Stewart Enterprises 10Q 2011 Q2 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 April 30, 2011


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)

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

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

The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of May 31, 2011, was 87,509,089 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 April 30, 2011 and 2010		3

Condensed Consolidated Statements of Earnings — Six Months Ended April 30, 2011 and 2010		4

Condensed Consolidated Balance Sheets — April 30, 2011 and October 31, 2010		5

Condensed Consolidated Statement of Shareholders’ Equity — Six Months Ended April 30, 2011		7

Condensed Consolidated Statements of Cash Flows — Six Months Ended April 30, 2011 and 2010		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		60

Item 4. Controls and Procedures		60

Part II. Other Information

Item 1. Legal Proceedings		61

Item 1A. Risk Factors		61

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		62

Item 6. Exhibits		62

Signatures		64
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION


Item 1.		Financial Statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Three Months Ended April 30,
	2011			2010
Revenues:
Funeral	$	72,974		$	71,060
Cemetery		56,691			56,973

		129,665			128,033

Costs and expenses:
Funeral		54,926			54,151
Cemetery		49,098			48,802

		104,024			102,953

Gross profit		25,641			25,080
Corporate general and administrative expenses		(6,650	)		(6,116	)
Hurricane related charges, net		(54	)		(32	)
Net loss on dispositions		(400	)		—
Other operating income, net		448			265

Operating earnings		18,985			19,197
Interest expense		(5,732	)		(5,891	)
Loss on early extinguishment of debt		(1,811	)		—
Investment and other income, net		340			36

Earnings from continuing operations before income taxes		11,782			13,342
Income taxes		1,784			4,954

Earnings from continuing operations		9,998			8,388

Discontinued operations:
Earnings from discontinued operations before income taxes		—			4
Income taxes		—			1

Earnings from discontinued operations		—			3


Net earnings	$	9,998		$	8,391


Basic earnings per common share:
Earnings from continuing operations	$	.11		$	.09
Earnings from discontinued operations		—			—

Net earnings	$	.11		$	.09


Diluted earnings per common share:
Earnings from continuing operations	$	.11		$	.09
Earnings from discontinued operations		—			—

Net earnings	$	.11		$	.09


Weighted average common shares outstanding (in thousands):
Basic		90,442			92,113

Diluted		91,066			92,387


Dividends declared per common share	$	.03		$	.03

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Six Months Ended April 30,
	2011			2010
Revenues:
Funeral	$	146,840		$	142,780
Cemetery		112,089			109,265

		258,929			252,045

Costs and expenses:
Funeral		108,404			106,600
Cemetery		96,529			95,122

		204,933			201,722

Gross profit		53,996			50,323
Corporate general and administrative expenses		(13,289	)		(12,786	)
Hurricane related charges, net		(104	)		(32	)
Net loss on dispositions		(400	)		—
Other operating income, net		681			444

Operating earnings		40,884			37,949
Interest expense		(11,468	)		(12,347	)
Gain (loss) on early extinguishment of debt		(1,811	)		17
Investment and other income, net		364			60

Earnings from continuing operations before income taxes		27,969			25,679
Income taxes		9,927			9,830

Earnings from continuing operations		18,042			15,849

Discontinued operations:
Earnings from discontinued operations before income taxes		—			46
Income taxes		—			17

Earnings from discontinued operations		—			29


Net earnings	$	18,042		$	15,878


Basic earnings per common share:
Earnings from continuing operations	$	.20		$	.17
Earnings from discontinued operations		—			—

Net earnings	$	.20		$	.17


Diluted earnings per common share:
Earnings from continuing operations	$	.20		$	.17
Earnings from discontinued operations		—			—

Net earnings	$	.20		$	.17


Weighted average common shares outstanding (in thousands):
Basic		90,658			92,082

Diluted		91,125			92,332


Dividends declared per common share	$	.06		$	.06

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	April 30, 2011		October 31, 2010
ASSETS
Current assets:
Cash and cash equivalents	$	78,310	$	56,060
Certificates of deposit and marketable securities		598		10,000
Receivables, net of allowances		48,836		51,151
Inventories		35,793		35,708
Prepaid expenses		7,671		5,479
Deferred income taxes, net		28,405		28,312
Assets held for sale		—		27

Total current assets		199,613		186,737
Receivables due beyond one year, net of allowances		64,267		67,458
Preneed funeral receivables and trust investments		432,696		414,918
Preneed cemetery receivables and trust investments		226,650		209,287
Goodwill		247,038		247,038
Cemetery property, at cost		387,641		386,004
Property and equipment, at cost:
Land		43,726		43,518
Buildings		342,474		338,237
Equipment and other		194,219		191,428

		580,419		573,183
Less accumulated depreciation		295,205		283,633

Net property and equipment		285,214		289,550
Deferred income taxes, net		92,112		98,025
Cemetery perpetual care trust investments		242,542		230,730
Non-current assets held for sale		—		1,214
Other assets		15,878		11,905

Total assets	$	2,193,651	$	2,142,866

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	April 30, 2011			October 31, 2010
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current maturities of long-term debt	$	5,817		$	5
Accounts payable and accrued expenses		24,175			24,797
Accrued payroll and other benefits		13,406			14,311
Accrued insurance		20,850			20,912
Accrued interest		2,018			4,197
Estimated obligation to fund cemetery perpetual care trust		12,633			13,253
Other current liabilities		9,495			12,132
Income taxes payable		698			2,533
Liabilities associated with assets held for sale		—			8

Total current liabilities		89,092			92,148
Long-term debt, less current maturities		315,891			314,027
Deferred income taxes, net		4,906			4,950
Deferred preneed funeral revenue		242,032			243,520
Deferred preneed cemetery revenue		256,364			258,044
Deferred preneed funeral and cemetery receipts held in trust		591,761			554,716
Perpetual care trusts’ corpus		241,576			229,240
Long-term liabilities associated with assets held for sale		—			714
Other long-term liabilities		20,456			20,023

Total liabilities		1,762,078			1,717,382

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 87,646,189 and 88,739,140 shares at April 30, 2011 and October 31, 2010, respectively		87,646			88,739
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at April 30, 2011 and October 31, 2010; 10 votes per share convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		536,450			547,319
Accumulated deficit		(196,105	)		(214,147	)
Accumulated other comprehensive income:
Unrealized appreciation of investments		27			18

Total accumulated other comprehensive income		27			18

Total shareholders’ equity		431,573			425,484

Total liabilities and shareholders’ equity	$	2,193,651		$	2,142,866

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


				Additional						Unrealized		Total
	Common			Paid-In			Accumulated			Appreciation		Shareholders’
	Stock⁽¹⁾			Capital			Deficit			of Investments		Equity
Balance October 31, 2010	$	92,294		$	547,319		$	(214,147	)	$	18	$	425,484

Comprehensive income:
Net earnings		—			—			18,042			—		18,042

Other comprehensive income:
Unrealized appreciation of investments, net of deferred tax expense of ($5)		—			—			—			9		9

Total other comprehensive income		—			—			—			9		9

Total comprehensive income		—			—			18,042			9		18,051

Restricted stock activity		84			506			—			—		590
Issuance of common stock		107			500			—			—		607
Stock options exercised		238			810			—			—		1,048
Stock option expense		—			561			—			—		561
Tax benefit associated with stock activity		—			104			—			—		104
Purchase and retirement of common stock		(1,522	)		(7,865	)		—			—		(9,387	)
Dividends ($.06 per share)		—			(5,485	)		—			—		(5,485	)

Balance April 30, 2011	$	91,201		$	536,450		$	(196,105	)	$	27	$	431,573


⁽¹⁾		Amount includes 87,646 and 88,739 shares (in thousands) of Class A common stock with a stated value of $1 per share as of April 30, 2011 and October 31, 2010, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Six Months Ended April 30,
	2011			2010
Cash flows from operating activities:
Net earnings	$	18,042		$	15,878
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net loss on dispositions		400			—
(Gain) loss on early extinguishment of debt		1,811			(17	)
Premiums paid on early extinguishment of debt		(777	)		—
Depreciation and amortization		13,575			13,194
Non-cash interest and amortization of discount on senior convertible notes		2,636			3,046
Provision for doubtful accounts		2,528			2,406
Share-based compensation		1,661			1,500
Excess tax benefits from share-based payment arrangements		(144	)		(26	)
Provision for deferred income taxes		8,278			8,395
Estimated obligation to fund cemetery perpetual care trust		73			—
Other		(328	)		12
Changes in assets and liabilities:
Decrease in receivables		486			754
Increase in prepaid expenses		(2,193	)		(2,271	)
(Increase) decrease in inventories and cemetery property		(684	)		1,106
Federal income tax refunds		—			1,600
Decrease in accounts payable and accrued expenses		(8,524	)		(11,501	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments		4,083			5,925
Decrease in deferred preneed funeral revenue		(1,674	)		(2,104	)
Decrease in deferred preneed funeral receipts held in trust		(1,947	)		(6,926	)
Net effect of preneed cemetery production and deliveries:
(Increase) decrease in preneed cemetery receivables and trust investments		(3,901	)		793
Decrease in deferred preneed cemetery revenue		(1,682	)		(5,679	)
Increase in deferred preneed cemetery receipts held in trust		3,935			325
Increase in other		42			45

Net cash provided by operating activities		35,696			26,455


Cash flows from investing activities:
Proceeds from sales of certificates of deposit and marketable securities		10,000			250
Purchases of certificates of deposit and marketable securities		(585	)		(10,661	)
Proceeds from sale of assets		285			—
Purchase of subsidiaries and other investments, net of cash acquired		(1,809	)		—
Additions to property and equipment		(8,762	)		(8,366	)
Other		54			50

Net cash used in investing activities		(817	)		(18,727	)


Cash flows from financing activities:
Proceeds of long-term debt		200,000			—
Repayments of long-term debt		(194,190	)		(847	)
Retirement of common stock warrants		—			(107	)
Issuance of common stock		1,199			471
Retirement of call options		—			107
Purchase and retirement of common stock		(9,387	)		—
Debt refinancing costs		(4,910	)		(38	)
Dividends		(5,485	)		(5,589	)
Excess tax benefits from share-based payment arrangements		144			26

Net cash used in financing activities		(12,629	)		(5,977	)


Net increase in cash		22,250			1,751
Cash and cash equivalents, beginning of period		56,060			62,808

Cash and cash equivalents, end of period	$	78,310		$	64,559


Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net	$	3,281		$	(430	)
Interest	$	11,105		$	9,728
Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors	$	456		$	414
Issuance of restricted stock, net of forfeitures	$	590		$	437

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation

(a) The Company

Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. 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 April 30, 2011, the Company owned and operated 217 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, cemetery segment and corporate trust management segment.

(b) Principles of Consolidation

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

The information as of April 30, 2011, and for the three and six months ended April 30, 2011 and 2010, 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, 2010 (the “2010 Form 10-K”).

The October 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2010 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 2010 Form 10-K.

The results of operations for the three and six months ended April 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2011.

(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 2010 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 2010 Form 10-K. Net earnings for the three months ended April 30, 2011 and 2010 include $250 and $265, 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 six months ended April 30, 2011 and 2010 include $561 and $540, 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 April 30, 2011, there was $2,915 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 3.1 years, of which $1,052 of total stock option expense is expected for fiscal year 2011. The expense related to restricted stock is reflected in

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $279 and $273 for the three months ended April 30, 2011 and 2010, respectively, and $644 and $546 for the six months ended April 30, 2011 and 2010, respectively. As of April 30, 2011, there was $1,488 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2011 is expected to be $1,340.

In November 2010, the Company issued 82,160 shares of Class A common stock and paid approximately $114 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $456 and was recorded in corporate general and administrative expenses during the first quarter of fiscal year 2011. 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 was $414 and was recorded in corporate general and administrative expenses during the first quarter of fiscal year 2010. Each of the shares received has a restriction requiring each independent director to hold the respective shares 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 six months ended April 30, 2011:

Weighted

Number of Shares

Average

Grant Type

Granted

Price per Share

Vesting Period

Vesting Condition

Stock options

1,330,000

6.24

Equal one-fourth
portions over 4 years

Service condition

Restricted stock

518,000

6.24

Equal one-third
portions over 3 years

Market condition

The fair value of the Company’s service based stock options granted in fiscal year 2011 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 six months ended April 30, 2011: expected dividend yield of 1.9 percent; expected volatility of 41.5 percent; risk-free interest rate of 1.9 percent; and an expected term of 4.8 years. During the six months ended April 30, 2011, the Company granted 518,000 shares of restricted stock with market conditions based on achieving certain target stock prices in the fiscal years 2011, 2012 and 2013. The Company records the expense over the requisite service period. The market condition related to fiscal year 2011 was achieved during the second quarter of fiscal year 2011.

(f) Receivables and Allowance for Doubtful Accounts

The Company establishes an allowance for uncollectible installment contracts and trade accounts based on a range of percentages applied to accounts receivable aging categories. These percentages are based on an analysis of the Company’s historical collection and write-off experience. At-need funeral and other receivables are considered past due after 30 days. The Company records an allowance on its interest accruals similar to the corresponding principal aging categories. For accounts that are greater than 90 days past due, interest continues to be accrued, however, an allowance is established to fully reserve for the interest. Interest income on these receivables is recognized only to the extent the account becomes less than 90 days past due and then only on the non-reserved portion. Accounts are restored to normal accrual status only when interest and principal payments are brought current and future payments are reasonably assured.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

As of April 30, 2011 and October 31, 2010, the Company’s receivables and related allowances were as follows:


	Receivables as of April 30, 2011		Receivables as of October 31, 2010
	Ending Balance Collectively		Ending Balance Collectively
	Evaluated for Impairment		Evaluated for Impairment
Current receivables — at-need funeral	$	9,182	$	9,153
Current receivables — other		45,147		47,736
Receivables, due beyond one year — other		72,199		75,782
Preneed funeral receivables		42,797		42,879
Preneed cemetery receivables		30,980		31,643

Total	$	200,305	$	207,193

Total current receivables		54,329		56,889
Total noncurrent receivables		145,976		150,304

Total	$	200,305	$	207,193

Other receivables are comprised primarily of receivables related to the sale of preneed property interment rights but also include income tax receivables and trade and other receivables.


