Stewart Enterprises 10Q 2001 Q3 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(X) Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended July 31, 2001

( ) Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from to

Commission File Number: 0-19508

STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)

LOUISIANA (State or other jurisdiction of incorporation or organization)	72-0693290 (I.R.S. Employer Identification No.)

110 Veterans Memorial Boulevard Metairie, Louisiana (Address of principal executive offices)	70005 (Zip Code)

Registrant's telephone number, including area code: (504) 837-5880

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

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 September 7, 2001, was 104,050,449 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

Part I.	Financial Information		Page

	Item 1.	Financial Statements (Unaudited)

	Consolidated Statements of Earnings -- Three Months Ended July 31, 2001 and 2000		3

	Consolidated Statements of Earnings -- Nine Months Ended July 31, 2001 and 2000		4

	Consolidated Balance Sheets -- July 31, 2001 and October 31, 2000		5

	Consolidated Statement of Shareholders' Equity -- Nine Months Ended July 31, 2001		7

	Consolidated Statements of Cash Flows -- Nine Months Ended July 31, 2001 and 2000		8

	Notes to Consolidated Financial Statements		10

	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	34

	Item 3.	Quantitative and Qualitative Disclosures About Market Risk	51



Part II.	Other Information

	Item 1.	Legal Proceedings	53

	Item 2.	Changes in Securities and Use of Proceeds	53

	Item 5.	Other Information	53

	Item 6.	Exhibits and Reports on Form 8-K	58
	Signatures		60

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)

				Three Months Ended July 31,
				2001			2000

Revenues:
	Funeral			$	102,641	$	108,448
	Cemetery				63,108		73,375

					165,749		181,823

Costs and expenses:
		Funeral			81,703		81,024
		Cemetery			50,099		54,864

					131,802		135,888

		Gross profit			33,947		45,935
Corporate general and administrative expenses					4,316		4,796
Loss on assets held for sale and other charges (Note 8)					269,158		--

		Operating earnings (loss)			(239,527)		41,139
Interest expense, net					(14,602)		(14,410)
Other income, net					2,633		1,738

			Earnings (loss) before income taxes and extraordinary item		(251,496)		28,467
Income tax expense (benefit)					(57,623)		10,390

			Earnings (loss) before extraordinary item		(193,873)		18,077
Extraordinary item --early extinguishment of debt, net of a $3,648 income tax benefit (Note 9)					(5,472)		--

	Net earnings (loss)			$	(199,345)	$	18,077

Basic earnings per common share:
		Earnings (loss) before extraordinary item		$	(1.80)	$	.17
		Extraordinary item --early extinguishment of debt			(.05)		--

		Net earnings (loss)		$	(1.85)	$	.17

Diluted earnings per common share:
		Earnings (loss) before extraordinary item		$	(1.80)	$	.17
		Extraordinary item --early extinguishment of debt			(.05)		--

		Net earnings (loss)		$	(1.85)	$	.17

Weighted average common shares outstanding (in thousands):
			Basic		107,538		106,737

			Diluted		107,538		106,737

Dividends per common share				$	--	$	.02

Pro forma amounts assuming 2001 change in accounting principles was applied retroactively:
			Net earnings			$	14,379

			Basic earnings per common share			$	.13

			Diluted earnings per common share			$	.13

See accompanying notes to consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)

		Nine Months Ended July 31,
		2001		2000

Revenues:
	Funeral	$	317,948	$	346,835
	Cemetery		195,430		216,809

			513,378		563,644

Costs and expenses:
	Funeral		246,675		253,873
	Cemetery		148,456		165,344

			395,131		419,217

	Gross profit		118,247		144,427
Corporate general and administrative expenses			13,382		14,939
Loss on assets held for sale and other charges (Note 8)			269,158		--

	Operating earnings (loss)		(164,293)		129,488
Interest expense, net			(40,385)		(43,440)
Other income, net			5,817		2,534

	Earnings (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principles		(198,861)		88,582

Income tax expense (benefit)			(38,410)		32,332

	Earnings (loss) before extraordinary item and cumulative effect of change in accounting principles		(160,451)		56,250

Extraordinary item -- early extinguishment of debt, net of a $3,648 income tax benefit (Note 9)			(5,472)		--
Cumulative effect of change in accounting principles, net of a $166,669 income tax benefit (Note 2)			(250,004)		--

	Net earnings (loss)	$	(415,927)	$	56,250

Basic earnings per common share:
	Earnings (loss) before extraordinary item and cumulative effect of change in accounting principles	$	(1.50)	$	.53

	Extraordinary item -- early extinguishment of debt		(.05)		--
	Cumulative effect of change in accounting principles		(2.33)		--

	Net earnings (loss)	$	(3.88)	$	.53

Diluted earnings per common share:
	Earnings (loss) before extraordinary item and cumulative effect of change in accounting principles	$	(1.50)	$	.53
	Extraordinary item -- early extinguishment of debt		(.05)		--
	Cumulative effect of change in accounting principles		(2.33)	$	--

	Net earnings (loss)	$	(3.88)	$	.53

Weighted average common shares outstanding (in thousands):
	Basic		107,268		106,522

	Diluted		107,268		106,540

Dividends per common share		$	--	$	.06

Pro forma amounts assuming 2001 change in accounting principles was applied retroactively:
	Net earnings			$	47,559

	Basic earnings per common share			$	.45

	Diluted earnings per common share			$	.45

See accompanying notes to consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

ASSETS			July 31, 2001		October 31, 2000
Current assets:
	Cash and cash equivalent investments		$	83,122	$	91,595
	Marketable securities			2,989		7,273
	Receivables, net of allowances			75,352		177,474
	Inventories			48,433		51,049
	Prepaid expenses			2,159		4,063
	Deferred income taxes			14,970		--
	Assets held for sale (Note 8)			321,645		--

		Total current assets		548,670		331,454
Receivables due beyond one year, net of allowances				58,210		217,073
Prearranged receivables				1,222,259		--
Intangible assets				496,352		668,462
Deferred charges				260,508		126,158
Cemetery property, at cost				386,241		441,646
Property and equipment, at cost:
	Land			44,179		78,736
	Buildings			297,302		353,189
	Equipment and other			143,022		161,223

				484,503		593,148
	Less accumulated depreciation			143,398		145,219

	Net property and equipment			341,105		447,929
Long-term investments				18		4,203
Merchandise trust asset				--		234,752
Deferred income taxes				141,718		--
Other assets				2,881		4,514

			$	3,457,962	$	2,476,191

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

LIABILITIES AND SHAREHOLDERS' EQUITY			July 31, 2001		October 31, 2000
Current liabilities:
	Current maturities of long-term debt		$	6,817	$	29,857
	Accounts payable			2,821		20,342
	Accrued payroll			11,671		17,433
	Accrued insurance			15,974		16,470
	Accrued interest			5,887		13,039
	Accrued other			17,196		22,084
	Deferred income taxes			--		15,251
	Liabilities associated with assets held for sale (Note 8)			256,977		--

		Total current liabilities		317,343		134,476
Long-term debt, less current maturities				840,112		920,670
Deferred income taxes				--		83,740
Prearranged deferred revenue				1,606,138		108,744
Estimated cost to deliver merchandise				--		139,183
Other long-term liabilities				20,497		14,721

		Total liabilities		2,784,090		1,401,534

Contingencies (Note 4)
Shareholders' equity: Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued				--		--

Common stock, $1.00 stated value: Class A authorized 150,000,000 shares; issued and outstanding 104,024,449 and 103,277,329 shares at July 31, 2001 and October 31, 2000, respectively				104,024		103,277
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 31, 2001 and October 31, 2000; 10 votes per share; convertible into an equal number of Class A shares				3,555		3,555



Additional paid-in capital				675,121		673,658
Retained earnings (accumulated deficit)				(8,529)		407,398
Cumulative foreign translation adjustment				(97,481)		(103,553)
Unrealized depreciation of investments				(1,053)		(9,678)
Derivative financial instrument losses				(1,765)		--

Total shareholders' equity				673,872		1,074,657

			$	3,457,962	$	2,476,191

See accompanying notes to consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		Common Stock ⁽¹⁾	Additional Paid-In Capital	Retained Earnings (Accumulated Deficit)	Cumulative Foreign Translation Adjustment	Unrealized Appreciation (Depreciation) of Investments	Derivative Financial Instrument Gains (Losses)	Total Shareholders' Equity

Balance October 31, 2000		$ 106,832	$ 673,658	$ 407,398	$ (103,553)	$ (9,678)	$ --	$ 1,074,657

Comprehensive income (loss):
	Net loss			(415,927)				(415,927)

Other comprehensive income (loss):

Foreign translation adjustment					6,072			6,072

Cumulative effect of change in accounting for unrealized appreciation of investments						8,494		8,494

Unrealized appreciation of investments						206		206

Deferred income tax expense on unrealized appreciation of investments						(75)		(75)


Cumulative effect of change in accounting for derivative financial instrument							4,693	4,693


Unrealized loss on derivative financial instrument designated and qualifying as a cash flow hedging instrument							(6,458)	(6,458)

Total other comprehensive income (loss)		--	--	--	6,072	8,625	(1,765)	12,932


Total comprehensive income (loss)		--	--	(415,927)	6,072	8,625	(1,765)	(402,995)

Issuance of common stock		747	1,463					2,210

Balance July 31, 2001		$ 107,579	$ 675,121	$ (8,529)	$ (97,481)	$ (1,053)	$ (1,765)	$ 673,872


^{______________________ (1)} Amount includes shares of common stock with a stated value of $1 per share.

See accompanying notes to consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

				Nine Months Ended July 31,
				2001	2000
Cash flows from operating activities:
	Net earnings (loss)			$ (415,927)	$ 56,250
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Loss on assets held for sale and other charges		269,158	--
		Extraordinary item - early extinguishment of debt		5,472	--
		Cumulative effect of change in accounting principles		250,004	--
		Depreciation and amortization		60,121	40,608
		Provision for doubtful accounts		12,058	26,092
		Net (gains) losses on sales of marketable securities		63	(1,079)
		Loss on sale of assets, net		1,324	--
		Benefit for deferred income taxes		(63,314)	(2,386)
		Changes in assets and liabilities, net of effects from acquisitions:
			Increase in other receivables	(1,801)	(21,640)
			Increase in other deferred charges and intangible assets	(1,457)	(3,493)
			(Increase) decrease in inventories and cemetery property	9,281	(4,597)
			Increase (decrease) in accounts payable and accrued expenses	2,452	(11,652)
			Change in prearranged activity	(8,824)	(3,782)
			Prearranged acquisition costs	(26,343)	--
			Increase in merchandise trust, less estimated cost to deliver merchandise	--	(20,895)
			Decrease in other	(2,762)	(1,965)

			Net cash provided by operating activities	89,505	51,461

Cash flows from investing activities:
		Proceeds from sales of marketable securities		4,504	63,088
		Purchases of marketable securities and long-term investments		(1,894)	(13,058)
		Proceeds from sale of assets, net		3,436	--
		Additions to property and equipment		(17,970)	(31,977)
		Other		2,423	1,679

			Net cash provided by (used in) investing activities	(9,501)	19,732

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

				Nine Months Ended July 31,
				2001		2000
Cash flows from financing activities:
	Funeral trust withdrawal			$	40,000		$	--
	Proceeds from long-term debt				725,000			8,366
	Repayments of long-term debt				(821,942)			(21,223)
	Debt issue costs				(34,271)			--
	Issuance of common stock				675			2,380
	Dividends				--			(6,398)

		Net cash used in financing activities			(90,538)			(16,875)


Effect of exchange rates on cash and cash equivalents					2,061			(2,509)


Net increase (decrease) in cash					(8,473)			51,809
Cash and cash equivalents, beginning of period					91,595			30,877

Cash and cash equivalents, end of period				$	83,122		$	82,686


Supplemental cash flow information:
	Cash paid during the period for:
		Income taxes		$	6,900		$	18,200
		Interest		$	52,300		$	55,900

		Noncash investing and financing activities:
			Subsidiaries acquired through seller financing	$	--		$	13,900
			Issuance of common stock to fund employee benefit plan	$	1,535		$	--

See accompanying notes to consolidated financial statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation

(a) The Company

Stewart Enterprises, Inc. (the "Company") is the third largest provider of products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services.

As of July 31, 2001, the Company owned and operated 320 funeral homes and 151 cemeteries in 30 states within the United States and Puerto Rico, and 291 funeral homes and 10 cemeteries in Mexico, Australia, New Zealand, Canada, Spain, Portugal, the Netherlands, Argentina, France and Belgium. For the nine months ended July 31, 2001, foreign operations contributed approximately 10 percent of total revenue and, as of July 31, 2001, represented approximately 13 percent of total assets. In August 2001, the Company sold its Mexican, Australian and New Zealand operations which consisted of 66 funeral homes and 2 cemeteries. For additional information, see Note 11.

(b) Principles of Consolidation

The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. See Note 8 for discussion of assets held for sale and liabilities associated with assets held for sale.

The information as of July 31, 2001, and for the three and nine months ended July 31, 2001 and 2000, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000.

The results of operations for the three and nine months ended July 31, 2001 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2001.

(d) Foreign Currency Translation

All assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of shareholders' equity.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation--(Continued)

(e) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

(f) Reclassifications

Certain reclassifications have been made to the 2000 consolidated financial statements. These reclassifications had no effect on net earnings or shareholders' equity. In fiscal year 2001, prearranged acquisition costs and the change in prearranged activity are included in cash flows from operating activities in the accompanying statements of cash flows. These cash flows have characteristics of both cash flows from operating and investing activities. For comparative purposes, a reclassification has been made to the consolidated statement of cash flows for the nine months ended July 31, 2000.

(2) Change in Accounting Principles

(a) SAB No. 101

The Company reached a final resolution on discussions with the Securities and Exchange Commission on Staff Accounting Bulletin No. 101 ("SAB No. 101") -- "Revenue Recognition in Financial Statements" as it relates to prearranged sales activities. Although not required to implement SAB No. 101 until the fourth quarter of fiscal year 2001, the Company elected to implement the new accounting guidance in the first fiscal quarter of 2001. The accounting for the Company's preneed sales activities was affected as follows:

For preneed sales of interment rights, the associated revenue and all costs to acquire the sale are recognized in accordance with Statement of Financial Accounting Standards ("SFAS") No. 66, "Accounting for Sales of Real Estate." Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sale price has been collected. Previously, the revenue and costs were recognized at the time the contract was executed with the customer.

