Stewart Enterprises 10Q/A 2005 Q2 Quarterly report (amended)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q/A

(Amendment No. 1)


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

For the quarterly period ended April 30, 2005


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

For the transition period from to

Commission File Number: 1-15449

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)


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


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

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

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filero Accelerated filerþ Non-accelerated filero

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

The number of shares of the Registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of May 31, 2005, was 106,143,977 and 3,555,020, respectively.

EXPLANATORY NOTE

This Amendment No. 1 to the Form 10-Q for the quarter ended April 30, 2005 reflects all adjustments related to operating and reportable segments and reporting units, the deferred revenue project and other miscellaneous adjustments including adjustments for lease-related accounting practices. See below for further discussion of these adjustments.

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.

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.

For further discussion of the restatements related to these matters, see Note 1 to the condensed consolidated financial statements included herein. See Part I, Item 4 included herein for a discussion of material weaknesses related to controls over the determination of operating and reportable segments and reporting units in our internal control over financial reporting as of April 30, 2005.

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 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 and fiscal year 2000. Deferred realized trust earnings are included in deferred preneed funeral revenue and deferred preneed cemetery revenue prior to recognition as revenues. The adjustments impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2000 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) to the condensed consolidated financial statements included herein for information on the change in accounting for preneed selling costs.

The overall impact of the restatement related to the deferred revenue project on net earnings and net earnings per share for the three months ended April 30, 2005 and 2004 was a decrease in net earnings of $1.9 million and $3.6 million, respectively, and a decrease in diluted earnings per share of $.01 and $.03, respectively. The overall impact of the restatement related to the deferred revenue project for the six months ended April 30, 2005 and 2004 was a decrease in net earnings of $15.5 million (including $11.9 million, or $.11 per diluted share, related to the cumulative effect of change in accounting principle for preneed selling costs) and $6.6 million, respectively, and a decrease in earnings per diluted share of $.14 and $.06, respectively. See Note 1 to the condensed consolidated financial statements included herein for information on the restatements. See Part I, Item 4 included herein for a discussion of the material weaknesses related to our controls over revenue recognition associated with preneed cemetery merchandise and service contracts and recognition of realized trust earnings on preneed cemetery and funeral contracts in our internal control over financial reporting as of April 30, 2005.

Other Adjustments

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 are amending our financial statements for the restatements discussed above, we have recorded the lease adjustments in the periods they were actually incurred. In this filing, we removed the cumulative effect of this adjustment of $1.8 million ($1.1 million after tax). We also recorded other immaterial miscellaneous adjustments. The effects of these adjustments are included in Note 1 to the condensed consolidated financial statements included herein.

Certain reclassifications have been made to the 2004 and 2005 condensed consolidated financial statements. All businesses sold in fiscal years 2004 and 2005 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented. For further information, see Notes 2(t) and 13.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX


		Page
Part I.	Financial Information

	Item 1. Financial Statements (Unaudited)

	Condensed Consolidated Statements of Earnings — Three Months Ended April 30, 2005 and 2004	5

	Condensed Consolidated Statements of Earnings — Six Months Ended April 30, 2005 and 2004	6

	Condensed Consolidated Balance Sheets — April 30, 2005 and October 31, 2004	7

	Condensed Consolidated Statement of Shareholders’ Equity — Six Months Ended April 30, 2005	9

	Condensed Consolidated Statements of Cash Flows — Six Months Ended April 30, 2005 and 2004	10

	Notes to Condensed Consolidated Financial Statements	11

	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	65

	Item 3. Quantitative and Qualitative Disclosures About Market Risk	82

	Item 4. Controls and Procedures	82

Part II.	Other Information

	Item 1. Legal Proceedings	85

	Item 2. Unregistered Sales of Equity Securities and Use of Proceeds	85

	Item 4. Submission of Matters to a Vote of Security Holders	85

	Item 5. Other Information	86

	Item 6. Exhibits	86

	Signatures	88
Calculation of Ratio of Earnings to Fixed Charges
Certification pursuant to Section 302
Certification 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 April 30,
	2005			2004
	(Restated)			(Restated)
	(Note 1)			(Note 1)
Revenues:
Funeral	$	74,425		$	69,643
Cemetery		58,145			54,795

		132,570			124,438

Costs and expenses:
Funeral		54,297			50,433
Cemetery		45,048			42,821

		99,345			93,254

Gross profit		33,225			31,184
Corporate general and administrative expenses		(4,582	)		(4,621	)
Separation charges (Note 14)		—			(138	)
Gains on dispositions and impairment (losses), net (Note 13)		359			(853	)
Other operating income, net		259			511

Operating earnings		29,261			26,083
Interest expense		(6,671	)		(11,953	)
Loss on early extinguishment of debt (Note 15)		(30,057	)		—
Investment and other income, net		112			57

Earnings (loss) from continuing operations before income taxes		(7,355	)		14,187
Income tax expense (benefit)		(2,682	)		5,435

Earnings (loss) from continuing operations		(4,673	)		8,752

Discontinued operations (Note 13):
Earnings (loss) from discontinued operations before income taxes		(151	)		1,440
Income tax expense (benefit)		93			(236	)

Earnings (loss) from discontinued operations		(244	)		1,676


Net earnings (loss)	$	(4,917	)	$	10,428


Basic earnings (loss) per common share:
Earnings (loss) from continuing operations	$	(.04	)	$	.08
Earnings from discontinued operations		—			.02

Net earnings (loss)	$	(.04	)	$	.10


Diluted earnings (loss) per common share:
Earnings (loss) from continuing operations	$	(.04	)	$	.08
Earnings from discontinued operations		—			.02

Net earnings (loss)	$	(.04	)	$	.10


Weighted average common shares outstanding (in thousands):
Basic		109,506			107,438

Diluted		109,506			108,400


Dividends declared per common share	$	.025		$	—

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Six Months Ended April 30,
	2005			2004
	(Restated)			(Restated)
	(Note 1)			(Note 1)
Revenues:
Funeral	$	144,141		$	142,415
Cemetery		110,997			107,193

		255,138			249,608

Costs and expenses:
Funeral		106,215			102,767
Cemetery		88,456			83,723

		194,671			186,490

Gross profit		60,467			63,118
Corporate general and administrative expenses		(8,798	)		(8,534	)
Separation charges (Note 14)		—			(2,131	)
Gains on dispositions and impairment (losses), net (Note 13)		1,237			(550	)
Other operating income, net		498			948

Operating earnings		53,404			52,851
Interest expense		(17,047	)		(24,474	)
Loss on early extinguishment of debt (Note 15)		(32,708	)		—
Investment and other income, net		220			32

Earnings from continuing operations before income taxes and cumulative effect of change in accounting principle		3,869			28,409
Income taxes		1,153			10,988

Earnings from continuing operations before cumulative effect of change in accounting principle		2,716			17,421

Discontinued operations (Note 13):
Earnings from discontinued operations before income taxes		379			2,090
Income taxes		109			11

Earnings from discontinued operations		270			2,079


Earnings before cumulative effect of change in accounting principle		2,986			19,500
Cumulative effect of change in accounting principle (net of $101,061 income tax benefit) (Note 3)		(153,180	)		—

Net earnings (loss)	$	(150,194	)	$	19,500


Basic earnings (loss) per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle	$	.03		$	.16
Earnings from discontinued operations		—			.02
Cumulative effect of change in accounting principle		(1.40	)		—

Net earnings (loss)	$	(1.37	)	$	.18


Diluted earnings (loss) per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle	$	.03		$	.16
Earnings from discontinued operations		—			.02
Cumulative effect of change in accounting principle		(1.40	)		—

Net earnings (loss)	$	(1.37	)	$	.18


Weighted average common shares outstanding (in thousands):
Basic		109,293			107,660

Diluted		109,506			108,177


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)


	April 30,		October 31,
	2005		2004
	(Restated)		(Restated)
	(Note 1)		(Note 1)
ASSETS

Current assets:
Cash and cash equivalents	$	18,450	$	21,514
Marketable securities		1,292		1,297
Receivables, net of allowances		70,521		69,133
Inventories		33,790		36,174
Prepaid expenses		3,670		2,953
Deferred income taxes, net		4,195		7,674
Assets held for sale		5,278		10,493

Total current assets		137,196		149,238
Receivables due beyond one year, net of allowances		77,244		78,692
Preneed funeral receivables and trust investments		498,594		503,808
Preneed cemetery receivables and trust investments		258,659		258,176
Goodwill		272,729		272,729
Deferred charges (Note 3)		—		253,360
Cemetery property, at cost		366,219		366,874
Property and equipment, at cost:
Land		41,118		39,527
Buildings		300,721		295,567
Equipment and other		161,136		156,205

		502,975		491,299
Less accumulated depreciation		198,732		189,552

Net property and equipment		304,243		301,747
Deferred income taxes, net		198,509		93,014
Cemetery perpetual care trust investments		211,503		210,267
Other assets		21,097		23,603

Total assets	$	2,345,993	$	2,511,508

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	April 30,			October 31,
	2005			2004
	(Restated)			(Restated)
	(Note 1)			(Note 1)
LIABILITIES AND SHAREHOLDERS’ EQUITY

Current liabilities:
Current maturities of long-term debt	$	5,087		$	1,725
Accounts payable		9,000			9,865
Accrued payroll		10,589			13,005
Accrued insurance		22,697			21,430
Accrued interest		4,708			11,315
Other current liabilities		14,857			17,889
Income taxes payable		1,723			130
Liabilities associated with assets held for sale		3,484			6,491

Total current liabilities		72,145			81,850
Long-term debt, less current maturities		413,377			415,080
Deferred preneed funeral revenue		290,424			297,328
Deferred preneed cemetery revenue		277,945			280,570
Non-controlling interest in funeral and cemetery trusts		627,040			627,344
Other long-term liabilities		10,636			12,465

Total liabilities		1,691,567			1,714,637

Commitments and contingencies		—			—
Non-controlling interest in perpetual care trusts		209,833			208,893

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 106,143,977 and 104,330,101 shares at April 30, 2005 and October 31, 2004, respectively		106,144			104,330
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at April 30, 2005 and October 31, 2004; 10 votes per share; convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		679,098			673,630
Accumulated deficit		(343,176	)		(192,982	)
Unearned restricted stock compensation		(1,028	)		(222	)
Accumulated other comprehensive loss:
Derivative financial instrument losses		—			(333	)

Total accumulated other comprehensive losses		—			(333	)

Total shareholders’ equity		444,593			587,978

Total liabilities and shareholders’ equity	$	2,345,993		$	2,511,508

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)


													Derivative
							Retained			Unearned			Financial
				Additional			Earnings			Restricted			Instrument			Total
	Common			Paid-In			(Accumulated			Stock			Gains			Shareholders’
	Stock⁽¹⁾			Capital			Deficit)			Compensation			(Losses)			Equity
							(Restated)									(Restated)
							(Note 1)									(Note 1)
Balance October 31, 2004 – as previously reported	$	107,885		$	673,630		$	3,298		$	(222	)	$	(333	)	$	784,258
Prior period adjustments								(196,280	)								(196,280	)

Balance October 31, 2004 – Restated (Note 1)	$	107,885		$	673,630		$	(192,982	)	$	(222	)	$	(333	)	$	587,978

Comprehensive income (loss):
Net loss-Restated (Note 1)								(150,194	)								(150,194	)

Other comprehensive income:
Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($204)														333			333

Total other comprehensive income		—			—			—			—			333			333

Total comprehensive income (loss)-Restated (Note 1)		—			—			(150,194	)		—			333			(149,861	)

Restricted stock activity		166			992						(806	)					352
Issuance of common stock		37			183												220
Stock options exercised		2,511			9,877												12,388
Tax benefit associated with stock options exercised		—			1,939												1,939
Purchase and retirement of common stock		(900	)		(4,781	)											(5,681	)
Dividends ($.025 per share)		—			(2,742	)											(2,742	)


Balance April 30, 2005 – Restated (Note 1)	$	109,699		$	679,098		$	(343,176	)	$	(1,028	)	$	—		$	444,593


⁽¹⁾		Amount includes 106,144 and 104,330 shares (in thousands) of Class A common stock with a stated value of $1 per share as of April 30, 2005 and October 31, 2004, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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


	Six Months Ended April 30,
	2005			2004
	(Restated)			(Restated)
	(Note 1)			(Note 1)
Cash flows from operating activities:
Net earnings (loss)	$	(150,194	)	$	19,500
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
(Gains) on dispositions and impairment losses, net		(1,682	)		(478	)
Cumulative effect of change in accounting principle		153,180			—
Loss on early extinguishment of debt		32,708			—
Premiums paid on early extinguishment of debt		(25,369	)		—
Depreciation and amortization		10,324			11,725
Amortization of preneed selling costs		—			11,986
Amortization of deferred financing costs		739			2,612
Provision for doubtful accounts		3,063			4,197
Net loss realized on marketable securities		—			94
Provision for deferred income taxes		(681	)		5,046
Tax benefit on stock options exercised		1,939			595
Other		771			197
Changes in assets and liabilities:
(Increase) decrease in other receivables		(6,066	)		25,649
(Increase) decrease in inventories and cemetery property		1,794			(77	)
Increase (decrease) in accounts payable and accrued expenses		(9,130	)		1,305
Net effect of preneed funeral production and maturities		(7,835	)		(12,813	)
Net effect of preneed cemetery production and deliveries		2,266			9,012
Change in deferred charges – prearranged acquisition costs		—			(16,763	)
Decrease in other		(2,177	)		(908	)

Net cash provided by operating activities		3,650			60,879


Cash flows from investing activities:
Proceeds from sales of marketable securities		16			1,019
Proceeds from sale of assets, net		6,385			8,938
Additions to property and equipment		(12,968	)		(8,333	)
Other		(188	)		47

Net cash provided by (used in) investing activities		(6,755	)		1,671


Cash flows from financing activities:
Proceeds from long-term debt		440,000			—
Repayments of long-term debt		(438,341	)		(48,158	)
Debt issue costs		(5,811	)		—
Issuance of common stock		12,608			4,711
Purchase and retirement of common stock		(5,681	)		(10,692	)
Dividends		(2,742	)		—
Other		8			—

Net cash provided by (used in) financing activities		41			(54,139	)


Net increase (decrease) in cash		(3,064	)		8,411
Cash and cash equivalents, beginning of period		21,514			18,585

Cash and cash equivalents, end of period	$	18,450		$	26,996


Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes	$	2,400		$	(29,800	)
Interest	$	22,500		$	21,500

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

The Company has restated its consolidated financial statements for fiscal years 2004 and 2003, all the quarters therein and the first three quarters of fiscal year 2005. 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 discussed in Note 10, the Company reorganized its operating divisions effective in the fourth quarter of 2005 which will result in a change in its operating and reportable segments in future filings.

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 reviews 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. For further discussion of the Company’s reporting units, see Note 2(i).

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. Due to these changes, the gain or loss on those sales has been re-evaluated and restated. In 2004, this resulted in an additional net gain of $579, of which a loss of $841 occurred in the three and six months ended April 30, 2004 (a loss of $653 relates to continuing operations and a loss of $188 relates to discontinued operations).

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 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 and fiscal year 2000. Deferred realized trust earnings are included in deferred preneed funeral revenue and deferred preneed cemetery revenue prior to recognition as revenues. The adjustments impacted the cumulative effect of adopting SAB No. 101 on November 1, 2000, and reported revenues and earnings for fiscal years 2000 through 2004 and the first three quarters of 2005.

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 April 30, 2005 and 2004 was a decrease in net earnings of $1,890 and $3,607 respectively, and a decrease in diluted earnings per share of $.01 and $.03, respectively. The overall impact of the restatements related to the deferred revenue project for the six months ended April 30, 2005 and 2004 was a decrease in net earnings of $15,450 (including $11,862, or $.11 per diluted share, related to the cumulative effect of change in accounting principle for preneed selling costs) and $6,571, respectively, and a decrease in earnings per diluted share of $.14 and $.06, respectively.

Other Adjustments

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 is amending its financial statements for the restatements discussed above, the Company has recorded the lease adjustments in the periods they were actually incurred. In this filing, the Company removed the cumulative effect of this prior period adjustment of $1,839 ($1,149 after tax) from the statement of earnings for the six months ended April 30, 2005. The Company also recorded other miscellaneous immaterial adjustments.

A summary of the effects of the restatements described above on the Company’s condensed consolidated financial statements for the three and six months ended April 30, 2005 and 2004 and as of April 30, 2005 and October 31, 2004 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)


				Effect of			Effect of
				restating to			restating to									As Restated and
	As Previously			correct for			correct for the						As Restated-			Reclassified
	Reported- Three			goodwill			impact of the						Three Months			Three Months
	Months Ended			reporting			deferred			Other			Ended			Ended
	April 30, 2005⁽¹⁾			unit errors			revenue project			Adjustments⁽²⁾			April 30, 2005			April 30, 2005⁽³⁾
Consolidated Statements of Earnings:

Revenues:
Funeral	$	75,524		$	—		$	(919	)	$	—		$	74,605		$	74,425
Cemetery		61,139			—			(2,790	)		—			58,349			58,145

		136,663			—			(3,709	)		—			132,954			132,570
Costs and expenses:
Funeral		56,367			—			—			(1,839	)		54,528			54,297
Cemetery		45,196			—			—			—			45,196			45,048

		101,563			—			—			(1,839	)		99,724			99,345

Gross profit		35,100			—			(3,709	)		1,839			33,230			33,225
Corporate general and administrative expenses		(4,582	)		—			—			—			(4,582	)		(4,582	)
Gains on dispositions and impairment (losses), net		421			(32	)		—			—			389			359
Other operating income, net		261			—			—			—			261			259

Operating earnings		31,200			(32	)		(3,709	)		1,839			29,298			29,261
Interest expense		(6,671	)		—			—			—			(6,671	)		(6,671	)
Loss on early extinguishment of debt		(30,057	)		—			—			—			(30,057	)		(30,057	)
Investment and other income, net		111			—			—			—			111			112

Loss from continuing operations before income taxes		(5,417	)		(32	)		(3,709	)		1,839			(7,319	)		(7,355	)
Income tax benefit		(1,519	)		(42	)		(1,819	)		690			(2,690	)		(2,682	)

Loss from continuing operations		(3,898	)		10			(1,890	)		1,149			(4,629	)		(4,673	)

Loss from discontinued operations before income taxes		(186	)		(3	)		—			—			(189	)		(151	)
Income tax expense (benefit)		(94	)		193			—			—			99			93

Loss from discontinued operations		(92	)		(196	)		—			—			(288	)		(244	)

Net loss	$	(3,990	)	$	(186	)	$	(1,890	)	$	1,149		$	(4,917	)	$	(4,917	)


Basic loss per common share:
Loss from continuing operations	$	(.04	)	$	—		$	(.01	)	$	.01		$	(.04	)	$	(.04	)
Earnings from discontinued operations		—			—			—			—			—			—

Net loss per share	$	(.04	)	$	—		$	(.01	)	$	.01		$	(.04	)	$	(.04	)


Diluted loss per common share:
Loss from continuing operations	$	(.04	)	$	—		$	(.01	)	$	.01		$	(.04	)	$	(.04	)
Earnings from discontinued operations		—			—			—			—			—			—

Net loss per share	$	(.04	)	$	—		$	(.01	)	$	.01		$	(.04	)	$	(.04	)


⁽¹⁾		The previously reported amounts represent amounts reported in the Form 10-Q for the quarter ended April 30, 2005 filed on June 9, 2005.

⁽²⁾		Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments.

⁽³⁾		Represents the October 2005 classification of continuing and discontinued operations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)


				Effect of			Effect of
				restating to			restating to
	As Previously			correct for			correct for the									As Restated and
	Reported-Six			goodwill			impact of the						As Restated- Six			Reclassified-Six
	Months Ended			reporting			deferred			Other			Months Ended			Months Ended
	April 30, 2005⁽¹⁾			unit errors			revenue project			Adjustments⁽²⁾			April 30, 2005			April 30, 2005⁽³⁾
Consolidated Statements of Earnings:

Revenues:
Funeral	$	147,026		$	—		$	(2,527	)	$	—		$	144,499		$	144,141
Cemetery		115,786			—			(4,382	)		—			111,404			110,997

		262,812			—			(6,909	)		—			255,903			255,138
Costs and expenses:
Funeral		108,426			—			—			(1,839	)		106,587			106,215
Cemetery		88,703			—			—			—			88,703			88,456

		197,129			—			—			(1,839	)		195,290			194,671

Gross profit		65,683			—			(6,909	)		1,839			60,613			60,467
Corporate general and administrative expenses		(8,798	)		—			—			—			(8,798	)		(8,798	)
Gains on dispositions and impairment (losses), net		1,147			138			—			—			1,285			1,237
Other operating income, net		505			—			—			—			505			498

Operating earnings		58,537			138			(6,909	)		1,839			53,605			53,404
Interest expense		(17,047	)		—			—			—			(17,047	)		(17,047	)
Loss on early extinguishment of debt		(32,708	)		—			—			—			(32,708	)		(32,708	)
Investment and other income, net		219			—			—			—			219			220

Earnings from continuing operations before income taxes		9,001			138			(6,909	)		1,839			4,069			3,869
Income taxes		4,008			(123	)		(3,321	)		690			1,254			1,153

Earnings from continuing operations before cumulative effect of change in accounting principle		4,993			261			(3,588	)		1,149			2,815			2,716

Earnings from discontinued operations before income taxes		127			50			—			—			177			379
Income taxes		125			(119	)		—			—			6			109

Earnings from discontinued operations		2			169			—			—			171			270

Earnings before cumulative effect of change in accounting principle		4,995			430			(3,588	)		1,149			2,986			2,986
Cumulative effect of change in accounting principle		(141,318	)		—			(11,862	)		—			(153,180	)		(153,180	)

Net loss	$	(136,323	)	$	430		$	(15,450	)	$	1,149		$	(150,194	)	$	(150,194	)


Basic earnings (loss) per common share:
Earnings from continuing operations	$	.05		$	—		$	(.03	)	$	.01		$	.03		$	.03
Earnings from discontinued operations		—			—			—			—			—			—
Cumulative effect of change in accounting principle		(1.30	)		—			(.10	)		—			(1.40	)		(1.40	)

Net loss per share	$	(1.25	)	$	—		$	(.13	)	$	.01		$	(1.37	)	$	(1.37	)


Diluted earnings (loss) per common share:
Earnings from continuing operations	$	.05		$	—		$	(.03	)	$	.01		$	.03		$	.03
Earnings from discontinued operations		—			—			—			—			—			—
Cumulative effect of change in accounting principle		(1.29	)		—			(.11	)		—			(1.40	)		(1.40	)

Net loss per share	$	(1.24	)	$	—		$	(.14	)	$	.01		$	(1.37	)	$	(1.37	)


⁽¹⁾		The previously reported amounts represent amounts reported in the Form 10-Q for the quarter ended April 30, 2005 filed on June 9, 2005.

