STEWART ENTERPRISES INC - 10-Q Quarterly Report

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 is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes X No

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 September 2, 2003, was 104,729,151 and 3,555,020, respectively.


		Page

Part I.	Financial Information
	Item 1. Financial Statements (Unaudited)
	Consolidated Statements of Earnings —
	Three Months Ended July 31, 2003 and 2002	3
	Consolidated Statements of Earnings —
	Nine Months Ended July 31, 2003 and 2002	4
	Consolidated Balance Sheets —
	July 31, 2003 and October 31, 2002	5
	Consolidated Statement of Shareholders’ Equity —
	Nine Months Ended July 31, 2003	7
	Consolidated Statements of Cash Flows —
	Nine Months Ended July 31, 2003 and 2002	8
	Notes to Consolidated Financial Statements	10
	Item 2. Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	37
	Item 3. Quantitative and Qualitative Disclosures
	About Market Risk	49
	Item 4. Controls and Procedures	51
Part II.	Other Information
	Item 1. Legal Proceedings	51
	Item 5. Other Information	51
	Item 6. Exhibits and Reports on Form 8-K	59
	Signatures	61

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


		Three Months Ended July 31,

		2003			2002

Revenues:
	Funeral	$	73,513		$	83,265
	Cemetery		55,266			60,989

			128,779			144,254

Costs and expenses:
	Funeral		56,964			64,428
	Cemetery		43,905			46,430

			100,869			110,858

	Gross profit		27,910			33,396
Corporate general and administrative expenses			7,381			4,516
Loss on assets held for sale (Note 7)			—			18,500

	Operating earnings		20,529			10,380
Interest expense			(13,249	)		(15,560	)
Loss on early extinguishment of debt (Note 8)			(11,289	)		—
Investment income			66			152
Other income, net			459			583

	Loss before income taxes		(3,484	)		(4,445	)
Income tax benefit			(985	)		(1,959	)

	Net loss	$	(2,499	)	$	(2,486	)

Net loss per common share:
	Basic	$	(.02	)	$	(.02	)

	Diluted	$	(.02	)	$	(.02	)

Weighted average common shares outstanding (in thousands):
	Basic		108,386			107,961

	Diluted		108,386			107,961

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


		Nine Months Ended July 31,

		2003			2002

Revenues:
	Funeral	$	226,044		$	269,196
	Cemetery		167,316			179,616

			393,360			448,812

Costs and expenses:
	Funeral		171,847			198,626
	Cemetery		129,324			135,675

			301,171			334,301

	Gross profit		92,189			114,511
Corporate general and administrative expenses			15,863			12,401
Loss on assets held for sale (Note 7)			—			18,500

	Operating earnings		76,326			83,610
Interest expense			(40,405	)		(48,389	)
Loss on early extinguishment of debt (Note 8)			(11,289	)		—
Investment income			237			374
Other income, net			2,234			1,173

	Earnings before income taxes		27,103			36,768
Income taxes			10,638			13,702

	Net earnings	$	16,465		$	23,066

Net earnings per common share:
	Basic	$	.15		$	.21

	Diluted	$	.15		$	.21

Weighted average common shares outstanding (in thousands):
	Basic		108,242			107,807

	Diluted		108,266			108,355

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


			July 31,		October 31,
ASSETS			2003		2002

Current assets:
	Cash and cash equivalent investments		$	19,370	$	28,190
	Marketable securities			2,289		2,588
	Receivables, net of allowances			68,391		86,827
	Inventories			43,178		41,666
	Prepaid expenses			3,422		2,815
	Deferred income taxes, net			1,764		1,348
	Assets held for sale			5,448		8,966

		Total current assets		143,862		172,400
Receivables due beyond one year, net of allowances				77,663		76,653
Prearranged receivables, net				1,216,392		1,200,914
Goodwill				491,323		491,323
Deferred charges				253,990		253,083
Cemetery property, at cost				387,691		388,065
Property and equipment, at cost:
	Land			44,555		44,402
	Buildings			308,782		304,125
	Equipment and other			159,949		154,389

				513,286		502,916
	Less accumulated depreciation			184,368		168,600

	Net property and equipment			328,918		334,316
Deferred income taxes, net				83,489		95,794
Other assets				1,243		3,036

		Total assets	$	2,984,571	$	3,015,584

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


					July 31,			October 31,
LIABILITIES AND SHAREHOLDERS' EQUITY					2003			2002

Current liabilities:
	Current maturities of long-term debt (Note 8)				$	16,745		$	9,396
	Accounts payable					8,243			11,113
	Accrued payroll					9,728			11,813
	Accrued insurance					18,280			14,764
	Accrued interest					3,189			14,642
	Other current liabilities					15,235			15,883
	Liabilities associated with assets held for sale					2,174			2,911

			Total current liabilities			73,594			80,522
Long-term debt, less current maturities (Note 8)						502,737			542,548
Prearranged deferred revenue, net						1,559,645			1,561,533
Other long-term liabilities						17,166			18,718

			Total liabilities			2,153,142			2,203,321

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 150,000,000 shares; issued and outstanding 104,910,651 and 104,469,572 shares at July 31, 2003 and October 31, 2002, respectively			104,911			104,470
			Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at July 31, 2003 and October 31, 2002; 10 votes per share; convertible into an equal number of Class A shares			3,555			3,555
	Additional paid-in capital					678,673			677,087
	Retained earnings					47,069			30,604
	Accumulated other comprehensive loss:
		Unrealized depreciation of investments				(818	)		(965	)
		Derivative financial instrument losses				(1,961	)		(2,488	)

		Total accumulated other comprehensive loss				(2,779	)		(3,453	)

				Total shareholders’ equity		831,429			812,263

		Total liabilities and shareholders’ equity			$	2,984,571		$	3,015,584

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


									Unrealized
									Appreciation			Derivative
					Additional				(Depreciation)			Financial			Total
			Common		Paid-In		Retained		of			Instrument			Shareholders’
			Stock⁽¹⁾		Capital		Earnings		Investments			Gains (Losses)			Equity

Balance October 31, 2002			$	108,025	$	677,087	$	30,604	$	(965	)	$	(2,488	)	$	812,263
Comprehensive income:
	Net earnings							16,465								16,465
	Other comprehensive income:
		Unrealized appreciation of investments								238						238
		Net deferred income tax expense on unrealized appreciation of investments								(91	)					(91	)
		Unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument											849			849
		Deferred income tax expense on unrealized appreciation on derivative instrument designated and qualifying as a cash flow hedging instrument											(322	)		(322	)

		Total other comprehensive income		—		—		—		147			527			674

	Total comprehensive income			—		—		16,465		147			527			17,139
Issuance of common stock				441		1,586										2,027

Balance July 31, 2003			$	108,466	$	678,673	$	47,069	$	(818	)	$	(1,961	)	$	831,429

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


					Nine Months Ended July 31,

					2003			2002

Cash flows from operating activities:
	Net earnings				$	16,465		$	23,066
	Adjustments to reconcile net earnings to net cash provided by operating activities:
		Loss on assets held for sale				—			18,500
		Loss on early extinguishment of debt				11,289			—
		Depreciation and amortization				40,375			42,415
		Provision for doubtful accounts				5,406			8,470
		Net loss realized on marketable securities				—			485
		Net gains on sale of assets				(1,072	)		(559	)
		Provision for deferred income taxes				11,246			10,367
		Changes in assets and liabilities:
				Decrease in other receivables		12,844			7,979
				Decrease in deferred charges		5,088			4,179
				Increase in inventories and cemetery property		(140	)		(2,579	)
				Decrease in accounts payable and accrued expenses		(12,948	)		(14,183	)
				Change in prearranged activity		(18,267	)		(15,517	)
				Prearranged acquisition costs		(27,346	)		(23,054	)
				Increase (decrease) in other		3,294			(2,549	)

				Net cash provided by operating activities		46,234			57,020

Cash flows from investing activities:
	Proceeds from sales of marketable securities and long-term investments					550			169
	Purchases of marketable securities and long-term investments					(12	)		(34	)
	Proceeds from sale of assets, net					2,009			18,152
	Additions to property and equipment					(13,967	)		(14,115	)
	Other					84			(579	)

			Net cash provided by (used in) investing activities			(11,336	)		3,593

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


			Nine Months Ended July 31,

			2003			2002

Cash flows from financing activities:
	Retirement of Remarketable Or Redeemable Securities (“ROARS”)			(12,691	)		—
	Proceeds from long-term debt			105,000			—
	Repayments of long-term debt			(135,796	)		(54,845	)
	Debt issue costs			(813	)		—
	Issuance of common stock			582			806

		Net cash used in financing activities		(43,718	)		(54,039	)

Effect of exchange rates on cash and cash equivalents				—			(205	)

Net increase (decrease) in cash				(8,820	)		6,369
Cash and cash equivalents, beginning of period				28,190			23,123

Cash and cash equivalents, end of period			$	19,370		$	29,492

Supplemental cash flow information:
	Cash paid (received) during the period for:
		Income taxes	$	(17,200	)	$	(12,200	)
		Interest	$	47,300		$	54,200
	Noncash investing and financing activities:
		Issuance of common stock to fund employee benefit plan	$	1,445		$	1,318

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

Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis.

As of July 31, 2003, the Company owned and operated 300 funeral homes and 148 cemeteries in 29 states within the United States and Puerto Rico. In fiscal year 2002, the Company sold its foreign operations in Spain, Portugal, France, Canada and Argentina, which consisted of 196 funeral homes and 8 cemeteries.

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

The information as of July 31, 2003, and for the three and nine months ended July 31, 2003 and 2002, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying 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, 2002.

The results of operations for the three and nine months ended July 31, 2003 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2003.

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 and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

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

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

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

The Company evaluates the collectibility of the prearranged trust receivable for impairment when the fair market value of the trust assets are below the recorded prearranged receivable balance. A prearranged trust receivable is deemed to be impaired when, based on current information and events, it is probable that the Company will be unable to collect all amounts from the trust at the time the receivables are due. In those instances that a receivable is deemed to be impaired, the trust receivable is reduced to the currently estimated recoverable amount with a corresponding reduction to the associated deferred revenue balance. There is no income statement impact as long as the deferred revenue is not below the estimated costs to deliver the underlying products or services. If the deferred revenue were below the estimated costs to deliver the underlying products or services, the Company would record a charge to earnings. During the fourth quarter of fiscal year 2002, the Company recorded a valuation allowance of $20,000 related to its prearranged receivables from its trust funds, which resulted in a reduction in prearranged receivables and prearranged deferred revenue. The Company recorded a $2,000 increase in its valuation allowance in the first quarter of fiscal year 2003 and a $7,000 decrease in its valuation allowance in the second quarter of fiscal year 2003. In the third quarter of 2003, the Company recorded a $10,000 decrease in its valuation allowance related to its prearranged receivables, which resulted in an increase in prearranged receivables and prearranged deferred revenue. Accordingly, the valuation allowance as of July 31, 2003 was $5,000. There were no charges to earnings during these periods as a result of these valuation allowances.

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

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

Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 19 to 45 years and from 3 to 10 years, respectively, primarily using the straight-line method.

In accordance with SFAS No. 52, “Foreign Currency Translation,” revenues and expenses of the Company’s foreign subsidiaries were translated at average exchange rates prevailing during the periods until they were sold. The resulting translation adjustments were reflected in a separate component of shareholders’ equity.

At July 31, 2003, the Company had five stock-based employee compensation plans, which are described in more detail in Note 15 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002. The Company accounts for those plans under the recognition and measurement principles of Accounting Principles Board (“APB”) Opinion No. 25, “Accounting for Stock Issued to Employees” and has adopted the disclosure-only provisions of SFAS No. 123, “Accounting for Stock-Based Compensation” and SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123.” No stock-based employee compensation cost is reflected in net earnings, as all options granted under those plans had an exercise price equal to or greater than the market value of the underlying common stock on the grant date. The following table illustrates the pro forma effect on net earnings (loss) and net earnings (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to stock-based employee compensation using the Black-Scholes option pricing methodology.

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

The Company sells prearranged funeral services and merchandise under contracts that provide for delivery of the services and merchandise at the time of death. Prearranged funeral services are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral merchandise is recognized as revenue upon delivery. Prior to performing the funeral or delivery of the merchandise, such sales are deferred and reported as prearranged deferred revenue on the balance sheet.

Commissions and other direct costs that vary with and are primarily related to the acquisition of new prearranged funeral service sales and prearranged funeral merchandise sales are deferred and amortized as the contracts are delivered in accordance with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” Indirect costs of marketing prearranged funeral services are expensed in the period in which incurred.

Prearranged funeral services and merchandise generally are funded either through trust funds or escrow accounts established by the Company or through third-party insurance companies. Principal amounts deposited in the trust funds or escrow accounts are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser’s option to cancel the contract. Certain jurisdictions provide for non-refundable trust funds or escrow accounts where the Company receives such amounts upon cancellation by the customer. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed funeral service trust funds or escrow accounts as prearranged deferred revenue on the balance sheet until the underlying service is delivered.

Earnings are withdrawn only as funeral services and merchandise are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used. When prearranged funeral services and merchandise are funded through insurance policies purchased by customers from third-party insurance companies, the Company earns a commission if it acts as agent on the sale of the policies. Insurance commissions, net of related expenses, are recognized at the point at which the commission is no longer subject to refund. Policy proceeds, including the buildup in the face value of the insurance contracts, are available to the Company as funeral services and merchandise are delivered.

Funeral services sold at the time of need are recorded as funeral revenue in the period the funeral is performed.

