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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q þ
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of
1934
 For the quarterly period ended January 31, 2005
OR
 o
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition
period from  to
   Commission File Number: 1-15449   STEWART ENTERPRISES, INC.  LOUISIANA
(State or other jurisdiction of incorporation or organization)
    
    72-0693290
(I.R.S. Employer Identification No.)
 1333 South Clearview Parkway
Jefferson, Louisiana
(Address of principal executive offices)
    
    70121
(Zip Code)
   Registrants telephone number, including area code: (504) 729-1400   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
þ 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
þ 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 March 1, 2005, was 106,258,424 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 January 31, 2005 and 2004
    
    
    3Condensed Consolidated Balance Sheets 
January 31, 2005 and October 31, 2004
    
    
    4Condensed Consolidated Statement of Shareholders Equity 
Three Months Ended January 31, 2005
    
    
    6Condensed Consolidated Statements of Cash Flows 
Three Months Ended January 31, 2005 and 2004
    
    
    7Notes to Condensed Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    43Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    50Item 4. Controls and Procedures
    
    
    52Part II. Other InformationItem 1. Legal Proceedings
    
    
    52Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    53Item 5. Other Information
    
    
    53Item 6. Exhibits
    
    
    61Signatures
    
    
    63Calculation of Ratio Earnings to Fixed ChargesCertification of President & CEO Pursuant to Section 302Certification of EVP & CFO Pursuant to Section 302Certifications 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 January 31,2005
    
    
    2004Revenues:Funeral
    
    $
    71,623
    
    
    $
    74,774Cemetery
    
    
    54,856
    
    
    
    56,015126,479
    
    
    
    130,789Costs and expenses:Funeral
    
    
    51,413
    
    
    
    51,936Cemetery
    
    
    43,172
    
    
    
    41,84894,585
    
    
    
    93,784Gross profit
    
    
    31,894
    
    
    
    37,005Corporate general and administrative expenses
    
    
    (4,216
    )
    
    
    (3,913
    )Separation charges (Note 12)
    
    
    
    
    
    
    (1,993
    )Gains on dispositions net of impairment losses (Note 11)
    
    
    331
    
    
    
    603Other operating income, net
    
    
    244
    
    
    
    439Operating earnings
    
    
    28,253
    
    
    
    32,141Interest expense
    
    
    (10,376
    )
    
    
    (12,521
    )Loss on early extinguishment of debt (Note 13)
    
    
    (2,651
    )
    
    
    Investment and other income (expense), net
    
    
    108
    
    
    
    (1,125
    )Earnings from continuing operations before income taxes
    
    
    15,334
    
    
    
    18,495Income taxes
    
    
    5,989
    
    
    
    7,028Earnings from continuing operations
    
    
    9,345
    
    
    
    11,467Discontinued operations (Note 11):Earnings from discontinued operations before income taxes
    
    
    3
    
    
    
    420Income taxes
    
    
    138
    
    
    
    159Earnings (loss) from discontinued operations
    
    
    (135
    )
    
    
    261Net earnings
    
    $
    9,210
    
    
    $
    11,728Basic earnings per common share:Earnings from continuing operations
    
    $
    .08
    
    
    $
    .11Earnings from discontinued operations
    
    
    
    
    
    
    Net earnings
    
    $
    .08
    
    
    $
    .11Diluted earnings per common share:Earnings from continuing operations
    
    $
    .08
    
    
    $
    .11Earnings from discontinued operations
    
    
    
    
    
    
    Net earnings
    
    $
    .08
    
    
    $
    .11Weighted average common shares outstanding (in thousands):Basic
    
    
    109,087
    
    
    
    107,878Diluted
    
    
    109,450
    
    
    
    108,098
 See accompanying notes to condensed consolidated financial statements. 3




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) January 31,
    
    
    October 31,ASSETS
    
    2005
    
    
    2004Current assets:Cash and cash equivalent investments
    
    $
    12,142
    
    
    $
    21,514Marketable securities
    
    
    1,286
    
    
    
    1,297Receivables, net of allowances
    
    
    64,262
    
    
    
    60,292Inventories
    
    
    37,836
    
    
    
    39,036Prepaid expenses
    
    
    4,321
    
    
    
    2,952Deferred income taxes, net
    
    
    4,308
    
    
    
    4,522Assets held for sale (Note 11)
    
    
    
    
    
    
    16,382Total current assets
    
    
    124,155
    
    
    
    145,995Receivables due beyond one year, net of allowances
    
    
    77,802
    
    
    
    79,879Preneed funeral receivables and trust investments
    
    
    511,125
    
    
    
    503,386Preneed cemetery receivables and trust investments
    
    
    264,120
    
    
    
    257,253Goodwill
    
    
    404,550
    
    
    
    404,014Deferred charges
    
    
    254,101
    
    
    
    253,754Cemetery property, at cost
    
    
    371,027
    
    
    
    369,434Property and equipment, at cost:Land
    
    
    40,404
    
    
    
    39,383Buildings
    
    
    297,855
    
    
    
    290,748Equipment and other
    
    
    165,893
    
    
    
    162,383504,152
    
    
    
    492,514Less accumulated depreciation
    
    
    202,746
    
    
    
    195,830Net property and equipment
    
    
    301,406
    
    
    
    296,684Deferred income taxes, net
    
    
    39,005
    
    
    
    43,286Cemetery perpetual care trust investments
    
    
    215,785
    
    
    
    210,267Other assets
    
    
    1,408
    
    
    
    1,408Total assets
    
    $
    2,564,484
    
    
    $
    2,565,360
 (continued) 4




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) January 31,
    
    
    October 31,LIABILITIES AND SHAREHOLDERS EQUITY
    
    2005
    
    
    2004Current liabilities:Current maturities of long-term debt (Note 13)
    
    $
    2,197
    
    
    $
    1,725Accounts payable
    
    
    7,534
    
    
    
    9,075Accrued payroll
    
    
    8,704
    
    
    
    13,005Accrued insurance
    
    
    22,282
    
    
    
    21,430Accrued interest
    
    
    3,707
    
    
    
    11,315Other current liabilities
    
    
    9,905
    
    
    
    12,713Income taxes payable
    
    
    1,187
    
    
    
    130Liabilities associated with assets held for sale (Note 11)
    
    
    
    
    
    
    10,837Total current liabilities
    
    
    55,516
    
    
    
    80,230Long-term debt, less current maturities
    
    
    400,334
    
    
    
    415,080Deferred preneed funeral revenue
    
    
    149,229
    
    
    
    152,524Deferred preneed cemetery revenue
    
    
    284,573
    
    
    
    286,884Non-controlling interest in funeral and cemetery trusts
    
    
    643,925
    
    
    
    626,361Other long-term liabilities
    
    
    10,935
    
    
    
    11,130Total liabilities
    
    
    1,544,512
    
    
    
    1,572,209Commitments and contingencies
    
    
    
    
    
    
    Non-controlling interest in perpetual care trusts
    
    
    213,990
    
    
    
    208,893Shareholders 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
106,601,424 and 104,330,101 shares at January 31, 2005
and October 31, 2004, respectively
    
    
    106,601
    
    
    
    104,330Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at January 31, 2005 and October 31, 2004;
10 votes per share; convertible into an equal number of
Class A shares
    
    
    3,555
    
    
    
    3,555Additional paid-in capital
    
    
    684,693
    
    
    
    673,630Retained earnings
    
    
    12,508
    
    
    
    3,298Unearned restricted stock compensation
    
    
    (1,235
    )
    
    
    (222
    )Accumulated other comprehensive loss:Derivative financial instrument losses
    
    
    (140
    )
    
    
    (333
    )Total accumulated other comprehensive losses
    
    
    (140
    )
    
    
    (333
    )Total shareholders equity
    
    
    805,982
    
    
    
    784,258Total liabilities and shareholders equity
    
    $
    2,564,484
    
    
    $
    2,565,360
 See accompanying notes to condensed consolidated financial statements. 5




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts) Unearned
    
    
    DerivativeAdditional
    
    
    
    
    
    
    Restricted
    
    
    Financial
    
    
    TotalCommon
    
    
    Paid-In
    
    
    Retained
    
    
    Stock
    
    
    Instrument
    
    
    ShareholdersStock(1)
    
    
    Capital
    
    
    Earnings
    
    
    Compensation
    
    
    Gains (Losses)
    
    
    EquityBalance October 31, 2004
    
    $
    107,885
    
    
    $
    673,630
    
    
    $
    3,298
    
    
    $
    (222
    )
    
    $
    (333
    )
    
    $
    784,258Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    9,210
    
    
    
    
    
    
    
    
    
    
    
    9,210Other comprehensive income:Unrealized appreciation on derivative
instrument designated and qualifying as
a cash flow hedging instrument, net of
deferred tax expense of ($118)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    193Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193
    
    
    
    193Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    9,210
    
    
    
    
    
    
    
    193
    
    
    
    9,403Restricted stock activity
    
    
    166
    
    
    
    992
    
    
    
    
    
    
    
    (1,013
    )
    
    
    
    
    
    
    145Issuance of common stock
    
    
    37
    
    
    
    183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220Stock options exercised
    
    
    2,068
    
    
    
    8,131
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,199Tax benefit associated with stock options
exercised
    
    
    
    
    
    
    1,757
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,757Balance January 31, 2005
    
    $
    110,156
    
    
    $
    684,693
    
    
    $
    12,508
    
    
    $
    (1,235
    )
    
    $
    (140
    )
    
    $
    805,982
   (1) Amount includes 106,601 and 104,330 shares (in thousands) of Class A common stock
with a stated value of $1 per share as of January 31, 2005 and October 31, 2004, respectively,
and includes 3,555 shares (in thousands) of Class B common stock. See accompanying notes to condensed consolidated financial statements. 6




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED
STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts) Three Months Ended January 31,2005
    
    
    2004Cash flows from operating activities:Net earnings
    
    $
    9,210
    
    
    $
    11,728Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:Gains on dispositions net of impairment losses
    
    
    (495
    )
    
    
    (603
    )Loss on early extinguishment of debt
    
    
    2,651
    
    
    
    Depreciation and amortization
    
    
    11,687
    
    
    
    12,883Provision for doubtful accounts
    
    
    1,920
    
    
    
    2,315Net loss realized on marketable securities
    
    
    
    
    
    
    1,204Provision for deferred income taxes
    
    
    4,048
    
    
    
    3,764Other
    
    
    60
    
    
    
    (85
    )Changes in assets and liabilities:(Increase) decrease in other receivables
    
    
    (1,246
    )
    
    
    29,742Decrease in deferred charges
    
    
    945
    
    
    
    1,732Decrease in inventories and cemetery property
    
    
    375
    
    
    
    775Decrease in accounts payable and accrued expenses
    
    
    (14,245
    )
    
    
    (9,379
    )Change in prearranged activity
    
    
    (8,286
    )
    
    
    (9,953
    )Prearranged acquisition costs
    
    
    (7,170
    )
    
    
    (7,437
    )Decrease in other
    
    
    (1,327
    )
    
    
    (695
    )Net cash provided by (used in) operating activities
    
    
    (1,873
    )
    
    
    35,991Cash flows from investing activities:Proceeds from sales of marketable securities
    
    
    16
    
    
    
    Proceeds from sale of assets, net
    
    
    5,449
    
    
    
    859Additions to property and equipment
    
    
    (6,512
    )
    
    
    (4,806
    )Other
    
    
    28
    
    
    
    (42
    )Net cash used in investing activities
    
    
    (1,019
    )
    
    
    (3,989
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    110,000
    
    
    
    Repayments of long-term debt
    
    
    (124,274
    )
    
    
    (38,791
    )Debt issue costs
    
    
    (1,681
    )
    
    
    Issuance of common stock
    
    
    10,419
    
    
    
    3,127Purchase and retirement of common stock
    
    
    
    
    
    
    (321
    )Other
    
    
    (944
    )
    
    
    Net cash used in financing activities
    
    
    (6,480
    )
    
    
    (35,985
    )Net decrease in cash
    
    
    (9,372
    )
    
    
    (3,983
    )Cash and cash equivalents, beginning of period
    
    
    21,514
    
    
    
    18,585Cash and cash equivalents, end of period
    
    $
    12,142
    
    
    $
    14,602Supplemental cash flow information:Cash paid (received) during the period for:Income taxes
    
    $
    700
    
    
    $
    (33,100
    )Interest
    
    $
    17,300
    
    
    $
    19,000
 See accompanying notes to condensed consolidated financial statements. 7




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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 January 31, 2005,
the Company owned and operated 236 funeral homes and 147 cemeteries in 27 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. (c) Interim Disclosures The information as of January 31, 2005, and for the three months ended January 31, 2005 and
2004, 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, 2004. 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, 2004. The results of operations for the three months ended January 31, 2005 are not necessarily
indicative of the results to be expected for the fiscal year ending October 31, 2005. (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 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(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) 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. (g) 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. The direct selling costs that relate to the Companys preneed funeral and cemetery merchandise
and services contracts are included in deferred charges until the underlying products and services
are delivered. When the underlying products and services are delivered and recognized as revenue,
the associated direct selling costs are amortized in expense in the consolidated statement of
earnings and included in depreciation and amortization in the consolidated statement of cash flows. (h) Long-lived Assets The Company reviews for continued appropriateness the carrying value of its long-lived assets
whenever events and circumstances indicate a potential impairment. This review is based on its
projections of anticipated undiscounted future cash flows. If indicators of impairment were
present, the Company would evaluate the undiscounted future cash flows estimated to be generated by
those assets compared to the carrying amount of those assets. The net carrying value of assets not
recoverable would be reduced to fair value. While the Company believes that its estimates of
undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and
comparable sales values could materially affect its evaluations. 9




