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EX-31.2 - EX-31.2 - STEWART ENTERPRISES INCh70096exv31w2.htm
Table of Contents

 
 
UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
 
FORM 10-Q
     
þ   Quarterly Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the quarterly period ended January 31, 2010
or
     
o   Transition Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the transition period from                    to                    
Commission File Number: 1-15449
 
STEWART ENTERPRISES, INC.
(Exact name of registrant as specified in its charter)
     
LOUISIANA
(State or other jurisdiction of incorporation or organization)
  72-0693290
(I.R.S. Employer Identification No.)
     
1333 South Clearview Parkway
Jefferson, Louisiana

(Address of principal executive offices)
  70121
(Zip Code)
 
Registrant’s telephone number, including area code: (504) 729-1400
 
     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ   No o
     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o   No o
     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
             
Large accelerated filer o   Accelerated filer þ   Non-accelerated filer o (Do not check if a smaller reporting company)   Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Securities Exchange Act.) Yes o  No þ
     The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of February 28, 2010, was 89,566,742 and 3,555,020, respectively.
 
 

 


 

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
INDEX
         
    Page  
       
 
       
       
 
       
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    8  
 
       
    43  
 
       
    51  
 
       
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    52  
 
       
    52  
 
       
    52  
 
       
    53  
 
       
    54  
 EX-31.1
 EX-31.2
 EX-32.1


Table of Contents

PART I. FINANCIAL INFORMATION
Item 1.   Financial Statements
STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF EARNINGS
(Unaudited)
(Dollars in thousands, except per share amounts)
                 
    Three Months Ended January 31,  
    2010     2009  
            (As Adjusted)  
Revenues:
               
Funeral
  $ 72,108     $ 71,750  
Cemetery
    52,292       47,580  
 
           
 
    124,400       119,330  
 
           
Costs and expenses:
               
Funeral
    52,911       53,495  
Cemetery
    46,320       42,752  
 
           
 
    99,231       96,247  
 
           
Gross profit
    25,169       23,083  
Corporate general and administrative expenses
    (6,554 )     (7,506 )
Hurricane related charges, net
          (315 )
Net impairment losses on dispositions
          (63 )
Other operating income, net
    179       259  
 
           
Operating earnings
    18,794       15,458  
Interest expense
    (6,456 )     (7,395 )
Gain on early extinguishment of debt
    17        
Investment and other income, net
    24       41  
 
           
Earnings before income taxes
    12,379       8,104  
Income taxes
    4,892       3,338  
 
           
Net earnings
  $ 7,487     $ 4,766  
 
           
 
               
Net earnings per common share:
               
Basic
  $ .08     $ .05  
 
           
Diluted
  $ .08     $ .05  
 
           
 
               
Weighted average common shares outstanding (in thousands):
               
Basic
    92,053       91,824  
 
           
Diluted
    92,234       91,843  
 
           
 
               
Dividends declared per common share
  $ .030     $ .025  
 
           
See accompanying notes to condensed consolidated financial statements.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
                 
    January 31, 2010     October 31, 2009  
            (As Adjusted)  
ASSETS
               
 
               
Current assets:
               
Cash and cash equivalents
  $ 52,780     $ 62,808  
Certificates of deposit
    5,000        
Receivables, net of allowances
    59,331       59,439  
Inventories
    35,947       36,156  
Prepaid expenses
    11,574       6,748  
Deferred income taxes, net
    21,645       21,715  
 
           
Total current assets
    186,277       186,866  
Receivables due beyond one year, net of allowances
    62,062       63,011  
Preneed funeral receivables and trust investments
    397,454       389,512  
Preneed cemetery receivables and trust investments
    196,797       193,417  
Goodwill
    247,236       247,236  
Cemetery property, at cost
    386,189       385,977  
Property and equipment, at cost:
               
Land
    43,677       43,677  
Buildings
    332,061       329,685  
Equipment and other
    188,092       187,100  
 
           
 
    563,830       560,462  
Less accumulated depreciation
    267,234       261,005  
 
           
Net property and equipment
    296,596       299,457  
Deferred income taxes, net
    109,866       113,398  
Cemetery perpetual care trust investments
    214,460       205,476  
Other assets
    14,139       14,654  
 
           
Total assets
  $ 2,111,076     $ 2,099,004  
 
           
(continued)

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Table of Contents

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS
(Unaudited)
(Dollars in thousands, except per share amounts)
                 
    January 31, 2010     October 31, 2009  
            (As Adjusted)  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
 
               
Current liabilities:
               
Current maturities of long-term debt
  $ 3     $ 5  
Accounts payable and accrued expenses
    21,260       25,604  
Accrued payroll and other benefits
    11,938       15,200  
Accrued insurance
    20,139       20,504  
Accrued interest
    6,181       4,561  
Estimated obligation to fund cemetery perpetual care trust
    13,642       14,010  
Other current liabilities
    11,982       14,099  
Income taxes payable
    3,143       2,028  
 
           
Total current liabilities
    88,288       96,011  
Long-term debt, less current maturities
    339,934       339,721  
Deferred preneed funeral revenue
    245,584       247,825  
Deferred preneed cemetery revenue
    263,388       266,964  
Deferred preneed funeral and cemetery receipts held in trust
    526,424       514,787  
Perpetual care trusts’ corpus
    212,076       204,168  
Other long-term liabilities
    21,032       20,871  
 
           
Total liabilities
    1,696,726       1,690,347  
 
           
Commitments and contingencies
               
 
           
Shareholders’ equity:
               
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued
           
Common stock, $1.00 stated value:
               
Class A authorized 200,000,000 shares; issued and outstanding 89,566,742 and 89,128,700 shares at January 31, 2010 and October 31, 2009, respectively
    89,567       89,129  
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at January 31, 2010 and October 31, 2009; 10 votes per share convertible into an equal number of Class A shares
    3,555       3,555  
Additional paid-in capital
    558,832       561,063  
Accumulated deficit
    (237,638 )     (245,125 )
Accumulated other comprehensive income:
               
Unrealized appreciation of investments
    34       35  
 
           
Total accumulated other comprehensive income
    34       35  
 
           
Total shareholders’ equity
    414,350       408,657  
 
           
Total liabilities and shareholders’ equity
  $ 2,111,076     $ 2,099,004  
 
           
See accompanying notes to condensed consolidated financial statements.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENT OF SHAREHOLDERS’ EQUITY
(Unaudited)
(Dollars in thousands, except per share amounts)
                                         
                            Unrealized        
                            Appreciation        
    Common     Additional Paid-In             (Depreciation) of     Total Shareholders’  
    Stock(1)     Capital     Accumulated Deficit     Investments     Equity  
Balance October 31, 2009, as previously reported
  $ 92,684     $ 526,062     $ (227,897 )   $ 35     $ 390,884  
Adoption of convertible debt standard (See Note 2)
          35,001       (17,228 )           17,773  
 
                             
Balance October 31, 2009, as adjusted
  $ 92,684     $ 561,063     $ (245,125 )   $ 35     $ 408,657  
 
                                       
Comprehensive income (loss):
                                       
Net earnings
                7,487             7,487  
 
                                       
Other comprehensive loss:
                                       
Unrealized depreciation of investments, net of deferred tax benefit of $1
                      (1 )     (1 )
 
                             
Total other comprehensive loss
                      (1 )     (1 )
 
                             
Total comprehensive income (loss)
                7,487       (1 )     7,486  
 
                                       
Restricted stock activity
    317       (87 )                 230  
Issuance of common stock
    109       388                   497  
Stock options exercised
    12       20                   32  
Stock option expense
          275                   275  
Tax benefit associated with stock activity
          17                   17  
Retirement of call options, net of tax expense of $37
          70                   70  
Retirement of common stock warrants
          (107 )                 (107 )
Repurchase of convertible notes, net of tax benefit of $7
          (13 )                 (13 )
Dividends ($.030 per share)
          (2,794 )                 (2,794 )
 
                             
Balance January 31, 2010
  $ 93,122     $ 558,832     $ (237,638 )   $ 34     $ 414,350  
 
                             
 
(1)   Amount includes 89,567 and 89,129 shares (in thousands) of Class A common stock with a stated value of $1 per share as of January 31, 2010 and October 31, 2009, respectively, and includes 3,555 shares (in thousands) of Class B common stock.
See accompanying notes to condensed consolidated financial statements.

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Table of Contents

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(Dollars in thousands, except per share amounts)
                 
    Three Months Ended January 31,  
    2010     2009  
            (As Adjusted)  
Cash flows from operating activities:
               
Net earnings
  $ 7,487     $ 4,766  
Adjustments to reconcile net earnings to net cash provided by operating activities:
               
Net impairment losses on dispositions
          63  
Gain on early extinguishment of debt
    (17 )      
Depreciation and amortization
    6,587       6,971  
Non-cash interest and amortization of discount on senior convertible notes
    1,521       1,907  
Provision for doubtful accounts
    1,674       2,215  
Share-based compensation
    962       802  
Excess tax benefits from share-based payment arrangements
    (20 )      
Provision (benefit) for deferred income taxes
    3,569       (749 )
Estimated obligation to fund cemetery perpetual care trust
          88  
Other
    20       66  
Changes in assets and liabilities:
               
(Increase) decrease in receivables
    (1,648 )     2,993  
Increase in prepaid expenses
    (4,825 )     (5,050 )
Increase in inventories and cemetery property
    (3 )     (1,043 )
Decrease in accounts payable and accrued expenses
    (7,204 )     (7,629 )
Net effect of preneed funeral production and maturities:
               
Decrease in preneed funeral receivables and trust investments
    3,031       3,910  
Decrease in deferred preneed funeral revenue
    (2,240 )     (2,054 )
Decrease in deferred preneed funeral receipts held in trust
    (3,324 )     (1,996 )
Net effect of preneed cemetery production and deliveries:
               
Decrease in preneed cemetery receivables and trust investments
    781       1,934  
Decrease in deferred preneed cemetery revenue
    (3,575 )     (1,645 )
Increase (decrease) in deferred preneed cemetery receipts held in trust
    (173 )     81  
Increase in other
    170       1,654  
 
           
Net cash provided by operating activities
    2,773       7,284  
 
           
 
