|
(8,831 |
) (1) |
|
|
(14,307 |
) (2) |
|
|
(302 |
) |
Interest income, dividend and other ordinary income |
|
|
5,005 |
|
|
|
6,486 |
|
|
|
5,894 |
|
Deposits |
|
|
18,540 |
|
|
|
17,619 |
|
|
|
18,185 |
|
Withdrawals |
|
|
21,364 |
|
|
|
19,354 |
|
|
|
20,844 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase) in net unrealized losses |
|
|
23,345 |
|
|
|
(57,469 |
) |
|
|
2,774 |
|
Reclassification to deferred preneed
cemetery receipts held in trust |
|
|
(23,345 |
) |
|
|
57,469 |
|
|
|
(2,774 |
) |
|
|
|
(1) |
|
Includes $5,376 in losses from the sale of investments and $3,455 in losses related to
certain investments that were rendered worthless or practically worthless and to certain
investments that the Company determined it did not have the intent to hold until they recover
in value. |
|
(2) |
|
Includes $434 in losses from the sale of investments and $13,873 in losses related to certain
investments that were rendered worthless or practically worthless. |
The following table shows the gross unrealized losses and fair value of the preneed cemetery
merchandise and services trust investments aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position as of October 31,
2009 and 2008.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Corporate bonds |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,045 |
|
|
$ |
(74 |
) |
|
$ |
1,045 |
|
|
$ |
(74 |
) |
Preferred stocks |
|
|
|
|
|
|
|
|
|
|
16,356 |
|
|
|
(4,363 |
) |
|
|
16,356 |
|
|
|
(4,363 |
) |
Common stocks |
|
|
1,755 |
|
|
|
(464 |
) |
|
|
67,374 |
|
|
|
(53,790 |
) |
|
|
69,129 |
|
|
|
(54,254 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
20,186 |
|
|
|
(9,980 |
) |
|
|
20,186 |
|
|
|
(9,980 |
) |
Fixed income |
|
|
20 |
|
|
|
|
|
|
|
15 |
|
|
|
(4 |
) |
|
|
35 |
|
|
|
(4 |
) |
Other long-term investments |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,775 |
|
|
$ |
(464 |
) |
|
$ |
104,976 |
|
|
$ |
(68,219 |
) |
|
$ |
106,751 |
|
|
$ |
(68,683 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Government,
agencies and
municipalities |
|
$ |
458 |
|
|
$ |
(3 |
) |
|
$ |
201 |
|
|
$ |
(2 |
) |
|
$ |
659 |
|
|
$ |
(5 |
) |
Corporate bonds |
|
|
5,371 |
|
|
|
(312 |
) |
|
|
3,819 |
|
|
|
(1,547 |
) |
|
|
9,190 |
|
|
|
(1,859 |
) |
Preferred stocks |
|
|
4,587 |
|
|
|
(3,128 |
) |
|
|
12,069 |
|
|
|
(5,700 |
) |
|
|
16,656 |
|
|
|
(8,828 |
) |
Common stocks |
|
|
18,227 |
|
|
|
(12,604 |
) |
|
|
51,495 |
|
|
|
(54,972 |
) |
|
|
69,722 |
|
|
|
(67,576 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
13,599 |
|
|
|
(10,201 |
) |
|
|
4,117 |
|
|
|
(2,374 |
) |
|
|
17,716 |
|
|
|
(12,575 |
) |
Fixed income |
|
|
|
|
|
|
|
|
|
|
13 |
|
|
|
(6 |
) |
|
|
13 |
|
|
|
(6 |
) |
Other long-term investments |
|
|
|
|
|
|
|
|
|
|
40 |
|
|
|
(15 |
) |
|
|
40 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42,242 |
|
|
$ |
(26,248 |
) |
|
$ |
71,754 |
|
|
$ |
(64,616 |
) |
|
$ |
113,996 |
|
|
$ |
(90,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in the preneed cemetery merchandise and services trust portfolio
are not considered to be other than temporary. For each of these securities, the Company evaluates
consensus analyst recommendations, ratings from established ratings agencies, any concerns specific
to the issuer of the securities and overall market performance. Of the total unrealized losses at
October 31, 2009, 85 percent, or $58,617, were generated by common stock and preferred stock
investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred
stocks had a rating of A or better at the time of purchase. Because approximately 45 percent of
the Companys preneed cemetery merchandise and service trusts portfolio is currently invested in
common stock, the Company generally expects its portfolio performance to improve if the performance
of the overall stock market improves, but would also expect its performance to deteriorate if the
overall stock market declines. The preferred stocks are primarily in the financial services sector
which experienced a significant decline in market value in late 2008 and early 2009 due to the
current economic crisis. The Company believes that it has sufficient cash and cash equivalents
within the trusts and from cash deposits of future preneed sales and cash received from ordinary
income to fund future services and allow the Company to hold these investments until they recover
in value.
(6) Cemetery Interment Rights and Perpetual Care Trusts
Earnings realized from cemetery perpetual care trust investments that the Company is legally
permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery
maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery
perpetual care trust investments were $6,840, $10,660 and $10,164 for the years ended October 31,
2009, 2008 and 2007, respectively.
The cost and market values of the trust investments held by the cemetery perpetual care trusts
as of October 31, 2009 are detailed below. Based on the Companys evaluation, the cost basis of
the cemetery perpetual care trusts below reflects realized losses for the year ended October 31,
2009 of approximately $3,418 from their original cost basis. These realized losses are related to
certain investments held that were rendered worthless or practically worthless and to certain
investments that the Company determined it did not have the intent to hold until they recover in
value.
80
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other
short-term investments |
|
$ |
17,784 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
17,784 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
5,416 |
|
|
|
394 |
|
|
|
(82 |
) |
|
|
5,728 |
|
|
|
|
|
Corporate bonds |
|
|
42,735 |
|
|
|
2,088 |
|
|
|
(1,085 |
) |
|
|
43,738 |
|
|
|
|
|
Preferred stocks |
|
|
58,421 |
|
|
|
2 |
|
|
|
(17,137 |
) |
|
|
41,286 |
|
|
|
|
|
Common stocks |
|
|
96,831 |
|
|
|
2,663 |
|
|
|
(42,792 |
) |
|
|
56,702 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
6,838 |
|
|
|
25 |
|
|
|
(1,560 |
) |
|
|
5,303 |
|
|
|
|
|
Fixed income |
|
|
32,561 |
|
|
|
1,340 |
|
|
|
(342 |
) |
|
|
33,559 |
|
|
|
|
|
Other long-term investments |
|
|
766 |
|
|
|
4 |
|
|
|
(177 |
) |
|
|
593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
261,352 |
|
|
$ |
6,516 |
|
|
$ |
(63,175 |
) |
|
$ |
204,693 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.3 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
783 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
205,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost and market values of the trust investments held by the cemetery perpetual care trusts
as of October 31, 2008 are detailed below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
|
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other short-term investments |
|
$ |
16,920 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
16,920 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
8,739 |
|
|
|
292 |
|
|
|
(96 |
) |
|
|
8,935 |
|
|
|
|
|
Corporate bonds |
|
|
44,287 |
|
|
|
397 |
|
|
|
(5,709 |
) |
|
|
38,975 |
|
|
|
|
|
Preferred stocks |
|
|
67,514 |
|
|
|
|
|
|
|
(26,299 |
) |
|
|
41,215 |
|
|
|
|
|
Common stocks |
|
|
106,347 |
|
|
|
3,427 |
|
|
|
(50,431 |
) |
|
|
59,343 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
6,740 |
|
|
|
|
|
|
|
(2,103 |
) |
|
|
4,637 |
|
|
|
|
|
Fixed income |
|
|
2,086 |
|
|
|
|
|
|
|
(472 |
) |
|
|
1,614 |
|
|
|
|
|
Other long-term investments |
|
|
594 |
|
|
|
28 |
|
|
|
(11 |
) |
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
253,227 |
|
|
$ |
4,144 |
|
|
$ |
(85,121 |
) |
|
$ |
172,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
173,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts(Continued)
The estimated maturities and market values of debt securities included above are as follows:
|
|
|
|
|
|
|
October 31, 2009 |
|
Due in one year or less |
|
$ |
11,939 |
|
Due in one to five years |
|
|
23,747 |
|
Due in five to ten years |
|
|
13,199 |
|
Thereafter |
|
|
581 |
|
|
|
|
|
|
|
$ |
49,466 |
|
|
|
|
|
The Company is actively managing a covered call program on its equity securities within the
cemetery perpetual care trust. As of October 31, 2009, the Company has outstanding covered calls
with a market value of $220. These covered calls constitute a hedge on $9,361, or approximately
16.5 percent, of the common stock portion of the Companys portfolio within the cemetery perpetual
care trust and also provide an opportunity for current income. For the year ended October 31,
2009, the Company realized trust earnings of approximately $177 related to the covered call
program.
Where quoted prices are available in an active market, investments held by the trusts are
classified as Level 1 investments pursuant to the three-level valuation hierarchy provided in ASC
820. The Companys Level 1 investments include cash, money market and other short-term
investments, common stock and mutual funds.
Where quoted market prices are not available for the specific security, then fair values are
estimated by using quoted prices of securities with similar characteristics. These investments are
primarily U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all
of which are classified within Level 2 of the valuation hierarchy.
The Companys Level 3 investments include an investment in a partnership. The valuation of
partnership investments requires significant management judgment due to the absence of quoted
prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value
of the partnership investments was determined by using its most recent audited financial statements
and assessing the market value of the underlying securities within the partnership.
The inputs into the fair value of the Companys cemetery perpetual care trust investments are
categorized as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
Significant |
|
|
|
|
|
|
Quoted Market |
|
Other |
|
Significant |
|
|
|
|
Prices in Active |
|
Observable |
|
Unobservable |
|
|
|
|
Markets |
|
Inputs |
|
Inputs |
|
Fair market |
|
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
113,715 |
|
|
$ |
90,752 |
|
|
$ |
226 |
|
|
$ |
204,693 |
|
The change in the Companys cemetery perpetual care trust investments with significant
unobservable inputs (Level 3) is as follows:
|
|
|
|
|
Fair market value, November 1, 2008 |
|
$ |
611 |
|
Total unrealized losses included in other comprehensive income (1) |
|
|
(177 |
) |
Transfers out of Level 3 category |
|
|
(208 |
) |
|
|
|
|
Fair market value, October 31, 2009 |
|
$ |
226 |
|
|
|
|
|
82
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts(Continued)
|
|
|
(1) |
|
All gains (losses) recognized in other comprehensive income for cemetery perpetual
care trust investments are attributable to the Companys customers and are offset by a
corresponding increase (decrease) in perpetual care trusts corpus. |
In states where the Company withdraws and recognizes capital gains in its cemetery perpetual
care trusts, if it realizes net capital losses (i.e. losses in excess of capital gains in the
trust) and the fair market value of the trust assets is less than the aggregate amounts required to
be contributed to the trust, some states may require the Company to make cash deposits to the
trusts or may require the Company to stop withdrawing earnings until future earnings restore the
net realized losses. As of October 31, 2008, the Company had a liability recorded for the
estimated probable funding obligation to restore the net realized losses as a result of fiscal year
2008 losses of $13,281, which was recognized as a realized loss in the consolidated statement of
earnings for the year ended October 31, 2008 in cemetery costs. The Company recorded an additional
$3,421 for the estimated probable funding obligation to restore the net realized losses in the
cemetery perpetual care trust during fiscal year 2009. Also, during fiscal year 2009, the Company
contributed approximately $734 to the trusts as part of its funding obligation and had earnings of
$1,958 within the trusts that it did not withdraw from the trusts in order to satisfy its estimated
probable funding obligation. As of October 31, 2009, the Companys estimated probable funding
obligation was $14,010. In those states where realized net capital gains have not been withdrawn,
the Company believes it is reasonably possible that additional funding obligations may exist with
an estimated amount of approximately $3,500.
Activity related to preneed cemetery perpetual care trust investments is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2009 |
|
2008 |
|
2007 |
Purchases |
|
$ |
31,856 |
|
|
$ |
54,315 |
|
|
$ |
65,172 |
|
Sales |
|
|
24,798 |
|
|
|
53,902 |
|
|
|
57,921 |
|
Realized gains from sales of investments |
|
|
1,822 |
|
|
|
4,498 |
|
|
|
4,173 |
|
Realized losses from sales of investments and other |
|
|
(4,416 |
) (1) |
|
|
(14,173 |
) (3) |
|
|
(359 |
) |
Interest income, dividend and other ordinary income |
|
|
9,570 |
|
|
|
10,520 |
|
|
|
9,820 |
|
Deposits |
|
|
8,754 |
(2) |
|
|
8,295 |
|
|
|
8,158 |
|
Withdrawals |
|
|
5,339 |
|
|
|
10,081 |
|
|
|
10,536 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase) in net unrealized losses |
|
|
24,318 |
|
|
|
(61,717 |
) |
|
|
(77 |
) |
Reclassification to perpetual care trusts corpus |
|
|
(24,318 |
) |
|
|
61,717 |
|
|
|
77 |
|
|
|
|
(1) |
|
Includes $998 in losses from the sale of investments and $3,418 in losses related to
certain investments that were rendered worthless or practically worthless and to certain
investments that the Company determined it did not have the intent to hold until they recover
in value. |
|
(2) |
|
Includes $734 that the Company contributed to the cemetery perpetual care trusts as
part of its funding obligation during the year ended October 31, 2009. |
|
(3) |
|
Includes $530 in losses from the sale of investments and $13,643 in losses related
to certain investments that were rendered worthless or practically worthless. |
During the years ended October 31, 2009, 2008 and 2007, cemetery revenues were $211,477,
$241,276 and $243,487, respectively, of which $7,701, $9,322 and $7,748, respectively, were
required to be placed into perpetual care trusts and were recorded as revenues and expenses.
The following table shows the gross unrealized losses and fair value of the cemetery perpetual
care trust investments with unrealized losses aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position as of October 31,
2009 and 2008.
83
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Government,
agencies and
municipalities |
|
$ |
270 |
|
|
$ |
(81 |
) |
|
$ |
6 |
|
|
$ |
(1 |
) |
|
$ |
276 |
|
|
$ |
(82 |
) |
Corporate bonds |
|
|
600 |
|
|
|
(124 |
) |
|
|
1,732 |
|
|
|
(961 |
) |
|
|
2,332 |
|
|
|
(1,085 |
) |
Preferred stocks |
|
|
|
|
|
|
|
|
|
|
40,784 |
|
|
|
(17,137 |
) |
|
|
40,784 |
|
|
|
(17,137 |
) |
Common stocks |
|
|
(38 |
) |
|
|
(473 |
) |
|
|
50,445 |
|
|
|
(42,319 |
) |
|
|
50,407 |
|
|
|
(42,792 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
43 |
|
|
|
(11 |
) |
|
|
5,034 |
|
|
|
(1,549 |
) |
|
|
5,077 |
|
|
|
(1,560 |
) |
Fixed income |
|
|
118 |
|
|
|
|
|
|
|
1,096 |
|
|
|
(342 |
) |
|
|
1,214 |
|
|
|
(342 |
) |
Other long-term investments |
|
|
201 |
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
201 |
|
|
|
(177 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,194 |
|
|
$ |
(866 |
) |
|
$ |
99,097 |
|
|
$ |
(62,309 |
) |
|
$ |
100,291 |
|
|
$ |
(63,175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Government,
agencies and
municipalities |
|
$ |
324 |
|
|
$ |
(1 |
) |
|
$ |
627 |
|
|
$ |
(95 |
) |
|
$ |
951 |
|
|
$ |
(96 |
) |
Corporate bonds |
|
|
15,652 |
|
|
|
(2,352 |
) |
|
|
12,281 |
|
|
|
(3,357 |
) |
|
|
27,933 |
|
|
|
(5,709 |
) |
Preferred stocks |
|
|
8,752 |
|
|
|
(6,227 |
) |
|
|
32,463 |
|
|
|
(20,072 |
) |
|
|
41,215 |
|
|
|
(26,299 |
) |
Common stocks |
|
|
17,832 |
|
|
|
(8,252 |
) |
|
|
34,352 |
|
|
|
(42,179 |
) |
|
|
52,184 |
|
|
|
(50,431 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
4,501 |
|
|
|
(2,075 |
) |
|
|
90 |
|
|
|
(28 |
) |
|
|
4,591 |
|
|
|
(2,103 |
) |
Fixed income |
|
|
258 |
|
|
|
(14 |
) |
|
|
1,078 |
|
|
|
(458 |
) |
|
|
1,336 |
|
|
|
(472 |
) |
Other long-term investments |
|
|
|
|
|
|
|
|
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,319 |
|
|
$ |
(18,921 |
) |
|
$ |
80,879 |
|
|
$ |
(66,200 |
) |
|
$ |
128,198 |
|
|
$ |
(85,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The unrealized losses in the cemetery perpetual care trust portfolio are not considered
to be other than temporary. For each of these securities, the Company evaluates consensus analyst
recommendations, ratings from established ratings agencies, any concerns specific to the issuer of
the securities and overall market performance. Of
the total unrealized losses at October 31, 2009, 95 percent, or $59,929, were generated by
common stock and preferred stock investments. Most of the common stock investments are part of the
S&P 500 Index, and all preferred stocks had a rating of A or better at the time of purchase.
Because approximately 28 percent of the Companys cemetery perpetual care trusts portfolio is
currently invested in common stock, the Company generally expects its portfolio performance to
improve if the performance of the overall stock market improves, but would also expect its
performance to deteriorate if the overall stock market declines. The preferred stocks are
primarily in the financial services sector which experienced a significant decline in market value
in late 2008 and early 2009 due to the current economic crisis. The Company believes that it has
sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed
sales and cash received from ordinary income to fund future services and allow the Company to hold
these investments until they recover in value.
84
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(7) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts Corpus
The components of deferred preneed funeral and cemetery receipts held in trust in the
consolidated balance sheet at October 31, 2009 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Receipts Held in Trust |
|
|
|
|
|
|
Preneed |
|
|
Preneed |
|
|
|
|
|
|
Funeral |
|
|
Cemetery |
|
|
Total |
|
Trust assets at market value |
|
$ |
358,430 |
|
|
$ |
163,938 |
|
|
$ |
522,368 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Pending withdrawals |
|
|
(9,080 |
) |
|
|
(5,740 |
) |
|
|
(14,820 |
) |
Pending deposits |
|
|
4,141 |
|
|
|
3,098 |
|
|
|
7,239 |
|
|
|
|
|
|
|
|
|
|
|
Deferred receipts held in trust |
|
$ |
353,491 |
|
|
$ |
161,296 |
|
|
$ |
514,787 |
|
|
|
|
|
|
|
|
|
|
|
The components of perpetual care trusts corpus in the consolidated balance sheet at October
31, 2009 are as follows:
|
|
|
|
|
|
|
Perpetual Care |
|
|
|
Trusts Corpus |
|
Trust assets at market value |
|
$ |
205,476 |
|
Less: |
|
|
|
|
Pending withdrawals |
|
|
(2,134 |
) |
Pending deposits |
|
|
826 |
|
|
|
|
|
Perpetual care trusts corpus |
|
$ |
204,168 |
|
|
|
|
|
The components of deferred preneed funeral and cemetery receipts held in trust in the
consolidated balance sheet at October 31, 2008 are as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred Receipts Held in Trust |
|
|
|
|
|
|
Preneed |
|
|
Preneed |
|
|
|
|
|
|
Funeral |
|
|
Cemetery |
|
|
Total |
|
Trust assets at market value |
|
$ |
336,782 |
|
|
$ |
148,533 |
|
|
$ |
485,315 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Pending withdrawals |
|
|
(8,926 |
) |
|
|
(4,362 |
) |
|
|
(13,288 |
) |
Pending deposits |
|
|
2,131 |
|
|
|
1,262 |
|
|
|
3,393 |
|
|
|
|
|
|
|
|
|
|
|
Deferred receipts held in trust |
|
$ |
329,987 |
|
|
$ |
145,433 |
|
|
$ |
475,420 |
|
|
|
|
|
|
|
|
|
|
|
The components of perpetual care trusts corpus in the consolidated balance sheet at October
31, 2008 are as follows:
|
|
|
|
|
|
|
Perpetual Care |
|
|
|
Trusts Corpus |
|
Trust assets at market value |
|
$ |
173,090 |
|
Less: |
|
|
|
|
Pending withdrawals |
|
|
(2,442 |
) |
Pending deposits |
|
|
723 |
|
|
|
|
|
Perpetual care trusts corpus |
|
$ |
171,371 |
|
|
|
|
|
Investment and other income, net
The components of investment and other income, net in the consolidated statement of earnings
for the years ended October 31, 2009, 2008 and 2007 are detailed below.
