Stewart Enterprises 10Q 2006 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended January 31, 2006


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

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

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

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

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

Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934.)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 March 1, 2006, was 105,115,187 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX


		Page
Part I. Financial Information

	Item 1. Financial Statements (Unaudited)

	Condensed Consolidated Statements of Earnings — Three Months Ended January 31, 2006 and 2005		3

	Condensed Consolidated Balance Sheets — January 31, 2006 and October 31, 2005		4

	Condensed Consolidated Statement of Shareholders’ Equity — Three Months January 31, 2006		6

	Condensed Consolidated Statements of Cash Flows — Three Months Ended January 31, 2006 and 2005		7

	Notes to Condensed Consolidated Financial Statements		8

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

	Item 3. Quantitative and Qualitative Disclosures About Market Risk		48

	Item 4. Controls and Procedures		48

Part II. Other Information

	Item 1. Legal Proceedings		50

	Item 1A. Risk Factors		50

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		50

	Item 5. Other Information		50

	Item 6. Exhibits		51

	Signatures		53
Certification of President & CEO Pursuant to Section 302
Certification of EVP & CFO Pursuant to Section 302
Certifications Pursuant to Section 906

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Three Months Ended January 31,
	2006			2005
				(Restated)
				(Note 1)
Revenues:
Funeral	$	71,789		$	69,716
Cemetery		54,816			52,852

		126,605			122,568


Costs and expenses:
Funeral		53,973			51,918
Cemetery		43,553			43,408

		97,526			95,326

Gross profit		29,079			27,242
Corporate general and administrative expenses		(7,219	)		(4,216	)
Hurricane related charges, net		(2,638	)		—
Separation charges		(154	)		—
Gains on dispositions and impairment (losses), net		298			878
Other operating income, net		978			239

Operating earnings		20,344			24,143
Interest expense		(7,528	)		(10,376	)
Loss on early extinguishment of debt		—			(2,651	)
Investment and other income, net		468			108

Earnings from continuing operations before income taxes		13,284			11,224
Income taxes		4,895			3,835

Earnings from continuing operations		8,389			7,389

Discontinued operations:
Earnings from discontinued operations before income taxes		—			530
Income taxes		—			16

Earnings from discontinued operations		—			514

Earnings before cumulative effect of change in accounting principle		8,389			7,903
Cumulative effect of change in accounting principle (net of $101,061 income tax benefit)		—			(153,180	)


Net earnings (loss)	$	8,389		$	(145,277	)


Basic earnings (loss) per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle	$	.08		$	.07
Earnings from discontinued operations		—			—
Cumulative effect of change in accounting principle		—			(1.40	)

Net earnings (loss)	$	.08		$	(1.33	)


Diluted earnings (loss) per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle	$	.08		$	.07
Earnings from discontinued operations		—			—
Cumulative effect of change in accounting principle		—			(1.40	)

Net earnings (loss)	$	.08		$	(1.33	)


Weighted average common shares outstanding (in thousands):
Basic		108,504			109,087

Diluted		108,522			109,450


Dividends declared per common share	$	.025		$	—

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	January 31,		October 31,
	2006		2005
ASSETS
Current assets:
Cash and cash equivalents	$	64,572	$	40,605
Marketable securities		1,307		1,302
Receivables, net of allowances		67,208		79,897
Inventories		32,282		33,480
Prepaid expenses		4,911		2,766
Deferred income taxes, net		8,101		11,116

Total current assets		178,381		169,166
Receivables due beyond one year, net of allowances		70,783		68,935
Preneed funeral receivables and trust investments		513,338		503,468
Preneed cemetery receivables and trust investments		252,719		257,437
Goodwill		272,729		272,729
Cemetery property, at cost		366,384		366,776
Property and equipment, at cost:
Land		41,495		41,191
Buildings		289,416		288,005
Equipment and other		161,075		158,285

		491,986		487,481
Less accumulated depreciation		200,831		195,845

Net property and equipment		291,155		291,636
Deferred income taxes, net		186,910		187,573
Cemetery perpetual care trust investments		218,963		213,088
Other assets		19,573		20,318

Total assets	$	2,370,935	$	2,351,126

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	January 31,			October 31,
	2006			2005
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,142		$	3,168
Accounts payable		10,472			10,758
Accrued payroll		11,285			12,306
Accrued insurance		21,269			20,757
Accrued interest		8,949			5,236
Other current liabilities		16,475			24,681
Income taxes payable		1,296			886

Total current liabilities		72,888			77,792
Long-term debt, less current maturities		405,994			406,859
Deferred preneed funeral revenue		280,867			284,464
Deferred preneed cemetery revenue		299,602			292,511
Non-controlling interest in funeral and cemetery trusts		636,895			626,841
Other long-term liabilities		11,784			11,442

Total liabilities		1,708,030			1,699,909

Commitments and contingencies		—			—
Non-controlling interest in perpetual care trusts		217,263			211,764

Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued		—			—
Common stock, $1.00 stated value:
Class A authorized 150,000,000 shares issued and outstanding 105,115,187 shares at January 31, 2006 and October 31, 2005		105,115			105,115
Class B authorized 5,000,000 shares issued and outstanding 3,555,020 shares at January 31, 2006 and October 31, 2005, 10 votes per share, convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		665,370			667,663
Accumulated deficit		(327,919	)		(336,308	)
Unearned restricted stock compensation		(474	)		(569	)
Accumulated other comprehensive loss:
Unrealized depreciation of investments		(5	)		(3	)

Total accumulated other comprehensive losses		(5	)		(3	)

Total shareholders’ equity		445,642			439,453

Total liabilities and shareholders’ equity	$	2,370,935		$	2,351,126

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)


									Unearned			Unrealized
			Additional						Restricted			Depreciation			Total
	Common		Paid-In			Accumulated			Stock			of			Shareholders’
	Stock⁽¹⁾		Capital			Deficit			Compensation			Investments			Equity
Balance October 31, 2005	$	108,670	$	667,663		$	(336,308	)	$	(569	)	$	(3	)	$	439,453

Comprehensive income (loss):
Net earnings							8,389									8,389

Other comprehensive loss:
Unrealized depreciation of investments, net of deferred tax benefit of $1													(2	)		(2	)

Total other comprehensive loss		—		—			—			—			(2	)		(2	)

Total comprehensive income (loss)		—		—			8,389			—			(2	)		8,387

Restricted stock activity										95						95
Share-based compensation				424												424
Dividends ($.025 per share)				(2,717	)											(2,717	)

Balance January 31, 2006	$	108,670	$	665,370		$	(327,919	)	$	(474	)	$	(5	)	$	445,642


⁽¹⁾		Amount includes 105,115 shares (in thousands) of Class A common stock with a stated value of $1 per share as of January 31, 2006 and October 31, 2005, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Three Months Ended January 31,
	2006			2005
				(Restated)
				(Note 1)
Cash flows from operating activities:
Net earnings (loss)	$	8,389		$	(145,277	)
Adjustments to reconcile net earnings (loss) to net cash provided by (used in) operating activities:
(Gains) on dispositions and impairment losses, net		(298	)		(1,421	)
Cumulative effect of change in accounting principle		—			153,180
Loss on early extinguishment of debt		—			2,651
Depreciation and amortization		5,149			5,330
Amortization of deferred financing costs		264			508
Provision for doubtful accounts		2,095			1,920
Share-based compensation		424			—
Tax benefit on stock options exercised		—			1,757
Provision for deferred income taxes		3,679			1,772
Other		95			60
Changes in assets and liabilities:
(Increase) decrease in other receivables		4,029			(3,003	)
Decrease in inventories and cemetery property		1,589			375
Decrease in accounts payable and accrued expenses		(5,078	)		(14,245	)
Net effect of preneed funeral production and maturities		(3,629	)		(4,222	)
Net effect of preneed cemetery production and deliveries		12,024			(587	)
Decrease in other		(1,508	)		(671	)

Net cash provided by (used in) operating activities		27,224			(1,873	)


Cash flows from investing activities:
Proceeds from sales of marketable securities		—			16
Proceeds from sale of assets, net		9			5,449
Insurance proceeds related to hurricane damaged properties		4,540			—
Additions to property and equipment		(4,274	)		(6,512	)
Other		15			28

Net cash provided by (used in) investing activities		290			(1,019	)


Cash flows from financing activities:
Proceeds from long-term debt		—			110,000
Repayments of long-term debt		(891	)		(124,274	)
Debt issue costs		—			(1,681	)
Issuance of common stock		—			10,419
Dividends		(2,717	)		—
Other		61			(944	)

Net cash used in financing activities		(3,547	)		(6,480	)


Net increase (decrease) in cash		23,967			(9,372	)
Cash and cash equivalents, beginning of period		40,605			21,514

Cash and cash equivalents, end of period	$	64,572		$	12,142


Supplemental cash flow information:
Cash paid during the period for:
Income taxes	$	200		$	700
Interest	$	3,200		$	17,300

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) Restatement

In connection with the filing of the 2005 Form 10-K, the Company reported that it was restating its consolidated financial statements for fiscal years 2004 and 2003, all the quarters therein and the first three quarters of fiscal year 2005. These restatements have resulted in the restatement of the condensed consolidated statements of earnings and cash flows for the first quarter of fiscal year 2005 included in this Form 10-Q. The restatements are primarily the result of:

	(A)		The incorrect determination of operating and reportable segments and reporting units related to the application of FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), which also had the effect of changing the charges recorded for the assets sold as part of the Company’s plan initiated in December 2003 (see Note 13) to sell a number of businesses, and the net book value of assets held for sale on its balance sheet.

	(B)		Errors identified in revenue recognition of preneed cemetery merchandise and services contracts and recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts.

	(C)		Other miscellaneous adjustments, including adjustments for lease-related accounting practices.

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

Segments and Reporting Units

The Company re-evaluated its application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and determined that it had incorrectly identified its operating and reportable segments for all prior periods. The Company concluded that it had eleven operating and reportable segments, which consisted of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern — Florida and All Other. The Company’s historical presentation of segment data had consisted of two operating and reportable segments, funeral and cemetery. As part of the Company’s strategic planning process, in the fourth quarter of 2005, the Company reorganized and revised its operating divisions from four to two and revised its operating and reportable segments. For further discussion of the Company’s operating and reportable segments, see Note 10.

The correction of the Company’s operating segments had the related effect of requiring changes in the Company’s reporting units for purposes of goodwill impairment testing under SFAS No. 142, retroactive to the November 1, 2001 adoption date of SFAS No. 142. The Company’s evaluation of goodwill should have been performed to include 13 reporting units as opposed to the two reporting units historically identified. As a result of the reorganization and revision of the Company’s divisions effective for the fourth quarter of 2005, the Company revised its evaluation of goodwill based upon 11 reporting units.

The restatement of the Company’s operating segments and reporting units resulted in the need to correct its goodwill impairment reviews as of November 1, 2001 (the date the Company adopted SFAS No. 142) and as of October 31, 2002, 2003 and 2004. Consequently, the Company recorded a $209,400 ($193,090 after tax, or $1.78 per diluted share) charge on November 1, 2001 as a cumulative effect of change in accounting principle for the adoption of SFAS No. 142. The Company’s previously reported financial statements did not include a goodwill impairment charge upon the initial adoption of SFAS No. 142 on November 1, 2001 or during its annual assessment in the fourth quarter of fiscal year 2002. The Company also restated its previously reported fiscal year 2003 goodwill impairment charge of $73,000 ($66,900 after tax, or $.62 per share) because based on its revised reporting units, no goodwill impairment charge for the year ended October 31, 2003 was necessary.

Further, the restatement of goodwill on the Company’s balance sheet had the effect of changing the net book value of the assets the Company sold as part of the Company’s plan to sell a number of its businesses and the net book value of assets held for sale on the Company’s balance sheet.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)

Deferred Revenue Project

In connection with the Company’s internal control assessment under Section 404 of Sarbanes-Oxley, it undertook a project (the “deferred revenue project”) in 2005 to verify the balances in deferred preneed cemetery revenue and deferred preneed funeral revenue by reviewing substantially all of the preneed cemetery and funeral service and merchandise contracts included in its backlog. This process involved the review of nearly 700,000 preneed contracts. The deferred revenue project resulted in the Company’s assessment that the recorded amount of deferred revenue and revenue associated with cemetery merchandise and funeral service and merchandise contracts were misstated, and therefore, the Company needed to correct and restate its prior period financial statements for fiscal years 2001 through 2004, including the quarters therein, and the first three quarters of 2005. The Company also identified errors in the amounts of recorded realized trust earnings and deferred realized trust earnings for these periods. Deferred realized trust earnings are included in deferred preneed funeral revenue and deferred preneed cemetery revenue prior to recognition as revenues. The adjustment impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2001 through 2004 and the first three quarters of 2005.

The errors to deferred preneed revenues discussed above also resulted in restatements to the amount of preneed selling costs recorded upon the adoption of SAB No. 101, and in subsequent years and also the charge for the 2005 cumulative effect of change in accounting principle related to preneed selling costs adopted effective November 1, 2004. See Note 3(a).

The overall impact of the restatements related to the deferred revenue project on net earnings and net earnings per share for the three months ended January 31, 2005 was a decrease in net earnings of $13,560 (including $11,862, or $.11 per share, related to the cumulative effect of change in accounting principle for preneed selling costs), and a decrease in earnings per share of $.12, respectively.

Other Adjustments

As previously disclosed in the Company’s Form 10-Q for the second quarter of fiscal year 2005, the Company reviewed its lease-related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1,839 ($1,149 after tax, or $.01 per share). The Company evaluated the materiality of these operating lease adjustments on its financial statements and concluded that the impact of these adjustments was not material. As a result, the Company recorded the cumulative effect of these prior period adjustments of $1,839 as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because the Company amended its financial statements for the restatements discussed above, the Company is now required to record the lease adjustments in the periods they were actually incurred.

