UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

For the fiscal year ended October 31, 2005

OR

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

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

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

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, No Par Value
Preferred Stock Purchase Rights
(Title of Class)

     Indicate by check mark if the Registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Exchange Act of 1933. Yes o No þ

     Indicate by check mark if the Registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

     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 o No þ

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. þ

     Indicate by check mark whether the Registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Large accelerated filer o Accelerated filer þ Non-Accelerated filer o

     Indicate by check mark whether the Registrant is a shell company as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes o No þ

     The aggregate market value of the voting stock held by non-affiliates (affiliates being, for this purpose only, directors, executive officers and holders of more than 5 percent of the Company’s Class A common stock) of the Registrant as of April 30, 2005, was approximately $451,000,000.

     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 January 31, 2006, was 105,115,187 and 3,555,020, respectively.

     Portions of the proxy statement in connection with the 2006 annual meeting of shareholders are incorporated in Part III of this Report.

 

 

EXPLANATORY NOTE

     This Form 10-K contains restated annual financial statements and information relating to fiscal years 2001 through 2004 and interim financial statements and information for fiscal year 2004 and the first three quarters of fiscal year 2005 to correct certain accounting errors. For a discussion of these restatements, see “Selected Financial Data” included in Item 6, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and Note 2 to the consolidated financial statements included in Item 8. See item 9A for a discussion of material weaknesses in our internal control over financial reporting as of October 31, 2005.

Cautionary Note

     This annual report contains forward-looking statements of our management regarding factors that we believe may affect our performance in the future. Such statements typically are identified by terms expressing our future expectations or projections of revenues, earnings, earnings per share, cash flow, market share, capital expenditures, effects of operating initiatives, gross profit margin, debt levels, interest costs, tax benefits and other financial items. All forward-looking statements, although made in good faith, are based on assumptions about future events and are therefore inherently uncertain, and actual results may differ materially from those expected or projected. Important factors that may cause our actual results to differ materially from expectations or projections include those described under the heading “Cautionary Statements” in Item 1A. “Risk Factors”. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

PART I

Item 1. Business

General

     Founded in 1910, Stewart Enterprises, Inc. is the third largest provider of funeral and cemetery products and services in the death care industry in the United States. Through our subsidiaries, we provide a complete range 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 October 31, 2005, our operations included 231 funeral homes and 144 cemeteries in 26 states within the United States and in Puerto Rico.

     For fiscal year 2005, funeral operations accounted for approximately 55 percent of our total revenues, and cemetery operations accounted for the remaining 45 percent. Our funeral homes offer a wide range of services and products including funeral services, cremation, transportation services, removal and preparation of remains, caskets and flowers. Our cemetery operations sell cemetery property, merchandise and services. Cemetery property includes lots, lawn crypts and family and community mausoleums. Cemetery merchandise includes vaults, monuments and markers. Cemetery services include burial site openings and closings and inscriptions.

     We believe that we operate one or more of the premier death care facilities in each of our principal markets. Our funeral homes and cemeteries are located primarily in the Southern, Western, Mid-Atlantic and Mid-Western states, generally in large metropolitan areas such as Miami, Orlando, Tampa and St. Petersburg, Florida; Dallas, Fort Worth and Houston, Texas; Los Angeles, San Diego and San Francisco, California; New Orleans, Louisiana; Baltimore, Maryland and the District of Columbia. According to the United States Bureau of the Census, many of these areas have a large population over age 65, which represents a principal target market for our preneed sales program as well as at-need sales. We believe that we are an industry leader in marketing preneed cemetery property and preneed funeral and cemetery merchandise and services, and we consider preneed sales to be an integral part of our long-term business strategy.

     Cemetery operations account for a significantly larger percentage of our total revenues than those of our three largest public competitors. We believe cemeteries provide the best foundation for securing long-term market share in our industry. The sale of cemetery property to a family creates a relationship that builds heritage over time, as family members are buried in a plot or mausoleum and as other family members purchase additional cemetery

property in order to be buried in the same cemetery. Our relationships with our cemetery property customers allow us to offer related products and services, such as cemetery merchandise and funeral services, at one of our businesses located on the cemetery grounds or nearby.

     We believe that our combination operations help to increase market share. By building new funeral homes on existing cemetery property, we are able to offer families the convenience of complete funeral home and cemetery planning, services and merchandise from a single location at a competitive price at the time of need or on a preneed basis. Approximately 48 percent of our cemeteries have a funeral home onsite that we operate in conjunction with the cemetery. In addition to our combination operations, approximately 37 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes. We frequently organize our operating units in “clusters,” which are geographically integrated groups of funeral homes and cemeteries, allowing us to cost-effectively pool resources, such as assets, personnel and services, and generate higher margins.

     On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. Of our 231 funeral homes and 144 cemeteries, three funeral homes and five cemeteries, which represent approximately 4 percent of our annual revenues and approximately five percent of our annual gross profit, are located in the New Orleans metropolitan area, suffered substantial damage and are conducting business in temporary facilities until repairs are completed. Our mausoleum construction and sales business, Acme Mausoleum, which primarily operates in southwest Louisiana and Texas, was also negatively impacted by Hurricanes Katrina and Rita. As of October 31, 2005, we had incurred approximately $20.9 million in expenses related to Hurricane Katrina including the write-off of damaged buildings, equipment and inventory, demolition costs, debris removal, record restoration, general cleanup, temporary living facilities for employees, relocation expenses and other costs. We expect insurance proceeds of at least $11.5 million currently based on the status of our insurance review, $0.5 million of which had been received as of October 31, 2005. We believe that a significant portion of the remainder of the loss we experienced may be covered by insurance. For additional information about the effects of Hurricane Katrina, and Hurricanes Rita and Wilma, on our business, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7 and Note 24 to the consolidated financial statements included in Item 8.

     In July 2005, as part of our strategic planning process, we announced the reorganization of our geographic operating divisions from four to two. For additional information, see “Business Strategy” and “Operations” below and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. Effective in the fourth quarter of 2005, our business had five operating segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of two geographic areas: Western and Eastern. Additional information on our segments can be found in Note 22 to the consolidated financial statements included in Item 8.

     Our business was founded by the Stewart family in 1910, and was incorporated as a Louisiana corporation in 1970. Our principal executive offices are located at 1333 South Clearview Parkway, Jefferson, Louisiana 70121, and our telephone number is 504-729-1400. Our website address is www.stewartenterprises.com, where all of our public filings are available free of charge on the same day they are filed with the Securities and Exchange Commission (“SEC”). The SEC also maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov.

The Death Care Industry

     Industry consolidation. Death care businesses in the United States have traditionally been relatively small, family-owned enterprises that have passed through successive generations within the family. The decade of the 1990s witnessed a trend of family-owned firms consolidating with larger organizations, but this trend slowed dramatically in 1999. As the number of consolidators participating in the acquisition market declined, those that remained generally applied significantly tighter pricing criteria, and many potential sellers withdrew their businesses from the market rather than pursuing transactions at lower prices.

     During 1999, Service Corporation International, one of our primary competitors for acquisitions, announced plans to significantly reduce the level of its acquisition activity. The Loewen Group, Inc., now reorganized as Alderwoods Group, Inc., previously a primary competitor for acquisitions, entered into bankruptcy proceedings during 1999, after announcing that it had terminated its acquisition activity and was offering a number

of its own properties for sale. In addition, Equity Corporation International, previously the fourth largest public death care company and another of our competitors for acquisitions, merged with Service Corporation International in 1999.

     Throughout fiscal year 1999, we continually reduced our acquisition pricing multiples. In the third quarter of fiscal year 1999, our acquisition activity began to decrease substantially from prior quarters as many potential sellers were not willing to sell their businesses at the lower prices. As the business model shifted, death care consolidators experienced diminishing access to capital. In response to these changes, we ceased our acquisition activity and developed strategies for improving our cash flow and reducing and restructuring debt. During fiscal year 2000 through fiscal year 2003, we completed our transitional strategies of improving our cash flow, restructuring and reducing our debt and selling our foreign assets. During fiscal years 2004 and 2005, we sold underperforming assets, refinanced and further reduced our debt and implemented new strategies to improve operations.

     We estimate that our industry, which consists of approximately 22,000 funeral homes and 10,500 cemeteries in the United States, collectively generates approximately $15 billion in annual revenue. Our industry continues to be characterized by a large number of locally-owned, independent operations, with approximately 80 percent of industry revenue being generated by independently-owned operations. At current stock prices, the use of our cash to pay dividends, repurchase stock, reduce debt and construct funeral homes on our cemeteries or those of unaffiliated third parties continues to be more attractive than acquisitions. However, if acquisition pricing improves, we believe that growing our organization through acquisitions can again be a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our infrastructure.

     Importance of tradition; barriers to entry. We believe it is difficult for new competitors to enter existing markets successfully by opening new cemeteries and funeral homes. Entry into the cemetery market can be difficult due to several factors. Because families tend to return to the same cemetery for multiple generations to bury family members, it is difficult for new cemeteries to attract families. Additionally, mature markets, including many of the metropolitan areas where our cemeteries are located, are often served by an adequate number of existing cemeteries with sufficient land for additional plots, whereas land for new cemetery development is often scarce and expensive. Regulatory complexities and zoning restrictions also make entry into the cemetery market difficult. Finally, development of a new cemetery usually requires a significant capital investment that takes several years to produce a return. Entry into the funeral home market can be difficult for many of the same reasons. Families are often willing to move from an existing funeral home to a newer facility developed on the grounds of their preferred cemetery; however, absent that connection, families tend to choose the funeral home that previously served their family. Families also choose a funeral home because of its reputation, which can only be developed over time.

     Continuing need for products and services; increasing number of deaths. There is an inevitable need for our products and services. Although the number of deaths in the United States will reflect short-term fluctuations, deaths in the United States are expected to increase at a steady, moderate pace over the long-term. According to the United States Bureau of the Census, the number of deaths in the United States is expected to increase by approximately 1 percent per year, from 2.4 million in 2003 to 2.6 million in 2010. Furthermore, the average age of the population in the United States is increasing. According to the United States Bureau of the Census, the United States population over 50 years of age is expected to increase by approximately 2 percent per year, from 76.8 million in 2000 to 98.6 million in 2010. We believe the aging of the population is particularly important because it expands our target market for preneed sales, as persons over the age of 50 are the most likely group to make preneed funeral and cemetery arrangements.

     Growing demand for cremation. Consumer preferences in the death care industry tend to change slowly. One significant trend in the United States is an increasing preference of consumers for cremations. Industry research indicates that the percentage of cremations has increased steadily and that cremations will represent approximately 36 percent of deaths in the United States by the year 2010, compared to 29 percent in 2003. The trend toward cremations has been a significant concern for traditional funeral home and cemetery operators because cremations have typically included few, if any, additional products or services other than the cremation itself. However, industry research has shown that consumers most commonly choose cremation over traditional funerals for reasons other than cost, and we believe that cremations also provide our company with an opportunity to offer families an array of additional products and services with an emphasis on customization.

     Growing demand for customization. Our market research and operational experience indicate a growing demand for increased personalization of death care products and services, presenting us with an opportunity for enhancing our customers’ satisfaction and increasing our revenue per sale through our custom funeral planning program. For additional information, see below under the heading “Competitive Strengths — Emphasis on customization and personalization.”

Competitive Strengths

     Leading market positions. We are the third largest provider of funeral and cemetery products and services in the United States and have been in business for more than 90 years. We believe that we operate one or more of the premier death care facilities in each of our principal markets, which are primarily in larger metropolitan areas in the Southern, Western, Mid-Atlantic and Mid-Western states. In our view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion. While funeral homes and cemeteries in the United States perform an average of approximately 100 funerals and 165 burials per year, our facilities perform an average of approximately 265 funerals and 370 burials per year. In addition, approximately 40 percent of our properties are located in California, Florida and Texas, which are three of the four states with the highest populations over age 65, an age group that represents a large portion of our target market.

     Strong cemetery operations. Our cemetery operations account for approximately 45 percent of our total revenues, which is a significantly larger percentage than any of our three largest competitors. We believe this is a competitive advantage because families generally return to the same cemetery for multiple generations to bury family members. Cemetery property often becomes an important part of a family’s heritage, and family members who relocate are often returned to their home cemetery to be buried. We build on our relationships with our cemetery customers by offering additional cemetery property to related family members and by offering related products and services such as cemetery merchandise and funeral services at one of our funeral homes located on the cemetery grounds or nearby. Approximately 39 percent of our total cemetery acreage is available for future development.

     Emphasis on combination operations. Approximately 48 percent of our cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which we refer to as a combination operation. This is a higher percentage of combination operations than any of our three largest competitors. We believe combination operations represent a competitive advantage because they offer families the convenience of complete death care services at a single location. A family that is planning a burial in one of our cemeteries often perceives our onsite funeral home to be a more desirable location for funeral services than an unaffiliated offsite funeral home. Thus, the call volume of the funeral home is enhanced by the heritage of the cemetery, and, over time, the volume of cemetery events increases as well. In addition, combination operations enhance our purchasing power, enable us to employ more sophisticated management systems and allow us to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. As a result, our combination operations usually generate higher operating margins compared to our stand-alone funeral homes and cemeteries. In addition to our combination operations, approximately 37 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes.

