e10vk
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, 2008
OR
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Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
Commission File Number: 1-15449
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
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LOUISIANA
(State or other jurisdiction of incorporation or organization)
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72-0693290
(I.R.S. Employer Identification No.) |
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1333 South Clearview Parkway
Jefferson, Louisiana
(Address of principal executive offices)
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70121
(Zip Code) |
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
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Name of Exchange on which registered |
| Class A Common Stock, No Par Value
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The NASDAQ Stock Market LLC |
| Preferred Stock Purchase Rights
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The NASDAQ Stock Market LLC |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule
405 of the Securities Act. Yes þ No o
Indicate by check mark if the registrant is not required to file reports pursuant to Section
13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
Indicate by check mark whether the registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o
Indicate by check mark 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. (Check one):
| Large accelerated filer þ | Accelerated filer o |
Non-accelerated filer o
(Do not check if a smaller reporting company) | Smaller reporting company o |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of
the Exchange Act). Yes o No þ
The aggregate market value of the voting stock held by non-affiliates of the registrant as of
April 30, 2008, was approximately $558,000,000.
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, 2008, was 88,783,127
and 3,555,020, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
Portions of the proxy statement in connection with the 2009 annual meeting of shareholders are
incorporated in Part III of this Report.
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
Index
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Cautionary Note
This annual report contains forward-looking statements that are generally identifiable through
the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,”
“project,” “will” and similar expressions. These forward-looking statements rely on assumptions,
estimates and predictions that could be inaccurate and that are subject to risks and uncertainties
that could cause actual results to differ materially. Important factors that may cause our actual
results to differ materially from expectations reflected in our forward-looking statements include
those described in Item 1A. “Risk Factors.” Forward-looking statements speak only as of the date
of this report, and we undertake no obligation to update or revise such statements to reflect new
circumstances or unanticipated events as they occur.
PART I
Item 1. Business
Operations
Founded in 1910, Stewart Enterprises, Inc. (the “Company”) is the second largest provider of
funeral and cemetery products and services in the death care industry in the United States.
Through our subsidiaries, we provide a complete range of funeral merchandise and services, along
with cemetery property, merchandise and services, both at the time of need and on a preneed basis.
As of October 31, 2008, our operations included 221 funeral homes and 139 cemeteries in 24 states
within the United States and in Puerto Rico.
General. We believe that we operate one or more of the premier death care facilities in each
of our principal markets, which are primarily in larger metropolitan areas in the Southern,
Western, Mid-Atlantic and Mid-Western states. In our view, a “premier” facility is one that is
among the most highly regarded facilities in its market area in terms of a number of factors such
as tradition, heritage, reputation, physical size, volume of business, available inventory, name
recognition, aesthetics and/or potential for development or expansion. While funeral homes and
cemeteries in the United States perform an average of approximately 110 funerals and 150 burials
per year, our facilities perform an average of approximately 270 funerals and 360 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 caskets and other merchandise and, most significantly,
personnel, including prearrangement sales personnel; thus, we are able to reduce our costs and
expand our sales and marketing effectiveness at each location. By virtue of their proximity to one
another, clustered facilities also create opportunities for more integrated and sophisticated
management of operations.
Funeral operations. Our funeral homes offer a complete range of funeral services and products
both at the time of need and on a preneed basis. Our services and products include family
consultation, removal and preparation of remains, the use of funeral home facilities for
visitation, worship and funeral services, transportation services, flowers and caskets. In
addition to traditional funeral services, all of our funeral homes offer cremation products and
services. Most of our funeral homes have a non-denominational chapel on the premises, which allows
family visitation and religious services to take place at the same location. We also earn
commissions on the sale of
insurance-funded preneed funeral contracts that will be funded by life insurance or annuity
contracts issued by third party insurers when we act as an agent on the sale of the policies.
Funeral operations accounted for 54 percent of our revenues for fiscal year 2008.
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. 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
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and local laws. Cemetery operations
accounted for approximately 46 percent of our revenues for fiscal year 2008, 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. 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 47 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
37 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 and non-profit entities and plan to pursue more of these types of affiliations. In
1987, we entered into an agreement with the Catholic Archdiocese of New Orleans pursuant to which
we constructed and own a mausoleum on one of our cemeteries, and the Archdiocese of New Orleans
assists in the promotion of the sale of crypts in the mausoleum to Catholic parishioners of the
Archdiocese of New Orleans. The Company pays the Archdiocese of New Orleans a percentage of the
revenue from the sale of all crypts in the mausoleum. Additionally, in fiscal year 1994, we
constructed a funeral home and mausoleum on the grounds of the New Orleans Cemetery of the
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, 2008, 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 cemeteries.
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
effort of these crypts, primarily in Louisiana and Texas. In return for these services, ACME
receives a sales commission for the crypts sold and construction revenue. 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. Certain of these preneed sales arrangements 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 1,000 commissioned sales counselors. We
estimate that as of October 31, 2008, the future value of our preneed backlog of funeral and
cemetery products and services (including estimated future earnings on funds held in trust and
build-up in the face value of third-party insurance contracts, in each case using projected
returns) represented approximately $1.7 billion of revenue to be recognized in the future as these
prepaid products and services are
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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 10 percent,
of the proceeds from cemetery property sales (interment rights) is deposited into perpetual care
trusts. The income from these trusts is used to defray the cost of maintenance of those
cemeteries, but principal, including in some jurisdictions net realized capital gains, must
generally be held in perpetuity. Accordingly, we maintain three types of trusts and escrow
accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and
services and (3) cemetery perpetual care. Differing state laws govern preneed sales, including
matters such as required deposits, permitted withdrawals and customers’ rights regarding contract
cancellation, and generally require prudent investment of fund assets. For further discussion of
these trusts and escrow accounts, 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.
Because of our focus on preneed sales and related trusting activities that accompany selling
preneed, our business is impacted by changes in financial markets. During fiscal year 2008, and
particularly during our fourth fiscal quarter, the United States and global economies have
experienced significant declines. For example, from November 1, 2007 to October 31, 2008, the
Standard and Poor’s 500 Index (“S&P 500 Index”) declined 37.5 percent from
1,549.38 to 968.75, and during our fourth fiscal quarter, the S&P 500 Index declined 23.6
percent from 1,267.38 to 968.75. Among other events, during our fourth fiscal quarter of 2008,
investment bank Lehman Brothers Holdings, Inc. declared bankruptcy and several financial
institutions failed, including Washington Mutual, Inc., the largest bank failure in American
history. The United States federal government has provided financing to and invested in a number
of financial institutions. Our trust accounts held securities issued by some of these companies
that have been rendered worthless or practically worthless by these events, and we have treated
these losses as realized. Primarily as a result of these developments, during fiscal year 2008 we
realized aggregate net losses of $35.1 million in our preneed funeral and cemetery merchandise and
services trusts and recorded a $7.4 million tax valuation allowance. In addition, we realized
aggregate net losses of $9.7 million in our cemetery perpetual care trusts. We recorded a related
charge for the estimated probable funding obligation to restore net realized losses of $13.3
million in certain of our cemetery perpetual care trusts. In addition, the market values of our
trust assets have declined substantially. Unless the market values of our trust assets increase
substantially, we expect to report lower earnings and reduced cash flows from our trusts and lower
trust management fees. The preneed contracts we manage are long-term in nature, and we believe the
trust investments have the potential over the long-term to appreciate in value. However, whether
they will appreciate and over what time period are unknown. For additional information, see Item
1A. “Risk Factors.”
Notwithstanding the decline in the value of our trust portfolio, 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
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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, 2008, ITI managed assets with a market value of approximately
$637.8 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 security selection, emphasizes
diversification and balances long-term growth objectives with the need for current income. The
long-term objectives are to preserve principal while seeking appropriate levels of current income
and capital appreciation in order to provide returns that match or exceed inflation. For
additional information, see “Management’s Discussion and Analysis of Financial Condition and
Results of Operations” in Item 7.
Customization, personalization and packages. Our market research indicates that consumer
preferences are shifting towards more personalized memorial services and merchandise in the context
of both traditional burials and cremations. We have responded to these changing preferences by,
among other things, training our funeral arrangers to offer our customers a broad range of options,
such as designing a funeral service to reflect the special interests or accomplishments of the
deceased. We developed a custom funeral planning program that as of 2006 was implemented in all of
our funeral homes and is part of our regular training process. We are also changing the way our
product offerings are displayed at our locations, making it easier for our customers to appreciate
our wider selection. We continually evaluate our funeral packages which provides value to our
families by simplifying the selection process while enhancing the services we provide. We believe
that
our product and service offerings have enhanced the experiences provided to families at our
funeral homes and have contributed to increased revenues per sale.
Enhanced cremation and alternative service offerings. In fiscal years 2008, 2007 and 2006, 40
percent, 39 percent and 39 percent, respectively, of the funeral services we performed in our
continuing operations were cremations. A significant trend in the United States is an increasing
preference of consumers for cremation. According to industry estimates, 34 percent of funeral
services in the United States during 2006 resulted in cremations, and cremations are expected to
represent 39 percent of funeral services in the United States by the year 2010. 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. Our
23 alternative service 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.
Management. We have an experienced management team. Many of our divisional and regional
managers owned and operated their own funeral homes and cemeteries and joined us when we acquired
their business. Our management structure is designed to allow local funeral home directors and
cemetery managers substantial flexibility in deciding how their businesses will be managed and how
their products and services will be priced and merchandised. At the same time, financial and
strategic goals are established by management at the corporate level.
As of October 31, 2008, we were divided into two geographic operating divisions in the United
States, each of which was managed by a division president and chief financial officer. Our
operating divisions are further divided into regions, each of which is managed by a regional vice
president. During fiscal year 2008, we named a senior vice president of operations to oversee both
geographic operating divisions with the intent to further drive our “Best in Class” initiative and
increase focus on improving operations. The division presidents report to the senior vice
president of operations. We also have a Corporate division, which manages our corporate services,
such as accounting and treasury, information systems, human resources, training and communications,
and a Sales and Marketing division responsible for sales teams in all operating divisions. From
time to time, we may increase, reduce or realign our divisions and regions.
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
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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. In 2006, we instituted a centralized purchasing department to
leverage our size and negotiate more favorable supplier contracts. During 2007, we implemented a
new financial software system and in 2008 a new payroll system which have created efficiencies. We
are also implementing a new contract processing industry-specific software system in 2009 that is
expected to create further efficiencies. As we look at our opportunities for growth, we expect to
leverage the efficiencies that we have
achieved through our Shared Services Center and expect to manage much of our growth with our
existing infrastructure. Additionally, we have a centralized formal training program and began
implementation of a standardized marketing approach to enhance sales effectiveness.
Financial information about industry and geographic segments. For financial information about
our industry and geographic segments for fiscal years 2008, 2007 and 2006, see Note 21 to our
consolidated financial statements included in Item 8.
Business Strategy
Implement long-term strategic plan. Our long-term business strategy has three components:
our “Best in Class” initiative, our “Innovation” initiative and our “Acquisition” initiative. Our
focus for fiscal year 2008 was on our “Best in Class” initiative. This initiative aims to improve
performance at the rooftop level by giving all managers the same key metrics by which they can
measure their performance and by providing tools to facilitate the sharing of best practices by key
metric across the organization. For example, one of the key metrics is the change in the number of
funeral calls. If funeral calls are below expectations, our program provides various suggestions
taken from our best performing locations that the manager can use to help grow funeral calls. We
will also seek to strengthen our performance-oriented company culture and to refocus management
time and attention on improving field operations. The goal of our “Best in Class” initiative is to
generate a higher return on assets and to grow profits and cash flow.
“Best in Class” focuses on increasing average revenue per event, improving field labor
productivity, leaning initiatives to reduce overhead and 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. We are also focusing more attention
on improving cremation profitability. We are allocating resources to train funeral directors with
regard to cremation offerings and are focusing on improving product offerings and family
presentations. We have restructured our training department to better align our training with our
“Best in Class” initiative and the use of empirical data for improvement opportunities. We have
established a Continuous Improvement department to coordinate and facilitate the increased focus on
improving processes to eliminate waste and inefficiency. Efforts are presently focused on contract
processing, which is our largest single company process, with many other initiatives in the
pipeline. We are analyzing performance at each rooftop and underperforming businesses will be
analyzed for training needs, standardization of processes and implementation of “Best in Class” to
improve results. Any potential future divestitures will be determined based on performance,
demographics, and proximity to other locations.
Our “Innovation” initiative seeks to generate new tangential growth opportunities not tied to
the growth of our base business. We have begun to lay the ground work for this component of our
strategic plan with our investment, along with other industry participants, in an Internet start-up
company called Tributes.com. The purpose of this initiative is to capture revenue and profit
streams from the creation of meaningful, significant and lasting remembrances that either
complement or substitute for obituary notices. Currently, Stewart field locations incur labor
costs for the development of obituary notices but do not receive any compensation from the
publications that receive a fee for publishing the notice. This initiative is intended to allow us
to capture market share in the existing obituary revenue stream in each of the communities in which
we operate. While still in start-up mode, we believe this initiative will have significant benefit
to both Stewart and the industry. Additionally, we are beginning other initiatives with the goal
of generating new revenue and profit sources from web commerce. We have modified web pages for all
of our locations to further implement this initiative, and aim to expand our customer base beyond
our at-need or preneed customers to their relatives and friends or anyone who reaches our websites
or visits our facilities.
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Our “Acquisition” initiative is to acquire businesses and implement our “Best in Class”
initiatives in these newly-acquired businesses. Our “Acquisition” initiative will be ongoing and
will proceed as appropriate acquisition opportunities are identified. We deliberately slowed
investigation of businesses to acquire while the “Best in Class” initiative was being initially
implemented, and plan to focus more attention on this initiative in fiscal year 2009. We will
evaluate acquisition opportunities that make sense for our business strategy at prices we believe
will result in satisfactory returns.
Improve key metrics. We continue to believe that increasing cemetery property sales, funeral
calls and preneed funeral sales is important to the growth of our business. These goals have been
a key focus for the last four fiscal years, and we plan to continue to focus on them as we
implement our “Best in Class” initiative.
We view preneed cemetery property sales as the catalyst for growth in our cemetery segment as
they create a customer base for all our businesses. These sales also result in high margins and
produce positive cash flow. We have transitioned to personalized selling, and in addition to
responding to requests generated by our media campaigns, our sales people have been successful in
obtaining referrals from their existing customer base, allowing them to assist new customers with
their cemetery and funeral needs.
We continue to develop and implement strategies to drive at-need and preneed funeral growth
throughout our organization. We are using the most successful tactics of our top performing
funeral homes to develop strategies to drive funeral call growth throughout our organization with
an increased focus on preneed funeral sales. We believe that the continuous addition of preneed
funeral contracts to our backlog is a primary driver of sustainable long-term growth in the number
of families served by our funeral homes.
Continue focus on improving cash flow and controlling costs. We plan to continue our focus on
improving our cash flow and controlling our costs by, among other things, obtaining volume
discounts from suppliers and leveraging our operating costs through clustering and combination
operations. Additionally, we have been incentivizing local managers to control costs by aligning
their compensation more closely to the profitability of the locations they manage. During 2006, we
established a director of purchasing position to leverage our size and negotiate more favorable
long-term contracts with our supplier base. In 2007, we completed the sale of $250.0 million of
convertible notes which will significantly decrease our future interest payments and improve cash
flow. In 2008, we formalized a Continuous Improvement department aimed at creating efficiencies
and reducing costs.
Continue focus on customer and employee satisfaction. Part of our strategic plan focuses on
putting people first — customers and employees. We have conducted market research to obtain a
clearer understanding of customer service expectations and are measuring the results through one of
our key metrics — a customer service rating. We also seek to enhance employee satisfaction
through professional growth, which includes the implementation of a mentoring program and
succession plan for all key employee positions. We continue to invest in the professional growth
of our employees through numerous programs.
Maintain backlog through preneed marketing. We consider maintaining our backlog through
preneed marketing to be an integral part of our long-term business strategy. Our primary objective
is to balance our preneed sales levels and our cash investments while maintaining a sustainable and
predictable level of growth in our backlog. The aging of the population represents a significant
opportunity for us to expand our customer base through preneed marketing, as persons over 50 years
of age are most likely to make these purchases.
Deploy cash flow. In evaluating our cash flow deployment opportunities, we generally intend
to conserve cash until we are able to renew or replace our revolving credit facility which matures
in November 2009. As of October 31, 2008, we had $72.6 million in cash and cash equivalents.
While we have nothing drawn on our current facility, as of October 31, 2008, we do have $14.6
million in letters of credit and a $30.8 million bond we are required to maintain to guarantee our
obligations related to funds we withdrew in fiscal year 2001 from trusts in Florida. We believe
that the use of our cash to pay dividends, repurchase debt and stock, construct funeral homes on
cemeteries of unaffiliated third parties and make acquisitions of or investments in death care or
related business are
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. For additional information, see “Liquidity
and Capital Resources,” in “Management’s Discussion and Analysis of Financial Condition and Results
of Operations” in Item 7.
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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. In 1999, The Loewen
Group, Inc., at the time the second largest provider and a primary competitor for acquisitions,
entered into bankruptcy proceedings. In addition, Equity Corporation International, previously the
fourth largest public death care company and another of our competitors for acquisitions, merged
with Service Corporation International (“SCI”) in 1999. The Loewen Group emerged from bankruptcy
as Alderwoods Group, Inc. and was acquired by SCI in November 2006. In June 2008, we received an
unsolicited proposal from SCI to acquire all of our outstanding shares for $9.50 per share in cash,
which we subsequently rejected. We then received another letter from SCI dated July 21, 2008
offering $11.00 per share in cash for all of our outstanding shares. In October 2008, SCI withdrew
its acquisition proposal.
During the 1990s, we grew rapidly primarily through acquisitions of funeral homes and
cemeteries both domestically and abroad, financed by new equity and debt capital. We ceased our
acquisition activity in 1999 and developed strategies for improving our cash flow and reducing and
restructuring debt. During fiscal year 2000 through fiscal year 2003, we completed our
transitional strategies of improving our cash flow, restructuring and reducing our debt and selling
our foreign assets. During fiscal years 2004 through 2007, we sold underperforming assets,
refinanced and further reduced our debt and implemented new strategies to improve operations. 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 on
the funeral side. Entry into the cemetery market can be difficult due to several factors. Because
families tend to return to the same cemetery for multiple generations to bury family members, it is
difficult for new cemeteries to attract families. Additionally, mature markets, including many of
the metropolitan areas where our cemeteries are located, are often served by an adequate number of
existing cemeteries with sufficient land for additional plots, whereas land for new cemetery
development is often scarce and expensive. Regulatory complexities and zoning restrictions also
make entry into the cemetery market difficult. Finally, development of a new cemetery usually
requires a significant capital investment that takes several years to produce a return.
Continuing need for products and services; increasing number of deaths. There is an
inevitable need for our products and services. Although the number of deaths in the United States
will reflect short-term fluctuations, deaths in the United States are expected to increase at a
steady, moderate pace over the long-term. According to the United States Bureau of the Census, the
number of deaths in the United States is expected to increase by approximately 1 percent per year,
from 2.4 million in 2006 to 2.6 million in 2010. Furthermore, the average age of the population in
the United States is increasing. According to the United States Bureau of the Census, the United
States population over 50 years of age is expected to increase by approximately 2 percent per year,
from 76.8 million in 2000 to 98.6 million in 2010. 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
9
and cemetery operators because cremations have typically included few,
if any, additional products or services other than the cremation itself. For additional
information, including information about our strategies to address this trend, see
“Operations—Enhanced cremation and alternative service 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.
Traditional cemetery and funeral service operators face competition from the increasing number
of cremations in the United States. Additional information about the trend toward cremation and
our strategies to address that trend can be found under the heading “Operations—Enhanced cremation
and alternative service offerings” above.
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 FTC
began reviewing the Funeral Rule in 1999 at which time it conducted hearings to receive input from
industry and consumer groups. The FTC has concluded its review and determined that no revisions to
the existing regulation are required.
The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain
requirements to prevent these acts or practices. The preventive measures require a funeral
provider to give
consumers accurate, itemized price information and various other disclosures about funeral
goods and services and prohibit a funeral provider from: (1) misrepresenting legal, crematory and
cemetery requirements; (2) embalming for a fee without permission; (3) requiring the purchase of a
casket for direct cremation; and (4) requiring consumers to buy certain funeral goods or services
as a condition for furnishing other funeral goods or services.
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, 2008, we employed approximately 5,400 persons, 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.
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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. 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.
Item 1A. Risk Factors
Cautionary Statements
Our business is subject to significant risks. We caution readers that the following important
factors, among others, in some cases have affected, and in the future, could affect, our actual
consolidated results and could cause our actual consolidated results in the future to differ
materially from the goals and expectations expressed in the forward-looking statements in this
report and in any other forward-looking statements made by us or on our behalf.
Risks Related to our Business
Our earnings from our trusts can be reduced by declines in stock and bond prices and interest and
dividend rates, which can have a significant adverse effect on our gross profit, net earnings and
cash flows.
Because of our preneed sales activities and the related state trusting requirements that
accompany preneed sales, our business is impacted by changes in financial markets. We maintain
three types of trusts: (1) preneed funeral merchandise and services, (2) preneed cemetery
merchandise and services and (3) cemetery perpetual care. Our trust assets are generally invested
in a mix of equity and fixed-income securities, and dividend and interest earnings and investment
gains and losses are affected by financial market conditions that are not within our control.
Generally, declines in market performance reduce the earnings in our trusts and reduce our earnings
and cash flow. In addition, any significant or sustained investment losses could result in there
being insufficient funds in the trusts to cover the cost of delivering services and merchandise in
the future and result in there being less funds available to defray the costs of cemetery
maintenance. Any such deficiency would have to be covered by operating cash flow, which could have
a material adverse effect on our financial position and results of operations. In addition, our
subsidiary ITI earns trust management fees based on the fair market value of the trusts managed;
therefore, declines in the value of the assets in the trusts decrease the amount of fees we collect
and record for trust management.
In fiscal years 2008, 2007 and 2006, cemetery perpetual care trust earnings, funeral and
cemetery merchandise and services trust earnings and ITI trust management fees comprised 7 percent
of our revenue and 36 percent, 33 percent and 32 percent of our gross profit, for each respective
year. During the fourth quarter of fiscal 2008, as a result of significant declines in the United
States markets associated with a rapidly deteriorating economy, we experienced similar sharp
declines in the fair market values of the equity investments in our trust portfolios. The value of
many corporate bonds and other fixed-income investments also declined. In addition, interest rates
have declined, negatively affecting yields available to us for short term fixed-income investments.
Unless market conditions improve and the values of our trust investments increase substantially,
we expect to report lower earnings and cash flow from our trusts and trust management in future
periods. Based on market conditions and realized losses as of October 31, 2008, we believe the
decrease in revenue from trust earnings recognized on delivery of
preneed services and merchandise, cemetery perpetual care trust earnings and trust management fees
for fiscal year 2009 could be as much as $10 million, or approximately 2 percent, of fiscal year
2008 revenue and approximately 10 percent of fiscal year 2008 gross profit. The preneed contracts
we manage are long-term in nature, and we believe the trust investments have the potential over the
long-term to appreciate in value. However, whether they will appreciate and over what time period
are unknown. If market conditions deteriorate or we experience additional realized losses, the
decrease would be higher. Additional information regarding our trusts and related risks are
described in the risk factors that follow.
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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, 2008, the fair market
value of the investments in the trusts of $483.7 million was $253.6 million lower than our original
cost basis of $737.3 million. Unrealized gains and losses are not allocated to contracts; however,
over time, gains and losses realized 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 performed. As
of October 31, 2008, we had $240.9 million in earnings that have been realized and allocated to
contracts that we will recognize 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 year 2008, funeral trust earnings amounted to $13.2 million,
and cemetery trust earnings amounted to $4.2 million.
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, 2008, no
such charge was required. For additional information, see “Management’s Discussion and Analysis of
Financial Condition and Results of Operations—Overview of Critical Accounting Policies—Loss
Contracts” included in Item 7.
Realized capital losses in preneed funeral and cemetery merchandise and services trusts for which
we are the grantor, if we have or expect insufficient offsetting capital gains, can cause increases
in our current period effective tax rate and a reduction of our current period reported net
earnings and a reduction in operating cash flows in future periods.
Approximately one-half of the October 31, 2008 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 year 2008, the trusts for which we are the grantor
realized net losses of $23.5 million, and the trusts for which the customer is the grantor
realized net losses of $14.5 million.
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 our fourth fiscal
quarter of 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. 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 purpose until the underlying contract is performed.
As of October 31, 2008, we have approximately $154 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 $62 million,
assuming a projected tax rate of 40 percent. We currently have only a limited amount of embedded
capital gains that we can generate 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
12
forward from
earlier years. Accordingly, if we experience additional realized losses in these trusts and do not
have or expect to have future capital gains available (within or outside the trusts) to offset
these losses, we would record additional valuation allowances and related reductions of net income.
Earnings
in cemetery perpetual care trusts may be reduced by declines in stock and bond prices and will be reduced by declines in
interest and dividend rates, resulting in lower current and potentially future revenues and cash
flows. In addition, we may be required to fund realized net capital losses in these trusts, which
would have a negative effect on our earnings and cash flow.
Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of
the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from
these trusts, which have been established in most jurisdictions in which the Company operates
cemeteries, is used for maintenance of those cemeteries, but principal must generally be held by
the trust in perpetuity. The statutory provisions that create and regulate these trusts differ
from state to state, as do the regulatory interpretations of the provisions. The trusts are
reviewed regularly by the state regulatory authorities.
We currently recognize and withdraw all dividend and interest income earned and, in states
where it is permitted, realized net capital gains generated by cemetery perpetual care trusts. The
cash 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 current revenues
and 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 2008, earnings in these trusts
contributed $10.7 million to cemetery revenue, including $3.0 million in capital gains. Unless
current market conditions improve substantially, we expect to report lower earnings from the trusts
in the future.
In our cemetery perpetual care trusts, at October 31, 2008, the fair market value of our
investments of $172.2 million was $81.0 million lower than our original cost basis of $253.2
million. If we realize losses in our cemetery perpetual care trusts and the fair market value of
the trust assets is less than the aggregate amounts required to be contributed to the trust, some
states may require us to make cash deposits to the trust to cover the net realized loss or may
require us to stop withdrawing earnings until future earnings cover the net realized loss.
In those states where we have withdrawn realized net capital gains in the past, regulators may
seek replenishment of the realized net capital losses either by requiring a cash deposit to the
trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss.
As of October 31, 2008, we have recorded a $13.3 million estimated probable funding obligation as
an increase in cemetery costs in fiscal 2008. As of October 31, 2008, we had unrealized losses of
$64.4 million in the trusts in these states. Because all of these trusts currently have assets
with a fair market value less than the aggregate amounts required to be contributed to the trust,
any additional realized net capital losses in these trusts may result in a corresponding funding
liability and increase in cemetery costs.
In those states where realized net capital gains have not been withdrawn, due to the different
laws and our practices in those states, we do not believe that we will be required to replenish the
realized net capital loss, and have not recorded a funding obligation; however, it is possible that
a regulator may disagree with our conclusion, and future funding obligations may exist. As of
October 31, 2008, the realized net capital loss in these trusts was $1.2 million, and the
unrealized capital loss was $20.7 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.
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 2008, we recognized and
withdrew $3.0 million of net realized capital gains in cemetery perpetual care trusts. Our
portfolio mix in these states is more heavily weighted to investments that potentially generate
capital gains, such as equities. In states where we do not withdraw capital gains, our portfolio
mix is more heavily weighted to fixed income type securities. If states where capital gains are
13
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 until we are able to
replace some or all of the investments that potentially generate capital gains with ones that
generate more ordinary income such as fixed income securities. Given current economic conditions
and market values, we may not be able to make that shift quickly without triggering capital losses
that could require funding obligations.
Reduced market values of preneed funeral and cemetery merchandise and services trusts and cemetery
perpetual care trusts will also reduce our trust management fees.
The fees that our subsidiary, ITI, collects for managing the trusts are based on the fair
market value of the trusts as determined by quoted market prices. Thus as market values decline,
the earnings ITI collects and the cash we withdraw for managing the trusts is also reduced. To the
extent market values do not improve, we will earn less in ITI fees than we have historically
earned. During fiscal year 2008, ITI trust management fees collected were approximately $10.0
million.
Our trust portfolio is invested in various sectors, some of which may be more susceptible to
additional adverse impact from the current economic crisis.
As of October 31, 2008, approximately 25 percent of our preneed funeral and cemetery
merchandise and services trust portfolios and 40 percent of our cemetery perpetual care trust
portfolios are invested in the financials sector. We also have concentrations in the information
technology and consumer discretionary sectors, which includes United States automotive
manufacturers. The current economic crisis may result in greater declines to the fair market value
of our investments in these and other sectors as compared to the performance of our overall trust
portfolio and/or market benchmarks, including the S&P 500 Index. Each sector has particular risks
associated with it, and depending on our asset allocation, sector mix, company-specific information
and future economic events, our portfolio could be at risk for further decline. For additional
information on the various sectors comprising our trust portfolio and related risks, see the
section titled “Preneed-Backlog, Trust Portfolio and Cash Impact of Sales” included in
“Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
A weakening economy could decrease preneed sales. A reduction in discretionary spending could also
decrease amounts at-need customers are willing to pay, and could cause third-party insurance
providers that fund our insurance-funded preneed funeral contracts to experience financial
difficulties.
A weakening economy that causes customers to reduce discretionary spending could cause, and we
believe has caused in the past, a decline in preneed sales, and could also decrease the amounts
at-need customers are willing to pay. Declines in preneed cemetery property sales and average
revenue per at-need event would reduce current revenue. Declines in preneed funeral and cemetery
service and merchandise sales would reduce our backlog and could reduce our future revenues and
market share.
A weakening economy could also impact our customers’ ability to pay, causing increased
delinquencies, increased bad debt and decreased finance charge revenue which would reduce future
earnings and cash flow. A weakening economy could also increase costs related to sales force
turnover and commissions we are unable to recoup as contract cancellation rates increase. If a
contract is cancelled before collecting a specified amount, the related commission is charged back
to the sales counselor. If the sales counselor is no longer employed by us when the contract is
cancelled, we are 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, 2008 was $477.1 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 receive from selling
these contracts, 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.
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Continued economic crisis and financial and stock market declines could reduce future potential
earnings and cash flows and could result in future goodwill impairments.
In the fourth quarter of fiscal year 2008, we recorded a goodwill impairment charge of $26.0
million, which eliminated goodwill in our Eastern division cemetery segment. As of October 31,
2008, goodwill amounted to $247.2 million, consisting of $91.1 million in the Eastern division
funeral segment, $107.4 million in the Western division funeral segment and $48.7 million in the
Western division cemetery segment. Cemetery segments tend to be more sensitive to goodwill
impairments with a heavier reliance on preneed sales which are impacted by changes in 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.
Although we do not have any significant outstanding long-term debt maturities until 2013, our
senior secured credit facility matures in November 2009. Servicing our debt will require a
significant amount of cash. 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. This, to a significant extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. In addition, our ability to
borrow funds in the future to make payments on our debt will depend on our meeting the financial
covenants in our debt agreements. Our business may not generate cash flow from operations, and
future borrowings may not be available to us under our senior secured 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.
Although we do not have any significant outstanding long-term debt maturities until 2013, our
senior secured credit facility matures in November 2009. While we have nothing drawn, as of
November 30, 2008, we do have $12.0 million in letters of credit and a $30.8 million bond we are
required to maintain to guarantee our obligations related to funds we withdrew in fiscal year 2001
from trusts in Florida. We have entered into discussions with various banks to assess commitment
levels, pricing and covenant expectations. Given the current credit market conditions, we expect a
new revolving credit facility to be more expensive than our existing facility and have tighter
covenants, including, potentially, more restrictive conditions on when we can pay dividends and
repurchase stock. While we expect to replace or renew the credit facility with acceptable terms,
if we are unable to negotiate a facility at acceptable terms, we would be required to cover the
letters of credit and may be required to cover the Florida bond with existing cash on hand. As of
October 31, 2008, we had sufficient cash and cash equivalents of $72.6 million to cover these
funding obligations, but if current economic conditions do not improve and we are unable to secure
a new facility, we will be required to continue to impose cost and cash savings strategies, which
could result in the elimination of the dividend and a reduction in capital expenditures.
We have experienced a decline in funeral call volume 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.
We experienced declines in same-store funeral call volumes for a number of years due to many
factors described elsewhere herein including the number of deaths, intense competition and our
ability to identify changing consumer preferences. From fiscal years 2002 to 2008, we experienced
same-store funeral call volume changes of (1.5) percent, (2.6) percent, (1.0) percent, 0.4 percent,
(0.2) percent, (2.2) percent and 0 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.
15
Our funeral home and cemetery operations generally face intense competition in local markets
that typically are served by numerous funeral homes and cemetery firms. We have historically
experienced price competition primarily from independent funeral home and cemetery operators, and
from monument dealers, casket retailers, low-cost funeral providers and other non-traditional
providers of services or products including, in recent years, internet providers. From time to
time, this price competition has caused us to lose market share in some markets. In other markets,
we have had to reduce prices, thereby reducing profit margins in order to retain or recapture
market share. Increased price competition in the future could further reduce revenues, profit
margins and backlog and potentially impact our annual goodwill impairment analysis.
Discount retailers sell caskets at prices substantially lower than prices we offer. Consumers
also can now buy caskets in funeral supply stores and directly from manufacturers, as well as over
the Internet. Competition from these sources could reduce our casket sales, which could adversely
affect funeral revenues and margins.
Increased advertising and better marketing by competitors, as well as increased offering of
products or services over the Internet, could cause us to lose market share and revenues or cause
us to incur increased costs or to decrease prices in order to retain or recapture market share.
In recent years, the marketing of preneed funeral services through television, radio and print
advertising, direct mailings and personal sales calls has increased. Extensive advertising or
effective marketing by competitors in local markets could cause us to lose market share and
revenues or cause us to incur increased marketing costs. In addition, competitors may change the
types or mix of products or services offered. These changes may attract customers, causing us to
lose market share and revenue or to incur costs necessary to respond to competition by varying the
types or mix of products or services offered by us. Also, increased use of the Internet by
customers to research and/or purchase products and services could cause us to lose market share to
competitors offering to sell products or services over the Internet.
If we are not able to respond effectively to changing consumer preferences, our market share,
revenues and profitability could decrease.
Future market share, revenues and profits will depend in part on our ability to anticipate,
identify and respond to changing consumer preferences. We may not correctly anticipate or identify
trends in consumer preferences, or we may identify them later than our competitors do. In
addition, any strategies we may implement to address these trends may prove incorrect or
ineffective.
Increased preneed sales may have a negative impact on current cash flow and earnings.
Preneed sales of cemetery property and funeral and cemetery products and services, which are
generally paid on an installment basis, are generally cash flow negative initially, primarily due
to the commissions and other costs to acquire the sale and the fact that a portion of the sales
proceeds is required to be placed into trusts or escrow 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 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, we have experienced increased property and casualty insurance costs primarily as a result
of Hurricanes Katrina, Wilma and Rita. We have also incurred significant legal costs related to
the unanticipated class action litigation, the SEC investigation and an unsolicited acquisition
proposal from Service Corporation International, which it later withdrew. We will incur additional
costs in fiscal year 2009 in conjunction with improving our business systems. In addition, the
cost of certain commodities, particularly copper, which represents a large component of our bronze
markers sold in our cemetery business, increased significantly during 2008. Our contract with our
major casket supplier expires in October 2009, and our ability to negotiate a new contract at
favorable terms could impact future costs. 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.
16
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. A significant portion of the loss we experienced due to Hurricane Katrina was covered by
insurance, but we cannot predict the long-term effects on our operations because of the economic
conditions currently existing in the New Orleans metropolitan area or the timing and amount of
collection of any additional insurance recoveries. In fiscal year 2008, Hurricane Ike impacted our
Houston operations resulting in $1.2 million of expense primarily for debris removal, clean-up and
repairs. We are currently working on our insurance claim related to Hurricane Ike.
We have a recorded an estimated liability of $7 million primarily related to certain unidentified
contracts sold prior to the time we acquired certain businesses, 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 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 $7 million as of October 31, 2008. We are in the process of implementing
and testing a new contract processing system, which may cause us to become aware of other such
contracts. 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.
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, 2008, our Chairman, Frank B. Stewart, Jr., held 10,815,361 shares (or
approximately 8 percent) of our outstanding Class A common stock and all of the 3,555,020
outstanding shares of our Class B common stock. There is no established public trading market for
our Class B common stock. Because each share of Class B common stock is entitled to 10 votes on
all matters presented for a vote by our shareholders, Mr. Stewart controls approximately 34 percent
of our total voting power, while holding approximately 12 percent of our outstanding equity.
Accordingly, Mr. Stewart may have a significant and disproportionate influence over the election of
directors and other matters requiring the affirmative vote of our shareholders and this control may
be exercised in a manner that may conflict with the interest of other shareholders. Additionally,
because Louisiana law and our articles of incorporation require the affirmative vote of two-thirds
of the voting power present to approve certain major transactions such as mergers and any
amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent the
consummation of such actions, even if they are recommended by our Board of Directors and favored by
a substantial majority of our shareholders.
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
17
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 Merrill Lynch International and sold warrants to Merrill
Lynch Financial Markets, Inc. The counterparties’ obligations to us under the call options and
warrants are guaranteed by Merrill Lynch & Co., Inc. By simultaneously purchasing the call options
and selling the warrants, we have effectively increased the conversion premium on the senior
convertible notes to 55-65 percent above the market price of the Class A common stock at the time
of the offering. The call options are expected to offset our exposure to dilution from conversion
of the senior convertible notes because any shares we would be obligated to deliver to holders upon
conversion would be delivered to us by the counterparty to the call options. This obligation is
dependent upon the financial viability of the counterparty and guarantor. With the uncertainty in
the United States financial markets, there are risks that the counterparty and guarantor may not
remain financially viable or may seek bankruptcy protection. If the counterparty and guarantor are
relieved of or cannot perform this obligation, then at the time of conversion, we may be required
to issue additional shares based upon the initial conversion price of the notes and cause further
dilution to our shareholders.
The call options we purchased and the warrants we sold contemporaneously with the sale of our
senior convertible notes may affect the trading price of our Class A common stock and the value of
the senior convertible notes.
The counterparties to the call options we purchased and the warrants we sold may engage in
hedging activities and modify their hedge positions from time to time prior to the conversion or
maturity of our senior convertible notes, and particularly around the time of any conversion of the
notes. These hedging activities may include purchasing and selling shares of our Class A common
stock, or other of our securities, or other instruments, including over-the-counter derivative
instruments. The effect, if any, of these activities on the trading price of our Class A common
stock or the senior convertible notes will depend in part on market conditions at the time and
cannot be reasonably predicted at this time. Any of these activities could adversely affect the
trading price of our Class A common stock and the value of the senior convertible notes. For
additional information about the
call options we purchased and the warrants we sold, see Note 15 to our consolidated financial
statements included in Item 8.
Exercise of the outstanding warrants could dilute the ownership interests of our existing
stockholders.
Concurrently with the sale of our senior convertible notes, we sold warrants expiring in 2014
to purchase approximately 11.3 million shares of Class A common stock at $12.93 per share and
warrants expiring in 2016 to purchase approximately 11.3 million shares of Class A common stock at
$13.76 per share. The warrants expiring in 2014 may not be exercised prior to the maturity of the
senior convertible notes due in 2014, and the warrants expiring in 2016 may not be exercised prior
to the maturity of the senior convertible notes due in 2016. The warrants may be settled in cash
at our election. Exercise of the warrants could dilute the ownership interests of our existing
stockholders. For additional information, see Note 15 to our consolidated financial statements
included in Item 8.
The accounting method for our senior convertible notes will change beginning in fiscal year 2010
and will substantially increase our reported interest expense relating to the senior convertible
notes.
In May 2008, the final version of Financial Accounting Standards Board (“FASB”) Staff Position
No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon
Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”), was issued, and the new
accounting rules will be effective for us beginning November 1, 2009 and must be applied
retrospectively to all periods presented. FSP No. APB 14-1 clarifies that: (1) convertible debt
instruments that may be settled in cash upon conversion, including partial cash
18
settlement, are not
considered debt instruments within the scope of APB Opinion No. 14, “Accounting for Convertible
Debt and Debt Issued with Stock Purchase Warrants” (“APB No. 14”), and (2) issuers of such
instruments should separately account for the liability and equity components of those instruments
by allocating the proceeds from issuance of the instrument between the liability component and the
embedded conversion option (i.e., the equity component). This allocation is done by first
determining the carrying amount of the liability component based on the fair value of a similar
liability excluding the embedded conversion option, and then allocating to the embedded conversion
option the excess of the initial proceeds ascribed to the convertible debt instrument over the
amount allocated to the liability component. That excess is reported as a debt discount and
subsequently amortized as interest cost over the instrument’s expected life using the interest
method. Thus, the new accounting rules will substantially increase our reported interest expense
relating to the senior convertible notes which are currently accounted for under APB No. 14 and
will have an adverse effect on our reported earnings, which could be material. However, the new
accounting rules will have no impact on cash flows.
Increases in interest rates would increase interest costs on our 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 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 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 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 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
credit facility contains specific limits on capital expenditures. Furthermore, our senior secured
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 credit facility. See Note 15 to the consolidated
financial statements included in Item 8.
Unanticipated litigation or negative developments in pending litigation could have a material
adverse effect on our financial statements.
19
We are a defendant in the litigation described in Note 20 to the consolidated financial
statements included in Item 8 and other litigation in the ordinary course of business. The outcome
of litigation and investigations is inherently uncertain and adverse developments or outcomes can
result in significant monetary damages, penalties or injunctive relief against us.
We may not be able to consummate significant acquisitions of or investments in death care or
related businesses successfully.
Although we have not made any significant acquisitions in recent years, we may in the future.
Also, our “Innovation” initiative calls for us to seek to generate new tangential growth
opportunities but 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 delivered. The
accounting for these unusual features is complex, and in recent years there have been periodic
changes in the application of generally accepted accounting principles to our business. Some of
these changes have made it difficult to compare results from one period to the next. Such changes
have also increased our administrative costs. We can give no assurances that we will not face
similar issues in the future.
Risks Related to the Death Care Industry
Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the
number of deaths are not predictable from market to market or over the short term, and reliable
statistics on deaths in particular markets can be difficult to obtain.
Declines in the number of deaths could cause at-need sales of funeral and cemetery services,
property and merchandise to decline and could cause a decline in the number of preneed sales being
delivered, both of which could decrease revenues. Although the United States Bureau of the Census
estimates that the number of deaths in the United States will increase by approximately 1 percent
per year from 2000 to 2010, longer lifespans 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.
20
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 39 percent of
deaths in the United States by the year 2010, compared to 34 percent in 2006. In fiscal years 2006,
2007 and 2008, 39 percent, 39 percent and 40 percent, respectively, of the funeral services we
performed in our continuing operations were cremations, and 56 percent of those were direct
cremations. A full service cremation, which includes a funeral service, a casket and
memorialization of the remains in a mausoleum or columbarium niche or a burial of the remains, can
result in funeral and cemetery revenue and profit margins similar to those of traditional funeral
services and burials, although the cemetery property sale revenue would generally be lower. In
contrast, a basic or direct cremation, with no funeral service or casket and no memorialization of
the remains, produces no revenues for cemetery operations and lower revenues and profit margins for
funeral operations when delivered through a traditional funeral home. During fiscal years 2006,
2007 and 2008, 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 funerals and cremations. In addition, the
increasing trend towards cremations in the United States could cause us to lose market share to
firms specializing in cremations.
Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative
changes in revenue
can have a disproportionately large effect on cash flow and profits.
Funeral homes and cemetery businesses must incur many of the costs of operating and
maintaining facilities, land and equipment regardless of the level of sales in any given period.
For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes
and maintain the grounds of cemeteries regardless of the number of funeral services or interments
performed. Because we cannot decrease these costs significantly or rapidly when we experience
declines in sales, declines in sales can cause margins, profits and cash flow to decline at a
greater rate than the decline in revenues.
Changes or increases in, or failure to comply with, regulations applicable to our business could
increase costs or decrease cash flows.
The death care industry is subject to extensive regulation and licensing requirements under
federal, state and local laws. For example, the funeral home industry is regulated by the FTC,
which requires funeral homes to take actions designed to protect consumers. State laws impose
licensing requirements and regulate preneed sales including our preneed trust activities.
Embalming facilities are subject to stringent environmental and health regulations. Compliance
with these regulations is burdensome, and we are always at risk of not complying with the
regulations.
