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UNITED STATES SECURITIES AND EXCHANGE COMMISSION  Washington, D.C. 20549
   FORM 10-Q  x Quarterly Report Pursuant to Section 13 or15(d)of the Securities Exchange Act of 1934 For the quarterly period ended July 31, 2004
 OR
 o Transition Report Pursuant to Section 13 or15(d)of the Securities Exchange Act of 1934
 For the transition period from  to
   Commission File Number: 1-15449   STEWART ENTERPRISES, INC.  LOUISIANA
    
    72-0693290(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)
 110 Veterans Memorial BoulevardMetairie, Louisiana
    
    70005(Address of principal executive offices)
    
    (Zip Code)
   Registrants telephone number, including area code: (504) 837-5880   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes x No o Indicate by check mark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes x No o The number of shares of the Registrants Class A common stock, no par
value per share, and Class B common stock, no par value per share, outstanding
as of September 1, 2004, was 104,291,472 and 3,555,020, respectively.




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES INDEX PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Statements of Earnings 
Three Months Ended July 31, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Earnings 
Nine Months Ended July 31, 2004 and 2003
    
    
    4Condensed Consolidated Balance Sheets 
July 31, 2004 and October 31, 2003
    
    
    5Condensed Consolidated Statement of Shareholders Equity 
Nine Months Ended July 31, 2004
    
    
    7Condensed Consolidated Statements of Cash Flows 
Nine Months Ended July 31, 2004 and 2003
    
    
    8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2.Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    42Item 3.Quantitative and Qualitative Disclosures
About Market Risk
    
    
    53Item 4.Controls and Procedures
    
    
    54Part II. Other InformationItem 1.Legal Proceedings
    
    
    55Item 2.Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    55Item 5.Other Information
    
    
    56Item 6.Exhibits and Reports on Form 8-K
    
    
    63Signatures
    
    
    651st Sup. to App. A of Emp. Agmt.-Kenneth C. Budde1st Sup. to App. A of Emp. Agmt.-Lawrence B. Hawkins1st Sup. to App. A of Emp. Agmt.-Brent F. Heffron3rd Sup. to App. A of Emp. Agmt.-Randall L. Stricklin3rd Sup. to App. A of Emp. Agmt.-G. Kenneth Stephens, Jr.3rd Sup. to App. A of Emp. Agmt.-Michael K. Crane3rd Sup. to App. A of Emp. Agmt.-Everett N. KendrickCalculation of Ratio of Earnings to Fixed ChargesCertification of CEO & CFO pursuant to Section 302Certification of CEO & CFO pursuant to Section 906
  2




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 (Dollars in thousands, except per share amounts)
 Three Months Ended July 31,2004
    
    2003Revenues:Funeral
    
    $
    67,285
    
    
    $
    68,838Cemetery
    
    
    60,326
    
    
    
    54,936127,611
    
    
    
    123,774Costs and expenses:Funeral
    
    
    49,520
    
    
    
    52,033Cemetery
    
    
    46,667
    
    
    
    43,61696,187
    
    
    
    95,649Gross profit
    
    
    31,424
    
    
    
    28,125Corporate general and administrative expenses
    
    
    (4,150
    )
    
    
    (4,931
    )Separation charges (Note 12)
    
    
    (1,085
    )
    
    
    (2,450
    )Operating earnings
    
    
    26,189
    
    
    
    20,744Interest expense
    
    
    (11,502
    )
    
    
    (13,249
    )Loss on early extinguishment of debt (Note 13)
    
    
    
    
    
    
    (11,289
    )Investment income
    
    
    77
    
    
    
    66Other income, net
    
    
    1,585
    
    
    
    438Earnings (loss) from continuing operations before income taxes
    
    
    16,349
    
    
    
    (3,290
    )Income tax expense (benefit)
    
    
    5,984
    
    
    
    (911
    )Earnings (loss) from continuing operations
    
    
    10,365
    
    
    
    (2,379
    )Discontinued operations (Note 11):Loss from discontinued operations before income taxes
    
    
    (483
    )
    
    
    (194
    )Income tax benefit
    
    
    (961
    )
    
    
    (74
    )Earnings (loss) from discontinued operations
    
    
    478
    
    
    
    (120
    )Net earnings (loss)
    
    $
    10,843
    
    
    $
    (2,499
    )Basic earnings (loss) per common share:Earnings (loss) from continuing operations
    
    $
    .10
    
    
    $
    (.02
    )Earnings from discontinued operations
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    .10
    
    
    $
    (.02
    )Diluted earnings (loss) per common share:Earnings (loss) from continuing operations
    
    $
    .10
    
    
    $
    (.02
    )Earnings from discontinued operations
    
    
    
    
    
    
    Net earnings (loss)
    
    $
    .10
    
    
    $
    (.02
    )Weighted average common shares outstanding (in thousands):Basic
    
    
    107,067
    
    
    
    108,386Diluted
    
    
    108,068
    
    
    
    108,386
 See accompanying notes to condensed consolidated financial statements. 3




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 (Dollars in thousands, except per share amounts)
 Nine Months Ended July 31,2004
    
    2003Revenues:Funeral
    
    $
    212,830
    
    
    $
    210,433Cemetery
    
    
    175,044
    
    
    
    166,229387,874
    
    
    
    376,662Costs and expenses:Funeral
    
    
    150,672
    
    
    
    156,426Cemetery
    
    
    132,005
    
    
    
    128,415282,677
    
    
    
    284,841Gross profit
    
    
    105,197
    
    
    
    91,821Corporate general and administrative expenses
    
    
    (12,684
    )
    
    
    (13,413
    )Separation charges (Note 12)
    
    
    (3,216
    )
    
    
    (2,450
    )Operating earnings
    
    
    89,297
    
    
    
    75,958Interest expense
    
    
    (35,976
    )
    
    
    (40,405
    )Loss on early extinguishment of debt (Note 13)
    
    
    
    
    
    
    (11,289
    )Investment income
    
    
    202
    
    
    
    237Other income, net
    
    
    1,441
    
    
    
    2,123Earnings from continuing operations before income taxes
    
    
    54,964
    
    
    
    26,624Income taxes
    
    
    20,477
    
    
    
    10,456Earnings from continuing operations
    
    
    34,487
    
    
    
    16,168Discontinued operations (Note 11):Earnings from discontinued operations before income taxes
    
    
    1,742
    
    
    
    479Income tax expense (benefit)
    
    
    (1,099
    )
    
    
    182Earnings from discontinued operations
    
    
    2,841
    
    
    
    297Net earnings
    
    $
    37,328
    
    
    $
    16,465Basic earnings per common share:Earnings from continuing operations
    
    $
    .32
    
    
    $
    .15Earnings from discontinued operations
    
    
    .03
    
    
    
    Net earnings
    
    $
    .35
    
    
    $
    .15Diluted earnings per common share:Earnings from continuing operations
    
    $
    .32
    
    
    $
    .15Earnings from discontinued operations
    
    
    .03
    
    
    
    Net earnings
    
    $
    .35
    
    
    $
    .15Weighted average common shares outstanding (in thousands):Basic
    
    
    107,461
    
    
    
    108,242Diluted
    
    
    108,061
    
    
    
    108,266
 See accompanying notes to condensed consolidated financial statements. 4




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS (Unaudited)
 (Dollars in thousands, except per share amounts)
 July 31,
    
    October 31,ASSETS
    
    2004
    
    2003Current assets:Cash and cash equivalent investments
    
    $
    16,076
    
    
    $
    18,585Marketable securities
    
    
    1,292
    
    
    
    2,346Receivables, net of allowances
    
    
    59,276
    
    
    
    97,203Inventories
    
    
    39,164
    
    
    
    40,154Prepaid expenses
    
    
    2,764
    
    
    
    2,887Deferred income taxes, net
    
    
    1,671
    
    
    
    2,990Assets held for sale (Note 11)
    
    
    30,987
    
    
    
    52,117Total current assets
    
    
    151,230
    
    
    
    216,282Receivables due beyond one year, net of allowances
    
    
    78,252
    
    
    
    76,374Preneed funeral receivables and trust investments
    
    
    502,036
    
    
    
    Preneed cemetery receivables and trust investments
    
    
    254,087
    
    
    
    Prearranged receivables, net
    
    
    
    
    
    
    891,028Goodwill
    
    
    402,910
    
    
    
    403,790Deferred charges
    
    
    247,240
    
    
    
    247,067Cemetery property, at cost
    
    
    372,991
    
    
    
    374,043Property and equipment, at cost:Land
    
    
    37,342
    
    
    
    37,350Buildings
    
    
    294,477
    
    
    
    292,157Equipment and other
    
    
    159,990
    
    
    
    155,429491,809
    
    
    
    484,936Less accumulated depreciation
    
    
    193,246
    
    
    
    181,801Net property and equipment
    
    
    298,563
    
    
    
    303,135Deferred income taxes, net
    
    
    47,683
    
    
    
    60,565Cemetery perpetual care trust investments
    
    
    205,695
    
    
    
    Other assets
    
    
    1,455
    
    
    
    1,238Total assets
    
    $
    2,562,142
    
    
    $
    2,573,522
 (continued) 5




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) July 31,
    
    October 31,LIABILITIES AND SHAREHOLDERS EQUITY
    
    2004
    
    2003Current liabilities:Current maturities of long-term debt (Note 13)
    
    $
    73,953
    
    
    $
    13,935Accounts payable
    
    
    6,240
    
    
    
    7,274Accrued payroll
    
    
    11,595
    
    
    
    8,596Accrued insurance
    
    
    17,506
    
    
    
    19,243Accrued interest
    
    
    3,208
    
    
    
    11,428Other current liabilities
    
    
    11,970
    
    
    
    17,273Income taxes payable
    
    
    150
    
    
    
    769Liabilities associated with assets held for sale (Note 11)
    
    
    18,586
    
    
    
    30,071Total current liabilities
    
    
    143,208
    
    
    
    108,589Long-term debt, less current maturities
    
    
    363,413
    
    
    
    488,180Deferred preneed funeral revenue
    
    
    157,282
    
    
    
    Deferred preneed cemetery revenue
    
    
    289,254
    
    
    
    Non-controlling interest in funeral and cemetery trusts
    
    
    618,771
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    1,222,785Other long-term liabilities
    
    
    11,108
    
    
    
    15,109Total liabilities
    
    
    1,583,036
    
    
    
    1,834,663Commitments and contingencies
    
    
    
    
    
    
    Non-controlling interest in perpetual care trusts
    
    
    204,390
    
    
    
    Shareholders equity:Preferred stock, $1.00 par value, 5,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, $1.00 stated value:Class A authorized 150,000,000 shares; issued and outstanding
104,290,872 and 104,172,151 shares at July 31, 2004
and October 31, 2003, respectively
    
    
    104,291
    
    
    
    104,172Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at July 31, 2004 and October 31, 2003;
10 votes per share; convertible into an equal number of
Class A shares
    
    
    3,555
    
    
    
    3,555Additional paid-in capital
    
    
    673,374
    
    
    
    676,439Accumulated deficit
    
    
    (5,536
    )
    
    
    (42,864
    )Unearned restricted stock compensation
    
    
    (413
    )
    
    
    Accumulated other comprehensive loss:Unrealized depreciation of investments
    
    
    
    
    
    
    (797
    )Derivative financial instrument losses
    
    
    (555
    )
    
    
    (1,646
    )Total accumulated other comprehensive loss
    
    
    (555
    )
    
    
    (2,443
    )Total shareholders equity
    
    
    774,716
    
    
    
    738,859Total liabilities and shareholders equity
    
    $
    2,562,142
    
    
    $
    2,573,522
 See accompanying notes to condensed consolidated financial statements. 6




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (Unaudited)
 (Dollars in thousands, except per share amounts)
 UnrealizedRetained
    
    Unearned
    
    Appreciation
    
    DerivativeAdditional
    
    Earnings
    
    Restricted
    
    (Depreciation)
    
    Financial
    
    TotalCommon
    
    Paid-In
    
    (Accumulated
    
    Stock
    
    of
    
    Instrument
    
    ShareholdersStock (1)
    
    Capital
    
    Deficit)
    
    Compensation
    
    Investments
    
    Gains (Losses)
    
    EquityBalance October 31, 2003
    
    $
    107,727
    
    
    $
    676,439
    
    
    $
    (42,864
    )
    
    $
    
    
    
    $
    (797
    )
    
    $
    (1,646
    )
    
    $
    738,859Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    37,328
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    37,328Other comprehensive income:Reclassification adjustment for realized
loss on investments, net of deferred tax
benefit of $454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    740
    
    
    
    
    
    
    
    740Unrealized appreciation of investments,
net of deferred tax expense of ($14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    57Termination of derivative instrument
designated and qualifying as a cash
flow hedging instrument, net of
deferred tax expense of ($119)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    194Unrealized appreciation on derivative
instrument designated and qualifying as
a cash flow hedging instrument, net of
deferred tax expense of ($507)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    897
    
    
    
    897Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    797
    
    
    
    1,091
    
    
    
    1,888Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    37,328
    
    
    
    
    
    
    
    797
    
    
    
    1,091
    
    
    
    39,216Issuance of restricted stock awards, net of
cancellations
    
    
    160
    
    
    
    712
    
    
    
    
    
    
    
    (872
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    459
    
    
    
    
    
    
    
    
    
    
    
    459Issuance of common stock
    
    
    74
    
    
    
    347
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    421Stock options exercised
    
    
    2,646
    
    
    
    9,999
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,645Tax benefit associated with stock options
exercised
    
    
    
    
    
    
    2,465
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,465Purchase and retirement of common stock
    
    
    ( 2,761
    )
    
    
    (16,588
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 19,349
    )Balance July 31, 2004
    
    $
    107,846
    
    
    $
    673,374
    
    
    $
    ( 5,536
    )
    
    $
    ( 413
    )
    
    $
    
    
    
    $
    ( 555
    )
    
    $
    774,716
   (1)
    
    Amount includes 104,291 and 104,172 shares (in thousands) of Class A
common stock with a stated value of $1 per share as of July 31, 2004 and
October 31, 2003, respectively, and includes 3,555 shares (in thousands)
of Class B common stock. See accompanying notes to condensed consolidated financial statements. 7




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 (Dollars in thousands, except per share amounts)
 Nine Months Ended July 31,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    37,328
    
    
    $
    16,465Adjustments to reconcile net earnings to net cash
provided by operating activities:Reduction in 2003 impairment charge and gain on asset disposals, net
    
    
    (1,765
    )
    
    
    (1,072
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    11,289Depreciation and amortization
    
    
    39,560
    
    
    
    40,375Provision for doubtful accounts
    
    
    5,595
    
    
    
    5,406Net loss realized on marketable securities
    
    
    1,203
    
    
    
    Provision for deferred income taxes
    
    
    12,100
    
    
    
    11,246Other
    
    
    460
    
    
    
    Changes in assets and liabilities:Decrease in other receivables
    
    
    28,642
    
    
    
    12,844Decrease in deferred charges
    
    
    5,665
    
    
    
    5,088(Increase) decrease in inventories and cemetery property
    
    
    1,839
    
    
    
    (140
    )Decrease in accounts payable and accrued expenses
    
    
    (11,477
    )
    
    
    (12,948
    )Change in prearranged activity
    
    
    (23,064
    )
    
    
    (18,267
    )Prearranged acquisition costs
    
    
    (26,224
    )
    
    
    (27,346
    )Increase (decrease) in other
    
    
    (1,260
    )
    
    
    3,294Net cash provided by operating activities
    
    
    68,602
    
    
    
    46,234Cash flows from investing activities:Proceeds from sales of marketable securities
    
    
    1,121
    
    
    
    550Proceeds from sale of assets, net
    
    
    12,871
    
    
    
    2,009Additions to property and equipment
    
    
    (14,280
    )
    
    
    (13,967
    )Other
    
    
    208
    
    
    
    72Net cash used in investing activities
    
    
    (80
    )
    
    
    (11,336
    )Cash flows from financing activities:Retirement of Remarketable Or Redeemable Securities (ROARS)
    
    
    
    
    
    
    (12,691
    )Proceeds from long-term debt
    
    
    
    
    
    
    105,000Repayments of long-term debt
    
    
    (64,748
    )
    
    
    (135,796
    )Debt issue costs
    
    
    
    
    
    
    (813
    )Issuance of common stock
    
    
    13,066
    
    
    
    582Purchase and retirement of common stock
    
    
    (19,349
    )
    
    
    Net cash used in financing activities
    
    
    (71,031
    )
    
    
    (43,718
    )Net decrease in cash
    
    
    (2,509
    )
    
    
    (8,820
    )Cash and cash equivalents, beginning of period
    
    
    18,585
    
    
    
    28,190Cash and cash equivalents, end of period
    
    $
    16,076
    
    
    $
    19,370Supplemental cash flow information:Cash paid (received) during the period for:Income taxes
    
    $
    (26,900
    )
    
    $
    (17,200
    )Interest
    
    $
    39,500
    
    
    $
    47,300Noncash investing and financing activities:Issuance of common stock to fund employee benefit plan
    
    $
    
    
    
    $
    1,445
 See accompanying notes to condensed consolidated financial statements. 8




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 (Dollars in thousands, except per share amounts)
 (1) Basis of Presentation (a) The Company Stewart Enterprises, Inc. (the Company) is a provider of funeral and
cemetery products and services in the death care industry in the United States.
Through its subsidiaries, the Company offers a complete line of funeral
merchandise and services, along with cemetery property, merchandise and
services, both at the time of need and on a preneed basis. As of July 31,
2004, the Company owned and operated 259 funeral homes and 148 cemeteries in 28
states within the United States and Puerto Rico. (b) Principles of Consolidation The accompanying condensed consolidated financial statements include the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. See Note 11 for a discussion of
discontinued operations, assets held for sale and liabilities associated with
assets held for sale. (c) Interim Disclosures The information as of July 31, 2004, and for the three and nine months
ended July 31, 2004 and 2003, is unaudited but, in the opinion of management,
reflects all adjustments, which are of a normal recurring nature, necessary for
a fair presentation of financial position and results of operations for the
interim periods. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Companys Annual Report on Form 10-K for the
fiscal year ended October 31, 2003. The year-end condensed consolidating balance sheet data was derived from
audited financial statements but does not include all disclosures required by
accounting principles generally accepted in the United States of America, which
are presented in the Companys annual report on Form 10-K for the fiscal year
ended October 31, 2003. The results of operations for the three and nine months ended July 31,
2004 are not necessarily indicative of the results to be expected for the
fiscal year ending October 31, 2004. (d) Use of Estimates 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. (e) Fair Value of Financial Instruments 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 9




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) 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 marketable securities included in preneed funeral
trust investments, preneed cemetery trust investments and cemetery perpetual
care trust 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- and
fixed-rate debt is estimated using quoted market prices, where applicable, or
future cash flows discounted at rates for similar types of borrowing
arrangements. (f) Prearranged Trust Receivable and Prearranged Deferred Revenue The Company adopted FIN 46R effective April 30, 2004, as described in Note
2(a). The following discussion describes the Companys accounting prior to the
adoption of FIN 46R. The Company evaluated the collectibility of the
prearranged trust receivable for impairment when the fair market value of the
trust assets was below the recorded prearranged trust receivable balance. A
prearranged trust receivable was deemed to be impaired when, based on current
information and events, it was probable that the Company would be unable to
collect all amounts from the trust at the time the receivables are due. In
those instances that a receivable was deemed to be impaired, a valuation
allowance was provided on the trust receivable to reduce it to the currently
estimated recoverable amount with a corresponding reduction to the associated
deferred revenue balance. There was no income statement impact as long as the
deferred revenue was not below the estimated costs to deliver the underlying
products or services. If the deferred revenue were below the estimated costs
to deliver the underlying products or services, the Company would record a
charge to earnings. The valuation allowance as of October 31, 2003 was $4,500. (g) Inventories 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. Such estimates are based on the Companys
historical experience or results. (h) Depreciation and Amortization Buildings and equipment are recorded at cost and are depreciated over
their estimated useful lives, ranging from 10 to 40 years and from 3 to 10
years, respectively, primarily using the straight-line method. SFAS No. 142, Goodwill and Other Intangibles, provides that goodwill is
no longer amortized, but must be tested for impairment using a fair value
approach rather than an undiscounted cash flow approach. The Companys
evaluation of goodwill is performed at the funeral and cemetery segments, which
constitute the Companys reporting 10




