Stewart Enterprises Announces Delay in Filing Fiscal Year 2005 Form 10-K
18 Gennaio 2006 - 2:50PM
Business Wire
Stewart Enterprises, Inc. (Nasdaq NMS: STEIE) will file today a
Form 12b-25 announcing the delay of filing its results for the
fiscal year 2005 on Form 10-K. INTRODUCTION Stewart Enterprises,
Inc. (the "Company") was unable to file its Annual Report on Form
10-K for the fiscal year ended October 31, 2005 (the "2005 Form
10-K") by January 17, 2006 because the Company has experienced
significant delays in completing its consolidated financial
statements and its Section 404 assessment of internal control over
financial reporting. The delays are primarily a result of (1) the
Company's deferred revenue project not being completed by that
time, (2) the disruption caused by Hurricane Katrina, and (3) the
Company's continued efforts to complete management's assessment of
internal control over financial reporting in accordance with
Section 404 of the Sarbanes-Oxley Act, principally with regard to
the deferred revenue project. As previously reported, in connection
with its internal control assessment under Section 404 of
Sarbanes-Oxley, the Company undertook a project (the "deferred
revenue project") in 2005 to verify the balances in deferred
preneed cemetery service and merchandise revenue and deferred
preneed funeral revenue by physically reviewing substantially all
of the preneed cemetery and funeral service and merchandise
contracts included in its backlog. This process involved the
physical review of nearly 700,000 preneed contracts. The Company's
review of these contracts is substantially complete, and the
results of that review are in the process of being analyzed by the
Company and are subject to completion of audit procedures by the
Company's independent registered public accounting firm. DEFERRED
REVENUE PROJECT Although the deferred revenue project is not yet
complete, based on information currently available, management
believes that the project will result in a restatement of the
Company's financial statements for fiscal years 2001 through 2004,
including the quarters therein, and the first three quarters of
2005. Management believes that a significant portion of the
adjustment will relate to the cumulative effect of adopting Staff
Accounting Bulletin 101 ("SAB 101") on November 1, 2000, but that a
material portion of the adjustment will impact reported revenues
and earnings for fiscal years 2001 through 2005. Management
believes that the restatement will result in adjustments for prior
period financial statements (for all annual and quarterly periods
for fiscal years 2001 through 2005) that will increase deferred
revenue at October 31, 2005 in an amount that is not currently
expected to materially exceed $120 million, that will decrease
shareholders' equity at October 31, 2005 in an amount that is not
currently expected to materially exceed $75 million and increase
deferred tax assets at October 31, 2005 in an amount that is not
currently expected to materially exceed $45 million. These
estimates and the estimates in the table are unaudited and are
derived from information available based on the current status of
the Company's deferred revenue project. Such amounts are
preliminary and remain subject to further review by the Company and
completion of audit procedures by the Company's independent
registered public accounting firm, both of which could result in
material changes. Deferred revenue and the related non-controlling
interest in funeral and cemetery trusts as originally reported as
of October 31, 2004 was approximately $1.1 billion. The Company has
identified a significant number of contracts under which services
and or merchandise have been delivered but related trust funds have
not been withdrawn. As a result, based on information developed in
the project, the Company has been able to withdraw approximately
$19 million from its trust accounts during 2005 representing
amounts that were not withdrawn in prior periods, even though the
related services and merchandise had been delivered in prior
periods. The table below shows the estimated reduction in diluted
earnings per share resulting from the deferred revenue project,
compared with the diluted earnings per share reported in the
incomplete Form 10-K/A for the fiscal year ended October 31, 2004
filed in October 2005 and in the incomplete Form 10-Q for the third
quarter ended July 31, 2005 (the "2005 Third Quarter Report.") -0-
*T
----------------------------------------------------------------------
Nine months ended July 31, FY 2001 FY 2002 FY 2003 FY 2004 2005
-------------------------------------------- Reported EPS $(3.81)
$(1.49) $(0.04) $0.45 $(1.14) Estimated change in reported EPS
based on the current status of the deferred revenue project $(0.10)
$(0.09) $(0.04) $(0.04) $(0.03) Cumulative Effect of SAB 101 on
11/1/2000(1) $(0.27) Cumulative Effect of Change in Accounting -
Deferred Acquisition Costs 11/1/2004(2) $(0.09)
-------------------------------------------- Estimated EPS after
impact based on the current status of the deferred revenue project
$(4.18) $(1.58) $(0.08) $0.41 $(1.26)
============================================ Weighted average
diluted common shares outstanding 107,355 108,299 108,230 108,159
109,430
----------------------------------------------------------------------