In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of preneed cemetery merchandise and services be placed in trust funds or escrow accounts. The Company defers all dividends and interest earned and net capital gains and losses realized by preneed cemetery merchandise and service trust funds or escrow accounts as prearranged deferred revenue on the balance

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

sheet until the underlying merchandise or service is delivered. Principal and earnings are withdrawn only as the merchandise and services are delivered or contracts are cancelled.

Pursuant to perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trust funds. The income from these funds, which has been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. Accordingly, the trust fund corpus is not reflected in the consolidated financial statements. The Company currently recognizes and withdraws all dividend and interest income earned and, where permitted, capital gains realized by perpetual care funds.

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

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

Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Management would provide a valuation allowance against the deferred tax asset for amounts which are not considered more likely than not to be realized.

Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares (in this case, exercise of the Company’s time-vest stock options) had been issued during each period as discussed in Note 4.

On June 26, 2003, the Company announced that its Board of Directors had approved a new stock repurchase program that will allow the Company to invest up to $25,000 in repurchases of its Class A common stock. The

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

repurchases are limited to the Company’s Class A common stock and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending on market conditions and other factors. These repurchases will reduce the weighted average number of common shares outstanding during each period. As of July 31, 2003, no Class A common stock repurchases had taken place.

The Company accounts for its derivative financial instruments under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” SFAS No. 137, “Accounting for Derivative Instruments and Hedging Activities — Deferral of the Effective Date of FASB Statement No. 133” and SFAS No. 138, “Accounting for Certain Derivative Instruments and Certain Hedging Activities.” The notional amounts of derivative financial instruments do not represent amounts exchanged between parties and, therefore, are not a measure of the Company’s exposure resulting from its use of derivatives. The amounts exchanged are calculated based upon the notional amounts as well as other terms of the instruments, such as interest rates, exchange rates or other indices. In accordance with SFAS No. 133, the Company accounts for its interest rate swaps as cash flow hedges whereby the fair value of the interest rate swaps is reflected as a liability in the accompanying consolidated balance sheet with the offset recorded to other comprehensive income.

Certain reclassifications have been made to the 2002 consolidated balance sheet and consolidated statement of cash flows. These reclassifications had no effect on net earnings or shareholders’ equity.

(a) Statement of Financial Accounting Standards (“SFAS”) No. 142, “Goodwill and Other Intangible Assets"

In June 2001, the Financial Accounting Standards Board (“FASB”) issued SFAS No. 142, “Goodwill and Other Intangible Assets.” Although not required to implement SFAS No. 142 until the first quarter of fiscal year 2003, the Company implemented it in the first quarter of fiscal year 2002.

SFAS No. 142 addresses financial accounting and reporting for goodwill and other intangible assets. SFAS No. 142 provides that goodwill is no longer amortized, but must be tested for impairment using a fair value approach rather than an undiscounted cash flow approach. Goodwill must be tested for impairment at a level referred to as a reporting unit, generally a level lower than that of the total entity. The Company’s evaluation of goodwill is performed at the funeral and cemetery segments, which constitute the Company’s reporting units. SFAS No. 142 requires entities to perform the first goodwill impairment test by comparing the fair value with the book value of a reporting unit on all reporting units within six months of adopting the statement. Any impairment loss recognized in connection with adoption of SFAS No. 142 is recorded as a change in accounting principle. The Company did not

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

Impairment losses recognized as a result of an impairment test occurring subsequent to the first six months after adoption will be included in operating income. Goodwill of a reporting unit must be tested for impairment after the initial adoption of the statement on an annual basis and between annual tests if an event occurs or circumstances change that would more likely than not reduce the fair value of a reporting unit below its carrying amount. The Company’s annual goodwill impairment analysis occurs during its fourth fiscal quarter each year.

Prior to the adoption of SFAS No. 142, the Company allocated goodwill amortization between its funeral and cemetery segments thereby impacting funeral and cemetery gross profit. As a result of the adoption of SFAS No. 142, the Company no longer amortizes goodwill, effective November 1, 2001. The carrying amount of goodwill at July 31, 2003 and October 31, 2002 amounted to $491,323.

In June 2001, the FASB issued SFAS No. 143, “Accounting for Asset Retirement Obligations.” SFAS No. 143 addresses the diversity in practice for recognizing asset retirement obligations (“ARO’s”). SFAS No. 143 requires that obligations associated with the retirement of a tangible long-lived asset be recorded as a liability when those obligations are incurred, with the amount of the liability initially measured at fair value. Upon initially recognizing a liability for ARO’s, an entity must capitalize the cost by recognizing an increase in the carrying amount of the related long-lived asset. Over time, the liability is accreted to its present value each period, and the capitalized cost is depreciated over the useful life of the related asset. Upon settlement of the liability, an entity either settles the obligation for its recorded amount or incurs a gain or loss upon settlement. SFAS No. 143 is effective for financial statements for fiscal years beginning after June 15, 2002. The implementation of SFAS No. 143 in fiscal year 2003 had no impact on the Company’s financial condition or results of operations.

In August 2001, the FASB issued SFAS No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets.” SFAS No. 144 addresses financial accounting and reporting for the impairment or disposal of long-lived assets. This statement supercedes SFAS No. 121, “Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to be Disposed of,” and the accounting and reporting provisions of Accounting Principles Board (“APB”) Opinion No. 30, “Reporting the Results of Operations — Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions,” for the disposal of a segment of a business. The provisions of the statement are effective for financial statements issued for fiscal years beginning after December 15, 2001, and interim periods within those fiscal years, with early application encouraged. The provisions of this statement generally are to be applied prospectively. The adoption of SFAS No. 144 had no impact on the Company’s financial condition or results of operations.

In April 2002, the FASB issued SFAS No. 145, “Rescission of FASB Statements No. 4, 44 and 64, Amendment of FASB Statement No. 13 and Technical Corrections.” With the rescission of FASB Statements No. 4 and 64, only gains and losses from extinguishments of debt meeting the criteria in APB Opinion No. 30 would be classified as

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

extraordinary items. This statement also amends other existing authoritative pronouncements to make various technical corrections, clarify meanings or describe their applicability under changed conditions. SFAS No. 145 is effective for fiscal years beginning after May 15, 2002. The adoption of SFAS No. 145 had no impact on the Company’s financial condition or results of operations.

In June 2002, the FASB issued SFAS No. 146, “Accounting for Costs Associated with Exit or Disposal Activities.” This statement addresses financial accounting and reporting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force (“EITF”) Issue No. 94-3, “Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity (including Certain Costs Incurred in a Restructuring).” SFAS No. 146 requires that a liability for a cost associated with an exit or disposal activity be recognized when the liability is incurred. The provisions of this statement are effective for exit or disposal activities that are initiated after December 31, 2002, with early application encouraged. The adoption of SFAS No. 146 had no impact on the Company’s financial condition or results of operations.

In October 2002, the FASB issued SFAS No. 147, “Acquisitions of Certain Financial Institutions — An Amendment of FASB Statements No. 72 and 144 and FASB Interpretation No. 9.” The provision of this statement related to the application of the purchase method of accounting is effective for acquisitions for which the date of acquisition is on or after October 1, 2002. The provisions related to accounting for the impairment or disposal of certain long-term customer-relationship intangible assets are effective on October 1, 2002. Transition provisions for previously recognized unidentifiable intangible assets are effective on October 1, 2002, with earlier application permitted. The adoption of SFAS No. 147 had no impact on the Company’s financial condition or results of operations.

In November 2002, the FASB issued FASB Interpretation No. 45 (“FIN 45”), “Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others, an interpretation of FASB Statements No. 5, 57 and 107 and Rescission of FASB Interpretation No. 34.” FIN 45 clarifies the requirements of SFAS No. 5, “Accounting for Contingencies,” relating to the guarantor’s accounting for, and disclosure of, the issuance of certain types of guarantees. The disclosure provisions of FIN 45 are effective for the Company’s first quarter of fiscal year 2003. However, the provisions for initial recognition and measurement are effective on a prospective basis for guarantees that are issued or modified after December 31, 2002, irrespective of a guarantor’s year-end. The Company has determined that it is subject to the disclosure provisions of FIN 45 and has included the required disclosures in Note 11.

In December 2002, the FASB issued SFAS No. 148, “Accounting for Stock-Based Compensation — Transition and Disclosure — an Amendment of FASB Statement No. 123,” to provide alternative methods of transition for a voluntary change to the fair value-based method of accounting for stock-based employee compensation. In addition, this statement amends the disclosure requirements of SFAS No. 123 to require prominent disclosures in both annual and interim financial statements about the method of accounting for stock-based employee compensation and the effect of the method used on reported results. This statement also requires that those effects be disclosed more prominently

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

by specifying the form, content and location of those disclosures. SFAS No. 148 improves the prominence and clarity of the pro forma disclosures required by SFAS No. 123 by prescribing a specific tabular format and by requiring disclosure in the “Summary of Significant Accounting Policies” or its equivalent. In addition, this statement improves the timeliness of those disclosures by requiring their inclusion in financial reports for interim periods. This statement is effective for financial statements for fiscal years ending after December 15, 2002 and is effective for financial reports containing condensed financial statements for interim periods beginning after December 15, 2002 with earlier application permitted. The Company adopted the disclosure provisions of SFAS No. 148 and presented the pro forma effects of SFAS No. 123 for fiscal years 2002, 2001 and 2000 in its Annual Report on Form 10-K for the fiscal year ended October 31, 2002. The pro forma effects on the three and nine months ended July 31, 2003 and 2002 are presented in Note 1(j) above.

In January 2003, the FASB issued FASB Interpretation No. 46 (“FIN 46”), “Consolidation of Variable Interest Entities.” FIN 46 clarifies the application of Accounting Research Bulletin No. 51, “Consolidated Financial Statements,” to certain entities in which equity investors do not have the characteristics of a controlling financial interest or do not have sufficient equity at risk for the entity to finance its activities without additional subordinated financial support from other parties. FIN 46 applies immediately to variable interest entities created after January 31, 2003, and to variable interest entities in which an enterprise obtains an interest after that date. It applies in the first fiscal year or interim period beginning after June 15, 2003, to variable interest entities in which an enterprise holds a variable interest that it acquired before February 1, 2003. Therefore, FIN 46 would be applicable to the Company beginning in the fourth quarter of fiscal year 2003. The Company is currently evaluating the impact of FIN 46 and believes that its preneed funeral, preneed cemetery merchandise and perpetual care trust funds and escrow accounts will be consolidated at fair value in the Company’s balance sheet.

In April 2003, the FASB issued SFAS No. 149, “Amendment of Statement 133 on Derivative Instruments and Hedging Activities.” This statement amends and clarifies financial accounting and reporting for derivative instruments, including certain derivative instruments embedded in other contracts (collectively referred to as derivatives) and for hedging activities under SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities.” This statement is effective for contracts entered into or modified after June 30, 2003 and for hedging relationships designated after June 30, 2003. In addition, all provisions of this statement should be applied prospectively. The provisions of this statement that relate to SFAS No. 133 implementation issues that have been effective for fiscal quarters that began prior to June 15, 2003, should continue to be applied in accordance with their respective effective dates. The adoption of SFAS No. 149 had no impact on the Company’s financial condition or results of operations.

In May 2003, the FASB issued SFAS No. 150, “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity.” This statement establishes standards for the classification and measurement of certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). Many of those instruments were previously classified as equity. This statement is effective for financial instruments entered into or modified after May 31, 2003 and otherwise is effective at the beginning of the first interim period beginning

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

after June 15, 2003. The adoption of SFAS No. 150 had no impact on the Company’s financial condition or results of operations.

On July 15, 2003, the Company announced that Frank B. Stewart, Jr., Chairman of the Board, had elected to retire and become Chairman Emeritus of the Company. As part of Mr. Stewart’s retirement benefits agreement, the Company agreed to pay Mr. Stewart $1,650, payable in three installments of $550 each. The first payment was made within five days after the announcement of his retirement. The remaining two payments will be made on June 20, 2004 and June 20, 2005. The Company recorded the $1,650 charge in the third quarter of 2003 but will continue to make the payments in accordance with the terms of the agreement.

On June 10, 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had stepped down to pursue other interests. According to the terms of his employment agreement, he is entitled to receive an amount equal to two years of salary, or $800, over the next two years. The Company recorded the $800 charge in the third quarter of 2003 but will continue to make the payments in accordance with the terms of the agreement.

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

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

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

Options to purchase 4,995,130 shares of common stock at prices ranging from $4.41 to $27.25 per share were outstanding during the nine months ended July 31, 2003, but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares. These options expire between July 31, 2004 and April 12, 2005. Options to purchase 1,260,826 shares of common stock at prices ranging from $5.96 to $27.25 per share were outstanding during the nine months ended July 31, 2002 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.

Common stock equivalents are excluded in the calculation of weighted average shares outstanding when a company reports a net loss from continuing operations for a period. The number of potentially antidilutive shares excluded from the calculation of diluted loss per share was 6,964,631 and 6,897,694 for the three months ended July 31, 2003 and 2002, respectively, because of the net loss from continuing operations for those periods.

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

A reconciliation of total segment gross profit to total earnings (loss) before income taxes for the three and nine months ended July 31, 2003 and 2002 is as follows:

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

(6) Condensed Consolidating Financial Statements of Guarantors of Senior Subordinated Notes

The following tables present the condensed consolidating historical financial statements as of July 31, 2003 and October 31, 2002 and for the three and nine months ended July 31, 2003 and 2002, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the senior subordinated notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries include the Puerto Rican subsidiaries, all other non-domestic subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are either intended to be used for foreign tax planning purposes or are prohibited by law from guaranteeing the senior subordinated notes.

