Stewart Enterprises (STEI) 10-Q 2010 Q3 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 July 31, 2010

or

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	Smaller reporting companyo
		(Do not check if a smaller reporting company)

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

     The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of August 31, 2010, was 89,631,002 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

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

2

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

See accompanying notes to condensed consolidated financial statements

3

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

See accompanying notes to condensed consolidated financial statements.

4

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

(continued)

5

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

See accompanying notes to condensed consolidated financial statements.

6

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

⁽¹⁾ Amount includes 89,631 and 89,129 shares (in thousands) of Class A common stock with a stated value of $1 per share as of July 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.

7

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

See accompanying notes to condensed consolidated financial statements.

8

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation

     (a) The Company

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

     (b) Principles of Consolidation

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

     (c) Interim Disclosures

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

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

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

     (d) Use of Estimates

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

     (e) Share-Based Compensation

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

9

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

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

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

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

	Number of Shares		Weighted Average
Grant Type	Granted		Price per Share		Vesting Period	Vesting Condition
Stock options		960,750	$	5.08	Equal one-fourth portions over 4 years	Service condition
Restricted stock		324,500	$	5.09	Equal one-third portions over 3 years	Market condition
Restricted stock		7,500	$	4.89	Equal one-third portions over 3 years	Service condition

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

     (f) Goodwill

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

     (g) Reclassifications

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

10

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles

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

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

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

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

11

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

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

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

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

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

12

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

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

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

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

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

13

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities

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

Preneed Funeral Receivables and Trust Investments

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

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

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

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

14

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

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

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

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

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

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

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

15

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

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

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

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

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

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

⁽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.

16

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     Activity related to preneed funeral trust investments is as follows:

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

(1)	Includes $193 in losses from the sale of investments and $3,536 in losses related to certain investments that the Company determined it no longer had the intent to hold until they recover in value.
(2)	Includes $477 in losses from the sale of investments and $34 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it no longer had the intent to hold until they recover in value.
(3)	Includes $1,426 in losses from the sale of investments and $3,536 in losses related to certain investments that the Company determined it no longer had the intent to hold until they recover in value.
(4)	Includes $964 in losses from the sale of investments and $8,440 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it no longer had 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 July 31, 2010 and October 31, 2009.

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

17

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

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

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

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

18

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

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

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

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

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

19

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:

	July 31, 2010
Due in one year or less	$	4,041
Due in one to five years		10,585
Due in five to ten years		5,848
Thereafter		125
	$	20,599

     The Company is actively managing a covered call program on its equity securities within the cemetery merchandise and services trust in order to provide an opportunity for additional income. As of July 31, 2010 and October 31, 2009, the Company had outstanding covered calls with a market value of $77 and $308, respectively. These covered calls are included at market value in the balance sheet line “preneed cemetery receivables and trust investments.” For the three months ended July 31, 2010 and 2009, the Company realized trust earnings of approximately $9 and $99, respectively, related to the covered call program. For the nine months ended July 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($205) and $337 respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as for other cemetery merchandise and services trust earnings and flow through cemetery revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the nine months ended July 31, 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $2,823 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.

20

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)

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

     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 Market
	Prices in Active		Significant Other		Significant
	Markets		Observable Inputs		Unobservable Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—July 31, 2010	$	133,833	$	39,431	$	—	$	173,264
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 July 31,						Nine Months Ended July 31,
	2010			2009			2010			2009
Purchases	$	9,739		$	4,444		$	20,874		$	7,870
Sales		3,054			6,966			15,823			11,464
Realized gains from sales of investments		170			233			1,429			611
Realized losses from sales of investments and other		(281	)(1)		(776	)(2)		(1,799	)(3)		(6,526	)(4)
Interest income, dividends and other ordinary income		1,461			1,293			3,851			3,801
Deposits		4,303			4,370			13,779			12,692
Withdrawals		4,472			4,641			13,201			13,023

(1)	Includes $264 in losses from the sale of investments and $17 in losses related to certain investments that were previously deemed other than temporarily impaired.
(2)	Includes $756 in losses from the sale of investments and $20 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it no longer had the intent to hold until they recover in value.
(3)	Includes $1,988 in losses from the sale of investments and $17 in losses related to certain investments that were previously deemed other than temporarily impaired.
(4)	Includes $3,230 in losses from the sale of investments and $3,296 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it no longer had the intent to hold until they recover in value.

21

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 July 31, 2010 and October 31, 2009.

	July 31, 2010
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
Corporate bonds	$	1,660	$	(13	)	$	685	$	(14	)	$	2,345	$	(27	)
Preferred stocks		—		—			17,568		(2,188	)		17,568		(2,188	)
Common stocks		1,314		(214	)		65,426		(50,126	)		66,740		(50,340	)
Mutual funds:
Equity		—		—			21,276		(8,890	)		21,276		(8,890	)
Fixed income		2,383		(24	)		15		(3	)		2,398		(27	)
Total	$	5,357	$	(251	)	$	104,970	$	(61,221	)	$	110,327	$	(61,472	)

	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, concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2010, 85 percent, or $52,528, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

     The Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, trust earnings which include dividends and interest earned and net capital gains and losses realized by preneed cemetery 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 sales price when the underlying service or merchandise is actually delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.

22

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)

     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 $2,186 and $1,541 for the three months ended July 31, 2010 and 2009, respectively, and $6,005 and $5,342 for the nine months ended July 31, 2010 and 2009, respectively.

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

	July 31, 2010
	Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments	$	39,522	$	—	$	—		$	39,522
U.S. Government, agencies and municipalities		2,346		243		(52	)		2,537
Corporate bonds		35,035		1,293		(888	)		35,440
Preferred stocks		57,613		80		(9,060	)		48,633
Common stocks		90,675		994		(39,821	)		51,848
Mutual funds:
Equity		8,853		17		(1,238	)		7,632
Fixed income		35,461		576		(385	)		35,652
Other long-term investments		642		1		(177	)		466
Trust investments	$	270,147	$	3,204	$	(51,621	)		221,730
Market value as a percentage of cost										82.1	%
Accrued investment income									638
Trust assets								$	222,368

23

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)

     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:

	July 31, 2010
Due in one year or less	$	10,772
Due in one to five years		19,345
Due in five to ten years		7,467
Thereafter		393
	$	37,977

     The Company is actively managing a covered call program on its equity securities within the cemetery perpetual care trust in order to provide an opportunity for additional income. As of July 31, 2010 and October 31, 2009, the Company had outstanding covered calls with a market value of $59 and $220, respectively. These covered calls are included at market value in the balance sheet line “cemetery perpetual care trust investments.” For the three months ended July 31, 2010 and 2009, the Company realized trust earnings of approximately $5 and $83, respectively, related to the covered call program. For the nine months ended July 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($178) and $240, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as for other cemetery perpetual care trust earnings and flow through cemetery revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the nine months ended July 31, 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $1,905 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.

24

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)

     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, convertible 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—July 31, 2010	$	134,804	$	86,610	$	316	$	221,730
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 July 31,						Nine Months Ended July 31,
	2010			2009			2010			2009
Fair market value, beginning balance	$	250		$	287		$	226		$	611
Total unrealized losses included in other comprehensive income(1)		(3	)		—			(3	)		(177	)
Transfers out of Level 3 category and other		69			(83	)		93			(230	)
Fair market value, ending balance	$	316		$	204		$	316		$	204

⁽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 initial corpus. As of July 31, 2010 and October 31, 2009, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $13,533 and $14,010, respectively. The Company recorded an additional $31 for the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust for the quarter and nine months ended July 31, 2010. The additional funding obligation is related to the further decline in certain investments that the Company had previously deemed other than temporarily impaired. The Company had earnings of $508 for the nine months ended July 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. In those states where realized net capital gains have not been withdrawn, the Company believes it is

25

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)

reasonably possible but not probable that additional funding obligations may exist with an estimated amount of $2,668; no charge has been recorded for these amounts as of July 31, 2010.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2010			2009			2010			2009
Purchases	$	21,806		$	1,721		$	60,908		$	9,590
Sales		35,931			1,492			78,016			3,345
Realized gains from sales of investments		945			85			5,228			619
Realized losses from sales of investments and other		(81	)(1)		(26	)		(899	)(2)		(3,235	)(3)
Interest income, dividends and other ordinary income		2,072			2,145			6,410			7,001
Deposits		1,691			2,526			5,424			6,747	(4)
Withdrawals		1,838			1,182			4,847			4,136

(1)	Includes $50 in losses from the sale of investments and includes $31 in losses related to certain investments that were previously deemed other than temporarily impaired.
(2)	Includes $868 in losses from the sale of investments and includes $31 in losses related to certain investments that were previously deemed other than temporarily impaired.
(3)	Includes $16 in losses from the sale of investments and includes $3,219 in losses related to certain investments that were rendered worthless or practically worthless.
(4)	Includes $734 that the Company contributed to the cemetery perpetual care trusts as part of its funding obligation during the nine months ended July 31, 2009..