85
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(7) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts
Corpus(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Realized gains from sales of investments |
|
$ |
5,519 |
|
|
$ |
8,530 |
|
|
$ |
28,560 |
|
Realized losses from sales of investments
and other |
|
|
(24,414 |
) |
|
|
(53,348 |
) |
|
|
(1,844 |
) |
Interest income, dividends and other
ordinary income |
|
|
25,903 |
|
|
|
30,484 |
|
|
|
32,478 |
|
Trust expenses and income taxes |
|
|
(8,331 |
) |
|
|
(10,601 |
) |
|
|
(11,253 |
) |
|
|
|
|
|
|
|
|
|
|
Net trust investment income (loss) |
|
|
(1,323 |
) |
|
|
(24,935 |
) |
|
|
47,941 |
|
Investment income (loss) of deferred preneed
funeral and cemetery receipts held in trusts |
|
|
5,525 |
|
|
|
22,875 |
|
|
|
(37,635 |
) |
Investment income (loss) of perpetual care
trusts corpus |
|
|
(4,202 |
) |
|
|
2,060 |
|
|
|
(10,306 |
) |
|
|
|
|
|
|
|
|
|
|
Total deferred preneed funeral and cemetery
receipts held in trust and perpetual care
trusts corpus |
|
|
|
|
|
|
|
|
|
|
|
|
Investment and other income, net (1) |
|
|
92 |
|
|
|
2,406 |
|
|
|
3,374 |
|
|
|
|
|
|
|
|
|
|
|
Total investment and other income, net |
|
$ |
92 |
|
|
$ |
2,406 |
|
|
$ |
3,374 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Investment and other income, net is comprised of interest income primarily on the
Companys cash, cash equivalents and marketable securities not held in trust. |
(8) Marketable Securities and Restricted Investments
The market value of marketable securities as of October 31, 2009 and 2008 was $902 and
$1,055, respectively, which included gross unrealized gains of $54 and $58 for fiscal years 2009
and 2008, respectively, and no unrealized losses for both years. As of October 31, 2009, $1,000
is classified as a long-term asset in the line item Other assets in the consolidated balance
sheet, which includes $902 of marketable securities and $98 of cash. As of October 31, 2008,
$1,000 is classified as a long-term asset in Other assets in the consolidated balance sheet, all
of which is marketable securities. The Company is required by Texas statutes to maintain a minimal
capital level of $1,000, of which 40 percent must be in readily marketable investments.
(9) Receivables
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
Current receivables are summarized as follows: |
|
|
|
|
|
|
|
|
Installment contracts due within one year |
|
$ |
39,023 |
|
|
$ |
44,039 |
|
Income tax receivables |
|
|
6,767 |
|
|
|
1,077 |
|
Trade and other receivables |
|
|
14,905 |
|
|
|
14,942 |
|
Funeral receivables |
|
|
9,322 |
|
|
|
9,740 |
|
Allowance for doubtful accounts |
|
|
(7,390 |
) |
|
|
(7,215 |
) |
Amounts to be collected for cemetery perpetual care trusts |
|
|
(3,188 |
) |
|
|
(3,454 |
) |
|
|
|
|
|
|
|
Net current receivables |
|
$ |
59,439 |
|
|
$ |
59,129 |
|
|
|
|
|
|
|
|
Long-term receivables are summarized as follows: |
|
|
|
|
|
|
|
|
Installment contracts due beyond one year |
|
$ |
79,229 |
|
|
$ |
87,115 |
|
Income tax receivables |
|
|
33 |
|
|
|
77 |
|
Allowance for doubtful accounts |
|
|
(9,778 |
) |
|
|
(9,689 |
) |
Amounts to be collected for cemetery perpetual care trusts |
|
|
(6,473 |
) |
|
|
(6,832 |
) |
|
|
|
|
|
|
|
Net long-term receivables |
|
$ |
63,011 |
|
|
$ |
70,671 |
|
|
|
|
|
|
|
|
86
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(9) |
|
Receivables(continued) |
Installment contracts due within one year and due beyond one year include receivables in the
Companys preneed cemetery property sales only. Receivables for preneed funeral and cemetery
merchandise and services sales are included in preneed funeral receivables and trust investments
and preneed cemetery receivables and trust investments as discussed in Notes 4 and 5.
The Companys receivables as of October 31, 2009 are expected to be collected as follows:
|
|
|
|
|
Years ending October 31, |
|
|
|
|
2010 |
|
$ |
59,439 |
|
2011 |
|
|
18,678 |
|
2012 |
|
|
14,574 |
|
2013 |
|
|
10,611 |
|
2014 |
|
|
7,364 |
|
Thereafter |
|
|
11,784 |
|
|
|
|
|
|
|
$ |
122,450 |
|
|
|
|
|
(10) |
|
Inventories and Cemetery Property |
Inventories are comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
Developed cemetery property |
|
$ |
10,331 |
|
|
$ |
12,223 |
|
Merchandise and supplies |
|
|
25,825 |
|
|
|
23,647 |
|
|
|
|
|
|
|
|
|
|
$ |
36,156 |
|
|
$ |
35,870 |
|
|
|
|
|
|
|
|
Cemetery property is comprised of the following:
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
Developed cemetery property |
|
$ |
112,511 |
|
|
$ |
106,861 |
|
Undeveloped cemetery property |
|
|
273,466 |
|
|
|
270,410 |
|
|
|
|
|
|
|
|
|
|
$ |
385,977 |
|
|
$ |
377,271 |
|
|
|
|
|
|
|
|
The portion of developed cemetery property that management estimates will be used in the next
twelve months is included in inventories. Included in the non-current developed portion of
cemetery property are $14,157 and $13,860 related to cemetery property under development as of
October 31, 2009 and 2008, respectively.
87
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) |
|
Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes |
The following tables present the condensed consolidating historical financial statements as of
October 31, 2009 and October 31, 2008 and for the fiscal years ended October 31, 2009, 2008 and
2007, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of
the Companys 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible
notes, and the financial results of the Companys subsidiaries that do not serve as guarantors.
Non-guarantor subsidiaries of the 6.25 percent senior notes include the Puerto Rican subsidiaries,
Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law
from guaranteeing the senior notes. The guarantor subsidiaries of the 6.25 percent senior notes are
wholly-owned directly or indirectly by the Company, except for three immaterial guarantor
subsidiaries of which the Company is the majority owner. The non-guarantor subsidiaries of the
senior convertible notes are identical to those of the 6.25 percent senior notes but also include
three immaterial non-wholly owned subsidiaries and any future non-wholly owned subsidiaries. The
guarantees are full and unconditional and joint and several. In the statements presented within
this footnote, Tier 2 guarantor subsidiaries represent the three immaterial non-wholly owned
subsidiaries that do not guaranty the senior convertible notes but do guaranty the 6.25 percent
senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the
6.25 percent senior notes and senior convertible notes. In the condensed consolidating statements
of earnings and other comprehensive income, corporate general and administrative expenses and
interest expense of the parent are presented net of amounts charged to the guarantor and
non-guarantor subsidiaries.
Certain reclassifications have been made to the October 31, 2008 non-guarantor balance sheet
related to prior period dividends declared. The reclassifications had no effect on the
consolidated or guarantor balance sheets as of October 31, 2008.
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2009 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
|
|
|
$ |
256,731 |
|
|
$ |
1,866 |
|
|
$ |
17,733 |
|
|
$ |
|
|
|
$ |
276,330 |
|
Cemetery |
|
|
|
|
|
|
190,386 |
|
|
|
2,915 |
|
|
|
18,176 |
|
|
|
|
|
|
|
211,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
447,117 |
|
|
|
4,781 |
|
|
|
35,909 |
|
|
|
|
|
|
|
487,807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
|
|
|
|
197,605 |
|
|
|
1,176 |
|
|
|
12,420 |
|
|
|
|
|
|
|
211,201 |
|
Cemetery |
|
|
|
|
|
|
171,811 |
|
|
|
2,540 |
|
|
|
14,515 |
|
|
|
|
|
|
|
188,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
369,416 |
|
|
|
3,716 |
|
|
|
26,935 |
|
|
|
|
|
|
|
400,067 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
77,701 |
|
|
|
1,065 |
|
|
|
8,974 |
|
|
|
|
|
|
|
87,740 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general and administrative
expenses |
|
|
(30,670 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(30,670 |
) |
Hurricane related recoveries (charges), net |
|
|
(720 |
) |
|
|
340 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(380 |
) |
Separation charges |
|
|
(55 |
) |
|
|
(220 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(275 |
) |
Gains on dispositions and impairment
(losses), net |
|
|
(8 |
) |
|
|
(88 |
) |
|
|
|
|
|
|
(122 |
) |
|
|
|
|
|
|
(218 |
) |
Other operating income, net |
|
|
211 |
|
|
|
903 |
|
|
|
2 |
|
|
|
134 |
|
|
|
|
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(31,242 |
) |
|
|
78,636 |
|
|
|
1,067 |
|
|
|
8,986 |
|
|
|
|
|
|
|
57,447 |
|
Interest expense |
|
|
3,594 |
|
|
|
(23,800 |
) |
|
|
(118 |
) |
|
|
(2,029 |
) |
|
|
|
|
|
|
(22,353 |
) |
Gain on early extinguishment of debt |
|
|
20,078 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
20,078 |
|
Investment and other income, net |
|
|
91 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92 |
|
Equity in subsidiaries |
|
|
40,860 |
|
|
|
747 |
|
|
|
|
|
|
|
|
|
|
|
(41,607 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings before income taxes |
|
|
33,381 |
|
|
|
55,584 |
|
|
|
949 |
|
|
|
6,957 |
|
|
|
(41,607 |
) |
|
|
55,264 |
|
Income tax expense (benefit) |
|
|
(2,272 |
) |
|
|
20,030 |
|
|
|
262 |
|
|
|
1,591 |
|
|
|
|
|
|
|
19,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
35,653 |
|
|
|
35,554 |
|
|
|
687 |
|
|
|
5,366 |
|
|
|
(41,607 |
) |
|
|
35,653 |
|
Other comprehensive loss, net |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
35,651 |
|
|
$ |
35,554 |
|
|
$ |
687 |
|
|
$ |
5,364 |
|
|
$ |
(41,605 |
) |
|
$ |
35,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) |
|
Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued) |
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2008 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
|
|
|
$ |
265,015 |
|
|
$ |
1,954 |
|
|
$ |
19,638 |
|
|
$ |
|
|
|
$ |
286,607 |
|
Cemetery |
|
|
|
|
|
|
217,123 |
|
|
|
3,432 |
|
|
|
20,721 |
|
|
|
|
|
|
|
241,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
482,138 |
|
|
|
5,386 |
|
|
|
40,359 |
|
|
|
|
|
|
|
527,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
|
|
|
|
203,125 |
|
|
|
1,217 |
|
|
|
13,886 |
|
|
|
|
|
|
|
218,228 |
|
Cemetery |
|
|
|
|
|
|
189,878 |
|
|
|
2,927 |
|
|
|
16,033 |
|
|
|
|
|
|
|
208,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
393,003 |
|
|
|
4,144 |
|
|
|
29,919 |
|
|
|
|
|
|
|
427,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
89,135 |
|
|
|
1,242 |
|
|
|
10,440 |
|
|
|
|
|
|
|
100,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general and administrative
expenses |
|
|
(32,611 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(32,611 |
) |
Impairment of goodwill |
|
|
|
|
|
|
(25,952 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(25,952 |
) |
Hurricane related recoveries (charges), net |
|
|
(1,448 |
) |
|
|
(1,165 |
) |
|
|
316 |
|
|
|
|
|
|
|
|
|
|
|
(2,297 |
) |
Gains on dispositions and impairment
(losses), net |
|
|
126 |
|
|
|
(479 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(353 |
) |
Other operating income, net |
|
|
101 |
|
|
|
497 |
|
|
|
2 |
|
|
|
219 |
|
|
|
|
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(33,832 |
) |
|
|
62,036 |
|
|
|
1,560 |
|
|
|
10,659 |
|
|
|
|
|
|
|
40,423 |
|
Interest expense |
|
|
3,391 |
|
|
|
(25,237 |
) |
|
|
(155 |
) |
|
|
(2,114 |
) |
|
|
|
|
|
|
(24,115 |
) |
Investment and other income, net |
|
|
2,219 |
|
|
|
179 |
|
|
|
|
|
|
|
8 |
|
|
|
|
|
|
|
2,406 |
|
Equity in subsidiaries |
|
|
17,783 |
|
|
|
548 |
|
|
|
|
|
|
|
|
|
|
|
(18,331 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) before income taxes |
|
|
(10,439 |
) |
|
|
37,526 |
|
|
|
1,405 |
|
|
|
8,553 |
|
|
|
(18,331 |
) |
|
|
18,714 |
|
Income tax expense (benefit) |
|
|
(6,746 |
) |
|
|
26,675 |
|
|
|
464 |
|
|
|
2,014 |
|
|
|
|
|
|
|
22,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
(3,693 |
) |
|
|
10,851 |
|
|
|
941 |
|
|
|
6,539 |
|
|
|
(18,331 |
) |
|
|
(3,693 |
) |
Other comprehensive income, net |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
26 |
|
|
|
(26 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(3,667 |
) |
|
$ |
10,851 |
|
|
$ |
941 |
|
|
$ |
6,565 |
|
|
$ |
(18,357 |
) |
|
$ |
(3,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) |
|
Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued) |
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2007 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
|
|
|
$ |
257,783 |
|
|
$ |
1,558 |
|
|
$ |
19,989 |
|
|
$ |
|
|
|
$ |
279,330 |
|
Cemetery |
|
|
|
|
|
|
218,836 |
|
|
|
3,193 |
|
|
|
21,458 |
|
|
|
|
|
|
|
243,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
476,619 |
|
|
|
4,751 |
|
|
|
41,447 |
|
|
|
|
|
|
|
522,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
|
|
|
|
202,721 |
|
|
|
1,036 |
|
|
|
12,618 |
|
|
|
|
|
|
|
216,375 |
|
Cemetery |
|
|
|
|
|
|
175,070 |
|
|
|
2,492 |
|
|
|
16,450 |
|
|
|
|
|
|
|
194,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
377,791 |
|
|
|
3,528 |
|
|
|
29,068 |
|
|
|
|
|
|
|
410,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
|
|
|
|
98,828 |
|
|
|
1,223 |
|
|
|
12,379 |
|
|
|
|
|
|
|
112,430 |
|
Corporate general and administrative
expenses |
|
|
(31,143 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(31,143 |
) |
Hurricane related charges, net |
|
|
(4 |
) |
|
|
(965 |
) |
|
|
(1,564 |
) |
|
|
|
|
|
|
|
|
|
|
(2,533 |
) |
Separation charges |
|
|
(384 |
) |
|
|
(196 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(580 |
) |
Gains on dispositions and impairment
(losses), net |
|
|
4 |
|
|
|
(45 |
) |
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(44 |
) |
Other operating income, net |
|
|
361 |
|
|
|
1,054 |
|
|
|
2 |
|
|
|
234 |
|
|
|
|
|
|
|
1,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(31,166 |
) |
|
|
98,676 |
|
|
|
(339 |
) |
|
|
12,610 |
|
|
|
|
|
|
|
79,781 |
|
Interest expense |
|
|
8,718 |
|
|
|
(31,481 |
) |
|
|
(189 |
) |
|
|
(2,113 |
) |
|
|
|
|
|
|
(25,065 |
) |
Loss on early extinguishment of debt |
|
|
(677 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(677 |
) |
Investment and other income, net |
|
|
3,266 |
|
|
|
94 |
|
|
|
|
|
|
|
14 |
|
|
|
|
|
|
|
3,374 |
|
Equity in subsidiaries |
|
|
59,324 |
|
|
|
530 |
|
|
|
|
|
|
|
|
|
|
|
(59,854 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
39,465 |
|
|
|
67,819 |
|
|
|
(528 |
) |
|
|
10,511 |
|
|
|
(59,854 |
) |
|
|
57,413 |
|
Income tax expense (benefit) |
|
|
(348 |
) |
|
|
16,041 |
|
|
|
(186 |
) |
|
|
2,592 |
|
|
|
|
|
|
|
18,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations |
|
|
39,813 |
|
|
|
51,778 |
|
|
|
(342 |
) |
|
|
7,919 |
|
|
|
(59,854 |
) |
|
|
39,314 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued
operations before income taxes |
|
|
|
|
|
|
807 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
807 |
|
Income taxes |
|
|
|
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
|
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
39,813 |
|
|
|
52,277 |
|
|
|
(342 |
) |
|
|
7,919 |
|
|
|
(59,854 |
) |
|
|
39,813 |
|
Other comprehensive income, net |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
14 |
|
|
|
(14 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
39,827 |
|
|
$ |
52,277 |
|
|
$ |
(342 |
) |
|
$ |
7,933 |
|
|
$ |
(59,868 |
) |
|
$ |
39,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
90
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) |
|
Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued) |
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
56,734 |
|
|
$ |
5,096 |
|
|
$ |
52 |
|
|
$ |
926 |
|
|
$ |
|
|
|
$ |
62,808 |
|
Receivables, net of allowances |
|
|
7,062 |
|
|
|
47,388 |
|
|
|
504 |
|
|
|
4,485 |
|
|
|
|
|
|
|
59,439 |
|
Inventories |
|
|
269 |
|
|
|
33,440 |
|
|
|
312 |
|
|
|
2,135 |
|
|
|
|
|
|
|
36,156 |
|
Prepaid expenses |
|
|
1,218 |
|
|
|
3,804 |
|
|
|
38 |
|
|
|
1,688 |
|
|
|
|
|
|
|
6,748 |
|
Deferred income taxes, net |
|
|
9,006 |
|
|
|
11,168 |
|
|
|
47 |
|
|
|
1,494 |
|
|
|
|
|
|
|
21,715 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
74,289 |
|
|
|
100,896 |
|
|
|
953 |
|
|
|
10,728 |
|
|
|
|
|
|
|
186,866 |
|
Receivables due beyond one year, net of
allowances |
|
|
|
|
|
|
48,783 |
|
|
|
420 |
|
|
|
13,808 |
|
|
|
|
|
|
|
63,011 |
|
Preneed funeral receivables and trust
investments |
|
|
|
|
|
|
379,899 |
|
|
|
|
|
|
|
9,613 |
|
|
|
|
|
|
|
389,512 |
|
Preneed cemetery receivables and trust
investments |
|
|
|
|
|
|
185,447 |
|
|
|
1,124 |
|
|
|
6,846 |
|
|
|
|
|
|
|
193,417 |
|
Goodwill |
|
|
|
|
|
|
227,401 |
|
|
|
48 |