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


		Three Months Ended July 31, 2003

					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues:
	Funeral	$	—		$	68,429		$	5,084		$	—		$	73,513
	Cemetery		—			47,907			7,359			—			55,266

			—			116,336			12,443			—			128,779

Costs and expenses:
	Funeral		—			53,223			3,741			—			56,964
	Cemetery		—			38,497			5,408			—			43,905

			—			91,720			9,149			—			100,869

	Gross profit		—			24,616			3,294			—			27,910
Corporate general and administrative expenses			7,493			(112	)		—			—			7,381

	Operating earnings (loss)		(7,493	)		24,728			3,294			—			20,529
Interest income (expense)			7,847			(18,367	)		(2,729	)		—			(13,249	)
Loss on early extinguishment of debt			(11,289	)		—			—			—			(11,289	)
Investment income			66			—			—			—			66
Other income, net			84			291			84			—			459

	Earnings (loss) before income taxes		(10,785	)		6,652			649			—			(3,484	)
Income tax expense (benefit)			(4,256	)		2,520			751			—			(985	)

	Net earnings (loss) before equity in subsidiaries		(6,529	)		4,132			(102	)		—			(2,499	)

Equity in subsidiaries			4,030			—			—			(4,030	)		—

	Net earnings (loss)		(2,499	)		4,132			(102	)		(4,030	)		(2,499	)
	Other comprehensive income, net		518			—			—			—			518

	Comprehensive income (loss)	$	(1,981	)	$	4,132		$	(102	)	$	(4,030	)	$	(1,981	)

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

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

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


		Three Months Ended July 31, 2002

					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues:
	Funeral	$	—		$	68,841		$	14,424		$	—		$	83,265
	Cemetery		—			55,430			5,559			—			60,989

			—			124,271			19,983			—			144,254

Costs and expenses:
	Funeral		—			52,411			12,017			—			64,428
	Cemetery		—			40,740			5,690			—			46,430

			—			93,151			17,707			—			110,858

	Gross profit		—			31,120			2,276			—			33,396
Corporate general and administrative expenses			4,566			(50	)		—			—			4,516
Loss on assets held for sale			—			688			17,812			—			18,500

	Operating earnings (loss)		(4,566	)		30,482			(15,536	)		—			10,380
Interest income (expense)			12,815			(20,978	)		(7,397	)		—			(15,560	)
Investment income			152			—			—			—			152
Other income, net			201			198			184			—			583

	Earnings (loss) before income taxes		8,602			9,702			(22,749	)		—			(4,445	)
Income tax expense (benefit)			(6,721	)		3,881			881			—			(1,959	)

	Net earnings (loss) before equity loss in subsidiaries		15,323			5,821			(23,630	)		—			(2,486	)

Equity loss in subsidiaries			(17,809	)		—			—			17,809			—

	Net earnings (loss)		(2,486	)		5,821			(23,630	)		17,809			(2,486	)
	Other comprehensive income, net		1,812			—			3,219			(3,219	)		1,812

	Comprehensive income (loss)	$	(674	)	$	5,821		$	(20,411	)	$	14,590		$	(674	)

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

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

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


		Nine Months Ended July 31, 2003

					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues:
	Funeral	$	—		$	210,544		$	15,500		$	—		$	226,044
	Cemetery		—			146,511			20,805			—			167,316

			—			357,055			36,305			—			393,360

Costs and expenses:
	Funeral		—			160,856			10,991			—			171,847
	Cemetery		—			113,616			15,708			—			129,324

			—			274,472			26,699			—			301,171

	Gross profit		—			82,583			9,606						92,189
Corporate general and administrative expenses			16,293			(430	)		—			—			15,863

	Operating earnings (loss)		(16,293	)		83,013			9,606			—			76,326
Interest income (expense)			21,763			(54,246	)		(7,922	)		—			(40,405	)
Loss on early extinguishment of debt			(11,289	)		—			—			—			(11,289	)
Investment income			237			—			—			—			237
Other income, net			547			1,439			248			—			2,234

	Earnings (loss) before income taxes		(5,035	)		30,206			1,932			—			27,103
Income tax expense (benefit)			(3,225	)		11,470			2,393			—			10,638

	Net earnings (loss) before equity in subsidiaries		(1,810	)		18,736			(461	)		—			16,465

Equity in subsidiaries			18,275			—			—			(18,275	)		—

	Net earnings (loss)		16,465			18,736			(461	)		(18,275	)		16,465
	Other comprehensive income, net		674			—			—			—			674

	Comprehensive income (loss)	$	17,139		$	18,736		$	(461	)	$	(18,275	)	$	17,139

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

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

Condensed Consolidating Statements of Earnings and Other Comprehensive Income


		Nine Months Ended July 31, 2002

					Guarantor			Non-Guarantor
		Parent			Subsidiaries			Subsidiaries			Eliminations			Consolidated

Revenues:
	Funeral	$	—		$	217,409		$	51,787		$	—		$	269,196
	Cemetery		—			161,246			18,370			—			179,616

			—			378,655			70,157			—			448,812

Costs and expenses:
	Funeral		—			157,964			40,662			—			198,626
	Cemetery		—			117,446			18,229			—			135,675

			—			275,410			58,891			—			334,301

	Gross profit		—			103,245			11,266			—			114,511
Corporate general and administrative expenses			12,669			(268	)		—			—			12,401
Loss on assets held for sale			—			688			17,812			—			18,500

	Operating earnings (loss)		(12,669	)		102,825			(6,546	)		—			83,610
Interest income (expense)			41,379			(66,274	)		(23,494	)		—			(48,389	)
Investment income			355			—			19			—			374
Other income (expense), net			(35	)		890			318			—			1,173

	Earnings (loss) before income taxes		29,030			37,441			(29,703	)		—			36,768
Income tax expense (benefit)			(4,577	)		14,977			3,302			—			13,702

	Net earnings (loss) before equity loss in subsidiaries		33,607			22,464			(33,005	)		—			23,066

Equity loss in subsidiaries			(10,541	)		—			—			10,541			—

	Net earnings (loss)		23,066			22,464			(33,005	)		10,541			23,066
	Other comprehensive income, net		1,625			1,310			1,755			(3,065	)		1,625

	Comprehensive income (loss)	$	24,691		$	23,774		$	(31,250	)	$	7,476		$	24,691

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

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


			July 31, 2003

						Guarantor		Non-Guarantor
			Parent			Subsidiaries		Subsidiaries			Eliminations			Consolidated

ASSETS
Current assets:
	Cash and cash equivalent investments		$	16,951		$	3,187	$	(768	)	$	—		$	19,370
	Marketable securities			993			26		1,270			—			2,289
	Receivables, net of allowances			10,901			36,132		21,358			—			68,391
	Inventories			317			35,128		7,733			—			43,178
	Prepaid expenses			651			2,673		98			—			3,422
	Deferred income taxes, net			501			1,263		—			—			1,764
	Assets held for sale			—			4,930		518			—			5,448

		Total current assets		30,314			83,339		30,209			—			143,862
Receivables due beyond one year, net of allowances				180			51,363		26,120			—			77,663
Prearranged receivables, net				—			1,198,530		17,862			—			1,216,392
Goodwill				—			451,656		39,667			—			491,323
Deferred charges				7,960			226,330		19,700			—			253,990
Cemetery property, at cost				—			364,444		23,247			—			387,691
Property and equipment, at cost				31,039			440,340		41,907			—			513,286
	Less accumulated depreciation			16,042			155,971		12,355			—			184,368

	Net property and equipment			14,997			284,369		29,552			—			328,918
Deferred income taxes, net				30,910			52,579		—			—			83,489
Investment in subsidiaries				150,649			—		—			(150,649	)		—
Other assets				103			1,140		—			—			1,243

	Total assets		$	235,113		$	2,713,750	$	186,357		$	(150,649	)	$	2,984,571

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current maturities of long-term debt		$	16,745		$	—	$	—		$	—		$	16,745
	Accounts payable			229			7,596		418			—			8,243
	Accrued expenses and other current liabilities			11,130			29,185		6,117			—			46,432
	Liabilities associated with assets held for sale			—			2,159		15			—			2,174

		Total current liabilities		28,104			38,940		6,550			—			73,594
Long-term debt, less current maturities				472,737			—		30,000			—			502,737
Intercompany payables, net				(1,109,671	)		1,056,734		52,937			—			—
Prearranged deferred revenue, net				—			1,465,597		94,048			—			1,559,645
Other long-term liabilities				12,514			4,652		—			—			17,166

	Total liabilities			(596,316	)		2,565,923		183,535			—			2,153,142

Common stock				108,466			426		53			(479	)		108,466
Other				725,742			147,401		2,769			(150,170	)		725,742
Accumulated other comprehensive loss				(2,779	)		—		—			—			(2,779	)

	Total shareholders’ equity			831,429			147,827		2,822			(150,649	)		831,429

Total liabilities and shareholders’ equity			$	235,113		$	2,713,750	$	186,357		$	(150,649	)	$	2,984,571

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


			October 31, 2002

						Guarantor		Non-Guarantor
			Parent			Subsidiaries		Subsidiaries		Eliminations			Consolidated

ASSETS
Current assets:
	Cash and cash equivalent investments		$	24,752		$	3,209	$	229	$	—		$	28,190
	Marketable securities			755			26		1,807		—			2,588
	Receivables, net of allowances			24,340			41,131		21,356		—			86,827
	Inventories			407			32,987		8,272		—			41,666
	Prepaid expenses			706			2,032		77		—			2,815
	Deferred income taxes, net			591			757		—		—			1,348
	Assets held for sale			—			8,424		542		—			8,966

		Total current assets		51,551			88,566		32,283		—			172,400
Receivables due beyond one year, net of allowances				—			52,020		24,633		—			76,653
Prearranged receivables, net				—			1,181,775		19,139		—			1,200,914
Goodwill				—			451,656		39,667		—			491,323
Deferred charges				8,716			224,959		19,408		—			253,083
Cemetery property, at cost				—			364,830		23,235		—			388,065
Property and equipment, at cost				29,028			432,492		41,396		—			502,916
	Less accumulated depreciation			13,385			144,059		11,156		—			168,600

	Net property and equipment			15,643			288,433		30,240		—			334,316
Deferred income taxes, net				30,794			63,980		1,020		—			95,794
Investment in subsidiaries				150,555			—		—		(150,555	)		—
Other assets				1,981			1,055		—		—			3,036

	Total assets		$	259,240		$	2,717,274	$	189,625	$	(150,555	)	$	3,015,584

LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
	Current maturities of long-term debt		$	9,396		$	—	$	—	$	—		$	9,396
	Accounts payable			880			9,836		397		—			11,113
	Accrued expenses and other current liabilities			24,062			27,744		5,296		—			57,102
	Liabilities associated with assets held for sale			—			2,896		15		—			2,911

		Total current liabilities		34,338			40,476		5,708		—			80,522
Long-term debt, less current maturities				512,548			—		30,000		—			542,548
Intercompany payables, net				(1,112,077	)		1,071,567		40,510		—			—
Prearranged deferred revenue, net				—			1,469,680		91,853		—			1,561,533
Other long-term liabilities				12,168			6,550		—		—			18,718

	Total liabilities			(553,023	)		2,588,273		168,071		—			2,203,321

Common stock				108,025			336		53		(389	)		108,025
Other				707,691			128,665		21,501		(150,166	)		707,691
Accumulated other comprehensive loss				(3,453	)		—		—		—			(3,453	)

	Total shareholders’ equity			812,263			129,001		21,554		(150,555	)		812,263

Total liabilities and shareholders’ equity			$	259,240		$	2,717,274	$	189,625	$	(150,555	)	$	3,015,584

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

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


			Nine Months Ended July 31, 2003

						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated

Net cash provided by operating activities			$	21,548		$	19,847		$	4,839		$	—	$	46,234

Cash flows from investing activities:
	Proceeds from sales of marketable securities			—			—			550			—		550
	Purchases of marketable securities			—			—			(12	)		—		(12	)
	Proceeds from sale of assets, net			(860	)		2,869			—			—		2,009
	Additions to property and equipment			(2,085	)		(11,352	)		(530	)		—		(13,967	)
	Other			—			84			—			—		84

		Net cash provided by (used in) investing activities		(2,945	)		(8,399	)		8			—		(11,336	)

Cash flows from financing activities:
	Retirement of ROARS			(12,691	)		—			—			—		(12,691	)
	Proceeds from long-term debt			105,000			—			—			—		105,000
	Repayments of long-term debt			(135,796	)		—			—			—		(135,796	)
	Intercompany receivables (payables)			17,314			(11,470	)		(5,844	)		—		—
	Debt issue costs			(813	)		—			—			—		(813	)
	Issuance of common stock			582			—			—			—		582

		Net cash used in financing activities		(26,404	)		(11,470	)		(5,844	)		—		(43,718	)

Net decrease in cash				(7,801	)		(22	)		(997	)		—		(8,820	)
Cash and cash equivalents, beginning of period				24,752			3,209			229			—		28,190

Cash and cash equivalents, end of period			$	16,951		$	3,187		$	(768	)	$	—	$	19,370

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


			Nine Months Ended July 31, 2002

						Guarantor			Non-Guarantor
			Parent			Subsidiaries			Subsidiaries			Eliminations		Consolidated

Net cash provided by operating activities			$	46,090		$	9,601		$	1,329		$	—	$	57,020

Cash flows from investing activities:
	Proceeds from sales of marketable securities and long-term investments			—			—			169			—		169
	Purchases of marketable securities and long-term investments			—			—			(34	)		—		(34	)
	Proceeds from sale of assets, net			10,897			7,255			—			—		18,152
	Additions to property and equipment			(2,097	)		(11,184	)		(834	)		—		(14,115	)
	Other			(899	)		210			110			—		(579	)

		Net cash provided by (used in) investing activities		7,901			(3,719	)		(589	)		—		3,593

Cash flows from financing activities:
	Repayments of long-term debt			(53,733	)		—			(1,112	)		—		(54,845	)
	Intercompany receivables (payables)			2,961			906			(3,867	)		—		—
	Issuance of common stock			806			—			—			—		806

		Net cash provided by (used in) financing activities		(49,966	)		906			(4,979	)		—		(54,039	)

Effect of exchange rates on cash and cash equivalents				—			—			(205	)		—		(205	)

Net increase (decrease) in cash				4,025			6,788			(4,444	)		—		6,369
Cash and cash equivalents, beginning of period				22,537			(5,636	)		6,222			—		23,123

Cash and cash equivalents, end of period			$	26,562		$	1,152		$	1,778		$	—	$	29,492

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

During the third quarter of fiscal year 2001, the Company adopted a formal plan to sell its foreign operations and certain domestic assets, primarily funeral home real estate and excess cemetery property. In addition, it reviewed non-competition agreements that it had entered into with sellers, key employees and others in connection with previous acquisitions, and it decided to relieve some of these individuals from the obligations not to compete, although it will continue to make the payments in accordance with the contract terms.