⁽²⁾		Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments.

⁽³⁾		Represents the October 2005 classification of continuing and discontinued operations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)


				Effect of			Effect of
				restating to			restating to									As Restated and
	As Previously			correct for			correct for the						As Restated -			Reclassified –
	Reported-Three			goodwill			impact of the						Three Months			Three Months
	Months Ended			reporting			deferred			Other			Ended			Ended
	April 30, 2005⁽¹⁾			unit errors			revenue project			Adjustments⁽²⁾			April 30, 2004			April 30, 2004⁽³⁾
Consolidated Statements of Earnings:

Revenues:
Funeral	$	71,582		$	—		$	(2,126	)	$	—		$	69,456		$	69,643
Cemetery		59,511			—			(4,300	)		—			55,211			54,795

		131,093			—			(6,426	)		—			124,667			124,438
Costs and expenses:
Funeral		50,232			—			—			53			50,285			50,433
Cemetery		44,043			—			(1,022	)		—			43,021			42,821

		94,275			—			(1,022	)		53			93,306			93,254

Gross profit		36,818			—			(5,404	)		(53	)		31,361			31,184
Corporate general and administrative expenses		(4,621	)		—			—			—			(4,621	)		(4,621	)
Separation charges		(138	)		—			—			—			(138	)		(138	)
Gains on dispositions and impairment (losses), net		(315	)		(653	)		—			—			(968	)		(853	)
Other operating income, net		504			—			—			—			504			511

Operating earnings		32,248			(653	)		(5,404	)		(53	)		26,138			26,083
Interest expense		(11,953	)		—			—			—			(11,953	)		(11,953	)
Investment and other income, net		57			—			—			—			57			57

Earnings from continuing operations before income taxes		20,352			(653	)		(5,404	)		(53	)		14,242			14,187
Income taxes		7,615			(350	)		(1,797	)		(20	)		5,448			5,435

Earnings from continuing operations		12,737			(303	)		(3,607	)		(33	)		8,794			8,752

Earnings from discontinued operations before income taxes		1,573			(188	)		—			—			1,385			1,440
Income tax benefit		(447	)		198			—			—			(249	)		(236	)

Earnings from discontinued operations		2,020			(386	)		—			—			1,634			1,676

Net earnings	$	14,757		$	(689	)	$	(3,607	)	$	(33	)	$	10,428		$	10,428


Basic earnings per common share:
Earnings from continuing operations	$	.12		$	(.01	)	$	(.03	)	$	—		$	.08		$	.08
Earnings from discontinued operations		.02			—			—			—			.02			.02

Net earnings per share	$	.14		$	(.01	)	$	(.03	)	$	—		$	.10		$	.10


Diluted earnings per common share:
Earnings from continuing operations	$	.12		$	(.01	)	$	(.03	)	$	—		$	.08		$	.08
Earnings from discontinued operations		.02			—			—			—			.02			.02

Net earnings per share	$	.14		$	(.01	)	$	(.03	)	$	—		$	.10		$	.10


⁽¹⁾		The previously reported amounts represent amounts reported in the Form 10-Q for the quarter ended April 30, 2005 filed on June 9, 2005.

⁽²⁾		Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments.

⁽³⁾		Represents the October 2005 classification of continuing and discontinued operations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)


							Effect of
							restating to
				Effect of			correct for
				restating to			the impact
	As Previously			correct for			of the						As Restated -			As Restated and
	Reported- Six			goodwill			deferred						Six Months			Reclassified – Six
	Months Ended			reporting			revenue			Other			Ended			Months Ended
	April 30, 2005⁽¹⁾			unit errors			project			Adjustments⁽²⁾			April 30, 2004			April 30, 2004⁽³⁾
Consolidated Statements of Earnings:

Revenues:
Funeral	$	146,309		$	—		$	(4,086	)	$	—		$	142,223		$	142,415
Cemetery		115,526			—			(7,629	)		—			107,897			107,193

		261,835			—			(11,715	)		—			250,120			249,608
Costs and expenses:
Funeral		102,128			—			—			357			102,485			102,767
Cemetery		85,892			—			(1,772	)		—			84,120			83,723

		188,020			—			(1,772	)		357			186,605			186,490

Gross profit		73,815			—			(9,943	)		(357	)		63,515			63,118
Corporate general and administrative expenses		(8,534	)		—			—			—			(8,534	)		(8,534	)
Separation charges		(2,131	)		—			—			—			(2,131	)		(2,131	)
Gains on dispositions and impairment (losses), net		288			(653	)		—			(300	)		(665	)		(550	)
Other operating income, net		943			—			—			—			943			948

Operating earnings		64,381			(653	)		(9,943	)		(657	)		53,128			52,851
Interest expense		(24,474	)		—			—			—			(24,474	)		(24,474	)
Investment and other income (expense), net		(1,068	)		—			—			1,100			32			32

Earnings from continuing operations before income taxes		38,839			(653	)		(9,943	)		443			28,686			28,409
Income taxes		14,640			(350	)		(3,372	)		168			11,086			10,988

Earnings from continuing operations		24,199			(303	)		(6,571	)		275			17,600			17,421

Earnings from discontinued operations before income taxes		2,001			(188	)		—			—			1,813			2,090
Income tax expense (benefit)		(285	)		198			—			—			(87	)		11

Earnings from discontinued operations		2,286			(386	)		—			—			1,900			2,079

Net earnings	$	26,485		$	(689	)	$	(6,571	)	$	275		$	19,500		$	19,500


Basic earnings per common share:
Earnings from continuing operations	$	.22		$	—		$	(.06	)	$	—		$	.16		$	.16
Earnings from discontinued operations		.03			(.01	)		—			—			.02			.02

Net earnings per share	$	.25		$	(.01	)	$	(.06	)	$	—		$	.18		$	.18


Diluted earnings per common share:
Earnings from continuing operations	$	.22		$	—		$	(.06	)	$	—		$	.16		$	.16
Earnings from discontinued operations		.02			—			—			—			.02			.02

Net earnings per share	$	.24		$	—		$	(.06	)	$	—		$	.18		$	.18


⁽¹⁾		The previously reported amounts represent amounts reported in the Form 10-Q for the quarter ended April 30, 2005 filed on June 9, 2005.

⁽²⁾		Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments.

⁽³⁾		Represents the October 2005 classification of continuing and discontinued operations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)


				Effect of			Effect of
				restating to			restating to
				correct for			correct for the
	As Previously			goodwill			impact of the									As Restated and
	Reported –			reporting unit			deferred revenue			Other			As Restated –			Reclassified -
	April 30, 2005⁽¹⁾			errors			project			adjustments⁽²⁾			April 30, 2005			April 30, 2005⁽³⁾
Consolidated Balance Sheets:

Assets held for sale	$	—		$	—		$	—		$	—		$	—		$	5,278
Total current assets		126,960			—			8,966			(2,681	)		133,245			137,196
Deferred income taxes		134,106			12,036			48,740			3,677			198,559			198,509
Goodwill		405,627			(131,227	)		2,979			(4,541	)		272,838			272,729
Total assets		2,407,459			(121,427	)		60,685			(724	)		2,345,993			2,345,993
Liabilities associated with assets held for sale		—			—			—			—			—			3,484
Total current liabilities		61,964			—			790			5,907			68,661			72,145
Deferred preneed funeral revenue		145,554			—			150,861			(4,800	)		291,615			290,424
Deferred preneed cemetery revenue		282,736			—			(4,068	)		(5	)		278,663			277,945
Accumulated deficit		(133,025	)		(121,427	)		(86,898	)		(1,826	)		(343,176	)		(343,176	)
Total shareholders’ equity		654,744			(121,427	)		(86,898	)		(1,826	)		444,593			444,593
Total liabilities and shareholders’ equity		2,407,459			(121,427	)		60,685			(724	)		2,345,993			2,345,993


⁽¹⁾		The previously reported amounts represent amounts reported in the Form 10-Q for the quarter ended April 30, 2005 filed on June 9, 2005.

⁽²⁾		Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments.

⁽³⁾		Represents the October 2005 classification of continuing and discontinued operations.


						Effect of
						restating to									As Restated
	As Previously		Effect of restating			correct for the									and
	Reported -		to correct for			impact of the						As Restated -			Reclassified–
	October		goodwill reporting			deferred			Other			October			October 31,
	31, 2004⁽¹⁾		unit errors			revenue project			adjustments⁽²⁾			31, 2004			2004⁽³⁾
Consolidated Balance Sheets:

Assets held for sale	$	3,590	$	(15	)	$	—		$	—		$	3,575		$	10,493
Total current assets		134,491		(15	)		8,966			(1,597	)		141,845			149,238
Deferred income taxes		43,124		11,794			37,593			481			92,992			93,014
Goodwill		404,169		(131,400	)		2,980			(2,976	)		272,773			272,729
Total assets		2,565,198		(121,857	)		69,226			(1,081	)		2,511,486			2,511,508
Liabilities associated with assets held for sale		2,388		—			—			—			2,388			6,491
Total current liabilities		71,781		—			790			5,176			77,747			81,850
Deferred preneed funeral revenue		156,164		—			145,161			(2,653	)		298,672			297,328
Deferred preneed cemetery revenue		288,516		—			(5,278	)		(1,963	)		281,275			280,570
Retained earnings (accumulated deficit)		3,298		(121,857	)		(71,447	)		(2,976	)		(192,982	)		(192,982	)
Total shareholders’ equity		784,258		(121,857	)		(71,447	)		(2,976	)		587,978			587,978
Total liabilities and shareholders’ equity		2,565,198		(121,857	)		69,226			(1,081	)		2,511,486			2,511,508


⁽¹⁾		The previously reported amounts represent amounts reported in the April 12, 2005 Form 8-K.

⁽²⁾		Represents adjustments which are immaterial individually and in the aggregate relating to lease-related accounting practices and other miscellaneous adjustments.

⁽³⁾		Represents the October 2005 classification of continuing and discontinued operations.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Restatement—(Continued)

The presentation of the restatement of the Company’s October 31, 2004 consolidated balance sheet above has been prepared consistent with the presentation of this restatement in the Company’s recently filed Form 10-K for the year ended October 31, 2005.

(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 April 30, 2005, the Company owned and operated 235 funeral homes and 147 cemeteries in 26 states within the United States and Puerto Rico. The Company has 11 operating and reportable segments consisting 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. All Other consists of the Company’s operations in Puerto Rico. Additional information on segments can be found in Note 10.

(b) Principles of Consolidation

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

The information as of April 30, 2005, and for the three and six months ended April 30, 2005 and 2004, 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 consolidated financial statements for the year ended October 31, 2004 have been restated in Amendment No. 3 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2004. Accordingly, these consolidated financial statements have been prepared in a manner consistent with the 2004 fiscal year consolidated financial statements presented in Amendment No. 3 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2004 and the accounting policies described in the accompanying notes, unless otherwise disclosed herein, and should be read in conjunction therewith.

The results of operations for the three and six months ended April 30, 2005 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2005.

(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.

(e) Fair Value of Financial Instruments

Estimated fair value amounts have been determined using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop estimates of fair value. Accordingly, the estimates presented herein may not be indicative of the amounts the Company could realize in a current market. The use of different market assumptions or valuation methodologies may

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

have a material effect on the estimated fair value amounts.

The carrying amounts of cash and cash equivalents and current receivables approximate fair value due to the short-term nature of these instruments. The carrying amounts of receivables due beyond one year approximate fair value because they bear interest at rates currently offered by the Company for receivables with similar terms and maturities. The carrying amounts of marketable securities, including marketable securities in preneed funeral trust investments, preneed cemetery trust investments and cemetery perpetual care trust investments, are stated at fair value as they are classified as available for sale under the provisions of SFAS No. 115, “Accounting for Certain Investments in Debt and Equity Securities.” See Note 3(b) for additional information. The fair value of the Company’s long-term variable- and fixed-rate debt is estimated using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements.

Any investment with a fair market value that has been less than its cost basis by 20 percent or greater for more than six months as of the respective balance sheet reporting date is considered to be other than temporarily impaired. The Company periodically reviews its investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily impaired. This evaluation includes determining if the Company has the ability and intent to hold these investments for its forecasted recovery period and determining if there have been any changes in market conditions or concerns specific to the issuer of the securities. Otherwise, an investment with a fair market value that is less than its cost basis is considered to be temporarily impaired. This evaluation of impairment with respect to the Company’s trust portfolio is performed each quarter using quoted market prices. If a loss is other than temporary, the cost basis of the security is adjusted downward to its market value. This affects the Company’s footnote disclosure, but does not otherwise have an effect on the financial statements, since the trust portfolio amount as reported in the consolidated balance sheet is already marked to market value each quarter.

(f) Inventories

Inventories are stated at the lower of cost (specific identification and first-in, first-out methods) or net realizable value. The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. Such estimates are based on the Company’s historical experience or results.

(g) Depreciation and Amortization

Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 10 to 40 years and from 3 to 10 years, respectively, primarily using the straight-line method.

(h) Long-lived Assets

The Company reviews for continued appropriateness the carrying value of its long-lived assets whenever events and circumstances indicate a potential impairment. This review is based on its projections of anticipated undiscounted future cash flows. If indicators of impairment were present, the Company would evaluate the undiscounted future cash flows estimated to be generated by those assets compared to the carrying amount of those assets. The net carrying value of assets not recoverable would be reduced to fair value. While the Company believes that its estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and comparable sales values could materially affect its evaluations.

(i) Goodwill (Restated)

The Company’s historical evaluation of goodwill was performed at the funeral and cemetery segment levels, which the Company previously reported as its reporting units. As discussed in Note 1, the Company’s evaluation of the goodwill of its operations resulted in a restatement of its reporting units and will now consist of 13 reporting units. Those reporting units include nine reporting units that are consistent with nine of the Company’s 11 operating and reportable segments and an additional four reporting units which are a further breakdown of its two operating and

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

reportable segments in its Western division. These reporting units include the Archdiocese of Los Angeles Funeral operations, Southern Regional Cemetery operations, Other Cemetery operations and Other Funeral operations.

The Company’s goodwill impairment test involves estimates and management judgment and was performed using a discounted cash flow valuation methodology. Step two of the impairment test involves determining estimates of fair values of the Company’s assets and liabilities. The Company may obtain assistance from third parties in assessing the fair value of certain of its assets, primarily real estate, in performing the step two analysis.

Goodwill of a reporting unit must be tested for impairment on at least an annual basis. The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, the Company assesses the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of the Company’s assets or the strategy for its overall business and significant negative industry or economic trends.

In reviewing goodwill for impairment, the Company first compares the fair value of each of its reporting units with its carrying amount (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, the Company then measures the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value.

Restated goodwill in excess of net assets of companies acquired, totaled approximately $272,729 as of April 30, 2005 and October 31, 2004.

(j) Stock-Based Compensation

As of April 30, 2005, the Company had five stock-based compensation plans. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and has 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 is 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. The expense related to the restricted stock granted in fiscal year 2005 and 2004 is reflected in earnings and amounted to $207 and $258 for the three months ended April 30, 2005 and 2004, respectively, and $352 and $373 for the six months ended April 30, 2005 and 2004, respectively. See Note 2(o) for further discussion on the Company’s restricted stock. The FASB issued SFAS No. 123R in December 2004, which is effective for the Company in the first quarter of fiscal year 2006. The Company has evaluated the impact of its adoption on its financial statements. See Note 3 for additional information. The following table illustrates the effect on net earnings (loss) and net earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)


	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2005			2004			2005			2004
	(Restated)			(Restated)			(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)
Net earnings (loss)	$	(4,917	)	$	10,428		$	(150,194	)	$	19,500
Stock-based employee compensation expense included in reported net earnings, net of tax		129			160			218			231
Total stock-based employee compensation expense determined under fair value-based method, net of tax		(408	)		(554	)		(935	)		(971	)

Pro forma net earnings (loss)	$	(5,196	)	$	10,034		$	(150,911	)	$	18,760

Net earnings (loss) per common share:
Basic – as reported	$	(.04	)	$	.10		$	(1.37	)	$	.18

Basic – pro forma	$	(.05	)	$	.09		$	(1.38	)	$	.17

Diluted – as reported	$	(.04	)	$	.10		$	(1.37	)	$	.18

Diluted – pro forma	$	(.05	)	$	.09		$	(1.38	)	$	.17

(k) Funeral Revenue

The Company sells price-guaranteed prearranged funeral services and merchandise under contracts that provide for delivery of the services and merchandise at the time of death. Prearranged funeral services are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral merchandise is recognized as revenue upon delivery. Prior to performing the funeral or delivering the merchandise, such sales are deferred. Funeral services and merchandise sold at the time of need are recorded as funeral revenue in the period the funeral is performed or the merchandise is delivered.

On May 31, 2005, the Company changed its method of accounting for preneed selling costs incurred related to the acquisition of new prearranged funeral service and merchandise sales. The Company has applied this change in accounting principle effective November 1, 2004. All selling costs related to the acquisition of new prearranged funeral service sales and prearranged funeral merchandise sales are now expensed as incurred. Prior to that time, the selling costs that related to the Company’s preneed funeral service and merchandise contracts were included in deferred charges and amortized in proportion to the preneed revenue recognized during the period. See Note 3(a) for additional information.

Prearranged funeral services and merchandise generally are funded either through trust or escrow accounts established by the Company or through third-party insurance companies. Principal amounts deposited in the trust or escrow accounts generally range from 70 percent to 90 percent of each installment received. The sale of caskets is treated in some jurisdictions in the same manner as the sale of cemetery merchandise and in some jurisdictions as the sale of funeral services for trusting purposes. Amounts deposited are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser’s option to cancel the contract. Certain jurisdictions provide for non-refundable trust or escrow accounts where the Company receives such amounts upon cancellation by the customer. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts until the underlying service or merchandise is delivered.

Earnings are withdrawn from trust or escrow accounts only as funeral services and merchandise are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Even so, such withdrawn earnings are not recognized as revenue until the related funeral services are performed or merchandise delivered. Withdrawals from preneed funeral merchandise and service trusts are made when state laws allow the Company to withdraw such funds. Based on various state statutes, the Company is sometimes allowed to withdraw a portion of the trust assets prior to the service or merchandise being delivered. Although the Company is allowed to withdraw cash prior to the delivery, the Company

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

defers the revenue associated with such early withdrawals until the underlying contracts are delivered.

When prearranged funeral services and merchandise are funded through insurance policies purchased by customers from third-party insurance companies, the Company earns a commission if it acts as agent on the sale of the policies. Customer payments of premiums on the insurance policies are sent directly to the insurance company, and the insurance premium receivables and related customer payments are not recorded on the Company’s financial statements. Insurance commissions are recognized as revenue at the point at which the commission is no longer subject to refund. The costs related to the commissions are expensed at the same time. Nothing more is recorded until the contracted service or merchandise is delivered. At that time, the face amount of the contract and the build-up in the face value of the contract (i.e., the policy proceeds) are recorded as funeral revenue, and the related expenses are recorded. A receivable from the insurance company for the policy proceeds is recorded as a funeral receivable.

(l) Cemetery Revenue

The Company sells preneed cemetery merchandise and services under contracts that provide for delivery of the merchandise and services at the time of need. Preneed cemetery merchandise and service sales are recorded as cemetery revenue in the period the merchandise is delivered or service is performed. Cemetery merchandise and services sold at the time of need are recorded as cemetery revenue in the period the service is performed or the merchandise is delivered.

On May 31, 2005, the Company changed its method of accounting for preneed selling costs related to the acquisition of new prearranged cemetery service and merchandise sales. The Company has applied this change in accounting principle effective November 1, 2004. All selling costs related to the acquisition of new prearranged cemetery service sales and prearranged cemetery merchandise sales are now expensed as incurred. Prior to that time, the selling costs that related to the Company’s preneed cemetery merchandise and services contracts were included in deferred charges and amortized in proportion to the preneed revenue recognized during the period. See Note 3(a) for additional information.

In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of preneed cemetery merchandise and services be placed in trust or escrow accounts. With respect to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30 percent to 50 percent of each installment received. With respect to the preneed sale of cemetery services, the Company is generally required to place in trust 70 percent to 90 percent of each installment received. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed cemetery merchandise and services trust or escrow accounts until the underlying merchandise or service is delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. Withdrawals from preneed cemetery merchandise and service trusts are made when state laws allow the Company to withdraw such funds. Based on various state statutes, the Company is sometimes allowed to withdraw a portion of the trust assets prior to the service or merchandise being delivered. Although the Company is allowed to withdraw cash prior to the delivery, the Company defers the revenue associated with such early withdrawals until the underlying contracts are delivered.

The Company sells price-guaranteed preneed cemetery contracts providing for property interment rights. For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sale price has been collected. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs. The Company measures the percentage of completion by taking the costs incurred to date and dividing that number by the total projected cost of the project.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from these trusts, which have been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are received, the Company generally funds the perpetual care trust in the same proportion as the payment bears to the contract amount. For example, if the Company receives 20 percent of the contract price, it places in trust 20 percent of the total amount to be placed in trust for that contract. The Company currently recognizes and withdraws all dividend and interest income earned and, where permitted, capital gains realized by cemetery perpetual care trusts. Earnings from perpetual care trusts are recognized as cemetery revenue when the earnings are distributable from the trusts based on state laws. Investment earnings are considered realized in the perpetual care trusts when dividends are received on common stocks, when investment income is received on fixed income securities and when capital gains and losses are realized through sale of securities.