               
Cash flows from investing activities:
               
Purchases of certificates of deposit
    (5,000 )      
Proceeds from sale of assets
          292  
Purchase of subsidiaries and other investments, net of cash acquired
          (1,623 )
Additions to property and equipment
    (4,297 )     (4,789 )
Other
    39       1  
 
           
Net cash used in investing activities
    (9,258 )     (6,119 )
 
           
 
               
Cash flows from financing activities:
               
Repayments of long-term debt
    (846 )     (9 )
Retirement of common stock warrants
    (107 )      
Issuance of common stock
    115       83  
Retirement of call options
    107        
Debt refinancing costs
    (38 )      
Dividends
    (2,794 )     (2,318 )
Excess tax benefits from share-based payment arrangements
    20        
 
           
Net cash used in financing activities
    (3,543 )     (2,244 )
 
           
 
               
Net decrease in cash
    (10,028 )     (1,079 )
Cash and cash equivalents, beginning of period
    62,808       72,574  
 
           
Cash and cash equivalents, end of period
  $ 52,780     $ 71,495  
 
           
 
               
Supplemental cash flow information:
               
Cash paid (received) during the period for:
               
Income taxes, net
  $ (44 )   $ 874  
Interest
  $ 3,191     $ 5,125  
 
               
Non-cash investing and financing activities:
               
Issuance of common stock to executive officers and directors
  $ 414     $ 305  
Issuance of restricted stock, net of forfeitures
  $ 1,024     $ 312  
See accompanying notes to condensed consolidated financial statements.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(1) Basis of Presentation
(a) The Company
     Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete line of funeral and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of January 31, 2010, the Company owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, cemetery segment and corporate trust management segment.
     (b) Principles of Consolidation
     The accompanying condensed consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.
     (c) Interim Disclosures
     The information as of January 31, 2010, and for the three months ended January 31, 2010 and 2009, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2009 (the “2009 Form 10-K”).
     The October 31, 2009 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2009 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2009 Form 10-K. Certain amounts reported in prior periods have been adjusted to conform to the 2010 presentation as further discussed in Note 2.
     The results of operations for the three months ended January 31, 2010 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2010.
     (d) Use of Estimates
     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2009 Form 10-K.
     (e) Share-Based Compensation
     The Company has share-based compensation plans, which are described in more detail in Note 19 to the consolidated financial statements in the Company’s 2009 Form 10-K. Net earnings for the three months ended January 31, 2010 and 2009 include $275 and $324, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. As of January 31, 2010, there was $2,297 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 3.02 years of which $1,014 of total stock option expense is expected for fiscal year 2010. The expense related to restricted stock is reflected in earnings and amounted to $273 and $173 for the three months ended January 31, 2010 and 2009, respectively. As of January 31,

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(1) Basis of Presentation—(Continued)
2010, there was $1,234 of future restricted stock expense to be recognized, of which $984 is expected for fiscal year 2010.
     In November 2009, the Company issued 90,000 shares of Class A common stock and paid approximately $96 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $414 and was recorded in corporate general and administrative expenses during the first quarter of 2010. Each independent director must hold all of the shares received until completion of service as a member of the Board of Directors.
     The table below presents all stock options and restricted stock granted to employees during the three months ended January 31, 2010:
                     
    Number of Shares     Weighted Average        
Grant Type   Granted     Price per Share   Vesting Period   Vesting Condition
Stock options
    960,750     $5.08   Equal one-fourth   Service condition
 
              portions over 4 years    
 
                   
Restricted stock
    324,500     $5.09   Equal one-third   Market condition
 
              portions over 3 years    
 
                   
Restricted stock
    7,500     $4.89   Equal one-third   Service condition
 
              portions over 3 years    
     The fair value of the Company’s service based stock options is the estimated present value at grant date using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended January 31, 2010: expected dividend yield of 2.4 percent; expected volatility of 40.1 percent; risk-free interest rate of 2.2 percent; and an expected term of 4.8 years. In the first quarter of 2010, the Company granted 324,500 shares of restricted stock with market conditions based on achieving certain target stock prices in the years 2010, 2011 and 2012. The Company records the expense over the requisite service period.
     (f) Reclassifications
     Certain reclassifications have been made to the 2009 condensed consolidated statement of cash flows in order for these periods to be comparable. These reclassifications had no effect on operating cash flows.
(2) New Accounting Principles
     In December 2007, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Codification 805-Business Combinations (“ASC 805”). This guidance states that all business combinations, whether full, partial or step acquisitions, will result in all assets and liabilities of an acquired business being recorded at their fair values at the acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair value or the estimated amounts to be realized. ASC 805 applies to all transactions or other events in which an entity obtains control of one or more businesses. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. This guidance will apply to any future business combinations as of that date.
     In December 2007, the FASB amended guidance regarding noncontrolling interests in consolidated financial statements. This guidance states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. This guidance

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) New Accounting Principles—(Continued)
applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This guidance is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. The adoption did not have a material impact on the Company’s consolidated results of operations, financial position or cash flows.
     In May 2008, the FASB issued guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. The guidance states that issuers of convertible debt instruments that may be settled in cash upon conversion should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate as the related interest cost is recognized in subsequent periods. The entity must determine the carrying amount of the liability component of any outstanding debt instrument by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the debt instrument. The value of the debt instrument is adjusted through a discount to the face value of the debt, which is amortized as non-cash interest expense over the expected life of the debt. This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016 which were originally issued in 2007, and is required to be applied retrospectively to all periods presented. The Company adopted this guidance effective November 1, 2009. The tables below reflect the Company’s retrospective adoption of this guidance as of November 1, 2009 and summarize the impact on the Company’s balance sheet as of October 31, 2009 and statements of earnings for the three months ended January 31, 2009 and the year ended October 31, 2009. See Note 13 for additional information.
     In June 2008, the FASB issued guidance on determining whether instruments granted in share-based payment transactions are participating securities. This guidance states whether instruments granted in share-based payment transactions are participating securities prior to vesting and, therefore, need to be included in the earnings allocation in computing earnings per share under the two-class method. Unvested share-based payment awards that contain nonforfeitable rights to dividends are participating securities. Dividends are currently paid by the Company on shares of restricted stock, whether vested or nonvested, at the same rate as dividends on normal shares of the Company’s stock. In addition, restricted stockholders are not required to return the dividends to the Company if their shares of nonvested restricted stock do not vest. Therefore, under this guidance, the Company must include nonvested restricted stock in the basic earnings per share calculation and allocate earnings to common stock and the participating securities according to dividends declared and participation rights in undistributed earnings. This is effective for financial statements issued for fiscal years beginning after December 15, 2008 and must be applied retrospectively to all periods presented (including interim financial statements, summaries of earnings and selected financial data). The Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance for the three months ended January 31, 2009 and the year ended October 31, 2009 was immaterial and is presented in the statement of earnings tables below, along with the impact of the adoption of the convertible debt guidance described above.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) New Accounting Principles—(Continued)
                         
            Effects of the    
            Adoption of    
    October 31, 2009   Convertible Debt   October 31, 2009
Balance Sheet:   As Reported   Guidance   As Adjusted
Deferred tax assets
  $ 145,110     $ (9,997 )   $ 135,113  
Long-term debt
    367,496       (27,770 )     339,726  
Additional paid-in capital
    526,062       35,001       561,063  
Accumulated deficit
    (227,897 )     (17,228 )     (245,125 )
                                 
            Effects of the             Three Months  
    Three Months Ended     Adoption of     Effects of Adoption     Ended  
    January 31, 2009     Convertible Debt     of Participating     January 31, 2009  
Statement of earnings:   As Reported     Guidance     Share Guidance     As Adjusted  
Interest expense
  $ 5,910     $ 1,485             $ 7,395  
Income taxes
    3,873       (535 )             3,338  
Net earnings
    5,716       (950 )             4,766  
Basic earnings per share
  $ .06     $ (.01 )           $ .05  
 
                         
Diluted earnings per share
  $ .06     $ (.01 )           $ .05  
 
                         
Weighted average basic shares outstanding
    91,824                     91,824  
 
                         
Weighted average diluted shares outstanding
    91,896               (53 )     91,843  
 
                         
                                 
            Effects of the              
    Year Ended     Adoption of     Effects of Adoption     Year Ended October  
    October 31, 2009     Convertible Debt     of Participating     31, 2009  
Statement of earnings:   As Reported     Guidance     Share Guidance     As Adjusted  
Interest expense
  $ 22,353     $ 5,423             $ 27,776  
Gain on early extinguishment of debt
    20,078       (13,932 )             6,146  
Income taxes
    19,611       (6,968 )             12,643  
Net earnings
    35,653       (12,387 )             23,266  
Basic earnings per share
  $ .39     $ (.14 )           $ .25  
 
                         
Diluted earnings per share
  $ .39     $ (.14 )           $ .25  
 
                         
Weighted average basic shares outstanding
    91,898                     91,898  
 
                         
Weighted average diluted shares outstanding
    91,995               (17 )     91,978  
 
                         
     In June 2009, the FASB issued guidance on the accounting for transfers of financial assets. It will require more information about transfers of financial assets, including securitization transactions, and enhanced disclosures when companies have continuing exposure to the risks related to transferred financial assets. Additionally, it eliminates the concept of a qualifying special-purpose entity. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The Company is evaluating the impact the adoption will have on its consolidated financial statements.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(2) New Accounting Principles—(Continued)
     In June 2009, the FASB issued guidance which amends the consolidation guidance for variable interest entities. It will require additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The Company is evaluating the impact the adoption will have on its consolidated financial statements.
     In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The guidance on transfers between Levels 1 and 2 is effective for the Company as of its second fiscal quarter ended April 30, 2010. The guidance on Level 3 activity is effective for the Company’s fiscal year beginning November 1, 2011. The Company is evaluating the impact the adoption will have on its consolidated financial statements.
     In February 2010, the FASB issued ASU No. 2010-09 regarding subsequent events disclosure. This guidance clarifies that an entity that is a Securities and Exchange Commission filer is not required to disclose the date through which subsequent events have been evaluated. This guidance was effective upon issuance, and the Company adopted the provisions effective with the preparation of its condensed consolidated financial statements for the three months ended January 31, 2010.
(3) Preneed Funeral Activities
     The Company maintains three types of trust and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The activity of these trust and escrow accounts is detailed below and in Notes 4 and 5.
Preneed Funeral Receivables and Trust Investments
     Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of January 31, 2010 and October 31, 2009 are as follows:
                 
