Stewart Enterprises (STEI) 10-Q 2007 Q1 Quarterly report

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended January 31, 2007

or

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

For the transition period from                    to                    

Commission File Number: 1-15449

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

LOUISIANA	72-0693290
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
1333 South Clearview Parkway
Jefferson, Louisiana	70121
(Address of principal executive offices)	(Zip Code)

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

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

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

Large accelerated filer  o     Accelerated filer  þ     Non-accelerated filer  o

     Indicated by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act of 1934.)
Yeso  Noþ

     The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of February 28, 2007, was 101,953,257 and 3,555,020, respectively.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

			Page
Part I.	Financial Information
	Item 1.	Financial Statements (Unaudited)
	Condensed Consolidated Statements of Earnings — Three Months Ended January 31, 2007 and 2006			3
	Condensed Consolidated Balance Sheets — January 31, 2007 and October 31, 2006			4
	Condensed Consolidated Statement of Shareholders’ Equity — Three Months Ended January 31, 2007			6
	Condensed Consolidated Statements of Cash Flows — Three Months Ended January 31, 2007 and 2006			7
	Notes to Condensed Consolidated Financial Statements			8
	Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations		30
	Item 3.	Quantitative and Qualitative Disclosures About Market Risk		38
	Item 4.	Controls and Procedures		39
Part II.	Other Information
	Item 1.	Legal Proceedings		39
	Item 1A.	Risk Factors		40
	Item 6.	Exhibits		40
	Signatures			41
Certification Pursuant to Section 302
Certification Pursuant to Section 906

2

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended January 31,
	2007			2006
Revenues:
Funeral	$	72,721		$	71,628
Cemetery		59,960			54,454
		132,681			126,082
Costs and expenses:
Funeral		53,981			53,785
Cemetery		47,647			43,173
		101,628			96,958
Gross profit		31,053			29,124
Corporate general and administrative expenses		(7,042	)		(7,219	)
Hurricane related charges, net		(1,850	)		(2,638	)
Separation charges		(485	)		(154	)
Gains on dispositions and impairment (losses), net		98			—
Other operating income, net		268			977
Operating earnings		22,042			20,090
Interest expense		(6,757	)		(7,528	)
Investment and other income, net		1,050			468
Earnings from continuing operations before income taxes		16,335			13,030
Income taxes		4,327			4,911
Earnings from continuing operations		12,008			8,119
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes		(97	)		254
Income tax benefit		(15	)		(16	)
Earnings (loss) from discontinued operations		(82	)		270
Net earnings	$	11,926		$	8,389
Basic earnings per common share:
Earnings from continuing operations	$	.11		$	.08
Earnings from discontinued operations		—			—
Net earnings	$	.11		$	.08
Diluted earnings per common share:
Earnings from continuing operations	$	.11		$	.08
Earnings from discontinued operations		—			—
Net earnings	$	.11		$	.08
Weighted average common shares outstanding (in thousands):
Basic		104,900			108,504
Diluted		104,998			108,522
Dividends declared per common share	$	.025		$	.025

See accompanying notes to condensed consolidated financial statements.

3

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

	January 31,		October 31,
ASSETS	2007		2006
Current assets:
Cash and cash equivalents	$	50,116	$	43,870
Marketable securities		519		239
Receivables, net of allowances		58,965		72,527
Inventories		35,754		36,372
Prepaid expenses		12,867		6,428
Deferred income taxes, net		9,421		10,502
Assets held for sale		—		881
Total current assets		167,642		170,819
Receivables due beyond one year, net of allowances		76,687		75,350
Preneed funeral receivables and trust investments		528,047		517,963
Preneed cemetery receivables and trust investments		261,638		258,212
Goodwill		275,212		273,327
Cemetery property, at cost		370,195		371,230
Property and equipment, at cost:
Land		42,233		41,448
Buildings		297,273		294,172
Equipment and other		154,156		150,004
		493,662		485,624
Less accumulated depreciation		196,515		190,061
Net property and equipment		297,147		295,563
Deferred income taxes, net		177,089		173,986
Cemetery perpetual care trust investments		235,189		230,487
Other assets		13,419		13,640
Total assets	$	2,402,265	$	2,380,577

(continued)

4

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

	January 31,			October 31,
LIABILITIES AND SHAREHOLDERS’ EQUITY	2007			2006
Current liabilities:
Current maturities of long-term debt	$	2,600		$	2,839
Accounts payable		15,654			19,375
Accrued payroll and other benefits		12,617			17,353
Accrued insurance		23,510			21,803
Accrued interest		8,861			5,822
Other current liabilities		12,604			18,141
Income taxes payable		7,172			3,703
Liabilities associated with assets held for sale		—			469
Total current liabilities		83,018			89,505
Long-term debt, less current maturities		373,394			374,020
Deferred preneed funeral revenue		273,613			274,682
Deferred preneed cemetery revenue		294,750			296,075
Non-controlling interest in funeral and cemetery trusts		672,549			658,012
Other long-term liabilities		12,956			12,410
Total liabilities		1,710,280			1,704,704
Commitments and contingencies
Non-controlling interest in perpetual care trusts		234,284			228,980
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 101,630,170 and 101,408,227 shares at January 31, 2007 and October 31, 2006, respectively		101,630			101,408
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at January 31, 2007 and October 31, 2006, 10 votes per share, convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		639,175			640,648
Accumulated deficit		(286,789	)		(298,715	)
Accumulated other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments		130			(3	)
Total accumulated other comprehensive income (losses)		130			(3	)
Total shareholders’ equity		457,701			446,893
Total liabilities and shareholders’ equity	$	2,402,265		$	2,380,577

See accompanying notes to condensed consolidated financial statements.

5

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share amounts)

						Retained			Unrealized
			Additional			Earnings			Appreciation			Total
	Common		Paid-In			(Accumulated			(Depreciation)			Shareholders’
	Stock(1)		Capital			Deficit)			of Investments			Equity
Balance October 31, 2006	$	104,963	$	640,648		$	(298,715	)	$	(3	)	$	446,893
Comprehensive income:
Net earnings		—		—			11,926			—			11,926
Other comprehensive income:
Unrealized appreciation of investments, net of deferred tax expense of ($81)		—		—			—			133			133
Total other comprehensive income		—		—			—			133			133
Total comprehensive income		—		—			11,926			133			12,059
Restricted stock activity		46		(20	)		—			—			26
Issuance of common stock		89		444			—			—			533
Stock options exercised		87		386			—			—			473
Share-based compensation		—		318			—			—			318
Tax benefit associated with stock options exercised		—		26			—			—			26
Dividends ($.025 per share)		—		(2,627	)		—			—			(2,627	)
Balance January 31, 2007	$	105,185	$	639,175		$	(286,789	)	$	130		$	457,701

⁽¹⁾ Amount includes 101,630 and 101,408 shares (in thousands) of Class A common stock with a stated value of $1 per share as of January 31, 2007 and October 31, 2006, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

6

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended January 31,
	2007			2006
Cash flows from operating activities:
Net earnings	$	11,926		$	8,389
Adjustments to reconcile net earnings to net cash provided by operating activities:
(Gains) on dispositions and impairment losses, net		(17	)		(298	)
Depreciation and amortization		6,494			6,081
Provision for doubtful accounts		2,238			2,095
Share-based compensation		318			424
Excess tax benefits from share-based payment arrangements		(37	)		—
Provision (benefit) for deferred income taxes		(2,102	)		3,679
Other		66			95
Changes in assets and liabilities:
Decrease in other receivables		9,159			4,029
Decrease in inventories and cemetery property		837			1,589
Decrease in accounts payable and accrued expenses		(3,426	)		(5,078	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments		77			2,712
Decrease in deferred preneed funeral revenue		(2,891	)		(6,467	)
Increase (decrease) in funeral non-controlling interest		(82	)		126
Net effect of preneed cemetery production and deliveries:
(Increase) decrease in preneed cemetery receivables and trust investments		(1,000	)		11,402
Decrease in deferred preneed cemetery revenue		(1,325	)		(1,060	)
Increase in cemetery non-controlling interest		3,312			1,682
Decrease in other		(5,658	)		(2,176	)
Net cash provided by operating activities		17,889			27,224
Cash flows from investing activities:
Proceeds from sale of assets, net		388			9
Purchase of subsidiaries, net of cash acquired		(2,805	)		—
Insurance proceeds related to hurricane damaged properties		1,400			4,540
Additions to property and equipment		(7,777	)		(4,274	)
Other		(37	)		15
Net cash provided by (used in) investing activities		(8,831	)		290
Cash flows from financing activities:
Repayments of long-term debt		(865	)		(891	)
Issuance of common stock		643			—
Dividends		(2,627	)		(2,717	)
Excess tax benefits from share-based payment arrangements		37			—
Other		—			61
Net cash used in financing activities		(2,812	)		(3,547	)
Net increase in cash		6,246			23,967
Cash and cash equivalents, beginning of period		43,870			40,605
Cash and cash equivalents, end of period	$	50,116		$	64,572
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes	$	(1,370	)	$	200
Interest	$	3,600		$	3,200
Non-cash investing and financing activities:
Issuance of common stock to executive officers	$	363		$	—
Issuance of restricted stock	$	290		$	—

See accompanying notes to condensed consolidated financial statements.

