What does change, however, are our business strategies. Adapting to meet shifting market conditions and consumer trends is something we have done successfully on many occasions in our 91-year history. During the 1990s, a time of consolidation and acquisitions in the death care industry, our company achieved its position as the third largest death care provider in North America. As we entered fiscal 2000, however, we modified our business strategies to focus more on cash flow and operations rather than acquisitions. Because we redirected our focus and terminated acquisition activity, fiscal 2000 was a transition year for us.

STRENGTHENING THE BALANCE SHEET
Two of our top priorities this year were to generate more cash and reduce debt—goals toward which we made good progress. Cash flow from operations grew to $87.2 million in fiscal 2000 from $16.4 million in fiscal 1999. Free cash flow (operating cash flow less maintenance capital expenditures and prearranged funeral activity) grew to $53.0 million in fiscal 2000 from a negative $14.4 million in fiscal 1999. As of October 31, 2000, we had accumulated $98.9 million in cash, cash-equivalent investments and marketable securities, an increase of $21.4 million from the same date in 1999. Subsequent to fiscal year 2000, we reduced long-term debt by $80 million with $25 million of regularly scheduled principal payments and $55 million in payments to reduce the outstanding balance on the revolving credit facility. As a result, as of January 9, 2001, we had cash, cash-equivalent investments and marketable securities of $70.0 million and outstanding long-term debt of $870.6 million.

We used a range of strategies to achieve the improvements in our cash position. We suspended our acquisitions program and limited our capital expenditures, keeping them well within our $43.5 million budget. We also restructured our preneed sales program—altering contract terms and conditions as well as standardizing the sales compensation plan—to promote optimal cash retention. In our domestic divisions, we replaced Company financing of at-need sales with third-party financing, a move that we expect to result in a one-time, $20-$25 million improvement in cash to be received over time.

Additionally, in October 2000, we suspended payment of dividends, which should add approximately $8.5 million to our cash position each year. To reduce debt, we began analyzing our portfolio of assets to identify underperforming businesses or excess real estate that would be more valuable if sold or converted to another use. We also began evaluating the benefits associated with the possible sale of some or all of our foreign operations. These initiatives continue into fiscal 2001.

FOCUSING ON OPERATIONS
Many of our key operating strategies have been in place for years. We provide a full spectrum of products and services—both funeral home and cemetery, traditional and alternative, preneed and at-need. This wide range of products and services enables us to satisfy varying consumer preferences.

Combination operations
An internal initiative we have used successfully through the years is the construction of funeral homes on the grounds of our cemeteries. Today, approximately 46 percent of our cemeteries operate in conjunction with funeral homes. Our experience has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both. During the year, we created four new combination operations by opening funeral homes in four of our cemeteries.

Our success with combinations has led us to form alliances with third parties to construct, own and operate funeral homes on the grounds of their cemeteries. During fiscal 2000, Stewart built three funeral homes in cemeteries owned by the Archdiocese of Los Angeles. Thus far in fiscal 2001, we have opened a fourth and broken ground on a fifth. The performance of these funeral homes has exceeded our expectations. Also during the year, Wyuka Funeral Home—owned and operated by Stewart—was completed and opened in Wyuka Cemetery, a state-owned cemetery in Lincoln, Nebraska.

For fiscal 2001, we have earmarked the capital needed to complete construction and open the fifth funeral home with the Archdiocese of Los Angeles. While our focus remains on cash flow and debt reduction, we will continue to explore third-party alliances in 2001.

Preneed sales
Selling prearranged death care products and services builds tomorrow’s market share today. For Stewart, helping families make prearrangements has been a successful strategy since the 1940s. At the close of fiscal year 2000, our backlog of prearranged funeral services exceeded 446,000, representing approximately $1.5 billion in expected future funeral revenue.

During fiscal 2000, we made a number of changes in our preneed sales strategies. We had two goals—to optimize the cash flow from preneed sales and to prepare for significant accounting changes anticipated as a result of a staff accounting bulletin issued by the Securities and Exchange Commission (SEC). While the changes we made reduced our preneed sales revenue for the year, they helped improve our cash flow significantly and will serve our shareholders well in the long term.

