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UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549
    FORM 10-Q x
    
    Quarterly Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934For the quarterly period ended January 31, 2004ORo
    
    Transition Report Pursuant to Section 13 or 15(d) of the Securities
Exchange Act of 1934For 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.)110 Veterans Memorial Boulevard
Metairie, Louisiana
(Address of principal executive offices)
    
    70005
(Zip Code)
    Registrants telephone number, including area code: (504) 837-5880    Indicate by check mark whether the Registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
Registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes  x  No  o Indicate by check mark whether the Registrant is an accelerated filer as
defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes  x  No  o The number of shares of the Registrants Class A common stock, no par
value per share, and Class B common stock, no par value per share, outstanding
as of March 4, 2004, was 103,819,703 and 3,555,020, respectively.




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES INDEX PagePart I.
    
    Financial InformationItem 1. Financial Statements (Unaudited)Consolidated Statements of Earnings 
Three Months Ended January 31, 2004 and 2003
    
    
    3Consolidated Balance Sheets 
January 31, 2004 and October 31, 2003
    
    
    4Consolidated Statement of Shareholders Equity 
Three Months Ended January 31, 2004
    
    
    6Consolidated Statements of Cash Flows 
Three Months Ended January 31, 2004 and 2003
    
    
    7Notes to Consolidated Financial Statements
    
    
    8Item 2. Managements Discussion and Analysis of
Financial Condition and Results of Operations
    
    
    28Item 3. Quantitative and Qualitative Disclosures
About Market Risk
    
    
    35Item 4. Controls and Procedures
    
    
    36Part II.
    
    Other InformationItem 1.Legal Proceedings
    
    
    37Item 2.Changes in Securities, Use of Proceeds and Issuer
Purchases of Equity Securities
    
    
    37Item 5.Other Information
    
    
    37Item 6.Exhibits and Reports on Form 8-K
    
    
    45Signatures
    
    
    47By-laws of the CompanyCredit AgreementAmendment No. 2 to Employment AgreementAmendment No. 1 to Change of Control AgreementAmendment to Employee's Retirement TrustCalculation of Ratio of Earnings to Fixed ChargesCertification Pursuant to Section 302 - CEOCertification Pursuant to Section 302 - CFOCertifications Pursuant to Section 906
  2




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Part I. Financial Information 
 Item 1. Financial Statements STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF EARNINGS (Unaudited)
 (Dollars in thousands, except per share amounts)
 Three Months Ended January 31,2004
    
    2003Revenues:Funeral
    
    $
    74,196
    
    
    $
    71,127Cemetery
    
    
    55,642
    
    
    
    54,070129,838
    
    
    
    125,197Costs and expenses:Funeral
    
    
    51,429
    
    
    
    52,240Cemetery
    
    
    41,568
    
    
    
    41,88092,997
    
    
    
    94,120Gross profit
    
    
    36,841
    
    
    
    31,077Corporate general and administrative expenses
    
    
    3,913
    
    
    
    4,300Severance charge (Note 8)
    
    
    1,993
    
    
    
    Operating earnings
    
    
    30,935
    
    
    
    26,777Interest expense
    
    
    (12,521
    )
    
    
    (13,577
    )Investment income
    
    
    69
    
    
    
    87Other income (expense), net
    
    
    (154
    )
    
    
    883Earnings from continuing operations before income taxes
    
    
    18,329
    
    
    
    14,170Income taxes
    
    
    6,965
    
    
    
    5,384Earnings from continuing operations
    
    
    11,364
    
    
    
    8,786Discontinued operations (Note 7):Earnings from discontinued operations before income taxes
    
    
    586
    
    
    
    1,108Income taxes
    
    
    222
    
    
    
    421Earnings from discontinued operations
    
    
    364
    
    
    
    687Net earnings
    
    $
    11,728
    
    
    $
    9,473Basic earnings per common share:Earnings from continuing operations
    
    $
    .11
    
    
    $
    .08Earnings from discontinued operations
    
    
    
    
    
    
    .01Net earnings
    
    $
    .11
    
    
    $
    .09Diluted earnings per common share:Earnings from continuing operations
    
    $
    .11
    
    
    $
    .08Earnings from discontinued operations
    
    
    
    
    
    
    .01Net earnings
    
    $
    .11
    
    
    $
    .09Weighted average common shares outstanding (in thousands):Basic
    
    
    107,878
    
    
    
    108,043Diluted
    
    
    108,098
    
    
    
    108,320
 See accompanying notes to consolidated financial statements. 3




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONSOLIDATED BALANCE SHEETS (Unaudited)
 (Dollars in thousands, except per share amounts)
 January 31,
    
    October 31,ASSETS
    
    2004
    
    2003Current assets:Cash and cash equivalent investments
    
    $
    14,602
    
    
    $
    18,585Marketable securities
    
    
    2,388
    
    
    
    2,346Receivables, net of allowances
    
    
    61,919
    
    
    
    97,203Inventories
    
    
    39,837
    
    
    
    40,154Prepaid expenses
    
    
    2,629
    
    
    
    2,887Deferred income taxes, net
    
    
    1,511
    
    
    
    2,990Assets held for sale (Note 7)
    
    
    60,869
    
    
    
    63,269Total current assets
    
    
    183,755
    
    
    
    227,434Receivables due beyond one year, net of allowances
    
    
    76,536
    
    
    
    76,374Prearranged receivables, net
    
    
    1,213,174
    
    
    
    1,207,584Goodwill
    
    
    403,790
    
    
    
    403,790Deferred charges
    
    
    246,725
    
    
    
    247,067Cemetery property, at cost
    
    
    376,100
    
    
    
    377,118Property and equipment, at cost:Land
    
    
    37,306
    
    
    
    37,350Buildings
    
    
    290,037
    
    
    
    289,082Equipment and other
    
    
    157,800
    
    
    
    155,429485,143
    
    
    
    481,861Less accumulated depreciation
    
    
    186,296
    
    
    
    181,801Net property and equipment
    
    
    298,847
    
    
    
    300,060Deferred income taxes, net
    
    
    59,198
    
    
    
    60,565Other assets
    
    
    1,161
    
    
    
    1,238Total assets
    
    $
    2,859,286
    
    
    $
    2,901,230
 (continued) 4




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts) January 31,
    
    October 31,LIABILITIES AND SHAREHOLDERS' EQUITY
    
    2004
    
    2003Current liabilities:Current maturities of long-term debt
    
    $
    13,812
    
    
    $
    13,935Accounts payable
    
    
    6,834
    
    
    
    7,274Accrued payroll
    
    
    8,288
    
    
    
    8,596Accrued insurance
    
    
    18,948
    
    
    
    19,243Accrued interest
    
    
    3,370
    
    
    
    11,428Other current liabilities
    
    
    11,175
    
    
    
    17,273Income taxes payable
    
    
    3,141
    
    
    
    769Liabilities associated with assets held for sale (Note 7)
    
    
    39,494
    
    
    
    41,223Total current liabilities
    
    
    105,062
    
    
    
    119,741Long-term debt, less current maturities
    
    
    449,511
    
    
    
    488,180Prearranged deferred revenue, net
    
    
    1,535,485
    
    
    
    1,539,341Other long-term liabilities
    
    
    14,381
    
    
    
    15,109Total liabilities
    
    
    2,104,439
    
    
    
    2,162,371Commitments and contingenciesShareholders equity:Preferred stock, $1.00 par value, 5,000,000 shares authorized;
no shares issued
    
    
    
    
    
    
    Common stock, $1.00 stated value:Class A authorized 150,000,000 shares; issued and outstanding
104,730,725 and 104,172,151 shares at January 31, 2004
and October 31, 2003, respectively
    
    
    104,731
    
    
    
    104,172Class B authorized 5,000,000 shares; issued and outstanding
3,555,020 shares at January 31, 2004 and October 31, 2003;
10 votes per share; convertible into an equal number of
Class A shares
    
    
    3,555
    
    
    
    3,555Additional paid-in capital
    
    
    680,160
    
    
    
    676,439Accumulated deficit
    
    
    (31,136
    )
    
    
    (42,864
    )Unearned restricted stock compensation
    
    
    (1,359
    )
    
    
    Accumulated other comprehensive loss:Unrealized depreciation of investments
    
    
    (13
    )
    
    
    (797
    )Derivative financial instrument losses
    
    
    (1,091
    )
    
    
    (1,646
    )Total accumulated other comprehensive loss
    
    
    (1,104
    )
    
    
    (2,443
    )Total shareholders equity
    
    
    754,847
    
    
    
    738,859Total liabilities and shareholders equity
    
    $
    2,859,286
    
    
    $
    2,901,230
 See accompanying notes to consolidated financial statements. 5




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENT OF SHAREHOLDERS EQUITY (Unaudited)
 (Dollars in thousands, except per share amounts)
 UnrealizedRetained
    
    Unearned
    
    Appreciation
    
    DerivativeAdditional
    
    Earnings
    
    Restricted
    
    (Depreciation)
    
    Financial
    
    TotalCommon
    
    Paid-In
    
    (Accumulated
    
    Stock
    
    of
    
    Instrument
    
    Shareholders'Stock (1)
    
    Capital
    
    Deficit)
    
    Compensation
    
    Investments
    
    Gains (Losses)
    
    EquityBalance October 31, 2003
    
    $
    107,727
    
    
    $
    676,439
    
    
    $
    (42,864
    )
    
    $
    
    
    
    $
    (797
    )
    
    $
    (1,646
    )
    
    $
    738,859Comprehensive income:Net earnings
    
    
    
    
    
    
    
    
    
    
    11,728
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    11,728Other comprehensive income:Reclassification adjustment for realized
loss on investments, net of deferred tax
benefit of $457
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    746
    
    
    
    
    
    
    
    746Unrealized appreciation of investments,
net
of deferred tax expense of ($23)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    38
    
    
    
    
    
    
    
    38Unrealized appreciation on derivative
instrument designated and qualifying as
a cash flow hedging instrument, net of
deferred tax expense of ($298)
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    555
    
    
    
    555Total other comprehensive income
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    784
    
    
    
    555
    
    
    
    1,339Total comprehensive income
    
    
    
    
    
    
    
    
    
    
    11,728
    
    
    
    
    
    
    
    784
    
    
    
    555
    
    
    
    13,067Issuance of restricted stock awards
    
    
    
    
    
    
    1,474
    
    
    
    
    
    
    
    (1,474
    )
    
    
    
    
    
    
    
    
    
    
    Amortization of unearned restricted stock
compensation
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    115
    
    
    
    
    
    
    
    
    
    
    
    115Issuance of common stock
    
    
    609
    
    
    
    2,518
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,127Purchase and retirement of common stock
    
    
    (50
    )
    
    
    (271
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (321
    )Balance January 31, 2004
    
    $
    108,286
    
    
    $
    680,160
    
    
    $
    (31,136
    )
    
    $
    (1,359
    )
    
    $
    (13
    )
    
    $
    (1,091
    )
    
    $
    754,847
   (1)
    
    Amount includes 104,731 and 104,172 shares (in thousands) of Class A
common stock with a stated value of $1 per share as of January 31, 2004
and October 31, 2003, respectively, and includes 3,555 shares (in
thousands) of Class B common stock. See accompanying notes to consolidated financial statements. 6




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 CONSOLIDATED STATEMENTS OF CASH FLOWS (Unaudited)
 (Dollars in thousands, except per share amounts)
 Three Months Ended January 31,2004
    
    2003Cash flows from operating activities:Net earnings
    
    $
    11,728
    
    
    $
    9,473Adjustments to reconcile net earnings to net cash
provided by (used in) operating activities:Depreciation and amortization
    
    
    12,883
    
    
    
    13,436Provision for doubtful accounts
    
    
    2,315
    
    
    
    2,009Net loss realized on marketable securities
    
    
    1,204
    
    
    
    Net gains on sale of assets
    
    
    (803
    )
    
    
    (1,038
    )Provision for deferred income taxes
    
    
    1,739
    
    
    
    5,777Changes in assets and liabilities:(Increase) decrease in other receivables
    
    
    29,742
    
    
    
    (4,507
    )Decrease in deferred charges
    
    
    1,732
    
    
    
    1,606(Increase) decrease in inventories and cemetery property
    
    
    775
    
    
    
    (180
    )Decrease in accounts payable and accrued expenses
    
    
    (7,354
    )
    
    
    (19,401
    )Change in prearranged activity
    
    
    (9,953
    )
    
    
    (7,962
    )Prearranged acquisition costs
    
    
    (7,437
    )
    
    
    (8,019
    )Increase (decrease) in other
    
    
    (580
    )
    
    
    1,122Net cash provided by (used in) operating activities
    
    
    35,991
    
    
    
    (7,684
    )Cash flows from investing activities:Proceeds from sale of assets, net
    
    
    859
    
    
    
    1,830Additions to property and equipment
    
    
    (4,806
    )
    
    
    (3,052
    )Other
    
    
    (42
    )
    
    
    94Net cash used in investing activities
    
    
    (3,989
    )
    
    
    (1,128
    )Cash flows from financing activities:Repayments of long-term debt
    
    
    (38,791
    )
    
    
    (2,682
    )Issuance of common stock
    
    
    3,127
    
    
    
    313Purchase and retirement of common stock
    
    
    (321
    )
    
    
    Net cash used in financing activities
    
    
    (35,985
    )
    
    
    (2,369
    )Net decrease in cash
    
    
    (3,983
    )
    
    
    (11,181
    )Cash and cash equivalents, beginning of period
    
    
    18,585
    
    
    
    28,190Cash and cash equivalents, end of period
    
    $
    14,602
    
    
    $
    17,009Supplemental cash flow information:Cash paid (received) during the period for:Income taxes
    
    $
    (33,100
    )
    
    $
    25Interest
    
    $
    19,000
    
    
    $
    21,900
 See accompanying notes to consolidated financial statements. 7




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)
 (Dollars in thousands, except per share amounts)
 (1) Basis of Presentation (a) The Company Stewart Enterprises, Inc. (the Company) is a provider of funeral and
cemetery products and services in the death care industry in the United States.
Through its subsidiaries, the Company offers a complete line of funeral
merchandise and services, along with cemetery property, merchandise and
services, both at the time of need and on a preneed basis. As of January 31,
2004, the Company owned and operated 291 funeral homes and 148 cemeteries in 29
states within the United States and Puerto Rico. (b) Principles of Consolidation The accompanying consolidated financial statements include the Company and
its subsidiaries. All significant intercompany balances and transactions have
been eliminated. See Note 7 for a discussion of discontinued operations,
assets held for sale and liabilities associated with assets held for sale. (c) Interim Disclosures The information as of January 31, 2004, and for the three months ended
January 31, 2004 and 2003, is unaudited but, in the opinion of management,
reflects all adjustments, which are of a normal recurring nature, necessary for
a fair presentation of financial position and results of operations for the
interim periods. The accompanying consolidated financial statements should be
read in conjunction with the consolidated financial statements and notes
thereto contained in the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. The results of operations for the three months ended January 31, 2004 are
not necessarily indicative of the results to be expected for the fiscal year
ending October 31, 2004. (d) Use of Estimates The preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America requires
management to make estimates and assumptions that affect the reported amounts
of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues
and expenses during the reporting period. Actual results could differ from
those estimates. (e) Fair Value of Financial Instruments Estimated fair value amounts have been determined using available market
information and the valuation methodologies described below. However,
considerable judgment is required in interpreting market data to develop
estimates of fair value. Accordingly, the estimates presented herein may not
be indicative of the amounts the Company 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. 8