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) units. In the fourth quarter of each fiscal year, the Company conducts its
annual goodwill impairment analysis which compares the fair value with the book
value for each reporting unit. The Company recorded a noncash goodwill
impairment charge of $73,000 in the fourth quarter of fiscal year 2003 related
to its cemetery segment as a result of the annual goodwill impairment review.
Goodwill decreased $880 to $402,910 at July 31, 2004 compared to $403,790 at
October 31, 2003, due to the sale of certain businesses. (i) Stock-Based Compensation At July 31, 2004, the Company had five stock-based employee compensation
plans, which are described in more detail in Note 17 to the consolidated
financial statements of the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees and has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure  an Amendment of FASB Statement No. 123. No
stock-based employee compensation cost related to stock options is reflected in
net earnings, as all options granted under those plans had an exercise price
equal to or greater than the market value of the underlying common stock on the
grant date. The expense related to the restricted stock granted in fiscal year
2004 is reflected in earnings and amounted to $87 and $459 for the three and
nine months ended July 31, 2004, respectively. See Note 1(n) for further
discussion on the Companys restricted stock. The following table illustrates
the effect on net earnings (loss) and net earnings (loss) per share if the
Company had applied the fair value recognition provisions of SFAS No. 123 to
stock-based employee compensation. Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Net earnings (loss)
    
    $
    10,843
    
    
    $
    (2,499
    )
    
    $
    37,328
    
    
    $
    16,465Stock-based employee compensation expense
included in reported net earnings, net of tax
    
    
    54
    
    
    
    
    
    
    
    285
    
    
    
    Total stock-based employee compensation expense
determined under fair value-based method,
net of tax
    
    
    (416
    )
    
    
    (752
    )
    
    
    (1,386
    )
    
    
    (2,197
    )Pro forma net earnings (loss)
    
    $
    10,481
    
    
    $
    (3,251
    )
    
    $
    36,227
    
    
    $
    14,268Net earnings (loss) per common share:Basic  as reported
    
    $
    .10
    
    
    $
    (.02
    )
    
    $
    .35
    
    
    $
    .15Basic  pro forma
    
    $
    .10
    
    
    $
    (.03
    )
    
    $
    .34
    
    
    $
    .13Diluted
 as reported
    
    $
    .10
    
    
    $
    (.02
    )
    
    $
    .35
    
    
    $
    .15Diluted
 pro forma
    
    $
    .10
    
    
    $
    (.03
    )
    
    $
    .34
    
    
    $
    .13
 (j) Funeral Revenue 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. Prior to performing the funeral or delivering of the
merchandise, such sales are deferred. 11




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) Commissions and other direct costs that vary with and are primarily
related to the acquisition of new prearranged funeral service sales and
prearranged funeral merchandise sales are deferred and amortized as the
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 or escrow accounts established by the Company or through
third-party insurance companies. Principal amounts deposited in the trust 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 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
trust or escrow accounts until the underlying service or merchandise is
delivered. Earnings are withdrawn from trust or escrow accounts 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. Even so, such withdrawn earnings
are not recognized as revenue until the related funeral services are performed
or merchandise delivered. When prearranged funeral services and merchandise
are funded through insurance policies purchased by customers from third-party
insurance companies, the Company earns a commission if it acts as agent 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, including the buildup in the face value of the insurance
contracts, are available to the Company as funeral services and merchandise are
delivered. Funeral services and merchandise sold at the time of need are recorded as
funeral revenue in the period the funeral is performed or the merchandise is
delivered. (k) Cemetery Revenue The Company sells preneed cemetery merchandise and services under
contracts that provide for delivery of the merchandise and services at the time
of need. Preneed cemetery merchandise and service sales are recorded as
cemetery revenue in the period the merchandise is delivered or service is
performed. 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 or escrow
accounts. The Company defers all dividends and interest earned and net capital
gains and losses realized by preneed cemetery merchandise and service trust or
escrow accounts until the underlying merchandise or service is delivered.
Principal and earnings are withdrawn only as the merchandise and services 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. For preneed sales of interment rights (cemetery property), the associated
revenue and all costs to acquire the sale are recognized in accordance with
SFAS No. 66, Accounting for Sales of Real Estate. Under SFAS No. 66,
recognition of revenue and costs must be deferred until 10 percent of the
property sale price has been collected. 12




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) Pursuant to cemetery perpetual care contracts and laws, a portion,
generally 10 percent, of the proceeds from cemetery property sales is deposited
into perpetual care trusts. The income from these trusts, 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 trust in
perpetuity. The Company currently recognizes and withdraws all dividend and
interest income earned and, where permitted, capital gains realized by cemetery
perpetual care trusts. 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. (l) Allowance for Doubtful Accounts The Company establishes an allowance based on a range of percentages
applied to accounts receivable aging categories. These percentages are based
on historical collection and write-off experience. (m) Income Taxes Income taxes are accounted for using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. Management provides a valuation allowance against
the deferred tax asset for amounts which are not considered more likely than
not to be realized. The Company received a $33,222 income tax refund in December 2003 due to a
change in the tax accounting methods for cemetery merchandise revenue. During
the third quarter of 2003, the Company received a tax refund of $23,334 related
to the sale of its foreign operations. The Company used these refunds to
reduce its outstanding debt balance. (n) Earnings Per Common Share 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 and non-vested restricted stock awards) had been issued during
each period as discussed in Note 8. On June 26, 2003, the Company announced that its Board of Directors had
approved a new stock repurchase program that allows the Company to invest up to
$25,000 in repurchases of its Class A common stock. In June 2004, the Board of
Directors approved an additional $3,000 in stock repurchases, which increases
the stock repurchase program limit from $25,000 to $28,000. The repurchases
are limited to the Companys Class A common stock and 13




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) are made in the open market or in privately negotiated transactions at such
times and in such amounts as management (1) Basis of Presentation(Continued) deems appropriate, depending on market conditions and other factors. These
repurchases reduce the weighted average number of common shares outstanding
during each period. Since the inception of the program through July 31, 2004,
the Company had repurchased 3,500,000 shares of its Class A common stock at an
average price of $6.35 per share. On December 22, 2003, the Company granted 271,000 shares of restricted
stock to its executive officers (of which 110,666 shares have been cancelled as
of July 31, 2004). The restricted stock is included in total shares
outstanding but is not included in the weighted average number of common shares
outstanding in each period until the shares vest. The restricted stock vests
equally on October 31, 2004, October 31, 2005 and October 31, 2006. (o) Derivatives The Company accounts for its derivative financial instruments under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
The notional amounts of derivative financial instruments do not represent
amounts exchanged between parties and, therefore, are not a measure of the
Companys exposure resulting from its use of derivatives. The amounts
exchanged are calculated based upon the notional amounts as well as other terms
of the instruments, such as interest rates, exchange rates or other indices.
In accordance with SFAS No. 133, the Company accounts for its $50,000 interest
rate swap as a cash flow hedge whereby the fair value of the interest rate swap
is reflected as a liability of $555 in the accompanying consolidated balance
sheet with the offset recorded to other comprehensive income. (p) Reclassifications Certain reclassifications have been made to the 2003 condensed
consolidated statements of earnings and balance sheet in order for these
periods to be comparable. These reclassifications had no effect on net
earnings or shareholders equity. (2) Change in Accounting Principles (a) FASB Interpretation No. 46 (FIN 46 and FIN 46R), Consolidation
of Variable Interest Entities In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin (ARB) No. 51. This
interpretation clarifies the application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB
revised FASB Interpretation No. 46 (FIN 46R). The Company implemented FIN 46R as of April 30, 2004, which resulted in
the consolidation of the Companys preneed funeral and cemetery merchandise and
service trusts and the Companys cemetery perpetual care trusts. The implementation
of FIN 46R affects certain line items in the consolidated balance sheet and statement of earnings as 14




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles(Continued) described below, but has no impact on net earnings. Also, the implementation
of FIN 46R did not result in any net changes to the Companys consolidated
statement of cash flows, but does require disclosure of certain financing and
investing activities. See Notes 3, 4 and 5. Although FIN 46R requires consolidation of the preneed funeral and
cemetery merchandise and service trusts and cemetery perpetual care trusts, it
does not change the legal relationships among the trusts, the Company and its
customers. In the case of preneed funeral and cemetery merchandise and service
trusts, the customers are the legal beneficiaries. In the case of cemetery
perpetual care trusts, the Company does not have a legal right to the cemetery
perpetual care trust assets. For these reasons, upon consolidation of the
trusts, the Company recognized non-controlling interests in its financial
statements to reflect third-party interests in these trusts in accordance with
SFAS No. 150, Accounting for Certain Financial Instruments with
Characteristics of Both Liabilities and Equity. The Company classifies
deposits to the funeral and cemetery merchandise and service trusts as
non-controlling liability interests and classifies deposits to the cemetery
perpetual care trusts as non-controlling interests outside of liabilities. All of these trusts hold investments in marketable securities, which have
been classified as available-for-sale and are reported at fair value, with
unrealized gains and losses excluded from earnings and initially reported as a
separate component of accumulated other comprehensive income or loss in the
Companys consolidated balance sheet pursuant to the provisions of SFAS No.
115. Unrealized gains and losses attributable to the non-controlling interest
holders are reclassified from accumulated other comprehensive income or loss to
non-controlling interest in funeral and cemetery trusts and perpetual care
trusts in the Companys consolidated balance sheet. Unrealized gains and losses
attributable to the Company, but that have not been earned through the
performance of services or delivery of merchandise are reclassified from
accumulated other comprehensive income or loss to deferred revenues. Beginning April 30, 2004, the Company recognizes realized earnings of the
preneed funeral and cemetery merchandise and service trusts and cemetery
perpetual care trusts within other income, net (with a corresponding debit to
the related trust asset). The Company then recognizes a corresponding expense
within other income, net representing the realized earnings of these trusts
attributable to the non-controlling interest holders (with a corresponding
credit to non-controlling interest in funeral and cemetery trusts or
non-controlling interest in perpetual care trusts, as the case may be). The
Company also simultaneously recognizes a similar expense for realized earnings
of the trusts attributable to the Company (with a corresponding credit to
deferred preneed funeral or cemetery revenue), when such earnings have not been
earned by the Company through the performance of services or delivery of
merchandise (see Note 6). The net effect is an increase by the amount of the
realized earnings in both the trust asset and the related non-controlling
interest and deferred revenue; there is no effect on net income. In the case
of preneed funeral and cemetery merchandise and service trusts, the Company
recognizes as revenues amounts attributed to the non-controlling interest
holders and the Company upon the performance of services and delivery of
merchandise, including realized earnings accumulated in these trusts (with
corresponding debits to non-controlling interest in funeral and cemetery trusts
and to deferred preneed funeral revenues or deferred preneed cemetery revenues,
as the case may be). In the case of cemetery perpetual care trusts, the
Company recognizes investment earnings in cemetery revenues when such earnings
are realized and distributable (with a corresponding debit to non-controlling
interest in perpetual care trusts). These earnings and related funds are
intended to defray cemetery maintenance costs. 15




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles(Continued) The end result of FIN 46R is that the Companys trust assets are now
recorded on the consolidated balance sheet at their market value and included
in preneed receivables and trust investments with corresponding credits to
deferred preneed revenue and non-controlling interest in the trusts, as opposed
to being recorded at their original cost as prearranged receivables and
prearranged deferred revenue prior to adoption of FIN 46R. The realized
earnings on these trust assets under FIN 46R flow into and out of the statement
of earnings through other income, net with no net effect on revenue or net
earnings. Both prior to and after the adoption of FIN 46R, accumulated trust
earnings from the preneed funeral and cemetery merchandise and service trusts
are recognized as revenue when the related merchandise and services are
delivered, and perpetual care trust earnings are recognized as revenue as they
are realized in the trust and distributable. In summary, the adoption of FIN
46R had no effect on revenues, net earnings, cash flows or shareholders
equity. For more detailed discussions of the Companys accounting policies after
the implementation of FIN 46R, see Notes 3 through 6. (b) Insurance-Funded Preneed Funeral Contracts The Company has changed its method of accounting for insurance-funded
preneed funeral contracts as the Company has concluded that these contracts are
not assets and liabilities as defined by Statement of Financial Accounting
Concepts No. 6, Elements in Financial Statements. Therefore, the Company has
removed from its consolidated balance sheet amounts relating to
insurance-funded preneed funeral contracts previously recorded in prearranged
receivables, net and prearranged deferred revenue, net, which at October 31,
2003 were $327,708 (of which $11,152 related to the Companys assets held for
sale). The removal of these amounts did not affect the Companys consolidated
shareholders equity, results of operations or cash flows. See Note 3 for
additional information on insurance-related preneed funeral balances. (c) Other Changes In December 2003, the FASB issued revised SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits  an amendment of
FASB Statements No. 87, 88, and 106. This statement revises employers
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by SFAS No.
87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. Except as noted, this statement
was effective for financial statements with fiscal years ending after December
15, 2003. The adoption of revised SFAS No. 132 had no impact on the Companys
financial condition or results of operations. (3) Preneed Funeral Activities The Company sells price-guaranteed preneed funeral contracts through
various programs. Because the services or merchandise will not be provided
until the future, most states require that all or a portion of the customer
payments under these contracts be protected for the benefit of the customers
pursuant to applicable law. Some or all of the funds 16




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) may be required to be placed into trust accounts (trust-funded preneed funeral
contracts). Alternatively, where allowed, customers may purchase a life
insurance or annuity policy from third-party insurance companies to fund their
preneed funeral contracts (insurance-funded preneed funeral contracts). The
funeral goods and services selected at the time of contract origination will be
funded by the insurance policy proceeds, which include increasing insurance
benefits. Under either customer funding option, the Company enters into a
preneed funeral contract with the customer to provide funeral services in the
future. Effective April 30, 2004, the Company changed certain aspects of its
accounting for preneed funeral contracts and related trust investments in
connection with the implementation of FIN 46R. See Note 2(a) for additional
information. The Company also changed its accounting for insurance-funded
preneed funeral contracts. See Note 2(b) for additional information. The
contract amounts associated with unfulfilled insurance-funded preneed funeral
contracts are not reflected on the consolidated balance sheet. However, when a
trust-funded preneed funeral contract is entered into, the Company records an
asset (included in preneed funeral receivables and trust investments) and a
corresponding liability (included in deferred preneed funeral revenues) for the
contract price. As the customer makes payments on the contract prior to
performance by the Company, the Company deposits into the related trust the
required portion of the payment and reclassifies the corresponding amount from
deferred preneed funeral revenues into non-controlling interest in funeral and
cemetery trusts. Funeral revenues are recognized in the consolidated statement of earnings
on preneed funeral contracts (trust- funded and insurance-funded) at the time
the funeral service is performed. Through April 30, 2004, trust investment
earnings, net of taxes and certain other expenses paid by the trust, were
accrued and deferred when realized. When the services were performed, those
net investment earnings were recognized in funeral revenues. These amounts are
intended to cover future increases in the cost of providing a price-guaranteed
funeral service. Beginning with the third quarter of 2004, the Company now
recognizes realized earnings of these trusts within other income, net (with a
corresponding debit to preneed funeral receivables and trust investments) when
such earnings have not been earned by the Company through the performance of
services or delivery of merchandise. The Company recognizes a corresponding
expense within other income, net equal to the realized earnings of the trusts
attributable to the non-controlling interest holders (with a corresponding
credit to non-controlling interest in funeral and cemetery trusts), or
attributable to the Company (with a corresponding credit to deferred preneed
funeral revenues). The net effect is an increase by the amount of the
unrealized earnings in both (1) the trust asset and (2) the related
non-controlling interest; there is no effect on net income. As of April 30,
2004, the cumulative undistributed net trust investment earnings of the funeral
merchandise and service trusts are included in non-controlling interest in
funeral and cemetery trusts instead of deferred preneed funeral revenues. Upon
performance of the funeral services, the Company recognizes as revenues
amounts attributed to the non-controlling interest holders, including realized
trust earnings. 17




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) Preneed Funeral Receivables and Trust Investments Preneed funeral receivables and trust investments represent trust assets
and customer receivables related to unperformed, price-guaranteed trust-funded
preneed funeral contracts. The components of preneed funeral receivables and
trust investments in the condensed consolidated balance sheet at July 31, 2004
are as follows: July 31, 2004Trust assets
    
    $
    438,124Receivables from customers
    
    
    63,912Preneed funeral receivables and trust investments
    
    $
    502,036
 Upon cancellation of a trust-funded preneed funeral contract, a customer
is generally entitled to receive a refund of the funds held in trust. In many
jurisdictions, the Company may be obligated to fund any shortfall if the
amounts deposited by the customer exceed the funds in trust including
investment income. As a result, when realized or unrealized losses of trust
investments result in trust-funded preneed funeral contracts being
under-funded, the Company assesses those contracts to determine whether a loss
provision should be recorded. Based upon this assessment, no loss amounts have
been required to be recognized as of July 31, 2004. Preneed funeral receivables and trust investments are reduced by the trust
investment earnings the Company has been allowed to withdraw prior to
performance by the Company and amounts received from customers that are not
required to be deposited into trust, pursuant to various state laws. These
amounts are reflected in deferred preneed funeral revenues until the underlying
service is performed or merchandise is delivered. The cost and market values associated with preneed funeral merchandise and
services trust assets at July 31, 2004 are detailed below. The cost basis of
the funeral merchandise and services trust assets below reflect an other than
temporary decline in the trust assets of approximately $69,147 as of July 31,
2004 from their original cost basis. The Company believes the unrealized
losses reflected below of $21,476 related to trust investments are temporary in
nature. 18




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    MarketCash, money market and other
short-term investments
    
    $
    68,880
    
    
    $
    
    
    
    $
    
    
    
    $
    68,880U.S. Government, agencies
and municipalities
    
    
    2,608
    
    
    
    137
    
    
    
    (23
    )
    
    
    2,722Corporate bonds
    
    
    23,495
    
    
    
    1,634
    
    
    
    (94
    )
    
    
    25,035Preferred stocks
    
    
    66,358
    
    
    
    1,354
    
    
    
    (1,257
    )
    
    
    66,455Common stocks
    
    
    238,453
    
    
    
    10,544
    
    
    
    (19,829
    )
    
    
    229,168Mutual funds
    
    
    27,763
    
    
    
    1,066
    
    
    
    (228
    )
    
    
    28,601Insurance contracts and other long-
term investments
    
    
    21,754
    
    
    
    297
    
    
    
    (45
    )
    
    
    22,006Trust investments
    
    $
    449,311
    
    
    $
    15,032
    
    
    $
    (21,476
    )
    
    $
    442,867Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98.6
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,889Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (6,632
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    438,124
 The estimated maturities and market values of debt securities included above
are as follows: July 31, 2004Due in one year or less
    
    $
    2,548Due in one to five years
    
    
    11,283Due in five to ten years
    
    
    13,251Thereafter
    
    
    675$
    27,757
 During the three months ended July 31, 2004, purchases and sales of
available for sale securities included in trust investments were $1,003 and
$9,732, respectively. These transactions resulted in realized gains and losses
of $292 and $1,562, respectively. Deferred Preneed Funeral Revenue As of July 31, 2004, deferred preneed funeral revenue represents future
funeral contract revenues. This includes distributed and distributable trust
investment earnings associated with unperformed trust-funded preneed funeral
contracts where the related cash or investments are not held in trust accounts
(generally because the Company was not required to deposit the cash in the
trust or was permitted to withdraw the cash from the trust before performance
of the service or delivery of the merchandise). Future funeral contract
revenues and non-distributable net trust investment earnings where the related
cash or investments are held in trust accounts are included in non-controlling
interest in 19




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) funeral and cemetery trusts. As of October 31, 2003 (prior to implementation
of FIN 46R), prearranged deferred revenue, net included the original price of a
trust-funded preneed funeral contract plus the net trust investment earnings. Insurance-Funded Preneed Funeral Contracts Insurance-funded preneed funeral contracts that will be funded by life
insurance or annuity contracts issued by third party insurers are not reflected
above or in the consolidated balance sheet. The net amount of these contracts
that have not been fulfilled as of July 31, 2004 and October 31, 2003 was
$348,231 and $327,708, respectively, of which $4,864 and $11,152 related to the
Companys assets held for sale as of July 31, 2004 and October 31, 2003,
respectively. The proceeds of the life insurance policies or annuity contracts
will be reflected in funeral revenues as these funerals are performed by the
Company. (4) Preneed Cemetery Activities The Company sells price-guaranteed preneed cemetery contracts providing
for property interment rights, merchandise or services to be used in the future
at prices prevailing when the agreements are signed. Some or all of the funds
received under these contracts for merchandise or services may be required to
be placed into trust accounts, pursuant to applicable state law. Effective
April 30, 2004, the Company changed certain aspects of its accounting for
preneed cemetery contracts upon implementation of FIN 46R. For additional
information, see Note 2(a). When a trust-funded preneed cemetery contract is
entered into, the Company records an asset (included in preneed cemetery
receivables and trust investments) and a corresponding liability (included in
deferred preneed cemetery revenues) for the contract price. As the customer
makes payments on the contract prior to performance by the Company, the Company
deposits into the related trust the required portion of the payment and
reclassifies the corresponding amount from deferred preneed cemetery revenues
into non-controlling interest in funeral and cemetery trusts. Beginning with the third quarter of 2004, the Company recognizes realized
earnings of these trusts within other income, net (with a corresponding debit
to preneed cemetery receivables and trust investments). The Company
recognizes a corresponding expense within other income, net equal to the
realized earnings of the trusts attributable to the non-controlling interest
holders (with a corresponding credit to non-controlling interest in funeral and
cemetery trusts), or attributable to the Company (with a corresponding credit
to deferred preneed cemetery revenues) when such earnings have not been earned
by the Company through the performance of services or delivery of merchandise.
The net effect is an increase by the amount of the unrealized earnings in both
(1) the trust asset and (2) the related non-controlling interest; there is no
effect on net income. As of April 30, 2004, the cumulative undistributed net
trust investment earnings of the cemetery merchandise and service trusts are
included in non-controlling interest in funeral and cemetery trusts instead of
deferred preneed cemetery revenues. Upon performance of services or delivery
of merchandise, the Company recognizes as revenues amounts attributed to the
non-controlling interest holders, including realized trust earnings. 20