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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) (i) Goodwill SFAS No. 142, Goodwill and Other Intangibles, provides that goodwill is no longer amortized,
but must be tested annually 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 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 performed its annual goodwill impairment
review during the fourth quarter of 2004 and determined that there was no impairment. Goodwill
increased $536 to $404,550 as of January 31, 2005 compared to $404,014 as of October 31, 2004, due
to changes in businesses held for sale. (j) Stock-Based Compensation At January 31, 2005, the Company had five stock-based compensation plans, which are described
in more detail in Note 22 to the consolidated financial statements of the Companys Annual Report
on Form 10-K for the fiscal year ended October 31, 2004. 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 2005 and 2004 is reflected in earnings and amounted to $145 and $115
for the three months ended January 31, 2005 and 2004, respectively. See Note 1(o) for further
discussion on the Companys restricted stock. The FASB issued SFAS No. 123R in December 2004,
which is effective for the Company in the fourth quarter of fiscal year 2005. The Company has
evaluated the impact of its adoption on its financial statements. See Note 2 for additional
information. The following table illustrates the effect on net earnings and net earnings per share
if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based
employee compensation. Three Months EndedJanuary 31,2005
    
    
    2004Net earnings
    
    $
    9,210
    
    
    $
    11,728Stock-based employee compensation expense
included in reported net earnings, net of tax
    
    
    90
    
    
    
    71Total stock-based employee compensation expense
determined under fair value-based method,
net of tax
    
    
    (528
    )
    
    
    (417
    )Pro forma net earnings
    
    $
    8,772
    
    
    $
    11,382Net earnings per common share:Basic  as reported
    
    $
    .08
    
    
    $
    .11Basic  pro forma
    
    $
    .08
    
    
    $
    .11Diluted  as reported
    
    $
    .08
    
    
    $
    .11Diluted  pro forma
    
    $
    .08
    
    
    $
    .11
 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) (k) 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. 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 generally range from 70 percent to 90 percent of
each installment received. Amounts deposited 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. The Company applies customer payments
to pay premiums on the insurance 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. (l) 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. Commissions and other direct costs that vary with and are primarily related to the acquisition
of new prearranged cemetery service sales and prearranged cemetery 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 cemetery merchandise
and services are expensed in the period in which incurred. 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) 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. With respect to the preneed sale of cemetery
merchandise, the Company is generally required to place in trust 30 percent to 50 percent of each
installment received. With respect to the preneed sale of cemetery services, the Company is
generally required to place in trust 70 percent to 90 percent of each installment received. The
sale of caskets is treated in some jurisdictions in the same manner as the sale of cemetery
merchandise and in some jurisdictions as the sale of funeral services for these purposes. The
Company defers all dividends and interest earned and net capital gains and losses realized by
preneed cemetery merchandise and services trust or escrow accounts until the underlying merchandise
or service is delivered. Principal and earnings are withdrawn only as the merchandise or 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. Revenue related to the preneed sale of
cemetery property prior to its construction is recognized on a percentage of completion method of
accounting as construction occurs. 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 perpetuity. As payments are
received, the Company generally funds the perpetual care trust in the same proportion as the
payment bears to the contract amount. For example, if the Company receives 20 percent of the
contract price, it places in trust 20 percent of the total amount to be placed in trust for that
contract. 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. (m) Allowance for Doubtful Accounts The Company establishes a reserve based on a range of percentages applied to accounts
receivable aging categories. These percentages are based on historical collection and write-off
experience. (n) 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. As of January 31, 2005 and October 31,
2004, the Companys deferred tax asset valuation allowance was $9,487 and $9,556, respectively. 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) 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. The Company used this refund to reduce its
outstanding debt balance. (o) 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 allowing 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 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. These repurchases reduce the
weighted average number of common shares outstanding during each period. Since the inception of
the program through January 31, 2005, the Company had repurchased and retired 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 January 31, 2005 and October 31, 2004
and 27,972 shares were withheld to cover the tax obligation related to the vested restricted stock
as of October 31, 2004). The restricted stock vests equally at October 31, 2004, October 31, 2005
and October 31, 2006. On November 18, 2004, the Company granted 72,000 shares of restricted stock
to an executive officer, which vests 25 percent on November 18, 2005, 25 percent on November 18,
2006 and 50 percent on November 18, 2007. On December 20, 2004, the Company granted 58,000 shares
of restricted stock to executive officers, which vests 25 percent on December 20, 2005, 25 percent
on December 20, 2006 and 50 percent on December 20, 2007. On December 20, 2004, the Company also
granted 36,500 shares of restricted stock to executive officers, which vests equally on December
20, 2005, 2006, 2007 and 2008. Once granted, 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 used to calculate basic earnings per common share until the shares vest. (p) 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, 13




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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) the Company accounts for its sole derivative instrument, a $50,000 interest rate swap, as a cash
flow hedge whereby the fair value of the interest rate swap is reflected as a liability in the
accompanying consolidated balance sheet with the offset recorded to other comprehensive income. As
of January 31, 2005, the fair value of the interest rate swap, net of taxes, was $140. (q) Insurance Loss Reserves The Company purchases comprehensive general liability, automobile liability and workers
compensation insurance coverages structured within a large deductible/self-insured retention
premium rating program. This program results in the Company being primarily self-insured for
claims and associated costs and losses covered by these policies. Historical insurance industry
experience indicates some degree of inherent variability in assessing the ultimate amount of losses
associated with the types of claims covered by the program. This is especially true due to the
extended period of time that transpires between when the claim might occur and the full settlement
of such claim, often many years. The Company continually evaluates the receivables due from its
insurance carriers as well as loss estimates associated with claims and losses related to these
insurance coverages with information obtained by its primary insurer. With respect to health insurance, the Company purchases individual and aggregate stop loss
coverage with a large deductible. This program results in the Company being primarily self-insured
for claims and associated costs up to the amount of the deductible, with claims in excess of the
deductible amount being covered by insurance. Expected claims are based on actuarial estimates;
actual claims may differ from those estimates. The Company continually evaluates its claims
experience related to this coverage with information obtained by its insurer. Assumptions used in preparing these estimates are based on factors such as claim settlement
patterns, claim development trends, claim frequency and severity patterns, inflationary trends and
data reasonableness. Together these factors will generally affect the analysis and determination
of the best estimate of the projected ultimate claim losses. The results of these evaluations are
used to both analyze and adjust the Companys insurance loss reserves. The estimated reserves on the uninsured legal and employment-related claims are established by
management based upon the recommendations of professionals who perform a review of known claims.
These reserves include the estimated settlement costs. Although management believes estimated
reserves related to uninsured claims are adequately recorded, it is possible that actual results
could significantly differ from the recorded reserves. (r) Reclassifications Certain reclassifications have been made to the 2004 condensed consolidated statements of
earnings in order for these periods to be comparable. These reclassifications had no effect on net
earnings or shareholders equity. 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 (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 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 services 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 services 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 services trusts and cemetery perpetual care trusts within investment and
other income, net (with a corresponding debit to the related trust asset). The Company then
recognizes a corresponding expense within investment and 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 cemetery 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 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) 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 earnings. In the
case of preneed funeral and cemetery merchandise and services 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 permitted to be legally withdrawn by the
Company (with a corresponding debit to non-controlling interest in cemetery perpetual care trusts).
These earnings and related funds are intended to defray cemetery maintenance costs. 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 investment and 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 services
trusts are recognized as revenue when the related merchandise and services are delivered, and
cemetery perpetual care trust earnings are recognized as revenue as they are realized in the trust
and permitted to be legally withdrawn by the Company. 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) Other Changes In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock
Based Compensation. The revision establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or services, particularly transactions
in which an entity obtains employee services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award. That cost is
to be recognized over the period during which the employee is required to provide service in
exchange for the award. Changes in fair value during the requisite service period are to be
recognized as compensation cost over that period. In addition, the revised statement amends SFAS
No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing
cash flow rather than as a reduction of taxes paid. The provisions of
the revised statement are effective for financial statements issued for the first interim or annual reporting
period beginning after June 15, 2005, with early adoption encouraged. Based on current options and
restricted stock outstanding, selection of the modified prospective method and an implementation
date of August 1, 2005, the Company would expect an impact of approximately $.01 per share in
fiscal year 2005 and $.01 per share in fiscal year 2006. Most of the 2005 expense relates to
restricted stock, which is already currently expensed in the Companys consolidated statement of
earnings. 16




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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) In March 2004, the FASB issued Emerging Issues Task Force (EITF) 03-1, Impairment and Its
Application to Certain Investments. EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the FASB issued Staff
Position EITF 03-1-1, which delays the effective date until additional guidance is issued for the
application of the recognition and measurement provisions of EITF 03-1 to investments in securities
that are impaired. The Company is continuing to evaluate the impact of EITF 03-1. The amount of
other than temporary impairment to be recognized, if any, will be depend on market conditions,
managements intent and ability to hold investments until a forecasted recovery and the
finalization of the proposed guidance by the FASB. This pronouncement as it relates to the
Companys trusts will have no impact on net earnings. See Note 2(a) and Notes 3, 4 and 5. (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 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. 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 investment and
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 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) corresponding expense within investment and 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 or deferred preneed funeral revenue line items; there is no effect on net earnings. As of
April 30, 2004, the cumulative undistributed net trust investment earnings of the funeral
merchandise and services 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 or
included in deferred preneed funeral revenue, including realized trust earnings. 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 January 31, 2005 and October 31, 2004 are as follows: January 31, 2005
    
    
    October 31, 2004Trust assets
    
    $
    448,711
    
    
    $
    439,465Receivables from customers
    
    
    62,414
    
    
    
    63,921Preneed funeral receivables and trust investments
    
    $
    511,125
    
    
    $
    $503,386
 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 at the time of cancellation. If the fair market value of the trusts
were to decline below the estimated costs to deliver the underlying products and services, the
Company would record a charge to earnings to record a liability for the expected loss on the
delivery of contracts in the Companys backlog. Based upon this assessment, no loss amounts have
been required to be recognized as of January 31, 2005. 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 January 31, 2005 are detailed below. The adjusted cost basis of the funeral merchandise
and services trust assets below reflect an other than temporary decline in the trust assets of
approximately $77,563 as of January 31, 2005 from their original cost basis. The Company believes
the unrealized losses reflected below of $10,241 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) Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    63,492
    
    
    $
    
    
    
    $
    
    
    
    $
    63,492U.S. Government, agencies
and municipalities
    
    
    1,916
    
    
    
    100
    
    
    
    (32
    )
    
    
    1,984Corporate bonds
    
    
    22,230
    
    
    
    1,527
    
    
    
    (34
    )
    
    
    23,723Preferred stocks
    
    
    60,685
    
    
    
    1,763
    
    
    
    (293
    )
    
    
    62,155Common stocks
    
    
    237,948
    
    
    
    11,851
    
    
    
    (9,230
    )
    
    
    240,569Mutual funds
    
    
    31,358
    
    
    
    127
    
    
    
    (652
    )
    
    
    30,833Insurance contracts and other long-
term investments
    
    
    23,804
    
    
    
    301
    
    
    
    
    
    
    
    24,105Trust investments
    
    $
    441,433
    
    
    $
    15,669
    
    
    $
    (10,241
    )
    
    $
    446,861Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101.2
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,850Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    448,711
 The estimated maturities and market values of debt securities included above are as follows: January 31, 2005Due in one year or less
    
    $
    4,190Due in one to five years
    
    
    11,761Due in five to ten years
    
    
    9,357Thereafter
    
    
    399$
    25,707
 During the three months ended January 31, 2005, purchases and sales of available for sale
securities included in trust investments were $89,252 and $23,796, respectively. These
transactions resulted in realized gains and losses of $1,726 and $2,195, respectively. The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2004 are detailed below. The adjusted cost basis of the funeral
merchandise and services trust assets below reflect an other than temporary decline in the trust
assets of approximately $76,135 as of October 31, 2004 from their original cost basis. The Company
believes the unrealized losses reflected below of $13,735 related to trust investments are
temporary in nature. 19




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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) Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    133,205
    
    
    $
    9
    
    
    $
    
    
    
    $
    133,214U.S. Government, agencies
and municipalities
    
    
    1,971
    
    
    
    115
    
    
    
    (26
    )
    
    
    2,060Corporate bonds
    
    
    22,826
    
    
    
    1,938
    
    
    
    
    
    
    
    24,764Preferred stocks
    
    
    62,947
    
    
    
    1,703
    
    
    
    (422
    )
    
    
    64,228Common stocks
    
    
    188,298
    
    
    
    3,692
    
    
    
    (13,214
    )
    
    
    178,776Mutual funds
    
    
    12,431
    
    
    
    322
    
    
    
    (73
    )
    
    
    12,680Insurance contracts and other long-
term investments
    
    
    23,631
    
    
    
    298
    
    
    
    
    
    
    
    23,929Trust investments
    
    $
    445,309
    
    
    $
    8,077
    
    
    $
    (13,735
    )
    
    $
    439,651Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98.7
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,002Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,188
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    439,465
 Deferred Preneed Funeral Revenue Deferred preneed funeral revenue represents future funeral contract revenues. In addition to
amounts receivable from customers and amounts not required to be trusted, 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 funeral
and cemetery trusts. 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 January 31, 2005 and
October 31, 2004 was $357,621 and $352,092, respectively, of which $490 related to the Companys
assets held for sale as of October 31, 2004. 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 Merchandise and Service Activities The Company sells price-guaranteed preneed cemetery contracts providing for merchandise or
services to be delivered 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 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 Merchandise and Service Activities(Continued) 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 investment and other income, net (with a corresponding debit to preneed cemetery
receivables and trust investments). The Company recognizes a corresponding expense within
investment and 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 or deferred preneed cemetery revenue line items; there is no effect on net earnings. As
of April 30, 2004, the cumulative undistributed net trust investment earnings of the cemetery
merchandise and services 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 or
included in deferred preneed cemetery revenue, including realized trust earnings. 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 merchandise or services are needed. The
receivables related to the sale of preneed property interment rights are included in current and
long-term receivables. The components of preneed cemetery receivables and trust investments in the
condensed consolidated balance sheet as of January 31, 2005 and October 31, 2004 are as follows: January 31, 2005
    
    
    October 31, 2004Trust assets
    
    $
    202,132
    
    
    $
    193,185Receivables from customers
    
    
    61,988
    
    
    
    64,068Preneed cemetery receivables and trust investments
    
    $
    264,120
    
    
    $
    257,253
 The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of January 31, 2005 are detailed below. The adjusted cost basis of the cemetery
merchandise and services trust assets below reflect an other than temporary decline in the trust
assets of approximately $42,284 as of January 31, 2005 from their original cost basis. The Company
believes the unrealized losses reflected below of $4,691 related to trust investments are temporary
in nature. 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 Merchandise and Service Activities(Continued) Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    38,672
    
