Stewart Enterprises (STEI) 10-Q 2013 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended July 31, 2013

or

¨ 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)

(504) 729-1400

(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x    No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer	¨	Accelerated filer	x
Non-accelerated filer	¨  (Do not check if a smaller reporting company)	Smaller reporting company	¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    Yes  ¨    No  x

The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of August 31, 2013, was 82,172,804 and 3,555,020, respectively.

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended July 31,
	2013			2012
Revenues:
Funeral	$	68,696		$	68,883
Cemetery		58,366			60,356
		127,062			129,239
Costs and expenses:
Funeral		54,714			53,128
Cemetery		49,153			49,125
		103,867			102,253
Gross profit		23,195			26,986
Corporate general and administrative expenses		(6,386	)		(7,326	)
Merger-related costs		(3,126	)		—
Restructuring and other charges		—			(305	)
Other operating income, net		568			191
Operating earnings		14,251			19,546
Interest expense		(5,922	)		(5,873	)
Investment and other income (expense), net		(2	)		57
Earnings from continuing operations before income taxes		8,327			13,730
Income taxes		50			3,834
Earnings from continuing operations		8,277			9,896
Discontinued operations:
Loss from discontinued operations before income taxes		—			(380	)
Income tax benefit		—			(122	)
Loss from discontinued operations		—			(258	)
Net earnings	$	8,277		$	9,638
Basic earnings per common share:
Earnings from continuing operations	$	.10		$	.11
Loss from discontinued operations		—			—
Net earnings	$	.10		$	.11
Diluted earnings per common share:
Earnings from continuing operations	$	.10		$	.11
Loss from discontinued operations		—			—
Net earnings	$	.10		$	.11
Weighted average common shares outstanding (in thousands):
Basic		84,692			85,798
Diluted		85,952			86,178
Dividends declared per common share	$	.045		$	.04

See accompanying notes to condensed consolidated financial statements.

2

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2013			2012
Revenues:
Funeral	$	222,004		$	213,646
Cemetery		174,592			173,015
		396,596			386,661
Costs and expenses:
Funeral		168,299			160,685
Cemetery		140,819			144,456
		309,118			305,141
Gross profit		87,478			81,520
Corporate general and administrative expenses		(20,294	)		(20,264	)
Merger-related costs		(3,715	)		—
Restructuring and other charges		(81	)		(2,852	)
Net gain on dispositions		742			332
Other operating income, net		1,688			773
Operating earnings		65,818			59,509
Interest expense		(17,794	)		(17,544	)
Investment and other income, net		160			148
Earnings from continuing operations before income taxes		48,184			42,113
Income taxes		12,498			13,773
Earnings from continuing operations		35,686			28,340
Discontinued operations:
Loss from discontinued operations before income taxes		(88	)		(2,065	)
Income tax benefit		(31	)		(644	)
Loss from discontinued operations		(57	)		(1,421	)
Net earnings	$	35,629		$	26,919
Basic earnings per common share:
Earnings from continuing operations	$	.42		$	.32
Loss from discontinued operations		—			(.01	)
Net earnings	$	.42		$	.31
Diluted earnings per common share:
Earnings from continuing operations	$	.41		$	.32
Loss from discontinued operations		—			(.01	)
Net earnings	$	.41		$	.31
Weighted average common shares outstanding (in thousands):
Basic		84,533			86,295
Diluted		85,382			86,619
Dividends declared per common share	$	.09		$	.115

See accompanying notes to condensed consolidated financial statements.

3

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

	Three Months Ended July 31,
	2013			2012
Net earnings	$	8,277		$	9,638
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of $38 and ($9), respectively		(66	)		15
Comprehensive income	$	8,211		$	9,653

See accompanying notes to condensed consolidated financial statements.

4

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(Unaudited)

(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2013			2012
Net earnings	$	35,629		$	26,919
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of $40 and ($13), respectively		(70	)		23
Comprehensive income	$	35,559		$	26,942

See accompanying notes to condensed consolidated financial statements.

5

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

	July 31, 2013		October 31, 2012
ASSETS
Current assets:
Cash and cash equivalents	$	99,087	$	68,187
Restricted cash and cash equivalents		6,250		6,250
Marketable securities		18,673		10,514
Receivables, net of allowances		54,756		52,441
Inventories		36,108		36,495
Prepaid expenses		6,188		4,923
Deferred income taxes, net		17,734		30,671
Total current assets		238,796		209,481
Receivables due beyond one year, net of allowances		71,364		72,620
Preneed funeral receivables and trust investments		457,520		432,422
Preneed cemetery receivables and trust investments		233,565		225,048
Goodwill		249,584		249,584
Cemetery property, at cost		402,730		401,670
Property and equipment, at cost:
Land		50,227		49,085
Buildings		370,942		360,852
Equipment and other		196,984		204,971
		618,153		614,908
Less accumulated depreciation		326,016		323,648
Net property and equipment		292,137		291,260
Deferred income taxes, net		69,324		62,125
Cemetery perpetual care trust investments		275,891		263,663
Other assets		12,029		13,812
Total assets	$	2,302,940	$	2,221,685

(continued)

6

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED BALANCE SHEETS

(Unaudited)

(Dollars in thousands, except per share amounts)

	July 31, 2013			October 31, 2012
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	83,940		$	6
Accounts payable and accrued expenses		24,923			25,214
Accrued payroll and other benefits		16,371			19,964
Accrued insurance		23,694			22,152
Accrued interest		4,323			2,161
Estimated obligation to fund cemetery perpetual care trust		11,950			11,965
Other current liabilities		10,080			14,723
Income taxes payable		1,038			1,004
Total current liabilities		176,319			97,189
Long-term debt, less current maturities		241,192			321,887
Deferred income taxes, net		4,768			4,931
Deferred preneed funeral revenue		238,921			240,415
Deferred preneed cemetery revenue		268,775			265,347
Deferred preneed funeral and cemetery receipts held in trust		620,839			585,164
Perpetual care trusts’ corpus		273,218			261,883
Other long-term liabilities		21,335			20,548
Total liabilities		1,845,367			1,797,364
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued		—			—
Common stock, $1.00 stated value:
Class A authorized 200,000,000 shares; issued and outstanding 82,157,854 and 81,359,536 shares at July 31, 2013 and October 31, 2012, respectively		82,158			81,360
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 31, 2013 and October 31, 2012; 10 votes per share convertible into an equal number of Class A shares		3,555			3,555
Additional paid-in capital		475,955			479,060
Accumulated deficit		(104,067	)		(139,696	)
Accumulated other comprehensive income (loss):
Unrealized appreciation (depreciation) of investments		(28	)		42
Total accumulated other comprehensive income (loss)		(28	)		42
Total shareholders’ equity		457,573			424,321
Total liabilities and shareholders’ equity	$	2,302,940		$	2,221,685

See accompanying notes to condensed consolidated financial statements.

7

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY

(Unaudited)

(Dollars in thousands, except per share amounts)

	Common Stock(1)			Additional Paid-In Capital			Accumulated Deficit			Accumulated Other Comprehensive Income (Loss)			Total Shareholders’ Equity
Balance October 31, 2012	$	84,915		$	479,060		$	(139,696	)	$	42		$	424,321
Comprehensive income (loss)		—			—			35,629			(70	)		35,559
Restricted stock activity		513			978			—			—			1,491
Issuance of common stock		38			263			—			—			301
Stock options exercised		492			2,368			—			—			2,860
Stock option expense		—			1,395			—			—			1,395
Tax benefit associated with stock activity		—			1,074			—			—			1,074
Purchase and retirement of common stock		(245	)		(1,588	)		—			—			(1,833	)
Dividends ($.09 per share)		—			(7,595	)		—			—			(7,595	)
Balance July 31, 2013	$	85,713		$	475,955		$	(104,067	)	$	(28	)	$	457,573

⁽¹⁾  Amount includes 82,158 and 81,360 shares (in thousands) of Class A common stock with a stated value of $1 per share as of July 31, 2013 and October 31, 2012, respectively, and includes 3,555 shares (in thousands) of Class B common stock.

See accompanying notes to condensed consolidated financial statements.

8

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

(Unaudited)

(Dollars in thousands, except per share amounts)

	Nine Months Ended July 31,
	2013			2012
Cash flows from operating activities:
Net earnings	$	35,629		$	26,919
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net (gain) loss on dispositions		(654	)		539
Non-cash restructuring charge		—			1,236
Depreciation and amortization		19,645			19,859
Non-cash interest and amortization of discount on senior convertible notes		4,340			4,127
Provision for doubtful accounts		3,377			3,041
Share-based compensation		3,021			2,630
Excess tax benefits from share-based payment arrangements		(433	)		(23	)
Provision for deferred income taxes		6,276			6,935
Estimated obligation to fund cemetery perpetual care trust		7			567
Other		100			90
Changes in assets and liabilities:
Increase in receivables		(5,263	)		(7,380	)
Increase in prepaid expenses		(1,266	)		(1,165	)
Increase in inventories and cemetery property		(1,141	)		(5,636	)
Increase (decrease) in accounts payable and accrued expenses		(1	)		1,307
Federal income tax refund received		740			—
Net effect of preneed funeral production and maturities:
(Increase) decrease in preneed funeral receivables and trust investments		(8,652	)		1,703
Increase (decrease) in deferred preneed funeral revenue		(1,466	)		503
Increase (decrease) in deferred preneed funeral receipts held in trust		7,312			(2,959	)
Net effect of preneed cemetery production and deliveries:
Decrease in preneed cemetery receivables and trust investments		677			409
Increase in deferred preneed cemetery revenue		3,428			6,398
Increase (decrease) in deferred preneed cemetery receipts held in trust		1,803			(695	)
Increase in other		904			334
Net cash provided by operating activities		68,383			58,739
Cash flows from investing activities:
Proceeds from sales/maturities of marketable securities and release of restricted funds		2,264			2,006
Deposits of restricted funds and purchases of marketable securities		(10,366	)		(2,036	)
Proceeds from sale of assets		799			533
Purchase of subsidiaries and other investments, net of cash acquired		—			(3,113	)
Additions to property and equipment		(20,913	)		(16,215	)
Other		104			87
Net cash used in investing activities		(28,112	)		(18,738	)
Cash flows from financing activities:
Repayments of long-term debt		(4	)		(4	)
Debt refinancing costs		—			(34	)
Issuance of common stock		3,028			1,433
Purchase and retirement of common stock		(1,833	)		(19,075	)
Dividends		(10,995	)		(9,955	)
Excess tax benefits from share-based payment arrangements		433			23
Net cash used in financing activities		(9,371	)		(27,612	)
Net increase in cash		30,900			12,389
Cash and cash equivalents, beginning of period		68,187			65,688
Cash and cash equivalents, end of period	$	99,087		$	78,077
Supplemental cash flow information:
Cash paid during the period for:
Income taxes, net	$	5,608		$	2,542
Interest	$	11,466		$	11,452
Non-cash investing and financing activities:
Issuance of common stock to directors	$	133		$	437
Issuance of restricted stock, net of forfeitures	$	1,491		$	1,084

See accompanying notes to condensed consolidated financial statements.

9

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation

(a) The Company

Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. Through its subsidiaries, the Company offers a complete line of funeral and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of July 31, 2013, the Company owned and operated 217 funeral homes and 141 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, a cemetery segment and a corporate trust management segment.

(b) Principles of Consolidation

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

(c) Interim Disclosures

The information as of July 31, 2013, and for the three and nine months ended July 31, 2013 and 2012, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results 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, 2012 (the “2012 Form 10-K”).

The October 31, 2012 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2012 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 2012 Form 10-K.

The results of operations for the three and nine months ended July 31, 2013 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2013.

(d) Use of Estimates

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2012 Form 10-K.

(e) Share-Based Compensation

The Company has share-based compensation plans, which are described in more detail in Note 19 to the consolidated financial statements in the Company’s 2012 Form 10-K. Stock option expense is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $469 and $358 for the three months ended July 31, 2013 and 2012, respectively, and $1,395 and $1,076 for the nine months ended July 31, 2013 and 2012, respectively. As of July 31, 2013, there was $4,016 of total unrecognized compensation costs related to stock options that is expected to be recognized over a weighted-average period of 2.7 years. Total stock option expense for fiscal year 2013 is expected to be approximately $1,800. The expense related to restricted stock is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $567 and $385 for the three months ended July 31, 2013 and 2012,

10

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation—(Continued)

respectively, and $1,493 and $1,117 for the nine months ended July 31, 2013 and 2012, respectively. As of July 31, 2013, there was $1,780 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2013 is expected to be approximately $2,100. Under the terms of the Company’s share-based compensation plans, all unvested stock options and restricted stock become fully vested and exercisable upon a change of control with respect to the Company’s ownership.

During the nine months ended July 31, 2013, the Company issued 17,116 shares of Class A common stock which amounted to $133 and paid approximately $437 in cash to the independent directors of the Company. During the nine months ended July 31, 2012, the Company issued 67,853 shares of Class A common stock which amounted to $437 and paid approximately $133 in cash to the independent directors of the Company. The total expenses related to these annual grants are reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings. All of the shares issued have a restriction requiring each independent director to hold the respective shares until completion of service as a member of the Company’s Board of Directors.

The table below presents all stock options and restricted stock granted to employees during the nine months ended July 31, 2013:

Grant Type	Number of Shares Granted	Weighted Average Price per Share	Vesting Period	Vesting Condition
Stock options	1,256,500	$7.36	Equal one-fourth portions over 4 years	Service condition
Restricted stock	516,500	$7.36	Equal one-third portions over 3 years	Market condition

The fair value of the Company’s service based stock options granted in fiscal year 2013 is the estimated present value at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the nine months ended July 31, 2013: expected dividend yield of 2.2 percent; expected volatility of 37.6 percent; risk-free interest rate of 1.1 percent; and an expected term of 6.3 years. During the nine months ended July 31, 2013, the Company granted 516,500 shares of restricted stock with market conditions based on achieving certain specified target stock prices in the fiscal years 2013, 2014 and 2015. The market condition related to fiscal year 2013 was achieved. The Company records the expense over the requisite service period.

(f) Purchase and Retirement of Common Stock

Share repurchases are recorded at stated value with the amount in excess of stated value recorded as a reduction to additional paid-in capital. Share repurchases reduce the weighted average number of common shares outstanding during each period.

In September 2007, the Company announced a stock repurchase program, authorizing the investment of up to $25,000 in the repurchase of the Company’s common stock. The program was increased by $25,000 in December 2007, June 2008, June 2011 and September 2011, resulting in a $125,000 program. Repurchases under the program are limited to the Company’s Class A common stock, and can be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. During the nine months ended July 31, 2013, the Company repurchased 245,118 shares of its Class A common stock for $1,826 at an average price of $7.45 per share. As of July 31, 2013, the Company has repurchased 16,172,850 shares of its Class A common stock since the start of the program for $110,381 at an average price of $6.83 per share.

11

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation—(Continued)

(g) Dividends

In March 2005, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of Class A and B common stock. In each of September 2009, June 2011, March 2012 and April 2013, the Company announced that it had increased its quarterly dividend rate by one half cent per share. As a result, effective April 2013, the quarterly dividend rate is four and one-half cents per share of Class A and B common stock. Although the Company intends to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of the Company’s financial performance. For the nine months ended July 31, 2013 and 2012, the Company paid $10,995 and $9,955, respectively, in dividends. The Company’s Board of Directors declared its first quarter 2013 dividend in the fourth quarter of fiscal year 2012, accelerating the payment to December of 2012.

(h) Receivables and Allowance for Doubtful Accounts

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

As of July 31, 2013 and October 31, 2012, the Company’s receivables and related allowances were as follows:

	Receivables as of July 31, 2013		Receivables as of October 31, 2012
	Ending Balance Collectively Evaluated for Impairment		Ending Balance Collectively Evaluated for Impairment
Current receivables – at-need funeral	$	7,663	$	8,120
Current receivables – other		51,359		48,380
Receivables, due beyond one year – other		76,391		77,873
Preneed funeral receivables		45,520		44,959
Preneed cemetery receivables		28,862		29,594
Total	$	209,795	$	208,926
Total current receivables		59,022		56,500
Total noncurrent receivables		150,773		152,426
Total	$	209,795	$	208,926

12

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation—(Continued)

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

	Allowance for Doubtful Accounts and Cancellations as of July 31, 2013			Allowance for Doubtful Accounts and Cancellations as of October 31, 2012
	Ending Balance Collectively Evaluated for Impairment			Ending Balance Collectively Evaluated for Impairment
Current receivables allowance – at-need funeral and other	$	(4,266	)	$	(4,059	)
Receivables allowance, due beyond one year – other		(5,027	)		(5,253	)
Preneed funeral receivables allowance		(10,053	)		(10,412	)
Preneed cemetery receivables allowance		(1,699	)		(2,090	)
Total	$	(21,045	)	$	(21,814	)
Total current receivables allowance		(4,266	)		(4,059	)
Total noncurrent receivables allowance		(16,779	)		(17,755	)
Total	$	(21,045	)	$	(21,814	)

	Allowance for Doubtful Accounts and Cancellations Rollforward
	Balance – October 31, 2012		Charged to costs and expenses		Write-offs			Balance – July  31, 2013
Current receivables allowance– at-need funeral and other	$	4,059		1,550		(1,343	)	$	4,266
Receivables allowance, due beyond one year – other		5,253		1,827		(2,053	)		5,027
	$	9,312		3,377		(3,396	)	$	9,293

	Allowance for Doubtful Accounts and Cancellations Rollforward
	Balance – October 31, 2011		Charged to costs and expenses		Write-offs			Balance – July  31, 2012
Current receivables allowance – at-need funeral and other	$	4,626		1,316		(1,893	)	$	4,049
Receivables allowance, due beyond one year – other		7,118		1,725		(3,538	)		5,305
	$	11,744		3,041		(5,431	)	$	9,354

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

13

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(1) Basis of Presentation—(Continued)

The following summarizes the Company’s receivables aging analysis:

	Receivables Aging Analysis as of July 31, 2013
	1 to 30 Days		31 to 60 Days		61 to 90 Days		Greater than 90 Days		Total
Receivables – at-need funeral	$	3,778	$	1,261	$	573	$	2,051	$	7,663
Receivables – other		111,303		3,263		2,051		11,133		127,750
Preneed funeral receivables		34,244		627		358		10,291		45,520
Preneed cemetery receivables		25,720		817		397		1,928		28,862
	$	175,045	$	5,968	$	3,379	$	25,403	$	209,795

	Receivables Aging Analysis as of October 31, 2012
	1 to 30 Days		31 to 60 Days		61 to 90 Days		Greater than 90 Days		Total
Receivables – at-need funeral	$	4,392	$	1,274	$	509	$	1,945	$	8,120
Receivables – other		107,602		4,239		2,491		11,921		126,253
Preneed funeral receivables		33,034		825		406		10,694		44,959
Preneed cemetery receivables		25,472		1,012		584		2,526		29,594
	$	170,500	$	7,350	$	3,990	$	27,086	$	208,926

(i) Marketable Securities

The market value of the Company’s marketable securities as of July 31, 2013 and October 31, 2012 was $19,673 and $11,514, respectively. Of the total marketable securities balance as of July 31, 2013 and October 31, 2012, $1,000 is classified as a long-term asset in “other assets” in the condensed consolidated balance sheet. The Company is required by Texas statutes to maintain a minimal capital level of $1,000, of which at least 40 percent must be in readily marketable investments. The July 31, 2013 balance consists of $16,521 of Level 1 investments and $3,152 of Level 2 investments. The October 31, 2012 balance consists of $10,999 of Level 1 investments and $515 of Level 2 investments. Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds. Level 2 investments include U.S. government, agencies and municipalities and corporate bonds. See Notes 3, 4 and 5 for a discussion of the investments in the Company’s preneed funeral merchandise and services trust, preneed cemetery merchandise and services trust and cemetery perpetual care trust.