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (4) Preneed Cemetery Activities(Continued) Preneed Cemetery Receivables and Trust Investments Preneed cemetery receivables and trust investments represent trust assets
and customer receivables for contracts sold in advance of when the property
interment rights, merchandise or services are needed. The components of
preneed cemetery receivables and trust investments in the condensed
consolidated balance sheet as of July 31, 2004 are as follows: July 31, 2004Trust assets
    
    $
    188,601Receivables from customers
    
    
    65,486Preneed cemetery receivables and trust investments
    
    $
    254,087
 The cost and market values associated with the preneed cemetery
merchandise and services trust assets as of July 31, 2004 are detailed below.
The cost basis of the cemetery merchandise and services trust assets below
reflect an other than temporary decline in the trust assets of approximately
$38,504 as of July 31, 2004 from their original cost basis. The Company
believes the unrealized losses reflected below of $10,093 related to trust
investments are temporary in nature. Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    MarketCash, money market and other
short-term investments
    
    $
    32,350
    
    
    $
    7
    
    
    $
    
    
    
    $
    32,357U.S. Government, agencies
and municipalities
    
    
    781
    
    
    
    23
    
    

    
    (4
    )
    
    
    800Corporate bonds
    
    
    11,859
    
    
    
    861
    
    
    
    (14
    )
    
    
    12,706Preferred stocks
    
    
    29,227
    
    
    
    781
    
    
    
    (420
    )
    
    
    29,588Common stocks
    
    
    108,315
    
    
    
    4,056
    
    
    
    (9,645
    )
    
    
    102,726Mutual funds
    
    
    11,280
    
    
    
    544
    
    
    
    (10
    )
    
    
    11,814Insurance contracts and other long-term
investments
    
    
    759
    
    
    
    
    
    
    
    
    
    
    
    759Trust investments
    
    $
    194,571
    
    
    $
    6,272
    
    
    $
    (10,093
    )
    
    $
    190,750Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98.0
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    909Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,058
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    188,601
 The estimated maturities and market values of debt securities included above
are as follows: July 31, 2004Due in one year or less
    
    $
    1,390Due in one to five years
    
    
    6,784Due in five to ten years
    
    
    4,744Thereafter
    
    
    588$
    13,506
 21




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (4) Preneed Cemetery Activities(Continued) During the three months ended July 31, 2004, purchases and sales of
available for sale securities included in trust investments were $993 and
$3,270, respectively. These transactions resulted in realized gains and losses
of $31 and $98, respectively. Deferred Preneed Cemetery Revenue As of July 31, 2004, deferred preneed cemetery revenue represents future
preneed cemetery revenues to be recognized upon delivery of merchandise or
performance of services. This includes distributed and distributable trust
investment earnings associated with the deferred items where the related cash
or investments are not held in trust accounts (generally because the Company
was not required to deposit the cash in the trust or was permitted to withdraw
the cash from the trust before performance of the service or delivery of the
merchandise). Future contract revenues and non-distributable net trust
investment earnings where the related cash or investments are held in trust
accounts are included in non-controlling interest in funeral and cemetery
trusts. As of October 31, 2003 (prior to implementation of FIN 46R),
prearranged deferred revenue, net represents the original contract price for
the preneed cemetery items deferred plus net investment earnings associated
with the deferred items. (5) Cemetery Perpetual Care Trusts The Company is required by state law to pay into perpetual care trusts a
portion of the proceeds from the sale of cemetery property interment rights. As
a result of the implementation of FIN 46R, the Company has consolidated the
perpetual care trusts, including investments accounted for under SFAS No. 115,
resulting in such funds being reflected in cemetery perpetual care trust
investments within total assets, with a corresponding amount reflected as
non-controlling interest in perpetual care trusts. Beginning April 30, 2004, the Company recognizes realized earnings of
these trusts within other income, net (with a corresponding debit to cemetery
perpetual care trust investments). The Company recognizes a corresponding
expense within other income, net for the amount of realized earnings of the
trusts attributable to the non-controlling interest holders (with a
corresponding credit to non-controlling interest in perpetual care trusts).
The net effect is an increase by the amount of the realized earnings of the
trusts in both the trust asset and the related non-controlling interest; there
is no effect on net income. Realized and distributable earnings from these cemetery perpetual care
trust investments are recognized in current cemetery revenues and are used to
defray cemetery maintenance costs which are expensed as incurred. Recognized
earnings related to these cemetery perpetual care trust investments were $644
and $2,091 for the three months ended July 31, 2004 and 2003, respectively, and
$5,264 and $6,067 for the nine months ended July 31, 2004 and 2003,
respectively. The cost and market values of the trust investments held by the cemetery
perpetual care trusts at July 31, 2004 are detailed below. The cost basis of
the cemetery perpetual care trusts below reflect an other than temporary
decline in the trust assets of $29,357 as of July 31, 2004 from their original
cost basis. The Company believes the unrealized losses reflected below of
$6,915 related to trust investments are temporary in nature. 22




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (5) Cemetery Perpetual Care Trusts(Continued) Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    MarketCash, money market and other
short-term investments
    
    $
    33,690
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    33,688U.S. Government, agencies
and municipalities
    
    
    3,243
    
    
    
    64
    
    
    
    (149
    )
    
    
    3,158Corporate bonds
    
    
    19,373
    
    
    
    2,415
    
    
    
    (45
    )
    
    
    21,743Preferred stocks
    
    
    55,864
    
    
    
    1,597
    
    
    
    (185
    )
    
    
    57,276Common stocks
    
    
    81,814
    
    
    
    7,399
    
    
    
    (6,462
    )
    
    
    82,751Mutual funds
    
    
    5,053
    
    
    
    138
    
    
    
    (72
    )
    
    
    5,119Insurance contracts and other long-term
investments
    
    
    843
    
    
    
    21
    
    
    
    
    
    
    
    864Trust investments
    
    $
    199,880
    
    
    $
    11,634
    
    
    $
    (6,915
    )
    
    $
    204,599Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102.4
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,096Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    205,695
 The estimated maturities and market values of debt securities included above
are as follows: July 31, 2004Due in one year or less
    
    $
    1,345Due in one to five years
    
    
    4,102Due in five to ten years
    
    
    17,336Thereafter
    
    
    2,118$
    24,901
 During the three months ended July 31, 2004, purchases and sales of
available for sale securities were $8,391 and $15,444, respectively. These
transactions resulted in realized gains and losses of $474 and $841,
respectively. (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual
Care Trusts Non-Controlling Interest in Funeral and Cemetery Trusts Effective April 30, 2004, the Company consolidated the preneed funeral and
cemetery merchandise and service trusts associated with its preneed funeral and
cemetery activities as a result of the implementation of FIN 46R. Although FIN
46R requires the consolidation of the preneed funeral and cemetery merchandise
and service trusts, it does not change the legal relationships among the
trusts, the Company and its customers. The customers are the legal
beneficiaries of these funeral and cemetery merchandise and service trusts, and
therefore, their interests in these trusts represent a non-controlling interest
in subsidiaries. For additional information, see Note 2(a). 23




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual
Care Trusts(Continued) Non-Controlling Interest in Perpetual Care Trusts The non-controlling interest in perpetual care trusts reflected in the
condensed consolidated balance sheet represents the cemetery perpetual care
trusts in accordance with SFAS No. 115, net of the accrued expenses and other
long-term liabilities of the perpetual care trusts. For additional information,
see Note 2(a). The components of non-controlling interest in funeral and cemetery trusts
and non-controlling interest in perpetual care trusts at July 31, 2004 are as
follows: Non-controlling Interest
    
    
    
    
    
    Non-controllingInterest inPreneed
    
    Preneed
    
    
    
    
    
    PerpetualFuneral
    
    Cemetery
    
    Total
    
    Care TrustsTrust assets at market value
    
    $
    438,124
    
    
    $
    188,601
    
    
    $
    626,725
    
    
    $
    205,695Less:Pending withdrawals
    
    
    (8,572
    )
    
    
    (3,067
    )
    
    
    (11,639
    )
    
    
    (1,879
    )Pending deposits
    
    
    2,201
    
    
    
    1,484
    
    
    
    3,685
    
    
    
    574Non-controlling interest
    
    $
    431,753
    
    
    $
    187,018
    
    
    $
    618,771
    
    
    $
    204,390
 Other income, net The components of other income, net in the condensed consolidated
statement of earnings for the three months ended July 31, 2004 are detailed
below. Three Months EndedJuly 31, 2004Non-controlling interest:Realized gains
    
    $
    797Realized losses
    
    
    (2,501
    )Interest income, dividend and other ordinary income
    
    
    5,783Trust expenses and income taxes
    
    
    (3,160
    )Net trust investment income
    
    
    919Interest expense related to non-controlling interest in funeral
and cemetery trust investments
    
    
    (201
    )Interest expense related to non-controlling interest in perpetual
care trust investments
    
    
    (718
    )Total non-controlling interest
    
    
    Other income, net (1)
    
    
    1,585Total other income, net
    
    $
    1,585
  (1)
    
    Other income for the three months ended July 31, 2004 consists of sales
of excess land, a reduction in the 2003 impairment charge (see Note 11)
and other miscellaneous income. 24




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (7) Commitments and Contingencies The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While
the outcome of these proceedings cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company. The Company carries insurance with coverages and coverage limits that it
believes to be adequate. Although there can be no assurance that such
insurance is sufficient to protect the Company against all contingencies,
management believes that its insurance protection is reasonable in view of the
nature and scope of the Companys operations. (8) Reconciliation of Basic and Diluted Per Share Data Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataThree Months Ended July 31, 2004Earnings from continuing operations
    
    $
    10,365Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    10,365
    
    
    
    107,067
    
    
    $
    .10Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    1,001Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    10,365
    
    
    
    108,068
    
    
    $
    .10
 Loss
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataThree Months Ended July 31, 2003Loss from continuing operations
    
    $
    (2,379
    )Basic loss per common share:Loss from continuing operations available to
common shareholders
    
    $
    (2,379
    )
    
    
    108,386
    
    
    $
    (.02
    )Effect of dilutive securities:Time-vest stock options assumed exercised
    
    
    
    
    
    
    Diluted loss per common share:Loss from continuing operations available to
common shareholders plus time-vest stock options
assumed exercised
    
    $
    (2,379
    )
    
    
    108,386
    
    
    $
    (.02
    )
 25




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (8) Reconciliation of Basic and Diluted Per Share Data(Continued) Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataNine Months Ended July 31, 2004Earnings from continuing operations
    
    $
    34,487Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    34,487
    
    
    
    107,461
    
    
    $
    .32Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    600Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    34,487
    
    
    
    108,061
    
    
    $
    .32
 Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataNine Months Ended July 31, 2003Earnings from continuing operations
    
    $
    16,168Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    16,168
    
    
    
    108,242
    
    
    $

    .15Effect of dilutive securities:Time-vest stock options assumed exercised
    
    
    
    
    
    
    24Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock options
assumed exercised
    
    $
    16,168
    
    
    
    108,266
    
    
    $
    .15
 Options to purchase 100,190 shares of common stock at a price of $6.96 per
share were outstanding during the nine months ended July 31, 2004 but were not
included in the computation of diluted earnings per share because the exercise
prices of the options were greater than the average market price of the common
shares. These options expire on April 12, 2005. Options to purchase 545,352
and 584,606 shares at prices ranging from $16.00 to $27.25 per share were
outstanding during the three and nine months ended July 31, 2004, respectively,
but were not included in the computation of diluted earnings per share because
the exercise prices of the options were greater than the average market price
of the common shares. These options expired on July 31, 2004. Options to
purchase 4,995,130 shares of common stock at prices ranging from $4.41 to
$27.25 per share were outstanding during the nine months ended July 31, 2003,
respectively, but were not included in the computation of diluted earnings per
share because the exercise prices of the options were greater than the average
market price of the common shares. Common stock equivalents are excluded in the calculation of weighted
average shares outstanding when a net loss from continuing operations is
reported. The number of potentially antidilutive shares excluded from the
calculation of diluted loss per share was 6,964,631 for the three months ended
July 31, 2003 because of the net loss from continuing operations for that
period. (9) Segment Data The Companys primary reportable operating segments are based on products
and services and include funeral and cemetery operations. Pursuant to SFAS No.
144, the operating results of the Companys businesses identified for sale that
meet the criteria in SFAS No. 144 are reported in the discontinued operations
section of the consolidated 26




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (9) Segment Data(Continued) statements of earnings (see Note 11). Accordingly, the results of operations
included in the segment information below reflect only the Companys continuing
operations. The Companys reportable segment information is as follows: Reconciling
    
    ConsolidatedFuneral
    
    Cemetery
    
    Items
    
    TotalsRevenues from external customers:Three months ended July 31,2004
    
    $
    67,285
    
    
    
    60,326
    
    
    
    
    
    
    $
    127,6112003
    
    $
    68,838
    
    
    
    54,936
    
    
    
    
    
    
    $
    123,774Nine months ended July 31,2004
    
    $
    212,830
    
    
    
    175,044
    
    
    
    
    
    
    $
    387,8742003
    
    $
    210,433
    
    
    
    166,229
    
    
    
    
    
    
    $
    376,662Gross profit:Three months ended July 31,2004
    
    $
    17,765
    
    
    
    13,659
    
    
    
    
    
    
    $
    31,4242003
    
    $
    16,805
    
    
    
    11,320
    
    
    
    
    
    
    $
    28,125Nine months ended July 31,2004
    
    $
    62,158
    
    
    
    43,039
    
    
    
    
    
    
    $
    105,1972003
    
    $
    54,007
    
    
    
    37,814
    
    
    
    
    
    
    $
    91,821Total assets:July 31, 2004
    
    $
    1,180,579
    
    
    
    1,303,562
    
    
    
    78,001
    
    
    $
    2,562,142October 31, 2003
    
    $
    1,312,177
    
    
    
    1,141,356
    
    
    
    119,989
    
    
    $
    2,573,522Goodwill:July 31, 2004
    
    $
    317,979
    
    
    
    84,931
    
    
    
    
    
    
    $
    402,910October 31, 2003
    
    $
    318,851
    
    
    
    84,939
    
    
    
    
    
    
    $
    403,790
 A reconciliation of total segment gross profit to total earnings (loss)
from continuing operations before income taxes for the three and nine months
ended July 31, 2004 and 2003 is as follows: Three Months Ended
    
    Nine Months EndedJuly 31,
    
    July 31,2004
    
    2003
    
    2004
    
    2003Gross profit for reportable segments
    
    $
    31,424
    
    
    $
    28,125
    
    
    $
    105,197
    
    
    $
    91,821Corporate general and administrative expenses
    
    
    (4,150
    )
    
    
    (4,931
    )
    
    
    (12,684
    )
    
    
    (13,413
    )Separation charges
    
    
    (1,085
    )
    
    
    (2,450
    )
    
    
    (3,216
    )
    
    
    (2,450
    )Interest expense
    
    
    (11,502
    )
    
    
    (13,249
    )
    
    
    (35,976
    )
    
    
    (40,405
    )Loss on early extinguishment of debt
    
    
    
    
    
    
    (11,289
    )
    
    
    
    
    
    
    (11,289
    )Investment income
    
    
    77
    
    
    
    66
    
    
    
    202
    
    
    
    237Other income, net
    
    
    1,585
    
    
    
    438
    
    
    
    1,441
    
    
    
    2,123Earnings (loss) from continuing operations
before income taxes
    
    $
    16,349
    
    
    $
    (3,290
    )
    
    $
    54,964
    
    
    $
    26,624
 27




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes The following tables present the condensed consolidating historical
financial statements as of July 31, 2004 and October 31, 2003 and for the three
and nine months ended July 31, 2004 and 2003, for the direct and indirect
domestic subsidiaries of the Company that serve as guarantors of the senior
subordinated notes, and the financial results of the Companys subsidiaries
that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto
Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic
subsidiaries, which are prohibited by law from guaranteeing the senior
subordinated notes. Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended July 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    62,395
    
    
    $
    4,890
    
    
    $
    
    
    
    $
    67,285Cemetery
    
    
    
    
    
    
    54,403
    
    
    
    5,923
    
    
    
    
    
    
    
    60,326
    
    
    
    116,798
    
    
    
    10,813
    
    
    
    
    
    
    
    127,611Costs and expenses:Funeral
    
    
    
    
    
    
    46,551
    
    
    
    2,969
    
    
    
    
    
    
    
    49,520Cemetery
    
    
    
    
    
    
    42,219
    
    
    
    4,448
    
    
    
    
    
    
    
    46,667
    
    
    
    88,770
    
    
    
    7,417
    
    
    
    
    
    
    
    96,187Gross profit
    
    
    
    
    
    
    28,028
    
    
    
    3,396
    
    
    
    
    
    
    
    31,424Corporate general and administrative
expenses
    
    
    (4,150
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,150
    )Separation charges
    
    
    (1,085
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,085
    )Operating earnings (loss)
    
    
    (5,235
    )
    
    
    28,028
    
    
    
    3,396
    
    
    
    
    
    
    
    26,189Interest income (expense)
    
    
    10,246
    
    
    
    (19,698
    )
    
    
    (2,050
    )
    
    
    
    
    
    
    (11,502
    )Investment income
    
    
    77
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    77Other income, net
    
    
    27
    
    
    
    922
    
    
    
    636
    
    
    
    
    
    
    
    1,585Earnings from continuing
operations before income taxes
    
    
    5,115
    
    
    
    9,252
    
    
    
    1,982
    
    
    
    
    
    
    
    16,349Income taxes
    
    
    1,690
    
    
    
    3,471
    
    
    
    823
    
    
    
    
    
    
    
    5,984Earnings from continuing operations
    
    
    3,425
    
    
    
    5,781
    
    
    
    1,159
    
    
    
    
    
    
    
    10,365Discontinued operations:Loss from discontinued operations
before income taxes
    
    
    
    
    
    
    (476
    )
    
    
    (7
    )
    
    
    
    
    
    
    (483
    )Income tax benefit
    
    
    
    
    
    
    (961
    )
    
    
    
    
    
    
    
    
    
    
    (961
    )Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    485
    
    
    
    (7
    )
    
    
    
    
    
    
    478Net earnings before equity in
subsidiaries
    
    
    3,425
    
    
    
    6,266
    
    
    
    1,152
    
    
    
    
    
    
    
    10,843Equity in subsidiaries
    
    
    7,418
    
    
    
    
    
    
    
    
    
    
    
    (7,418
    )
    
    
    Net earnings
    
    
    10,843
    
    
    
    6,266
    
    
    
    1,152
    
    
    
    (7,418
    )
    
    
    10,843Other comprehensive income, net
    
    
    287
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    287Comprehensive income
    
    $
    11,130
    
    
    $
    6,266
    
    
    $
    1,152
    
    
    $
    (7,418
    )
    
    $
    11,130
 28




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended July 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    64,127
    
    
    $
    4,711
    
    
    $
    
    
    
    $
    68,838Cemetery
    
    
    
    
    
    
    47,577
    
    
    
    7,359
    
    
    
    
    
    
    
    54,936
    
    
    
    111,704
    
    
    
    12,070
    
    
    
    
    
    
    
    123,774Costs and expenses:Funeral
    
    
    
    
    
    
    48,736
    
    
    
    3,297
    
    
    
    
    
    
    
    52,033Cemetery
    
    
    
    
    
    
    38,208
    
    
    
    5,408
    
    
    
    
    
    
    
    43,616
    
    
    
    86,944
    
    
    
    8,705
    
    
    
    
    
    
    
    95,649Gross profit
    
    
    
    
    
    
    24,760
    
    
    
    3,365
    
    
    
    
    
    
    
    28,125Corporate general and administrative
expenses
    
    
    (4,931
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,931
    )Separation charges
    
    
    (2,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,450
    )Operating earnings (loss)
    
    
    (7,381
    )
    
    
    24,760
    
    
    
    3,365
    
    
    
    
    
    
    
    20,744Interest income (expense)
    
    
    7,847
    
    
    
    (19,071
    )
    
    
    (2,025
    )
    
    
    
    
    