A summary of the effects of the restatements described above on the Company’s condensed consolidated financial statements for the three months ended January 31, 2005 is presented below.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)


	As Previously			Effect of						Effect of restating
	Reported- Three			2005 preneed			Effect of restating			to correct for the						As Reclassified and
	Months Ended			selling costs			to correct for			impact of the			As Restated- Three			Restated-
	January 31,			accounting			goodwill reporting			deferred revenue			Months Ended			Three Months Ended
	2005⁽¹⁾			change⁽²⁾			unit errors⁽³⁾			project			January 31, 2005			January 31, 2005⁽⁴⁾
Consolidated Statements of Earnings:
Revenues:
Funeral	$	71,623		$	(67	)	$	—		$	(1,609	)	$	69,947		$	69,716
Cemetery		54,856			(210	)		—			(1,591	)		53,055			52,852

		126,479			(277	)		—			(3,200	)		123,002			122,568

Costs and expenses:
Funeral		51,413			697			—			—			52,110			51,918
Cemetery		43,172			335			—			—			43,507			43,408

		94,585			1,032			—			—			95,617			95,326

Gross profit		31,894			(1,309	)		—			(3,200	)		27,385			27,242
Corporate general and administrative expenses		(4,216	)		—			—			—			(4,216	)		(4,216	)
Gains on dispositions and impairment (losses), net		331			390			173			—			894			878
Other operating income, net		244			—			—			—			244			239

Operating earnings		28,253			(919	)		173			(3,200	)		24,307			24,143
Interest expense		(10,376	)		—			—			—			(10,376	)		(10,376	)
Loss on early extinguishment of debt		(2,651	)		—			—			—			(2,651	)		(2,651	)
Investment and other income, net		108			—			—			—			108			108

Earnings from continuing operations before income taxes		15,334			(919	)		173			(3,200	)		11,388			11,224
Income taxes		5,989			(434	)		(77	)		(1,502	)		3,976			3,835

Earnings from continuing operations		9,345			(485	)		250			(1,698	)		7,412			7,389

Earnings from discontinued operations before income taxes		3			313			50			—			366			530
Income taxes		138			80			(343	)		—			(125	)		16

Earnings (loss) from discontinued operations		(135	)		233			393			—			491			514

Earnings before cumulative effect of change in accounting principles		9,210			(252	)		643			(1,698	)		7,903			7,903
Cumulative effect of change in accounting principles		—			(141,318	)		—			(11,862	)		(153,180	)		(153,180	)

Net earnings (loss)	$	9,210		$	(141,570	)	$	643		$	(13,560	)	$	(145,277	)	$	(145,277	)


Basic earnings (loss) per common share:
Earnings from continuing operations	$	.08		$	(.01	)	$	.01		$	(.01	)	$	.07		$	.07
Earnings from discontinued operations		—			—			—			—			—			—
Cumulative effect of change in accounting principle		—			(1.29	)		—			(.11	)		(1.40	)		(1.40	)

Net earnings (loss)	$	.08		$	(1.30	)	$	.01		$	(.12	)	$	(1.33	)	$	(1.33	)


Diluted earnings (loss) per common share:
Earnings from continuing operations	$	.08		$	(.01	)	$	.01		$	(.01	)	$	.07		$	.07
Earnings from discontinued operations		—			—			—			—			—			—
Cumulative effect of change in accounting principle		—			(1.29	)		—			(.11	)		(1.40	)		(1.40	)

Net earnings (loss)	$	.08		$	(1.30	)	$	.01		$	(.12	)	$	(1.33	)	$	(1.33	)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement — (Continued)


⁽¹⁾		The previously reported amounts represent amounts reported in the Form 10-Q for the quarter ended January 31, 2005 filed on March 10, 2005.

⁽²⁾		Represents changes due to the 2005 change in accounting principle related to preneed selling costs that was first reported in the Form 10-Q for the second quarter of fiscal year 2005 but was effective as of November 1, 2004. The amounts in this column reflect the impact of recording the cumulative effect of the change in accounting principle, reversal of amounts previously amortized and the recording of selling costs incurred in the period. See Note 3(a) for further discussion of this change in accounting principle.

⁽³⁾		Represents adjustments for the restatement of goodwill on the Company’s consolidated balance sheet which had the effect of changing the net book value of the assets included as part of its plan to sell a number of its businesses initiated in December 2003.

⁽⁴⁾		Represents the January 2006 classification of continuing and discontinued operations. See Note 13 for further discussion related to discontinued operations.

(2) Basis of Presentation

(a) The Company

The Company is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of January 31, 2006, the Company owned and operated 231 funeral homes and 144 cemeteries in 26 states within the United States and Puerto Rico. The Company has five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of two geographic areas: Eastern and Western.

(b) Principles of Consolidation

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

The information as of January 31, 2006, and for the three months ended January 31, 2006 and 2005, 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, 2005.

The October 31, 2005 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2005 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 2005 Form 10-K.

The results of operations for the three months ended January 31, 2006 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2006.

(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.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation — (Continued)

(e) Share-Based Compensation

As of January 31, 2006, the Company had three share-based compensation plans, which are described in more detail in Note 20 to the consolidated financial statements of the Company’s 2005 Form 10-K. Prior to November 1, 2005, the Company accounted for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation - Transition and Disclosure — an Amendment of FASB Statement No. 123.” No stock-based employee compensation cost related to stock options was reflected in net earnings, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. Accordingly, share-based compensation related to stock options was only included as a pro forma disclosure in the financial statement footnotes.

Effective November 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment,” using the modified prospective application transition method. Under this transition method, compensation cost in 2006 includes the portion vesting in the period for (1) all share-based payments granted prior to, but not vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123 and (2) all share-based payments granted subsequent to November 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. Under the modified prospective application transition method, no cumulative effect of change in accounting principle charge is required for the Company, and results for prior periods have not been restated. See below for the pro forma disclosures related to the three months ended January 31, 2005. SFAS No. 123R also requires excess tax benefits be reported as a financing cash inflow rather than an operating cash inflow.

Net earnings for the three months ended January 31, 2006 includes $424 ($275 after tax) of share-based compensation costs and is included in corporate general and administrative expenses in the condensed consolidated statement of earnings for the three months ended January 31, 2006. As of January 31, 2006, there was $4,091 of total unrecognized compensation cost related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 2.41 years. Based on current grants, total share-based compensation cost for fiscal year 2006 is expected to be approximately $1,658.

On November 29, 2005, the Company granted new options to employees for the purchase of 269,250 shares of Class A common stock at an exercise price of $5.06 per share, which vest in equal 25 percent portions on November 29, 2006, 2007, 2008 and 2009. These options expire on November 29, 2012. These were the only options granted during the quarter ended January 31, 2006. There were no stock option exercises during the quarter ended January 31, 2006. A summary of option activity under the plans for the three months ended January 31, 2006 is as follows:


	Three Months Ended January 31, 2006
	Number of Shares		Weighted Average		Aggregate
	Underlying Options		Exercise Prices		Intrinsic Value
Outstanding as of November 1, 2005		1,468,734	$	6.62
Granted		269,250	$	5.06
Exercised/Repurchased		—	$	—
Forfeited		—	$	—

Outstanding as of January 31, 2006		1,737,984	$	6.38	$	163

Exercisable as of January 31, 2006		517,188	$	6.28	$	23


Weighted-average fair value of options granted			$	2.22

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation — (Continued)

The following table further describes the Company’s stock options outstanding as of January 31, 2006.


	Options Outstanding					Options Exercisable
	Number		Weighted Average			Number		Weighted
Range of	Outstanding		Remaining	Weighted Average		Exercisable		Average
Exercise Prices	at 1/31/2006		Contractual Life	Exercise Prices		at 1/31/2006		Exercise Prices
$5.06		269,250	6.83 years	$	5.06		—	$	—
$5.44		333,334	7.89 years	$	5.44		233,338	$	5.44
$6.90		560,400	5.89 years	$	6.90		140,100	$	6.90
$7.03		575,000	5.80 years	$	7.03		143,750	$	7.03

$5.06 to $7.03		1,737,984	6.39 years	$	6.38		517,188	$	6.28


				Weighted Average
	Three Months Ended			Grant-Date
	January 31, 2006			Fair Value
Nonvested options as of November 1, 2005		1,235,396		$	3.92
Granted		269,250		$	2.22
Vested		(283,850	)	$	4.06
Forfeited		—		$	—

Nonvested options as of January 31, 2006		1,220,796		$	3.52

The fair value of the Company’s stock options is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for the quarter ended January 31, 2006: expected dividend yield of 0.3 percent; expected volatility of 54.9 percent; risk-free interest rate of 3.5 percent; and an expected term of 7.8 years. The following were the weighted average assumptions for 2005: expected dividend yield of zero percent; expected volatility of 43.3 percent; risk-free interest rate of 4.4 percent; and an expected term of 4.3 years. The expected dividend yield is based on the Company’s annual dividend payout at grant date. Expected volatility is based on the historical volatility of the Company’s stock for a period approximating the expected life. The risk-free interest rate is based on the U.S. treasury yield in effect at the time of grant and has a term equal to the expected life. The expected term of the options represents the period of time the options are expected to be outstanding.

The expense related to restricted stock that was granted in fiscal year 2005 and 2004 is reflected in earnings and amounted to $95 and $145 for the three months ended January 31, 2006 and 2005, respectively. The following table illustrates the effect on net loss and net loss per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation for the three months ended January 31, 2005.


	Three Months
	Ended
	January 31, 2005
Net loss	$	(145,277	)
Stock-based employee compensation expense included in reported net earnings, net of tax		90
Total stock-based employee compensation expense determined under fair value-based method, net of tax		(528	)

Pro forma net loss	$	(145,715	)

Net loss per common share:
Basic — as reported	$	(1.33	)

Basic — pro forma	$	(1.33	)

Diluted — as reported	$	(1.33	)

Diluted — pro forma	$	(1.33	)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation — (Continued)

(f)Reclassifications

Certain reclassifications have been made to the 2005 condensed consolidated statements of earnings and cash flows in order for these periods to be comparable. All businesses sold in fiscal year 2006 and fiscal year 2005 that met the criteria for discontinued operations have been classified as discontinued operations for all periods presented. These reclassifications had no effect on net earnings or shareholders’ equity.

(3) Change in Accounting Principles and New Accounting Principles

(a) Preneed Selling Costs

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

As of November 1, 2004, the Company recorded a cumulative effect of change in accounting principle of $254,241 ($153,180 after tax, or $1.40 per diluted share), which represents the cumulative balance of deferred preneed selling costs in the deferred charges line on the Company’s condensed consolidated balance sheet at the time of the change.

(b) Other Accounting Pronouncements

In December 2004, the FASB revised its SFAS No. 123 (“SFAS No. 123R”), “Accounting for Stock Based Compensation.” The revision establishes standards for the accounting of transactions in which an entity exchanges its equity instruments for goods or services, particularly transactions in which an entity obtains employee services in share-based payment transactions. The revised statement requires a public entity to measure the cost of employee services received in exchange for an award of equity instruments based on the grant-date fair value of the award. That cost is to be recognized over the period during which the employee is required to provide service in exchange for the award. Changes in fair value during the requisite service period are to be recognized as compensation cost over that period. In addition, the revised statement amends SFAS No. 95, “Statement of Cash Flows,” to require that excess tax benefits be reported as a financing cash flow rather than as a reduction of taxes paid. The Company adopted SFAS No. 123R on November 1, 2005. See Note 2(e) for a discussion of the impact of adopting this statement in the first quarter of 2006.

(4) Preneed Funeral Activities

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 sheet at January 31, 2006 and October 31, 2005 are as follows:

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Funeral Activities—(Continued)


	January 31, 2006		October 31, 2005
Trust assets	$	456,312	$	446,344
Receivables from customers		57,026		57,124

Preneed funeral receivables and trust investments	$	513,338	$	503,468

The cost and market values associated with preneed funeral merchandise and services trust assets at January 31, 2006 are detailed below. The adjusted cost basis of the funeral merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $82,597 as of January 31, 2006 from their original cost basis. The Company believes the unrealized losses reflected below of $9,654 related to trust investments are temporary in nature.


	January 31, 2006
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	48,056	$	—	$	—		$	48,056
U.S. Government, agencies and municipalities		6,396		45		(124	)		6,317
Corporate bonds		19,103		650		(709	)		19,044
Preferred stocks		72,234		590		(1,307	)		71,517
Common stocks		238,821		21,736		(7,273	)		253,284
Mutual funds		30,441		2,639		(241	)		32,839
Insurance contracts and other long- term investments		22,825		357		—			23,182

Trust investments	$	437,876	$	26,017	$	(9,654	)		454,239

Market value as a percentage of cost										103.7	%

Accrued investment income									2,073

Trust assets								$	456,312

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


	January 31, 2006
Due in one year or less	$	1,352
Due in one to five years		13,315
Due in five to ten years		10,346
Thereafter		348

	$	25,361

During the three months ended January 31, 2006, purchases and sales of available for sale securities included in trust investments were $4,412 and $2,123, respectively. These sales resulted in realized gains and losses of $120 and $904, respectively. During the three months ended January 31, 2005, purchases and sales of available for sale securities included in trust investments were $89,252 and $23,796, respectively, and these sales resulted in realized gains and losses of $1,726 and $2,195, respectively.