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) The carrying amounts of cash and cash equivalents and current receivables
approximate fair value due to the short-term nature of these instruments. The
carrying amount of receivables due beyond one year approximates fair value
because they bear interest at rates currently offered by the Company for
receivables with similar terms and maturities. The carrying amounts of
marketable securities are stated at fair value as they are classified as
available for sale under the provisions of Statement of Financial Accounting
Standards (SFAS) No. 115, Accounting for Certain Investments in Debt and
Equity Securities. The fair value of the Companys long-term variable- and
fixed-rate debt is estimated using quoted market prices, where applicable, or
future cash flows discounted at rates for similar types of borrowing
arrangements. (f) Prearranged Trust Receivable and Prearranged Deferred Revenue The Company evaluates the collectibility of the prearranged trust
receivable for impairment when the fair market value of the trust assets is
below the recorded prearranged trust receivable balance. A prearranged trust
receivable is deemed to be impaired when, based on current information and
events, it is probable that the Company will be unable to collect all amounts
from the trust at the time the receivables are due. In those instances that a
receivable is deemed to be impaired, a valuation allowance is provided on the
trust receivable to reduce it to the currently estimated recoverable amount
with a corresponding reduction to the associated deferred revenue balance.
There is no income statement impact as long as the deferred revenue is not
below the estimated costs to deliver the underlying products or services. If
the deferred revenue were below the estimated costs to deliver the underlying
products or services, the Company would record a charge to earnings. During
fiscal year 2002, the Company recorded a valuation allowance of $20,000 related
to its prearranged receivables from its trust funds, which resulted in a
reduction in prearranged receivables and prearranged deferred revenue. This
valuation allowance was deemed necessary due to a decline in the overall market
value of the underlying trust funds. During fiscal year 2003, the valuation
allowance was decreased by $15,500 due to an increase in the market value of
the underlying trust funds, which resulted in an increase in prearranged
receivables and prearranged deferred revenue. Accordingly, the valuation
allowance as of October 31, 2003 was $4,500. During the first quarter of
fiscal year 2004, the valuation allowance was decreased by $500, which resulted
in an increase in prearranged receivables and prearranged deferred revenue.
Thus, as of January 31, 2004, the valuation allowance was $4,000. There were
no charges to earnings during these periods as a result of these valuation
allowances. (g) Inventories Inventories are stated at the lower of cost (specific identification and
first-in, first-out methods) or net realizable value. The portion of developed
cemetery property that management estimates will be used in the next twelve
months is included in inventories. Such estimates are based on the Companys
historical experience or results. (h) Depreciation and Amortization Buildings and equipment are recorded at cost and are depreciated over
their estimated useful lives, ranging from 10 to 40 years and from 3 to 10
years, respectively, primarily using the straight-line method. 9




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) The Companys accounting for goodwill changed in the first quarter of
fiscal year 2002 with the implementation of SFAS No. 142, Goodwill and Other
Intangibles. SFAS No. 142 provides that goodwill is no longer amortized, but
must be tested for impairment using a fair value approach rather than an
undiscounted cash flow approach. The Companys evaluation of goodwill is
performed at the funeral and cemetery segments, which constitute the Companys
reporting units. The Company did not record any impairment loss upon the
implementation of SFAS No. 142 in fiscal year 2002. In the fourth quarter of
each fiscal year, the Company compares the fair value with the book value for
each reporting unit. As a result of the annual goodwill impairment review that
occurred during the fourth quarter of fiscal year 2003, the Company recorded a
noncash goodwill impairment charge of $73,000 in the fourth quarter of fiscal
year 2003 related to its cemetery segment. Prior to the implementation of SFAS
No. 142, the Company amortized goodwill principally over 40 years using the
straight-line method. Goodwill amounted to $403,790 as of January 31, 2004 and
October 31, 2003. (i) Stock-Based Compensation At January 31, 2004, the Company had five stock-based employee
compensation plans, which are described in more detail in Note 17 to the
consolidated financial statements of the Companys Annual Report on Form 10-K
for the fiscal year ended October 31, 2003. The Company accounts for those
plans under the recognition and measurement principles of Accounting Principles
Board (APB) Opinion No. 25, Accounting for Stock Issued to Employees and
has adopted the disclosure-only provisions of SFAS No. 123, Accounting for
Stock-Based Compensation and SFAS No. 148, Accounting for Stock-Based
Compensation  Transition and Disclosure  an Amendment of FASB Statement No.
123. No stock-based employee compensation cost 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 following table illustrates the effect on net earnings and net earnings
per share if the Company had applied the fair value recognition provisions of
SFAS No. 123 to stock-based employee compensation. Three Months EndedJanuary 31,2004
    
    2003Net earnings
    
    $
    11,728
    
    
    $
    9,473Total stock-based employee compensation expense
determined under fair value-based method,
net of tax
    
    
    (346
    )
    
    
    (727
    )Pro forma net earnings
    
    $
    11,382
    
    
    $
    8,746Net earnings per common share:Basic  as reported
    
    $
    .11
    
    
    $
    .09Basic  pro forma
    
    $
    .11
    
    
    $
    .08Diluted  as reported
    
    $
    .11
    
    
    $
    .09Diluted  pro forma
    
    $
    .11
    
    
    $
    .08
 10




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) (j) Funeral Revenue The Company sells prearranged funeral services and merchandise under
contracts that provide for delivery of the services and merchandise at the time
of death. Prearranged funeral services are recorded as funeral revenue in the
period the funeral is performed. Prearranged funeral merchandise is recognized
as revenue upon delivery. Prior to performing the funeral or delivery of the
merchandise, such sales are deferred and reported as prearranged deferred
revenue on the balance sheet. Commissions and other direct costs that vary with and are primarily
related to the acquisition of new prearranged funeral service sales and
prearranged funeral merchandise sales are deferred and amortized as the
contracts are delivered in accordance with SFAS No. 60, Accounting and
Reporting for Insurance Companies. Indirect costs of marketing prearranged
funeral services are expensed in the period in which incurred. Prearranged funeral services and merchandise generally are funded either
through trust funds or escrow accounts established by the Company or through
third-party insurance companies. Principal amounts deposited in the trust
funds or escrow accounts are available to the Company as funeral services and
merchandise are delivered and are refundable to the customer in those
situations where state law provides for the return of those amounts under the
purchasers option to cancel the contract. Certain jurisdictions provide for
non-refundable trust funds 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 funds or escrow accounts as prearranged deferred revenue on the
balance sheet until the underlying service or merchandise is delivered. Earnings are withdrawn from trust funds or escrow accounts only as funeral
services and merchandise are delivered or contracts are cancelled, except in
jurisdictions that permit earnings to be withdrawn currently and in unregulated
jurisdictions where escrow accounts are used. Even so, such withdrawn earnings
are not recognized as revenue until the related funeral services are performed
or merchandise delivered. When prearranged funeral services and merchandise
are funded through insurance policies purchased by customers from third-party
insurance companies, the Company earns a commission if it acts as agent on the
sale of the policies. Insurance commissions, net of related expenses, are
recognized at the point at which the commission is no longer subject to refund.
Policy proceeds, including the buildup in the face value of the insurance
contracts, are available to the Company as funeral services and merchandise are
delivered. Funeral services sold at the time of need are recorded as funeral revenue
in the period the funeral is performed. (k) Cemetery Revenue The Company sells preneed cemetery merchandise under contracts that
provide for delivery of the merchandise at the time of need. Preneed cemetery
merchandise sales are recorded as cemetery revenue in the period the
merchandise is delivered. 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 funds or escrow
accounts. The Company defers all dividends and interest earned and net capital
gains and losses realized by preneed cemetery merchandise and service trust
funds or escrow accounts as prearranged deferred revenue on the balance 11




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) sheet until the underlying merchandise or service is delivered. Principal and
earnings are withdrawn only as the merchandise and services are delivered or
contracts are cancelled. Pursuant to perpetual care contracts and laws, a portion, generally 10
percent, of the proceeds from cemetery property sales is deposited into
perpetual care trust funds. The income from these funds, which has been
established in most jurisdictions in which the Company operates cemeteries, is
used for maintenance of those cemeteries, but principal, including in some
jurisdictions net realized capital gains, must generally be held in trust in
perpetuity. Accordingly, the trust fund corpus is not reflected in the
consolidated financial statements. The Company currently recognizes and
withdraws all dividend and interest income earned and, where permitted, capital
gains realized by perpetual care funds. Some of the Companys sales of cemetery property and merchandise are made
under installment contracts bearing interest at prevailing rates. Finance
charges are recognized as cemetery revenue under the effective interest method
over the terms of the related installment receivables. (l) Allowance for Doubtful Accounts The Company establishes an allowance based on a range of percentages
applied to accounts receivable aging categories. These percentages are based
on historical collection and write-off experience. (m) Income Taxes Income taxes are accounted for using the asset and liability method under
which deferred income taxes are recognized for the tax consequences of
temporary differences by applying enacted statutory tax rates applicable to
future years to differences between the financial statement carrying amounts
and the tax bases of existing assets and liabilities. The effect on deferred
taxes for a change in tax rates is recognized in income in the period that
includes the enactment date. Management provides a valuation allowance against
the deferred tax asset for amounts which are not considered more likely than
not to be realized. The Company received a $33,222 income tax refund in December 2003 due to a
change in the tax accounting methods for cemetery merchandise revenue. The
Company used this refund to reduce the outstanding balance of its Term Loan B. (n) Earnings Per Common Share Basic earnings per common share is computed by dividing net earnings by
the weighted average number of common shares outstanding during each period.
Diluted earnings per common share is computed by dividing net earnings by the
weighted average number of common shares outstanding plus the number of
additional common shares that would have been outstanding if the dilutive
potential common shares (in this case, exercise of the Companys time-vest
stock options) had been issued during each period as discussed in Note 4. On June 26, 2003, the Company announced that its Board of Directors had
approved a new stock repurchase program that allows the Company to invest up to
$25,000 in repurchases of its Class A common stock. The repurchases are
limited to the Companys Class A common stock and are made in the open market
or in privately negotiated transactions at such times and in such amounts as
management deems appropriate, depending on market 12




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (1) Basis of Presentation(Continued) conditions and other factors. These repurchases reduce the weighted average
number of common shares outstanding during each period. Since the inception of
the program through January 31, 2004, the Company had repurchased 788,500
shares of its Class A common stock at an average price of $4.15 per share. On December 22, 2003, the Company granted 271,000 shares of restricted
stock to its executive officers. The restricted stock vests equally on October
31, 2004, October 31, 2005 and October 31, 2006. As the restricted stock
vests, it will increase the weighted average number of common shares
outstanding in each period. (o) Derivatives The Company accounts for its derivative financial instruments under SFAS
No. 133, Accounting for Derivative Instruments and Hedging Activities, SFAS
No. 137, Accounting for Derivative Instruments and Hedging Activities 
Deferral of the Effective Date of FASB Statement No. 133 and SFAS No. 138,
Accounting for Certain Derivative Instruments and Certain Hedging Activities.
The notional amounts of derivative financial instruments do not represent
amounts exchanged between parties and, therefore, are not a measure of the
Companys exposure resulting from its use of derivatives. The amounts
exchanged are calculated based upon the notional amounts as well as other terms
of the instruments, such as interest rates, exchange rates or other indices.
In accordance with SFAS No. 133, the Company accounts for its interest rate
swaps as cash flow hedges whereby the fair value of the interest rate swaps is
reflected as a liability in the accompanying consolidated balance sheet with
the offset recorded to other comprehensive income. (p) Reclassifications Certain reclassifications have been made to the 2003 consolidated
statement of earnings and balance sheet in order for these periods to be
comparable due to the adoption of SFAS No. 144, Accounting for the Impairment
or Disposal of Long-Lived Assets in the first quarter of fiscal year 2004.
These reclassifications had no effect on net earnings or shareholders equity. (2) Change in Accounting Principles (a) Statement of Financial Accounting Standards (SFAS) No. 142,
Goodwill and Other Intangible Assets In June 2001, the Financial Accounting Standards Board (FASB) issued
SFAS No. 142, Goodwill and Other Intangible Assets. SFAS No. 142 provides
that goodwill is no longer amortized, but must be tested for impairment using a
fair value approach rather than an undiscounted cash flow approach. Goodwill
must be tested for impairment at a level referred to as a reporting unit,
generally a level lower than that of the total entity. The Companys
evaluation of goodwill is performed at the funeral and cemetery segments, which
constitute the Companys reporting units. Impairment losses recognized as a
result of an impairment test will be included in operating income. Goodwill of
a reporting unit must be tested for impairment on an annual basis and between
annual tests if an event occurs or circumstances change that would more likely
than not reduce the fair value of a reporting unit below its carrying amount.
As a result of the Companys annual evaluation of goodwill in the fourth
quarter of fiscal year 2003, the Company recorded a goodwill impairment charge
in the fourth quarter of fiscal year 2003 of $73,000. The carrying amount of
goodwill at January 31, 2004 and October 31, 2003 amounted to $403,790. 13




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (2) Change in Accounting Principles(Continued) (b) Other Changes In August 2001, the FASB issued SFAS No. 144, Accounting for the
Impairment or Disposal of Long-Lived Assets. This statement supercedes SFAS
No. 121, Accounting for the Impairment of Long-Lived Assets and for Long-Lived
Assets to be Disposed of, and the accounting and reporting provisions of
Accounting Principles Board (APB) Opinion No. 30, Reporting the Results of
Operations  Reporting the Effects of Disposal of a Segment of a Business, and
Extraordinary, Unusual and Infrequently Occurring Events and Transactions, for
the disposal of a segment of a business. The provisions of the statement are
effective for financial statements issued for fiscal years beginning after
December 15, 2001 and interim periods within those fiscal years. The
provisions of this statement generally are to be applied prospectively. For
additional information regarding the Companys adoption of SFAS No. 144, see
Note 7. In January 2003, the FASB issued FASB Interpretation No. 46 (FIN 46),
Consolidation of Variable Interest Entities. FIN 46 clarifies the application
of Accounting Research Bulletin 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. The FASB issued a revision to FIN 46 (FIN 46R)
in December 2003. FIN 46 and FIN 46R apply immediately to variable interest
entities (VIEs) created after January 31, 2003, and to VIEs in which an
enterprise obtains an interest after that date. It applies in the first fiscal
year or interim period ending after March 15, 2004, to VIEs in which an
enterprise holds a variable interest that it acquired before February 1, 2003.
The Company will implement the provisions of FIN 46 in the second quarter of
fiscal year 2004 and though no final decision has been made as of this time, it
currently plans to consolidate into its balance sheets its preneed funeral,
preneed cemetery and perpetual care trust funds and escrow accounts at fair
value, as a result of such implementation. The ultimate resolution for the
accounting for the trusts and the associated trust investment income has not
been determined and could potentially result in a material impact on the
Companys financial position and results of operations. The Company has not
been able to quantify the impact, if any, at this time. In December 2003, the FASB issued revised SFAS No. 132, Employers
Disclosures about Pensions and Other Postretirement Benefitsan amendment of
FASB Statements No. 87, 88, and 106. This statement revises employers
disclosures about pension plans and other postretirement benefit plans. It does
not change the measurement or recognition of those plans required by SFAS No.
87, Employers Accounting for Pensions, SFAS No. 88, Employers Accounting
for Settlements and Curtailments of Defined Benefit Pension Plans and for
Termination Benefits and SFAS No. 106, Employers Accounting for
Postretirement Benefits Other Than Pensions. This statement retains the
disclosures required by SFAS No. 132, which standardized the disclosure
requirements for pensions and other postretirement benefits to the extent
practicable and required additional information on changes in the benefit
obligations and fair values of plan assets. Additional disclosures have been
added such as information describing the types of plan assets, investment
strategy, measurement date(s), plan obligations, cash flows and components of
net periodic benefit cost recognized during interim periods. The provisions of
the original SFAS No. 132 remain in effect until the provisions of this
statement are adopted. Except as noted, this statement is effective for
financial statements with fiscal years ending after December 15, 2003. The
interim-period disclosures required by this statement are effective for interim
periods beginning after December 15, 2003. The adoption of revised SFAS No.
132 will have no impact on the Companys financial condition or results of
operations. 14




