Stewart Enterprises 10Q 2010 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended January 31, 2010


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

For the transition period from to

Commission File Number: 1-15449

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)


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

1333 South Clearview Parkway Jefferson, Louisiana (Address of principal executive offices)		70121 (Zip Code)

Registrant’s telephone number, including area code: (504) 729-1400

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yesþ Noo

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yeso Noo

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


Large accelerated filero		Accelerated filerþ		Non-accelerated filero(Do not check if a smaller reporting company)		Smaller reporting companyo

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act.) Yeso Noþ

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 February 28, 2010, was 89,566,742 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX


	Page
Part I. Financial Information

Item 1. Financial Statements (Unaudited)

Condensed Consolidated Statements of Earnings — Three Months Ended January 31, 2010 and 2009		3

Condensed Consolidated Balance Sheets — January 31, 2010 and October 31, 2009		4

Condensed Consolidated Statement of Shareholders’ Equity — Three Months Ended January 31, 2010		6

Condensed Consolidated Statements of Cash Flows — Three Months Ended January 31, 2010 and 2009		7

Notes to Condensed Consolidated Financial Statements		8

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		43

Item 3. Quantitative and Qualitative Disclosures About Market Risk		51

Item 4. Controls and Procedures		51

Part II. Other Information

Item 1. Legal Proceedings		52

Item 1A. Risk Factors		52

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		52

Item 6. Exhibits		53

Signatures		54
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Three Months Ended January 31,
	2010			2009
				(As Adjusted)
Revenues:
Funeral	$	72,108		$	71,750
Cemetery		52,292			47,580

		124,400			119,330

Costs and expenses:
Funeral		52,911			53,495
Cemetery		46,320			42,752

		99,231			96,247

Gross profit		25,169			23,083
Corporate general and administrative expenses		(6,554	)		(7,506	)
Hurricane related charges, net		—			(315	)
Net impairment losses on dispositions		—			(63	)
Other operating income, net		179			259

Operating earnings		18,794			15,458
Interest expense		(6,456	)		(7,395	)
Gain on early extinguishment of debt		17			—
Investment and other income, net		24			41

Earnings before income taxes		12,379			8,104
Income taxes		4,892			3,338

Net earnings	$	7,487		$	4,766


Net earnings per common share:
Basic	$	.08		$	.05

Diluted	$	.08		$	.05


Weighted average common shares outstanding (in thousands):
Basic		92,053			91,824

Diluted		92,234			91,843


Dividends declared per common share	$	.030		$	.025

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	January 31, 2010		October 31, 2009
			(As Adjusted)
ASSETS

Current assets:
Cash and cash equivalents	$	52,780	$	62,808
Certificates of deposit		5,000		—
Receivables, net of allowances		59,331		59,439
Inventories		35,947		36,156
Prepaid expenses		11,574		6,748
Deferred income taxes, net		21,645		21,715

Total current assets		186,277		186,866
Receivables due beyond one year, net of allowances		62,062		63,011
Preneed funeral receivables and trust investments		397,454		389,512
Preneed cemetery receivables and trust investments		196,797		193,417
Goodwill		247,236		247,236
Cemetery property, at cost		386,189		385,977
Property and equipment, at cost:
Land		43,677		43,677
Buildings		332,061		329,685
Equipment and other		188,092		187,100

		563,830		560,462
Less accumulated depreciation		267,234		261,005

Net property and equipment		296,596		299,457
Deferred income taxes, net		109,866		113,398
Cemetery perpetual care trust investments		214,460		205,476
Other assets		14,139		14,654

Total assets	$	2,111,076	$	2,099,004

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	January 31, 2010			October 31, 2009
				(As Adjusted)
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current maturities of long-term debt	$	3		$	5
Accounts payable and accrued expenses		21,260			25,604
Accrued payroll and other benefits		11,938			15,200
Accrued insurance		20,139			20,504
Accrued interest		6,181			4,561
Estimated obligation to fund cemetery perpetual care trust		13,642			14,010
Other current liabilities		11,982			14,099
Income taxes payable		3,143			2,028

Total current liabilities		88,288			96,011
Long-term debt, less current maturities		339,934			339,721
Deferred preneed funeral revenue		245,584			247,825
Deferred preneed cemetery revenue		263,388			266,964
Deferred preneed funeral and cemetery receipts held in trust		526,424			514,787
Perpetual care trusts’ corpus		212,076			204,168
Other long-term liabilities		21,032			20,871

Total liabilities		1,696,726			1,690,347

Commitments and contingencies

Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued		—			—
Common stock, $1.00 stated value:
Class A authorized 200,000,000 shares; issued and outstanding 89,566,742 and 89,128,700 shares at January 31, 2010 and October 31, 2009, respectively		89,567			89,129
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at January 31, 2010 and October 31, 2009; 10 votes per share convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		558,832			561,063
Accumulated deficit		(237,638	)		(245,125	)
Accumulated other comprehensive income:
Unrealized appreciation of investments		34			35

Total accumulated other comprehensive income		34			35

Total shareholders’ equity		414,350			408,657

Total liabilities and shareholders’ equity	$	2,111,076		$	2,099,004

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


									Unrealized
									Appreciation
	Common		Additional Paid-In						(Depreciation) of			Total Shareholders’
	Stock⁽¹⁾		Capital			Accumulated Deficit			Investments			Equity
Balance October 31, 2009, as previously reported	$	92,684	$	526,062		$	(227,897	)	$	35		$	390,884
Adoption of convertible debt standard (See Note 2)		—		35,001			(17,228	)		—			17,773

Balance October 31, 2009, as adjusted	$	92,684	$	561,063		$	(245,125	)	$	35		$	408,657

Comprehensive income (loss):
Net earnings		—		—			7,487			—			7,487

Other comprehensive loss:
Unrealized depreciation of investments, net of deferred tax benefit of $1		—		—			—			(1	)		(1	)

Total other comprehensive loss		—		—			—			(1	)		(1	)

Total comprehensive income (loss)		—		—			7,487			(1	)		7,486

Restricted stock activity		317		(87	)		—			—			230
Issuance of common stock		109		388			—			—			497
Stock options exercised		12		20			—			—			32
Stock option expense		—		275			—			—			275
Tax benefit associated with stock activity		—		17			—			—			17
Retirement of call options, net of tax expense of $37		—		70			—			—			70
Retirement of common stock warrants		—		(107	)		—			—			(107	)
Repurchase of convertible notes, net of tax benefit of $7		—		(13	)		—			—			(13	)
Dividends ($.030 per share)		—		(2,794	)		—			—			(2,794	)

Balance January 31, 2010	$	93,122	$	558,832		$	(237,638	)	$	34		$	414,350


⁽¹⁾		Amount includes 89,567 and 89,129 shares (in thousands) of Class A common stock with a stated value of $1 per share as of January 31, 2010 and October 31, 2009, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Three Months Ended January 31,
	2010			2009
				(As Adjusted)
Cash flows from operating activities:
Net earnings	$	7,487		$	4,766
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net impairment losses on dispositions		—			63
Gain on early extinguishment of debt		(17	)		—
Depreciation and amortization		6,587			6,971
Non-cash interest and amortization of discount on senior convertible notes		1,521			1,907
Provision for doubtful accounts		1,674			2,215
Share-based compensation		962			802
Excess tax benefits from share-based payment arrangements		(20	)		—
Provision (benefit) for deferred income taxes		3,569			(749	)
Estimated obligation to fund cemetery perpetual care trust		—			88
Other		20			66
Changes in assets and liabilities:
(Increase) decrease in receivables		(1,648	)		2,993
Increase in prepaid expenses		(4,825	)		(5,050	)
Increase in inventories and cemetery property		(3	)		(1,043	)
Decrease in accounts payable and accrued expenses		(7,204	)		(7,629	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments		3,031			3,910
Decrease in deferred preneed funeral revenue		(2,240	)		(2,054	)
Decrease in deferred preneed funeral receipts held in trust		(3,324	)		(1,996	)
Net effect of preneed cemetery production and deliveries:
Decrease in preneed cemetery receivables and trust investments		781			1,934
Decrease in deferred preneed cemetery revenue		(3,575	)		(1,645	)
Increase (decrease) in deferred preneed cemetery receipts held in trust		(173	)		81
Increase in other		170			1,654

Net cash provided by operating activities		2,773			7,284


Cash flows from investing activities:
Purchases of certificates of deposit		(5,000	)		—
Proceeds from sale of assets		—			292
Purchase of subsidiaries and other investments, net of cash acquired		—			(1,623	)
Additions to property and equipment		(4,297	)		(4,789	)
Other		39			1

Net cash used in investing activities		(9,258	)		(6,119	)


Cash flows from financing activities:
Repayments of long-term debt		(846	)		(9	)
Retirement of common stock warrants		(107	)		—
Issuance of common stock		115			83
Retirement of call options		107			—
Debt refinancing costs		(38	)		—
Dividends		(2,794	)		(2,318	)
Excess tax benefits from share-based payment arrangements		20			—

Net cash used in financing activities		(3,543	)		(2,244	)


Net decrease in cash		(10,028	)		(1,079	)
Cash and cash equivalents, beginning of period		62,808			72,574

Cash and cash equivalents, end of period	$	52,780		$	71,495


Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net	$	(44	)	$	874
Interest	$	3,191		$	5,125

Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors	$	414		$	305
Issuance of restricted stock, net of forfeitures	$	1,024		$	312

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation

(a)The Company

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

(b) Principles of Consolidation

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

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

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

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

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2009 Form 10-K.

(e) Share-Based Compensation

The Company has share-based compensation plans, which are described in more detail in Note 19 to the consolidated financial statements in the Company’s 2009 Form 10-K. Net earnings for the three months ended January 31, 2010 and 2009 include $275 and $324, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. As of January 31, 2010, there was $2,297 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 3.02 years of which $1,014 of total stock option expense is expected for fiscal year 2010. The expense related to restricted stock is reflected in earnings and amounted to $273 and $173 for the three months ended January 31, 2010 and 2009, respectively. As of January 31,

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

2010, there was $1,234 of future restricted stock expense to be recognized, of which $984 is expected for fiscal year 2010.