(2) New Accounting Principles

In June 2011, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) No. 2011-05 regarding the presentation of comprehensive income. This guidance amends the previous application of comprehensive income and the requirements regarding presentation in the financial statements. It requires the disclosure of the components of comprehensive income, which the Company disclosed in other sections of its filings, to be presented as part of one statement of comprehensive income, or as a separate statement of comprehensive income following the statement of earnings. This guidance is effective for fiscal years (and interim periods within such years) beginning after December 15, 2011, which corresponds to the Company’s first fiscal quarter beginning November 1, 2012. The adoption of this guidance by the Company had no impact on its financial condition or results of operations. The Company now includes separate statements of comprehensive income within its financial statements.

In December 2011, the FASB issued ASU No. 2011-12 which temporarily deferred those changes in ASU No. 2011-05 that relate to the presentation of reclassification adjustments out of accumulated other comprehensive income. In February 2013, the FASB issued ASU No. 2013-02 which clarified the reporting requirements of

14

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(2) New Accounting Principles—(Continued)

reclassifications out of accumulated other comprehensive income. This guidance requires prospective application for annual periods and interim periods within those annual periods beginning after December 15, 2012. The Company adopted the disclosure guidance in its first fiscal quarter beginning November 1, 2012. The adoption of this guidance had no impact on the Company’s financial condition or results of operations. See the required disclosures in Note 14.

In July 2012, the FASB issued ASU No. 2012-02 regarding subsequent measurement guidance for long lived intangibles. This guidance is meant to reduce the cost and complexity of performing an impairment test for indefinite-lived intangible assets. This guidance is effective for annual and interim tests performed for fiscal years beginning after September 15, 2012, which corresponds to the Company’s first fiscal quarter beginning November 1, 2012. The adoption of this guidance by the Company had no impact on its consolidated financial statements.

In July 2013, the FASB issued ASU No. 2013-11 which amended the Income Taxes Topic of the Accounting Standards Codification to eliminate a diversity in practice for the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses or tax credit carryforwards exist. The amendment requires that the unrecognized tax benefit be presented as a reduction of the deferred tax assets associated with the carryforwards except in certain circumstances when it would be reflected as a liability. This guidance is effective for annual periods and interim periods within those annual periods beginning after December 15, 2013, which corresponds to the Company’s first fiscal quarter beginning November 1, 2014. The Company is currently evaluating the impact the adoption of this guidance will have on its consolidated financial statements.

(3) Preneed Funeral Activities

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

Preneed Funeral Receivables and Trust Investments

Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2013 and October 31, 2012 are as follows:

	July 31, 2013			October 31, 2012
Trust assets	$	422,053		$	397,875
Receivables from customers		45,520			44,959
		467,573			442,834
Allowance for cancellations		(10,053	)		(10,412	)
Preneed funeral receivables and trust investments	$	457,520		$	432,422

15

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

The cost basis and market values associated with preneed funeral merchandise and services trust assets as of July 31, 2013 are detailed below.

	July 31, 2013
	Fair Value Hierarchy Level		Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments		1	$	21,338	$	—	$	—		$	21,338
Long-term certificate of deposit investments		1		5,939		—		—			5,939
U.S. Government, agencies and municipalities		2		2,359		55		(21	)		2,393
Corporate bonds		2		14,297		729		(9	)		15,017
Preferred stocks		2		26,456		935		(1,188	)		26,203
Common stocks		1		181,854		12,367		(26,219	)		168,002
Mutual funds:
Equity		1		22,212		1,200		(964	)		22,448
Fixed income		1		115,238		470		(4,271	)		111,437
Commodity		1		9,012		—		(3,183	)		5,829
Real estate investment trusts		1		8,512		333		(338	)		8,507
Master limited partnerships		1		27,772		548		(28	)		28,292
Preferred stock		1		105		—		(3	)		102
Insurance contracts and other		3		5,136		—		—			5,136
Trust investments			$	440,230	$	16,637	$	(36,224	)	$	420,643
Market value as a percentage of cost												95.6	%
Accrued investment income											1,410
Trust assets										$	422,053

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

	July 31, 2013
Due in one year or less	$	4,451
Due in one to five years		8,619
Due in five to ten years		3,831
Thereafter		509
	$	17,410

The weighted average maturity of the mutual fund-fixed income investments as of July 31, 2013 is 6.6 years.

16

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

The cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2012 are detailed below.

	October 31, 2012
	Fair Value Hierarchy Level		Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments		1	$	24,501	$	—	$	—		$	24,501
Long-term certificate of deposit investments		1		6,775		—		—			6,775
U.S. Government, agencies and municipalities		2		1,657		79		—			1,736
Corporate bonds		2		18,946		1,580		—			20,526
Preferred stocks		2		34,939		1,099		(688	)		35,350
Common stocks		1		196,745		4,598		(42,568	)		158,775
Mutual funds:
Equity		1		18,471		1,007		(1,494	)		17,984
Fixed income		1		96,021		3,271		(570	)		98,722
Commodity		1		13,412		—		(2,864	)		10,548
Real estate investment trusts		1		8,737		564		(9	)		9,292
Master limited partnerships		1		6,867		1		(26	)		6,842
Insurance contracts and other		3		5,372		168		—			5,540
Trust investments			$	432,443	$	12,367	$	(48,219	)	$	396,591
Market value as a percentage of cost												91.7	%
Accrued investment income											1,284
Trust assets										$	397,875

The Company periodically manages a covered call program on its equity securities within the preneed funeral merchandise and services trust in order to reduce the exposure to and volatility of equity securities as well as provide an opportunity for additional income. As of July 31, 2013 and October 31, 2012, the Company had outstanding covered calls with a market value of $282 and $379, respectively. Covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended July 31, 2013 and 2012, the Company realized trust earnings (losses) of approximately ($402) and $180, respectively, related to the covered call program. For the nine months ended July 31, 2013 and 2012, the Company realized trust earnings (losses) of ($625) and $336, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other funeral merchandise and services trust earnings and losses and flow through funeral revenue in the condensed consolidated statements of earnings as the underlying service or merchandise are actually performed or delivered. Although the Company realized losses associated with the covered call program for the three and nine months ended July 31, 2013, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $1,520 for the three months ended July 31, 2013 and $2,426 for the nine months ended July 31, 2013.

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

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

17

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

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

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

	Three Months Ended July 31,					Nine Months Ended July 31,
	2013			2012		2013			2012
Fair market value, beginning balance	$	5,401		$	5,698	$	5,540		$	5,868
Total unrealized gains (losses) included in other comprehensive income(1)		(208	)		56		(208	)		56
Distributions and other, net		(57	)		8		(196	)		(162	)
Fair market value, ending balance	$	5,136		$	5,762	$	5,136		$	5,762

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

Activity related to preneed funeral trust investments is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
Purchases	$	76,924		$	22,182		$	209,213		$	56,092
Sales		58,527			14,587			212,718			51,669
Realized gains from sales of investments		6,343			1,320			18,661			4,491
Realized losses from sales of investments and other		(1,196	)(1)		(1,605	)		(4,898	)(2)		(2,709	)
Interest income, dividends and other ordinary income		3,440			2,952			10,056			10,914
Deposits(3)		6,835			6,462			19,763			18,828
Withdrawals(3)		11,619			10,905			31,621			29,995

⁽¹⁾  Includes $980 in losses from the sale of investments and $216 in losses related to certain investments that the Company determined it no longer had the ability and intent to hold until they recover in value.

⁽²⁾  Includes $2,847 in losses from the sale of investments and $2,051 in losses related to certain investments that the Company determined it no longer had the ability and intent to hold until they recover in value.

⁽³⁾  The Company historically sold a significant portion of its preneed funeral sales through trust-funded price-guaranteed contracts. Over time, the mix has shifted to a more significant portion being sold using insurance, particularly in states where trusting requirements are high.

18

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2013 and October 31, 2012.

	July 31, 2013
	Less than 12 Months					12 Months or Greater					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
U.S. Government, agencies and municipalities	$	1,088	$	(21	)	$	—	$	—		$	1,088	$	(21	)
Corporate bonds		991		(9	)		—		—			991		(9	)
Preferred stocks		10,180		(678	)		1,915		(510	)		12,095		(1,188	)
Common stocks		27,624		(1,522	)		61,658		(24,697	)		89,282		(26,219	)
Mutual funds:
Equity		6,504		(132	)		2,357		(832	)		8,861		(964	)
Fixed income		82,391		(3,868	)		1,005		(403	)		83,396		(4,271	)
Commodity		—		—			5,829		(3,183	)		5,829		(3,183	)
Real estate investment trusts		5,982		(338	)		—		—			5,982		(338	)
Master limited partnerships		5,769		(28	)		—		—			5,769		(28	)
Preferred stock		102		(3	)		—		—			102		(3	)
Total	$	140,631	$	(6,599	)	$	72,764	$	(29,625	)	$	213,395	$	(36,224	)

	October 31, 2012
	Less than 12 Months					12 Months or Greater					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
Preferred stocks	$	5,707	$	(170	)	$	6,923	$	(518	)	$	12,630	$	(688	)
Common stocks		34,686		(2,241	)		76,621		(40,327	)		111,307		(42,568	)
Mutual funds:
Equity		2,467		(24	)		3,363		(1,470	)		5,830		(1,494	)
Fixed income		7,054		(11	)		3,684		(559	)		10,738		(570	)
Commodity		—		—			10,547		(2,864	)		10,547		(2,864	)
Real estate investment trusts		2,005		(9	)		—		—			2,005		(9	)
Master limited partnerships		5,281		(26	)		—		—			5,281		(26	)
Total	$	57,200	$	(2,481	)	$	101,138	$	(45,738	)	$	158,338	$	(48,219	)

The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For a discussion of the Company’s policies for determining whether a security is other-than-temporarily impaired, see Note 2(k) to the consolidated financial statements in the Company’s 2012 Form 10-K. Of the total unrealized losses at July 31, 2013, 84 percent, or $30,490 were generated by common stock and mutual fund-fixed income investments. Most of the common stock investments are part of the S&P 500 Index. The fixed income mutual funds with losses are invested mostly in investment grade bonds and include both world bond funds and domestic bond funds. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes it has the intent and ability to hold these investments until they recover in value.

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

19

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(3) Preneed Funeral Activities—(Continued)

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

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or service is needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of July 31, 2013 and October 31, 2012 are as follows:

	July 31, 2013			October 31, 2012
Trust assets	$	206,402		$	197,544
Receivables from customers		28,862			29,594
		235,264			227,138
Allowance for cancellations		(1,699	)		(2,090	)
Preneed cemetery receivables and trust investments	$	233,565		$	225,048

The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of July 31, 2013 are detailed below.

	July 31, 2013
	Fair Value Hierarchy Level		Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments		1	$	4,999	$	—	$	—		$	4,999
Long-term certificate of deposit investments		1		435		—		—			435
U.S. Government, agencies and municipalities		2		2,691		76		(35	)		2,732
Corporate bonds		2		2,153		108		—			2,261
Preferred stocks		2		9,426		22		(549	)		8,899
Common stocks		1		89,414		5,226		(18,508	)		76,132
Mutual funds:
Equity		1		32,163		485		(5,018	)		27,630
Fixed income		1		62,243		185		(1,868	)		60,560
Commodity		1		8,693		—		(3,161	)		5,532
Real estate investment trusts		1		3,970		36		(41	)		3,965
Master limited partnerships		1		12,038		513		(8	)		12,543
Preferred stock		1		44		—		(1	)		43
Trust investments			$	228,269	$	6,651	$	(29,189	)	$	205,731
Market value as a percentage of cost												90.1	%
Accrued investment income											671
Trust assets										$	206,402

20

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

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

	July 31, 2013
Due in one year or less	$	309
Due in one to five years		1,998
Due in five to ten years		2,424
Thereafter		262
	$	4,993

The weighted average maturity of the mutual fund-fixed income investments as of July 31, 2013 is 5.7 years.

The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2012 are detailed below.

	October 31, 2012
	Fair Value Hierarchy Level		Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments		1	$	9,099	$	—	$	—		$	9,099
Long-term certificate of deposit investments		1		487		—		—			487
U.S. Government, agencies and municipalities		2		1,568		115		—			1,683
Corporate bonds		2		1,981		156		—			2,137
Preferred stocks		2		12,790		142		—			12,932
Common stocks		1		104,170		1,931		(27,687	)		78,414
Mutual funds:
Equity		1		23,818		201		(6,253	)		17,766
Fixed income		1		53,572		857		(16	)		54,413
Commodity		1		8,693		—		(1,991	)		6,702
Real estate investment trusts		1		3,021		—		(14	)		3,007
Master limited partnerships		1		10,303		—		(67	)		10,236
Trust investments			$	229,502	$	3,402	$	(36,028	)	$	196,876
Market value as a percentage of cost												85.8	%
Accrued investment income											668
Trust assets										$	197,544

The Company periodically manages a covered call program on its equity securities within the preneed cemetery merchandise and services trust in order to reduce the exposure to and volatility of equity securities as well as provide an opportunity for additional income. As of July 31, 2013 and October 31, 2012, the Company had outstanding covered calls with a market value of $99 and $171, respectively. Covered calls are included at market value in the balance sheet line “preneed cemetery receivables and trust investments.” For the three months ended July 31, 2013 and 2012, the Company realized trust (losses) earnings of approximately ($235) and $89, respectively, related to the covered call program. For the nine months ended July 31, 2013 and 2012, the Company realized trust earnings (losses) of ($426) and $203, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other cemetery merchandise and services trust earnings and losses and flow through cemetery revenue in the condensed consolidated statements of earnings as the underlying service or merchandise are actually performed or delivered. Although the Company realized losses associated with the covered call program for the three and nine months ended July 31, 2013, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $577 for the three months ended July 31, 2013 and $1,309 for the nine months ended July 31, 2013.

21

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

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

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

There are no Level 3 investments in the preneed cemetery merchandise and services trust investment portfolio.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
Purchases	$	30,500		$	17,953		$	101,144		$	29,186
Sales		35,207			5,480			102,935			31,144
Realized gains from sales of investments		3,568			653			8,120			3,001
Realized losses from sales of investments and other		(1,016	)(1)		(176	)		(3,412	)(2)		(381	)
Interest income, dividends and other ordinary income		2,060			1,978			5,927			6,285
Deposits		4,459			4,127			13,361			12,769
Withdrawals		10,459			8,601			20,551			19,847

⁽¹⁾  Includes $995 in losses from the sale of investments and $21 in the losses related to certain investments that the Company determined it no longer had the ability and intent to hold until they recover in value.

⁽²⁾  Includes $2,328 in losses from the sale of investments and $1,084 in the losses related to certain investments that the Company determined it no longer had the ability and intent to hold until they recover in value.

The following tables show the gross unrealized losses and fair value of the preneed cemetery merchandise and services trust investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2013 and October 31, 2012.