     During the three months ended July 31, 2010 and 2009, cemetery revenues were $55,873 and $51,735, respectively, of which $1,466 and $1,972, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses. During the nine months ended July 31, 2010 and 2009, cemetery revenues were $165,138 and $154,693, respectively, of which $6,110 and $5,625, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.

26

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)

     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 July 31, 2010 and October 31, 2009.

	July 31, 2010
	Less than 12 Months					12 Months or Greater					Total
	Market		Unrealized			Market		Unrealized			Market		Unrealized
	Value		Losses			Value		Losses			Value		Losses
U.S. Government, agencies and municipalities	$	—	$	—		$	115	$	(52	)	$	115	$	(52	)
Corporate bonds		3,388		(38	)		1,562		(850	)		4,950		(888	)
Preferred stocks		—		—			43,157		(9,060	)		43,157		(9,060	)
Common stocks		878		(483	)		48,733		(39,338	)		49,611		(39,821	)
Mutual funds:
Equity		2,137		(14	)		5,356		(1,224	)		7,493		(1,238	)
Fixed income		7,979		(83	)		851		(302	)		8,830		(385	)
Other long-term investments		—		—			199		(177	)		199		(177	)
Total	$	14,382	$	(618	)	$	99,973	$	(51,003	)	$	114,355	$	(51,621	)

	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, concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at July 31, 2010, 95 percent, or $48,881, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

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

27

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

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

	Deferred Receipts Held in Trust
	Preneed			Preneed
	Funeral			Cemetery			Total
Trust assets at market value	$	369,418		$	173,725		$	543,143
Less:
Pending withdrawals		(7,557	)		(5,087	)		(12,644	)
Pending deposits		2,118			1,365			3,483
Deferred receipts held in trust	$	363,979		$	170,003		$	533,982

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

	Perpetual Care
	Trusts’ Corpus
Trust assets at market value	$	222,368
Less:
Pending withdrawals		(2,755	)
Perpetual care trusts’ corpus	$	219,613

Investment and other income, net

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2010			2009			2010			2009
Realized gains from sales of investments	$	1,375		$	1,028		$	8,354		$	2,932
Realized losses from sales of investments and other		(4,091	)		(1,313	)		(7,481	)		(19,165	)
Interest income, dividends and other ordinary income		6,384			6,355			17,999			19,544
Trust expenses and income taxes		(2,223	)		(2,106	)		(7,363	)		(6,203	)
Net trust investment income (loss)		1,445			3,964			11,509			(2,892	)
Reclassification to deferred preneed funeral and cemetery receipts held in trust		758			(2,453	)		(3,238	)		5,160
Reclassification to perpetual care trusts’ corpus		(2,203	)		(1,511	)		(8,271	)		(2,268	)
Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		—			—			—			—
Investment and other income, net(1)		62			12			122			85
Total investment and other income, net	$	62		$	12		$	122		$	85

⁽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.

28

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(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., United States District Court for the Southern District of Texas. This purported class action was originally filed on May 2, 2005 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”). In 2009, the court denied plaintiffs’ motion for class certification, and the United States Court of Appeals for the Fifth Circuit denied plaintiffs’ petition for permission to appeal.

     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 California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees. The named plaintiffs (Funeral Consumers Alliance and thirteen individuals) were proceeding to 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 indicated their intent to seek injunctive relief and attorneys’ fees. In June 2010, the suit against the Company was withdrawn pursuant to a confidential settlement agreement, and the plaintiffs dismissed with prejudice all claims against the Company without any finding or admission of liability or wrongdoing by any party.

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 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 July 31, 2010, the Company had $13,533 recorded as a liability for an estimated probable funding obligation. As of July 31, 2010, the Company had net unrealized losses of approximately $42,137 in the cemetery perpetual care 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 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 previously been delivered. Using historical trends and statistical analysis, the Company has recorded an estimated net liability for these items of approximately $3.5 million and $3.0 million as of July 31, 2010 and October 31, 2009, respectively.

29

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies—(Continued)

     The Company is required to maintain a bond ($24,815 as of July 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 and return to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts in lieu of this bond.

(8) Reconciliation of Basic and Diluted Per Share Data

	Earnings			Shares		Per Share
Three Months Ended July 31, 2010	(Numerator)			(Denominator)		Data
Net earnings	$	6,039
Allocation of earnings to nonvested restricted stock		(63	)
Basic earnings per common share:
Net earnings available to common shareholders	$	5,976			92,207	$	.06
Effect of dilutive securities:
Stock options assumed exercised					292
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	5,976			92,499	$	.06

	Earnings			Shares		Per Share
Three Months Ended July 31, 2009	(Numerator)			(Denominator)		Data
Net earnings	$	6,092
Allocation of earnings to nonvested restricted stock		(48	)
Basic earnings per common share:
Net earnings available to common shareholders	$	6,044			91,936	$	.07
Effect of dilutive securities:
Stock options assumed exercised					125
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	6,044			92,061	$	.07

	Earnings			Shares		Per Share
Nine Months Ended July 31, 2010	(Numerator)			(Denominator)		Data
Net earnings	$	21,917
Allocation of earnings to nonvested restricted stock		(226	)
Basic earnings per common share:
Net earnings available to common shareholders	$	21,691			92,124	$	.24
Effect of dilutive securities:
Stock options assumed exercised					273
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	21,691			92,397	$	.23

30

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)

	Earnings			Shares		Per Share
Nine Months Ended July 31, 2009	(Numerator)			(Denominator)		Data
Net earnings	$	19,724
Allocation of earnings to nonvested restricted stock		(156	)
Basic earnings per common share:
Net earnings available to common shareholders	$	19,568			91,883	$	.21
Effect of dilutive securities:
Stock options assumed exercised					43
Diluted earnings per common share:
Net earnings available to common shareholders plus stock options assumed exercised	$	19,568			91,926	$	.21

     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 and nine months ended July 31, 2009 has been adjusted to reflect the adoption of this guidance.

     During the three months ended July 31, 2010, options to purchase 1,149,289 shares of common stock at prices ranging from $6.33 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 that period. Additionally, weighted-average shares outstanding for the three months ended July 31, 2010 exclude the effect of approximately 943,495 options because such options were not dilutive. These options expire between December 20, 2011 and January 18, 2017.

     During the nine months ended July 31, 2010, options to purchase 1,273,571 shares of common stock at prices ranging from $5.84 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 that period. Additionally, weighted-average shares outstanding for the nine months ended July 31, 2010 exclude the effect of approximately 2,750 options because such options were not dilutive. These options expire between December 20, 2011 and September 2, 2016.

     Options to purchase 1,556,373 and 1,631,653 shares of common stock at prices ranging from $5.06 to $8.47 per share for the three and nine months ended July 31, 2009, respectively, 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. Additionally, weighted-average shares outstanding for the nine months ended July 31, 2009 exclude the effect of approximately 278,681 options because such options were not dilutive.

     For the three and nine months ended July 31, 2010 and 2009, 438,000 market based stock options 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 and nine months ended July 31, 2010, a maximum of 14,640,100 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 11,712,080 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 and nine months ended July 31, 2010 was less than the conversion price of the senior convertible notes and strike price of the warrants. For the three and nine months ended July 31, 2009, a maximum of 19,165,600 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 15,332,480 shares of Class A common stock under the associated common stock warrants were also not dilutive.

31

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)

     The Company includes Class A and Class B common stock in its diluted shares calculation. As of July 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.

	Total Revenue				Total Revenue
	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	July 31, 2010		July 31, 2009		July 31, 2010		July 31, 2009
Funeral	$	63,426	$	62,476	$	198,518	$	197,698
Cemetery(1)		54,023		49,779		159,603		149,069
Corporate Trust Management(2)		5,466		5,497		17,553		16,933
Total	$	122,915	$	117,752	$	375,674	$	363,700

	Total Gross Profit				Total Gross Profit
	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	July 31, 2010		July 31, 2009		July 31, 2010		July 31, 2009
Funeral	$	11,095	$	11,112	$	39,057	$	40,513
Cemetery(1)		6,025		3,202		16,893		11,914
Corporate Trust Management(2)		5,080		5,019		16,335		15,584
Total	$	22,200	$	19,333	$	72,285	$	68,011

	Net Total Preneed Merchandise				Net Total Preneed Merchandise
	and Service Sales(3)				and Service Sales(3)
	Three Months		Three Months		Nine Months		Nine Months
	Ended		Ended		Ended		Ended
	July 31, 2010		July 31, 2009		July 31, 2010		July 31, 2009
Funeral	$	25,586	$	27,643	$	70,976	$	71,197
Cemetery		12,975		13,454		35,513		36,154
Total	$	38,561	$	41,097	$	106,489	$	107,351

⁽¹⁾ Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $2,186 and $1,541 for the three months ended July 31, 2010 and 2009, respectively, and $6,005 and $5,342 for the nine months July 31, 2010 and 2009, respectively.