     Expertise in preneed sales; strong backlog. We believe that we are distinguished from our competitors by our strong emphasis on, and more than 60-year history of experience with, preneed sales. Preneed plans enable families to specify in advance and prepay for cemetery property and funeral and cemetery services and products. We market our preneed properties, services and products domestically through a full-time staff of approximately 1,100 commissioned sales counselors. We estimate that as of October 31, 2005, the future value of our preneed backlog of funeral and cemetery products and services (including estimated future earnings on funds held in trust and build-up in the face value of third-party insurance contracts, in each case using projected returns) represented approximately $2.0 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. Our expertise in preneed sales has historically developed out of, and now complements, our strong cemetery operations. This is because cemetery property, such as a burial plot, is usually the first purchase a family will make when considering preneed arrangements. We build on our relationships with our preneed cemetery property customers by offering them additional preneed products and services such as cemetery merchandise and funeral services. Our focus on preneed cemetery property sales is also important because

these sales generate current revenues and higher current cash flows than other types of preneed sales.

     Emphasis on customization and personalization. During 1999 we took steps to gain a competitive advantage by placing our company at the forefront of product offerings based on consumer preferences. We hired a major consulting firm to assist us in conducting an extensive market study evaluating changing trends in consumer preferences. With more than 2,400 interviews conducted, we believe this to be the most exhaustive recent study of consumer preferences in our industry. This project provided us with the consumer’s perspective on our operations and facilities. We gained valuable insight into how our employees, business practices and facilities can better meet consumer preferences. Our implementation of new products and services based on the findings of this project continue to be positive drivers for our funeral business.

     Among other important findings, our market research indicated that consumer preferences are shifting towards more personalized memorial services and merchandise in the context of both traditional burials and cremations. We responded to these changing preferences by, among other things, training our funeral arrangers to offer our customers a broad range of options, such as designing a funeral service to reflect the special interests or accomplishments of the deceased. We developed a custom funeral planning program and have implemented this program in over 140 of our funeral homes through the end of fiscal year 2005. By the end of fiscal year 2006, we expect to have implemented this program in an additional 30 of our funeral homes. We are also changing the way our product offerings are displayed at our locations, making it easier for our customers to appreciate our wider selection. In our markets where these new business practices have been implemented, we believe that our product and service offerings have enhanced the experiences provided to families at our funeral homes and have contributed to increased revenues per sale.

     Expertise in enhanced cremation and alternative service offerings. Our alternative service firms are generally located in leased premises and have lower overhead than traditional funeral homes. Although death care arrangements at these locations are typically more cost-effective for the consumer than services at a traditional funeral home, it is not our goal to be the low-price leader in these markets. While the average revenue for a cremation service is generally lower than that of a traditional full-service funeral, we have found that these revenues can be substantially enhanced by our emphasis on customization. For example, in addition to a personalized memorial service to celebrate the life of the deceased, an enhanced cremation may include a casket, an urn and a niche in a mausoleum or columbarium in which to place the remains. We continue to market our products and services to address the rising demand for cremations.

     Centralized support services; cost controls. Our Shared Services Center, which we opened in 1997, was developed for the standardization and centralization of all of our facilities’ administrative and support processes such as accounting, management reporting, payroll, trust administration, contract processing, accounts receivable collection and other services. It allows us to decrease our costs without diminishing service by creating significant savings on items such as trust administration fees, travel expenses, office supplies, overnight delivery and long distance telephone services. As we look at our opportunities for growth, we expect to leverage the efficiencies that we have achieved through our Shared Services Center and expect to manage much of our growth with our existing infrastructure. Additionally, at the beginning of fiscal year 2000 we developed our centralized formal training strategy and began implementation of standardized marketing programs to enhance sales effectiveness. While our centralization of resources and standardization of processes represent a competitive advantage, our management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in their operations and service to families in an effort to maintain the traditional structure and culture of an individually-owned operation. We believe that this is important in order to maintain the level of caring, personalized service expected by the families we serve.

     Experienced management. We have an experienced management team, many of whom owned and operated their own funeral homes and cemeteries and joined us when we acquired their businesses. Our seven top executives have an average of 27 years of experience in the death care industry and have served our company for an average of 12 years.

Business Strategy

     Implement strategic plan. In July 2005, management began to implement a new strategic plan designed to transform our culture and grow our business organically, with a focus on increasing the number of funeral calls, the average revenue per funeral call and the number of preneed sales. One part of the plan focuses on putting people

first — customers and employees. In 2005, we hired an independent research firm to conduct market research with customers, prospective customers and front-line employees as a means of gaining a clearer understanding of customer service expectations. From that research we have implemented ways to increase customer satisfaction. We also conducted employee satisfaction surveys. In response to the surveys, we have emphasized the career ownership concept and enhanced our focus on advancement, development and awareness of opportunities within our organization. Additionally, through new employee orientation, an employee suggestion campaign and enhanced communication from senior management, communication throughout the company will improve as employees have better knowledge of changes that directly affect them. Another part of the strategic plan focuses on growing our business through several initiatives that include expanding our product and service offerings to the cremation consumer, forging additional third-party affiliations and marketing additional products and services to our existing customer-base.

     In order to more effectively communicate within our organization and execute this strategic plan, in July 2005 we promoted Everett N. Kendrick to Chief Operating Officer and announced a reorganization of our operating divisions from four to two. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

     Continue to implement 2003 operating initiatives. In fiscal year 2003, our executive management team identified several key strategies that we believe will improve the future growth of our business. This led to our announcement in September 2003 of a set of operating initiatives, which resulted in the creation of four task forces to address the following key areas: increased cemetery property sales volume, growth in the number of funeral events performed, cost improvements and employee development initiatives. We continued to implement these initiatives in fiscal years 2004 and 2005 and plan to continue them in 2006.

     Our preneed cemetery property task force identified locations with maximum growth potential and developed specific plans to increase preneed property sales and attract new customers at each of those locations. We view preneed property sales as the catalyst for growth in our cemetery segment as they create a customer base for all our businesses. These sales also result in high margins and produce positive cash flow. We have transitioned to personalized selling, and in addition to responding to requests generated by our media campaigns, our salespeople have been successful in obtaining referrals from their existing customer base, allowing them to assist new customers with their cemetery and funeral needs.

     We continue to develop and implement strategies to drive at-need and preneed funeral growth throughout our organization. We developed an at-need task force and a cremation task force, implemented a funeral call incentive compensation program and continue to proceed with full implementation of our custom funeral planning program, additional advertising and employee training. Our funeral call volume task force also used 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 believe that the continuous addition of preneed funeral contracts to our backlog is a primary driver of sustainable long-term growth in the number of families served by our funeral homes.

     To improve margins and reduce costs, our task force identified opportunities where we could reduce costs without sacrificing long-term results. These individuals conducted in-depth reviews of cost centers outside of their areas of responsibility to assure effective utilization of all resources. In December 2003, we restructured certain management functions and reduced our employee headcount by approximately 300 throughout the organization. In the markets in which we operate, declining deaths in recent years have resulted in reduced activity in many of our businesses, requiring fewer employees. Additionally, we restructured for a flatter organization to bring leadership closer to those individuals who have the greatest potential to improve the performance of each location. There were no reductions in the number of commissioned sales counselors. We believe the workforce reduction and other cost reductions did not reduce the quality, service and value consistently provided to families through our funeral homes and cemeteries. While we intend to continue controlling costs and growing revenues, we do not anticipate further significant cost cuts (see “Forward-Looking Statements” included in Item 7 and “Cautionary Statements” included in Item 1A. “Risk Factors”).

     The fourth initiative was to enhance employee satisfaction through professional growth, which includes the implementation of a mentoring program and succession plan for all key employee positions. We continue to invest in the professional growth of our employees through numerous programs including those adopted in connection with our 2005 strategic plan.

     Maintain backlog through preneed marketing. As part of the 2003 operating initiatives described above, we have increased our focus on preneed sales. We consider maintaining our backlog through preneed marketing to be an integral part of our long-term business strategy. Our primary objective is to balance our preneed sales levels and our cash investment while maintaining a sustainable and predictable level of growth in our backlog. The aging of the population represents a significant opportunity for us to expand our customer base through preneed marketing, as persons over 50 years of age are most likely to make these purchases.

     Focus on cash flow. In addition to controlling our costs, we plan to continue to focus on our cash flow through initiatives begun in fiscal year 2000. In fiscal year 2000, we restructured our preneed sales program to focus on increasing cash flow. We improved the quality of our preneed sales and the associated receivables by increasing finance charges, requiring larger down payments and shortening installment payment terms, although this resulted in a decrease in the overall level of preneed sales. Also in 2000, we suspended dividends and implemented a more rigorous internal process for reviewing capital expenditures. With a more solid cash flow position, on March 28, 2005, we announced that our Board of Directors approved the initiation of a quarterly cash dividend, paying approximately $8 million in dividends during the fiscal year. We plan to continue our focus on improving our cash flow and continue controlling our costs by, among other things, obtaining volume discounts from suppliers and leveraging our operating costs through clustering and combination operations. Additionally, we have been incentivizing local managers to control costs by tying their compensation more closely to the profitability of the locations they manage.

     Deploy cash flow. We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. On March 28, 2005, we announced a new stock repurchase program, having completed our initial program initiated in June 2003, and announced that our Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7. At current stock prices, the use of our cash to pay dividends, repurchase stock, reduce debt and construct funeral homes on our cemeteries or those of unaffiliated third parties continues to be more attractive than acquisitions. However, if acquisition pricing improves, we believe that growing our organization through acquisitions can again be a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our infrastructure.

     Increase enhanced cremation products and services. In fiscal years 2005, 2004 and 2003, 38 percent, 37 percent and 36 percent, respectively, of the funeral services we performed in our continuing operations were cremations. The cremation rate in the United States has been increasing. According to industry estimates, 29 percent of deaths in the United States during 2003 resulted in cremations, and cremations are expected to represent 36 percent of deaths in the United States by the year 2010. As described above in “Competitive Strengths — Expertise in enhanced cremation and alternative service offerings,” we have been addressing this trend by providing enhanced cremation products and services at all of our funeral homes.

Operations

     General. We believe that we operate one or more of the premier death care facilities in each of our principal markets. In our view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion.

     We operate most of our funeral homes and cemeteries in “clusters.” Clusters are groups of funeral homes and cemeteries located close enough to one another that their operations can be integrated to achieve economies of scale. For example, clustered facilities can share vehicles, embalming services, inventories of caskets and other merchandise and, most significantly, personnel, including prearrangement sales personnel; thus, we are able to decrease our costs and expand our sales and marketing effectiveness at each location. By virtue of their proximity to one another, clustered facilities also create opportunities for more integrated and sophisticated management of operations.

     Funeral operations. Funeral operations accounted for approximately 55 percent of our revenues for fiscal year 2005. Our funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. Our services and products include family consultation, removal and preparation of remains, the

use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of our funeral homes offer cremation products and services. Most of our funeral homes have a non-denominational chapel on the premises, which allows family visitation and religious services to take place at the same location. As of October 31, 2005, we operated 231 funeral homes.

     Cemetery operations. Cemetery operations accounted for approximately 45 percent of our revenues for fiscal year 2005. Our cemetery operations sell cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, markers and burial vaults, and also provide burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis. We also maintain cemetery grounds under cemetery perpetual care contracts and local laws. As of October 31, 2005, we operated 144 cemeteries.

     Combination funeral home and cemetery operations. Approximately 48 percent of our cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which is a higher percentage of combination operations than any of our three largest competitors. Many of these facilities are in our key markets, including New Orleans, Louisiana; Dallas, Fort Worth and Houston, Texas; Miami, Orlando, Tampa and St. Petersburg, Florida; and Los Angeles and San Diego, California.

     Combination operations help to increase market share by allowing us to offer families the convenience of complete funeral and cemetery planning and services from a single location at a competitive price at the time of need or on a preneed basis. Our experience demonstrates that a family planning a burial in our cemetery often views our associated funeral home as a more desirable location for funeral services than an unaffiliated offsite funeral home. Thus, the funeral home’s sales benefit from the heritage of the cemetery, and over time, the cemetery’s activity increases as well. In addition, combination operations enhance our purchasing power, enable us to employ more sophisticated management systems and allow us to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded sales and marketing opportunities. Although it generally takes several years before a newly constructed funeral home becomes profitable, our experience with combination operations has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both.

     We have three primary strategies for growth through the use of combination operations. One strategy is to create combination operations by constructing funeral homes on the grounds of our cemeteries. Another is to enter into agreements in which we construct funeral homes on the grounds of unaffiliated cemeteries, which allows us to enjoy many of the benefits of a combination operation without the capital investment of purchasing the cemetery. The cemetery revenue of the unaffiliated cemetery is enhanced as it benefits by being able to compete more effectively with other cemeteries or combination operations in the market and by providing a better service to their parishioners or other constituencies. The third strategy is to acquire combination operations.

     In 1987, we entered into an agreement with the Catholic Archdiocese of New Orleans pursuant to which we constructed and own a mausoleum on one of our cemeteries, and the Archdiocese of New Orleans assists in the promotion of the sale of crypts in the mausoleum to Catholic parishioners of the Archdiocese of New Orleans. The Company pays the Archdiocese of New Orleans a percentage of the revenue from the sale of all crypts in the mausoleum. Additionally, in fiscal year 1994, we constructed a funeral home and mausoleum on the grounds of the New Orleans Cemetery of the Firemen’s Charitable and Benevolent Association, a non-profit organization. We own and operate the funeral home and mausoleum.

     In 1997, we entered into lease agreements with the Archdiocese of Los Angeles whereby we have the right to construct and operate funeral homes on the sites of up to nine cemeteries owned and operated by the Archdiocese. As of October 31, 2005, five of these funeral homes were operating, and construction had begun on the sixth funeral home. The leases expire in 2039, and we do not have an option to renew. We account for these leases as operating leases.