In addition, from time to time, governments and agencies propose to amend or add regulations,
which could increase costs or decrease cash flows. For example, federal, state, Puerto Rican and
other regulatory agencies have considered and may enact additional legislation or regulations that
could affect the death care industry. Several jurisdictions and regulatory agencies have
considered or are considering regulations that could require more liberal refund and cancellation
policies for preneed sales of products and services, limit or eliminate our ability to use surety
bonding, impose or increase trust requirements and prohibit the common ownership of funeral homes
and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions
in which we operate, these and other possible proposals could have a material adverse effect on us,
our financial condition, our results of operations, our cash flows and our future prospects.
Item 1B. Unresolved Staff Comments
None.
21
Item 2. Properties
The following table shows the number of funeral homes and cemeteries we operated in each of
our geographic operating segments as of October 31, 2008:
| |
|
|
|
|
|
|
|
|
|
|
| |
|
Number of |
|
|
|
|
| |
|
Funeral |
|
Number of |
|
|
| Operating Segment |
|
Homes |
|
Cemeteries |
|
Geographic Areas |
|
|
|
|
|
|
|
|
|
|
|
Western Division — Funeral
|
|
|
115 |
|
|
|
|
|
|
Alabama, Arkansas,
California,
Illinois, Kansas,
Louisiana,
Mississippi,
Missouri, Nebraska,
Oregon, Texas,
Washington |
|
|
|
|
|
|
|
|
|
|
|
Western Division — Cemetery
|
|
|
|
|
|
|
47 |
|
|
Alabama, Arkansas,
California, Kansas,
Louisiana,
Mississippi,
Missouri, Nebraska,
Oregon, Texas,
Washington,
Wisconsin |
|
|
|
|
|
|
|
|
|
|
|
Eastern Division — Funeral
|
|
|
106 |
|
|
|
|
|
|
Alabama, Florida,
Georgia, Maryland,
North Carolina,
Pennsylvania, South
Carolina,
Tennessee,
Virginia, West
Virginia and Puerto
Rico |
|
|
|
|
|
|
|
|
|
|
|
Eastern Division — Cemetery
|
|
|
|
|
|
|
92 |
|
|
Alabama, Florida,
Georgia, Kentucky,
Maryland, North
Carolina, Ohio,
Pennsylvania, South
Carolina,
Tennessee,
Virginia, West
Virginia and Puerto
Rico |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
221 |
|
|
|
139 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of October 31, 2008, approximately 77 percent of our 221 funeral home locations were owned
by our subsidiaries, and approximately 23 percent were held under operating leases. The leases
have terms ranging from one to 14 years, except for one lease that expires in 2032 and six leases
with the Archdiocese of Los Angeles that expire in 2039. 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, 2008, we owned 139 cemeteries covering a total of approximately 9,908 acres.
Although approximately 38 percent of the total acreage is available for future development, life
spans of our cemeteries can be extended through the mix of cemetery development such as through the
construction of mausoleums, niche spaces and other cremation products.
We own a 98,200 square-foot building in suburban New Orleans that we use for our corporate
headquarters, shared services center, human resources, communications, internal audit and
information systems departments.
Item 3. Legal Proceedings
For a discussion of our current litigation, see Note 20 to the consolidated financial
statements included in Item 8.
In addition to the matters described in Note 20, we and certain of our subsidiaries are
parties to a number of other legal proceedings that have arisen in the ordinary course of business.
While the outcome of these proceedings cannot be predicted with certainty, we do not expect these
matters to have a material effect on our consolidated financial position, results of operations or
cash flows.
We carry insurance with coverages and coverage limits that we believe to be adequate.
Although there can
22
be no assurance that such insurance is sufficient to protect us against all
contingencies, we believe that our insurance protection is reasonable in view of the nature and
scope of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
None.
Executive Officers of the Registrant
The following table sets forth certain information with respect to our executive officers.
Each of the following has served in the capacity indicated for more than five years, except as
indicated below.
| |
|
|
|
|
|
|
| Name |
|
Age |
|
Position |
|
|
|
|
|
|
|
Thomas J. Crawford
|
|
|
55 |
|
|
President, Chief Executive Officer and Director(1) |
|
|
|
|
|
|
|
Thomas M. Kitchen
|
|
|
61 |
|
|
Senior Executive Vice President, Chief Financial Officer and
Director(2) |
|
|
|
|
|
|
|
Brent F. Heffron
|
|
|
59 |
|
|
Executive Vice President and President—Eastern Division(3) |
|
|
|
|
|
|
|
Lawrence B. Hawkins
|
|
|
60 |
|
|
Executive Vice President and President—Investors Trust, Inc. |
|
|
|
|
|
|
|
G. Kenneth Stephens, Jr.
|
|
|
47 |
|
|
Executive Vice President and President—Western Division(4) |
|
|
|
|
|
|
|
Lewis J. Derbes, Jr.
|
|
|
37 |
|
|
Senior Vice President of Finance(5) |
|
|
|
|
|
|
|
Kenneth G. Myers, Jr.
|
|
|
51 |
|
|
Senior Vice President of Operations(6) |
|
|
|
|
|
|
|
Larry Merington
|
|
|
54 |
|
|
Senior Vice President of Sales and Marketing(7) |
|
|
|
|
|
|
|
Martin de Laurèal
|
|
|
57 |
|
|
Senior Vice President of Corporate Development and Investor
Relations(8) |
|
|
|
|
|
|
|
Lisa T. Winningkoff
|
|
|
41 |
|
|
Vice President and Senior Administrative Officer(9) |
|
|
|
|
|
|
|
Angela M. Lacour
|
|
|
36 |
|
|
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, |
23
|
|
|
| |
|
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 subsequently acquired by Northrop Grumman Corporation. |
| |
| (3) |
|
Mr. Heffron has served as Executive Vice President and President of our Eastern
Division since July 14, 2005. From November 1, 1998 to July 13, 2005, he served as Executive
Vice President and President of our Southern Division. |
| |
| (4) |
|
Mr. Stephens has served as Executive Vice President and President of our Western
Division since July 14, 2005. From January 31, 2000 to July 13, 2005, he served as Senior
Vice President and President of our Eastern Division. From January 1, 1997 to January 30,
2000, he served as Chief Operating Officer of the Southern Region of our Eastern Division. |
| |
| (5) |
|
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. |
| |
| (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) |
|
Mr. Merington was appointed Senior Vice President of Sales and Marketing on
September 17, 2007. From 2005 to 2007, he was the Chief Operating Officer of Ace Bayou, a
furniture and pet products corporation in Kenner, Louisiana. From 2003 to 2005, Mr. Merington
was the Vice President of Business Development at New York Environmental Services, a medical
waste company. After the terrorist attack on the United States on September 11, 2001, he was
called to active duty for one year as a commander in the United States Air Force in
Afghanistan. From 1996-2001, he served in various senior management roles at Browning-Ferris
Industries before becoming president of its Gas Services Division. |
| |
| (8) |
|
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, including serving as Vice President of Corporate Development in the
1990s. |
| |
| (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 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. |
24
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 28, 2008, the closing sale price as reported by the NASDAQ Stock Market was $3.19. 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, 2008, there were 1,020 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.
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High |
|
Low |
Fiscal Year 2008 |
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|
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|
|
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Fourth Quarter |
|
$ |
10.00 |
|
|
$ |
4.07 |
|
Third Quarter |
|
|
9.46 |
|
|
|
6.61 |
|
Second Quarter |
|
|
7.20 |
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|
|
5.37 |
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First Quarter |
|
|
9.08 |
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|
6.82 |
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Fiscal Year 2007 |
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Fourth Quarter |
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$ |
9.13 |
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$ |
6.25 |
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Third Quarter |
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|
8.43 |
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|
|
6.79 |
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Second Quarter |
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|
8.50 |
|
|
|
7.05 |
|
First Quarter |
|
|
7.18 |
|
|
|
5.88 |
|
There is no established public trading market for our Class B common stock. As of October 31,
2008, 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, 2008, by virtue of his beneficial ownership
of outstanding Class A and Class B common shares, Mr. Stewart controlled approximately 34 percent
of our total voting power and held approximately 12 percent of our outstanding equity.
Dividends
The Company has paid a quarterly cash dividend of two and one-half cents per share for its
Class A and Class B common stock since April 2005. 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 credit facility. See Note 15 to the consolidated financial
statements included in Item 8.
Equity Plan Information
For information regarding compensation plans under which equity securities of the Company are
authorized for issuance, see Part III, Item 12.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
As indicated by the table below, there were no 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 2008.
25
Issuer Purchases of Equity Securities
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Total number of |
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Maximum approximate |
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shares purchased as |
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dollar value of shares |
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Total number |
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part of publicly |
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that may yet be |
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of shares |
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Average price paid |
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announced |
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purchased under the |
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| Period |
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purchased |
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|
per share |
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|
plans or programs(1) |
|
|
plans or programs |
|
August 1, 2008
through August 31,
2008 |
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|
— |
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$ |
— |
|
|
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— |
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$ |
— |
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September 1, 2008
through September
30, 2008 |
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— |
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$ |
— |
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— |
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$ |
— |
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October 1, 2008
through October 31,
2008 |
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|
— |
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|
$ |
— |
|
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|
— |
|
|
$ |
— |
|
|
|
|
|
|
|
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Total |
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— |
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$ |
— |
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— |
|
|
$ |
— |
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| (1) |
|
On September 19, 2007, we announced that our Board of Directors had authorized a new
$25.0 million stock repurchase program. 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. On December 20, 2007, we announced a $25.0 million increase in
this program. On June 19, 2008, we announced an additional $25.0 million increase to the
program, which increased the program to $75.0 million. As of October 31, 2008, we had
repurchased 6.6 million shares for $48.4 million at an average price of $7.32 per share and
have $26.6 million remaining available under this program. |
Item 6. Selected Financial Data
Reclassifications
The following selected consolidated financial data for the fiscal years ended October 31, 2006
through October 31, 2008 are derived from our audited consolidated financial statements included in
Item 8. The data for fiscal years 2004 and 2005 have been reclassified to reflect certain
businesses as discontinued operations under the provisions of Statement of Financial Accounting
Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS
No. 144”), as discussed 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.
Comparability of Information in Selected Consolidated Financial Data Table
As discussed in more detail in the footnotes to the table below and in the related footnotes
to the consolidated financial statements included in Item 8, the following are the main factors
that materially affect the comparability of the revenues, gross profits and assets reflected in the
selected financial data:
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• |
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In fiscal year 2005, we changed our method of accounting for preneed selling costs. |
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| |
• |
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In fiscal year 2006, we adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”). |
| |
| |
• |
|
In fiscal year 2008, we adopted FASB Interpretation No. 48, “Accounting for the
Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” (“FIN 48”). |
| |
| |
• |
|
All businesses sold in fiscal years 2004 through 2007 that met the criteria for
discontinued operations under SFAS No. 144 have been classified as discontinued operations
for all periods presented. |
26
Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
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Year Ended October 31,(1) |
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2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Statement of Earnings Data: |
|
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|
|
|
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|
|
|
|
|
|
|
|
|
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|
Total revenues |
|
$ |
527,883 |
|
|
$ |
522,817 |
|
|
$ |
514,230 |
|
|
$ |
488,909 |
|
|
$ |
489,626 |
|
Total gross profit |
|
|
100,817 |
|
|
|
112,430 |
|
|
|
114,613 |
|
|
|
101,479 |
|
|
|
114,349 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations |
|
$ |
(3,693 |
) |
|
$ |
39,314 |
|
|
$ |
37,580 |
|
|
$ |
8,303 |
|
|
$ |
30,575 |
|
Earnings from discontinued operations |
|
|
— |
|
|
|
499 |
|
|
|
13 |
|
|
|
1,551 |
|
|
|
6,117 |
|
Cumulative effect of change in
accounting principle (net of $101,061
income tax benefit in 2005) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(153,180 |
) (1) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(3,693 |
) (2)(3)(5)(7) |
|
$ |
39,813 |
(4)(5)(6)(7) |
|
$ |
37,593 |
(5)(6)(7) |
|
$ |
(143,326 |
) (5)(6)(7)(8) |
|
$ |
36,692 |
(6)(7) |
|
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|
|
|
|
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Per Share Data: |
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Basic earnings (loss) per common share: |
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|
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|
|
|
|
|
|
Earnings (loss) from continuing
operations before cumulative effect
of change in accounting principle |
|
$ |
(.04 |
) |
|
$ |
.38 |
|
|
$ |
.35 |
|
|
$ |
.08 |
|
|
$ |
.28 |
|
Earnings from discontinued
operations |
|
|
— |
|
|
|
.01 |
|
|
|
— |
|
|
|
.01 |
|
|
|
.06 |
|
Cumulative effect of change in
accounting principle |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.40 |
) |
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|
— |
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|
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|
|
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|
Net earnings (loss) |
|
$ |
(.04 |
) (2)(3)(5)(7) |
|
$ |
.39 |
(4)(5)(6)(7) |
|
$ |
.35 |
(5)(6)(7) |
|
$ |
(1.31 |
) (1)(5)(6)(7)(8) |
|
$ |
.34 |
(6)(7) |
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|
Diluted earnings (loss) per common
share: |
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before cumulative effect
of change in accounting principle |
|
$ |
(.04 |
) |
|
$ |
.38 |
|
|
$ |
.35 |
|
|
$ |
.08 |
|
|
$ |
.28 |
|
Earnings from discontinued
operations |
|
|
— |
|
|
|
.01 |
|
|
|
— |
|
|
|
.01 |
|
|
|
.06 |
|
Cumulative effect of change in
accounting principle |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1.40 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(.04 |
) (2)(3)(5)(7) |
|
$ |
.39 |
(4)(5)(6)(7) |
|
$ |
.35 |
(5)(6)(7) |
|
$ |
(1.31 |
) (1)(5)(6)(7)(8) |
|
$ |
.34 |
(6)(7) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
.075 |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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|
| |
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| |
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Year Ended |
|
| |
|
October 31, 2004(9) |
|
Pro forma amounts assuming 2005 change in
accounting principle for preneed selling
costs was applied retroactively: |
|
|
|
|
Net earnings |
|
$ |
30,739 |
|
|
|
|
|
Basic earnings per common share |
|
$ |
.28 |
|
|
|
|
|
Diluted earnings per common share |
|
$ |
.28 |
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, |
| |
|
2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
Balance Sheet Data : |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Assets |
|
$ |
2,104,515 |
|
|
$ |
2,438,974 |
|
|
$ |
2,380,577 |
|
|
$ |
2,335,609 |
|
|
$ |
2,511,508 |
|
Long-term debt, less current maturities |
|
|
450,095 |
|
|
|
450,115 |
|
|
|
374,020 |
|
|
|
406,859 |
|
|
|
415,080 |
|
Shareholders’ equity |
|
|
365,637 |
(10) |
|
|
423,318 |
|
|
|
446,893 |
|
|
|
439,453 |
|
|
|
587,978 |
|
27
Selected Consolidated Operating Data
| |
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|
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|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2005 |
|
|
2004 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral homes in operation at end of period |
|
|
221 |
|
|
|
221 |
|
|
|
229 |
|
|
|
231 |
|
|
|
242 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At-need funerals performed |
|
|
37,589 |
|
|
|
38,072 |
|
|
|
38,937 |
|
|
|
39,264 |
|
|
|
42,542 |
|
Prearranged funerals performed |
|
|
21,436 |
|
|
|
21,275 |
|
|
|
21,799 |
|
|
|
22,076 |
|
|
|
23,891 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total funerals performed |
|
|
59,025 |
|
|
|
59,347 |
|
|
|
60,736 |
|
|
|
61,340 |
|
|
|
66,433 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Prearranged funerals sold |
|
|
28,390 |
|
|
|
29,953 |
|
|
|
30,738 |
|
|
|
28,967 |
|
|
|
29,296 |
|
Backlog of prearranged funerals at end of
period |
|
|
329,085 |
(11) |
|
|
329,617 |
|
|
|
333,592 |
|
|
|
326,672 |
|
|
|
337,879 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemeteries in operation at end of period |
|
|
139 |
|
|
|
139 |
|
|
|
143 |
|
|
|
144 |
|
|
|
147 |
|
Interments performed |
|
|
47,953 |
|
|
|
49,283 |
|
|
|
52,255 |
|
|
|
52,436 |
|
|
|
53,149 |
|
|
|
|
| (1) |
|
Effective November 1, 2004, we changed our method of accounting for selling costs
incurred related to new preneed funeral and cemetery service and merchandise sales to expense
them as incurred, which resulted in a $254.2 million ($153.2 million after tax, or $1.40 per
diluted share) charge for the cumulative effect of the change in accounting principle. |
| |
| |
|
Effective November 1, 2005, we implemented SFAS No. 123R, using the modified prospective
application transition method. Our financial statements were not retrospectively adjusted to
reflect this implementation. Accordingly, the implementation of SFAS No. 123R is reflected in
our fiscal year 2008, 2007 and 2006 financial statements but not in our financial statements for
fiscal years 2005 and 2004. |
| |
| |
|
Effective November 1, 2007, we implemented FIN 48 and recognized a $1.0 million charge to the
November 1, 2007 accumulated deficit balance. For additional information, see Notes 3 and 18 to
the consolidated financial statements included in Item 8. |
| |
| |
|
All businesses sold in fiscal years 2004 through 2007 that met the criteria for discontinued
operations under SFAS No. 144 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) |
|
In the fourth quarter of fiscal year 2008, we recorded a charge for goodwill
impairment of $26.0 million. For additional information, see Note 13 to the consolidated
financial statements included in Item 8. |
| |
| (3) |
|
In the fourth quarter of fiscal year 2008, we recorded a $13.3 million charge
related to our estimated probable obligation to fund the cemetery perpetual care trust
investment losses. For additional information, see Note 6 to the consolidated financial
statements included in Item 8. In the fourth quarter of fiscal year 2008, we also recorded a
$7.4 million tax valuation allowance as a result of realized trust investment losses, as
described in Note 18 to the consolidated financial statements included in Item 8. |
| |
| (4) |
|
In the third quarter of fiscal year 2007, we recorded a charge for the loss on early
extinguishment of debt of $0.7 million as a result of our senior convertible debt transaction.
For additional information, see Note 15 to the consolidated financial statements included in
Item 8. |
| |
| (5) |
|
In fiscal year 2008, we recorded ($1.2) million in net expenses related to Hurricane
Ike, which struck the Texas Gulf Coast area in September 2008. In fiscal year 2006, we
recorded $3.2 million in business interruption insurance proceeds in funeral and cemetery
revenue related to Hurricane Katrina, which struck the New Orleans metropolitan area and
Mississippi and Alabama Gulf Coasts on August 29, 2005. In fiscal years 2008, 2007, 2006 and
2005, we also recorded ($1.1) million, ($2.5) million, $1.6 million and ($9.4) million,
respectively, in net recoveries (expenses) related to Hurricane Katrina. See Note 23 to the
consolidated financial statements
included in Item 8. |
28
|
|
|
| (6) |
|
During fiscal years 2007 and 2006, we recorded $0.6 million and $1.0 million,
respectively, in separation charges related to separation pay of former executive officers and
additional reorganization costs for the 2005 restructuring of the divisions. During the
fourth quarter of 2005, we restructured our operating divisions and incurred $1.5 million in
related severance charges. During fiscal year 2004, we incurred $3.4 million in separation
charges related to severance and other costs associated with workforce reductions announced in
December 2003 and related to separation pay for former executive officers. See Note 14 to the
consolidated financial statements included in Item 8. |
| |
| (7) |
|
In fiscal year 2004, we recorded gains on dispositions, net of impairment losses, of
($0.2) million in continuing operations and $2.4 million in discontinued operations. In
fiscal year 2005, we recorded gains on dispositions, net of impairment losses, of $1.3 million
in continuing operations and $1.1 million in discontinued operations. In fiscal year 2006, we
recorded gains on dispositions, net of impairment losses, of ($0.2) million in continuing
operations and ($0.2) million in discontinued operations. In fiscal year 2007, we recorded
gains on dispositions, net of impairment losses, of $0.6 million in discontinued operations.
In fiscal year 2008, we recorded gains on dispositions, net of impairment losses, of ($0.4)
million in continuing operations. |
| |
| (8) |
|
In the first quarter of fiscal year 2005, we completed the refinancing of our senior
secured credit facility and recorded a charge for early extinguishment of debt of $2.7 million
to write off fees associated with the previous credit facility. In the second quarter of
fiscal year 2005, we completed the private offering of our 6.25 percent senior notes and
recorded a charge for early extinguishment of debt of $30.0 million representing the bond
tender premium, related fees and expenses and the write-off of unamortized fees related to our
10.75 percent senior subordinated notes. In the third quarter of fiscal year 2005, we
recorded a charge for early extinguishment of debt of $0.1 million representing the call
premium and write-off of remaining unamortized fees on the 10.75 percent senior subordinated
notes. |
| |
| (9) |
|
The pro forma data presented for fiscal year 2004 is reported as if the fiscal year
2005 change in accounting principle had occurred at the beginning of fiscal year 2004. |
| |
| (10) |
|
The decline in shareholders’ equity from October 31, 2007 to October 31, 2008 was
primarily due to stock repurchases made under our current stock repurchase program which
amounted to $48.6 million during fiscal year 2008, along with a net loss of $3.7 million for
fiscal year 2008. |
| |
| (11) |
|
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, 2008, our preneed funeral backlog is
comprised of 197,837 preneed funeral trust-funded contracts and 131,248 insurance-funded
preneed funeral 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, 2008, we owned and operated 221 funeral
homes and 139 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.
29
Recent Events
For the fiscal year ended October 31, 2008, we increased our consolidated revenues $5.1
million from $522.8 million in fiscal year 2007 to $527.9 million in fiscal year 2008, primarily
due to a $7.3 million increase in funeral revenue, partially offset by a $2.2 million decrease in
cemetery revenue. The increase in funeral revenue is primarily due to a 3.0 percent increase in
same-store average revenue per funeral service, including trust earnings, while the number of our
same-store funeral services remained flat. The decrease in cemetery revenue is primarily due to a
decrease in cemetery property sales, net of discounts; however, we are currently promoting various
incentive programs to stimulate cemetery property sales in the future. Our cash flow from
operations remained strong at $84.5 million for the year ended October 31, 2008. We had $72.6
million in cash on hand at October 31, 2008, and no significant scheduled principal payments on our
long-term debt until 2013, although our revolving credit facility matures in November 2009, as
discussed below.
During our 2008 fiscal year, and particularly during our fourth fiscal quarter, the United
States and global economies experienced significant declines. For example, from November 1, 2007
to October 31, 2008, the S&P 500 Index declined 37.5 percent from 1,549.38 to 968.75, and during
our fourth fiscal quarter, the S&P 500 Index declined 23.6 percent from 1,267.38 to 968.75. The
S&P 500 Index closed at 873.59 on December 11, 2008. Among other events, during our fourth fiscal
quarter of 2008, investment bank Lehman Brothers Holdings, Inc. declared bankruptcy and several
financial institutions failed, including Washington Mutual, Inc., the largest bank failure in
American history. The United States federal government has provided financing to and invested in a
number of financial institutions. Our trust accounts held securities issued by some of these
companies that have been rendered worthless or practically worthless by these events, and we have
treated these losses as realized. Primarily as a result of these developments, the value of our
trust assets has declined sharply. During fiscal year 2008, we realized aggregate net losses of
$35.1 million in our preneed funeral and cemetery merchandise and services trusts and recorded a
$7.4 million tax valuation allowance. In addition, we realized aggregate net losses of $9.7
million in our cemetery perpetual care trusts. We recorded a related charge for the estimated
probable funding obligation to restore the net realized losses of $13.3 million in certain of our
cemetery perpetual care trusts.
The magnitude of the market decline in such a short time frame, and the failure of several
large financial institutions and the resulting substantial realized losses in our trusts were not
anticipated. In addition, the realized losses came at a time when we have limited unrealized gains
against which to offset the losses. Typically, realized losses in our funeral and cemetery
merchandise and services trusts have no immediate impact on our reported results; however, in the
fourth quarter of 2008, the realized losses had an impact on our preneed funeral and cemetery
merchandise and services trusts and our cemetery perpetual care trusts, as described above.
As a result of significant declines in the United States equity markets during our fiscal year
2008, we experienced similar declines in the fair
market value of our trust investment portfolios. At October 31, 2008, the fair market value of our
total trust investments was $334.6 million less than our original cost basis of $990.5 million. As
of November 30, 2008, the fair market value of our total trust investments was $584.8 million. The
preneed contracts we manage are long-term in nature, and we believe that the trust investments have
the potential over the long-term to appreciate in value. However, whether they will appreciate and
over what time period are unknown. As of October 31, 2008, we had $240.9 million in earnings that
have been realized and allocated to contracts that we will recognize when the underlying contracts
are performed.
We anticipate that the decline in the value of our trust investments will have several impacts
on our Company in the future. Unless the market values of our trusts increase substantially, we
expect to report lower earnings from our trusts. In addition, our trust management fees are based
on the fair market value of the assets managed; therefore, we expect to report lower trust
management fees. In fiscal year 2008, cemetery perpetual care trust earnings, funeral and cemetery
merchandise and services trust earnings and trust management fees comprised 7 percent of our
revenue and 36 percent of our gross profit. Based on current market conditions and current
realized losses, we believe the decrease in revenue from trust earnings recognized on delivery of
preneed services and merchandise, cemetery perpetual care trust earnings and trust management fees
for fiscal year 2009 could be as much as $10 million, or approximately 2 percent, of fiscal year
2008 revenue and approximately 10 percent of fiscal year 2008 gross profit. If market conditions
deteriorate or we experience additional realized losses, the decrease in revenue could be
significantly higher. In addition, we expect to report lower cash flow from operations due to our
estimated probable funding obligation to restore the net realized losses of $13.3 million related
to our cemetery
30
perpetual care trusts and reduced earnings and realized gains that we can withdraw
from our trusts. We have recorded an estimated probable obligation to restore the net realized
losses in our cemetery perpetual care trusts in states where we have previously recognized and
withdrawn capital gains. In addition, we may incur additional realized losses with impacts of the
nature of those experienced during our fourth quarter. Our portfolio includes investments in the
domestic automotive industry as further described in the section titled “Supplemental Trust
Portfolio Information” provided below. For a more detailed discussion of risks related to our
trust investments, see Item 1A. “Risk Factors.”
The further weakened economy in the fourth quarter of fiscal year 2008 has negatively impacted
cemetery property sales, particularly in our Eastern division. When we performed our evaluation of
goodwill during the fourth quarter of 2008, particularly taking into account the reduction in trust
earnings, the estimated probable funding obligation related to the cemetery perpetual care trusts
and the overall market performance, a noncash goodwill impairment charge of $26.0 million related
to the aggregated Northern and Central regions of the Eastern division cemetery operating segment
was required, which eliminated the goodwill in our Eastern division cemetery segment. There were
no goodwill impairment charges for the years ended October 31, 2007 and 2006. As of October 31,
2008, we had $247.2 million of goodwill, consisting of $107.4 million of goodwill related to the
Western division funeral segment, $91.1 million of goodwill related to the Eastern division funeral
segment and $48.7 million of goodwill related to Western
division cemetery segment. 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 impairment. Cemetery segments tend to be more sensitive to
goodwill impairments with heavier reliance on preneed sales which are impacted by changes in
customer discretionary income. Accordingly, further economic and market declines would be more
likely to result in an impairment of goodwill in our Western division cemetery segment.
Currently, the fair values of our funeral segments’ reporting units substantially exceed their book
value.
Current economic conditions have impacted our ability to timely close preneed sales. For
fiscal year 2008, preneed cemetery property sales, net of discounts, declined 7.3 percent, which
decreases our cemetery revenue. In addition, preneed funeral and cemetery service and merchandise
sales decreased 3.0 percent for the fiscal year which does not impact current revenue, but reduces
our backlog and could reduce our future revenues. Current economic conditions could also decrease
prices at-need customers are willing to pay, but we have not seen this trend occur through fiscal
year 2008.
We have no amounts drawn on our $125.0 million revolving credit facility and no significant
scheduled principal payments on our long-term debt until fiscal year 2013. We also are not, and do
not expect to be, in breach of any of the covenants in our debt agreements. Our current revolving
credit facility matures in November 2009. While we have nothing drawn, as of November 30, 2008, we
do have $12.0 million in letters of credit and a $30.8 million bond we are required to maintain to
guarantee our obligations related to funds we withdrew in fiscal year 2001 from trusts in Florida.
We have entered into discussions with various banks to assess commitment levels, pricing and
covenant expectations. Given current credit market conditions, we expect a new revolving facility
to be more expensive than our existing facility and have tighter covenants, including potentially
more restrictive conditions on when we can pay dividends and repurchase stock. While we expect to
replace or renew the credit facility with acceptable terms, if we are unable to negotiate a
facility at acceptable terms, we would be required to cover the letters of credit and may be
required to cover the Florida bond with existing cash on hand. As of October 31, 2008, we had
$72.6 million of cash on hand to cover these funding obligations, but if current economic
conditions do not improve and we are unable to secure a new credit facility, we will be required to
continue to impose cost and cash savings strategies, which could result in the elimination of the
dividend and a reduction in capital expenditures. For additional discussion, see the “Liquidity and
Capital Resources” section below and Item 1A. “Risk Factors.”
As a result of the realized capital losses on investments in some of our preneed funeral and
cemetery merchandise and services trusts for which we are the grantor, we recorded a charge to tax
expense of $7.4 million related to a tax valuation allowance, which increased our reported tax
expense by $7.4 million and will reduce future operating cash flow as these contracts mature. If
additional capital losses are realized in trusts for which we are the grantor, we may be required
to establish additional valuation allowances unless capital gains are generated in the future,
reducing our reported net income and future operating cash flow. For additional information, see
Item 1A.
31
“Risk Factors”, “Overview of Critical Accounting Policies” and Note 18 to our consolidated
financial statements.
General
Our focus for fiscal year 2008 has been our “Best in Class” initiative, which aims to improve
performance at the individual locations by giving all managers the same key metrics by which they
can measure their performance and by providing tools to facilitate the sharing of best practices by
key metric across the organization. We also seek to strengthen our performance-oriented company
culture and to refocus management’s time and attention on improving field operations. The goal of
our “Best in Class” initiative is to generate a higher return on assets and to grow profits and
cash flow at our existing funeral homes and cemeteries. For additional information, see Item 1.
“Business.” As part of “Best in Class”, we are also currently implementing continuous improvement
initiatives. During the third quarter of 2008, we formalized a Continuous Improvement department
which was formed to coordinate and facilitate the increased focus on the strengthening and
streamlining of our processes to
eliminate waste and inefficiencies.
Our results can be affected by the number of deaths in our markets. The number of deaths in
the United States is expected to increase at a steady, moderate pace over the long-term; however,
the number can fluctuate from market to market and period to period. Although we have experienced
a decline in funeral service volume for several years, our funeral service volumes have remained
flat from fiscal year 2007 to fiscal year 2008. For additional information, see Item 1.
“Business.” We are addressing funeral service volumes through our “Best in Class” initiative and
enhanced sales and marketing efforts for both at-need and preneed sales.
Families have been showing an increasing preference for cremation. This trend 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. For additional
information, see Item 1. “Business.” To address this trend, we have increased our efforts to
market full service funerals and cremations. Other efforts to increase our funeral and cemetery
revenue include our funeral package pricing and our emphasis on personalization and customization.
For additional information, see Item 1. “Business.” We are also increasing our focus on expanding
the types of death care products and services we offer our customers. For the year ended October
31, 2008, we achieved a 2.7 percent increase in our average revenue per traditional funeral service
and a 4.1 percent increase in our average revenue per cremation service.
In addition, the cost of certain commodities, particularly copper, which represents a large
component of the bronze markers sold in our cemetery business, increased significantly for most of
our fiscal year, although commodity prices began declining in September of the current fiscal year.
In the first quarter of 2008, we were impacted by escalating merchandise and energy costs, and we
have taken steps to counter this impact. Some of the costs impacting our business are largely
beyond our control. To the extent that we are unable to continue to pass these cost increases on
to our customers, they will have a negative impact on our earnings and cash flows.
Financial Summary of Fiscal Year 2008
For the year ended October 31, 2008, net earnings decreased $43.5 million to a net loss of
$3.7 million from net earnings of $39.8 million for fiscal year 2007. Earnings from continuing
operations for fiscal year 2008 decreased $43.0 million to a net loss of $3.7 million from net
earnings of $39.3 million for the prior year.
Revenue from continuing operations increased $5.1 million to $527.9 million for the year ended
October 31, 2008. Funeral revenue from continuing operations increased $7.3 million from $279.3
million in fiscal year 2007 to $286.6 million in fiscal year 2008. For the year ended October 31,
2008, our same-store funeral operations achieved an increase in average revenue per traditional
funeral service of 2.7 percent and an increase in average revenue per cremation service of 4.1
percent due primarily to the continued refinement of new funeral packages and pricing. These
increases along with a year-over-year increase in funeral trust earnings resulted in an overall
increase in our same-store average revenue per funeral service of 3.0 percent. Our same-store
funeral services performed remained flat for fiscal year 2008 compared to fiscal year 2007.
Cemetery revenue from continuing operations decreased $2.2 million from $243.5 million for the year
ended October 31, 2007 to $241.3 million for the year ended October 31, 2008. This decrease is due
primarily to an $8.2 million, or 7.3 percent, decrease in cemetery property
32
sales, net of
discounts, due to current economic conditions. In addition, we experienced a $3.6 million decrease
in construction on various cemetery projects. These decreases were partially offset by a $3.2
million, or 3.5 percent, increase in cemetery merchandise delivered and services performed, a $2.8
million increase in cemetery commission income related to a new program to manage the cemetery
sales at eleven Archdiocese of Los Angeles cemeteries and a $2.1 million increase related to the
leasing of our mineral rights at one of our cemeteries to an outside third
party. Consolidated gross profit decreased $11.6 million to $100.8 million primarily due to a
$17.0 million decrease in cemetery gross profit, partially offset by a $5.4 million increase in
funeral gross profit. Cemetery gross profit decreased primarily due to the $13.3 million charge
recorded in the fourth quarter of 2008 for our estimated probable funding obligation to restore the
net realized losses in certain of our cemetery perpetual care trusts.
Corporate general and administrative expenses increased $1.5 million to $32.6 million for
fiscal year 2008. We incurred $2.3 million in hurricane related charges in fiscal year 2008
compared to $2.5 million in hurricane related charges for fiscal year 2007. Interest expense for
the period decreased $1.0 million to $24.1 million for fiscal year 2008. As a result of the $250.0
million senior convertible note transaction in June 2007, we recorded a $0.7 million charge for the
loss on early extinguishment of debt during 2007. Our weighted average diluted shares outstanding
decreased to 93.8 million shares for the year ended October 31, 2008 compared to 102.7 million
shares for 2007, yielding a positive impact on earnings per share.
For the year ended October 31, 2008, we had a 5.2 percent decrease in net preneed funeral
sales and a 7.3 percent decrease in cemetery property sales, net of discounts, compared to the same
period of last year due to current economic conditions.
Goodwill declined $26.0 million due to an impairment charge recorded during the fourth quarter
of fiscal year 2008.
Income tax expense increased $4.3 million due in part to a $7.4 million valuation allowance
recorded on the unrealized capital loss carryforward of $18.8 million, attributable to the
write-down of investments of certain trusts and due in part to the fact that $25.0 million of the
2008 goodwill impairment charge was not tax deductible.
Cash flow provided by operating activities for the year ended October 31, 2008 was $84.5
million compared to $81.9 million for fiscal year 2007 primarily due to an increase in net tax
refunds in the current year.
For the year ended October 31, 2008, we spent $48.4 million under our current stock repurchase
program.
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 SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”).
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, 2008 the future value of our preneed funeral and cemetery
services and merchandise backlog represented approximately $1.7 billion of revenue to be recognized
in the future as these prepaid products and services are delivered. This is made up of
approximately $1.1 billion from trust and $0.6 billion from insurance. This represents the face
value of the backlog taking into account current realized earnings not yet recognized and current
unrealized gains and losses plus the earnings that are projected on the funds held in trust and the
estimated build-up in the face value of insurance contracts. It assumes no future preneed sales
and assumes maturities each year consistent with our experience, with the majority of existing
contracts expected to mature over the next 15 years. In addition, the analysis assumes a weighted
annual return of 5 percent projected from our trusts over the expected life of the contracts and a
2 percent build-up from the insurance contracts. Actual
33
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, 2008, the value of the preneed backlog, excluding any future earnings on the
funds held in trust and any build-up in the face value of insurance contracts, but including
unrealized earnings and losses on the funds held in trust and realized earnings and losses on the
funds held in trust not yet recognized as revenue,
was approximately $1.5 billion.
Supplemental Trust Portfolio Information
We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and
services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The size
of the trusts depends primarily upon the level of preneed sales and maturities, the amount of
dividend and interest income and investment gains or losses, and funds added through acquisitions,
if any.
As of October 31, 2008, approximately 10 percent of our portfolio was invested in cash, 20
percent in fixed-income securities, 16 percent in preferred stocks and 43 percent in common stock.
Because approximately 43 percent of our total trust portfolio is currently invested in common
stock, 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.
The following table presents the overall annual realized return in our domestic trusts for the
years 1991 to 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| 1991-1999 |
|
2000 |
|
2001 |
|
2002 |
|
2003 |
|
2004 |
|
2005 |
|
2006 |
|
2007 |
|
2008 |
8-9%
|
|
|
5.8 |
% |
|
|
6.3 |
% |
|
|
4.3 |
% |
|
|
4.8 |
% |
|
|
2.6 |
% |
|
|
4.3 |
% |
|
|
5.1 |
% |
|
|
4.8 |
% |
|
|
(3.3 |
)% |
The above returns represent interest, dividends and realized capital gains or losses but not
unrealized capital gains or losses.
The table below presents our returns including realized and unrealized gains and losses.
| |
|
|
|
|
|
|
|
|
| |
|
Funeral and Cemetery |
|
|
| |
|
Merchandise and |
|
|
| |
|
Services Trusts |
|
Perpetual Care Trusts |
|
|
|
|
|
|
|
|
|
For the year ended October 31, 2008
|
|
|
(29.5 |
)% |
|
|
(25.9 |
)% |
For the last three years ended October 31, 2008
|
|
|
(4.9 |
)% |
|
|
(4.4 |
)% |
For the last five years ended October 31, 2008
|
|
|
(1.0 |
)% |
|
|
(1.0 |
)% |
For the last ten years ended October 31, 2008
|
|
|
1.6 |
% |
|
|
1.4 |
% |
In our preneed funeral and cemetery merchandise and services trusts, at October 31, 2008, the
fair market value of the investments in the trusts was $253.6 million lower than our original cost
basis. For additional detail, see Notes 4 and 5 to the consolidated financial statements. In our
cemetery perpetual care trusts, at October 31, 2008, the fair market value of our investments was
$81.0 million lower than our original cost basis. For additional detail, see Note 6 to the
consolidated financial statements.
Of the unrealized losses at October 31, 2008 of $342.0 million, securities representing
unrealized losses totaling $254.8 million were also in a loss position at October 31, 2007, up from
$119.5 million at the end of last year. The increase in these losses is partly a result of the
dramatic declines in the equity markets in the latter part of fiscal 2008. For each of these
securities, we evaluate consensus analyst recommendations, ratings from established ratings
agencies and overall market performance. Most of our common stocks are part of the S&P 500 Index,
and all preferred stocks and corporate bonds had a rating of “A” or better at the time of purchase.
We believe that we have sufficient cash and cash equivalents within the trusts and 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. While the unrealized loss has
increased, based on review of the individual securities, we do not believe the loss on these
securities should be realized. Of the $254.8 million, approximately 16 percent, or $41.0 million,
were
34
generated by preferred stock investments and 77 percent, or $196.3 million, were generated by
common stock investments. The market value of these securities represents approximately 39 percent
of the market value of the securities in our trust portfolio. The preferred stocks are primarily in
the financial services sector which has experienced a significant decline in market value due to
the current economic crisis. Our Investment Committee, which provides oversight for the trust
portfolio management, believed that preferred stocks presented an attractive investment layer in
our portfolio as they involved less risk than common equities and often produced returns more
similar to and higher than fixed-income securities. The vast majority of these companies were
rated “A” or better at the time of purchase by S&P, Moody’s or Fitch, and most continue to pay
dividends. Although we cannot predict future stock prices, our management expects that the
financial services sector and the S&P 500 will recover and that these stocks may recover along with
them. We believe we have the ability and intent to hold these investments for the forecasted
recovery period.
The table below presents the sectors in which our trust portfolio is invested and the
percentage of each sector in the total trust portfolio as of October 31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Funeral and Cemetery |
|
|
|
|
| |
|
Merchandise and |
|
|
Cemetery Perpetual |
|
| |
|
Services Trusts |
|
|
Care Trusts |
|
| |
|
Fair Market |
|
|
|
|
|
|
Fair Market |
|
|
|
|
| |
|
Value in |
|
|
Percentage |
|
|
Value in |
|
|
Percentage |
|
| Sector |
|
Millions |
|
|
of Portfolio |
|
|
Millions |
|
|
of Portfolio |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Financials |
|
$ |
119.5 |
|
|
|
25 |
% |
|
$ |
69.4 |
|
|
|
40 |
% |
Cash |
|
|
59.9 |
|
|
|
12 |
% |
|
|
16.9 |
|
|
|
10 |
% |
Information Technology |
|
|
55.4 |
|
|
|
12 |
% |
|
|
12.4 |
|
|
|
7 |
% |
Mutual Funds |
|
|
42.2 |
|
|
|
9 |
% |
|
|
6.2 |
|
|
|
4 |
% |
Consumer Staples |
|
|
39.4 |
|
|
|
8 |
% |
|
|
13.8 |
|
|
|
8 |
% |
Consumer Discretionary |
|
|
31.2 |
|
|
|
6 |
% |
|
|
16.8 |
|
|
|
10 |
% |
Healthcare |
|
|
34.2 |
|
|
|
7 |
% |
|
|
9.0 |
|
|
|
5 |
% |
Government |
|
|
25.5 |
|
|
|
5 |
% |
|
|
9.5 |
|
|
|
6 |
% |
Energy |
|
|
22.3 |
|
|
|
5 |
% |
|
|
6.0 |
|
|
|
3 |
% |
Industrials |
|
|
18.8 |
|
|
|
4 |
% |
|
|
6.2 |
|
|
|
4 |
% |
Telecommunications |
|
|
15.3 |
|
|
|
3 |
% |
|
|
4.6 |
|
|
|
3 |
% |
Utilities |
|
|
4.6 |
|
|
|
1 |
% |
|
|
0.3 |
|
|
|
— |
|
Materials |
|
|
5.4 |
|
|
|
1 |
% |
|
|
1.0 |
|
|
|
— |
|
Mortgage Securities |
|
|
0.2 |
|
|
|
— |
|
|
|
0.1 |
|
|
|
— |
|
Miscellaneous |
|
|
9.8 |
|
|
|
2 |
% |
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
483.7 |
|
|
|
|
|
|
$ |
172.2 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investments in the financials sector represented 25 percent, or $119.5 million of fair market
value, of our preneed funeral and cemetery merchandise and services portfolios and 40 percent, or
$69.4 million, of our cemetery perpetual care portfolio as of October 31, 2008. This sector has
unrealized losses of $80.4 million as of October 31, 2008 in our preneed funeral and cemetery
merchandise and services trusts, $30.4 million of which relate to preferred stock investments.
With respect to our cemetery perpetual care trust portfolio, the financials sector has unrealized
losses of $39.2 million as of October 31, 2008, $24.0 million of which relate to preferred stock
investments. Risks associated with the financials sector include recent failures of various large
financial institutions, government regulation, interest rates, cost of capital funds, credit losses
and volatility in financial markets.
We also have concentrations in other sectors that may be more susceptible to additional
adverse impact from the current economic crisis, primarily the information technology sector and
the consumer discretionary sector, which includes the United States automotive manufacturers. The
information technology sector has unrealized losses of $76.9 million as of October 31, 2008 in our
preneed funeral and cemetery merchandise and services trusts
and unrealized losses of $17.6 million as of October 31, 2008 in our cemetery perpetual care
trusts. The consumer discretionary sector has unrealized losses of $30.6 million as of October 31,
2008 in our preneed funeral and cemetery merchandise and services trusts and unrealized losses of
$12.2 million as of October 31, 2008 in our cemetery perpetual care trusts The information
technology sector risks include overall economic conditions, short
35
product cycles, rapid
obsolescence of products, competition and government regulation. The consumer discretionary sector
risks include overall economic conditions, interest rates, consumer confidence and disposable
income.