	Allowance for Doubtful Accounts			Allowance for Doubtful Accounts
	and Cancellations as of			and Cancellations as of
	April 30, 2011			October 31, 2010
	Ending Balance Collectively			Ending Balance Collectively
	Evaluated for Impairment			Evaluated for Impairment
Current receivables — at-need funeral and other	$	(5,493	)	$	(5,738	)
Receivables, due beyond one year — other		(7,932	)		(8,324	)
Preneed funeral receivables		(11,673	)		(11,753	)
Preneed cemetery receivables		(4,093	)		(4,692	)

Total	$	(29,191	)	$	(30,507	)

Total current receivables		(5,493	)		(5,738	)
Total noncurrent receivables		(23,698	)		(24,769	)

Total	$	(29,191	)	$	(30,507	)


	Allowance for Doubtful Accounts and Cancellations Rollforward
	Balance –		Charged to
	October 31,		costs and					Balance –
	2010		expenses		Write-offs			April 30, 2011
Current receivables — at-need funeral and other	$	5,738		1,034		(1,279	)	$	5,493
Receivables, due beyond one year — other	$	8,324		1,494		(1,886	)	$	7,932

	$	14,062	$	2,528	$	(3,165	)	$	13,425

The Company has established allowances for preneed funeral and cemetery merchandise and services trust receivables. Changes in these allowances have no effect on the condensed consolidated statement of earnings but are recorded as reductions in preneed receivables and preneed deferred revenue in the condensed consolidated balance sheet.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

The following summarizes the Company’s receivables aging analysis:


	Receivables Aging Analysis
	as of April 30, 2011
							Greater than
	1 to 30 Days		31 to 60 Days		61 to 90 Days		90 Days		Total
Receivables — at-need funeral	$	5,578	$	656	$	366	$	2,582	$	9,182
Receivables — other		94,978		3,245		2,268		16,855		117,346
Preneed funeral receivables		29,127		949		433		12,288		42,797
Preneed cemetery receivables		24,888		976		587		4,529		30,980

	$	154,571	$	5,826	$	3,654	$	36,254	$	200,305

(g) Reclassifications

Certain reclassifications have been made to the 2010 condensed consolidated statements of earnings and balance sheet in order for these periods to be comparable. These reclassifications had no effect on the Company’s net earnings, total shareholders’ equity or cash flows.

(2) New Accounting Principles

In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The guidance on transfers between Levels 1 and 2 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 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 adoption of this guidance did not have a material effect on the Company’s financial statements.

In July 2010, the FASB issued ASU No. 2010-20, which requires new disclosures on finance receivables and allowance for credit losses. The new disclosures are required for interim and annual periods ending after December 15, 2010, although the disclosures of reporting period activity are required for interim and annual periods beginning after December 15, 2010. In January 2011, the FASB issued ASU No. 2011-01, which delayed the effective date of ASU No. 2010-20 for public companies with regard to the disclosures on trouble debt restructurings. The guidance was adopted by the Company as of its first fiscal quarter ended January 31, 2011. The disclosures of reporting period activity were effective for the Company’s second fiscal quarter beginning February 1, 2011. The adoption of this guidance by the Company did not have a material effect on its consolidated financial statements. See Note 1(f) for the required disclosures.

In April 2011, the FASB issued ASU No. 2011-02, which clarifies the guidance for identifying restructuring of receivables that constitute a troubled debt restructuring for a creditor. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

beginning of the annual period of adoption, which corresponds to the Company’s fourth fiscal quarter beginning August 1, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with International Financial Reporting Standards. This guidance is effective for the first interim or annual period beginning after December 15, 2011, which corresponds to the Company’s second fiscal quarter beginning February 1, 2012. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

(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 April 30, 2011 and October 31, 2010 are as follows:


	April 30,			October 31,
	2011			2010
Trust assets	$	401,572		$	383,792
Receivables from customers		42,797			42,879

		444,369			426,671
Allowance for cancellations		(11,673	)		(11,753	)

Preneed funeral receivables and trust investments	$	432,696		$	414,918

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 April 30, 2011 are detailed below.


	April 30, 2011
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	17,044	$	—	$	—		$	17,044
U.S. Government, agencies and municipalities		1,990		35		(1	)		2,024
Corporate bonds		27,352		1,582		—			28,934
Preferred stocks		53,748		493		(1,782	)		52,459
Common stocks		231,361		3,513		(77,148	)		157,726
Mutual funds:
Equity		26,045		2,877		(860	)		28,062
Fixed income		55,949		979		(761	)		56,167
Commodity		23,660		2,388		—			26,048
Real estate investment trusts		7,987		771		—			8,758
World bond		9,030		310		—			9,340
Insurance contracts and other long-term investments		13,840		45		(98	)		13,787

Trust investments	$	468,006	$	12,993	$	(80,650	)	$	400,349

Market value as a percentage of cost										85.5	%

Accrued investment income									1,223

Trust assets								$	401,572

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


	October 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	26,118	$	—	$	—		$	26,118
U.S. Government, agencies and municipalities		2,224		84		(1	)		2,307
Corporate bonds		44,077		2,887		(1	)		46,963
Preferred stocks		56,297		356		(2,220	)		54,433
Common stocks		234,946		925		(91,593	)		144,278
Mutual funds:
Equity		27,154		185		(2,936	)		24,403
Fixed income		53,444		1,718		(767	)		54,395
Commodity		13,572		1,968		—			15,540
Insurance contracts and other long-term investments		14,171		146		(98	)		14,219

Trust investments	$	472,003	$	8,269	$	(97,616	)	$	382,656

Market value as a percentage of cost										81.1	%

Accrued investment income									1,136

Trust assets								$	383,792

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


	April 30, 2011
Due in one year or less	$	4,058
Due in one to five years		19,185
Due in five to ten years		7,697
Thereafter		18

	$	30,958

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 April 30, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $76 and $311, 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 April 30, 2011 and 2010, the Company realized trust losses of approximately ($81) and ($17), respectively, related to the covered call program. For the six months ended April 30, 2011 and 2010, the Company realized trust losses of ($227) and ($253), respectively, related to the covered call program. These trust losses are accounted for in the same manner as other funeral merchandise and services trust earnings and losses and flow through funeral revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. These underlying securities appreciated in value by $1,383 and $651 for the three months ended April 30, 2011 and 2010, respectively, and $2,374 and $3,786 for the six months ended April 30, 2011 and 2010, respectively.

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 stocks and mutual funds.

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds, 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		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—April 30, 2011	$	310,802	$	83,418	$	6,129	$	400,349
Trust investments—October 31, 2010	$	272,173	$	103,703	$	6,780	$	382,656

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

In connection with its revised trust asset allocation, the Company sold several Level 2 investments including corporate bonds and preferred stocks and increased its holdings in several Level 1 investments such as highly diversified mutual funds invested in commodities, real estate investment trusts and world bonds.

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 April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Fair market value, beginning balance	$	6,383		$	8,735		$	6,780		$	8,662
Total unrealized losses included in other comprehensive income⁽¹⁾		—			(930	)		—			(930	)
Distributions and other, net		(254	)		73			(651	)		146

Fair market value, ending balance	$	6,129		$	7,878		$	6,129		$	7,878


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

Activity related to preneed funeral trust investments is as follows:


	Three Months Ended April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Purchases	$	27,759		$	14,709		$	72,048		$	15,558
Sales		32,872			18,079			70,629			22,428
Realized gains from sales of investments		1,591			809			4,409			1,437
Realized losses from sales of investments and other		(581	)		(538	)		(680	)		(1,054	)
Interest income, dividends and other ordinary income		3,477			2,542			6,813			4,887
Deposits⁽¹⁾		4,674			5,590			10,030			13,605
Withdrawals⁽¹⁾		11,930			10,070			22,315			22,047


⁽¹⁾		The Company historically sold a significant portion of its preneed funeral sales through trust. Over time, the mix has shifted to a more significant portion being sold through insurance versus trust, particularly in states where the trusting requirements are high.

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 April 30, 2011 and October 31, 2010.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)


	April 30, 2011
	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	$	—	$	—		$	20	$	(1	)	$	20	$	(1	)
Preferred stocks		—		—			31,268		(1,782	)		31,268		(1,782	)
Common stocks		2,607		(529	)		128,805		(76,619	)		131,412		(77,148	)
Mutual funds:
Equity		—		—			3,163		(860	)		3,163		(860	)
Fixed income		341		(3	)		4,234		(758	)		4,575		(761	)
Insurance contracts and other long-term investments		30		(98	)		—		—			30		(98	)

Total	$	2,978	$	(630	)	$	167,490	$	(80,020	)	$	170,468	$	(80,650	)


	October 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		896			(1	)		—		—			896		(1	)
Preferred stocks		49			(1	)		35,205		(2,219	)		35,254		(2,220	)
Common stocks		(17	)		(136	)		136,483		(91,457	)		136,466		(91,593	)
Mutual funds:
Equity		—			—			20,298		(2,936	)		20,298		(2,936	)
Fixed income		3,575			(3	)		4,550		(764	)		8,125		(767	)
Insurance contracts and other long-term investments		—			—			—		(98	)		—		(98	)

Total	$	4,503		$	(141	)	$	196,557	$	(97,475	)	$	201,060	$	(97,616	)

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 April 30, 2011, 96 percent, or $77,148, were generated by common stock investments. Most of the common stock investments are part of the S&P 500 Index. 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 Company believes these investments will recover in value and that it has sufficient liquidity from cash and cash equivalents within the trusts, 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 individual 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 performed or 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.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of April 30, 2011 and October 31, 2010 are as follows:


	April 30,			October 31,
	2011			2010
Trust assets	$	199,763		$	182,336
Receivables from customers		30,980			31,643

		230,743			213,979
Allowance for cancellations		(4,093	)		(4,692	)

Preneed cemetery receivables and trust investments	$	226,650		$	209,287

The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of April 30, 2011 are detailed below.


	April 30, 2011
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	9,065	$	—	$	—		$	9,065
U.S. Government, agencies and municipalities		1,106		28		(6	)		1,128
Corporate bonds		2,750		333		—			3,083
Preferred stocks		19,967		182		(907	)		19,242
Common stocks		119,246		3,621		(38,579	)		84,288
Mutual funds:
Equity		29,284		950		(4,213	)		26,021
Fixed income		26,633		491		—			27,124
Commodity		14,679		1,427		—			16,106
Real estate investment trusts		6,626		644		—			7,270
World bond		5,230		169		—			5,399
Other long-term investments		437		—		—			437

Trust investments	$	235,023	$	7,845	$	(43,705	)	$	199,163

Market value as a percentage of cost										84.7	%

Accrued investment income									600

Trust assets								$	199,763

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, 2010 are detailed below.


	October 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short- term investments	$	12,719	$	—	$	—		$	12,719
U.S. Government, agencies and municipalities		5,655		667		(2	)		6,320
Corporate bonds		11,790		950		(13	)		12,727
Preferred stocks		20,132		139		(1,182	)		19,089
Common stocks		122,529		1,223		(45,792	)		77,960
Mutual funds:
Equity		30,291		50		(6,978	)		23,363
Fixed income		21,405		660		(6	)		22,059
Commodity		6,521		966		—			7,487
Other long-term investments		592		3		—			595

Trust investments	$	231,634	$	4,658	$	(53,973	)	$	182,319

Market value as a percentage of cost											78.7	%

Accrued investment income									470
Less trust investments of assets held for sale									(453	)

Trust assets								$	182,336

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


	April 30, 2011
Due in one year or less	$	339
Due in one to five years		2,234
Due in five to ten years		1,545
Thereafter		93

	$	4,211

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 April 30, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $99 and $128, 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 April 30, 2011 and 2010, the Company realized trust losses of approximately ($40) and ($26), respectively, related to the covered call program. For the six months ended April 30, 2011 and 2010, the Company realized trust losses of ($130) and ($214), respectively, related to the covered call program. These trust losses are accounted for in the same manner as other cemetery merchandise and services trust earnings and losses and flow through cemetery revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. These underlying securities appreciated in value by $693 and $503 for the three months ended April 30, 2011 and 2010, respectively, and $1,113 and $2,912 for the six months ended April 30, 2011 and 2010, respectively.

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:


			Significant
	Quoted Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—April 30, 2011	$	175,741	$	23,422	$	—	$	199,163
Trust investments—October 31, 2010	$	144,048	$	38,271	$	—	$	182,319

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


	Three Months Ended April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Purchases	$	20,022		$	9,089		$	51,894		$	11,135
Sales		19,389			10,449			47,773			12,769
Realized gains from sales of investments		1,072			836			3,323			1,259
Realized losses from sales of investments and other		(209	)		(637	)		(549	)		(1,518	)
Interest income, dividends and other ordinary income		1,612			1,237			3,410			2,390
Deposits		4,307			3,783			8,008			9,476
Withdrawals		4,865			4,325			9,472			8,729

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 April 30, 2011 and October 31, 2010.


