##### Table of Contents



UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
   FORM 10-Q þ Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 For the quarterly period ended April 30, 2005
 OR
 o Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
 For the transition period from ___to
   Commission File Number: 1-15449   STEWART ENTERPRISES, INC.  LOUISIANA
(State or other jurisdiction of incorporation or organization)
    
    72-0693290
(I.R.S. Employer Identification No.)1333 South Clearview Parkway
Jefferson, Louisiana
(Address of principal executive offices)
    
    70121
(Zip Code)
   Registrants telephone number, including area code: (504) 729-1400   Indicate by check mark whether the Registrant (1) has filed all reports required to be filed
by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or
for such shorter period that the Registrant was required to file such reports), and (2) has been
subject to such filing requirements for the past 90 days. Yes þ No o Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2
of the Securities Exchange Act of 1934. Yes þ No o The number of shares of the Registrants Class A common stock, no par value per share, and
Class B common stock, no par value per share, outstanding as of May 31, 2005, was 106,143,977 and
3,555,020, respectively.




---



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES INDEX  
 PagePart I. Financial InformationItem 1. Financial Statements (Unaudited)Condensed Consolidated Statements of Earnings Three Months Ended April 30, 2005 and 2004
    
    
    3Condensed Consolidated Statements of Earnings Six Months Ended April 30, 2005 and 2004
    
    
    4Condensed Consolidated Balance Sheets April 30, 2005 and October 31, 2004
    
    
    5Condensed Consolidated Statement of Shareholders Equity Six Months Ended April 30, 2005
    
    
    7Condensed Consolidated Statements of Cash Flows Six Months Ended April 30, 2005 and 2004
    
    
    8Notes to Condensed Consolidated Financial Statements
    
    
    9Item 2.Managements Discussion and Analysis of Financial Condition and Results of Operations
    
    
    53Item 3.Quantitative and Qualitative DisclosuresAbout Market Risk
    
    
    65Item 4.Controls and Procedures
    
    
    66Part II. Other InformationItem 1.Legal Proceedings
    
    
    66Item 2.Unregistered Sales of Equity Securities and Use of Proceeds
    
    
    67Item 4.Submission of Matters to a Vote of Security Holders
    
    
    68Item 5.Other Information
    
    
    68Item 6.Exhibits
    
    
    76Signatures
    
    
    78Exhibit 4.1Calculation of Ratio of Earnings to Fixed ChargesPreferability Letter regarding change in accounting principleCertification pursuant to Section 302 of Kenneth C. BuddeCertification pursuant to Section 302 of Thomas M. KitchenCertifications pursuant to Section 906 of Kenneth C. Budde and Thomas M. Kitchen
  2




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts) Three Months Ended April 30,2005
    
    
    2004Revenues:Funeral
    
    $
    75,524
    
    
    $
    71,582Cemetery
    
    
    61,139
    
    
    
    59,511136,663
    
    
    
    131,093Costs and expenses:Funeral
    
    
    56,367
    
    
    
    50,232Cemetery
    
    
    45,196
    
    
    
    44,043101,563
    
    
    
    94,275Gross profit
    
    
    35,100
    
    
    
    36,818Corporate general and administrative expenses
    
    
    (4,582
    )
    
    
    (4,621
    )Separation charges (Note 13)
    
    
    
    
    
    
    (138
    )Gains on dispositions and impairment (losses), net (Note 12)
    
    
    421
    
    
    
    (315
    )Other operating income, net
    
    
    261
    
    
    
    504Operating earnings
    
    
    31,200
    
    
    
    32,248Interest expense
    
    
    (6,671
    )
    
    
    (11,953
    )Loss on early extinguishment of debt (Note 14)
    
    
    (30,057
    )
    
    
    Investment and other income, net
    
    
    111
    
    
    
    57Earnings (loss) from continuing operations before income taxes
    
    
    (5,417
    )
    
    
    20,352Income tax expense (benefit)
    
    
    (1,519
    )
    
    
    7,615Earnings (loss) from continuing operations
    
    
    (3,898
    )
    
    
    12,737Discontinued operations (Note 12):Earnings (loss) from discontinued operations before income taxes
    
    
    (186
    )
    
    
    1,573Income tax benefit
    
    
    ( 94
    )
    
    
    (447
    )Earnings (loss) from discontinued operations
    
    
    (92
    )
    
    
    2,020Net earnings (loss)
    
    $
    (3,990
    )
    
    $
    14,757Basic earnings (loss) per common share:Earnings (loss) from continuing operations
    
    $
    (.04
    )
    
    $
    .12Earnings from discontinued operations
    
    
    
    
    
    
    .02Net earnings (loss)
    
    $
    (.04
    )
    
    $
    .14Diluted earnings (loss) per common share:Earnings (loss) from continuing operations
    
    $
    (.04
    )
    
    $
    .12Earnings from discontinued operations
    
    
    
    
    
    
    .02Net earnings (loss)
    
    $
    (.04
    )
    
    $
    .14Weighted average common shares outstanding (in thousands):Basic
    
    
    109,506
    
    
    
    107,438Diluted
    
    
    109,506
    
    
    
    108,400Dividends declared per common share
    
    $
    .025
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements. 3




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts) Six Months Ended April 30,2005
    
    
    2004Revenues:Funeral
    
    $
    147,026
    
    
    $
    146,309Cemetery
    
    
    115,786
    
    
    
    115,526262,812
    
    
    
    261,835Costs and expenses:Funeral
    
    
    108,426
    
    
    
    102,128Cemetery
    
    
    88,703
    
    
    
    85,892197,129
    
    
    
    188,020Gross profit
    
    
    65,683
    
    
    
    73,815Corporate general and administrative expenses
    
    
    (8,798
    )
    
    
    (8,534
    )Separation charges (Note 13)
    
    
    
    
    
    
    (2,131
    )Gains on dispositions and impairment (losses), net (Note 12)
    
    
    1,147
    
    
    
    288Other operating income, net
    
    
    505
    
    
    
    943Operating earnings
    
    
    58,537
    
    
    
    64,381Interest expense
    
    
    (17,047
    )
    
    
    (24,474
    )Loss on early extinguishment of debt (Note 14)
    
    
    (32,708
    )
    
    
    Investment and other income (expense), net
    
    
    219
    
    
    
    (1,068
    )Earnings from continuing operations before income taxes and
cumulative effect of change in accounting principle
    
    
    9,001
    
    
    
    38,839Income taxes
    
    
    4,008
    
    
    
    14,640Earnings from continuing operations before cumulative effect of
change in accounting principle
    
    
    4,993
    
    
    
    24,199Discontinued operations (Note 12):Earnings from discontinued operations before income taxes
    
    
    127
    
    
    
    2,001Income tax expense (benefit)
    
    
    125
    
    
    
    (285
    )Earnings from discontinued operations
    
    
    2
    
    
    
    2,286Earnings before cumulative effect of change in accounting principle
    
    
    4,995
    
    
    
    26,485Cumulative effect of change in accounting principle (net of
$93,235 income tax benefit) (Note 2)
    
    
    (141,318
    )
    
    
    Net earnings (loss)
    
    $
    (136,323
    )
    
    $
    26,485Basic earnings (loss) per common share:Earnings from continuing operations before cumulative effect of
change in accounting principle
    
    $
    .05
    
    
    $
    .22Earnings from discontinued operations
    
    
    
    
    
    
    .03Cumulative effect of change in accounting principle
    
    
    (1.30
    )
    
    
    Net earnings (loss)
    
    $
    (1.25
    )
    
    $
    .25Diluted earnings (loss) per common share:Earnings from continuing operations before cumulative effect of
change in accounting principle
    
    $
    .05
    
    
    $
    .22Earnings from discontinued operations
    
    
    
    
    
    
    .02Cumulative effect of change in accounting principle
    
    
    (1.29
    )
    
    
    Net earnings (loss)
    
    $
    (1.24
    )
    
    $
    .24Weighted average common shares outstanding (in thousands):Basic
    
    
    109,293
    
    
    
    107,660Diluted
    
    
    109,506
    
    
    
    108,177Dividends declared per common share
    
    $
    .025
    
    
    $
    
 See accompanying notes to condensed consolidated financial statements. 4




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) April 30,
    
    
    October 31,2005
    
    
    2004ASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    18,450
    
    
    $
    21,514Marketable securities
    
    
    1,292
    
    
    
    1,297Receivables, net of allowances
    
    
    61,599
    
    
    
    59,461Inventories
    
    
    37,750
    
    
    
    39,455Prepaid expenses
    
    
    3,657
    
    
    
    2,954Deferred income taxes, net
    
    
    4,212
    
    
    
    4,522Assets held for sale (Note 12)
    
    
    
    
    
    
    3,590Total current assets
    
    
    126,960
    
    
    
    132,793Receivables due beyond one year, net of allowances
    
    
    77,244
    
    
    
    79,879Preneed funeral receivables and trust investments
    
    
    498,898
    
    
    
    504,882Preneed cemetery receivables and trust investments
    
    
    260,143
    
    
    
    259,459Goodwill
    
    
    405,627
    
    
    
    405,136Deferred charges (Note 2)
    
    
    19,696
    
    
    
    254,834Cemetery property, at cost
    
    
    370,519
    
    
    
    371,094Property and equipment, at cost:Land
    
    
    41,746
    
    
    
    40,525Buildings
    
    
    298,168
    
    
    
    294,916Equipment and other
    
    
    168,358
    
    
    
    163,427508,272
    
    
    
    498,868Less accumulated depreciation
    
    
    206,926
    
    
    
    197,576Net property and equipment
    
    
    301,346
    
    
    
    301,292Deferred income taxes, net
    
    
    134,106
    
    
    
    43,124Cemetery perpetual care trust investments
    
    
    211,503
    
    
    
    210,267Other assets
    
    
    1,417
    
    
    
    1,408Total assets
    
    $
    2,407,459
    
    
    $
    2,564,168
 (continued) 5




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) April 30,
    
    
    October 31,2005
    
    
    2004LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt (Note 14)
    
    $
    5,087
    
    
    $
    1,725Accounts payable
    
    
    8,210
    
    
    
    9,075Accrued payroll
    
    
    10,589
    
    
    
    13,005Accrued insurance
    
    
    22,697
    
    
    
    21,430Accrued interest
    
    
    4,708
    
    
    
    11,315Other current liabilities
    
    
    10,057
    
    
    
    13,089Income taxes payable
    
    
    616
    
    
    
    130Liabilities associated with assets held for sale (Note 12)
    
    
    
    
    
    
    2,388Total current liabilities
    
    
    61,964
    
    
    
    72,157Long-term debt, less current maturities
    
    
    413,377
    
    
    
    415,080Deferred preneed funeral revenue
    
    
    145,554
    
    
    
    158,311Deferred preneed cemetery revenue
    
    
    282,736
    
    
    
    284,963Non-controlling interest in funeral and cemetery trusts
    
    
    628,615
    
    
    
    629,376Other long-term liabilities
    
    
    10,636
    
    
    
    11,130Total liabilities
    
    
    1,542,882
    
    
    
    1,571,017Commitments and contingencies
    
    
    
    
    
    
    Non-controlling interest in perpetual care trusts
    
    
    209,833
    
    
    
    208,893Shareholders equity:Preferred stock, $1.00 par value, 5,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, $1.00 stated value:Class A authorized 150,000,000 shares; issued and outstanding
106,143,977 and 104,330,101 shares at April 30, 2005
and October 31, 2004, respectively
    
    
    106,144
    
    
    
    104,330Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at April 30, 2005 and October 31, 2004;
10 votes per share; convertible into an equal number of
Class A shares
    
    
    3,555
    
    
    
    3,555Additional paid-in capital
    
    
    679,098
    
    
    
    673,630Retained earnings (accumulated deficit)
    
    
    (133,025
    )
    
    
    3,298Unearned restricted stock compensation
    
    
    (1,028
    )
    
    
    (222
    )Accumulated other comprehensive loss:Derivative financial instrument losses
    
    
    
    
    
    
    (333
    )Total accumulated other comprehensive losses
    
    
    
    
    
    
    (333
    )Total shareholders equity
    
    
    654,744
    
    
    
    784,258Total liabilities and shareholders equity
    
    $
    2,407,459
    
    
    $
    2,564,168
 See accompanying notes to condensed consolidated financial statements. 6




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts) Retained
    
    
    Unearned
    
    
    DerivativeAdditional
    
    
    Earnings
    
    
    Restricted
    
    
    Financial
    
    
    TotalCommon
    
    
    Paid-In
    
    
    (Accumulated
    
    
    Stock
    
    
    Instrument
    
    
    ShareholdersStock(1)
    
    
    Capital
    
    
    Deficit)
    
    
    Compensation
    
    
    Gains (Losses)
    
    
    EquityBalance October 31, 2004
    
    $
    107,885
    
    
    $
    673,630
    
    
    $
    3,298
    
    
    $
    (222
    )
    
    $
    (333
    )
    
    $
    784,258Comprehensive income (loss):Net loss
    
    
    
    
    
    
    
    
    
    
    (136,323
    )
    
    
    
    
    
    
    
    
    
    
    (136,323
    )Other comprehensive income:Unrealized appreciation on derivative
instrument designated and qualifying as
a cash flow hedging instrument, net of
deferred tax expense of ($204)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333
    
    
    
    333Total comprehensive income (loss)
    
    
    
    
    
    
    
    
    
    
    (136,323
    )
    
    
    
    
    
    
    333
    
    
    
    (135,990
    )Restricted stock activity
    
    
    166
    
    
    
    992
    
    
    
    
    
    
    
    (806
    )
    
    
    
    
    
    
    352Issuance of common stock
    
    
    37
    
    
    
    183
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    220Stock options exercised
    
    
    2,511
    
    
    
    9,877
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,388Tax benefit associated with stock options
exercised
    
    
    
    
    
    
    1,939
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,939Purchase and retirement of common stock
    
    
    (900
    )
    
    
    (4,781
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,681
    )Dividends ($.025 per share)
    
    
    
    
    
    
    (2,742
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,742
    )Balance April 30, 2005
    
    $
    109,699
    
    
    $
    679,098
    
    
    $
    (133,025
    )
    
    $
    (1,028
    )
    
    $
    
    
    
    $
    654,744
   (1)
    
    Amount includes 106,144 and 104,330 shares (in thousands) of Class A common stock
with a stated value of $1 per share as of April 30, 2005 and October 31, 2004, respectively,
and includes 3,555 shares (in thousands) of Class B common stock. See accompanying notes to condensed consolidated financial statements. 7




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts) Six Months Ended April 30,2005
    
    
    2004Cash flows from operating activities:Net earnings (loss)
    
    $
    (136,323
    )
    
    $
    26,485Adjustments to reconcile net earnings (loss) to net cash
provided by operating activities:(Gains) on dispositions and impairment losses, net
    
    
    (1,494
    )
    
    
    (1,619
    )Cumulative effect of change in accounting principle
    
    
    141,318
    
    
    
    Loss on early extinguishment of debt
    
    
    32,708
    
    
    
    Depreciation and amortization
    
    
    10,827
    
    
    
    11,700Amortization of preneed selling costs
    
    
    
    
    
    
    13,758Provision for doubtful accounts
    
    
    3,063
    
    
    
    4,197Net loss realized on marketable securities
    
    
    
    
    
    
    1,194Provision for deferred income taxes
    
    
    2,193
    
    
    
    6,057Other
    
    
    771
    
    
    
    197Changes in assets and liabilities:(Increase) decrease in other receivables
    
    
    (4,127
    )
    
    
    28,548Decrease in deferred charges
    
    
    960
    
    
    
    2,810(Increase) decrease in inventories and cemetery property
    
    
    1,794
    
    
    
    (77
    )Increase (decrease) in accounts payable and accrued expenses
    
    
    ( 9,130
    )
    
    
    1,096Net effect of preneed funeral production and maturities
    
    
    (10,362
    )
    
    
    (16,899
    )Net effect of preneed cemetery production and deliveries
    
    
    (2,117
    )
    
    
    1,383Change in deferred charges  prearranged acquisition costs
    
    
    
    
    
    
    (16,763
    )Decrease in other
    
    
    (1,062
    )
    
    
    (1,188
    )Net cash provided by operating activities
    
    
    29,019
    
    
    
    60,879Cash flows from investing activities:Proceeds from sales of marketable securities
    
    
    16
    
    
    
    1,019Proceeds from sale of assets, net
    
    
    6,385
    
    
    
    8,938Additions to property and equipment
    
    
    (12,968
    )
    
    
    (8,333
    )Other
    
    
    (188
    )
    
    
    47Net cash provided by (used in) investing activities
    
    
    (6,755
    )
    
    
    1,671Cash flows from financing activities:Proceeds from long-term debt
    
    
    440,000
    
    
    
    Repayments of long-term debt
    
    
    (438,341
    )
    
    
    (48,158
    )Debt issue costs and tender premium
    
    
    (31,180
    )
    
    
    Issuance of common stock
    
    
    12,608
    
    
    
    4,711Purchase and retirement of common stock
    
    
    (5,681
    )
    
    
    (10,692
    )Dividends
    
    
    (2,742
    )
    
    
    Other
    
    
    8
    
    
    
    Net cash used in financing activities
    
    
    (25,328
    )
    
    
    (54,139
    )Net increase (decrease) in cash
    
    
    (3,064
    )
    
    
    8,411Cash and cash equivalents, beginning of period
    
    
    21,514
    
    
    
    18,585Cash and cash equivalents, end of period
    
    $
    18,450
    
    
    $
    26,996Supplemental cash flow information:Cash paid (received) during the period for:Income taxes
    
    $
    2,400
    
    
    $
    (29,800
    )Interest
    
    $
    22,500
    
    
    $
    21,500
 See accompanying notes to condensed consolidated financial statements. 8




---



##### 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 (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, 2005,
the Company owned and operated 235 funeral homes and 147 cemeteries in 26 states within the United
States and Puerto Rico. (b) Principles of Consolidation The accompanying condensed consolidated financial statements include the Company and its
subsidiaries. All significant intercompany balances and transactions have been eliminated. (c) Interim Disclosures The information as of April 30, 2005, and for the three and six months ended April 30, 2005
and 2004, is unaudited but, in the opinion of management, reflects all adjustments, which are of a
normal recurring nature, necessary for a fair presentation of financial position and results of
operations for the interim periods. The accompanying condensed consolidated financial statements
should be read in conjunction with the consolidated financial statements and notes thereto
contained in the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2004. The year-end condensed consolidating balance sheet data was derived from audited financial
statements but does not include all disclosures required by accounting principles generally
accepted in the United States of America, which are presented in the Companys Annual Report on
Form 10-K for the fiscal year ended October 31, 2004. The results of operations for the three and six months ended April 30, 2005 are not
necessarily indicative of the results to be expected for the fiscal year ending October 31, 2005. (d) Use of Estimates The preparation of financial statements in conformity with accounting principles generally
accepted in the United States of America requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and
liabilities at the date of the financial statements and the reported amounts of revenues and
expenses during the reporting period. Actual results could differ from those estimates. (e) Fair Value of Financial Instruments Estimated fair value amounts have been determined using available market information and the
valuation methodologies described below. However, considerable judgment is required in
interpreting market data to develop estimates of fair value. Accordingly, the estimates presented
herein may not be indicative of the amounts the Company 9




---



##### 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 amounts of receivables due
beyond one year approximate 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, including marketable securities 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.
See Note 2(b) for additional information. 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. Any investment with a fair market value that has been less than its cost basis by 20 percent
or greater for more than six months as of the respective balance sheet reporting date is considered
to be other than temporarily impaired. Otherwise, an investment with a fair market value that is
less than its cost basis is considered to be temporarily impaired. This evaluation of impairment
with respect to the Companys trust portfolio is performed each quarter using quoted market prices.
If a loss is other than temporary, the cost basis of the security is adjusted downward to its
market value. This affects the Companys footnote disclosure, but does not otherwise have an
effect on the financial statements, since the trust portfolio amount as reported in the
consolidated balance sheet is already marked to market value each quarter. (f) Inventories Inventories are stated at the lower of cost (specific identification and first-in, first-out
methods) or net realizable value. The portion of developed cemetery property that management
estimates will be used in the next twelve months is included in inventories. Such estimates are
based on the Companys historical experience or results. (g) Depreciation and Amortization Buildings and equipment are recorded at cost and are depreciated over their estimated useful
lives, ranging from 10 to 40 years and from 3 to 10 years, respectively, primarily using the
straight-line method. On May 31, 2005, the Company changed its method of accounting for preneed selling costs as
described further in Note 2(a). Under the Companys previous accounting method, the
selling costs that related to the Companys preneed funeral and cemetery merchandise and services
contracts were included in deferred charges and amortized into
funeral and cemetery costs and expenses in the
consolidated statement of earnings in proportion to preneed revenue recognized during the period.
This expense amortization was included in amortization of preneed
selling costs in the consolidated
statements of cash flows. Effective November 1, 2004, these
preneed selling costs are recorded in funeral and cemetery costs and
expenses in the period incurred. Accordingly, fiscal year 2004 includes the
amortization of these deferred preneed selling costs, while
fiscal year 2005 does not. (h) Long-lived Assets The Company reviews for continued appropriateness the carrying value of its long-lived assets
whenever events and circumstances indicate a potential impairment. This review is based on its
projections of anticipated undiscounted future cash flows. If indicators of impairment were
present, the Company would evaluate the undiscounted future cash flows 10




---



##### 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) estimated to be generated by those assets compared to the carrying amount of those assets. The net
carrying value of assets not recoverable would be reduced to fair value. While the Company
believes that its estimates of undiscounted future cash flows are reasonable, different assumptions
regarding such cash flows and comparable sales values could materially affect its evaluations. (i) Goodwill SFAS No. 142, Goodwill and Other Intangibles, provides that goodwill is no longer amortized,
but must be tested annually for impairment using a fair value approach rather than an undiscounted
cash flow approach. The Companys evaluation of goodwill is performed at the funeral and cemetery
segments, which constitute the Companys reporting units. In the fourth quarter of each fiscal
year, the Company conducts its annual goodwill impairment analysis, which compares the fair value
with the book value for each reporting unit. The Company performed its annual goodwill impairment
review during the fourth quarter of 2004 and determined that there was no impairment. Goodwill
increased $491 to $405,627 as of April 30, 2005 compared to $405,136 as of October 31, 2004, due to
changes in businesses held for sale. (j) Stock-Based Compensation As of April 30, 2005, the Company had five stock-based compensation plans, which are described
in more detail in Note 22 to the consolidated financial statements of the Companys Annual Report
on Form 10-K for the fiscal year ended October 31, 2004. The Company accounts for those plans
under the recognition and measurement principles of Accounting Principles Board (APB) Opinion No.
25, Accounting for Stock Issued to Employees and has adopted the disclosure-only provisions of
SFAS No. 123, Accounting for Stock-Based Compensation and SFAS No. 148, Accounting for
Stock-Based Compensation  Transition and Disclosure  an Amendment of FASB Statement No. 123. No
stock-based employee compensation cost related to stock options is reflected in net earnings, as
all options granted under those plans had an exercise price equal to or greater than the market
value of the underlying common stock on the grant date. The expense related to the restricted
stock granted in fiscal year 2005 and 2004 is reflected in earnings and amounted to $207 and $258
for the three months ended April 30, 2005 and 2004, respectively, and $352 and $373 for the six
months ended April 30, 2005 and 2004, respectively. See Note 1(o) for further discussion on the
Companys restricted stock. The FASB issued SFAS No. 123R in December 2004, which is effective for
the Company in the first quarter of fiscal year 2006. The Company has evaluated the impact of its
adoption on its financial statements. See Note 2 for additional information. The following table
illustrates the effect on net earnings (loss) and net earnings (loss) per share if the Company had
applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation. Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Net earnings (loss)
    
    $
    (3,990
    )
    
    $
    14,757
    
    
    $
    (136,323
    )
    
    $
    26,485Stock-based employee compensation expense
included in reported net earnings, net of tax
    
    
    129
    
    
    
    160
    
    
    
    218
    
    
    
    231Total stock-based employee compensation expense
determined under fair value-based method,
net of tax
    
    
    (408
    )
    
    
    (554
    )
    
    
    (935
    )
    
    
    (971
    )Pro forma net earnings (loss)
    
    $
    (4,269
    )
    
    $
    14,363
    
    
    $
    (137,040
    )
    
    $
    25,745Net earnings (loss) per common share:Basic  as reported
    
    $
    (.04
    )
    
    $
    .14
    
    
    $
    (1.25
    )
    
    $
    .25Basic  pro forma
    
    $
    (.04
    )
    
    $
    .13
    
    
    $
    (1.25
    )
    
    $
    .24Diluted  as reported
    
    $
    (.04
    )
    
    $
    .14
    
    
    $
    (1.24
    )
    
    $
    .24Diluted  pro forma
    
    $
    (.04
    )
    
    $
    .13
    
    
    $
    (1.25
    )
    