In the third quarter of 2001 the Company wrote down the aggregate value of these assets to their estimated fair value, which was based upon current offers at that time from interested parties, or market prices of comparable properties, less cost to sell. As a result, the Company incurred an aggregate pretax noncash charge to earnings of $269,158 ($205,089 after-tax, of which $187,329 related to foreign operations) in the third quarter of 2001. Primarily as a result of the significant devaluation of the Argentine peso and the depressed economic conditions in Argentina, the Company re-evaluated the expected loss on the disposition of the assets held for sale and recorded an aggregate pretax noncash charge to earnings of $18,500 ($11,200 after-tax) in the third quarter of 2002.

The impairment charges related to these writedowns and the writedowns of the non-competition agreements are reflected in the “loss on assets held for sale and other charges” line item of the consolidated statement of earnings in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002. The related assets and liabilities associated with assets held for sale are shown in separate line items in the consolidated balance sheet titled “assets held for sale” and “liabilities associated with assets held for sale.” At July 31, 2003 and October 31, 2002, the assets held for sale (excluding $2 of cash and cash equivalent investments of the operations held for sale as of July 31, 2003 and October 31, 2002) and the liabilities associated with assets held for sale line items in the balance sheet represent the assets and liabilities, respectively, of certain assets, primarily funeral homes.

A summary of the assets and liabilities included in these line items at July 31, 2003 and October 31, 2002 is as follows:

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

The operating results of assets sold and held for sale included in the consolidated statements of earnings for the three and nine months ended July 31, 2003 and 2002 were as follows:

On May 1, 2003, the Company redeemed its $99,897 outstanding Remarketable Or Redeemable Securities (“ROARS”). When the remarketing dealer elected to remarket the ROARS, the Company exercised its right to redeem the ROARS rather than allow them to be remarketed. The Company paid the remarketing dealer $12,691, the contractually specified value of the remarketing right, which was based on the 10-year Treasury rate of 3.894 percent. Net of the $1,532 unamortized ROARS option premium and $130 in costs, the Company recorded a charge of $11,289 ($7,338 after-tax, or $.07 per share) in the third quarter of fiscal year 2003. In order to redeem the ROARS, the Company used $50,000 of additional Term Loan B financing along with $50,000 from its revolving credit facility.

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

The Company also amended the loan covenants that govern its revolving credit and Term Loan B credit. The amendment relaxes certain financial ratio requirements and allows further flexibility with regard to higher spending limits on acquisitions, dividends and the repurchase of Company stock. Under the amendment, if there is no default or event of default, the Company may pay cash dividends and repurchase its stock, provided that the aggregate amount of the dividends and stock repurchased plus other types of restricted payments in any fiscal year does not exceed $15,000, or, if the Company’s consolidated leverage ratio is not greater than 3.00 to 1.00 both before and after the payment, $25,000. Under the restrictions in its debt agreements, as of July 31, 2003, the Company could use up to $15,000 to pay dividends or repurchase its stock during fiscal year 2003. The amendment limits capital expenditures (excluding the costs of acquisitions as defined in the amendment) in any fiscal year to $35,000, with a provision for the carryover of permitted but unused amounts under specified circumstances. The costs of acquisitions in any fiscal year are limited to $50,000, with a provision for the carryover of permitted but unused amounts under specified circumstances.

In the third quarter of 2003, the Company received $23,334 in tax proceeds related to loss carrybacks generated from the sale of its foreign operations. The Company used these proceeds to reduce its debt balance. The Company also drew down an additional $5,000 from its revolving credit facility in the third quarter of 2003.

Amounts due from preneed funeral and preneed cemetery merchandise trust and escrow accounts are included in the prearranged receivables line in the Company’s consolidated balance sheet. As discussed in Note 1(f), the Company recorded a valuation allowance of $20,000 as of October 31, 2002, increased its valuation allowance by $2,000 as of January 31, 2003 and reduced its valuation allowance by $7,000 as of April 30, 2003. As of July 31, 2003, the Company reduced its valuation allowance by $10,000, which resulted in an increase to prearranged receivables and prearranged deferred revenue. Accordingly, as of July 31, 2003, the valuation allowance was $5,000. For further information regarding prearranged receivables, see Note 4 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002. The Company’s perpetual care trust fund accounts are not reflected in the accompanying financial statements. For further information regarding the perpetual care trust funds, see Note 5 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002.

The following reflects the Company’s preneed funeral, preneed cemetery merchandise and perpetual care trust fund and escrow account balances as of July 31, 2003 and October 31, 2002.

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

Consolidated comprehensive income for the nine months ended July 31, 2003 and 2002 is as follows:


		Nine Months Ended July 31,

		2003			2002

Net earnings		$	16,465		$	23,066
Other comprehensive income:
	Reclassification adjustment for realized loss on foreign translation		—			10,700
	Foreign translation adjustment		—			(8,945	)
	Unrealized appreciation of investments		238			510
	Net deferred income tax expense on unrealized appreciation of investments		(91	)		(166	)
	Expiration of derivative instrument designated and qualifying as a cash flow hedging instrument		—			2,128
	Unrealized appreciation (depreciation) on derivative instrument designated and qualifying as a cash flow hedging instrument		849			(2,935	)
	Deferred income tax expense (benefit) on unrealized appreciation (depreciation) on derivative instrument designated and qualifying as a cash flow hedging instrument		(322	)		333

	Total other comprehensive income		674			1,625

Total comprehensive income		$	17,139		$	24,691

The Company’s obligations under its senior secured credit facility are guaranteed by all of its existing and future direct and indirect subsidiaries formed under the laws of the United States, any state thereof or the District of Columbia, except for specified excluded subsidiaries. The senior subordinated notes are guaranteed by all of the domestic subsidiaries of the Company, other than certain specified subsidiaries including the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries. For additional information regarding the senior secured credit facility and senior subordinated notes, see Note 12 to the consolidated financial statements of the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002.

All obligations under the senior secured credit facility, including the guarantees and any interest rate protection and other hedging agreements with any lender or its affiliates, are secured equally and ratably with the 6.70 percent Notes by a first priority perfected security interest in (1) all capital stock and other equity interests of the Company’s existing and future direct and indirect domestic subsidiaries, other than certain domestic subsidiaries acceptable to the agents, (2) 65 percent of the voting equity interests and 100 percent of all other equity interests (other than qualifying shares of directors) of all direct existing and future foreign subsidiaries, and (3) all other existing and future assets

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

and properties of the Company and the guarantors, except for real property, vehicles and other specified exclusions.

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

As of July 31, 2003, the Company has guaranteed long-term debt of its subsidiaries of approximately $4,767 that represents notes the subsidiaries issued as part of the purchase price of acquired businesses or debt the subsidiaries assumed in connection with acquisitions.

During the fiscal year ended October 31, 1992, Mr. Frank B. Stewart, Jr., Chairman of the Board, and two trusts established by Mr. Stewart and his wife for the benefit of their children, entered into an agreement with the Company whereby the Company, with the approval of all of the disinterested members of the Board of Directors, agreed to advance the premiums on a split dollar “second-to-die” life insurance policy purchased by the trusts and insuring the lives of Mr. and Mrs. Stewart. The premiums were payable over a 12-year period, and the trusts were required to reimburse the Company currently for that portion of the premiums the Company paid that, if not reimbursed, would be treated as compensation to Mr. Stewart for federal income tax purposes. Interest accrued on the remaining premium advanced at 8 percent per annum from the date each premium payment was made by the Company. The advances were collateralized by an assignment of other insurance policies owned by the trusts and shares of the Company’s Class A common stock that are held by the trusts. The trusts originally agreed that, upon the death of Mr. or Mrs. Stewart, the proceeds of such other insurance policies would be used to reduce the outstanding balance due to the Company. In addition, the Company was entitled to reimbursement of the unpaid balance of all amounts advanced, together with accrued interest, upon the first to occur of (1) the surrender of the policy, (2) the deaths of Mr. and Mrs. Stewart or (3) the expiration of 120 days following the payment in full of all premiums on the policy. The outstanding amount advanced to the trusts by the Company, including accrued interest, was approximately $1,879 at October 31, 2002. On April 29, 2003, the outstanding amount advanced to the trusts, including accrued interest, under the split dollar insurance policy was repaid by the trusts in the amount of $1,935.

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

In January 1998, the Company discontinued an insurance policy on the life of Mr. Stewart unrelated to the policy described in the preceding paragraph. In order to purchase a replacement policy, The Stewart Family Special Trust borrowed $685 from the Company pursuant to a promissory note due 180 days after the death of Mr. Stewart. Interest on the note accrues annually at a rate equal to the Company’s cost of borrowing under its revolving credit facility and is payable when the principal becomes due. The amount of the loan was equal to the cash value received by the Company upon the discontinuance of the prior insurance policy. The loan proceeds were used by the trust to purchase a single premium policy on the life of Mr. Stewart. Certain of the beneficiaries of The Stewart Family Special Trust are members of Mr. Stewart’s family. The loan was approved by all of the disinterested members of the Board of Directors. The outstanding balance of the loan at July 31, 2003, including accrued interest, was approximately $958.

On July 15, 2003, the Company announced that Frank B. Stewart, Jr. Chairman of the Board, had elected to retire and become Chairman Emeritus. On June 10, 2003, the Company announced that Brian J. Marlowe, Chief Operating Officer, had stepped down to pursue other interests. See Note 3 for information regarding the separation pay related to these former executive officers.

As stated in Note 1(o), in June of 2003, the Company announced that its Board of Directors had approved a new stock repurchase program that allows the Company to invest up to $25,000 in repurchases of its Class A common stock. No stock repurchases had taken place as of July 31, 2003. As of September 2, 2003, the Company had repurchased 181,500 shares of its Class A common stock at an average price of $3.95 per share.

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

We are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of September 2, 2003, we owned and operated 300 funeral homes and 148 cemeteries in 29 states within the United States and Puerto Rico.

We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust fund earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings and finance charges. For a discussion of our accounting for preneed sales, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2002 and Note 1 to the consolidated financial statements included herein.

Our funeral and cemetery businesses include prearranged sales funded through trust and escrow arrangements. The cemetery business includes maintenance of cemetery grounds funded through perpetual care trust funds. We defer all of the earnings realized by our preneed funeral and preneed cemetery merchandise trust funds and escrow accounts until the underlying merchandise or services are delivered. We recognize the earnings from our perpetual care trust funds as they are realized in the trust.

From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0 percent in our trust funds. However, the average realized return on our domestic trust funds was 5.8 percent, 6.3 percent, 4.3 percent and 2.3 percent, for fiscal years 2000, 2001, 2002 and the nine months ended July 31, 2003, respectively. These returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses. We defer recognition of all earnings and losses realized by preneed funeral and cemetery merchandise trust funds until the underlying products and services are delivered. Consequently, the lower investment returns realized during the last few years are expected to reduce the trust earnings to be recognized as revenue in 2003. We recognize all earnings and losses realized by our perpetual care trust funds currently. As a result, depressed stock prices and returns on fixed-income investments in the current market are expected to continue to put pressure on perpetual care trust earnings recognized during the current year. Because approximately 50 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we would generally expect our portfolio performance to follow the overall stock market performance.

As disclosed in Note 9 to the consolidated financial statements, our preneed funeral and preneed cemetery merchandise trust funds and escrow accounts had net unrealized depreciation of $80.6 million and $45.4 million, respectively, as of July 31, 2003. Unrealized gains and losses in the funeral trust funds and cemetery merchandise trust funds have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair market value of the funds were to decline below the estimated costs to deliver the underlying products and services. If that were to occur, we would record a charge to earnings to reduce the investment value to the expected cost to deliver. Over time, gains and losses realized in the funds are allocated to underlying preneed contracts and affect the amount of trust fund earnings we record when we deliver the underlying product or service. Accordingly, if current market conditions do not improve, the funds may eventually realize losses, and

our revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue we would realize when we deliver the underlying products and services. We project that with approximately 2.0 percent to 4.0 percent annualized returns in the funds over the estimated lives of the associated preneed contracts, we would recover the net unrealized depreciation currently in the funds by the time the underlying products and services are delivered. As discussed in Note 9 to the consolidated financial statements, our perpetual care trust fund accounts had net unrealized depreciation of $29.5 million as of July 31, 2003. Unrealized gains and losses in the perpetual care trust funds do not affect earnings but could limit the capital gains available to us and could result in lower returns and current revenues than we have historically achieved. For a more detailed discussion of our accounting for our preneed trust and escrow account earnings, see our Annual Report on Form 10-K for the fiscal year ended October 31, 2002.