22

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

	July 31, 2013
	Less than 12 Months					12 Months or Greater					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
U.S. Government, agencies and municipalities	$	1,533	$	(35	)	$	—	$	—		$	1,533	$	(35	)
Preferred stocks		3,304		(243	)		1,189		(306	)		4,493		(549	)
Common stocks		13,175		(834	)		27,141		(17,674	)		40,316		(18,508	)
Mutual funds:
Equity		8,526		(312	)		13,060		(4,706	)		21,586		(5,018	)
Fixed income		51,031		(1,868	)		—		—			51,031		(1,868	)
Commodity		—		—			5,532		(3,161	)		5,532		(3,161	)
Real estate investment trusts		1,666		(41	)		—		—			1,666		(41	)
Master limited partnerships		2,228		(8	)		—		—			2,228		(8	)
Preferred stock		43		(1	)		—		—			43		(1	)
Total	$	81,506	$	(3,342	)	$	46,922	$	(25,847	)	$	128,428	$	(29,189	)

	October 31, 2012
	Less than 12 Months					12 Months or Greater					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
Common stocks	$	18,856	$	(1,271	)	$	37,775	$	(26,416	)	$	56,631	$	(27,687	)
Mutual funds:
Equity		1,868		(14	)		11,756		(6,239	)		13,624		(6,253	)
Fixed income		11,014		(16	)		—		—			11,014		(16	)
Commodity		—		—			6,703		(1,991	)		6,703		(1,991	)
Real estate investment trusts		3,007		(14	)		—		—			3,007		(14	)
Master limited partnerships		10,236		(67	)		—		—			10,236		(67	)
Total	$	44,981	$	(1,382	)	$	56,234	$	(34,646	)	$	101,215	$	(36,028	)

The unrealized losses in the preneed cemetery merchandise and services trust portfolio are not considered to be other than temporary. For a discussion of the Company’s policies for determining whether a security is other-than-temporarily impaired, see Note 2(k) to the consolidated financial statements in the Company’s 2012 Form 10-K. Of the total unrealized losses at July 31, 2013, 81 percent, or $23,526, were generated by common stock and mutual fund-equity investments. Most of the common stock investments are part of the S&P 500 Index, and the mutual fund-equity investments are invested in small-cap, mid-cap and international mutual funds that are highly diversified. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes it has the intent and ability to hold these investments until they recover in value.

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

23

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

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

(5) Cemetery Interment Rights and Perpetual Care Trusts

Earnings from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized as 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 $2,433 and $1,815 for the three months ended July 31, 2013 and 2012, respectively, and $10,690 and $7,098 for the nine months ended July 31, 2013 and 2012, respectively.

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of July 31, 2013 are detailed below.

	July 31, 2013
	Fair Value Hierarchy Level		Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments		1	$	21,349	$	—	$	—		$	21,349
U.S. Government, agencies and municipalities		2		6,331		151		(63	)		6,419
Corporate bonds		2		22,645		839		(315	)		23,169
Preferred stocks		2		24,527		1,679		(1,251	)		24,955
Common stocks		1		69,967		6,036		(11,681	)		64,322
Mutual funds:
Equity		1		17,708		2,806		(349	)		20,165
Fixed income		1		94,938		373		(3,750	)		91,561
Commodity		1		4,615		—		(1,186	)		3,429
Real estate investment trusts		1		7,981		1,016		(80	)		8,917
Preferred stock		1		10,862		—		(285	)		10,577
Other		3		41		—		—			41
Trust investments			$	280,964	$	12,900	$	(18,960	)	$	274,904
Market value as a percentage of cost												97.8	%
Accrued investment income											987
Trust assets										$	275,891

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

	July 31, 2013
Due in one year or less	$	2,090
Due in one to five years		14,537
Due in five to ten years		9,075
Thereafter		3,886
	$	29,588

The weighted average maturity of the mutual fund-fixed income investments as of July 31, 2013 is 5.5 years.

24

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2012 are detailed below.

	October 31, 2012
	Fair Value Hierarchy Level		Cost Basis		Unrealized Gains		Unrealized Losses			Market
Cash, money market and other short-term investments		1	$	16,856	$	—	$	—		$	16,856
U.S. Government, agencies and municipalities		2		5,089		250		—			5,339
Corporate bonds		2		26,479		1,409		(828	)		27,060
Preferred stocks		2		33,476		552		(2,069	)		31,959
Common stocks		1		90,085		3,017		(19,440	)		73,662
Mutual funds:
Equity		1		17,204		1,164		(521	)		17,847
Fixed income		1		74,762		2,400		(713	)		76,449
Commodity		1		4,591		6		(463	)		4,134
Real estate investment trusts		1		8,792		614		(15	)		9,391
Other		3		47		—		—			47
Trust investments			$	277,381	$	9,412	$	(24,049	)	$	262,744
Market value as a percentage of cost												94.7	%
Accrued investment income											919
Trust assets										$	263,663

The Company periodically manages a covered call program on its equity securities within the cemetery perpetual care trust in order to reduce the exposure to and volatility of equity securities as well as provide an opportunity for additional income. As of July 31, 2013 and October 31, 2012, the Company had outstanding covered calls with a market value of $115 and $131, respectively. Covered calls are included at market value in the balance sheet line “cemetery perpetual care trust investments.” For the three months ended July 31, 2013 and 2012, the Company realized trust earnings (losses) of approximately ($186) and $73, respectively, related to the covered call program. For the nine months ended July 31, 2013 and 2012, the Company realized trust earnings (losses) of approximately ($305) and $147, respectively, related to the covered call program. These trust earnings and losses are accounted for in the same manner as other cemetery perpetual care trust earnings and losses and flow through cemetery revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three and nine months ended July 31, 2013, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $385 for the three months ended July 31, 2013 and $899 for the nine months ended July 31, 2013.

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

Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds, convertible bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

The Company’s Level 3 investments include an investment in a partnership. The valuation of partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the partnership investment was determined by using its most recent audited financial statements and assessing the market value of the underlying securities within the partnership.

25

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
Fair market value, beginning balance	$	47		$	48		$	47		$	48
Total unrealized losses included in other comprehensive income(1)		(6	)		(1	)		(6	)		(1	)
Fair market value, ending balance	$	41		$	47		$	41		$	47

⁽¹⁾  All gains (losses) recognized in other comprehensive income for perpetual care trust investments are attributable to the Company’s customers and are offset by a corresponding increase (decrease) in perpetual care trusts’ corpus.

In states where the Company withdraws and recognizes capital gains in its cemetery perpetual care trusts, if it realizes subsequent net capital losses (i.e., losses in excess of capital gains in the trust) and the fair market value of the trust assets is less than the aggregate amounts required to be contributed to the trust, some states may require the Company to make cash deposits to the trusts or may require the Company to stop withdrawing earnings until future earnings restore the initial corpus. As of July 31, 2013 and October 31, 2012, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $11,950 and $11,965, respectively. The Company recorded an additional $7 and $567 for the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust for the nine months ended July 31, 2013 and 2012, respectively. The Company had earnings of $4 and $0 for the three months ended July 31, 2013 and 2012, respectively, and $22 and $520 for the nine months ended July 31, 2013 and 2012, respectively, within the trusts that it did not withdraw from the trusts in order to satisfy a portion of its estimated probable funding obligation. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible but not probable that additional funding obligations may exist with an estimated amount of $1,206; no charge has been recorded for these amounts as of July 31, 2013.

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

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
Purchases	$	63,372		$	19,529		$	184,608		$	83,809
Sales		62,160			18,313			190,079			75,211
Realized gains from sales of investments		2,967			660			10,069			4,715
Realized losses from sales of investments and other		(252	)(1)		(963	)		(1,734	)(2)		(2,902	)
Interest income, dividends and other ordinary income		2,524			2,523			8,555			7,958
Deposits		2,857			2,180			6,675			6,849
Withdrawals		3,270			2,299			9,904			7,211

⁽¹⁾  Includes $223 in losses from the sale of investments and $29 in the losses related to certain investments that the Company determined it no longer had the ability and intent to hold until they recover in value.

⁽²⁾  Includes $604 in losses from the sale of investments and $1,130 in the losses related to certain investments that the Company determined it no longer had the ability and intent to hold until they recover in value.

26

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

During the three months ended July 31, 2013 and 2012, cemetery revenues were $58,366 and $60,356, respectively, of which $2,244 and $2,373, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses. During the nine months ended July 31, 2013 and 2012, cemetery revenues were $174,592 and $173,015, respectively, of which $6,558 and $6,701, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.

The following tables show the gross unrealized losses and fair value of the cemetery perpetual care trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of July 31, 2013 and October 31, 2012.

	July 31, 2013
	Less than 12 Months					12 Months or Greater					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
U.S. Government, agencies and municipalities	$	2,975	$	(63	)	$	—	$	—		$	2,975	$	(63	)
Corporate bonds		7,790		(315	)		—		—			7,790		(315	)
Preferred stocks		10,521		(400	)		3,443		(851	)		13,964		(1,251	)
Common stocks		15,753		(820	)		22,636		(10,861	)		38,389		(11,681	)
Mutual funds:
Equity		202		(8	)		1,395		(341	)		1,597		(349	)
Fixed income		53,858		(2,254	)		12,273		(1,496	)		66,131		(3,750	)
Commodity		1,168		(253	)		2,261		(933	)		3,429		(1,186	)
Real estate investment trusts		1,384		(80	)		—		—			1,384		(80	)
Preferred stock		10,576		(285	)		—		—			10,576		(285	)
Total	$	104,227	$	(4,478	)	$	42,008	$	(14,482	)	$	146,235	$	(18,960	)

	October 31, 2012
	Less than 12 Months					12 Months or Greater					Total
	Market Value		Unrealized Losses			Market Value		Unrealized Losses			Market Value		Unrealized Losses
Corporate bonds	$	4,736	$	(80	)	$	276	$	(748	)	$	5,012	$	(828	)
Preferred stocks		4,076		(54	)		6,492		(2,015	)		10,568		(2,069	)
Common stocks		19,623		(704	)		32,424		(18,736	)		52,047		(19,440	)
Mutual funds:
Equity		3,405		(40	)		1,169		(481	)		4,574		(521	)
Fixed income		7,267		(12	)		14,517		(701	)		21,784		(713	)
Commodity		2,559		(234	)		1,539		(229	)		4,098		(463	)
Real estate investment trusts		2,106		(15	)		—		—			2,106		(15	)
Total	$	43,772	$	(1,139	)	$	56,417	$	(22,910	)	$	100,189	$	(24,049	)

The unrealized losses in the cemetery perpetual care trust portfolio are not considered to be other than temporary. For a discussion of the Company’s policies for determining whether a security is other-than-temporarily impaired, see Note 2(k) to the consolidated financial statements in the Company’s 2012 Form 10-K. Of the total unrealized losses at July 31, 2013, 81 percent, or $15,431, were generated by common stock and mutual fund-fixed income investments. Most of the common stock investments are part of the S&P 500 Index. The fixed income mutual funds with losses are invested mostly in investment grade bonds and include both world bond funds and domestic bond funds. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes it has the intent and ability to hold these investments until they recover in value.

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

27

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at July 31, 2013 are as follows:

	Deferred Receipts Held in Trust
	Preneed Funeral			Preneed Cemetery			Total
Trust assets at market value	$	422,053		$	206,402		$	628,455
Less:
Pending withdrawals		(8,270	)		(3,159	)		(11,429	)
Pending deposits		2,339			1,474			3,813
Deferred receipts held in trust	$	416,122		$	204,717		$	620,839

The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at July 31, 2013 are as follows:

	Perpetual Care Trusts’ Corpus
Trust assets at market value	$	275,891
Less:
Pending withdrawals		(2,958	)
Pending deposits		285
Perpetual care trusts’ corpus	$	273,218

The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at October 31, 2012 are as follows:

	Deferred Receipts Held in Trust
	Preneed Funeral			Preneed Cemetery			Total
Trust assets at market value	$	397,875		$	197,544		$	595,419
Less:
Pending withdrawals		(7,870	)		(6,345	)		(14,215	)
Pending deposits		2,333			1,627			3,960
Deferred receipts held in trust	$	392,338		$	192,826		$	585,164

The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at October 31, 2012 are as follows:

	Perpetual Care Trusts’ Corpus
Trust assets at market value	$	263,663
Less:
Pending withdrawals		(1,905	)
Pending deposits		125
Perpetual care trusts’ corpus	$	261,883

28

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Investment and other income, net

The components of investment and other income, net in the condensed consolidated statements of earnings for the three and nine months ended July 31, 2013 and 2012 are detailed below.

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
Realized gains from sales of investments	$	12,878		$	2,633		$	36,850		$	12,207
Realized losses from sales of investments and other		(2,464	)		(2,744	)		(10,044	)		(5,992	)
Interest income, dividends and other ordinary income		8,024			7,453			24,538			25,157
Trust expenses and income taxes		(4,093	)		(2,966	)		(11,076	)		(8,792	)
Net trust investment income		14,345			4,376			40,268			22,580
Reclassification to deferred preneed funeral and cemetery receipts held in trust		(10,539	)		(3,112	)		(27,103	)		(15,802	)
Reclassification to perpetual care trusts’ corpus		(3,806	)		(1,264	)		(13,165	)		(6,778	)
Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		—			—			—			—
Investment and other income (expense), net		(2	)		57			160			148
Total investment and other income, net	$	(2	)	$	57		$	160		$	148

(7) Commitments and Contingencies

Litigation

On June 13, 2013, a putative class action was filed in the Civil District Court of the Parish of Orleans by Karen Moulton, an alleged shareholder of the Company (Karen Moulton, Individually and on Behalf of All Others Similarly Situated v. Stewart Enterprises, Inc. et al., Case No. 2013-5636). A subsequent similar suit and interventions have been consolidated with theMoulton case.

The lawsuit alleges, among other things, (i) the Company’s board of directors breached its fiduciary duties by conducting a conflicted process to sell the Company, by agreeing to inadequate consideration, and by agreeing to terms in the merger agreement that impose deal protection devices that preclude other bidders from making a successful competing offer, (ii) the Company’s board of directors breached its fiduciary duties by failing to disclose material information concerning the proposed transaction, and (iii) that Stewart Enterprises, Inc., Service Corporation International and Rio Acquisition Corp. aided and abetted the breaches of fiduciary duty. The lawsuit seeks to enjoin the merger, and award the plaintiffs costs, including reasonable attorneys’ fees.

The Company and director defendants believe that the lawsuit is without merit and intend to defend themselves vigorously.

29

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(7) Commitments and Contingencies—(Continued)

On August 9, 2013, the court denied the plaintiffs’ request for a preliminary injunction to enjoin the special meeting of shareholders on August 13, 2013.

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

Other Commitments and Contingencies

In those states where the Company has withdrawn realized net capital gains in the past from its cemetery perpetual care trusts, regulators may seek replenishment of subsequent realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they restore the initial corpus. As of July 31, 2013, the Company had $11,950 recorded as a liability for the estimated probable funding obligation. As of July 31, 2013, the Company had net unrealized losses of approximately $11,491 in the cemetery perpetual care trusts in these states that could be subject to a future funding obligation. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in an additional corresponding funding liability and increase in cemetery costs.

From time to time, contracts are presented to the Company relating to contracts sold prior to the time the Company acquired certain businesses for which the Company was previously unaware. In addition, from time to time, the Company has identified in its backlog certain contracts in which services or merchandise have previously been delivered but the revenue was not yet recognized. Using historical trends and statistical analyses, the Company has recorded for these items $0 and an estimated net debit of approximately $0.3 million as of July 31, 2013 and October 31, 2012, respectively.

The Company is required to maintain a bond ($18,797 and $23,456 as of July 31, 2013 and October 31, 2012, respectively) to guarantee its obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. This amount would become senior secured debt if the Company was required to borrow funds under the senior secured revolving credit facility and return to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts in lieu of this bond.

(8) Reconciliation of Basic and Diluted Per Share Data

	Earnings (Numerator)			Shares (Denominator)		Per Share Data
Three Months Ended July 31, 2013
Earnings from continuing operations	$	8,277
Allocation of earnings to nonvested restricted stock		(90	)
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	8,187			84,692	$	.10
Effect of dilutive securities:
Stock options assumed exercised					1,260
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	8,187			85,952	$	.10

30

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

	Earnings (Numerator)			Shares (Denominator)		Per Share Data
Three Months Ended July 31, 2012
Earnings from continuing operations	$	9,896
Allocation of earnings to nonvested restricted stock		(87	)
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	9,809			85,798	$	.11
Effect of dilutive securities:
Stock options assumed exercised					380
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	9,809			86,178	$	.11

	Earnings (Numerator)			Shares (Denominator)		Per Share Data
Nine Months Ended July 31, 2013
Earnings from continuing operations	$	35,686
Allocation of earnings to nonvested restricted stock		(388	)
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	35,298			84,533	$	.42
Effect of dilutive securities:
Stock options assumed exercised					849
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	35,298			85,382	$	.41

	Earnings (Numerator)			Shares (Denominator)		Per Share Data
Nine Months Ended July 31, 2012
Earnings from continuing operations	$	28,340
Allocation of earnings to nonvested restricted stock		(251	)
Basic earnings per common share:
Earnings from continuing operations available to common shareholders	$	28,089			86,295	$	.32
Effect of dilutive securities:
Stock options assumed exercised					324
Diluted earnings per common share:
Earnings from continuing operations available to common shareholders plus stock options assumed exercised	$	28,089			86,619	$	.32

During the three and nine months ended July 31, 2013, all stock options were dilutive.

Options to purchase 390,290 shares of common stock at prices ranging from $6.83 to $8.47 per share for the three months ended July 31, 2012 and options to purchase 877,683 shares of common stock at prices ranging from $6.33 to $8.47 per share for the nine months ended July 31, 2012 were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for those periods. Additionally, weighted average shares outstanding for the three and nine months ended July 31, 2012 exclude the effect of approximately 2,140,192 and 1,936,384 options respectively, because such options were not dilutive.

31

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

For the three and nine months ended July 31, 2013 and 2012, all of the outstanding 94,500 market based stock options were dilutive as the respective market conditions had been previously achieved.

For the three and nine months ended July 31, 2013, a maximum of 13,153,500 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 12,161,253 shares of Class A common stock under the common stock warrants associated with the June 2007 senior convertible debt transaction were not dilutive. For the three and nine months ended July 31, 2012, a maximum of 13,153,500 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 12,033,253 shares of Class A common stock under the associated common stock warrants were also not dilutive.

