UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934

Commission File Number: 1-15449

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

LOUISIANA (State or other jurisdiction of incorporation or organization)		72-0693290 (I.R.S. Employer Identification No.)
1333 South Clearview Parkway Jefferson, Louisiana (Address of principal executive offices)		70121 (Zip Code)

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No o

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o No o

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer o		Accelerated filer þ		Non-accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act.) Yes o No x

     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 August 31, 2010, was 89,631,002 and 3,555,020, respectively.

 

 

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings — Three Months Ended July 31, 2010 and 2009			3
Condensed Consolidated Statements of Earnings — Nine Months Ended July 31, 2010 and 2009			4
Condensed Consolidated Balance Sheets — July 31, 2010 and October 31, 2009			5
Condensed Consolidated Statement of Shareholders’ Equity — Nine Months Ended July 31, 2010			7
Condensed Consolidated Statements of Cash Flows — Nine Months Ended July 31, 2010 and 2009			8
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Item 3. Quantitative and Qualitative Disclosures About Market Risk			59
Item 4. Controls and Procedures			60
Part II. Other Information
Item 1. Legal Proceedings			60
Item 1A. Risk Factors			60
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			61
Item 6. Exhibits			61
Signatures			63
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

		Three Months Ended July 31,
		2010				2009
						(As Adjusted)
Revenues:
Funeral		$	67,042			$	66,017
Cemetery			55,873				51,735
			122,915				117,752
Costs and expenses:
Funeral			52,527				51,607
Cemetery			48,188				46,812
			100,715				98,419
Gross profit			22,200				19,333
Corporate general and administrative expenses			(7,686	)			(8,089	)
Hurricane related charges, net			(30	)			(46	)
Net impairment losses on dispositions			—				(117	)
Other operating income, net			607				397
Operating earnings			15,091				11,478
Interest expense			(6,184	)			(6,597	)
Gain (loss) on early extinguishment of debt			(106	)			2,414
Investment and other income, net			62				12
Earnings before income taxes			8,863				7,307
Income taxes			2,824				1,215
Net earnings		$	6,039			$	6,092
Net earnings per common share:
Basic		$	.06			$	.07
Diluted		$	.06			$	.07
Weighted average common shares outstanding (in thousands):
Basic			92,207				91,936
Diluted			92,499				92,061
Dividends declared per common share		$	.030			$	.025

See accompanying notes to condensed consolidated financial statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

		Nine Months Ended July 31,
		2010				2009
						(As Adjusted)
Revenues:
Funeral		$	210,536			$	209,007
Cemetery			165,138				154,693
			375,674				363,700
Costs and expenses:
Funeral			160,079				157,817
Cemetery			143,310				137,872
			303,389				295,689
Gross profit			72,285				68,011
Corporate general and administrative expenses			(20,188	)			(22,601	)
Hurricane related charges, net			(62	)			(566	)
Separation charges			—				(275	)
Net impairment losses on dispositions			—				(215	)
Other operating income, net			1,051				960
Operating earnings			53,086				45,314
Interest expense			(18,531	)			(21,358	)
Gain (loss) on early extinguishment of debt			(89	)			5,798
Investment and other income, net			122				85
Earnings before income taxes			34,588				29,839
Income taxes			12,671				10,115
Net earnings		$	21,917			$	19,724
Net earnings per common share:
Basic		$	.24			$	.21
Diluted		$	.23			$	.21
Weighted average common shares outstanding (in thousands):
Basic			92,124				91,883
Diluted			92,397				91,926
Dividends declared per common share		$	.090			$	.075