    $
    .24
 11




---



##### 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) (k) Funeral Revenue The Company sells prearranged funeral services and merchandise under contracts that provide
for delivery of the services and merchandise at the time of death. Prearranged funeral services
are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral
merchandise is recognized as revenue upon delivery. Prior to performing the funeral or delivering
the merchandise, such sales are deferred. On May 31, 2005, the Company changed its method of accounting for preneed selling costs
incurred related to the acquisition of new prearranged funeral service and merchandise sales. The
Company has applied this change in accounting principle effective November 1, 2004. All selling
costs related to the acquisition of new prearranged funeral service sales and prearranged funeral
merchandise sales are now expensed as incurred. Prior to that time, the selling costs that related
to the Companys preneed funeral service and merchandise contracts were included in deferred
charges and amortized in proportion to the preneed revenue recognized during the period. See Note
2(a) for additional information. Prearranged funeral services and merchandise generally are funded either through trust or
escrow accounts established by the Company or through third-party insurance companies. Principal
amounts deposited in the trust or escrow accounts generally range from 70 percent to 90 percent of
each installment received. The sale of caskets is treated in some jurisdictions in the same manner
as the sale of cemetery merchandise and in some jurisdictions as the sale of funeral services for
trusting purposes. Amounts deposited are available to the Company as funeral services and
merchandise are delivered and are refundable to the customer in those situations where state law
provides for the return of those amounts under the purchasers option to cancel the contract.
Certain jurisdictions provide for non-refundable trust or escrow accounts where the Company
receives such amounts upon cancellation by the customer. The Company defers all dividends and
interest earned and net capital gains and losses realized by preneed funeral trust or escrow
accounts until the underlying service or merchandise is delivered. Earnings are withdrawn from trust or escrow accounts only as funeral services and merchandise
are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be
withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Even so, such
withdrawn earnings are not recognized as revenue until the related funeral services are performed
or merchandise delivered. When prearranged funeral services and merchandise are funded through insurance policies
purchased by customers from third-party insurance companies, the Company earns a commission if it
acts as agent on the sale of the policies. Customer payments of premiums on the insurance policies
are sent directly to the insurance company, and the insurance premium receivables and related
customer payments are not recorded on the Companys financial statements. Insurance commissions
are recognized as revenue at the point at which the commission is no longer subject to refund. The
costs related to the commissions are expensed at the same time. Nothing more is recorded until the
contracted service or merchandise is delivered. At that time, the face amount of the contract and
the build-up in the face value of the contract (i.e., the policy proceeds) are recorded as funeral
revenue, and the related expenses are recorded. A receivable from the insurance company for the
policy proceeds is recorded as a funeral receivable. Funeral services and merchandise sold at the time of need are recorded as funeral revenue in
the period the funeral is performed or the merchandise is delivered. (l) Cemetery Revenue The Company sells preneed cemetery merchandise and services under contracts that provide for
delivery of the merchandise and services at the time of need. Preneed cemetery merchandise and
service sales are recorded as cemetery revenue in the period the merchandise is delivered or
service is performed. 12




---



##### 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) On May 31, 2005, the Company changed its method of accounting for preneed selling costs
related to the acquisition of new prearranged cemetery service and merchandise sales. The Company
has applied this change in accounting principle effective November 1, 2004. All selling costs
related to the acquisition of new prearranged cemetery service sales and prearranged cemetery
merchandise sales are now expensed as incurred. Prior to that time, the selling costs that related
to the Companys preneed cemetery merchandise and services contracts were included in deferred
charges and amortized in proportion to the preneed revenue recognized during the period. See Note
2(a) for additional information. In certain jurisdictions in which the Company operates, local law or contracts with customers
generally require that a portion of the sale price of preneed cemetery merchandise and services
be placed in trust or escrow accounts. With respect to the preneed sale of cemetery
merchandise, the Company is generally required to place in trust 30 percent to 50 percent of each
installment received. With respect to the preneed sale of cemetery services, the Company is
generally required to place in trust 70 percent to 90 percent of each installment received. The
Company defers all dividends and interest earned and net capital gains and losses realized by
preneed cemetery merchandise and services trust or escrow accounts until the underlying merchandise
or service is delivered. Principal and earnings are withdrawn only as the merchandise or services
are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be
withdrawn currently and in unregulated jurisdictions where escrow accounts are used. For preneed sales of interment rights (cemetery property), the associated revenue and all
costs to acquire the sale are recognized in accordance with SFAS No. 66, Accounting for Sales of
Real Estate. Under SFAS No. 66, recognition of revenue and costs must be deferred until 10
percent of the property sale price has been collected. Revenue related to the preneed sale of
cemetery property prior to its construction is recognized on a percentage of completion method of
accounting as construction occurs. The Company measures the percentage of completion by taking the
costs incurred to date and dividing that number by the total projected cost of the project. Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of
the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from
these trusts, which have been established in most jurisdictions in which the Company operates
cemeteries, is used for maintenance of those cemeteries, but principal, including in some
jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are
received, the Company generally funds the perpetual care trust in the same proportion as the
payment bears to the contract amount. For example, if the Company receives 20 percent of the
contract price, it places in trust 20 percent of the total amount to be placed in trust for that
contract. The Company currently recognizes and withdraws all dividend and interest income earned
and, where permitted, capital gains realized by cemetery perpetual care trusts. Some of the Companys sales of cemetery property and merchandise are made under installment
contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue
under the effective interest method over the terms of the related installment receivables. (m) Allowance for Doubtful Accounts The Company establishes a reserve based on a range of percentages applied to accounts
receivable aging categories. These percentages are based on historical collection and write-off
experience. 13




---



##### 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) (n) Income Taxes Income taxes are accounted for using the asset and liability method under which deferred
income taxes are recognized for the tax consequences of temporary differences by applying enacted
statutory tax rates applicable to future years to differences between the financial statement
carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that includes the enactment
date. Management provides a valuation allowance against the deferred tax asset for amounts which
are not considered more likely than not to be realized. As of April 30, 2005 and October 31, 2004,
the Companys deferred tax asset valuation allowance was $9,305 and $9,556, respectively. The
valuation allowance is attributed primarily to capital losses for which the Company does not expect
to receive a benefit. For the purpose of calculating income taxes for discontinued operations, earnings (loss) from
discontinued operations is segregated into two categories: operating results and gain or loss on
dispositions. Operating results are tax effected in the ordinary manner (i.e., income tax expense
on net operating income, income tax benefit on net operating loss). For calculating the gain or loss on dispositions, businesses held for sale are grouped by sale
type (i.e., stock sale or asset sale). Those classified as asset sales are netted, and any losses
are characterized as ordinary. An income tax benefit is calculated on these losses. Those
classified as stock sales are netted, and any losses are characterized as capital. An income tax
benefit is calculated on these losses. The Companys current policy is to provide a valuation
allowance for this benefit because capital losses are deductible only against capital gains, and
the Company cannot at this time predict with certainty its ability to generate sufficient capital
gains in future periods to absorb the losses before the carry-forward expiration. As sales are finalized, the Company adjusts the gain or loss for changes in actual sales
proceeds as compared to estimates, and for basis differences at the time of sale, as well as any
changes in the type of sale. Sales originally anticipated to be stock sales but consummated as
asset sales will generate ordinary losses. The Company records a tax benefit and adjusts the
valuation allowance for the respective amount resulting from the changes in circumstances
surrounding the finalized sale. This adjustment is allocated to continuing operations or
discontinued operations according to its original sourcing of the income or loss. 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. At the end of fiscal year 2003, the Company
had decreased its deferred tax asset and increased receivables by $33,222. When the refund was
received in the first quarter of 2004, the Company increased cash and decreased the corresponding
receivable. The Company used this refund to reduce its outstanding debt balance. (o) Earnings Per Common Share Basic earnings per common share is computed by dividing net earnings by the weighted average
number of common shares outstanding during each period. Diluted earnings per common share is
computed by dividing net earnings by the weighted average number of common shares outstanding plus
the number of additional common shares 14




---



##### 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) 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 March 17, 2005, the Company substantially completed its $28,000 stock repurchase program
initiated in June 2003, having repurchased 4,400,000 shares since its inception. On March 28,
2005, the Company announced a new $30,000 stock repurchase program. 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 new program through April 30,
2005, the Company has not repurchased any shares of its Class A common stock. On December 22, 2003, the Company granted 271,000 shares of restricted stock to its executive
officers (of which 110,666 shares have been cancelled as of April 30, 2005 and 27,972 shares were
withheld to cover the tax obligation related to the vested restricted stock as of April 30, 2005).
The restricted stock vests in equal one-third portions at October 31, 2004, October 31, 2005 and
October 31, 2006. On November 18, 2004, the Company granted 72,000 shares of restricted stock to
an executive officer, which vest 25 percent on November 18, 2005, 25 percent on November 18, 2006
and 50 percent on November 18, 2007. On December 20, 2004, the Company granted 58,000 shares of
restricted stock to executive officers, which vest 25 percent on December 20, 2005, 25 percent on
December 20, 2006 and 50 percent on December 20, 2007. On December 20, 2004, the Company also
granted 36,500 shares of restricted stock to executive officers, which vest in equal 25 percent
portions on December 20, 2005, 2006, 2007 and 2008. Once granted, the restricted stock is included
in total shares outstanding but is not included in the weighted average number of common shares
outstanding in each period used to calculate basic earnings per common share until the shares vest. (p) Derivatives The Company accounted 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 accounted for its sole derivative instrument, a $50,000 interest
rate swap which expired on March 11, 2005, 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 as of
October 31, 2004 with the offset recorded to other comprehensive income. The Company has no
remaining interest rate swaps. 15




---



##### 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) (q) Estimated Insurance Loss Liabilities The Company purchases comprehensive general liability, automobile liability and workers
compensation insurance coverages structured within a large deductible/self-insured retention
premium rating program. This program results in the Company being primarily self-insured for
claims and associated costs and losses covered by these policies. Historical insurance industry
experience indicates some degree of inherent variability in assessing the ultimate amount of losses
associated with the types of claims covered by the program. This is especially true due to the
extended period of time that transpires between when the claim might occur and the full settlement
of such claim, often many years. The Company continually evaluates the receivables due from its
insurance carriers as well as loss estimates associated with claims and losses related to these
insurance coverages with information obtained from its primary insurer. With respect to health insurance that covers substantially all of the Companys employees, the
Company purchases individual and aggregate stop loss coverage with a large deductible. This
program results in the Company being primarily self-insured for claims and associated costs up to
the amount of the deductible, with claims in excess of the deductible amount being covered by
insurance. Expected claims are based on actuarial estimates; actual claims may differ from those
estimates. The Company continually evaluates its claims experience related to this coverage with
information obtained from its insurer. Assumptions used in preparing these estimates are based on factors such as claim settlement
patterns, claim development trends, claim frequency and severity patterns, inflationary trends and
data reasonableness. Together these factors will generally affect the analysis and determination
of the best estimate of the projected ultimate claim losses. The results of these evaluations are
used to assess the reasonableness of the Companys insurance loss liability. The estimated liability on the uninsured legal and employment-related claims are established
by management based upon the recommendations of professionals who
perform a review of both reported claims and estimate a liability for
incurred but not reported claims.
These liabilities include the estimated settlement costs. Although management believes estimated
liabilities related to uninsured claims are adequately recorded, it is possible that actual results
could significantly differ from the recorded liabilities. (r) Dividends On March 28, 2005, the Company announced that its Board of Directors approved the initiation
of a quarterly cash dividend of two and one-half cents per share of common stock. The first
dividend was paid on April 29, 2005 to shareholders of record at the close of business on April 15,
2005. Although the Company intends to pay regular quarterly cash dividends for the foreseeable
future, the declaration and payment of future dividends are discretionary and will be subject to
determination by the Board of Directors each quarter after its review of the Companys financial
performance. (s) Leases The Company has noncancellable operating leases, primarily for land and buildings, that expire
over the next 1 to 15 years, except for six leases that expire between 2032 and 2039. As of April
30, 2005, approximately 74 percent of the Companys 235 funeral locations were owned by the
Companys subsidiaries and approximately 26 percent were held under operating leases. 16




---



##### 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) On February 7, 2005, the Office of the Chief Accountant of the Securities and Exchange
Commission (SEC) issued a letter to the American Institute of Certified Public Accountants
expressing its views regarding certain operating lease accounting issues and their application
under accounting principles generally accepted in the United States of America. The Company
subsequently reviewed its lease-related accounting practices and determined that
certain adjustments related to rent escalations and leasehold improvement amortization were
necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge
of $1,838 ($1,140 after tax, or $.01 per share). The Company evaluated the materiality of these operating lease adjustments on its financial
statements and concluded that the impact of these adjustments was not material. As a result, the
Company has recorded the cumulative effect of these prior period adjustments of $1,838 as non-cash
charges to funeral and cemetery costs in the condensed consolidated statement of earnings for the
three and six months ended April 30, 2005. Of this amount, $1,823 was attributed to funeral costs
and expenses, and the remaining $15 to cemetery cost and expenses. The Company records operating lease expense for leases with escalating rents on a
straight-line basis over the life of the lease, including reasonably assured lease renewals. The
Company amortizes leasehold improvements in an operating lease over the shorter of their economic
lives or the lease term, including reasonably assured lease renewals. (t) Reclassifications Certain reclassifications have been made to the 2004 condensed consolidated statements of
earnings and cash flows in order for these periods to be comparable. These reclassifications had
no effect on net earnings or shareholders equity. (2) Change in Accounting Principles and New Accounting Principles (a) Preneed Selling Costs On May 31, 2005, the Company changed its method of accounting for preneed selling costs
incurred related to the acquisition of new prearranged funeral and cemetery service and merchandise
sales. The Company has applied this change in accounting principle effective November 1, 2004.
Therefore, the Companys results of operations for the three and six months ended April 30, 2005
are reported on the basis of our changed method. Prior to this change, commissions and other
costs that varied with and were primarily related to the acquisition of new prearranged funeral and
cemetery service and merchandise sales were deferred and amortized in proportion to preneed revenue
recognized during the period in a manner consistent with SFAS No. 60, Accounting and Reporting for
Insurance Companies. The Company has decided to change its accounting for preneed selling costs
to expense such costs as incurred. The Company concluded that expensing these costs as they are
incurred would be preferable to the old method because it will make its reported results more
comparable with other public death care companies, better align the costs of obtaining preneed
contracts with the cash outflows associated with obtaining such contracts and eliminate the burden
of maintaining deferred selling cost records. 17




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles and New Accounting Principles(Continued) As of November 1, 2004, the Company recorded a cumulative effect of change in accounting
principle of $234,553 pretax or $141,318 after tax (net of income tax benefit of $93,235), or $1.29
per diluted share, which represents the cumulative balance of deferred preneed selling costs in the
deferred charges line on the Companys condensed consolidated balance sheet at the time of the
change. The table below presents the Companys earnings
(loss) from continuing operations before cumulative effect of
change in accounting principle, net
earnings (loss), diluted earnings (loss) per share from
continuing operations before cumulative effect of change in
accounting principle and diluted net
earnings (loss) per share for the three and six months ended April 30, 2005 had the Company not
made this accounting change. Three Months Ended
    
    
    Six Months EndedApril 30, 2005
    
    
    April 30, 2005As Reported
    
    
    Changes
    
    

Results
underOld Method
    
    
    As Reported
    
    
    Changes
    
    

Results
underOld MethodEarnings (loss) from
continuing operations before cumulative effect of change in
accounting principle
    
    $
    (3,898
    )
    
    $
    750
    
    
    $
    (3,148
    )
    
    $
    4,993
    
    
    $
    1,392
    
    
    $
    6,385Net earnings (loss)
    
    $
    (3,990
    )
    
    $
    750
    
    
    $
    (3,240
    )
    
    $
    (136,323
    )
    
    $
    142,710
    
    
    $
    6,387Diluted earnings (loss)
per common share from
continuing operations
before cumulative effect
of change in accounting
principle
    
    $
    (.04
    )
    
    $
    .01
    
    
    $
    (.03
    )
    
    $
    .05
    
    
    $
    .01
    
    
    $
    .06Diluted earnings (loss)
per common share
    
    $
    (.04
    )
    
    $
    .01
    
    
    $
    (.03
    )
    
    $
    (1.24
    )
    
    $
    1.29
    
    
    $
    .05
 The table below presents the pro forma amounts for the three and six months ended April 30,
2004 as if the accounting change had been in effect during those periods. Three Months Ended
    
    
    Six Months EndedApril 30, 2004
    
    
    April 30, 2004As Reported
    
    
    Changes
    
    
    Pro Forma
    
    
    As Reported
    
    
    Changes
    
    
    Pro FormaGross profit:Funeral
    
    $
    21,350
    
    
    $
    (1,557
    )
    
    $
    19,793
    
    
    $
    44,181
    
    
    $
    (2,152
    )
    
    $
    42,029Cemetery
    
    
    15,468
    
    
    
    (754
    )
    
    
    14,714
    
    
    
    29,634
    
    
    
    (999
    )
    
    
    28,635$
    36,818
    
    
    $
    (2,311
    )
    
    $
    34,507
    
    
    $
    73,815
    
    
    $
    (3,151
    )
    
    $
    70,664Earnings from
continuing
operations
    
    $
    12,737
    
    
    $
    (1,433
    )
    
    $
    11,304
    
    
    $
    24,199
    
    
    $
    (1,954
    )
    
    $
    22,245Net earnings
    
    $
    14,757
    
    
    $
    (1,400
    )
    
    $
    13,357
    
    
    $
    26,485
    
    
    $
    (1,863
    )
    
    $
    24,622Diluted earnings per
common share from
continuing operations
    
    $
    .12
    
    
    $
    (.02
    )
    
    $
    .10
    
    
    $
    .22
    
    
    $
    (.02
    )
    
    $
    .20Diluted earnings per
common share
    
    $
    .14
    
    
    $
    (.02
    )
    
    $
    .12
    
    
    $
    .24
    
    
    $
    (.02
    )
    
    $
    .22
 18




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles and New Accounting Principles(Continued) The Company previously reported in its Form 10-Q for the quarter ended January 31, 2005 its
operating results based on its prior accounting principle of deferring selling costs. The table
below presents the data as of January 31, 2005 as previously reported and restated for gross
profit, earnings from continuing operations before cumulative effect of change in accounting
principle, net earnings (loss), diluted earnings (loss) per share from continuing operations before
cumulative effect of change in accounting principle and diluted net earnings (loss) per share
amounts for the three months ended January 31, 2005 based on applying the change in accounting
principle for preneed selling costs effective November 1, 2004. Three Months Ended January 31, 2005As PreviouslyReported
    
    
    Changes
    
    
    RestatedGross profit:Funeral
    
    $
    20,210
    
    
    $
    (701
    )
    
    $
    19,509Cemetery
    
    
    11,684
    
    
    
    (334
    )
    
    
    11,350$
    31,894
    
    
    $
    (1,035
    )
    
    $
    30,859Earnings from continuing operations before
cumulative effect of change in accounting
principle
    
    $
    9,345
    
    
    $
    (642
    )
    
    $
    8,703Cumulative effect of change in accounting principle
    
    $
    
    
    
    $
    (141,318
    )
    
    $
    (141,318
    )Net earnings (loss)
    
    $
    9,210
    
    
    $
    (141,960
    )
    
    $
    (132,750
    )Diluted earnings per common share from continuing
operations before cumulative effect of change in
accounting principle
    
    $
    .08
    
    
    $
    (.01
    )
    
    $
    .07Diluted earnings (loss) per common share
    
    $
    .08
    
    
    $
    (1.29
    )
    
    $
    (1.21
    )
 (b) FASB Interpretation No. 46 (FIN 46 and FIN 46R), Consolidation of Variable Interest
Entities In January 2003, the Financial Accounting Standards Board (FASB) issued FASB Interpretation
No. 46, Consolidation of Variable Interest Entities, an Interpretation of Accounting Research
Bulletin (ARB) No. 51. This interpretation clarifies the application of ARB No. 51,
Consolidated Financial Statements, to certain entities in which equity investors do not have the
characteristics of a controlling financial interest or do not have sufficient equity at risk for
the entity to finance its activities without additional subordinated financial support from other
parties. In December 2003, the FASB revised FASB Interpretation No. 46 (FIN 46R). The Company implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of
the Companys preneed funeral and cemetery merchandise and service trusts and the Companys
cemetery perpetual care trusts. The implementation of FIN 46R affects certain line items in the
consolidated balance sheet and statement of earnings as described below, but has no impact on net
earnings. Also, the implementation of FIN 46R did not result in any net changes to the Companys
consolidated statement of cash flows, but does require disclosure of certain financing and
investing activities. See Notes 3, 4 and 5. Although FIN 46R requires consolidation of the preneed funeral and cemetery merchandise and
service trusts and cemetery perpetual care trusts, it does not change the legal relationships among
the trusts, the Company and its customers. In the case of preneed funeral and cemetery merchandise
and services trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual
care trusts, the Company does not have a legal right to the cemetery perpetual care trust assets.
For these reasons, upon consolidation of the trusts, the Company recognized non- 19




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles and New Accounting Principles(Continued) controlling interests in its financial statements to reflect third-party interests in these trusts
in accordance with SFAS No. 150, Accounting for Certain Financial Instruments with Characteristics
of Both Liabilities and Equity. The Company classifies deposits to the funeral and cemetery
merchandise and services trusts as non-controlling liability interests and classifies deposits to
the cemetery perpetual care trusts as non-controlling interests outside of liabilities. All of these trusts hold investments in marketable securities, which have been classified as
available-for-sale and are reported at fair value, with unrealized gains and losses excluded from
earnings and initially reported as a separate component of accumulated other comprehensive income
or loss in the Companys consolidated balance sheet pursuant to the provisions of SFAS No. 115.
Unrealized gains and losses attributable to the non-controlling interest holders are reclassified
from accumulated other comprehensive income or loss to non-controlling interest in funeral and
cemetery trusts and perpetual care trusts in the Companys consolidated balance sheet. Unrealized
gains and losses attributable to the Company, but that have not been earned through the performance
of services or delivery of merchandise are reclassified from accumulated other comprehensive income
or loss to deferred revenues. Beginning April 30, 2004, the Company recognizes realized earnings of the preneed funeral and
cemetery merchandise and services trusts and cemetery perpetual care trusts within investment and
other income, net (with a corresponding debit to the related trust asset). The Company then
recognizes a corresponding expense within investment and other income, net, representing the
realized earnings of these trusts attributable to the non-controlling interest holders (with a
corresponding credit to non-controlling interest in funeral and cemetery trusts or non-controlling
interest in cemetery perpetual care trusts, as the case may be). The Company also simultaneously
recognizes a similar expense for realized earnings of the trusts attributable to the Company (with
a corresponding credit to deferred preneed funeral or cemetery revenue), when such earnings have
not been earned by the Company through the performance of services or delivery of merchandise (see
Note 6). The net effect is an increase by the amount of the realized earnings in both the trust
asset and the related non-controlling interest and deferred revenue; there is no effect on net
earnings. In the case of preneed funeral and cemetery merchandise and services trusts, the Company
recognizes as revenues amounts attributed to the non-controlling interest holders and the Company
upon the performance of services and delivery of merchandise, including realized earnings
accumulated in these trusts (with corresponding debits to non-controlling interest in funeral and
cemetery trusts and to deferred preneed funeral revenues or deferred preneed cemetery revenues, as
the case may be). In the case of cemetery perpetual care trusts, the Company recognizes investment
earnings in cemetery revenues when such earnings are realized and permitted to be legally withdrawn
by the Company (with a corresponding debit to non-controlling interest in cemetery perpetual care
trusts). These earnings and related funds are intended to defray cemetery maintenance costs. The end result of FIN 46R is that the Companys trust assets are now recorded on the
consolidated balance sheet at their market value and included in preneed receivables and trust
investments with corresponding credits to deferred preneed revenue and non-controlling interest in
the trusts, as opposed to being recorded at their original cost as prearranged receivables and
prearranged deferred revenue prior to adoption of FIN 46R. The realized earnings on these trust
assets under FIN 46R flow into and out of the statement of earnings through investment and other
income, net with no net effect on revenue or net earnings. Both prior to and after the adoption of
FIN 46R, accumulated trust earnings from the preneed funeral and cemetery merchandise and services
trusts are recognized as revenue when the related merchandise and services are delivered, and
cemetery perpetual care trust earnings are recognized as revenue as they are realized in the trust
and permitted to be legally withdrawn by the Company. In summary, the adoption of FIN 46R had no
effect on revenues, net earnings, cash flows or shareholders equity. 20




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles and New Accounting Principles(Continued) For more detailed discussions of the Companys accounting policies after the implementation of
FIN 46R, see Notes 3 through 6. (c) Other Accounting Pronouncements In December 2004, the FASB revised its SFAS No. 123 (SFAS No. 123R), Accounting for Stock
Based Compensation. The revision establishes standards for the accounting of transactions in
which an entity exchanges its equity instruments for goods or services, particularly transactions
in which an entity obtains employee services in share-based payment transactions. The revised
statement requires a public entity to measure the cost of employee services received in exchange
for an award of equity instruments based on the grant-date fair value of the award. That cost is
to be recognized over the period during which the employee is required to provide service in
exchange for the award. Changes in fair value during the requisite service period are to be
recognized as compensation cost over that period. In addition, the revised statement amends SFAS
No. 95, Statement of Cash Flows, to require that excess tax benefits be reported as a financing
cash flow rather than as a reduction of taxes paid. The provisions of the revised statement are
effective for financial statements issued for the first interim reporting period of the first
fiscal year that begins on or after June 15, 2005. Based on current options and restricted stock
outstanding, selection of the modified prospective method and an implementation date of November 1,
2005, the Company would expect an impact of approximately $.01 per share in fiscal year 2006. In March 2004, the FASB issued Emerging Issues Task Force (EITF) 03-1, Impairment and Its
Application to Certain Investments. EITF 03-1 includes new guidance for evaluating and recording
impairment losses on debt and equity investments, as well as new disclosure requirements for
investments that are deemed to be temporarily impaired. In September 2004, the FASB issued Staff
Position EITF 03-1-1, which delays the effective date until additional guidance is issued for the
application of the recognition and measurement provisions of EITF 03-1 to investments in securities
that are impaired. The disclosure guidance included in EITF 03-1 remains effective. The Company
is continuing to evaluate the impact of EITF 03-1. The amount of other than temporary impairment
to be recognized, if any, will depend on market conditions, managements intent and ability to hold
investments until a forecasted recovery and the finalization of the proposed guidance by the FASB.
This pronouncement as it relates to the Companys trusts will have no impact on net earnings. See
Notes 1(e), 2(b), 3, 4 and 5. (3) Preneed Funeral Activities The Company sells price-guaranteed preneed funeral contracts through various programs. Because
the services or merchandise will not be provided until the future, most states require that all or
a portion of the customer payments under these contracts be protected for the benefit of the
customers pursuant to applicable law. Some or all of the funds may be required to be placed into
trust accounts (trust-funded preneed funeral contracts). Alternatively, where allowed, customers
may purchase a life insurance or annuity policy from third-party insurance companies to fund their
preneed funeral contracts (insurance-funded preneed funeral contracts). The funeral goods and
services selected at the time of contract origination will be funded by the insurance policy
proceeds, which include increasing insurance benefits. Under either customer funding option, the
Company enters into a preneed funeral contract with the customer to provide funeral services in the
future. 21