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (3) Commitments and Contingencies The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While
the outcome of these proceedings cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on the
consolidated financial position, results of operations or cash flows of the
Company. The Company carries insurance with coverages and coverage limits that it
believes to be adequate. Although there can be no assurance that such
insurance is sufficient to protect the Company against all contingencies,
management believes that its insurance protection is reasonable in view of the
nature and scope of the Companys operations. (4) Reconciliation of Basic and Diluted Per Share Data Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataThree Months Ended January 31, 2004Earnings from continuing operations
    
    $
    11,364Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    11,364
    
    
    
    107,878
    
    
    $
    .11Effect of dilutive securities:Time-vest stock options assumed exercised and
restricted stock
    
    
    
    
    
    
    220Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock
options assumed exercised and restricted stock
    
    $
    11,364
    
    
    
    108,098
    
    
    $
    .11
 Earnings
    
    Shares
    
    Per Share(Numerator)
    
    (Denominator)
    
    DataThree Months Ended January 31, 2003Earnings from continuing operations
    
    $
    8,786Basic earnings per common share:Earnings from continuing operations available to
common shareholders
    
    $
    8,786
    
    
    
    108,043
    
    
    $
    .08Effect of dilutive securities:Time-vest stock options assumed exercised
    
    
    
    
    
    
    277Diluted earnings per common share:Earnings from continuing operations available to
common shareholders plus time-vest stock options
assumed exercised
    
    $
    8,786
    
    
    
    108,320
    
    
    $
    .08
 Options to purchase 3,879,136 shares of common stock at prices ranging
from $5.44 to $27.25 per share were outstanding during the three months ended
January 31, 2004 but were not included in the computation of diluted earnings
per share because the exercise prices of the options were greater than the
average market price of the 15




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (4) Reconciliation of Basic and Diluted Per Share Data(Continued) common shares. These options expire between July 31, 2004 and December 22,
2013. Options to purchase 4,110,061 shares of common stock at prices ranging
from $5.50 to $27.25 per share were outstanding during the three months ended
January 31, 2003 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. (5) Segment Data The Companys primary reportable operating segments are based on products
and services and include funeral and cemetery operations. Pursuant to SFAS No.
144, the operating results of the Companys businesses identified for sale that
meet the criteria in SFAS No. 144 are reported in the discontinued operations
section of the consolidated statements of earnings (see Note 7). Accordingly,
the results of operations included in the segment information below reflect
only the Companys continuing operations. The Companys reportable segment information is as follows: ConsolidatedFuneral
    
    Cemetery
    
    TotalsRevenues from external customers:Three months ended January 31,2004
    
    $
    74,196
    
    
    
    55,642
    
    
    $
    129,8382003
    
    $
    71,127
    
    
    
    54,070
    
    
    $
    125,197Gross profit:Three months ended January 31,2004
    
    $
    22,767
    
    
    
    14,074
    
    
    $
    36,8412003
    
    $
    18,887
    
    
    
    12,190
    
    
    $
    31,077Goodwill:January 31, 2004
    
    $
    318,851
    
    
    
    84,939
    
    
    $
    403,790October 31, 2003
    
    $
    318,851
    
    
    
    84,939
    
    
    $
    403,790
 A reconciliation of total segment gross profit to total earnings from
continuing operations before income taxes for the three months ended January
31, 2004 and 2003 is as follows: Three Months EndedJanuary 31,2004
    
    2003Gross profit for reportable segments
    
    $
    36,841
    
    
    $
    31,077Corporate general and administrative expenses
    
    
    (3,913
    )
    
    
    (4,300
    )Severance charge
    
    
    (1,993
    )
    
    
    Interest expense
    
    
    (12,521
    )
    
    
    (13,577
    )Investment income
    
    
    69
    
    
    
    87Other income (expense), net
    
    
    (154
    )
    
    
    883Earnings from continuing operations before
income taxes
    
    $
    18,329
    
    
    $
    14,170
 16




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Condensed Consolidating Financial Statements of Guarantors of Senior
Subordinated Notes The following tables present the condensed consolidating historical
financial statements as of January 31, 2004 and October 31, 2003 and for the
three months ended January 31, 2004 and 2003, for the direct and indirect
domestic subsidiaries of the Company that serve as guarantors of the senior
subordinated notes, and the financial results of the Companys subsidiaries
that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto
Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic
subsidiaries, which are prohibited by law from guaranteeing the senior
subordinated notes. Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended January 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    69,182
    
    
    $
    5,014
    
    
    $
    
    
    
    $
    74,196Cemetery
    
    
    
    
    
    
    50,125
    
    
    
    5,517
    
    
    
    
    
    
    
    55,642
    
    
    
    119,307
    
    
    
    10,531
    
    
    
    
    
    
    
    129,838Costs and expenses:Funeral
    
    
    
    
    
    
    48,416
    
    
    
    3,013
    
    
    
    
    
    
    
    51,429Cemetery
    
    
    
    
    
    
    37,284
    
    
    
    4,284
    
    
    
    
    
    
    
    41,568
    
    
    
    85,700
    
    
    
    7,297
    
    
    
    
    
    
    
    92,997Gross profit
    
    
    
    
    
    
    33,607
    
    
    
    3,234
    
    
    
    
    
    
    
    36,841Corporate general and administrative
expenses
    
    
    3,913
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,913Severance charge
    
    
    363
    
    
    
    1,614
    
    
    
    16
    
    
    
    
    
    
    
    1,993Operating earnings (loss)
    
    
    (4,276
    )
    
    
    31,993
    
    
    
    3,218
    
    
    
    
    
    
    
    30,935Interest income (expense)
    
    
    9,624
    
    
    
    (20,118
    )
    
    
    (2,027
    )
    
    
    
    
    
    
    (12,521
    )Investment income
    
    
    69
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    69Other income (expense), net
    
    
    (573
    )
    
    
    355
    
    
    
    64
    
    
    
    
    
    
    
    (154
    )Earnings from continuing
operations before income taxes
    
    
    4,844
    
    
    
    12,230
    
    
    
    1,255
    
    
    
    
    
    
    
    18,329Income taxes
    
    
    1,401
    
    
    
    4,647
    
    
    
    917
    
    
    
    
    
    
    
    6,965Earnings from continuing operations
    
    
    3,443
    
    
    
    7,583
    
    
    
    338
    
    
    
    
    
    
    
    11,364Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    627
    
    
    
    (41
    )
    
    
    
    
    
    
    586Income taxes
    
    
    
    
    
    
    222
    
    
    
    
    
    
    
    
    
    
    
    222Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    405
    
    
    
    (41
    )
    
    
    
    
    
    
    364Net earnings before equity in
subsidiaries
    
    
    3,443
    
    
    
    7,988
    
    
    
    297
    
    
    
    
    
    
    
    11,728Equity in subsidiaries
    
    
    8,285
    
    
    
    
    
    
    
    
    
    
    
    (8,285
    )
    
    
    Net earnings
    
    
    11,728
    
    
    
    7,988
    
    
    
    297
    
    
    
    (8,285
    )
    
    
    11,728Other comprehensive income, net
    
    
    1,339
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    1,339Comprehensive income
    
    $
    13,067
    
    
    $
    7,988
    
    
    $
    297
    
    
    $
    (8,285
    )
    
    $
    13,067
 17




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes(Continued) Condensed Consolidating Statements of Earnings and Other Comprehensive Income Three Months Ended January 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedRevenues:Funeral
    
    $
    
    
    
    $
    66,365
    
    
    $
    4,762
    
    
    $
    
    
    
    $
    71,127Cemetery
    
    
    
    
    
    
    47,946
    
    
    
    6,124
    
    
    
    
    
    
    
    54,070
    
    
    
    114,311
    
    
    
    10,886
    
    
    
    
    
    
    
    125,197Costs and expenses:Funeral
    
    
    
    
    
    
    49,182
    
    
    
    3,058
    
    
    
    
    
    
    
    52,240Cemetery
    
    
    
    
    
    
    37,064
    
    
    
    4,816
    
    
    
    
    
    
    
    41,880
    
    
    
    86,246
    
    
    
    7,874
    
    
    
    
    
    
    
    94,120Gross profit
    
    
    
    
    
    
    28,065
    
    
    
    3,012
    
    
    
    
    
    
    
    31,077Corporate general and administrative
expenses
    
    
    4,300
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    4,300Operating earnings (loss)
    
    
    (4,300
    )
    
    
    28,065
    
    
    
    3,012
    
    
    
    
    
    
    
    26,777Interest income (expense)
    
    
    7,271
    
    
    
    (18,823
    )
    
    
    (2,025
    )
    
    
    
    
    
    
    (13,577
    )Investment income
    
    
    87
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    87Other income, net
    
    
    245
    
    
    
    566
    
    
    
    72
    
    
    
    
    
    
    
    883Earnings from continuing operations
before income taxes
    
    
    3,303
    
    
    
    9,808
    
    
    
    1,059
    
    
    
    
    
    
    
    14,170Income taxes
    
    
    841
    
    
    
    3,727
    
    
    
    816
    
    
    
    
    
    
    
    5,384Earnings from continuing
operations
    
    
    2,462
    
    
    
    6,081
    
    
    
    243
    
    
    
    
    
    
    
    8,786Discontinued operations:Earnings (loss) from discontinued
operations before income taxes
    
    
    
    
    
    
    1,232
    
    
    
    (124
    )
    
    
    
    
    
    
    1,108Income taxes
    
    
    
    
    
    
    421
    
    
    
    
    
    
    
    
    
    
    
    421Earnings (loss) from discontinued
operations
    
    
    
    
    
    
    811
    
    
    
    (124
    )
    
    
    
    
    
    
    687Net earnings before equity in
subsidiaries
    
    
    2,462
    
    
    
    6,892
    
    
    
    119
    
    
    
    
    
    
    
    9,473Equity in subsidiaries
    
    
    7,011
    
    
    
    
    
    
    
    
    
    
    
    (7,011
    )
    
    
    Net earnings
    
    
    9,473
    
    
    
    6,892
    
    
    
    119
    
    
    
    (7,011
    )
    
    
    9,473Other comprehensive income, net
    
    
    89
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    89Comprehensive income
    
    $
    9,562
    
    
    $
    6,892
    
    
    $
    119
    
    
    $
    (7,011
    )
    
    $
    9,562
 18




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes(Continued) Condensed Consolidating Balance Sheets January 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    16,630
    
    
    $
    (1,943
    )
    
    $
    (85
    )
    
    $
    
    
    
    $
    14,602Marketable securities
    
    
    1,088
    
    
    
    26
    
    
    
    1,274
    
    
    
    
    
    
    
    2,388Receivables, net of allowances
    
    
    5,252
    
    
    
    41,999
    
    
    
    14,668
    
    
    
    
    
    
    
    61,919Inventories
    
    
    305
    
    
    
    33,210
    
    
    
    6,322
    
    
    
    
    
    
    
    39,837Prepaid expenses
    
    
    694
    
    
    
    1,899
    
    
    
    36
    
    
    
    
    
    
    
    2,629Deferred income taxes, net
    
    
    8
    
    
    
    1,503
    
    
    
    
    
    
    
    
    
    
    
    1,511Assets held for sale
    
    
    
    
    
    
    55,516
    
    
    
    5,353
    
    
    
    
    
    
    
    60,869Total current assets
    
    
    23,977
    
    
    
    132,210
    
    
    
    27,568
    
    
    
    
    
    
    
    183,755Receivables due beyond one year, net of
allowances
    
    
    166
    
    
    
    61,614
    
    
    
    14,756
    
    
    
    
    
    
    
    76,536Prearranged receivables, net
    
    
    
    
    
    
    1,169,351
    
    
    
    43,823
    
    
    
    
    
    
    
    1,213,174Goodwill
    
    
    
    
    
    
    366,157
    
    
    
    30,433
    
    
    
    7,200
    
    
    
    403,790Deferred charges
    
    
    6,523
    
    
    
    220,790
    
    
    
    19,412
    
    
    
    
    
    
    
    246,725Cemetery property, at cost
    
    
    
    
    
    
    352,891
    
    
    
    23,209
    
    
    
    
    
    
    
    376,100Property and equipment, at cost
    
    
    31,873
    
    
    
    419,849
    
    
    
    33,421
    
    
    
    
    
    
    
    485,143Less accumulated depreciation
    
    
    17,877
    
    
    
    157,418
    
    
    
    11,001
    
    
    
    
    
    
    
    186,296Net property and equipment
    
    
    13,996
    
    
    
    262,431
    
    
    
    22,420
    
    
    
    
    
    
    
    298,847Deferred income taxes, net
    
    
    17,767
    
    
    
    29,323
    
    
    
    12,710
    
    
    
    (602
    )
    
    
    59,198Investment in subsidiaries
    
    
    82,403
    
    
    
    
    
    
    
    
    
    
    
    (82,403
    )
    
    
    Other assets
    
    
    104
    
    
    
    1,057
    
    
    
    
    
    
    
    
    
    
    
    1,161Total assets
    
    $
    144,936
    
    
    $
    2,595,824
    
    
    $
    194,331
    
    
    $
    (75,805
    )
    
    $
    2,859,286LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    13,812
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,812Accounts payable
    
    
    706
    
    
    
    5,804
    
    
    
    324
    
    
    
    
    
    
    
    6,834Accrued expenses and other current
liabilities
    
    
    11,038
    
    
    
    28,790
    
    
    
    5,094
    
    
    
    
    
    
    
    44,922Liabilities associated with assets held
for sale
    
    
    
    
    
    
    35,190
    
    
    
    4,304
    
    
    
    
    
    
    
    39,494Total current liabilities
    
    
    25,556
    
    
    
    69,784
    
    
    
    9,722
    
    
    
    
    
    
    
    105,062Long-term debt, less current maturities
    
    
    419,511
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    449,511Intercompany payables, net
    
    
    (1,065,464
    )
    
    
    1,032,267
    
    
    
    33,197
    
    
    
    
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    1,424,419
    
    
    
    111,066
    
    
    
    
    
    
    
    1,535,485Other long-term liabilities
    
    
    10,486
    
    
    
    3,895
    
    
    
    
    
    
    
    
    
    
    
    14,381Total liabilities
    
    
    (609,911
    )
    
    
    2,530,365
    
    
    
    183,985
    
    
    
    
    
    
    
    2,104,439Common stock
    
    
    108,286
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    108,286Other
    
    
    647,665
    
    
    
    65,033
    
    
    
    10,294
    
    
    
    (75,327
    )
    
    
    647,665Accumulated other comprehensive loss
    
    
    (1,104
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (1,104
    )Total shareholders equity
    
    
    754,847
    
    
    
    65,459
    
    
    
    10,346
    
    
    
    (75,805
    )
    
    
    754,847Total liabilities and shareholders equity
    
    $
    144,936
    
    
    $
    2,595,824
    
    
    $
    194,331
    
    
    $
    (75,805
    )
    