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

		July 31, 2010				October 31, 2009
						(As Adjusted)
ASSETS
Current assets:
Cash and cash equivalents		$	59,673			$	62,808
Certificates of deposit and marketable securities			15,429				—
Receivables, net of allowances			57,088				59,439
Inventories			36,115				36,156
Prepaid expenses			7,760				6,748
Deferred income taxes, net			25,472				21,715
Total current assets			201,537				186,866
Receivables due beyond one year, net of allowances			62,349				63,011
Preneed funeral receivables and trust investments			400,378				389,512
Preneed cemetery receivables and trust investments			201,071				193,417
Goodwill			247,236				247,236
Cemetery property, at cost			383,910				385,977
Property and equipment, at cost:
Land			43,621				43,677
Buildings			335,832				329,685
Equipment and other			190,884				187,100
			570,337				560,462
Less accumulated depreciation			278,689				261,005
Net property and equipment			291,648				299,457
Deferred income taxes, net			96,798				113,398
Cemetery perpetual care trust investments			222,368				205,476
Other assets			12,694				14,654
Total assets		$	2,119,989			$	2,099,004

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)

		July 31, 2010				October 31, 2009
						(As Adjusted)
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	5			$	5
Accounts payable and accrued expenses			20,896				25,604
Accrued payroll and other benefits			13,730				15,200
Accrued insurance			21,082				20,504
Accrued interest			6,243				4,561
Estimated obligation to fund cemetery perpetual care trust			13,533				14,010
Other current liabilities			14,239				14,099
Income taxes payable			1,663				2,028
Total current liabilities			91,391				96,011
Long-term debt, less current maturities			325,482				339,721
Deferred preneed funeral revenue			245,225				247,825
Deferred preneed cemetery revenue			261,271				266,964
Deferred preneed funeral and cemetery receipts held in trust			533,982				514,787
Perpetual care trusts’ corpus			219,613				204,168
Other long-term liabilities			19,803				20,871
Total liabilities			1,696,767				1,690,347
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued			—				—
Common stock, $1.00 stated value:
Class A authorized 200,000,000 shares; issued and outstanding 89,631,002 and 89,128,700 shares at July 31, 2010 and October 31, 2009, respectively			89,631				89,129
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 31, 2010 and October 31, 2009; 10 votes per share convertible into an equal number of Class A shares			3,555				3,555
Additional paid-in capital			553,197				561,063
Accumulated deficit			(223,208	)			(245,125	)
Accumulated other comprehensive income:
Unrealized appreciation of investments			47				35
Total accumulated other comprehensive income			47				35
Total shareholders’ equity			423,222				408,657
Total liabilities and shareholders’ equity		$	2,119,989			$	2,099,004

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)

						Additional								Unrealized				Total
		Common				Paid-In				Accumulated				Appreciation				Shareholders’
		Stock(1)				Capital				Deficit				of Investments				Equity
Balance October 31, 2009, as previously reported		$	92,684			$	526,062			$	(227,897	)		$	35			$	390,884
Adoption of convertible debt standard (See Note 2)			—				35,001				(17,228	)			—				17,773
Balance October 31, 2009, as adjusted		$	92,684			$	561,063			$	(245,125	)		$	35			$	408,657
Comprehensive income:
Net earnings			—				—				21,917				—				21,917
Other comprehensive income:
Unrealized appreciation of investments, net of deferred tax expense of ($6)			—				—				—				12				12
Total other comprehensive income			—				—				—				12				12
Total comprehensive income			—				—				21,917				12				21,929
Restricted stock activity			281				319				—				—				600
Issuance of common stock			140				509				—				—				649
Stock options exercised			81				305				—				—				386
Stock option expense			—				805				—				—				805
Tax benefit associated with stock activity			—				(57	)			—				—				(57	)
Retirement of call options, net of tax expense of $830			—				1,540				—				—				1,540
Retirement of common stock warrants			—				(2,118	)			—				—				(2,118	)
Repurchase of convertible notes, net of tax benefit of $442			—				(785	)			—				—				(785	)
Dividends ($.09 per share)			—				(8,384	)			—				—				(8,384	)
Balance July 31, 2010		$	93,186			$	553,197			$	(223,208	)		$	47			$	423,222

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)