7

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation

     (a) The Company

     Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of January 31, 2007, the Company owned and operated 227 funeral homes and 143 cemeteries in 25 states within the United States and Puerto Rico. The Company has five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of two geographic areas: Eastern and Western.

     (b) Principles of Consolidation

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

     (c) Interim Disclosures

     The information as of January 31, 2007, and for the three months ended January 31, 2007 and 2006, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2006 (the “2006 Form 10-K”).

     The October 31, 2006 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2006 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2006 Form 10-K.

     The results of operations for the three months ended January 31, 2007 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2007.

     (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) Share-Based Compensation

     The Company has three share-based compensation plans, which are described in more detail in Note 18 to the consolidated financial statements of the Company’s 2006 Form 10-K. Net earnings for the three months ended January 31, 2007 and 2006 include $318 ($216 after tax) and $424 ($275 after tax), respectively, of share-based compensation costs which are included in corporate general and administrative expenses in the condensed consolidated statement of earnings. As of January 31, 2007, there was $2,635 of total unrecognized compensation costs related to nonvested share-based compensation that is expected to be recognized over a weighted-average period of 3.04 years, of which $1,141 of total share-based compensation is expected for fiscal year 2007. The expense related to restricted stock granted in fiscal years 2007 and 2006 is reflected in earnings and amounted to $68

8

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation — (Continued)

and $95 for the three months ended January 31, 2007 and 2006, respectively.

     On January 8, 2007, the Company granted new options to employees for the purchase of 484,000 shares of Class A common stock at an exercise price of $6.33 per share, which vest in equal 25 percent portions on January 8, 2008, 2009, 2010 and 2011. On January 8, 2007, the Company granted 52,500 shares of restricted stock to certain executive officers, which vest in equal 25 percent portions on January 8, 2008, 2009, 2010 and 2011.

     Subsequent to quarter end, the Company agreed to grant 340,000 shares of restricted stock and options to purchase 360,000 shares of Class A common stock to an executive officer, of which a portion will be subject to performance-based conditions.

     In February 2007, the Company issued a total of 84,000 shares of Class A common stock to the independent directors of the Company. Each independent director must hold at least 75 percent of the shares received by him until he no longer serves as a member of the Board of Directors.

     (f) Reclassifications

     Certain reclassifications have been made to the 2006 condensed consolidated statements of earnings, balance sheet and cash flows in order for these periods to be comparable. All businesses sold in fiscal year 2007 and fiscal year 2006 that met the criteria for discontinued operations have been classified as discontinued operations for all periods presented. These reclassifications had no effect on net earnings, shareholders’ equity or operating cash flows.

     The Company also changed its presentation of activities related to its preneed funeral and cemetery trusts within the 2006 condensed consolidated statements of cash flows. Previously, all funeral and cemetery trust activities were included in the “net effect of preneed funeral production and maturities” and “net effect of preneed cemetery production and deliveries” line items. The Company now presents separate components of the funeral and cemetery trust activities within the following line items: changes in preneed receivables and trust investments, changes in deferred preneed revenue and changes in non-controlling interest. This new presentation has no effect on operating cash flows. The effect of the new presentation for the trust activities reflected in the consolidated statements of cash flows for the years ended October 31, 2006, 2005 and 2004 is presented below to update the disclosure from that included in the Company’s 2006 Form 10-K:

	Year Ended October 31,
	2006			2005			2004
Decrease in preneed funeral receivables and trust investments	$	4,567		$	4,141		$	5,481
Decrease in deferred preneed funeral revenue		(15,375	)		(13,628	)		(14,162	)
Increase (decrease) in funeral non-controlling interest		5,058			2,449			(5,603	)
Net effect of preneed funeral production and maturities		(5,750	)		(7,038	)		(14,284	)
(Increase) decrease in preneed cemetery receivables and trust investments	$	3,479		$	1,192		$	(2,646	)
Increase (decrease) in deferred preneed cemetery revenue		10,235			(8,313	)		7,073
Increase in cemetery non-controlling interest		11,686			12,368			1,994
Net effect of preneed cemetery production and deliveries	$	25,400		$	5,247		$	6,421

9

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles

     In July 2006, the Financial Accounting Standards Board (“FASB”) issued FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes – an Interpretation of FASB Statement No. 109” (“FIN 48”), which clarifies the accounting and disclosure for uncertain tax positions in accordance with SFAS No. 109, “Accounting for Income Taxes.” FIN 48 addresses the recognition, measurement, classification and disclosure issues related to the recording of financial statement benefits for income tax positions that have some degree of uncertainty. This interpretation is effective as of the beginning of an entity’s first fiscal year that begins after December 15, 2006. The Company is currently evaluating the impact the adoption of FIN 48 will have on its consolidated financial statements.

     In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for measuring fair value in accordance with Generally Accepted Accounting Principles (“GAAP”) and expands disclosures about fair value measurements. This statement is effective as of the beginning of the entity’s first fiscal year that begins after November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 157 will have on its consolidated financial statements.

     In February 2007, the FASB issued Statement of Financial Accounting Standards (“SFAS”) No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115 (“SFAS No. 159”). This statement permits entities to choose to measure many financial assets and liabilities and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of the entity’s first fiscal year beginning after November 15, 2007. The Company is currently evaluating the impact, if any, the adoption of SFAS No. 159 will have on its consolidated financial statements.

(3) Preneed Funeral Activities

Preneed Funeral Receivables and Trust Investments

     Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheet at January 31, 2007 and October 31, 2006 are as follows:

	January 31, 2007		October 31, 2006
Trust assets	$	476,251	$	467,640
Receivables from customers		51,796		50,323
Preneed funeral receivables and trust investments	$	528,047	$	517,963

     The cost and market values associated with preneed funeral merchandise and services trust assets at January 31, 2007 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 $79,262 as of January 31, 2007 from their original cost basis. The Company believes the unrealized losses reflected below of $4,380 related to trust investments are temporary in nature.

10

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities — (Continued)

	January 31, 2007
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	46,719	$	—	$	—		$	46,719
U.S. Government, agencies and municipalities		18,042		48		(202	)		17,888
Corporate bonds		40,110		572		(291	)		40,391
Preferred stocks		73,175		841		(693	)		73,323
Common stocks		214,203		31,169		(2,973	)		242,399
Mutual funds		33,097		1,741		(221	)		34,617
Insurance contracts and other long-term investments		19,395		223		—			19,618
Trust investments	$	444,741	$	34,594	$	(4,380	)		474,955
Market value as a percentage of cost										106.8	%
Accrued investment income									1,296
Trust assets								$	476,251

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

	January 31, 2007
Due in one year or less	$	2,007
Due in one to five years		24,531
Due in five to ten years		31,415
Thereafter		326
	$	58,279

     During the three months ended January 31, 2007, purchases and sales of available for sale securities included in trust investments were $33,589 and $33,871, respectively. These sales resulted in realized gains and losses of $2,149 and ($297), respectively. During the three months ended January 31, 2006 purchases and sales of available for sale securities included in trust investments were $4,412 and $2,123, respectively, and these sales resulted in realized gains and losses of $120 and ($904), respectively.

     The Company deposited $7,419 and $6,793 into and withdrew $11,230 and $11,560 from preneed funeral trusts during the three months ended January 31, 2007 and 2006, respectively.

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

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

     Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheet as of January 31, 2007 and October 31, 2006 are as follows:

11

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

	January 31, 2007		October 31, 2006
Trust assets	$	207,459	$	201,983
Receivables from customers		54,179		56,229
Preneed cemetery receivables and trust investments	$	261,638	$	258,212

     The cost and market values associated with the preneed cemetery merchandise and services trust assets as of January 31, 2007 are detailed below. The adjusted cost basis of the cemetery merchandise and services trust assets below reflects an other than temporary decline in the trust assets of approximately $43,060 as of January 31, 2007 from their original cost basis. The Company believes the unrealized losses reflected below of $2,798 related to trust investments are temporary in nature.

	January 31, 2007
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	15,384	$	—	$	—		$	15,384
U.S. Government, agencies and municipalities		15,174		38		(140	)		15,072
Corporate bonds		11,902		299		(45	)		12,156
Preferred stocks		27,883		261		(296	)		27,848
Common stocks		99,137		11,708		(2,312	)		108,533
Mutual funds		27,050		385		(1	)		27,434
Insurance contracts and other long-term investments		538		—		(4	)		534
Trust investments	$	197,068	$	12,691	$	(2,798	)		206,961
Market value as a percentage of cost										105.0	%
Accrued investment income									498
Trust assets								$	207,459

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

	January 31, 2007
Due in one year or less	$	5,075
Due in one to five years		12,428
Due in five to ten years		9,156
Thereafter		569
	$	27,228

     During the three months ended January 31, 2007, purchases and sales of available for sale securities included in trust investments were $57,022 and $50,853, respectively, which resulted in realized gains and losses of $2,801 and ($300), respectively. During the three months ended January 31, 2006, purchases and sales of available for sale securities included in trust investments were $2,199 and $8,420, respectively, and these sales resulted in realized gains and losses of $246 and ($346), respectively.

     The Company deposited $4,447 and $4,384 into and withdrew $4,137 and $16,397 from preneed cemetery merchandise and service trusts during the three months ended January 31, 2007 and 2006, respectively.

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

12

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(5) Cemetery Interment Rights and Perpetual Care Trusts

     Earnings realized from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $2,362 and $2,615 for the three months ended January 31, 2007 and 2006, respectively.