     Over the last 50 years, through our mausoleum construction business, we have developed relationships with the Catholic Church in approximately 70 dioceses in 39 states. We plan to pursue more of these agreements with the Catholic Church, other faith-based organizations and non-profit entities. We also plan to develop additional combination operations on our own cemetery properties as well as pursuing the acquisition of privately-owned combination operations.

     Cremation. In fiscal year 2005, 38 percent of the funeral services we performed in our continuing operations were cremations. The increasing preference of consumers for cremations is a significant trend in the United States. Industry research indicates that the percentage of cremations has steadily increased and that cremations will represent approximately 36 percent of deaths in the United States by the year 2010, compared to 29 percent in 2003. We have been addressing this trend by providing enhanced cremation products and services at all of our funeral homes, including funeral services and memorialization for families choosing cremation. We are also addressing this trend through our alternative service firm strategy as discussed above in “Competitive Strengths — Expertise in enhanced cremation and alternative service offerings.”

     Preneed arrangements. We market death care products and services domestically on a preneed basis through a full-time staff of approximately 1,100 commissioned sales counselors. Preneed plans enable families to specify in advance and prepay for funeral and cemetery arrangements. Prearrangements spare families the emotional strain of making death care decisions at the time of need. The products and services included in preneed contracts are set at prices prevailing at the time the agreement is signed rather than when the products and services are delivered. As described in Note 3 to the consolidated financial statements included in Item 8, customer payments related to these contracts are generally placed in trusts and invested or are used to purchase insurance policies to cover the cost of the future delivery of products and services. When the service or merchandise is delivered, we realize the full contract amount plus all accumulated trust earnings associated with that contract or the buildup in the face value of the insurance contract, generally offsetting increases in our costs due to inflation.

     We estimate that as of October 31, 2005, the future value of our preneed backlog (including estimated earnings on funds held in trust and build-up in the face value of third-party insurance contracts, in each case using projected returns) represented approximately $2.0 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

     Trusts and escrow accounts. We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. For further discussion of these trusts and escrow accounts, see Notes 5, 6 and 7 to the consolidated financial statements included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. As of October 31, 2005, the market value of our preneed funeral merchandise and services trust and escrow accounts totaled approximately $444.2 million, the market value of our preneed cemetery merchandise and services trust and escrow accounts totaled approximately $190.4 million, and the market value of our cemetery perpetual care trusts totaled approximately $212.1 million.

     We believe that the balances in our trusts and escrow accounts, along with insurance proceeds, installment payments due under contracts and future earnings on the balances, will be sufficient to cover our estimated cost of providing the related preneed services and products in the future (see Item 1A. “Risk Factors”).

     Generally, our wholly-owned subsidiary, Investors Trust, Inc. (“ITI”), a Texas corporation with trust powers, serves as investment advisor on our investment portfolio and our prearranged funeral, merchandise and cemetery perpetual care trusts and escrow accounts. ITI provides investment advisory services exclusively to our trusts for a fee. Under state trust laws, we are allowed to charge the trusts a fee for managing the investment of the trust assets. We have elected to perform these services in-house, and the fees are recognized as income as the services are performed. For additional information, see Note 22 to the consolidated financial statements included in Item 8. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. As of October 31, 2005, ITI managed assets with a market value of approximately $812.6 million. Lawrence B. Hawkins, one of our executive officers and a professional investment manager, serves as President of ITI. ITI operates within the guidelines of a formal investment policy established by the Investment Committee of our Board of Directors. The policy emphasizes conservation, diversification and preservation of principal while seeking appropriate levels of current income and capital appreciation.

     Management. We have an experienced management team, many of whom joined us through acquisitions. Our management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in deciding how their businesses will be managed and how their products and services will be priced and merchandised. At the same time, financial and strategic goals are established by management at the corporate level. We provide business support services primarily through our Shared Services Center, which opened in 1997 and provides centralized and standardized accounting, management reporting, payroll, contract processing, accounts

receivable collection and other services for all of our facilities. In December 2003, we restructured certain management functions and reduced our employee headcount by approximately 300 employees throughout the organization. In July 2005, we announced that we were reorganizing our operating divisions from four to two, effective for the fourth quarter of fiscal year 2005.

     As of October 31, 2005, we were divided into two geographic operating divisions in the United States, each of which was managed by a division president and chief financial officer. Our operating divisions are further divided into regions, each of which is managed by a regional vice president. We also have a Corporate Division, which manages our corporate services, accounting, financial operations and strategic planning and a Sales and Marketing Division responsible for sales teams in all operating divisions. From time to time, we may increase, reduce or realign our divisions and regions.

     In December 2004, Thomas M. Kitchen, a member of our Board of Directors, was named Executive Vice President and Chief Financial Officer. In July 2005, Everett N. Kendrick, Senior Vice President and President of the Sales and Marketing Division, was named Executive Vice President and Chief Operating Officer. John P. Laborde, an independent member of the Board of Directors since 1995, was appointed Chairman of the Board in April 2005.

     Financial information about industry and geographic segments. For financial information about our industry and geographic segments for fiscal years 2005, 2004 and 2003, see Note 22 to our consolidated financial statements included in Item 8.

Competition

     Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral home and cemetery firms. We also compete with monument dealers, casket retailers, low-cost funeral providers and crematories, and other non-traditional providers of limited services or products. Discount retailers have begun marketing caskets at prices sometimes lower than what we offer. Consumers can now buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet, and recently, the first large general merchandise company has entered the market for low-cost caskets. Market share for funeral services and cemetery property is largely a function of goodwill, family heritage and tradition, although competitive pricing, professional service and attractive, well-maintained and conveniently-located facilities are also important, and price can be especially important for funeral and cemetery merchandise. Because of the significant role of goodwill and tradition, market share increases for funeral services and cemetery property are usually gained over a long period of time. Extensive marketing through media advertising, direct mailings and personal sales calls has increased in recent years, especially with respect to the sales of preneed funeral services. Information about our sales and marketing approach can be found above under the heading “Business Strategy.” Traditional cemetery and funeral service operators face competition from the increasing number of cremations in the United States. Additional information about the trend toward cremation and our strategies to address that trend can be found under the headings “The Death Care Industry,” “Competitive Strengths” and “Business Strategy.”

Regulation

     Our funeral home operations are regulated by the Federal Trade Commission (the “FTC”) under the FTC’s Trade Regulation Rule on Funeral Industry Practices, 16 CFR Part 453 (the “Funeral Rule”), which went into effect on April 30, 1984, and was revised effective July 19, 1994. The FTC began reviewing the Funeral Rule in 1999 at which time it conducted hearings to receive input from industry and consumer groups. At this time, the FTC has not issued any proposed changes to the regulation nor are any anticipated in the immediate future.

     The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (1) misrepresenting legal, crematory and cemetery requirements; (2) embalming for a fee without permission; (3) requiring the purchase of a casket for direct cremation; and (4) requiring consumers to buy certain funeral goods or services as a condition for furnishing other funeral goods or services.

     Our operations are also subject to extensive regulation, supervision and licensing under numerous federal, state and local laws and regulations. For example, state laws impose licensing requirements for funeral homes and

funeral directors and regulate preneed sales. Our embalming facilities are subject to stringent environmental and health regulations. We have a department that monitors compliance, and we believe that we are in substantial compliance with the Funeral Rule and all such laws and regulations. Federal, state and local legislative bodies and regulatory agencies frequently propose new laws and regulations, some of which could have a material effect on our operations and on the death care industry in general. We cannot predict the outcome of any proposed legislation or regulation or the effect that any such legislation or regulation might have on us.

Employees

     As of October 31, 2005, we employed approximately 5,400 persons, and we believe that we maintain a good relationship with our employees. Approximately 133 of our employees are represented by labor unions or collective bargaining units.

Item 1A. Risk Factors

Cautionary Statements

     Our business is subject to significant risks. We caution readers that the following important factors, among others, in some cases have affected, and in the future, could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements above and in any other forward-looking statements made by us or on our behalf.

Risks Related to Our Business

We have recently been required to restate previously issued financial statements and have discovered material weaknesses in our internal controls over financial reporting, which caused us to be unable to timely file our Form 10-Q for the quarter ended July 31, 2005 and our Form 10-K for the fiscal year ended October 31, 2005 with the Securities and Exchange Commission.

     As a result of our restatement discussed in Note 2 to the consolidated financial statements included in Item 8, we missed filing deadlines for our Form 10-Q for the quarter ended July 31, 2005 (the “2005 Third Quarter Report”) and our Form 10-K for the fiscal year ended October 31, 2005 (the “2005 Form 10-K”). We also have been unable to complete an amendment to our Form 10-K for the fiscal year ended October 31, 2004 (the “2004 Form 10-K/A”). We plan to file a completed 2005 Third Quarter Report by February 22, 2006 and a completed 2004 Form 10-K/A by April 7, 2006. During any period when we are not current with our SEC reports, neither our affiliates nor any person that purchased shares in a private offering during the preceding two years will be able to sell their shares in public markets pursuant to Rule 144 under the Securities Act of 1933. Also our registration statements on Form S-8 regarding sales of our securities through our employee benefit plans will not be available, and we have suspended sales under these registration statements until we are current in our SEC filings.

     As discussed in Item 9A, we are in the process of remediating the material weaknesses in our internal controls, and we can give no assurances as to when the remediation will be completed.

We are subject to a delisting proceeding by The Nasdaq Stock Market.

     We have received notifications from Nasdaq that our incomplete 2005 Third Quarter Report, the delay in filing our 2005 Form 10-K and our incomplete 2004 Form 10-K/A are not in compliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c)(14). The Nasdaq Listing Qualifications Panel granted our request for an extension of time to file the complete 2005 Third Quarter Report and the 2005 Form 10-K to February 15, 2006. On February 14, 2006, we requested an additional extension of time to February 22, 2006 in which to file the 2005 Form 10-K and 2005 Third Quarter Report. We also requested an extension of time in which to file the 2004 Form 10-K/A until April 7, 2006. Nasdaq has granted these extensions. Delisting of our Class A common stock could have a material adverse effect on the trading price of and market for our Class A common stock and on our ability to raise capital.

The delay in filing our SEC reports has also resulted in an increase in the interest rate payable on our 6.25 percent senior notes, and we cannot predict when the increase will be reduced.

     In connection with the issuance of our 6.25 percent senior notes in February 2005, we entered into a registration rights agreement requiring us to conduct a registered exchange offer to allow holders of the unregistered notes to exchange them for similar registered notes, all with specified times. Due to accounting matters referenced above, we were unable to comply with the agreement within the specified time frames, and have so far not been able to cause the required registration statement to become effective. As a result, we have incurred additional interest on the notes which will continue until the registration statement is effective and the exchange offer completed. The additional interest is currently accruing at the rate of 1.50 percent, which is the maximum additional interest rate under the agreement. See Note 16 to our consolidated financial statements included in Item 8. Before the exchange offer can occur, we must complete and file an amended Form 10-K for the fiscal year ended 2004, file amended Form 10-Qs for the quarters ended January 31, 2005, April 30, 2005 and July 31, 2005, complete a registration statement for the exchange offer and have the registration statement declared effective by the SEC. We cannot currently predict when we will be able to file the registration statement and have it declared effective by the SEC. Although we believe we have resolved all issues raised by the SEC Staff, we can give no assurances regarding how and when the SEC will complete its review.

Failure to achieve and maintain effective internal controls over financial reporting in accordance with Section 404 of the Sarbanes-Oxley Act could have a material adverse effect on the market price of our common stock and our access to capital.

     Section 404 of the Sarbanes-Oxley Act requires management’s assessment of the effectiveness of internal controls over financial reporting and a report by our independent registered public accounting firm addressing management’s assessment and the effectiveness of the internal controls over financial reporting. During the course of testing, we identified deficiencies and material weaknesses which caused management to conclude that our internal controls over financial reporting were not effective as of the end of fiscal year 2005, and our auditors also concluded that these controls were not effective as of the end of fiscal year 2005. This could have a material adverse effect on the market price of our common stock and on our access to capital. If we are unable to achieve and maintain effective internal controls over financial reporting, such adverse effects may continue. See Management’s Report on Internal Control over Financial Reporting in Item 9A and the Report of Independent Registered Public Accounting Firm in Item 8.

From fiscal years 1994 to 2004, we have experienced a decline in funeral call volume due to many factors, such as the number of deaths and competition in our markets, our ability to identify changing consumer preferences and various other factors, some of which are beyond our control.

     We have experienced declines in same-store funeral call volumes for a number of years due to many factors described elsewhere herein including the number of deaths, intense competition and our ability to identify changing consumer preferences. From fiscal years 2001 to 2002 and 2002 to 2003, same-store funeral call volumes decreased 1.5 percent and 2.6 percent, respectively. One of the operating initiatives announced in 2003 was the creation of a funeral call volume task force, which is using the most successful tactics of our top performing funeral homes to develop strategies to drive funeral call growth throughout our organization with an increased focus on preneed funeral sales. Nevertheless, we experienced a decline in same-store funeral call volumes from fiscal year 2003 to 2004 of 1.0 percent. We did experience an increase of 0.3 percent in same-store funeral call volumes for the year ended October 31, 2005, as compared to the prior year, which includes the impact of the Louisiana funeral homes affected by Hurricane Katrina. We believe the increase in funeral call volume is attributable to the implementation of the operating initiatives described above. However, we can give no assurance that we will be able to sustain such increases in the long term or that we will succeed in stopping or reversing the long-term trend in declining same-store funeral call volumes.

