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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Liquidity
and Capital Resources Long-term debt as of October 31, 1999, amounted to $951.4 million, compared to $924.4 million as of October 31, 1998. The Company's long-term debt consisted of $529.0 million under the Company's revolving credit facilities, $400.9 million of long-term notes including the Remarketable Or Redeemable Securities (ROARS) discussed below, and $21.5 million of term notes incurred principally in connection with the acquisition of funeral home and cemetery properties. All of the Company's debt is unsecured, except for approximately $2.9 million of term notes incurred principally in connection with acquisitions. In April 1998, the Company issued $200 million of 6.40 percent ROARS due May 1, 2013 (remarketing date May 1, 2003). The ROARS were priced to the public at 99.677 percent to yield 6.476 percent. Net proceeds were approximately $203.6 million, including the remarketing payment made to the Company by the remarketing dealer for the right to remarket the securities after five years. The proceeds were used to reduce balances outstanding under the Company's existing revolving credit facilities. The net effective rate to the Company, assuming the securities are redeemed by the Company after five years, is 5.77 percent. If the securities are remarketed after five years, the net effective rate for the remaining term will be 5.44 percent (10-year Treasury rate, fixed upon initial issuance of the ROARS) plus the Company's then current credit spread. The most restrictive of the Company's credit agreements require it to maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has managed its capitalization within that limit, with a ratio of total debt to equity of .9 and 1.1 to 1.0 as of October 31, 1999 and 1998, respectively. In February 1999, the Company completed the sale of 13.6 million shares of Class A Common Stock. This resulted in approximately $219 million in net proceeds, which were used principally to repay balances outstanding under its revolving credit facilities. These amounts then became available to fund the Company's acquisition program and for general corporate purposes. As of January 17, 2000, the Company had a debt-to-equity ratio of approximately .9 to 1.0 and $362.5 million of additional borrowing capacity within this parameter, of which $75.8 million was available under its revolving credit facilities. On August 18, 1999, the Company announced that its Board of Directors had authorized the repurchase of up to 5 percent of its then outstanding common stock, or approximately 5.6 million shares. The repurchase was limited to the Company's Class A Common Stock and was made in the open market at such times and in such amounts as management deemed appropriate, depending on market conditions and other factors. During the fourth quarter of 1999, the Company completed this program with the repurchase of approximately 5.6 million shares of Class A Common Stock for approximately $33.0 million, or $5.91 per share. The Company's ratio of earnings to fixed charges was as follows:
(1) Pretax earnings
for fiscal year 1995 include a nonrecurring, noncash charge of $17.3 million
in connection with the vesting of performance-based stock options. Excluding
the charge, the Company's ratio of earnings to fixed charges for fiscal
year 1995 would have been 3.43. For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness, and the portion of rental expense that management believes to be representative of the interest component of rental expense. Fiscal year 1999 reflects the 1999 change in accounting principle; fiscal years 1998 and 1997 reflect the 1997 change in accounting principles; fiscal years 1996 and 1995 reflect the Company's previous accounting methods that were in effect at that time. During fiscal year 1999, the Company completed the acquisition of 83 funeral homes and 17 cemeteries for purchase prices aggregating approximately $156.4 million, which includes the issuance of approximately 19,000 shares of Class A Common Stock and $2.2 million of seller-financed acquisition indebtedness. The cash portion of the purchase price of these acquisitions was funded primarily with advances under the Company's revolving credit facilities. Subsequent to October 31, 1999, and through January 17, 2000, the Company acquired or had outstanding letters of intent or definitive agreements to acquire eight businesses for an aggregate purchase price of approximately $8.9 million. The Company plans to finance the purchase price of pending acquisitions primarily through seller financing or cash generated from the Company's operations. Historically, the Company has required significant capital resources to finance its acquisition program. In response to changes in the acquisition market described under the heading "Introduction" above, the Company expects to suspend its acquisition strategy in fiscal 2000, although the Company may consider acquiring firms that present an unusually attractive investment opportunity. In addition, the Company plans to implement the following cash flow initiatives: suspend acquisition activity unless an acquisition is unusually attractive and generates positive cash flow; limit spending on internal growth initiatives in fiscal year 2000 to $25 million, some of which has already been earmarked for construction of the Archdiocese of Los Angeles funeral homes; centralize control at the corporate office for all capital expenditures; and establish a program to analyze and possibly re-deploy excess cemetery property, under-performing assets and real estate that would be more valuable if converted to another use. Although the Company has no material commitments for capital expenditures (other than approximately $15 million in commitments related to construction of the Archdiocese of Los Angeles funeral homes), the Company contemplates capital expenditures of approximately $43.5 million for the fiscal year ending October 31, 2000, which includes approximately $25 million in internal growth initiatives (including the construction of the Los Angeles funeral homes) and approximately $18.5 million for maintenance capital expenditures. Management expects that future capital requirements will be satisfied through a combination of internally-generated cash and amounts available under its revolving credit facilities. In addition, the Company monitors its mix of fixed- and floating-rate debt obligations in light of changing market conditions and may from time to time decide to alter that mix by, for example, refinancing balances outstanding under its floating-rate revolving credit facility with public or private fixed-rate debt, or by entering into interest rate swaps or similar interest rate hedging transactions. On December 8, 1999, Moody's Investors Service ("Moody's") announced that it had lowered the Company's credit rating from Baa3 to Ba2, and on December 15, 1999, Standard & Poor's ("S&P") announced that it had placed the Company on credit watch with negative implications. Interest paid by the Company on its revolving line of credit is based in part on its credit ratings from Moody's and S&P. While the outcome of the S&P review cannot be predicted at this time, neither it nor the Moody's downgrade is expected to have a material effect on the Company's results of operations.
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