     The cost and market values of the trust investments held by the cemetery perpetual care trusts at January 31, 2007 are detailed below. The adjusted cost basis of the cemetery perpetual care trusts below reflects an other than temporary decline in the trust assets of $32,523 as of January 31, 2007 from their original cost basis. The Company believes the unrealized losses reflected below of $3,401 related to trust investments are temporary in nature.

	January 31, 2007
	Adjusted		Unrealized		Unrealized
	Cost Basis		Gains		Losses			Market
Cash, money market and other short-term investments	$	19,606	$	—	$	—		$	19,606
U.S. Government, agencies and municipalities		9,804		28		(166	)		9,666
Corporate bonds		30,694		1,193		(171	)		31,716
Preferred stocks		65,049		1,664		(993	)		65,720
Common stocks		80,702		16,167		(1,988	)		94,881
Mutual funds		10,745		1,001		(72	)		11,674
Insurance contracts and other long-term investments		992		146		(11	)		1,127
Trust investments	$	217,592	$	20,199	$	(3,401	)		234,390
Market value as a percentage of cost										107.7	%
Accrued investment income									799
Trust assets								$	235,189

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

	January 31, 2007
Due in one year or less	$	775
Due in one to five years		23,066
Due in five to ten years		16,083
Thereafter		1,458
	$	41,382

     During the three months ended January 31, 2007, purchases and sales of available for sale securities were $19,867 and $22,526, respectively, which resulted in realized gains and losses of $1,144 and ($330), respectively. During the three months ended January 31, 2006, purchases and sales of available for sale securities were $14,051 and $10,957, respectively, and these sales resulted in realized gains and losses of $804 and ($68), respectively.

     The Company deposited $1,863 and $1,971 into and withdrew $3,148 and $2,173 from perpetual care trusts during the three months ended January 31, 2007 and 2006, respectively.

     During the three months ended January 31, 2007 and 2006, cemetery revenues were $59,960 and $54,454, respectively, of which $2,547 and $1,887, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.

13

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

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

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

     The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at January 31, 2007 are as follows:

	Non-controlling Interest									Non-controlling
	Preneed			Preneed						Interest in Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	476,251		$	207,459		$	683,710		$	235,189
Less:
Pending withdrawals		(9,956	)		(4,760	)		(14,716	)		(1,674	)
Pending deposits		2,155			1,400			3,555			769
Non-controlling interest	$	468,450		$	204,099		$	672,549		$	234,284

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

	Non-controlling Interest									Non-controlling
	Preneed			Preneed						Interest in Perpetual
	Funeral			Cemetery			Total			Care Trusts
Trust assets at market value	$	467,640		$	201,983		$	669,623		$	230,487
Less:
Pending withdrawals		(10,317	)		(5,175	)		(15,492	)		(2,300	)
Pending deposits		2,362			1,519			3,881			793
Non-controlling interest	$	459,685		$	198,327		$	658,012		$	228,980

Investment and other income, net

     The components of investment and other income, net in the condensed consolidated statements of earnings for the three months ended January 31, 2007 and 2006 are detailed below.

14

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

	Three Months			Three Months
	Ended			Ended
	January 31, 2007			January 31, 2006
Non-controlling interest:
Realized gains	$	6,094		$	1,170
Realized losses		(927	)		(1,318	)
Interest income, dividend and other ordinary income		5,846			7,575
Trust expenses and income taxes		(2,527	)		(2,831	)
Net trust investment income		8,486			4,596
Non-controlling interest in funeral and cemetery trust investments		(6,167	)		(1,994	)
Non-controlling interest in perpetual care trust investments		(2,319	)		(2,602	)
Total non-controlling interest		—			—
Investment and other income, net(1)		1,050			468
Total investment and other income, net	$	1,050		$	468

⁽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. For the three months ended January 31, 2007, the balance includes approximately $444 of interest income receivable from the Internal Revenue Service.

(7) Commitments and Contingencies

Litigation

     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 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 amended her case twice. On January 31, 2006, however, the court overruled SCI’s demurrer to the third amended complaint and established a schedule leading to a hearing on a motion for summary judgment 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 charged to the plaintiffs for certain goods and services the SCI defendants 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.

     In September and October 2006, the court granted the motion for summary judgment filed by the SCI affiliate with whom the plaintiff had contracted and entered a judgment of dismissal in favor of that SCI affiliate. On

15

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies — (Continued)

December 8, 2006, the plaintiff noticed an appeal of this judgment.

     Because the matter is being appealed, 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., number H-05-3394 on the docket of the United States District Court for the Southern District of Texas. This purported class action was originally filed on May 2, 2005, in the United States District Court for the Northern District of California, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home defendants at any time. The court consolidated it with five subsequently filed, substantially similar cases (the “Consolidated Consumer Cases”).

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

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

     On November 10, 2006, after the court denied Defendants’ motions to dismiss, the Company answered the first amended consolidated class action complaint, denying liability and asserting various affirmative defenses. Discovery is underway. The court conducted a hearing on plaintiffs’ motion for class certification on December 4-7, 2006.

     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 originally 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 Consolidated Consumer Cases,but the plaintiffs in this suit (the “Fancher plaintiffs”) alleged that the defendants violated state antitrust, consumer protection and/or unjust enrichment laws. The Fancher plaintiffs withdrew their 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 was transferred to the Southern District of Texas and consolidated with the Consolidated Consumer Cases for purposes of discovery. The Fancher plaintiffs 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. However, the Fancher plaintiffs filed a voluntary notice of dismissal seeking to dismiss their claims without prejudice. On June 13, 2006, the Court entered an order granting the voluntary dismissal without prejudice.

     Pioneer Valley Casket Co., Inc., et al. v. Service Corporation International, Alderwoods Group, Inc.,

16

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(7) Commitments and Contingencies — (Continued)

Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co., number H-05-3399 (“Pioneer Valley Case”). This purported class action was filed on July 8, 2005, in the Northern District of California on behalf of a nationwide class of independent casket retailers. The casket retailers make allegations similar to those involved made in the Consolidated Consumer Cases reported above and seek treble damages, injunctive relief, interest, costs and attorneys’ fees.

     Like the Consolidated Consumer Cases, in late September 2005, this matter was transferred to the United States District Court for the Southern District of Texas. The Pioneer Valley Case has been consolidated with the Consolidated Consumer Cases for purposes of discovery only.

     On November 14, 2006, after the court denied Defendants’ motions to dismiss, the Company answered the first amended complaint, denying liability and asserting various defenses. Discovery is underway. The court conducted a hearing on plaintiffs’ motion for class certification on December 8, 2006.

     Because this matter is in preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

     In Re: 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. Subsequently, the Attorneys General for the States of Florida and Connecticut issued a similar civil investigative demand to the Company. The Company has entered into arrangements allowing the Maryland and Florida Attorneys General to share in information provided by the Company with the attorneys general of certain other states. The Company is cooperating with the attorneys general and has provided information relevant to their investigations. Because these matters are in their preliminary stages, the likelihood of liability and the extent of any damages cannot be reasonably assessed at this time. The Company intends to aggressively defend itself in these matters.

Other Litigation

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

Securities and Exchange Commission Investigation

     In November 2006, the Company received a subpoena from the Securities and Exchange Commission (“SEC”), issued pursuant to a formal order of investigation, seeking documents and information related to the Company’s previously disclosed and completed deferred revenue project. The SEC has informed the Company that this is a fact-finding inquiry to determine whether there have been any violations of the federal securities laws. The SEC has also informed the Company that the investigation and subpoena do not mean that the SEC has concluded that the Company, or anyone else, has violated any law or that the SEC has a negative opinion of any person, entity or security. The Company is cooperating fully with the investigation and has commenced providing documents that are responsive to the subpoena.

17

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(8) Reconciliation of Basic and Diluted Per Share Data

	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended January 31, 2007
Earnings from continuing operations	$	12,008
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	12,008		104,900	$	.11
Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock				98
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	12,008		104,998	$	.11

	Earnings		Shares		Per Share
	(Numerator)		(Denominator)		Data
Three Months Ended January 31, 2006
Earnings from continuing operations	$	8,119
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	8,119		108,504	$	.08
Effect of dilutive securities:
Time-vest stock options assumed exercised and restricted stock				18
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus time-vest stock options assumed exercised and restricted stock	$	8,119		108,522	$	.08

     Options to purchase 672,678 shares of common stock at prices ranging from $6.90 to $7.03 per share were outstanding during the three months ended January 31, 2007, respectively, 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 1,468,734 shares of common stock at prices ranging from $5.44 to $7.03 per share were outstanding during the three months ended January 31, 2006, respectively, 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.

     The Company includes Class A and Class B common stock in its diluted shares calculation. As of January 31, 2007, 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.

(9) Segment Data

     The Company has five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of two geographic areas: Western and Eastern. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same.

18

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data — (Continued)

     The operating results of the Company’s businesses sold that meet the discontinued operations criteria in SFAS No. 144, “Accounting For Impairment or Disposal of Long-Lived Assets,” are reported in the discontinued operations section of the consolidated statements of earnings (see Note 12). The table below presents information about reported segments for the Company’s continuing operations.