Our business is subject to the risk of losses due to hurricanes.

     Our company is headquartered in the New Orleans metropolitan area, and approximately 75 of our funeral homes and 45 of our cemeteries, along with our mausoleum construction and sales business, Acme Mausoleum, are located near the Gulf Coast in southern Texas, Louisiana, Mississippi, Alabama and Florida, along the eastern coasts of Florida, and North and South Carolina and in Puerto Rico. These areas are periodically threatened by hurricanes, which can damage our properties, interrupt our business and disrupt the lives of our customers and employees.

     In fiscal year 2005 our business was adversely affected by Hurricanes Katrina, Wilma and Rita. We believe that a significant portion of the loss we experienced due to Hurricane Katrina should be covered by insurance, but we cannot predict the long-term effects on our operations of the following factors: the economic conditions currently existing in the New Orleans metropolitan area; the success and timing of repairs and reconstruction of the New Orleans metropolitan area and of our facilities following the effects of Hurricane Katrina; and the timing and amount of collection of insurance recoveries.

We may experience declines in preneed sales due to numerous factors, including 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 revenues and market share.

     A weakening economy that causes customers to reduce discretionary spending could cause, and we believe has caused in the past, a decline in preneed sales. Geopolitical concerns could lower consumer confidence, which could also result in a decline in preneed sales. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.

Price competition could reduce market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.

     Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products including, in recent years, Internet providers. From time to time, this price competition has caused us to lose 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 backlog and potentially impact our annual goodwill impairment analysis.

     Discount retailers sell caskets at prices substantially lower than prices we offer. Consumers can now buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet, and the first large general merchandise company recently entered the market for low-cost caskets. Competition from these sources could reduce our casket sales, which could adversely affect funeral revenues and margins.

Increased advertising and better marketing by competitors, as well as increased offering of 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 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 incur increased 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 necessary to respond to competition by varying the types or mix of products or services offered by us. Also, increased use of the Internet by customers to research and/or purchase products and services could cause us to lose market share to competitors offering to sell products or services over the Internet. We do not currently sell products or services over the Internet.

If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.

     Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. During fiscal year 2000, we began to implement strategies based on an extensive proprietary study of consumer preferences we commissioned in 1999. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In

addition, any strategies we may implement to address these trends may prove incorrect or ineffective.

Earnings from and principal of trusts and escrow accounts could be reduced by changes in stock and bond prices and interest and dividend rates.

     We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Earnings and investment gains and losses on trusts and escrow accounts are affected by financial market conditions that are not within our control. Earnings are also affected by the mix of fixed-income and equity securities that we choose to maintain in the trusts, and we may not choose the optimal mix for any particular market condition. The size of the trusts depends upon the level of preneed sales and maturities, the amount of ordinary income and investment gains or losses and funds added through acquisitions, if any. Declines in earnings from cemetery perpetual care trusts would cause a decline in current revenues, while declines in earnings from other trusts and escrow accounts could cause a decline in future cash flows and revenues. In addition, any significant or sustained investment losses could result in there being insufficient funds in the trusts to cover the cost of delivering services and merchandise or maintaining cemeteries in the future. Any such deficiency would have to be covered by cash flow, which could have a material adverse effect on our financial position and results of operations.

     Unrealized gains and losses in the preneed funeral and cemetery merchandise and services trusts have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair market value of the trusts were to decline below the estimated costs to deliver the underlying products and services. If that were to occur, we would record a charge to earnings to record a liability for the expected losses on the delivery of the associated contract. Over time, gains and losses realized in the trusts are allocated to underlying preneed contracts and affect the amount of the trust earnings we record when we deliver the underlying products or services. Accordingly, if current market conditions do not improve, the trusts may eventually realize losses, and our revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue when we deliver the underlying products and services. Unrealized gains and losses in the cemetery perpetual care trusts do not affect earnings but could limit the capital gains available to us and could result in lower returns and lower current revenues than we have historically achieved.

Increased preneed sales may have a negative impact on cash flow and earnings.

     Preneed sales of cemetery property and funeral and cemetery products and services are generally cash flow negative initially, primarily due to the commissions and other costs to acquire the sale, the portion of the sales proceeds required to be placed into trusts or escrow accounts and the terms of the particular contract, such as the size of the down payment required and the length of the contract. We will continue to invest a significant portion of cash flow in preneed acquisition costs, which reduces cash flow available for other activities, and, to the extent preneed activities are increased, cash flow would be further reduced, and our ability to service debt could be adversely affected.

Increased costs may have a negative impact on earnings and cash flows.

     During fiscal year 2004, we reduced funeral, cemetery and corporate general and administrative expenses, primarily through a reduction in our workforce. While we intend to continue to control costs, we do not anticipate any further significant cost cuts. We may not be successful in maintaining our margins and may incur additional costs. For example, we are experiencing increased costs, at least in the near term, as a result of Hurricane Katrina. We have also incurred significant legal costs to defend unanticipated class action litigation and significant costs in connection with Sarbanes-Oxley compliance, our deferred revenue project and restatement of our financial statements. We may incur additional costs in fiscal year 2006 in conjunction with improving our systems and remediating control deficiencies noted as part of our Sarbanes-Oxley Section 404 assessment.

     Insurance costs, in particular, have increased substantially in recent years. The terrorist attacks in the United States on September 11, 2001 and related subsequent events have resulted in higher insurance premiums. The volume of claims made in such a short span of time resulted in liquidity challenges that many insurers have passed on to their policyholders. Insurers have increased premiums to offset losses in equity markets due to recent economic conditions. Insurance costs may also increase in the future due to the volume of claims associated with

Hurricanes Katrina, Rita and Wilma. Additionally, we have experienced increases in health insurance costs. Additional increases in insurance costs cannot be predicted.

Our Chairman Emeritus may have a significant and disproportionate influence on the outcome of election of directors and other matters presented for a vote of shareholders and this control may be exercised in a manner that may conflict with the interests of shareholders.

     As of October 31, 2005, our Chairman Emeritus, Frank B. Stewart, Jr., held 7,235,623 shares (or approximately 7 percent) of our outstanding Class A common stock and all of the 3,555,020 outstanding shares of our Class B common stock. Because each share of Class B common stock is entitled to 10 votes on all matters presented for a vote by our shareholders, Mr. Stewart controls approximately 30 percent of our total voting power, while holding approximately 10 percent of our outstanding equity. Accordingly, Mr. Stewart may have a significant and disproportionate influence over the election of directors and other matters requiring the affirmative vote of our shareholders and this control may be exercised in a manner that may conflict with the interest of shareholders. Additionally, because Louisiana law and our articles of incorporation require the affirmative vote of two-thirds of the voting power present to approve certain major transactions and any amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent the consummation of such actions, even if they are recommended by our Board of Directors and favored by a substantial majority of our shareholders.

Servicing our debt will require a significant amount of cash, and our ability to generate sufficient cash depends on many factors, some of which are beyond our control.

     Our ability to make payments on and to refinance our debt depends on our ability to generate cash flow. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on our meeting the financial covenants in our senior secured credit facility and other debt agreements we may have in the future. Our business may not generate cash flow from operations, and future borrowings may not be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our debt on favorable terms could have a material adverse effect on our financial condition.

Increases in interest rates would increase interest costs on our variable-rate long-term debt and could have a material adverse effect on our net income and earnings per share.

     Amounts borrowed under the senior secured credit facility are subject to variable interest rates. Any significant increase in interest rates could increase our interest costs on our variable-rate long-term debt or indebtedness incurred in the future, which could decrease our net income and earnings per share materially.

Our ability to maintain compliance with our covenants under our senior secured credit facility and 6.25 percent senior notes is dependent upon many factors, one of which is our ability to file timely reports with the SEC. Covenant restrictions may also limit our ability to operate our business.

     The restatements described in Note 2 to the consolidated financial statements included in Item 8 as well as our failure to deliver financial statements within the specified deadlines in our senior secured credit facility resulted in a default and potential event of default under the facility. We sought and received waivers of the defaults and potential events of default related to the restatements and failure to deliver audited consolidated financial statements by the specified deadline. A waiver granted an extension to deliver the audited consolidated financial statements for a date subsequent to this filing. We delivered the financial statements within the time period specified in the waiver. We believe our incomplete July 31, 2005 Form 10-Q filed with the SEC met the financial statement compliance requirements of our senior secured credit facility. We believe we were in compliance with the terms of the senior secured credit facility.

     The indenture governing our 6.25 percent notes requires us to furnish to the trustee for forwarding to the holders of the notes, within the time periods specified in the SEC’s rules and regulations, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements from our certified independent accountants. In addition, we must file a copy with the SEC for public availability within the time periods specified in the SEC’s rules and regulations. An event of default would occur if we failed to provide that information within 30 days after receipt of written notice by the trustee or holders of at least 25 percent of the principal amount outstanding. We furnished our July 31, 2005 Form 10-Q to the trustee and filed it with the SEC, and believe that doing so complied with the requirements of the indenture. We have not received a default notice from the trustee or note holders with respect to the late filing of the Form 10-K for the fiscal year ended October 31, 2005 and have now filed this report with the SEC. We believe we are in compliance with the terms of our 6.25 percent notes.

     Our senior secured credit facility and the indenture governing the 6.25 percent senior notes contain, among other things, covenants that restrict our and our subsidiaries’ activities. Our senior secured credit facility limits, among other things, our and the guarantors’ ability to: borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in transactions with affiliates; engage in sale and leaseback transactions; consummate specified asset sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our assets; and create liens on our assets. In addition, our senior secured credit facility contains specific limits on capital expenditures. Furthermore, our senior secured credit facility requires us to maintain specified financial ratios and satisfy financial condition tests. The indenture governing the 6.25 percent senior notes restricts our and the guarantors’ ability to create liens on assets, enter into sale and leaseback transactions and merge or consolidate with other companies. Our and our subsidiaries’ future indebtedness may contain similar or even

more restrictive covenants.

     These covenants may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. In addition, events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy these covenants. We might not meet those covenants, and the lenders might not waive any failure to meet those covenants. A breach of any of those covenants could result in a default under such indebtedness. If an event of default under our senior secured credit facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. Any such declaration would also result in an event of default under the indenture governing the 6.25 percent senior notes. For additional information, see “Liquidity and Capital Resources” included in Item 7.

The payment of dividends on our common stock in the future is subject to uncertainties.

     The declaration of dividends on our common stock in the future is subject to the discretion of our Board of Directors each quarter after its review of our financial performance. Our ability to pay dividends is restricted under our senior credit facility. See Note 16 to the consolidated financial statements included in Item 8.

Unanticipated litigation or negative developments in pending litigation could have a material adverse effect on our financial statements.

     We are a defendant in the litigation described in Note 21 to the consolidated financial statements included in Item 8 and other litigation in the ordinary course of business. The outcome of litigation is inherently uncertain and adverse developments or outcomes can result in significant monetary damages, penalties or injunctive relief against us.

Our projections do not include any earnings from acquisition activity. Several important factors, among others, may affect our ability to consummate acquisitions.

     Although we have not made any significant acquisitions in recent years, we may in the future. Any such acquisitions have risks. We may fail to identify suitable acquisition candidates, and even if we do, acquisitions may not be completed on acceptable terms or successfully integrated into our existing business. We may not be able to find businesses for sale at prices we are willing to pay. Acquisition activity, if any, will also depend on our ability to enter new markets. Due in part to our lack of experience operating in new areas and to the presence of competitors who have been in certain markets longer than we have, such entry may be more difficult or expensive than we anticipate.

We have had significant changes in the application of generally accepted accounting principles to our business. No assurances can be given that we will not face similar issues in the future.

      In recent years we have had significant changes in the application of generally accepted accounting principles to our business. These changes have sometimes made it difficult to compare results from one period to the next and have also resulted in reclassifications and restatements of previously reported results. We can give no assurances that we will not face similar issues in the future.

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. 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 deaths in the United States by the year 2010, compared to 29 percent in 2003. In fiscal years 2002, 2003, 2004 and 2005, 35 percent, 36 percent, 37 percent and 38 percent, respectively, of the funeral services we performed in our continuing operations were cremations. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, basic cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.

Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.

     Funeral homes and cemetery businesses must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues.

Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.

     The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the Federal Trade Commission, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. Embalming facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations.

     In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, federal, state, Puerto Rican and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. Several jurisdictions and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, impose or increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate,

these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations, our cash flows and our future prospects.

Item 1B. Unresolved Staff Comments

     None.

Item 2. Properties

     The following table shows the number of funeral homes and cemeteries we operated in each of our geographic operating segments as of October 31, 2005:

		Number
		of
		Funeral				Number of
Operating Segment		Homes				Cemeteries				Geographic Areas
Western Division — Funeral			122							Alabama, Arkansas, California, Illinois, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oregon, Texas, Washington
Western Division — Cemetery							50			Alabama, Arkansas, California, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Oregon, Texas, Washington, Wisconsin
Eastern Division — Funeral			109							Alabama, Florida, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia and Puerto Rico
Eastern Division — Cemetery							94			Alabama, Florida, Georgia, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia and Puerto Rico
			231				144

     As of October 31, 2005, approximately 75 percent of our 231 funeral home locations were owned by our subsidiaries, and approximately 25 percent were held under operating leases. The leases have terms ranging from 1 to 13 years, except for one lease that expires in 2032 and five leases with the Archdiocese of Los Angeles that expire in 2039. An aggregate of $0.5 million of our term notes are secured by mortgages on some of our funeral homes; these notes were either assumed by us upon our acquisition of the property or represent seller financing for the acquired property.