|
|
|
19,787 |
|
|
|
|
|
|
|
247,236 |
|
Cemetery property, at cost |
|
|
|
|
|
|
348,627 |
|
|
|
11,315 |
|
|
|
26,035 |
|
|
|
|
|
|
|
385,977 |
|
Property and equipment, at cost |
|
|
53,956 |
|
|
|
466,187 |
|
|
|
2,183 |
|
|
|
38,136 |
|
|
|
|
|
|
|
560,462 |
|
Less accumulated depreciation |
|
|
36,015 |
|
|
|
208,806 |
|
|
|
994 |
|
|
|
15,190 |
|
|
|
|
|
|
|
261,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
17,941 |
|
|
|
257,381 |
|
|
|
1,189 |
|
|
|
22,946 |
|
|
|
|
|
|
|
299,457 |
|
Deferred income taxes, net |
|
|
8,325 |
|
|
|
107,636 |
|
|
|
|
|
|
|
10,415 |
|
|
|
(2,981 |
) |
|
|
123,395 |
|
Cemetery perpetual care trust investments |
|
|
|
|
|
|
193,616 |
|
|
|
8,207 |
|
|
|
3,653 |
|
|
|
|
|
|
|
205,476 |
|
Other assets |
|
|
8,402 |
|
|
|
5,196 |
|
|
|
6 |
|
|
|
1,050 |
|
|
|
|
|
|
|
14,654 |
|
Intercompany receivables |
|
|
771,490 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(771,490 |
) |
|
|
|
|
Equity in subsidiaries |
|
|
15,065 |
|
|
|
8,121 |
|
|
|
|
|
|
|
|
|
|
|
(23,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
895,512 |
|
|
$ |
1,863,003 |
|
|
$ |
23,262 |
|
|
$ |
124,881 |
|
|
$ |
(797,657 |
) |
|
$ |
2,109,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
5 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
5 |
|
Accounts payable, accrued expenses and
other current liabilities |
|
|
15,209 |
|
|
|
75,920 |
|
|
|
199 |
|
|
|
4,678 |
|
|
|
|
|
|
|
96,006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,214 |
|
|
|
75,920 |
|
|
|
199 |
|
|
|
4,678 |
|
|
|
|
|
|
|
96,011 |
|
Long-term debt, less current maturities |
|
|
367,491 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
367,491 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
2,981 |
|
|
|
|
|
|
|
(2,981 |
) |
|
|
|
|
Intercompany payables |
|
|
|
|
|
|
747,847 |
|
|
|
3,402 |
|
|
|
20,241 |
|
|
|
(771,490 |
) |
|
|
|
|
Deferred preneed funeral revenue |
|
|
|
|
|
|
200,990 |
|
|
|
|
|
|
|
46,835 |
|
|
|
|
|
|
|
247,825 |
|
Deferred preneed cemetery revenue |
|
|
|
|
|
|
239,177 |
|
|
|
277 |
|
|
|
27,510 |
|
|
|
|
|
|
|
266,964 |
|
Deferred preneed funeral and cemetery
receipts held in trust |
|
|
|
|
|
|
507,912 |
|
|
|
1,045 |
|
|
|
5,830 |
|
|
|
|
|
|
|
514,787 |
|
Perpetual care trusts corpus |
|
|
|
|
|
|
192,324 |
|
|
|
8,208 |
|
|
|
3,636 |
|
|
|
|
|
|
|
204,168 |
|
Other long-term liabilities |
|
|
17,040 |
|
|
|
3,716 |
|
|
|
|
|
|
|
115 |
|
|
|
|
|
|
|
20,871 |
|
Negative equity in subsidiaries |
|
|
104,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(104,883 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
504,628 |
|
|
|
1,967,886 |
|
|
|
16,112 |
|
|
|
108,845 |
|
|
|
(879,354 |
) |
|
|
1,718,117 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
92,684 |
|
|
|
102 |
|
|
|
324 |
|
|
|
52 |
|
|
|
(478 |
) |
|
|
92,684 |
|
Other |
|
|
298,165 |
|
|
|
(104,985 |
) |
|
|
6,826 |
|
|
|
15,949 |
|
|
|
82,210 |
|
|
|
298,165 |
|
Accumulated other comprehensive income |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
35 |
|
|
|
(35 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
390,884 |
|
|
|
(104,883 |
) |
|
|
7,150 |
|
|
|
16,036 |
|
|
|
81,697 |
|
|
|
390,884 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
895,512 |
|
|
$ |
1,863,003 |
|
|
$ |
23,262 |
|
|
$ |
124,881 |
|
|
$ |
(797,657 |
) |
|
$ |
2,109,001 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
91
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) |
|
Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued) |
Condensed Consolidating Balance Sheets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Subsidiaries-Tier 1 |
|
|
Subsidiaries-Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
65,593 |
|
|
$ |
4,332 |
|
|
$ |
22 |
|
|
$ |
2,627 |
|
|
$ |
|
|
|
$ |
72,574 |
|
Marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
55 |
|
|
|
|
|
|
|
55 |
|
Receivables, net of allowances |
|
|
2,987 |
|
|
|
51,137 |
|
|
|
546 |
|
|
|
4,459 |
|
|
|
|
|
|
|
59,129 |
|
Inventories |
|
|
300 |
|
|
|
32,821 |
|
|
|
361 |
|
|
|
2,388 |
|
|
|
|
|
|
|
35,870 |
|
Prepaid expenses |
|
|
1,282 |
|
|
|
4,618 |
|
|
|
37 |
|
|
|
1,380 |
|
|
|
|
|
|
|
7,317 |
|
Deferred income taxes, net |
|
|
1,395 |
|
|
|
6,117 |
|
|
|
55 |
|
|
|
1,231 |
|
|
|
|
|
|
|
8,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
71,557 |
|
|
|
99,025 |
|
|
|
1,021 |
|
|
|
12,140 |
|
|
|
|
|
|
|
183,743 |
|
Receivables due beyond one year, net of
allowances |
|
|
|
|
|
|
54,326 |
|
|
|
404 |
|
|
|
15,941 |
|
|
|
|
|
|
|
70,671 |
|
Preneed funeral receivables and trust
investments |
|
|
|
|
|
|
358,891 |
|
|
|
|
|
|
|
9,521 |
|
|
|
|
|
|
|
368,412 |
|
Preneed cemetery receivables and trust
investments |
|
|
|
|
|
|
173,484 |
|
|
|
1,047 |
|
|
|
7,610 |
|
|
|
|
|
|
|
182,141 |
|
Goodwill |
|
|
|
|
|
|
227,401 |
|
|
|
48 |
|
|
|
19,787 |
|
|
|
|
|
|
|
247,236 |
|
Cemetery property, at cost |
|
|
|
|
|
|
340,232 |
|
|
|
11,424 |
|
|
|
25,615 |
|
|
|
|
|
|
|
377,271 |
|
Property and equipment, at cost |
|
|
49,583 |
|
|
|
452,050 |
|
|
|
1,932 |
|
|
|
38,109 |
|
|
|
|
|
|
|
541,674 |
|
Less accumulated depreciation |
|
|
30,479 |
|
|
|
190,645 |
|
|
|
824 |
|
|
|
14,118 |
|
|
|
|
|
|
|
236,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
19,104 |
|
|
|
261,405 |
|
|
|
1,108 |
|
|
|
23,991 |
|
|
|
|
|
|
|
305,608 |
|
Deferred income taxes, net |
|
|
25,853 |
|
|
|
148,403 |
|
|
|
|
|
|
|
8,527 |
|
|
|
(3,268 |
) |
|
|
179,515 |
|
Cemetery perpetual care trust investments |
|
|
|
|
|
|
162,789 |
|
|
|
7,137 |
|
|
|
3,164 |
|
|
|
|
|
|
|
173,090 |
|
Non-current assets held for sale |
|
|
|
|
|
|
354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
354 |
|
Other assets |
|
|
9,451 |
|
|
|
5,937 |
|
|
|
16 |
|
|
|
1,070 |
|
|
|
|
|
|
|
16,474 |
|
Intercompany receivables |
|
|
849,862 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(849,862 |
) |
|
|
|
|
Equity in subsidiaries |
|
|
15,502 |
|
|
|
7,374 |
|
|
|
|
|
|
|
|
|
|
|
(22,876 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
991,329 |
|
|
$ |
1,839,621 |
|
|
$ |
22,205 |
|
|
$ |
127,366 |
|
|
$ |
(876,006 |
) |
|
$ |
2,104,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
20 |
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
20 |
|
Accounts payable, accrued expenses and
other current liabilities |
|
|
18,026 |
|
|
|
77,920 |
|
|
|
180 |
|
|
|
4,350 |
|
|
|
|
|
|
|
100,476 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,046 |
|
|
|
77,920 |
|
|
|
180 |
|
|
|
4,350 |
|
|
|
|
|
|
|
100,496 |
|
Long-term debt, less current maturities |
|
|
450,095 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
450,095 |
|
Deferred income taxes |
|
|
|
|
|
|
|
|
|
|
3,268 |
|
|
|
|
|
|
|
(3,268 |
) |
|
|
|
|
Intercompany payables |
|
|
|
|
|
|
819,691 |
|
|
|
3,939 |
|
|
|
26,232 |
|
|
|
(849,862 |
) |
|
|
|
|
Deferred preneed funeral revenue |
|
|
|
|
|
|
199,867 |
|
|
|
|
|
|
|
45,315 |
|
|
|
|
|
|
|
245,182 |
|
Deferred preneed cemetery revenue |
|
|
|
|
|
|
248,098 |
|
|
|
324 |
|
|
|
27,413 |
|
|
|
|
|
|
|
275,835 |
|
Deferred preneed funeral and cemetery
receipts held in trust |
|
|
|
|
|
|
470,167 |
|
|
|
899 |
|
|
|
4,354 |
|
|
|
|
|
|
|
475,420 |
|
Perpetual care trusts corpus |
|
|
|
|
|
|
161,074 |
|
|
|
7,132 |
|
|
|
3,165 |
|
|
|
|
|
|
|
171,371 |
|
Other long-term liabilities |
|
|
17,114 |
|
|
|
3,241 |
|
|
|
|
|
|
|
124 |
|
|
|
|
|
|
|
20,479 |
|
Negative equity in subsidiaries |
|
|
140,437 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(140,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
625,692 |
|
|
|
1,980,058 |
|
|
|
15,742 |
|
|
|
110,953 |
|
|
|
(993,567 |
) |
|
|
1,738,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
92,248 |
|
|
|
102 |
|
|
|
324 |
|
|
|
52 |
|
|
|
(478 |
) |
|
|
92,248 |
|
Other |
|
|
273,352 |
|
|
|
(140,539 |
) |
|
|
6,139 |
|
|
|
16,324 |
|
|
|
118,076 |
|
|
|
273,352 |
|
Accumulated other comprehensive income |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
37 |
|
|
|
(37 |
) |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders equity |
|
|
365,637 |
|
|
|
(140,437 |
) |
|
|
6,463 |
|
|
|
16,413 |
|
|
|
117,561 |
|
|
|
365,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders equity |
|
$ |
991,329 |
|
|
$ |
1,839,621 |
|
|
$ |
22,205 |
|
|
$ |
127,366 |
|
|
$ |
(876,006 |
) |
|
$ |
2,104,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) |
|
Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued) |
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2009 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
15,586 |
|
|
$ |
58,085 |
|
|
$ |
775 |
|
|
$ |
10,449 |
|
|
$ |
|
|
|
$ |
84,895 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable
securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
250 |
|
Purchases of marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(197 |
) |
|
|
|
|
|
|
(197 |
) |
Proceeds from sale of assets |
|
|
292 |
|
|
|
202 |
|
|
|
|
|
|
|
230 |
|
|
|
|
|
|
|
724 |
|
Purchases of subsidiaries and other
investments, net of cash acquired |
|
|
(300 |
) |
|
|
(1,623 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,923 |
) |
Additions to property and equipment |
|
|
(5,024 |
) |
|
|
(15,305 |
) |
|
|
(208 |
) |
|
|
(701 |
) |
|
|
|
|
|
|
(21,238 |
) |
Other |
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(5,032 |
) |
|
|
(16,677 |
) |
|
|
(208 |
) |
|
|
(418 |
) |
|
|
|
|
|
|
(22,335 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(60,860 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,860 |
) |
Intercompany receivables (payables) |
|
|
52,913 |
|
|
|
(40,644 |
) |
|
|
(537 |
) |
|
|
(11,732 |
) |
|
|
|
|
|
|
|
|
Retirement of common stock warrants |
|
|
(8,560 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(8,560 |
) |
Issuance of common stock |
|
|
299 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
299 |
|
Retirement of call options |
|
|
8,714 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
8,714 |
|
Purchase and retirement of common stock |
|
|
(75 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(75 |
) |
Debt refinancing costs |
|
|
(2,110 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,110 |
) |
Dividends |
|
|
(9,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(19,413 |
) |
|
|
(40,644 |
) |
|
|
(537 |
) |
|
|
(11,732 |
) |
|
|
|
|
|
|
(72,326 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(8,859 |
) |
|
|
764 |
|
|
|
30 |
|
|
|
(1,701 |
) |
|
|
|
|
|
|
(9,766 |
) |
Cash and cash equivalents, beginning of
period |
|
|
65,593 |
|
|
|
4,332 |
|
|
|
22 |
|
|
|
2,627 |
|
|
|
|
|
|
|
72,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
56,734 |
|
|
$ |
5,096 |
|
|
$ |
52 |
|
|
$ |
926 |
|
|
$ |
|
|
|
$ |
62,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
93
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued)
Condensed Consolidating Statements of Cash Flows
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2008 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
5,618 |
|
|
$ |
66,856 |
|
|
$ |
614 |
|
|
$ |
11,435 |
|
|
$ |
|
|
|
$ |
84,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable
securities |
|
|
19,969 |
|
|
|
|
|
|
|
|
|
|
|
250 |
|
|
|
|
|
|
|
20,219 |
|
Purchases of marketable securities |
|
|
(19,953 |
) |
|
|
|
|
|
|
|
|
|
|
(3 |
) |
|
|
|
|
|
|
(19,956 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
599 |
|
Purchases of subsidiaries and other
investments, net of cash acquired |
|
|
(1,378 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1,378 |
) |
Additions to property and equipment |
|
|
(6,956 |
) |
|
|
(18,887 |
) |
|
|
(148 |
) |
|
|
(1,004 |
) |
|
|
|
|
|
|
(26,995 |
) |
Other |
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(8,318 |
) |
|
|
(18,144 |
) |
|
|
(148 |
) |
|
|
(757 |
) |
|
|
|
|
|
|
(27,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(198 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(198 |
) |
Intercompany receivables (payables) |
|
|
61,218 |
|
|
|
(51,065 |
) |
|
|
(480 |
) |
|
|
(9,673 |
) |
|
|
|
|
|
|
|
|
Issuance of common stock |
|
|
1,845 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,845 |
|
Purchase and retirement of common stock |
|
|
(48,627 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(48,627 |
) |
Dividends |
|
|
(9,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(9,374 |
) |
Excess tax benefits from share-based
payment arrangements |
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
5,091 |
|
|
|
(51,065 |
) |
|
|
(480 |
) |
|
|
(9,673 |
) |
|
|
|
|
|
|
(56,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
2,391 |
|
|
|
(2,353 |
) |
|
|
(14 |
) |
|
|
1,005 |
|
|
|
|
|
|
|
1,029 |
|
Cash and cash equivalents, beginning of
period |
|
|
63,202 |
|
|
|
6,685 |
|
|
|
36 |
|
|
|
1,622 |
|
|
|
|
|
|
|
71,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
65,593 |
|
|
$ |
4,332 |
|
|
$ |
22 |
|
|
$ |
2,627 |
|
|
$ |
|
|
|
$ |
72,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
94
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior
Convertible Notes(Continued)
Condensed Consolidating Statements of Cash Flows
|
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|
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|
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|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2007 |
|
|
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
|
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
|
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
$ |
637 |
|
|
$ |
68,417 |
|
|
$ |
(1,838 |
) |
|
$ |
14,725 |
|
|
$ |
|
|
|
$ |
81,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1 |
) |
|
|
|
|
|
|
(1 |
) |
Proceeds from sale of assets |
|
|
|
|
|
|
3,750 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,750 |
|
Purchases of subsidiaries and other
investments, net of cash acquired |
|
|
|
|
|
|
(5,203 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(5,203 |
) |
Insurance proceeds related to
hurricane damaged properties |
|
|
|
|
|
|
2,439 |
|
|
|
90 |
|
|
|
|
|
|
|
|
|
|
|
2,529 |
|
Additions to property and equipment |
|
|
(6,648 |
) |
|
|
(27,167 |
) |
|
|
(150 |
) |
|
|
(1,345 |
) |
|
|
|
|
|
|
(35,310 |
) |
Other |
|
|
|
|
|
|
48 |
|
|
|
|
|
|
|
1 |
|
|
|
|
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,648 |
) |
|
|
(26,133 |
) |
|
|
(60 |
) |
|
|
(1,345 |
) |
|
|
|
|
|
|
(34,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
250,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
250,000 |
|
Repayments of long-term debt |
|
|
(146,547 |
) |
|
|
|
|
|
|
|
|
|
|
(30,000 |
) |
|
|
|
|
|
|
(176,547 |
) |
Intercompany receivables (payables) |
|
|
20,173 |
|
|
|
(38,853 |
) |
|
|
1,897 |
|
|
|
16,783 |
|
|
|
|
|
|
|
|
|
Debt issue costs |
|
|
(6,217 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6,217 |
) |
Proceeds from sale of common stock
warrants |
|
|
43,850 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
43,850 |
|
Issuance of common stock |
|
|
3,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,066 |
|
Purchase of call options |
|
|
(60,000 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(60,000 |
) |
Purchase and retirement of common stock |
|
|
(64,201 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(64,201 |
) |
Dividends |
|
|
(10,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(10,184 |
) |
Excess tax benefits from share-based
payment arrangements |
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
30,093 |
|
|
|
(38,853 |
) |
|
|
1,897 |
|
|
|
(13,217 |
) |
|
|
|
|
|
|
(20,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
24,082 |
|
|
|
3,431 |
|
|
|
(1 |
) |
|
|
163 |
|
|
|
|
|
|
|
27,675 |
|
Cash and cash equivalents, beginning of
period |
|
|
39,120 |
|
|
|
3,254 |
|
|
|
37 |
|
|
|
1,459 |
|
|
|
|
|
|
|
43,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
63,202 |
|
|
$ |
6,685 |
|
|
$ |
36 |
|
|
$ |
1,622 |
|
|
$ |
|
|
|
$ |
71,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(12) Dispositions and Acquisitions
In fiscal years 2009, 2008 and 2007, the Company recorded gains on dispositions, net of
impairment losses, of ($218), ($353) and ($44) in continuing operations, respectively, and $609 in
discontinued operations in fiscal year 2007.
Assets associated with assets held for sale are presented in the non-current assets held for
sale line in the consolidated balance sheet. As of October 31, 2008, non-current assets held for
sale consists of $354 of land, buildings and equipment that was designated as held for sale in
fiscal year 2009, and subsequently sold in fiscal year 2009. Cemetery property and land that was
previously designated as held for sale at October 31, 2008 was no longer for sale at October 31,
2009.