	Funeral Revenue				Cemetery Revenue(1)				Total Revenue
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	January 31, 2007		January 31, 2006		January 31, 2007		January 31, 2006		January 31, 2007		January 31, 2006
Western Division	$	37,837	$	36,867	$	21,859	$	19,349	$	59,696	$	56,216
Eastern Division		30,541		30,108		35,810		32,498		66,351		62,606
Corporate Trust Management(2)		4,343		4,653		2,291		2,607		6,634		7,260
Total	$	72,721	$	71,628	$	59,960	$	54,454	$	132,681	$	126,082

	Funeral Gross Profit				Cemetery Gross Profit(1)				Total Gross Profit
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	January 31, 2007		January 31, 2006		January 31, 2007		January 31, 2006		January 31, 2007		January 31, 2006
Western Division	$	8,683	$	7,721	$	4,044	$	3,753	$	12,727	$	11,474
Eastern Division		5,875		5,602		6,122		5,041		11,997		10,643
Corporate Trust Management(2)		4,182		4,520		2,147		2,487		6,329		7,007
Total	$	18,740	$	17,843	$	12,313	$	11,281	$	31,053	$	29,124

	Net Preneed Funeral Merchandise				Net Preneed Cemetery Merchandise				Net Total Preneed Merchandise
	and Service Sales(3)				and Service Sales(3)				and Service Sales(3)
	Three Months		Three Months		Three Months		Three Months		Three Months		Three Months
	Ended		Ended		Ended		Ended		Ended		Ended
	January 31, 2007		January 31, 2006		January 31, 2007		January 31, 2006		January 31, 2007		January 31, 2006
Western Division	$	12,102	$	12,356	$	4,029	$	3,805	$	16,131	$	16,161
Eastern Division		10,061		9,589		9,612		10,133		19,673		19,722
Total	$	22,163	$	21,945	$	13,641	$	13,938	$	35,804	$	35,883

(1)	Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment and amounted to $2,362 and $2,615 for the three months ended January 31, 2007 and 2006, respectively.
(2)	Corporate trust management consists of trust management fees and funeral and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms and are paid by the trusts to the Company’s subsidiary, Investor’s Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. Trust management fees included in funeral revenue for the three months ended January 31, 2007 and 2006 were $1,468 and $1,368, respectively, and funeral trust earnings for the three months ended January 31, 2007 and 2006 were $2,875 and $3,285, respectively. Trust management fees included in cemetery revenue for the three months ended January 31, 2007 and 2006 were $1,315 and $1,206, respectively, and cemetery trust earnings for the three months ended January 31, 2007 and 2006 were $976 and $1,401, respectively.
(3)	Preneed sales amounts represent total preneed funeral and cemetery service and merchandise sales generated in the applicable period, net of cancellations. These sales are deferred and are recorded as revenue in the period the services are performed or the merchandise is delivered.

19

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(9) Segment Data — (Continued)

     A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes for the three months ended January 31, 2007 and 2006 is as follows:

	Three Months Ended
	January 31,
	2007			2006
Gross profit for reportable segments	$	31,053		$	29,124
Corporate general and administrative expenses		(7,042	)		(7,219	)
Hurricane related charges, net		(1,850	)		(2,638	)
Separation charges		(485	)		(154	)
Gains on dispositions and impairment (losses), net		98			—
Other operating income, net		268			977
Interest expense		(6,757	)		(7,528	)
Investment and other income, net		1,050			468
Earnings from continuing operations before income taxes	$	16,335		$	13,030

20

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(10) Supplementary Information

     The detail of certain income statement accounts is as follows for the three months ended January 31, 2007 and 2006.

	Three Months Ended
	January 31,
	2007		2006
Service revenue
Funeral	$	44,196	$	41,039
Cemetery		15,588		15,714
		59,784		56,753
Merchandise revenue
Funeral		26,435		28,552
Cemetery		40,255		34,747
		66,690		63,299
Other revenue
Funeral		2,090		2,037
Cemetery		4,117		3,993
		6,207		6,030
Total revenue	$	132,681	$	126,082
Service costs
Funeral	$	14,486	$	13,257
Cemetery		10,312		9,755
		24,798		23,012
Merchandise costs
Funeral		15,429		16,982
Cemetery		23,783		20,496
		39,212		37,478
General and administrative expenses
Funeral		24,066		23,546
Cemetery		13,552		12,922
		37,618		36,468
Total costs	$	101,628	$	96,958

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

(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes

     The following tables present the condensed consolidating historical financial statements as of January 31, 2007 and October 31, 2006 and for the three months ended January 31, 2007 and 2006, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of 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

21

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

subsidiaries, Investor’s Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the 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 for three immaterial guarantor subsidiaries of which the Company is the majority owner.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended January 31, 2007
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	67,713		$	5,008		$	—		$	72,721
Cemetery		—			54,547			5,413			—			59,960
		—			122,260			10,421			—			132,681
Costs and expenses:
Funeral		—			50,799			3,182			—			53,981
Cemetery		—			43,385			4,262			—			47,647
		—			94,184			7,444			—			101,628
Gross profit		—			28,076			2,977			—			31,053
Corporate general and administrative expenses		(7,042	)		—			—			—			(7,042	)
Hurricane related charges, net		(3	)		(1,847	)		—			—			(1,850	)
Separation charges		(384	)		(101	)		—			—			(485	)
Gains on dispositions and impairment (losses), net		—			98			—			—			98
Other operating income, net		30			165			73			—			268
Operating earnings (loss)		(7,399	)		26,391			3,050			—			22,042
Interest expense		(1,757	)		(4,448	)		(552	)		—			(6,757	)
Investment and other income, net		1,036			13			1			—			1,050
Equity in subsidiaries		18,976			137			—			(19,113	)		—
Earnings from continuing operations before income taxes		10,856			22,093			2,499			(19,113	)		16,335
Income tax expense (benefit)		(1,070	)		4,340			1,057			—			4,327
Earnings from continuing operations		11,926			17,753			1,442			(19,113	)		12,008
Discontinued operations:
Loss from discontinued operations before income taxes		—			(97	)		—			—			(97	)
Income tax benefit		—			(15	)		—			—			(15	)
Loss from discontinued operations		—			(82	)		—			—			(82	)
Net earnings		11,926			17,671			1,442			(19,113	)		11,926
Other comprehensive income (loss), net		133			—			(2	)		2			133
Comprehensive income	$	12,059		$	17,671		$	1,440		$	(19,111	)	$	12,059

22

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Condensed Consolidating Statements of Earnings and Other Comprehensive Income

	Three Months Ended January 31, 2006
							Non-
				Guarantor			Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	66,769		$	4,859		$	—		$	71,628
Cemetery		—			50,097			4,357			—			54,454
		—			116,866			9,216			—			126,082
Costs and expenses:
Funeral		—			50,672			3,113			—			53,785
Cemetery		—			39,710			3,463			—			43,173
		—			90,382			6,576			—			96,958
Gross profit		—			26,484			2,640			—			29,124
Corporate general and administrative expenses		(7,219	)		—			—			—			(7,219	)
Hurricane related charges, net		—			(2,638	)		—			—			(2,638	)
Separation charges		(55	)		(99	)		—			—			(154	)
Other operating income, net		16			918			43			—			977
Operating earnings (loss)		(7,258	)		24,665			2,683			—			20,090
Interest income (expense)		9,735			(15,586	)		(1,677	)		—			(7,528	)
Investment and other income, net		468			—			—			—			468
Equity in subsidiaries		6,576			—			—			(6,576	)		—
Earnings from continuing operations before income taxes		9,521			9,079			1,006			(6,576	)		13,030
Income taxes		1,132			3,398			381			—			4,911
Earnings from continuing operations		8,389			5,681			625			(6,576	)		8,119
Discontinued operations:
Earnings (loss) from discontinued operations before income taxes		—			(41	)		295			—			254
Income tax benefit		—			(16	)		—			—			(16	)
Earnings (loss) from discontinued operations		—			(25	)		295			—			270
Net earnings		8,389			5,656			920			(6,576	)		8,389
Other comprehensive loss, net		(2	)		—			(2	)		2			(2	)
Comprehensive income	$	8,387		$	5,656		$	918		$	(6,574	)	$	8,387

23

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Condensed Consolidating Balance Sheets

	January 31, 2007
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	46,762		$	1,762		$	1,592		$	—		$	50,116
Marketable securities		282			—			237			—			519
Receivables, net of allowances		5,893			49,071			4,001			—			58,965
Inventories		282			32,591			2,881			—			35,754
Prepaid expenses		869			10,320			1,678			—			12,867
Deferred income taxes, net		2,902			6,519			—			—			9,421
Total current assets		56,990			100,263			10,389			—			167,642
Receivables due beyond one year, net of allowances		9,524			48,428			18,735			—			76,687
Preneed funeral receivables and trust investments		—			516,947			11,100			—			528,047
Preneed cemetery receivables and trust investments		—			248,508			13,130			—			261,638
Goodwill		—			255,425			19,787			—			275,212
Cemetery property, at cost		—			345,897			24,298			—			370,195
Property and equipment, at cost		38,901			418,625			36,136			—			493,662
Less accumulated depreciation		22,654			162,034			11,827			—			196,515
Net property and equipment		16,247			256,591			24,309			—			297,147
Deferred income taxes, net		5,978			157,438			13,673			—			177,089
Cemetery perpetual care trust investments		—			235,189			—			—			235,189
Other assets		5,046			7,273			1,100			—			13,419
Equity in subsidiaries		9,854			6,081			—			(15,935	)		—
Total assets	$	103,639		$	2,178,040		$	136,521		$	(15,935	)	$	2,402,265
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	2,600		$	—		$	—		$	—		$	2,600
Accounts payable		466			14,079			1,109			—			15,654
Accrued expenses and other current liabilities		19,683			41,594			3,487			—			64,764
Total current liabilities		22,749			55,673			4,596			—			83,018
Long-term debt, less current maturities		343,394			—			30,000			—			373,394
Intercompany payables, net		(910,136	)		902,443			7,693			—			—
Deferred preneed funeral revenue		—			225,915			47,698			—			273,613
Deferred preneed cemetery revenue		—			264,151			30,599			—			294,750
Non-controlling interest in funeral and cemetery trusts		—			672,549			—			—			672,549
Other long-term liabilities		10,855			2,101			—			—			12,956
Negative equity in subsidiaries		179,076			—			—			(179,076	)		—
Total liabilities		(354,062	)		2,122,832			120,586			(179,076	)		1,710,280
Non-controlling interest in perpetual care trusts		—			234,284			—			—			234,284
Common stock		105,185			426			52			(478	)		105,185
Other		352,386			(179,502	)		15,888			163,614			352,386
Accumulated other comprehensive income (loss)		130			—			(5	)		5			130
Total shareholders’ equity		457,701			(179,076	)		15,935			163,141			457,701
Total liabilities and shareholders’ equity	$	103,639		$	2,178,040		$	136,521		$	(15,935	)	$	2,402,265