32

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data—(Continued)

(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 July 31, 2010 and 2009 were $1,107 and $1,010, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended July 31, 2010 and 2009 were $2,509 and $2,531, respectively. Trust management fees included in cemetery revenue for the three months ended July 31, 2010 and 2009 were $1,197 and $1,060, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended July 31, 2010 and 2009 were $653 and $896, respectively. Trust management fees included in funeral revenue for the nine months ended July 31, 2010 and 2009 were $3,369 and $2,832, respectively, and funeral trust earnings for the nine months ended July 31, 2010 and 2009 were $8,648 and $8,477, respectively. Trust management fees included in cemetery revenue for the nine months ended July 31, 2010 and 2009 were $3,621 and $2,923, respectively, and cemetery trust earnings for the nine months ended July 31, 2010 and 2009 were $1,915 and $2,701, 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.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2010			2009			2010			2009
Gross profit for reportable segments	$	22,200		$	19,333		$	72,285		$	68,011
Corporate general and administrative expenses		(7,686	)		(8,089	)		(20,188	)		(22,601	)
Hurricane related charges, net		(30	)		(46	)		(62	)		(566	)
Separation charges		—			—			—			(275	)
Net impairment losses on dispositions		—			(117	)		—			(215	)
Other operating income, net		607			397			1,051			960
Interest expense		(6,184	)		(6,597	)		(18,531	)		(21,358	)
Gain (loss) on early extinguishment of debt		(106	)		2,414			(89	)		5,798
Investment and other income, net		62			12			122			85
Earnings before income taxes	$	8,863		$	7,307		$	34,588		$	29,839

33

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 and nine months ended July 31, 2010 and 2009.

	Three Months Ended July 31,				Nine Months Ended July 31,
	2010		2009		2010		2009
Service revenue
Funeral	$	45,313	$	41,821	$	136,364	$	132,658
Cemetery		14,272		13,952		45,081		44,062
		59,585		55,773		181,445		176,720
Merchandise revenue
Funeral		19,978		22,631		69,112		71,861
Cemetery		38,035		34,315		108,777		100,456
		58,013		56,946		177,889		172,317
Other revenue
Funeral		1,751		1,565		5,060		4,488
Cemetery		3,566		3,468		11,280		10,175
		5,317		5,033		16,340		14,663
Total revenue	$	122,915	$	117,752	$	375,674	$	363,700
Service costs
Funeral	$	15,738	$	14,497	$	45,370	$	43,883
Cemetery		10,455		10,568		30,810		29,941
		26,193		25,065		76,180		73,824
Merchandise costs
Funeral		13,292		14,073		42,447		43,647
Cemetery		23,299		22,479		69,654		67,419
		36,591		36,552		112,101		111,066
Facility expenses
Funeral		23,497		23,037		72,262		70,287
Cemetery		14,434		13,765		42,846		40,512
		37,931		36,802		115,108		110,799
Total costs	$	100,715	$	98,419	$	303,389	$	295,689

     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.

34

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 July 31, 2010 and October 31, 2009 and for the three and nine months ended July 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 July 31, 2010
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	62,261		$	428		$	4,353		$	—		$	67,042
Cemetery		—			50,435			790			4,648			—			55,873
		—			112,696			1,218			9,001			—			122,915
Costs and expenses:
Funeral		—			49,134			273			3,120			—			52,527
Cemetery		—			43,741			579			3,868			—			48,188
		—			92,875			852			6,988			—			100,715
Gross profit		—			19,821			366			2,013			—			22,200
Corporate general and administrative expenses		(7,686	)		—			—			—			—			(7,686	)
Hurricane related charges, net		(30	)		—			—			—			—			(30	)
Other operating income, net		18			547			—			42			—			607
Operating earnings (loss)		(7,698	)		20,368			366			2,055			—			15,091
Interest expense		(690	)		(5,025	)		(2	)		(467	)		—			(6,184	)
Loss on early extinguishment of debt		(106	)		—			—			—			—			(106	)
Investment and other income, net		62			—			—			—			—			62
Equity in subsidiaries		8,920			413			—			—			(9,333	)		—
Earnings before income taxes		488			15,756			364			1,588			(9,333	)		8,863
Income tax expense (benefit)		(5,551	)		7,066			80			1,229			—			2,824
Net earnings		6,039			8,690			284			359			(9,333	)		6,039
Other comprehensive income, net		12			—			—			12			(12	)		12
Comprehensive income	$	6,051		$	8,690		$	284		$	371		$	(9,345	)	$	6,051

35

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 July 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	61,217		$	497		$	4,303		$	—		$	66,017
Cemetery		—			46,813			786			4,136			—			51,735
		—			108,030			1,283			8,439			—			117,752
Costs and expenses:
Funeral		—			48,093			314			3,200			—			51,607
Cemetery		—			42,379			673			3,760			—			46,812
		—			90,472			987			6,960			—			98,419
Gross profit		—			17,558			296			1,479			—			19,333
Corporate general and administrative expenses		(8,089	)		—			—			—			—			(8,089	)
Hurricane related charges, net		(44	)		(2	)		—			—			—			(46	)
Net impairment losses on dispositions		—			2			—			(119	)		—			(117	)
Other operating income, net		20			317			—			60			—			397
Operating earnings (loss)		(8,113	)		17,875			296			1,420			—			11,478
Interest expense		(87	)		(5,990	)		(28	)		(492	)		—			(6,597	)
Gain on early extinguishment of debt		2,414			—			—			—			—			2,414
Investment and other income, net		12			—			—			—			—			12
Equity in subsidiaries		8,354			32			—			—			(8,386	)		—
Earnings before income taxes		2,580			11,917			268			928			(8,386	)		7,307
Income tax expense (benefit)		(3,512	)		4,401			86			240			—			1,215
Net earnings		6,092			7,516			182			688			(8,386	)		6,092
Other comprehensive loss, net		(1	)		—			—			(1	)		1			(1	)
Comprehensive income	$	6,091		$	7,516		$	182		$	687		$	(8,385	)	$	6,091

36

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

	Nine Months Ended July 31, 2010
				Guarantor
				Subsidiaries-			Guarantor			Non-Guarantor
	Parent			Tier 1			Subsidiaries-Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	196,079		$	1,383		$	13,074		$	—		$	210,536
Cemetery		—			147,981			2,191			14,966			—			165,138
		—			344,060			3,574			28,040			—			375,674
Costs and expenses:
Funeral		—			149,736			832			9,511			—			160,079
Cemetery		—			129,447			1,848			12,015			—			143,310
		—			279,183			2,680			21,526			—			303,389
Gross profit		—			64,877			894			6,514			—			72,285
Corporate general and administrative expenses		(20,188	)		—			—			—			—			(20,188	)
Hurricane related recoveries (charges), net		(117	)		—			55			—			—			(62	)
Other operating income, net		60			839			3			149			—			1,051
Operating earnings (loss)		(20,245	)		65,716			952			6,663			—			53,086
Interest expense		(1,172	)		(15,923	)		(13	)		(1,423	)		—			(18,531	)
Loss on early extinguishment of debt		(89	)		—			—			—			—			(89	)
Investment and other income, net		121			1			—			—			—			122
Equity in subsidiaries		32,133			658			—			—			(32,791	)		—
Earnings before income taxes		10,748			50,452			939			5,240			(32,791	)		34,588
Income tax expense (benefit)		(11,169	)		21,151			258			2,431			—			12,671
Net earnings		21,917			29,301			681			2,809			(32,791	)		21,917
Other comprehensive income, net		12			—			—			12			(12	)		12
Comprehensive income	$	21,929		$	29,301		$	681		$	2,821		$	(32,803	)	$	21,929