The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2005 are detailed below. The adjusted cost basis of the funeral merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $81,829 as of October 31, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $12,586 related to trust investments are temporary in nature.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Funeral Activities—(Continued)


	October 31, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	52,275	$	—	$	—		$	52,275
U.S. Government, agencies and municipalities		7,421		52		(384	)		7,089
Corporate bonds		19,702		679		(566	)		19,815
Preferred stocks		68,419		503		(1,577	)		67,345
Common stocks		239,970		13,803		(9,812	)		243,961
Mutual funds		30,254		215		(247	)		30,222
Insurance contracts and other long- term investments		23,190		351		—			23,541

Trust investments	$	441,231	$	15,603	$	(12,586	)		444,248

Market value as a percentage of cost										100.7	%

Accrued investment income									2,096

Trust assets								$	446,344

(5) 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 current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheet as of January 31, 2006 and October 31, 2005 are as follows:


	January 31, 2006		October 31, 2005
Trust assets	$	189,004	$	191,506
Receivables from customers		63,715		65,931

Preneed cemetery receivables and trust investments	$	252,719	$	257,437

The cost and market values associated with the preneed cemetery merchandise and services trust assets as of January 31, 2006 are detailed below. The adjusted cost basis of the cemetery merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $43,292 as of January 31, 2006 from their original cost basis. The Company believes the unrealized losses reflected below of $5,199 related to trust investments are temporary in nature.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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


	January 31, 2006
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	9,415	$	—	$	—		$	9,415
U.S. Government, agencies and municipalities		11,705		34		(74	)		11,665
Corporate bonds		8,782		279		(211	)		8,850
Preferred stocks		32,743		270		(624	)		32,389
Common stocks		99,264		8,686		(4,289	)		103,661
Mutual funds		19,018		2,254		(1	)		21,271
Insurance contracts and other long-term investments		568		2		—			570

Trust investments	$	181,495	$	11,525	$	(5,199	)		187,821

Market value as a percentage of cost										103.5	%

Accrued investment income									1,183

Trust assets								$	189,004

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


	January 31, 2006
Due in one year or less	$	568
Due in one to five years		14,550
Due in five to ten years		4,820
Thereafter		577

	$	20,515

During the three months ended January 31, 2006, purchases and sales of available for sale securities included in trust investments were $2,199 and $8,420, respectively. These sales resulted in realized gains and losses of $246 and $346, respectively. During the three months ended January 31, 2005, purchases and sales of available for sale securities included in trust investments were $24,378 and $10,419, respectively, and these sales resulted in realized gains and losses of $800 and $939, respectively.

The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2005 are detailed below. The adjusted cost basis of the cemetery merchandise and services trust assets below reflect an other than temporary decline in the trust assets of approximately $43,209 as of October 31, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $6,615 related to trust investments are temporary in nature.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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


	October 31, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	12,377	$	—	$	—		$	12,377
U.S. Government, agencies and municipalities		10,686		27		(76	)		10,637
Corporate bonds		8,893		309		(145	)		9,057
Preferred stocks		34,319		296		(861	)		33,754
Common stocks		104,999		5,465		(5,486	)		104,978
Mutual funds		19,018		86		(47	)		19,057
Insurance contracts and other long-term investments		568		2		—			570

Trust investments	$	190,860	$	6,185	$	(6,615	)		190,430

Market value as a percentage of cost										99.8	%

Accrued investment income									1,076

Trust assets								$	191,506

(6) Cemetery Interment Rights and Perpetual Care Trusts

Earnings realized from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $2,618 and $1,122 for the three months ended January 31, 2006 and 2005, respectively.

The cost and market values of the trust investments held by the cemetery perpetual care trusts at January 31, 2006 are detailed below. The adjusted cost basis of the cemetery perpetual care trusts below reflect an other than temporary decline in the trust assets of $30,212 as of January 31, 2006 from their original cost basis. The Company believes the unrealized losses reflected below of $8,748 related to trust investments are temporary in nature.


	January 31, 2006
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	18,375	$	1	$	(5	)	$	18,371
U.S. Government, agencies and municipalities		6,949		39		(110	)		6,878
Corporate bonds		18,621		1,487		(212	)		19,896
Preferred stocks		75,851		787		(3,811	)		72,827
Common stocks		86,930		12,669		(4,520	)		95,079
Mutual funds		3,511		126		(64	)		3,573
Insurance contracts and other long-term investments		1,032		48		(26	)		1,054

Trust investments	$	211,269	$	15,157	$	(8,748	)		217,678

Market value as a percentage of cost										103.0	%

Accrued investment income									1,285

Trust assets								$	218,963

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

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


	January 31, 2006
Due in one year or less	$	1,178
Due in one to five years		20,303
Due in five to ten years		3,851
Thereafter		1,442

	$	26,774

During the three months ended January 31, 2006, purchases and sales of available for sale securities were $14,051 and $10,957, respectively. These sales resulted in realized gains and losses of $804 and $68, respectively. During the three months ended January 31, 2005, purchases and sales of available for sale securities were $24,468 and $19,617, respectively, and these sales resulted in realized gains and losses of $1,058 and $935, respectively.

The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2005 are detailed below. The adjusted cost basis of the cemetery perpetual care trusts below reflect an other than temporary decline in the trust assets of $30,299 as of October 31, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $10,363 related to trust investments are temporary in nature.


	October 31, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	20,172	$	—	$	—		$	20,172
U.S. Government, agencies and municipalities		7,077		36		(127	)		6,986
Corporate bonds		18,817		1,669		(156	)		20,330
Preferred stocks		71,168		642		(4,187	)		67,623
Common stocks		87,406		10,659		(5,795	)		92,270
Mutual funds		3,557		129		(72	)		3,614
Insurance contracts and other long-term investments		1,132		45		(26	)		1,151

Trust investments	$	209,329	$	13,180	$	(10,363	)		212,146

Market value as a percentage of cost										101.3	%

Accrued investment income									942

Trust assets								$	213,088

(7) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts

The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at January 31, 2006 are as follows:



										Non-controlling
	Non-controlling Interest									Interest in
	Preneed			Preneed						Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	456,312		$	189,004		$	645,316		$	218,963
Less:
Pending withdrawals		(8,384	)		(3,599	)		(11,983	)		(2,308	)
Pending deposits		2,036			1,526			3,562			608

Non-controlling interest	$	449,964		$	186,931		$	636,895		$	217,263

The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at October 31, 2005 are as follows:

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7)

Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts—(Continued)



										Non-controlling
	Non-controlling Interest									Interest in
	Preneed			Preneed						Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	446,344		$	191,506		$	637,850		$	213,088
Less:
Pending withdrawals		(7,868	)		(6,104	)		(13,972	)		(1,866	)
Pending deposits		1,648			1,315			2,963			542

Non-controlling interest	$	440,124		$	186,717		$	626,841		$	211,764

Investment and other income, net

The components of investment and other income, net in the condensed consolidated statements of earnings for the three months ended January 31, 2006 and 2005 are detailed below.


	Three Months			Three Months
	Ended			Ended
	January 31, 2006			January 31, 2005
				(Restated)
Non-controlling interest:
Realized gains	$	1,170		$	3,584
Realized losses		(1,318	)		(4,069	)
Interest income, dividend and other ordinary income		7,575			6,851
Trust expenses and income taxes		(2,831	)		(2,864	)

Net trust investment income		4,596			3,502
Interest expense related to non-controlling interest in funeral and cemetery trust investments		(1,994	)		(2,013	)
Interest expense related to non-controlling interest in perpetual care trust investments		(2,602	)		(1,489	)

Total non-controlling interest		—			—
Investment and other income, net⁽¹⁾		468			108

Total investment and other income, net	$	468		$	108


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

(8) Commitments and Contingencies

Henrietta Torres and Teresa Fiore, on behalf of themselves and all others similarly situated and the General Public v. Stewart Enterprises, Inc., et al.; No. BC328961 on the docket of the Superior Court for the State of California for the County of Los Angeles, Central District. This purported class action was filed on February 17, 2005, on behalf of a nationwide class defined to include all persons, entities and organizations who purchased funeral goods and/or services in the United States from defendants at any time on or after February 17, 2001. The suit named the Company and several of its Southern California affiliates as defendants and also sought to assert claims against a class of all entities located anywhere in the United States whose ultimate parent corporation has been the Company at any time on or after February 17, 2001.

In May, 2005, the court ruled that this case was related to similar actions against Service Corporation International (“SCI”) and Alderwoods Group, Inc., and designated the SCI case as the lead case. The case against the

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8)

Commitments and Contingencies—(Continued)

Company effectively has been held in abeyance while the court tests plaintiff’s legal theories in the lead case. Rulings on legal issues in the lead case will apply equally in the case against the Company, and the court has allowed the Company to participate in hearings and briefings in the lead case.

As a result of demurrers, the plaintiff in the lead case has amended her complaint twice. On January 31, 2006, however, the court overruled SCI’s demurrer to the third amended complaint and established a schedule leading to hearing on a motion for summary judgment in early July to test the viability of the named plaintiff’s claim against SCI.

The third amended complaint in the lead case alleges that the SCI defendants violated the “Funeral Rule” promulgated by the Federal Trade Commission by failing to disclose that the prices of certain goods and services they obtained from third parties specifically on the plaintiff’s behalf exceeded what the defendants paid for them. The plaintiff alleges that by failing to comply with the Funeral Rule, defendants (i) breached contracts with the plaintiffs, (ii) were unjustly enriched, and (iii) engaged in unfair, unlawful and fraudulent business practices in violation of a provision of California’s Business and Professions Code. The plaintiff seeks restitution damages, disgorgement, interest, costs, and attorneys’ fees.

Although the plaintiffs have amended their complaint against the Company once as a result of a demurrer in the lead case, they have not amended their complaint to correspond with the third amended complaint in the lead case. Because the matter is in its early stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in this matter.

In re: Funeral Consumer Antitrust Litigation— On May 2, 2005, a purported class action lawsuit entitledFuneral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.(“FCA Case”) was filed in the Federal District Court for the Northern District of California, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home defendants.

The suit alleges that the defendants acted jointly to reduce competition from independent casket discounters and fix and maintain prices on caskets in violation of the federal antitrust laws and California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees.

Thereafter, five substantially similar lawsuits were filed in the Northern District of California asserting claims under the federal antitrust laws and various state antitrust and consumer protection laws. These five suits were transferred to the division in which theFCA Case was pending and consolidated with the FCA Case (collectively referred to as the “Consolidated Consumer Cases”).

On July 8, 2005, a purported class action was filed in the Northern District of California entitledPioneer Valley Casket Co., Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co. (“Pioneer ValleyCase”). The Pioneer Valley Case involves the same claims asserted in the Consolidated Consumer Cases, except that it was brought on behalf of a nationwide class defined to include only independent casket retailers.

On July 15, 2005, the defendants filed motions to dismiss for failure to plead facts sufficient to establish viable antitrust and unfair competition claims. On September 9, 2005, the Court denied the defendants’ motions to dismiss, without prejudice, but ordered the plaintiffs to file an amended and consolidated complaint that satisfies the objections raised in the motions to dismiss.

At the defendants’ request, the Court also issued orders in late September 2005 transferring the Consolidated Consumer Cases and the Pioneer Valley Case to the United States District Court for the Southern District of Texas. The transferred Consolidated Consumer Cases have been consolidated before a single judge in the Southern District of Texas. The Pioneer Valley Case has been consolidated with these cases for purposes of discovery only.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8)

Commitments and Contingencies—(Continued)

On October 12, 2005, the consumer plaintiffs filed a first amended consolidated class action complaint. Defendants then filed motions to dismiss the first amended complaint, which are pending. On October 21, 2005, Pioneer Valley filed a first amended complaint. Defendants then filed motions to dismiss, which are pending. Discovery is underway in both cases. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

A similar action captionedRalph Lee Fancher, on behalf of himself and all others similarly situated v. Service Corporation International, Alderwoods Group, Inc,. Stewart Enterprises, Inc., Hillenbrand Industries, Inc., Aurora Casket Co., York Group, Inc., and Batesville Casket Co.,was filed in the United States District Court for the Eastern District of Tennessee on behalf of consumers in twenty-three states and the District of Columbia who purchased caskets. The allegations of fact were essentially the same as those made in the FCA Case,but the plaintiff in this suit alleged that the defendants violated state antitrust, consumer protection and/or unjust enrichment laws. The plaintiff in this purported class action withdrew his complaint on August 2, 2005, and re-filed a nearly identical complaint under Tennessee law and on behalf of only Tennessee consumers in the Northern District of California on September 23, 2005, the same day that the Consolidated Consumer Cases were transferred to the Southern District of Texas. This matter has now been transferred to the Southern District of Texas, and consolidated with the Consolidated Consumer Cases for purposes of discovery. The plaintiff filed a First Amended Complaint expanding the purported class to include “all individuals and entities in the United States who purchased Batesville caskets” and dropping claims made under the Tennessee consumer protection law. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

State Attorney General Civil Investigative Demands– On August 4, 2005, the Attorney General for the State of Maryland issued a civil investigative demand to the Company seeking documents and information relating to funeral and cemetery goods and services. The Attorney General for the State of Florida issued a similar civil investigative demand to the Company. The Company is cooperating with the attorneys general and has begun providing them with information relevant to their investigations. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

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

The Company is required to maintain a bond of $41,061 to guarantee its obligations relating to funds it withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. The Company substituted a bond to guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. The Company believes that cash flow from operations will be sufficient to cover its estimated cost of providing the prearranged services and products in the future. During the first quarter of 2006, the Company posted an $11,000 letter of credit in order to secure the bond. In addition, the Company has $12,870 of other outstanding letters of credit posted during the normal course of business.

As of January 31, 2006, there were no amounts drawn on the Company’s $125,000 revolving credit facility. As of January 31, 2006, the Company’s availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit and remaining bond obligation, was $71,069.

The Company carries insurance with coverages and coverage limits that it believes to be adequate. Although there can be no assurance that such insurance is sufficient to protect the Company against all contingencies,

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8)

Commitments and Contingencies—(Continued)

management believes that its insurance protection is reasonable in view of the nature and scope of the Company’s operations.