For preneed sales of cemetery merchandise, primarily vaults and markers, and preneed sales of cemetery service fees, primarily openings and closings of burial sites and installations of markers, the associated revenue and all costs to acquire the sale are deferred until the merchandise is delivered or the service is performed. Previously, the revenue and costs were recognized at the time the contract was executed with the customer.

Cemetery merchandise trust earnings are deferred until the underlying merchandise is delivered. Previously, the earnings were recognized as earned in the trust.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Change in Accounting Principles--(Continued)

Accounting for preneed funeral service sales and earnings on preneed funeral merchandise and services trust funds was not affected, as those revenues were recognized upon delivery of funeral merchandise and services under the Company's historical accounting methods.

Preneed funeral merchandise sales, primarily caskets, and associated direct selling costs, primarily commissions and direct marketing costs, are deferred until the merchandise is delivered, at which time they will be reflected in funeral revenue and funeral cost of sales, respectively. Previously, these sales and associated direct costs were recognized as funeral revenue and funeral cost of sales, respectively, when the contract was executed with the customer.

The method of accounting for perpetual care trusts was not affected. Earnings on those trusts continue to be recognized as they are earned in the trusts to offset the costs of maintaining the Company's cemeteries.

The implementation of SAB No. 101 resulted in several changes to the Company's balance sheet including the addition of two new categories: prearranged receivables and prearranged deferred revenue. Prearranged receivables are related to preneed sales of funeral and cemetery merchandise and services. Prearranged receivables represent the funds owed to the Company (1) from preneed funeral merchandise and services trusts and from preneed cemetery merchandise and services trusts, which represent amounts already paid by customers, and realized earnings on those amounts, (2) from customers and (3) from insurance companies. Prearranged deferred revenue represents the revenue the Company will recognize upon delivery of the preneed funeral and cemetery merchandise and services at the time of need. The net change in prearranged receivables and prearranged deferred revenue is recognized in the cash flow statement in the operating section as a change in prearranged activity.

Prior to the adoption of SAB No. 101, neither the funeral trust assets nor the receivables related to preneed funerals were included on the balance sheet. Receivables due from customers related to preneed cemetery merchandise and services were previously included with other receivables on the balance sheet. The preneed cemetery merchandise and services trust asset was previously presented net of the liability for the estimated cost to deliver cemetery services and merchandise.

All direct costs to acquire the sales of preneed funeral and cemetery merchandise and cemetery services are now included in deferred charges (asset). Previously, these costs were expensed as incurred. Also included in deferred charges are the costs to acquire preneed funeral service sales, which is consistent with the Company's historical accounting methods. The cost to acquire all preneed merchandise and service sales are included in the operating section of the cash flow statement as prearranged acquisition costs.

The Company filed a Form 8-K dated March 14, 2001 which describes in detail the new accounting methods as compared to its previous accounting methods.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Change in Accounting Principles--(Continued)

The cumulative effect of these changes on prior years resulted in a decrease in net earnings for the nine months ended July 31, 2001 of $250,004 (net of a $166,669 income tax benefit), or $2.33 per share. The effect of the change in accounting principles for the three and nine months ended July 31, 2001 was an increase in net earnings of $2,935 and $9,803 respectively, or $.03 and $.09 per share, respectively. Additionally, the Company corrected the application of purchase price allocations related to certain prior period acquisitions. These non-SAB No. 101 adjustments were immaterial to the Company's financial position and current and prior period results.

(b) Other Changes

Effective November 1, 2000, the Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities." SFAS No. 137, "Accounting for Derivative Instruments and Hedging Activities --Deferral of the Effective Date of FASB Statement No. 133," and SFAS No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities," are amendments to the accounting and reporting standards of SFAS No. 133 and were adopted by the Company concurrently with SFAS No. 133.

SFAS No. 133 requires the Company to recognize all derivatives on the balance sheet at fair value. The adoption of SFAS No. 133 on November 1, 2000 did not have an impact on results of operations and resulted in $4,693 being recognized in other comprehensive income for the cumulative effect of a change in accounting for a derivative financial instrument. The notional amounts of derivative financial instruments do not represent amounts exchanged between parties and, therefore, are not a measure of the Company's exposure resulting from its use of derivatives. The amounts exchanged are calculated based upon the notional amounts as well as other terms of the instruments, which relate to interest rates, exchange rates or other indices.

In accordance with SFAS No. 133, the Company accounts for the interest rate swap as a cash flow hedge whereby the fair value of the interest rate swap is reflected as a liability in the accompanying consolidated balance sheet with the offset recorded to other comprehensive income. The estimated fair value of the interest rate swap as of July 31, 2001, based on quoted market prices, was a loss of $1,765. The timing of the swap is simultaneous with the timing of the variable interest payments. Therefore, interest expense includes amounts related to the underlying hedged debt and to the swap in the accompanying financial statements.

In 2000, the Financial Accounting Standards Board ("FASB" or the "Board") issued SFAS No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities - a replacement of FASB Statement No. 125." SFAS No. 140 is effective for transfers occurring after March 31, 2001 and for disclosures relating to securitization transactions and collateral for fiscal years ending after December 15, 2000. The

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Change in Accounting Principles--(Continued)

implementation of SFAS No. 140 did not have an impact on the Company's results of operations or financial condition for the three and nine months ended July 31, 2001.

On June 29, 2001, the FASB approved its proposed SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets." SFAS No. 141 supercedes Accounting Principles Board ("APB") Opinion No. 16, "Business Combinations," to prohibit use of the pooling-of-interest (pooling) method of accounting for business combinations initiated after the issuance date of the final Statement. SFAS No. 142 supercedes APB Opinion No. 17, "Intangible Assets," by stating that goodwill will no longer be amortized, but will be tested for impairment in a manner different from the way other assets are tested for impairment. SFAS No. 142 establishes a new method of testing goodwill for impairment by requiring that goodwill be separately tested for impairment using a fair value approach rather than an undiscounted cash flow approach. Goodwill will be tested for impairment at a level referred to as a reporting unit, generally a level lower than that of the total entity. SFAS No. 142 requires entities to perform the first goodwill impairment test by comparing the fair value with the book value of a reporting unit on all reporting units within six months of adopting the Statement. If the fair value of a reporting unit is less than its book value, an impairment loss will be recognized and treated as a change in accounting principle. That change in accounting principle must be recognized by fiscal year end. Impairment losses recognized as a result of an impairment test occurring subsequent to the first six months after adoption will be included in operating income. The unamortized balance of any existing negative goodwill will be written off upon adoption of SFAS No. 142 and treated as a change in accounting principle. Goodwill of a reporting unit must be tested for impairment after the initial adoption of the Statement on an annual basis, and must be tested between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount.

The provisions of SFAS No. 141 and SFAS No. 142 will be effective for fiscal years beginning after December 15, 2001. However, early adoption of SFAS No. 142 will be permitted for companies with a fiscal year beginning after March 15, 2001, provided their first quarter financial statements have not been previously issued. In all cases, SFAS No. 142 must be adopted at the beginning of a fiscal year. Therefore, the Company can elect to early adopt the provisions of SFAS No. 142 in the first quarter of fiscal year 2002 or adopt the provisions in the first quarter of fiscal year 2003. The Company has not completed its review and analysis; however, based on the Company's initial interpretation of SFAS No. 142 and if it were effective as of July 31, 2001, the preliminary estimate is that the Company would incur a pre-tax noncash impairment charge of between $100,000 and $300,000 for its domestic operations. The Company's foreign operations will not be affected as they will have been previously marked to fair value. The Company's amortization of goodwill amounted to $19,644 ($14,409 related to domestic operations) in fiscal year 2000. Changes in the fair value of the Company's relevant businesses could change the estimated impairment charge materially.

At the end of June 2001, the FASB issued SFAS No. 143, "Accounting for Asset Retirement Obligations." SFAS No. 143 addresses the diversity in practice for recognizing asset retirement obligations ("ARO's"). SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Change in Accounting Principles--(Continued)

recognizing a liability for ARO's, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 will be effective for financial statements for fiscal years beginning after June 15, 2002, although early application is encouraged. The Company believes that the adoption of SFAS No. 143 will not have any impact on its financial position or results of operations.

(3) Acquisitions

During the nine months ended July 31, 2001, the Company had no acquisitions. Four cemeteries were purchased during the nine months ended July 31, 2000.

These acquisitions have been accounted for by the purchase method, and their results of operations are included in the accompanying consolidated financial statements from the dates of acquisition. The purchase price allocations for certain of these acquisitions were originally based on preliminary information.

(4) Contingencies

The Company and certain of its subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does not expect these matters to have a material adverse effect on the consolidated financial position, results of operations or cash flows of the Company.

The Company carries insurance with coverages and coverage limits that it believes to be adequate. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies, management believes that its insurance protection is reasonable in view of the nature and scope of the Company's operations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Reconciliation of Basic and Diluted Per Share Data
		Loss (Numerator)	Shares (Denominator)	Per Share Data

Three Months ended July 31, 2001
Loss before extraordinary item		$ (193,873)

Basic loss per common share:
	Loss available to common shareholders	$ (193,873)	107,538	$ (1.80)

Effect of dilutive securities:
	Time-vest stock options assumed exercised	--	--

Diluted loss per common share:
	Loss available to common shareholders plus time-vest stock options assumed exercised	$ (193,873)	107,538	$ (1.80)


		Earnings (Numerator)	Shares (Denominator)	Per Share Data

Three Months ended July 31, 2000
Net earnings		$ 18,077

Basic earnings per common share:
	Earnings available to common shareholders	$ 18,077	106,737	$ .17
Effect of dilutive securities:
	Time-vest stock options assumed exercised	--	--

Diluted earnings per common share:
	Earnings available to common shareholders plus time-vest stock options assumed exercised	$ 18,077	106,737	$ .17

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Reconciliation of Basic and Diluted Per Share Data--(Continued)

		Loss (Numerator)	Shares (Denominator)	Per Share Data

Nine Months ended July 31, 2001
Loss before extraordinary item and cumulative effect of change in accounting principles		$ (160,451)

Basic loss per common share:
	Loss available to common shareholders	$ (160,451)	107,268	$ (1.50)

Effect of dilutive securities:
	Time-vest stock options assumed exercised	--	--

Diluted loss per common share:
	Loss available to common shareholders plus time-vest stock options assumed exercised	$ (160,451)	107,268	$ (1.50)


		Earnings (Numerator)	Shares (Denominator)	Per Share Data
Nine Months ended July 31, 2000
Net earnings		$ 56,250

Basic earnings per common share:
	Earnings available to common shareholders	$ 56,250	106,522	$ .53

Effect of dilutive securities:
	Time-vest stock options assumed exercised	--	18

Diluted earnings per common share:
	Earnings available to common shareholders plus time-vest stock options assumed exercised	$ 56,250	106,540	$ .53

Common stock equivalents are excluded in the calculation of weighted average shares outstanding when a company reports a net loss from continuing operations for a period. The number of potentially antidilutive shares excluded from the calculation of diluted earnings per share were 2,155,695 and 6,063,737 for the three and nine months ended July 31, 2001, respectively, because of the net loss from continuing operations for both of those periods.

Options to purchase 8,667,587 and 5,820,042 shares of common stock at prices ranging from $3.78 to $27.25 per share were outstanding during the three and nine months ended July 31, 2000, respectively, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(6) Segment Data

The Company's reportable segment information was as follows:

			Funeral		Cemetery	Reconciling Items ⁽¹⁾	Consolidated Totals

Revenues from external customers:
	^{Three months ended July 31,}
		2001	$	^102,641	63,108	^--	$	^165,749
		2000	$	^108,448	73,375	^--	$	^181,823
	^{Nine months ended July 31,}
		2001	$	^317,948	195,430	^--	$	^513,378
		2000	$	^346,835	216,809	^--	$	^563,644

Gross Profit:
	^{Three months ended July 31,}
		2001	$	^20,938	13,009	^--	$	^33,947
		2000	$	^27,424	18,511	^--	$	^45,935
	^{Nine months ended July 31,}
		2001	$	^71,273	46,974	^--	$	^118,247
		2000	$	^92,962	51,465	^--	$	^144,427

Total assets:
	^{July 31, 2001}		$	^1,995,693	^1,327,811	^134,458	$	^3,457,962
	^{October 31, 2000}		$	^1,253,754	^1,145,612	^76,825	$	^2,476,191

Assets held for sale (2):
	July 31, 2001		$	^285,731	^35,914	^--	$	^321,645

(1)	Reconciling items consist of unallocated corporate assets, depreciation and amortization on unallocated corporate assets and additions to corporate long-lived assets.

(2)	See Note 8.