Some of the Company’s sales of cemetery property and merchandise are made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables.

(m) Allowance for Doubtful Accounts

The Company establishes a reserve based on a range of percentages applied to accounts receivable aging categories. These percentages are based on historical collection and write-off experience.

(n) Income Taxes

Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Management provides a valuation allowance against the deferred tax asset for amounts which are not considered more likely than not to be realized. As of April 30, 2005 and October 31, 2004, the Company’s deferred tax asset valuation allowance was $9,305 and $9,744, respectively. The valuation allowance is attributed primarily to expected capital losses related to businesses held for sale or sold for which the Company does not expect to receive a benefit.

For the purpose of calculating income taxes for discontinued operations, earnings (loss) from discontinued operations is segregated into two categories: operating results and gain or loss on dispositions. Operating results are tax effected in the ordinary manner (i.e., income tax expense on net operating income, income tax benefit on net operating loss).

For calculating the gain or loss on dispositions, businesses held for sale are grouped by sale type (i.e., stock sale or asset sale). Those classified as asset sales for tax purposes are netted, and any gains or losses are characterized as “ordinary.” An income tax provision or benefit is calculated as appropriate on these gains or losses. Those classified as stock sales for tax purposes are netted, and any gains or losses are characterized as “capital.” An income tax provision or benefit is calculated as appropriate on these gains or losses. The Company’s current policy is to provide a valuation allowance for any net benefits because capital losses are deductible only against capital gains, and the Company cannot at this time predict with certainty its ability to generate sufficient capital gains in future periods to absorb the losses before the carry-forward expiration given the significant amount of capital losses that were incurred in prior years.

As sales are finalized, the Company adjusts the gain or loss for changes in actual sales proceeds as compared to estimates, and for basis differences at the time of sale, as well as any changes in the type of sale. Sales originally anticipated to be stock sales but consummated as asset sales will generate ordinary losses. The Company records a

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

tax benefit and adjusts the valuation allowance for the respective amount resulting from the changes in circumstances surrounding the finalized sale. This adjustment is allocated to continuing operations or discontinued operations consistent with the reporting of the pre-tax income or loss.

The Company received a $33,222 income tax refund in December 2003 due to a change in the tax accounting methods for cemetery merchandise revenue. At the end of fiscal year 2003, the Company had decreased its deferred tax asset and increased receivables by $33,222. When the refund was received in the first quarter of 2004, the Company increased cash and decreased the corresponding receivable. The Company used this refund to reduce its outstanding debt balance.

(o) Earnings Per Common Share

Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s time-vest stock options and non-vested restricted stock awards) had been issued during each period as discussed in Note 9.

On March 17, 2005, the Company substantially completed its $28,000 stock repurchase program initiated in June 2003, having repurchased 4,400,000 shares since its inception. On March 28, 2005, the Company announced a new $30,000 stock repurchase program. The repurchases are limited to the Company’s Class A common stock and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending on market conditions and other factors. These repurchases reduce the weighted average number of common shares outstanding during each period. Since the inception of the new program through April 30, 2005, the Company has not repurchased any shares of its Class A common stock.

On December 22, 2003, the Company granted 271,000 shares of restricted stock to its executive officers (of which 110,666 shares have been cancelled as of April 30, 2005 and 27,972 shares were withheld to cover the tax obligation related to the vested restricted stock as of April 30, 2005). The restricted stock vests in equal one-third portions at October 31, 2004, October 31, 2005 and October 31, 2006. On November 18, 2004, the Company granted 72,000 shares of restricted stock to an executive officer, which vest 25 percent on November 18, 2005, 25 percent on November 18, 2006 and 50 percent on November 18, 2007. On December 20, 2004, the Company granted 58,000 shares of restricted stock to executive officers, which vest 25 percent on December 20, 2005, 25 percent on December 20, 2006 and 50 percent on December 20, 2007. On December 20, 2004, the Company also granted 36,500 shares of restricted stock to executive officers, which vest in equal 25 percent portions on December 20, 2005, 2006, 2007 and 2008. Once granted, the restricted stock is included in total shares outstanding but is not included in the weighted average number of common shares outstanding in each period used to calculate basic earnings per common share until the shares vest.

(p) Derivatives

The Company accounted for its derivative financial instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” The notional amounts of derivative financial instruments do not represent amounts exchanged between parties and, therefore, are not a measure of the Company’s exposure resulting from its use of derivatives. The amounts exchanged are calculated based upon the notional amounts as well as other terms of the instruments, such as interest rates, exchange rates or other indices. In accordance with SFAS No. 133, the Company accounted for its sole derivative instrument, a $50,000 interest rate swap which expired on March 11, 2005, as a cash flow hedge whereby the fair value of the interest rate swap is reflected as a liability in the

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

accompanying consolidated balance sheet as of October 31, 2004 with the offset recorded to other comprehensive income. The Company has no remaining interest rate swaps.

(q) Estimated Insurance Loss Liabilities

The Company purchases comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. The Company continually evaluates the receivables due from its insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from its primary insurer.

With respect to health insurance that covers substantially all of the Company’s employees, the Company purchases individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims are based on actuarial estimates; actual claims may differ from those estimates. The Company continually evaluates its claims experience related to this coverage with information obtained from its insurer.

Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of the Company’s insurance loss liability.

The estimated liability on the uninsured legal and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.

(r) Dividends

On March 28, 2005, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend of two and
one-half cents per share of common stock. The first dividend was paid on April 29, 2005 to shareholders of record at the close of business on April 15, 2005. Although the Company intends to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of the Company’s financial performance.

(s) Leases

The Company has noncancellable operating leases, primarily for land and buildings, that expire over the next 1 to 15 years, except for six leases that expire between 2032 and 2039. As of April 30, 2005, approximately 74 percent of the Company’s 235 funeral locations were owned by the Company’s subsidiaries and approximately 26 percent were held under operating leases.

The Company records operating lease expense for leases with escalating rents on a straight-line basis over the life of the lease, including reasonably assured lease renewals. The Company amortizes leasehold improvements in an operating lease over the shorter of their economic lives or the lease term, including reasonably assured lease

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) Basis of Presentation—(Continued)

renewals.

(t) Reclassifications

Certain reclassifications have been made to the 2004 and 2005 condensed consolidated financial statements. All businesses sold in fiscal year 2004 and fiscal year 2005 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented. Results associated with real estate sold or intended to be sold as part of the divestiture plan have been included in continuing operations for all periods. See Note 13 for a discussion of discontinued operations.

Premiums paid on early extinguishment of debt previously reported in cash flows from financing activities are now reported in cash flows from operating activities.

The foregoing reclassifications in themselves had no effect on the Company’s total net income or loss, total shareholders’ equity or the net increase or decrease in cash.

(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. Therefore, the Company’s results of operations for the three and six months ended April 30, 2005 are reported on the basis of the changed method. 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.” This expense amortization was included in amortization of preneed selling costs in the consolidated statements of cash flows. Accordingly, fiscal year 2004 includes the amortization of these deferred preneed selling costs, while fiscal year 2005 does not. The Company has 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.

The table below presents the pro forma amounts for the three and six months ended April 30, 2004 as if the accounting change had been in effect during those periods.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)


	Three Months Ended							Six Months Ended
	April 30, 2004							April 30, 2004
	As Reported							As Reported
	Restated (Note 1)		Changes			Pro Forma		Restated (Note 1)		Changes			Pro Forma
Gross profit:
Funeral	$	19,210	$	(1,575	)	$	17,635	$	39,648	$	(2,154	)	$	37,494
Cemetery		11,974		(1,777	)		10,197		23,470		(2,774	)		20,696

	$	31,184	$	(3,352	)	$	27,832	$	63,118	$	(4,928	)	$	58,190

Earnings from continuing operations	$	8,752	$	(2,045	)	$	6,707	$	17,421	$	(2,981	)	$	14,440
Net earnings	$	10,428	$	(2,007	)	$	8,421	$	19,500	$	(2,887	)	$	16,613
Basic earnings per common share from continuing operations	$	.08	$	(.02	)	$	.06	$	.16	$	(.03	)	$	.13
Diluted earnings per common share from continuing operations	$	.08	$	(.02	)	$	.06	$	.16	$	(.03	)	$	.13
Basic earnings per common share	$	.10	$	(.02	)	$	.08	$	.18	$	(.03	)	$	.15
Diluted earnings per common share	$	.10	$	(.02	)	$	.08	$	.18	$	(.03	)	$	.15

(b) FASB Interpretation No. 46 (“FIN 46” and “FIN 46R”), “Consolidation of Variable Interest Entities”

In January 2003, the FASB issued FASB Interpretation No. 46, “Consolidation of Variable Interest Entities, an Interpretation of Accounting Research Bulletin (“ARB”) No. 51.” This interpretation clarifies the application of ARB No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. In December 2003, the FASB revised FASB Interpretation No. 46 (“FIN 46R”).

The Company implemented FIN 46R as of April 30, 2004, which resulted in the consolidation of the Company’s preneed funeral and cemetery merchandise and service trusts and the Company’s cemetery perpetual care trusts. The implementation of FIN 46R affects certain line items in the consolidated balance sheet and statement of earnings as described below, but has no impact on net earnings. Also, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows, but does require disclosure of certain financing and investing activities. See Notes 4, 5 and 6.

Although FIN 46R requires consolidation of the preneed funeral and cemetery merchandise and service trusts and cemetery perpetual care trusts, it does not change the legal relationships among the trusts, the Company and its customers. In the case of preneed funeral and cemetery merchandise and services trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, the Company does not have a legal right to the cemetery perpetual care trust assets. For these reasons, upon consolidation of the trusts, the Company recognized
non-controlling interests in its financial statements to reflect third-party interests in these trusts in accordance with SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of Both Liabilities and Equity.” The Company classifies deposits to the funeral and cemetery merchandise and services trusts as non-controlling liability interests and classifies deposits to the cemetery perpetual care trusts as non-controlling interests outside of liabilities.

All of these trusts hold investments in marketable securities, which have been classified as available-for-sale and are reported at fair value, with unrealized gains and losses excluded from earnings and initially reported as a separate component of accumulated other comprehensive income or loss in the Company’s consolidated balance sheet pursuant to the provisions of SFAS No. 115. Unrealized gains and losses attributable to the non-controlling interest holders are reclassified from accumulated other comprehensive income or loss to non-controlling interest in funeral and cemetery trusts and perpetual care trusts in the Company’s consolidated balance sheet. Unrealized gains and

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)

losses attributable to the Company, but that have not been earned through the performance of services or delivery of merchandise are reclassified from accumulated other comprehensive income or loss to deferred revenues.

Beginning April 30, 2004, the Company recognizes realized earnings of the preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts within investment and other income, net (with a corresponding debit to the related trust asset). The Company then recognizes a corresponding expense within investment and other income, net, representing the realized earnings of these trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts or non-controlling interest in cemetery perpetual care trusts, as the case may be). The Company also simultaneously recognizes a similar expense for realized earnings of the trusts attributable to the Company (with a corresponding credit to deferred preneed funeral or cemetery revenue), when such earnings have not been earned by the Company through the performance of services or delivery of merchandise (see Note 7). The net effect is an increase by the amount of the realized earnings in both the trust asset and the related non-controlling interest and deferred revenue; there is no effect on net earnings. In the case of preneed funeral and cemetery merchandise and services trusts, the Company recognizes as revenues amounts attributed to the non-controlling interest holders and the Company upon the performance of services and delivery of merchandise, including realized earnings accumulated in these trusts (with corresponding debits to non-controlling interest in funeral and cemetery trusts and to deferred preneed funeral revenues or deferred preneed cemetery revenues, as the case may be). In the case of cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and permitted to be legally withdrawn by the Company (with a corresponding debit to non-controlling interest in cemetery perpetual care trusts). These earnings and related funds are intended to defray cemetery maintenance costs.

The end result of FIN 46R is that the Company’s trust assets are now recorded on the consolidated balance sheet at their market value and included in preneed receivables and trust investments with corresponding credits to deferred preneed revenue and non-controlling interest in the trusts, as opposed to being recorded at their original cost as prearranged receivables and prearranged deferred revenue prior to adoption of FIN 46R. The realized earnings on these trust assets under FIN 46R flow into and out of the statement of earnings through investment and other income, net with no net effect on revenue or net earnings. Both prior to and after the adoption of FIN 46R, accumulated trust earnings from the preneed funeral and cemetery merchandise and services trusts are recognized as revenue when the related merchandise and services are delivered, and cemetery perpetual care trust earnings are recognized as revenue as they are realized in the trust and permitted to be legally withdrawn by the Company. In summary, the adoption of FIN 46R had no effect on revenues, net earnings, cash flows or shareholders’ equity.

For more detailed discussions of the Company’s accounting policies after the implementation of FIN 46R, see Notes 4 through 7.

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 provisions of the revised statement are effective for financial statements issued for the first interim reporting period of the first fiscal year that begins on or after June 15, 2005. Based on current options and restricted stock outstanding, selection of the modified prospective method and an implementation date of November 1, 2005, the Company would expect an impact of approximately $.01 per share in fiscal year 2006.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Change in Accounting Principles and New Accounting Principles—(Continued)

In March 2004, the FASB issued Emerging Issues Task Force (“EITF”) 03-1, “Impairment and Its Application to Certain Investments.” EITF 03-1 includes new guidance for evaluating and recording impairment losses on debt and equity investments, as well as new disclosure requirements for investments that are deemed to be temporarily impaired. In September 2004, the FASB issued Staff Position EITF 03-1-1, which delays the effective date until additional guidance is issued for the application of the recognition and measurement provisions of EITF 03-1 to investments in securities that are impaired. In June 2005, the FASB decided not to provide additional guidance on the meaning of other-than-temporary impairment, and directed the staff to issue proposed FSP EITF 03-1-a, “Implementation Guidance for the Application of Paragraph 16 of EITF Issue No. 03-1,” as final. The final FSP supersedes EITF Issued No. 03-1 and EITF Topic No. D-44, “Recognition of Other-Than-Temporary Impairment upon the Planned Sale of a Security Whose Cost Exceeds Fair Value.” The final FSP (retitled FSP FAS 115-1, “The Meaning of Other-Than-Temporary Impairment and Its Application to Certain Investments”) replaces the guidance set forth in paragraphs 10-18 of EITF Issue 03-1 with references to existing other-than-temporary impairment guidance. FSP FAS 115-1 codifies the guidance set forth in EITF Topic D-44 and clarifies that an investor should recognize an impairment loss no later than when the impairment is deemed other-than- temporary, even if a decision to sell has not been made. FSP FAS 115-1 is effective for other-than-temporary analysis conducted in periods beginning after December 15, 2005. This pronouncement as it relates to the Company’s trusts will have no impact on net earnings.

In May 2005, the FASB issued SFAS No. 154, “Accounting Changes and Error Corrections, a replacement of APB Opinion No. 20 and FASB Statement No. 3.” This statement will be effective for accounting changes and corrections of errors made in fiscal years beginning after December 15, 2005. Early adoption is permitted for accounting changes and corrections of errors made in fiscal years beginning after the date this statement was issued. This statement requires retrospective application to prior periods’ financial statements of changes in accounting principle, unless it is impracticable to determine either the period-specific effects or the cumulative effect of the change.

(4) Preneed Funeral Activities

The Company sells price-guaranteed preneed funeral contracts through various programs. Because the services or merchandise will not be provided until the future, most states require that all or a portion of the customer payments under these contracts be protected for the benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be placed into trust accounts (“trust-funded preneed funeral contracts”). Alternatively, where allowed, customers may purchase a life insurance or annuity policy from third-party insurance companies to fund their preneed funeral contracts (“insurance-funded preneed funeral contracts”). The funeral goods and services selected at the time of contract origination will be funded by the insurance policy proceeds, which include increasing insurance benefits. Under either customer funding option, the Company enters into a preneed funeral contract with the customer to provide funeral services in the future.

Effective April 30, 2004, the Company changed certain aspects of its accounting for preneed funeral contracts and related trust investments in connection with the implementation of FIN 46R. See Note 3(b) for additional information. The Company also changed its accounting for insurance-funded preneed funeral contracts. The contract amounts associated with unfulfilled insurance-funded preneed funeral contracts are not reflected on the consolidated balance sheet. However, when a trust-funded preneed funeral contract is entered into, the Company records an asset (included in preneed funeral receivables and trust investments) and a corresponding liability (included in deferred preneed funeral revenues) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed funeral revenues into non-controlling interest in funeral and cemetery trusts.

Funeral revenues are recognized in the consolidated statement of earnings on preneed funeral contracts (trust- funded and insurance-funded) at the time the funeral service is performed. Through April 30, 2004, trust investment earnings, net of taxes and certain other expenses paid by the trust, were accrued and deferred when realized. When the services were performed, those net investment earnings were recognized in funeral revenues.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Funeral Activities—(Continued)

These amounts are intended to cover future increases in the cost of providing a price-guaranteed funeral service. Beginning with the third quarter of 2004, the Company now recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to preneed funeral receivables and trust investments) when such earnings have not been earned by the Company through the performance of services or delivery of merchandise. The Company simultaneously recognizes a corresponding expense within investment and other income, net equal to the realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to deferred preneed funeral revenues). The net effect is an increase by the amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred preneed funeral revenue line items; there is no effect on net earnings. Effective April 30, 2004, the cumulative undistributed net trust investment earnings of the funeral merchandise and services trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred preneed funeral revenues. Upon performance of the funeral services, the Company recognizes as revenues amounts attributed to the non-controlling interest holders or included in deferred preneed funeral revenue, including realized trust earnings.

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 April 30, 2005 and October 31, 2004 are as follows:


	April 30, 2005		October 31, 2004
Trust assets	$	437,619	$	439,625
Receivables from customers		60,975		64,183

Preneed funeral receivables and trust investments	$	498,594	$	503,808

Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled to receive a refund of the funds held in trust. In many jurisdictions, the Company may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust including investment income at the time of cancellation. If the fair market value of the trusts were to decline below the estimated costs to deliver the underlying products and services, the Company would record a charge to earnings to record a liability for the expected loss on the delivery of contracts in the Company’s backlog. Based upon this assessment, no loss amounts have been required to be recognized as of April 30, 2005.

Preneed funeral receivables and trust investments are reduced by the trust investment earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. These amounts are reflected in deferred preneed funeral revenues until the underlying service is performed or merchandise is delivered.

The cost and market values associated with preneed funeral merchandise and services trust assets at April 30, 2005 are detailed below. The adjusted cost basis of the funeral merchandise and services trust assets below reflects an other than temporary decline in the trust assets of approximately $79,695 as of April 30, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $15,835 related to trust investments are temporary in nature. See Note 2(e) for additional information.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(4) Preneed Funeral Activities—(Continued)


	April 30, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	56,930	$	—	$	—		$	56,930
U.S. Government, agencies and municipalities		2,772		86		(21	)		2,837
Corporate bonds		22,858		1,152		(638	)		23,372
Preferred stocks		64,763		940		(1,239	)		64,464
Common stocks		240,286		9,606		(12,626	)		237,266
Mutual funds		28,292		126		(1,311	)		27,107
Insurance contracts and other long-term investments		23,651		351		—			24,002

Trust investments	$	439,552	$	12,261	$	(15,835	)	$	435,978

Market value as a percentage of cost											99.2	%

Accrued investment income									1,821
Less trust investments of assets held for sale									(180	)

Trust assets								$	437,619

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


	April 30, 2005
Due in one year or less	$	3,627
Due in one to five years		11,523
Due in five to ten years		10,601
Thereafter		458

	$	26,209

During the three months ended April 30, 2005, purchases and sales of available for sale securities included in trust investments were $42,419 and $39,717, respectively. These sales resulted in realized gains and losses of $3,305 and $2,431, respectively. During the six months ended April 30, 2005, purchases and sales of available for sale securities included in trust investments were $131,671 and $63,513, respectively, and these sales resulted in realized gains and losses of $5,031 and $4,626, respectively.

The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2004 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 $76,135 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $13,735 related to trust investments are temporary in nature. See Note 2(e) for additional information.

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, 2004
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	133,205	$	9	$	—		$	133,214
U.S. Government, agencies and municipalities		1,971		115		(26	)		2,060
Corporate bonds		22,826		1,938		—			24,764
Preferred stocks		62,947		1,703		(422	)		64,228
Common stocks		188,298		3,692		(13,214	)		178,776
Mutual funds		12,431		322		(73	)		12,680
Insurance contracts and other long-term investments		23,631		298		—			23,929

Trust investments	$	445,309	$	8,077	$	(13,735	)	$	439,651

Market value as a percentage of cost											98.7	%

Accrued investment income									2,002
Less trust investments of assets held for sale									(2,028	)

Trust assets								$	439,625

Deferred Preneed Funeral Revenue

Deferred preneed funeral revenue represents future funeral contract revenues. In addition to amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed trust-funded preneed funeral contracts where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future funeral contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts.

Insurance-Funded Preneed Funeral Contracts

Insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected above or in the consolidated balance sheet. The net amount of these contracts that have not been fulfilled as of April 30, 2005 and October 31, 2004 was $365,488 and $352,092, respectively, of which $71 relates to assets held for sale at October 31, 2004. The proceeds of the life insurance policies or annuity contracts will be reflected in funeral revenues as these funerals are performed by the Company. See Note 2(k) for additional information.

(5) Preneed Cemetery Merchandise and Service Activities

The Company sells price-guaranteed preneed cemetery contracts providing for merchandise or services to be delivered in the future at prices prevailing when the agreements are signed. Some or all of the funds received under these contracts for merchandise or services may be required to be placed into trust accounts, pursuant to applicable state law. Effective April 30, 2004, the Company changed certain aspects of its accounting for preneed cemetery contracts upon implementation of FIN 46R. For additional information, see Note 3(b). When a trust-funded preneed cemetery contract is entered into, the Company records an asset (included in preneed cemetery receivables and trust investments) and a corresponding liability (included in deferred preneed cemetery revenues) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed cemetery revenues into non-controlling interest in funeral and cemetery trusts.