    
    $
    1
    
    
    $
    
    
    
    $
    38,673U.S. Government, agencies
and municipalities
    
    
    1,050
    
    
    
    14
    
    
    
    (10
    )
    
    
    1,054Corporate bonds
    
    
    11,361
    
    
    
    763
    
    
    
    (5
    )
    
    
    12,119Preferred stocks
    
    
    27,016
    
    
    
    907
    
    
    
    (136
    )
    
    
    27,787Common stocks
    
    
    105,819
    
    
    
    6,653
    
    
    
    (4,326
    )
    
    
    108,146Mutual funds
    
    
    13,023
    
    
    
    49
    
    
    
    (214
    )
    
    
    12,858Insurance contracts and other long-term
investments
    
    
    569
    
    
    
    2
    
    
    
    
    
    
    
    571Trust investments
    
    $
    197,510
    
    
    $
    8,389
    
    
    $
    (4,691
    )
    
    $
    201,208Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    101.9
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    924Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    202,132
 The estimated maturities and market values of debt securities included above are as follows: January 31, 2005Due in one year or less
    
    $
    2,353Due in one to five years
    
    
    6,034Due in five to ten years
    
    
    4,180Thereafter
    
    
    606$
    13,173
 During the three months ended January 31, 2005, purchases and sales of available for sale
securities included in trust investments were $24,378 and $10,419, respectively. These
transactions resulted in realized gains and losses of $800 and $939, respectively. The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery
merchandise and services trust assets below reflect an other than temporary decline in the trust
assets of approximately $42,537 as of October 31, 2004 from their original cost basis. The Company
believes the unrealized losses reflected below of $6,098 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) (4) Preneed Cemetery Merchandise and Service Activities(Continued) Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    50,646
    
    
    $
    4
    
    
    $
    
    
    
    $
    50,650U.S. Government, agencies
and municipalities
    
    
    1,050
    
    
    
    21
    
    
    
    (4
    )
    
    
    1,067Corporate bonds
    
    
    10,690
    
    
    
    1,086
    
    
    
    
    
    
    
    11,776Preferred stocks
    
    
    24,287
    
    
    
    869
    
    
    
    (158
    )
    
    
    24,998Common stocks
    
    
    104,788
    
    
    
    2,482
    
    
    
    (5,934
    )
    
    
    101,336Mutual funds
    
    
    3,774
    
    
    
    70
    
    
    
    (2
    )
    
    
    3,842Insurance contracts and other long-term
investments
    
    
    569
    
    
    
    
    
    
    
    
    
    
    
    569Trust investments
    
    $
    195,804
    
    
    $
    4,532
    
    
    $
    (6,098
    )
    
    $
    194,238Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.2
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    956Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,009
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    193,185
 Deferred Preneed Cemetery Revenue Deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized
upon delivery of merchandise or performance of services. In addition to the amounts receivable
from customers and amounts not required to be trusted, this includes distributed and distributable
trust investment earnings associated with unperformed preneed cemetery services or undelivered
preneed cemetery merchandise 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. (5) Cemetery Interment Rights and Perpetual Care Trusts The Company sells price-guaranteed preneed cemetery contracts providing for property interment
rights. 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. The Company is required by state law to pay
into cemetery 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
cemetery 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. 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) (5) Cemetery Interment Rights and Perpetual Care Trusts(Continued) Beginning April 30, 2004, the Company recognizes realized earnings of these trusts within
investment and other income, net (with a corresponding debit to cemetery perpetual care trust
investments). The Company recognizes a corresponding expense within investment and 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 earnings. Earnings realized from these cemetery perpetual care trust investments that the Company is
legally permitted to withdraw 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 $1,130 and $2,397 for the three months ended January
31, 2005 and 2004. The cost and market values of the trust investments held by the cemetery perpetual care trusts
at January 31, 2005 are detailed below. The adjusted cost basis of the cemetery perpetual care
trusts below reflect an other than temporary decline in the trust assets of $30,134 as of January
31, 2005 from their original cost basis. The Company believes the unrealized losses reflected
below of $3,833 related to trust investments are temporary in nature. Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    32,490
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    32,488U.S. Government, agencies
and municipalities
    
    
    2,991
    
    
    
    245
    
    
    
    (114
    )
    
    
    3,122Corporate bonds
    
    
    19,272
    
    
    
    2,494
    
    
    
    (27
    )
    
    
    21,739Preferred stocks
    
    
    63,176
    
    
    
    2,369
    
    
    
    (110
    )
    
    
    65,435Common stocks
    
    
    79,044
    
    
    
    10,025
    
    
    
    (3,527
    )
    
    
    85,542Mutual funds
    
    
    5,201
    
    
    
    192
    
    
    
    (50
    )
    
    
    5,343Insurance contracts and other long-term
investments
    
    
    944
    
    
    
    68
    
    
    
    (3
    )
    
    
    1,009Trust investments
    
    $
    203,118
    
    
    $
    15,393
    
    
    $
    (3,833
    )
    
    $
    214,678Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    105.7
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,107Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    215,785
 The estimated maturities and market values of debt securities included above are as follows: January 31, 2005Due in one year or less
    
    $
    2,136Due in one to five years
    
    
    5,546Due in five to ten years
    
    
    15,546Thereafter
    
    
    1,633$
    24,861
 During the three months ended January 31, 2005, purchases and sales of available for sale
securities were $24,468 and $19,617, respectively. These transactions resulted in realized gains
and losses of $1,058 and $935, respectively. 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) (5) Cemetery Interment Rights and Perpetual Care Trusts(Continued) The cost and market values of the trust investments held by the cemetery perpetual care trusts
as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery perpetual care
trusts below reflect an other than temporary decline in the trust assets of $30,524 as of October
31, 2004 from their original cost basis. The Company believes the unrealized losses reflected
below of $6,017 related to trust investments are temporary in nature. Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    29,154
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    29,151U.S. Government, agencies
and municipalities
    
    
    3,173
    
    
    
    62
    
    
    
    (97
    )
    
    
    3,138Corporate bonds
    
    
    19,368
    
    
    
    2,731
    
    
    
    (23
    )
    
    
    22,076Preferred stocks
    
    
    65,176
    
    
    
    2,571
    
    
    
    (46
    )
    
    
    67,701Common stocks
    
    
    78,531
    
    
    
    8,406
    
    
    
    (5,797
    )
    
    
    81,140Mutual funds
    
    
    5,072
    
    
    
    193
    
    
    
    (51
    )
    
    
    5,214Insurance contracts and other long-term
investments
    
    
    841
    
    
    
    43
    
    
    
    
    
    
    
    884Trust investments
    
    $
    201,315
    
    
    $
    14,006
    
    
    $
    (6,017
    )
    
    $
    209,304Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104.0
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    963Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    210,267
 (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 services 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 services 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 services trusts, and therefore, their interests in these
trusts represent a non-controlling interest in subsidiaries. For additional information, see Note
2(a). 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 January 31, 2005 are as follows: Non-controllingNon-controlling Interest
    
    
   
    Interest inPreneed
    
    
    Preneed
    
    
    
    
    
    
    PerpetualFuneral
    
    
    Cemetery
    
    
    Total
    
    
    Care TrustsTrust assets at market value
    
    $
    448,711
    
    
    $
    202,132
    
    
    $
    650,843
    
    
    $
    215,785Less:Pending withdrawals
    
    
    (7,191
    )
    
    
    (2,844
    )
    
    
    (10,035
    )
    
    
    (2,339
    )Pending deposits
    
    
    1,680
    
    
    
    1,437
    
    
    
    3,117
    
    
    
    544Non-controlling interest
    
    $
    443,200
    
    
    $
    200,725
    
    
    $
    643,925
    
    
    $
    213,990
 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) (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care
Trusts(Continued) The components of non-controlling interest in funeral and cemetery trusts and non-controlling
interest in perpetual care trusts at October 31, 2004 are as follows: Non-controllingNon-controlling Interest
    
    
    Interest inPreneed
    
    
    Preneed
    
    
    
    
    
    
    PerpetualFuneral
    
    
    Cemetery
    
    
    Total
    
    
    Care TrustsTrust assets at market value
    
    $
    439,465
    
    
    $
    193,185
    
    
    $
    632,650
    
    
    $
    210,267Less:Pending withdrawals
    
    
    (6,847
    )
    
    
    (2,797
    )
    
    
    (9,644
    )
    
    
    (1,951
    )Pending deposits
    
    
    1,788
    
    
    
    1,567
    
    
    
    3,355
    
    
    
    577Non-controlling interest
    
    $
    434,406
    
    
    $
    191,955
    
    
    $
    626,361
    
    
    $
    208,893
 Investment and other income, net The components of investment and other income, net in the condensed consolidated statement of
earnings for the three months ended January 31, 2005 are detailed below. Three Months EndedJanuary 31, 2005Non-controlling interest:Realized gains
    
    $
    3,584Realized losses
    
    
    (4,069
    )Interest income, dividend and other ordinary income
    
    
    6,851Trust expenses and income taxes
    
    
    (2,864
    )Net trust investment income
    
    
    3,502Interest expense related to non-controlling interest in funeral
and cemetery trust investments
    
    
    (2,013
    )Interest expense related to non-controlling interest in perpetual
care trust investments
    
    
    (1,489
    )Total non-controlling interest
    
    
    Investment and other income, net (1)
    
    
    108Total investment and other income, net
    
    $
    108
   (1) Investment and other income, net for the three months ended January 31, 2005
consists of interest income primarily on the Companys cash, cash equivalents and marketable
securities not held in trust. 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) (7) Commitments and Contingencies Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated
and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961; In the Superior Court
for the State of California for the County of Los Angeles, Central District. This purported class
action was filed on February 17, 2005 on behalf of a nationwide class defined to include all
persons, entities and organizations who purchased funeral goods and/or services in the United
States from defendants at any time on or after February 17, 2001. The suit names the Company and a
number of its Southern California affiliates as defendants and also seeks to assert claims against
a class of all entities located anywhere in the United States whose ultimate parent corporation has
been the Company at any time on or after February 17, 2001. The plaintiffs allege that defendants failed to disclose that the prices charged by defendants
for certain goods and services exceeded what defendants paid to third parties for those same goods
and services and that such failure (i) violated provisions of the Federal Trade Commissions
Funeral Rule that require a funeral home to disclose, if true, that it marks up the price of
certain items purchased from third parties on behalf of customers on a cash advance or
accommodation basis, (ii) violated a provision of Californias Business and Professions Code that
prohibits unlawful, unfair or fraudulent business acts or practices and unfair, deceptive, untrue
or misleading advertising, (iii) constituted unfair, unlawful and fraudulent business practices,
(iv) resulted in unjust enrichment, and (v) constituted a civil conspiracy among the defendants to
commit acts of unfair competition. The plaintiffs seek restitution damages, disgorgement, interest
and attorneys fees. The Company was notified of the complaint only recently and has had limited
time to understand or evaluate it. Based on its preliminary analysis, the Company believes the
complaint is meritless and intends to aggressively defend itself. However, the ultimate outcome of
the matter cannot be determined at this time. 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. 27




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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 Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    DataThree Months Ended January 31, 2005Earnings from continuing operations
    
    $
    9,345Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    9,345
    
    
    
    109,087
    
    
    $
    .08Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    363Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    9,345
    
    
    
    109,450
    
    
    $
    .08
 Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    DataThree Months Ended January 31, 2004Earnings from continuing operations
    
    $
    11,467Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    11,467
    
    
    
    107,878
    
    
    $
    .11Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    220Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock options
assumed exercised and restricted stock
    
    $
    11,467
    
    
    
    108,098
    
    
    $
    .11
 Options to purchase 468,750 shares of common stock at a price of $7.03 per share were
outstanding during the three months ended January 31, 2005 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 November 18, 2011. Options to purchase 3,879,136 shares of common stock at prices ranging from $5.44 to $27.25
per share were outstanding during the three months ended January 31, 2004 but were not included in
the computation of diluted earnings per share because the exercise prices were greater than the
average market price of the common shares. 28




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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 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 sold that meet the criteria in SFAS No. 144 are reported in the discontinued
operations section of the consolidated 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(1)
    
    
    TotalsRevenues from external customers:Three months ended January 31,2005
    
    $
    71,623
    
    
    
    54,856
    
    
    
    
    
    
    $
    126,4792004
    
    $
    74,774
    
    
    
    56,015
    
    
    
    
    
    
    $
    130,789Gross profit:Three months ended January 31,2005
    
    $
    20,210
    
    
    
    11,684
    
    
    
    
    
    
    $
    31,8942004
    
    $
    22,838
    
    
    
    14,167
    
    
    
    
    
    
    $
    37,005Goodwill:January 31, 2005
    
    $
    319,316
    
    
    
    85,234
    
    
    
    
    
    
    $
    404,550October 31, 2004
    
    $
    318,780
    
    
    
    85,234
    
    
    
    
    
    
    $
    404,014
   (1) Reconciling items consist of unallocated corporate assets. A reconciliation of total segment gross profit to total earnings from continuing operations
before income taxes for the three months ended January 31, 2005 and 2004 is as follows: Three Months EndedJanuary 31,2005
    
    
    2004Gross profit for reportable segments
    
    $
    31,894
    
    
    $
    37,005Corporate general and administrative expenses
    
    
    (4,216
    )
    
    
    (3,913
    )Separation charges
    
    
    
    
    
    
    (1,993
    )Gains on dispositions net of impairment losses
    
    
    331
    
    
    
    603Other operating income, net
    
    
    244
    
    
    
    439Interest expense
    
    
    (10,376
    )
    
    
    (12,521
    )Loss on early extinguishment of debt
    
    
    (2,651
    )
    
    
    Investment and other income (expense), net
    
    
    108
    
    
    
    (1,125
    )Earnings from continuing operations before income
taxes
    
    $
    15,334
    
    
    $
    18,495
 29




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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 The following tables present the condensed consolidating historical financial statements as of
January 31, 2005 and October 31, 2004 and for the three months ended January 31, 2005 and 2004, 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 January 31, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    66,050
    
    
    $
    5,573
    
    
    $
    
    
    
    $
    71,623Cemetery
    
    
    