A reconciliation of total segment gross profit to total earnings (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principles for the three and nine months ended July 31, 2001 and 2000, is as follows:

		Three Months Ended July 31,				Nine Months Ended July 31,
		2001		2000		2001		2000

Gross profit for reportable segments		$	33,947	$	45,935	$	118,247	$	144,427
Corporate general and administrative expenses			(4,316)		(4,796)		(13,382)		(14,939)
Loss on assets held for sale and other charges			(269,158)		--		(269,158)		--
Interest expense, net			(14,602)		(14,410)		(40,385)		(43,440)
Other income, net			2,633		1,738		5,817		2,534

	Earnings (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principles	$	(251,496)	$	28,467	$	(198,861)	$	88,582

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes

The following presents the condensed consolidating historical financial statements as of July 31, 2001 and October 31, 2000 and for the three months and nine months ended July 31, 2001and 2000, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Senior Subordinated Notes, and the financial results of the Company's subsidiaries that do not serve as guarantors.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Three Months Ended July 31, 2001

	Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

Revenues:
Funeral	$ --	$ 66,777	$ 35,864	$ --	$ 102,641
Cemetery	--	53,345	9,763	--	63,108

	--	120,122	45,627	--	165,749

Costs and expenses:
Funeral	--	53,954	27,749	--	81,703
Cemetery	--	39,953	10,140	6	50,099

	--	93,907	37,889	6	131,802

Gross profit		26,215	7,738	(6)	33,947
Corporate general and administrative expenses	4,388	(72)	--	--	4,316
Loss on assets held for sale and other charges	239,558	29,430	170	--	269,158

Operating earnings (loss)	(243,946)	(3,143)	7,568	(6)	(239,527)
Interest income (expense), net	18,490	(21,548)	(12,695)	1,151	(14,602)
Other income, net	672	1,506	1,606	(1,151)	2,633

Loss before income taxes and extraordinary item	(224,784)	(23,185)	(3,521)	(6)	(251,496)
Income tax benefit	(46,836)	(9,817)	(968)	(2)	(57,623)

Loss before extraordinary item	(177,948)	(13,368)	(2,553)	(4)	(193,873)
Extraordinary item - early extinguishment of debt	(5,472)	--	--	--	(5,472)

Net loss before equity in subsidiaries	(183,420)	(13,368)	(2,553)	(4)	(199,345)

Equity in subsidiaries	(15,925)	--	--	15,925	--

Net loss	(199,345)	(13,368)	(2,553)	15,921	(199,345)
Other comprehensive income (loss), net	(949)	(15)	919	--	(45)

Comprehensive loss	$ (200,294)	$ (13,383)	$ (1,634)	$ 15,921	$ (199,390)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended July 31, 2000

	Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

Revenues:
Funeral	$ --	$ 67,049	$ 41,399	$ --	$ 108,448
Cemetery	--	61,494	11,881	--	73,375

	--	128,543	53,280	--	181,823

Costs and expenses:
Funeral	--	49,658	31,366	--	81,024
Cemetery	--	44,035	10,829	--	54,864

	--	93,693	42,195	--	135,888

Gross profit	--	34,850	11,085	--	45,935
Corporate general and administrative expenses	4,953	(157)	--	--	4,796

Operating earnings (loss)	(4,953)	35,007	11,085	--	41,139
Interest income (expense), net	13,159	(19,088)	(10,006)	1,525	(14,410)
Other income (loss), net	1,330	(592)	2,368	(1,368)	1,738

Earnings before income taxes	9,536	15,327	3,447	157	28,467
Income tax expense	3,481	5,595	1,258	56	10,390

Net earnings before equity in subsidiaries	6,055	9,732	2,189	101	18,077

Equity in subsidiaries	12,022	--	--	(12,022)	--

Net earnings	18,077	9,732	2,189	(11,921)	18,077
Other comprehensive loss, net	--	(2,021)	(596)	--	(2,617)

Comprehensive income	$ 18,077	$ 7,711	$ 1,593	$ (11,921)	$ 15,460

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Nine Months Ended July 31, 2001

	Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

Revenues:
Funeral	$ --	$ 211,884	$ 106,064	$ --	$ 317,948
Cemetery	--	169,339	26,091	--	195,430

	--	381,223	132,155	--	513,378

Costs and expenses:
Funeral	--	164,236	82,439	--	246,675
Cemetery	--	122,818	25,620	18	148,456

	--	287,054	108,059	18	395,131

Gross profit	--	94,169	24,096	(18)	118,247
Corporate general and administrative expenses	13,733	(351)	--	--	13,382
Loss on assets held for sale and other charges	239,558	29,430	170	--	269,158

Operating earnings (loss)	(253,291)	65,090	23,926	(18)	(164,293)
Interest income (expense), net	59,047	(67,587)	(36,634)	4,789	(40,385)
Other income, net	2,403	4,213	3,990	(4,789)	5,817

Earnings (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principles	(191,841)	1,716	(8,718)	(18)	(198,861)
Income tax benefit	(34,812)	(728)	(2,864)	(6)	(38,410)

Earnings (loss) before extraordinary item and cumulative effect of change in accounting principles	(157,029)	2,444	(5,854)	(12)	(160,451)
Extraordinary item - early extinguishment of debt	(5,472)	--	--	--	(5,472)
Cumulative effect of change in accounting principles	--	(234,016)	(15,988)	--	(250,004)

Net loss before equity in subsidiaries	(162,501)	(231,572)	(21,842)	(12)	(415,927)

Equity in subsidiaries	(253,426)	--	--	253,426	--

Net loss	(415,927)	(231,572)	(21,842)	253,414	(415,927)
Other comprehensive income (loss), net	(563)	7,423	6,072	--	12,932

Comprehensive loss	$ (416,490)	$ (224,149)	$ (15,770)	$ 253,414	$ (402,995)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Nine Months Ended July 31, 2000

	Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

Revenues:
Funeral	$ --	$ 218,331	$ 128,504	$ --	$ 346,835
Cemetery	--	186,902	29,907	--	216,809

	--	405,233	158,411	--	563,644

Costs and expenses:
Funeral	--	156,755	97,118	--	253,873
Cemetery	--	137,875	27,457	12	165,344

	--	294,630	124,575	12	419,217

Gross profit	--	110,603	33,836	(12)	144,427
Corporate general and administrative expenses	14,992	(53)	--	--	14,939

Operating earnings (loss)	(14,992)	110,656	33,836	(12)	129,488
Interest income (expense), net	42,823	(59,856)	(29,022)	2,615	(43,440)
Other income, net	1,172	936	2,884	(2,458)	2,534

Earnings before income taxes	29,003	51,736	7,698	145	88,582
Income tax expense	10,586	18,884	2,810	52	32,332

Net earnings before equity in subsidiaries	18,417	32,852	4,888	93	56,250

Equity in subsidiaries	37,833	--	--	(37,833)	--

Net earnings	56,250	32,852	4,888	(37,740)	56,250
Other comprehensive loss, net	--	(5,413)	(18,673)	--	(24,086)

Comprehensive income (loss)	$ 56,250	$ 27,439	$ (13,785)	$ (37,740)	$ 32,164

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Balance Sheets

		July 31, 2001

		Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

ASSETS

Current assets:
Cash and cash equivalent investments		$ 40,832	$ (1,072)	$ 43,362	$ --	$ 83,122
Marketable securities		1,119	115	1,755	--	2,989
Receivables, net of allowances		2,240	58,969	14,143	--	75,352
Inventories		374	33,467	14,592	--	48,433
Prepaid expenses		773	1,371	15	--	2,159
Deferred income taxes		32,006	(14,325)	(2,711)	--	14,970
Assets held for sale		--	12,217	309,428	--	321,645

Total current assets		77,344	90,742	380,584	--	548,670
Receivables due beyond one year, net of allowances		--	32,961	25,249	--	58,210
Prearranged receivables		--	1,196,487	25,772	--	1,222,259
Intangible assets		126	458,103	38,123	--	496,352
Deferred charges		1,966	256,264	2,278	--	260,508
Cemetery property, at cost		--	363,112	23,129	--	386,241
Property and equipment, at cost		26,690	418,660	39,057	96	484,503
	Less accumulated depreciation	9,483	124,846	9,030	39	143,398

	Net property and equipment	17,207	293,814	30,027	57	341,105
income taxes		23,665	119,482	(1,429)	--	141,718
Investment in subsidiaries		70,495	--	--	(70,495)	--
Other assets		1,834	1,065	--	--	2,899

		$ 192,637	$ 2,812,030	$ 523,733	$ (70,438)	$ 3,457,962

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt	$ 6,817	$ --	$ --	$ --	$ 6,817
Accounts payable	(100)	1,624	1,267	30	2,821
Accrued expenses	10,933	41,043	(1,248)	--	50,728
Liabilities associated with assets held for sale	--	2,859	254,118	--	256,977

Total current liabilities	17,650	45,526	254,137	30	317,343
Long-term debt, less current maturities	799,652	460	40,000	--	840,112
Intercompany payables, net	(1,401,614)	1,096,231	323,111	(17,728)	--
Prearranged deferred revenue	250	1,593,134	12,754	--	1,606,138
Other long-term liabilities	4,293	16,052	--	152	20,497

Total liabilities	(579,769)	2,751,403	630,002	(17,546)	2,784,090

Common stock	107,579	336	53	(389)	107,579
Other	666,592	61,344	(8,841)	(52,503)	666,592
Accumulated other comprehensive loss	(1,765)	(1,053)	(97,481)	--	(100,299)

Total shareholders' equity (deficit)	772,406	60,627	(106,269)	(52,892)	673,872

	$ 192,637	$ 2,812,030	$ 523,733	$ (70,438)	$ 3,457,962

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Balance Sheets

		October 31, 2000

		Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

ASSETS

Current assets:
Cash and cash equivalent investments		$ 59,862	$ (299)	$ 32,032	$ --	$ 91,595
Marketable securities		5,356	190	1,727	--	7,273
Receivables, net of allowances		1,004	122,232	54,238	--	177,474
Inventories		383	34,867	15,799	--	51,049
Prepaid expenses		769	1,941	1,353	--	4,063

Total current assets		67,374	158,931	105,149	--	331,454
Receivables due beyond one year, net of allowances		--	152,093	64,980	--	217,073
Intangible assets		191	457,088	211,183	--	668,462
Deferred charges		2,007	108,792	15,359	--	126,158
Cemetery property, at cost		--	377,898	63,748	--	441,646
Property and equipment, at cost		24,768	422,609	145,675	96	593,148
	Less accumulated depreciation	6,924	113,325	24,900	70	145,219

	Net property and equipment	17,844	309,284	120,775	26	447,929
Merchandise trust asset		--	261,515	(26,763)	--	234,752
Investment in subsidiaries		323,921	--	--	(323,921)	--
Other assets		1,505	1,785	5,427	--	8,717

		$ 412,842	$ 1,827,386	$ 559,858	$ (323,895)	$ 2,476,191

LIABILITIES AND SHAREHOLDERS' EQUITY

Current liabilities:
Current maturities of long-term debt	$ 29,857	$ --	$ --	$ --	$ 29,857
Accounts payable	299	3,988	16,026	29	20,342
Accrued expenses	14,572	43,409	11,181	(136)	69,026
Income taxes payable	(13,796)	3,448	12,031	(1,683)	--
Deferred income taxes	(307)	14,695	2,425	(1,562)	15,251

Total current liabilities	30,625	65,540	41,663	(3,352)	134,476
Long-term debt, less current maturities	836,385	--	84,285	--	920,670
Intercompany payables, net	(1,654,754)	1,194,997	473,017	(13,260)	--
Deferred income taxes	13,400	71,857	(276)	(1,241)	83,740
Prearranged deferred revenue	500	64,664	43,580	--	108,744
Estimated cost to deliver merchandise	--	139,183	--	--	139,183
Other long-term liabilities	--	6,481	8,088	152	14,721

Total liabilities	(773,844)	1,542,722	650,357	(17,701)	1,401,534

Common stock	106,832	224	53	(277)	106,832
Other	1,081,056	292,916	13,001	(305,917)	1,081,056
Accumulated other comprehensive loss	(1,202)	(8,476)	(103,553)	--	(113,231)

Total shareholders' equity (deficit)	1,186,686	284,664	(90,499)	(306,194)	1,074,657

	$ 412,842	$ 1,827,386	$ 559,858	$ (323,895)	$ 2,476,191

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2001

	Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

Net cash provided by (used in) operating activities	$ 57,171	$ 63,958	$ (36,092)	$ 4,468	$ 89,505

Cash flows from investing activities:
Proceeds from sales of marketable securities	--	4,464	40	--	4,504
Purchases of marketable securities and long-term investments	--	--	(1,894)	--	(1,894)
Proceeds from sale of assets, net	--	3,436	--	--	3,436
Additions to property and equipment	--	(15,897)	(2,073)	--	(17,970)
Other	--	2,032	391	--	2,423

Net cash used in investing activities	--	(5,965)	(3,536)	--	(9,501)

Cash flows from financing activities:
Funeral trust withdrawal	--	40,000	--	--	40,000
Proceeds from long-term debt	725,000	--	--	--	725,000
Repayments of long-term debt	(781,187)	--	(40,755)	--	(821,942)
Intercompany receivables (payables)	13,582	(98,766)	89,652	(4,468)	--
Debt issue costs	(34,271)	--	--	--	(34,271)
Issuance of common stock	675	--	--	--	675

Net cash provided by (used in) financing activities	(76,201)	(58,766)	48,897	(4,468)	(90,538)

Effect of exchange rates on cash and cash equivalents	--	--	2,061	--	2,061

Net increase (decrease) in cash	(19,030)	(773)	11,330	--	(8,473)
Cash and cash equivalents, beginning of period	59,862	(299)	32,032	--	91,595

Cash and cash equivalents, end of period	$ 40,832	$ (1,072)	$ 43,362	$ --	$ 83,122

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes--(Continued)

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2000

	Parent	Guarantor Subsidiaries	Non-Guarantor Subsidiaries	Eliminations	Consolidated

Net cash provided by (used in) operating activities	$ 31,174	$ 25,275	$ (7,134)	$ 2,146	$ 51,461

Cash flows from investing activities:
Proceeds from sales of marketable securities	978	45,624	16,486	--	63,088
Purchases of marketable securities and long-term investments	(5,426)	(3,572)	(4,060)	--	(13,058)
Additions to property and equipment	(2,298)	(25,714)	(3,965)	--	(31,977)
Other	--	1,608	71	--	1,679

Net cash provided by (used in) investing activities	(6,746)	17,946	8,532	--	19,732

Cash flows from financing activities:
Proceeds from long-term debt	8,366	--	--	--	8,366
Repayments of long-term debt	(12,017)	--	(9,206)	--	(21,223)
Intercompany receivables (payables)	18,903	(43,813)	27,056	(2,146)	--
Issuance of common stock	2,380	--	--	--	2,380
Dividends	(6,398)	--	--	--	(6,398)

Net cash provided by (used in) financing activities	11,234	(43,813)	17,850	(2,146)	(16,875)

Effect of exchange rates on cash and cash equivalents	--	--	(2,509)	--	(2,509)

Net increase (decrease) in cash	35,662	(592)	16,739	--	51,809
Cash and cash equivalents, beginning of period	11,689	1,649	17,539	--	30,877

Cash and cash equivalents, end of period	$ 47,351	$ 1,057	$ 34,278	$ --	$ 82,686

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Loss on Assets Held for Sale and Other Charges

SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and Long-Lived Assets to be Disposed of," applies to long-lived assets, certain identifiable intangibles, and goodwill related to those assets to be held and used and to long-lived assets and certain identifiable intangibles to be disposed. An entity must review long-lived assets and certain identifiable intangibles to be held and used for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. All long- lived assets to be disposed of that are not covered by APB Opinion No. 30 and for which management, having the authority to approve the action, has committed to a plan to dispose of the assets, must be reported at the lower of carrying amount or fair value less cost to sell.