(9)

Reconciliation of Basic and Diluted Per Share Data


	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended January 31, 2006
Earnings from continuing operations	$	8,389

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	8,389		108,504	$	.08

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

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	8,389		108,522	$	.08


	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended January 31, 2005 — Restated
Earnings from continuing operations before cumulative effect of change in accounting principle	$	7,389

Basic earnings per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders	$	7,389		109,087	$	.07

Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		363

Diluted earnings per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	7,389		109,450	$	.07

Options to purchase 1,468,734 shares of common stock at prices ranging from $5.44 to $7.03 per share were outstanding during the three months ended January 31, 2006, 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. These options expire on November 18, 2011, December 20, 2011 and December 22, 2013. Options to purchase 468,750 shares of common stock at a price of $7.03 per share were outstanding during the three months ended January 31, 2005, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Reconciliation of Basic and Diluted Per Share Data—(Continued)

The Company includes Class A and Class B common stock in its diluted shares calculation. As of January 31, 2006, the Company’s Chairman Emeritus, 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.

(10)

Segment Data

The Company re-evaluated its application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and restated its operating and reportable segments during fiscal year 2005 to include eleven operating and reportable segments. The Company’s historical presentation of segment data had incorrectly consisted of two operating and reportable segments, funeral and cemetery. As a result of the Company’s strategic planning process, effective for the fourth quarter of fiscal year 2005, the Company reorganized its operating divisions from four to two and revised its operating and reportable segments accordingly. The Company’s new presentation as a result of its strategic planning process reflects five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of two geographic areas: Western and Eastern. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same.

The corporate trust management segment revenues reflect (1) investment management fees earned and (2) the realized earnings related to preneed contracts delivered, which are the earnings realized over the life of the contracts delivered during the relevant period. Earnings recognition in this segment is unrelated to investment results in the current period. Current investment results of the funeral and cemetery merchandise and service trusts are deferred and are not reflected in the statement of earnings but are disclosed in Notes 4, 5, and 7 along with the cost and market value of the trust assets. The Company’s fee income related to management of its trust assets, the investment income recognized on preneed contracts delivered and the trust assets are referred to as “corporate trust management” for the benefit of the divisions.

Perpetual care trust earnings are reported in the geographic segments, as these revenues are recognized currently and are used to maintain the cemeteries. Perpetual care trust earnings and the cost and market values of the perpetual care trust assets are presented in Note 6.

The accounting policies of the Company’s segments are the same as those described in Note 3 to the consolidated financial statements included in the Company’s 2005 Form 10-K. The Company evaluates the performance of its segments and allocates resources to them using a variety of profitability metrics. The most comprehensive of these measures is gross profit.

The Company also measures its preneed sales growth year-over-year. Although the Company does not consider its preneed selling activities to be a separate segment, the Company is providing additional disclosure of preneed funeral and cemetery merchandise and service sales in its segment footnote as preneed sales are reviewed monthly by the Company’s CODM to assess performance and allocate resources. Preneed sales are strategically significant to the Company as those sales are one of the primary drivers of market share protection and growth. That is because preneed selling not only adds to the Company’s backlog but also strengthens at-need performance in the near-term. As such, the CODM reviews the preneed sales data in addition to revenue and gross profit.

The Company’s operations are product-based and geographically-based. As such, the Company’s primary reportable segments presented in the following table are based on products and services and their geographical orientation.

The Company’s funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. The Company’s services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of the Company’s funeral homes offer

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10)

Segment Data —(Continued)

cremation products and services. The Company’s cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, memorials and burial vaults, along with the sale of burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis.

The Company incurs certain costs at the divisional or regional level which benefit all of the funeral homes and cemeteries in the division or region such as division management compensation, divisional and regional headquarters overhead, insurance costs or legal and professional fees. These costs are allocated to the facilities in the regions or divisions using various methods including their proportionate share of sales (which can include preneed sales) or payroll. These costs are included in funeral and cemetery costs.

The Company incurs certain other costs at its Shared Services Center which benefit all of the funeral homes and cemeteries, such as the costs to process contracts, make collections, pay vendors, deliver information system services and deliver human resource services. These costs are allocated to the divisions and further allocated to the facilities in the division using various methods including their proportionate share of sales (which can include preneed sales) and the number of employees. These costs are included in funeral and cemetery costs.

The operating results of the Company’s businesses sold that meet the discontinued operations criteria in SFAS No. 144 are reported in the discontinued operations section of the consolidated statements of earnings (see Note 13). The table below presents information about reported segments for the Company’s continuing operations.


	Funeral Revenue				Cemetery Revenue⁽¹⁾				Total Revenue
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	January 31, 2006		January 31, 2005		January 31, 2006		January 31, 2005		January 31, 2006		January 31, 2005
			(Restated)				(Restated)				(Restated)
Western Division	$	36,974	$	35,690	$	19,480	$	20,303	$	56,454	$	55,993
Eastern Division		30,163		29,548		32,729		29,845		62,892		59,393
Corporate Trust Management⁽²⁾		4,652		4,478		2,607		2,704		7,259		7,182

Total	$	71,789	$	69,716	$	54,816	$	52,852	$	126,605	$	122,568


	Funeral Gross Profit				Cemetery Gross Profit⁽¹⁾				Total Gross Profit
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	January 31, 2006		January 31, 2005		January 31, 2006		January 31, 2005		January 31, 2006		January 31, 2005
			(Restated)				(Restated)				(Restated)
Western Division	$	7,697	$	7,615	$	3,727	$	4,016	$	11,424	$	11,631
Eastern Division		5,599		5,847		5,049		2,851		10,648		8,698
Corporate Trust Management⁽²⁾		4,520		4,336		2,487		2,577		7,007		6,913

Total	$	17,816	$	17,798	$	11,263	$	9,444	$	29,079	$	27,242


	Net Preneed Funeral Merchandise				Net Preneed Cemetery Merchandise				Net Total Preneed Merchandise
	and Service Sales⁽³⁾				and Service Sales⁽³⁾				and Service Sales⁽³⁾
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	January 31, 2006		January 31, 2005		January 31, 2006		January 31, 2005		January 31, 2006		January 31, 2005
			(Restated)				(Restated)				(Restated)
Western Division	$	12,367	$	11,062	$	3,810	$	3,777	$	16,177	$	14,839
Eastern Division		9,598		9,136		10,133		9,895		19,731		19,031

Total	$	21,965	$	20,198	$	13,943	$	13,672	$	35,908	$	33,870


⁽¹⁾		Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment and amounted to $2,618 and $1,122 for the three months ended January 31, 2006 and 2005, respectively.

⁽²⁾		Corporate trust management consists of trust management fees and funeral and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10)		Segment Data—(Continued)

		are established by the Company at rates consistent with industry norms and are paid by the trusts to the Company’s subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. Trust management fees included in funeral revenue for the three months ended January 31, 2006 and 2005 were $1,367 and $1,153, respectively, and funeral trust earnings for the three months ended January 31, 2006 and 2005 were $3,285 and $3,325, respectively. Trust management fees included in cemetery revenue for the three months ended January 31, 2006 and 2005 were $1,206 and $1,231, respectively, and cemetery trust earnings for the three months ended January 31, 2006 and 2005 were $1,401 and $1,473, respectively.

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

A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes and cumulative effect of change in accounting principle for the three months ended January 31, 2006 and 2005 is as follows:


	Three Months Ended
	January 31
	2006			2005
				(Restated)
Gross profit for reportable segments	$	29,079		$	27,242
Corporate general and administrative expenses		(7,219	)		(4,216	)
Hurricane related charges, net		(2,638	)		—
Separation charges		(154	)		—
Gains on dispositions and impairment (losses), net		298			878
Other operating income, net		978			239
Interest expense		(7,528	)		(10,376	)
Loss on early extinguishment of debt		—			(2,651	)
Investment and other income, net		468			108

Earnings from continuing operations before income taxes and cumulative effect of change in accounting principle	$	13,284		$	11,224

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(11) Supplementary Information

The detail of certain income statement accounts is as follows for the three months ended January 31, 2006 and 2005.


	Three Months Ended
	January 31,
	2006		2005
			(Restated)
Service revenue
Funeral	$	41,161	$	39,617
Cemetery		15,722		13,462

		56,883		53,079

Merchandise revenue
Funeral		28,592		28,293
Cemetery		35,100		35,714

		63,692		64,007

Other revenue
Funeral		2,036		1,806
Cemetery		3,994		3,676

		6,030		5,482


Total revenue	$	126,605	$	122,568


Service costs
Funeral		13,342		12,335
Cemetery		9,694		9,526

		23,036		21,861

Merchandise costs
Funeral		17,005		16,111
Cemetery		20,582		20,526

		37,587		36,637

General and administrative expenses
Funeral		23,626		23,472
Cemetery		13,277		13,356

		36,903		36,828


Total costs	$	97,526	$	95,326

Service revenue includes funeral service revenue, funeral trust earnings, burial site openings and closings and perpetual care trust earnings. Merchandise revenue includes funeral merchandise, 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)

(12)

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

The following tables present the condensed consolidating historical financial statements as of January 31, 2006 and October 31, 2005 and for the three months ended January 31, 2006 and 2005, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the 10.75 percent senior subordinated notes and 6.25 percent senior notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto Rican subsidiaries, Investor’s Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the senior subordinated notes and senior notes. The guarantees are full and unconditional and joint and several. The guarantor subsidiaries are wholly-owned directly or indirectly by the Company, except that the Company owned 99.5 percent and 98.4 percent of two immaterial guarantor subsidiaries.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Three Months Ended January 31, 2006
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	66,875		$	4,914		$	—		$	71,789
Cemetery		—			50,458			4,358			—			54,816

		—			117,333			9,272			—			126,605

Costs and expenses:
Funeral		—			50,802			3,171			—			53,973
Cemetery		—			40,089			3,464			—			43,553

		—			90,891			6,635			—			97,526

Gross profit		—			26,442			2,637			—			29,079
Corporate general and administrative expenses		(7,219	)		—			—			—			(7,219	)
Hurricane related charges, net		—			(2,638	)		—			—			(2,638	)
Separation charges		(55	)		(99	)		—			—			(154	)
Gains on dispositions and impairment (losses), net		—			—			298			—			298
Other operating income, net		16			919			43			—			978

Operating earnings (loss)		(7,258	)		24,624			2,978			—			20,344
Interest income (expense)		9,735			(15,586	)		(1,677	)		—			(7,528	)
Investment and other income, net		468			—			—			—			468
Equity in subsidiaries		6,576			—			—			(6,576	)		—

Earnings from continuing operations before income taxes		9,521			9,038			1,301			(6,576	)		13,284
Income taxes		1,132			3,382			381			—			4,895

Net earnings		8,389			5,656			920			(6,576	)		8,389
Other comprehensive loss, net		(2	)		—			(2	)		2			(2	)

Comprehensive income	$	8,387		$	5,656		$	918		$	(6,574	)	$	8,387

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12)

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

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Three Months Ended January 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)		(Restated)
Revenues:
Funeral	$	—		$	64,275		$	5,441		$	—	$	69,716
Cemetery		—			47,416			5,436			—		52,852

		—			111,691			10,877			—		122,568

Costs and expenses:
Funeral		—			48,627			3,291			—		51,918
Cemetery		—			39,243			4,165			—		43,408

		—			87,870			7,456			—		95,326

Gross profit		—			23,821			3,421			—		27,242
Corporate general and administrative expenses		(4,216	)		—			—			—		(4,216	)
Gains on dispositions and impairment (losses), net		—			614			264			—		878
Other operating income, net		117			43			79			—		239

Operating earnings (loss)		(4,099	)		24,478			3,764			—		24,143
Interest income (expense)		11,284			(19,677	)		(1,983	)		—		(10,376	)
Loss on early extinguishment of debt		(2,651	)		—			—			—		(2,651	)
Investment and other income, net		108			—			—			—		108
Equity loss in subsidiaries		(148,220	)		—			—			148,220		—

Earnings (loss) from continuing operations before income taxes		(143,578	)		4,801			1,781			148,220		11,224
Income taxes		1,699			1,590			546			—		3,835

Earnings (loss) from continuing operations		(145,277	)		3,211			1,235			148,220		7,389

Discontinued operations:
Earnings from discontinued operations before income taxes		—			246			284			—		530
Income taxes		—			16			—			—		16

Earnings from discontinued operations		—			230			284			—		514

Earnings (loss) before cumulative effect of change in accounting principle		(145,277	)		3,441			1,519			148,220		7,903

Cumulative effect of change in accounting principle		—			(145,276	)		(7,904	)		—		(153,180	)

Net loss		(145,277	)		(141,835	)		(6,385	)		148,220		(145,277	)
Other comprehensive income, net		193			—			—			—		193

Comprehensive loss	$	(145,084	)	$	(141,835	)	$	(6,385	)	$	148,220	$	(145,084	)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12)

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

Condensed Consolidating Balance Sheets


	January 31, 2006
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	60,035		$	3,264		$	1,273		$	—		$	64,572
Marketable securities		—			—			1,307			—			1,307
Receivables, net of allowances		14,240			46,406			6,562			—			67,208
Inventories		358			24,902			7,022			—			32,282
Prepaid expenses		785			4,103			23			—			4,911
Deferred income taxes, net		2,918			5,181			2			—			8,101

Total current assets		78,336			83,856			16,189			—			178,381
Receivables due beyond one year, net of allowances		—			50,549			20,234			—			70,783
Preneed funeral receivables and trust investments		—			502,647			10,691			—			513,338
Preneed cemetery receivables and trust investments		—			236,192			16,527			—			252,719
Goodwill		—			252,942			19,787			—			272,729
Cemetery property, at cost		—			347,193			19,191			—			366,384
Property and equipment, at cost		35,589			419,501			36,896			—			491,986
Less accumulated depreciation		20,528			168,823			11,480			—			200,831

