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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549   FORM 10-Q (X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended April 30, 2004
 OR
 ( ) 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
    
    72-0693290(State or other jurisdiction of incorporation or organization)
    
    (I.R.S. Employer Identification No.)110 Veterans Memorial BoulevardMetairie, Louisiana
    
    70005(Address of principal executive offices)
    
    (Zip Code)
   Registrants telephone number, including area code: (504) 837-5880   Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes (X) No (  ) Indicate by check mark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934.
Yes (X) No (  ) 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 June 2, 2004, was 103,248,466 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 April 30, 2004 and 2003
    
    
    3Condensed Consolidated Statements of Earnings  Six Months Ended April 30, 2004 and 2003
    
    
    4Condensed Consolidated Balance Sheets  April 30, 2004 and October 31, 2003
    
    
    5Condensed Consolidated Statement of Shareholders Equity  Six Months Ended April 30, 2004
    
    
    7Condensed Consolidated Statements of Cash Flows  Six Months Ended April 30, 2004 and 2003
    
    
    8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    39Item 3. Quantitative and Qualitative Disclosures About Market Risk
    
    
    49Item 4. Controls and Procedures
    
    
    50Part II. Other InformationItem 1. Legal Proceedings
    
    
    51Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities
    
    
    51Item 4. Submission of Matters to a Vote of Security Holders
    
    
    51Item 5. Other Information
    
    
    52Item 6. Exhibits and Reports on Form 8-K
    
    
    59Signatures
    
    
    61Separation AgreementCalculation of Ratio of Earnings to Fixed ChargesCertificaiton of CEO Pursuant to Section 302Certification of CFO Pursuant to Section 906
  2




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts) Three Months Ended April 30,2004
    
    2003Revenues:Funeral
    
    $
    71,002
    
    
    $
    70,080Cemetery
    
    
    59,077
    
    
    
    57,228130,079
    
    
    
    127,308Costs and expenses:Funeral
    
    
    49,452
    
    
    
    51,817Cemetery
    
    
    43,768
    
    
    
    42,91393,220
    
    
    
    94,730Gross profit
    
    
    36,859
    
    
    
    32,578Corporate general and administrative expenses
    
    
    4,621
    
    
    
    4,182Severance charge (Note 13)
    
    
    138
    
    
    
    Impairment and other charges, net (Note 11)
    
    
    91
    
    
    
    Operating earnings
    
    
    32,009
    
    
    
    28,396Interest expense
    
    
    (11,953
    )
    
    
    (13,579
    )Investment income
    
    
    56
    
    
    
    84Other income, net
    
    
    107
    
    
    
    802Earnings from continuing operations before income taxes
    
    
    20,219
    
    
    
    15,703Income taxes
    
    
    7,503
    
    
    
    5,967Earnings from continuing operations
    
    
    12,716
    
    
    
    9,736Discontinued operations (Note 12):Earnings (loss) from discontinued operations before income taxes
(including net gain (loss) on disposals of $1,502 and ($712)
in 2004 and 2003, respectively)
    
    
    1,706
    
    
    
    (394
    )Income tax benefit
    
    
    (335
    )
    
    
    (149
    )Earnings (loss) from discontinued operations
    
    
    2,041
    
    
    
    (245
    )Net earnings
    
    $
    14,757
    
    
    $
    9,491Basic earnings per common share:Earnings from continuing operations
    
    $
    .12
    
    
    $
    .09Earnings from discontinued operations
    
    
    .02
    
    
    
    Net earnings
    
    $
    .14
    
    
    $
    .09Diluted earnings per common share:Earnings from continuing operations
    
    $
    .12
    
    
    $
    .09Earnings from discontinued operations
    
    
    .02
    
    
    
    Net earnings
    
    $
    .14
    
    
    $
    .09Weighted average common shares outstanding (in thousands):Basic
    
    
    107,438
    
    
    
    108,299Diluted
    
    
    108,400
    
    
    
    108,302
 See accompanying notes to condensed consolidated financial statements. 3




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts) Six Months Ended April 30,2004
    
    2003Revenues:Funeral
    
    $
    144,854
    
    
    $
    140,787Cemetery
    
    
    114,718
    
    
    
    111,298259,572
    
    
    
    252,085Costs and expenses:Funeral
    
    
    100,544
    
    
    
    103,623Cemetery
    
    
    85,339
    
    
    
    84,792185,883
    
    
    
    188,415Gross profit
    
    
    73,689
    
    
    
    63,670Corporate general and administrative expenses
    
    
    8,534
    
    
    
    8,482Severance charge (Note 13)
    
    
    2,131
    
    
    
    Impairment and other charges, net (Note 11)
    
    
    91
    
    
    
    Operating earnings
    
    
    62,933
    
    
    
    55,188Interest expense
    
    
    (24,474
    )
    
    
    (27,156
    )Investment income
    
    
    125
    
    
    
    171Other income (expense), net
    
    
    (47
    )
    
    
    1,684Earnings from continuing operations before income taxes
    
    
    38,537
    
    
    
    29,887Income taxes
    
    
    14,463
    
    
    
    11,357Earnings from continuing operations
    
    
    24,074
    
    
    
    18,530Discontinued operations (Note 12):Earnings from discontinued operations before income taxes
(including net gain on disposals of $1,502 and $91 in 2004
and 2003, respectively)
    
    
    2,303
    
    
    
    700Income tax expense (benefit)
    
    
    (108
    )
    
    
    266Earnings from discontinued operations
    
    
    2,411
    
    
    
    434Net earnings
    
    $
    26,485
    
    
    $
    18,964Basic earnings per common share:Earnings from continuing operations
    
    $
    .22
    
    
    $
    .17Earnings from discontinued operations
    
    
    .03
    
    
    
    .01Net earnings
    
    $
    .25
    
    
    $
    .18Diluted earnings per common share:Earnings from continuing operations
    
    $
    .22
    
    
    $
    .17Earnings from discontinued operations
    
    
    .02
    
    
    
    .01Net earnings
    
    $
    .24
    
    
    $
    .18Weighted average common shares outstanding (in thousands):Basic
    
    
    107,660
    
    
    
    108,169Diluted
    
    
    108,177
    
    
    
    108,196
 See accompanying notes to condensed consolidated financial statements. 4




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) April 30,
    
    October 31,2004
    
    2003ASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    26,996
    
    
    $
    18,585Marketable securities
    
    
    1,402
    
    
    
    2,346Receivables, net of allowances
    
    
    57,933
    
    
    
    97,203Inventories
    
    
    39,535
    
    
    
    40,154Prepaid expenses
    
    
    2,290
    
    
    
    2,887Deferred income taxes, net
    
    
    1,589
    
    
    
    2,990Assets held for sale (Note 12)
    
    
    38,958
    
    
    
    52,117Total current assets
    
    
    168,703
    
    
    
    216,282Receivables due beyond one year, net of allowances
    
    
    77,578
    
    
    
    76,374Preneed funeral receivables and trust investments
    
    
    514,282
    
    
    
    Preneed cemetery receivables and trust investments
    
    
    255,906
    
    
    
    Prearranged receivables, net
    
    
    
    
    
    
    891,028Goodwill
    
    
    403,722
    
    
    
    403,790Deferred charges
    
    
    247,070
    
    
    
    247,067Cemetery property, at cost
    
    
    377,679
    
    
    
    377,118Property and equipment, at cost:Land
    
    
    37,350
    
    
    
    37,350Buildings
    
    
    290,570
    
    
    
    289,082Equipment and other
    
    
    158,828
    
    
    
    155,429486,748
    
    
    
    481,861Less accumulated depreciation
    
    
    190,770
    
    
    
    181,801Net property and equipment
    
    
    295,978
    
    
    
    300,060Deferred income taxes, net
    
    
    54,632
    
    
    
    60,565Cemetery perpetual care trust investments
    
    
    205,114
    
    
    
    Other assets
    
    
    1,417
    
    
    
    1,238Total assets
    
    $
    2,602,081
    
    
    $
    2,573,522
 (continued) 5




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) April 30,
    
    October 31,2004
    
    2003LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    5,639
    
    
    $
    13,935Accounts payable
    
    
    6,507
    
    
    
    7,274Accrued payroll
    
    
    10,214
    
    
    
    8,596Accrued insurance
    
    
    17,727
    
    
    
    19,243Accrued interest
    
    
    11,199
    
    
    
    11,428Other current liabilities
    
    
    11,720
    
    
    
    17,273Income taxes payable
    
    
    2,667
    
    
    
    769Liabilities associated with assets held for sale (Note 12)
    
    
    23,752
    
    
    
    30,071Total current liabilities
    
    
    89,425
    
    
    
    108,589Long-term debt, less current maturities
    
    
    448,318
    
    
    
    488,180Deferred preneed funeral revenue
    
    
    160,696
    
    
    
    Deferred preneed cemetery revenue
    
    
    290,404
    
    
    
    Non-controlling interest in funeral and cemetery trusts
    
    
    635,638
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    1,222,785Other long-term liabilities
    
    
    13,581
    
    
    
    15,109Total liabilities
    
    
    1,638,062
    
    
    
    1,834,663Commitments and contingenciesNon-controlling interest in perpetual care trusts
    
    
    202,682
    
    
    
    Shareholders equity:Preferred stock, $1.00 par value, 5,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, $1.00 stated value:Class A authorized 150,000,000 shares; issued and outstanding
103,779,966 and 104,172,151 shares at April 30, 2004
and October 31, 2003, respectively
    
    
    103,780
    
    
    
    104,172Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at April 30, 2004 and October 31, 2003;
10 votes per share; convertible into an equal number of
Class A shares
    
    
    3,555
    
    
    
    3,555Additional paid-in capital
    
    
    672,324
    
    
    
    676,439Accumulated deficit
    
    
    (16,379
    )
    
    
    (42,864
    )Unearned restricted stock compensation
    
    
    (1,101
    )
    
    
    Accumulated other comprehensive loss:Unrealized depreciation of investments
    
    
    
    
    
    
    (797
    )Derivative financial instrument losses
    
    
    (842
    )
    
    
    (1,646
    )Total accumulated other comprehensive loss
    
    
    (842
    )
    
    
    (2,443
    )Total shareholders equity
    
    
    761,337
    
    
    
    738,859Total liabilities and shareholders equity
    
    $
    2,602,081
    
    
    $
    2,573,522
 See accompanying notes to condensed consolidated financial statements. 6




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts) UnrealizedRetained
    
    Unearned
    
    Appreciation
    
    DerivativeAdditional
    
    Earnings
    
    Restricted
    
    (Depreciation)
    
    Financial
    
    TotalCommon
    
    Paid-In
    
    (Accumulated
    
    Stock
    
    of
    
    Instrument
    
    ShareholdersStock (1)
    
    Capital
    
    Deficit)
    
    Compensation
    
    Investments
    
    Gains (Losses)
    
    EquityBalance October 31, 2003
    
    $
    107,727
    
    
    $
    676,439
    
    
    $
    (42,864
    )
    
    $
    
    
    
    $
    (797
    )
    
    $
    (1,646
    )
    
    $
    738,859Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    26,485
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    26,485Other comprehensive income:Reclassification adjustment for realized
loss on investments, net of deferred tax
benefit of $454
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    740
    
    
    
    
    
    
    
    740Unrealized appreciation of investments,
net of deferred tax expense of ($14)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57
    
    
    
    
    
    
    
    57Termination of derivative instrument
designated and qualifying as a cash
flow hedging instrument, net of
deferred tax expense of ($119)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    194
    
    
    
    194Unrealized appreciation on derivative
instrument designated and qualifying as
a cash flow hedging instrument, net of
deferred tax expense of ($332)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    610
    
    
    
    610Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    797
    
    
    
    804
    
    
    
    1,601Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    26,485
    
    
    
    
    
    
    
    797
    
    
    
    804
    
    
    
    28,086Issuance of restricted stock awards
    
    
    271
    
    
    
    1,203
    
    
    
    
    
    
    
    (1,474
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    373
    
    
    
    
    
    
    
    
    
    
    
    373Issuance of common stock
    
    
    44
    
    
    
    173
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    217Stock options exercised
    
    
    913
    
    
    
    3,581
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,494Purchase and retirement of common stock
    
    
    (1,620
    )
    
    
    (9,072
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,692
    )Balance April 30, 2004
    
    $
    107,335
    
    
    $
    672,324
    
    
    $
    (16,379
    )
    
    $
    (1,101
    )
    
    $
    
    
    
    $
    (842
    )
    
    $
    761,337
    (1)
    
    Amount includes 103,780 and 104,172 shares (in thousands) of Class A
common stock with a stated value of $1 per share as of April 30, 2004 and
October 31, 2003, respectively, and includes 3,555 shares (in thousands)
of Class B common stock. See accompanying notes to condensed consolidated financial statements. 7




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts) Six Months Ended April 30,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    26,485
    
    
    $
    18,964Adjustments to reconcile net earnings to net cash
provided by operating activities:Impairment and other charges, net
    
    
    (1,411
    )
    
    
    Depreciation and amortization
    
    
    26,010
    
    
    
    27,112Provision for doubtful accounts
    
    
    4,197
    
    
    
    3,515Net loss realized on marketable securities
    
    
    1,194
    
    
    
    Provision for deferred income taxes
    
    
    6,057
    
    
    
    7,842Other
    
    
    (11
    )
    
    
    (887
    )Changes in assets and liabilities:(Increase) decrease in other receivables
    
    
    28,548
    
    
    
    (2,448
    )Decrease in deferred charges
    
    
    3,606
    
    
    
    2,472Increase in inventories and cemetery property
    
    
    (77
    )
    
    
    (525
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    1,096
    
    
    
    (4,871
    )Change in prearranged activity
    
    
    (15,914
    )
    
    
    (17,746
    )Prearranged acquisition costs
    
    
    (17,713
    )
    
    
    (17,437
    )Increase (decrease) in other
    
    
    (1,188
    )
    
    
    2,119Net cash provided by operating activities
    
    
    60,879
    
    
    
    18,110Cash flows from investing activities:Proceeds from sales of marketable securities
    
    
    1,019
    
    
    
    550Proceeds from sale of assets, net
    
    
    8,938
    
    
    
    1,714Additions to property and equipment
    
    
    (8,333
    )
    
    
    (7,473
    )Other
    
    
    47
    
    
    
    173Net cash provided by (used in) investing activities
    
    
    1,671
    
    
    
    (5,036
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    
    
    
    
    50,000Repayments of long-term debt
    
    
    (48,158
    )
    
    
    (7,338
    )Issuance of common stock
    
    
    4,711
    
    
    
    313Purchase and retirement of common stock
    
    
    (10,692
    )
    
    
    Net cash provided by (used in) financing activities
    
    
    (54,139
    )
    
    
    42,975Net increase in cash
    
    
    8,411
    
    
    
    56,049Cash and cash equivalents, beginning of period
    
    
    18,585
    
    
    
    28,190Cash and cash equivalents, end of period
    
    $
    26,996
    
    
    $
    84,239Supplemental cash flow information:Cash paid (received) during the period for:Income taxes
    
    $
    (29,800
    )
    
    $
    3,800Interest
    
    $
    21,500
    
    
    $
    24,500Noncash investing and financing activities:Issuance of common stock to fund employee benefit plan
    
    $
    
    
    
    $
    1,280
 See accompanying notes to condensed consolidated financial statements. 8




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation (a) The Company Stewart Enterprises, Inc. (the Company) is a provider of funeral and
cemetery products and services in the death care industry in the United States.
Through its subsidiaries, the Company offers a complete line of funeral
merchandise and services, along with cemetery property, merchandise and
services, both at the time of need and on a preneed basis. As of April 30,
2004, the Company owned and operated 275 funeral homes and 148 cemeteries in 29
states within the United States and Puerto Rico. (b) Principles of Consolidation The accompanying condensed consolidated financial statements include the
Company and its subsidiaries. All significant intercompany balances and
transactions have been eliminated. See Note 12 for a discussion of
discontinued operations, assets held for sale and liabilities associated with
assets held for sale. (c) Interim Disclosures The information as of April 30, 2004, and for the three and six months
ended April 30, 2004 and 2003, is unaudited but, in the opinion of management,
reflects all adjustments, which are of a normal recurring nature, necessary for
a fair presentation of financial position and results of operations for the
interim periods. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and
notes thereto contained in the Companys Annual Report on Form 10-K for the
fiscal year ended October 31, 2003. The year-end condensed consolidating balance sheet data was derived from
audited financial statements but does not include all disclosures required by
accounting principles generally accepted in the United States of America, which
are presented in the Companys annual report on Form 10-K for the fiscal year
ended October 31, 2003. The results of operations for the three and six months ended April 30,
2004 are not necessarily indicative of the results to be expected for the
fiscal year ending October 31, 2004. (d) Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. (e) Fair Value of Financial Instruments Estimated fair value amounts have been determined using available market
information and the valuation methodologies described below. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein may not
be indicative of the amounts the Company 9




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) could realize in a current market. The use of different market assumptions or
valuation methodologies may have a material effect on the estimated fair value
amounts. The carrying amounts of cash and cash equivalents and current receivables
approximate fair value due to the short-term nature of these instruments. The
carrying amount of receivables due beyond one year approximates fair value
because they bear interest at rates currently offered by the Company for
receivables with similar terms and maturities. The carrying amounts of
marketable securities and marketable securities included in preneed funeral
trust investments, preneed cemetery trust investments and cemetery perpetual
care trust investments are stated at fair value as they are classified as
available for sale under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The fair value of the Companys long-term variable- and
fixed-rate debt is estimated using quoted market prices, where applicable, or
future cash flows discounted at rates for similar types of borrowing
arrangements. (f) Prearranged Trust Receivable and Prearranged Deferred Revenue The Company adopted FIN 46R effective April 30, 2004, as described in Note
2(a). The following discussion describes the Companys accounting prior to the
adoption of FIN 46R. The Company evaluated the collectibility of the
prearranged trust receivable for impairment when the fair market value of the
trust assets was below the recorded prearranged trust receivable balance. A
prearranged trust receivable was deemed to be impaired when, based on current
information and events, it was probable that the Company would be unable to
collect all amounts from the trust at the time the receivables are due. In
those instances that a receivable was deemed to be impaired, a valuation
allowance was provided on the trust receivable to reduce it to the currently
estimated recoverable amount with a corresponding reduction to the associated
deferred revenue balance. There was no income statement impact as long as the
deferred revenue was not below the estimated costs to deliver the underlying
products or services. If the deferred revenue were below the estimated costs
to deliver the underlying products or services, the Company would record a
charge to earnings. The valuation allowance as of October 31, 2003 was $4,500. (g) Inventories Inventories are stated at the lower of cost (specific identification and
first-in, first-out methods) or net realizable value. The portion of developed
cemetery property that management estimates will be used in the next twelve
months is included in inventories. Such estimates are based on the Companys
historical experience or results. (h) Depreciation and Amortization Buildings and equipment are recorded at cost and are depreciated over
their estimated useful lives, ranging from 10 to 40 years and from 3 to 10
years, respectively, primarily using the straight-line method. SFAS No. 142, Goodwill and Other Intangibles, provides that goodwill is
no longer amortized, but must be tested for impairment using a fair value
approach rather than an undiscounted cash flow approach. The Companys
evaluation of goodwill is performed at the funeral and cemetery segments, which
constitute the Companys reporting 10