    
    (13,249
    )Loss on early extinguishment of debt
    
    
    (11,289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,289
    )Investment income
    
    
    66
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    66Other income, net
    
    
    16
    
    
    
    342
    
    
    
    80
    
    
    
    
    
    
    
    438Earnings (loss) from continuing
operations before income taxes
    
    
    (10,741
    )
    
    
    6,031
    
    
    
    1,420
    
    
    
    
    
    
    
    (3,290
    )Income tax expense (benefit)
    
    
    (3,992
    )
    
    
    2,292
    
    
    
    789
    
    
    
    
    
    
    
    (911
    )Earnings (loss) from continuing
operations
    
    
    (6,749
    )
    
    
    3,739
    
    
    
    631
    
    
    
    
    
    
    
    (2,379
    )Discontinued operations:Loss from discontinued
operations before income taxes
    
    
    
    
    
    
    (126
    )
    
    
    (68
    )
    
    
    
    
    
    
    (194
    )Income tax benefit
    
    
    
    
    
    
    (74
    )
    
    
    
    
    
    
    
    
    
    
    (74
    )Loss from discontinued
operations
    
    
    
    
    
    
    (52
    )
    
    
    (68
    )
    
    
    
    
    
    
    (120
    )Net earnings (loss) before equity in
subsidiaries
    
    
    (6,749
    )
    
    
    3,687
    
    
    
    563
    
    
    
    
    
    
    
    (2,499
    )Equity in subsidiaries
    
    
    4,250
    
    
    
    
    
    
    
    
    
    
    
    (4,250
    )
    
    
    Net earnings (loss)
    
    
    (2,499
    )
    
    
    3,687
    
    
    
    563
    
    
    
    (4,250
    )
    
    
    (2,499
    )Other comprehensive income, net
    
    
    518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    518Comprehensive income (loss)
    
    $
    (1,981
    )
    
    $
    3,687
    
    
    $
    563
    
    
    $
    (4,250
    )
    
    $
    (1,981
    )
 29




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Nine Months Ended July 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    197,776
    
    
    $
    15,054
    
    
    $
    
    
    
    $
    212,830Cemetery
    
    
    
    
    
    
    156,956
    
    
    
    18,088
    
    
    
    
    
    
    
    175,044
    
    
    
    354,732
    
    
    
    33,142
    
    
    
    
    
    
    
    387,874Costs and expenses:Funeral
    
    
    
    
    
    
    141,602
    
    
    
    9,070
    
    
    
    
    
    
    
    150,672Cemetery
    
    
    
    
    
    
    118,400
    
    
    
    13,605
    
    
    
    
    
    
    
    132,005
    
    
    
    260,002
    
    
    
    22,675
    
    
    
    
    
    
    
    282,677Gross profit
    
    
    
    
    
    
    94,730
    
    
    
    10,467
    
    
    
    
    
    
    
    105,197Corporate general and administrative
expenses
    
    
    (12,684
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,684
    )Separation charges
    
    
    (1,567
    )
    
    
    (1,629
    )
    
    
    (20
    )
    
    
    
    
    
    
    (3,216
    )Operating earnings (loss)
    
    
    (14,251
    )
    
    
    93,101
    
    
    
    10,447
    
    
    
    
    
    
    
    89,297Interest income (expense)
    
    
    29,670
    
    
    
    (59,364
    )
    
    
    (6,282
    )
    
    
    
    
    
    
    (35,976
    )Investment income
    
    
    202
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    202Other income (expense), net
    
    
    (897
    )
    
    
    1,751
    
    
    
    587
    
    
    
    
    
    
    
    1,441Earnings from continuing operations
before income taxes
    
    
    14,724
    
    
    
    35,488
    
    
    
    4,752
    
    
    
    
    
    
    
    54,964Income taxes
    
    
    4,643
    
    
    
    13,232
    
    
    
    2,602
    
    
    
    
    
    
    
    20,477Earnings from continuing
operations
    
    
    10,081
    
    
    
    22,256
    
    
    
    2,150
    
    
    
    
    
    
    
    34,487Discontinued operations:Earnings from discontinued
operations before income taxes
    
    
    
    
    
    
    1,659
    
    
    
    83
    
    
    
    
    
    
    
    1,742Income tax benefit
    
    
    
    
    
    
    (1,099
    )
    
    
    
    
    
    
    
    
    
    
    (1,099
    )Earnings from discontinued
operations
    
    
    
    
    
    
    2,758
    
    
    
    83
    
    
    
    
    
    
    
    2,841Net earnings before equity in
subsidiaries
    
    
    10,081
    
    
    
    25,014
    
    
    
    2,233
    
    
    
    
    
    
    
    37,328Equity in subsidiaries
    
    
    27,247
    
    
    
    
    
    
    
    
    
    
    
    (27,247
    )
    
    
    Net earnings
    
    
    37,328
    
    
    
    25,014
    
    
    
    2,233
    
    
    
    (27,247
    )
    
    
    37,328Other comprehensive income, net
    
    
    1,888
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,888Comprehensive income
    
    $
    39,216
    
    
    $
    25,014
    
    
    $
    2,233
    
    
    $
    (27,247
    )
    
    $
    39,216
 30




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Nine Months Ended July 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    196,130
    
    
    $
    14,303
    
    
    $
    
    
    
    $
    210,433Cemetery
    
    
    
    
    
    
    145,404
    
    
    
    20,825
    
    
    
    
    
    
    
    166,229
    
    
    
    341,534
    
    
    
    35,128
    
    
    
    
    
    
    
    376,662Costs and expenses:Funeral
    
    
    
    
    
    
    146,787
    
    
    
    9,639
    
    
    
    
    
    
    
    156,426Cemetery
    
    
    
    
    
    
    112,704
    
    
    
    15,711
    
    
    
    
    
    
    
    128,415
    
    
    
    259,491
    
    
    
    25,350
    
    
    
    
    
    
    
    284,841Gross profit
    
    
    
    
    
    
    82,043
    
    
    
    9,778
    
    
    
    
    
    
    
    91,821Corporate general and administrative
expenses
    
    
    (13,413
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (13,413
    )Separation charges
    
    
    (2,450
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,450
    )Operating earnings (loss)
    
    
    (15,863
    )
    
    
    82,043
    
    
    
    9,778
    
    
    
    
    
    
    
    75,958Interest income (expense)
    
    
    21,763
    
    
    
    (56,122
    )
    
    
    (6,046
    )
    
    
    
    
    
    
    (40,405
    )Loss on early extinguishment of debt
    
    
    (11,289
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,289
    )Investment income
    
    
    237
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    237Other income, net
    
    
    309
    
    
    
    1,574
    
    
    
    240
    
    
    
    
    
    
    
    2,123Earnings (loss) from continuing
operations before income taxes
    
    
    (4,843
    )
    
    
    27,495
    
    
    
    3,972
    
    
    
    
    
    
    
    26,624Income tax expense (benefit)
    
    
    (2,332
    )
    
    
    10,448
    
    
    
    2,340
    
    
    
    
    
    
    
    10,456Earnings (loss) from continuing
operations
    
    
    (2,511
    )
    
    
    17,047
    
    
    
    1,632
    
    
    
    
    
    
    
    16,168Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    643
    
    
    
    (164
    )
    
    
    
    
    
    
    479Income taxes
    
    
    
    
    
    
    182
    
    
    
    
    
    
    
    
    
    
    
    182Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    461
    
    
    
    (164
    )
    
    
    
    
    
    
    297Net earnings (loss) before equity in
subsidiaries
    
    
    (2,511
    )
    
    
    17,508
    
    
    
    1,468
    
    
    
    
    
    
    
    16,465Equity in subsidiaries
    
    
    18,976
    
    
    
    
    
    
    
    
    
    
    
    (18,976
    )
    
    
    Net earnings
    
    
    16,465
    
    
    
    17,508
    
    
    
    1,468
    
    
    
    (18,976
    )
    
    
    16,465Other comprehensive income, net
    
    
    674
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    674Comprehensive income
    
    $
    17,139
    
    
    $
    17,508
    
    
    $
    1,468
    
    
    $
    (18,976
    )
    
    $
    17,139
 31




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Balance Sheets July 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    15,841
    
    
    $
    489
    
    
    $
    (254
    )
    
    $
    
    
    
    $
    16,076Marketable securities
    
    
    
    
    
    
    14
    
    
    
    1,278
    
    
    
    
    
    
    
    1,292Receivables, net of allowances
    
    
    7,683
    
    
    
    37,998
    
    
    
    13,595
    
    
    
    
    
    
    
    59,276Inventories
    
    
    406
    
    
    
    33,032
    
    
    
    5,726
    
    
    
    
    
    
    
    39,164Prepaid expenses
    
    
    797
    
    
    
    1,964
    
    
    
    3
    
    
    
    
    
    
    
    2,764Deferred income taxes, net
    
    
    
    
    
    
    1,671
    
    
    
    
    
    
    
    
    
    
    
    1,671Assets held for sale
    
    
    
    
    
    
    25,262
    
    
    
    5,725
    
    
    
    
    
    
    
    30,987Total current assets
    
    
    24,727
    
    
    
    100,430
    
    
    
    26,073
    
    
    
    
    
    
    
    151,230Receivables due beyond one year, net of
allowances
    
    
    180
    
    
    
    62,464
    
    
    
    15,608
    
    
    
    
    
    
    
    78,252Preneed funeral receivables and trust
investments
    
    
    
    
    
    
    485,358
    
    
    
    16,678
    
    
    
    
    
    
    
    502,036Preneed cemetery receivables and trust
investments
    
    
    
    
    
    
    227,429
    
    
    
    26,658
    
    
    
    
    
    
    
    254,087Goodwill
    
    
    
    
    
    
    365,376
    
    
    
    30,334
    
    
    
    7,200
    
    
    
    402,910Deferred charges
    
    
    5,682
    
    
    
    221,857
    
    
    
    19,701
    
    
    
    
    
    
    
    247,240Cemetery property, at cost
    
    
    
    
    
    
    349,440
    
    
    
    23,551
    
    
    
    
    
    
    
    372,991Property and equipment, at cost
    
    
    31,254
    
    
    
    428,198
    
    
    
    32,357
    
    
    
    
    
    
    
    491,809Less accumulated depreciation
    
    
    17,335
    
    
    
    165,628
    
    
    
    10,283
    
    
    
    
    
    
    
    193,246Net property and equipment
    
    
    13,919
    
    
    
    262,570
    
    
    
    22,074
    
    
    
    
    
    
    
    298,563Deferred income taxes, net
    
    
    17,767
    
    
    
    17,808
    
    
    
    12,710
    
    
    
    (602
    )
    
    
    47,683Investment in subsidiaries
    
    
    101,365
    
    
    
    
    
    
    
    
    
    
    
    (101,365
    )
    
    
    Cemetery perpetual care trust investments
    
    
    
    
    
    
    205,695
    
    
    
    
    
    
    
    
    
    
    
    205,695Other assets
    
    
    104
    
    
    
    1,351
    
    
    
    
    
    
    
    
    
    
    
    1,455Total assets
    
    $
    163,744
    
    
    $
    2,299,778
    
    
    $
    193,387
    
    
    $
    (94,767
    )
    
    $
    2,562,142LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    73,953
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    73,953Accounts payable
    
    
    480
    
    
    
    5,446
    
    
    
    314
    
    
    
    
    
    
    
    6,240Accrued expenses and other current
liabilities
    
    
    10,799
    
    
    
    28,358
    
    
    
    5,272
    
    
    
    
    
    
    
    44,429Liabilities associated with assets held
for sale
    
    
    
    
    
    
    14,559
    
    
    
    4,027
    
    
    
    
    
    
    
    18,586Total current liabilities
    
    
    85,232
    
    
    
    48,363
    
    
    
    9,613
    
    
    
    
    
    
    
    143,208Long-term debt, less current maturities
    
    
    333,413
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    363,413Intercompany payables, net
    
    
    (1,039,946
    )
    
    
    1,010,898
    
    
    
    29,048
    
    
    
    
    
    
    
    Deferred preneed funeral revenue
    
    
    
    
    
    
    109,436
    
    
    
    47,846
    
    
    
    
    
    
    
    157,282Deferred preneed cemetery revenue
    
    
    
    
    
    
    224,656
    
    
    
    64,598
    
    
    
    
    
    
    
    289,254Non-controlling interest in funeral and
cemetery trusts
    
    
    
    
    
    
    618,771
    
    
    
    
    
    
    
    
    
    
    
    618,771Other long-term liabilities
    
    
    10,329
    
    
    
    779
    
    
    
    
    
    
    
    
    
    
    
    11,108Total liabilities
    
    
    (610,972
    )
    
    
    2,012,903
    
    
    
    181,105
    
    
    
    
    
    
    
    1,583,036Non-controlling interest in perpetual care
trusts
    
    
    
    
    
    
    204,390
    
    
    
    
    
    
    
    
    
    
    
    204,390Common stock
    
    
    107,846
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,846Other
    
    
    667,425
    
    
    
    82,059
    
    
    
    12,230
    
    
    
    (94,289
    )
    
    
    667,425Accumulated other comprehensive loss
    
    
    (555
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (555
    )Total shareholders equity
    
    
    774,716
    
    
    
    82,485
    
    
    
    12,282
    
    
    
    (94,767
    )
    
    
    774,716Total liabilities and shareholders equity
    
    $
    163,744
    
    
    $
    2,299,778
    
    
    $
    193,387
    
    
    $
    (94,767
    )
    
    $
    2,562,142
 32




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Balance Sheets October 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    18,975
    
    
    $
    (478
    )
    
    $
    88
    
    
    $
    
    
    
    $
    18,585Marketable securities
    
    
    1,048
    
    
    
    26
    
    
    
    1,272
    
    
    
    
    
    
    
    2,346Receivables, net of allowances
    
    
    41,826
    
    
    
    40,852
    
    
    
    14,525
    
    
    
    
    
    
    
    97,203Inventories
    
    
    325
    
    
    
    33,323
    
    
    
    6,506
    
    
    
    
    
    
    
    40,154Prepaid expenses
    
    
    713
    
    
    
    2,137
    
    
    
    37
    
    
    
    
    
    
    
    2,887Deferred income taxes, net
    
    
    1,434
    
    
    
    1,556
    
    
    
    
    
    
    
    
    
    
    
    2,990Assets held for sale
    
    
    
    
    
    
    46,740
    
    
    
    5,377
    
    
    
    
    
    
    
    52,117Total current assets
    
    
    64,321
    
    
    
    124,156
    
    
    
    27,805
    
    
    
    
    
    
    
    216,282Receivables due beyond one year, net of
allowances
    
    
    147
    
    
    
    61,118
    
    
    
    15,109
    
    
    
    
    
    
    
    76,374Prearranged receivables, net
    
    
    
    
    
    
    848,625
    
    
    
    42,403
    
    
    
    
    
    
    
    891,028Goodwill
    
    
    
    
    
    
    366,157
    
    
    
    30,433
    
    
    
    7,200
    
    
    
    403,790Deferred charges
    
    
    7,271
    
    
    
    218,816
    
    
    
    20,980
    
    
    
    
    
    
    
    247,067Cemetery property, at cost
    
    
    
    
    
    
    350,810
    
    
    
    23,233
    
    
    
    
    
    
    
    374,043Property and equipment, at cost
    
    
    31,697
    
    
    
    419,368
    
    
    
    33,871
    
    
    
    
    
    
    
    484,936Less accumulated depreciation
    
    
    16,942
    
    
    
    154,004
    
    
    
    10,855
    
    
    
    
    
    
    
    181,801Net property and equipment
    
    
    14,755
    
    
    
    265,364
    
    
    
    23,016
    
    
    
    
    
    
    
    303,135Deferred income taxes, net
    
    
    17,767
    
    
    
    30,690
    
    
    
    12,710
    
    
    
    (602
    )
    
    
    60,565Investment in subsidiaries
    
    
    74,118
    
    
    
    
    
    
    
    
    
    
    
    (74,118
    )
    
    
    Other assets
    
    
    104
    
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    1,238Total assets
    
    $
    178,483
    
    
    $
    2,266,870
    
    
    $
    195,689
    
    
    $
    (67,520
    )
    
    $
    2,573,522LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    13,935
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,935Accounts payable
    
    
    348
    
    
    
    6,543
    
    
    
    383
    
    
    
    
    
    
    
    7,274Accrued expenses and other current
liabilities
    
    
    20,865
    
    
    
    33,001
    
    
    
    3,443
    
    
    
    
    
    
    
    57,309Liabilities associated with assets held
for sale
    
    
    
    
    
    
    25,757
    
    
    
    4,314
    
    
    
    
    
    
    
    30,071Total current liabilities
    
    
    35,148
    
    
    
    65,301
    
    
    
    8,140
    
    
    
    
    
    
    
    108,589Long-term debt, less current maturities
    
    
    458,180
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    488,180Intercompany payables, net
    
    
    (1,064,814
    )
    
    
    1,031,018
    
    
    
    33,796
    
    
    
    
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    1,109,081
    
    
    
    113,704
    
    
    
    
    
    
    
    1,222,785Other long-term liabilities
    
    
    11,110
    
    
    
    3,999
    
    
    
    
    
    
    
    
    
    
    
    15,109Total liabilities
    
    
    (560,376
    )
    
    
    2,209,399
    
    
    
    185,640
    
    
    
    
    
    
    
    1,834,663Common stock
    
    
    107,727
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,727Other
    
    
    633,575
    
    
    
    57,045
    
    
    
    9,997
    
    
    
    (67,042
    )
    
    
    633,575Accumulated other comprehensive loss
    
    
    (2,443
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,443
    )Total shareholders equity
    
    
    738,859
    
    
    
    57,471
    
    
    
    10,049
    
    
    
    (67,520
    )
    
    
    738,859Total liabilities and shareholders equity
    
    $
    178,483
    
    
    $
    2,266,870
    
    
    $
    195,689
    
    
    $
    (67,520
    )
    
    $
    2,573,522
 33




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Cash Flows Nine Months Ended July 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by operating activities
    
    $
    45,504
    
    
    $
    18,266
    
    
    $
    4,832
    
    
    $
    
    
    
    $
    68,602Cash flows from investing activities:Proceeds from sales of marketable
securities
    
    
    1,121
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,121Proceeds from sale of assets, net
    
    
    (1,203
    )
    
    
    14,074
    
    
    
    
    
    
    
    
    
    
    
    12,871Additions to property and equipment
    
    
    (2,393
    )
    
    
    (11,452
    )
    
    
    (435
    )
    
    
    
    
    
    
    (14,280
    )Other
    
    
    
    
    
    
    199
    
    
    
    9
    
    
    
    
    
    
    
    208Net cash provided by (used in)
investing activities
    
    
    (2,475
    )
    
    
    2,821
    
    
    
    (426
    )
    
    
    
    
    
    
    (80
    )Cash flows from financing activities:Repayments of long-term debt
    
    
    (64,748
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (64,748
    )Intercompany receivables (payables)
    
    
    24,868
    
    
    
    (20,120
    )
    
    
    (4,748
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    13,066
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    13,066Purchase and retirement of common
stock
    
    
    (19,349
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (19,349
    )Net cash used in financing activities
    
    
    (46,163
    )
    
    
    (20,120
    )
    
    
    (4,748
    )
    
    
    
    
    
    
    (71,031
    )Net increase (decrease) in cash
    
    
    (3,134
    )
    
    
    967
    
    
    
    (342
    )
    
    
    
    
    
    
    (2,509
    )Cash and cash equivalents, beginning of
period
    
    
    18,975
    
    
    
    (478
    )
    
    
    88
    
    
    
    
    
    
    
    18,585Cash and cash equivalents, end of
period
    
    $
    15,841
    
    
    $
    489
    
    
    $
    (254
    )
    
    $
    
    
    
    $
    16,076
 34




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Cash Flows Nine Months Ended July 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    21,548
    
    
    $
    19,847
    
    
    $
    4,839
    
    
    $
    
    
    
    $
    46,234Cash flows from investing activities:Proceeds from sales of marketable
securities
    
    
    
    
    
    
    
    
    
    
    550
    
    
    
    
    
    
    
    550Proceeds from sale of assets, net
    
    
    (860
    )
    
    
    2,869
    
    
    
    
    
    
    
    
    
    
    
    2,009Additions to property and
equipment
    
    
    (2,085
    )
    
    
    (11,352
    )
    
    
    (530
    )
    
    
    
    
    
    
    (13,967
    )Other
    
    
    
    
    
    
    84
    
    
    
    (12
    )
    
    
    
    
    
    
    72Net cash provided by (used in)
investing activities
    
    
    (2,945
    )
    
    
    (8,399
    )
    
    
    8
    
    
    
    
    
    
    
    (11,336
    )Cash flows from financing activities:Retirement of ROARS
    
    
    (12,691
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (12,691
    )Proceeds from long-term debt
    
    
    105,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105,000Repayments of long-term debt
    
    
    (135,796
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (135,796
    )Intercompany receivables
(payables)
    