    $
    2,859,286
 19




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes(Continued) Condensed Consolidating Balance Sheets October 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedASSETSCurrent assets:Cash and cash equivalent investments
    
    $
    18,975
    
    
    $
    (478
    )
    
    $
    88
    
    
    $
    
    
    
    $
    18,585Marketable securities
    
    
    1,048
    
    
    
    26
    
    
    
    1,272
    
    
    
    
    
    
    
    2,346Receivables, net of allowances
    
    
    41,826
    
    
    
    40,852
    
    
    
    14,525
    
    
    
    
    
    
    
    97,203Inventories
    
    
    325
    
    
    
    33,323
    
    
    
    6,506
    
    
    
    
    
    
    
    40,154Prepaid expenses
    
    
    713
    
    
    
    2,137
    
    
    
    37
    
    
    
    
    
    
    
    2,887Deferred income taxes, net
    
    
    1,434
    
    
    
    1,556
    
    
    
    
    
    
    
    
    
    
    
    2,990Assets held for sale
    
    
    
    
    
    
    57,892
    
    
    
    5,377
    
    
    
    
    
    
    
    63,269Total current assets
    
    
    64,321
    
    
    
    135,308
    
    
    
    27,805
    
    
    
    
    
    
    
    227,434Receivables due beyond one year, net of
allowances
    
    
    147
    
    
    
    61,118
    
    
    
    15,109
    
    
    
    
    
    
    
    76,374Prearranged receivables, net
    
    
    
    
    
    
    1,165,181
    
    
    
    42,403
    
    
    
    
    
    
    
    1,207,584Goodwill
    
    
    
    
    
    
    366,157
    
    
    
    30,433
    
    
    
    7,200
    
    
    
    403,790Deferred charges
    
    
    7,271
    
    
    
    218,816
    
    
    
    20,980
    
    
    
    
    
    
    
    247,067Cemetery property, at cost
    
    
    
    
    
    
    353,885
    
    
    
    23,233
    
    
    
    
    
    
    
    377,118Property and equipment, at cost
    
    
    31,697
    
    
    
    416,293
    
    
    
    33,871
    
    
    
    
    
    
    
    481,861Less accumulated depreciation
    
    
    16,942
    
    
    
    154,004
    
    
    
    10,855
    
    
    
    
    
    
    
    181,801Net property and equipment
    
    
    14,755
    
    
    
    262,289
    
    
    
    23,016
    
    
    
    
    
    
    
    300,060Deferred income taxes, net
    
    
    17,767
    
    
    
    30,690
    
    
    
    12,710
    
    
    
    (602
    )
    
    
    60,565Investment in subsidiaries
    
    
    74,118
    
    
    
    
    
    
    
    
    
    
    
    (74,118
    )
    
    
    Other assets
    
    
    104
    
    
    
    1,134
    
    
    
    
    
    
    
    
    
    
    
    1,238Total assets
    
    $
    178,483
    
    
    $
    2,594,578
    
    
    $
    195,689
    
    
    $
    (67,520
    )
    
    $
    2,901,230LIABILITIES AND SHAREHOLDERS EQUITYCurrent liabilities:Current maturities of long-term debt
    
    $
    13,935
    
    
    $
    
    
    
    $
    
    
    
    $
    
    
    
    $
    13,935Accounts payable
    
    
    348
    
    
    
    6,543
    
    
    
    383
    
    
    
    
    
    
    
    7,274Accrued expenses and other current
liabilities
    
    
    20,865
    
    
    
    33,001
    
    
    
    3,443
    
    
    
    
    
    
    
    57,309Liabilities associated with assets held
for sale
    
    
    
    
    
    
    36,909
    
    
    
    4,314
    
    
    
    
    
    
    
    41,223Total current liabilities
    
    
    35,148
    
    
    
    76,453
    
    
    
    8,140
    
    
    
    
    
    
    
    119,741Long-term debt, less current maturities
    
    
    458,180
    
    
    
    
    
    
    
    30,000
    
    
    
    
    
    
    
    488,180Intercompany payables, net
    
    
    (1,064,814
    )
    
    
    1,031,018
    
    
    
    33,796
    
    
    
    
    
    
    
    Prearranged deferred revenue, net
    
    
    
    
    
    
    1,425,637
    
    
    
    113,704
    
    
    
    
    
    
    
    1,539,341Other long-term liabilities
    
    
    11,110
    
    
    
    3,999
    
    
    
    
    
    
    
    
    
    
    
    15,109Total liabilities
    
    
    (560,376
    )
    
    
    2,537,107
    
    
    
    185,640
    
    
    
    
    
    
    
    2,162,371Common stock
    
    
    107,727
    
    
    
    426
    
    
    
    52
    
    
    
    (478
    )
    
    
    107,727Other
    
    
    633,575
    
    
    
    57,045
    
    
    
    9,997
    
    
    
    (67,042
    )
    
    
    633,575Accumulated other comprehensive loss
    
    
    (2,443
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,443
    )Total shareholders equity
    
    
    738,859
    
    
    
    57,471
    
    
    
    10,049
    
    
    
    (67,520
    )
    
    
    738,859Total liabilities and shareholders equity
    
    $
    178,483
    
    
    $
    2,594,578
    
    
    $
    195,689
    
    
    $
    (67,520
    )
    
    $
    2,901,230
 20




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes(Continued) Condensed Consolidating Statements of Cash Flows Three Months Ended January 31, 2004Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by operating
activities
    
    $
    35,237
    
    
    $
    206
    
    
    $
    548
    
    
    $
    
    
    
    $
    35,991Cash flows from investing activities:Proceeds from sale of assets, net
    
    
    (772
    )
    
    
    1,631
    
    
    
    
    
    
    
    
    
    
    
    859Additions to property and equipment
    
    
    (175
    )
    
    
    (4,511
    )
    
    
    (120
    )
    
    
    
    
    
    
    (4,806
    )Other
    
    
    
    
    
    
    (40
    )
    
    
    (2
    )
    
    
    
    
    
    
    (42
    )Net cash used in investing activities
    
    
    (947
    )
    
    
    (2,920
    )
    
    
    (122
    )
    
    
    
    
    
    
    (3,989
    )Cash flows from financing activities:Repayments of long-term debt
    
    
    (38,791
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (38,791
    )Intercompany receivables (payables)
    
    
    (650
    )
    
    
    1,249
    
    
    
    (599
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    3,127
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    3,127Purchase and retirement of common
stock
    
    
    (321
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (321
    )Net cash provided by (used in)
financing activities
    
    
    (36,635
    )
    
    
    1,249
    
    
    
    (599
    )
    
    
    
    
    
    
    (35,985
    )Net decrease in cash
    
    
    (2,345
    )
    
    
    (1,465
    )
    
    
    (173
    )
    
    
    
    
    
    
    (3,983
    )Cash and cash equivalents, beginning of
period
    
    
    18,975
    
    
    
    (478
    )
    
    
    88
    
    
    
    
    
    
    
    18,585Cash and cash equivalents, end of
period
    
    $
    16,630
    
    
    $
    (1,943
    )
    
    $
    (85
    )
    
    $
    
    
    
    $
    14,602
 21




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (6) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes(Continued) Condensed Consolidating Statements of Cash Flows Three Months Ended January 31, 2003Guarantor
    
    Non-GuarantorParent
    
    Subsidiaries
    
    Subsidiaries
    
    Eliminations
    
    ConsolidatedNet cash provided by (used in) operating
activities
    
    $
    (8,301
    )
    
    $
    (1,791
    )
    
    $
    2,408
    
    
    $
    
    
    
    $
    (7,684
    )Cash flows from investing activities:Proceeds from sale of assets, net
    
    
    (705
    )
    
    
    2,535
    
    
    
    
    
    
    
    
    
    
    
    1,830Additions to property and
equipment
    
    
    (276
    )
    
    
    (2,586
    )
    
    
    (190
    )
    
    
    
    
    
    
    (3,052
    )Other
    
    
    
    
    
    
    99
    
    
    
    (5
    )
    
    
    
    
    
    
    94Net cash provided by (used in)
investing activities
    
    
    (981
    )
    
    
    48
    
    
    
    (195
    )
    
    
    
    
    
    
    (1,128
    )Cash flows from financing activities:Repayments of long-term debt
    
    
    (2,682
    )
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    (2,682
    )Intercompany receivables
(payables)
    
    
    3,428
    
    
    
    (1,281
    )
    
    
    (2,147
    )
    
    
    
    
    
    
    Issuance of common stock
    
    
    313
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    313Net cash provided by (used in)
financing activities
    
    
    1,059
    
    
    
    (1,281
    )
    
    
    (2,147
    )
    
    
    
    
    
    
    (2,369
    )Net increase (decrease) in cash
    
    
    (8,223
    )
    
    
    (3,024
    )
    
    
    66
    
    
    
    
    
    
    
    (11,181
    )Cash and cash equivalents, beginning of
period
    
    
    24,752
    
    
    
    3,209
    
    
    
    229
    
    
    
    
    
    
    
    28,190Cash and cash equivalents, end of
period
    
    $
    16,529
    
    
    $
    185
    
    
    $
    295
    
    
    $
    
    
    
    $
    17,009
 22




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##### Table of Contents



STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (7) Discontinued Operations and Assets Held for Sale In accordance with SFAS No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, the Company reviews its long-lived assets for
impairment when changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. SFAS No. 144 requires that long-lived assets
to be held and used be recorded at the lower of carrying amount or fair value.
Long-lived assets to be disposed of are to be recorded at the lower of carrying
amount or fair value, less cost to sell. In December 2003, the Company
announced plans to close or sell a number of small businesses, primarily small
funeral homes, most of which were acquired as part of a group of facilities,
that are performing below acceptable levels and no longer fit the Companys
operating profile. As required by the Companys credit agreement, the Company plans to use substantially all of the proceeds from businesses held for sale to reduce its debt. The Company determined that the carrying value of a number
of these businesses exceeded their fair value. As a result, the Company
recorded an impairment charge of $34,300 during the fourth quarter of fiscal
year 2003. The fair market value was determined by specific offer or bid, or
an estimate based on a multiple or percentage of historical results. Although
the Company identified these businesses during the fourth quarter of fiscal
year 2003, it did not meet all of the criteria in SFAS No. 144 to classify
these operations as held for sale or discontinued operations in the fourth
quarter of fiscal year 2003. The operating results of those businesses that
met the criteria in SFAS No. 144 in the first quarter of fiscal year 2004 and
businesses sold during fiscal years 2003 or 2004 are reported in the
discontinued operations section of the consolidated statements of earnings. The assets and liabilities associated with assets held for sale are shown
in separate line items in the consolidated balance sheet titled assets held
for sale and liabilities associated with assets held for sale. At January
31, 2004 and October 31, 2003, the assets held for sale (excluding $16 and $17
of cash and cash equivalent investments of the operations held for sale as of
January 31, 2004 and October 31, 2003, respectively) and the liabilities
associated with assets held for sale line items in the balance sheet represent
the assets and liabilities, respectively, of certain assets, primarily funeral
homes. A summary of the assets and liabilities included in the assets held for
sale and liabilities associated with assets held for sale line items at
January 31, 2004 and October 31, 2003 and the operating results of the
discontinued operations for the three months ended January 31, 2004 and 2003
are as follows: Assets
    
    January 31, 2004
    
    October 31, 2003Receivables, net of allowances
    
    $
    3,904
    
    
    $
    3,866Inventories and other current assets
    
    
    4,176
    
    
    
    4,007Net property and equipment
    
    
    14,063
    
    
    
    14,712Prearranged receivables, net
    
    
    29,357
    
    
    
    30,228Deferred charges and other assets
    
    
    8,699
    
    
    
    9,786Cemetery property
    
    
    670
    
    
    
    670Assets held for sale(1)
    
    $
    60,869
    
    
    $
    63,269LiabilitiesDeferred income taxes, net
    
    $
    2,209
    
    
    $
    2,542Prearranged deferred revenue, net
    
    
    37,285
    
    
    
    38,681Liabilities associated with assets held for sale
    
    $
    39,494
    
    
    $
    41,223
   (1)
    
    Perpetual care trust funds are not reflected on the consolidated balance
sheet as the principal must remain in perpetuity. The cost and market
values of the perpetual care trust funds for the assets held for sale were
$1,917 and $1,732, respectively, at January 31, 2004 and $1,823 and
$1,593, respectively, at October 31, 2003. 23




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (7) Discontinued Operations and Assets Held for Sale(Continued) Three Months Ended January 31,2004
    
    2003Revenue:Funeral
    
    $
    4,797
    
    
    $
    5,609Cemetery
    
    
    408
    
    
    
    411$
    5,205
    
    
    $
    6,020Gross profit:Funeral
    
    $
    478
    
    
    $
    223Cemetery
    
    
    96
    
    
    
    83574
    
    
    
    306Other income(1)
    
    
    12
    
    
    
    802Earnings from discontinued operations before income taxes
    
    $
    586
    
    
    $
    1,108
   (1)
    
    Other income for the three months ended January 31, 2004 includes a loss
of approximately $80 related to the sale of several businesses. Other
income for the three months ended January 31, 2003 includes a gain of
approximately $790 related to the sale of two businesses. (8) Severance Charge In December 2003, the Company announced plans to restructure and reduce
its workforce by approximately 300 employees throughout the organization. In
the markets in which the Company operates, declining deaths in recent years
have resulted in reduced activity in many of its businesses, requiring fewer
employees. Additionally, the Company restructured for a flatter organization
to bring leadership closer to those individuals who have the greatest potential
to improve the performance of each location. The total charge for severance
and other costs associated with the workforce reductions is expected to be
approximately $2,314. In the first quarter of fiscal year 2004, the Company
recorded a charge of $1,993 ($1,236 after tax, or $.01 per share) for these
severance costs. There are approximately $321 in severance and other costs
remaining under the workforce reduction plan, which is expected to be completed
by June 1, 2004. (9) Funeral and Cemetery Trust Funds and Escrow Accounts Amounts due from preneed funeral and preneed cemetery trust and escrow
accounts are included in the prearranged receivables line in the Companys
consolidated balance sheet. As discussed in Note 1(f), the Company
recorded a valuation allowance of $20,000 as of October 31, 2002, related to
its prearranged receivables from its trust funds, which resulted in a reduction
in prearranged receivables and prearranged deferred revenue. This valuation
allowance was deemed necessary due to a decline in the overall market value of
the underlying trust funds. During fiscal year 2003, the valuation allowance
was decreased by $15,500 due to an increase in the market value of the
underlying trust funds, which resulted in an increase in prearranged
receivables and prearranged deferred revenue. Thus, the valuation allowance as
of October 31, 2003 was $4,500. During the first quarter of fiscal year 2004,
the valuation allowance was decreased by $500, which resulted in an increase to
prearranged receivables and prearranged deferred revenue. Accordingly, as of
January 31, 2004, the valuation allowance was $4,000. For further information
regarding prearranged receivables, see Note 4 to the consolidated financial
statements of the Companys Annual Report on Form 10-K for the fiscal year
ended October 31, 2003. The Companys perpetual care trust fund accounts are
not reflected in the accompanying financial statements. For further
information regarding the 24




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (9) Funeral and Cemetery Trust Funds and Escrow Accounts(Continued) perpetual care trust funds, see Note 5 to the consolidated financial statements
of the Companys Annual Report on Form 10-K for the fiscal year ended October
31, 2003. The following reflects the Companys preneed funeral, preneed cemetery and
perpetual care trust fund and escrow account balances, excluding the trust fund
and escrow account balances of the assets held for sale, as of January 31, 2004
and October 31, 2003. Funeral
    