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)

Beginning with the third quarter of 2004, the Company recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to preneed cemetery receivables and trust investments). The Company simultaneously recognizes a corresponding expense within investment and other income, net equal to the realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in funeral and cemetery trusts), or attributable to the Company (with a corresponding credit to deferred preneed cemetery revenues) when such earnings have not been earned by the Company through the performance of services or delivery of merchandise. The net effect is an increase by the amount of the unrealized earnings in both (1) the trust asset and (2) the related non-controlling interest or deferred preneed cemetery revenue line items; there is no effect on net earnings. Effective April 30, 2004, the cumulative undistributed net trust investment earnings of the cemetery merchandise and services trusts are included in non-controlling interest in funeral and cemetery trusts instead of deferred preneed cemetery revenues. Upon performance of services or delivery of merchandise, the Company recognizes as revenues amounts attributed to the non-controlling interest holders or included in deferred preneed cemetery revenue, including realized trust earnings.

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 April 30, 2005 and October 31, 2004 are as follows:


	April 30, 2005		October 31, 2004
Trust assets	$	197,490	$	194,008
Receivables from customers		61,169		64,168

Preneed cemetery receivables and trust investments	$	258,659	$	258,176

The cost and market values associated with the preneed cemetery merchandise and services trust assets as of April 30, 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 $44,325 as of April 30, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $6,882 related to trust investments are temporary in nature. See Note 2(e) for additional information.


	April 30, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	31,959	$	—	$	—		$	31,959
U.S. Government, agencies and municipalities		6,896		131		(14	)		7,013
Corporate bonds		10,562		522		(223	)		10,861
Preferred stocks		32,530		573		(640	)		32,463
Common stocks		106,204		4,775		(5,421	)		105,558
Mutual funds		9,705		4		(584	)		9,125
Insurance contracts and other long-term investments		563		1		—			564

Trust investments	$	198,419	$	6,006	$	(6,882	)	$	197,543

Market value as a percentage of cost											99.6	%

Accrued investment income									1,342
Less trust investments of assets held for sale									(1,395	)

Trust assets								$	197,490

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)

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


	April 30, 2005
Due in one year or less	$	1,583
Due in one to five years		8,806
Due in five to ten years		6,937
Thereafter		548

	$	17,874

During the three months ended April 30, 2005, purchases and sales of available for sale securities included in trust investments were $34,353 and $30,526, respectively. These sales resulted in realized gains and losses of $2,377 and $2,058, respectively. During the six months ended April 30, 2005, purchases and sales of available for sale securities included in trust investments were $58,731 and $40,945, respectively, and these sales resulted in realized gains and losses of $3,177 and $2,997, respectively.

The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2004 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 $42,537 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $6,098 related to trust investments are temporary in nature. See Note 2(e) for additional information.


	October 31, 2004
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	50,646	$	4	$	—		$	50,650
U.S. Government, agencies and municipalities		1,050		21		(4	)		1,067
Corporate bonds		10,690		1,086		—			11,776
Preferred stocks		24,287		869		(158	)		24,998
Common stocks		104,788		2,482		(5,934	)		101,336
Mutual funds		3,774		70		(2	)		3,842
Insurance contracts and other long-term investments		569		—		—			569

Trust investments	$	195,804	$	4,532	$	(6,098	)	$	194,238

Market value as a percentage of cost											99.2	%

Accrued investment income									956
Less trust investments of assets held for sale									(1,186	)

Trust assets								$	194,008

Deferred Preneed Cemetery Revenue

Deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized upon delivery of merchandise or performance of services. In addition to the amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed preneed cemetery services or undelivered preneed cemetery merchandise where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts.

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

As a result of the implementation of FIN 46R, the Company has consolidated the cemetery perpetual care trusts, including investments accounted for under SFAS No. 115, resulting in such funds being reflected in cemetery perpetual care trust investments within total assets, with a corresponding amount reflected as non-controlling interest in perpetual care trusts.

Beginning April 30, 2004, the Company recognizes realized earnings of these trusts within investment and other income, net (with a corresponding debit to cemetery perpetual care trust investments). The Company recognizes a corresponding expense within investment and other income, net for the amount of realized earnings of the trusts attributable to the non-controlling interest holders (with a corresponding credit to non-controlling interest in perpetual care trusts). The net effect is an increase by the amount of the realized earnings of the trusts in both the trust asset and the related non-controlling interest; there is no effect on net earnings.

Earnings realized from these cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $1,578 and $2,240 for the three months ended April 30, 2005 and 2004, respectively, and $2,700 and $4,636 for the six months ended April 30, 2005 and 2004, respectively.

The cost and market values of the trust investments held by the cemetery perpetual care trusts at April 30, 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 $31,085 as of April 30, 2005 from their original cost basis. The Company believes the unrealized losses reflected below of $7,888 related to trust investments are temporary in nature. See Note 2(e) for additional information.


	April 30, 2005
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	22,125	$	—	$	(2	)	$	22,123
U.S. Government, agencies and municipalities		6,241		123		(78	)		6,286
Corporate bonds		18,821		2,145		(129	)		20,837
Preferred stocks		67,915		1,182		(2,721	)		66,376
Common stocks		84,766		9,617		(4,883	)		89,500
Mutual funds		4,007		151		(71	)		4,087
Insurance contracts and other long-term investments		945		74		(4	)		1,015

Trust investments	$	204,820	$	13,292	$	(7,888	)	$	210,224

Market value as a percentage of cost										102.6	%

Accrued investment income									1,279

Trust assets								$	211,503

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:


	April 30, 2005
Due in one year or less	$	1,589
Due in one to five years		6,898
Due in five to ten years		17,579
Thereafter		1,057

	$	27,123

During the three months ended April 30, 2005, purchases and sales of available for sale securities were $26,657 and $21,439, respectively. These sales resulted in realized gains and losses of $841 and $1,082, respectively. During the six months ended April 30, 2005, purchases and sales of available for sale securities were $51,125 and $41,056, respectively, and these sales resulted in realized gains and losses of $1,899 and $2,017, respectively.

The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2004 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 $30,524 as of October 31, 2004 from their original cost basis. The Company believes the unrealized losses reflected below of $6,017 related to trust investments are temporary in nature. See Note 2(e) for additional information.


	October 31, 2004
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	29,154	$	—	$	(3	)	$	29,151
U.S. Government, agencies and municipalities		3,173		62		(97	)		3,138
Corporate bonds		19,368		2,731		(23	)		22,076
Preferred stocks		65,176		2,571		(46	)		67,701
Common stocks		78,531		8,406		(5,797	)		81,140
Mutual funds		5,072		193		(51	)		5,214
Insurance contracts and other long-term investments		841		43		—			884

Trust investments	$	201,315	$	14,006	$	(6,017	)	$	209,304

Market value as a percentage of cost										104.0	%

Accrued investment income									963

Trust assets								$	210,267

(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 April 30, 2005 are as follows:


	Non-controlling Interest
										Non-controlling
										Interest in
	Preneed			Preneed						Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	437,619		$	197,490		$	635,109		$	211,503
Less:
Pending withdrawals		(7,659	)		(3,675	)		(11,334	)		(2,351	)
Pending deposits		1,755			1,510			3,265			681

Non-controlling interest	$	431,715		$	195,325		$	627,040		$	209,833

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)

The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at October 31, 2004 are as follows:


	Non-controlling Interest
										Non-controlling
										Interest in
	Preneed			Preneed						Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	439,625		$	194,008		$	633,633		$	210,267
Less:
Pending withdrawals		(6,847	)		(2,797	)		(9,644	)		(1,951	)
Pending deposits		1,788			1,567			3,355			577

Non-controlling interest	$	434,566		$	192,778		$	627,344		$	208,893

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 April 30, 2005 and 2004 and the six months ended April 30, 2005 are detailed below.


	Three Months Ended			Six Months Ended
	April 30, 2005			April 30, 2005
Non-controlling interest:
Realized gains	$	6,523		$	10,107
Realized losses		(5,571	)		(9,640	)
Interest income, dividend and other ordinary income		6,029			12,880
Trust expenses and income taxes		(3,448	)		(6,312	)

Net trust investment income		3,533			7,035
Interest expense related to non-controlling interest in funeral and cemetery trust investments		(2,655	)		(4,668	)
Interest expense related to non-controlling interest in perpetual care trust investments		(878	)		(2,367	)

Total non-controlling interest		—			—
Investment and other income, net⁽¹⁾		112			220

Total investment and other income, net	$	112		$	220


⁽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 names the Company and several of its Southern California affiliates as defendants and also seeks 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.

The plaintiffs allege that defendants failed to disclose that the prices charged by defendants for certain goods and services exceeded what defendants paid to third parties for those same goods and services and that such failure

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Commitments and Contingencies—Continued

violated provisions of the Federal Trade Commission’s “Funeral Rule” that require a funeral home to disclose, if true, that it marks up the price of certain items purchased from third parties on behalf of customers on a “cash advance” or “accommodation” basis. The plaintiffs allege that by failing to comply with the Funeral Rule, defendants (i) breached contracts with the plaintiffs, (ii) were unjustly enriched, (iii) engaged in unfair, unlawful and fraudulent business practices in violation of a provision of California’s Business and Professions Code, and (iv) engaged in a civil conspiracy among the defendants to breach plaintiffs’ contracts and commit acts of unfair competition. The plaintiffs seek restitution damages, disgorgement, interest, costs, and attorneys’ fees. The Company was served with the complaint on April 7, 2005. By order dated May 5, 2005, the court ruled that this case was related to similar actions against Service Corporation International and Alderwoods Group, Inc. Because the matter is in its 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 this matter.

Funeral Consumers Alliance, Inc, et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co.; No. C 05 1804 on the docket of the United States District Court, Northern District of California. This purported class action was filed on May 2, 2005, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home defendants.

The suit alleges that the defendants acted jointly to fix and maintain prices on caskets and reduce competition from independent casket discounters in violation of the federal antitrust laws and California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees. The Company was served with the complaint on May 10, 2005. Because the matter is in its 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 this matter.

Ralph 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.; No. 2:05cv145 on the docket of the United States District Court, Eastern District of Tennessee. This purported class action was filed on May 18, 2005, on behalf of consumers in twenty-three states and the District of Columbia who purchased caskets. The allegations of fact are essentially the same as those made inFuneral Consumers Alliance, Inc. v Service Corporation Internationalreported above. Rather than allege violations of federal law, however, the plaintiff in this suit alleges that the defendants violated state antitrust, consumer protection and/or unjust enrichment laws. The plaintiff seeks damages, treble damages where appropriate, restitution, interest and costs. The Company was served with the complaint on May 26, 2005. Because the matter is in its 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 this matter.

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Reconciliation of Basic and Diluted Per Share Data


	Loss			Shares		Per Share
	(Numerator)			(Denominator)		Data
Three Months Ended April 30, 2005 – Restated (Note 1)
Loss from continuing operations	$	(4,673	)

Basic earnings per common share:
Loss from continuing operations available to common shareholders	$	(4,673	)		109,506	$	(.04	)

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

Diluted loss per common share:
Loss from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	(4,673	)		109,506	$	(.04	)


	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended April 30, 2004 – Restated (Note 1)
Earnings from continuing operations	$	8,752

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	8,752		107,438	$	.08

Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		962

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	8,752		108,400	$	.08


	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Six Months Ended April 30, 2005 – Restated (Note 1)
Earnings from continuing operations before cumulative effect of change in accounting principle	$	2,716

Basic earnings per common share:
Earnings from continuing operations before cumulative effect of change in accounting principle available to common shareholders	$	2,716		109,293	$	.03

Time-vest stock options assumed exercised and restricted stock		—		213

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	$	2,716		109,506	$	.03

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)


	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Six Months Ended April 30, 2004– Restated (Note 1)
Earnings from continuing operations	$	17,421

Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	17,421		107,660	$	.16

Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock		—		517

Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	17,421		108,177	$	.16

Options to purchase 1,051,083 shares of common stock at prices ranging from $6.90 to $7.03 per share were outstanding during the six months ended April 30, 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. These options expire on November 18, 2011 and December 20, 2011. Options to purchase 701,119 and 1,312,247 shares of common stock at prices ranging from $6.96 to $27.25 and $5.96 to $27.25 per share were outstanding during the three and six months ended April 30, 2004, respectively, but were not included in the computation of diluted earnings per share because the exercise prices were greater than the average market price of the common shares.

Common stock equivalents are excluded in the calculation of weighted average shares outstanding when a net loss from continuing operations is reported for a period. The number of potentially antidilutive shares excluded from the calculation of diluted loss per share was 1,823,039 for the three months ended April 30, 2005 because of the net loss from continuing operations for that period.

The Company includes Class A and Class B common stock in its diluted shares calculation. As of April 30, 2005, 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 (Restated)

The Company re-evaluated its application of SFAS No. 131, and has restated its operating and reportable segments. The Company’s historical presentation of segment data consisted of two operating and reportable segments, funeral and cemetery. The Company’s restated presentation of segment data reflects 11 operating and reportable segments consisting 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. All Other consists of the Company’s operations in Puerto Rico. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same.

The Company operates four geographic divisions each with a division president: Central division, Western division, Eastern division and Southern division. The Company’s chief executive officer, who is the chief operating decision maker (“CODM”), reviews the Southern division’s operations separately for Florida and Puerto Rico. Thus, the five geographic areas are the Central division, Western division, Eastern division, Southern division-Florida and Southern division-Puerto Rico. The Company’s funeral operations and cemetery operations in each of those

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data (Restated)—(Continued)

geographic areas are further reviewed separately, resulting in 10 segments. The Central division consists of 73 funeral homes and 46 cemeteries in Alabama, Arkansas, Illinois, Iowa, Kansas, Louisiana, Mississippi, Missouri, Nebraska, New Mexico, Tennessee, Texas and Wisconsin. The Western division consists of 56 funeral homes and 8 cemeteries in California, Oregon and Washington. The Eastern division consists of 49 funeral homes and 64 cemeteries in Georgia, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia and West Virginia. The Southern division consists of 41 funeral homes and 21 cemeteries in Florida and 16 funeral homes and 8 cemeteries in Puerto Rico.

The eleventh operating segment is the corporate trust management segment. The corporate trust management segment includes (i) the funeral and cemetery service and merchandise trust earnings recognized for GAAP purposes, which are further described below, and (ii) fee income related to the Company’s wholly-owned subsidiary, Investor’s Trust, Inc. (“ITI”). Trust assets and the earnings on those assets are associated exclusively with preneed sales. Because preneed services and merchandise will not be provided until an unknown future date, most states require that all or a portion of the customer payments under preneed contracts be placed in trust or escrow accounts for the benefit of the customers. These trust assets and the earnings on the trust assets are described in detail in Notes 4, 5, 6, and 7.

ITI serves as investment advisor exclusively to the Company’s trust funds. ITI provides investment advisory services to the trusts for a fee. The Company has elected to perform these services in-house, and the fees are recognized as income as earned.

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 2. 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. Preneed sales and the accounting for these sales are discussed in Notes 2(k) and 2(l), and Notes 3 through 7. 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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data (Restated)—(Continued)

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 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.

As discussed in Note 19, effective for the fourth quarter of fiscal year 2005, the Company reorganized its divisions. As a result, the Company will revise its operating and reportable segments and reporting units in the fourth quarter of 2005.

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
	April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)
Central Division	$	23,632	$	21,368	$	18,534	$	22,081	$	42,166	$	43,449
Western Division		15,750		15,742		3,086		3,339		18,836		19,081
Eastern Division		14,509		13,784		18,143		15,617		32,652		29,401
Southern Division – Florida		11,871		10,672		11,061		10,516		22,932		21,188
All Other⁽²⁾		3,285		3,363		4,325		738		7,610		4,101
Corporate Trust Management⁽³⁾		5,378		4,714		2,996		2,504		8,374		7,218

Total	$	74,425	$	69,643	$	58,145	$	54,795	$	132,570	$	124,438

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data (Restated)—(Continued)


	Funeral Revenue				Cemetery Revenue⁽¹⁾				Total Revenue
	Six Months		Six Months		Six Months		Six Months		Six Months		Six Months
	Ended		Ended		Ended		Ended		Ended		Ended
	April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)
Central Division	$	44,693	$	44,151	$	36,027	$	39,904	$	80,720	$	84,055
Western Division		31,324		31,775		6,315		6,085		37,639		37,860
Eastern Division		28,158		27,707		32,725		30,853		60,883		58,560
Southern Division – Florida		23,049		22,319		22,089		20,847		45,138		43,166
All Other⁽²⁾		7,060		6,749		8,140		4,480		15,200		11,229
Corporate Trust Management⁽³⁾		9,857		9,714		5,701		5,024		15,558		14,738

Total	$	144,141	$	142,415	$	110,997	$	107,193	$	255,138	$	249,608


	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
	April 30, 2005		April 30, 2004⁽⁴⁾		April 30, 2005		April 30, 2004⁽⁴⁾			April 30, 2005		April 30, 2004⁽⁴⁾
	(Restated)		(Restated)		(Restated)		(Restated)			(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)			(Note 1)		(Note 1)
Central Division	$	7,056	$	6,184	$	4,524	$	5,093		$	11,580	$	11,277
Western Division		2,083		2,950		373		663			2,456		3,613
Eastern Division		3,272		3,445		2,368		2,872			5,640		6,317
Southern Division – Florida		1,978		1,449		2,128		2,159			4,106		3,608
All Other⁽²⁾		518		610		848		(1,164	)		1,366		(554	)
Corporate Trust Management⁽³⁾		5,221		4,572		2,856		2,351			8,077		6,923

Total	$	20,128	$	19,210	$	13,097	$	11,974		$	33,225	$	31,184


	Funeral Gross Profit				Cemetery Gross Profit⁽¹⁾					Total Gross Profit
	Six Months		Six Months		Six Months		Six Months			Six Months		Six Months
	Ended		Ended		Ended		Ended			Ended		Ended
	April 30, 2005		April 30, 2004⁽⁴⁾		April 30, 2005		April 30, 2004⁽⁴⁾			April 30, 2005		April 30, 2004⁽⁴⁾
	(Restated)		(Restated)		(Restated)		(Restated)			(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)			(Note 1)		(Note 1)
Central Division	$	12,515	$	12,912	$	8,019	$	9,557		$	20,534	$	22,469
Western Division		4,388		5,756		885		1,505			5,273		7,261
Eastern Division		6,274		6,994		2,830		4,660			9,104		11,654
Southern Division – Florida		3,769		3,427		4,268		4,115			8,037		7,542
All Other⁽²⁾		1,426		1,133		1,107		(1,083	)		2,533		50
Corporate Trust Management⁽³⁾		9,554		9,426		5,432		4,716			14,986		14,142

Total	$	37,926	$	39,648	$	22,541	$	23,470		$	60,467	$	63,118

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data (Restated)—(Continued)


	Preneed Funeral Merchandise				Preneed Cemetery Merchandise				Total Preneed Merchandise
	and Service Sales⁽⁵⁾				and Service Sales⁽⁵⁾				and Service Sales⁽⁵⁾
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)
Central Division	$	6,667	$	5,301	$	3,585	$	3,521	$	10,252	$	8,822
Western Division		6,079		5,812		914		1,009		6,993		6,821
Eastern Division		4,455		4,280		7,112		7,340		11,567		11,620
Southern Division – Florida		5,675		5,004		3,284		3,960		8,959		8,964
All Other⁽²⁾		1,278		1,373		1,006		1,124		2,284		2,497

Total	$	24,154	$	21,770	$	15,901	$	16,954	$	40,055	$	38,724


	Preneed Funeral Merchandise				Preneed Cemetery Merchandise				Total Preneed Merchandise
	and Service Sales⁽⁵⁾				and Service Sales⁽⁵⁾				and Service Sales⁽⁵⁾
	Six Months		Six Months		Six Months		Six Months		Six Months		Six Months
	Ended		Ended		Ended		Ended		Ended		Ended
	April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004		April 30, 2005		April 30, 2004
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)
Central Division	$	11,560	$	10,277	$	6,548	$	6,611	$	18,108	$	16,888
Western Division		12,403		11,744		1,859		1,857		14,262		13,601
Eastern Division		8,494		8,160		13,255		13,033		21,749		21,193
Southern Division – Florida		9,728		9,320		6,191		6,552		15,919		15,872
All Other⁽²⁾		2,168		2,434		1,720		2,005		3,888		4,439

Total	$	44,353	$	41,935	$	29,573	$	30,058	$	73,926	$	71,993


	Total Funeral Assets				Total Cemetery Assets				Total Assets
	April 30,		October 31,		April 30,		October 31,		April 30,		October 31,
	2005		2004		2005		2004		2005		2004
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)
Central Division	$	237,289	$	274,029	$	325,301	$	340,994	$	562,590	$	615,023
Western Division		73,083		91,579		56,737		56,837		129,820		148,416
Eastern Division		65,245		78,333		325,070		347,286		390,315		425,619
Southern Division – Florida		139,231		158,725		261,120		297,157		400,351		455,882
All Other⁽²⁾		57,830		60,921		74,660		75,318		132,490		136,239
Corporate Trust Management⁽³⁾		437,619		439,625		197,490		194,008		635,109		633,633
Reconciling Items⁽⁶⁾										95,318		96,696

Total									$	2,345,993	$	2,511,508

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data (Restated)—(Continued)


	Funeral Goodwill				Cemetery Goodwill				Total Goodwill
	April 30,		October 31,		April 30,		October 31,		April 30,		October 31,
	2005		2004		2005		2004		2005		2004
	(Restated)		(Restated)		(Restated)		(Restated)		(Restated)		(Restated)
	(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)		(Note 1)
Central Division	$	116,881	$	116,881	$	49,787	$	49,787	$	166,668	$	166,668
Western Division		—		—		—		—		—		—
Eastern Division		17,052		17,052		25,239		25,239		42,291		42,291
Southern Division - Florida		46,199		46,199		—		—		46,199		46,199
All Other⁽²⁾		17,571		17,571		—		—		17,571		17,571

Total	$	197,703	$	197,703	$	75,026	$	75,026	$	272,729	$	272,729


⁽¹⁾		Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment and amounted to $1,578 and $2,240 for the three months ended April 30, 2005 and 2004, respectively, and $2,700 and $4,636 for the six months ended April 30, 2005 and 2004, respectively.