24

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Condensed Consolidating Balance Sheets

	October 31, 2006
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	39,120		$	3,291		$	1,459		$	—		$	43,870
Marketable securities		—			—			239			—			239
Receivables, net of allowances		9,875			58,970			3,682			—			72,527
Inventories		316			33,204			2,852			—			36,372
Prepaid expenses		539			3,598			2,291			—			6,428
Deferred income taxes, net		3,835			6,667			—			—			10,502
Assets held for sale		—			881			—			—			881
Total current assets		53,685			106,611			10,523			—			170,819
Receivables due beyond one year, net of allowances		9,139			47,035			19,176			—			75,350
Preneed funeral receivables and trust investments		—			506,770			11,193			—			517,963
Preneed cemetery receivables and trust investments		—			244,748			13,464			—			258,212
Goodwill		—			253,540			19,787			—			273,327
Cemetery property, at cost		—			346,718			24,512			—			371,230
Property and equipment, at cost		37,126			411,808			36,690			—			485,624
Less accumulated depreciation		21,278			156,506			12,277			—			190,061
Net property and equipment		15,848			255,302			24,413			—			295,563
Deferred income taxes, net		6,124			154,204			13,658			—			173,986
Cemetery perpetual care trust investments		—			230,487			—			—			230,487
Other assets		5,312			7,228			1,100			—			13,640
Equity in subsidiaries		8,551			5,944			—			(14,495	)		—
Total assets	$	98,659		$	2,158,587		$	137,826		$	(14,495	)	$	2,380,577
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	2,839		$	—		$	—		$	—		$	2,839
Accounts payable		1,540			16,579			1,256			—			19,375
Accrued expenses and other current liabilities		15,197			48,602			3,023			—			66,822
Liabilities associated with assets held for sale		—			469			—			—			469
Total current liabilities		19,576			65,650			4,279			—			89,505
Long-term debt, less current maturities		344,020			—			30,000			—			374,020
Intercompany payables, net		(925,163	)		914,429			10,734			—			—
Deferred preneed funeral revenue		—			227,288			47,394			—			274,682
Deferred preneed cemetery revenue		—			265,151			30,924			—			296,075
Non-controlling interest in funeral and cemetery trusts		—			658,012			—			—			658,012
Other long-term liabilities		10,386			2,024			—			—			12,410
Negative equity in subsidiaries		202,947			—			—			(202,947	)		—
Total liabilities		(348,234	)		2,132,554			123,331			(202,947	)		1,704,704
Non-controlling interest in perpetual care trusts		—			228,980			—			—			228,980
Common stock		104,963			426			52			(478	)		104,963
Other		341,933			(203,373	)		14,446			188,927			341,933
Accumulated other comprehensive loss		(3	)		—			(3	)		3			(3	)
Total shareholders’ equity		446,893			(202,947	)		14,495			188,452			446,893
Total liabilities and shareholders’ equity	$	98,659		$	2,158,587		$	137,826		$	(14,495	)	$	2,380,577

25

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Condensed Consolidating Statements of Cash Flows

	Three Months Ended January 31, 2007
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	4,457		$	9,898		$	3,534		$	—	$	17,889
Cash flows from investing activities:
Proceeds from sale of assets, net		—			388			—			—		388
Purchases of subsidiaries, net of cash acquired		—			(2,805	)		—			—		(2,805	)
Insurance proceeds related to hurricane damaged properties		—			1,400			—			—		1,400
Additions to property and equipment		(2,767	)		(4,651	)		(359	)		—		(7,777	)
Other		(63	)		27			(1	)		—		(37	)
Net cash used in investing activities		(2,830	)		(5,641	)		(360	)		—		(8,831	)
Cash flows from financing activities:
Repayments of long-term debt		(865	)		—			—			—		(865	)
Intercompany receivables (payables)		8,827			(5,786	)		(3,041	)		—		—
Issuance of common stock		643			—			—			—		643
Dividends		(2,627	)		—			—			—		(2,627	)
Excess tax benefits from share-based payment arrangements		37			—			—			—		37
Net cash provided by (used in) financing activities		6,015			(5,786	)		(3,041	)		—		(2,812	)
Net increase (decrease) in cash		7,642			(1,529	)		133			—		6,246
Cash and cash equivalents, beginning of period		39,120			3,291			1,459			—		43,870
Cash and cash equivalents, end of period	$	46,762		$	1,762		$	1,592		$	—	$	50,116

26

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

Condensed Consolidating Statements of Cash Flows

	Three Months Ended January 31, 2006
				Guarantor			Non-Guarantor
	Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	6,713		$	15,780		$	4,731		$	—	$	27,224
Cash flows from investing activities:
Proceeds from sale of assets, net		—			9			—			—		9
Insurance proceeds related to hurricane damaged properties		—			4,540			—			—		4,540
Additions to property and equipment		(551	)		(3,571	)		(152	)		—		(4,274	)
Other		—			23			(8	)		—		15
Net cash provided by (used in) investing activities		(551	)		1,001			(160	)		—		290
Cash flows from financing activities:
Repayments of long-term debt		(891	)		—			—			—		(891	)
Intercompany receivables (payables)		18,745			(14,391	)		(4,354	)		—		—
Dividends		(2,717	)		—			—			—		(2,717	)
Other		61			—			—			—		61
Net cash provided by (used in) financing activities		15,198			(14,391	)		(4,354	)		—		(3,547	)
Net increase in cash		21,360			2,390			217			—		23,967
Cash and cash equivalents, beginning of period		38,675			874			1,056			—		40,605
Cash and cash equivalents, end of period	$	60,035		$	3,264		$	1,273		$	—	$	64,572

(12) Discontinued Operations and Acquisitions

     The Company recorded net gains on dispositions and impairment (losses) of $98 and $0 for the three months ended January 31, 2007 and 2006, respectively, in continuing operations related to real estate. The Company also recorded net gains on dispositions and impairment (losses) related to discontinued operations of ($81) and $298 for the three months ended January 31, 2007 and 2006, respectively, which is reflected in the discontinued operations section of the consolidated statement of earnings, all of which relates to businesses sold. The Company sold one facility in the first quarter of fiscal year 2007, and its assets and liabilities were reclassified from their respective lines in the October 31, 2006 balance sheet and included in the “assets held for sale” and “liabilities associated with assets held for sale” line items.

     A summary of the assets and liabilities included in the “assets held for sale” and “liabilities associated with assets held for sale” line items at October 31, 2006 and the operating results of the discontinued operations for the three months ended January 31, 2007 and 2006, respectively, are as follows:

27

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(12) Discontinued Operations and Acquisitions — (Continued)

	October 31, 2006
Assets
Receivables, net of allowances	$	2
Inventories and other current assets		17
Net property and equipment		345
Preneed funeral receivables and trust investments		452
Deferred charges and other assets		65
Assets held for sale	$	881
Liabilities
Deferred preneed funeral revenue	$	32
Non-controlling interest in funeral and cemetery trusts		437
Liabilities associated with assets held for sale	$	469

	Three Months			Three Months
	Ended			Ended
	January 31, 2007			January 31, 2006
Revenue:
Funeral	$	21		$	161
Cemetery		—			11
	$	21		$	172
Gross profit:
Funeral	$	(16	)	$	(26	)
Cemetery		—			(18	)
		(16	)		(44	)
Gains on dispositions and impairment (losses), net		(81	)		298
Earnings (loss) from discontinued operations before income taxes	$	(97	)	$	254

Acquisitions

     On December 12, 2006, the Company acquired a new funeral home in the Eastern Division’s Southern Region for approximately $2,800. This funeral home serves approximately 250 families per year and is located in Florida. This acquisition has been accounted for under the purchase method, and the acquired assets and liabilities have been valued at their estimated fair values. Its results of operations have been included since the acquisition date. The excess purchase price over the fair value of net assets acquired was allocated to goodwill, which amounted to approximately $1,885.