Included in the consumer discretionary sector in our preneed funeral and cemetery merchandise
and services trusts and our cemetery perpetual care trusts are the United States automotive
manufacturers such as General Motors, Chrysler and Ford. Currently, General Motors and Chrysler
have asked Congress for funds they say are necessary to avert bankruptcy in the near future, and
Ford has stated that it may have longer-term liquidity problems. To date, Congress has refused to
act to assist the automakers; however, the United States Treasury Department may provide
assistance. The table below represents our original cost basis and the fair market value of the
automotive manufacturers and the automotive financial arms in our consumer discretionary sector.
For additional information on the potential implications of realized losses in Stewart grantor
trusts and customer grantor trusts, and in cemetery perpetual care trusts where we withdraw net
realized capital gains and those where we do not, see Item 1. “Risk Factors.”
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Preneed Funeral and |
|
|
|
|
|
|
|
| |
|
Cemetery Merchandise and |
|
|
|
|
|
|
|
| |
|
Services Trust |
|
|
Perpetual Care Trusts |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Perpetual |
|
|
|
|
| |
|
Stewart |
|
|
Customer |
|
|
Perpetual |
|
|
Care |
|
|
|
|
| |
|
Grantor |
|
|
Grantor |
|
|
Care with |
|
|
without |
|
|
|
|
| |
|
Trusts |
|
|
Trusts |
|
|
Gains |
|
|
Gains |
|
|
Totals |
|
| |
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
|
(in millions) |
|
Automotive manufacturers: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost basis |
|
$ |
2.8 |
|
|
$ |
1.8 |
|
|
$ |
4.0 |
|
|
$ |
4.0 |
|
|
$ |
12.6 |
|
Fair market value as
of December 9, 2008 |
|
$ |
0.4 |
|
|
$ |
0.3 |
|
|
$ |
0.6 |
|
|
$ |
1.4 |
|
|
$ |
2.7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Automotive financial arms: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost basis |
|
$ |
5.6 |
|
|
$ |
3.8 |
|
|
$ |
3.8 |
|
|
$ |
3.6 |
|
|
$ |
16.8 |
|
Fair market value as
of December 9, 2008 |
|
$ |
1.9 |
|
|
$ |
1.1 |
|
|
$ |
1.2 |
|
|
$ |
1.2 |
|
|
$ |
5.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Totals: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Original cost basis |
|
$ |
8.4 |
|
|
$ |
5.6 |
|
|
$ |
7.8 |
|
|
$ |
7.6 |
|
|
$ |
29.4 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair market value as
of December 9, 2008 |
|
$ |
2.3 |
|
|
$ |
1.4 |
|
|
$ |
1.8 |
|
|
$ |
2.6 |
|
|
$ |
8.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We perform a separate analysis to determine whether our preneed contracts are 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 2008, these fees amounted to $10.0 million. These fees are based
on the fair market value of the investments in the funeral and cemetery merchandise and services
trust portfolio and cemetery perpetual care trusts, and significant changes in the fair market
value of the portfolio impact the fees earned. To the extent the fair market values of our trust
assets continue to be less than those values prevailing during 2008, we will recognize less revenue
from ITI fees than we earned in 2008 and than we have historically earned.
Impact of Preneed Sales on Near-Term Cash
The impact of preneed sales on near-term cash flow depends primarily on the commissions paid
on the sale, the timing of the tax payments on the sale, the portion of the sale required to be
placed into trust and the terms of the particular contracts such as the size of the down payment
required and the length of the contract. We generally pay commissions to our preneed sales
counselors based on a percentage of the total preneed contract price, but only to the extent cash
is paid by the customer. If the initial cash installment paid by the customer is not sufficient to
cover
36
the entire commission, the remaining commission is paid from subsequent customer
installments. However, because we are required to place a portion of each cash installment paid by
the customer into trust, we may be required to use our own cash to cover a portion of the
commission due on the installment from the customer. Accordingly, preneed sales are generally cash
flow negative initially, but become cash flow positive at varying times over the life of the
contract, depending upon the trusting requirements and the terms of the particular contract.
Commissions related to preneed funeral and preneed cemetery services and merchandise sales are
expensed as incurred.
Cash flows related to earnings in our trusts, deposits and withdrawals and related matters and
our cemetery perpetual care funding obligations are described in Notes 4, 5 and 6 of the
consolidated financial statements.
Overview of Critical Accounting Policies
The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make estimates and
assumptions. See Note 2(b) to the consolidated financial statements included in Item 8. We
believe that of our significant accounting policies, the following are both most important to the
portrayal of our financial condition and results of operations and require 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 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 performed. See Note 2(i) to the
consolidated financial statements included in Item 8.
Revenue associated with cemetery merchandise and services is recognized when the service is
performed or merchandise is delivered. Revenue associated with preneed cemetery property interment
rights is recognized in accordance with the retail land sales provision of SFAS No. 66. Under SFAS
No. 66, 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 its
construction is recognized on a percentage of completion method of accounting. Revenue associated
with sales of preneed merchandise and services is not recognized until the merchandise is delivered
or the services are 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
contracts.
Perpetual Care Funding Obligation
Certain states allow us to withdraw realized capital gains from cemetery perpetual care
trusts, and other states prohibit these withdrawals. These earnings and related funds are intended
to defray cemetery maintenance costs and are recorded as revenue. In the event that we have been
allowed to withdraw realized gains and there are
realized losses in the trust, we may determine we have a funding obligation to restore the net
realized losses of the trust. A charge is recorded in the statement of earnings at the time it is
considered probable that we will be required to restore the realized losses.
Loss Contract Analysis
Each quarter we perform an analysis to determine whether our preneed contracts are in a loss
position, which would necessitate a charge to earnings. For this analysis, we determine which
trusts are in a net loss position by comparing the aggregate market value of the trust’s
investments with the aggregate actual cost basis of the investments. If the aggregate cost basis
exceeds the aggregate market value of the investments, the trust is
37
considered to be in a net loss
position. For trusts in a net loss position, we add the sales prices of the underlying contracts
and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds
for contracts associated with the trusts in question as of that particular balance sheet date. We
look at 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 proceeds 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 funeral 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 backlog. Due to the positive margins of our preneed contracts and the trust portfolio
returns we have experienced in prior years, there is currently capacity for additional market
depreciation before a contract loss would result.
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 after
the implementation of FIN 46R including our policy for determining whether a loss in an investment
in our trust portfolio should be considered realized, see Notes 2(k) and 4 through 7 to the
consolidated financial statements included in Item 8. Concurrently with the adoption of FIN 46R,
we changed our accounting for insurance-funded preneed funeral contracts, which are not recorded on
our balance sheet, as described in Note 2(i) to the consolidated financial statements included in
Item 8.
Allowance for Doubtful Accounts and Sales Cancellations
Management must make estimates of the uncollectibility of our accounts receivable. We
establish a reserve for uncollectible installment contracts and trade accounts based on a range of
percentages applied to accounts receivable aging categories. These percentages are based on an
analysis of 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
38
our operating divisions are considered economically similar.
Our division presidents also review a variety of metrics when assessing the performance of our
regions. Qualitative factors include the nature of our products and services, consistency of
products and services and the delivering 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 13 reporting units. Because goodwill impairment
tests are applied at the reporting unit level, a change in reporting unit can have a material
effect on the outcome of the test. See Note 2(g) to the consolidated financial statements included
in Item 8 for additional information.
Goodwill of a reporting unit must be tested for impairment on at least an annual basis. We
conduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. In
addition to an annual review, we assess the impairment of goodwill whenever events or changes in
circumstances indicate that the carrying value of goodwill may be greater than its fair value.
Factors we consider important that could trigger an impairment review include significant
underperformance relative to historical or projected future operating results, significant changes
in the manner of the use of our assets or the strategy for our overall business and significant
negative industry or economic trends.
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. 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. An impairment charge is recorded when the carrying amount of goodwill
exceeds its implied fair value.
Our goodwill impairment test involves estimates and management judgment. We determine fair
value of each reporting unit using a discounted cash flow valuation methodology. From time to
time, we may obtain assistance from third parties in our evaluation. The discounted cash flow
valuation uses projections of future cash flows and includes assumptions concerning future
operating performance and economic conditions and may differ from actual future cash flows. We
test our results by comparing them to the trading multiples of companies in our industry and
supplier industries calculated as enterprise value divided by EBITDA. We also reviewed multiples
used in recent acquisition transactions. In projecting our cash flows we used growth rates of
three to five percent. We adjusted the results for our estimate of the impact of the realized
losses in our trusts on our cash flows. For the discount rate, we used 8.3 percent, which
reflected our weighted average cost of capital determined based on our industry and our supplier
industries and capital structure as adjusted for equity risk premiums and size risk premiums based
on our market capitalization. Fair value is calculated as the sum of the projected discounted cash
flows of the reporting units over the next five years and terminal value at the end of those five
years. The terminal value is calculated as the projected EBITDA at the end of the five year period
divided by the discount rate minus terminal growth rates ranging from 2 to 3.5 percent. We
considered sensitivities within the terminal values and used the midpoint enterprise value as our
best estimate.
Step two of our impairment test involves determining estimates of the fair values of our
assets and liabilities. We may obtain assistance from third parties in assessing the fair value of
certain of our assets, primarily real estate, in performing our step two analysis. 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 2008 impairment test, we may be required to record an additional impairment
charge.
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
39
assets will
be recovered from future taxable income, and to the extent we believe that recovery is not likely,
we establish a valuation allowance. The following items are reviewed to determine if a valuation
allowance is required: net operating losses (federal, state and United States possessions), capital
loss carry forwards and deferred tax assets (federal, state and United States possessions). To the
extent we establish a valuation allowance or increase this allowance in a period, we include an
expense within the tax provision in the statement of earnings.
Approximately one-half of the October 31, 2008 fair market value of our preneed funeral and
cemetery merchandise and services trusts are in trusts for which we are the grantor. For these
trusts (unlike the remaining trusts for which the customers are the grantors), we retain the income
tax characteristics of all earnings as realized in the trust. For example, capital gains and
losses in the trusts are capital gains and losses on our tax returns. In addition, we must
recognize these earnings currently for tax purposes, while for book purposes they are deferred.
Realized capital losses in the trusts for which we are the grantor, if we have or expect
insufficient offsetting capital gains, can require us to record a valuation allowance against the
related deferred tax asset (capital loss carryforward), which increases our current period
effective tax rate and reduces our current period reported net earnings. During our fourth fiscal
quarter of 2008, we recorded a tax valuation allowance related to capital losses realized in our
preneed funeral and cemetery merchandise and services trusts for which we are the grantor for tax
purposes. 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.
We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an
Interpretation of Statement of Financial Accounting Standards Statement No. 109” (“FIN 48”) during
the first quarter of fiscal year 2008. FIN 48 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 2002. 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. 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. We continually evaluate the
receivables due from our insurance carriers as well as loss estimates associated with claims and
losses related to these insurance coverages with information obtained from our primary insurer.
With respect to health insurance that covers substantially all of our employees, 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
40
amount being covered by insurance. Expected
claims are based on actuarial estimates; actual claims may differ from those estimates. We
continually evaluate our claims experience related to this coverage with information obtained from
our 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 our 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.
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.
Results of Operations
The following discussion segregates the financial results of our continuing operations into
our various segments, grouped by our funeral and cemetery operations. For a discussion of
discontinued operations, see 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 2008 and 2007, results from continuing operations reflect those of same-store locations.
Comparison of Fiscal Year 2008 to Fiscal Year 2007
Year Ended October 31, 2008 Compared to Year Ended October 31, 2007—Continuing Operations
Funeral Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
| |
|
|
|
|
|
(In millions) |
|
|
|
|
|
Funeral Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
117.8 |
|
|
$ |
117.1 |
|
|
$ |
.7 |
|
Western Division |
|
|
150.5 |
|
|
|
143.8 |
|
|
|
6.7 |
|
Corporate Trust Management (1) |
|
|
18.3 |
|
|
|
18.4 |
|
|
|
(.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Revenue |
|
$ |
286.6 |
|
|
$ |
279.3 |
|
|
$ |
7.3 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
98.8 |
|
|
$ |
99.3 |
|
|
$ |
(.5 |
) |
Western Division |
|
|
118.7 |
|
|
|
116.4 |
|
|
|
2.3 |
|
Corporate Trust Management (1) |
|
|
.8 |
|
|
|
.7 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Costs |
|
$ |
218.3 |
|
|
$ |
216.4 |
|
|
$ |
1.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
19.0 |
|
|
$ |
17.8 |
|
|
$ |
1.2 |
|
Western Division |
|
|
31.8 |
|
|
|
27.4 |
|
|
|
4.4 |
|
Corporate Trust Management (1) |
|
|
17.5 |
|
|
|
17.7 |
|
|
|
(.2 |
) |
|
|
|
|
|
|
|
|
|
|
Total Funeral Gross Profit |
|
$ |
68.3 |
|
|
$ |
62.9 |
|
|
$ |
5.4 |
|
|
|
|
|
|
|
|
|
|
|
41
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Change in Average |
|
Change in Same- |
|
|
| |
|
Revenue Per |
|
Store Funeral |
|
Same-Store |
| Same-Store Analysis |
|
Funeral Service |
|
Services |
|
Cremation Rate |
| |
|
|
|
|
|
|
|
|
|
2008 |
|
2007 |
Eastern Division |
|
|
0.6 |
% |
|
|
(0.5 |
)% |
|
|
36.2 |
% |
|
|
35.1 |
% |
Western Division |
|
|
4.7 |
% |
|
|
0.3 |
% |
|
|
42.7 |
% |
|
|
42.5 |
% |
Total |
|
|
3.0 |
%(1) |
|
|
— |
% |
|
|
39.8 |
% |
|
|
39.3 |
% |
|
|
|
| (1) |
|
Corporate trust management consists of the trust management fees and funeral
merchandise and services trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by us at rates consistent with
industry norms based on the fair market value of assets managed and are paid by the trusts to
our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings
realized by the trusts over the life of the preneed contracts and allocated to those products
and services delivered during the relevant periods. See Notes 4 and 7 to the consolidated
financial statements included in Item 8 for information regarding the cost basis and market
value of the trust assets and current performance of the trusts (i.e. current realized gains
and losses, interest income and dividends). Trust management fees included in funeral revenue
for 2008 and 2007 were $5.1 million and $5.9 million, respectively. As corporate trust
management is considered a separate operating segment, trust earnings are included in total
average revenue per call presented, but not in the Eastern and Western divisions’ average
revenue per call. Funeral trust earnings recognized with respect to preneed contracts
delivered included in funeral revenue for 2008 and 2007 were $13.2 million and $12.5 million,
respectively. |
Consolidated Operations—Funeral
Funeral revenue from continuing operations increased $7.3 million, or 2.6 percent, from $279.3
million for the year ended October 31, 2007 to $286.6 million for the year ended October 31, 2008.
Our same-store funeral services performed remained flat with a 15 event decrease to 58,462 events.
Our same-store funeral operations achieved a 2.7 percent increase in the average revenue per
traditional funeral service and a 4.1 percent increase in the average revenue per cremation service
due primarily to the continued refinement of new funeral packages and pricing. These increases
along with a year-over-year increase in funeral trust earnings resulted in an overall increase in
our same-store average revenue per funeral service of 3.0 percent. The cremation rate for our
same-store operations was 39.8 percent for the year ended October 31, 2008 compared to 39.3 percent
for the corresponding period in 2007.
Funeral gross profit increased $5.4 million to $68.3 million for fiscal year 2008 compared to
$62.9 million for fiscal year 2007 primarily due to the increase in revenue, as noted above.
Funeral gross profit margin increased 130 basis points to 23.8 percent for fiscal year 2008 from
22.5 percent for the same period in 2007.
Segment Discussion—Funeral
Funeral revenue in the Eastern division funeral segment increased $0.7 million primarily due
to a 0.6 percent increase in average revenue per funeral service in same-store operations,
partially offset by a 0.5 percent
decrease in the number of funeral services performed by same-store operations. Funeral
revenue in the Western division funeral segment increased $6.7 million primarily due to a 4.7
percent increase in the average revenue per funeral service in same-store operations and a 0.3
percent increase in the number of funeral services performed by same-store operations. Funeral
revenue in the corporate trust management segment decreased $0.1 million primarily due to a $0.8
million decrease in trust management fees, offset by a $0.7 million increase in funeral trust
earnings.
Funeral gross profit for the Eastern division funeral segment increased $1.2 million primarily
due to an increase in revenue, as discussed above, and a decrease in expenses. The decrease in
expenses is primarily due to a prior year $0.7 million impairment charge related to funeral
licenses in the state of Maryland. Funeral gross profit for the Western division funeral segment
increased $4.4 million primarily due to an increase in revenue, as discussed above. As
demonstrated in the table above, the same-store cremation rate increased for both the Eastern and
Western division.
42
Cemetery Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2008 |
|
|
2007 |
|
|
(Decrease) |
|
| |
|
(In millions) |
|
Cemetery Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
130.6 |
|
|
$ |
143.2 |
|
|
$ |
(12.6 |
) |
Western Division |
|
|
101.6 |
|
|
|
90.4 |
|
|
|
11.2 |
|
Corporate Trust Management (1) |
|
|
9.1 |
|
|
|
9.9 |
|
|
|
(.8 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Revenue |
|
$ |
241.3 |
|
|
$ |
243.5 |
|
|
$ |
(2.2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
125.2 |
|
|
$ |
122.2 |
|
|
$ |
3.0 |
|
Western Division |
|
|
82.7 |
|
|
|
71.2 |
|
|
|
11.5 |
|
Corporate Trust Management (1) |
|
|
.9 |
|
|
|
.6 |
|
|
|
.3 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Costs |
|
$ |
208.8 |
|
|
$ |
194.0 |
|
|
$ |
14.8 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cemetery Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
5.4 |
|
|
$ |
21.0 |
|
|
$ |
(15.6 |
) |
Western Division |
|
|
18.9 |
|
|
|
19.2 |
|
|
|
(.3 |
) |
Corporate Trust Management (1) |
|
|
8.2 |
|
|
|
9.3 |
|
|
|
(1.1 |
) |
|
|
|
|
|
|
|
|
|
|
Total Cemetery Gross Profit |
|
$ |
32.5 |
|
|
$ |
49.5 |
|
|
$ |
(17.0 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Corporate trust management consists of the trust management fees and cemetery
merchandise and services trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by us at rates consistent with
industry norms based on the fair market value of the assets managed and are paid by the trusts
to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings
realized by the trust over the life of the preneed contracts and allocated to those products
and services delivered during the relevant periods. See Notes 5 and 7 to the consolidated
financial statements included in Item 8 for information regarding the cost basis and market
value of the trust assets and current performance of the trusts (i.e. current realized gains
and losses, interest income and dividends). Trust management fees included in cemetery
revenue for 2008 and 2007 were $4.9 million and $5.3 million and cemetery trust earnings
recognized with respect to preneed contracts delivered included in cemetery revenue for 2008
and 2007 were $4.2 million and $4.6 million, respectively. Perpetual care trust earnings are
included in the revenues and gross profit of the related geographic segment. |
Consolidated Operations—Cemetery
Cemetery revenue from continuing operations decreased $2.2 million, or 0.9 percent, from
$243.5 million for the year ended October 31, 2007 to $241.3 million for the year ended October 31,
2008. The decrease is due primarily to an $8.2 million, or 7.3 percent, decrease in cemetery
property sales, net of discounts, due to current economic conditions. In addition, we experienced
a $3.6 million decrease in construction on various cemetery projects. In the prior year, we
experienced growth due to focused efforts to reduce the production backlog in existing cemetery
projects. These decreases were partially offset by a $3.2 million, or 3.5 percent, increase in
cemetery merchandise delivered and services performed, a $2.8 million increase in cemetery
commission income related to a new program to manage the cemetery sales at eleven Archdiocese of
Los Angeles cemeteries and a $2.1 million increase related to the leasing of our mineral rights at
one of our cemeteries to an outside third party.
Perpetual care trust earnings for the year ended October 31, 2008 amounted to $10.7 million
compared to $10.2 million for the year ended October 31, 2007.
Cemetery gross profit decreased $17.0 million from $49.5 million in fiscal year 2007 to $32.5
million in fiscal year 2008. The decrease in cemetery gross profit is primarily due to a $13.3
million charge recorded in the fourth quarter of 2008 for our estimated probable funding obligation
to restore the net realized losses in certain of our cemetery perpetual care trusts, included in
cemetery costs. See Note 6 to the consolidated financial statements for additional information.
43
Segment Discussion—Cemetery
Cemetery revenue in the Eastern division cemetery segment decreased $12.6 million primarily
due to a $6.8 million decrease in construction on various cemetery development projects and a $7.1
million, or 9.9 percent, decrease in cemetery property sales, net of discounts, due in part to
current economic conditions. Cemetery revenue in the Western division cemetery segment increased
$11.2 million primarily due to a $3.2 million increase in construction on various cemetery
projects, a $2.8 million increase in cemetery commission income related to a new program to manage
the cemetery sales at eleven Archdiocese of Los Angeles cemeteries, a $2.1 million increase related
to the leasing of our mineral rights at one of our cemeteries to an outside third party and a $1.7
million increase in cemetery merchandise delivered and services performed. Cemetery revenue in the
corporate trust management segment decreased $0.8 million due to a $0.4 million decline in trust
management fees and a $0.4 million decline in cemetery trust earnings.
Cemetery gross profit for the Eastern division cemetery segment decreased $15.6 million due to
the decrease in cemetery revenue, as discussed above, and an increase in expenses. The increase in
expenses is primarily due to the $9.3 million charge related to the estimated probable funding
obligation to restore the net realized losses in certain of our cemetery perpetual care trusts
described above. Cemetery gross profit for the Western division cemetery segment decreased $0.3
million primarily due to an increase in expenses due in part to the $4.0 million charge related to
the estimated probable funding obligation to restore the net realized losses in certain of our
cemetery perpetual care trusts described above.
Other
Corporate general and administrative expenses increased $1.5 million to $32.6 million for
fiscal year 2008. The increase was primarily due to a $2.3 million increase in information
technology costs due in part to the implementation of new business systems and a web development
project in the current year, a $1.8 million increase in costs related to our evaluation of the
unsolicited acquisition proposal received from Service Corporation International in the third
quarter of 2008 and a $1.5 million increase in costs related to the continuous improvement
initiative that began in the first quarter of 2008. The increases were partially offset by a $2.0
million decrease in professional fees primarily due to a decrease in litigation expense and a $1.0
million decrease in depreciation expense for the year ended October 31, 2008 due to the accelerated
depreciation in the prior year of our previous computer software systems associated with the
implementation of the new business systems in the prior year.
We recorded $0.6 million in separation charges during the year ended October 31, 2007
primarily related to separation pay of a former executive officer who retired in the first quarter
of 2007.
As a result of the annual goodwill impairment evaluation performed in the fourth quarter of
2008, we recorded a goodwill impairment charge of $26.0 million for the year ended October 31,
2008. For additional information, see Note 13 to the consolidated financial statements included in
Item 8.
We incurred $2.3 million in hurricane related charges in fiscal 2008 primarily related to
Hurricane Ike and Hurricane Katrina. In September 2008, Hurricane Ike struck the Texas Gulf Coast
and our facilities in that area were affected resulting in a $1.2 million charge primarily for
debris cleanup and repairs. We are in the process of preparing our insurance claim related to
Hurricane Ike. The $1.1 million charge in the current year in relation to Hurricane Katrina
primarily relates to legal costs associated with ongoing insurance claims. We incurred $2.5
million in hurricane related charges for the same period of 2007 primarily due to repairs at
locations damaged by Hurricane Katrina. We are continuing to pursue claims with our insurance
carriers as described in Note 23 to the consolidated financial statements.
Interest expense decreased $1.0 million to $24.1 million for the year ended October 31, 2008
primarily due to a 123 basis-point decrease in the average rate, partially offset by a $52.7
million increase in the average debt outstanding.
Other operating income, net decreased $0.8 million to $0.9 million for the year ended October
31, 2008. The decrease is primarily due to the sale of excess cemetery property in the Western
division in the second quarter
of fiscal year 2007 and proceeds related to the sale of an investment during fiscal year 2007.
44
Investment and other income, net decreased $1.0 million to $2.4 million due primarily to a
decrease in the average rate earned on our cash balances from 4.75 percent in fiscal year 2007 to
1.67 percent in fiscal year 2008. In light of the current economic and market conditions, we
decided to seek stable investments in money-market funds invested in United States treasury
securities. These investments realize a lower average rate on cash.
As a result of the $250.0 million senior convertible note transaction in June 2007, we
recorded a $0.7 million charge for the loss on early extinguishment of debt during fiscal year
2007.
The effective tax rate for continuing operations for the year ended October 31, 2008 was 119.7
percent compared to 31.5 percent for the same period in 2007. The increased rate in 2008 was
primarily due to the $26.0 million goodwill impairment charge recorded in the fourth quarter of
fiscal year 2008, of which $25.0 million was non-deductible for tax purposes. This increase was
coupled with a $7.4 million valuation allowance recorded on the unrealized capital loss
carryforward of approximately $18.8 million, net of capital gains, attributable to the write-down
of investments of certain trusts which are recognized for tax purposes and deferred for book
purposes. We concluded a valuation allowance for the capital loss carryforward was necessary
because it was uncertain whether we could generate any taxable capital gains within the
carryforward period. The reduced rate in 2007 was primarily caused by a tax benefit of $3.4
million attributable to the utilization of a capital loss carryforward, coupled with a tax benefit
of $0.8 million attributable to the completion and settlement of an audit by the Commonwealth of
Puerto Rico for tax periods 1999, 2000 and 2001.
As of November 1, 2007, we adopted FIN 48, which clarifies the accounting and disclosure for
uncertain tax positions in accordance with SFAS No. 109, “Accounting for Income Taxes.” We have
reviewed our income tax positions and identified certain tax deductions or revenue deferrals that
are not certain. The cumulative effect of adopting FIN 48 has been recorded as a $1.0 million
increase to the November 1, 2007 opening balance of accumulated deficit, a $3.4 million increase in
deferred tax assets and a $4.4 million increase in other long-term liabilities. For additional
information on FIN 48, see Notes 3 and 18 to the consolidated financial statements included herein.
Our weighted average diluted shares outstanding decreased to 93.8 million shares for the year
ended October 31, 2008 compared to 102.7 million shares for the same period in 2007. The decrease
is primarily due to our $75.0 million stock repurchase program in which we have repurchased $48.4
million, or 6.6 million shares, of our Class A common stock, yielding a positive impact on earnings
per share.
Long-term receivables decreased $12.9 million from October 31, 2007 to October 31, 2008
primarily due to a $10.8 million income tax refund receivable collected during fiscal year 2008.
Goodwill declined $26.0 million due to the $26.0 million goodwill impairment charge, discussed
above. Deferred income taxes decreased $13.3 million from October 31, 2007 to October 31, 2008
primarily due to a change in income tax accounting methods which resulted in an $8.9 million
reduction of deferred tax assets offsetting current taxes payable. See Note 18 to the consolidated
financial statements for additional information on income tax related items that occurred in fiscal
year 2008. The $13.3 million estimated probable funding obligation to restore the net realized
losses in certain of our cemetery perpetual care trusts is discussed in Note 6 to the consolidated
financial statements. The $6.6 million increase in other long-term liabilities from October 31,
2007 to October 31, 2008 was primarily due to a $4.4 million charge due to the adoption of FIN 48
in the first quarter of 2008.
Preneed funeral receivables and trust investments, preneed cemetery receivables and trust
investments, cemetery perpetual care trust investments, non-controlling interest in funeral and
cemetery trusts and non-controlling interest in perpetual care trusts decreased substantially
primarily due to the recent decline in market value of our trust assets due to a broad based
decline in the overall financial markets. For additional information, see Notes 4, 5 and 6 to our
consolidated financial statements included herein.
Preneed Sales into and Deliveries out of the Backlog
Preneed funeral sales decreased 5.2 percent for the year ended October 31, 2008 compared to
the same period in 2007 due in part to current economic conditions.
45
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 added $173.9
million in gross preneed sales to our funeral and cemetery merchandise and services backlog
(including $76.5 million related to insurance-funded preneed funeral contracts) during the year
ended October 31, 2008 to be recognized in the future (net of cancellations) as these prepaid
products and services are delivered, compared to gross sales of $179.2 million (including $76.9
million related to insurance-funded preneed funeral contracts) for the corresponding period in
2007. Deliveries out of our preneed funeral and cemetery merchandise and services backlog,
including accumulated trust earnings related to these preneed deliveries, amounted to $151.4
million for the year ended October 31, 2008, compared to $145.2 million for the corresponding
period in 2007, resulting in net increases in the backlog of $22.5 million and $34.0 million for
the years ended October 31, 2008 and 2007, respectively.
Comparison of Fiscal Year 2007 to Fiscal Year 2006
Financial Summary of Fiscal Year 2007
For fiscal year 2007, we had net earnings of $39.8 million compared to a $37.6 million for
fiscal year 2006. Fiscal year 2007 earnings from continuing operations increased by $1.7 million
to $39.3 million compared to $37.6 million for fiscal year 2006.
Funeral revenue decreased $0.9 million from $280.2 million in fiscal year 2006 to $279.3
million in fiscal year 2007. During fiscal year 2006 we recorded an increase of $1.6 million in
funeral revenue related to an out of period adjustment and $2.8 million of business interruption
insurance proceeds related to the 2005 hurricanes. During 2007, our same-store funeral operations
experienced an increase in the average revenue per traditional funeral service of 3.4 percent and
an increase in average revenue per cremation service of 7.4 percent. The increase in the average
revenue per traditional funeral and cremation service were partially offset by a shift in mix to
lower-priced cremation services resulting in an overall increase in the same-store average revenue
per funeral service of 3.5 percent. We also experienced a decrease in same-store funeral services
performed of 2.2 percent. The cremation rate for our same-store operations was 39.3 percent for
fiscal year 2007 compared to 38.6 percent for fiscal year 2006.
Cemetery revenue increased $9.5 million from $234.0 million in fiscal year 2006 to $243.5
million in fiscal year 2007 due to increases in construction during the period on various cemetery
projects and an increase in gross cemetery property sales. These increases were partially offset
by a decrease in merchandise delivery revenue due in part to a decrease in interments and an
increase in the reserve for cancellations, which was due in large part to an improvement in the
reserve for cancellations in the prior year following Hurricane Katrina.
Funeral gross profit decreased $2.3 million due primarily to the decrease in revenue discussed
above and a $1.4 million increase in expenses. The increase in expenses is primarily due to an
increase in property, casualty and general liability insurance costs along with a $0.7 million
impairment charge related to funeral licenses in the state of Maryland. Cemetery gross profit
increased $0.1 million.
There was a $4.1 million increase in hurricane related charges in 2007 over 2006. We recorded
a $2.5 million charge for net hurricane related costs in 2007 compared to a $1.6 million recovery
in 2006. Interest expense decreased $4.5 million due to a 282 basis-point decrease in the average
rate during the year. The decrease in the average rate is primarily due to additional interest
incurred in fiscal year 2006 on the Company’s 6.25 percent senior notes as a result of the
Company’s inability to timely complete a required exchange offer and due in part to the reduction
in interest resulting from the issuance of $250.0 million of senior convertible notes. In June
2007, we issued $125.0 million of 3.125 percent senior convertible notes and $125.0 million of
3.375 percent senior convertible notes, and we prepaid our Term Loan B. As a result of this
transaction, we recorded a charge for the loss of early extinguishment of debt of $0.7 million. We
recognized tax expenses and benefits during fiscal year 2007. The largest of these was a $4.2
million income tax benefit due to the utilization of a capital loss carry forward and the
completion of an audit in the Commonwealth of Puerto Rico, resulting in a lower effective tax rate
of 31.5 percent for fiscal year 2007 compared to 36.0 percent for fiscal year 2006.
Cash flow from operations decreased from $90.1 million for the year ended October 31, 2006 to
$81.9 million for the year ended October 31, 2007, due primarily to $14.8 million in unusual trust
withdrawals received
46
during fiscal year 2006 associated with the deferred revenue project compared
to $2.1 million in 2007. In addition, we made net tax payments of $9.3 million during 2007
compared to $4.2 million in 2006 due to a net operating loss carryforward utilized in fiscal year
2006. There were also $1.3 million of net cash inflows recorded related to Hurricane Katrina in
2007 compared to $3.8 million of cash outflows in 2006. Lastly, we received $2.1 million due to
the execution of a lease of our mineral rights at one of our cemeteries to an outside third-party.
During fiscal year 2007, we repurchased 7,698,000 shares of our Class A common stock in
connection with the June 2007 senior convertible debt transaction for $64.2 million and paid $10.2
million, or $0.10 per share, in dividends. In addition, in September 2007, the Board approved a
new $25.0 million stock repurchase program, and in December 2007 increased the program by an
additional $25.0 million.
For fiscal year 2007, we experienced a 6.2 percent increase in cemetery property sales and a
1.1 percent decrease in preneed funeral sales.
Reconstruction of our largest funeral operation in New Orleans began in early fiscal year 2007
and was completed in November 2007. Our second largest funeral home in New Orleans reopened in the
second quarter of 2007.
Year Ended October 31, 2007 Compared to Year Ended October 31, 2006—Continuing Operations
Funeral Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
| |
|
(In millions) |
|
Funeral Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
117.1 |
|
|
$ |
116.3 |
|
|
$ |
.8 |
|
Western Division |
|
|
143.8 |
|
|
|
146.1 |
|
|
|
(2.3 |
) |
Corporate Trust Management (1) |
|
|
18.4 |
|
|
|
17.8 |
|
|
|
.6 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Revenue |
|
$ |
279.3 |
|
|
$ |
280.2 |
|
|
$ |
(.9 |
) |
|
|
|
|
|
|
|
|
|
|
Funeral Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
99.3 |
|
|
$ |
97.9 |
|
|
$ |
1.4 |
|
Western Division |
|
|
116.4 |
|
|
|
116.6 |
|
|
|
(.2 |
) |
Corporate Trust Management (1) |
|
|
.7 |
|
|
|
.5 |
|
|
|
.2 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Costs |
|
$ |
216.4 |
|
|
$ |
215.0 |
|
|
$ |
1.4 |
|
|
|
|
|
|
|
|
|
|
|
Funeral Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
17.8 |
|
|
$ |
18.4 |
|
|
$ |
(.6 |
) |
Western Division |
|
|
27.4 |
|
|
|
29.5 |
|
|
|
(2.1 |
) |
Corporate Trust Management (1) |
|
|
17.7 |
|
|
|
17.3 |
|
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Gross Profit |
|
$ |
62.9 |
|
|
$ |
65.2 |
|
|
$ |
(2.3 |
) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Change in Average |
|
Change in Same- |
|
Same-Store |
| |
|
Revenue Per |
|
Store Funeral |
|
Cremation Rate |
| Same-Store Analysis |
|
Funeral Service |
|
Services |
|
2007 |
|
2006 |
Eastern Division |
|
|
2.4 |
% |
|
|
(1.3 |
)% |
|
|
35.1 |
% |
|
|
33.3 |
% |
Western Division |
|
|
4.1 |
% |
|
|
(2.8 |
)% |
|
|
42.5 |
% |
|
|
42.5 |
% |
Total |
|
|
3.5 |
%(1) |
|
|
(2.2 |
)% |
|
|
39.3 |
% |
|
|
38.6 |
% |
|
|
|
| (1) |
|
Corporate trust management consists of the trust management fees and funeral
merchandise and services trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by us at rates consistent with
industry norms based on the fair market value of the assets managed and are paid by the trusts
to our subsidiary, Investors Trust, Inc. The trust earnings represent earnings realized
over the life of the preneed contracts delivered during the relevant periods. See Notes 4 and 7
to the |
47
consolidated financial statements included in Item 8 for information regarding the cost
basis and market value of the trust assets and current performance of the trusts (i.e. current
realized gains and losses, interest income and dividends). Trust management fees included in
funeral revenue for 2007 and 2006 were $5.9 million and $5.5 million, respectively. As
corporate trust management is considered a separate operating segment, trust earnings are
included in total average revenue per call presented, but not in the Eastern and Western
divisions’ average revenue per call. Funeral trust earnings recognized with respect to preneed
contracts delivered included in funeral revenue for 2007 and 2006 were $12.5 million and $12.3
million, respectively.
Consolidated Operations—Funeral
Total funeral revenue from continuing operations decreased $0.9 million, or 0.3 percent, for
the year ended October 31, 2007, compared to the corresponding period in 2006. Our same-store
businesses achieved a 3.4 percent increase in the average revenue per traditional funeral service
and a 7.4 percent increase in the average revenue per cremation service. The increase in the
average revenue per traditional funeral and cremation service were partially offset by a shift in
mix to lower-priced cremation services. This resulted in an overall 3.5 percent increase in the
average revenue per funeral service in our same-store businesses. The cremation rate for our
same-store operations was 39.3 percent for the year ended October 31, 2007 compared to 38.6 percent
for the year ended October 31, 2006. We also recorded $1.6 million in funeral revenue related to
an out of period adjustment and $2.8 million in business interruption insurance proceeds related to
the 2005 hurricanes for the year ended October 31, 2006. We experienced a 2.2 percent decrease in
the number of funeral services performed by our same-store businesses, or 1,304 events out of the
58,631 total same-store events performed. We believe the primary factors contributing to the
increases in our average revenue per traditional and cremation service were normal inflationary
price increases, more effective merchandising and packaging, and our focus on training and
personalization.
Funeral gross profit from continuing operations decreased from $65.2 million in the year ended
October 31, 2006 to $62.9 million in the year ended October 31, 2007 due primarily to the decreases
in revenue discussed above and a $1.4 million increase in expenses. The increase in expenses is
primarily due to an increase in property, casualty and general liability insurance costs, along
with a $0.7 million impairment charge related to funeral licenses in the state of Maryland. Prior
to October 2007, funeral licenses in the state of Maryland were restricted to a specific number
that had previously been limited under Maryland law. The law changed in October 2007, and these
restrictions are no longer in place; therefore, the value of these assets has been impaired, and an
impairment charge was recorded.
Segment Discussion—Funeral
Funeral revenue in the Eastern division funeral segment increased primarily due to an increase
in the same-store average revenue per funeral service of 2.4 percent. The increase in average
revenue is partially offset by a 1.3 percent decrease in the number of funeral services performed
by our same-store businesses. For fiscal year 2006, funeral revenue in the Western division
segment was increased by a $1.1 million out of period adjustment and $2.8 million in business
interruption insurance proceeds related to the 2005 hurricanes. The Western division experienced a
2.8 percent decrease in the number of funeral services performed by our same-store businesses,
partially offset by an increase in the same-store average revenue per funeral service of 4.1
percent. Funeral revenue in the corporate trust management segment increased $0.6 million
primarily due to an increase of $0.4 million in trust management fees and $0.2 million in funeral
trust earnings.
Funeral gross profit for the Eastern division funeral segment decreased primarily due to an
increase in expenses. The increase in expenses is primarily due to an increase in property,
casualty and general liability insurance costs along with a $0.7 million impairment charge for
funeral licenses in the state of Maryland, as described above. Funeral gross profit for the
Western division funeral segment decreased primarily due to the decrease in revenue as discussed
above without a corresponding decrease in expenses. Expenses for the Western division funeral
segment would have decreased more significantly were it not for an increase in property, casualty
and general liability insurance.
48
As demonstrated in the table above, the same-store cremation rate increased for the Eastern
division funeral segments and was flat for the Western division funeral segment.
Cemetery Operations
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
|
|
|
|
|
|
|
|
Increase |
|
| |
|
2007 |
|
|
2006 |
|
|
(Decrease) |
|
| |
|
(In millions) |
|
Cemetery Revenue: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
143.2 |
|
|
$ |
136.8 |
|
|
$ |
6.4 |
|
Western Division |
|
|
90.4 |
|
|
|
87.8 |
|
|
|
2.6 |
|
Corporate Trust Management (1) |
|
|
9.9 |
|
|
|
9.4 |
|
|
|
.5 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Revenue |
|
$ |
243.5 |
|
|
$ |
234.0 |
|
|
$ |
9.5 |
|
|
|
|
|
|
|
|
|
|
|
Cemetery Costs: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
122.2 |
|
|
$ |
112.8 |
|
|
$ |
9.4 |
|
Western Division |
|
|
71.2 |
|
|
|
71.3 |
|
|
|
(.1 |
) |
Corporate Trust Management (1) |
|
|
.6 |
|
|
|
.5 |
|
|
|
.1 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Costs |
|
$ |
194.0 |
|
|
$ |
184.6 |
|
|
$ |
9.4 |
|
|
|
|
|
|
|
|
|
|
|
Cemetery Gross Profit: |
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
21.0 |
|
|
$ |
24.0 |
|
|
$ |
(3.0 |
) |
Western Division |
|
|
19.2 |
|
|
|
16.5 |
|
|
|
2.7 |
|
Corporate Trust Management (1) |
|
|
9.3 |
|
|
|
8.9 |
|
|
|
.4 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Gross Profit |
|
$ |
49.5 |
|
|
$ |
49.4 |
|
|
$ |
.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Corporate trust management consists of the trust management fees and cemetery
merchandise and services trust earnings recognized with respect to preneed contracts delivered
during the period. Trust management fees are established by us at rates consistent with
industry norms based on the fair market value of the assets managed and are paid by the trusts
to our subsidiary, Investors Trust, Inc. The trust earnings represent earnings realized over
the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 7 to
the consolidated financial statements included in Item 8 for information regarding the cost
basis and market value of the trust assets and current performance of the trusts (i.e. current
realized gains and losses, interest income and dividends). Trust management fees included in
cemetery revenue for 2007 and 2006 were $5.3 million and $4.9 million and cemetery trust
earnings recognized with respect to preneed contracts delivered included in cemetery revenue
for 2007 and 2006 were $4.6 million and $4.5 million, respectively. Perpetual care trust
earnings are included in the revenues and gross profit of the related geographic segment. |
Consolidated Operations—Cemetery
Cemetery revenue from continuing operations increased $9.5 million, or 4.1 percent, for the
year ended October 31, 2007, compared to the corresponding period in 2006, primarily due to an
increase in construction during the period on various cemetery projects and an increase in gross
cemetery property sales. The increase is due in part to serving customers interested in large
cemetery property purchases such as private estates. These increases were partially offset by a
decrease in merchandise delivery revenues due in part to a decrease in interments and an increase
in the reserve for cancellations, which was due in part to an improvement in the reserve for
cancellations in the prior year following Hurricane Katrina. Gross cemetery property sales
increased 6.2 percent for the year ended October 31, 2007 compared to the year ended October 31,
2006 from $107.7 million to $114.4 million and represent the aggregate contract price of cemetery
property sale contracts entered into during the period. Gross cemetery property sales are deferred
until either ten percent is collected or if construction occurs. Cemetery gross profit from
continuing operations increased $0.1 million from $49.4 million in fiscal year 2006 to $49.5
million in fiscal year 2007.
We experienced an average return, excluding unrealized gains and losses, of 4.4 percent in our
perpetual care trusts for the year ended October 31, 2007 resulting in revenue of $10.2 million,
compared to 4.6 percent for the corresponding period in 2006 resulting in revenue of $10.1 million. Perpetual care trust earnings
are included in the
49
geographic segments’ revenue and gross profit. See Notes 6 and 7 to the
consolidated financial statements included in Item 8 for information regarding the cost basis and
market value of those trust assets and the current performance of the trusts (i.e. current realized
gains and losses, interest income and dividends).
Segment Discussion—Cemetery
Cemetery revenue in the Eastern division cemetery segment increased primarily due to an
increase in construction during the year on various cemetery projects, partially offset by a
decrease in merchandise delivery revenue. Cemetery revenue in the Western division cemetery
segment increased primarily due to increases in cemetery property sales, partially offset by a
decrease in merchandise delivery revenue. Cemetery revenue in the corporate trust management
segment increased $0.5 million primarily due to a $0.4 million increase in trust management fees
and a $0.1 million increase in trust earnings recognized upon the delivery of preneed cemetery
merchandise and services.
Cemetery gross profit for the Eastern division decreased primarily due to an increase in
expenses associated with the increase in revenue and due to an increase in property, casualty and
general liability insurance costs. Cemetery gross profit for the Western division increased due to
increases in revenue noted above and due to out of period adjustments in fiscal year 2007 which had
a $1.3 million positive impact to gross profit.
Discontinued Operations
Included in discontinued operations for the year ended October 31, 2007 were gains on
dispositions, net of impairment losses, of $0.6 million compared to ($0.2) million recognized for
the year ended October 31, 2006. Revenues for fiscal year 2007 were $2.8 million compared to $3.9
million in fiscal year 2006. The effective tax rate for our discontinued operations for the year
ended October 31, 2007 was a 38.2 percent expense compared to a 116.3 percent benefit for the same
period in 2006. For additional information, see Notes 12 and 18 to the consolidated financial
statements included in Item 8.
Other
For the year ended October 31, 2007, hurricane related charges, net of recoveries, increased
$4.1 million from net recoveries of $1.6 million in fiscal year 2006 to net charges of $2.5 million
in fiscal year 2007. These charges were due to repairs at locations damaged by Hurricane Katrina.