Acquisitions
During the year ended October 31, 2009, the Company acquired a new cemetery for approximately
$1,623. This cemetery acquisition was accounted for under the purchase method, and the acquired
assets and liabilities (primarily deferred revenue of approximately $7,500, cemetery property of
approximately $5,700 and inventory of approximately $2,900) were valued at their estimated fair
values. Its results of operations, which are considered immaterial, have been included since the
acquisition date.
During the year ended October 31, 2008, the Company acquired an investment in an outside
business for approximately $1,378, which is accounted for under the cost method of accounting.
During fiscal year 2009, the Company invested an additional $300 in this business.
During the year ended October 31, 2007, the Company purchased a property for approximately
$2,398 and a new funeral home for approximately $2,805. This funeral home acquisition was
accounted for under the purchase method, and the acquired assets and liabilities were valued at
their estimated fair values. Its results of operations have been included since the acquisition
date.
(13) Impairment of Goodwill
There were no goodwill impairment charges for the years ended October 31, 2009 and 2007. When
the Company performed its fiscal year 2008 evaluation of goodwill during the fourth quarter of
2008, a noncash goodwill impairment charge of $25,952 related to the aggregated Northern and
Central regions of the former Eastern division cemetery operating segment was required. In
calculating the goodwill impairment charge, the fair value of the reporting units was determined
using a discounted cash flow valuation approach. See Note 2(g) for a discussion of the Companys
reporting units and its annual goodwill impairment evaluation methodology.
Goodwill in excess of net assets of companies acquired totaled $247,236 as of October 31, 2009
and 2008, respectively. The Company has approximately $30,431 of tax deductible goodwill which is
being amortized for tax purposes.
Goodwill and changes to goodwill by operating segment from October 31, 2007 to October 31,
2008 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 31, 2007 |
|
|
Changes |
|
|
October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
198,613 |
|
|
$ |
(98 |
) |
|
$ |
198,515 |
|
Cemetery |
|
|
74,673 |
|
|
|
(25,952 |
) (1) |
|
|
48,721 |
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
273,286 |
|
|
$ |
(26,050 |
) |
|
$ |
247,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Goodwill impairment charge recorded as a result of the fiscal year 2008 annual
goodwill impairment test. |
96
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(14) Separation Charges
The Company previously had five operating and reportable segments consisting of a corporate
trust management segment and a funeral and cemetery segment for each of the two geographical
divisions (each with a division president): Western and Eastern. As described in Note 21, in the
second quarter of 2009, the Company eliminated its two geographic divisions of Western and Eastern
and the positions of Western and Eastern division presidents from its organizational structure and
now has three operating segments: a funeral segment, a cemetery segment and a corporate trust
management segment. During the year ended October 31, 2009, the Company recorded $275 in total
separation charges related to the reorganization.
During fiscal year 2007, the Company recorded $580 in total separation charges.
(15) Long-term Debt
|
|
|
|
|
|
|
|
|
|
|
October 31, 2009 |
|
|
October 31, 2008 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
3.125% senior convertible notes due 2014 |
|
$ |
87,416 |
|
|
$ |
125,000 |
|
3.375% senior convertible notes due 2016 |
|
|
79,985 |
|
|
|
125,000 |
|
Senior secured revolving credit facility |
|
|
|
|
|
|
|
|
6.25% senior notes due 2013 |
|
|
200,000 |
|
|
|
200,000 |
|
Other, principally seller financing of
acquired operations or assumption upon
acquisition, weighted average interest
rates of 8.0% and 7.7% as of October
31, 2009 and October 31, 2008,
respectively, partially secured by
assets of subsidiaries, with maturities
through 2022 |
|
|
95 |
|
|
|
115 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
367,496 |
|
|
|
450,115 |
|
Less current maturities |
|
|
5 |
|
|
|
20 |
|
|
|
|
|
|
|
|
|
|
$ |
367,491 |
|
|
$ |
450,095 |
|
|
|
|
|
|
|
|
Fair Value
As of October 31, 2009, the carrying values, including accrued interest, of the Companys
3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016
were $88,220 and $80,780, respectively, compared to fair values of $75,217 and $67,033,
respectively. As of October 31, 2008, the carrying values of the Companys 3.125 percent senior
convertible notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued
interest, were $126,150 and $126,242, respectively, compared to fair values of $81,634 and $81,286,
respectively.
As of October 31, 2009 and 2008, the carrying values of the Companys 6.25 percent senior
notes, including accrued interest, were $202,604 and $202,604, respectively, compared to fair
values of $197,096 and $168,531, respectively.
Senior Secured Revolving Credit Facility
On June 2, 2009, the Company entered into a new senior secured revolving credit facility which
replaced the previous $125,000 revolving credit facility that was set to mature in November 2009.
The new senior secured revolving credit facility matures on June 2, 2012, and includes a $95,000
revolving credit facility, a $30,000 sublimit for the issuance of standby letters of credit and a
$10,000 sublimit for swingline loans. As of October 31, 2009, there were no amounts drawn on the
senior secured revolving credit facility, and the Companys availability under the senior secured
revolving credit facility, after giving consideration to $11,224 outstanding letters of credit and
the $27,047 Florida bond, was $56,729. The Company may also request the addition of a new tranche
of term loans, an increase in the commitments to the senior secured revolving credit facility or a
combination thereof not to exceed $30,000. During fiscal year 2009, the Company recorded a charge
for the loss on early extinguishment of
97
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt(Continued)
debt of $91 to write-off a portion of the unamortized fees on the prior agreement. The remaining
fees related to the prior agreement and the fees incurred for the new agreement were $2,202 (of
which $2,110 was paid in cash as of October 31, 2009) and will be amortized over the term of the
new credit facility.
The leverage-based grid pricing for the interest rate on the new senior secured revolving
credit facility ranges from LIBOR plus 300 to 400 basis points based on the Companys consolidated
leverage ratio and was LIBOR plus 400 basis points at October 31, 2009. The Company also has a
base rate option, and swingline loans bear interest at the base rate which is the highest of (a)
the federal funds rate plus 0.50 percent, (b) the prime rate or (c) the Eurodollar rate plus 1
percent; plus a spread ranging from 200 to 300 basis points depending on the Companys consolidated
leverage ratio. The annual commitment fee is 75 basis points payable quarterly.
The new senior secured revolving credit facility is governed by the following financial
covenants at all times:
|
|
|
Maintenance on a rolling four quarter basis of a maximum consolidated senior secured
leverage ratio (total funded senior secured debt divided by EBITDA (as defined)) Maximum
1.25x; |
|
|
|
|
Maintenance on a rolling four quarter basis of a minimum consolidated interest coverage
ratio (EBITDAR (as defined) divided by interest expense paid in cash plus rent expense)
Minimum 2.50x through January 31, 2010 and 2.60x thereafter; and |
|
|
|
|
Maintenance at all times of a minimum cash balance of the greater of $20,000 or the then
outstanding amount of all letters of credit obligations. |
In addition, the new senior secured revolving credit facility is governed by the following
additional financial covenant only when a loan under the facility is outstanding:
|
|
|
Maintenance on a rolling four quarter basis of a maximum consolidated leverage ratio
(funded debt (net of domestic cash, cash equivalents and marketable securities) divided by
EBITDA (as defined)) Maximum 5.0x through January 31, 2010, 4.75x from February 1, 2010
through January 31, 2011 and 4.50x thereafter. |
The covenants include limitations on liens, limitations on mergers, consolidations and asset
sales, limitations on incurrence of debt, limitations on dividends, stock redemptions and the
redemption, repurchase and/or prepayment of other debt, limitation on capital expenditures,
limitations on investments and acquisitions and limitations on transactions with affiliates. If
there is no default or event of default, the Company may pay cash dividends and repurchase its
stock, provided that the aggregate amount of the dividends and stock repurchased plus other types
of restricted payments in any fiscal year does not exceed $30,000 plus any positive amounts in the
discretionary basket. As of October 31, 2009, the amount available to pay dividends or repurchase
stock was $143,581. In addition, the Company may prepay its debt without limitation as long as it
has $35,000 in cash and marketable securities. If the Companys cash and marketable securities are
below $35,000, the Company is limited to $25,000 of debt prepayments in any twelve month period.
The agreement also limits capital expenditures in any fiscal year to $40,000, with a provision for
the carryover of permitted but unused amounts. The lenders under the senior secured revolving
credit facility can accelerate all obligations under the facility and terminate the revolving
credit commitment if an event of default occurs and is continuing.
Obligations under the senior secured revolving credit facility are guaranteed by substantially
all existing and future direct and indirect domestic subsidiaries of the Company formed under the
laws of any one of the states or the District of Columbia of the United States of America (SEI
Guarantors).
The lenders under the new senior secured revolving credit facility have received a first
priority perfected security interest in (1) all of the capital stock or other equity interests of
each of the domestic subsidiaries of the Company whether now existing or hereafter created or
acquired other than certain excluded immaterial subsidiaries
98
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt(Continued)
and 65 percent of the voting capital stock of all direct foreign subsidiaries whether now
existing or hereafter acquired and (2) all other present and future assets and properties of the
Company and the SEI Guarantors except (a) real property, (b) vehicles, (c) assets to which
applicable law or regulation prohibits security interest therein or requires the consent of a third
party, (d) contract rights in which a security interest without the approval of the other party to
the contract would constitute a default thereunder and (e) any assets with respect to which a
security interest cannot be perfected.
Senior Convertible Notes
On June 27, 2007, the Company issued in a private placement $125,000 aggregate principal
amount of 3.125 percent senior convertible notes due 2014 (the 2014 Notes) and $125,000 aggregate
principal amount of 3.375 percent senior convertible notes due 2016 (the 2016 Notes and together
with the 2014 Notes, the senior convertible notes). In connection with the sale of the senior
convertible notes, the Company also sold common stock warrants for approximately $43,850, as
described below. Total proceeds from the issuance of the senior convertible notes and sale of the
common stock warrants was approximately $293,850. The Company used approximately $163,978 of the
proceeds to prepay the remaining balance of the Companys Term Loan B at par value (the Company had
previously paid $13,098 of principal payments during 2007 prior to the extinguishment of the debt),
including accrued interest, and used $60,000 for the purchase of call options as described below.
The Company also used approximately $64,201 of the proceeds to repurchase 7,698,000 shares of the
Companys Class A common stock in negotiated transactions. The Company incurred debt issuance
costs of approximately $6,217 for investment bank fees, legal fees and other costs related to the
transaction. Debt issuance costs were capitalized and will be amortized over the terms of the
senior convertible notes or until they become convertible. The Company recorded a charge for the
loss on early extinguishment of debt of $677 as of October 31, 2007 which represents the write-off
of remaining Term Loan B deferred charges.
The 2014 Notes and 2016 Notes are governed by separate indentures dated as of June 27, 2007,
among the Company, the Guarantors named therein and the trustee. The 2014 Notes mature July 15,
2014, and the 2016 Notes mature July 15, 2016. The 2014 Notes bear interest at a rate of 3.125
percent per annum, and the 2016 Notes bear interest at a rate of 3.375 percent per annum. Interest
is payable semiannually in arrears on January 15 and July 15 of each year, commencing January 15,
2008.
Holders may convert their senior convertible notes based on a conversion rate of 90.4936
shares of the Companys Class A common stock per $1,000 principal amount of senior convertible
notes (which is equal to an initial conversion price of approximately $11.05 per share), subject to adjustment: (1)
during any fiscal quarter beginning after October 31, 2007, if the closing price of the Companys
Class A common stock for a specified period in the prior quarter is more than 130 percent of the
conversion price per share, (2) for a specified period after five trading days in which the trading
price of the notes for each trading day was less than 95 percent of the product of the closing
price of the Companys Class A common stock and the then applicable conversion rate, (3) if
specified distributions to holders of the Companys Class A common stock occur, (4) if a
fundamental change occurs or (5) during the last month prior to the maturity date of the notes.
None of these conditions had been met during fiscal years 2009 or 2008.
Upon conversion, in lieu of shares of the Companys Class A common stock, for each $1,000
principal amount of senior convertible notes converted, a holder will receive an amount in cash
equal to the lesser of (1) $1,000 or (2) the conversion value, determined in the manner set forth
in the indentures, of the number of shares of the Companys Class A common stock equal to the
conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at the
Companys election, cash or Class A common stock or a combination of cash and Class A common stock
with respect to such excess amount, subject to the limitations in the indentures. If a holder
elects to convert its senior convertible notes in connection with certain fundamental change
transactions, the Company will pay, to the extent described in the indentures, a make whole premium
by increasing the conversion rate applicable to such senior convertible notes.
99
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt(Continued)
Upon specified fundamental change events, holders will have the option to require the Company
to purchase for cash all or any portion of their senior convertible notes at a price equal to 100
percent of the principal amount of the senior convertible notes plus accrued and unpaid interest,
if any, to, but excluding, the fundamental change purchase date.
The senior convertible notes are the Companys senior unsecured obligations. The senior
convertible notes are guaranteed, fully and unconditionally, jointly and severally, on an unsecured
senior basis, by all of the Companys subsidiaries that are guarantors of the Companys 6.25
percent senior notes, except for three immaterial non-wholly owned subsidiaries and except for any
future non-wholly owned subsidiaries. The indentures contain events of default which, if they
occur, entitle the holders of the senior convertible notes to declare the senior convertible notes
immediately due and payable.
Also, in connection with the sale of the senior convertible notes, the Company purchased call
options with respect to its Class A common stock from Bank of America/Merrill Lynch International.
The call options cover, subject to anti-dilution adjustments, 11,311,700 shares of Class A common
stock for each series of senior convertible notes, at strike prices that correspond to the initial
conversion price of the notes. The call options are expected to offset the Companys exposure to
dilution from conversion of the senior convertible notes because any shares the Company would be
obligated to deliver to holders upon conversion of the senior convertible notes would be delivered
to the Company by the counterparty to the call options. The Company paid approximately $60,000 for
the call options.
The Company also entered into warrant transactions whereby it sold to Bank of America/Merrill
Lynch Financial Markets warrants expiring in 2014 and 2016 to acquire, subject to customary
anti-dilution adjustments, 11,311,700 and 11,311,700 shares of Class A common stock, respectively.
The strike prices of the sold warrants expiring in 2014 and 2016 are $12.93 per share of Class A
common stock and $13.76 per share of Class A common
stock, respectively. The warrants expiring in 2014 and 2016 may not be exercised prior to the
maturity of the 2014 Notes and 2016 Notes, respectively. The Company can elect to settle the
warrants in cash or Class A common stock, subject to certain conditions. The Company received
approximately $43,850 for the warrants. In connection with the fiscal year 2009 purchases of the
Companys senior convertible notes described below, the number of shares subject to the warrants
was reduced to 6,993,280 related to the 2014 Notes and 6,398,800 related to the 2016 Notes.
The price of the call options is treated for tax purposes as interest expense, which amortizes
over the lives of the notes. Accordingly, the Company will have a tax benefit of approximately
$21,000 over the lives of the senior convertible notes. The sale of the warrants is not expected
to have any tax consequences to the Company.
By selling the warrants, the Company used the proceeds to offset much of the cost of the call
options. By simultaneously purchasing the call options and selling the warrants, the Company has
effectively increased the conversion premium on the senior convertible notes to 55-65 percent above
the market price of the Class A common stock at the time of the offering.
As of October 31, 2009, the Company purchased $37,584 aggregate principal amount of its 3.125
percent senior convertible notes due 2014 and $45,015 aggregate principal amount of its 3.375
percent senior convertible notes due 2016 in the open market. In connection with these debt
purchases, corresponding call options and common stock warrants were also terminated. The total
value of the call options terminated that Bank of America/Merrill Lynch would have been required to
pay the Company was $8,714 for the fiscal year ended October 31, 2009. The total value of the
common stock warrants terminated that would have required a payment from the Company to Bank of
America/Merrill Lynch was $8,560 as of October 31, 2009. In connection with the debt purchases
that occurred during the fiscal year 2009, the value of the call options was greater than the value
of the warrants. This amount
was settled by Bank of America/Merrill Lynch delivering 15,936 of the Companys shares to the
Company which reduced the number of the Companys outstanding common shares.
100
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt(Continued)
As a result of the debt purchases at significant discounts, the Company recorded $20,169 in
pre-tax gains on early extinguishment of debt during the fiscal year ended October 31, 2009,
respectively, which represents the discount on the purchase of the senior convertible notes less
the write-off of remaining deferred charges.
Senior Notes
On February 11, 2005, the Company issued $200,000 6.25 percent senior notes due 2013 (the
6.25 percent senior notes). The 6.25 percent senior notes are governed by the terms of an
indenture dated as of February 11, 2005. For each twelve month period beginning on February 15,
2009, the Company may redeem the 6.25 percent senior notes in whole or in part at redemption prices
of 103.125 percent in 2009, 101.563 percent in 2010 and 100 percent in 2011 and thereafter, plus
any accrued and unpaid interest. In addition, upon a change of control of the Company, holders of
the 6.25 percent senior notes will have the right to require the Company to repurchase all or any
part of their 6.25 percent senior notes for cash at a price equal to 101 percent of the aggregate
principal amount of the 6.25 percent senior notes repurchased, plus any accrued and unpaid
interest.
The 6.25 percent senior notes are guaranteed, jointly and severally, by the SEI Guarantors,
and are the Companys senior unsecured obligations and the guarantees of the 6.25 percent senior notes are the
SEI Guarantors senior unsecured obligations.
The indenture contains affirmative and negative covenants that, among other things, limit the
Company and the SEI Guarantors ability to engage in sale and leaseback transactions, effect a
consolidation or merger or sale, transfer, lease, or otherwise dispose of all or substantially all
assets, and create liens on assets. The indenture also contains customary events of default. Upon
the occurrence of certain events of default, the Trustee or the holders of the 6.25 percent senior
notes may declare all outstanding 6.25 percent senior notes to be due and payable immediately.
Other
As of October 31, 2009, the Companys subsidiaries had approximately $95 of long-term debt
that represents notes the subsidiaries issued as part of the purchase price of acquired businesses
or debt the subsidiaries assumed in connection with acquisitions. All of this debt is secured by
liens on the stock or assets of the related subsidiaries.
Scheduled principal payments of the Companys long-term debt for the fiscal years ending
October 31, 2010 through October 31, 2014, are approximately $5 in 2010, $5 in 2011, $5 in 2012,
$200,006 in 2013 and $87,422 in 2014. Scheduled principal payments thereafter are $80,053.
As of October 31, 2009, the Company was in compliance with the covenants in its debt
agreements.
(16) Guarantees
The Companys obligations under its senior secured revolving credit facility, 6.25 percent
senior notes and its 3.125 percent and 3.375 percent senior convertible notes are guaranteed by all
of its existing and future direct and indirect subsidiaries formed under the laws of the United
States, any state thereof or the District of Columbia, except for specified excluded subsidiaries.
For additional information regarding the senior secured revolving credit facility, senior
convertible notes, and senior notes, see Note 15.
All obligations under the senior secured revolving credit facility, including the guarantees
and any interest rate protection and other hedging agreements with any lender or its affiliates,
are secured by a first priority perfected security interest as described in Note 15.
101
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(16) Guarantees(Continued)
As discussed in Note 2(i), the Company sells insurance-funded price-guaranteed preneed funeral
contracts that will be funded by life insurance or annuity contracts issued by third-party insurers
which are not reflected in the consolidated balance sheet. The net amount of these contracts that
have not been fulfilled as of October 31, 2009 and 2008 was $507,349 and $477,069, respectively.
