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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, 2010
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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) |
Registrant’s 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
Class A Common Stock, No Par Value
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Name of each Exchange on which registered
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 Act. 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 registrant’s knowledge, in
definitive proxy or information statements incorporated by reference in Part III of this Form 10-K
or any amendment to this Form 10-K. 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 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, 2010, was approximately $547,000,000.
The number of shares of the registrant’s Class A common stock, no par value per share, and
Class B common stock, no par value per share, outstanding as of November 30, 2010, was 87,973,659
and 3,555,020, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement in connection with the 2011 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
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 and cremation 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, 2010, our operations included 217 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 120 funerals and 150 burials
per year, our facilities perform an average of approximately 250 funerals and 335 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 and cremation
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. 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 55 percent of our revenues for fiscal year 2010.
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 contracts and local laws. Cemetery
operations accounted for approximately 45 percent of our revenues for fiscal
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year 2010, 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 family’s
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 the future. 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
its parishioners. 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 Firemen’s 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, 2010, 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 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
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counselors. We estimate that as of October 31, 2010 and October 31, 2009, the future value of
our preneed backlog of funeral and cemetery products and services (including estimated future
earnings on funds held in trust and the current face value of third-party insurance contracts, in
each case using a weighted annual projected return of approximately 4 percent from our trusts for
fiscal years 2010 and 2009 and zero percent for increasing death benefits as it is at the
discretion of the insurance company), 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 “Management’s 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 between 10
percent and 15 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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
included in Item 7.
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. “Management’s
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, 2010, ITI managed assets with a market value of approximately
$785.8 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 asset allocation, investment
quality requirements, 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 “Management’s Discussion and Analysis
of Financial Condition and Results of Operations” in Item 7.
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
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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 2010, 2009 and 2008, 42 percent, 41 percent
and 40 percent, respectively, of the funeral services we performed in our operations were
cremations. According to industry estimates, 36 percent of funeral services in the United States
during 2008 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. During fiscal year 2010, we began a
program of improving our cremation property and merchandise product offerings. We intend 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. During fiscal year 2009, we began using the Internet to create new sales channels
and new consumer relationships, and are continuing that initiative. While we did not earn
significant revenue from this activity in 2010, 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 certain 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.
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
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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 being implemented in
fiscal years 2010 and 2011. Also, over the last two years, we implemented a new supplier invoice
processing system that has streamlined the way we route, code and approve invoices for payment.
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 2010, 2009 and 2008, 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 “Manage for Cash, Invest for Growth” 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, key metrics include the number of funeral calls and amount of preneed
sales. If funeral calls or preneed sales 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 and preneed sales. 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. The ultimate goal is organic growth and
increased profitability.
Part of “Best in Class” includes operational improvements. 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.”
Additionally through our “Best in Class” initiative, 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 resources to it. For additional information, see
“Operations — Enhanced cremation offerings.” We are also working to expand our third-party
affiliations.
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.com is still a start-up company, we believe it will have
significant benefits to our company, the industry and the families we serve. Additionally, during
fiscal year 2009, we began using the websites of our businesses to create new sales channels. For
additional information, see “Operations—E-Commerce.”
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Finally, we are “Managing for Cash, Investing for Growth.” This includes strengthening our
balance sheet, supporting our base businesses, growing through prudent acquisitions and supporting
new invention. The acquisition component of our strategic plan is to acquire businesses and
implement our “Best in Class” practices in them. We will evaluate acquisition opportunities that
make sense for our business strategy at prices we believe will result in satisfactory returns to
our shareholders.
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
board’s confidence in our company’s solid balance sheet and ability to continue to generate cash
flow, our board increased our annual cash dividend by 20 percent to $0.12 per share in September
2009. During fiscal years 2009 and 2010, we repurchased $82.6 million and $35.9 million,
respectively, principal amount of our outstanding senior convertible notes at a significant
discount to their par value. Since the inception of the debt repurchase program in fiscal year
2009, we have repurchased the senior convertible notes at $26.5 million less than face value and
have produced $3.8 million of annual cash interest savings. During fiscal year 2010, we also
repurchased 0.8 million shares of our stock under our stock repurchase program for approximately
$4.0 million. During fiscal year 2011, we plan to complete the construction of 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 March 2010, SCI acquired 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 years 2000 through 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, 2009 and 2010, we focused on our new long-term strategic plan and on implementing new
business 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 2.5 million in 2008 to 2.9 million in 2020. 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 resources to it. For additional information,
including information about our strategies to address this trend, see “Operations—Enhanced
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 FTC’s Trade Regulation Rule on Funeral Industry Practices, 16 CFR Part 453 (the “Funeral
Rule”), which went into effect on April 30, 1984, and was revised effective July 19, 1994. The
Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain
requirements to prevent these 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 was reported favorably by the Energy and
Commerce Committee on July 21, 2010, and an estimate of its
9
cost was submitted by the Congressional Budget Office on September 8, 2010. The full House of
Representatives has not voted on this bill at this time. We cannot predict the effect this
legislation might have on us if passed.
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, 2010, we employed approximately 5,200 persons (including approximately 4,000
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 SEC’s website address is www.sec.gov.
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 2010, 2009 and 2008, cemetery perpetual care trust earnings, funeral and
cemetery merchandise and services trust earnings and ITI trust management fees comprised 6 percent,
6 percent and 7 percent of our revenue, respectively, and 30 percent, 31 percent and 36 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,
consistent with overall market declines during that time period. During fiscal year 2010, our
preneed funeral and cemetery merchandise and services trusts experienced a total return of 14.2
percent, and our cemetery perpetual care trust experienced a total return of 15.1 percent.
However, these improved returns did not restore all of the market value lost during fiscal year
2008 and early 2009. On October 31, 2007, the aggregate market value of our trust portfolio was
$926.7 million, and on October 31, 2010, it was $795.4 million. 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 2010, we recognized $1.4 million more in
revenue than we did in fiscal year 2009 from trust-related activities, or $30.7 million in fiscal
year 2010 compared to $29.3 million in fiscal year 2009. By comparison, in fiscal year 2007, we
recognized $38.5 million from trust-related activities. Based on current market conditions as of
October 31, 2010, 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 2011 would be about the same as for fiscal year 2010. If market conditions further
deteriorate or we experience additional realized losses, trust-related revenue would likely further
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, 2010, the fair market
value of the investments in the trusts of $565.0 million was $138.6 million lower than our cost
basis of $703.6 million. In most of our trusts, unrealized gains and losses are not allocated to
individual contracts, in accordance with our trust agreements; 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, 2010, we had $212.1 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 2010 and 2009, funeral trust earnings included in our reported
revenue amounted to $11.3 million, and cemetery merchandise and service trust earnings amounted to
$2.6 million and $3.2 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, 2010, 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.
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Approximately one-half of the October 31, 2010 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 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 2010 and 2009, the trusts for which we are the grantor realized net
losses for book purposes of $1.0 million and $5.1 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 and
were able to reduce the allowance by $1.8 million in fiscal year 2010. 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, 2010, we have approximately $96.4 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 $38.6 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 to 15
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 respective 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 funding
obligation resulting from previously realized capital losses, which is discussed below. 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 2010, earnings in these trusts
contributed $7.4 million to cemetery revenue, which includes $2.1 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 2010 which is lower than we have historically earned.
In our cemetery perpetual care trusts, at October 31, 2010, the fair market value of our
investments of $230.4 million was $41.0 million lower than our cost basis of $271.4 million. If we
realize losses in our cemetery
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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.
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, 2010, $13.3 million was recorded for the estimated probable funding obligation.
As of October 31, 2010, we had net unrealized losses of $36.4 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, 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, 2010, the realized net capital loss in these trusts was $2.5 million, and the
unrealized loss was $4.6 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 2010, we recognized and
withdrew $2.1 million of net realized capital gains in cemetery perpetual care trusts. Currently,
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. We are currently transitioning all
cemetery perpetual care trusts to a more diversified asset allocation that emphasizes higher levels
of current income while preserving capital. 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 additional 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 2010, 2009 and 2008, ITI trust management fees collected were
approximately $9.4 million, $8.0 million and $10.0 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 environment.
As of October 31, 2010, approximately 20 percent of our preneed funeral and cemetery
merchandise and services trust portfolios and 30 percent of our cemetery perpetual care trust
portfolios are invested in the financials sector. For the preneed funeral and cemetery merchandise
and services trust portfolio financial sector investments, approximately 57 percent was invested in
preferred stock, 29 percent in fixed-income securities and 14 percent in common stock investments.
For the cemetery perpetual care trust portfolio financial sector investments, approximately 68
percent was invested in preferred stock, 26 percent in fixed-income securities and six percent in
common stock investments. The current economic environment may result in greater declines to the
fair market value of our investments in this and other sectors as compared to the performance of
our overall trust portfolio
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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, see the section titled “Preneed-Backlog, Trust Portfolio and Cash Impact of Sales”
included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations”
in Item 7.
A weakened 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 weakened economy that causes customers to reduce discretionary spending could cause, and we
believe has caused, 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 weakened 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 weakened 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, 2010 was $530.4 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 weakness and financial and stock market declines could reduce future potential
earnings and cash flows and could result in future goodwill impairments.
As of October 31, 2010, goodwill amounted to $247.0 million, consisting of $198.3 million in
the funeral segment and $48.7 million in the cemetery segment. Our cemetery segment tends to be
more sensitive to goodwill impairments because it has 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 in 2012, on which no amounts
were drawn as of October 31, 2010, and $331.5 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
14
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.
Our same-store funeral call volumes have not increased 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 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 2006
to 2010, we experienced same-store funeral call volume changes of (0.2) percent, (2.2) percent, 0
percent, (5.9) percent and (2.1) 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.
15
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 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. On March 23, 2010, the Patient Protection and
Affordable Care Act became law, and one week later, the Health Care and Education Reconciliation
Act of 2010 became effective, together enacting comprehensive health care reform in the United
States. The legislation is likely to increase our health care costs. Many provisions of the law
that could impact our business will not become effective until 2014, or later, and require
implementation through regulations that have not yet been promulgated. Accordingly, the costs and
other effects of the legislation, which may include the cost of compliance and potentially
increased costs of providing for medical insurance for our employees, cannot be determined with
certainty at this time. We incurred additional costs in fiscal year 2010 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, 2010. 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, 2010, our Chairman, Frank B. Stewart, Jr., held 7,200,236 shares (or
approximately 8.1 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
16
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.
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.
17
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 and 2010 repurchases of our senior
convertible notes, the number of shares of Class A common stock subject to the warrants was reduced
to 6.9 million related to the senior convertible notes due in 2014 and 3.6 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.
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.
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.
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
18
“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 2008 to 2020, 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.
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 36 percent in 2008. In fiscal years 2008,
2009 and 2010, 40 percent, 41 percent and 42 percent, respectively, of the funeral services we
performed in our operations were cremations, and 56 percent, 56 percent and 64 percent of those
were direct cremations, respectively. 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
19
cemetery operations and lower revenues and profit margins for funeral operations when
delivered through a traditional funeral home. During fiscal years 2007 through 2010, 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 and have begun a program of enhancing our cremation
memorialization offerings. 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 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 was reported favorably by the Energy and Commerce
Committee on July 21, 2010, and an estimate of its cost was submitted by the Congressional Budget
Office on September 8, 2010. The full House of Representatives has not voted on this bill at this
time.
|
|
|
| Item 1B. |
|
Unresolved Staff Comments |
None.
20
The following table shows the number of funeral homes and cemeteries we operated in each of
our operating segments as of October 31, 2010:
| |
|
|
|
|
|
|
| |
|
Number of |
|
|
| Operating Segment |
|
Locations |
|
Geographic Areas |
Funeral
|
|
|
217 |
|
|
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 |
|
|
|
|
|
|
|
|
|
|
357 |
|
|
|
|
|
|
|
|
|
|
As of October 31, 2010, approximately 77 percent of our 217 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 20 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, 2010, 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 |
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.
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.
21
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
|
|
|
57 |
|
|
President, Chief Executive Officer and Director(1) |
|
|
|
|
|
|
|
Thomas M. Kitchen
|
|
|
63 |
|
|
Senior Executive Vice President, Chief Financial Officer and Director(2) |
|
|
|
|
|
|
|
Lawrence B. Hawkins
|
|
|
62 |
|
|
Executive Vice President and President—Investors Trust, Inc. |
|
|
|
|
|
|
|
Martin de Laurèal
|
|
|
59 |
|
|
Senior Vice President of Corporate Development and Investor Relations(3) |
|
|
|
|
|
|
|
Lewis J. Derbes, Jr.
|
|
|
39 |
|
|
Senior Vice President of Finance, Treasurer and Secretary(4) |
|
|
|
|
|
|
|
Christine Hunsaker
|
|
|
44 |
|
|
Senior Vice President of Cremation(5) |
|
|
|
|
|
|
|
Kenneth G. Myers, Jr.
|
|
|
53 |
|
|
Senior Vice President of Operations(6) |
|
|
|
|
|
|
|
G. Kenneth Stephens, Jr.
|
|
|
49 |
|
|
Senior Vice President of Sales(7) |
|
|
|
|
|
|
|
Larry Merington
|
|
|
56 |
|
|
Vice President of Strategic Market Development(8) |
|
|
|
|
|
|
|
Lisa T. Winningkoff
|
|
|
43 |
|
|
Vice President and Senior Administrative Officer(9) |
|
|
|
|
|
|
|
Angela M. Lacour
|
|
|
38 |
|
|
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. |
| |
| (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. Crawford’s 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 Avondale’s
acquisition by Litton Industries, which was |
22
|
|
|
| |
|
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 Kirschman’s 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, SCI’s 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, Batesville’s
cremation company. |
| |
| (6) |
|
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. |
| |
| (7) |
|
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. |
| |
| (8) |
|
On August 9, 2010, Mr. Merington was appointed Vice President of Strategic Market
Development. From March 2009 through August 9, 2010, he was 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 through 2001, he served various senior management roles at
Browning-Ferris Industries before becoming president of its Gas Services Division. |
| |
| (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 Company’s
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 |
23
|
|
|
| |
|
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 Registrant’s 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, 2010, the closing sale price as reported by the NASDAQ Stock Market was $5.67. 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, 2010, there were 942 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 2010 |
|
|
|
|
|
|
|
|
Fourth Quarter |
|
$ |
5.74 |
|
|
$ |
4.60 |
|
Third Quarter |
|
|
6.99 |
|
|
|
4.99 |
|
Second Quarter |
|
|
6.87 |
|
|
|
4.50 |
|
First Quarter |
|
|
5.47 |
|
|
|
4.38 |
|
|
|
|
|
|
|
|
|
|
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 |
|
There is no established public trading market for our Class B common stock. As of October 31,
2010, 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, 2010, 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 paid a quarterly cash dividend of two and one-half cents per share for its Class A
and Class B common stock from April 2005 through June 2009, 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 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.
24
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 2010.
Issuer Purchases of Equity Securities
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Total number of |
|
|
Maximum approximate |
|
| |
|
|
|
|
|
|
|
|
|
shares purchased as |
|
|
dollar value of shares |
|
| |
|
Total number |
|
|
Average price |
|
|
part of publicly |
|
|
that may yet be |
|
| |
|
of shares |
|
|
paid per |
|
|
announced |
|
|
purchased under the |
|
| Period |
|
purchased |
|
|
share |
|
|
plans or programs(1) |
|
|
plans or programs(1) |
|
August 1, 2010
through August 31,
2010 |
|
|
— |
|
|
$ |
— |
|
|
|
— |
|
|
$ |
26,495,706 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
September 1, 2010
through September
30, 2010 |
|
|
152,900 |
|
|
$ |
5.10 |
|
|
|
152,900 |
|
|
$ |
25,716,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
October 1, 2010
through October 31,
2010 |
|
|
590,362 |
|
|
$ |
5.51 |
|
|
|
590,362 |
|
|
$ |
22,461,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
743,262 |
|
|
$ |
5.43 |
|
|
|
743,262 |
|
|
$ |
22,461,704 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
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, 2010, we had repurchased 7.4 million shares for $52.5 million at
an average price of $7.12 per share and have $22.5 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, 2006 through October 31, 2010. The data for fiscal years 2006 through 2009 have been
reclassified to reflect certain businesses as discontinued operations under the provisions of
Accounting Standards Codification 360 — Property, Plant and Equipment (“ASC 360”) as discussed in
footnote 1 to the table below. In addition, the data for fiscal years 2006 through 2009 reflects
the required retrospective adoption of accounting guidance related to convertible debt instruments
and participating securities as described in footnote 1 to the table below. The data set forth
below should be read in conjunction with our consolidated financial statements and the notes
thereto included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” included in Item 7.
25
Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31,(1) |
|
| |
|
2010(2) |
|
|
2009(3) |
|
|
2008(4) |
|
|
2007(5) |
|
|
2006(6) |
|
Statement of Earnings Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
$ |
499,907 |
|
|
$ |
486,379 |
|
|
$ |
526,246 |
|
|
$ |
521,332 |
|
|
$ |
512,709 |
|
Total gross profit |
|
$ |
96,204 |
|
|
$ |
87,619 |
|
|
$ |
100,607 |
|
|
$ |
112,307 |
|
|
$ |
114,440 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
30,569 |
|
|
$ |
23,191 |
|
|
$ |
(7,468 |
) |
|
$ |
38,038 |
|
|
$ |
37,469 |
|
Earnings from discontinued operations |
|
|
409 |
|
|
|
75 |
|
|
|
134 |
|
|
|
577 |
|
|
|
124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
30,978 |
|
|
$ |
23,266 |
|
|
$ |
(7,334 |
) |
|
$ |
38,615 |
|
|
$ |
37,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Per Share Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
|
$ |
.36 |
|
|
$ |
.35 |
|
Earnings from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
.01 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
|
$ |
.37 |
|
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
|
$ |
.36 |
|
|
$ |
.35 |
|
Earnings from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
.01 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
|
$ |
.37 |
|
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
.12 |
|
|
$ |
.105 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, |
| |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,142,866 |
|
|
$ |
2,099,004 |
|
|
$ |
2,087,306 |
|
|
$ |
2,419,716 |
|
|
$ |
2,380,577 |
|
Long-term debt, less current maturities |
|
|
314,027 |
|
|
|
339,721 |
|
|
|
402,291 |
|
|
|
396,620 |
|
|
|
374,020 |
|
Shareholders’ equity |
|
|
425,484 |
|
|
|
408,657 |
|
|
|
396,232 |
|
|
|
457,554 |
|
|
|
446,893 |
|
Selected Consolidated Operating Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
| |
|
2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral homes in operation at end of period |
|
|
217 |
|
|
|
218 |
|
|
|
221 |
|
|
|
221 |
|
|
|
229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At-need funerals performed |
|
|
34,652 |
|
|
|
35,581 |
|
|
|
37,589 |
|
|
|
38,072 |
|
|
|
38,937 |
|
Prearranged funerals performed |
|
|
19,795 |
|
|
|
19,984 |
|
|
|
21,436 |
|
|
|
21,275 |
|
|
|
21,799 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funerals performed |
|
|
54,447 |
|
|
|
55,565 |
|
|
|
59,025 |
|
|
|
59,347 |
|
|
|
60,736 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prearranged funerals sold |
|
|
26,656 |
|
|
|
26,966 |
|
|
|
28,390 |
|
|
|
29,953 |
|
|
|
30,738 |
|
Backlog of prearranged funerals at end of
period |
|
|
331,374 |
(7) |
|
|
331,041 |
|
|
|
329,085 |
|
|
|
329,617 |
|
|
|
333,592 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries in operation at end of period |
|
|
140 |
|
|
|
140 |
|
|
|
139 |
|
|
|
139 |
|
|
|
143 |
|
|
|
|
| (1) |
|
Effective November 1, 2005, we began recording share-based compensation costs
using the modified prospective application transition method. |
| |
| |
|
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. |
26
|
|
|
| |
|
Effective November 1, 2009, we adopted FASB issued guidance regarding the accounting for
convertible debt instruments that may be settled in cash upon conversion. This guidance applies
to our senior convertible notes, which were originally issued in 2007, and was required to be
applied retrospectively to all periods presented. For additional information, see Note 3 to the
consolidated financial statements. |
| |
| |
|
Effective November 1, 2009, we adopted FASB issued guidance on determining whether instruments
granted in share-based payment transactions are participating securities. This guidance was
required to be applied retrospectively to all periods presented. See Note 3 to the consolidated
financial statements for additional information. |
| |
| |
|
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. |
| |
| (2) |
|
During fiscal year 2010, we recorded the following items: |
| |
• |
|
$0.6 million in gains on dispositions recorded in discontinued operations (see Note 12
of the consolidated financial statements). |
| |
| |
• |
|
$1.0 million charge for the loss on early extinguishment of debt due to open market
purchases of our senior convertible notes (see Note 15 to the consolidated financial
statements). |
| (3) |
|
During fiscal year 2009, we recorded the following items: |
| |
• |
|
$6.2 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). |
| (4) |
|
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. |
| |
| |
• |
|
$2.3 million in net hurricane related expenses related to Hurricanes Ike and Katrina
(see Note 23 to the consolidated financial statements). |
| (5) |
|
During fiscal year 2007, we recorded the following items: |
| |
• |
|
$0.7 million charge for the loss on early extinguishment of debt as a result of the
refinancing in connection with our senior convertible debt transaction. |
| |
| |
• |
|
$2.5 million in net hurricane related expenses related to Hurricane Katrina. |
| |
| |
• |
|
$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. |
| (6) |
|
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. |
| (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, 2010, 57 percent of |
27
| |
|
our preneed funeral backlog is comprised of trust-funded contracts and 43 percent is
insurance-funded contracts. |
Item 7. Management’s 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, 2010, we owned and operated 217 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.
As of November 1, 2009, we adopted guidance regarding the accounting for our 2014 and 2016
senior convertible notes and applied the change retrospectively for all periods presented. For
further information on the impact of the accounting change on our consolidated statements of
earnings and balance sheet, see Note 3 and Note 15 to the consolidated financial statements
included in Item 8. In addition, during the fourth quarter of fiscal year 2010, we sold one small
funeral business for a gain of $0.4 million, net of taxes, which is included in discontinued
operations. For further information on the impact of discontinued operations on our consolidated
statements of earnings and balance sheet, see Note 12 to the consolidated financial statements
included in Item 8.
General
By focusing on our long-term strategic plan, we maintained a strong balance sheet and improved
revenue and earnings during fiscal year 2010. We reported earnings from continuing operations of
$30.6 million, or $.33 per diluted share, and total revenue of $499.9 million in fiscal year 2010,
compared to earnings from continuing operations of $23.2 million, or $.25 per diluted share, and
total revenue of $486.4 million in fiscal year 2009. We generated $63.4 million in operating cash
flow. We repurchased $35.9 million aggregate principal amount of our senior convertible notes in
the open market at $4.5 million less than their face value, producing annual cash interest savings
of $1.2 million. We repurchased 0.8 million shares of our Class A common stock for approximately
$4.0 million through our stock repurchase program. We yielded a combination of refunds and
reductions of income tax payments totaling approximately $14.7 million primarily due to our tax
planning strategies.
Our operating results through fiscal year 2010 were positively affected by the overall
improvement in the economy. In particular, we experienced a 9.1 percent increase in merchandise
delivered and a 5.5 percent increase in our cemetery property sales. During the fourth quarter of
2010, we achieved the highest quarterly merchandise deliveries in two years. In contrast, net
preneed funeral sales declined 3.9 percent for fiscal year 2010. While preneed funeral sales
decreased from the prior year, our goal is for preneed funeral sales to exceed preneed maturities,
and for fiscal year 2010 preneed funeral sales exceeded preneed deliveries by $17.8 million, or 1.2
times.
During fiscal year 2010, same-store funeral services declined 2.1 percent. We continue to
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 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. In addition, during fiscal year 2010, we began a program of improving our
cremation inventory and product offerings. For the year ended October 31, 2010, we achieved a 1.0
percent increase in our average revenue per traditional funeral service and a 3.1 percent increase
in our average
28
revenue per cremation service. Additional information about our business and strategies can be
found in Item 1. “Business.”
Throughout the latter part of fiscal year 2008 and the early part of fiscal year 2009, the
adverse financial market conditions caused a decrease in our revenue from trust-related activities.
During fiscal year 2009, we recognized approximately $8.8 million less revenue from trust-related
activities than we did in fiscal year 2008. Due to the improvement in the overall economy, we
recognized $1.4 million more revenue from trust-related activities in fiscal year 2010 than we did
in fiscal year 2009. Though we have not reached the trust related revenue levels we had prior to
the downturn in the overall economy, our trends appear to be improving. Based on current market
conditions as of October 31, 2010, we believe our revenues from trust related activities for fiscal
year 2011 would be consistent with fiscal year 2010. With the improvements in the financial
markets during 2010, our trust portfolios had a total return of 14.2 percent in our preneed funeral
and cemetery merchandise and services trusts and a 15.1 percent return in our cemetery perpetual
care trusts. During late fiscal 2008, we engaged a new investment consultant to review the
portfolio. We reviewed alternative asset allocation models and selected a new asset allocation
that emphasizes diversification and reduces volatility. As a result, we have taken advantage of
the rebound in the financial markets to rebalance the trust portfolio. In fiscal year 2009, we
reduced our exposure to common equities and increased our investment in fixed income securities
with the intent 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.
Financial Summary for Fiscal Year 2010
For fiscal year 2010, net earnings were $31.0 million compared to net earnings of $23.3
million for fiscal year 2009. Fiscal year 2010 earnings from continuing operations increased $7.4
million to $30.6 million compared to $23.2 million for fiscal year 2009. Net earnings for fiscal
year 2010 included a $1.0 million net loss on early extinguishment of debt, compared to a $6.2
million net gain on early extinguishment of debt for fiscal year 2009, related to our open market
repurchases of our senior convertible notes during fiscal years 2010 and 2009. During fiscal year
2010, we repurchased $35.9 million aggregate principal amount of our senior convertible notes in
the open market at $4.5 million less than their face value, producing annual cash interest savings
of $1.2 million. Fiscal year 2009 included a $3.4 million charge related to our probable funding
obligation related to our perpetual care trusts.