37

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

	Nine Months Ended July 31, 2009
				Guarantor
				Subsidiaries-			Guarantor			Non-Guarantor
	Parent			Tier 1			Subsidiaries-Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	194,481		$	1,397		$	13,129		$	—		$	209,007
Cemetery		—			139,701			2,200			12,792			—			154,693
		—			334,182			3,597			25,921			—			363,700
Costs and expenses:
Funeral		—			147,551			880			9,386			—			157,817
Cemetery		—			125,322			1,905			10,645			—			137,872
		—			272,873			2,785			20,031			—			295,689
Gross profit		—			61,309			812			5,890			—			68,011
Corporate general and administrative expenses		(22,601	)		—			—			—			—			(22,601	)
Hurricane related recoveries (charges), net		(670	)		104			—			—			—			(566	)
Separation charges		(55	)		(220	)		—			—			—			(275	)
Net impairment losses on dispositions		(8	)		(88	)		—			(119	)		—			(215	)
Other operating income, net		39			804			1			116			—			960
Operating earnings (loss)		(23,295	)		61,909			813			5,887			—			45,314
Interest expense		(1,488	)		(18,264	)		(90	)		(1,516	)		—			(21,358	)
Gain on early extinguishment of debt		5,798			—			—			—			—			5,798
Investment and other income, net		85			—			—			—			—			85
Equity in subsidiaries		32,661			455			—			—			(33,116	)		—
Earnings before income taxes		13,761			44,100			723			4,371			(33,116	)		29,839
Income tax expense (benefit)		(5,963	)		14,804			202			1,072			—			10,115
Net earnings		19,724			29,296			521			3,299			(33,116	)		19,724
Other comprehensive loss, net		(4	)		—			—			(4	)		4			(4	)
Comprehensive income	$	19,720		$	29,296		$	521		$	3,295		$	(33,112	)	$	19,720

38

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

	July 31, 2010
			Guarantor			Guarantor		Non-Guarantor
	Parent		Subsidiaries-Tier 1			Subsidiaries-Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	52,454	$	7,067		$	42	$	110	$	—		$	59,673
Certificates of deposit and marketable securities		15,000		—			—		429		—			15,429
Receivables, net of allowances		5,604		46,707			507		4,270		—			57,088
Inventories		318		33,310			347		2,140		—			36,115
Prepaid expenses		1,642		4,096			65		1,957		—			7,760
Deferred income taxes, net		13,086		10,868			35		1,483		—			25,472
Intercompany receivables		7,782		—			—		—		(7,782	)		—
Total current assets		95,886		102,048			996		10,389		(7,782	)		201,537
Receivables due beyond one year, net of allowances		—		48,285			427		13,637		—			62,349
Preneed funeral receivables and trust investments		—		390,976			—		9,402		—			400,378
Preneed cemetery receivables and trust investments		—		193,587			1,094		6,390		—			201,071
Goodwill		—		227,401			48		19,787		—			247,236
Cemetery property, at cost		—		347,085			11,151		25,674		—			383,910
Property and equipment, at cost		56,448		472,673			2,286		38,930		—			570,337
Less accumulated depreciation		39,656		221,724			1,131		16,178		—			278,689
Net property and equipment		16,792		250,949			1,155		22,752		—			291,648
Deferred income taxes, net		19,575		70,534			—		9,965		(3,276	)		96,798
Cemetery perpetual care trust investments		—		209,711			8,733		3,924		—			222,368
Other assets		6,761		4,890			8		1,035		—			12,694
Intercompany receivables		704,288		—			—		—		(704,288	)		—
Equity in subsidiaries		14,515		8,779			—		—		(23,294	)		—
Total assets	$	857,817	$	1,854,245		$	23,612	$	122,955	$	(738,640	)	$	2,119,989
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5	$	—		$	—	$	—	$	—		$	5
Accounts payable, accrued expenses and other current liabilities		15,814		70,164			140		5,268		—			91,386
Intercompany payables		—		—			—		7,782		(7,782	)		—
Total current liabilities		15,819		70,164			140		13,050		(7,782	)		91,391
Long-term debt, less current maturities		325,482		—			—		—		—			325,482
Deferred income taxes		—		—			3,276		—		(3,276	)		—
Intercompany payables		—		691,420			2,307		10,561		(704,288	)		—
Deferred preneed funeral revenue		—		198,676			—		46,549		—			245,225
Deferred preneed cemetery revenue		—		233,995			305		26,971		—			261,271
Deferred preneed funeral and cemetery receipts held in trust		—		526,462			1,051		6,469		—			533,982
Perpetual care trusts’ corpus		—		207,072			8,702		3,839		—			219,613
Other long-term liabilities		17,712		2,038			—		53		—			19,803
Negative equity in subsidiaries		75,582		—			—		—		(75,582	)		—
Total liabilities		434,595		1,929,827			15,781		107,492		(790,928	)		1,696,767
Common stock		93,186		102			324		52		(478	)		93,186
Other		329,989		(75,684	)		7,507		15,364		52,813			329,989
Accumulated other comprehensive income		47		—			—		47		(47	)		47
Total shareholders’ equity		423,222		(75,582	)		7,831		15,463		52,288			423,222
Total liabilities and shareholders’ equity	$	857,817	$	1,854,245		$	23,612	$	122,955	$	(738,640	)	$	2,119,989

39

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-Guarantor
	Parent		Subsidiaries-Tier 1			Subsidiaries-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
Intercompany receivables		6,000		—			—		—		(6,000	)		—
Total current assets		80,289		100,896			953		10,728		(6,000	)		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		765,490		—			—		—		(765,490	)		—
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
Intercompany payables		—		—			—		6,000		(6,000	)		—
Total current liabilities		15,214		75,920			199		10,678		(6,000	)		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		14,241		(765,490	)		—
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

40

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

	Nine Months Ended July 31, 2010
				Guarantor						Non-
				Subsidiaries-			Guarantor			Guarantor
	Parent			Tier 1			Subsidiaries-Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	955		$	44,143		$	917		$	3,130		$	—	$	49,145
Cash flows from investing activities:
Proceeds from sales of marketable securities		—			—			—			250			—		250
Purchases of certificates of deposit and marketable securities		(15,000	)		—			—			(661	)		—		(15,661	)
Proceeds from sale of assets		—			388			—			—			—		388
Additions to property and equipment		(2,320	)		(8,424	)		(87	)		(733	)		—		(11,564	)
Other		—			136			—			—			—		136
Net cash used in investing activities		(17,320	)		(7,900	)		(87	)		(1,144	)		—		(26,451	)
Cash flows from financing activities:
Repayments of long-term debt		(18,423	)		—			—			—			—		(18,423	)
Intercompany receivables (payables)		37,914			(34,272	)		(840	)		(2,802	)		—		—
Retirement of common stock warrants		(2,118	)		—			—			—			—		(2,118	)
Issuance of common stock		621			—			—			—			—		621
Retirement of call options		2,370			—			—			—			—		2,370
Debt refinancing costs		(38	)		—			—			—			—		(38	)
Dividends		(8,278	)		—			—			—			—		(8,278	)
Excess tax benefits from share-based payment arrangements		37			—			—			—			—		37
Net cash provided by (used in) financing activities		12,085			(34,272	)		(840	)		(2,802	)		—		(25,829	)
Net increase (decrease) in cash		(4,280	)		1,971			(10	)		(816	)		—		(3,135	)
Cash and cash equivalents, beginning of period		56,734			5,096			52			926			—		62,808
Cash and cash equivalents, end of period	$	52,454		$	7,067		$	42		$	110		$	—	$	59,673

41

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

	Nine Months Ended July 31, 2009
				Guarantor			Guarantor			Non-
				Subsidiaries-			Subsidiaries-			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	15,345		$	39,487		$	1,036		$	7,722		$	—	$	63,590
Cash flows from investing activities:
Proceeds from sales of marketable securities		—			—			—			250			—		250
Purchases of marketable securities		—			—			—			(199	)		—		(199	)
Proceeds from sale of assets		292			202			—			—			—		494
Purchase of subsidiaries and other investments, net of cash acquired		(300	)		(1,623	)		—			—			—		(1,923	)
Additions to property and equipment		(4,144	)		(10,281	)		(130	)		(474	)		—		(15,029	)
Other		—			37			—			—			—		37
Net cash used in investing activities		(4,152	)		(11,665	)		(130	)		(423	)		—		(16,370	)
Cash flows from financing activities:
Repayments of long-term debt		(39,901	)		—			—			—			—		(39,901	)
Intercompany receivables (payables)		35,778			(26,734	)		(885	)		(8,159	)		—		—
Retirement of common stock warrants		(4,981	)		—			—			—			—		(4,981	)
Issuance of common stock		225			—			—			—			—		225
Retirement of call options		5,111			—			—			—			—		5,111
Purchase and retirement of common stock		(52	)		—			—			—			—		(52	)
Debt refinancing costs		(2,029	)		—			—			—			—		(2,029	)
Dividends		(6,953	)		—			—			—			—		(6,953	)
Net cash used in financing activities		(12,802	)		(26,734	)		(885	)		(8,159	)		—		(48,580	)
Net increase (decrease) in cash		(1,609	)		1,088			21			(860	)		—		(1,360	)
Cash and cash equivalents, beginning of period		65,593			4,332			22			2,627			—		72,574
Cash and cash equivalents, end of period	$	63,984		$	5,420		$	43		$	1,767		$	—	$	71,214