    January 31,     October 31,  
    2010     2009  
Trust assets
  $ 366,900     $ 358,430  
Receivables from customers
    42,448       43,225  
 
           
 
    409,348       401,655  
Allowance for cancellations
    (11,894 )     (12,143 )
 
           
Preneed funeral receivables and trust investments
  $ 397,454     $ 389,512  
 
           

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities—(Continued)
     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of January 31, 2010 are detailed below.
                                         
    January 31, 2010  
            Unrealized     Unrealized              
    Cost Basis     Gains     Losses     Market        
Cash, money market and other short- term investments
  $ 29,830     $     $     $ 29,830          
U.S. Government, agencies and municipalities
    5,888       166       (1 )     6,053          
Corporate bonds
    38,247       1,883       (874 )     39,256          
Preferred stocks
    56,785       34       (7,985 )     48,834          
Common stocks
    247,824       973       (100,269 )     148,528          
Mutual funds:
                                       
Equity
    28,839       24       (6,360 )     22,503          
Fixed income
    54,755       485       (915 )     54,325          
Insurance contracts and other long-term investments
    19,088       112       (2,637 )     16,563          
 
                               
Trust investments
  $ 481,256     $ 3,677     $ (119,041 )     365,892          
 
                                 
Market value as a percentage of cost
                                    76.0 %
 
                                     
Accrued investment income
                            1,008          
 
                                     
Trust assets
                          $ 366,900          
 
                                     
     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2009 are detailed below.
                                         
    October 31, 2009  
            Unrealized     Unrealized              
    Cost Basis     Gains     Losses     Market        
Cash, money market and other short- term investments
  $ 28,979     $     $     $ 28,979          
U.S. Government, agencies and municipalities
    6,044       214       (1 )     6,257          
Corporate bonds
    39,007       1,650       (1,458 )     39,199          
Preferred stocks
    56,885       9       (10,394 )     46,500          
Common stocks
    248,750       848       (106,788 )     142,810          
Mutual funds:
                                       
Equity
    28,841       20       (7,486 )     21,375          
Fixed income
    56,193       448       (916 )     55,725          
Insurance contracts and other long-term investments
    19,054       112       (2,594 )     16,572          
 
                               
Trust investments
  $ 483,753     $ 3,301     $ (129,637 )   $ 357,417          
 
                                 
Market value as a percentage of cost
                                    73.9 %
 
                                     
Accrued investment income
                            1,013          
 
                                     
Trust assets
                          $ 358,430          
 
                                     

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities—(Continued)
     The estimated maturities and market values of debt securities included above are as follows:
         
    January 31, 2010  
Due in one year or less
  $ 1,331  
Due in one to five years
    31,699  
Due in five to ten years
    12,255  
Thereafter
    24  
 
     
 
  $ 45,309  
 
     
     The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust. As of January 31, 2010, the Company has outstanding covered calls with a market value of $48. These covered calls constitute a hedge on $4,769, or approximately 3.2 percent, of the common stock portion of the Company’s portfolio within the funeral merchandise and services trust and also provide an opportunity for income. For the three months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($235) and $253, respectively, related to the covered call program. Although the Company realized losses associated with the covered call program in the first quarter of 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $3,135 during the period that the covered calls were outstanding.
     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.
     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.
     The Company’s Level 3 investments include insurance contracts and partnership investments. The valuation of insurance contracts and partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the insurance contracts was obtained from the insurance companies’ sites showing the current face value of the contracts which is deemed to approximate fair market value. The fair market value of the partnership investments was determined by using their most recent audited financial statements and assessing the market value of the underlying securities within the partnership.
     The inputs into the fair value of the Company’s preneed funeral merchandise and services trust investments are categorized as follows:
                                 
    Quoted Market            
    Prices in Active   Significant Other   Significant    
    Markets   Observable Inputs   Unobservable Inputs   Fair Market
    (Level 1)   (Level 2)   (Level 3)   Value
Trust investments—January 31, 2010
  $ 263,014     $ 94,143     $ 8,735     $ 365,892  
Trust investments—October 31, 2009
  $ 256,799     $ 91,956     $ 8,662     $ 357,417  

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities—(Continued)
     The change in the Company’s preneed funeral merchandise and services trust investments with significant unobservable inputs (Level 3) is as follows:
                 
    Three Months Ended January 31,  
    2010     2009  
Fair market value, beginning balance
  $ 8,662     $ 11,299  
Total unrealized losses included in other comprehensive income (1)
          (1,714 )
Purchases, sales, contributions and distributions, net
    73       (515 )
 
           
Fair market value, ending balance
  $ 8,735     $ 9,070  
 
           
 
(1)   All gains (losses) recognized in other comprehensive income for funeral trust investments are attributable to the Company’s preneed customers and are offset by a corresponding increase (decrease) in deferred preneed funeral receipts held in trust.
     Activity related to preneed funeral trust investments is as follows:
                 
    Three Months Ended January 31,
    2010   2009
Purchases
  $ 849     $ 641  
Sales
    4,349       4,616  
Realized gains from sales of investments
    628       508  
Realized losses from sales of investments and other
    (516 )     (8,501 )(1)
Interest income, dividends and other ordinary income
    2,346       3,153  
Deposits
    8,015       6,359  
Withdrawals
    11,977       11,052  
 
(1)   Includes $195 in losses from the sale of investments and $8,306 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.
     The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2010 and October 31, 2009.
                                                 
    January 31, 2010  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. Government, agencies and municipalities
  $     $     $ 21     $ (1 )   $ 21     $ (1 )
Corporate bonds
    462       (136 )     8,920       (738 )     9,382       (874 )
Preferred stocks
    491       (9 )     44,518       (7,976 )     45,009       (7,985 )
Common stocks
    1,934       (110 )     136,357       (100,159 )     138,291       (100,269 )
Mutual funds:
                                               
Equity
    3             22,357       (6,360 )     22,360       (6,360 )
Fixed income
    7,712       (30 )     4,584       (885 )     12,296       (915 )
Insurance contracts and other long-term investments
                3,219       (2,637 )     3,219       (2,637 )
 
                                   
Total
  $ 10,602     $ (285 )   $ 219,976     $ (118,756 )   $ 230,578     $ (119,041 )
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Preneed Funeral Activities—(Continued)
                                                 
    October 31, 2009  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. Government, agencies and municipalities
  $     $     $ 21     $ (1 )   $ 21     $ (1 )
Corporate bonds
                10,154       (1,458 )     10,154       (1,458 )
Preferred stocks
    493       (7 )     43,519       (10,387 )     44,012       (10,394 )
Common stocks
    1,000       (276 )     133,428       (106,512 )     134,428       (106,788 )
Mutual funds:
                                               
Equity
                21,237       (7,486 )     21,237       (7,486 )
Fixed income
    318       (1 )     4,539       (915 )     4,857       (916 )
Insurance contracts and other long-term investments
    1,203       (1,060 )     2,016       (1,534 )     3,219       (2,594 )
 
                                   
Total
  $ 3,014     $ (1,344 )   $ 214,914     $ (128,293 )   $ 217,928     $ (129,637 )
 
                                   
     The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2010, 91 percent, or $108,254, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 41 percent of the Company’s preneed funeral trust portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value during late 2008 and early 2009 due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.
     The Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts net of fees are allocated to individual contracts when earned or realized. In these trusts, unrealized gains and losses are not allocated to contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is delivered. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.
     Cash flows from preneed funeral contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.
(4) Preneed Cemetery Merchandise and Service Activities
Preneed Cemetery Receivables and Trust Investments
     Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of January 31, 2010 and October 31, 2009 are as follows:

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities—(Continued)
                 
    January 31,        
    2010     October 31, 2009  
Trust assets
  $ 169,260     $ 163,938  
Receivables from customers
    33,740       35,718  
 
           
 
    203,000       199,656  
Allowance for cancellations
    (6,203 )     (6,239 )
 
           
Preneed cemetery receivables and trust investments
  $ 196,797     $ 193,417  
 
           
     The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of January 31, 2010 are detailed below.
                                         
    January 31, 2010  
            Unrealized     Unrealized              
    Cost Basis     Gains     Losses     Market        
Cash, money market and other short- term investments
  $ 17,148     $     $     $ 17,148          
U.S. Government, agencies and municipalities
    8,751       632             9,383          
Corporate bonds
    7,491       619       (74 )     8,036          
Preferred stocks
    20,831       64       (3,498 )     17,397          
Common stocks
    127,715       846       (51,495 )     77,066          
Mutual funds:
                                       
Equity
    30,291       16       (9,554 )     20,753          
Fixed income
    18,530       143       (17 )     18,656          
Other long-term investments
    495             (75 )     420          
 
                               
Trust investments
  $ 231,252     $ 2,320     $ (64,713 )     168,859          
 
                                 
Market value as a percentage of cost
                                    73.0 %
 
                                     
Accrued investment income
                            401          
 
                                     
Trust assets
                          $ 169,260          
 
                                     

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities—(Continued)
     The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2009 are detailed below.
                                         
    October 31, 2009  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 15,123     $     $     $ 15,123          
U.S. Government, agencies and municipalities
    9,259       678             9,937          
Corporate bonds
    7,554       552       (74 )     8,032          
Preferred stocks
    20,831       46       (4,363 )     16,514          
Common stocks
    127,942       714       (54,254 )     74,402          
Mutual funds:
                                       
Equity
    30,291       15       (9,980 )     20,326          
Fixed income
    18,530       125       (4 )     18,651          
Other long-term investments
    562             (8 )     554          
 
                               
Trust investments
  $ 230,092     $ 2,130     $ (68,683 )   $ 163,539          
 
                                 
Market value as a percentage of cost
                                    71.1 %
 
                                     
Accrued investment income
                            399          
 
                                     
Trust assets
                          $ 163,938          
 
                                     
     The estimated maturities and market values of debt securities included above are as follows:
         