Historically, our growth has been primarily from acquisitions. This trend began to change in late fiscal year 1999. As industry conditions reduced the number of major consolidators participating in the acquisition market, those that remained generally applied significantly tighter pricing criteria, and many potential sellers withdrew their businesses from the market rather than pursue transactions at lower prices. As the business model shifted, death care consolidators experienced diminishing access to capital. In response to these changes, we ceased our acquisition activity and developed strategies for improving cash flow and reducing and restructuring debt. Throughout fiscal years 2000, 2001 and 2002, we focused on debt reduction and cash flow. During fiscal year 2002, we began positioning ourselves for business expansion in fiscal year 2003.

At the end of the first fiscal quarter of 2003, we announced that several external factors were impacting us and our industry with regard to recent death trends, today’s economy, consumer confidence and financial markets. Based on these factors, we revised our outlook for 2003. While we believe that most of the external factors adversely impacting our business are temporary, through the first nine months of fiscal year 2003, these factors have continued to impact our at-need results, preneed sales, trust portfolio performance and growth strategies.

We track our at-need sales by market and regularly compare our performance with data from a variety of sources to gauge changes in market share. The data from these sources indicate a decline in the number of deaths in our markets through the first nine months of fiscal year 2003. We expect to eventually see more normalized mortality trends, and we expect our at-need results to improve when that occurs. In fact, we began to see more normalized mortality trends during our third fiscal quarter.

We believe that low levels of consumer confidence can negatively affect our ability to increase preneed sales. The consumer confidence index reached 10-year lows in February and March of 2003. The index improved in April of 2003 and remained at that level during most of our third fiscal quarter. We remain cautiously optimistic as we monitor this index and its effect on our preneed sales organization.

The financial markets were weaker in the early part of our fiscal year and in May of 2003, have begun improving. The Dow Jones Industrial Average is up approximately 13 percent this calendar year through August, and in the same time period, our trust portfolio, including unrealized gains and losses, increased over 8 percent. Because approximately 50 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we would generally expect our portfolio performance to follow the overall stock market performance.

As we await improvements in the economy, financial markets and normalized mortality trends, we will remain focused on improving operational performance, generating cash and reducing debt. In that regard, having achieved substantial financial goals and other strategic initiatives outlined by management near the end of fiscal year 2000, we have also announced a set of new operating initiatives, which have resulted in the creation

of four task forces to address the following key areas: growth in the number of funeral events performed, increased cemetery property sales volume, cost improvements and employee development initiatives.

Our funeral call volume task force is using our top performing businesses as a benchmark for the rest of our operations to implement similar successes throughout the organization. The task force is working directly with the manager of each location to develop specific proven strategies to grow market share. Our preneed cemetery property task force is strategically targeting businesses with maximum potential, and developing specific plans to increase preneed property sales and attain new customers at each of the targeted locations. The third key area is to reduce costs, and we have formed a task force of several key employees who are conducting in-depth reviews of cost centers outside of their areas of responsibility to assure that all resources are being effectively utilized without sacrificing our long-term results. The fourth initiative is to enhance employee satisfaction through professional growth, which includes the implementation of a mentoring program and succession plan for the Company including all key employee positions.

We will also continue to evaluate our options for deployment of our cash flow as opportunities arise. We will consider acquiring high-quality cemeteries and funeral homes that are priced within our guidelines and that fit our new business model, opening new funeral homes or entering into agreements to construct funeral homes in third-party cemeteries. At certain levels, we believe our stock represents a better investment at lower risk than other external growth opportunities, or we may consider further reducing our debt levels. On June 26, 2003, we announced that our Board of Directors approved a new stock repurchase program that will allow us to invest up to $25.0 million in repurchases of our Class A common stock. The repurchases are limited to our Class A common stock and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. As of September 2, 2003, we had repurchased 181,500 shares of our Class A common stock at an average price of $3.95 per share.

We discuss additional trends in our business, such as reduced preneed property sales, rising insurance costs, fewer deaths in the short-term, reduced interest costs, elimination of the earnings contribution from foreign operations, redemption of the ROARS and separation pay to former officers in our “Forward-Looking Statements” included in Part II, Item 5.

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 consolidated financial statements). We believe that our critical accounting policies (as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in our Annual Report on Form 10-K for the fiscal year ended October 31, 2002) are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. There have been no changes to our critical accounting policies since the filing of our Annual Report on Form 10-K for the fiscal year ended October 31, 2002.

Because we held our foreign operations and several small domestic operations for sale, in the third quarter of 2001 we began segregating the operating results of these businesses from the operations we will retain. The following discussion segregates the financial results into two main categories in order to present our ongoing operating results and to provide more useful information for investors. “Operations to be Retained” consist of those businesses we have owned and operated for the entire current fiscal year and last and that we plan to retain (“Existing Operations”) and those businesses that have been opened during this fiscal year or last and that we plan to retain (“Opened Operations”). “Closed and Held for Sale Operations” consist of those that have been sold or closed during this fiscal year or last and the businesses that are currently being offered for sale.

Total funeral revenue declined $9.7 million in the third quarter of 2003 compared to the corresponding period in 2002 primarily due to a decrease in revenue from Closed and Held for Sale Operations. The decrease in revenue from Closed and Held for Sale Operations resulted primarily from the sale of our foreign operations during fiscal year 2002.

Funeral revenue from Operations to be Retained increased $.2 million, or .3 percent, for the three months ended July 31, 2003, compared to the corresponding period in 2002. There was a 2.0 percent increase in the average revenue per funeral service performed by these businesses, partially offset by a .6 percent decrease (107 events) in the number of funeral services performed. All of the reduction in calls can be attributed to a few of our low-cost cremation centers, where our call volumes are primarily price-driven. We experienced a $.1 million, or .1 percent, increase in funeral revenue from Existing Operations, primarily due to a 2.1 percent increase in the average revenue per funeral service performed by these businesses, partially offset by a .8 percent decrease (141 events) in the number of funeral services performed. The average revenue per call increases for Operations to be Retained and Existing Operations were negatively impacted by a reduction in trust earnings recognized upon the delivery of preneed funerals. The reduction resulted from lower investment returns realized in our preneed funeral trust funds during the last few years.

Funeral gross profit margin from Existing Operations decreased from 24.8 percent in the third quarter of fiscal year 2002 to 23.0 percent in the third quarter of fiscal year 2003. The decline is primarily due to an increase in insurance costs combined with reduced trust earnings recognition. The cremation rate for Existing Operations was 39.2 percent for the quarter ended July 31, 2003 compared to 38.9 percent for the quarter ended July 31, 2002.

Total cemetery revenue decreased $5.7 million, or 9.3 percent, for the three months ended July 31, 2003, compared to the corresponding period in 2002. We experienced a $4.7 million, or 7.9 percent, decrease in revenue from Operations to be Retained, primarily due to a decline in merchandise deliveries. We believe the decline in the third quarter is due primarily to the decrease in the number of deaths in our markets in recent prior quarters. Cemetery merchandise revenue is not recognized until the merchandise is delivered and installed. Typically, installation of cemetery merchandise occurs several months after the burial occurs. Thus, a decline in the number of deaths in one quarter can cause a decline in cemetery merchandise deliveries in subsequent quarters. In addition to the decline in the volume of deliveries, the merchandise delivered during the third quarter of 2003 had a lower value than the merchandise delivered during the third quarter of 2002. We also experienced a $1.0 million decline in revenue from Closed and Held for Sale Operations due primarily to the disposition of our foreign operations in fiscal year 2002.

During the quarter ended July 31, 2003, our perpetual care trust earnings were consistent with the comparable quarter of last year. We experienced an annualized average return, excluding unrealized gains and

losses, of 4.4 percent in our perpetual care trust funds for the quarter ended July 31, 2003 resulting in revenue of $2.1 million, compared to 4.5 percent for the corresponding period in 2002 resulting in revenue of $2.1 million.

Cemetery gross profit margin from Existing Operations decreased from 24.7 percent in the third quarter of 2002 to 20.7 percent in the third quarter of 2003. The decline was principally due to increased insurance costs coupled with the reduction in cemetery revenue as discussed above.

Corporate general and administrative expenses for the three months ended July 31, 2003 increased $2.9 million compared to the same period in 2002. The increase is primarily due to a $2.5 million charge for separation pay incurred in the third quarter of fiscal year 2003 related to two former executive officers. For additional information, see Note 3 to the consolidated financial statements.

Depreciation and amortization was $13.3 million for the third quarter of fiscal year 2003 compared to $14.4 million for the same period in 2002. The decrease is primarily due to the sale of our foreign operations during 2002.

Interest expense decreased $2.4 million to $13.2 million for the third quarter of fiscal year 2003 compared to $15.6 million for the same period in 2002. The decrease is primarily due to a $124.7 million decrease in the average debt outstanding, partially offset by an approximate 50 basis point increase in the average interest rate during the quarter ended July 31, 2003 compared to the quarter ended July 31, 2002.

As of July 31, 2003 and September 2, 2003, our outstanding debt totaled $519.5 million and $512.7 million, respectively. On May 1, 2003, we exercised our right to redeem our outstanding $99.9 million Remarketable Or Redeemable Securities (“ROARS”) rather than allowing them to be remarketed and recorded a loss on early extinguishment of debt of $11.3 million as discussed in Note 8 to the consolidated financial statements. In order to redeem the ROARS, we used $50.0 million of additional Term Loan B financing and $50.0 million from our revolving credit facility. Of the total amount of debt outstanding, including the portion subject to the interest rate swap agreements in effect as of July 31, 2003, approximately 79 percent was fixed-rate debt, with the remaining 21 percent subject to short-term variable interest rates averaging approximately 4.5 percent.

In order to hedge a portion of the interest rate risk associated with our variable-rate debt, effective March 11, 2002, we entered into two interest rate swap agreements, expiring on March 11, 2004 and March 11, 2005, each involving a notional amount of $50.0 million. The agreements effectively convert variable-rate debt bearing interest based on three-month LIBOR plus the applicable margin specified under our senior secured credit facility to fixed- rate debt bearing interest at the fixed swap rate plus such applicable margin. As of September 2, 2003, the effective rate of the debt hedged by the interest rate swaps was 7.025 percent and 7.64 percent on each $50.0 million swapped.

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 above. We added $42.6 million in preneed sales to our funeral and cemetery merchandise and service backlog during the three months ended July 31, 2003 to be recognized in the future, net of cancellations, as these prepaid products and services are delivered, compared to $44.1 million for the corresponding period in 2002. Deliveries out of our preneed funeral and cemetery merchandise and service backlog, including accumulated trust fund earnings related to these preneed deliveries, amounted to $42.3 million for the three months ended July 31, 2003, compared to $46.1 million for the corresponding period in 2002.

Total funeral revenue declined $43.2 million for the nine months ended July 31, 2003, compared to the corresponding period in 2002 primarily due to a decrease in revenue from Closed and Held for Sale Operations. The decrease in revenue from Closed and Held for Sale Operations resulted primarily from the sale of our foreign operations in fiscal year 2002. The decline in total funeral revenue is also due to a decrease in the number of funeral services performed coupled with a reduction in trust earnings recognized upon the delivery of preneed funerals. The reduction in trust earnings resulted from lower investment returns realized in our preneed funeral trust funds during the last few years.

Funeral revenue from Operations to be Retained decreased $5.8 million, or 2.5 percent, for the nine months ended July 31, 2003, compared to the corresponding period in 2002. There was a 2.8 percent decrease (1,550 events) in the number of funeral services performed, partially offset by a 1.3 percent increase in the average revenue per funeral service performed by these businesses. We experienced a $6.0 million, or 2.6 percent, decrease in funeral revenue from Existing Operations primarily due to a 3.0 percent decrease (1,638 events) in the number of funeral services performed, partially offset by a 1.4 percent increase in the average revenue per funeral service performed by these businesses.

Funeral gross profit margin from Existing Operations decreased from 28.3 percent for the nine months ended July 31, 2002 to 24.4 percent for the corresponding period in 2003 primarily due to an increase in insurance costs combined with the decrease in revenue discussed above. The cremation rate for Existing Operations was 39.2 percent for the nine months ended July 31, 2003, compared to 38.5 percent for the nine months ended July 31, 2002.

Total cemetery revenue decreased $12.3 million, or 6.8 percent, for the nine months ended July 31, 2003, compared to the corresponding period in 2002. We experienced an $8.7 million, or 5.0 percent, decrease in revenue from Operations to be Retained, primarily due to a decline in merchandise deliveries and reduced perpetual care trust earnings. We believe the decline in merchandise deliveries during the first nine months of fiscal year 2003 is due primarily to the decrease in the number of deaths in our markets in recent prior quarters. Cemetery merchandise revenue is not recognized until the merchandise is delivered and installed. Typically, installation of cemetery merchandise occurs several months after the burial occurs. Thus, a decline in the number of deaths in one quarter can cause a decline in cemetery merchandise deliveries in subsequent quarters. In addition to the decline in the volume of deliveries, the merchandise delivered during the nine months ended July 31, 2003 had a lower value than the merchandise delivered during the comparable period in 2002. We experienced an annualized average return, excluding unrealized gains and losses, of 4.4 percent in our perpetual care trust funds for the nine months ended July 31, 2003 resulting in revenue of $6.1 million, compared to 5.8 percent for the corresponding period in 2002 resulting in revenue of $8.3 million. We also experienced a decline in revenue from Closed and Held for Sale Operations due primarily to the disposition of our foreign operations in fiscal year 2002.