    Cemetery
    
    Perpetual CareJanuary 31,
    
    October 31,
    
    January 31,
    
    October 31,
    
    January 31,
    
    October 31,2004
    
    2003
    
    2004
    
    2003
    
    2004
    
    2003Total value at cost
    
    $
    530,280
    
    
    $
    528,825
    
    
    $
    231,501
    
    
    $
    230,796
    
    
    $
    226,679
    
    
    $
    223,927Net unrealized depreciation
    
    
    (60,943
    )
    
    
    (79,926
    )
    
    
    (37,511
    )
    
    
    (44,833
    )
    
    
    (18,293
    )
    
    
    (23,445
    )Total value at market
    
    $
    469,337
    
    
    $
    448,899
    
    
    $
    193,990
    
    
    $
    185,963
    
    
    $
    208,386
    
    
    $
    200,482
 (10) Consolidated Comprehensive Income Consolidated comprehensive income for the three months ended January 31,
2004 and 2003 is as follows: Three Months Ended January 31,2004
    
    2003Net earnings
    
    $
    11,728
    
    
    $
    9,473Other comprehensive income:Reclassification adjustment for realized loss on investments, net of
deferred tax benefit of $457
    
    
    746
    
    
    
    Unrealized appreciation of investments, net of deferred tax expense of
($23) and ($28), respectively
    
    
    38
    
    
    
    44Unrealized appreciation on derivative instrument designated and
qualifying as a cash flow hedging instrument, net of deferred tax
expense of ($298) and ($28), respectively
    
    
    555
    
    
    
    45Total other comprehensive income
    
    
    1,339
    
    
    
    89Total comprehensive income
    
    $
    13,067
    
    
    $
    9,562
 (11) Guarantees The Companys obligations under its senior secured credit facility are
guaranteed by all of its existing and future direct and indirect subsidiaries
formed under the laws of the United States, any state thereof or the District
of Columbia, except for specified excluded subsidiaries. The senior
subordinated notes are guaranteed by all of the domestic subsidiaries of the
Company, other than certain specified subsidiaries including the Puerto Rican
subsidiaries, Investors Trust, Inc. and certain immaterial domestic
subsidiaries. For additional information regarding the senior secured credit
facility and senior subordinated notes, see Note 13 to the consolidated
financial statements of the Companys Annual Report on Form 10-K for the fiscal
year ended October 31, 2003. All obligations under the senior secured credit facility, including the
guarantees and any interest rate protection and other hedging agreements with
any lender or its affiliates, are secured by a first priority perfected
security 25




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (11) Guarantees(Continued) interest in (1) all capital stock and other equity interests of the Companys
existing and future direct and indirect domestic subsidiaries, other than
certain domestic subsidiaries acceptable to the agents, (2) 65 percent of the
voting equity interests and 100 percent of all other equity interests (other
than qualifying shares of directors) of all direct existing and future foreign
subsidiaries, and (3) all other existing and future asset and properties of the
Company and the guarantors, except for real property, vehicles and other
specified exclusions. Louisiana law gives Louisiana corporations broad powers to indemnify their
present and former directors and officers and those of affiliated corporations
against expenses incurred in the defense of any lawsuit to which they are made
parties by reason of their positions. The Companys By-laws make mandatory the
indemnification of directors and officers permitted by Louisiana law. The
Company has in effect a directors and officers liability insurance policy
that provides for indemnification of its officers and directors against losses
arising from claims asserted against them in their capacities as officers and
directors, subject to limitations and conditions set forth in such policy. The
Company has also entered into indemnity agreements with each director and
executive officer, pursuant to which the Company has agreed, subject to certain
exceptions, to purchase and maintain directors and officers liability
insurance. The agreements also provide that the Company will indemnify each
director and executive officer against any costs and expenses, judgments,
settlements and fines incurred in connection with any claim involving him or
her by reason of his or her position as director or officer, provided that the
director or executive officer meets certain standards of conduct. As of January 31, 2004, the Company has guaranteed long-term debt of its
subsidiaries of approximately $3,366 that represents notes the subsidiaries
issued as part of the purchase price of acquired businesses or debt the
subsidiaries assumed in connection with acquisitions. (12) Related Party Transactions On July 15, 2003, the Company announced that Frank B. Stewart, Jr.,
Chairman of the Board, had elected to retire and become Chairman Emeritus of
the Company. As part of Mr. Stewarts retirement benefits agreement, the
Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550
each. The first payment was made within five days after the announcement of
his retirement. The remaining two payments will be made on June 20, 2004 and
June 20, 2005. The Company recorded the $1,650 charge in the third quarter of
2003 but will continue to make the payments in accordance with the terms of the
agreement. On June 10, 2003, the Company announced that Brian J. Marlowe, Chief
Operating Officer, had stepped down to pursue other interests. According to
the terms of his employment agreement, he is entitled to receive an amount
equal to two years of salary, or $800, over the next two years. The Company
recorded the $800 charge in the third quarter of 2003 but will continue to make
the payments in accordance with the terms of the agreement. In January 1998, the Company discontinued an insurance policy on the life
of Mr. Frank B. Stewart, Jr., Chairman Emeritus of the Company. In order to
purchase a replacement policy, The Stewart Family Special Trust borrowed $685
from the Company pursuant to a promissory note due 180 days after the death of
Mr. Stewart. Interest on the note accrues annually at a rate equal to the
Companys cost of borrowing under its revolving credit facility and is payable
when the principal becomes due. The amount of the loan was equal to the cash
value received by the Company upon the discontinuance of the prior insurance
policy. The loan proceeds were used by the trust to 26




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts) (12) Related Party Transactions(Continued) purchase a single premium policy on the life of Mr. Stewart. Certain of the
beneficiaries of The Stewart Family Special Trust are members of Mr. Stewarts
family. The loan was approved by all of the disinterested members of the Board
of Directors. The outstanding balance of the loan at January 31, 2004,
including accrued interest, was approximately $970. The father of G. Kenneth Stephens, Jr., Senior Vice President and
President of the Companys eastern division, has an 81 percent ownership
interest in Cemetery Funeral Supply, Inc., a vendor of the Company. During the
first quarter of fiscal year 2004 and in fiscal year 2003, the Company paid
Cemetery Funeral Supply, Inc. $46 and $281, respectively. (13) Subsequent Events In February 2004, the Company amended its credit agreement to reduce the
applicable margin on its Term Loan B to 250 basis points. The previous margin
ranged from 312.5 basis points to 337.5 basis points, subject to quarterly
adjustments based on the Companys consolidated leverage ratio. 27




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Item 2. Managements Discussion and Analysis of Financial Condition and Results of Operations General We are the third largest provider of funeral and cemetery products and
services in the death care industry in the United States. As of March 4, 2004,
we owned and operated 290 funeral homes and 148 cemeteries in 29 states within
the United States and Puerto Rico. We sell cemetery property and funeral and cemetery products and services
both at the time of need and on a preneed basis. Our revenues in each period
are derived primarily from at-need sales, preneed sales delivered out of our
backlog during the period (including the accumulated trust fund earnings or
build-up in the face value of insurance contracts related to these preneed
deliveries), preneed cemetery property sales and other items such as perpetual
care trust earnings and finance charges. For a discussion of our accounting
for preneed sales and trust and escrow account earnings, see Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 7 in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2003 and Note 1 to the consolidated financial statements included
herein. In connection with our implementation of FASB Interpretation No. 46
(FIN 46), Consolidation of Variable Interest Entities, in our next fiscal
quarter, we may be required to materially change how we account for our trust
funds and escrow accounts and earnings from our trust funds and escrow
accounts. For further discussion, see Note 2 to the consolidated financial
statements included herein. Our funeral and cemetery businesses include prearranged sales funded
through trust and escrow arrangements. The cemetery business includes
maintenance of cemetery grounds funded through perpetual care trust funds.
Under our current accounting practices, we defer all of the earnings realized
by our preneed funeral and preneed cemetery trust funds and escrow accounts
until the underlying merchandise or services are delivered. We recognize the
earnings from our perpetual care trust funds as they are realized in the trust. From 1991 through 1999, we achieved an overall annual realized return of
8.0 percent to 9.0 percent in our trust funds. However, the average annual
realized return on our domestic trust funds was 5.8 percent, 6.3 percent, 4.3
percent, 4.8 percent and 2.3 percent for fiscal years 2000, 2001, 2002, 2003
and the three months ended January 31, 2004, respectively. These returns
represent interest, dividends and realized capital gains or losses but not
unrealized capital gains or losses. Under our current accounting practices, we
defer recognition of all earnings and losses realized by preneed funeral and
cemetery trust funds until the underlying products and services are delivered.
Consequently, the lower investment returns realized reduced the trust earnings
recognized as revenue in 2003 and did so again in the first quarter of 2004.
Under our current accounting practices, we recognize all earnings and losses
realized by our perpetual care trust funds currently including capital gains
and losses in those jurisdictions where capital gains can be withdrawn and used
for cemetery maintenance. As a result, depressed stock prices and returns on
fixed-income investments are expected to continue to put pressure on perpetual
care trust earnings recognized during the current year. Because approximately
50 percent of our total trust portfolio is currently invested in a diversified
group of equity securities, we would generally expect our portfolio performance
to improve as the performance of the overall stock market improves. As disclosed in Note 9 to the consolidated financial statements, our
preneed funeral and preneed cemetery trust funds and escrow accounts had net
unrealized depreciation of $60.9 million and $37.5 million, respectively, as of
January 31, 2004. Under our current accounting practices, unrealized gains and
losses in the funeral and cemetery trust funds and escrow accounts have no
immediate impact on our revenues, margins, earnings or cash flow, unless the
fair market value of the funds were to decline below the estimated costs to
deliver the underlying products and services. If that were to occur, we would
record a charge to earnings to record a liability for the expected loss on the
delivery of contracts in our backlog. Over time, gains and losses realized in
the funds are allocated to underlying preneed contracts and affect the amount
of trust fund earnings we record when we deliver the underlying product or
service. Accordingly, if current market conditions do not improve, our
revenues, margins, earnings and cash flow would be negatively affected by the
reduced revenue we would realize when we deliver the underlying products 28




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and services. We project that with approximately 1.0 percent to 3.0 percent
annualized returns in the funds over the estimated lives of the associated
preneed contracts, we would recover the net unrealized depreciation currently
in the funds by the time the underlying products and services are delivered.
As discussed in Note 9 to the consolidated financial statements, our perpetual
care trust fund accounts had net unrealized depreciation of $18.3 million as of
January 31, 2004. Under our current accounting practices, unrealized gains and
losses in the perpetual care trust funds do not affect earnings but could limit
the capital gains available to us and could result in lower returns and lower
current revenues than we have historically achieved. For a discussion of our forecasts for continuing operations in fiscal year
2004 and the principal assumptions underlying the forecasts, see the discussion
under the heading Forward-Looking Statements. Critical Accounting Policies The consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America, which
require us to make estimates and assumptions (see Note 1(d) to the consolidated
financial statements). Our critical accounting policies are those that are
both important to the portrayal of our financial condition and results of
operations and require managements most difficult, subjective and complex
judgment. These critical accounting policies are discussed in Managements
Discussion and Analysis of Financial Condition and Results of Operations in
our Annual Report on Form 10-K for the fiscal year ended October 31, 2003.
There have been no changes to our critical accounting policies since the filing
of our Annual Report on Form 10-K for the fiscal year ended October 31, 2003. Results of Operations In December 2003, we announced our plan to close or sell a number of small
businesses, primarily funeral homes, most of which were acquired as part of a
group of facilities, that are performing below acceptable levels and no longer
fit our operating profile. In accordance with Statement of Financial
Accounting Standards (SFAS) No. 144, Accounting for the Impairment or
Disposal of Long-Lived Assets, businesses held for sale or sold that meet
certain criteria in SFAS No. 144 are to be classified as discontinued
operations. Thus, in the first quarter of fiscal year 2004, the businesses
that met the criteria and businesses sold during fiscal years 2003 and 2004
were classified as discontinued operations. The following discussion
segregates the financial results of continuing operations into our funeral and
cemetery segments. As there have been no material acquisitions or construction
of new locations in fiscal years 2004 and 2003, results from continuing
operations reflect those of same store locations. Three Months Ended January 31, 2004 Compared to Three Months Ended January 31,
2003Continuing Operations Funeral Segment Three Months EndedJanuary 31,Increase2004
    
    2003
    
    (Decrease)(In millions)Total Funeral Revenue
    
    $
    74.2
    
    
    $
    71.1
    
    
    $
    3.1Total Funeral Costs
    
    
    51.4
    
    
    
    52.2
    
    
    
    (.8
    )Total Funeral Gross Profit
    
    $
    22.8
    
    
    $
    18.9
    
    
    $
    3.9
 Funeral revenue from continuing operations increased $3.1 million, or 4.4
percent, for the three months ended January 31, 2004, compared to the
corresponding period in 2003. The increase in funeral revenue was primarily
due to a 2.2 percent increase in the number of funeral services performed by
our same store businesses, combined with an increase in the average revenue per
funeral service for these businesses. Our same store businesses achieved a 4.2
percent increase in the average price paid per traditional funeral service and
a 4.6 percent increase in the average price paid per cremation service. The
average revenue per call increase was negatively impacted by a reduction in
trust earnings recognized upon the delivery of preneed funerals, resulting from
lower investment returns realized in our preneed funeral trust funds during
previous years, and by a decrease in the proportion of funerals that were 29




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traditional funeral services. This resulted in an overall 1.2 percent
increase in the average revenue per call for our same store businesses. Funeral gross profit margin from continuing operations increased from 26.6
percent in the first quarter of fiscal year 2003 to 30.7 percent in the first
quarter of fiscal year 2004. The increase is primarily due to the increase in
revenue as discussed above, combined with reduced funeral costs, primarily
salaries, wages and benefits, resulting from our cost reduction initiatives.
The cremation rate for our same store operations was 36.5 percent for the
quarter ended January 31, 2004 compared to 35.8 percent for the quarter ended
January 31, 2003. Cemetery Segment Three Months EndedJanuary 31,Increase2004
    
    2003
    
    (Decrease)(In millions)Total Cemetery Revenue
    
    $
    55.6
    
    
    $
    54.1
    
    
    $
    1.5Total Cemetery Costs
    
    
    41.6
    
    
    
    41.9
    
    
    