The Company includes Class A and Class B common stock in its diluted shares calculation. As of July 31, 2013, the Company’s Chairman, Frank B. Stewart, Jr., was the record holder of all of the Company’s shares of Class B common stock. The Company’s Class A and B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr.

(9) Segment Data

The Company has determined that management’s approach to operating the business indicates that there are three operating and reportable segments: a funeral segment, a cemetery segment and a corporate trust management segment. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same. The tables below present information about reported segments for the three and nine months ended July 31, 2013 and 2012 for the Company’s continuing operations.

	Total Revenue				Total Revenue
	Three Months Ended July 31, 2013		Three Months Ended July  31, 2012		Nine Months Ended July  31, 2013		Nine Months Ended July  31, 2012
Funeral	$	64,608	$	65,468	$	209,243	$	201,960
Cemetery(1)		55,410		57,918		166,034		165,809
Corporate Trust Management(2)		7,044		5,853		21,319		18,892
Total	$	127,062	$	129,239	$	396,596	$	386,661

	Total Gross Profit				Total Gross Profit
	Three Months Ended July 31, 2013		Three Months Ended July  31, 2012		Nine Months Ended July  31, 2013		Nine Months Ended July  31, 2012
Funeral	$	10,108	$	12,628	$	41,644	$	41,973
Cemetery(1)		6,501		9,061		25,957		22,019
Corporate Trust Management(2)		6,586		5,297		19,877		17,528
Total	$	23,195	$	26,986	$	87,478	$	81,520

⁽¹⁾  Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $2,433 and $1,815 for the three months ended July 31, 2013 and 2012, respectively, and $10,690 and $7,098 for the nine months ended July 31, 2013 and 2012, 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 based on the fair

32

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(9) Segment Data—(Continued)

market value of the assets managed and are paid by the trusts to the Company’s subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by the Company’s respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. Trust management fees included in funeral revenue for the three months ended July 31, 2013 and 2012 were $1,860 and $1,335, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended July 31, 2013 and 2012 were $2,227 and $2,080, respectively. Trust management fees included in cemetery revenue for the three months ended July 31, 2013 and 2012 were $2,174 and $1,555, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended July 31, 2013 and 2012 were $783 and $883, respectively.

Trust management fees included in funeral revenue for the nine months ended July 31, 2013 and 2012 were $5,271 and $3,993, respectively, and funeral trust earnings for the nine months ended July 31, 2013 and 2012 were $7,490 and $7,693, respectively. Trust management fees included in cemetery revenue for the nine months ended July 31, 2013 and 2012 were $6,077 and $4,649, respectively, and cemetery trust earnings for the nine months ended July 31, 2013 and 2012 were $2,481 and $2,557, respectively.

A reconciliation of total segment gross profit to total earnings from continuing operations before income taxes for the three and nine months ended July 31, 2013 and 2012 is as follows:

	Three Months Ended July 31,						Nine Months Ended July 31,
	2013			2012			2013			2012
Gross profit for reportable segments	$	23,195		$	26,986		$	87,478		$	81,520
Corporate general and administrative expenses		(6,386	)		(7,326	)		(20,294	)		(20,264	)
Merger-related costs		(3,126	)		—			(3,715	)		—
Restructuring and other charges		—			(305	)		(81	)		(2,852	)
Net gain on dispositions		—			—			742			332
Other operating income, net		568			191			1,688			773
Interest expense		(5,922	)		(5,873	)		(17,794	)		(17,544	)
Investment and other income (expense), net		(2	)		57			160			148
Earnings from continuing operations before income taxes	$	8,327		$	13,730		$	48,184		$	42,113

The table below presents total net preneed merchandise and services sales for the three and nine months ended July 31, 2013 and 2012.

	Total Net Preneed Merchandise and Service Sales(1)				Total Net Preneed Merchandise and Service Sales(1)
	Three Months Ended July 31, 2013		Three Months Ended July  31, 2012		Nine Months Ended July  31, 2013		Nine Months Ended July  31, 2012
Funeral	$	27,440	$	28,013	$	75,596	$	79,714
Cemetery		13,002		12,949		35,418		38,109
Total	$	40,442	$	40,962	$	111,014	$	117,823

⁽¹⁾  Preneed sales amounts represent total preneed funeral trust and insurance sales and cemetery service and merchandise trust sales generated in the applicable period, net of cancellations. Preneed funeral and cemetery merchandise and service sales are deferred until a future period and have no impact on current revenues.

33

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(10) Supplementary Information

The detail of certain income statement accounts is as follows for the three and nine months ended July 31, 2013 and 2012.

	Three Months Ended July 31,					Nine Months Ended July 31,
	2013			2012		2013		2012
Service revenue
Funeral	$	47,057		$	47,688	$	152,016	$	146,675
Cemetery		16,626			14,459		54,736		45,706
		63,683			62,147		206,752		192,381
Merchandise revenue
Funeral		19,338			19,333		63,321		61,265
Cemetery		38,365			42,781		109,982		117,514
		57,703	��		62,114		173,303		178,779
Other revenue
Funeral		2,301			1,862		6,667		5,706
Cemetery		3,375			3,116		9,874		9,795
		5,676			4,978		16,541		15,501
Total revenue	$	127,062		$	129,239	$	396,596	$	386,661
Service costs
Funeral	$	17,865		$	16,535	$	54,071	$	50,032
Cemetery		12,353			11,024		36,072		31,891
		30,218			27,559		90,143		81,923
Merchandise costs
Funeral		13,900			13,292		43,452		41,216
Cemetery		22,159			24,181		61,200		70,266
		36,059			37,473		104,652		111,482
Facility expenses
Funeral		22,949			23,301		70,776		69,437
Cemetery		14,641			13,920		43,547		42,299
		37,590			37,221		114,323		111,736
Total costs	$	103,867		$	102,253	$	309,118	$	305,141

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

34

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

The following tables present the condensed consolidating historical financial statements as of July 31, 2013 and October 31, 2012 and for the three and nine months ended July 31, 2013 and 2012, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.50 percent senior notes and its 3.125 percent and 3.375 percent senior convertible notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries of the 6.50 percent senior notes and senior convertible notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries that are not 100 percent owned, or are prohibited by law from guaranteeing the 6.50 percent senior notes and senior convertible notes. The guarantor subsidiaries of the 6.50 percent senior notes and senior convertible notes are 100 percent-owned directly or indirectly by the Company. The guarantees are full and unconditional and joint and several. In the condensed consolidating statements of earnings, corporate general and administrative expenses and interest expense of the parent are presented net of amounts charged to the guarantor and non-guarantor subsidiaries. All amounts reported as interest expense on the guarantor and non-guarantor subsidiaries are amounts charged by the parent.

Condensed Consolidating Statements of Earnings

	Three Months Ended July 31, 2013
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	63,247		$	5,449		$	—		$	68,696
Cemetery		—			52,266			6,100			—			58,366
		—			115,513			11,549			—			127,062
Costs and expenses:
Funeral		—			51,095			3,619			—			54,714
Cemetery		—			44,648			4,505			—			49,153
		—			95,743			8,124			—			103,867
Gross profit		—			19,770			3,425			—			23,195
Corporate general and administrative expenses		(6,386	)		—			—			—			(6,386	)
Merger-related costs		(3,126	)		—			—			—			(3,126	)
Other operating income, net		48			471			49			—			568
Operating earnings (loss)		(9,464	)		20,241			3,474			—			14,251
Interest expense		(2,981	)		(2,766	)		(175	)		—			(5,922	)
Investment and other income (expense), net		(15	)		—			13			—			(2	)
Equity in subsidiaries		15,198			226			—			(15,424	)		—
Earnings from continuing operations before income taxes		2,738			17,701			3,312			(15,424	)		8,327
Income tax expense (benefit)		(5,539	)		7,441			(1,852	)		—			50
Net earnings	$	8,277		$	10,260		$	5,164		$	(15,424	)	$	8,277

35

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Earnings

	Three Months Ended July 31, 2012
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	63,813		$	5,070		$	—		$	68,883
Cemetery		—			54,252			6,104			—			60,356
		—			118,065			11,174			—			129,239
Costs and expenses:
Funeral		—			49,452			3,676			—			53,128
Cemetery		—			44,372			4,753			—			49,125
		—			93,824			8,429			—			102,253
Gross profit		—			24,241			2,745			—			26,986
Corporate general and administrative expenses		(7,326	)		—			—			—			(7,326	)
Restructuring and other charges		(305	)		—			—			—			(305	)
Other operating income, net		10			126			55			—			191
Operating earnings (loss)		(7,621	)		24,367			2,800			—			19,546
Interest expense		(1,869	)		(3,669	)		(335	)		—			(5,873	)
Investment and other income, net		57			—			—			—			57
Equity in subsidiaries		15,417			607			—			(16,024	)		—
Earnings from continuing operations before income taxes		5,984			21,305			2,465			(16,024	)		13,730
Income tax expense (benefit)		(3,654	)		6,411			1,077			—			3,834
Earnings from continuing operations		9,638			14,894			1,388			(16,024	)		9,896
Discontinued operations:
Loss from discontinued operations before income taxes		—			(380	)		—			—			(380	)
Income tax benefit		—			(122	)		—			—			(122	)
Loss from discontinued operations		—			(258	)		—			—			(258	)
Net earnings	$	9,638		$	14,636		$	1,388		$	(16,024	)	$	9,638

36

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Earnings

	Nine Months Ended July 31, 2013
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	205,480		$	16,524		$	—		$	222,004
Cemetery		—			156,066			18,526			—			174,592
		—			361,546			35,050			—			396,596
Costs and expenses:
Funeral		—			157,099			11,200			—			168,299
Cemetery		—			127,330			13,489			—			140,819
		—			284,429			24,689			—			309,118
Gross profit		—			77,117			10,361			—			87,478
Corporate general and administrative expenses		(20,294	)		—			—			—			(20,294	)
Merger-related costs		(3,715	)		—			—			—			(3,715	)
Restructuring and other charges		(81	)		—			—			—			(81	)
Net gain on dispositions		—			742			—			—			742
Other operating income, net		80			1,445			163			—			1,688
Operating earnings (loss)		(24,010	)		79,304			10,524			—			65,818
Interest expense		(8,708	)		(8,577	)		(509	)		—			(17,794	)
Investment and other income, net		109			—			51			—			160
Equity in subsidiaries		55,513			802			—			(56,315	)		—
Earnings from continuing operations before income taxes		22,904			71,529			10,066			(56,315	)		48,184
Income tax expense (benefit)		(12,725	)		24,779			444			—			12,498
Earnings from continuing operations		35,629			46,750			9,622			(56,315	)		35,686
Discontinued operations:
Loss from discontinued operations before income taxes		—			(88	)		—			—			(88	)
Income tax benefit		—			(31	)		—			—			(31	)
Loss from discontinued operations		—			(57	)		—			—			(57	)
Net earnings	$	35,629		$	46,693		$	9,622		$	(56,315	)	$	35,629

37

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Earnings

	Nine Months Ended July 31, 2012
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations			Consolidated
Revenues:
Funeral	$	—		$	198,789		$	14,857		$	—		$	213,646
Cemetery		—			155,460			17,555			—			173,015
		—			354,249			32,412			—			386,661
Costs and expenses:
Funeral		—			150,421			10,264			—			160,685
Cemetery		—			131,144			13,312			—			144,456
		—			281,565			23,576			—			305,141
Gross profit		—			72,684			8,836			—			81,520
Corporate general and administrative expenses		(20,264	)		—			—			—			(20,264	)
Restructuring and other charges		(1,616	)		(1,071	)		(165	)		—			(2,852	)
Net gain on dispositions		—			332			—			—			332
Other operating income, net		67			529			177			—			773
Operating earnings (loss)		(21,813	)		72,474			8,848			—			59,509
Interest expense		(5,212	)		(11,296	)		(1,036	)		—			(17,544	)
Investment and other income, net		148			—			—			—			148
Equity in subsidiaries		42,487			1,161			—			(43,648	)		—
Earnings from continuing operations before income taxes		15,610			62,339			7,812			(43,648	)		42,113
Income tax expense (benefit)		(11,309	)		22,224			2,858			—			13,773
Earnings from continuing operations		26,919			40,115			4,954			(43,648	)		28,340
Discontinued operations:
Loss from discontinued operations before income taxes		—			(2,065	)		—			—			(2,065	)
Income tax benefit		—			(644	)		—			—			(644	)
Loss from discontinued operations		—			(1,421	)		—			—			(1,421	)
Net earnings	$	26,919		$	38,694		$	4,954		$	(43,648	)	$	26,919

38

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Comprehensive Income

	Three Months Ended July 31, 2013
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net earnings	$	8,277		$	10,260	$	5,164		$	(15,424	)	$	8,277
Unrealized depreciation of investments, net of tax		(66	)		—		(23	)		23			(66	)
Comprehensive income	$	8,211		$	10,260	$	5,141		$	(15,401	)	$	8,211

39

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Comprehensive Income

	Three Months Ended July 31, 2012
	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net earnings	$	9,638	$	14,636	$	1,388	$	(16,024	)	$	9,638
Unrealized appreciation of investments, net of tax		15		—		15		(15	)		15
Comprehensive income	$	9,653	$	14,636	$	1,403	$	(16,039	)	$	9,653

40

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Comprehensive Income

	Nine Months Ended July 31, 2013
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
Net earnings	$	35,629		$	46,693	$	9,622		$	(56,315	)	$	35,629
Unrealized depreciation of investments, net of tax		(70	)		—		(15	)		15			(70	)
Comprehensive income	$	35,559		$	46,693	$	9,607		$	(56,300	)	$	35,559

41

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Comprehensive Income

	Nine Months Ended July 31, 2012
	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
Net earnings	$	26,919	$	38,694	$	4,954	$	(43,648	)	$	26,919
Unrealized appreciation of investments, net of tax		23		—		23		(23	)		23
Comprehensive income	$	26,942	$	38,694	$	4,977	$	(43,671	)	$	26,942

42

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Balance Sheets

	July 31, 2013
	Parent			Guarantor Subsidiaries		Non-Guarantor Subsidiaries			Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	94,997		$	2,580	$	1,510		$	—		$	99,087
Restricted cash and cash equivalents		6,250			—		—			—			6,250
Marketable securities		17,856			—		817			—			18,673
Receivables, net of allowances		2,353			45,550		6,853			—			54,756
Inventories		214			33,237		2,657			—			36,108
Prepaid expenses		1,531			3,043		1,614			—			6,188
Deferred income taxes, net		5,122			11,945		667			—			17,734
Intercompany receivables		1,784			—		—			(1,784	)		—
Total current assets		130,107			96,355		14,118			(1,784	)		238,796
Receivables due beyond one year, net of allowances		—			60,324		11,040			—			71,364
Preneed funeral receivables and trust investments		—			447,504		10,016			—			457,520
Preneed cemetery receivables and trust investments		—			226,389		7,176			—			233,565
Goodwill		—			229,749		19,835			—			249,584
Cemetery property, at cost		—			367,699		35,031			—			402,730
Property and equipment, at cost		59,863			513,654		44,636			—			618,153
Less accumulated depreciation		48,800			255,734		21,482			—			326,016
Net property and equipment		11,063			257,920		23,154			—			292,137
Deferred income taxes, net		7,841			50,771		10,712			—			69,324
Cemetery perpetual care trust investments		—			261,368		14,523			—			275,891
Other assets		7,192			3,813		1,024			—			12,029
Intercompany receivables		557,644			—		—			(557,644	)		—
Equity in subsidiaries		105,291			11,872		—			(117,163	)		—
Total assets	$	819,138		$	2,013,764	$	146,629		$	(676,591	)	$	2,302,940
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	83,940		$	—	$	—		$	—		$	83,940
Accounts payable, accrued expenses and other current liabilities		16,527			71,849		4,003			—			92,379
Intercompany payables		—			—		1,784			(1,784	)		—
Total current liabilities		100,467			71,849		5,787			(1,784	)		176,319
Long-term debt, less current maturities		241,192			—		—			—			241,192
Deferred income taxes, net		—			4,191		577			—			4,768
Intercompany payables		—			550,358		7,286			(557,644	)		—
Deferred preneed funeral revenue		—			190,973		47,948			—			238,921
Deferred preneed cemetery revenue		—			239,238		29,537			—			268,775
Deferred preneed funeral and cemetery receipts held in trust		—			612,283		8,556			—			620,839
Perpetual care trusts’ corpus		—			258,712		14,506			—			273,218
Other long-term liabilities		19,906			1,429		—			—			21,335
Total liabilities		361,565			1,929,033		114,197			(559,428	)		1,845,367
Common stock		85,713			102		376			(478	)		85,713
Other		371,888			84,629		32,062			(116,691	)		371,888
Accumulated other comprehensive loss		(28	)		—		(6	)		6			(28	)
Total shareholders’ equity		457,573			84,731		32,432			(117,163	)		457,573
Total liabilities and shareholders’ equity	$	819,138		$	2,013,764	$	146,629		$	(676,591	)	$	2,302,940