Total revenue increased $13.5 million to $499.9 million for fiscal year 2010. Funeral revenue
increased $1.0 million to $275.9 million from $274.9 million in fiscal year 2009. Our same-store
funeral operations experienced a 1.0 percent increase in average revenue per traditional funeral
service and a 3.1 percent increase in average revenue per cremation service. These increases were
partially offset by a shift-in-mix to lower-priced cremation services resulting in an overall
increase of 0.6 percent in same-store average revenue per funeral service. The increase in
same-store average revenue per funeral service was partially offset by a 2.1 percent decrease in
same-store funeral services performed, which we believe is generally consistent with industry-wide
data in our markets. For the year ended October 31, 2010 we had a 3.9 percent decrease in net
preneed funeral sales. While preneed funeral sales decreased from the prior year, our goal is for
preneed funeral sales to exceed preneed maturities, and for fiscal year 2010 preneed funeral sales
exceeded preneed deliveries by $17.8 million, or 1.2 times. Preneed funeral sales are deferred
until the underlying contracts are performed and have no impact on current revenue.
Cemetery revenue increased $12.5 million, or 5.9 percent, to $224.0 million primarily due to a
$5.0 million, or 5.5 percent, increase in cemetery property sales and a $3.6 million, or 9.1
percent, increase in cemetery merchandise delivered. In addition, we experienced a $2.3 million
improvement in the reserve for cancellations and a $1.0 million increase in cemetery property
revenue due to the timing of revenue recognition for cemetery property sales.
Consolidated gross profit increased $8.6 million to $96.2 million due to an $8.5 million
increase in cemetery gross profit and a $0.1 million increase in funeral gross profit. Cemetery
gross profit was $31.1 million for fiscal year 2010, and was positively impacted by $1.1 million of
perpetual care withdrawals related to prior year cancellations which we used to offset our deposit
requirement. This compares to $22.6 million of cemetery gross profit for fiscal year 2009, which
included a $3.4 million charge to record a probable funding obligation related to
29
our perpetual care trusts. The increase in cemetery gross profit is primarily due to the
increase in revenue, as noted above.
Corporate general and administrative expenses decreased $2.9 million to $27.8 million for
fiscal year 2010 primarily due to a decrease in training costs related to the implementation of a
new business system in the prior year, coupled with a decline in incentive compensation. We
managed our corporate general and administrative expenses more aggressively in fiscal year 2010.
Interest expense decreased $3.4 million to $24.4 million for fiscal year 2010 primarily due to the
significant repurchases of our senior convertible notes in the open market, as previously
mentioned.
Cash flow provided by operating activities for fiscal 2010 was $63.4 million compared to $84.9
million for fiscal year 2009. We received $14.4 million of net tax refunds during fiscal year 2009
compared to receiving $0.3 million in net tax refunds in fiscal year 2010. In addition, we
experienced a change in working capital during fiscal year 2010, partly driven by the $6.2 million
change in receivables due in part to the improved cemetery property sales, which are typically
financed.
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, 2010 and 2009 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 $1.2 billion from trust and $0.5 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
current face value of insurance contracts. It assumes no future preneed sales and assumes
maturities each year consistent with our historical experience, with the majority of existing
contracts expected to mature over the next 15 years. In addition, in fiscal years 2010 and 2009,
the analysis assumes a weighted annual return of approximately 4 percent projected from our trusts
over the expected life of the contracts and zero percent for increasing death benefits as it is at
the discretion of the insurance company. 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, 2010 and October 31, 2009, 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 $1.6 billion and
$1.5 billion, respectively.
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, 2010, approximately 10 percent of our portfolio was invested in cash, 29
percent in fixed-income securities, 16 percent in preferred stocks, 41 percent in common equities,
3 percent in passive commodity index funds and 1 percent in other investments. Because
approximately 41 percent of our total trust
30
portfolio is currently invested in common 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 and emphasizes diversification. As a
result, we have taken advantage of the rebound in the financial markets to rebalance the trust
portfolio. Throughout fiscal years 2009 and 2010, 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 2000 to 2010. The returns represent interest, dividends and realized capital gains or losses
but not unrealized capital gains or losses.
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| 2000 |
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2001 |
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2002 |
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2003 |
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2004 |
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2005 |
|
2006 |
|
2007 |
|
2008 |
|
2009 |
|
2010 |
|
5.8 |
% |
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|
6.3 |
% |
|
|
4.3 |
% |
|
|
4.8 |
% |
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|
2.6 |
% |
|
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4.3 |
% |
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|
5.1 |
% |
|
|
4.8 |
% |
|
|
(3.3 |
)% |
|
|
(.4 |
)% |
|
|
1.7 |
% |
During fiscal year 2010, we experienced positive trends in the overall market and in our
preneed and perpetual care trusts. For the year ended October 31, 2010, our preneed funeral and
cemetery merchandise and services trusts experienced a total return, including both realized and
unrealized losses, of 14.2 percent, and our cemetery perpetual care trusts experienced a total
return, including both realized and unrealized losses, of 15.1 percent.
The table below presents the total returns of our trusts including realized and unrealized
gains and losses.
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Funeral and Cemetery |
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Merchandise and |
|
Cemetery Perpetual |
| |
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Services Trusts |
|
Care Trusts |
For the year ended October 31, 2010 |
|
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14.2 |
% |
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15.1 |
% |
For the last three years ended October 31, 2010 |
|
|
(2.4 |
)% |
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|
.8 |
% |
For the last five years ended October 31, 2010. |
|
|
2.6 |
% |
|
|
3.9 |
% |
In our preneed funeral and cemetery merchandise and services trusts, the fair market value of
the investments in the trusts were $138.6 million and $192.9 million lower than our cost basis as
of October 31, 2010 and October 31, 2009, respectively. In our cemetery perpetual care trusts, the
fair market value of our investments were $41.0 million and $56.7 million lower than our cost basis
as of October 31, 2010 and October 31, 2009, respectively. For additional information see Notes 4,
5 and 6 to the consolidated financial statements.
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, 2010 and October 31, 2009, we had $212.1 million and $220.7
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.
Securities representing unrealized losses totaling $195.9 million at October 31, 2010 were
also in a loss position at October 31, 2009, down from $258.8 million at the end of the last fiscal
year. Based upon our review of the specific underlying securities, we continue to believe that 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 most preferred stocks and corporate bonds had a rating of investment grade 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 $195.9
million, 89 percent, or $173.4 million, were generated by common stock investments. The market
value of these securities represents approximately 32 percent of the market value of the securities
in our trust portfolio. Although we cannot predict future stock prices, our management expects
that as the overall S&P 500
31
recovers these stocks may recover along with them.
The sectors in which our trust investment portfolio is invested are diversified except as
described below. Passive investments such as cash and highly diversified mutual funds represented
35 percent, or $195.3 million, of fair market value of our preneed funeral and cemetery merchandise
and services portfolios and 37 percent, or $84.8 million, of fair market value of our cemetery
perpetual care portfolio as of October 31, 2010.
Investments in the financials sector represented 20 percent, or $115.7 million of fair market
value, of our preneed funeral and cemetery merchandise and services portfolios, of which 57 percent
was related to preferred stock, 29 percent related to fixed-income securities and 14 percent
related to common stock investments. Investments in the financials sector represented 30 percent,
or $69.0 million, of our cemetery perpetual care portfolio as of October 31, 2010, of which 68
percent was related to preferred stock, 26 percent related to fixed-income securities and 6 percent
related to common stock investments. This sector has unrealized losses of $37.4 million as of
October 31, 2010 in our preneed funeral and cemetery merchandise and services trusts, $3.8 million
of which relate to preferred stock investments. With respect to our cemetery perpetual care trust
portfolio, the financials sector has unrealized losses of $9.8 million as of October 31, 2010, $3.4
million of which relate to preferred stock investments. Risks associated with the financials
sector include risk of failure of various large financial institutions, changing government
regulation, interest rates, cost of capital funds, credit losses and volatility in financial
markets.
Investments in the information technology sector represented 11 percent, or $59.4 million, of
fair market value of our preneed funeral and cemetery merchandise and services portfolios and 6
percent, or $12.9 million, of fair market value of our cemetery perpetual care portfolio as of
October 31, 2010. 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. For fiscal year 2010, none of our preneed contracts were in a loss position. 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 2010, these fees amounted to $9.4 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.
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, whether the sale is funded by trust or
insurance, 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 trust 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. Generally preneed insurance sales are
slightly cash flow positive. 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
32
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 management’s most
difficult, subjective or complex judgment. See Note 2 to the consolidated financial statements
included in Item 8.
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
ultimately performed or merchandise is actually 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 actually 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 then realize net losses in the trust, we may determine we
have a funding obligation to restore the net realized. 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 sufficient capacity for additional market depreciation before a contract loss would
occur.
33
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 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 collectibility 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 ten reporting units. Because goodwill impairment tests are
applied at the reporting unit level, a change in a 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
34
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 unit’s goodwill is determined in a manner similar to the
amount of goodwill determined in a 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, as supplemented 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 deathcare industry.
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 unit’s goodwill by comparing the implied fair value of the reporting unit’s 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 2010 impairment test, we may be
required to record an impairment charge.
Our goodwill impairment test involves estimates and management judgment. We measure fair
value based on present value techniques including discounted cash flows. Our 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 deathcare industry. In projecting our cash
flows, we used growth rates generally ranging from two to five percent in revenues and costs, with
the growth in costs slightly below that of revenues, resulting in growth in cash flows of
approximately six percent overall. 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 9.0 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 1.5 to 4 percent. We
considered a sensitivity analysis of the terminal values and used the midpoint enterprise value as
our best estimate. As of October 31, 2010, none of our reporting units with material goodwill are
at risk of failing step one of the goodwill impairment test.
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 or benefit within the tax provision in the statement of earnings.
Approximately one-half of the October 31, 2010 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
35
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 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 continuing operations into
our three segments, grouped by our funeral and cemetery operations. The consolidated statements of
earnings for the years ended October 31, 2010 and 2009 have been adjusted to reflect the impact of
accounting changes as discussed in Note 3 of the consolidated financial statements included in Item
8 and for discontinued operations as discussed in Note 12 to the consolidated financial statements
included in Item 8. For a discussion of our segments, see Note 21 to the consolidated financial
statements included in Item 8. As there have been no material acquisitions or construction of new
locations in fiscal years 2010 and 2009, results from continuing operations reflect those of
same-store locations.
36
Comparison of Fiscal Year 2010 to Fiscal Year 2009
Year Ended October 31, 2010 Compared to Year Ended October 31, 2009 — Continuing Operations
Funeral Operations
| |
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| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
| |
|
(In millions) |
|
Funeral Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
260.1 |
|
|
$ |
259.7 |
|
|
$ |
.4 |
|
Corporate Trust Management (1) |
|
|
15.8 |
|
|
|
15.2 |
|
|
|
.6 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Revenue |
|
$ |
275.9 |
|
|
$ |
274.9 |
|
|
$ |
1.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
209.9 |
|
|
$ |
209.0 |
|
|
$ |
.9 |
|
Corporate Trust Management (1) |
|
|
.9 |
|
|
|
.9 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Costs |
|
$ |
210.8 |
|
|
$ |
209.9 |
|
|
$ |
.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
50.2 |
|
|
$ |
50.7 |
|
|
$ |
(.5 |
) |
Corporate Trust Management (1) |
|
|
14.9 |
|
|
|
14.3 |
|
|
|
.6 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Gross Profit |
|
$ |
65.1 |
|
|
$ |
65.0 |
|
|
$ |
.1 |
|
|
|
|
|
|
|
|
|
|
|
Same-Store Analysis for the Years Ended October 31, 2010 and 2009
| |
|
|
|
|
|
|
| Change in Average Revenue |
|
Change in Same-Store |
|
Same-Store Cremation Rate |
| Per Funeral Service |
|
Funeral Services |
|
2010 |
|
2009 |
.6% (1)
|
|
(2.1)%
|
|
41.9%
|
|
40.9% |
|
|
|
| (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
distributable earnings as stipulated by our respective trust agreements that are generated 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 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 2010 and 2009 were $4.5 million and $3.9 million, respectively. Funeral trust earnings
recognized in funeral revenue for both fiscal years 2010 and 2009 with respect to preneed
contracts delivered were $11.3 million. |
Funeral revenue increased $1.0 million to $275.9 million from $274.9 million in fiscal year
2009. Our same-store funeral operations experienced a 1.0 percent increase in average revenue per
traditional funeral service and a 3.1 percent increase in average revenue per cremation service.
These increases were partially offset by a shift-in-mix to lower-priced cremation services
resulting in an overall increase of 0.6 percent in same-store average revenue per funeral service.
The increase in same-store average revenue per funeral service was partially offset by a 2.1
percent decrease in same-store funeral services performed, which we believe is generally consistent
with industry-wide data in our markets. The cremation rate for our same-store operations was 41.9
percent for fiscal year 2010 compared to 40.9 percent for fiscal year 2009.
Funeral gross profit increased $0.1 million to $65.1 million for fiscal year 2010 compared to
$65.0 million for fiscal year 2009. Funeral gross profit margin was 23.6 percent for both fiscal
years 2010 and 2009. Net preneed
37
funeral sales decreased 3.9 percent during fiscal year 2010 compared to fiscal year 2009.
While preneed funeral sales decreased from the prior year, our goal is for preneed funeral sales to
exceed preneed maturities, and for fiscal year 2010 preneed funeral sales exceeded preneed
deliveries by $17.8 million, or 1.2 times. Preneed funeral sales are deferred until the underlying
contracts are performed and have no impact on current revenue.
Cemetery Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2010 |
|
|
2009 |
|
|
(Decrease) |
|
| |
|
(In millions) |
|
Cemetery Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
216.5 |
|
|
$ |
204.2 |
|
|
$ |
12.3 |
|
Corporate Trust Management (1) |
|
|
7.5 |
|
|
|
7.3 |
|
|
|
.2 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Revenue |
|
$ |
224.0 |
|
|
$ |
211.5 |
|
|
$ |
12.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
192.0 |
|
|
$ |
187.9 |
|
|
$ |
4.1 |
|
Corporate Trust Management (1) |
|
|
.9 |
|
|
|
1.0 |
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Costs |
|
$ |
192.9 |
|
|
$ |
188.9 |
|
|
$ |
4.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Locations |
|
$ |
24.5 |
|
|
$ |
16.3 |
|
|
$ |
8.2 |
|
Corporate Trust Management (1) |
|
|
6.6 |
|
|
|
6.3 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Gross Profit |
|
$ |
31.1 |
|
|
$ |
22.6 |
|
|
$ |
8.5 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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
distributable earnings as stipulated by our respective trust agreements that are generated by
the trusts 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 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 2010 and 2009 were $4.9 million and $4.1 million, respectively, and cemetery trust
earnings included in cemetery revenue for fiscal years 2010 and 2009 recognized with respect
to preneed contracts delivered were $2.6 million and $3.2 million, respectively. Perpetual
care trust earnings of $7.4 million and $6.8 million for fiscal years 2010 and 2009,
respectively, are included in the revenues and gross profit of the cemetery segment and are
reflected in cemetery locations. See Notes 6 and 7 to the consolidated financial statements
included herein for information regarding the cemetery perpetual care trusts. |
Cemetery revenue increased $12.5 million, or 5.9 percent, to $224.0 million primarily due to a
$5.0 million, or 5.5 percent, increase in cemetery property sales and a $3.6 million, or 9.1
percent, increase in cemetery merchandise delivered. In addition, we experienced a $2.3 million
improvement in the reserve for cancellations and a $1.0 million increase in cemetery property
revenue due to the timing of revenue recognition for cemetery property sales.
Cemetery gross profit increased $8.5 million, or 37.6 percent, to $31.1 million for fiscal
year 2010, which was positively impacted by $1.1 million of perpetual care withdrawals related to
prior year cancellations which we used to offset our deposit requirement. This compares to $22.6
million of cemetery gross profit for fiscal year 2009, which included a $3.4 million charge to
record our probable funding obligation related to our perpetual care trusts. The increase in
cemetery gross profit is primarily due to the increase in revenue, as noted above. Cemetery gross
profit margin increased 320 basis points to 13.9 percent for fiscal year 2010 from 10.7 percent for
the same period of 2009.
38
Discontinued Operations
During the fourth quarter of fiscal year 2010, we sold one business for a gain of $0.4
million, net of taxes, which is included in discontinued operations. For additional information,
see Note 12 to the consolidated financial statements included in Item 8.
Other
Corporate general and administrative expenses decreased $2.9 million to $27.8 million for
fiscal year 2010 primarily due to a decrease in training costs related to our implementation of a
new business system in the prior year, coupled with a decline in incentive compensation. We
managed our corporate general and administrative expenses more aggressively in fiscal year 2010.
Interest expense decreased $3.4 million to $24.4 million during fiscal year 2010 primarily due
to the significant repurchases of our senior convertible notes in the open market.
The effective tax rate for fiscal year 2010 was 31.3 percent compared to 35.2 percent for
fiscal year 2009. The decreased rate for fiscal year 2010 was primarily due to a tax benefit in
fiscal year 2010 from the net reduction in the valuation allowance on our capital loss
carryforwards and an increased tax benefit from the recognition and utilization of net operating
losses in certain states and a U.S. possession.
During fiscal years 2010 and 2009, we purchased $35.9 million and $82.6 million, respectively,
aggregate principal amount of our senior convertible notes in the open market, at $4.5 million and
$22.0 million, respectively, less than the face value of the notes. Annual cash interest savings
from these purchases is approximately $3.8 million in the aggregate. In connection with the
purchases, we recorded a net loss on early extinguishment of debt of $1.0 million for fiscal year
2010, compared to a net gain on early extinguishment of debt of $6.2 million for fiscal year 2009.
Since the inception of the debt repurchase program in fiscal year 2009, we have purchased $118.5
million aggregate principal amount of our senior convertible notes in the open market at $26.5
million less than the face value of the notes.
During fiscal year 2010, we repurchased 0.8 million shares of our Class A common stock for
$4.0 million under our stock repurchase program.
Cash and cash equivalents decreased $6.7 million from October 31, 2009 to October 31, 2010
primarily due to the net purchase of $10.0 million in certificates of deposits and marketable
securities, partially offset by an increase in cash from operations. Current receivables decreased
$8.3 million from October 31, 2009 to October 31, 2010 primarily due to collections of prior period
sales exceeding receivables for new sales and the decrease in income taxes receivable. Current
deferred income taxes increased $6.6 million from October 31, 2009 to October 31, 2010 primarily
due to an increase in the current portion of the net operating loss in fiscal 2010. Long-term
deferred income taxes decreased $15.4 million from October 31, 2009 to October 31, 2010 primarily
due to the changes in tax accounting methods made during fiscal year 2010. For additional
information, see Note 18 to the consolidated financial statements included herein. 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 improvement in the market value
of our trust assets during the year ended October 31, 2010. For additional information, see Notes
4, 5 and 6 to our consolidated financial statements included herein. We purchased $35.9 million
aggregate principal amount of our senior convertible notes during the year ended October 31, 2010
resulting in a decrease in long-term debt.
Preneed Sales into the Backlog
Net preneed funeral sales decreased 3.9 percent during the year ended October 31, 2010
compared to the corresponding period in 2009.
The revenues from our preneed funeral and cemetery merchandise and service sales are deferred
into our
39
backlog and are not included in our operating results presented above. We had $143.5 million
in net preneed funeral and cemetery merchandise and service sales (including $76.6 million related
to insurance-funded preneed funeral contracts) during the year ended October 31, 2010 to be
recognized in the future as these prepaid products and services are delivered, compared to net
sales of $147.7 million (including $77.3 million related to insurance-funded preneed funeral
contracts) for the corresponding period in 2009. 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 consolidated balance sheets.
Comparison of Fiscal Year 2009 to Fiscal Year 2008
Year Ended October 31, 2009 Compared to Year Ended October 31, 2008 — Continuing Operations
Funeral Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2009 |
|
|
2008 |
|
|
(Decrease) |
|
| |
|
(In millions) |
|
Funeral Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
259.7 |
|
|
$ |
266.6 |
|
|
$ |
(6.9 |
) |
Corporate Trust Management (1) |
|
|
15.2 |
|
|
|
18.3 |
|
|
|
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Revenue |
|
$ |
274.9 |
|
|
$ |
284.9 |
|
|
$ |
(10.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
209.0 |
|
|
$ |
216.0 |
|
|
$ |
(7.0 |
) |
Corporate Trust Management (1) |
|
|
.9 |
|
|
|
.8 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Costs |
|
$ |
209.9 |
|
|
$ |
216.8 |
|
|
$ |
(6.9 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Home Locations |
|
$ |
50.7 |
|
|
$ |
50.6 |
|
|
$ |
.1 |
|
Corporate Trust Management (1) |
|
|
14.3 |
|
|
|
17.5 |
|
|
|
(3.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Gross Profit |
|
$ |
65.0 |
|
|
$ |
68.1 |
|
|
$ |
(3.1 |
) |
|
|
|
|
|
|
|
|
|
|
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 |
2.7% (1)
|
|
(5.9)%
|
|
40.9%
|
|
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
distributable earnings as stipulated by our respective trust agreements that are generated 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 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 $10.0 million, or 3.5 percent, from $284.9 million for the year
ended October 31, 2008 to $274.9 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 3,470 event, decrease in our same-store funeral services
performed, to 55,112 events. We believe the decline is primarily due to a reduced
40
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 2.7 percent. The cremation rate for our same-store operations was 40.9 percent
for the year ended October 31, 2009 compared to 40.0 percent for fiscal year 2008.
Funeral gross profit decreased $3.1 million to $65.0 million for the year ended October 31,
2009 compared to $68.1 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
distributable earnings as stipulated by our respective trust agreements that are generated by
the trusts 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 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 6 and 7
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
41
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.
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 Board’s 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 $2.0 million to $27.8 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 $6.2 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 35.2 percent compared to 158.3
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.
Preneed Sales into the Backlog
Net preneed funeral sales increased 1.9 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 $147.7
million in net preneed funeral and cemetery merchandise and service sales (including $77.3 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 $150.8 million (including $76.5 million related to insurance-funded
42
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 consolidated balance sheets.
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 placed in trust and cemetery
perpetual care trust earnings. Over the last five years, we have generated annually over $50.0
million each year 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.
As of October 31, 2010, we had no amounts drawn on the $95.0 million senior secured revolving
credit facility, and our availability under the senior secured revolving credit facility, after
giving consideration to $8.3 million outstanding letters of credit and the $24.8 million Florida
bond, was $61.9 million. We also have the ability to 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 $131.5 million in
senior convertible notes as of October 31, 2010 of which $86.4 million mature in 2014 and $45.1
million mature in 2016. See the table below under “Contractual Obligations and Commercial
Commitments” for further information on our long-term debt obligations.
Beginning in the fourth quarter of 2009, we increased our quarterly cash dividend from two and
one-half cents per share to three cents per share on our Class A and B common stock, which amounted
to $11.2 million for fiscal year 2010. 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 September 2010, we announced plans to resume purchases of
our Class A common stock under our $75.0 million stock repurchase program. We repurchased 0.8
million shares under the program for $4.0 million during fiscal year 2010. Subsequent to October
31, 2010 through November 30, 2010, we repurchased an additional 0.8 million shares for $4.8
million and have $17.7 million remaining available as of November 30, 2010. 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 fiscal year 2009, we repurchased $82.6
million aggregate principal amount of our senior convertible notes in the open market at
substantial discounts and repurchased an additional $35.9 million aggregate principal amount during
fiscal year 2010. Since inception in fiscal year 2009, we have purchased $118.5 million aggregate
principal amount of our senior convertible notes at $26.5 million less than face value and have
produced $3.8 million of annual cash interest savings.
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, construct funeral homes on cemeteries
of unaffiliated third parties or in strategic locations, make acquisitions of or investments in
death care or related businesses and repurchase debt and stock 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 are continuing to invest in further
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 $3.5 million in fiscal
year 2011 to complete the construction of two funeral homes.
43
We continue to pursue several tax planning strategies. During the third quarter of 2009, the
Internal Revenue Service approved a change in one of our tax accounting methods that resulted 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, $1.6 million
was received as a refund in the first quarter of 2010, $8.0 million was used to offset estimated
tax payments during fiscal 2009 and the remaining $4.5 million was used to offset future federal
income tax payments in 2010. The change relates to our tax accounting method 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 method relates 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 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 received IRS approval in fiscal year 2010 on five requests for changes in tax accounting
methods, which resulted in the deferral of approximately $84.0 million of taxable income. These
changes increase the current net operating loss to be utilized beginning in 2010 to approximately
$104.0 million. The utilization of this net operating loss will significantly reduce federal income
tax payments by approximately $36.0 million for the next three years beginning in 2010, of which
approximately $12.0 million was used to reduce federal income tax payments in fiscal year 2010. We
utilized approximately $33.5 million of this net operating loss in fiscal year 2010. These changes
primarily relate to our tax accounting methods for preneed cemetery services and preneed funeral
merchandise. These changes permit us to defer the recognition of income for tax purposes (and pay
taxes) with respect to those amounts until the time the service is provided or the merchandise is
actually delivered. We will eventually pay taxes with respect to the $84.0 million as the related
preneed contracts are performed in the future. We are continuing to review all of our tax
accounting methods to determine opportunities to improve our current tax position. Several
possible changes are being considered that could result in potential reductions in future tax
payments. At this time, we cannot predict with certainty what, if any, reductions in future tax
payments we will obtain. However, we currently do not expect that these potential reductions in
future tax payments, if obtained, will be as substantial as those obtained in fiscal years 2009 or
2010.
Cash Flow
Comparison of Fiscal Year 2010 to Fiscal Year 2009
Cash flow provided by operating activities for fiscal 2010 was $63.4 million compared to $84.9
million for fiscal year 2009. We received $14.4 million of net tax refunds during fiscal year 2009
compared to receiving $0.3 million in net tax refunds in fiscal year 2010. In addition, we
experienced a change in working capital during fiscal year 2010, partly driven by the $6.2 million
change in receivables due in part to the improved cemetery property sales, which are typically
financed.
Our investing activities resulted in a net cash outflow of $24.6 million for the year ended
October 31, 2010, compared to a net cash outflow of $22.3 million for the comparable period in
2009. The change is primarily due to $10.0 million in net purchases of certificates of deposit in
fiscal year 2010, offset by a decline in capital expenditures. In the first quarter of 2010, we
entered into a certificate of deposit account registry service program in order to obtain a higher
rate of return on our cash balances, while maintaining our FDIC insurance protection. For the year
ended October 31, 2010, capital expenditures amounted to $16.5 million, which included $12.7
million for maintenance capital expenditures, $3.0 million for growth initiatives and $0.8 million
related to the implementation of new business systems. For the year ended October 31, 2009,
capital expenditures were $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. We also purchased a cemetery business in fiscal year 2009 resulting in a net
cash outflow of $1.6 million and sold a funeral business in fiscal year 2010 resulting in a net
cash inflow of $1.7 million.