    
    
    
    49,566
    
    
    
    5,290
    
    
    
    
    
    
    
    54,856
    
    
    
    115,616
    
    
    
    10,863
    
    
    
    
    
    
    
    126,479Costs and expenses:Funeral
    
    
    
    
    
    
    47,942
    
    
    
    3,471
    
    
    
    
    
    
    
    51,413Cemetery
    
    
    
    
    
    
    39,116
    
    
    
    4,056
    
    
    
    
    
    
    
    43,172
    
    
    
    87,058
    
    
    
    7,527
    
    
    
    
    
    
    
    94,585Gross profit
    
    
    
    
    
    
    28,558
    
    
    
    3,336
    
    
    
    
    
    
    
    31,894Corporate general and administrative
expenses
    
    
    (4,216
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,216
    )Gains on dispositions net of impairment
(losses)
    
    
    
    
    
    
    341
    
    
    
    (10
    )
    
    
    
    
    
    
    331Other operating income, net
    
    
    117
    
    
    
    44
    
    
    
    83
    
    
    
    
    
    
    
    244Operating earnings (loss)
    
    
    (4,099
    )
    
    
    28,943
    
    
    
    3,409
    
    
    
    
    
    
    
    28,253Interest income (expense)
    
    
    11,284
    
    
    
    (19,677
    )
    
    
    (1,983
    )
    
    
    
    
    
    
    (10,376
    )Loss on early extinguishment of debt
    
    
    (2,651
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,651
    )Investment and other income, net
    
    
    108
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    108Earnings from continuing
operations before income taxes
    
    
    4,642
    
    
    
    9,266
    
    
    
    1,426
    
    
    
    
    
    
    
    15,334Income taxes
    
    
    1,510
    
    
    
    3,600
    
    
    
    879
    
    
    
    
    
    
    
    5,989Earnings from continuing operations
    
    
    3,132
    
    
    
    5,666
    
    
    
    547
    
    
    
    
    
    
    
    9,345Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    7
    
    
    
    (4
    )
    
    
    
    
    
    
    3Income taxes
    
    
    
    
    
    
    138
    
    
    
    
    
    
    
    
    
    
    
    138Loss from discontinued operations
    
    
    
    
    
    
    (131
    )
    
    
    (4
    )
    
    
    
    
    
    
    (135
    )Net earnings before equity in
subsidiaries
    
    
    3,132
    
    
    
    5,535
    
    
    
    543
    
    
    
    
    
    
    
    9,210Equity in subsidiaries
    
    
    6,078
    
    
    
    
    
    
    
    
    
    
    
    (6,078
    )
    
    
    Net earnings
    
    
    9,210
    
    
    
    5,535
    
    
    
    543
    
    
    
    (6,078
    )
    
    
    9,210Other comprehensive income, net
    
    
    193
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    193Comprehensive income
    
    $
    9,403
    
    
    $
    5,535
    
    
    $
    543
    
    
    $
    (6,078
    )
    
    $
    9,403
 30




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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 January 31, 2004Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    69,426
    
    
    $
    5,348
    
    
    $
    
    
    
    $
    74,774Cemetery
    
    
    
    
    
    
    50,498
    
    
    
    5,517
    
    
    
    
    
    
    
    56,015
    
    
    
    119,924
    
    
    
    10,865
    
    
    
    
    
    
    
    130,789Costs and expenses:Funeral
    
    
    
    
    
    
    48,573
    
    
    
    3,363
    
    
    
    
    
    
    
    51,936Cemetery
    
    
    
    
    
    
    37,565
    
    
    
    4,283
    
    
    
    
    
    
    
    41,848
    
    
    
    86,138
    
    
    
    7,646
    
    
    
    
    
    
    
    93,784Gross profit
    
    
    
    
    
    
    33,786
    
    
    
    3,219
    
    
    
    
    
    
    
    37,005Corporate general and administrative
expenses
    
    
    (3,913
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (3,913
    )Separation charges
    
    
    (363
    )
    
    
    (1,614
    )
    
    
    (16
    )
    
    
    
    
    
    
    (1,993
    )Gains on dispositions net of impairment
losses
    
    
    
    
    
    
    
    
    
    
    603
    
    
    
    
    
    
    
    603Other operating income, net
    
    
    16
    
    
    
    358
    
    
    
    65
    
    
    
    
    
    
    
    439Operating earnings (loss)
    
    
    (4,260
    )
    
    
    32,530
    
    
    
    3,871
    
    
    
    
    
    
    
    32,141Interest income (expense)
    
    
    9,624
    
    
    
    (20,118
    )
    
    
    (2,027
    )
    
    
    
    
    
    
    (12,521
    )Investment and other income (expense),
net
    
    
    (1,125
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,125
    )Earnings from continuing operations
before income taxes
    
    
    4,239
    
    
    
    12,412
    
    
    
    1,844
    
    
    
    
    
    
    
    18,495Income taxes
    
    
    1,165
    
    
    
    4,717
    
    
    
    1,146
    
    
    
    
    
    
    
    7,028Earnings from continuing operations
    
    
    3,074
    
    
    
    7,695
    
    
    
    698
    
    
    
    
    
    
    
    11,467Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    449
    
    
    
    (29
    )
    
    
    
    
    
    
    420Income taxes
    
    
    
    
    
    
    159
    
    
    
    
    
    
    
    
    
    
    
    159Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    290
    
    
    
    (29
    )
    
    
    
    
    
    
    261Net earnings before equity in
subsidiaries
    
    
    3,074
    
    
    
    7,985
    
    
    
    669
    
    
    
    
    
    
    
    11,728Equity in subsidiaries
    
    
    8,654
    
    
    
    
    
    
    
    
    
    
    
    (8,654
    )
    
    
    Net earnings
    
    
    11,728
    
    
    
    7,985
    
    
    
    669
    
    
    
    (8,654
    )
    
    
    11,728Other comprehensive income, net
    
    
    1,339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339Comprehensive income
    
    $
    13,067
    
    
    $
    7,985
    
    
    $
    669
    
    
    $
    (8,654
    )
    
    $
    13,067
 31




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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 January 31, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    5,268
    
    
    $
    6,663
    
    
    $
    211
    
    
    $
    
    
    
    $
    12,142Marketable securities
    
    
    
    
    
    
    
    
    
    
    1,286
    
    
    
    
    
    
    
    1,286Receivables, net of allowances
    
    
    7,071
    
    
    
    42,363
    
    
    
    14,828
    
    
    
    
    
    
    
    64,262Inventories
    
    
    353
    
    
    
    30,527
    
    
    
    6,956
    
    
    
    
    
    
    
    37,836Prepaid expenses
    
    
    894
    
    
    
    3,415
    
    
    
    12
    
    
    
    
    
    
    
    4,321Deferred income taxes, net
    
    
    2,145
    
    
    
    2,163
    
    
    
    
    
    
    
    
    
    
    
    4,308Total current assets
    
    
    15,731
    
    
    
    85,131
    
    
    
    23,293
    
    
    
    
    
    
    
    124,155Receivables due beyond one year, net of
allowances
    
    
    70
    
    
    
    64,701
    
    
    
    13,031
    
    
    
    
    
    
    
    77,802Preneed funeral receivables and trust
investments
    
    
    
    
    
    
    499,314
    
    
    
    11,811
    
    
    
    
    
    
    
    511,125Preneed cemetery receivables and trust
investments
    
    
    
    
    
    
    235,018
    
    
    
    29,102
    
    
    
    
    
    
    
    264,120Goodwill
    
    
    
    
    
    
    366,957
    
    
    
    34,793
    
    
    
    2,800
    
    
    
    404,550Deferred charges
    
    
    3,741
    
    
    
    229,396
    
    
    
    20,964
    
    
    
    
    
    
    
    254,101Cemetery property, at cost
    
    
    
    
    
    
    346,380
    
    
    
    24,647
    
    
    
    
    
    
    
    371,027Property and equipment, at cost
    
    
    32,903
    
    
    
    430,855
    
    
    
    40,394
    
    
    
    
    
    
    
    504,152Less accumulated depreciation
    
    
    17,995
    
    
    
    172,440
    
    
    
    12,311
    
    
    
    
    
    
    
    202,746Net property and equipment
    
    
    14,908
    
    
    
    258,415
    
    
    
    28,083
    
    
    
    
    
    
    
    301,406Deferred income taxes, net
    
    
    12,807
    
    
    
    15,619
    
    
    
    10,813
    
    
    
    (234
    )
    
    
    39,005Investment in subsidiaries
    
    
    111,116
    
    
    
    
    
    
    
    
    
    
    
    (111,116
    )
    
    
    Cemetery perpetual care trust investments
    
    
    
    
    
    
    215,785
    
    
    
    
    
    
    
    
    
    
    
    215,785Other assets
    
    
    104
    
    
    
    1,304
    
    
    
    
    
    
    
    
    
    
    
    1,408Total assets
    
    $
    158,477
    
    
    $
    2,318,020
    
    
    $
    196,537
    
    
    $
    (108,550
    )
    
    $
    2,564,484LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    2,197
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    2,197Accounts payable
    
    
    630
    
    
    
    6,590
    
    
    
    314
    
    
    
    
    
    
    
    7,534Accrued expenses and other current
liabilities
    
    
    9,653
    
    
    
    31,140
    
    
    
    4,992
    
    
    
    
    
    
    
    45,785Total current liabilities
    
    
    12,480
    
    
    
    37,730
    
    
    
    5,306
    
    
    
    
    
    
    
    55,516Long-term debt, less current maturities
    
    
    370,334
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    400,334Intercompany payables, net
    
    
    (1,040,384
    )
    
    
    1,016,250
    
    
    
    24,134
    
    
    
    
    
    
    
    Deferred preneed funeral revenue
    
    
    
    
    
    
    100,189
    
    
    
    49,040
    
    
    
    
    
    
    
    149,229Deferred preneed cemetery revenue
    
    
    
    
    
    
    214,353
    
    
    
    70,220
    
    
    
    
    
    
    
    284,573Non-controlling interest in funeral and
cemetery trusts
    
    
    
    
    
    
    643,925
    
    
    
    
    
    
    
    
    
    
    
    643,925Other long-term liabilities
    
    
    10,065
    
    
    
    870
    
    
    
    
    
    
    
    
    
    
    
    10,935Total liabilities
    
    
    (647,505
    )
    
    
    2,013,317
    
    
    
    178,700
    
    
    
    
    
    
    
    1,544,512Non-controlling interest in perpetual care
trusts
    
    
    
    
    
    
    213,990
    
    
    
    
    
    
    
    
    
    
    
    213,990Common stock
    
    
    110,156
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    110,156Other
    
    
    695,966
    
    
    
    90,287
    
    
    
    17,785
    
    
    
    (108,072
    )
    
    
    695,966Accumulated other comprehensive loss
    
    
    (140
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (140
    )Total shareholders equity
    
    
    805,982
    
    
    
    90,713
    
    
    
    17,837
    
    
    
    (108,550
    )
    
    
    805,982Total liabilities and shareholders equity
    
    $
    158,477
    
    
    $
    2,318,020
    
    
    $
    196,537
    
    
    $
    (108,550
    )
    
    $
    2,564,484
 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, 2004Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    13,553
    
    
    $
    7,625
    
    
    $
    336
    
    
    $
    
    
    
    $
    21,514Marketable securities
    
    
    
    
    
    
    16
    
    
    
    1,281
    
    
    
    
    
    
    
    1,297Receivables, net of allowances
    
    
    4,551
    
    
    
    41,446
    
    
    
    14,295
    
    
    
    
    
    
    
    60,292Inventories
    
    
    389
    
    
    
    32,112
    
    
    
    6,535
    
    
    
    
    
    
    
    39,036Prepaid expenses
    
    
    822
    
    
    
    2,116
    
    
    
    14
    
    
    
    
    
    
    
    2,952Deferred income taxes, net
    
    
    2,263
    
    
    
    2,259
    
    
    
    
    
    
    
    
    
    
    
    4,522Assets held for sale
    
    
    
    
    
    
    11,321
    
    
    
    5,061
    
    
    
    
    
    
    
    16,382Total current assets
    
    
    21,578
    
    
    
    96,895
    
    
    
    27,522
    
    
    
    
    
    
    
    145,995Receivables due beyond one year, net of
allowances
    
    
    98
    
    
    
    65,326
    
    
    
    14,455
    
    
    
    
    
    
    
    79,879Preneed funeral receivables and trust
investments
    
    
    
    
    
    
    487,633
    
    
    
    15,753
    
    
    
    
    
    
    
    503,386Preneed cemetery receivables and trust
investments
    
    
    
    
    
    
    231,570
    
    
    
    25,683
    
    
    
    
    
    
    
    257,253Goodwill
    
    
    
    
    
    
    367,299
    
    
    
    33,915
    
    
    
    2,800
    
    
    
    404,014Deferred charges
    
    
    4,859
    
    
    
    228,285
    
    
    
    20,610
    
    
    
    
    
    
    
    253,754Cemetery property, at cost
    
    
    
    
    
    
    344,633
    
    
    
    24,801
    
    
    
    
    
    
    
    369,434Property and equipment, at cost
    
    
    31,845
    
    
    
    428,066
    
    
    
    32,603
    
    
    
    
    
    
    
    492,514Less accumulated depreciation
    
    
    17,273
    
    
    
    167,914
    
    
    
    10,643
    
    
    
    
    
    
    
    195,830Net property and equipment
    
    
    14,572
    
    
    
    260,152
    
    
    
    21,960
    
    
    
    
    
    
    
    296,684Deferred income taxes, net
    
    
    12,808
    
    
    
    19,899
    
    
    
    10,813
    
    
    
    (234
    )
    
    
    43,286Investment in subsidiaries
    
    
    105,038
    
    
    
    
    
    
    
    
    
    
    
    (105,038
    )
    
    
    Cemetery perpetual care trust investments
    
    
    
    
    
    
    210,267
    
    
    
    
    
    
    
    
    
    
    
    210,267Other assets
    
    
    104
    
    
    
    1,304
    
    
    
    
    
    
    
    
    
    
    
    1,408Total assets
    
    $
    159,057
    
    
    $
    2,313,263
    
    
    $
    195,512
    
    
    $
    (102,472
    )
    