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) units. In the fourth quarter of each fiscal year, the Company compares the
fair value with the book value for each reporting unit. The Company recorded a
noncash goodwill impairment charge of $73,000 in the fourth quarter of fiscal
year 2003 related to its cemetery segment as a result of the annual goodwill
impairment review. Goodwill decreased $68 to $403,722 at April 30, 2004
compared to $403,790 at October 31, 2003, primarily due to asset sales. (i) Stock-Based Compensation At April 30, 2004, the Company had five stock-based employee compensation
plans, which are described in more detail in Note 17 to the consolidated
financial statements of the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. The Company accounts for those plans under the
recognition and measurement principles of Accounting Principles Board (APB)
Opinion No. 25, Accounting for Stock Issued to Employees and has adopted the
disclosure-only provisions of SFAS No. 123, Accounting for Stock-Based
Compensation and SFAS No. 148, Accounting for Stock-Based Compensation -
Transition and Disclosure - an Amendment of FASB Statement No. 123. No
stock-based employee compensation cost related to stock options is reflected in
net earnings, as all options granted under those plans had an exercise price
equal to or greater than the market value of the underlying common stock on the
grant date. The expense related to the restricted stock granted in fiscal year
2004 is reflected in net earnings and amounted to $258 and $373 for the three
and six months ended April 30, 2004, respectively. See Note 1(n) for further
discussion on the Companys restricted stock. 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 Ended
    
    Six Months EndedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Net earnings
    
    $
    14,757
    
    
    $
    9,491
    
    
    $
    26,485
    
    
    $
    18,964Stock-based employee compensation expense
included in reported net earnings, net of tax
    
    
    160
    
    
    
    
    
    
    
    231
    
    
    
    Total stock-based employee compensation expense
determined under fair value-based method,
net of tax
    
    
    (554
    )
    
    
    (718
    )
    
    
    (971
    )
    
    
    (1,445
    )Pro forma net earnings
    
    $
    14,363
    
    
    $
    8,773
    
    
    $
    25,745
    
    
    $
    17,519Net earnings per common share:Basic  as reported
    
    $
    .14
    
    
    $
    .09
    
    
    $
    .25
    
    
    $
    .18Basic  pro forma
    
    $
    .13
    
    
    $
    .08
    
    
    $
    .24
    
    
    $
    .16Diluted  as reported
    
    $
    .14
    
    
    $
    .09
    
    
    $
    .24
    
    
    $
    .18Diluted  pro forma
    
    $
    .13
    
    
    $
    .08
    
    
    $
    .24
    
    
    $
    .16
 (j) Funeral Revenue The Company sells prearranged funeral services and merchandise under
contracts that provide for delivery of the services and merchandise at the time
of death. Prearranged funeral services are recorded as funeral revenue in the
period the funeral is performed. Prearranged funeral merchandise is recognized
as revenue upon delivery. Prior to performing the funeral or delivery of the
merchandise, such sales are deferred. 11




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) Commissions and other direct costs that vary with and are primarily
related to the acquisition of new prearranged funeral service sales and
prearranged funeral merchandise sales are deferred and amortized as the
contracts are delivered in accordance with SFAS No. 60, Accounting and
Reporting for Insurance Companies. Indirect costs of marketing prearranged
funeral services are expensed in the period in which incurred. Prearranged funeral services and merchandise generally are funded either
through trust or escrow accounts established by the Company or through
third-party insurance companies. Principal amounts deposited in the trust
or escrow accounts are available to the Company as funeral services and
merchandise are delivered and are refundable to the customer in those
situations where state law provides for the return of those amounts under the
purchasers option to cancel the contract. Certain jurisdictions provide for
non-refundable trust or escrow accounts where the Company receives such
amounts upon cancellation by the customer. The Company defers all dividends
and interest earned and net capital gains and losses realized by preneed
funeral trust or escrow accounts until the underlying service or
merchandise is delivered. Earnings are withdrawn from trust or escrow accounts only as funeral
services and merchandise are delivered or contracts are cancelled, except in
jurisdictions that permit earnings to be withdrawn currently and in unregulated
jurisdictions where escrow accounts are used. Even so, such withdrawn earnings
are not recognized as revenue until the related funeral services are performed
or merchandise delivered. When prearranged funeral services and merchandise
are funded through insurance policies purchased by customers from third-party
insurance companies, the Company earns a commission if it acts as agent on the
sale of the policies. Insurance commissions, net of related expenses, are
recognized at the point at which the commission is no longer subject to refund.
Policy proceeds, including the buildup in the face value of the insurance
contracts, are available to the Company as funeral services and merchandise are
delivered. Funeral services and merchandise sold at the time of need are recorded as
funeral revenue in the period the funeral is performed or the merchandise is
delivered. (k) Cemetery Revenue The Company sells preneed cemetery merchandise and services under
contracts that provide for delivery of the merchandise and services at the time
of need. Preneed cemetery merchandise and service sales are recorded as
cemetery revenue in the period the merchandise is delivered or service is
performed. In certain jurisdictions in which the Company operates, local law or
contracts with customers generally require that a portion of the sale price of
preneed cemetery merchandise and services be placed in trust or escrow
accounts. The Company defers all dividends and interest earned and net capital
gains and losses realized by preneed cemetery merchandise and service trust
or escrow accounts until the underlying merchandise or service is
delivered. Principal and earnings are withdrawn only as the merchandise and
services are delivered or contracts are cancelled. For preneed sales of interment rights (cemetery property), the associated
revenue and all costs to acquire the sale are recognized in accordance with
SFAS No. 66, Accounting for Sales of Real Estate. Under SFAS No. 66,
recognition of revenue and costs must be deferred until 10 percent of the
property sale price has been collected. 12




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) Pursuant to perpetual care contracts and laws, a portion, generally 10
percent, of the proceeds from cemetery property sales is deposited into
perpetual care trusts. The income from these trusts, which have been
established in most jurisdictions in which the Company operates cemeteries, is
used for maintenance of those cemeteries, but principal, including in some
jurisdictions net realized capital gains, must generally be held in trust in
perpetuity. The Company currently recognizes and withdraws all dividend and
interest income earned and, where permitted, capital gains realized by
perpetual care trusts. Some of the Companys sales of cemetery property and merchandise are made
under installment contracts bearing interest at prevailing rates. Finance
charges are recognized as cemetery revenue under the effective interest method
over the terms of the related installment receivables. (l) Allowance for Doubtful Accounts The Company establishes an allowance based on a range of percentages
applied to accounts receivable aging categories. These percentages are based
on historical collection and write-off experience. (m) Income Taxes Income taxes are accounted for using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. Management provides a valuation allowance against
the deferred tax asset for amounts which are not considered more likely than
not to be realized. The Company received a $33,222 income tax refund in December 2003 due to a
change in the tax accounting methods for cemetery merchandise revenue. The
Company used this refund to reduce the outstanding balance of its Term Loan B. (n) Earnings Per Common Share Basic earnings per common share is computed by dividing net earnings by
the weighted average number of common shares outstanding during each period.
Diluted earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if the dilutive
potential common shares (in this case, exercise of the Companys time-vest
stock options and non-vested restricted stock awards) had been issued during
each period as discussed in Note 8. On June 26, 2003, the Company announced that its Board of Directors had
approved a new stock repurchase program that allows the Company to invest up to
$25,000 in repurchases of its Class A common stock. 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
April 30, 2004, the Company had repurchased 13




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) 2,358,400 shares of its Class A common stock at an average price of $5.76 per
share. On December 22, 2003, the Company granted 271,000 shares of restricted
stock to its executive officers, which are included in total shares outstanding
but are not included in the weighted average number of common shares
outstanding in each period until the shares vest. The restricted stock vests
equally on October 31, 2004, October 31, 2005 and October 31, 2006. (o) Derivatives The Company accounts for its derivative financial instruments under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
The notional amounts of derivative financial instruments do not represent
amounts exchanged between parties and, therefore, are not a measure of the
Companys exposure resulting from its use of derivatives. The amounts
exchanged are calculated based upon the notional amounts as well as other terms
of the instruments, such as interest rates, exchange rates or other indices.
In accordance with SFAS No. 133, the Company accounts for its 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. (p) Reclassifications Certain reclassifications have been made to the 2003 condensed
consolidated statements of earnings and balance sheet in order for these
periods to be comparable. These reclassifications had no effect on net
earnings or shareholders equity. (2) Change in Accounting Principles (a) FASB Interpretation No. 46 (FIN 46 and FIN 46R), Consolidation
of Variable Interest Entities In January 2003, the Financial Accounting Standards Board (FASB) issued
FASB Interpretation No. 46, Consolidation of Variable Interest Entities, an
Interpretation of Accounting Research Bulletin (ARB) No. 51. This
interpretation clarifies the application of ARB No. 51, Consolidated Financial
Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient
equity at risk for the entity to finance its activities without additional
subordinated financial support from other parties. In December 2003, the FASB
revised FASB Interpretation No. 46 (FIN 46R). The Company implemented FIN 46R as of April 30, 2004, which resulted in
the consolidation of the Companys preneed funeral and cemetery merchandise and
service trusts and the Companys cemetery perpetual care trust. This
implementation was as of April 30, 2004 and only affected the Companys
consolidated balance sheet and had no impact on the Companys second quarter
2004 results of operations or cash flows. In future periods, the
implementation of FIN 46R, as it relates to the consolidation of trust,
will affect classifications within the 14




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles(Continued) balance sheet, statement of earnings and statement of cash flows, but will have
no effect on shareholders equity, net cash flow or the recognition and
reporting of revenues or net earnings in the statement of earnings. Although FIN 46R requires consolidation of the preneed funeral and
cemetery merchandise and service trusts and cemetery perpetual care trusts, it
does not change the legal relationships among the trusts, the Company and its
customers. In the case of preneed funeral and cemetery merchandise and service
trusts, the customers are the legal beneficiaries. In the case of cemetery
perpetual care trusts, the Company does not have a legal right to the perpetual
care trust assets. For these reasons, the Company has 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 classified
deposits to the funeral and cemetery merchandise and services trusts as liability non-controlling interests
and classified deposits to the cemetery perpetual care trusts as
non-controlling interests outside of liabilities. Both the preneed funeral and cemetery merchandise and service trusts and
the cemetery perpetual care trusts hold investments in marketable securities
which have been classified as available-for-sale. These investments are
reported at fair value, with unrealized gains and losses excluded from earnings
and reported as a separate component of accumulated other comprehensive 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 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 loss to deferred revenues. Beginning after April 30, 2004, the Company will recognize realized
earnings of the preneed funeral and cemetery merchandise and service trusts and
cemetery perpetual care trusts within other income, net (with a corresponding
debit to the related trust asset). The Company will recognize a corresponding
expense within other income, net equal to the realized earnings of these trusts
attributable to the non-controlling interest holders (with a corresponding
credit to non-controlling interest in funeral and cemetery trusts or
non-controlling interest in perpetual care trusts, as the case may be). The
net effect will be an increase by the amount of the realized earnings in both
the trust asset and the related non-controlling interest; there will be no
effect on net income. The Company will simultaneously also recognize a similar
expense for realized earnings of the trusts attributable to the Company (with a
corresponding credit to deferred preneed funeral or cemetery revenue), when
such earnings have not been earned by the Company through the performance of
services or delivery of merchandise. In the case of preneed funeral and
cemetery merchandise and service trusts, the Company will recognize 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 will recognize
investment earnings in cemetery revenues when such earnings are realized and
distributable (with a corresponding debit to non-controlling interest in
perpetual care trusts). These earnings and related funds are intended to
defray cemetery maintenance costs. The
end result of FIN 46R is that the Companys trust assets are now recorded on
the 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 the other income line,
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 perpetual care
trust earnings are recognized as revenue as they are realized in the
trust and distributable. In summary, the adoption of FIN 46R
had no effect on revenues, net earnings, cash flows or
shareholders equity. 15




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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) For more detailed discussions of the Companys accounting policies after
the implementation of FIN 46R, see Notes 3 through 6. (2) Change in Accounting Principles(Continued) (b) Insurance Funded Preneed Funeral Contracts The Company has changed its method of accounting for insurance funded
preneed funeral contracts as the Company has concluded that its insurance
funded preneed funeral contracts are not assets and liabilities as defined by
Statement of Financial Accounting Concepts No. 6, Elements in Financial
Statements. Therefore, the Company has removed from its consolidated balance
sheet amounts relating to insurance funded preneed funeral contracts previously
recorded in prearranged receivables, net and prearranged deferred revenue, net,
which at October 31, 2003 were $327,708 (of which $11,152 related to the
Companys assets held for sale). The removal of these amounts did not have an
impact on the Companys consolidated shareholders equity, results of
operations or cash flows. See Note 3 for additional information on insurance
related preneed funeral balances. (c) Other Changes In December 2003, the FASB issued revised SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefits  an amendment of
FASB Statements No. 87, 88, and 106. This statement revises employers
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by SFAS No.
87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. The provisions of the original
SFAS No. 132 remain in effect until the provisions of this statement are
adopted. Except as noted, this statement was effective for financial
statements with fiscal years ending after December 15, 2003. The adoption of
revised SFAS No. 132 had no impact on the Companys financial condition or
results of operations. (3) Preneed Funeral Activities The Company sells price-guaranteed preneed funeral contracts through
various programs. Because the services or merchandise will not be provided
until the future, most states require that all or a portion of the customer
payments under these contracts be protected for the benefit of the customers
pursuant to applicable law. Some or all of the funds may be required to be
placed into trust accounts (trust funded preneed funeral contracts).
Alternatively, where allowed, customers may purchase a life insurance or
annuity policy from third-party insurance companies to fund their preneed
funeral contracts (insurance funded preneed funeral contracts). The funeral
goods and services selected at the time of contract origination will be funded
by the insurance policy proceeds, which include increasing insurance benefits.
Under either customer funding option, the Company enters into a preneed funeral
contract with the customer to provide funeral services in the future. Effective April 30, 2004, the Company changed certain aspects of its
accounting for preneed funeral contracts and related trust investments in
connection with the implementation of FIN 46R. See Note 2(a) for additional
information. The Company also changed its accounting for insurance funded
preneed funeral contracts. See Note 2(b) for additional information. The
contract amounts associated with unfulfilled insurance funded preneed funeral
contracts are not reflected on the consolidated balance sheet. However, when a
trust funded preneed funeral contract is entered into, the Company records an
asset (included in preneed funeral receivables and trust investments) and a
corresponding liability (included in deferred preneed funeral revenues) for the
contract price. As the customer makes payments on the 16




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) contract prior to performance by the Company, the Company deposits into the
related trust the required portion of the payment, resulting in a credit to the
relevant non-controlling interest account and a corresponding debit to deferred
preneed funeral revenues. 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 will
recognize realized earnings of these trusts within other income, net (with a
corresponding debit to preneed funeral receivables and trust investments). The
Company will recognize a corresponding expense within other income, net equal
to the realized earnings of the trusts attributable to the non-controlling
interest holders (with a corresponding credit to non-controlling interest in
funeral and cemetery trusts), or attributable to the Company (with a
corresponding credit to deferred preneed funeral revenues) when such earnings
have not been earned by the Company through the performance of services or
delivery of merchandise. The net effect will be an increase by the amount of
the unrealized earnings in both (1) the trust asset and (2) the related
non-controlling interest; there will be no effect on net income. As of April
30, 2004, the cumulative undistributed net trust investment earnings of the
funeral merchandise and service trusts are included in non-controlling interest
in funeral and cemetery trusts instead of deferred preneed funeral revenues.
Upon performance of the funeral services, the Company will recognize as
revenues amounts attributed to the non-controlling interest holders, 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 April 30, 2004 are as follows: April 30, 2004Trust assets
    
    $
    449,164Receivables from customers
    
    
    65,118Preneed funeral receivables and trust investments
    
    $
    514,282
 Upon cancellation of a trust funded preneed funeral contract, a customer
is generally entitled to receive a refund of the funds held in trust. In many
jurisdictions, the Company may be obligated to fund any shortfall if the
amounts deposited by the customer exceed the funds in trust including
investment income. As a result, when realized or unrealized losses of a trust
result in trust funded preneed funeral contracts being under-funded, the
Company assesses those contracts to determine whether a loss provision should
be recorded. No loss amounts have been required to be recognized as of April
30, 2004. 17




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) Preneed funeral receivables and trust investments 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 continue to be 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 April 30, 2004 are detailed below. The cost basis of
the funeral merchandise and services trust assets below reflect an other than
temporary decline in the trust assets of approximately $70,549 as of April 30,
2004 from their original cost basis. The Company believes the unrealized
losses reflected below of $15,388 related to trust investments are temporary in nature. Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    MarketCash, money market and other
short-term securities
    
    $
    73,518
    
    
    $
    12
    
    
    $
    
    
    
    $
    73,530U.S. Government, agencies
and municipalities
    
    
    2,728
    
    
    
    147
    
    
    
    (20
    )
    
    
    2,855Corporate bonds
    
    
    23,189
    
    
    
    1,880
    
    
    
    (181
    )
    
    
    24,888Preferred stocks
    
    
    70,652
    
    
    
    1,014
    
    
    
    (1,626
    )
    
    
    70,040Common stocks
    
    
    244,509
    
    
    
    7,590
    
    
    
    (13,334
    )
    
    
    238,765Mutual funds
    
    
    26,603
    
    
    
    1,064
    
    
    
    (227
    )
    
    
    27,440Insurance contracts and other long-
term investments
    
    
    21,324
    
    
    
    298
    
    
    
    
    
    
    
    21,622Trust investments
    
    $
    462,523
    
    
    $
    12,005
    
    
    $
    (15,388
    )
    
    $
    459,140Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.3
    %Accrued investment income, net
of fees of $652
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,229Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (11,205
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    449,164
 Maturities of debt securities are estimated as follows: April 30, 2004Due in one year or less
    
    $
    2,947Due in one to five years
    
    
    7,812Due in five to ten years
    
    
    16,097Thereafter
    
    
    887$
    27,743
 Deferred Preneed Funeral Revenues At April 30, 2004, deferred preneed funeral revenues represent future
funeral contract revenues. This includes distributed and distributable trust
investment earnings associated with unperformed trust funded preneed funeral 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) 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. At October 31, 2003 (prior to
implementation of FIN 46R), prearranged deferred revenue, net included the
original price of a trust funded preneed funeral contract plus the net trust
investment earnings. Insurance Funded Preneed Funeral Contracts Insurance funded preneed funeral contracts that will be funded by life
insurance or annuity contracts issued by third party insurers are not reflected
above or in the consolidated balance sheet. The net amount of these contracts
that have not been fulfilled at April 30, 2004 and October 31, 2003 was
$339,763 and $327,708, respectively, of which $8,001 and $11,152 related to the
Companys assets held for sale at April 30, 2004 and October 31, 2003,
respectively. The proceeds of the life insurance policies or annuity contracts
will be reflected in funeral revenues as these funerals are performed by the
Company. (4) Preneed Cemetery Activities The Company sells price-guaranteed preneed cemetery contracts providing
for property interment rights, merchandise or services to be used in the future
at prices prevailing when the agreements are signed. Some or all of the funds
received under these contracts for merchandise or services may be required to
be placed into trust accounts, pursuant to applicable state law. Effective
April 30, 2004, the Company changed certain aspects of its accounting for
preneed cemetery contracts upon implementation of FIN 46R. For additional
information, see Note 2(a). Beginning with the third quarter of 2004, the Company will recognize
realized earnings of these trusts within other income, net (with a
corresponding debit to preneed cemetery receivables and trust investments).
The Company will recognize a corresponding expense within other income, net
equal to the realized earnings of the trusts attributable to the
non-controlling interest holders (with a corresponding credit to
non-controlling interest in funeral and cemetery trusts), or attributable to
the Company (with a corresponding credit to deferred preneed cemetery revenues)
when such earnings have not been earned by the Company through the performance
of services or delivery of merchandise. The net effect will be an increase by
the amount of the unrealized earnings in both (1) the trust asset and (2) the
related non-controlling interest; there will be no effect on net income. As of
April 30, 2004, the cumulative undistributed net trust investment earnings of
the cemetery merchandise and service trusts are included in non-controlling
interest in funeral and cemetery trusts instead of deferred preneed cemetery
revenues. Upon performance of services or delivery of merchandise, the Company
will recognize as revenues amounts attributed to the non-controlling interest
holders, including realized trust earnings. 19