44
Our financing activities resulted in a net cash outflow of $45.5 million for the year ended
October 31, 2010, compared to a net cash outflow of $72.3 million for the comparable period in
2009. We had $31.5 million in repayments of long-term debt in 2010 due primarily to the purchases
of our senior convertible notes, compared to $60.9 million in repayments in 2009. In fiscal year
2010, $4.1 million was spent on stock repurchases under our current stock repurchase plan, compared
to less than $0.1 million in stock repurchases during 2009.
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 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.
Contractual Obligations and Commercial Commitments
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, 2010.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
| Contractual Obligations |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Long-term debt obligations (1) |
|
$ |
331.6 |
|
|
$ |
— |
|
|
$ |
200.0 |
|
|
$ |
86.4 |
|
|
$ |
45.2 |
|
Interest on long-term debt (2) |
|
|
51.7 |
|
|
|
16.7 |
|
|
|
27.2 |
|
|
|
5.8 |
|
|
|
2.0 |
|
Operating lease agreements (3) |
|
|
31.0 |
|
|
|
4.8 |
|
|
|
6.8 |
|
|
|
3.7 |
|
|
|
15.7 |
|
Purchase obligations (4) |
|
|
2.6 |
|
|
|
2.6 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Non-competition and other agreements (5) |
|
|
1.3 |
|
|
|
.5 |
|
|
|
.3 |
|
|
|
.2 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
418.2 |
|
|
$ |
24.6 |
|
|
$ |
234.3 |
|
|
$ |
96.1 |
|
|
$ |
63.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
See below for a breakdown of future scheduled principal payments and maturities of
our long-term debt by type as of October 31, 2010. |
| |
| (2) |
|
Includes contractual interest payments for our senior convertible notes, senior
notes and third-party debt. |
45
|
|
|
| (3) |
|
Our noncancellable operating leases are primarily for land and buildings and expire
over the next one to 20 years, except for eight leases that expire between 2032 and 2039.
This category also includes leases under our vehicle fleet leasing program. Our future
minimum lease payments for all operating leases as of October 31, 2010 were $4.8 million, $3.7
million, $3.1 million, $2.2 million, $1.5 million and $15.7 million for the years ending
October 31, 2011, 2012, 2013, 2014, 2015 and later years, respectively. |
| |
| (4) |
|
Represents construction contracts for two funeral homes currently under
construction. |
| |
| (5) |
|
This category includes payments pursuant to non-competition agreements with prior
owners and key employees of acquired businesses. |
The following table details our known potential or possible future cash payments related to
the specified contingent obligations specified below (in millions) as of October 31, 2010.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expiration by Period |
|
| |
|
|
|
|
|
Less than |
|
|
|
|
|
|
|
|
|
|
More than |
|
| Contingent Obligations |
|
Total |
|
|
1 year |
|
|
1-3 years |
|
|
3-5 years |
|
|
5 years |
|
Cemetery perpetual care
trust funding
obligations(1) |
|
$ |
13.3 |
|
|
$ |
13.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Long-term obligations related
to uncertain tax
positions(2) |
|
|
2.2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15.5 |
|
|
$ |
13.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
2.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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 subsequent 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 $13.3 million as
of October 31, 2010. As of October 31, 2010, we had net unrealized losses of $36.4 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 but not probable that additional
funding obligations may exist with an estimated amount of approximately $2.5 million; no
change has been recorded for these amounts as of October 31, 2010. |
| |
| (2) |
|
As discussed in Note 18 to the consolidated financial statements included in Item 8,
we adopted the required accounting guidance related to uncertain tax positions on November 1,
2007. In accordance with this guidance, as of October 31, 2010, we recorded $2.2 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, 2010, our outstanding long-term debt obligations amounted to $331.6 million,
consisting of $86.4 million in 3.125 percent senior convertible notes due 2014, $45.1 million in
3.375 percent senior convertible notes due 2016, $200.0 million of 6.25 percent senior notes due
2013 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, 2010.
46
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
Senior |
|
|
|
|
|
|
|
|
|
|
Principally |
|
|
|
|
| |
|
Secured |
|
|
|
|
|
|
|
|
|
|
Seller |
|
|
|
|
| |
|
Revolving |
|
|
Senior |
|
|
|
|
|
|
Financing of |
|
|
|
|
| Fiscal Year Ending |
|
Credit |
|
|
Convertible |
|
|
|
|
|
|
Acquired |
|
|
|
|
| October 31, |
|
Facility |
|
|
Notes |
|
|
Senior Notes |
|
|
Operations |
|
|
Total |
|
2011 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
2012 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2013 |
|
|
— |
|
|
|
— |
|
|
|
200.0 |
|
|
|
— |
|
|
|
200.0 |
|
2014 |
|
|
— |
|
|
|
86.4 |
|
|
|
— |
|
|
|
— |
|
|
|
86.4 |
|
2015 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
Thereafter |
|
|
— |
|
|
|
45.1 |
|
|
|
— |
|
|
|
.1 |
|
|
|
45.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
— |
|
|
$ |
131.5 |
|
|
$ |
200.0 |
|
|
$ |
.1 |
|
|
$ |
331.6 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of October 31, 2010 consist of the following two items:
| (1) |
|
the $24.8 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 above and 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, |
| 2010 |
|
2009 |
|
2008 |
|
2007 |
|
2006 |
2.69 (1)
|
|
2.21 (2)
|
|
1.40 (3)
|
|
2.85 (4)
|
|
2.82 (5) |
|
|
|
| (1) |
|
Pre-tax earnings for fiscal year 2010 include a $1.0 million pre-tax net loss on the
early extinguishment of debt due to fiscal year 2010 debt repurchases. |
| |
| (2) |
|
Pre-tax earnings for fiscal year 2009 include a $6.2 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
net impairment losses on dispositions of ($0.2) million. |
| |
| (3) |
|
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 net impairment losses on dispositions of ($0.4) million. |
| |
| (4) |
|
Pre-tax earnings for fiscal year 2007 include a charge of $2.5 million related to
Hurricane Katrina, a charge of $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. |
| |
| (5) |
|
Pre-tax earnings for fiscal year 2006 include 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 |
47
|
|
|
| |
|
and net impairment losses on dispositions of ($0.2) million. |
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, amortization of 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, 2010 and 2009, 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
$401.3 million and $378.2 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 $40.1 million and $37.8
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, which are primarily managed by ITI, are further discussed in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7,
and in Notes 4, 5 and 6 to our consolidated 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, 2010, our long-term fixed-rate debt consists of our $200.0 million 6.25
percent senior notes due 2013, $76.1 million 3.125 percent senior convertible notes due 2014, $37.8
million 3.375 percent senior convertible notes due 2016 and our third-party debt. There was
nothing drawn on our $95.0 million senior secured revolving credit facility. As of October 31,
2010 and 2009, the carrying values of our long-term fixed-rate debt, including accrued interest,
were approximately $317.9 million and $343.9 million, respectively, compared to fair values of
$328.3 million and $339.4 million, respectively. Fair values were determined using quoted market
prices.
48
Each approximate 10 percent change in the average interest rates applicable to determine the fair
value of such debt, 55 basis points for 2010 and 70 basis points for 2009, would result in changes
of approximately $5.7 million and $9.0 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, 2010 and 2009, 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
$108.1 million and $112.9 million, respectively. Each 10 percent change in interest rates on these
fixed-income securities would result in changes of approximately $1.8 million and $2.3 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, 2010 and 2009, 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 $287.7 million and $236.1 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, 2010 and 2009, only $86.8 million and $58.8 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 2010 and 2009, would result in changes of less than $0.1 million for 2010 and 2009 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.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
49
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, 2010 and 2009, and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 2010 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, 2010, based on
criteria established in Internal Control — Integrated Framework issued by the Committee of
Sponsoring Organizations of the Treadway Commission (COSO). The Company’s 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 Management’s 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 Company’s 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.
As discussed in Note 3 to the consolidated financial statements, on November 1, 2009, the Company
changed its accounting for convertible debt instruments that may be settled in cash upon conversion
and earnings per share. These changes were applied retrospectively for all periods presented.
A company’s 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
company’s 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 company’s assets that could have a material effect on the
financial statements.
50
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 15, 2010
51
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(As Adjusted) |
|
|
(As Adjusted) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
275,898 |
|
|
$ |
274,902 |
|
|
$ |
284,970 |
|
Cemetery |
|
|
224,009 |
|
|
|
211,477 |
|
|
|
241,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
499,907 |
|
|
|
486,379 |
|
|
|
526,246 |
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
210,812 |
|
|
|
209,894 |
|
|
|
216,801 |
|
Cemetery |
|
|
192,891 |
|
|
|
188,866 |
|
|
|
208,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
403,703 |
|
|
|
398,760 |
|
|
|
425,639 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
96,204 |
|
|
|
87,619 |
|
|
|
100,607 |
|
Corporate general and administrative expenses |
|
|
(27,784 |
) |
|
|
(30,670 |
) |
|
|
(32,611 |
) |
Impairment of goodwill |
|
|
— |
|
|
|
— |
|
|
|
(25,952 |
) |
Hurricane related charges, net |
|
|
(66 |
) |
|
|
(380 |
) |
|
|
(2,297 |
) |
Separation charges |
|
|
— |
|
|
|
(275 |
) |
|
|
— |
|
Net impairment losses on dispositions |
|
|
— |
|
|
|
(218 |
) |
|
|
(353 |
) |
Other operating income, net |
|
|
1,424 |
|
|
|
1,250 |
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
|
69,778 |
|
|
|
57,326 |
|
|
|
40,213 |
|
Interest expense |
|
|
(24,392 |
) |
|
|
(27,776 |
) |
|
|
(29,805 |
) |
Gain (loss) on early extinguishment of debt |
|
|
(1,035 |
) |
|
|
6,146 |
|
|
|
— |
|
Investment and other income, net |
|
|
156 |
|
|
|
92 |
|
|
|
2,406 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
44,507 |
|
|
|
35,788 |
|
|
|
12,814 |
|
Income taxes |
|
|
13,938 |
|
|
|
12,597 |
|
|
|
20,282 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
30,569 |
|
|
|
23,191 |
|
|
|
(7,468 |
) |
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations before income taxes |
|
|
660 |
|
|
|
121 |
|
|
|
210 |
|
Income taxes |
|
|
251 |
|
|
|
46 |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
409 |
|
|
|
75 |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
30,978 |
|
|
$ |
23,266 |
|
|
$ |
(7,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
Earnings from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
Earnings from discontinued operations |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
.33 |
|
|
$ |
.25 |
|
|
$ |
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
92,119 |
|
|
|
91,898 |
|
|
|
93,795 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
92,394 |
|
|
|
91,978 |
|
|
|
93,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
.12 |
|
|
$ |
.105 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
52
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| ASSETS |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
(As Adjusted) |
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
56,060 |
|
|
$ |
62,808 |
|
Certificates of deposit and marketable securities |
|
|
10,000 |
|
|
|
— |
|
Receivables, net of allowances |
|
|
51,170 |
|
|
|
59,439 |
|
Inventories |
|
|
35,715 |
|
|
|
34,463 |
|
Prepaid expenses |
|
|
5,480 |
|
|
|
6,728 |
|
Deferred income taxes, net |
|
|
28,312 |
|
|
|
21,715 |
|
Assets held for sale |
|
|
— |
|
|
|
35 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
186,737 |
|
|
|
185,188 |
|
Receivables due beyond one year, net of allowances |
|
|
67,458 |
|
|
|
63,011 |
|
Preneed funeral receivables and trust investments |
|
|
414,918 |
|
|
|
389,338 |
|
Preneed cemetery receivables and trust investments |
|
|
209,750 |
|
|
|
193,417 |
|
Goodwill |
|
|
247,038 |
|
|
|
247,038 |
|
Cemetery property, at cost |
|
|
386,094 |
|
|
|
387,656 |
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Land |
|
|
43,518 |
|
|
|
43,574 |
|
Buildings |
|
|
338,264 |
|
|
|
328,715 |
|
Equipment and other |
|
|
191,428 |
|
|
|
186,760 |
|
|
|
|
|
|
|
|
|
|
|
573,210 |
|
|
|
559,049 |
|
Less accumulated depreciation |
|
|
283,637 |
|
|
|
260,422 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
289,573 |
|
|
|
298,627 |
|
Deferred income taxes, net |
|
|
98,025 |
|
|
|
113,398 |
|
Cemetery perpetual care trust investments |
|
|
231,008 |
|
|
|
205,476 |
|
Non-current assets held for sale |
|
|
360 |
|
|
|
1,201 |
|
Other assets |
|
|
11,905 |
|
|
|
14,654 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,142,866 |
|
|
$ |
2,099,004 |
|
|
|
|
|
|
|
|
(continued)
53
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
2010 |
|
|
2009 |
|
| |
|
|
|
|
|
(As Adjusted) |
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
5 |
|
|
$ |
5 |
|
Accounts payable and accrued expenses |
|
|
24,797 |
|
|
|
25,604 |
|
Accrued payroll and other benefits |
|
|
14,313 |
|
|
|
15,200 |
|
Accrued insurance |
|
|
20,912 |
|
|
|
20,504 |
|
Accrued interest |
|
|
4,197 |
|
|
|
4,561 |
|
Estimated obligation to fund cemetery perpetual care trust |
|
|
13,253 |
|
|
|
14,010 |
|
Other current liabilities |
|
|
12,138 |
|
|
|
14,099 |
|
Income taxes payable |
|
|
2,533 |
|
|
|
2,028 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
92,148 |
|
|
|
96,011 |
|
Long-term debt, less current maturities |
|
|
314,027 |
|
|
|
339,721 |
|
Deferred income taxes, net |
|
|
4,950 |
|
|
|
— |
|
Deferred preneed funeral revenue |
|
|
243,520 |
|
|
|
247,825 |
|
Deferred preneed cemetery revenue |
|
|
258,044 |
|
|
|
266,964 |
|
Deferred preneed funeral and cemetery receipts held in trust |
|
|
555,152 |
|
|
|
514,613 |
|
Perpetual care trusts’ corpus |
|
|
229,518 |
|
|
|
204,168 |
|
Long-term liabilities associated with assets held for sale |
|
|
— |
|
|
|
174 |
|
Other long-term liabilities |
|
|
20,023 |
|
|
|
20,871 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,717,382 |
|
|
|
1,690,347 |
|
|
|
|
|
|
|
|
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 88,739,140 and 89,128,700 shares at
October 31, 2010 and 2009, respectively |
|
|
88,739 |
|
|
|
89,129 |
|
Class B authorized 5,000,000 shares; issued and
outstanding 3,555,020 shares at October 31, 2010 and
2009; 10 votes per share convertible into an equal
number of Class A shares |
|
|
3,555 |
|
|
|
3,555 |
|
Additional paid-in capital |
|
|
547,319 |
|
|
|
561,063 |
|
Accumulated deficit |
|
|
(214,147 |
) |
|
|
(245,125 |
) |
Accumulated other comprehensive income : |
|
|
|
|
|
|
|
|
Unrealized appreciation of investments |
|
|
18 |
|
|
|
35 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
|
18 |
|
|
|
35 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
425,484 |
|
|
|
408,657 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
2,142,866 |
|
|
$ |
2,099,004 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
54
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
| |
|
Common |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
Appreciation |
|
|
Total Shareholders’ |
|
| |
|
Stock(1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2007, as
previously reported |
|
$ |
98,420 |
|
|
$ |
583,789 |
|
|
$ |
(258,902 |
) |
|
$ |
11 |
|
|
$ |
423,318 |
|
Adoption of convertible debt standard
(see Note 3) |
|
|
— |
|
|
|
35,436 |
|
|
|
(1,200 |
) |
|
|
— |
|
|
|
34,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2007, as adjusted |
|
$ |
98,420 |
|
|
$ |
619,225 |
|
|
$ |
(260,102 |
) |
|
$ |
11 |
|
|
$ |
$457,554 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(7,334 |
) |
|
|
— |
|
|
|
(7,334 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of
investments, net of deferred tax
expense of ($15) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
(7,334 |
) |
|
|
26 |
|
|
|
(7,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of
uncertain tax position guidance in
ASC 740 |
|
|
— |
|
|
|
— |
|
|
|
(955 |
) |
|
|
— |
|
|
|
(955 |
) |
Restricted stock activity |
|
|
9 |
|
|
|
440 |
|
|
|
— |
|
|
|
— |
|
|
|
449 |
|
Issuance of common stock |
|
|
172 |
|
|
|
1,082 |
|
|
|
— |
|
|
|
— |
|
|
|
1,254 |
|
Stock options exercised |
|
|
265 |
|
|
|
1,249 |
|
|
|
— |
|
|
|
— |
|
|
|
1,514 |
|
Stock option expense |
|
|
— |
|
|
|
1,544 |
|
|
|
— |
|
|
|
— |
|
|
|
1,544 |
|
Tax benefit associated with stock
options exercised |
|
|
— |
|
|
|
181 |
|
|
|
— |
|
|
|
— |
|
|
|
181 |
|
Purchase and retirement of common
stock |
|
|
(6,618 |
) |
|
|
(42,009 |
) |
|
|
— |
|
|
|
— |
|
|
|
(48,627 |
) |
Dividends ($.10 per share) |
|
|
— |
|
|
|
(9,374 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2008, as adjusted |
|
$ |
92,248 |
|
|
$ |
572,338 |
|
|
$ |
(268,391 |
) |
|
$ |
37 |
|
|
$ |
396,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
| |
|
|
|
|
|
Additional |
|
|
|
|
|
|
Appreciation |
|
|
Total |
|
| |
|
Common |
|
|
Paid-In |
|
|
Accumulated |
|
|
(Depreciation) |
|
|
Shareholders’ |
|
| |
|
Stock(1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2008, as adjusted |
|
$ |
92,248 |
|
|
$ |
572,338 |
|
|
$ |
(268,391 |
) |
|
$ |
37 |
|
|
$ |
396,232 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
23,266 |
|
|
|
— |
|
|
|
23,266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
|
|
— |
|
|
|
— |
|
|
|
23,266 |
|
|
|
(2 |
) |
|
|
23,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
Repurchase of convertible notes, net of
tax benefit of $245 |
|
|
|
|
|
|
(435 |
) |
|
|
|
|
|
|
|
|
|
|
(435 |
) |
Dividends ($.105 per share) |
|
|
— |
|
|
|
(9,734 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,734 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2009, as adjusted |
|
$ |
92,684 |
|
|
$ |
561,063 |
|
|
$ |
(245,125 |
) |
|
$ |
35 |
|
|
$ |
408,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
55
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
| |
|
|
|
|
|
Additional |
|
|
|
|
|
|
Appreciation |
|
|
Total |
|
| |
|
Common |
|
|
Paid-In |
|
|
|
|
|
|
(Depreciation) of |
|
|
Shareholders’ |
|
| |
|
Stock(1) |
|
|
Capital |
|
|
Accumulated Deficit |
|
|
Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2009, as adjusted |
|
$ |
92,684 |
|
|
$ |
561,063 |
|
|
$ |
(245,125 |
) |
|
$ |
35 |
|
|
$ |
408,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
30,978 |
|
|
|
— |
|
|
|
30,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized depreciation of
investments, net of deferred tax
benefit of $9 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive loss |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
30,978 |
|
|
|
(17 |
) |
|
|
30,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity |
|
|
115 |
|
|
|
549 |
|
|
|
— |
|
|
|
— |
|
|
|
664 |
|
Issuance of common stock |
|
|
156 |
|
|
|
566 |
|
|
|
— |
|
|
|
— |
|
|
|
722 |
|
Stock options exercised |
|
|
82 |
|
|
|
304 |
|
|
|
— |
|
|
|
— |
|
|
|
386 |
|
Stock option expense |
|
|
— |
|
|
|
1,054 |
|
|
|
— |
|
|
|
— |
|
|
|
1,054 |
|
Tax benefit associated with stock
activity |
|
|
— |
|
|
|
(120 |
) |
|
|
— |
|
|
|
— |
|
|
|
(120 |
) |
Purchase and retirement of common
stock |
|
|
(743 |
) |
|
|
(3,313 |
) |
|
|
— |
|
|
|
— |
|
|
|
(4,056 |
) |
Retirement of call options, net of
tax expense of $1,247 |
|
|
— |
|
|
|
2,315 |
|
|
|
— |
|
|
|
— |
|
|
|
2,315 |
|
Retirement of common stock warrants |
|
|
— |
|
|
|
(3,143 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3,143 |
) |
Repurchase of convertible notes, net
of tax benefit of $442 |
|
|
— |
|
|
|
(786 |
) |
|
|
— |
|
|
|
— |
|
|
|
(786 |
) |
Dividends ($.12 per share) |
|
|
— |
|
|
|
(11,170 |
) |
|
|
— |
|
|
|
— |
|
|
|
(11,170 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2010 |
|
$ |
92,294 |
|
|
$ |
547,319 |
|
|
$ |
(214,147 |
) |
|
$ |
18 |
|
|
$ |
425,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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.
56
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
| |
|
|
|
|
|
(As Adjusted) |
|
|
(As Adjusted) |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
30,978 |
|
|
$ |
23,266 |
|
|
$ |
(7,334 |
) |
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net impairment losses and (gains) on dispositions, net |
|
|
(645 |
) |
|
|
218 |
|
|
|
353 |
|
Impairment of goodwill |
|
|
— |
|
|
|
— |
|
|
|
25,952 |
|
(Gain) loss on early extinguishment of debt |
|
|
1,035 |
|
|
|
(6,146 |
) |
|
|
— |
|
Depreciation and amortization |
|
|
26,367 |
|
|
|
27,666 |
|
|
|
26,579 |
|
Non-cash interest and amortization of discount on senior convertible notes |
|
|
5,901 |
|
|
|
7,139 |
|
|
|
7,387 |
|
Provision for doubtful accounts |
|
|
4,758 |
|
|
|
7,916 |
|
|
|
7,995 |
|
Share-based compensation |
|
|
2,457 |
|
|
|
2,204 |
|
|
|
2,819 |
|
Excess tax benefits from share-based payment arrangements |
|
|
(121 |
) |
|
|
— |
|
|
|
(227 |
) |
Provision for deferred income taxes |
|
|
10,922 |
|
|
|
9,945 |
|
|
|
5,124 |
|
Estimated obligation to fund cemetery perpetual care trust |
|
|
31 |
|
|
|
3,421 |
|
|
|
13,281 |
|
Other |
|
|
(649 |
) |
|
|
158 |
|
|
|
443 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables |
|
|
(1,980 |
) |
|
|
4,216 |
|
|
|
(3,058 |
) |
(Increase) decrease in prepaid expenses |
|
|
1,249 |
|
|
|
569 |
|
|
|
(1,031 |
) |
(Increase) decrease in inventories and cemetery property |
|
|
301 |
|
|
|
(553 |
) |
|
|
(2,509 |
) |
Federal income tax refunds |
|
|
1,600 |
|
|
|
18,018 |
|
|
|
15,165 |
|
Increase (decrease) in accounts payable and accrued expenses |
|
|
(4,502 |
) |
|
|
(7,674 |
) |
|
|
2,623 |
|
Net effect of preneed funeral production and maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in preneed funeral receivables and trust investments |
|
|
11,424 |
|
|
|
16,335 |
|
|
|
36,604 |
|
Increase (decrease) in deferred preneed funeral revenue |
|
|
(4,143 |
) |
|
|
2,642 |
|
|
|
(11,067 |
) |
Decrease in deferred preneed funeral receipts held in trust |
|
|
(14,043 |
) |
|
|
(13,932 |
) |
|
|
(30,642 |
) |
Net effect of preneed cemetery production and deliveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in preneed cemetery receivables and trust investments |
|
|
905 |
|
|
|
12,069 |
|
|
|
15,910 |
|
Decrease in deferred preneed cemetery revenue |
|
|
(8,919 |
) |
|
|
(16,276 |
) |
|
|
(8,673 |
) |
Increase (decrease) in deferred preneed cemetery receipts held in trust |
|
|
178 |
|
|
|
(7,482 |
) |
|
|
(9,599 |
) |
Increase (decrease) in other |
|
|
250 |
|
|
|
1,176 |
|
|
|
(1,572 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
63,354 |
|
|
|
84,895 |
|
|
|
84,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable securities |
|
|
5,901 |
|
|
|
250 |
|
|
|
20,219 |
|
Purchases of certificates of deposit and marketable securities |
|
|
(15,875 |
) |
|
|
(197 |
) |
|
|
(19,956 |
) |
Proceeds from sale of assets |
|
|
1,681 |
|
|
|
724 |
|
|
|
599 |
|
Purchase of subsidiaries and other investments, net of cash acquired |
|
|
— |
|
|
|
(1,923 |
) |
|
|
(1,378 |
) |
Additions to property and equipment |
|
|
(16,450 |
) |
|
|
(21,238 |
) |
|
|
(26,995 |
) |
Other |
|
|
176 |
|
|
|
49 |
|
|
|
144 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(24,567 |
) |
|
|
(22,335 |
) |
|
|
(27,367 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(31,505 |
) |
|
|
(60,860 |
) |
|
|
(198 |
) |
Retirement of common stock warrants |
|
|
(3,143 |
) |
|
|
(8,560 |
) |
|
|
— |
|
Issuance of common stock |
|
|
694 |
|
|
|
299 |
|
|
|
1,845 |
|
Retirement of call options |
|
|
3,562 |
|
|
|
8,714 |
|
|
|
— |
|
Purchase and retirement of common stock |
|
|
(4,056 |
) |
|
|
(75 |
) |
|
|
(48,627 |
) |
Debt refinancing costs |
|
|
(38 |
) |
|
|
(2,110 |
) |
|
|
— |
|
Dividends |
|
|
(11,170 |
) |
|
|
(9,734 |
) |
|
|
(9,374 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
121 |
|
|
|
— |
|
|
|
227 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(45,535 |
) |
|
|
(72,326 |
) |
|
|
(56,127 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(6,748 |
) |
|
|
(9,766 |
) |
|
|
1,029 |
|
Cash and cash equivalents, beginning of year |
|
|
62,808 |
|
|
|
72,574 |
|
|
|
71,545 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
56,060 |
|
|
$ |
62,808 |
|
|
$ |
72,574 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net |
|
$ |
(309 |
) |
|
$ |
(14,353 |
) |
|
$ |
(3,980 |
) |
Interest |
|
$ |
19,311 |
|
|
$ |
22,331 |
|
|
$ |
22,120 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to executive officers and directors |
|
$ |
414 |
|
|
$ |
305 |
|
|
$ |
923 |
|
Issuance of restricted stock, net of forfeitures |
|
$ |
724 |
|
|
$ |
20 |
|
|
$ |
162 |
|
See accompanying notes to consolidated financial statements.