    $
    2,565,360LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    1,725
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,725Accounts payable
    
    
    1,090
    
    
    
    7,662
    
    
    
    323
    
    
    
    
    
    
    
    9,075Accrued expenses and other current
liabilities
    
    
    17,992
    
    
    
    34,956
    
    
    
    5,645
    
    
    
    
    
    
    
    58,593Liabilities associated with assets held
for sale
    
    
    
    
    
    
    6,824
    
    
    
    4,013
    
    
    
    
    
    
    
    10,837Total current liabilities
    
    
    20,807
    
    
    
    49,442
    
    
    
    9,981
    
    
    
    
    
    
    
    80,230Long-term debt, less current maturities
    
    
    385,080
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    415,080Intercompany payables, net
    
    
    (1,041,358
    )
    
    
    1,019,779
    
    
    
    21,579
    
    
    
    
    
    
    
    Deferred preneed funeral revenue
    
    
    
    
    
    
    105,115
    
    
    
    47,409
    
    
    
    
    
    
    
    152,524Deferred preneed cemetery revenue
    
    
    
    
    
    
    217,635
    
    
    
    69,249
    
    
    
    
    
    
    
    286,884Non-controlling interest in funeral and
cemetery trusts
    
    
    
    
    
    
    626,361
    
    
    
    
    
    
    
    
    
    
    
    626,361Other long-term liabilities
    
    
    10,270
    
    
    
    860
    
    
    
    
    
    
    
    
    
    
    
    11,130Total liabilities
    
    
    (625,201
    )
    
    
    2,019,192
    
    
    
    178,218
    
    
    
    
    
    
    
    1,572,209Non-controlling interest in perpetual care
trusts
    
    
    
    
    
    
    208,893
    
    
    
    
    
    
    
    
    
    
    
    208,893Common stock
    
    
    107,885
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,885Other
    
    
    676,706
    
    
    
    84,752
    
    
    
    17,242
    
    
    
    (101,994
    )
    
    
    676,706Accumulated other comprehensive loss
    
    
    (333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333
    )Total shareholders equity
    
    
    784,258
    
    
    
    85,178
    
    
    
    17,294
    
    
    
    (102,472
    )
    
    
    784,258Total liabilities and shareholders equity
    
    $
    159,057
    
    
    $
    2,313,263
    
    
    $
    195,512
    
    
    $
    (102,472
    )
    
    $
    2,565,360
 33




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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 Three Months Ended January 31, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by (used in)
operating activities
    
    $
    (2,486
    )
    
    $
    (2,111
    )
    
    $
    2,724
    
    
    $
    
    
    
    $
    (1,873
    )Cash flows from investing activities:Proceeds from sales of marketable
securities
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Proceeds from sale of assets, net
    
    
    (147
    )
    
    
    4,921
    
    
    
    675
    
    
    
    
    
    
    
    5,449Additions to property and equipment
    
    
    (1,059
    )
    
    
    (2,257
    )
    
    
    (3,196
    )
    
    
    
    
    
    
    (6,512
    )Other
    
    
    
    
    
    
    28
    
    
    
    
    
    
    
    
    
    
    
    28Net cash provided by (used in)
investing activities
    
    
    (1,206
    )
    
    
    2,708
    
    
    
    (2,521
    )
    
    
    
    
    
    
    (1,019
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    110,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    110,000Repayments of long-term debt
    
    
    (124,274
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (124,274
    )Intercompany receivables (payables)
    
    
    1,887
    
    
    
    (1,559
    )
    
    
    (328
    )
    
    
    
    
    
    
    Debt issue costs
    
    
    (1,681
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,681
    )Issuance of common stock
    
    
    10,419
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    10,419Other
    
    
    (944
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (944
    )Net cash used in financing activities
    
    
    (4,593
    )
    
    
    (1,559
    )
    
    
    (328
    )
    
    
    
    
    
    
    (6,480
    )Net decrease in cash
    
    
    (8,285
    )
    
    
    (962
    )
    
    
    (125
    )
    
    
    
    
    
    
    (9,372
    )Cash and cash equivalents, beginning of
period
    
    
    13,553
    
    
    
    7,625
    
    
    
    336
    
    
    
    
    
    
    
    21,514Cash and cash equivalents, end of
period
    
    $
    5,268
    
    
    $
    6,663
    
    
    $
    211
    
    
    $
    
    
    
    $
    12,142
 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 Three Months Ended January 31, 2004Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    35,237
    
    
    $
    206
    
    
    $
    548
    
    
    $
    
    
    
    $
    35,991Cash flows from investing activities:Proceeds from sale of assets, net
    
    
    (772
    )
    
    
    1,631
    
    
    
    
    
    
    
    
    
    
    
    859Additions to property and equipment
    
    
    (175
    )
    
    
    (4,511
    )
    
    
    (120
    )
    
    
    
    
    
    
    (4,806
    )Other
    
    
    
    
    
    
    (40
    )
    
    
    (2
    )
    
    
    
    
    
    
    (42
    )Net cash used in investing activities
    
    
    (947
    )
    
    
    (2,920
    )
    
    
    (122
    )
    
    
    
    
    
    
    (3,989
    )Cash flows from financing activities:Repayments of long-term debt
    
    
    (38,791
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,791
    )Intercompany receivables (payables)
    
    
    (650
    )
    
    
    1,249
    
    
    
    (599
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    3,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,127Purchase and retirement of common
stock
    
    
    (321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (321
    )Net cash provided by (used in)
financing activities
    
    
    (36,635
    )
    
    
    1,249
    
    
    
    (599
    )
    
    
    
    
    
    
    (35,985
    )Net decrease in cash
    
    
    (2,345
    )
    
    
    (1,465
    )
    
    
    (173
    )
    
    
    
    
    
    
    (3,983
    )Cash and cash equivalents, beginning of
period
    
    
    18,975
    
    
    
    (478
    )
    
    
    88
    
    
    
    
    
    
    
    18,585Cash and cash equivalents, end of
period
    
    $
    16,630
    
    
    $
    (1,943
    )
    
    $
    (85
    )
    
    $
    
    
    
    $
    14,602
 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
were performing below acceptable levels or no longer fit the Companys operating profile. One of
the criteria for classification as discontinued operations or assets held for sale is that the
transfer of the asset is normally expected to qualify for accounting recognition as a sale within
one years time, with certain exceptions. Certain of the businesses classified as discontinued
operations during the first quarter of fiscal year 2004 that were not sold within the one-year
requirement were reclassified as continuing operations in the first quarter of fiscal year 2005.
The operating results of those businesses that met the criteria in SFAS No. 144 that were sold
during fiscal years 2005 or 2004 are currently reported in the discontinued operations
section of the 2005 and 2004 consolidated statements of earnings. As of January 31, 2005, the
Company had closed on the sale of 62 businesses for $24,692 in proceeds. During fiscal year 2004, the Company evaluated its long-lived assets, recorded impairment
charges of $684 and sold several assets that it held for sale at a net gain of $1,037. The net
effect was that the Company recorded gains on dispositions, net of impairment losses, of $353 for
year ended October 31, 2004 in continuing operations, of which $603 related to the three months
ended January 31, 2004 and is included in Gains on dispositions net of impairment losses in the
consolidated statement of earnings. 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 three months ended January 31, 2005, the Company evaluated its long-lived assets,
recorded impairment charges of $273 and sold several assets that it held for sale at a net gain of
$604. The net effect was that the Company recorded gains on dispositions, net of impairment
losses, of $331 for the three months ended January 31, 2005 in continuing operations. The Company
also recorded gains on dispositions, net of impairment losses related to discontinued operations of
$164 for the three months ended January 31, 2005, which is reflected in the discontinued operations
section of the consolidated statement of earnings, all of which relates to businesses sold. 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 October 31, 2004, the assets held for sale (excluding $3 cash
and cash equivalent investments of the operations held for sale as of October 31, 2004) 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. At January 31, 2005, the remaining businesses from those identified in December 2003 no longer
met the criteria to be classified as held for sale as required by SFAS No. 144 because they
remained unsold for a period of time longer than one year and included 17 businesses, some of which
will be sold as real estate. We still intend to sell these businesses and have entered into
preliminary agreements to sell 9 of the 17 businesses. As of January 31, 2005, total assets and
total liabilities of the 17 businesses were $11,142 and $6,358, respectively. Any of these
businesses which were previously included in discontinued operations were reclassified back into
continuing operations. Additionally, the line items assets held for sale and liabilities
associated with assets held for sale were eliminated from the January 31, 2005 balance sheet. The
operations of these businesses (including $633 and $640 in revenue and $71 and $37 in operating
earnings for the three months ended January 31, 2005 and 2004, respectively) are included in
continuing operations in the consolidated statements of earnings for the three months ended January
31, 2005 and 2004. 36




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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 as of October 31, 2004 and the
operating results of the discontinued operations for the three months ended January 31, 2005 and
2004, respectively, are as follows: October 31, 2004AssetsReceivables, net of allowances
    
    $
    905Inventories and other current assets
    
    
    2,055Net property and equipment
    
    
    6,242Preneed funeral receivables and trust investments
    
    
    2,855Preneed cemetery receivables and trust investments
    
    
    2,206Deferred charges and other assets
    
    
    1,991Cemetery property
    
    
    128Assets held for sale
    
    $
    16,382LiabilitiesDeferred income taxes, net
    
    $
    328Deferred preneed funeral revenue
    
    
    4,680Deferred preneed cemetery revenue
    
    
    1,632Non-controlling interest in funeral and cemetery
trusts
    
    
    4,197Liabilities associated with assets held for sale
    
    $
    10,837
 Three Months Ended January 31,2005
    
    
    2004Revenue:Funeral
    
    $
    100
    
    
    $
    4,219Cemetery
    
    
    
    
    
    
    35$
    100
    
    
    $
    4,254Gross profit:Funeral
    
    $
    (144
    )
    
    $
    407Cemetery
    
    
    (17
    )
    
    
    5(161
    )
    
    
    412Gains on dispositions net of impairment losses
    
    
    164
    
    
    
    Other operating income, net
    
    
    
    
    
    
    8Earnings from discontinued operations before income taxes
    
    $
    3
    
    
    $
    420
 (12) Separation Charges In December 2003, the Company announced plans to restructure and reduce its workforce by
approximately 300 employees throughout the organization. For fiscal year 2004, the Company
recorded a charge for severance and other costs associated with the workforce reductions of $2,435
($1,510 after tax, or $.01 per share), of which $1,993 ($1,236 after tax, or $.01 per share) was
recorded during the three months ended January 31, 2004. There are no material remaining costs
under the workforce reduction plan. The plan was completed June 1, 2004. 37




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (13) Long-term Debt January 31, 2005
    
    
    October 31, 2004Long-term debt:Senior secured credit facility:Revolving credit facility
    
    $
    10,000
    
    
    $
    59,000Term Loan B
    
    
    89,750
    
    
    
    54,00510.75% senior subordinated notes due 2008
    
    
    300,000
    
    
    
    300,000Other, principally seller financing of acquired operations
or assumption upon acquisition, weighted average
interest rates of 3.8% and 4.6% as of January 31, 2005
and October 31, 2004, respectively, partially secured
by assets of subsidiaries, with maturities through 2022
    
    
    2,781
    
    
    
    3,800Total long-term debt
    
    
    402,531
    
    
    
    416,805Less current maturities
    
    
    2,197
    
    
    
    1,725$
    400,334
    
    
    $
    415,080
 As of October 31, 2004, the Companys revolving credit facility was set to mature in June of
2005, and the Companys Term Loan B was set to mature in October of 2005. On November 19, 2004,
the Company entered into an amended and restated senior secured credit facility consisting of a
$125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. Thus, in the
October 31, 2004 balance sheet, the $59,000 outstanding balance of the revolving credit facility
and the $54,005 outstanding balance of the Term Loan B were classified as long-term debt. During
the first quarter of fiscal year 2005, we incurred a charge for early extinguishment of debt of
$2,651 ($1,723 after tax, or $.02 per share) to write off fees associated with the prior facility. The new facility consists of a $125,000 five-year revolving credit facility and a $100,000
seven-year Term Loan B. As a result of the refinancing, the leverage-based grid pricing for the
interest rate on the Companys new revolving credit facility was reduced to LIBOR plus 150.0 basis
points at closing, representing a 50 basis-point reduction. The grid for the new revolving credit
facility ranges from 137.5 to 200.0 basis points. The Company will pay a commitment fee of 37.5 to
50.0 basis points, based on the Companys consolidated leverage ratio. The interest rate on the
Companys Term Loan B was reduced to LIBOR plus 175.0 basis points, which is 75 basis points below
the prior facility and is not subject to grid pricing. In connection with the refinancing in
February 2005 of substantially all of the Companys 10.75 percent senior subordinated notes (which
is discussed below), the Company borrowed an additional $130,000 in Term Loan B. The Term Loan B
matures on November 19, 2011 with 94 percent of the
principal due in 2011, and the
revolving credit facility matures on November 19, 2009. No amounts under the senior secured credit
facility are hedged by the Companys remaining interest rate swap. Obligations under the senior secured credit facility are guaranteed by substantially all
existing and future direct and indirect domestic subsidiaries of the Company formed under the laws
of any one of the states or the District of Columbia of the United States of America (SEI
Guarantors). The lenders under the senior secured credit facility have received a first priority perfected
security interest in (i) all of the capital stock or other equity interests of each of the domestic
subsidiaries of the Company and 65 percent of the voting capital stock of all direct foreign
subsidiaries and (ii) all other present and future assets and properties of the Company and the SEI
Guarantors except (a) real property, (b) vehicles, (c) assets to which applicable law 38