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

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


	Number of Shares		Weighted Average
Grant Type	Granted		Price per Share	Vesting Period	Vesting Condition
Stock options		960,750	$5.08	Equal one-fourth	Service condition
				portions over 4 years

Restricted stock		324,500	$5.09	Equal one-third	Market condition
				portions over 3 years

Restricted stock		7,500	$4.89	Equal one-third	Service condition
				portions over 3 years

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

(f) Reclassifications

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

(2) New Accounting Principles

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

In December 2007, the FASB amended guidance regarding noncontrolling interests in consolidated financial statements. This guidance states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. This guidance

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

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

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

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)


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


			Effects of the						Three Months
	Three Months Ended		Adoption of			Effects of Adoption			Ended
	January 31, 2009		Convertible Debt			of Participating			January 31, 2009
Statement of earnings:	As Reported		Guidance			Share Guidance			As Adjusted
Interest expense	$	5,910	$	1,485					$	7,395
Income taxes		3,873		(535	)					3,338
Net earnings		5,716		(950	)					4,766
Basic earnings per share	$	.06	$	(.01	)				$	.05

Diluted earnings per share	$	.06	$	(.01	)				$	.05

Weighted average basic shares outstanding		91,824					—			91,824

Weighted average diluted shares outstanding		91,896					(53	)		91,843


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

Diluted earnings per share	$	.39	$	(.14	)				$	.25

Weighted average basic shares outstanding		91,898					—			91,898

Weighted average diluted shares outstanding		91,995					(17	)		91,978

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

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

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

In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events disclosure. This guidance clarifies that an entity that is a Securities and Exchange Commission filer is not required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance, and the Company adopted the provisions effective with the preparation of its condensed consolidated financial statements for the three months ended January 31, 2010.

(3) Preneed Funeral Activities

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

Preneed Funeral Receivables and Trust Investments

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


	January 31,			October 31,
	2010			2009
Trust assets	$	366,900		$	358,430
Receivables from customers		42,448			43,225

		409,348			401,655
Allowance for cancellations		(11,894	)		(12,143	)

Preneed funeral receivables and trust investments	$	397,454		$	389,512

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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


	January 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	29,830	$	—	$	—		$	29,830
U.S. Government, agencies and municipalities		5,888		166		(1	)		6,053
Corporate bonds		38,247		1,883		(874	)		39,256
Preferred stocks		56,785		34		(7,985	)		48,834
Common stocks		247,824		973		(100,269	)		148,528
Mutual funds:
Equity		28,839		24		(6,360	)		22,503
Fixed income		54,755		485		(915	)		54,325
Insurance contracts and other long-term investments		19,088		112		(2,637	)		16,563

Trust investments	$	481,256	$	3,677	$	(119,041	)		365,892

Market value as a percentage of cost										76.0	%

Accrued investment income									1,008

Trust assets								$	366,900

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


	October 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	28,979	$	—	$	—		$	28,979
U.S. Government, agencies and municipalities		6,044		214		(1	)		6,257
Corporate bonds		39,007		1,650		(1,458	)		39,199
Preferred stocks		56,885		9		(10,394	)		46,500
Common stocks		248,750		848		(106,788	)		142,810
Mutual funds:
Equity		28,841		20		(7,486	)		21,375
Fixed income		56,193		448		(916	)		55,725
Insurance contracts and other long-term investments		19,054		112		(2,594	)		16,572

Trust investments	$	483,753	$	3,301	$	(129,637	)	$	357,417

Market value as a percentage of cost										73.9	%

Accrued investment income									1,013

Trust assets								$	358,430

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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


	January 31, 2010
Due in one year or less	$	1,331
Due in one to five years		31,699
Due in five to ten years		12,255
Thereafter		24

	$	45,309

The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust. As of January 31, 2010, the Company has outstanding covered calls with a market value of $48. These covered calls constitute a hedge on $4,769, or approximately 3.2 percent, of the common stock portion of the Company’s portfolio within the funeral merchandise and services trust and also provide an opportunity for income. For the three months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($235) and $253, respectively, related to the covered call program. Although the Company realized losses associated with the covered call program in the first quarter of 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $3,135 during the period that the covered calls were outstanding.

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

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

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

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


	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—January 31, 2010	$	263,014	$	94,143	$	8,735	$	365,892
Trust investments—October 31, 2009	$	256,799	$	91,956	$	8,662	$	357,417

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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


	Three Months Ended January 31,
	2010		2009
Fair market value, beginning balance	$	8,662	$	11,299
Total unrealized losses included in other comprehensive income⁽¹⁾		—		(1,714	)
Purchases, sales, contributions and distributions, net		73		(515	)

Fair market value, ending balance	$	8,735	$	9,070


⁽¹⁾		All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to the Company’s preneed customers and are offset by a corresponding increase (decrease) in deferred preneed funeral receipts held in trust.

Activity related to preneed funeral trust investments is as follows:


	Three Months Ended January 31,
	2010			2009
Purchases	$	849		$	641
Sales		4,349			4,616
Realized gains from sales of investments		628			508
Realized losses from sales of investments and other		(516	)		(8,501	)⁽¹⁾
Interest income, dividends and other ordinary income		2,346			3,153
Deposits		8,015			6,359
Withdrawals		11,977			11,052


⁽¹⁾		Includes $195 in losses from the sale of investments and $8,306 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.

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


	January 31, 2010
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	—	$	—		$	21	$	(1	)	$	21	$	(1	)
Corporate bonds		462		(136	)		8,920		(738	)		9,382		(874	)
Preferred stocks		491		(9	)		44,518		(7,976	)		45,009		(7,985	)
Common stocks		1,934		(110	)		136,357		(100,159	)		138,291		(100,269	)
Mutual funds:
Equity		3		—			22,357		(6,360	)		22,360		(6,360	)
Fixed income		7,712		(30	)		4,584		(885	)		12,296		(915	)
Insurance contracts and other long-term investments		—		—			3,219		(2,637	)		3,219		(2,637	)

Total	$	10,602	$	(285	)	$	219,976	$	(118,756	)	$	230,578	$	(119,041	)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)


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

Total	$	3,014	$	(1,344	)	$	214,914	$	(128,293	)	$	217,928	$	(129,637	)

The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2010, 91 percent, or $108,254, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 41 percent of the Company’s preneed funeral trust portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value during late 2008 and early 2009 due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

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

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

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)


	January 31,
	2010			October 31, 2009
Trust assets	$	169,260		$	163,938
Receivables from customers		33,740			35,718

		203,000			199,656
Allowance for cancellations		(6,203	)		(6,239	)

Preneed cemetery receivables and trust investments	$	196,797		$	193,417

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


	January 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	17,148	$	—	$	—		$	17,148
U.S. Government, agencies and municipalities		8,751		632		—			9,383
Corporate bonds		7,491		619		(74	)		8,036
Preferred stocks		20,831		64		(3,498	)		17,397
Common stocks		127,715		846		(51,495	)		77,066
Mutual funds:
Equity		30,291		16		(9,554	)		20,753
Fixed income		18,530		143		(17	)		18,656
Other long-term investments		495		—		(75	)		420

Trust investments	$	231,252	$	2,320	$	(64,713	)		168,859

Market value as a percentage of cost										73.0	%

Accrued investment income									401

Trust assets								$	169,260

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

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


	October 31, 2009
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	15,123	$	—	$	—		$	15,123
U.S. Government, agencies and municipalities		9,259		678		—			9,937
Corporate bonds		7,554		552		(74	)		8,032
Preferred stocks		20,831		46		(4,363	)		16,514
Common stocks		127,942		714		(54,254	)		74,402
Mutual funds:
Equity		30,291		15		(9,980	)		20,326
Fixed income		18,530		125		(4	)		18,651
Other long-term investments		562		—		(8	)		554

Trust investments	$	230,092	$	2,130	$	(68,683	)	$	163,539

Market value as a percentage of cost										71.1	%

Accrued investment income									399

Trust assets								$	163,938

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


	January 31, 2010
Due in one year or less	$	2,974
Due in one to five years		9,137
Due in five to ten years		5,153
Thereafter		155

	$	17,419

The Company is actively managing a covered call program on its equity securities within the cemetery merchandise and services trust. As of January 31, 2010, the Company has outstanding covered calls with a market value of $41. These covered calls constitute a hedge on $3,744, or approximately 4.9 percent, of the common stock portion of the Company’s portfolio within the cemetery merchandise and services trust and also provide an opportunity for income. For the three months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($187) and $86 respectively, related to the covered call program. Although the Company realized losses associated with the covered call program in the first quarter of fiscal year 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $2,409 during the period that the covered calls were outstanding.

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

There are no Level 3 investments in the preneed cemetery merchandise and services trust investment portfolio.

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


	Quoted		Significant
	Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—January 31, 2010	$	134,140	$	34,719	$	—	$	168,859
Trust investments—October 31, 2009	$	129,032	$	34,507	$	—	$	163,539

Activity related to preneed cemetery merchandise and services trust investments is as follows:


	Three Months Ended January 31,
	2010			2009
Purchases	$	2,046		$	1,153
Sales		2,320			2,456
Realized gains from sales of investments		423			104
Realized losses from sales of investments and other		(881	)		(4,464	)⁽¹⁾
Interest income, dividends and other ordinary income		1,152			1,300
Deposits		5,693			4,033
Withdrawals		4,404			3,768


(1)		Includes $1,243 in losses from the sale of investments and $3,221 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

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


	January 31, 2010
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	41	$	—		$	—	$	—		$	41	$	—
Corporate bonds		220		(44	)		670		(30	)		890		(74	)
Preferred stocks		—		—			17,221		(3,498	)		17,221		(3,498	)
Common stocks		2,257		(19	)		68,299		(51,476	)		70,556		(51,495	)
Mutual funds:
Equity		—		—			20,612		(9,554	)		20,612		(9,554	)
Fixed income		2,979		(14	)		15		(3	)		2,994		(17	)
Other long-term investments		—		—			—		(75	)		—		(75	)

Total	$	5,497	$	(77	)	$	106,817	$	(64,636	)	$	112,314	$	(64,713	)


	October 31, 2009
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Corporate bonds	$	—	$	—		$	1,045	$	(74	)	$	1,045	$	(74	)
Preferred stocks		—		—			16,356		(4,363	)		16,356		(4,363	)
Common stocks		1,755		(464	)		67,374		(53,790	)		69,129		(54,254	)
Mutual funds:
Equity		—		—			20,186		(9,980	)		20,186		(9,980	)
Fixed income		20		—			15		(4	)		35		(4	)
Other long-term investments		—		—			—		(8	)		—		(8	)

Total	$	1,775	$	(464	)	$	104,976	$	(68,219	)	$	106,751	$	(68,683	)

The unrealized losses in the preneed cemetery merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2010, 85 percent, or $54,993, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 46 percent of the Company’s preneed cemetery merchandise and services trust portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities—(Continued)

unrealized gains and losses are not allocated to contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original sales price when the underlying service or merchandise is delivered. Principal and earnings are withdrawn only as the merchandise or servies are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

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

(5) Cemetery Interment Rights and Perpetual Care Trusts

Earnings from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $2,473 and $1,722 for the three months ended January 31, 2010 and 2009, respectively.