43

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Balance Sheets

	October 31, 2012
	Parent		Guarantor Subsidiaries		Non-Guarantor Subsidiaries		Eliminations			Consolidated
ASSETS
Current assets:
Cash and cash equivalents	$	65,722	$	1,033	$	1,432	$	—		$	68,187
Restricted cash and cash equivalents		6,250		—		—		—			6,250
Marketable securities		10,046		—		468		—			10,514
Receivables, net of allowances		2,682		43,453		6,306		—			52,441
Inventories		193		33,929		2,373		—			36,495
Prepaid expenses		1,373		2,128		1,422		—			4,923
Deferred income taxes, net		16,701		13,154		816		—			30,671
Intercompany receivables		1,247		—		—		(1,247	)		—
Total current assets		104,214		93,697		12,817		(1,247	)		209,481
Receivables due beyond one year, net of allowances		—		61,025		11,595		—			72,620
Preneed funeral receivables and trust investments		—		422,753		9,669		—			432,422
Preneed cemetery receivables and trust investments		—		218,018		7,030		—			225,048
Goodwill		—		229,749		19,835		—			249,584
Cemetery property, at cost		—		365,901		35,769		—			401,670
Property and equipment, at cost		63,328		506,957		44,623		—			614,908
Less accumulated depreciation		50,732		252,124		20,792		—			323,648
Net property and equipment		12,596		254,833		23,831		—			291,260
Deferred income taxes, net		2,967		52,379		6,779		—			62,125
Cemetery perpetual care trust investments		—		249,608		14,055		—			263,663
Other assets		8,281		4,279		1,252		—			13,812
Intercompany receivables		601,223		—		—		(601,223	)		—
Equity in subsidiaries		55,287		11,070		—		(66,357	)		—
Total assets	$	784,568	$	1,963,312	$	142,632	$	(668,827	)	$	2,221,685
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt	$	6	$	—	$	—	$	—		$	6
Accounts payable, accrued expenses and other current liabilities		19,263		73,119		4,801		—			97,183
Intercompany payables		—		—		1,247		(1,247	)		—
Total current liabilities		19,269		73,119		6,048		(1,247	)		97,189
Long-term debt, less current maturities		321,887		—		—		—			321,887
Deferred income taxes, net		—		4,350		581		—			4,931
Intercompany payables		—		591,381		9,842		(601,223	)		—
Deferred preneed funeral revenue		—		193,860		46,555		—			240,415
Deferred preneed cemetery revenue		—		236,249		29,098		—			265,347
Deferred preneed funeral and cemetery receipts held in trust		—		577,013		8,151		—			585,164
Perpetual care trusts’ corpus		—		247,845		14,038		—			261,883
Other long-term liabilities		19,091		1,457		—		—			20,548
Total liabilities		360,247		1,925,274		114,313		(602,470	)		1,797,364
Common stock		84,915		102		376		(478	)		84,915
Other		339,364		37,936		27,934		(65,870	)		339,364
Accumulated other comprehensive income		42		—		9		(9	)		42
Total shareholders’ equity		424,321		38,038		28,319		(66,357	)		424,321
Total liabilities and shareholders’ equity	$	784,568	$	1,963,312	$	142,632	$	(668,827	)	$	2,221,685

44

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2013
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	656		$	59,264		$	8,463		$	—	$	68,383
Cash flows from investing activities:
Proceeds from sales/maturities of marketable securities		2,014			—			250			—		2,264
Purchases of marketable securities		(9,978	)		—			(388	)		—		(10,366	)
Proceeds from sale of assets		—			799			—			—		799
Additions to property and equipment		(2,582	)		(17,596	)		(735	)		—		(20,913	)
Other		—			103			1			—		104
Net cash used in investing activities		(10,546	)		(16,694	)		(872	)		—		(28,112	)
Cash flows from financing activities:
Repayments of long-term debt		(4	)		—			—			—		(4	)
Intercompany receivables (payables)		48,536			(41,023	)		(7,513	)		—		—
Issuance of common stock		3,028			—			—			—		3,028
Purchase and retirement of common stock		(1,833	)		—			—			—		(1,833	)
Dividends		(10,995	)		—			—			—		(10,995	)
Excess tax benefits from share-based payment arrangements		433			—			—			—		433
Net cash provided by (used in) financing activities		39,165			(41,023	)		(7,513	)		—		(9,371	)
Net increase in cash		29,275			1,547			78			—		30,900
Cash and cash equivalents, beginning of period		65,722			1,033			1,432			—		68,187
Cash and cash equivalents, end of period	$	94,997		$	2,580		$	1,510		$	—	$	99,087

45

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

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

Condensed Consolidating Statements of Cash Flows

	Nine Months Ended July 31, 2012
	Parent			Guarantor Subsidiaries			Non-Guarantor Subsidiaries			Eliminations		Consolidated
Net cash provided by operating activities	$	7,049		$	45,188		$	6,502		$	—	$	58,739
Cash flows from investing activities:
Proceeds from sales/maturities of marketable securities and release of restricted funds		1,756			—			250			—		2,006
Deposits of restricted funds and purchases of marketable securities		(1,756	)		—			(280	)		—		(2,036	)
Proceeds from sale of assets		—			533			—			—		533
Purchase of subsidiaries and other investments, net of cash acquired		(100	)		(3,013	)		—			—		(3,113	)
Additions to property and equipment		(2,669	)		(12,319	)		(1,227	)		—		(16,215	)
Other		—			87			—			—		87
Net cash used in investing activities		(2,769	)		(14,712	)		(1,257	)		—		(18,738	)
Cash flows from financing activities:
Repayments of long-term debt		(4	)		—			—			—		(4	)
Intercompany receivables (payables)		36,305			(31,249	)		(5,056	)		—		—
Debt refinancing costs		(34	)		—			—			—		(34	)
Issuance of common stock		1,433			—			—			—		1,433
Purchase and retirement of common stock		(19,075	)		—			—			—		(19,075	)
Dividends		(9,955	)		—			—			—		(9,955	)
Excess tax benefits from share based payment arrangements		23			—			—			—		23
Net cash provided by (used in) financing activities		8,693			(31,249	)		(5,056	)		—		(27,612	)
Net increase (decrease) in cash		12,973			(773	)		189			—		12,389
Cash and cash equivalents, beginning of period		62,388			1,937			1,363			—		65,688
Cash and cash equivalents, end of period	$	75,361		$	1,164		$	1,552		$	—	$	78,077

46

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(12) Definitive Merger Agreement

On May 29, 2013, the Company announced that it has entered into a definitive merger agreement with Service Corporation International. Pursuant to the agreement, holders of the Company’s Class A and Class B common stock will receive $13.25 in cash for each share of common stock they hold. The transaction is subject to the satisfaction of customary closing conditions and regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976 (“HSR Act”) or of any agreement with the Federal Trade Commission (“FTC”) not to complete the merger. On July 17, 2013, the Company announced that it and SCI had received second requests from the FTC, which extend the waiting period under the HSR Act until the 30th day after substantial compliance by SCI and the Company with the requests, unless that period is extended voluntarily by the parties or terminated sooner by the FTC. Subsequently, the Company and SCI have entered into an agreement with the FTC not to consummate the merger prior to 90 days after both SCI and Stewart certify substantial compliance with the second request, or December 13, 2013, whichever is earlier. The Company is preparing responses to the second request, and the proposed transaction is expected to close in late calendar year 2013 or early 2014. The Company’s shareholders voted on August 13, 2013 to approve this agreement. During the three and nine months ended July 31, 2013, the Company incurred $3,126 and $3,715, respectively, in merger-related costs which consist primarily of financial advisory and legal fees.

(13) Dispositions

During the nine months ended July 31, 2013 and 2012, the Company recorded net gains on dispositions of $742 and $332, respectively, due to the sale of funeral homes.

In April 2012, the Company designated a business as held for sale, recorded impairment charges related to the business and classified its operations as discontinued operations for all periods presented. The loss from discontinued operations before income taxes for the three months ended July 31, 2013 and 2012 was $0 and $380, respectively, and for the nine months ended July 31, 2013 and 2012 was $88 and $2,065, respectively.

(14) Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income (loss) are as follows:

	Accumulated Other Comprehensive Income (Loss)
Balance as of October 31, 2012	$	42
Unrealized depreciation of investments, net of deferred tax benefit of $40		(70	)
Reduction in net unrealized losses associated with available-for-sale securities of the trusts		34,930
Reclassification of the net unrealized losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus		(34,930	)
Balance as of July 31, 2013	$	(28	)

(15) Restructuring and Other Charges

In April 2012, the Company announced an organizational restructuring as well as a separate workforce reduction. The organizational restructuring involved the integration of management of operations and sales and a complete restructuring of the Company’s sales force. The Company realigned its geographic regions and appointed one regional vice president who is responsible for funeral and cemetery operations and sales in each region. Formerly, the Company had different managers responsible for operations and sales. In addition, the Company engaged in an across-the-board redesign of its sales organization. The Company eliminated layers of sales management, redefined sales roles, and in the first quarter of fiscal year 2013, completed the restructuring with the implementation of a new sales compensation program. Separately in April 2012, the Company reduced its workforce by approximately 60 employees, primarily in corporate support services. Total expenses related to the organizational restructuring and workforce reduction consisted primarily of separation pay and termination benefits and other non-cash asset impairments associated with the sales restructuring. The Company recorded $3,291 in charges related to the restructuring and workforce reduction during the year ended October 31, 2012 and $81 during the nine months ended July 31, 2013. These charges are in the “restructuring and other charges” line in the

47

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(15) Restructuring and Other Charges—(Continued)

condensed consolidated statements of earnings. As of July 31, 2013, the Company does not expect to incur any material additional costs related to the restructuring. The following table summarizes the activity related to the restructuring liability for the nine months ended July 31, 2013:

Restructuring liability as of October 31, 2012	$	206
Additional restructuring costs incurred		81
Cash payments		(287	)
Restructuring liability as of July 31, 2013	$	—

(16) Long-term Debt

	July 31, 2013		October 31, 2012
Long-term debt:
3.125% senior convertible notes due 2014, net of unamortized discount of $2,482 and $4,757 as of July 31, 2013 and October 31, 2012, respectively	$	83,934	$	81,659
3.375% senior convertible notes due 2016, net of unamortized discount of $3,996 and $4,965 as of July 31, 2013 and October 31, 2012, respectively		41,123		40,154
Senior secured revolving credit facility		—		—
6.50% senior notes due 2019		200,000		200,000
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rate of 8.0% as of July 31, 2013 and October 31, 2012, partially secured by assets of subsidiaries, with maturities through 2022		75		80
Total long-term debt		325,132		321,893
Less current maturities		83,940		6
	$	241,192	$	321,887

Fair Value

As of July 31, 2013, the carrying values of the Company’s 3.125 percent senior convertible notes due 2014 (the “2014 Notes”) and 3.375 percent senior convertible notes due 2016 (the “2016 Notes”), including accrued interest, were $84,054 and $41,191, respectively, compared to fair values of $106,736 and $58,553, respectively. The aggregate principal amounts outstanding of the 2014 Notes and 2016 Notes as of July 31, 2013 were $86,416 and $45,119, respectively. As of July 31, 2013, the carrying value of the Company’s 6.50 percent senior notes due 2019, including accrued interest, was $203,792 compared to a fair value of $217,069. Fair values were determined using quoted market prices for those securities and are classified within Level 1 of the three-level valuation hierarchy.

Senior Notes

On June 12, 2013, after receiving the required consent of the holders of the 6.50 percent senior notes due 2019 (the “senior notes”), the Company and trustee entered into a supplemental indenture amending the indenture for the senior notes to waive the requirement for a change of control offer upon completion of the merger and providing that the Company’s obligations to deliver quarterly and annual financial information and other reports to the trustee under the indenture will be satisfied by the delivery of Service Corporation International’s (“SCI”) filings with the Securities and Exchange Commission for so long as SCI guarantees the senior notes. SCI has agreed to guarantee the senior notes promptly following completion of the merger. In consideration for the consents, the Company agreed to pay to the holders of the senior notes that timely consented an aggregate cash payment equal to $2.50 per $1,000 principal amount of senior notes, of which half was paid promptly after the consent solicitation expiration (for which the Company has been reimbursed by SCI) and the other half will be paid, if at all, promptly after completion of the merger.

48

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(16) Long-term Debt—(Continued)

Senior Convertible Notes

As of July 31, 2013, the $86,416 principal amount outstanding of the 2014 Notes, which are due in July 2014, was reclassified to current maturities of long-term debt.

As a result of the proposed merger with Service Corporation International, holders of the Company’s 2014 Notes and 2016 Notes will have the right to convert their notes, subject to the terms and conditions of the indentures governing these notes. As a result of the recent increase in the Company’s quarterly dividend rate on its Class A common stock to $0.045 per share, the conversion rate for the senior convertible notes was adjusted to 92.4564 effective April 11, 2013.

With respect to the senior convertible notes, a “Fundamental Change” as defined in the indentures for such notes, will occur at the effective time of the merger. Holders of the senior convertible notes will have the option to require the Company to purchase such notes, in whole or in part, on a date (the “Fundamental Change Purchase Date”) to be specified by the Company that is not less than 30 days and not more than 45 days after the effective date of the merger, for 100 percent of the principal amount plus accrued and unpaid interest to but excluding the Fundamental Change Purchase Date.

As provided in the indentures for such notes, the Company will provide notice to the holders of the notes and the trustee at least 15 days prior to the date that is anticipated to be the effective date of the merger. Holders of the notes may surrender them for conversion at any time beginning 15 days prior to the date that is anticipated to be the effective date of the merger, until the trading day prior to the Fundamental Change Purchase Date. If notice of conversion is received by the conversion agent during such time but prior to the effective date of the merger, the conversion rate will be 92.4564. If notice of conversion is received by the conversion agent from and including the effective date of the merger and prior to the close of business on the business day before the Fundamental Change Purchase Date, then the conversion rate for the notes will be increased to include a “make whole premium,” based on the date on which the closing occurs and the price paid per share in the merger.

In connection with the issuance of the senior convertible notes in 2007, the Company also purchased call options and sold warrants. The settlement of the call options is expected to offset any amounts more than $1,000 per note that the Company pays in connection with conversion of such notes. The settlement of the warrants is determined pursuant to the provisions in the confirmations for such warrants.

(17) Income Taxes

In June 2013, the government of Puerto Rico signed into law corporate tax rate changes that increased the top tax rate from 30 percent to 39 percent. The Company will incur additional tax expense from this increased tax rate when paying taxes in the future. As a result of this change, the Company was required to revalue its previously

49

STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

(Dollars in thousands, except per share amounts)

(17) Income Taxes—(Continued)

recorded Puerto Rican-related deferred tax asset using the new top tax rate of 39 percent. During the third quarter of fiscal year 2013, the Company recorded a non-cash benefit of $2,970 ($4,570 benefit less a federal tax charge of $1,600). The Puerto Rican deferred tax asset increased from approximately $16,960 to $21,530 at the newly enacted rate of 39 percent. In January 2011, the government of Puerto Rico had decreased the top tax rate for businesses from 39 percent to 30 percent.

Income tax expense for the nine months ended July 31, 2013 was positively impacted by a $2,700 overall reduction in the capital loss tax valuation allowance associated with the positive performance of the Company’s trust portfolio during the nine months ended July 31, 2013. Realized capital losses in the trusts for which the Company is the grantor, in which insufficient offsetting capital gains are expected, may require the Company to record a valuation allowance against the related deferred tax asset (capital loss carryforward). Reductions in the valuation allowance result when the Company has realized or unrealized gains in the grantor trust or from other assets that are expected to be sold at a capital gain.

Income tax expense for the three and nine months ended July 31, 2012 was impacted by $1,125 and $2,075, respectively, overall reductions in the capital loss tax valuation allowance primarily due to the reduction of a portion of the valuation allowance related to capital losses associated with the positive performance of the Company’s trust portfolio during those periods.

(18) Subsequent Events

As of August 31, 2013, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts decreased 2.4 percent, or approximately $21,246, from July 31, 2013.

50

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

The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2012 (the “2012 Form 10-K”) and in conjunction with our consolidated financial statements included in this report and in our 2012 Form 10-K.

This report contains forward-looking statements that are generally identifiable through the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “project,” “will” and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors included in Item 1A in our 2012 Form 10-K and in this report. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

Definitive Merger Agreement with Service Corporation International

On May 28, 2013, the Company entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Service Corporation International, a Texas corporation (“SCI”), and Rio Acquisition Corp., a Delaware corporation and a wholly-owned subsidiary of SCI (“Merger Sub”), providing for the merger of Merger Sub with and into the Company (the “Merger”), with the Company surviving the Merger as a wholly-owned subsidiary of SCI. The Merger Agreement was unanimously approved by the Company’s Board of Directors (the “Board”), acting upon the unanimous recommendation of a special committee of independent directors consisting of all directors other than Frank B. Stewart, Jr., Chairman of the Board, and Thomas M. Kitchen, President and Chief Executive Officer. On August 13, 2013, the Company’s shareholders approved the Merger Agreement.

At the effective time of the closing of the Merger (the “Effective Time”), each share of the Company’s Class A common stock and Class B common stock issued and outstanding immediately prior to the Effective Time will be converted automatically into the right to receive $13.25 in cash (“Per Share Purchase Price”), without interest. In the event the Effective Time occurs after December 30, 2013 (the “Outside Date”), shareholders will be entitled to receive additional per share consideration in the amount of $0.002178 for each day during the period beginning on the day following the Outside Date and ending on the Effective Time, subject to tolling under certain circumstances specified in the Merger Agreement (together with the Per Share Purchase Price, the “Per Share Merger Consideration”).

Company stock options and restricted shares will generally be cancelled upon completion of the Merger in exchange for the Per Share Merger Consideration or, in the case of stock options, the excess, if any, of the Per Share Merger Consideration over the exercise price of the option.