    
    17,314
    
    
    
    (11,470
    )
    
    
    (5,844
    )
    
    
    
    
    
    
    Debt issue costs
    
    
    (813
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (813
    )Issuance of common stock
    
    
    582
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    582Net cash used in financing activities
    
    
    (26,404
    )
    
    
    (11,470
    )
    
    
    (5,844
    )
    
    
    
    
    
    
    (43,718
    )Net decrease in cash
    
    
    (7,801
    )
    
    
    (22
    )
    
    
    (997
    )
    
    
    
    
    
    
    (8,820
    )Cash and cash equivalents, beginning of
period
    
    
    24,752
    
    
    
    3,209
    
    
    
    229
    
    
    
    
    
    
    
    28,190Cash and cash equivalents, end of
period
    
    $
    16,951
    
    
    $
    3,187
    
    
    $
    (768
    )
    
    $
    
    
    
    $
    19,370
 35




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Discontinued Operations, Assets Held for Sale and Impairment Charges In December 2003, the Company announced plans to close or sell a number of
small businesses, primarily small funeral homes, most of which were acquired as
part of a group of facilities, that are performing below acceptable levels and
no longer fit the Companys operating profile. Although the Company identified
these businesses during the fourth quarter of fiscal year 2003, it did not meet
all of the criteria in SFAS No. 144 for classification as discontinued
operations or assets held for sale until the first quarter of fiscal year 2004.
The operating results of those businesses that met the criteria in SFAS No.
144 in fiscal year 2004 and businesses sold during fiscal years 2003 or 2004
are currently reported in the discontinued operations section of the
consolidated statements of earnings. Included in these plans to sell
businesses were several facilities that the Company determined would be more
profitable if sold as real estate. The operations of these businesses and any
gains and losses related to these businesses are included in continuing
operations. As required by the Companys credit agreement, the Company plans
to use substantially all of the proceeds from the sale of assets and businesses
to reduce its debt. During the fourth quarter of fiscal year 2003, the Company determined that
the carrying value of a number of these assets and businesses exceeded their
fair value. As required by SFAS No. 144, the Company recorded an impairment
charge of $34,300 during the fourth quarter of fiscal year 2003. The fair
market value was determined by specific offer or bid, or an estimate based on a
multiple or percentage of historical results. During the third quarter of
2004, the Company determined that the current fair market value of certain of
these assets exceeded the fair market value estimated in 2003, less costs to
sell. This resulted in a $586 and $495 reduction in the 2003 impairment charge
for the three and nine months ended July 31, 2004 in continuing operations,
respectively, (of which $140 and $134 relates to assets sold, respectively),
which is included in Other income, net in the consolidated statement of
earnings. Also included in other income, net was $897 and $186 for the three
months ended July 31, 2004 and 2003, respectively, and $1,073 and $934 for the
nine months ended July 31, 2004 and 2003, respectively, related to the sale of
assets which were not considered held for sale. The Company recorded a reduction (increase) to the 2003 impairment charge
and net gains on businesses sold related to discontinued operations for the
three and nine months ended July 31, 2004 of ($643) and $858, respectively,
that is reflected in discontinued operations in the consolidated statement of
earnings and in the other income line in the table below, of which ($1,521) and
$116, respectively, relates to businesses sold. A tax benefit was recorded by the discontinued operations during the three
and nine months ended July 31, 2004 due to the fact that the Company determined
that certain tax benefits on asset sales will be realized. These benefits were
previously reserved due to the uncertainty of characterization as capital or
ordinary losses. The assets and liabilities associated with assets held for sale are shown
in separate line items in the consolidated balance sheet titled assets held
for sale and liabilities associated with assets held for sale. As of July
31, 2004 and October 31, 2003, the assets held for sale (excluding $8 and $17
of cash and cash equivalent investments of the operations held for sale as of
July 31, 2004 and October 31, 2003, respectively) and the liabilities
associated with assets held for sale line items in the balance sheet represent
the assets and liabilities, respectively, of certain assets, primarily funeral
homes. 36




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Discontinued Operations, Assets Held for Sale and Impairment
Charges(Continued) A summary of the assets and liabilities included in the assets held for
sale and liabilities associated with assets held for sale line items at July
31, 2004 and October 31, 2003 and the operating results of the discontinued
operations for the three and nine months ended July 31, 2004 and 2003,
respectively, are as follows: July 31, 2004
    
    October 31, 2003AssetsReceivables, net of allowances
    
    $
    2,623
    
    
    $
    3,866Inventories and other current assets
    
    
    2,869
    
    
    
    4,007Net property and equipment
    
    
    9,922
    
    
    
    14,712Preneed funeral trust investments
    
    
    6,632
    
    
    
    Preneed cemetery trust investments
    
    
    3,059
    
    
    
    Prearranged receivables, net
    
    
    
    
    
    
    19,076Deferred charges and other assets
    
    
    5,214
    
    
    
    9,781Cemetery property
    
    
    668
    
    
    
    675Assets held for sale
    
    $
    30,987
    
    
    $
    52,117LiabilitiesDeferred income taxes, net
    
    $
    1,304
    
    
    $
    2,542Deferred preneed funeral revenue
    
    
    5,662
    
    
    
    Deferred preneed cemetery revenue
    
    
    1,929
    
    
    
    Non-controlling interest in funeral and cemetery
trusts
    
    
    9,691
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    27,529Liabilities associated with assets held for sale
    
    $
    18,586
    
    
    $
    30,071
 Three Months Ended July 31,
    
    Nine Months Ended July 31,2004
    
    2003
    
    2004
    
    2003Revenue:Funeral
    
    $
    2,982
    
    
    $
    4,675
    
    
    $
    11,705
    
    
    $
    15,611Cemetery
    
    
    430
    
    
    
    330
    
    
    
    1,298
    
    
    
    1,087$
    3,412
    
    
    $
    5,005
    
    
    $
    13,003
    
    
    $
    16,698Gross profit:Funeral
    
    $
    (3
    )
    
    $
    (256
    )
    
    $
    406
    
    
    $
    190Cemetery
    
    
    130
    
    
    
    41
    
    
    
    404
    
    
    
    178127
    
    
    
    (215
    )
    
    
    810
    
    
    
    368Other income (expense), net
    
    
    (610
    )
    
    
    21
    
    
    
    932
    
    
    
    111Earnings (loss) from discontinued operations before
income taxes
    
    $
    (483
    )
    
    $
    (194
    )
    
    $
    1,742
    
    
    $
    479
 37




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (12) Separation Charges In December 2003, the Company announced plans to restructure and reduce
its workforce by approximately 300 employees throughout the organization. The
total charge for severance and other costs associated with the workforce
reductions was expected to be approximately $2,341. In the first six months of
fiscal year 2004, the Company recorded a charge for severance costs of $2,131.
In the third quarter of fiscal year 2004, the Company recorded an additional
$85 in severance costs for a total of $2,216 ($1,374 after tax, or $0.01 per
share) for the nine months ended July 31, 2004. All costs incurred as of July
31, 2004 have been paid. The plan was completed June 1, 2004. There were
approximately $125 in severance and other costs remaining to be incurred under
the workforce reduction plan as of July 31, 2004. In the third quarter of fiscal years 2004 and 2003, the Company recorded
charges of $1,000 and $2,450, respectively, related to separation pay of former
executive officers. For additional information, see Note 16. (13) Long-term Debt July 31, 2004
    
    October 31, 2003Long-term debt:Senior secured credit facility:Revolving credit facility
    
    $
    69,000
    
    
    $
    79,000Term Loan B
    
    
    63,630
    
    
    
    115,3806.70% Notes
    
    
    
    
    
    
    10010.75% senior subordinated notes due 2008
    
    
    300,000
    
    
    
    300,000Other, principally seller financing of acquired operations
or assumption upon acquisition, weighted average
interest rates of 5.1% and 5.9% as of July 31, 2004
and October 31, 2003, respectively, partially secured
by assets of subsidiaries, with maturities through 2022.
    
    
    4,736
    
    
    
    7,635Total long-term debt
    
    
    437,366
    
    
    
    502,115Less current maturities
    
    
    73,953
    
    
    
    13,935$
    363,413
    
    
    $
    488,180
 On May 1, 2003, the Company redeemed its $99,897 outstanding Remarketable
Or Redeemable Securities (ROARS). When the remarketing dealer elected to
remarket the ROARS, the Company exercised its right to redeem the ROARS rather
than allow them to be remarketed. The Company paid the remarketing dealer
$12,691, the contractually specified value of the remarketing right, which was
based on the 10-year treasury rate of 3.894 percent. Net of the $1,532
unamortized ROARS option premium and $130 in costs, the Company recorded a
charge of $11,289 ($7,338 after tax, or $.07 per share) in the third quarter of
fiscal year 2003. As of July 31, 2004, of the total $73,953 of current maturities of
long-term debt, $69,000 was related to the Companys revolving credit facility
which is due June 30, 2005. In addition, the final payment on the Companys
$63,630 principal amount Term Loan B is due on October 31, 2005. The Company
plans to refinance its revolving credit facility and Term Loan B in advance of
their maturities. 38




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (14) Consolidated Comprehensive Income Consolidated comprehensive income for the nine months ended July 31, 2004
and 2003 is as follows: Nine Months Ended July 31,2004
    
    2003Net earnings
    
    $
    37,328
    
    
    $
    16,465Other comprehensive income:Reclassification adjustment for realized loss on investments, net of
deferred tax benefit of $454
    
    
    740
    
    
    
    Unrealized appreciation of investments, net of deferred tax expense of
($14) and ($91), respectively
    
    
    57
    
    
    
    147Termination of derivative instrument designated and qualifying as a cash
flow hedging instrument, net of deferred tax expense of ($119)
    
    
    194
    
    
    
    Unrealized appreciation on derivative instrument designated and
qualifying as a cash flow hedging instrument, net of deferred tax
expense of ($507) and ($322), respectively
    
    
    897
    
    
    
    527Increase in net unrealized losses associated with available-for-sale
securities of the trusts
    
    
    (3,639
    )
    
    
    Reclassification of the net unrealized losses activity attributable to the
non-controlling interest holders
    
    
    3,639
    
    
    
    Total other comprehensive income
    
    
    1,888
    
    
    
    674Total comprehensive income
    
    $
    39,216
    
    
    $
    17,139
 (15) Guarantees The Companys obligations under its senior secured credit facility are
guaranteed by all of its existing and future direct and indirect subsidiaries
formed under the laws of the United States, any state thereof or the District
of Columbia, except for specified excluded subsidiaries. The senior
subordinated notes are guaranteed by all of the domestic subsidiaries of the
Company, other than certain specified subsidiaries including the Puerto Rican
subsidiaries, Investors Trust, Inc. and certain immaterial domestic
subsidiaries. For additional information regarding the senior secured credit
facility and senior subordinated notes, see Note 13 to the consolidated
financial statements of the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. All obligations under the senior secured credit facility, including the
guarantees and any interest rate protection and other hedging agreements with
any lender or its affiliates, are secured by a first priority perfected
security interest in (1) all capital stock and other equity interests of the
Companys existing and future direct and indirect domestic subsidiaries, other
than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of
the voting equity interests and 100 percent of all other equity interests
(other than qualifying shares of directors) of all direct existing and future
foreign subsidiaries, and (3) all other existing and future assets and
properties of the Company and the guarantors, except for real property,
vehicles and other specified exclusions. Louisiana law gives Louisiana corporations broad powers to indemnify their
present and former directors and officers and those of affiliated corporations
against expenses incurred in the defense of any lawsuit to which they are made
parties by reason of their positions. The Companys By-laws make mandatory the
indemnification of directors 39




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (15) Guarantees(Continued) and officers permitted by Louisiana law. The Company has in effect a
directors and officers liability insurance policy that provides for
indemnification of its officers and directors against losses arising from
claims asserted against them in their capacities as officers and directors,
subject to limitations and conditions set forth in such policy. The Company has
also entered into indemnity agreements with each director and executive
officer, pursuant to which the Company has agreed, subject to certain
exceptions, to purchase and maintain directors and officers liability
insurance. The agreements also provide that the Company will indemnify each
director and executive officer against any costs and expenses, judgments,
settlements and fines incurred in connection with any claim involving him or
her by reason of his or her position as director or officer, provided that the
director or executive officer meets certain standards of conduct. As of July 31, 2004, the Company has guaranteed long-term debt of its
subsidiaries of approximately $1,964 that represents notes the subsidiaries
issued as part of the purchase price of acquired businesses or debt the
subsidiaries assumed in connection with acquisitions. (16) Related Party Transactions On June 8, 2004, the Company announced that William E. Rowe, Chairman of
the Board, Chief Executive Officer and President, had decided to retire
effective October 31, 2004. He stepped down from his position as President and
Chief Executive Officer and will continue in his role as Chairman of the Board
until his retirement is effective. As part of Mr. Rowes separation agreement,
the Company will pay Mr. Rowe $1,000 in equal installments over a two year
period, effective October 31, 2004. The Company recorded the $1,000 charge in
the third quarter of fiscal year 2004 but will make the payments in accordance
with the terms of the agreement. On July 15, 2003, the Company announced that Frank B. Stewart, Jr.,
Chairman of the Board, had elected to retire and become Chairman Emeritus of
the Company. As part of Mr. Stewarts retirement benefits agreement, the
Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550
each. The first payment was made within five days after the announcement of
his retirement. The second payment was made on June 20, 2004, and the final
payment will be made on June 20, 2005. The Company recorded the $1,650 charge
in the third quarter of 2003 but will continue to make the payments in
accordance with the terms of the agreement. On June 10, 2003, the Company announced that Brian J. Marlowe, Chief
Operating Officer, had stepped down to pursue other interests. According to
the terms of his employment agreement, he is entitled to receive an amount
equal to two years of salary, or $800, over the next two years. The Company
recorded the $800 charge in the third quarter of 2003 and has paid $452 of the
$800 commitment as of July 31, 2004. The remaining amount will be fully paid
by June 17, 2005. In January 1998, the Company discontinued an insurance policy on the life of
Mr. Frank B. Stewart, Jr., Chairman Emeritus of the Company. In order to
purchase a replacement policy, The Stewart Family Special Trust borrowed $685
from the Company pursuant to a promissory note due 180 days after the death of
Mr. Stewart. Interest on the note accrues annually at a rate equal to the
Companys cost of borrowing under its revolving credit facility and is payable
when the principal becomes due. The amount of the loan was equal to the cash
value received by the Company upon the discontinuance of the prior insurance
policy. The loan proceeds were used by the trust to purchase a single premium
policy on the life of Mr. Stewart. Certain of the beneficiaries of The Stewart
Family 40




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (16) Related Party Transactions(Continued) Special Trust are members of Mr. Stewarts family. The loan was approved by
all of the disinterested members of the Board of Directors. The outstanding
balance of the loan at July 31, 2004, including accrued interest, was
approximately $994. The father of G. Kenneth Stephens, Jr., Senior Vice President and
President of the Companys eastern division, has an 81 percent ownership
interest in Cemetery Funeral Supply, Inc., a vendor of the Company. During the
first nine months of fiscal year 2004 and in fiscal year 2003, the Company paid
Cemetery Funeral Supply, Inc. $179 and $281, respectively. 41




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Item 2. Managements Discussion and Analysis of Financial Condition and
Results of Operations General We are the third largest provider of funeral and cemetery products and
services in the death care industry in the United States. As of September 1,
2004, we owned and operated 254 funeral homes and 147 cemeteries in 28 states
within the United States and Puerto Rico. We sell cemetery property and funeral and cemetery products and services
both at the time of need and on a preneed basis. Our revenues in each period
are derived primarily from at-need sales, preneed sales delivered out of our
backlog during the period (including the accumulated trust earnings or build-up
in the face value of insurance contracts related to these preneed deliveries),
preneed cemetery property sales and other items such as perpetual care trust
earnings and finance charges. For a discussion of our accounting for preneed
sales and trust and escrow account earnings, see Managements Discussion and
Analysis of Financial Condition and Results of Operations included in Item 7
in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003
and Note 1 to the consolidated financial statements included herein. We
implemented revised Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest
Entities, as of April 30, 2004, which resulted in the consolidation of our
preneed funeral and cemetery merchandise and service trusts and our cemetery
perpetual care trusts. This implementation was as of April 30, 2004 and only
affected our consolidated balance sheet and had no impact on our second quarter
2004 results of operations or cash flows. In subsequent periods, including the
quarter ended July 31, 2004, the implementation of FIN 46R, as it relates to
the consolidation of trusts, affects classifications within the balance sheet,
statement of earnings and statement of cash flows, but has no effect on
shareholders equity, net cash flow or the recognition and reporting of
revenues or net earnings. For further discussion, see Critical Accounting
Policies below and Notes 2 through 6 to the condensed consolidated financial
statements included herein. Our funeral and cemetery businesses include prearranged sales funded
through trust and escrow arrangements. The cemetery business includes
maintenance of cemetery grounds funded through cemetery perpetual care trusts.
We defer all of the earnings realized by our preneed funeral and preneed
cemetery trusts and escrow accounts until the underlying merchandise or
services are delivered. We recognize the earnings from our cemetery perpetual
care trusts as they are realized in the trust and distributable. From 1991 through 1999, we achieved an overall annual realized return of
8.0 percent to 9.0 percent in our trusts. However, the average annual realized
return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8
percent and 1.2 percent for fiscal years 2000, 2001, 2002, 2003 and the nine
months ended July 31, 2004, respectively. These returns represent interest,
dividends and realized capital gains or losses but not unrealized capital gains
or losses. We defer revenue recognition of all earnings and losses realized by
preneed funeral and cemetery trusts until the underlying products and services
are delivered. Consequently, the lower investment returns realized during
previous years reduced the trust earnings recognized as revenue in 2003 and did
so again in the first nine months of 2004. We recognize as revenue all
earnings and losses realized by our cemetery perpetual care trusts currently,
including capital gains and losses in those jurisdictions where capital gains
can be withdrawn and used for cemetery maintenance. As a result, depressed
stock prices and returns on fixed-income investments are expected to continue
to put pressure on cemetery perpetual care trust earnings recognized during the
current year. Because approximately 55 percent of our total trust portfolio is
currently invested in a diversified group of equity securities, we would
generally expect our portfolio performance to improve if the performance of the
overall stock market improves, but we would also expect its performance to
deteriorate over time if the overall stock market declines. Our preneed funeral trusts and escrow accounts had net unrealized
depreciation of $6.4 million, and our preneed cemetery trusts and escrow
accounts had net unrealized depreciation of $3.8 million, as of July 31, 2004,
resulting from temporary unrealized gains and losses. See Notes 3 and 4 to the
condensed consolidated financial statements included herein for a discussion of
our preneed funeral and cemetery merchandise and services trusts. Unrealized
gains and losses in the preneed funeral and cemetery merchandise and services
trusts and escrow accounts have no 42




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immediate impact on our revenues, margins,
earnings or cash flow, unless the fair market value of the trusts were to
decline below the estimated costs to deliver the underlying products and
services. If that were to occur, we would record a charge to earnings to
record a liability for the expected loss on the delivery of contracts in our
backlog. Over time, gains and losses realized in the trusts are allocated to
underlying preneed contracts and affect the amount of trust earnings to be
recorded when we deliver the underlying product or service. Accordingly, if
current market conditions do not improve, our revenues, margins, earnings and
cash flow would be negatively affected by the reduced revenue we would realize
when we deliver the underlying products and services. Our cemetery perpetual
care trust accounts had net unrealized appreciation of $4.7 million as of July
31, 2004, resulting from temporary unrealized gains and losses. See Note 5 to
the condensed consolidated financial statements included herein for a
discussion of our cemetery perpetual care trusts. Unrealized gains and losses
in the cemetery perpetual care trusts do not affect current earnings but could
limit the capital gains available to us and eventually could result in lower
returns and lower revenues than we have historically achieved from these
trusts. For a discussion of our forecasts for continuing operations in fiscal year
2004 and the principal assumptions underlying the forecasts, see the discussion
under the heading Forward-Looking Statements. Critical Accounting Policies The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions (see Note 1(d) to the condensed
consolidated financial statements). Our critical accounting policies are those
that are both important to the portrayal of our financial condition and results
of operations and require managements most difficult, subjective and complex
judgment. These critical accounting policies are discussed in Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the fiscal year ended October 31, 2003,
which should be read in conjunction with the information below. Variable Interest Entities In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities. This interpretation clarifies
the application of ARB No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB revised FASB
Interpretation No. 46 (FIN 46R). We implemented FIN 46R as of April 30, 2004, which resulted in the
consolidation of our preneed funeral and cemetery merchandise and service
trusts and our cemetery perpetual care trusts. This implementation was as of
April 30, 2004 and only affected our consolidated balance sheet and had no
impact on our second quarter 2004 results of operations or cash flows. In
subsequent periods, including the quarter ended July 31, 2004, the
implementation of FIN 46R, as it relates to the consolidation of trusts,
affects classifications within the balance sheet, statement of
earnings and statement of cash flows, but has no effect on shareholders
equity, net cash flow or the recognition and reporting of revenues or net
earnings. For a more detailed discussion of our accounting policies after the
implementation of FIN 46R, see Notes 2 through 6 to the condensed consolidated
financial statements included herein. Insurance-Funded Preneed Funeral Contracts We have changed our method of accounting for insurance-funded preneed
funeral contracts as we have concluded that these contracts are not assets and
liabilities as defined by Statement of Financial Accounting Concepts No. 6,
Elements in Financial Statements. Therefore, we have removed from our
consolidated balance sheet amounts relating to insurance-funded preneed funeral
contracts previously recorded in prearranged receivables, net and prearranged
deferred revenue, net which at October 31, 2003 were $327.7 million (of which
$11.2 million related to our assets held for sale). The removal of these
amounts did not have an impact on our consolidated 43