Cemetery gross profit margin from Existing Operations decreased from 25.4 percent for the nine months ended July 31, 2002 to 22.8 percent for the corresponding period in 2003. The decline was principally due to an increase in insurance costs and the decrease in cemetery revenue as discussed above.

Corporate general and administrative expenses for the nine months ended July 31, 2003 increased $3.5 million compared to the same period in 2002. The increase is primarily due to a $2.5 million charge for separation pay incurred during the third quarter of fiscal year 2003 related to two former executive officers. For additional information, see Note 3 to the consolidated financial statements. The increase is also due to expenses related to the Supplemental Executive Retirement Plan (the “Plan”). The Plan, which became effective April 30, 2002, provides retirement benefits to certain executive officers that are intended to supplement the benefits available under our 401(k) Plan and in part replace other benefits previously available under the executive officers’ employment agreements.

Depreciation and amortization was $40.4 million for the nine months ended July 31, 2003, compared to $42.4 million for the same period in 2002. The decrease is primarily due to the sale of our foreign operations in 2002.

Interest expense decreased $8.0 million to $40.4 million for the nine months ended July 31, 2003, compared to $48.4 million for the same period in 2002. The decrease is primarily due to a $130.3 million decrease in the average debt outstanding, partially offset by an approximate 40 basis point increase in the average interest rate during the nine months ended July 31, 2003 compared to the same period in 2002.

Other income, net, increased approximately $1.1 million during the nine months ended July 31, 2003, compared to the same period in 2002. The increase is due in part to net gains on the sales of a few small domestic funeral homes in the first nine months of 2003. We have approximately $5.4 million of assets held for sale, consisting primarily of domestic funeral homes, and we may elect to sell other small domestic properties from time to time. Any future sales may generate gains or losses that would be reflected in other income in future periods.

As of July 31, 2003, our outstanding debt totaled $519.5 million. Our outstanding debt and the loss on early extinguishment of debt incurred in the third quarter of fiscal year 2003 are discussed under the heading “Three Months Ended July 31, 2003 Compared to Three Months Ended July 31, 2002 — Other.”

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 above. We added $121.7 million in preneed sales to our funeral and cemetery merchandise and service backlog during the nine months ended July 31, 2003 to be recognized in the future, net of cancellations, as these prepaid products and services are delivered, compared to $127.0 million for the corresponding period in 2002. Deliveries out of our preneed funeral and cemetery merchandise and service backlog, including accumulated trust fund earnings related to these preneed deliveries, amounted to $130.8 million for the nine months ended July 31, 2003, compared to $136.7 million for the corresponding period in 2002.

Our operations provided cash of $46.2 million for the nine months ended July 31, 2003, compared to providing cash of $57.0 million for the corresponding period in 2002. The decrease in operating cash flow is due primarily to a reduction in earnings before taxes, an increase in the investment in preneed activity and an increase in cash used to pay taxes. In the first nine months of 2002, we were not required to use any of our cash flow to pay federal taxes due to a 2001 federal tax refund that was applied to our 2002 estimated tax payments and due to benefits realized related to the sale of our foreign operations. During the first nine months of 2003, we were required to pay federal taxes. This was partially offset by a $23.3 million tax refund received related to the sale of our foreign operations in the first nine months of 2003, compared to an $11.1 million tax refund received related to the sale of our foreign operations for the comparable period in 2002.

Our investing activities resulted in a net cash outflow of $11.3 million for the nine months ended July 31, 2003, compared to a net cash inflow of $3.6 million for the comparable period in 2002. The change is primarily due to proceeds of $18.2 million received from the sale of foreign operations, domestic funeral home real estate and small domestic operations during the first nine months of fiscal year 2002 compared to $2.0 million for the comparable period in 2003. For the nine months ended July 31, 2003, capital expenditures amounted to $14.0 million, which included $12.9 million for maintenance capital expenditures and $1.1 million for new growth initiatives.

Our financing activities resulted in a net cash outflow of $43.7 million for the nine months ended July 31, 2003, compared to a net cash outflow of $54.0 million for the comparable period in 2002. The change is primarily due to the $105.0 million in proceeds from long-term debt received in 2003 and the $12.7 million remarketing right paid in 2003 in connection with the debt refinancing previously discussed under the heading “Contractual Obligations and Commercial Commitments.” The change is also due to repayments of long-term debt of $135.8 million in the nine months ended July 31, 2003, compared to $54.8 million in the comparable period of 2002.

As of July 31, 2003, our outstanding debt balance was $519.5 million. In order to redeem our Remarketable Or Redeemable Securities (“ROARS”) on May 1, 2003, we used $50.0 million of additional Term Loan B financing and $50.0 million from our revolving credit facility. We also received $23.3 million in tax proceeds related to the sale of our foreign operations in the third quarter of 2003. We used these proceeds and cash on hand to reduce our debt to $512.7 million as of September 2, 2003. The following table details our known future cash payments (in millions) related to various contractual obligations as of July 31, 2003.

(2)

Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 17 years, except for six leases that expire between 2032 and 2039. Our future minimum lease payments as of July 31, 2003 are $1.4 million, $4.6 million, $3.6 million, $3.2 million, $2.7 million and $23.4 million for the years ending October 31, 2003, 2004, 2005, 2006, 2007 and later years, respectively.

(3)

We have entered into non-competition agreements with prior owners of acquired subsidiaries that expire through 2012. During fiscal year 2001, we decided to relieve some of the prior owners and key employees of their obligations not to compete; however, we will continue to make the payments in accordance with the contract terms. This category also includes separation pay related to two former executive officers payable over the next two years.

The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of July 31, 2003.

On May 1, 2003, we used $50.0 million of additional Term Loan B financing along with $50.0 million from our revolving credit facility to redeem our $99.9 million outstanding ROARS. When the remarketing dealer elected to remarket the ROARS, we exercised our right to redeem the ROARS rather than allow them to be remarketed. We paid the remarketing dealer $12.7 million, the contractually specified value of the remarketing right, which was based on the 10-year Treasury rate of 3.894 percent. Net of the $1.5 million unamortized ROARS option premium and $.1 million in costs, we recorded a charge of $11.3 million ($7.3 million after-tax, or $.07 per share) in the third quarter of fiscal year 2003. In connection with the redemption of the ROARS, we amended the loan covenants that govern our revolving credit and Term Loan B credit. The amendment to the credit agreement provides greater financial flexibility.

We also have $14.1 million of outstanding letters of credit as of July 31, 2003, and we are required to maintain a bond to guarantee our obligations relating to funds we withdrew from our preneed funeral trusts in Florida. We substituted a bond to guarantee performance under certain preneed funeral contracts and agreed to maintain unused credit facilities in an amount that will equal or exceed the bond amount. As of July 31, 2003, the balance of the Florida bond was $41.1 million. We believe that cash flow from operations will be sufficient to cover our estimated cost of providing the related prearranged services and products in the future.

As of July 31, 2003 and September 2, 2003, there was $30.0 million drawn on our $175.0 million revolving credit facility. As of July 31, 2003 and September 2, 2003, our availability under the revolving credit facility, after giving consideration to the aforementioned letters of credit, bond obligation and the required reserve, was $89.7 million.

The amendment to our loan covenants relaxes certain financial ratio requirements and allows further flexibility with regard to higher spending limits on acquisitions, dividends and the repurchase of our stock. Under the amendment, if there is no default or event of default, we may pay cash dividends and repurchase our stock, provided that the aggregate amount of the dividends and stock repurchased plus other types of restricted payments in any fiscal year does not exceed $15.0 million, or, if our consolidated leverage ratio is not greater than 3.00 to 1.00 both before and after the payment, $25.0 million. Under the restrictions in our debt agreements, as of July 31, 2003, we could use up to $15.0 million to pay dividends or repurchase our stock during fiscal year 2003. The amendment limits capital expenditures (excluding the costs of acquisitions as defined in the amendment) in any fiscal year to $35.0 million, with a provision for the carryover of permitted but

unused amounts under specified circumstances. The costs of acquisitions in any fiscal year are limited to $50.0 million, with a provision for the carryover of permitted but unused amounts under specified circumstances.

(1)

Pretax earnings for the nine months ended July 31, 2003 include a charge of $11.3 million for the loss on early extinguishment of debt in connection with the redemption of the ROARS.

(2)

Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million in connection with the writedown of assets held for sale.

(4)

Pretax earnings for fiscal year 2001 include a noncash charge of $269.2 million in connection with the writedown of assets held for sale and other charges. As a result of this charge, our earnings for the fiscal year ended October 31, 2001, were insufficient to cover our fixed charges, and an additional $187.8 million in pretax earnings would have been required to eliminate the coverage deficiency.

(5)

Pretax earnings for fiscal year 1998 include a nonrecurring, noncash charge of $76.8 million in connection with the vesting of performance-based stock options.

For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness and the portion of rental expense that management believes to be representative of the interest component of rental expense. The ratio of earnings to fixed charges for the nine months ended July 31, 2003 and fiscal year 2002 reflect the adoption of SFAS No. 142; fiscal year 2001 reflects the 2001 change in accounting principles; fiscal years 2000 and 1999 reflect the 1999 change in accounting principle; and fiscal year 1998 reflects the accounting methods in effect that year.

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

Quantitative and qualitative disclosure about market risk is presented in Item 7A to our Annual Report on Form 10-K for the fiscal year ended October 31, 2002, filed with the Securities and Exchange Commission on January 24, 2003. The following disclosure discusses only those instances in which the market risk has changed by more than 10 percent from the annual disclosure.

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

As of July 31, 2003 and October 31, 2002, our marketable equity securities subject to market risk consisted principally of investments held by our prearranged funeral, merchandise and perpetual care trust funds and escrow accounts and had fair values of $576.7 million and $476.0 million, respectively, which were determined using final sale prices quoted on stock exchanges. Each 10 percent change in the average market prices of the equity securities held in such accounts would result in a change of approximately $57.7 million and $47.6 million, respectively, in the fair value of such accounts.

We have entered into various fixed- and variable-rate debt obligations, which are detailed in Note 12 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2002 and in the “Liquidity and Capital Resources” section of our “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 2.

Effective March 11, 2002, we entered into two interest rate swap agreements, each involving a notional amount of $50.0 million. The first agreement effectively converts $50.0 million of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 3.65 percent and expires on March 11, 2004. The second agreement effectively converts $50.0 million of variable-rate debt bearing interest based on three-month LIBOR to a fixed rate based on the swap rate of 4.265 percent and expires on March 11, 2005. The estimated fair value of the interest rate swaps based on quoted market prices was ($3.2) million and ($4.0) million as of July 31, 2003 and October 31, 2002, respectively. A hypothetical 100 basis point increase in the average interest rates applicable to such debt would result in an increase of approximately $1.0 million and $1.8 million in the fair value of these instruments as of July 31, 2003 and October 31, 2002, respectively.

As of July 31, 2003 and October 31, 2002, the carrying values of our Term Loan B and revolving credit facility, including accrued interest, were $208.0 million and $135.7 million, respectively, compared to fair values of $209.6 million and $136.5 million, respectively. Fair value was determined using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements. Of the $208.0 million outstanding under our Term Loan B and revolving credit facility on July 31, 2003, $108.0 million was not hedged by the interest rate swaps and was subject to short-term variable interest rates. Each approximate 10 percent, or 60 basis point, change in the average interest rate applicable to this debt would result in a change of approximately $.3 million in our pretax earnings. Of the $135.7 million outstanding under Term Loan B on October 31, 2002, $35.7 million was not hedged by the interest rate swaps and was subject to short-term variable interest rates. Each approximate 10 percent, or 60 basis point, change in the average interest rate applicable to this debt would result in a change of approximately $.1 million in our pretax earnings.

As of July 31, 2003 and October 31, 2002, the carrying values of our long-term fixed-rate debt, including accrued interest and the unamortized portion of the ROARS option premium, were approximately $314.2 million and $430.1 million, respectively, compared to fair values of $344.8 million and $455.8 million, respectively. Fair values were determined using quoted market prices. For a discussion of the redemption of the ROARS, see Note 8 to the consolidated financial statements. Each approximate 10 percent change in the average interest rates applicable to such debt, 80 basis points for July 31, 2003 and October 31, 2002, would result in changes of approximately $8.6 million and $10.1 million, respectively, in the fair values of these instruments. If these instruments are held to maturity, no change in fair value will be realized.

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

As of July 31, 2003 and October 31, 2002, our marketable equity securities and our fixed-income securities subject to market risk consisted principally of investments held by our prearranged funeral, cemetery merchandise and perpetual care trust funds and escrow accounts. We estimate that each 100 basis point increase or decrease in the yield, which excludes unrealized gains and losses, on the preneed funeral and cemetery merchandise and perpetual care trust funds, based on the July 31, 2003 balances, would result in an approximate increase or decrease in our revenues associated with the delivery of prearranged products and services and earnings from the perpetual care trust funds in fiscal year 2003 of $1.9 million, $2.3 million in 2004, $3.5 million in 2005 and $5.0 million in 2006.

Our prearranged funeral, cemetery merchandise and perpetual care trust funds and escrow accounts are detailed in Notes 4 and 5 to our consolidated financial statements included in our Annual Report on Form 10-K for the fiscal year ended October 31, 2002. Generally, our wholly-owned subsidiary, Investors Trust, Inc. (“ITI”), serves as investment adviser on these trust funds and escrow accounts. ITI manages the mix of equities and fixed-income securities in accordance with an investment policy established by the Investment Committee of our Board of Directors with the assistance of third-party professional financial consultants. The policy emphasizes conservation, diversification and preservation of principal, while seeking appropriate levels of current income and capital appreciation. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940.