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) 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(b) for additional information. The Company also changed its accounting for
insurance-funded preneed funeral contracts. The contract amounts associated with unfulfilled
insurance-funded preneed funeral contracts are not reflected on the consolidated balance sheet.
However, when a trust-funded preneed funeral contract is entered into, the Company records an asset
(included in preneed funeral receivables and trust investments) and a corresponding liability (included in
deferred preneed funeral revenues) for the contract price. As the customer makes payments on the
contract prior to performance by the Company, the Company deposits into the related trust the
required portion of the payment and reclassifies the corresponding amount from deferred preneed
funeral revenues into non-controlling interest in funeral and cemetery trusts. Funeral revenues are recognized in the consolidated statement of earnings on preneed funeral
contracts (trust- funded and insurance-funded) at the time the funeral service is performed.
Through April 30, 2004, trust investment earnings, net of taxes and certain other expenses paid by
the trust, were accrued and deferred when realized. When the services were performed, those net
investment earnings were recognized in funeral revenues. These amounts are intended to cover
future increases in the cost of providing a price-guaranteed funeral service. Beginning with the
third quarter of 2004, the Company now recognizes realized earnings of these trusts within investment and
other income, net (with a corresponding debit to preneed funeral receivables and trust investments)
when such earnings have not been earned by the Company through the performance of services or
delivery of merchandise. The Company simultaneously recognizes a corresponding expense within
investment and other income, net equal to the realized earnings of the trusts attributable to the
non-controlling interest holders (with a corresponding credit to non-controlling interest in
funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to
deferred preneed funeral revenues). The net effect is an increase by the amount of the unrealized
earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred
preneed funeral revenue line items; there is no effect on net earnings. As of April 30, 2004, the
cumulative undistributed net trust investment earnings of the funeral merchandise and services
trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred
preneed funeral revenues. Upon performance of the funeral services, the Company recognizes as
revenues amounts attributed to the non-controlling interest holders or included in deferred preneed
funeral revenue, including realized trust earnings. Preneed Funeral Receivables and Trust Investments Preneed funeral receivables and trust investments represent trust assets and customer
receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The
components of preneed funeral receivables and trust investments in the condensed consolidated
balance sheet at April 30, 2005 and October 31, 2004 are as follows: April 30, 2005
    
    
    October 31, 2004Trust assets
    
    $
    437,799
    
    
    $
    440,471Receivables from customers
    
    
    61,099
    
    
    
    64,411Preneed funeral receivables and trust investments
    
    $
    498,898
    
    
    $
    $504,882
 22




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled
to receive a refund of the funds held in trust. In many jurisdictions, the Company may be
obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust
including investment income at the time of cancellation. If the fair market value of the trusts
were to decline below the estimated costs to deliver the underlying products and services, the
Company would record a charge to earnings to record a liability for the expected loss on the
delivery of contracts in the Companys backlog. Based upon this assessment, no loss amounts have
been required to be recognized as of April 30, 2005. Preneed funeral receivables and trust investments are reduced by the trust investment earnings
the Company has been allowed to withdraw prior to performance by the Company and amounts received
from customers that are not required to be deposited into trust, pursuant to various state laws.
These amounts are reflected in deferred preneed funeral revenues until the underlying service is
performed or merchandise is delivered. The cost and market values associated with preneed funeral merchandise and services trust
assets at April 30, 2005 are detailed below. The adjusted cost basis of the funeral merchandise
and services trust assets below reflect an other than temporary decline in the trust assets of
approximately $79,695 as of April 30, 2005 from their original cost basis. The Company believes
the unrealized losses reflected below of $15,835 related to trust investments are temporary in
nature. See Note 1(e) for additional information. April 30, 2005Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    56,930
    
    
    $
    
    
    
    $
    
    
    
    $
    56,930U.S. Government, agencies
and municipalities
    
    
    2,772
    
    
    
    86
    
    
    
    (21
    )
    
    
    2,837Corporate bonds
    
    
    22,858
    
    
    
    1,152
    
    
    
    (638
    )
    
    
    23,372Preferred stocks
    
    
    64,763
    
    
    
    940
    
    
    
    (1,239
    )
    
    
    64,464Common stocks
    
    
    240,286
    
    
    
    9,606
    
    
    
    (12,626
    )
    
    
    237,266Mutual funds
    
    
    28,292
    
    
    
    126
    
    
    
    (1,311
    )
    
    
    27,107Insurance contracts and other long-
term investments
    
    
    23,651
    
    
    
    351
    
    
    
    
    
    
    
    24,002Trust investments
    
    $
    439,552
    
    
    $
    12,261
    
    
    $
    (15,835
    )
    
    $
    435,978Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.2
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,821Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    437,799
 The estimated maturities and market values of debt securities included above are as follows: April 30, 2005Due in one year or less
    
    $
    3,627Due in one to five years
    
    
    11,523Due in five to ten years
    
    
    10,601Thereafter
    
    
    458$
    26,209
 23




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) During the three months ended April 30, 2005, purchases and sales of available for sale
securities included in trust investments were $42,419 and $39,717, respectively. These
transactions resulted in realized gains and losses of $3,305 and $2,431, respectively. During the
six months ended April 30, 2005, purchases and sales of available for sale securities included in
trust investments were $131,671 and $63,513, respectively, which resulted in realized gains and
losses of $5,031 and $4,626, respectively. The cost and market values associated with preneed funeral merchandise and services trust
assets as of October 31, 2004 are detailed below. The adjusted cost basis of the funeral
merchandise and services trust assets below reflect an other than temporary decline in the trust
assets of approximately $76,135 as of October 31, 2004 from their original cost basis. The Company
believes the unrealized losses reflected below of $13,735 related to trust investments are
temporary in nature. See Note 1(e) for additional information. October 31, 2004Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    133,205
    
    
    $
    9
    
    
    $
    
    
    
    $
    133,214U.S. Government, agencies
and municipalities
    
    
    1,971
    
    
    
    115
    
    
    
    (26
    )
    
    
    2,060Corporate bonds
    
    
    22,826
    
    
    
    1,938
    
    
    
    
    
    
    
    24,764Preferred stocks
    
    
    62,947
    
    
    
    1,703
    
    
    
    (422
    )
    
    
    64,228Common stocks
    
    
    188,298
    
    
    
    3,692
    
    
    
    (13,214
    )
    
    
    178,776Mutual funds
    
    
    12,431
    
    
    
    322
    
    
    
    (73
    )
    
    
    12,680Insurance contracts and other long-
term investments
    
    
    23,631
    
    
    
    298
    
    
    
    
    
    
    
    23,929Trust investments
    
    $
    445,309
    
    
    $
    8,077
    
    
    $
    (13,735
    )
    
    $
    439,651Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    98.7
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2,002Less trust investments of assets
held for sale
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,182
    )Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    440,471
 Deferred Preneed Funeral Revenue Deferred preneed funeral revenue represents future funeral contract revenues. In addition to
amounts receivable from customers and amounts not required to be trusted, this includes distributed
and distributable trust investment earnings associated with unperformed trust-funded preneed
funeral contracts where the related cash or investments are not held in trust accounts (generally
because the Company was not required to deposit the cash in the trust or was permitted to withdraw
the cash from the trust before performance of the service or delivery of the merchandise). Future
funeral contract revenues and non-distributable net trust investment earnings where the related
cash or investments are held in trust accounts are included in non-controlling interest in funeral
and cemetery trusts. Insurance-Funded Preneed Funeral Contracts Insurance-funded preneed funeral contracts that will be funded by life insurance or annuity
contracts issued by third-party insurers are not reflected above or in the consolidated balance
sheet. The net amount of these contracts that 24




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Preneed Funeral Activities(Continued) have not been fulfilled as of April 30, 2005 and October 31, 2004 was $365,488 and $352,092,
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. See Note 1(k) for additional
information. (4) Preneed Cemetery Merchandise and Service Activities The Company sells price-guaranteed preneed cemetery contracts providing for merchandise or
services to be delivered in the future at prices prevailing when the agreements are signed. Some
or all of the funds received under these contracts for merchandise or services may be required to
be placed into trust accounts, pursuant to applicable state law. Effective April 30, 2004, the
Company changed certain aspects of its accounting for preneed cemetery contracts upon
implementation of FIN 46R. For additional information, see Note 2(b). When a trust-funded preneed
cemetery contract is entered into, the Company records an asset (included in preneed cemetery
receivables and trust investments) and a corresponding liability (included in deferred preneed
cemetery revenues) for the contract price. As the customer makes payments on the contract prior to
performance by the Company, the Company deposits into the related trust the required portion of the
payment and reclassifies the corresponding amount from deferred preneed cemetery revenues into
non-controlling interest in funeral and cemetery trusts. Beginning with the third quarter of 2004, the Company recognizes realized earnings of these
trusts within investment and other income, net (with a corresponding debit to preneed cemetery
receivables and trust investments). The Company simultaneously recognizes a corresponding expense
within investment and other income, net equal to the realized earnings of the trusts attributable
to the non-controlling interest holders (with a corresponding credit to non-controlling interest in
funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to
deferred preneed cemetery revenues) when such earnings have not been earned by the Company through
the performance of services or delivery of merchandise. The net effect is an increase by the
amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling
interest or deferred preneed cemetery revenue line items; there is no effect on net earnings. As
of April 30, 2004, the cumulative undistributed net trust investment earnings of the cemetery
merchandise and services trusts are included in non-controlling interest in funeral and cemetery
trusts instead of deferred preneed cemetery revenues. Upon performance of services or delivery of
merchandise, the Company recognizes as revenues amounts attributed to the non-controlling interest
holders or included in deferred preneed cemetery revenue, including realized trust earnings. Preneed Cemetery Receivables and Trust Investments Preneed cemetery receivables and trust investments represent trust assets and customer
receivables for contracts sold in advance of when the merchandise or services are needed. The
receivables related to the sale of preneed property interment rights are included in current and
long-term receivables. The components of preneed cemetery receivables and trust investments in the
condensed consolidated balance sheet as of April 30, 2005 and October 31, 2004 are as follows: April 30, 2005
    
    
    October 31, 2004Trust assets
    
    $
    198,885
    
    
    $
    195,194Receivables from customers
    
    
    61,258
    
    
    
    64,265Preneed cemetery receivables and trust investments
    
    $
    260,143
    
    
    $
    259,459
 The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of April 30, 2005 are detailed below. The adjusted cost basis of the cemetery merchandise
and services trust assets below 25




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (4) Preneed Cemetery Merchandise and Service Activities(Continued) reflect an other than temporary decline in the trust assets of approximately $44,325 as of April
30, 2005 from their original cost basis. The Company believes the unrealized losses reflected
below of $6,882 related to trust investments are temporary in nature. See Note 1(e) for additional
information. April 30, 2005Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    31,959
    
    
    $
    
    
    
    $
    
    
    
    $
    31,959U.S. Government, agencies
and municipalities
    
    
    6,896
    
    
    
    131
    
    
    
    (14
    )
    
    
    7,013Corporate bonds
    
    
    10,562
    
    
    
    522
    
    
    
    (223
    )
    
    
    10,861Preferred stocks
    
    
    32,530
    
    
    
    573
    
    
    
    (640
    )
    
    
    32,463Common stocks
    
    
    106,204
    
    
    
    4,775
    
    
    
    (5,421
    )
    
    
    105,558Mutual funds
    
    
    9,705
    
    
    
    4
    
    
    
    (584
    )
    
    
    9,125Insurance contracts and other long-term
investments
    
    
    563
    
    
    
    1
    
    
    
    
    
    
    
    564Trust investments
    
    $
    198,419
    
    
    $
    6,006
    
    
    $
    (6,882
    )
    
    $
    197,543Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.6
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,342Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    198,885
 The estimated maturities and market values of debt securities included above are as follows: April 30, 2005Due in one year or less
    
    $
    1,583Due in one to five years
    
    
    8,806Due in five to ten years
    
    
    6,937Thereafter
    
    
    548$
    17,874
 During the three months ended April 30, 2005, purchases and sales of available for sale
securities included in trust investments were $34,353 and $30,526, respectively. These
transactions resulted in realized gains and losses of $2,377 and $2,058, respectively. During the
six months ended April 30, 2005, purchases and sales of available for sale securities included in
trust investments were $58,731 and $40,945, respectively, and these transactions resulted in
realized gains and losses of $3,177 and $2,997, respectively. The cost and market values associated with the preneed cemetery merchandise and services trust
assets as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery
merchandise and services trust assets below reflect an other than temporary decline in the trust
assets of approximately $42,537 as of October 31, 2004 from their original cost basis. The Company
believes the unrealized losses reflected below of $6,098 related to trust investments are temporary
in nature. See Note 1(e) for additional information. 26




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (4) Preneed Cemetery Merchandise and Service Activities(Continued) October 31, 2004Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    50,646
    
    
    $
    4
    
    
    $
    
    
    
    $
    50,650U.S. Government, agencies
and municipalities
    
    
    1,050
    
    
    
    21
    
    
    
    (4
    )
    
    
    1,067Corporate bonds
    
    
    10,690
    
    
    
    1,086
    
    
    
    
    
    
    
    11,776Preferred stocks
    
    
    24,287
    
    
    
    869
    
    
    
    (158
    )
    
    
    24,998Common stocks
    
    
    104,788
    
    
    
    2,482
    
    
    
    (5,934
    )
    
    
    101,336Mutual funds
    
    
    3,774
    
    
    
    70
    
    
    
    (2
    )
    
    
    3,842Insurance contracts and other long-term
investments
    
    
    569
    
    
    
    
    
    
    
    
    
    
    
    569Trust investments
    
    $
    195,804
    
    
    $
    4,532
    
    
    $
    (6,098
    )
    
    $
    194,238Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    99.2
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    956Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    195,194
 Deferred Preneed Cemetery Revenue Deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized
upon delivery of merchandise or performance of services. In addition to the amounts receivable
from customers and amounts not required to be trusted, this includes distributed and distributable
trust investment earnings associated with unperformed preneed cemetery services or undelivered
preneed cemetery merchandise where the related cash or investments are not held in trust accounts
(generally because the Company was not required to deposit the cash in the trust or was permitted
to withdraw the cash from the trust before performance of the service or delivery of the
merchandise). Future contract revenues and non-distributable net trust investment earnings where
the related cash or investments are held in trust accounts are included in non-controlling interest
in funeral and cemetery trusts. (5) Cemetery Interment Rights and Perpetual Care Trusts The Company sells price-guaranteed preneed cemetery contracts providing for property interment
rights. For preneed sales of interment rights (cemetery property), the associated revenue and all
costs to acquire the sale are recognized in accordance with SFAS No. 66, Accounting For Sales of
Real Estate. Under SFAS No. 66, recognition of revenue and costs must be deferred until 10
percent of the property sale price has been collected. The Company is required by state law to pay
into cemetery perpetual care trusts a portion of the proceeds from the sale of cemetery property
interment rights. As a result of the implementation of FIN 46R, the Company has consolidated the
cemetery perpetual care trusts, including investments accounted for under SFAS No. 115, resulting
in such funds being reflected in cemetery perpetual care trust investments within total assets,
with a corresponding amount reflected as non-controlling interest in perpetual care trusts. 27




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (5) Cemetery Interment Rights and Perpetual Care Trusts(Continued) Beginning April 30, 2004, the Company recognizes realized earnings of these trusts within
investment and other income, net (with a corresponding debit to cemetery perpetual care trust
investments). The Company recognizes a corresponding expense within investment and other income,
net for the amount of realized earnings of the trusts attributable to the non-controlling interest
holders (with a corresponding credit to non-controlling interest in perpetual care trusts). The
net effect is an increase by the amount of the realized earnings of the trusts in both the trust
asset and the related non-controlling interest; there is no effect on net earnings. Earnings realized from these cemetery perpetual care trust investments that the Company is
legally permitted to withdraw are recognized in current cemetery revenues and are used to defray
cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these
cemetery perpetual care trust investments were $1,577 and $2,240 for the three months ended April
30, 2005 and 2004, respectively, and $2,707 and $4,637 for the six months ended April 30, 2005 and
2004, respectively. The cost and market values of the trust investments held by the cemetery perpetual care trusts
at April 30, 2005 are detailed below. The adjusted cost basis of the cemetery perpetual care
trusts below reflect an other than temporary decline in the trust assets of $31,085 as of April 30,
2005 from their original cost basis. The Company believes the unrealized losses reflected below of
$7,888 related to trust investments are temporary in nature. See Note 1(e) for additional
information. April 30, 2005Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    22,125
    
    
    $
    
    
    
    $
    (2
    )
    
    $
    22,123U.S. Government, agencies
and municipalities
    
    
    6,241
    
    
    
    123
    
    
    
    (78
    )
    
    
    6,286Corporate bonds
    
    
    18,821
    
    
    
    2,145
    
    
    
    (129
    )
    
    
    20,837Preferred stocks
    
    
    67,915
    
    
    
    1,182
    
    
    
    (2,721
    )
    
    
    66,376Common stocks
    
    
    84,766
    
    
    
    9,617
    
    
    
    (4,883
    )
    
    
    89,500Mutual funds
    
    
    4,007
    
    
    
    151
    
    
    
    (71
    )
    
    
    4,087Insurance contracts and other long-term
investments
    
    
    945
    
    
    
    74
    
    
    
    (4
    )
    
    
    1,015Trust investments
    
    $
    204,820
    
    
    $
    13,292
    
    
    $
    (7,888
    )
    
    $
    210,224Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    102.6
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,279Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    211,503
 The estimated maturities and market values of debt securities included above are as follows: April 30, 2005Due in one year or less
    
    $
    1,589Due in one to five years
    
    
    6,898Due in five to ten years
    
    
    17,579Thereafter
    
    
    1,057$
    27,123
 During the three months ended April 30, 2005, purchases and sales of available for sale
securities were $26,657 and $21,439, respectively. These transactions resulted in realized gains
and losses of $841 and $1,082, respectively. 28




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (5) Cemetery Interment Rights and Perpetual Care Trusts(Continued) During the six months ended April 30, 2005, purchases and sales of available for sale
securities were $51,125 and $41,056, respectively, and these transactions resulted in realized
gains and losses of $1,899 and $2,017, respectively. The cost and market values of the trust investments held by the cemetery perpetual care trusts
as of October 31, 2004 are detailed below. The adjusted cost basis of the cemetery perpetual care
trusts below reflect an other than temporary decline in the trust assets of $30,524 as of October
31, 2004 from their original cost basis. The Company believes the unrealized losses reflected
below of $6,017 related to trust investments are temporary in nature. See Note 1(e) for additional
information. October 31, 2004Adjusted
    
    
    Unrealized
    
    
    UnrealizedCost Basis
    
    
    Gains
    
    
    Losses
    
    
    MarketCash, money market and other
short-term investments
    
    $
    29,154
    
    
    $
    
    
    
    $
    (3
    )
    
    $
    29,151U.S. Government, agencies
and municipalities
    
    
    3,173
    
    
    
    62
    
    
    
    (97
    )
    
    
    3,138Corporate bonds
    
    
    19,368
    
    
    
    2,731
    
    
    
    (23
    )
    
    
    22,076Preferred stocks
    
    
    65,176
    
    
    
    2,571
    
    
    
    (46
    )
    
    
    67,701Common stocks
    
    
    78,531
    
    
    
    8,406
    
    
    
    (5,797
    )
    
    
    81,140Mutual funds
    
    
    5,072
    
    
    
    193
    
    
    
    (51
    )
    
    
    5,214Insurance contracts and other long-term
investments
    
    
    841
    
    
    
    43
    
    
    
    
    
    
    
    884Trust investments
    
    $
    201,315
    
    
    $
    14,006
    
    
    $
    (6,017
    )
    
    $
    209,304Market value as a percentage of cost
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    104.0
    %Accrued investment income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    963Trust assets
    
    
    
    
    
    
    
    
    
    
    
    
    
    $
    210,267
 (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts Non-Controlling Interest in Funeral and Cemetery Trusts Effective April 30, 2004, the Company consolidated the preneed funeral and cemetery
merchandise and services trusts associated with its preneed funeral and cemetery activities as a
result of the implementation of FIN 46R. Although FIN 46R requires the consolidation of the preneed
funeral and cemetery merchandise and services trusts, it does not change the legal relationships
among the trusts, the Company and its customers. The customers are the legal beneficiaries of these
funeral and cemetery merchandise and services trusts, and therefore, their interests in these
trusts represent a non-controlling interest in subsidiaries. For additional information, see Note
2(b). Non-Controlling Interest in Perpetual Care Trusts The non-controlling interest in perpetual care trusts reflected in the condensed consolidated balance sheet represents the
cemetery perpetual care trusts in accordance with SFAS No. 115, net of the accrued expenses and other long-term liabilities of the
perpetual care trusts. For additional information, see Note 2(b). 29




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care
Trusts(Continued) The components of non-controlling interest in funeral and cemetery trusts and non-controlling
interest in perpetual care trusts at April 30, 2005 are as follows: Non-controllingNon-controlling Interest
    
    
    Interest inPreneed
    
    
    Preneed
    
    
    
    
    
    
    PerpetualFuneral
    
    
    Cemetery
    
    
    Total
    
    
    Care TrustsTrust assets at market value
    
    $
    437,799
    
    
    $
    198,885
    
    
    $
    636,684
    
    
    $
    211,503Less:Pending withdrawals
    
    
    (7,659
    )
    
    
    (3,675
    )
    
    
    (11,334
    )
    
    
    (2,351
    )Pending deposits
    
    
    1,755
    
    
    
    1,510
    
    
    
    3,265
    
    
    
    681Non-controlling interest
    
    $
    431,895
    
    
    $
    196,720
    
    
    $
    628,615
    
    
    $
    209,833
 The components of non-controlling interest in funeral and cemetery trusts and non-controlling
interest in perpetual care trusts at October 31, 2004 are as follows: Non-controllingNon-controlling Interest
    
    
    Interest inPreneed
    
    
    Preneed
    
    
    
    
    
    
    PerpetualFuneral
    
    
    Cemetery
    
    
    Total
    
    
    Care TrustsTrust assets at market value
    
    $
    440,471
    
    
    $
    195,194
    
    
    $
    635,665
    
    
    $
    210,267Less:Pending withdrawals
    
    
    (6,847
    )
    
    
    (2,797
    )
    
    
    (9,644
    )
    
    
    (1,951
    )Pending deposits
    
    
    1,788
    
    
    
    1,567
    
    
    
    3,355
    
    
    
    577Non-controlling interest
    
    $
    435,412
    
    
    $
    193,964
    
    
    $
    629,376
    
    
    $
    208,893
 30




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care
Trusts(Continued) Investment and other income, net The components of investment and other income, net in the condensed consolidated statements of
earnings for the three and six months ended April 30, 2005 are detailed below. Three Months Ended
    
    
    Six Months EndedApril 30, 2005
    
    
    April 30, 2005Non-controlling interest:Realized gains
    
    $
    6,523
    
    
    $
    10,107Realized losses
    
    
    (5,571
    )
    
    
    (9,640
    )Interest income, dividend and other ordinary income
    
    
    6,029
    
    
    
    12,880Trust expenses and income taxes
    
    
    (3,448
    )
    
    
    (6,312
    )Net trust investment income
    
    
    3,533
    
    
    
    7,035Interest expense related to non-controlling interest in funeral
and cemetery trust investments
    
    
    (2,655
    )
    
    
    (4,668
    )Interest expense related to non-controlling interest in
perpetual
care trust investments
    
    
    (878
    )
    
    
    (2,367
    )Total non-controlling interest
    
    
    
    
    
    
    Investment and other income, net (1)
    
    
    111
    
    
    
    219Total investment and other income, net
    
    $
    111
    
    
    $
    219
   (1)
    
    Investment and other income, net for the three and six months ended April 30, 2005
consists of interest income primarily on the Companys cash, cash equivalents and marketable
securities not held in trust. (7) Commitments and Contingencies Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated
and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961 on the docket of the
Superior Court for the State of California for the County of Los Angeles, Central District. This
purported class action was filed on February 17, 2005, on behalf of a nationwide class defined to
include all persons, entities and organizations who purchased funeral goods and/or services in the
United States from defendants at any time on or after February 17, 2001. The suit names the
Company and several of its Southern California affiliates as defendants and also seeks to assert
claims against a class of all entities located anywhere in the United States whose ultimate parent
corporation has been the Company at any time on or after February 17, 2001. The plaintiffs allege that defendants failed to disclose that the prices charged by defendants
for certain goods and services exceeded what defendants paid to third parties for those same goods
and services and that such failure violated provisions of the Federal Trade Commissions Funeral
Rule that require a funeral home to disclose, if true, that it marks up the price of certain items
purchased from third parties on behalf of customers on a cash advance or accommodation basis.
The plaintiffs allege that by failing to comply with the Funeral Rule, defendants (i) breached
contracts with the plaintiffs, (ii) were unjustly enriched, (iii) engaged in unfair, unlawful and
fraudulent business practices in violation of a provision of Californias Business and Professions
Code, and (iv) engaged in a civil conspiracy among 31




---



##### 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(Continued) the defendants to breach plaintiffs contracts and commit acts of unfair competition. The
plaintiffs seek restitution damages, disgorgement, interest, costs, and attorneys fees. The
Company was served with the complaint on April 7, 2005. By order dated May 5, 2005, the court ruled
that this case was related to similar actions against Service Corporation International and
Alderwoods Group, Inc. Because the matter is in its preliminary stages, the likelihood of
liability and the extent of any damages cannot be reasonably assessed at this time. The Company
intends to aggressively defend itself in this matter. Funeral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods
Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.;
No. C 05 1804 on the docket of the United States District Court, Northern District of California.
This purported class action was filed on May 2, 2005, on behalf of a nationwide class defined to
include all consumers who purchased a Batesville casket from the funeral home defendants. The suit alleges that the defendants acted jointly to fix and maintain prices on caskets and
reduce competition from independent casket discounters in violation of the federal antitrust laws
and Californias Business and Professions Code. The plaintiffs seek treble damages, restitution,
injunctive relief, interest, costs and attorneys fees. The Company was served with the complaint
on May 10, 2005. Because the matter is in its preliminary stages, the likelihood of liability and
the extent of any damages cannot be reasonably assessed at this time. The Company intends to
aggressively defend itself in this matter. Ralph Lee Fancher, on behalf of himself and all others similarly situated v. Service
Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand
Industries, Inc., Aurora Casket Co., York Group, Inc., and Batesville Casket Co.; No. 2:05cv145 on
the docket of the United States District Court, Eastern District of Tennessee. This purported
class action was filed on May 18, 2005, on behalf of consumers in twenty-three states and the
District of Columbia who purchased caskets. The allegations of fact are essentially the same as
those made in Funeral Consumers Alliance, Inc. v Service Corporation Internationalreported above.
Rather than allege violations of federal law, however, the plaintiff in this suit alleges that the
defendants violated state antitrust, consumer protection and/or unjust enrichment laws. The
plaintiff seeks damages, treble damages where appropriate, restitution, interest and costs. The
Company was served with the complaint on May 26, 2005. Because the matter is in its preliminary
stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at
this time. The Company intends to aggressively defend itself in this matter. In addition to the matters above, the Company and certain of its subsidiaries are parties to a
number of other 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. 32