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of January 31, 2010 are detailed below.


	January 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	33,444	$	—	$	—		$	33,444
U.S. Government, agencies and municipalities		6,508		368		(80	)		6,796
Corporate bonds		31,843		1,570		(1,065	)		32,348
Preferred stocks		57,893		5		(13,397	)		44,501
Common stocks		96,517		2,746		(39,965	)		59,298
Mutual funds:
Equity		8,869		37		(1,478	)		7,428
Fixed income		29,729		290		(397	)		29,622
Other long-term investments		513		1		(196	)		318

Trust investments	$	265,316	$	5,017	$	(56,578	)		213,755

Market value as a percentage of cost										80.6	%

Accrued investment income									705

Trust assets								$	214,460

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2009 are detailed below.


	October 31, 2009
	Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short- term investments	$	17,784	$	—	$	—		$	17,784
U.S. Government, agencies and municipalities		5,416		394		(82	)		5,728
Corporate bonds		42,735		2,088		(1,085	)		43,738
Preferred stocks		58,421		2		(17,137	)		41,286
Common stocks		96,831		2,663		(42,792	)		56,702
Mutual funds:
Equity		6,838		25		(1,560	)		5,303
Fixed income		32,561		1,340		(342	)		33,559
Other long-term investments		766		4		(177	)		593

Trust investments	$	261,352	$	6,516	$	(63,175	)	$	204,693

Market value as a percentage of cost										78.3	%

Accrued investment income									783

Trust assets								$	205,476

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


	January 31, 2010
Due in one year or less	$	10,259
Due in one to five years		19,974
Due in five to ten years		8,424
Thereafter		487

	$	39,144

The Company is actively managing a covered call program on its equity securities within the cemetery perpetual care trust. As of January 31, 2010, the Company has outstanding covered calls with a market value of $24. These covered calls constitute a hedge on $2,514, or approximately 4.2 percent, of the common stock portion of the Company’s portfolio within the cemetery perpetual care trust and also provide an opportunity for current income. For the three months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($165) and $37, respectively, related to the covered call program. Although the Company realized losses associated with the covered call program in the first quarter of fiscal year 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $1,599 during the period that the covered calls were outstanding.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

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

The Company’s Level 3 investments include an investment in a partnership. The valuation of partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the partnership investment was determined by using its most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

The inputs into the fair value of the Company’s cemetery perpetual care trust investments are categorized as follows:


	Quoted Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—January 31, 2010	$	129,942	$	83,645	$	168	$	213,755
Trust investments—October 31, 2009	$	113,715	$	90,752	$	226	$	204,693

The change in the Company’s cemetery perpetual care trust investments with significant unobservable inputs (Level 3) is as follows:


	Three Months Ended January 31,
	2010			2009
Fair market value, beginning balance	$	226		$	611
Total unrealized losses included in other comprehensive income⁽¹⁾		—			(118	)
Transfers out of Level 3 category and other		(58	)		(250	)

Fair market value, ending balance	$	168		$	243


⁽¹⁾		All gains (losses) recognized in other comprehensive income for cemetery perpetual care trust investments are attributable to the Company’s customers and are offset by a corresponding increase (decrease) in perpetual care trusts’ corpus.

In states where the Company withdraws and recognizes capital gains in its cemetery perpetual care trusts, if it realizes net capital losses (i.e. losses in excess of capital gains in the trust) and the fair market value of the trust assets is less than the aggregate amounts required to be contributed to the trust, some states may require the Company to make cash deposits to the trusts or may require the Company to stop withdrawing earnings until future earnings restore the net realized losses. As of October 31, 2009, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses as a result of fiscal year 2008 and 2009 losses of $14,010, which was recognized as realized losses in the consolidated statement of earnings in fiscal years 2008 and 2009 in cemetery costs. The Company recorded no additional estimated probable funding obligation during the three months ended January 31, 2010. The Company had earnings of $368 for the three months ended January 31, 2010, within the trusts that it did not withdraw from the trusts in order to satisfy a portion of its estimated probable funding obligation. As of January 31, 2010, the Company’s estimated probable funding obligation was $13,642. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible that additional funding obligations may exist with an estimated amount of approximately $3,100.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)

Activity related to preneed cemetery perpetual care trust investments is as follows:


	Three Months Ended January 31,
	2010			2009
Purchases	$	16,172		$	329
Sales		28,885			1,806
Realized gains from sales of investments		2,025			359
Realized losses from sales of investments and other		(550	)		(96	)⁽¹⁾
Interest income, dividends and other ordinary income		2,161			2,284
Deposits		1,838			2,454	⁽²⁾
Withdrawals		888			1,587


⁽¹⁾		Includes $84 in losses related to certain investments that were rendered worthless or practically worthless.

⁽²⁾		Includes $734 that the Company contributed to the cemetery perpetual care trusts as part of its funding obligation during the three months ended January 31, 2009.

During the three months ended January 31, 2010 and 2009, cemetery revenues were $52,292 and $47,580, respectively, of which $2,334 and $1,613, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.

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


	January 31, 2010
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	—	$	—		$	270	$	(80	)	$	270	$	(80	)
Corporate bonds		514		(92	)		2,178		(973	)		2,692		(1,065	)
Preferred stocks		—		—			42,898		(13,397	)		42,898		(13,397	)
Common stocks		1,716		(16	)		51,118		(39,949	)		52,834		(39,965	)
Mutual funds:
Equity		1,949		(53	)		5,188		(1,425	)		7,137		(1,478	)
Fixed income		5,416		(51	)		1,074		(346	)		6,490		(397	)
Other long-term investments		—		—			201		(196	)		201		(196	)

Total	$	9,595	$	(212	)	$	102,927	$	(56,366	)	$	112,522	$	(56,578	)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)


	October 31, 2009
	Less than 12 Months						12 Months or Greater					Total
	Market			Unrealized			Market		Unrealized			Market		Unrealized
	Value			Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	270		$	(81	)	$	6	$	(1	)	$	276	$	(82	)
Corporate bonds		600			(124	)		1,732		(961	)		2,332		(1,085	)
Preferred stocks		—			—			40,784		(17,137	)		40,784		(17,137	)
Common stocks		(38	)		(473	)		50,445		(42,319	)		50,407		(42,792	)
Mutual funds:
Equity		43			(11	)		5,034		(1,549	)		5,077		(1,560	)
Fixed income		118			—			1,096		(342	)		1,214		(342	)
Other long-term investments		201			(177	)		—		—			201		(177	)

Total	$	1,194		$	(866	)	$	99,097	$	(62,309	)	$	100,291	$	(63,175	)

The unrealized losses in the cemetery perpetual care trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2010, 94 percent, or $53,362, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 28 percent of the Company’s cemetery perpetual care trusts portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

Cash flows from cemetery perpetual care contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.

(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus

The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at January 31, 2010 are as follows:


	Deferred Receipts Held in Trust
	Preneed			Preneed
	Funeral			Cemetery			Total
Trust assets at market value	$	366,900		$	169,260		$	536,160
Less:
Pending withdrawals		(7,387	)		(5,015	)		(12,402	)
Pending deposits		1,627			1,039			2,666

Deferred receipts held in trust	$	361,140		$	165,284		$	526,424

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus-(Continued)

The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at January 31, 2010 are as follows:


	Perpetual Care
	Trusts’ Corpus
Trust assets at market value	$	214,460
Less:
Pending withdrawals		(3,164	)
Pending deposits		780

Perpetual care trusts’ corpus	$	212,076

Investment and other income, net

The components of investment and other income, net in the condensed consolidated statements of earnings for the three months ended January 31, 2010 and 2009 are detailed below.


	Three Months Ended January 31,
	2010			2009
Realized gains from sales of investments	$	3,076		$	971
Realized losses from sales of investments and other		(1,947	)		(13,061	)
Interest income, dividends and other ordinary income		5,659			6,737
Trust expenses and income taxes		(2,538	)		(2,134	)

Net trust investment income (loss)		4,250			(7,487	)
Reclassification to deferred preneed funeral and cemetery receipts held in trust		(1,350	)		9,273
Reclassification to perpetual care trusts’ corpus		(2,900	)		(1,786	)

Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		—			—
Investment and other income, net⁽¹⁾		24			41

Total investment and other income, net	$	24		$	41


⁽¹⁾		Investment and other income, net consists of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust.

(7) Commitments and Contingencies

Litigation

Funeral Consumers Alliance, Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co., on the docket of the United States District Court for the Southern District of Texas. This purported class action was originally filed on May 2, 2005, in the United States District Court for the Northern District of California, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home defendants at any time. The court consolidated it with five subsequently filed, substantially similar cases (the “Consolidated Consumer Cases”).

The Consolidated Consumer Cases allege that the defendants acted jointly to reduce competition from independent casket discounters and fix and maintain prices on caskets in violation of the federal antitrust laws and

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies-(Continued)

California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees.

At the defendants’ request, in late September 2005, the court transferred the Consolidated Consumer Cases to the United States District Court for the Southern District of Texas. The transferred Consolidated Consumer Cases have been consolidated before a single judge in the Southern District of Texas.

On November 10, 2006, after the court denied defendants’ motions to dismiss, the Company answered the first amended consolidated class action complaint, denying liability and asserting various affirmative defenses. Fact discovery has been completed, and expert discovery is complete with the exception of the deposition of one expert witness.

In April 2007, the plaintiffs filed an expert report indicating that the amounts sought from all defendants as damages to the proposed class would be in the range of approximately $950 million to approximately $1.5 billion, before trebling. Accordingly, any judgment in favor of the proposed class could have a material adverse effect on the Company’s financial condition and results of operations.

On March 26, 2009, the court denied plaintiffs’ motion for class certification. The United States Court of Appeals for the Fifth Circuit denied plaintiffs’ petition for permission to appeal on June 19, 2009, and denied plaintiffs’ motion for reconsideration on July 29, 2009.

The named plaintiffs (FCA and thirteen individuals) are proceeding with a jury trial scheduled for August 2, 2010 on their individual claims for alleged damages arising out of the purchase of ten caskets. The named plaintiffs also have indicated an intent to seek injunctive relief and attorneys’ fees.