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (4) Preneed Cemetery Activities(Continued) Preneed Cemetery Receivables and Trust Investments Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the
property interment rights, merchandise or services are needed. The components
of preneed cemetery receivables and trust investments in the condensed
consolidated balance sheet at April 30, 2004 are as follows: April 30, 2004Trust assets
    
    $
    189,897Receivables from customers
    
    
    66,009Preneed cemetery receivables and trust investments
    
    $
    255,906
 The cost and market values associated with the preneed cemetery
merchandise and services trust assets at April 30, 2004 are detailed below. The
cost basis of the cemetery merchandise and services trust assets below
reflected an other than temporary decline in the trust assets of approximately
$40,831 as of April 30, 2004 from their original cost basis. The Company
believes the unrealized losses reflected below of $7,839 related to
trust investments are temporary in nature. Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    MarketCash, money market and other
short-term investments
    
    $
    29,290
    
    
    $
    12
    
    
    $
    
    
    
    $
    29,302U.S. Government, agencies
and municipalities
    
    
    781
    
    
    
    29
    
    
    
    (3
    )
    
    
    807Corporate bonds
    
    
    13,159
    
    
    
    1,004
    
    
    
    (591
    )
    
    
    13,572Preferred stocks
    
    
    30,957
    
    
    
    597
    
    
    
    (477
    )
    
    
    31,077Common stocks
    
    
    108,759
    

    
    
    2,682
    
    
    
    (6,767
    )
    
    
    104,674Mutual funds
    
    
    11,280
    
    
    
    541
    
    
    
    (1
    )
    
    
    11,820Insurance contracts and other long-term
investments
    
    
    742
    
    
    
    
    
    
    
    
    
    
    
    742Trust investments
    
    $
    194,968
    
    
    $
    4,865
    
    
    $
    (7,839
    )
    
    $
    191,994Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98.5
    %Accrued investment income, net
of fees of $273
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    631Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    ( 2,728
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    189,897
 Maturities of debt securities are estimated as follows: April 30, 2004Due in one year or less
    
    $
    1,594Due in one to five years
    
    
    5,619Due in five to ten years
    
    
    6,491Thereafter
    
    
    675$
    14,379
 (4) Preneed Cemetery Activities(Continued) 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) Deferred Preneed Cemetery Revenues At April 30, 2004, deferred preneed cemetery revenues represent future
preneed cemetery revenues to be recognized upon delivery of merchandise or
performance of services. This includes distributed and distributable trust
investment earnings associated with the deferred items where the related cash
or investments are not held in trust accounts (generally because the Company
was not required to deposit the cash in the trust or was permitted to withdraw
the cash from the trust before performance of the service or delivery of the
merchandise). Future contract revenues and non-distributable net trust
investment earnings where the related cash or investments are held in trust
accounts are included in non-controlling interest in funeral and cemetery
trusts. At October 31, 2003 (prior to implementation of FIN 46R), prearranged
deferred revenue, net represents the original contract price for the preneed
cemetery items deferred plus net investment earnings associated with the
deferred items. (5) Cemetery Perpetual Care Trusts The Company is required by state law to pay into perpetual care trust
funds a portion of the proceeds from the sale of cemetery property interment
rights. As a result of the implementation of FIN 46R, the Company has
consolidated the perpetual care trusts, including investments accounted
for under SFAS No. 115, resulting in such funds being reflected in cemetery
perpetual care trust investments within total assets, with a corresponding
amount reflected as non-controlling interest in perpetual care trusts.
Beginning April 30, 2004, the Company will recognize realized earnings of these
trusts within other income, net (with a corresponding debit to cemetery
perpetual care trust investments). The Company will simultaneously recognize a
corresponding expense within other income, net for the amount of realized
earnings of the trusts attributable to the non-controlling interest holders
(with a corresponding credit to non-controlling interest in perpetual care
trusts). The net effect will be an increase by the amount of the realized
earnings of the trusts in both the trust asset and the related non-controlling
interest; there will be no effect on net income. The cost and market values of
the trust investments held by the perpetual care trusts at April 30, 2004
are detailed below. The cost basis of the perpetual care trusts below
reflect an other than temporary decline in the trust assets of $29,804 as of
April 30, 2004 from their original cost basis. The Company believes the
unrealized losses reflected below of $5,971 related to trust investments are temporary in
nature. Unrealized
    
    UnrealizedCost
    
    Gains
    
    Losses
    
    MarketCash, money market and other
short-term investments
    
    $
    33,183
    
    
    $
    
    
    
    $
    (1
    )
    
    $
    33,182U.S. Government, agencies
and municipalities
    
    
    3,295
    
    
    
    77
    
    
    
    (92
    )
    
    
    3,280Corporate bonds
    
    
    21,292
    
    
    
    2,651
    
    
    
    (37
    )
    
    
    23,906Preferred stocks
    
    
    51,636
    
    
    
    1,011
    
    
    
    (286
    )
    
    
    52,361Common stocks
    
    
    81,460
    
    
    
    6,506
    
    
    
    (5,478
    )
    
    
    82,488Mutual funds
    
    
    8,070
    
    
    
    161
    
    
    
    (77
    )
    
    
    8,154Insurance contracts and other long-term
investments
    
    
    852
    
    
    
    15
    
    
    
    
    
    
    
    867Trust investments
    
    $
    199,788
    
    
    $
    10,421
    
    
    $
    (5,971
    )
    
    $
    204,238Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102.2
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    876Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    205,114
 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) (5) Cemetery Perpetual Care Trusts(Continued) Maturities of debt securities are estimated as follows: April 30, 2004Due in one year or less
    
    $
    2,606Due in one to five years
    
    
    3,810Due in five to ten years
    
    
    18,670Thereafter
    
    
    2,100$
    27,186
 Realized and distributable earnings from these perpetual care trust
investments are recognized in current cemetery revenues and are used to defray
cemetery maintenance costs which are expensed as incurred. Recognized earnings
related to these perpetual care trust investments were $2,231 and $2,090 for
the three months ended April 30, 2004 and 2003, respectively, and $4,619 and
$3,976 for the six months ended April 30, 2004 and 2003, respectively. (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual
Care Trusts Non-Controlling Interest in Funeral and Cemetery Trusts Effective April 30, 2004, the Company consolidated the preneed funeral and
cemetery merchandise and service trusts associated with its preneed
funeral and cemetery activities as a result of the implementation of FIN 46R.
Although FIN 46R requires the consolidation of the preneed funeral and cemetery
merchandise and service trusts, it does not change the legal relationships
among the trusts, the Company and its customers. The customers are the legal
beneficiaries of these funeral and cemetery merchandise and service trusts, and
therefore, their interests in these trusts represent a non-controlling interest
in subsidiaries. For additional information, see Note 2(a). 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
trust 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 April 30, 2004 are as
follows: Non-controlling InterestCemeteryPreneed
    
    Preneed
    
    
    
    
    
    PerpetualFuneral
    
    Cemetery
    
    Total
    
    CareTrust assets at market value
    
    $
    449,164
    
    
    $
    189,897
    
    
    $
    639,061
    
    
    $
    205,114Less:Pending withdrawals
    
    
    (5,675
    )
    
    
    (1,324
    )
    
    
    (6,999
    )
    
    
    (2,909
    )Pending deposits
    
    
    2,197
    
    
    
    1,379
    
    
    
    3,576
    
    
    
    477Non-controlling interest
    
    $
    445,686
    
    
    $
    189,952
    
    
    $
    635,638
    
    
    $
    202,682
 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) (7) Commitments and Contingencies The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While
the outcome of these proceedings cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company. The Company carries insurance with coverages and coverage limits that it
believes to be adequate. Although there can be no assurance that such
insurance is sufficient to protect the Company against all contingencies,
management believes that its insurance protection is reasonable in view of the
nature and scope of the Companys operations. (8) Reconciliation of Basic and Diluted Per Share Data Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataThree Months Ended April 30, 2004Earnings from continuing operations
    
    $
    12,716Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    12,716
    
    
    
    107,438
    
    
    $
    .12Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    962Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    12,716
    
    
    
    108,400
    
    
    $
    .12
 Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataThree Months Ended April 30, 2003Earnings from continuing operations
    
    $
    9,736Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    9,736
    
    
    
    108,299
    
    
    $
    .09Effect of dilutive securities:Time-vest stock options assumed exercised
    
    
    
    
    
    
    3Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock options
assumed exercised
    
    $
    9,736
    
    
    
    108,302
    
    
    $
    .09
 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) (8) Reconciliation of Basic and Diluted Per Share Data(Continued) Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataSix Months Ended April 30, 2004Earnings from continuing operations
    
    $
    24,074Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    24,074
    
    
    
    107,660
    
    
    $
    .22Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    517Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    24,074
    
    
    
    108,177
    
    
    $
    .22
 Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataSix Months Ended April 30, 2003Earnings from continuing operations
    
    $
    18,530Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    18,530
    
    
    
    108,169
    
    
    $
    .17Effect of dilutive securities:Time-vest stock options assumed exercised
    
    
    
    
    
    
    27Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock options
assumed exercised
    
    $
    18,530
    
    
    
    108,196
    
    
    $
    .17
 Options to purchase 701,119 and 1,312,247 shares of common stock at prices
ranging from $6.96 to $27.25 and $5.96 to $27.25 per share were outstanding
during the three and six months ended April 30, 2004, respectively, but were
not included in the computation of diluted earnings per share because the
exercise prices of the options were greater than the average market price of
the common shares. These options expire between July 31, 2004 and April 12,
2005. Options to purchase 6,869,117 and 4,948,670 shares of common stock at
prices ranging from $3.78 to $27.25 and $4.41 to $27.25 per share were
outstanding during the three and six months ended April 30, 2003, respectively,
but were not included in the computation of diluted earnings per share because
the exercise prices of the options were greater than the average market price
of the common shares. (9) Segment Data The Companys primary reportable operating segments are based on products
and services and include funeral and cemetery operations. Pursuant to SFAS No.
144, the operating results of the Companys businesses identified for sale that
meet the criteria in SFAS No. 144 are reported in the discontinued operations
section of the consolidated (9) Segment Data(Continued) 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) statements of earnings (see Note 12). Accordingly, the results of operations
included in the segment information below reflect only the Companys continuing
operations. The Companys reportable segment information is as follows: Reconciling
    
    ConsolidatedFuneral
    
    Cemetery
    
    Items
    
    TotalsRevenues from external customers:Three months ended April 30,2004
    
    $
    71,002
    
    
    
    59,077
    
    
    
    
    
    
    $
    130,0792003
    
    $
    70,080
    
    
    
    57,228
    
    
    
    
    
    
    $
    127,308Six months ended April 30,2004
    
    $
    144,854
    
    
    
    114,718
    
    
    
    
    
    
    $
    259,5722003
    
    $
    140,787
    
    
    
    111,298
    
    
    
    
    
    
    $
    252,085Gross profit:Three months ended April 30,2004
    
    $
    21,550
    
    
    
    15,309
    
    
    
    
    
    
    $
    36,8592003
    
    $
    18,263
    
    
    
    14,315
    
    
    
    
    
    
    $
    32,578Six months ended April 30,2004
    
    $
    44,310
    
    
    
    29,379
    
    
    
    
    
    
    $
    73,6892003
    
    $
    37,164
    
    
    
    26,506
    
    
    
    
    
    
    $
    63,670Total assets:April 30, 2004
    
    $
    1,207,974
    
    
    
    1,306,900
    
    
    
    87,207
    
    
    $
    2,602,081October 31, 2003
    
    $
    1,312,177
    
    
    
    1,141,356
    
    
    
    119,989
    
    
    $
    2,573,522Goodwill:April 30, 2004
    
    $
    318,761
    
    
    
    84,961
    
    
    
    
    
    
    $
    403,722October 31, 2003
    
    $
    318,851
    
    
    
    84,939
    
    
    
    
    
    
    $
    403,790
 A reconciliation of total segment gross profit to total earnings from
continuing operations before income taxes for the three and six months ended
April 30, 2004 and 2003 is as follows: Three Months Ended
    
    Six Months EndedApril 30,
    
    April 30,2004
    
    2003
    
    2004
    
    2003Gross profit for reportable segments
    
    $
    36,859
    
    
    $
    32,578
    
    
    $
    73,689
    
    
    $
    63,670Corporate general and administrative expenses
    
    
    (4,621
    )
    
    
    (4,182
    )
    
    
    (8,534
    )
    
    
    (8,482
    )Severance charge
    
    
    (138
    )
    
    
    
    
    
    
    (2,131
    )
    
    
    Impairment and other charges, net
    
    
    (91
    )
    
    
    
    
    
    
    (91
    )
    
    
    Interest expense
    
    
    (11,953
    )
    
    
    (13,579
    )
    
    
    (24,474
    )
    
    
    (27,156
    )Investment income
    
    
    56
    
    
    
    84
    
    
    
    125
    
    
    
    171Other income (expense), net
    
    
    107
    
    
    
    802
    
    
    
    (47
    )
    
    
    1,684Earnings from continuing operations before
income taxes
    
    $
    20,219
    
    
    $
    15,703
    
    
    $
    38,537
    
    
    $
    29,887
 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) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes The following tables present the condensed consolidating historical
financial statements as of April 30, 2004 and October 31, 2003 and for the
three and six months ended April 30, 2004 and 2003, for the direct and indirect
domestic subsidiaries of the Company that serve as guarantors of the senior
subordinated notes, and the financial results of the Companys subsidiaries
that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto
Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic
subsidiaries, which are prohibited by law from guaranteeing the senior
subordinated notes. Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended April 30, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    65,919
    
    
    $
    5,083
    
    
    $
    
    
    
    $
    71,002Cemetery
    
    
    
    
    
    
    52,429
    
    
    
    6,648
    
    
    
    
    
    
    
    59,077
    
    
    
    118,348
    
    
    
    11,731
    
    
    
    
    
    
    
    130,079Costs and expenses:Funeral
    
    
    
    
    
    
    46,491
    
    
    
    2,961
    
    
    
    
    
    
    
    49,452Cemetery
    
    
    
    
    
    
    38,893
    
    
    
    4,875
    
    
    
    
    
    
    
    43,768
    
    
    
    85,384
    
    
    
    7,836
    
    
    
    
    
    
    
    93,220Gross profit
    
    
    
    
    
    
    32,964
    
    
    
    3,895
    
    
    
    
    
    
    
    36,859Corporate general and administrative
expenses
    
    
    4,621
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,621Severance charge
    
    
    119
    
    
    
    15
    
    
    
    4
    
    
    
    
    
    
    
    138Impairment and other charges, net
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Operating earnings (loss)
    
    
    (4,740
    )
    
    
    32,858
    
    
    
    3,891
    
    
    
    
    
    
    
    32,009Interest income (expense)
    
    
    9,800
    
    
    
    (19,548
    )
    
    
    (2,205
    )
    
    
    
    
    
    
    (11,953
    )Investment income
    
    
    56
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    56Other income (expense), net
    
    
    (351
    )
    
    
    556
    
    
    
    (98
    )
    
    
    
    
    
    
    107Earnings from continuing
operations before income taxes
    
    
    4,765
    
    
    
    13,866
    
    
    
    1,588
    
    
    
    
    
    
    
    20,219Income taxes
    
    
    1,552
    
    
    
    5,089
    
    
    
    862
    
    
    
    
    
    
    
    7,503Earnings from continuing operations
    
    
    3,213
    
    
    
    8,777
    
    
    
    726
    
    
    
    
    
    
    
    12,716Discontinued operations:Earnings from discontinued
operations before income taxes
    
    
    
    
    
    
    1,648
    
    
    
    58
    
    
    
    
    
    
    
    1,706Income tax benefit
    
    
    
    
    
    
    (335
    )
    
    
    
    
    
    
    
    
    
    
    (335
    )Earnings from discontinued
operations
    
    
    
    
    
    
    1,983
    
    
    
    58
    
    
    
    
    
    
    
    2,041Net earnings before equity in
subsidiaries
    
    
    3,213
    
    
    
    10,760
    
    
    
    784
    
    
    
    
    
    
    
    14,757Equity in subsidiaries
    
    
    11,544
    
    
    
    
    
    
    
    
    
    
    
    (11,544
    )
    
    
    Net earnings
    
    
    14,757
    
    
    
    10,760
    
    
    
    784
    
    
    
    (11,544
    )
    
    
    14,757Other comprehensive income, net
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262Comprehensive income
    
    $
    15,019
    
    
    $
    10,760
    
    
    $
    784
    
    
    $
    (11,544
    )
    
    $
    15,019
 26




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended April 30, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    65,299
    
    
    $
    4,781
    
    
    $
    
    
    
    $
    70,080Cemetery
    
    
    
    
    
    
    49,882
    
    
    
    7,346
    
    
    
    
    
    
    
    57,228
    
    
    
    115,181
    
    
    
    12,127
    
    
    
    
    
    
    
    127,308Costs and expenses:Funeral
    
    
    
    
    
    
    48,689
    
    
    
    3,128
    
    
    
    
    
    
    
    51,817Cemetery
    
    
    
    
    
    
    37,434
    
    
    
    5,479
    
    
    
    
    
    
    
    42,913
    
    
    
    86,123
    
    
    
    8,607
    
    
    
    
    
    
    
    94,730Gross profit
    
    
    
    
    
    
    29,058
    
    
    
    3,520
    
    
    
    
    
    
    
    32,578Corporate general and administrative
expenses
    
    
    4,182
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,182Operating earnings (loss)
    
    
    (4,182
    )
    
    
    29,058
    
    
    
    3,520
    
    
    
    
    
    
    
    28,396Interest income (expense)
    
    
    6,645
    
    
    
    (18,228
    )
    
    
    (1,996
    )
    
    
    
    
    
    
    (13,579
    )Investment income
    
    
    84
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    84Other income, net
    
    
    49
    
    
    
    665
    
    
    
    88
    
    
    
    
    
    
    
    802Earnings from continuing operations
before income taxes
    
    
    2,596
    
    
    
    11,495
    
    
    
    1,612
    
    
    
    
    
    
    
    15,703Income taxes
    
    
    773
    
    
    
    4,368
    
    
    
    826
    
    
    
    
    
    
    
    5,967Earnings from continuing
operations
    
    
    1,823
    
    
    
    7,127
    
    
    
    786
    
    
    
    
    
    
    
    9,736Discontinued operations:Loss from discontinued
operations before income taxes
    
    
    
    
    
    
    (303
    )
    
    
    (91
    )
    
    
    
    
    
    
    (394
    )Income tax benefit
    
    
    