The timing of the receipt of insurance proceeds is not in line with the timing of cash spending
related to Hurricane Katrina. For additional information, see Note 23 to the consolidated
financial statements included in Item 8.
Interest expense decreased $4.5 million to $25.1 million for the year ended October 31, 2007
compared to $29.6 million for the same period in 2006 due primarily to a 282 basis-point decrease
in the average interest rate during the year. The decrease in the average rate is primarily due to
additional interest incurred in fiscal year 2006 on the Company’s 6.25 percent senior notes as a
result of the Company’s inability to timely complete a required exchange offer and due in part to
the reduction in interest resulting from the issuance of $250.0 million of senior convertible
notes.
The effective tax rate for our continuing operations for the year ended October 31, 2007 was
31.5 percent compared to 36.0 percent for the year ended October 31, 2006. The reduced rate in
fiscal year 2007 was primarily caused by a tax benefit of $3.4 million attributable to the
utilization of a capital loss carryforward, coupled with a tax benefit of $0.8 million attributable
to the completion and settlement of an audit by the Commonwealth of Puerto Rico for tax periods
1999, 2000 and 2001. For additional information, see Note 18 to the consolidated financial
statements included in Item 8.
As of October 31, 2007, our outstanding debt totaled $450.3 million. On June 27, 2007, we
issued $125.0 million aggregate principal amount of 3.125 percent senior convertible notes due 2014
and $125.0 million aggregate principal amount of 3.375 percent senior convertible notes due 2016.
As part of this debt transaction, we prepaid the remaining balance of our Term Loan B for $164.0
million, sold common stock warrants and purchased call options resulting in a net cash outflow of
$16.2 million and recorded debt issuance costs of $6.2 million. We had net debt proceeds of $73.5 million ($250.0 million in proceeds of long-term debt and $176.5 million in
repayments of long-
50
term debt). Also, as part of this debt transaction, we repurchased
approximately 7.7 million shares of our Class A common stock for $64.2 million in negotiated
transactions which reduced our shareholder’s equity.
Preneed Sales into and Deliveries out of the Backlog
Preneed funeral sales decreased 1.1 percent for the year ended October 31, 2007 compared to
the same period in 2006. This decrease is primarily due to a decline in preneed funeral sales in
our Eastern division due to the selection of a new preneed insurance vendor and increased
regulatory requirements for licensing.
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 added $179.2
million in gross preneed sales to our funeral and cemetery merchandise and services backlog
(including $76.9 million related to insurance-funded preneed funeral contracts) during the year
ended October 31, 2007 to be recognized in the future (net of cancellations) as these prepaid
products and services are delivered, compared to gross sales of $182.5 million (including $74.5
million related to insurance-funded preneed funeral contracts) for the corresponding period in
2006. Deliveries out of our preneed funeral and cemetery merchandise and services backlog,
including accumulated trust earnings related to these preneed deliveries, amounted to $145.2
million for the year ended October 31, 2007, compared to $151.8 million for the corresponding
period in 2006, resulting in net increases in the backlog of $34.0 million and $30.7 million for
the years ended October 31, 2007 and 2006, respectively.
Liquidity and Capital Resources
General
We generate cash in our operations primarily from at-need sales, preneed sales that turn
at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn
at-need, monies collected on preneed sales that are not required to be trusted and cemetery
perpetual care trust earnings. Over the last five years, we have generated more than $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 $125.0 million revolving
credit facility will be sufficient to meet our cash requirements for the foreseeable future,
although we will need to renew or replace our revolving credit facility which matures in November
2009 and will need to refinance long-term debt becoming due in 2013 through 2016, as described
below.
As described above in the section “Overview—Recent Events,” during our 2008 fiscal year and
particularly during our fourth fiscal quarter, the United States and global economies experienced
substantial declines. The anticipated future effect of these events on our cash flow is described
in that section and in Item 1A. “Risk Factors.”
We have initiated discussions with members of our bank group regarding the renewal of the
$125.0 million revolving credit facility which matures in November 2009. While we have nothing
drawn as of October 31, 2008, we do have $14.6 million in letters of credit and a $30.8 million
bond we are required to maintain to guarantee our obligations related to funds we withdrew in
fiscal year 2001 from trusts in Florida. As of October 31, 2008, we had cash and cash equivalents
of $72.6 million. Given current credit market conditions, we expect a new revolving credit
facility to be more expensive than our existing facility and have tighter covenants, including,
potentially, more restrictive conditions on when we can pay dividends and repurchase stock. We
have entered into discussions to assess commitment levels, pricing and covenant expectations.
While we expect to renew or replace the current credit facility with acceptable terms, if we are
unable to negotiate a facility at acceptable terms, we would be required to cover the letters of
credit and may be required to cover the Florida bond with existing cash on hand. As of October 31,
2008, we had sufficient cash on hand to cover these funding obligations but if current economic
conditions do not improve and we are unable to secure a new credit facility, we will be required to
continue to impose cost and cash savings strategies which, for example, could result in the
elimination of the dividend, reduced capital expenditures and other cash savings steps. Our
availability under the revolving credit facility, after giving consideration to aforementioned
outstanding letters of credit and bond, was $79.6 million as of October 31, 2008. Our $200.0 million senior notes are not redeemable by us until February 15, 2009 and mature on
February 15, 2013. We also have $250.0 million in senior convertible notes, half of which mature
in 2014 and the other half of which mature in 2016. See the table below under “Contractual
Obligations and Commercial Commitments” for further information on our long-term debt obligations.
51
We plan to conserve our cash pending the renewal or replacement of our revolving credit
facility. Otherwise, we plan to continue to evaluate our options for deployment of cash flow as
opportunities arise. We believe that the use of our cash to pay dividends, repurchase debt and
stock, construct funeral homes on cemeteries of unaffiliated third parties and make acquisitions of
or investments in death care or related businesses are 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 infrastructure. We
regularly review acquisition and other strategic opportunities, which may require us to draw on our
revolving credit facility or pursue additional debt or equity financing.
We currently pay quarterly cash dividends of two and one-half cents per share on our Class A
and B common stock, which amounted to $9.4 million for year ended October 31, 2008. 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. We also have a $75.0 million
stock repurchase program, of which $26.6 million remains available as of October 31, 2008.
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
deemed appropriate, depending upon market conditions and other factors.
Cash Flow
Comparison of Fiscal Year 2008 to Fiscal Year 2007
Our operations provided cash of $84.5 million for the year ended October 31, 2008, compared to
$81.9 million for the corresponding period in 2007. The increase in operating cash flow is
primarily due to $9.3 million in net tax payments made in fiscal year 2007 compared to $4.0 million
in net tax refunds received in fiscal year 2008, which included approximately $21.8 million in tax
refunds in 2008 compared to $5.8 million in refunds in 2007. We expect to be a cash tax payer in
fiscal year 2009. The timing of additional refunds cannot be predicted at this time, although we
continually review our tax planning strategies looking for opportunities. These increases are
partially offset by $3.2 million of business interruption insurance proceeds and $1.3 million of
insurance proceeds, net of expenses, related to Hurricane Katrina, received in fiscal year 2007.
In addition, in fiscal year 2007, we withdrew $2.1 million of unusual trust withdrawals related to
the deferred revenue project and received $2.1 million due to the execution of a lease of our
mineral rights at one of our cemeteries to an outside third party.
Our investing activities resulted in a net cash outflow of $27.4 million for the year ended
October 31, 2008, compared to a net cash outflow of $34.2 million for the comparable period in
2007. The change is primarily due to the fact that we purchased several properties in 2007
resulting in a net cash outflow of $5.2 million compared to $1.4 million in 2008 and due to a
decline in capital expenditures related to Hurricane Katrina. For the year ended October 31, 2008,
capital expenditures amounted to $27.0 million, which included $17.4 million for maintenance
capital expenditures, $1.0 million for growth initiatives, $2.9 million related to Hurricane
Katrina and $5.7 million related to the implementation of new business systems. For the year ended October 31, 2007,
capital expenditures were $35.3 million, which included $18.9 million for maintenance capital
expenditures, $3.5 million for growth initiatives, $8.4 million related to Hurricane Katrina and
$4.5 million related to the implementation of new business systems. In the year ended October 31,
2008, there were no insurance proceeds related to hurricane damaged properties compared to $2.5
million in the same period in 2007.
Our financing activities resulted in a net cash outflow of $56.1 million for the year ended
October 31, 2008, compared to a net cash outflow of $20.1 million for the comparable period in
2007. This change is primarily due to net debt proceeds of $73.5 million ($250.0 million in
proceeds of long-term debt and $176.5 million in repayments of long-term debt) in 2007. There were
$0.2 million in debt repayments in 2008. In June 2007, we issued $250.0 million in senior
convertible notes. As part of this debt transaction, we prepaid the remaining balance of our Term
Loan B for $164.0 million, sold common stock warrants and purchased call options resulting in a net
cash outflow of $16.2 million and recorded debt issuance costs of $6.2 million. Also, as part of
this debt transaction, we
52
repurchased approximately 7.7 million shares of our Class A common stock
for $64.2 million, compared to $48.6 million in cash outflows related to our current stock
repurchase program in 2008.
Comparison of Fiscal Year 2007 to Fiscal Year 2006
Our operations provided cash of $81.9 million for the year ended October 31, 2007, compared to
providing cash of $90.1 million for the corresponding period in 2006. The change in operating cash
flow is due to cash inflows of $2.1 million of extraordinary trust withdrawals in 2007 compared to
cash inflows of $14.8 million for trust withdrawals in 2006 related to the deferred revenue
project. Also, $9.3 million of net tax payments were made during the year ended October 31, 2007
compared to $4.2 million of net tax payments for the comparable period in 2006 due to a net
operating loss carryforward utilized in fiscal year 2006. There were $1.3 million of net cash
inflows recorded related to Hurricane Katrina in 2007 compared to $3.8 million of cash outflows in
2006. The timing of receipt of insurance proceeds does not match the timing of cash spending
related to Hurricane Katrina. Lastly, we received $2.1 million due to the execution of a lease of
our mineral rights at one of our cemeteries to an outside third party.
Our investing activities resulted in a net cash outflow of $34.2 million for the year ended
October 31, 2007, compared to a net cash outflow of $21.4 million for the comparable period in
2006. For the year ended October 31, 2007, capital expenditures amounted to $35.3 million, which
included $18.9 million for maintenance capital expenditures, $3.5 million for growth initiatives,
$8.4 million related to Hurricane Katrina and $4.5 million related to the implementation of two new
business systems. For the year ended October 31, 2006, capital expenditures amounted to $28.9
million, which included $20.7 million for maintenance capital expenditures, $2.9 million for growth
initiatives and $5.3 million related to Hurricane Katrina. We also purchased several properties in
fiscal year 2007 resulting in a net cash outflow of $5.2 million. For the year ended October 31,
2007, there was a net cash inflow of $2.5 million for insurance proceeds related to hurricane
damaged properties compared to $6.0 million as of October 31, 2006.
Our financing activities resulted in a net cash outflow of $20.1 million for the year ended
October 31, 2007, compared to a net cash outflow of $65.4 million for the comparable period in
2006. This change is primarily due to net debt proceeds of $73.5 million ($250.0 million in
proceeds of long-term debt and $176.5 million in repayments of long-term debt) in fiscal year 2007
compared to $33.2 million of debt repayments in fiscal year 2006. A $30.0 million unscheduled Term
Loan B payment was made during the second quarter of 2006. In June 2007, we issued $250.0 million
in senior convertible notes as described in Note 15 to the consolidated financial statements
included in Item 8. As part of this debt transaction, we prepaid the remaining balance of our Term
Loan B for $164.0 million, sold common stock warrants and purchased call options resulting in a net
cash outflow of $16.2 million and recorded debt issuance costs of $6.2 million. Also, as part of
this debt transaction, we repurchased approximately 7.7 million shares of our Class A common stock
for $64.2 million, compared to $22.0 million in stock repurchases for the same period in 2006 under
our stock repurchase program in effect at that time.
Contractual Obligations and Commercial Commitments
As of October 31, 2008, our outstanding debt balance totaled $450.1 million. We have
contractual obligations requiring future cash payments under existing contractual arrangements.
The following table details our known future cash payments (in millions) related to various
contractual obligations as of October 31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Payments Due by Period |
|
| |
|
|
|
|
|
Fiscal Year |
|
|
Fiscal Years |
|
|
Fiscal Years |
|
|
|
|
| Contractual Obligations |
|
Total |
|
|
2009 |
|
|
2010-2011 |
|
|
2012-2013 |
|
|
Thereafter |
|
Long-term debt obligations (1) |
|
$ |
450.1 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
200.0 |
|
|
$ |
250.1 |
|
Interest on long-term debt (2) |
|
|
113.2 |
|
|
|
20.6 |
|
|
|
41.3 |
|
|
|
35.0 |
|
|
|
16.3 |
|
Operating lease agreements (3) |
|
|
30.6 |
|
|
|
4.6 |
|
|
|
6.0 |
|
|
|
3.5 |
|
|
|
16.5 |
|
Non-competition and other agreements (4) |
|
|
1.0 |
|
|
|
.5 |
|
|
|
.5 |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
594.9 |
|
|
$ |
25.7 |
|
|
$ |
47.8 |
|
|
$ |
238.5 |
|
|
$ |
282.9 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
53
|
|
|
| (1) |
|
See below for a breakdown of future scheduled principal payments and maturities of
our long-term debt by type as of October 31, 2008. |
| |
| (2) |
|
Includes contractual interest payments for our senior convertible notes, senior
notes and third-party debt. |
| |
| (3) |
|
Our noncancellable operating leases are primarily for land and buildings and expire
over the next 1 to 14 years, except for seven leases that expire between 2032 and 2039. In
the first quarter of 2008, we entered into a capital lease for equipment with a two-year term
for approximately $0.4 million. Our future minimum lease payments as of October 31, 2008 were
$4.6 million, $3.5 million, $2.5 million, $2.0 million, $1.5 million and $16.5 million for the
years ending October 31, 2009, 2010, 2011, 2012, 2013 and later years, respectively. |
| |
| (4) |
|
We have entered into non-competition agreements with prior owners and key employees
of acquired subsidiaries that expire at various times through 2012. During fiscal year 2001,
we decided to relieve some of the prior owners and key employees of their obligations not to
compete; however, we will continue to make the payments in accordance with the contract terms.
This category also includes separation pay related to former executive officers. |
The following table details our known potential or possible future cash payments related to
various contingent obligations as of October 31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Expiration by Period |
|
| |
|
|
|
|
|
Fiscal Year |
|
|
Fiscal Years |
|
|
Fiscal Years |
|
|
|
|
| Contingent Obligations |
|
Total |
|
|
2009 |
|
|
2010-2011 |
|
|
2012-2013 |
|
|
Thereafter |
|
Cemetery perpetual care
trust funding
obligation(1) |
|
$ |
13.3 |
|
|
$ |
13.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Long-term obligations
related to uncertain tax
positions(2) |
|
|
5.0 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18.3 |
|
|
$ |
13.3 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
5.0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
In those states where we have withdrawn realized net capital gains in the past from
our cemetery perpetual care trusts, regulators may seek replenishment of the realized net
capital losses either by requiring a cash deposit to the trust or by prohibiting or
restricting withdrawals of future earnings until they cover the loss. The estimated probable
funding obligation in the cemetery perpetual care trusts in these states was $13.3 million as
of October 31, 2008, and we recorded this as an increase in cemetery costs in fiscal year
2008. As of October 31, 2008, we had unrealized losses of $64.4 million in the trusts in
these states. Because all of these trusts currently have assets with a fair market value less
than the aggregate amounts required to be contributed to the trust, any additional realized
net capital losses in these trusts may result in a corresponding funding liability and
increase in cemetery costs. |
| |
| (2) |
|
As discussed in Notes 3 and 18 to the consolidated financial statements included in
Item 8, we adopted the provisions of FIN 48 on November 1, 2007. In accordance with the
provisions of FIN 48, we recorded $5.0 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, 2008, our outstanding debt balance was $450.1 million, consisting of $250.0
million in senior convertible notes, $200.0 million of 6.25 percent senior notes and $0.1 million
of other debt. There were no amounts drawn on the revolving credit facility. The following table
reflects future scheduled principal payments and maturities of our long-term debt (in millions) as
of October 31, 2008.
54
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Other |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Principally |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Seller |
|
|
|
|
| |
|
Revolving |
|
|
Senior |
|
|
|
|
|
|
Financing of |
|
|
|
|
| |
|
Credit |
|
|
Convertible |
|
|
|
|
|
|
Acquired |
|
|
|
|
| Fiscal Year Ending October 31, |
|
Facility |
|
|
Notes |
|
|
Senior Notes |
|
|
Operations |
|
|
Total |
|
2009 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
2010 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2011 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2012 |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
2013 |
|
|
— |
|
|
|
— |
|
|
|
200.0 |
|
|
|
— |
|
|
|
200.0 |
|
Thereafter |
|
|
— |
|
|
|
250.0 |
|
|
|
— |
|
|
|
.1 |
|
|
|
250.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total long-term debt |
|
$ |
— |
|
|
$ |
250.0 |
|
|
$ |
200.0 |
|
|
$ |
.1 |
|
|
$ |
450.1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Off-Balance Sheet Arrangements
Our off-balance sheet arrangements as of October 31, 2008 consist of the following two items:
| |
(1) |
|
the $30.8 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 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, |
| 2008 |
|
2007 |
|
2006 |
|
2005 |
|
2004 |
1.72 (1)
|
|
3.05 (2)
|
|
2.83 (3)
|
|
1.34 (4)(5)
|
|
1.97 (6) |
|
|
|
| (1) |
|
Pretax earnings for fiscal year 2008 include a charge of $2.3 million related to
Hurricanes Katrina and Ike, a charge of $26.0 million for impairment of goodwill, a $13.3
million charge related to the estimated probable obligation to fund the cemetery perpetual
care trust net realized losses and gains on dispositions, net impairment losses of ($0.4)
million. |
| |
| (2) |
|
Pretax 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. |
| |
| (3) |
|
Pretax earnings for fiscal year 2006 includes a net recovery of $1.6 million related
to Hurricane Katrina, business interruption proceeds of $3.2 million related to Hurricane
Katrina, a charge of $1.0 million for separation charges related to July 2005 restructuring of
our divisions and the retirement of an executive officer and gains on dispositions, net of
impairment losses of ($0.2) million. |
| |
| (4) |
|
Pretax earnings for fiscal year 2005 include a charge of $9.4 million for expenses
related to Hurricane Katrina, a charge of $1.5 million for separation charges related to the
July 2005 restructuring of our divisions, $1.3 million of gains on disposition, net of
impairment losses and $32.8 million for the loss on early extinguishment of debt related to
the 2005 debt refinancings. |
| |
| (5) |
|
Excludes the cumulative effect of change in accounting principles. |
| |
| (6) |
|
Pretax earnings for fiscal year 2004 include charges of $3.4 million for severance
and other costs relating to the workforce reductions announced in December 2003 and separation
payments to a former executive officer and ($0.2) million in gains on dispositions, net of
impairment losses |
55
For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax
earnings from continuing operations plus fixed charges (excluding interest capitalized during the
period). Fixed charges consist of interest expense, capitalized interest, amortization of debt
expense and discount or premium relating to any indebtedness and the portion of rental expense that
management believes to be representative of the interest component of rental expense.
Effect of Recent Accounting Standards
For additional information on changes in accounting principles and new accounting principles,
see Note 3 to the consolidated financial statements included in Item 8.
Inflation
Inflation has not had a significant impact on our operations over the past three years, nor is
it expected to have a significant impact in the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
The market risk inherent in our market risk sensitive instruments and positions is the
potential change arising from increases or decreases in the prices of marketable equity securities
and interest rates as discussed below. Generally, our market risk sensitive instruments and
positions are characterized as “other than trading.” Our exposure to market risk as discussed
below includes forward-looking statements and represents an estimate of possible changes in fair
value or future earnings that would occur assuming hypothetical future movements in equity markets
or interest rates. Our views on market risk are not necessarily indicative of actual results that
may occur, and do not represent the maximum possible gains and losses that may occur. Actual gains
and losses, fluctuations in equity markets, interest rates and the timing of transactions, may
differ from those estimated.
On June 27, 2007, we issued $125.0 million aggregate principal amount of 3.125 percent senior
convertible notes due 2014 and $125.0 million aggregate principal amount of 3.375 percent senior
convertible notes due 2016. As part of this transaction, we sold common stock warrants and
purchased call options. Such transactions were entered into to mitigate the potential dilutive
effect of the conversion feature of the senior convertible notes on our common stock. For
additional information about these transactions, see Note 15 to our consolidated financial
statements included in Item 8.
Marketable Equity Securities
As of October 31, 2008 and 2007, 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
$387.4 million and $598.0 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 such accounts would result in a change of approximately $38.7 million and $59.8
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, all of which are 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.
56
As of October 31, 2008, our long-term fixed-rate debt consists of our $200.0 million 6.25
percent senior notes, $125.0 million 3.125 percent senior convertible notes, $125.0 million 3.375
percent senior convertible notes and our third-party debt. On June 27, 2007 we issued the $250.0
million of senior convertible notes. This transaction is further discussed in Note 15 to our
consolidated financial statements included in Item 8. As of October 31, 2008 and 2007, the
carrying values of our long-term fixed-rate debt, including accrued interest, were approximately
$455.1 million and $455.7 million, respectively, compared to fair values of $331.6 million and
$457.1 million, respectively. Fair values were determined using quoted market prices. Each
approximate 10 percent change in the average interest rates applicable to determine the fair value
of such debt, 115 basis points for 2008 and 50 basis points for 2007 would result in changes of
approximately $17.6 million and $13.3 million, respectively, in the fair values of these
instruments. If these instruments are held to maturity, no change in fair value will be realized.
In June 2007, we prepaid the remaining balance of our variable-rate Term Loan B using proceeds
from the issuance of the senior convertible notes. As of October 31, 2008 and 2007, there were no
amounts drawn on the revolving credit facility.
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, refinancing balances
outstanding under our variable-rate senior secured credit facility with fixed-rate debt or by
entering into interest rate swaps.
As of October 31, 2008 and 2007, 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
$131.5 million and $159.0 million, respectively. Each 10 percent change in interest rates on these
fixed-income securities would result in changes of approximately $3.1 million and $3.8 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, 2008 and 2007, our 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 $138.6 million and $171.1 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 pretax earnings. As such, as of
October 31, 2008 and 2007, only $25.3 million and $27.1 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 2008 and 2007, would
result in changes of less than $0.1 million for 2008 and 2007 in our pretax earnings.
The fixed-income securities, 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 as discussed above.
Item 8. Financial Statements and Supplementary Data
Index to Consolidated Financial Statements
57
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, 2008 and 2007, and the results of their operations and their cash flows
for each of the three years in the period ended October 31, 2008 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, 2008, 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, the Company changed the manner in
which it accounts for uncertain tax positions effective November 1, 2007.
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.
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 18, 2008
58
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
286,607 |
|
|
$ |
279,330 |
|
|
$ |
280,237 |
|
Cemetery |
|
|
241,276 |
|
|
|
243,487 |
|
|
|
233,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
527,883 |
|
|
|
522,817 |
|
|
|
514,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
218,228 |
|
|
|
216,375 |
|
|
|
215,042 |
|
Cemetery |
|
|
208,838 |
|
|
|
194,012 |
|
|
|
184,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
427,066 |
|
|
|
410,387 |
|
|
|
399,617 |
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
100,817 |
|
|
|
112,430 |
|
|
|
114,613 |
|
Corporate general and administrative expenses |
|
|
(32,611 |
) |
|
|
(31,143 |
) |
|
|
(31,739 |
) |
Impairment of goodwill |
|
|
(25,952 |
) |
|
|
— |
|
|
|
— |
|
Hurricane related recoveries (charges), net |
|
|
(2,297 |
) |
|
|
(2,533 |
) |
|
|
1,628 |
|
Separation charges |
|
|
— |
|
|
|
(580 |
) |
|
|
(991 |
) |
Gains on dispositions and impairment (losses), net |
|
|
(353 |
) |
|
|
(44 |
) |
|
|
(153 |
) |
Other operating income, net |
|
|
819 |
|
|
|
1,651 |
|
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
Operating earnings |
|
|
40,423 |
|
|
|
79,781 |
|
|
|
84,691 |
|
Interest expense |
|
|
(24,115 |
) |
|
|
(25,065 |
) |
|
|
(29,633 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
(677 |
) |
|
|
— |
|
Investment and other income, net |
|
|
2,406 |
|
|
|
3,374 |
|
|
|
3,676 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
18,714 |
|
|
|
57,413 |
|
|
|
58,734 |
|
Income taxes |
|
|
22,407 |
|
|
|
18,099 |
|
|
|
21,154 |
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
|
(3,693 |
) |
|
|
39,314 |
|
|
|
37,580 |
|
|
|
|
|
|
|
|
|
|
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued operations before income taxes |
|
|
— |
|
|
|
807 |
|
|
|
(80 |
) |
Income tax expense (benefit) |
|
|
— |
|
|
|
308 |
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
— |
|
|
|
499 |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(3,693 |
) |
|
$ |
39,813 |
|
|
$ |
37,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
(.04 |
) |
|
$ |
.38 |
|
|
$ |
.35 |
|
Earnings from discontinued operations |
|
|
— |
|
|
|
.01 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(.04 |
) |
|
$ |
.39 |
|
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing operations |
|
$ |
(.04 |
) |
|
$ |
.38 |
|
|
$ |
.35 |
|
Earnings from discontinued operations |
|
|
— |
|
|
|
.01 |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(.04 |
) |
|
$ |
.39 |
|
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding (in thousands): |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
93,795 |
|
|
|
102,584 |
|
|
|
106,855 |
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
93,795 |
|
|
|
102,737 |
|
|
|
106,900 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends declared per common share |
|
$ |
.10 |
|
|
$ |
.10 |
|
|
$ |
.10 |
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
59
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2008 |
|
|
2007 |
|
ASSETS |
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
72,574 |
|
|
$ |
71,545 |
|
Marketable securities |
|
|
55 |
|
|
|
262 |
|
Receivables, net of allowances |
|
|
59,129 |
|
|
|
60,615 |
|
Inventories |
|
|
35,870 |
|
|
|
36,061 |
|
Prepaid expenses |
|
|
7,317 |
|
|
|
6,355 |
|
Deferred income taxes, net |
|
|
8,798 |
|
|
|
8,621 |
|
|
|
|
|
|
|
|
Total current assets |
|
|
183,743 |
|
|
|
183,459 |
|
Receivables due beyond one year, net of allowances |
|
|
70,671 |
|
|
|
83,608 |
|
Preneed funeral receivables and trust investments |
|
|
368,412 |
|
|
|
515,053 |
|
Preneed cemetery receivables and trust investments |
|
|
182,141 |
|
|
|
255,679 |
|
Goodwill |
|
|
247,236 |
|
|
|
273,286 |
|
Cemetery property, at cost |
|
|
375,832 |
|
|
|
373,038 |
|
Property and equipment, at cost: |
|
|
|
|
|
|
|
|
Land |
|
|
42,343 |
|
|
|
42,334 |
|
Buildings |
|
|
319,839 |
|
|
|
310,968 |
|
Equipment and other |
|
|
178,589 |
|
|
|
164,246 |
|
|
|
|
|
|
|
|
|
|
|
540,771 |
|
|
|
517,548 |
|
Less accumulated depreciation |
|
|
236,243 |
|
|
|
213,063 |
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
304,528 |
|
|
|
304,485 |
|
Deferred income taxes, net |
|
|
179,515 |
|
|
|
192,859 |
|
Cemetery perpetual care trust investments |
|
|
173,090 |
|
|
|
236,503 |
|
Non-current assets held for sale |
|
|
2,873 |
|
|
|
3,195 |
|
Other assets |
|
|
16,474 |
|
|
|
17,809 |
|
|
|
|
|
|
|
|
Total assets |
|
$ |
2,104,515 |
|
|
$ |
2,438,974 |
|
|
|
|
|
|
|
|
(continued)
60
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2008 |
|
|
2007 |
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
20 |
|
|
$ |
198 |
|
Accounts payable |
|
|
27,652 |
|
|
|
26,606 |
|
Accrued payroll and other benefits |
|
|
14,133 |
|
|
|
16,316 |
|
Accrued insurance |
|
|
21,287 |
|
|
|
21,252 |
|
Accrued interest |
|
|
5,864 |
|
|
|
5,576 |
|
Estimated obligation to fund cemetery perpetual care trust |
|
|
13,281 |
|
|
|
— |
|
Other current liabilities |
|
|
16,198 |
|
|
|
17,958 |
|
Income taxes payable |
|
|
2,061 |
|
|
|
4,177 |
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
100,496 |
|
|
|
92,083 |
|
Long-term debt, less current maturities |
|
|
450,095 |
|
|
|
450,115 |
|
Deferred preneed funeral revenue |
|
|
245,182 |
|
|
|
256,603 |
|
Deferred preneed cemetery revenue |
|
|
275,835 |
|
|
|
284,507 |
|
| Non-controlling interest in funeral and cemetery trusts |
|
|
475,420 |
|
|
|
683,052 |
|
Other long-term liabilities |
|
|
20,479 |
|
|
|
13,869 |
|
|
|
|
|
|
|
|
Total liabilities |
|
|
1,567,507 |
|
|
|
1,780,229 |
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 20)
Non-controlling interest in perpetual care trusts |
|
|
171,371 |
|
|
|
235,427 |
|
|
|
|
|
|
|
|
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 88,693,127 and 94,865,387 shares at
October 31, 2008 and 2007, respectively |
|
|
88,693 |
|
|
|
94,865 |
|
Class B authorized 5,000,000 shares; issued and
outstanding 3,555,020 shares at October 31, 2008 and
2007; 10 votes per share convertible into an equal
number of Class A shares |
|
|
3,555 |
|
|
|
3,555 |
|
Additional paid-in capital |
|
|
536,902 |
|
|
|
583,789 |
|
Accumulated deficit |
|
|
(263,550 |
) |
|
|
(258,902 |
) |
Accumulated other comprehensive income : |
|
|
|
|
|
|
|
|
Unrealized appreciation of investments |
|
|
37 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total accumulated other comprehensive income |
|
|
37 |
|
|
|
11 |
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
365,637 |
|
|
|
423,318 |
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
2,104,515 |
|
|
$ |
2,438,974 |
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
61
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unearned |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Additional |
|
|
|
|
|
|
Restricted |
|
|
Unrealized |
|
|
Total |
|
| |
|
Common |
|
|
Paid-In |
|
|
Accumulated |
|
|
Stock |
|
|
Depreciation |
|
|
Shareholders’ |
|
| |
|
Stock (1) |
|
|
Capital |
|
|
Deficit |
|
|
Compensation |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2005 |
|
$ |
108,670 |
|
|
$ |
667,663 |
|
|
$ |
(336,308 |
) |
|
$ |
(569 |
) |
|
$ |
(3 |
) |
|
$ |
439,453 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: net earnings |
|
|
— |
|
|
|
— |
|
|
|
37,593 |
|
|
|
— |
|
|
|
— |
|
|
|
37,593 |
|
Adoption of SFAS No. 123R |
|
|
— |
|
|
|
(569 |
) |
|
|
— |
|
|
|
569 |
|
|
|
— |
|
|
|
— |
|
Restricted stock activity |
|
|
6 |
|
|
|
327 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
333 |
|
Issuance of common stock |
|
|
150 |
|
|
|
648 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
798 |
|
Stock options exercised |
|
|
33 |
|
|
|
149 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
182 |
|
Stock option expense |
|
|
— |
|
|
|
1,203 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
1,203 |
|
Purchase and retirement of common
stock |
|
|
(3,896 |
) |
|
|
(18,100 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,996 |
) |
Dividends ($.10 per share) |
|
|
— |
|
|
|
(10,673 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,673 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2006 |
|
$ |
104,963 |
|
|
$ |
640,648 |
|
|
$ |
(298,715 |
) |
|
$ |
— |
|
|
$ |
(3 |
) |
|
$ |
446,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Appreciation |
|
|
Total |
|
| |
|
Common |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
(Depreciation) |
|
|
Shareholders’ |
|
| |
|
Stock (1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2006 |
|
$ |
104,963 |
|
|
$ |
640,648 |
|
|
$ |
(298,715 |
) |
|
$ |
(3 |
) |
|
$ |
446,893 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings |
|
|
— |
|
|
|
— |
|
|
|
39,813 |
|
|
|
— |
|
|
|
39,813 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of
investments, net of deferred
tax expense of ($8) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
39,813 |
|
|
|
14 |
|
|
|
39,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock activity |
|
|
531 |
|
|
|
(144 |
) |
|
|
— |
|
|
|
— |
|
|
|
387 |
|
Issuance of common stock |
|
|
213 |
|
|
|
1,249 |
|
|
|
— |
|
|
|
— |
|
|
|
1,462 |
|
Stock options exercised |
|
|
411 |
|
|
|
2,221 |
|
|
|
— |
|
|
|
— |
|
|
|
2,632 |
|
Stock option expense |
|
|
— |
|
|
|
1,576 |
|
|
|
— |
|
|
|
— |
|
|
|
1,576 |
|
Tax benefit associated with
stock options exercised |
|
|
— |
|
|
|
76 |
|
|
|
— |
|
|
|
— |
|
|
|
76 |
|
Purchase and retirement of
common stock |
|
|
(7,698 |
) |
|
|
(56,503 |
) |
|
|
— |
|
|
|
— |
|
|
|
(64,201 |
) |
Purchase of call options, net of
tax benefit of $21,000 |
|
|
— |
|
|
|
(39,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
(39,000 |
) |
Sale of common stock warrants |
|
|
— |
|
|
|
43,850 |
|
|
|
— |
|
|
|
— |
|
|
|
43,850 |
|
Dividends ($.10 per share) |
|
|
— |
|
|
|
(10,184 |
) |
|
|
— |
|
|
|
— |
|
|
|
(10,184 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2007 |
|
$ |
98,420 |
|
|
$ |
583,789 |
|
|
$ |
(258,902 |
) |
|
$ |
11 |
|
|
$ |
423,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(continued)
62
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized |
|
|
Total |
|
| |
|
Common |
|
|
Additional Paid-In |
|
|
Accumulated |
|
|
Appreciation |
|
|
Shareholders’ |
|
| |
|
Stock (1) |
|
|
Capital |
|
|
Deficit |
|
|
of Investments |
|
|
Equity |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2007 |
|
$ |
98,420 |
|
|
$ |
583,789 |
|
|
$ |
(258,902 |
) |
|
$ |
11 |
|
|
$ |
423,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss |
|
|
— |
|
|
|
— |
|
|
|
(3,693 |
) |
|
|
— |
|
|
|
(3,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Unrealized appreciation of
investments, net of deferred
tax expense of ($15) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total other comprehensive income |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
|
— |
|
|
|
— |
|
|
|
(3,693 |
) |
|
|
26 |
|
|
|
(3,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cumulative effect of adoption of
FIN 48 |
|
|
— |
|
|
|
— |
|
|
|
(955 |
) |
|
|
— |
|
|
|
(955 |
) |
Restricted stock activity |
|
|
9 |
|
|
|
440 |
|
|
|
— |
|
|
|
— |
|
|
|
449 |
|
Issuance of common stock |
|
|
172 |
|
|
|
1,082 |
|
|
|
— |
|
|
|
— |
|
|
|
1,254 |
|
Stock options exercised |
|
|
265 |
|
|
|
1,249 |
|
|
|
— |
|
|
|
— |
|
|
|
1,514 |
|
Stock option expense |
|
|
— |
|
|
|
1,544 |
|
|
|
— |
|
|
|
— |
|
|
|
1,544 |
|
Tax benefit associated with
stock options exercised |
|
|
— |
|
|
|
181 |
|
|
|
— |
|
|
|
— |
|
|
|
181 |
|
Purchase and retirement of
common stock |
|
|
(6,618 |
) |
|
|
(42,009 |
) |
|
|
— |
|
|
|
— |
|
|
|
(48,627 |
) |
Dividends ($.10 per share) |
|
|
— |
|
|
|
(9,374 |
) |
|
|
— |
|
|
|
— |
|
|
|
(9,374 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance October 31, 2008 |
|
$ |
92,248 |
|
|
$ |
536,902 |
|
|
$ |
(263,550 |
) |
|
$ |
37 |
|
|
$ |
365,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (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
63
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
$ |
(3,693 |
) |
|
$ |
39,813 |
|
|
$ |
37,593 |
|
Adjustments to reconcile net earnings (loss) to net cash provided by
operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Gains) on dispositions and impairment losses, net |
|
|
353 |
|
|
|
(565 |
) |
|
|
327 |
|
Impairment of goodwill |
|
|
25,952 |
|
|
|
— |
|
|
|
— |
|
Loss on early extinguishment of debt |
|
|
— |
|
|
|
677 |
|
|
|
— |
|
Depreciation and amortization |
|
|
28,275 |
|
|
|
27,638 |
|
|
|
25,666 |
|
Provision for doubtful accounts |
|
|
7,995 |
|
|
|
9,756 |
|
|
|
6,795 |
|
Share-based compensation |
|
|
2,819 |
|
|
|
2,687 |
|
|
|
2,146 |
|
Excess tax benefits from share-based payment arrangements |
|
|
(227 |
) |
|
|
(153 |
) |
|
|
(11 |
) |
Provision for deferred income taxes |
|
|
7,174 |
|
|
|
4,337 |
|
|
|
14,281 |
|
Estimated obligation to fund cemetery perpetual care trust |
|
|
13,281 |
|
|
|
— |
|
|
|
— |
|
Other |
|
|
443 |
|
|
|
908 |
|
|
|
2,428 |
|
Changes in assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
(Increase) decrease in receivables |
|
|
12,107 |
|
|
|
(7,795 |
) |
|
|
(22,256 |
) |
(Increase) decrease in prepaid expenses |
|
|
(1,031 |
) |
|
|
73 |
|
|
|
(2,741 |
) |
Increase in inventories and cemetery property |
|
|
(2,509 |
) |
|
|
(4,365 |
) |
|
|
(4,193 |
) |
Increase in accounts payable and accrued expenses |
|
|
2,623 |
|
|
|
1,741 |
|
|
|
10,454 |
|
Net effect of preneed funeral production and maturities: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in preneed funeral receivables and trust investments |
|
|
36,604 |
|
|
|
4,167 |
|
|
|
4,567 |
|
Decrease in deferred preneed funeral revenue |
|
|
(11,067 |
) |
|
|
(15,435 |
) |
|
|
(15,375 |
) |
Increase (decrease) in funeral non-controlling interest |
|
|
(30,642 |
) |
|
|
10,867 |
|
|
|
5,058 |
|
Net effect of preneed cemetery production and deliveries: |
|
|
|
|
|
|
|
|
|
|
|
|
Decrease in preneed cemetery receivables and trust investments |
|
|
15,910 |
|
|
|
5,042 |
|
|
|
3,479 |
|
Increase (decrease) in deferred preneed cemetery revenue |
|
|
(8,673 |
) |
|
|
(11,807 |
) |
|
|
10,235 |
|
Increase (decrease) in cemetery non-controlling interest |
|
|
(9,599 |
) |
|
|
11,681 |
|
|
|
11,686 |
|
Increase (decrease) in other |
|
|
(1,572 |
) |
|
|
2,674 |
|
|
|
(38 |
) |
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
|
84,523 |
|
|
|
81,941 |
|
|
|
90,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable securities |
|
|
20,219 |
|
|
|
— |
|
|
|
— |
|
Purchases of marketable securities |
|
|
(19,956 |
) |
|
|
(1 |
) |
|
|
(53 |
) |
Proceeds from sale of assets, net |
|
|
599 |
|
|
|
3,750 |
|
|
|
1,218 |
|
Purchase of subsidiaries and other investments, net of cash acquired |
|
|
(1,378 |
) |
|
|
(5,203 |
) |
|
|
— |
|
Insurance proceeds related to hurricane damaged properties |
|
|
— |
|
|
|
2,529 |
|
|
|
6,000 |
|
Additions to property and equipment |
|
|
(26,995 |
) |
|
|
(35,310 |
) |
|
|
(28,907 |
) |
Other |
|
|
144 |
|
|
|
49 |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(27,367 |
) |
|
|
(34,186 |
) |
|
|
(21,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
— |
|
|
|
250,000 |
|
|
|
— |
|
Repayments of long-term debt |
|
|
(198 |
) |
|
|
(176,547 |
) |
|
|
(33,168 |
) |
Debt issue costs |
|
|
— |
|
|
|
(6,217 |
) |
|
|
— |
|
Proceeds from sale of common stock warrants |
|
|
— |
|
|
|
43,850 |
|
|
|
— |
|
Issuance of common stock |
|
|
1,845 |
|
|
|
3,066 |
|
|
|
368 |
|
Purchase of call options |
|
|
— |
|
|
|
(60,000 |
) |
|
|
— |
|
Purchase and retirement of common stock |
|
|
(48,627 |
) |
|
|
(64,201 |
) |
|
|
(21,996 |
) |
Dividends |
|
|
(9,374 |
) |
|
|
(10,184 |
) |
|
|
(10,673 |
) |
Excess tax benefits from share-based payment arrangements |
|
|
227 |
|
|
|
153 |
|
|
|
11 |
|
Other |
|
|
— |
|
|
|
— |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
Net cash used in financing activities |
|
|
(56,127 |
) |
|
|
(20,080 |
) |
|
|
(65,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
1,029 |
|
|
|
27,675 |
|
|
|
3,265 |
|
Cash and cash equivalents, beginning of year |
|
|
71,545 |
|
|
|
43,870 |
|
|
|
40,605 |
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
72,574 |
|
|
$ |
71,545 |
|
|
$ |
43,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Supplemental cash flow information: |
|
|
|
|
|
|
|
|
|
|
|
|
Cash paid (received) during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes, net |
|
$ |
(3,980 |
) |
|
$ |
9,276 |
|
|
$ |
4,266 |
|
Interest |
|
$ |
22,120 |
|
|
$ |
24,772 |
|
|
$ |
27,564 |
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Issuance of common stock to executive officers and directors |
|
$ |
923 |
|
|
$ |
1,028 |
|
|
$ |
612 |
|
Issuance of restricted stock, net of forfeitures |
|
$ |
162 |
|
|
$ |
4,136 |
|
|
$ |
35 |
|
See accompanying notes to consolidated financial statements
64
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(1) The Company
Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and
services in the death care industry in the United States. Through its subsidiaries, the Company
offers a complete range of funeral merchandise and services, along with cemetery property,
merchandise and services, both at the time of need and on a preneed basis. As of October 31, 2008,
the Company owned and operated 221 funeral homes and 139 cemeteries in 24 states within the United
States and Puerto Rico. The Company has five operating and reportable segments consisting of a
corporate trust management segment and a funeral and cemetery segment for each of two geographic
areas: Western and Eastern. Additional information on segments can be found in Note 21.
(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 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 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.
Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds with
Issuer Option to Settle for Cash upon Conversion,” (“EITF 90-19”), EITF Issue No. 00-19,
“Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a
Company’s Own Stock,” (“EITF 00-19”), and EITF Issue No. 01-06, “The Meaning of Indexed to a
Company’s Own Stock” (“EITF 01-06”), the senior convertible notes issued in fiscal year 2007 are
accounted for as a liability with a carrying amount equal to their principal amount in the
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)
consolidated balance sheet and the embedded conversion option in the senior convertible notes has
not been accounted for as a separate derivative.
The call options purchased and warrants sold contemporaneously with the sale of the senior
convertible notes are equity contracts that meet the paragraph 11(a) scope exception of Statement
of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and
Hedging Activities,” (“SFAS No. 133”) 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 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, 2008, 2007 and 2006, depreciation expense totaled $25,456, $25,146 and $22,841,
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 in accordance with SFAS No. 66,
“Accounting for Sales of Real Estate” (“SFAS No. 66”).
(g) Goodwill
The Company’s evaluation of the goodwill of its operations consists of 13 reporting units.
Those reporting units are: corporate trust management; the Western division funeral operating
segment comprised of two reporting units (Western-North and Western-South regions aggregated and
Midwestern, Southern and Southwestern regions aggregated); the Western division cemetery operating
segment comprised of three reporting units (Western-North
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)
region, Western-South region and Midwestern, Southern and Southwestern regions aggregated); the
Eastern division funeral operating segment comprised of four reporting units (Southern region,
Puerto Rico region, Northern region and Central region); and the Eastern division cemetery
operating segment comprised of three reporting units (Puerto Rico region, Southern region and
Northern and Central regions aggregated).
Goodwill of a reporting unit must be tested for impairment on at least an annual basis. The
Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal
year. In addition to an annual review, the Company assesses the impairment of goodwill whenever
events or changes in circumstances indicate that the carrying value may be greater than fair value.