The Company believes it has meritorious defenses to the substantive allegations asserted, to class certification, and to the plaintiffs’ damage theories and calculations, and the Company intends to aggressively defend itself in these proceedings. The Company has not recorded a liability related to this litigation given that it does not believe that a loss is probable and estimable.

Other Litigation

The Company has been unable to finalize its negotiations with its insurance carriers related to property damage and extra expenses, and business interruption damages, related to Hurricane Katrina, and filed suit against the carriers in August 2007. In 2007, the carriers advanced an additional $1,100, which the Company has not recorded as income but as a liability pending the outcome of the litigation. The suit involves numerous significant policy interpretation disputes, among other issues, and no assurance can be given as to how much additional proceeds the Company may recover from its insurers, if any, or the timing of the receipt of any additional proceeds.

The Company is a defendant in a variety of other litigation matters that have arisen in the ordinary course of business, which are covered by insurance or otherwise not considered to be material. The Company carries insurance with coverages and coverage limits that it believes to be adequate.

Other Commitments and Contingencies

In those states where the Company has withdrawn realized net capital gains in the past from its cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. As of January 31, 2010, the Company had $13,642 recorded as a liability for an estimated probable funding obligation. As of January 31, 2010, the Company had unrealized losses of approximately $44,774 in the cemetery perpetual care

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies-(Continued)

trusts in these states. Because all of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in an additional corresponding funding liability and increase in cemetery costs.

From time to time, unidentified contracts are presented to the Company relating to contracts sold prior to the time the Company acquired certain businesses. In addition, from time to time, the Company has identified in its backlog, certain contracts in which services or merchandise have already been delivered. Using historical trends and statistical analysis, the Company has recorded an estimated net liability for these items of approximately $2.0 million and $3.0 million as of January 31, 2010 and October 31, 2009, respectively.

The Company is required to maintain a bond ($24,815 as of January 31, 2010) to guarantee its obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. This amount would become senior secured debt if the Company was required to borrow funds under the senior secured revolving credit facility to extinguish the bond obligation by returning to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts.

(8) Reconciliation of Basic and Diluted Per Share Data


	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Three Months Ended January 31, 2010
Net earnings	$	7,487
Allocation of earnings to nonvested restricted stock		(83	)

Basic earnings per common share:
Net earnings available to common shareholders	$	7,404			92,053	$	.08

Effect of dilutive securities:
Stock options assumed exercised					181

Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	7,404			92,234	$	.08


	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Three Months Ended January 31, 2009
Net earnings	$	4,766
Allocation of earnings to nonvested restricted stock		(44	)

Basic earnings per common share:
Net earnings available to common shareholders	$	4,722			91,824	$	.05

Effect of dilutive securities:
Stock options assumed exercised					19

Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	4,722			91,843	$	.05

As discussed in Note 2, the Company adopted guidance on determining whether instruments granted in share-based payment transactions are participating securities, effective November 1, 2009. Since this guidance requires retrospective treatment, the information presented above for the three months ended January 31, 2009 has been adjusted to reflect the adoption of this guidance.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

During the three months ended January 31, 2010, options to purchase 2,074,986 shares of common stock at prices ranging from $5.04 to $8.47 per share were outstanding 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 for those periods. These options expire between November 29, 2012 and January 18, 2017.

Options to purchase 1,653,796 shares of common stock at prices ranging from $5.06 to $8.47 per share for the three months ended January 31, 2009 were outstanding 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 for the period. Additionally, weighted-average shares outstanding for the three months ended January 31, 2009 exclude the effect of approximately 110,217 options, because such options were not dilutive.

For the three months ended January 31, 2010 and 2009, 438,000 and 468,000 market based stock options, respectively, were not dilutive. The market based stock options were not dilutive because the market conditions required for vesting for the respective grants were not achieved during any of periods presented.

For the three months ended January 31, 2010, a maximum of 16,640,100 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 13,312,080 shares of Class A common stock under the common stock warrants associated with the June 2007 senior convertible debt transaction were not dilutive, as the average price of the Company’s stock for the three months ended January 31, 2010 was less than the conversion price of the senior convertible notes and strike price of the warrants. For the three months ended January 31, 2009, a maximum of 25,000,000 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 20,000,000 shares of Class A common stock under the associated common stock warrants were also not dilutive.

The Company includes Class A and Class B common stock in its diluted shares calculation. As of January 31, 2010, the Company’s Chairman, Frank B. Stewart, Jr., was the record holder of all of the Company’s shares of Class B common stock. The Company’s Class A and B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr.

(9) Segment Data

The Company has determined that managements’ approach to operating the business indicates that there are three operating and reportable segments: a funeral segment, a cemetery segment and a corporate trust management segment. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same. Prior period data has been retrospectively adjusted to conform to the new segment presentation.


	Total Revenue
	Three Months
	Ended		Three Months Ended
	January 31, 2010		January 31, 2009
Funeral	$	68,029	$	68,146
Cemetery⁽¹⁾		50,508		45,690
Corporate Trust Management⁽²⁾		5,863		5,494

Total	$	124,400	$	119,330

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data-(Continued)


	Total Gross Profit
	Three Months Ended		Three Months Ended
	January 31, 2010		January 31, 2009
Funeral	$	15,347	$	14,842
Cemetery⁽¹⁾		4,411		3,187
Corporate Trust Management⁽²⁾		5,411		5,054

Total	$	25,169	$	23,083


	Net Total Preneed Merchandise and
	Service Sales⁽³⁾
	Three Months Ended		Three Months Ended
	January 31, 2010		January 31, 2009
Funeral	$	18,111	$	18,732
Cemetery⁽¹⁾		10,204		10,779

Total	$	28,315	$	29,511


⁽¹⁾		Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $2,473 and $1,722 for the three months ended January 31, 2010 and 2009, respectively.

⁽²⁾		Corporate trust management consists of trust management fees and funeral and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to the Company’s subsidiary, Investors Trust, Inc. The trust earnings represent earnings generated over the life of the preneed contracts delivered during the relevant periods and distributable to the Company based upon the Company’s respective trust agreements. Trust management fees included in funeral revenue for the three months ended January 31, 2010 and 2009 were $1,115 and $937, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended January 31, 2010 and 2009 were $2,963 and $2,667, respectively. Trust management fees included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $1,189 and $952, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $596 and $938, respectively.

⁽³⁾		Preneed sales amounts represent total preneed funeral trust and insurance sales and cemetery service and merchandise trust sales generated in the applicable period, net of cancellations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data-(Continued)

A reconciliation of total segment gross profit to total earnings before income taxes for the three months ended January 31, 2010 and 2009 is as follows:


	Three Months Ended January 31,
	2010			2009
Gross profit for reportable segments	$	25,169		$	23,083
Corporate general and administrative expenses		(6,554	)		(7,506	)
Hurricane related charges, net		—			(315	)
Net impairment losses on dispositions		—			(63	)
Other operating income, net		179			259
Interest expense		(6,456	)		(7,395	)
Gain on early extinguishment of debt		17			—
Investment and other income, net		24			41

Earnings before income taxes	$	12,379		$	8,104

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Supplementary Information

The detail of certain income statement accounts is as follows for the three months ended January 31, 2010 and 2009.


	Three Months Ended January 31,
	2010		2009
Service revenue
Funeral	$	45,327	$	45,306
Cemetery		15,571		15,101

		60,898		60,407

Merchandise revenue
Funeral		25,142		24,917
Cemetery		33,141		29,027

		58,283		53,944

Other revenue
Funeral		1,639		1,527
Cemetery		3,580		3,452

		5,219		4,979


Total revenue	$	124,400	$	119,330


Service costs
Funeral	$	14,705	$	14,668
Cemetery		9,802		9,755

		24,507		24,423

Merchandise costs
Funeral		14,585		15,006
Cemetery		22,204		19,250

		36,789		34,256

Facility expenses
Funeral		23,621		23,821
Cemetery		14,314		13,747

		37,935		37,568


Total costs	$	99,231	$	96,247

Service revenue includes funeral service revenue, funeral trust earnings, insurance commission revenue, burial site openings and closings and perpetual care trust earnings. Merchandise revenue includes funeral merchandise revenue, flower sales, cemetery property sales revenue, cemetery merchandise delivery revenue and merchandise trust earnings. Other revenue consists of finance charge revenue and trust management fees. Service costs include the direct costs associated with service revenue and preneed selling costs associated with preneed service sales. Merchandise costs include the direct costs associated with merchandise revenue, preneed selling costs associated with preneed merchandise sales and the Company’s estimated obligation to fund the cemetery perpetual care trusts.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11)

Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes

The following tables present the condensed consolidating historical financial statements as of January 31, 2010 and October 31, 2009 and for the three months ended January 31, 2010 and 2009, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries of the 6.25 percent senior notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the senior notes. The guarantor subsidiaries of the 6.25 percent senior notes are wholly-owned directly or indirectly by the Company, except for three immaterial guarantor subsidiaries of which the Company is the majority owner. The non-guarantor subsidiaries of the senior convertible notes are identical to those of the 6.25 percent senior notes but also include three immaterial non-wholly owned subsidiaries and any future non-wholly owned subsidiaries. The guarantees are full and unconditional and joint and several. In the statements presented within this footnote, Tier 2 guarantor subsidiaries represent the three immaterial non-wholly owned subsidiaries that do not guaranty the senior convertible notes but do guaranty the 6.25 percent senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the 6.25 percent senior notes and senior convertible notes. In the condensed consolidating statements of earnings and other comprehensive income, corporate general and administrative expenses and interest expense of the parent are presented net of amounts charged to the guarantor and non-guarantor subsidiaries.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Three Months Ended January 31, 2010
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	67,232		$	485		$	4,391		$	—		$	72,108
Cemetery		—			46,676			572			5,044			—			52,292

		—			113,908			1,057			9,435			—			124,400


Costs and expenses:
Funeral		—			49,441			263			3,207			—			52,911
Cemetery		—			41,573			620			4,127			—			46,320

		—			91,014			883			7,334			—			99,231

Gross profit		—			22,894			174			2,101			—			25,169
Corporate general and administrative expenses		(6,554	)		—			—			—			—			(6,554	)
Hurricane related recoveries (charges), net		(54	)		—			54			—			—			—
Other operating income, net		16			143			—			20			—			179