(13) Separation Charges

     The Company recorded $350 for separation pay in the first quarter of 2007 related to the retirement of a former executive officer, but will make the payments over a two-year period in accordance with the terms of the retirement agreement. The Company also recorded approximately $101 in the first quarter of 2007 compared to $154 in the first quarter of 2006 related to the reorganization of its divisions during fiscal year 2005. The remaining costs related to the reorganization are the result of a lease agreement for which the Company is committed through 2009. The Company is in the process of negotiating a sublease of this property.

28

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(14) Consolidated Comprehensive Income

     Consolidated comprehensive income for the three months ended January 31, 2007 and 2006 is as follows:

	Three Months Ended January 31,
	2007			2006
Net earnings	$	11,926		$	8,389
Other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of ($81) and $1, respectively		133			(2	)
Reduction in net unrealized losses associated with available-for-sale securities of the trusts		56,905			29,098
Reclassification of the net unrealized losses activity attributable to the non-controlling interest holders		(56,905	)		(29,098	)
Total other comprehensive income (loss)		133			(2	)
Total comprehensive income	$	12,059		$	8,387

(15) Hurricane Related Charges

     On Monday, August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area and the Mississippi and Alabama Gulf Coasts. During 2006, the Company’s largest funeral operation in New Orleans operated out of a temporary facility. Reconstruction of this funeral home began in early fiscal year 2007 and is expected to be completed by early 2008. The Company’s second largest funeral home in New Orleans was not open during fiscal year 2006 but is expected to open in the second quarter of 2007. The Company’s smallest funeral home in New Orleans opened during the third quarter of 2006. Burials occurred in all of the Company’s Louisiana cemeteries during 2006. The Company has renovations remaining at one of the mausoleums.

     The Company has insurance coverage related to property damage, incremental costs and property operating expenses it incurred due to damage caused by Hurricane Katrina. The insurance policies also provide coverage for interruption to the business, including lost profits, and reimbursement for other expenses and costs incurred relating to the damages and losses suffered. As of January 31, 2007, the Company had incurred approximately $33,075 (of which $31,225 was incurred as of October 31, 2006) 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 is expensing non-capitalizable costs related to Hurricane Katrina as incurred. As of January 31, 2007, the Company has recorded insurance proceeds of $23,562 and business interruption insurance proceeds of $3,169, all of which were recorded as of October 31, 2006, and has incurred expenses of $1,850 during the first quarter of fiscal year 2007. Since no additional insurance proceeds were recorded in the first three months of 2007, net expenses of $1,850 are reflected in the “Hurricane related charges, net” line item in the condensed consolidated statement of earnings for the three months ended January 31, 2007. The Company received $10,000 in hurricane related insurance proceeds during the first quarter of fiscal year 2007, all of which was recorded in current receivables as of October 31, 2006. For the three months ended January 31, 2006, the Company recorded net expenses of $2,638.

(16) Subsequent Events

     In February 2007, the Company announced that the Board of Directors has appointed Thomas J. Crawford as President and Chief Executive Officer and as a director of the Company, effective on his start date with the Company, which will be no later than March 31, 2007.

     Subsequent to the end of the quarter, the Company made an optional prepayment of $12,000 on its Term Loan B.

29

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

Overview

     We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States. As of February 28, 2007, we owned and operated 227 funeral homes and 143 cemeteries in 25 states within the United States and Puerto Rico.

     We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings and finance charges. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7 in our 2006 Form 10-K.

     For the first quarter of fiscal year 2007, we had net earnings of $11.9 million, compared to net earnings of $8.4 million for the first quarter of fiscal year 2006. Earnings from continuing operations for the quarter were $12.0 million, compared to $8.1 million for the corresponding period in the prior year.

     Revenues increased $6.6 million to $132.7 million for the quarter ended January 31, 2007. Funeral revenue increased $1.1 million, due primarily to a 5.5 percent increase in same-store average revenue per funeral service due in part to the implementation of new funeral package pricing, partially offset by a 5.5 percent decrease in funeral calls and a year-over-year reduction in funeral trust earnings. Cemetery revenue increased $5.5 million due primarily to increased gross cemetery property sales and an increase in revenue related to various construction projects related to presold property, partially offset by decreased cemetery service and merchandise delivery revenue. Consolidated gross profit increased $1.9 million due to a $0.9 million increase in funeral gross profit and a $1.0 million increase in cemetery gross profit, due primarily to the increases in funeral and cemetery revenue discussed above.

     Corporate general and administrative expenses decreased $0.2 million, which was due primarily to the timing of professional fees in the first quarter of fiscal year 2006 related to restated Securities and Exchange Commission (“SEC”) filings, partially offset by accelerated depreciation of our current computer software systems due to the implementation of two new business systems. We also recorded a $1.9 million charge related to Hurricane Katrina in the first quarter of fiscal year 2007 compared to $2.6 million for the same period in 2006. Interest expense for the quarter-to-date period decreased $0.7 million to $6.8 million for the first quarter of 2007, due to a $33.1 million decrease in average debt outstanding during the quarter. We also recognized a $1.9 million tax benefit due to utilization of a capital loss carryforward.

     For the first quarter of fiscal year 2007, we had a 1.0 percent increase in preneed funeral sales and a 15.6 percent increase in gross cemetery property sales as compared to the same period last year.

     Cash flow from operations decreased from $27.3 million for the three months ended January 31, 2006 to $17.9 million for the three months ended January 31, 2007 due primarily to trust withdrawals associated with the deferred revenue project in the first quarter of 2006, increased customer collections following Hurricane Katrina in the first quarter of 2006 and an increase in annual property and casualty insurance premiums paid in the first quarter of 2007. The overall decrease was offset by $2.1 million of cash inflows in excess of expenditures related to Hurricane Katrina in the first quarter of 2007 compared to $2.1 million of cash outflows for the same period in 2006.

Critical Accounting Policies

     The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective

30

and complex judgment. These critical accounting policies are discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our 2006 Form 10-K. There have been no changes to our critical accounting policies since the filing of our 2006 Form 10-K.

Results of Operations

     The following discussion segregates the financial results of our continuing operations into our various segments, grouped by our funeral and cemetery operations. For a discussion of discontinued operations, see Note 12 to the condensed consolidated financial statements included herein. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. As there have been no material acquisitions or construction of new locations in fiscal years 2007 and 2006, results from continuing operations essentially reflect those of same-store locations.

Three Months Ended January 31, 2007 Compared to Three Months Ended January 31, 2006—Continuing Operations

Funeral Operations

	Three Months Ended January 31,
					Increase
	2007		2006		(Decrease)
			(In millions)
Funeral Revenue:
Eastern Division	$	30.5	$	30.1	$	.4
Western Division		37.8		36.9		.9
Corporate Trust Management(1)		4.4		4.6		(.2	)
Total Funeral Revenue	$	72.7	$	71.6	$	1.1
Funeral Costs:
Eastern Division	$	24.7	$	24.5	$	.2
Western Division		29.1		29.2		(.1	)
Corporate Trust Management(1)		.2		.1		.1
Total Funeral Costs	$	54.0	$	53.8	$	.2
Funeral Gross Profit:
Eastern Division	$	5.8	$	5.6	$	.2
Western Division		8.7		7.7		1.0
Corporate Trust Management(1)		4.2		4.5		(.3	)
Total Funeral Gross Profit	$	18.7	$	17.8	$	.9

     Same-Store Analysis

	Change in
	Average			Change in Same-Store			Cremation Rate
	Revenue Per Call			Funeral Services			2007			2006
Eastern Division		7.2	%		(5.5	%)		34.1	%		32.6	%
Western Division		5.5	%		(5.6	%)		42.3	%		43.0	%
Total		5.5	%(1)		(5.5	%)		38.8	%		38.6	%

⁽¹⁾ Corporate trust management consists of trust management fees and funeral merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent the earnings realized over the life of the contract for those preneed contracts delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended January 31, 2007 and 2006 were $1.5 million and $1.3 million, respectively. As corporate trust management is considered a separate operating

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segment, trust earnings are included in the total average revenue per call presented, not in the Eastern or Western divisions’ average revenue per call. Funeral trust earnings for the three months ended January 31, 2007 and 2006 were $2.9 million and $3.3 million, respectively.

Consolidated Operations — Funeral

     Funeral revenue from continuing operations increased $1.1 million, or 1.5 percent, for the three months ended January 31, 2007, compared to the corresponding period in 2006. Our same-store businesses had a 4.9 percent increase in the average revenue per traditional funeral service and a 9.9 percent increase in the average revenue per cremation service. The increases in the average revenue per traditional and cremation funeral services were in part due to the implementation of new funeral package pricing, which provides value to our families by simplifying the selection process while enhancing the services we provide. The increases in average revenue relating to package pricing were partially offset by a year-over-year reduction in funeral trust earnings. This resulted in an overall 5.5 percent increase in the average revenue per funeral service for our same-store businesses. We experienced a 5.5 percent decrease in the number of same-store funeral services performed, or 889 events, to 15,141 total same-store funeral services performed, which we believe is due primarily to the decrease in the number of deaths in our markets. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. These variations can cause revenues to fluctuate.

     Funeral gross profit increased $0.9 million to $18.7 million for the quarter ended January 31, 2007. Funeral gross profit margin from continuing operations was 25.7 percent for the first quarter of fiscal year 2007 compared to 24.9 percent for the same period in 2006. The increase is primarily due to the increases in revenue discussed above. The cremation rate for our same-store operations was 38.8 percent for the three months ended January 31, 2007 compared to 38.6 percent for the corresponding period in 2006.