Factors the Company considers important that could trigger an impairment review include
significant underperformance relative to historical or projected future operating results,
significant changes in the manner of the use of the Company’s assets or the strategy for its
overall business and significant negative industry or economic trends.
The Company’s goodwill impairment test involves estimates and management judgment. The
Company determines fair value of each reporting unit using a discounted cash flow valuation
methodology. From time to time, it may obtain assistance from third parties in its evaluation. 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. In projecting its cash
flows, the Company used growth rates of three to five percent. The Company adjusted the results
for its estimate of the impact of the realized losses in its trusts on its cash flows. For the
discount rate, the Company used 8.3 percent, which reflected its weighted average cost of capital
determined based on its industry and supplier industries and capital structure as adjusted for
equity risk premiums and size risk premiums based on its market capitalization. Fair value is
calculated as the sum of the projected discounted cash flows of the reporting units over the next
five years and terminal value at the end of those five years. The terminal value is calculated as
the projected EBITDA at the end of the five year period divided by the discount rate minus terminal
growth rates ranging from 2 to 3.5 percent. The Company considered sensitivities within the
terminal values and used the midpoint enterprise value as its best estimate.
Step two of the impairment test involves determining estimates of fair values of the Company’s
assets and liabilities. The Company may obtain assistance from third parties in assessing the fair
value of certain of its assets, primarily real estate, in performing the step two analysis.
In reviewing goodwill for impairment, the Company first compares the fair value of each of its
reporting units with its carrying amount (including goodwill). If the carrying amount of a
reporting unit (including goodwill) exceeds its fair value, the Company then measures the amount of
impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting
unit’s goodwill with the carrying amount of that goodwill. The
implied fair value of a reporting unit’s goodwill is determined in the same manner as the amount of
goodwill recognized in a business combination is determined. 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.
An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair
value. See Note 13 for a discussion of the 2008 goodwill impairment charge.
(h) Stock-Based Compensation
Effective November 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS
No. 123R”), using the modified prospective application transition method. Under this transition
method, compensation cost for the period includes the portion vesting in the period for (1) all
share-based compensation arrangements
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)
granted prior to, but not vested as of November 1, 2005, based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock Based
Compensation” and (2) all share-based compensation arrangements granted subsequent to November 1,
2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No.
123R. See Note 19 for additional information on SFAS No. 123R.
(i) Funeral Revenue
The Company sells price-guaranteed prearranged funeral services and merchandise under
contracts that provide for delivery of the services and merchandise at the time of death.
Prearranged funeral services are recorded as funeral revenue in the period the funeral is
performed. Prearranged funeral merchandise is recognized as revenue upon delivery. When a
contract turns at-need or the merchandise is delivered, the contract face value along with related
trust dividends, interest income and realized gains and losses are included in revenue along with
original contract principal. Prior to performing the funeral or delivering of the merchandise,
such sales and related trust earnings are deferred. Funeral services and merchandise sold at the
time of need are recorded as funeral revenue in the period the funeral is performed or the
merchandise is delivered. The Company records cash advance items such as public transportation
arranged on behalf of a customer on a net basis. Discounts are also recorded on a net basis in
revenue. The Company presents all taxes assessed by governmental authorities on its
revenue-producing transactions (i.e., sales taxes) as well as the recoveries from its customers
from these taxes on a net basis in its consolidated financial statements.
Because preneed services or merchandise will not be provided until the future, most states
require that all or a portion of the customer payments under these contracts be protected for the
benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be
placed into trust accounts (“trust-funded preneed funeral contracts”). Alternatively, where
allowed, customers may purchase a life insurance or annuity policy from third-party insurance
companies to fund their preneed funeral contracts (“insurance-funded preneed funeral contracts”).
The funeral goods and services selected at the time of contract origination will be funded by the
insurance policy proceeds, which include increasing insurance benefits. Under either customer
funding option, the Company enters into a preneed funeral contract with the customer to provide
funeral services in the future. See discussion of insurance-funded preneed funeral contracts
below.
When a trust-funded preneed funeral contract is entered into, the Company records an asset
(included in preneed funeral receivables and trust investments) and a corresponding liability
(included in deferred preneed funeral revenues) for the contract price. Principal amounts
deposited in the trust or escrow accounts generally range from 70 percent to 90 percent of each
installment received. The sale of caskets is treated in some jurisdictions in the same manner as
the sale of cemetery merchandise and in some jurisdictions as the sale of funeral services for
trusting purposes. As the customer makes payments on the contract prior to performance by the
Company, the Company deposits into the related trust the required portion of the payment and
reclassifies the corresponding amount from deferred preneed
funeral revenues into non-controlling interest in funeral and cemetery trusts.
The Company defers all dividends and interest earned and net capital gains and losses realized
by preneed funeral trust or escrow accounts until the underlying service or merchandise is
delivered. Unrealized capital gains and losses are not allocated to contracts. When a contract is
delivered, the earned interest, dividends and net realized capital gain or loss which have been
allocated to the contract are recognized as components of revenue along with the original contract
sales price.
Deferred preneed funeral revenue represents future funeral contract revenues. In addition to
amounts receivable from customers and amounts 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
68
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
non-distributable
net trust investment earnings where the related cash or investments are held in trust accounts are
included in non-controlling interest in funeral and cemetery trusts.
Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled
to receive a refund of the funds held in trust. In many jurisdictions, the Company may be
obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust
including investment income at the time of cancellation. If the fair market value of the trusts
were to decline below the estimated costs to deliver the underlying products and services, the
Company would record a charge to earnings to record a liability for the expected loss on the
delivery of contracts in the 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, 2008, 2007 and
2006. 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,
2008 and 2007 was $477,069 and $448,735, 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 $3,299 and $3,295 for October 31, 2008
and 2007, respectively. The costs related to the commissions are expensed as incurred. Proceeds
of these policies may be used by customers for other purposes and are portable to other funeral
service providers or for completely separate purposes. Nothing more is recorded until the
contracted service or merchandise is delivered. At that time, the face amount of the contract and
the build-up in the face value of the contract (i.e., the policy proceeds) are recorded as funeral
revenue, as well as the related costs to deliver the contract, and a receivable from the insurance
company for the policy proceeds is recorded as a funeral receivable.
(j) Cemetery Revenue
The Company sells price-guaranteed preneed cemetery merchandise and services under contracts
that provide for delivery of the merchandise and services at the time of need. Preneed cemetery
merchandise and service
sales are recorded as cemetery revenue in the period the merchandise is delivered or service is
performed. Prior to that time, such sales are deferred. Cemetery merchandise and services sold at
the time of need are recorded as cemetery revenue in the period the service is performed or the
merchandise is delivered. Discounts are recorded on a net basis in revenue. The Company presents
all taxes assessed by governmental authorities on its revenue-producing transactions (i.e., sales
taxes) as well as the recoveries from its customers from these taxes on a net basis in its
consolidated financial statements.
Some or all of the funds received under preneed cemetery contracts for merchandise or services
may be required to be placed into trust accounts, pursuant to applicable state law. With respect
to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30
percent to 50 percent of each installment received. With respect to the preneed sale of cemetery
services, the Company is generally required to place in trust 70 percent to 90 percent of each
installment received. When a trust-funded preneed cemetery contract is entered into, the Company
records an asset (included in preneed cemetery receivables and trust investments) and a
corresponding liability (included in deferred preneed cemetery revenues) for the contract price.
As the customer makes payments on the contract prior to performance by the Company, the Company
deposits into the related trust the required portion of the payment and reclassifies the
corresponding amount from deferred preneed cemetery revenues into non-controlling interest in
funeral and cemetery trusts.
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
69
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
amounts not required to be trusted, this includes distributed and distributable
trust investment earnings associated with unperformed preneed cemetery services or undelivered
preneed cemetery merchandise where the related cash or investments are not held in trust accounts
(generally because the Company was permitted to withdraw the cash from the trust before performance
of the service or delivery of the merchandise). Future contract revenues and non-distributable net
trust investment earnings where the related cash or investments are held in trust accounts are
included in non-controlling interest in funeral and cemetery trusts.
When the contract is delivered, the Company records in revenue the original contract sales
price along with dividends, interest income and net realized capital gains and losses. Until that
time, the Company defers all dividends and interest earned and net capital gains and losses
realized by preneed cemetery merchandise and services trust or escrow accounts as a component of
non-controlling interest. Unrealized capital gains and losses are not allocated to contracts.
Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts
are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in
unregulated jurisdictions where escrow accounts are used.
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 SFAS No. 66.
Under SFAS No. 66, 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 in accordance with SFAS No. 66. As of October 31, 2008 and
2007, the amount of inventory included in the Company’s consolidated balance sheets on which the 10
percent collection requirement has not been met was $1,122 and $1,662, respectively. Revenue
related to the preneed sale of cemetery property prior to its construction is recognized on a
percentage of completion method of accounting as construction occurs. The Company measures the
percentage of completion by taking the costs incurred to date and dividing that number by the total
projected cost of the project.
Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of
the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from
these trusts, which have been established in most jurisdictions in which the Company operates
cemeteries, is used for maintenance of those cemeteries, but principal, including in some
jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are
received, the Company generally funds the perpetual care trust in the same proportion as the
payment bears to the contract amount. For example, if the Company receives 20 percent of the
contract price, it places in trust 20 percent of the total amount it is required to place in the
cemetery perpetual care trust for that contract. The Company currently recognizes and withdraws
all dividend and interest income earned and, where permitted, capital gains realized by cemetery
perpetual care funds.
If the Company realizes net losses in those states that allowed it to withdraw capital gains,
these states may require the Company to make cash deposits to the trust to cover the net loss, or
may require the Company to stop withdrawing earnings until future earnings cover the net losses.
Some of the 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 8.9 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
The Company implemented Financial Accounting Standards Board (“FASB”) Interpretation No. 46,
“Consolidation of Variable Interest Entities” (“FIN 46R”) as of April 30, 2004, which resulted in
the consolidation
70
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
of the Company’s preneed funeral and cemetery merchandise and services trusts and
the Company’s cemetery perpetual care trusts. The implementation of FIN 46R 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 of FIN 46R 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 FIN 46R 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 non-controlling
interests in its financial statements to reflect third-party interests in these trusts. The
Company classifies deposits to the funeral and cemetery merchandise and services trusts as
non-controlling liability interests and classifies deposits to the cemetery perpetual care trusts
as non-controlling interests outside of liabilities.
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 non-controlling interest in funeral and cemetery trusts in the Company’s consolidated balance
sheet. Dividends, interest income and realized gains and losses 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 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 non-controlling interest in cemetery perpetual care trusts).
Certain states allow the Company to withdraw realized capital gains, and other states prohibit
these withdrawals. These earnings and related funds are intended to defray cemetery maintenance
costs and are recorded as revenue. In the event that the Company has been allowed to withdraw
realized gains and there are realized losses in the trust, the Company may determine it has a
funding obligation to restore the net realized losses of the trust. A charge is recorded in the
statement of earnings at the time it is considered probable that the Company will be required to
restore the realized losses.
See Notes 4, 5 and 6 for fair market value information for the 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 which it considers recovery of value to be
remote.
Cash flows from preneed funeral and cemetery merchandise and services contracts and cemetery
perpetual care contracts are presented as operating cash flows in the Company’s consolidated
statements of cash flows, with related unrealized gains and losses excluded as they are
attributable to non-controlling interests and flow through accumulated other comprehensive income
or loss in the Company’s consolidated balance sheet.
(l) Trust Fee Revenue
71
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
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
determines which trusts are in a net loss position by comparing the aggregate market value of the
trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost
basis exceeds the aggregate market value of the investments, the trust is considered to be in a net
loss position. For trusts in a net loss position, the Company adds the sales prices of the
underlying contracts and net realized earnings, then subtracts net unrealized losses to derive the
net amount of proceeds for contracts associated with the trusts in question as of that particular
balance sheet date. The Company then looks at unrealized gains and losses based on current market
prices quoted for the investments, but does not include future expected returns on the investments
in its analysis. The Company compares the amount of proceeds 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 funeral 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.
(n) Allowance for Doubtful Accounts and Sales Cancellations
The Company establishes an allowance for doubtful accounts based on a range of percentages
applied to accounts receivable aging categories. These percentages are based on historical
collection and write-off experience. The Company establishes a reserve for cancellations for
cemetery property sales based on historical cancellations and recent write-off activity. This
reserve is recorded as a reduction of cemetery revenue. The Company establishes an allowance for
preneed funeral and cemetery merchandise and services trust receivables. This reserve is recorded
as a reduction in preneed receivables and preneed deferred revenue. The Company also establishes
an allowance for cancellations for insurance and third-party commissions based on historical
experience for cancellations of insurance contracts within the period of refundability.
(o) Income Taxes
Income taxes are accounted for using the asset and liability method under which deferred
income taxes are recognized for the tax consequences of “temporary differences” by applying enacted
statutory tax rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that includes the enactment
date. Management provides a valuation allowance against the deferred tax asset for amounts which
are not considered more likely than not to be realized. For additional information see Note 18.
For the purpose of calculating income taxes for discontinued operations, earnings (loss) from
discontinued operations is segregated into two categories: operating results and gain or loss on
dispositions. Operating results are tax affected in the ordinary manner (i.e., income tax expense
on net operating income, income tax benefit on net operating loss).
(p) Earnings Per Common Share
Basic earnings per common share is computed by dividing net earnings by the weighted average
number of common shares outstanding during each period. Diluted earnings per common share is
computed by dividing net
72
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
earnings by the weighted average number of common shares outstanding plus
the number of additional common shares that would have been outstanding if the dilutive potential
common shares had been issued during each period as discussed in Note 17.
For purposes of calculating the effect of the 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.
(q) 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. As of October
31, 2008, the Company has repurchased 6,618,200 shares of its Class A common stock for $48,429 at
an average price of $7.32 per share and has $26,571 remaining available under this program.
(r) Derivatives
The Company accounts for derivative financial instruments under SFAS No. 133. The Company had
no derivative financial instruments accounted for under SFAS No. 133 during the years ended October
31, 2008, 2007 and 2006.
(s) Estimated Insurance Loss Liabilities
The Company purchases comprehensive general liability, automobile liability and workers
compensation insurance coverages structured within a large deductible/self-insured retention
premium rating program. This
program results in the Company being primarily self-insured for claims and associated costs and
losses covered by these policies but below our deductible. Historical insurance industry experience
indicates some degree of inherent variability in assessing the ultimate amount of losses associated
with the types of claims covered by the program. This is especially true due to the extended
period of time that transpires between when the claim might occur and the full settlement of such
claim, often many years. The Company continually evaluates the receivables due from its insurance
carriers as well as loss estimates associated with claims and losses related to these insurance
coverages with information obtained from its primary insurer.
With respect to health insurance that covers substantially all of the Company’s employees, 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
73
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
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 incurred 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.
(t) Dividends
On March 28, 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.
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, 2008, 2007 and 2006, the Company paid $9,374, $10,184
and $10,673, respectively, in dividends.
(u) Leases
The Company has noncancellable operating leases, primarily for land and buildings, that expire
over the next 1 to 14 years, with the exception of seven leases that expire between 2032 and 2039.
As of October 31, 2008, approximately 77 percent of the Company’s 221 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 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.
(v) Business Interruption Insurance
The Company has insurance policies that provide coverage for interruption to the business,
including lost profits. For the fiscal year 2006, the Company recorded $3,169 in business
interruption insurance proceeds related to hurricane damaged properties based on information
received from its insurance carrier. This amount is reflected in the funeral and cemetery revenue
line items in the consolidated statements of earnings for the year ended October 31, 2006. See
Note 23 for additional information.
74
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
(w) Computer Software
In fiscal year 2006, the Company began implementing two new computer software systems.
Concurrently with the implementation of the new systems, the Company began disposing of the three
original software systems. In 2006, the Company revisited the original useful life set for the
original software systems based on the fact the Company decided to purchase externally developed
software. The Company recorded the change in life of the original software systems as a change in
accounting estimate and accounted for the change on a prospective basis. The decision to purchase
the software was approved by the Board of Directors in September 2006 with implementation beginning
in October 2006. Accordingly, the Company recorded one month of accelerated depreciation in
October 2006. Prior to the end of fiscal year 2007, the original software was fully depreciated.
In the third quarter of fiscal year 2007, the Company completed the implementation of its Oracle
financial software system. In the fourth quarter of fiscal year 2008, the Company completed the
implementation of the payroll module of the Oracle software system.
(x) Out of Period Adjustments
In 2007 and 2006, the Company discovered adjustments that related to prior accounting periods.
The Company does not believe these adjustments were quantitatively or qualitatively material to
its financial position, results of operations and cash flows for the years ended October 31, 2007
and 2006 or to any of its prior annual or quarterly financial statements. As a result, the Company
did not restate any prior period financial statements. The net impact of the adjustments in 2007
is an increase in gross profit of $1,247 and an increase to net earnings of $843, almost all
attributable to the Western division cemetery segment. The errors for 2006 primarily related to
the following and the impact on the 2006 financial statements is shown below:
| |
(1) |
|
The Company overstated deferred revenue primarily at the time of adoption of
Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial
Statements,” in fiscal year 2001. The correction of this item resulted in additional
cemetery revenue in fiscal year 2006. |
| |
| |
(2) |
|
The Company understated accounts payable as of October 31, 2005 because the
Company failed to accrue for individually immaterial expenses incurred at the
individual funeral home and cemetery locations. The Company protocol was designed to
record expenses for a twelve month period and failed to consider the impact of period
end cutoff. |
| |
| |
(3) |
|
The Company misapplied its accounting policies related to the capitalization of
certain fixed assets primarily related to periods prior to 2004 and the depreciable
lives used for certain fixed assets. |
| |
| |
(4) |
|
The Company incorrectly calculated its estimate of the reserve for
cancellations of preneed insurance sales. The reserve is recorded to reflect the
estimated effect on commissions recorded for future cancellations of these sales. The
Company determined there was an error in this reserve and the correction of this error
resulted in an increase to funeral revenue. |
| |
| |
(5) |
|
The Company incorrectly calculated its non-compete amortization. |
| |
| |
(6) |
|
The Company also had other immaterial miscellaneous adjustments. |
75
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
| |
|
|
|
|
| |
|
Year Ended |
|
| |
|
October 31, 2006 |
|
| |
|
Out of Period Adjustments |
|
| |
|
Increase (Decrease) |
|
|
|
|
|
|
Revenue: |
|
|
|
|
Funeral: |
|
|
|
|
Western division |
|
$ |
1,083 |
|
Eastern division |
|
|
514 |
|
|
|
|
|
Total funeral revenue |
|
|
1,597 |
|
|
|
|
|
Cemetery: |
|
|
|
|
Western division |
|
|
636 |
|
Eastern division |
|
|
611 |
|
|
|
|
|
Total cemetery revenue |
|
|
1,247 |
|
|
|
|
|
Total revenues |
|
|
2,844 |
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
Funeral: |
|
|
|
|
Western division |
|
|
2,471 |
|
Eastern division |
|
|
3,105 |
|
|
|
|
|
Total funeral costs and expenses |
|
|
5,576 |
|
|
|
|
|
Cemetery: |
|
|
|
|
Western division |
|
|
705 |
|
Eastern division |
|
|
(972 |
) |
|
|
|
|
Total cemetery costs and expenses |
|
|
(267 |
) |
|
|
|
|
Total costs and expenses |
|
|
5,309 |
|
|
|
|
|
|
|
|
|
|
Gross profit: |
|
|
|
|
Funeral: |
|
|
|
|
Western division |
|
|
(1,388 |
) |
Eastern division |
|
|
(2,591 |
) |
|
|
|
|
Total funeral gross profit |
|
|
(3,979 |
) |
|
|
|
|
Cemetery: |
|
|
|
|
Western division |
|
|
(69 |
) |
Eastern division |
|
|
1,583 |
|
|
|
|
|
Total cemetery gross profit |
|
|
1,514 |
|
|
|
|
|
Total gross profit |
|
|
(2,465 |
) |
Corporate general and administrative expenses |
|
|
(104 |
) |
|
|
|
|
Operating earnings |
|
|
(2,569 |
) |
Investment and other income, net |
|
|
281 |
|
|
|
|
|
Earnings from continuing operations before income taxes |
|
|
(2,288 |
) |
Income taxes |
|
|
(833 |
) |
|
|
|
|
Net earnings |
|
$ |
(1,455 |
) |
|
|
|
|
(y) Reclassifications
Certain reclassifications have been made to the 2007 and 2006 consolidated financial
statements in order for these periods to be comparable. The reclassifications in themselves had no
effect on the Company’s total net income or loss, total shareholders’ equity or the net increase or
decrease in cash. The presentation of Notes 4, 5 and 6 have been adjusted to conform to current
year presentation.
76
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
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of
FASB Statement No. 109” (“FIN 48”)
In July 2006, the FASB issued FIN 48, which clarifies the accounting and disclosure for
uncertain tax positions in accordance with SFAS No. 109, “Accounting for Income Taxes.” This
interpretation requires companies to use a prescribed model for assessing the financial statement
recognition and measurement of all tax positions taken or expected to be taken in tax returns. FIN
48 also provides guidance on derecognition, classification, interest and penalties, accounting in
interim periods, disclosure and transition. This interpretation was adopted by the Company on
November 1, 2007. The Company has reviewed its income tax positions and identified certain tax
deductions or revenue deferrals that are not certain. As a result of the adoption, the Company
recognized a charge of $955 to the November 1, 2007 accumulated deficit balance, a $3,394 increase
in deferred tax assets and a $4,375 increase in other long-term liabilities. For additional
information, see Note 18.
Other, not yet adopted
In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”),
which establishes a framework for measuring fair value in accordance with generally accepted
accounting principles (“GAAP”) and expands disclosures about fair value measurements. This
statement is effective for financial assets and liabilities as well as for any assets and
liabilities that are carried at fair value on a recurring basis in financial statements as of the
beginning of an entity’s first fiscal year that begins after November 15, 2007, which corresponds
to the Company’s fiscal year beginning November 1, 2008. In February 2008, the FASB issued a
one-year deferral for non-financial assets and liabilities to comply with SFAS No. 157. The
Company expects to implement the disclosure requirements of this statement related to financial
assets and liabilities carried at fair value on a recurring basis in the first quarter of fiscal
year 2009.
In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets
and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”).
This statement permits entities to choose to measure many financial assets and liabilities and
certain other items at fair value. The objective is to improve financial reporting by providing
entities with the opportunity to mitigate volatility in reported earnings caused by measuring
related assets and liabilities differently without having to apply complex hedge accounting
provisions. This statement is effective as of the beginning of an entity’s first fiscal year
beginning after November 15, 2007, which corresponds to the Company’s fiscal year beginning
November 1, 2008. The Company does not anticipate electing the fair value option under SFAS No.
159.
In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations (SFAS
141(R))” (“SFAS No. 141R”). SFAS No. 141R 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. SFAS No. 141R 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 statement will apply to any future business
combinations as of that date.
In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated
Financial Statement—amendments of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 states that
accounting and reporting for minority interests will be recharacterized as noncontrolling interests
and classified as a component of shareholders’ equity. SFAS No. 160 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 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. The Company is currently evaluating the impact the adoption of SFAS
No. 160 will have on its
77
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)
consolidated financial statements.
In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting
Principles” (“SFAS No. 162”). This statement identifies sources of accounting principles and the
framework for selecting the principles to be used in the preparation of financial statements that
are presented in conformity with GAAP in the United States. SFAS No. 162 moves the hierarchy of
GAAP sources for non-governmental entities from the auditing literature to the accounting
literature. This statement will become effective 60 days following approval by the Securities and
Exchange Commission (“SEC”) of amendments made by the Public Company Accounting Oversight Board to
AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting
Principles.” Any effect of applying SFAS No. 162 should be reported as a change in accounting
principle. The Company does not expect this statement to have any impact on its consolidated
financial statements.
In May 2008, FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments
That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB
14-1”) was issued. FSP No. APB 14-1 states that convertible debt instruments that may be settled
in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of
Accounting Principles Board Opinion No. 14 and that issuers of such instruments 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 when interest cost is recognized in subsequent
periods. This opinion 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,
and must be applied retrospectively to all periods presented. The Company is currently evaluating
the impact the adoption of FSP No. APB 14-1 will have on its consolidated financial statements, but
expects to record higher interest expense related to its senior convertible notes beginning in
fiscal year 2010.
(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 sheet
as of October 31, 2008 and 2007 are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
|
October 31, 2007 |
|
Trust assets |
|
$ |
336,782 |
|
|
$ |
477,335 |
|
Receivables from customers |
|
|
44,796 |
|
|
|
48,488 |
|
|
|
|
|
|
|
|
|
|
|
381,578 |
|
|
|
525,823 |
|
Allowances for cancellations |
|
|
(13,166 |
) |
|
|
(10,770 |
) |
|
|
|
|
|
|
|
Preneed funeral receivables and trust investments |
|
$ |
368,412 |
|
|
$ |
515,053 |
|
|
|
|
|
|
|
|
The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2008 are detailed below. The cost basis of the funeral merchandise and
services trust assets below reflects realized losses in the trust assets of approximately $24,003
as of October 31, 2008 from their original cost basis related to certain securities
held that have been rendered worthless or practically worthless during the Company’s fourth quarter
of fiscal year 2008.
78
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities—(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and
other short- term
investments |
|
$ |
35,355 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
35,355 |
|
|
|
|
|
U.S. Government,
agencies and
municipalities |
|
|
11,585 |
|
|
|
157 |
|
|
|
(4 |
) |
|
|
11,738 |
|
|
|
|
|
Corporate bonds |
|
|
56,661 |
|
|
|
67 |
|
|
|
(9,078 |
) |
|
|
47,650 |
|
|
|
|
|
Preferred stocks |
|
|
68,300 |
|
|
|
12 |
|
|
|
(21,906 |
) |
|
|
46,406 |
|
|
|
|
|
Common stocks |
|
|
272,598 |
|
|
|
1,847 |
|
|
|
(124,156 |
) |
|
|
150,289 |
|
|
|
|
|
Mutual funds |
|
|
35,228 |
|
|
|
11 |
|
|
|
(10,764 |
) |
|
|
24,475 |
|
|
|
|
|
Insurance contracts and
other long-term
investments |
|
|
19,645 |
|
|
|
104 |
|
|
|
(63 |
) |
|
|
19,686 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
499,372 |
|
|
$ |
2,198 |
|
|
$ |
(165,971 |
) |
|
$ |
335,599 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a
percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
67.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,183 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
336,782 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities and market values of debt securities included above are as follows:
| |
|
|
|
|
| |
|
October 31, 2008 |
|
Due in one year or less |
|
$ |
7,753 |
|
Due in one to five years |
|
|
27,262 |
|
Due in five to ten years |
|
|
24,342 |
|
Thereafter |
|
|
31 |
|
|
|
|
|
|
|
$ |
59,388 |
|
|
|
|
|
The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2007 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and
other short- term
investments |
|
$ |
39,349 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
39,349 |
|
|
|
|
|
U.S. Government,
agencies and
municipalities |
|
|
21,183 |
|
|
|
192 |
|
|
|
(46 |
) |
|
|
21,329 |
|
|
|
|
|
Corporate bonds |
|
|
54,438 |
|
|
|
413 |
|
|
|
(1,334 |
) |
|
|
53,517 |
|
|
|
|
|
Preferred stocks |
|
|
69,125 |
|
|
|
119 |
|
|
|
(6,103 |
) |
|
|
63,141 |
|
|
|
|
|
Common stocks |
|
|
291,119 |
|
|
|
11,571 |
|
|
|
(60,646 |
) |
|
|
242,044 |
|
|
|
|
|
Mutual funds |
|
|
34,941 |
|
|
|
2,601 |
|
|
|
(896 |
) |
|
|
36,646 |
|
|
|
|
|
Insurance contracts and
other long-term
investments |
|
|
19,862 |
|
|
|
117 |
|
|
|
— |
|
|
|
19,979 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
530,017 |
|
|
$ |
15,013 |
|
|
$ |
(69,025 |
) |
|
$ |
476,005 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a
percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89.8 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
477,335 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
79
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities—(Continued)
Activity related to preneed funeral trust investments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Purchases |
|
$ |
18,839 |
|
|
$ |
152,126 |
|
|
$ |
149,504 |
|
Sales |
|
|
24,072 |
|
|
|
148,309 |
|
|
|
159,106 |
|
Realized gains |
|
|
2,572 |
|
|
|
13,690 |
|
|
|
18,196 |
|
Realized losses |
|
|
(24,868 |
)(1) |
|
|
(1,183 |
) |
|
|
(2,910 |
) |
Deposits |
|
|
31,520 |
|
|
|
32,120 |
|
|
|
29,191 |
|
Withdrawals |
|
|
46,403 |
|
|
|
44,433 |
|
|
|
50,770 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase)
in net unrealized
losses |
|
|
(109,761 |
) |
|
|
3,753 |
|
|
|
19,290 |
|
Reclassification to
non-controlling
interest |
|
|
109,761 |
|
|
|
(3,753 |
) |
|
|
(19,290 |
) |
|
|
|
| (1) |
|
Includes realized losses of $24,003 related to certain securities held that have
been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal
year 2008. |
The following table shows the gross unrealized losses and fair value of the preneed funeral
merchandise and services trust investments with unrealized losses aggregated by investment category
and length of time that individual securities have been in a continuous unrealized loss position as
of October 31, 2008 and 2007.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
| |
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
| |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Government,
agencies and
municipalities |
|
$ |
1,147 |
|
|
$ |
(3 |
) |
|
$ |
21 |
|
|
$ |
(1 |
) |
|
$ |
1,168 |
|
|
$ |
(4 |
) |
Corporate bonds |
|
|
20,609 |
|
|
|
(2,027 |
) |
|
|
21,258 |
|
|
|
(7,051 |
) |
|
|
41,867 |
|
|
|
(9,078 |
) |
Preferred stocks |
|
|
9,055 |
|
|
|
(6,686 |
) |
|
|
36,445 |
|
|
|
(15,220 |
) |
|
|
45,500 |
|
|
|
(21,906 |
) |
Common stocks |
|
|
51,658 |
|
|
|
(25,033 |
) |
|
|
86,718 |
|
|
|
(99,123 |
) |
|
|
138,376 |
|
|
|
(124,156 |
) |
Mutual funds |
|
|
16,624 |
|
|
|
(8,200 |
) |
|
|
7,707 |
|
|
|
(2,564 |
) |
|
|
24,331 |
|
|
|
(10,764 |
) |
Insurance contracts
and other long-term
investments |
|
|
3,510 |
|
|
|
— |
|
|
|
58 |
|
|
|
(63 |
) |
|
|
3,568 |
|
|
|
(63 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
102,603 |
|
|
$ |
(41,949 |
) |
|
$ |
152,207 |
|
|
$ |
(124,022 |
) |
|
$ |
254,810 |
|
|
$ |
(165,971 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
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 |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
4,271 |
|
|
$ |
(46 |
) |
|
$ |
4,271 |
|
|
$ |
(46 |
) |
Corporate bonds |
|
|
20,546 |
|
|
|
(785 |
) |
|
|
7,795 |
|
|
|
(549 |
) |
|
|
28,341 |
|
|
|
(1,334 |
) |
Preferred stocks |
|
|
17,861 |
|
|
|
(1,008 |
) |
|
|
35,834 |
|
|
|
(5,095 |
) |
|
|
53,695 |
|
|
|
(6,103 |
) |
Common stocks |
|
|
39,833 |
|
|
|
(5,772 |
) |
|
|
104,555 |
|
|
|
(54,874 |
) |
|
|
144,388 |
|
|
|
(60,646 |
) |
Mutual funds |
|
|
2,975 |
|
|
|
(16 |
) |
|
|
6,294 |
|
|
|
(880 |
) |
|
|
9,269 |
|
|
|
(896 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
81,215 |
|
|
$ |
(7,581 |
) |
|
$ |
158,749 |
|
|
$ |
(61,444 |
) |
|
$ |
239,964 |
|
|
$ |
(69,025 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
80
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities
Preneed Cemetery Receivables and Trust Investments
Preneed cemetery receivables and trust investments represent trust assets and customer
receivables for contracts sold in advance of when the merchandise or services are needed. The
receivables related to the sale of preneed property interment rights are included in the Company’s
current and long-term receivables discussed in Note 9. The components of preneed cemetery
receivables and trust investments in the consolidated balance sheet as of October 31, 2008 and 2007
are as follows:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
|
October 31, 2007 |
|
Trust assets |
|
$ |
148,533 |
|
|
$ |
215,541 |
|
Receivables from customers |
|
|
39,868 |
|
|
|
46,906 |
|
|
|
|
|
|
|
|
|
|
|
188,401 |
|
|
|
262,447 |
|
Allowance for cancellations |
|
|
(6,260 |
) |
|
|
(6,768 |
) |
|
|
|
|
|
|
|
Preneed cemetery receivables and trust investments |
|
$ |
182,141 |
|
|
$ |
255,679 |
|
|
|
|
|
|
|
|
The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of October 31, 2008 are detailed below. The cost basis of the cemetery merchandise and
services trust assets below reflects realized losses in the trust assets of approximately $13,873
as of October 31, 2008 from their original cost basis related to certain securities held that have
been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year
2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and
other short- term
investments |
|
$ |
15,939 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
15,939 |
|
|
|
|
|
U.S. Government,
agencies and
municipalities |
|
|
12,960 |
|
|
|
647 |
|
|
|
(5 |
) |
|
|
13,602 |
|
|
|
|
|
Corporate bonds |
|
|
12,399 |
|
|
|
15 |
|
|
|
(1,859 |
) |
|
|
10,555 |
|
|
|
|
|
Preferred stocks |
|
|
25,589 |
|
|
|
1 |
|
|
|
(8,828 |
) |
|
|
16,762 |
|
|
|
|
|
Common stocks |
|
|
140,654 |
|
|
|
303 |
|
|
|
(67,576 |
) |
|
|
73,381 |
|
|
|
|
|
Mutual funds |
|
|
30,310 |
|
|
|
— |
|
|
|
(12,581 |
) |
|
|
17,729 |
|
|
|
|
|
Insurance contracts and
other long-term
investments |
|
|
107 |
|
|
|
— |
|
|
|
(15 |
) |
|
|
92 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
237,958 |
|
|
$ |
966 |
|
|
$ |
(90,864 |
) |
|
$ |
148,060 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a
percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
62.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
473 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
148,533 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities and market values of debt securities included above are as follows:
| |
|
|
|
|
| |
|
October 31, 2008 |
|
Due in one year or less |
|
$ |
4,691 |
|
Due in one to five years |
|
|
12,622 |
|
Due in five to ten years |
|
|
6,645 |
|
Thereafter |
|
|
199 |
|
|
|
|
|
|
|
$ |
24,157 |
|
|
|
|
|
81
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities—(Continued)
The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of October 31, 2007 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and
other short- term
investments |
|
$ |
17,120 |
|
|
$ |
— |
|
|
$ |
(165 |
) |
|
$ |
16,955 |
|
|
|
|
|
U.S. Government,
agencies and
municipalities |
|
|
15,397 |
|
|
|
223 |
|
|
|
(13 |
) |
|
|
15,607 |
|
|
|
|
|
Corporate bonds |
|
|
11,563 |
|
|
|
177 |
|
|
|
(269 |
) |
|
|
11,471 |
|
|
|
|
|
Preferred stocks |
|
|
26,437 |
|
|
|
38 |
|
|
|
(2,312 |
) |
|
|
24,163 |
|
|
|
|
|
Common stocks |
|
|
146,609 |
|
|
|
3,731 |
|
|
|
(34,603 |
) |
|
|
115,737 |
|
|
|
|
|
Mutual funds |
|
|
30,269 |
|
|
|
964 |
|
|
|
(196 |
) |
|
|
31,037 |
|
|
|
|
|
Insurance contracts and
other long-term
investments |
|
|
68 |
|
|
|
— |
|
|
|
(4 |
) |
|
|
64 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
247,463 |
|
|
$ |
5,133 |
|
|
$ |
(37,562 |
) |
|
$ |
215,034 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a
percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
215,541 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Activity related to preneed cemetery merchandise and services trust investments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Purchases |
|
$ |
16,492 |
|
|
$ |
223,437 |
|
|
$ |
115,257 |
|
Sales |
|
|
12,081 |
|
|
|
218,808 |
|
|
|
131,166 |
|
Realized gains |
|
|
1,460 |
|
|
|
10,697 |
|
|
|
10,296 |
|
Realized losses |
|
|
(14,307 |
)(1) |
|
|
(302 |
) |
|
|
(1,137 |
) |
Deposits |
|
|
17,619 |
|
|
|
18,185 |
|
|
|
19,630 |
|
Withdrawals |
|
|
19,354 |
|
|
|
20,844 |
|
|
|
29,330 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase)
in net unrealized
losses |
|
|
(57,469 |
) |
|
|
2,774 |
|
|
|
8,471 |
|
Reclassification to
non-controlling
interest |
|
|
57,469 |
|
|
|
(2,774 |
) |
|
|
(8,471 |
) |
|
|
|
| (1) |
|
Includes realized losses of $13,873 related to certain securities held that have
been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal
year 2008. |
82
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 table shows the gross unrealized losses and fair value of the preneed cemetery
merchandise and services trust investments aggregated by investment category and length of time
that individual securities have been in a continuous unrealized loss position as of October 31,
2008 and 2007.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
| |
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
| |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Government,
agencies and
municipalities |
|
$ |
458 |
|
|
$ |
(3 |
) |
|
$ |
201 |
|
|
$ |
(2 |
) |
|
$ |
659 |
|
|
$ |
(5 |
) |
Corporate bonds |
|
|
5,371 |
|
|
|
(312 |
) |
|
|
3,819 |
|
|
|
(1,547 |
) |
|
|
9,190 |
|
|
|
(1,859 |
) |
Preferred stocks |
|
|
4,587 |
|
|
|
(3,128 |
) |
|
|
12,069 |
|
|
|
(5,700 |
) |
|
|
16,656 |
|
|
|
(8,828 |
) |
Common stocks |
|
|
18,227 |
|
|
|
(12,604 |
) |
|
|
51,495 |
|
|
|
(54,972 |
) |
|
|
69,722 |
|
|
|
(67,576 |
) |
Mutual funds |
|
|
13,599 |
|
|
|
(10,201 |
) |
|
|
4,130 |
|
|
|
(2,380 |
) |
|
|
17,729 |
|
|
|
(12,581 |
) |
Insurance contracts
and other long-term
investments |
|
|
— |
|
|
|
— |
|
|
|
40 |
|
|
|
(15 |
) |
|
|
40 |
|
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
42,242 |
|
|
$ |
(26,248 |
) |
|
$ |
71,754 |
|
|
$ |
(64,616 |
) |
|
$ |
113,996 |
|
|
$ |
(90,864 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
| |
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
| |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
Cash, money markets
and other
short-term
investments |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
(165 |
) |
|
$ |
— |
|
|
$ |
(165 |
) |
U.S. Government,
agencies and
municipalities |
|
|
— |
|
|
|
— |
|
|
|
1,389 |
|
|
|
(13 |
) |
|
|
1,389 |
|
|
|
(13 |
) |
Corporate bonds |
|
|
4,035 |
|
|
|
(172 |
) |
|
|
1,061 |
|
|
|
(97 |
) |
|
|
5,096 |
|
|
|
(269 |
) |
Preferred stocks |
|
|
5,955 |
|
|
|
(362 |
) |
|
|
12,921 |
|
|
|
(1,950 |
) |
|
|
18,876 |
|
|
|
(2,312 |
) |
Common stocks |
|
|
25,792 |
|
|
|
(5,623 |
) |
|
|
59,913 |
|
|
|
(28,980 |
) |
|
|
85,705 |
|
|
|
(34,603 |
) |
Mutual funds |
|
|
3,053 |
|
|
|
(30 |
) |
|
|
3,239 |
|
|
|
(166 |
) |
|
|
6,292 |
|
|
|
(196 |
) |
Insurance contracts
and other long-term
investments |
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
(4 |
) |
|
|
14 |
|
|
|
(4 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
38,835 |
|
|
$ |
(6,187 |
) |
|
$ |
78,537 |
|
|
$ |
(31,375 |
) |
|
$ |
117,372 |
|
|
$ |
(37,562 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(6) Cemetery Interment Rights and Perpetual Care Trusts
Earnings realized from cemetery perpetual care trust investments that the Company is legally
permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery
maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery
perpetual care trust investments were $10,660, $10,164 and $10,079 for the years ended October 31,
2008, 2007 and 2006, respectively.
The cost and market values of the trust investments held by the cemetery perpetual care trusts
as of October 31, 2008 are detailed below. The cost basis of the cemetery perpetual care trusts
below reflects realized losses in the trust assets of $13,643 as of October 31, 2008 from their
original cost basis related to certain securities held that have been rendered worthless or
practically worthless during the Company’s fourth quarter of fiscal year 2008.
83
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
Cost Basis |
|
|
Unrealized Gains |
|
|
Unrealized Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and
other short- term
investments |
|
$ |
16,920 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
16,920 |
|
|
|
|
|
U.S. Government,
agencies and
municipalities |
|
|
8,739 |
|
|
|
292 |
|
|
|
(96 |
) |
|
|
8,935 |
|
|
|
|
|
Corporate bonds |
|
|
44,287 |
|
|
|
397 |
|
|
|
(5,709 |
) |
|
|
38,975 |
|
|
|
|
|
Preferred stocks |
|
|
67,514 |
|
|
|
— |
|
|
|
(26,299 |
) |
|
|
41,215 |
|
|
|
|
|
Common stocks |
|
|
106,347 |
|
|
|
3,427 |
|
|
|
(50,431 |
) |
|
|
59,343 |
|
|
|
|
|
Mutual funds |
|
|
8,826 |
|
|
|
— |
|
|
|
(2,575 |
) |
|
|
6,251 |
|
|
|
|
|
Insurance contracts and
other long-term
investments |
|
|
594 |
|
|
|
28 |
|
|
|
(11 |
) |
|
|
611 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
253,227 |
|
|
$ |
4,144 |
|
|
$ |
(85,121 |
) |
|
$ |
172,250 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a
percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
68.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
840 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
173,090 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The estimated maturities and market values of debt securities included above are as follows:
| |
|
|
|
|
| |
|
October 31, 2008 |
|
Due in one year or less |
|
$ |
1,936 |
|
Due in one to five years |
|
|
27,126 |
|
Due in five to ten years |
|
|
18,287 |
|
Thereafter |
|
|
561 |
|
|
|
|
|
|
|
$ |
47,910 |
|
|
|
|
|
The cost and market values of the trust investments held by the cemetery perpetual care trusts
as of October 31, 2007 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
|
|
|
|
Unrealized |
|
|
Unrealized |
|
|
|
|
|
|
|
|
| |
|
Cost Basis |
|
|
Gains |
|
|
Losses |
|
|
Market |
|
|
|
|
|
Cash, money market and
other short- term
investments |
|
$ |
11,752 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
11,752 |
|
|
|
|
|
U.S. Government,
agencies and
municipalities |
|
|
12,340 |
|
|
|
159 |
|
|
|
(116 |
) |
|
|
12,383 |
|
|
|
|
|
Corporate bonds |
|
|
44,018 |
|
|
|
1,155 |
|
|
|
(504 |
) |
|
|
44,669 |
|
|
|
|
|
Preferred stocks |
|
|
64,515 |
|
|
|
58 |
|
|
|
(6,944 |
) |
|
|
57,629 |
|
|
|
|
|
Common stocks |
|
|
110,150 |
|
|
|
9,828 |
|
|
|
(24,675 |
) |
|
|
95,303 |
|
|
|
|
|
Mutual funds |
|
|
11,329 |
|
|
|
1,937 |
|
|
|
(301 |
) |
|
|
12,965 |
|
|
|
|
|
Insurance contracts and
other long-term
investments |
|
|
825 |
|
|
|
151 |
|
|
|
(8 |
) |
|
|
968 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust investments |
|
$ |
254,929 |
|
|
$ |
13,288 |
|
|
$ |
(32,548 |
) |
|
$ |
235,669 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Market value as a
percentage of cost |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
92.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Accrued investment income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
834 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Trust assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
236,503 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In states where the Company withdraws and recognizes capital gains in its cemetery perpetual
care trusts, if it realizes net capital losses (i.e. losses in excess of capital gains in the
trust) and the fair market value of the trust
84
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)
assets is less than the aggregate amounts required to be contributed to the trust, some
states may require the Company to make cash deposits to the trusts or may require the Company to
stop withdrawing earnings until future earnings restore the net realized losses. As of October 31,
2008, the Company recorded a liability for the estimated probable funding obligation to restore the
net realized losses as a result of fiscal year 2008 losses of $13,281, which was recognized as a
realized loss in the consolidated statement of earnings for the year ended October 31, 2008 in
cemetery costs. In those states where realized net capital gains have not been withdrawn, the
Company believes it is reasonably possible that additional funding obligations may exist with an
estimated range of up to $1,200. See Note 24 for risks and uncertainties related to the Company’s
unrealized loss position in the cemetery perpetual care trusts.