Net property and equipment		15,061			250,678			25,416			—			291,155
Deferred income taxes, net		13,176			160,119			13,615			—			186,910
Cemetery perpetual care trust investments		—			218,963			—			—			218,963
Other assets		6,183			12,467			923			—			19,573
Equity in subsidiaries		7,860			5,353			—			(13,213	)		—

Total assets	$	120,616		$	2,120,959		$	142,573		$	(13,213	)	$	2,370,935

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,142		$	—		$	—		$	—		$	3,142
Accounts payable		200			9,935			337			—			10,472
Accrued expenses and other current liabilities		15,888			38,575			4,811			—			59,274

Total current liabilities		19,230			48,510			5,148			—			72,888
Long-term debt, less current maturities		375,994			—			30,000			—			405,994
Intercompany payables, net		(973,858	)		954,607			19,251			—			—
Deferred preneed funeral revenue		—			231,286			49,581			—			280,867
Deferred preneed cemetery revenue		—			274,222			25,380			—			299,602
Non-controlling interest in funeral and cemetery trusts		—			636,895			—			—			636,895
Other long-term liabilities		9,274			2,510			—			—			11,784
Negative equity in subsidiaries		244,334			—			—			(244,334	)		—

Total liabilities		(325,026	)		2,148,030			129,360			(244,334	)		1,708,030

Non-controlling interest in perpetual care trusts		—			217,263			—			—			217,263

Common stock		108,670			426			52			(478	)		108,670
Other		336,977			(244,760	)		13,166			231,594			336,977
Accumulated other comprehensive loss		(5	)		—			(5	)		5			(5	)

Total shareholders’ equity		445,642			(244,334	)		13,213			231,121			445,642

Total liabilities and shareholders’ equity	$	120,616		$	2,120,959		$	142,573		$	(13,213	)	$	2,370,935

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12)

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

Condensed Consolidating Balance Sheets


	October 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	38,675		$	874		$	1,056		$	—		$	40,605
Marketable securities		—			—			1,302			—			1,302
Receivables, net of allowances		17,337			56,381			6,179			—			79,897
Inventories		401			26,194			6,885			—			33,480
Prepaid expenses		451			2,278			37			—			2,766
Deferred income taxes, net		2,918			8,196			2			—			11,116

Total current assets		59,782			93,923			15,461			—			169,166
Receivables due beyond one year, net of allowances		—			49,384			19,551			—			68,935
Preneed funeral receivables and trust investments		—			492,247			11,221			—			503,468
Preneed cemetery receivables and trust investments		—			239,027			18,410			—			257,437
Goodwill		—			252,942			19,787			—			272,729
Cemetery property, at cost		—			346,611			20,165			—			366,776
Property and equipment, at cost		35,078			415,970			36,433			—			487,481
Less accumulated depreciation		19,744			164,959			11,142			—			195,845

Net property and equipment		15,334			251,011			25,291			—			291,636
Deferred income taxes, net		13,176			160,782			13,615			—			187,573
Cemetery perpetual care trust investments		—			213,088			—			—			213,088
Other assets		6,447			13,061			810			—			20,318
Equity in subsidiaries		6,942			5,353			—			(12,295	)		—

Total assets	$	101,681		$	2,117,429		$	144,311		$	(12,295	)	$	2,351,126

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	3,168	��	$	—		$	—		$	—		$	3,168
Accounts payable		513			9,578			667			—			10,758
Accrued expenses and other current liabilities		15,322			45,356			3,188			—			63,866

Total current liabilities		19,003			54,934			3,855			—			77,792
Long-term debt, less current maturities		376,859			—			30,000			—			406,859
Intercompany payables, net		(992,609	)		968,998			23,611			—			—
Deferred preneed funeral revenue		—			237,200			47,264			—			284,464
Deferred preneed cemetery revenue		—			265,225			27,286			—			292,511
Non-controlling interest in funeral and cemetery trusts		—			626,841			—			—			626,841
Other long-term liabilities		8,985			2,457			—			—			11,442
Negative equity in subsidiaries		249,990			—			—			(249,990	)		—

Total liabilities		(337,772	)		2,155,655			132,016			(249,990	)		1,699,909

Non-controlling interest in perpetual care trusts		—			211,764			—			—			211,764

Common stock		108,670			426			52			(478	)		108,670
Other		330,786			(250,416	)		12,246			238,170			330,786
Accumulated other comprehensive loss		(3	)		—			(3	)		3			(3	)

Total shareholders’ equity		439,453			(249,990	)		12,295			237,695			439,453

Total liabilities and shareholders’ equity	$	101,681		$	2,117,429		$	144,311		$	(12,295	)	$	2,351,126

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12)

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

Condensed Consolidating Statements of Cash Flows


	Three Months Ended January 31, 2006
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	6,713		$	15,780		$	4,731		$	—	$	27,224

Cash flows from investing activities:
Proceeds from sale of assets, net		—			9			—			—		9
Insurance proceeds related to hurricane damaged properties		—			4,540			—			—		4,540
Additions to property and equipment		(551	)		(3,571	)		(152	)		—		(4,274	)
Other		—			23			(8	)		—		15

Net cash provided by (used in) investing activities		(551	)		1,001			(160	)		—		290

Cash flows from financing activities:
Repayments of long-term debt		(891	)		—			—			—		(891	)
Intercompany receivables (payables)		18,745			(14,391	)		(4,354	)		—		—
Dividends		(2,717	)		—			—			—		(2,717	)
Other		61			—			—			—		61

Net cash provided by (used in) financing activities		15,198			(14,391	)		(4,354	)		—		(3,547	)

Net increase in cash		21,360			2,390			217			—		23,967
Cash and cash equivalents, beginning of period		38,675			874			1,056			—		40,605

Cash and cash equivalents, end of period	$	60,035		$	3,264		$	1,273		$	—	$	64,572

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Condensed Consolidating Statements of Cash Flows


	Three Months Ended January 31, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)		(Restated)
Net cash provided by (used in) operating activities	$	(2,486	)	$	(2,111	)	$	2,724		$	—	$	(1,873	)

Cash flows from investing activities:
Proceeds from sales of marketable securities		—			16			—			—		16
Proceeds from sale of assets, net		(147	)		4,921			675			—		5,449
Additions to property and equipment		(1,059	)		(2,257	)		(3,196	)		—		(6,512	)
Other		—			28			—			—		28

Net cash provided by (used in) investing activities		(1,206	)		2,708			(2,521	)		—		(1,019	)

Cash flows from financing activities:
Proceeds from long-term debt		110,000			—			—			—		110,000
Repayments of long-term debt		(124,274	)		—			—			—		(124,274	)
Intercompany receivables (payables)		1,887			(1,559	)		(328	)		—		—
Debt issue costs		(1,681	)		—			—			—		(1,681	)
Issuance of common stock		10,419			—			—			—		10,419
Other		(944	)		—			—			—		(944	)

Net cash used in financing activities		(4,593	)		(1,559	)		(328	)		—		(6,480	)

Net decrease in cash		(8,285	)		(962	)		(125	)		—		(9,372	)
Cash and cash equivalents, beginning of period		13,553			7,625			336			—		21,514

Cash and cash equivalents, end of period	$	5,268		$	6,663		$	211		$	—	$	12,142

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(13) Discontinued Operations, Assets Held for Sale and Impairment Charges

In December 2003, the Company announced plans to close or sell a number of small businesses, primarily small funeral homes, most of which were acquired as part of a group of facilities, that were performing below acceptable levels or no longer fit the Company’s operating profile. One of the criteria for classification as discontinued operations or assets held for sale is that the transfer of the asset is normally expected to qualify for accounting recognition as a sale within one year’s time, with certain exceptions. Certain of the businesses classified as discontinued operations during the first quarter of fiscal year 2004 that were not sold within the one-year requirement were reclassified as continuing operations in the first quarter of fiscal year 2005. The operating results of those businesses that met the criteria in SFAS No. 144 that were sold during fiscal years 2006 or 2005 are currently reported in the discontinued operations section of the 2006 and 2005 consolidated statements of earnings. There were no businesses sold in the first quarter of 2006.

The Company recorded net gains on dispositions and impairment (losses) of $298 and $878 for the three months ended January 31, 2006 and 2005 in continuing operations, respectively, for long-lived assets sold, primarily real estate, that did not qualify as discontinued operations. The Company also recorded net gains on dispositions and impairment (losses) related to discontinued operations of $543 for the three months ended January 31, 2005, which is reflected in the discontinued operations section of the consolidated statement of earnings, all of which relates to businesses sold.

The operating results of the discontinued operations for the three months ended January 31, 2005, are set forth below:


	Three Months Ended
	January 31,
	2005
	(Restated)
Revenue:
Funeral	$	331
Cemetery		203

	$	534

Gross profit:
Funeral	$	(105	)
Cemetery		87

		(18	)
Gains on dispositions and impairment (losses), net		543
Other operating income, net		5

Earnings from discontinued operations before income taxes	$	530

(14) Separation Charges

On July 14, 2005, the Company named a new Chief Operating Officer and announced that it was reorganizing its divisions. The reorganization consolidated operations from four divisions to two: Eastern and Western. These changes are a result of the Company’s recent strategic planning process and became effective for the fourth quarter of fiscal year 2005. The total charge for severance and other costs associated with the reorganization including relocation costs of certain personnel, exit of the leases associated with certain administrative facilities and charges associated with certain leasehold improvements of the related leases is expected to be approximately $1,850. During fiscal year 2005, the Company recorded $1,507 ($942 after tax, or $.01 per share) in related costs. During the quarter ended January 31, 2006, the Company recorded a charge of $154 for these costs. As of January 31, 2006, the Company has paid $773 of these costs. There are no material remaining costs under the reorganization.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15) Consolidated Comprehensive Income

Consolidated comprehensive income (loss) for the three months ended January 31, 2006 and 2005 is as follows:


	Three Months Ended January 31,
	2006			2005
				(Restated)
Net earnings (loss)	$	8,389		$	(145,277	)
Other comprehensive income:
Unrealized depreciation of investments, net of deferred tax benefit of $1		(2	)		—
Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($118)		—			193
Reduction in net unrealized losses associated with available-for-sale securities of the trusts		29,098			20,686
Reclassification of the net unrealized losses activity attributable to the non-controlling interest holders		(29,098	)		(20,686	)

Total other comprehensive income		(2	)		193

Total comprehensive income (loss)	$	8,387		$	(145,084	)

(16) Guarantees

The Company’s obligations under its senior secured credit facility and 6.25 percent senior notes are guaranteed by all of its existing and future direct and indirect subsidiaries formed under the laws of the United States, any state thereof or the District of Columbia, except for specified excluded subsidiaries. For additional information regarding the senior secured credit facility and the 6.25 percent senior notes, see Note 16 to the consolidated financial statements of the Company’s 2005 Form 10-K.

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

Louisiana law gives Louisiana corporations broad powers to indemnify their present and former directors and officers and those of affiliated corporations against expenses incurred in the defense of any lawsuit to which they are made parties by reason of their positions. The Company’s By-laws make mandatory the indemnification of directors and officers permitted by Louisiana law. The Company has in effect a directors’ and officers’ liability insurance policy that provides for indemnification of its officers and directors against losses arising from claims asserted against them in their capacities as officers and directors, subject to limitations and conditions set forth in such policy. The Company has also entered into indemnity agreements with each director and executive officer, pursuant to which the Company has agreed, subject to certain exceptions, to purchase and maintain directors’ and officers’ liability insurance. The agreements also provide that the Company will indemnify each director and executive officer against any costs and expenses, judgments, settlements and fines incurred in connection with any claim involving him or her by reason of his or her position as director or officer, provided that the director or executive officer meets certain standards of conduct.

As of January 31, 2006, the Company has guaranteed long-term debt of its subsidiaries of approximately $794 that represents notes the subsidiaries issued as part of the purchase price of acquired businesses or debt the subsidiaries assumed in connection with acquisitions.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(17) Related Party Transactions

In July 2005, the Company announced the retirement of Michael K. Crane, Sr., Senior Vice President and President of the Central Division, effective October 31, 2005. As part of his separation agreement, he is entitled to receive $300 in equal installments over a two year period beginning in May 2006. The Company recorded the $300 charge in the fourth quarter of fiscal year 2005 but will make the payments in accordance with the terms of the agreement.

In June 2004, the Company entered into a separation agreement with William E. Rowe, who stepped down from his position as President and Chief Executive Officer. As part of Mr. Rowe’s separation agreement, the Company is paying Mr. Rowe $1,000 in equal installments over a two year period, beginning November 1, 2004. The Company recorded the $1,000 charge in the third quarter of fiscal year 2004 but will make the payments in accordance with the terms of the agreement.

In July 2003, the Company entered into a retirement benefits agreement with Frank B. Stewart, Jr., who retired from his position as Chairman of the Board and became Chairman Emeritus of the Company. As part of Mr. Stewart’s retirement benefits agreement, the Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550 each. The Company recorded the $1,650 charge in the third quarter of 2003 and paid all of the $1,650 commitment as of June 20, 2005.

In June 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had stepped down. According to the terms of his employment agreement, he was entitled to receive an amount equal to two years of salary, or $800, over the next two years. The Company recorded the $800 charge in the third quarter of 2003 and paid all of the $800 commitment as of June 17, 2005.

In January 1998, the Company discontinued an insurance policy on the life of Mr. Frank B. Stewart, Jr., Chairman Emeritus of the Company. In order to purchase a replacement policy, The Stewart Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180 days after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the Company’s cost of borrowing under its revolving credit facility and is payable when the principal becomes due. The amount of the loan was equal to the cash value received by the Company upon the discontinuance of the prior insurance policy. The loan proceeds were used by the trust to purchase a single premium policy on the life of Mr. Stewart. Certain of the beneficiaries of The Stewart Family Special Trust are members of Mr. Stewart’s family. The loan was approved by all of the disinterested members of the Board of Directors. The outstanding balance of the loan at January 31, 2006, including accrued interest, was approximately $1,066.