---



##### 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 Loss
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    DataThree Months Ended April 30, 2005Loss from continuing operations
    
    $
    (3,898
    )Basic loss per common share:Loss from continuing operations available to
common shareholders
    
    $
    (3,898
    )
    
    
    109,506
    
    
    $
    (.04
    )Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    Diluted loss per common share:Loss from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    (3,898
    )
    
    
    109,506
    
    
    $
    (.04
    )
 Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    DataThree Months Ended April 30, 2004Earnings from continuing operations
    
    $
    12,737Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    12,737
    
    
    
    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
    
    $
    12,737
    
    
    
    108,400
    
    
    $
    .12
 33




---



##### 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, 2005Earnings from continuing operations before cumulative
effect of change in accounting principle
    
    $
    4,993Basic earnings per common share:Earnings from continuing operations before cumulative
effect of change in accounting principle available to
common shareholders
    
    $
    4,993
    
    
    
    109,293
    
    
    $
    .05Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    213Diluted earnings per common share:Earnings from continuing operations before cumulative
effect of change in accounting principle available to
common shareholders plus time-vest stock options
assumed exercised and restricted stock
    
    $
    4,993
    
    
    
    109,506
    
    
    $
    .05
 Earnings
    
    
    Shares
    
    
    Per Share(Numerator)
    
    
    (Denominator)
    
    
    DataSix Months Ended April 30, 2004Earnings from continuing operations
    
    $
    24,199Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    24,199
    
    
    
    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
    
    $
    24,199
    
    
    
    108,177
    
    
    $
    .22
 Options to purchase 1,051,083 shares of common stock at prices ranging from $6.90 to $7.03 per
share were outstanding during the six months ended April 30, 2005, 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 on
November 18, 2011 and December 20, 2011. 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 were greater than the average
market price of the common shares. Common stock equivalents are excluded in the calculation of weighted average shares
outstanding when a net loss from continuing operations is reported for a period. The number of
potentially antidilutive shares excluded from the calculation of diluted loss per share was
1,823,039 for the three months ended April 30, 2005 because of the net loss from continuing
operations for that period. 34




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (9) Segment Data The Companys primary reportable operating segments are based on products and services and
include funeral and cemetery operations. Pursuant to SFAS No. 144, the operating results of the
Companys businesses sold that meet the criteria in SFAS No. 144 are reported in the discontinued
operations section of the consolidated statements of earnings (see Note 12). The table below
presents information about reported segments for the Companys continuing operations. ConsolidatedFuneral
    
    
    Cemetery
    
    
    TotalsRevenues from external customers:Three months ended April 30,2005
    
    $
    75,524
    
    
    
    61,139
    
    
    $
    136,6632004
    
    $
    71,582
    
    
    
    59,511
    
    
    $
    131,093Six months ended April 30,2005
    
    $
    147,026
    
    
    
    115,786
    
    
    $
    262,8122004
    
    $
    146,309
    
    
    
    115,526
    
    
    $
    261,835Gross profit:Three months ended April 30,2005
    
    $
    19,157
    
    
    
    15,943
    
    
    $
    35,1002004
    
    $
    21,350
    
    
    
    15,468
    
    
    $
    36,818Six months ended April 30,2005
    
    $
    38,600
    
    
    
    27,083
    
    
    $
    65,6832004
    
    $
    44,181
    
    
    
    29,634
    
    
    $
    73,815
 The table below presents information about reported segments as of April 30, 2005 and October 31, 2004. Goodwill:April 30, 2005
    
    $
    319,674
    
    
    
    85,953
    
    
    $
    405,627October 31, 2004
    
    $
    319,207
    
    
    
    85,929
    
    
    $
    405,136
 35




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (9) Segment Data(Continued) A reconciliation of total segment gross profit to total earnings (loss) from continuing
operations before income taxes and cumulative effect of change in accounting principle for the
three and six months ended April 30, 2005 and 2004 is as follows: Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Gross profit for reportable segments
    
    $
    35,100
    
    
    $
    36,818
    
    
    $
    65,683
    
    
    $
    73,815Corporate general and administrative expenses
    
    
    (4,582
    )
    
    
    (4,621
    )
    
    
    (8,798
    )
    
    
    (8,534
    )Separation charges
    
    
    
    
    
    
    (138
    )
    
    
    
    
    
    
    (2,131
    )Gains on dispositions and impairment (losses), net
    
    
    421
    
    
    
    (315
    )
    
    
    1,147
    
    
    
    288Other operating income, net
    
    
    261
    
    
    
    504
    
    
    
    505
    
    
    
    943Interest expense
    
    
    (6,671
    )
    
    
    (11,953
    )
    
    
    (17,047
    )
    
    
    (24,474
    )Loss on early extinguishment of debt
    
    
    (30,057
    )
    
    
    
    
    
    
    (32,708
    )
    
    
    Investment and other income (expense), net
    
    
    111
    
    
    
    57
    
    
    
    219
    
    
    
    (1,068
    )Earnings (loss) from continuing operations before
income taxes and cumulative effect of change
in accounting principle
    
    $
    (5,417
    )
    
    $
    20,352
    
    
    $
    9,001
    
    
    $
    38,839
 (10) Supplementary Information The detail of certain income statement accounts is as follows for the three and six months
ended April 30, 2005 and 2004. Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Service revenueFuneral
    
    $
    42,659
    
    
    $
    40,560
    
    
    $
    83,166
    
    
    $
    82,458Cemetery
    
    
    15,337
    
    
    
    14,771
    
    
    
    28,857
    
    
    
    29,90857,996
    
    
    
    55,331
    
    
    
    112,023
    
    
    
    112,366Merchandise revenueFuneral
    
    
    30,676
    
    
    
    28,712
    
    
    
    59,864
    
    
    
    59,234Cemetery
    
    
    41,829
    
    
    
    40,338
    
    
    
    79,267
    
    
    
    76,71672,505
    
    
    
    69,050
    
    
    
    139,131
    
    
    
    135,950Other revenueFuneral
    
    
    2,189
    
    
    
    2,310
    
    
    
    3,996
    
    
    
    4,617Cemetery
    
    
    3,973
    
    
    
    4,402
    
    
    
    7,662
    
    
    
    8,902Total revenue
    
    $
    136,663
    
    
    $
    131,093
    
    
    $
    262,812
    
    
    $
    261,835Service costsFuneral
    
    $
    13,071
    
    
    $
    11,904
    
    
    $
    25,545
    
    
    $
    23,628Cemetery
    
    
    9,667
    
    
    
    9,792
    
    
    
    19,459
    
    
    
    18,76322,738
    
    
    
    21,696
    
    
    
    45,004
    
    
    
    42,391Merchandise costsFuneral
    
    
    17,592
    
    
    
    15,977
    
    
    
    33,637
    
    
    
    32,169Cemetery
    
    
    22,452
    
    
    
    21,398
    
    
    
    43,098
    
    
    
    41,05340,044
    
    
    
    37,375
    
    
    
    76,735
    
    
    
    73,222General and administrative expensesFuneral
    
    
    25,704
    
    
    
    22,350
    
    
    
    49,244
    
    
    
    46,331Cemetery
    
    
    13,077
    
    
    
    12,854
    
    
    
    26,146
    
    
    
    26,076Total costs
    
    $
    101,563
    
    
    $
    94,275
    
    
    $
    197,129
    
    
    $
    188,020
 36




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and Senior
Notes The following tables present the condensed consolidating historical financial statements as of
April 30, 2005 and October 31, 2004 and for the three and six months ended April 30, 2005 and 2004,
for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the
10.75 percent senior subordinated notes and 6.25 percent senior 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 and senior notes. The
guarantees are full and unconditional and joint and several. The guarantor subsidiaries are each
wholly-owned directly or indirectly by the Company, except that the Company owned 99.5 percent and
98.4 percent of two immaterial guarantor subsidiaries. Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended April 30, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    70,343
    
    
    $
    5,181
    
    
    $
    
    
    
    $
    75,524Cemetery
    
    
    
    
    
    
    54,917
    
    
    
    6,222
    
    
    
    
    
    
    
    61,139
    
    
    
    125,260
    
    
    
    11,403
    
    
    
    
    
    
    
    136,663Costs and expenses:Funeral
    
    
    
    
    
    
    53,132
    
    
    
    3,235
    
    
    
    
    
    
    
    56,367Cemetery
    
    
    
    
    
    
    41,565
    
    
    
    3,631
    
    
    
    
    
    
    
    45,196
    
    
    
    94,697
    
    
    
    6,866
    
    
    
    
    
    
    
    101,563Gross profit
    
    
    
    
    
    
    30,563
    
    
    
    4,537
    
    
    
    
    
    
    
    35,100Corporate general and administrative
expenses
    
    
    (4,582
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,582
    )Gains on dispositions and impairment
(losses), net
    
    
    
    
    
    
    395
    
    
    
    26
    
    
    
    
    
    
    
    421Other operating income, net
    
    
    44
    
    
    
    155
    
    
    
    62
    
    
    
    
    
    
    
    261Operating earnings (loss)
    
    
    (4,538
    )
    
    
    31,113
    
    
    
    4,625
    
    
    
    
    
    
    
    31,200Interest income (expense)
    
    
    14,276
    
    
    
    (19,136
    )
    
    
    (1,811
    )
    
    
    
    
    
    
    (6,671
    )Loss on early extinguishment of debt
    
    
    (30,057
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (30,057
    )Investment and other income, net
    
    
    111
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    111Earnings (loss) from continuing
operations before income taxes
    
    
    (20,208
    )
    
    
    11,977
    
    
    
    2,814
    
    
    
    
    
    
    
    (5,417
    )Income tax expense (benefit)
    
    
    (6,941
    )
    
    
    4,559
    
    
    
    863
    
    
    
    
    
    
    
    (1,519
    )Earnings (loss) from continuing
operations
    
    
    (13,267
    )
    
    
    7,418
    
    
    
    1,951
    
    
    
    
    
    
    
    (3,898
    )Discontinued operations:Loss from discontinued
operations before income taxes
    
    
    
    
    
    
    (179
    )
    
    
    (7
    )
    
    
    
    
    
    
    (186
    )Income tax benefit
    
    
    
    
    
    
    (94
    )
    
    
    
    
    
    
    
    
    
    
    (94
    )Loss from discontinued operations
    
    
    
    
    
    
    (85
    )
    
    
    (7
    )
    
    
    
    
    
    
    (92
    )Net earnings (loss) before equity in
subsidiaries
    
    
    (13,267
    )
    
    
    7,333
    
    
    
    1,944
    
    
    
    
    
    
    
    (3,990
    )Equity in subsidiaries
    
    
    9,277
    
    
    
    
    
    
    
    
    
    
    
    (9,277
    )
    
    
    Net earnings (loss)
    
    
    (3,990
    )
    
    
    7,333
    
    
    
    1,944
    
    
    
    (9,277
    )
    
    
    (3,990
    )Other comprehensive income, net
    
    
    140
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    140Comprehensive income (loss)
    
    $
    (3,850
    )
    
    $
    7,333
    
    
    $
    1,944
    
    
    $
    (9,277
    )
    
    $
    (3,850
    )
 37




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and
Senior Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended April 30, 2004Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    66,167
    
    
    $
    5,415
    
    
    $
    
    
    
    $
    71,582Cemetery
    
    
    
    
    
    
    52,863
    
    
    
    6,648
    
    
    
    
    
    
    
    59,511
    
    
    
    119,030
    
    
    
    12,063
    
    
    
    
    
    
    
    131,093Costs and expenses:Funeral
    
    
    
    
    
    
    46,905
    
    
    
    3,327
    
    
    
    
    
    
    
    50,232Cemetery
    
    
    
    
    
    
    39,164
    
    
    
    4,879
    
    
    
    
    
    
    
    44,043
    
    
    
    86,069
    
    
    
    8,206
    
    
    
    
    
    
    
    94,275Gross profit
    
    
    
    
    
    
    32,961
    
    
    
    3,857
    
    
    
    
    
    
    
    36,818Corporate general and administrative
expenses
    
    
    (4,621
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (4,621
    )Separation charges
    
    
    (119
    )
    
    
    (15
    )
    
    
    (4
    )
    
    
    
    
    
    
    (138
    )Gains on dispositions and impairment
(losses), net
    
    
    
    
    
    
    8
    
    
    
    (323
    )
    
    
    
    
    
    
    (315
    )Other operating income (expense), net
    
    
    (351
    )
    
    
    439
    
    
    
    416
    
    
    
    
    
    
    
    504Operating earnings (loss)
    
    
    (5,091
    )
    
    
    33,393
    
    
    
    3,946
    
    
    
    
    
    
    
    32,248Interest income (expense)
    
    
    9,799
    
    
    
    (19,548
    )
    
    
    (2,204
    )
    
    
    
    
    
    
    (11,953
    )Investment and other income, net
    
    
    57
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    57Earnings from continuing operations
before income taxes
    
    
    4,765
    
    
    
    13,845
    
    
    
    1,742
    
    
    
    
    
    
    
    20,352Income taxes
    
    
    1,702
    
    
    
    5,169
    
    
    
    744
    
    
    
    
    
    
    
    7,615Earnings from continuing operations
    
    
    3,063
    
    
    
    8,676
    
    
    
    998
    
    
    
    
    
    
    
    12,737Discontinued operations:Earnings from discontinued operations
before income taxes
    
    
    
    
    
    
    1,552
    
    
    
    21
    
    
    
    
    
    
    
    1,573Income tax benefit
    
    
    
    
    
    
    (447
    )
    
    
    
    
    
    
    
    
    
    
    (447
    )Earnings from discontinued operations
    
    
    
    
    
    
    1,999
    
    
    
    21
    
    
    
    
    
    
    
    2,020Net earnings before equity in
subsidiaries
    
    
    3,063
    
    
    
    10,675
    
    
    
    1,019
    
    
    
    
    
    
    
    14,757Equity in subsidiaries
    
    
    11,694
    
    
    
    
    
    
    
    
    
    
    
    (11,694
    )
    
    
    Net earnings
    
    
    14,757
    
    
    
    10,675
    
    
    
    1,019
    
    
    
    (11,694
    )
    
    
    14,757Other comprehensive income, net
    
    
    262
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    262Comprehensive income
    
    $
    15,019
    
    
    $
    10,675
    
    
    $
    1,019
    
    
    $
    (11,694
    )
    
    $
    15,019
 38




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and
Senior Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Six Months Ended April 30, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    136,272
    
    
    $
    10,754
    
    
    $
    
    
    
    $
    147,026Cemetery
    
    
    
    
    
    
    104,274
    
    
    
    11,512
    
    
    
    
    
    
    
    115,786
    
    
    
    240,546
    
    
    
    22,266
    
    
    
    
    
    
    
    262,812Costs and expenses:Funeral
    
    
    
    
    
    
    101,812
    
    
    
    6,614
    
    
    
    
    
    
    
    108,426Cemetery
    
    
    
    
    
    
    80,881
    
    
    
    7,822
    
    
    
    
    
    
    
    88,703
    
    
    
    182,693
    
    
    
    14,436
    
    
    
    
    
    
    
    197,129Gross profit
    
    
    
    
    
    
    57,853
    
    
    
    7,830
    
    
    
    
    
    
    
    65,683Corporate general and administrative
expenses
    
    
    (8,798
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,798
    )Gains on dispositions and impairment
(losses), net
    
    
    
    
    
    
    947
    
    
    
    200
    
    
    
    
    
    
    
    1,147Other operating income, net
    
    
    161
    
    
    
    243
    
    
    
    101
    
    
    
    
    
    
    
    505Operating earnings (loss)
    
    
    (8,637
    )
    
    
    59,043
    
    
    
    8,131
    
    
    
    
    
    
    
    58,537Interest income (expense)
    
    
    25,560
    
    
    
    (38,813
    )
    
    
    (3,794
    )
    
    
    
    
    
    
    (17,047
    )Loss on early extinguishment of debt
    
    
    (32,708
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (32,708
    )Investment and other income, net
    
    
    219
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    219Earnings (loss) from continuing
operations before income taxes
    
    
    (15,566
    )
    
    
    20,230
    
    
    
    4,337
    
    
    
    
    
    
    
    9,001Income tax expense (benefit)
    
    
    (5,431
    )
    
    
    7,697
    
    
    
    1,742
    
    
    
    
    
    
    
    4,008Earnings (loss) from continuing
operations
    
    
    (10,135
    )
    
    
    12,533
    
    
    
    2,595
    
    
    
    
    
    
    
    4,993Discontinued operations:Earnings from discontinued operations
before income taxes
    
    
    
    
    
    
    55
    
    
    
    72
    
    
    
    
    
    
    
    127Income taxes
    
    
    
    
    
    
    125
    
    
    
    
    
    
    
    
    
    
    
    125Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    (70
    )
    
    
    72
    
    
    
    
    
    
    
    2Earnings (loss) before cumulative effect
of change in accounting principle
    
    
    (10,135
    )
    
    
    12,463
    
    
    
    2,667
    
    
    
    
    
    
    
    4,995Cumulative effect of change in
accounting principle
    
    
    
    
    
    
    (131,395
    )
    
    
    (9,923
    )
    
    
    
    
    
    
    (141,318
    )Net loss before equity (loss) in
subsidiaries
    
    
    (10,135
    )
    
    
    (118,932
    )
    
    
    (7,256
    )
    
    
    
    
    
    
    (136,323
    )Equity (loss) in subsidiaries
    
    
    (126,188
    )
    
    
    
    
    
    
    
    
    
    
    126,188
    
    
    
    Net loss
    
    
    (136,323
    )
    
    
    (118,932
    )
    
    
    ( 7,256
    )
    
    
    126,188
    
    
    
    (136,323
    )Other comprehensive income, net
    
    
    333
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    333Comprehensive loss
    
    $
    (135,990
    )
    
    $
    (118,932
    )
    
    $
    (7,256
    )
    
    $
    126,188
    
    
    $
    (135,990
    )
 39




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)  (11)
    Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and
Senior Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Six Months Ended April 30, 2004Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    135,546
    
    
    $
    10,763
    
    
    $
    
    
    
    $
    146,309Cemetery
    
    
    
    
    
    
    103,360
    
    
    
    12,166
    
    
    
    
    
    
    
    115,526
    
    
    
    238,906
    
    
    
    22,929
    
    
    
    
    
    
    
    261,835Costs and expenses:Funeral
    
    
    
    
    
    
    95,438
    
    
    
    6,690
    
    
    
    
    
    
    
    102,128Cemetery
    
    
    
    
    
    
    76,730
    
    
    
    9,162
    
    
    
    
    
    
    
    85,892
    
    
    
    172,168
    
    
    
    15,852
    
    
    
    
    
    
    
    188,020Gross profit
    
    
    
    
    
    
    66,738
    
    
    
    7,077
    
    
    
    
    
    
    
    73,815Corporate general and administrative
expenses
    
    
    (8,534
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (8,534
    )Separation charges
    
    
    (482
    )
    
    
    (1,629
    )
    
    
    (20
    )
    
    
    
    
    
    
    (2,131
    )Gains on dispositions and impairment
(losses), net
    
    
    
    
    
    
    8
    
    
    
    280
    
    
    
    
    
    
    
    288Other operating income (expense), net
    
    
    269
    
    
    
    795
    
    
    
    (121
    )
    
    
    
    
    
    
    943Operating earnings (loss)
    
    
    (8,747
    )
    
    
    65,912
    
    
    
    7,216
    
    
    
    
    
    
    
    64,381Interest income (expense)
    
    
    19,424
    
    
    
    (39,666
    )
    
    
    (4,232
    )
    
    
    
    
    
    
    (24,474
    )Investment and other income (expense),
net
    
    
    (1,068
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,068
    )Earnings from continuing operations
before income taxes
    
    
    9,609
    
    
    
    26,246
    
    
    
    2,984
    
    
    
    
    
    
    
    38,839Income taxes
    
    
    2,900
    
    
    
    9,882
    
    
    
    1,858
    
    
    
    
    
    
    
    14,640Earnings from continuing operations
    
    
    6,709
    
    
    
    16,364
    
    
    
    1,126
    
    
    
    
    
    
    
    24,199Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    2,009
    
    
    
    (8
    )
    
    
    
    
    
    
    2,001Income tax benefit
    
    
    
    
    
    
    (285
    )
    
    
    
    
    
    
    
    
    
    
    (285
    )Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    2,294
    
    
    
    (8
    )
    
    
    
    
    
    
    2,286Net earnings before equity in
subsidiaries
    
    
    6,709
    
    
    
    18,658
    
    
    
    1,118
    
    
    
    
    
    
    
    26,485Equity in subsidiaries
    
    
    19,776
    
    
    
    
    
    
    
    
    
    
    
    (19,776
    )
    
    
    Net earnings
    
    
    26,485
    
    
    
    18,658
    
    
    
    1,118
    
    
    
    (19,776
    )
    
    
    26,485Other comprehensive income, net
    
    
    1,601
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,601Comprehensive income
    
    $
    28,086
    
    
    $
    18,658
    
    
    $
    1,118
    
    
    $
    (19,776
    )
    
    $
    28,086
 40




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)  (11)
    Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes
and Senior Notes(Continued) Condensed Consolidating Balance Sheets April 30, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    15,003
    
    
    $
    2,693
    
    
    $
    754
    
    
    $
    
    
    
    $
    18,450Marketable securities
    
    
    
    
    
    
    
    
    
    
    1,292
    
    
    
    
    
    
    
    1,292Receivables, net of allowances
    
    
    6,547
    
    
    
    40,462
    
    
    
    14,590
    
    
    
    
    
    
    
    61,599Inventories
    
    
    367
    
    
    
    30,610
    
    
    
    6,773
    
    
    
    
    
    
    
    37,750Prepaid expenses
    
    
    664
    
    
    
    2,991
    
    
    
    2
    
    
    
    
    
    
    
    3,657Deferred income taxes, net
    
    
    2,145
    
    
    
    2,067
    
    
    
    
    
    
    
    
    
    
    
    4,212Total current assets
    
    
    24,726
    
    
    
    78,823
    
    
    
    23,411
    
    
    
    
    
    
    
    126,960Receivables due beyond one year, net of
allowances
    
    
    38
    
    
    
    64,076
    
    
    
    13,130
    
    
    
    
    
    
    
    77,244Preneed funeral receivables and trust
investments
    
    
    
    
    
    
    487,298
    
    
    
    11,600
    
    
    
    
    
    
    
    498,898Preneed cemetery receivables and trust
investments
    
    
    
    
    
    
    240,881
    
    
    
    19,262
    
    
    
    
    
    
    
    260,143Goodwill
    
    
    
    
    
    
    374,283
    
    
    
    28,544
    
    
    
    2,800
    
    
    
    405,627Deferred charges
    
    
    3,370
    
    
    
    15,402
    
    
    
    924
    
    
    
    
    
    
    
    19,696Cemetery property, at cost
    
    
    
    
    
    
    350,206
    
    
    
    20,313
    
    
    
    
    
    
    
    370,519Property and equipment, at cost
    
    
    32,988
    
    
    
    436,203
    
    
    
    39,081
    
    
    
    
    
    
    
    508,272Less accumulated depreciation
    
    
    18,236
    
    
    
    176,582
    
    
    
    12,108
    
    
    
    
    
    
    
    206,926Net property and equipment
    
    
    14,752
    
    
    
    259,621
    
    
    
    26,973
    
    
    
    
    
    
    
    301,346Deferred income taxes, net
    
    
    12,808
    
    
    
    104,172
    
    
    
    17,360
    
    
    
    (234
    )
    
    
    134,106Cemetery perpetual care trust investments
    
    
    
    
    
    
    211,503
    
    
    
    
    
    
    
    
    
    
    
    211,503Other assets
    
    
    105
    
    
    
    1,312
    
    
    
    
    
    
    
    
    
    
    
    1,417Total assets
    
    $
    55,799
    
    
    $
    2,187,577
    
    
    $
    161,517
    
    
    $
    2,566
    
    
    $
    2,407,459LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    5,087
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    5,087Accounts payable
    
    
    327
    
    
    
    7,635
    
    
    
    248
    
    
    
    
    
    
    
    8,210Accrued expenses and other current
liabilities
    
    
    11,913
    
    
    
    31,260
    
    
    
    5,494
    
    
    
    
    
    
    
    48,667Total current liabilities
    
    
    17,327
    
    
    
    38,895
    
    
    
    5,742
    
    
    
    
    
    
    
    61,964Long-term debt, less current maturities
    
    
    383,377
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    413,377Intercompany payables, net
    
    
    (1,029,140
    )
    
    
    1,019,749
    
    
    
    9,391
    
    
    
    
    
    
    
    Deferred preneed funeral revenue
    
    
    
    
    
    
    96,228
    
    
    
    49,326
    
    
    
    
    
    
    
    145,554Deferred preneed cemetery revenue
    
    
    
    
    
    
    225,114
    
    
    
    57,622
    
    
    
    
    
    
    
    282,736Non-controlling interest in funeral and
cemetery trusts
    
    
    
    
    
    
    628,615
    
    
    
    
    
    
    
    
    
    
    
    628,615Other long-term liabilities
    
    
    29,491
    
    
    
    2,296
    
    
    
    
    
    
    
    (21,151
    )
    
    
    10,636Total liabilities
    
    
    (598,945
    )
    
    
    2,010,897
    
    
    
    152,081
    
    
    
    (21,151
    )
    
    
    1,542,882Non-controlling interest in perpetual care
trusts
    
    
    
    
    
    
    209,833
    
    
    
    
    
    
    
    
    
    
    
    209,833Common stock
    
    
    109,699
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    109,699Other
    
    
    545,045
    
    
    
    (33,579
    )
    
    
    9,384
    
    
    
    24,195
    
    
    
    545,045Total shareholders equity
    
    
    654,744
    
    
    
    (33,153
    )
    
    
    9,436
    
    
    
    23,717
    
    
    
    654,744Total liabilities and shareholders equity
    
    $
    55,799
    
    
    $
    2,187,577
    
    
    $
    161,517
    
    
    $
    2,566
    
    
    $
    2,407,459
   41




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)  (11)
    Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated
Notes and Senior Notes(Continued) Condensed Consolidating Balance Sheets October 31, 2004Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    13,553
    
    
    $
    7,625
    
    
    $
    336
    
    
    $
    
    
    
    $
    21,514Marketable securities
    
    
    
    
    
    
    16
    
    
    
    1,281
    
    
    
    
    
    
    
    1,297Receivables, net of allowances
    
    
    4,551
    
    
    
    40,355
    
    
    
    14,555
    
    
    
    
    
    
    
    59,461Inventories
    
    
    389
    
    
    
    32,419
    
    
    
    6,647
    
    
    
    
    
    
    
    39,455Prepaid expenses
    
    
    822
    
    
    
    2,118
    
    
    
    14
    
    
    
    
    
    
    
    2,954Deferred income taxes, net
    
    
    2,263
    
    
    
    2,259
    
    
    
    
    
    
    
    
    
    
    
    4,522Assets held for sale
    
    
    
    
    
    
    2,318
    
    
    
    1,272
    
    
    
    
    
    
    
    3,590Total current assets
    
    
    21,578
    
    
    
    87,110
    
    
    
    24,105
    
    
    
    
    
    
    
    132,793Receivables due beyond one year, net of
allowances
    
    
    98
    
    
    
    65,326
    
    
    
    14,455
    
    
    
    
    
    
    
    79,879Preneed funeral receivables and trust
investments
    
    
    
    
    
    
    488,765
    
    
    
    16,117
    
    
    
    
    
    
    
    504,882Preneed cemetery receivables and trust
investments
    
    
    
    
    
    
    233,776
    
    
    
    25,683
    
    
    
    
    
    
    
    259,459Goodwill
    
    
    
    
    
    
    368,311
    
    
    
    34,025
    
    
    
    2,800
    
    
    
    405,136Deferred charges
    
    
    4,859
    
    
    
    229,875
    
    
    
    20,100
    
    
    
    
    
    
    
    254,834Cemetery property, at cost
    
    
    
    
    
    
    346,293
    
    
    
    24,801
    
    
    
    
    
    
    
    371,094Property and equipment, at cost
    
    
    31,845
    
    
    
    430,328
    
    
    
    36,695
    
    
    
    
    
    
    
    498,868Less accumulated depreciation
    
    
    17,273
    
    
    
    168,469
    
    
    
    11,834
    
    
    
    
    
    
    
    197,576Net property and equipment
    
    
    14,572
    
    
    
    261,859
    
    
    
    24,861
    
    
    
    
    
    
    
    301,292Deferred income taxes, net
    
    
    12,808
    
    
    
    19,737
    
    
    
    10,813
    
    
    
    (234
    )
    
    
    43,124Investment in subsidiaries
    
    
    105,038
    
    
    
    
    
    
    
    
    
    
    
    (105,038
    )
    
    
    Cemetery perpetual care trust investments.
    