During the third quarter of fiscal year 2001, the Company adopted a formal plan to sell its foreign operations and certain domestic assets, primarily funeral home real estate and excess cemetery property. In addition, it reviewed noncompetition agreements that it had entered into with sellers, key employees and others in connection with previous acquisitions, and it decided to relieve some of these individuals from the obligations not to compete, although it will continue to make the payments in accordance with the contract terms. Based on its progress to date and management's and the Board of Directors' decision to proceed with these sales if acceptable prices and terms can be obtained, the Company wrote down the aggregate value of these assets to their estimated fair value, which was based upon current offers from interested parties or market prices of comparable properties, less cost to sell in the third quarter of 2001. As a result, the Company incurred an aggregate pre-tax noncash charge to earnings of $269,158 (net of a $64,069 income tax benefit).

Because the Company has already reduced equity for the cumulative foreign translation adjustment incurred in each period that it has owned these businesses, the total related charge to shareholders' equity for the loss on its foreign operations is estimated to ultimately be $88,929. However, in the third quarter of 2001, the charge to equity will be equal to the entire after-tax charge to earnings of $187,329. In the periods in which the sale of each of the foreign operations is consummated, the cumulative foreign translation adjustment relating to the operation sold will be reversed and included in comprehensive income, resulting in a corresponding increase in equity. As the Company has previously announced, it sold its Mexican, Australian and New Zealand operations in the fourth fiscal quarter. As such in the fourth fiscal quarter, the Company will realize comprehensive income and an increase to equity for the cumulative foreign currency translation related to these operations, which is equal to approximately $67,000. The remainder of the approximately $31,000 cumulative foreign translation adjustment would be reversed upon completion of the sale of the Company's European and Canadian operations.

The related assets and liabilities associated with assets held for sale are shown in separate line items in the balance sheet titled "assets held for sale" and "liabilities associated with assets held for sale." In the consolidated statement of earnings, the impairment charges related to these writedowns and the writedowns of the noncompetition agreements are reflected in the "loss on assets held for sale and other charges" line item.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Loss on Assets Held for Sale and Other Charges--(Continued)

At July 31, 2001, the assets held for sale (excluding $40,461 of cash and cash equivalent investments of the operations held for sale) and the liabilities associated with assets held for sale line items in the balance sheet represent the assets and liabilities, respectively, of all of the Company's foreign operations and certain domestic assets, primarily funeral home real estate and excess cemetery property. A summary of the assets and liabilities included in these line items is as follows:

Assets		July 31, 2001

Receivables, net of allowances		$	40,496
Inventories and other current assets			14,867
Net property and equipment			61,226
Prearranged receivables			154,056
Intangible assets			8,870
Deferred charges and other assets			21,078
Cemetery property, at cost			14,790
Long-term investments			6,262

	Assets held for sale	$	321,645


Liabilities

Current liabilities		$	29,359
Deferred income taxes			6,023
Prearranged deferred revenue			210,630
Long-term debt			3,652
Other long-term liabilities			7,313

	Liabilities associated with assets held for sale	$	256,977

The operating results of assets held for sale included in the statements of earnings for the three and nine months ended July 31, 2001 and 2000 were as follows:

	Three Months Ended July 31,				Nine Months Ended July 31,

	2001		2000		2001		2000
Revenues	$	33,672	$	36,602	$	98,522	$	112,454

Operating earnings

4,684

6,570

13,213

18,444

Earnings before income taxes

4,214

6,077

11,835

17,256

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Long-term Debt

			July 31, 2001		October 31, 2000

Long-term debt:
	Unsecured revolving credit facility		$	--	$	529,000
	Senior secured credit facility:
		Revolving credit facility		50,000		--
		Asset sale term loan		75,000		--
		Term loan B		300,000		--
	6.40% ROARS			102,144		204,781
	6.70% Notes			100		100,000
	Privately held senior notes			--		88,572
	10.75% senior subordinated notes due 2008			300,000		--
	Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rates of 6.6% and 6.4% as of July 31, 2001 and October 31, 2000, respectively, partially secured by assets of subsidiaries, with maturities through 2023			23,337		28,174

		Total long-term debt		850,581		950,527
Less debt associated with assets held for sale				3,652		--
Less current maturities				6,817		29,857

			$	840,112	$	920,670

On June 29, 2001, the Company completed refinancing transactions that retired (1) the $600,000 unsecured revolving credit facility, which was scheduled to mature on April 30, 2002 and which was a current liability, (2) $99,900 of the 6.70 percent Notes which mature in 2003, (3) approximately $100,103 of the 6.40 percent ROARS which will mature or be remarketed in 2003 subject to market conditions and (4) the privately held senior notes, which had varying maturities from fiscal years 2002 through 2007. This constituted all of the Company's long-term debt, except for approximately $100,000 in publicly held senior notes that remain outstanding and $23,337 of debt incurred or assumed in connection with acquisitions. The Company also incurred charges in the amount of $5,472 (net of a $3,648 income tax benefit) in the three months ended July 31, 2001, relating to the early extinguishment of debt.

The new financing consists of a $550,000 senior secured credit facility and $300,000 of senior subordinated notes. The senior secured credit facility consists of (1) a $175,000 four-year revolving credit facility (on which the Company drew approximately $50,000 at the closing of the refinancing transactions), (2) a $75,000 18-month asset sale term loan and (3) a $300,000 five-year term loan B. As a result of its tender offer, on June 29, 2001, the Company repurchased $99,900 of the 6.70 percent Notes and $100,103 of the 6.40 percent ROARS. The remaining 6.70 percent Notes and the remaining 6.40 percent ROARS are secured equally and ratably with the new senior secured credit facility.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Long-term Debt--(Continued)

The 18-month asset sale term loan was drawn in full upon the completion of the refinancing transactions and was repaid in full subsequent to the end of the third quarter. The revolving credit facility was reduced to $10,000 subsequent to the end of the third quarter. The term loan B was drawn in full upon the completion of the refinancing transactions, and the following annual amounts will be amortized on a quarterly basis each year: loan years one and two - $2,500 per year, loan year three - $15,000, loan year four - $25,000, and loan year five - $255,000.

The applicable margin spreads for LIBOR rate loans under the revolving credit facility and term loan B are generally subject to quarterly adjustment within a range of 200 to 275 basis points for the revolving credit facility and a range of 312.5 and 337.5 basis points for the term loan B, based upon the Company's leverage ratio. In addition, the Company will pay a commitment fee on the unused portion of the revolving credit facility within a range of 50.0 to 62.5 basis points, based upon the Company's leverage ratio.

The new senior secured credit facility contains affirmative and negative covenants. The covenants include required reserves, mandatory prepayments from the proceeds of certain asset sales and debt and equity offerings, limitations on liens, limitations on mergers, consolidations and asset sales, limitations on incurrence of debt, limitations on dividends, stock redemptions and the redemption and/or prepayment of other debt, limitations on investments and acquisitions, limitations on lease payments, limitations on negative pledges and limitations on transactions with affiliates. In addition, the credit agreement contains the following financial covenants: (1) a maximum leverage ratio, (2) a minimum fixed charge coverage ratio, and (3) a minimum interest coverage ratio. The financial covenants will be calculated on a consolidated basis after giving pro forma effect to permitted asset dispositions and acquisitions. Capital expenditures are limited to $35,000 in fiscal year 2001, $45,000 in fiscal year 2002, $50,000 in fiscal year 2003 and $55,000 for each fiscal year thereafter.

The Company's obligations under the new senior secured credit facility are guaranteed by all of its existing and future direct and indirect subsidiaries formed under the laws of the United States, any state thereof or the District of Columbia, except for specified excluded subsidiaries. The remaining 6.70 percent Notes and 6.40 percent ROARS are not guaranteed by the Company's subsidiaries.

All obligations under the new senior secured credit facility, including the guarantees, are secured by a first priority perfected security interest in (1) all capital stock and other equity interests of the Company's existing and future direct and indirect subsidiaries, other than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of the voting equity interests and 100 percent of all other equity interests (other than directors qualifying shares) of all direct existing and future foreign subsidiaries and (3) all other existing and future assets and properties of the Company and the guarantors, except for real property, vehicles and other specified exclusions.

In December 1996, the Company issued $100,000 of 6.70 percent Notes due 2003. The 6.70 percent Notes are now secured equally and ratably with the new senior secured credit facility. The 6.70 percent Notes are not redeemable prior to maturity and are not entitled to the benefit of any mandatory redemption or sinking fund. Interest on the 6.70 percent Notes is payable semi-annually on December 1 and June 1 of each year. As of July 31, 2001 and October 31, 2000, the carrying value of these notes, including accrued interest, was $101 and $102,773, whereas the fair value was $99 and $65,573, respectively.

In April 1998, the Company issued $200,000 of 6.40 percent Remarketable Or Redeemable Securities ("ROARS") due May 1, 2013 (remarketing date May 1, 2003). The 6.40 percent ROARS are now secured equally and ratably with the new senior secured credit facility. Interest on the 6.40 percent ROARS is payable semi-annually on November 1 and May 1 of each year. Outstanding 6.40 percent ROARS must be redeemed by the Company or remarketed by the remarketing dealer on May 1, 2003. If the remarketing dealer does not elect to remarket the 6.40 percent ROARS, the Company must redeem them on May 1, 2003 for 100 percent of their principal amount plus accrued interest. If the remarketing dealer elects to remarket the 6.40 percent ROARS, the Company may override that election by choosing to redeem them on May 1, 2003 for 100 percent of their principal amount plus accrued interest, in which case the Company will be obligated to pay the remarketing dealer the value of its remarketing right. If the 6.40 percent ROARS are remarketed, holders immediately prior to May 1, 2003 must tender them to the remarketing dealer for purchase on May 1, 2003 for a purchase price of 100 percent of their principal amount plus accrued interest. Except as described above, the 6.40 percent ROARS are not redeemable prior to maturity and are not entitled to the benefit of any mandatory redemption or sinking fund. If remarketed, the 6.40 percent ROARS will become due May 1, 2013, and the coupon for the remaining term will be 5.44 percent (which was the 10-year United States Treasury rate at the time of initial issuance) plus the Company's then current credit spread. As of July 31, 2001 and October 31, 2000, the carrying value of these notes, including accrued interest and the unamortized portion of the option premium, was $103,742 and $211,146, whereas the fair value was $102,265 and $136,444, respectively.

The indenture governing the 6.40 percent ROARS and 6.70 percent Notes contains covenants that, among other things, and subject to some exceptions, (1) restrict the Company's ability and the ability of its subsidiaries to create liens and enter into sale leaseback transactions, and (2) restrict the Company's ability (but not its subsidiaries' ability) to sell all or substantially all of its assets, or merge or consolidate with other companies.

The 10.75 percent senior subordinated notes are general unsecured obligations of the Company, are subordinated in right of payment to all existing and future senior debt of the Company and are pari passu in right of payment with any future senior subordinated indebtedness of the Company. The notes are guaranteed by all of the domestic subsidiaries of the Company, other than certain specified subsidiaries. Interest on the notes accrues at the rate of 10.75 percent per annum and is payable semi-annually in arrears on January 1 and July 1. As of July 31, 2001, the carrying value, including accrued interest, and fair value of the senior subordinated notes were $302,867 and $317,623, respectively.

The indenture governing the 10.75 percent senior subordinate notes limits the Company's and its subsidiaries' ability to borrow money, create liens, pay dividends on or redeem or repurchase stock, make investments, sell stock in subsidiaries, restrict dividends or other payments from subsidiaries, enter into transactions with affiliates and sell assets or merge with other companies. The notes are redeemable at the option of the Company on or after July 1, 2005. In addition, prior to July 1, 2004, the Company may redeem up to 35 percent of the notes with the net cash proceeds from specified equity offerings. The Company must offer to purchase the notes at 101 percent of their face amount, plus accrued interest, if the Company experiences specific kinds of changes in control.

As of July 31, 2001, the Company's subsidiaries had approximately $23,337 of long-term debt that represents notes its subsidiaries issued as part of the purchase price of acquired businesses or debt its subsidiaries assumed in connection with acquisitions. Approximately $11,358 of this debt is secured by liens on the stock or assets of the related subsidiaries.

Scheduled principal payments and maturities of the Company's long-term debt for the fiscal years ending October 31, 2002 through October 31, 2006, are approximately $7,072 in 2002, $185,140 in 2003, $22,474 in 2004, $134,535 in 2005 and $192,850 in 2006. Current maturities of long-term debt of $6,817 as of July 31, 2001, as reported in the Company's consolidated balance sheets, include $191 relating to the unamortized ROARS option premium.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Consolidated Comprehensive Income (Loss)

Consolidated comprehensive income (loss) for the three months ended July 31, 2001 and 2000, and for the nine months ended July 31, 2001 and 2000 is as follows:

		Three Months Ended July 31,				Nine Months Ended July 31,

		2001		2000		2001		2000


Net earnings (loss)		$	(199,345)	$	18,077	$	(415,927)	$	56,250
Other comprehensive income (loss):
	Foreign translation adjustment	919		(599)		6,072		(18,673)
	Cumulative effect of change in accounting for unrealized appreciation of investments	--		--		8,494		--
	Unrealized appreciation (depreciation) of investments	(23)		(3,178)		206		(8,524)
	Deferred income tax expense (benefit) on unrealized appreciation of investments	8		1,160		(75)		3,111
	Cumulative effect of change in accounting for derivative financial instrument	--		--		4,693		--
	Unrealized loss on derivative financial instrument designated and qualifying as a cash flow hedging instrument	(949)		--		(6,458)		--

	Total other comprehensive income (loss)	(45)		(2,617)		12,932		(24,086)

Total comprehensive income (loss)		$	(199,390)	$	15,460	$	(402,995)	$	32,164

(11) Subsequent Events

As a result of the Company's decision to sell its foreign operations as discussed in Note 8, the Company has sold its Mexican operations and Australasian operations. On August 15, 2001, the Company completed the sale of its Mexican operations. The proceeds, net of transaction expenses, plus cash on hand were used to retire the $75,000 asset sale term loan the Company entered into on June 29, 2001. The revenues, operating earnings and EBITDA of the Mexican operations in fiscal year 2000 presented on a pro forma basis for SAB No. 101 were $22,774, $10,145 and $12,723, respectively. On August 23, 2001, the Company completed the sale of its operations in Australia and New Zealand. The proceeds, net of transaction expenses, plus cash on hand were used to reduce the Company's revolving credit facility. The revenues, operating earnings and EBITDA of the Company's expenses operations in Australia and New Zealand in fiscal year 2000 presented on a pro forma basis for SAB No. 101 were $21,740, $2,759 and $5,792, respectively. The Company has paid down approximately $115,000 of debt since the end of the third quarter.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

General

The Company sells cemetery property and funeral and cemetery products and services both on an at-need and preneed basis. The Company's revenues in each period consist primarily of at-need sales, preneed sales delivered out of the Company's backlog during the period, preneed cemetery property sales and other items such as perpetual care earnings and finance charges.