57
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
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 and cremation 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, 2010, the Company owned and operated 217 funeral homes and 140 cemeteries in 24 states within
the United States and Puerto Rico. 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. A discussion of
discontinued operations and assets held for sale can be found in Note 12.
(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 amortized cost, but determines the fair value for disclosure
purposes. The fair value of the Company’s 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 call options purchased and warrants sold contemporaneously with the sale of the senior
convertible notes issued in fiscal year 2007 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 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
58
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (2) |
|
Summary of Significant Accounting Policies—(Continued) |
|
|
|
| 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
Company’s 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, 2010, 2009 and 2008, depreciation expense totaled $25,622, $26,662 and $25,456,
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 Company’s evaluation of the goodwill of its operations previously consisted of eight
reporting units. In the third quarter of fiscal year 2010, the Company combined its Western North
and Western South regions, which were previously in different reporting units in both the funeral
segment and cemetery segment, to form new Western regions in both the funeral and cemetery
segments. In connection with this change in its regions, the Company reviewed its reporting units
and increased the number of reporting units from eight to ten reporting units. Those reporting
units are: the funeral operating segment comprised of four reporting units (Southern, Southwestern,
Northern, Midwestern, and Central regions aggregated; Western region; Puerto Rico region; and
Southeastern region); the cemetery operating segment comprised of six reporting units (Southwestern
region; Southern and Midwestern regions aggregated; Puerto Rico region; Central and Northern
regions aggregated; Southeastern region; and Western region).
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
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) |
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 Company’s 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 unit’s 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, as supplemented by comparing them to the trading multiples of
companies in this industry and supplier industries calculated as enterprise value divided by
EBITDA. We also reviewed multiples used in recent acquisition transactions within the deathcare
industry.
In reviewing goodwill for impairment, the Company first compares the fair value of each of its
reporting units with their carrying amounts (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 unit’s goodwill by comparing the implied fair value of the reporting
unit’s 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 reporting units’ assets and liabilities.
The Company’s goodwill impairment test involves estimates and management judgment. The
Company determines fair value of each reporting unit based on present value techniques including
discounted cash flows. 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 the Company’s cash flows, it used growth rates
generally ranging from two to five percent in revenues and costs, with the growth in costs slightly
below that of revenues, resulting in growth in cash flows of approximately six percent overall.
The Company adjusted the results for its estimate to reflect of the impact of the realized losses
in its trusts on its cash flows. For the discount rate, the Company used 9.0 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 1.5 to 4 percent. The
Company considered a sensitivity analysis of the terminal values and used the midpoint enterprise
value as its best estimate. As of October 31, 2010, none of the Company’s reporting units with
material goodwill are at risk of failing step one of the goodwill impairment test.
(h) Stock-Based Compensation
The Company’s 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
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) |
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 actually
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 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. 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 based on
applicable state law and reclassifies the corresponding amount from deferred preneed funeral
revenues into deferred preneed funeral and cemetery receipts held in trust.
The Company’s policy for recognizing trust income follows the allocation of trust earnings to
individual contracts as stipulated in the Company’s respective trust agreements for distributable
income. In substantially all of the Company’s trusts, trust earnings which include 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. In many jurisdictions, the Company may be obligated to fund any shortfall if
the amounts deposited by the
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) |
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 Company’s backlog. Based upon
the analysis described in Note 2(m), no loss amounts have been required to be recognized for the
years ended October 31, 2010, 2009 and 2008. 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, 2010 and
2009 was $530,424 and $507,349, 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 Company’s
financial statements. Insurance commissions are recognized as revenue as earned, net of an
allowance for cancellations. This allowance amounted to $3,527 and $3,446 for October 31, 2010 and
2009, respectively. The costs related to the commissions paid to the Company’s sales counselors
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 including any build-up (i.e., the policy proceeds) is 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 based on applicable state law
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 in advance of
performance of the service or delivery of the merchandise). Future contract revenues
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) |
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.
The Company’s policy for recognizing trust income follows the allocation of trust earnings to
individual contracts as stipulated in the Company’s respective trust agreements for distributable
income. In substantially all of the Company’s trusts, trust earnings which include 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, 2010 and
2009, the amount of inventory included in the Company’s consolidated balance sheets on which the 10
percent collection requirement has not been met was $951 and $1,008, 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 between 10
percent and 15 percent, of the proceeds from cemetery property sales is deposited into perpetual
care trusts. As payments are received, the Company generally funds the perpetual care trust based
on applicable state law 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 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. The
Company currently recognizes and withdraws all dividend and interest income earned and, where
permitted, net capital gains realized by cemetery perpetual care funds.
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.
The Company is currently utilizing some of the cash that could be withdrawn from the trusts to
satisfy its funding obligation resulting from the net realized capital losses recorded in fiscal
years 2008, 2009 and 2010.
Some of the Company’s 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 FASB’s applicable guidance on the
consolidation of variable interest entities. This resulted in the consolidation of the Company’s
preneed funeral and cemetery
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) |
merchandise and services trusts and the Company’s 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 Company’s consolidated statement of cash flows, but does require
disclosure of certain financing and investing activities. See Notes 4, 5 and 6.
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 Company’s consolidated balance sheet. These earnings are then reclassified
to deferred preneed funeral and cemetery receipts held in trust in the Company’s 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
Company’s 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, 2010.
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 net 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 net realized gains and there are subsequent 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 net realized losses.
See Notes 4, 5 and 6 for fair market value information for the Company’s 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.
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) |
Cash flows from preneed funeral and cemetery merchandise and services contracts and cemetery
perpetual care contracts are presented as operating cash flows in the Company’s consolidated
statement of cash flows, with related unrealized gains and losses excluded and reflected in
accumulated other comprehensive income or loss in the Company’s consolidated balance sheet.
(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 Company’s 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 and 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 such amounts were recognized during fiscal years 2010, 2009 or 2008.
(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 records 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 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).
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) |
(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 available to common
shareholders by the weighted average number of common shares outstanding during each period.
Diluted earnings per common share is computed by dividing net earnings available to common
shareholders 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 Company’s 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 Company’s common stock. Repurchases under the
program are limited to the Company’s 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. On September
22, 2010, the Company announced plans to resume purchases of its Class A common stock. During
fiscal year 2010, the Company repurchased 743,262 shares of its Class A common stock for $4,034 at
an average price of $5.43 per share. As of October 31, 2010, the Company has repurchased 7,377,398
shares of its Class A common stock since the start of the program for $52,538 at an average price
of $7.12 per share and has $22,462 remaining available under this program.
(s) Derivatives
The Company accounts for derivative financial instruments under ASC 815 — Derivatives and
Hedging. The Company’s only derivatives are its covered calls in its trust portfolios. A
discussion of covered calls can be found in Notes 4, 5 and 6.
(t) Estimated Insurance Loss Liabilities
The Company purchases comprehensive general liability, automobile liability and workers
compensation
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) |
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 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 Company’s 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 Company’s 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 Company’s financial performance. For the years ended October 31,
2010, 2009 and 2008, the Company paid $11,170, $9,734 and $9,374, respectively, in dividends.
(v) Leases
The Company has noncancellable operating leases, primarily for land and buildings, that expire
over the next one to 20 years, with the exception of eight leases that expire between 2032 and
2039. As of October 31, 2010, approximately 77 percent of the Company’s 217 funeral locations were
owned by the Company’s subsidiaries and approximately 23 percent were held under operating leases.
The Company records operating lease expense for
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) |
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.
(x) Reclassifications
Certain reclassifications have been made to the 2009 and 2008 consolidated financial
statements in order for these periods to be comparable. All businesses sold in fiscal years 2008,
2009 and 2010 that met the criteria for discontinued operations under applicable accounting
guidance have been classified as discontinued operations for all periods presented. Results
associated with real estate sold or intended to be sold have been included in continuing operations
for all periods presented. See Note 12 for a discussion of discontinued operations.
|
|
|
| (3) |
|
Change in Accounting Principles and New Accounting Principles |
In December 2007, the FASB issued Accounting Standards Codification 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 entity’s first
fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year
beginning November 1, 2009. This guidance applies 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 entity’s first fiscal year beginning after December
15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. The adoption
did not have a material impact on the Company’s consolidated results of operations, financial
position or cash flows.
The FASB issued guidance in February 2008 which provided a one-year deferral of the effective
date of ASC 820-Fair Value Measurements and Disclosures (“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 major categories of assets and liabilities that are subject to
non-recurring fair value measurement for which these provisions of ASC 820 apply are as follows:
reporting units measured at fair value in the goodwill impairment test under ASC
350-Intangibles—Goodwill and Other, and non-financial assets and liabilities initially measured at
fair value in a business combination under ASC 805-Business Combinations. On November 1, 2009, the
Company adopted this guidance for its non-financial assets and liabilities, such as goodwill, that
are disclosed or recognized at fair value on a non-recurring basis. The adoption did not have a
material impact on the Company’s consolidated results of operations, financial position or cash
flows.
In May 2008, the FASB issued guidance regarding the accounting for convertible debt
instruments that may be settled in cash upon conversion. The guidance states that issuers of
convertible debt instruments that may be settled in cash upon conversion should account separately
for the liability and equity components of the instruments
68
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) |
in a manner that will reflect the entity’s nonconvertible debt borrowing rate as the related
interest cost is recognized in subsequent periods. The entity must determine the carrying amount
of the liability component of any outstanding debt instrument by estimating the fair value of a
similar liability without the conversion option. The amount of the equity component is then
calculated by deducting the fair value of the liability component from the principal amount of the
debt instrument. The value of the debt instrument is adjusted through a discount to the face value
of the debt, which is amortized as non-cash interest expense over the expected life of the debt.
This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 and 3.375
percent senior convertible notes due 2016 which were originally issued in 2007, and is required to
be applied retrospectively to all periods presented. The Company adopted this guidance effective
November 1, 2009. The tables below reflect the Company’s retrospective adoption of this guidance as
of November 1, 2009 and summarize the impact on the Company’s balance sheet as of October 31, 2009
and statements of earnings for the years ended October 31, 2009 and 2008. See Note 15 for
additional information.
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 considered participating securities. Dividends are currently paid by the
Company on all shares of restricted stock, whether vested or nonvested, at the same rate as
dividends on normal shares of the Company’s 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 nonvested restricted stock in
the basic earnings per share calculation and allocate earnings to common stock and the
participating securities according to dividends declared and participation rights in undistributed
earnings. This is effective for financial statements issued for fiscal years beginning after
December 15, 2008 and must be applied retrospectively to all periods presented (including interim
financial statements, summaries of earnings and selected financial data). The Company adopted this
guidance effective November 1, 2009. The impact of adopting this guidance was immaterial and is
presented in the statements of earnings tables below, along with the impact of the adoption of the
convertible debt guidance described above.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Effects of |
|
|
| |
|
|
|
|
|
the Adoption |
|
|
| |
|
October 31, 2009 |
|
of Convertible Debt |
|
October 31, 2009 |
| |
|
As Reported |
|
Guidance |
|
As Adjusted |
Balance Sheet: |
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax assets |
|
$ |
145,110 |
|
|
$ |
(9,997 |
) |
|
$ |
135,113 |
|
Long-term debt |
|
|
367,496 |
|
|
|
(27,770 |
) |
|
|
339,726 |
|
Additional paid-in capital |
|
|
526,062 |
|
|
|
35,001 |
|
|
|
561,063 |
|
Accumulated deficit |
|
|
(227,897 |
) |
|
|
(17,228 |
) |
|
|
(245,125 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Effects of the |
|
|
Effects of |
|
|
|
|
|
|
Year Ended |
|
| |
|
October |
|
|
Adoption of |
|
|
Adoption |
|
|
Effect of |
|
|
October |
|
| |
|
31, 2009 |
|
|
Convertible Debt |
|
|
of Participating |
|
|
Discontinued |
|
|
31, 2009 |
|
| |
|
As Reported |
|
|
Guidance |
|
|
Share Guidance |
|
|
Operations |
|
|
As Adjusted |
|
Statement of earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
22,353 |
|
|
$ |
5,423 |
|
|
|
|
|
|
|
|
|
|
$ |
27,776 |
|
Gain on early
extinguishment of debt |
|
|
20,078 |
|
|
|
(13,932 |
) |
|
|
|
|
|
|
|
|
|
|
6,146 |
|
Income taxes |
|
|
19,611 |
|
|
|
(6,968 |
) |
|
|
|
|
|
|
(46 |
) |
|
|
12,597 |
|
Earnings from continuing
operations |
|
|
35,653 |
|
|
|
(12,387 |
) |
|
|
|
|
|
|
(75 |
) |
|
|
23,191 |
|
Net earnings |
|
|
35,653 |
|
|
|
(12,387 |
) |
|
|
|
|
|
|
|
|
|
|
23,266 |
|
Basic earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from
continuing operations |
|
$ |
.39 |
|
|
$ |
(.14 |
) |
|
|
|
|
|
|
|
|
|
$ |
.25 |
|
Earnings from
discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
.39 |
|
|
$ |
(.14 |
) |
|
|
|
|
|
|
|
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from
continuing operations |
|
$ |
.39 |
|
|
$ |
(.14 |
) |
|
|
|
|
|
|
|
|
|
$ |
.25 |
|
Earnings from
discontinued operations |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
$ |
.39 |
|
|
$ |
(.14 |
) |
|
|
|
|
|
|
|
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic
shares outstanding |
|
|
91,898 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
91,898 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted
shares outstanding |
|
|
91,995 |
|
|
|
|
|
|
|
(17 |
) |
|
|
|
|
|
|
91,978 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Effects of the |
|
|
Effects |
|
|
|
|
|
|
Year Ended |
|
| |
|
October |
|
|
Adoption of |
|
|
of Adoption |
|
|
Effect of |
|
|
October |
|
| |
|
31, 2008 |
|
|
Convertible Debt |
|
|
of Participating |
|
|
Discontinued |
|
|
31, 2008 |
|
| |
|
As Reported |
|
|
Guidance |
|
|
Share Guidance |
|
|
Operations |
|
|
As Adjusted |
|
Statement of earnings: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
$ |
24,115 |
|
|
$ |
5,690 |
|
|
|
|
|
|
|
|
|
|
$ |
29,805 |
|
Income taxes |
|
|
22,407 |
|
|
|
(2,049 |
) |
|
|
|
|
|
|
(76 |
) |
|
|
20,282 |
|
Loss from continuing
operations |
|
|
(3,693 |
) |
|
|
(3,641 |
) |
|
|
|
|
|
|
(134 |
) |
|
|
(7,468 |
) |
Net loss |
|
|
(3,693 |
) |
|
|
(3,641 |
) |
|
|
|
|
|
|
|
|
|
|
(7,334 |
) |
Basic earnings (loss)
per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing
operations |
|
$ |
(.04 |
) |
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
$ |
(.08 |
) |
Earnings from
discontinued
operations |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(.04 |
) |
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
$ |
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings
(loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from
continuing
operations |
|
$ |
(.04 |
) |
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
$ |
(.08 |
) |
Earnings from
discontinued
operations |
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
$ |
(.04 |
) |
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
$ |
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
basic shares
outstanding |
|
|
93,795 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
93,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average
diluted shares
outstanding |
|
|
93,795 |
|
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
93,795 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which requires
additional fair value disclosures. This guidance requires reporting entities to disclose transfers
in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and
settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is
effective for interim and annual reporting periods beginning after December 15, 2009, except for
the disclosures about purchases, sales, issuances and settlements related to Level 3 activity.
Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim
periods within those fiscal years. The guidance on transfers between Levels 1 and 2 was adopted by
the Company as of its second fiscal quarter ended April 30, 2010. The guidance on Level 3 activity
is effective for the Company’s fiscal year beginning November 1, 2011. The Company is evaluating
the impact the adoption will have on its consolidated financial statements.
In June 2009, the FASB issued guidance which amends the consolidation guidance for variable
interest entities. 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 Company’s fiscal year beginning November 1, 2010. The Company does
not expect the adoption of this guidance to have a material effect on its consolidated financial
statements.
|
|
|
| (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, 2010 and 2009 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
Trust assets |
|
$ |
383,792 |
|
|
$ |
358,256 |
|
Receivables from customers |
|
|
42,879 |
|
|
|
43,225 |
|
|
|
|
|
|
|
|
|
|
|
426,671 |
|
|
|
401,481 |
|
Allowances for cancellations |
|
|
(11,753 |
) |
|
|
(12,143 |
) |
|
|
|
|
|
|
|
Preneed funeral receivables and trust investments |
|
$ |
414,918 |
|
|
$ |
389,338 |
|
|
|
|
|
|
|
|
71
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (4) |
|
Preneed Funeral Activities—(Continued) |
The cost basis and market values associated with preneed funeral merchandise and services
trust assets as of October 31, 2010 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other
short-term investments |
|
$ |
26,118 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
26,118 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
2,224 |
|
|
|
84 |
|
|
|
(1 |
) |
|
|
2,307 |
|
|
|
|
|
Corporate bonds |
|
|
44,077 |
|
|
|
2,887 |
|
|
|
(1 |
) |
|
|
46,963 |
|
|
|
|
|
Preferred stocks |
|
|
56,297 |
|
|
|
356 |
|
|
|
(2,220 |
) |
|
|
54,433 |
|
|
|
|
|
Common stocks |
|
|
234,946 |
|
|
|
925 |
|
|
|
(91,593 |
) |
|
|
144,278 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
27,154 |
|
|
|
185 |
|
|
|
(2,936 |
) |
|
|
24,403 |
|
|
|
|
|
Fixed income |
|
|
53,444 |
|
|
|
1,718 |
|
|
|
(767 |
) |
|
|
54,395 |
|
|
|
|
|
Commodity |
|
|
13,572 |
|
|
|
1,968 |
|
|
|
— |
|
|
|
15,540 |
|
|
|
|
|
Insurance contracts and other
long-term investments |
|
|
14,171 |
|
|
|
146 |
|
|
|
(98 |
) |
|
|
14,219 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
472,003 |
|
|
$ |
8,269 |
|
|
$ |
(97,616 |
) |
|
$ |
382,656 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
81.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,136 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
383,792 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2009 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
|
|
|
Less trust investments of assets
held for sale |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(174 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
358,256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (4) |
|
Preneed Funeral Activities—(Continued) |
The estimated maturities and market values of debt securities included above are as follows:
| |
|
|
|
|
| |
|
October 31, 2010 |
|
Due in one year or less |
|
$ |
5,723 |
|
Due in one to five years |
|
|
30,200 |
|
Due in five to ten years |
|
|
13,326 |
|
Thereafter |
|
|
21 |
|
|
|
|
|
|
|
$ |
49,270 |
|
|
|
|
|
The Company is actively managing a covered call program on its equity securities within the
funeral merchandise and services trust in order to provide an opportunity for additional income.
As of October 31, 2010 and 2009, the Company had outstanding covered calls with a market value of
$311 and $424, respectively. These covered calls are included at market value in the balance sheet
line “preneed funeral receivables and trust investments.” For the fiscal years October 31, 2010
and 2009, the Company realized trust earnings (losses) of approximately ($270) and $463,
respectively, related to the covered call program. These trust earnings and losses are accounted
for in the same manner as for other funeral merchandise and services trust earnings and flow
through funeral revenue in the statement of earnings. Although the Company realized losses
associated with the covered call program as of October 31, 2010, it continues to hold the
underlying securities against which these covered calls were issued; these underlying securities
appreciated in value by $3,877 during the period that the covered calls were outstanding.
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. The Company’s
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, convertible bonds and
preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.
The Company’s Level 3 investments include insurance contracts and partnership investments
purchased within the trusts. 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 is based upon the current face value of the contracts according to the respective
insurance companies which is deemed to approximate fair market value. The fair market value of the
partnership investments was determined by using their most recent audited financial statements
and assessing the market value of the underlying securities within the partnership.
73
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (4) |
|
Preneed Funeral Activities—(Continued) |
The inputs into the fair value of the Company’s preneed funeral merchandise and services trust
investments are categorized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Significant |
|
|
|
|
| |
|
Quoted Market |
|
Other |
|
Significant |
|
|
| |
|
Prices in Active |
|
Observable |
|
Unobservable |
|
|
| |
|
Markets |
|
Inputs |
|
Inputs |
|
Fair Market |
| |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
Trust investments — October 31, 2010 |
|
$ |
272,173 |
|
|
$ |
103,703 |
|
|
$ |
6,780 |
|
|
$ |
382,656 |
|
Trust investments — October 31, 2009 |
|
$ |
256,799 |
|
|
$ |
91,956 |
|
|
$ |
8,662 |
|
|
$ |
357,417 |
|
The change in the Company’s preneed funeral merchandise and services trust investments with
significant unobservable inputs (Level 3) is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
Fair market value, beginning balance |
|
$ |
8,662 |
|
|
$ |
11,299 |
|
Total unrealized losses included in
other comprehensive income
(1) |
|
|
(1,762 |
) |
|
|
(2,554 |
) |
Distributions and other, net |
|
|
(120 |
) |
|
|
(83 |
) |
|
|
|
|
|
|
|
Fair market value, ending balance |
|
$ |
6,780 |
|
|
$ |
8,662 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
All gains (losses) recognized in other comprehensive income for funeral trust
investments are attributable to the Company’s 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, |
| |
|
2010 |
|
2009 |
|
2008 |
Purchases |
|
$ |
41,441 |
|
|
$ |
53,739 |
|
|
$ |
18,839 |
|
Sales |
|
|
45,995 |
|
|
|
54,120 |
|
|
|
24,072 |
|
Realized gains from sales of investments |
|
|
2,222 |
|
|
|
2,566 |
|
|
|
2,572 |
|
Realized losses from sales of investments and other |
|
|
(5,959 |
)(1) |
|
|
(11,167 |
) (2) |
|
|
(24,868 |
) (3) |
Interest income, dividend and other ordinary income |
|
|
10,685 |
|
|
|
11,328 |
|
|
|
13,478 |
|
Deposits |
|
|
26,018 |
|
|
|
26,540 |
|
|
|
31,520 |
|
Withdrawals |
|
|
44,009 |
|
|
|
41,085 |
|
|
|
46,403 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase) in net unrealized losses |
|
|
36,989 |
|
|
|
37,437 |
|
|
|
(109,761 |
) |
Reclassification to deferred preneed funeral
receipts held in trust |
|
|
(36,989 |
) |
|
|
(37,437 |
) |
|
|
109,761 |
|
|
|
|
| (1) |
|
Includes $4,722 in losses from the sale of investments and $1,416 in losses related
to certain investments that the Company determined it no longer had the intent to hold until
they recover in value. |
| |
| (2) |
|
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. |
| |
| (3) |
|
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. |
74
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (4) |
|
Preneed Funeral Activities—(Continued) |
The following tables 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, 2010 and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
| |
|
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 |
|
|
896 |
|
|
|
(1 |
) |
|
|
— |
|
|
|
— |
|
|
|
896 |
|
|
|
(1 |
) |
Preferred stocks |
|
|
49 |
|
|
|
(1 |
) |
|
|
35,205 |
|
|
|
(2,219 |
) |
|
|
35,254 |
|
|
|
(2,220 |
) |
Common stocks |
|
|
(17 |
) |
|
|
(136 |
) |
|
|
136,483 |
|
|
|
(91,457 |
) |
|
|
136,466 |
|
|
|
(91,593 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
— |
|
|
|
— |
|
|
|
20,298 |
|
|
|
(2,936 |
) |
|
|
20,298 |
|
|
|
(2,936 |
) |
Fixed income |
|
|
3,575 |
|
|
|
(3 |
) |
|
|
4,550 |
|
|
|
(764 |
) |
|
|
8,125 |
|
|
|
(767 |
) |
Insurance contracts
and other long-term
investments |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(98 |
) |
|
|
— |
|
|
|
(98 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
4,503 |
|
|
$ |
(141 |
) |
|
$ |
196,557 |
|
|
$ |
(97,475 |
) |
|
$ |
201,060 |
|
|
$ |
(97,616 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, concerns specific to
the issuer of the securities and overall market performance. Of the total unrealized losses at
October 31, 2010, 94 percent, or $91,593, were generated by common stock investments. Most of the
common stock investments are part of the S&P 500 Index. The Company generally expects its
portfolio performance to improve if the performance of the overall financial market improves, but
would also expect its performance to deteriorate if the overall financial market declines. 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.
|
|
|
| (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
75
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) |
preneed property interment rights are included in the Company’s
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, 2010 and 2009 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
Trust assets |
|
$ |
182,789 |
|
|
$ |
163,938 |
|
Receivables from customers |
|
|
31,656 |
|
|
|
35,718 |
|
|
|
|
|
|
|
|
|
|
|
214,445 |
|
|
|
199,656 |
|
Allowance for cancellations |
|
|
(4,695 |
) |
|
|
(6,239 |
) |
|
|
|
|
|
|
|
Preneed cemetery receivables and trust investments |
|
$ |
209,750 |
|
|
$ |
193,417 |
|
|
|
|
|
|
|
|
The cost basis and market values associated with the preneed cemetery merchandise and services
trust assets as of October 31, 2010 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other
short-term investments |
|
$ |
12,719 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
12,719 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
5,655 |
|
|
|
667 |
|
|
|
(2 |
) |
|
|
6,320 |
|
|
|
|
|
Corporate bonds |
|
|
11,790 |
|
|
|
950 |
|
|
|
(13 |
) |
|
|
12,727 |
|
|
|
|
|
Preferred stocks |
|
|
20,132 |
|
|
|
139 |
|
|
|
(1,182 |
) |
|
|
19,089 |
|
|
|
|
|
Common stocks |
|
|
122,529 |
|
|
|
1,223 |
|
|
|
(45,792 |
) |
|
|
77,960 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
30,291 |
|
|
|
50 |
|
|
|
(6,978 |
) |
|
|
23,363 |
|
|
|
|
|
Fixed income |
|
|
21,405 |
|
|
|
660 |
|
|
|
(6 |
) |
|
|
22,059 |
|
|
|
|
|
Commodity |
|
|
6,521 |
|
|
|
966 |
|
|
|
— |
|
|
|
7,487 |
|
|
|
|
|
Other long-term investments |
|
|
592 |
|
|
|
3 |
|
|
|
— |
|
|
|
595 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
231,634 |
|
|
$ |
4,658 |
|
|
$ |
(53,973 |
) |
|
$ |
182,319 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
470 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
182,789 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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—(Continued) |
The cost basis and market values associated with the preneed cemetery merchandise and services
trust assets as of October 31, 2009 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities and market values of debt securities included above are as follows:
| |
|
|
|
|
| |
|
October 31, 2010 |
|
Due in one year or less |
|
$ |
2,885 |
|
Due in one to five years |
|
|
10,830 |
|
Due in five to ten years |
|
|
5,218 |
|
Thereafter |
|
|
114 |
|
|
|
|
|
|
|
$ |
19,047 |
|
|
|
|
|
The Company is actively managing a covered call program on its equity securities within the
cemetery merchandise and services trust in order to provide an opportunity for additional income.