Louisiana law gives Louisiana corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses incurred in the
defense of any lawsuit to which they are made parties by reason of their positions. The Companys
By-laws make mandatory the indemnification of
directors and officers permitted by Louisiana law. The Company has in effect a directors and
officers liability insurance policy that provides for indemnification of its officers and
directors against losses arising from claims asserted against them in their capacities as officers
and directors, subject to limitations and conditions set forth in such policy. The Company has
also entered into indemnity agreements with each director pursuant to which the Company has agreed,
subject to certain exceptions, to purchase and maintain directors liability insurance. The
agreements also provide that the Company will indemnify each director against any costs and
expenses, judgments, settlements and fines incurred in connection with any claim involving him or
her by reason of his or her position as director, provided that the director meets certain
standards of conduct.
(17) Reconciliation of Basic and Diluted Per Share Data
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
35,653 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders |
|
$ |
35,653 |
|
|
|
91,898 |
|
|
$ |
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised
and restricted stock |
|
|
|
|
|
|
97 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders plus stock options
assumed exercised and
restricted stock |
|
$ |
35,653 |
|
|
$ |
91,995 |
|
|
$ |
.39 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(3,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations available to
common shareholders |
|
$ |
(3,693 |
) |
|
|
93,795 |
|
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed
exercised and restricted
stock |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations available to
common shareholders plus
stock options assumed
exercised and restricted
stock |
|
$ |
(3,693 |
) |
|
|
93,795 |
|
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
102
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(17) Reconciliation of Basic and Diluted Per Share Data(Continued)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
|
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
39,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders |
|
$ |
39,314 |
|
|
|
102,584 |
|
|
$ |
.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised
and restricted stock |
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders plus stock options
assumed exercised and
restricted stock |
|
$ |
39,314 |
|
|
|
102,737 |
|
|
$ |
.38 |
|
|
|
|
|
|
|
|
|
|
|
During the fiscal year ended October 31, 2009, options to purchase 1,607,525 shares of common
stock at prices ranging from $5.06 to $8.47 per share were outstanding but were not included in the
computation of diluted earnings per share because the exercise prices of the options were greater
than the average market price of the common shares for those periods. These options expire between
December 20, 2011 and September 2, 2016.
Common stock equivalents are excluded in the calculation of weighted average shares
outstanding when a company reports a net loss from continuing operations for a period. The number
of potentially antidilutive shares excluded from the calculation of diluted earnings per share was
1,733,139 for the fiscal year ended October 31, 2008 because of the net loss from continuing
operations for this period.
Options to purchase 392,212 shares of common stock at prices ranging from $6.33 to $7.31 per
share for the fiscal year ended October 31, 2007 were outstanding but were not included in the
computation of diluted earnings per share because the exercise prices of the options were greater
than the average market price of the common shares for this period.
For the fiscal year ended October 31, 2009, 438,000 market based stock options and 612,000
market and performance based shares of restricted stock were not dilutive. For the fiscal year
ended October 31, 2008, 468,000 market based stock options and 415,000 market and performance based
shares of restricted stock were not dilutive. For the fiscal year ended October 31, 2007, 540,000
market based stock options and 360,000 market and performance based shares of restricted stock were
not dilutive. The market based stock options and the market and performance based restricted stock
were not dilutive because the market conditions or performance conditions for the respective grants
were not achieved during any of the periods presented.
For the fiscal year ended October 31, 2009, a maximum of 16,740,100 shares of the Companys
Class A common stock related to the senior convertible notes and a maximum of 13,392,080 shares of
Class A common stock under the common stock warrants associated with the June 2007 senior
convertible debt transaction were not dilutive, as the average price of the Companys stock for the
fiscal year ended October 31, 2009 was less than the conversion price of the senior convertible
notes and strike price of the warrants. For the fiscal years ended October 31, 2008 and 2007,
respectively, a maximum of 25,000,000 shares of the Companys Class A common stock related to the
senior convertible notes and a maximum of 20,000,000 shares of Class A common stock under the
associated common stock warrants were also not dilutive. As discussed in Note 15, during the
fiscal year ended October 31, 2009, the Company purchased $82,599 of its senior convertible notes
in the open market which resulted in associated common stock warrants being terminated. This
accounts for the decrease in the Class A common stock
related to the senior convertible notes and associated common stock warrants that could
potentially be included in the diluted earnings per share calculations as of October 31, 2009.
103
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(17) Reconciliation of Basic and Diluted Per Share Data(Continued)
The Company includes Class A and Class B common stock in its diluted shares calculation. As
of October 31, 2009, the Companys Chairman, Frank B. Stewart, Jr., was the record holder of all of
the Companys shares of Class B common stock. The Companys Class A and B common stock are
substantially identical, except that holders of Class A common stock are entitled to one vote per
share, and holders of Class B common stock are entitled to ten votes per share. Each share of
Class B common stock is automatically converted into one share of Class A common stock upon
transfer to persons other than certain affiliates of Frank B. Stewart, Jr.
(18) Income Taxes
Income tax expense is comprised of the following components:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing Operations |
|
|
|
U.S. and |
|
|
|
|
|
|
|
|
|
Possessions |
|
|
State |
|
|
Totals |
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
1,043 |
|
|
$ |
1,654 |
|
|
$ |
2,697 |
|
Deferred tax expense |
|
|
15,706 |
|
|
|
1,208 |
|
|
|
16,914 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
16,749 |
|
|
$ |
2,862 |
|
|
$ |
19,611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
13,048 |
|
|
$ |
2,185 |
|
|
$ |
15,233 |
|
Deferred tax expense |
|
|
4,962 |
|
|
|
2,212 |
|
|
|
7,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,010 |
|
|
$ |
4,397 |
|
|
$ |
22,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
10,582 |
|
|
$ |
3,180 |
|
|
$ |
13,762 |
|
Deferred tax expense |
|
|
1,725 |
|
|
|
2,612 |
|
|
|
4,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,307 |
|
|
$ |
5,792 |
|
|
$ |
18,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Discontinued Operations |
|
|
|
U.S. and |
|
|
|
|
|
|
|
|
|
Possessions |
|
|
State |
|
|
Totals |
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Deferred tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
Deferred tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
269 |
|
|
$ |
39 |
|
|
$ |
308 |
|
Deferred tax expense |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
269 |
|
|
$ |
39 |
|
|
$ |
308 |
|
|
|
|
|
|
|
|
|
|
|
104
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes(Continued)
The reconciliation of the statutory tax rate to the effective tax rate is as follows for
continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
2009 |
|
2008 |
|
2007 |
Statutory tax rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Increases (reductions) in tax rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax |
|
|
3.36 |
|
|
|
14.19 |
|
|
|
3.68 |
|
U.S. possession income tax |
|
|
(1.22 |
) |
|
|
(2.35 |
) |
|
|
(.79 |
) |
Nondeductible expenses and other |
|
|
.29 |
|
|
|
.75 |
|
|
|
.04 |
|
Dividend exclusion |
|
|
(2.60 |
) |
|
|
(9.77 |
) |
|
|
(3.13 |
) |
Goodwill impairment |
|
|
|
|
|
|
46.77 |
|
|
|
|
|
Valuation allowance |
|
|
.66 |
|
|
|
35.14 |
|
|
|
(3.27 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
35.49 |
% |
|
|
119.73 |
% |
|
|
31.53 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
|
|
|
|
|
|
|
|
|
|
|
October 31, |
|
|
|
2009 |
|
|
2008 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
7,772 |
|
|
$ |
6,629 |
|
Allowance for sales cancellations and doubtful accounts |
|
|
6,009 |
|
|
|
5,917 |
|
Capital loss carryover |
|
|
10,017 |
|
|
|
8,242 |
|
Deferred preneed sales and expenses |
|
|
175,339 |
|
|
|
204,069 |
|
Deferred compensation |
|
|
5,256 |
|
|
|
4,843 |
|
Inventory writedown |
|
|
1,012 |
|
|
|
1,022 |
|
Original issue discount on purchased call options |
|
|
10,657 |
|
|
|
18,254 |
|
Lease obligations |
|
|
712 |
|
|
|
718 |
|
Net operating loss carryover |
|
|
7,135 |
|
|
|
|
|
Non-compete amortization |
|
|
413 |
|
|
|
1,232 |
|
Other |
|
|
2,019 |
|
|
|
1,503 |
|
Share-based compensation |
|
|
2,016 |
|
|
|
1,816 |
|
State income taxes (1) |
|
|
32,332 |
|
|
|
32,086 |
|
U.S. possession income tax (2) |
|
|
15,016 |
|
|
|
16,077 |
|
|
|
|
|
|
|
|
|
|
|
275,705 |
|
|
|
302,408 |
|
Valuation allowance (3) |
|
|
(10,194 |
) |
|
|
(10,649 |
) |
|
|
|
|
|
|
|
|
|
|
265,511 |
|
|
|
291,759 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
12,647 |
|
|
|
4,396 |
|
Goodwill amortization |
|
|
34,227 |
|
|
|
31,060 |
|
Deferral on gain on early extinguishment of debt |
|
|
5,071 |
|
|
|
|
|
Partnership interest |
|
|
1,879 |
|
|
|
1,221 |
|
Purchase accounting adjustments (primarily cemetery
property) |
|
|
66,577 |
|
|
|
66,769 |
|
|
|
|
|
|
|
|
|
|
|
120,401 |
|
|
|
103,446 |
|
|
|
|
|
|
|
|
|
|
$ |
145,110 |
|
|
$ |
188,313 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current net deferred asset |
|
$ |
21,715 |
|
|
$ |
8,798 |
|
Long-term net deferred asset |
|
|
123,395 |
|
|
|
179,515 |
|
|
|
|
|
|
|
|
|
|
$ |
145,110 |
|
|
$ |
188,313 |
|
|
|
|
|
|
|
|
105
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes(Continued)
|
|
|
(1) |
|
A significant component of this balance is a gross state net operating loss
carryover of approximately $275,088 ($11,025 net of federal tax). This loss is not
concentrated in any one state, but instead, is widespread in states whose carryover period
averages from 15 to 20 years. During fiscal year 2009, the Company adjusted its previously
recorded valuation allowance from $2,087 to $2,317. The increased valuation allowance
resulted in a current period tax expense of $230. |
|
(2) |
|
This U.S. possession is Puerto Rico. A component of this balance is a net operating
loss carryover of $402 ($102 net of federal tax). In 2009, the Company reduced its previously
recorded valuation allowance from $1,162 to $102 as a result of its net operating loss
utilization for the period of $4,167. The reduced valuation allowance resulted in a current
period tax benefit of $1,060. |
|
(3) |
|
During fiscal 2009, the Company decreased its valuation allowance from $10,649 to
$10,194. This was the result of recording net decreases to the reserve of $830 attributable
to the net operating loss changes noted in items (1) and (2) above, offset by a $375 increase
in the reserve on the Companys capital loss carryover. At the end of fiscal year 2009, the
breakdown of the valuation allowance is $7,775 attributable to the capital loss carryover and
$2,419 attributable to the net operating loss carryforwards in certain states and Puerto Rico. |
During the third quarter of fiscal year 2009, the Internal Revenue Service approved a change
in one of the Companys tax accounting policies that will result in a combination of refunds and
reductions of federal income tax payments totaling approximately $32,000. Of that amount, $17,900
was received as a refund in fiscal year 2009, approximately $1,600 is expected to be received as a
refund by the end of the first quarter of 2010, approximately $8,000 was used to offset estimated
tax payments during fiscal 2009 and the remaining approximately $4,500 is expected to be used to
offset future federal income tax payments. The change relates to the Companys tax accounting
policy for preneed contracts in one state. For those contracts, the Company was recognizing income
for tax purposes (and paying taxes) relating to amounts received from customers and placed in trust
at the time the cash was received from the customers. This policy resulted in approximately
$89,400 of income that was taxed prior to the actual delivery of the merchandise or services. The
change permits the Company to defer recognition of income for tax purposes (and pay taxes) with
respect to those amounts until the time the service is actually performed or the merchandise is
actually delivered and cash is withdrawn from the trust, which generally aligns the Companys book
and tax accounting for these amounts and is consistent with the Companys approach in the other
states. The change essentially allowed the Company to apply the approximately $89,400 reversal of
previously reported taxable income to reduce taxable income for fiscal years 2006, 2007, 2008, 2009
and potentially part of 2010. The Company will
eventually have to pay federal income taxes with respect to the $89,400 as the related preneed
contracts are performed in the future.
During the third quarter of 2008, the Company filed with the Internal Revenue Service (in
connection with the filing of its October 31, 2007 federal income tax return) an application to
change its tax accounting method with regard to the taxation of preneed services. This change
resulted in an increase in income tax receivables of $8,912 and a corresponding decrease in
deferred income taxes in the balance sheet. The Company received $4,345 of this refund in August
2008. The remaining amount of $4,567 was applied against tax payments due by the Company on July
15, 2008, which reduced income taxes payable.
During the fourth quarter of fiscal 2008, the Company was advised that the congressional Joint
Committee on Taxation approved its requested refund of approximately $10,400 and interest of
approximately $2,700 related to its amended federal income tax returns for fiscal years ended
October 31, 1997 through 2000 and 2002 through 2004. All but $500 of interest was received by
October 31, 2008. Also in the fourth quarter of fiscal year 2008, the Company recorded a $25,952
goodwill impairment charge, of which $25,009 was non-deductible for tax purposes.
During fiscal 2007, the Company recognized a combined non-recurring tax benefit of $4,180, of
which $787 is attributable to the completion of an audit by the Commonwealth of Puerto Rico for tax
periods 1999 to 2001, and $3,393 is attributable to a reduced valuation allowance on its capital
loss carryover which was due to expire at
106
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes(Continued)
the end of 2007. In September of 2007 it reached a settlement with the taxing authority which
enabled it to record a partial recovery of $1,211 ($787 net of federal tax) on the $2,550 ($1,657
net of federal tax) that had been previously reserved. The $3,393 reduction in the valuation
allowance was the result of the Companys ability to generate sufficient capital gain income prior
to the 2007 expiration date on the loss carryover.
On November 1, 2007, the Company adopted the uncertain tax position guidance in ASC
740-Income Taxes. A reconciliation of the beginning and ending balances of the total amounts of
gross unrecognized tax benefit is as follows:
|
|
|
|
|
Gross unrecognized tax benefits at November 1, 2008 |
|
$ |
3,920 |
|
Reductions for tax for prior years positions |
|
|
(689 |
) |
Additions for tax for current year positions |
|
|
|
|
Reduction in tax relating to settlements with taxing authorities |
|
|
(140 |
) |
Reduction in tax as a result of a lapse of applicable statute of limitations |
|
|
(324 |
) |
|
|
|
|
Gross unrecognized tax benefits at October 31, 2009 |
|
$ |
2,767 |
|
|
|
|
|
The total amount of gross unrecognized tax benefit that, if recognized, would affect the
effective tax rate was $255 at October 31, 2009. The Companys policy with respect to potential
penalties and interest is to record them as other expense and interest expense, respectively. As
of October 31, 2009, the Company had accrued interest and penalties related to the unrecognized tax
benefits of $735. During fiscal year 2009, an additional $211 of interest was accrued for
uncertain tax positions and $583 of interest and penalties was reduced due to payments and lapse of
applicable statute of limitations.
With few exceptions, the Company is no longer subject to U.S. federal, state and local, or
non-U.S. income
tax examinations by tax authorities for fiscal years before 2006. During the next fiscal year,
certain open tax years will close and the statute of limitations will lapse. If this occurs, the
Company would reduce the unrecognized tax benefits by $186. Also, accrued interest and penalties
will be reduced by $223 due to the close of those tax years.
(19) Benefit Plans
Stewart Enterprises Employees Retirement Trust
The Company has a defined contribution retirement plan, the Stewart Enterprises Employees
Retirement Trust (A Profit-Sharing Plan) (SEERT). All regular employees are eligible to
participate in this plan. New employees are automatically enrolled in the plan at a three percent
contribution rate after 60 days of employment, unless they elect not to participate. Contributions
are made to the plan at the discretion of the Companys Board of Directors. Additionally,
employees who participate may contribute 100 percent of their earnings, up to the limit set by the
Internal Revenue Code. Employee contributions of up to six percent of earnings are eligible for
Company matching contributions at the rate of $.50 for each $1.00 contributed. The Companys
expense, including the Companys matching contributions, for the fiscal years ended October 31,
2009, 2008 and 2007 was approximately $3,013, $2,923 and $3,138, respectively.
Stewart Enterprises Puerto Rico Employees Retirement Trust
On January 1, 2003, the Stewart Enterprises Puerto Rico Employees Retirement Trust, a defined
contribution retirement plan, became effective when the Company adopted the Banco Popular de Puerto
Rico Master Defined Contribution Retirement Plan. Employees in Puerto Rico who were formerly
participating in the Stewart Enterprises Employees Retirement Trust had their account balances
transferred to this plan in February 2003. Individuals employed in Puerto Rico by the Company or
certain of its subsidiaries and affiliates are eligible to participate in this plan. Contributions
are made to the plan at the discretion of the Companys Board of Directors. Eligible employees may
contribute up to 100 percent of their earnings, up to a maximum annual contribution of $9.
107
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans(Continued)
Employee contributions of up to six percent of earnings are eligible for Company matching
contributions at the rate of $0.50 for each $1.00 contributed. Additional contributions may also
be made to this plan at the discretion of the Companys Board of Directors. The Companys expense,
including the Companys matching contributions, for the fiscal years ended October 31, 2009, 2008
and 2007 was $69, $74 and $85, respectively.
Non-qualified Supplemental Retirement and Deferred Compensation Plan
The Company has a non-qualified key employee defined contribution supplemental retirement
plan, which provides certain highly compensated employees the opportunity to accumulate deferred
compensation which cannot be accumulated under the SEERT due to certain limitations. Contributions
are made to the plan at the discretion of the Companys Board of Directors. Additionally,
employees who participate may contribute up to 15 percent of their earnings. The first 5 percent
of such employee contributions are eligible for Company matching contributions at the rate of $.50
for each $1.00 contributed. The Companys expense, including the Companys matching contributions,
for the fiscal years ended October 31, 2009, 2008 and 2007 was approximately $258, $186 and $318,
respectively.
Supplemental Executive Retirement Plan
On April 1, 2002, the Company adopted an unfunded, non-qualified retirement plan, the Stewart
Enterprises, Inc. Supplemental Executive Retirement Plan (SERP), to provide for the payment of
pension benefits to a select group of highly-compensated management employees as approved by the
Compensation Committee of the Companys Board of Directors. The retirement plan is
non-contributory and provides retirement benefits based on final average compensation, position and
the participants age, years of service or years of participation in the SERP. The Companys
expense for the fiscal years ended October 31, 2009, 2008 and 2007 was $2,400, $2,468 and $2,448,
respectively. The Companys liability as of October 31, 2009 and 2008 was $12,969 and $11,380,
respectively, and is presented in other current liabilities and other long-term liabilities in the
consolidated balance sheet.
Compensation Plans
In April 2007, the Companys shareholders approved the 2007 Stock Incentive Plan (Stock
Plan) and the Companys Executive Officer Annual Incentive Plan (Incentive Plan) at its annual
shareholders meeting. The Stock Plan replaces the Companys 1995 Incentive Compensation Plan,
2000 Incentive Compensation Plan and 2005 Directors Stock Plan. No future grants will be made
through these prior plans. The Compensation Committee of the Companys Board of Directors
administers the Stock Plan and has the authority to make awards under the Stock Plan including
setting the terms of the awards. A total of 5,000,000 shares of the Companys Class A common stock
are authorized to be issued under the Stock Plan. Officers, directors and key employees will be
eligible to receive incentives under the Stock Plan when designated as a Stock Plan participant by
the Committee.