    (.3
    )Total Cemetery Gross Profit
    
    $
    14.0
    
    
    $
    12.2
    
    
    $
    1.8
 Cemetery revenue from continuing operations increased $1.5 million, or 2.8
percent, for the three months ended January 31, 2004, compared to the
corresponding period in 2003, primarily due to an increase in preneed cemetery
property sales. Preneed cemetery property sales increased 8 percent in the
first quarter of fiscal year 2004 compared to the first quarter of fiscal year
2003. We attribute this improvement to our cemetery property sales initiative
announced in September 2003. We experienced an annualized average return, excluding unrealized gains
and losses, of 4.7 percent in our perpetual care trust funds for the quarter
ended January 31, 2004 resulting in revenue of $2.4 million, compared to 4.2
percent for the corresponding period in 2003 resulting in revenue of $1.9
million. Cemetery gross profit margin from continuing operations increased from
22.5 percent in the first quarter of fiscal year 2003 to 25.2 percent in the
first quarter of fiscal year 2004. The increase is primarily due to an
increase in preneed cemetery property sales, combined with reduced cemetery
costs, primarily salaries, wages and benefits, resulting from our cost
reduction initiatives. Discontinued Operations In accordance with SFAS No. 144, we review our long-lived assets for
impairment when changes in circumstances indicate that the carrying amount of
the asset may not be recoverable. SFAS No. 144 requires that long-lived assets
to be held and used be recorded at the lower of carrying amount or fair value.
Long-lived assets to be disposed of are to be recorded at the lower of carrying
amount or fair value, less cost to sell. In December 2003, we announced plans
to close or sell a number of small businesses, primarily small funeral homes,
most of which were acquired as part of a group of facilities, that are
performing below acceptable levels and no longer fit our operating profile. We
determined that the carrying value of a number of these businesses exceeded
their fair value. As a result, we recorded an impairment charge of $34.3
million during the fourth quarter of fiscal year 2003. The fair market value
was determined by specific offer or bid, or an estimate based on a multiple or
percentage of historical results. Although we identified these businesses
during the fourth quarter of fiscal year 2003, we did not meet all of the
criteria in SFAS No. 144 to classify these operations as held for sale or
discontinued operations in the fourth quarter of fiscal year 2003. The
operating results of those businesses that met the criteria in SFAS No. 144 in
the first quarter of fiscal year 2004 and businesses sold during fiscal years
2003 or 2004 are reported in the discontinued operations section of the
consolidated statements of earnings. Included in discontinued operations for
the three months ended January 31, 2004 and 2003 was a loss of approximately
$.1 million and a gain of approximately $.8 million, respectively, related to
the sale of businesses. 30




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Other Corporate general and administrative expenses for the three months ended
January 31, 2004 decreased $.4 million compared to the same period in 2003
primarily due to decreased salaries and benefits. In December 2003, we announced a reduction and restructuring of our
workforce. We recorded a charge of $2.0 million in the first quarter of fiscal
year 2004 for severance and other related costs. This charge is presented in
the Severance charge line item in the consolidated statements of earnings. Total depreciation and amortization was $12.9 million for the first
quarter of fiscal year 2004 compared to $13.4 million for the same period in
2003. Depreciation and amortization from continuing operations was $12.7
million for the first quarter of fiscal year 2004 compared to $12.9 million for
the same period in 2003. Interest expense decreased $1.1 million to $12.5 million for the first
quarter of fiscal year 2004 compared to $13.6 million for the same period in
2003. The decrease is due to a $65.0 million decrease in the average debt
outstanding, partially offset by a 21 basis point increase in the average
interest rate during the quarter ended January 31, 2004 compared to the quarter
ended January 31, 2003. Other income (expense), net decreased from $.9 million in the first
quarter of fiscal year 2003 to ($.2) million in the first quarter of fiscal
year 2004 primarily due to the writedown of certain marketable securities in
the first quarter of 2004, which had market value losses that were deemed to be
other than temporary. As of January 31, 2004 and March 4, 2004, our outstanding debt totaled
$463.3 million and $462.3 million, respectively. Of the total amount of debt
outstanding, including the portion subject to the interest rate swap agreements
in effect as of January 31, 2004, approximately 83 percent was fixed-rate debt,
with the remaining 17 percent subject to short-term variable interest rates
averaging approximately 3.9 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, expiring on March 11, 2004 and March 11, 2005, each involving
a notional amount of $50.0 million. The agreements effectively convert
variable-rate debt bearing interest based on three-month LIBOR plus the
applicable margin specified under our senior secured credit facility to fixed-
rate debt bearing interest at the fixed swap rate plus such applicable margin.
As of January 31, 2004, the effective rate of the debt hedged by the interest
rate swaps was 7.025 percent and 7.64 percent on each $50.0 million swapped. Preneed Sales and Deliveries In the third quarter of fiscal year 2003, we increased our focus on
preneed funeral sales as part of our operating initiatives, and since then have
seen significant increases. Preneed funeral sales increased 17 percent in the
first quarter of fiscal year 2004 compared to the same period in 2003. The revenues from our preneed funeral and cemetery merchandise and service
sales are deferred into our backlog and are not included in our operating
results above. We added $37.3 million in preneed sales to our funeral and
cemetery merchandise and services backlog during the three months ended January
31, 2004 to be recognized in the future, net of cancellations, as these prepaid
products and services are delivered, compared to $35.2 million for the
corresponding period in 2003. Deliveries out of our preneed funeral and
cemetery merchandise and services backlog, including accumulated trust fund
earnings related to these preneed deliveries, amounted to $42.7 million for the
three months ended January 31, 2004, compared to $43.9 million for the
corresponding period in 2003. Liquidity and Capital Resources 31




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Cash Flow Our operations provided cash of $36.0 million for the three months ended
January 31, 2004, compared to using cash of $7.7 million for the corresponding
period in 2003, primarily due to the $33.2 million tax refund received during
the first quarter of fiscal year 2004 resulting from a change in tax accounting
methods for cemetery merchandise revenue. The increase is also a result of the
improvement in earnings combined with a $4.0 million increase in accrued
expenses due to the timing of payroll. Our investing activities resulted in a net cash outflow of $4.0 million
for the three months ended January 31, 2004, compared to a net cash outflow of
$1.1 million for the comparable period in 2003. For the three months ended
January 31, 2004, capital expenditures amounted to $4.8 million, which included
$3.9 million for maintenance capital expenditures and $.9 million for new
growth initiatives, compared to capital expenditures of $3.1 million in the
same period in 2003, which included $2.9 million for maintenance capital
expenditures and $.2 million for new growth initiatives. Our financing activities resulted in a net cash outflow of $36.0 million
for the three months ended January 31, 2004, compared to a net cash outflow of
$2.4 million for the comparable period in 2003. The change is primarily due to
repayments of long-term debt of $38.8 million in the three months ended January
31, 2004, compared to $2.7 million in the comparable period of 2003. The
repayment of long-term debt in 2004 resulted from the use of the $33.2 million
tax refund to reduce our outstanding Term Loan B in the first quarter of fiscal
year 2004. Contractual Obligations and Commercial Commitments As of January 31, 2004, our outstanding debt balance was $463.3 million.
The following table details our known future cash payments (in millions)
related to various contractual obligations as of January 31, 2004. Payments Due by PeriodLess Than
    
    
    
    
    
    
    
    
    
    More ThanContractual Obligations
    
    Total
    
    1 Year
    
    1-3 Years
    
    3-5 Years
    
    5 YearsLong-term debt obligations (1)
    
    $
    463.3
    
    
    $
    10.3
    
    
    $
    152.2
    
    
    $
    300.2
    
    
    $
    .6Operating lease obligations (2)
    
    
    43.0
    
    
    
    4.2
    
    
    
    12.7
    
    
    
    7.9
    
    
    
    18.2Non-competition and other agreements(3)
    
    
    13.4
    
    
    
    4.0
    
    
    
    7.3
    
    
    
    1.8
    
    
    
    .3$
    519.7
    
    
    $
    18.5
    
    
    $
    172.2
    
    
    $
    309.9
    
    
    $
    19.1
   (1)
    
    See below for a breakdown of our future scheduled principal payments and
maturities of our long-term debt by type as of January 31, 2004.(2)
    
    Our noncancellable operating leases are primarily for land and buildings
and expire over the next one to 16 years, except for six leases that
expire between 2032 and 2039. Our future minimum lease payments as of
January 31, 2004 are $4.2 million, $4.7 million, $4.3 million, $3.7
million, $3.3 million and $22.8 million for the years ending October 31,
2004, 2005, 2006, 2007, 2008 and later years, respectively.(3)
    
    We have entered into non-competition agreements with prior owners and key
employees of acquired subsidiaries that expire through 2012. During
fiscal year 2001, we decided to relieve some of the prior owners and key
employees of their obligations not to compete; however, we will continue
to make the payments in accordance with the contract terms. This category
also includes separation pay related to two former executive officers
payable over the next two years. As stated above, we received a $33.2 million tax refund in the first
quarter of fiscal year 2004, which was used to reduce our outstanding Term Loan
B. As required by our credit agreement, we plan to use substantially all of
the proceeds from businesses held for sale and the approximate $12 million of
remaining income tax benefits related to 32




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##### Table of Contents



the sale of our foreign operations, the majority of which we expect to
receive over the next three years, to reduce our debt. The following table
reflects future scheduled principal payments and maturities of our long-term
debt (in millions) as of January 31, 2004. Other,PrincipallySellerFiscal
    
    Revolving
    
    
    
    
    
    Senior
    
    Financing ofYear Ending
    
    Credit
    
    Term
    
    Subordinated
    
    AcquiredOctober 31,
    
    Facility
    
    Loan B
    
    Notes
    
    Operations
    
    Total2004
    
    $
    
    
    
    $
    7.5
    
    
    $
    
    
    
    $
    2.8
    
    
    $
    10.32005
    
    
    79.0
    
    
    
    70.2
    
    
    
    
    
    
    
    1.7
    
    
    
    150.92006
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .8
    
    
    
    .82007
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .5
    
    
    
    .52008
    
    
    
    
    
    
    
    
    
    
    300.0
    
    
    
    .2
    
    
    
    300.2Thereafter
    
    
    
    
    
    
    
    
    
    
    
    
    
    
    .6
    
    
    
    .6Total long-term debt
    
    $
    79.0
    
    
    $
    77.7
    
    
    $
    300.0
    
    
    $
    6.6
    
    
    $
    463.3
 We had $14.9 million of outstanding letters of credit as of January 31,
2004, and we are required to maintain a bond to guarantee our obligations
relating to funds we withdrew from our preneed funeral trusts in Florida. We
substituted a bond to guarantee performance under certain preneed funeral
contracts and agreed to maintain unused credit facilities in an amount that
will equal or exceed the bond amount. As of January 31, 2004, the balance of
the Florida bond was $41.1 million. We believe that cash flow from operations
will be sufficient to cover our estimated cost of providing the related
prearranged services and products in the future. As of January 31, 2004 and
March 4, 2004, there was $79.0 million drawn on our $175.0 million revolving
credit facility. As of January 31, 2004 and March 4, 2004, our availability
under the revolving credit facility, after giving consideration to the
aforementioned letters of credit and bond obligation was $40.0 million. Under our credit agreement, if there is no default or event of default, we
may pay cash dividends and repurchase our stock, provided that the aggregate
amount of the dividends and stock repurchased plus other types of restricted
payments in any fiscal year does not exceed $15.0 million, or, if our
consolidated leverage ratio is not greater than 3.00 to 1.00 both before and
after the payment, $25.0 million. Under the restrictions in our debt
agreements, as of January 31, 2004, we could use up to $15.0 million to pay
dividends or repurchase our stock during fiscal year 2004. Since the inception
of our stock repurchase program in June 2003 through March 4, 2004, we had
repurchased 1,735,000 shares of our Class A common stock at an average price of
$5.30 per share. The credit agreement limits capital expenditures (excluding
the costs of acquisitions as defined in the amendment) in any fiscal year to
$35.0 million, with a provision for the carryover of permitted but unused
amounts under specified circumstances. The costs of acquisitions in any fiscal
year are limited to $50.0 million, with a provision for the carryover of
permitted but unused amounts under specified circumstances. In February 2004,
we amended our credit agreement to reduce our applicable margin on our Term
Loan B to 250 basis points. The previous margin ranged from 312.5 basis points
to 337.5 basis points, subject to quarterly adjustments based on our
consolidated leverage ratio. We expect to be able to pay our debt coming due in fiscal year 2004 using
cash from operations or by drawing on our revolving credit facility. It is not
our intention to pay all remaining amounts on our long-term debt exclusively
from cash flow from operations. We expect to be able to refinance the debt
well in advance of the maturity dates. Any refinancing could result in
additional interest and other costs depending primarily on financial markets
and our credit profile at the time of refinancing. 33




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##### Table of Contents



Off-Balance Sheet Arrangements Our off-balance sheet arrangements as of January 31, 2004 consist of the
following two items: (1) the $41.1 million bond we are required to maintain to guarantee our
obligations relating to funds we withdrew from our preneed funeral
trusts in Florida, which is discussed above and in Note 18 to the
consolidated financial statements in our Annual Report on Form 10-K for
the fiscal year ended October 31, 2003; and (2) our preneed funeral, preneed cemetery and perpetual care trust
funds, which are discussed both in Note 9 to the consolidated financial
statements included herein and in Notes 4 and 5 to the consolidated
financial statements included in Item 8 and at Summary of Current
Accounting for Trust and Escrow Account Earnings included in Item 7 in
our Annual Report on Form 10-K for the fiscal year ended October 31,
2003. Ratio of Earnings to Fixed Charges Our ratio of earnings to fixed charges was as follows: Three Months
Ended
January 31,
    
    Years Ended October 31,2004
    
    2003
    
    2002
    
    2001
    
    2000
    
    19992.39(1)
    
    
    
    (2)
    
    
    1.75
    (3)
    
    
    
    (4)(5)
    
    
    2.57
    
    
    
    3.43
    (4)
   (1)
    
    Pretax earnings for the three months ended January 31, 2004 include a
charge of $2.0 million for severance costs related to workforce
reductions.(2)
    
    Pretax earnings for fiscal year 2003 include a charge of $11.3 million
for the loss on early extinguishment of debt in connection with the
redemption of our Remarketable Or Redeemable Securities and a noncash
charge of $107.3 million for the impairment charges related to goodwill
and long-lived asset impairment. As a result of these charges, our
earnings for fiscal year 2003 were insufficient to cover our fixed
charges, and an additional $69.8 million in pretax earnings would have
been required to eliminate the coverage deficiency.(3)
    
    Pretax earnings for fiscal year 2002 include a noncash charge of $18.5
million in connection with the writedown of assets held for sale.(4)
    
    Excludes the cumulative effect of change in accounting principles.(5)
    
    Pretax earnings for fiscal year 2001 include a noncash charge of $269.2
million in connection with the writedown of assets held for sale and other
charges and a $9.1 million charge for the loss on early extinguishment of
debt. As a result of these charges, our earnings for fiscal year 2001
were insufficient to cover our fixed charges, and an additional $197.0
million in pretax earnings would have been required to eliminate the
coverage deficiency. For purposes of computing the ratio of earnings to fixed charges, earnings
consist of pretax earnings plus fixed charges (excluding interest capitalized
during the period). Fixed charges consist of interest expense, capitalized
interest, amortization of debt expense and discount or premium relating to any
indebtedness and the portion of rental expense that management believes to be
representative of the interest component of rental expense. The ratio of
earnings to fixed charges for the three months ended January 31, 2004 reflects
the adoption of SFAS No. 144; fiscal years 2003 and 2002 reflect the adoption
of SFAS No. 142; fiscal year 2001 reflects the 2001 change in accounting
principles; and fiscal years 2000 and 1999 reflect the 1999 change in
accounting principle. 34