Operating earnings (loss)		(6,592	)		23,037			228			2,121			—			18,794
Interest expense		(487	)		(5,478	)		(8	)		(483	)		—			(6,456	)
Gain on early extinguishment of debt		17			—			—			—			—			17
Investment and other income, net		24			—			—			—			—			24
Equity in subsidiaries		11,821			80			—			—			(11,901	)		—

Earnings before income taxes		4,783			17,639			220			1,638			(11,901	)		12,379
Income tax expense (benefit)		(2,704	)		7,043			54			499			—			4,892

Net earnings		7,487			10,596			166			1,139			(11,901	)		7,487
Other comprehensive loss, net		(1	)		—			—			(1	)		1			(1	)

Comprehensive income	$	7,486		$	10,596		$	166		$	1,138		$	(11,900	)	$	7,486

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11)

Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Three Months Ended January 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	66,871		$	399		$	4,480		$	—		$	71,750
Cemetery		—			43,025			661			3,894			—			47,580
��
		—			109,896			1,060			8,374			—			119,330

Costs and expenses:
Funeral		—			50,000			291			3,204			—			53,495
Cemetery		—			38,811			636			3,305			—			42,752

		—			88,811			927			6,509			—			96,247

Gross profit		—			21,085			133			1,865			—			23,083
Corporate general and administrative expenses		(7,506	)		—			—			—			—			(7,506	)
Hurricane related charges, net		(276	)		(39	)		—			—			—			(315	)
Net impairment losses on dispositions		(8	)		(55	)		—			—			—			(63	)
Other operating income (expense), net		(2	)		244			1			16			—			259

Operating earnings (loss)		(7,792	)		21,235			134			1,881			—			15,458
Interest expense		(666	)		(6,165	)		(36	)		(528	)		—			(7,395	)
Investment and other income, net		41			—			—			—			—			41
Equity in subsidiaries		11,171			135			—			—			(11,306	)		—

Earnings before income taxes		2,754			15,205			98			1,353			(11,306	)		8,104
Income tax expense (benefit)		(2,012	)		4,836			19			495			—			3,338

Net earnings		4,766			10,369			79			858			(11,306	)		4,766
Other comprehensive income, net		3			—			—			3			(3	)		3

Comprehensive income	$	4,769		$	10,369		$	79		$	861		$	(11,309	)	$	4,769

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11)

Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Balance Sheets


	January 31, 2010
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	44,418	$	6,023		$	36	$	2,303	$	—		$	52,780
Certificates of deposit		5,000		—			—		—		—			5,000
Receivables, net of allowances		6,968		47,689			447		4,227		—			59,331
Inventories		263		33,440			336		1,908		—			35,947
Prepaid expenses		1,516		8,068			61		1,929		—			11,574
Deferred income taxes, net		9,932		10,296			43		1,374		—			21,645

Total current assets		68,097		105,516			923		11,741		—			186,277
Receivables due beyond one year, net of allowances		—		48,113			397		13,552		—			62,062
Preneed funeral receivables and trust investments		—		387,954			—		9,500		—			397,454
Preneed cemetery receivables and trust investments		—		189,112			1,085		6,600		—			196,797
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		348,668			11,286		26,235		—			386,189
Property and equipment, at cost		54,268		469,159			2,208		38,195		—			563,830
Less accumulated depreciation		37,134		213,539			1,039		15,522		—			267,234

Net property and equipment		17,134		255,620			1,169		22,673		—			296,596
Deferred income taxes, net		—		105,844			—		10,994		(6,972	)		109,866
Cemetery perpetual care trust investments		—		202,202			8,462		3,796		—			214,460
Other assets		7,975		5,113			6		1,045		—			14,139
Intercompany receivables		774,766		—			—		—		(774,766	)		—
Equity in subsidiaries		16,289		8,201			—		—		(24,490	)		—

Total assets	$	884,261	$	1,883,744		$	23,376	$	125,923	$	(806,228	)	$	2,111,076


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3	$	—		$	—	$	—	$	—		$	3
Accounts payable, accrued expenses and other current liabilities		14,528		68,931			220		4,606		—			88,285

Total current liabilities		14,531		68,931			220		4,606		—			88,288
Long-term debt, less current maturities		339,934		—			—		—		—			339,934
Deferred income taxes		3,996		—			2,976		—		(6,972	)		—
Intercompany payables		—		751,049			3,082		20,635		(774,766	)		—
Deferred preneed funeral revenue		—		198,957			—		46,627		—			245,584
Deferred preneed cemetery revenue		—		236,145			278		26,965		—			263,388
Deferred preneed funeral and cemetery receipts held in trust		—		519,327			1,049		6,048		—			526,424
Perpetual care trusts’ corpus		—		199,846			8,455		3,775		—			212,076
Other long-term liabilities		17,163		3,776			—		93		—			21,032
Negative equity in subsidiaries		94,287		—			—		—		(94,287	)		—

Total liabilities		469,911		1,978,031			16,060		108,749		(876,025	)		1,696,726

Common stock		93,122		102			324		52		(478	)		93,122
Other		321,194		(94,389	)		6,992		17,088		70,309			321,194
Accumulated other comprehensive income		34		—			—		34		(34	)		34

Total shareholders’ equity		414,350		(94,287	)		7,316		17,174		69,797			414,350

Total liabilities and shareholders’ equity	$	884,261	$	1,883,744		$	23,376	$	125,923	$	(806,228	)	$	2,111,076

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11)

Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Balance Sheets


	October 31, 2009
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	56,734	$	5,096		$	52	$	926	$	—		$	62,808
Receivables, net of allowances		7,062		47,388			504		4,485		—			59,439
Inventories		269		33,440			312		2,135		—			36,156
Prepaid expenses		1,218		3,804			38		1,688		—			6,748
Deferred income taxes, net		9,006		11,168			47		1,494		—			21,715

Total current assets		74,289		100,896			953		10,728		—			186,866
Receivables due beyond one year, net of allowances		—		48,783			420		13,808		—			63,011
Preneed funeral receivables and trust investments		—		379,899			—		9,613		—			389,512
Preneed cemetery receivables and trust investments		—		185,447			1,124		6,846		—			193,417
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		348,627			11,315		26,035		—			385,977
Property and equipment, at cost		53,956		466,187			2,183		38,136		—			560,462
Less accumulated depreciation		36,015		208,806			994		15,190		—			261,005

Net property and equipment		17,941		257,381			1,189		22,946		—			299,457
Deferred income taxes, net		—		107,636			—		10,415		(4,653	)		113,398
Cemetery perpetual care trust investments		—		193,616			8,207		3,653		—			205,476
Other assets		8,402		5,196			6		1,050		—			14,654
Intercompany receivables		771,490		—			—		—		(771,490	)		—
Equity in subsidiaries		15,065		8,121			—		—		(23,186	)		—

Total assets	$	887,187	$	1,863,003		$	23,262	$	124,881	$	(799,329	)	$	2,099,004


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5	$	—		$	—	$	—	$	—		$	5
Accounts payable, accrued expenses and other current liabilities		15,209		75,920			199		4,678		—			96,006

Total current liabilities		15,214		75,920			199		4,678		—			96,011
Long-term debt, less current maturities		339,721		—			—		—		—			339,721
Deferred income taxes		1,672		—			2,981		—		(4,653	)		—
Intercompany payables		—		747,847			3,402		20,241		(771,490	)		—
Deferred preneed funeral revenue		—		200,990			—		46,835		—			247,825
Deferred preneed cemetery revenue		—		239,177			277		27,510		—			266,964
Deferred preneed funeral and cemetery receipts held in trust		—		507,912			1,045		5,830		—			514,787
Perpetual care trusts’ corpus		—		192,324			8,208		3,636		—			204,168
Other long-term liabilities		17,040		3,716			—		115		—			20,871
Negative equity in subsidiaries		104,883		—			—		—		(104,883	)		—

Total liabilities		478,530		1,967,886			16,112		108,845		(881,026	)		1,690,347

Common stock		92,684		102			324		52		(478	)		92,684
Other		315,938		(104,985	)		6,826		15,949		82,210			315,938
Accumulated other comprehensive income		35		—			—		35		(35	)		35

Total shareholders’ equity		408,657		(104,883	)		7,150		16,036		81,697			408,657

Total liabilities and shareholders’ equity	$	887,187	$	1,863,003		$	23,262	$	124,881	$	(799,329	)	$	2,099,004

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11)

Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Cash Flows


	Three Months Ended January 31, 2010
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(131	)	$	1,411		$	380		$	1,113		$	—	$	2,773

Cash flows from investing activities:
Purchases of certificates of deposit		(5,000	)		—			—			—			—		(5,000	)
Additions to property and equipment		(366	)		(3,725	)		(76	)		(130	)		—		(4,297	)
Other		—			39			—			—			—		39

Net cash used in investing activities		(5,366	)		(3,686	)		(76	)		(130	)		—		(9,258	)

Cash flows from financing activities:
Repayments of long-term debt		(846	)		—			—			—			—		(846	)
Intercompany receivables (payables)		(3,276	)		3,202			(320	)		394			—		—
Retirement of common stock warrants		(107	)		—			—			—			—		(107	)
Issuance of common stock		115			—			—			—			—		115
Retirement of call options		107			—			—			—			—		107
Debt refinancing costs		(38	)		—			—			—			—		(38	)
Dividends		(2,794	)		—			—			—			—		(2,794	)
Excess tax benefits from share-based payment arrangements		20			—			—			—			—		20

Net cash provided by (used in) financing activities		(6,819	)		3,202			(320	)		394			—		(3,543	)

Net increase (decrease) in cash		(12,316	)		927			(16	)		1,377			—		(10,028	)
Cash and cash equivalents, beginning of period		56,734			5,096			52			926			—		62,808

Cash and cash equivalents, end of period	$	44,418		$	6,023		$	36		$	2,303		$	—	$	52,780

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11)

Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)

Condensed Consolidating Statements of Cash Flows


	Three Months Ended January 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(2,134	)	$	7,005		$	103		$	2,310		$	—	$	7,284

Cash flows from investing activities:
Proceeds from sale of assets		292			—			—			—			—		292
Purchase of subsidiaries and other investments, net of cash acquired		—			(1,623	)		—			—			—		(1,623	)
Additions to property and equipment		(1,908	)		(2,587	)		(5	)		(289	)		—		(4,789	)
Other		—			1			—			—			—		1

Net cash used in investing activities		(1,616	)		(4,209	)		(5	)		(289	)		—		(6,119	)