(1) The original charge recorded upon the adoption of SAB 101 on
November 1, 2000 was approximately $416.7 million pretax ($250.0
million after tax or $2.33 per diluted share). (2) Effective at the
beginning of fiscal year 2005, the Company changed its method of
accounting for preneed selling costs to expense such costs in the
period incurred rather than to defer and amortize such costs. Prior
to this change, commissions and other costs that varied with and
were primarily related to the acquisition of new prearranged
funeral and cemetery service and merchandise sales were deferred,
included in deferred charges and amortized in proportion to preneed
revenue recognized during the period in a manner consistent with
SFAS 60, "Accounting and Reporting for Insurance Companies." The
estimated changes in reported earnings per share included in the
table above for fiscal years 2001 through 2004 include additional
deferred charges (and reductions in expenses) as a result of the
increased deferred revenue (and decreases in revenue) based on the
current status of the deferred revenue project. The cumulative
effect of adopting this accounting change in fiscal year 2005 would
also change as the deferred charge balance at November 1, 2004
would have increased from the Company's previously issued financial
statements reflecting the additional deferred charges. The original
charge recorded as the cumulative effect of change in accounting
principle on November 1, 2004 was $234.5 million pretax ($141.3
million after tax or $1.29 per diluted share). *T The anticipated
adjustments to previously reported annual and interim financial
statements are primarily matters identified during the deferred
revenue project. The Company identified errors in the amount of
deferred revenue and trust earnings associated with undelivered
cemetery merchandise and funeral service and merchandise contracts
as of the date it adopted SAB 101. The Company identified errors in
its recognition of cemetery merchandise revenue in the periods
subsequent to its adoption of SAB 101. The Company did not properly
recognize trust earnings at the date of adoption of SAB 101 and in
subsequent periods. NONRELIANCE ON PREVIOUSLY ISSUED FINANCIAL
STATEMENTS Due to the restatements described above, the Company's
audit committee concluded on January 16, 2006 that the previously
issued financial statements for all annual and quarterly periods
for fiscal years 2001 through 2005 should no longer be relied upon.
The Company has discussed these matters with its independent
registered public accounting firm. EFFECT ON DEBT AGREEMENTS The
restatements relating to the deferred revenue project may create a
default or event of default under the Company's bank credit
facility. Also, if the Company is unable to file the completed 2005
Form 10-K by February 1, 2006, there will be a default under the
credit facility that will become an event of default if not cured
within 15 days. The Company is continuing to assess these matters,
has initiated contact with its lead lenders under the facility and
expects to seek, and receive, waivers of any such defaults in the
near future, although no assurances can be given that such waivers
will be received. The indenture governing the Company's 6.25
percent senior notes due 2013 requires the Company to furnish the
trustee within the time periods required by the SEC's rules and
regulations all annual financial information that would be required
to be contained in an SEC filing, including an auditor's report. An
event of default would occur under the indenture if the Company
failed to comply with this requirement within 30 days after receipt
of written notice of such failure from the trustee or the holders
of at least 25 percent of the principal amount outstanding. NASDAQ
LISTING Additionally, as previously disclosed, the Nasdaq Stock
Market has granted the Company's request for an extension of time
within which to file the 2005 Form 10-K and its Third Quarter
Report until February 15, 2006. If the Company is not able to meet
that deadline, the Company would request an extension. However,
there can be no assurances that such an extension would be granted
and the Company may be subject to further delisting proceedings by
Nasdaq. Nasdaq notified the Company on January 17, 2006 that the
Company's filing on October 24, 2005 of the Form 10-K/A for the
fiscal year ended October 31, 2004 without an audit report and
without the certifications of the CEO and CFO was an additional
noncompliance with the continued listing requirements of Nasdaq
Marketplace Rule 4310(c)(14). This matter was previously disclosed
to and discussed with the Nasdaq Listing Qualifications Panel and
the Company believes that the extension to February 15, 2006 was
intended to cover this report as well. The Company plans to present
its views to the Panel by January 24, 2006 and, if the Company
cannot complete the Form 10-K/A for the fiscal year ended October
31, 2004 by February 15, 2006 to request an extension of time for
this report as well. ANTICPATED FILING SCHEDULE The Company intends
to file the 2005 Third Quarter Report prior to or concurrently with
filing its 2005 Form 10-K. The Company is working diligently to
complete the 2005 Form 10-K by the extended deadline of February 1,
2006 and file its 2005 Third Quarter Report by February 1, 2006.