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (13) Long-term Debt(Continued) prohibits security interest therein or requires the consent of a third party, (d) contract rights
in which a security interest without the approval of the other party to the contract would
constitute a default thereunder and (e) any assets with respect to which a security interest cannot
be perfected. The Companys senior secured credit facility contains affirmative and negative covenants that,
among other things, impose limitations on liens, mergers, consolidations and asset sales, the
incurrence of debt, and the payment of dividends. The senior secured credit facility also contains
mandatory and optional prepayment provisions, financial covenants and customary events of default.
If an event of default occurs, the lenders under the senior secured credit facility are entitled,
among other rights, to declare the additional term loan borrowings and other amounts outstanding
under the facility to be due and payable immediately. For further information regarding the
Companys senior secured credit facility, see Note 18 to the consolidated financial statements of
the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2004. On February 18, 2005, the Company completed its tender offer and consent solicitation for any
and all of its $300,000 10.75 percent senior subordinated notes. The Company purchased a total of
$298,250 in aggregate principal amount of the notes in the offer. The first call date on the
remaining $1,750 principal amount of the notes is July 1, 2005 at a price of 105.375 percent of the
notes principal amount. The Company has entered into a supplemental indenture with respect to the
notes that eliminates substantially all of the restrictive covenants and certain events of default.
In the second quarter of fiscal year 2005, the Company will incur a charge for early
extinguishment of debt of approximately $30,057 ($19,537 after tax, or $.17 per share) representing
the $25,369 million tender premium, related fees and expenses and $4,688 write-off of the
remaining unamortized book value of fees on the 10.75 percent notes. The Company funded the tender offer for the 10.75 percent notes, including related tender
premiums, fees, expenses and accrued interest of $28,931, with the net proceeds of the $130,000 in
additional Term Loan B borrowings described above, a portion of its available cash, and with the
net proceeds of the issuance of $200,000 6.25 percent senior notes due 2013 (the 6.25 percent
senior notes), which were issued on February 11, 2005. The 6.25 percent senior notes are governed by the terms of an indenture dated as of February
11, 2005. Prior to February 15, 2009, the 6.25 percent senior notes are not redeemable. Beginning
on February 15, 2009, the Company may redeem the 6.25 percent senior notes in whole or in part at
any time at the redemption prices set forth in the indenture, plus any accrued and unpaid interest.
In addition, upon a change of control of the Company, holders of the 6.25 percent senior notes
will have the right to require the Company to repurchase all or any part of their 6.25 percent
senior notes for cash at a price equal to 101 percent of the aggregate principal amount of the 6.25
percent senior notes repurchased, plus any accrued and unpaid interest. The 6.25 percent senior notes are guaranteed, jointly and severally, by the SEI
Guarantors, and are the Companys general unsecured and unsubordinated obligations, and the
guarantees of the 6.25 percent senior notes are the SEI guarantors general unsecured and
unsubordinated obligations. Accordingly, they will rank equally in right of payment with all of
the Companys, in the case of the 6.25 percent senior notes, and the SEI Guarantors, in the case
of their guarantees of the 6.25 percent senior notes, existing and future unsubordinated
indebtedness and senior to any existing and future subordinated indebtedness. 39




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (13) Long-term Debt(Continued) In addition, the 6.25 percent senior notes effectively rank junior to any of the Companys,
and the guarantees of the 6.25 percent senior notes effectively rank junior to the SEI Guarantors,
existing and future secured indebtedness, including obligations under the Companys senior secured
credit facility, to the extent of the assets securing such indebtedness. The indenture contains affirmative and negative covenants that, among other things, limit the
Company and the SEI Guarantors ability to engage in sale and leaseback transactions, effect a
consolidation or merger or sale, transfer, lease, or other disposition of all or substantially all
assets, and create liens on assets. The indenture also contains customary events of default. Upon
the occurrence of certain events of default, the Trustee or the holders of the 6.25 percent senior
notes may declare all outstanding 6.25 percent senior notes to be due and payable immediately. (14) Consolidated Comprehensive Income Consolidated comprehensive income for the three months ended January 31, 2005 and 2004 is as
follows: Three Months Ended January 31,2005
    
    
    2004Net earnings
    
    $
    9,210
    
    
    $
    11,728Other comprehensive income:Reclassification adjustment for realized loss on investments, net of
deferred tax benefit of $457
    
    
    
    
    
    
    746Unrealized appreciation of investments, net of deferred tax expense of
($23)
    
    
    
    
    
    
    38Unrealized appreciation on derivative instrument designated and
qualifying as a cash flow hedging instrument, net of deferred tax
expense of ($118) and ($298), respectively
    
    
    193
    
    
    
    555Reduction in net unrealized losses associated with available-for-sale
securities of the trusts
    
    
    20,686
    
    
    
    Reclassification of the net unrealized losses activity attributable to the
non-controlling interest holders
    
    
    (20,686
    )
    
    
    Total other comprehensive income
    
    
    193
    
    
    
    1,339Total comprehensive income
    
    $
    9,403
    
    
    $
    13,067
 (15) Guarantees The Companys obligations under its senior secured credit facility, 10.75 percent senior
subordinated notes and 6.25 percent senior notes 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. For additional information
regarding the senior secured credit facility and senior subordinated notes, see Note 18 to the
consolidated financial statements of the Companys Annual Report on Form 10-K for the fiscal year
ended October 31, 2004 and Note 13 included herein. For additional information regarding the 6.25
percent senior notes, see Note 13 included herein. 40




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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) (15) Guarantees(Continued) 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 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 January 31, 2005, the Company has guaranteed long-term debt of its subsidiaries of
approximately $1,551that 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 In June 2004, the Company entered into a separation agreement with William E. Rowe, who
stepped down from his position as President and Chief Executive Officer, but continued in his role
as Chairman of the Board. As part of Mr. Rowes separation agreement, the Company will pay Mr.
Rowe $1,000 in equal installments over a two year period, beginning November 1, 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. In July 2003, the Company entered into a retirement benefits agreement with Frank B. Stewart,
Jr., who retired from his position as Chairman of the Board and became 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 41




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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) 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 $652 of the $800 commitment as of January 31,
2005. 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 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 January
31, 2005, including accrued interest, was approximately $1,013. (17) Subsequent Events On February 11, 2005, the Company completed the private offering of $200,000 aggregate
principal amount of its 6.25 percent senior notes due 2013. The Company also borrowed $130,000 in
additional term loan debt under its senior secured credit facility. The Company used the net
proceeds from these transactions, together with a portion of its available cash, to repurchase for
a total of $298,250 in aggregate principal amount of its 10.75 percent senior subordinated notes
due 2008 and to pay related tender premiums, fees, expenses and accrued interest of $28,931. In
the second quarter of fiscal year 2005, the Company will incur a charge for early extinguishment of
debt of approximately $30,057 ($19,537 after tax, or $.17 per share) representing the bond tender
premium, related fees and expenses and the write-off of unamortized fees. For additional
information, see Note 13 included herein. 42




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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 March 1, 2005, we owned and operated 236 funeral homes
and 147 cemeteries in 27 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, 2004 and Note 1 to the consolidated financial statements included herein. We believe that preneed funeral and cemetery property sales are two of the primary drivers of
sustainable long-term growth in the number of families served by our funeral homes and cemeteries.
Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise
sales are deferred into our backlog while our preneed cemetery property sales are recognized
currently in accordance with SFAS No. 66. For a detailed discussion of our revenue recognition
policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes 1(k)
and 1(l) to the consolidated financial statements. 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. Because a
portion of the funds we receive from preneed sales are deposited into the trusts and invested in a
variety of debt and equity securities and other investments, the performance of the trusts
investments can affect our current and future revenue streams. From 1991 through 1999, we achieved
an overall annual realized return of 8.0 percent to 9.0 percent in our domestic trusts. However,
the average realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8
percent, 2.6 percent and 3.2 percent for fiscal years 2000, 2001, 2002, 2003, 2004 and the three
months ended January 31, 2005, respectively. These returns represent interest, dividends and
realized capital gains or losses but not unrealized capital gains or losses. We defer recognition
of all earnings and losses realized by preneed funeral and cemetery merchandise and services 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 2004 and
the first fiscal quarter of 2005, and will likely do so for the remainder of fiscal year 2005. We
recognize 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 low returns on fixed-income
investments put pressure on perpetual care trust earnings recognized in fiscal year 2004, in the
first quarter of fiscal 2005, and may do so again during the remainder of fiscal year 2005.
Because approximately 60 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. On a quarterly basis, we evaluate the market value of our preneed funeral and cemetery
merchandise and services trusts and our cemetery perpetual care trusts. If we determine that an
unrealized loss is other than temporary, we adjust the cost basis to the current market value. The
other than temporary loss is reflected as a reduction in the value of the trust asset and a
corresponding reduction in the related non-controlling interest and deferred revenue liabilities
and has no effect on shareholders equity. Unrealized gains and losses reflected in the tables in
Notes 3, 4 and 5 to the consolidated financial statements are temporary as the cost basis in these
tables have already been adjusted to reflect the other than temporary unrealized losses. Our
preneed funeral and cemetery merchandise and services trusts and escrow accounts had other than
temporary declines of $77.6 million and $42.3 43




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##### Table of Contents



million, respectively, as of January 31, 2005, from
their original cost basis. They had net unrealized appreciation of $5.4 million and $3.7 million,
respectively, as of January 31, 2005 resulting from temporary unrealized gains and losses. See
Notes 3 and 4 to the consolidated financial statements. If the fair market value of the trusts were to decline below the estimated costs to deliver
the underlying products and services, 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 products or services. 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 other than temporary declines of $30.1 million
as of January 31, 2005, from their original cost basis. They had net unrealized appreciation of
$11.6 million as of January 31, 2005 resulting from temporary unrealized gains and losses. See
Note 5 to the consolidated financial statements. Unrealized gains and losses in the cemetery
perpetual care trusts and escrow accounts do not affect current earnings but unrealized losses
could limit the capital gains available to us and could eventually 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 2005, the
principal assumptions underlying the forecasts and risk factors related to our businesses and
industry, see Item 5 below. 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, 2004. There have been no changes to our critical accounting policies since
the filing of our Annual Report on Form 10-K for the fiscal year ended October 31, 2004. 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 2005 and 2004,
results from continuing operations reflect those of same store locations. 44




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Three Months Ended January 31, 2005 Compared to Three Months Ended January 31,
2004Continuing Operations Funeral Segment Three Months EndedJanuary 31,2005
    
    
    2004
    
    
    Decrease(In millions)Total Funeral Revenue
    
    $
    71.6
    
    
    $
    74.8
    
    
    $
    (3.2
    )Total Funeral Costs
    
    
    51.4
    
    
    
    51.9
    
    
    
    (.5
    )Total Funeral Gross Profit
    
    $
    20.2
    
    
    $
    22.9
    
    
    $
    (2.7
    )
 Funeral revenue from continuing operations decreased $3.2 million, or 4.3 percent, for the
three months ended January 31, 2005, compared to the corresponding period in 2004. The decrease in
funeral revenue was primarily due to a 5.4 percent decrease in the number of same store funeral
services performed, or 904 events out of 16,633 total same store funeral services performed. Our
results for the three months ended January 31, 2005 were significantly impacted by this decline in
same store funeral events performed, particularly during the months of December and January, which
we believe to be consistent with a decline in the number of deaths in our markets. Through the
monitoring of our funeral market share, we believe that the lower events in the first quarter of
fiscal year 2005 were primarily related to a decrease in deaths and are not indicative of a
substantial loss in market share. Our data indicates that we have experienced increases in market
share in some markets and decreases in others, resulting in an overall slight decrease in market
share. Also this year we seem to be experiencing a milder and later flu season than we experienced
last year. The timing and severity of the flu season fluctuates from year to year and can have a
considerable impact on our business. We experienced a similar decline in same store cemetery
events. The decline in same store funeral events was 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 6.0
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 1.7 percent increase in the average revenue per funeral
service for our same store businesses. We believe a number of factors contributed to the increases
in our average revenue per traditional and cremation service. We believe the primary factors were
normal inflationary price increases, more effective merchandising and packaging, our focus on
training, customized funeral planning and personalization and a new program for funeral arranger
incentives. Funeral gross profit margin from continuing operations decreased from 30.6 percent in the
first quarter of fiscal year 2004 to 28.2 percent in the first quarter of fiscal year 2005. The
decrease is primarily due to the decline in revenues described above combined with the fixed cost
nature of the funeral business. The cremation rate for our same store operations was 37.0 percent
for the quarter ended January 31, 2005 compared to 36.3 percent for the quarter ended January 31,
2004. Due to the fixed cost nature of the funeral business, the significant decline in funeral
events had a disproportionate impact on margins. Cemetery Segment Three Months EndedJanuary 31,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)(In millions)Total Cemetery Revenue
    
    $
    54.9
    
    
    $
    56.0
    
    
    $
    (1.1
    )Total Cemetery Costs
    
    
    43.2
    
    
    
    41.9
    
    
    
    1.3Total Cemetery Gross Profit
    
    $
    11.7
    
    
    $
    14.1
    
    
    $
    (2.4
    )
 45




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Cemetery revenue from continuing operations decreased $1.1 million, or 2.0 percent, for the
three months ended January 31, 2005, compared to the corresponding period in 2004, primarily due to
a decrease in perpetual care trust earnings and a decline in the number of events performed,
partially offset by an increase in revenue associated with the construction of cemetery projects
during the quarter and an increase in cemetery property sales. Revenue related to the sale of
cemetery property prior to its construction is recognized on a percentage of completion method of
accounting as construction occurs. Cemetery property sales increased 1.8 percent in the first
quarter of fiscal year 2005 compared to the first quarter of fiscal year 2004. Cemetery property
sales were significantly lower than expected in Puerto Rico. As a result, we have restructured our
Puerto Rican sales organization and expect preneed sales to improve. Excluding sales in Puerto
Rico, we would have achieved an 8 percent increase in cemetery property sales during the first
quarter. We experienced an annualized average return, excluding unrealized gains and losses, of 3.8
percent in our perpetual care trusts for the quarter ended January 31, 2005 resulting in revenue of
$1.1 million, compared to 4.7 percent for the corresponding period in 2004 resulting in revenue of
$2.4 million. Cemetery gross profit margin from continuing operations decreased from 25.2 percent in the
first quarter of fiscal year 2004 to 21.3 percent in the first quarter of fiscal year 2005. This
decline resulted from decreased revenues as discussed above and the fixed cost nature of the
cemetery business. Due to the fixed cost nature of the cemetery business, the significant decline
in cemetery events had a disproportionate impact on margins. 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 were performing
below acceptable levels and no longer fit our operating profile. The operating results of those
businesses that meet the discontinued operations criteria in SFAS No. 144 are reported in the
discontinued operations section of the consolidated statements of earnings. Included in
discontinued operations for the three months ended January 31, 2005 were gains on dispositions, net
of impairment losses, of $.2 million. Revenues for the three months ended January 31, 2005 were
$.1 million compared to $4.2 million in the same period in 2004. Income tax expense for our
discontinued operations for the three months ended January 31, 2005 was $.1 million compared to $.2
million for the same period in 2004. Other Corporate general and administrative expenses for the three months ended January 31, 2005
increased $.3 million compared to the same period in 2004 primarily due to increased legal and
professional fees. In December 2003, we announced a reduction and restructuring of our workforce. For the three
months ended January 31, 2004, we recorded $2.0 million for severance and other costs associated
with the workforce reductions, which is presented in the Separation charges line item in the
consolidated statements of earnings. The workforce reduction plan was completed June 1, 2004.
There were no separation charges for the three months ended January 31, 2005. Total depreciation and amortization was $11.7 million for the first quarter of fiscal year
2005 compared to $12.9 million for the same period in 2004. Depreciation and amortization from
continuing operations was $11.6 million for the first quarter of fiscal year 2005 compared to $12.7
million for the same period in 2004. The decline in depreciation and amortization is due in part
to a decrease in the amortization of previously deferred selling costs because of the decline in
funeral and cemetery events occurring during the first quarter of 2005 compared to the same period
in 2004. For additional information, see Note 1(g) to the condensed consolidated financial
statements. 46