⁽²⁾		All Other represents the Company’s operations in Puerto Rico.

⁽³⁾		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 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 April 30, 2005 and 2004 were $1,524 and $1,438, respectively, and funeral trust earnings for the three months ended April 30, 2005 and 2004 were $3,854 and $3,276, respectively. Trust management fees included in cemetery revenue for the three months ended April 30, 2005 and 2004 were $1,233 and $1,207, respectively, and cemetery trust earnings for the three months ended April 30, 2005 and 2004 were $1,763 and $1,297, respectively. Trust management fees included in funeral revenue for the six months ended April 30, 2005 and 2004 were $2,678 and $2,876, respectively, and funeral trust earnings for the six months ended April 30, 2005 and 2004 were $7,179 and $6,838, respectively. Trust management fees included in cemetery revenue for the six months ended April 30, 2005 and 2004 were $2,464 and $2,396, respectively, and cemetery trust earnings for the six months ended April 30, 2005 and 2004 were $3,237 and $2,628, respectively.

⁽⁴⁾		Funeral and cemetery gross profit for the three and six months ended April 30, 2004 do not include net preneed selling costs which would have been expensed if the accounting change described in Note 3(a) had been implemented in fiscal year 2004. The effect of net preneed selling costs is calculated by removing the amortization of deferred selling costs and including in expense the preneed selling costs incurred during 2004. The result of that calculation is the net preneed selling costs that would have reduced 2004 gross profit if the accounting change had been implemented in fiscal year 2004. Net preneed funeral selling costs amounted to $1,575 and $2,154 for the three and six months ended April 30, 2004, respectively. Net preneed cemetery selling costs amounted to $1,777 and $2,774 for the three and six months ended April 30, 2004, respectively.

⁽⁵⁾		Preneed sales amounts represent total preneed funeral and cemetery service and merchandise sales generated in the applicable period, net of cancellations.

⁽⁶⁾		Reconciling items consist of unallocated corporate assets.

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 and six months ended April 30, 2005 and 2004 is as follows:

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Segment Data (Restated)—(Continued)


	Three Months Ended						Six Months Ended
	April 30,						April 30,
	2005			2004			2005			2004
	(Restated)			(Restated)			(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)
Gross profit for reportable segments	$	33,225		$	31,184		$	60,467		$	63,118
Corporate general and administrative expenses		(4,582	)		(4,621	)		(8,798	)		(8,534	)
Separation charges		—			(138	)		—			(2,131	)
Gains on dispositions and impairment (losses), net		359			(853	)		1,237			(550	)
Other operating income, net		259			511			498			948
Interest expense		(6,671	)		(11,953	)		(17,047	)		(24,474	)
Loss on early extinguishment of debt		(30,057	)		—			(32,708	)		—
Investment and other income, net		112			57			220			32

Earnings (loss) from continuing operations before income taxes and cumulative effect of change in accounting principle	$	(7,355	)	$	14,187		$	3,869		$	28,409

(11) Supplementary Information (Restated)

The detail of certain income statement accounts is as follows for the three and six months ended April 30, 2005 and 2004.


	Three Months Ended				Six Months Ended
	April 30,				April 30,
	2005		2004		2005		2004
Service revenue
Funeral	$	42,137	$	39,501	$	81,757	$	80,329
Cemetery		15,290		14,716		28,751		29,807

		57,427		54,217		110,508		110,136

Merchandise revenue
Funeral		30,100		27,832		58,391		57,471
Cemetery		38,896		35,700		74,611		68,513

		68,996		63,532		133,002		125,984

Other revenue
Funeral		2,188		2,310		3,993		4,615
Cemetery		3,959		4,379		7,635		8,873

		6,147		6,689		11,628		13,488

Total revenue	$	132,570	$	124,438	$	255,138	$	249,608


Service costs
Funeral	$	12,851	$	12,123	$	25,188	$	24,333
Cemetery		9,869		9,768		19,395		18,712

		22,720		21,891		44,583		43,045

Merchandise costs
Funeral		17,702		15,964		33,809		32,111
Cemetery		22,445		20,237		42,971		39,008

		40,147		36,201		76,780		71,119

General and administrative expenses
Funeral		23,744		22,346		47,218		46,323
Cemetery		12,734		12,816		26,090		26,003

		36,478		35,162		73,308		72,326

Total costs	$	99,345	$	93,254	$	194,671	$	186,490

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 (Restated)

The following tables present the condensed consolidating historical financial statements as of April 30, 2005 and October 31, 2004 and for the three and six months ended April 30, 2005 and 2004, 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 April 30, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)			(Note 1)
Revenues:
Funeral	$	—		$	69,371		$	5,054		$	—		$	74,425
Cemetery		—			52,071			6,074			—			58,145

		—			121,442			11,128			—			132,570

Costs and expenses:
Funeral		—			51,147			3,150			—			54,297
Cemetery		—			41,386			3,662			—			45,048

		—			92,533			6,812			—			99,345

Gross profit		—			28,909			4,316			—			33,225
Corporate general and administrative expenses		(4,582	)		—			—			—			(4,582	)
Gains on dispositions and impairment (losses), net		—			373			(14	)		—			359
Other operating income, net		44			207			8			—			259

Operating earnings (loss)		(4,538	)		29,489			4,310			—			29,261
Interest income (expense)		14,276			(19,136	)		(1,811	)		—			(6,671	)
Loss on early extinguishment of debt		(30,057	)		—			—			—			(30,057	)
Investment and other income, net		112			—			—			—			112
Equity in subsidiaries		7,755			—			—			(7,755	)		—

Earnings (loss) from continuing operations before income taxes		(12,452	)		10,353			2,499			(7,755	)		(7,355	)
Income tax expense (benefit)		(7,535	)		3,759			1,094			—			(2,682	)

Earnings (loss) from continuing operations		(4,917	)		6,594			1,405			(7,755	)		(4,673	)

Discontinued operations:
Earnings (loss) from discontinued operations before income taxes		—			(211	)		60			—			(151	)
Income taxes		—			93			—			—			93

Earnings (loss) from discontinued operations		—			(304	)		60			—			(244	)

Net earnings (loss)		(4,917	)		6,290			1,465			(7,755	)		(4,917	)
Other comprehensive income, net		140			—			—			—			140

Comprehensive income (loss)	$	(4,777	)	$	6,290		$	1,465		$	(7,755	)	$	(4,777	)

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 (Restated)—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Three Months Ended April 30, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)			(Note 1)
Revenues:
Funeral	$	—		$	64,326		$	5,317		$	—		$	69,643
Cemetery		—			48,461			6,334			—			54,795

		—			112,787			11,651			—			124,438

Costs and expenses:
Funeral		—			47,197			3,236			—			50,433
Cemetery		—			38,028			4,793			—			42,821

		—			85,225			8,029			—			93,254

Gross profit		—			27,562			3,622			—			31,184
Corporate general and administrative expenses		(4,621	)		—			—			—			(4,621	)
Separation charges		(119	)		(15	)		(4	)		—			(138	)
Gains on dispositions and impairment (losses), net		(395	)		(506	)		48			—			(853	)
Other operating income (expense), net		(351	)		449			413			—			511

Operating earnings (loss)		(5,486	)		27,490			4,079			—			26,083
Interest income (expense)		9,799			(19,548	)		(2,204	)		—			(11,953	)
Investment and other income, net		57			—			—			—			57
Equity in subsidiaries		7,976			—			—			(7,976	)		—

Earnings from continuing operations before income taxes		12,346			7,942			1,875			(7,976	)		14,187
Income taxes		1,918			2,823			694			—			5,435

Earnings from continuing operations		10,428			5,119			1,181			(7,976	)		8,752

Discontinued operations:
Earnings from discontinued operations before income taxes		—			1,384			56			—			1,440
Income tax benefit		—			(236	)		—			—			(236	)

Earnings from discontinued operations		—			1,620			56			—			1,676

Net earnings		10,428			6,739			1,237			(7,976	)		10,428
Other comprehensive income, net		262			—			—			—			262

Comprehensive income	$	10,690		$	6,739		$	1,237		$	(7,976	)	$	10,690

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 (Restated)—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Six Months Ended April 30, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)		(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)		(Note 1)
Revenues:
Funeral	$	—		$	133,646		$	10,495		$	—	$	144,141
Cemetery		—			99,487			11,510			—		110,997

		—			233,133			22,005			—		255,138

Costs and expenses:
Funeral		—			99,774			6,441			—		106,215
Cemetery		—			80,629			7,827			—		88,456

		—			180,403			14,268			—		194,671

Gross profit		—			52,730			7,737			—		60,467
Corporate general and administrative expenses		(8,798	)		—			—			—		(8,798	)
Gains on dispositions and impairment (losses), net		—			987			250			—		1,237
Other operating income, net		161			250			87			—		498

Operating earnings (loss)		(8,637	)		53,967			8,074			—		53,404
Interest income (expense)		25,560			(38,813	)		(3,794	)		—		(17,047	)
Loss on early extinguishment of debt		(32,708	)		—			—			—		(32,708	)
Investment and other income, net		220			—			—			—		220
Equity (loss) in subsidiaries		(140,465	)		—			—			140,465		—

Earnings (loss) from continuing operations before income taxes		(156,030	)		15,154			4,280			140,465		3,869
Income tax expense (benefit)		(5,836	)		5,349			1,640			—		1,153

Earnings (loss) from continuing operations		(150,194	)		9,805			2,640			140,465		2,716

Discontinued operations:
Earnings from discontinued operations before income taxes		—			35			344			—		379
Income taxes		—			109			—			—		109

Earnings (loss) from discontinued operations		—			(74	)		344			—		270

Earnings (loss) before cumulative effect of change in accounting principle		(150,194	)		9,731			2,984			140,465		2,986
Cumulative effect of change in accounting principle		—			(145,276	)		(7,904	)		—		(153,180	)

Net loss		(150,194	)		(135,545	)		(4,920	)		140,465		(150,194	)
Other comprehensive income, net		333			—			—			—		333

Comprehensive loss	$	(149,861	)	$	(135,545	)	$	(4,920	)	$	140,465	$	(149,861	)

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 (Restated)—(Continued)

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


	Six Months Ended April 30, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)			(Note 1)
Revenues:
Funeral	$	—		$	131,874		$	10,541		$	—		$	142,415
Cemetery		—			95,257			11,936			—			107,193

		—			227,131			22,477			—			249,608

Costs and expenses:
Funeral		—			96,241			6,526			—			102,767
Cemetery		—			74,626			9,097			—			83,723

		—			170,867			15,623			—			186,490

Gross profit		—			56,264			6,854			—			63,118
Corporate general and administrative expenses		(8,534	)		—			—			—			(8,534	)
Separation charges		(482	)		(1,629	)		(20	)		—			(2,131	)
Gains on dispositions and impairment (losses), net		(300	)		(506	)		256			—			(550	)
Other operating income (expense), net		269			803			(124	)		—			948

Operating earnings (loss)		(9,047	)		54,932			6,966			—			52,851
Interest income (expense)		19,424			(39,667	)		(4,231	)		—			(24,474	)
Investment and other income, net		32			—			—			—			32
Equity in subsidiaries		12,239			—			—			(12,239	)		—

Earnings from continuing operations before income taxes		22,648			15,265			2,735			(12,239	)		28,409
Income taxes		3,148			5,881			1,959			—			10,988

Earnings from continuing operations		19,500			9,384			776			(12,239	)		17,421

Discontinued operations:
Earnings from discontinued operations before income taxes		—			2,023			67			—			2,090
Income taxes		—			11			—			—			11

Earnings from discontinued operations		—			2,012			67			—			2,079

Net earnings		19,500			11,396			843			(12,239	)		19,500
Other comprehensive income, net		919			—			—			—			919

Comprehensive income	$	20,419		$	11,396		$	843		$	(12,239	)	$	20,419

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 (Restated)—(Continued)

Condensed Consolidating Balance Sheets


	April 30, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)		(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)		(Note 1)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	15,003		$	2,693		$	754	$	—		$	18,450
Marketable securities		—			—			1,292		—			1,292
Receivables, net of allowances		15,900			49,616			5,005		—			70,521
Inventories	��	367			26,875			6,548		—			33,790
Prepaid expenses		664			2,989			17		—			3,670
Deferred income taxes, net		2,145			2,050			—		—			4,195
Assets held for sale		—			3,489			1,789		—			5,278

Total current assets		34,079			87,712			15,405		—			137,196
Receivables due beyond one year, net of allowances		38			54,631			22,575		—			77,244
Preneed funeral receivables and trust investments		—			486,994			11,600		—			498,594
Preneed cemetery receivables and trust investments		—			239,397			19,262		—			258,659
Goodwill		—			247,567			25,162		—			272,729
Cemetery property, at cost		—			345,906			20,313		—			366,219
Property and equipment, at cost		32,988			434,141			35,846		—			502,975
Less accumulated depreciation		18,236			170,074			10,422		—			198,732

Net property and equipment		14,752			264,067			25,424		—			304,243
Deferred income taxes, net		12,574			166,322			19,613		—			198,509
Cemetery perpetual care trust investments		—			211,503			—		—			211,503
Other assets		6,612			13,576			909		—			21,097
Equity in subsidiaries		6,841			5,353			—		(12,194	)		—

Total assets	$	74,896		$	2,123,028		$	160,263	$	(12,194	)	$	2,345,993


Current liabilities:
Current maturities of long-term debt	$	5,087		$	—		$	—	$	—		$	5,087
Accounts payable		327			8,425			248		—			9,000
Accrued expenses and other current liabilities		12,300			36,270			6,004		—			54,574
Liabilities associated with assets held for sale		—			2,405			1,079		—			3,484

Total current liabilities		17,714			47,100			7,331		—			72,145
Long-term debt, less current maturities		383,377			—			30,000		—			413,377
Intercompany payables, net		(1,017,677	)		981,596			36,081		—			—
Deferred preneed funeral revenue		—			243,608			46,816		—			290,424
Deferred preneed cemetery revenue		—			250,104			27,841		—			277,945
Non-controlling interest in funeral and cemetery trusts		—			627,040			—		—			627,040
Other long-term liabilities		8,340			2,296			—		—			10,636
Negative equity in subsidiaries		238,549			—			—		(238,549	)		—

Total liabilities		(369,697	)		2,151,744			148,069		(238,549	)		1,691,567

Non-controlling interest in perpetual care trusts		—			209,833			—		—			209,833

Common stock		109,699			426			52		(478	)		109,699
Other		334,894			(238,975	)		12,142		226,833			334,894

Total shareholders’ equity		444,593			(238,549	)		12,194		226,355			444,593

Total liabilities and shareholders’ equity	$	74,896		$	2,123,028		$	160,263	$	(12,194	)	$	2,345,993

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 (Restated)—(Continued)

Condensed Consolidating Balance Sheets


	October 31, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries		Eliminations			Consolidated
	(Restated)			(Restated)			(Restated)		(Restated)			(Restated)
	(Note 1)			(Note 1)			(Note 1)		(Note 1)			(Note 1)
ASSETS
Current assets:
Cash and cash equivalents	$	13,553		$	7,625		$	336	$	—		$	21,514
Marketable securities		—			16			1,281		—			1,297
Receivables, net of allowances		19,207			42,450			7,476		—			69,133
Inventories		389			29,362			6,423		—			36,174
Prepaid expenses		822			2,117			14		—			2,953
Deferred income taxes, net		2,263			5,411			—		—			7,674
Assets held for sale		—			7,393			3,100		—			10,493

Total current assets		36,234			94,374			18,630		—			149,238
Receivables due beyond one year, net of allowances		98			57,086			21,508		—			78,692
Preneed funeral receivables and trust investments		—			487,840			15,968		—			503,808
Preneed cemetery receivables and trust investments		—			232,493			25,683		—			258,176
Goodwill		—			247,567			25,162		—			272,729
Deferred charges		—			237,825			15,535		-			253,360
Cemetery property, at cost		—			341,233			25,641		—			366,874
Property and equipment, at cost		31,845			426,969			32,485		—			491,299
Less accumulated depreciation		17,273			162,434			9,845		—			189,552

Net property and equipment		14,572			264,535			22,640		—			301,747
Deferred income taxes, net		12,808			67,198			13,008		—			93,014
Cemetery perpetual care trust investments		—			210,267			—		—			210,267
Other assets		8,835			13,560			1,208		—			23,603
Equity in subsidiaries		11,761			5,353			—		(17,114	)		—

Total assets	$	84,308		$	2,259,331		$	184,983	$	(17,114	)	$	2,511,508

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	1,725		$	—		$	—	$	—		$	1,725
Accounts payable		1,090			8,452			323		—			9,865
Accrued expenses and other current liabilities		17,992			39,680			6,097		—			63,769
Liabilities associated with assets held for sale		—			4,777			1,714		—			6,491

Total current liabilities		20,807			52,909			8,134		—			81,850
Long-term debt, less current maturities		385,080			—			30,000		—			415,080
Intercompany payables, net		(1,022,830	)		973,226			49,604		—			—
Deferred preneed funeral revenue		—			250,556			46,772		—			297,328
Deferred preneed cemetery revenue		—			247,211			33,359		—			280,570
Non-controlling interest in funeral and cemetery trusts		—			627,344			—		—			627,344
Other long-term liabilities		10,269			2,196			—		—			12,465
Negative equity in subsidiaries		103,004			—			—		(103,004	)		—

Total liabilities		(503,670	)		2,153,442			167,869		(103,004	)		1,714,637

Non-controlling interest in perpetual care trusts		—			208,893			—		—			208,893

Common stock		107,885			426			52		(478	)		107,885
Other		480,426			(103,430	)		17,062		86,368			480,426
Accumulated other comprehensive loss		(333	)		—			—		—			(333	)

Total shareholders’ equity		587,978			(103,004	)		17,114		85,890			587,978

Total liabilities and shareholders’ equity	$	84,308		$	2,259,331		$	184,983	$	(17,114	)	$	2,511,508

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 (Restated)—(Continued)

Condensed Consolidating Statements of Cash Flows


	Six Months Ended April 30, 2005
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)		(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)		(Note 1)
Net cash provided by (used in) operating activities	$	(10,701	)	$	7,311		$	7,040		$	—	$	3,650

Cash flows from investing activities:
Proceeds from sales of marketable securities		—			16			—			—		16
Proceeds from sale of assets, net		(205	)		5,915			675			—		6,385
Additions to property and equipment		(1,636	)		(7,988	)		(3,344	)		—		(12,968	)

Other		—			(188	)		—			—		(188	)

Net cash used in investing activities		(1,841	)		(2,245	)		(2,669	)		—		(6,755	)

Cash flows from financing activities:
Proceeds from long-term debt		440,000			—			—			—		440,000
Repayments of long-term debt		(438,341	)		—			—			—		(438,341	)
Intercompany receivables (payables)		13,951			(9,998	)		(3,953	)		—		—
Debt issue costs		(5,811	)		—			—			—		(5,811	)
Issuance of common stock		12,608			—			—			—		12,608
Purchase and retirement of common stock		(5,681	)		—			—			—		(5,681	)
Dividends		(2,742	)		—			—			—		(2,742	)
Other		8			—			—			—		8

Net cash provided by (used in) financing activities		13,992			(9,998	)		(3,953	)		—		41

Net increase (decrease) in cash		1,450			(4,932	)		418			—		(3,064	)
Cash and cash equivalents, beginning of period		13,553			7,625			336			—		21,514

Cash and cash equivalents, end of period	$	15,003		$	2,693		$	754		$	—	$	18,450

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 (Restated)—(Continued)

Condensed Consolidating Statements of Cash Flows


	Six Months Ended April 30, 2004
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
	(Restated)			(Restated)			(Restated)			(Restated)		(Restated)
	(Note 1)			(Note 1)			(Note 1)			(Note 1)		(Note 1)
Net cash provided by operating activities	$	51,664		$	7,045		$	2,170		$	—	$	60,879

Cash flows from investing activities:
Proceeds from sales of marketable securities		1,019			—			—			—		1,019
Proceeds from sale of assets, net		(922	)		9,860			—			—		8,938
Additions to property and equipment		(569	)		(7,596	)		(168	)		—		(8,333	)

Other		—			41			6			—		47

Net cash provided by (used in) investing activities		(472	)		2,305			(162	)		—		1,671

Cash flows from financing activities:
Repayments of long-term debt		(48,158	)		—			—			—		(48,158	)
Intercompany receivables (payables)		12,002			(9,238	)		(2,764	)		—		—
Issuance of common stock		4,711			—			—			—		4,711
Purchase and retirement of common stock		(10,692	)		—			—			—		(10,692	)

Net cash used in financing activities		(42,137	)		(9,238	)		(2,764	)		—		(54,139	)

Net increase (decrease) in cash		9,055			112			(756	)		—		8,411
Cash and cash equivalents, beginning of period		18,975			(478	)		88			—		18,585

Cash and cash equivalents, end of period	$	28,030		$	(366	)	$	(668	)	$	—	$	26,996

(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. Subsequently, the Company has sold seven of these businesses and reclassified them back into discontinued operations. The operating results of those businesses that met the criteria in SFAS No. 144 that were sold during fiscal years 2005 or 2004 are currently reported in the discontinued operations section of the 2005 and 2004 consolidated statements of earnings.

For the six months ended April 30, 2005, the Company recorded net gains on dispositions and impairment (losses) of $359 and $1,237 for the three and six months ended April 30, 2005 in continuing operations, respectively, and ($853) and ($550) for the three and six months ended April 30, 2004, 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 ($97) and $446 for the three and six months ended April 30, 2005, respectively, and $1,028 for the three and six months ended April 30, 2004, which is

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—(Continued)

reflected in the discontinued operations section of the consolidated statement of earnings, all of which relates to businesses sold.

A summary of the assets and liabilities included in the “assets held for sale” and “liabilities associated with assets held for sale” line items as of April 30, 2005 and October 31, 2004 is set forth below. As of April 30, 2005 and October 31, 2004, these assets and liabilities relate primarily to the businesses sold during fiscal year 2005.