(18) Hurricane Related Charges

On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. The Company’s executive offices and Shared Services Center are located in a building it owns in the New Orleans metropolitan area, and no significant damage occurred to that building. However, most of the approximately 400 employees who work at this location did not have access to their homes until late September or early October, and many of those homes remain uninhabitable. For the month of September, the Company temporarily housed most of the Shared Services Center functions, such as cash receipts and disbursements, customer service, contract processing and information technology in Orlando, Florida, in newly-leased and existing Company office space, and temporarily housed other functions such as the executive offices, treasury, accounting, trust administration, human resources, training, communications, marketing, tax and compliance in the Dallas, Texas area in newly-leased office space. As of October 31, 2005, the Company had used approximately $2,500 in cash on hand for hurricane related expenses. Beginning in early October, the executive offices and Shared Services Center were open and operating.

Of the Company’s 231 funeral homes and 144 cemeteries, three funeral homes and five cemeteries, which prior to the hurricane represented approximately four percent of the Company’s annual revenues and approximately

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(18) Hurricane Related Charges—(Continued)

five percent of its annual gross profit, are located in the New Orleans metropolitan area, have suffered substantial damage and are conducting business in temporary facilities until repairs are completed. The Company’s mausoleum construction and sales business, Acme Mausoleum, which primarily operates in southwest Louisiana and Texas, was also negatively impacted by Hurricanes Katrina and Rita. Including Acme Mausoleum, the New Orleans area funeral home and cemetery operations represented approximately six percent of the Company’s annual revenue and gross profit prior to the hurricane. The book value of net property and equipment, receivables, inventory and cemetery property at the affected properties amounted to approximately $24,700 prior to the storms (of which approximately $13,267 was written off as described below).

Hurricanes Katrina, Rita and Wilma also interrupted business in Florida, Alabama, Mississippi and Texas primarily due to evacuations and power-outages. The Company has insurance coverage related to property damage, incremental costs and property operating expenses it incurred due to damage caused by Hurricane Katrina. As of January 31, 2006, the Company had incurred approximately $23,735 (of which $20,897 was incurred as of October 31, 2005) in total expenses related to Hurricane Katrina including the write-off of damaged buildings, equipment and inventory, demolition costs, debris removal, record restoration, general cleanup, temporary living facilities for employees, relocation expenses and other costs. The Company expects insurance proceeds of at least $11,731 currently based on the status of its insurance review, $500 of which had been received as of October 31, 2005 and $10,731 of which was received in the first quarter of 2006. The remaining $500 in insurance proceeds to be received is included in current receivables in the consolidated balance sheet for fiscal year 2006. The net amount of $2,638 ($1,583 after tax, or $.01 per share) is included in the “Hurricane related charges, net” line in the consolidated statement of earnings for fiscal year 2006. A charge of $9,366 in net hurricane related charges was recorded in fiscal year 2005. The Company believes that a significant portion of the loss it experienced may be covered by insurance. When the Company and its insurance carriers agree on the final amount of the insurance proceeds the Company is entitled to, if the proceeds are greater than the loss incurred, then the Company will record any related gain at that time.

(19) Long-term Debt

During the first quarter of fiscal year 2005, the Company completed the refinancing of its senior secured credit facility and recorded a charge for the early extinguishment of debt of $2,651 ($1,723 after tax, or $.02 per share) to write off fees associated with the previous credit facility. For additional information, see Note 16 to the consolidated financial statements of the Company’s 2005 Form 10-K.

(20) Subsequent Events

The Company received notifications from Nasdaq that its incomplete 2005 Third Quarter Report, the delay in filing its 2005 Form 10-K and its incomplete 2004 Form 10-K/A are not in compliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c)(14). The Nasdaq Listing Qualifications Panel granted the Company’s request for an extension of time to file the complete 2005 Third Quarter Report and the 2005 Form 10-K to February 15, 2006. On February 14, 2006, the Company requested an additional extension of time to February 22, 2006 in which to file the 2005 Form 10-K and 2005 Third Quarter Report. The Company also requested an extension of time in which to file the 2004 Form 10-K/A until April 7, 2006. Nasdaq granted these extensions. The Company filed its 2005 Form 10-K on February 17, 2006 and filed the 2005 Third Quarter Report on February 22, 2006.

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

Restatement of Historical Financial Statements

In connection with the filing of the 2005 Form 10-K, we reported that we were restating our consolidated financial statements for fiscal years 2004 and 2003, all the quarters therein and the first three quarters of fiscal year 2005. These restatements have resulted in the restatement of the condensed consolidated statements of earnings and cash flows for the first quarter of fiscal year 2005 included in this Form 10-Q. The restatements are primarily the result of:

	(A)		The incorrect determination of operating and reportable segments and reporting units related to the application of FASB Statement No. 142, “Goodwill and Other Intangible Assets,” (“SFAS No. 142”), which also had the effect of changing the charges recorded for the assets sold as part of our plan initiated in December 2003 to sell a number of businesses, and the net book value of assets held for sale on our balance sheet.

	(B)		Errors identified in revenue recognition of preneed cemetery merchandise and services contracts and recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts.

	(C)		Other miscellaneous adjustments, including adjustments for lease-related accounting practices.

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

Segments and Reporting Units

We re-evaluated our application of FASB Statement No. 131, “Disclosures about Segments of an Enterprise and Related Information” (“SFAS No. 131”), and determined that we had incorrectly identified our operating and reportable segments for all prior periods. We concluded that we had eleven operating and reportable segments, which consisted of a corporate trust management segment and a funeral and cemetery segment for each of five geographic areas: Central, Western, Eastern, Southern – Florida and All Other. Our historical presentation of segment data had consisted of two operating and reportable segments, funeral and cemetery. As part of our strategic planning process, in the fourth quarter of 2005, we organized and revised our operating divisions from four to two and revised our operating and reportable segments. For further discussion of our operating and reportable segments, see Note 10 to the condensed consolidated financial statements included herein.

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

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

Further, the restatement of goodwill on our balance sheet had the effect of changing the net book value of the assets we sold as part of our plan to sell a number of our businesses and the net book value of assets held for sale on our balance sheet.

Deferred Revenue Project

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

The errors to deferred preneed revenue discussed above also resulted in restatements to the amount of preneed selling costs recorded upon the adoption of SAB No. 101, and in subsequent years and also the charge for the 2005 cumulative effect of change in accounting principle related to preneed selling costs adopted effective November 1, 2004. See Note 3(a) to the condensed consolidated financial statements included herein.

The overall impact of the restatements related to the deferred revenue project on net earnings and net earnings per share for the three months ended January 31, 2005 was a decrease in net earnings of $13.6 million (including $11.9 million, or $.11 per share, related to the cumulative effect of change in accounting principle for preneed selling costs), and a decrease in earnings per share of $.12, respectively.

Other Adjustments

As previously disclosed in our Form 10-Q for the second quarter of fiscal year 2005, we reviewed our lease-related accounting practices and determined that certain adjustments related to rent escalations and leasehold improvement amortization were necessary. The cumulative effect of these adjustments for all prior periods amounted to a charge of $1.8 million ($1.1 million after tax, or $.01 per share). We evaluated the materiality of these operating lease adjustments on our financial statements and concluded that the impact of these adjustments was not material. As a result, we recorded the cumulative effect of these prior period adjustments of $1.8 million as non-cash charges to funeral and cemetery costs in the second quarter of fiscal year 2005. Because we have amended our financial statements for the restatements discussed above, we are now required to record the lease adjustments in the periods they were actually incurred.

A summary of the effects of the restatements described above on our condensed consolidated financial statements can be found in Note 1 to the condensed consolidated financial statements included herein.

Overview

We are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of March 1, 2006, we owned and operated 230 funeral homes and 144 cemeteries in 26 states within the United States and Puerto Rico.

We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings and finance charges. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 in our 2005 Form 10-K.

For the first quarter of fiscal year 2006, we had net earnings of $8.4 million, compared to a net loss of $145.3 million for the first quarter of fiscal year 2005. Fiscal year 2005 results include a cumulative effect of change in accounting principle of $153.2 million. Earnings from continuing operations increased $1.0 million to $8.4

million for the first quarter of fiscal year 2006 compared to $7.4 million for the first quarter of fiscal year 2005. Interest expense decreased $2.9 million.

Operating earnings decreased $3.8 million, from $24.1 million in the first quarter of fiscal year 2005 to $20.3 million in the first quarter of fiscal year 2006. Gross profit increased $1.9 million due to an increase in cemetery gross profit resulting primarily from increases in cemetery property sales and perpetual care trust earnings. Excluding the three Louisiana funeral homes damaged by Hurricane Katrina, same-store funeral services performed increased 3.3 percent; including those funeral homes, the increase was 2.4 percent. Average revenue per funeral service for our same-store business also increased. First quarter 2006 operating earnings also reflect an increase of $3.0 million in corporate general and administrative expenses primarily due to increased professional fees associated with our Sarbanes-Oxley Section 404 compliance effort, increased legal and professional fees relating in part to the class action lawsuits, the increased work performed during the first quarter of 2006 pertaining to SEC filings and the deferred revenue project and an increase due to the implementation of SFAS No. 123R, “Share-Based Payment,” of $0.4 million of share-based compensation costs in the first quarter of 2006. We also recorded a $2.6 million charge related to Hurricane Katrina.

Cash flow from operations increased from ($1.9) million in the first quarter of fiscal year 2005 to $27.3 million in the first quarter of fiscal year 2006. The increase is primarily due to trust withdrawals associated with the deferred revenue project, the timing of interest payments and the timing of customer collections. These increases in cash flow were partially offset by $2.1 million of cash outflows in excess of insurance proceeds received related to Hurricane Katrina.

For the first quarter of fiscal year 2006, we achieved an 8.7 percent increase in preneed funeral sales and a 10.4 percent increase in gross cemetery property sales.

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 2(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 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2005 Form 10-K. There have been no changes to our critical accounting policies since the filing of our 2005 Form 10-K.

Results of Operations

The following discussion segregates the financial results of our continuing operations into our various segments, grouped by our funeral and cemetery operations. For a discussion of discontinued operations, see Note 13 to the condensed consolidated financial statements included herein. For a discussion of our segments, see Note 10 to the consolidated financial statements included herein. As there have been no material acquisitions or construction of new locations in fiscal years 2006 and 2005, results from continuing operations reflect those of same-store locations.

Three Months Ended January 31, 2006 Compared to Three Months Ended January 31, 2005—Continuing Operations

Funeral Operations


	Three Months Ended
	January 31,				Increase
	2006		2005		(Decrease)
			(In millions)
			(Restated)
Funeral Revenue:
Eastern Division	$	30.2	$	29.5	$	.7
Western Division		37.0		35.7		1.3
Corporate Trust Management⁽¹⁾		4.6		4.5		.1

Total Funeral Revenue	$	71.8	$	69.7	$	2.1


Funeral Costs:
Eastern Division	$	24.6	$	23.7	$	.9
Western Division		29.3		28.1		1.2
Corporate Trust Management⁽¹⁾		.1		.1		—

Total Funeral Costs	$	54.0	$	51.9	$	2.1


Funeral Gross Profit:
Eastern Division	$	5.6	$	5.8	$	(.2	)
Western Division		7.7		7.6		.1
Corporate Trust Management⁽¹⁾		4.5		4.4		.1

Total Funeral Gross Profit	$	17.8	$	17.8	$	—

Same-Store Analysis⁽²⁾


	Change in Average			Change in Same-Store			Cremation Rate
	Revenue Per Call			Funeral Services			2006			2005
Eastern Division		1.6	%		1.3	%		32.6	%		29.3	%
Western Division		1.7	%		3.2	%		43.2	%		42.8	%
Total		1.3	%		2.4	%		38.7	%		37.0	%


⁽¹⁾		Corporate trust management consists of trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 4 and 7 to the consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended January 31, 2006 and 2005 were $1.3 million and $1.2 million, respectively, and funeral trust earnings for the three months ended January 31, 2006 and 2005 were $3.3 million.

⁽²⁾		On August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and severely damaged three of our funeral homes located in that area, which is part of our Western division. This same-store analysis includes these three funeral homes which had revenue of $1.5 million and $2.2 million for the three months ended January 31, 2006 and 2005, respectively, and performed 359 and 476 funeral services in the first quarter of 2006 and 2005, respectively. Excluding these three funeral homes, the increase in average revenue per call for the Western division and the Company was 2.6 percent and 1.7 percent, respectively, and the change in same-store funeral services for the Western division and the Company was 4.8 percent and 3.3 percent, respectively.

Consolidated Operations — Funeral

Funeral revenue from continuing operations increased $2.1 million, or 3.0 percent, for the three months ended January 31, 2006, compared to the corresponding period in 2005. The increase in funeral revenue was primarily due to a 2.4 percent increase in the number of same-store funeral services performed, or 384 events out of 15,727 total same-store funeral services performed. Excluding the three Louisiana funeral homes damaged by Hurricane Katrina, same-store funeral services performed increased 3.3 percent.

We also experienced an increase in the average revenue per funeral service performed by our same-store businesses. Our same-store businesses achieved a 4.1 percent increase in the average revenue per traditional funeral service and a 0.2 percent increase in the average revenue per cremation service. The increase in the average revenue per traditional funeral service was offset by an increase in the proportion of non-traditional funeral services, including cremations, which experienced a smaller increase in average revenue than the traditional services, and resulted in an overall 1.3 percent increase in the average revenue per funeral service for our same-store businesses. We believe the primary factors that contributed to the increases in our average revenue per traditional and cremation services were normal inflationary price increases, more effective merchandising and packaging, our focus on training, customized funeral planning and personalization and the funeral home incentive compensation plan.