As of October 31, 2010 and 2009, the Company had outstanding covered calls with a market value of
$128 and $308, respectively. These covered calls are included at market value in the balance sheet
line “preneed cemetery receivables and trust investments.” For the fiscal years October 31, 2010
and 2009, the Company realized trust earnings (losses) of approximately ($220) and $285,
respectively, related to the covered call program. These trust earnings and losses are accounted
for in the same manner as for other cemetery merchandise and services trust earnings and flow
through cemetery revenue in the statement of earnings. Although the Company realized losses
associated with the covered call program as of October 31, 2010, it continues to hold the
underlying securities against which these covered calls were issued; these underlying securities
appreciated in value by $3,014 during the period that the covered calls were outstanding.
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. The Company’s
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, convertible bonds and preferred
stocks, all of which are classified within Level 2 of the valuation hierarchy.
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) |
There are no Level 3 investments in the preneed cemetery merchandise and services trust
investment portfolio.
The inputs into the fair value of the Company’s preneed cemetery merchandise and services
trust investments are categorized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Significant |
|
|
|
|
| |
|
Quoted Market |
|
Other |
|
Significant |
|
|
| |
|
Prices in Active |
|
Observable |
|
Unobservable |
|
|
| |
|
Markets |
|
Inputs |
|
Inputs |
|
Fair Market |
| |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
Value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments — October 31, 2010 |
|
$ |
144,048 |
|
|
$ |
38,271 |
|
|
$ |
— |
|
|
$ |
182,319 |
|
Trust investments — October 31, 2009 |
|
$ |
129,032 |
|
|
$ |
34,507 |
|
|
$ |
— |
|
|
$ |
163,539 |
|
Activity related to preneed cemetery merchandise and services trust investments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Purchases |
|
$ |
31,721 |
|
|
$ |
24,628 |
|
|
$ |
16,492 |
|
Sales |
|
|
27,364 |
|
|
|
23,104 |
|
|
|
12,081 |
|
Realized gains from sales of investments |
|
|
1,708 |
|
|
|
1,131 |
|
|
|
1,460 |
|
Realized losses from sales of investments and other |
|
|
(2,153 |
) (1) |
|
|
(8,831 |
) (2) |
|
|
(14,307 |
) (3) |
Interest income, dividend and other ordinary income |
|
|
5,322 |
|
|
|
5,005 |
|
|
|
6,486 |
|
Deposits |
|
|
17,963 |
|
|
|
18,540 |
|
|
|
17,619 |
|
Withdrawals |
|
|
18,536 |
|
|
|
21,364 |
|
|
|
19,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase) in net unrealized losses |
|
|
17,238 |
|
|
|
23,345 |
|
|
|
(57,469 |
) |
Reclassification to deferred preneed
cemetery receipts held in trust |
|
|
(17,238 |
) |
|
|
(23,345 |
) |
|
|
57,469 |
|
|
|
|
| (1) |
|
Includes $2,164 in losses from the sale of investments and $195 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 $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. |
| |
| (3) |
|
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. |
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 following tables 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,
2010 and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
| |
|
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 |
|
$ |
517 |
|
|
$ |
(2 |
) |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
517 |
|
|
$ |
(2 |
) |
Corporate bonds |
|
|
627 |
|
|
|
(6 |
) |
|
|
493 |
|
|
|
(7 |
) |
|
|
1,120 |
|
|
|
(13 |
) |
Preferred stocks |
|
|
— |
|
|
|
— |
|
|
|
15,206 |
|
|
|
(1,182 |
) |
|
|
15,206 |
|
|
|
(1,182 |
) |
Common stocks |
|
|
1,957 |
|
|
|
(139 |
) |
|
|
66,544 |
|
|
|
(45,653 |
) |
|
|
68,501 |
|
|
|
(45,792 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
— |
|
|
|
— |
|
|
|
22,582 |
|
|
|
(6,978 |
) |
|
|
22,582 |
|
|
|
(6,978 |
) |
Fixed income |
|
|
2,677 |
|
|
|
(3 |
) |
|
|
16 |
|
|
|
(3 |
) |
|
|
2,693 |
|
|
|
(6 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
5,778 |
|
|
$ |
(150 |
) |
|
$ |
104,841 |
|
|
$ |
(53,823 |
) |
|
$ |
110,619 |
|
|
$ |
(53,973 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, concerns specific to
the issuer of the securities and overall market performance. Of the total unrealized losses at
October 31, 2010, 98 percent, or $52,770 were generated by common stock investments and mutual fund
— equity investments. Most of the common stock investments are part of the S&P 500 Index, and the
mutual fund — equity investments are invested in small-cap, mid-cap and international mutual funds
that are highly diversified. The Company generally expects its portfolio performance to improve if
the performance of the overall financial market improves, but would also expect its performance to
deteriorate if the overall financial market declines. 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 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 $7,376, $6,840 and $10,660 for the years ended October 31, 2010, 2009 and
2008, respectively.
79
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 cost basis and market values of the trust investments held by the cemetery perpetual care
trusts as of October 31, 2010 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and other
short-term investments |
|
$ |
32,403 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
32,403 |
|
|
|
|
|
U.S. Government, agencies and
municipalities |
|
|
8,006 |
|
|
|
196 |
|
|
|
(54 |
) |
|
|
8,148 |
|
|
|
|
|
Corporate bonds |
|
|
31,086 |
|
|
|
1,334 |
|
|
|
(825 |
) |
|
|
31,595 |
|
|
|
|
|
Preferred stocks |
|
|
56,807 |
|
|
|
257 |
|
|
|
(6,376 |
) |
|
|
50,688 |
|
|
|
|
|
Common stocks |
|
|
90,284 |
|
|
|
1,042 |
|
|
|
(36,496 |
) |
|
|
54,830 |
|
|
|
|
|
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
5,783 |
|
|
|
49 |
|
|
|
(662 |
) |
|
|
5,170 |
|
|
|
|
|
Fixed income |
|
|
46,646 |
|
|
|
878 |
|
|
|
(304 |
) |
|
|
47,220 |
|
|
|
|
|
Other long-term investments |
|
|
401 |
|
|
|
2 |
|
|
|
(79 |
) |
|
|
324 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
271,416 |
|
|
$ |
3,758 |
|
|
$ |
(44,796 |
) |
|
$ |
230,378 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
630 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
231,008 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The cost basis and market values of the trust investments held by the cemetery perpetual care
trusts as of October 31, 2009 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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) |
The estimated maturities and market values of debt securities included above are as follows:
| |
|
|
|
|
| |
|
October 31, 2010 |
|
Due in one year or less |
|
$ |
10,715 |
|
Due in one to five years |
|
|
18,171 |
|
Due in five to ten years |
|
|
9,392 |
|
Thereafter |
|
|
1,465 |
|
|
|
|
|
|
|
$ |
39,743 |
|
|
|
|
|
The Company is actively managing a covered call program on its equity securities within the
cemetery perpetual care trust in order to provide an opportunity for additional income. As of
October 31, 2010 and 2009, the Company had outstanding covered calls with a market value of $111
and $220, respectively. These covered calls are included at market value in the balance sheet line
“cemetery perpetual care trust investments.” For the fiscal years October 31, 2010 and 2009, the
Company realized trust earnings (losses) of approximately ($187) and $186, respectively, related to
the covered call program. These trust earnings and losses are accounted for in the same manner as
for other cemetery perpetual care trust earnings and flow through cemetery revenue in the statement
of earnings. Although the Company realized losses associated with the covered call programs of
October 31, 2010, it continues to hold the underlying securities against which these covered calls
were issued; these underlying securities appreciated in value by $2,005 during the period that the
covered calls were outstanding.
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. The Company’s
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, convertible bonds and
preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.
The Company’s 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 Company’s cemetery perpetual care trust investments are
categorized as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Significant |
|
|
|
|
| |
|
Quoted Market |
|
Other |
|
Significant |
|
|
| |
|
Prices in Active |
|
Observable |
|
Unobservable |
|
|
| |
|
Markets |
|
Inputs |
|
Inputs |
|
Fair Market |
| |
|
(Level 1) |
|
(Level 2) |
|
(Level 3) |
|
value |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments — October 31, 2010 |
|
$ |
139,774 |
|
|
$ |
90,431 |
|
|
$ |
173 |
|
|
$ |
230,378 |
|
Trust investments — October 31, 2009 |
|
$ |
113,715 |
|
|
$ |
90,752 |
|
|
$ |
226 |
|
|
$ |
204,693 |
|
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 change in the Company’s cemetery perpetual care trust investments with significant
unobservable inputs (Level 3) is as follows:
| |
|
|
|
|
|
|
|
|
| |
|
Year Ended |
|
|
Year Ended |
|
| |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
Fair market value, beginning balance |
|
$ |
226 |
|
|
$ |
611 |
|
Total unrealized losses included in
other comprehensive income
(1) |
|
|
(113 |
) |
|
|
(177 |
) |
Transfers out of Level 3 and other |
|
|
60 |
|
|
|
(208 |
) |
|
|
|
|
|
|
|
Fair market value, ending balance |
|
$ |
173 |
|
|
$ |
226 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
All gains (losses) recognized in other comprehensive income for cemetery perpetual
care trust investments are attributable to the Company’s 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 subsequent 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 initial corpus. As of October 31, 2010 and 2009, the Company had a liability recorded for the
estimated probable funding obligation to restore the net realized losses of $13,253 and $14,010,
respectively. The Company recorded $31 and $3,421 for the estimated probable funding obligation to
restore the net realized losses in the cemetery perpetual care trust for the years ended October
31, 2010 and 2009, respectively. The additional funding obligation in fiscal year 2010 is related
to the further decline in certain investments that the Company had previously deemed other than
temporarily impaired. The Company had earnings of $788 and $1,958 within the trusts that it did
not withdraw from the trusts in order to satisfy a portion of its estimated probable funding
obligation for the years ended October 31, 2010 and 2009, respectively. Also during fiscal year
2009, the Company contributed approximately $734 to the trusts as part of its funding obligation.
In those states where realized net capital gains have not been withdrawn, the Company believes it
is reasonably possible but not probable that additional funding obligations may exist with an
estimated amount of $2,463; no charge has been recorded for these amounts as of October 31, 2010.
Activity related to preneed cemetery perpetual care trust investments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
| |
|
2010 |
|
2009 |
|
2008 |
Purchases |
|
$ |
106,857 |
|
|
$ |
31,856 |
|
|
$ |
54,315 |
|
Sales |
|
|
116,361 |
|
|
|
24,798 |
|
|
|
53,902 |
|
Realized gains from sales of investments |
|
|
6,031 |
|
|
|
1,822 |
|
|
|
4,498 |
|
Realized losses from sales of investments and other |
|
|
(1,328 |
) (1) |
|
|
(4,416 |
) (2) |
|
|
(14,173 |
) (4) |
Interest income, dividend and other ordinary income |
|
|
8,769 |
|
|
|
9,570 |
|
|
|
10,520 |
|
Deposits |
|
|
7,293 |
|
|
|
8,754 |
(3) |
|
|
8,295 |
|
Withdrawals |
|
|
7,213 |
|
|
|
5,339 |
|
|
|
10,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase) in net unrealized losses |
|
|
15,621 |
|
|
|
24,318 |
|
|
|
(61,717 |
) |
Reclassification to perpetual care trusts’ corpus |
|
|
(15,621 |
) |
|
|
(24,318 |
) |
|
|
61,717 |
|
|
|
|
| (1) |
|
Includes $1,297 in losses from the sale of investments and $31 in losses related to
certain investments that were rendered worthless or practically worthless. |
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) |
|
|
|
| (2) |
|
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. |
| |
| (3) |
|
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. |
| |
| (4) |
|
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, 2010, 2009 and 2008, cemetery revenues were $224,009,
$211,477 and $241,276, respectively, of which $8,288, $7,701 and $9,322, respectively, were
required to be placed into perpetual care trusts and were recorded as revenues and expenses.
The following tables 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, 2010 and 2009.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
| |
|
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 |
|
$ |
269 |
|
|
$ |
(1 |
) |
|
$ |
105 |
|
|
$ |
(53 |
) |
|
$ |
374 |
|
|
$ |
(54 |
) |
Corporate bonds |
|
|
2,786 |
|
|
|
(15 |
) |
|
|
682 |
|
|
|
(810 |
) |
|
|
3,468 |
|
|
|
(825 |
) |
Preferred stocks |
|
|
— |
|
|
|
— |
|
|
|
32,747 |
|
|
|
(6,376 |
) |
|
|
32,747 |
|
|
|
(6,376 |
) |
Common stocks |
|
|
717 |
|
|
|
(161 |
) |
|
|
51,334 |
|
|
|
(36,335 |
) |
|
|
52,051 |
|
|
|
(36,496 |
) |
Mutual funds: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Equity |
|
|
— |
|
|
|
— |
|
|
|
4,674 |
|
|
|
(662 |
) |
|
|
4,674 |
|
|
|
(662 |
) |
Fixed income |
|
|
14,850 |
|
|
|
(15 |
) |
|
|
1,076 |
|
|
|
(289 |
) |
|
|
15,926 |
|
|
|
(304 |
) |
Other long-term investments |
|
|
— |
|
|
|
— |
|
|
|
88 |
|
|
|
(79 |
) |
|
|
88 |
|
|
|
(79 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
18,622 |
|
|
$ |
(192 |
) |
|
$ |
90,706 |
|
|
$ |
(44,604 |
) |
|
$ |
109,328 |
|
|
$ |
(44,796 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
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 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, concerns specific to the issuer of the
securities and overall market performance. Of the total unrealized losses at October 31, 2010, 96
percent, or $42,872, 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 stock investments had a
rating of investment grade at the time of purchase. The Company generally expects its portfolio
performance to improve if the performance of the overall financial market improves, but would also
expect its
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) |
performance to deteriorate if the overall financial market declines. 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.
|
|
|
| (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, 2010 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Deferred Receipts Held in Trust |
|
|
|
|
| |
|
Preneed |
|
|
Preneed |
|
|
|
|
| |
|
Funeral |
|
|
Cemetery |
|
|
Total |
|
Trust assets at market value |
|
$ |
383,792 |
|
|
$ |
182,789 |
|
|
$ |
566,581 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Pending withdrawals |
|
|
(9,144 |
) |
|
|
(5,300 |
) |
|
|
(14,444 |
) |
Pending deposits |
|
|
1,791 |
|
|
|
1,224 |
|
|
|
3,015 |
|
|
|
|
|
|
|
|
|
|
|
Deferred receipts held in trust |
|
$ |
376,439 |
|
|
$ |
178,713 |
|
|
$ |
555,152 |
|
|
|
|
|
|
|
|
|
|
|
The components of perpetual care trusts’ corpus in the consolidated balance sheet at October
31, 2010 are as follows:
| |
|
|
|
|
| |
|
Perpetual Care |
|
| |
|
Trusts’ Corpus |
|
Trust assets at market value |
|
$ |
231,008 |
|
Less: |
|
|
|
|
Pending withdrawals |
|
|
(1,581 |
) |
Pending deposits |
|
|
91 |
|
|
|
|
|
Perpetual care trusts’ corpus |
|
$ |
229,518 |
|
|
|
|
|
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 |
|
$ |
358,256 |
|
|
$ |
163,938 |
|
|
$ |
522,194 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
Pending withdrawals |
|
|
(9,080 |
) |
|
|
(5,740 |
) |
|
|
(14,820 |
) |
Pending deposits |
|
|
4,141 |
|
|
|
3,098 |
|
|
|
7,239 |
|
|
|
|
|
|
|
|
|
|
|
Deferred receipts held in trust |
|
$ |
353,317 |
|
|
$ |
161,296 |
|
|
$ |
514,613 |
|
|
|
|
|
|
|
|
|
|
|
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—(Continued) |
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 |
|
|
|
|
|
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, 2010, 2009 and 2008 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Realized gains from sales of investments |
|
$ |
9,961 |
|
|
$ |
5,519 |
|
|
$ |
8,530 |
|
Realized losses from sales of investments and
other |
|
|
(9,440 |
) |
|
|
(24,414 |
) |
|
|
(53,348 |
) |
Interest income, dividends and other ordinary
income |
|
|
24,776 |
|
|
|
25,903 |
|
|
|
30,484 |
|
Trust expenses and income taxes |
|
|
(9,983 |
) |
|
|
(8,331 |
) |
|
|
(10,601 |
) |
|
|
|
|
|
|
|
|
|
|
Net trust investment income (loss) |
|
|
15,314 |
|
|
|
(1,323 |
) |
|
|
(24,935 |
) |
Reclassification to deferred preneed funeral and
cemetery receipts held in trusts |
|
|
(5,384 |
) |
|
|
5,525 |
|
|
|
22,875 |
|
Reclassification to perpetual care trusts’ corpus |
|
|
(9,930 |
) |
|
|
(4,202 |
) |
|
|
2,060 |
|
|
|
|
|
|
|
|
|
|
|
Total deferred preneed funeral and cemetery
receipts held in trust and perpetual care
trusts’ corpus |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment and other income, net (1) |
|
|
156 |
|
|
|
92 |
|
|
|
2,406 |
|
|
|
|
|
|
|
|
|
|
|
Total investment and other income, net |
|
$ |
156 |
|
|
$ |
92 |
|
|
$ |
2,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Investment and other income, net consists of interest income primarily on the
Company’s cash, cash equivalents and marketable securities not held in trust. |
|
|
|
| (8) |
|
Certificates of Deposit, Marketable Securities and Restricted Investments |
The market value of marketable securities as of October 31, 2010 and 2009 was $786 and $902,
respectively, which included gross unrealized gains of $29 and $54 for fiscal years 2010 and 2009,
respectively, and no unrealized losses for both years. As of October 31, 2010, $1,000 is
classified as a long-term asset in “other assets” in the consolidated balance sheet, which
includes $786 of marketable securities and $214 of cash. As of October 31, 2009, $1,000 is
classified as a long-term asset in “other assets” in the consolidated balance sheet, which
includes $902 of marketable securities and $98 of cash. 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.
In the first quarter of fiscal year 2010, the Company entered into a certificate of deposit
account registry service program in order to obtain a higher rate of return on its cash balances,
while maintaining its FDIC insurance protection. As of October 31, 2010, the Company had invested
$10,000 in certificates of deposit.
85
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2010 |
|
|
2009 |
|
Current receivables are summarized as follows: |
|
|
|
|
|
|
|
|
Installment contracts due within one year |
|
$ |
34,030 |
|
|
$ |
39,023 |
|
Income tax receivables |
|
|
3,171 |
|
|
|
6,767 |
|
Trade and other receivables |
|
|
13,629 |
|
|
|
14,905 |
|
Funeral receivables |
|
|
9,153 |
|
|
|
9,322 |
|
Allowance for doubtful accounts |
|
|
(5,758 |
) |
|
|
(7,390 |
) |
Amounts to be collected for cemetery perpetual care trusts |
|
|
(3,055 |
) |
|
|
(3,188 |
) |
|
|
|
|
|
|
|
Net current receivables |
|
$ |
51,170 |
|
|
$ |
59,439 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term receivables are summarized as follows: |
|
|
|
|
|
|
|
|
Installment contracts due beyond one year |
|
$ |
81,090 |
|
|
$ |
79,229 |
|
Income tax receivables |
|
|
1,973 |
|
|
|
33 |
|
Allowance for doubtful accounts |
|
|
(8,324 |
) |
|
|
(9,778 |
) |
Amounts to be collected for cemetery perpetual care trusts |
|
|
(7,281 |
) |
|
|
(6,473 |
) |
|
|
|
|
|
|
|
Net long-term receivables |
|
$ |
67,458 |
|
|
$ |
63,011 |
|
|
|
|
|
|
|
|
Installment contracts due within one year and due beyond one year include receivables in the
Company’s 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 Company’s receivables as of October 31, 2010 are expected to be collected as follows:
| |
|
|
|
|
|
Years ending October 31, |
|
|
|
|
2011 |
|
$ |
51,170 |
|
2012 |
|
|
21,301 |
|
2013 |
|
|
14,767 |
|
2014 |
|
|
10,865 |
|
2015 |
|
|
8,040 |
|
Thereafter |
|
|
12,485 |
|
|
|
|
|
|
|
$ |
118,628 |
|
|
|
|
|
|
|
|
| (10) |
|
Inventories and Cemetery Property |
Inventories are comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2010 |
|
|
2009 |
|
Developed cemetery property |
|
$ |
12,221 |
|
|
$ |
11,702 |
|
Merchandise and supplies |
|
|
23,494 |
|
|
|
22,761 |
|
|
|
|
|
|
|
|
|
|
$ |
35,715 |
|
|
$ |
34,463 |
|
|
|
|
|
|
|
|
86
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (10) |
|
Inventories and Cemetery Property—(Continued) |
Cemetery property is comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2010 |
|
|
2009 |
|
Developed cemetery property |
|
$ |
114,517 |
|
|
$ |
114,190 |
|
Undeveloped cemetery property |
|
|
271,577 |
|
|
|
273,466 |
|
|
|
|
|
|
|
|
|
|
$ |
386,094 |
|
|
$ |
387,656 |
|
|
|
|
|
|
|
|
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 $17,054 and $14,157 related to cemetery property under development as of
October 31, 2010 and 2009, respectively.
|
|
|
| (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, 2010 and October 31, 2009 and for the fiscal years ended October 31, 2010, 2009 and
2008, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of
the Company’s 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible
notes, and the financial results of the Company’s 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.