Activity related to preneed cemetery perpetual care trust investments is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
| |
|
2008 |
|
2007 |
|
2006 |
Purchases |
|
$ |
54,315 |
|
|
$ |
65,172 |
|
|
$ |
63,074 |
|
Sales |
|
|
53,902 |
|
|
|
57,921 |
|
|
|
54,450 |
|
Realized gains |
|
|
4,498 |
|
|
|
4,173 |
|
|
|
4,788 |
|
Realized losses |
|
|
(14,173 |
)(1) |
|
|
(359 |
) |
|
|
(1,270 |
) |
Deposits |
|
|
8,295 |
|
|
|
8,158 |
|
|
|
7,902 |
|
Withdrawals |
|
|
10,081 |
|
|
|
10,536 |
|
|
|
9,848 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other comprehensive income: |
|
|
|
|
|
|
|
|
|
|
|
|
Reduction (increase)
in net unrealized
losses |
|
|
(61,717 |
) |
|
|
(77 |
) |
|
|
8,277 |
|
Reclassification to
non-controlling
interest |
|
|
61,717 |
|
|
|
77 |
|
|
|
(8,277 |
) |
|
|
|
| (1) |
|
Includes realized losses of $13,643 related to certain securities held that have
been rendered worthless or practically worthless during the Company’s fourth quarter of
fiscal year 2008. |
During the years ended October 31, 2008, 2007 and 2006, cemetery revenues were $241,276,
$243,487 and $233,993, respectively, of which $9,322, $7,748 and $9,396, respectively, were
required to be placed into perpetual care trusts and were recorded as revenues and expenses.
The following table shows the gross unrealized losses and fair value of the cemetery perpetual
care trust investments with unrealized losses aggregated by investment category and length of time that
individual securities have been in a continuous unrealized loss position as of October 31, 2008 and
2007.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
Less than 12 Months |
|
|
12 Months or Greater |
|
|
Total |
|
| |
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
|
Market |
|
|
Unrealized |
|
| |
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
|
Value |
|
|
Losses |
|
U.S. Government,
agencies and
municipalities |
|
$ |
324 |
|
|
$ |
(1 |
) |
|
$ |
627 |
|
|
$ |
(95 |
) |
|
$ |
951 |
|
|
$ |
(96 |
) |
Corporate bonds |
|
|
15,652 |
|
|
|
(2,352 |
) |
|
|
12,281 |
|
|
|
(3,357 |
) |
|
|
27,933 |
|
|
|
(5,709 |
) |
Preferred stocks |
|
|
8,752 |
|
|
|
(6,227 |
) |
|
|
32,463 |
|
|
|
(20,072 |
) |
|
|
41,215 |
|
|
|
(26,299 |
) |
Common stocks |
|
|
17,832 |
|
|
|
(8,252 |
) |
|
|
34,352 |
|
|
|
(42,179 |
) |
|
|
52,184 |
|
|
|
(50,431 |
) |
Mutual funds |
|
|
4,759 |
|
|
|
(2,089 |
) |
|
|
1,168 |
|
|
|
(486 |
) |
|
|
5,927 |
|
|
|
(2,575 |
) |
Insurance contracts
and other long-term
investments |
|
|
— |
|
|
|
— |
|
|
|
(12 |
) |
|
|
(11 |
) |
|
|
(12 |
) |
|
|
(11 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
47,319 |
|
|
$ |
(18,921 |
) |
|
$ |
80,879 |
|
|
$ |
(66,200 |
) |
|
$ |
128,198 |
|
|
$ |
(85,121 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
85
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
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 |
|
$ |
125 |
|
|
$ |
— |
|
|
$ |
2,317 |
|
|
$ |
(116 |
) |
|
$ |
2,442 |
|
|
$ |
(116 |
) |
Corporate bonds |
|
|
13,401 |
|
|
|
(330 |
) |
|
|
2,782 |
|
|
|
(174 |
) |
|
|
16,183 |
|
|
|
(504 |
) |
Preferred stocks |
|
|
24,479 |
|
|
|
(2,451 |
) |
|
|
26,914 |
|
|
|
(4,493 |
) |
|
|
51,393 |
|
|
|
(6,944 |
) |
Common stocks |
|
|
12,017 |
|
|
|
(3,031 |
) |
|
|
44,339 |
|
|
|
(21,644 |
) |
|
|
56,356 |
|
|
|
(24,675 |
) |
Mutual funds |
|
|
623 |
|
|
|
(26 |
) |
|
|
1,864 |
|
|
|
(275 |
) |
|
|
2,487 |
|
|
|
(301 |
) |
Insurance contracts
and other long-term
investments |
|
|
40 |
|
|
|
(8 |
) |
|
|
99 |
|
|
|
— |
|
|
|
139 |
|
|
|
(8 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
50,685 |
|
|
$ |
(5,846 |
) |
|
$ |
78,315 |
|
|
$ |
(26,702 |
) |
|
$ |
129,000 |
|
|
$ |
(32,548 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(7) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts
The components of non-controlling interest in funeral and cemetery trusts and non-controlling
interest in perpetual care trusts at October 31, 2008 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling |
|
| |
|
Non-controlling Interest |
|
|
|
|
|
|
Interest in |
|
| |
|
Preneed |
|
|
Preneed |
|
|
|
|
|
|
Perpetual |
|
| |
|
Funeral |
|
|
Cemetery |
|
|
Total |
|
|
Care Trusts |
|
Trust assets at market
value |
|
$ |
336,782 |
|
|
$ |
148,533 |
|
|
$ |
485,315 |
|
|
$ |
173,090 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending withdrawals |
|
|
(8,926 |
) |
|
|
(4,362 |
) |
|
|
(13,288 |
) |
|
|
(2,442 |
) |
Pending deposits |
|
|
2,131 |
|
|
|
1,262 |
|
|
|
3,393 |
|
|
|
723 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest. |
|
$ |
329,987 |
|
|
$ |
145,433 |
|
|
$ |
475,420 |
|
|
$ |
171,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The components of non-controlling interest in funeral and cemetery trusts and non-controlling
interest in perpetual care trusts at October 31, 2007 are as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling |
|
| |
|
Non-controlling Interest |
|
|
|
|
|
|
Interest in |
|
| |
|
Preneed |
|
|
Preneed |
|
|
|
|
|
|
Perpetual |
|
| |
|
Funeral |
|
|
Cemetery |
|
|
Total |
|
|
Care Trusts |
|
Trust assets at market
value |
|
$ |
477,335 |
|
|
$ |
215,541 |
|
|
$ |
692,876 |
|
|
$ |
236,503 |
|
Less: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Pending withdrawals |
|
|
(9,551 |
) |
|
|
(4,528 |
) |
|
|
(14,079 |
) |
|
|
(1,907 |
) |
Pending deposits |
|
|
2,607 |
|
|
|
1,648 |
|
|
|
4,255 |
|
|
|
831 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest. |
|
$ |
470,391 |
|
|
$ |
212,661 |
|
|
$ |
683,052 |
|
|
$ |
235,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
86
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(7) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts
—(Continued)
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, 2008, 2007 and 2006 are detailed below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Non-controlling interest: |
|
|
|
|
|
|
|
|
|
|
|
|
Realized gains |
|
$ |
8,530 |
|
|
$ |
28,560 |
|
|
$ |
33,280 |
|
Realized losses |
|
|
(53,348 |
) |
|
|
(1,844 |
) |
|
|
(5,317 |
) |
Interest income, dividends and other
ordinary income |
|
|
30,484 |
|
|
|
32,478 |
|
|
|
29,254 |
|
Trust expenses and income taxes |
|
|
(10,601 |
) |
|
|
(11,253 |
) |
|
|
(12,069 |
) |
|
|
|
|
|
|
|
|
|
|
Net trust investment income |
|
|
(24,935 |
) |
|
|
47,941 |
|
|
|
45,148 |
|
Non-controlling interest in funeral and
cemetery trust investment income |
|
|
22,875 |
|
|
|
(37,635 |
) |
|
|
(34,950 |
) |
Non-controlling interest in perpetual care
trust investment income |
|
|
2,060 |
|
|
|
(10,306 |
) |
|
|
(10,198 |
) |
|
|
|
|
|
|
|
|
|
|
Total non-controlling interest |
|
|
— |
|
|
|
— |
|
|
|
— |
|
Investment and other income, net (1) |
|
|
2,406 |
|
|
|
3,374 |
|
|
|
3,676 |
|
|
|
|
|
|
|
|
|
|
|
Total investment and other income, net |
|
$ |
2,406 |
|
|
$ |
3,374 |
|
|
$ |
3,676 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Investment and other income, net is comprised of interest income primarily on the
Company’s cash, cash equivalents and marketable securities not held in trust. |
(8) Marketable Securities and Restricted Investments
The market value of marketable securities as of October 31, 2008 and 2007 was $1,055 and
$1,262, respectively, which included gross unrealized gains of $58 and $17 and no gross unrealized
losses for fiscal years 2008 and 2007. Of the total marketable securities balances as of October
31, 2008 and 2007, $1,000 is classified as a long-term asset in the line item “Other assets” in
the consolidated balance sheets. 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.
87
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(9) Receivables
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2008 |
|
|
2007 |
|
Current receivables are summarized as follows: |
|
|
|
|
|
|
|
|
Installment contracts due within one year |
|
$ |
44,039 |
|
|
$ |
44,070 |
|
Income tax receivables |
|
|
1,077 |
|
|
|
1,833 |
|
Trade and other receivables |
|
|
14,942 |
|
|
|
15,114 |
|
Funeral receivables |
|
|
9,740 |
|
|
|
11,102 |
|
Allowance for doubtful accounts |
|
|
(7,215 |
) |
|
|
(8,142 |
) |
Amounts to be collected for cemetery perpetual care trusts |
|
|
(3,454 |
) |
|
|
(3,362 |
) |
|
|
|
|
|
|
|
Net current receivables |
|
$ |
59,129 |
|
|
$ |
60,615 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term receivables are summarized as follows: |
|
|
|
|
|
|
|
|
Installment contracts due beyond one year |
|
$ |
87,115 |
|
|
$ |
90,453 |
|
Income tax receivables |
|
|
77 |
|
|
|
10,880 |
|
Allowance for doubtful accounts |
|
|
(9,689 |
) |
|
|
(10,824 |
) |
Amounts to be collected for cemetery perpetual care trusts |
|
|
(6,832 |
) |
|
|
(6,901 |
) |
|
|
|
|
|
|
|
Net long-term receivables |
|
$ |
70,671 |
|
|
$ |
83,608 |
|
|
|
|
|
|
|
|
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, 2008 are expected to be collected as follows:
| |
|
|
|
|
Years ending October 31, |
|
|
|
|
2009 |
|
$ |
59,129 |
|
2010 |
|
|
13,376 |
|
2011 |
|
|
13,344 |
|
2012 |
|
|
12,656 |
|
2013 |
|
|
10,711 |
|
Thereafter |
|
|
20,584 |
|
|
|
|
|
|
|
$ |
129,800 |
|
|
|
|
|
(10) Inventories and Cemetery Property
Inventories are comprised of the following:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2008 |
|
|
2007 |
|
Developed cemetery property |
|
$ |
12,223 |
|
|
$ |
12,518 |
|
Merchandise and supplies |
|
|
23,647 |
|
|
|
23,543 |
|
|
|
|
|
|
|
|
|
|
$ |
35,870 |
|
|
$ |
36,061 |
|
|
|
|
|
|
|
|
88
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, |
|
| |
|
2008 |
|
|
2007 |
|
Developed cemetery property |
|
$ |
106,861 |
|
|
$ |
104,058 |
|
Undeveloped cemetery property |
|
|
268,971 |
|
|
|
268,980 |
|
|
|
|
|
|
|
|
|
|
$ |
375,832 |
|
|
$ |
373,038 |
|
|
|
|
|
|
|
|
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 $13,860 and $13,589 related to cemetery property under development as of
October 31, 2008 and 2007, 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, 2008 and October 31, 2007 and for the fiscal years ended October 31, 2008, 2007 and
2006, 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.
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 |
|
$ |
— |
|
|
$ |
265,015 |
|
|
$ |
1,954 |
|
|
$ |
19,638 |
|
|
$ |
— |
|
|
$ |
286,607 |
|
Cemetery |
|
|
— |
|
|
|
217,123 |
|
|
|
3,432 |
|
|
|
20,721 |
|
|
|
— |
|
|
|
241,276 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
482,138 |
|
|
|
5,386 |
|
|
|
40,359 |
|
|
|
— |
|
|
|
527,883 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
— |
|
|
|
203,125 |
|
|
|
1,217 |
|
|
|
13,886 |
|
|
|
— |
|
|
|
218,228 |
|
Cemetery |
|
|
— |
|
|
|
189,878 |
|
|
|
2,927 |
|
|
|
16,033 |
|
|
|
— |
|
|
|
208,838 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
393,003 |
|
|
|
4,144 |
|
|
|
29,919 |
|
|
|
— |
|
|
|
427,066 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
89,135 |
|
|
|
1,242 |
|
|
|
10,440 |
|
|
|
— |
|
|
|
100,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Corporate general and administrative
expenses |
|
|
(32,611 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(32,611 |
) |
Impairment of goodwill |
|
|
— |
|
|
|
(25,952 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(25,952 |
) |
Hurricane related recoveries (charges), net |
|
|
(1,448 |
) |
|
|
(1,165 |
) |
|
|
316 |
|
|
|
— |
|
|
|
— |
|
|
|
(2,297 |
) |
Gains on dispositions and impairment
(losses), net |
|
|
126 |
|
|
|
(479 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(353 |
) |
Other operating income, net |
|
|
101 |
|
|
|
497 |
|
|
|
2 |
|
|
|
219 |
|
|
|
— |
|
|
|
819 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(33,832 |
) |
|
|
62,036 |
|
|
|
1,560 |
|
|
|
10,659 |
|
|
|
— |
|
|
|
40,423 |
|
Interest expense |
|
|
3,391 |
|
|
|
(25,237 |
) |
|
|
(155 |
) |
|
|
(2,114 |
) |
|
|
— |
|
|
|
(24,115 |
) |
Investment and other income, net |
|
|
2,219 |
|
|
|
179 |
|
|
|
— |
|
|
|
8 |
|
|
|
— |
|
|
|
2,406 |
|
Equity in subsidiaries |
|
|
17,783 |
|
|
|
548 |
|
|
|
— |
|
|
|
— |
|
|
|
(18,331 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
(10,439 |
) |
|
|
37,526 |
|
|
|
1,405 |
|
|
|
8,553 |
|
|
|
(18,331 |
) |
|
|
18,714 |
|
Income tax expense (benefit) |
|
|
(6,746 |
) |
|
|
26,675 |
|
|
|
464 |
|
|
|
2,014 |
|
|
|
— |
|
|
|
22,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
(3,693 |
) |
|
|
10,851 |
|
|
|
941 |
|
|
|
6,539 |
|
|
|
(18,331 |
) |
|
|
(3,693 |
) |
Other comprehensive income, net |
|
|
26 |
|
|
|
— |
|
|
|
— |
|
|
|
26 |
|
|
|
(26 |
) |
|
|
26 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
(3,667 |
) |
|
$ |
10,851 |
|
|
$ |
941 |
|
|
$ |
6,565 |
|
|
$ |
(18,357 |
) |
|
$ |
(3,667 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Statements of Earnings and Other Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, 2007 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
— |
|
|
$ |
257,783 |
|
|
$ |
1,558 |
|
|
$ |
19,989 |
|
|
$ |
— |
|
|
$ |
279,330 |
|
Cemetery |
|
|
— |
|
|
|
218,836 |
|
|
|
3,193 |
|
|
|
21,458 |
|
|
|
— |
|
|
|
243,487 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
476,619 |
|
|
|
4,751 |
|
|
|
41,447 |
|
|
|
— |
|
|
|
522,817 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
— |
|
|
|
202,721 |
|
|
|
1,036 |
|
|
|
12,618 |
|
|
|
— |
|
|
|
216,375 |
|
Cemetery |
|
|
— |
|
|
|
175,070 |
|
|
|
2,492 |
|
|
|
16,450 |
|
|
|
— |
|
|
|
194,012 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
377,791 |
|
|
|
3,528 |
|
|
|
29,068 |
|
|
|
— |
|
|
|
410,387 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
98,828 |
|
|
|
1,223 |
|
|
|
12,379 |
|
|
|
— |
|
|
|
112,430 |
|
Corporate general and administrative
expenses |
|
|
(31,143 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31,143 |
) |
Hurricane related charges, net |
|
|
(4 |
) |
|
|
(965 |
) |
|
|
(1,564 |
) |
|
|
— |
|
|
|
— |
|
|
|
(2,533 |
) |
Separation charges |
|
|
(384 |
) |
|
|
(196 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(580 |
) |
Gains on dispositions and impairment
(losses), net |
|
|
4 |
|
|
|
(45 |
) |
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(44 |
) |
Other operating income, net |
|
|
361 |
|
|
|
1,054 |
|
|
|
2 |
|
|
|
234 |
|
|
|
— |
|
|
|
1,651 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(31,166 |
) |
|
|
98,676 |
|
|
|
(339 |
) |
|
|
12,610 |
|
|
|
— |
|
|
|
79,781 |
|
Interest expense |
|
|
8,718 |
|
|
|
(31,481 |
) |
|
|
(189 |
) |
|
|
(2,113 |
) |
|
|
— |
|
|
|
(25,065 |
) |
Loss on early extinguishment of debt |
|
|
(677 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(677 |
) |
Investment and other income, net |
|
|
3,266 |
|
|
|
94 |
|
|
|
— |
|
|
|
14 |
|
|
|
— |
|
|
|
3,374 |
|
Equity in subsidiaries |
|
|
59,324 |
|
|
|
530 |
|
|
|
— |
|
|
|
— |
|
|
|
(59,854 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
39,465 |
|
|
|
67,819 |
|
|
|
(528 |
) |
|
|
10,511 |
|
|
|
(59,854 |
) |
|
|
57,413 |
|
Income tax expense (benefit) |
|
|
(348 |
) |
|
|
16,041 |
|
|
|
(186 |
) |
|
|
2,592 |
|
|
|
— |
|
|
|
18,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations |
|
|
39,813 |
|
|
|
51,778 |
|
|
|
(342 |
) |
|
|
7,919 |
|
|
|
(59,854 |
) |
|
|
39,314 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued
operations before income taxes |
|
|
— |
|
|
|
807 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
807 |
|
Income taxes |
|
|
— |
|
|
|
308 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from discontinued operations |
|
|
— |
|
|
|
499 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
499 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
39,813 |
|
|
|
52,277 |
|
|
|
(342 |
) |
|
|
7,919 |
|
|
|
(59,854 |
) |
|
|
39,813 |
|
Other comprehensive income, net |
|
|
14 |
|
|
|
— |
|
|
|
— |
|
|
|
14 |
|
|
|
(14 |
) |
|
|
14 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
39,827 |
|
|
$ |
52,277 |
|
|
$ |
(342 |
) |
|
$ |
7,933 |
|
|
$ |
(59,868 |
) |
|
$ |
39,827 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Statements of Earnings and Other Comprehensive Income
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, 2006 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
— |
|
|
$ |
259,673 |
|
|
$ |
1,321 |
|
|
$ |
19,243 |
|
|
$ |
— |
|
|
$ |
280,237 |
|
Cemetery |
|
|
— |
|
|
|
213,343 |
|
|
|
3,091 |
|
|
|
17,559 |
|
|
|
— |
|
|
|
233,993 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
473,016 |
|
|
|
4,412 |
|
|
|
36,802 |
|
|
|
— |
|
|
|
514,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Costs and expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
— |
|
|
|
201,744 |
|
|
|
815 |
|
|
|
12,483 |
|
|
|
— |
|
|
|
215,042 |
|
Cemetery |
|
|
— |
|
|
|
167,577 |
|
|
|
2,637 |
|
|
|
14,361 |
|
|
|
— |
|
|
|
184,575 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
— |
|
|
|
369,321 |
|
|
|
3,452 |
|
|
|
26,844 |
|
|
|
— |
|
|
|
399,617 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
— |
|
|
|
103,695 |
|
|
|
960 |
|
|
|
9,958 |
|
|
|
— |
|
|
|
114,613 |
|
Corporate general and administrative
expenses |
|
|
(31,739 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(31,739 |
) |
Hurricane related recoveries (charges), net |
|
|
(127 |
) |
|
|
2,463 |
|
|
|
(708 |
) |
|
|
— |
|
|
|
— |
|
|
|
1,628 |
|
Separation charges |
|
|
(807 |
) |
|
|
(184 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(991 |
) |
Gains on dispositions and impairment
(losses), net |
|
|
— |
|
|
|
(78 |
) |
|
|
— |
|
|
|
(75 |
) |
|
|
— |
|
|
|
(153 |
) |
Other operating income (expense), net |
|
|
36 |
|
|
|
1,048 |
|
|
|
(49 |
) |
|
|
298 |
|
|
|
— |
|
|
|
1,333 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating earnings (loss) |
|
|
(32,637 |
) |
|
|
106,944 |
|
|
|
203 |
|
|
|
10,181 |
|
|
|
— |
|
|
|
84,691 |
|
Interest expense |
|
|
9,173 |
|
|
|
(36,441 |
) |
|
|
(417 |
) |
|
|
(1,948 |
) |
|
|
— |
|
|
|
(29,633 |
) |
Investment and other income, net |
|
|
3,676 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,676 |
|
Equity in subsidiaries |
|
|
48,652 |
|
|
|
591 |
|
|
|
— |
|
|
|
— |
|
|
|
(49,243 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations before income taxes |
|
|
28,864 |
|
|
|
71,094 |
|
|
|
(214 |
) |
|
|
8,233 |
|
|
|
(49,243 |
) |
|
|
58,734 |
|
Income tax expense (benefit) |
|
|
(8,729 |
) |
|
|
23,570 |
|
|
|
(58 |
) |
|
|
6,371 |
|
|
|
— |
|
|
|
21,154 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from continuing
operations |
|
|
37,593 |
|
|
|
47,524 |
|
|
|
(156 |
) |
|
|
1,862 |
|
|
|
(49,243 |
) |
|
|
37,580 |
|
Discontinued operations: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued
operations before income taxes |
|
|
— |
|
|
|
(418 |
) |
|
|
— |
|
|
|
338 |
|
|
|
— |
|
|
|
(80 |
) |
Income tax benefit |
|
|
— |
|
|
|
(93 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(93 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) from discontinued
operations |
|
|
— |
|
|
|
(325 |
) |
|
|
— |
|
|
|
338 |
|
|
|
— |
|
|
|
13 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net earnings (loss) |
|
|
37,593 |
|
|
|
47,199 |
|
|
|
(156 |
) |
|
|
2,200 |
|
|
|
(49,243 |
) |
|
|
37,593 |
|
Other comprehensive income, net |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Comprehensive income (loss) |
|
$ |
37,593 |
|
|
$ |
47,199 |
|
|
$ |
(156 |
) |
|
$ |
2,200 |
|
|
$ |
(49,243 |
) |
|
$ |
37,593 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
65,593 |
|
|
$ |
4,332 |
|
|
$ |
22 |
|
|
$ |
2,627 |
|
|
$ |
— |
|
|
$ |
72,574 |
|
Marketable securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
55 |
|
|
|
— |
|
|
|
55 |
|
Receivables, net of allowances |
|
|
2,987 |
|
|
|
51,137 |
|
|
|
546 |
|
|
|
4,459 |
|
|
|
— |
|
|
|
59,129 |
|
Inventories |
|
|
300 |
|
|
|
32,821 |
|
|
|
361 |
|
|
|
2,388 |
|
|
|
— |
|
|
|
35,870 |
|
Prepaid expenses |
|
|
1,282 |
|
|
|
4,618 |
|
|
|
37 |
|
|
|
1,380 |
|
|
|
— |
|
|
|
7,317 |
|
Deferred income taxes, net |
|
|
1,395 |
|
|
|
6,117 |
|
|
|
55 |
|
|
|
1,231 |
|
|
|
— |
|
|
|
8,798 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
71,557 |
|
|
|
99,025 |
|
|
|
1,021 |
|
|
|
12,140 |
|
|
|
— |
|
|
|
183,743 |
|
Receivables due beyond one year, net of
allowances |
|
|
— |
|
|
|
54,326 |
|
|
|
404 |
|
|
|
15,941 |
|
|
|
— |
|
|
|
70,671 |
|
Preneed funeral receivables and trust
investments |
|
|
— |
|
|
|
358,891 |
|
|
|
— |
|
|
|
9,521 |
|
|
|
— |
|
|
|
368,412 |
|
Preneed cemetery receivables and trust
investments |
|
|
— |
|
|
|
173,484 |
|
|
|
1,047 |
|
|
|
7,610 |
|
|
|
— |
|
|
|
182,141 |
|
Goodwill |
|
|
— |
|
|
|
227,401 |
|
|
|
48 |
|
|
|
19,787 |
|
|
|
— |
|
|
|
247,236 |
|
Cemetery property, at cost |
|
|
— |
|
|
|
338,793 |
|
|
|
11,424 |
|
|
|
25,615 |
|
|
|
— |
|
|
|
375,832 |
|
Property and equipment, at cost |
|
|
49,583 |
|
|
|
451,147 |
|
|
|
1,932 |
|
|
|
38,109 |
|
|
|
— |
|
|
|
540,771 |
|
Less accumulated depreciation |
|
|
30,479 |
|
|
|
190,822 |
|
|
|
824 |
|
|
|
14,118 |
|
|
|
— |
|
|
|
236,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
19,104 |
|
|
|
260,325 |
|
|
|
1,108 |
|
|
|
23,991 |
|
|
|
— |
|
|
|
304,528 |
|
Deferred income taxes, net |
|
|
25,853 |
|
|
|
148,403 |
|
|
|
— |
|
|
|
8,527 |
|
|
|
(3,268 |
) |
|
|
179,515 |
|
Cemetery perpetual care trust investments |
|
|
— |
|
|
|
162,789 |
|
|
|
7,137 |
|
|
|
3,164 |
|
|
|
— |
|
|
|
173,090 |
|
Non-current assets held for sale |
|
|
— |
|
|
|
2,873 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
2,873 |
|
Other assets |
|
|
9,451 |
|
|
|
5,937 |
|
|
|
16 |
|
|
|
1,070 |
|
|
|
— |
|
|
|
16,474 |
|
Intercompany receivables |
|
|
837,282 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(837,282 |
) |
|
|
— |
|
Equity in subsidiaries |
|
|
28,082 |
|
|
|
7,374 |
|
|
|
— |
|
|
|
— |
|
|
|
(35,456 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
991,329 |
|
|
$ |
1,839,621 |
|
|
$ |
22,205 |
|
|
$ |
127,366 |
|
|
$ |
(876,006 |
) |
|
$ |
2,104,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
20 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
20 |
|
Accounts payable |
|
|
2,530 |
|
|
|
23,237 |
|
|
|
167 |
|
|
|
1,718 |
|
|
|
— |
|
|
|
27,652 |
|
Accrued expenses and other current
liabilities |
|
|
15,496 |
|
|
|
54,683 |
|
|
|
13 |
|
|
|
2,632 |
|
|
|
— |
|
|
|
72,824 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
18,046 |
|
|
|
77,920 |
|
|
|
180 |
|
|
|
4,350 |
|
|
|
— |
|
|
|
100,496 |
|
Long-term debt, less current maturities |
|
|
450,095 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
450,095 |
|
Deferred income taxes |
|
|
— |
|
|
|
— |
|
|
|
3,268 |
|
|
|
— |
|
|
|
(3,268 |
) |
|
|
— |
|
Intercompany payables, net |
|
|
— |
|
|
|
819,691 |
|
|
|
3,939 |
|
|
|
13,652 |
|
|
|
(837,282 |
) |
|
|
— |
|
Deferred preneed funeral revenue |
|
|
— |
|
|
|
199,867 |
|
|
|
— |
|
|
|
45,315 |
|
|
|
— |
|
|
|
245,182 |
|
Deferred preneed cemetery revenue |
|
|
— |
|
|
|
248,098 |
|
|
|
324 |
|
|
|
27,413 |
|
|
|
— |
|
|
|
275,835 |
|
Non-controlling interest in funeral and
cemetery trusts |
|
|
— |
|
|
|
470,167 |
|
|
|
899 |
|
|
|
4,354 |
|
|
|
— |
|
|
|
475,420 |
|
Other long-term liabilities |
|
|
17,114 |
|
|
|
3,241 |
|
|
|
— |
|
|
|
124 |
|
|
|
— |
|
|
|
20,479 |
|
Negative equity in subsidiaries |
|
|
140,437 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(140,437 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
625,692 |
|
|
|
1,818,984 |
|
|
|
8,610 |
|
|
|
95,208 |
|
|
|
(980,987 |
) |
|
|
1,567,507 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in perpetual
care trusts |
|
|
— |
|
|
|
161,074 |
|
|
|
7,132 |
|
|
|
3,165 |
|
|
|
— |
|
|
|
171,371 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
92,248 |
|
|
|
102 |
|
|
|
324 |
|
|
|
52 |
|
|
|
(478 |
) |
|
|
92,248 |
|
Other |
|
|
273,352 |
|
|
|
(140,539 |
) |
|
|
6,139 |
|
|
|
28,904 |
|
|
|
105,496 |
|
|
|
273,352 |
|
Accumulated other comprehensive income |
|
|
37 |
|
|
|
— |
|
|
|
— |
|
|
|
37 |
|
|
|
(37 |
) |
|
|
37 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
365,637 |
|
|
|
(140,437 |
) |
|
|
6,463 |
|
|
|
28,993 |
|
|
|
104,981 |
|
|
|
365,637 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
991,329 |
|
|
$ |
1,839,621 |
|
|
$ |
22,205 |
|
|
$ |
127,366 |
|
|
$ |
(876,006 |
) |
|
$ |
2,104,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 Balance Sheets
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
63,202 |
|
|
$ |
6,685 |
|
|
$ |
36 |
|
|
$ |
1,622 |
|
|
$ |
— |
|
|
$ |
71,545 |
|
Marketable securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
262 |
|
|
|
— |
|
|
|
262 |
|
Receivables, net of allowances |
|
|
4,054 |
|
|
|
51,619 |
|
|
|
103 |
|
|
|
4,839 |
|
|
|
— |
|
|
|
60,615 |
|
Inventories |
|
|
368 |
|
|
|
32,765 |
|
|
|
328 |
|
|
|
2,600 |
|
|
|
— |
|
|
|
36,061 |
|
Prepaid expenses |
|
|
950 |
|
|
|
4,306 |
|
|
|
3 |
|
|
|
1,096 |
|
|
|
— |
|
|
|
6,355 |
|
Deferred income taxes, net |
|
|
1,334 |
|
|
|
5,785 |
|
|
|
78 |
|
|
|
1,424 |
|
|
|
— |
|
|
|
8,621 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
69,908 |
|
|
|
101,160 |
|
|
|
548 |
|
|
|
11,843 |
|
|
|
— |
|
|
|
183,459 |
|
Receivables due beyond one year, net of
allowances |
|
|
10,358 |
|
|
|
53,926 |
|
|
|
928 |
|
|
|
18,396 |
|
|
|
— |
|
|
|
83,608 |
|
Preneed funeral receivables and trust
investments |
|
|
— |
|
|
|
504,534 |
|
|
|
— |
|
|
|
10,519 |
|
|
|
— |
|
|
|
515,053 |
|
Preneed cemetery receivables and trust
investments |
|
|
— |
|
|
|
245,056 |
|
|
|
1,199 |
|
|
|
9,424 |
|
|
|
— |
|
|
|
255,679 |
|
Goodwill |
|
|
— |
|
|
|
253,451 |
|
|
|
48 |
|
|
|
19,787 |
|
|
|
— |
|
|
|
273,286 |
|
Cemetery property, at cost |
|
|
— |
|
|
|
336,512 |
|
|
|
11,408 |
|
|
|
25,118 |
|
|
|
— |
|
|
|
373,038 |
|
Property and equipment, at cost |
|
|
43,395 |
|
|
|
435,155 |
|
|
|
1,699 |
|
|
|
37,299 |
|
|
|
— |
|
|
|
517,548 |
|
Less accumulated depreciation |
|
|
26,701 |
|
|
|
172,924 |
|
|
|
663 |
|
|
|
12,775 |
|
|
|
— |
|
|
|
213,063 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net property and equipment |
|
|
16,694 |
|
|
|
262,231 |
|
|
|
1,036 |
|
|
|
24,524 |
|
|
|
— |
|
|
|
304,485 |
|
Deferred income taxes, net |
|
|
29,238 |
|
|
|
156,254 |
|
|
|
— |
|
|
|
9,913 |
|
|
|
(2,546 |
) |
|
|
192,859 |
|
Cemetery perpetual care trust investments |
|
|
— |
|
|
|
224,182 |
|
|
|
8,322 |
|
|
|
3,999 |
|
|
|
— |
|
|
|
236,503 |
|
Non-current assets held for sale |
|
|
— |
|
|
|
3,195 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,195 |
|
Other assets |
|
|
9,664 |
|
|
|
7,039 |
|
|
|
16 |
|
|
|
1,090 |
|
|
|
— |
|
|
|
17,809 |
|
Intercompany receivables |
|
|
897,546 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(897,546 |
) |
|
|
— |
|
Equity in subsidiaries |
|
|
21,124 |
|
|
|
6,826 |
|
|
|
— |
|
|
|
— |
|
|
|
(27,950 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
1,054,532 |
|
|
$ |
2,154,366 |
|
|
$ |
23,505 |
|
|
$ |
134,613 |
|
|
$ |
(928,042 |
) |
|
$ |
2,438,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current maturities of long-term debt |
|
$ |
198 |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
198 |
|
Accounts payable |
|
|
2,196 |
|
|
|
21,284 |
|
|
|
1,075 |
|
|
|
2,051 |
|
|
|
— |
|
|
|
26,606 |
|
Accrued expenses and other current
liabilities |
|
|
16,654 |
|
|
|
45,934 |
|
|
|
— |
|
|
|
2,691 |
|
|
|
— |
|
|
|
65,279 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
19,048 |
|
|
|
67,218 |
|
|
|
1,075 |
|
|
|
4,742 |
|
|
|
— |
|
|
|
92,083 |
|
Long-term debt, less current maturities |
|
|
450,115 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
450,115 |
|
Deferred income taxes |
|
|
— |
|
|
|
— |
|
|
|
2,546 |
|
|
|
— |
|
|
|
(2,546 |
) |
|
|
— |
|
Intercompany payables, net |
|
|
— |
|
|
|
869,802 |
|
|
|
4,419 |
|
|
|
23,325 |
|
|
|
(897,546 |
) |
|
|
— |
|
Deferred preneed funeral revenue |
|
|
— |
|
|
|
212,166 |
|
|
|
— |
|
|
|
44,437 |
|
|
|
— |
|
|
|
256,603 |
|
Deferred preneed cemetery revenue |
|
|
— |
|
|
|
255,266 |
|
|
|
515 |
|
|
|
28,726 |
|
|
|
— |
|
|
|
284,507 |
|
Non-controlling interest in funeral and
cemetery trusts |
|
|
— |
|
|
|
674,977 |
|
|
|
1,119 |
|
|
|
6,956 |
|
|
|
— |
|
|
|
683,052 |
|
Other long-term liabilities |
|
|
11,717 |
|
|
|
2,152 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
13,869 |
|
Negative equity in subsidiaries |
|
|
150,334 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(150,334 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
631,214 |
|
|
|
2,081,581 |
|
|
|
9,674 |
|
|
|
108,186 |
|
|
|
(1,050,426 |
) |
|
|
1,780,229 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-controlling interest in perpetual
care trusts |
|
|
— |
|
|
|
223,119 |
|
|
|
8,309 |
|
|
|
3,999 |
|
|
|
— |
|
|
|
235,427 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Common stock |
|
|
98,420 |
|
|
|
102 |
|
|
|
324 |
|
|
|
52 |
|
|
|
(478 |
) |
|
|
98,420 |
|
Other |
|
|
324,887 |
|
|
|
(150,436 |
) |
|
|
5,198 |
|
|
|
22,365 |
|
|
|
122,873 |
|
|
|
324,887 |
|
Accumulated other comprehensive income |
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
|
|
(11 |
) |
|
|
11 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total shareholders’ equity |
|
|
423,318 |
|
|
|
(150,334 |
) |
|
|
5,522 |
|
|
|
22,428 |
|
|
|
122,384 |
|
|
|
423,318 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total liabilities and shareholders’ equity |
|
$ |
1,054,532 |
|
|
$ |
2,154,366 |
|
|
$ |
23,505 |
|
|
$ |
134,613 |
|
|
$ |
(928,042 |
) |
|
$ |
2,438,974 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities |
|
$ |
5,618 |
|
|
$ |
66,856 |
|
|
$ |
614 |
|
|
$ |
11,435 |
|
|
$ |
— |
|
|
$ |
84,523 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from sales of marketable
securities |
|
|
19,969 |
|
|
|
— |
|
|
|
— |
|
|
|
250 |
|
|
|
— |
|
|
|
20,219 |
|
Purchases of marketable securities |
|
|
(19,953 |
) |
|
|
— |
|
|
|
— |
|
|
|
(3 |
) |
|
|
— |
|
|
|
(19,956 |
) |
Proceeds from sale of assets, net |
|
|
— |
|
|
|
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)
| (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, 2007 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in) operating
activities |
|
$ |
637 |
|
|
$ |
68,417 |
|
|
$ |
(1,838 |
) |
|
$ |
14,725 |
|
|
$ |
— |
|
|
$ |
81,941 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(1 |
) |
|
|
— |
|
|
|
(1 |
) |
Proceeds from sale of assets, net |
|
|
— |
|
|
|
3,750 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,750 |
|
Purchases of subsidiaries and other
investments, net of cash acquired |
|
|
— |
|
|
|
(5,203 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(5,203 |
) |
Insurance proceeds related to
hurricane damaged properties |
|
|
— |
|
|
|
2,439 |
|
|
|
90 |
|
|
|
— |
|
|
|
— |
|
|
|
2,529 |
|
Additions to property and equipment |
|
|
(6,648 |
) |
|
|
(27,167 |
) |
|
|
(150 |
) |
|
|
(1,345 |
) |
|
|
— |
|
|
|
(35,310 |
) |
Other |
|
|
— |
|
|
|
48 |
|
|
|
— |
|
|
|
1 |
|
|
|
— |
|
|
|
49 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash used in investing activities |
|
|
(6,648 |
) |
|
|
(26,133 |
) |
|
|
(60 |
) |
|
|
(1,345 |
) |
|
|
— |
|
|
|
(34,186 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Proceeds from long-term debt |
|
|
250,000 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
250,000 |
|
Repayments of long-term debt |
|
|
(146,547 |
) |
|
|
— |
|
|
|
— |
|
|
|
(30,000 |
) |
|
|
— |
|
|
|
(176,547 |
) |
Intercompany receivables (payables) |
|
|
20,173 |
|
|
|
(38,853 |
) |
|
|
1,897 |
|
|
|
16,783 |
|
|
|
— |
|
|
|
— |
|
Debt issue costs |
|
|
(6,217 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(6,217 |
) |
Proceeds from sale of common stock
warrants |
|
|
43,850 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
43,850 |
|
Issuance of common stock |
|
|
3,066 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
3,066 |
|
Purchase of call options |
|
|
(60,000 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(60,000 |
) |
Purchase and retirement of common stock |
|
|
(64,201 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(64,201 |
) |
Dividends |
|
|
(10,184 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,184 |
) |
Excess tax benefits from share-based
payment arrangements |
|
|
153 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
30,093 |
|
|
|
(38,853 |
) |
|
|
1,897 |
|
|
|
(13,217 |
) |
|
|
— |
|
|
|
(20,080 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash |
|
|
24,082 |
|
|
|
3,431 |
|
|
|
(1 |
) |
|
|
163 |
|
|
|
— |
|
|
|
27,675 |
|
Cash and cash equivalents, beginning of
period |
|
|
39,120 |
|
|
|
3,254 |
|
|
|
37 |
|
|
|
1,459 |
|
|
|
— |
|
|
|
43,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
63,202 |
|
|
$ |
6,685 |
|
|
$ |
36 |
|
|
$ |
1,622 |
|
|
$ |
— |
|
|
$ |
71,545 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
96
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, 2006 |
|
| |
|
|
|
|
|
Guarantor |
|
|
Guarantor |
|
|
Non- |
|
|
|
|
|
|
|
| |
|
|
|
|
|
Subsidiaries- |
|
|
Subsidiaries- |
|
|
Guarantor |
|
|
|
|
|
|
|
| |
|
Parent |
|
|
Tier 1 |
|
|
Tier 2 |
|
|
Subsidiaries |
|
|
Eliminations |
|
|
Consolidated |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities
|
|
$ |
1,968 |
|
|
$ |
73,676 |
|
|
$ |
789 |
|
|
$ |
13,668 |
|
|
$ |
— |
|
|
$ |
90,101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchases of marketable securities |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(53 |
) |
|
|
— |
|
|
|
(53 |
) |
Proceeds from sale of assets, net |
|
|
— |
|
|
|
485 |
|
|
|
— |
|
|
|
733 |
|
|
|
— |
|
|
|
1,218 |
|
Insurance proceeds related to
hurricane damaged properties |
|
|
— |
|
|
|
5,616 |
|
|
|
384 |
|
|
|
— |
|
|
|
— |
|
|
|
6,000 |
|
Additions to property and equipment |
|
|
(3,583 |
) |
|
|
(23,970 |
) |
|
|
(169 |
) |
|
|
(1,185 |
) |
|
|
— |
|
|
|
(28,907 |
) |
Other |
|
|
10 |
|
|
|
175 |
|
|
|
— |
|
|
|
117 |
|
|
|
— |
|
|
|
302 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
investing activities |
|
|
(3,573 |
) |
|
|
(17,694 |
) |
|
|
215 |
|
|
|
(388 |
) |
|
|
— |
|
|
|
(21,440 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Repayments of long-term debt |
|
|
(33,168 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(33,168 |
) |
Intercompany receivables (payables) |
|
|
67,446 |
|
|
|
(53,602 |
) |
|
|
(967 |
) |
|
|
(12,877 |
) |
|
|
— |
|
|
|
— |
|
Issuance of common stock |
|
|
368 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
368 |
|
Purchase and retirement of common stock |
|
|
(21,996 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(21,996 |
) |
Dividends |
|
|
(10,673 |
) |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
(10,673 |
) |
Excess tax benefits from share-based
payment arrangements |
|
|
11 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
11 |
|
Other |
|
|
62 |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
62 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by (used in)
financing activities |
|
|
2,050 |
|
|
|
(53,602 |
) |
|
|
(967 |
) |
|
|
(12,877 |
) |
|
|
— |
|
|
|
(65,396 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash |
|
|
445 |
|
|
|
2,380 |
|
|
|
37 |
|
|
|
403 |
|
|
|
— |
|
|
|
3,265 |
|
Cash and cash equivalents, beginning of
period |
|
|
38,675 |
|
|
|
874 |
|
|
|
— |
|
|
|
1,056 |
|
|
|
— |
|
|
|
40,605 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of period |
|
$ |
39,120 |
|
|
$ |
3,254 |
|
|
$ |
37 |
|
|
$ |
1,459 |
|
|
$ |
— |
|
|
$ |
43,870 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(12) Dispositions and Acquisitions
In fiscal years 2008, 2007 and 2006, the Company recorded gains on dispositions, net of
impairment losses, of ($353), ($44) and ($153) in continuing operations, respectively, and $0, $609
and ($174) in discontinued operations, respectively. In the consolidated statements of earnings,
the impairment charges related to the write-down of these long-lived assets occurring in 2006, 2007
and 2008 in continuing operations are reflected in the “Gains on dispositions and impairment
(losses), net” line item. All businesses sold in fiscal years 2007 and 2006 have been classified
as discontinued operations for all periods presented.
The related assets associated with assets held for sale are presented in the “non-current
assets held for sale” line in the consolidated balance sheets for October 31, 2008 and 2007. For
October 31, 2008, this represents $1,440 in cemetery property and $1,433 in land held for sale.
For October 31, 2007, this represents $1,762 in cemetery property and $1,433 in land held for sale.