The Incentive Plan was presented to the shareholders for approval in order to qualify the
quantitative portion of the annual incentive award as fully deductible performance-based
compensation under Section 162(m) of the Internal Revenue Code. The Incentive Plan is administered
by the Compensation Committee of the Companys Board of Directors, and it applies to each of the
five fiscal years during the period beginning November 1, 2007 and
ending October 31, 2012, unless terminated earlier by the Compensation Committee. Any
executive officer may be designated by the Compensation Committee as a participant in the Incentive
Plan for any year. No participant may be paid a bonus under the Incentive Plan of more than $1,500
for any fiscal year. The Compensation Committee may determine to pay bonuses under the Incentive
Plan in whole or in part in cash or stock. Any such stock will be issued through the Companys
stock-based incentive plans.
108
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans(Continued)
Employee Stock Purchase Plan
On July 1, 1992, the Company adopted an Employee Stock Purchase Plan. This plan was
terminated and replaced by the 2003 Employee Stock Purchase Plan (the Employee Stock Plan), which
was approved by the Companys shareholders at its 2003 annual meeting. The Company authorized
1,000,000 shares for issuance under the Employee Stock Plan. The Employee Stock Plan provides to
eligible employees the opportunity to purchase the Companys Class A common stock on a quarterly
basis. The purchase price is established at a 15 percent discount from fair market value, as
defined in the Employee Stock Plan. Since the inception of the Plan through October 31, 2009,
478,559 shares had been acquired under this Plan.
Share-Based Compensation
Stock Options
For the years ended October 31, 2009, 2008 and 2007, stock option expenses amounted to $1,180,
$1,544 and $1,576, respectively, which are included in corporate general and administrative
expenses in the consolidated statements of earnings. As of October 31, 2009, there was $1,263 of
total unrecognized compensation costs related to nonvested stock options that are expected to be
recognized over a weighted-average period of 2.18 years. The following table is a summary of the
Companys stock options outstanding as of October 31, 2009, 2008 and 2007, and the changes that
occurred during fiscal years 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
2008 |
|
2007 |
|
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
Number of |
|
Weighted |
|
|
Shares |
|
Average |
|
Shares |
|
Average |
|
Shares |
|
Average |
|
|
Underlying |
|
Exercise |
|
Underlying |
|
Exercise |
|
Underlying |
|
Exercise |
|
|
Options |
|
Prices |
|
Options |
|
Prices |
|
Options |
|
Prices |
Outstanding at beginning of year |
|
|
2,141,679 |
|
|
$ |
7.10 |
|
|
|
1,900,729 |
|
|
$ |
6.58 |
|
|
|
1,441,294 |
|
|
$ |
6.15 |
|
Granted |
|
|
979,500 |
|
|
$ |
2.83 |
|
|
|
561,250 |
|
|
$ |
8.18 |
|
|
|
1,039,167 |
|
|
$ |
7.12 |
|
Exercised |
|
|
|
|
|
$ |
|
|
|
|
(264,862 |
) |
|
$ |
5.71 |
|
|
|
(411,511 |
) |
|
$ |
6.40 |
|
Forfeited |
|
|
(256,617 |
) |
|
$ |
5.60 |
|
|
|
(55,438 |
) |
|
$ |
6.75 |
|
|
|
(168,221 |
) |
|
$ |
6.63 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
2,864,562 |
|
|
$ |
5.78 |
|
|
|
2,141,679 |
|
|
$ |
7.10 |
|
|
|
1,900,729 |
|
|
$ |
6.58 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
1,067,954 |
|
|
$ |
6.73 |
|
|
|
781,307 |
|
|
$ |
6.73 |
|
|
|
471,353 |
|
|
$ |
5.90 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
options granted |
|
|
|
|
|
$ |
0.71 |
|
|
|
|
|
|
$ |
2.18 |
|
|
|
|
|
|
$ |
2.84 |
|
|
|
|
|
|
|
|
Year Ended October 31, 2009 |
|
|
Aggregate Intrinsic Value |
Options outstanding as of October 31, 2009 |
|
$ |
1,573 |
|
Options exercisable as of October 31, 2009 |
|
$ |
|
|
Options exercised during 2009 |
|
$ |
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2008 |
|
|
Aggregate Intrinsic Value |
Options outstanding as of October 31, 2008 |
|
$ |
21 |
|
Options exercisable as of October 31, 2008 |
|
$ |
15 |
|
Options exercised during 2008 |
|
$ |
790 |
|
109
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans(Continued)
The following table further describes the Companys stock options outstanding as of October
31, 2009.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding |
|
|
Options Exercisable |
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
Weighted |
|
|
|
|
|
|
Number |
|
|
Average |
|
|
Weighted |
|
|
Number |
|
|
Average |
|
|
Weighted |
|
Range of |
|
Outstanding at |
|
|
Remaining |
|
|
Average |
|
|
Exercisable at |
|
|
Remaining |
|
|
Average |
|
Exercise Prices |
|
10/31/2009 |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
10/31/2009 |
|
|
Contractual Life |
|
|
Exercise Price |
|
$2.65 |
|
|
552,500 |
|
|
6.13 years |
|
|
$ |
2.65 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$3.09 |
|
|
340,000 |
|
|
6.18 years |
|
|
$ |
3.09 |
|
|
|
|
|
|
|
|
|
|
$ |
|
|
$5.06 - $5.86 |
|
|
309,144 |
|
|
3.35 years |
|
|
$ |
5.37 |
|
|
|
268,150 |
|
|
3.25 years |
|
|
$ |
5.32 |
|
$6.33 - $6.90 |
|
|
673,918 |
|
|
3.30 years |
|
|
$ |
6.60 |
|
|
|
487,501 |
|
|
2.96 years |
|
|
$ |
6.68 |
|
$7.31 - $7.65 |
|
|
211,000 |
|
|
4.67 years |
|
|
$ |
7.40 |
|
|
|
67,750 |
|
|
4.62 years |
|
|
$ |
7.39 |
|
$8.06 - $8.47 |
|
|
778,000 |
|
|
4.79 years |
|
|
$ |
8.19 |
|
|
|
244,553 |
|
|
4.77 years |
|
|
$ |
8.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.65 - $8.47 |
|
|
2,864,562 |
|
|
4.70 years |
|
|
$ |
5.78 |
|
|
|
1,067,954 |
|
|
3.56 years |
|
|
$ |
6.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted Average |
|
|
Year Ended |
|
Grant-Date |
|
|
October 31, 2009 |
|
Fair Value |
Nonvested options as of November 1, 2008 |
|
|
1,360,372 |
|
|
$ |
2.35 |
|
Granted |
|
|
979,500 |
|
|
$ |
0.71 |
|
Vested |
|
|
(319,459 |
) |
|
$ |
2.31 |
|
Forfeited |
|
|
(223,805 |
) |
|
$ |
1.63 |
|
|
|
|
|
|
|
|
|
|
Nonvested options as of October 31, 2009 |
|
|
1,796,608 |
|
|
$ |
1.55 |
|
|
|
|
|
|
|
|
|
|
The fair value of the Companys service based stock options is the estimated present value at
grant date using the Black-Scholes option pricing model with the following weighted average
assumptions for fiscal years 2009, 2008 and 2007: expected dividend yield of 2.2 percent, 1.4
percent and 1.1 percent; expected volatility of 38.4 percent, 38.2 percent and 47.7 percent;
risk-free interest rate of 3.2 percent, 4.2 percent and 4.4 percent; and an expected term of 4.9
years, 5.0 years and 7.0 years. In 2008 and 2007, the Company issued stock options with market
conditions based on reaching certain target stock prices in the years 2008, 2009 and 2010. The
Company records this expense over the requisite service period. In fiscal year 2008, the target
stock prices were met, and in fiscal year 2009, the target stock prices were not met. The fair
value of the Companys market based stock options is the estimated present value at the grant date
using the Monte Carlo lattice model approach with the following weighted average assumptions for
fiscal years 2009, 2008 and 2007: expected dividend yield of 1.3 percent; expected volatility of
37.9 percent, 37.9 percent and 39.9 percent; risk-free interest rate of 4.3 percent, 4.3 percent
and 4.5 percent; and an expected term of 3.4 years, 3.4 years and 3.5 years. The expected dividend
yield is based on the Companys annual dividend payout at grant date. Expected volatility is based
on the historical volatility of the Companys stock for a period approximating the expected term.
The risk-free interest rate is based on the U.S. treasury yield in effect at the time of grant over
the expected term. The expected term of service based options is calculated using the simplified
method which is the average of the vesting term and contractual term.
Likewise, the fair value of shares acquired through the Employee Stock Plan is estimated
quarterly using the Black-Scholes option pricing model with the following weighted average
assumptions for fiscal years 2009, 2008 and 2007, respectively: expected dividend yield of 3.2
percent, 1.4 percent and 1.5 percent; expected volatility
of 42.0 percent, 37.2 percent and 42.5 percent; risk-free interest rate of 0.2 percent, 2.3 percent
and 5.0 percent; and an expected term of 0.3 years, 0.3 years and 0.3 years.
Restricted Stock
The expense related to restricted stock granted in fiscal years 2009, 2008 and 2007 is reflected in
earnings and amounted to $719, $744 and $447, respectively. Once granted, the restricted stock is
included in total shares outstanding but is not included in the weighted average number of common
shares outstanding in each period used
110
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans(Continued)
to calculate basic earnings per common share until the shares vest. The table below is a
summary of the Companys restricted stock activity for fiscal years 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
(In shares) |
|
2009(1) |
|
|
2008(2) |
|
|
2007(3) |
|
Nonvested restricted stock at beginning of year |
|
|
510,887 |
|
|
|
606,947 |
|
|
|
97,398 |
|
Granted |
|
|
353,000 |
|
|
|
55,000 |
|
|
|
565,000 |
|
Vested |
|
|
(72,390 |
) |
|
|
(151,060 |
) |
|
|
(29,801 |
) |
Forfeited |
|
|
(61,832 |
) |
|
|
|
|
|
|
(25,650 |
) |
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock at end of year |
|
|
729,665 |
|
|
|
510,887 |
|
|
|
606,947 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
On December 15, 2008, the Company granted 102,000 shares of restricted stock to
certain employees with market conditions based on achieving certain target stock prices in the
years 2009, 2010 and 2011. On January 5, 2009, the Company granted 195,000 shares of
restricted stock to executive officers conditional on the same market criteria mentioned
above. Also on January 5, 2009, the Company granted 56,000 shares of restricted stock to
certain employees which vest in equal one-third portions over three years. The market
conditions discussed above were not met in 2009. |
|
(2) |
|
On December 19, 2007, the Company granted 45,000 shares of restricted stock to
executive officers and on June 26, 2008, the Company granted 10,000 shares of restricted stock
to an executive officer conditional on certain performance criteria. The performance
conditions are based on meeting certain return on equity targets in each of the years 2008,
2009 and 2010. The Company assesses the probability of achieving these targets each reporting
period in determining the requisite service period in which to record compensation expense.
The performance conditions were not met in 2008 or 2009. |
|
(3) |
|
On January 8, 2007, the Company granted 52,500 shares of restricted stock to a group
of executive officers which vests in equal 25 percent portions over four years. On March 31,
2007, the Company granted 340,000 shares of restricted stock to an executive officer
consisting of 100,000 shares conditional on service, 120,000 shares conditional on certain
performance criteria and 120,000 shares conditional on certain market criteria. On May 16,
2007, the Company granted 170,000 shares of restricted stock to an executive officer
consisting of 50,000 shares conditional on service, 60,000 shares conditional on certain
performance criteria and 60,000 shares conditional on certain market criteria. The restricted
shares based on service conditions vest in equal one-third portions on the anniversary date of
the respective grant dates. The performance conditions are based on meeting certain return on
equity targets in each of the years 2008, 2009 and 2010 and were not achieved in 2008 or 2009.
The Company assesses the probability of achieving these targets each reporting period in
determining the requisite service period in which to record compensation expense. The market
conditions are
based on reaching certain target stock prices in the years 2008, 2009 and 2010 and were achieved
in 2008 and were not achieved in 2009. The Company records the expense over the requisite
service period. On September 17, 2007, the Company granted 2,500 shares of restricted stock to
an executive officer which vest in equal one-third portions over three years. |
Other
On November 18, 2008, the Company issued 15,000 shares of Class A common stock and paid $34 in
cash to each of the independent directors of the Company. The expense related to this stock grant
amounted to $305 and was recorded in corporate general and administrative expenses during the first
quarter of 2009. Each independent director must hold all of the shares received until completion
of service as a member of the Board of Directors.
On January 17, 2008, the Company issued a total of 72,000 shares of Class A common stock to
the independent directors of the Company. The expense related to this stock amounted to $531 and
was recorded in corporate general and administrative expenses during the first quarter of 2008.
Each independent director must hold at least 75 percent of the shares received until completion of
service as a member of the Board of Directors.
111
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans(Continued)
On February 28, 2007, the Company issued a total of 84,000 shares of Class A common stock to
the independent directors of the Company. The expense related to this stock amounted to $664 and
was recorded in corporate general and administrative expenses during the second quarter of 2007.
Each independent director must hold at least 75 percent of the shares received until completion of
service as a member of the Board of Directors.
In fiscal years 2008 and 2007, the Company granted 48,682 shares and 57,481 shares,
respectively, of Class A common stock to executive officers as part of their previous year-end
bonuses. The expense related to these shares was reflected in earnings in fiscal years 2007 and
2006 and amounted to $390 and $364, respectively.
(20) Commitments, Contingencies and Related Party Transactions
Litigation
Funeral Consumers Alliance, Inc., et al. v. Service Corporation International, Alderwoods
Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co., on
the docket of the United States District Court for the Southern District of Texas. This purported
class action was originally filed on May 2, 2005, in the United States District Court for the
Northern District of California, on behalf of a nationwide class defined to include all consumers
who purchased a Batesville casket from the funeral home defendants at any time. The court
consolidated it with five subsequently filed, substantially similar cases (the Consolidated
Consumer Cases).
The Consolidated Consumer Cases allege that the defendants acted jointly to reduce competition
from independent casket discounters and fix and maintain prices on caskets in violation of the
federal antitrust laws and Californias Business and Professions Code. The plaintiffs seek treble
damages, restitution, injunctive relief, interest, costs and attorneys fees.
At the defendants request, in late September 2005, the court transferred the Consolidated
Consumer Cases
to the United States District Court for the Southern District of Texas. The transferred
Consolidated Consumer Cases have been consolidated before a single judge in the Southern District
of Texas.
On November 10, 2006, after the court denied defendants motions to dismiss, the Company
answered the first amended consolidated class action complaint, denying liability and asserting
various affirmative defenses. Fact discovery has been completed, and expert discovery is complete
with the exception of the deposition of one expert witness.
In April 2007, the plaintiffs filed an expert report indicating that the amounts sought from
all defendants as damages to the proposed class would be in the range of approximately $950 million
to approximately $1.5 billion, before trebling. Accordingly, any judgment in favor of the proposed
class could have a material adverse effect on the Companys financial condition and results of
operations.
On March 26, 2009, the court denied plaintiffs motion for class certification. The United
States Court of Appeals for the Fifth Circuit denied plaintiffs petition for permission to appeal
on June 19, 2009, and denied plaintiffs motion for reconsideration on July 29, 2009.
The Company believes it has meritorious defenses to the substantive allegations asserted, to
class certification, and to the plaintiffs damage theories and calculations, and the Company
intends to aggressively defend itself in these proceedings. The Company has not recorded a
liability related to this litigation given that it does not believe that a loss is probable and
estimable.
112
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(20) Commitments, Contingencies and Related Party Transactions(Continued)
Other Litigation
The Company is a defendant in a variety of other litigation matters that have arisen in the
ordinary course of business, which are covered by insurance or otherwise not considered to be
material. The Company carries insurance with coverages and coverage limits that it believes to be
adequate.
Leases
The Company has noncancellable operating leases, primarily for land and buildings that expire
over the next 1 to 14 years, except for eight leases that expire between 2032 and 2039. Rent
payments under these leases were $4,708, $4,638 and $4,478 for the years ended October 31, 2009,
2008 and 2007, respectively. The Companys future minimum lease payments as of October 31, 2009
are $4,554, $3,320, $2,666, $2,112, $1,659 and $16,659 for the years ending October 31, 2010, 2011,
2012, 2013, 2014 and later years, respectively.
Other Commitments and Contingencies
In those states where the Company has withdrawn realized net capital gains in the past from
its cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital
losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals
of future earnings until they cover the loss. As of October 31, 2008, the Company had $13,281
recorded as a liability for an estimated probable funding obligation as an increase in cemetery
costs in fiscal year 2008. The Company recorded an additional $3,421 for the estimated
probable funding obligation and funded $2,692 of the estimated probable funding obligation in
fiscal year 2009. As of October 31, 2009, the Companys estimated probable funding obligation was
$14,010. As of October 31, 2009, the Company had unrealized losses of approximately $48,217 in
cemetery perpetual care trusts in these states. Because all of these trusts currently have assets
with a fair market value less than the aggregate amounts required to be contributed to the trust,
any additional realized net capital losses in these trusts may result in a corresponding funding
liability and increase in cemetery costs.
From time to time, unidentified contracts are presented to the Company relating to contracts
sold prior to the time the Company acquired certain businesses. In addition, from time to time,
the Company has identified in its backlog, certain contracts in which services or merchandise have
already been delivered. Using historical trends and statistical analysis, the Company has recorded
an estimated net liability for these items of approximately $3.0 million and $7.0 million as of
October 31, 2009 and 2008, respectively.
The Company has entered into non-compete agreements with prior owners of acquired subsidiaries
that expire through 2018. Non-compete agreements are included in the other assets line in the
consolidated balance sheet and amounted to $5,927 and $5,921 as of October 31, 2009 and 2008,
respectively. The Companys future non-compete payments as of October 31, 2009 are $342, $342,
$168, $100, $100 and $400 for the years ending October 31, 2010, 2011, 2012, 2013, 2014 and
thereafter, respectively.
The Company is required to maintain a bond ($27,047 as of October 31, 2009) to guarantee its
obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral
trusts in Florida. This amount would become senior secured debt if the Company was required to
borrow funds under the senior secured revolving credit facility to extinguish the bond obligation
by returning to the trusts the amounts it previously withdrew that relate to the remaining
undelivered preneed contracts.
Related Party Transactions
In March 2009, the Company announced the retirement of an executive officer effective April
30, 2009. As part of the related retirement agreement, the Company must pay the former executive
officer $175 in equal bi-weekly installments over a one-year period commencing after the retirement
date. The Company recorded the $175 charge in the second quarter of fiscal year 2009 but will make
the payments in accordance with the agreement.
113
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(20) Commitments, Contingencies and Related Party Transactions(Continued)
In November 2006, the Company announced the retirement of an executive officer effective
December 31, 2006. As part of the related separation agreement, the Company must pay the executive
officer $350 in equal bi-weekly installments over a two-year period commencing six months after the
retirement date. The Company recorded the $350 charge in the first quarter of fiscal year 2007 but
will make the payments in accordance with the agreement.
In January 1998, the Company discontinued an insurance policy on the life of Mr. Frank B.