    
    
    
    (149
    )
    
    
    
    
    
    
    
    
    
    
    (149
    )Loss from discontinued
operations
    
    
    
    
    
    
    (154
    )
    
    
    (91
    )
    
    
    
    
    
    
    (245
    )Net earnings before equity in
subsidiaries
    
    
    1,823
    
    
    
    6,973
    
    
    
    695
    
    
    
    
    
    
    
    9,491Equity in subsidiaries
    
    
    7,668
    
    
    
    
    
    
    
    
    
    
    
    (7,668
    )
    
    
    Net earnings
    
    
    9,491
    
    
    
    6,973
    
    
    
    695
    
    
    
    (7,668
    )
    
    
    9,491Other comprehensive income, net
    
    
    67
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    67Comprehensive income
    
    $
    9,558
    
    
    $
    6,973
    
    
    $
    695
    
    
    $
    (7,668
    )
    
    $
    9,558
 27




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Six Months Ended April 30, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    134,757
    
    
    $
    10,097
    
    
    $
    
    
    
    $
    144,854Cemetery
    
    
    
    
    
    
    102,553
    
    
    
    12,165
    
    
    
    
    
    
    
    114,718
    
    
    
    237,310
    
    
    
    22,262
    
    
    
    
    
    
    
    259,572Costs and expenses:Funeral
    
    
    
    
    
    
    94,570
    
    
    
    5,974
    
    
    
    
    
    
    
    100,544Cemetery
    
    
    
    
    
    
    76,180
    
    
    
    9,159
    
    
    
    
    
    
    
    85,339
    
    
    
    170,750
    
    
    
    15,133
    
    
    
    
    
    
    
    185,883Gross profit
    
    
    
    
    
    
    66,560
    
    
    
    7,129
    
    
    
    
    
    
    
    73,689Corporate general and administrative
expenses
    
    
    8,534
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,534Severance charge
    
    
    482
    
    
    
    1,629
    
    
    
    20
    
    
    
    
    
    
    
    2,131Impairment and other charges, net
    
    
    
    
    
    
    91
    
    
    
    
    
    
    
    
    
    
    
    91Operating earnings (loss)
    
    
    (9,016
    )
    
    
    64,840
    
    
    
    7,109
    
    
    
    
    
    
    
    62,933Interest income (expense)
    
    
    19,424
    
    
    
    (39,666
    )
    
    
    (4,232
    )
    
    
    
    
    
    
    (24,474
    )Investment income
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    125Other income (expense), net
    
    
    (924
    )
    
    
    911
    
    
    
    (34
    )
    
    
    
    
    
    
    (47
    )Earnings from continuing operations
before income taxes
    
    
    9,609
    
    
    
    26,085
    
    
    
    2,843
    
    
    
    
    
    
    
    38,537Income taxes
    
    
    2,953
    
    
    
    9,731
    
    
    
    1,779
    
    
    
    
    
    
    
    14,463Earnings from continuing
operations
    
    
    6,656
    
    
    
    16,354
    
    
    
    1,064
    
    
    
    
    
    
    
    24,074Discontinued operations:Earnings from discontinued
operations before income taxes
    
    
    
    
    
    
    2,286
    
    
    
    17
    
    
    
    
    
    
    
    2,303Income tax benefit
    
    
    
    
    
    
    (108
    )
    
    
    
    
    
    
    
    
    
    
    (108
    )Earnings from discontinued
operations
    
    
    
    
    
    
    2,394
    
    
    
    17
    
    
    
    
    
    
    
    2,411Net earnings before equity in
subsidiaries
    
    
    6,656
    
    
    
    18,748
    
    
    
    1,081
    
    
    
    
    
    
    
    26,485Equity in subsidiaries
    
    
    19,829
    
    
    
    
    
    
    
    
    
    
    
    (19,829
    )
    
    
    Net earnings
    
    
    26,485
    
    
    
    18,748
    
    
    
    1,081
    
    
    
    (19,829
    )
    
    
    26,485Other comprehensive income, net
    
    
    1,601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,601Comprehensive income
    
    $
    28,086
    
    
    $
    18,748
    
    
    $
    1,081
    
    
    $
    (19,829
    )
    
    $
    28,086
 28




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Six Months Ended April 30, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    131,244
    
    
    $
    9,543
    
    
    $
    
    
    
    $
    140,787Cemetery
    
    
    
    
    
    
    97,828
    
    
    
    13,470
    
    
    
    
    
    
    
    111,298
    
    
    
    229,072
    
    
    
    23,013
    
    
    
    
    
    
    
    252,085Costs and expenses:Funeral
    
    
    
    
    
    
    97,438
    
    
    
    6,185
    
    
    
    
    
    
    

    103,623Cemetery
    
    
    
    
    
    
    74,496
    
    
    
    10,296
    
    
    
    
    
    
    
    84,792
    
    
    
    171,934
    
    
    
    16,481
    
    
    
    
    
    
    
    188,415Gross profit
    
    
    
    
    
    
    57,138
    
    
    
    6,532
    
    
    
    
    
    
    
    63,670Corporate general and administrative
expenses
    
    
    8,482
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8,482Operating earnings (loss)
    
    
    (8,482
    )
    
    
    57,138
    
    
    
    6,532
    
    
    
    
    
    
    
    55,188Interest income (expense)
    
    
    13,916
    
    
    
    (37,051
    )
    
    
    (4,021
    )
    
    
    
    
    
    
    (27,156
    )Investment income
    
    
    171
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    171Other income, net
    
    
    294
    
    
    
    1,231
    
    
    
    159
    
    
    
    
    
    
    
    1,684Earnings from continuing operations
before income taxes
    
    
    5,899
    
    
    
    21,318
    
    
    
    2,670
    
    
    
    
    
    
    
    29,887Income taxes
    
    
    1,614
    
    
    
    8,101
    
    
    
    1,642
    
    
    
    
    
    
    
    11,357Earnings from continuing
operations
    
    
    4,285
    
    
    
    13,217
    
    
    
    1,028
    
    
    
    
    
    
    
    18,530Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    915
    
    
    

    (215
    )
    
    
    
    
    
    
    700Income taxes
    
    
    
    
    
    
    266
    
    
    
    
    
    
    
    
    
    
    
    266Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    649
    
    
    
    (215
    )
    
    
    
    
    
    
    434Net earnings before equity in
subsidiaries
    
    
    4,285
    
    
    
    13,866
    
    
    
    813
    
    
    
    
    
    
    
    18,964Equity in subsidiaries
    
    
    14,679
    
    
    
    
    
    
    
    
    
    
    
    (14,679
    )
    
    
    Net earnings
    
    
    18,964
    
    
    
    13,866
    
    
    
    813
    
    
    
    (14,679
    )
    
    
    18,964Other comprehensive income, net
    
    
    156
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    156Comprehensive income
    
    $
    19,120
    
    
    $
    13,866
    
    
    $
    813
    
    
    $
    (14,679
    )
    
    $
    19,120
 29




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Balance Sheets April 30, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    28,030
    
    
    $
    (366
    )
    
    $
    (668
    )
    
    $
    
    
    
    $
    26,996Marketable securities
    
    
    100
    
    
    
    26
    
    
    
    1,276
    
    
    
    
    
    
    
    1,402Receivables, net of allowances
    
    
    5,167
    
    
    
    38,254
    
    
    
    14,512
    
    
    
    
    
    
    
    57,933Inventories
    
    
    394
    
    
    
    33,335
    
    
    
    5,806
    
    
    
    
    
    
    
    39,535Prepaid expenses
    
    
    610
    
    
    
    1,665
    
    
    
    15
    
    
    
    
    
    
    
    2,290Deferred income taxes, net
    
    
    
    
    
    
    1,589
    
    
    
    
    
    
    
    
    
    
    
    1,589Assets held for sale
    
    
    
    
    
    
    33,585
    
    
    
    5,373
    
    
    
    
    
    
    
    38,958Total current assets
    
    
    34,301
    
    
    
    108,088
    
    
    
    26,314
    
    
    
    
    
    
    
    168,703Receivables due beyond one year, net of
allowances
    
    
    232
    
    
    
    62,155
    
    
    
    15,191
    
    
    
    
    
    
    
    77,578Preneed funeral receivables and trust
investments
    
    
    
    
    
    
    497,349
    
    
    
    16,933
    
    
    
    
    
    
    
    514,282Preneed cemetery receivables and trust
investments
    
    
    
    
    
    
    229,013
    
    
    
    26,893
    
    
    
    
    
    
    
    255,906Goodwill
    
    
    
    
    
    
    366,072
    
    
    
    30,450
    
    
    
    7,200
    
    
    
    403,722Deferred charges
    
    
    5,655
    
    
    
    221,844
    
    
    
    19,571
    
    
    
    
    
    
    
    247,070Cemetery property, at cost
    
    
    
    
    
    
    354,109
    
    
    
    23,570
    
    
    
    
    
    
    
    377,679Property and equipment, at cost
    
    
    31,557
    
    
    
    421,692
    
    
    
    33,499
    
    
    
    
    
    
    
    486,748Less accumulated depreciation
    
    
    18,299
    
    
    
    161,070
    
    
    
    11,401
    
    
    
    
    
    
    
    190,770Net property and equipment
    
    
    13,258
    
    
    
    260,622
    
    
    
    22,098
    
    
    
    
    
    
    
    295,978Deferred income taxes, net
    
    
    17,767
    
    
    
    24,757
    
    
    
    12,710
    
    
    
    (602
    )
    
    
    54,632Investment in subsidiaries
    
    
    93,947
    
    
    
    
    
    
    
    
    
    
    
    (93,947
    )
    
    
    Cemetery perpetual care trust investments
    
    
    
    
    
    
    205,114
    
    
    
    
    
    
    
    
    
    
    
    205,114Other assets
    
    
    104
    
    
    
    1,313
    
    
    
    
    
    
    
    
    
    
    
    1,417Total assets
    
    $
    165,264
    
    
    $
    2,330,436
    
    
    $
    193,730
    
    
    $
    (87,349
    )
    
    $
    2,602,081LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    5,639
    
    
    $

    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,639Accounts payable
    
    
    1,188
    
    
    
    4,994
    
    
    
    325
    
    
    
    
    
    
    
    6,507Accrued expenses and other current
liabilities
    
    
    21,735
    
    
    
    26,452
    
    
    
    5,340
    
    
    
    
    
    
    
    53,527Liabilities associated with assets held
for sale
    
    
    
    
    
    
    19,425
    
    
    
    4,327
    
    
    
    
    
    
    
    23,752Total current liabilities
    
    
    28,562
    
    
    
    50,871
    
    
    
    9,992
    
    
    
    
    
    
    
    89,425Long-term debt, less current maturities
    
    
    418,318
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    448,318Intercompany payables, net
    
    
    (1,052,812
    )
    
    
    1,021,780
    
    
    
    31,032
    
    
    
    
    
    
    
    Deferred preneed funeral revenue
    
    
    
    
    
    
    113,259
    
    
    
    47,437
    
    
    
    
    
    
    
    160,696Deferred preneed cemetery revenue
    
    
    
    
    
    
    226,265
    
    
    
    64,139
    
    
    
    
    
    
    
    290,404Non-controlling interest in funeral and
cemetery trusts
    
    
    
    
    
    
    635,638
    
    
    
    
    
    
    
    
    
    
    
    635,638Other long-term liabilities
    
    
    9,859
    
    
    
    3,722
    
    
    
    
    
    
    
    
    
    
    
    13,581Total liabilities
    
    
    (596,073
    )
    
    
    2,051,535
    
    
    
    182,600
    
    
    
    
    
    
    
    1,638,062Non-controlling interest in perpetual care
trusts
    
    
    
    
    
    
    202,682
    
    
    
    
    
    
    
    
    
    
    
    202,682Common stock
    
    
    107,335
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,335Other
    
    
    654,844
    
    
    
    75,793
    
    
    
    11,078
    
    
    
    (86,871
    )
    
    
    654,844Accumulated other comprehensive loss
    
    
    (842
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (842
    )Total shareholders equity
    
    
    761,337
    
    
    
    76,219
    
    
    
    11,130
    
    
    
    (87,349
    )
    
    
    761,337Total liabilities and shareholders equity
    
    $
    165,264
    
    
    $
    2,330,436
    
    
    $
    193,730
    
    
    $
    (87,349
    )
    
    $
    2,602,081
 30




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (10) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes(Continued) Condensed Consolidating Balance Sheets October 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    18,975
    
    
    $
    (478
    )
    
    $
    88
    
    
    $
    
    
    
    $
    18,585Marketable securities
    
    
    1,048
    
    
    
    26
    
    
    
    1,272
    
    
    
    
    
    
    
    2,346Receivables, net of allowances
    
    
    41,826
    
    
    
    40,852
    
    
    
    14,525
    
    
    
    
    
    
    
    97,203Inventories
    
    
    325
    
    
    
    33,323
    
    
    
    6,506
    
    
    
    
    
    
    
    40,154Prepaid expenses
    
    
    713
    
    
    
    2,137
    
    
    
    37
    
    
    
    
    
    
    
    2,887Deferred income taxes, net
    
    
    1,434
    
    
    
    1,556
    
    
    
    
    
    
    
    
    
    
    
    2,990Assets held for sale
    
    
    
    
    
    
    46,740
    
    
    
    5,377
    
    
    
    
    
    
    
    52,117Total current assets
    
    
    64,321
    
    
    
    124,156
    
    
    
    27,805
    
    
    
    
    
    
    
    216,282Receivables due beyond one year, net of
allowances
    
    
    147
    
    
    
    61,118
    
    
    
    15,109
    
    
    
    
    
    
    
    76,374Prearranged receivables, net
    
    
    
    
    
    
    848,625
    
    
    
    42,403
    
    
    
    
    
    
    
    891,028Goodwill
    
    
    
    
    
    
    366,157
    
    
    
    30,433
    
    
    
    7,200
    
    
    
    403,790Deferred charges
    
    
    7,271
    
    
    
    218,816
    
    
    
    20,980
    
    
    
    
    
    
    
    247,067Cemetery property, at cost
    
    
    
    
    
    
    353,885
    
    
    
    23,233
    
    
    
    
    
    
    
    377,118Property and equipment, at cost
    
    
    31,697
    
    
    
    416,293
    
    
    
    33,871
    
    
    
    
    
    
    
    481,861Less accumulated depreciation
    
    
    16,942
    
    
    
    154,004
    
    
    
    10,855
    
    
    
    
    
    
    
    181,801Net property and equipment
    
    
    14,755
    
    
    
    262,289
    
    
    
    23,016
    
    
    
    
    
    
    
    300,060Deferred income taxes, net
    
    
    17,767
    
    
    
    30,690
    
    
    
    12,710
    
    
    
    (602
    )
    
    
    60,565Investment in subsidiaries
    
    
    74,118
    
    
    
    
    
    
    
    
    
    
    
    (74,118
    )
    
    
    Other assets
    
    
    104
    
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    1,238Total assets
    
    $
    178,483
    
    
    $
    2,266,870
    
    
    $
    195,689
    
    
    $
    (67,520
    )
    
    $
    2,573,522LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    13,935
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,935Accounts payable
    
    
    348
    
    
    
    6,543
    
    
    
    383
    
    
    
    
    
    
    
    7,274Accrued expenses and other current
liabilities
    
    
    20,865
    
    
    
    33,001
    
    
    
    3,443
    
    
    
    
    
    
    
    57,309Liabilities associated with assets held
for sale
    
    
    
    
    
    
    25,757
    
    
    
    4,314
    
    
    
    
    
    
    
    30,071Total current liabilities
    
    
    35,148
    
    
    
    65,301
    
    
    
    8,140
    
    
    
    
    
    
    
    108,589Long-term debt, less current maturities
    
    
    458,180
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    488,180Intercompany payables, net
    
    
    (1,064,814
    )
    
    
    1,031,018
    
    
    
    33,796
    
    
    
    
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    1,109,081
    
    
    
    113,704
    
    
    
    
    
    
    
    1,222,785Other long-term liabilities
    
    
    11,110
    
    
    
    3,999
    
    
    
    
    
    
    
    
    
    
    
    15,109Total liabilities
    
    
    (560,376
    )
    
    
    2,209,399
    
    
    
    185,640
    
    
    
    
    
    
    
    1,834,663Common stock
    
    
    107,727
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,727Other
    
    
    633,575
    
    
    
    57,045
    
    
    
    9,997
    
    
    
    (67,042
    )
    
    
    633,575Accumulated other comprehensive loss
    
    
    (2,443
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,443
    )Total shareholders equity
    
    
    738,859
    
    
    
    57,471
    
    
    
    10,049
    
    
    
    (67,520
    )
    
    
    738,859Total liabilities and shareholders equity
    
    $
    178,483
    
    
    $
    2,266,870
    
    
    $
    195,689
    
    
    $
    (67,520
    )
    
    $
    2,573,522
 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 Statements of Cash Flows Six Months Ended April 30, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    51,664
    
    
    $
    7,045
    
    
    $
    2,170
    
    
    $
    
    
    
    $
    60,879Cash flows from investing activities:Proceeds from sales of marketable
securities
    
    
    1,019
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,019Proceeds from sale of assets, net
    
    
    (922
    )
    
    
    9,860
    
    
    
    
    
    
    
    
    
    
    
    8,938Additions to property and equipment
    
    
    (569
    )
    
    
    (7,596
    )
    
    
    (168
    )
    
    
    
    
    
    
    (8,333
    )Other
    
    
    
    
    
    
    41
    
    
    
    6
    
    
    
    
    
    
    
    47Net cash provided by (used in)
investing activities
    
    
    (472
    )
    
    
    2,305
    
    
    
    (162
    )
    
    
    
    
    
    
    1,671Cash flows from financing activities:Repayments of long-term debt
    
    
    (48,158
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (48,158
    )Intercompany receivables (payables)
    
    
    12,002
    
    
    
    (9,238
    )
    
    
    (2,764
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    4,711
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,711Purchase and retirement of common
stock
    
    
    (10,692
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (10,692
    )Net cash used in financing activities
    
    
    (42,137
    )
    
    
    (9,238
    )
    
    
    (2,764
    )
    
    
    
    
    
    
    (54,139
    )Net increase (decrease) in cash
    
    
    9,055
    
    
    
    112
    
    
    
    (756
    )
    
    
    
    
    
    
    8,411Cash and cash equivalents, beginning of
period
    
    
    18,975
    
    
    
    (478
    )
    
    
    88
    
    
    
    
    
    
    
    18,585Cash and cash equivalents, end of
period
    
    $
    28,030
    
    
    $
    (366
    )
    
    $
    (668
    )
    
    $
    
    
    
    $
    26,996
 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 Statements of Cash Flows Six Months Ended April 30, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    6,738
    
    
    $
    7,107
    
    
    $
    4,265
    
    
    $
    
    
    
    $
    18,110Cash flows from investing activities:Proceeds from sales of marketable
securities
    
    
    
    
    
    
    
    
    
    
    550
    
    
    
    
    
    
    
    550Proceeds from sale of assets, net
    
    
    (821
    )
    
    
    2,535
    
    
    
    
    
    
    
    
    
    
    
    1,714Additions to property and
equipment
    
    
    (1,085
    )
    
    
    (6,123
    )
    
    
    (265
    )
    
    
    
    
    
    
    (7,473
    )Other
    
    
    
    
    
    
    182
    
    
    
    (9
    )
    
    
    
    
    