Consummation of the Merger is subject to customary closing conditions, including without limitation: (i) the expiration or termination of the waiting period applicable to the Merger under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended (“HSR Act”) or of any agreement with the Federal Trade Commission (“FTC”) not to complete the Merger, and (ii) the absence of any law, injunction, judgment or ruling that prohibits, restrains or makes illegal the consummation of the Merger (each, a “Restraint”). Moreover, each party’s obligation to consummate the Merger is subject to certain other conditions, including without limitation: (i) the accuracy of the other party’s representations and warranties contained in the Merger Agreement (subject to materiality qualifiers) and (ii) the other party’s performance of its obligations under the Merger Agreement in all material respects. In addition, the obligation of SCI and Merger Sub to consummate the Merger is subject to the absence, since the date of the Merger Agreement, of any event, circumstance, change or effect that, individually or in the aggregate, has had or is reasonably likely to have a Material Adverse Effect (as defined in the Merger Agreement) on the Company.

On July 17, 2013, the Company announced that it and SCI had received second requests from the FTC, which extend the waiting period under the HSR Act until the 30th day after substantial compliance by SCI and the Company with the requests, unless that period is extended voluntarily by the parties or terminated sooner by the FTC. Subsequently, the Company and SCI have entered into an agreement with the FTC not to consummate the

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merger prior to 90 days after both SCI and Stewart certify substantial compliance with the second request, or December 13, 2013, whichever is earlier. The parties may close the merger sooner if the FTC grants early termination, closes its investigation or accepts for public comment a proposed consent agreement settling the matter. The Company is preparing responses to the second request and continues to anticipate that the transaction will close in late calendar year 2013 or early 2014.

The Company has made customary representations and warranties and covenants in the Merger Agreement, including, among other things, covenants that: (i) the Company will conduct its business in the ordinary course consistent with past practice during the interim period between the execution of the Merger Agreement and the Effective Time and (ii) the Company will not engage in certain kinds of transactions during such period without the consent of SCI.

The Merger Agreement contains certain termination rights for the Company and SCI. In connection with the termination of the Merger Agreement under specified circumstances, SCI may be required to pay the Company a termination fee of $75.0 million (including in the event the Merger Agreement is terminated as a result of (i) a failure to obtain HSR approval by February 28, 2014 or (ii) the failure of SCI to close once closing conditions are satisfied, each subject to certain conditions). Either party may terminate the Merger Agreement if the Merger is not completed on or before December 30, 2013, subject to extension by either party for an additional 60 days if HSR approvals have not yet been obtained but are reasonably likely to be obtained.

SCI has obtained a financing commitment from JPMorgan Chase Bank, N.A. and others to fund the transactions contemplated by the Merger Agreement, refinance certain outstanding indebtedness of the Company and finance the payment of related fees, expenses, interest and premiums. The Merger Agreement requires SCI to use its reasonable best efforts to obtain the financing on the terms described in such financing commitment. The obligation of SCI and Merger Sub to close the Merger is not conditioned upon financing.

The Company estimates that the total amount of funds required to complete the Merger and pay related fees and expenses will be approximately $1.4 billion (excluding the Company’s $200 million senior notes which are expected to remain outstanding upon closing of the Merger). As part of its permanent financing for the Merger, on July 1, 2013, SCI issued $425 million aggregate principal amount of 5.375% Senior Notes due 2022 in a private offering. The net proceeds of this notes offering of approximately $414.7 million are being held by SCI in an escrow account pending the closing of the Merger. Also, on July 2, 2013, SCI entered into a new credit facility consisting of a $500 million revolving credit facility (in replacement of SCI’s existing revolving credit facility) and a term loan of up to $600 million; the term loan is expected to be drawn contemporaneously with the closing of the Merger.

The Merger Agreement has been filed as an exhibit to this Form 10-Q to provide information regarding the terms of the agreement and is not intended to modify or supplement any factual disclosure about the Company in its public reports filed with the Securities and Exchange Commission (the “SEC”). In particular, the Merger Agreement and related summary are not intended to be, and should not be relied upon as, disclosures regarding any facts and circumstances relating to the Company or SCI. The representations and warranties have been negotiated with the principal purpose of establishing the circumstances in which a party may have the right not to close the Merger if the representations and warranties of the other party prove to be untrue due to a change in circumstance or otherwise, and allocate risk between the parties, rather than establishing matters of fact.

The foregoing description of the Merger Agreement is not complete and is qualified in its entirety by reference to the Merger Agreement, which is filed as Exhibit 2.1 hereto and is incorporated herein by reference.

As a result of the proposed merger, holders of the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016 will have the right to convert their notes, subject to the terms and conditions of the indentures governing these notes. For additional information, see “Liquidity and Capital Resources – Senior Convertible Notes.”

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Voting Agreement

Concurrently with the execution of the Merger Agreement, Frank B. Stewart, Jr., Chairman of the Company’s Board, and his spouse (collectively, the “Shareholder”) entered into a Voting and Support Agreement (the “Voting Agreement”) with SCI pursuant to which the Shareholder voted shares of Class A and Class B common stock representing 29.99 percent of the aggregate voting power of the Company’s voting stock in favor of the Merger Agreement and the Merger. The Shareholder has also agreed to certain restrictions on dispositions of shares of Class A and Class B common stock covered by the Voting Agreement. The Voting Agreement will terminate upon the earlier of (i) the Merger, (ii) the termination of the Merger Agreement, (iii) the mutual written consent of the Shareholder and SCI and (iv) any amendment, modification or waiver of the terms of the Merger Agreement reducing or changing the form of consideration, creating any conditions to the consummation of the Merger or adversely affecting the shareholders of the Company in any material respect without the prior written consent of the Shareholder.

The Voting Agreement is included as Exhibit 99.1 to this report, and incorporated herein by reference. The foregoing description of the Voting Agreement does not purport to be complete and is qualified in its entirety by reference to the full text of the Voting Agreement.

Overview

General

We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. As of July 31, 2013, we owned and operated 217 funeral homes and 141 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral, cremation and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges on installment sales contracts and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2012 Form 10-K.

Financial Summary

For the three months ended July 31, 2013, we reported net earnings and earnings from continuing operations of $8.3 million, or $.10 per diluted share, compared to net earnings and earnings from continuing operations of $9.6 million and $9.9 million, respectively, or $.11 per diluted share, for the same period of 2012. Total revenue was $127.1 million for the third quarter of 2013, compared to $129.3 million for the third quarter of 2012, and total gross profit was $23.2 million for the three months ended July 31, 2013, compared to $27.0 million for the same period of fiscal year 2012. During the three months ended July 31, 2013, we incurred $3.1 million in merger-related costs which consist primarily of legal fees, and we recognized a $3.0 million, net one-time non-cash benefit as a result of the revaluation of our Puerto Rican deferred tax assets due to a change in tax legislation.

We produced $68.7 million in funeral revenue during the third quarter of 2013, a $0.2 million decline from the third quarter of 2012. This decline is primarily attributable to a 0.4 percent decrease in same-store funeral services performed, coupled with a 0.7 percent decrease in same-store average revenue per funeral service. During the third quarter of 2013, we experienced a $0.7 million increase in revenue related to trust activities. Net preneed funeral sales decreased 2.0 percent during the three months ended July 31, 2013, compared to the same period of fiscal year 2012. Preneed funeral sales are deferred until the underlying contracts are performed and have no impact on current revenue.

We generated $58.4 million in cemetery revenue for the third quarter of 2013, a $2.0 million decline from the corresponding period of 2012. During the third quarter of fiscal year 2013, we experienced a $3.0 million decline in revenue due to the timing of revenue recognition for both construction of cemetery projects and the payments for cemetery property sales. Due to the nature of these items, revenue recognition does not happen evenly throughout the year. As construction occurs and additional payments are received, these contracts will be

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recognized as revenue in the future. In addition, we experienced a strong third quarter in fiscal year 2012 of revenue recognized from these items. These results were partially offset by a $1.1 million increase in revenue related to trust activities and a $0.9 million improvement in merchandise delivered and services performed.

Cemetery gross profit decreased $2.0 million, or 17.9 percent, to $9.2 million, and cemetery gross profit margin declined 270 basis points to 15.8 percent compared to the third quarter of 2012. The decline is primarily due to the decrease in revenue, as previously mentioned. Funeral gross profit decreased $1.8 million, or 11.4 percent, to $14.0 million, and funeral gross profit margin declined 250 basis points to 20.4 percent compared to the third quarter of 2012. During the third quarter of 2013, we continued to refine our sales compensation plan, which resulted in an increase of preneed selling costs of $1.5 million. This negatively affected our third quarter 2013 results, because preneed selling costs are expensed as incurred, while preneed funeral sales are deferred until they are performed. We are continuing to refine our sales compensation plan to seek the appropriate balance between preneed production and current period expenses.

During the nine months ended July 31, 2013, we maintained our strong balance sheet, while generating the highest nine month revenue and gross profit in five years. For the first nine months of fiscal year 2013, total revenue increased to $396.6 million, compared to $386.7 million for the prior year period, and total gross profit increased to $87.5 million, compared to $81.5 million for the same period of last year. We reported net earnings and earnings from continuing operations of $35.6 million, or $.41 per diluted share, for the nine months ended July 31, 2013, compared to net earnings of $26.9 million, or $.31 per diluted share, and earnings from continuing operations of $28.3 million, or $.32 per diluted share, for the same period of fiscal year 2012. During the nine months ended July 31, 2013, we incurred $3.7 million in merger-related costs which consist primarily of financial advisory and legal fees. Our earnings from continuing operations for the first nine months of fiscal year 2012 included a $2.9 million charge due to the organizational restructuring and a separate reduction in workforce. In addition, during the second quarter of 2012, we decided to hold one of our e-commerce businesses for sale resulting in a net loss from discontinued operations of $1.4 million.

We generated $222.0 million in funeral revenue during the first nine months of fiscal year 2013, an $8.3 million, or 3.9 percent, increase compared to the first nine months of fiscal year 2012. This increase is primarily attributable to a 4.3 percent improvement in same-store funeral services performed, coupled with a $1.1 million improvement in revenue related to trust activities. These increases were partially offset by a 0.4 percent decrease in same-store average revenue per funeral service. Net preneed funeral sales declined 5.2 percent during the first nine months of fiscal year 2013, compared to the first nine months of fiscal year 2012. As part of the integration of our operations and sales teams, we revised our organizational structure and compensation packages. These actions negatively impacted preneed funeral sales and cemetery property sales for the first nine months of fiscal year 2013. We anticipated these changes would create challenges, and are taking the necessary steps to address them. We have been recruiting, hiring and training new counselors. We continue to believe that the new structure will improve customer service and increase preneed sales over time. Preneed funeral sales are deferred until the underlying contracts are performed and have no impact on current revenue.

Cemetery revenue improved $1.6 million, or 0.9 percent, to $174.6 million for the nine months ended July 31, 2013. We produced a $4.9 million increase in revenue related to trust activities and a $3.2 million improvement in merchandise delivered and services performed. In addition, we generated a $3.1 million increase in revenue recognized for cemetery property sales for which the down payment required for revenue recognition was received and a $1.6 million increase in revenue recognized from the construction of various cemetery projects. These increases were partially offset by a $1.3 million decline in finance charges. Cemetery property sales declined $9.3 million, or 11.9 percent, compared to the first nine months of fiscal year 2012, primarily due to the revised sales initiatives, as previously discussed.

Cemetery gross profit increased $5.3 million, or 18.6 percent, to $33.8 million, and cemetery gross profit margin improved 290 basis points to 19.4 percent for the first nine months of fiscal year 2013. The increase in gross profit is primarily due to the reduction in property and related selling costs, coupled with the improvement in revenue, as previously noted. Funeral gross profit increased $0.7 million, or 1.3 percent, to $53.7 million, primarily due to the $8.3 million improvement in revenue, as previously noted. Funeral gross profit margin declined 60 basis points to 24.2 percent compared to the same period of 2012, due in part to an increase in preneed selling costs, as previously discussed.

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Cash flow provided by operating activities for the first nine months of fiscal year 2013 was $68.4 million compared to $58.7 million for the same period in fiscal year 2012. For the first nine months of fiscal year 2013, we generated an $8.7 million improvement in net earnings. In addition, we experienced a change in working capital, partly driven by a $4.5 million decline in spending on cemetery development projects and a $2.1 million improvement in cash flow from receivables due in part to the decline in preneed funeral and cemetery property sales, which are typically financed. These changes were partially offset by the timing of trust withdrawals and deposits, coupled with additional net tax payments in the first nine months of fiscal year 2013.

In fiscal year 2010, we began a program of developing cremation gardens and other cremation projects in our cemeteries. We have successfully completed 41 cremation projects, and we currently have 6 projects either under construction or expected to begin construction this fiscal year. For the nine months ended July 31, 2013, we have spent approximately $3.0 million in our cremation inventory development projects, compared to approximately $7.2 million during the first nine months of fiscal year 2012.

Supplemental Trust Portfolio Information

During the third quarter of fiscal year 2013, our preneed funeral and cemetery merchandise and services trusts (“preneed trusts”) experienced a three month total return, including both realized and unrealized gains and losses, of 0.4 percent. Our cemetery perpetual care trusts experienced a total decline, including both realized and unrealized gains and losses, of 0.9 percent. As of July 31, 2013, the fair market value of our preneed trusts and our cemetery perpetual care trusts was $901.3 million, an improvement of 5.3 percent, or $45.1 million, from October 31, 2012.

As of July 31, 2013 and October 31, 2012, the fair market value of the investments in our preneed trusts were $42.1 million and $68.5 million, respectively, lower than our cost basis. In our cemetery perpetual care trusts, as of July 31, 2013 and October 31, 2012, the fair market value of the investments were $6.1 million and $14.6 million, respectively, lower than our cost basis. The cost basis of our trust assets reflect the price we originally paid for the securities, reduced for other-than-temporary impairments we have recorded pursuant to GAAP.

The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of July 31, 2013 and October 31, 2012, we had $204.0 million and $187.1 million, respectively, in trust earnings, net of losses that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.

As of August 31, 2013, the fair market value of our preneed trusts and our cemetery perpetual care trusts declined 2.4 percent, or approximately $21.2 million from July 31, 2013.

The following table presents the material sectors in which our trust portfolio is invested and the percentage of each sector to the total trust portfolio as of July 31, 2013 (in millions):

	Preneed Trusts					Cemetery Perpetual Care Trusts
Sector	Fair Market Value		Percentage of Portfolio			Fair Market Value		Percentage of Portfolio
Cash and mutual funds	$	280.0		44.7	%	$	153.1		55.7	%
Energy	$	65.7		10.5	%	$	8.2		3.0	%
Information Technology	$	65.1		10.4	%	$	13.7		5.0	%
Financial Services	$	56.8		9.1	%	$	36.2		13.2	%

Issuer specific investments in the energy sector represent $65.7 million of the fair market value of our preneed trust portfolio as of July 31, 2013, of which 62 percent related to investments in master limited partnerships, 36 percent related to investments in common stock and 2 percent related to fixed-income securities. Issuer specific investments in the energy sector represent $8.2 million of the fair market value of our cemetery perpetual care trust portfolio as of July 31, 2013, of which 66 percent related to investments in common stock and 34 percent related to fixed-income securities.

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Issuer specific investments in the information technology sector represent $65.1 million of the fair market value of our preneed trust portfolio as of July 31, 2013, of which 98 percent related to investments in common stock and 2 percent related to fixed-income securities. Issuer specific investments in the information technology sector represent $13.7 million of the fair market value of our cemetery perpetual care trust portfolio as of July 31, 2013, of which 92 percent related to investments in common stock and 8 percent related to fixed-income securities.

Issuer specific investments in the financial services sector represent $56.8 million of the fair market value of our preneed trust portfolio as of July 31, 2013, of which 51 percent related to investments in preferred stock, 37 percent related to investments in common stock and 12 percent related to fixed-income securities. Issuer specific investments in the financial services sector represented $36.2 million of the fair market value of our cemetery perpetual care trust portfolio as of July 31, 2013, of which 89 percent related to fixed-income securities and 11 percent related to investments in common stock.

The following table presents the material sector in which our trust portfolio currently has unrealized losses and the percentage of the sector’s unrealized loss to the total unrealized losses as of July 31, 2013 (in millions):

	Preneed Trusts					Cemetery Perpetual Care Trusts
Sector	Unrealized Losses		Percentage of Total Unrealized Losses			Unrealized Losses		Percentage of Total Unrealized Losses
Information Technology	$	19.4		30	%	$	5.2		27	%

Each quarter we perform a separate analysis to determine whether our preneed contracts are in a loss position and whether a charge to earnings to record a liability for any expected loss is required. No charge has ever been required. For additional information, see Note 2(m) to the consolidated financial statements included in Item 8. and “Overview of Critical Accounting Policies” in the 2012 Form 10-K.

In states where we withdraw and recognize capital gains in our cemetery perpetual care trusts, if we realize subsequent net capital losses (i.e., losses in excess of capital gains in the trust) and the fair market value of the trust assets are less than the aggregate amounts required to be contributed to the trust, some states may require us to make cash deposits to the trusts or may require us to stop withdrawing earnings until future earnings restore the initial corpus. As of July 31, 2013 and October 31, 2012, we had a liability recorded for the estimated probable funding obligation to restore the net realized losses of $12.0 million. During the first quarter of fiscal year 2012, we increased the estimated probable funding obligation to restore the net realized losses in the cemetery perpetual care trust by $0.6 million. The additional funding in fiscal year 2012 was primarily related to the bankruptcy of Eastman Kodak.

For additional information regarding our preneed trusts and our cemetery perpetual care trusts, including further information on the estimated probable funding obligation, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in Item 1. herein.

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

	Funeral and Cemetery Merchandise and Services Trusts(1)			Cemetery Perpetual Care Trusts(1)
For the three months ended July 31, 2013		0.4	%		(0.9	)%
For the last twelve months ended July 31, 2013		13.3	%		10.8	%
For the last three years ended July 31, 2013		10.8	%		10.4	%
For the last five years ended July 31, 2013		6.7	%		8.2	%

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

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Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2012 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2012 Form 10-K.

