Frank B. Stewart, Jr.
Chairman of the Board

William E. Rowe
President
Chief Executive Officer

To Our Shareholders:
During its 90-year history, Stewart Enterprises has periodically experienced changing business environments and market trends. Fiscal year 1999 was one of those times. After 31 consecutive quarters of meeting or exceeding our goals and Wall Street's expectations, we missed the target for the third quarter and the initial target for fiscal year 1999. We also adjusted our earnings objective for fiscal year 2000 to one that we felt was more reflective of the current environment. Despite the disappointment with our lower earnings growth rate, our company remains very strong and is well positioned for the future. Fiscal year 1999 was an excellent year in many respects.

The following were among the highlights:

  • Revenues increased 19%, to nearly $760 million.*
  • Gross profit increased 15%, to $210 million.*
  • Earnings increased 8%, to $90 million. Diluted earnings per share decreased 1%, to $.84.*
  • Funeral revenues increased 22%, to nearly $450 million.*
  • Cemetery revenues increased 15%, to $310 million.
  • In February 1999, we completed our sixth public offering of Class A Common Stock including our IPO in 1991, generating nearly $220 million in net proceeds.
  • We acquired 100 businesses for an aggregate purchase price of $156 million.

We believe that our core operations are healthy, and that they provide a strong foundation for continuing growth in our changing business environment. Our business is well diversified, with funeral homes, cemeteries and combination operations (funeral homes located on cemetery grounds). We are a leader in the prearranged funeral market, with a backlog of more than 436,000 funeral prearrangements at year-end 1999 that represents approximately $1.5 billion in future revenue. We also have a significant presence in the growing cremation market.

Changing Environment
Of the industry changes we began to see in fiscal 1999, three were of particular significance. First, the demand for acquisitions decreased as several of our largest competitors greatly reduced or terminated their acquisition activities. As a result, the prices being offered for target companies declined. Since many potential sellers were not willing to sell their businesses at the lower prices, our own acquisition activity decreased substantially from its prior levels beginning in the third quarter. A second factor that came into play was the pricing pressure we experienced from the emergence of low-cost funeral service and merchandise providers in some markets. The third factor was shifting consumer preferences in certain areas, with more consumers considering cremation, and more consumers becoming price-conscious in some markets.

As a result of these circumstances, we decided to modify our business strategies to focus on internal growth and operations rather than acquisitions, with added emphasis on cash flow.

Business Strategies
In the past, we have talked a great deal about the number of acquisitions we completed. We have no plans to make acquisitions in 2000. However, if an unusually attractive acquisition opportunity presents itself, we will give it all due consideration.

Of the 100 businesses we purchased in fiscal 1999, one stands out as our largest domestic acquisition to date. D. W. Newcomer's Sons, Inc. came on board in the second quarter with eight funeral homes, four cemeteries and seven combination operations operating in Missouri, Kansas and Iowa. The addition of these funeral homes and cemeteries significantly expanded our operations in the Midwest. At the same time, we entered the Wisconsin market through the acquisition of the magnificent Wisconsin Memorial Park in Milwaukee. These two businesses, which enjoy outstanding reputations in our industry, enabled us to increase the number of families we serve each year by nearly 8,700.

In previous annual reports, we discussed key initiatives we have launched to promote internal growth and make our operations more efficient. These initiatives include the development of alternative-services firms, expansion of our office automation systems and formation of operating partnerships with third parties. As you read this annual report, you will learn of our plans in each of these areas for the coming year.

More importantly, you will learn about our business plans to enhance revenues, profits and cash flow at existing operations, and to grow our business through means other than acquisitions.

We took an important step in the third quarter when we launched Project 2000, a comprehensive national study of consumer preferences related to the total death care industry. We expect to receive the results of this study in early 2000, and believe they will help us evaluate the public's changing attitudes regarding pricing, merchandising and services.

In the fourth quarter, we adopted a new accounting method under which all earnings on the trust funds set up for prearranged funerals will be deferred until the delivery of the related funeral service. The new method matches revenue recognition more closely with cash receipts and improves the comparability of our earnings with those of our principal competitors. The change has been well received by the investment community.

New Leadership
Leading Stewart Enterprises is a new chief executive officer. William E. Rowe (formerly president and chief operating officer) was named president and CEO by the Board of Directors in November 1999. His appointment reflects the Company's intensified focus on operations, internal growth and cash flow. In December, Brian J. Marlowe was named chief operating officer. Together, they have over 65 years of operating experience in the death care industry.

Under this leadership, our more than 11,200 dedicated employees worldwide will continue to provide families with services of the utmost quality and value. And, as always, we will strive to find new and even better products and services to meet the changing needs of those we serve.

In Summary
We firmly believe that Stewart Enterprises is a very strong company, both financially and operationally. We also believe that our recent initiatives demonstrate both our flexibility and our progressiveness. Furthermore, we operate in an industry that has, because of excellent demographics, a very bright future. It is the goal of your management to return our company to double-digit growth rates and to maximize shareholder value.

 

January 28, 2000

Frank B. Stewart, Jr.
Chairman of the Board

William E. Rowe
President and Chief Executive Officer

* The Company's fiscal 1999 results reflect a change in accounting principle, effective November 1, 1998. Earnings and diluted earnings per share for fiscal 1999 exclude a charge of $50.1 million, or $.47 per share, for the cumulative effect of the change in accounting principle. Fiscal 1998 results are presented on a pro forma basis as if the accounting change had occurred at the beginning of that fiscal year. Additionally, fiscal 1998 results exclude a nonrecurring, noncash charge of $50.3 million, or $.51 per share, after-tax, recorded in connection with the vesting of the Company's performance-based stock options.