    
    
    
    
    
    210,267
    
    
    
    
    
    
    
    
    
    
    
    210,267Other assets
    
    
    104
    
    
    
    1,304
    
    
    
    
    
    
    
    
    
    
    
    1,408Total assets
    
    $
    159,057
    
    
    $
    2,312,623
    
    
    $
    194,960
    
    
    $
    (102,472
    )
    
    $
    2,564,168LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    1,725
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    1,725Accounts payable
    
    
    1,090
    
    
    
    7,662
    
    
    
    323
    
    
    
    
    
    
    
    9,075Accrued expenses and other current
liabilities
    
    
    17,992
    
    
    
    35,332
    
    
    
    5,645
    
    
    
    
    
    
    
    58,969Liabilities associated with assets held
for sale
    
    
    
    
    
    
    1,792
    
    
    
    596
    
    
    
    
    
    
    
    2,388Total current liabilities
    
    
    20,807
    
    
    
    44,786
    
    
    
    6,564
    
    
    
    
    
    
    
    72,157Long-term debt, less current maturities
    
    
    385,080
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    415,080Intercompany payables, net
    
    
    (1,041,358
    )
    
    
    1,019,341
    
    
    
    22,017
    
    
    
    
    
    
    
    Deferred preneed funeral revenue
    
    
    
    
    
    
    107,485
    
    
    
    50,826
    
    
    
    
    
    
    
    158,311Deferred preneed cemetery revenue
    
    
    
    
    
    
    216,704
    
    
    
    68,259
    
    
    
    
    
    
    
    284,963Non-controlling interest in funeral and
cemetery trusts
    
    
    
    
    
    
    629,376
    
    
    
    
    
    
    
    
    
    
    
    629,376Other long-term liabilities
    
    
    10,270
    
    
    
    860
    
    
    
    
    
    
    
    
    
    
    
    11,130Total liabilities
    
    
    (625,201
    )
    
    
    2,018,552
    
    
    
    177,666
    
    
    
    
    
    
    
    1,571,017Non-controlling interest in perpetual care
trusts
    
    
    
    
    
    
    208,893
    
    
    
    
    
    
    
    
    
    
    
    208,893Common stock
    
    
    107,885
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,885Other
    
    
    676,706
    
    
    
    84,752
    
    
    
    17,242
    
    
    
    (101,994
    )
    
    
    676,706Accumulated other comprehensive loss
    
    
    (333
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (333
    )Total shareholders equity
    
    
    784,258
    
    
    
    85,178
    
    
    
    17,294
    
    
    
    (102,472
    )
    
    
    784,258Total liabilities and shareholders equity
    
    $
    159,057
    
    
    $
    2,312,623
    
    
    $
    194,960
    
    
    $
    (102,472
    )
    
    $
    2,564,168
   42




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)  (11)
    Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated
Notes and Senior Notes(Continued) Condensed Consolidating Statements of Cash Flows Six Months Ended April 30, 2005Guarantor
    
    
    Non-GuarantorParent
    
    
    Subsidiaries
    
    
    Subsidiaries
    
    
    Eliminations
    
    
    ConsolidatedNet cash provided by operating activities
    
    $
    14,668
    
    
    $
    7,311
    
    
    $
    7,040
    
    
    $
    
    
    
    $
    29,019Cash flows from investing activities:Proceeds from sales of marketable securities
    
    
    
    
    
    
    16
    
    
    
    
    
    
    
    
    
    
    
    16Proceeds from sale of assets, net
    
    
    (205
    )
    
    
    5,915
    
    
    
    675
    
    
    
    
    
    
    
    6,385Additions to property and equipment
    
    
    (1,636
    )
    
    
    (7,988
    )
    
    
    (3,344
    )
    
    
    
    
    
    
    (12,968
    )Other
    
    
    
    
    
    
    (188
    )
    
    
    
    
    
    
    
    
    
    
    (188
    )Net cash used in investing activities
    
    
    (1,841
    )
    
    
    (2,245
    )
    
    
    (2,669
    )
    
    
    
    
    
    
    (6,755
    )Cash flows from financing activities:Proceeds from long-term debt
    
    
    440,000
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    440,000Repayments of long-term debt
    
    
    (438,341
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (438,341
    )Intercompany receivables (payables)
    
    
    13,951
    
    
    
    (9,998
    )
    
    
    (3,953
    )
    
    
    
    
    
    
    Debt issue costs
    
    
    (31,180
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (31,180
    )Issuance of common stock
    
    
    12,608
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    12,608Purchase and retirement of common
stock
    
    
    (5,681
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (5,681
    )Dividends
    
    
    (2,742
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,742
    )Other
    
    
    8
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    8Net cash used in financing activities
    
    
    (11,377
    )
    
    
    (9,998
    )
    
    
    (3,953
    )
    
    
    
    
    
    
    (25,328
    )Net increase (decrease) in cash
    
    
    1,450
    
    
    
    (4,932
    )
    
    
    418
    
    
    
    
    
    
    
    (3,064
    )Cash and cash equivalents, beginning of
period
    
    
    13,553
    
    
    
    7,625
    
    
    
    336
    
    
    
    
    
    
    
    21,514Cash and cash equivalents, end of
period
    
    $
    15,003
    
    
    $
    2,693
    
    
    $
    754
    
    
    $
    
    
    
    $
    18,450
 43




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)  (11)
    Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes and
Senior 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
 44




---



##### 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, Assets Held for Sale and Impairment Charges In December 2003, the Company announced plans to close or sell a number of small businesses,
primarily small funeral homes, most of which were acquired as part of a group of facilities, that
were performing below acceptable levels or no longer fit the Companys operating profile. One of
the criteria for classification as discontinued operations or assets held for sale is that the
transfer of the asset is normally expected to qualify for accounting recognition as a sale within
one years time, with certain exceptions. Certain of the businesses classified as discontinued
operations during the first quarter of fiscal year 2004 that were not sold within the one-year
requirement were reclassified as continuing operations in the first quarter of fiscal year 2005.
Subsequently, during the second quarter ended April 30, 2005,
the Company sold two of these businesses. The
operating results of those businesses that met the criteria in SFAS No. 144 that were sold during
fiscal years 2005 or 2004 (including those sold in the second quarter ended April 30, 2005) are
currently reported in the discontinued operations section of the 2005 and 2004
consolidated statements of earnings. As of April 30, 2005, the Company had closed on the sale of
63 businesses for $25,706 in proceeds. As of April 30, 2005, total assets and total liabilities of
the 14 remaining businesses were $8,606 and $4,754, respectively. The operations of these
businesses (including $664 and $829 in revenue and $54 and $165 in gross profit for the three
months ended April 30, 2005 and 2004, respectively, and $1,324 and $1,606 in revenue and $181 and
$265 in gross profit for the six months ended April 30, 2005 and 2004, respectively) are included
in continuing operations in the consolidated statements of earnings for the three and six months
ended April 30, 2005 and 2004. During fiscal year 2004, the Company evaluated its long-lived assets, recorded impairment
charges of $473 and sold several assets that it held for sale at a net gain of $1,037. The net
effect was that the Company recorded net gains on dispositions and impairment (losses), of $564 for
the year ended October 31, 2004 in continuing operations, of which ($315) and $288 related to the
three and six months ended April 30, 2004, respectively, and is included in Gains on dispositions
and impairment (losses), net in the consolidated statement of earnings. The fair market value was
determined by specific offer or bid, appraisal or an estimate based on a multiple or percentage of
historical results. For the six months ended April 30, 2005, the Company recorded net gains on dispositions and
impairment (losses) of $421 and $1,147 for the three and six months ended April 30, 2005 in
continuing operations, respectively, for long-lived assets sold, primarily real estate that did not
qualify as discontinued operations. The Company also recorded net gains on dispositions and
impairment (losses) related to discontinued operations of ($125) and $347 for the three and six
months ended April 30, 2005, which is reflected in the discontinued operations section of the
consolidated statement of earnings, all of which relates to businesses sold. 45




---



##### 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, Assets Held for Sale and Impairment Charges(Continued) A summary of the assets and liabilities included in the assets held for sale and
liabilities associated with assets held for sale line items as of October 31, 2004 and the
operating results of the discontinued operations for the three and six months ended April 30, 2005
and 2004, respectively, are as follows: October 31, 2004AssetsReceivables, net of allowances
    
    $
    38Inventories and other current assets
    
    
    102Net property and equipment
    
    
    1,362Preneed funeral receivables and trust investments
    
    
    1,359Deferred charges and other assets
    
    
    729Assets held for sale
    
    $
    3,590LiabilitiesDeferred income taxes, net
    
    $
    166Deferred preneed funeral revenue
    
    
    1,040Non-controlling interest in funeral and cemetery trusts
    
    
    1,182Liabilities associated with assets held for sale
    
    $
    2,388
 Three Months Ended
    
    
    Six Months EndedApril 30,
    
    
    April 30,2005
    
    
    2004
    
    
    2005
    
    
    2004Revenue:Funeral
    
    $
    34
    
    
    $
    3,692
    
    
    $
    188
    
    
    $
    7,959Cemetery
    
    
    4
    
    
    
    27
    
    
    
    3
    
    
    
    61$
    38
    
    
    $
    3,719
    
    
    $
    191
    
    
    $
    8,020Gross profit:Funeral
    
    $
    (55
    )
    
    $
    206
    
    
    $
    (196
    )
    
    $
    621Cemetery
    
    
    2
    
    
    
    17
    
    
    
    (15
    )
    
    
    20(53
    )
    
    
    223
    
    
    
    (211
    )
    
    
    641Gains on dispositions and impairment (losses), net
    
    
    (125
    )
    
    
    1,322
    
    
    
    347
    
    
    
    1,324Other operating income (expense), net
    
    
    (8
    )
    
    
    28
    
    
    
    (9
    )
    
    
    36Earnings (loss) from discontinued operations
before income taxes
    
    $
    (186
    )
    
    $
    1,573
    
    
    $
    127
    
    
    $
    2,001
 (13) Separation Charges In December 2003, the Company announced plans to restructure and reduce its workforce by
approximately 300 employees throughout the organization. For fiscal year 2004, the Company
recorded a charge for severance and other costs associated with the workforce reductions of $2,435
($1,510 after tax, or $.01 per share), of which $138 was recorded during the three months ended
April 30, 2004 and $2,131 ($1,321 after tax, or $.01 per share) was recorded during the six months
ended April 30, 2004. There are no material remaining costs under the workforce reduction plan.
The plan was completed June 1, 2004. 46




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (14) Long-term Debt April 30, 2005
    
    
    October 31, 2004Long-term debt:Senior secured credit facility:Revolving credit facility
    
    $
    
    
    
    $
    59,000Term Loan B
    
    
    214,201
    
    
    
    54,0056.25% senior notes due 2013
    
    
    200,000
    
    
    
    10.75% senior subordinated notes due 2008
    
    
    1,750
    
    
    
    300,000Other, principally seller financing of acquired operations
or assumption upon acquisition, weighted average
interest rates of 3.7% and 4.6% as of April 30, 2005
and October 31, 2004, respectively, partially secured
by assets of subsidiaries, with maturities through 2022
    
    
    2,513
    
    
    
    3,800Total long-term debt
    
    
    418,464
    
    
    
    416,805Less current maturities
    
    
    5,087
    
    
    
    1,725$
    413,377
    
    
    $
    415,080
 As of October 31, 2004, the Companys revolving credit facility was set to mature in June of
2005, and the Companys Term Loan B was set to mature in October of 2005. On November 19, 2004,
the Company entered into an amended and restated senior secured credit facility consisting of a
$125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. Thus, in the
October 31, 2004 balance sheet, the $59,000 outstanding balance of the revolving credit facility
and the $54,005 outstanding balance of the Term Loan B were classified as long-term debt. During
the first quarter of fiscal year 2005, the Company incurred a charge for early extinguishment of
debt of $2,651 ($1,723 after tax, or $.02 per share) to write off fees associated with the prior
facility. The new
facility consists of a $125,000 five-year revolving credit facility and a $100,000
seven-year Term Loan B. The senior secured credit facility also
included an accordion feature which provided for the Company to
borrow additional funds on a one-time basis. As a result of the refinancing, the leverage-based grid pricing for the
interest rate on the Companys new revolving credit facility was reduced to LIBOR plus 150.0 basis
points at closing, representing a 50 basis-point reduction. The grid for the new revolving credit
facility ranges from 137.5 to 200.0 basis points. The Company pays a quarterly commitment fee of
37.5 to 50.0 basis points, based on the Companys consolidated leverage ratio. The interest rate
on the Companys Term Loan B was reduced to LIBOR plus 175.0 basis points, which is 75 basis points
below the prior facility and is not subject to grid pricing. In connection with the refinancing in
February 2005 of substantially all of the Companys 10.75 percent senior subordinated notes (which
is discussed below), the Company borrowed an additional $130,000 in
Term Loan B under the aforementioned accordion
feature of its senior secured credit facility. The Term Loan B matures on November 19, 2011 with
94 percent of the principal due in 2011, and the revolving credit facility matures on
November 19, 2009. As of April 30, 2005, there were no amounts drawn on the Companys $125,000 revolving credit
facility. As of April 30, 2005, after giving consideration to the $15,658 of outstanding letters
of credit and $41,061 bond the Company is required to maintain to guarantee its obligations
relating to funds it withdrew from trust funds in Florida, the Companys availability under the
revolving credit facility was $68,281. As of April 30, 2005 and October 31, 2004, the weighted
average interest rate of the Companys revolving credit facility and Term Loan B that were not
hedged by the interest rate swap agreement in effect at October 31, 2004 and were subject to
short-term variable interest rates was approximately 4.6 percent and 4.0 percent, respectively.
The Companys revolving credit facility includes a provision whereby the revolving credit
commitment may be terminated by the lenders if an event of default occurs and is continuing. 47




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (14) Long-term Debt(Continued) Obligations under the senior secured credit facility are guaranteed by substantially all
existing and future direct and indirect domestic subsidiaries of the Company formed under the laws
of any one of the states or the District of Columbia of the United States of America (SEI
Guarantors). The lenders under the senior secured credit facility have received a first priority perfected
security interest in (i) all of the capital stock or other equity interests of each of the domestic
subsidiaries of the Company and 65 percent of the voting capital stock of all direct foreign
subsidiaries and (ii) all other present and future assets and properties of the Company and the SEI
Guarantors except (a) real property, (b) vehicles, (c) assets to which applicable law prohibits
security interest therein or requires the consent of a third party, (d) contract rights in which a
security interest without the approval of the other party to the contract would constitute a
default thereunder and (e) any assets with respect to which a security interest cannot be
perfected. The Companys senior secured credit facility contains affirmative and negative covenants that,
among other things, impose limitations on liens, mergers, consolidations and asset sales, the
incurrence of debt, and the payment of dividends. The senior secured credit facility also contains
mandatory and optional prepayment provisions, financial covenants and customary events of default.
If an event of default occurs, the lenders under the senior secured credit facility are entitled,
among other rights, to declare the additional term loan borrowings and other amounts outstanding
under the facility to be due and payable immediately. For further information regarding the
Companys senior secured credit facility, see Note 18 to the consolidated financial statements of
the Companys Annual Report on Form 10-K for the fiscal year ended October 31, 2004. On February 18, 2005, the Company completed its tender offer and consent solicitation for any
and all of its $300,000 10.75 percent senior subordinated notes. The Company purchased a total of
$298,250 in aggregate principal amount of the notes in the offer. The Company has entered into a
supplemental indenture with respect to the notes that eliminates substantially all of the
restrictive covenants and certain events of default. In the second quarter of fiscal year 2005,
the Company incurred a charge for early extinguishment of debt of approximately $30,057 ($19,210
after tax, or $.18 per share) representing $25,369 for a tender premium,
related fees and expenses and $4,688 for the write-off of the remaining unamortized fees on the
senior subordinated notes. The first call date on the remaining $1,750 principal amount of the senior subordinated notes
is July 1, 2005 at a price of 105.375 percent of the notes principal amount. On May 31, 2005, the
Company gave notice to the remaining holders of the senior subordinated notes of its intention to
call the remaining $1,750 principal amount. As such, this amount has been classified as a
short-term obligation in the April 30, 2005 condensed consolidated balance sheet. In the third
quarter of fiscal year 2005, the Company will incur a charge for the early extinguishment of debt
of approximately $114 including the call premium and write-off of the remaining unamortized fees on
the senior subordinated notes. The Company intends to fund the call of the remaining senior
subordinated notes using excess cash on hand. The Company funded the tender offer for the 10.75 percent senior subordinated notes, including
related tender premiums, fees, expenses and accrued interest of $28,931, with the net proceeds of
the $130,000 in additional Term Loan B borrowings described above, a portion of its available cash,
and the net proceeds of the issuance of $200,000 6.25 percent senior notes due 2013 (the 6.25
percent senior notes), which were issued on February 11, 2005. 48




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (14) Long-term Debt(Continued) The 6.25 percent senior notes are governed by the terms of an indenture dated as of February
11, 2005. Prior to February 15, 2009, the 6.25 percent senior notes are not redeemable. Beginning
on February 15, 2009, the Company may redeem the 6.25 percent senior notes in whole or in part at
any time at the redemption prices set forth in the indenture, plus any accrued and unpaid interest.
In addition, upon a change of control of the Company, holders of the 6.25 percent senior notes
will have the right to require the Company to repurchase all or any part of their 6.25 percent
senior notes for cash at a price equal to 101 percent of the aggregate principal amount of the 6.25
percent senior notes repurchased, plus any accrued and unpaid interest. The 6.25 percent senior notes are guaranteed, jointly and severally, by the SEI Guarantors,
and are the Companys general unsecured and unsubordinated obligations, and the guarantees of the
6.25 percent senior notes are the SEI guarantors general unsecured and unsubordinated obligations.
Accordingly, they will rank equally in right of payment with all of the Companys, in the case of
the 6.25 percent senior notes, and the SEI Guarantors, in the case of their guarantees of the 6.25
percent senior notes, existing and future unsubordinated indebtedness and senior to any existing
and future subordinated indebtedness. In addition, the 6.25 percent senior notes effectively rank junior to any of the Companys,
and the guarantees of the 6.25 percent senior notes effectively rank junior to the SEI Guarantors,
existing and future secured indebtedness, including obligations under the Companys senior secured
credit facility, to the extent of the assets securing such indebtedness. The indenture contains affirmative and negative covenants that, among other things, limit the
Company and the SEI Guarantors ability to engage in sale and leaseback transactions, effect a
consolidation or merger or sale, transfer, lease, or other disposition of all or substantially all
assets, and create liens on assets. The indenture also contains customary events of default. Upon
the occurrence of certain events of default, the Trustee or the holders of the 6.25 percent senior
notes may declare all outstanding 6.25 percent senior notes to be due and payable immediately. 49




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (15) Consolidated Comprehensive Income Consolidated comprehensive income (loss) for the six months ended April 30, 2005 and 2004 is
as follows: Six Months Ended April 30,2005
    
    
    2004Net earnings (loss)
    
    $
    (136,323
    )
    
    $
    26,485Other comprehensive income:Reclassification adjustment for realized loss on investments, net of
deferred tax benefit of $454
    
    
    
    
    
    
    740Unrealized appreciation of investments, net of deferred tax expense of
($14)
    
    
    
    
    
    
    57Termination of derivative instrument designated and qualifying as a
cash flow hedging instrument, net of deferred tax expense of
($119)
    
    
    
    
    
    
    194Unrealized appreciation on derivative instrument designated and
qualifying as a cash flow hedging instrument, net of deferred tax
expense of ($204) and ($332), respectively
    
    
    333
    
    
    
    610Reduction in net unrealized losses associated with available-for-sale
securities of the trusts
    
    
    954
    
    
    
    Reclassification of the net unrealized losses activity attributable to the
non-controlling interest holders
    
    
    (954
    )
    
    
    Total other comprehensive income
    
    
    333
    
    
    
    1,601Total comprehensive income (loss)
    
    $
    (135,990
    )
    
    $
    28,086
 (16) Guarantees The Companys obligations under its senior secured credit facility, 10.75 percent senior
subordinated notes and 6.25 percent senior notes are guaranteed by all of its existing and future
direct and indirect subsidiaries formed under the laws of the United States, any state thereof or
the District of Columbia, except for specified excluded subsidiaries. For additional information regarding the senior secured credit facility and senior subordinated
notes, see Note 18 to the consolidated financial statements of the Companys Annual Report on Form
10-K for the fiscal year ended October 31, 2004 and Note 14 included herein. For additional
information regarding the 6.25 percent senior notes, see Note 14 included herein. All obligations under the senior secured credit facility, including the guarantees and any
interest rate protection and other hedging agreements with any lender or its affiliates, are
secured by a first priority perfected security interest in (1) all capital stock and other equity
interests of the Companys existing and future direct and indirect domestic subsidiaries, other
than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of the voting equity
interests and 100 percent of all other equity interests (other than qualifying shares of directors)
of all direct existing and future foreign subsidiaries, and (3) all other existing and future
assets and properties of the Company and the guarantors, except for real property, vehicles and
other specified exclusions. Louisiana law gives Louisiana corporations broad powers to indemnify their present and former
directors and officers and those of affiliated corporations against expenses incurred in the
defense of any lawsuit to which they are made parties by reason of their positions. The Companys
By-laws make mandatory the indemnification of directors 50




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (16) Guarantees(Continued) and officers permitted by Louisiana law. The Company has in effect a directors and officers
liability insurance policy that provides for indemnification of its officers and directors against
losses arising from claims asserted against them in their capacities as officers and directors, subject to limitations and conditions set forth
in such policy. The Company has also entered into indemnity agreements with each director and
executive officer, pursuant to which the Company has agreed, subject to certain exceptions, to
purchase and maintain directors and officers liability insurance. The agreements also provide
that the Company will indemnify each director and executive officer against any costs and expenses,
judgments, settlements and fines incurred in connection with any claim involving him or her by
reason of his or her position as director or officer, provided that the director or executive
officer meets certain standards of conduct. As of April 30, 2005, the Company has guaranteed long-term debt of its subsidiaries of
approximately $1,335 that represents notes the subsidiaries issued as part of the purchase price of
acquired businesses or debt the subsidiaries assumed in connection with acquisitions. (17) Related Party Transactions In June 2004, the Company entered into a separation agreement with William E. Rowe, who
stepped down from his position as President and Chief Executive Officer, but continued in his role
as Chairman of the Board. As part of Mr. Rowes separation agreement, the Company will pay Mr.
Rowe $1,000 in equal installments over a two year period, beginning November 1, 2004. The Company
recorded the $1,000 charge in the third quarter of fiscal year 2004 but will make the payments in
accordance with the terms of the agreement. In July 2003, the Company entered into a retirement benefits agreement with Frank B. Stewart,
Jr., who retired from his position as Chairman of the Board and became Chairman Emeritus of the
Company. As part of Mr. Stewarts retirement benefits agreement, the Company agreed to pay Mr.
Stewart $1,650, payable in three installments of $550 each. The first payment was made within five
days after the announcement of his retirement. The second payment was made on June 20, 2004, and
the final payment will be made on June 20, 2005. The Company recorded the $1,650 charge in the
third quarter of 2003 but will continue to make the payments in accordance with the terms of the
agreement. On June 10, 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had
stepped down to pursue other interests. According to the terms of his employment agreement, he is
entitled to receive an amount equal to two years of salary, or $800, over the next two years. The
Company recorded the $800 charge in the third quarter of 2003 and has paid $760 of the $800
commitment as of April 30, 2005. The remaining amount will be fully paid by June 17, 2005. In January 1998, the Company discontinued an insurance policy on the life of Mr. Frank B.
Stewart, Jr., Chairman Emeritus of the Company. In order to purchase a replacement policy, The
Stewart Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180
days after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the
Companys cost of borrowing under its revolving credit facility and is payable when the principal
becomes due. The amount of the loan was equal to the cash value received by the Company upon the
discontinuance of the prior insurance policy. The loan proceeds were used by the trust to purchase
a single premium policy on the life of Mr. Stewart. Certain of the beneficiaries of The Stewart
Family 51