Segment Discussion — Funeral

     Funeral revenue in the Eastern division funeral segment increased primarily due to an increase in the average revenue per funeral service in the Eastern division of 7.2 percent, partially offset by a decrease in the number of funeral services performed by the same-store businesses of 5.5 percent. Funeral revenue in the Western division funeral segment increased primarily due to an increase in the average revenue per funeral service in the same-store businesses of 5.5 percent, partially offset by a decrease in the number of funeral services performed by same-store businesses of 5.6 percent. Funeral revenue in the corporate trust management segment decreased primarily due to a $0.4 million decrease in funeral trust earnings offset by a $0.2 million increase in trust management fees.

     Funeral gross profit margin for the Eastern and Western division funeral segments increased primarily due to the increases in funeral service revenue as discussed above. As demonstrated in the table above, the same-store cremation rate increased for the Eastern division funeral segment and decreased for the Western division funeral segment.

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Cemetery Operations

	Three Months Ended January 31,
					Increase
	2007		2006		(Decrease)
			(In millions)
Cemetery Revenue:
Eastern Division	$	35.8	$	32.5	$	3.3
Western Division		21.9		19.4		2.5
Corporate Trust Management(1)		2.3		2.6		(.3	)
Total Cemetery Revenue	$	60.0	$	54.5	$	5.5
Cemetery Costs:
Eastern Division	$	29.7	$	27.5	$	2.2
Western Division		17.9		15.6		2.3
Corporate Trust Management(1)		.1		.1		—
Total Cemetery Costs	$	47.7	$	43.2	$	4.5
Cemetery Gross Profit:
Eastern Division	$	6.1	$	5.0	$	1.1
Western Division		4.0		3.8		.2
Corporate Trust Management(1)		2.2		2.5		(.3	)
Total Cemetery Gross Profit	$	12.3	$	11.3	$	1.0

⁽¹⁾ Corporate trust management consists of trust management fees and cemetery merchandise and service trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trust earnings represent the earnings realized over the life of the contract for those preneed contracts delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended January 31, 2007 and 2006 were $1.3 million and $1.2 million, respectively, and cemetery trust earnings for the three months ended January 31, 2007 and 2006 were $1.0 million and $1.4 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.

Consolidated Operations — Cemetery

     Cemetery revenue from continuing operations increased $5.5 million, or 10.1 percent, for the three months ended January 31, 2007, compared to the corresponding period in 2006, primarily due to a 15.6 percent increase in gross cemetery property sales from $24.5 million in the first quarter of 2006 to $28.3 million in the first quarter of 2007 and an increase in construction during the quarter on various cemetery projects, partially offset by a decrease in cemetery service and merchandise delivery revenue resulting from the decrease in deaths in our markets. The increase in cemetery property sales was due in part to serving customers interested in large cemetery property purchases such as private estates which has also been an important factor of our cemetery business. Gross cemetery property sales represent the aggregate contract price of cemetery property sale contracts entered into during the period. 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.

     We experienced an annualized average return, excluding unrealized gains and losses, of 4.0 percent in our perpetual care trusts for the quarter ended January 31, 2007 resulting in revenue of $2.4 million, compared to 4.9 percent for the corresponding period in 2006 resulting in revenue of $2.6 million.

     Cemetery gross profit increased $1.0 million from $11.3 million in the first quarter of fiscal year 2006 to $12.3 million in the first quarter of 2007, due to the increases in revenues discussed above. Cemetery gross profit margin from continuing operations decreased from 20.7 percent in the first quarter of fiscal year 2006 to 20.5 percent

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in the first quarter of fiscal year 2007. The decrease is due in part to decreased cemetery service and merchandise delivery revenue resulting from a decline in deaths in our markets, coupled with the high fixed-cost nature of the cemetery business, partially offset by the increase in gross cemetery property sales and the increase in construction on various cemetery projects discussed above.

Segment Discussion — Cemetery

     Cemetery revenue in the Eastern division segment increased $3.3 million primarily due to an increase in revenue from the sale of cemetery property and an increase in construction during the quarter on various cemetery development projects. Cemetery revenue in the Western division segment increased $2.5 million primarily due to an increase in revenue from the sale of cemetery property and an increase in construction during the quarter on various cemetery development projects, offset by decreased perpetual care trust earnings. 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 revenue in the corporate trust management segment decreased due to a $0.4 million decrease in cemetery trust earnings.

     Cemetery gross profit margin for the Eastern division cemetery segment increased due to the increased cemetery revenue discussed above. Cemetery gross profit margin for the Western division cemetery segment decreased due to increased property and merchandise selling costs.

Discontinued Operations

     The operating results of those businesses sold in fiscal years 2007 and 2006 are reported in the discontinued operations section of the condensed consolidated statements of earnings. There was one business sold in the first quarter of 2007. Revenues for the three months ended January 31, 2007 and 2006 were less than $0.1 million and $0.2 million, respectively.

Other

     Corporate general and administrative expenses for the three months ended January 31, 2007 decreased $0.2 million compared to the same period in 2006 due primarily to the timing of professional fees in the first quarter of fiscal year 2006 related to restated SEC filings partially offset by the accelerated depreciation of our current computer software systems. In October 2006, we accelerated the depreciation on our current software systems so that they would be fully depreciated when our two new business systems would be ready for their intended use.

     We recorded $0.5 million of separation charges primarily related to the separation pay of a former executive officer who retired in the first quarter of 2007. For additional information, see Note 13 to the condensed consolidated financial statements included herein.

     For the three months ended January 31, 2007 and 2006, we recorded net charges of $1.9 million and $2.6 million, respectively, related to Hurricane Katrina. These charges were due to repairs at locations damaged by Hurricane Katrina. The timing of the receipt of insurance proceeds is not in line with the timing of cash spending related to Hurricane Katrina. We are continuing to work with our insurance carriers on remaining claims. For additional information, see Note 15 to the condensed consolidated financial statements included herein.

     Depreciation and amortization from continuing operations and total operations was $6.5 million and $6.1 million for the first quarters of fiscal years 2007 and 2006, respectively. The increase is primarily due to the accelerated depreciation of our current computer software systems due to the implementation of two new business systems, as described above.

     Interest expense decreased $0.7 million to $6.8 million for the first quarter of fiscal year 2007 compared to $7.5 million for the same period in 2006 primarily due to a $33.1 million decrease in average debt outstanding.

     Other operating income, net, decreased $0.6 million to $0.3 million for the first quarter of 2007 from $0.9 million for the first quarter of 2006. The decrease was primarily due to a gain related to the sale of undeveloped

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cemetery land in the first quarter of 2006.

     Investment and other income, net, increased $0.6 million to $1.1 million in the first quarter of fiscal year 2007, primarily due to $0.4 million of interest income receivable from the Internal Revenue Service and an improvement in the average rate earned on our cash balances from 3.3 percent in the first quarter of 2006 to 4.6 percent in the first quarter of 2007.

     The effective tax rate for our continuing operations for the three months ended January 31, 2007 was 26.5 percent compared to 37.7 percent for the same period in 2006. The reduced rate in 2007 was primarily caused by a tax benefit of $1.9 million attributable to the utilization of a capital loss carryforward which was not previously recorded because of our uncertainty to generate capital gain income prior to its expiration at the end of fiscal year 2007. The capital gain income for the quarter was generated from the sale of investments held in preneed trusts where earnings are recognized for tax purposes as earned in trust. The effective tax rate exclusive of this benefit would have been 37.9 percent which is more comparable to the 2006 rate.

     We experienced a $13.6 million decrease in current receivables from October 31, 2006 to January 31, 2007 primarily due to declines in insurance receivables. We recorded $10.0 million in insurance proceeds receivable related to Hurricane Katrina at October 31, 2006 and received the entire amount during the first quarter of 2007. Prepaid expenses increased $6.4 million from October 31, 2006 to January 31, 2007 primarily due to increases in prepaid property insurance. A $6.1 million property insurance payment was made in November 2006. There was no prepaid property insurance in the prepaid expense balance at October 31, 2006.

     The decrease in accounts payable of $3.7 million from October 31, 2006 to January 31, 2007 was due primarily to approximately $1.2 million of accrued expenses at October 31, 2006 related to the implementation of our two new business systems and approximately $1.7 million due to timing of payment of invoices. Accrued payroll decreased $4.7 million due primarily to fiscal year 2006 bonuses, which were accrued at October 31, 2006 and paid in the first quarter of 2007, offset by the fiscal year 2007 bonus accrual recorded in the first quarter of 2007. The decline in other current liabilities of $5.5 million from October 31, 2006 to January 31, 2007 was primarily due to a $2.8 million decrease in accrued property taxes and the payment of approximately $1.4 million in Hurricane Katrina related items. Approximately 80 percent of our property taxes are paid in the months of December and January each year.

     As of January 31, 2007, our outstanding debt totaled $376.0 million of which approximately 53 percent was subject to fixed rates averaging 6.2 percent, and 47 percent was subject to short-term variable rates averaging approximately 7.2 percent.

Preneed Sales into and Deliveries out of the Backlog

     Preneed funeral sales increased 1.0 percent during the first quarter of 2007 compared to the corresponding period in 2006.