	April 30, 2011
	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	$	272	$	(6	)	$	—	$	—		$	272	$	(6	)
Preferred stocks		—		—			12,270		(907	)		12,270		(907	)
Common stocks		2,391		(57	)		57,687		(38,522	)		60,078		(38,579	)
Mutual funds:
Equity		—		—			13,823		(4,213	)		13,823		(4,213	)

Total	$	2,663	$	(63	)	$	83,780	$	(43,642	)	$	86,443	$	(43,705	)


	October 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	$	517	$	(2	)	$	—	$	—		$	517	$	(2	)
Corporate bonds		627		(6	)		493		(7	)		1,120		(13	)
Preferred stocks		—		—			15,206		(1,182	)		15,206		(1,182	)
Common stocks		1,957		(139	)		66,544		(45,653	)		68,501		(45,792	)
Mutual funds:
Equity		—		—			22,582		(6,978	)		22,582		(6,978	)
Fixed income		2,677		(3	)		16		(3	)		2,693		(6	)

Total	$	5,778	$	(150	)	$	104,841	$	(53,823	)	$	110,619	$	(53,973	)

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 April 30, 2011, 98 percent, or $42,792, were generated by common stock and mutual fund-equity investments. Most of the common stock investments are part of the S&P 500 Index, and the mutual fund-equity investments are invested in small-cap, mid-cap and international mutual funds that are highly diversified. 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 Company believes these investments will recover in value and that it has sufficient liquidity from cash and cash equivalents within the trusts, 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 individual 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 performed or 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.

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 $1,683 and $1,346 for the three months ended April 30, 2011 and 2010, respectively, and $3,993 and $3,819 for the six months ended April 30, 2011 and 2010, respectively.

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of April 30, 2011 are detailed below.


	April 30, 2011
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	7,659	$	—	$	—		$	7,659
U.S. Government, agencies and municipalities		7,114		187		(95	)		7,206
Corporate bonds		31,897		1,142		(837	)		32,202
Preferred stocks		36,337		145		(4,663	)		31,819
Common stocks		92,143		1,748		(31,683	)		62,208
Mutual funds:
Equity		8,464		595		(285	)		8,774
Fixed income		58,438		755		(1,420	)		57,773
Commodity		10,467		490		—			10,957
Real estate investment trusts		5,922		357		—			6,279
Master limited partnerships		8,587		162		—			8,749
World bond		7,663		305		—			7,968
Other long-term investments		245		—		(105	)		140

Trust investments	$	274,936	$	5,886	$	(39,088	)	$	241,734

Market value as a percentage of cost										87.9	%

Accrued investment income									808

Trust assets								$	242,542

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, 2010 are detailed below.


	October 31, 2010
			Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	32,403	$	—	$	—		$	32,403
U.S. Government, agencies and municipalities		8,006		196		(54	)		8,148
Corporate bonds		31,086		1,334		(825	)		31,595
Preferred stocks		56,807		257		(6,376	)		50,688
Common stocks		90,284		1,042		(36,496	)		54,830
Mutual funds:
Equity		5,783		49		(662	)		5,170
Fixed income		46,646		878		(304	)		47,220
Other long-term investments		401		2		(79	)		324

Trust investments	$	271,416	$	3,758	$	(44,796	)	$	230,378

Market value as a percentage of cost											84.9	%

Accrued investment income									630
Less trust investments of assets held for sale									(278	)

Trust assets								$	230,730

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


	April 30, 2011
Due in one year or less	$	5,694
Due in one to five years		17,481
Due in five to ten years		11,451
Thereafter		4,782

	$	39,408

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 April 30, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $49 and $111, respectively. These covered calls are included at market value in the balance sheet line “cemetery perpetual care trust investments.” For the three months ended April 30, 2011 and 2010, the Company realized trust losses of approximately ($33) and ($18), respectively, related to the covered call program. For the six months ended April 30, 2011 and 2010, the Company realized trust losses of approximately ($118) and ($183), respectively, related to the covered call program. These trust losses are accounted for in the same manner as other cemetery perpetual care trust earnings and losses and flow through cemetery revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. These underlying securities appreciated in value by $467 and $397 for the three months ended April 30, 2011 and 2010, respectively, and $934 and $1,996 for the six months ended April 30, 2011 and 2010, respectively.

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 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:


			Significant
	Quoted Market		Other		Significant
	Prices in Active		Observable		Unobservable
	Markets		Inputs		Inputs		Fair Market
	(Level 1)		(Level 2)		(Level 3)		Value
Trust investments—April 30, 2011	$	170,366	$	71,228	$	140	$	241,734
Trust investments—October 31, 2010	$	139,774	$	90,431	$	173	$	230,378

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


	Three Months Ended April 30,				Six Months Ended April 30,
	2011		2010		2011			2010
Fair market value, beginning balance	$	106	$	168	$	173		$	226
Other		34		82		(33	)		24

Fair market value, ending balance	$	140	$	250	$	140		$	250

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) 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 April 30, 2011 and October 31, 2010, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $12,633 and $13,253, respectively. The Company recorded an additional $73 for the estimated probable funding obligation for the six months ended April 30, 2011. The Company had earnings of $483 and $693 for the three and six months ended April 30, 2011, respectively, within the trusts that it did not withdraw 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 reasonably possible but not probable that additional funding obligations may exist with an estimated amount of $2,333; no charge has been recorded for these amounts as of April 30, 2011.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

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


	Three Months Ended April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Purchases	$	40,289		$	22,930		$	81,244		$	39,102
Sales		34,669			13,200			52,534			42,085
Realized gains from sales of investments		416			2,258			932			4,283
Realized losses from sales of investments and other		(274	)		(268	)		(438	)		(818	)
Interest income, dividends and other ordinary income		2,492			2,177			5,324			4,338
Deposits		1,869			1,895			3,399			3,733
Withdrawals		1,423			2,121			3,644			3,009

During the three months ended April 30, 2011 and 2010, cemetery revenues were $56,691 and $56,973, respectively, of which $2,327 and $2,311, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses. During the six months ended April 30, 2011 and 2010, cemetery revenues were $112,089 and $109,265, respectively, of which $4,306 and $4,645, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and costs.

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 April 30, 2011 and October 31, 2010.


	April 30, 2011
	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	$	1,998	$	(39	)	$	79	$	(56	)	$	2,077	$	(95	)
Corporate bonds		6,435		(131	)		538		(706	)		6,973		(837	)
Preferred stocks		—		—			25,210		(4,663	)		25,210		(4,663	)
Common stocks		599		(186	)		51,056		(31,497	)		51,655		(31,683	)
Mutual funds:
Equity		31		(1	)		2,315		(284	)		2,346		(285	)
Fixed income		21,546		(1,175	)		890		(245	)		22,436		(1,420	)
Other long-term investments		—		—			88		(105	)		88		(105	)

Total	$	30,609	$	(1,532	)	$	80,176	$	(37,556	)	$	110,785	$	(39,088	)


	October 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	$	269	$	(1	)	$	105	$	(53	)	$	374	$	(54	)
Corporate bonds		2,786		(15	)		682		(810	)		3,468		(825	)
Preferred stocks		—		—			32,747		(6,376	)		32,747		(6,376	)
Common stocks		717		(161	)		51,334		(36,335	)		52,051		(36,496	)
Mutual funds:
Equity		—		—			4,674		(662	)		4,674		(662	)
Fixed income		14,850		(15	)		1,076		(289	)		15,926		(304	)
Other long-term investments		—		—			88		(79	)		88		(79	)

Total	$	18,622	$	(192	)	$	90,706	$	(44,604	)	$	109,328	$	(44,796	)

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 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 April 30, 2010, 93 percent, or $36,346, 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 investment grade 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 Company believes these investments will recover in value and that it has sufficient liquidity from cash and cash equivalents within the trusts, cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

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

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

The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at April 30, 2011 are as follows:


	Deferred Receipts Held in Trust
	Preneed			Preneed
	Funeral			Cemetery			Total
Trust assets at market value	$	401,572		$	199,763		$	601,335
Less:
Pending withdrawals		(7,345	)		(5,270	)		(12,615	)
Pending deposits		1,954			1,087			3,041

Deferred receipts held in trust	$	396,181		$	195,580		$	591,761

The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at April 30, 2011 are as follows:


	Perpetual Care
	Trusts’ Corpus
Trust assets at market value	$	242,542
Less:
Pending withdrawals		(1,612	)
Pending deposits		646

Perpetual care trusts’ corpus	$	241,576

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Investment and other income, net

The components of investment and other income, net in the condensed consolidated statements of earnings for the three and six months ended April 30, 2011 and 2010 are detailed below.


	Three Months Ended April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Realized gains from sales of investments	$	3,079		$	3,903		$	8,664		$	6,979
Realized losses from sales of investments and other		(1,064	)		(1,443	)		(1,667	)		(3,390	)
Interest income, dividends and other ordinary income		7,581			5,956			15,547			11,615
Trust expenses and income taxes		(2,433	)		(2,602	)		(4,929	)		(5,140	)

Net trust investment income		7,163			5,814			17,615			10,064
Reclassification to deferred preneed funeral and cemetery receipts held in trust		(5,459	)		(2,646	)		(13,557	)		(3,996	)
Reclassification to perpetual care trusts’ corpus		(1,704	)		(3,168	)		(4,058	)		(6,068	)

Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		—			—			—			—
Investment and other income, net⁽¹⁾		340			36			364			60

Total investment and other income, net	$	340		$	36		$	364		$	60


⁽¹⁾		Investment and other income, net generally consists of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust. For the three and six months ended April 30, 2011, the balance includes approximately $323 of interest income related to the recent resolution of an audit by the Internal Revenue Service.

(7) Commitments and Contingencies

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 as a result 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, if any, the Company may recover from its insurers or the timing of the receipt of any additional proceeds.

The Company is a defendant in a variety of 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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies—(Continued)

April 30, 2011, the Company had $12,633 recorded as a liability for an estimated probable funding obligation. As of April 30, 2011, the Company had net unrealized losses of approximately $30,332 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 $3.0 million as of April 30, 2011 and October 31, 2010.

The Company is required to maintain a bond ($24,815 as of April 30, 2011) 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
	(Numerator)			(Denominator)		Data
Three Months Ended April 30, 2011
Earnings from continuing operations	$	9,998
Allocation of earnings to nonvested restricted stock		(87	)

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	9,911			90,442	$	.11

Effect of dilutive securities:
Stock options assumed exercised					624

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	9,911			91,066	$	.11


	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Three Months Ended April 30, 2010
Earnings from continuing operations	$	8,388
Allocation of earnings to nonvested restricted stock		(89	)

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	8,299			92,113	$	.09

Effect of dilutive securities:
Stock options assumed exercised					274

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	8,299			92,387	$	.09

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
	(Numerator)			(Denominator)		Data
Six Months Ended April 30, 2011
Earnings from continuing operations	$	18,042
Allocation of earnings to nonvested restricted stock		(161	)

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	17,881			90,658	$	.20

Effect of dilutive securities:
Stock options assumed exercised					467

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	17,881			91,125	$	.20


	Earnings			Shares		Per Share
	(Numerator)			(Denominator)		Data
Six Months Ended April 30, 2010
Earnings from continuing operations	$	15,849
Allocation of earnings to nonvested restricted stock		(167	)

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	15,682			92,082	$	.17

Effect of dilutive securities:
Stock options assumed exercised					250

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	15,682			92,332	$	.17

During the three months ended April 30, 2011, options to purchase 425,093 shares of common stock at prices ranging from $8.06 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 April 30, 2011 exclude the effect of approximately 1,266,382 options because such options were not dilutive. These options expire between March 31, 2014 and March 12, 2018.

During the six months ended April 30, 2011, options to purchase 806,197 shares of common stock at prices ranging from $6.83 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. These options expire between December 20, 2011 and March 12, 2018.

Options to purchase 1,285,255 shares of common stock at prices ranging from $5.84 to $8.47 per share for the three months ended April 30, 2010 and options to purchase 1,312,058 shares of common stock at prices ranging from $5.35 to $8.47 per share for the six months ended April 30, 2010 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

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)

three and six months ended April 30, 2010 exclude the effect of approximately 959,006 and 4,173 options, respectively, because such options were not dilutive.

For the three and six months ended April 30, 2011, all of the outstanding 214,500 market based stock options were dilutive as the respective market conditions had been previously achieved. For the three and six months ended April 30, 2010, 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 those periods.

For the three and six months ended April 30, 2011, a maximum of 13,153,500 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 10,522,798 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 six months ended April 30, 2011 was less than the conversion price of the senior convertible notes and strike price of the warrants. For the three and six months ended April 30, 2010, a maximum of 16,640,100 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 13,312,080 shares of Class A common stock under the associated common stock warrants were also not dilutive.

The Company includes Class A and Class B common stock in its diluted shares calculation. As of April 30, 2011, 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 management’s 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. The tables below present information about reported segments for the three and six months ended April 30, 2011 and 2010 for the Company’s continuing operations only. Prior period data has been retrospectively adjusted to conform to this presentation.


	Total Revenue				Total Revenue
	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	April 30, 2011		April 30, 2010		April 30, 2011		April 30, 2010
Funeral	$	68,635	$	66,736	$	138,408	$	134,378
Cemetery⁽¹⁾		54,462		55,072		107,826		105,579
Corporate Trust Management⁽²⁾		6,568		6,225		12,695		12,088

Total	$	129,665	$	128,033	$	258,929	$	252,045

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data—(Continued)


	Total Gross Profit				Total Gross Profit
	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	April 30, 2011		April 30, 2010		April 30, 2011		April 30, 2010
Funeral	$	13,920	$	12,778	$	30,436	$	28,199
Cemetery⁽¹⁾		5,565		6,457		11,711		10,868
Corporate Trust Management⁽²⁾		6,156		5,845		11,849		11,256

Total	$	25,641	$	25,080	$	53,996	$	50,323


	Net Total Preneed Merchandise				Net Total Preneed Merchandise
	and Service Sales⁽³⁾				and Service Sales⁽³⁾
	Three Months		Three Months		Six Months		Six Months
	Ended		Ended		Ended		Ended
	April 30, 2011		April 30, 2010		April 30, 2011		April 30, 2010
Funeral	$	24,558	$	26,342	$	44,004	$	45,295
Cemetery		13,220		12,334		24,218		22,538

Total	$	37,778	$	38,676	$	68,222	$	67,833


⁽¹⁾		Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $1,683 and $1,346 for the three months ended April 30, 2011 and 2010, respectively, and $3,993 and $3,819 for the six months ended April 30, 2011 and 2010, respectively.