    
    173Net cash provided by (used in)
investing activities
    
    
    (1,906
    )
    
    
    (3,406
    )
    
    
    276
    
    
    
    
    
    
    
    (5,036
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    50,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    50,000Repayments of long-term debt
    
    
    (7,338
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (7,338
    )Intercompany receivables
(payables)
    
    
    9,093
    
    
    
    (5,274
    )
    
    
    (3,819
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313Net cash provided by (used in)
financing activities
    
    
    52,068
    
    
    
    (5,274
    )
    
    
    (3,819
    )
    
    
    
    
    
    
    42,975Net increase (decrease) in cash
    
    
    56,900
    
    
    
    (1,573
    )
    
    
    722
    
    
    
    
    
    
    
    56,049Cash and cash equivalents, beginning of
period
    
    
    24,752
    
    
    
    3,209
    
    
    
    229
    
    
    
    
    
    
    
    28,190Cash and cash equivalents, end of
period
    
    $
    81,652
    
    
    $
    1,636
    
    
    $
    951
    
    
    $
    
    
    
    $
    84,239
 33




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Impairment and Other Charges In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company reviews its long-lived assets for
impairment when changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. SFAS No. 144 requires that long-lived assets
to be held and used be recorded at the lower of carrying amount or fair value.
Long-lived assets to be disposed of are to be recorded at the lower of carrying
amount or fair value, less cost to sell. In the first quarter of fiscal year
2004, the Company had designated certain real estate as held for sale. During
the quarter ended April 30, 2004, the Company determined that the carrying
amounts of this real estate exceeded their original estimate of fair market
value, less costs to sell. Accordingly, the Company recorded a long-lived
asset impairment charge of $291, along with net gains of approximately $200.
The net amount of these charges of $91 is presented in the Impairment and
other charges, net line item in the consolidated statements of earnings for
the three and six months ended April 30, 2004. The fair market value was
determined by specific offer or bid, or an estimate based on a multiple or
percentage of historical results. As a result, actual results could differ
significantly from these estimates. See Note 12 for a discussion of the
Companys discontinued operations and assets held for sale. (12) Discontinued Operations and Assets Held for Sale In December 2003, the Company announced plans to close or sell a number of
small businesses, primarily small funeral homes, most of which were acquired as
part of a group of facilities, that are performing below acceptable levels and
no longer fit the Companys operating profile. Although the Company identified
these businesses during the fourth quarter of fiscal year 2003, it did not meet
all of the criteria in SFAS No. 144 to classify these operations as held for
sale or discontinued operations in the fourth quarter of fiscal year 2003. The
operating results of those businesses that met the criteria in SFAS No. 144 in
fiscal year 2004 and businesses sold during fiscal years 2003 or 2004 are
reported in the discontinued operations section of the consolidated statements
of earnings. As required by the Companys credit agreement, the Company plans
to use substantially all of the proceeds from businesses held for sale to
reduce its debt. The Company determined that the carrying value of a number of
these businesses exceeded their fair value. As required by SFAS No. 144, the
Company recorded an impairment charge of $34,300 during the fourth quarter of
fiscal year 2003. The fair market value was determined by specific offer or
bid, or an estimate based on a multiple or percentage of historical results. 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. At April 30,
2004 and October 31, 2003, the assets held for sale (excluding $13 and $17 of
cash and cash equivalent investments of the operations held for sale as of
April 30, 2004 and October 31, 2003, respectively) and the liabilities
associated with assets held for sale line items in the balance sheet represent
the assets and liabilities, respectively, of certain assets, primarily funeral
homes. 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) (12) Discontinued Operations and Assets Held for Sale(Continued) A summary of the assets and liabilities included in the assets held for
sale and liabilities associated with assets held for sale line items at
April 30, 2004 and October 31, 2003 and the operating results of the
discontinued operations for the three and six months ended April 30, 2004 and
2003, respectively, are as follows: April 30, 2004
    
    October 31, 2003AssetsReceivables, net of allowances
    
    $
    3,262
    
    
    $
    3,866Inventories and other current assets
    
    
    3,625
    
    
    
    4,007Net property and equipment
    
    
    10,598
    
    
    
    14,712Preneed funeral trust investments
    
    
    11,205
    
    
    
    Preneed cemetery trust investments
    
    
    2,728
    
    
    
    Prearranged receivables, net
    
    
    
    
    
    
    19,076Deferred charges and other assets
    
    
    6,865
    
    
    
    9,781Cemetery property
    
    
    675
    
    
    
    675Assets held for sale
    
    $
    38,958
    
    
    $
    52,117LiabilitiesDeferred income taxes, net
    
    $
    2,036
    
    
    $
    2,542Deferred preneed funeral revenue
    
    
    6,300
    
    
    
    Deferred preneed cemetery revenue
    
    
    1,482
    
    
    
    Non-controlling interest in funeral and cemetery
trusts
    
    
    13,934
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    27,529Liabilities associated with assets held for sale
    
    $
    23,752
    
    
    $
    30,071
 Three Months Ended April 30,
    
    Six Months Ended April 30,2004
    
    2003
    
    2004
    
    2003Revenue:Funeral
    
    $
    4,272
    
    
    $
    5,715
    
    
    $
    9,414
    
    
    $
    11,744Cemetery
    
    
    461
    
    
    
    341
    
    
    
    869
    
    
    
    752$
    4,733
    
    
    $
    6,056
    
    
    $
    10,283
    
    
    $
    12,496Gross profit:Funeral
    
    $
    6
    
    
    $
    275
    
    
    $
    492
    
    
    $
    484Cemetery
    
    
    176
    
    
    
    43
    
    
    
    275
    
    
    
    125182
    
    
    
    318
    
    
    
    767
    
    
    
    609Impairment and other charges, net
    
    
    1,502
    
    
    
    
    
    
    
    1,502
    
    
    
    Other income (expense), net(1)
    
    
    22
    
    
    
    (712
    )
    
    
    34
    
    
    
    91Earnings (loss) from discontinued operations before
income taxes
    
    $
    1,706
    
    
    $
    (394
    )
    
    $
    2,303
    
    
    $
    700
  (1)
    
    Other income (expense), net for the three and six months ended April 30, 2003 includes
a loss of approximately $712 and a gain of approximately $91 related to
the sale of businesses, respectively. 35




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (13) Severance Charge In December 2003, the Company announced plans to restructure and reduce
its workforce by approximately 300 employees throughout the organization. The
total charge for severance and other costs associated with the workforce
reductions was expected to be approximately $2,281. In the first quarter of
fiscal year 2004, the Company recorded a charge of $1,993 for these severance
costs. In the second quarter of fiscal year 2004, the Company recorded an
additional charge of $138 for these severance costs for a total of $2,131
($1,321 after tax, or $.01 per share) for the six months ended April 30, 2004.
All costs incurred as of April 30, 2004 have been paid. There were
approximately $150 in severance and other costs remaining under the workforce
reduction plan as of April 30, 2004. The plan was completed June 1, 2004. (14) Consolidated Comprehensive Income Consolidated comprehensive income for the six months ended April 30, 2004
and 2003 is as follows: Six Months Ended April 30,2004
    
    2003Net earnings
    
    $
    26,485
    
    
    $
    18,964Other comprehensive income:Reclassification adjustment for realized loss on investments, net of
deferred tax benefit of $454
    
    
    740
    
    
    
    Unrealized appreciation of investments, net of deferred tax expense of
($14) and ($56), respectively
    
    
    57
    
    
    
    88Termination of derivative instrument designated and qualifying as a
cash
flow hedging instrument, net of deferred tax expense of ($119)
    
    
    194
    
    
    
    Unrealized appreciation on derivative instrument designated and
qualifying as a cash flow hedging instrument, net of deferred tax
expense of ($332) and ($41), respectively
    
    
    610
    
    
    
    68Total other comprehensive income
    
    
    1,601
    
    
    
    156Total comprehensive income
    
    $
    28,086
    
    
    $
    19,120
 (15) Guarantees The Companys obligations under its senior secured credit facility are
guaranteed by all of its existing and future direct and indirect subsidiaries
formed under the laws of the United States, any state thereof or the District
of Columbia, except for specified excluded subsidiaries. The senior
subordinated notes are guaranteed by all of the domestic subsidiaries of the
Company, other than certain specified subsidiaries including the Puerto Rican
subsidiaries, Investors Trust, Inc. and certain immaterial domestic
subsidiaries. For additional information regarding the senior secured credit
facility and senior subordinated notes, see Note 13 to the consolidated
financial statements of the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. All obligations under the senior secured credit facility, including the
guarantees and any interest rate protection and other hedging agreements with
any lender or its affiliates, are secured by a first priority perfected
security interest in (1) all capital stock and other equity interests of the
Companys existing and future direct and indirect domestic subsidiaries, other
than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of
the voting equity interests and 100 percent of all other equity interests
(other than qualifying shares of directors) of all direct existing and future
foreign subsidiaries, and (3) all other existing and future asset and
properties of the Company and the guarantors, except for real property,
vehicles and other specified exclusions. 36




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (15) Guarantees  (Continued) 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 April 30, 2004, the Company has guaranteed long-term debt of its
subsidiaries of approximately $2,665 that represents notes the subsidiaries
issued as part of the purchase price of acquired businesses or debt the
subsidiaries assumed in connection with acquisitions. (16) Related Party Transactions On July 15, 2003, the Company announced that Frank B. Stewart, Jr.,
Chairman of the Board, had elected to retire and become Chairman Emeritus of
the Company. As part of Mr. Stewarts retirement benefits agreement, the
Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550
each. The first payment was made within five days after the announcement of
his retirement. The remaining two payments will be made on June 20, 2004 and
June 20, 2005. The Company recorded the $1,650 charge in the third quarter of
2003 but will continue to make the payments in accordance with the terms of the
agreement. On June 10, 2003, the Company announced that Brian J. Marlowe, Chief
Operating Officer, had stepped down to pursue other interests. According to
the terms of his employment agreement, he is entitled to receive an amount
equal to two years of salary, or $800, over the next two years. The Company
recorded the $800 charge in the third quarter of 2003 but will continue to make
the payments in accordance with the terms of the agreement. 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 April 30, 2004, including accrued interest,
was approximately $982. The father of G. Kenneth Stephens, Jr., Senior Vice President and
President of the Companys eastern division, has an 81 percent ownership
interest in Cemetery Funeral Supply, Inc., a vendor of the Company. During the
first six months of fiscal year 2004 and in fiscal year 2003, the Company paid
Cemetery Funeral Supply, Inc. $143 and $281, respectively. 37




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (17) Subsequent Events On June 8, 2004, the Company announced that William E. Rowe, Chairman of
the Board, Chief Executive Officer and President, had decided to retire
effective October 31, 2004. He stepped down from his current position as
President and Chief Executive Officer and will continue in his role as Chairman
of the Board until his retirement is effective. As part of Mr. Rowes
separation agreement, the Company will pay Mr. Rowe $1,000 in equal
installments over a two year period, effective October 31, 2004. The Company will record the $1,000 charge in the third quarter of fiscal year 2004. Mr. Rowe will
not be eligible to receive an annual bonus. Kenneth C. Budde has been named
Chief Executive Officer while the Board of Directors performs a search of
internal and external candidates. The Companys executive officers and directors hold options to purchase
approximately 4,000,000 shares of the Companys Class A common stock that
expire in January and April of 2005 at exercise prices ranging from $4.16 to
$6.96, and averaging $5.21. In order to provide for an orderly means of
exercising those options, including the sale of the underlying shares to pay
the exercise prices and applicable income taxes, those individuals generally
will (1) use other shares held by them to pay the exercise price for as many
shares as possible, (2) receive shares of Class A common stock in exchange for
exercising the options and (3) enter into plan to adopt a prearranged group
stock trading plan for the purpose of selling the remaining shares
(approximately 3,300,000 shares based on current market prices) in accordance
with Rule 10b5-1 under the Securities Exchange Act of 1934, as amended. As a
result, the directors and executive officers will increase their shares of the
Companys Class A common stock by over 365,000 shares. Rule 10b5-1 permits
officers and directors to establish, at a time when they are not in possession
of material non-public information, a prearranged plan to buy or sell Company
securities, and allows them to purchase or sell shares in accordance with the
specific terms of the plan, even if the individual subsequently comes into
possession of material non-public information. Using these plans, insiders can
spread stock trades over an extended period of time to minimize the market
impact of the trades. Six of the seven current executive officers holding such options will sell
only those shares necessary to pay the exercise price and applicable income
taxes, resulting in selling 2,100,000 shares in the plan. Mr. Rowe, who holds
options on approximately 1,000,000 shares, will be participating in the plan
and several directors, who hold approximately 200,000 shares, are expected to
participate in the plan, so that approximately 3,300,000 shares (based on
current market prices) may be sold pursuant to the plan. The number of shares
of Company stock already owned by these executive officers and directors will
not be reduced by this plan. The transactions under the 10b5-1 stock trading
plan will commence no earlier than June 14, 2004 and will be disclosed publicly
through Form 144 and Form 4 filings with the Securities and Exchange
Commission. These pre-planned trades will be executed as set forth in the plan. 38




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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 June 2, 2004,
we owned and operated 274 funeral homes and 148 cemeteries in 29 states within
the United States and Puerto Rico. We sell cemetery property and funeral and cemetery products and services
both at the time of need and on a preneed basis. Our revenues in each period
are derived primarily from at-need sales, preneed sales delivered out of our
backlog during the period (including the accumulated trust earnings or
build-up in the face value of insurance contracts related to these preneed
deliveries), preneed cemetery property sales and other items such as perpetual
care trust earnings and finance charges. For a discussion of our accounting
for preneed sales and trust and escrow account earnings, see Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2003 and Note 1 to the consolidated financial statements included
herein. We implemented revised Financial Accounting Standards Board (FASB)
Interpretation No. 46 (FIN 46R), Consolidation of Variable Interest
Entities, as of April 30, 2004, which resulted in the consolidation of our
preneed funeral and cemetery merchandise and service trusts and our perpetual
care trusts. This implementation was as of April 30, 2004 and only
affected our consolidated balance sheet and had no impact on our second quarter
2004 results of operations or cash flows. In future periods, the
implementation of FIN 46R, as it relates to the consolidation of trusts,
will affect classifications within the balance sheet, statement of earnings and
statement of cash flows, but will have no effect on shareholders equity, net
cash flow or the recognition and reporting of revenues or net earnings in the
statement of earnings. For further discussion, see Critical Accounting
Policies below and Notes 2 through 6 to the condensed consolidated financial
statements included herein. Our funeral and cemetery businesses include prearranged sales funded
through trust and escrow arrangements. The cemetery business includes
maintenance of cemetery grounds funded through perpetual care trusts. We
defer all of the earnings realized by our preneed funeral and preneed cemetery
trust and escrow accounts until the underlying merchandise or services
are delivered. We recognize the earnings from our cemetery perpetual care
trust as they are realized in the trust and distributable. From 1991 through 1999, we achieved an overall annual realized return of
8.0 percent to 9.0 percent in our trusts. However, the average annual
realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3
percent, 4.8 percent and 2.1 percent for fiscal years 2000, 2001, 2002, 2003
and the six months ended April 30, 2004, 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 trusts until the underlying
products and services are delivered. Consequently, the lower investment returns
realized during previous years reduced the trust earnings recognized as revenue
in 2003 and did so again in the first six months of 2004. We recognize all
earnings and losses realized by our perpetual care trusts currently,
including capital gains and losses in those jurisdictions where capital gains
can be withdrawn and used for cemetery maintenance. As a result, depressed
stock prices and returns on fixed-income investments are expected to continue
to put pressure on perpetual care trust earnings recognized during the current
year. Because approximately 55 percent of our total trust portfolio is
currently invested in a diversified group of equity securities, we would
generally expect our portfolio performance to improve as the performance of the
overall stock market improves. 
 Our preneed funeral and preneed cemetery trust and escrow accounts
had net unrealized depreciation of $3.4 million and $3.0 million, respectively,
as of April 30, 2004, resulting from temporary unrealized gains
and losses. See Notes 3 and 4 to the condensed consolidated financial
statements included herein for a discussion of our preneed funeral and cemetery merchandise and
services trusts. Unrealized gains and losses in the preneed funeral and
cemetery merchandise and services trust and escrow accounts 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 loss on the
delivery of contracts in our backlog. Over time, gains and losses realized in
the trusts are allocated to underlying preneed contracts and affect the amount
of trust earnings to be recorded when we deliver the underlying product or
service. Accordingly, if current market conditions do not improve, our
revenues, margins, earnings and cash flow would be negatively affected by the
reduced revenue we would realize 
 39




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when we deliver the underlying products and services. Our cemetery perpetual
care trust accounts had net unrealized appreciation of $4.5 million as of
April 30, 2004, resulting from temporary unrealized gains and
losses. See Note 5 to the consolidated financial statements included herein for a discussion of our cemetery perpetual care trusts. Unrealized gains and losses in the 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. For a discussion of our forecasts for continuing operations in fiscal year
2004 and the principal assumptions underlying the forecasts, see the discussion
under the heading Forward-Looking Statements. Critical Accounting Policies The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions (see Note 1(d) to the consolidated
financial statements). Our critical accounting policies are those that are
both important to the portrayal of our financial condition and results of
operations and require managements most difficult, subjective and complex
judgment. These critical accounting policies are discussed in Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the fiscal year ended October 31, 2003 and
should be read in conjunction with the information below. Variable Interest Entities In January 2003, the FASB issued FASB Interpretation No. 46,
Consolidation of Variable Interest Entities. This interpretation clarifies
the application of ARB No. 51, Consolidated Financial Statements, to certain
entities in which equity investors do not have the characteristics of a
controlling financial interest or do not have sufficient equity at risk for the
entity to finance its activities without additional subordinated financial
support from other parties. In December 2003, the FASB revised FASB
Interpretation No. 46 (FIN 46R). We implemented FIN 46R as of April 30, 2004, which resulted in the
consolidation of our preneed funeral and cemetery merchandise and service
trusts and our cemetery perpetual care trusts. This implementation was as
of April 30, 2004 and only affected our consolidated balance sheet and had no
impact on our second quarter 2004 results of operations or cash flows. In
future periods, the implementation of FIN 46R, as it relates to the
consolidation of trusts, will affect classifications within the balance
sheet, statement of earnings and statement of cash flows, but will have no
effect on shareholders equity, net cash flow or the recognition and reporting
of revenues or net earnings in the statement of earnings. For a more detailed discussion of our accounting policies after the
implementation of FIN 46R, see Notes 2 through 6 to the condensed consolidated
financial statements included herein. Insurance Funded Preneed Funeral Contracts We have changed our method of accounting for insurance funded preneed
funeral contracts as we have concluded that our insurance funded preneed
funeral contracts are not assets and liabilities as defined by Statement of
Financial Accounting Concepts No. 6, Elements in Financial Statements.
Therefore, we have removed from our consolidated balance sheet amounts relating
to insurance funded preneed funeral contracts previously recorded in
prearranged receivables, net and prearranged deferred revenue, net which at
October 31, 2003 were $327.7 million (of which $11.2 million related to our
assets held for sale). The removal of these amounts did not have an impact on
our consolidated shareholders equity, results of operations or cash flows. See
Notes 2(b) and 3 to the condensed consolidated financial statements included
herein for additional information on insurance related preneed funeral
balances. Results of Operations In December 2003, we announced our plan to close or sell a number of small
businesses, primarily funeral homes, most of which were acquired as part of a
group of facilities, that are performing below acceptable levels and no longer
fit our operating profile. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, businesses held for sale or sold that meet
certain criteria in SFAS No. 144 are to be classified as discontinued
operations. Thus, beginning in the first quarter
of fiscal year 2004, the businesses that met the criteria and the
businesses sold during fiscal years 2003 and 2004 40