We have evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of the end of the period covered by this report. The evaluation was carried out under the supervision of and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer. Based on the evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures are effective as of the end of the period covered by this report in timely alerting them to material information relating to the Company, including its consolidated subsidiaries, required to be included in reports we file with or submit to the Securities and Exchange Commission under the Securities Exchange Act of 1934. There have been no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

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

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

Certain statements made herein or elsewhere by us or on our behalf that are not historical facts are intended to be forward-looking statements within the meaning of the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements concerning proposed new products, services or developments; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may,” “will,” “estimate,” “intend,” “continue,” “believe,” “expect,” “plan” or “anticipate” and other similar words. Forward-looking statements contained in this report include but are not limited to statements relating to (1) our expectations of the timing of our receipt of income tax benefits related to the sale of our foreign operations, (2) our plans to reduce debt, (3) anticipated future performance of our preneed sales program, (4) anticipated future performance of funds held in trust, (5) anticipated mortality trends, (6) potential results of our new operating initiatives and (7) our long-term growth plan, including our ability to find attractive acquisition opportunities at prices we are willing to pay.

Accuracy of the forecasts is dependent upon assumptions about events that change over time and is thus susceptible to periodic change based on actual experience and new developments. The forecasts are based on a variety of estimates and assumptions made by our management with respect to, among other things, industry performance; general economic, market, industry and interest rate conditions; preneed and at-need sales activities and trends; fluctuations in cost of goods sold and other expenses; capital expenditures; and other matters that

cannot be accurately predicted, may not be realized and are subject to significant business, economic and competitive uncertainties, all of which are difficult to predict and many of which are beyond our control. Accordingly, there can be no assurance that the assumptions made in preparing the forecasts will prove accurate, and actual results may vary materially from those contained in the forecasts. For these reasons, the forecasts should not be regarded as an accurate prediction of future results, but only of results that may be obtained if substantially all of our principal expectations are realized.

We caution readers that we assume no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by us or on our behalf.

During fiscal year 2002, we completed the sale of all of our foreign operations within our targeted timeframe, resulting in cash proceeds in our estimated range. Our goal was to sell our foreign operations and receive proceeds including tax benefits in the range of $200 million to $250 million. Now that all sales are completed, we expect to ultimately receive total proceeds and income tax benefits of approximately $245 million. We have received $229 million of the proceeds including $2 million of tax benefits realized during the second quarter of 2003 and $23 million of tax refunds received in the third quarter of 2003. We expect to realize the majority of the remaining proceeds of approximately $16 million of income tax benefits during 2004.

We believe that most of the external factors adversely impacting our business are temporary, but while they continue, we will remain focused on improving operational performance, generating cash and reducing debt. In that regard, having achieved substantial financial goals and other strategic initiatives outlined by management near the end of fiscal year 2000, we have also announced a set of new operating initiatives, which have resulted in the creation of four task forces to address the following key areas: growth in the number of funeral events performed, increased cemetery property sales volume, cost improvements and employee development initiatives. For a discussion of these new operating initiatives, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations — General” included in Item 2.

We will also continue to evaluate our options for deployment of our cash flow as opportunities arise. We will consider acquiring high-quality cemeteries and funeral homes that are priced within our guidelines and that fit our new business model, opening new funeral homes or entering into agreements to construct funeral homes in third-party cemeteries. Our goal is to produce an internal rate of return on the deployment of our cash of 15 to 20 percent. At certain levels, we believe our stock represents a better investment at lower risk than other external growth opportunities. On June 26, 2003, we announced that our Board of Directors approved a new stock repurchase program that will allow us to invest up to $25.0 million in repurchases of our Class A common stock. The repurchases are limited to our Class A common stock and will be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. As of September 2, 2003, we had repurchased 181,500 shares of our Class A common stock at an average price of $3.95 per share.

We project that earnings will be in the low end of the range of $.21 and $.26 per share for fiscal year 2003, including the ($.07) per share impact from the redemption of the Remarketable Or Redeemable Securities (“ROARS”) as discussed below and the ($.01) per share impact for the separation pay to former executive officers as discussed below. We expect cash flow from operations to be between $73 million and $81 million including $23 million in tax refunds received related to the sale of our foreign operations and maintenance capital expenditures to be between $15 million and $18 million.

We believe that significant declines in consumer confidence in the national economy and reduced discretionary spending can place significant downward pressure on preneed property sales. We had originally projected preneed property sales to increase over the prior year, but based on lower consumer confidence, we have lowered our expectations for preneed property sales to be less than last year. The consumer confidence index reached 10-year lows in February and March of 2003. The index improved in April of 2003 and remained at that level during most of

our third fiscal quarter. We remain cautiously optimistic as we monitor this possible trend and its effect on our preneed sales organization.

The terrorist attacks in the United States on September 11, 2001 and related subsequent events have resulted in higher insurance premiums. The volume of claims made in such a short time span resulted in liquidity challenges that many insurers have passed on to their policyholders. Additionally, insurers have increased premiums to offset losses in equity markets due to recent economic conditions. Accordingly, our insurance costs have increased materially in 2003.

From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0 percent in our trust funds. However, the average realized return on our domestic trust funds was 5.8 percent, 6.3 percent, 4.3 percent and 2.3 percent, for fiscal years 2000, 2001, 2002 and the nine months ended July 31, 2003, respectively. These returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses. We defer recognition of all earnings and losses realized by preneed funeral and cemetery merchandise trust funds until the underlying products and services are delivered. Consequently, the lower investment returns realized during the last few years are expected to reduce the trust earnings to be recognized as revenue in 2003. We recognize all earnings and losses realized by our perpetual care trust funds currently. As a result, depressed stock prices and returns on fixed-income investments in the current market are expected to continue to put pressure on perpetual care trust earnings recognized. Because approximately 50 percent of our total trust portfolio is currently invested in a diversified group of equity securities, we generally expect our portfolio performance to follow the overall stock market performance. The yield on our total trust portfolio, including unrealized gains and losses, through August of calendar year 2003 increased over 8 percent. We remain cautiously optimistic as we monitor this possible trend.

Although the death care business is relatively stable and predictable, our business can be affected by seasonal fluctuations in the death rate. Generally, death rates are higher during the winter months primarily related to higher incidents of deaths from pneumonia and influenza. We track our at-need sales by market and regularly compare our performance with data from a variety of sources to gauge changes in market share. The data from these sources indicate a decline in the number of deaths in our markets through the first nine months of fiscal year 2003. We had originally projected deaths in our markets to increase slightly from the prior year. Based on our actual results in the first nine months of 2003, we are projecting deaths to be down slightly from the prior year.

Interest expense has decreased as a result of a reduction in our average debt balance.

Earnings have decreased due to the elimination of earnings contributed by our foreign operations; however, the reduction in operating earnings from the sale of our foreign operations that remained during fiscal year 2002 (Spain, Portugal, France, Canada and Argentina) was substantially offset by interest expense savings resulting from the use of proceeds from these sales to reduce our average debt balance.

We redeemed the ROARS as an alternative to allowing them to be remarketed on May 1, 2003. We paid the remarketing dealer $12.7 million, the contractually specified value of the remarketing right, which was based on the 10-year Treasury rate of 3.894 percent. Net of the $1.5 million unamortized portion of the option premium paid to us at the time of issuance for the right to remarket the ROARS and $.1 million in costs, we recorded a charge of $11.3 million ($7.3 million after-tax, or $.07 per share) in the third quarter of fiscal year 2003.

In July of 2003, we incurred a charge to corporate general and administrative expense of $2.5 million ($1.5 million after-tax, or $.01 per share) for separation pay related to two former executive officers.

We caution readers that the following important factors, among others, in some cases have affected, and in the future, could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements above and in any other forward-looking statements made by us or on our behalf.

Earnings from and principal of trust funds and escrow accounts could be reduced by changes in stock and bond prices and interest and dividend rates or by a decline in the size of the funds.

We maintain three types of trust funds and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) perpetual care. Earnings and investment gains and losses on trust funds and escrow accounts are affected by financial market conditions that are not within our control. Earnings are also affected by the mix of fixed-income and equity securities that we choose to maintain in the funds, and we may not choose the optimal mix for any particular market condition. The size of the funds depends upon the level of preneed sales and maturities, the amount of ordinary income and investment gains or losses and funds added through acquisitions, if any. Declines in earnings from perpetual care trust funds would cause a decline in current revenues, while declines in earnings from other trust funds and escrow accounts could cause a decline in future cash flows and revenues. In addition, any significant or sustained investment losses could result in there being insufficient funds in the trusts to cover the cost of delivering services and merchandise or maintaining cemeteries in the future. Any such deficiency would have to be covered by cash flow, which could have a material adverse effect on our financial position and results of operations.

Unrealized gains and losses in the funeral trust funds and cemetery merchandise trust funds have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair market value of the funds were to decline below the estimated costs to deliver the underlying products and services. If that were to occur, we would record a charge to earnings to reduce the investment value to the expected cost to deliver. Over time, gains and losses realized in the funds are allocated to underlying preneed contracts and affect the amount of the trust fund earnings we record when we deliver the underlying product or service. Accordingly, if current market conditions do not improve, the funds may eventually realize losses, and our revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue when we deliver the underlying products and services. We project that with approximately 2.0 percent to 4.0 percent annualized returns in the funds over the estimated lives of the associated preneed contracts, our trust and escrow funds would recover the net unrealized

depreciation currently in the funds by the time the underlying products and services are delivered. Unrealized gains and losses in the perpetual care trust fund do not affect earnings but could limit the capital gains available to us and could result in lower returns and lower current revenues than we have historically achieved.

We may not be able to achieve revenue growth that exceeds our cost increases. Although we continue to have a goal of increasing our revenues at a rate of growth greater than the growth in our costs, we have not achieved that goal in recent years or in the first nine months of 2003, and we can give no assurance that we will be successful in doing so for the remainder of 2003.

Insurance costs, in particular, have increased substantially in 2003. The terrorist attacks in the United States on September 11, 2001 and related subsequent events have resulted in higher insurance premiums. The volume of claims made in such a short span of time resulted in liquidity challenges that many insurers have passed on to their policyholders. Additionally, insurers have increased premiums to offset losses in equity markets due to recent economic conditions. While our insurance costs have increased materially, the actual increase in insurance costs cannot be predicted.

We may experience declines in preneed sales due to numerous factors, including changes made to contract terms and sales force compensation and a weakening economy. Declines in preneed property sales would reduce current revenue. Declines in preneed funeral and cemetery service and merchandise sales would reduce our backlog and could reduce our future market share.

In an effort to increase cash flow, we modified our preneed sales strategies early in fiscal year 2000 by increasing finance charges, requiring larger down payments and shortening installment payment terms. Later in fiscal year 2000, we changed the compensation structure for our preneed sales force. These changes, and the accompanying sales force attrition and adverse impact on sales force morale, caused preneed sales to decline. Although we do not anticipate making further significant changes in these areas, we may decide that further adjustments are advisable, which could cause additional declines in preneed sales. In addition, a weakening economy that causes customers to reduce discretionary spending could cause, and we believe has caused, a decline in preneed sales. Geopolitical concerns could continue to lower consumer confidence, which could also result in a further decline in preneed sales. Declines in preneed cemetery property sales would reduce current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.

Our ability to service our debt in the future depends upon our ability to generate sufficient cash, which depends upon many factors, some of which are beyond our control.

Our ability to service our debt depends upon our ability to generate sufficient cash. We expect to be able to reduce our debt with approximately $16 million of remaining income tax benefits relating to the sale of our foreign operations, the majority of which we expect to receive during 2004. Our ability to receive the expected income tax benefits within our expected time frame depends upon, among other things, the timing of our filing for capital loss carrybacks to apply against previously-taxed capital gains and the rate at which we realize additional capital gains. Our primary tax planning strategy is to produce these capital gains in our trust funds. Our ability to generate capital gains could be affected by a decline in market conditions. Our ability to generate cash flows from operations depends upon, among other things, the number of deaths in our markets, competition, the level of preneed sales and their maturities, our ability to control our costs, stock and bond market conditions, and general economic, financial and regulatory factors, most of which are beyond our control.

Preneed sales of cemetery property and funeral and cemetery products and services are generally cash flow negative initially, primarily due to the commissions paid on the sale, the portion of the sales proceeds required to be placed into trust or escrow and the terms of the particular contract such as the size of the down payment required and the length of the contract. In fiscal year 2000, we changed the terms and conditions of preneed sales contracts and commissions and moderated our preneed sales effort in order to reduce the initial negative impact on cash flow. Nevertheless, we will continue to invest a significant portion of cash flow in preneed acquisition costs, which reduces cash flow available for other activities, and, to the extent preneed activities are increased, cash flow would be further reduced, and our ability to service debt could be adversely affected.

Price competition could reduce market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.

Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. In the past, this price competition has resulted in losing market share in some markets. In other markets, we have had to reduce prices thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues, profit margins and the backlog and potentially impact our annual goodwill impairment analysis.

Increased advertising or better marketing by competitors, or increased activity by competitors offering products or services over the Internet, could cause us to lose market share and revenues or cause us to incur increased costs in order to retain or recapture our market share.

In recent years, the marketing of preneed funeral services through television, radio and print advertising, direct mailings and personal sales calls has increased. Extensive advertising or effective marketing by competitors in local markets could cause us to lose market share and revenues or cause us to increase marketing costs. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue or to incur costs in response to competition in order to vary the types or mix of products or services offered by us. Also, increased use of the Internet by customers to research and/or purchase products and services could cause us to lose market share to competitors offering to sell products or services over the Internet.

Increases in interest rates would increase interest costs on our variable-rate long-term debt and could have a material adverse effect on our net income and earnings per share.