Cash flows from financing activities:
Repayments of long-term debt		(9	)		—			—			—			—		(9	)
Intercompany receivables (payables)		3,690			(744	)		(86	)		(2,860	)		—		—
Issuance of common stock		83			—			—			—			—		83
Dividends		(2,318	)		—			—			—			—		(2,318	)

Net cash provided by (used in) financing activities		1,446			(744	)		(86	)		(2,860	)		—		(2,244	)

Net increase (decrease) in cash		(2,304	)		2,052			12			(839	)		—		(1,079	)
Cash and cash equivalents, beginning of period		65,593			4,332			22			2,627			—		72,574

Cash and cash equivalents, end of period	$	63,289		$	6,384		$	34		$	1,788		$	—	$	71,495

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12)

Consolidated Comprehensive Income

Consolidated comprehensive income for the three months ended January 31, 2010 and 2009 is as follows:


	Three Months Ended January 31,
	2010			2009
Net earnings	$	7,487		$	4,766
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of $1 and ($2), respectively		(1	)		3
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts		20,230			(35,915	)
Reclassification of the net unrealized (increases) losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		(20,230	)		35,915

Total other comprehensive income (loss)		(1	)		3

Total comprehensive income	$	7,486		$	4,769

(13)

Long-term Debt


	January 31, 2010		October 31, 2009
Long-term debt:
3.125% senior convertible notes due 2014, net of unamortized discount of $12,156 and $12,912 as of January 31, 2010 and October 31, 2009, respectively	$	74,260	$	74,504
3.375% senior convertible notes due 2016, net of unamortized discount of $14,400 and $14,858 as of January 31, 2010 and October 31, 2009, respectively		65,584		65,127
Senior secured revolving credit facility		—		—
6.25% senior notes due 2013		200,000		200,000
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rate of 8.0% as of January 31, 2010 and October 31, 2009, partially secured by assets of subsidiaries, with maturities through 2022		93		95

Total long-term debt		339,937		339,726
Less current maturities		3		5

	$	339,934	$	339,721

Fair Value

As of January 31, 2010, the carrying values of the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued interest, were $74,380 and $65,704, respectively, compared to fair values of $72,871 and $65,708, respectively. As of January 31, 2010, the carrying value of the Company’s 6.25 percent senior notes, including accrued interest, was $205,729 compared to a fair value of $200,713.

Senior Convertible Notes

During the three months ended January 31, 2010, the Company purchased $1,000 aggregate principal amount of its 3.125 percent senior convertible notes due 2014 in the open market. In connection with these debt purchases, corresponding call options and common stock warrants were also terminated. As a result of the debt

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13)

Long-term Debt—(Continued)

purchases at discounts, the Company recorded $17 in pre-tax gains on early extinguishment of debt during the three months ended January 31, 2010.

Adoption of Convertible Debt Guidance

This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 (“2014 Notes”) and 3.375 percent senior convertible notes due 2016 (“2016 Notes” and together with the 2014 Notes, the “senior convertible notes”), which were originally issued in 2007, and must be applied retrospectively to all periods since inception. The Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance on the Company’s October 31, 2009 balance sheet was a $9,997 decrease to deferred tax assets, a $27,770 decrease in long-term debt, a $35,001 increase to additional paid-in capital and an increase of $17,228 to accumulated deficit. See Note 2 for additional information on the effects of the adoption of this guidance.

The remaining periods over which the discount on the 2014 Notes and 2016 Notes will be amortized is approximately 4.25 years and approximately 6.25 years, respectively. The carrying value of the equity component of the 2014 Notes as of January 31, 2010 and October 31, 2009 was $16,191 and $16,204, respectively. The carrying value of the equity component of the 2016 Notes was $18,797 as of January 31, 2010 and October 31, 2009. The amount of interest expense recorded for the senior convertible notes for the three months ended January 31, 2010 and 2009 related both to the contractual interest coupon and amortization of the discount on the liability component is $2,426 and $3,516, respectively. For the three months ended January 31, 2010 and 2009, the coupon and amortization of the discount yielded an effective interest rate of approximately 6.96 percent on the 2014 Notes and the 2016 Notes.

Holders may convert their senior convertible notes based on a conversion rate of 90.4936 shares of the Company’s Class A common stock per $1,000 principal amount of senior convertible notes (which is equal to an initial conversion price of approximately $11.05 per share), subject to adjustment: (1) during any fiscal quarter beginning after October 31, 2007, if the closing price of the Company’s Class A common stock for a specified period in the prior quarter is more than 130 percent of the conversion price per share, (2) for a specified period after five trading days in which the trading price of the notes for each trading day was less than 95 percent of the product of the closing price of the Company’s Class A common stock and the then applicable conversion rate, (3) if specified distributions to holders of the Company’s Class A common stock occur, (4) if a fundamental change occurs or (5) during the last month prior to the maturity date of the notes. None of these conditions had been met during the three months ended January 31, 2010, fiscal year 2009 or fiscal year 2008.

Upon conversion, in lieu of shares of the Company’s Class A common stock, for each $1,000 principal amount of senior convertible notes converted, a holder will receive an amount in cash equal to the lesser of (1) $1,000 or (2) the conversion value, determined in the manner set forth in the indentures, of the number of shares of the Company’s Class A common stock equal to the conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at the Company’s election, cash or Class A common stock or a combination of cash and Class A common stock with respect to such excess amount, subject to the limitations in the indentures. If a holder

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13)

Long-term Debt—(Continued)

elects to convert its senior convertible notes in connection with certain fundamental change transactions, the Company will pay, to the extent described in the indentures, a make whole premium by increasing the conversion rate applicable to such senior convertible notes.

Upon specified fundamental change events, holders will have the option to require the Company to purchase for cash all or any portion of their senior convertible notes at a price equal to 100 percent of the principal amount of the senior convertible notes plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.

Also, in connection with the sale of the senior convertible notes, the Company purchased call options with respect to its Class A common stock from Bank of America/Merrill Lynch International. The call options cover, subject to anti-dilution adjustments, 11,311,700 shares of Class A common stock for each series of senior convertible notes, at strike prices that correspond to the initial conversion price of the notes. The call options are expected to offset the Company’s exposure to dilution from conversion of the senior convertible notes because any shares the Company would be obligated to deliver to holders upon conversion of the senior convertible notes would be delivered to the Company by the counterparty to the call options. The Company paid approximately $60,000 for the call options.

The Company also entered into warrant transactions whereby it sold to Bank of America/Merrill Lynch Financial Markets warrants expiring in 2014 and 2016 to acquire, subject to customary anti-dilution adjustments, 11,311,700 and 11,311,700 shares of Class A common stock, respectively. The strike prices of the sold warrants expiring in 2014 and 2016 are $12.93 per share of Class A common stock and $13.76 per share of Class A common stock, respectively. The warrants expiring in 2014 and 2016 may not be exercised prior to the maturity of the 2014 Notes and 2016 Notes, respectively. The Company can elect to settle the warrants in cash or Class A common stock, subject to certain conditions. The Company received approximately $43,850 for the warrants. In connection with the purchases of the Company’s senior convertible notes during fiscal year 2009 and the three months ended January 31, 2010, the number of shares subject to the warrants was reduced to 6,913,280 related to the 2014 Notes and 6,398,800 related to the 2016 Notes.

The price of the call options is treated for tax purposes as interest expense, which amortizes over the lives of the notes. Accordingly, the Company will have a tax benefit of approximately $21,000 over the lives of the senior convertible notes. The sale of the warrants is not expected to have any tax consequences to the Company.

By selling the warrants, the Company used the proceeds to offset much of the cost of the call options. By simultaneously purchasing the call options and selling the warrants, the Company has effectively increased the conversion premium on the senior convertible notes to 55-65 percent above the market price of the Class A common stock at the time of the offering.

(14)

Income Taxes

The Company continues to pursue several tax planning strategies. The Company received IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result in the deferral of approximately $70.0 million of taxable income. The combination of these two changes will significantly reduce federal income tax cash payments (approximately $25.0 million) for the next two to three years.

(15)

Subsequent Events

During February 2010, several of the Company’s facilities in Texas and one facility in Maryland experienced property damage from winter storms but were able to restore operations quickly. The Company is in the process of assessing the damages.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15)

Subsequent Events—(Continued)

As of February 28, 2010, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts increased 1.6 percent, or approximately $12,000, from January 31, 2010.

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2009 (the “2009 Form 10-K”), and in conjunction with our consolidated financial statements included in this report and in our 2009 Form 10-K.

This report contains forward-looking statements that are generally identifiable through the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “project,” “will” and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors in our 2009 Form 10-K. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Overview

General

We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States. As of January 31, 2010, we owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral, cremation and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2009 Form 10-K.

As of November 1, 2009, the Company adopted guidance regarding the accounting for our 2014 and 2016 senior convertible notes and applied the change retrospectively for all periods presented. See Note 2 and Note 13 to the condensed consolidated financial statements for further information on the impact of the accounting change in the Company’s statements of earnings and balance sheets.

Financial Summary

For the first quarter of fiscal year 2010, net earnings increased $2.7 million to $7.5 million from $4.8 million for the first quarter of fiscal year 2009. Revenue increased $5.1 million to $124.4 million for the quarter ended January 31, 2010. Funeral revenue increased $0.4 million to $72.1 million in the first quarter of 2010, primarily due to a $0.5 million increase in funeral trust related activities. The increase in trust earnings was partially offset by a 1.3 percent, or 185 event, decrease in same-store funeral services performed and a 0.6 percent decrease in same-store average revenue per funeral service, including trust earnings. Cemetery revenue increased $4.7 million to $52.3 million for the quarter ended January 31, 2010. This increase is due primarily to a $1.8 million, or 9.8 percent, increase in cemetery property sales, net of discounts, a $1.4 million increase in merchandise delivered and a $0.6 million increase in cemetery trust related activities. Consolidated gross profit increased $2.1 million to $25.2 million primarily due to a $1.2 million increase in cemetery gross profit and a $0.9 million increase in funeral gross profit.

Corporate general and administrative expenses decreased $1.0 million to $6.5 million for the quarter ended January 31, 2010 largely due to a decrease in information technology costs and a decrease in training costs related to our implementation of a new business system in the prior year. Interest expense decreased $0.9 million to $6.5 million during the first quarter of 2010 primarily due to the significant fiscal year 2009 repurchases of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009. The effective tax

rate for the three months ended January 31, 2010 was 39.5 percent compared to 41.2 percent for the same period in 2009. We recorded a tax valuation allowance of $0.2 million for the three months ended January 31, 2010, compared to a $0.3 million tax valuation allowance for the same period in 2009. The tax valuation allowance increased income tax expense for both periods by the respective amounts. The tax rate for both the current and prior quarter would have been approximately 37 percent without the tax valuation allowance.