Acquisitions
During the year ended October 31, 2008, the Company acquired an investment in an outside
business that sells obituaries on-line for approximately $1,378, which is accounted for under the
cost method of accounting. During the year ended October 31, 2007, the Company purchased a
property for approximately $2,398 and a new funeral home in its Eastern division for approximately
$2,805. This funeral home acquisition was accounted for under the purchase method, and the
acquired assets and liabilities were valued at their estimated fair values. Its results of
operations have been included since the acquisition date. The excess purchase price over the fair
value of net assets acquired for this funeral home was allocated to goodwill.
(13) Impairment of Goodwill
During the Company’s fiscal year 2008, and particularly during its fourth fiscal quarter, the
United States and global economies have experienced significant declines. These events caused the
Company to realize losses in its trust investment portfolio and to record an estimated probable
funding obligation related to its cemetery perpetual care trusts. The overall market performance
caused reduced cemetery perpetual care trust earnings and reduced funeral and cemetery merchandise
trust earnings. The current economic downturn has also negatively impacted cemetery property
sales, particularly in the Eastern division. When the Company performed its annual 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 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. There were no goodwill impairment
charges for the years ended October 31, 2007 and 2006. 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 $247,236 and $273,286 as of
October 31, 2008 and 2007, respectively. The Company has approximately $37,857 of tax deductible
goodwill which is being amortized for tax purposes.
98
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(13) Impairment of Goodwill—(Continued)
Goodwill and changes to goodwill by operating segment from October 31, 2006 to October 31,
2007 and from October 31, 2007 to October 31, 2008 are presented below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2006 |
|
|
Changes |
|
|
October 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division—Funeral |
|
$ |
89,147 |
|
|
$ |
1,944 |
(1) |
|
$ |
91,091 |
|
Western Division—Funeral |
|
|
107,522 |
|
|
|
— |
|
|
|
107,522 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Goodwill |
|
$ |
196,669 |
|
|
$ |
1,944 |
|
|
$ |
198,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division—Cemetery |
|
$ |
25,952 |
|
|
$ |
— |
|
|
$ |
25,952 |
|
Western Division—Cemetery |
|
|
48,721 |
|
|
|
— |
|
|
|
48,721 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Goodwill |
|
$ |
74,673 |
|
|
$ |
— |
|
|
$ |
74,673 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
271,342 |
|
|
$ |
1,944 |
|
|
$ |
273,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
The change is due to the purchase of a funeral home and another property during
fiscal year 2007. |
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
October 31, 2007 |
|
|
Changes |
|
|
October 31, 2008 |
|
| |
Eastern Division—Funeral |
|
$ |
91,091 |
|
|
$ |
— |
|
|
$ |
91,091 |
|
Western Division—Funeral |
|
|
107,522 |
|
|
|
(98 |
) |
|
|
107,424 |
|
|
|
|
|
|
|
|
|
|
|
Total Funeral Goodwill |
|
$ |
198,613 |
|
|
$ |
(98 |
) |
|
$ |
198,515 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division—Cemetery |
|
$ |
25,952 |
|
|
$ |
(25,952 |
) (1) |
|
$ |
— |
|
Western Division—Cemetery |
|
|
48,721 |
|
|
|
— |
|
|
|
48,721 |
|
|
|
|
|
|
|
|
|
|
|
Total Cemetery Goodwill |
|
$ |
74,673 |
|
|
$ |
(25,952 |
) |
|
$ |
48,721 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Goodwill |
|
$ |
273,286 |
|
|
$ |
(26,050 |
) |
|
$ |
247,236 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Goodwill impairment charge recorded as a result of the fiscal year 2008 annual
goodwill impairment test. |
(14) Separation Charges
During fiscal years 2007 and 2006, the Company recorded $580 and $991, respectively, in total
separation charges, of which $350 and $550, respectively, are related to the separation pay of
former executive officers. For a discussion of the separation pay to former executive officers,
see Note 20. As of October 31, 2008, the Company has $157 in remaining payments under all
executive officer separation agreements.
The Company reorganized its operating divisions from four operating divisions to two, Eastern
and Western, effective for the fourth quarter of fiscal year 2005. The Company recorded $230 and
$441 in costs related to this reorganization for the years ended October 31, 2007 and 2006,
respectively. The liability related to the
reorganization amounted to $91 and $130 at October 31, 2008 and 2007, respectively. The
Company paid approximately $408 and $846 of the reorganization costs during fiscal years 2007 and
2006, respectively. Reorganization costs in 2006 primarily related to moving and other costs
associated with the reorganization. Reorganization costs in 2007 are primarily related to a lease
agreement for which the Company is committed through 2009. In the third quarter of 2007, the
Company entered into a sublease of this property, however, this sublease does not cover the full
cost of the original lease.
99
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt
| |
|
|
|
|
|
|
|
|
| |
|
October 31, 2008 |
|
|
October 31, 2007 |
|
Long-term debt: |
|
|
|
|
|
|
|
|
3.125% senior convertible notes due 2014 |
|
$ |
125,000 |
|
|
$ |
125,000 |
|
3.375% senior convertible notes due 2016 |
|
|
125,000 |
|
|
|
125,000 |
|
Senior secured credit facility: |
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
— |
|
|
|
— |
|
6.25% senior notes due 2013 |
|
|
200,000 |
|
|
|
200,000 |
|
Other, principally seller financing of
acquired operations or assumption upon
acquisition, weighted average interest
rates of 7.7% and 4.5% as of October
31, 2008 and October 31, 2007,
respectively, partially secured by
assets of subsidiaries, with maturities
through 2022 |
|
|
115 |
|
|
|
313 |
|
|
|
|
|
|
|
|
Total long-term debt |
|
|
450,115 |
|
|
|
450,313 |
|
Less current maturities |
|
|
20 |
|
|
|
198 |
|
|
|
|
|
|
|
|
|
|
$ |
450,095 |
|
|
$ |
450,115 |
|
|
|
|
|
|
|
|
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 (the Company had
previously paid $13,098 of principal payments during 2007 prior to the extinguishment of the debt),
including accrued interest, and used $60,000 for the purchase of call options as described below.
The Company also used approximately $64,201 of the proceeds to repurchase 7,698,000 shares of the
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 will be amortized over the terms of the
senior convertible notes or until they become convertible. The Company recorded a charge for the
loss on early extinguishment of debt of $677 as of October 31, 2007 which represents the write-off
of remaining Term Loan B deferred charges.
The 2014 Notes and 2016 Notes are governed by separate indentures dated as of June 27, 2007,
among the Company, the Guarantors named therein and the trustee. The 2014 Notes mature July 15,
2014, and the 2016 Notes mature July 15, 2016. The 2014 Notes bear interest at a rate of 3.125
percent per annum, and the 2016 Notes bear interest at a rate of 3.375 percent per annum. Interest
is payable semiannually in arrears on January 15 and July 15 of each year, commencing January 15,
2008. As of October 31, 2008, the carrying values of the Company’s 2014 Notes and 2016 Notes,
including accrued interest, were $126,150 and $126,242, respectively, compared to fair values of
$81,634 and $81,286, respectively. As of October 31, 2007, the carrying values of the Company’s
2014 Notes and 2016 Notes, including accrued interest, were $126,345 and $126,453, respectively,
compared to fair values of $131,520 and $131,653, respectively.
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
100
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt—(Continued)
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 year 2008.
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 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, the Company purchased call
options with respect to its Class A common stock from 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.
The Company also entered into warrant transactions whereby it sold to 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.
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.
101
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt—(Continued)
Senior Secured Credit Facility
On November 19, 2004, the Company entered into an amended and restated senior secured credit
facility consisting of a $125,000 five-year revolving credit facility maturing on November 19,
2009, and a $100,000 seven-year Term Loan B. In 2005, the Company borrowed an additional $130,000
in Term Loan B under an accordion feature. On June 27, 2007, the Company repaid the balance of its
Term Loan B prior to its maturity date.
As a result of the amendment of the facility in 2004, the leverage-based grid pricing for the
interest rate on the Company’s revolving credit facility was reduced to LIBOR plus 150.0 basis
points at closing, representing a 50 basis-point reduction. The grid for the revolving credit
facility ranges from 137.5 to 200.0 basis points. The Company pays a quarterly commitment fee of
37.5 to 50.0 basis points, based on the Company’s consolidated leverage ratio. The interest rate
on the Company’s Term Loan B was reduced to LIBOR plus 175.0 basis points, which was 75 basis
points below the prior facility and not subject to grid pricing.
As of October 31, 2008 and 2007, there were no amounts drawn on the Company’s $125,000
revolving credit facility. As of October 31, 2008, after giving consideration to the $14,535 of
outstanding letters of credit and a $30,838 bond the Company is required to maintain to guarantee
its obligations relating to funds it withdrew in fiscal year 2001 from trusts in Florida, the
Company’s availability under the revolving credit facility was $79,627.
The senior secured credit facility is governed by three financial covenants:
| |
• |
|
Maintenance on a rolling four quarter basis of a maximum consolidated leverage ratio
(funded debt (net of domestic cash, cash equivalents and marketable securities) divided by
EBITDA (as defined)) — Maximum 3.50x, |
| |
| |
• |
|
Maintenance on a rolling four quarter basis of a minimum consolidated interest coverage
ratio (EBITDA (as defined) divided by interest expense) — Minimum 2.50x, and |
| |
| |
• |
|
Maintenance on a rolling four quarter basis of a maximum consolidated senior secured
leverage ratio (total funded senior secured debt divided by EBITDA (as defined)) — Maximum
3.00x with step-downs. |
The covenants include required mandatory prepayments from the proceeds of certain asset sales
and debt and equity offerings (with the first $25,000 per year of asset sale proceeds considered to
be an optional prepayment), limitations on liens, limitations on mergers, consolidations and asset
sales, limitations on incurrence of debt, limitations on dividends, stock redemptions and the
redemption and/or prepayment of other debt, 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. 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 cost of acquisitions is unlimited if the consolidated leverage ratio is
less than or equal to 3.00 to 1.00 and the consolidated senior secured leverage ratio is less than
or equal to 1.75 to 1.00, after giving pro forma effect to the acquisition; otherwise, the limit is
$75,000 in any fiscal year, with a provision for the carryover of permitted but unused amounts.
The lenders under the senior secured credit facility can accelerate all obligations under the
facility and terminate the revolving credit commitment if an event of default occurs and is
continuing.
Under the dividend and stock repurchase restrictions in the senior secured credit facility,
the Company could use up to $210,102 to pay dividends or repurchase its stock as of October 31,
2008.
Obligations under the senior secured 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”).
102
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt—(Continued)
The lenders under the senior secured 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 and 65 percent of the voting capital stock of all direct foreign
subsidiaries 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 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.
The Company has initiated discussions with members of its bank group regarding the renewal of
the revolving credit facility due to its maturity in November 2009. Given current credit market
conditions, the Company expects a new revolving credit facility to be more expensive than its
existing facility and have tighter covenants, including, potentially, more restrictive conditions
on when the Company can pay dividends and repurchase stock. The Company has entered into
discussions to assess commitment levels, pricing and covenant expectations. While the Company
expects to renew or replace the current revolving credit facility with acceptable terms, if it is
unable to negotiate a facility at acceptable terms, it would be required to cover the letters of
credit and may be required to cover the Florida bond with existing cash on hand.
Senior Notes
On February 18, 2005, the Company completed its tender offer and consent solicitation for any
and all of its $300,000 10.75 percent senior subordinated notes. The Company purchased a total of
$298,250 in aggregate principal amount of the notes in the offer. The Company funded the tender
offer for the 10.75 percent senior subordinated notes, including related tender premiums, fees,
expenses and accrued interest of $28,931, with the net proceeds of the $130,000 in additional Term
Loan B borrowings described above, a portion of its available cash, and the net proceeds of the
issuance of $200,000 6.25 percent senior notes due 2013 (the “6.25 percent senior notes”), which
were issued on February 11, 2005. The Company redeemed the remaining $1,750 principal amount of
senior subordinated notes on the first call date of July 1, 2005 at the aggregate redemption price
of $1,844, which was funded by cash on hand.
The 6.25 percent senior notes are governed by the terms of an indenture dated as of February
11, 2005. Prior to February 15, 2009, the 6.25 percent senior notes are not redeemable. 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. As of October 31, 2008 and 2007, the carrying value of the Company’s
6.25 percent senior notes including accrued interest was $202,604 compared to fair values of
$168,531 and $193,578, respectively.
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.
103
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(15) Long-term Debt—(Continued)
In connection with the issuance of the 6.25 percent senior notes in February 2005, the Company
entered into a registration rights agreement that required that a registration statement be filed
and declared effective by the SEC, and that an exchange offer be conducted providing for the
exchange of the unregistered notes for similar registered notes, all within specified times. The
Company was unable to cause the required registration statement to become effective on time and
therefore was required to pay additional interest at the regular interest payment rates to the note
holders until the default was cured. Additional interest began to accrue on June 12, 2005 at a
rate of 0.50 percent per annum, increased to 1.00 percent on September 11, 2005 and increased to
1.50 percent on December 11, 2005. The exchange offer was completed on June 5, 2006. Total
additional interest incurred from June 12, 2005 to June 5, 2006 was $2,200 of which $1,672 was
incurred in fiscal year 2006. Since the exchange offer was completed, the additional interest has
been eliminated.
Other
As of October 31, 2008, the Company’s subsidiaries had approximately $115 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. Approximately $99 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, 2009 through October 31, 2013, are approximately $20 in 2009, $5 in 2010, $5 in 2011,
$5 in 2012 and $200,006 in 2013. Scheduled principal payments thereafter are $250,074.
As of October 31, 2008, the Company was in compliance with the covenants in its debt
agreements.
(16) Guarantees
The Company’s obligations under its senior secured 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 credit facility, senior convertible notes, and
senior notes, see Note 15.
All obligations under the senior secured 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, 2008 and 2007 was $477,069 and $448,735, 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
104
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(16) Guarantees—(Continued)
director, provided that the director meets certain standards of conduct.
(17) Reconciliation of Basic and Diluted Per Share Data
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Loss |
|
|
Shares |
|
|
Per Share |
|
| |
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2008 |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations |
|
$ |
(3,693 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations available to
common shareholders |
|
$ |
(3,693 |
) |
|
|
93,795 |
|
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed
exercised and restricted
stock |
|
|
|
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing
operations available to
common shareholders plus
stock options assumed
exercised and restricted
stock |
|
$ |
(3,693 |
) |
|
|
93,795 |
|
|
$ |
(.04 |
) |
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
| |
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2007 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
39,314 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders |
|
$ |
39,314 |
|
|
|
102,584 |
|
|
$ |
.38 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised
and restricted stock |
|
|
|
|
|
|
153 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders plus stock options
assumed exercised and
restricted stock |
|
$ |
39,314 |
|
|
|
102,737 |
|
|
$ |
.38 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Earnings |
|
|
Shares |
|
|
Per Share |
|
| |
|
(Numerator) |
|
|
(Denominator) |
|
|
Data |
|
Year Ended October 31, 2006 |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations |
|
$ |
37,580 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders |
|
$ |
37,580 |
|
|
|
106,855 |
|
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
|
Effect of dilutive securities: |
|
|
|
|
|
|
|
|
|
|
|
|
Stock options assumed exercised
and restricted stock |
|
|
|
|
|
|
45 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing
operations available to common
shareholders plus stock options
assumed exercised and
restricted stock |
|
$ |
37,580 |
|
|
|
106,900 |
|
|
$ |
.35 |
|
|
|
|
|
|
|
|
|
|
|
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
105
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)
excluded from the calculation of diluted earnings per share was
1,733,139 for the fiscal year ended October 31, 2008 because of the net loss from continuing
operations for this period.
Options to purchase 392,212 shares of common stock at prices ranging from $6.33 to $7.31 per
share were outstanding during the year ended October 31, 2007, 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.
Options to purchase 1,068,771 shares of common stock at prices ranging from $5.86 to $7.03 per
share were outstanding during the year ended October 31, 2006, 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 the year ended October 31, 2008, 468,000 market based stock options and 415,000 market and
performance based shares of restricted stock were not dilutive. For the year ended October 31,
2007, 540,000 market based stock options and 360,000 market and performance based shares of
restricted stock were not dilutive. These market based stock options and the market and
performance based restricted stock were not dilutive because the market conditions or performance
conditions for the respective grants were not achieved during any of periods presented.
For the years ended October 31, 2008 and 2007, 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 common stock warrants associated with the June 2007 senior
convertible debt transaction were also not dilutive, as the average price of the Company’s stock
for those periods was less than the conversion price of the senior convertible notes and strike
price of the warrants.
The Company includes Class A and Class B common stock in its diluted shares calculation. As
of October 31, 2008, 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.
106
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes
Income tax expense (benefit) is comprised of the following components:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Continuing Operations |
|
| |
|
U.S. and |
|
|
|
|
|
|
|
| |
|
Possessions |
|
|
State |
|
|
Totals |
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
13,048 |
|
|
$ |
2,185 |
|
|
$ |
15,233 |
|
Deferred tax expense |
|
|
4,962 |
|
|
|
2,212 |
|
|
|
7,174 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
18,010 |
|
|
$ |
4,397 |
|
|
$ |
22,407 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
10,582 |
|
|
$ |
3,180 |
|
|
$ |
13,762 |
|
Deferred tax expense |
|
|
1,725 |
|
|
|
2,612 |
|
|
|
4,337 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
12,307 |
|
|
$ |
5,792 |
|
|
$ |
18,099 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
1,680 |
|
|
$ |
5,053 |
|
|
$ |
6,733 |
|
Deferred tax expense |
|
|
14,247 |
|
|
|
174 |
|
|
|
14,421 |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
15,927 |
|
|
$ |
5,227 |
|
|
$ |
21,154 |
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Discontinued Operations |
|
| |
|
U.S. and |
|
|
|
|
|
|
|
| |
|
Possessions |
|
|
State |
|
|
Totals |
|
Year Ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
2008: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Deferred tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2007: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense |
|
$ |
269 |
|
|
$ |
39 |
|
|
$ |
308 |
|
Deferred tax expense |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
269 |
|
|
$ |
39 |
|
|
$ |
308 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2006: |
|
|
|
|
|
|
|
|
|
|
|
|
Current tax expense (benefit) |
|
$ |
51 |
|
|
$ |
(4 |
) |
|
$ |
47 |
|
Deferred tax benefit |
|
|
(126 |
) |
|
|
(14 |
) |
|
|
(140 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
$ |
(75 |
) |
|
$ |
(18 |
) |
|
$ |
(93 |
) |
|
|
|
|
|
|
|
|
|
|
107
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, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Statutory tax rate |
|
|
35.00 |
% |
|
|
35.00 |
% |
|
|
35.00 |
% |
Increases (reductions) in tax rate resulting from: |
|
|
|
|
|
|
|
|
|
|
|
|
State income tax |
|
|
14.19 |
|
|
|
3.68 |
|
|
|
4.67 |
|
U.S. possession income tax |
|
|
(2.35 |
) |
|
|
(.79 |
) |
|
|
2.48 |
|
Nondeductible expenses and other |
|
|
.75 |
|
|
|
.04 |
|
|
|
.13 |
|
Dividend exclusion |
|
|
(9.77 |
) |
|
|
(3.13 |
) |
|
|
(3.47 |
) |
Goodwill impairment |
|
|
46.77 |
|
|
|
— |
|
|
|
— |
|
Valuation allowance |
|
|
35.14 |
|
|
|
(3.27 |
) |
|
|
.86 |
|
Work opportunity tax credit |
|
|
— |
|
|
|
— |
|
|
|
(.20 |
) |
Settlement of federal tax audit |
|
|
— |
|
|
|
— |
|
|
|
(3.45 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
119.73 |
% |
|
|
31.53 |
% |
|
|
36.02 |
% |
|
|
|
|
|
|
|
|
|
|
Deferred tax assets and liabilities consist of the following:
| |
|
|
|
|
|
|
|
|
| |
|
October 31, |
|
| |
|
2008 |
|
|
2007 |
|
Deferred tax assets: |
|
|
|
|
|
|
|
|
Accrued expenses |
|
$ |
6,629 |
|
|
$ |
5,297 |
|
Allowance for sales cancellations and doubtful accounts |
|
|
5,917 |
|
|
|
6,638 |
|
Capital loss carryover |
|
|
8,242 |
|
|
|
— |
|
Deferred preneed sales and expenses |
|
|
204,069 |
|
|
|
213,463 |
|
Deferred compensation |
|
|
4,843 |
|
|
|
4,420 |
|
Inventory writedown |
|
|
1,022 |
|
|
|
1,022 |
|
Original issue discount on purchased call options |
|
|
18,254 |
|
|
|
20,321 |
|
Lease obligations |
|
|
718 |
|
|
|
675 |
|
Non-compete amortization |
|
|
1,232 |
|
|
|
2,358 |
|
Other |
|
|
1,503 |
|
|
|
1,173 |
|
Share-based compensation |
|
|
1,816 |
|
|
|
1,095 |
|
State income taxes (1) |
|
|
32,086 |
|
|
|
32,342 |
|
U.S. possession income tax (2) |
|
|
16,077 |
|
|
|
16,860 |
|
|
|
|
|
|
|
|
|
|
|
302,408 |
|
|
|
305,664 |
|
Valuation allowance (3) |
|
|
(10,649 |
) |
|
|
(4,032 |
) |
|
|
|
|
|
|
|
|
|
|
291,759 |
|
|
|
301,632 |
|
|
|
|
|
|
|
|
Deferred tax liabilities: |
|
|
|
|
|
|
|
|
Depreciation |
|
|
4,396 |
|
|
|
2,854 |
|
Goodwill amortization |
|
|
31,060 |
|
|
|
27,617 |
|
Partnership interest |
|
|
1,221 |
|
|
|
2,037 |
|
Purchase accounting adjustments |
|
|
66,769 |
|
|
|
67,644 |
|
|
|
|
|
|
|
|
|
|
|
103,446 |
|
|
|
100,152 |
|
|
|
|
|
|
|
|
|
|
$ |
188,313 |
|
|
$ |
201,480 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Current net deferred asset |
|
$ |
8,798 |
|
|
$ |
8,621 |
|
Long-term net deferred asset |
|
|
179,515 |
|
|
|
192,859 |
|
|
|
|
|
|
|
|
|
|
$ |
188,313 |
|
|
$ |
201,480 |
|
|
|
|
|
|
|
|
108
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes—(Continued)
|
|
|
| (1) |
|
A significant component of this balance is a gross state net operating loss
carryover of approximately $190,564 ($7,957 net of federal tax). This loss is not
concentrated in any one state, but instead, is widespread in states whose carryover period
averages from 15 to 20 years. During fiscal year 2008, the Company adjusted its previously
recorded valuation allowance from $1,962 to $2,087. This change is the net effect of
recording reductions to the reserve of $16 for utilization of part of the net operating loss
carryover in certain states offset by additions to the reserve of $141. |
| |
| (2) |
|
This U.S. possession is Puerto Rico, which operates as three separate tax entities.
A significant component of this balance is a net operating loss carryover of $4,585 ($1,162
net of federal tax), which expires in various periods between 2010 and 2015 with the majority
of $3,896 expiring in 2013. Puerto Rico’s allowable carryforward period is 7 years from the
date incurred. In 2008, the Company reduced its previously recorded valuation allowance from
$2,070 to $1,162. This change is the net effect of recording reductions to the reserve of
$940 for utilization of part of the net operating loss carryover for one of the tax entities
and additions to the reserve of $32 for another tax entity which represents a full reserve on
the carryover amounts. |
| |
| (3) |
|
During fiscal 2008, the Company increased its valuation allowance from $4,032 to
$10,649 which was the result of recording a valuation allowance of $7,400 attributable to its
unrealized capital loss carryover of $18,791 as a result of the writedown of investments in
certain trusts which are recognized for tax purposes and deferred for book purposes. This
increase to the allowance was offset by $783 of net decreases to the
reserve attributable to the
net operating loss changes noted in items (1) and (2) above. At the end of 2008, the
breakdown of the allowance is attributable to the $7,400 unrealized capital loss carryover and
$3,249 net operating loss carryforwards in certain states and Puerto Rico. The Company
expects to trigger these capital losses for tax purposes in fiscal year 2009. The capital
loss carryforward period is 5 years from that point. |
During the third quarter of 2008, the Company filed with the Internal Revenue Service (in
connection with the filing of its October 31, 2007 federal income tax return) an application to
change its tax accounting method with regard to the taxation of preneed services. This change
resulted in an increase in income tax receivables of $8,912 and a corresponding decrease in
deferred income taxes in the balance sheet. The Company received $4,345 of this refund in August
2008. The remaining amount of $4,567 was applied against tax payments due by the Company on July
15, 2008, which reduced income taxes payable.
During the fourth quarter of fiscal 2008, the Company was advised that the congressional Joint
Committee on Taxation approved its requested refund of approximately $10,400 and interest of
approximately $2,700 related to its amended federal income tax returns for fiscal years ended
October 31, 1997 through 2000 and 2002 through 2004. All but $500 of interest was received by
October 31, 2008. Also in the fourth quarter of fiscal year 2008, the Company recorded a $25,952
goodwill impairment charge, of which $25,009 was non-deductible for tax purposes.
During fiscal 2007, the Company recognized a combined non-recurring tax benefit of $4,180, of
which $787 is attributable to the completion of an audit by the Commonwealth of Puerto Rico for tax
periods 1999 to 2001, and $3,393 is attributable to a reduced valuation allowance on its capital
loss carryover which was due to expire at the end of 2007. In September of 2007 it reached a
settlement with the taxing authority which enabled it to record a partial recovery of $1,211 ($787
net of federal tax) on the $2,550 ($1,657 net of federal tax) that had been previously reserved.
The $3,393 reduction in the valuation allowance was the result of the Company’s ability to generate
sufficient capital gain income prior to the 2007 expiration date on the loss carryover.
During the year ended October 31, 2006, the Company resolved a significant number of tax
related matters and new matters arose that created a net impact on the tax provision of $973. This
net impact to income tax expense is included in income from continuing operations for the year
ended October 31, 2006 and is further explained below.
109
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes—(Continued)
First, as a result of the completion of an Internal Revenue Service examination for the tax
years ended October 31, 2001 and 2002, the Company recorded an income tax benefit of $2,028 (the
cash was received in October 2006). In August 2006, the Company learned that the Joint Committee
review of the IRS’s examination of the Company’s tax returns for those tax years had been
completed. Resolution was reached on a number of issues, including adjustments related to foreign
source income and the calculation of the foreign tax credit, various tax accounting methods and
separate return limitation year net operating loss limitations.
Second, the Company’s valuation allowance on deferred tax assets was increased by $237 (a net
tax expense) which is the net result of reductions to the allowance of $1,558 offset by additions
of $1,795. The reduction of $1,558 was primarily attributable to removing the valuation allowance
on the capital loss carryover subject to expiration at the end of 2009 which the Company believed
was more likely than not to be realized. The additions to the allowance included $1,378 on the
Puerto Rico net operating loss, $313 on a portion of the state net operating losses and $104 on the
capital loss carryover subject to expiration at the end of 2007.
Third, a reserve of $2,550 was recorded on a tax receivable (a net tax expense of $1,657) due
from the Commonwealth of Puerto Rico which was under examination and was uncertain as to payment.
This reserve related to requested refunds of approximately $2,550 related to tax years October 31,
1999 to 2001 applied for by various subsidiaries operating in Puerto Rico. In September of 2007,
the Company reached a settlement with the taxing authority which enabled it to record a partial
recovery of $1,211 ($787 net of federal tax) on the $2,550 ($1,657 net of federal tax) that had
been previously reserved.
Fourth, an additional tax expense of $906 was recorded as a result of prior years refund
denials issued by the State of Texas of $631 ($410 net of a federal tax benefit) coupled with tax
assessments of $1,185 ($780 net of a federal tax benefit) on subsequent tax years attributable to
the same sourcing issue in the denied refunds. Also with regard to Texas, new legislation was
passed enacting a new margins tax in place of the existing franchise tax which resulted in a tax
benefit of $437 ($284 net of a federal tax).
Fifth, an additional tax expense of $885 was recorded in relation to the write-off of a
deferred tax asset attributable to foreign tax credits which the Company now believes it cannot
recognize based on its anticipated downward trend in future net foreign source income.
Finally, an additional net tax benefit of $684 was recorded in 2006 for tax rate adjustments
to various state deferred tax items at the operating entity level and miscellaneous adjustments to
deferred taxes after filing its state income tax returns for fiscal year 2005.
To the extent the Company were to prevail in matters for which reserves have been established
or be required to pay amounts in excess of the aforementioned reserves, the Company’s effective tax
rate in a given financial statement period may be impacted.
FIN 48
As described in Note 3, the Company adopted FIN 48 on November 1, 2007.
110
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(18) Income Taxes—(Continued)
A reconciliation of the beginning and ending balances of the total amounts of gross
unrecognized tax benefit is as follows:
| |
|
|
|
|
Gross unrecognized tax benefits at November 1, 2007 |
|
$ |
3,615 |
|
Additions for tax for prior years positions |
|
|
165 |
|
Additions for tax for current year positions |
|
|
140 |
|
Reduction in tax relating to settlements with taxing authorities |
|
|
— |
|
Reduction in tax as a result of a lapse of applicable statute of limitations |
|
|
— |
|
|
|
|
|
Gross unrecognized tax benefits at October 31, 2008 |
|
$ |
3,920 |
|
|
|
|
|
The total amount of gross unrecognized tax benefit that, if recognized, would affect the
effective tax rate was $692 at October 31, 2008. The Company’s policy with respect to potential
penalties and interest is to record them as “other” expense and interest expense, respectively. As
of October 31, 2008, the Company had accrued interest and penalties related to the unrecognized tax
benefits of $1,107. During the year, 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 2002. 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 $467. Also, accrued interest and
penalties will be reduced by $561 due to the close of those tax years.
(19) Benefit Plans
Stewart Enterprises Employees’ Retirement Trust
The Company has a defined contribution retirement plan, the “Stewart Enterprises Employees’
Retirement Trust (A Profit-Sharing Plan)” (“SEERT”). All regular employees are eligible to
participate in this plan. New employees are automatically enrolled in the plan at a three percent
contribution rate after 60 days of employment, unless they elect not to participate. Contributions
are made to the plan at the discretion of the 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. Employee contributions of up to five percent of earnings (which increased
to six percent effective January 1, 2008) are eligible for Company matching contributions at the
rate of $.50 for each $1.00 contributed. The Company’s expense, including the Company’s matching
contributions, for the fiscal years ended October 31, 2008, 2007 and 2006 was approximately $2,923,
$3,138 and $2,113, 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. Eligible
employees may contribute up to 10 percent of their earnings, up to a maximum annual contribution of
$8. Employee contributions of up to five percent of earnings are (which increased to six percent
effective January 1, 2008) eligible for Company matching contributions at the rate of $0.50 for
each $1.00 contributed. In July 2008, the employee contribution rate
eligible for Company matching contributions increased to six percent of earnings. 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, 2008, 2007 and 2006 was $74, $85 and $95, respectively.
111
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans—(Continued)
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. The first 5 percent
of such employee contributions are eligible for Company matching contributions at the rate of $.50
for each $1.00 contributed. The Company’s expense, including the Company’s matching contributions,
for the fiscal years ended October 31, 2008, 2007 and 2006 was approximately $186, $318 and $144,
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, 2008, 2007 and 2006 was $2,468, $2,448 and $2,100,
respectively. The Company’s liability as of October 31, 2008 and 2007 was $11,380 and $9,699,
respectively.
Compensation Plans
In April 2007, the Company’s shareholders approved the 2007 Stock Incentive Plan (“Stock
Plan”) and the Company’s Executive Officer Annual Incentive Plan (“Incentive Plan”) at its annual
shareholders’ meeting. The Stock Plan replaces the Company’s 1995 Incentive Compensation Plan,
2000 Incentive Compensation Plan and 2005 Directors’ Stock Plan. No future grants will be made
through these prior plans. The Compensation Committee of the 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.
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. As of October 31, 2008, 386,224 shares had been
acquired under this Plan.
112
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans—(Continued)
Share-Based Compensation
Stock Options
For the years ended October 31, 2008, 2007 and 2006, stock option expenses amounted to $1,544,
$1,576 and $1,203, respectively, which are included in corporate general and administrative
expenses in the consolidated statements of earnings. As of October 31, 2008, there was $2,027 of
total unrecognized compensation costs related to nonvested stock options that are expected to be
recognized over a weighted-average period of 2.27 years. The following table is a summary of the
Company’s stock options outstanding as of October 31, 2008, 2007 and 2006, and the changes that
occurred during fiscal years 2008, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
2008 |
|
2007 |
|
2006 |
| |
|
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 |
|
|
1,900,729 |
|
|
$ |
6.58 |
|
|
|
1,441,294 |
|
|
$ |
6.15 |
|
|
|
1,468,734 |
|
|
$ |
6.62 |
|
Granted |
|
|
561,250 |
|
|
$ |
8.18 |
|
|
|
1,039,167 |
|
|
$ |
7.12 |
|
|
|
473,060 |
|
|
$ |
5.37 |
|
Exercised |
|
|
(264,862 |
) |
|
$ |
5.71 |
|
|
|
(411,511 |
) |
|
$ |
6.40 |
|
|
|
(33,334 |
) |
|
$ |
5.44 |
|
Forfeited |
|
|
(55,438 |
) |
|
$ |
6.75 |
|
|
|
(168,221 |
) |
|
$ |
6.63 |
|
|
|
(467,166 |
) |
|
$ |
6.89 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at end of year |
|
|
2,141,679 |
|
|
$ |
7.10 |
|
|
|
1,900,729 |
|
|
$ |
6.58 |
|
|
|
1,441,294 |
|
|
$ |
6.15 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at end of year |
|
|
781,307 |
|
|
$ |
6.73 |
|
|
|
471,353 |
|
|
$ |
5.90 |
|
|
|
645,665 |
|
|
$ |
6.10 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted-average fair value of
options granted |
|
|
|
|
|
$ |
2.18 |
|
|
|
|
|
|
$ |
2.84 |
|
|
|
|
|
|
$ |
2.27 |
|
| |
|
|
|
|
| |
|
Year Ended October 31, 2008 |
| |
|
Aggregate Intrinsic Value |
Options outstanding as of October 31, 2008 |
|
$ |
21 |
|
Options exercisable as of October 31, 2008 |
|
$ |
15 |
|
Options exercised during 2008 |
|
$ |
790 |
|
|
|
|
|
|
| |
|
Year Ended October 31, 2007 |
| |
|
Aggregate Intrinsic Value |
Options outstanding as of October 31, 2007 |
|
$ |
4,731 |
|
Options exercisable as of October 31, 2007 |
|
$ |
1,496 |
|
Options exercised during 2007 |
|
$ |
539 |
|
The following table further describes the Company’s stock options outstanding as of October
31, 2008.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Options Outstanding |
|
|
Options Exercisable |
|
| |
|
|
|
|
|
Weighted |
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Number |
|
|
Average |
|
|
Weighted |
|
|
Number |
|
|
Weighted Average |
|
|
|
|
| Range of |
|
Outstanding at |
|
|
Remaining |
|
|
Average |
|
|
Exercisable at |
|
|
Remaining |
|
|
Weighted Average |
|
| Exercise Prices |
|
10/31/2008 |
|
|
Contractual Life |
|
|
Exercise Price |
|
|
10/31/2008 |
|
|
Contractual Life |
|
|
Exercise Price |
|
$5.06 - $5.86 |
|
|
356,448 |
|
|
4.32 years |
|
$ |
5.39 |
|
|
|
200,338 |
|
|
4.21 years |
|
$ |
5.28 |
|
$6.33 - $6.90 |
|
|
724,231 |
|
|
4.36 years |
|
$ |
6.58 |
|
|
|
350,344 |
|
|
3.69 years |
|
$ |
6.75 |
|
$7.31 - $7.65 |
|
|
211,000 |
|
|
5.67 years |
|
$ |
7.40 |
|
|
|
65,625 |
|
|
5.61 years |
|
$ |
7.38 |
|
$8.06 - $8.47 |
|
|
850,000 |
|
|
5.82 years |
|
$ |
8.20 |
|
|
|
165,000 |
|
|
5.61 years |
|
$ |
8.17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$5.06 - $8.47 |
|
|
2,141,679 |
|
|
5.06 years |
|
$ |
7.10 |
|
|
|
781,307 |
|
|
4.39 years |
|
$ |
6.73 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
113
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, 2008 |
|
Fair Value |
Nonvested options as of November 1, 2007 |
|
|
1,429,376 |
|
|
$ |
2.87 |
|
Granted |
|
|
561,250 |
|
|
$ |
2.18 |
|
Vested |
|
|
(574,816 |
) |
|
$ |
2.72 |
|
Forfeited |
|
|
(55,438 |
) |
|
$ |
2.10 |
|
|
|
|
|
|
|
|
|
|
Nonvested options as of October 31, 2008 |
|
|
1,360,372 |
|
|
$ |
2.35 |
|
|
|
|
|
|
|
|
|
|
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 2008, 2007 and 2006: expected dividend yield of 1.4 percent, 1.1
percent and 0.4 percent; expected volatility of 38.2 percent, 47.7 percent and 53.2 percent;
risk-free interest rate of 4.2 percent, 4.4 percent and 3.7 percent; and an expected term of 5.0
years, 7.0 years and 7.7 years. In 2007 and 2008, the Company issued stock options with market
conditions based on reaching certain target stock prices in the years 2008, 2009 and 2010. The
Company records this expense over the requisite service period. 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 2008 and
2007: expected dividend yield of 1.3 percent; expected volatility of 37.9 percent and 39.9 percent;
risk-free interest rate of 4.3 percent and 4.5 percent; and an expected term of 3.4 years and 3.5
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 2008, 2007 and 2006, respectively: expected dividend yield of 1.4
percent, 1.5 percent and 1.4 percent; expected volatility of 37.2 percent, 42.5 percent and 44.6
percent; risk-free interest rate of 2.3 percent, 5.0 percent and 4.3 percent; and an expected term
of .3 years, .3 years and .5 years.
Restricted Stock
The expense related to restricted stock granted in fiscal years 2008, 2007 and 2006 is
reflected in earnings and amounted to $744, $447 and $484, respectively. Once granted, the
restricted stock is included in total shares outstanding but is not included in the weighted
average number of common shares outstanding in each period used 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 2008, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| (In shares) |
|
2008(1) |
|
2007(2) |
|
2006(3) |
Nonvested restricted stock at beginning of year |
|
|
606,947 |
|
|
|
97,398 |
|
|
|
190,866 |
|
Granted |
|
|
55,000 |
|
|
|
565,000 |
|
|
|
31,998 |
|
Vested |
|
|
(151,060 |
) |
|
|
(29,801 |
) |
|
|
(125,466 |
) |
Forfeited |
|
|
— |
|
|
|
(25,650 |
) |
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested restricted stock at end of year |
|
|
510,887 |
|
|
|
606,947 |
|
|
|
97,398 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
On December 19, 2007, the Company granted 45,000 shares of restricted stock to
executive officers and on June 26, 2008, the Company granted 10,000 shares of restricted stock
to an executive officer conditional on certain performance criteria. The performance
conditions are based on meeting certain return on equity targets in each of the years 2008,
2009 and 2010. The Company assesses the probability of achieving these targets
each reporting period in determining the requisite service period in which to record
compensation expense. |
114
\
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(19) Benefit Plans—(Continued)
|
|
|
| (2) |
|
On January 8, 2007, the Company granted 52,500 shares of restricted stock to a group
of executive officers of which vests in equal 25 percent portions on January 8, 2008, 2009,
2010 and 2011. On March 31, 2007, the Company granted 340,000 shares of restricted stock to an
executive officer consisting of 100,000 shares conditional on service, 120,000 shares
conditional on certain performance criteria and 120,000 shares conditional on certain market
criteria. On May 16, 2007, the Company granted 170,000 shares of restricted stock to an
executive officer consisting of 50,000 shares conditional on service, 60,000 shares
conditional on certain performance criteria and 60,000 shares conditional on certain market
criteria. The restricted shares based on service conditions vest in equal one-third portions
on the anniversary date of the respective grant dates. The performance conditions are based
on meeting certain return on equity targets in each of the years 2008, 2009 and 2010. The
Company assesses the probability of achieving these targets each reporting period in
determining the requisite service period in which to record compensation expense. The market
conditions are based on reaching certain target stock prices in the years 2008, 2009 and 2010.
The Company records the expense over the requisite service period. On September 17, 2007, the
Company granted 2,500 shares of restricted stock to an executive officer of which 34 percent
vested on September 17, 2008, 33 percent vest on September 17, 2009 and 33 percent vest on
September 17, 2010. |
| |
| (3) |
|
On May 11, 2006, the Company granted 31,998 shares of restricted stock to certain
executive officers, which vest in equal 25 percent portions on May 11, 2007, 2008, 2009 and
2010. |
Other
On January 17, 2008, the Company issued a total of 72,000 shares of Class A common stock to
the independent directors of the Company. The expense related to this stock amounted to $531 and
was recorded in corporate general and administrative expenses during the first quarter of 2008.
Each independent director must hold at least 75 percent of the shares received until completion of
service as a member of the Board of Directors.
On February 28, 2007, the Company issued a total of 84,000 shares of Class A common stock to
the independent directors of the Company. The expense related to this stock amounted to $664 and
was recorded in corporate general and administrative expenses during the second quarter of 2007. Each independent director must hold at least 75
percent of the shares received until completion of service as a member of the Board of Directors.
On
May 12, 2006, the Company granted 84,000 shares of Class A common stock to the
Company’s independent directors. The expense related to this
stock amounted to $459 and was recorded in corporate general and
administrative expenses. Each independent director must hold at least
75 percent of the shares received until completion of service as a
member of the Board of Directors.
In fiscal years 2008, 2007 and 2006, the Company granted 48,682 shares, 57,481 shares and
27,759 shares, respectively, of Class A common stock to executive officers as part of their
previous year end bonuses. The expense related to these shares was reflected in earnings in fiscal
years 2007, 2006 and 2005 and amounted to $390, $364 and $247, respectively.
(20) Commitments, Contingencies and Related Party Transactions
Litigation
Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated
and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961, on the docket of the
Superior Court for the State of California for the County of Los Angeles, Central District. This
purported class action was filed on February 17, 2005 on behalf of a nationwide class defined to
include all persons who purchased funeral goods and/or services in the United States from
defendants at any time on or after February 17, 2001. The suit named the Company and several of
its Southern California affiliates as defendants and also sought to assert claims against a class
of all
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)
entities located anywhere in the United States whose ultimate parent corporation has been
the Company at any time on or after February 17, 2001.
In May 2005, the court ruled that this case was related to similar actions against Service
Corporation International (“SCI”) and Alderwoods Group, Inc., and designated the SCI case as the
lead case. The case against the Company effectively has been held in abeyance while the court
tests plaintiff’s legal theories in the lead case. Rulings on legal issues in the lead case will
apply equally in the case against the Company, and the court has allowed the Company to participate
in hearings and briefings in the lead case.
As a result of demurrers, the plaintiff in the lead case amended her case twice. On January
31, 2006, however, the court overruled SCI’s demurrer to the third amended complaint and
established a schedule leading to a hearing on a motion for summary judgment to test the viability
of the named plaintiff’s claim against SCI. The third amended complaint in the lead case alleges
that the SCI defendants violated the “Funeral Rule” promulgated by the Federal Trade Commission by
failing to disclose that the prices charged to the plaintiffs for certain goods and services the
SCI defendants obtained from third parties specifically on the plaintiff’s behalf exceeded what the
defendants paid for them. The plaintiff alleges that by failing to comply with the Funeral Rule,
defendants (i) breached contracts with the plaintiffs, (ii) were unjustly enriched, and (iii)
engaged in unfair, unlawful and fraudulent business practices in violation of a provision of
California’s Business and Professions Code. The plaintiff seeks restitution damages, disgorgement,
interest, costs and attorneys’ fees.
In September and October 2006, the court granted the motion for summary judgment filed by the
SCI affiliate with whom the plaintiff had contracted and entered a judgment of dismissal in favor
of that SCI affiliate. On December 8, 2006, the plaintiff noticed an appeal of this judgment.
Because the matter is being appealed, the likelihood of liability and the extent of any
damages cannot be reasonably assessed at this time. The Company intends to aggressively defend
itself in this matter. The Company has not recorded a liability related to this litigation given
that it does not believe that a loss is probable and estimatable.
Funeral Consumers Alliance, Inc., et al. v. Service Corporation International, Alderwoods
Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.,
number H-05-3394 on the docket of the United States District Court for the Southern District of
Texas. This purported class action was originally filed on May 2, 2005, in the United States
District Court for the Northern District of California, on behalf of a nationwide class defined to
include all consumers who purchased a Batesville casket from the funeral home defendants at any
time. The court consolidated it with five subsequently filed, substantially similar cases (the
“Consolidated Consumer Cases”).