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (17) Related Party Transactions(Continued) Special Trust are members of Mr. Stewarts family. The loan was approved by all of the
disinterested members of the Board of Directors. The outstanding balance of the loan at April 30,
2005, including accrued interest, was approximately $1,023. 52




---



##### Table of Contents



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 May 31, 2005, we owned and operated 234 funeral homes
and 147 cemeteries in 26 states within the United States and Puerto Rico. We sell cemetery property and funeral and cemetery products and services both at the time of
need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales,
preneed sales delivered out of our backlog during the period (including the accumulated trust
earnings or build-up in the face value of insurance contracts related to these preneed deliveries),
preneed cemetery property sales and other items such as perpetual care trust earnings and finance
charges. For a discussion of our accounting for preneed sales and trust and escrow account
earnings, see Managements Discussion and Analysis of Financial Condition and Results of
Operations included in Item 7 in our Annual Report on Form 10-K for the fiscal year ended October
31, 2004 and Notes 1(e), 1(g), 1(k), 1(l) and Notes 2 through 6 to the condensed consolidated
financial statements included herein. We believe that preneed funeral and cemetery property sales are two of the primary drivers of
sustainable long-term growth in the number of families served by our funeral homes and cemeteries.
Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise
sales are deferred into our backlog while our preneed cemetery property sales are recognized
currently in accordance with SFAS No. 66. For a detailed discussion of our revenue recognition
policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes
1(e), 1(g), 1(k), 1(l) and Notes 2 through 6 to the condensed consolidated financial statements. We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and
services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Because a
portion of the funds we receive from preneed sales are deposited into the trusts and invested in a
variety of debt and equity securities and other investments, the performance of the trusts
investments can affect our current and future revenue streams. From 1991 through 1999, we achieved
an overall annual realized return of 8.0 percent to 9.0 percent in our domestic trusts. However,
the average realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8
percent, 2.6 percent and 3.7 percent for fiscal years 2000, 2001, 2002, 2003, 2004 and the six
months ended April 30, 2005, respectively. These returns represent interest, dividends and
realized capital gains or losses but not unrealized capital gains or losses. We defer recognition
of all earnings and losses realized by preneed funeral and cemetery merchandise and services trusts
until the underlying products and services are delivered. Consequently, the lower investment
returns realized during recent years reduced the trust earnings recognized as revenue in 2004 and
the first six months of 2005, and will likely do so for the remainder of fiscal year 2005. We
recognize all earnings and losses realized by our cemetery perpetual care trusts currently,
including capital gains and losses in those jurisdictions where capital gains can be withdrawn and
used for cemetery maintenance. As a result, depressed stock prices and low returns on fixed-income
investments put pressure on perpetual care trust earnings recognized in fiscal year 2004, in the
first half of fiscal 2005, and may do so again during the remainder of fiscal year 2005. Because
approximately 56 percent of our total trust portfolio is currently invested in a diversified group
of equity securities, we would generally expect our portfolio performance to improve if the
performance of the overall stock market improves, but we would also expect its performance to
deteriorate over time if the overall stock market declines. We mark our trust portfolio to market value each quarter. Changes in the market value of the
trusts are recorded by increasing or decreasing trust assets included in the preneed funeral and
cemetery receivables and trust investments line items on the balance sheet, with a corresponding
increase or decrease in the deferred preneed revenue and non-controlling interest line items on the
balance sheet. Therefore, there is no effect on net income. We determine whether or not the
investment portfolio has
an other than temporary impairment on a security-by-security basis. A loss is considered
other than temporary if the security has a reduction in market value compared with its cost basis
of 20 percent or more for a period of six months or longer. If a loss is other than temporary, the
cost basis of the security is adjusted downward to its market value. This affects our footnote
disclosure but does not have an effect on our financial statements, since the trust portfolio is
already marked to market value each quarter. The 53




---



##### Table of Contents



footnotes disclose the adjusted cost basis and
how much of the losses are considered other than temporary. Accordingly, unrealized gains and
losses reflected in the tables in Notes 3, 4 and 5 to the condensed consolidated financial
statements are temporary as the cost basis in these tables has already been adjusted to reflect the
other than temporary unrealized losses. Our preneed funeral and cemetery merchandise and services
trusts and escrow accounts had other than temporary declines of $79.7 million and $44.3 million,
respectively, as of April 30, 2005, from their original cost basis. They had net unrealized
depreciation of $3.6 million and $0.9 million, respectively, as of April 30, 2005 resulting from
temporary unrealized gains and losses. See Notes 3 and 4 to the condensed consolidated financial
statements. Our cemetery perpetual care trust accounts had other than temporary declines of $31.1 million
as of April 30, 2005, from their original cost basis. They had net unrealized appreciation of $5.4
million as of April 30, 2005 resulting from temporary unrealized gains and losses. See Note 5 to
the condensed consolidated financial statements. Unrealized gains and losses in the cemetery
perpetual care trusts and escrow accounts do not affect current earnings but unrealized losses
could limit the capital gains available to us and could eventually result in lower returns and
lower revenues than we have historically achieved from these trusts. We perform a separate analysis to determine whether our preneed contracts are in a loss
position, which would necessitate a charge to earnings. For this analysis, we determine which
trusts are in a net loss position by comparing the aggregate market value of the trusts
investments with the aggregate actual cost basis of the investments. If the aggregate cost basis
exceeds the aggregate market value of the investments, the trust is considered to be in a net loss
position. For trusts in a net loss position, we add the sales prices of the underlying contracts
and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds
for contracts associated with the trusts in question as of that particular balance sheet date. We
look at unrealized gains and losses based on current market prices quoted for the investments, but
we do not include future expected returns on the investments in our analysis. We compare the
amount of proceeds to the estimated costs to deliver the contracts, which consist primarily of
merchandise costs. If a deficiency were to exist, we would record a charge to earnings and a
corresponding liability for the expected loss on the delivery of those contracts from our backlog.
Due to the margins of our preneed contracts and the relatively high trust portfolio returns we
enjoyed prior to fiscal year 2000, there is currently substantial capacity for additional market
depreciation before a contract loss would result. For a discussion of the principal assumptions underlying our expectations for fiscal year 2005
and risk factors related to our businesses and industry, see Item 5 below. Critical Accounting Policies The consolidated financial statements are prepared in accordance with accounting principles
generally accepted in the United States of America, which require us to make estimates and
assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical
accounting policies are those that are both important to the portrayal of our financial condition
and results of operations and require managements most difficult, subjective and complex judgment.
These critical accounting policies are discussed in Managements Discussion and Analysis of
Financial Condition and Results of Operations in our Annual Report on Form 10-K for the fiscal
year ended October 31, 2004. There have been no other changes to our critical accounting policies
since the filing of our Annual Report on Form 10-K for the fiscal year ended October 31, 2004
except for our treatment of preneed selling costs as noted below. Preneed Selling Costs On May 31, 2005, we changed our method of accounting for preneed selling costs incurred
related to the acquisition of new prearranged funeral and cemetery service and merchandise sales.
We have applied this change in accounting principle effective November 1, 2004. Therefore, our
results of operations for the three and six months ended April 30, 2005 are reported on the basis
of our changed method. Prior to this change, commissions and other costs that varied with and were
primarily related to the acquisition of new prearranged funeral and cemetery service sales and
prearranged funeral and cemetery merchandise sales were deferred and amortized in proportion to the 54




---



##### Table of Contents



preneed revenue recognized in the period in a manner consistent with SFAS No. 60, Accounting and
Reporting for Insurance Companies. We have decided to change our accounting for preneed selling
costs to expense such costs as incurred. We concluded that expensing these costs as they are
incurred would be preferable to the old method because it will make our reported results more
comparable with other public death care companies, better align the costs of obtaining preneed
contracts with the cash outflows associated with obtaining such contracts and eliminate the burden
of maintaining deferred selling cost records. As of November 1, 2004, we recorded a cumulative effect of change in accounting principle of
$234.5 million pretax, $141.3 million after tax (net of income tax benefit of $93.2 million), or
$1.29 per diluted share, which represents the cumulative balance of deferred preneed selling costs
in the deferred charges line in the condensed consolidated balance sheet at the time of the change.
See Note 2(a) to the condensed consolidated financial statements for additional information. 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 were
performing below acceptable levels and no longer fit our operating profile. In accordance with
Statement of Financial Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, businesses held for sale or sold that meet certain criteria in SFAS
No. 144 are to be classified as discontinued operations. Thus, beginning in the first quarter of
fiscal year 2004, the businesses that met the criteria and the businesses sold during fiscal years
2003 and 2004 were classified as discontinued operations. The following discussion segregates the
financial results of continuing operations into our funeral and cemetery segments. As there have
been no material acquisitions or construction of new locations in fiscal years 2005 and 2004,
results from continuing operations reflect those of same-store locations. As described above in Critical Accounting Policies, on May 31, 2005, we changed our method
of accounting for selling costs incurred related to preneed funeral and cemetery service and
merchandise sales. We have applied this change in accounting principle effective November 1, 2004.
Prior to this time, we deferred preneed selling costs and amortized them into expense in
proportion to the preneed revenue recognized in the period. We now expense these costs in the
period incurred. In the funeral and cemetery segment discussions below, the amounts presented in
the tables for the three and six months ended April 30, 2004 reflect historical amounts and
therefore are not adjusted for this accounting change. In order to present results for the three
and six months ended April 30, 2004 comparable to those for the same periods of 2005 which include
the accounting change, we have also included a discussion of the net preneed selling costs for
each period of 2004 and their effect on gross profit. The effect of net preneed selling costs is
calculated by removing the amortization of deferred selling costs and including in expense the
preneed selling costs incurred during 2004. The result of that calculation is the net preneed
selling costs that would have reduced 2004 gross profit if the accounting change had been
implemented in fiscal year 2004. Three Months Ended April 30, 2005 Compared to Three Months Ended April 30, 2004Continuing Operations Funeral Segment Three Months EndedApril 30,2005
    
    
    2004
    
    
    Increase(In millions)
    
    
    (Decrease)Total Funeral Revenue
    
    $
    75.5
    
    
    $
    71.6
    
    
    $
    3.9Total Funeral Costs
    
    
    56.3
    
    
    
    50.2
    (1)
    
    
    6.1
    (1)Total Funeral Gross Profit
    
    $
    19.2
    
    
    $
    21.4
    (1)
    
    $
    (2.2
    ) (1)
   (1)
    
    Funeral costs from continuing operations for the three months ended April 30, 2004
do not include net preneed selling costs of $1.6 million which would have been expensed if
the accounting change described above had been implemented in fiscal
year 2004. Had we included
these costs in 2004, funeral gross profit from continuing operations for 55




---



##### Table of Contents



the three months ended April
30, 2005 would have decreased $0.6 million from $19.8 million for the three months ended
April 30, 2004. Funeral revenue from continuing operations increased $3.9 million, or 5.4 percent, for the
three months ended April 30, 2005, compared to the corresponding period in 2004. The increase in
funeral revenue was primarily due to a 4.4 percent increase in the number of same-store funeral
services performed, or 686 events out of 15,573 total same-store funeral services performed. In
addition to an increase in the number of deaths in our markets during the second quarter of 2005,
we believe that our improved performance also reflects the success of our initiatives to grow the
business, including a funeral home incentive compensation plan. We also experienced an increase in the average revenue per funeral service performed by our
same-store businesses. Our same-store businesses achieved a 3.9 percent increase in the average
revenue per traditional funeral service and a 5.0 percent increase in the average revenue per
cremation service. The increase in average revenue per funeral service was partially offset by a
reduction in trust earnings recognized upon the delivery of preneed funerals, resulting from lower
investment returns realized in our preneed funeral trusts during previous years. This resulted in
an overall 2.2 percent increase in the average revenue per funeral service for our same-store
businesses. We believe the primary factors that contributed to the increases in our average
revenue per traditional and cremation service were normal inflationary price increases, more
effective merchandising and packaging, our focus on training, customized funeral planning and
personalization and a new funeral home incentive compensation plan. Funeral gross profit margin from continuing operations decreased from 29.9 percent in the
second quarter of fiscal year 2004 to 25.4 percent in the second quarter of fiscal year 2005.
Funeral costs from continuing operations for the three months ended April 30, 2004 do not include
$1.6 million of net preneed selling costs associated with the accounting change as described above.
Including these costs, the pro forma funeral gross profit margin from continuing operations would
have been 27.7 percent for the three months ended April 30, 2004. The remaining decrease was
primarily due to a $1.8 million charge related to prior period operating leases recorded during the
second quarter of 2005 combined with a reduction in trust earnings and increased health insurance
costs. See Note 1(s) to the condensed consolidated financial statements for additional information
on the lease accounting adjustment. The cremation rate for our same- store operations was 36.7
percent for the three months ended April 30, 2005 and 2004. Cemetery Segment Three Months EndedApril 30,2005
    
    
    2004
    
    
    Increase(In millions)Total Cemetery Revenue
    
    $
    61.1
    
    
    $
    59.5
    
    
    $
    1.6Total Cemetery Costs
    
    
    45.2
    
    
    
    44.1
    (1)
    
    
    1.1
    (1)Total Cemetery Gross Profit
    
    $
    15.9
    
    
    $
    15.4
    (1)
    
    $
    .5
    (1)
   (1)
    
    Cemetery costs from continuing operations for the three months ended April 30, 2004
do not include net preneed selling costs of $0.7 million which would have been expensed if the
accounting change described above had been implemented in fiscal year
2004. Had we included these
costs in 2004, cemetery gross profit from continuing operations for the three months ended April 30,
2005 would have increased $1.2 million from $14.7 million for the three months ended April 30,
2004. Cemetery revenue from continuing operations increased $1.6 million, or 2.7 percent, for the
three months ended April 30, 2005, compared to the corresponding period in 2004, primarily due to
increased cemetery property sales and merchandise deliveries, partially offset by a decrease in
perpetual care trust earnings and a decrease in revenue associated with the construction of
cemetery projects during the quarter. Revenue related to the sale of cemetery property prior to
its construction is recognized on a percentage of completion method of accounting as construction
occurs. Cemetery property sales increased 5.7 percent in the second quarter of fiscal year 2005
compared to the second quarter of fiscal year 2004. We believe this increase can be attributed in
part to the implementation of our 56




---



##### Table of Contents



growth strategies that target cemeteries with the greatest
potential for growth and develop specific plans to increase sales in each of these businesses. We experienced an annualized average return, excluding unrealized gains and losses, of 3.7
percent in our perpetual care trusts for the quarter ended April 30, 2005 resulting in revenue of
$1.6 million, compared to 4.5 percent for the corresponding period in 2004 resulting in revenue of
$2.2 million. Cemetery gross profit margin from continuing operations increased from 25.9 percent in the
second quarter of fiscal year 2004 to 26.0 percent in the second quarter of fiscal year 2005.
Cemetery costs from continuing operations for the three months ended April 30, 2004 do not include
$0.7 million of net preneed selling costs associated with the accounting change as described above.
Including these costs, the pro forma cemetery gross profit margin from continuing operations would
have been 24.7 percent for the three months ended April 30, 2004. The increase resulted from
increased revenues as discussed above, partially offset by a reduction in perpetual care trust
earnings and increased health insurance costs. Discontinued Operations The operating results of those businesses that meet the discontinued operations criteria in
SFAS No. 144 are reported in the discontinued operations section of the consolidated statements of
earnings. Included in discontinued operations for the three months ended April 30, 2005 and 2004
were gains on dispositions and impairment (losses), net of ($0.1) million and $1.3 million,
respectively. Revenues for the three months ended April 30, 2005 were $0.1 million compared to
$3.7 million in the same period in 2004. Income tax benefits for our discontinued operations for
the three months ended April 30, 2005 were $0.1 million compared to $0.5 million for the same
period in 2004. Other Corporate general and administrative expenses for the three months ended April 30, 2005 was
flat compared to the same period in 2004. In December 2003, we announced a reduction and restructuring of our workforce. For the three
months ended April 30, 2004, we recorded $0.1 million for severance and other costs associated with
the workforce reductions, which is presented in the Separation charges line item in the
consolidated statements of earnings. The workforce reduction plan was completed June 1, 2004. Total depreciation and amortization was $5.5 million for the second quarter of fiscal year
2005 compared to $13.1 million for the same period in 2004. Depreciation and amortization from
continuing operations was $5.5 million for the second quarter
of fiscal year 2005 compared to $12.7 million for the same period in 2004. Amortization in fiscal
year 2004 included $7.0 million of deferred selling costs. Effective November 1, 2004, we changed
our accounting principle for selling costs related to preneed funeral and cemetery service and
merchandise sales and we no longer amortize these costs but rather expense them as incurred. Interest expense decreased $5.3 million to $6.7 million for the second quarter of fiscal year
2005 compared to $12.0 million for the same period in 2004 primarily due to a 387 basis-point
decrease in the average interest rate during the period resulting from recent debt refinancings,
combined with a $37.0 million decrease in average debt outstanding. During the fourth quarter of fiscal year 2003, we identified a number of small businesses to
close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair
values. For the three months ended April 30, 2005 and 2004, we reported net gains on dispositions
and impairment (losses) of $0.4 million and ($0.3) million in continuing operations, respectively.
These charges are presented in the Gains on dispositions and impairment (losses), net line item
in the condensed consolidated statements of earnings. 57




---



##### Table of Contents



Other operating income, net, was $0.3 million for the three months ended April 30, 2005
compared to $0.5 million for the three months ended April 30, 2004. The effective tax rate for our continuing operations for the three months ended April 30, 2005
was a 27.8 percent benefit compared to a 37.7 percent expense for the same period in 2004. The
change in the effective rate in 2005 compared to 2004 is primarily due to the tax benefit on the
early extinguishment of debt, which was treated separately from the tax expense associated with
ordinary income that was computed at 38.0 percent. The tax benefit on the early extinguishment of
debt was calculated at 36.0 percent because of an expected reduced state benefit. As of April 30, 2005 and May 31, 2005, our outstanding debt totaled $418.5 million and $418.4
million, respectively. Of the total debt outstanding as of April 30, 2005, approximately 49
percent was subject to fixed rates averaging 6.3 percent, and 51 percent was subject to short-term
variable rates averaging approximately 4.6 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, each involving a notional amount of $50.0 million. One of the
agreements expired on March 11, 2004, and the other expired on March 11, 2005. On November 19,
2004, we completed the refinancing of our senior secured credit facility and recorded a charge for
early extinguishment of debt of $2.7 million ($1.7 million after tax, or $.02 per share) to write
off fees associated with the previous credit facility. On February 11, 2005, we completed the
private offering of $200.0 million principal amount of our 6.25 percent senior notes due 2013. We
also borrowed $130.0 million in additional term loan debt under our senior secured credit facility.
We used the net proceeds from these transactions, together with a portion of our available cash,
to repurchase $298.2 million in aggregate principal amount of our 10.75 percent senior subordinated
notes due 2008 and to pay related tender premiums, fees, expenses and accrued interest of $28.9
million. In the second quarter of fiscal year 2005, we recorded a charge for early extinguishment
of debt of $30.0 million ($19.2 million after tax, or $.18 per share) representing the bond tender
premium, related fees and expenses and the write-off of unamortized fees. For additional
information, see Note 14 to the condensed consolidated financial statements. Preneed Sales into and Deliveries out of the Backlog During the second quarter of 2005 as compared to the corresponding period of 2004, we
increased preneed funeral sales 16 percent. We believe the increase can be attributed in part to
the implementation of our growth strategies that target funeral homes with the greatest potential
for growth and develop specific plans to increase sales in each of these businesses. 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 $45.4 million in preneed sales to
our funeral and cemetery merchandise and services backlog (including $19.1 million related to
insurance-funded preneed funeral contracts) during the three months ended April 30, 2005 to be
recognized in the future (net of cancellations) as these prepaid products and services are
delivered, compared to $41.2 million (including $15.9 million related to insurance-funded preneed
funeral contracts) for the corresponding period in 2004. Revenues recognized on deliveries out of
our preneed funeral and cemetery merchandise and services backlog, including accumulated trust
earnings related to these preneed deliveries, amounted to $45.3 million for the three months ended
April 30, 2005, compared to $42.8 million for the corresponding period in 2004, resulting in a net
addition to the backlog of $.1 million and a net reduction in the backlog of $1.6 million for the
three months ended April 30, 2005 and 2004, respectively. 58




---



##### Table of Contents



Six Months Ended April 30, 2005 Compared to Six Months Ended April 30, 2004  Continuing Operations Funeral Segment Six Months EndedApril 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)(In millions)Total Funeral Revenue
    
    $
    147.0
    
    
    $
    146.3
    
    
    $
    .7Total Funeral Costs
    
    
    108.4
    
    
    
    102.1
    (1)
    
    
    6.3
    (1)Total Funeral Gross Profit
    
    $
    38.6
    
    
    $
    44.2
    (1)
    
    $
    (5.6
    ) (1)
   (1)
    
    Funeral costs from continuing operations for the six months ended April 30, 2004 do
not include net preneed selling costs of $2.2 million which would have been expensed if the
accounting change described above had been implemented in fiscal year
2004. Had we included these
costs in 2004, funeral gross profit from continuing operations for the six months ended April 30, 2005
would have decreased $3.4 million from $42.0 million for the six months ended April 30, 2004. Funeral revenue from continuing operations increased $.7 million, or 0.5 percent, for the six
months ended April 30, 2005, compared to the corresponding period in 2004. 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 3.2 percent increase in the
average revenue per traditional funeral service and a 5.6 percent increase in the average revenue
per cremation service. The increase in average revenue per funeral service was partially offset by
a reduction in trust earnings recognized upon the delivery of preneed funerals, resulting from
lower investment returns realized in our preneed funeral trusts during previous years, and by an
increase in the proportion of non-traditional funerals, including cremations. This resulted in an
overall 2.1 percent increase in the average revenue per funeral service for our same-store
businesses. We believe a number of factors contributed to the increases in our average revenue per
traditional and cremation service. We believe the primary factors were normal inflationary price
increases, more effective merchandising and packaging, our focus on training, customized funeral
planning and personalization and a new funeral home incentive compensation plan. The increase in average revenue per funeral service performed by our same-store businesses was
partially offset by a 0.7 percent decrease in the number of same-store funeral services performed,

or 216 events out of 32,204 total same-store funeral services performed. The comparable period in
2004 included one more day than 2005 due to the fact that 2004 was a leap year. During the first
six months of 2004, we performed approximately 200 calls per day. After adjusting the 2004 results
for the extra day, we would have performed approximately the same number of funeral services for
the six months ended April 30, 2005 as the previous year. Our data indicates that we have
experienced increases in market share in some markets and decreases in others, resulting in an
overall slight increase in market share. Funeral gross profit margin from continuing operations decreased from 30.2 percent in the
first half of fiscal year 2004 to 26.3 percent in the first half of fiscal year 2005. Funeral
costs from continuing operations for the six months ended April 30, 2004 do not include $2.2
million of net preneed selling costs associated with the accounting change as described above.
Including these costs, the pro forma funeral gross profit margin from continuing operations would
have been 28.7 percent for the six months ended April 30, 2004. The remaining decrease in our
funeral margin is primarily due to a $1.8 million charge related to prior period operating leases
recorded during the second quarter of 2005 combined with the decline in trust earnings described
above and increased health insurance costs. See Note 1(s) to the condensed consolidated financial
statements for additional information on the lease accounting adjustment. The cremation rate for
our same-store operations was 36.9 percent for the six months ended April 30, 2005 compared to 36.5
percent for the corresponding period in 2004. 59




---



##### Table of Contents



Cemetery Segment Six Months EndedApril 30,
    
    
    Increase2005
    
    
    2004
    
    
    (Decrease)(In millions)Total Cemetery Revenue
    
    $
    115.8
    
    
    $
    115.5
    
    
    $
    .3Total Cemetery Costs
    
    
    88.7
    
    
    
    85.9
    (1)
    
    
    2.8
    (1)Total Cemetery Gross Profit
    
    $
    27.1
    
    
    $
    29.6
    (1)
    
    $
    (2.5
    ) (1)
   (1)
    