Results of Operations

The following discussion segregates our financial results into our various segments, grouped by our funeral and cemetery operations. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein.

Three Months Ended July 31, 2013 Compared to Three Months Ended July 31, 2012

Funeral Operations

	Three Months Ended July 31,
	2013		2012		Increase (Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	64.6	$	65.5	$	(.9	)
Corporate Trust Management(1)		4.1		3.4		.7
Total Funeral Revenue	$	68.7	$	68.9	$	(.2	)
Funeral Costs:
Funeral Home Locations	$	54.5	$	52.9	$	1.6
Corporate Trust Management(1)		.2		.2		—
Total Funeral Costs	$	54.7	$	53.1	$	1.6
Funeral Gross Profit:
Funeral Home Locations	$	10.1	$	12.6	$	(2.5	)
Corporate Trust Management(1)		3.9		3.2		.7
Total Funeral Gross Profit	$	14.0	$	15.8	$	(1.8	)

Same-Store Analysis for the Three Months Ended July 31, 2013 and 2012

Change in Average Revenue Per Funeral Service	Change in Same-Store Funeral Services	Same-Store Cremation Rate
		2013	2012
(0.7)% (1)	(0.4)%	44.9%	43.8%

⁽¹⁾  Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended July 31, 2013 and 2012 were $1.9 million and $1.3 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended July 31, 2013 and 2012 were $2.2 million and $2.1 million, respectively.

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We generated $68.7 million in funeral revenue during the third quarter of 2013, a $0.2 million, or 0.3 percent, decline from the third quarter of 2012. This decrease is primarily attributable to a 0.4 percent decline in same-store funeral services performed, coupled with a 0.7 percent decrease in same-store average revenue per funeral service. These decreases were partially offset by a $0.7 million increase in revenue related to trust activities.

Funeral gross profit decreased $1.8 million, or 11.4 percent, to $14.0 million for the third quarter of 2013 compared to $15.8 million for the same period of 2012. Funeral gross profit margin declined 250 basis points to 20.4 percent for the third quarter of 2013 from 22.9 percent for the third quarter of 2012. During the third quarter of 2013, we continued to refine our sales compensation plan, which resulted in an increase of preneed selling costs of $1.5 million. This negatively affected our third quarter 2013 results, because preneed selling costs are expensed as incurred, while preneed funeral sales are deferred until they are performed. We are continuing to refine our sales compensation plan to seek the appropriate balance preneed production and current period expenses.

Cemetery Operations

	Three Months Ended July 31,
	2013		2012		Increase (Decrease)
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	55.4	$	57.9	$	(2.5	)
Corporate Trust Management(1)		3.0		2.5		.5
Total Cemetery Revenue	$	58.4	$	60.4	$	(2.0	)
Cemetery Costs:
Cemetery Locations	$	49.0	$	48.9	$	.1
Corporate Trust Management(1)		.2		.3		(.1	)
Total Cemetery Costs	$	49.2	$	49.2	$	—
Cemetery Gross Profit:
Cemetery Locations	$	6.4	$	9.0	$	(2.6	)
Corporate Trust Management(1)		2.8		2.2		.6
Total Cemetery Gross Profit	$	9.2	$	11.2	$	(2.0	)

⁽¹⁾  Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended July 31, 2013 and 2012 were $2.2 million and $1.6 million, respectively, and cemetery trust earnings included in cemetery revenue for the three months ended July 31, 2013 and 2012 were $0.8 million and $0.9 million, respectively. Perpetual care trust earnings were $2.4 million and $1.8 million for the three months ended July 31, 2013 and 2012, respectively, and are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

Cemetery revenue decreased $2.0 million, or 3.3 percent, to $58.4 million for the third quarter of 2013, compared to $60.4 million during the third quarter of 2012. During the third quarter of fiscal year 2013, we

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experienced a $3.0 million decline in revenue due to the timing of revenue recognition for both construction of cemetery projects and the payments for cemetery property sales. Due to the nature of these items, revenue recognition does not happen evenly throughout the year. As construction occurs and additional payments are received, these contracts will be recognized as revenue in the future. In addition, we experienced a strong third quarter in fiscal year 2012 of revenue recognized from these items. These results were partially offset by a $1.1 million increase in revenue related to trust activities, of which $0.6 million of the increase related to cemetery perpetual care trust earnings, and a $0.9 million improvement in merchandise delivered and services performed.

Cemetery property sales were essentially flat compared to the third quarter of 2012. These results for the third quarter of fiscal year 2013 are the strongest quarter of property sales since the implementation of the sales initiatives earlier this year, due primarily to strong sales throughout the month of July.

Cemetery gross profit decreased $2.0 million, or 17.9 percent, to $9.2 million for the third quarter of 2013, compared to $11.2 million for the same period of 2012. Cemetery gross profit margin declined 270 basis points to 15.8 percent for the third quarter of 2013 from 18.5 percent for the same period of 2012. The decline is due primarily to the decrease in revenue, as previously noted.

Other

Corporate general and administrative expenses improved $0.9 million to $6.4 million for the third quarter of fiscal year 2013. We reduced our accrual for annual incentive compensation based on third quarter results.

During the three months ended July 31, 2013, we incurred $3.1 million in merger-related costs which consist primarily of legal fees.

The effective tax rate for continuing operations for the quarter ended July 31, 2013 was 0.6 percent compared to 27.9 percent for the same period in 2012. The reduced rate during the third quarter of 2013 is primarily due to a change in Puerto Rican tax legislation that increased the top tax rate for businesses from 30 percent to 39 percent. This new tax legislation reverses the tax legislation passed in January 2011. As a result, we revalued our Puerto Rican deferred tax assets, resulting in a one-time non-cash benefit of $3.0 million, net. During the third quarter of the prior year, we recorded a tax benefit of $1.1 million resulting from a reduction in the valuation allowance for capital losses, associated with the improved performance of our trust portfolio. We did not have an adjustment to the valuation allowance during the third quarter of 2013. For additional information, see Note 17 to the condensed consolidated financial statements included in Item 1. herein.

Preneed Sales into the Backlog

Net preneed funeral sales decreased 2.0 percent during the third quarter of 2013 compared to the third quarter of 2012. Preneed funeral sales are deferred until the underlying contracts are performed and have no impact on current revenue.

The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented herein. We had $40.4 million in net preneed funeral and cemetery merchandise and services sales (including $21.1 million related to insurance-funded preneed funeral contracts) during the third quarter of 2013 to be recognized in the future as these prepaid products and services are actually delivered, compared to net preneed funeral and cemetery merchandise and services sales of $41.0 million (including $21.3 million related to insurance-funded preneed funeral contracts) for the corresponding period in fiscal year 2012. Insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in the condensed consolidated balance sheet.

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Nine Months Ended July 31, 2013 Compared to Nine Months Ended July 31, 2012

Funeral Operations

	Nine Months Ended July 31,
	2013		2012		Increase (Decrease)
			(In millions)
Funeral Revenue:
Funeral Home Locations	$	209.2	$	202.0	$	7.2
Corporate Trust Management(1)		12.8		11.7		1.1
Total Funeral Revenue	$	222.0	$	213.7	$	8.3
Funeral Costs:
Funeral Home Locations	$	167.6	$	160.0	$	7.6
Corporate Trust Management(1)		.7		.7		—
Total Funeral Costs	$	168.3	$	160.7	$	7.6
Funeral Gross Profit:
Funeral Home Locations	$	41.6	$	42.0	$	(.4	)
Corporate Trust Management(1)		12.1		11.0		1.1
Total Funeral Gross Profit	$	53.7	$	53.0	$	.7

Same-Store Analysis for the Nine Months Ended July 31, 2013 and 2012

Change in Average Revenue Per Funeral Service	Change in Same-Store Funeral Services	Same-Store Cremation Rate
		2013	2012
(0.4)% (1)	4.3%	43.8%	43.2%

⁽¹⁾  Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the nine months ended July 31, 2013 and 2012 were $5.3 million and $4.0 million, respectively. Funeral trust earnings recognized in funeral revenue for the nine months ended July 31, 2013 and 2012 were $7.5 million and $7.7 million, respectively.

We generated $222.0 million in funeral revenue during the nine months ended July 31, 2013, an $8.3 million, or 3.9 percent, increase from the corresponding period of 2012. This improvement is primarily attributable to a 4.3 percent, or 1,736 event, increase in same-store funeral services performed. During the first nine months of fiscal year 2013, we experienced a $1.1 million increase in revenue related to trust activities. These increases were partially offset by a 0.4 percent decrease in same-store average revenue per funeral service.

Funeral gross profit increased $0.7 million, or 1.3 percent, to $53.7 million for the nine months ended July 31, 2013. The increase is primarily due to the $8.3 million improvement in revenue, as previously noted. Funeral gross profit margin declined 60 basis points to 24.2 percent for the first nine months of fiscal year 2013 from 24.8 percent for the same period of 2012, due in part to an increase in preneed selling costs, as previously discussed.

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Cemetery Operations

	Nine Months Ended July 31,
	2013		2012		Increase (Decrease)
			(In millions)
Cemetery Revenue:
Cemetery Locations	$	166.0	$	165.8	$	.2
Corporate Trust Management(1)		8.6		7.2		1.4
Total Cemetery Revenue	$	174.6	$	173.0	$	1.6
Cemetery Costs:
Cemetery Locations	$	140.1	$	143.8	$	(3.7	)
Corporate Trust Management(1)		.7		.7		—
Total Cemetery Costs	$	140.8	$	144.5	$	(3.7	)
Cemetery Gross Profit:
Cemetery Locations	$	25.9	$	22.0	$	3.9
Corporate Trust Management(1)		7.9		6.5		1.4
Total Cemetery Gross Profit	$	33.8	$	28.5	$	5.3

⁽¹⁾  Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the nine months ended July 31, 2013 and 2012 were $6.1 million and $4.6 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the nine months ended July 31, 2013 and 2012 were $2.5 million and $2.6 million, respectively. Perpetual care trust earnings were $10.6 million and $7.1 million for the nine months ended July 31, 2013 and 2012, respectively, and are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.

Cemetery revenue increased $1.6 million, or 0.9 percent, to $174.6 million for the nine months ended July 31, 2013. We produced a $4.9 million increase in revenue related to trust activities, of which $3.5 million of the increase related to cemetery perpetual care trust earnings, and a $3.2 million improvement in merchandise delivered and services performed. In addition, we generated a $3.1 million increase in revenue recognized for cemetery property sales for which the down payment required for revenue recognition was received and a $1.6 million increase in revenue recognized from the construction of various cemetery projects. These increases were partially offset by a $1.3 million decline in finance charges.

Cemetery property sales declined $9.3 million, or 11.9 percent, compared to the first nine months of fiscal year 2012. As part of the integration of our operations and sales teams, we revised our organizational structure and compensation packages. These actions negatively impacted our preneed funeral sales and cemetery property sales for the first nine months of fiscal year 2013. We anticipated these changes would create challenges, and we are taking the necessary steps to address them. We have been recruiting, hiring and training new counselors. We continue to believe that the new structure will improve customer service and increase preneed sales over time.

Cemetery gross profit increased $5.3 million, or 18.6 percent, to $33.8 million for the nine months ended July 31, 2013. Cemetery gross profit margin improved 290 basis points to 19.4 percent for the first nine months of

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fiscal year 2013 from 16.5 percent for the same period of fiscal year 2012. The increase in gross profit is primarily due to a reduction in property and related selling costs, coupled with the improvement in revenue, as previously noted.

Other

During the nine months ended July 31, 2013, we incurred $3.7 million in merger-related costs which consist primarily of financial advisory and legal fees.

During the nine months ended July 31, 2012, we recorded $2.9 million in restructuring and other charges. These charges were primarily related to separation pay, termination benefits and a non-cash asset impairment due to the restructuring of the sales and operations of the organization, as well as a separate reduction in workforce associated with our ongoing continuous improvement initiative.

Other operating income, net increased $0.9 million compared to the first nine months of fiscal year 2012 primarily due to the sale of excess cemetery land during fiscal year 2013.

The effective tax rate for continuing operations for the nine months ended July 31, 2013 was 25.9 percent compared to 32.7 percent for the same period in fiscal year 2012. The reduced rate for the first nine months of fiscal year 2013 is primarily due to a change in Puerto Rican tax legislation that increased the top tax rate for businesses from 30 percent to 39 percent, as previously discussed. As a result, we revalued our Puerto Rican deferred tax assets, resulting in a one-time non-cash benefit of $3.0 million, net. In addition, we benefitted from a $2.7 million and a $2.1 million reduction in the valuation allowance for capital losses, associated with the positive performance of our trust portfolio for the nine months ended July 31, 2013 and 2012, respectively. For additional information, see Note 17 to the condensed consolidated financial statements included in Item 1. herein.

During the nine months ended July 31, 2012, we decided to hold one of our e-commerce businesses for sale. The results of operations and the related impairment resulted in a loss of $1.4 million in discontinued operations.

Cash and cash equivalents increased $30.9 million from October 31, 2012 to July 31, 2013 primarily due to cash provided by operations, offset by $20.9 million in additions to property, plant and equipment, $11.0 million of dividends paid and $10.4 million in purchases of marketable securities. Prepaid expenses increased $1.3 million from October 31, 2012 to July 31, 2013 primarily due to annual premiums paid in the first quarter of fiscal year 2013 for property, general liability and other insurance. Current deferred income taxes decreased $12.9 million and long-term deferred income taxes increased $7.2 million from October 31, 2012 to July 31, 2013 primarily due to a decrease in the Company’s net operating loss. Preneed funeral receivables and trust investments, preneed cemetery receivables and trust investments, cemetery perpetual care trust investments, deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus were all positively impacted by the improvement in the market value of our trust assets during the nine months ended July 31, 2013. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.

Current maturities of long-term debt increased $83.9 million and long-term debt decreased $80.7 million from October 31, 2012 to July 31, 2013, primarily due to the reclassification of our 3.125 percent senior convertible notes due July 2014. Accrued payroll decreased $3.6 million from October 31, 2012 to July 31, 2013 primarily due to fiscal year 2012 incentive compensation paid in the first quarter of 2013. Other current liabilities decreased $4.6 million from October 31, 2012 to July 31, 2013 primarily due to a decrease in dividends payable and the timing of our property taxes, which are typically paid at the end of the calendar year.

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Preneed Sales into the Backlog

Net preneed funeral sales decreased 5.2 percent during the first nine months of fiscal year 2013 compared to the same period in 2012, primarily due to the revised sales initiative, as previously discussed. Preneed funeral sales are deferred until the underlying contracts are performed and have no impact on current revenue.

The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented herein. We had $111.0 million in net preneed funeral and cemetery merchandise and services sales (including $57.5 million related to insurance-funded preneed funeral contracts) during the nine months ended July 31, 2013 to be recognized in the future as these prepaid products and services are actually delivered, compared to net preneed funeral and cemetery merchandise and services sales of $117.8 million (including $60.0 million related to insurance-funded preneed funeral contracts) for the corresponding period in fiscal year 2012. Insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in the condensed consolidated balance sheets.

Liquidity and Capital Resources

General

We generate cash in our operations primarily from at-need sales, preneed sales that turn at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn at-need, monies collected on preneed sales that are not required to be placed in trust and items such as cemetery perpetual care trust earnings and finance charges. Over the last five years, we have generated more than $60 million each year in cash flow from operations. We have historically satisfied our working capital requirements with cash flows from operations. We believe that our current level of cash on hand, projected cash flows from operations and available capacity under our $150.0 million senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future.

As of July 31, 2013, we had no amounts drawn on the $150.0 million senior secured revolving credit facility, which matures in 2016, and our availability under the facility, after giving consideration to $0.8 million outstanding letters of credit and the $18.8 million Florida bond, was $130.4 million. In addition, we also have outstanding $131.5 million principal amount in senior convertible notes as of July 31, 2013, of which $86.4 million is scheduled to mature in July 2014 and $45.1 million is scheduled to mature in 2016. We have outstanding $200.0 million principal amount in senior notes set to mature in 2019. See the table “Contractual Obligations and Commercial Commitments,” Note 14 to the consolidated financial statements included in our 2012 Form 10-K and Note 16 to the condensed consolidated financial statements included in this report for further information on our long-term debt obligations.

Beginning in the second quarter of fiscal year 2012, we increased our quarterly cash dividend on our Class A and B common stock from three and one-half cents per share to four cents per share resulting in a 14 percent increase in our annual dividend rate to $.16 per share. In April 2013, we increased our quarterly cash dividend on our Class A and B common stock from four cents per share to four and one-half cents per share resulting in a 12.5 percent increase in our annual dividend rate to $.18 per share. Dividends paid amounted to $11.0 million for the nine months ended July 31, 2013 compared to $10.0 million during the same period in fiscal year 2012. The declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. Under our $125.0 million stock repurchase program, we purchased 0.2 million shares of our Class A common stock for approximately $1.8 million during the nine months ended July 31, 2013.

We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to make acquisitions of death care businesses, pay dividends, repurchase debt and stock, invest in our strategic initiatives and construct funeral homes on cemeteries of unaffiliated third parties or on our own strategic locations are all attractive options. We are continuing to invest in further improving our business processes and continue to look at ways to improve our organization and cost structure. The merger agreement with SCI limits our ability to engage in some of these activities without the prior written consent of SCI, which cannot be unreasonably withheld, conditioned or delayed.

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In fiscal year 2010, we began a program of developing cremation gardens and other cremation projects in our cemeteries. We have successfully completed 41 cremation projects, and we currently have 6 projects either under construction or expected to begin construction this fiscal year. During the nine months ended July 31, 2013, we spent approximately $3.0 million to develop our cremation inventory projects, compared to approximately $7.2 million during the first nine months of fiscal year 2012.