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—(Continued) |
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, 2010 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
— |
|
|
$ |
256,423 |
|
|
$ |
1,859 |
|
|
$ |
17,616 |
|
|
$ |
— |
|
|
$ |
275,898 |
|
Cemetery |
|
|
— |
|
|
|
200,524 |
|
|
|
3,027 |
|
|
|
20,458 |
|
|
|
— |
|
|
|
224,009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
456,947 |
|
|
|
4,886 |
|
|
|
38,074 |
|
|
|
— |
|
|
|
499,907 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
— |
|
|
|
197,120 |
|
|
|
1,121 |
|
|
|
12,571 |
|
|
|
— |
|
|
|
210,812 |
|
Cemetery |
|
|
— |
|
|
|
174,340 |
|
|
|
2,486 |
|
|
|
16,065 |
|
|
|
— |
|
|
|
192,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
371,460 |
|
|
|
3,607 |
|
|
|
28,636 |
|
|
|
— |
|
|
|
403,703 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
85,487 |
|
|
|
1,279 |
|
|
|
9,438 |
|
|
|
— |
|
|
|
96,204 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general and administrative
expenses |
|
|
(27,784 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(27,784 |
) |
Hurricane related recoveries (charges), net |
|
|
(121 |
) |
|
|
— |
|
|
|
55 |
|
|
|
— |
|
|
|
— |
|
|
|
(66 |
) |
Other operating income, net |
|
|
69 |
|
|
|
1,048 |
|
|
|
3 |
|
|
|
304 |
|
|
|
— |
|
|
|
1,424 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(27,836 |
) |
|
|
86,535 |
|
|
|
1,337 |
|
|
|
9,742 |
|
|
|
— |
|
|
|
69,778 |
|
Interest expense |
|
|
(1,400 |
) |
|
|
(20,436 |
) |
|
|
(8 |
) |
|
|
(2,548 |
) |
|
|
— |
|
|
|
(24,392 |
) |
Loss on early extinguishment of debt |
|
|
(1,035 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1,035 |
) |
Investment and other income, net |
|
|
154 |
|
|
|
2 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
156 |
|
Equity in subsidiaries |
|
|
46,329 |
|
|
|
767 |
|
|
|
— |
|
|
|
— |
|
|
|
(47,096 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
|
16,212 |
|
|
|
66,868 |
|
|
|
1,329 |
|
|
|
7,194 |
|
|
|
(47,096 |
) |
|
|
44,507 |
|
Income tax expense (benefit) |
|
|
(14,766 |
) |
|
|
24,906 |
|
|
|
411 |
|
|
|
3,387 |
|
|
|
— |
|
|
|
13,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
30,978 |
|
|
|
41,962 |
|
|
|
918 |
|
|
|
3,807 |
|
|
|
(47,096 |
) |
|
|
30,569 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations
before income taxes |
|
|
— |
|
|
|
660 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
660 |
|
Income taxes |
|
|
— |
|
|
|
251 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
— |
|
|
|
409 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
30,978 |
|
|
|
42,371 |
|
|
|
918 |
|
|
|
3,807 |
|
|
|
(47,096 |
) |
|
|
30,978 |
|
Other comprehensive loss, net |
|
|
(17 |
) |
|
|
— |
|
|
|
— |
|
|
|
(17 |
) |
|
|
17 |
|
|
|
(17 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
30,961 |
|
|
$ |
42,371 |
|
|
$ |
918 |
|
|
$ |
3,790 |
|
|
$ |
(47,079 |
) |
|
$ |
30,961 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
— |
|
|
$ |
255,303 |
|
|
$ |
1,866 |
|
|
$ |
17,733 |
|
|
$ |
— |
|
|
$ |
274,902 |
|
Cemetery |
|
|
— |
|
|
|
190,386 |
|
|
|
2,915 |
|
|
|
18,176 |
|
|
|
— |
|
|
|
211,477 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
445,689 |
|
|
|
4,781 |
|
|
|
35,909 |
|
|
|
— |
|
|
|
486,379 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
— |
|
|
|
196,298 |
|
|
|
1,176 |
|
|
|
12,420 |
|
|
|
— |
|
|
|
209,894 |
|
Cemetery |
|
|
— |
|
|
|
171,811 |
|
|
|
2,540 |
|
|
|
14,515 |
|
|
|
— |
|
|
|
188,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
368,109 |
|
|
|
3,716 |
|
|
|
26,935 |
|
|
|
— |
|
|
|
398,760 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
77,580 |
|
|
|
1,065 |
|
|
|
8,974 |
|
|
|
— |
|
|
|
87,619 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general and administrative
expenses |
|
|
(30,670 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(30,670 |
) |
Hurricane related recoveries (charges), net |
|
|
(720 |
) |
|
|
340 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(380 |
) |
Separation charges |
|
|
(55 |
) |
|
|
(220 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(275 |
) |
Net impairment losses on dispositions |
|
|
(8 |
) |
|
|
(88 |
) |
|
|
— |
|
|
|
(122 |
) |
|
|
— |
|
|
|
(218 |
) |
Other operating income, net |
|
|
211 |
|
|
|
903 |
|
|
|
2 |
|
|
|
134 |
|
|
|
— |
|
|
|
1,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(31,242 |
) |
|
|
78,515 |
|
|
|
1,067 |
|
|
|
8,986 |
|
|
|
— |
|
|
|
57,326 |
|
Interest expense |
|
|
(1,829 |
) |
|
|
(23,800 |
) |
|
|
(118 |
) |
|
|
(2,029 |
) |
|
|
— |
|
|
|
(27,776 |
) |
Gain on early extinguishment of debt |
|
|
6,146 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,146 |
|
Investment and other income, net |
|
|
91 |
|
|
|
1 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
92 |
|
Equity in subsidiaries |
|
|
40,860 |
|
|
|
747 |
|
|
|
— |
|
|
|
— |
|
|
|
(41,607 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations
before income taxes |
|
|
14,026 |
|
|
|
55,463 |
|
|
|
949 |
|
|
|
6,957 |
|
|
|
(41,607 |
) |
|
|
35,788 |
|
Income tax expense (benefit) |
|
|
(9,240 |
) |
|
|
19,984 |
|
|
|
262 |
|
|
|
1,591 |
|
|
|
— |
|
|
|
12,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
|
23,266 |
|
|
|
35,479 |
|
|
|
687 |
|
|
|
5,366 |
|
|
|
(41,607 |
) |
|
|
23,191 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations
before income taxes |
|
|
— |
|
|
|
121 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121 |
|
Income taxes |
|
|
— |
|
|
|
46 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
— |
|
|
|
75 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
23,266 |
|
|
|
35,554 |
|
|
|
687 |
|
|
|
5,366 |
|
|
|
(41,607 |
) |
|
|
23,266 |
|
Other comprehensive loss, net |
|
|
(2 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2 |
) |
|
|
2 |
|
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income |
|
$ |
23,264 |
|
|
$ |
35,554 |
|
|
$ |
687 |
|
|
$ |
5,364 |
|
|
$ |
(41,605 |
) |
|
$ |
23,264 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2008 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
— |
|
|
$ |
263,378 |
|
|
$ |
1,954 |
|
|
$ |
19,638 |
|
|
$ |
— |
|
|
$ |
284,970 |
|
Cemetery |
|
|
— |
|
|
|
217,123 |
|
|
|
3,432 |
|
|
|
20,721 |
|
|
|
— |
|
|
|
241,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
480,501 |
|
|
|
5,386 |
|
|
|
40,359 |
|
|
|
— |
|
|
|
526,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
— |
|
|
|
201,698 |
|
|
|
1,217 |
|
|
|
13,886 |
|
|
|
— |
|
|
|
216,801 |
|
Cemetery |
|
|
— |
|
|
|
189,878 |
|
|
|
2,927 |
|
|
|
16,033 |
|
|
|
— |
|
|
|
208,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
391,576 |
|
|
|
4,144 |
|
|
|
29,919 |
|
|
|
— |
|
|
|
425,639 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
88,925 |
|
|
|
1,242 |
|
|
|
10,440 |
|
|
|
— |
|
|
|
100,607 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
) |
Net impairment gains (losses) on dispositions |
|
|
126 |
|
|
|
(479 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(353 |
) |
Other operating income, net |
|
|
101 |
|
|
|
497 |
|
|
|
2 |
|
|
|
219 |
|
|
|
— |
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(33,832 |
) |
|
|
61,826 |
|
|
|
1,560 |
|
|
|
10,659 |
|
|
|
— |
|
|
|
40,213 |
|
Interest expense |
|
|
(2,299 |
) |
|
|
(25,237 |
) |
|
|
(155 |
) |
|
|
(2,114 |
) |
|
|
— |
|
|
|
(29,805 |
) |
Investment and other income, net |
|
|
2,219 |
|
|
|
179 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
2,406 |
|
Equity in subsidiaries |
|
|
17,783 |
|
|
|
548 |
|
|
|
— |
|
|
|
— |
|
|
|
(18,331 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
(16,129 |
) |
|
|
37,316 |
|
|
|
1,405 |
|
|
|
8,553 |
|
|
|
(18,331 |
) |
|
|
12,814 |
|
Income tax expense (benefit) |
|
|
(8,795 |
) |
|
|
26,599 |
|
|
|
464 |
|
|
|
2,014 |
|
|
|
— |
|
|
|
20,282 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
(7,334 |
) |
|
|
10,717 |
|
|
|
941 |
|
|
|
6,539 |
|
|
|
(18,331 |
) |
|
|
(7,468 |
) |
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations
before income taxes |
|
|
— |
|
|
|
210 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
210 |
|
Income taxes |
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
— |
|
|
|
134 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
134 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
(7,334 |
) |
|
|
10,851 |
|
|
|
941 |
|
|
|
6,539 |
|
|
|
(18,331 |
) |
|
|
(7,334 |
) |
Other comprehensive income, net |
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
(26 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(7,308 |
) |
|
$ |
10,851 |
|
|
$ |
941 |
|
|
$ |
6,565 |
|
|
$ |
(18,357 |
) |
|
$ |
(7,308 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Subsidiaries-Tier 1 |
|
|
Subsidiaries-Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
48,270 |
|
|
$ |
6,055 |
|
|
$ |
58 |
|
|
$ |
1,677 |
|
|
$ |
— |
|
|
$ |
56,060 |
|
Certificates of deposit and marketable
securities |
|
|
10,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
10,000 |
|
Receivables, net of allowances |
|
|
3,685 |
|
|
|
40,717 |
|
|
|
372 |
|
|
|
6,396 |
|
|
|
— |
|
|
|
51,170 |
|
Inventories |
|
|
329 |
|
|
|
32,786 |
|
|
|
330 |
|
|
|
2,270 |
|
|
|
— |
|
|
|
35,715 |
|
Prepaid expenses |
|
|
1,292 |
|
|
|
2,590 |
|
|
|
60 |
|
|
|
1,538 |
|
|
|
— |
|
|
|
5,480 |
|
Deferred income taxes, net |
|
|
13,835 |
|
|
|
11,604 |
|
|
|
32 |
|
|
|
2,841 |
|
|
|
— |
|
|
|
28,312 |
|
Intercompany receivables |
|
|
7,782 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(7,782 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
85,193 |
|
|
|
93,752 |
|
|
|
852 |
|
|
|
14,722 |
|
|
|
(7,782 |
) |
|
|
186,737 |
|
Receivables due beyond one year, net of
allowances |
|
|
1,973 |
|
|
|
53,683 |
|
|
|
572 |
|
|
|
11,230 |
|
|
|
— |
|
|
|
67,458 |
|
Preneed funeral receivables and trust
investments |
|
|
— |
|
|
|
405,296 |
|
|
|
— |
|
|
|
9,622 |
|
|
|
— |
|
|
|
414,918 |
|
Preneed cemetery receivables and trust
investments |
|
|
— |
|
|
|
202,423 |
|
|
|
1,123 |
|
|
|
6,204 |
|
|
|
— |
|
|
|
209,750 |
|
Goodwill |
|
|
— |
|
|
|
227,203 |
|
|
|
48 |
|
|
|
19,787 |
|
|
|
— |
|
|
|
247,038 |
|
Cemetery property, at cost |
|
|
— |
|
|
|
349,342 |
|
|
|
11,154 |
|
|
|
25,598 |
|
|
|
— |
|
|
|
386,094 |
|
Property and equipment, at cost |
|
|
56,964 |
|
|
|
474,565 |
|
|
|
2,509 |
|
|
|
39,172 |
|
|
|
— |
|
|
|
573,210 |
|
Less accumulated depreciation |
|
|
40,837 |
|
|
|
225,122 |
|
|
|
1,180 |
|
|
|
16,498 |
|
|
|
— |
|
|
|
283,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
16,127 |
|
|
|
249,443 |
|
|
|
1,329 |
|
|
|
22,674 |
|
|
|
— |
|
|
|
289,573 |
|
Deferred income taxes, net |
|
|
16,620 |
|
|
|
75,449 |
|
|
|
— |
|
|
|
9,224 |
|
|
|
(3,268 |
) |
|
|
98,025 |
|
Cemetery perpetual care trust investments |
|
|
— |
|
|
|
218,021 |
|
|
|
8,973 |
|
|
|
4,014 |
|
|
|
— |
|
|
|
231,008 |
|
Non-current assets held for sale |
|
|
— |
|
|
|
360 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
360 |
|
Other assets |
|
|
6,096 |
|
|
|
4,772 |
|
|
|
7 |
|
|
|
1,030 |
|
|
|
— |
|
|
|
11,905 |
|
Intercompany receivables |
|
|
693,981 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(693,981 |
) |
|
|
— |
|
Equity in subsidiaries |
|
|
15,612 |
|
|
|
8,888 |
|
|
|
— |
|
|
|
— |
|
|
|
(24,500 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
835,602 |
|
|
$ |
1,888,632 |
|
|
$ |
24,058 |
|
|
$ |
124,105 |
|
|
$ |
(729,531 |
) |
|
$ |
2,142,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
5 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5 |
|
Accounts payable, accrued expenses and
other current liabilities |
|
|
15,524 |
|
|
|
70,748 |
|
|
|
151 |
|
|
|
5,720 |
|
|
|
— |
|
|
|
92,143 |
|
Intercompany payables |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
7,782 |
|
|
|
(7,782 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,529 |
|
|
|
70,748 |
|
|
|
151 |
|
|
|
13,502 |
|
|
|
(7,782 |
) |
|
|
92,148 |
|
Long-term debt, less current maturities |
|
|
314,027 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
314,027 |
|
Deferred income taxes, net |
|
|
— |
|
|
|
4,950 |
|
|
|
3,268 |
|
|
|
— |
|
|
|
(3,268 |
) |
|
|
4,950 |
|
Intercompany payables |
|
|
— |
|
|
|
683,501 |
|
|
|
2,099 |
|
|
|
8,381 |
|
|
|
(693,981 |
) |
|
|
— |
|
Deferred preneed funeral revenue |
|
|
— |
|
|
|
197,148 |
|
|
|
— |
|
|
|
46,372 |
|
|
|
— |
|
|
|
243,520 |
|
Deferred preneed cemetery revenue |
|
|
— |
|
|
|
228,908 |
|
|
|
500 |
|
|
|
28,636 |
|
|
|
— |
|
|
|
258,044 |
|
Deferred preneed funeral and cemetery
receipts held in trust |
|
|
— |
|
|
|
547,312 |
|
|
|
1,049 |
|
|
|
6,791 |
|
|
|
— |
|
|
|
555,152 |
|
Perpetual care trusts’ corpus |
|
|
— |
|
|
|
216,657 |
|
|
|
8,923 |
|
|
|
3,938 |
|
|
|
— |
|
|
|
229,518 |
|
Other long-term liabilities |
|
|
18,050 |
|
|
|
1,920 |
|
|
|
— |
|
|
|
53 |
|
|
|
— |
|
|
|
20,023 |
|
Negative equity in subsidiaries |
|
|
62,512 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(62,512 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
410,118 |
|
|
|
1,951,144 |
|
|
|
15,990 |
|
|
|
107,673 |
|
|
|
(767,543 |
) |
|
|
1,717,382 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
92,294 |
|
|
|
102 |
|
|
|
324 |
|
|
|
52 |
|
|
|
(478 |
) |
|
|
92,294 |
|
Other |
|
|
333,172 |
|
|
|
(62,614 |
) |
|
|
7,744 |
|
|
|
16,362 |
|
|
|
38,508 |
|
|
|
333,172 |
|
Accumulated other comprehensive income |
|
|
18 |
|
|
|
— |
|
|
|
— |
|
|
|
18 |
|
|
|
(18 |
) |
|
|
18 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
425,484 |
|
|
|
(62,512 |
) |
|
|
8,068 |
|
|
|
16,432 |
|
|
|
38,012 |
|
|
|
425,484 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
835,602 |
|
|
$ |
1,888,632 |
|
|
$ |
24,058 |
|
|
$ |
124,105 |
|
|
$ |
(729,531 |
) |
|
$ |
2,142,866 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Subsidiaries-Tier 1 |
|
|
Subsidiaries-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 |
|
|
|
31,747 |
|
|
|
312 |
|
|
|
2,135 |
|
|
|
— |
|
|
|
34,463 |
|
Prepaid expenses |
|
|
1,218 |
|
|
|
3,784 |
|
|
|
38 |
|
|
|
1,688 |
|
|
|
— |
|
|
|
6,728 |
|
Deferred income taxes, net |
|
|
9,006 |
|
|
|
11,168 |
|
|
|
47 |
|
|
|
1,494 |
|
|
|
— |
|
|
|
21,715 |
|
Assets held for sale |
|
|
— |
|
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
35 |
|
Intercompany receivables |
|
|
6,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,000 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
80,289 |
|
|
|
99,218 |
|
|
|
953 |
|
|
|
10,728 |
|
|
|
(6,000 |
) |
|
|
185,188 |
|
Receivables due beyond one year, net of
allowances |
|
|
— |
|
|
|
48,783 |
|
|
|
420 |
|
|
|
13,808 |
|
|
|
— |
|
|
|
63,011 |
|
Preneed funeral receivables and trust
investments |
|
|
— |
|
|
|
379,725 |
|
|
|
— |
|
|
|
9,613 |
|
|
|
— |
|
|
|
389,338 |
|
Preneed cemetery receivables and trust
investments |
|
|
— |
|
|
|
185,447 |
|
|
|
1,124 |
|
|
|
6,846 |
|
|
|
— |
|
|
|
193,417 |
|
Goodwill |
|
|
— |
|
|
|
227,203 |
|
|
|
48 |
|
|
|
19,787 |
|
|
|
— |
|
|
|
247,038 |
|
Cemetery property, at cost |
|
|
— |
|
|
|
350,306 |
|
|
|
11,315 |
|
|
|
26,035 |
|
|
|
— |
|
|
|
387,656 |
|
Property and equipment, at cost |
|
|
53,956 |
|
|
|
464,774 |
|
|
|
2,183 |
|
|
|
38,136 |
|
|
|
— |
|
|
|
559,049 |
|
Less accumulated depreciation |
|
|
36,015 |
|
|
|
208,223 |
|
|
|
994 |
|
|
|
15,190 |
|
|
|
— |
|
|
|
260,422 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
17,941 |
|
|
|
256,551 |
|
|
|
1,189 |
|
|
|
22,946 |
|
|
|
— |
|
|
|
298,627 |
|
Deferred income taxes, net |
|
|
— |
|
|
|
107,636 |
|
|
|
— |
|
|
|
10,415 |
|
|
|
(4,653 |
) |
|
|
113,398 |
|
Cemetery perpetual care trust investments |
|
|
— |
|
|
|
193,616 |
|
|
|
8,207 |
|
|
|
3,653 |
|
|
|
— |
|
|
|
205,476 |
|
Non-current assets held for sale |
|
|
— |
|
|
|
1,201 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,201 |
|
Other assets |
|
|
8,402 |
|
|
|
5,196 |
|
|
|
6 |
|
|
|
1,050 |
|
|
|
— |
|
|
|
14,654 |
|
Intercompany receivables |
|
|
765,490 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(765,490 |
) |
|
|
— |
|
Equity in subsidiaries |
|
|
15,065 |
|
|
|
8,121 |
|
|
|
— |
|
|
|
— |
|
|
|
(23,186 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
887,187 |
|
|
$ |
1,863,003 |
|
|
$ |
23,262 |
|
|
$ |
124,881 |
|
|
$ |
(799,329 |
) |
|
$ |
2,099,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
Intercompany payables |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
|
|
(6,000 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
15,214 |
|
|
|
75,920 |
|
|
|
199 |
|
|
|
10,678 |
|
|
|
(6,000 |
) |
|
|
96,011 |
|
Long-term debt, less current maturities |
|
|
339,721 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
339,721 |
|
Deferred income taxes |
|
|
1,672 |
|
|
|
— |
|
|
|
2,981 |
|
|
|
— |
|
|
|
(4,653 |
) |
|
|
— |
|
Intercompany payables |
|
|
— |
|
|
|
747,847 |
|
|
|
3,402 |
|
|
|
14,241 |
|
|
|
(765,490 |
) |
|
|
— |
|
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 |
|
|
— |
|
|
|
507,738 |
|
|
|
1,045 |
|
|
|
5,830 |
|
|
|
— |
|
|
|
514,613 |
|
Perpetual care trusts’ corpus |
|
|
— |
|
|
|
192,324 |
|
|
|
8,208 |
|
|
|
3,636 |
|
|
|
— |
|
|
|
204,168 |
|
Long-term liabilities associated with
assets held for sale |
|
|
— |
|
|
|
174 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
174 |
|
Other long-term liabilities |
|
|
17,040 |
|
|
|
3,716 |
|
|
|
— |
|
|
|
115 |
|
|
|
— |
|
|
|
20,871 |
|
Negative equity in subsidiaries |
|
|
104,883 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(104,883 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
478,530 |
|
|
|
1,967,886 |
|
|
|
16,112 |
|
|
|
108,845 |
|
|
|
(881,026 |
) |
|
|
1,690,347 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
92,684 |
|
|
|
102 |
|
|
|
324 |
|
|
|
52 |
|
|
|
(478 |
) |
|
|
92,684 |
|
Other |
|
|
315,938 |
|
|
|
(104,985 |
) |
|
|
6,826 |
|
|
|
15,949 |
|
|
|
82,210 |
|
|
|
315,938 |
|
Accumulated other comprehensive income |
|
|
35 |
|
|
|
— |
|
|
|
— |
|
|
|
35 |
|
|
|
(35 |
) |
|
|
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
408,657 |
|
|
|
(104,883 |
) |
|
|
7,150 |
|
|
|
16,036 |
|
|
|
81,697 |
|
|
|
408,657 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
887,187 |
|
|
$ |
1,863,003 |
|
|
$ |
23,262 |
|
|
$ |
124,881 |
|
|
$ |
(799,329 |
) |
|
$ |
2,099,004 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2010 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Subsidiaries-Tier 1 |
|
|
Subsidiaries-Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
$ |
(780 |
) |
|
$ |
56,234 |
|
|
$ |
1,354 |
|
|
$ |
6,546 |
|
|
$ |
— |
|
|
$ |
63,354 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable
securities |
|
|
5,000 |
|
|
|
— |
|
|
|
— |
|
|
|
901 |
|
|
|
— |
|
|
|
5,901 |
|
Purchases of certificates of deposit
and marketable securities |
|
|
(15,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(875 |
) |
|
|
— |
|
|
|
(15,875 |
) |
Proceeds from sale of assets |
|
|
— |
|
|
|
1,681 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,681 |
|
Additions to property and equipment |
|
|
(2,792 |
) |
|
|
(12,430 |
) |
|
|
(291 |
) |
|
|
(937 |
) |
|
|
— |
|
|
|
(16,450 |
) |
Other |
|
|
— |
|
|
|
176 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
176 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(12,792 |
) |
|
|
(10,573 |
) |
|
|
(291 |
) |
|
|
(911 |
) |
|
|
— |
|
|
|
(24,567 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(31,505 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31,505 |
) |
Intercompany receivables (payables) |
|
|
50,643 |
|
|
|
(44,702 |
) |
|
|
(1,057 |
) |
|
|
(4,884 |
) |
|
|
— |
|
|
|
— |
|
Retirement of common stock warrants |
|
|
(3,143 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(3,143 |
) |
Issuance of common stock |
|
|
694 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
694 |
|
Retirement of call options |
|
|
3,562 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,562 |
|
Purchase and retirement of common stock |
|
|
(4,056 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(4,056 |
) |
Debt refinancing costs |
|
|
(38 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(38 |
) |
Dividends |
|
|
(11,170 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(11,170 |
) |
Excess tax benefits from share-based
payment arrangements |
|
|
121 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
121 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
5,108 |
|
|
|
(44,702 |
) |
|
|
(1,057 |
) |
|
|
(4,884 |
) |
|
|
— |
|
|
|
(45,535 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
(8,464 |
) |
|
|
959 |
|
|
|
6 |
|
|
|
751 |
|
|
|
— |
|
|
|
(6,748 |
) |
Cash and cash equivalents, beginning of
period |
|
|
56,734 |
|
|
|
5,096 |
|
|
|
52 |
|
|
|
926 |
|
|
|
— |
|
|
|
62,808 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
48,270 |
|
|
$ |
6,055 |
|
|
$ |
58 |
|
|
$ |
1,677 |
|
|
$ |
— |
|
|
$ |
56,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2009 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Subsidiaries-Tier 1 |
|
|
Subsidiaries-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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, 2008 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non-Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Subsidiaries-Tier 1 |
|
|
Subsidiaries-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 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (12) |
|
Dispositions and Acquisitions |
All businesses sold in fiscal years 2010, 2009 and 2008 that met the criteria for discontinued
operations under applicable accounting guidance have been classified as discontinued operations for
all periods presented. In fiscal years 2010, 2009 and 2008, the Company recorded net impairment
gains (losses) on dispositions of $0, ($218) and ($353) in continuing operations, respectively, and
$645 in discontinued operations in fiscal year 2010. In the consolidated statements of earnings,
the impairment charges related to the write-down of these long-lived assets occurring in fiscal
years 2010, 2009 and 2008 in continuing operations are reflected in the “net impairment losses on
dispositions” line item.
A summary of the assets and liabilities included in the “assets held for sale” and
“liabilities associated with assets held for sale” line items at October 31, 2010 and 2009,
respectively, and the operating results of the discontinued operations for the years ended October
31, 2010, 2009 and 2008, respectively, are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
Assets |
|
|
|
|
|
|
|
|
Inventories and other current assets |
|
$ |
— |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
Assets held for sale |
|
$ |
— |
|
|
$ |
35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
$ |
360 |
|
|
$ |
829 |
|
Preneed funeral receivables and trust investments |
|
|
— |
|
|
|
174 |
|
Goodwill |
|
|
— |
|
|
|
198 |
|
|
|
|
|
|
|
|
Non-current assets held for sale |
|
$ |
360 |
|
|
$ |
1,201 |
|
|
|
|
|
|
|
|
Liabilities |
|
|
|
|
|
|
|
|
Deferred preneed funeral receipts held in trust |
|
$ |
— |
|
|
$ |
174 |
|
|
|
|
|
|
|
|
Long-term liabilities associated with assets held for sale |
|
$ |
— |
|
|
$ |
174 |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Funeral revenue |
|
$ |
1,253 |
|
|
$ |
1,427 |
|
|
$ |
1,637 |
|
|
|
|
|
|
|
|
|
|
|
Funeral gross profit |
|
$ |
15 |
|
|
$ |
121 |
|
|
$ |
210 |
|
Net gain on dispositions |
|
|
645 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Earnings from
discontinued operations
before income taxes |
|
$ |
660 |
|
|
$ |
121 |
|
|
$ |
210 |
|
|
|
|
|
|
|
|
|
|
|
96
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (12) |
|
Dispositions and Acquisitions — (Continued) |
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 in
consolidated results 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.
|
|
|
| (13) |
|
Impairment of Goodwill |
There were no goodwill impairment charges for the years ended October 31, 2010 and 2009. 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 Company’s
reporting units and its annual goodwill impairment evaluation methodology.
Goodwill in excess of net assets of companies acquired totaled $247,038 as of October 31, 2010
and 2009, respectively. The Company has approximately $23,109 of tax deductible goodwill which is
being amortized for tax purposes.
Goodwill and changes to goodwill by operating segment from October 31, 2008 to October 31,
2009 is presented below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
|
Changes |
|
|
October 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
198,515 |
|
|
$ |
(198 |
) (1) |
|
$ |
198,317 |
|
Cemetery |
|
|
48,721 |
|
|
|
— |
|
|
|
48,721 |
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
247,236 |
|
|
$ |
(198 |
) |
|
$ |
247,038 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The change is due to the sale of a funeral home in fiscal year 2010. |
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 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.
97
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2010 |
|
|
October 31, 2009 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
3.125% senior convertible notes due
2014, net of unamortized discount of
$10,275 and $12,912 as of October 31,
2010 and October 31, 2009, respectively |
|
$ |
76,141 |
|
|
$ |
74,504 |
|
3.375% senior convertible notes due
2016, net of unamortized discount of
$7,318 and $14,858 as of October 31,
2010 and October 31, 2009, respectively |
|
|
37,801 |
|
|
|
65,127 |
|
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
rate of 8.0% as of October 31, 2010 and
October 31, 2009, partially secured by
assets of subsidiaries, with maturities
through 2022 |
|
|
90 |
|
|
|
95 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
314,032 |
|
|
|
339,726 |
|
Less current maturities |
|
|
5 |
|
|
|
5 |
|
|
|
|
|
|
|
|
|
|
$ |
314,027 |
|
|
$ |
339,721 |
|
|
|
|
|
|
|
|
Fair Value
As of October 31, 2010, the carrying values of the Company’s 3.125 percent senior convertible
notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued interest,
were $76,936 and $38,249, respectively, compared to fair values of $82,512 and $41,196,
respectively. As of October 31, 2009, the carrying values of the Company’s 3.125 percent senior
convertible notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued
interest, were $75,308 and $65,922, respectively, compared to fair values of $75,217 and $67,033,
respectively.
As of October 31, 2010 and 2009, the carrying values of the Company’s 6.25 percent senior
notes, including accrued interest, were $202,604, compared to fair values of $204,474 and $197,096,
respectively.
Senior Secured Revolving Credit Facility
On June 2, 2009, the Company entered into a senior secured revolving credit facility which
replaced the previous $125,000 revolving credit facility that was set to mature in November 2009.
The 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, 2010, there were no amounts drawn on the
senior secured revolving credit facility, and the Company’s availability under the senior secured
revolving credit facility, after giving consideration to $8,250 outstanding letters of credit and
the $24,815 Florida bond, was $61,935. 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 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 $2,240 (of which $2,148 was paid in cash in connection with the
transaction) and will be amortized over the term of the new credit facility.