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##### Table of Contents



Inflation Inflation has not had a significant impact on our operations over the past
three years, nor is it expected to have a significant impact in the foreseeable
future. Recent Accounting Standards See Note 2 to the consolidated financial statements included herein. 
 Item 3. Quantitative and Qualitative Disclosures About Market Risk Quantitative and qualitative disclosure about market risk is presented in
Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31,
2003, filed with the Securities and Exchange Commission on January 14, 2004.
The following disclosure discusses only those instances in which the market
risk has changed by more than 10 percent from the annual disclosure. The market risk inherent in our market risk sensitive instruments and
positions is the potential change arising from increases or decreases in the
prices of marketable equity securities and interest rates as discussed below.
Generally, our market risk sensitive instruments and positions are
characterized as other than trading. Our exposure to market risk as
discussed below includes forward-looking statements and represents an
estimate of possible changes in fair value or future earnings that would occur
assuming hypothetical future movements in equity markets or interest rates.
Our views on market risk are not necessarily indicative of actual results that
may occur and do not represent the maximum possible gains and losses that may
occur, since actual gains and losses will differ from those estimated, based on
actual fluctuations in equity markets, interest rates and the timing of
transactions. Interest We have entered into various fixed- and variable-rate debt obligations,
which are detailed in Note 13 to our consolidated financial statements included
in our Annual Report on Form 10-K for the fiscal year ended October 31, 2003
and in the Liquidity and Capital Resources section of our Managements
Discussion and Analysis of Financial Condition and Results of Operations
included in Item 2. Effective March 11, 2002, we entered into two interest rate swap
agreements, each involving a notional amount of $50.0 million. The first
agreement effectively converts $50.0 million of variable-rate debt bearing
interest based on three-month LIBOR to a fixed rate based on the swap rate of
3.65 percent and expires on March 11, 2004. The second agreement effectively
converts $50.0 million of variable-rate debt bearing interest based on
three-month LIBOR to a fixed rate based on the swap rate of 4.265 percent and
expires on March 11, 2005. The estimated fair value of the interest rate swaps
based on quoted market prices was ($2.1) million and ($2.6) million as of
January 31, 2004 and October 31, 2003, respectively. A hypothetical 100 basis
point increase in the average interest rates applicable to such debt would
result in an increase of approximately $.5 million and $.8 million in the fair
value of these instruments as of January 31, 2004 and October 31, 2003,
respectively. As of January 31, 2004 and October 31, 2003, the carrying values of our
Term Loan B and revolving credit facility, including accrued interest, were
$156.7 million and $194.4 million, respectively, compared to fair values of
$157.8 million and $195.9 million, respectively. Fair value was determined
using quoted market prices, where applicable, or future cash flows discounted
at market rates for similar types of borrowing arrangements. Of the $156.7
million outstanding under our Term Loan B and revolving credit facility on
January 31, 2004, $79.0 million was not hedged by the interest rate swaps and
was subject to short-term variable interest rates. Each approximate 10
percent, or 45 basis point, change in the average interest rate applicable to
this debt would result in a change of approximately $.2 million in our pretax
earnings. Of the $194.4 million outstanding under our Term Loan B and
revolving credit facility on October 31, 2003, $94.4 million was not hedged by
the interest rate swaps and was 35




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##### Table of Contents



subject to short-term variable interest rates. Each approximate 10
percent, or 45 basis point, change in the average interest rate applicable to
this debt would result in a change of approximately $.1 million in our pretax
earnings. As of January 31, 2004 and October 31, 2003, the carrying values of our
long-term fixed-rate debt, including accrued interest, were approximately
$309.3 million and $318.5 million, respectively, compared to fair values of
$347.7 million and $357.6 million, respectively. Fair values were determined
using quoted market prices. Each approximate 10 percent change in the average
interest rates applicable to such debt, 50 and 60 basis points for January 31,
2004 and October 31, 2003, would result in changes of approximately $2.3
million and $3.1 million, respectively, in the fair values of these
instruments. If these instruments are held to maturity, no change in fair
value will be realized. We monitor our mix of fixed- and variable-rate debt obligations in light
of changing market conditions and from time to time may alter that mix by, for
example, refinancing balances outstanding under our variable-rate revolving
credit facility with fixed-rate debt or by entering into interest rate swaps. Trust Funds As of January 31, 2004 and October 31, 2003, our marketable equity
securities and our fixed-income securities subject to market risk consisted
principally of investments held by our prearranged funeral, cemetery and
perpetual care trust funds and escrow accounts. We estimate that each 100
basis point increase or decrease in the yield, which excludes unrealized gains
and losses, on the preneed funeral and cemetery and perpetual care trust funds,
based on the January 31, 2004 balances, would result in an approximate increase
or decrease in our revenues associated with the delivery of prearranged
products and services and earnings from the perpetual care trust funds of $2.1
million in 2004, $3.2 million in 2005 and $4.5 million in 2006. Our prearranged funeral, cemetery and perpetual care trust funds and
escrow accounts are detailed in Notes 4 and 5 to our consolidated financial
statements included in our Annual Report on Form 10-K for the fiscal year ended
October 31, 2003. Generally, our wholly-owned subsidiary, Investors Trust,
Inc. (ITI), serves as investment adviser on these trust funds and escrow
accounts. ITI manages the mix of equities and fixed-income securities in
accordance with an investment policy established by the Investment Committee of
our Board of Directors with the assistance of third-party professional
financial consultants. The policy emphasizes conservation, diversification and
preservation of principal, while seeking appropriate levels of current income
and capital appreciation. ITI is registered with the Securities and Exchange
Commission under the Investment Advisers Act of 1940. 
 Item 4. Controls and Procedures We have evaluated the effectiveness of the design and operation of our
disclosure controls and procedures as of the end of the period covered by this
report. The evaluation was carried out under the supervision of and with the
participation of our management, including our Chief Executive Officer and
Chief Financial Officer. Based on the evaluation, our Chief Executive Officer
and Chief Financial Officer concluded that our disclosure controls and
procedures are effective as of the end of the period covered by this report in
timely alerting them to material information relating to the Company, including
its consolidated subsidiaries, required to be included in reports we file with
or submit to the Securities and Exchange Commission under the Securities
Exchange Act of 1934. There have been no changes in our internal control over
financial reporting that occurred during our most recent fiscal quarter that
have materially affected, or are reasonably likely to materially affect, our
internal control over financial reporting. 36




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##### Table of Contents



PART II. OTHER INFORMATION 
 Item 1. Legal Proceedings We and certain of our subsidiaries are parties to a number of legal
proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management
does not expect these matters to have a material adverse effect on our
consolidated financial position, results of operations or cash flows. We carry insurance with coverages and coverage limits that we believe to
be adequate. Although there can be no assurance that such insurance is
sufficient to protect us against all contingencies, management believes that
our insurance protection is reasonable in view of the nature and scope of our
operations. 
 Item 2. Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities Purchases of Equity Securities by the Issuer and Affiliated Purchasers Issuer Purchases of Equity Securities Total number of
    
    Maximum approximateshares purchased
    
    dollar value of sharesTotal number
    
    
    
    
    
    as part of
    
    that may yet beof shares
    
    Average price
    
    publicly-announced
    
    purchased under thePeriod
    
    purchased
    
    paid per share
    
    plans or programs(1)
    
    plans or programsNovember 1, 2003 through
November 30, 2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    22,049,945December 1, 2003
through December 31, 2003
    
    
    
    
    
    $
    
    
    
    
    
    
    
    $
    22,049,945January 1, 2004 through
January 31, 2004
    
    
    50,000
    
    
    $
    6.39
    
    
    
    50,000
    
    
    $
    21,730,469Total
    
    
    50,000
    
    
    $
    6.39
    
    
    
    50,000
    
    
    $
    21,730,469
   (1)
    
    On June 26, 2003, we announced that our Board of Directors had approved a
new stock repurchase program that allows us to invest up to $25.0 million
in repurchases of our Class A common stock. The repurchases are limited
to our Class A common stock and are made in the open market or in
privately negotiated transactions at such times and in such amounts as
management deems appropriate, depending on market conditions and other
factors. Since the inception of the program through January 31, 2004, we
have repurchased 788,500 shares at an average price of $4.15 per share. 
 Item 5. Other Information Forward-Looking Statements Certain statements made herein or elsewhere by us or on our behalf that
are not historical facts are intended to be forward-looking statements within
the meaning of the safe harbor provisions of the Private Securities Litigation
Reform Act of 1995. Forward-looking statements may include the words may,
will, estimate, intend, continue, believe, expect, plan or
anticipate and other similar words. These statements include any projections
of earnings, revenues, asset sales, cash flow, debt levels or other financial
items; any statements of the plans, strategies and objectives of management for
future operations; any statements concerning proposed new products, services or
developments; any statements regarding future economic conditions or
performance; any 37




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##### Table of Contents



statements of belief; and any statements of assumptions underlying any of the
foregoing. Forward-looking statements contained in this report include but are
not limited to the financial projections made in this section and the
assumptions underlying them, along with statements relating to (1) anticipated
future performance of our preneed sales program, (2) anticipated future
performance of funds held in trust, (3) anticipated mortality trends, (4)
potential results of our operating initiatives, (5) our current plans for
deployment of our projected cash flow, (6) the anticipated impact of the recent
workforce reduction and restructuring and (7) the success and timing of selling
the small businesses designated as held for sale. Accuracy of the forecasts is dependent upon assumptions about events that
change over time and is thus susceptible to periodic change based on actual
experience and new developments. The forecasts are based on a variety of
estimates and assumptions made by our management with respect to, among other
things, industry performance; general economic, market, industry and interest
rate conditions; preneed and at-need sales activities and trends; fluctuations
in cost of goods sold and other expenses; capital expenditures; and other
matters that cannot be accurately predicted, may not be realized and are
subject to significant business, economic and competitive uncertainties, all of
which are difficult to predict and many of which are beyond our control.
Accordingly, there can be no assurance that the assumptions made in preparing
the forecasts will prove accurate, and actual results may vary materially from
those contained in the forecasts. For these reasons, the forecasts should not
be regarded as an accurate prediction of future results, but only of results
that may be obtained if substantially all of our principal expectations are
realized. We caution readers that we assume no obligation to update or publicly
release any revisions to forward-looking statements made herein or any other
forward-looking statements made by us or on our behalf. We project that earnings for continuing operations will be in the range of
$.36 and $.40 per share for fiscal year 2004 including the $.01 per share
impact for the severance charge. We expect cash flow from operations to be
between $77 million and $86 million, including the $33 million tax refund
received in December 2003 due to a change in the tax accounting methods for
cemetery merchandise revenue. Maintenance capital expenditures are expected to
be between $16 million and $17 million. Our 2004 forecast for continuing operations is based on the following
principal assumptions:  (1)
    
    An increase in revenue of 1 to 3 percent for continuing
operations and a corresponding increase in the associated direct
costs.(2)
    
    The increase in revenue is expected to be driven by an
increase in the average revenue per service performed of
approximately 2 to 3 percent, excluding any impact from funeral
trust earnings, and an increase in preneed property sales of 5 to 10
percent.(3)
    
    Increases in average revenue per service performed may be
partially offset by a decrease in the number of families served by
continuing operations in 2004 as compared to 2003. The upper end of
the forecast range assumes that these businesses will serve the same
number of families during fiscal year 2004 as in 2003, and the lower
end assumes a possible reduction in the number of families served of
up to 3 percent, which is in line with trends over previous years.(4)
    
    Total revenue from trust earnings, including earnings
recognition from funeral, cemetery and perpetual care trust funds,
is expected to be about the same as that recognized in 2003.(5)
    
    Our cost-saving initiatives, including the reduction in
workforce, are expected to reduce costs by $16 million to $20
million. These cost savings are expected to be partially offset by
about $8 million to $10 million in normal inflation of costs
remaining in the business, assuming an inflation rate of
approximately 2 percent.(6)
    
    We expect to use cash flow from operations to maintain our
facilities at a level comparable to 2003, to reduce debt and to
repurchase stock, or for growth initiatives as appropriate.(7)
    
    The potential impact on our financial statements of FIN 46,
which is effective for the second quarter of fiscal year 2004, has
not yet been determined and is not reflected in our 2004 forecast
for continuing operations. For further information on FIN 46, see
Note 2 to the consolidated financial statements included herein. 38




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##### Table of Contents



These forecasts for continuing operations exclude the results of a number
of small businesses that we have decided to close or sell, the results of which
are reported separately as discontinued operations in the consolidated
financial statements included herein. Cautionary Statements We caution readers that the following important factors, among others, in
some cases have affected, and in the future, could affect, our actual
consolidated results and could cause our actual consolidated results in the
future to differ materially from the goals and expectations expressed in the
forward-looking statements above and in any other forward-looking statements
made by us or on our behalf. Risks Related to Our Business In connection with our implementation of FIN 46 in our next fiscal quarter, we
may be required to materially change how we account for our trust funds and
escrow accounts and earnings from our trust funds and escrow accounts. For further discussion, see Note 2 to the consolidated financial
statements included herein. Earnings from and principal of trust funds and escrow accounts could be reduced
by changes in stock and bond prices and interest and dividend rates or by a
decline in the size of the funds. We maintain three types of trust funds and escrow accounts: (1) preneed
funeral merchandise and services, (2) preneed cemetery merchandise and services
and (3) perpetual care. Earnings and investment gains and losses on trust
funds 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 funds, and we may not
choose the optimal mix for any particular market condition. The size of the
funds 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. As discussed above, in our next fiscal quarter, we may
be required to change how we account for our trust funds and escrow accounts.
Under our current accounting practices, declines in earnings from perpetual
care trust funds would cause a decline in current revenues, while declines in
earnings from other trust funds 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. Under our current accounting practices, unrealized gains and losses in the
funeral trust funds and cemetery trust funds have no immediate impact on our
revenues, margins, earnings or cash flow, unless the fair market value of the
funds 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 funds are
allocated to underlying preneed contracts and affect the amount of the trust
fund earnings we record when we deliver the underlying product or service.
Accordingly, if current market conditions do not improve, the funds may
eventually realize losses, and our revenues, margins, earnings and cash flow
would be negatively affected by the reduced revenue when we deliver the
underlying products and services. This factor adversely affected our results
in fiscal year 2003 and did so again in the first quarter of fiscal year 2004.
We project that with approximately 1.0 percent to 3.0 percent annualized
returns in the funds over the estimated lives of the associated preneed
contracts, our trust and escrow funds would recover the net unrealized
depreciation currently in the funds by the time the underlying products and
services are delivered. Unrealized gains and losses in the perpetual care
trust fund 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. 39




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##### Table of Contents



Increased costs may have a negative impact on earnings and cash flows. Overall costs are expected to decline in 2004 due to our cost reduction
operating initiatives, including the workforce restructuring and reduction that
occurred in December 2003. The cost reduction initiatives are expected to
reduce costs $16 million to $20 million. These cost savings are expected to be
partially offset by about $8 million to $10 million in normal inflation of
costs remaining in the business. We may not be successful in fully
implementing these initiatives and may incur additional costs. Insurance costs, in particular, have increased substantially in recent
years. The terrorist attacks in the United States on September 11, 2001 and
related subsequent events have resulted in higher insurance premiums. The
volume of claims made in such a short span of time resulted in liquidity
challenges that many insurers have passed on to their policyholders.
Additionally, insurers have increased premiums to offset losses in equity
markets due to recent economic conditions. While our insurance costs have
increased materially, additional increases in insurance costs cannot be
predicted. We may experience declines in preneed sales due to numerous factors, including
changes made to contract terms and sales force compensation and a weakening
economy. Declines in preneed property sales would reduce current revenue.
Declines in preneed funeral and cemetery service and merchandise sales would
reduce our backlog and could reduce our future market share. In an effort to increase cash flow, we modified our preneed sales
strategies early in fiscal year 2000 by increasing finance charges, requiring
larger down payments and shortening installment payment terms. Later in fiscal
year 2000, we changed the compensation structure for our preneed sales force.
These changes, and the accompanying sales force attrition and adverse impact on
sales force morale, caused preneed sales to decline. Although we do not
anticipate making further significant changes in these areas, we may decide
that further adjustments are advisable, which could cause additional declines
in preneed sales. In addition, a weakening economy that causes customers to
reduce discretionary spending could cause, and we believe has caused in the
past, a decline in preneed sales. Geopolitical concerns could continue to
lower consumer confidence, which could also result in a further decline in
preneed sales. Declines in preneed cemetery property sales would reduce
current revenue, and declines in other preneed sales would reduce our backlog
and future revenue and could reduce future market share. One of the operating
initiatives announced in 2003 was the creation of a preneed cemetery property
task force, which is strategically targeting businesses with maximum preneed
sales potential and developing specific plans to increase preneed property
sales and attain new customers at each of the targeted locations. Increasing
preneed funeral sales is also a part of our operating initiatives. However, we
can give no assurance that we will be successful in implementing these
operating initiatives. Our ability to increase funeral call volume is influenced by many factors such
as the decline in deaths, competition, our ability to identify changing
consumer preferences and various other factors, some of which are beyond our
control. One of the new operating initiatives announced in 2003 was the creation of
a funeral call volume task force, which is using the most successful tactics of
our top performing funeral homes to develop strategies to drive funeral call
growth throughout our organization with an increased focus on preneed funeral
sales. We can give no assurance that we will be successful in implementing
this operating initiative.We discuss the risk of declining deaths, intense
competition and our ability to identify changing consumer preferences in other
risk factors herein. Our ability to dispose of our businesses held for sale at prices consistent
with our expectations depends on several factors, many of which are beyond our
control. Any changes in expected sales prices or bases of these businesses
could result in additional impairment charges or could adversely affect our
ability to sell these businesses at prices we are willing to accept. 40