    Cemetery costs from continuing operations for the six months ended April 30, 2004 do
not include net preneed selling costs of $1.0 million which would have been expensed if the
accounting change described above had been implemented in fiscal year
2004. Had we included these
costs in 2004, cemetery gross profit from continuing operations for the six months ended April 30,
2005 would have decreased $1.5 million from $28.6 for the six months ended April 30, 2004. Cemetery revenue from continuing operations increased $0.3 million, or 0.3 percent, for the
six months ended April 30, 2005, compared to the corresponding period in 2004, primarily due to an
increase in cemetery property sales, offset by a reduction in perpetual care trust earnings and a
decrease in revenue associated with the construction of cemetery projects. Revenue related to the
sale of cemetery property prior to its construction is recognized on a percentage of completion
method of accounting as construction occurs. Cemetery property sales increased 3.9 percent in the
first half of fiscal year 2005 compared to the first half of fiscal year 2004. We believe this
increase can be attributed to the implementation of our growth strategies as discussed in the
section Three Months Ended April 30, 2005 Compared to Three Months Ended April 30, 2004  Cemetery
Segment. We experienced an annualized average return, excluding unrealized gains and losses, of 3.4
percent in our perpetual care trusts for the six months ended April 30, 2005 resulting in revenue
of $2.7 million, compared to 4.6 percent for the corresponding period in 2004 resulting in revenue
of $4.6 million. Cemetery gross profit margin from continuing operations decreased from 25.6 percent in the
first half of fiscal year 2004 to 23.4 percent in the first half of fiscal year 2005. Cemetery
costs from continuing operations for the six months ended April 30, 2004 do not include $1.0
million of net preneed selling costs associated with the accounting change as described above.
Including these costs, the pro forma cemetery gross profit margin from continuing operations would
have been 24.8 percent for the six months ended April 30, 2004. This decline resulted from a
decrease in perpetual care trust earnings as discussed above and increased health insurance costs. Discontinued Operations The operating results of those businesses that meet the discontinued operations criteria in
SFAS No. 144 are reported in the discontinued operations section of the consolidated statements of
earnings. Included in discontinued operations for the six months ended April 30, 2005 and 2004
were net gains on dispositions of $0.3 million and $1.3 million, respectively. Revenues for the
six months ended April 30, 2005 were $0.2 million compared to $8.0 million in the same period in
2004. Income tax expense for our discontinued operations for the six months ended April 30, 2005
were $0.1 million compared to an income tax benefit of $0.3 million for the same period in 2004. Other Corporate general and administrative expenses for the six months ended April 30, 2005
increased $0.3 million compared to the same period in 2004 primarily due to increased professional
fees associated with our Sarbanes-Oxley Section 404 compliance effort. In December 2003, we announced a reduction and restructuring of our workforce. For the six
months ended April 30, 2004, we recorded $2.1 million for severance and other costs associated with
the workforce reductions, 60




---



##### Table of Contents



which is presented in the Separation charges line item in the condensed consolidated statements
of earnings. The workforce reduction plan was completed June 1, 2004. Total depreciation and amortization was $10.8 million for the first half of fiscal year 2005
compared to $25.5 million for the same period in 2004. Depreciation and amortization from
continuing operations was $10.8 million for the first half of fiscal year 2005 compared to $25.2
million for the same period in 2004. Amortization in fiscal year 2004 included $13.8 million of
deferred selling costs. Effective November 1, 2004, we changed our accounting principle for
selling costs related to preneed funeral and cemetery service and merchandise sales, and we no
longer amortize these costs but rather expense them as incurred. Interest expense decreased $7.5 million to $17.0 million for the six months ended April 30,
2005 compared to $24.5 million for the same period in 2004 primarily due to a 203 basis point
decrease in the average interest rate during the period resulting from recent debt refinancings,
combined with a $56.5 million decrease in average debt outstanding. During the fourth quarter of fiscal year 2003, we identified a number of small businesses to
close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair
values, resulting in an impairment charge. For the six months ended April 30, 2005, we evaluated
our long-lived assets, reduced the 2003 impairment charge by $0.1 million and sold several assets
that we held for sale at a net gain of $1.0 million. The net effect was that we reported net gains
on dispositions and impairment (losses) of $1.1 million in continuing operations for the six months
ended April 30, 2005, compared to $0.3 million for the same period in 2004. These charges are
presented in the Gains on dispositions and impairment (losses), net line item in the consolidated
statements of earnings. Other operating income net, was $0.5 million for the six months ended April 30, 2005 compared
to $0.9 million for the six months ended April 30, 2004. Investment and other income (expense), net, increased $1.3 million from an expense of $1.1
million for the six months ended April 30, 2004 to income of $0.2 million for the six months ended
April 30, 2005. The $1.1 million expense for the six months ended April 30, 2004 was primarily
comprised of a write-down of certain marketable securities, which had market value losses that were
deemed to be other than temporary. The effective tax rate for our continuing operations for the six months ended April 30, 2005
was 44.5 percent compared to 37.6 percent for the same period in 2004. The change in the effective
rate in 2005 compared to 2004 is primarily due to the tax benefit on the early extinguishment of
debt, which was treated separately from the tax expense associated with ordinary income that was
computed at 38.0 percent. The tax benefit on the early extinguishment of debt was calculated at
36.0 percent because of an expected reduced state benefit. On May 31, 2005, we changed our method of accounting for selling costs incurred related to new
preneed funeral and cemetery service and merchandise sales. As of November 1, 2004, we recorded a
cumulative effect of change in accounting principle of $234.5 million pretax, $141.3 million after
tax (net of income tax benefit of $93.2 million) or $1.29 per diluted share, which represents the
cumulative balance of deferred preneed selling costs in the deferred charges line in the condensed
consolidated balance sheet at the time of the change. See Note 2(a) to the condensed consolidated
financial statements for additional information. As of April 30, 2005 and May 31, 2005, our outstanding debt totaled $418.5 million and $418.4
million, respectively. Of the total debt outstanding as of April 30, 2005, approximately 49
percent was subject to fixed rates averaging 6.3 percent, and 51 percent was subject to short-term
variable rates averaging approximately 4.6 percent. For the six months ended April 30, 2005, we
recorded charges for the early extinguishment of debt of $32.7 million ($20.9 million after tax, or
$.19 per share) related to the two debt refinancings in fiscal year 2005. See the section entitled
Three Months Ended April 30, 2005 Compared to Three Months Ended April 30, 2004  Other for
further information. Preneed Sales into and Deliveries out of the Backlog 61




---



##### Table of Contents



During the six months ended April 30, 2005 as compared to the same period in 2004, we
increased preneed funeral sales 8 percent. We believe this can be attributed in part to our growth
strategies as discussed in the section Three Months Ended April 30, 2005 Compared to Three Months
Ended April 30, 2004  Preneed Sales into and Deliveries out of the Backlog. The revenues from our preneed funeral and cemetery merchandise and service sales are deferred
into our backlog and are not included in our operating results presented above. We added $83.7
million in preneed sales to our funeral and cemetery merchandise and services backlog (including
$35.4 million related to insurance-funded preneed funeral contracts) during the six months ended
April 30, 2005 to be recognized in the future (net of cancellations) as these prepaid products and
services are delivered, compared to $78.9 million (including $30.8 million related to
insurance-funded preneed funeral contracts) for the corresponding period in 2004. Revenues
recognized on deliveries out of our preneed funeral and cemetery merchandise and services backlog,
including accumulated trust earnings related to these preneed deliveries, amounted to $84.7 million
for the six months ended April 30, 2005, compared to $85.8 million for the corresponding period in
2004, resulting in net reductions in the backlog of $1.0 million and $6.9 million for the six
months ended April 30, 2005 and 2004, respectively. Liquidity and Capital Resources Cash Flow Our operations provided cash of $29.0 million for the six months ended April 30, 2005,
compared to $60.9 million for the corresponding period in 2004. The 2004 amount includes a $33.2
million tax refund received during the first quarter of 2004 resulting from a change in tax
accounting methods for cemetery merchandise revenue. The reduction in cash flow from operations
primarily resulted from the tax refund received during the first quarter of 2004. Our investing activities resulted in a net cash outflow of $6.8 million for the six months
ended April 30, 2005, compared to a net cash inflow of $1.7 million for the comparable period in
2004. For the six months ended April 30, 2005, capital expenditures amounted to $13.0 million,
which included $8.3 million for maintenance capital expenditures, $1.6 million for growth
initiatives and $3.1 million related to a building we purchased which was previously leased,
compared to capital expenditures of $8.3 million in the same period in 2004, which included $7.1
million for maintenance capital expenditures and $1.2 million for growth initiatives. Our financing activities resulted in a net cash outflow of $25.3 million for the six months
ended April 30, 2005, compared to $54.1 million for the comparable period in 2004. The change was
due primarily to net proceeds of long-term debt of $1.7 million in the six months ended April 30,
2005 (which includes $440.0 million in proceeds of long-term debt and $438.3 million in repayments
of long-term debt), compared to repayments of $48.2 million in the comparable period of 2004. We
used the $33.2 million tax refund included in operating cash flow to reduce our outstanding Term
Loan B in the first quarter of fiscal year 2004. Contractual Obligations and Commercial Commitments As of April 30, 2005, our outstanding debt balance was $418.5 million. The following table
details our known future cash payments (in millions) related to various contractual obligations as
of April 30, 2005. Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    
    1 Year
    
    
    1-3 Years
    
    
    3-5 Years
    
    
    5 YearsLong-term debt obligations (1)
    
    $
    418.5
    
    
    $
    5.1
    
    
    $
    5.6
    
    
    $
    4.5
    
    
    $
    403.3Interest on long-term debt (2)
    
    
    164.3
    
    
    
    22.9
    
    
    
    45.0
    
    
    
    44.4
    
    
    
    52.0Operating lease obligations (3)
    
    
    36.6
    
    
    
    2.3
    
    
    
    7.9
    
    
    
    6.8
    
    
    
    19.6Non-competition and other agreements (4)
    
    
    8.2
    
    
    
    2.1
    
    
    
    4.0
    
    
    
    1.5
    
    
    
    .6$
    627.6
    
    
    $
    32.4
    
    
    $
    62.5
    
    
    $
    57.2
    
    
    $
    475.5
 62




---



##### Table of Contents



(1)
    
    See below for a breakdown of our future scheduled principal payments and maturities
of our long-term debt by type as of May 31, 2005.(2)
    
    Includes contractual interest payments for our revolving credit facility, Term Loan
B, senior subordinated notes, senior notes and third-party debt. The interest on the
revolving credit facility and Term Loan B was calculated based on interest rates in effect as
of April 30, 2005.(3)
    
    Our noncancellable operating leases are primarily for land and buildings and expire
over the next one to 15 years, except for six leases that expire between 2032 and 2039. Our
future minimum lease payments as of April 30, 2005 are $2.3 million, $4.2 million, $3.7
million, $2.9 million, $3.9 million and $19.6 million for the years ending October 31, 2005,
2006, 2007, 2008, 2009 and later years, respectively.(4)
    
    We have entered into non-competition agreements with prior owners and key employees
of acquired subsidiaries that expire through 2012. This category also includes separation pay
related to three former executive officers. We expect to be able to reduce our debt with approximately $10 million of remaining income tax
benefits related to the sale of our foreign operations which we expect to receive by the end of
fiscal year 2007. In February 2005, we used the net proceeds of the issuance of $200.0 million of our 6.25
percent senior notes, an additional $130.0 million in Term Loan B borrowings and a portion of our
available cash to complete a tender offer pursuant to which we repurchased $298.2 million of our
10.75 percent senior subordinated notes and paid related tender premiums, fees, expenses and
accrued interest of $28.9 million. For additional information, see Note 14 to the condensed
consolidated financial statements. As of May 31, 2005, our outstanding debt balance was $418.4
million, consisting of $214.2 million in Term Loan B, $200.0 million of 6.25 percent senior notes,
$1.8 million of 10.75 percent senior subordinated notes and $2.4 million of other debt. There were
no amounts drawn on the revolving credit facility. The following table reflects future scheduled
principal payments and maturities of our long-term debt (in millions) as of May 31, 2005. Other,PrincipallySellerFiscal
    
    Revolving
    
    
    
    
    
    
    Senior
    
    
    
    
    
    
    Financing ofYear Ending
    
    Credit
    
    
    Term
    
    
    Subordinated
    
    
    Senior
    
    
    AcquiredOctober 31,
    
    Facility
    
    
    Loan B
    
    
    Notes
    
    
    Notes
    
    
    Operations
    
    
    Total2005
    
    $
    
    
    
    $
    1.1
    
    
    $
    1.8
    (1)
    
    $
    
    
    
    $
    .5
    
    
    $
    3.42006
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    1.0
    
    
    
    3.22007
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    .6
    
    
    
    2.82008
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    .2
    
    
    
    2.42009
    
    
    
    
    
    
    2.2
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    2.2Thereafter
    
    
    
    
    
    
    204.3
    
    
    
    
    
    
    
    200.0
    
    
    
    .1
    
    
    
    404.4Total long-term debt
    
    $
    
    
    
    $
    214.2
    
    
    $
    1.8
    
    
    $
    200.0
    
    
    $
    2.4
    
    
    $
    418.4
   (1)
    
    The first call date on our remaining senior subordinated notes is July 1, 2005 at a
price of 105.375 percent of the notes principal amount. On May 31, 2005, we gave notice to
the remaining holders of the senior subordinated notes of our intention to call the remaining
$1.8 million principal amount. As such, this amount has been classified as a short-term
obligation in the April 30, 2005 condensed consolidated balance sheet. In the third quarter
of fiscal year 2005, we will record a charge for the early extinguishment of debt of
approximately $0.1 million including the call premium and write-off of the remaining
unamortized fees on the senior subordinated notes. We intend to fund the call of the
remaining notes using excess cash on hand. We also had $15.7 million of outstanding letters of credit as of April 30, 2005 and May 31,
2005, and we are required to maintain a bond of $41.1 million to guarantee our obligations relating
to funds we withdrew from our preneed funeral trusts in Florida. We substituted a bond to
guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit
facilities in an amount that will equal or exceed the bond amount. We 63




---



##### Table of Contents



believe that cash flow from operations will be sufficient to cover our estimated cost of providing
the prearranged services and products in the future. As of April 30, 2005 and May 31, 2005, there were no amounts drawn on our $125.0 million
revolving credit facility. As of April 30, 2005 and May 31, 2005, our availability under the
revolving credit facility, after giving consideration to the aforementioned letters of credit and
bond obligation, was $68.2 million. On March 17, 2005, we substantially completed our $28.0 million stock repurchase program,
having repurchased 4,400,000 shares since the inception of the program. On March 28, 2005, we
announced a new $30.0 million stock repurchase program. Repurchases under the new program are
limited to our Class A common stock and will be 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 this program through May 31, 2005, there have
been no repurchases of our Class A common stock. On March 28, 2005, we announced that our Board of Directors approved the initiation of a
quarterly cash dividend of two and one-half cents per share of common stock. The first dividend
was paid on April 29, 2005 to shareholders of record at the close of business on April 15, 2005.
Although we intend to pay regular quarterly cash dividends for the foreseeable future, the
declaration and payment of future dividends are discretionary and will be subject to determination
by the Board of Directors each quarter after its review of our financial performance. Off-Balance Sheet Arrangements Our off-balance sheet arrangements as of April 30, 2005 consist of the following items:  (1)
    the $41.1 million bond we are required to maintain to guarantee our obligations
relating to funds we withdrew from our preneed funeral trusts in Florida, which is
discussed above and in Note 23 to the consolidated financial statements in our Annual
Report on Form 10-K for the fiscal year ended October 31, 2004; and(2)
    the insurance-funded preneed funeral contracts, which will be funded by life insurance
or annuity contracts issued by third-party insurers, are not reflected in our consolidated
balance sheets, and are discussed in Note 3 to the condensed consolidated financial
statements included herein. Ratio of Earnings to Fixed Charges Our ratio of earnings to fixed charges was as follows: Six MonthsEndedApril 30,
    
    Years Ended October 31,2005
    

2004
    
    

2003
    
    

2002
    
    
    2001
    
    
    20001.49(1)(5)
    
    
    2.38
    (2)
    
    

(3)
    
    
    
    1.73
    (4)
    
    

(5)(6)
    
    
    
    2.54
   (1)
    
    Pretax earnings for the six months ended April 30, 2005 include $1.1 million of
gains on dispositions and impairment (losses), net and a charge of $32.7 million for the loss
on early extinguishment of debt.(2)
    
    Pretax earnings for fiscal year 2004 includes separation charges of $3.4 million for
costs related to workforce reductions and separation pay to a former executive officer and
$0.6 million in gains on dispositions and impairment (losses), net.(3)
    
    Pretax earnings for fiscal year 2003 include a charge of $11.3 million for the loss
on early extinguishment of debt in connection with redemption of the ROARS, a noncash charge
of $73.0 million for goodwill impairment, a noncash charge of $19.0 million for long-lived
asset impairment and a charge of $2.5 million for separation payments to former executive
officers. As a result of these charges, our earnings for the fiscal year ended October 31,
2003 were insufficient to cover our fixed charges, and an additional $54.8 million in pretax
earnings would have been required to eliminate the coverage deficiency. 64




---



##### Table of Contents



(4)
    
    Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million in
connection with the write-down of assets held for sale.(5)
    
    Excludes the cumulative effect of change in accounting principles.(6)
    
    Pretax earnings for fiscal year 2001 include a noncash charge of $269.2 million in
connection with the write-down of assets held for sale and other charges and a $9.1 million
charge for the loss on early extinguishment of debt. As a result of these charges, our
earnings for fiscal year 2001 were insufficient to cover our fixed charges, and an additional
$198.6 million in pretax earnings would have been required to eliminate the coverage
deficiency. For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax
earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges
consist of interest expense, capitalized interest, amortization of debt expense and discount or
premium relating to any indebtedness and the portion of rental expense that management believes to
be representative of the interest component of rental expense. Inflation Inflation has not had a significant impact on our operations over the past three years, nor is
it expected to have a significant impact in the foreseeable future. Recent Accounting Standards See Note 2 to the condensed consolidated financial statements included herein. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosure about market risk is presented in Item 7A in our
Annual Report on Form 10-K for the fiscal year ended October 31, 2004, filed with the Securities
and Exchange Commission on January 11, 2005. The following disclosure discusses only those
instances in which the market risk has changed by more than 10 percent from the annual disclosure. The market risk inherent in our market risk sensitive instruments and positions is the
potential change arising from increases or decreases in the prices of marketable equity securities
and interest rates as discussed below. Generally, our market risk sensitive instruments and
positions are characterized as other than trading. Our exposure to market risk as discussed
below includes forward-looking statements and represents an estimate of possible changes in fair
value or future earnings that would occur assuming hypothetical future movements in equity markets
or interest rates. Our views on market risk are not necessarily indicative of actual results that
may occur and do not represent the maximum possible gains and losses that may occur. Actual gains
and losses, fluctuations in equity markets, interest rates and the timing of transactions may
differ from those estimated. Interest We have entered into various fixed-rate and variable-rate debt obligations, which are detailed
in Note 18 to our consolidated financial statements included in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2004, in Note 14 to the condensed consolidated financial
statements included herein and in the Liquidity and Capital Resources section of our
Managements Discussion and Analysis of Financial Condition and Results of Operations in both
reports. As of April 30, 2005 and October 31, 2004, the carrying values of our long-term fixed-rate
debt, including accrued interest, were approximately $206.9 million and $314.6 million,
respectively, compared to fair values of $198.6 million and $344.7 million, respectively. Fair
values were determined using quoted market prices. Each approximate 10 percent change in the
average interest rates applicable to such debt, 70 basis points and 40 basis points for April 30,
2005 and October 31, 2004, respectively, would result in changes of approximately $8.3 million 65




---



##### Table of Contents



and $0.9 million, respectively, in the fair values of these instruments. If these instruments are
held to maturity, no change in fair value will be realized. Our
variable-rate debt consists of our Term Loan B and revolving credit
facility. As of April 30, 2005 and October 31, 2004, the
carrying value of our Term Loan B was $216.0 million and
$54.0 million, respectively, compared to a fair value of $217.3 million and $54.7 million, respectively.
As of April 30, 2005 there were no amounts drawn on the revolving credit facility, and as of
October 31, 2004, the carrying value and fair value of our revolving credit facility was $59.0
million. None of the $216.0 million outstanding under the Term
Loan B at April 30, 2005 was
hedged. Each approximate 10 percent, or 55 basis-point, change in the average interest rate
applicable to this debt would result in a change of approximately $0.9 million in our pretax
earnings. Of the $113.0 million outstanding under Term Loan B and the revolving credit facility
on October 31, 2004, $63.0 million was not hedged by the interest rate swap in effect at that time
and was subject to short-term variable interest rates. Each approximate 10 percent, or 55
basis-point, change in the average interest rate applicable to this debt would result in a change
of approximately $0.3 million in our pretax earnings. Fair value was determined using quoted
market prices, where applicable, or future cash flows discounted at market rates for similar types
of borrowing arrangements. 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. 
 Item 4. Controls and Procedures Our management, with the participation of our Chief Executive Officer and Chief Financial
Officer, has evaluated the effectiveness of our disclosure controls and procedures (as defined in
Rule 13a-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by
this report. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer
have concluded that our disclosure controls and procedures were effective as of such date. There
have been no changes in our internal control over financial reporting that occurred during our most
recent fiscal quarter that have materially affected, or are reasonably likely to materially affect,
our internal control over financial reporting. 
 PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated
and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961 on the docket of the
Superior Court for the State of California for the County of Los Angeles, Central District. This
purported class action was filed on February 17, 2005, on behalf of a nationwide class defined to
include all persons, entities and organizations who purchased funeral goods and/or services in the
United States from defendants at any time on or after February 17, 2001. The suit names the
Company and several of its Southern California affiliates as defendants and also seeks to assert
claims against a class of all entities located anywhere in the United States whose ultimate parent
corporation has been the Company at any time on or after February 17, 2001. The plaintiffs allege that defendants failed to disclose that the prices charged by defendants
for certain goods and services exceeded what defendants paid to third parties for those same goods
and services and that such failure violated provisions of the Federal Trade Commissions Funeral
Rule that require a funeral home to disclose, if true, that it marks up the price of certain items
purchased from third parties on behalf of customers on a cash advance or accommodation basis.
The plaintiffs allege that by failing to comply with the Funeral Rule, defendants (i) breached
contracts with the plaintiffs, (ii) were unjustly enriched, (iii) engaged in unfair, unlawful and
fraudulent business practices in violation of a provision of Californias Business and Professions
Code, and (iv) engaged in a civil conspiracy among the defendants to breach plaintiffs contracts

and commit acts of unfair competition. The plaintiffs seek restitution damages, disgorgement,
interest, costs, and attorneys fees. The Company was served with 66




---



##### Table of Contents



the complaint on April 7, 2005. By order dated May 5, 2005, the court ruled that this case was
related to similar actions against Service Corporation International and Alderwoods Group, Inc.
Because the matter is in its preliminary stages, the likelihood of liability and the extent of any
damages cannot be reasonably assessed at this time. The Company intends to aggressively defend
itself in this matter. Funeral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods
Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.;
No. C 05 1804 on the docket of the United States District Court, Northern District of California.
This purported class action was filed on May 2, 2005, on behalf of a nationwide class defined to
include all consumers who purchased a Batesville casket from the funeral home defendants. The suit alleges that the defendants acted jointly to fix and maintain prices on caskets and
reduce competition from independent casket discounters in violation of the federal antitrust laws
and Californias Business and Professions Code. The plaintiffs seek treble damages, restitution,
injunctive relief, interest, costs and attorneys fees. The Company was served with the complaint
on May 10, 2005. The Company intends to aggressively defend itself it this matter. Ralph Lee Fancher, on behalf of himself and all others similarly situated v. Service
Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand
Industries, Inc., Aurora Casket Co., York Group, Inc., and Batesville Casket Co.; No. 2:05cv145 on
the docket of the United States District Court, Eastern District of Tennessee. This purported
class action was filed on May 18, 2005, on behalf of consumers in twenty-three states and the
District of Columbia who purchased caskets. The allegations of fact are essentially the same as
those made in Funeral Consumers Alliance, Inc. v Service Corporation Internationalreported above.
Rather than allege violations of federal law, however, the plaintiff in this suit alleges that the
defendants violated state antitrust, consumer protection and/or unjust enrichment laws. The
plaintiff seeks damages, treble damages where appropriate, restitution, interest and costs. The
Company was served with the complaint on May 26, 2005. Because the matter is in its preliminary
stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at
this time. The Company intends to aggressively defend itself in this matter. In addition to the matters above, we and certain of our subsidiaries are parties to a number
of other 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. Unregistered Sales of Equity Securities and Use of Proceeds Purchases of Equity Securities by the Issuer and Affiliated Purchasers Issuer Purchases of Equity Securities Total number of
    
    
    Maximum approximateshares purchased
    
    
    dollar value of sharesTotal number
    
    
    
    
    
    
    as part of
    
    
    that may yet beof shares
    
    
    Average price
    
    
    publicly-announced
    
    
    purchased under thePeriod
    
    purchased(1)
    
    
    paid per share
    
    
    plans or programs(2)
    
    
    plans or programsFebruary 1, 2005 through
February 28, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    5,783,509March 1, 2005
through March 31, 2005
    
    
    900,669
    
    
    $
    6.28
    
    
    
    900,000
    
    
    $
    30,129,265
 67




---



##### Table of Contents



Total number of
    
    
    Maximum approximateshares purchased
    
    
    dollar value of sharesTotal number
    
    
    
    
    
    
    as part of
    
    
    that may yet beof shares
    
    
    Average price
    
    
    publicly-announced
    
    
    purchased under thePeriod
    
    purchased(1)
    
    
    paid per share
    
    
    plans or programs(2)
    
    
    plans or programsApril 1, 2005 through
April 30, 2005
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    30,129,265Total
    
    
    900,669
    
    
    $
    6.28
    
    
    
    900,000
    
    
    $
    30,129,265
   (1)
    
    Consists of shares repurchased from employees to satisfy the exercise price and tax
withholding of certain stock option exercises and share repurchases under our stock repurchase
program.(2)
    
    On June 26, 2003, we announced that our Board of Directors had approved a stock
repurchase program that allows us to invest up to $25.0 million in repurchases of our Class A
common stock. In June 2004, the Board of Directors increased the program limit by an
additional $3.0 million to $28.0 million. On March 17, 2005, we substantially completed our
$28.0 million stock repurchase program, having repurchased 4,400,000 shares since its
inception. On March 28, 2005, we announced a new $30.0 million stock repurchase program.
Repurchases under the new program 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 new program through April 30, 2005, we have not repurchased any shares. 
 Item 4. Submission of Matters to a Vote of Security Holders Our 2005 annual meeting of shareholders was held on April 5, 2005. All director nominees were
elected. The voting tabulation was as follows: James W. McFarland: 124,560,308 votes for,
3,044,364 votes withheld; Kenneth C. Budde: 123,872,499 votes for, 3,732,173 votes withheld; Alden
J. McDonald, Jr.: 124,355,813 votes for, 3,248,859 votes withheld: John C. McNamara: 123,974,905
votes for, 3,629,767 votes withheld. The proposal to ratify the retention of
PricewaterhouseCoopers LLP as independent registered public accounting firm for the fiscal year
ending October 31, 2005 was approved. The voting tabulation was as follows: 125,369,379 votes for,
609,362 votes against and 1,625,931 abstentions. The proposal to adopt the 2005 Directors Stock
Plan was approved. The voting tabulation was as follows: 102,846,931 votes for, 6,126,695 votes
against and 246,576 abstentions. 
 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 ability to control costs and maintain our
margins, (6) our current plans for deployment of our projected cash flow, (7) the success and
timing of selling the small businesses designated as held for sale and (8) our ability to realize
the carrying value of our deferred tax assets. The financial forecasts included in this Form 10-Q have been prepared by, and are the
responsibility of, our management. PricewaterhouseCoopers LLP has neither examined nor compiled
the financial forecasts and, accordingly, PricewaterhouseCoopers LLP does not express an opinion or
any other form of assurance with respect thereto. 68