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shareholders equity,
results of operations or cash flows. See Notes 2(b) and 3 to the condensed
consolidated financial statements included herein for additional information on
insurance related preneed funeral balances. Results of Operations In December 2003, we announced our plan to close or sell a number of small
businesses, primarily funeral homes, most of which were acquired as part of a
group of facilities, that are performing below acceptable levels and no longer
fit our operating profile. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, businesses held for sale or sold that meet
certain criteria in SFAS No. 144 are to be classified as discontinued
operations. Thus, beginning in the first quarter of fiscal year 2004, the
businesses that met the criteria and the businesses sold during fiscal years
2003 and 2004 were classified as discontinued operations. The following
discussion segregates the financial results of continuing operations into our
funeral and cemetery segments. As there have been no material acquisitions or
construction of new locations in fiscal years 2004 and 2003, results from
continuing operations reflect those of same store locations. Three Months Ended
July 31, 2004 Compared to Three Months Ended July 31,
2003Continuing Operations Funeral Segment Three Months EndedJuly 31,Increase2004
    
    2003
    
    (Decrease)(In millions)Total Funeral Revenue
    
    $
    67.3
    
    
    $
    68.8
    
    
    $
    (1.5
    )Total Funeral Costs
    
    
    49.5
    
    
    
    52.0
    
    
    
    (2.5
    )Total Funeral Gross Profit
    
    $
    17.8
    
    
    $
    16.8
    
    
    $
    1.0
 Funeral revenue from continuing operations decreased $1.5 million, or 2.2
percent, for the three months ended July 31, 2004, compared to the
corresponding period in 2003. The decrease in funeral revenue was primarily
due to a 3.5 percent decrease in the number of same store funeral services
performed, or 526 events out of 14,866 total same store funeral services
performed, partially offset by an increase in the average revenue per funeral
service performed by our same store businesses. Our same store businesses
achieved a 2.3 percent increase in the average revenue per traditional funeral
service and a 5.7 percent increase in the average revenue per cremation
service. The increase in average revenue per funeral service was partially
offset by a reduction in trust earnings recognized upon the delivery of preneed
funerals, resulting from lower investment returns realized in our preneed
funeral trusts during previous years, and by an increase in the proportion of
non-traditional funerals, including cremations. This resulted in an overall
1.0 percent increase in the average revenue per funeral service for our same
store businesses. We believe the increase in average revenue per traditional
and cremation service is due primarily to normal inflationary price increases
combined with effective merchandising and our focus on customized funeral
planning and personalization. Over the last four years, we have experienced annual declines in same
store funeral events ranging from 1.2 percent to 2.9 percent. We believe these
declines are due to different reasons in individual markets. Overall, we
believe the decline in funeral events is due primarily to a decrease in the
number of deaths in some markets and increased competition in others. These
factors are consistent with trends affecting funeral operations nationwide, and
we currently foresee no changes in these trends. For more information
regarding the risk of declining deaths and competition, see the discussion
under the heading Cautionary Statements. As a result, we have based our
forecasts for fiscal year 2004 on the assumption that same store funeral events
will range from being flat to down 3 percent compared with fiscal year 2003. Funeral gross profit margin from continuing operations increased from 24.4
percent in the third quarter of fiscal year 2003 to 26.4 percent in the third
quarter of fiscal year 2004. The increase is primarily due to reduced general 44




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and administrative costs in the funeral segment resulting from our cost
reduction initiatives. The cremation rate for our same store operations was
36.5 percent for the quarter ended July 31, 2004 compared to 36.2 percent for
the quarter ended July 31, 2003. Cemetery Segment Three Months EndedJuly 31,2004
    
    2003
    
    Increase(In millions)Total Cemetery Revenue
    
    $
    60.3
    
    
    $
    54.9
    
    
    $
    5.4Total Cemetery Costs
    
    
    46.7
    
    
    
    43.6
    
    
    
    3.1Total Cemetery Gross Profit
    
    $
    13.6
    
    
    $
    11.3
    
    
    $
    2.3
 Cemetery revenue from continuing operations increased $5.4 million, or 9.8
percent, for the three months ended July 31, 2004, compared to the
corresponding period in 2003, primarily due to an increase in cemetery property
sales, partially offset by a decrease in perpetual care trust earnings.
Cemetery property sales increased 13.2 percent in the third quarter of fiscal
year 2004 compared to the third quarter of fiscal year 2003 due primarily to
our preneed cemetery property sales initiative announced in September 2003. We experienced an annualized average return, excluding unrealized gains
and losses, of 2.4 percent in our perpetual care trusts for the quarter ended
July 31, 2004 resulting in revenue of $.6 million, compared to 4.4 percent for
the corresponding period in 2003 resulting in revenue of $2.1 million. Cemetery gross profit margin from continuing operations increased from
20.6 percent in the third quarter of fiscal year 2003 to 22.6 percent in the
third quarter of fiscal year 2004. This improvement resulted from increased
cemetery property sales as discussed above, combined with reduced general and
administrative costs in the cemetery segment resulting primarily from our cost
reduction initiatives. Discontinued Operations In accordance with SFAS No. 144, we review our long-lived assets for
impairment when changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. In December 2003, we announced plans to
close or sell a number of small businesses, primarily small funeral homes, most
of which were acquired as part of a group of facilities, that are performing
below acceptable levels and no longer fit our operating profile. The operating
results of those businesses that met the criteria in SFAS No. 144 in fiscal
year 2004 and businesses sold during fiscal years 2003 or 2004 are reported in
the discontinued operations section of the consolidated statements of earnings.
We had determined that the carrying value of these businesses exceeded their
fair market value and recorded an impairment charge in the fourth quarter of
fiscal year 2003. Included in discontinued operations for the three months
ended July 31, 2004 was an increase in the 2003 impairment charge and net gains
on businesses sold of approximately ($.6) million. During the third quarter of
2004, we determined that the current fair market value of these businesses was
less than the fair market value estimated in 2003, less costs to sell, and
recorded an increase in the impairment charge. The effective tax rate in the
third quarter of 2004 for our discontinued operations was a 199.0 percent
benefit compared to a benefit of 38.1 percent for the same period in 2003. A
benefit was recorded by the discontinued operations in the third quarter of
2004 due to the fact that we determined that certain tax benefits on asset
sales will be realized. These benefits were previously reserved due to the
uncertainty of characterization as capital or ordinary losses. Other Corporate general and administrative expenses for the three months ended
July 31, 2004 decreased $.7 million compared to the same period in 2003
primarily due to decreases in salaries and legal fees. 45




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In December 2003, we announced a reduction and restructuring of our
workforce. For the nine months ended July 31, 2004, we recorded $2.2 million
in related charges, of which $.1 million was recorded in the third quarter of
fiscal year 2004. We also recorded charges of $1.0 million and $2.5 million in
the third quarter of fiscal year 2004 and 2003, respectively, for separation
pay related to former executive officers. These charges relating to the
workforce reduction and the separation pay to former executive officers are
presented in the Separation charges line item in the consolidated statements
of earnings. Total depreciation and amortization was $13.6 million for the third
quarter of fiscal year 2004 compared to $13.3 million for the same period in
2003. Depreciation and amortization from continuing operations was $13.4
million for the third quarter of fiscal year 2004 compared to $12.7 million for
the same period in 2003. Interest expense decreased $1.7 million to $11.5 million for the third
quarter of fiscal year 2004 compared to $13.2 million for the same period in
2003 due to a $77.4 million decrease in average debt outstanding, partially
offset by a 26 basis point increase in the average interest rate. Other income, net, increased from $.4 million in the third quarter of
fiscal year 2003 to $1.6 million in the third quarter of fiscal year 2004
primarily due to sales of excess land and a reduction in the 2003 impairment
charge of approximately $.6 million. During the fourth quarter of fiscal year
2003, we recorded an impairment charge to write down to estimated fair market
value certain assets we had determined to sell. During the third quarter of
2004, we determined that the current fair market value of these assets exceeded
the fair market value estimated in 2003, less costs to sell, and recorded a
reduction in the 2003 impairment charge. As of July 31, 2004 and September 1, 2004, our outstanding debt totaled
$437.4 million and $425.7 million, respectively. Of the total debt
outstanding, including the portion subject to the interest rate swap agreement
in effect as of July 31, 2004, approximately 81 percent was subject to fixed
rates averaging 10.1 percent, with the remaining 19 percent subject to
short-term variable rates averaging approximately 3.8 percent. On May 1, 2003,
we redeemed our outstanding $99.9 million Remarketable Or Redeemable Securities
(ROARS) rather than allowing them to be remarketed. We recorded a loss on
early extinguishment of debt of $11.3 million, which is presented in the Loss
on early extinguishment of debt line item in the 2003 consolidated statements
of earnings. In order to hedge a portion of the interest rate risk associated with our
variable-rate debt, effective March 11, 2002, we entered into two interest rate
swap agreements, one of which expired on March 11, 2004 and the other expiring
March 11, 2005, each involving a notional amount of $50.0 million. As of July
31, 2004, the effective rate of the debt hedged by the remaining interest rate
swap was 6.765 percent. On June 8, 2004, we announced that our executive officers and directors
adopted a prearranged group stock trading plan in accordance with Rule 10b5-1
under the Securities Exchange Act of 1934, as amended. Our executive officers
and directors hold options to purchase shares of our Class A common stock that
expire in January and April of 2005. Those individuals entered into the plan in
order to provide an orderly means of exercising those options, including the
sale of the underlying shares to pay the exercise prices and applicable income
taxes. Most executive officers are taking the net difference between the
exercise price and market price of shares, after applicable income taxes, in
our Class A common stock, which are not being sold through the plan. After
exercise of all of the options, the number of shares of our stock owned by
these executive officers and directors will be increased. These pre-planned
trades will be executed as set forth in the plan. As of September 1, 2004,
approximately 800,000 shares of the approximate 3,200,000 shares in the trading
plan had been sold since its implementation on June 14, 2004. Preneed Sales into and Deliveries out of the Backlog In the third quarter of fiscal year 2003, we increased our focus on
preneed sales as part of our operating initiatives, and that effort helped us
achieve a 4.6 percent increase in preneed funeral sales in the third quarter of
fiscal year 2004 compared to the same period in 2003. 46




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The revenues from our preneed funeral and cemetery merchandise and service
sales are deferred into our backlog and are not included in our operating
results presented above. We added $42.2 million in preneed sales to our
funeral and cemetery merchandise and services backlog (including $17.6 million
related to insurance-funded preneed funeral contracts) during the three months
ended July 31, 2004 to be recognized in the future (net of cancellations) as
these prepaid products and services are delivered, compared to $41.0 million
(including $16.8 million related to insurance-funded preneed funeral contracts)
for the corresponding period in 2003. Deliveries out of our preneed funeral and cemetery merchandise and
services backlog, including accumulated trust earnings related to these preneed
deliveries, amounted to $42.5 million for the three months ended July 31, 2004,
compared to $42.0 million for the corresponding period in 2003, resulting in
net reductions in the backlog of $.3 million and $1.0 million for the three
months ended July 31, 2004 and 2003, respectively. Nine Months Ended July 31, 2004 Compared to Nine Months Ended July 31, 2003-Continuing Operations Funeral Segment Nine Months EndedJuly 31,Increase2004
    
    2003
    
    (Decrease)(In millions)Total Funeral Revenue
    
    $
    212.8
    
    
    $
    210.4
    
    
    $
    2.4Total Funeral Costs
    
    
    150.7
    
    
    
    156.4
    
    
    
    (5.7
    )Total Funeral Gross Profit
    
    $
    62.1
    
    
    $
    54.0
    
    
    $
    8.1
 Funeral revenue from continuing operations increased $2.4 million, or 1.1
percent, for the nine months ended July 31, 2004, compared to the corresponding
period in 2003. The increase in funeral revenue was primarily due to an
increase in the average revenue per funeral service performed by our same store
businesses, partially offset by a .4 percent decrease in the number of funeral
services performed, or 165 events out of the 46,467 total same store events
performed. Our same store businesses achieved a 3.6 percent increase in the
average revenue per traditional funeral service and a 4.9 percent increase in
the average revenue per cremation service. The increase in average revenue per
funeral service was partially offset by a reduction in trust earnings
recognized upon the delivery of preneed funerals, resulting from lower
investment returns realized in our preneed funeral trusts during previous
years, and by an increase in the proportion of non-traditional funerals,
including cremations. This resulted in an overall 1.6 percent increase in the
average revenue per funeral service for our same store businesses. We believe
the increase in average revenue per traditional and cremation service is due
primarily to normal inflationary price increases combined with effective
merchandising and our focus on customized funeral planning and personalization.
For a discussion of death trends over the last four years, see Three Months
Ended July 31, 2004 Compared to Three Months Ended July 31, 2003  Funeral
Segment. Funeral gross profit margin from continuing operations increased from 25.7
percent in the nine months ended July 31, 2003 to 29.2 percent in the nine
months ended July 31, 2004. This improvement was due primarily to the increase
in revenue discussed above, combined with reduced general and administrative
costs in the funeral segment resulting from our cost reduction initiatives.
The cremation rate for our same store operations was 36.6 percent for the nine
months ended July 31, 2004 compared to 36.1 percent for the nine months ended
July 31, 2003. Cemetery Segment Nine Months EndedJuly 31,2004
    
    2003
    
    Increase(In millions)Total Cemetery Revenue
    
    $
    175.1
    
    
    $
    166.2
    
    
    $
    8.9Total Cemetery Costs
    
    
    132.0
    
    
    
    128.4
    
    
    
    3.6Total Cemetery Gross Profit
    
    $
    43.1
    
    
    $
    37.8
    
    
    $
    5.3
 47




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Cemetery revenue from continuing operations increased $8.9 million, or 5.4
percent, for the nine months ended July 31, 2004, compared to the corresponding
period in 2003, primarily due to an increase in cemetery property sales,
partially offset by a decrease in perpetual care trust earnings. Cemetery
property sales increased 9.3 percent in the nine months ended July 31, 2004
compared to the nine months ended July 31, 2003 due primarily to our preneed
cemetery property sales initiative announced in September 2003. We experienced an annualized average return, excluding unrealized gains
and losses, of 3.5 percent in our perpetual care trusts for the nine months
ended July 31, 2004 resulting in revenue of $5.3 million, compared to 4.4
percent for the corresponding period in 2003 resulting in revenue of $6.1
million. Cemetery gross profit margin from continuing operations increased from
22.7 percent in the nine months ended July 31, 2003 to 24.6 percent in the nine
months ended July 31, 2004. This improvement resulted from increased cemetery
property sales as discussed above, combined with reduced general and
administrative costs in the cemetery segment resulting primarily from our cost
reduction initiatives. Discontinued Operations Included in discontinued operations for the nine months ended July 31,
2004 was a reduction in the 2003 impairment charge and net gains on businesses
sold of approximately $.9 million. During the third quarter of 2004, we
determined that the current fair market value of these businesses exceeded the
fair market value estimated in 2003, less costs to sell, and recorded a
reduction in the impairment charge. The effective tax rate for the nine months
ended July 31, 2004 for our discontinued operations was a 63.1 percent benefit
compared to an expense of 38.0 percent for the same period in 2003. A benefit
was recorded by the discontinued operations in the first nine months of 2004
due to the fact that we determined that certain tax benefits on asset sales
will be realized. These benefits were previously reserved due to the
uncertainty of characterization as capital or ordinary losses. For further
information on our discontinued operations, see Three Months Ended July 31,
2004 Compared to Three Months Ended July 31, 2003  Discontinued Operations. Other Corporate general and administrative expenses for the nine months ended
July 31, 2004 decreased $.7 million compared to the same period in 2003
primarily due to decreases in salaries and legal fees. In December 2003, we announced a reduction and restructuring of our
workforce. We recorded $2.2 million in related charges during the nine months
ended July 31, 2004. We also recorded charges of $1.0 million and $2.5 million
for the nine months ended July 31, 2004 and 2003, respectively, for separation
pay related to former executive officers. These charges relating to the
workforce reduction and the separation pay to former executive officers are
presented in the Separation charges line item in the consolidated statements
of earnings. Total depreciation and amortization was $39.6 million for the nine months
ended July 31, 2004 compared to $40.4 million for the same period in 2003.
Depreciation and amortization from continuing operations was $38.9 million for
the nine months ended July 31, 2004 compared to $38.8 million for the same
period in 2003. Interest expense decreased $4.4 million to $36.0 million for the nine
months ended July 31, 2004 compared to $40.4 million for the same period in
2003 due to a $76.7 million decrease in average debt outstanding, partially
offset by a 24 basis point increase in the average interest rate. Other income, net, decreased from $2.2 million for the nine months ended
July 31, 2003 to $1.5 million in the nine months ended July 31, 2004 primarily
due to the writedown of certain marketable securities in the first quarter of
2004, which had market value losses that were deemed to be other than
temporary. This was partially offset by a reduction in the 2003 impairment
charge of $.5 million recorded in 2004. During the fourth quarter of fiscal
year 48




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2003, we recorded an impairment charge to write down to estimated fair
market value certain assets we had determined to sell. During the third
quarter of 2004, we determined that the current fair market value of these
assets exceeded the fair market value estimated in 2003, less costs to sell,
and recorded the reduction in the 2003 impairment charge. As of July 31, 2004, our outstanding debt totaled $437.4 million. Our
outstanding debt is discussed further under the heading Three Months Ended
July 31, 2004 Compared to Three Months Ended July 31, 2003  Other. On June 8, 2004, we announced that our executive officers and directors
adopted a prearranged group stock trading plan in accordance with Rule 10b5-1
under the Securities Exchange Act of 1934, as discussed under the heading
Three Months Ended July 31, 2004 Compared to Three Months Ended July 31, 2003
 Other. Preneed Sales into and Deliveries out of the Backlog In the third quarter of fiscal year 2003, we increased our focus on
preneed sales as part of our operating initiatives, and that effort helped us
achieve a 9.9 percent increase in preneed funeral sales for the nine months
ended July 31, 2004 compared to the same period in 2003. The revenues from our preneed funeral and cemetery merchandise and service
sales are deferred into our backlog and are not included in our operating
results presented above. We added $120.5 million in preneed sales to our
funeral and cemetery merchandise and services backlog (including $48.4 million
related to insurance-funded preneed funeral contracts) during the nine months
ended July 31, 2004 to be recognized in the future (net of cancellations) as
these prepaid products and services are delivered, compared to $118.0 million
(including $48.5 million related to insurance-funded preneed funeral contracts)
for the corresponding period in 2003. Deliveries out of our preneed funeral
and cemetery merchandise and services backlog, including accumulated trust
earnings related to these preneed deliveries, amounted to $127.9 million for
the nine months ended July 31, 2004, compared to $130.6 million for the
corresponding period in 2003, resulting in net reductions in the backlog of
$7.4 million and $12.6 million for the nine months ended July 31, 2004 and
2003, respectively. Liquidity and Capital Resources Cash Flow Our operations provided cash of $68.6 million for the nine months ended
July 31, 2004, compared to $46.2 million for the corresponding period in 2003.
The 2004 amount includes a $33.2 million tax refund received during the first
quarter of 2004 resulting from a change in tax accounting methods for cemetery
merchandise revenue and a cash outflow of $1.9 million for separation pay in
2004. The 2003 amount includes a $23.3 million tax refund received related to
the sale of our foreign operations and a cash outflow of $.4 million for
separation pay in 2003. The increase in operating cash flow is also due to the
increase in earnings. Our cash receipts and payments are not distributed
evenly throughout the year due to the seasonality of our business, the timing
of interest and other large payments and other factors. In the last three
years, our first, second, third and fourth quarter operating cash flows (not
including tax refunds) have been in the range of 0-10 percent, 40-50 percent,
10-20 percent and 30-50 percent, respectively, of total operating cash flows
for the fiscal year. Our investing activities resulted in a net cash outflow of $.1 million for
the nine months ended July 31, 2004, compared to $11.3 million for the
comparable period in 2003. The change was due primarily to $12.9 million of
proceeds from asset sales, compared to $2.0 million for the same period in
2003. For the nine months ended July 31, 2004, capital expenditures amounted
to $14.3 million, which included $12.9 million for maintenance capital
expenditures and $1.4 million for new growth initiatives, compared to capital
expenditures of $14.0 million in the same period in 2003, which included $12.9
million for maintenance capital expenditures and $1.1 million for new growth
initiatives. 49