First, we adjusted the terms and conditions of our preneed contracts to improve cash flow and the quality of receivables. The adjustments included requiring larger down payments, increasing finance charges and shortening installment payment periods. Next, during the second and third quarters of the fiscal year, we developed a simplified, standardized sales compensation structure to promote increased growth in our customer base; it was implemented in the fourth quarter. While our sales force was dealing with these necessary modifications, we also rearranged the mix of our preneed products and services to emphasize sales of preneed funeral services and preneed property and de-emphasize sales of preneed funeral merchandise and preneed cemetery services.

In December 1999, the SEC issued Staff Accounting Bulletin (SAB) 101. SAB 101, which was not directed exclusively at the death care industry, generally requires that companies recognize revenue from a sale only after the product or service has been delivered. Throughout the year, our company and other industry participants worked with the SEC to determine the effects of SAB 101 on accounting for preneed sales.

As discussions with the SEC proceeded and in anticipation of the probable effects of SAB 101, we began to move our sales force toward a different sales mix by changing the incentives associated with preneed sales of certain products and services.

In the fourth quarter, we significantly reduced the commissions paid on sales of preneed cemetery services (opening and closing the grave site) and preneed funeral merchandise (caskets). We believe that under SAB 101, we will not be able to recognize these sales as revenue until delivery. Our preneed strategy now emphasizes cemetery property sales and prearranged funeral services. These are the sales that establish the relationship with the consumer and grow market share.

The changes in our sales approach resulted in reduced preneed sales for the year. However, we believe that the decisions we made to modify our preneed programs are prudent, long-term strategies that will ultimately improve the quality of our sales, our future cash flow and our future earnings. As a result of these changes, our revenues for our cemetery business in fiscal 2000 were $283 million compared to $310 million for the previous year.

Overall, our funeral business performed well during the entire fiscal year. We generated $452 million in revenue compared to $446 million the previous year. Our domestic core funeral businesses (those owned for at least two full years) sustained the number of funeral services performed and increased the average sale at the same time. The average revenue per call grew 6.2 percent. Much of this success can be attributed to the outstanding reputation of our funeral homes and the high quality of service they provide, in addition to the funeral arranger training program introduced during the year. This program educated our funeral arrangers about how to more effectively merchandise our products and improve personalization of services to client families.

ENHANCING THE CUSTOMER’S EXPERIENCE
The success of our company stems from our proven ability to provide death care products and services to consumers when they need them, in the manner they want them and at a fair and reasonable price. Prearranged services, combination operations and alternative services are examples of ongoing initiatives developed to satisfy our customers’ needs. To continue our success, we must not only respond to changing consumer preferences but also enhance the consumer’s experience with us. To that end, we are investing in research and development and in employee training.

Research and Development
During fiscal 1999, we commissioned one of the most comprehensive national studies ever of consumer trends and preferences related to the death care industry. Among the study’s findings is that while cremation will continue to slowly rise, the absolute number of traditional burials (full service adult burials) will remain stable. The study’s projections indicate that this will hold true for at least the next 10 years. The study also finds that consumers are willing to pay for products and services if they recognize their inherent value. During fiscal 2000, we began to implement strategies based on these results.

For example, in our funeral arranger training program, we have been teaching our employees to better merchandise our services and to better tailor services to individual customers’ needs and preferences.

Last year, we moved into the second phase of our research and development effort, known as Project Catalyst. Working with the same national consulting firm that conducted the study, we developed specific implementation-ready business models that we are now beginning to test.

Training
Employee training programs deliver a number of important benefits, such as enhanced customer experience, improved employee performance and increased employee satisfaction. To realize these benefits, we established a corporate training department early in fiscal 2000. Its first program was the successful funeral arranger initiative. Management and leadership training initiatives are planned for the coming year, as are efforts to enhance sales and safety performance. Training in all of these areas will ultimately contribute to a more positive customer experience.

STRENGTHENED LEADERSHIP
The leadership of our company has never been more solid. Our senior management team possesses the vision, industry knowledge and business acumen necessary to successfully steer the organization forward. The leadership of our new sales and marketing division created in January 2000 has already rationalized the sales force and established a standardized, more centralized sales approach. We are confident this approach will enhance sales effectiveness as we move through 2001. Our corporate development team is leading the way in research and development, just as our training team is building our greatest asset—our employees.