⁽²⁾		Corporate trust management consists of trust management fees and funeral and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to the Company’s subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by the Company’s 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. Trust management fees included in funeral revenue for the three months ended April 30, 2011 and 2010 were $1,223 and $1,148, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended April 30, 2011 and 2010 were $3,115 and $3,176, respectively. Trust management fees included in cemetery revenue for the three months ended April 30, 2011 and 2010 were $1,350 and $1,235, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended April 30, 2011 and 2010 were $880 and $666, respectively.

		Trust management fees included in funeral revenue for the six months ended April 30, 2011 and 2010 were $2,412 and $2,263, respectively, and funeral trust earnings for the six months ended April 30, 2011 and 2010 were $6,020 and $6,139, respectively. Trust management fees included in cemetery revenue for the six months ended April 30, 2011 and 2010 were $2,650 and $2,424, respectively, and cemetery trust earnings for the six months ended April 30, 2011 and 2010 were $1,613 and $1,262, respectively.

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data—(Continued)

A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes for the three and six months ended April 30, 2011 and 2010 is as follows:


	Three Months Ended April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Gross profit for reportable segments	$	25,641		$	25,080		$	53,996		$	50,323
Corporate general and administrative expenses		(6,650	)		(6,116	)		(13,289	)		(12,786	)
Hurricane related charges, net		(54	)		(32	)		(104	)		(32	)
Net loss on dispositions		(400	)		—			(400	)		—
Other operating income, net		448			265			681			444
Interest expense		(5,732	)		(5,891	)		(11,468	)		(12,347	)
Gain (loss) on early extinguishment of debt		(1,811	)		—			(1,811	)		17
Investment and other income, net		340			36			364			60

Earnings from continuing operations before income taxes	$	11,782		$	13,342		$	27,969		$	25,679

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 six months ended April 30, 2011 and 2010.


	Three Months Ended April 30,				Six Months Ended April 30,
	2011		2010		2011		2010
Service revenue
Funeral	$	49,369	$	45,410	$	99,015	$	90,475
Cemetery		14,435		15,238		30,624		30,809

		63,804		60,648		129,639		121,284
Merchandise revenue
Funeral		21,589		23,981		43,995		48,997
Cemetery		38,732		37,601		74,553		70,742

		60,321		61,582		118,548		119,739
Other revenue
Funeral		2,016		1,669		3,830		3,308
Cemetery		3,524		4,134		6,912		7,714

		5,540		5,803		10,742		11,022


Total revenue	$	129,665	$	128,033	$	258,929	$	252,045


Service costs
Funeral	$	16,563	$	14,824	$	32,124	$	29,389
Cemetery		10,424		10,551		20,770		20,354

		26,987		25,375		52,894		49,743
Merchandise costs
Funeral		14,084		14,489		28,229		29,001
Cemetery		24,129		24,151		46,784		46,355

		38,213		38,640		75,013		75,356
Facility expenses		��
Funeral		24,279		24,838		48,051		48,210
Cemetery		14,545		14,100		28,975		28,413

		38,824		38,938		77,026		76,623


Total costs	$	104,024	$	102,953	$	204,933	$	201,722

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 and preneed selling costs associated with preneed merchandise sales.

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 April 30, 2011 and October 31, 2010 and for the three and six months ended April 30, 2011 and 2010, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.50 percent senior notes, 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 6.50 percent senior notes and senior convertible notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are not 100 percent owned, or are prohibited by law from guaranteeing the 6.50 percent senior notes and senior convertible notes. The guarantor subsidiaries of the 6.50 percent senior notes and senior convertible notes are 100 percent owned directly or indirectly by the Company. The non-guarantor subsidiaries of the 6.25 percent senior notes are identical to those of the 6.50 percent senior notes and senior convertible notes, except for three immaterial non-100 percent owned subsidiaries which serve as guarantors of the 6.25 percent senior notes. 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-100 percent owned subsidiaries that do not guaranty the 6.50 percent senior notes and senior convertible notes but do guaranty the 6.25 percent senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the 6.50 percent senior notes, 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 April 30, 2011
				Guarantor			Guarantor		Non-
				Subsidiaries –			Subsidiaries –		Guarantor
	Parent			Tier 1			Tier 2		Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	67,909		$	562	$	4,503		$	—		$	72,974
Cemetery		—			50,769			860		5,062			—			56,691

		—			118,678			1,422		9,565			—			129,665

Costs and expenses:
Funeral		—			51,657			319		2,950			—			54,926
Cemetery		—			44,495			696		3,907			—			49,098

		—			96,152			1,015		6,857			—			104,024

Gross profit		—			22,526			407		2,708			—			25,641
Corporate general and administrative expenses		(6,650	)		—			—		—			—			(6,650	)
Hurricane related charges, net		(54	)		—			—		—			—			(54	)
Net loss on dispositions		—			(400	)		—		—			—			(400	)
Other operating income, net		110			273			1		64			—			448

Operating earnings (loss)		(6,594	)		22,399			408		2,772			—			18,985
Interest income (expense)		(1,009	)		(4,256	)		9		(476	)		—			(5,732	)
Loss on early extinguishment of debt		(1,811	)		—			—		—			—			(1,811	)
Investment and other income, net		340			—			—		—			—			340
Equity in subsidiaries		13,415			217			—		—			(13,632	)		—

Earnings before income taxes		4,341			18,360			417		2,296			(13,632	)		11,782
Income tax expense (benefit)		(5,657	)		6,386			133		922			—			1,784

Net earnings		9,998			11,974			284		1,374			(13,632	)		9,998
Other comprehensive income, net		12			—			—		12			(12	)		12

Comprehensive income	$	10,010		$	11,974		$	284	$	1,386		$	(13,644	)	$	10,010

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 April 30, 2010
				Guarantor			Guarantor
				Subsidiaries –			Subsidiaries –			Non-Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	66,260		$	470		$	4,330		$	—		$	71,060
Cemetery		—			50,870			829			5,274			—			56,973

		—			117,130			1,299			9,604			—			128,033

Costs and expenses:
Funeral		—			50,682			296			3,173			—			54,151
Cemetery		—			44,133			649			4,020			—			48,802

		—			94,815			945			7,193			—			102,953

Gross profit		—			22,315			354			2,411			—			25,080
Corporate general and administrative expenses		(6,116	)		—			—			—			—			(6,116	)
Hurricane related recoveries (charges), net		(33	)		—			1			—			—			(32	)
Other operating income, net		26			149			3			87			—			265

Operating earnings (loss)		(6,123	)		22,464			358			2,498			—			19,197
Interest income (expense)		5			(5,420	)		(3	)		(473	)		—			(5,891	)
Investment and other income, net		35			1			—			—			—			36
Equity in subsidiaries		11,560			165			—			—			(11,725	)		—

Earnings from continuing operations before income taxes		5,477			17,210			355			2,025			(11,725	)		13,342
Income tax expense (benefit)		(2,914	)		7,061			104			703			—			4,954

Earnings from continuing operations		8,391			10,149			251			1,322			(11,725	)		8,388
Discontinued operations:
Earnings from discontinued operations before income taxes		—			4			—			—			—			4
Income taxes		—			1			—			—			—			1

Earnings from discontinued operations		—			3			—			—			—			3

Net earnings		8,391			10,152			251			1,322			(11,725	)		8,391
Other comprehensive income, net		1			—			—			1			(1	)		1

Comprehensive income	$	8,392		$	10,152		$	251		$	1,323		$	(11,726	)	$	8,392

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


	Six Months Ended April 30, 2011
				Guarantor			Guarantor
				Subsidiaries –			Subsidiaries –		Non-Guarantor
	Parent			Tier 1			Tier 2		Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	136,608		$	1,046	$	9,186		$	—		$	146,840
Cemetery		—			100,381			1,575		10,133			—			112,089

		—			236,989			2,621		19,319			—			258,929

Costs and expenses:
Funeral		—			101,747			612		6,045			—			108,404
Cemetery		—			87,475			1,287		7,767			—			96,529

		—			189,222			1,899		13,812			—			204,933

Gross profit		—			47,767			722		5,507			—			53,996
Corporate general and administrative expenses		(13,289	)		—			—		—			—			(13,289	)
Hurricane related charges, net		(104	)		—			—		—			—			(104	)
Net loss on dispositions		—			(400	)		—		—			—			(400	)
Other operating income, net		128			434			1		118			—			681

Operating earnings (loss)		(13,265	)		47,801			723		5,625			—			40,884
Interest income (expense)		(1,835	)		(8,721	)		14		(926	)		—			(11,468	)
Loss on early extinguishment of debt		(1,811	)		—			—		—			—			(1,811	)
Investment and other income, net		364			—			—		—			—			364
Equity in subsidiaries		25,007			387			—		—			(25,394	)		—

Earnings before income taxes		8,460			39,467			737		4,699			(25,394	)		27,969
Income tax expense (benefit)		(9,582	)		14,664			243		4,602			—			9,927

Net earnings		18,042			24,803			494		97			(25,394	)		18,042
Other comprehensive income, net		9			—			—		9			(9	)		9

Comprehensive income	$	18,051		$	24,803		$	494	$	106		$	(25,403	)	$	18,051

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


	Six Months Ended April 30, 2010
				Guarantor			Guarantor
				Subsidiaries –			Subsidiaries –			Non-Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	133,104		$	955		$	8,721		$	—		$	142,780
Cemetery		—			97,546			1,401			10,318			—			109,265

		—			230,650			2,356			19,039			—			252,045

Costs and expenses:
Funeral		—			99,671			559			6,370			—			106,600
Cemetery		—			85,706			1,269			8,147			—			95,122

		—			185,377			1,828			14,517			—			201,722

Gross profit		—			45,273			528			4,522			—			50,323
Corporate general and administrative expenses		(12,786	)		—			—			—			—			(12,786	)
Hurricane related recoveries (charges), net		(87	)		—			55			—			—			(32	)
Other operating income, net		42			292			3			107			—			444

Operating earnings (loss)		(12,831	)		45,565			586			4,629			—			37,949
Interest expense		(482	)		(10,898	)		(11	)		(956	)		—			(12,347	)
Gain on early extinguishment of debt		17			—			—			—			—			17
Investment and other income, net		59			1			—			—			—			60
Equity in subsidiaries		23,497			245			—			—			(23,742	)		—

Earnings from continuing operations before income taxes		10,260			34,913			575			3,673			(23,742	)		25,679
Income tax expense (benefit)		(5,618	)		14,068			178			1,202			—			9,830

Earnings from continuing operations		15,878			20,845			397			2,471			(23,742	)		15,849
Discontinued operations:
Earnings from discontinued operations before income taxes		—			46			—			—			—			46
Income taxes		—			17			—			—			—			17

Earnings from discontinued operations		—			29			—			—			—			29

Net earnings		15,878			20,874			397			2,471			(23,742	)		15,878
Other comprehensive loss, net		—			—			—			—			—			—

Comprehensive income	$	15,878		$	20,874		$	397		$	2,471		$	(23,742	)	$	15,878

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


	April 30, 2011
			Guarantor			Guarantor		Non-
			Subsidiaries-			Subsidiaries-		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	73,363	$	4,025		$	79	$	843	$	—		$	78,310
Certificates of deposit and marketable securities		—		—			—		598		—			598
Receivables, net of allowances		3,537		38,579			341		6,379		—			48,836
Inventories		298		32,907			327		2,261		—			35,793
Prepaid expenses		1,350		4,606			65		1,650		—			7,671
Deferred income taxes, net		14,135		11,470			31		2,769		—			28,405
Intercompany receivables		2,413		—			—		—		(2,413	)		—

Total current assets		95,096		91,587			843		14,500		(2,413	)		199,613
Receivables due beyond one year, net of allowances		—		52,392			619		11,256		—			64,267
Preneed funeral receivables and trust investments		—		422,939			—		9,757		—			432,696
Preneed cemetery receivables and trust investments		—		219,176			1,170		6,304		—			226,650
Goodwill		—		227,203			48		19,787		—			247,038
Cemetery property, at cost		—		350,906			11,101		25,634		—			387,641
Property and equipment, at cost		57,953		480,203			2,575		39,688		—			580,419
Less accumulated depreciation		43,228		233,581			1,258		17,138		—			295,205

Net property and equipment		14,725		246,622			1,317		22,550		—			285,214
Deferred income taxes, net		10,719		77,116			—		6,932		(2,655	)		92,112
Cemetery perpetual care trust investments		—		229,475			9,128		3,939		—			242,542
Other assets		10,108		4,735			15		1,020		—			15,878
Intercompany receivables		676,121		—			—		—		(676,121	)		—
Equity in subsidiaries		15,825		9,275			—		—		(25,100	)		—

Total assets	$	822,594	$	1,931,426		$	24,241	$	121,679	$	(706,289	)	$	2,193,651


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5,817	$	—		$	—	$	—	$	—		$	5,817
Accounts payable, accrued expenses and other current liabilities		12,945		66,385			113		3,832		—			83,275
Intercompany payables		—		—			—		2,413		(2,413	)		—

Total current liabilities		18,762		66,385			113		6,245		(2,413	)		89,092
Long-term debt, less current maturities		315,891		—			—		—		—			315,891
Deferred income taxes, net		—		4,327			3,229		5		(2,655	)		4,906
Intercompany payables		—		661,804			1,592		12,725		(676,121	)		—
Deferred preneed funeral revenue		—		195,697			—		46,335		—			242,032
Deferred preneed cemetery revenue		—		227,134			526		28,704		—			256,364
Deferred preneed funeral and cemetery receipts held in trust		—		583,505			1,071		7,185		—			591,761
Perpetual care trusts’ corpus		—		228,517			9,148		3,911		—			241,576
Other long-term liabilities		18,659		1,766			—		31		—			20,456
Negative equity in subsidiaries		37,709		—			—		—		(37,709	)		—