     As of October 31, 2005, we owned 144 cemeteries covering a total of approximately 10,039 acres. Approximately 39 percent of the total acreage is available for future development.

     We own a 98,200 square-foot building in suburban New Orleans that we use for our corporate headquarters, shared services center, human resources, communications, internal audit and information systems departments.

Item 3. Legal Proceedings

     For a discussion of our current litigation, see Note 21 to the consolidated financial statements included in Item 8.

     In addition to the matters described in Note 21, we and certain of our subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material 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, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

Item 4. Submission of Matters to a Vote of Security Holders

     None.

Item 4(a). Executive Officers of the Registrant

     The following table sets forth certain information with respect to our executive officers. Each of the following has served in the capacity indicated for more than five years, except as indicated below.

Name		Age				Position
Kenneth C. Budde			58			President, Chief Executive Officer and Director(1)
Everett N. Kendrick			64			Executive Vice President, Chief Operating Officer and President — Sales and Marketing Division(2)
Thomas M. Kitchen			58			Executive Vice President, Chief Financial Officer and Director(3)
Brent F. Heffron			56			Executive Vice President and President—Eastern Division(4)
Lawrence B. Hawkins			57			Executive Vice President and President—Investors Trust, Inc.
G. Kenneth Stephens, Jr.			44			Executive Vice President and President—Western Division(5)
Randall L. Stricklin			61			Senior Vice President and President—Corporate Development(6)

PART II

Item 5. Market for Registrant’s Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities

Market Information

     Our Class A common stock trades on the Nasdaq National Market under the symbol STEI. The fifth character “E” is currently appended to the trading symbol until we regain compliance with Nasdaq’s continued listing requirements. For additional information, see Note 26 to the consolidated financial statements included in Item 8.

     On January 31, 2006, the closing sale price as reported by the Nasdaq National Market was $5.54. The following table sets forth, for the periods indicated, the range of high and low sale prices, as reported by the Nasdaq National Market. As of December 30, 2005, there were 1,294 record holders of our Class A common stock. Record holders include persons holding Class A common stock on behalf of one or more beneficial owners who are not holders of record.

		High				Low
Fiscal Year 2005
Fourth Quarter		$	7.71			$	4.43
Third Quarter			7.62				5.23
Second Quarter			6.58				5.14
First Quarter			7.75				6.23
Fiscal Year 2004
Fourth Quarter		$	7.38			$	6.53
Third Quarter			8.24				6.59
Second Quarter			8.00				5.57
First Quarter			6.93				4.09

     There is no established public trading market for our Class B common stock. As of December 30, 2005, our Chairman Emeritus, Frank B. Stewart, Jr., was the record holder of all of our shares of Class B common stock. Our Class A and Class B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr. As of October 31, 2005, by virtue of his beneficial ownership of outstanding Class A and Class B common shares, Mr. Stewart controlled approximately 30 percent of our total voting power and held approximately 10 percent of our outstanding equity.

Dividends

     On October 5, 2000, our Board of Directors suspended the payment of quarterly dividends on our common stock. On March 28, 2005, our Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. Although we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance.

Sales of Unregistered Equity Securities

     For many years, we have maintained a 401(k) plan through which employees may invest in our Class A common stock or other investment choices. We have a Registration Statement on Form S-8 in effect for this 401(k) plan. In January 2003, we adopted a separate plan for the employees of our Puerto Rican subsidiary (the “Puerto Rico Plan”). Employees of this subsidiary were also permitted to invest in our Class A common stock through the Puerto Rico Plan. We did not file a separate Registration Statement on Form S-8 with the Securities and Exchange

Commission for the Puerto Rico Plan until December 8, 2004. From January 1, 2003 to December 7, 2004, three participants in the Puerto Rico Plan acquired a total of 1,146 units in the Stewart Enterprises, Inc. Stock Fund (approximately 1,643 shares of our Class A common stock based upon the closing sale price of our Class A common stock on December 7, 2004 of $7.50 per share) through the Puerto Rico Plan as a result of employee contributions, employer matching contributions and employee transfers from other investment funds or plans. Because participants in the Puerto Rico Plan purchased shares of our Class A common stock through the Puerto Rico Plan prior to the filing of the Registration Statement, these participants may have the right to rescind their purchases or recover damages if they no longer own the shares, subject to the applicable statute of limitations. Due to the small number of unregistered shares sold, our potential liability is not material.

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

     We have a stock repurchase program under which we are authorized to invest up to $30.0 million in the repurchase of our common stock. As of October 31, 2005, we had approximately $22.0 million remaining available under the plan. The table below provides information about purchases made by or on behalf of us, or of any “affiliated purchaser” as defined in SEC rules, of our equity securities registered pursuant to Section 12 of the Exchange Act, for each month during the fourth quarter of fiscal year 2005, in the format required by SEC rules. As indicated by the table, there were no such repurchases during the fourth quarter of fiscal year 2005.

Issuer Purchases of Equity Securities

														Maximum
										Total number of				approximate
										shares purchased				dollar value of shares
		Total number								as part of				that may yet be
		of shares				Average price				publicly-announced				purchased under the
Period		purchased				paid per share				plans or programs(1)				plans or programs
August 1, 2005 through August 31, 2005			—			$	—				—			$	22,032,533
September 1, 2005 through September 30, 2005			—			$	—				—			$	22,032,533
October 1, 2005 through October 31, 2005			—			$	—				—			$	22,032,533
Total			—			$	—				—			$	22,032,533

(1)		On March 28, 2005, we announced a new stock repurchase program, authorizing the investment of up to $30.0 million in the repurchase of our common stock. Repurchases under the new program will be limited to our Class A common stock, and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors.

Item 6. Selected Financial Data

Restatements and Reclassifications

     The following selected consolidated financial data for the fiscal years ended October 31, 2001 through October 31, 2005 are derived from our audited consolidated financial statements, as restated and reclassified. As discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 and in Note 2 to the consolidated financial statements included in Item 8, the financial statements for the fiscal years ended October 31, 2001, 2002, 2003, 2004 and the first three quarters of 2005 have been restated to correct for certain accounting errors. All applicable amounts relating to these restatements have been reflected in the following selected financial data.

     The data for fiscal years 2001 through 2005 have also been reclassified to reflect certain businesses as discontinued operations under the provisions of SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets,” as discussed in footnote 1 to the table below and in Note 3(s) to the consolidated financial statements included in Item 8. The data set forth below should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

     A summary of the effect of these restatements on our consolidated statements of earnings for fiscal years 2003 and 2004 and consolidated balance sheet for fiscal year 2004 can be found in Note 2 to the consolidated financial statements included in Item 8. A summary of the effects on the consolidated statements of earnings for fiscal years 2002 and 2001 and on the consolidated balance sheets of fiscal years 2001, 2002 and 2003 are presented in footnote 13 to the Selected Financial Data table below.

Comparability of Information in Selected Consolidated Financial Data Table

     As discussed in more detail in the footnotes to the table below and in the related footnotes to the consolidated financial statements included in Item 8, the following are the main factors that materially affect the comparability of the revenues, gross profits and assets reflected in the selected financial data:

•		SFAS No. 142 was implemented in fiscal year 2002.
•		In fiscal year 2005, we changed our method of accounting for preneed selling costs.
•		In fiscal year 2004, we adopted FIN 46R.
•		Fiscal years 2001 and 2002 include the results of our foreign operations in continuing operations. The sale of our foreign operations was completed in fiscal year 2002.
•		All businesses sold in fiscal years 2003, 2004 and 2005 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented.

Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)

		Year Ended October 31, (1)(13)
		2005 (2)				2004				2003				2002				2001
Statement of Earnings Data:						(Restated)				(Restated)				(Restated)				(Restated)
Revenues:
Funeral		$	274,067			$	271,239			$	269,109			$	311,301			$	375,578
Cemetery			220,732				222,827				209,374				214,989				233,082
Total revenues			494,799				494,066				478,483				526,290				608,660
Gross profit:
Funeral			61,726				68,741				58,820				71,577				76,632
Cemetery			40,545				46,271				39,823				40,460				42,571
Total gross profit			102,271				115,012				98,643				112,037				119,203
Corporate general and administrative expenses			(19,440	)			(17,097	)			(17,733	)			(17,261	)			(18,020	)
Hurricane related charges, net			(9,366	) (3)			—				—				—				—
Separation charges			(1,507	) (4)			(3,435	) (4)			(2,450	) (4)			—				—
Gains on dispositions and impairment (losses), net			1,297	(6)			(204	) (6)			(10,206	) (6)			(18,500	) (8)			(269,158	) (9)
Other operating income, net			1,422				2,112				2,083				2,535				6,967
Operating earnings (loss)			74,677	(3)(4) (6)			96,388	(3)(6)			70,337	(3)(6)			78,811	(8)			(161,008	) (9)
Interest expense			(30,460	)			(47,335	)			(53,643	)			(61,980	)			(63,572	)
Loss on early extinguishment of debt			(32,822	) (5)			—				(11,289	) (7)			—				(9,120	) (10)
Investment and other income (expense), net			713				178				(749	)			794				4,438
Earnings (loss) from continuing operations before income taxes		$	12,108			$	49,231			$	4,656			$	17,625			$	(229,262	)
Earnings (loss) from continuing operations		$	8,815			$	31,022			$	1,065			$	11,101			$	(179,213	)
Earnings (loss) from discontinued operations			1,039	(6)			5,670	(6)			(19,097	) (6)			1,192				1,005
Cumulative effect of change in accounting principles (net of $101,061, $16,310 and $167,562 income tax benefit in 2005, 2002 and 2001, respectively)			(153,180	) (1)			—				—				(193,090	) (1)			(248,666	) (1)
Net earnings (loss)		$	(143,326	)		$	36,692			$	(18,032	)		$	(180,797	)		$	(426,874	)
Per Share Data:
Basic earnings (loss) per common share:
Earnings (loss) from continuing operations		$	.08	(3)(4)(5)(6)		$	.29	(3)(6)		$	.01	(3)(6)(7)		$	.10	(8)		$	(1.67	) (9)(10)
Earnings (loss) from discontinued operations			.01	(6)			.05	(6)			(.18	) (6)			.01				.01
Cumulative effect of change in accounting principles			(1.40	) (1)			—				—				(1.79	) (1)			(2.32	) (1)
Net earnings (loss)		$	(1.31	)		$	.34			$	(.17	)		$	(1.68	)		$	(3.98	)
Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations		$	.08	(3)(4)(5)(6)		$	.29	(3)(6)		$	.01	(3)(6)(7)		$	.10	(8)		$	(1.67	) (9)(10)
Earnings (loss) from discontinued operations			.01	(6)			.05	(6)			(.18	) (6)			.01				.01
Cumulative effect of change in accounting principles			(1.40	) (1)			—				—				(1.78	) (1)			(2.32	) (1)
Net earnings (loss)		$	(1.31	)		$	.34			$	(.17	)		$	(1.67	)		$	(3.98	)
Weighted average common shares outstanding (in thousands):
Basic			109,040				107,522				108,220				107,861				107,355
Diluted			109,205				108,159				108,230				108,299				107,355
Dividends declared per common share		$	.075			$	—			$	—			$	—			$	—

(continued)

Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)

		Year Ended October 31, (11)
		2004				2003				2002				2001
														(Restated)
Pro forma amounts assuming 2005 and 2002 change in accounting principles were applied retroactively:
Net earnings (loss)		$	30,739			$	(24,721	)		$	(186,907	)		$	(412,825	)
Basic earnings (loss) per common share		$	.28			$	(.23	)		$	(1.73	)		$	(3.85	)
Diluted earnings (loss) per common share		$	.28			$	(.23	)		$	(1.73	)		$	(3.85	)

										October 31,
		2005 (1)(2)				2004				2003				2002 (12)				2001
						(Restated)				(Restated)				(Restated)				(Restated)
Balance Sheet Data (13) :
Assets		$	2,351,126			$	2,511,508			$	2,504,161			$	2,565,047			$	2,993,367
Long-term debt, less current maturities			406,859				415,080				488,180				542,548				684,036
Shareholders’ equity			439,453				587,978				552,731				570,017				722,477

Selected Consolidated Operating Data

		Year Ended October 31,
		2005 (2)(6)				2004 (6)				2003				2002 (12)				2001
Operating Data:
Funeral homes in operation at end of period			231				242				299				307				516
At-need funerals performed			39,264				42,542				48,544				71,017				102,944
Prearranged funerals performed			22,076				23,891				22,538				24,314				26,682
Total funerals performed			61,340				66,433				71,082				95,331				129,626
Prearranged funerals sold			28,967				29,296				28,563				31,270				36,417
Backlog of prearranged funerals at end of period			326,672				337,879				347,785				349,110				392,986
Cemeteries in operation at end of period			144				147				148				150				159
Interments performed			52,436				53,149				53,830				57,405				60,347