		Nine Months Ended July 31,
		2010				2009
						(As Adjusted)
Cash flows from operating activities:
Net earnings		$	21,917			$	19,724
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net impairment losses on dispositions			—				215
(Gain) loss on early extinguishment of debt			89				(5,798	)
Depreciation and amortization			19,822				20,798
Non-cash interest and amortization of discount on senior convertible notes			4,549				5,532
Provision for doubtful accounts			3,065				6,610
Share-based compensation			1,970				1,732
Excess tax benefits from share-based payment arrangements			(37	)			—
Provision for deferred income taxes			11,082				7,350
Estimated obligation to fund cemetery perpetual care trust			31				3,222
Other			(557	)			146
Changes in assets and liabilities:
(Increase) decrease in receivables			(2,059	)			6,602
Increase in prepaid expenses			(1,011	)			(1,962	)
(Increase) decrease in inventories and cemetery property			2,107				(639	)
Federal income tax refunds			1,600				12,134
Decrease in accounts payable and accrued expenses			(5,880	)			(8,068	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments			11,313				16,245
Increase (decrease) in deferred preneed funeral revenue			(2,600	)			229
Decrease in deferred preneed funeral receipts held in trust			(11,690	)			(13,288	)
Net effect of preneed cemetery production and deliveries:
Decrease in preneed cemetery receivables and trust investments			287				7,530
Decrease in deferred preneed cemetery revenue			(5,692	)			(10,620	)
Increase (decrease) in deferred preneed cemetery receipts held in trust			765				(5,222	)
Increase in other			74				1,118
Net cash provided by operating activities			49,145				63,590
Cash flows from investing activities:
Proceeds from sales of marketable securities			250				250
Purchases of certificates of deposit and marketable securities			(15,661	)			(199	)
Proceeds from sale of assets			388				494
Purchase of subsidiaries and other investments, net of cash acquired			—				(1,923	)
Additions to property and equipment			(11,564	)			(15,029	)
Other			136				37
Net cash used in investing activities			(26,451	)			(16,370	)
Cash flows from financing activities:
Repayments of long-term debt			(18,423	)			(39,901	)
Retirement of common stock warrants			(2,118	)			(4,981	)
Issuance of common stock			621				225
Retirement of call options			2,370				5,111
Purchase and retirement of common stock			—				(52	)
Debt refinancing costs			(38	)			(2,029	)
Dividends			(8,278	)			(6,953	)
Excess tax benefits from share-based payment arrangements			37				—
Net cash used in financing activities			(25,829	)			(48,580	)
Net decrease in cash			(3,135	)			(1,360	)
Cash and cash equivalents, beginning of period			62,808				72,574
Cash and cash equivalents, end of period		$	59,673			$	71,214
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net		$	97			$	(8,168	)
Interest		$	12,686			$	15,647
Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors		$	414			$	305
Issuance of restricted stock, net of forfeitures		$	879			$	22

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(1) Basis of Presentation

     (a) The Company

     Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of July 31, 2010, the Company owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, cemetery segment and corporate trust management segment.

     (b) Principles of Consolidation

     The accompanying condensed consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

     (c) Interim Disclosures

     The information as of July 31, 2010, and for the three and nine months ended July 31, 2010 and 2009, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009 (the “2009 Form 10-K”).

     The October 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2009 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2009 Form 10-K. Certain amounts reported in prior periods have been adjusted to conform to the 2010 presentation as further discussed in Note 2.

     The results of operations for the three and nine months ended July 31, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2010.

     (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. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2009 Form 10-K.

     (e) Share-Based Compensation

     The Company has share-based compensation plans, which are described in more detail in Note 19 to the consolidated financial statements in the Company’s 2009 Form 10-K. Net earnings for the three months ended July 31, 2010 and 2009 include $265 and $287, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. Net earnings for the nine months ended July 31, 2010 and 2009 include $805 and $896, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. As of July 31, 2010, there was $1,773 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 2.76 years of which $997 of total stock

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(1) Basis of Presentation—(Continued)

option expense is expected for fiscal year 2010. The expense related to restricted stock is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $205 and $186 for the three months ended July 31, 2010 and 2009, respectively, and $751 and $531 for the nine months ended July 31, 2010 and 2009, respectively. As of July 31, 2010, there was $720 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2010 is expected to be $958.