Stewart, Jr., Chairman of the Company. In order to purchase a replacement policy, The Stewart
Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180 days
after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the
Companys cost of borrowing under its senior secured revolving credit facility and is payable when
the principal becomes due. The amount of the loan was equal to the cash value
received by the Company upon the discontinuance of the prior insurance policy. The loan proceeds
were used by the trust to purchase a single premium policy on the life of Mr. Stewart. Certain of
the beneficiaries of The Stewart Family Special Trust are members of Mr. Stewarts family. The
loan was approved by all of the disinterested members of the Board of Directors. The outstanding
balance of the loan at October 31, 2009, including accrued interest, was approximately $1,328.
(21) Segment Data
The Company previously had five operating and reportable segments consisting of a corporate
trust management segment and a funeral and cemetery segment for each of the two geographical
divisions (each with a division president): Western and Eastern. In the second quarter of 2009,
the Company eliminated its two geographical divisions of Western and Eastern and the positions of
Western and Eastern division presidents from its organizational structure in order to maximize the
benefits of its Best in Class initiative, improve efficiencies and provide more focus on the
development of new revenue opportunities. As of October 31, 2009, the Companys Chief Executive
Officer and Chief Financial Officer meet monthly with the Senior Vice President of Operations to
discuss operational performance. There is also a president of the Companys wholly-owned
subsidiary, Investors Trust, Inc. (ITI), who reports to the Chief Financial Officer. The
Companys Senior Vice President of Operations acts as the segment manager for the funeral and
cemetery businesses and the Executive Vice President and President of ITI acts as segment manager
for corporate trust.
The Company has determined that its Chief Executive Officer and Chief Financial Officer remain
the chief operating decision makers (CODM) as they make decisions about the Companys overall
resource allocation and assessment of performance. In order to re-evaluate the Companys segments,
the CODM review of the Companys operational performance and management compensation were
considered. Based on its evaluation, the Company has determined that managements approach to
operating the business indicates that there are three operating and reportable segments: a funeral
segment, a cemetery segment and a corporate trust management segment. The Company does not
aggregate its operating segments. Therefore, its operating and reportable segments are the same.
The corporate trust management segment includes (1) the funeral and cemetery service and
merchandise trust earnings recognized for GAAP purposes, which are further described below, and (2)
fee income related to the Companys wholly-owned subsidiary, ITI. Trust assets and the earnings on
those assets are associated exclusively with preneed sales. Because preneed services and
merchandise will not be provided until an unknown future date, most states require that all or a
portion of the customer payments under preneed contracts be placed in trust or escrow accounts for
the benefit of the customers.
ITI serves as investment advisor to the Companys trust funds. ITI provides investment
advisory services to the trusts for a fee. The Company has elected to perform these services
in-house, and the fees are recognized as income as earned.
114
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(21) Segment Data(Continued)
The corporate trust management segment revenues reflect (1) investment management fees earned and (2)
the realized earnings related to preneed contracts delivered, which are the earnings realized over
the life of the contracts delivered during the relevant period. Earnings recognition in this
segment is unrelated to investment results in the current period. Current investment results of the
funeral and cemetery merchandise and services trusts are deferred until the underlying products and
services are delivered and are not reflected in the statement of earnings but are disclosed in
Notes 4, 5 and 7 along with the cost and market value of the trust assets. The
Companys fee income related to management of its trust assets, the investment income recognized on
preneed contracts delivered and the trust assets are referred to as corporate trust management
for the benefit of the segments.
Perpetual care trust earnings are reported in the cemetery segment, as these revenues are
recognized currently and are used to maintain the cemeteries. Perpetual care trust earnings and
the cost and market values of the perpetual care trust assets are presented in Note 6.
The accounting policies of the Companys segments are the same as those described in Note 2.
The Company evaluates the performance of its segments and allocates resources to them using a
variety of profitability metrics. The most comprehensive of these measures is gross profit.
The Company also measures its preneed sales growth year-over-year. Preneed sales and the
accounting for these sales are discussed in Notes 2(i), 2(j) and 2(k). Although the Company does
not consider its preneed selling activities to be a separate segment, the Company is providing
additional disclosure of preneed funeral and cemetery merchandise and service sales in its segment
footnote as preneed sales are reviewed monthly by the Companys CODM to assess performance and
allocate resources. Preneed sales are strategically significant to the Company as those sales are
one of the primary drivers of market share protection and growth. As such, the CODM reviews the
preneed sales data in addition to revenue and gross profit. Information on segment assets is not
disclosed as it is not reviewed by the CODM.
The Companys operations are product-based. As such, the Companys primary reportable
segments presented in the following table are based on products and services.
The Companys funeral homes offer a complete range of funeral services and products both at
the time of need and on a preneed basis. The Companys 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 Companys funeral homes offer cremation
products and services. The Companys cemetery operations involve the sale of cemetery property and
related merchandise, including lots, lawn crypts, family and community mausoleums, columbariums,
cremation niches, cremation gardens, monuments, memorials 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 incurs certain costs that benefit all of the funeral homes and cemeteries, such as
management compensation, headquarters overhead, insurance costs and legal and professional fees.
These costs are allocated to the facilities using various methods including their proportionate
share of sales (which can include preneed sales) or payroll. These costs are included in funeral
and cemetery costs.
The Company incurs certain other costs at its shared services center that benefit all of the
funeral homes and cemeteries, such as the costs to process contracts, make collections, pay
vendors, deliver information system services and deliver human resource services. These costs are
allocated using various methods including their proportionate share of sales (which can include
preneed sales) and the number of employees. These costs are included in funeral and cemetery
costs.
115
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(21) Segment Data(Continued)
The table below presents information about reported segments for the fiscal years ended
October 31, 2009, 2008 and 2007 for the Companys continuing operations only. Prior period data
has been retrospectively adjusted to conform to the new segment presentation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Revenue |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Funeral |
|
$ |
261,162 |
|
|
$ |
268,295 |
|
|
$ |
260,935 |
|
Cemetery(1) |
|
|
204,181 |
|
|
|
232,163 |
|
|
|
233,587 |
|
Corporate Trust Management(2) |
|
|
22,464 |
|
|
|
27,425 |
|
|
|
28,295 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
487,807 |
|
|
$ |
527,883 |
|
|
$ |
522,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Gross Profit |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Funeral |
|
$ |
50,834 |
|
|
$ |
50,841 |
|
|
$ |
45,288 |
|
Cemetery(1) |
|
|
16,266 |
|
|
|
24,219 |
|
|
|
40,197 |
|
Corporate Trust Management(2) |
|
|
20,640 |
|
|
|
25,757 |
|
|
|
26,945 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
87,740 |
|
|
$ |
100,817 |
|
|
$ |
112,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Net Preneed |
|
|
|
Merchandise and Service Sales(3) |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Funeral |
|
$ |
97,580 |
|
|
$ |
97,326 |
|
|
$ |
102,629 |
|
Cemetery |
|
|
48,629 |
|
|
|
53,644 |
|
|
|
55,736 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
146,209 |
|
|
$ |
150,970 |
|
|
$ |
158,365 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and Amortization |
|
|
|
Total |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Funeral |
|
$ |
16,015 |
|
|
$ |
14,811 |
|
|
$ |
13,502 |
|
Cemetery |
|
|
8,337 |
|
|
|
6,955 |
|
|
|
6,990 |
|
Reconciling Items(4) |
|
|
5,029 |
|
|
|
6,509 |
|
|
|
7,146 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
29,381 |
|
|
$ |
28,275 |
|
|
$ |
27,638 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Additions to Long-Lived Assets |
|
|
|
Total(5) |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Funeral |
|
$ |
9,949 |
|
|
$ |
11,286 |
|
|
$ |
19,374 |
|
Cemetery |
|
|
20,851 |
|
|
|
18,539 |
|
|
|
22,420 |
|
Reconciling Items(4) |
|
|
4,924 |
|
|
|
7,686 |
|
|
|
7,703 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
35,724 |
|
|
$ |
37,511 |
|
|
$ |
49,497 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
|
|
2009 |
|
|
2008 |
|
Funeral |
|
$ |
198,515 |
|
|
$ |
198,515 |
|
Cemetery |
|
|
48,721 |
|
|
|
48,721 |
|
|
|
|
|
|
|
|
Total |
|
$ |
247,236 |
|
|
$ |
247,236 |
|
|
|
|
|
|
|
|
|
|
|
(1) |
|
Perpetual care trust earnings of $6,840, $10,660 and $10,164 for fiscal years
2009, 2008 and 2007, respectively,
are included in the revenue and gross profit data of the cemetery segment. |
116
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(21) Segment Data(Continued)
|
|
|
(2) |
|
Corporate trust management consists of the trust management fees and funeral and
cemetery merchandise and services trust earnings recognized with respect to preneed contracts
delivered during the period. Trust management fees are established by the Company at rates
consistent with industry norms based on the fair market value of the assets managed and are
paid by the trusts to the Companys subsidiary, Investors Trust, Inc. The trust earnings
represent earnings realized over the life of the preneed contracts delivered during the
relevant periods. Trust management fees included in funeral revenue for 2009, 2008 and 2007
were $3,912, $5,075 and $5,881, respectively, and funeral trust earnings recognized with
respect to preneed contracts delivered included in funeral revenue for 2009, 2008 and 2007
were $11,256, $13,237 and $12,514, respectively. Trust management fees included in cemetery
revenue for 2009, 2008 and 2007 were $4,062, $4,949 and $5,343, respectively, and cemetery
trust earnings recognized with respect to preneed contracts delivered included in cemetery
revenue for 2009, 2008 and 2007 were $3,234, $4,164 and $4,557, respectively. |
|
(3) |
|
Preneed sales amounts represent total preneed funeral trust and insurance sales and
cemetery service and merchandise trust sales generated in the applicable period, net of
cancellations. |
|
(4) |
|
Reconciling items consist of unallocated corporate assets, depreciation and
amortization on unallocated corporate assets, amortization of deferred financing costs and
additions to corporate long-lived assets. |
|
(5) |
|
Long-lived assets include cemetery property and net property and equipment. |
A reconciliation of total segment gross profit to total earnings from continuing operations
before income taxes for the fiscal years ended October 31, 2009, 2008 and 2007, is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Gross profit for reportable segments |
|
$ |
87,740 |
|
|
$ |
100,817 |
|
|
$ |
112,430 |
|
Corporate general and administrative expenses |
|
|
(30,670 |
) |
|
|
(32,611 |
) |
|
|
(31,143 |
) |
Impairment of goodwill |
|
|
|
|
|
|
(25,952 |
) |
|
|
|
|
Hurricane related charges, net |
|
|
(380 |
) |
|
|
(2,297 |
) |
|
|
(2,533 |
) |
Separation charges |
|
|
(275 |
) |
|
|
|
|
|
|
(580 |
) |
Gains on dispositions and impairment (losses), net |
|
|
(218 |
) |
|
|
(353 |
) |
|
|
(44 |
) |
Other operating income, net |
|
|
1,250 |
|
|
|
819 |
|
|
|
1,651 |
|
Interest expense |
|
|
(22,353 |
) |
|
|
(24,115 |
) |
|
|
(25,065 |
) |
Gain (loss) on early extinguishment of debt |
|
|
20,078 |
|
|
|
|
|
|
|
(677 |
) |
Investment and other income, net |
|
|
92 |
|
|
|
2,406 |
|
|
|
3,374 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income
taxes |
|
$ |
55,264 |
|
|
$ |
18,714 |
|
|
$ |
57,413 |
|
|
|
|
|
|
|
|
|
|
|
117
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(22) Supplementary Information
The detail of certain income statement accounts is as follows for the fiscal years ended
October 31, 2009, 2008 and 2007.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, |
|
|
|
2009 |
|
|
2008 |
|
|
2007 |
|
Service revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
175,147 |
|
|
$ |
178,839 |
|
|
$ |
169,680 |
|
Cemetery |
|
|
60,438 |
|
|
|
65,260 |
|
|
|
60,002 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
235,585 |
|
|
|
244,099 |
|
|
|
229,682 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
95,098 |
|
|
|
100,164 |
|
|
|
101,232 |
|
Cemetery |
|
|
137,310 |
|
|
|
160,602 |
|
|
|
166,772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
232,408 |
|
|
|
260,766 |
|
|
|
268,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
6,085 |
|
|
|
7,604 |
|
|
|
8,418 |
|
Cemetery |
|
|
13,729 |
|
|
|
15,414 |
|
|
|
16,713 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
19,814 |
|
|
|
23,018 |
|
|
|
25,131 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
487,807 |
|
|
$ |
527,883 |
|
|
$ |
522,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
58,212 |
|
|
$ |
61,520 |
|
|
$ |
59,540 |
|
Cemetery |
|
|
42,067 |
|
|
|
44,054 |
|
|
|
40,649 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100,279 |
|
|
|
105,574 |
|
|
|
100,189 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise costs |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
57,974 |
|
|
|
61,852 |
|
|
|
63,187 |
|
Cemetery |
|
|
92,063 |
|
|
|
108,343 |
|
|
|
97,904 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
150,037 |
|
|
|
170,195 |
|
|
|
161,091 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
95,015 |
|
|
|
94,856 |
|
|
|
93,648 |
|
Cemetery |
|
|
54,736 |
|
|
|
56,441 |
|
|
|
55,459 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,751 |
|
|
|
151,297 |
|
|
|
149,107 |
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
400,067 |
|
|
$ |
427,066 |
|
|
$ |
410,387 |
|
|
|
|
|
|
|
|
|
|
|
Service revenue includes funeral service revenue, funeral trust earnings, insurance commission
revenue, burial site openings and closings and perpetual care trust earnings. Merchandise revenue
includes funeral merchandise revenue, flower sales, cemetery property sales revenue, cemetery
merchandise delivery revenue and merchandise trust earnings. Other revenue consists of finance
charge revenue and trust management fees. Service costs include the direct costs associated with
service revenue and preneed selling costs associated with preneed service sales. Merchandise costs
include the direct costs associated with merchandise revenue, preneed selling costs associated with
preneed merchandise sales and the Companys $3,421 and $13,281 estimated obligation to fund the
cemetery perpetual care trusts for the fiscal years ended October 31, 2009 and 2008, respectively.
(23) Hurricane Related Charges
The Company has insurance coverage related to property damage, incremental costs and property
operating expenses it incurred due to damage caused by Hurricanes Katrina and Ike. In August 2005,
Hurricane Katrina struck the Companys South Louisiana operations. In September 2008, Hurricane
Ike struck the Texas Gulf Coast and the Companys facilities in the area. The insurance policies
also provide coverage for interruption to the business, including lost profits, and reimbursement
for other expenses and costs incurred relating to the damages and losses suffered.
118
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(23) Hurricane Related Charges(Continued)
The Company recorded hurricane related charges of $380, $2,297 and $2,533 for the years ended
October 31, 2009, 2008 and 2007, respectively. In fiscal year 2009, the Company received $300 in
insurance proceeds related to Hurricane Ike. The Hurricane Katrina charges for fiscal year 2009
primarily relate to legal costs associated with ongoing litigation as described below.
The Company has been unable to finalize its negotiations with its insurance carriers related
to property damage and extra expenses, and business interruption damages, related to Hurricane
Katrina, and filed suit against the carriers in August 2007. In 2007, the carriers advanced an
additional $1,100, which the Company has not recorded as income but as a liability pending the
outcome of the litigation. The suit involves numerous significant policy interpretation disputes,
among other issues, and no assurance can be given as to how much additional proceeds the Company
may recover from its insurers, if any, or the timing of the receipt of any additional proceeds.
With the exception of any legal costs related to this suit, the Company does not anticipate any
additional charges related to Hurricane Katrina.
(24) Significant Risks and Uncertainties
Concentrations of Investments
The Companys preneed funeral and cemetery merchandise and services trusts and cemetery
perpetual care trusts are invested in various industry sectors, including the financial services
sector. There are various risks associated with this sector including the failure of various large
financial institutions, government regulation, interest rates, cost of capital funds, credit losses
and volatility in the financial markets. As described in Notes 4, 5 and 6, the market values of
the trusts experienced a significant decline from the cost basis during late fiscal year 2008 and
early fiscal year 2009. As of October 31, 2009, the Company has a concentration in the financial
services sector with 21 percent of fair market value of its preneed funeral and cemetery
merchandise and services portfolios and 37 percent of its cemetery perpetual care portfolio
invested in the financial services sector. See Notes 2(i), 2(j) and 2(k) for the Companys policy
outlining how realized losses could impact future revenue and additional potential funding
obligations for cemetery perpetual care trusts.
Customer Installment Receivables
The Company has gross installment contract receivables of $118,252 relating to cemetery
property sales as of October 31, 2009. The continued economic downturn could impact the ability of
customers to meet payment obligations.
Deferred Tax Assets
In addition to the potential additional realized losses described above in the Companys trust
investment portfolios, further realized capital losses in the trusts for which the Company is the
grantor, to the extent there are insufficient offsetting capital gains, may result in additional
valuation allowances against the related deferred tax asset (capital loss carryforward).
(25) Subsequent Events
The Company has evaluated subsequent events for recognition and disclosure through December
17, 2009, which was the date the Company filed this Form 10-K with the Securities and Exchange
Commission.
As of November 30, 2009, the fair market value of the Companys preneed funeral and cemetery
merchandise and services trusts and cemetery perpetual care trusts increased three percent, or
approximately $21,500, from October 31, 2009.
119
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(25) Subsequent Events(Continued)
In November 2009, the Company issued 90,000 shares of Class A common stock and paid
approximately $96 in cash to the independent directors of the Company. Each independent director
must hold all of the shares received until completion of service as a member of the Board of
Directors.
(26) Quarterly Financial Data (Unaudited)
Quarterly financial data for fiscal years 2009 and 2008 is presented below.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2009(1) |
|
First |
|
Second |
|
Third |
|
Fourth |
Revenues |
|
$ |
119,330 |
|
|
$ |
126,618 |
|
|
$ |
117,752 |
|
|
$ |
124,107 |
|
Gross profit |
|
|
23,083 |
|
|
|
25,595 |
|
|
|
19,333 |
|
|
|
19,729 |
|
Net earnings |
|
|
5,716 |
|
|
|
13,202 |
|
|
|
10,838 |
|
|
|
5,897 |
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.06 |
|
|
|
.14 |
|
|
|
.12 |
|
|
|
.06 |
|
Diluted |
|
|
.06 |
|
|
|
.14 |
|
|
|
.12 |
|
|
|
.06 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended October 31, 2008(2) |
|
First |
|
Second |
|
Third |
|
Fourth |
Revenues |
|
$ |
130,273 |
|
|
$ |
136,819 |
|
|
$ |
130,428 |
|
|
$ |
130,363 |
|
Gross profit |
|
|
27,070 |
|
|
|
35,634 |
|
|
|
27,998 |
|
|
|
10,115 |
|
Net earnings (loss) |
|
|
8,885 |
|
|
|
13,940 |
|
|
|
9,129 |
|
|
|
(35,647 |
) |
Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.09 |
|
|
|
.15 |
|
|
|
.10 |
|
|
|
(.39 |
) |
Diluted |
|
|
.09 |
|
|
|
.15 |
|
|
|
.10 |
|
|
|
(.39 |
) |
|
|
|
(1) |
|
First quarter of fiscal year 2009 includes a charge of $315 in net hurricane related
costs and an $88 charge for the estimated probable obligation to fund the cemetery perpetual
care trusts. Second quarter of fiscal year 2009 includes a charge of $205 related to net
hurricane related costs, $275 in separation charges, a $3,112 charge
related to the Companys estimated probable obligation to fund the cemetery perpetual care
trusts and an $8,671 gain on the early extinguishment of debt. Third quarter of fiscal year
2009 includes $(117) in net gains and dispositions and impairment (losses), a $23 charge related
to the Companys estimated probable obligation to fund the cemetery perpetual care trusts and an
$8,533 gain on the early extinguishment of debt. Fourth quarter of fiscal year 2009 includes a
net recovery of $186 related to hurricane related costs, a $199 charge related to the Companys
estimated probable obligation to fund the cemetery perpetual care trusts and a $2,874 gain on
the early extinguishment of debt. |
|
(2) |
|
First quarter of fiscal year 2008 includes a recovery of $159 in net hurricane
related costs and $147 in net gains on dispositions and impairment (losses). Second quarter
of fiscal year 2008 includes a charge of $169 related to net hurricane related costs. Third
quarter of fiscal year 2008 includes a charge of $341 related to net hurricane related costs.