	April 30, 2005		October 31, 2004
	(Restated)		(Restated)
	(Note 1)		(Note 1)
Assets

Receivables, net of allowances	$	431	$	519
Inventories and other current assets		896		1,093
Net property and equipment		1,988		3,851
Preneed funeral receivables and trust investments		304		2,433
Preneed cemetery receivables and trust investments		1,484		1,283
Deferred charges and other assets		125		1,314
Deferred income taxes, net		50		—

Assets held for sale	$	5,278	$	10,493


Liabilities

Deferred income taxes, net	$	—	$	188
Deferred preneed funeral revenue		1,191		2,384
Deferred preneed cemetery revenue		718		705
Non-controlling interest in funeral and cemetery trusts		1,575		3,214

Liabilities associated with assets held for sale	$	3,484	$	6,491


	Three Months Ended					Six Months Ended
	April 30,					April 30,
	2005			2004		2005			2004
	(Restated)			(Restated)		(Restated)			(Restated)
	(Note 1)			(Note 1)		(Note 1)			(Note 1)
Revenue:
Funeral	$	215		$	3,505	$	546		$	7,766
Cemetery		208			442		411			765

	$	423		$	3,947	$	957		$	8,531


Gross profit:
Funeral	$	(107	)	$	167	$	(212	)	$	710
Cemetery		60			224		147			322

		(47	)		391		(65	)		1,032
Gains on dispositions and impairment (losses), net		(97	)		1,028		446			1,028
Other operating income (expense), net		(7	)		21		(2	)		30

Earnings (loss) from discontinued operations before income taxes	$	(151	)	$	1,440	$	379		$	2,090

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Separation Charges

In December 2003, the Company announced plans to restructure and reduce its workforce by approximately 300 employees throughout the organization. For fiscal year 2004, the Company recorded a charge for severance and other costs associated with the workforce reductions of $2,435 ($1,510 after tax, or $.01 per share), of which $138 was recorded during the three months ended April 30, 2004 and $2,131 ($1,321 after tax, or $.01 per share) was recorded during the six months ended April 30, 2004. There are no material remaining costs under the workforce reduction plan. The plan was completed June 1, 2004.

(15) Long-term Debt


	April 30, 2005		October 31, 2004
Long-term debt:
Senior secured credit facility:

Revolving credit facility	$	—	$	59,000
Term Loan B		214,201		54,005

6.25% senior notes due 2013		200,000		—
10.75% senior subordinated notes due 2008		1,750		300,000
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rates of 3.7% and 4.6% as of April 30, 2005 and October 31, 2004, respectively, partially secured by assets of subsidiaries, with maturities through 2022		2,513		3,800

Total long-term debt		418,464		416,805
Less current maturities		5,087		1,725

	$	413,377	$	415,080

As of October 31, 2004, the Company’s revolving credit facility was set to mature in June of 2005, and the Company’s Term Loan B was set to mature in October of 2005. On November 19, 2004, the Company entered into an amended and restated senior secured credit facility consisting of a $125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. Thus, in the October 31, 2004 balance sheet, the $59,000 outstanding balance of the revolving credit facility and the $54,005 outstanding balance of the Term Loan B were classified as long-term debt. During the first quarter of fiscal year 2005, the Company incurred a charge for early extinguishment of debt of $2,651 ($1,723 after tax, or $.02 per share) to write off fees associated with the prior facility.

The new facility consists of a $125,000 five-year revolving credit facility and a $100,000 seven-year Term Loan B. The senior secured credit facility also included an accordion feature which provided for the Company to borrow additional funds on a one-time basis. As a result of the refinancing, the leverage-based grid pricing for the interest rate on the Company’s new revolving credit facility was reduced to LIBOR plus 150.0 basis points at closing, representing a 50 basis-point reduction. The grid for the new revolving credit facility ranges from 137.5 to 200.0 basis points. The Company pays a quarterly commitment fee of 37.5 to 50.0 basis points, based on the Company’s consolidated leverage ratio. The interest rate on the Company’s Term Loan B was reduced to LIBOR plus 175.0 basis points, which is 75 basis points below the prior facility and is not subject to grid pricing. In connection with the refinancing in February 2005 of substantially all of the Company’s 10.75 percent senior subordinated notes (which is discussed below), the Company borrowed an additional $130,000 in Term Loan B under the aforementioned accordion feature of its senior secured credit facility. The Term Loan B matures on November 19, 2011 with 94 percent of the principal due in 2011, and the revolving credit facility matures on November 19, 2009.

As of April 30, 2005, there were no amounts drawn on the Company’s $125,000 revolving credit facility. As of April 30, 2005, after giving consideration to the $15,658 of outstanding letters of credit and $41,061 bond the Company is required to maintain to guarantee its obligations relating to funds it withdrew from trust funds in Florida, the Company’s availability under the revolving credit facility was $68,281. As of April 30, 2005

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15) Long-term Debt—(Continued)

and October 31, 2004, the weighted average interest rate of the Company’s revolving credit facility and Term Loan B that were not hedged by the interest rate swap agreement in effect at October 31, 2004 and were subject to short-term variable interest rates was approximately 4.6 percent and 4.0 percent, respectively. The Company’s revolving credit facility includes a provision whereby the revolving credit commitment may be terminated by the lenders if an event of default occurs and is continuing.

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

The lenders under the senior secured credit facility have received a first priority perfected security interest in (i) all of the capital stock or other equity interests of each of the domestic subsidiaries of the Company and 65 percent of the voting capital stock of all direct foreign subsidiaries and (ii) all other present and future assets and properties of the Company and the SEI Guarantors except (a) real property, (b) vehicles, (c) assets to which applicable law prohibits security interest therein or requires the consent of a third party, (d) contract rights in which a security interest without the approval of the other party to the contract would constitute a default thereunder and (e) any assets with respect to which a security interest cannot be perfected.

The Company’s senior secured credit facility contains affirmative and negative covenants that, among other things, impose limitations on liens, mergers, consolidations and asset sales, the incurrence of debt, and the payment of dividends. The senior secured credit facility also contains mandatory and optional prepayment provisions, financial covenants and customary events of default. If an event of default occurs, the lenders under the senior secured credit facility are entitled, among other rights, to declare the additional term loan borrowings and other amounts outstanding under the facility to be due and payable immediately. For further information regarding the Company’s senior secured credit facility, see Note 18 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2004.

On February 18, 2005, the Company completed its tender offer and consent solicitation for any and all of its $300,000 10.75 percent senior subordinated notes. The Company purchased a total of $298,250 in aggregate principal amount of the notes in the offer. The Company has entered into a supplemental indenture with respect to the notes that eliminates substantially all of the restrictive covenants and certain events of default. In the second quarter of fiscal year 2005, the Company incurred a charge for early extinguishment of debt of approximately $30,057 ($19,210 after tax, or $.18 per share) representing $25,369 for a tender premium, related fees and expenses and $4,688 for the write-off of the remaining unamortized fees on the senior subordinated notes.

The first call date on the remaining $1,750 principal amount of the senior subordinated notes is July 1, 2005 at a price of 105.375 percent of the notes’ principal amount. On May 31, 2005, the Company gave notice to the remaining holders of the senior subordinated notes of its intention to call the remaining $1,750 principal amount. As such, this amount has been classified as a short-term obligation in the April 30, 2005 condensed consolidated balance sheet. In the third quarter of fiscal year 2005, the Company will incur a charge for the early extinguishment of debt of approximately $114 including the call premium and write-off of the remaining unamortized fees on the senior subordinated notes. The Company intends to fund the call of the remaining senior subordinated notes using excess cash on hand.

The Company funded the tender offer for the 10.75 percent senior subordinated notes, including related tender premiums, fees, expenses and accrued interest of $28,931, with the net proceeds of the $130,000 in additional Term Loan B borrowings described above, a portion of its available cash, and the net proceeds of the issuance of $200,000 6.25 percent senior notes due 2013 (the “6.25 percent senior notes”), which were issued on February 11, 2005.

The 6.25 percent senior notes are governed by the terms of an indenture dated as of February 11, 2005. Prior to February 15, 2009, the 6.25 percent senior notes are not redeemable. Beginning on February 15, 2009, the

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(15) Long-term Debt—(Continued)

Company may redeem the 6.25 percent senior notes in whole or in part at any time at the redemption prices set forth in the indenture, plus any accrued and unpaid interest. In addition, upon a change of control of the Company, holders of the 6.25 percent senior notes will have the right to require the Company to repurchase all or any part of their 6.25 percent senior notes for cash at a price equal to 101 percent of the aggregate principal amount of the 6.25 percent senior notes repurchased, plus any accrued and unpaid interest.

The 6.25 percent senior notes are guaranteed, jointly and severally, by the SEI Guarantors, and are the Company’s general unsecured and unsubordinated obligations, and the guarantees of the 6.25 percent senior notes are the SEI guarantors’ general unsecured and unsubordinated obligations. Accordingly, they will rank equally in right of payment with all of the Company’s, in the case of the 6.25 percent senior notes, and the SEI Guarantors’, in the case of their guarantees of the 6.25 percent senior notes, existing and future unsubordinated indebtedness and senior to any existing and future subordinated indebtedness.

In addition, the 6.25 percent senior notes effectively rank junior to any of the Company’s, and the guarantees of the 6.25 percent senior notes effectively rank junior to the SEI Guarantors’, existing and future secured indebtedness, including obligations under the Company’s senior secured credit facility, to the extent of the assets securing such indebtedness.

The indenture contains affirmative and negative covenants that, among other things, limit the Company and the SEI Guarantors’ ability to engage in sale and leaseback transactions, effect a consolidation or merger or sale, transfer, lease, or other disposition of all or substantially all assets, and create liens on assets. The indenture also contains customary events of default. Upon the occurrence of certain events of default, the Trustee or the holders of the 6.25 percent senior notes may declare all outstanding 6.25 percent senior notes to be due and payable immediately.

(16) Consolidated Comprehensive Income (Loss)

Consolidated comprehensive income (loss) for the six months ended April 30, 2005 and 2004 is as follows:


	Six Months Ended April 30,
	2005			2004
	(Restated)			(Restated)
	(Note 1)			(Note 1)
Net earnings (loss)	$	(150,194	)	$	19,500
Other comprehensive income:
Unrealized appreciation of investments, net of deferred tax expense of ($50)		—			115
Termination of derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($119)		—			194
Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument, net of deferred tax expense of ($204) and ($332), respectively		333			610
Reduction in net unrealized losses associated with available- for-sale securities of the trusts		954			—
Reclassification of the net unrealized losses activity attributable to the non-controlling interest holders		(954	)		—

Total other comprehensive income		333			919

Total comprehensive income (loss)	$	(149,861	)	$	20,419

(17) 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 15 included herein.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(17) Guarantees—(Continued)

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 April 30, 2005, the Company has guaranteed long-term debt of its subsidiaries of approximately $1,335 that represents notes the subsidiaries issued as part of the purchase price of acquired businesses or debt the subsidiaries assumed in connection with acquisitions.

(18) Related Party Transactions

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, but continued in his role as Chairman of the Board. As part of Mr. Rowe’s separation agreement, the Company will pay 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 first payment was made within five days after the announcement of his retirement. The second payment was made on June 20, 2004, and the final payment was made on June 20, 2005. The Company recorded the $1,650 charge in the third quarter of 2003.

On June 10, 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had stepped down. According to the terms of his employment agreement, he is 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 has paid $760 of the $800 commitment as of April 30, 2005. The remaining amount will be fully paid by 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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(18) Related Party Transactions—(Continued)

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 April 30, 2005, including accrued interest, was approximately $1,023.

(19) Subsequent Events

Litigation Update

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 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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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(19)

Subsequent Events—(Continued)

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.

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(19)

Subsequent Events—(Continued)

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.

Commitments

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. During the first quarter of 2006, the Company posted an $11,000 letter of credit in order to secure the bond. In addition, as of January 31, 2006, the Company has $12,870 of other outstanding letters of credit posted during the normal course of business.

Reorganization of Operating Divisions

On July 14, 2005, the Company named a new Chief Operating Officer and announced that it was reorganizing its operating divisions, effective for the fourth quarter of fiscal year 2005. The reorganization consolidated operations from four operating divisions to two: Eastern and Western. These changes are a result of the Company’s recent strategic planning process. The total charge for severance and other costs associated with the reorganization is expected to be approximately $1,850, of which $1,507 was incurred in fiscal year 2005 and $154 was incurred in the first quarter of 2006.

Hurricanes

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 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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(19)

Subsequent Events—(Continued)

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 as of January 31, 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 the quarter ended January 31, 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. As of April 28, 2006, the Company had received an additional $3,000 in hurricane-related insurance proceeds.

Late Filings

The restatements described in Note 1 as well as the Company’s failure to deliver financial statements within the specified deadlines in its senior secured credit facility resulted in a default and potential event of default under the facility. The Company sought and received waivers of the defaults and potential events of default related to the restatements and failure to deliver audited consolidated financial statements by the specified deadline. A waiver granted an extension to deliver the audited consolidated financial statements, and the Company delivered the financial statements within the time period specified in the waiver. The Company believes its incomplete July 31, 2005 Form 10-Q filed with the SEC met the financial statement compliance requirements of its senior secured credit facility. The Company believes it is in compliance with the terms of the senior secured credit facility.

The indenture governing the 6.25 percent notes requires the Company to furnish to the trustee for forwarding to the holders of the notes, within the time periods specified in the SEC’s rules and regulations, all quarterly and annual financial information that would be required to be contained in a filing with the SEC on Forms 10-Q and 10-K, including a “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and, with respect to the annual information only, a report on the annual financial statements from our certified independent accountants. In addition, the Company must file a copy with the SEC for public availability within the time periods specified in the SEC’s rules and regulations. An event of default would occur if the Company failed to provide that information within 30 days after receipt of written notice by the trustee or holders of at least 25 percent of the principal amount outstanding. The Company furnished its July 31, 2005 Form 10-Q to the trustee and filed it with the SEC, and believes that doing so complied with the requirements of the indenture. The Company has not received a default notice from the trustee or note holders with respect to the late filing of the Form 10-K for the fiscal year ended October 31, 2005 and has now filed this report with the SEC. The Company believes it is in compliance with the terms of its 6.25 percent notes.

The Company received a Staff Determination Letter from the Nasdaq Listing Qualifications Department on October 25, 2005 notifying the Company that because it filed its third quarter 2005 Form 10-Q prior to completion of the review by its independent registered public accounting firm and without the certifications of its Chief Executive Officer and Chief Financial Officer, that the Company was not in compliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c)(14).

On November 17, 2005, the Company appeared before a Nasdaq Listing Qualifications Panel to seek an extension of time to complete the filing and thereby regain compliance with the listing standard. On December 12, 2005, the Company received a response from the Nasdaq Listing Qualifications Panel which granted its request for continued listing on the Nasdaq National Market of its Class A common stock, provided that the Company filed its completed Form 10-Q for the quarter ended July 31, 2005 and Form 10-K for the fiscal year ended October 31, 2005 no later than February 15, 2006. On February 3, 2006, Nasdaq notified the Company that the Company’s failure to file the Form 10-K for the fiscal year ended October 31, 2005 by February 1, 2006 was an additional violation of the continued listing requirements, but that the extension of time previously granted by the Panel for the filing was not affected by this notice. The Company was granted an additional extension of time to February 22, 2006. The Company filed its 2005 Form 10-K on February 17, 2006 and filed the Form 10-Q for the quarter ended July 31, 2005

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
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(19)

Subsequent Events—(Continued)

on February 22, 2006.

Nasdaq also notified the Company on January 17, 2006 that the Company’s filing on October 24, 2005 of the Form 10-K/A for the fiscal year ended October 31, 2004 prior to completion of the audit by its independent registered public accounting firm and without the certifications of its Chief Executive Officer and Chief Financial Officer was an additional event of noncompliance with the continued listing requirements of Nasdaq Marketplace Rule 4310(c)(14). This matter was previously disclosed to and discussed with the Nasdaq Listing Qualifications Panel. The Company was granted an extension of time in which to file this report to April 7, 2006, and the filing of this Amendment No. 3 to the Form 10-K for the fiscal year ended October 31, 2004 on April 5, 2006 satisfies this requirement. On April 11, 2006, the Company received a letter from Nasdaq advising that the Company has complied with all of the requirements for continued listing.

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

Restatement of Historical Financial Statements

We have restated our consolidated financial statements for fiscal years 2004 and 2003, all the quarters therein and the first three quarters of fiscal year 2005. 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

The correction of our operating segments had the related effect of requiring changes in our reporting units for purposes of goodwill impairment reviews 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 as discussed in Note 19 to the condensed consolidated financial statements included herein, we revised our evaluation of goodwill based upon 11 reporting units. For further discussion of our reporting units, see Note 2(i).

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. Due to these changes, the gain or loss on those sales has been re-evaluated and restated. In 2004, this resulted in an additional net gain of $0.6 million, of which a loss of $0.8 million occurred in the three and six months ended April 30, 2004 (a loss of $0.6 million relates to continuing operations and a loss of $0.2 million relates to discontinued operations).

Deferred Revenue Project

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 in Item 8.

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 April 30, 2005 and 2004 was a decrease in net earnings of $1.9 million and $3.6 million, respectively, and a decrease in earnings per diluted share of $.01 and $.03, respectively. The overall impact of the restatements related to the deferred revenue project for the six months ended April 30, 2005 and 2004 was a decrease in net earnings of $15.5 million (including $11.9 million, or $.11 per diluted share, related to the cumulative effect of change in accounting principle for preneed selling costs) and $6.6 million, respectively, and a decrease in diluted earnings per share of $.14 and $.06, 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 are amending our financial statements for the restatements discussed above, we have recorded the lease adjustments in the periods they were actually incurred. In this filing, we removed the cumulative effect of this prior period adjustment of $1.8 million ($1.1 million after tax) from the statement of earnings for the six months ended April 30, 2005. We also recorded other immaterial miscellaneous adjustments.

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.

General

We are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of May 31, 2005, we owned and operated 234 funeral homes and 147 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 discussion of our accounting for preneed sales and trust and escrow account earnings, see Notes 2(e), 2(k), 2(l) and Notes 3 through 7 to the condensed consolidated financial statements included herein.

We believe that preneed funeral and cemetery property sales are two of the primary drivers of sustainable long-term growth in the number of families served by our funeral homes and cemeteries. Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise sales are deferred into our backlog while our preneed cemetery property sales are recognized currently in accordance with SFAS No. 66. For a detailed discussion of our revenue recognition policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes 2(e), 2(k), 2(l) and Notes 3 through 7 to the condensed consolidated financial statements.

We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Because a portion of the funds we receive from preneed sales are deposited into the trusts and invested in a variety of debt and equity securities and other investments, the performance of the trusts’ investments can affect our current and future revenue streams. From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0 percent in our domestic trusts. However, the average realized return on our domestic trusts was 5.8 percent, 6.3 percent, 4.3 percent, 4.8 percent, 2.6 percent and 3.7 percent for fiscal years 2000, 2001, 2002, 2003, 2004 and the six months ended April 30, 2005, respectively. These returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses. We defer recognition of all earnings and losses realized by preneed funeral and cemetery merchandise and services trusts until the underlying products and services are delivered. We recognize all earnings and losses realized by our cemetery perpetual care trusts currently, including capital gains and losses in those jurisdictions where capital gains can be withdrawn and used for cemetery maintenance. Because approximately 56 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we would generally expect our portfolio performance to improve if the performance of the overall stock market improves, but we would also expect its performance to deteriorate over time if the overall stock market declines.

We mark our trust portfolio to market value each quarter. Changes in the market value of the trusts are recorded by increasing or decreasing trust assets included in the preneed funeral and cemetery receivables and trust investments line items on the balance sheet, with a corresponding increase or decrease in the deferred preneed revenue and non-controlling interest line items on the balance sheet. Therefore, there is no effect on net income. We determine whether or not the investment portfolio has an other than temporary impairment on a security-by-security basis. A loss is considered other than temporary if the security has a reduction in market value compared with its cost basis of 20 percent or more for a period of six months or longer. We periodically review our investment portfolio to determine if any of the temporarily impaired assets should be designated as other than temporarily impaired. This evaluation includes determining if we have the ability and intent to hold these investments for its forecasted recovery period and determining if there have been any changes in market conditions or concerns specific to the issuer of the securities. If a loss is other than temporary, the cost basis of the security is adjusted downward to its market value. This affects our footnote disclosure but does not have an effect on our financial statements, since the trust portfolio is already marked to market value each quarter. The footnotes disclose the adjusted cost basis and how much of the losses are considered other than temporary. Accordingly, unrealized gains and losses reflected in the tables in Notes 4, 5 and 6 to the condensed consolidated financial statements are temporary as the cost basis in these tables has already been adjusted to reflect the other than temporary unrealized losses. Our preneed funeral and cemetery merchandise and services trusts and escrow accounts had other than temporary declines of $79.7 million and $44.3 million, respectively, as of April 30, 2005, from their original cost basis. They had net unrealized appreciation of $3.6 million and $0.9 million, respectively, as of April 30, 2005 resulting from temporary unrealized gains and losses. See Notes 4 and 5 to the condensed consolidated financial statements.

Our cemetery perpetual care trust accounts had other than temporary declines of $31.1 million as of April 30, 2005, from their original cost basis. They had net unrealized appreciation of $5.4 million as of April 30, 2005 resulting from temporary unrealized gains and losses. See Note 6 to the condensed consolidated financial statements. Unrealized gains and losses in the cemetery perpetual care trusts and escrow accounts do not affect current earnings but unrealized losses could limit the capital gains available to us and could eventually result in lower returns and lower revenues than we have historically achieved from these trusts.