42

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 and nine months ended July 31, 2010 and 2009 is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2010			2009			2010			2009
Net earnings	$	6,039		$	6,092		$	21,917		$	19,724
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of ($6), $0, ($6)and $2, respectively		12			(1	)		12			(4	)
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts		(17,308	)		74,562			38,359			61,993
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		17,308			(74,562	)		(38,359	)		(61,993	)
Total other comprehensive income (loss)		12			(1	)		12			(4	)
Total comprehensive income	$	6,051		$	6,091		$	21,929		$	19,720

(13) Long-term Debt

	July 31, 2010		October 31, 2009
Long-term debt:
3.125% senior convertible notes due 2014, net of unamortized discount of $10,913 and $12,912 as of July 31, 2010 and October 31, 2009, respectively	$	75,503	$	74,504
3.375% senior convertible notes due 2016, net of unamortized discount of $10,092 and $14,858 as of July 31, 2010 and October 31, 2009, respectively		49,893		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 July 31, 2010 and October 31, 2009, partially secured by assets of subsidiaries, with maturities through 2022		91		95
Total long-term debt		325,487		339,726
Less current maturities		5		5
	$	325,482	$	339,721

Fair Value

     As of July 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 $75,623 and $49,983, respectively, compared to fair values of $79,353 and $52,427, respectively. As of July 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 $208,009.

43

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Long-term Debt—(Continued)

Senior Convertible Notes

          During the nine months ended July 31, 2010, the Company purchased $1,000 aggregate principal amount of its 3.125 percent senior convertible notes due 2014 in the open market. During the three and nine months ended July 31, 2010, the Company purchased $20,000 aggregate principal amount of its 3.375 percent senior convertible notes due 2016 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 purchases, the Company recorded $106 and $89 in pre-tax losses on early extinguishment of debt during the three and nine months ended July 31, 2010, respectively. The Company also recorded $2,414 and $5,798 in pre-tax gains on early extinguishment of debt during the three and nine months ended July 31, 2009, respectively, related to debt purchases occurring during those periods.

          Although the Company recorded a loss from the early extinguishment of debt for the three months ended July 31, 2010, the Company was able to purchase the $20,000 of aggregate principal amount of its 3.375 percent senior convertible notes for $17,525 in the open market thereby representing savings of $2,475 and annual interest savings of $675. Since the inception of the debt repurchase program and including $14,866 of purchases of aggregate principal amounts of its 3.375 percent senior convertible notes subsequent to the quarter ended July 31, 2010, the Company has repurchased a total of $118,465 of aggregate principal of its senior convertible notes in the open market for a total of $91,964 thereby representing savings of approximately $26,501 while producing annual interest savings of $3,777.

Adoption of Convertible Debt Guidance

          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 Company used the market valuations of its 6.25 percent senior notes due 2013 as the basis for estimating fair value. 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 (“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 years and 5.75 years, respectively. The carrying value of the equity component of the 2014 Notes as of July 31, 2010 and October 31, 2009 was $15,995 and $16,008, respectively. The carrying value of the equity component of the 2016 Notes as of July 31, 2010 and October 31, 2009 was $18,219 and $18,993, respectively. The amount of interest expense recorded for the senior convertible notes related both to the contractual interest coupon and amortization of the discount on the liability component was $2,354 and $2,982 for the three months ended July 31, 2010 and 2009, respectively, and was $7,212 and $9,975 for the nine months ended July 31, 2010 and 2009,

44

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Long-term Debt—(Continued)

respectively. For the three and nine months ended July 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 and nine months ended July 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 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 in 2007, 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. In connection with the purchases of the Company’s senior convertible notes during fiscal years 2009 and 2010, the number of shares covered by the call options was reduced to 7,820,095 related to the 2014 Notes and 5,428,259 related to the 2016 Notes.

          The Company also entered into warrant transactions in 2007 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 years 2009 and 2010, the number of shares subject to the warrants was reduced to 6,913,280 related to the 2014 Notes and 4,798,800 related to the 2016 Notes.

45

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Long-term Debt—(Continued)

          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 three pending requests for changes in tax accounting methods, which will result in the deferral of approximately $78.0 million of taxable income. The combination of these three changes increases the current net operating loss carryforward to approximately $98.0 million and will significantly reduce federal income tax cash payments (approximately $34.0 million) for the next two to three years beginning in 2010.

(15) Subsequent Events

          As of August 31, 2010, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts decreased 1.5 percent, or approximately $11,500, from July 31, 2010.

          Subsequent to July 31, 2010 through August 31, 2010, the Company purchased an additional $14,866 aggregate principal amount of its senior convertible notes in the open market.

46

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 and in this report. 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 July 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, we 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 on our statements of earnings and balance sheets.

Financial Summary

          For the third quarter of fiscal year 2010, net earnings decreased $0.1 million to $6.0 million from $6.1 million for the third quarter of fiscal year 2009. Revenue increased $5.2 million to $122.9 million for the quarter ended July 31, 2010. Funeral revenue increased $1.0 million to $67.0 million in the third quarter of 2010. During the third quarter of 2010, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 2.1 percent and an increase in average revenue per cremation service of 3.8 percent. These increases were partially offset by a shift in mix to lower-priced cremation services and a decrease in funeral trust earnings which resulted in an overall increase of 1.5 percent in the same-store average revenue per funeral service. The increases in same-store average revenue were partially offset by a 1.2 percent, or 156 event, decrease in same-store funeral services performed, which is less than one event per funeral home. Cemetery revenue increased $4.2 million to $55.9 million for the quarter ended July 31, 2010. This increase is due primarily to a $2.2 million, or 9.5 percent, increase in cemetery property sales, a $1.2 million improvement in the reserve for cancellations and a $1.0 million increase in merchandise delivered. Consolidated gross profit increased $2.9 million to $22.2 million for the quarter ending July 31, 2010, primarily due to a $2.8 million increase in cemetery gross profit and a $0.1 million increase in funeral gross profit.

          Interest expense decreased $0.4 million to $6.2 million during the third quarter of 2010 primarily due to the significant repurchases of our senior convertible notes in the open market. For the three months ended July 31, 2010

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and 2009, we purchased $20.0 million and $35.7 million, respectively, aggregate principal amount of our senior convertible notes in the open market. As a result, we recorded a net loss on early extinguishment of debt of $0.1 million for the three months ended July 31, 2010, compared to a net gain of $2.4 million on early extinguishment of debt for the three months ended July 31, 2009. Although we recorded a loss from the early extinguishment of debt for the three months ended July 31, 2010, we were able to purchase the $20.0 million of aggregate principal amount of our 3.375 percent senior convertible notes for $17.5 million in the open market thereby representing savings of $2.5 million and annual interest savings of $0.7 million. The effective tax rate for the third quarter of 2010 increased to 31.9 percent from 16.6 percent for the same period in 2009. The decreased rate for the three months ended July 31, 2009 was primarily caused by tax benefits recorded in 2009 for reductions in our tax valuation allowance for net operating loss carryforwards for certain states and a U.S. possession, partially offset by an increase in the rate due to a lower dividend exclusion.

          For the third quarter of 2010, preneed cemetery property sales increased 9.5 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net preneed funeral sales decreased 7.4 percent during the third quarter of 2010 compared to the third quarter of 2009. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

          For the nine months ended July 31, 2010, net earnings increased $2.2 million to $21.9 million from $19.7 million for the same period of fiscal year 2009. Revenue increased $12.0 million to $375.7 million for the nine months ended July 31, 2010. Funeral revenue increased $1.6 million to $210.6 million in the first nine months of 2010. The increase in funeral revenue is partially due to a $0.7 million increase in funeral earnings related to trust activities. During the nine months ended July 31, 2010, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 0.8 percent and an increase in average revenue per cremation service of 2.8 percent. These increases were partially offset by a shift in mix to lower-priced cremation services which resulted in an overall increase in same-store average revenue per funeral service of 0.5 percent. The increases in same-store average revenue were partially offset by a 1.7 percent, or 732 event, decrease in same-store funerals services performed, which we believe is consistent with industry wide data. Cemetery revenue increased $10.4 million to $165.1 million for the nine months ended July 31, 2010. This increase is due primarily to a $5.0 million, or 7.6 percent, increase in cemetery property sales, a $3.4 million increase in merchandise delivered and a $2.6 million improvement in the reserve for cancellations. The increases were partially offset by a $1.1 million decrease in construction during the period on various cemetery projects primarily due to a high rate of completion on construction of several private mausoleums completed in the first nine months of fiscal 2009. Consolidated gross profit increased $4.3 million to $72.3 million for the nine months ending July 31, 2010. This compares to $68.0 million of gross profit for the nine months ended July 31, 2009, which included a $3.2 million charge to record our probable funding obligation related to our perpetual care trusts.