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In December 2003, we announced plans to close or sell a number of small
businesses, primarily small funeral
homes, most of which were acquired as part of a group of facilities, that are
performing below acceptable levels and no longer fit our operating profile. We
believe that the closing or sale of those businesses will enable management to
focus on our most productive operations where our operating initiatives may
bring about the greatest benefits in increased revenues. We can give no
assurance that we will be able to dispose of these businesses or that buyers
will accept our terms, nor can we give any assurance that the selling prices of
these businesses will not be materially different from our expectations. Any
variance between the anticipated and actual sale prices or changes in the bases
of these businesses would result in additional impairment charges. Our ability to service our debt in the future depends upon our ability to
generate sufficient cash, which depends upon many factors, some of which are
beyond our control. Our ability to service our debt depends upon our ability to generate
sufficient cash. As required by our credit agreement, we plan to use
substantially all of the proceeds from businesses held for sale and the
approximate $12 million of remaining income tax benefits relating to the sale
of our foreign operations, the majority of which we expect to receive over the
next three years, to reduce our debt. We discuss the risks associated with the
sale of the businesses held for sale in other risk factors herein. Our ability
to receive the expected income tax benefits within our expected time frame
depends upon, among other things, the rate at which we realize additional
capital gains. Our primary tax planning strategy is to produce these capital
gains in our trust funds. Our ability to generate capital gains could be
affected by a decline in market conditions. Our ability to generate cash flows
from operations depends upon, among other things, the number of deaths in our
markets, competition, the level of preneed sales and their maturities, our
ability to control our costs, stock and bond market conditions, and general
economic, financial and regulatory factors, most of which are beyond our
control. It is not our intention to pay amounts due on our long-term debt
maturing in fiscal year 2005 and beyond exclusively with cash flow from
operations. We expect to refinance the debt well in advance of their
maturities. If we are unsuccessful in refinancing this debt, we may not
generate sufficient cash from operations to satisfy this debt as it becomes
due. Our ability to refinance this debt, and potential increased interest and
other costs associated with refinancings, depends primarily on financial
markets and our credit profile at the time of the refinancing. Increased preneed sales may have a negative impact on cash flow. Preneed sales of cemetery property and funeral and cemetery products and
services are generally cash flow negative initially, primarily due to the
commissions paid on the sale, the portion of the sales proceeds required to be
placed into trust or escrow and the terms of the particular contract such as
the size of the down payment required and the length of the contract. In
fiscal year 2000, we changed the terms and conditions of preneed sales
contracts and commissions and moderated our preneed sales effort in order to
reduce the initial negative impact on cash flow. Nevertheless, we will
continue to invest a significant portion of cash flow in preneed acquisition
costs, which reduces cash flow available for other activities, and, to the
extent preneed activities are increased, cash flow would be further reduced,
and our ability to service debt could be adversely affected. Price competition could reduce market share or cause us to reduce prices to
retain or recapture market share, either of which could reduce revenues and
margins. Our funeral home and cemetery operations generally face intense
competition in local markets that typically are served by numerous funeral
homes and cemetery firms. We have historically experienced price competition
primarily from independent funeral home and cemetery operators, and from
monument dealers, casket retailers, low-cost funeral providers and other
non-traditional providers of services or products. From time to time, this
price competition has resulted in losing market share in some markets. In
other markets, we have had to reduce prices thereby reducing profit margins in
order to retain or recapture market share. Increased price competition in the
future could further reduce revenues, profit margins and the backlog and
potentially impact our annual goodwill impairment analysis. 41




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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. Increases in interest rates would increase interest costs on our variable-rate
long-term debt and could have a material adverse effect on our net income and
earnings per share. As of March 4, 2004, $156.4 million of our long-term debt was subject to
variable interest rates, although $77.4 million of that amount was fixed
pursuant to the terms of interest rate swaps expiring in March of 2004 and
2005. Accordingly, any significant increase in interest rates could increase
our interest costs on our variable-rate long-term debt or indebtedness incurred
in the future, which could decrease our net income and earnings per share
materially. Covenant restrictions under our senior secured credit facility and senior
subordinated note indenture limit our flexibility in operating our business. Our senior secured credit facility and the indenture governing the senior
subordinated notes contain, among other things, covenants that restrict us and
our subsidiary guarantors ability to finance future operations or capital
needs or to engage in other business activities. They limit, among other
things, our and our subsidiary guarantors ability to: borrow money; pay
dividends or distributions; purchase or redeem stock; make investments; engage
in transactions with affiliates; engage in sale leaseback transactions;
consummate specified asset sales; effect a consolidation or merger or sell,
transfer, lease, or otherwise dispose of all or substantially all assets; and
create liens on assets. In addition, the senior secured credit facility
contains specific limits on capital expenditures and the prepayment of debt
other than that incurred under the senior secured credit facility and requires
us to maintain specified financial ratios and satisfy financial condition
tests. These covenants may require us to act in a manner contrary to our business
objectives. In addition, events beyond our control, including changes in
general economic and business conditions, may affect our ability to satisfy
these covenants. A breach of any of those covenants could result in a default,
allowing the lenders to declare all amounts owed immediately due and payable. Our projections for 2004 do not include any earnings from acquisition activity.
Several important factors, among others, may affect our ability to consummate
acquisitions. Our projections for 2004 do not include any earnings from acquisition
activity. The actual level of acquisition activity, if any, will depend not
only on the number of properties acquired, but also on the size of the
acquisitions. Several important factors, among others, may affect our ability
to consummate acquisitions. We may not be able to find a sufficient number of
businesses for sale at prices we are willing to pay, particularly in view of
our new pricing parameters and cash flow criteria. Acquisition activity, if
any, will also depend on our ability to enter into new markets. Due in part to
our lack of experience operating in new areas and to the presence of
competitors who have been in certain markets longer than we have, such entry
may be more difficult or expensive than we anticipate. 42




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Risks Related to the Death Care Industry Declines in the number of deaths in our markets can cause a decrease in
revenues. Changes in the number of deaths are not predictable from market to
market or over the short term. Declines in the number of deaths could cause at-need sales of funeral and
cemetery services, property and merchandise to decline, which could decrease
revenues. This factor adversely affected our results in fiscal year 2003 and
may do so again in fiscal year 2004. Although the United States Bureau of the
Census estimates that the number of deaths in the United States will increase
by approximately 1 percent per year from 2000 to 2010, longer lifespans could
reduce the rate of deaths. Changes in the number of deaths can vary among
local markets and from quarter to quarter, and variations in the number of
deaths in our markets or from quarter to quarter are not predictable. However,
generally the number of deaths fluctuates with the seasons with more deaths
occurring during the winter months primarily resulting from pneumonia and
influenza. These variations can cause revenues to fluctuate. Our comparisons of the change in the number of families served to the
change in the number of deaths reported by the Centers for Disease Control and
Prevention (CDC) from time to time may not necessarily be meaningful. The
CDC receives weekly mortality reports from 122 cities and metropolitan areas in
the United States within two to three weeks from the date of death and reports
the total number of deaths occurring in these areas each week based on the
reports received from state health departments. The comparability of our
funeral calls to the CDC data is limited, as reports from the state health
departments are often delayed, and the 122 cities reporting to the CDC are not
necessarily comparable with the markets in which we operate. The increasing number of cremations in the United States could cause revenues
to decline because we could lose market share to firms specializing in
cremations. In addition, basic cremations produce no revenues for cemetery
operations and lesser funeral revenues and, in certain cases, lesser profit
margins than traditional funerals. Our traditional cemetery and funeral service operations face competition
from the increasing number of cremations in the United States. Industry
studies indicate that the percentage of cremations has steadily increased and
that cremations will represent approximately 36 percent of the United States
burial market by the year 2010, compared to 27 percent in 2001. The trend
toward cremation could cause cemeteries and traditional funeral homes to lose
market share and revenues to firms specializing in cremations. In addition,
basic cremations (with no funeral service, casket, urn, mausoleum niche,
columbarium niche or burial) produce no revenues for cemetery operations and
lower revenues than traditional funerals and, when delivered at a traditional
funeral home, produce lower profit margins as well. If we are not able to respond effectively to changing consumer preferences, our
market share, revenues and profitability could decrease. Future market share, revenues and profits will depend in part on our
ability to anticipate, identify and respond to changing consumer preferences.
During fiscal year 2000, we began to implement strategies based on a
proprietary, extensive study of consumer preferences we commissioned in 1999.
However, we may not correctly anticipate or identify trends in consumer
preferences, or we may identify them later than our competitors do. In
addition, any strategies we may implement to address these trends may prove
incorrect or ineffective. Because the funeral and cemetery businesses are high fixed-cost businesses,
positive or negative changes in revenue can have a disproportionately large
effect on cash flow and profits. Companies in the funeral home and cemetery business must incur many of the
costs of operating and maintaining facilities, land and equipment regardless of
the level of sales in any given period. For example, we must pay salaries,
utilities, property taxes and maintenance costs on funeral homes and maintain
the grounds of cemeteries regardless of the number of funeral services or
interments performed. Because we cannot decrease these costs 43




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significantly or rapidly when we experience declines in sales, declines in
sales can cause margins, profits and cash flow to decline at a greater rate
than the decline in revenues. Changes or increases in, or failure to comply with, regulations applicable to
our business could increase costs or decrease cash flows. The death care industry is subject to extensive regulation and licensing
requirements under federal, state and local laws. For example, the funeral
home industry is regulated by the Federal Trade Commission, which requires
funeral homes to take actions designed to protect consumers. State laws impose
licensing requirements and regulate preneed sales. Embalming facilities are
subject to stringent environmental and health regulations. Compliance with
these regulations is burdensome, and we are always at risk of not complying
with the regulations. In addition, from time to time, governments and agencies propose to amend
or add regulations, which could increase costs or decrease cash flows. For
example, federal, state, local and other regulatory agencies have considered
and may enact additional legislation or regulations that could affect the death
care industry. Several states and regulatory agencies have considered or are
considering regulations that could require more liberal refund and cancellation
policies for preneed sales of products and services, limit or eliminate our
ability to use surety bonding, increase trust requirements and prohibit the
common ownership of funeral homes and cemeteries in the same market. If
adopted by the regulatory authorities of the jurisdictions in which we operate,
these and other possible proposals could have a material adverse effect on us,
our financial condition, our results of operations, our cash flows and our
future prospects. 44




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Item 6. Exhibits and Reports on Form 8-K (a)
    
    Exhibits3.1
    
    Amended and Restated Articles of Incorporation of the Company, as amended
and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended April
30, 2003)3.2
    
    By-laws of the Company, as amended and restated as of February 18, 20044.1
    
    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, 20044.5
    
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named
therein and Firstar Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Form S-4 dated August 14, 2001)4.6
    
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by
reference to Exhibit 4.2 to the Companys Form S-4 dated August 14, 2001)
   10.1
    
    Amendment No. 2 dated January 22, 2004 to Employment Agreement between
the Company and William E. Rowe10.2
    
    Amendment No. 1 dated January 22, 2004 to Change of Control Agreement
between the Company and William E. Rowe10.3
    
    Amendment dated September 24, 2003 to the Stewart Enterprises Employees
Retirement Trust12
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
William E. Rowe, Chairman of the Board, Chief Executive Officer and
President
 45




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31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Executive Vice President and Chief Financial Officer32
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
William E. Rowe, Chairman of the Board, Chief Executive Officer and
President, and Kenneth C. Budde, Executive Vice President and Chief
Financial Officer
   (b)
    
    Reports on Form 8-K
 We filed a Form 8-K dated December 4, 2003, reporting under Item 5.
Other Events, the announcement of a restructuring and reduction of our
workforce and plans to close or sell a number of small businesses. We filed a Form 8-K dated December 16, 2003, reporting under Item 7.
Financial Statements and Exhibits and Item 12. Results of Operations and
Financial Condition, the earnings release for the quarter ended October 31,
2003. 46




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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES 
 SIGNATURES Pursuant to the requirements of the Securities Exchange Act of 1934, the
Registrant has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized. STEWART ENTERPRISES, INC.March 11, 2004
    
    /s/ KENNETH C. BUDDEKenneth C. BuddeExecutive Vice PresidentChief Financial OfficerMarch 11, 2004
    
    /s/ MICHAEL G. HYMELMichael G. HymelVice PresidentCorporate ControllerChief Accounting Officer
 47




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Exhibit Index Exhibit
    
    Description3.1
    
    Amended and Restated Articles of Incorporation of the Company, as amended
and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1
to the Companys Quarterly Report on Form 10-Q for the quarter ended April
30, 2003)3.2
    
    By-laws of the Company, as amended and restated as of February 18, 20044.1
    
    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, 20044.5
    
    Indenture dated June 29, 2001 by and among Stewart, the Guarantors named
therein and Firstar Bank, N.A., as Trustee (incorporated by reference to
Exhibit 4.1 to the Companys Form S-4 dated August 14, 2001)4.6
    
    Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by
reference to Exhibit 4.2 to the Companys Form S-4 dated August 14, 2001)
   10.1
    
    Amendment No. 2 dated January 22, 2004 to Employment Agreement between
the Company and William E. Rowe10.2
    
    Amendment No. 1 dated January 22, 2004 to Change of Control Agreement
between the Company and William E. Rowe10.3
    
    Amendment dated September 24, 2003 to the Stewart Enterprises Employees
Retirement Trust12
    
    Calculation of Ratio of Earnings to Fixed Charges31.1
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
William E. Rowe, Chairman of the Board, Chief Executive Officer and
President
 48




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31.2
    
    Certification pursuant to Section 302 of the Sarbanes-Oxley Act of
Kenneth C. Budde, Executive Vice President and Chief Financial Officer32
    
    Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of
William E. Rowe, Chairman of the Board, Chief Executive Officer and
President, and Kenneth C. Budde, Executive Vice President and Chief
Financial Officer
   (b)   Reports on Form 8-K We filed a Form 8-K dated
December 4, 2003, reporting under Item 5. Other
Events, the announcement of a restructuring and reduction of
our workforce and plans to close or sell a number of small
businesses. We filed a Form 8-K dated
December 16, 2003, reporting under
Item 7. Financial Statements and Exhibits and
Item 12. Results of Operations and Financial
Condition, the earnings release for the quarter ended
October 31, 2003. 49