    January 31, 2010  
Due in one year or less
  $ 2,974  
Due in one to five years
    9,137  
Due in five to ten years
    5,153  
Thereafter
    155  
 
     
 
  $ 17,419  
 
     
     The Company is actively managing a covered call program on its equity securities within the cemetery merchandise and services trust. As of January 31, 2010, the Company has outstanding covered calls with a market value of $41. These covered calls constitute a hedge on $3,744, or approximately 4.9 percent, of the common stock portion of the Company’s portfolio within the cemetery merchandise and services trust and also provide an opportunity for income. For the three months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($187) and $86 respectively, related to the covered call program. Although the Company realized losses associated with the covered call program in the first quarter of fiscal year 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $2,409 during the period that the covered calls were outstanding.
     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.
     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are U. S. Government, agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities—(Continued)
     There are no Level 3 investments in the preneed cemetery merchandise and services trust investment portfolio.
     The inputs into the fair value of the Company’s preneed cemetery merchandise and services trust investments are categorized as follows:
                                 
    Quoted   Significant        
    Market   Other   Significant    
    Prices in Active   Observable   Unobservable    
    Markets   Inputs   Inputs   Fair Market
    (Level 1)   (Level 2)   (Level 3)   Value
Trust investments—January 31, 2010
  $ 134,140     $ 34,719     $     $ 168,859  
Trust investments—October 31, 2009
  $ 129,032     $ 34,507     $     $ 163,539  
     Activity related to preneed cemetery merchandise and services trust investments is as follows:
                 
    Three Months Ended January 31,
    2010   2009
Purchases
  $ 2,046     $ 1,153  
Sales
    2,320       2,456  
Realized gains from sales of investments
    423       104  
Realized losses from sales of investments and other
    (881 )     (4,464 ) (1)
Interest income, dividends and other ordinary income
    1,152       1,300  
Deposits
    5,693       4,033  
Withdrawals
    4,404       3,768  
 
(1)   Includes $1,243 in losses from the sale of investments and $3,221 in losses related to certain investments that were rendered worthless or practically worthless and to certain investments that the Company determined it did not have the intent to hold until they recover in value.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities—(Continued)
     The following tables show the gross unrealized losses and fair value of the preneed cemetery merchandise and services trust investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2010 and October 31, 2009.
                                                 
    January 31, 2010  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. Government, agencies and municipalities
  $ 41     $     $     $     $ 41     $  
Corporate bonds
    220       (44 )     670       (30 )     890       (74 )
Preferred stocks
                17,221       (3,498 )     17,221       (3,498 )
Common stocks
    2,257       (19 )     68,299       (51,476 )     70,556       (51,495 )
Mutual funds:
                                               
Equity
                20,612       (9,554 )     20,612       (9,554 )
Fixed income
    2,979       (14 )     15       (3 )     2,994       (17 )
Other long-term investments
                      (75 )           (75 )
 
                                   
Total
  $ 5,497     $ (77 )   $ 106,817     $ (64,636 )   $ 112,314     $ (64,713 )
 
                                   
                                                 
    October 31, 2009  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
Corporate bonds
  $     $     $ 1,045     $ (74 )   $ 1,045     $ (74 )
Preferred stocks
                16,356       (4,363 )     16,356       (4,363 )
Common stocks
    1,755       (464 )     67,374       (53,790 )     69,129       (54,254 )
Mutual funds:
                                               
Equity
                20,186       (9,980 )     20,186       (9,980 )
Fixed income
    20             15       (4 )     35       (4 )
Other long-term investments
                      (8 )           (8 )
 
                                   
Total
  $ 1,775     $ (464 )   $ 104,976     $ (68,219 )   $ 106,751     $ (68,683 )
 
                                   
     The unrealized losses in the preneed cemetery merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2010, 85 percent, or $54,993, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 46 percent of the Company’s preneed cemetery merchandise and services trust portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.
     The Company’s policy for recognizing trust income follows the allocation of trust earnings to individual contracts as stipulated in the Company’s respective trust agreements for distributable income. In substantially all of the Company’s trusts, dividends and interest earned and net capital gains and losses realized by preneed cemetery trust or escrow accounts net of fees are allocated to individual contracts when earned or realized. In these trusts,

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(4) Preneed Cemetery Merchandise and Service Activities—(Continued)
     unrealized gains and losses are not allocated to contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original sales price when the underlying service or merchandise is delivered. Principal and earnings are withdrawn only as the merchandise or servies are delivered or contracts are cancelled, except in jurisdictions that permit trust earnings to be withdrawn currently.
     Cash flows from preneed cemetery merchandise and services contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.
(5) Cemetery Interment Rights and Perpetual Care Trusts
     Earnings from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $2,473 and $1,722 for the three months ended January 31, 2010 and 2009, respectively.
     The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of January 31, 2010 are detailed below.
                                         
    January 31, 2010  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 33,444     $     $     $ 33,444          
U.S. Government, agencies and municipalities
    6,508       368       (80 )     6,796          
Corporate bonds
    31,843       1,570       (1,065 )     32,348          
Preferred stocks
    57,893       5       (13,397 )     44,501          
Common stocks
    96,517       2,746       (39,965 )     59,298          
Mutual funds:
                                       
Equity
    8,869       37       (1,478 )     7,428          
Fixed income
    29,729       290       (397 )     29,622          
Other long-term investments
    513       1       (196 )     318          
 
                               
Trust investments
  $ 265,316     $ 5,017     $ (56,578 )     213,755          
 
                                 
Market value as a percentage of cost
                                    80.6 %
 
                                     
Accrued investment income
                            705          
 
                                     
Trust assets
                          $ 214,460          
 
                                     

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
     The cost basis and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2009 are detailed below.
                                         
    October 31, 2009  
    Cost Basis     Unrealized Gains     Unrealized Losses     Market          
Cash, money market and other short- term investments
  $ 17,784     $     $     $ 17,784          
U.S. Government, agencies and municipalities
    5,416       394       (82 )     5,728          
Corporate bonds
    42,735       2,088       (1,085 )     43,738          
Preferred stocks
    58,421       2       (17,137 )     41,286          
Common stocks
    96,831       2,663       (42,792 )     56,702          
Mutual funds:
                                       
Equity
    6,838       25       (1,560 )     5,303          
Fixed income
    32,561       1,340       (342 )     33,559          
Other long-term investments
    766       4       (177 )     593          
 
                               
Trust investments
  $ 261,352     $ 6,516     $ (63,175 )   $ 204,693          
 
                                 
Market value as a percentage of cost
                                    78.3 %
 
                                     
Accrued investment income
                            783          
 
                                     
Trust assets
                          $ 205,476          
 
                                     
     The estimated maturities and market values of debt securities included above are as follows:
         
    January 31, 2010  
Due in one year or less
  $ 10,259  
Due in one to five years
    19,974  
Due in five to ten years
    8,424  
Thereafter
    487  
 
     
 
  $ 39,144  
 
     
     The Company is actively managing a covered call program on its equity securities within the cemetery perpetual care trust. As of January 31, 2010, the Company has outstanding covered calls with a market value of $24. These covered calls constitute a hedge on $2,514, or approximately 4.2 percent, of the common stock portion of the Company’s portfolio within the cemetery perpetual care trust and also provide an opportunity for current income. For the three months ended January 31, 2010 and 2009, the Company realized trust earnings (losses) of approximately ($165) and $37, respectively, related to the covered call program. Although the Company realized losses associated with the covered call program in the first quarter of fiscal year 2010, it continues to hold the underlying securities against which these covered calls were issued; these underlying securities appreciated in value by $1,599 during the period that the covered calls were outstanding.
     Where quoted prices are available in an active market, investments held by the trusts are classified as Level 1 investments pursuant to the three-level valuation hierarchy. The Company’s Level 1 investments include cash, money market and other short-term investments, common stock and mutual funds.
     Where quoted market prices are not available for the specific security, then fair values are estimated by using quoted prices of securities with similar characteristics. These investments are primarily U. S. Government,

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
agencies and municipalities, corporate bonds and preferred stocks, all of which are classified within Level 2 of the valuation hierarchy.
     The Company’s Level 3 investments include an investment in a partnership. The valuation of partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the partnership investment was determined by using its most recent audited financial statements and assessing the market value of the underlying securities within the partnership.
     The inputs into the fair value of the Company’s cemetery perpetual care trust investments are categorized as follows:
                                 
    Quoted Market            
    Prices in Active   Significant Other   Significant    
    Markets   Observable Inputs   Unobservable Inputs   Fair Market
    (Level 1)   (Level 2)   (Level 3)   Value
Trust investments—January 31, 2010
  $ 129,942     $ 83,645     $ 168     $ 213,755  
Trust investments—October 31, 2009
  $ 113,715     $ 90,752     $ 226     $ 204,693  
     The change in the Company’s cemetery perpetual care trust investments with significant unobservable inputs (Level 3) is as follows:
                 
    Three Months Ended January 31,  
    2010     2009  
Fair market value, beginning balance
  $ 226     $ 611  
Total unrealized losses included in other comprehensive income (1)
          (118 )
Transfers out of Level 3 category and other
    (58 )     (250 )
 
           
Fair market value, ending balance
  $ 168     $ 243  
 
           
 
(1)     All gains (losses) recognized in other comprehensive income for cemetery perpetual care trust investments are attributable to the Company’s customers and are offset by a corresponding increase (decrease) in perpetual care trusts’ corpus.
     In states where the Company withdraws and recognizes capital gains in its cemetery perpetual care trusts, if it realizes net capital losses (i.e. losses in excess of capital gains in the trust) and the fair market value of the trust assets is less than the aggregate amounts required to be contributed to the trust, some states may require the Company to make cash deposits to the trusts or may require the Company to stop withdrawing earnings until future earnings restore the net realized losses. As of October 31, 2009, the Company had a liability recorded for the estimated probable funding obligation to restore the net realized losses as a result of fiscal year 2008 and 2009 losses of $14,010, which was recognized as realized losses in the consolidated statement of earnings in fiscal years 2008 and 2009 in cemetery costs. The Company recorded no additional estimated probable funding obligation during the three months ended January 31, 2010. The Company had earnings of $368 for the three months ended January 31, 2010, within the trusts that it did not withdraw from the trusts in order to satisfy a portion of its estimated probable funding obligation. As of January 31, 2010, the Company’s estimated probable funding obligation was $13,642. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible that additional funding obligations may exist with an estimated amount of approximately $3,100.