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were classified as
discontinued operations. The following discussion segregates the financial
results of continuing operations into our funeral and cemetery segments. As
there have been no material acquisitions or construction of new locations in
fiscal years 2004 and 2003, results from continuing operations reflect those of
same store locations. Three
Months Ended April 30, 2004 Compared to Three Months Ended
April 30, 2003  Continuing Operations
Funeral Segment Three Months EndedApril 30,
    
    Increase2004
    
    2003
    
    (Decrease)(In millions)Total Funeral Revenue
    
    $
    71.0
    
    
    $
    70.1
    
    
    $
    .9Total Funeral Costs
    
    
    49.4
    
    
    
    51.8
    
    
    
    (2.4
    )Total Funeral Gross Profit
    
    $
    21.6
    
    
    $
    18.3
    
    
    $
    3.3
 Funeral revenue from continuing operations increased $.9 million, or 1.3
percent, for the three months ended April 30, 2004, compared to the
corresponding period in 2003. The increase in funeral revenue was primarily
due to an increase in the average revenue per funeral service performed by our
same store businesses. Our same store businesses achieved a 4.3 percent
increase in the average price paid per traditional funeral service and a 4.6
percent increase in the average price paid per cremation service. The increase
in average revenue per funeral service was negatively impacted 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. This resulted in an overall 2.6 percent increase in the average
revenue per funeral service for our same store businesses. During the second
quarter of 2004, we experienced a .2 percent decrease in funeral services,
which represents 34 events. Funeral gross profit margin from continuing operations increased from 26.1
percent in the second quarter of fiscal year 2003 to 30.4 percent in the second
quarter of fiscal year 2004. The increase is primarily due to the increase in
revenue as discussed above, combined with reduced general and administrative
costs in the funeral segment resulting from our cost reduction initiatives.
The cremation rate for our same store operations was 37.0 percent for the
quarter ended April 30, 2004 compared to 36.5 percent for the quarter ended
April 30, 2003. Cemetery Segment Three Months EndedApril 30,2004
    
    2003
    
    Increase(In millions)Total Cemetery Revenue
    
    $
    59.1
    
    
    $
    57.2
    
    
    $
    1.9Total Cemetery Costs
    
    
    43.8
    
    
    
    42.9
    
    
    
    .9Total Cemetery Gross Profit
    
    $
    15.3
    
    
    $
    14.3
    
    
    $
    1.0
 Cemetery revenue from continuing operations increased $1.9 million, or 3.3
percent, for the three months ended April 30, 2004, compared to the
corresponding period in 2003, primarily due to an increase in cemetery property
sales. Cemetery property sales increased 6.5 percent in the second quarter of
fiscal year 2004 compared to the second quarter of fiscal year 2003 due
primarily to our preneed cemetery property sales initiative announced in
September 2003. We experienced an annualized average return, excluding unrealized gains
and losses, of 4.5 percent in our perpetual care trusts for the quarter
ended April 30, 2004 resulting in revenue of $2.2 million, compared to 4.6
percent for the corresponding period in 2003 resulting in revenue of $2.1
million. Cemetery gross profit margin from continuing operations increased from
25.0 percent in the second quarter of fiscal year 2003 to 25.9 percent in the
second quarter of fiscal year 2004. The increase is primarily due to an 41




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increase in cemetery property sales, combined with reduced general and
administrative costs in the cemetery segment resulting from our cost reduction
initiatives. Discontinued Operations In accordance with SFAS No. 144, we review our long-lived assets for
impairment when changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. In December 2003, we announced plans to
close or sell a number of small businesses, primarily small funeral homes, most
of which were acquired as part of a group of facilities, that are performing
below acceptable levels and no longer fit our operating profile. The operating
results of those businesses that met the criteria in SFAS No. 144 in fiscal
year 2004 and businesses sold during fiscal years 2003 or 2004 are reported in
the discontinued operations section of the consolidated statements of earnings.
Included in discontinued operations for the three months ended April 30, 2004
and 2003 was a net gain of approximately $1.5 million and a net loss of
approximately $.7 million, respectively, related to the sale of
businesses. The effective tax rate in the second quarter of 2004 for
our discontinued operations was a 19.6 percent benefit compared
to a benefit of 37.8 percent for the same period in 2003. A
benefit was realized by the discontinued operations in the second
quarter of 2004 on operating earnings due to the fact that we
realized tax benefits on asset sales previously reserved due to the
original assumption that the sales would generate capital losses,
which upon disposal resulted in operating losses. Other Corporate general and administrative expenses for the three months ended
April 30, 2004 increased $.4 million compared to the same
period in 2003 primarily due to increased legal and professional fees. In December 2003, we announced a reduction and restructuring of our
workforce. We recorded a charge of $.1 million in the second quarter of fiscal
year 2004 for severance and other related costs. This charge is presented in
the Severance charge line item in the consolidated statements of earnings. In the second quarter of 2004, we determined that the carrying amounts of
certain real estate previously designated as held for sale exceeded their fair
market value, less costs to sell. Accordingly, we recorded a long-lived asset
impairment charge of $.3 million, along with net gains of approximately $.2
million. The net amount of these charges of $.1 million is presented in the
Impairment and other charges, net line item in the consolidated statement of
earnings for the three months ended April 30, 2004. Total depreciation and amortization was $13.1 million for the second
quarter of fiscal year 2004 compared to $13.7 million for the same period in
2003. Depreciation and amortization from continuing operations was $12.9
million for the second quarter of fiscal year 2004 compared to $13.1 million
for the same period in 2003. Interest expense decreased $1.6 million to $12.0 million for the second
quarter of fiscal year 2004 compared to $13.6 million for the same period in
2003. The decrease is due to an $86.9 million decrease in the average debt
outstanding, partially offset by a 24 basis point increase in the average
interest rate during the quarter ended April 30, 2004 compared to the quarter
ended April 30, 2003. Other income, net decreased from $.8 million in the second quarter of
fiscal year 2003 to $.1 million in the second quarter of fiscal year 2004 due
to the recognition of a gain in the second quarter of 2003 related to the sale
of assets. As of April 30, 2004 and June 2, 2004, our outstanding debt totaled $454.0
million and $450.7 million, respectively. Of the total amount of debt
outstanding, including the portion subject to the interest rate swap agreement
in effect as of April 30, 2004, approximately 78 percent was fixed-rate debt,
with the remaining 22 percent subject to short-term variable interest rates
averaging approximately 3.6 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, one of which expired on March 11, 2004 and the other expiring
March 11, 2005, each involving a notional amount of $50.0 million. The
agreements effectively convert variable-rate debt bearing interest based on
three-month LIBOR plus the applicable margin specified under our
senior secured credit facility to fixed-rate debt bearing interest at the
fixed swap rate plus such applicable margin. As of April 30, 2004, the
effective rate of the debt hedged by the remaining interest rate swap was 6.765
percent. 42




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Our executive officers and directors hold options to purchase
approximately 4,000,000 shares of our Class A common stock that expire in
January and April of 2005 at exercise prices ranging from $4.16 to $6.96, and
averaging $5.21. In order to provide for an orderly means of exercising those
options, including the sale of the underlying shares to pay the exercise prices
and applicable income taxes, those individuals generally will (1) use other
shares held by them to pay the exercise price for as many shares as possible,
(2) receive shares of Class A common stock in exchange for exercising the
options and (3) enter into plan to adopt a prearranged group stock trading plan
for the purpose of selling the remaining shares (approximately 3,300,000 shares
based on current market prices) in accordance with Rule 10b5-1 under the
Securities Exchange Act of 1934, as amended. As a result, the directors and
executive officers will increase their shares of our Class A common stock by
over 365,000 shares. Rule 10b5-1 permits officers and directors to establish,
at a time when they are not in possession of material non-public information, a
prearranged plan to buy or sell Company securities, and allows them to purchase
or sell shares in accordance with the specific terms of the plan, even if the
individual subsequently comes into possession of material non-public
information. Using these plans, insiders can spread stock trades over an
extended period of time to minimize the market impact of the trades. Six of the seven current executive officers holding such options will sell
only those shares necessary to pay the exercise price and applicable income
taxes, resulting in selling 2,100,000 shares in the plan. William E. Rowe,
Chairman of the Board, who holds options on approximately 1,000,000 shares,
will be participating in the plan and several directors, who hold approximately
200,000 shares, are expected to participate in the plan, so that approximately
3,300,000 shares (based on current market prices) may be sold pursuant to the
plan. The number of shares of our stock already owned by these executive
officers and directors will not be reduced by this plan. The transactions under
the 10b5-1 stock trading plan will commence no earlier than June 14, 2004 and
will be disclosed publicly through Form 144 and Form 4 filings with the
Securities and Exchange Commission. These pre-planned trades will be executed
as set forth in the plan. Preneed Sales and Deliveries In the third quarter of fiscal year 2003, we increased our focus on
preneed funeral sales as part of our operating initiatives. Preneed funeral
sales increased 3.6 percent in the second quarter of fiscal year 2004 compared
to the same period in 2003. The revenues from our preneed funeral and cemetery merchandise and service
sales are deferred into our backlog and are not included in our operating
results presented above. We added $40.9 million in preneed sales to our
funeral and cemetery merchandise and services backlog (including $15.9 million
related to insurance funded preneed funeral contracts) during the three months
ended April 30, 2004 to be recognized in the future, net of cancellations, as
these prepaid products and services are delivered, compared to $40.2 million
(including $17.4 million related to insurance funded preneed funeral contracts)
for the corresponding period in 2003. Deliveries out of our preneed funeral
and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $42.6 million for the
three months ended April 30, 2004, compared to $45.4 million for the
corresponding period in 2003. Six Months Ended April 30, 2004 Compared to Six Months Ended April 30, 2003  Continuing Operations Funeral Segment 43




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Six Months EndedApril 30,
    
    Increase2004
    
    2003
    
    (Decrease)(In millions)Total Funeral Revenue
    
    $
    144.9
    
    
    $
    140.8
    
    
    $
    4.1Total Funeral Costs
    
    
    100.6
    
    
    
    103.6
    
    
    
    (3.0
    )Total Funeral Gross Profit
    
    $
    44.3
    
    
    $
    37.2
    
    
    $
    7.1
 Funeral revenue from continuing operations increased $4.1 million, or 2.9
percent, for the six months ended April 30, 2004, compared to the corresponding
period in 2003. The increase in funeral revenue was primarily due to a 1.1
percent increase in the number of funeral services performed by our same store
businesses, combined with an increase in the average revenue per funeral
service performed by these businesses. Our same store businesses achieved a
4.2 percent increase in the average price paid per traditional funeral service
and a 4.6 percent increase in the average price paid per cremation service.
The increase in average revenue per funeral service was negatively impacted 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. This resulted in an overall 1.9 percent increase in
the average revenue per funeral service for our same store businesses. Funeral gross profit margin from continuing operations increased from 26.4
percent in the six months ended April 30, 2003 to 30.6 percent in the six
months ended April 30, 2004. The increase is primarily due to the increase in
revenue as discussed above, combined with reduced general and administrative
costs in the funeral segment resulting from our cost reduction initiatives.
The cremation rate for our same store operations was 36.7 percent for the six
months ended April 30, 2004 compared to 36.1 percent for the six months ended
April 30, 2003. Cemetery Segment Six Months EndedApril 30,2004
    
    2003
    
    Increase(In millions)Total Cemetery Revenue
    
    $
    114.7
    
    
    $
    111.3
    
    
    $
    3.4Total Cemetery Costs
    
    
    85.3
    
    
    
    84.8
    
    
    
    .5Total Cemetery Gross Profit
    
    $
    29.4
    
    
    $
    26.5
    
    
    $
    2.9
 Cemetery revenue from continuing operations increased $3.4 million, or 3.1
percent, for the six months ended April 30, 2004, compared to the corresponding
period in 2003, primarily due to an increase in cemetery property sales.
Cemetery property sales increased 7.3 percent in the six months ended April 30,
2004 compared to the six months ended April 30, 2003 due primarily to our
preneed cemetery property sales initiative announced in September 2003. We experienced an annualized average return, excluding unrealized gains
and losses, of 4.6 percent in our perpetual care trusts for the six months
ended April 30, 2004 resulting in revenue of $4.6 million, compared to 4.4
percent for the corresponding period in 2003 resulting in revenue of $4.0
million. Cemetery gross profit margin from continuing operations increased from
23.8 percent in the six months ended April 30, 2003 to 25.6 percent in the six
months ended April 30, 2004. The increase is primarily due to an increase in
cemetery property sales, combined with reduced general and administrative costs
in the cemetery segment resulting from our cost reduction initiatives. Discontinued Operations Included in discontinued operations for the six months ended April 30,
2004 and 2003 were net gains of approximately $1.5 million and $.1 million,
respectively, related to the sale of businesses. The effective tax
rate for the six months ended April 30, 2004 for our discontinued
operations was a 4.7 percent benefit compared to an expense of
38.0 percent for the same period in 2003. A benefit was realized by
the discontinued operations on operating earnings in the first six
months of 2004 due to the fact that we realized tax benefits on asset
sales previously reserved due to the original assumption that the
sales would generate capital losses, which upon disposal resulted in
operating losses. For further information 44




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on
our discontinued operations, see Three Months Ended April 30, 2004 Compared to
Three Months Ended April 30, 2003  Discontinued Operations. Other Corporate general and administrative expenses for the six months ended
April 30, 2004 were flat compared to the same period in 2003. In December 2003, we announced a reduction and restructuring of our
workforce. We recorded a charge of $2.1 million in the six months ended April
30, 2004 for severance and other related costs. This charge is presented in
the Severance charge line item in the consolidated statements of earnings. Total depreciation and amortization was $26.0 million for the six months
ended April 30, 2004 compared to $27.1 million for the same period in 2003.
Depreciation and amortization from continuing operations was $25.7 million for
the six months ended April 30, 2004 compared to $26.0 million for the same
period in 2003. In the second quarter of 2004, we determined that the carrying amounts of
certain real estate previously designated as held for sale exceeded their fair
market value, less costs to sell. Accordingly, we recorded a long-lived asset
impairment charge of $.3 million, along with net gains of approximately $.2
million. The net amount of these charges of $.1 million is presented in the
Impairment and other charges, net line item in the consolidated statement of
earnings for the six months ended April 30, 2004. Interest expense decreased $2.6 million to $24.5 million for the six
months ended April 30, 2004 compared to $27.1 million for the same period in
2003. The decrease is due to a $75.9 million decrease in the average debt
outstanding, partially offset by a 22 basis point increase in the average
interest rate during the six months ended April 30, 2004 compared to the six
months ended April 30, 2003. Other income (expense), net decreased from $1.7 million for the six months
ended April 30, 2003 to ($.1) million in the six months ended April 30, 2004
primarily due to the writedown of certain marketable securities in the first
quarter of 2004, which had market value losses that were deemed to be other
than temporary, in addition to the recognition of a gain in 2003 related to the
sale of assets. As of April 30, 2004, our outstanding debt totaled $454.0 million. Our
outstanding debt is discussed further under the heading Three Months Ended
April 30, 2004 Compared to Three Months Ended April 30, 2003  Other. On June 8, 2004, we announced that our executive officers and directors
planned to adopt a prearranged group stock trading plan in accordance with Rule
10b5-1 under the Securities Exchange Act of 1934, as amended. For further
information, see Three Months Ended April 30, 2004 Compared to Three Months
Ended April 30, 2003  Other. Preneed Sales and Deliveries In the third quarter of fiscal year 2003, we increased our focus on
preneed funeral sales as part of our operating initiatives. Preneed funeral
sales increased 9.9 percent for the six months ended April 30, 2004 compared to
the same period in 2003. The revenues from our preneed funeral and cemetery merchandise and service
sales are deferred into our backlog and are not included in our operating
results presented above. We added $78.3 million in preneed sales to our
funeral and cemetery merchandise and services backlog (including $30.8 million
related to insurance funded preneed funeral contracts) during the six months
ended April 30, 2004 to be recognized in the future, net of
cancellations, as these prepaid products and services are delivered,
compared to $75.4 million (including $31.7 million related to insurance funded
preneed funeral contracts) for the corresponding period in 2003. Deliveries
out of our preneed funeral and cemetery merchandise and services backlog,
including accumulated trust earnings related to these preneed deliveries,
amounted to $85.2 million for the six months ended April 30, 2004, compared to
$89.2 million for the corresponding period in 2003. 45




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##### Table of Contents



Liquidity and Capital Resources Cash Flow Our operations provided cash of $60.9 million for the six months ended
April 30, 2004, compared to providing cash of $18.1 million for the
corresponding period in 2003. This includes a cash inflow of $33.2 million
from a tax refund received during the first quarter of 2004 resulting from a
change in tax accounting methods for cemetery merchandise revenue and a cash
outflow of $1.3 million for severance costs in 2004. Our investing activities resulted in a net cash inflow of $1.7 million for
the six months ended April 30, 2004, compared to a net cash outflow of $5.0
million for the comparable period in 2003. The change is primarily due to $8.9
million of proceeds received in connection with asset sales, compared to $1.7
million for the same period in 2003. For the six months ended April 30, 2004,
capital expenditures amounted to $8.3 million, which included $7.1 million for
maintenance capital expenditures and $1.2 million for new growth initiatives,
compared to capital expenditures of $7.5 million in the same period in 2003,
which included $7.0 million for maintenance capital expenditures and $.5
million for new growth initiatives. Our financing activities resulted in a net cash outflow of $54.1 million
for the six months ended April 30, 2004, compared to a net cash inflow of $43.0
million for the comparable period in 2003. The change is primarily due to
repayments of long-term debt of $48.2 million in the six months ended April 30,
2004, compared to $7.3 million in the comparable period of 2003. We used the
$33.2 million tax refund included in operating cash flow to reduce our
outstanding Term Loan B in the first quarter of fiscal year 2004. The change
is also due to $50.0 million in additional Term Loan B financing received in
2003 in connection with the redemption of our Remarketable Or Redeemable
Securities. We have also used $10.7 million in 2004 to repurchase stock under
our stock repurchase program, which began in the third quarter of fiscal year
2003. Contractual Obligations and Commercial Commitments As of April 30, 2004, our outstanding debt balance was $454.0 million.
The following table details our known future cash payments (in millions)
related to various contractual obligations as of April 30, 2004. Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLong-term debt obligations(1)
    
    $
    454.0
    
    
    $
    5.6
    
    
    $
    147.7
    
    
    $
    300.2
    
    
    $
    .5Operating lease obligations (2)
    
    
    41.5
    
    
    
    2.8
    
    
    
    12.6
    
    
    
    7.9
    
    
    
    18.2Non-competition and other agreements (3)
    
    
    12.1
    
    
    
    2.6
    
    
    
    7.3
    
    
    
    1.8
    
    
    
    .4$
    507.6
    
    
    $
    11.0
    
    
    $
    167.6
    
    
    $
    309.9
    
    
    $
    19.1
  (1)
    
    See below for a breakdown of our future scheduled principal payments and
maturities of our long-term debt by type as of April 30, 2004.(2)
    