          Corporate general and administrative expenses decreased $2.4 million to $20.2 million for the nine months ended July 31, 2010 largely due to a decrease in information technology costs and training costs related to our implementation of a new business system in the prior year, coupled with a decline in incentive compensation and employee benefits. Interest expense decreased $2.8 million to $18.6 million during the first nine months of fiscal 2010 primarily due to the significant repurchases of our senior convertible notes in the open market. For the nine months ended July 31, 2010 and 2009, we purchased $21.0 million and $58.3 million, respectively, aggregate principal amount of our senior convertible notes in the open market. As a result, we recorded a net loss on early extinguishment of debt of $0.1 million for the nine months ended July 31, 2010, compared to a net gain on early extinguishment of debt of $5.8 million for the nine months ended July 31, 2009. Although we recorded a loss from the early extinguishment of debt for the nine months ended July 31, 2010, we were able to purchase the $21.0 million of aggregate principal amount of our senior convertible notes for $18.4 million in the open market thereby representing savings of $2.6 million and annual interest savings of $0.7 million. Since the inception of the debt repurchase program and including $14.9 million of purchases of aggregate principal amounts of our 3.375 percent senior convertible notes subsequent to the quarter ended July 31, 2010, we have repurchased a total of $118.5 million of aggregate principal of our senior convertible notes in the open market for a total of $92.0 million thereby representing savings of approximately $26.5 million while producing annual interest savings of $3.8 million. The effective tax rate for the nine months ended July 31, 2010 increased to 36.6 percent from 33.9 percent for the same period in 2009. The decreased rate for the nine months ended July 31, 2009 was primarily caused by a tax benefit recorded in 2009 for a reduction in our tax valuation allowance for net operating loss carryforwards for certain states and a U.S. possession.

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          For the first nine months of 2010, preneed cemetery property sales increased 7.6 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net preneed funeral sales decreased 0.3 percent during the nine months ended July 31, 2010 compared to the same period of last year. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

          Due to the recent decline in the overall financial markets, our preneed funeral and cemetery merchandise and services trusts and our perpetual care trusts declined during the third quarter of fiscal year 2010. Specifically, our preneed funeral and cemetery merchandise and services trusts experienced a total decline, including both realized and unrealized losses, of 2.3 percent, and our cemetery perpetual care trusts experienced a total decline, including both realized and unrealized losses, of 0.4 percent. As of July 31, 2010, the fair market value of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts decreased 2.6 percent, or approximately $20.5 million, from April 30, 2010.

          As of July 31, 2010 and October 31, 2009, the fair market value of the investments in our funeral and cemetery merchandise and services trusts were $162.8 million and $192.9 million, respectively, lower than our cost basis. We review our investment portfolio quarterly, and as part of that review during the quarter ended July 31, 2010, we determined we no longer had the intent to hold certain securities until they recover in value. In addition, there were certain securities that we have previously deemed other than temporarily impaired that further declined in value in the third quarter of fiscal 2010. As a result, in the third quarter of fiscal 2010, we realized additional losses of $3.6 million. These losses were allocated to the underlying contracts and will affect the amount of future revenue recognized, and cash withdrawn, at the time the specific contract is performed.

          In our cemetery perpetual care trusts, as of July 31, 2010 and October 31, 2009, the fair market value of our investments were $48.4 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 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 July 31, 2010 and October 31, 2009, we had $213.3 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 ultimately performed.

          As of August 31, 2010, the fair market value of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts decreased 1.5 percent, or approximately $11.5 million from July 31, 2010.

          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 sufficient 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.

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	Funeral and
	Cemetery
	Merchandise and
	Services			Cemetery Perpetual
	Trusts(1)			CareTrusts(1)
For the quarter ended July 31, 2010		(2.3	)%		(0.4	)%
For the last twelve months ended July 31, 2010		12.4	%		14.2	%
For the last five years ended July 31, 2010		1.2	%		2.6	%
For the last ten years ended July 31, 2010		2.2	%		3.0	%

⁽¹⁾ Periods less than a year represent actual returns experienced. Periods of one year or more represent annualized returns.

          Our operations provided cash of $49.1 million compared to $63.6 million for the same period of last year. The decrease in operating cash flow is largely due to $12.1 million of tax refunds received primarily in the third quarter of 2009 due to effective tax planning strategies. We received $8.2 million of net tax refunds in the first nine months of 2009 compared to paying $0.1 million in net tax payments in the first nine months of 2010. The tax payments made during the first nine months of 2010 were made to various state taxing authorities. In addition, we experienced a change in working capital, partly driven by an $8.7 million change in receivables during the first nine months of fiscal year 2010 due in part to the improved cemetery property sales, which are typically financed.

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

          The following discussion segregates the financial results into our various segments, grouped by our funeral and cemetery operations. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. 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 July 31, 2010 Compared to Three Months Ended July 31, 2009

Funeral Operations

	Three Months Ended July 31,
	2010		2009		Increase
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	63.4	$	62.5	$	.9
Corporate Trust Management(1)		3.6		3.5		.1
Total Funeral Revenue	$	67.0	$	66.0	$	1.0
Funeral Costs:
Funeral Home Locations	$	52.3	$	51.4	$	.9
Corporate Trust Management(1)		.2		.2		—
Total Funeral Costs	$	52.5	$	51.6	$	.9
Funeral Gross Profit:
Funeral Home Locations	$	11.1	$	11.1	$	—
Corporate Trust Management(1)		3.4		3.3		.1
Total Funeral Gross Profit	$	14.5	$	14.4	$	.1

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

Change in Average	Change in Same-Store
Revenue Per FuneralService	Funeral Services	Same-Store Cremation Rate
		2010	2009
1.5%(1)	(1.2)%	42.4%	41.8%

⁽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 July 31, 2010 and 2009 were $1.1 million and $1.0 million, respectively. Funeral trust earnings recognized in funeral revenue for both the three months ended July 31, 2010 and 2009 were $2.5 million.

          Funeral revenue increased $1.0 million, or 1.5 percent, to $67.0 million in the third quarter of 2010 from $66.0 million in the third quarter of 2009. During the third quarter of 2010, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 2.1 percent and an increase in average revenue per cremation service of 3.8 percent. These averages were partially offset by a shift in mix to lower-priced cremation services and a decrease in funeral trust earnings resulting in an overall increase in the same-store average revenue per funeral service of 1.5 percent. Same-store funeral services decreased 1.2 percent, or 156 events, or less than one event per funeral home. The cremation rate for our same-store operations was 42.4 percent for the third quarter of 2010 compared to 41.8 percent for the third quarter of 2009.

          Funeral gross profit increased $0.1 million, or 0.7 percent, to $14.5 million for the third quarter of 2010 compared to $14.4 million for the same period of 2009.

Cemetery Operations

	Three Months Ended July 31,
					Increase
	2010		2009		(Decrease)
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	54.1	$	49.8	$	4.3
Corporate Trust Management(1)		1.8		1.9		(.1	)
Total Cemetery Revenue	$	55.9	$	51.7	$	4.2
Cemetery Costs:
Cemetery Locations	$	48.0	$	46.6	$	1.4
Corporate Trust Management(1)		.2		.2		—
Total Cemetery Costs	$	48.2	$	46.8	$	1.4
Cemetery Gross Profit:
Cemetery Locations	$	6.1	$	3.2	$	2.9
Corporate Trust Management(1)		1.6		1.7		(.1	)
Total Cemetery Gross Profit	$	7.7	$	4.9	$	2.8

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⁽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 July 31, 2010 and 2009 were $1.1 million and $1.0 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the three months ended July 31, 2010 and 2009 were $0.7 million and $0.9 million, respectively. Perpetual care trust earnings of $2.2 million and $1.6 million for the three months ended July 31, 2010 and 2009, 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 $4.2 million, or 8.1 percent, to $55.9 million for the quarter ended July 31, 2010 from $51.7 million for the quarter ended July 31, 2009. This increase is due primarily to a $2.2 million, or 9.5 percent, increase in cemetery property sales, a $1.2 million improvement in the reserve for cancellations and a $1.0 million increase in merchandise delivered.

          Cemetery gross profit increased $2.8 million, or 57.1 percent, to $7.7 million for the third quarter of 2010 from $4.9 million for the quarter ended July 31, 2009. The increase in gross profit is primarily due to the $4.2 million increase in revenue, as noted above, offset by a $1.4 million increase in expenses. The increase in expenses is primarily due to the increase in property costs and selling costs resulting from the 9.5 percent increase in cemetery property sales. Cemetery gross profit was also positively impacted during the quarter ended July 31, 2010 by $1.1 million of perpetual care deposits which relate to prior cancellations which we used to offset against our deposit requirements.