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Table of Contents

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
     Activity related to preneed cemetery perpetual care trust investments is as follows:
                 
    Three Months Ended January 31,
    2010   2009
Purchases
  $ 16,172     $ 329  
Sales
    28,885       1,806  
Realized gains from sales of investments
    2,025       359  
Realized losses from sales of investments and other
    (550 )     (96 ) (1)
Interest income, dividends and other ordinary income
    2,161       2,284  
Deposits
    1,838       2,454 (2)
Withdrawals
    888       1,587  
 
(1)    Includes $84 in losses related to certain investments that were rendered worthless or practically worthless.
 
(2)    Includes $734 that the Company contributed to the cemetery perpetual care trusts as part of its funding obligation during the three months ended January 31, 2009.
     During the three months ended January 31, 2010 and 2009, cemetery revenues were $52,292 and $47,580, respectively, of which $2,334 and $1,613, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.
     The following tables show the gross unrealized losses and fair value of the cemetery perpetual care trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2010 and October 31, 2009.
                                                 
    January 31, 2010  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. Government, agencies and municipalities
  $     $     $ 270     $ (80 )   $ 270     $ (80 )
Corporate bonds
    514       (92 )     2,178       (973 )     2,692       (1,065 )
Preferred stocks
                42,898       (13,397 )     42,898       (13,397 )
Common stocks
    1,716       (16 )     51,118       (39,949 )     52,834       (39,965 )
Mutual funds:
                                               
Equity
    1,949       (53 )     5,188       (1,425 )     7,137       (1,478 )
Fixed income
    5,416       (51 )     1,074       (346 )     6,490       (397 )
Other long-term investments
                201       (196 )     201       (196 )
 
                                   
Total
  $ 9,595     $ (212 )   $ 102,927     $ (56,366 )   $ 112,522     $ (56,578 )
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(5) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
                                                 
    October 31, 2009  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
U.S. Government, agencies and municipalities
  $ 270     $ (81 )   $ 6     $ (1 )   $ 276     $ (82 )
Corporate bonds
    600       (124 )     1,732       (961 )     2,332       (1,085 )
Preferred stocks
                40,784       (17,137 )     40,784       (17,137 )
Common stocks
    (38 )     (473 )     50,445       (42,319 )     50,407       (42,792 )
Mutual funds:
                                               
Equity
    43       (11 )     5,034       (1,549 )     5,077       (1,560 )
Fixed income
    118             1,096       (342 )     1,214       (342 )
Other long-term investments
    201       (177 )                 201       (177 )
 
                                   
Total
  $ 1,194     $ (866 )   $ 99,097     $ (62,309 )   $ 100,291     $ (63,175 )
 
                                   
     The unrealized losses in the cemetery perpetual care trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, any concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2010, 94 percent, or $53,362, were generated by common stock and preferred stock investments. Most of the common stock investments are part of the S&P 500 Index, and all preferred stocks had a rating of “A” or better at the time of purchase. Because approximately 28 percent of the Company’s cemetery perpetual care trusts portfolio is currently invested in common stock, the Company generally expects its portfolio performance to improve if the performance of the overall stock market improves, but would also expect its performance to deteriorate if the overall stock market declines. The preferred stocks are primarily in the financial services sector which experienced a significant decline in market value in late 2008 and early 2009 due to the current economic crisis. The Company believes that it has sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.
     Cash flows from cemetery perpetual care contracts are presented as operating cash flows in the Company’s condensed consolidated statements of cash flows.
(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus
     The components of deferred preneed funeral and cemetery receipts held in trust in the condensed consolidated balance sheet at January 31, 2010 are as follows:
                         
    Deferred Receipts Held in Trust        
    Preneed     Preneed        
    Funeral     Cemetery     Total  
Trust assets at market value
  $ 366,900     $ 169,260     $ 536,160  
Less:
                       
Pending withdrawals
    (7,387 )     (5,015 )     (12,402 )
Pending deposits
    1,627       1,039       2,666  
 
                 
Deferred receipts held in trust
  $ 361,140     $ 165,284     $ 526,424  
 
                 

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(6) Deferred Preneed Funeral and Cemetery Receipts Held in Trust and Perpetual Care Trusts’ Corpus-(Continued)
     The components of perpetual care trusts’ corpus in the condensed consolidated balance sheet at January 31, 2010 are as follows:
         
    Perpetual Care  
    Trusts’ Corpus  
Trust assets at market value
  $ 214,460  
Less:
       
Pending withdrawals
    (3,164 )
Pending deposits
    780  
 
     
Perpetual care trusts’ corpus
  $ 212,076  
 
     
Investment and other income, net
     The components of investment and other income, net in the condensed consolidated statements of earnings for the three months ended January 31, 2010 and 2009 are detailed below.
                 
    Three Months Ended January 31,  
    2010     2009  
Realized gains from sales of investments
  $ 3,076     $ 971  
Realized losses from sales of investments and other
    (1,947 )     (13,061 )
Interest income, dividends and other ordinary income
    5,659       6,737  
Trust expenses and income taxes
    (2,538 )     (2,134 )
 
           
Net trust investment income (loss)
    4,250       (7,487 )
Reclassification to deferred preneed funeral and cemetery receipts held in trust
    (1,350 )     9,273  
Reclassification to perpetual care trusts’ corpus
    (2,900 )     (1,786 )
 
           
Total deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus
           
Investment and other income, net (1)
    24       41  
 
           
Total investment and other income, net
  $ 24     $ 41  
 
           
 
(1)    Investment and other income, net consists of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust.
(7) Commitments and Contingencies
Litigation
     Funeral Consumers Alliance, Inc., et al. v. Service Corporation International, Alderwoods Group, Inc., Stewart Enterprises, Inc., Hillenbrand Industries, Inc., and Batesville Casket Co., on the docket of the United States District Court for the Southern District of Texas. This purported class action was originally filed on May 2, 2005, in the United States District Court for the Northern District of California, on behalf of a nationwide class defined to include all consumers who purchased a Batesville casket from the funeral home defendants at any time. The court consolidated it with five subsequently filed, substantially similar cases (the “Consolidated Consumer Cases”).
     The Consolidated Consumer Cases allege that the defendants acted jointly to reduce competition from independent casket discounters and fix and maintain prices on caskets in violation of the federal antitrust laws and

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(7) Commitments and Contingencies-(Continued)
California’s Business and Professions Code. The plaintiffs seek treble damages, restitution, injunctive relief, interest, costs and attorneys’ fees.
     At the defendants’ request, in late September 2005, the court transferred the Consolidated Consumer Cases to the United States District Court for the Southern District of Texas. The transferred Consolidated Consumer Cases have been consolidated before a single judge in the Southern District of Texas.
     On November 10, 2006, after the court denied defendants’ motions to dismiss, the Company answered the first amended consolidated class action complaint, denying liability and asserting various affirmative defenses. Fact discovery has been completed, and expert discovery is complete with the exception of the deposition of one expert witness.
     In April 2007, the plaintiffs filed an expert report indicating that the amounts sought from all defendants as damages to the proposed class would be in the range of approximately $950 million to approximately $1.5 billion, before trebling. Accordingly, any judgment in favor of the proposed class could have a material adverse effect on the Company’s financial condition and results of operations.
     On March 26, 2009, the court denied plaintiffs’ motion for class certification. The United States Court of Appeals for the Fifth Circuit denied plaintiffs’ petition for permission to appeal on June 19, 2009, and denied plaintiffs’ motion for reconsideration on July 29, 2009.
     The named plaintiffs (FCA and thirteen individuals) are proceeding with a jury trial scheduled for August 2, 2010 on their individual claims for alleged damages arising out of the purchase of ten caskets. The named plaintiffs also have indicated an intent to seek injunctive relief and attorneys’ fees.
     The Company believes it has meritorious defenses to the substantive allegations asserted, to class certification, and to the plaintiffs’ damage theories and calculations, and the Company intends to aggressively defend itself in these proceedings. The Company has not recorded a liability related to this litigation given that it does not believe that a loss is probable and estimable.
Other Litigation
     The Company has been unable to finalize its negotiations with its insurance carriers related to property damage and extra expenses, and business interruption damages, related to Hurricane Katrina, and filed suit against the carriers in August 2007. In 2007, the carriers advanced an additional $1,100, which the Company has not recorded as income but as a liability pending the outcome of the litigation. The suit involves numerous significant policy interpretation disputes, among other issues, and no assurance can be given as to how much additional proceeds the Company may recover from its insurers, if any, or the timing of the receipt of any additional proceeds.
     The Company is a defendant in a variety of other litigation matters that have arisen in the ordinary course of business, which are covered by insurance or otherwise not considered to be material. The Company carries insurance with coverages and coverage limits that it believes to be adequate.
Other Commitments and Contingencies
     In those states where the Company has withdrawn realized net capital gains in the past from its cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. As of January 31, 2010, the Company had $13,642 recorded as a liability for an estimated probable funding obligation. As of January 31, 2010, the Company had unrealized losses of approximately $44,774 in the cemetery perpetual care

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(7) Commitments and Contingencies-(Continued)
trusts in these states. Because all of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in an additional corresponding funding liability and increase in cemetery costs.
     From time to time, unidentified contracts are presented to the Company relating to contracts sold prior to the time the Company acquired certain businesses. In addition, from time to time, the Company has identified in its backlog, certain contracts in which services or merchandise have already been delivered. Using historical trends and statistical analysis, the Company has recorded an estimated net liability for these items of approximately $2.0 million and $3.0 million as of January 31, 2010 and October 31, 2009, respectively.
     The Company is required to maintain a bond ($24,815 as of January 31, 2010) to guarantee its obligations relating to funds the Company withdrew in fiscal year 2001 from its preneed funeral trusts in Florida. This amount would become senior secured debt if the Company was required to borrow funds under the senior secured revolving credit facility to extinguish the bond obligation by returning to the trusts the amounts it previously withdrew that relate to the remaining undelivered preneed contracts.
(8) Reconciliation of Basic and Diluted Per Share Data
                         