Preneed Sales

The Company considers maintaining its preneed backlog through preneed marketing and sales to be an integral part of its long-term business strategy. The Company's primary objective is to produce preneed sales levels sufficient to balance its cash investment with its goal of maintaining a sustainable and predictable level of growth in its preneed backlog. The Company's current goal is to make four preneed funeral sales for every three it delivers.

The Company estimates that as of July 31, 2001 the future value of its preneed backlog represented over $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, assuming an average yield of 8.5 percent and a build-up in the face value of insurance contracts. It assumes no future sales and assumes maturities of the existing contracts over a weighted average life of approximately ten years, which is consistent with the Company's experience. While the investment yield over the past five years has been in this range, there is no guarantee that future yields will be at this level. As of July 31, 2001, 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 earnings realized to date on the funds held in trust, was approximately $1.6 billion.

Preneed property, products and services are typically sold on an installment basis with terms of approximately three to five years. In fiscal year 2000, the Company changed the terms and conditions of its preneed sales contracts and commissions, and moderated its preneed sales activities, in order to enhance its cash flow. These changes are described in more detail under the heading, "Results of Operations - Three Months Ended July 31, 2001 Compared to Three Months ended July 31, 2000 - Cemetery Segment" below.

With respect to the sale of cemetery property, whether preneed or at-need, the Company is generally required by state law to place into a perpetual care trust, a portion, usually 10 percent, of the proceeds it receives in order to fund maintenance of the cemetery grounds. As payments are received, the Company generally funds the perpetual care trust in the same proportion as the payment bears to the contract amount; for example, if the Company receives 20 percent of the contract price, it places in trust 20 percent of the total amount to be placed in trust for that contract. The Company withdraws realized earnings, including net realized capital gains in some jurisdictions, on these funds to use towards the maintenance of its cemeteries, but principal must generally be held in the trust in perpetuity.

With respect to the preneed sale of cemetery and funeral products and services, state laws generally require either (1) a portion of the installment payments received be placed into a trust fund or (2) the use of an insurance policy underwritten by an insurance company to provide funds to cover the costs of delivering funeral products and services in the future. With respect to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30 to 50 percent of each installment received. With respect to the preneed sale of funeral and cemetery services, the Company is generally required to place in trust 70 to 90 percent of each installment received. The sale of caskets is treated in some jurisdictions in the same manner as the sale of cemetery merchandise and in some jurisdictions in the same manner as the sale of funeral services for these purposes. When insurance is used, the Company applies customer payments to pay premiums on the insurance policies. The Company typically acts as agent for the insurance company and earns a commission. Generally, the Company can withdraw the principal of and earnings on the funds placed in trust only at the time that the related products and services are delivered.

If a preneed funeral product or service contract is cancelled, the Company generally returns to the customer the related principal that was placed in trust and retains the portion not placed in trust. In many jurisdictions, the Company can withdraw and retain all related earnings in the trust, but in other jurisdictions these earnings must be returned to the customer. If a preneed cemetery property, product or service contract is cancelled, the Company generally is not required to return any funds to the customer.

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). The Company generally pays commissions to its 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 the Company is required to place a portion of each cash installment paid by the customer into trust, it may be required to use its 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 cemetery merchandise and service sales, principally sales commissions, is capitalized in deferred charges on the balance sheet and amortized and expensed as cost of sales as the contracts are delivered.

Implementation of SAB No. 101

Effective November 1, 2000, the Company implemented Staff Accounting Bulletin No. 101 ("SAB No. 101") which resulted in changing its methods of accounting for preneed sales activities. The effect of the change in accounting principles is described in Note 2 to the consolidated financial statements included in Item 1.

Summary of Current Accounting for Preneed Sales

A description of the Company's current accounting for preneed sales under SAB No. 101 follows.

Revenue from preneed sales of funeral services and funeral merchandise is deferred until the period in which the funeral is performed and the merchandise is delivered. On the balance sheet, the full contract amount is included in prearranged deferred revenue (liability). The corresponding receivable due from the customer is reflected in prearranged receivables (asset), and the corresponding cash received from the customer is reflected part in prearranged receivables (for the portion placed in trust) and part in cash (for the portion the Company is allowed to retain). The costs to acquire the sales, primarily commissions and direct marketing costs, are reflected on the balance sheet as deferred charges (asset) and are charged to expense as the funeral services are performed and products delivered. Indirect costs of marketing preneed funeral services and merchandise are expensed in the period in which they are incurred.

As the customer makes payments on the preneed contract, the portion of prearranged receivables representing the receivable due from the customer declines, and the portion representing the receivable from the trust increases. The Company records cash for the amount of cash received that is not required to be placed in trust. Realized earnings on the amounts held in trust represent a debit to prearranged receivables (asset) and a credit to prearranged deferred revenue (liability) and are not recognized as revenue until delivery of the service or merchandise.

When the funeral service or merchandise is delivered, the Company recognizes as revenue the full contract amount plus all trust earnings associated with that contract, with a corresponding reduction recorded to prearranged deferred revenue (liability). The Company debits cash with the amount removed from trust that is attributable to the contract (consisting of the customer's payments and related realized earnings, all of which is withdrawn at that time) and records a corresponding reduction in prearranged receivables (asset). Associated deferred charges (asset) are expensed, and the actual expenses incurred in delivering the services and merchandise are recognized.

Preneed sales of cemetery merchandise, primarily vaults and markers, and preneed sales of cemetery services, primarily openings and closings of burial sites and installations of markers, are accounted for in essentially the same manner as preneed sales of funeral services and merchandise.

For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with SFAS No. 66, "Accounting for Sales of Real Estate." Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sales price has been collected. A portion, generally 10 percent, of the sale proceeds are placed into perpetual care trust funds. The Company withdraws and recognizes realized earnings from these funds on a monthly basis to offset the cost of maintaining its cemetery grounds. The perpetual care trust funds are not reflected on the financial statements because principal must remain in the trust in perpetuity.

Summary of Current Accounting for Trust and Escrow Account Earnings

The Company has three types of trust funds and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) perpetual care. As described below, earnings on preneed funeral and cemetery merchandise and services trust funds and escrow accounts are now accounted for in the same manner. The accounting for earnings on perpetual care trust funds differs from the other two types of trust funds due to the nature of the trusts, as described below.

Preneed funeral merchandise and services trust funds and escrow accounts

Effective November 1, 1998, the Company changed its method of accounting for earnings realized by those preneed funeral merchandise and services trust funds and escrow accounts where it is allowed to retain earnings on the funds if the contract is cancelled. The Company now defers recognition of all earnings realized by these trust funds and escrow accounts until the underlying funeral service or merchandise is delivered. (For those trust funds and escrow accounts where it must return earnings on the funds if the contract is cancelled, it has always deferred recognition of realized earnings until the underlying funeral service or merchandise is delivered.) These accounting methods were not affected by the implementation of SAB No. 101. The Company generally does not withdraw cash (principal and earnings) from these trust funds and escrow accounts until the merchandise or service is delivered. Principal and realized earnings in these funds and escrow accounts are reflected as prearranged receivables (asset) on the balance sheet. The full contract amount and realized earnings in these funds and escrow accounts are reflected as prearranged deferred revenue (liability) on the balance sheet. Unrealized gains and losses are not reflected on the balance sheet or income statement but are included in the footnotes to the Company's annual financial statements.

Preneed cemetery merchandise and services trust funds and escrow accounts

As discussed above, effective November 1, 2000, the Company implemented SAB No. 101 and changed its method of accounting for earnings realized by preneed cemetery merchandise and services trust funds and escrow accounts. The Company now defers all earnings from these funds until the underlying merchandise or service is delivered. The Company generally does not withdraw cash (principal and earnings) from these trust funds and escrow accounts until the merchandise or service is delivered. Principal and realized earnings in these funds and escrow accounts are reflected as prearranged receivables (asset) on the balance sheet. The full contract amount and realized earnings in these funds and escrow accounts are reflected as prearranged deferred revenue (liability) on the balance sheet. Unrealized gains and losses are not reflected on the balance sheet or income statement but are included in the footnotes to the annual financial statements.

Perpetual care trust funds

The Company recognizes the earnings on its perpetual care trust funds as they are realized in the trust. This accounting method was not affected by the implementation of SAB No. 101. The Company generally withdraws the earnings on a monthly basis to offset the cost of maintaining its cemeteries. Principal in these funds is not reflected on the balance sheet because the principal must remain in the trust in perpetuity.

Income from funds, especially those invested partially in common stock, can be materially affected by prevailing interest rates and the performance of the stock market. In managing its North American funds (including those in Puerto Rico) that have investments in common stock, the Company seeks an overall annual yield of approximately 8.0 percent to 9.0 percent, which is well in excess of the Company's expectation for inflation over the short term. However, no assurance can be given that the Company will be successful in achieving any particular yield.

Results of Operations

In the following discussion, results for the three months ended July 31, 2001, as reported after the implementation of SAB No. 101, are compared with results for the three months ended July 31, 2000, as reported, which do not reflect the implementation of SAB No. 101. Following this discussion is a pro forma comparison using the same accounting methods for both the three months ended July 31, 2001 and 2000. For the pro forma discussion, the three months ended July 31, 2001 are presented as reported after the implementation of SAB No. 101, and the three months ended July 31, 2000 are adjusted on a pro forma basis to show the effects of SAB No. 101. Results for the nine month period follow the same order.

As the Company has its foreign operations and several small domestic operations held for sale, in the third quarter of 2001 it began segregating the operating results of these businesses from the operations it will retain. The following discussion segregates the financial results into two main categories in order to present the Company's ongoing operating results and to provide more useful information for investors. The Company's "Operations to be Retained" consist of those businesses it has owned and operated for the entire fiscal year and last and which are not for sale ("Existing Operations") and those businesses that have been acquired or opened during this fiscal year or last ("Acquired/Opened Operations"). "Closed and Held for Sale Operations" consist of those that have been sold or closed during this fiscal year or last and the businesses that are currently being sold or offered for sale.

Three Months Ended July 31, 2001 Compared to Three Months Ended July 31, 2000

Funeral Segment
		Three Months Ended July 31,
		2001	2000	Increase (Decrease)
			(As reported) (In millions)
	Funeral Revenue	$ 102.6	$ 108.4	$ (5.8)
	Funeral Costs	81.7	81.0	0.7

	Funeral Segment Profit	$ 20.9	$ 27.4	$ (6.5)

Funeral revenue decreased $5.8 million, or 5 percent, for the three months ended July 31, 2001, compared to the corresponding period in 2000. The Company experienced a $7.7 million, or 7 percent, decrease due to the effect of implementing SAB No. 101. The average revenue per funeral service performed by Existing Operations increased 0.2 percent, while the number of funeral services performed by Existing Operations increased 1.9 percent.

Three Months Ended July 31, 2001 Compared to Pro Forma Three Months Ended July 31, 2000

Funeral Segment
	Three Months Ended July 31,
	2001		2000		Increase (Decrease)
			(Pro Forma) (In millions)
FUNERAL -- OPERATIONS TO BE RETAINED
Revenue
Existing operations	$	69.3	$	67.4	$	1.9
Opened operations		2.1		0.7		1.4

	$	71.4	$	68.1	$	3.3

Costs
Existing operations	$	54.7	$	50.0	$	4.7
Opened operations		2.0		0.7		1.3

	$	56.7	$	50.7	$	6.0

Profit
Existing operations	$	14.6	$	17.4	$	(2.8)
Opened operations		0.1		--		0.1

	$	14.7	$	17.4	$	(2.7)


FUNERAL -- CLOSED AND HELD FOR SALE OPERATIONS
Revenue	$	31.2	$	32.6	$	(1.4)
Costs		25.0		26.9		(1.9)

Profit	$	6.2	$	5.7	$	0.5



Total Funeral Revenue	$	102.6	$	100.7	$	1.9
Total Funeral Costs		81.7		77.6		4.1

Total Funeral Profit	$	20.9	$	23.1	$	(2.2)

Funeral revenue from Operations to be Retained increased $3.3 million, or 5 percent, for the three months ended July 31, 2001, compared to the corresponding period in 2000. The Company experienced a $1.9 million, or 3 percent, increase in funeral revenue from Existing Operations primarily due to a 1.9 percent increase (314 events) in the number of funeral services performed by these businesses and a 0.2 percent increase in the average revenue per funeral service performed by these businesses. The increase in revenue from Opened Operations of $1.4 million, resulted primarily from the Company's construction or opening of funeral homes from May 2000 through July 2001, which were not open for the entirety of both periods presented. This is primarily attributable to the opening of the Archdiocese of Los Angeles facilities.

Funeral profit margin from Existing Operations decreased from 25.8 percent in 2000 to 21.1 percent in 2001 primarily due to upward pressure on funeral costs, including labor costs, of about $3.7 million as well as an increase in overhead costs allocated to the funeral segment of about $1.0 million. The Company allocates common overhead between its segments based on revenue. Due to the moderation in preneed cemetery sales discussed below, the allocation has shifted a higher amount of those costs to the funeral segment and a corresponding lower amount to the cemetery segment.

The decrease in revenue and costs from Closed and Held for Sale Operations is primarily due to changes in foreign currency exchange rates (due in part to the Euro).