    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
April 30, 2004 are $2.8 million, $4.7 million, $4.2 million, $3.7 million,
$3.3 million and $22.8 million for the years ending October 31, 2004,
2005, 2006, 2007, 2008 and later years, respectively.(3)
    
    We have entered into non-competition agreements with prior owners and key
employees of acquired subsidiaries that expire through 2012. During
fiscal year 2001, we decided to relieve some of the prior owners and key
employees of their obligations not to compete; however, we will continue
to make the payments in accordance with the contract terms. This category
also includes separation pay related to two former executive officers. 46




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##### Table of Contents



As stated above, we received a $33.2 million tax refund in the first
quarter of fiscal year 2004, which was used to reduce our outstanding Term Loan
B. As required by our credit agreement, we plan to use substantially all of
the proceeds from businesses held for sale and the approximate $12 million of
remaining income tax benefits related to the sale of our foreign operations,
the majority of which we expect to receive over the next three years, to reduce
our debt. The following table reflects future scheduled principal payments and
maturities of our long-term debt (in millions) as of April 30, 2004. Other,PrincipallySellerFiscal
    
    Revolving
    
    
    
    
    
    Senior
    
    Financing ofYear Ending
    
    Credit
    
    Term
    
    Subordinated
    
    AcquiredOctober 31,
    
    Facility
    
    Loan B
    
    Notes
    
    Operations
    
    Total2004
    
    $
    
    
    
    $
    1.3
    
    
    $
    
    
    
    $
    1.9
    
    
    $
    3.22005
    
    
    79.0
    
    
    
    68.0
    
    
    
    
    
    
    
    1.7
    
    
    
    148.72006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .8
    
    
    
    .82007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .5
    
    
    
    .52008
    
    
    
    
    
    
    
    
    
    
    300.0
    
    
    
    .2
    
    
    
    300.2Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .6
    
    
    
    .6Total long-term debt
    
    $
    79.0
    
    
    $
    69.3
    
    
    $
    300.0
    
    
    $
    5.7
    
    
    $
    454.0
 We had $15.0 million of outstanding letters of credit as of April 30,
2004, 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. As of April 30, 2004, the balance of the
Florida bond was $41.1 million. We believe that cash flow from operations will
be sufficient to cover our estimated cost of providing the related prearranged
services and products in the future. As of April 30, 2004 and June 2, 2004,
there was $79.0 million drawn on our $175.0 million revolving credit facility.
As of April 30, 2004 and June 2, 2004, our availability under the revolving
credit facility, after giving consideration to the aforementioned letters of
credit and bond obligation was $40.0 million. Under our credit agreement, if there is no default or event of default, we
may pay cash dividends and repurchase our stock, provided that the aggregate
amount of the dividends and stock repurchased plus other types of restricted
payments in any fiscal year does not exceed $15.0 million, or, if our
consolidated leverage ratio is not greater than 3.00 to 1.00 both before and
after the payment, $25.0 million. Under the restrictions in our debt
agreements, as of April 30, 2004, we could use up to $25.0 million to pay
dividends or repurchase our stock during fiscal year 2004. Since the inception
of our stock repurchase program in June 2003 through June 2, 2004, we had
repurchased 2,980,200 shares of our Class A common stock at an average price of
$6.10 per share. The credit agreement limits capital expenditures (excluding the costs of
acquisitions as defined in the amendment) in any fiscal year to $35.0 million,
with a provision for the carryover of permitted but unused amounts under
specified circumstances. The costs of acquisitions in any fiscal year are
limited to $50.0 million, with a provision for the carryover of permitted but
unused amounts under specified circumstances. In February 2004, we amended our
credit agreement to reduce our applicable margin on our Term Loan B to 250
basis points. The previous margin ranged from 312.5 basis points to 337.5
basis points, subject to quarterly adjustments based on our consolidated
leverage ratio. We expect to be able to pay our debt coming due in fiscal year 2004 using
cash from operations or by drawing on our revolving credit facility. It is not
our intention to pay all remaining amounts on our long-term debt
exclusively from cash flow from operations. We plan to refinance our
revolving credit facility and Term Loan B within the next twelve
months. The first call date on our senior subordinated notes is in
July 2005 at 105.375 percent. If we call these notes at that
time, we would record an early extinguishment of debt charge of approximately $20.2 million including
the bond call premium of $16.1 million and expensing of the unamortized fees of $4.1 million. Any
refinancing could result in additional interest savings or additional interest
and other costs depending primarily on financial markets and our credit profile
at the time of refinancing. 47




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##### Table of Contents



Off-Balance Sheet Arrangements Our off-balance sheet arrangements as of April 30, 2004 consist of the
following items:  (1)
    
    the $41.1 million bond we are required to maintain to guarantee our
obligations relating to funds we withdrew from our preneed funeral
trusts in Florida, which is discussed above and in Note 18 to the
consolidated financial statements in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2003; and(2)
    
    the insurance funded preneed funeral contracts, which will be
funded by life insurance or annuity contracts issued by third party
insurers, are not reflected in our consolidated balance sheets, and are
discussed above and in Notes 2 and 3 to the condensed consolidated
financial statements included herein. Ratio of Earnings to Fixed Charges Our ratio of earnings to fixed charges was as follows: Six Months Ended April 30,
    
    Years Ended October 31,2004
    
    2003
    
    2002
    
    2001
    
    2000
    
    19992.50(1)
    
    
    (2)
    
    
    
    1.75
    (3)
    
    
    (4)(5)
    
    
    
    2.57
    
    
    
    3.43
    (4)
  (1)
    
    Pretax earnings for the six months ended April 30, 2004 include a charge
of $2.1 million for severance costs related to workforce reductions and a
charge of $.1 million for impairment and other charges.  (2)
    
    Pretax earnings for fiscal year 2003 include a charge of $11.3 million
for the loss on early extinguishment of debt in connection with the
redemption of our Remarketable Or Redeemable Securities and a noncash
charge of $107.3 million for the impairment charges related to goodwill
and long-lived asset impairment. As a result of these charges, our
earnings for fiscal year 2003 were insufficient to cover our fixed
charges, and an additional $69.8 million in pretax earnings would have
been required to eliminate the coverage deficiency.  (3)
    
    Pretax earnings for fiscal year 2002 include a noncash charge of $18.5
million in connection with the writedown of assets held for sale.  (4)
    
    Excludes the cumulative effect of change in accounting principles.  (5)
    
    Pretax earnings for fiscal year 2001 include a noncash charge of $269.2
million in connection with the writedown of assets held for sale and other
charges and a $9.1 million charge for the loss on early extinguishment of
debt. As a result of these charges, our earnings for fiscal year 2001
were insufficient to cover our fixed charges, and an additional $197.0
million in pretax earnings would have been required to eliminate the
coverage deficiency. For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pretax earnings plus fixed charges (excluding interest capitalized
during the period). Fixed charges consist of interest expense, capitalized
interest, amortization of debt expense and discount or premium relating to any
indebtedness and the portion of rental expense that management believes to be
representative of the interest component of rental expense. The ratio of
earnings to fixed charges for the six months ended April 30, 2004 reflects the
adoption of SFAS No. 144; fiscal years 2003 and 2002 reflect the adoption of
SFAS No. 142; fiscal year 2001 reflects the 2001 change in accounting
principles; and fiscal years 2000 and 1999 reflect the 1999 change in
accounting principle. Inflation Inflation has not had a significant impact on our operations over the past
three years, nor is it expected to have a significant impact in the foreseeable
future. Recent Accounting Standards 48




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##### Table of Contents



See Note 2 to the consolidated financial statements included herein. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosure about market risk is presented in
Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31,
2003, filed with the Securities and Exchange Commission on January 14, 2004.
The following disclosure discusses only those instances in which the market
risk has changed by more than 10 percent from the annual disclosure. The market risk inherent in our market risk sensitive instruments and
positions is the potential change arising from increases or decreases in the
prices of marketable equity securities and interest rates as discussed below.
Generally, our market risk sensitive instruments and positions are
characterized as other than trading. Our exposure to market risk as
discussed below includes forward-looking statements and represents an
estimate of possible changes in fair value or future earnings that would occur
assuming hypothetical future movements in equity markets or interest rates.
Our views on market risk are not necessarily indicative of actual results that
may occur and do not represent the maximum possible gains and losses that may
occur, since actual gains and losses will differ from those estimated, based on
actual fluctuations in equity markets, interest rates and the timing of
transactions. Interest We have entered into various fixed- and variable-rate debt obligations,
which are detailed in Note 13 to our consolidated financial statements included
in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003
and in the Liquidity and Capital Resources section of our Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 2. Effective March 11, 2002, we entered into two interest rate swap
agreements, each involving a notional amount of $50.0 million. The first
agreement effectively converted $50.0 million of variable-rate debt bearing
interest based on three-month LIBOR to a fixed rate based on the swap rate of
3.65 percent and expired on March 11, 2004. The second agreement effectively
converts $50.0 million of variable-rate debt bearing interest based on
three-month LIBOR to a fixed rate based on the swap rate of 4.265 percent and
expires on March 11, 2005. The estimated fair value of the interest rate swaps
based on quoted market prices was ($1.4) million and ($2.6) million as of April
30, 2004 and October 31, 2003, respectively. A hypothetical 100 basis point
increase in the average interest rates applicable to such debt would result in
an increase of approximately $.4 million and $.8 million in the fair value of
these instruments as of April 30, 2004 and October 31, 2003, respectively. As of April 30, 2004 and October 31, 2003, the carrying values of our Term
Loan B and revolving credit facility, including accrued interest, were $148.3
million and $194.4 million, respectively, compared to fair values of $148.9
million and $195.9 million, respectively. Fair value was determined using
quoted market prices, where applicable, or future cash flows discounted at
market rates for similar types of borrowing arrangements. Of the $148.3
million outstanding under our Term Loan B and revolving credit facility on
April 30, 2004, $98.3 million was not hedged by the interest rate swaps and was
subject to short-term variable interest rates. Each approximate 10 percent, or
45 basis point, change in the average interest rate applicable to this debt
would result in a change of approximately $.3 million in our pretax earnings.
Of the $194.4 million outstanding under our Term Loan B and revolving credit
facility on October 31, 2003, $94.4 million was not hedged by the interest rate
swaps and was subject to short-term variable interest rates. Each approximate
10 percent, or 45 basis point, change in the average interest rate applicable
to this debt would result in a change of approximately $.1 million in our
pretax earnings. As of April 30, 2004 and October 31, 2003, the carrying values of our
long-term fixed-rate debt, including accrued interest, were approximately
$316.5 million and $318.5 million, respectively, compared to fair values of
$350.0 million and $357.6 million, respectively. Fair values were determined
using quoted market prices. Each approximate 10 percent change in the average
interest rates applicable to such debt, 40 and 60 basis points for April 30,
2004 and October 31, 2003, would result in changes of approximately $1.5
million and $3.1 million, 49




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##### Table of Contents



respectively, in the fair values of these
instruments. If these instruments are held to maturity, no change in fair
value will be realized. We monitor our mix of fixed- and variable-rate debt obligations in light
of changing market conditions and from time to time may alter that mix by, for
example, refinancing balances outstanding under our variable-rate revolving
credit facility with fixed-rate debt or by entering into interest rate swaps. Trusts As of April 30, 2004 and October 31, 2003, our marketable equity
securities and our fixed-income securities subject to market risk consisted
principally of investments held by our prearranged funeral, cemetery and
perpetual care trust and escrow accounts. We estimate that each 100
basis point increase or decrease in the yield, which excludes unrealized gains
and losses, on the preneed funeral and cemetery and perpetual care
trusts, based on the April 30, 2004 balances, would result in an approximate increase
or decrease in our revenues associated with the delivery of prearranged
products and services and earnings from the perpetual care trust of $2.1
million in 2004, $3.2 million in 2005 and $4.5 million in 2006. Our
prearranged funeral, cemetery and perpetual care trust and
escrow accounts are detailed in Notes 3, 4 and 5 to our condensed consolidated
financial statement included in Item 1 and in Notes 4 and 5 to our consolidated
financial statements included in our Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. Generally, our wholly-owned subsidiary, Investors
Trust, Inc. (ITI), serves as investment adviser on these trust and
escrow accounts. ITI manages the mix of equities and fixed-income securities
in accordance with an investment policy established by the Investment Committee
of our Board of Directors with the assistance of third-party professional
financial consultants. The policy emphasizes conservation, diversification and
preservation of principal, while seeking appropriate levels of current income
and capital appreciation. ITI is registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940. 
 Item 4. Controls and Procedures We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. The evaluation was carried out under the supervision of and with the
participation of our management, including our Chief Executive Officer 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 him to material information relating to the Company, including
its consolidated subsidiaries, required to be included in reports we file with
or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934. There have been no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 50




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We and certain of our subsidiaries are parties to a number of legal
proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on our
consolidated financial position, results of operations or cash flows. We carry insurance with coverages and coverage limits that we believe to
be adequate. Although there can be no assurance that such insurance is
sufficient to protect us against all contingencies, management believes that
our insurance protection is reasonable in view of the nature and scope of our
operations. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Purchases of Equity Securities by the Issuer and Affiliated Purchasers Issuer Purchases of Equity Securities Total number of
    
    Maximum approximateshares purchased
    
    dollar value of sharesTotal number
    
    
    
    
    
    as part of
    
    that may yet beof shares
    
    Average price
    
    publicly-announced
    
    purchased under thePeriod
    
    purchased
    
    paid per share
    
    plans or programs(1)
    
    plans or programsFebruary 1, 2004 through
February 29, 2004
    
    
    761,500
    
    
    $
    6.28
    
    
    
    761,500
    
    
    $
    16,949,505March 1, 2004
through March 31, 2004
    
    
    544,400
    
    
    $
    6.60
    
    
    
    544,400
    
    
    $
    13,355,548April 1, 2004 through
April 30, 2004
    
    
    264,000
    
    
    $
    7.38
    
    
    
    264,000
    
    
    $
    11,406,218Total
    
    
    1,569,900
    
    
    $
    6.58
    
    
    
    1,569,900
    
    
    $
    11,406,218
  (1)
    
    On June 26, 2003, we announced that our Board of Directors had approved a
new stock repurchase program that allows us to invest up to $25.0 million
in repurchases of our Class A common stock. 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 April 30, 2004, we
have repurchased 2,358,400 shares at an average price of $5.76 per share. 
 Item 4. Submission of Matters to a Vote of Security Holders Our 2004 annual meeting of shareholders was held on April 13, 2004. All
director nominees were elected. The voting tabulation was as follows: Frank B.
Stewart, Jr.: 125,176,520 votes for, 1,865,183 votes withheld; John P. Laborde:
125,205,579 votes for, 1,836,124 votes withheld; Thomas M. Kitchen: 125,218,156
votes for, 1,823,547 votes withheld. The proposal to ratify the retention of
PricewaterhouseCoopers LLP, certified public accountants, as independent
auditors for the fiscal year ending October 31, 2004 was approved. The voting
tabulation was as follows: 125,511,572 votes for, 1,502,469 votes against and
27,662 abstentions. 51




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##### Table of Contents



Item 5. Other Information Forward-Looking Statements Certain statements made herein or elsewhere by us or on our behalf that
are not historical facts are intended to be forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may include the words may,
will, estimate, intend, continue, believe, expect, plan or
anticipate and other similar words. These statements include any projections
of earnings, revenues, asset sales, cash flow, debt levels or other financial
items; any statements of the plans, strategies and objectives of management for
future operations; any statements concerning proposed new products, services or
developments; any statements regarding future economic conditions or
performance; any statements of belief; and any statements of assumptions
underlying any of the foregoing. Forward-looking statements contained in this
report include but are not limited to the financial projections made in this
section and the assumptions underlying them, along with statements relating to
(1) anticipated future performance of our preneed sales program, (2)
anticipated future performance of funds held in trust, (3) anticipated
mortality trends, (4) potential results of our operating initiatives, (5) our
current plans for deployment of our projected cash flow, (6) the anticipated
impact of the recent workforce reduction and restructuring and (7) the success
and timing of selling the small businesses designated as held for sale. Accuracy of the forecasts is dependent upon assumptions about events that
change over time and is thus susceptible to periodic change based on actual
experience and new developments. The forecasts are based on a variety of
estimates and assumptions made by our management with respect to, among other
things, industry performance; general economic, market, industry and interest
rate conditions; preneed and at-need sales activities and trends; fluctuations
in cost of goods sold and other expenses; capital expenditures; and other
matters that cannot be accurately predicted, may not be realized and are
subject to significant business, economic and competitive uncertainties, all of
which are difficult to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the assumptions made in preparing
the forecasts will prove accurate, and actual results may vary materially from
those contained in the forecasts. For these reasons, the forecasts should not
be regarded as an accurate prediction of future results, but only of results
that may be obtained if substantially all of our principal expectations are
realized. We caution readers that we assume no obligation to update or publicly
release any revisions to forward-looking statements made herein or any other
forward-looking statements made by us or on our behalf. We project that earnings for continuing operations will be in the range of
$.36 and $.40 per share for fiscal year 2004 including the $.01 per share
impact of the severance charge. We expect cash flow from operations to be
between $77 million and $86 million, including the $33 million tax refund
received in December 2003 due to a change in the tax accounting methods for
cemetery merchandise revenue. Maintenance capital expenditures are expected to
be between $16 million and $17 million. Our 2004 forecast for continuing operations is based on the following
principal assumptions:  (1)
    
    An increase in revenue of 1 to 3 percent for continuing
operations and a corresponding increase in the associated direct
costs.(2)
    
    The increase in revenue is expected to be driven by an
increase in the average revenue per service performed of
approximately 2 to 3 percent, excluding any impact from funeral
trust earnings, and an increase in preneed property sales of 5 to 10
percent.(3)
    
    Increases in average revenue per service performed may be
partially offset by a decrease in the number of families served by
continuing operations in 2004 as compared to 2003. The upper end of
the forecast range assumes that these businesses will serve the same
number of families during fiscal year 2004 as in 2003, and the lower
end assumes a possible reduction in the number of families served of
up to 3 percent, which is in line with trends over previous years.(4)
    
    Total revenue from trust earnings, including earnings
recognition from funeral, cemetery and perpetual care trusts,
is expected to be about the same as that recognized in 2003.(5)
    
    Our cost-saving initiatives, including the reduction in
workforce, are expected to reduce costs by $16 52




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##### Table of Contents



million to $20 million. These cost savings are expected to be
partially offset by about $8 million to $10 million in normal
inflation of costs remaining in the business, assuming an inflation
rate of approximately 2 percent.(6)
    
    We expect to use cash flow from operations to maintain our
facilities at a level comparable to 2003, to reduce debt and to
repurchase stock, or for growth initiatives as appropriate. Our 2004 forecast for continuing operations is intended to reflect
forecasted same store results and excludes the effects of divestitures. We
believe it is appropriate to use the range of diluted earnings per share
provided herein because of the uncertainty of possible developments described
below. Guidance for diluted earnings per share and all other forecasted
operating measures specifically exclude the following:  
    
    The possibility of gains or losses associated with asset
dispositions.
    