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Our financing activities resulted in a net cash outflow of $71.0 million
for the nine months ended July 31, 2004, compared to $43.7 million for the
comparable period in 2003. The change was due primarily to repayments of
long-term debt of $64.7 million in the nine months ended July 31, 2004,
compared to net repayments of $30.8 million ($135.8 million in repayments, net
of $105.0 million in proceeds) in the comparable period of 2003. We used the
$33.2 million tax refund included in operating cash flow to reduce our
outstanding Term Loan B in the first quarter of fiscal year 2004. The $105.0
million in proceeds from long-term debt received in 2003 and the $12.7 million
remarketing right paid in 2003 were incurred in connection with the redemption
of our $99.9 million Remarketable Or Redeemable Securities. We also used $19.3
million during the nine months ended July 31, 2004 to repurchase stock under
our stock repurchase program, which began in the third quarter of fiscal year
2003. Contractual Obligations and Commercial Commitments As of July 31, 2004, our outstanding debt balance was $437.4 million. The
following table details our known future cash payments (in millions) related to
various contractual obligations as of July 31, 2004. Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLong-term debt obligations(1)
    
    $
    437.4
    
    
    $
    74.0
    (2)
    
    $
    62.6
    
    
    $
    300.3
    
    
    $
    .5Operating lease obligations(3)
    
    
    40.1
    
    
    
    1.4
    
    
    
    12.6
    
    
    
    7.9
    
    
    
    18.2Non-competition and other agreements(4)
    
    
    11.7
    
    
    
    1.3
    
    
    
    8.3
    
    
    
    1.8
    
    
    
    .3$
    489.2
    
    
    $
    76.7
    
    
    $
    83.5
    
    
    $
    310.0
    
    
    $
    19.0
  (1)
    
    See below for a breakdown of our future scheduled principal payments and
maturities of our long-term debt by type as of July 31, 2004.  (2)
    
    Represents $69.0 million maturing on the revolving credit facility on
June 30, 2005 and $5.0 million of Term Loan B and third party debt
maturing quarterly through July 31, 2005. See below for a discussion of
our intention to refinance the revolving credit facility and Term Loan B.  (3)
    
    Our noncancellable operating leases are primarily for land and buildings
and expire over the next one to 15 years, except for six leases that
expire between 2032 and 2039. Our future minimum lease payments as of
July 31, 2004 are $1.4 million, $4.7 million, $4.2 million, $3.7 million,
$3.3 million and $22.8 million for the years ending October 31, 2004,
2005, 2006, 2007, 2008 and later years, respectively.  (4)
    
    We have entered into non-competition agreements with prior owners and key
employees of acquired subsidiaries that expire through 2012. During
fiscal year 2001, we decided to relieve some of the prior owners and key
employees of their obligations not to compete; however, we will continue
to make the payments in accordance with the contract terms. This category
also includes separation pay related to three former executive officers. As stated above, we received a $33.2 million tax refund in the first
quarter of fiscal year 2004, which was used to reduce our outstanding Term Loan
B. As required by our credit agreement, we plan to use substantially all of
the proceeds from the sale of assets and businesses held for sale of
approximately $25 million to $30 million and the approximate $12 million of
remaining income tax benefits related to the sale of our foreign operations,
the majority of which we expect to receive over the next three years, to reduce
our debt. Currently, we have sold or received acceptable offers on
approximately 65 percent of the businesses we identified for sale in December
2003. 50




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The following table reflects future scheduled principal payments and
maturities of our long-term debt (in millions) as of July 31, 2004. Other,PrincipallySellerFiscal
    
    Revolving
    
    
    
    
    
    Senior
    
    Financing ofYear Ending
    
    Credit
    
    Term
    
    Subordinated
    
    AcquiredOctober 31,
    
    Facility
    
    Loan B
    
    Notes
    
    Operations
    
    Total2004
    
    $
    
    
    
    $
    .6
    
    
    $
    
    
    
    $
    .9
    
    
    $
    1.52005
    
    
    69.0
    
    
    
    63.0
    
    
    
    
    
    
    
    1.7
    
    
    
    133.72006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .8
    
    
    
    .82007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .6
    
    
    
    .62008
    
    
    
    
    
    
    
    
    
    
    300.0
    
    
    
    .2
    
    
    
    300.2Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .6
    
    
    
    .6Total long-term debt
    
    $
    69.0
    
    
    $
    63.6
    
    
    $
    300.0
    
    
    $
    4.8
    
    
    $
    437.4
 We have a senior secured credit facility that specifies the terms of our
revolving credit facility and Term Loan B. We also have $300.0 million of
senior subordinated notes outstanding. As of July 31, 2004 and September 1,
2004, there was $63.6 million and $57.6 million outstanding on our Term Loan B,
respectively. As of July 31, 2004 and September 1, 2004, there was $69.0
million and $64.0 million, respectively, drawn on our $175.0 million revolving
credit facility. After giving consideration to the amount drawn, $15.0 million
of outstanding letters of credit and our reserve for the $41.1 million Florida
bond, we have $50.0 million and $55.0 million in availability under the
revolving credit facility as of July 31, 2004 and September 1, 2004,
respectively. We are required to maintain a bond to guarantee our obligations
relating to funds we withdrew from our preneed funeral trusts in Florida and
have agreed to maintain unused credit facilities in an amount that will equal
or exceed the bond amount. We believe that cash flow from operations will be
sufficient to cover our estimated cost of providing the prearranged services
and products in the future related to the Florida bond obligation. Under our senior secured credit facility, if there is no default or event
of default, we may pay cash dividends and repurchase our stock, provided that
the aggregate amount of the dividends and stock repurchased plus other types of
restricted payments in any fiscal year does not exceed $15.0 million, or, if
our consolidated leverage ratio is not greater than 3.00 to 1.00 both before
and after the payment, $25.0 million. Under these restrictions, as of July 31,
2004, we could use up to $25.0 million to pay dividends or repurchase our stock
during fiscal year 2004. For the nine months ended July 31, 2004, we have used
$19.3 million to repurchase stock under our stock repurchase program. In June
2004, the Board of Directors approved an additional $3.0 million in stock
repurchases thereby increasing the program limit from $25.0 million to $28.0
million, of which an aggregate of $22.2 million had been spent through
September 1, 2004. Since the inception of our stock repurchase program in June
2003 through September 1, 2004, we have repurchased 3,500,000 shares of our
Class A common stock at an average price of $6.35 per share. In February 2004, we amended our senior secured credit facility to reduce
our applicable margin on our Term Loan B to 250 basis points. The previous
margin ranged from 312.5 basis points to 337.5 basis points, subject to
quarterly adjustments based on our consolidated leverage ratio. For additional
information regarding our senior secured credit facility and other debt
obligations, see Note 13 to the consolidated financial statements and
Liquidity and Capital Resources in our Form 10-K for the fiscal year ended
October 31, 2003. We expect to be able to pay our debt coming due in fiscal year 2004 using
cash from operations. It is not our intention to pay all remaining amounts on
our long-term debt exclusively from cash flow from operations. We currently
have $64.0 million drawn on our revolving credit facility, which expires in
June 2005, and we have $57.6 million outstanding under our Term Loan B, with
the final payment due in October 2005. In addition to the regular
communication we have with our bankers, we have recently been meeting with
various financial institutions to discuss refinancing options. Based on these
discussions, we currently expect to refinance this debt in advance of 51




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their
maturities. Additionally, the first call date on our senior subordinated notes
is in July 2005 at 105.375 percent. If we call these notes at that time, we
would record an early extinguishment of debt charge of approximately $20.2
million including the bond call premium of $16.1 million and expensing of the
unamortized fees of $4.1 million. As
the senior subordinated notes represent approximately 70 percent of our
total debt outstanding, the call right may present a significant opportunity to
refinance this debt at more attractive interest rates. Our ability to
refinance our senior secured credit facility or our senior subordinated notes
will depend primarily on the condition of U.S. financial markets and our credit
profile at the time of refinancing. Any refinancing of the senior secured
credit facility or senior subordinated notes could either increase or decrease
our interest expense, and in any case will cause us to incur refinancing costs
that could be material. Off-Balance Sheet Arrangements Our off-balance sheet arrangements as of July 31, 2004 consist of the
following items:  (1)
    
    the $41.1 million bond we are required to maintain to guarantee our
obligations relating to funds we withdrew from our preneed funeral
trusts in Florida, which is discussed above and in Note 18 to the
consolidated financial statements in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2003; and(2)
    
    the insurance-funded preneed funeral contracts, which will be
funded by life insurance or annuity contracts issued by third-party
insurers, are not reflected in our consolidated balance sheets, and are
discussed above and in Notes 2 and 3 to the condensed consolidated
financial statements included herein. Ratio of Earnings to Fixed Charges Our ratio of earnings to fixed charges was as follows: Nine MonthsEnded
    
    Years Ended October 31,July 31,2004
    
    2003
    
    2002
    
    2001
    
    2000
    
    19992.45(1)
    
    
    
    (2)
    
    
    1.75
    (3)
    
    
    
    (4)(5)
    
    
    2.57
    
    
    
    3.43
    (4)
  (1)
    
    Pretax earnings for the nine months ended July 31, 2004 include
separation charges of $3.2 million for costs related to workforce
reductions and separation pay to former executive officers.  (2)
    
    Pretax earnings for fiscal year 2003 include a charge of $11.3 million
for the loss on early extinguishment of debt in connection with the
redemption of our Remarketable Or Redeemable Securities and a noncash
charge of $107.3 million for the impairment charges related to goodwill
and long-lived asset impairment. As a result of these charges, our
earnings for fiscal year 2003 were insufficient to cover our fixed
charges, and an additional $69.8 million in pretax earnings would have
been required to eliminate the coverage deficiency.  (3)
    
    Pretax earnings for fiscal year 2002 include a noncash charge of $18.5
million in connection with the writedown of assets held for sale.  (4)
    
    Excludes the cumulative effect of change in accounting principles.  (5)
    
    Pretax earnings for fiscal year 2001 include a noncash charge of $269.2
million in connection with the writedown of assets held for sale and other
charges and a $9.1 million charge for the loss on early extinguishment of
debt. As a result of these charges, our earnings for fiscal year 2001
were insufficient to cover our fixed charges, and an additional $197.0
million in pretax earnings would have been required to eliminate the
coverage deficiency. For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pretax earnings plus fixed charges (excluding interest capitalized
during the period). Fixed charges consist of interest expense, capitalized
interest, amortization of debt expense and discount or premium relating to any
indebtedness and the portion of rental 52




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expense that management believes to be
representative of the interest component of rental expense. The ratio of
earnings to fixed charges for the nine months ended July 31, 2004 reflects the
adoption of SFAS No. 144; fiscal years 2003 and 2002 reflect the adoption of
SFAS No. 142; fiscal years 2003, 2002 and 2001 are accounted for under the 2001
change in accounting principles; and fiscal years 2000 and 1999 are accounted
for under the 1999 change in accounting principle. Inflation Inflation has not had a significant impact on our operations over the past
three years, nor is it expected to have a significant impact in the foreseeable
future. Recent Accounting Standards See Note 2 to the consolidated financial statements included herein. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosure about market risk is presented in
Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31,
2003, filed with the Securities and Exchange Commission on January 14, 2004.
The following disclosure discusses only those instances in which the market
risk has changed by more than 10 percent from the annual disclosure. The market risk inherent in our market risk sensitive instruments and
positions is the potential change arising from increases or decreases in the
prices of marketable equity securities and interest rates as discussed below.
Generally, our market risk sensitive instruments and positions are
characterized as other than trading. Our exposure to market risk as
discussed below includes forward-looking statements and represents an
estimate of possible changes in fair value or future earnings that would occur
assuming hypothetical future movements in equity markets or interest rates.
Our views on market risk are not necessarily indicative of actual results that
may occur and do not represent the maximum possible gains and losses that may
occur, since actual gains and losses will differ from those estimated, based on
actual fluctuations in equity markets, interest rates and the timing of
transactions. Interest We have entered into various fixed- and variable-rate debt obligations,
which are detailed in Note 13 to our consolidated financial statements included
in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003
and in the Liquidity and Capital Resources section of our Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 2. Effective March 11, 2002, we entered into two interest rate swap
agreements, each involving a notional amount of $50.0 million. The first
agreement effectively converted $50.0 million of variable-rate debt bearing
interest based on three-month LIBOR to a fixed rate based on the swap rate of
3.65 percent and expired on March 11, 2004. The second agreement effectively
converts $50.0 million of variable-rate debt bearing interest based on
three-month LIBOR to a fixed rate based on the swap rate of 4.265 percent and
expires on March 11, 2005. The estimated fair value of the interest rate swaps
based on quoted market prices was ($.9) million and ($2.6) million as of July
31, 2004 and October 31, 2003, respectively. A hypothetical 100 basis point
increase in the average interest rates applicable to such debt would result in
an increase of approximately $.2 million and $.8 million in the fair value of
these instruments as of July 31, 2004 and October 31, 2003, respectively. As of July 31, 2004 and October 31, 2003, the carrying values of our Term
Loan B and revolving credit facility, including accrued interest, were $132.6
million and $194.4 million, respectively, compared to fair values of $133.3
million and $195.9 million, respectively. Fair value was determined using
quoted market prices, where applicable, 53




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or future cash flows discounted at
market rates for similar types of borrowing arrangements. Of the $132.6
million outstanding under our Term Loan B and revolving credit facility on July
31, 2004, $82.6 million was not hedged by the interest rate swaps and was
subject to short-term variable interest rates. Each approximate 10 percent, or
50 basis point, change in the average interest rate applicable to this debt
would result in a change of approximately $.3 million in our pretax earnings.
Of the $194.4 million outstanding under our Term Loan B and revolving credit
facility on October 31, 2003, $94.4 million was not hedged by the interest rate
swaps and was subject to short-term variable interest rates. Each approximate
10 percent, or 45 basis-point, change in the average interest rate applicable
to this debt would result in a change of approximately $.1 million in our
pretax earnings. As of July 31, 2004 and October 31, 2003, the carrying values of our
long-term fixed-rate debt, including accrued interest, were approximately
$307.4 million and $318.5 million, respectively, compared to fair values of
$341.0 million and $357.6 million, respectively. Fair values were determined
using quoted market prices. Each approximate 10 percent change in the average
interest rates applicable to such debt, 40 and 60 basis points, respectively,
for July 31, 2004 and October 31, 2003, would result in changes of
approximately $1.2 million and $3.1 million, respectively, in the fair values
of these instruments. If these instruments are held to maturity, no change in
fair value will be realized. We monitor our mix of fixed- and variable-rate debt obligations in light
of changing market conditions and from time to time may alter that mix by, for
example, refinancing balances outstanding under our variable-rate revolving
credit facility with fixed-rate debt or by entering into interest rate swaps. Trusts As of July 31, 2004 and October 31, 2003, our marketable equity securities
and our fixed-income securities subject to market risk consisted principally of
investments held by our prearranged funeral, cemetery and perpetual care trust
and escrow accounts. We estimate that each 100 basis point increase or
decrease in the yield, which excludes unrealized gains and losses, on the
preneed funeral and cemetery and perpetual care trusts, based on the July 31,
2004 balances, would result in an approximate increase or decrease in our
revenues associated with the delivery of prearranged products and services and
earnings from the perpetual care trust funds of $2.1 million in 2004, $3.2
million in 2005 and $4.5 million in 2006. Our prearranged funeral, cemetery and perpetual care trust and escrow
accounts are detailed in Notes 3 through 6 to our condensed consolidated
financial statements included in Item 1 and in Notes 4 and 5 to our
consolidated financial statements included in our Annual Report on Form 10-K
for the fiscal year ended October 31, 2003. Generally, our wholly-owned
subsidiary, Investors Trust, Inc. (ITI), serves as investment adviser on
these trust and escrow accounts. ITI manages the mix of equities and
fixed-income securities in accordance with an investment policy established by
the Investment Committee of our Board of Directors with the assistance of
third-party professional financial consultants. The policy emphasizes
conservation, diversification and preservation of principal, while seeking
appropriate levels of current income and capital appreciation. ITI is
registered with the Securities and Exchange Commission under the Investment
Advisers Act of 1940. 
 Item 4. Controls and Procedures We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. The evaluation was carried out under the supervision of and with the
participation of our management, including our Chief Executive Officer/Chief
Financial Officer. Based on the evaluation, our Chief Executive Officer/Chief
Financial Officer concluded that our disclosure controls and procedures are
effective as of the end of the period covered by this report in timely alerting
him to material information relating to the Company, including its consolidated
subsidiaries, required to be included in reports we file with or submit to the
Securities and Exchange Commission under the Securities Exchange Act of 1934.
There have been no changes in our internal control over financial reporting
that occurred during our most recent fiscal 54




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quarter that have materially
affected, or are reasonably likely to materially affect, our internal control
over financial reporting. 55




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PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We and certain of our subsidiaries are parties to a number of legal
proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on our
consolidated financial position, results of operations or cash flows. We carry insurance with coverages and coverage limits that we believe to
be adequate. Although there can be no assurance that such insurance is
sufficient to protect us against all contingencies, management believes that
our insurance protection is reasonable in view of the nature and scope of our
operations. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Purchases of Equity Securities by the Issuer and Affiliated Purchasers Issuer Purchases of Equity Securities Total number of
    
    Maximum approximateshares purchased
    
    dollar value of sharesTotal number
    
    
    
    
    
    as part of
    
    that may yet beof shares
    
    Average price
    
    publicly-announced
    
    purchased under thePeriod
    
    purchased
    
    paid per share
    
    plans or programs(1)
    
    plans or programsMay 1, 2004 through
May 31, 2004
    
    
    621,800
    
    
    $
    7.39
    
    
    
    621,800
    
    
    $
    6,812,985June 1, 2004
through June 30, 2004
    
    
    507,000
    
    
    $
    7.74
    
    
    
    507,000
    
    
    $
    5,887,105July 1, 2004 through
July 31, 2004
    
    
    12,800
    
    
    $
    8.09
    
    
    
    12,800
    
    
    $
    5,783,509Total
    
    
    1,141,600
    
    
    $
    7.55
    
    
    
    1,141,600
    
    
    $
    5,783,509
  (1)
    
    On June 26, 2003, we announced that our Board of Directors had approved a
new stock repurchase program that allows us to invest up to $25.0 million
in repurchases of our Class A common stock. In June 2004, the Board of
Directors increased the program limit by an additional $3.0 million to
$28.0 million. The repurchases are limited to our Class A common stock
and are made in the open market or in privately negotiated transactions at
such times and in such amounts as management deems appropriate, depending
on market conditions and other factors. Since the inception of the
program through July 31, 2004, we have repurchased 3,500,000 shares at an
average price of $6.35 per share. 56




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Item 5. Other Information Forward-Looking Statements Certain statements made herein or elsewhere by us or on our behalf that
are not historical facts are intended to be forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may include the words may,
will, estimate, intend, continue, believe, expect, plan or
anticipate and other similar words. These statements include any projections
of earnings, revenues, asset sales, cash flow, debt levels or other financial
items; any statements of the plans, strategies and objectives of management for
future operations; any statements concerning proposed new products, services or
developments; any statements regarding future economic conditions or
performance; any statements of belief; and any statements of assumptions
underlying any of the foregoing. Forward-looking statements contained in this
report include but are not limited to the financial projections made in this
section and the assumptions underlying them, along with statements relating to
(1) anticipated future performance of our preneed sales program, (2)
anticipated future performance of funds held in trust, (3) anticipated
mortality trends, (4) potential results of our operating initiatives, (5) our
current plans for deployment of our projected cash flow, (6) the anticipated
impact of the workforce reduction and restructuring and (7) the success and
timing of selling the small businesses designated as held for sale. Accuracy of the forecasts is dependent upon assumptions about events that
change over time and is thus susceptible to periodic change based on actual
experience and new developments. The forecasts are based on a variety of
estimates and assumptions made by our management 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 our 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. 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 our principal expectations are
realized. We caution readers that we assume no obligation to update or publicly
release any revisions to forward-looking statements made herein or any other
forward-looking statements made by us or on our behalf. We project that earnings from continuing operations will be in the range
of $.39 to $.41 per share for fiscal year 2004 including the impact of
separation charges of $.02 per share, partially offset by the reduction in the
2003 impairment charge recorded in the third quarter of 2004 of $.01 per share.
We expect cash flow from operations to be between $77 million and $86 million,
including the $33 million tax refund received in December 2003 due to a change
in the tax accounting methods for cemetery merchandise revenue. Maintenance
capital expenditures are expected to be between $16 million and $17 million. Our 2004 forecast for continuing operations is based on the following
principal assumptions:  (1)
    
    An increase in revenue of 1 to 3 percent for continuing
operations and a corresponding increase in the associated direct
costs.(2)
    
    The increase in revenue is expected to be driven by an
increase in the average revenue per service performed of
approximately 2 to 3 percent, excluding any impact from funeral
trust earnings, and an increase in preneed property sales of 5 to 10
percent.(3)
    
    Increases in average revenue per service performed may be
partially offset by a decrease in the number of families served by
continuing operations in 2004 as compared to 2003. The upper end of
the forecast range assumes that these businesses will serve the same
number of families during fiscal year 2004 as in 2003, and the lower

end assumes a possible reduction in the number of families served 57




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of up to 3 percent, which is in line with trends over previous years.(4)
    
    Total revenue from trust earnings, including earnings
recognition from funeral, cemetery and perpetual care trusts, is
expected to be slightly down from that recognized in 2003.(5)
    
    Our cost-saving initiatives, including the reduction in
workforce, are expected to reduce costs by $16 million to $20
million. These cost savings are expected to be partially offset by
about $8 million to $10 million in normal inflation of costs
remaining in the business, assuming an inflation rate of
approximately 2 percent.(6)
    
    We expect to use cash flow from operations to maintain our
facilities at a level comparable to 2003, to reduce debt and to
repurchase stock, or for growth initiatives as appropriate. Our 2004 forecast for continuing operations is intended to reflect
forecasted same store results. We believe it is appropriate to use the range
of diluted earnings per share provided herein because of the uncertainty of
possible developments described below. Guidance for diluted earnings per share
and all other forecasted operating measures specifically exclude the following:  
    
    The possibility of additional gains or losses associated with
future impairments related to asset dispositions.
    