Three Months Ended July 31, 2001 Compared to Three Months Ended July 31, 2000

Cemetery Segment
		Three Months Ended July 31,
		2001		2000		Decrease
				(As reported) (In millions)
	Cemetery Revenue	$	63.1	$	73.4	$	(10.3)
	Cemetery Costs		50.1		54.9		(4.8)

	Cemetery Segment Profit	$	13.0	$	18.5	$	(5.5)

Cemetery revenue decreased $10.3 million, or 14 percent, for the three months ended July 31, 2001, compared to the corresponding period in 2000. The Company experienced a decrease in cemetery merchandise deliveries and reduced preneed cemetery property sales, a $1.2 million, or 2 percent, decrease due to the effect of implementing SAB No. 101 and an average yield of 6.7 percent in its perpetual care trust funds which is below the Company's goal of 8.0 percent to 9.0 percent.

In fiscal year 2000 the Company changed the terms and conditions of its preneed sales contracts and commissions and moderated its preneed sales activities in order to enhance its cash flow. This resulted in an anticipated reduction in preneed sales, including preneed cemetery property sales mentioned above. The Company modified its preneed payment plans early in fiscal year 2000 by increasing finance charges, requiring larger down payments and shortening installment payment terms. Effective the first day of the fourth quarter of fiscal year 2000, the Company also substantially reduced the commissions paid on sales of preneed cemetery services and preneed funeral and cemetery merchandise, which the Company believes had the largest impact on preneed sales. Although the Company reduced or eliminated commissions available to preneed sales counselors on certain sales, the Company now provides a minimum compensation guarantee. The change in commission structure provides an incentive to preneed sales counselors to focus on selling preneed cemetery property and preneed funeral services. The Company believes that these are the sales that build and maintain market share. In addition, the change better aligned operations with changes in accounting necessitated by the adoption of SAB No. 101 because, after the implementation of SAB No. 101, preneed cemetery property sales are the only preneed sales that the Company recognizes on a current basis (after collection of 10 percent of the sales price). The Company also believes that these changes have improved the quality of preneed sales and receivables. These changes in preneed sales strategies contributed to a decline in the full-time domestic preneed sales force from approximately 2,200 counselors during the first quarter of fiscal year 2000 to 1,200 counselors by the end of the second quarter of fiscal year 2001, although the Company believes that it has retained its best sales counselors. The Company has also reduced its selling costs by closing selected telemarketing and sales offices. The Company has not experienced and does not expect any significant further decline in the size of the preneed sales force.

Three Months Ended July 31, 2001 Compared to Pro Forma Three Months Ended July 31, 2000

Cemetery Segment
	Three Months Ended July 31,
	2001		2000		Increase (Decrease)
			(Pro Forma) (In millions)
CEMETERY -- OPERATIONS TO BE RETAINED
Revenue
Existing operations	$	59.2	$	66.5	$	(7.3)
Acquired/Opened operations		1.2		1.5		(0.3)

	$	60.4	$	68.0	$	(7.6)

Costs
Existing operations	$	45.2	$	50.5	$	(5.3)
Acquired/Opened operations		1.0		1.2		(0.2)

		46.2	$	51.7	$	(5.5)

Profit
Existing operations	$	14.0	$	16.0	$	(2.0)
Acquired/Opened operations		0.2		0.3		(0.1)

	$	14.2	$	16.3	$	(2.1)


CEMETERY -- CLOSED AND HELD FOR SALE OPERATIONS
Revenue	$	2.7	$	4.2	$	(1.5)
Costs		3.9		3.5		0.4

Profit	$	(1.2)	$	0.7	$	(1.9)

Total Cemetery Revenue	$	63.1	$	72.2	$	(9.1)
Total Cemetery Costs		50.1		55.2		(5.1)

Total Cemetery Profit	$	13.0	$	17.0	$	(4.0)

Cemetery revenue decreased $9.1 million, or 13 percent, for the three months ended July 31, 2001, compared to the corresponding period in 2000. The Company experienced a $7.6 million, or 11 percent, decrease in revenue from Operations to be Retained primarily due to a decline in revenue from Existing Operations. Revenue from Existing Operations decreased $7.3 million, or 11 percent, resulting primarily from a decrease in cemetery merchandise deliveries during the quarter and reduced preneed cemetery property sales. The reduction in preneed sales was anticipated due to the changes made to the Company's preneed sales program in fiscal year 2000, as discussed above. In addition, the yield of 6.7 percent realized in its perpetual care trust funds was below the Company's goal of 8.0 percent to 9.0 percent. Through the nine months ended July 31, 2001, the yield was 7.9 percent.

Cemetery profit margin from Existing Operations decreased from 24.1 percent in 2000 to 23.6 percent in 2001. The decline was principally due to the reduction in preneed property sales, merchandise deliveries and a decline in the average yield in its perpetual care trust funds mentioned above.

Other

Depreciation and amortization was $21.0 million for the third quarter of fiscal year 2001 compared to pro forma $17.4 million for the same period in 2000. Domestic depreciation and amortization, which is fairly representative of Operations to be Retained, was $17.8 million for the third quarter of fiscal year 2001 compared to pro forma $14.6 million for the same period in 2000.

EBITDA (defined as earnings before gross interest expense, taxes, depreciation and amortization excluding the nonrecurring, noncash loss on assets held for sale and other charges) was $54.4 million, or 32.8 percent of revenue for the third quarter of fiscal year 2001 compared to pro forma $56.0 million, or 32.4 percent of revenue for the same period in 2000. Domestic EBITDA, which is fairly representative of Operations to be Retained, was $45.6 million, or 34.2 percent of domestic revenue for the third quarter of fiscal year 2001 compared to pro forma $45.6 million, or 33.1 percent of domestic revenue for the same period in 2000.

Net interest expense, which is comprised of gross interest expense of $15.8 million, netted with investment income of $1.2 million, increased $0.2 million during the third quarter of fiscal year 2001 compared to the same period in 2000. The increase resulted primarily from a $114.0 million decrease in the average outstanding debt balance, which was substantially offset by a 60 basis point increase in the average interest rate due to the higher interest costs associated with debt incurred in the Company's recent refinancing transactions. Investment income resulted from cash and cash equivalent investments earning an average rate of 5.2 percent, including funds in foreign jurisdictions earning 7.0 percent.

Other income, net, increased approximately $0.9 million during the third quarter of fiscal year 2001 compared to the same period in 2000 due principally to a net gain on the sale of excess cemetery property.

Nine Months Ended July 31, 2001 Compared to Nine Months Ended July 31, 2000

Funeral Segment
	Nine Months Ended July 31,
	2001		2000		Decrease
			(As reported) (In millions)
Funeral Revenue	$	317.9	$	346.8	$	(28.9)
Funeral Costs		246.7		253.9		(7.2)

Funeral Segment Profit	$	71.2	$	92.9	$	(21.7)

Funeral revenue decreased $28.9 million, or 8 percent, for the nine months ended July 31, 2001, compared to the corresponding period in 2000. The Company experienced a $22.4 million, or 6 percent, decrease due to the effect of implementing SAB No. 101. The Company also experienced a 1.4 percent (766 events) decrease in the number of funeral services performed by Existing Operations. This is equivalent to less than 3 events per existing funeral home. The decrease is also attributable to changes in foreign currency exchange rates (due in part to the Euro) and a decline in the number of funeral events performed by its foreign businesses.

Nine Months Ended July 31, 2001 Compared to Pro Forma Nine Months Ended July 31, 2000

Funeral Segment
	Nine Months Ended July 31,
	2001		2000		Increase (Decrease)
			(Pro Forma) (In millions)
FUNERAL -- OPERATIONS TO BE RETAINED
Revenue
Existing operations	$	219.9	$	220.2	$	(0.3)
Opened operations		5.8		1.1		4.7

	$	225.7	$	221.3	$	4.4

Costs
Existing operations	$	165.7	$	156.3	$	9.4
Opened operations		6.1		1.3		4.8

	$	171.8	$	157.6	$	14.2

Profit
Existing operations	$	54.2	$	63.9	$	(9.7)
Opened operations		(0.3)		(0.2)		(0.1)

	$	53.9	$	63.7	$	(9.8)


FUNERAL -- CLOSED AND HELD FOR SALE OPERATIONS
Revenue	$	92.2	$	103.1	$	(10.9)
Costs		74.9		86.0		(11.1)

Profit	$	17.3	$	17.1	$	0.2



Total Funeral Revenue	$	317.9	$	324.4	$	(6.5)
Total Funeral Costs		246.7		243.6		3.1

Total Funeral Profit	$	71.2	$	80.8	$	(9.6)

Funeral revenue decreased $6.5 million, or 2 percent, for the nine months ended July 31, 2001, compared to the corresponding period in 2000. Funeral revenue from Operations to be Retained increased $4.4 million primarily due to an increase in revenue from Opened Operations resulting principally from the construction or opening of funeral homes from November 1999 through July 2001, which were not open for the entirety of both periods presented. This increase is primarily attributable to the opening of the Archdiocese of Los Angeles facilities. The Company also experienced a 1.4 percent (766 events) decrease in the number of funeral services performed by Existing Operations. This is equivalent to less than 3 events per existing funeral home. Partially offsetting this decrease was a 0.7 percent increase in the average revenue per funeral service performed by Existing Operations.

Funeral profit margin from Existing Operations decreased from 29.0 percent in 2000 to 24.6 percent in 2001 primarily due to upward pressure on funeral costs, including labor costs, of about $6.4 million as well as an increase in overhead costs allocated to the funeral segment of about $3.0 million. The Company allocates common overhead between its segments based on revenue. Due to the moderation in preneed cemetery sales discussed above, the allocation has shifted a higher amount of those costs to the funeral segment and a corresponding lower amount to the cemetery segment. This decrease is also due to the decline in the number of funeral services performed by Existing Operations mentioned above and the high fixed -cost nature of the funeral business.

The decrease in revenues and costs from Closed and Held for Sale Operations resulted primarily from changes in foreign currency exchange rates (due in part to the Euro) and a decline in the number of funeral events performed by these businesses.

Nine Months Ended July 31, 2001 Compared to Nine Months Ended July 31, 2000

Cemetery Segment
		Nine Months Ended July 31,
		2001		2000		(Decrease)
				(As reported) (In millions)
	Cemetery Revenue	$	195.4	$	216.8	$	(21.4)
	Cemetery Costs		148.4		165.3		(16.9)

	Cemetery Segment Profit	$	47.0	$	51.5	$	(4.5)

Cemetery revenue decreased $21.4 million, or 10 percent, for the nine months ended July 31, 2001, compared to the corresponding period in 2000 primarily from reduced cemetery merchandise deliveries and reduced preneed cemetery property sales. The reduction in preneed sales is due to the changes made to the Company's preneed sales program in fiscal year 2000. See the discussion under the heading, "Three Months Ended July 31, 2001 Compared to Three Months Ended July 31, 2000 - Cemetery Segment" above. Partially offsetting this decrease, the Company experienced a $2.4 million, or 1 percent, increase due to the effect of implementing SAB No. 101.

Nine Months Ended July 31, 2001 Compared to Pro Forma Nine Months Ended July 31, 2000

Cemetery Segment
	Nine Months Ended July 31,
	2001		2000		Increase (Decrease)
			(Pro Forma) (In millions)
CEMETERY -- OPERATIONS TO BE RETAINED
Revenue
Existing operations	$	185.7	$	205.2	$	(19.5)
Acquired/Opened operations		2.7		3.5		(0.8)

	$	188.4	$	208.7	$	(20.3)

Costs
Existing operations	$	135.3	$	156.7	$	(21.4)
Acquired/Opened operations		2.5		3.1		(0.6)

	$	137.8	$	159.8	$	(22.0)

Profit
Existing operations	$	50.4	$	48.5	$	1.9
Acquired/Opened operations		0.2		0.4		(0.2)

	$	50.6	$	48.9	$	1.7


CEMETERY -- CLOSED AND HELD FOR SALE OPERATIONS
Revenue	$	7.0	$	10.5	$	(3.5)
Costs		10.6		9.5		1.1

Profit	$	(3.6)	$	1.0	$	(4.6)

Total Cemetery Revenue	$	195.4	$	219.2	$	(23.8)
Total Cemetery Costs		148.4		169.3		(20.9)

Total Cemetery Profit	$	47.0	$	49.9	$	(2.9)

Cemetery revenue decreased $23.8 million, or 11 percent, for the nine months ended July 31, 2001, compared to the corresponding period in 2000. The Company experienced a $20.3 million, or 10 percent, decrease in revenue from Operations to be Retained due principally to a decline in revenue from Existing Operations. The decline in revenue from Existing Operations resulted primarily from reduced cemetery merchandise deliveries and reduced preneed property sales.

The Company however, anticipated the reduced preneed property sales mentioned above due to the changes made to the Company's preneed sales program in fiscal year 2000; however, through nine months, the Company's Operations to be Retained were achieving 97 percent of expected preneed property sales. See the discussion under the heading, "Three Months Ended July 31, 2001 Compared to Three Months Ended July 31, 2000 - Cemetery Segment" above. The reduction in preneed property sales has resulted in increased operating cash flow as described in the "Liquidity and Capital Resources" discussion and has resulted in operating cash flow of approximately $15 million in excess of the Company's expectations.

Cemetery profit margin from Existing Operations increased from 23.6 percent in 2000 to 27.1 percent in 2001. The increase was attributable principally to cost savings resulting from the changes the Company made in its preneed sales organization in fiscal year 2000 and additional cost savings at its cemeteries arising from increased scrutiny of expenses primarily by local managers. The Company has provided incentives to local managers to decrease costs by tying their compensation more closely to the profitability of the locations they manage. Additionally, the cemetery margins benefited from the reduction in common overhead allocation mentioned in "Nine Months Ended July 31, 2001 Compared to Pro Forma Nine Months Ended July 31, 2000 - Funeral Segment" above.

Other

Depreciation and amortization was $60.1 million for the first nine months of fiscal year 2001 compared to pro forma $58.4 million for the same period in 2000. Domestic depreciation and amortization, which is fairly representative of Operations to be Retained, was $52.3 million for the first nine months of fiscal year 2001 compared to pro forma $49.9 million for the same period in 2000.

