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(dollars in thousands, except per share amounts.)
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The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. See Note 13 for a discussion of assets held for sale and liabilities associated with assets held for sale.
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.
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. Accordingly, the estimates presented herein may not be indicative of the amounts the Company could realize in a current market. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts.
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 marketable securities and long-term investments are stated at fair value as they are classified as available for sale under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” The fair value of the Company’s long-term variable rate debt is estimated using future cash flows discounted at market rates for similar types of borrowing arrangements. The fair value of the Company’s long-term 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 14.
Inventories are stated at the lower of cost (specific identification 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.
Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 19 to 45 years and from 3 to 10 years, respectively, primarily using the straight-line method. For the fiscal years ended October 31, 2001, 2000 and 1999, depreciation expense totaled approximately $28,967, $28,938 and $25,418, respectively.
Goodwill, net, or costs in excess of net assets of companies acquired, totaled approximately $491,122 and $667,128 as of October 31, 2001 and 2000, respectively, and is amortized principally over 40 years using the straight-line method. The Company continually evaluates the recoverability of this intangible asset by assessing whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted expected future cash flows. Accumulated amortization included in net goodwill was $65,912 and $82,944 as of October 31, 2001 and 2000, respectively. The Company’s accounting for goodwill will change with the implementation of SFAS No. 142, “Goodwill and Other Intangibles,” as discussed in Note 3.
In accordance with SFAS No. 52, “Foreign Currency Translation,” all assets and liabilities of the Company’s foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of shareholders’ equity. Additionally, as discussed in Note 13, the Company realized comprehensive income and an increase to equity for the cumulative foreign currency translation related to the sale of the Company’s operations in Mexico, Australia, New Zealand, Belgium and the Netherlands.
The Company sells 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.
Commissions and other direct costs to acquire the prearranged funeral services and prearranged funeral merchandise sales are deferred and amortized as the funeral contracts are delivered in accordance with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” Indirect costs of marketing prearranged funeral services are expensed in the period in which incurred.
Prearranged funeral services and merchandise generally are funded either through trust funds or escrow accounts established by the Company or through third-party insurance companies. Principal amounts deposited in the trust funds or escrow accounts are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser’s option to cancel the contract. Certain jurisdictions provide for non-refundable trust funds or escrow accounts where the Company receives such amounts upon cancellation by the customer. The Company defers all dividends and interest earned, and net capital gains and losses realized by preneed funeral service trust funds or escrow accounts until the underlying service is delivered. Earnings are withdrawn only as funeral services and merchandise 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. When prearranged funeral services and merchandise are funded through insurance policies purchased by customers from third-party insurance companies, the Company earns a commission on the sale of the policies. Insurance commissions, net of related expenses, are recognized at the point at which the commission is no longer subject to refund. Policy proceeds are available to the Company as funeral services and merchandise are delivered.
Effective November 1, 2000, the Company changed its method of accounting for preneed funeral merchandise. Effective November 1, 1998, the Company changed its method of accounting for preneed funeral merchandise and services trust earnings. See the discussion of these accounting changes in Note 3.
Funeral services sold at the time of need are recorded as funeral revenue in the period the funeral is performed.
Effective November 1, 2000, the Company changed its method of accounting for preneed sales of merchandise and cemetery services and cemetery merchandise trust earnings, as discussed in Note 3.
In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of preneed cemetery merchandise and services be placed in trust funds or escrow accounts. The Company defers all dividends and interest earned, and net capital gains and losses realized, by preneed cemetery merchandise and services trust funds or escrow accounts until the underlying merchandise is delivered. Principal and earnings are withdrawn only as the merchandise is delivered or contracts are cancelled.
Pursuant to perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trust funds. The income from these funds, 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. Accordingly, the trust fund corpus is not reflected in the consolidated financial statements. The Company recognizes and withdraws currently all dividend and interest income earned and, where permitted, capital gains realized by perpetual care funds.
Some of the Company’s sales of cemetery property and merchandise are made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables.
The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities.
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 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 (in this case, exercise of the Company’s time-vest stock options) had been issued during each period as discussed in Note 16.
Certain reclassifications have been made to the 2000 and 1999 consolidated financial statements. These reclassifications had no effect on net earnings or shareholders’ equity. In fiscal year 2001, prearranged acquisition costs and the change in prearranged activity are included in the accompanying statements of cash flows. These cash flows have characteristics of cash flows both from operating and investing activities. For comparative purposes, prearranged activity, as previously reported, has been reclassified in the accompanying statement of cash flows and resulted in a decrease in cash flows from operating activities for the years ended October 31, 2000 and 1999 by $17,687 and $10,807, respectively, and an increase in cash flows from investing activities by a corresponding amount.
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