    The possibility of gains or losses associated with early
extinguishments of debt and changes in capital structure. Cautionary Statements We caution readers that the following important factors, among others, in
some cases have affected, and in the future, could affect, our actual
consolidated results and could cause our actual consolidated results in the
future to differ materially from the goals and expectations expressed in the
forward-looking statements above and in any other forward-looking statements
made by us or on our behalf. Risks Related to Our Business Earnings from and principal of trust 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 trust and escrow accounts: (1) preneed
funeral merchandise and services, (2) preneed cemetery merchandise and services
and (3) perpetual care. Earnings and investment gains and losses on trust
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 perpetual care trusts
would cause a decline in current revenues, while declines in earnings from
other trust and escrow accounts could cause a decline in future cash
flows and revenues. In addition, any significant or sustained investment
losses could result in there being insufficient funds in the trusts to cover
the cost of delivering services and merchandise or maintaining cemeteries in
the future. Any such deficiency would have to be covered by cash flow, which
could have a material adverse effect on our financial position and results of
operations. Unrealized gains and losses in the preneed funeral and cemetery
merchandise and service trusts have no immediate impact on our revenues,
margins, earnings or cash flow, unless the fair market value of the
trusts were
to decline below the estimated costs to deliver the underlying products and
services. If that were to occur, we would record a charge to earnings to
record a liability for the expected losses on the delivery of the associated
contract. Over time, gains and losses realized in the trusts are allocated to
underlying preneed contracts and affect the amount of the trust earnings
we record when we deliver the underlying product or service. Accordingly, if
current market conditions do not improve, the trusts may eventually realize
losses, and our revenues, margins, earnings and cash flow would be negatively
affected by the reduced revenue when we deliver the underlying products and
services. This factor adversely affected our results in fiscal year 2003 and
did so again in the first six months of fiscal year 2004. Unrealized gains and
losses in the perpetual care trust do not affect earnings but could limit
the capital gains available to us and could result in lower returns and lower
current revenues than we have historically achieved. 53




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Increased costs may have a negative impact on earnings and cash flows. Overall costs are expected to decline in 2004 due to our cost reduction
operating initiatives, including the workforce restructuring and reduction that
occurred in December 2003. The cost reduction initiatives are expected to
reduce costs $16 million to $20 million. These cost savings are expected to be
partially offset by about $8 million to $10 million in normal inflation of
costs remaining in the business. We may not be successful in fully
implementing these initiatives and may incur additional costs. Insurance costs, in particular, have increased substantially in recent
years. The terrorist attacks in the United States on September 11, 2001 and
related subsequent events have resulted in higher insurance premiums. The
volume of claims made in such a short span of time resulted in liquidity
challenges that many insurers have passed on to their policyholders.
Additionally, insurers have increased premiums to offset losses in equity
markets due to recent economic conditions. While our insurance costs have
increased materially, additional increases in insurance costs cannot be
predicted. We may experience declines in preneed sales due to numerous factors, including
changes made to contract terms and sales force compensation and a weakening
economy. Declines in preneed property sales would reduce current revenue.
Declines in preneed funeral and cemetery service and merchandise sales would
reduce our backlog and could reduce our future market share. In an effort to increase cash flow, we modified our preneed sales
strategies early in fiscal year 2000 by increasing finance charges, requiring
larger down payments and shortening installment payment terms. Later in fiscal
year 2000, we changed the compensation structure for our preneed sales force.
These changes, and the accompanying sales force attrition and adverse impact on
sales force morale, caused preneed sales to decline. Although we do not
anticipate making further significant changes in these areas, we may decide
that further adjustments are advisable, which could cause additional declines
in preneed sales. In addition, a weakening economy that causes customers to
reduce discretionary spending could cause, and we believe has caused in the
past, a decline in preneed sales. Geopolitical concerns could continue to
lower consumer confidence, which could also result in a further decline in
preneed sales. Declines in preneed cemetery property sales would reduce
current revenue, and declines in other preneed sales would reduce our backlog
and future revenue and could reduce future market share. One of the operating
initiatives announced in 2003 was the creation of a preneed cemetery property
task force, which is strategically targeting businesses with maximum preneed
sales potential and developing specific plans to increase preneed property
sales and attain new customers at each of the targeted locations. Increasing
preneed funeral sales is also a part of our operating initiatives. However, we
can give no assurance that we will be successful in implementing these
operating initiatives. Our ability to increase funeral call volume is influenced by many factors such
as the decline in deaths, competition, our ability to identify changing
consumer preferences and various other factors, some of which are beyond our
control. One of the new operating initiatives announced in 2003 was the creation of
a funeral call volume task force, which is using the most successful tactics of
our top performing funeral homes to develop strategies to drive funeral call
growth throughout our organization with an increased focus on preneed funeral
sales. We can give no assurance that we will be successful in implementing
this operating initiative.We discuss the risk of declining deaths, intense
competition and our ability to identify changing consumer preferences in other
risk factors herein. Our ability to dispose of our businesses held for sale at prices consistent
with our expectations depends on several factors, many of which are beyond our
control. Any changes in expected sales prices or bases of these businesses
could result in additional impairment charges or could adversely affect our
ability to sell these businesses at prices we are willing to accept. In December 2003, we announced plans to close or sell a number of small
businesses, primarily small funeral homes, most of which were acquired as part
of a group of facilities, that are performing below acceptable levels and no
longer fit our operating profile. We believe that the closing or sale of those
businesses will enable management to
focus on our most productive operations where our operating initiatives may
bring about the greatest benefits in 54




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increased revenues. We can give no
assurance that we will be able to dispose of these businesses or that buyers
will accept our terms, nor can we give any assurance that the selling prices of
these businesses will not be materially different from our expectations. Any
variance between the anticipated and actual sale prices or changes in the bases
of these businesses would result in additional impairment charges. Our ability to service our debt in the future depends upon our ability to
generate sufficient cash, which depends upon many factors, some of which are
beyond our control. Our ability to service our debt depends upon our ability to generate
sufficient cash. As required by our credit agreement, we plan to use
substantially all of the proceeds from businesses held for sale and the
approximate $12 million of remaining income tax benefits relating to the sale
of our foreign operations, the majority of which we expect to receive over the
next three years, to reduce our debt. We discuss the risks associated with the
sale of the businesses held for sale in other risk factors herein. Our ability
to receive the expected income tax benefits within our expected time frame
depends upon, among other things, the rate at which we realize additional
capital gains. Our primary tax planning strategy is to produce these capital
gains in our trust funds. Our ability to generate capital gains could be
affected by a decline in market conditions. Our ability to generate cash flows
from operations depends upon, among other things, the number of deaths in our
markets, competition, the level of preneed sales and their maturities, our
ability to control our costs, stock and bond market conditions, and general
economic, financial and regulatory factors, most of which are beyond our
control. It is not our intention to pay amounts due on our long-term debt
maturing in fiscal year 2005 and beyond exclusively with cash flow from
operations. We plan to refinance our revolving credit facility and Term Loan B
within the next twelve months. The first call date on our senior
subordinated notes is in July 2005 at 105.375 percent. If we call these notes at that
time, we would record an early extinguishment of debt charge of approximately
$20.2 million including the bond call premium of $16.1 million and expensing of the unamortized fees
of $4.1 million. If we are unsuccessful in refinancing
this debt, we may not generate sufficient cash from operations to satisfy this
debt as it becomes due. Our ability to refinance this debt, and any potential
interest savings or potential increased interest and other costs associated
with refinancings, depends primarily on financial markets and our credit
profile at the time of the refinancing. Increased preneed sales may have a negative impact on cash flow. Preneed sales of cemetery property and funeral and cemetery products and
services are generally cash flow negative initially, primarily due to the
commissions paid on the sale, the portion of the sales proceeds required to be
placed into trust or escrow and the terms of the particular contract such as
the size of the down payment required and the length of the contract. In
fiscal year 2000, we changed the terms and conditions of preneed sales
contracts and commissions and moderated our preneed sales effort in order to
reduce the initial negative impact on cash flow. Nevertheless, we will
continue to invest a significant portion of cash flow in preneed acquisition
costs, which reduces cash flow available for other activities, and, to the
extent preneed activities are increased, cash flow would be further reduced,
and our ability to service debt could be adversely affected. Price competition could reduce market share or cause us to reduce prices to
retain or recapture market share, either of which could reduce revenues and
margins. Our funeral home and cemetery operations generally face intense
competition in local markets that typically are served by numerous funeral
homes and cemetery firms. We have historically experienced price competition
primarily from independent funeral home and cemetery operators, and from
monument dealers, casket retailers, low-cost funeral providers and other
non-traditional providers of services or products. From time to time, this
price competition has resulted in losing market share in some markets. In
other markets, we have had to reduce prices thereby reducing profit margins in
order to retain or recapture market share. Increased price competition in the
future could further reduce revenues, profit margins and the backlog and
potentially impact our annual goodwill impairment analysis. 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. 55




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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. Increases in interest rates would increase interest costs on our variable-rate
long-term debt and could have a material adverse effect on our net income and
earnings per share. As of June 2, 2004, $145.8 million of our long-term debt was subject to
variable interest rates, although $50.0 million of that amount was fixed
pursuant to the terms of an interest rate swap expiring in March 2005.
Accordingly, any significant increase in interest rates could increase our
interest costs on our variable-rate long-term debt or indebtedness incurred in
the future, which could decrease our net income and earnings per share
materially. Covenant restrictions under our senior secured credit facility and senior
subordinated note indenture limit our flexibility in operating our business. Our senior secured credit facility and the indenture governing the senior
subordinated notes contain, among other things, covenants that restrict us and
our subsidiary guarantors ability to finance future operations or capital
needs or to engage in other business activities. They limit, among other
things, our and our subsidiary guarantors ability to: borrow money; pay
dividends or distributions; purchase or redeem stock; make investments; engage
in transactions with affiliates; engage in sale leaseback transactions;
consummate specified asset sales; effect a consolidation or merger or sell,
transfer, lease, or otherwise dispose of all or substantially all assets; and
create liens on assets. In addition, the senior secured credit facility
contains specific limits on capital expenditures and the prepayment of debt
other than that incurred under the senior secured credit facility and requires
us to maintain specified financial ratios and satisfy financial condition
tests. These covenants may require us to act in a manner contrary to our business
objectives. In addition, events beyond our control, including changes in
general economic and business conditions, may affect our ability to satisfy
these covenants. A breach of any of those covenants could result in a default,
allowing the lenders to declare all amounts owed immediately due and payable. Our projections for 2004 do not include any earnings from acquisition activity.
Several important factors, among others, may affect our ability to consummate
acquisitions. Our projections for 2004 do not include any earnings from acquisition
activity. The actual level of acquisition activity, if any, will depend not
only on the number of properties acquired, but also on the size of the
acquisitions. Several important factors, among others, may affect our ability
to consummate acquisitions. We may not be able to find a sufficient number of
businesses for sale at prices we are willing to pay, particularly in view of
our new pricing parameters and cash flow criteria. Acquisition activity, if
any, will also depend on our ability to enter into new markets. Due in part to
our lack of experience operating in new areas and to the presence of
competitors who have been in certain markets longer than we have, such entry
may be more difficult or expensive than we anticipate. 56




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Risks Related to the Death Care Industry Declines in the number of deaths in our markets can cause a decrease in
revenues. Changes in the number of deaths are not predictable from market to
market or over the short term. Declines in the number of deaths could cause at-need sales of funeral and
cemetery services, property and merchandise to decline, which could decrease
revenues. This factor adversely affected our results in fiscal year 2003 and
may do so again in fiscal year 2004. Although the United States Bureau of the
Census estimates that the number of deaths in the United States will increase
by approximately 1 percent per year from 2000 to 2010, longer lifespans could
reduce the rate of deaths. Changes in the number of deaths can vary among
local markets and from quarter to quarter, and variations in the number of
deaths in our markets or from quarter to quarter are not predictable. However,
generally the number of deaths fluctuates with the seasons with more deaths
occurring during the winter months primarily resulting from pneumonia and
influenza. These variations can cause revenues to fluctuate. Our comparisons of the change in the number of families served to the
change in the number of deaths reported by the Centers for Disease Control and
Prevention (CDC) from time to time may not necessarily be meaningful. The
CDC receives weekly mortality reports from 122 cities and metropolitan areas in
the United States within two to three weeks from the date of death and reports
the total number of deaths occurring in these areas each week based on the
reports received from state health departments. The comparability of our
funeral calls to the CDC data is limited, as reports from the state health
departments are often delayed, and the 122 cities reporting to the CDC are not
necessarily comparable with the markets in which we operate. The increasing number of cremations in the United States could cause revenues
to decline because we could lose market share to firms specializing in
cremations. In addition, basic cremations produce no revenues for cemetery
operations and lesser funeral revenues and, in certain cases, lesser profit
margins than traditional funerals. Our traditional cemetery and funeral service operations face competition
from the increasing number of cremations in the United States. Industry
studies indicate that the percentage of cremations has steadily increased and
that cremations will represent approximately 36 percent of the United States
burial market by the year 2010, compared to 27 percent in 2001. The trend
toward cremation could cause cemeteries and traditional funeral homes to lose
market share and revenues to firms specializing in cremations. In addition,
basic cremations (with no funeral service, casket, urn, mausoleum niche,
columbarium niche or burial) produce no revenues for cemetery operations and
lower revenues than traditional funerals and, when delivered at a traditional
funeral home, produce lower profit margins as well. If we are not able to respond effectively to changing consumer preferences, our
market share, revenues and profitability could decrease. Future market share, revenues and profits will depend in part on our
ability to anticipate, identify and respond to changing consumer preferences.
During fiscal year 2000, we began to implement strategies based on a
proprietary, extensive study of consumer preferences we commissioned in 1999.
However, we may not correctly anticipate or identify trends in consumer
preferences, or we may identify them later than our competitors do. In
addition, any strategies we may implement to address these trends may prove
incorrect or ineffective. Because the funeral and cemetery businesses are high fixed-cost businesses,
positive or negative changes in revenue can have a disproportionately large
effect on cash flow and profits. Companies in the funeral home and cemetery business must incur many of the
costs of operating and maintaining facilities, land and equipment regardless of
the level of sales in any given period. For example, we must pay salaries,
utilities, property taxes and maintenance costs on funeral homes and maintain
the grounds of cemeteries regardless of the number of funeral services or
interments performed. Because we cannot decrease these costs significantly or
rapidly when we experience declines in sales, declines in sales can cause
margins, profits and cash
flow to decline at a greater rate than the decline in revenues. 57




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Changes or increases in, or failure to comply with, regulations applicable to
our business could increase costs or decrease cash flows. The death care industry is subject to extensive regulation and licensing
requirements under federal, state and local laws. For example, the funeral
home industry is regulated by the Federal Trade Commission, which requires
funeral homes to take actions designed to protect consumers. State laws impose
licensing requirements and regulate preneed sales. Embalming facilities are
subject to stringent environmental and health regulations. Compliance with
these regulations is burdensome, and we are always at risk of not complying
with the regulations. In addition, from time to time, governments and agencies propose to amend
or add regulations, which could increase costs or decrease cash flows. For
example, federal, state, local and other regulatory agencies have considered
and may enact additional legislation or regulations that could affect the death
care industry. Several states and regulatory agencies have considered or are
considering regulations that could require more liberal refund and cancellation
policies for preneed sales of products and services, limit or eliminate our
ability to use surety bonding, increase trust requirements and prohibit the
common ownership of funeral homes and cemeteries in the same market. If
adopted by the regulatory authorities of the jurisdictions in which we operate,
these and other possible proposals could have a material adverse effect on us,
our financial condition, our results of operations, our cash flows and our
future prospects. 58




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Item 6. Exhibits and Reports on Form 8-K  (a)
    
    Exhibits3.1
    
    Amended and Restated Articles of Incorporation of the Company, as amended
and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended April
30, 2003)3.2
    
    By-laws of the Company, as amended and restated as of February 18, 2004
(incorporated by reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.1
    
    See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and
Restated Articles of Incorporation, as amended, and By-laws, as amended,
defining the rights of holders of Class A and Class B common stock4.2
    
    Specimen of Class A common stock certificate (incorporated by reference
to Exhibit 4.2 to Amendment No. 3 to the Companys Registration Statement
on Form S-1 (Registration No. 33-42336) filed with the Commission on
October 7, 1991)4.3
    
    Rights Agreement, dated as of October 28, 1999, between Stewart
Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent (incorporated by reference to Exhibit 1 to the Companys Form 8-A
dated November 3, 1999)4.4
    
    Credit Agreement dated June 29, 2001 by and among the Company, Empresas
Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of
America, N.A., as Administrative Agent, Collateral Agent and as a Lender,
Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust
Company, as a Lender and the other Lenders party thereto from time to time
(incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit
Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1
to the Companys Current Report on Form 8-K dated May 1, 2003) and
Amendment No. 2 to the Credit Agreement dated February 18, 2004
(incorporated by reference to Exhibit 4.4 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.5
    
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named
therein and Firstar Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Form S-4 dated August 14, 2001)4.6
    
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by
reference to Exhibit 4.2 to the Companys Form S-4 dated August 14, 2001)10.1
    
    Separation Agreement by and between the Company and William E. Rowe dated
as of June 3, 200412
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Financial Officer (included in Exhibit 31.1) 59




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32
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer and Chief Financial Officer  (b)
    
Reports on Form 8-K We filed a Form 8-K dated February 25, 2004, reporting under Item 5.
Other Events, the announcement that Mr. Thomas M. Kitchen was named to the
Companys Board of Directors. We filed a Form 8-K dated March 9, 2004, reporting under Item 7.
Financial Statements and Exhibits and Item 12. Results of Operations and
Financial Condition, the earnings release for the quarter ended January 31,
2004. 60




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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.June 9, 2004
    
    /s/ KENNETH C. BUDDEKenneth C. BuddeChief Executive Officer andChief Financial OfficerJune 9, 2004
    
    /s/ MICHAEL G. HYMELMichael G. HymelVice PresidentCorporate ControllerChief Accounting Officer
 61




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INDEX TO 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 February 18, 2004
(incorporated by reference to Exhibit 3.2 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.1
    
    See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and
Restated Articles of Incorporation, as amended, and By-laws, as amended,
defining the rights of holders of Class A and Class B common stock4.2
    
    Specimen of Class A common stock certificate (incorporated by reference
to Exhibit 4.2 to Amendment No. 3 to the Companys Registration Statement
on Form S-1 (Registration No. 33-42336) filed with the Commission on
October 7, 1991)4.3
    
    Rights Agreement, dated as of October 28, 1999, between Stewart
Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights
Agent (incorporated by reference to Exhibit 1 to the Companys Form 8-A
dated November 3, 1999)4.4
    
    Credit Agreement dated June 29, 2001 by and among the Company, Empresas
Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of
America, N.A., as Administrative Agent, Collateral Agent and as a Lender,
Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust
Company, as a Lender and the other Lenders party thereto from time to time
(incorporated by reference to Exhibit 4.1 to the Companys Current Report
on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit
Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1
to the Companys Current Report on Form 8-K dated May 1, 2003) and
Amendment No. 2 to the Credit Agreement dated February 18, 2004
(incorporated by reference to Exhibit 4.4 to the Companys Quarterly
Report on Form 10-Q for the quarter ended January 31, 2004)4.5
    
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named
therein and Firstar Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Form S-4 dated August 14, 2001)4.6
    
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by
reference to Exhibit 4.2 to the Companys Form S-4 dated August 14, 2001)10.1
    
    Separation Agreement by and between the Company and William E. Rowe dated
as of June 3, 200412
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Financial Officer (included in Exhibit 31.1)32
    
    Certification pursuant to Section 906 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Chief Executive Officer and Chief Financial Officer