    Earnings     Shares     Per Share  
    (Numerator)     (Denominator)     Data  
Three Months Ended January 31, 2010
                       
Net earnings
  $ 7,487                  
Allocation of earnings to nonvested restricted stock
    (83 )                
 
                     
Basic earnings per common share:
                       
Net earnings available to common shareholders
  $ 7,404       92,053     $ .08  
 
                   
Effect of dilutive securities:
                       
Stock options assumed exercised
            181          
 
                     
Diluted earnings per common share:
                       
Net earnings available to common shareholders plus stock options assumed exercised
  $ 7,404       92,234     $ .08  
 
                 
                         
    Earnings     Shares     Per Share  
    (Numerator)     (Denominator)     Data  
Three Months Ended January 31, 2009
                       
Net earnings
  $ 4,766                  
Allocation of earnings to nonvested restricted stock
    (44 )                
 
                     
Basic earnings per common share:
                       
Net earnings available to common shareholders
  $ 4,722       91,824     $ .05  
 
                   
Effect of dilutive securities:
                       
Stock options assumed exercised
            19          
 
                     
Diluted earnings per common share:
                       
Net earnings available to common shareholders plus stock options assumed exercised
  $ 4,722       91,843     $ .05  
 
                 
     As discussed in Note 2, the Company adopted guidance on determining whether instruments granted in share-based payment transactions are participating securities, effective November 1, 2009. Since this guidance requires retrospective treatment, the information presented above for the three months ended January 31, 2009 has been adjusted to reflect the adoption of this guidance.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(8) Reconciliation of Basic and Diluted Per Share Data-(Continued)
     During the three months ended January 31, 2010, options to purchase 2,074,986 shares of common stock at prices ranging from $5.04 to $8.47 per share were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for those periods. These options expire between November 29, 2012 and January 18, 2017.
     Options to purchase 1,653,796 shares of common stock at prices ranging from $5.06 to $8.47 per share for the three months ended January 31, 2009 were outstanding but were not included in the computation of diluted earnings per share because the exercise prices of the options were greater than the average market price of the common shares for the period. Additionally, weighted-average shares outstanding for the three months ended January 31, 2009 exclude the effect of approximately 110,217 options, because such options were not dilutive.
     For the three months ended January 31, 2010 and 2009, 438,000 and 468,000 market based stock options, respectively, were not dilutive. The market based stock options were not dilutive because the market conditions required for vesting for the respective grants were not achieved during any of periods presented.
     For the three months ended January 31, 2010, a maximum of 16,640,100 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 13,312,080 shares of Class A common stock under the common stock warrants associated with the June 2007 senior convertible debt transaction were not dilutive, as the average price of the Company’s stock for the three months ended January 31, 2010 was less than the conversion price of the senior convertible notes and strike price of the warrants. For the three months ended January 31, 2009, a maximum of 25,000,000 shares of the Company’s Class A common stock related to the senior convertible notes and a maximum of 20,000,000 shares of Class A common stock under the associated common stock warrants were also not dilutive.
     The Company includes Class A and Class B common stock in its diluted shares calculation. As of January 31, 2010, the Company’s Chairman, Frank B. Stewart, Jr., was the record holder of all of the Company’s shares of Class B common stock. The Company’s Class A and B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr.
(9) Segment Data
     The Company has determined that managements’ approach to operating the business indicates that there are three operating and reportable segments: a funeral segment, a cemetery segment and a corporate trust management segment. The Company does not aggregate its operating segments. Therefore, its operating and reportable segments are the same. Prior period data has been retrospectively adjusted to conform to the new segment presentation.
                 
    Total Revenue  
    Three Months        
    Ended     Three Months Ended  
    January 31, 2010     January 31, 2009  
Funeral
  $ 68,029     $ 68,146  
Cemetery(1)
    50,508       45,690  
Corporate Trust Management(2)
    5,863       5,494  
 
           
Total
  $ 124,400     $ 119,330  
 
           

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(9) Segment Data-(Continued)
                 
    Total Gross Profit  
    Three Months Ended     Three Months Ended  
    January 31, 2010     January 31, 2009  
Funeral
  $ 15,347     $ 14,842  
Cemetery(1)
    4,411       3,187  
Corporate Trust Management(2)
    5,411       5,054  
 
           
Total
  $ 25,169     $ 23,083  
 
           
                 
    Net Total Preneed Merchandise and  
    Service Sales(3)  
    Three Months Ended     Three Months Ended  
    January 31, 2010     January 31, 2009  
Funeral
  $ 18,111     $ 18,732  
Cemetery(1)
    10,204       10,779  
 
           
Total
  $ 28,315     $ 29,511  
 
           
 
(1)    Perpetual care trust earnings are included in the revenues and gross profit of the cemetery segment and amounted to $2,473 and $1,722 for the three months ended January 31, 2010 and 2009, respectively.
 
(2)    Corporate trust management consists of trust management fees and funeral and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to the Company’s subsidiary, Investors Trust, Inc. The trust earnings represent earnings generated over the life of the preneed contracts delivered during the relevant periods and distributable to the Company based upon the Company’s respective trust agreements. Trust management fees included in funeral revenue for the three months ended January 31, 2010 and 2009 were $1,115 and $937, respectively, and funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for the three months ended January 31, 2010 and 2009 were $2,963 and $2,667, respectively. Trust management fees included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $1,189 and $952, respectively, and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $596 and $938, respectively.
 
(3)    Preneed sales amounts represent total preneed funeral trust and insurance sales and cemetery service and merchandise trust sales generated in the applicable period, net of cancellations.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(9) Segment Data-(Continued)
     A reconciliation of total segment gross profit to total earnings before income taxes for the three months ended January 31, 2010 and 2009 is as follows:
                 
    Three Months Ended January 31,  
    2010     2009  
Gross profit for reportable segments
  $ 25,169     $ 23,083  
Corporate general and administrative expenses
    (6,554 )     (7,506 )
Hurricane related charges, net
          (315 )
Net impairment losses on dispositions
          (63 )
Other operating income, net
    179       259  
Interest expense
    (6,456 )     (7,395 )
Gain on early extinguishment of debt
    17        
Investment and other income, net
    24       41  
 
           
Earnings before income taxes
  $ 12,379     $ 8,104  
 
           

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(10) Supplementary Information
     The detail of certain income statement accounts is as follows for the three months ended January 31, 2010 and 2009.
                 
    Three Months Ended January 31,  
    2010     2009  
Service revenue
               
Funeral
  $ 45,327     $ 45,306  
Cemetery
    15,571       15,101  
 
           
 
    60,898       60,407  
 
               
Merchandise revenue
               
Funeral
    25,142       24,917  
Cemetery
    33,141       29,027  
 
           
 
    58,283       53,944  
 
               
Other revenue
               
Funeral
    1,639       1,527  
Cemetery
    3,580       3,452  
 
           
 
    5,219       4,979  
 
           
 
               
Total revenue
  $ 124,400     $ 119,330  
 
           
 
               
Service costs
               
Funeral
  $ 14,705     $ 14,668  
Cemetery
    9,802       9,755  
 
           
 
    24,507       24,423  
 
               
Merchandise costs
               
Funeral
    14,585       15,006  
Cemetery
    22,204       19,250  
 
           
 
    36,789       34,256  
 
               
Facility expenses
               
Funeral
    23,621       23,821  
Cemetery
    14,314       13,747  
 
           
 
    37,935       37,568  
 
           
 
               
Total costs
  $ 99,231     $ 96,247  
 
           
     Service revenue includes funeral service revenue, funeral trust earnings, insurance commission revenue, burial site openings and closings and perpetual care trust earnings. Merchandise revenue includes funeral merchandise revenue, flower sales, cemetery property sales revenue, cemetery merchandise delivery revenue and merchandise trust earnings. Other revenue consists of finance charge revenue and trust management fees. Service costs include the direct costs associated with service revenue and preneed selling costs associated with preneed service sales. Merchandise costs include the direct costs associated with merchandise revenue, preneed selling costs associated with preneed merchandise sales and the Company’s estimated obligation to fund the cemetery perpetual care trusts.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes
     The following tables present the condensed consolidating historical financial statements as of January 31, 2010 and October 31, 2009 and for the three months ended January 31, 2010 and 2009, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries of the 6.25 percent senior notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the senior notes. The guarantor subsidiaries of the 6.25 percent senior notes are wholly-owned directly or indirectly by the Company, except for three immaterial guarantor subsidiaries of which the Company is the majority owner. The non-guarantor subsidiaries of the senior convertible notes are identical to those of the 6.25 percent senior notes but also include three immaterial non-wholly owned subsidiaries and any future non-wholly owned subsidiaries. The guarantees are full and unconditional and joint and several. In the statements presented within this footnote, Tier 2 guarantor subsidiaries represent the three immaterial non-wholly owned subsidiaries that do not guaranty the senior convertible notes but do guaranty the 6.25 percent senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the 6.25 percent senior notes and senior convertible notes. In the condensed consolidating statements of earnings and other comprehensive income, corporate general and administrative expenses and interest expense of the parent are presented net of amounts charged to the guarantor and non-guarantor subsidiaries.
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
                                                 
    Three Months Ended January 31, 2010  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
Revenues:
                                               
Funeral
  $     $ 67,232     $ 485     $ 4,391     $     $ 72,108  
Cemetery
          46,676       572       5,044             52,292  
 
                                   
 
          113,908       1,057       9,435             124,400  
 
                                   
 
                                               
Costs and expenses:
                                               
Funeral
          49,441       263       3,207             52,911  
Cemetery
          41,573       620       4,127             46,320  
 
                                   
 
          91,014       883       7,334             99,231  
 
                                   
Gross profit
          22,894       174       2,101             25,169  
Corporate general and administrative expenses
    (6,554 )                             (6,554 )
Hurricane related recoveries (charges), net
    (54 )           54                    
Other operating income, net
    16       143             20             179  
 