Total liabilities		391,021		1,969,135			15,679		105,141		(718,898	)		1,762,078

Common stock		91,201		102			324		52		(478	)		91,201
Other		340,345		(37,811	)		8,238		16,459		13,114			340,345
Accumulated other comprehensive income		27		—			—		27		(27	)		27

Total shareholders’ equity		431,573		(37,709	)		8,562		16,538		12,609			431,573

Total liabilities and shareholders’ equity	$	822,594	$	1,931,426		$	24,241	$	121,679	$	(706,289	)	$	2,193,651

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, 2010
			Guarantor			Guarantor		Non-
			Subsidiaries –			Subsidiaries –		Guarantor
	Parent		Tier 1			Tier 2		Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	48,270	$	6,055		$	58	$	1,677	$	—		$	56,060
Certificates of deposit and marketable securities		10,000		—			—		—		—			10,000
Receivables, net of allowances		3,685		40,698			372		6,396		—			51,151
Inventories		329		32,779			330		2,270		—			35,708
Prepaid expenses		1,292		2,589			60		1,538		—			5,479
Deferred income taxes, net		13,835		11,604			32		2,841		—			28,312
Assets held for sale		—		27			—		—		—			27
Intercompany receivables		7,782		—			—		—		(7,782	)		—

Total current assets		85,193		93,752			852		14,722		(7,782	)		186,737
Receivables due beyond one year, net of allowances		1,973		53,683			572		11,230		—			67,458
Preneed funeral receivables and trust investments		—		405,296			—		9,622		—			414,918
Preneed cemetery receivables and trust investments		—		201,960			1,123		6,204		—			209,287
Goodwill		—		227,203			48		19,787		—			247,038
Cemetery property, at cost		—		349,252			11,154		25,598		—			386,004
Property and equipment, at cost		56,964		474,538			2,509		39,172		—			573,183
Less accumulated depreciation		40,837		225,118			1,180		16,498		—			283,633

Net property and equipment		16,127		249,420			1,329		22,674		—			289,550
Deferred income taxes, net		16,620		75,449			—		9,224		(3,268	)		98,025
Cemetery perpetual care trust investments		—		217,743			8,973		4,014		—			230,730
Non-current assets held for sale		—		1,214			—		—		—			1,214
Other assets		6,096		4,772			7		1,030		—			11,905
Intercompany receivables		693,981		—			—		—		(693,981	)		—
Equity in subsidiaries		15,612		8,888			—		—		(24,500	)		—

Total assets	$	835,602	$	1,888,632		$	24,058	$	124,105	$	(729,531	)	$	2,142,866


LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	5	$	—		$	—	$	—	$	—		$	5
Accounts payable, accrued expenses and other current liabilities		15,524		70,740			151		5,720		—			92,135
Liabilities associated with assets held for sale		—		8			—		—		—			8
Intercompany payables		—		—			—		7,782		(7,782	)		—

Total current liabilities		15,529		70,748			151		13,502		(7,782	)		92,148
Long-term debt, less current maturities		314,027		—			—		—		—			314,027
Deferred income taxes, net		—		4,950			3,268		—		(3,268	)		4,950
Intercompany payables		—		683,501			2,099		8,381		(693,981	)		—
Deferred preneed funeral revenue		—		197,148			—		46,372		—			243,520
Deferred preneed cemetery revenue		—		228,908			500		28,636		—			258,044
Deferred preneed funeral and cemetery receipts held in trust		—		546,876			1,049		6,791		—			554,716
Perpetual care trusts’ corpus		—		216,379			8,923		3,938		—			229,240
Long-term liabilities associated with assets held for sale		—		714			—		—		—			714
Other long-term liabilities		18,050		1,920			—		53		—			20,023
Negative equity in subsidiaries		62,512		—			—		—		(62,512	)		—

Total liabilities		410,118		1,951,144			15,990		107,673		(767,543	)		1,717,382

Common stock		92,294		102			324		52		(478	)		92,294
Other		333,172		(62,614	)		7,744		16,362		38,508			333,172
Accumulated other comprehensive income		18		—			—		18		(18	)		18

Total shareholders’ equity		425,484		(62,512	)		8,068		16,432		38,012			425,484

Total liabilities and shareholders’ equity	$	835,602	$	1,888,632		$	24,058	$	124,105	$	(729,531	)	$	2,142,866

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


	Six Months Ended April 30, 2011
				Guarantor			Guarantor			Non-
				Subsidiaries –			Subsidiaries –			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	3,606		$	30,200		$	645		$	1,245		$	—	$	35,696

Cash flows from investing activities:
Proceeds from sales of certificates of deposit		10,000			—			—			—			—		10,000
Purchases of certificates of deposit and marketable securities		—			—			—			(585	)		—		(585	)
Proceeds from sale of assets		—			285			—			—			—		285
Purchase of subsidiaries and other investments, net of cash acquired		—			(1,809	)		—			—			—		(1,809	)
Additions to property and equipment		(922	)		(7,254	)		(117	)		(469	)		—		(8,762	)
Other		—			54			—			—			—		54

Net cash provided by (used in) investing activities		9,078			(8,724	)		(117	)		(1,054	)		—		(817	)

Cash flows from financing activities:
Proceeds from long-term debt		200,000			—			—			—			—		200,000
Intercompany receivables (payables)		25,038			(23,506	)		(507	)		(1,025	)		—		—
Repayments of long-term debt		(194,190	)		—			—			—			—		(194,190	)
Issuance of common stock		1,199			—			—			—			—		1,199
Purchase and retirement of common stock		(9,387	)		—			—			—			—		(9,387	)
Debt refinancing costs		(4,910	)		—			—			—			—		(4,910	)
Dividends		(5,485	)		—			—			—			—		(5,485	)
Excess tax benefits from share-based payment arrangements		144			—			—			—			—		144

Net cash provided by (used in) financing activities		12,409			(23,506	)		(507	)		(1,025	)		—		(12,629	)

Net increase (decrease) in cash		25,093			(2,030	)		21			(834	)		—		22,250
Cash and cash equivalents, beginning of period		48,270			6,055			58			1,677			—		56,060

Cash and cash equivalents, end of period	$	73,363		$	4,025		$	79		$	843		$	—	$	78,310

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


	Six Months Ended April 30, 2010
				Guarantor			Guarantor			Non-
				Subsidiaries –			Subsidiaries –			Guarantor
	Parent			Tier 1			Tier 2			Subsidiaries			Eliminations		Consolidated
Net cash provided by (used in) operating activities	$	(1,511	)	$	24,505		$	661		$	2,800		$	—	$	26,455

Cash flows from investing activities:
Proceeds from sales of marketable securities		—			—			—			250			—		250
Purchases of certificates of deposit and marketable securities		(10,000	)		—			—			(661	)		—		(10,661	)
Additions to property and equipment		(1,430	)		(6,416	)		(75	)		(445	)		—		(8,366	)
Other		—			50			—			—			—		50

Net cash used in investing activities		(11,430	)		(6,366	)		(75	)		(856	)		—		(18,727	)

Cash flows from financing activities:
Repayments of long-term debt		(847	)		—			—			—			—		(847	)
Intercompany receivables (payables)		20,725			(17,604	)		(588	)		(2,533	)		—		—
Retirement of common stock warrants		(107	)		—			—			—			—		(107	)
Issuance of common stock		471			—			—			—			—		471
Retirement of call options		107			—			—			—			—		107
Debt refinancing costs		(38	)		—			—			—			—		(38	)
Dividends		(5,589	)		—			—			—			—		(5,589	)
Excess tax benefits from share based payment arrangements		26			—			—			—			—		26

Net cash provided by (used in) financing activities		14,748			(17,604	)		(588	)		(2,533	)		—		(5,977	)

Net increase (decrease) in cash		1,807			535			(2	)		(589	)		—		1,751
Cash and cash equivalents, beginning of period		56,734			5,096			52			926			—		62,808

Cash and cash equivalents, end of period	$	58,541		$	5,631		$	50		$	337		$	—	$	64,559

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Dispositions and Acquisitions

During the six months ended April 30, 2011, the Company acquired a new funeral home and cemetery for approximately $1,809. This acquisition was accounted for under the purchase method, and the acquired assets and liabilities (primarily cemetery property of approximately $1,045 and property, plant and equipment of approximately $549) were valued at their estimated fair values. The results of operations for these businesses, which are considered immaterial, have been included in consolidated results since the acquisition date.

Assets and liabilities associated with assets held for sale are presented in the “assets held for sale,” “non-current assets held for sale,” “liabilities associated with assets held for sale” and “long-term liabilities associated with assets held for sale” lines in the condensed consolidated balance sheet. As of October 31, 2010, assets held for sale and liabilities associated with assets held for sale were comprised of the following:


	October 31, 2010
Assets
Receivables	$	20
Inventories		7

Assets held for sale	$	27


Net property and equipment	$	383
Cemetery property		90
Preneed cemetery receivables and trust investments		463
Cemetery perpetual care trust investments		278

Non-current assets held for sale	$	1,214

Liabilities
Liabilities associated with assets held for sale	$	8


Deferred preneed cemetery receipts held in trust	$	436
Perpetual care trusts’ corpus		278

Long-term liabilities associated with assets held for sale	$	714

(13) Consolidated Comprehensive Income

��Consolidated comprehensive income for the three and six months ended April 30, 2011 and 2010 is as follows:


	Three Months Ended April 30,						Six Months Ended April 30,
	2011			2010			2011			2010
Net earnings	$	9,998		$	8,391		$	18,042		$	15,878
Other comprehensive income:
Unrealized appreciation of investments, net of deferred tax expense of ($7), ($1) and ($5), respectively		12			1			9			—
Reduction in net unrealized losses associated with available-for-sale securities of the trusts		25,900			35,437			42,981			55,667
Reclassification of the net unrealized losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		(25,900	)		(35,437	)		(42,981	)		(55,667	)

Total other comprehensive income		12			1			9			—

Total comprehensive income	$	10,010		$	8,392		$	18,051		$	15,878

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Long-term Debt


	April 30, 2011		October 31, 2010
Long-term debt:
3.125% senior convertible notes due 2014, net of unamortized discount of $8,966 and $10,275 as of April 30, 2011 and October 31, 2010, respectively	$	77,450	$	76,141
3.375% senior convertible notes due 2016, net of unamortized discount of $6,760 and $7,318 as of April 30, 2011 and October 31, 2010, respectively		38,359		37,801
Senior secured revolving credit facility		—		—
6.50% senior notes due 2019		200,000		—
6.25% senior notes due 2013		5,812		200,000
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rate of 8.0% as of April 30, 2011 and October 31, 2010, partially secured by assets of subsidiaries, with maturities through 2022		87		90

Total long-term debt		321,708		314,032
Less current maturities		5,817		5

	$	315,891	$	314,027

Fair Value

As of April 30, 2011, the carrying values of the Company’s 3.125 percent senior convertible notes due 2014 (the “2014 Notes”) and 3.375 percent senior convertible notes due 2016 (the “2016 Notes”), including accrued interest, were $78,245 and $38,807, respectively, compared to fair values of $90,128 and $46,357, respectively. The aggregate principal amounts outstanding of the 2014 Notes and 2016 Notes as of April 30, 2011 were $86,416 and $45,119, respectively. As of April 30, 2011, the carrying value of the Company’s 6.50 percent senior notes, including accrued interest, was $200,433 compared to a fair value of $202,194. The carrying value of the Company’s 6.25 percent notes, including accrued interest, was $5,888 compared to a fair value of $5,812 as of April 30, 2011.

Senior Secured Revolving Credit Facility

On April 20, 2011, the Company amended its $95,000 senior secured revolving credit facility which was set to mature in June 2012. The amended senior secured revolving credit facility matures on April 20, 2016 and was increased to $150,000 and includes a $30,000 sublimit for the issuance of standby letters of credit and a $10,000 sublimit for swingline loans. The Company may also request the addition of a new tranche of term loans, an increase in the commitments to the amended senior secured revolving credit facility or a combination thereof not to exceed $50,000. As of April 30, 2011, there were no amounts drawn on the amended senior secured revolving credit facility, and the Company’s availability for future borrowings under the facility, after giving consideration to its $7,500 of outstanding letters of credit and $24,815 reserve for its Florida bond, was $117,685. During the quarter ended April 30, 2011, the Company recorded a charge for the loss on early extinguishment of debt of $88 to write-off a portion of the unamortized fees on the prior agreement. The remaining fees related to the prior agreement and the fees incurred for the amended agreement were $2,311 (of which $1,313 was paid in cash as of April 30, 2011) and will be amortized over the term of the new credit facility.

The interest rate on the amended senior secured revolving credit facility ranges from LIBOR plus 225.0 to 275.0 basis points, and was LIBOR plus 250.0 basis points at closing. The Company pays a quarterly commitment fee ranging from 40 to 50 basis points annually based on the undrawn portion of the commitments.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Long-term Debt—(Continued)

The amended senior secured revolving credit facility is governed by the following financial covenants:

	•		Maintenance on a rolling four quarter basis of a maximum consolidated adjusted leverage ratio (total funded debt (net of eligible securities and readily marketable securities, but in no event greater than $30,000) divided by EBITDA (as defined)) of not more than 4.75 to 1.00;

	•		Maintenance on a rolling four quarter basis of a maximum consolidated senior secured leverage ratio (total funded senior secured debt divided by EBITDA (as defined)) — of not more than 2.00 to 1.00; and

	•		Maintenance on a rolling four quarter basis of a minimum consolidated interest coverage ratio (EBITDAR (as defined) divided by interest expense paid in cash plus rent expense less certain transaction costs to the extent such constitutes cash interest expense) — of not less than 2.60 to 1.00

The covenants include limitations on (i) liens, (ii) mergers, consolidations and asset sales, (iii) the incurrence of debt, (iv) dividends, stock redemptions and the redemption and/or prepayment of other debt, (v) capital expenditures, (vi) investments and acquisitions, (vii) transactions with affiliates and (viii) a change of control. If there is no default or event of default, the Company may pay cash dividends and repurchase its stock, provided that the aggregate amount of the dividends and stock repurchased plus other types of restricted payments in any fiscal year does not exceed $30,000 plus any positive amounts available in the discretionary basket. As of April 30, 2011, the amount available to pay dividends or repurchase stock was $206,927. The agreement also limits capital expenditures in any fiscal year to $45,000, with a provision for the carryover of permitted but unused amounts. The lenders under the amended senior secured credit facility can accelerate all obligations under the facility and terminate the revolving credit commitments if an event of default occurs and is continuing.