										Effect of												As Restated
		As Previously				Effect of				restating to												and
		Reported for				restating to				correct for the								As Restated for				Reclassified for
		the Year				correct for				impact of the								the Year				the Year
Consolidated Statements of Earnings		Ended				goodwill				deferred								Ended				Ended
(Dollars in thousands, except per share		October 31,				reporting unit				revenue				Other				October 31,				October 31,
amounts)		2002 (1)				errors				project				adjustments (2)				2002				2002 (3)
Revenues:
Funeral		$	325,240			$	—			$	(13,925	)		$	—			$	311,315			$	311,301
Cemetery			235,908				—				(20,073	)			(143	)			215,692				214,989
			561,148				—				(33,998	)			(143	)			527,007				526,290
Costs and expenses:
Funeral			238,827				—				—				911				239,738				239,724
Cemetery			179,324				—				(4,733	)			631				175,222				174,529
			418,151				—				(4,733	)			1,542				414,960				414,253
Gross profit			142,997				—				(29,265	)			(1,685	)			112,047				112,037
Corporate general and administrative expense			(17,261	)			—				—				—				(17,261	)			(17,261	)
Gains on dispositions and impairment (losses), net			(18,500	)			—				—				—				(18,500	)			(18,500	)
Other operating income, net			2,544				—				—				—				2,544				2,535
Operating earnings			109,780				—				(29,265	)			(1,685	)			78,830				78,811
Interest expense			(62,339	)			—				—				359				(61,980	)			(61,980	)
Investment and other income (expense), net			20				—				—				774				794				794
Earnings from continuing operations before income taxes			47,461				—				(29,265	)			(552	)			17,644				17,625
Income taxes			16,776				—				(10,035	)			(209	)			6,532				6,524
Earnings from continuing operations			30,685				—				(19,230	)			(343	)			11,112				11,101
Earnings from discontinued operations before income taxes			1,860				—				—				—				1,860				1,879
Income taxes			679				—				—				—				679				687
Earnings from discontinued operations			1,181				—				—				—				1,181				1,192
Earnings before cumulative effect of change in accounting principle			31,866				—				(19,230	)			(343	)			12,293				12,293
Cumulative effect of change in accounting principle			—				(193,090	)			—				—				(193,090	)			(193,090	)
Net earnings (loss)		$	31,866			$	(193,090	)		$	(19,230	)		$	(343	)		$	(180,797	)		$	(180,797	)
Basic earnings (loss) per common share:
Earnings from continuing operations		$	.29			$	—			$	(.18	)		$	(.01	)		$	.10			$	.10
Earnings from discontinued operations			.01				—				—				—				.01				.01
Cumulative effect of change in accounting principle			—				(1.79	)			—				—				(1.79	)			(1.79	)
Net earnings (loss) per share		$	.30				(1.79	)		$	(.18	)		$	(.01	)		$	(1.68	)		$	(1.68	)
Diluted earnings (loss) per common share:
Earnings from continuing operations		$	.28			$	—			$	(.18	)		$	—			$	.10			$	.10
Earnings from discontinued operations			.01				—				—				—				.01				.01
Cumulative effect of change in accounting principle			—				(1.78	)			—			$	—				(1.78	)			(1.78	)
Net earnings (loss) per share		$	.29			$	(1.78	)		$	(.18	)		$	—			$	(1.67	)		$	(1.67	)

						Effect of												As Restated
		As Previously				restating to												and
		Reported for				correct for the								As Restated				Reclassified
		the Year				impact of the								for the Year				for the Year
		Ended				deferred								Ended				Ended
Consolidated Statements of Earnings		October 31,				revenue				Other				October 31,				October 31,
(Dollars in thousands, except per share amounts)		2001 (1)				project				adjustments(2)				2001				2001 (3)
Revenues:
Funeral		$	389,497			$	(13,931	)		$	—			$	375,566			$	375,578
Cemetery			256,493				(22,610	)			(157	)			233,726				233,082
			645,990				(36,541	)			(157	)			609,292				608,660
Costs and expenses:
Funeral			299,230				—				(287	)			298,943				298,946
Cemetery			197,002				(5,313	)			(500	)			191,189				190,511
			496,232				(5,313	)			(787	)			490,132				489,457
Gross profit			149,758				(31,228	)			630				119,160				119,203
Corporate general and administrative expense			(18,020	)			—				—				(18,020	)			(18,020	)
Gains on dispositions and impairment (losses), net			(269,158	)			—				—				(269,158	)			(269,158	)
Other operating income, net			6,997				—				—				6,997				6,967
Operating loss			(130,423	)			(31,228	)			630				(161,021	)			(161,008	)
Interest expense			(63,572	)			—				—				(63,572	)			(63,572	)
Loss on early extinguishment of debt			(9,120	)			—				—				(9,120	)			(9,120	)
Investment and other income (expense), net			5,212				—				(774	)			4,438				4,438
Loss from continuing operations before income taxes			(197,903	)			(31,228	)			(144	)			(229,275	)			(229,262	)
Income tax benefit			(38,233	)			(11,764	)			(56	)			(50,053	)			(50,049	)
Loss from continuing operations			(159,670	)			(19,464	)			(88	)			(179,222	)			(179,213	)
Earnings from discontinued operations before income taxes			1,602				—				—				1,602				1,589
Income taxes			588				—				—				588				584
Earnings from discontinued operations			1,014				—				—				1,014				1,005
Net loss before cumulative effect of change in accounting principle			(158,656	)			(19,464	)			(88	)			(178,208	)			(178,208	)
Cumulative effect of change in accounting principle			(250,004	)			1,338				—				(248,666	)			(248,666	)
Net loss		$	(408,660	)		$	(18,126	)		$	(88	)		$	(426,874	)		$	(426,874	)
Basic earnings (loss) per common share:
Loss from continuing operations		$	(1.49	)		$	(.18	)		$	—			$	(1.67	)		$	(1.67	)
Earnings from continuing operations			.01				—				—				.01				.01
Cumulative effect of change in accounting principle			(2.33	)			.01				—				(2.32	)			(2.32	)
Net loss per share		$	(3.81	)		$	(.17	)		$	—			$	(3.98	)		$	(3.98	)
Diluted earnings (loss) per common share:
Loss from continuing operations		$	(1.49	)		$	(.18	)		$	—			$	(1.67	)		$	(1.67	)
Earnings from discontinued operations			.01				—				—				.01				.01
Cumulative effect of change in accounting principle			(2.33	)			.01				—				(2.32	)			(2.32	)
Net loss per share		$	(3.81	)		$	(.17	)		$	—			$	(3.98	)		$	(3.98	)

Consolidated Balance Sheets
(Amounts in thousands)		2003				2002				2001
Assets as previously reported (1)		$	2,573,175			$	3,015,584			$	3,238,407
Effect of restatement of goodwill			(124,167	)			(193,090	)			—
Effect of restatements due to deferred revenue project			59,522				48,174				33,407
Effect of change in accounting for insurance - funded preneed funeral contracts (2)			—				(302,159	)			(274,759	)
Effect of other adjustments (3)			(4,369	)			(3,462	)			(3,688	)
Assets as restated and reclassified		$	2,504,161			$	2,565,047			$	2,993,367
Shareholders’ equity as previously reported (1)		$	738,859			$	812,263			$	752,060
Effect of restatement of goodwill			(124,167	)			(193,090	)			—
Effect of restatements due to deferred revenue project			(59,458	)			(46,267	)			(27,035	)
Effect of other adjustments (3)			(2,503	)			(2,889	)			(2,548	)
Total shareholders’ equity		$	552,731			$	570,017			$	722,477

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Restatement of Historical Financial Statements

          We have restated our consolidated financial statements for fiscal years 2004 and 2003, all the quarters therein and the first three quarters of fiscal year 2005. The restatements are primarily the result of:

	(A)		The incorrect determination of operating and reportable segments and reporting units related to the application of FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), which also had the effect of changing the charges recorded for the assets sold as part of our plan initiated in December 2003 to sell a number of businesses, and the net book value of assets held for sale on our balance sheet.
	(B)		Errors identified in revenue recognition of preneed cemetery merchandise and services contracts and recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts.
	(C)		Other miscellaneous adjustments, including adjustments for lease-related accounting practices.

The restatement for these errors is discussed in more detail below.

Segments and Reporting Units

          We re-evaluated our application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and determined that we had incorrectly identified our operating and reportable segments for all prior periods. We concluded that we had eleven operating and reportable segments, which consisted of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. Our historical presentation of segment data had consisted of two operating and reportable segments, funeral and cemetery. As part of our strategic planning process discussed in “Business Strategy” in Item 1, in the fourth quarter of fiscal year 2005, we reorganized and revised our operating divisions from four to two and revised our operating and reportable segments. For further discussion of the revision of our operating and reportable segments in the fourth quarter of 2005, see

Note 22 to the consolidated financial statements included in Item 8.

     The correction of our operating segments had the related effect of requiring changes in our reporting units for purposes of goodwill impairment reviews under SFAS No. 142, retroactive to the November 1, 2001 adoption date of SFAS No. 142. Our evaluation of goodwill should have been performed to include 13 reporting units as opposed to the two reporting units historically identified. As a result of the reorganization and revision of our divisions effective for the fourth quarter of fiscal year 2005, we revised our evaluation of goodwill based upon 11 reporting units. For further discussion of the change in our reporting units in the fourth quarter of 2005, see Note 3(g).

     The restatement of our operating segments and reporting units resulted in the need to correct our goodwill impairment reviews as of November 1, 2001 (the date we adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. Consequently, we recorded a $209.4 million ($193.1 million after tax, or $1.78 per diluted share) charge on November 1, 2001 as a cumulative effect of change in accounting principle for the adoption of SFAS No. 142. Our previously reported financial statements did not include a goodwill impairment charge upon the initial adoption of SFAS No. 142 on November 1, 2001 or during our annual assessment in the fourth quarter of fiscal year 2002. We also restated our previously reported fiscal year 2003 goodwill impairment charge of $73.0 million ($66.9 million after tax, or $.62 per share) because based on our revised reporting units, no goodwill impairment charge for the year ended October 31, 2003 was necessary.

     Further, the restatement of goodwill on our balance sheet had the effect of changing the net book value of the assets we sold as part of our plan to sell a number of our businesses and the net book value of assets held for sale on our balance sheet. Due to these changes and changes in the classification of certain businesses between continuing operations and discontinued operations, the gain or loss on those sales has been re-evaluated and restated. In 2003, this resulted in an additional net gain of $2.1 million, representing a gain of $1.3 million related to continuing operations as originally reported and a gain of $0.8 million related to discontinued operations. In 2004, this resulted in an additional net gain of $0.6 million, representing a loss of $0.5 million related to continuing operations as originally reported and a gain of $1.1 million related to discontinued operations.

Deferred Revenue Project

     In connection with our internal control assessment under Section 404 of Sarbanes-Oxley, we undertook a project (the “deferred revenue project”) in 2005 to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by reviewing substantially all of the preneed cemetery and funeral service and merchandise contracts included in our backlog. This process involved the review of nearly 700,000 preneed contracts. The deferred revenue project resulted in our assessment that deferred revenue was misstated and therefore we needed to restate our prior period financial statements for fiscal years 2001 through 2004, including the quarters therein, and the first three quarters of 2005. The adjustment impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2001 through 2004 and the first three quarters of 2005.

     We identified errors in the amount of recorded revenue, deferred revenue and related deferred trust earnings associated with cemetery merchandise and funeral service and merchandise contracts. The errors also resulted in restatements to the amount of preneed selling costs recorded upon the adoption of SAB No. 101, and in subsequent years and also the charge for the 2005 cumulative effect of change in accounting principle related to preneed selling costs adopted effective November 1, 2004. See Note 3(f) and 4(a) to the consolidated financial statements included in Item 8.

     The overall impact of the deferred revenue project on net earnings and earnings per share for the first three quarters of 2005 and fiscal years 2004, 2003, 2002 and 2001 was a decrease in net earnings of $18.2 million (including $11.9 million, or $.11 per share, related to the cumulative effect of change in accounting principle for preneed selling costs), $12.0 million, $13.2 million, $19.2 million and $18.1 million, respectively, and a decrease in earnings per share of $.16, $.11, $.12, $.18 and $.17, respectively. The 2005 amount reflects the adjustment to the previously reported unaudited results through July 31, 2005. The deferred revenue project also resulted in changes to our consolidated balance sheet as described in footnote 13 to the Selected Financial Data table included in Item 6 and Note 2 to the consolidated financial statements included in Item 8.

Other Adjustments

     As previously disclosed in our Form 10-Q for the second quarter of fiscal year 2005, we reviewed our lease-related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1.8 million ($1.1 million after tax, or $.01 per share). We evaluated the materiality of these operating lease adjustments on our financial statements and concluded that the impact of these adjustments was not material. As a result, we recorded the cumulative effect of these prior period adjustments of $1.8 million as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because we are amending our Form 10-K for the year ended October 31, 2004 for the restatements discussed above under the heading “Restatement of Financial Statements,” we are now required to record the lease adjustments in the periods they were actually incurred. In this filing, we removed the cumulative effect of this prior period adjustment of $1.8 million ($1.1 million after tax) and will remove it from subsequent amended Form 10-Q filings for January 31, 2005, April 30, 2005 and July 31, 2005. We also recorded other immaterial miscellaneous adjustments.

     The information included in “Results of Operations” below reflects the restated amounts. A summary of the effects of these restatements on our financial statements can be found in Note 2 to the consolidated financial statements included in Item 8.

Overview of Fiscal Year 2005

     We are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of December 30, 2005, we owned and operated 231 funeral homes and 144 cemeteries in 26 states within the United States and Puerto Rico.

     We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust 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.