Fourth quarter of fiscal year 2008 includes a charge of $1,946 related to net hurricane
related costs, $25,952 for goodwill impairment, a $13,281 charge related to the Companys
estimated probable obligation to fund the cemetery perpetual care trusts, a tax valuation
allowance of $7,400 and ($506) in net gains on dispositions and impairment (losses). |
Changes in the number of deaths can vary among local markets and from quarter to quarter, and
variations in the number of deaths in the Companys markets or from quarter to quarter are not
predictable. However, generally the number of deaths fluctuates with the seasons with more deaths
occurring during the winter months primarily resulting from pneumonia and influenza. These
variations can cause revenues to fluctuate.
120
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
None.
Item 9A. Controls and Procedures
Disclosure Controls and Procedures
The Company maintains disclosure controls and procedures that are designed to ensure that
information required to be disclosed in the reports that the Company files or submits under the
Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time
periods specified in the Securities and Exchange Commissions (SEC) rules and forms, and that
such information is accumulated and communicated to the Companys management, including its Chief
Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions regarding
required disclosure.
As of the end of the period covered by this report, the Company carried out an evaluation,
under the supervision and with the participation of the Companys Disclosure Committee and
management, including the Chief Executive Officer and the Chief Financial Officer, of the
effectiveness of disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based
upon this evaluation, the Chief Executive Officer and the Chief Financial Officer concluded that
the Companys disclosure controls and procedures were effective as of the end of the period covered
by this report.
Managements Report on Internal Control over Financial Reporting
Management of the Company is responsible for establishing and maintaining adequate internal
control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Securities
Exchange Act of 1934. The Companys internal control over financial reporting is a process designed
under the supervision of the Companys Chief Executive Officer and Chief Financial Officer to
provide reasonable assurance regarding the reliability of financial reporting and the preparation
of financial statements for external purposes in accordance with U.S. generally accepted accounting
principles.
Because of its inherent limitations, internal control over financial reporting may not prevent
or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are
subject to the risk that controls may become inadequate because of changes in conditions, or that
the degree of compliance with policies and procedures may deteriorate.
Management assessed the effectiveness of the Companys internal control over financial
reporting as of October 31, 2009. In making this assessment, management used the criteria described
in Internal Control Integrated Framework issued by the Committee of Sponsoring Organizations of
the Treadway Commission (COSO). Based on this assessment, management concluded that the Company
maintained effective internal control over financial reporting as of October 31, 2009.
The effectiveness of the Companys internal control over financial reporting as of October 31,
2009 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
As of November 1, 2008, the Company began the implementation of a new contract processing
system, which is an integrated software system targeted specifically to the death care industry in
areas such as customer data, billing information, products and services sold and/or delivered,
collections, accounts receivables and property inventory. As of July 31, 2009, the implementation
was completed in all of the Companys regions. In connection with this implementation, the Company
expects to improve its internal controls over financial reporting by increasing its reliance on
automated controls. During the year ended October 31, 2009, the Company supplemented its automated
internal controls with additional manual and detective controls as it implemented the new system.
There was a particular focus on revenue completeness and cut-off with additional manual and
analytic procedures
performed during the transition to the new system.
121
With the exception of this implementation described above, there have been no changes in the
Companys internal control over financial reporting during the year ended October 31, 2009 that
have materially affected, or are reasonably likely to materially affect, the Companys internal
control over financial reporting.
Item 9B. Other Information
None.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding executive officers required by Item 10 may be found under Item 4 of
this report.
We have adopted the Stewart Enterprises, Inc. Code of Business Conduct and Ethics (the
code), a code of ethics that applies to all employees, including our Chief Executive Officer,
Chief Financial Officer and Corporate Controller. The code is available at the Company website
where all of its public filings are available free of charge on the same day they are filed with
the SEC. The Companys website address is www.stewartenterprises.com. Any substantive amendments
to the code, or any waivers granted for any directors or our Chief Executive Officer, Chief
Financial Officer or Corporate Controller will be disclosed in a report on Form 8-K.
The remaining information required by Item 10 is incorporated by reference to the Registrants
definitive proxy statement relating to its 2010 annual meeting of shareholders, which proxy
statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the Registrants
definitive proxy statement relating to its 2010 annual meeting of shareholders, which proxy
statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
|
|
|
Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Equity Compensation Plan Information
The following table provides information about our common stock that may be issued under
equity compensation plans as of October 31, 2009:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of Securities |
|
|
|
|
|
|
|
|
|
|
|
Remaining Available For |
|
|
|
|
|
|
|
|
|
|
|
Future Issuance Under |
|
|
|
Number of Securities to be |
|
|
Weighted-Average |
|
|
Equity Compensation |
|
|
|
Issued Upon Exercise of |
|
|
Exercise Price of |
|
|
Plans (Excluding Securities |
|
|
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
Reflected in the First |
|
Plan Category |
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Column)(1) |
|
Equity compensation
plans approved by
security holders |
|
|
3,594,227 |
|
|
$ |
5.76 |
|
|
|
3,226,592 |
|
Equity compensation
plans not approved
by security holders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,594,227 |
|
|
$ |
5.76 |
|
|
|
3,226,592 |
|
|
|
|
(1) |
|
Includes 2,705,151 shares of our common stock under the 2007 Stock Incentive Plan,
which are issuable as stock appreciation rights, restricted stock, performance shares or stock
awards. This also includes 521,441 shares remaining to be granted under the 2003 Employee Stock Purchase Plan. |
122
The remaining information required by Item 12 is incorporated by reference to the Registrants
definitive proxy statement relating to its 2010 annual meeting of shareholders, which proxy
statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
Item 13. Certain Relationships and Related Transactions and Director Independence
The information required by Item 13 is incorporated by reference to the Registrants
definitive proxy statement relating to its 2010 annual meeting of shareholders, which proxy
statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
Item 14. Principal Accounting Fees and Services
The information required by Item 14 is incorporated by reference to the Registrants
definitive proxy statement relating to its 2010 annual meeting of shareholders, which proxy
statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements
The Companys consolidated financial statements listed below have been filed as part of this
report:
|
|
|
|
|
|
|
Page |
|
|
|
|
52 |
|
|
|
|
53 |
|
|
|
|
54 |
|
|
|
|
56 |
|
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
|
|
(2) Financial Statement Schedule for the years ended October 31, 2009, 2008 and 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
124 |
|
All other schedules are omitted because they are not applicable or not required, or the
information appears in the financial statements or notes thereto.
123
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SCHEDULE II VALUATION AND QUALIFYING ACCOUNTS
(Unaudited)
(Dollars in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
COLUMN A |
|
COLUMN B |
|
COLUMN C |
|
COLUMN D |
|
COLUMN E |
|
COLUMN F |
|
|
Balance at
beginning |
|
Charged to
costs and |
|
|
|
|
|
|
|
|
|
Balance at |
Description |
|
of period |
|
expenses |
|
Other changes |
|
Write-offs |
|
end of period |
CurrentAllowance for doubtful
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
7,215 |
|
|
|
3,407 |
|
|
|
|
|
|
|
(3,232 |
) |
|
$ |
7,390 |
|
2008 |
|
$ |
8,142 |
|
|
|
3,412 |
|
|
|
|
|
|
|
(4,339 |
) |
|
$ |
7,215 |
|
2007 |
|
$ |
6,635 |
|
|
|
4,188 |
|
|
|
|
|
|
|
(2,681 |
) |
|
$ |
8,142 |
|
|
Due after one yearAllowance for
doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
9,689 |
|
|
|
4,509 |
|
|
|
|
|
|
|
(4,420 |
) |
|
$ |
9,778 |
|
2008 |
|
$ |
10,824 |
|
|
|
4,583 |
|
|
|
|
|
|
|
(5,718 |
) |
|
$ |
9,689 |
|
2007 |
|
$ |
10,888 |
|
|
|
5,568 |
|
|
|
|
|
|
|
(5,632 |
) |
|
$ |
10,824 |
|
|
Deferred tax asset valuation allowance
|
|
|
Year ended October 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009 |
|
$ |
10,649 |
|
|
|
(455 |
) |
|
|
|
|
|
|
|
|
|
$ |
10,194 |
|
2008 |
|
$ |
4,032 |
|
|
|
6,617 |
|
|
|
|
|
|
|
|
|
|
$ |
10,649 |
|
2007 |
|
$ |
10,457 |
|
|
|
(1,595 |
) |
|
|
|
|
|
|
(4,830 |
) (1) |
|
$ |
4,032 |
|
|
|
|
(1) |
|
This is primarily related to the write-off of both the deferred tax asset and
related valuation allowance for a worthless stock deduction for which recognition was
determined to be remote in fiscal year 2007. |
Item 15(a)(3) Exhibits
3.1 |
|
Amended and Restated Articles of Incorporation of the Company, as amended and restated as of
April 3, 2008 (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended April 30, 2008) |
|
3.2 |
|
By-laws of the Company, as amended and restated as of September 8, 2008 (incorporated by
reference to Exhibit 3.2 to the Companys Quarterly Report on Form 10-Q for the quarter ended
July 31, 2008) |
|
4.1 |
|
See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and Restated Articles of
Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A
and Class B common stock |
|
4.2 |
|
Specimen of Class A common stock certificate (incorporated by reference to Exhibit 3 to the
Companys Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007) |
|
4.3 |
|
Second Amended and Restated Credit Agreement dated June 2, 2009 by and among the Company,
Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America,
N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The
Other Lenders party
thereto (incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form
8-K filed June 3, 2009) |
|
4.4 |
|
Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the
Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25
percent Senior Notes due 2013 |
124
|
|
(incorporated by reference to Exhibit 4.1 to the Companys
Current Report on Form 8-K filed February 14, 2005) |
|
4.5 |
|
Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K filed February 14, 2005) |
|
4.6 |
|
Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named
therein and U.S. Bank National Association, as Trustee, with respect to 3.125 percent Senior
Convertible Notes due 2014 (including Form of 3.125 percent Senior Convertible Notes due 2014)
(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K filed
June 27, 2007) |
|
4.7 |
|
Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named
therein and U.S. Bank National Association, as Trustee, with respect to 3.375 percent Senior
Convertible Notes due 2016 (including Form of 3.375 percent Senior Convertible Notes due 2016)
(incorporated by reference to Exhibit 4.2 to the Companys Current Report on Form 8-K filed
June 27, 2007) |
The Company hereby agrees to furnish to the Commission, upon request, a copy of the instruments
which define the rights of holders of the Companys long-term debt. None of such instruments
(other than those included as exhibits herein) represent long-term debt in excess of 10 percent of
the Companys consolidated total assets.
Management Contracts and Compensatory Plans or Arrangements
10.1 |
|
Form of Indemnity Agreement between the Company and its Directors and Executive Officers
(incorporated by reference to Exhibit 10.3 to the Companys Annual Report on Form 10-K for the
year ended October 31, 2004, filed January 11, 2005) (the Original 2004 Form 10-K); Form of
First Amendment to Indemnity Agreements between Stewart Enterprises, Inc. and its Directors
(incorporated by reference to Exhibit 10.5 to the Companys Quarterly Report on Form 10-Q for
the quarter ended July 31, 2008) |
|
10.2 |
|
Amended and Restated Employment Agreement between the Company and Thomas J. Crawford dated
December 16, 2008 (incorporated by reference to Exhibit 10.3 to
the Companys Annual Report on Form 10-K for the year ended
October 31, 2008) |
|
10.3 |
|
Amended and Restated Employment Agreement between the Company and Thomas M. Kitchen dated
December 16, 2008 (incorporated by reference to Exhibit 10.4 to
the Companys Annual Report on Form 10-K for the year ended
October 31, 2008) |
|
10.4 |
|
Retirement Agreement dated October 26, 2006, effective November 2, 2006, between the Company
and Everett N. Kendrick (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed November 3, 2006) |
|
10.5 |
|
Form of Stock Option Agreement between the Company and its Executive Officers (incorporated
by reference to Exhibit 10.27 to the Original 2004 Form 10-K) |
|
10.6 |
|
Form of Restricted Stock Agreement between the Company and its Executive Officers
(incorporated by reference to Exhibit 10.28 to the Original 2004 Form 10-K) |
|
10.7 |
|
Form of Restricted Stock Agreement under the Stewart Enterprises, Inc. 2007 Stock Incentive
Plan between the Company and its Executive Officers (incorporated by reference to Exhibit 10.9
to the Companys Annual Report on Form 10-K for the year ended October 31, 2007) |
|
10.8 |
|
Form of Stock Option Agreement under the Stewart Enterprises, Inc. 2007 Stock Incentive Plan
between the Company and its Executive Officers (incorporated by reference to Exhibit 10.10 to
the Companys Annual Report on Form 10-K for the year ended October 31, 2007) |
125
10.9 |
|
Confirmation of OTC Convertible Note Hedge dated as of June 21, 2007 by and between Stewart
Enterprises, Inc. and Merrill Lynch International (incorporated by reference to Exhibit 10.2
to the Companys Current Report on Form 8-K filed June 27, 2007) |
|
10.10 |
|
Confirmation of OTC Convertible Note Hedge dated as of June 21, 2007 by and between Stewart
Enterprises, Inc. and Merrill Lynch International (incorporated by reference to Exhibit 10.3
to the Companys Current Report on Form 8-K filed June 27, 2007) |
|
10.11 |
|
Confirmation of OTC Warrant Transaction dated as of June 21, 2007 by and between Stewart
Enterprises, Inc. and Merrill Lynch Financial Markets (incorporated by reference to Exhibit
10.4 to the Companys Current Report on Form 8-K filed June 27, 2007) |
|
10.12 |
|
Confirmation of OTC Warrant Transaction dated as of June 21, 2007 by and between Stewart
Enterprises, Inc. and Merrill Lynch Financial Markets (incorporated by reference to Exhibit
10.5 to the Companys Current Report on Form 8-K filed June 27, 2007) |
|
10.13 |
|
Stewart Enterprises, Inc. 2007 Stock Incentive Plan (incorporated by reference to Appendix A
to the Companys definitive proxy statement for the year ended October 31, 2006) |
|
10.14 |
|
Amended and Restated Stewart Enterprises, Inc. Executive Officer Annual Incentive Plan
(incorporated by reference to Exhibit 10.2 to the Companys Quarterly Report on Form 10-Q for
the quarter ended January 31, 2009) |
|
10.15 |
|
Amended and Restated 2003 Employee Stock Purchase Plan (incorporated by reference to Exhibit
10.3 to the Companys Annual Report on Form 10-K for the year ended October 31, 2006) |
|
10.16 |
|
2000 Incentive Compensation Plan (incorporated by reference to Exhibit 10.45 to the
Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2000, Commission
File No. 1-5449) |
|
10.17 |
|
Amended and Restated Stewart Enterprises, Inc. Retention Plan and Summary Plan Description
effective August 1, 2008 (incorporated by reference to Exhibit 10.4 to the Companys Quarterly
Report on Form 10-Q for the quarter ended July 31, 2008) |
|
10.18 |
|
Amended and Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred
Compensation Plan effective January 1, 2008 (incorporated by
reference to Exhibit 10.20 to the Companys Annual Report on
Form 10-K for the year ended October 31, 2008); Amendment No. 1 to the Amended and Restated
Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan effective
December 17, 2008 (incorporated by reference to Exhibit 10.1 to the Companys Quarterly Report
on Form 10-Q for the quarter ended January 31, 2009) |
|
10.19 |
|
Amended and Restated Stewart Enterprises, Inc. Supplemental Executive Retirement Plan
effective January 1, 2008 (incorporated by
reference to Exhibit 10.21 to the Companys Annual Report on
Form 10-K for the year ended October 31, 2008); Amendment No. 1 to the Amended and Restated Stewart Enterprises,
Inc. Supplemental Executive Retirement Plan effective January 26, 2009 (incorporated by
reference to Exhibit 10.3 to the Companys Quarterly Report on Form 10-Q for the quarter ended
January 31, 2009) |
|
10.20 |
|
Retirement Agreement by and between the Company and Brent F. Heffron dated March 13, 2009
(incorporated by reference to Exhibit 10.1 to the Companys Current Report on Form 8-K filed
March 17, 2009) |
|
|
12 |
|
Calculation of Ratio of Earnings to Fixed Charges |
|
21 |
|
Subsidiaries of the Company |
126
23 |
|
Consent of PricewaterhouseCoopers LLP |
|
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford,
President and Chief Executive Officer |
|
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior
Executive Vice President and Chief Financial Officer |
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford,
President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President
and Chief Financial Officer |
127
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934,
the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto
duly authorized on December 17, 2009.
|
|
|
|
|
|
STEWART ENTERPRISES, INC.
|
|
|
By: |
/s/ THOMAS J. CRAWFORD
|
|
|
|
Thomas J. Crawford |
|
|
|
President, Chief Executive Officer and a Director |
|
|
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been
signed by the following persons on behalf of the Registrant and in the capacities and on the dates
indicated.
|
|
|
|
|
Signature |
|
Title |
|
Date |
|
|
|
|
|
/s/ THOMAS J. CRAWFORD
Thomas J. Crawford
(Principal Executive Officer)
|
|
President, Chief Executive Officer
and a Director
|
|
December 17, 2009 |
|
|
|
|
|
/s/ THOMAS M. KITCHEN
Thomas M. Kitchen
(Principal Financial Officer)
|
|
Senior Executive Vice President,
Chief Financial Officer and a
Director
|
|
December 17, 2009 |
|
|
|
|
|
/s/ ANGELA M. LACOUR
Angela M. Lacour
(Principal Accounting Officer)
|
|
Vice President,
Corporate Controller and
Chief Accounting Officer
|
|
December 17, 2009 |
|
|
|
|
|
/s/ FRANK B. STEWART, JR.
Frank B. Stewart, Jr.
|
|
Chairman of the Board
|
|
December 17, 2009 |
|
|
|
|
|
/s/ ALDEN J. McDONALD, JR.
Alden J. McDonald, Jr.
|
|
Director
|
|
December 17, 2009 |
|
|
|
|
|
/s/ JAMES W. McFARLAND
James W. McFarland
|
|
Director
|
|
December 17, 2009 |
|
|
|
|
|
/s/ RONALD H. PATRON
Ronald H. Patron
|
|
Director
|
|
December 17, 2009 |
|
|
|
|
|
/s/ MICHAEL O. READ
Michael O. Read
|
|
Director
|
|
December 17, 2009 |
|
|
|
|
|
/s/ ASHTON J. RYAN, JR.
Ashton J. Ryan, Jr.
|
|
Director
|
|
December 17, 2009 |
128
Exhibit Index
12 |
|
Calculation of Ratio of Earnings to Fixed Charges |
|
21 |
|
Subsidiaries of the Company |
|
23 |
|
Consent of PricewaterhouseCoopers LLP |
31.1 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford,
President and Chief Executive Officer |
|
31.2 |
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior
Executive Vice President and Chief Financial Officer |
|
32.1 |
|
Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford,
President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President
and Chief Financial Officer |
-129-