The Company also plans to file a complete Form 10-K/A for the
fiscal year ended October 31, 2004 by February 15, 2006. Management
cannot predict with certainty whether these deadlines will be met.
CAUTIONARY STATEMENTS Management's estimate of the results and
timing of completion of the deferred revenue project, the Company's
plan to file the completed 2005 Form 10-K and 2005 Third Quarter
Report on or prior to February 1, 2006, the Company's ability to
comply with Nasdaq's deadlines, and the potential consequences of
failing to meet those deadlines, are forward-looking statements
that are subject to significant uncertainties. Important factors
that could cause actual results and timing to differ materially
from the estimates indicated herein include whether the Company
uncovers unanticipated issues during its completion of the project,
and the timing and results of the related audit procedures by the
Company's independent registered public accounting firm. INTERNAL
CONTROL ASSESSMENT The Company is required to provide management's
annual report on internal control over financial reporting in the
2005 Form 10-K. Management anticipates that such report, and the
related auditor's report, will conclude that as of October 31,
2005, the Company's internal control over financial reporting was
not effective due to material weakness related to its accounting
for deferred revenue. A material weakness is a control deficiency,
or combination of control deficiencies, that results in more than a
remote likelihood that a material misstatement of the annual or
interim financial statements will not be prevented or detected. The
Company did not maintain effective controls over the accounting for
deferred preneed revenue, including recognition of related trust
earnings and costs. As discussed above, this control deficiency
will result in the restatement of the Company's consolidated
financial statements for fiscal 2001 through 2005. Additionally,
this control deficiency could result in further misstatements to
the Company's goodwill, deferred taxes, deferred preneed revenue,
revenue, equity and disclosures that would result in a material
misstatement to the annual or interim financial statements that
would not be prevented or detected. Accordingly, as of October 31,
2005, management determined that this control deficiency
represented a material weakness in internal control over financial
reporting. In connection with the deferred revenue project,
management has been implementing measures designed to remediate the
control deficiency related to the reporting of deferred preneed
revenue and related deferred trust earnings. These measures include
modification of an accounting system that will facilitate more
accurate reporting of deferred preneed revenue and revenue.
Management believes that these measures will be implemented and
anticipates that the control deficiency should be remediated in
fiscal 2006. However, there can be no assurance of such
remediation. As previously reported, the Company did not maintain
effective controls over the determination of operating and
reportable segments in accordance with accounting principles
generally accepted in the United States of America. Specifically,
the Company did not maintain effective controls to properly
identify its segments and reporting units for purposes of reporting
its segment results and assessing goodwill impairments in
accordance with accounting principles generally accepted in the
United States of America. This control deficiency resulted in the
restatement of the Company's interim and annual consolidated
financial statements for 2004 and 2003, the annual consolidated
financial statements for 2002, and adjustments to the consolidated
financial statements of the first and second quarters of 2005. The
Company has taken a series of steps designed to improve these
control processes, including re-assessing the information provided
to the Company's Chief Operating Decision Maker and how that
determines the Company's operating segments as well as assessing
the economic similarity for reportable segments and reporting unit
determination in the Company's goodwill impairment analysis. The
Company is in the process of testing this control to see if this
material weakness has been effectively remediated as of October 31,
2005 given the series of steps taken. Because management has not
yet completed its evaluation and testing of internal controls over
financial reporting, there can be no assurance that additional
material weaknesses will not be identified or additional material
adjustments made to the Company's previously reported financial
results and the preliminary results it has reported for fiscal
2005. Founded in 1910, Stewart Enterprises is the third largest
provider of products and services in the death care industry in the
United States, currently owning and operating 231 funeral homes and
144 cemeteries. Through its subsidiaries, the Company provides a
complete range of funeral merchandise and services, along with
cemetery property, merchandise and services, both at the time of
need and on a preneed basis.
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