The Consolidated Consumer Cases allege that the defendants acted jointly to reduce competition
from independent casket discounters and fix and maintain prices on caskets in violation of the
federal antitrust laws and California’s Business and Professions Code. The plaintiffs seek treble
damages, restitution, injunctive relief, interest, costs and attorneys’ fees.
At the defendants’ request, in late September 2005, the court transferred the Consolidated
Consumer Cases to the United States District Court for the Southern District of Texas. The
transferred Consolidated Consumer Cases have been consolidated before a single judge in the
Southern District of Texas.
On November 10, 2006, after the court denied defendants’ motions to dismiss, the Company
answered the first amended consolidated class action complaint, denying liability and asserting
various affirmative defenses. The court conducted a hearing on plaintiffs’ motion for class
certification on December 4-7, 2006 and took the motion under advisement. Fact discovery has been
completed, and expert discovery is complete with the exception of the deposition of one expert
witness. The court has entered an order staying the matter pending resolution of the motion for
class certification.
116
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(20) Commitments, Contingencies and Related Party Transactions—(Continued)
In April 2007, the plaintiffs filed an expert report indicating that the damages sought from
all defendants would be in the range of approximately $950 million to approximately $1.5 billion,
before trebling. On November 24, 2008, the magistrate judge issued a Memorandum and Recommendation
that the plaintiffs’ motion for class certification be denied. A successful plaintiff in an
anti-trust case may elect to enforce any judgment against any or all of the co-defendants, who have
no right of contribution against one another. Accordingly, any adverse judgment could have a
material adverse effect on the Company’s financial condition and results of operations. The
Company believes it has meritorious defenses to the substantive allegations asserted, to class
certification, and to the plaintiffs’ damage theories and calculations, and the Company intends to
aggressively defend itself in these proceedings. The Company has not recorded a liability related
to this litigation given that it does not believe that a loss is probable and estimatable.
Pioneer Valley Casket Co., Inc., et al. v. Service Corporation International, Alderwoods
Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.,
number H-05-3399 (“Pioneer Valley Case”). This purported class action was filed on July 8, 2005,
in the Northern District of California on behalf of a nationwide class of independent casket
retailers. The casket retailers make allegations similar to those made in the Consolidated
Consumer Cases reported above and seek treble damages, injunctive relief, interest, costs and
attorneys’ fees.
Like the Consolidated Consumer Cases, in late September 2005, this matter was transferred to
the United States District Court for the Southern District of Texas. The Pioneer Valley Case has
been consolidated with the Consolidated Consumer Cases for purposes of discovery only.
On November 14, 2006, after the court denied Defendants’ motions to dismiss, the Company
answered the first amended complaint, denying liability and asserting various defenses. The court
conducted a hearing on plaintiffs’ motion for class certification on December 8, 2006 and took the
motion under advisement. Fact discovery has been completed, and expert discovery is complete with
the exception of the deposition of one expert witness. The court has entered an order staying the
matter pending resolution of the motion for class certification.
In April 2007, the plaintiffs filed an expert report indicating that the damages sought from
all defendants would be approximately $99.0 million, before trebling. On November 24, 2008, the
magistrate judge issued a Memorandum and Recommendation that the plaintiffs’ motion for class
certification be denied. A successful plaintiff in an anti-trust case may elect to enforce any
judgment against any or all of the co-defendants, who have no right of contribution against one
another. Accordingly, any adverse judgment could have a material adverse effect on the Company’s
financial condition and results of operations. The Company believes it has meritorious defenses to
the substantive allegations asserted, to class certification, and to the plaintiffs’ damage
theories and calculations, and the Company intends to aggressively defend itself in these
proceedings. The Company has not recorded a liability related to this litigation given that it
does not believe that a loss is probable and estimatable.
In Re: State Attorney General Civil Investigative Demands - On August 4, 2005, the Attorney
General for the State of Maryland issued a civil investigative demand to the Company seeking
documents and information relating to funeral and cemetery goods and services. Subsequently, the
Attorneys General for the States of Florida and Connecticut issued a similar civil investigative
demand to the Company. The Company has entered into arrangements allowing the Maryland and Florida
Attorneys General to share in information provided by the Company with the attorneys general of
certain other states. The Company has provided documents and information to the attorneys general,
and they have not sought any additional documents or information since 2006. The
Company will continue to cooperate with the attorneys general in their investigation if it is
called upon to do so.
Other Litigation
The Company is a defendant in a variety of other litigation matters that have arisen in the
ordinary course of business, which are covered by insurance or otherwise not considered to be
material. The Company carries
117
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)
insurance with coverages and coverage limits that it believes to be adequate.
Securities and Exchange Commission Investigation
As previously disclosed, in November 2006, the Company received a subpoena from the SEC issued
pursuant to a formal order of investigation, seeking documents and information related to the
Company’s previously disclosed and completed deferred revenue project. On December 9, 2008, the
SEC approved a settlement with the Company, bringing a conclusion to the SEC’s investigation.
Under the settlement, without admitting or denying the SEC’s findings, the Company consented to an
administrative cease and desist order requiring future compliance with specified provisions of the
federal securities laws relating to reporting, books and records and internal accounting controls
requirements. The settlement does not require the Company to pay a monetary penalty.
Leases
The Company has noncancellable operating leases, primarily for land and buildings that expire
over the next 1 to 14 years, except for seven leases that expire between 2032 and 2039. Rent
payments under these leases were $4,638, $4,478 and $4,588 for the years ended October 31, 2008,
2007 and 2006, respectively. The Company’s future minimum lease payments as of October 31, 2008
are $4,572, $3,487, $2,537, $1,997, $1,546 and $16,507 for the years ending October 31, 2009, 2010,
2011, 2012, 2013 and later years, respectively.
Other Commitments and Contingencies
In those states where the Company has withdrawn realized net capital gains in the past from
its cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital
losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals
of future earnings until they cover the loss. As of October 31, 2008, the Company recorded
$13,281 for an estimated probable funding obligation as an increase in cemetery costs in fiscal
year 2008. As of October 31, 2008, the Company had unrealized losses of $64,420 in the trusts in
these states. Because all of these trusts currently have assets with a fair market value less than
the aggregate amounts required to be contributed to the trust, any additional realized net capital
losses in these trusts may result in a corresponding funding liability and increase in cemetery
costs.
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 liability for these items of approximately $7 million and $8 million as of October 31,
2008 and 2007, respectively.
The Company has entered into non-compete agreements with prior owners of acquired subsidiaries
that expire through 2012. During fiscal year 2001, the Company decided to relieve some of the
prior owners and key employees of their obligations not to compete; however, the payments will
continue to be made in accordance with the contract terms. Non-compete agreements are included in
the “other assets” line in the consolidated balance sheet and amounted to $5,921 and $7,086 as of
October 31, 2008 and 2007, respectively. The Company’s future non-compete payments as of October
31, 2008 are $328, $242, $242, $68 and $0 for the years ending October 31, 2009, 2010, 2011, 2012
and thereafter, respectively.
The Company is required to maintain a bond ($30,838 as of October 31, 2008) 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 to borrow funds
under the revolving credit facility to extinguish the bond obligation by returning to the trusts
the amounts it previously withdrew that relate to the remaining preneed contracts.
118
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)
Related Party Transactions
In November 2006, the Company announced the retirement of Everett N. Kendrick, Executive Vice
President, Chief Operating Officer and President — Sales and Marketing Division, effective
December 31, 2006. As part of Mr. Kendrick’s separation agreement, the Company must pay Mr.
Kendrick $350 in equal bi-weekly installments over a two-year period commencing six months after
his retirement date. The Company recorded the $350 charge in the first quarter of fiscal year 2007
but will make the payments in accordance with the agreement.
In June 2006, the Company announced the retirement of Kenneth C. Budde, President and Chief
Executive Officer, effective June 30, 2006. As part of Mr. Budde’s separation agreement, the
Company is paying Mr. Budde an amount equal to one year of salary, or $550, in equal installments
over a two-year period beginning in January 2007. The Company recorded the $550 charge in the
third quarter of fiscal year 2006 but will make payments in accordance with the agreement.
In January 1998, the Company discontinued an insurance policy on the life of Mr. Frank B.
Stewart, Jr., Chairman of the Company. In order to purchase a replacement policy, The Stewart
Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180 days
after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the
Company’s cost of borrowing under its 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, 2008, including accrued interest, was approximately $1,288.
The father of G. Kenneth Stephens, Jr., Executive Vice President and President of the
Company’s Western division, has an 81 percent ownership interest in Cemetery Funeral Supply, Inc.,
a vendor of the Company. For the years ended October 31, 2008, 2007 and 2006, the Company paid
Cemetery Funeral Supply, Inc. $230, $186, and $329, respectively.
(21) Segment Data
As of October 31, 2008, the Company has five operating and reportable segments consisting of a
corporate trust management segment and a funeral and cemetery segment for each of two geographic
areas (each with a division president): Western and Eastern. The Western division consists of 115
funeral homes and 47 cemeteries in Alabama, Arkansas, California, Illinois, Kansas, Louisiana,
Mississippi, Missouri, Nebraska, Oregon, Texas, Washington and Wisconsin. The Eastern division
consists of 106 funeral homes and 92 cemeteries in Alabama, Florida, Georgia, Kentucky, Maryland,
North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia,
West Virginia and Puerto Rico.
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, Investors Trust, Inc. (“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 trusts. 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.
119
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(21) Segment Data—(Continued)
The corporate trust management segment revenues reflect (1) investment management fees earned
and (2) the realized earnings related to preneed contracts delivered. 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 divisions.
Perpetual care trust earnings are reported in the geographic segments, 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.
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 Chief Operating Decision Maker
(“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 and geographically-based. As such, the Company’s
primary reportable segments presented in the following table are based on products and services and
their geographical orientation.
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, 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 at the divisional or regional level that benefit all of the
funeral homes and cemeteries in the division or region, such as division management compensation, divisional and
regional headquarters overhead, insurance costs and legal and professional fees. These costs are
allocated to the facilities in the regions or divisions 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 to the divisions and further allocated to the facilities in the division 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.
120
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(21) Segment Data—(Continued)
For a discussion of discontinued operations, see Note 12. The table below presents
information about reported segments for the fiscal years ended October 31, 2008, 2007 and 2006 for
the Company’s continuing operations only based on the Company’s reportable segments.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Funeral Revenue |
|
|
Cemetery Revenue (1) |
|
|
Total Revenue |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
117,787 |
|
|
$ |
117,164 |
|
|
$ |
116,283 |
|
|
$ |
130,578 |
|
|
$ |
143,233 |
|
|
$ |
136,807 |
|
|
$ |
248,365 |
|
|
$ |
260,397 |
|
|
$ |
253,090 |
|
Western Division |
|
|
150,508 |
|
|
|
143,771 |
|
|
|
146,094 |
|
|
|
101,585 |
|
|
|
90,354 |
|
|
|
87,829 |
|
|
|
252,093 |
|
|
|
234,125 |
|
|
|
233,923 |
|
Corporate Trust Management (2) |
|
|
18,312 |
|
|
|
18,395 |
|
|
|
17,860 |
|
|
|
9,113 |
|
|
|
9,900 |
|
|
|
9,357 |
|
|
|
27,425 |
|
|
|
28,295 |
|
|
|
27,217 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
286,607 |
|
|
$ |
279,330 |
|
|
$ |
280,237 |
|
|
$ |
241,276 |
|
|
$ |
243,487 |
|
|
$ |
233,993 |
|
|
$ |
527,883 |
|
|
$ |
522,817 |
|
|
$ |
514,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Funeral Gross Profit |
|
|
Cemetery Gross Profit (1) |
|
|
Total Gross Profit |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
18,965 |
|
|
$ |
17,846 |
|
|
$ |
18,387 |
|
|
$ |
5,303 |
|
|
$ |
20,993 |
|
|
$ |
24,030 |
|
|
$ |
24,268 |
|
|
$ |
38,839 |
|
|
$ |
42,417 |
|
Western Division |
|
|
31,876 |
|
|
|
27,442 |
|
|
|
29,495 |
|
|
|
18,916 |
|
|
|
19,204 |
|
|
|
16,522 |
|
|
|
50,792 |
|
|
|
46,646 |
|
|
|
46,017 |
|
Corporate Trust Management (2) |
|
|
17,538 |
|
|
|
17,667 |
|
|
|
17,313 |
|
|
|
8,219 |
|
|
|
9,278 |
|
|
|
8,866 |
|
|
|
25,757 |
|
|
|
26,945 |
|
|
|
26,179 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
68,379 |
|
|
$ |
62,955 |
|
|
$ |
65,195 |
|
|
$ |
32,438 |
|
|
$ |
49,475 |
|
|
$ |
49,418 |
|
|
$ |
100,817 |
|
|
$ |
112,430 |
|
|
$ |
114,613 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Net Preneed Funeral |
|
|
Net Preneed Cemetery |
|
|
Net Total Preneed |
|
| |
|
Merchandise and Service Sales(3) |
|
|
Merchandise and Service Sales (3) |
|
|
Merchandise and Service Sales(3) |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
41,098 |
|
|
$ |
44,837 |
|
|
$ |
47,288 |
|
|
$ |
36,827 |
|
|
$ |
38,939 |
|
|
$ |
42,123 |
|
|
$ |
77,925 |
|
|
$ |
83,776 |
|
|
$ |
89,411 |
|
Western Division |
|
|
56,228 |
|
|
|
57,792 |
|
|
|
56,470 |
|
|
|
16,817 |
|
|
|
16,797 |
|
|
|
17,720 |
|
|
|
73,045 |
|
|
|
74,589 |
|
|
|
74,190 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
97,326 |
|
|
$ |
102,629 |
|
|
$ |
103,758 |
|
|
$ |
53,644 |
|
|
$ |
55,736 |
|
|
$ |
59,843 |
|
|
$ |
150,970 |
|
|
$ |
158,365 |
|
|
$ |
163,601 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Depreciation and Amortization Funeral |
|
|
Depreciation and Amortization Cemetery |
|
|
Depreciation and Amortization Total |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
7,122 |
|
|
$ |
6,720 |
|
|
$ |
7,615 |
|
|
$ |
4,222 |
|
|
$ |
4,418 |
|
|
$ |
3,340 |
|
|
$ |
11,344 |
|
|
$ |
11,138 |
|
|
$ |
10,955 |
|
Western Division |
|
|
7,689 |
|
|
|
6,782 |
|
|
|
6,702 |
|
|
|
2,733 |
|
|
|
2,572 |
|
|
|
2,504 |
|
|
|
10,422 |
|
|
|
9,354 |
|
|
|
9,206 |
|
Reconciling Items (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6,509 |
|
|
|
7,146 |
|
|
|
5,505 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
28,275 |
|
|
$ |
27,638 |
|
|
$ |
25,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Additions to Long-Lived Assets |
|
|
Additions to Long-Lived Assets |
|
|
Additions to Long-Lived Assets |
|
| |
|
Funeral(5) |
|
|
Cemetery(5) |
|
|
Total(5) |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
4,478 |
|
|
$ |
5,304 |
|
|
$ |
3,740 |
|
|
$ |
10,369 |
|
|
$ |
11,882 |
|
|
$ |
8,602 |
|
|
$ |
14,847 |
|
|
$ |
17,186 |
|
|
$ |
12,342 |
|
Western Division |
|
|
6,808 |
|
|
|
14,070 |
|
|
|
11,285 |
|
|
|
8,170 |
|
|
|
10,538 |
|
|
|
10,526 |
|
|
|
14,978 |
|
|
|
24,608 |
|
|
|
21,811 |
|
Reconciling Items (4) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7,686 |
|
|
|
7,703 |
|
|
|
5,329 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$ |
37,511 |
|
|
$ |
49,497 |
|
|
$ |
39,482 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Funeral Goodwill |
|
|
Cemetery Goodwill |
|
|
Total Goodwill |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
91,091 |
|
|
$ |
91,091 |
|
|
$ |
— |
|
|
$ |
25,952 |
|
|
$ |
91,091 |
|
|
$ |
117,043 |
|
Western Division |
|
|
107,424 |
|
|
|
107,522 |
|
|
|
48,721 |
|
|
|
48,721 |
|
|
|
156,145 |
|
|
|
156,243 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
198,515 |
|
|
$ |
198,613 |
|
|
$ |
48,721 |
|
|
$ |
74,673 |
|
|
$ |
247,236 |
|
|
$ |
273,286 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
121
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(21) Segment Data—(Continued)
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Assets held for Sale-Funeral |
|
|
Assets held for Sale-Cemetery |
|
|
Assets held for Sale-Total |
|
| |
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
2008 |
|
|
2007 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Eastern Division |
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
|
$ |
— |
|
Western Division |
|
|
1,433 |
|
|
|
1,433 |
|
|
|
1,440 |
|
|
|
1,762 |
|
|
|
2,873 |
|
|
|
3,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,433 |
|
|
$ |
1,433 |
|
|
$ |
1,440 |
|
|
$ |
1,762 |
|
|
$ |
2,873 |
|
|
$ |
3,195 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| (1) |
|
Perpetual care trust earnings of $10,660, $10,164 and $10,079 for fiscal years 2008,
2007 and 2006, respectively, are included in the revenue and gross profit data of the related
geographic segment. |
| |
| (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 earnings realized over the life of the preneed contracts delivered during the
relevant periods. Trust management fees included in funeral revenue for 2008, 2007 and 2006
were $5,075, $5,881 and $5,528, respectively, and funeral trust earnings recognized with
respect to preneed contracts delivered included in funeral revenue for 2008, 2007 and 2006
were $13,237, $12,514 and $12,332, respectively. Trust management fees included in cemetery
revenue for 2008, 2007 and 2006 were $4,949, $5,343 and $4,894, respectively, and cemetery
trust earnings recognized with respect to preneed contracts delivered included in cemetery
revenue for 2008, 2007 and 2006 were $4,164, $4,557 and $4,463, respectively. |
| |
| (3) |
|
Preneed sales amounts represent total preneed funeral trust and insurance sales and
cemetery service and merchandise trust sales generated in the applicable period, net of
cancellations. |
| |
| (4) |
|
Reconciling items consist of unallocated corporate assets, depreciation and
amortization on unallocated corporate assets 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, 2008, 2007 and 2006, is as follows:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
Gross profit for reportable segments |
|
$ |
100,817 |
|
|
$ |
112,430 |
|
|
$ |
114,613 |
|
Corporate general and administrative expenses |
|
|
(32,611 |
) |
|
|
(31,143 |
) |
|
|
(31,739 |
) |
Impairment of goodwill |
|
|
(25,952 |
) |
|
|
— |
|
|
|
— |
|
Hurricane related recoveries (charges), net |
|
|
(2,297 |
) |
|
|
(2,533 |
) |
|
|
1,628 |
|
Separation charges |
|
|
— |
|
|
|
(580 |
) |
|
|
(991 |
) |
Gains on dispositions and impairment (losses), net |
|
|
(353 |
) |
|
|
(44 |
) |
|
|
(153 |
) |
Other operating income, net |
|
|
819 |
|
|
|
1,651 |
|
|
|
1,333 |
|
Interest expense |
|
|
(24,115 |
) |
|
|
(25,065 |
) |
|
|
(29,633 |
) |
Loss on early extinguishment of debt |
|
|
— |
|
|
|
(677 |
) |
|
|
— |
|
Investment and other income, net |
|
|
2,406 |
|
|
|
3,374 |
|
|
|
3,676 |
|
|
|
|
|
|
|
|
|
|
|
Earnings from continuing operations before income
taxes |
|
$ |
18,714 |
|
|
$ |
57,413 |
|
|
$ |
58,734 |
|
|
|
|
|
|
|
|
|
|
|
122
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, 2008, 2007 and 2006.
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
Year Ended October 31, |
|
| |
|
2008 |
|
|
2007 |
|
|
2006 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
178,839 |
|
|
$ |
169,680 |
|
|
$ |
165,418 |
|
Cemetery |
|
|
65,260 |
|
|
|
60,002 |
|
|
|
62,436 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
244,099 |
|
|
|
229,682 |
|
|
|
227,854 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
100,164 |
|
|
|
101,232 |
|
|
|
106,718 |
|
Cemetery |
|
|
160,602 |
|
|
|
166,772 |
|
|
|
155,406 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
260,766 |
|
|
|
268,004 |
|
|
|
262,124 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Other revenue |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
7,604 |
|
|
|
8,418 |
|
|
|
8,101 |
|
Cemetery |
|
|
15,414 |
|
|
|
16,713 |
|
|
|
16,151 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23,018 |
|
|
|
25,131 |
|
|
|
24,252 |
|
|
|
|
|
|
|
|
|
|
|
Total revenue |
|
$ |
527,883 |
|
|
$ |
522,817 |
|
|
$ |
514,230 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Service costs |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
$ |
61,520 |
|
|
$ |
59,540 |
|
|
$ |
56,434 |
|
Cemetery |
|
|
44,054 |
|
|
|
40,649 |
|
|
|
42,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
105,574 |
|
|
|
100,189 |
|
|
|
98,604 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Merchandise costs |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
61,852 |
|
|
|
63,187 |
|
|
|
64,728 |
|
Cemetery |
|
|
108,343 |
|
|
|
97,904 |
|
|
|
90,527 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
170,195 |
|
|
|
161,091 |
|
|
|
155,255 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Facility expenses |
|
|
|
|
|
|
|
|
|
|
|
|
Funeral |
|
|
94,856 |
|
|
|
93,648 |
|
|
|
93,880 |
|
Cemetery |
|
|
56,441 |
|
|
|
55,459 |
|
|
|
51,878 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
151,297 |
|
|
|
149,107 |
|
|
|
145,758 |
|
|
|
|
|
|
|
|
|
|
|
Total costs |
|
$ |
427,066 |
|
|
$ |
410,387 |
|
|
$ |
399,617 |
|
|
|
|
|
|
|
|
|
|
|
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, 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 September
2008, Hurricane Ike struck the Texas Gulf Coast and the Company’s facilities in the area. The
Company is in the process of preparing the insurance claim related to Hurricane Ike. 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.
For the year ended October 31, 2008, the Company incurred $2,297 in net hurricane related
123
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(23) Hurricane Related Charges—(Continued)
charges, of which $1,082 was due to Hurricane Katrina, $1,185 was due to Hurricane Ike and $30 was
due to Hurricane Gustav.
As of October 31, 2008, the Company had incurred approximately $34,840 (of which $20,897 was
incurred in fiscal year 2005, $10,328 was incurred in fiscal year 2006, $2,533 was incurred in
fiscal year 2007 and $1,082 was incurred in fiscal year 2008) in total expenses related to
Hurricane Katrina including the write-off of damaged buildings, equipment and inventory, demolition
costs, debris removal, record restoration, general cleanup, temporary living facilities for
employees, relocation expenses and other costs. The Hurricane Katrina charges for fiscal year 2008
primarily relate to legal costs associated with ongoing litigation as described below. The Company
expensed non-capitalizable costs related to Hurricane Katrina as incurred.
The Company recorded hurricane related charges of $2,533 for the year ended October 31, 2007
and a $1,628 recovery for the year ended October 31, 2006. As of October 31, 2008, the Company has
recorded insurance proceeds from Hurricane Katrina of $23,562 and business interruption proceeds of
$3,169 for a total of $26,731. Of this amount, $15,200 was recorded in fiscal year 2006 and no
additional insurance proceeds were recorded in fiscal year 2007 or 2008.
Some of the insurance proceeds were recorded as receivables and were collected in a subsequent
period. As of October 31, 2006, the Company had received $16,731 in insurance proceeds and
received an additional $10,000 in insurance proceeds, including $3,169 in business interruption
insurance proceeds, in fiscal year 2007.
For the year ended October 31, 2006, the Company recorded $3,169 in business interruption
insurance proceeds based on information received from the Company’s insurance carrier. The Company
has reflected $2,829 and $340 of the business interruption insurance in the funeral and cemetery
revenue line items, respectively, in the consolidated statements of earnings for the year ended
October 31, 2006.
The Company has been unable to finalize its negotiations with its insurance carriers related
to property damage and extra expenses, and business interruption damages, related to Hurricane
Katrina, and filed suit against the carriers in August 2007. In 2007, the carriers advanced an
additional $1,100, which the Company has not recorded as income but as a liability pending the
outcome of the litigation. The suit involves numerous significant policy interpretation disputes,
among other issues, and no assurance can be given as to how much additional proceeds the Company
may recover from its insurers, if any, or the timing of the receipt of any additional proceeds. A
trial date had been set in Federal Court for December 1, 2008, but was postponed, and a new trial
date has been set for April 2009. With the exception of any legal costs related to this suit, the
Company does not anticipate any additional charges related to Hurricane Katrina.
(24) Significant Risks and Uncertainties
During the fourth quarter of 2008, the United States and global economies experienced
significant declines. As a result, the Company’s preneed funeral and cemetery merchandise and
services trusts and cemetery perpetual care trusts have experienced significant declines as of
October 31, 2008. The following are 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 recent failure of
various large financial institutions, government regulation, interest rates, cost of capital funds,
credit losses and volatility in the financial markets. As described in Notes 4, 5 and 6, as of
October 31, 2008 the market values of the trusts have experienced a significant decline from the
cost basis. As of October 31, 2008, the Company has a concentration in the financial services
sector with 25 percent of
124
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(24) Significant Risks and Uncertainties—(Continued)
fair market value of its preneed funeral and cemetery merchandise and services portfolios and
40 percent of its cemetery perpetual care portfolio invested in the financial services sector, with
a significant amount in preferred stocks. In addition, as of October 31, 2008, the Company has
investments in domestic automotive makers, including the related financing companies, in its
preneed funeral and cemetery merchandise and services portfolios and its cemetery perpetual care
portfolio with fair market values of $5,381 and $5,071, respectively. There is significant
uncertainty with respect to how the economic downturn will impact the continuing operations of the
domestic automotive makers. 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.
As of October 31, 2008, the Company also has concentrations in other sectors that may be more
susceptible to additional adverse impact from the current economic crisis, primarily 10 percent in
the information technology sector and 7 percent in the consumer discretionary sector, which
includes the domestic automotive makers.
Customer installment receivables
The Company has gross installment contract receivables of $131,154 relating to cemetery
property sales as of October 31, 2008. The continued economic downturn could impact the ability of
customers to meet payment obligations.
Goodwill
As of October 31, 2008, the Company has goodwill of $247,236, consisting of $91,091 in its
Eastern division funeral operating segment, $107,424 in its Western division funeral operating
segment and $48,721 in its Western division cemetery operating segment. As discussed in Note 13,
the economic downturn resulted in the realization of losses in the Company’s trust investment
portfolios, the estimated probable funding obligation related to the cemetery perpetual care trusts
and reduced cemetery perpetual care earnings and reduced funeral and cemetery merchandise trust
earnings. The current economic downturn has also negatively impacted cemetery property sales. To
the extent that the economic downturn continues, the Company may be required to evaluate the
carrying value of its goodwill in accordance with
the policy described in Note 2(g), which could result in additional impairments.
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).
(25) Subsequent Events
On November 18, 2008, the Company issued 15,000 shares of Class A common stock and paid $34 in
cash to each of the independent directors of the Company. 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.
As of November 30, 2008, the fair market value of the Company’s preneed funeral and cemetery
merchandise and services trusts and cemetery perpetual care trusts declined 11 percent from October
31, 2008 to $584,834.
In November 2008, the Company acquired a cemetery for approximately $1,623 to expand its
business in Arkansas.
125
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(26) Quarterly Financial Data (Unaudited)
Quarterly financial data for fiscal years 2008 and 2007 is presented below.
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended October 31, 2008(1) |
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
130,273 |
|
|
$ |
136,819 |
|
|
$ |
130,428 |
|
|
$ |
130,363 |
|
Gross profit |
|
|
27,070 |
|
|
|
35,634 |
|
|
|
27,998 |
|
|
|
10,115 |
|
Net earnings (loss) |
|
|
8,885 |
|
|
|
13,940 |
|
|
|
9,129 |
|
|
|
(35,647 |
) |
Net earnings (loss) per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.09 |
|
|
|
.15 |
|
|
|
.10 |
|
|
|
(.39 |
) |
Diluted |
|
|
.09 |
|
|
|
.15 |
|
|
|
.10 |
|
|
|
(.39 |
) |
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Year Ended October 31, 2007(2) |
|
First |
|
Second |
|
Third |
|
Fourth |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues |
|
$ |
131,846 |
|
|
$ |
137,028 |
|
|
$ |
127,579 |
|
|
$ |
126,364 |
|
Gross profit |
|
|
30,997 |
|
|
|
32,775 |
|
|
|
26,509 |
|
|
|
22,149 |
|
Net earnings |
|
|
11,926 |
|
|
|
13,629 |
|
|
|
8,123 |
|
|
|
6,135 |
|
Net earnings per common share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
.11 |
|
|
|
.13 |
|
|
|
.08 |
|
|
|
.06 |
|
Diluted |
|
|
.11 |
|
|
|
.13 |
|
|
|
.08 |
|
|
|
.06 |
|
|
|
|
| (1) |
|
First quarter of fiscal year 2008 includes a recovery of $159 in net hurricane
related costs and $147 in net gains on dispositions and impairment (losses) in continuing
operations. Second quarter of fiscal year 2008 includes a charge of $169 related to net
hurricane related costs and ($19) in net gains on dispositions and impairment (losses) in
continuing operations. Third quarter of fiscal year 2008 includes a charge of $341 related to
net hurricane related costs and $25 in net gains on dispositions and impairment (losses) in
continuing operations. Fourth quarter of fiscal year 2008 includes a charge of $1,946 related
to net hurricane related costs, $25,952 for goodwill impairment, a $13,281 charge related to
the Company’s estimated probable obligation to fund the cemetery perpetual care trusts, a tax
valuation allowance of $7,400 and ($506) in net gains on dispositions and impairment (losses)
in continuing operations. |
| |
| (2) |
|
First quarter of fiscal year 2007 includes a charge of $1,850 in net hurricane
related costs, $485 in separation charges primarily related to the retirement of a former
executive officer and $98 in net gains on dispositions and impairment (losses) in continuing
operations. Second quarter of fiscal year 2007 includes a charge of $283 related to net
hurricane related costs and $47 in separation charges. Third quarter of fiscal year 2007
includes a charge of $210 related to net hurricane related costs, ($46) in net gains on
dispositions and impairment (losses) in continuing operations, $48 in separation charges and
$677 for the loss on early extinguishment of debt. Fourth quarter of fiscal year 2007
includes a charge of $190 related to net hurricane related costs and ($88) in net gains on
dispositions and impairment (losses) in continuing operations. |
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.
126
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 the design and operation of our 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, 2008. 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, 2008.
The effectiveness of the Company’s internal control over financial reporting as of October 31,
2008 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting
firm, as stated in their report which appears herein.
Changes in Internal Control over Financial Reporting
In the fourth quarter of fiscal year 2008, the Company completed the implementation of the
payroll module of the Oracle software system. With the exception of the Oracle payroll module
implementation described above, there have been no changes in the Company’s internal control over
financial reporting during the most recently completed fiscal year that have materially affected,
or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
127
Item 9B. Other Information
On December 16, 2008, the Company entered into Amended and Restated Employment Agreements (the
“Amended Agreements”) with Thomas J. Crawford, President and Chief Executive Officer, and Thomas M.
Kitchen, Senior Executive Vice President and Chief Financial Officer (the “Officers”).
The Amended Agreements made certain changes to the prior agreements to protect the Officers’
bonus rights in the event of a termination of employment without “Cause” or with “Good Reason” (as
“Cause” and “Good Reason” are defined in the “Amended Agreements”) following a change of control.
The Amended Agreements provide that for each fiscal year ending in the two-year period following a
change of control during which entire fiscal year the Officer remains employed, each Officer is
guaranteed to receive a bonus at least equal to the “Average Bonus.” If the Officer is terminated
during a fiscal year either at the time of the change of control or within two years thereafter,
the Officer would be entitled to be paid the “Average Bonus”, reduced pro rata to reflect the
portion of the fiscal year for which the Officer was employed. The “Average Bonus” is equal to the
average bonus paid to the Officer for the last three completed fiscal years prior to the change of
control, or in the case of Mr. Crawford who has not been employed by the Company for the entirety
of those years, the average bonuses paid since employment began, annualized if a bonus was for a
partial year. The prior agreements did not provide bonus protection following a change of control.
Based on current compensation levels, the “Average Bonus” of Mr. Crawford is $952,799 and Mr.
Kitchen is $409,935.
The Amended Agreements contain additional changes made to comply with Section 409A of the
Internal Revenue Code. The foregoing description of the Amended Agreements is qualified in its
entirety by the terms of such agreements, which are filed as Exhibits 10.3 and 10.4 to this Form
10-K and are incorporated herein by reference.
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information regarding executive officers required by Item 10 may be found under Item 4(a)
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 2009 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 2009 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.
128
|
|
|
| Item 12. |
|
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder
Matters |
Equity Compensation Plan Information
The following table provides information about our common stock that may be issued under
equity compensation plans as of October 31, 2008:
| |
|
|
|
|
|
|
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
Number of Securities |
|
| |
|
|
|
|
|
|
|
|
|
Remaining Available For |
|
| |
|
|
|
|
|
|
|
|
|
Future Issuance Under |
|
| |
|
Number of Securities to be |
|
|
Weighted-Average |
|
|
Equity Compensation |
|
| |
|
Issued Upon Exercise of |
|
|
Exercise Price of |
|
|
Plans (Excluding Securities |
|
| |
|
Outstanding Options, |
|
|
Outstanding Options, |
|
|
Reflected in the First |
|
| Plan Category |
|
Warrants and Rights |
|
|
Warrants and Rights |
|
|
Column)(1) |
|
Equity compensation
plans approved by
security holders |
|
|
2,652,566 |
|
|
$ |
7.23 |
|
|
|
4,536,177 |
|
Equity compensation
plans not approved
by security holders |
|
|
— |
|
|
|
— |
|
|
|
— |
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
2,652,566 |
|
|
$ |
7.23 |
|
|
|
4,536,177 |
|
|
|
|
| (1) |
|
Includes 3,922,401 shares of our common stock under the 2007 Stock Incentive Plan,
which are issuable as stock appreciation rights, restricted stock, performance shares or stock
awards. This also includes 613,776 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 2009 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 2009 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 2009 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.
129
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 |
|
| |
|
|
|
58 |
|
|
|
|
59 |
|
|
|
|
60 |
|
|
|
|
62 |
|
|
|
|
64 |
|
|
|
|
65 |
|
|
|
|
|
|
(2) Financial Statement Schedule for the years ended October 31, 2008, 2007 and 2006 |
|
|
|
|
|
|
|
131 |
|
All other schedules are omitted because they are not applicable or not required, or the
information appears in the financial statements or notes thereto.
130
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 and |
|
|
|
|
|
|
|
|
|
Balance at |
| Description |
|
of period |
|
expenses |
|
Other changes |
|
Write-offs |
|
end of period |
Current—Allowance for doubtful
accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
2008 |
|
$ |
8,142 |
|
|
|
3,412 |
|
|
|
— |
|
|
|
(4,339 |
) |
|
$ |
7,215 |
|
2007 |
|
$ |
6,635 |
|
|
|
4,188 |
|
|
|
— |
|
|
|
(2,681 |
) |
|
$ |
8,142 |
|
2006 |
|
$ |
6,785 |
|
|
|
2,579 |
|
|
|
(23 |
) |
|
|
(2,706 |
) |
|
$ |
6,635 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Due after one year—Allowance for
doubtful accounts: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
10,824 |
|
|
|
4,583 |
|
|
|
— |
|
|
|
(5,718 |
) |
|
$ |
9,689 |
|
2007 |
|
$ |
10,888 |
|
|
|
5,568 |
|
|
|
— |
|
|
|
(5,632 |
) |
|
$ |
10,824 |
|
2006 |
|
$ |
11,350 |
|
|
|
4,216 |
|
|
|
— |
|
|
|
(4,678 |
) |
|
$ |
10,888 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax asset valuation allowance |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year ended October 31, |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2008 |
|
$ |
4,032 |
|
|
|
6,617 |
|
|
|
— |
|
|
|
— |
|
|
$ |
10,649 |
|
2007 |
|
$ |
10,457 |
|
|
|
(1,595 |
) |
|
|
— |
|
|
|
(4,830 |
) (1) |
|
$ |
4,032 |
|
2006 |
|
$ |
10,220 |
|
|
|
237 |
|
|
|
— |
|
|
|
— |
|
|
$ |
10,457 |
|
|
|
|
| (1) |
|
This is primarily related to the write-off of both the deferred tax asset and
related valuation allowance for a worthless stock deduction for which recognition was
determined to be remote in fiscal year 2007. |
131
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 4.2 to
Amendment No. 3 to the Company’s Registration Statement on Form S-1 (Registration No.
33-42336) filed with the Commission on October 7, 1991) |
|
|
|
4.3
|
|
Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit
1 to the Company’s Form 8-A filed November 4, 1999) |
|
|
|
4.4
|
|
Amendment No. 1 to the Rights Agreement dated June 26, 2007 between Stewart Enterprises, Inc.
and Mellon Investor Services LLC (incorporated by reference to Exhibit 4.4 to the Company’s
Current Report on Form 8-K filed June 27, 2007) |
|
|
|
4.5
|
|
Amended and Restated Credit Agreement dated November 19, 2004 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 hereto (incorporated by reference to Exhibit 4.1 to the Company’s Current
Report on Form 8-K filed November 23, 2004) |
|
|
|
4.6
|
|
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) |
|
|
|
4.7
|
|
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) |
|
|
|
4.8
|
|
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) |
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4.9
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|
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) |
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4.10
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|
Registration Rights Agreement dated June 27, 2007 by and among Stewart Enterprises, Inc., the
guarantors named therein and the Initial Purchases (incorporated by reference to Exhibit 4.3
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
132
herein) represent long-term debt in excess of 10 percent of the Company’s consolidated total
assets.
Management Contracts and Compensatory Plans or Arrangements
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10.1
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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) |
|
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10.2
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Retirement Agreement by and between the Company and Kenneth C. Budde dated June 6, 2006
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
June 9 2006) |
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10.3
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Employment Agreement dated February 20, 2007 between the Company and Thomas J. Crawford
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
February 21, 2007); Amendment No. 1 to Employment Agreement dated February 20, 2007, effective
May 14, 2007, between the Company and Thomas J. Crawford (incorporated by reference to Exhibit
10.3 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2007);
Amendment No. 2 to Employment Agreement dated May 1, 2008 between the Company and Thomas J.
Crawford (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form
10-Q for the quarter ended April 30, 2008); Amended and Restated Employment Agreement between
the Company and Thomas J. Crawford dated December 16, 2008 |
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10.4
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|
Employment Agreement dated May 14, 2007 between the Company and Thomas M. Kitchen
(incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed
May 17, 2007); Amendment No. 1 to Employment Agreement dated May 1, 2008 between the Company
and Thomas M. Kitchen (incorporated by reference to Exhibit 10.2 to the Company’s Quarterly
Report on Form 10-Q for the quarter ended April 30, 2008); Amended and Restated Employment
Agreement between the Company and Thomas M. Kitchen dated December 16, 2008 |
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10.5
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Retirement Agreement dated October 26, 2006, effective November 2, 2006, between the Company
and Everett N. Kendrick (incorporated by reference to Exhibit 10.1 to the Current Report on
Form 8-K filed November 3, 2006) |
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10.6
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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) |
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10.7
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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) |
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10.8
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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) |
|
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10.9
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|
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) |
|
|
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10.10
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|
Purchase Agreement dated June 21, 2007 by and among Stewart Enterprises, Inc., the
guarantors listed on Schedule A thereto and the Initial Purchases (incorporated by reference
to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed June 27, 2007) |
133
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10.11
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|
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) |
|
|
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10.12
|
|
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) |
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10.13
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|
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) |
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10.14
|
|
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) |
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|
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10.15
|
|
Stewart Enterprises, Inc. 2007 Stock Incentive Plan (incorporated by reference to Appendix A
to the Company’s definitive proxy statement for the year ended October 31, 2006) |
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|
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10.16
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|
2007 Executive Officer Annual Incentive Plan (incorporated by reference to Appendix B to the
Company’s definitive proxy statement for the year ended October 31, 2006) |
|
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10.17
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|
2003 Employee Stock Purchase Plan (incorporated by reference to Exhibit B in the Company’s
definitive proxy statement for the year ended October 31, 2002, Commission File No. 1-5449);
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, 2006) |
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10.18
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|
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) |
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|
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10.19
|
|
Stewart Enterprises, Inc. Retention Plan and Summary Plan Description effective June 18,
2008 (incorporated by reference to Exhibit 10.3 to the Company’s Quarterly Report on Form 10-Q
for the quarter ended July 31, 2008); 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) |
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10.20
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|
The Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan for
certain highly compensated executives (incorporated by reference to Exhibit 10.3 to the
Company’s Quarterly Report on Form 10-Q for the Quarter ended July 31, 2001, Commission File
No. 1-5449); Amendment No. 1 dated January 1, 2005 (incorporated by reference to Exhibit 10.2
to the Company’s Annual Report on Form 10-K for the year ended October 31, 2005); Amended and
Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan
effective January 1, 2008 |
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|
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10.21
|
|
Stewart Enterprises, Inc. Supplemental Executive Retirement Plan (incorporated by reference
to Exhibit 10.12 to the Company’s Quarterly Report on Form 10-Q for the Quarter ended April
30, 2002, Commission File No. 1-5449); Amendment No. 1 dated April 1, 2005 (incorporated by
reference to Exhibit 10.3 to the Company’s Annual Report on Form 10-K for the year ended
October 31, 2005); Amendment to Stewart Enterprises, Inc. Supplemental Executive Retirement
Plan effective June 17, 2008 (incorporated by reference to Exhibit 10.6 to the Company’s
Quarterly Report on Form 10-Q for the quarter ended July 31, 2008); Amended and Restated
Stewart Enterprises, Inc. Supplemental Executive Retirement Plan effective January 1, 2008 |
134
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12
|
|
Calculation of Ratio of Earnings to Fixed Charges |
|
|
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21
|
|
Subsidiaries of the Company |
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23
|
|
Consent of PricewaterhouseCoopers LLP |
|
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31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford,
President and Chief Executive Officer |
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31.2
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior
Executive Vice President and Chief Financial Officer |
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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 |
135
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 18, 2008.
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STEWART ENTERPRISES, INC.
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By: |
/s/ THOMAS J. CRAWFORD
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| |
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Thomas J. Crawford |
|
| |
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President, Chief Executive Officer and a Director |
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| |
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.
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| Signature |
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Title |
|
Date |
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|
|
|
/s/ THOMAS J. CRAWFORD
Thomas J. Crawford
(Principal Executive Officer)
|
|
President, Chief Executive Officer
and a Director
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December 18, 2008 |
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|
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/s/ THOMAS M. KITCHEN
Thomas M. Kitchen
(Principal Financial Officer)
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|
Senior Executive Vice President,
Chief Financial Officer and a
Director
|
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December 18, 2008 |
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|
/s/ ANGELA M. LACOUR
Angela M. Lacour
(Principal Accounting Officer)
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|
Vice President,
Corporate Controller and
Chief Accounting Officer
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December 18, 2008 |
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/s/ FRANK B. STEWART, JR.
Frank B. Stewart, Jr.
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Chairman of the Board
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December 18, 2008 |
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/s/ ALDEN J. McDONALD, JR.
Alden J. McDonald, Jr.
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|
Director
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December 18, 2008 |
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/s/ JAMES W. McFARLAND
James W. McFarland
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Director
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December 18, 2008 |
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/s/ RONALD H. PATRON
Ronald H. Patron
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Director
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December 18, 2008 |
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/s/ MICHAEL O. READ
Michael O. Read
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Director
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December 18, 2008 |
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/s/ ASHTON J. RYAN, JR.
Ashton J. Ryan, Jr.
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|
Director
|
|
December 18, 2008 |
136
Exhibit Index
| |
|
|
10.3
|
|
Amended and Restated Employment Agreement between the Company and Thomas J. Crawford dated
December 16, 2008 |
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|
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10.4
|
|
Amended and Restated Employment Agreement between the Company and Thomas M. Kitchen dated
December 16, 2008 |
|
|
|
10.20
|
|
Amended and Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred
Compensation Plan effective January 1, 2008 |
|
|
|
10.21
|
|
Amended and Restated Stewart Enterprises, Inc. Supplemental Executive Retirement Plan
effective January 1, 2008 |
|
|
|
12
|
|
Calculation of Ratio of Earnings to Fixed Charges |
|
|
|
21
|
|
Subsidiaries of the Company |
|
|
|
23
|
|
Consent of PricewaterhouseCoopers LLP |
|
|
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31.1
|
|
Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford,
President and Chief Executive Officer |
|
|
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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 |
137