EBITDA (defined as earnings before gross interest expense, taxes, depreciation and amortization excluding the nonrecurring, noncash loss on assets held for sale and other charges) was $175.6 million, or 34.2 percent of revenue for the first nine months of fiscal year 2001 compared to pro forma $179.4 million, or 33.0 percent of revenue for the same period in 2000. Domestic EBITDA, which is fairly representative of Operations to be Retained, was $151.0 million, or 36.1 percent of domestic revenue for the first nine months of fiscal year 2001 compared to pro forma $150.4 million, or 34.5 percent of domestic revenue for the same period in 2000.

Net interest expense, which is comprised of gross interest expense of $45.2 million, netted with investment income of $4.8 million, decreased $3.0 million during the first nine months of fiscal year 2001 compared to the same period in 2000. This is due principally to a $2.1 million increase in investment income from an increase in the average balance of cash and cash equivalents, which earned an average rate of 6.9 percent, including funds in foreign jurisdictions that earned 9.4 percent. The decrease in gross interest expense of $0.9 million was due principally to an $86.0 million decrease in average outstanding debt, partially offset by a 40 basis point increase in average interest rates from 6.3 percent in 2000 to 6.7 percent in 2001 due to the higher interest costs associated with debt incurred in the Company's recent financing transactions.

Other income, net, increased approximately $3.3 million during the first nine months of fiscal year 2001 compared to the same period in 2000. This increase is principally due to a net gain on the sale of excess cemetery property during fiscal year 2001.

As of July 31, 2001, the Company's outstanding borrowings totaled $850.6 million including $3.7 million related to outstanding foreign debt which is included in the liabilities associated with assets held for sale line item in the July 31, 2001 balance sheet. Of the total amount outstanding, including the portion subject to the interest rate swap agreement, approximately 74 percent was fixed-rate debt, with the remaining 26 percent subject to short-term variable interest rates averaging approximately 6.2 percent. Subsequent to July 31, 2001, the Company sold its Mexican, Australian and New Zealand operations and used the proceeds to reduce its debt. Consequently, as of September 5, 2001, the Company's outstanding debt was $735.6 million.

Liquidity and Capital Resources

Early in fiscal year 2000, the Company's management resolved to improve cash flow and build cash reserves in order to deleverage the Company's balance sheet. The Company had accumulated $86.1 million in cash, cash equivalent investments and marketable securities as of July 31, 2001. As of September 5, 2001, the Company had reduced debt by $215 million since the beginning of the fiscal year and had cash and marketable securities on hand of about $45 million.

Although the implementation of SAB No. 101 did not have an impact on the Company's consolidated cash flows, it did have an impact on the components of the operating section of the consolidated statement of cash flows. The following table presents pro forma cash flows from operating activities for the nine months ended July 31, 2001 and 2000 using the same accounting methods and as reported. Cash flows from operating activities for the nine months ended July 31, 2001 are presented as reported after the implementation of SAB No. 101. Cash flows from operating activities for the nine months ended July 31, 2000 are presented as adjusted on a pro forma basis to show the effects of SAB No. 101 and are also presented as reported, not reflecting the implementation of SAB No. 101.

Consolidated Cash Flows from Operating Activities (dollars in thousands)


				Nine Months Ended July 31,
				2001		2000		2000
						(Pro Forma)		(As Reported)
Cash flows from operating activities:
	Net earnings (loss)			$	(415,927)	$	47,559	$	56,250
	Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
		Loss on assets held for sale and other charges			269,158		--		--
		Extraordinary item - early extinguishment of debt			5,472		--		--
		Cumulative effect of change in accounting principles			250,004		--		--
		Depreciation and amortization			60,121		58,404		40,608
		Provision for doubtful accounts			12,058		16,986		26,092
		Net (gains) losses on sales of marketable securities			63		(1,079)		(1,079)
		Loss on sale of assets, net			1,324		--		--
		Benefit for deferred income taxes			(63,314)		(7,381)		(2,386)
		Changes in assets and liabilities, net of effects from acquisitions:
			Increase in other receivables		(1,801)		(12,984)		(21,640)
			Increase in other deferred charges and intangible assets		(1,457)		(3,493)		(3,493)
			(Increase) decrease in inventories and cemetery property		9,281		(4,597)		(4,597)
			Increase (decrease) in accounts payable and accrued expenses		2,452		(11,652)		(11,652)
			Change in prearranged activity		(8,824)		3,938		(3,782)
			Prearranged acquisition costs		(26,343)		(32,275)		--
			Increase in merchandise trust, less estimated cost to deliver merchandise		--		--		(20,895)
			Decrease in other		(2,762)		(1,965)		(1,965)

		Net cash provided by operating activities		$	89,505	$	51,461	$	51,461

The Company's operations provided cash of $89.5 million for the nine months ended July 31, 2001, compared to $51.5 million for the corresponding period in 2000. The increase in operating cash flow is due to improvements in operations and several working capital changes, including a smaller increase in other receivables due to moderation in the Company's preneed sales and changes in preneed sales terms and conditions. Additionally, operating cash flow increased due to (1) the sale of $13.5 million in excess undeveloped cemetary property (which impacted net earnings and inventories and cemetery property), and (2) a $7.0 million tax refund (which impacted other receivables).

The moderation of the Company's preneed activities, the changes in its preneed sales terms and conditions and $7 million tax refund have impacted other receivables. During the nine months ended July 31, 2001, the Company has sold $13.5 million in excess undeveloped cemetery property. This has impacted inventories and cemetary property.

The Company's investing activities resulted in a cash outflow of $9.5 million for the nine months ended July 31, 2001, compared to a cash inflow of $19.7 million for the comparable period in 2000. The cash inflow from investing activities in the first nine months of 2000 was a result of converting certain voluntary escrow funds to cash for general operating purposes.

The Company's financing activities resulted in a cash outflow of $90.5 million for the nine months ended July 31, 2001, compared to a cash outflow of $16.9 million for the comparable period in 2000. This is due principally to repayments of long-term debt of $821.9 million during the nine months ended July 31, 2001, offset by proceeds from long-term debt of $725.0 million from the Company's debt refinancing that took place in the third quarter. Also offsetting this cash outflow was $40.0 million that the Company withdrew from its trust funds in Florida in the first quarter of 2001, whereby the Company substituted a bond to guarantee performance under the related contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. Management believes that cash flow from operations will be sufficient to cover its estimated cost of providing the related prearranged services and products in the future.

On June 29, 2001, the Company completed several transactions that refinanced substantially all of its long-term debt. For a discussion of these transactions and additional information about the Company's long-term debt, see Note 9 to the consolidated financial statements included in Item 1.

The Company is currently pursuing the sale of its foreign operations and believes that it will be able to dispose of all foreign operations at acceptable prices, resulting in cash proceeds within the range of $200.0 million to $250.0 million, including tax benefits. The Company expects these sales to be completed before the end of 2002. In accordance with this plan, subsequent to July 31, 2001, the Company completed the sale of its Mexican and Australasian operations and received about half of the $200.0 to $250.0 million in proceeds it expects to receive from the sale of all of its foreign operations. For additional information, see Notes 8 and 11 to the consolidated financial statements included in Item 1.

Additionally, the Company has suspended its acquisition activity, restructured and moderated its preneed sales activities, limited spending on internal growth initiatives and suspended the payment of quarterly dividends on Class A and Class B common stock. Further, the Company continues to control capital expenditures at the corporate level and utilize third party at-need financing.

Long-term debt, including $3.7 million of debt associated with assets held for sale, at July 31, 2001 decreased to $850.6 million compared to $950.5 million at October 31, 2000. The following table reflects future scheduled principal payments or maturities of the Company's long-term debt (in millions) as of July 31, 2001:

Year Ending October 31,	Asset Sale Term Loan	Revolving Credit Facility	Term Loan B	Senior Subordinated Notes	6.7% Public Notes	6.4% Public Notes (ROARS)	Other, Principally Seller Financing of Acquired Operations	Total
2001	$ --	$ --	$ .6	$ --	$ --	$ --	$ 1.1	$ 1.7
2002	--	--	2.5	--	--	--	4.6	7.1
2003	75.0 ⁽¹⁾	--	5.6	--	--	99.9 ⁽³⁾	4.6	185.1
2004	--	--	17.5	--	.1	--	4.9	22.5
2005	--	50.0 ⁽²⁾	82.5	--	--	--	2.0	134.5
Thereafter	--	--	191.3	300.0	--	--	6.1	497.4

Subtotal	$ 75.0	$ 50.0	$ 300.0	$ 300.0	$ .1	$ 99.9	$ 23.3	848.3

Unamortized option premium relating to Remarketable Or Redeemable Securities ("ROARS")								2.3

Total long-term debt								850.6
less debt associated with assets held for sale								(3.7)

Long-term debt on the Company's consolidated balance sheets								$ 846.9

(1)	The Company extinguished the Asset Sale Term Loan in August of 2001 with proceeds from the sale of its Mexican operations.
(2)	The Company reduced the revolving credit facility to $10.0 million as of September 7, 2001 with cash on hand and cash received from the sale of its Australian and New Zealand operations.
(3)	The Company could be required to redeem the ROARS on May 1, 2003 if the debt is not remarketed, which will depend primarily upon prevailing market conditions at that time. If remarketed, new notes will be issued with a maturity date of May 1, 2013 and the coupon rate for the remaining term will be 5.44 percent (10-year Treasury rate, fixed upon initial issuance of the ROARS) plus the Company's then current credit spread.

The Company's ratio of earnings to fixed charges was as follows for the years and period indicated:

					Nine months ended July 31,

Years ended October 31,

1996	1997	1998	1999	2000	2001

3.98	3.65 ⁽¹⁾	2.38 ⁽²⁾	3.43 ⁽¹⁾	2.57	(3.16)^{(3) (4)}

^{_____________________}

⁽¹⁾	Excludes the cumulative effect of change in accounting principles.
⁽²⁾	Pretax earnings for fiscal year 1998 include a nonrecurring, noncash charge of $76.8 million in connection with the vesting of performance-based stock options. Excluding the charge, the Company's ratio of earnings to fixed charges for fiscal year 1998 would have been 4.01.
⁽³⁾	Excludes extraordinary item and cumulative effect of change in accounting principles.
⁽⁴⁾	Pretax earnings for the nine months ended July 31, 2001 include a nonrecurring, noncash charge of $269.2 million in connection with the writedowns of assets held for sale and other charges. As a result of this charge, the Company's earnings through the nine months ended July 31, 2001 were insufficient to cover its fixed charges, and an additional $199.4 million in pretax earnings would have been required to eliminate the coverage deficiency. Excluding the charge, the Company's ratio of earnings to fixed charges for the nine months ended July 31, 2001 would have been 2.46.

For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of gross interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness and the portion of rental expense that management believes to be representative of the interest component of rental expense. The ratio of earnings to fixed charges for the nine months ended July 31, 2001 reflects the 2001 change in accounting principles; fiscal years 2000 and 1999 reflect the 1999 change in accounting principle; fiscal years 1998 and 1997 reflect the 1997 change in accounting principles; fiscal year 1996 reflects the Company's previous accounting methods which were in effect at that time.

Historically, the Company's growth has been primarily from acquisitions. This trend began to change in late fiscal year 1999. As industry conditions reduced the number of major consolidators participating in the acquisition market, 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.

As the business model shifted, death care consolidators experienced diminishing access to capital. In response to these changes, the Company began to develop strategies for improving cash flow and reducing and restructuring debt. Throughout fiscal years 2000 and 2001, the Company has focused on liquidity, leverage and cash flow. As a result, the Company's acquisition activity has ceased, and the Company has no pending acquisitions. The Company's expectations for fiscal year 2001 and beyond include no acquisitions.

The Company's current strategy focuses on achieving internal growth from existing operations and from new initiatives. For example, during fiscal year 2000 and the nine months ended July 31, 2001, the Company began to implement programs based on the results of its comprehensive study of consumer preferences. The Company has begun to offer more personalized services and products and has enhanced its funeral arranger training. The Company has also created a Sales and Marketing Division to strengthen sales effectiveness and create consistency in marketing, sales and training.

During fiscal year 2000 and the first nine months of 2001, the Company opened four new funeral homes in an operating partnership with the Los Angeles Archdiocese. The construction of a fifth funeral home has been completed. The operating partnership enables the Company to build a total of nine funeral homes on cemetery land owned by the Archdiocese. The number of families serviced by the Archdiocese funeral homes thus far has exceeded management's expectations.

Although the Company has no material commitments for capital expenditures in fiscal year 2001 (other than approximately $7.0 million related to construction of the Archdiocese of Los Angeles funeral homes), the Company contemplates capital expenditures of no more than $28.0 million for the fiscal year ending October 31, 2001. This includes $10.0 million in new growth initiatives (including the construction of the Archdiocese of Los Angeles funeral homes) and approximately $18.0 million for maintenance capital expenditures.

Inflation

Inflation has not had a significant impact on the Company's operations over the past three years, nor is it expected to have a significant impact in the foreseeable future.

Recent Accounting Standards

(a) SAB No. 101

In March of 2001, the Company reached a final resolution on discussions with the Securities and Exchange Commission on SAB No. 101 - "Revenue Recognition in Financial Statements" as it relates to prearranged sales activities. Although not required to implement SAB No. 101 until the fourth quarter of fiscal year 2001, the Company elected to implement the new accounting guidance in the first fiscal quarter of 2001. See Note 2 to the consolidated financial statements in Item 1 for further discussion of SAB No. 101 and its impact on the Company's financial condition and results of operations.

(b) Statements Issued but not yet Implemented

For a discussion of these accounting standards, see Note 2 to the consolidated financial statements in Item 1.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is presented in Item 7A to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000, filed with the Securities and Exchange Commission on January 25, 2001. The following disclosure discusses only those instances in which the market risk has changed by more than 10 percent from the annual disclosure.

The market risk inherent in the Company's market risk sensitive instruments and positions is the potential change arising from increases or decreases in the prices of marketable equity securities, foreign currency exchange rates and interest rates as discussed below. Generally, the Company's market risk sensitive instruments and positions are characterized as "other than trading." The Company's exposure to market risk as discussed below includes "forward-looking statements" and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in equity markets, foreign currency exchange rates or interest rates. The Company's views on market risk are not necessarily indicative of actual results that may occur and do not represent the maximum possible gains and losses that may occur, since actual gains and losses will differ from those estimated, based on actual fluctuations in equity markets, foreign currency exchange rates, interest rates and the timing of transactions.