     In November 2009, the Company issued 90,000 shares of Class A common stock and paid approximately $96 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $414 and was recorded in corporate general and administrative expenses during the first quarter of 2010. Each of the shares received has a restriction requiring each independent director to hold the respective share until completion of service as a member of the Board of Directors.

     The table below presents all stock options and restricted stock granted to employees during the nine months ended July 31, 2010:

Number of Shares

Weighted Average

Grant Type

Granted

Price per Share

Vesting Period

Vesting Condition

Stock options

960,750

$

5.08

Equal one-fourth portions over 4 years

Service condition

Restricted stock

324,500

$

5.09

Equal one-third portions over 3 years

Market condition

Restricted stock

7,500

$

4.89

Equal one-third portions over 3 years

Service condition

     The fair value of the Company’s service based stock options granted in fiscal year 2010 is the estimated present value at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the nine months ended July 31, 2010: expected dividend yield of 2.4 percent; expected volatility of 40.1 percent; risk-free interest rate of 2.2 percent; and an expected term of 4.8 years. In the first quarter of 2010, the Company granted 324,500 shares of restricted stock with market conditions based on achieving certain target stock prices in the years 2010, 2011 and 2012. The Company records the expense over the requisite service period. The market condition related to fiscal year 2010 was achieved during the quarter ended April 30, 2010.

     (f) Goodwill

     The Company’s evaluation of the goodwill of its operations previously consisted of eight reporting units as described in the Company’s 2009 Form 10-K. In the third quarter of fiscal year 2010, the Company combined its Western North and Western South regions, which were previously in different reporting units in both the funeral segment and cemetery segment, to form new Western regions in both the funeral and cemetery segments. In connection with this change in its regions, the Company reviewed its reporting units and increased the number of reporting units that will be evaluated in the Company’s annual goodwill impairment test from eight to ten reporting units.

     (g) Reclassifications

     Certain reclassifications have been made to the 2009 condensed consolidated statement of cash flows in order for these periods to be comparable. These reclassifications had no effect on operating cash flows.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(2) New Accounting Principles

     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 805-Business Combinations (“ASC 805”). This guidance states that all business combinations, whether full, partial or step acquisitions, will result in all assets and liabilities of an acquired business being recorded at their fair values at the acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair value or the estimated amounts to be realized. ASC 805 applies to all transactions or other events in which an entity obtains control of one or more businesses. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. This guidance will apply to any future business combinations as of that date.

     In December 2007, the FASB amended guidance regarding noncontrolling interests in consolidated financial statements. This guidance states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. This guidance applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. The adoption did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.

     In May 2008, the FASB issued guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. The guidance states that issuers of convertible debt instruments that may be settled in cash upon conversion should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate as the related interest cost is recognized in subsequent periods. The entity must determine the carrying amount of the liability component of any outstanding debt instrument by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the debt instrument. The value of the debt instrument is adjusted through a discount to the face value of the debt, which is amortized as non-cash interest expense over the expected life of the debt. This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016 which were originally issued in 2007, and is required to be applied retrospectively to all periods presented. The Company adopted this guidance effective November 1, 2009. The following tables reflect the Company’s retrospective adoption of this guidance as of November 1, 2009 and summarize the impact on the Company’s balance sheet as of October 31, 2009 and statements of earnings for the three and nine months ended July 31, 2009 and the year ended October 31, 2009. See Note 13 for additional information.

     In June 2008, the FASB issued guidance on determining whether instruments granted in share-based payment transactions are participating securities. This guidance states whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. Unvested share-based payment awards that contain nonforfeitable rights to dividends are considered participating securities. Dividends are currently paid by the Company on all shares of restricted stock, whether vested or nonvested, at the same rate as dividends on normal shares of the Company’s stock. In addition, restricted stockholders are not required to return the dividends to the Company if their shares of nonvested restricted stock do not vest. Therefore, under this guidance, the Company must include nonvested restricted stock in the basic earnings per share calculation and allocate earnings to common stock and the participating securities according to dividends declared and participation rights in undistributed earnings. This is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented (including interim financial statements, summaries of earnings and selected financial data). The Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance for the three and nine months ended July 31, 2009 and the year ended October 31, 2009

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(2) New Accounting Principles—(Continued)

was immaterial and is presented in the statements of earnings tables below, along with the impact of the adoption of the convertible debt guidance described above.