     The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We added $40.6 million in preneed sales to our funeral and cemetery merchandise and services backlog (including $15.9 million related to insurance-funded preneed funeral contracts) during the three months ended January 31, 2007 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to sales of $40.5 million (including $17.3 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2006. 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 $35.9 million for the three months ended January 31, 2007, compared to $36.8 million for the corresponding period in 2006, resulting in net additions to the backlog of $4.7 million and $3.7 million for the three months ended January 31, 2007 and 2006, respectively.

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Liquidity and Capital Resources

Cash Flow

     Our operations provided cash of $17.9 million for the three months ended January 31, 2007, compared to $27.3 million for the corresponding period in 2006. The decrease is primarily due to cash inflows of $11.0 million for trust withdrawals associated with the deferred revenue project in the first quarter of 2006. Operating cash flow in the first quarter of 2006 was also enhanced as a result of an increase in customer collections following the delay in collection processing during the fourth quarter of 2005 due to Hurricane Katrina. Additionally, the decrease is due to an increase in annual property and casualty insurance premiums that were paid in the first quarter of 2007, which is reflected in the “other” category under changes in assets and liabilities. The overall decrease was partially offset by $2.1 million of cash inflows in excess of expenditures related to Hurricane Katrina in the first quarter of 2007 compared to $2.1 million of cash outflows for the same period in 2006.

     Our investing activities resulted in a net cash outflow of $8.8 million for the three months ended January 31, 2007, compared to a net cash inflow of $0.3 million for the comparable period in 2006. For the three months ended January 31, 2007, capital expenditures amounted to $7.8 million, which included $3.6 million for maintenance capital expenditures, $0.5 million for growth initiatives, $1.1 million related to Hurricane Katrina and $2.6 million related to the implementation of two new business systems. For the three months ended January 31, 2006, capital expenditures were $4.3 million, all of which was for maintenance capital expenditures. We also purchased a funeral home in the first quarter of fiscal year 2007 resulting in a net cash outflow of $2.8 million. In the first three months of 2007, there was a net cash inflow of $1.4 million for insurance proceeds related to hurricane damaged properties compared to $4.5 million in the same period in 2006.

     Our financing activities resulted in a net cash outflow of $2.8 million for the three months ended January 31, 2007, compared to a net cash outflow of $3.5 million for the comparable period in 2006. The change is due to issuances of common stock of $0.6 million in the first quarter of 2007 primarily as a result of stock option exercises. There were no issuances of common stock in the first three months of 2006. Subsequent to the end of the quarter, we made an optional prepayment of $12.0 million on our Term Loan B.

Contractual Obligations and Commercial Commitments

     As of January 31, 2007, our outstanding debt balance was $376.0 million. The following table details our known future cash payments (in millions) related to various contractual obligations as of January 31, 2007.

	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)	$	376.0	$	2.6	$	4.5	$	168.8	$	200.1
Interest on long-term debt(2)		140.7		25.3		50.0		46.6		18.8
Operating lease obligations(3)		30.8		3.3		6.9		3.5		17.1
Non-competition and other agreements(4)		4.2		1.5		2.2		.4		.1
	$	551.7	$	32.7	$	63.6	$	219.3	$	236.1

(1)	See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of January 31, 2007.
(2)	Includes contractual interest payments for our revolving credit facility, Term Loan B, senior notes and third-party debt. The interest on the revolving credit facility and Term Loan B was calculated based on interest rates in effect as of January 31, 2007.
(3)	Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 12 years, except for six leases that expire between 2032 and 2039. Our future minimum lease payments as of January 31, 2007 are $3.3 million, $3.6 million, $3.3 million, $2.5 million, $1.0 million, and $17.1 million for the years ending October 31, 2007, 2008, 2009, 2010, 2011 and later years, respectively.

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

     As of January 31, 2007, our outstanding debt balance was $376.0 million, consisting of $175.4 million in Term Loan B, $200.0 million of 6.25 percent senior notes and $0.6 million of other debt. There were no amounts drawn on the revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of January 31, 2007.

							Other,
							Principally
	Revolving						Seller Financing
Fiscal Year Ending	Credit		Term		Senior		of Acquired
October 31,	Facility		Loan B		Notes		Operations		Total
2007	$	—	$	1.7	$	—	$	.3	$	2.0
2008		—		2.2		—		.2		2.4
2009		—		2.2		—		—		2.2
2010		—		2.2		—		—		2.2
2011		—		115.5		—		—		115.5
Thereafter		—		51.6		200.0		.1		251.7
Total long-term debt	$	—	$	175.4	$	200.0	$	.6	$	376.0

     We are required to maintain a bond of $41.1 million to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida. We substituted a bond to guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. We believe that cash flow from operations will be sufficient to cover our estimated cost of providing the prearranged services and products in the future. We also have $13.0 million of outstanding letters of credit as of January 31, 2007.

     As of January 31, 2007, there were no amounts drawn on our $125.0 million revolving credit facility. As of January 31, 2007, our availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit and remaining bond obligation, was $70.9 million.

Off-Balance Sheet Arrangements

     Our off-balance sheet arrangements as of January 31, 2007 consist of the following items:

(1)	the $41.1 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed above and in Note 19 to the consolidated financial statements in our 2006 Form 10-K; and
(2)	the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements in our 2006 Form 10-K.

Ratio of Earnings to Fixed Charges

     Our ratio of earnings to fixed charges was as follows:

Three Months Ended	Years Ended October 31,
January 31, 2007	2006			2005			2004			2003			2002
3.17(1)		2.83	(2)		1.36	(3)(7)		1.98	(4)		1.09	(5)		1.27	(6)(7)

⁽¹⁾ Pretax earnings for the first quarter of fiscal year 2007 include a charge of $1.9 million related to Hurricane Katrina, a charge of $0.5 million for separation charges primarily related to separation pay of a former executive

37

	officer who retired in the first quarter of 2007 and gains on dispositions, net of impairment losses of $0.1 million.
(2)	Pretax earnings for fiscal year 2006 include a net recovery of $1.6 million related to Hurricane Katrina, business interruption insurance proceeds of $3.2 million related to Hurricane Katrina, a charge of $1.0 million for separation charges related to the July 2005 restructuring of our divisions and the retirement of an executive officer and gains on dispositions, net of impairment losses of ($0.3) million.
(3)	Pretax earnings for fiscal year 2005 include a charge of $9.4 million for expenses related to Hurricane Katrina, a charge of $1.5 million for separation charges related to the July 2005 restructuring of our divisions, $1.2 million of gains on dispositions, net of impairment losses and $32.8 million for the loss on early extinguishment of debt related to the 2005 debt refinancings.
(4)	Pretax earnings for fiscal year 2004 include separation charges of $3.4 million for severance and other costs related to workforce reductions announced in December 2003 and separation pay to a former executive officer and ($0.2) million in gains on dispositions, net of impairment losses.
(5)	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 $9.6 million for long-lived asset impairment and a charge of $2.5 million for separation payments to former executive officers.
(6)	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.
(7)	Excludes the cumulative effect of change in accounting principles.

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

Recent Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     Quantitative and qualitative disclosure about market risk is presented in Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31, 2006, filed with the Securities and Exchange Commission on January 16, 2007. The following disclosure discusses only those instances in which market risk has changed by more than 10 percent from the annual disclosures.

     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 14 to our consolidated financial statements included in our 2006 Form 10-K and in the “Liquidity and Capital Resources”

38

section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included herein.

     Our variable-rate debt consists of our Term Loan B and revolving credit facility. As of January 31, 2007 and October 31, 2006, the carrying value of our Term Loan B including accrued interest was $177.6 million and $178.1 million, respectively, compared to a fair value of $177.8 million and $177.9 million, respectively. As of January 31, 2007 and October 31, 2006, there were no amounts drawn on the revolving credit facility. As of January 31, 2007, each approximate 10 percent, or 80 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $1.3 million in our pretax earnings. As of October 31, 2006, each approximate 10 percent, or 75 basis-point, change in the average interest rate applicable to this debt would result in a change of approximately $1.1 million in our pretax earnings. Fair value was determined using quoted market prices, where applicable, or future cash flows discounted at market rates for similar types of borrowing arrangements.

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

Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

     There have been no changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2007 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II. OTHER INFORMATION

Item 1. Legal Proceedings

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

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

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

Item 1A. Risk Factors

     There have been no material changes from the risk factors previously disclosed in the 2006 Form 10-K.

Item 6. Exhibits

3.1	Amended and Restated Articles of Incorporation of the Company, as amended and restated as of April 20, 2006 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2006)
3.2	By-laws of the Company, as amended and restated as of April 20, 2006 (incorporated by reference to Exhibit 3.2 of the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2006)
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	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)
4.5	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)
4.6	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)
10.1	Employment Agreement dated February 20, 2007 between the Company and Thomas J. Crawford (incorporated by reference to Exhibit 10.1 to the Company’s Current Report on Form 8-K dated February 15, 2007)
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Acting Chief Executive Officer and Chief Financial Officer
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Acting Chief Executive Officer and Chief Financial Officer

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

SIGNATURES

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

	STEWART ENTERPRISES, INC.
March 12, 2007	/s/ THOMAS M. KITCHEN
	Thomas M. Kitchen
	Acting Chief Executive Officer and
	Chief Financial Officer
March 12, 2007	/s/ ANGELA M. LACOUR
	Angela M. Lacour
	Vice President
	Corporate Controller
	Chief Accounting Officer

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Exhibit Index

31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Acting Chief Executive Officer and Chief Financial Officer
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Acting Chief Executive Officer and Chief Financial Officer

42