We perform a separate analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, we determine which trusts are in a net loss position by comparing the aggregate market value of the trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost basis exceeds the aggregate market value of the investments, the trust is considered to be in a net loss position. For trusts in a net loss position, we add the sales prices of the underlying

contracts and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds for contracts associated with the trusts in question as of that particular balance sheet date. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include future expected returns on the investments in our analysis. We compare the amount of proceeds to the estimated costs to deliver the contracts. The estimated costs to deliver preneed funeral and cemetery service and merchandise contracts consist primarily of funeral and cemetery merchandise costs, and salaries, supplies and equipment related to the delivery of preneed funerals. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts from our backlog. Due to the margins of our preneed contracts and the relatively high trust portfolio returns we enjoyed prior to fiscal year 2000, there is currently substantial capacity for additional market depreciation before a contract loss would result.

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. There have been no changes to our critical accounting policies except for our treatment of preneed selling costs as noted below.

Preneed Selling Costs

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 have applied this change in accounting principle effective November 1, 2004. Therefore, our results of operations for the three and six months ended April 30, 2005 are reported on the basis of our changed method. 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 sales and prearranged funeral and cemetery merchandise sales were deferred and amortized in proportion to the preneed revenue recognized in the period in a manner consistent with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” We have decided to change our accounting for preneed selling costs to expense such costs as incurred. We concluded that expensing these costs as they are incurred would be preferable to the old method because it will make our 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, 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 in the condensed consolidated balance sheet at the time of the change. See Note 3(a) to the condensed consolidated financial statements for additional information.

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 2005 and 2004, results from continuing operations reflect those of same-store locations.

As described above in “Critical Accounting Policies,” on May 31, 2005, we changed our method of accounting for selling costs incurred related to preneed funeral and cemetery service and merchandise sales. We have applied this change in accounting principle effective November 1, 2004. Prior to this time, we deferred preneed selling costs and amortized them into expense in proportion to the preneed revenue recognized in the period. We now expense these costs in the period incurred. In the discussion below, the amounts presented in the tables for the three and six months ended April 30, 2004 reflect historical amounts and therefore are not adjusted for this accounting change. In order to present results for the three and six months ended April 30, 2004 comparable to those for the same periods of 2005 which include the accounting change, we have also included a discussion of the net preneed selling costs for each period of 2004 and their effect on gross profit. The effect of net preneed selling costs is calculated by removing the amortization of deferred selling costs and including in expense the preneed

selling costs incurred during 2004. The result of that calculation is the net preneed selling costs that would have reduced 2004 gross profit if the accounting change had been implemented in fiscal year 2004.

Three Months Ended April 30, 2005 Compared to Three Months Ended April 30, 2004—Continuing Operations

Funeral Operations


	Three Months Ended
	April 30,					Increase
	2005		2004			(Decrease)
			(In millions)
	(Restated)		(Restated)
	(Note 1)		(Note 1)
Funeral Revenue

Central Division	$	23.6	$	21.4		$	2.2
Western Division		15.7		15.7			—
Eastern Division		14.5		13.8			.7
Southern Division – Florida		11.9		10.7			1.2
All Other⁽¹⁾		3.3		3.3			—
Corporate Trust Management⁽²⁾		5.4		4.7			.7

Total Funeral Revenue	$	74.4	$	69.6		$	4.8


Funeral Costs:

Central Division	$	16.6	$	15.2		$	1.4
Western Division		13.7		12.8			.9
Eastern Division		11.2		10.4			.8
Southern Division – Florida		9.9		9.2			.7
All Other⁽¹⁾		2.7		2.7			—
Corporate Trust Management⁽²⁾		.2		.1			.1

Total Funeral Costs	$	54.3	$	50.4	⁽³⁾	$	3.9	⁽³⁾


Funeral Gross Profit:

Central Division	$	7.0	$	6.2		$	.8
Western Division		2.0		2.9			(.9	)
Eastern Division		3.3		3.4			(.1	)
Southern Division – Florida		2.0		1.5			.5
All Other⁽¹⁾		.6		.6			—
Corporate Trust Management⁽²⁾		5.2		4.6			.6

Total Funeral Gross Profit	$	20.1	$	19.2	⁽³⁾	$	.9	⁽³⁾

Same-Store Analysis


	Change in Average			Change in Same-Store			Cremation Rate
	Revenue Per Call			Funeral Services			2005			2004
Central Division		5.9	%		7.0	%		21.8	%		22.4	%
Western Division		.6	%		(1.2	)%		58.9	%		57.9	%
Eastern Division		(1.1	)%		8.0	%		25.4	%		25.3	%
Southern Division – Florida		4.4	%		10.5	%		39.7	%		38.9	%
All Other⁽¹⁾		8.9	%		(5.7	)%		16.5	%		14.5	%
Total		4.1	%		4.4	%		36.7	%		36.7	%


⁽¹⁾		All Other represents our operations in Puerto Rico.

⁽²⁾		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 April 30, 2005 and 2004 were $1.5 million and $1.4 million, respectively, and funeral trust earnings for the three months ended April 30, 2005 and 2004 were $3.9 million and $3.3 million, respectively.

⁽³⁾		Funeral costs from continuing operations for the three months ended April 30, 2004 do not include net preneed selling costs of $1.6 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, funeral gross profit from continuing operations for the three months ended April 30, 2005 would have increased $2.5 million from $17.6 million for the three months ended April 30, 2004.

Consolidated Operations - Funeral

Funeral revenue from continuing operations increased $4.8 million, or 6.9 percent, for the three months ended April 30, 2005, compared to the corresponding period in 2004. The increase in funeral revenue was primarily due to a 4.4 percent increase in the number of same-store funeral services performed, or 686 events out of 15,573 total same-store funeral services performed. In addition to an increase in the number of deaths in our markets during the second quarter of 2005, we believe that our improved performance also reflects the success of our initiatives to grow the business, including a funeral home incentive compensation plan.

We also experienced an increase in the average revenue per funeral service performed by our same-store businesses. Our same-store businesses achieved a 3.9 percent increase in the average revenue per traditional funeral service and a 5.0 percent increase in the average revenue per cremation service. Including trust earnings, we experienced an overall 4.1 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 service were normal inflationary price increases, more effective merchandising and packaging, our focus on training, customized funeral planning and personalization and a new funeral home incentive compensation plan.

Funeral gross profit margin from continuing operations decreased from 27.6 percent in the second quarter of fiscal year 2004 to 27.0 percent in the second quarter of fiscal year 2005. Funeral costs from continuing operations for the three months ended April 30, 2004 do not include $1.6 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma funeral gross profit margin from continuing operations would have been 25.3 percent for the three months ended April 30, 2004. The remaining decrease resulted from increased health insurance costs due to an increase in the number of high-dollar claims in 2005. The cremation rate for our same-store operations was 36.7 percent for the three months ended April 30, 2005 and 2004.

Segment Discussion - Funeral

Funeral revenue in the Central division and Southern division-Florida funeral segments increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 7.0 percent and 10.5 percent, respectively, coupled with an increase in the average revenue per funeral service in the same-store businesses of 5.9 percent and 4.4 percent, respectively. Funeral revenue in the Eastern division segment increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 8.0 percent, offset by a decrease in average revenue per funeral service of 1.1 percent. Funeral revenue in the corporate trust management segment increased due to a $0.6 million increase in funeral trust earnings and a $0.1 million increase in trust management fees.

Funeral gross profit margin for the Central division and Southern division-Florida funeral segments increased due to the increase in revenue discussed above, offset by increased health insurance costs and the effect of the accounting change discussed above. Funeral gross profit margin for the Western division and Eastern division funeral segments decreased primarily due to increased health insurance costs and the effect of the accounting change as discussed above in “Consolidated Operations - Funeral.” As demonstrated in the table above, the same-store cremation rate increased for the Western division, Eastern division, Southern division-Florida and All Other funeral segments and decreased for the Central division segment.

Cemetery Operations


	Three Months Ended
	April 30,					Increase
	2005		2004			(Decrease)
			(In millions)

	(Restated)		(Restated)
	(Note 1)		(Note 1)
Cemetery Revenue:

Central Division	$	18.5	$	22.1		$	(3.6	)
Western Division		3.1		3.4			(.3	)
Eastern Division		18.1		15.6			2.5
Southern Division - Florida		11.1		10.5			.6
All Other⁽¹⁾		4.3		.7			3.6
Corporate Trust Management⁽²⁾		3.0		2.5			.5

Total Cemetery Revenue	$	58.1	$	54.8		$	3.3


Cemetery Costs:

Central Division	$	14.0	$	17.0		$	(3.0	)
Western Division		2.7		2.7			—
Eastern Division		15.7		12.7			3.0
Southern Division – Florida		9.0		8.4			.6
All Other⁽¹⁾		3.5		1.9			1.6
Corporate Trust Management⁽²⁾		.1		.1			—

Total Cemetery Costs	$	45.0	$	42.8	⁽³⁾	$	2.2	⁽³⁾


Cemetery Gross Profit:

Central Division	$	4.5	$	5.1		$	(.6	)
Western Division		.4		.7			(.3	)
Eastern Division		2.4		2.9			(.5	)
Southern Division – Florida		2.1		2.1			—
All Other⁽¹⁾		.8		(1.2	)		2.0
Corporate Trust Management⁽²⁾		2.9		2.4			.5

Total Cemetery Gross Profit	$	13.1	$	12.0	⁽³⁾	$	1.1	⁽³⁾


⁽¹⁾		All Other represents our operations in Puerto Rico.

⁽²⁾		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 April 30, 2005 and 2004 were $1.2 million and $1.2 million, respectively, and cemetery trust earnings for the three months ended April 30, 2005 and 2004 were $1.8 million and $1.3 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.

⁽³⁾		Cemetery costs from continuing operations for the three months ended April 30, 2004 do not include net preneed selling costs of $1.8 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, cemetery gross profit from continuing operations for the three months ended April 30, 2005 would have increased $2.9 million from $10.2 million for the three months ended April 30, 2004.

Consolidated Operations - Cemetery

Cemetery revenue from continuing operations increased $3.3 million, or 6.0 percent, for the three months ended April 30, 2005, compared to the corresponding period in 2004, primarily due to an increase in cemetery property sales and an increase in revenue from merchandise delivered, offset by a decrease in revenue associated with the construction of cemetery 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 property sales

increased 6.3 percent in the second quarter of fiscal year 2005 compared to the second quarter of fiscal year 2004, which is in line with the Company’s goal to increase cemetery property sales by 4 percent to 8 percent for fiscal year 2005.

We experienced an annualized average return, excluding unrealized gains and losses, of 3.7 percent in our perpetual care trusts for the quarter ended April 30, 2005 resulting in revenue of $1.6 million, compared to 4.5 percent for the corresponding period in 2004 resulting in revenue of $2.2 million.

Cemetery gross profit margin from continuing operations increased from 21.9 percent in the second quarter of fiscal year 2004 to 22.5 percent in the second quarter of fiscal year 2005. Cemetery costs from continuing operations for the three months ended April 30, 2004 do not include $1.8 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma cemetery gross profit margin from continuing operations would have been 18.6 percent for the three months ended April 30, 2004. The overall increase resulted from increased revenues as discussed above, partially offset by increased health insurance costs due to an increase in the number of high dollar claims in 2005.

Segment Discussion - Cemetery

Cemetery revenue in the Central division cemetery segment decreased primarily due to a decrease in revenue associated with the construction of cemetery projects, offset by increased cemetery property sales and merchandise deliveries. Cemetery revenue in the Eastern division segment increased primarily due to an increase in cemetery property sales, merchandise deliveries and revenue associated with the construction of cemetery projects. Cemetery revenue in the Southern division-Florida segment increased primarily due to an increase in cemetery property sales and merchandise deliveries, offset by decreased revenues associated with the construction of cemetery projects. Cemetery revenue in the Western division segment decreased primarily due to a decrease in merchandise deliveries. All Other cemetery segment revenue increased primarily due to an increase in revenue associated with the construction of cemetery projects in Puerto Rico. 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 Central division cemetery segment increased primarily due to decreased costs associated with the construction of cemetery projects. Cemetery gross profit margin for the Eastern division segment and Southern division-Florida segment declined due to cost increases described in “Consolidated Operations-Cemetery,” offset by increased revenues as described above. Cemetery gross profit margin for the Western division segment declined due to cost increases described above. The All Other cemetery segment gross profit margin increased due to increased revenues described above.

Discontinued Operations

The operating results of those businesses sold in fiscal years 2004 and 2005 are reported in the discontinued operations section of the consolidated statements of earnings. Included in discontinued operations for the three months ended April 30, 2005 and 2004 were gains on dispositions and impairment (losses), net of ($0.1) million and $1.0 million, respectively. Revenues for the three months ended April 30, 2005 were $0.4 million compared to $3.9 million in the same period in 2004. Income tax expense for our discontinued operations for the three months ended April 30, 2005 was $0.1 million compared to a $0.2 million benefit for the same period in 2004.

Other

Corporate general and administrative expenses for the three months ended April 30, 2005 were flat compared to the same period in 2004.

In December 2003, we announced a reduction and restructuring of our workforce. For the three months ended April 30, 2004, we recorded $0.1 million for severance and other costs associated with the workforce reductions. The December 2003 workforce reduction plan was completed June 1, 2004.

Total depreciation and amortization was $5.0 million for the second quarter of fiscal year 2005 compared to $12.1 million for the same period in 2004. Depreciation and amortization from continuing operations was $5.0 million for the second quarter of fiscal year 2005 compared to $12.0 million for the same period in 2004. Amortization in fiscal year 2004 included $6.1 million of deferred selling costs. Effective November 1, 2004, we

changed our accounting principle for selling costs related to preneed funeral and cemetery service and merchandise sales and we no longer amortize these costs but rather expense them as incurred.

Interest expense decreased $5.3 million to $6.7 million for the second quarter of fiscal year 2005 compared to $12.0 million for the same period in 2004 primarily due to a 387 basis-point decrease in the average interest rate during the period resulting from recent debt refinancings, combined with a $37.0 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 April 30, 2005 and 2004, we reported net gains on dispositions and impairment (losses) of $0.4 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 $0.3 million for the three months ended April 30, 2005 compared to $0.5 million for the three months ended April 30, 2004.

The effective tax rate for our continuing operations for the three months ended April 30, 2005 was a 36.5 percent benefit compared to a 38.3 percent expense for the same period in 2004. The lower rate on ordinary income is the result of increased dividend exclusion and lower state taxes in 2005 compared to 2004.

As of April 30, 2005 and May 31, 2005, our outstanding debt totaled $418.5 million and $418.4 million, respectively. Of the total debt outstanding as of April 30, 2005, approximately 49 percent was subject to fixed rates averaging 6.3 percent, and 51 percent was subject to short-term variable rates averaging approximately 4.6 percent. In order to hedge a portion of the interest rate risk associated with our
variable-rate debt, effective March 11, 2002, we entered into two interest rate swap agreements, each involving a notional amount of $50.0 million. One of the agreements expired on March 11, 2004, and the other expired on March 11, 2005. 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. On February 11, 2005, we completed the private offering of $200.0 million principal amount of our 6.25 percent senior notes due 2013. We also borrowed $130.0 million in additional term loan debt under our senior secured credit facility. We used the net proceeds from these transactions, together with a portion of our available cash, to repurchase $298.2 million in aggregate principal amount of our 10.75 percent senior subordinated notes due 2008 and to pay related tender premiums, fees, expenses and accrued interest of $28.9 million. In the second quarter of fiscal year 2005, we recorded a charge for early extinguishment of debt of $30.0 million ($19.2 million after tax, or $.18 per share) representing the bond tender premium, related fees and expenses and the write-off of unamortized fees. For additional information, see Note 15 to the condensed consolidated financial statements.

Preneed Sales into and Deliveries out of the Backlog

Preneed funeral sales increased 11.0 percent during the second quarter of 2005 compared to the corresponding period in 2004.

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 $44.3 million in gross preneed sales to our funeral and cemetery merchandise and services backlog (including $19.1 million related to insurance-funded preneed funeral contracts) during the three months ended April 30, 2005 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to gross sales of $42.3 million (including $15.9 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2004. 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 $41.5 million and $36.7 million for the three months ended April 30, 2005 and 2004, respectively, resulting in net additions to the backlog of $2.8 million and $5.6 million for the three months ended April 30, 2005 and 2004, respectively.

Six Months Ended April 30, 2005 Compared to Six Months Ended April 30, 2004 – Continuing Operations

Funeral Operations


	Six Months Ended
	April 30,					Increase
	2005		2004			(Decrease)
			(In millions)
	(Restated)		(Restated)
	(Note 1)		(Note 1)
Funeral Revenue:

Central Division	$	44.7	$	44.2		$	.5
Western Division		31.3		31.8			(.5	)
Eastern Division		28.1		27.7			.4
Southern Division – Florida		23.0		22.3			.7
All Other⁽¹⁾		7.1		6.7			.4
Corporate Trust Management⁽²⁾		9.9		9.7			.2

Total Funeral Revenue	$	144.1	$	142.4		$	1.7


Funeral Costs:

Central Division	$	32.2	$	31.3		$	.9
Western Division		26.9		26.0			.9
Eastern Division		21.9		20.7			1.2
Southern Division – Florida		19.3		18.9			.4
All Other⁽¹⁾		5.6		5.6			—
Corporate Trust Management⁽²⁾		.3		.3			—

Total Funeral Costs	$	106.2	$	102.8	⁽³⁾	$	3.4	⁽³⁾


Funeral Gross Profit:

Central Division	$	12.5	$	12.9		$	(.4	)
Western Division		4.4		5.8			(1.4	)
Eastern Division		6.2		7.0			(.8	)
Southern Division – Florida		3.7		3.4			.3
All Other⁽¹⁾		1.5		1.1			.4
Corporate Trust Management⁽²⁾		9.6		9.4			.2

Total Funeral Gross Profit	$	37.9	$	39.6	⁽³⁾	$	(1.7	)⁽³⁾

Same-Store Analysis


	Change in Average			Change in Same-Store			Cremation Rate
	Revenue Per Call			Funeral Services			2005			2004
Central Division		3.8	%		(.8	)%		22.4	%		21.6	%
Western Division		2.8	%		(4.0	)%		59.2	%		57.9	%
Eastern Division		.3	%		1.2	%		25.1	%		26.0	%
Southern Division – Florida		4.5	%		2.7	%		39.4	%		38.8	%
All Other⁽¹⁾		5.6	%		1.9	%		15.4	%		13.8	%
Total		3.3	%		(.7	)%		36.9	%		36.5	%


⁽¹⁾		All Other represents our operations in Puerto Rico.

⁽²⁾		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 six months ended April 30, 2005 and 2004 were $2.7 million and $2.9 million, respectively, and funeral trust earnings for the six months ended April 30, 2005 and 2004 were $7.2 million and $6.8 million, respectively.

⁽³⁾		Funeral costs from continuing operations for the six months ended April 30, 2004 do not include net preneed selling costs of $2.1 million, which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, funeral gross profit from


		continuing operations for the six months ended April 30, 2005 would have increased $0.4 million from $37.5 million for the six months ended April 30, 2004.

Consolidated Operations - Funeral

Funeral revenue from continuing operations increased $1.7 million, or 1.2 percent, for the six months ended April 30, 2005, compared to the corresponding period in 2004. The increase in funeral revenue was primarily due to an increase in the average revenue per funeral service performed by our same-store businesses. Our same-store businesses achieved a 3.2 percent increase in the average revenue per traditional funeral service and a 5.6 percent increase in the average revenue per cremation service. Including trust earnings, we experienced an overall 3.3 percent increase in the average revenue per funeral service for our same-store businesses. We believe a number of factors contributed to the increases in our average revenue per traditional and cremation service. We believe the primary factors were normal inflationary price increases, more effective merchandising and packaging, our focus on training, customized funeral planning and personalization and a new funeral home incentive compensation plan.

The increase in average revenue per funeral service performed by our same-store businesses was partially offset by a 0.7 percent decrease in the number of same-store funeral services performed, or 216 events out of 32,204 total same-store funeral services performed. The comparable period in 2004 included one more day than 2005 due to the fact that 2004 was a leap year. During the first six months of 2004, we performed approximately 200 calls per day. After adjusting the 2004 results for the extra day, we would have performed approximately the same number of funeral services for the six months ended April 30, 2005 as the previous year.

Funeral gross profit margin from continuing operations decreased from 27.8 percent for the six months ended April 30, 2004 to 26.3 percent in the corresponding period in 2005. Funeral costs from continuing operations for the six months ended April 30, 2004 do not include $2.1 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma funeral gross profit margin from continuing operations would have been 26.3 percent for the six months ended April 30, 2004. The remaining decrease is due to increased health insurance costs due to an increase in the number of high-dollar claims in 2005. The cremation rate for our same-store operations was 36.9 percent for the six months ended April 30, 2005 compared to 36.5 percent for the corresponding period in 2004.

Segment Discussion - Funeral

Funeral revenue in the Eastern division, Southern division-Florida and All Other funeral segments increased primarily due to an increase in the number of funeral services performed by the same-store businesses of 1.2 percent, 2.7 percent and 1.9 percent, respectively, coupled with an increase in the average revenue per funeral service in the same-store businesses of 0.3 percent, 4.5 percent and 5.6 percent, respectively. Funeral revenue in the Central division segment increased primarily due to an increase in the average revenue per funeral service in the
same-store businesses of 3.8 percent. Funeral revenue in the Western division segment decreased due to a decrease in the number funeral services performed by the same-store businesses of 4.0 percent offset by an increase in the average revenue per funeral service of 2.8 percent.

Funeral gross profit margin for the Central division, Western division and Eastern division funeral segments decreased primarily due to increased health insurance costs and the effect of the accounting change as discussed above in “Consolidated Operations - Funeral.” Funeral gross profit margin for the Southern division-Florida segment and All Other segment increased due to increased revenues, offset by increased health insurance costs and the effect of the accounting change as discussed above in “Consolidated Operations-Funeral.” As demonstrated in the table above, the same-store cremation rate increased for the Central division, Western division, Southern division-Florida and All Other funeral segments and decreased for the Eastern division funeral segment.