						Effects of the
						Adoption of
		October 31, 2009				Convertible Debt				October 31, 2009
		As Reported				Guidance				As Adjusted
Balance Sheet:
Deferred tax assets		$	145,110			$	(9,997	)		$	135,113
Long-term debt			367,496				(27,770	)			339,726
Additional paid-in capital			526,062				35,001				561,063
Accumulated deficit			(227,897	)			(17,228	)			(245,125	)

		Three Months				Effects of the				Effects of				Three Months
		Ended				Adoption of				Adoption of				Ended
		July 31, 2009				Convertible Debt				Participating Share				July 31, 2009
		As Reported				Guidance				Guidance				As Adjusted
Statement of earnings:
Interest expense		$	5,299			$	1,298							$	6,597
Gain on early extinguishment of debt			8,533				(6,119	)							2,414
Income taxes			3,886				(2,671	)							1,215
Net earnings			10,838				(4,746	)							6,092
Basic earnings per share		$	.12			$	(.05	)						$	.07
Diluted earnings per share		$	.12			$	(.05	)						$	.07
Weighted average basic shares outstanding			91,936								—				91,936
Weighted average diluted shares outstanding			92,118								(57	)			92,061

										Effects of
		Nine Months				Effects of the				Adoption of				Nine Months
		Ended				Adoption of				Participating				Ended
		July 31, 2009				Convertible				Share				July 31, 2009
		As Reported				Debt Guidance				Guidance				As Adjusted
Statement of earnings:
Interest expense		$	17,088			$	4,270							$	21,358
Gain on early extinguishment of debt			17,204				(11,406	)							5,798
Income taxes			15,759				(5,644	)							10,115
Net earnings			29,756				(10,032	)							19,724
Basic earnings per share		$	.32			$	(.11	)						$	.21
Diluted earnings per share		$	.32			$	(.11	)						$	.21
Weighted average basic shares outstanding			91,883								—				91,883
Weighted average diluted shares outstanding			91,936								(10	)			91,926

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(2) New Accounting Principles—(Continued)

										Effects of
						Effects of the				Adoption of
		Year Ended				Adoption of				Participating				Year Ended
		October 31, 2009				Convertible				Share				October 31, 2009
		As Reported				Debt Guidance				Guidance				As Adjusted
Statement of earnings:
Interest expense		$	22,353			$	5,423							$	27,776
Gain on early extinguishment of debt			20,078				(13,932	)							6,146
Income taxes			19,611				(6,968	)							12,643
Net earnings			35,653				(12,387	)							23,266
Basic earnings per share		$	.39			$	(.14	)						$	.25
Diluted earnings per share		$	.39			$	(.14	)						$	.25
Weighted average basic shares outstanding			91,898								—				91,898
Weighted average diluted shares outstanding			91,995								(17	)			91,978

     In January 2010, the FASB issued Accounting Standards Update No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The guidance on transfers between Levels 1 and 2 was adopted by the Company as of its second fiscal quarter ended April 30, 2010. The guidance on Level 3 activity is effective for the Company’s fiscal year beginning November 1, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

     In June 2009, the FASB issued guidance on the accounting for transfers of financial assets. It will require more information about transfers of financial assets, including securitization transactions, and enhanced disclosures when companies have continuing exposure to the risks related to transferred financial assets. Additionally, it eliminates the concept of a qualifying special-purpose entity. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

     In June 2009, the FASB issued guidance which amends the consolidation guidance for variable interest entities. It will require additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities

     The Company maintains three types of trust and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The activity of these trust and escrow accounts is detailed below and in Notes 4 and 5.