For the first quarter of 2010, preneed cemetery property sales, net of discounts, increased 9.8 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net preneed funeral sales decreased 3.3 percent during the first quarter of 2010 compared to the first quarter of 2009. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

During the first quarter of fiscal 2010, we experienced positive trends in the overall financial markets and in our preneed and perpetual care trusts. Specifically, our preneed funeral and cemetery merchandise and services trusts experienced a total return, including both realized and unrealized losses, of 4.1 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized losses, of 5.0 percent.

As of January 31, 2010 and October 31, 2009, the fair market value of the investments in our funeral and cemetery merchandise and services trusts were $177.8 million and $192.9 million, respectively, lower than our cost basis. The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of January 31, 2010 and October 31, 2009, we had $218.5 million and $220.7 million, respectively, in distributable earnings that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.

In our cemetery perpetual care trusts, as of January 31, 2010 and October 31, 2009, the fair market value of our investments were $51.6 million and $56.7 million, respectively, lower than our cost basis. See Note 5 to the condensed consolidated financial statements for further information on the estimated probable funding obligation.

The sectors in which our trust investment portfolio is invested have not materially changed from that disclosed in our 2009 Form 10-K.

Each quarter we perform an analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. When we review our backlog for potential loss contracts, we consider the impact of the market value of our trust assets. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include anticipated future returns on the investments in our analysis. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts in our backlog. Due to the positive margins of our preneed contracts and the trust portfolio returns we have experienced in prior years and deferred on our consolidated balance sheet until delivery, currently there is capacity for additional market depreciation before a contract loss would result.

For additional information regarding our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in this report.

The following table presents our trust portfolio returns including realized and unrealized gains and losses.


	Funeral and Cemetery
	Merchandise and			Cemetery Perpetual
	Services Trusts			Care Trusts
For the quarter ended January 31, 2010		4.1	%		5.0	%
For the last twelve months ended January 31, 2010		28.8	%		32.8	%
For the last five years ended January 31, 2010		(1.3	)%		2.1	%
For the last ten years ended January 31, 2010		1.9	%		2.7	%

largely due to an increase in working capital, partly driven by a $4.6 million increase in receivables due in part to the improved cemetery property sales during the quarter, which are typically financed. Due to the timing of our insurance, property tax and other annual payments made on or around calendar year end, we have historically had negative to slightly positive cash flow in the first quarter while generating greater amounts of cash in later quarters.

Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2009 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2009 Form 10-K.

Results of Operations

Effective as of the second quarter of fiscal year 2009, we have three operating and reportable segments consisting of a funeral segment, cemetery segment and a corporate trust management segment. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. Prior period data has been retrospectively adjusted to conform to the new segment presentation. As there have been no material acquisitions or construction of new locations in fiscal years 2010 and 2009, results essentially reflect those of same-store locations.

Three Months Ended January 31, 2010 Compared to Three Months Ended January 31, 2009

Funeral Operations


	Three Months Ended January 31,
					Increase
	2010		2009		(Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	68.0	$	68.1	$	(.1	)
Corporate Trust Management⁽¹⁾		4.1		3.6		.5

Total Funeral Revenue	$	72.1	$	71.7	$	.4


Funeral Costs:
Funeral Home Locations	$	52.6	$	53.2	$	(.6	)
Corporate Trust Management⁽¹⁾		.3		.2		.1

Total Funeral Costs	$	52.9	$	53.4	$	(.5	)


Funeral Gross Profit:
Funeral Home Locations	$	15.4	$	14.9	$	.5
Corporate Trust Management⁽¹⁾		3.8		3.4		.4

Total Funeral Gross Profit	$	19.2	$	18.3	$	.9

Same-Store Analysis for the Three Months Ended January 31, 2010 and 2009


Change in Average Revenue	Change in Same-Store
Per Funeral Service	Funeral Services			Same-Store Cremation Rate
				2010			2009
(.6)%⁽¹⁾		(1.3	)%		41.4	%		40.3	%


⁽¹⁾		Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are


		established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended January 31, 2010 and 2009 were $1.1 million and $0.9 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended January 31, 2010 and 2009 were $3.0 million and $2.7 million, respectively.

Funeral revenue increased $0.4 million, or 0.6 percent, from $71.7 million in the first quarter of 2009 to $72.1 million in the first quarter of 2010. The increase in funeral revenue is primarily due to a $0.5 million increase in funeral trust related activities. During the first quarter of 2010, our same-store funeral operations experienced a decrease in average revenue per traditional funeral service of 0.8 percent, partially offset by an increase in average revenue per cremation service of 1.3 percent. These averages were affected by a shift in mix to lower priced funeral services during the quarter. These averages were also impacted by a quarter-over-quarter increase in funeral trust earnings resulting in an overall decrease in the same-store average revenue per funeral service of 0.6 percent. Same-store funeral services decreased 1.3 percent, or 185 events, or less than one event per funeral home. The cremation rate for our same-store operations was 41.4 percent for the first quarter of 2010 compared to 40.3 percent for the first quarter of 2009.

Funeral gross profit increased $0.9 million, or 4.9 percent, to $19.2 million for the first quarter of 2010 compared to $18.3 million for the same period of 2009, primarily due to the increase in revenue, as noted above, coupled with a reduction in expenses due to effective cost management.

Cemetery Operations


	Three Months Ended January 31,
					Increase
	2010		2009		(Decrease)
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	50.5	$	45.7	$	4.8
Corporate Trust Management⁽¹⁾		1.8		1.9		(.1	)

Total Cemetery Revenue	$	52.3	$	47.6	$	4.7


Cemetery Costs:
Cemetery Locations	$	46.1	$	42.5	$	3.6
Corporate Trust Management⁽¹⁾		.2		.3		(.1	)

Total Cemetery Costs	$	46.3	$	42.8	$	3.5


Cemetery Gross Profit:
Cemetery Locations	$	4.4	$	3.2	$	1.2
Corporate Trust Management⁽¹⁾		1.6		1.6		—

Total Cemetery Gross Profit	$	6.0	$	4.8	$	1.2


⁽¹⁾		Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information


		regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $1.2 million and $1.0 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $0.6 million and $0.9 million, respectively. Perpetual care trust earnings of $2.4 million and $1.7 million, respectively, are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

Cemetery revenue increased $4.7 million, or 9.9 percent, from $47.6 million for the quarter ended January 31, 2009 to $52.3 million for the quarter ended January 31, 2010. This increase is due primarily to a $1.8 million, or 9.8 percent, increase in cemetery property sales, net of discounts, a $1.4 million increase in merchandise delivered and a $0.6 million increase in revenue related to trust activities, of which $0.7 million of the increase relates to cemetery perpetual care trust earnings.

Cemetery gross profit increased $1.2 million, or 25.0 percent, to $6.0 million for the first quarter of 2010 compared to $4.8 million for the same period of 2009. The increase in cemetery gross profit is primarily due to the increase in cemetery revenue, as discussed above, partially offset by an increase in property costs and selling costs resulting from the increase in cemetery property sales.

Other

Interest expense decreased $0.9 million to $6.5 million during the first quarter of fiscal year 2010 primarily due to the significant fiscal year 2009 repurchases of a portion of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009.

The effective tax rate for the three months ended January 31, 2010 was 39.5 percent compared to 41.2 percent for the same period in 2009. We recorded a tax valuation allowance of $0.2 million for the three months ended January 31, 2010, compared to a $0.3 million tax valuation allowance for the same period of 2009. The tax valuation allowance increased income tax expense for both periods by the respective amounts. The tax rate for both the current and prior quarter would have been approximately 37 percent without the tax valuation allowance.

Since January 31, 2009, we have repurchased $83.6 million aggregate principal amount of our senior convertible notes in the open market, including repurchases of $1.0 million aggregate principal amount during the first quarter of fiscal year 2010.

Cash and cash equivalents decreased $10.0 million from October 31, 2009 to January 31, 2010 primarily due to the purchase of $5.0 million in certificates of deposit and $4.3 million in capital expenditure projects. Prepaid expenses increased $4.8 million from October 31, 2009 to January 31, 2010 primarily due to annual premiums paid in the first quarter of fiscal year 2010 for property, general liability and other insurance. Deferred income taxes decreased $3.5 million primarily due to the utilization of net operating losses in the first quarter of 2010 and other timing differences. Preneed funeral receivables and trust investments, preneed cemetery receivables and trust investments, cemetery perpetual care trust investments, deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus were all positively impacted by the recent improvement in the market value of our trust assets. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

Accounts payable decreased $4.3 million from October 31, 2009 to January 31, 2010 primarily due to the timing of payables related to professional fees and vendor payments. Accrued payroll decreased $3.3 million from October 31, 2009 to January 31, 2010 due to fiscal year 2009 annual bonuses paid in the first quarter of 2010 and due to the timing of the payroll period at quarter end. Other current liabilities decreased $2.1 million from October

31, 2009 to January 31, 2010 primarily due to a $2.5 million decline in accrued property taxes, as 80 percent of our property taxes are paid in the months of December and January each year.

Preneed Sales into the Backlog

Net preneed funeral sales decreased 3.3 percent during the first three months of fiscal year 2010 compared to the corresponding period in 2009.

The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We had $28.3 million in net preneed funeral and cemetery merchandise and service sales (including $16.3 million related to insurance-funded preneed funeral contracts) during the three months ended January 31, 2010 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $29.5 million (including $16.3 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2009. Insurance-funded preneed funeral contracts which will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected in the condensed consolidated balance sheets.

Liquidity and Capital Resources

General

We generate cash in our operations primarily from at-need sales, preneed sales that turn at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn at-need, monies collected on preneed sales that are not required to be trusted and cemetery perpetual care trust earnings. Over the last five years, we have generated more than $50.0 million each year in cash flow from operations. We have historically satisfied our working capital requirements with cash flows from operations. We believe that our current level of cash on hand, projected cash flows from operations and available capacity under our $95.0 million senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future, although we will need to refinance the senior secured revolving credit facility in 2012 and long-term debt becoming due in 2013 through 2016, as described below.