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Interest expense decreased $2.1 million to $10.4 million for the first quarter of fiscal year
2005 compared to $12.5 million for the same period in 2004 due to a $72.4 million decrease in
average debt outstanding and a 27 basis point decrease in the average interest rate. During the fourth quarter of fiscal year 2003, we identified a number of small businesses to
close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair
values. For the three months ended January 31, 2005, we evaluated our long-lived assets, recorded
impairment charges of $.3 million and sold several assets that we held for sale at a net gain of
$.6 million. The net effect was that we reported gains on dispositions, net of impairment losses,
of $.3 million in continuing operations for the three months ended January 31, 2005, compared to
$.6 million for the same period in 2004. These charges are presented in the Gains on dispositions
net of impairment losses line item in the consolidated statements of earnings. Other operating income, net, was $.3 million for the three months ended January 31, 2005
compared to $.4 million for the three months ended January 31, 2004 and primarily included net
gains on the sale of assets which were not included in our businesses classified as held for sale. Investment and other income (expense), net, increased $1.2 million from an expense of $1.1
million for the three months ended January 31, 2004 to income of $.1 million for the three months
ended January 31, 2005. The $1.1 million expense for the three months ended January 31, 2004 was
primarily comprised of a write-down of certain marketable securities, which had market value losses
that were deemed to be other than temporary. The effective tax rate for our continuing operations for the three months ended January 31,
2005 was 39.1 percent compared to 38.0 percent for the same period in 2004. As of January 31, 2005 and March 1, 2005, our outstanding debt totaled $402.5 million and
$434.2 million, respectively. Of the total debt outstanding as of January 31, 2005, approximately
75 percent was subject to fixed rates averaging 10.7 percent, and 25 percent was subject to
short-term variable rates averaging approximately 5.4 percent. 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, each involving a notional amount of $50.0 million. One of
the agreements expired on March 11, 2004, and the other expires on March 11, 2005. As of January
31, 2005, the effective rate of the remaining interest rate swap was 4.265 percent. On November
19, 2004, we completed the refinancing of our senior secured credit facility. No amounts under the
new senior secured credit facility are hedged by the remaining interest rate swap. During the
three months ended January 31, 2005, we recorded a charge for early extinguishment of debt of $2.7
million ($1.7 million after tax, or $.02 per share) to write off fees associated with the previous
credit facility. Preneed Sales into and Deliveries out of the Backlog 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 $38.3
million in preneed sales to our funeral and cemetery merchandise and services backlog (including
$16.3 million related to insurance-funded preneed funeral contracts) during the three months ended
January 31, 2005 to be recognized in the future (net of cancellations) as these prepaid products
and services are delivered, compared to $37.6 million (including $15.0 million related to
insurance-funded preneed funeral contracts) for the corresponding period in 2004. Deliveries out
of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust
earnings related to these preneed deliveries, amounted to $39.4 million for the three months ended
January 31, 2005, compared to $42.7 million for the corresponding period in 2004, resulting in net
reductions in the backlog of $1.1 million and $5.1 million for the three months ended January 31,
2005 and 2004, respectively. Liquidity and Capital Resources Cash Flow 47




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Our operations used cash of $1.9 million for the three months ended January 31, 2005, compared
to providing cash of $36.0 million for the corresponding period in 2004. 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. The reduction in cash flow from operations
primarily resulted from the tax refund received during the first quarter of 2004, and a decrease in
accrued expenses due to the timing of vendor payments combined with a reduction in earnings in
2005. Our cash flow does not come in evenly throughout the year, and historically we have had
negative to slightly positive cash flow in our first fiscal quarter while generating greater
amounts of cash in later quarters. In January of 2005 and 2004, we had a $16 million interest
payment due related to our 10.75 percent senior subordinated notes. These cash outflows coupled
with several items that are paid out annually in our first quarter, such as property taxes and
insurance payments, burden our first quarter cash flow more than our later quarters. Our investing activities resulted in a net cash outflow of $1.0 million for the three months
ended January 31, 2005, compared to $4.0 million for the comparable period in 2004. For the three
months ended January 31, 2005, capital expenditures amounted to $6.5 million, which included $3.2
million for maintenance capital expenditures and $3.3 million for growth initiatives, compared to
capital expenditures of $4.8 million in the same period in 2004, which included $3.9 million for
maintenance capital expenditures and $.9 million for growth initiatives. Our financing activities resulted in a net cash outflow of $6.5 million for the three months
ended January 31, 2005, compared to $36.0 million for the comparable period in 2004. The change
was due primarily to net repayments of long-term debt of $14.3 million in the three months ended
January 31, 2005 (which includes $110.0 million in proceeds of long-term debt and $124.3 million in
repayments of long-term debt), compared to repayments of $38.8 million in the comparable period of
2004. 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. Contractual Obligations and Commercial Commitments As of January 31, 2005, our outstanding debt balance was $402.5 million. The following table
details our known future cash payments (in millions) related to various contractual obligations as
of January 31, 2005. Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    402.5
    
    
    $
    2.2
    
    
    $
    3.3
    
    
    $
    312.1
    
    
    $
    84.9Interest on long-term debt (2)
    
    
    141.5
    
    
    
    37.2
    
    
    
    73.6
    
    
    
    24.7
    
    
    
    6.0Operating lease obligations (3)
    
    
    37.8
    
    
    
    3.5
    
    
    
    7.9
    
    
    
    6.8
    
    
    
    19.6Non-competition and other agreements (4)
    
    
    9.5
    
    
    
    3.4
    
    
    
    4.0
    
    
    
    1.5
    
    
    
    .6$
    591.3
    
    
    $
    46.3
    
    
    $
    88.8
    
    
    $
    345.1
    
    
    $
    111.1
   (1)
    
    See below for a breakdown of our future scheduled principal payments and maturities
of our long-term debt by type as of March 1, 2005.(2)
    
    Includes contractual interest payments for our revolving credit facility, Term Loan
B, senior subordinated notes and third-party debt. The interest on the revolving credit
facility and Term Loan B was calculated based on interest rates in effect as of January 31,
2005.(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 January 31, 2005 are $3.5 million, $4.2 million, $3.7
million, $2.9 million, $3.9 million and $19.6 million for the years ending October 31, 2005,
2006, 2007, 2008, 2009 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. This category also includes separation pay
related to three former executive officers. 48




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##### Table of Contents



We expect to be able to reduce our debt with approximately $10 million of remaining income tax
benefits related to the sale of our foreign operations which we expect to receive by the end of
fiscal year 2007. In February 2005, we used the net proceeds of the issuance of $200.0 million of our 6.25
percent senior notes, an additional $130.0 million in Term Loan B borrowings and a portion of our
available cash to complete a tender offer pursuant to which we repurchased $298.2 million of our
10.75 percent senior subordinated notes and paid related tender premiums, fees, expenses and
accrued interest of $28.9 million. For additional information, see Note 13 to the consolidated
financial statements. As of March 1, 2005, our outstanding debt balance was $434.2 million,
consisting of $10.0 million drawn on our revolving credit facility, $219.7 million in Term Loan B,
$1.8 million of 10.75 percent senior subordinated notes, $200.0 million of 6.25 percent senior
notes and $2.7 million of other debt. The following table reflects future scheduled principal payments and
maturities of our long-term debt (in millions) as of March 1, 2005. Other,PrincipallySellerFiscal
    
    Revolving
    
    
    
    
    
    
    Senior
    
    
    
    
    
    
    Financing ofYear Ending
    
    Credit
    
    
    Term
    
    
    Subordinated
    
    
    Senior
    
    
    AcquiredOctober 31,
    
    Facility
    
    
    Loan B
    
    
    Notes
    
    
    Notes
    
    
    Operations
    
    
    Total2005
    
    $
    
    
    
    $
    1.6
    
    
    $
    
    
    
    $
    
    
    
    $
    .8
    
    
    $
    2.42006
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    3.22007
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    .6
    
    
    
    2.82008
    
    
    
    
    
    
    2.2
    
    
    
    1.8
    
    
    
    
    
    
    
    .2
    
    
    
    4.22009
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2Thereafter
    
    
    10.0
    
    
    
    209.3
    
    
    
    
    
    
    
    200.0
    
    
    
    .1
    
    
    
    419.4Total long-term debt
    
    $
    10.0
    
    
    $
    219.7
    
    
    $
    1.8
    
    
    $
    200.0
    
    
    $
    2.7
    
    
    $
    434.2
 We also had $15.7 million of outstanding letters of credit as of January 31, 2005 and March 1,
2005, and we are required to maintain a bond to guarantee our obligations relating to funds we
withdrew from our preneed funeral trusts in Florida. We substituted a bond to guarantee
performance under certain preneed funeral contracts and 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. As of January 31, 2005 and March 1, 2005, there was $10.0 million drawn on our revolving
credit facility. As of January 31, 2005 and March 1, 2005, our availability under the revolving
credit facility, after giving consideration to the aforementioned letters of credit and bond
obligation, was $58.2 million. In June 2004, the Board of Directors approved an additional $3.0 million in stock repurchases
thereby increasing the stock repurchase program limit from $25.0 million to $28.0 million, of which
an aggregate of $24.4 million had been spent through March 1, 2005. Since the inception of our
stock repurchase program in June 2003 through March 1, 2005, we have repurchased and retired
3,845,000 shares of our Class A common stock at an average price of $6.34 per share. Off-Balance Sheet Arrangements Our off-balance sheet arrangements as of January 31, 2005 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 23 to the consolidated financial statements in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2004; 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 in Note 3 to the condensed consolidated financial
statements included herein. 49




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##### Table of Contents



Ratio of Earnings to Fixed Charges Our ratio of earnings to fixed charges was as follows: Three MonthsEndedJanuary 31,
    
    Years Ended October 31,2005
    
    2004
    
    2003
    
    2002
    
    2001
    
    20002.42(1)
    
    2.37(2)
    
    (3)
    
    1.73(4)
    
    (5)(6)
    
    
    2.55
   (1)
    
    Pretax earnings for the three months ended January 31, 2005 include $.3 million of
gains on dispositions, net of impairment losses and a charge of $2.7 million for the loss on
early extinguishment of debt.(2)
    
    Pretax earnings for the fiscal year 2004 includes separation charges of $3.4 million
for costs related to workforce reductions and separation pay to a former executive officer and
$.3 million in gains on dispositions, net of impairment losses.(3)
    
    Pretax earnings for fiscal year 2003 include a charge of $11.3 million for the loss
on early extinguishment of debt in connection with redemption of the ROARS, a noncash charge
of $73.0 million for goodwill impairment, a noncash charge of $9.3 million for long-lived
asset impairment and a charge of $2.5 million for separation payments to former executive
officers. As a result of these charges, our earnings for the fiscal year ended October 31,
2003 were insufficient to cover our fixed charges, and an additional $45.1 million in pretax
earnings would have been required to eliminate the coverage deficiency.(4)
    
    Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million in
connection with the write-down of assets held for sale.(5)
    
    Excludes the cumulative effect of change in accounting principles.(6)
    
    Pretax earnings for fiscal year 2001 include a noncash charge of $269.2 million in
connection with the write-down 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
$198.1 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 expense that management believes to
be representative of the interest component of rental expense. 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, 2004, filed with the Securities
and Exchange Commission on January 11, 2005. The following disclosure discusses only those
instances in which the market risk has changed by more than 10 percent from the annual disclosure. 50




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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. Actual gains
and losses, fluctuations in equity markets, interest rates and the timing of transactions may
differ from those estimated. Interest We have entered into various fixed- and variable-rate debt obligations, which are detailed in
Note 18 to our consolidated financial statements included in our Annual Report on Form 10-K for the
fiscal year ended October 31, 2004 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
$50.0 million of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate
based on the swap rate of 4.265 percent and expires on March 11, 2005. The estimated fair value of
the remaining interest rate swap based on quoted market prices was ($.2) million and ($.5) million
as of January 31, 2005 and October 31, 2004, respectively. A hypothetical 100 basis point increase
in the average interest rates applicable to such debt would result in an increase of approximately
$0 and $.1 million in the fair value of this instrument as of January 31, 2005 and October 31,
2004, respectively. As of January 31, 2005 and October 31, 2004, the carrying values of our long-term fixed-rate
debt, including accrued interest, were approximately $305.5 million and $314.6 million,
respectively, compared to fair values of $329.6 million and $344.7 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 basis points for both January 31, 2005 and
October 31, 2004, would result in changes of approximately $.5 million and $.9 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. 51