Preneed Funeral Receivables and Trust Investments

     Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2010 and October 31, 2009 are as follows:

		July 31,				October 31,
		2010				2009
Trust assets		$	369,418			$	358,430
Receivables from customers			42,767				43,225
			412,185				401,655
Allowance for cancellations			(11,807	)			(12,143	)
Preneed funeral receivables and trust investments		$	400,378			$	389,512

     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of July 31, 2010 are detailed below.

		July 31, 2010
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	24,278			$	—			$	—			$	24,278
U.S. Government, agencies and municipalities			2,937				109				(1	)			3,045
Corporate bonds			44,300				2,543				(224	)			46,619
Preferred stocks			56,727				281				(4,346	)			52,662
Common stocks			238,095				703				(99,141	)			139,657
Mutual funds:
Equity			28,685				26				(4,824	)			23,887
Fixed income			53,304				1,263				(989	)			53,578
Commodity			8,910				385				—				9,295
Insurance contracts and other long-term investments			15,270				153				(98	)			15,325
Trust investments		$	472,506			$	5,463			$	(109,623	)			368,346
Market value as a percentage of cost																			78.0	%
Accrued investment income															1,072
Trust assets														$	369,418

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2009 are detailed below.

		October 31, 2009
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	28,979			$	—			$	—			$	28,979
U.S. Government, agencies and municipalities			6,044				214				(1	)			6,257
Corporate bonds			39,007				1,650				(1,458	)			39,199
Preferred stocks			56,885				9				(10,394	)			46,500
Common stocks			248,750				848				(106,788	)			142,810
Mutual funds:
Equity			28,841				20				(7,486	)			21,375
Fixed income			56,193				448				(916	)			55,725
Insurance contracts and other long-term investments			19,054				112				(2,594	)			16,572
Trust investments		$	483,753			$	3,301			$	(129,637	)		$	357,417
Market value as a percentage of cost																			73.9	%
Accrued investment income															1,013
Trust assets														$	358,430

     The estimated maturities and market values of debt securities included above are as follows:

		July 31, 2010
Due in one year or less		$	4,875
Due in one to five years			29,823
Due in five to ten years			14,943
Thereafter			23
		$	49,664

     The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust in order to provide an opportunity for additional income. As of July 31, 2010 and October 31, 2009, the Company had outstanding covered calls with a market value of $194 and $424, respectively. These covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended July 31, 2010 and 2009, the Company realized trust earnings of approximately $46 and $178, respectively, related to the covered call program. For the nine months ended July 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($207) and $619, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as for other funeral merchandise and services trust earnings and flow through funeral revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the nine months ended July 31, 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $3,739 during the period that the covered calls were outstanding.

     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.

     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government,

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

     The Company’s Level 3 investments include insurance contracts and partnership investments purchased within the trusts. The valuation of insurance contracts and partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the insurance contracts is based upon the current face value of the contracts according to the respective insurance companies which is deemed to approximate fair market value. The fair market value of the partnership investments was determined by using their most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

     The inputs into the fair value of the Company’s preneed funeral merchandise and services trust investments are categorized as follows:

						Significant
		Quoted Market				Other
		Prices in Active				Observable				Significant
		Markets				Inputs				Unobservable Inputs				Fair Market
		(Level 1)				(Level 2)				(Level 3)				Value
Trust investments—July 31, 2010		$	258,217			$	102,326			$	7,803			$	368,346
Trust investments—October 31, 2009		$	256,799			$	91,956			$	8,662			$	357,417

     The change in the Company’s preneed funeral merchandise and services trust investments with significant unobservable inputs (Level 3) is as follows:

		Three Months Ended July 31,								Nine Months Ended July 31,
		2010				2009				2010				2009
Fair market value, beginning balance		$	7,878			$	8,599			$	8,662			$	11,299
Total unrealized losses included in other comprehensive income (1)			(130	)			—				(1,060	)			(2,554	)
Distributions and other, net			55				112				201				(34	)
Fair market value, ending balance		$	7,803			$	8,711			$	7,803			$	8,711

