STEWART ENTERPRISES, INC. AND SUBSIDIARIES CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited) (Dollars in thousands, ex 65,573 82,366 --------- --------- Cemetery Operations to be retained 43,781 44,406 Closed and held for sale operations 1,496 2,952 --------- --------- Total cemetery 45,277 47,358 --------- --------- Total costs and expenses 110,850 129,724 --------- --------- Gross Profit: Funeral Operations to be retained 23,385 20,954 Closed and held for sale operations 1,890 4,638 --------- --------- Total funeral 25,275 25,592 --------- --------- Cemetery Operations to be retained 14,923 16,816 Closed and held for sale operations (59) (1,193) --------- --------- Total cemetery 14,864 15,623 --------- --------- Total gross profit $ 40,139 $ 41,215 ========= ========= STEWART ENTERPRISES, INC. AND SUBSIDIARIES SUPPLEMENTAL FINANCIAL INFORMATION (Unaudited) (Dollars in thousands, except per share amounts) Six Months Ended April 30, -------------------------------------------------------------------------------- 2002 2001 --------- --------- Revenues: Funeral Operations to be retained $ 157,829 $ 153,248 Closed and held for sale operations 28,102 62,059 --------- --------- Total funeral 185,931 215,307 --------- --------- Cemetery Operations to be retained 115,725 128,002 Closed and held for sale operations 2,902 4,320 --------- --------- Total cemetery 118,627 132,322 --------- --------- Total revenues 304,558 347,629 --------- --------- Costs and expenses: Funeral Operations to be retained 110,710 113,629 Closed and held for sale operations 23,488 51,343 --------- --------- Total funeral 134,198 164,972 --------- --------- Cemetery Operations to be retained 85,836 91,760 Closed and held for sale operations 3,409 6,597 --------- --------- Total cemetery 89,245 98,357 --------- --------- Total costs and expenses 223,443 263,329 --------- --------- Gross Profit: Funeral Operations to be retained 47,119 39,619 Closed and held for sale operations 4,614 10,716 --------- --------- Total funeral 51,733 50,335 --------- --------- Cemetery Operations to be retained 29,889 36,242 Closed and held for sale operations (507) (2,277) --------- --------- Total cemetery 29,382 33,965 --------- --------- Total gross profit $ 81,115 $ 84,300 ========= ========= COMPANY FORECASTS FOR FISCAL YEAR 2002 The forecasts included herein were prepared by the Company's management for the purpose of providing all investors with forward-looking financial information frequently sought by the investment community. The forecasts have not been audited or otherwise approved by the Company's independent accountants or by any regulatory authority. Accuracy of the forecasts is dependent on assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. The Company cautions readers that it assumes no obligation to update or publicly release any revisions to the forecasts made herein and, except to the extent required by applicable law, does not intend to update or otherwise revise the forecasts more frequently than quarterly. The forecasts are based on a variety of estimates and assumptions made by management of the Company with respect to, among other things, industry performance; general economic, market, industry and interest rate conditions; preneed and at-need sales activities and trends; fluctuations in cost of goods sold and other expenses; capital expenditures; and other matters that cannot be accurately predicted, may not be realized and are subject to significant business, economic and competitive uncertainties, all of which are difficult to predict and many of which are beyond the Company's control. Accordingly, there can be no assurance that the assumptions made in preparing the forecasts will prove accurate, and actual results may vary materially from those contained in the forecasts. More specific information about factors that could cause actual results to differ materially from these forecasts is included herein. For these reasons, the forecasts should not be regarded as an accurate prediction of future results, but only of results that may be obtained if substantially all of management's principal expectations are realized. The Company does not represent or warrant, and assumes no responsibility for, the completeness, accuracy or reliability of the forecasts. Cautionary Statements The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future, could affect, the Company's actual consolidated results and could cause the Company's actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements included herein and in any other forward-looking statements made by or on behalf of the Company. Risks Related to the Company's Business The Company's ability to achieve its debt reduction targets and to service its debt in the future depends upon the Company's ability to generate sufficient cash, which depends on many factors, some of which are beyond the Company's control. The Company's ability to achieve its debt reduction targets in the time frame projected by the Company depends upon the Company's ability to generate sufficient cash from three main sources: (1) closing on the sale of its foreign assets in Portugal and Canada, executing its agreement and closing on the sale of assets in France and selling its assets in Argentina, (2) income tax benefits associated with the foreign asset sales and (3) its ongoing operations. The Company cannot control whether or when it will be able to complete transactions for the sale of its remaining foreign assets with buyers willing to accept terms anticipated by the Company's forecasts. The timing of the receipt of the income tax benefits depends on the rate at which the Company can produce capital gains against which the asset sale losses can be offset and the timing of the Company's filing for capital loss carrybacks to apply against previously-taxed capital gains. The Company's ability to generate cash flow from operations depends upon, among other things, the number of deaths in the Company's markets, competition, the level of preneed sales, the Company's ability to control its costs, stock and bond market conditions, and general economic, financial and regulatory factors, much of which is beyond the Company's control. The Company may experience declines in preneed sales due to numerous factors including changes made to contract terms and sales force compensation, or a weakening economy. Declines in preneed sales would reduce the Company's backlog and revenue and could reduce its future market share. In an effort to increase cash flow, the Company modified its preneed sales strategies early in fiscal year 2000 by increasing finance charges, requiring larger down payments and shortening installment payment terms. Later in fiscal year 2000, the Company changed the compensation structure for its preneed sales force. These changes, and the accompanying sales force attrition and adverse impact on sales force morale, caused preneed sales to decline. Although the Company does not anticipate making further significant changes in these areas, it may decide that further adjustments are advisable, which could cause additional declines in preneed sales. In addition, a weakening economy that causes customers to have less discretionary income could cause a decline in preneed sales. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce the Company's backlog and future revenue and could reduce future market share. Increased preneed sales may have a negative impact on cash flow. Preneed sales of cemetery property and funeral and cemetery products and services are generally cash flow negative initially, primarily due to the commissions paid on the sale, the portion of the sales proceeds required to be placed into trust and the terms of the particular contract such as the size of the down payment required and the length of the contract. In fiscal year 2000, the Company changed the terms and conditions of preneed sales contracts and commissions and moderated its preneed sales effort in order to reduce the initial negative impact on cash flow. Nevertheless, the Company will continue to invest a significant portion of cash flow in preneed acquisition costs, which reduces cash flow available for other activities, and, to the extent preneed activities are increased, cash flow will be further reduced, and the Company's ability to service debt could be adversely affected. Price competition could reduce market share or cause the Company to reduce prices to retain or recapture market share, either of which could reduce revenues and margins. The Company's funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. The Company has historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. In the past, this price competition has resulted in losing market share in some markets. In other markets, the Company has had to reduce prices and thereby profit margins in order to retain or recapture market share. In addition, because of competition from these types of competitors in some key markets, in fiscal year 1999 the Company lowered its goals for increases in average revenue per funeral service performed in the future. Increased price competition in the future could further reduce revenues, profit margins and the backlog. Increased advertising or better marketing by competitors, or increased services from Internet providers, could cause the Company to lose market share and revenues or cause the Company to incur increased costs in order to retain or recapture the Company's market share. In recent years, marketing through television, radio and print advertising, direct mailings and personal sales calls has increased with respect to the sales of preneed funeral services. Extensive advertising or effective marketing by competitors in local markets could cause the Company to lose market share and revenues or cause it to increase marketing costs. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing the Company to lose market share and revenue or to incur costs in response to competition to vary the types or mix of products or services offered by the Company. Also, increased use of the Internet by customers to research and/or purchase products and services could cause the Company to lose market share to competitors offering to sell products or services over the Internet. The Company does not currently sell products or services over the Internet. Earnings from and principal of trust funds and escrow accounts could be reduced by changes in stock and bond prices and interest and dividend rates or by a decline in the size of the funds. Earnings and investment gains and losses on trust funds and escrow accounts are affected by financial market conditions that are not within the Company's control. Earnings are also affected by the mix of fixed-income and equity securities that the Company chooses to maintain in the funds, and it may not choose the optimal mix for any particular market condition. The size of the funds depends upon the level of preneed sales, the amount of investment gains or losses and funds added through acquisitions, if any. Declines in earnings from perpetual care trust funds would cause a decline in current revenues, while declines in earnings from other trust funds and escrow accounts could cause a decline in future revenues and cash flow. In addition, any significant or sustained investment losses could result in there being insufficient funds in the trusts to cover the cost of delivering services and merchandise or maintaining cemeteries in the future. Any such deficiency would have to be covered by cash flow, which could have a material adverse effect on the Company's financial condition. Increases in interest rates would increase the Company's interest costs on its variable-rate long-term debt and could have a material adverse effect on the Company's net income and earnings per share. As of June 5, 2002, $241 million of the Company's long-term debt was subject to variable interest rates, although $100 million of that amount was fixed pursuant to the terms of interest rate swaps expiring in March of 2004 and 2005. Accordingly, any significant increase in interest rates could substantially increase the Company's interest costs on its variable-rate long-term debt, which could decrease the Company's net income and earnings per share materially. Covenant restrictions under the Company's senior secured credit facilities and senior subordinated note indenture limit the Company's flexibility in operating its business. The Company's senior secured credit facilities and the indenture governing the senior subordinated notes contain, among other things, covenants that restrict the Company's and the subsidiary guarantors' ability to finance future operations or capital needs or to engage in other business activities. They limit, among other things, the Company's and the subsidiary guarantors' ability to: borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in transactions with affiliates; engage