                                   
Operating earnings (loss)
    (6,592 )     23,037       228       2,121             18,794  
Interest expense
    (487 )     (5,478 )     (8 )     (483 )           (6,456 )
Gain on early extinguishment of debt
    17                               17  
Investment and other income, net
    24                               24  
Equity in subsidiaries
    11,821       80                   (11,901 )      
 
                                   
Earnings before income taxes
    4,783       17,639       220       1,638       (11,901 )     12,379  
Income tax expense (benefit)
    (2,704 )     7,043       54       499             4,892  
 
                                   
Net earnings
    7,487       10,596       166       1,139       (11,901 )     7,487  
Other comprehensive loss, net
    (1 )                 (1 )     1       (1 )
 
                                   
Comprehensive income
  $ 7,486     $ 10,596     $ 166     $ 1,138     $ (11,900 )   $ 7,486  
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
                                                 
    Three Months Ended January 31, 2009  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
Revenues:
                                               
Funeral
  $     $ 66,871     $ 399     $ 4,480     $     $ 71,750  
Cemetery
          43,025       661       3,894             47,580  
 
                                   
 
          109,896       1,060       8,374             119,330  
 
                                   
Costs and expenses:
                                               
Funeral
          50,000       291       3,204             53,495  
Cemetery
          38,811       636       3,305             42,752  
 
                                   
 
          88,811       927       6,509             96,247  
 
                                   
Gross profit
          21,085       133       1,865             23,083  
Corporate general and administrative expenses
    (7,506 )                             (7,506 )
Hurricane related charges, net
    (276 )     (39 )                       (315 )
Net impairment losses on dispositions
    (8 )     (55 )                       (63 )
Other operating income (expense), net
    (2 )     244       1       16             259  
 
                                   
Operating earnings (loss)
    (7,792 )     21,235       134       1,881             15,458  
Interest expense
    (666 )     (6,165 )     (36 )     (528 )           (7,395 )
Investment and other income, net
    41                               41  
Equity in subsidiaries
    11,171       135                   (11,306 )      
 
                                   
Earnings before income taxes
    2,754       15,205       98       1,353       (11,306 )     8,104  
Income tax expense (benefit)
    (2,012 )     4,836       19       495             3,338  
 
                                   
Net earnings
    4,766       10,369       79       858       (11,306 )     4,766  
Other comprehensive income, net
    3                   3       (3 )     3  
 
                                   
Comprehensive income
  $ 4,769     $ 10,369     $ 79     $ 861     $ (11,309 )   $ 4,769  
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Balance Sheets
                                                 
    January 31, 2010  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
ASSETS
                                               
Current assets:
                                               
Cash and cash equivalents
  $ 44,418     $ 6,023     $ 36     $ 2,303     $     $ 52,780  
Certificates of deposit
    5,000                               5,000  
Receivables, net of allowances
    6,968       47,689       447       4,227             59,331  
Inventories
    263       33,440       336       1,908             35,947  
Prepaid expenses
    1,516       8,068       61       1,929             11,574  
Deferred income taxes, net
    9,932       10,296       43       1,374             21,645  
 
                                   
Total current assets
    68,097       105,516       923       11,741             186,277  
Receivables due beyond one year, net of allowances
          48,113       397       13,552             62,062  
Preneed funeral receivables and trust investments
          387,954             9,500             397,454  
Preneed cemetery receivables and trust investments
          189,112       1,085       6,600             196,797  
Goodwill
          227,401       48       19,787             247,236  
Cemetery property, at cost
          348,668       11,286       26,235             386,189  
Property and equipment, at cost
    54,268       469,159       2,208       38,195             563,830  
Less accumulated depreciation
    37,134       213,539       1,039       15,522             267,234  
 
                                   
Net property and equipment
    17,134       255,620       1,169       22,673             296,596  
Deferred income taxes, net
          105,844             10,994       (6,972 )     109,866  
Cemetery perpetual care trust investments
          202,202       8,462       3,796             214,460  
Other assets
    7,975       5,113       6       1,045             14,139  
Intercompany receivables
    774,766                         (774,766 )      
Equity in subsidiaries
    16,289       8,201                   (24,490 )      
 
                                   
Total assets
  $ 884,261     $ 1,883,744     $ 23,376     $ 125,923     $ (806,228 )   $ 2,111,076  
 
                                   
 
                                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                               
Current liabilities:
                                               
Current maturities of long-term debt
  $ 3     $     $     $     $     $ 3  
Accounts payable, accrued expenses and other current liabilities
    14,528       68,931       220       4,606             88,285  
 
                                   
Total current liabilities
    14,531       68,931       220       4,606             88,288  
Long-term debt, less current maturities
    339,934                               339,934  
Deferred income taxes
    3,996             2,976             (6,972 )      
Intercompany payables
          751,049       3,082       20,635       (774,766 )      
Deferred preneed funeral revenue
          198,957             46,627             245,584  
Deferred preneed cemetery revenue
          236,145       278       26,965             263,388  
Deferred preneed funeral and cemetery receipts held in trust
          519,327       1,049       6,048             526,424  
Perpetual care trusts’ corpus
          199,846       8,455       3,775             212,076  
Other long-term liabilities
    17,163       3,776             93             21,032  
Negative equity in subsidiaries
    94,287                         (94,287 )      
 
                                   
Total liabilities
    469,911       1,978,031       16,060       108,749       (876,025 )     1,696,726  
 
                                   
Common stock
    93,122       102       324       52       (478 )     93,122  
Other
    321,194       (94,389 )     6,992       17,088       70,309       321,194  
Accumulated other comprehensive income
    34                   34       (34 )     34  
 
                                   
Total shareholders’ equity
    414,350       (94,287 )     7,316       17,174       69,797       414,350  
 
                                   
Total liabilities and shareholders’ equity
  $ 884,261     $ 1,883,744     $ 23,376     $ 125,923     $ (806,228 )   $ 2,111,076  
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Balance Sheets
                                                 
    October 31, 2009  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
ASSETS
                                               
Current assets:
                                               
Cash and cash equivalents
  $ 56,734     $ 5,096     $ 52     $ 926     $     $ 62,808  
Receivables, net of allowances
    7,062       47,388       504       4,485             59,439  
Inventories
    269       33,440       312       2,135             36,156  
Prepaid expenses
    1,218       3,804       38       1,688             6,748  
Deferred income taxes, net
    9,006       11,168       47       1,494             21,715  
 
                                   
Total current assets
    74,289       100,896       953       10,728             186,866  
Receivables due beyond one year, net of allowances
          48,783       420       13,808             63,011  
Preneed funeral receivables and trust investments
          379,899             9,613             389,512  
Preneed cemetery receivables and trust investments
          185,447       1,124       6,846             193,417  
Goodwill
          227,401       48       19,787             247,236  
Cemetery property, at cost
          348,627       11,315       26,035             385,977  
Property and equipment, at cost
    53,956       466,187       2,183       38,136             560,462  
Less accumulated depreciation
    36,015       208,806       994       15,190             261,005  
 
                                   
Net property and equipment
    17,941       257,381       1,189       22,946             299,457  
Deferred income taxes, net
          107,636             10,415       (4,653 )     113,398  
Cemetery perpetual care trust investments
          193,616       8,207       3,653             205,476  
Other assets
    8,402       5,196       6       1,050             14,654  
Intercompany receivables
    771,490                         (771,490 )      
Equity in subsidiaries
    15,065       8,121                   (23,186 )      
 
                                   
Total assets
  $ 887,187     $ 1,863,003     $ 23,262     $ 124,881     $ (799,329 )   $ 2,099,004  
 
                                   
 
                                               
LIABILITIES AND SHAREHOLDERS’ EQUITY
                                               
Current liabilities:
                                               
Current maturities of long-term debt
  $ 5     $     $     $     $     $ 5  
Accounts payable, accrued expenses and other current liabilities
    15,209       75,920       199       4,678             96,006  
 
                                   
Total current liabilities
    15,214       75,920       199       4,678             96,011  
Long-term debt, less current maturities
    339,721                               339,721  
Deferred income taxes
    1,672             2,981             (4,653 )      
Intercompany payables
          747,847       3,402       20,241       (771,490 )      
Deferred preneed funeral revenue
          200,990             46,835             247,825  
Deferred preneed cemetery revenue
          239,177       277       27,510             266,964  
Deferred preneed funeral and cemetery receipts held in trust
          507,912       1,045       5,830             514,787  
Perpetual care trusts’ corpus
          192,324       8,208       3,636             204,168  
Other long-term liabilities
    17,040       3,716             115             20,871  
Negative equity in subsidiaries
    104,883                         (104,883 )      
 
                                   
Total liabilities
    478,530       1,967,886       16,112       108,845       (881,026 )     1,690,347  
 
                                   
Common stock
    92,684       102       324       52       (478 )     92,684  
Other
    315,938       (104,985 )     6,826       15,949       82,210       315,938  
Accumulated other comprehensive income
    35                   35       (35 )     35  
 
                                   
Total shareholders’ equity
    408,657       (104,883 )     7,150       16,036       81,697       408,657  
 
                                   
Total liabilities and shareholders’ equity
  $ 887,187     $ 1,863,003     $ 23,262     $ 124,881     $ (799,329 )   $ 2,099,004  
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Statements of Cash Flows
                                                 
    Three Months Ended January 31, 2010  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
Net cash provided by (used in) operating activities
  $ (131 )   $ 1,411     $ 380     $ 1,113     $     $ 2,773  
 
                                   
Cash flows from investing activities:
                                               
Purchases of certificates of deposit
    (5,000 )                             (5,000 )
Additions to property and equipment
    (366 )     (3,725 )     (76 )     (130 )           (4,297 )
Other
          39                         39  
 
                                   
Net cash used in investing activities
    (5,366 )     (3,686 )     (76 )     (130 )           (9,258 )
 
                                   
Cash flows from financing activities:
                                               
Repayments of long-term debt
    (846 )                             (846 )
Intercompany receivables (payables)
    (3,276 )     3,202       (320 )     394              
Retirement of common stock warrants
    (107 )                             (107 )
Issuance of common stock
    115                               115  
Retirement of call options
    107                               107  
Debt refinancing costs
    (38 )                             (38 )
Dividends
    (2,794 )                             (2,794 )
Excess tax benefits from share-based payment arrangements
    20                               20  
 