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

     Activity related to preneed funeral trust investments is as follows:

		Three Months Ended July 31,								Nine Months Ended July 31,
		2010				2009				2010				2009
Purchases		$	12,117			$	10,198			$	27,675			$	11,776
Sales			8,609				15,372				31,037				24,500
Realized gains from sales of investments			260				710				1,697				1,702
Realized losses from sales of investments and other			(3,729	)(1)			(511	)(2)			(4,783	)(3)			(9,404	)(4)
Interest income, dividends and other ordinary income			2,851				2,917				7,738				8,742
Deposits			6,404				6,442				20,009				19,456
Withdrawals			10,187				9,202				32,234				32,101

     The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2010 and October 31, 2009.

		July 31, 2010
		Less than 12 Months								12 Months or Greater								Total
		Market				Unrealized				Market				Unrealized				Market				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Government, agencies and municipalities		$	—			$	—			$	21			$	(1	)		$	21			$	(1	)
Corporate bonds			2,983				(21	)			7,465				(203	)			10,448				(224	)
Preferred stocks			—				—				40,686				(4,346	)			40,686				(4,346	)
Common stocks			1,873				(378	)			131,263				(98,763	)			133,136				(99,141	)
Mutual funds:
Equity			5				—				23,742				(4,824	)			23,747				(4,824	)
Fixed income			1,426				(14	)			4,295				(975	)			5,721				(989	)
Insurance contracts and other long-term investments			—				—				2,160				(98	)			2,160				(98	)
Total		$	6,287			$	(413	)		$	209,632			$	(109,210	)		$	215,919			$	(109,623	)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

		October 31, 2009
		Less than 12 Months								12 Months or Greater								Total
		Market				Unrealized				Market				Unrealized				Market				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Government, agencies and municipalities		$	—			$	—			$	21			$	(1	)		$	21			$	(1	)
Corporate bonds			—				—				10,154				(1,458	)			10,154				(1,458	)
Preferred stocks			493				(7	)			43,519				(10,387	)			44,012				(10,394	)
Common stocks			1,000				(276	)			133,428				(106,512	)			134,428				(106,788	)
Mutual funds:
Equity			—				—				21,237				(7,486	)			21,237				(7,486	)
Fixed income			318				(1	)			4,539				(915	)			4,857				(916	)
Insurance contracts and other long-term investments			1,203				(1,060	)			2,016				(1,534	)			3,219				(2,594	)
Total		$	3,014			$	(1,344	)		$	214,914			$	(128,293	)		$	217,928			$	(129,637	)

     The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2010, 94 percent, or $103,487, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value during late 2008 and early 2009 due to the economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

     The Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, trust earnings which include dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts net of fees are allocated to individual contracts when earned or realized. In these trusts, unrealized gains and losses are not allocated to contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is actually delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

     Cash flows from preneed funeral contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

     Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2010 and October 31, 2009 are as follows:

		July 31,				October 31,
		2010				2009
Trust assets		$	173,725			$	163,938
Receivables from customers			32,411				35,718
			206,136				199,656
Allowance for cancellations			(5,065	)			(6,239	)
Preneed cemetery receivables and trust investments		$	201,071			$	193,417

     The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of July 31, 2010 are detailed below.

		July 31, 2010
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	12,244			$	—			$	—			$	12,244
U.S. Government, agencies and municipalities			7,037				652				—				7,689
Corporate bonds			12,109				828				(27	)			12,910
Preferred stocks			20,812				100				(2,188	)			18,724
Common stocks			121,314				551				(50,340	)			71,525
Mutual funds:
Equity			30,291				18				(8,890	)			21,419
Fixed income			22,427				466				(27	)			22,866
Commodity			5,082				240				—				5,322
Other long-term investments			560				5				—				565
Trust investments		$	231,876			$	2,860			$	(61,472	)			173,264
Market value as a percentage of cost																			74.7	%
Accrued investment income															461
Trust assets														$	173,725