in sale leaseback transactions; consummate specified asset sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all assets; and create liens on assets. In addition, the senior secured credit facilities contain specific limits on capital expenditures as well as a requirement that the Company maintain a liquidity reserve that increases over time as long as any of the 6.70% Notes or 6.40% ROARS are outstanding. Furthermore, the senior secured credit facilities require the Company to maintain specified financial ratios and satisfy financial condition tests and prohibit payment of the 6.70% Notes and the 6.40% ROARS unless thereafter the Company will have liquidity no less than $25 million, as defined. These covenants may require the Company to act in a manner contrary to its business objectives. In addition, events beyond the Company's control, including changes in general economic and business conditions, may affect its ability to satisfy these covenants. A breach of any of these covenants could result in a default allowing the lenders to declare all amounts immediately due and payable. The Company believes that the completion of the sale of its remaining foreign operations will not violate these covenants. The Company's foreign operations are subject to political, economic, currency and other risks that could adversely impact its financial condition, operating results or cash flow. The Company's foreign operations are subject to risks inherent in doing business in foreign countries. Risks associated with operating internationally include political, social and economic instability, increased operating costs, expropriation and complex and changing government regulations, all of which are beyond the Company's control. To the extent the Company makes investments in foreign assets or receives revenues in currencies other than U.S. dollars, the value of assets and income could be, and have in the past been, adversely affected by fluctuations in the value of local currencies. Risks Related to the Death Care Industry Declines in the number of deaths in the Company's markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term. Declines in the number of deaths could cause at-need sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase by approximately 1 percent per year from 2000 to 2010, longer lifespans could reduce the rate of deaths. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in the Company's markets or from quarter to quarter are not predictable. These variations can cause revenues to fluctuate. The increasing number of cremations in the United States could cause revenues to decline because the Company could lose market share to firms specializing in cremations. In addition, basic cremations produce no revenues for cemetery operations and lesser funeral revenues and, in certain cases, lesser profit margins than traditional funerals. The Company's traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will represent approximately 40 percent of the United States burial market by the year 2010, compared to 25 percent in 1999. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, basic cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well. If the Company is not able to respond effectively to changing consumer preferences, the Company's market share, revenues and profitability could decrease. Future market share, revenues and profits will depend in part on the Company's ability to anticipate, identify and respond to changing consumer preferences. During fiscal year 2000, the Company began to implement strategies based on a proprietary, extensive study of consumer preferences it commissioned in 1999. However, the Company may not correctly anticipate or identify trends in consumer preferences, or it may identify them later than its competitors do. In addition, any strategies the Company may implement to address these trends may prove incorrect or ineffective. Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits. Companies in the funeral home and cemetery business must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, the Company must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because the Company cannot decrease these costs significantly or rapidly when it experiences declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues. Changes or increases in, or failure to comply with, regulations applicable to the Company's business could increase costs or decrease cash flows. The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws and the laws of foreign jurisdictions where it operates. For example, the funeral home industry is regulated by the Federal Trade Commission, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. Embalming facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome on the Company, and it is always at risk of not complying with the regulations. In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, foreign, federal, state, local and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. Several states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate the ability of the Company to use surety bonding, increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which the Company operates, these and other possible proposals could have a material effect on the Company, its financial condition, its results of operations and its future prospects. STEWART ENTERPRISES, INC. AND SUBSIDIARIES COMPANY FORECAST FOR THE THIRD QUARTER AND FISCAL YEAR 2002 (Unaudited) (Dollars in millions, except per share amounts) Third Quarter 2002 Forecast Revenue $ 130 - $ 145 Gross profit $ 30 - $ 40 Operating profit $ 25 - $ 35 Interest expense $ 14 - $ 17 Diluted EPS $ 0.06 - $ 0.09 Depreciation and amortization $ 13 - $ 15 EBITDA $ 38 - $ 48 Fiscal Year 2002 Forecast Income Statement Items Revenue $ 570 - $ 590 Gross profit $ 140 - $ 155 Operating profit $ 125 - $ 135 Interest expense $ 60 - $ 65 Diluted EPS $ 0.38 - $ 0.42 Cash Flow Items Depreciation and amortization $ 55 - $ 65 EBITDA $ 185 - $ 200 Cash flow from operations $ 60 - $ 70 Maintenance capital expenditures $ 10 - $ 15 Free cash flow $ 50 - $ 55 Expenditures for growth initiatives $ 10 - $ 12 Balance Sheet Items Cash and marketable securities $ 20 - $ 30 Total long-term debt $ 550 - $ 600 Free Cash Flow EBITDA $ 185 - $ 200 Preneed activity (45) - (50) Interest expense (60) - (65) Maintenance capex (10) - (15) Change in working capital 5 - 12 Taxes (25) - (27) Free cash flow $ 50 - $ 55 ==================