As of September 2, 2003, $203.0 million of our long-term debt was subject to variable interest rates, although $100.0 million of that amount was fixed pursuant to the terms of interest rate swaps expiring in March of 2004 and 2005. Accordingly, any significant increase in interest rates could increase our interest costs on our variable-rate long-term debt or indebtedness incurred in the future, which could decrease our net income and earnings per share materially.

Covenant restrictions under our senior secured credit facility and senior subordinated note indenture limit our flexibility in operating our business.

Our senior secured credit facility and the indenture governing the senior subordinated notes contain, among other things, covenants that restrict us and our subsidiary guarantors’ ability to finance future operations or capital needs or to engage in other business activities. They limit, among other things, our and our subsidiary guarantors’ ability to: borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in transactions with affiliates; engage in sale leaseback transactions; consummate specified asset sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all assets; and create liens on assets. In addition, the senior secured credit facility contains specific limits on capital expenditures and requires us to maintain specified financial ratios and satisfy financial condition tests.

These covenants may require us to act in a manner contrary to our business objectives. In addition, events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy these covenants. A breach of any of those covenants could result in a default, allowing the lenders to declare all amounts owed immediately due and payable.

Our projections for 2003 do not include any earnings from acquisition activity. Several important factors, among others, may affect our ability to consummate acquisitions.

Our projections for 2003 do not include any earnings from acquisition activity. The actual level of acquisition activity, if any, will depend not only on the number of properties acquired, but also on the size of the acquisitions. Several important factors, among others, may affect our ability to consummate acquisitions. We may not be able to find a sufficient number of businesses for sale at prices we are willing to pay, particularly in view of our new pricing parameters and cash flow criteria. Acquisition activity, if any, will also depend on our ability to enter into new markets. Due in part to our lack of experience operating in new areas and to the presence of competitors who have been in certain markets longer than we have, such entry may be more difficult or expensive than we anticipate.

Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term.

Declines in the number of deaths could cause at-need sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase by approximately 1 percent per year from 2000 to 2010, longer lifespans could reduce the rate of deaths. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. These variations can cause revenues to fluctuate.

Our comparisons of the change in the number of families served to the change in the number of deaths reported by the Centers for Disease Control and Prevention (“CDC”) from time to time may not necessarily be meaningful. The CDC receives weekly mortality reports from 122 cities and metropolitan areas in the United States within two to three weeks from the date of death and reports the total number of deaths occurring in these areas each week based on the reports received from state health departments. The comparability of our funeral calls to the CDC data is limited, as reports from the state health departments are often delayed, and the 122 cities reporting to the CDC are not necessarily comparable with the markets in which we operate. Nonetheless, we believe that the CDC data is the most comprehensive data of this kind available.

The increasing number of cremations in the United States could cause revenues to decline because we could lose

market share to firms specializing in cremations. In addition, basic cremations produce no revenues for cemetery operations and lesser funeral revenues and, in certain cases, lesser profit margins than traditional funerals.

Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will represent approximately 39 percent of the United States burial market by the year 2010, compared to 26 percent in 2000. The trends toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, basic cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.

If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.

Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. During fiscal year 2000, we began to implement strategies based on a proprietary, extensive study of consumer preferences we commissioned in 1999. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.

Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.

Companies in the funeral home and cemetery business must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues.

Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.

The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the Federal Trade Commission, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. Embalming facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations.

In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, federal, state, local and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. In November 2002, the Federal Death Care Inspection and Disclosure Act was introduced in the Senate, which, if adopted, would more heavily regulate the death care industry and could result in an increase in our costs. Several states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations, our cash flows and our future prospects.



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

3.2		By-laws of the Company, as amended and restated as of December 19, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002)

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

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

4.3		Indenture dated as of December 1, 1996 by and between the Company and Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 5, 1996) and Supplemental Indenture dated April 24, 1998 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 21, 1998) and Second Supplemental Indenture dated June 29, 2001 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 29, 2001)

4.4		Form of 6.70 percent Note due 2003 (incorporated by reference to Exhibit 4.6 to the Company’s Form S-4 dated August 14, 2001)

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

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

4.7		Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001)

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


10.1		Retirement Benefits Agreement dated June 20, 2003 between the Company and Frank B. Stewart, Jr.

10.2		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and Randall L. Stricklin

10.3		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and G. Kenneth Stephens, Jr.

10.4		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and Michael K. Crane

10.5		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and Everett N. Kendrick

12		Calculation of Ratio of Earnings to Fixed Charges

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of William E. Rowe, President and Chief Executive Officer

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

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

We filed a Form 8-K dated May 1, 2003, reporting under “Item 5. Other Events,” “Item 7. Financial Statements and Exhibits,” and “Item 9. Regulation FD Disclosure (Information Provided Under Item 12)”, the announcement of the refinancing of our Remarketable Or Redeemable Securities and an amendment to our Credit Agreement dated April 25, 2003.

We filed a Form 8-K dated June 10, 2003, reporting under “Item 7. Financial Statements and Exhibits,” and under “Item 9. Regulation FD Disclosure (Information Provided under Item 12),” the earnings release for the quarter ended April 30, 2003 and our forecasts for fiscal year 2003.

We filed a Form 8-K dated June 10, 2003, reporting under “Item 5. Other Events,” the announcement of management changes.

We filed a Form 8-K dated June 26, 2003, reporting under “Item 5. Other Events,” the announcement of a stock repurchase program.

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.



EXHIBIT NUMBER		DESCRIPTION

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

3.2		By-laws of the Company, as amended and restated as of December 19, 2002 (incorporated by reference to Exhibit 3.2 to the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2002)

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

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

4.3		Indenture dated as of December 1, 1996 by and between the Company and Citibank, N.A. as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated December 5, 1996) and Supplemental Indenture dated April 24, 1998 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K dated April 21, 1998) and Second Supplemental Indenture dated June 29, 2001 (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K dated June 29, 2001)

4.4		Form of 6.70 percent Note due 2003 (incorporated by reference to Exhibit 4.6 to the Company’s Form S-4 dated August 14, 2001)

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

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

4.7		Indenture dated June 29, 2001 by and among Stewart, the Guarantors named therein and Firstar Bank, N.A., as Trustee (incorporated by reference to Exhibit 4.1 to the Company’s Form S-4 dated August 14, 2001)

4.8		Form of 10.75 percent Senior Subordinated Note due 2008 (incorporated by reference to Exhibit 4.2 to the Company’s Form S-4 dated August 14, 2001)
10.1		Retirement Benefits Agreement dated June 20, 2003 between the Company and Frank B. Stewart, Jr.

10.2		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and Randall L. Stricklin

10.3		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and G. Kenneth Stephens, Jr.

10.4		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and Michael K. Crane

10.5		Second Supplement to Appendix A to Employment Agreement dated June 25, 2003 between the Company and Everett N. Kendrick

12		Calculation of Ratio of Earnings to Fixed Charges

31.1		Certification pursuant to Section 302 of the Sarbanes-Oxley Act of William E. Rowe, President and Chief Executive Officer

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

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


x		Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the quarterly period ended July 31, 2003
		OR
o		Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
		For the transition period from to


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

110 Veterans Memorial Boulevard Metairie, Louisiana (Address of principal executive offices)		70005 (Zip Code)


		Three Months Ended						Nine Months Ended
		July 31,						July 31,

		2003			2002			2003			2002

Net earnings (loss)		$	(2,499	)	$	(2,486	)	$	16,465		$	23,066
Total stock-based employee compensation expense determined under fair value-based method, net of tax			(752	)		(1,177	)		(2,197	)		(3,431	)

Pro forma net earnings (loss)		$	(3,251	)	$	(3,663	)	$	14,268		$	19,635

Net earnings (loss) per common share:
	Basic – as reported	$	(.02	)	$	(.02	)	$	.15		$	.21

	Basic – pro forma	$	(.03	)	$	(.03	)	$	.13		$	.18

	Diluted – as reported	$	(.02	)	$	(.02	)	$	.15		$	.21

	Diluted – pro forma	$	(.03	)	$	(.03	)	$	.13		$	.18


			Loss			Shares		Per Share
Three Months Ended July 31, 2003			(Numerator)			(Denominator)		Data

Net loss			$	(2,499	)

Basic loss per common share:
		Loss available to common shareholders	$	(2,499	)		108,386	$	(.02	)

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

Diluted loss per common share:
	Loss available to common shareholders plus time-vest stock options assumed exercised		$	(2,499	)		108,386	$	(.02	)


			Loss			Shares		Per Share
Three Months Ended July 31, 2002			(Numerator)			(Denominator)		Data

Net loss			$	(2,486	)

Basic loss per common share:
		Loss available to common shareholders	$	(2,486	)		107,961	$	(.02	)

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

Diluted loss per common share:
	Loss available to common shareholders plus time-vest stock options assumed exercised		$	(2,486	)		107,961	$	(.02	)


CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED STATEMENTS OF EARNINGS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED BALANCE SHEETS
CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
CONSOLIDATED STATEMENTS OF CASH FLOWS
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
	Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
	Item 3. Quantitative and Qualitative Disclosures About Market Risk
	Item 4. Controls and Procedures
PART II. OTHER INFORMATION
	Item 1. Legal Proceedings
	Item 5. Other Information
	Item 6. Exhibits and Reports on Form 8-K
SIGNATURES
EX-10.1 Retirement Benefits Agreement
EX-10.2 Supplement to Employment Agreement
EX-10.3 Supplement to Employment Agreement
EX-10.4 Supplement to Employment Agreement
EX-10.5 Supplement to Employment Agreement
EX-12 Calculation of Ratio of Earnings
EX-31.1 Certifcation Pursuant to Section 302
EX-31.2 Certifcation Pursuant to Section 302
EX-32 Certifications Pursuant to Section 906


							Consolidated
			Funeral		Cemetery		Totals

Revenues from external customers:
	Three months ended July 31,
		2003	$	73,513		55,266	$	128,779
		2002	$	83,265		60,989	$	144,254
	Nine months ended July 31,
		2003	$	226,044		167,316	$	393,360
		2002	$	269,196		179,616	$	448,812
Gross profit:
	Three months ended July 31,
		2003	$	16,549		11,361	$	27,910
		2002	$	18,837		14,559	$	33,396
	Nine months ended July 31,
		2003	$	54,197		37,992	$	92,189
		2002	$	70,570		43,941	$	114,511
Goodwill:
	July 31, 2003		$	332,508		158,815	$	491,323
	October 31, 2002		$	332,508		158,815	$	491,323


	Funeral						Cemetery Merchandise						Perpetual Care

	July 31,			October 31,			July 31,			October 31,			July 31,			October 31,
	2003			2002			2003			2002			2003			2002

Total value at cost	$	533,773		$	538,180		$	228,738		$	227,588		$	223,140		$	217,174
Net unrealized depreciation		(80,649	)		(116,760	)		(45,391	)		(60,010	)		(29,498	)		(38,007	)

Total value at market	$	453,124		$	421,420		$	183,347		$	167,578		$	193,642		$	179,167


	Three Months Ended
	July 31,
							Increase
	2003			2002			(Decrease)

	(In millions)
FUNERAL — OPERATIONS TO BE RETAINED
Revenue
Existing operations	$	72.6		$	72.5		$	.1
Opened operations		.1			—			.1

	$	72.7		$	72.5		$	.2

Costs
Existing operations	$	55.9		$	54.5		$	1.4
Opened operations		.1			.1			—

	$	56.0		$	54.6		$	1.4

Gross Profit
Existing operations	$	16.7		$	18.0		$	(1.3	)
Opened operations		—			(.1	)		.1

	$	16.7		$	17.9		$	(1.2	)

FUNERAL — CLOSED AND HELD FOR SALE OPERATIONS
Revenue	$	.8		$	10.7		$	(9.9	)
Costs		1.0			9.8			(8.8	)

Gross Profit	$	(.2	)	$	.9		$	(1.1	)

Total Funeral Revenue	$	73.5		$	83.2		$	(9.7	)
Total Funeral Costs		57.0			64.4			(7.4	)

Total Funeral Gross Profit	$	16.5		$	18.8		$	(2.3	)


	Payments Due by Period

			Fiscal Year		Fiscal Years		Fiscal Years
Contractual Obligations	Total		2003		2004 – 2005		2006 – 2007		Thereafter

Current maturities of long-term debt⁽¹⁾	$	16.8	$	6.3	$	10.5	$	—	$	—
Long-term debt⁽¹⁾		502.7		—		121.7		80.3		300.7
Operating lease agreements⁽²⁾		38.9		1.4		8.2		5.9		23.4
Non-competition and other agreements⁽³⁾		16.2		1.5		9.1		3.5		2.1

	$	574.6	$	9.2	$	149.5	$	89.7	$	326.2


									Other,
									Principally
									Seller
Fiscal	Revolving				Senior				Financing of
Year Ending	Credit		Term		Subordinated		6.70%		Acquired
October 31,	Facility		Loan B		Notes		Public Notes		Operations		Total

2003	$	—	$	2.5	$	—	$	—	$	3.8	$	6.3
2004		—		10.0		—		.1		3.9		14.0
2005		30.0		86.5		—		—		1.7		118.2
2006		—		79.0		—		—		.8		79.8
2007		—		—		—		—		.5		.5
Thereafter		—		—		300.0		—		.7		300.7

Total long-term debt	$	30.0	$	178.0	$	300.0	$	.1	$	11.4	$	519.5


		STEWART ENTERPRISES, INC.

September 9, 2003		/s/ KENNETH C. BUDDE Kenneth C. Budde Executive Vice President Chief Financial Officer

September 9, 2003		/s/ MICHAEL G. HYMEL Michael G. Hymel Vice President Corporate Controller Chief Accounting Officer