Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Management's Discussion and Analysis of Financial Condition and Results of Operations |
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Year Ended October 31, 1998 Compared to Year Ended October 31, 1997 Funeral Segment
Funeral revenue increased $87.5 million, or 30%, in fiscal year 1998, as compared with the prior fiscal year. The Company experienced a $15.9 million increase in revenue from Existing Operations as a result of a 6% increase in the average revenue per domestic funeral service performed by Existing Operations (10% increase in total, excluding the effect of foreign currency translation), due primarily to price increases and improved merchandising. Slightly offsetting this increase in revenue was a 2% decrease in the number of domestic funeral services performed by Existing Operations (4% decrease in total). The $7.0 million, or 4%, decrease in funeral costs from Existing Operations resulted principally from the implementation of certain cost control measures, including contract negotiations with certain vendors. Existing Operations achieved improved profit margins resulting primarily from improved cost control measures, including the Company's centralization and standardization of certain financial and administrative functions at its Shared Services Center, and the increased average revenue per funeral service mentioned above. The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition or construction of funeral homes during fiscal year 1998 which is not reflected in the 1997 period presented above. The $1.8 million increase in revenue from prearranged funeral trust funds and escrow accounts was attributable to a 21% growth in the average balance in such trust funds and escrow accounts, resulting primarily from current year customer payments deposited into the funds and funds added through acquisitions, offset by a modest decrease in the yield on the funds, which yield remained in line with the Company's goal. Cemetery Segment
Cemetery revenue increased $28.4 million, or 12%, in fiscal year 1998, as compared to fiscal year 1997. The Company experienced a $14.2 million or 6% increase in revenue from Existing Operations resulting principally from an increase in cemetery sales, including burial site openings and closings. The improved profit margin achieved by Existing Operations was attributable principally to the increase in cemetery sales discussed above, the implementation of certain cost control measures, including the centralization and standardization of certain financial and administrative functions at the Shared Services Center, and the increase in burial site openings and closings. The increase in revenues and costs associated with Acquired Operations resulted from the acquisition or construction of cemeteries during fiscal year 1998 which is not reflected in the 1997 period presented above. The $1.0 million increase in revenue from merchandise trust funds and escrow accounts was attributable principally to a 22% growth in the average balance in the merchandise trust funds and escrow accounts, resulting primarily from current year payments deposited into the funds, along with funds added through acquisitions, and offset by a slight decrease in the yield on the merchandise trust funds and escrow accounts, which yield remained in line with the Company's goal. Other Additionally, to encourage optionees to exercise their options immediately in order to renew the performance-based option program and to reduce potential dilution from additional shares in the market, the Company offered to repurchase the options for the difference between $27.31, the closing price on the date on which the options vested, and the exercise price of the options. The repurchase of certain of the options by the Company and the exercise of the remaining options resulted in a net cash outlay of approximately $69.4 million. In July and August 1998, the Company granted new options under the 1995 Incentive Compensation Plan to officers and employees for the purchase of 3,592,250 shares of Class A Common Stock at exercise prices equal to the fair market value on the grant dates, which ranged from $21.38 to $27.25 per share. One-third of the options become exercisable in 20% annual increments beginning on July 17, 1999. The remaining two-thirds of the options become exercisable in full on the first day between the grant date and July 17, 2003 that the average of the closing sale prices of a share of Class A Common Stock over the 20 preceding consecutive trading days equals or exceeds $67.81, which represents a 20% annual compounded growth in the price of a share of Class A Common Stock over five years. Generally accepted accounting principles require that a charge to earnings be recorded for the performance-based options for the difference between the exercise price and the then current stock price when achievement of the performance objective becomes probable. All of the options expire on July 31, 2004. Corporate general and administrative expenses declined to 2.6% of revenue in fiscal year 1998, as compared to 2.9% in fiscal year 1997, despite an aggregate increase of $1.2 million for the current year. The increase in these expenses is the result of activities to support the Company's growth. Interest expense increased $5.8 million during fiscal year 1998 when compared to fiscal year 1997. The increase resulted from an increase in average borrowings, which was partially offset by a decrease in average interest rates from 6.6% in 1997 to 6.4% in 1998. Approximately $492.0 million, or 53%, of the $924.4 million borrowings outstanding as of October 31, 1998 was subject to short-term variable interest rates averaging approximately 5.7%. In December 1998, the Company entered into an interest rate swap agreement on a notional amount of $200 million. Under the terms of the agreement, effective March 4, 1999, the Company will pay a fixed rate of 4.915% and receive 3-month LIBOR. The swap expires on March 4, 2002. Investment and other income increased $3.5 million during fiscal year 1998 when compared to the prior year, due principally to an approximately $2.3 million gain on the sale of nonessential assets. The Company experienced an increase in its effective tax rate from 34.5% in fiscal year 1997 to 35.5% in fiscal year 1998. The increase in the effective tax rate was due to an increase in income from jurisdictions with higher effective tax rates.
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