The leverage-based grid pricing for the interest rate on the senior secured revolving credit
facility ranges from LIBOR plus 300 to 400 basis points based on the Company’s consolidated
leverage ratio and was LIBOR plus 300 basis points at October 31, 2010. 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 Company’s
98
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (15) |
|
Long-term Debt—(Continued) |
consolidated leverage ratio. The annual commitment fee is 75 basis points payable quarterly.
The 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 in the
agreement)) — 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 balance of cash, eligible securities (as defined
in the agreement) and readily available marketable securities of the greater of $20,000 or
the then outstanding amount of all letters of credit obligations. |
In addition, the 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 in the agreement)) — 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, 2010, the amount available to pay dividends or repurchase
stock was $194,757. In addition, the Company may prepay its debt without limitation as long as it
has $35,000 in cash and marketable securities. If the Company’s 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 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 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.
99
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (15) |
|
Long-term Debt—(Continued) |
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 Company’s Term Loan B at par value, 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
Company’s 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 are being amortized over the terms of the
senior convertible notes or until they become convertible. The aggregate principal amount of the
2014 Notes and 2016 Notes outstanding at October 31, 2010 was $86,416 and $45,119, respectively,
reflecting open market purchases during fiscal years 2009 and 2010.
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, which commenced January
15, 2008.
Holders may convert their senior convertible notes based on a conversion rate of 90.4936
shares of the Company’s 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 Company’s 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 Company’s Class A common stock and the then applicable conversion rate,
(3) if specified distributions to holders of the Company’s 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 2010 or 2009.
Upon conversion, in lieu of shares of the Company’s 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 Company’s Class A common stock equal to the
conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at the
Company’s 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.
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 Company’s senior unsecured obligations. The senior
convertible notes are guaranteed, fully and unconditionally, jointly and severally, on an unsecured senior
basis, by all of the
100
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (15) |
|
Long-term Debt—(Continued) |
Company’s subsidiaries that are guarantors of the Company’s 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 in 2007, 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
Company’s 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. In connection with the purchases of the Company’s
senior convertible notes during fiscal years 2009 and 2010, the number of shares covered by the
call options was reduced to 7,820,095 related to the 2014 Notes and 4,082,979 related to the 2016
Notes.
The Company also entered into warrant transactions in 2007 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 purchases of the Company’s senior convertible notes described below, the number
of shares subject to the warrants was reduced to 6,913,280 related to the 2014 Notes and 3,609,518
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.
During fiscal years 2010 and 2009, the Company purchased $1,000 and $37,584 aggregate
principal amount of its 3.125 percent senior convertible notes due 2014 in the open market,
respectively, and $34,866 and $45,015 aggregate principal amount of its 3.375 percent senior
convertible notes due 2016 in the open market, respectively, at discounts to their face value. In
connection with these debt purchases, corresponding call options and common stock warrants were
also terminated. As a result of the debt purchases, the Company recorded ($1,035) and $6,237 in
pre-tax gains (losses) on early extinguishment of debt during fiscal years 2010 and 2009,
respectively.
Although the Company recorded a loss from the early extinguishment of debt in fiscal year
2010, the Company was able to purchase the $35,866 of aggregate principal amount of its senior
convertible notes at $4,455 less than the face amount of the senior convertible notes and will
produce annual cash interest savings of $1,208. Since the inception of the senior convertible note
repurchase program in fiscal year 2009, the Company has repurchased a total of $118,465 of
aggregate principal amount of its senior convertible notes in the open market at
$26,501 less than face value, while realizing annual cash interest savings of $3,777.
101
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (15) |
|
Long-term Debt—(Continued) |
Adoption of Convertible Debt Guidance — Senior Convertible Notes
In May 2008, the FASB issued guidance regarding the accounting for convertible debt
instruments that may be settled in cash upon conversion. The guidance states that issuers of
convertible debt instruments that may be settled in cash upon conversion should account separately
for the liability and equity components of the instruments in a manner that will reflect the
entity’s nonconvertible debt borrowing rate as the related interest cost is recognized in
subsequent periods. The entity must determine the carrying amount of the liability component of
any outstanding debt instrument by estimating the fair value of a similar liability without the
conversion option. The Company used the market valuations of its 6.25 percent senior notes due
2013 as the basis for estimating fair value. The amount of the equity component is then calculated
by deducting the fair value of the liability component from the principal amount of the debt
instrument. The value of the debt instrument is adjusted through a discount to the face value of
the debt, which is amortized as non-cash interest expense over the expected life of the debt.
This guidance applies to the Company’s senior convertible notes which as described above were
originally issued in 2007, and must be applied retrospectively to all periods since inception. The
Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance on
the Company’s October 31, 2009 balance sheet was a $9,997 decrease to deferred tax assets, a
$27,770 decrease in long-term debt, a $35,001 increase to additional paid-in capital and an
increase of $17,228 to accumulated deficit. See Note 3 for additional information on the effects
of the adoption of this guidance.
The remaining periods over which the discount on the 2014 Notes and 2016 Notes will be
amortized is approximately 3.75 years and 5.75 years, respectively. The carrying value of the
equity component of the 2014 Notes as of October 31, 2010 and 2009 was $15,995 and $16,008,
respectively. The carrying value of the equity component of the 2016 Notes as of October 31, 2010
and 2009 was $18,219 and $18,993, respectively. The amount of interest expense recorded for the
senior convertible notes related both to the contractual interest coupon and amortization of the
discount on the liability component was $9,212, $12,592 and $13,815 for the fiscal years ended
October 31, 2010, 2009 and 2008, respectively. For the years ended October 31, 2010, 2009 and
2008, the coupon and amortization of the discount yielded an effective interest rate of 6.96
percent on the 2014 Notes and 2016 Notes.
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 Company’s 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.
102
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (15) |
|
Long-term Debt—(Continued) |
Other
As of October 31, 2010, the Company’s subsidiaries had approximately $90 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 Company’s long-term debt for the fiscal years ending
October 31, 2011 through October 31, 2015, are approximately $5 in 2011, $5 in 2012, $200,006 in
2013, $86,422 in 2014 and $7 in 2015. Scheduled principal payments thereafter are $45,180.
As of October 31, 2010, the Company was in compliance with the covenants in its debt
agreements.
The Company’s 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.
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, 2010 and 2009 was $530,424 and $507,349, 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 Company’s
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.
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 |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
| |
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2010 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
30,569 |
|
|
|
|
|
|
|
|
|
Allocation of earnings to nonvested restricted stock |
|
$ |
(267 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations available to
common shareholders |
|
$ |
30,302 |
|
|
|
92,119 |
|
|
$ |
.33 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised |
|
|
|
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations available to
common shareholders plus stock options assumed
exercised |
|
$ |
30,302 |
|
|
|
92,394 |
|
|
$ |
.33 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
| |
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2009 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
23,191 |
|
|
|
|
|
|
|
|
|
Allocation of earnings to nonvested restricted stock |
|
$ |
(186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations available to
common shareholders |
|
$ |
23,005 |
|
|
|
91,898 |
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised |
|
|
|
|
|
|
80 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations available to
common shareholders plus stock options assumed
exercised |
|
$ |
23,005 |
|
|
|
91,978 |
|
|
$ |
.25 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Loss |
|
|
Shares |
|
|
Per Share |
|
| |
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(7,468 |
) |
|
|
|
|
|
|
|
|
Allocation of loss to nonvested restricted stock |
|
$ |
(42 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to
common shareholders |
|
$ |
(7,426 |
) |
|
|
93,795 |
|
|
$ |
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations available to
common shareholders plus stock options
assumed exercised |
|
$ |
(7,426 |
) |
|
|
93,795 |
|
|
$ |
(.08 |
) |
|
|
|
|
|
|
|
|
|
|
As discussed in Note 3, the Company adopted guidance on determining whether instruments
granted in share-based payment transactions are participating securities, effective November 1,
2009. Since this guidance
104
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) |
requires retrospective treatment, the information presented above for the fiscal years ended
October 31, 2009 and 2008 has been adjusted to reflect the adoption of this guidance.
During the year ended October 31, 2010, options to purchase 1,260,619 shares of common stock
at prices ranging from $5.84 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. Additionally,
weighted-average shares outstanding as of October 31, 2010 exclude the effect of approximately
2,750 options because such options were not dilutive. These options expire between December 20,
2011 and September 2, 2016.
During the 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.
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.
As of October 31, 2010, all of the outstanding 214,500 market based stock options were
dilutive as the respective market conditions had been achieved. As of October 31, 2009, 438,000
market based stock options were not dilutive. As of October 31, 2008, 468,000 market based stock
options were not dilutive. The market based stock options were not dilutive because the market
conditions for the respective grants were not achieved during those periods.
For the year ended October 31, 2010, a maximum of 13,153,500 shares of the Company’s Class A
common stock related to the senior convertible notes and a maximum of 10,522,798 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 Company’s stock for the fiscal year
ended October 31, 2010 was less than the conversion price of the senior convertible notes and
strike price of the warrants. For the year ended October 31, 2009, a maximum of 16,740,100 shares
of the Company’s 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 associated common stock warrants were also not
dilutive. For the year ended October 31, 2008, a maximum of 25,000,000 shares of the Company’s
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 fiscal years 2009 and 2010, the Company purchased $82,599 and $35,866,
respectively, 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 and 2010.
The Company includes Class A and Class B common stock in its diluted shares calculation. As
of October 31, 2010, the Company’s Chairman, Frank B. Stewart, Jr., was the record holder of all of
the Company’s shares of Class B common stock. The Company’s 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.
105
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
Income tax expense is comprised of the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Continuing Operations |
|
| |
|
U.S. and |
|
|
|
|
|
|
|
| |
|
Possessions |
|
|
State |
|
|
Totals |
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
1,489 |
|
|
$ |
1,527 |
|
|
$ |
3,016 |
|
Deferred tax expense (benefit) |
|
|
11,561 |
|
|
|
(639 |
) |
|
|
10,922 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
13,050 |
|
|
$ |
888 |
|
|
$ |
13,938 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
1,001 |
|
|
$ |
1,651 |
|
|
$ |
2,652 |
|
Deferred tax expense |
|
|
9,034 |
|
|
|
911 |
|
|
|
9,945 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
10,035 |
|
|
$ |
2,562 |
|
|
$ |
12,597 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
12,975 |
|
|
$ |
2,183 |
|
|
$ |
15,158 |
|
Deferred tax expense |
|
|
2,969 |
|
|
|
2,155 |
|
|
|
5,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,944 |
|
|
$ |
4,338 |
|
|
$ |
20,282 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Discontinued Operations |
|
| |
|
U.S. and |
|
|
|
|
|
|
|
| |
|
Possessions |
|
|
State |
|
|
Totals |
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2010: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
231 |
|
|
$ |
20 |
|
|
$ |
251 |
|
Deferred tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
231 |
|
|
$ |
20 |
|
|
$ |
251 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2009: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
42 |
|
|
$ |
4 |
|
|
$ |
46 |
|
Deferred tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
42 |
|
|
$ |
4 |
|
|
$ |
46 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
74 |
|
|
$ |
2 |
|
|
$ |
76 |
|
Deferred tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
74 |
|
|
$ |
2 |
|
|
$ |
76 |
|
|
|
|
|
|
|
|
|
|
|
106
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, |
| |
|
2010 |
|
2009 |
|
2008 |
Statutory tax rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Increases (reductions) in tax rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax |
|
|
1.21 |
|
|
|
4.64 |
|
|
|
21.85 |
|
U.S. possession income tax |
|
|
.71 |
|
|
|
(1.86 |
) |
|
|
(3.44 |
) |
Nondeductible expenses and other |
|
|
1.02 |
|
|
|
.44 |
|
|
|
(.48 |
) |
Dividend exclusion |
|
|
(2.96 |
) |
|
|
(4.04 |
) |
|
|
(14.27 |
) |
Goodwill impairment |
|
|
— |
|
|
|
— |
|
|
|
68.31 |
|
Capital loss valuation allowance |
|
|
(3.66 |
) |
|
|
1.02 |
|
|
|
51.33 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
31.32 |
% |
|
|
35.20 |
% |
|
|
158.30 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
107
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (18) |
|
Income Taxes—(Continued) |
Deferred tax assets and liabilities consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2010 |
|
|
2009 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
8,829 |
|
|
$ |
8,321 |
|
Allowance for sales cancellations and doubtful accounts |
|
|
6,238 |
|
|
|
7,387 |
|
Capital loss carryover |
|
|
11,473 |
|
|
|
11,255 |
|
Deferred compensation |
|
|
5,632 |
|
|
|
5,403 |
|
Deferred preneed sales and expenses |
|
|
197,090 |
|
|
|
225,956 |
|
Inventory writedown |
|
|
1,162 |
|
|
|
1,168 |
|
Lease obligations |
|
|
839 |
|
|
|
815 |
|
Net operating loss carryover — federal |
|
|
24,096 |
|
|
|
7,135 |
|
Net operating loss carryover — state |
|
|
14,820 |
|
|
|
11,080 |
|
Non-compete amortization |
|
|
— |
|
|
|
445 |
|
Original issue discount on purchased call options |
|
|
7,053 |
|
|
|
10,954 |
|
Other |
|
|
455 |
|
|
|
2,580 |
|
Share-based compensation |
|
|
2,054 |
|
|
|
2,085 |
|
|
|
|
|
|
|
|
|
|
|
279,741 |
|
|
|
294,584 |
|
Valuation allowance-federal capital loss carryover |
|
|
(6,000 |
) |
|
|
(7,775 |
) |
Valuation allowance-state net operating loss carryover |
|
|
(2,616 |
) |
|
|
(2,419 |
) |
|
|
|
|
|
|
|
|
|
|
271,125 |
|
|
|
284,390 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Cemetery property |
|
|
72,805 |
|
|
|
73,053 |
|
Debt discount amortization |
|
|
6,321 |
|
|
|
9,997 |
|
Deferral of gain on early extinguishment of debt |
|
|
5,714 |
|
|
|
5,212 |
|
Depreciation |
|
|
21,301 |
|
|
|
20,772 |
|
Goodwill amortization |
|
|
41,403 |
|
|
|
38,312 |
|
Non-compete amortization |
|
|
285 |
|
|
|
— |
|
Partnership interest |
|
|
1,909 |
|
|
|
1,931 |
|
|
|
|
|
|
|
|
|
|
|
149,738 |
|
|
|
149,277 |
|
|
|
|
|
|
|
|
|
|
$ |
121,387 |
|
|
$ |
135,113 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current net deferred asset |
|
$ |
28,312 |
|
|
$ |
21,715 |
|
Long-term net deferred asset |
|
|
98,025 |
|
|
|
113,398 |
|
Long-term net deferred liability |
|
|
(4,950 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
$ |
121,387 |
|
|
$ |
135,113 |
|
|
|
|
|
|
|
|
The Company received IRS approval in fiscal year 2010 on five requests for changes in tax
accounting methods, which resulted in the deferral of approximately $84,000 of taxable income.
These changes increase the current net operating loss to be utilized beginning in 2010 to
approximately $104,000. The utilization of this net operating loss will significantly reduce
federal income tax payments by approximately $36,000 for the next three years beginning in 2010, of
which approximately $12,000 was used to reduce federal income tax payments in fiscal year 2010.
The Company utilized approximately $33,500 of this net operating loss in fiscal year 2010. These
changes primarily relate to the Company’s tax accounting methods for preneed cemetery services and
preneed funeral merchandise. These changes permit the Company to defer the recognition of income
for tax purposes (and pay taxes) with respect to those amounts until the time the service is provided or the
merchandise is actually delivered. The Company will eventually pay taxes with respect to the
$84,000 as the related preneed contracts are performed in the future.
108
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (18) |
|
Income Taxes—(Continued) |
During the third quarter of fiscal year 2009, the Internal Revenue Service approved a change
in one of the Company’s tax accounting methods that resulted 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, $1,600 was received as a refund in the first quarter
of 2010, $8,000 was used to offset estimated tax payments during fiscal 2009 and the remaining
$4,500 was used to offset future federal income tax payments in 2010. The change relates to the
Company’s tax accounting method 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
method 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 Company’s book and tax accounting for these amounts and is consistent with the
Company’s 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 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.
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 benefits is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gross unrecognized tax benefits,
beginning of period |
|
$ |
2,767 |
|
|
$ |
3,920 |
|
|
$ |
3,615 |
|
Additions for tax for prior years positions |
|
|
131 |
|
|
|
— |
|
|
|
165 |
|
Reductions for tax for prior years positions |
|
|
(1,133 |
) |
|
|
(689 |
) |
|
|
— |
|
Additions for tax for current year positions |
|
|
— |
|
|
|
— |
|
|
|
140 |
|
Reduction in tax relating to settlements with
taxing authorities |
|
|
— |
|
|
|
(140 |
) |
|
|
— |
|
Reduction in tax as a result of a lapse of
applicable statute of limitations |
|
|
(21 |
) |
|
|
(324 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Gross unrecognized tax benefits, end of
period |
|
$ |
1,744 |
|
|
$ |
2,767 |
|
|
$ |
3,920 |
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2010, 2009, and 2008, the total amount of gross unrecognized tax benefits
that, if recognized, would affect the effective tax rate was $366, $255 and $692, respectively.
The Company’s policy with respect to potential penalties and interest is to record them as “other”
expense and interest expense, respectively.
109
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (18) |
|
Income Taxes—(Continued) |
For the years ended October 31, 2010, 2009, and 2008,
the Company had accrued interest and penalties related to the unrecognized tax benefits of $487,
$735 and $1,107, respectively. During fiscal year 2010, an additional $281 of interest was accrued
for uncertain tax positions and $528 of interest and penalties was reduced due to lapse of
applicable statute of limitations. 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. During fiscal year 2008, an additional $374 of
interest was accrued for uncertain tax positions.
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 $366. Also, accrued interest and
penalties will be reduced by $487 due to the close of those tax years.
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 Company’s Board of Directors. Additionally,
employees who participate may contribute 100 percent of their earnings, up to the limit set by the
Internal Revenue Code. Effective March 1, 2010, employee contributions of up to six percent of
earnings are eligible for Company matching contributions at the rate of $0.25 for each $1.00
contributed. Previously, the Company matching contribution rate was $0.50 for each $1.00
contributed. The Company’s expense, including the Company’s matching contributions, for the fiscal
years ended October 31, 2010, 2009 and 2008 was approximately $2,027, $3,013 and $2,923,
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 Company’s Board of Directors. Eligible employees may
contribute up to 100 percent of their earnings, up to a maximum annual contribution of $8.
Effective August 1, 2010, employee contributions of up to six percent of earnings are eligible for
Company matching contributions at the rate of $0.25 for each $1.00 contributed. Previously, the
Company matching contribution rate was $0.50 for each $1.00 contributed. Additional contributions
may also be made to this plan at the discretion of the Company’s Board of Directors. The Company’s
expense, including the Company’s matching contributions, for the fiscal years ended October 31,
2010, 2009 and 2008 was $69, $69 and $74, 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 Company’s Board of Directors. Additionally,
employees who participate may contribute up to 15 percent of their earnings. Effective March 1,
2010, employee contributions of up to six percent are eligible for Company matching contributions
at the rate of $0.25 for each $1.00 contributed. Previously, the Company matching contribution
rate was $.50 for each $1.00 contributed. The Company’s expense, including the Company’s matching
110
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (19) |
|
Benefit Plans—(Continued) |
contributions, for the fiscal years ended October 31, 2010, 2009 and 2008 was approximately $237,
$258 and $186, 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 Company’s Board of Directors. The retirement plan is
non-contributory and provides retirement benefits based on final average compensation, position and
the participant’s age, years of service or years of participation in the SERP. The Company’s
expense for the fiscal years ended October 31, 2010, 2009 and 2008 was $2,136, $2,400 and $2,468,
respectively. The Company’s liability as of October 31, 2010 and 2009 was $14,158 and $12,969,
respectively, and is presented in other current liabilities and other long-term liabilities in the
consolidated balance sheet.
Compensation Plans
In April 2010, the Company’s shareholders approved the 2010 Stock Incentive Plan (the “Stock
Plan”) at its annual shareholders’ meeting. The Stock Plan replaces the Company’s 2007 Stock
Incentive Plan. No future grants will be made through the prior plan. The Compensation Committee
of the Company’s 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
Company’s 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.
In April 2007, the Company’s shareholders approved the Company’s Executive Officer Annual
Incentive Plan (the “Incentive Plan”) at its annual shareholders’ meeting. 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
Company’s 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 Company’s stock-based incentive plans.
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 Company’s 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 Company’s 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 Employee Stock Plan through October
31, 2010, 544,395 shares had been acquired under the Employee Stock Plan.
Share-Based Compensation
Stock Options
111
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (19) |
|
Benefit Plans—(Continued) |
For the years ended October 31, 2010, 2009 and 2008, stock option expenses amounted to $1,054,
$1,180 and $1,544, respectively, which are included in corporate general and administrative expenses
in the consolidated statement of earnings. As of October 31, 2010, there was $1,502 of total
unrecognized compensation costs related to nonvested stock options that are expected to be
recognized over a weighted-average period of 2.69 years. The following table is a summary of the
Company’s stock options outstanding as of October 31, 2010, 2009 and 2008, and the changes that
occurred during fiscal years 2010, 2009 and 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2010 |
|
2009 |
|
2008 |
| |
|
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 |
|
|
2,864,562 |
|
|
$ |
5.78 |
|
|
|
2,141,679 |
|
|
$ |
7.10 |
|
|
|
1,900,729 |
|
|
$ |
6.58 |
|
Granted |
|
|
960,750 |
|
|
$ |
5.08 |
|
|
|
979,500 |
|
|
$ |
2.83 |
|
|
|
561,250 |
|
|
$ |
8.18 |
|
Exercised |
|
|
(81,714 |
) |
|
$ |
4.73 |
|
|
|
— |
|
|
$ |
— |
|
|
|
(264,862 |
) |
|
$ |
5.71 |
|
Forfeited |
|
|
(612,988 |
) |
|
$ |
7.20 |
|
|
|
(256,617 |
) |
|
$ |
5.60 |
|
|
|
(55,438 |
) |
|
$ |
6.75 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
3,130,610 |
|
|
$ |
5.31 |
|
|
|
2,864,562 |
|
|
$ |
5.78 |
|
|
|
2,141,679 |
|
|
$ |
7.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
1,366,738 |
|
|
$ |
6.24 |
|
|
|
1,067,954 |
|
|
$ |
6.73 |
|
|
|
781,307 |
|
|
$ |
6.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
options granted |
|
|
|
|
|
$ |
1.53 |
|
|
|
|
|
|
$ |
0.71 |
|
|
|
|
|
|
$ |
2.18 |
|
| |
|
|
|
|
| |
|
Year Ended October 31, 2010 |
| |
|
Aggregate Intrinsic Value |
Options outstanding as of October 31, 2010 |
|
$ |
2,720 |
|
Options exercisable as of October 31, 2010 |
|
$ |
593 |
|
Options exercised during 2010 |
|
$ |
112 |
|
| |
|
|
|
|
| |
|
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 |
|
$ |
— |
|
The following table further describes the Company’s stock options outstanding as of October
31, 2010.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number |
|
|
Average |
|
|
Weighted |
|
|
Number |
|
|
Weighted Average |
|
|
|
|
| Range of |
|
Outstanding at |
|
|
Remaining |
|
|
Average |
|
|
Exercisable at |
|
|
Remaining |
|
|
Weighted Average |
|
| Exercise Prices |
|
10/31/2010 |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
10/31/2010 |
|
|
Contractual Life |
|
|
Exercise Price |
|
$2.65 |
|
|
472,750 |
|
|
5.13 years |
|
$ |
2.65 |
|
|
|
104,302 |
|
|
5.13 years |
|
$ |
2.65 |
|
$3.09 |
|
|
340,000 |
|
|
5.18 years |
|
$ |
3.09 |
|
|
|
85,000 |
|
|
5.18 years |
|
$ |
3.09 |
|
$5.04-$5.86 |
|
|
1,190,992 |
|
|
5.23 years |
|
$ |
5.15 |
|
|
|
273,554 |
|
|
2.30 years |
|
$ |
5.36 |
|
$6.33-$6.90 |
|
|
620,368 |
|
|
2.26 years |
|
$ |
6.61 |
|
|
|
537,007 |
|
|
2.12 years |
|
$ |
6.65 |
|
$7.31-$7.65 |
|
|
73,000 |
|
|
3.65 years |
|
$ |
7.39 |
|
|
|
69,875 |
|
|
3.63 years |
|
$ |
7.39 |
|
$8.06-$8.47 |
|
|
433,500 |
|
|
3.91 years |
|
$ |
8.21 |
|
|
|
297,000 |
|
|
3.83 years |
|
$ |
8.19 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$2.65 to $8.47 |
|
|
3,130,610 |
|
|
4.40 years |
|
$ |
5.31 |
|
|
|
1,366,738 |
|
|
3.02 years |
|
$ |
6.24 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
112
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (19) |
|
Benefit Plans—(Continued) |
| |
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
Weighted Average |
| |
|
Year Ended |
|
Grant-Date |
| |
|
October 31, 2010 |
|
Fair Value |
Nonvested options as of November 1, 2009 |
|
|
1,796,608 |
|
|
$ |
1.55 |
|
Granted |
|
|
960,750 |
|
|
$ |
1.53 |
|
Vested |
|
|
(421,485 |
) |
|
$ |
1.40 |
|
Forfeited |
|
|
(572,001 |
) |
|
$ |
2.33 |
|
|
|
|
|
|
|
|
|
|
Nonvested options as of October 31, 2010 |
|
|
1,763,872 |
|
|
$ |
1.32 |
|
|
|
|
|
|
|
|
|
|
The fair value of the Company’s 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 2010, 2009 and 2008: expected dividend yield of 2.4 percent, 2.2
percent and 1.4 percent; expected volatility of 37.7 percent, 38.4 percent and 38.2 percent;
risk-free interest rate of 2.8 percent, 3.2 percent and 4.2 percent; and an expected term of 4.7
years, 4.9 years and 5.0 years. In 2008, the Company issued stock options with market conditions
based on reaching certain target stock prices in fiscal years 2008, 2009 and 2010. The Company
records this expense over the requisite service period. The market conditions were achieved in
fiscal year 2008 but were not met in fiscal years 2009 or 2010. The fair value of the Company’s
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 2010, 2009
and 2008: expected dividend yield of 1.3 percent; expected volatility of 37.9 percent; risk-free
interest rate of 4.3 percent; and an expected term of 3.4 years. The expected dividend yield is
based on the Company’s annual dividend payout at grant date. Expected volatility is based on the
historical volatility of the Company’s 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 2010, 2009 and 2008, respectively: expected dividend yield of 2.6
percent, 3.2 percent and 1.4 percent; expected volatility of 39.8 percent, 42.0 percent and 37.2
percent; risk-free interest rate of 0.1 percent, 0.2 percent and 2.3 percent; and an expected term
of 0.3 years, 0.3 years and 0.3 years.