    The possibility of gains or losses associated with early
extinguishments of debt and changes in capital structure. Cautionary Statements We caution readers that the following important factors, among others, in
some cases have affected, and in the future, could affect, our actual
consolidated results and could cause our actual consolidated results in the
future to differ materially from the goals and expectations expressed in the
forward-looking statements above and in any other forward-looking statements
made by us or on our behalf. Risks Related to Our Business Our ability to increase funeral call volume is influenced by many factors such
as the number of deaths and competition in our markets, our ability to identify
changing consumer preferences and various other factors, some of which are
beyond our control. We have experienced declines in same store funeral call volumes for a
number of years. One of the new operating initiatives announced in 2003 was
the creation of a funeral call volume task force, which is using the most
successful tactics of our top performing funeral homes to develop strategies to
drive funeral call growth throughout our organization with an increased focus
on preneed funeral sales. Nevertheless, we experienced a decline in funeral
call volumes for the nine months ended July 31, 2004. We can give no assurance
that we will be successful in implementing this operating initiative in the
long term.We discuss the risk of declining deaths, intense competition and our
ability to identify changing consumer preferences in other risk factors herein. Price competition could reduce market share or cause us to reduce prices to
retain or recapture market share, either of which could reduce revenues and
margins. Our funeral home and cemetery operations generally face intense
competition in local markets that typically are served by numerous funeral
homes and cemetery firms. We have 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. From time to time, this
price competition has resulted in losing market share in some markets. In
other markets, we have had to reduce prices thereby reducing profit margins in
order to retain or recapture market share. Increased price competition in the 58




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future could further reduce revenues, profit margins and the backlog and
potentially impact our annual goodwill impairment analysis. Discount retailers have begun marketing caskets at prices sometimes lower
than what we offer. Consumers can already buy caskets in funeral supply stores
and directly from manufacturers, as well as over the Internet. However,
recently, the first large general merchandise company has entered the market
for low-cost caskets. This could cause sales of caskets at our facilities to
decrease, which could adversely affect funeral revenues and margins. Increased advertising or better marketing by competitors, or increased activity
by competitors offering products or services over the Internet, could cause us
to lose market share and revenues or cause us to incur increased costs in order
to retain or recapture our market share. In recent years, the marketing of preneed funeral services through
television, radio and print advertising, direct mailings and personal sales
calls has increased. Extensive advertising or effective marketing by
competitors in local markets could cause us to lose market share and revenues
or cause us to increase marketing costs. In addition, competitors may change
the types or mix of products or services offered. These changes may attract
customers, causing us to lose market share and revenue or to incur costs in
response to competition in order to vary the types or mix of products or
services offered by us. Also, increased use of the Internet by customers to
research and/or purchase products and services could cause us to lose market
share to competitors offering to sell products or services over the Internet. Earnings from and principal of trusts 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. We maintain three types of trusts and escrow accounts: (1) preneed funeral
merchandise and services, (2) preneed cemetery merchandise and services and (3)
cemetery perpetual care. Earnings and investment gains and losses on trusts
and escrow accounts are affected by financial market conditions that are not
within our control. Earnings are also affected by the mix of fixed-income and
equity securities that we choose to maintain in the trusts, and we may not
choose the optimal mix for any particular market condition. The size of the
trusts depends upon the level of preneed sales and maturities, the amount of
ordinary income and investment gains or losses and funds added through
acquisitions, if any. Declines in earnings from cemetery perpetual care trusts
would cause a decline in current revenues, while declines in earnings from
other trusts and escrow accounts could cause a decline in future cash flows and
revenues. 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 our financial position and results of operations. Unrealized gains and losses in the preneed funeral and cemetery
merchandise and service trusts have no immediate impact on our revenues,
margins, earnings or cash flow, unless the fair market value of the trusts were
to decline below the estimated costs to deliver the underlying products and
services. If that were to occur, we would record a charge to earnings to
record a liability for the expected losses on the delivery of the associated
contract. Over time, gains and losses realized in the trusts are allocated to
underlying preneed contracts and affect the amount of the trust earnings we
record when we deliver the underlying product or service. Accordingly, if
current market conditions do not improve, the trusts may eventually realize
losses, and our revenues, margins, earnings and cash flow would be negatively
affected by the reduced revenue when we deliver the underlying products and
services. This factor adversely affected our results in fiscal year 2003 and
did so again in the first nine months of fiscal year 2004. Unrealized gains
and losses in the cemetery perpetual care trust do not affect earnings but
could limit the capital gains available to us and could result in lower returns
and lower current revenues than we have historically achieved. 59




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Increased costs may have a negative impact on earnings and cash flows. Overall costs are expected to decline in 2004 due to our cost reduction
operating initiatives, including the workforce restructuring and reduction that
occurred in December 2003. The cost reduction initiatives are expected to
reduce costs $16 million to $20 million. These cost savings are expected to be
partially offset by about $8 million to $10 million in normal inflation of
costs remaining in the business. We may not be successful in fully
implementing these initiatives and may incur additional costs. Insurance costs, in particular, have increased substantially in recent
years. The terrorist attacks in the United States on September 11, 2001 and
related subsequent events have resulted in higher insurance premiums. The
volume of claims made in such a short span of time resulted in liquidity
challenges that many insurers have passed on to their policyholders.
Additionally, insurers have increased premiums to offset losses in equity
markets due to recent economic conditions. While our insurance costs have
increased materially, additional increases in insurance costs cannot be
predicted. We may experience declines in preneed sales due to numerous factors, including
changes made to contract terms and sales force compensation and a weakening
economy. Declines in preneed property sales would reduce current revenue.
Declines in preneed funeral and cemetery service and merchandise sales would
reduce our backlog and could reduce our future market share. In an effort to increase cash flow, we modified our 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, we changed the compensation structure for our preneed sales force.
These changes, and the accompanying sales force attrition and adverse impact on
sales force morale, caused preneed sales to decline. Although we do not
anticipate making further significant changes in these areas, we may decide
that further adjustments are advisable, which could cause additional declines
in preneed sales. In addition, a weakening economy that causes customers to
reduce discretionary spending could cause, and we believe has caused in the
past, a decline in preneed sales. Geopolitical concerns could continue to
lower consumer confidence, which could also result in a further decline in
preneed sales. Declines in preneed cemetery property sales would reduce
current revenue, and declines in other preneed sales would reduce our backlog
and future revenue and could reduce future market share. One of the operating
initiatives announced in 2003 was the creation of a preneed cemetery property
task force, which is strategically targeting businesses with maximum preneed
sales potential and developing specific plans to increase preneed property
sales and attain new customers at each of the targeted locations. Increasing
preneed funeral sales is also a part of our operating initiatives. However, we
can give no assurance that we will be successful in implementing these
operating initiatives. Our ability to dispose of our businesses held for sale at prices consistent
with our expectations depends on several factors, many of which are beyond our
control. Any changes in expected sales prices or bases of these businesses
could result in additional impairment charges or could adversely affect our
ability to sell these businesses at prices we are willing to accept. In December 2003, we announced plans to close or sell a number of small
businesses, primarily small funeral homes, most of which were acquired as part
of a group of facilities, that are performing below acceptable levels and no
longer fit our operating profile. We believe that the closing or sale of those
businesses will enable management to focus on our most productive operations
where our operating initiatives may bring about the greatest benefits in
increased revenues. We can give no assurance that we will be able to dispose
of these businesses or that buyers will accept our terms, nor can we give any
assurance that the selling prices of these businesses will not be materially
different from our expectations. Any variance between the anticipated and
actual sale prices or changes in the bases of these businesses would result in
additional impairment charges. 60




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Our ability to service our debt in the future depends upon our ability to
generate sufficient cash from operations or refinancings, which depends upon
many factors, some of which are beyond our control. Our ability to service our debt depends upon our ability to generate
sufficient cash. As required by our credit agreement, we plan to use
substantially all of the proceeds from assets and businesses held for sale of
approximately $25 million to $30 million and the approximate $12 million of
remaining income tax benefits relating to the sale of our foreign operations,
the majority of which we expect to receive over the next three years, to reduce
our debt. We discuss the risks associated with the sale of the businesses held
for sale in other risk factors herein. Our ability to receive the expected
income tax benefits within our expected time frame depends upon, among other
things, the rate at which we realize additional capital gains. Our primary tax
planning strategy is to produce these capital gains in our trust funds. Our
ability to generate capital gains could be affected by a decline in market
conditions. Our ability to generate cash flows from operations depends upon,
among other things, the number of deaths in our markets, competition, the level
of preneed sales and their maturities, our ability to control our costs, stock
and bond market conditions, and general economic, financial and regulatory
factors, most of which are beyond our control. We expect to be able to pay our debt coming due in fiscal year 2004 using
cash from operations. It is not our intention to pay all remaining amounts on
our long-term debt exclusively from cash flow from operations. We currently
have $64.0 million drawn on our revolving credit facility, which expires in
June 2005, and we have $57.6 million outstanding under our Term Loan B, with
the final payment due in October 2005. In addition to the regular
communication we have with our bankers, we have recently been meeting with
various financial institutions to discuss refinancing options. Based on these
discussions, we currently expect to refinance this debt in advance of their
maturities. Additionally, the first call date on our senior subordinated notes
is in July 2005 at 105.375 percent. If we call these notes at that time, we
would record an early extinguishment of debt charge of approximately $20.2
million including the bond call premium of $16.1 million and expensing of the
unamortized fees of $4.1 million. As the senior subordinated notes represent
approximately 70 percent of our total debt outstanding, the call right may
present a significant opportunity to refinance this debt at more attractive
interest rates. Our ability to refinance our senior secured credit facility or
our senior subordinated notes will depend primarily on the condition of U.S.
financial markets and our credit profile at the time of refinancing. Because
we have limited control over our credit profile and no control over the
condition of financial markets, there is a risk that we will not be able to
successfully refinance this debt. Any refinancing of the senior secured credit
facility or senior subordinated notes could either increase or decrease our
interest expense, and in any case will cause us to incur refinancing costs that
could be material. 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 or escrow 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, we changed the terms and conditions of preneed sales
contracts and commissions and moderated our preneed sales effort in order to
reduce the initial negative impact on cash flow. Nevertheless, we 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 would be further reduced,
and our ability to service debt could be adversely affected. Increases in interest rates would increase interest costs on our variable-rate
long-term debt and could have a material adverse effect on our net income and
earnings per share. As of September 1, 2004, $121.6 million of our long-term debt was subject
to variable interest rates, although $50.0 million of that amount was fixed
pursuant to the terms of an interest rate swap expiring in March 2005.
Accordingly, any significant increase in interest rates could increase our
interest costs on our variable-rate long-term debt or indebtedness incurred in
the future, which could decrease our net income and earnings per share
materially. 61




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Covenant restrictions under our senior secured credit facility and senior
subordinated note indenture limit our flexibility in operating our business. Our senior secured credit facility and the indenture governing the senior
subordinated notes contain, among other things, covenants that restrict us and
our subsidiary guarantors ability to finance future operations or capital
needs or to engage in other business activities. They limit, among other
things, our and our 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 facility
contains specific limits on capital expenditures and the prepayment of debt
other than that incurred under the senior secured credit facility and requires
us to maintain specified financial ratios and satisfy financial condition
tests. These covenants may require us to act in a manner contrary to our business
objectives. In addition, events beyond our control, including changes in
general economic and business conditions, may affect our ability to satisfy
these covenants. A breach of any of those covenants could result in a default,
allowing the lenders to declare all amounts owed immediately due and payable. Our projections for 2004 do not include any earnings from acquisition activity.
Several important factors, among others, may affect our ability to consummate
acquisitions. Our projections for 2004 do not include any earnings from acquisition
activity. The actual level of acquisition activity, if any, will depend not
only on the number of properties acquired, but also on the size of the
acquisitions. Several important factors, among others, may affect our ability
to consummate acquisitions. We may not be able to find businesses for sale at
prices we are willing to pay. Acquisition activity, if any, will also depend
on our ability to enter into new markets. Due in part to our lack of
experience operating in new areas and to the presence of competitors who have
been in certain markets longer than we have, such entry may be more difficult
or expensive than we anticipate. Risks Related to the Death Care Industry Declines in the number of deaths in our 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. This factor adversely affected our results in fiscal year 2003 and
did so again in fiscal year 2004. 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. Changes in the number of deaths can vary among
local markets and from quarter to quarter, and variations in the number of
deaths in our markets or from quarter to quarter are not predictable. However,
generally the number of deaths fluctuates with the seasons with more deaths
occurring during the winter months primarily resulting from pneumonia and
influenza. These variations can cause revenues to fluctuate. Our comparisons of the change in the number of families served to the
change in the number of deaths reported by the Centers for Disease Control and
Prevention (CDC) from time to time may not necessarily be meaningful. The
CDC receives weekly mortality reports from 122 cities and metropolitan areas in
the United States within two to three weeks from the date of death and reports
the total number of deaths occurring in these areas each week based on the
reports received from state health departments. The comparability of our
funeral calls to the CDC data is limited, as reports from the state health
departments are often delayed, and the 122 cities reporting to the CDC are not
necessarily comparable with the markets in which we operate. 62




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The increasing number of cremations in the United States could cause revenues
to decline because we 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. Our 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 36 percent of the United States
burial market by the year 2010, compared to 27 percent in 2001. 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 we are not able to respond effectively to changing consumer preferences, our
market share, revenues and profitability could decrease. Future market share, revenues and profits will depend in part on our
ability to anticipate, identify and respond to changing consumer preferences.
During fiscal year 2000, we began to implement strategies based on a
proprietary, extensive study of consumer preferences we commissioned in 1999.
However, we may not correctly anticipate or identify trends in consumer
preferences, or we may identify them later than our competitors do. In
addition, any strategies we 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, we 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 we cannot decrease these costs significantly or
rapidly when we experience 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
our 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. 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, and we are 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, 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 our
ability 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 we operate,
these and other possible proposals could have a material adverse effect on us,
our financial condition, our results of operations, our cash flows and our
future prospects. 63




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Item 6. Exhibits and Reports on Form 8-K (a)
    
    Exhibits3.1
    
    Amended and Restated Articles of Incorporation of the Company, as amended
and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended April
30, 2003)3.2
    
    By-laws of the Company, as amended and restated as of February 18, 2004
(incorporated by reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.1
    
    See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and
Restated Articles of Incorporation, as amended, and By-laws, as amended,
defining the rights of holders of Class A and Class B common stock4.2
    
    Specimen of Class A common stock certificate (incorporated by reference
to Exhibit 4.2 to Amendment No. 3 to the Companys Registration Statement
on Form S-1 (Registration No. 33-42336) filed with the Commission on
October 7, 1991)4.3
    
    Rights Agreement, dated as of October 28, 1999, between Stewart
Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent (incorporated by reference to Exhibit 1 to the Companys Form 8-A
dated November 3, 1999)4.4
    
    Credit Agreement dated June 29, 2001 by and among the Company, Empresas
Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of
America, N.A., as Administrative Agent, Collateral Agent and as a Lender,
Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust
Company, as a Lender and the other Lenders party thereto from time to time
(incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit
Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1
to the Companys Current Report on Form 8-K dated May 1, 2003) and
Amendment No. 2 to the Credit Agreement dated February 18, 2004
(incorporated by reference to Exhibit 4.4 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.5
    
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named
therein and Firstar Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Form S-4 dated August 14, 2001)4.6
    
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by
reference to Exhibit 4.2 to the Companys Form S-4 dated August 14, 2001)10.1
    
    Separation Agreement by and between the Company and William E. Rowe dated
as of June 3, 2004 (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended April 30,
2004)10.2
    
    First Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Kenneth C. Budde10.3
    
    First Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Lawrence B. Hawkins10.4
    
    First Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Brent F. Heffron
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10.5
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Randall L. Stricklin10.6
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and G. Kenneth Stephens, Jr.10.7
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Michael K. Crane10.8
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Everett N. Kendrick12
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Financial Officer (included in Exhibit 31.1)32
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer and Chief Financial Officer(b)
    
    Reports on Form 8-K
 We filed a Form 8-K dated June 8, 2004, reporting under Item 7.
Financial Statements and Exhibits and Item 12. Results of Operations and
Financial Condition, the earnings release for the quarter ended April 30,
2004. We filed a Form 8-K dated July 26, 2004, reporting under Item 5. Other
Events, an update on the progress of the executive officers and directors
prearranged group stock trading plan. We filed a Form 8-K dated July 27, 2004, reporting under Item 5. Other
Events and Regulation FD Disclosure and Item 7. Financial Statements and
Exhibits, a letter to the Securities and Exchange Commission regarding the
conclusions on the application of FIN 46R. 65




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. STEWART ENTERPRISES, INC.September 10, 2004
    
    /s/ KENNETH C. BUDDEKenneth C. BuddeChief Executive Officer andChief Financial OfficerSeptember 10, 2004
    
    /s/ MICHAEL G. HYMELMichael G. HymelVice PresidentCorporate ControllerChief Accounting Officer
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##### Table of Contents



EXHIBIT INDEX 3.1
    
    Amended and Restated Articles of Incorporation of the Company, as amended
and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended April
30, 2003)3.2
    
    By-laws of the Company, as amended and restated as of February 18, 2004
(incorporated by reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.1
    
    See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and
Restated Articles of Incorporation, as amended, and By-laws, as amended,
defining the rights of holders of Class A and Class B common stock4.2
    
    Specimen of Class A common stock certificate (incorporated by reference
to Exhibit 4.2 to Amendment No. 3 to the Companys Registration Statement
on Form S-1 (Registration No. 33-42336) filed with the Commission on
October 7, 1991)4.3
    
    Rights Agreement, dated as of October 28, 1999, between Stewart
Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent (incorporated by reference to Exhibit 1 to the Companys Form 8-A
dated November 3, 1999)4.4
    
    Credit Agreement dated June 29, 2001 by and among the Company, Empresas
Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of
America, N.A., as Administrative Agent, Collateral Agent and as a Lender,
Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust
Company, as a Lender and the other Lenders party thereto from time to time
(incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit
Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1
to the Companys Current Report on Form 8-K dated May 1, 2003) and
Amendment No. 2 to the Credit Agreement dated February 18, 2004
(incorporated by reference to Exhibit 4.4 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.5
    
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named
therein and Firstar Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Form S-4 dated August 14, 2001)4.6
    
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by
reference to Exhibit 4.2 to the Companys Form S-4 dated August 14, 2001)10.1
    
    Separation Agreement by and between the Company and William E. Rowe dated
as of June 3, 2004 (incorporated by reference to Exhibit 10.1 to the
Companys Quarterly Report on Form 10-Q for the quarter ended April 30,
2004)10.2
    
    First Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Kenneth C. Budde10.3
    
    First Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Lawrence B. Hawkins10.4
    
    First Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Brent F. Heffron




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10.5
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Randall L. Stricklin10.6
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and G. Kenneth Stephens, Jr.10.7
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Michael K. Crane10.8
    
    Third Supplement to Appendix A to Employment Agreement dated as of April
21, 2004 between the Company and Everett N. Kendrick12
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Financial Officer (included in Exhibit 31.1)32
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer and Chief Financial Officer