Interest

The Company has entered into various fixed- and variable-rate debt obligations, which are detailed in Note 11 to the Company's consolidated financial statements included in the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 2000 and Note 9 to the consolidated financial statements in Item 1.

As of July 31, 2001 and October 31, 2000, the carrying values of the Company's long-term, fixed-rate debt, including accrued interest and the unamortized portion of the ROARS option premium, were approximately $430.0 million and $433.9 million, respectively, compared to fair values of $443.3 million and $305.0 million, respectively. Fair values were determined using quoted market prices, where applicable, or future cash flows discounted at market rates for similar types of borrowing arrangements. Each approximate 10 percent change in the average interest rates applicable to such debt, 90 basis points and 265 basis points for July 31, 2001 and October 31, 2000, respectively, would result in changes of approximately $15.9 million and $13.3 million, respectively, in the fair values of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

In order to hedge a portion of the interest rate risk associated with its variable-rate debt, during the first quarter of 1999, the Company entered into a three-year interest rate swap agreement involving a notional amount of $200 million. This agreement, which became effective March 4, 1999, effectively converted $200 million of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 4.915 percent. The estimated fair value of the interest rate swap based on quoted market prices was $(1.8) million and $4.7 million as of July 31, 2001 and October 31, 2000, respectively. A hypothetical 100 basis point increase in the average interest rates applicable to such debt would result in a change of approximately $1.5 million and $2.8 million in the fair value of this instrument as of July 31, 2001 and October 31, 2000, respectively.

The Company monitors its mix of fixed- and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix by, for example, refinancing balances outstanding under its variable-rate revolving credit facility with fixed-rate debt or by entering into interest rate swaps.

As of July 31, 2001 and October 31, 2000, money market and other short-term investments subject to market risk, including amounts held in preneed funeral and cemetery merchandise and services trust funds, and in perpetual care trust funds, had fair values of $290.6 million and $351.0 million, respectively. Under the Company's current accounting methods adopted in fiscal year 2001, a change in the average interest rate earned by the Company's prearranged funeral and cemetery merchandise and services trust funds would not result in a change in the Company's current pre-tax earnings. As such, as of July 31, 2001 and October 31, 2000, $93.5 million and $79.2 million, respectively, of these short-term investments, which includes amounts in the perpetual care trust funds and other short-term investments not held in trust, were subject to changes in interest rates. Each 10 percent change in average interest rates applicable to such investments, 70 basis points for July 31, 2001 and October 31, 2000, would result in changes of approximately $655,000 and $555,000, respectively, in the Company's pre-tax earnings.

The fixed-income securities, money market and other short-term investments in the Company's preneed funeral and cemetery merchandise and services and perpetual care trust and escrow accounts are managed by its subsidiary, Investor's Trust, Inc. Investor's Trust, Inc. operates pursuant to a formal investment policy established by the Investment Committee of the Company's Board of Directors.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

Item 2. Changes in Securities and Use of Proceeds

In connection with the refinancing transactions described in Note 9 to the consolidated financial statements included in Item 1, the Company entered into a Second Supplemental Indenture dated as of June 29, 2001 relating to the Company's 6.70% Notes Due 2003 and its 6.41% Remarketable Or Redeemable Securities (ROARS) due May 1, 2013 (Remarketing Date May 1, 2003). The Second Supplemental Indenture has the effect of securing these notes equally and ratably with the Company's new $550 million senior secured credit facility. In addition, as approved by the holders of the ROARS, the Second Supplemental Indenture deleted Section 3.7 of the First Supplemental Indenture relating to the ROARS, which provided that, as long as the Remarketing Agreement was in effect, the Company could not acquire any of the ROARS prior to the Remarketing Date, as defined therein.

Item 5. Other Information

Forward-Looking Statements

Certain statements made herein or elsewhere by, or on behalf of, the Company that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may," "will," "estimate," "intend," "continue," "believe," "expect," "plan" or "anticipate" and other similar words. Forward-looking statements contained in this report include but are not limited to statements relating to (1) proposed changes in accounting for goodwill and the potential effects thereof, (2) the Company's plan to sell its foreign operations and certain funeral home assets and excess cemetery property, and potential effects thereof, (3) anticipated future performance of the Company's preneed sales program and anticipated future performance of funds held in trust.

Management's current goal is to increase the Company's average revenue per funeral service performed at least 2 to 3 percent annually. The Company expects domestic cemetery sales for the fourth fiscal quarter of 2001 to approximate those for the third fiscal quarter. Fiscal year 2001 goals also include spending $10 million on internal growth initiatives. The current tax rate is 36.5 percent, although the Company expects the tax rate to approach 40.0 percent as it sells its foreign operations which have a lower effective tax rate.

Through the nine months ended July 31, 2001, the Company had exceeded its goal for cash flow from operations for the full fiscal year of 2001 of $65 million. The Company now expects to generate between $100 to $110 million in cash flow from operations for fiscal year 2001. The Company believes that its operating cash flow will not be materially affected by the sale of its foreign operations.

Forward-looking statements are based on assumptions about future events and are therefore inherently uncertain; actual results may differ materially from those projected. See "Cautionary Statements" below. The Company also cautions readers that it assumes no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by or on behalf of the Company.

Cautionary Statements

The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future, could affect, the Company's actual consolidated results and could cause the Company's 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 or on behalf of the Company.

The Company may experience declines in preneed sales due to numerous factors including changes made to contract terms and sales force compensation, or a weakening economy. Declines in preneed sales would reduce the Company's backlog and revenue and could reduce its future market share.

In an effort to increase cash flow, the Company modified its preneed sales strategies early in fiscal year 2000 by increasing finance charges, requiring larger down payments and shortening installment payment terms. Later in fiscal year 2000, the Company changed the compensation structure for its preneed sales force. These changes, and the accompanying sales force attrition and adverse impact on sales force morale, caused preneed sales to decline. Although the Company does not anticipate making further significant changes in these areas, it may decide that further adjustments are advisable, which could cause additional declines in preneed sales. In addition, a weakening economy that causes customers to have less discretionary income could cause a decline in preneed sales. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce the Company's backlog and future revenue and could reduce future market share.

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

Preneed sales of cemetery property and funeral and cemetery products and services are generally cash flow negative initially, primarily due to the commissions paid on the sale, the portion of the sales proceeds required to be placed into trust and the terms of the particular contract (such as the size of the down payment required and the length of the contract). See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- General." In fiscal year 2000, the Company changed the terms and conditions of preneed sales contracts and commissions and moderated its preneed sales effort in order to reduce the initial negative impact on cash flow. See "Management's Discussion and Analysis of Financial Condition and Results of Operations -- Three Months Ended July 31, 2001, Compared to Three Months Ended July 31, 2000 -- Cemetery Segment." Nevertheless, the Company 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 will be further reduced, and the Company's ability to service debt could be adversely affected.

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

The Company's funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. The Company has 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. In the past, this price competition has resulted in losing market share in some markets. In other markets, the Company has had to reduce prices and thereby profit margins in order to retain or recapture market share. In addition, because of competition from these types of competitors in some key markets, in fiscal year 1999 the Company lowered its goals for increases in average revenue per funeral service performed in the future. Increased price competition in the future could further reduce revenues, profit margins and the backlog.

Increased advertising or better marketing by competitors, or increased services from Internet providers, could cause the Company to lose market share and revenues or cause the Company to incur increased costs in order to retain or recapture the Company's market share.

In recent years, marketing through television, radio and print advertising, direct mailings and personal sales calls has increased with respect to the sales of preneed funeral services. Extensive advertising or effective marketing by competitors in local markets could cause the Company to lose market share and revenues or cause it to increase marketing costs. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing the Company to lose market share and revenue or to incur costs in response to competition to vary the types or mix of products or services offered by the Company. Also, increased use of the Internet by customers to research and/or purchase products and services could cause the Company to lose market share to competitors offering to sell products or services over the Internet. The Company does not currently sell products or services over the Internet.

Earnings from and principal of trust funds and escrow accounts could be reduced by changes in stock and bond prices and interest and dividend rates or by a decline in the size of the funds.

Earnings and investment gains and losses on trust funds and escrow accounts are affected by financial market conditions that are not within the Company's control. Earnings are also affected by the mix of fixed-income and equity securities that the Company chooses to maintain in the funds, and it may not choose the optimal mix for any particular market condition. The size of the funds depends upon the level of preneed sales, the amount of investment gains or losses and funds added through acquisitions, if any. Declines in earnings from perpetual care trust funds would cause a decline in current revenues, while declines in earnings from other trust funds and escrow accounts could cause a decline in future 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 the Company's financial condition.

The Company's foreign operations are subject to political, economic, currency and other risks that could adversely impact its financial condition, operating results or cash flow.

The Company's foreign operations are subject to risks inherent in doing business in foreign countries. For fiscal year 2000 (pro forma for SAB No. 101), approximately 20 percent of total revenues and 16 percent of total EBITDA were attributable to foreign operations. The Company defines EBITDA as earnings before the cumulative effect of the change in accounting principles and before gross interest expense, taxes, depreciation and amortization. The Company's consolidated EBITDA for fiscal year 2000 was $229.4 million (pro forma to reflect the changes resulting from its implementation of SAB No. 101). Risks associated with operating internationally include political, social and economic instability, increased operating costs, expropriation and complex and changing government regulations, all of which are beyond the Company's control. To the extent the Company makes investments in foreign assets or receives revenues in currencies other than U.S. dollars, the value of assets and income could be, and have in the past been, adversely affected by fluctuations in the value of local currencies.

Declines in the number of deaths in the Company's 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. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in the Company's markets or from quarter to quarter are not predictable. These variations can cause revenues to fluctuate.

The increasing number of cremations in the United States could cause revenues to decline because the Company 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, profit margins than traditional funerals.

The Company's 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 cremation will represent approximately 36 percent of the United States burial market by the year 2010, compared to 25 percent in 1999. The trend toward cremations could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, basic cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.

If the Company is not able to respond effectively to changing consumer preferences, the Company's market share, revenues and profitability could decrease.

Future market share, revenues and profits will depend in part on the Company's ability to anticipate, identify and respond to changing consumer preferences. During fiscal year 2000, the Company began to implement strategies based on a proprietary, extensive study of consumer preferences it commissioned in 1999. However, the Company may not correctly anticipate or identify trends in consumer preferences, or it may identify them later than its competitors do. In addition, any strategies the Company may implement to address these trends may prove incorrect or ineffective.

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

Companies in the funeral home and cemetery business must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, the Company 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 the Company cannot decrease these costs significantly or rapidly when it experiences 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 the Company's business could increase costs.

The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws and the laws of foreign jurisdictions where it operates. 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 on the Company, and it is 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.

Item 6. Exhibits and Reports on Form 8-K

(a)	Exhibits
3.1	Amended and Restated Articles of Incorporation of the Company, as amended and restated as of November 5, 1999 (incorporated by reference to Exhibit 3.1 to the Company's Annual Report on Form 10-K for the fiscal year ended October 31, 1999)
3.2	By-laws of the Company, as amended and restated as of June 23, 2000 (incorporated by reference to Exhibit 3.2 to the Company's Quarterly Report on Form 10-Q for the quarter ended July 31, 2000)
4.1	See Exhibits 3.1 and 3.2 for provisions of the Company's Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock
4.2	Specimen of Class A common stock certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company's Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991)
4.3	Indenture dated as of December 1, 1996 by and between the Company and Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated December 5, 1996) and Supplemental Indenture dated April 24, 1998 (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated April 21, 1998) and Second Supplemental Indenture dated June 29, 2001 (incorporated by reference to Exhibit 4.2 to the Company's Current Report on Form 8-K dated June 29, 2001)
4.4	Form of 6.70 percent Note due 2003 (incorporated by reference to Exhibit 4.6 to the Company's Form S-4 dated August 14, 2001)
4.5	Form of 6.40 percent Remarketable Or Redeemable Securities (ROARS) due May 1, 2013 (Remarketing date May 1, 2003) (incorporated by reference to Exhibit 4.7 to the Company's Form S-4 dated August 14, 2001)
4.6	Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company's Form 8-A dated November 3, 1999)
4.7	Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender, Deutsche Banc Alex. Brown Inc., as Syndication Agent, Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time (incorporated by reference to Exhibit 4.1 to the Company's Current Report on Form 8-K dated June 29, 2001)

Management Contracts and Compensatory Plans or Arrangements

10.1	Amendment No. 2 to Employment Agreement and Amendment No. 2 to Change of Control Agreement dated July 17, 2001, between the Company and Everett N. Kendrick
10.2	Amendment No. 2 to Employee Agreement and Amendment No. 2 to Change of Control Agreement dated July 17, 2001, between the Company and Randall L. Stricklin
10.3	The Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan for certain highly compensated executives

12	Calculation of Ratio of Earnings to Fixed Charges
(b)	Reports on Form 8-K

The Company filed a Form 8-K dated May 15, 2001, reporting under "Item 5. Other Events," the announcement of a cash tender offer for a portion of its debt securities.

The Company filed a Form 8-K dated June 4, 2001, reporting under "Item 5. Other Events," the definitive agreement for the sale of its Mexican operations.

The Company filed a Form 8-K dated June 5, 2001, reporting under "Item 5. Other Events," the earnings release for the quarter ended April 30, 2001 and plans for debt refinancing and asset sales.

The Company filed a Form 8-K dated June 13, 2001, reporting under "Item 5. Other Events," the announcement to extend the expiration date of its cash tender offer for a portion of its senior debt securities.

The Company filed a Form 8-K dated June 21, 2001, reporting under "Item 5. Other Events," the announcement that it has priced $300 million principal amount of senior subordinated notes due 2008.

The Company filed a Form 8-K dated June 29, 2001, reporting under "Item 5. Other Events," the completion of its refinancing plan.

The Company filed a Form 8-K dated June 29, 2001, reporting under "Item 5. Other Events," the filing of the Credit Agreement and Second Supplemental Indenture, dated June 29, 2001.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	STEWART ENTERPRISES, INC.

September 14, 2001	/s/ KENNETH C. BUDDE Kenneth C. Budde Executive Vice President Chief Financial Officer

September 14, 2001	/s/ MICHAEL G. HYMEL Michael G. Hymel Vice President Corporate Controller Chief Accounting Officer

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Stewart Enterprises (STEI) Inactive 10-Q2001 Q3 Quarterly report

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