Restricted Stock
For the years ended October 31, 2010, 2009 and 2008, the expense related to restricted stock
amounted to $989, $719 and $744, respectively, which are included in corporate general and
administrative expenses in the statement of earnings. As of October 31, 2010, there was $501 of
remaining future restricted stock expense to be recognized. 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 to calculate basic earnings per common share until the
shares vest. The table below is a summary of the Company’s restricted stock activity for fiscal
years 2010, 2009 and 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In shares) |
|
2010(1) |
|
2009(2) |
|
2008(3) |
Nonvested restricted stock at beginning of year |
|
|
729,665 |
|
|
|
510,887 |
|
|
|
606,947 |
|
Granted |
|
|
332,000 |
|
|
|
353,000 |
|
|
|
55,000 |
|
Vested |
|
|
(181,514 |
) |
|
|
(72,390 |
) |
|
|
(151,060 |
) |
Forfeited |
|
|
(159,332 |
) |
|
|
(61,832 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock at end of year |
|
|
720,819 |
|
|
|
729,665 |
|
|
|
510,887 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
In December 2009, the Company granted 324,500 shares of restricted stock to
executive officers and other employees with market conditions based on achieving certain
target stock prices in fiscal years 2010, 2011 and |
113
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (19) |
|
Benefit Plans—(Continued) |
|
|
|
| |
| |
|
2012. In November and December 2009, the Company also granted 7,500 shares of restricted stock
to certain employees which vest in equal one-third portions over three years. The market
condition discussed above related to fiscal year 2010 was achieved. |
| |
| (2) |
|
In December 2008, the Company granted 102,000 shares of restricted stock to certain
employees with market conditions based on achieving certain target stock prices in fiscal
years 2009, 2010 and 2011. In January 2009, the Company granted 195,000 shares of restricted
stock to executive officers conditional on the same market criteria mentioned above. Also in
January 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 fiscal years 2009 or 2010. |
| |
| (3) |
|
In December 2007, the Company granted 45,000 shares of restricted stock to executive
officers and in June 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 fiscal 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 fiscal years 2008, 2009 or 2010. |
Other
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. The expense related to this
stock grant amounted to $414 and was recorded in corporate general and administrative expenses
during the first quarter of 2010. Each of the shares received has a restriction requiring each
independent director to hold the respective shares until completion of service as a member of the
Board of Directors.
In November 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.
In January 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.
In fiscal year 2008, the Company granted 48,682 shares 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 year 2007 amounted to $390.
|
|
|
| (20) |
|
Commitments, Contingencies and Related Party Transactions |
Litigation
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 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.
114
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) |
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 20 years, except for eight leases that expire between 2032 and 2039. Rent
payments under these leases were $5,078, $4,708 and $4,638 for the years ended October 31, 2010,
2009 and 2008, respectively. The Company’s future minimum lease payments as of October 31, 2010
are $4,825, $3,738, $3,052, $2,145, $1,523 and $15,661 for the years ending October 31, 2011, 2012,
2013, 2014, 2015 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 subsequent 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, 2010, the Company had
$13,253 recorded as a liability for the estimated probable funding obligation. As of October 31,
2010, the Company had unrealized losses of approximately $36,415 in cemetery perpetual care 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.
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 as of October 31, 2010 and
2009.
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 $5,207 and $5,927 as of October 31, 2010 and 2009,
respectively. The Company’s future non-compete payments as of October 31, 2010 are $342, $168,
$100, $100, $100 and $300 for the years ending October 31, 2011, 2012, 2013, 2014, 2015 and
thereafter, respectively.
The Company is required to maintain a bond ($24,815 as of October 31, 2010) 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 and return to the trusts the
amounts it previously withdrew that relate to the remaining undelivered preneed contracts in lieu
of this bond.
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 was required to 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
and made 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
115
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) |
note accrues annually at a rate equal to the Company’s 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.
Stewart’s 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, 2010, including accrued interest,
was approximately $1,380.
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. As of October 31, 2010, the
Company’s 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
Company’s wholly-owned subsidiary, Investor’s Trust, Inc. (“ITI”), who reports to the Chief
Financial Officer. The Company’s 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 are the chief operating decision makers (“CODM”) as they make
decisions about the Company’s overall resource allocation and assessment of performance.
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 Company’s 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 Company’s 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.
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 Company’s 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 Company’s 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.
116
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (21) |
|
Segment Data—(Continued) |
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 Company’s 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 Company’s operations are product-based. As such, the Company’s primary reportable
segments presented in the following table are based on products and services.
The Company’s funeral homes offer a complete range of funeral services and products both at
the time of need and on a preneed basis. The Company’s services and products include family
consultation, removal and preparation of remains, the use of funeral home facilities for
visitation, worship and funeral services, transportation services, flowers and caskets. In
addition to traditional funeral services, all of the Company’s funeral homes offer cremation
products and services. The Company’s cemetery operations involve the sale of cemetery property and
related merchandise, including lots, lawn crypts, family and community mausoleums, 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.
For a discussion of discontinued operations, see Note 12. The table below presents
information about reported segments for the fiscal years ended October 31, 2010, 2009 and 2008 for
the Company’s continuing operations only.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Revenue |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Funeral |
|
$ |
260,087 |
|
|
$ |
259,734 |
|
|
$ |
266,658 |
|
Cemetery(1) |
|
|
216,504 |
|
|
|
204,181 |
|
|
|
232,163 |
|
Corporate Trust Management(2) |
|
|
23,316 |
|
|
|
22,464 |
|
|
|
27,425 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
499,907 |
|
|
$ |
486,379 |
|
|
$ |
526,246 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Gross Profit |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Funeral |
|
$ |
50,151 |
|
|
$ |
50,713 |
|
|
$ |
50,631 |
|
Cemetery(1) |
|
|
24,464 |
|
|
|
16,266 |
|
|
|
24,219 |
|
Corporate Trust Management(2) |
|
|
21,589 |
|
|
|
20,640 |
|
|
|
25,757 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
96,204 |
|
|
$ |
87,619 |
|
|
$ |
100,607 |
|
|
|
|
|
|
|
|
|
|
|
117
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (21) |
|
Segment Data—(Continued) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Total Net Preneed |
|
| |
|
Merchandise and Service Sales(3) |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Funeral |
|
$ |
95,217 |
|
|
$ |
99,067 |
|
|
$ |
97,173 |
|
Cemetery |
|
|
48,290 |
|
|
|
48,629 |
|
|
|
53,644 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
143,507 |
|
|
$ |
147,696 |
|
|
$ |
150,817 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and Amortization |
|
| |
|
Total |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Funeral |
|
$ |
15,203 |
|
|
$ |
16,015 |
|
|
$ |
14,811 |
|
Cemetery |
|
|
7,928 |
|
|
|
8,337 |
|
|
|
6,955 |
|
Reconciling Items(4) |
|
|
9,137 |
|
|
|
10,453 |
|
|
|
12,200 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
32,268 |
|
|
$ |
34,805 |
|
|
$ |
33,966 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Additions to Long-Lived Assets |
|
| |
|
Total(5) |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Funeral |
|
$ |
6,735 |
|
|
$ |
9,949 |
|
|
$ |
11,286 |
|
Cemetery |
|
|
16,773 |
|
|
|
20,851 |
|
|
|
18,539 |
|
Reconciling Items(4) |
|
|
3,084 |
|
|
|
4,924 |
|
|
|
7,686 |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
26,592 |
|
|
$ |
35,724 |
|
|
$ |
37,511 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
| |
|
Total Goodwill |
|
| |
|
2010 |
|
|
2009 |
|
Funeral |
|
$ |
198,317 |
|
|
$ |
198,317 |
|
Cemetery |
|
|
48,721 |
|
|
|
48,721 |
|
|
|
|
|
|
|
|
Total |
|
$ |
247,038 |
|
|
$ |
247,038 |
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Perpetual care trust earnings are included in the revenue and gross profit data of
the cemetery segment and amounted to $7,376, $6,840 and $10,660 for fiscal years 2010, 2009
and 2008, respectively. |
| |
| (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 Company’s subsidiary, Investors Trust, Inc. The trust earnings
represent the amount of distributable earnings as stipulated by the Company’s respective trust
agreements that are generated by the trusts over the life of the preneed contracts and
allocated to those products and services delivered during the relevant periods. Trust
management fees included in funeral revenue for 2010, 2009 and 2008 were $4,517, $3,912 and
$5,075, respectively, and funeral trust earnings recognized with respect to preneed contracts
delivered included in funeral revenue for 2010, 2009 and 2008 were $11,294, $11,256 and
$13,237, respectively. Trust management fees included in cemetery revenue for 2010, 2009 and
2008 were $4,873, $4,062 and $4,949, respectively, and cemetery trust earnings recognized with
respect to preneed contracts delivered included in cemetery revenue for 2010, 2009 and 2008
were $2,632, $3,234 and $4,164, 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. |
118
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (21) |
|
Segment Data—(Continued) |
|
|
|
| |
| (4) |
|
Reconciling items consist of unallocated corporate assets, depreciation and
amortization on unallocated corporate assets, amortization of deferred financing costs,
amortization of the discount on the Company’s senior convertible notes 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, 2010, 2009 and 2008, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Gross profit for reportable segments |
|
$ |
96,204 |
|
|
$ |
87,619 |
|
|
$ |
100,607 |
|
Corporate general and administrative expenses |
|
|
(27,784 |
) |
|
|
(30,670 |
) |
|
|
(32,611 |
) |
Impairment of goodwill |
|
|
— |
|
|
|
— |
|
|
|
(25,952 |
) |
Hurricane related charges, net |
|
|
(66 |
) |
|
|
(380 |
) |
|
|
(2,297 |
) |
Separation charges |
|
|
— |
|
|
|
(275 |
) |
|
|
— |
|
Net impairment losses on dispositions |
|
|
— |
|
|
|
(218 |
) |
|
|
(353 |
) |
Other operating income, net |
|
|
1,424 |
|
|
|
1,250 |
|
|
|
819 |
|
Interest expense |
|
|
(24,392 |
) |
|
|
(27,776 |
) |
|
|
(29,805 |
) |
Gain (loss) on early extinguishment of debt |
|
|
(1,035 |
) |
|
|
6,146 |
|
|
|
— |
|
Investment and other income, net |
|
|
156 |
|
|
|
92 |
|
|
|
2,406 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before
income taxes |
|
$ |
44,507 |
|
|
$ |
35,788 |
|
|
$ |
12,814 |
|
|
|
|
|
|
|
|
|
|
|
119
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, 2010, 2009 and 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2010 |
|
|
2009 |
|
|
2008 |
|
Service revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
180,419 |
|
|
$ |
174,116 |
|
|
$ |
177,772 |
|
Cemetery |
|
|
59,693 |
|
|
|
60,438 |
|
|
|
65,260 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
240,112 |
|
|
|
234,554 |
|
|
|
243,032 |
|
Merchandise revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
88,686 |
|
|
|
94,701 |
|
|
|
99,595 |
|
Cemetery |
|
|
149,161 |
|
|
|
137,310 |
|
|
|
160,602 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
237,847 |
|
|
|
232,011 |
|
|
|
260,197 |
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
6,793 |
|
|
|
6,085 |
|
|
|
7,603 |
|
Cemetery |
|
|
15,155 |
|
|
|
13,729 |
|
|
|
15,414 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
21,948 |
|
|
|
19,814 |
|
|
|
23,017 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
499,907 |
|
|
$ |
486,379 |
|
|
$ |
526,246 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
60,556 |
|
|
$ |
57,716 |
|
|
$ |
60,999 |
|
Cemetery |
|
|
42,067 |
|
|
|
42,067 |
|
|
|
44,054 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
102,623 |
|
|
|
99,783 |
|
|
|
105,053 |
|
Merchandise costs |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
55,472 |
|
|
|
57,763 |
|
|
|
61,553 |
|
Cemetery |
|
|
94,143 |
|
|
|
92,063 |
|
|
|
108,343 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
149,615 |
|
|
|
149,826 |
|
|
|
169,896 |
|
Facility expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
94,784 |
|
|
|
94,415 |
|
|
|
94,249 |
|
Cemetery |
|
|
56,681 |
|
|
|
54,736 |
|
|
|
56,441 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,465 |
|
|
|
149,151 |
|
|
|
150,690 |
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
403,703 |
|
|
$ |
398,760 |
|
|
$ |
425,639 |
|
|
|
|
|
|
|
|
|
|
|
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 Company’s estimated obligation to fund the cemetery perpetual
care trusts.
|
|
|
| (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 Company’s South Louisiana operations. In September 2008, Hurricane
Ike struck the Texas Gulf Coast and the Company’s 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.
120
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 $66, $380 and $2,297 for the years ended
October 31, 2010, 2009 and 2008, respectively. In fiscal year 2009, the Company received $300 in
insurance proceeds related to Hurricane Ike. The Hurricane Katrina charges for fiscal years 2009
and 2010 primarily related to legal costs associated with ongoing litigation as described in Note
20.
|
|
|
| (24) |
|
Significant Risks and Uncertainties |
Concentrations of Investments
The Company’s 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, changing 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, 2010, the Company has a
concentration in the financial services sector with 20 percent of fair market value of its preneed
funeral and cemetery merchandise and services portfolios and 30 percent of its cemetery perpetual
care portfolio invested in the financial services sector. See Notes 2(i), 2(j) and 2(k) for the
Company’s 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 $115,120 relating to cemetery
property sales as of October 31, 2010. A 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 Company’s 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).
As of November 30, 2010, the fair market value of the Company’s preneed funeral and
cemetery merchandise and services trusts and cemetery perpetual care trusts decreased one percent,
or approximately $7,649, from October 31, 2010.
In November 2010, the Company issued 82,160 shares of Class A common stock and paid
approximately $114 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.
121
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (25) |
|
Subsequent Events—(Continued) |
In November 2010, the Company acquired a new funeral home and cemetery in Texas for
approximately $1,820.
Subsequent to October 31, 2010 through November 30, 2010, the Company repurchased an
additional 847,200 shares of its Class A common stock for $4,790 at an average price of $5.65 per
share and has $17,672 remaining available under its current stock repurchase program.
|
|
|
| (26) |
|
Quarterly Financial Data (Unaudited) |
The quarterly financial data in the table below has been reclassified to reflect the results
of certain businesses previously reported as continuing operations to discontinued operations.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
Year Ended October 31, 2010(1) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
124,012 |
|
|
$ |
128,033 |
|
|
$ |
122,558 |
|
|
$ |
125,304 |
|
Gross profit |
|
|
25,127 |
|
|
|
24,912 |
|
|
|
22,181 |
|
|
|
23,984 |
|
Net earnings |
|
|
7,487 |
|
|
|
8,391 |
|
|
|
6,039 |
|
|
|
9,061 |
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.08 |
|
|
|
.09 |
|
|
|
.06 |
|
|
|
.10 |
|
Diluted |
|
|
.08 |
|
|
|
.09 |
|
|
|
.06 |
|
|
|
.10 |
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
First |
|
Second |
|
Third |
|
Fourth |
Year Ended October 31, 2009(2) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
118,948 |
|
|
$ |
126,337 |
|
|
$ |
117,342 |
|
|
$ |
123,752 |
|
Gross profit |
|
|
23,036 |
|
|
|
25,619 |
|
|
|
19,250 |
|
|
|
19,714 |
|
Net earnings |
|
|
4,766 |
|
|
|
8,866 |
|
|
|
6,092 |
|
|
|
3,542 |
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.05 |
|
|
|
.10 |
|
|
|
.07 |
|
|
|
.04 |
|
Diluted |
|
|
.05 |
|
|
|
.10 |
|
|
|
.07 |
|
|
|
.04 |
|
|
|
|
| (1) |
|
First quarter of fiscal year 2010 includes a $17 gain on early extinguishment of
debt. Second quarter of fiscal year 2010 includes a charge of $32 related to net hurricane
related costs. Third quarter of fiscal year 2010 includes a charge of $30 related to net
hurricane related costs, a $31 charge related to the Company’s estimated probable obligation
to fund the cemetery perpetual care trusts and a $106 loss on the early extinguishment of
debt. Fourth quarter of fiscal year 2010 includes a $946 loss on the early extinguishment of
debt. |
| |
| (2) |
|
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 Company’s
estimated probable obligation to fund the cemetery perpetual care trusts and a $3,384 gain on
the early extinguishment of debt. Third quarter of fiscal year 2009 includes ($117) in net
impairment losses on dispositions, a $23 charge related to the Company’s estimated probable
obligation to fund the cemetery perpetual care trusts and a $2,414 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 Company’s estimated probable
obligation to fund the cemetery perpetual care trusts and a $348 gain on the early
extinguishment of debt. |
122
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
|
|
|
| (26) |
|
Quarterly Financial Data (Unaudited)—(Continued) |
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 Company’s 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.
|
|
|
| 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 Commission’s (“SEC”) rules and forms, and that
such information is accumulated and communicated to the Company’s 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 Company’s 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 Company’s disclosure controls and procedures were effective as of the end of the period covered
by this report.
Management’s 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 Company’s internal control over financial reporting is a process designed
under the supervision of the Company’s 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 Company’s internal control over financial
reporting as of October 31, 2010. 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, 2010.
The effectiveness of the Company’s internal control over financial reporting as of October 31,
2010 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
123
Changes in Internal Control over Financial Reporting
There have been no changes in the Company’s internal control over financial reporting during
the quarter ended October 31, 2010 that have materially affected, or are reasonably likely to
materially affect, the Company’s internal control over financial reporting.
Item 9B. Other Information
James W. McFarland has advised our board’s Corporate Governance and Nominating Committee that,
after serving more than 15 years on our board, he will retire at the next annual meeting of
shareholders. Michael O. Read has also advised the committee that, after serving more than 19
years on our board, he will retire at the next annual meeting of shareholders.
Our board, upon the recommendation of the committee, has nominated John K. Saer, Jr. and John
B. Elstrott, Jr. to stand for election at the 2011 annual meeting of shareholders. Mr. Saer
retired as a partner of Kohlberg Kravis Roberts & Co in 2009 and recently joined GI Partners, a
real estate private equity firm, as Managing Director and Executive Chairman of CalEast Global
Logistics, a new venture in which GI Partners will manage and invest in a $3.4 billion portfolio of
CalPERS’ industrial and logistics related real estate businesses. Dr. Elstrott is a Clinical
Professor of Entrepreneurship and the founding director of the Levy-Rosenblum Institute for
Entrepreneurship at Tulane University’s Freeman School of Business, and is Chairman of the Board of
Whole Foods Market Inc., a public company with $9 billion in fiscal 2010 sales.
In addition, our board, upon the recommendation of the committee, has nominated the remaining
directors to stand for re-election at the 2011 annual meeting.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding executive officers required by Item 10 may be found in Part I 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 Company’s 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 Registrant’s
definitive proxy statement relating to its 2011 annual meeting of shareholders, which proxy
statement will be filed pursuant to Regulation 14A within 120 days after the end of the last fiscal
year.
Item 11. Executive Compensation
The information required by Item 11 is incorporated by reference to the Registrant’s
definitive proxy statement relating to its 2011 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
124
compensation plans as of October 31, 2010:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
| |
|
|
|
|
|
|
|
|
|
Remaining Available For |
|
| |
|
|
|
|
|
|
|
|
|
Future Issuance Under Equity |
|
| |
|
Number of Securities to be |
|
|
Weighted-Average |
|
|
Compensation Plans |
|
| |
|
Issued Upon Exercise of |
|
|
Exercise Price of |
|
|
(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 |
|
|
3,851,429 |
|
|
$ |
5.28 |
|
|
|
5,455,605 |
|
Equity compensation
plans not approved
by security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
3,851,429 |
|
|
$ |
5.28 |
|
|
|
5,455,605 |
|
|
|
|
| (1) |
|
Includes 5,000,000 shares of our common stock under the 2010 Stock Incentive Plan,
which are issuable as stock appreciation rights, restricted stock, performance shares or stock
awards. This also includes 455,605 shares remaining to be granted under the 2003 Employee
Stock Purchase Plan. |
The remaining information required by Item 12 is incorporated by reference to the Registrant’s
definitive proxy statement relating to its 2011 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 Registrant’s
definitive proxy statement relating to its 2011 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 Registrant’s
definitive proxy statement relating to its 2011 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.
125
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a) Documents filed as part of this report:
(1) Financial Statements
The Company’s consolidated financial statements listed below have been filed as part of this
report:
| |
|
|
|
|
| |
|
Page |
|
|
|
|
50 |
|
|
|
|
52 |
|
|
|
|
53 |
|
|
|
|
55 |
|
|
|
|
57 |
|
|
|
|
58 |
|
|
|
|
|
|
(2) Financial Statement Schedule for the years ended October 31, 2010, 2009 and 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
127 |
|
All other schedules are omitted because they are not applicable or not required, or the
information appears in the financial statements or notes thereto.
126
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 |
|
|
Charged to |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
beginning |
|
|
costs |
|
|
|
|
|
|
|
|
|
|
Balance at |
|
| Description |
|
of period |
|
|
and expenses |
|
|
Other changes |
|
|
Write-offs |
|
|
end of period |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current—Allowance for doubtful
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
7,390 |
|
|
|
1,946 |
|
|
|
— |
|
|
|
(3,578 |
) |
|
$ |
5,758 |
|
2009 |
|
$ |
7,215 |
|
|
|
3,407 |
|
|
|
— |
|
|
|
(3,232 |
) |
|
$ |
7,390 |
|
2008 |
|
$ |
8,142 |
|
|
|
3,412 |
|
|
|
— |
|
|
|
(4,339 |
) |
|
$ |
7,215 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year—Allowance for
doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
9,778 |
|
|
|
2,812 |
|
|
|
— |
|
|
|
(4,266 |
) |
|
$ |
8,324 |
|
2009 |
|
$ |
9,689 |
|
|
|
4,509 |
|
|
|
— |
|
|
|
(4,420 |
) |
|
$ |
9,778 |
|
2008 |
|
$ |
10,824 |
|
|
|
4,583 |
|
|
|
— |
|
|
|
(5,718 |
) |
|
$ |
9,689 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
$ |
10,194 |
|
|
|
(1,578 |
) |
|
|
— |
|
|
|
— |
|
|
$ |
8,616 |
|
2009 |
|
$ |
10,649 |
|
|
|
(455 |
) |
|
|
— |
|
|
|
— |
|
|
$ |
10,194 |
|
2008 |
|
$ |
4,032 |
|
|
|
6,617 |
|
|
|
— |
|
|
|
— |
|
|
$ |
10,649 |
|
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 Company’s 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 Company’s 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 Company’s Amended and Restated Articles of
Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A
and Class B common stock |
| |
| 4.2 |
|
Specimen of Class A common stock certificate (incorporated by reference to Exhibit 3 to the
Company’s 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 Company’s 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 (incorporated by reference to Exhibit 4.1 to the Company’s
Current Report on Form 8-K filed February 14, 2005) |
127
| 4.5 |
|
Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the
Company’s 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 Company’s 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 Company’s 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 Company’s long-term debt. None of such instruments
(other than those included as exhibits herein) represent long-term debt in excess of 10 percent of
the Company’s consolidated total assets.
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 Company’s 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 Company’s 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 Company’s 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 Company’s Annual Report on
Form 10-K for the year ended October 31, 2008) |
| |
| 10.4 |
|
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, Commission File No. 1-15449) |
| |
| 10.5 |
|
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, Commission File
No. 1-15449) |
| |
| 10.6 |
|
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 Company’s Annual Report on Form 10-K for the year ended October 31, 2007) |
| |
| 10.7 |
|
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 Company’s Annual Report on Form 10-K for the year ended October 31, 2007) |
| |
| 10.8 |
|
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 Company’s Current Report on Form 8-K filed June 27, 2007) |
128
| 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 10.3
to the Company’s Current Report on Form 8-K filed June 27, 2007) |
| |
| 10.10 |
|
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 Company’s 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
10.5 to the Company’s Current Report on Form 8-K filed June 27, 2007) |
| |
| 10.12 |
|
Stewart Enterprises, Inc. 2010 Stock Incentive Plan (incorporated by reference to Appendix A
to the Company’s definitive proxy statement for the year ended October 31, 2009) |
| |
| 10.13 |
|
Stewart Enterprises, Inc. 2007 Stock Incentive Plan (incorporated by reference to the
Company’s 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 Company’s 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 Company’s Annual Report on Form 10-K for the year ended October 31, 2009) |
| |
| 10.16 |
|
2000 Incentive Compensation Plan (incorporated by reference to Exhibit 10.45 to the
Company’s 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 Company’s 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
Company’s 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 Company’s 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 Company’s 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 Company’s 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 Company’s Current Report on Form 8-K filed
March 17, 2009) |
129
| 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 |
130
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 15, 2010.
| |
|
|
|
|
| |
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 15, 2010 |
|
|
|
|
|
/s/ THOMAS M. KITCHEN
Thomas M. Kitchen
(Principal Financial Officer)
|
|
Senior Executive Vice President, Chief
Financial Officer and a
Director
|
|
December 15, 2010 |
|
|
|
|
|
/s/ ANGELA M. LACOUR
Angela M. Lacour
(Principal Accounting Officer)
|
|
Vice President, Corporate
Controller and
Chief Accounting Officer
|
|
December 15, 2010 |
|
|
|
|
|
/s/ FRANK B. STEWART, JR.
Frank B. Stewart, Jr.
|
|
Chairman of the Board
|
|
December 15, 2010 |
|
|
|
|
|
/s/ ALDEN J. MCDONALD, JR.
Alden J. McDonald, Jr.
|
|
Director
|
|
December 15, 2010 |
|
|
|
|
|
/s/ JAMES W. MCFARLAND
James W. McFarland
|
|
Director
|
|
December 15, 2010 |
|
|
|
|
|
/s/ RONALD H. PATRON
Ronald H. Patron
|
|
Director
|
|
December 15, 2010 |
|
|
|
|
|
/s/ MICHAEL O. READ
Michael O. Read
|
|
Director
|
|
December 15, 2010 |
|
|
|
|
|
/s/ ASHTON J. RYAN, JR.
Ashton J. Ryan, Jr.
|
|
Director
|
|
December 15, 2010 |
131
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 |
132