Funeral gross profit margin from continuing operations decreased from 25.5 percent in the first quarter of fiscal year 2005 to 24.8 percent in the first quarter of fiscal year 2006. The decrease is primarily due to an increase in funeral home staffing levels and an increase in preneed selling costs. In our efforts to focus on customer service and in anticipation of growing our core funeral businesses up to 2 percent in fiscal year 2006, we increased staffing levels in funeral operations during the first quarter of 2006, resulting in increased payroll expenses when compared to prior year. Additionally, as a result of the 8.7 percent increase in preneed funeral sales occurring in the first quarter of 2006, the investment in preneed selling costs during the quarter placed some downward pressure on funeral gross profit, as these preneed selling costs are expensed as incurred. The increased preneed funeral sales are deferred into our backlog until the products and services are delivered. The cremation rate for our same-store operations was 38.7 percent for the three months ended January 31, 2006 compared to 37.0 percent for the corresponding period in 2005.

Segment Discussion — Funeral

Funeral revenue in the Eastern division and Western division funeral segments increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 1.3 percent and 3.2 percent, respectively, coupled with an increase in the average revenue per funeral service in the same-store businesses of 1.6 percent and 1.7 percent, respectively. Excluding the three Louisiana funeral homes damaged by Hurricane Katrina, the increase in the number of funeral services performed and the increase in average revenue per call in the Western division funeral segment were 4.8 percent and 2.6 percent, respectively. Funeral revenue in the corporate trust management segment increased primarily due to the increase in trust management fees.

Funeral gross profit margin for the Western division and Eastern division funeral segments decreased primarily due to increased preneed selling costs and funeral staffing levels discussed above. As demonstrated in the table above, the same-store cremation rate increased for the Western division and Eastern division funeral segments.

Cemetery Operations


	Three Months Ended
	January 31,				Increase
	2006		2005		(Decrease)
			(In millions)
			(Restated)
Cemetery Revenue:
Eastern Division	$	32.7	$	29.8	$	2.9
Western Division		19.5		20.3		(.8	)
Corporate Trust Management⁽¹⁾		2.6		2.7		(.1	)

Total Cemetery Revenue	$	54.8	$	52.8	$	2.0


Cemetery Costs:
Eastern Division	$	27.6	$	27.0	$	.6
Western Division		15.8		16.3		(.5	)
Corporate Trust Management⁽¹⁾		.1		.1		—

Total Cemetery Costs	$	43.5	$	43.4	$	.1


Cemetery Gross Profit:
Eastern Division	$	5.1	$	2.8	$	2.3
Western Division		3.7		4.0		(.3	)
Corporate Trust Management⁽¹⁾		2.5		2.6		(.1	)

Total Cemetery Gross Profit	$	11.3	$	9.4	$	1.9


⁽¹⁾		Corporate trust management consists of trust management fees and cemetery merchandise and service trust

earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 7 to the consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended January 31, 2006 and 2005 were $1.2 million, and cemetery trust earnings for the three months ended January 31, 2006 and 2005 were $1.4 million and $1.5 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.

Consolidated Operations — Cemetery

Cemetery revenue from continuing operations increased $2.0 million, or 3.8 percent, for the three months ended January 31, 2006, compared to the corresponding period in 2005, primarily due to increases in cemetery property sales and perpetual care trust earnings, partially offset by a decrease in construction during the year on various cemetery projects. Revenue related to the cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs. Gross cemetery property sales increased 10.4 percent in the first quarter of fiscal year 2006 compared to the first quarter of fiscal year 2005 from $22.2 million to $24.5 million.

We experienced an annualized average return, excluding unrealized gains and losses, of 4.9 percent in our perpetual care trusts for the quarter ended January 31, 2006 resulting in revenue of $2.6 million, compared to 3.8 percent for the corresponding period in 2005 resulting in revenue of $1.1 million.

Cemetery gross profit margin from continuing operations increased from 17.8 percent in the first quarter of fiscal year 2005 to 20.6 percent in the first quarter of fiscal year 2006. The overall increase resulted from increased revenues as discussed above.

Segment Discussion — Cemetery

Cemetery revenue in the Eastern division segment increased primarily due to an increase in preneed property sales and an increase in perpetual care trust earnings. Cemetery revenue in the Western division segment decreased primarily due to a decrease in merchandise deliveries and a decrease in construction during the year on various cemetery development projects. Revenue related to the sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs.

Cemetery gross profit margin for the Eastern division cemetery segment increased primarily due to increased cemetery revenue as discussed above, and cemetery gross profit margin for the Western division cemetery segment decreased due to the decrease in revenue discussed above.

Discontinued Operations

The operating results of those businesses sold in fiscal years 2005 and 2006 are reported in the discontinued operations section of the consolidated statements of earnings. There were no businesses sold in the first quarter of 2006. Included in discontinued operations for the three months ended January 31, 2005 were gains on dispositions and impairment (losses), net of $0.5 million. Revenues for the three months ended January 31, 2005 were $0.5 million.

Other

Corporate general and administrative expenses for the three months ended January 31, 2006 increased $3.0 million compared to the same period in 2005 due to increased professional fees associated with our Sarbanes-Oxley Section 404 compliance effort, increased legal and professional fees relating in part to the class action law suits and the increased work performed during the first quarter of 2006 pertaining to SEC filings and the deferred revenue project. Although we expect professional fees in fiscal year 2006 to be significantly greater than fiscal year 2005, we do not expect to sustain the level of professional fees we incurred in the first quarter of 2006. We also recorded

$0.4 million in share-based compensation costs in the first quarter of 2006 due to the adoption of SFAS No. 123R, as discussed in Note 2(e) to the condensed consolidated financial statements included herein.

In July 2005, we named a new Chief Operating Officer and announced a reorganization of our divisions from four to two, effective for the fourth quarter of fiscal year 2005. As a result of these changes, we recorded charges of $1.5 million in fiscal year 2005 and $0.2 million for the three months ended January 31, 2006. These charges are presented in the “Separation charges” line item in the consolidated statements of earnings.

For the three months ended January 31, 2006, we had recorded net expenses of $2.6 million related to Hurricane Katrina. For additional information, see Note 18 to the condensed consolidated financial statements included herein.

Total depreciation and amortization and depreciation and amortization from continuing operations were $5.2 million for the first quarter of fiscal year 2006 compared to $5.3 million for the same period in 2005.

Interest expense decreased $2.9 million to $7.5 million for the first quarter of fiscal year 2006 compared to $10.4 million for the same period in 2005 primarily due to a 259 basis-point decrease in the average interest rate during the period resulting from debt refinancings occurring in 2005, combined with a $1.4 million decrease in average debt outstanding.

During the fourth quarter of fiscal year 2003, we identified a number of small businesses to close or sell, mostly funeral homes, and determined that their carrying value exceeded their fair values. For the three months ended January 31, 2006 and 2005, we reported net gains on dispositions and impairment (losses) of $0.3 million and $0.9 million in continuing operations, respectively. These charges are presented in the “Gains on dispositions and impairment (losses), net” line item in the condensed consolidated statements of earnings.

Other operating income, net, was $0.9 million and $0.2 million for the three months ended January 31, 2006 and 2005, respectively. The increase in other operating income, net, was primarily due to a gain related to the sale of undeveloped cemetery land in the first quarter of 2006.

On May 31, 2005, we changed our method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral and cemetery service and merchandise sales. We applied this change in accounting principle effective November 1, 2004. We changed our accounting for preneed selling costs to expense such costs as incurred. As of November 1, 2004, we recorded a cumulative effect of change in accounting principle of $254.2 million ($153.2 million after tax, or $1.40 per diluted share), which represents the cumulative balance of deferred preneed selling costs in the deferred charges line on the condensed consolidated balance sheet at the time of the change. For additional information, see Note 3(a) to the condensed consolidated financial statements included herein.

The effective tax rate for our continuing operations for the three months ended January 31, 2006 was 36.8 percent compared to 34.2 percent for the same period in 2005. The change was primarily due to the greater impact of the dividend exclusion on a reduced level of book income in 2005. The dividend exclusion relates to dividends received for investments in certain trusts for which we recognize earnings for tax purposes as earned by the trust.

As of January 31, 2006, our outstanding debt totaled $409.1 million. Of the total debt outstanding as of January 31, 2006, approximately 49 percent was subject to fixed rates averaging 7.7 percent, and 51 percent was subject to short-term variable rates averaging approximately 6.0 percent. The average fixed rate includes the 1.50 percent additional interest we are required to pay until the registration statement related to our 6.25 percent senior notes is filed and declared effective by the SEC. On November 19, 2004, we completed the refinancing of our senior secured credit facility and recorded a charge for early extinguishment of debt of $2.7 million ($1.7 million after tax, or $.02 per share) to write off fees associated with the previous credit facility as of January 31, 2005.

Preneed Sales into and Deliveries out of the Backlog

Preneed funeral sales increased 8.7 percent during the first quarter of 2006 compared to the corresponding period in 2005.

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 added $40.5 million in preneed sales to our funeral and cemetery merchandise and services backlog (including $17.3 million related to insurance-funded preneed funeral contracts) during the three months ended January 31, 2006 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to sales of $38.2 million (including $16.3 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2005. Revenues recognized on deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $37.2 million for the three months ended January 31, 2006, compared to $36.1 million for the corresponding period in 2005, resulting in net additions to the backlog of $3.3 million and $2.1 million for the three months ended January 31, 2006 and 2005, respectively.

Liquidity and Capital Resources

Cash Flow

Our operations provided cash of $27.3 million for the three months ended January 31, 2006, compared to using cash of $1.9 million for the corresponding period in 2005. The increase is primarily due to cash inflows of $11.0 million for trust withdrawals associated with the deferred revenue project in the first quarter of 2006, the timing of interest payments and timing of customer collections. Prior to the debt refinancing that occurred in February 2005, we made interest payments in January and July of each year which correspond to our first and third fiscal quarters. After the February 2005 debt refinancing, we make interest payments in February and August of each year which correspond to our second and fourth fiscal quarters. The timing of interest payments accounted for approximately $14 million of the increase in operating cash flow. Additionally, operating cash in the first quarter of 2006 was partially impacted by an increase in customer collections in the quarter following the delay in collections processing during the fourth quarter of 2005 due to Hurricane Katrina. These increases in cash flow were partially offset by $2.1 million of cash outflows in excess of insurance proceeds received related to Hurricane Katrina. The timing of receipt of insurance proceeds is not in line with the timing of cash spending related to Hurricane Katrina.

Our investing activities resulted in a net cash inflow of $0.3 million for the three months ended January 31, 2006, compared to a net cash outflow of $1.0 million for the comparable period in 2005. In the first quarter of 2006, there was a net cash inflow of $4.5 million for insurance proceeds related to hurricane damaged properties. Net asset sale proceeds were less than $0.1 million for the three months ended January 31, 2006 compared to $5.4 million for the same period in 2005. For the three months ended January 31, 2006, capital expenditures amounted to $4.3 million, which included $4.3 million for maintenance capital expenditures compared to capital expenditures of $6.5 million in the same period in 2005, which included $3.2 million for maintenance capital expenditures and $3.3 million related to a building we purchased which was previously leased.

Our financing activities resulted in a net cash outflow of $3.5 million for the three months ended January 31, 2006, compared to $6.5 million for the comparable period in 2005. The change was due primarily to debt repayments of $0.9 million in the three months ended January 31, 2006 compared to net debt repayments of $14.3 million in the comparable period of 2005. Stock option exercises in the first quarter of 2005 resulting in issuances of common stock amounted to $10.4 million. There were no stock option exercises in the first quarter of 2006.

Contractual Obligations and Commercial Commitments

As of January 31, 2006, our outstanding debt balance was $409.1 million. The following table details our known future cash payments (in millions) related to various contractual obligations as of January 31, 2006.


	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⁾	$	409.1	$	3.1	$	4.9	$	4.4	$	396.7
Interest on long-term debt⁽²⁾		171.7		27.5		51.9		51.2		41.1
Operating lease obligations⁽³⁾		33.9		3.6		6.9		4.9		18.5
Non-competition and other agreements⁽⁴⁾		5.8		1.9		3.0		.6		.3

	$	620.5	$	36.1	$	66.7	$	61.1	$	456.6


⁽¹⁾		See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of January 31, 2006.

⁽²⁾		Includes contractual interest payments for our revolving credit facility, Term Loan B, senior notes and third-party debt. The interest on the revolving credit facility and Term Loan B was calculated based on interest rates in effect as of January 31, 2006.

⁽³⁾		Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 13 years, except for six leases that expire between 2032 and 2039. Our future minimum lease payments as of January 31, 2006 are $3.6 million, $3.8 million, $3.1 million, $2.7 million, $2.2 million, and $18.5 million for the years ending October 31, 2006, 2007, 2008, 2009, 2010 and later years, respectively.

⁽⁴⁾		We have entered into non-competition agreements with prior owners and key employees of acquired subsidiaries that expire through 2012. This category also includes separation pay related to former executive officers.

In connection with the issuance of the 6.25 percent senior notes, we entered into a registration rights agreement that requires that a registration statement be filed and declared effective by the SEC, and that an exchange offer be conducted providing for the exchange of the unregistered notes for similar registered notes, all within specified times. So far, we have been unable to cause the required registration statement to become effective and therefore are required to pay additional interest to the note holders until the default is cured. Additional interest began to accrue on June 12, 2005 at a rate of 0.50 percent per annum on the principal amount of the notes for a period of 90 days. The additional interest increases 0.50 percent for each 90-day period thereafter so long as the default exists, up to a maximum increase of 1.50 percent per annum. The additional interest is payable at the regular interest payment dates. The additional interest increased to 1.00 percent on September 11, 2005 and increased to 1.50 percent on December 11, 2005. Total additional interest incurred as of January 31, 2006 was $1.2 million.