As of January 31, 2010, we had no amounts drawn on the $95.0 million senior secured revolving credit facility, and our availability under the senior secured revolving credit facility, after giving consideration to $8.8 million outstanding letters of credit and the $24.8 million Florida bond, was $61.4 million. We also have the ability to request the addition of a new tranche of term loans, an increase in the commitments to the senior secured revolving credit facility or a combination thereof not to exceed $30.0 million. Our $200.0 million senior notes mature on February 15, 2013 and are currently redeemable at the redemption prices set forth in the indenture. We also have $166.4 million in senior convertible notes as of January 31, 2010 of which $86.4 million mature in 2014 and $80.0 million mature in 2016. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.

Beginning in the fourth quarter of fiscal year 2009, we increased our quarterly cash dividend from two and one-half cents per share to three cents per share on our Class A and B common stock, which amounted to $2.8 million for the three months ended January 31, 2010. The declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. We also have a $75.0 million stock repurchase program, of which $26.5 million remains available as of January 31, 2010. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. We have not made open-market stock repurchases under the program since July 2008. During fiscal year 2009, we repurchased $82.6 million aggregate principal amount of our senior convertible notes in the open market at substantial discounts and repurchased an additional $1.0 million aggregate principal amount during the first quarter of fiscal year 2010.

We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to pay dividends, construct funeral homes on cemeteries of unaffiliated third parties or in

strategic locations, make acquisitions of or investments in death care or related businesses and repurchase debt and stock are attractive options. We believe that growing our organization through acquisitions and investments is a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure. We have also redesigned our websites to support e-commerce initiatives that will provide new revenue opportunities in the future and are continuing to invest in improving our business processes. We regularly review acquisition and other strategic opportunities, which may require us to draw on our senior secured revolving credit facility or pursue additional debt or equity financing.

We pursued several tax planning strategies in fiscal year 2009. We received IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result in the deferral of approximately $70 million of taxable income. The combination of these two changes will significantly reduce federal income tax cash payments (approximately $25 million) for the next two to three years. We are continuing to review all of our tax accounting policies to determine opportunities to improve our current tax position. Several possible changes are being considered that could result in potential reductions in future tax payments. At this time, we cannot predict with certainty what, if any, reductions in future tax payments we will obtain. However, we currently do not expect that these potential reductions in future tax payments, if obtained, will be as substantial as those obtained in fiscal year 2009 or to date in fiscal year 2010.

Cash Flow

Our operations provided cash of $2.8 million for the three months ended January 31, 2010, compared to $7.3 million for the corresponding period in 2009. The decrease in the current quarter’s operating cash flow is largely due to an increase in working capital, partly driven by a $4.6 million increase in receivables due in part to the improved cemetery property sales during the quarter, which are typically financed. Due to the timing of our insurance, property tax and other annual payments made on or around calendar year end, we have historically had negative to slightly positive cash flow in the first quarter while generating greater amounts of cash in later quarters.

Our investing activities resulted in a net cash outflow of $9.3 million for the three months ended January 31, 2010, compared to a net cash outflow of $6.1 million for the comparable period in 2009. The change is primarily due to $5.0 million in purchases of certificates of deposit in the first quarter of fiscal year 2010. For the three months ended January 31, 2010, capital expenditures amounted to $4.3 million, which included $3.0 million for maintenance capital expenditures, $1.2 million for growth initiatives and $0.1 million related to the implementation of new business systems. For the three months ended January 31, 2009, capital expenditures were $4.8 million, which included $3.1 million for maintenance capital expenditures, $0.4 million for growth initiatives, and $1.3 million related to the implementation of new business systems. We also purchased a cemetery business in the first quarter of fiscal year 2009 resulting in a net cash outflow of $1.6 million.

Our financing activities resulted in a net cash outflow of $3.5 million for the three months ended January 31, 2010, compared to a net cash outflow of $2.2 million for the comparable period in 2009. The change is primarily due to $0.8 million in repayments of long-term debt during the first quarter of 2010. Also, dividends in the first quarter of 2010 reflect the increased quarterly dividend rate of $0.030 per share, from $0.025 per share, which went into effect in the fourth quarter of fiscal year 2009.

Contractual Obligations and Commercial Commitments

We have contractual obligations requiring future cash payments under existing contractual arrangements. The following table details our known future cash payments (in millions) related to various contractual obligations as of January 31, 2010.


	Payments Due by Period
			Less than						More than
Contractual Obligations	Total		1 year		1 – 3 years		3 – 5 years		5 years
Long-term debt obligations⁽¹⁾	$	366.5	$	—	$	—	$	286.4	$	80.1
Interest on long-term debt⁽²⁾		73.5		17.9		35.8		15.7		4.1
Operating and capital lease obligations⁽³⁾		29.9		3.4		6.0		3.8		16.7
Purchase obligations⁽⁴⁾		2.7		2.7		—		–		—
Non-competition and other agreements⁽⁵⁾		1.4		.3		.5		.2		.4

	$	474.0	$	24.3	$	42.3	$	306.1	$	101.3


⁽¹⁾		See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of January 31, 2010.

⁽²⁾		Includes contractual interest payments for our senior convertible notes, senior notes and third-party debt.

⁽³⁾		Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 14 years, except for eight leases that expire between 2032 and 2039. Our future minimum lease payments for all operating leases as of January 31, 2010 are $3.4 million, $3.3 million, $2.7 million, $2.1 million, $1.7 million and $16.7 million for the years ending October 31, 2010, 2011, 2012, 2013, 2014 and later years, respectively.

⁽⁴⁾		Represents a construction contract for a funeral home.

⁽⁵⁾		This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses and separation pay related to former executive officers.

The following table details our known potential or possible future cash payments related to the contingent obligations specified below (in millions) as of January 31, 2010.


	Expiration by Period
				Less than 1						More than 5
Contingent Obligations	Total			year		1 – 3 years		3 – 5 years		years
Cemetery perpetual care trust funding obligations⁽¹⁾	$	13.6	��	$	13.6	$	—	$	—	$	—
Long-term obligations related to uncertain tax positions⁽²⁾		3.6			—		—		—		3.6

	$	17.2		$	13.6	$	—	$	—	$	3.6


⁽¹⁾		In those states where we have withdrawn realized net capital gains in the past from our cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $13.6 million as of January 31, 2010. As of January 31, 2010, we had unrealized losses of $44.8 million in the trusts in these states. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs. In those states where realized net capital gains have not been withdrawn, we believe it is reasonably possible that additional funding obligations may exist with an estimated amount of approximately $3.1 million.

⁽²⁾		In accordance with the required accounting guidance on uncertain tax positions, as of January 31, 2010, we have recorded $3.6 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate


		the range of increase and decrease and the timing thereof of any potential cash payments.

As of January 31, 2010, our outstanding long-term debt balance was $366.5 million, consisting of $86.4 million in 3.125 percent senior convertible notes due 2014, $80.0 million in 3.375 percent senior convertible notes due 2016, $200.0 million of 6.25 percent senior notes and $0.1 million of other debt. There were no amounts drawn on the senior secured revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of January 31, 2010.


							Other,
		Senior					Principally
		Secured					Seller
		Revolving	Senior				Financing
		Credit	Convertible		Senior		of Acquired
Fiscal Years Ending October 31,		Facility	Notes		Notes		Operations		Total
2010	$	—	$	—	$	—	$	—	$	—
2011		—		—		—		—		—
2012		—		—		—		—		—
2013		—		—		200.0		—		200.0
2014		—		86.4		—		—		86.4
Thereafter		—		80.0		—		.1		80.1

Total long-term debt	$	—	$	166.4	$	200.0	$	.1	$	366.5

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of January 31, 2010 consist of the following items:

	(1)		the $24.8 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed above and in Note 20 to the consolidated financial statements in our 2009 Form 10-K; and

	(2)		the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our condensed consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements in our 2009 Form 10-K.

Recent Accounting Standards

See Note 2 to the condensed consolidated financial statements included herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is presented in Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on December 17, 2009. There have been no material changes in the Company’s market risk from that disclosed in our Form 10-K for the fiscal year ended October 31, 2009. For a discussion of fair market value as of January 31, 2010 of investments in our trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein.

Item 4. Controls and Procedures

Disclosure Controls and Procedures

The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s Disclosure Committee and management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

For a discussion of our current litigation, see Note 7 to the condensed consolidated financial statements included herein.

In addition to the matters in Note 7, we and certain of our subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.

We carry insurance with coverages and coverage limits that we believe to be adequate. Although there can be no assurance that such insurance is sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

Item 1A. Risk Factors

There have been no material changes from the risk factors previously disclosed in our 2009 Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers

Issuer Purchases of Equity Securities


					Total number of		Maximum
					shares		approximate dollar
					purchased as		value of shares that
	Total number		Average		part of publicly-		may yet be
	of shares		price paid		announced plans		purchased under the
Period	purchased		per share		or programs		plans or programs⁽¹⁾
November 1, 2009 through November 30, 2009		—	$	—		—	$	26,495,706

December 1, 2009 through December 31, 2009		—	$	—		—	$	26,495,706

January 1, 2010 through January 31, 2010		—	$	—		—	$	26,495,706


Total		—	$	—		—	$	26,495,706


⁽¹⁾		We announced a $25.0 million stock repurchase program in September 2007, which was increased by $25.0 million in December 2007 and June 2008, resulting in a $75.0 million program.

Item 6. Exhibits


3.1		Amended and Restated Articles of Incorporation of the Company, as amended and restated as of April 3, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2008)

3.2		By-laws of the Company, as amended and restated as of September 8, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2008)

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 3 to the Company’s Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007)

4.3		Second Amended and Restated Credit Agreement dated June 2, 2009 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 3, 2009)

4.4		Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25 percent Senior Notes due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 14, 2005)

4.5		Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 14, 2005)

4.6		Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.125 percent Senior Convertible Notes due 2014 (including Form of 3.125 percent Senior Convertible Notes due 2014) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 27, 2007)

4.7		Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.375 percent Senior Convertible Notes due 2016 (including Form of 3.375 percent Senior Convertible Notes due 2016) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 27, 2007)

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

SIGNATURES

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


	STEWART ENTERPRISES, INC.
March 10, 2010	/s/ THOMAS M. KITCHEN
	Thomas M. Kitchen
	Senior Executive Vice President and Chief Financial Officer


March 10, 2010	/s/ ANGELA M. LACOUR
	Angela M. Lacour
	Vice President Corporate Controller Chief Accounting Officer

Exhibit Index


31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

32.1		Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

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Stewart Enterprises (STEI) Inactive 10-Q2010 Q1 Quarterly report

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