Results of Operations

     For fiscal year 2005, we had a net loss of $143.3 million compared to net earnings of $36.7 million for fiscal year 2004. Contributing to the net loss was a charge of $153.2 million for the cumulative effect of change in accounting principle related to the change in our method of accounting for preneed selling costs, implemented effective November 1, 2004. Fiscal year 2005 earnings from continuing operations before the cumulative effect of change in accounting principle decreased by $22.2 million to $8.8 million, compared to $31.0 million for fiscal year 2004. Contributing to the decline were charges for the loss on early extinguishment of debt of $32.8 million related to the refinancing of our senior secured credit facility and our 10.25 percent senior subordinated notes. Also contributing to the decline was a $9.9 million increase in funeral costs, of which $5.4 million was due to the 2005 change in accounting for preneed selling costs and the remainder was due primarily to increased health insurance costs. Corporate general and administrative expenses increased $2.3 million due primarily to increased professional fees associated with our defense of the class action litigation, the Section 404 internal controls review process, the deferred revenue project and additional audit related services. We also recorded a $9.4 million charge for net hurricane-related costs. Further discussion of the hurricanes affecting us during fiscal year 2005 can be found below in the section entitled “Hurricanes.” In addition, cemetery revenues declined $2.1 million primarily due to a decrease in revenue associated with the construction of cemetery projects, a decrease in earned finance charges, a decrease in revenue due to Hurricane Katrina and an increase in bad debt resulting from the impact of Hurricane Katrina.

     Partially offsetting these declines, interest expense decreased by $16.8 million to $30.5 million in fiscal year 2005 from $47.3 million in fiscal year 2004, reflecting the results of the refinancing of our senior secured credit facility and 10.25 percent senior subordinated notes at lower rates and a $39.5 million decrease in average debt outstanding. As of October 31, 2005 we had achieved our lowest net debt level in nine years. In addition, funeral revenue increased $2.9 million from $271.2 million in fiscal year 2004 to $274.1 million in fiscal year 2005 primarily due to increased same-store funeral call growth of 0.3 percent and an increase in average revenue per call of 2.7 percent. Same-store results include the three funeral homes impacted by Hurricane Katrina. Excluding these funeral homes, same-store funeral call growth increased 0.9 percent. We believe that the increase in funeral calls reflects the implementation of our 2005 strategic plan beginning in July 2005, and can also be attributed to our funeral home incentive compensation plan implemented during the first quarter of fiscal year 2005. Management

believes this increase is a significant accomplishment given that this is the first year since 1994 that we have experienced positive year-over-year call growth.

     For fiscal year 2004, we achieved a 9 percent increase in preneed funeral sales, which was in line with our goal of 5 percent to 10 percent for 2004. For fiscal year 2005, we achieved a 5 percent increase in preneed funeral sales, which was in line with our goal of 4 percent to 8 percent for 2005. For fiscal year 2004, we achieved a 9 percent increase in cemetery property sales, which was in line with our goal of 5 percent to 10 percent for 2004. For fiscal year 2005, we achieved a 0.9 percent increase in cemetery property sales, which was below our stated goal of 4 percent to 8 percent, due in part to the effects of Hurricanes Katrina, Rita and Wilma.

Debt Refinancing

     On November 19, 2004, we completed the refinancing of our senior secured credit facility and recorded a charge for early extinguishment of debt of $2.7 million ($1.7 million after tax, or $.02 per share) to write off fees associated with the previous credit facility. On February 11, 2005, we completed the private offering of $200.0 million principal amount of our 6.25 percent senior notes due 2013. We also borrowed $130.0 million in additional term loan debt under our senior secured credit facility. We used the net proceeds from these transactions, together with a portion of our available cash, to repurchase $298.2 million in aggregate principal amount of our 10.75 percent senior subordinated notes due 2008 and to pay related tender premiums, fees, expenses and accrued interest of $28.9 million. In the second quarter of fiscal year 2005, we recorded a charge for early extinguishment of debt of $30.0 million ($19.2 million after tax, or $.18 per share) representing the bond tender premium, related fees and expenses and the write-off of unamortized fees. In the third quarter of fiscal year 2005, the remaining 10.75 percent senior subordinated notes were redeemed. We recorded a charge for early extinguishment of debt of $0.1 million representing the call premium and write-off of remaining unamortized fees on the 10.75 percent senior subordinated notes. For additional information, see Note 16 to the consolidated financial statements included in Item 8.

Dividends and Stock Repurchase Plan

     In March 2005, our Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. A total of $8.2 million in dividends was paid on April 29, 2005, July 29, 2005 and October 18, 2005. Although we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance (see “Forward-Looking Statements” included herein and Item 1A. “Risk Factors”).

     On March 28, 2005, we announced a new stock repurchase program, authorizing the investment of up to $30.0 million in the repurchase of our common stock. On March 17, 2005, we completed our initial stock repurchase program, having repurchased 4,400,000 shares since its inception. Since the inception of the new stock repurchase program through October 31, 2005, we have repurchased 1,200,000 shares of our Class A common stock at an average price of $6.64 per share. At current stock prices, the use of our cash to pay dividends, repurchase stock, reduce debt and construct funeral homes on our cemeteries or those of unaffiliated third parties continues to be more attractive than acquisitions. However, if acquisition pricing improves, we believe that growing our organization through acquisitions may again be a good business strategy, as it will enable us to enjoy important synergies and economies of scale from our infrastructure.

Strategic Plan

     In July 2005, we began to implement a new strategic plan. For a description of the plan, see “Business Strategy” in Item 1. Business. As a result of the strategic planning process, in July 2005, we named a new Chief Operating Officer and announced that we were reorganizing our operating divisions from four to two: Eastern and Western, effective for the fourth quarter of fiscal year 2005. These changes are a result of our recent strategic planning process. For the year ended October 31, 2005, we incurred $1.5 million in charges related to this reorganization, and expect to benefit from annual pre-tax cost savings of between $2 million and $2.5 million (see “Forward-Looking Statements” included here and Item 1A. “Risk Factors”).

Hurricanes

     On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. Our executive offices and Shared Services Center are located in a building

we own in the New Orleans metropolitan area, and no significant damage occurred to that building. For the month of September, we temporarily housed most of the Shared Services Center functions, such as cash receipts and disbursements, customer service, contract processing and information technology in Orlando, Florida, in newly-leased and existing Company office space, and temporarily housed other functions such as the executive offices, treasury, accounting, trust administration, human resources, training, communications, marketing, tax and compliance in the Dallas, Texas area in newly-leased office space.

     Of our 231 funeral homes and 144 cemeteries, three funeral homes and five cemeteries, which represent approximately four percent of our annual revenues and approximately five percent of our annual gross profit, are located in the New Orleans metropolitan area, have suffered substantial damage and are conducting business in temporary facilities until repairs are completed. Our mausoleum construction and sales business, Acme Mausoleum, which primarily operates in southwest Louisiana and Texas, was also negatively impacted by Hurricanes Katrina and Rita. Including Acme Mausoleum, the New Orleans area funeral home and cemetery operations represent approximately six percent of our annual revenue and gross profit. The book value of net property and equipment, receivables, inventory and cemetery property at the affected properties amounted to approximately $24.7 million prior to the storms. As of October 31, 2005, 2004 and 2003, total revenues of these facilities amounted to $19.8 million, $21.8 million and $22.7 million, respectively.

     Hurricanes Katrina, Rita and Wilma also interrupted business in Florida, Alabama, Mississippi and Texas primarily due to evacuations and power-outages. We have insurance coverage related to property damage, incremental costs and property operating expenses we incurred due to damage caused by Hurricane Katrina. As of October 31, 2005, we had incurred approximately $20.9 million in expenses related to Hurricane Katrina including the write-off of damaged buildings, equipment and inventory, demolition costs, debris removal, record restoration, general cleanup, temporary living facilities for employees, relocation expenses and other costs. We expect to receive insurance proceeds of at least $11.5 million currently based on the status of our insurance review, $0.5 million of which had been received as of October 31, 2005. We believe that a significant portion of the remainder of the loss we experienced may be covered by insurance. For additional information, see Note 24 to the consolidated financial statements included in Item 8.

Forecasts

     For a discussion of our forecasts for continuing operations in fiscal year 2006 and the principal assumptions underlying the forecasts, see the discussion under the heading “Forward-Looking Statements” below.

Preneed — Backlog, Trust Portfolio and Cash Impact of Sales

Overview

     We believe that preneed funeral and cemetery property sales are two of the primary drivers of sustainable long-term growth in the number of families served by our funeral homes and cemeteries. Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise sales are deferred into our backlog while our preneed cemetery property sales are recognized currently in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” For a detailed discussion of our revenue recognition policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes 3(i), 3(j), 3(k), and Notes 5 through 8 to the consolidated financial statements included in Item 8.

Backlog

     We estimate that as of October 31, 2005 the future value of our preneed funeral and cemetery services and merchandise backlog represented approximately $2.0 billion of revenue to be recognized in the future as these prepaid products and services are delivered. This represents the face value of the backlog plus the earnings that are projected on the funds held in trust and the estimated build-up in the face value of insurance contracts. It assumes no future preneed sales and assumes maturities each year consistent with our experience, with the majority of existing contracts expected to mature over the next 15 years. As of October 31, 2005, the value of the preneed backlog, excluding any future earnings on the funds held in trust and any build-up in the face value of insurance contracts, but including unrealized earnings and losses on the funds held in trust and realized earnings and losses on the funds held in trust not yet recognized as revenue, was approximately $1.6 billion.

Trust Portfolio

     We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Because a portion of the funds we receive from preneed sales are deposited into the trusts and invested in a variety of debt and equity securities and other investments, the performance of the trusts’ investments can affect our current and future revenue streams. From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0 percent in our domestic trusts. However, the average realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8 percent, 2.6 percent and 4.3 percent for fiscal years 2000, 2001, 2002, 2003, 2004 and 2005, respectively. These returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses. For fiscal year 2005, including realized and unrealized gains and losses, we achieved a 6.8 percent return on our funeral and cemetery merchandise and services trust and a 3.5 percent return on our perpetual care trust. For the last three years, including realized and unrealized gains and losses, our funeral and cemetery merchandise and services trusts achieved a total return of 8.8 percent, and our perpetual care trust achieved a total return of 7.9 percent. We recognize earnings and losses realized by preneed funeral and cemetery merchandise and services trusts based on delivery of underlying products and services. We recognize all earnings and losses realized by our cemetery perpetual care trusts currently, including capital gains and losses in those jurisdictions where capital gains can be withdrawn and used for cemetery maintenance. As a result, depressed stock prices and low returns on fixed-income investments put pressure on perpetual care trust earnings recognized in fiscal year 2005 and may do so again in fiscal year 2006. Because approximately 60 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we would generally expect our portfolio performance to improve if the performance of the overall stock market improves, but we would also expect its performance to deteriorate over time if the overall stock market declines.

     We mark our trust portfolio to market value each quarter. Changes in the market value of the trusts are recorded by increasing or decreasing trust assets included in the preneed funeral and cemetery receivables and trust investments line items on the balance sheet, with a corresponding increase or decrease in the deferred preneed revenue and non-controlling interest line items on the balance sheet. Therefore, there is no effect on net income.

     We determine whether or not the investment portfolio has an other than temporary impairment on a security-by-security basis. A loss is considered other than temporary if the security has a reduction in market value compared with its cost basis of 20 percent or more for a period of six months or longer. In addition, we periodically review our investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily impaired due to changes in market conditions or concerns specific to the issuer of the securities. If a loss is other than temporary, the cost basis of the security is adjusted downward to its market value, which is allocated to the non-controlling interests in the trusts. This affects our footnote disclosure but does not have an effect on our financial statements, since the trust portfolio is already marked to market value each quarter. The footnotes disclose the adjusted cost basis and how much of the losses are considered other than temporary. Accordingly, unrealized gains and losses reflected in the tables in Notes 5, 6 and 7 to the consolidated financial statements included in Item 8 are temporary as the cost basis in these tables have already been adjusted to reflect the other than temporary unrealized losses. Our preneed funeral and cemetery merchandise and services trusts and escrow accounts had other than temporary declines of $81.8 million and $43.2 million, respectively, as of October 31, 2005, from their original cost basis. They had net unrealized appreciation (depreciation) of $3.0 million and $(.4) million, respectively, as of October 31, 2005 resulting from temporary unrealized gains and losses. See Notes 5 and 6 to the consolidated financial statements included in Item 8.

     Our cemetery perpetual care trust accounts had other than temporary declines of $30.3 million as of October 31, 2005, from their original cost basis. They had net unrealized appreciation of $2.8 million as of October 31, 2005 resulting from temporary unrealized gains and losses. See Note 7 to the consolidated financial statements included in Item 8. Unrealized gains and losses in the cemetery perpetual care trusts and escrow accounts do not affect current earnings but unrealized losses could limit the capital gains available to us and could eventually result in lower returns and lower revenues than we have historically achieved from these trusts.

     Aggregate unrealized losses for twelve months or longer for temporarily impaired investments totaled $16.1 million at October 31, 2005. Of that amount, approximately 91 percent, or $14.7 million, were generated by common stock investments in 54 companies that are included in the S&P 500 Index. These securities represent approximately 12 percent of the securities in our portfolio. We believe the decline in the value of these stocks is primarily due to the general decline in the S&P 500 Index over the 2002 to 2003 timeframe. Since early 2003, the S&P 500 Index has risen significantly. Although we cannot predict future stock prices, our management expects that the S&P 500 Index will continue to recover and that these stocks may recover along with the overall Index. We also have the ability and intent to hold these investments for the forecasted recovery period.

     Whether or not we classify an investment as temporarily impaired or other than temporarily impaired has no effect on our basic consolidated financial statements (i.e., balance sheet, statement of earnings, statement of cash flows and statement of shareholders’ equity) because the investments are marked to market value each quarter and are included in the financial statements at current market value in accordance with our accounting under FASB Interpretation No. 46 (“FIN 46R”). The classification only affects the footnote presentation. The cost basis of investments classified as other than temporarily impaired is reduced to market value in the “Adjusted Cost Basis” column in Notes 5, 6 and 7, whereas other investments are included in that column at their actual cost basis.