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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 and Chief Financial Officer. Based on the evaluation, our Chief Executive
Officer and 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 them 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 quarter that have materially affected, or are
reasonably likely to materially affect, our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated
and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961; In the Superior Court
for the State of California for the County of Los Angeles, Central District. This purported class
action was filed on February 17, 2005 on behalf of a nationwide class defined to include all
persons, entities and organizations who purchased funeral goods and/or services in the United
States from defendants at any time on or after February 17, 2001. The suit names the Company and a
number of its Southern California affiliates as defendants and also seeks to assert claims against
a class of all entities located anywhere in the United States whose ultimate parent corporation has
been the Company at any time on or after February 17, 2001. The plaintiffs allege that defendants failed to disclose that the prices charged by defendants
for certain goods and services exceeded what defendants paid to third parties for those same goods
and services and that such failure (i) violated provisions of the Federal Trade Commissions
Funeral Rule that require a funeral home to disclose, if true, that it marks up the price of
certain items purchased from third parties on behalf of customers on a cash advance or
accommodation basis, (ii) violated a provision of Californias Business and Professions Code that
prohibits unlawful, unfair or fraudulent business acts or practices and unfair, deceptive, untrue
or misleading advertising, (iii) constituted unfair, unlawful and fraudulent business practices,
(iv) resulted in unjust enrichment, and (v) constituted a civil conspiracy among the defendants to
commit acts of unfair competition. The plaintiffs seek restitution damages, disgorgement, interest
and attorneys fees. The Company was notified of the complaint only recently and has had limited
time to understand or evaluate it. Based on its preliminary analysis, the Company believes the
complaint is meritless and intends to aggressively defend itself. However, the ultimate outcome of
the matter cannot be determined at this time. 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. 52




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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. Unregistered Sales of Equity Securities and Use of Proceeds 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(1)
    
    
    paid per share
    
    
    plans or programs(2)
    
    
    plans or programsNovember 1, 2004 through
November 30, 2004
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    5,783,509December 1, 2004
through December 31, 2004
    
    
    27,852
    
    
    $
    7.62
    
    
    
    
    
    
    $
    5,783,509January 1, 2005 through
January 31, 2005
    
    
    299,846
    
    
    $
    6.66
    
    
    
    
    
    
    $
    5,783,509Total
    
    
    327,698
    
    
    $
    6.74
    
    
    
    
    
    
    $
    5,783,509
   (1)
    
    Consists of shares repurchased from certain executive officers and directors to
satisfy the exercise price and tax withholding of certain stock option exercises.(2)
    
    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 January 31, 2005, we have repurchased and
retired 3,500,000 shares at an average price of $6.35 per share. 
 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 53




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results of our operating initiatives, (5) our ability to control costs and maintain our
margins, (6) our current plans for deployment of our projected cash flow, (7) the success and
timing of selling the small businesses designated as held for sale and (8) our ability to realize
the carrying value of our deferred tax assets. The financial forecasts included in this Form 10-Q have been prepared by, and are the
responsibility of, our management. PricewaterhouseCoopers LLP has neither examined nor compiled
the financial forecasts and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or
any other form of assurance with respect thereto. 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 forecast that earnings from continuing operations will be in the range of $.25 to $.29 per
share including two early extinguishment of debt charges estimated to total $.19 per share. We
expect cash flow from operations in fiscal year 2005 to be between $50 million and $60 million.
Maintenance capital expenditures are expected to be between $16 million and $18 million. Our 2005 forecast for continuing operations is based on the following principal assumptions:  (1)
    The average revenue per traditional and cremation funeral service performed is
expected to increase by approximately 2 percent to 3 percent, excluding any impact from
funeral trust earnings. Increases in average revenue per funeral service performed may be
partially offset by a decrease in the number of families served by continuing operations
in 2005 as compared to 2004. The upper end of the forecast range assumes that these
businesses will serve the same number of families during fiscal year 2005 as in 2004, and
the lower end assumes a possible reduction in the number of families served of up to 3
percent. Although the number of families served during the first quarter of fiscal year
2005 was below the lower end of the forecast range, we continue to believe deaths will be
more in line with our forecasts for the full fiscal year.(2)
    Cemetery property sales are expected to increase by 4 percent to 8 percent. Although
the increase in cemetery property sales was below this range during the first quarter of
fiscal year 2005, at this time, we believe the increase of 4 percent to 8 percent is
achievable for the fiscal year.(3)
    Total revenue from trust earnings, including earnings recognition from funeral,
cemetery merchandise and perpetual care trusts, is expected to be slightly down from that
recognized in 2004.(4)
    While we intend to control costs, we do not anticipate further significant cost cuts
as those implemented in 2004.(5)
    As a result of refinancing the senior secured credit facility in November 2004 and
refinancing substantially all of our 10.75 percent senior subordinated notes in February
2005, combined with continued debt reduction, interest expense is expected to decrease
significantly for fiscal year 2005. During the first quarter of fiscal year 2005, we
recorded a charge for early extinguishment of debt of $2.7 million. During the second
quarter of fiscal year 2005, we repurchased $298.2 million of our 10.75 percent senior
subordinated notes and will incur a charge for early extinguishment of debt of
approximately $30.1 million 54




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representing $25.4 million for the tender premium, related
fees and expenses and $4.7 million to write-off the remaining unamortized book value of
fees on the prior notes.(6)
    Cash flow for fiscal year 2005 is expected to be consistent with fiscal year 2004
with the exception of unusual items, such as the tax refund of $33.2 million received
during fiscal year 2004.(7)
    We expect to use cash flow from operations to maintain our facilities at a level
comparable to 2004, to further reduce debt, for growth initiatives or to repurchase stock
as appropriate. These forecasts for continuing operations exclude the results of a number of small businesses
that we have closed or sold, the results of which will be reported separately as discontinued
operations as appropriate in future reports. 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 We have experienced a decline in funeral call volume due to 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 due to
many factors described elsewhere herein including the number of deaths, intense competition and our
ability to identify changing consumer preferences. From fiscal years 2001 to 2002 and 2002 to 2003,
same-store funeral call volumes decreased 1.5 percent and 2.6 percent, respectively. One of the
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 same-store funeral call volumes from fiscal year
2003 to 2004 of 1.0 percent. We have experienced a decrease of 5.4 percent in same-store funeral
call volumes during the quarter ending January 31, 2005, as compared to the prior year. We can give
no assurance that we will be successful in implementing the operating initiative described above in
the long term or that it will succeed in stopping or reversing the decline in same-store funeral
call volumes. 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. A decline in cemetery property sales in Puerto
Rico reduced our overall cemetery property sales below our forecasts during the first quarter of
fiscal year 2005. We have addressed this by dividing the responsibility from one sales executive on
the island to three, allowing them to better focus on our primary markets. We can give no assurance
that they will be successful in stopping or reversing the decline in our Puerto Rican 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 lower consumer confidence, which could also result in a decline in preneed sales. 55




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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. 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 including, in recent years, Internet providers. 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 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 now buy caskets in funeral supply stores and directly from manufacturers, as well as
over the Internet, and 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. We do not currently sell products or
services over the Internet. 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. 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 56




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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 services
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 products or services. 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 2004 and did so again in the first quarter of fiscal year 2005. Unrealized gains and
losses in the cemetery perpetual care trusts 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. 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 and other costs to acquire
the sale, the portion of the sales proceeds required to be placed into trusts or escrow accounts
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. Increased costs may have a negative impact on earnings and cash flows. During fiscal year 2004, we reduced funeral, cemetery and corporate general and administrative
expenses, primarily through a reduction in our workforce. While we intend to continue to control
costs, we do not anticipate any further significant cost cuts. We may not be successful in
maintaining our margins 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. Additional increases in insurance costs cannot be predicted. Our ability to dispose of our businesses at prices consistent with our expectations depends on
several factors, many of which are beyond our control. Any changes in expected sales prices or
carrying values 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 were
performing below acceptable levels or 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. As of January 31, 2005, we had closed on or entered into preliminary agreements to sell
70 businesses for approximately $26.8 million and have 9 additional businesses we will continue to
market. 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. 57




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Any variance between the
anticipated and actual sale prices or changes in the carrying values of these businesses would
result in additional impairment charges in the future and did result in gains on dispositions, net
of impairment losses, recorded in 2004. Our Chairman Emeritus may have a significant and disproportionate influence on the outcome of
election of directors and other matters presented for a vote of shareholders and this control may
be exercised in a manner that may conflict with the interests of noteholders. As of January 1, 2005, our Chairman Emeritus, Frank B. Stewart, Jr., held 7,225,274 shares (or
approximately 6.8 percent) of our outstanding Class A common stock and all of the 3,555,020
outstanding shares of our Class B common stock. Because each share of Class B common stock is
entitled to 10 votes on all matters presented for a vote by our shareholders, Mr. Stewart controls
approximately 30.2 percent of our total voting power, while holding approximately 9.8 percent of
our outstanding equity. Accordingly, Mr. Stewart may have a significant and disproportionate
influence over the election of directors and other matters requiring the affirmative vote of our
shareholders and this control may be exercised in a manner that may conflict with the interest of
noteholders. Additionally, because Louisiana law and our articles of incorporation require the
affirmative vote of two-thirds of the voting power present to approve certain major transactions
and any amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent
the consummation of such actions, even if they are recommended by our Board of Directors and
favored by a substantial majority of our shareholders and in the interest of the note holders. Servicing our debt will require a significant amount of cash, and our ability to generate
sufficient cash depends on many factors, some of which are beyond our control. Our ability to make payments on and to refinance our debt depends on our ability to generate
cash flow. This, to a significant extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. In addition, our ability to
borrow funds in the future to make payments on our debt will depend on our meeting the financial
covenants in our senior secured credit facility and other debt agreements we may have in the
future. Our business may not generate cash flow from operations, and future borrowings may not be
available to us under our senior secured credit facility or otherwise in an amount sufficient to
enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance
all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt
on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our debt
on favorable terms could have a material adverse effect on our financial condition. 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. Amounts borrowed under the senior secured credit facility are subject to variable interest
rates. 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. Covenant restrictions under our senior secured credit facility and our 6.25 percent senior note
indenture may limit our ability to operate our business. Our senior secured credit facility and the indenture governing the 6.25 percent senior notes
contain, among other things, covenants that restrict our and our subsidiaries activities. Our
senior secured credit facility limits, among other things, our and the guarantors ability to:
borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in
transactions with affiliates; engage in sale and leaseback transactions; consummate specified asset
sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or
substantially all of our assets; and create liens on our assets. In addition, our senior secured
credit facility contains specific limits on capital expenditures. Furthermore, our senior secured
credit facility requires us to maintain specified financial ratios and satisfy financial condition
tests. The indenture governing the 6.25 percent senior notes restricts our and the guarantors
ability to create liens on assets, enter into sale and leaseback transactions and merge 58




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or consolidate with other companies. Our and our subsidiaries future indebtedness may contain similar
or even more restrictive covenants. These covenants may require that we take action to reduce our debt or 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. We
might not meet those covenants, and the lenders might not waive any failure to meet those
covenants. A breach of any of those covenants could result in a default under such indebtedness. If
an event of default under our senior secured credit facility occurs, the lenders could elect to
declare all amounts outstanding thereunder, together with accrued interest, to be immediately due
and payable. Any such declaration would also result in an event of default under the indenture
governing the 6.25 percent senior notes. Our projections for 2005 do not include any earnings from acquisition activity. Several important
factors, among others, may affect our ability to consummate acquisitions. Although we have not made any significant acquisitions in recent years, we may in the future.
Any such acquisitions have risks. We may fail to identify suitable acquisition candidates, and even
if we do, acquisitions may not be completed on acceptable terms or successfully integrated into our
existing business. 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 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. Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our internal control over financial
reporting, which could impact the market price of our common stock and our access to capital. We are in the process of completing our documentation and beginning the testing of our
internal control procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires managements assessments of the effectiveness of internal
controls over financial reporting as of the end of our fiscal year 2005 and a report by our
independent registered public accounting firm addressing managements assessments and the
effectiveness of the internal controls as of that date. During the course of testing, we may
identify deficiencies and weaknesses. The timing of the identification of any deficiencies or
weaknesses could cause management to be unable to conclude that our internal controls are effective
as of the end of fiscal year 2005 or our auditors to be unable to give a favorable report on
managements assessments. This could have a material adverse effect on the market price of our
common stock and possibly on our access to capital. 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 2004 and did so again in the first quarter of fiscal year 2005.
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 59




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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. 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 35 percent of
the deaths in the United States by the year 2010, compared to 28 percent in 2002. In fiscal years
2002, 2003, 2004 and the first quarter of fiscal year 2005, 35 percent, 36 percent, 37 percent and
37 percent, respectively, of the funeral services we performed in our continuing operations were
cremations. 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. 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. Funeral homes and cemetery businesses 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, Puerto Rican and
other regulatory agencies have considered and may enact additional legislation or regulations that
could affect the death care industry. Several jurisdictions 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, impose or 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. 60




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Item 6. Exhibits (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 November 19, 2004 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated November 22, 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
    
    Amended and Restated Credit Agreement dated November 19, 2004 by and among the Company,
Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America,
N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The
Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K dated November 22, 2004)4.6
    
    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) and First Supplemental Indenture, dated as of February 2, 2005 by and
among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association,
as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 2, 2005)4.7
    
    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)4.8
    
    Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the
Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25
percent Senior Notes due 2013
 61




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(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated February 11, 2005)4.9
    
    Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 11, 2005)12
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde,
President and Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen,
Executive Vice President and Chief Financial Officer32
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde,
President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and
Chief Financial Officer
 62




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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. March 9, 2005
    /s/ THOMAS M. KITCHENThomas M. KitchenExecutive Vice President and
Chief Financial Officer March 9, 2005
    /s/ MICHAEL G. HYMELMichael G. HymelVice President
Corporate Controller
Chief Accounting Officer 63




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Exhibit Index (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 November 19, 2004 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated November 22, 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
    
    Amended and Restated Credit Agreement dated November 19, 2004 by and among the Company,
Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America,
N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The
Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K dated November 22, 2004)4.6
    
    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) and First Supplemental Indenture, dated as of February 2, 2005 by and
among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association,
as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 2, 2005)4.7
    
    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)4.8
    
    Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the
Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25
percent Senior Notes due 2013
 64




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(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated February 11, 2005)4.9
    
    Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 11, 2005)12
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde,
President and Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen,
Executive Vice President and Chief Financial Officer32
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde,
President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and
Chief Financial Officer
 65