Other

          Interest expense decreased $0.4 million to $6.2 million during the third quarter of fiscal year 2010 primarily due to the significant repurchases of our senior convertible notes in the open market.

          The effective tax rate for the three months ended July 31, 2010 was 31.9 percent compared to 16.6 percent for the same period in 2009. The decreased rate for the three months ended July 31, 2009 was primarily caused by tax benefits recorded in 2009 for reductions in our tax valuation allowance for net operating loss carryforwards for certain states and a U.S. possession, partially offset by an increase in the rate due to a lower dividend exclusion.

          In the third quarter of fiscal years 2010 and 2009, we purchased $20.0 million and $35.7 million, respectively, aggregate principal amount of our senior convertible notes in the open market. As a result, we recorded a net loss on early extinguishment of debt of $0.1 million for the three months ended July 31, 2010, compared to a net gain on early extinguishment of debt of $2.4 million for the three months ended July 31, 2009. Although we recorded a loss from the early extinguishment of debt for the three months ended July 31, 2010, we were able to purchase the $20.0 million of aggregate principal amount of our 3.375 percent senior convertible notes for $17.5 million in the open market thereby representing savings of $2.5 million and annual interest savings of $0.7 million.

Preneed Sales into the Backlog

          Net preneed funeral sales decreased 7.4 percent during the third quarter of 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 $38.6 million in net preneed funeral

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and cemetery merchandise and services sales (including $19.2 million related to insurance-funded preneed funeral contracts) during the third quarter of 2010 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $41.1 million (including $20.5 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.

Nine Months Ended July 31, 2010 Compared to Nine Months Ended July 31, 2009

Funeral Operations

	Nine Months Ended July 31,
					Increase
	2010		2009		(Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	198.6	$	197.7	$	.9
Corporate Trust Management(1)		12.0		11.3		.7
Total Funeral Revenue	$	210.6	$	209.0	$	1.6
Funeral Costs:
Funeral Home Locations	$	159.5	$	157.2	$	2.3
Corporate Trust Management(1)		.6		.6		—
Total Funeral Costs	$	160.1	$	157.8	$	2.3
Funeral Gross Profit:
Funeral Home Locations	$	39.1	$	40.5	$	(1.4	)
Corporate Trust Management(1)		11.4		10.7		.7
Total Funeral Gross Profit	$	50.5	$	51.2	$	(.7	)

Same-Store Analysis for the Nine Months Ended July 31, 2010 and 2009

Change in AverageRevenue Per Funeral	Change in Same-Store
Service	Funeral Services	Same-Store Cremation Rate
		2010	2009
0.5%(1)	(1.7)%	42.0%	41.2%

⁽¹⁾ Corporate trust management consists of 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 nine months ended July 31, 2010 and 2009 were $3.4 million and $2.8 million, respectively. Funeral trust earnings recognized in funeral revenue for the nine months ended July 31, 2010 and 2009 were $8.6 million and $8.5 million, respectively.

     Funeral revenue increased $1.6 million, or 0.8 percent, to $210.6 million in the first nine months of fiscal 2010 from $209.0 million in the first nine months of fiscal 2009. The increase in funeral revenue is partially due to a $0.7 million increase in funeral earnings related to trust activities. During the nine months ended July 31, 2010, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 0.8 percent and an increase in average revenue per cremation service of 2.8 percent. These averages were impacted by a shift in mix to lower-priced cremation services, resulting in an overall increase in the same-store average revenue

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per funeral service of 0.5 percent. Same-store funeral services decreased 1.7 percent, or 732 events, which we believe is consistent with industry-wide data. The cremation rate for our same-store operations was 42.0 percent for the first nine months of fiscal year 2010 compared to 41.2 percent for the same period of fiscal year 2009.

     Funeral gross profit decreased $0.7 million, or 1.4 percent, to $50.5 million for the first nine months of 2010 compared to $51.2 million for the same period of fiscal 2009, primarily due to a $2.3 million increase in expenses, partially offset by the $1.6 million increase in revenue, as noted above. The increase in expenses is primarily due to an improvement in our worker’s compensation and general liability claims experience in the second quarter of 2009, resulting in a one-time $0.7 million reduction in our self insurance reserve. In addition, we experienced increased litigation costs in the first nine months of 2010.

Cemetery Operations

	Nine Months Ended July 31,
					Increase
	2010		2009		(Decrease)
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	159.6	$	149.1	$	10.5
Corporate Trust Management(1)		5.5		5.6		(.1	)
Total Cemetery Revenue	$	165.1	$	154.7	$	10.4
Cemetery Costs:
Cemetery Locations	$	142.7	$	137.2	$	5.5
Corporate Trust Management(1)		.6		.7		(.1	)
Total Cemetery Costs	$	143.3	$	137.9	$	5.4
Cemetery Gross Profit:
Cemetery Locations	$	16.9	$	11.9	$	5.0
Corporate Trust Management(1)		4.9		4.9		—
Total Cemetery Gross Profit	$	21.8	$	16.8	$	5.0

⁽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 nine months ended July 31, 2010 and 2009 were $3.6 million and $2.9 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the nine months ended July 31, 2010 and 2009 were $1.9 million and $2.7 million, respectively. Perpetual care trust earnings of $6.0 million and $5.3 million for the nine months ended July 31, 2010 and 2009, 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 $10.4 million, or 6.7 percent, to $165.1 million for the nine months ended July 31, 2010 from $154.7 million for the nine months ended July 31, 2009. This increase is primarily due to a $5.0 million, or 7.6 percent, increase in cemetery property sales, a $3.4 million increase in cemetery merchandise delivered and a $2.6 million improvement in the reserve for cancellations. These increases were partially offset by a $1.1 million decrease in construction during the period on various cemetery projects primarily due to a high rate of completion on construction of several private mausoleums completed in the first nine months of 2009.

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     Cemetery gross profit increased $5.0 million, or 29.8 percent, to $21.8 million in the first nine months of 2010. This compares to $16.8 million of cemetery gross profit for the first nine months of 2009, which included a $3.2 million charge to record our probable funding obligation related to our perpetual care trusts. The increase in gross profit is primarily due to the $10.4 million increase in revenue, as noted above, partially offset by a $5.4 million increase in expenses. The increase in expenses is primarily due to the increase in property costs and selling costs resulting from the 7.6 percent increase in cemetery property sales. Cemetery gross profit was also positively impacted during the nine months ended July 31, 2010 by $1.1 million of perpetual care trust deposits which relate to prior cancellations which we used to offset against our deposit requirements.

Other

     Corporate general and administrative expenses decreased $2.4 million to $20.2 million for the first nine months of fiscal 2010 primarily due to a decrease in information technology costs and training costs related to our implementation of a new business system in the prior year, coupled with a decline in incentive compensation and employee benefits. We are managing our corporate general and administrative expenses more aggressively in fiscal year 2010.

     Interest expense decreased $2.8 million to $18.6 million during the first nine months of fiscal year 2010 primarily due to the significant repurchases of our senior convertible notes in the open market.

     The effective tax rate for the nine months ended July 31, 2010 was 36.6 percent compared to 33.9 percent for the same period in 2009. The decreased rate for the nine months ended July 31, 2009 was primarily caused by a tax benefit recorded in 2009 for a reduction in our tax valuation allowance for net operating loss carryforwards for certain states and a U.S. possession.

     During the first nine months of fiscal years 2010 and 2009, we purchased $21.0 million and $58.3 million, respectively, aggregate principal amount of our senior convertible notes in the open market. As a result, we recorded a net loss on early extinguishment of debt of $0.1 million for the nine months ended July 31, 2010, compared to a net gain on early extinguishment of debt of $5.8 million for the nine months ended July 31, 2009. Although we recorded a loss from the early extinguishment of debt for the nine months ended July 31, 2010, we were able to purchase the $21.0 million of aggregate principal amount of our senior convertible notes for $18.4 million in the open market thereby representing savings of $2.6 million and annual interest savings of $0.7 million. Since the inception of the debt repurchase program and including $14.9 million of purchases of aggregate principal amounts of our 3.375 percent senior convertible notes subsequent to the quarter ended July 31, 2010, we have repurchased a total of $118.5 million of aggregate principal of our senior convertible notes in the open market for a total of $92.0 million thereby representing savings of approximately $26.5 million while producing annual interest savings of $3.8 million.