As of January 31, 2006, our outstanding debt balance was $409.1 million, consisting of $207.5 million in Term Loan B, $200.0 million of 6.25 percent senior notes, and $1.6 million of other debt. There were no amounts drawn on the revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of January 31, 2006.


							Other, Principally
	Revolving						Seller Financing
Fiscal Year Ending	Credit		Term		Senior		of Acquired
October 31,	Facility		Loan B		Notes		Operations		Total
2006	$	—	$	1.6	$	—	$	.7	$	2.3
2007		—		2.2		—		.6		2.8
2008		—		2.2		—		.2		2.4
2009		—		2.2		—		—		2.2
2010		—		2.2		—		—		2.2
Thereafter		—		197.1		200.0		.1		397.2

Total long-term debt	$	—	$	207.5	$	200.0	$	1.6	$	409.1

We are required to maintain a bond of $41.1 million to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida. We substituted a bond to guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. We believe that cash flow from operations will be sufficient to cover our estimated cost of providing the prearranged services and products in the future. During the first quarter of 2006, we posted an $11.0 million letter of credit in order to secure this bond. In addition, we have $12.9 million of other outstanding letters of credit posted during the normal course of business.

As of January 31, 2006, there were no amounts drawn on our $125.0 million revolving credit facility. As of January 31, 2006, our availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit and remaining bond obligation, was $71.1 million.

On March 28, 2005, we announced a new $30.0 million stock repurchase program. Repurchases under the new program are limited to our Class A common stock and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending on market conditions and other factors. Since the inception of this program through January 31, 2006, we have repurchased and retired 1,200,000 shares of our Class A common stock at an average price of $6.64 per share.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of January 31, 2006 consist of the following items:

	(1)		the $41.1 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 21 to the consolidated financial statements in our 2005 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 consolidated balance sheets, and are discussed in Note 3(i) to the consolidated financial statements in our 2005 Form 10-K.

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges was as follows:

Three Months

Ended

Years Ended October 31,

January 31, 2006

2005

2004

2003

2002

2001

(Restated)

2.67⁽¹⁾

1.36

⁽²⁾⁽⁶⁾

1.98

⁽³⁾

1.08

⁽⁴⁾

1.27

⁽⁵⁾⁽⁶⁾

—

⁽⁶⁾⁽⁷⁾


⁽¹⁾		Pretax earnings for the three months ended January 31, 2006 include $2.6 million in net hurricane related charges, $0.3 million of gains on dispositions and impairment (losses), net and $0.2 million in separation charges.

⁽²⁾		Pretax earnings for fiscal year 2005 include a charge of $9.4 million for expenses related to Hurricane Katrina, a charge of $1.5 million for separation charges related to the July 2005 restructuring of our divisions, $1.3 million of gains on dispositions and impairment (losses), net and $32.8 million for the loss on early extinguishment of debt related to the 2005 debt refinancings.

⁽³⁾		Pretax earnings for fiscal year 2004 includes separation charges of $3.4 million for costs related to workforce reductions and separation pay to a former executive officer and ($0.2) million in gains on dispositions and impairment (losses), net.

⁽⁴⁾		Pretax earnings for fiscal year 2003 include a charge of $11.3 million for the loss on early extinguishment of debt in connection with redemption of the ROARS, a noncash charge of $10.2 million for long-lived asset impairment and a charge of $2.5 million for separation payments to former executive officers.

⁽⁵⁾		Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million in connection with the write-down of assets held for sale.

⁽⁶⁾		Excludes the cumulative effect of change in accounting principles.

⁽⁷⁾		Pretax earnings for fiscal year 2001 include a noncash charge of $269.2 million in connection with the write-down of assets held for sale and other charges and a $9.1 million charge for the loss on early extinguishment of debt. As a result of these charges, our earnings for fiscal year 2001 were insufficient to cover our fixed charges, and an additional $229.9 million in pretax earnings would have been required to eliminate the coverage deficiency.

For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness and the portion of rental expense that management believes to be representative of the interest component of rental expense.

Recent Accounting Standards

See Note 3 to the condensed consolidated financial statements included herein.

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is presented in Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31, 2005, filed with the Securities and Exchange Commission on February 17, 2006. The following disclosure discusses only those instances in which the market risk has changed by more than 10 percent from the annual disclosure.

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

Interest

We have entered into various fixed-rate and variable-rate debt obligations, which are detailed in Note 16 to our consolidated financial statements included in our 2005 Form 10-K and in the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

Our variable-rate debt consists of our Term Loan B and revolving credit facility. As of January 31, 2006 and October 31, 2005, the carrying value of our Term Loan B was $209.7 million and $210.2 million, respectively, compared to a fair value of $211.9 million and $213.1 million, respectively. As of January 31, 2006 and October 31, 2005, there were no amounts drawn on the revolving credit facility. As of January 31, 2006, each approximate 10 percent, or 70 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $1.0 million in our pretax earnings. As of October 31, 2005, each approximate 10 percent, or 65 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $1.1 million in our pretax earnings. Fair value was determined using quoted market prices, where applicable, or future cash flows discounted at market rates for similar types of borrowing arrangements.

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

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 under the Securities Exchange Act of 1934, as amended (the “Exchange Act”), is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s (“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.

The Company’s management carried out an evaluation under the supervision and with the participation of the Company’s management, including the CEO and CFO, as of January 31, 2006 of the effectiveness of the design and operation of the Company’s disclosure controls and procedures, as such term is defined under Rule 13a-15(e) under the Exchange Act. Based upon, and as of the date of this evaluation, our CEO and CFO concluded that our disclosure controls and procedures were not effective because of the material weaknesses discussed below. Notwithstanding the material weaknesses discussed below, the Company’s management has concluded that the consolidated financial statements included in this Quarterly Report on Form 10-Q fairly present in all material respects the Company’s financial condition, results of operations and cash flows for the periods presented in conformity with generally accepted accounting principles.

A material weakness is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement of the annual or interim financial statements will not be prevented or detected. We identified the following material weaknesses in our assessment of the effectiveness of internal control over financial reporting as of January 31, 2006:

	1.		The Company did not maintain effective controls over revenue recognition related to preneed cemetery merchandise and services contracts. Specifically, the Company did not maintain effective controls over the reconciliation of recorded revenues to revenues based on physical delivery of preneed cemetery merchandise to ensure completeness and accuracy of recorded preneed cemetery merchandise revenue and deferred preneed cemetery revenue. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for all annual and interim periods beginning with fiscal year 2001, the period in which the Company adopted Staff Accounting Bulletin No. 101 (“SAB 101”) “Revenue Recognition in Financial Statements”, through fiscal year 2004 and the first three quarters of fiscal year 2005. Prior to the adoption of SAB 101, the Company recognized preneed cemetery merchandise revenues at the time a contract was entered into with a customer. This control deficiency could result in the misstatement of cemetery merchandise revenues and of deferred preneed cemetery revenues that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness.

	2.		The Company did not maintain effective controls over recognition of realized trust earnings on preneed cemetery and funeral contracts. Specifically, the Company did not maintain effective controls to recognize realized net trust earnings upon the delivery of the related preneed cemetery and funeral merchandise and performance of preneed funeral services to ensure accuracy of recorded realized trust earnings and deferred trust earnings. This control deficiency resulted in the restatement of the Company’s consolidated financial statements for all annual and interim periods from fiscal year 2001 through fiscal year 2004 and the first three quarters of fiscal year 2005. This control deficiency could result in the misstatement of cemetery and funeral revenues and of the deferred revenue associated with preneed cemetery and preneed funeral contracts sold on a preneed basis that would result in a material misstatement to annual or interim financial statements that would not be prevented or detected. Accordingly management determined that this control deficiency represents a material weakness.

As a result of the material weaknesses described above, the Company has concluded that our disclosure controls and procedures were not effective as of January 31, 2006.

Plan for Remediation

Management, with the oversight of the Audit Committee, has been addressing the material weaknesses described above in our internal control over financial reporting and its impact over disclosure controls and procedures and is committed to effectively remediating these deficiencies as expeditiously as possible. We have devoted significant time and resources to the remediation efforts having completed a detailed review and assessment of nearly 700,000 contracts. Also, we are in the process of enhancing our automated delivery systems over cemetery merchandise and are establishing a team to design and implement an improved system for tracking and reporting trust earnings. Further, the Company is undertaking steps to improve its employee training programs at both cemetery and funeral locations which will include reiteration to the appropriate personnel of the importance of performing their responsibilities in accordance with Company policies and procedures.

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2006 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 8 to the condensed consolidated financial statements included herein.

In addition to the matters in Note 8, we and certain of our subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, management does 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, management believes 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 the 2005 Form 10-K.

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

We have a stock repurchase program under which we are authorized to invest up to $30.0 million in the repurchase of our common stock. As of January 31, 2006, we had approximately $22.0 million remaining available under the plan. The table below provides information about purchases made by or on behalf of us, or of any “affiliated purchaser” as defined in SEC rules, of our equity securities registered pursuant to Section 12 of the Exchange Act, for each month during the first quarter of fiscal year 2006, in the format required by SEC rules. As indicated by the table, there were no such repurchases during the first quarter of fiscal year 2006.

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

Issuer Purchases of Equity Securities


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

December 1, 2005 through December 31, 2005		—	$	—		—	$	22,032,533

January 1, 2006 through January 31, 2006		—	$	—		—	$	22,032,533


Total		—	$	—		—	$	22,032,533


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

Item 5. Other Information

(a) The Company has an Employment Agreement with each of its executive officers that specifies the basis on which an annual bonus will be paid (the “Employment Agreements”). The Employment Agreements provide that for fiscal year 2005, no bonus would be earned unless the Company achieved a threshold earnings per share level. Although the Company’s earnings per share for fiscal year 2005 did not reach the threshold level, the Compensation Committee of the Company’s Board of Directors determined on December 21, 2005 to award each executive officer named in the Summary Compensation Table in the Company’s 2006 proxy statement a bonus of $75,000 to be paid one-half in cash and one-half in Company common stock. Other executive officers of the Company were also awarded bonuses of $25,000 or $75,000. The bonuses were awarded in recognition of the extraordinary efforts of the executive officers in leading the Company through the effects of Hurricane Katrina and after considering each officer’s individual performance.

Item 6. Exhibits

3.1		Amended and Restated Articles of Incorporation of the Company, as amended and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2003)

3.2		By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 22, 2004)

4.1		See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock

4.2		Specimen of Class A common stock certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991)

4.3		Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form 8-A dated November 3, 1999)

4.4		Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender, Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 1, 2003) and Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004)

4.5		Amended and Restated Credit Agreement dated November 19, 2004 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 dated November 22, 2004)

4.6		Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001) and First Supplemental Indenture, dated as of February 2, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 2, 2005) and Second Supplemental Indenture, dated as of February 28, 2005 by and among The Lincoln Memorial Park Cemetery Association, a subsidiary of Stewart Enterprises, Inc., Stewart Enterprises, Inc., the

		other Guarantors and U.S. Bank National Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005)

4.7		Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-4 dated August 14, 2001)

4.8		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 dated February 11, 2005)

4.9		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 dated February 11, 2005)

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer

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

32		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and Chief Financial Officer

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

SIGNATURES

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


		STEWART ENTERPRISES, INC.

March 13, 2006		/s/ THOMAS M. KITCHEN Thomas M. Kitchen
		Executive Vice President and
		Chief Financial Officer

March 13, 2006		/s/ MICHAEL G. HYMEL Michael G. Hymel
		Vice President
		Corporate Controller
		Chief Accounting Officer

Exhibit Index

Exhibit No.		Description

3.1		Amended and Restated Articles of Incorporation of the Company, as amended and restated as of May 7, 2003 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2003)

3.2		By-laws of the Company, as amended and restated as of November 19, 2004 (incorporated by reference to Exhibit 3.1 to the Company’s Current Report on Form 8-K dated November 22, 2004)

4.1		See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock

4.2		Specimen of Class A common stock certificate (incorporated by reference to Exhibit 4.2 to Amendment No. 3 to the Company’s Registration Statement on Form S-1 (Registration No. 33-42336) filed with the Commission on October 7, 1991)

4.3		Rights Agreement, dated as of October 28, 1999, between Stewart Enterprises, Inc. and ChaseMellon Shareholder Services, L.L.C. as Rights Agent (incorporated by reference to Exhibit 1 to the Company’s Form 8-A dated November 3, 1999)

4.4		Credit Agreement dated June 29, 2001 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent and as a Lender, Deutsche Banc Alex. Brown, Inc., as Syndication Agent, Bankers Trust Company, as a Lender and the other Lenders party thereto from time to time (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated June 29, 2001) and Amendment No. 1 to the Credit Agreement dated April 25, 2003 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated May 1, 2003) and Amendment No. 2 to the Credit Agreement dated February 18, 2004 (incorporated by reference to Exhibit 4.4 to the Company’s Quarterly Report on Form 10-Q for the quarter ended January 31, 2004)

4.5		Amended and Restated Credit Agreement dated November 19, 2004 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 dated November 22, 2004)

4.6		Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001) and First Supplemental Indenture, dated as of February 2, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, supplementing the Indenture (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated February 2, 2005) and Second Supplemental Indenture, dated as of February 28, 2005 by and among The Lincoln Memorial Park Cemetery Association, a subsidiary of Stewart Enterprises, Inc., Stewart Enterprises, Inc., the

		other Guarantors and U.S. National Bank Association, as trustee (incorporated by reference to Exhibit 4.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2005)

4.7		Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-4 dated August 14, 2001)

4.8		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 dated February 11, 2005)

4.9		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 dated February 11, 2005)

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer

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

32		Certifications pursuant to Section 906 of the Sarbanes-Oxley Act of Kenneth C. Budde, President and Chief Executive Officer, and Thomas M. Kitchen, Executive Vice President and Chief Financial Officer

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Stewart Enterprises (STEI) Inactive 10-Q2006 Q1 Quarterly report

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