Obligations under the amended senior secured revolving credit facility are guaranteed by substantially all existing and future direct and indirect domestic subsidiaries of the Company formed under the laws of any one of the states or the District of Columbia of the United States of America (“SEI Guarantors”).

The lenders under the amended senior secured revolving credit facility have a first priority perfected security interest in (1) all of the capital stock or other equity interests of each of the domestic subsidiaries of the Company whether now existing or hereafter created or acquired other than certain excluded immaterial subsidiaries and 65 percent of the voting capital stock of all direct foreign subsidiaries whether now existing or hereafter acquired and (2) all other present and future assets and properties of the Company and the SEI Guarantors except (a) real property, (b) vehicles, (c) assets to which applicable law or regulation prohibits security interest therein or requires the consent of a third party, (d) contract rights in which a security interest without the approval of the other party to the contract would constitute a default thereunder, (e) any assets with respect to which a security interest cannot be perfected and (f) a certain securities account to be maintained for the benefit of one of the Company’s umbrella insurance policies.

Senior Notes

On April 4, 2011, the Company commenced a cash tender offer and consent solicitation for any and all of its outstanding $200,000 aggregate principal amount 6.25 percent senior notes due 2013 (the “6.25 percent notes”) and a solicitation of consents to amend the indenture governing the 6.25 percent notes (the “Indenture”). On April 15, 2011, the Company announced that it had received the requisite consents to amend the Indenture and accordingly entered into a supplemental indenture, dated April 15, 2011 (the “Supplemental Indenture”), to the Indenture with U.S. Bank National Association, as trustee for the 6.25 percent notes. On April 18, 2011, the Company purchased a total of $194,188 in aggregate principal amount of its outstanding 6.25 percent notes in the offer for an aggregate purchase price (including consent payments) of $194,673 plus $2,124 in accrued and unpaid interest. During the quarter ended April 30, 2011, the Company recorded a charge for the loss on early extinguishment of debt of $1,723 representing $777 for related fees and expenses and $946 for the write-off of the remaining unamortized fees on the 6.25 percent senior notes.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Long-term Debt—(Continued)

The Company funded the tender offer for the 6.25 percent senior notes with a portion of its available cash and the net proceeds of the issuance of $200,000 6.50 percent senior notes due 2019 (the “6.50 percent notes”), which were issued April 18, 2011. As of April 30, 2011, fees incurred for the new 6.50 percent senior notes amounted to $4,293 (of which $3,597 was paid in cash as of April 30, 2011) and will be amortized over the term of the 6.50 percent senior notes. The Company redeemed the remaining $5,812 of the 6.25 percent senior notes in May 2011 at the redemption price of 100 percent of the principal amount, plus accrued and unpaid interest to the redemption date.

The 6.50 percent notes are governed by an indenture dated April 18, 2011. The Company will pay interest on the 6.50 percent notes on April 15 and October 15 of each year, beginning October 15, 2011. The 6.50 percent notes will mature on April 15, 2019. The indenture governing the 6.50 percent notes contains affirmative and negative covenants that will, among other things, limit the Company’s and the SEI Guarantors’ ability to engage in sale and leaseback transactions, effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all assets, and create liens on assets. Upon the occurrence of a change in control (as defined in the indenture), each holder of the 6.50 percent notes will have the right to require the Company to purchase that holder’s 6.50 percent notes for a cash price equal to 101 percent of their principal amount. The 6.50 percent notes are redeemable on or after April 15, 2014 at redemption prices specified in the indenture, and prior to April 15, 2014 at a “make-whole” premium described in the indenture. Upon the occurrence of certain events of default (as defined in the indenture), the trustee or the holders of the 6.50 percent notes may declare all outstanding 6.50 percent notes to be due and payable immediately.

The 6.50 percent notes are guaranteed, jointly and severally, by the Guarantors (as defined in the indenture), and are the Company’s, and the guarantees of the 6.50 percent notes are the Guarantors’, general unsecured and unsubordinated obligations, and rank equally in right of payment with all of the Company’s, in the case of the 6.50 percent notes, and the SEI Guarantors’, in the case of their guarantees of the 6.50 percent notes, existing and future unsubordinated indebtedness.

In connection with the issuance of the 6.50 percent notes, the Company entered into a registration rights agreement dated as of April 18, 2011 whereby the Company agreed to offer to exchange the 6.50 percent notes for a new issue of substantially identical notes registered under the Securities Act. Under the registration rights agreement, the Company is required to file an exchange offer registration statement with the Securities and Exchange Commission, use its reasonable best efforts to cause the exchange offer registration statement to be declared effective and consummate the exchange offer within 210 days after April 18, 2011. In the event the Company breaches its obligations under the registration rights agreement, it will be obligated to pay additional interest to the holders of the 6.50 percent notes.

(15) Income Taxes

In January 2011, the government of Puerto Rico signed into law corporate tax rate changes that decreased the top tax rate for businesses from 39 percent to 30 percent. The Company will benefit from this reduced rate when paying taxes in the future. However, as a result of this change, the Company was required to revalue its previously recorded Puerto Rican-related deferred tax asset using the 30 percent current top tax rate. During the six months ended April 30, 2011, the Company recorded a one-time, non-cash charge of $2.9 million ($4.5 million charge less a federal tax benefit of $1.6 million) in order to decrease the Puerto Rican deferred tax asset balance. The Puerto Rican deferred tax asset balance decreased from approximately $19.4 million at the previously required 39 percent tax rate to approximately $14.9 million at the newly-enacted 30 percent tax rate. This change in deferred tax assets increased the Company’s income tax expense for the six months ended April 30, 2011 by $2.9 million. Income tax expense for the six months ended April 30, 2011 was also impacted by a $3.3 million overall reduction in the tax valuation allowance primarily due to the reduction in the portion of the valuation allowance related to capital losses associated with the positive performance of the Company’s trust portfolio.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(16) Subsequent Events

As of May 31, 2011, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts declined 0.7 percent, or approximately $5,900, from April 30, 2011.

Subsequent to April 30, 2011, the Company purchased an additional 155,600 shares of its Class A common stock for approximately $1,200 at an average price of $7.67 per share. There is $11,927 remaining available under the Company’s $75,000 stock repurchase program.

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, 2010 (the “2010 Form 10-K”), and in conjunction with our consolidated financial statements included in this report and in our 2010 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 2010 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 and Puerto Rico. As of April 30, 2011, we owned and operated 217 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 2010 Form 10-K.

Financial Summary

For the second quarter of fiscal year 2011, net earnings increased $1.6 million to $10.0 million from $8.4 million for the second quarter of fiscal year 2010. Revenue increased $1.6 million to $129.6 million for the quarter ended April 30, 2011, reflecting a $1.9 million increase in funeral revenue to $72.9 million. During the second quarter of 2011, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 1.8 percent and an increase in average revenue per cremation service of 4.1 percent. We also experienced a 0.8 percent increase in same-store funeral services performed. Cemetery revenue decreased $0.3 million to $56.7 million for the quarter ended April 30, 2011. This decrease is primarily due to a $0.9 million decrease in construction during the period on various cemetery projects. In addition, we experienced a $0.3 million reduction in finance charges primarily due to reduced interest rates and a $0.3 million increase in the reserve for cancellations. Consolidated gross profit increased $0.5 million to $25.6 million for the quarter ending April 30, 2011, primarily due to a $1.1 million increase in funeral gross profit, partially offset by a $0.6 million decrease in cemetery gross profit.

Corporate general and administrative expenses increased $0.5 million to $6.7 million for the second quarter of 2011 primarily due to spending on various growth initiatives. During the second quarter of 2011, we donated land and a building, resulting in a loss on disposition of $0.4 million. We recorded a tax benefit for the donation that exceeded the loss. The effective tax rate for the second quarter of 2011 decreased to 15.1 percent from 37.1 percent for the same period in 2010. Due in part to the favorable performance of our trust portfolio, we recorded a $2.5 million tax benefit from a reduction in the valuation allowance related to our capital loss carry forward.

percent senior notes due 2019 and repurchased $194.2 million of our $200.0 million outstanding 6.25 percent senior notes due in 2013. We redeemed the remaining $5.8 million 6.25 percent senior notes outstanding in May 2011 at par. We also amended our $95.0 million revolving credit facility, which was undrawn and scheduled to mature in June 2012, to increase its size to $150.0 million and extend its maturity date to April 2016. The amended senior secured revolving credit facility remains undrawn. As a result of these transactions, we recorded a $1.8 million charge for early extinguishment of debt during the three months ended April 30, 2011. For additional information, see Note 14 to the condensed consolidated financial statements included herein.

During the second quarter of 2011, we purchased 0.2 million shares of our Class A outstanding common stock for approximately $1.3 million under our share repurchase program.

For the second quarter of 2011, preneed cemetery property sales increased 5.9 percent compared to the same period of last year. Our net preneed funeral sales decreased 6.8 percent during the second quarter of 2011 compared to the second quarter of 2010. While preneed funeral sales decreased from the prior year, our goal is for preneed funeral sales to exceed preneed maturities. For the second quarter of 2011, preneed funeral sales exceeded preneed deliveries by $3.3 million. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

For the first half of fiscal year 2011, net earnings increased $2.2 million to $18.1 million from $15.9 million for the same period of fiscal year 2010. Revenue increased $6.9 million to $259.0 million for the six months ended April 30, 2011. Funeral revenue increased $4.1 million to $146.9 million in the first half of 2011. During the six months ended April 30, 2011, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 1.6 percent and an increase in average revenue per cremation service of 4.4 percent. We also experienced a 0.9 percent increase in same-store funeral services performed. Cemetery revenue increased $2.8 million to $112.1 million for the six months ended April 30, 2011. This increase is due primarily to a $3.5 million, or 7.9 percent, increase in cemetery property sales, partially offset by a $1.1 million decrease in cemetery merchandise delivered. Consolidated gross profit increased $3.7 million to $54.0 million for the six months ended April 30, 2011, primarily due to a $2.3 million increase in funeral gross profit and a $1.4 million increase in cemetery gross profit.

Corporate general and administrative expenses increased $0.5 million to $13.3 million for the first six month period of fiscal 2011, primarily due to spending on various growth initiatives. During the first six months of 2011, we donated land and a building, resulting in a loss on disposition of $0.4 million. We recorded a tax benefit for the donation that exceeded the loss. Interest expense decreased $0.8 million to $11.5 million during the first half of 2011 primarily due to the significant repurchases of a portion of our senior convertible notes in the open market throughout fiscal year 2010. The effective tax rate for the six months ended April 30, 2011 was 35.5 percent compared to 38.3 percent for the same period in 2010. Due in part to the favorable performance of our trust portfolio, we recorded a $3.4 million tax benefit attributable to a reduction in our valuation allowance primarily related to our capital loss carry forward. This benefit was partially offset by a charge to income tax expense in the first quarter of 2011 as a result of the revaluation of our Puerto Rican deferred tax assets due to a change in Puerto Rican tax legislation.

For the six months ended April 30, 2011, preneed cemetery property sales increased 7.9 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net preneed funeral sales decreased 2.8 percent during the six months ended April 30, 2011 compared to the same period of 2010. For the first half of fiscal year 2011, preneed funeral sales exceeded preneed deliveries by $2.5 million.

As previously discussed, we completed the refinancings of our $200.0 million 6.25 percent senior notes due 2013 and amended our senior secured revolving credit facility during the quarter ended April 30, 2011. As a result, we recorded a $1.8 million charge for the early extinguishment of debt during the first six months ended April 30, 2011.

During the first half of 2011, we purchased 1.5 million shares of our Class A outstanding common stock for approximately $9.4 million under our share repurchase program. Subsequent to quarter-end, we repurchased an additional 0.2 million shares of our outstanding Class A common stock for $1.2 million. We currently have $11.9 million remaining under the $75.0 million program authorized by the Board of Directors.

Our operations provided cash of $35.7 million for the six months ended April 30, 2011, compared to $26.5 million for the same period of last year. The increase in operating cash flow is due in part to an improvement in net earnings and the timing of trust withdrawals and deposits, partially offset by an increase in net state tax payments.

We are planning to develop cremation gardens and other cremation projects in our cemeteries over the next few years. We have successfully completed five cremation projects, and we currently have eight projects under construction with more than 20 additional projects under feasibility review. We are working to complete a number of these projects in fiscal year 2011 and expect to spend up to $5 million. This spending represents a shift from traditional cemetery inventory spending to cremation inventory spending.

During the second quarter of fiscal year 2011, we experienced positive trends in the overall financial markets and in our preneed and perpetual care trusts. Specifically, our preneed funeral and cemetery merchandise and services trusts experienced a total return, including both realized and unrealized gains and losses, of 4.8 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized gains and losses, of 3.6 percent. As of April 30, 2011, the fair market value of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts was $841.2 million, an improvement of 5.8 percent, or $45.9 million, from October 31, 2010 and 7.3 percent, or $57.4 million, from April 30, 2010.

As of April 30, 2011 and October 31, 2010, the fair market values of the investments in our funeral and cemetery merchandise and services trusts were $103.5 million and $138.6 million, respectively, lower than our cost basis. In our cemetery perpetual care trusts, as of April 30, 2011 and October 31, 2010, the fair market values of our investments were $33.2 million and $41.0 million, respectively, lower than our cost basis.