     Cash and cash equivalents decreased $3.1 million from October 31, 2009 to July 31, 2010 primarily due to the purchase of $15.7 million in certificates of deposits and marketable securities, partially offset by an increase in cash from normal operations. Current receivables decreased $2.4 million from October 31, 2009 to July 31, 2010 primarily due to collections of prior period sales exceeding receivables for new sales and the collection of income taxes receivable. Current deferred income taxes increased $3.8 million from October 31, 2009 to July 31, 2010 primarily due to an increase in the current portion of the net operating loss in fiscal 2010. Long-term deferred income taxes decreased $16.6 million from October 31, 2009 to July 31, 2010 primarily due to the changes in tax accounting policies made during fiscal year 2010. 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 improvement in the market value of our trust assets during the nine months ended July 31, 2010. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

     Accounts payable decreased $4.7 million from October 31, 2009 to July 31, 2010 primarily due to the timing of payables related to property, plant and equipment and inventory. Accrued payroll decreased $1.5 million from October 31, 2009 to July 31, 2010 primarily due to fiscal year 2009 annual bonuses paid in the first quarter of

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2010. We purchased $21.0 million aggregate principal amount of our senior convertible notes during the nine months ended July 31, 2010 resulting in a decrease in long-term debt.

Preneed Sales into the Backlog

     Net preneed funeral sales decreased 0.3 percent during the first nine 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 $106.5 million in net preneed funeral and cemetery merchandise and service sales (including $56.4 million related to insurance-funded preneed funeral contracts) during the nine months ended July 31, 2010 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $107.4 million (including $57.0 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 placed in trust 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 July 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 $146.4 million in senior convertible notes as of July 31, 2010 of which $86.4 million mature in 2014 and $60.0 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 $8.3 million for the nine months ended July 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 July 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. 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 $21.0 million aggregate principal amount during the first nine months of fiscal year 2010. Subsequent to July 31, 2010 through August 31, 2010, we purchased an additional $14.9 million aggregate principal amount of our senior convertible notes in the open market. Since inception, we have purchased the senior convertible notes at $26.5 million less than the face value and have achieved $3.8 million of annual cash interest savings.

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     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 all 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 further 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 continue to pursue several tax planning strategies. We received IRS approval in fiscal year 2010 on three pending requests for changes in tax accounting methods, which will result in the deferral of approximately $78 million of taxable income. The combination of these three changes increases the current net operating loss carryforward to approximately $98 million and will significantly reduce federal income tax cash payments (approximately $34 million) for the next two to three years beginning in 2010. 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 $49.1 million for the nine months ended July 31, 2010, compared to $63.6 million for the corresponding period in 2009. The decrease in operating cash flow is largely due to $12.1 million of tax refunds received primarily in the third quarter of 2009 due to effective tax planning strategies. We received $8.2 million of net tax refunds in the first nine months of 2009 compared to paying $0.1 million in net tax payments in the first nine months of 2010. The tax payments made during the first nine months of 2010 were made to various state taxing authorities. In addition, we experienced a change in working capital, partly driven by an $8.7 million change in receivables during the first nine months of fiscal year 2010 due in part to the improved cemetery property sales, which are typically financed.

     Our investing activities resulted in a net cash outflow of $26.5 million for the nine months ended July 31, 2010, compared to a net cash outflow of $16.4 million for the comparable period in 2009. The change is primarily due to $15.0 million in purchases of certificates of deposit in the first nine months of fiscal year 2010. In the first quarter of fiscal year 2010, we entered into a certificate of deposit account registry service program in order to obtain a higher rate of return on our cash balances, while maintaining our FDIC insurance protection. For the nine months ended July 31, 2010, capital expenditures amounted to $11.6 million, which included $8.7 million for maintenance capital expenditures, $2.3 million for growth initiatives and $0.6 million related to the implementation of new business systems. For the nine months ended July 31, 2009, capital expenditures were $15.0 million, which included $8.5 million for maintenance capital expenditures, $4.7 million for growth initiatives and $1.8 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 $25.8 million for the nine months ended July 31, 2010, compared to a net cash outflow of $48.6 million for the comparable period in 2009. The change is primarily due to $39.9 million in repayments of long-term debt during the first nine months of fiscal year 2009 compared to $18.4 million for the first nine months of fiscal year 2010. Also, dividends in the first nine months of fiscal year 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.

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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 July 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)	$	346.5	$	—	$	200.0	$	86.4	$	60.1
Interest on long-term debt(2)		60.5		17.2		34.5		6.8		2.0
Operating lease obligations(3)		29.0		1.2		6.4		4.2		17.2
Purchase obligations(4)		2.7		2.7		—		—		—
Non-competition agreements(5)		1.2		.1		.5		.2		.4
	$	439.9	$	21.2	$	241.4	$	97.6	$	79.7

(1)	See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of July 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 July 31, 2010 are $1.2 million, $3.5 million, $2.9 million, $2.3 million, $1.9 million and $17.2 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.

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

	Expiration by Period
Contingent Obligations	Total		Less than 1 year		1-3 years		3-5 years		More than 5 years
Cemetery perpetual care trust funding obligations(1)	$	13.5	$	13.5	$	—	$	—	$	—
Long-term obligations related to uncertain tax positions(2)		2.2		—		—		—		2.2
	$	15.7	$	13.5	$	—	$	—	$	2.2

(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 $13.5 million as of July 31, 2010. As of July 31, 2010, we had net unrealized losses of $42.1 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 but not probable that additional funding obligations may exist with an estimated amount of approximately $2.7 million; no charge has been recorded for these amounts as of July 31, 2010.

(2)

In accordance with the required accounting guidance on uncertain tax positions, as of July 31, 2010, we have recorded $2.2 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty

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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 of any potential cash payments.

     As of July 31, 2010, our outstanding long-term debt obligations amounted to $346.5 million, consisting of $86.4 million in 3.125 percent senior convertible notes due 2014, $60.0 million in 3.375 percent senior convertible notes due 2016, $200.0 million of 6.25 percent senior notes due 2013 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 July 31, 2010.

	Senior
	Secured						Other, Principally
	Revolving						Seller Financing
	Credit		Senior 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		—		60.0		—		.1		60.1
Total long-term debt	$	—	$	146.4	$	200.0	$	.1	$	346.5

Off-Balance Sheet Arrangements

     Our off-balance sheet arrangements as of July 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. For a discussion of fair market value as of July 31, 2010 of investments in our trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein. The following disclosure discusses only those instances in which market risk has changed by more than 10 percent from the annual disclosures.

     As of July 31, 2010 and October 31, 2009, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $331.4 million and $343.9 million, respectively, compared to fair values of $339.9 million and $339.4 million, respectively. Fair values were determined using quoted market prices. As of July 31, 2010, each approximate 10 percent, or 60 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $6.3 million in the fair value of these instruments. As of October 31, 2009, each approximate 10 percent, or 70 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $9.0 million in the fair value of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

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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 July 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, except for the following:

Increased costs, including potential increased health care costs, may have a negative impact onearnings and cash flows.

     We may not be successful in maintaining our margins and may incur additional costs. For example, in the past we have experienced increased property and casualty insurance costs primarily as a result of hurricanes and natural disasters and are currently experiencing increased health care costs. On March 23, 2010, the Patient Protection and Affordable Care Act became law, and one week later, the Health Care and Education Reconciliation Act of 2010 became effective, together enacting comprehensive health care reform in the United States. The legislation is likely to increase our health care costs. Many provisions of the law that could impact our business will not become effective until 2014, or later, and require implementation through regulations that have not yet been

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promulgated. Accordingly, the costs and other effects of the legislation, which may include the cost of compliance and potentially increased costs of providing for medical insurance for our employees, cannot be determined with certainty at this time. We incurred additional costs in fiscal year 2009 in conjunction with improving our business systems. We have also incurred significant legal costs related to the unanticipated class action litigation. Some of the costs impacting our business are largely beyond our control. To the extent that we are unable to pass these cost increases on to our customers, they will have a negative impact on our earnings and cash flows.

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

							Maximum approximate
					Total number of		dollar value of shares
					shares purchased as		that may yet be
					part of		purchased under the
	Total number		Average price paid		publicly-announced		plans or
Period	of shares purchased		per share		plans or programs		programs(1)
May 1, 2010 through May 31, 2010		—	$	—		—	$	26,495,706
June 1, 2010 through June 30, 2010		—	$	—		—	$	26,495,706
July 1, 2010 through July 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 (File No. 001-15449))

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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 (File No. 001-15449))
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

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

SIGNATURES

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

	STEWART ENTERPRISES, INC.
September 8, 2010	/s/ THOMAS M. KITCHEN
	Thomas M. Kitchen
	Senior Executive Vice President and Chief Financial Officer
September 8, 2010	/s/ ANGELA M. LACOUR
	Angela M. Lacour
	Vice President Corporate Controller Chief Accounting Officer

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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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