Cemetery Operations


	Six Months Ended
	April 30,					Increase
	2005		2004			(Decrease)
			(In millions)
	(Restated)		(Restated)
	(Note 1)		(Note 1)
Cemetery Revenue:

Central Division	$	36.0	$	39.9		$	(3.9	)
Western Division		6.3		6.1			.2
Eastern Division		32.7		30.9			1.8
Southern Division – Florida		22.1		20.8			1.3
All Other⁽¹⁾		8.2		4.5			3.7
Corporate Trust Management⁽²⁾		5.7		5.0			.7

Total Cemetery Revenue	$	111.0	$	107.2		$	3.8


Cemetery Costs:

Central Division	$	28.0	$	30.3		$	(2.3	)
Western Division		5.4		4.6			.8
Eastern Division		29.9		26.2			3.7
Southern Division – Florida		17.8		16.7			1.1
All Other⁽¹⁾		7.1		5.6			1.5
Corporate Trust Management⁽²⁾		.3		.3			—

Total Cemetery Costs	$	88.5	$	83.7	⁽³⁾	$	4.8	⁽³⁾


Cemetery Gross Profit:

Central Division	$	8.0	$	9.6		$	(1.6	)
Western Division		.9		1.5			(.6	)
Eastern Division		2.8		4.7			(1.9	)
Southern Division – Florida		4.3		4.1			.2
All Other⁽¹⁾		1.1		(1.1	)		2.2
Corporate Trust Management⁽²⁾		5.4		4.7			.7

Total Cemetery Gross Profit	$	22.5	$	23.5	⁽³⁾	$	(1.0	) ⁽³⁾


⁽¹⁾		All Other represents our operations in Puerto Rico.

⁽²⁾		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 six months ended April 30, 2005 and 2004 were $2.5 million and $2.4 million, respectively, and cemetery trust earnings for the six months ended April 30, 2005 and 2004 were $3.2 million and $2.6 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.

⁽³⁾		Cemetery costs from continuing operations for the six months ended April 30, 2004 do not include net preneed selling costs of $2.8 million which would have been expensed if the accounting change described above had been implemented in fiscal year 2004. Had we included these costs in 2004, cemetery gross profit from continuing operations for the six months ended April 30, 2005 would have increased $1.8 million from $20.7 million for the six months ended April 30, 2004.

Consolidated Operations - Cemetery

Cemetery revenue from continuing operations increased $3.8 million, or 3.5 percent, for the six months ended April 30, 2005, compared to the corresponding period in 2004, primarily due to an increase in cemetery property sales and an increase in revenue from merchandise delivered during the six months offset by a decrease in revenue associated with the construction of cemetery 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 property sales increased 4.5 percent in the six months ended April 30, 2005 compared to the corresponding period in 2004.

We experienced an annualized average return, excluding unrealized gains and losses, of 3.4 percent in our perpetual care trusts for the six months ended April 30, 2005 resulting in revenue of $2.7 million, compared to 4.6 percent for the corresponding period in 2004 resulting in revenue of $4.6 million.

Cemetery gross profit margin from continuing operations decreased from 21.9 percent in the six months ended April 30, 2004 to 20.3 percent in the corresponding period in 2005. Cemetery costs from continuing operations for the six months ended April 30, 2004 do not include $2.8 million of net preneed selling costs associated with the accounting change as described above. Including these costs, the pro forma cemetery gross profit margin from continuing operations would have been 19.3 percent for the six months ended April 30, 2004. Cemetery operations also experienced increased health insurance costs due to an increase in the number of high-dollar claims in 2005.

Segment Discussion - Cemetery

Cemetery revenue in the Central division cemetery segment decreased primarily due to a decrease in the construction of cemetery projects, partially offset by an increase in preneed cemetery property sales. For further discussion on the decrease in construction of cemetery projects, see “Consolidated Operations - Cemetery.” Cemetery revenue in the Eastern division segment increased primarily due to an increase in preneed property sales and an increase in revenue from merchandise delivered. Cemetery revenue in the Southern division-Florida segment increased primarily due to increases in cemetery property sales and merchandise deliveries. All Other cemetery segment revenue increased primarily due to an increase in revenue associated with the construction of cemetery projects in Puerto Rico. Revenue in the corporate trust management segment increased due to a $0.6 million increase in cemetery trust earnings and a $0.1 million increase in cemetery trust management fees.

The cemetery gross profit for each of the cemetery segments was impacted by the effect of the accounting change as discussed above in “Consolidated Operations - Cemetery.” In addition, cemetery gross profit margin for the Central division segment decreased due primarily to a decline in cemetery revenue as described above and an increase in health insurance costs as described above in “Consolidated Operations - Cemetery.” Eastern division, Western division and Southern division-Florida segment gross profit margins decreased due primarily to increases in health insurance costs. All Other cemetery segment gross profit margin increased due to the increase in cemetery revenue in Puerto Rico.

Discontinued Operations

Other

Corporate general and administrative expenses for the six months ended April 30, 2005 increased $0.3 million compared to the same period in 2004 primarily due to increased professional fees associated with our Sarbanes Oxley Section 404 compliance effort.

In December 2003, we announced a reduction and restructuring of our workforce. For the six months ended April 30, 2004, we recorded $2.1 million for severance and other costs associated with the workforce reductions.

The workforce reduction plan was completed June 1, 2004. This charge is presented in the “Separation charges” line item in the condensed consolidated statements of earnings.

Total depreciation and amortization was $10.3 million for the six months ended April 30, 2005 compared to $23.7 million for the same period in 2004. Depreciation and amortization from continuing operations was $10.3 million for the six months ended April 30, 2005 compared to $23.4 million for the same period in 2004. Amortization in fiscal year 2004 included $12.0 million of deferred selling costs. Effective November 1, 2004, we changed our accounting principle for selling costs related to preneed funeral and cemetery service and merchandise sales, and we no longer amortize these costs but rather expense them as incurred.

Interest expense decreased $7.5 million to $17.0 million for the six months ended April 30, 2005 compared to $24.5 million for the same period in 2004 primarily due to a 203 basis point decrease in the average interest rate during the period resulting from recent debt refinancings, combined with a $56.5 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, resulting in an impairment charge. For the six months ended April 30, 2005, we reported net gains on dispositions and impairment (losses) of $1.2 million in continuing operations for the six months ended April 30, 2005, compared to ($0.6) million for the same period in 2004. These charges are presented in the “Gains on dispositions and impairment (losses), net” line item in the consolidated statements of earnings.

Other operating income, net was $0.5 million for the six months ended April 30, 2005 compared to $0.9 million for the six months ended April 30, 2004. The decrease is primarily due to net gains on the sale of excess land and property in 2004.

The effective tax rate for our continuing operations for the six months ended April 30, 2005 was 29.8 percent compared to 38.7 percent for the same period in 2004. The change in the effective rate in 2005 compared to 2004 is primarily due to the reduced rate calculated on the change to the 2003 impairment charge, which was treated separately from the tax expense associated with ordinary income that was computed at 36.0 percent in 2005 and 38.0 percent in 2004. The reduced rate on the 2003 impairment charge is the result of an increase to the total basis adjustments on properties held for sale as a result of two gain transactions recognized during the period coupled with a reduction to the basis adjustments on the properties held for sale following changes in the sale type for two properties. The lower rate on ordinary income is the result of increased dividend exclusion and lower state taxes in 2005 compared to 2004.

On May 31, 2005, we changed our method of accounting for selling costs incurred related to new preneed funeral and cemetery service and merchandise sales. 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 in the condensed consolidated balance sheet at the time of the change. See Note 3(a) to the condensed consolidated financial statements for additional information.

For the six months ended April 30, 2005, we recorded charges for the early extinguishment of debt of $32.7 million ($20.9 million after tax, or $.19 per share) related to the two debt refinancings in fiscal year 2005. See the section entitled “Three Months Ended April 30, 2005 Compared to Three Months Ended April 30, 2004 – Other” for further information.

Preneed Sales into and Deliveries out of the Backlog

Preneed funeral sales increased 5.8 percent for the six months ended April 30, 2005 compared to the same period in 2004.

cancellations) as these prepaid products and services are delivered, compared to gross sales of $78.7 million (including $30.8 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2004. 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 $77.6 million for the six months ended April 30, 2005, compared to $73.9 million for the corresponding period in 2004, resulting in net increases in the backlog of $4.9 million and $4.8 million for the six months ended April 30, 2005 and 2004, respectively.

Liquidity and Capital Resources

Cash Flow

Our operations provided cash of $3.7 million for the six months ended April 30, 2005, compared to $60.9 million for the corresponding period in 2004. The 2004 amount includes a $33.2 million tax refund received during the first quarter of 2004 resulting from a change in tax accounting methods for cemetery merchandise revenue. The reduction in cash flow from operations primarily resulted from the tax refund received during the first quarter of 2004. For the six months ended April 30, 2005, we also recorded $25.4 million for premiums paid for the early extinguishment of debt related to the debt refinancings occurring in 2005.

Our investing activities resulted in a net cash outflow of $6.8 million for the six months ended April 30, 2005, compared to a net cash inflow of $1.7 million for the comparable period in 2004. For the six months ended April 30, 2005, capital expenditures amounted to $13.0 million, which included $8.3 million for maintenance capital expenditures, $1.6 million for growth initiatives and $3.1 million related to a building we purchased which was previously leased, compared to capital expenditures of $8.3 million in the same period in 2004, which included $7.1 million for maintenance capital expenditures and $1.2 million for growth initiatives.

Our financing activities resulted in a net cash inflow of $0.1 million for the six months ended April 30, 2005, compared to a net cash outflow of $54.1 million for the comparable period in 2004. The change was due primarily to net proceeds of long-term debt of $1.7 million in the six months ended April 30, 2005 (which includes $440.0 million in proceeds of long-term debt and $438.3 million in repayments of
long-term debt), compared to repayments of $48.2 million in the comparable period of 2004. We used the $33.2 million tax refund included in operating cash flow to reduce our outstanding Term Loan B in the first quarter of fiscal year 2004.

Contractual Obligations and Commercial Commitments

As of April 30, 2005, our outstanding debt balance was $418.5 million. The following table details our known future cash payments (in millions) related to various contractual obligations as of April 30, 2005.


	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⁾	$	418.5	$	5.1	$	5.6	$	4.5	$	403.3
Interest on long-term debt⁽²⁾		164.3		22.9		45.0		44.4		52.0
Operating lease obligations⁽³⁾		36.6		2.3		7.9		6.8		19.6
Non-competition and other agreements⁽⁴⁾		8.2		2.1		4.0		1.5		.6

	$	627.6	$	32.4	$	62.5	$	57.2	$	475.5


⁽¹⁾		See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of May 31, 2005.

⁽²⁾		Includes contractual interest payments for our revolving credit facility, Term Loan B, senior subordinated notes, 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 April 30, 2005.

⁽³⁾		Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 15 years, except for six leases that expire between 2032 and 2039. Our future minimum lease payments as of April 30, 2005 are $2.3 million, $4.2 million, $3.7 million, $2.9 million, $3.9 million and $19.6 million for the years ending October 31, 2005, 2006, 2007, 2008, 2009 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 three former executive officers.

We expect to be able to reduce our debt with approximately $10 million of remaining income tax benefits related to the sale of our foreign operations which we expect to receive by the end of fiscal year 2007.

In February 2005, we used the net proceeds of the issuance of $200.0 million of our 6.25 percent senior notes, an additional $130.0 million in Term Loan B borrowings and a portion of our available cash to complete a tender offer pursuant to which we repurchased $298.2 million of our 10.75 percent senior subordinated notes and paid related tender premiums, fees, expenses and accrued interest of $28.9 million. For additional information, see Note 15 to the condensed consolidated financial statements. As of May 31, 2005, our outstanding debt balance was $418.4 million, consisting of $214.2 million in Term Loan B, $200.0 million of 6.25 percent senior notes, $1.8 million of 10.75 percent senior subordinated notes and $2.4 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 May 31, 2005.


										Other,
										Principally
										Seller
Fiscal	Revolving				Senior					Financing of
Year Ending	Credit		Term		Subordinated			Senior		Acquired
October 31,	Facility		Loan B		Notes			Notes		Operations		Total
2005	$	—	$	1.1	$	1.8	⁽¹⁾	$	—	$	.5	$	3.4
2006		—		2.2		—			—		1.0		3.2
2007		—		2.2		—			—		.6		2.8
2008		—		2.2		—			—		.2		2.4
2009		—		2.2		—			—		—		2.2
Thereafter		—		204.3		—			200.0		.1		404.4

Total long-term debt	$	—	$	214.2	$	1.8		$	200.0	$	2.4	$	418.4


⁽¹⁾		The first call date on our remaining senior subordinated notes is July 1, 2005 at a price of 105.375 percent of the notes’ principal amount. On May 31, 2005, we gave notice to the remaining holders of the senior subordinated notes of our intention to call the remaining $1.8 million principal amount. As such, this amount has been classified as a short-term obligation in the April 30, 2005 condensed consolidated balance sheet. In the third quarter of fiscal year 2005, we will record a charge for the early extinguishment of debt of approximately $0.1 million including the call premium and write-off of the remaining unamortized fees on the senior subordinated notes. We intend to fund the call of the remaining notes using excess cash on hand.

We also had $15.7 million of outstanding letters of credit as of April 30, 2005 and May 31, 2005, and we are required to maintain a bond of $41.1 million to guarantee our obligations relating to funds we withdrew 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.

As of April 30, 2005 and May 31, 2005, there were no amounts drawn on our $125.0 million revolving credit facility. As of April 30, 2005 and May 31, 2005, our availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit and bond obligation, was $68.2 million.

On March 17, 2005, we substantially completed our $28.0 million stock repurchase program, having repurchased 4,400,000 shares since the inception of the program. 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 May 31, 2005, there have been no repurchases of our Class A common stock.

On March 28, 2005, we announced that our Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of common stock. The first dividend was paid on April 29, 2005 to

shareholders of record at the close of business on April 15, 2005. Although we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of April 30, 2005 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

	(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 4 to the condensed consolidated financial statements included herein.

Ratio of Earnings to Fixed Charges

Our ratio of earnings to fixed charges was as follows:

Six Months

Ended

Years Ended October 31,

April 30, 2005

2004

2003

2002

2001

2000

(Restated)

(Note 1)

1.21⁽¹⁾⁽⁵⁾

1.98

⁽²⁾

1.08

⁽³⁾

1.27

⁽⁴⁾⁽⁵⁾

—

⁽⁵⁾⁽⁶⁾

2.33


⁽¹⁾		Pretax earnings for the six months ended April 30, 2005 include $1.2 million of gains on dispositions and impairment (losses), net and a charge of $32.7 million for the loss on early extinguishment of debt.

⁽²⁾		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.

⁽³⁾		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.

⁽⁴⁾		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.

⁽⁵⁾		Excludes the cumulative effect of change in accounting principles.

⁽⁶⁾		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.

Inflation

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

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, 2004, filed with the Securities and Exchange Commission on January 11, 2005. 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 18 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2004, in Note 15 to the condensed consolidated financial statements included herein and in the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in both reports.

As of April 30, 2005 and October 31, 2004, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $206.9 million and $314.6 million, respectively, compared to fair values of $198.6 million and $344.7 million, respectively. Fair values were determined using quoted market prices. Each approximate 10 percent change in the average interest rates applicable to such debt, 70 basis points and 40 basis points for April 30, 2005 and October 31, 2004, respectively, would result in changes of approximately $8.3 million and $0.9 million, respectively, in the fair values of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

Our variable-rate debt consists of our Term Loan B and revolving credit facility. As of April 30, 2005 and October 31, 2004, the carrying value of our Term Loan B was $216.0 million and $54.0 million, respectively, compared to a fair value of $217.3 million and $54.7 million, respectively. As of April 30, 2005 there were no amounts drawn on the revolving credit facility, and as of October 31, 2004, the carrying value and fair value of our revolving credit facility was $59.0 million. None of the $216.0 million outstanding under the Term Loan B at April 30, 2005 was hedged. Each approximate 10 percent, or 55 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $0.9 million in our pretax earnings. Of the $113.0 million outstanding under Term Loan B and the revolving credit facility on October 31, 2004, $63.0 million was not hedged by the interest rate swap in effect at that time and was subject to short-term variable interest rates. Each approximate 10 percent, or 55 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $0.3 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

Restatement

As described in Note 1 to the condensed consolidated financial statements included herein, the Company has restated 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 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”) and (b) errors identified in revenue recognition of preneed cemetery merchandise and services contracts and (c) errors identified in the recognition of realized trust earnings on preneed cemetery and funeral merchandise and services contracts.

Evaluation of 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 financial 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 April 30, 2005 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 weakness 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. As a result of the restatements described above, the following material weaknesses were identified in the Company’s assessment of the effectiveness of disclosure controls and procedures as of April 30, 2005:

(A) The Company did not maintain effective controls over the determination of operating and reportable segments in accordance with accounting principles generally accepted in the United States of America with regard to identifying its segments and reporting units for purposes of assessing goodwill impairments. This control deficiency resulted in the restatement of the Company’s interim and annual consolidated financial statements for 2004 and 2003, the annual consolidated financial statements for 2002, and adjustments to the consolidated financial statements of the first and second quarters of 2005. Additionally, this control deficiency could result in further misstatements to the Company’s goodwill, deferred taxes, equity and disclosures that would result in a material misstatement in the annual or interim financial statements that would not be prevented or detected. Accordingly, management determined that this control deficiency represents a material weakness in internal control over financial reporting.

(B) 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.

(C) 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 2000 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 April 30, 2005.

Management’s Remediation Initiatives

The Company took a series of steps during the fourth quarter of fiscal year 2005 designed to improve the control processes related to the determination of operating and reportable segments in accordance with accounting principles generally accepted in the United States of America. These steps included re-assessing the information provided to its Chief Operating Decision Maker and how that information affects the determination of its operating segments as well as assessing the economic similarity for reportable segments and reporting unit determination in its goodwill impairment analysis. The Company concluded that this material weakness has been remediated as of October 31, 2005 given the series of steps taken.

Management, with the oversight of the Audit Committee, has been addressing the material weaknesses described above in the Company’s internal control over financial reporting relating to deferred revenue described in paragraphs (B) and (C) above and their impact over disclosure controls and procedures, and is committed to effectively remediating these deficiencies as expeditiously as possible. The Company has devoted significant time and resources to the remediation efforts having completed a detailed review and assessment of nearly 700,000 contracts. Also, the Company is in the process of enhancing its automated delivery systems over cemetery merchandise and is 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 the Company’s policies and procedures.

Changes in Internal Control Over Financial Reporting

Except as described above, there have been no changes in the Company’s internal control over financial reporting during the most recently completed fiscal quarter 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

This item is not being amended by this Amendment. For a discussion of the current legal proceedings, see Note 19 to the condensed consolidated financial statements included herein.

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

Purchases of Equity Securities by the Issuer and Affiliated Purchasers

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. 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 second quarter of fiscal year 2005, in the format required by SEC rules.

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⁽¹⁾		paid per share		plans or programs⁽²⁾		plans or programs
February 1, 2005 through February 28, 2005		—	$	—		—	$	5,783,509

March 1, 2005 through March 31, 2005		900,669	$	6.28		900,000	$	30,129,265

April 1, 2005 through April 30, 2005		—	$	—		—	$	30,129,265


Total		900,669	$	6.28		900,000	$	30,129,265


⁽¹⁾		Consists of shares repurchased from employees to satisfy the exercise price and tax withholding of certain stock option exercises and share repurchases under our stock repurchase program.

⁽²⁾		On June 26, 2003, we announced that our Board of Directors had approved a stock repurchase program that allows us to invest up to $25.0 million in repurchases of our Class A common stock. In June 2004, the Board of Directors increased the program limit by an additional $3.0 million to $28.0 million. On March 17, 2005, we substantially completed our $28.0 million stock repurchase program, having repurchased 4,400,000 shares since its inception. 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 are 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 the new program through April 30, 2005, we have not repurchased any shares.

Item 4. Submission of Matters to a Vote of Security Holders

Our 2005 annual meeting of shareholders was held on April 5, 2005. All director nominees were elected. The voting tabulation was as follows: James W. McFarland: 124,560,308 votes for, 3,044,364 votes withheld; Kenneth C. Budde: 123,872,499 votes for, 3,732,173 votes withheld; Alden J. McDonald, Jr.: 124,355,813 votes for, 3,248,859 votes withheld; John C. McNamara: 123,974,905 votes for, 3,629,767 votes withheld. The proposal to ratify the retention of PricewaterhouseCoopers LLP as independent registered public accounting firm for the fiscal year ending October 31, 2005 was approved. The voting tabulation was as follows: 125,369,379 votes for, 609,362 votes against and 1,625,931 abstentions. The proposal to adopt the 2005 Directors’ Stock Plan was approved. The voting tabulation was as follows: 102,846,931 votes for, 6,126,695 votes against and 246,576 abstentions.

Item 5. Other Information

Certain statements made herein or elsewhere by us or on our behalf that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words. These statements include any statements regarding plans, strategies and objectives of management for future operations, regarding future financial or economic performance and assumptions underlying the foregoing. We caution readers that we assume no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by us or on our behalf. We also caution readers that important factors could cause our actual results to differ materially from those anticipated in forward-looking statements. Those important factors are described under the heading “Risk Factors” in Item 1A of our Form 10-K for the year ended October 31, 2005.

Item 6. Exhibits

(a)		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. 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)

12		Calculation of Ratio of Earnings to Fixed Charges

18		Preferability Letter from Independent Registered Public Accounting Firm regarding change in accounting principle (incorporated by reference to Exhibit 18 to the Company’s original Quarterly Report on Form 10-Q for the quarter ended April 30, 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.


May 4, 2006		/s/ THOMAS M. KITCHEN

		Thomas M. Kitchen
		Executive Vice President and
		Chief Financial Officer


May 4, 2006		/s/ MICHAEL G. HYMEL

		Michael G. Hymel
		Vice President
		Corporate Controller
		Chief Accounting Officer

Index to 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. 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)

12		Calculation of Ratio of Earnings to Fixed Charges

18		Preferability Letter from Independent Registered Public Accounting Firm regarding change in accounting principle (incorporated by reference to Exhibit 18 to the Company’s original Quarterly Report on Form 10-Q for the quarter ended April 30, 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 (STEI) Inactive 10-Q/A2005 Q2 Quarterly report (amended)