The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of April 30, 2011 and October 31, 2010, we had $217.7 million and $212.1 million, respectively, in distributable earnings in our funeral and cemetery merchandise and services trusts that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are ultimately performed.

As of May 31, 2011, the fair market value of our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts decreased 0.7 percent, or approximately $5.9 million from April 30, 2011.

The sectors in which our trust investment portfolio is invested have not materially changed from that disclosed in our 2010 Form 10-K except as described below.

Passive investments such as cash and highly diversified mutual funds represented 41 percent, or $245.9 million, of the fair market value of our preneed funeral and cemetery merchandise and services trust portfolios as of April 30, 2011, compared to 35 percent, or $195.3 million, as of October 31, 2010. Passive investments represented 40 percent, or $96.4 million, of the fair market value of our cemetery perpetual care trust portfolio as of April 30, 2011, compared to 37 percent, or $84.8 million, as of October 31, 2010. We believe increasing our trusts’ passive investments is an attractive approach to increasing the diversification of our trust portfolio.

During fiscal 2011, we have reduced the individual issuer financials sector concentration in our trust portfolio. As of April 30, 2011, individual issuer investments in the financials sector represented 17 percent, or $101.2 million of the fair market value, of our preneed funeral and cemetery merchandise and services portfolios, compared to 20 percent, or $115.7 million as of October 31, 2010. Of the fair market value at April 30, 2011, 64 percent related to preferred stock, 19 percent related to fixed-income securities and 17 percent related to common stock investments. As of April 30, 2011, individual issuer investments in the financials sector represented 21 percent, or $51.7 million of the fair market value, of our cemetery perpetual care portfolio, compared to 30 percent, or $69.0 million as of October 31, 2010. Of the fair market value at April 30, 2011, 60 percent related to preferred stock, 32 percent related to fixed-income securities and 8 percent related to common stock investments. Individual issuer investments in this sector have unrealized losses of $34.9 million as of April 30, 2011 in our preneed funeral and cemetery merchandise and services trusts, $2.5 million of which relate to preferred stock investments. With

respect to our cemetery perpetual care trust portfolio, the individual issuer investments in the financials sector have unrealized losses of $8.6 million as of April 30, 2011, $2.7 million of which relate to preferred stock investments.

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 significant 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, including further information on the estimated probable funding obligation, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in this report.

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


	Funeral and Cemetery
	Merchandise and			Cemetery Perpetual
	Services Trusts⁽¹⁾			Care Trusts⁽¹⁾
For the quarter ended April 30, 2011		4.8	%		3.6	%
For the last twelve months ended April 30, 2011		13.1	%		10.4	%
For the last five years ended April 30, 2011		3.3	%		4.3	%


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

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 2010 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2010 Form 10-K.

Results of Operations

The following discussion segregates our 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 2011 and 2010, results essentially reflect those of same-store locations.

Three Months Ended April 30, 2011 Compared to Three Months Ended April 30, 2010

Funeral Operations


	Three Months Ended April 30,
	2011		2010		Increase
	(In millions)
Funeral Revenue:
Funeral Home Locations	$	68.6	$	66.7	$	1.9
Corporate Trust Management⁽¹⁾		4.3		4.3		—

Total Funeral Revenue	$	72.9	$	71.0	$	1.9


Funeral Costs:
Funeral Home Locations	$	54.7	$	53.9	$	.8
Corporate Trust Management⁽¹⁾		.2		.2		—

Total Funeral Costs	$	54.9	$	54.1	$	.8


Funeral Gross Profit:
Funeral Home Locations	$	13.9	$	12.8	$	1.1
Corporate Trust Management⁽¹⁾		4.1		4.1		—

Total Funeral Gross Profit	$	18.0	$	16.9	$	1.1

Same-Store Analysis for the Three Months Ended April 30, 2011 and 2010


Change in Average Revenue	Change in Same-Store			Same-Store Cremation Rate
Per Funeral Service	Funeral Services			2011			2010
1.3%⁽¹⁾		0.8	%		43.2	%		42.1	%


⁽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 April 30, 2011 and 2010 were $1.2 million and $1.1 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended April 30, 2011 and 2010 were $3.1 million and $3.2 million, respectively.

Funeral revenue increased $1.9 million, or 2.7 percent, to $72.9 million in the second quarter of 2011 from $71.0 million in the second quarter of 2010. During the second quarter of 2011, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 1.8 percent and an increase in average revenue per cremation service of 4.1 percent. These averages were partially offset by a shift in mix to lower-priced cremation services resulting in an overall improvement in same-store average revenue per funeral service of 1.3 percent. Same-store funeral services increased 0.8 percent, or 106 events. The cremation rate for our same-store operations was 43.2 percent for the second quarter of 2011 compared to 42.1 percent for the second quarter of 2010.

Funeral gross profit increased $1.1 million, or 6.5 percent, to $18.0 million for the second quarter of 2011 compared to $16.9 million for the same period of 2010, primarily due to the $1.9 million increase in revenue, as noted above. Funeral gross profit margin improved 90 basis points to 24.7 percent for the second quarter of 2011 from 23.8 percent for the same period of 2010.

Cemetery Operations


	Three Months Ended April 30,
					Increase
	2011		2010		(Decrease)
	(In millions)
Cemetery Revenue:
Cemetery Locations	$	54.5	$	55.1	$	(.6	)
Corporate Trust Management⁽¹⁾		2.2		1.9		.3

Total Cemetery Revenue	$	56.7	$	57.0	$	(.3	)


Cemetery Costs:
Cemetery Locations	$	48.9	$	48.6	$	.3
Corporate Trust Management⁽¹⁾		.2		.2		—

Total Cemetery Costs	$	49.1	$	48.8	$	.3


Cemetery Gross Profit:
Cemetery Locations	$	5.6	$	6.5	$	(.9	)
Corporate Trust Management⁽¹⁾		2.0		1.7		.3

Total Cemetery Gross Profit	$	7.6	$	8.2	$	(.6	)


⁽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 April 30, 2011 and 2010 were $1.3 million and $1.2 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the three months ended April 30, 2011 and 2010 were $0.9 million and $0.7 million, respectively. Perpetual care trust earnings were $1.7 million and $1.4 million for the three months ended April 30, 2011 and 2010, respectively, and 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 decreased $0.3 million, or 0.5 percent, to $56.7 million for the quarter ended April 30, 2011 from $57.0 million for the quarter ended April 30, 2010. This decrease is due primarily to a $0.9 million decrease in construction during the period on various cemetery projects. In addition, we experienced a $0.3 million reduction in finance charges primarily due to reduced interest rates and a $0.3 million increase in the reserve for cancellations. These changes were partially offset by a $1.4 million, or 5.9 percent, improvement in cemetery property sales.

Cemetery gross profit decreased $0.6 million, or 7.3 percent, to $7.6 million for the second quarter of 2011 compared to $8.2 million for the same period of last year. The decrease in cemetery gross profit is primarily due to the decrease in revenue, as noted above, coupled with a slight increase in operating expenses. Cemetery gross profit margin declined 100 basis points to 13.4 percent for the second quarter of 2011 from 14.4 percent for the same period of 2010.

Other

Corporate general and administrative expenses increased $0.5 million to $6.7 million for the second quarter of 2011, primarily due to spending on various growth initiatives.

During the second quarter of 2011, we donated land and a building, resulting in a loss on disposition of $0.4 million. We recorded a tax benefit for the donation that exceeded the loss.

The effective tax rate for the three months ended April 30, 2011 was 15.1 percent reduced from 37.1 percent for the same period in 2010. Due in part to the favorable performance of our trust portfolio, we recorded a $2.5 million tax benefit from a reduction in the valuation allowance related to our capital loss carry forward.

During the quarter ended April 30, 2011, we completed refinancing transactions which significantly extended our debt maturity profile at favorable terms. We completed a private offering of $200.0 million 6.50 percent senior notes due 2019 and repurchased $194.2 million of our $200.0 million outstanding 6.25 percent senior notes due in 2013. We redeemed the remaining $5.8 million 6.25 percent senior notes outstanding in May 2011 at par. We also amended our $95.0 million revolving credit facility, which was undrawn and scheduled to mature in June 2012, to increase its size to $150.0 million and extend its maturity date to April 2016. The amended senior secured revolving credit facility remains undrawn. As a result of these transactions, we recorded a charge for the early extinguishment of debt of $1.8 million during the quarter ended April 30, 2011.

During the second quarter of 2011, we repurchased 0.2 million shares of our Class A outstanding common stock for approximately $1.3 million under our stock repurchase program.

Preneed Sales into the Backlog

Net preneed funeral sales decreased 6.8 percent during the second quarter of 2011 compared to the corresponding period in 2010. While preneed funeral sales decreased from the prior year, our goal is for preneed funeral sales to exceed preneed maturities. For the second quarter of 2011, preneed funeral sales exceeded preneed deliveries by $3.3 million. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

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 $37.8 million in net preneed funeral and cemetery merchandise and services sales (including $19.7 million related to insurance-funded preneed funeral contracts) during the second quarter of 2011 to be recognized in the future as these prepaid products and services are actually delivered, compared to net preneed funeral and cemetery merchandise and services sales of $38.7 million (including $20.8 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2010. 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.

Six Months Ended April 30, 2011 Compared to Six Months Ended April 30, 2010

Funeral Operations


	Six Months Ended April 30,
	2011		2010		Increase
	(In millions)
Funeral Revenue:
Funeral Home Locations	$	138.5	$	134.4	$	4.1
Corporate Trust Management⁽¹⁾		8.4		8.4		—

Total Funeral Revenue	$	146.9	$	142.8	$	4.1


Funeral Costs:
Funeral Home Locations	$	108.0	$	106.2	$	1.8
Corporate Trust Management⁽¹⁾		.4		.4		—

Total Funeral Costs	$	108.4	$	106.6	$	1.8


Funeral Gross Profit:
Funeral Home Locations	$	30.5	$	28.2	$	2.3
Corporate Trust Management⁽¹⁾		8.0		8.0		—

Total Funeral Gross Profit	$	38.5	$	36.2	$	2.3

Same-Store Analysis for the Six Months Ended April 30, 2011 and 2010


Change in Average Revenue	Change in Same-Store			Same-Store Cremation Rate
Per Funeral Service	Funeral Services			2011			2010
1.4%⁽¹⁾		0.9	%		42.5	%		41.7	%


⁽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 six months ended April 30, 2011 and 2010 were $2.4 million and $2.2 million, respectively. Funeral trust earnings recognized in funeral revenue for the six months ended April 30, 2011 and 2010 were $6.0 million and $6.2 million, respectively.

Funeral revenue increased $4.1 million, or 2.9 percent, to $146.9 million in the first half of fiscal 2011 from $142.8 million in the same period of 2010. During the six months ended April 30, 2011, our same-store funeral operations experienced an increase in average revenue per traditional funeral service of 1.6 percent and an increase in average revenue per cremation service of 4.4 percent. These averages were partially offset by a shift in mix to lower-priced cremation services resulting in an overall improvement in same-store average revenue per funeral service of 1.4 percent. Same-store funeral services increased 0.9 percent, or 260 events. The cremation rate for our same-store operations was 42.5 percent for the six months ended April 30, 2011 compared to 41.7 percent for the same period in 2010.

Funeral gross profit increased $2.3 million, or 6.4 percent, to $38.5 million for the first half of fiscal 2011 compared to $36.2 million for the same period of 2010, primarily due to the $4.1 million increase in revenue, as noted above. Funeral gross profit margin improved 80 basis points to 26.2 percent for the six months ended April 30, 2011 from 25.4 percent for the same period of 2010.

Cemetery Operations


	Six Months Ended April 30,
	2011		2010		Increase
	(In millions)
Cemetery Revenue:
Cemetery Locations	$	107.8	$	105.6	$	2.2
Corporate Trust Management⁽¹⁾		4.3		3.7		.6

Total Cemetery Revenue	$	112.1	$	109.3	$	2.8


Cemetery Costs:
Cemetery Locations	$	96.1	$	94.7	$	1.4
Corporate Trust Management⁽¹⁾		.5		.5		—

Total Cemetery Costs	$	96.6	$	95.2	$	1.4


Cemetery Gross Profit:
Cemetery Locations	$	11.7	$	10.9	$	.8
Corporate Trust Management⁽¹⁾		3.8		3.2		.6

Total Cemetery Gross Profit	$	15.5	$	14.1	$	1.4


⁽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 six months ended April 30, 2011 and 2010 were $2.7 million and $2.4 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the six months ended April 30, 2011 and 2010 were $1.6 million and $1.3 million, respectively. Perpetual care trust earnings were $4.0 million and $3.8 million for the six months ended April 30, 2011 and 2010, respectively, and 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 $2.8 million, or 2.6 percent, to $112.1 million for the six months ended April 30, 2011 from $109.3 million for the six months ended April 30, 2010. This improvement is due primarily to a $3.5 million, or 7.9 percent, increase in cemetery property sales, partially offset by a $1.1 million decrease in cemetery merchandise delivered.

Cemetery gross profit increased $1.4 million, or 9.9 percent, to $15.5 million for the first half of fiscal 2011 compared to $14.1 million for the same period of 2010. The increase in cemetery gross profit is primarily due to the $2.8 million increase in revenue, as noted above. Cemetery gross profit margin improved 90 basis points to 13.8 percent for the six months ended April 30, 2011 from 12.9 percent for the same period of 2010.

Other

Corporate general and administrative expenses increased $0.5 million to $13.3 million for the six months ended April 30, 2011, primarily due to spending on various growth initiatives.

During the first six months of 2011, we donated land and a building, resulting in a loss on disposition of $0.4 million. We recorded a tax benefit for the donation that exceeded the loss.