---



##### Table of Contents



Accuracy of the forecasts is dependent upon assumptions about events that change over time and
is thus susceptible to periodic change based on actual experience and new developments. The
forecasts are based on a variety of estimates and assumptions made by our management with respect
to, among other things, industry performance; general economic, market, industry and interest rate
conditions; preneed and at-need sales activities and trends; fluctuations in cost of goods sold and
other expenses; capital expenditures; and other matters that cannot be accurately predicted, may
not be realized and are subject to significant business, economic and competitive uncertainties,
all of which are difficult to predict and many of which are beyond our control. Accordingly, there
can be no assurance that the assumptions made in preparing the forecasts will prove accurate, and
actual results may vary materially from those contained in the forecasts. For these reasons, the
forecasts should not be regarded as an accurate prediction of future results, but only of results
that may be obtained if substantially all of our principal expectations are realized. We caution readers that we assume no obligation to update or publicly release any revisions to
forward-looking statements made herein or any other forward-looking statements made by us or on our
behalf. We
forecast that earnings from continuing operations will be in the
range of $.23 to $.27 per diluted share including three early extinguishment of debt charges estimated to total $.19 per share. We
expect cash flow from operations in fiscal year 2005 to be between $50 million and $60 million.
Maintenance capital expenditures are expected to be between $16 million and $18 million. Our 2005 forecast for continuing operations is based on the following principal assumptions:  (1)
    The average revenue per traditional and cremation funeral service performed is
expected to increase by approximately 2 percent to 3 percent, excluding any impact from
funeral trust earnings. Increases in average revenue per funeral service performed may be
partially offset by a decrease in the number of families served by continuing operations
in 2005 as compared to 2004. The upper end of the forecast range assumes that these
businesses will serve the same number of families during fiscal year 2005 as in 2004, and
the lower end assumes a possible reduction in the number of families served of up to 2
percent.(2)
    Cemetery property sales are expected to increase by 4 percent to 8 percent.(3)
    Total revenue from trust earnings, including earnings recognition from funeral,
cemetery merchandise and perpetual care trusts, is expected to be down from that
recognized in 2004.(4)
    While we intend to control costs, we do not anticipate further cost cuts as
significant as those implemented in 2004.(5)
    As a result of refinancing the senior secured credit facility in November 2004 and
refinancing substantially all of our 10.75 percent senior subordinated notes in February
2005, combined with continued debt reduction, interest expense is expected to decrease
significantly for fiscal year 2005. During the first half of fiscal year 2005, we
recorded charges for the early extinguishment of debt of $32.7 million and expect to incur
approximately $0.1 million during the third quarter of fiscal year 2005 related to the
redemption of the remaining $1.8 million in senior subordinated notes.(6)
    Cash flow for fiscal year 2005 is expected to be consistent with fiscal year 2004 with the
exception of the tax refund of $33.2 million received during fiscal year 2004.(7)
    We expect to use cash flow from operations to maintain our facilities at a level comparable
to 2004, for dividends and stock repurchases, to further reduce debt or for growth initiatives
as appropriate.(8)
    We expect to spend approximately $2.0 million on our Sarbanes Oxley Section 404
compliance effort. This represents external costs and does not include personnel allocated to
the project. These forecasts for continuing operations exclude the results of a number of small businesses
that we have closed or sold, the results of which will be reported separately as discontinued
operations as appropriate in future reports. Cautionary Statements 69




---



##### Table of Contents



We caution readers that the following important factors, among others, in some cases have
affected, and in the future, could affect, our actual consolidated results and could cause our
actual consolidated results in the future to differ materially from the goals and expectations
expressed in the forward-looking statements above and in any other forward-looking statements made
by us or on our behalf. Risks Related to Our Business We have experienced a decline in funeral call volume due to many factors, such as the number of
deaths and competition in our markets, our ability to identify changing consumer preferences and
various other factors, some of which are beyond our control. We have experienced declines in same-store funeral call volumes for a number of years due to
many factors described elsewhere herein including the number of deaths, intense competition and our
ability to identify changing consumer preferences. From fiscal years 2001 to 2002 and 2002 to 2003,
same-store funeral call volumes decreased 1.5 percent and 2.6 percent, respectively. One of the
operating initiatives announced in 2003 was the creation of a funeral call volume task force, which
is using the most successful tactics of our top performing funeral homes to develop strategies to
drive funeral call growth throughout our organization with an increased focus on preneed funeral
sales. Nevertheless, we experienced a decline in same-store funeral call volumes from fiscal year
2003 to 2004 of 1.0 percent. We have experienced a decrease of 0.7 percent in same-store funeral
call volumes during the six months ending April 30, 2005, as compared to the prior year. We can
give no assurance that we will be successful in implementing the operating initiative described
above in the long term or that it will succeed in stopping or reversing the decline in same-store
funeral call volumes. We may experience declines in preneed sales due to numerous factors, including changes made to
contract terms and sales force compensation and a weakening economy. Declines in preneed property
sales would reduce current revenue. Declines in preneed funeral and cemetery service and
merchandise sales would reduce our backlog and could reduce our future market share. We do not anticipate making significant changes in our preneed sales organization, but we may
decide that adjustments are advisable, which could cause declines in preneed sales. We experienced
a decline in cemetery property sales in Puerto Rico during the first quarter of fiscal year 2005.
We addressed this by dividing the responsibility from one sales executive on the island to three,
allowing them to better focus on our primary markets. We experienced significant improvement in our
preneed sales in Puerto Rico in the second quarter of fiscal year 2005. We can give no assurance
that they will continue to be successful in improving preneed sales. In addition, a weakening
economy that causes customers to reduce discretionary spending could cause, and we believe has
caused in the past, a decline in preneed sales. Geopolitical concerns could lower consumer
confidence, which could also result in a decline in preneed sales. Declines in preneed cemetery
property sales would reduce current revenue, and declines in other preneed sales would reduce our
backlog and future revenue and could reduce future market share. Price competition could reduce market share or cause us to reduce prices to retain or recapture
market share, either of which could reduce revenues and margins. Our funeral home and cemetery operations generally face intense competition in local markets
that typically are served by numerous funeral homes and cemetery firms. We have historically
experienced price competition primarily from independent funeral home and cemetery operators, and
from monument dealers, casket retailers, low-cost funeral providers and other non-traditional
providers of services or products including, in recent years, Internet providers. From time to
time, this price competition has resulted in losing market share in some markets. In other
markets, we have had to reduce prices thereby reducing profit margins in order to retain or
recapture market share. Increased price competition in the future could further reduce revenues,
profit margins and the backlog and potentially impact our annual goodwill impairment analysis. 70




---



##### Table of Contents



Discount retailers have begun marketing caskets at prices sometimes lower than what we offer.
Consumers can now buy caskets in funeral supply stores and directly from manufacturers, as well as
over the Internet, and recently, the first large general merchandise company has entered the market
for low-cost caskets. This could cause sales of caskets at our facilities to decrease, which could
adversely affect funeral revenues and margins. Increased advertising or better marketing by competitors, or increased activity by competitors
offering products or services over the Internet, could cause us to lose market share and revenues
or cause us to incur increased costs in order to retain or recapture our market share. In recent years, the marketing of preneed funeral services through television, radio and print
advertising, direct mailings and personal sales calls has increased. Extensive advertising or
effective marketing by competitors in local markets could cause us to lose market share and
revenues or cause us to increase marketing costs. In addition, competitors may change the types or
mix of products or services offered. These changes may attract customers, causing us to lose
market share and revenue or to incur costs in response to competition in order to vary the types or
mix of products or services offered by us. Also, increased use of the Internet by customers to
research and/or purchase products and services could cause us to lose market share to competitors
offering to sell products or services over the Internet. We do not currently sell products or
services over the Internet. If we are not able to respond effectively to changing consumer preferences, our market share,
revenues and profitability could decrease. Future market share, revenues and profits will depend in part on our ability to anticipate,
identify and respond to changing consumer preferences. During fiscal year 2000, we began to
implement strategies based on a proprietary, extensive study of consumer preferences we
commissioned in 1999. However, we may not correctly anticipate or identify trends in consumer
preferences, or we may identify them later than our competitors do. In addition, any strategies we
may implement to address these trends may prove incorrect or ineffective. Earnings from and principal of trusts and escrow accounts could be reduced by changes in stock and
bond prices and interest and dividend rates or by a decline in the size of the funds. We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and
services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Earnings
and investment gains and losses on trusts and escrow accounts are affected by financial market
conditions that are not within our control. Earnings are also affected by the mix of fixed-income
and equity securities that we choose to maintain in the trusts, and we may not choose the optimal
mix for any particular market condition. The size of the trusts depends upon the level of preneed
sales and maturities, the amount of ordinary income and investment gains or losses and funds added
through acquisitions, if any. Declines in earnings from cemetery perpetual care trusts would cause
a decline in current revenues, while declines in earnings from other trusts and escrow accounts
could cause a decline in future cash flows and revenues. In addition, any significant or sustained
investment losses could result in there being insufficient funds in the trusts to cover the cost of
delivering services and merchandise or maintaining cemeteries in the future. Any such deficiency
would have to be covered by cash flow, which could have a material adverse effect on our financial
position and results of operations. Unrealized gains and losses in the preneed funeral and cemetery merchandise and services
trusts have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair
market value of the trusts were to decline below the estimated costs to deliver the underlying
products and services. If that were to occur, we would record a charge to earnings to record a
liability for the expected losses on the delivery of the associated contract. Over time, gains and
losses realized in the trusts are allocated to underlying preneed contracts and affect the amount
of the trust earnings we record when we deliver the underlying products or services. Accordingly,
if current market conditions do not improve, the trusts may eventually realize losses, and our
revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue when
we deliver the underlying products and services. 71




---



##### Table of Contents



This factor adversely affected our results in fiscal year 2004 and did so again in the first
half of fiscal year 2005. Unrealized gains and losses in the cemetery perpetual care trusts do not
affect earnings but could limit the capital gains available to us and could result in lower returns
and lower current revenues than we have historically achieved. Increased preneed sales may have a negative impact on cash flow and earnings. Preneed sales of cemetery property and funeral and cemetery products and services are
generally cash flow negative initially, primarily due to the commissions and other costs to acquire
the sale, the portion of the sales proceeds required to be placed into trusts or escrow accounts
and the terms of the particular contract, such as the size of the down payment required and the
length of the contract. 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. With the change in accounting for preneed funeral and cemetery
merchandise and service sales, preneed selling costs will be expensed as incurred. Therefore,
increases in preneed spending would increase our costs and decrease earnings. Conversely,
decreases in preneed spending would decrease costs and increase earnings. Increased costs may have a negative impact on earnings and cash flows. During fiscal year 2004, we reduced funeral, cemetery and corporate general and administrative
expenses, primarily through a reduction in our workforce. While we intend to continue to control
costs, we do not anticipate any further significant cost cuts. We may not be successful in
maintaining our margins and may incur additional costs. Insurance costs, in particular, have increased substantially in recent years. The terrorist
attacks in the United States on September 11, 2001 and related subsequent events have resulted in
higher insurance premiums. The volume of claims made in such a short span of time resulted in
liquidity challenges that many insurers have passed on to their policyholders. Insurers have
increased premiums to offset losses in equity markets due to recent economic conditions.
Additionally, we have experienced increases in health insurance costs. Additional increases in
insurance costs cannot be predicted. Our ability to dispose of our businesses at prices consistent with our expectations depends on
several factors, many of which are beyond our control. Any changes in expected sales prices or
carrying values of these businesses could result in additional impairment charges or could
adversely affect our ability to sell these businesses at prices we are willing to accept. In December 2003, we announced plans to close or sell a number of small businesses, primarily
small funeral homes, most of which were acquired as part of a group of facilities, that were
performing below acceptable levels or no longer fit our operating profile. We believe that the
closing or sale of those businesses will enable management to focus on our most productive
operations where our operating initiatives may bring about the greatest benefits in increased
revenues. As of April 30, 2005, we had closed on or entered into preliminary agreements to sell 71
businesses for approximately $28.7 million and have 6 additional businesses we will continue to
market. We can give no assurance that we will be able to dispose of these businesses or that
buyers will accept our terms, nor can we give any assurance that the selling prices of these
businesses will not be materially different from our expectations. Any variance between the
anticipated and actual sale prices or changes in the carrying values of these businesses would
result in additional impairment charges in the future and did result in gains on dispositions, net
of impairment losses, recorded in 2004. Our Chairman Emeritus may have a significant and disproportionate influence on the outcome of
election of directors and other matters presented for a vote of shareholders and this control may
be exercised in a manner that may conflict with the interests of shareholders. 72




---



##### Table of Contents



As of January 1, 2005, our Chairman Emeritus, Frank B. Stewart, Jr., held 7,225,274 shares (or
approximately 6.8 percent) of our outstanding Class A common stock and all of the 3,555,020
outstanding shares of our Class B common stock. Because each share of Class B common stock is
entitled to 10 votes on all matters presented for a vote by our shareholders, Mr. Stewart controls
approximately 30.2 percent of our total voting power, while holding approximately 9.8 percent of
our outstanding equity. Accordingly, Mr. Stewart may have a significant and disproportionate
influence over the election of directors and other matters requiring the affirmative vote of our
shareholders and this control may be exercised in a manner that may conflict with the interest of
shareholders. Additionally, because Louisiana law and our articles of incorporation require the
affirmative vote of two-thirds of the voting power present to approve certain major transactions
and any amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent
the consummation of such actions, even if they are recommended by our Board of Directors and
favored by a substantial majority of our shareholders. Servicing our debt will require a significant amount of cash, and our ability to generate
sufficient cash depends on many factors, some of which are beyond our control. Our ability to make payments on and to refinance our debt depends on our ability to generate
cash flow. This, to a significant extent, is subject to general economic, financial, competitive,
legislative, regulatory and other factors that are beyond our control. In addition, our ability to
borrow funds in the future to make payments on our debt will depend on our meeting the financial
covenants in our senior secured credit facility and other debt agreements we may have in the
future. Our business may not generate cash flow from operations, and future borrowings may not be
available to us under our senior secured credit facility or otherwise in an amount sufficient to
enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance
all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt
on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our debt
on favorable terms could have a material adverse effect on our financial condition. Increases in interest rates would increase interest costs on our variable-rate long-term debt and
could have a material adverse effect on our net income and earnings per share. Amounts borrowed under the senior secured credit facility are subject to variable interest
rates. Any significant increase in interest rates could increase our interest costs on our
variable-rate long-term debt or indebtedness incurred in the future, which could decrease our net
income and earnings per share materially. Covenant restrictions under our senior secured credit facility and our 6.25 percent senior note
indenture may limit our ability to operate our business. Our senior secured credit facility and the indenture governing the 6.25 percent senior notes
contain, among other things, covenants that restrict our and our subsidiaries activities. Our
senior secured credit facility limits, among other things, our and the guarantors ability to:
borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in
transactions with affiliates; engage in sale and leaseback transactions; consummate specified asset
sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or
substantially all of our assets; and create liens on our assets. In addition, our senior secured
credit facility contains specific limits on capital expenditures. Furthermore, our senior secured
credit facility requires us to maintain specified financial ratios and satisfy financial condition
tests. The indenture governing the 6.25 percent senior notes restricts our and the guarantors
ability to create liens on assets, enter into sale and leaseback transactions and merge or
consolidate with other companies. Our and our subsidiaries future indebtedness may contain similar
or even more restrictive covenants. These covenants may require that we take action to reduce our debt or to act in a manner
contrary to our business objectives. In addition, events beyond our control, including changes in
general economic and business conditions, may affect our ability to satisfy these covenants. We
might not meet those covenants, and the lenders might not waive any failure to meet those
covenants. A breach of any of those covenants could result in a default 73




---



##### Table of Contents



under such indebtedness. If an event of default under our senior secured credit facility occurs,
the lenders could elect to declare all amounts outstanding thereunder, together with accrued
interest, to be immediately due and payable. Any such declaration would also result in an event of
default under the indenture governing the 6.25 percent senior notes. Our projections do not include any earnings from acquisition activity. Several important factors,
among others, may affect our ability to consummate acquisitions. Although we have not made any significant acquisitions in recent years, we may in the future.
Any such acquisitions have risks. We may fail to identify suitable acquisition candidates, and even
if we do, acquisitions may not be completed on acceptable terms or successfully integrated into our
existing business. We may not be able to find businesses for sale at prices we are willing to pay.
Acquisition activity, if any, will also depend on our ability to enter new markets. Due in part
to our lack of experience operating in new areas and to the presence of competitors who have been
in certain markets longer than we have, such entry may be more difficult or expensive than we
anticipate. Failure to achieve and maintain effective internal controls in accordance with Section 404 of the
Sarbanes-Oxley Act could have a material adverse effect on our internal control over financial
reporting, which could impact the market price of our common stock and our access to capital. We are in the process of completing our documentation and beginning the testing of our
internal control procedures in order to satisfy the requirements of Section 404 of the
Sarbanes-Oxley Act, which requires managements assessments of the effectiveness of internal
controls over financial reporting as of the end of our fiscal year 2005 and a report by our
independent registered public accounting firm addressing managements assessments and the
effectiveness of the internal controls as of that date. During the course of testing, we may
identify deficiencies and weaknesses. The timing of the identification of any deficiencies or
weaknesses could cause management to be unable to conclude that our internal controls are effective
as of the end of fiscal year 2005 or our auditors to be unable to give a favorable report on
managements assessments. This could have a material adverse effect on the market price of our
common stock and possibly on our access to capital. Risks Related to the Death Care Industry Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the
number of deaths are not predictable from market to market or over the short term. Declines in the number of deaths could cause at-need sales of funeral and cemetery services,
property and merchandise to decline, which could decrease revenues. This factor adversely affected
our results in fiscal year 2004. 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 74




---



##### Table of Contents



not necessarily comparable with the markets in which we operate. The increasing number of cremations in the United States could cause revenues to decline because we
could lose market share to firms specializing in cremations. In addition, basic cremations produce
no revenues for cemetery operations and lesser funeral revenues and, in certain cases, lesser
profit margins than traditional funerals. Our traditional cemetery and funeral service operations face competition from the increasing
number of cremations in the United States. Industry studies indicate that the percentage of
cremations has steadily increased and that cremations will represent approximately 35 percent of
the deaths in the United States by the year 2010, compared to 28 percent in 2002. In fiscal years
2002, 2003, 2004 and the first half of fiscal year 2005, 35 percent, 36 percent, 37 percent and 37
percent, respectively, of the funeral services we performed in our continuing operations were
cremations. The trend toward cremation could cause cemeteries and traditional funeral homes to
lose market share and revenues to firms specializing in cremations. In addition, basic cremations
(with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no
revenues for cemetery operations and lower revenues than traditional funerals and, when delivered
at a traditional funeral home, produce lower profit margins as well. Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative
changes in revenue can have a disproportionately large effect on cash flow and profits. Funeral homes and cemetery businesses must incur many of the costs of operating and
maintaining facilities, land and equipment regardless of the level of sales in any given period.
For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes
and maintain the grounds of cemeteries regardless of the number of funeral services or interments
performed. Because we cannot decrease these costs significantly or rapidly when we experience
declines in sales, declines in sales can cause margins, profits and cash flow to decline at a
greater rate than the decline in revenues. Changes or increases in, or failure to comply with, regulations applicable to our business could
increase costs or decrease cash flows. The death care industry is subject to extensive regulation and licensing requirements under
federal, state and local laws. For example, the funeral home industry is regulated by the Federal
Trade Commission, which requires funeral homes to take actions designed to protect consumers.
State laws impose licensing requirements and regulate preneed sales. Embalming facilities are
subject to stringent environmental and health regulations. Compliance with these regulations is
burdensome, and we are always at risk of not complying with the regulations. In addition, from time to time, governments and agencies propose to amend or add regulations,
which could increase costs or decrease cash flows. For example, federal, state, Puerto Rican and
other regulatory agencies have considered and may enact additional legislation or regulations that
could affect the death care industry. Several jurisdictions and regulatory agencies have
considered or are considering regulations that could require more liberal refund and cancellation
policies for preneed sales of products and services, limit or eliminate our ability to use surety
bonding, impose or increase trust requirements and prohibit the common ownership of funeral homes
and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions
in which we operate, these and other possible proposals could have a material adverse effect on us,
our financial condition, our results of operations, our cash flows and our future prospects. 75




---



##### Table of Contents



Item 6. Exhibits  (a)
    Exhibits3.1
    Amended and Restated Articles of Incorporation of the Company, as amended and restated as of
May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended April 30, 2003)3.2
    By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated November 22, 2004)4.1
    See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and Restated Articles of
Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A
and Class B common stock4.2
    Specimen of Class A common stock certificate (incorporated by reference to Exhibit 4.2 to
Amendment No. 3 to the Companys Registration Statement on Form S-1 (Registration No.
33-42336) filed with the Commission on October 7, 1991)4.3
    Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit
1 to the Companys Form 8-A dated November 3, 1999)4.4
    Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios
and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent,
Collateral Agent and as a Lender, Deutsche Banc Alex. Brown, Inc., as Syndication Agent,
Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time
(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated
June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated
by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated May 1, 2003) and
Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to
Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended January 31,
2004)4.5
    Amended and Restated Credit Agreement dated November 19, 2004 by and among the Company,
Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America,
N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The
Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K dated November 22, 2004)4.6
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar
Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Form S-4
dated August 14, 2001) and First Supplemental Indenture, dated as of February 2, 2005 by and
among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association,
as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 2, 2005) and Second Supplemental
Indenture, dated as of February 28, 2005 by and among The Lincoln Memorial Park Cemetery
Association, a subsidiary of Stewart Enterprises, Inc., Stewart Enterprises, Inc., the other
Guarantors and U.S. National Bank Association, as trustee4.7
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit
4.2 to the Companys Form S-4 dated August 14, 2001)4.8
    Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the
Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25
percent Senior Notes due 2013 76




---



##### Table of Contents



(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated
February 11, 2005)4.9
    Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 11, 2005)    4.1
    Second Supplemental Indenture, dated as of February 28, 2005 by and among The Lincoln
Memorial Park Cemetery Association, a subsidiary of Stewart Enterprises, Inc., Stewart
Enterprises, Inc., the other Guarantors and U.S. National Bank Association, as trustee12
    Calculation of Ratio of Earnings to Fixed Charges18
    Preferability Letter from Independent Registered Public Accounting Firm regarding change in
accounting principle31.1
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde, President
and Chief Executive Officer31.2
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen,
Executive Vice President and Chief Financial Officer32
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde,
President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and
Chief Financial Officer 77




---



##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of
1934, the Registrant has duly caused this report to be signed on its
behalf by the undersigned thereunto duly authorized. STEWART ENTERPRISES, INC.June 9, 2005
    
    /s/ THOMAS M. KITCHENThomas M. KitchenExecutive Vice President and
Chief Financial OfficerJune 9, 2005
    
    /s/ MICHAEL G. HYMELMichael G. HymelVice PresidentCorporate ControllerChief Accounting Officer
 78




---



##### Table of Contents



EXHIBIT INDEX Item 6. Exhibits  (a)
    Exhibits3.1
    Amended and Restated Articles of Incorporation of the Company, as amended and restated as of
May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Companys Quarterly Report on
Form 10-Q for the quarter ended April 30, 2003)3.2
    By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by
reference to Exhibit 3.1 to the Companys Current Report on Form 8-K dated November 22, 2004)4.1
    See Exhibits 3.1 and 3.2 for provisions of the Companys Amended and Restated Articles of
Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A
and Class B common stock4.2
    Specimen of Class A common stock certificate (incorporated by reference to Exhibit 4.2 to
Amendment No. 3 to the Companys Registration Statement on Form S-1 (Registration No.
33-42336) filed with the Commission on October 7, 1991)4.3
    Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and
ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit
1 to the Companys Form 8-A dated November 3, 1999)4.4
    Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios
and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent,
Collateral Agent and as a Lender, Deutsche Banc Alex. Brown, Inc., as Syndication Agent,
Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time
(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated
June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated
by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated May 1, 2003) and
Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to
Exhibit 4.4 to the Companys Quarterly Report on Form 10-Q for the quarter ended January 31,
2004)4.5
    Amended and Restated Credit Agreement dated November 19, 2004 by and among the Company,
Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America,
N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The
Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Companys Current
Report on Form 8-K dated November 22, 2004)4.6
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar
Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Companys Form S-4
dated August 14, 2001) and First Supplemental Indenture, dated as of February 2, 2005 by and
among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association,
as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 2, 2005) and Second Supplemental
Indenture, dated as of February 28, 2005 by and among The Lincoln Memorial Park Cemetery
Association, a subsidiary of Stewart Enterprises, Inc., Stewart Enterprises, Inc., the other
Guarantors and U.S. National Bank Association, as trustee4.7
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit
4.2 to the Companys Form S-4 dated August 14, 2001)4.8
    Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the
Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25
percent Senior Notes due 2013




---



##### Table of Contents



(incorporated by reference to Exhibit 4.1 to the Companys Current Report on Form 8-K dated
February 11, 2005)4.9
    Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the
Companys Current Report on Form 8-K dated February 11, 2005)    4.1
    Second Supplemental Indenture, dated as of February 28, 2005 by and among The Lincoln
Memorial Park Cemetery Association, a subsidiary of Stewart Enterprises, Inc., Stewart
Enterprises, Inc., the other Guarantors and U.S. National Bank Association, as trustee12
    Calculation of Ratio of Earnings to Fixed Charges18
    Preferability Letter from Independent Registered Public Accounting Firm regarding change in
accounting principle31.1
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde, President
and Chief Executive Officer31.2
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen,
Executive Vice President and Chief Financial Officer32
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde,
President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and
Chief Financial Officer