We believe that growing our organization through acquisitions remains a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure. We regularly review acquisition and other strategic opportunities, which may require us to draw on our senior secured revolving credit facility or pursue additional debt or equity financing. The merger agreement with SCI limits our ability to acquire other businesses without the prior written consent of SCI, which cannot be unreasonably withheld, conditioned or delayed.

We are continuing to review all of our tax accounting methods to determine opportunities to further improve our current tax position. At this time, we cannot predict with certainty what, if any, reductions in future tax payments we will obtain. However, we currently do not expect that these potential reductions in future tax payments, if obtained, will be as substantial as those obtained in fiscal years 2009 through 2012, which resulted in a combination of refunds and reductions of federal income tax payments totaling in excess of $100 million. Based on the currently approved changes, we expect to have federal net operating losses available in fiscal year 2013 to offset a portion of federal income taxes. For fiscal years 2013 and 2014, we expect our federal cash tax payments to be approximately $5 million to $10 million above fiscal year 2012 amounts.

Cash Flow

Cash flow provided by operating activities for the first nine months of fiscal year 2013 was $68.4 million compared to $58.7 million for the same period of last year. For the first nine months of fiscal year 2013, we generated an $8.7 million improvement in net earnings. In addition, we experienced a change in working capital, partly driven by a $4.5 million decline in spending on cemetery development projects and a $2.1 million improvement in cash flow from receivables due in part to the decline in preneed funeral and cemetery property sales, which are typically financed. These changes were partially offset by the timing of trust withdrawals and deposits, coupled with additional net tax payments in the first nine months of fiscal year 2013.

Our investing activities resulted in a net cash outflow of $28.1 million for the nine months ended July 31, 2013, compared to a net cash outflow of $18.7 million for the comparable period in 2012. The change is primarily due to an $8.1 million net change related to purchases of marketable securities and increased capital spending offset by decreased acquisition spending during the nine months ended July 31, 2013. For the nine months ended July 31, 2013, capital expenditures amounted to $20.9 million, which included $14.3 million for maintenance capital expenditures, $2.9 million for the purchase of land and a building for an existing business that we previously leased, $3.3 million for the construction of new funeral homes and $0.4 million related to the implementation of new business systems. For the nine months ended July 31, 2012, capital expenditures were $16.2 million, which included $11.4 million for maintenance capital expenditures, $1.7 million for the construction of new funeral homes, $1.3 million related to the implementation of new business systems and $1.8 million for the purchase of land and a new building for an existing business.

Our financing activities resulted in a net cash outflow of $9.4 million for the nine months ended July 31, 2013, compared to a net cash outflow of $27.6 million for the comparable period in 2012. The change is primarily due to decreased stock repurchases under our stock repurchase program in fiscal year 2013. Stock repurchases during the nine months ended July 31, 2013 amounted to $1.8 million compared to $19.1 million in the same period of fiscal year 2012. Dividends paid increased from $10.0 million in the first nine months of fiscal year 2012 to $11.0 million in the first nine months of fiscal year 2013. In the second quarter of fiscal year 2013, we increased our quarterly cash dividend from four cents per share to four and one-half cents per share.

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Contractual Obligations and Commercial Commitments

We have contractual obligations requiring future cash payments under existing contractual arrangements. The following table details our known future cash payments (in millions) related to various contractual obligations as of July 31, 2013:

	Payments Due by Period
Contractual Obligations	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Long-term debt obligations(1)	$	331.6	$	86.4	$	45.1	$	—	$	200.1
Interest on long-term debt(2)		85.4		17.2		29.1		26.0		13.1
Operating and capital lease obligations(3)		32.5		1.5		9.8		6.8		14.4
Non-competition and other agreements(4)		1.1		.1		.5		.4		.1
Total	$	450.6	$	105.2	$	84.5	$	33.2	$	227.7

⁽¹⁾  As of July 31, 2013, our outstanding long-term debt obligations amounted to $331.6 million, consisting of $86.4 million of 3.125 percent senior convertible notes due 2014, $45.1 million of 3.375 percent senior convertible notes due 2016, $200.0 million of 6.50 percent senior notes due 2019 and $0.1 million of other debt. There were no amounts drawn on the senior secured revolving credit facility.

⁽²⁾  Includes contractual interest payments for our senior convertible notes, senior notes and third-party debt.

⁽³⁾  Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 11 years, except for eight leases that expire between 2032 and 2039. This category also includes leases under our vehicle fleet leasing program. Our future minimum lease payments as of July 31, 2013 are $1.5 million, $5.4 million, $4.4 million, $3.7 million, $3.1 million and $14.4 million for the years ending October 31, 2013, 2014, 2015, 2016, 2017 and later years, respectively.

⁽⁴⁾  This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses.

The following table details our known potential or possible future cash payments related to the contingent obligations specified below (in millions) as of July 31, 2013.

	Expiration by Period
Contingent Obligations	Total		Less than 1 year		1 – 3 years		3 – 5 years		More than 5 years
Cemetery perpetual care trust funding obligations(1)	$	12.0	$	12.0	$	—	$	—	$	—
Long-term obligations related to uncertain tax positions(2)		1.5		—		—		—		1.5
	$	13.5	$	12.0	$	—	$	—	$	1.5

⁽¹⁾  In those states where we have withdrawn realized net capital gains in the past from our cemetery perpetual care trusts, regulators may seek replenishment of the subsequent realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $12.0 million as of July 31, 2013. As of July 31, 2013, we had net unrealized losses of $11.5 million in the trusts in these states that could be subject to a future funding obligation. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs. In those states where realized net capital gains have not been withdrawn, we believe it is reasonably possible but not probable that additional funding obligations may exist with an estimated amount of approximately $1.2 million; no charge has been recorded for these amounts as of July 31, 2013.

⁽²⁾  In accordance with the required accounting guidance on uncertain tax positions, as of July 31, 2013, we have recorded $1.5 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate the range of increase and decrease and the timing of any potential cash payments.

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Senior Notes

The $200.0 million aggregate principal amount of our 6.50 percent senior notes due 2019 are expected to remain outstanding upon the closing of the merger. On June 12, 2013, after receiving the required consent of the holders of the senior notes, the Company and trustee entered into a supplemental indenture amending the indenture for the senior notes to waive the requirement for the change of control offer upon completion of the merger and providing that the Company’s obligations to deliver quarterly and annual financial information and other reports to the trustee under the indenture will be satisfied by the delivery of SCI’s filings with the SEC for so long as SCI guarantees the senior notes. SCI has agreed to guarantee the senior notes promptly following completion of the merger. In consideration for the consents, Stewart agreed to pay to the holders of the senior notes that timely consented an aggregate cash payment equal to $2.50 per $1,000 principal amount of notes, of which half was paid promptly after the consent solicitation expiration (for which the Company has been reimbursed by SCI) and the other half will be paid, if at all, promptly after completion of the merger. The foregoing description of the supplemental indenture is not complete and is qualified in its entirety by reference to the supplemental indenture, which is filed as Exhibit 4.5 hereto and is incorporated herein by reference.

Senior Convertible Notes

As a result of the proposed merger with SCI, holders of our 3.125 percent senior convertible notes due 2014 (the “2014 notes”) and 3.375 percent senior convertible notes due 2016 (the “2016 notes”) will have the right to convert their notes, subject to the terms and conditions of the indentures governing these notes. As a result of the recent increase in our quarterly dividend rate on our Class A common stock to $0.045 per share, the conversion rate for the senior convertible notes was adjusted to 92.4564 effective April 11, 2013.

With respect to our senior convertible notes, a “Fundamental Change” as defined in the indentures for such notes, will occur at the effective time of the merger. Holders of the senior convertible notes will have the option to require us to purchase such notes, in whole or in part, on a date (the “Fundamental Change Purchase Date”) to be specified by us that is not less than 30 days and not more than 45 days after the effective date of the merger, for 100 percent of the principal amount plus accrued and unpaid interest to but excluding the Fundamental Change Purchase Date.

As provided in the indentures for such notes, we will provide notice to the holders of the notes and the trustee at least 15 days prior to the date that is anticipated to be the effective date of the merger. Holders of the notes may surrender them for conversion at any time beginning 15 days prior to the date that is anticipated to be the effective date of the merger, until the trading day prior to the Fundamental Change Purchase Date. If notice of conversion is received by the conversion agent during such time but prior to the effective date of the merger, the conversion rate will be 92.4564.

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If notice of conversion is received by the conversion agent from and including the effective date of the merger and prior to the close of business on the business day before the Fundamental Change Purchase Date, then the conversion rate for the notes will be increased to include a “make whole premium,” based on the date on which the closing occurs and the price paid per share in the merger, as provided in the table below, with dates and prices in between those in the table being determined by straight line interpolation:

Make Whole Premium

(Increase in Applicable Conversion Rate)

	Effective Time of Merger
Price Per Share in Merger	July 15, 2013	July 15, 2014
	2014 Notes
$12.23	4.5347	0.0000
14.68	2.0295	0.0000
	2016 Notes
$12.23	8.9523	6.8797
14.68	5.7564	4.0017

For example, assuming a closing date of December 30, 2013 and a price per share of $13.25, the conversion rate for the 2014 notes will increase to 94.3410 and the conversion rate for the 2016 notes will increase to 99.1851, and we will pay such holders an amount in cash equal to $1,250.02 per 2014 note and $1,314.20 per 2016 note (i.e., the adjusted applicable conversion rate multiplied by the amount of cash per share to be received by holders of Class A common stock in the merger).

The foregoing description of the senior convertible notes is qualified in its entirety by the terms of the indentures for the senior convertible notes, and holders of the senior convertible notes should refer to such indentures for a precise understanding of their terms.

In connection with the issuance of the senior convertible notes, we also purchased call options and sold warrants. The settlement of the call options is expected to offset any amounts more than $1,000 per note that we pay in connection with conversion of such notes. The settlement of the warrants is determined pursuant to the provisions in the confirmations for such warrants and is subject to change, but is estimated as of September 4, 2013 to be approximately $2.5 million to be paid by us to the counterparty.

Off-Balance Sheet Arrangements

Our off-balance sheet arrangements as of July 31, 2013 consist of the following items:

(1) the $18.8 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed above and in Note 20 to the consolidated financial statements in our 2012 Form 10-K; and

(2) the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our condensed consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements in our 2012 Form 10-K.

Recent Accounting Standards

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

Item 3. Quantitative and Qualitative Disclosures About Market Risk

Quantitative and qualitative disclosure about market risk is presented in Item 7A. in our 2012 Form 10-K, filed with the Securities and Exchange Commission (“SEC”) on December 17, 2012. There have been no material changes in the Company’s market risk from that disclosed in our 2012 Form 10-K. For a discussion of fair market value as of July 31, 2013 of investments in our trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein.

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Item 4. Controls and Procedures

Disclosure Controls and Procedures

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

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

Changes in Internal Control over Financial Reporting

There have been no changes in the Company’s internal control over financial reporting during the quarter ended July 31, 2013 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

See Note 7 to the condensed consolidated financial statements included in this report for information regarding pending litigation challenging the merger.

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

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

Item 1A. Risk Factors

Other than as set forth below, there have been no material changes from the risk factors previously disclosed in our 2012 Form 10-K.

Risks Related to the Proposed Transaction with Service Corporation International

The proposed merger of the Company with Service Corporation International is subject to certain closing conditions that, if not satisfied or waived, will result in the transaction not being completed, which may cause the price of the Company’s common stock to decline.

The proposed merger of the Company with Service Corporation International (“SCI”) is subject to customary conditions to closing, including the receipt of regulatory approvals, including expiration or termination of the applicable waiting period under the Hart-Scott-Rodino Antitrust Improvements Act of 1976. Many of the conditions to the closing of the transaction are outside of the control of the Company. If any condition to the closing of the transaction is not satisfied or, if permissible, waived, the transaction will not be completed.

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If the Company does not complete the transaction, the price of its Class A common stock may decline to the extent that the current market price reflects a market assumption that the transaction will be completed with each share of the Company’s common stock being converted into the right to receive $13.25 in cash. The Company will also be obligated to pay certain professional fees and related expenses in connection with the transaction, whether or not the transaction is completed. In addition, the Company has expended, and will continue to expend, significant management resources in an effort to complete the transaction. If the transaction is not completed, the Company will have incurred significant costs, including the diversion of management resources, for which it will have received little or no benefit.

Whether or not the transaction with Service Corporation International is completed, the announcement and pendency of the transaction could cause disruptions in the Company’s business, which could have an adverse effect on its business and financial results.

Whether or not the transaction with Service Corporation International is completed, the announcement and pendency of the transaction could cause disruptions in the Company’s business. Specifically:

• current and prospective employees may experience uncertainty about their future roles with the Company, which might adversely affect the Company’s ability to retain key managers and other employees or hire new employees; and

• the attention of management may be directed toward the completion of the transaction, rather than toward the execution of existing business plans.

Any delays in completing the merger may exacerbate the effects of these potential disruptions. In addition, the merger agreement restricts us from engaging in certain actions without SCI’s consent, which could prevent us from pursuing opportunities that may arise prior to completing the merger.

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

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

Issuer Purchases of Equity Securities

Period	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of publicly- announced plans or programs		Maximum approximate dollar value of shares that may yet be purchased under the plans or programs(1)
May 1, 2013 through May 31, 2013		—	$	—		—	$	14,619,197
June 1, 2013 through June 30, 2013		—	$	—		—	$	14,619,197
July 1, 2013 through July 31, 2013		—	$	—		—	$	14,619,197
Total		—	$	—		—	$	14,619,197

⁽¹⁾  We announced a $25.0 million stock repurchase program in September 2007, which was increased by $25.0 million in December 2007, June 2008, June 2011 and September 2011, resulting in a $125.0 million program. As of July 31, 2013, we had repurchased 16.2 million shares for $110.4 million at an average price of $6.83 per share since the inception of the program in 2007 and have $14.6 million remaining available under the program. The merger agreement prohibits us from purchasing additional shares of common stock under this program.

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Item 6. Exhibits

2.1	Agreement and Plan of Merger dated May 28, 2013, by and among Stewart Enterprises, Inc., Service Corporation International and Rio Acquisition Corp. (incorporated by reference to Exhibit 2.1 to the Company’s Current Report on Form 8-K filed May 29, 2013)
3.1	Amended and Restated Articles of Incorporation of the Company, as amended and restated as of April 3, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2008)
3.2	By-laws of the Company, as amended and restated as of December 13, 2012 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the year ended October 31, 2012)
4.1	See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock
4.2	Specimen of Class A common stock certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007, File No. 001-15449)
4.3	Third Amended and Restated Credit Agreement dated April 20, 2011 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 21, 2011)
4.4	Indenture dated as of April 18, 2011 by and among Stewart Enterprises, Inc., the Guarantors and U.S. Bank National Association, as Trustee, with respect to the 6.50 percent Senior Notes due 2019 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed April 19, 2011)
4.5	Supplemental Indenture dated as of June 12, 2013 to the Indenture dated as of April 18, 2011 by and among Stewart Enterprises, Inc., the Guarantors and U.S. Bank National Association, as Trustee, with respect to the 6.50 percent Senior Notes Due 2019 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 13, 2013)
4.6	Form of 6.50 percent Senior Note due 2019 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed April 19, 2011)
4.7	Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.125 percent Senior Convertible Notes due 2014 (including Form of 3.125 percent Senior Convertible Notes due 2014) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 27, 2007)
4.8	Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.375 percent Senior Convertible Notes due 2016 (including Form of 3.375 percent Senior Convertible Notes due 2016) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 27, 2007, File No. 001-15449)
10.1	Amendment No. 2 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Executive Retirement Plan effective January 28, 2011 (incorporated by reference to Exhibit 10.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2013)
10.2	Amendment No. 3 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan effective June 17, 2013
10.3	Amendment No. 1 to the Amended and Restated Stewart Enterprises, Inc. Retention Plan and Summary Plan Description effective August 15, 2013

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31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer, and Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer
99.1	Voting and Support Agreement dated May 28, 2013 by and among Service Corporation International, Frank B. Stewart, Jr. and Paulette D. Stewart (incorporated by reference to Exhibit 99.1 to the Company’s Current Report on Form 8-K filed May 29, 2013)
101	The following materials from Stewart Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statement of Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

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STEWART ENTERPRISES, INC.

AND SUBSIDIARIES

SIGNATURES

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

		STEWART ENTERPRISES, INC.
September 9, 2013	By:	/s/ Lewis J. Derbes, Jr.
		Lewis J. Derbes, Jr.
		Senior Vice President,
		Chief Financial Officer and Treasurer
September 9, 2013	By:	/s/ Angela M. Lacour
		Angela M. Lacour
		Senior Vice President of Finance
		and Chief Accounting Officer

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Exhibit Index

10.2	Amendment No. 3 to the Amended and Restated Stewart Enterprises, Inc. Supplemental Retirement and Deferred Compensation Plan effective June 17, 2013
10.3	Amendment No. 1 to the Amended and Restated Stewart Enterprises, Inc. Retention Plan and Summary Plan Description effective August 15, 2013
31.1	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer
31.2	Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer
32.1	Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas M. Kitchen, President and Chief Executive Officer, and Lewis J. Derbes, Jr., Senior Vice President, Chief Financial Officer and Treasurer
101	The following materials from Stewart Enterprises, Inc.’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2013 formatted in XBRL (Extensible Business Reporting Language): (i) Condensed Consolidated Statements of Earnings, (ii) Condensed Consolidated Statements of Comprehensive Income, (iii) Condensed Consolidated Balance Sheets, (iv) Condensed Consolidated Statement of Shareholders’ Equity, (v) Condensed Consolidated Statements of Cash Flows and (vi) Notes to Condensed Consolidated Financial Statements.

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