Interest expense decreased $0.8 million to $11.5 million during the six months ended April 30, 2011 primarily due to the significant repurchases of a portion of our senior convertible notes in the open market that occurred throughout fiscal year 2010.

The effective tax rate for the six months ended April 30, 2011 was 35.5 percent compared to 38.3 percent for the same period in 2010. Due in part to the favorable performance of our trust portfolio, we recorded a $3.4 million tax benefit attributable to a reduction in our valuation allowance primarily related to our capital loss carry forward. This benefit was partially offset by a $2.9 million charge to income tax expense in the first quarter of 2011 as a result of the revaluation of our Puerto Rican deferred tax assets due to a change in Puerto Rican tax legislation.

During the first six months of 2011, we repurchased 1.5 million shares of our Class A common stock for $9.4 million under our stock repurchase program.

Cash and cash equivalents increased $22.3 million from October 31, 2010 to April 30, 2011 primarily due to the maturity of $10.0 million in certificates of deposits and marketable securities in the first quarter of 2011 and an increase in cash from operations in the first six months of 2011. Current and long-term receivables decreased $2.3 million and $3.2 million, respectively, from October 31, 2010 to April 30, 2011 primarily due to collections of prior period sales exceeding receivables for new sales and the collection of income taxes receivable. Prepaid expenses increased $2.2 million from October 31, 2010 to April 30, 2011 primarily due to annual premiums paid in the first quarter of fiscal year 2011 for property, general liability and other insurance. Long-term deferred income taxes decreased $5.9 million from October 31, 2010 to April 30, 2011 primarily due to the utilization of net operating losses and the non-cash adjustment to our Puerto Rican deferred tax asset, as previously discussed. Other assets increased $4.0 from October 31, 2010 to April 30, 2011 due primarily to $5.8 million of deferred charges recorded in the second quarter of 2011 related to the refinancing of our senior notes and senior secured revolving credit facility. 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 six months ended April 30, 2011. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

Current maturities of long-term debt increased $5.8 million from October 31, 2010 to April 30, 2011, due to the remaining outstanding 6.25 percent senior notes due 2013 being called for redemption in April 2011, and redeemed in May 2011 at par. Accrued interest declined $2.2 million from October 31, 2010 to April 30, 2011 due to additional interest payments made in relation to the refinancing of the 6.25 percent senior notes due 2013. Other current liabilities decreased $2.6 million from October 31, 2010 to April 30, 2011 primarily due to the timing of the payment of our property taxes, which are typically paid at the end of the calendar year.

Preneed Sales into the Backlog

Net preneed funeral sales decreased 2.8 percent during the six months ended April 30, 2011 compared to the corresponding period in 2010. While preneed funeral sales decreased from the prior year, our goal is for preneed funeral sales to exceed preneed maturities. For the first half of 2011, preneed funeral sales exceeded preneed deliveries by $2.5 million. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

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 $68.2 million in net preneed funeral and cemetery merchandise and services sales (including $35.7 million related to insurance-funded preneed funeral contracts) during the six months ended April 30, 2011 to be recognized in the future as these prepaid products and services are actually delivered, compared to net preneed funeral and cemetery merchandise and services sales of $67.8 million (including $37.0 million related to insurance-funded preneed funeral contracts) for the corresponding

period in 2010. 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 amended $150.0 million senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future.

In April 2011, we completed a tender offer and consent solicitation for any and all of our $200.0 million 6.25 percent senior notes due 2013. As of April 30, 2011, we purchased a total of $194.2 million in aggregate principal amount of the 6.25 percent senior notes in the offer for an aggregate purchase price (including consent payments) of $194.7 million plus $2.1 million in accrued and unpaid interest. The tender offer was funded with the net proceeds of the issuance of $200.0 million 6.50 percent senior notes due 2019 and with available cash. The remaining $5.8 million of the 6.25 percent senior notes were redeemed in May 2011 at par, plus accrued and unpaid interest. Also in April 2011, we amended our $95.0 million senior secured revolving credit facility which was set to mature in June 2012. The amended senior secured revolving credit facility matures on April 20, 2016, was increased to $150.0 million and includes a $30.0 million sublimit for the issuance of standby letters of credit and a $10.0 million sublimit for swingline loans. We may also request the addition of a new tranche of term loans, an increase in the commitments to the amended senior secured revolving credit facility or a combination thereof not to exceed $50.0 million. As a result of these debt transactions occurring during the quarter ended April 30, 2011, we recorded a $1.8 million charge for the loss on early extinguishment of debt. See Note 14 to the condensed consolidated financial statements for further information. As of April 30, 2011, we had no amounts drawn on the amended $150.0 million senior secured revolving credit facility, and our availability under the facility, after giving consideration to $7.5 million outstanding letters of credit and the $24.8 million Florida bond, was $117.7 million. We also have outstanding $131.5 million principal amount in senior convertible notes as of April 30, 2011, of which $86.4 million mature in 2014 and $45.1 million mature in 2016. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.

We currently pay quarterly cash dividends of three cents per share on our Class A and B common stock, which amounted to $5.5 million for the six months ended April 30, 2011. 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, under which we purchased 1.5 million shares of our Class A common stock for approximately $9.4 million during the first half of fiscal 2011. In May 2011, we purchased an additional 0.2 million shares of our Class A common stock for approximately $1.2 million and currently have $11.9 million remaining available under the program. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors.

We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to make acquisitions of or investments in death care or related businesses, construct funeral homes on existing cemeteries, cemeteries of unaffiliated third parties or in strategic locations, develop inventory, pay dividends 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 are working on several e-commerce initiatives that we expect will provide new revenue opportunities in the future and are continuing to invest in further improving our business processes. We are planning to develop cremation gardens and other cremation projects in our cemeteries over the next few years. We have successfully completed five cremation projects, and we currently have eight projects under construction with more than 20 additional projects under feasibility review. We are

working to complete a number of these projects in fiscal year 2011 and expect to spend up to $5 million. This spending represents a shift from traditional cemetery inventory spending to cremation inventory spending. 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 are continuing to review all of our tax accounting methods to determine opportunities to further 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 years 2009 and 2010.

Cash Flow

Our investing activities resulted in a net cash outflow of $0.8 million for the six months ended April 30, 2011, compared to a net cash outflow of $18.7 million for the comparable period in 2010. The change is primarily due to a $19.8 million net change related to purchases and sales of certificates of deposit. There were $10.0 million in proceeds from the sale of certificates of deposit during the first half of fiscal year 2011 compared to $10.7 million in purchases of certificates of deposit and marketable securities during the first half of fiscal year 2010. For the six months ended April 30, 2011, capital expenditures amounted to $8.8 million, which included $7.2 million for maintenance capital expenditures, $1.0 million for growth initiatives and $0.6 million related to the implementation of new business systems. For the six months ended April 30, 2010, capital expenditures were $8.4 million, which included $6.0 million for maintenance capital expenditures, $1.7 million for growth initiatives and $0.7 million related to the implementation of new business systems. We also purchased a funeral and cemetery business in the first half of fiscal year 2011 resulting in a net cash outflow of $1.8 million.

Our financing activities resulted in a net cash outflow of $12.6 million for the six months ended April 30, 2011, compared to a net cash outflow of $6.0 million for the comparable period in 2010. The change is primarily due to $9.4 million in stock repurchases during the six months ended April 30, 2011 compared to none in the same period of 2010. This is offset by net debt proceeds of $5.8 million ($200.0 million in proceeds of long-term debt and $194.2 million in repayments of long-term debt) during the six months ended April 30, 2011 compared to $0.8 million of debt repayments in the same period of fiscal year 2010. In April 2011, we issued $200.0 million of 6.50 percent senior notes due 2019 and repurchased $194.2 million of 6.25 percent senior notes due 2013, as described in Note 14 to the condensed consolidated financial statements. We also paid $4.9 million in debt refinancing costs during the six months ended April 30, 2011 related to the senior notes transactions and refinancing of the senior secured revolving credit facility.

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 April 30, 2011.


	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⁾	$	337.4	$	5.8	$	—	$	86.4	$	245.2
Interest on long-term debt⁽²⁾		121.9		17.2		34.5		30.4		39.8
Operating lease obligations⁽³⁾		28.5		4.3		6.0		3.1		15.1
Purchase obligations⁽⁴⁾		1.9		1.9		—		—		—
Non-competition and other agreements⁽⁵⁾		1.0		.3		.2		.3		.2

	$	490.7	$	29.5	$	40.7	$	120.2	$	300.3


⁽¹⁾		See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of April 30, 2011.

⁽²⁾		Includes contractual interest payments for our senior convertible notes, 6.50 percent senior notes due 2019, 6.25 percent senior notes due 2013 and third-party debt.

⁽³⁾		Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 20 years, except for eight leases that expire between 2032 and 2039. This category also includes leases under our vehicle fleet leasing program. Our future minimum lease payments for all operating leases as of April 30, 2011 are $2.4 million, $3.7 million, $3.1 million, $2.1 million, $1.5 million and $15.7 million for the years ending October 31, 2011, 2012, 2013, 2014, 2015 and later years, respectively.

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

⁽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 April 30, 2011.


	Expiration by Period
			Less than						More than
Contingent Obligations	Total		1 year		1 – 3 years		3 – 5 years		5 years
Cemetery perpetual care trust funding obligations⁽¹⁾	$	12.6	$	12.6	$	—	$	—	$	—
Long-term obligations related to uncertain tax positions⁽²⁾		2.2		—		—		—		2.2

	$	14.8	$	12.6	$	—	$	—	$	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 subsequent 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 $12.6 million as of April 30, 2011. As of April 30, 2011, we had net unrealized losses of $30.3 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 $2.3 million; no charge has been recorded for these amounts as of April 30, 2011.

⁽²⁾		In accordance with the required accounting guidance on uncertain tax positions, as of April 30, 2011, we have recorded $2.2 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate the range of increase and decrease and the timing of any potential cash payments.

As of April 30, 2011, our outstanding long-term debt obligations amounted to $337.4 million, consisting of $86.4 million in 3.125 percent senior convertible notes due 2014, $45.1 million in 3.375 percent senior convertible notes due 2016, $5.8 million of 6.25 percent senior notes due 2013, $200.0 million of 6.50 percent senior notes due 2019 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 April 30, 2011.


									Other,
	Senior								Principally
	Secured								Seller
	Revolving		Senior		Senior		Senior		Financing
	Credit		Convertible		Notes Due		Notes Due		of Acquired
Fiscal Years Ending October 31,	Facility		Notes		2013		2019		Operations		Total
2011	$	—	$	—	$	5.8	$	—	$	—	$	5.8
2012		—		—		—		—		—		—
2013		—		—		—		—		—		—
2014		—		86.4		—		—		—		86.4
2015		—		—		—		—		—		—
Thereafter		—		45.1		—		200.0		.1		245.2

Total long-term debt	$	—	$	131.5	$	5.8	$	200.0	$	.1	$	337.4

We redeemed the remaining $5.8 million of the 6.25 percent senior notes in May 2011 at par.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of April 30, 2011 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 2010 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 2010 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 2010 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on December 16, 2010. For a discussion of fair market value as of April 30, 2011 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 April 30, 2011 and October 31, 2010, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $323.5 million and $317.9 million, respectively, compared to fair values of $344.6 million and $328.3 million, respectively. Fair values were determined using quoted market prices. As of April 30, 2011, each approximate 10 percent, or 50 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $8.8 million in the fair value of these instruments. As of October 31, 2010, each approximate 10 percent, or 55 basis point, change in the average interest rate applicable to determine the fair value of such debt would result in a change of approximately $5.7 million in the fair value of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

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 April 30, 2011 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.

We and certain of our subsidiaries are parties to a number of 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 2010 Form 10-K.

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

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

Issuer Purchases of Equity Securities


					Total number of		Maximum
					shares		approximate dollar
					purchased as		value of shares that
	Total number		Average		part of publicly-		may yet be
	of shares		price paid		announced plans		purchased under the
Period	purchased		per share		or programs		plans or programs⁽¹⁾
February 1, 2011 through February 28, 2011		—	$	—		—	$	14,394,009

March 1, 2011 through March 31, 2011		175,200	$	7.27		175,200	$	13,120,287

April 1, 2011 through April 30, 2011		—	$	—		—	$	13,120,287


Total		175,200	$	7.27		175,200	$	13,120,287


⁽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. As of April 30, 2011, we had repurchased 8.9 million shares for $61.9 million at an average price of $6.95 per share and had $13.1 million remaining under this program. In May 2011, we repurchased an additional 0.2 million shares for $1.2 million at an average price of $7.67 per share and currently have $11.9 million remaining available under the 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		Third Amended and Restated Credit Agreement dated April 20, 2011 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 April 21, 2011)

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)) and Supplemental Indenture dated as of April 15, 2011 by and among Stewart Enterprises, Inc., the subsidiary guarantors and U.S. Bank National Associations as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 18, 2011)

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 as of April 18, 2011 by and among Stewart Enterprises, Inc., the Guarantors and U.S. Bank National Association, as Trustee, with respect to the 6.50 percent Senior Notes due 2019 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 19, 2011)

4.7		Form of 6.50 percent Senior Note due 2019 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed April 19, 2011)

4.8		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)

4.9		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)

10.1		Registration Rights Agreement dated as of April 18, 2011 by and among Stewart Enterprises, Inc., the Guarantors and the Initial Purchasers (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K filed April 19, 2011)

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

31.2		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer

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

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.
June 8, 2011	/s/ LEWIS J. DERBES, JR.
	Lewis J. Derbes, Jr.
	Senior Vice President, Chief Financial Officer and Treasurer


June 8, 2011	/s/ ANGELA M. LACOUR
	Angela M. Lacour
	Vice President, Corporate Controller and Chief Accounting Officer

Exhibit Index

31.1

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

31.2

Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer

32.1

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

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Stewart Enterprises (STEI) Inactive 10-Q2011 Q2 Quarterly report

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