     We perform a separate analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, we determine which trusts are in a net loss position by comparing the aggregate market value of the trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost basis exceeds the aggregate market value of the investments, the trust is considered to be in a net loss position. For trusts in a net loss position, we add the sales prices of the underlying contracts and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds for contracts associated with the trusts in question as of that particular balance sheet date. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include future expected returns on the investments in our analysis. We compare the amount of proceeds to the estimated costs to deliver the contracts, which consist primarily of merchandise costs. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts from our backlog. Due to the margins of our preneed contracts and the relatively high trust portfolio returns we enjoyed prior to fiscal year 2000, there is currently substantial capacity for additional market depreciation before a contract loss would result.

Cash Impact of Preneed Sales

     The impact of preneed sales on near-term cash flow depends primarily on the commissions paid on the sale, the portion of the sale required to be placed into trust and the terms of the particular contract (such as the size of the down payment required and the length of the contract). We generally pay commissions to our preneed sales counselors based on a percentage of the total preneed contract price, but only to the extent cash is paid by the customer. If the initial cash installment paid by the customer is not sufficient to cover the entire commission, the remaining commission is paid from subsequent customer installments. However, because we are required to place a portion of each cash installment paid by the customer into trust, we may be required to use our own cash to cover a portion of the commission due on the installment from the customer. Accordingly, preneed sales are generally cash flow negative initially but become cash flow positive at varying times over the life of the contract, depending upon the trusting requirements and the terms of the particular contract.

     Cash expended for preneed funeral and preneed cemetery services and merchandise sales is expensed as incurred. See Note 4(a) to the consolidated financial statements included in Item 8 for a discussion of the change in accounting for preneed selling costs in fiscal year 2005.

Overview of 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 3(b) to the consolidated financial statements included in Item 8). We believe that of our significant accounting policies (discussed in Note 3 to the consolidated financial statements included in Item 8), the following are both most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgment.

Deferred Revenue and Revenue Recognition

     Funeral revenue is recognized when funeral services are performed. Our funeral receivables included in current receivables primarily consist of amounts due for funeral services already performed. We sell price-guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Revenues associated with sales of prearranged funeral contracts, which include accumulated trust earnings and increasing insurance benefits, are deferred until such time that the funeral services are performed (see Note 3(i) to the consolidated financial statements included in Item 8).

     Revenue associated with cemetery merchandise and services is recognized when the service is performed or merchandise is delivered. Revenue associated with preneed cemetery property interment rights is recognized in accordance with the retail land sales provision of SFAS No. 66. Under SFAS No. 66, revenue from constructed

cemetery property is not recognized until a minimum percentage (10 percent) of the sales price has been collected. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting. Revenue associated with sales of preneed merchandise and services is not recognized until the merchandise is delivered or the services are performed (see Note 3(j) to the consolidated financial statements included in Item 8).

     We defer all dividends and interest earned and net capital gains and losses realized by preneed funeral trust and preneed cemetery merchandise trust accounts until the underlying service or the merchandise is delivered.

     In February 2006, we completed our reconciliation of deferred revenue to the underlying preneed contracts, which resulted in the identification of a significant number of reconciling items. Our reconciliation of these items led to the restatements described above under “Restatement of Historical Financial Statements” and in Note 2 to the consolidated financial statements included in Item 8. In connection with the deferred revenue project, we also identified material weaknesses in our internal control over financial reporting as of October 31, 2005, as described in Item 9A.

Variable Interest Entities

     In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (“FIN 46R”).

     We implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts. This implementation was as of April 30, 2004 and only affected our consolidated balance sheet and had no impact on our second quarter 2004 results of operations or cash flows. In subsequent periods, the implementation of FIN 46R, as it relates to the consolidation of trusts, affects classifications within the balance sheet, statement of earnings and statement of cash flows, but has no effect on shareholders’ equity, net cash flow or the recognition and reporting of revenues or net earnings. For a more detailed discussion of our accounting policies after the implementation of FIN 46R, see Notes 3(k) and 5 through 8 to the consolidated financial statements included in Item 8.

Allowance for Doubtful Accounts

     Management must make estimates of the uncollectibility of our accounts receivable. We establish a reserve for uncollectible installment contracts and trade accounts based on a range of percentages applied to accounts receivable aging categories. These percentages are based on an analysis of historical collection and write-off experience. These estimates are impacted by a number of factors, including changes in the economy and demographic or competitive changes in our areas of operation. If circumstances change, our estimates of the recoverability of amounts due to us could change by a material amount.

Depreciation of Long-Lived Assets

     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. These estimates of the useful lives may be affected by such factors as changes in regulatory requirements or changing market conditions.

Valuation of Long-Lived Assets

     We review the carrying value of our long-lived assets whenever events or circumstances indicate that the carrying amount may not be recoverable. This review is based on our projections of anticipated undiscounted future cash flows and compares the estimated undiscounted future cash flows to be generated by those assets to the carrying amount of those assets. The net carrying value of any assets not fully recoverable would be reduced to fair value. While we believe that our estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and comparable sales values could materially affect our evaluations.

     In the fourth quarter of 2003, we identified a number of small businesses to close or sell in fiscal year 2004. Although at the time of identification, the assets did not meet the criteria as assets held for sale per SFAS No. 144,

we reviewed the carrying amount of these businesses compared to their fair value and recorded a noncash charge of $31.8 million related to the impairment of these long-lived assets. Of this amount, $10.2 million was included in continuing operations and $21.6 million was included in discontinued operations in the 2003 consolidated statement of earnings upon these businesses meeting the discontinued operations criteria of SFAS No. 144 in fiscal year 2004. Fair value was established based on our best estimate and is subject to revision in future periods as properties are actually sold or closed. For fiscal year 2004, we evaluated our long-lived assets, recorded impairment charges of $0.8 million and sold several assets that we held for sale at a net gain of $0.6 million. The net effect was that we reported gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations and recorded gains on dispositions, net of impairment losses, of $2.4 million in discontinued operations. In fiscal year 2005, we recorded gains on dispositions, net of impairment losses, of $1.3 million in continuing operations and $1.1 million in discontinued operations. See Note 14 to the consolidated financial statements included in Item 8.

Valuation of Goodwill

     Our historical evaluation of goodwill was performed at the funeral and cemetery segment levels, which we previously reported as our reporting units. However, this evaluation was incorrect and our operating segments, as defined by SFAS No. 131, and reporting units, as defined in SFAS No. 142, were required to be restated as discussed in Note 2 to the consolidated financial statements included in Item 8. This restatement of reporting units resulted in the need to correct our goodwill impairment reviews as of November 1, 2001 (the date we adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. For further discussion of the resulting charges, see Note 2 to the consolidated financial statements included in Item 8.

     Goodwill of a reporting unit must be tested for impairment on at least an annual basis. We conduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of goodwill may be greater than its fair value. Factors we consider important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of our assets or the strategy for our overall business and significant negative industry or economic trends.

     In reviewing goodwill for impairment, we first compare the fair value of each of our reporting units with their carrying amounts (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, we then measure the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in a manner similar to the amount of goodwill determined in a business combination. That is, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value.

     Our goodwill impairment test involves estimates and management judgment using a discounted cash flow valuation methodology. Step two of our impairment test involves determining estimates of the fair values of our assets and liabilities. We may obtain assistance from third parties in assessing the fair value of certain of our assets, primarily real estate, in performing our step two analysis. If these estimates or their related assumptions change in the future, we may be required to record further impairment charges for these assets. Goodwill amounted to $272.7 million as of October 31, 2005 and 2004.

Accounting for Income Taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from the different treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the statement of earnings.

     Significant management judgment is required in determining our provision for income taxes, deferred tax

assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change our allowance, which could materially impact our financial condition and results of operations.

Preneed Selling Costs

     On May 31, 2005, we changed our method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral and cemetery service and merchandise sales. We have applied this change in accounting principle effective November 1, 2004. Therefore, our results of operations for the year ended October 31, 2005 are reported on the basis of our changed method. Prior to this change, commissions and other costs that varied with and were primarily related to the acquisition of new prearranged funeral and cemetery service sales and prearranged funeral and cemetery merchandise sales were deferred and amortized in proportion to the preneed revenue recognized in the period in a manner consistent with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” We have decided to change our accounting for preneed selling costs to expense such costs as incurred. We concluded that expensing these costs as they are incurred would be preferable to the old method because it will make our reported results more comparable with other public death care companies, better align the costs of obtaining preneed contracts with the cash outflows associated with obtaining such contracts and eliminate the burden of maintaining deferred selling cost records.

     As of November 1, 2004, we recorded a cumulative effect of change in accounting principle of $254.2 million ($153.2 million after tax, or $1.40 per diluted share), which represents the cumulative balance of deferred preneed selling costs in the deferred charges line in the condensed consolidated balance sheet at the time of the change. See Note 4(a) to the consolidated financial statements included in Item 8 for additional information.

Estimated Insurance Loss Liabilities

     We purchase comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. We continually evaluate the receivables due from our insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from our primary insurer.

     With respect to health insurance that covers substantially all of our employees, we purchase individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims are based on actuarial estimates; actual claims may differ from those estimates. We continually evaluate our claims experience related to this coverage with information obtained from our insurer.

     Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of our insurance loss liability.

     The estimated liability on the uninsured legal and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.

     We also have insurance coverage related to property damage, incremental costs and property operating expenses we incurred due to damage caused by Hurricane Katrina. A significant portion of the expenses incurred is expected to be recovered when we negotiate a final settlement with our insurance carriers. For additional information, see Note 24 to the consolidated financial statements included in Item 8.

Results of Operations

     The following discussion segregates the financial results of our continuing operations into our various segments, grouped by our funeral and cemetery operations. For a discussion of discontinued operations, see Note 14 to the consolidated financial statements included in Item 8. For a discussion of our segments, see Note 22 to the consolidated financial statements included in Item 8. As there have been no material acquisitions or construction of new locations in fiscal years 2005 and 2004, results from continuing operations reflect those of same-store locations.

Comparison of Fiscal Year 2005 to Fiscal Year 2004

     As described above in “Critical Accounting Policies,” on May 31, 2005, we changed our method of accounting for selling costs incurred related to preneed funeral and cemetery service and merchandise sales. We have applied this change in accounting principle effective November 1, 2004. Prior to this time, we deferred preneed selling costs and amortized them into expense in proportion to the preneed revenue recognized in the period. We now expense these costs in the period incurred. In the discussion below, the amounts presented in the tables for the year ended October 31, 2004 reflect historical amounts and therefore are not adjusted for this accounting change. In order to present results for the year ended October 31, 2004 comparable to those of 2005 which include the accounting change, we have also included a discussion of the net preneed selling costs for 2004 and their effect on gross profit. The effect of net preneed selling costs is calculated by removing the amortization of deferred selling costs and including in expense the preneed selling costs incurred during 2004. The result of that calculation is the net preneed selling costs that would have reduced 2004 gross profit if the accounting change had been implemented in fiscal year 2004.

Funeral Operations

		Year Ended
		October 31,
										Increase
		2005				2004				(Decrease)
						(Restated)
						(In millions)
Funeral Revenue:
Eastern Division		$	114.4			$	108.6			$	5.8
Western Division			140.8				143.9				(3.1	)
Corporate Trust Management (1)			18.9				18.7				.2
Total Funeral Revenue		$	274.1			$	271.2			$	2.9
Funeral Costs:
Eastern Division		$	95.8			$	89.4			$	6.4
Western Division			116.1				112.6				3.5
Corporate Trust Management (1)			.5				.5				—
Total Funeral Costs		$	212.4			$	202.5	(2)		$	9.9	(2)
Funeral Gross Profit:
Eastern Division		$	18.6			$	19.2			$	(.6	)
Western Division			24.7				31.3				(6.6	)
Corporate Trust Management (1)			18.4				18.2				.2
Total Funeral Gross Profit		$	61.7			$	68.7	(2)		$	(7.0	) (2)

Same-Store Analysis(3)

										Same-Store
		Change in Average				Change in Same-Store				Cremation Rate
		Revenue Per Call				Funeral Services				2005				2004
Eastern Division			2.5	%			1.9	%			31.0	%			30.2	%
Western Division			2.7	%			(1.3	%)			42.1	%			41.1	%
Total			2.7	%			0.3	%			37.4	%			36.6	%

		contracts delivered during the relevant periods. See Notes 5 and 8 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for 2005 and 2004 were $5.4 million and $5.5 million, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for 2005 and 2004 were $13.5 million and $13.2 million, respectively.
(2)		Funeral costs from continuing operations for the year ended October 31, 2004 do not include net preneed selling costs of $5.6 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, funeral gross profit from continuing operations for the year ended October 31, 2005 would have decreased $1.4 million from $63.1 million for the year ended October 31, 2004.
(3)		On August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and severely damaged three of our funeral homes located in that area, which is part of our Western division. This same-store analysis includes these three funeral homes which had revenue of $8.1 million and $9.4 million for fiscal years 2005 and 2004, respectively, and performed 1,726 and 2,054 funeral services in 2005 and 2004, respectively. Excluding these three funeral homes, the increase in average revenue per call for the Western division and the Company was 2.9 percent and 2.7 percent, respectively, and the change in same-store funeral services for the Western division and the Company was (0.4) percent and 0.9 percent, respectively.