                                   
Net cash provided by (used in) financing activities
    (6,819 )     3,202       (320 )     394             (3,543 )
 
                                   
Net increase (decrease) in cash
    (12,316 )     927       (16 )     1,377             (10,028 )
Cash and cash equivalents, beginning of period
    56,734       5,096       52       926             62,808  
 
                                   
Cash and cash equivalents, end of period
  $ 44,418     $ 6,023     $ 36     $ 2,303     $     $ 52,780  
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Statements of Cash Flows
                                                 
    Three Months Ended January 31, 2009  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
Net cash provided by (used in) operating activities
  $ (2,134 )   $ 7,005     $ 103     $ 2,310     $     $ 7,284  
 
                                   
Cash flows from investing activities:
                                               
Proceeds from sale of assets
    292                               292  
Purchase of subsidiaries and other investments, net of cash acquired
          (1,623 )                       (1,623 )
Additions to property and equipment
    (1,908 )     (2,587 )     (5 )     (289 )           (4,789 )
Other
          1                         1  
 
                                   
Net cash used in investing activities
    (1,616 )     (4,209 )     (5 )     (289 )           (6,119 )
 
                                   
Cash flows from financing activities:
                                               
Repayments of long-term debt
    (9 )                             (9 )
Intercompany receivables (payables)
    3,690       (744 )     (86 )     (2,860 )            
Issuance of common stock
    83                               83  
Dividends
    (2,318 )                             (2,318 )
 
                                   
Net cash provided by (used in) financing activities
    1,446       (744 )     (86 )     (2,860 )           (2,244 )
 
                                   
Net increase (decrease) in cash
    (2,304 )     2,052       12       (839 )           (1,079 )
Cash and cash equivalents, beginning of period
    65,593       4,332       22       2,627             72,574  
 
                                   
Cash and cash equivalents, end of period
  $ 63,289     $ 6,384     $ 34     $ 1,788     $     $ 71,495  
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(12)   Consolidated Comprehensive Income
     Consolidated comprehensive income for the three months ended January 31, 2010 and 2009 is as follows:
                 
    Three Months Ended January 31,  
    2010     2009  
Net earnings
  $ 7,487     $ 4,766  
Other comprehensive income (loss):
               
Unrealized appreciation (depreciation) of investments, net of deferred tax (expense) benefit of $1 and ($2), respectively
    (1 )     3  
(Increase) reduction in net unrealized losses associated with available-for-sale securities of the trusts
    20,230       (35,915 )
Reclassification of the net unrealized (increases) losses activity attributable to the deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus
    (20,230 )     35,915  
 
           
Total other comprehensive income (loss)
    (1 )     3  
 
           
Total comprehensive income
  $ 7,486     $ 4,769  
 
           
(13)   Long-term Debt
                 
    January 31, 2010     October 31, 2009  
Long-term debt:
               
3.125% senior convertible notes due 2014, net of unamortized discount of $12,156 and $12,912 as of January 31, 2010 and October 31, 2009, respectively
  $ 74,260     $ 74,504  
3.375% senior convertible notes due 2016, net of unamortized discount of $14,400 and $14,858 as of January 31, 2010 and October 31, 2009, respectively
    65,584       65,127  
Senior secured revolving credit facility
           
6.25% senior notes due 2013
    200,000       200,000  
Other, principally seller financing of acquired operations or assumption upon acquisition, weighted average interest rate of 8.0% as of January 31, 2010 and October 31, 2009, partially secured by assets of subsidiaries, with maturities through 2022
    93       95  
 
           
Total long-term debt
    339,937       339,726  
Less current maturities
    3       5  
 
           
 
  $ 339,934     $ 339,721  
 
           
Fair Value
     As of January 31, 2010, the carrying values of the Company’s 3.125 percent senior convertible notes due 2014 and 3.375 percent senior convertible notes due 2016, including accrued interest, were $74,380 and $65,704, respectively, compared to fair values of $72,871 and $65,708, respectively. As of January 31, 2010, the carrying value of the Company’s 6.25 percent senior notes, including accrued interest, was $205,729 compared to a fair value of $200,713.
Senior Convertible Notes
     During the three months ended January 31, 2010, the Company purchased $1,000 aggregate principal amount of its 3.125 percent senior convertible notes due 2014 in the open market. In connection with these debt purchases, corresponding call options and common stock warrants were also terminated. As a result of the debt

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(13)   Long-term Debt—(Continued)
purchases at discounts, the Company recorded $17 in pre-tax gains on early extinguishment of debt during the three months ended January 31, 2010.
Adoption of Convertible Debt Guidance
     In May 2008, the FASB issued guidance regarding the accounting for convertible debt instruments that may be settled in cash upon conversion. The guidance states that issuers of convertible debt instruments that may be settled in cash upon conversion should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate as the related interest cost is recognized in subsequent periods. The entity must determine the carrying amount of the liability component of any outstanding debt instrument by estimating the fair value of a similar liability without the conversion option. The amount of the equity component is then calculated by deducting the fair value of the liability component from the principal amount of the debt instrument. The value of the debt instrument is adjusted through a discount to the face value of the debt, which is amortized as non-cash interest expense over the expected life of the debt.
     This guidance applies to the Company’s 3.125 percent senior convertible notes due 2014 (“2014 Notes”) and 3.375 percent senior convertible notes due 2016 (“2016 Notes” and together with the 2014 Notes, the “senior convertible notes”), which were originally issued in 2007, and must be applied retrospectively to all periods since inception. The Company adopted this guidance effective November 1, 2009. The impact of adopting this guidance on the Company’s October 31, 2009 balance sheet was a $9,997 decrease to deferred tax assets, a $27,770 decrease in long-term debt, a $35,001 increase to additional paid-in capital and an increase of $17,228 to accumulated deficit. See Note 2 for additional information on the effects of the adoption of this guidance.
     The remaining periods over which the discount on the 2014 Notes and 2016 Notes will be amortized is approximately 4.25 years and approximately 6.25 years, respectively. The carrying value of the equity component of the 2014 Notes as of January 31, 2010 and October 31, 2009 was $16,191 and $16,204, respectively. The carrying value of the equity component of the 2016 Notes was $18,797 as of January 31, 2010 and October 31, 2009. The amount of interest expense recorded for the senior convertible notes for the three months ended January 31, 2010 and 2009 related both to the contractual interest coupon and amortization of the discount on the liability component is $2,426 and $3,516, respectively. For the three months ended January 31, 2010 and 2009, the coupon and amortization of the discount yielded an effective interest rate of approximately 6.96 percent on the 2014 Notes and the 2016 Notes.
     Holders may convert their senior convertible notes based on a conversion rate of 90.4936 shares of the Company’s Class A common stock per $1,000 principal amount of senior convertible notes (which is equal to an initial conversion price of approximately $11.05 per share), subject to adjustment: (1) during any fiscal quarter beginning after October 31, 2007, if the closing price of the Company’s Class A common stock for a specified period in the prior quarter is more than 130 percent of the conversion price per share, (2) for a specified period after five trading days in which the trading price of the notes for each trading day was less than 95 percent of the product of the closing price of the Company’s Class A common stock and the then applicable conversion rate, (3) if specified distributions to holders of the Company’s Class A common stock occur, (4) if a fundamental change occurs or (5) during the last month prior to the maturity date of the notes. None of these conditions had been met during the three months ended January 31, 2010, fiscal year 2009 or fiscal year 2008.
     Upon conversion, in lieu of shares of the Company’s Class A common stock, for each $1,000 principal amount of senior convertible notes converted, a holder will receive an amount in cash equal to the lesser of (1) $1,000 or (2) the conversion value, determined in the manner set forth in the indentures, of the number of shares of the Company’s Class A common stock equal to the conversion rate. If the conversion value exceeds $1,000, the Company will also deliver, at the Company’s election, cash or Class A common stock or a combination of cash and Class A common stock with respect to such excess amount, subject to the limitations in the indentures. If a holder

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(13)   Long-term Debt—(Continued)
elects to convert its senior convertible notes in connection with certain fundamental change transactions, the Company will pay, to the extent described in the indentures, a make whole premium by increasing the conversion rate applicable to such senior convertible notes.
     Upon specified fundamental change events, holders will have the option to require the Company to purchase for cash all or any portion of their senior convertible notes at a price equal to 100 percent of the principal amount of the senior convertible notes plus accrued and unpaid interest, if any, to, but excluding, the fundamental change purchase date.
     Also, in connection with the sale of the senior convertible notes, the Company purchased call options with respect to its Class A common stock from Bank of America/Merrill Lynch International. The call options cover, subject to anti-dilution adjustments, 11,311,700 shares of Class A common stock for each series of senior convertible notes, at strike prices that correspond to the initial conversion price of the notes. The call options are expected to offset the Company’s exposure to dilution from conversion of the senior convertible notes because any shares the Company would be obligated to deliver to holders upon conversion of the senior convertible notes would be delivered to the Company by the counterparty to the call options. The Company paid approximately $60,000 for the call options.
     The Company also entered into warrant transactions whereby it sold to Bank of America/Merrill Lynch Financial Markets warrants expiring in 2014 and 2016 to acquire, subject to customary anti-dilution adjustments, 11,311,700 and 11,311,700 shares of Class A common stock, respectively. The strike prices of the sold warrants expiring in 2014 and 2016 are $12.93 per share of Class A common stock and $13.76 per share of Class A common stock, respectively. The warrants expiring in 2014 and 2016 may not be exercised prior to the maturity of the 2014 Notes and 2016 Notes, respectively. The Company can elect to settle the warrants in cash or Class A common stock, subject to certain conditions. The Company received approximately $43,850 for the warrants. In connection with the purchases of the Company’s senior convertible notes during fiscal year 2009 and the three months ended January 31, 2010, the number of shares subject to the warrants was reduced to 6,913,280 related to the 2014 Notes and 6,398,800 related to the 2016 Notes.
     The price of the call options is treated for tax purposes as interest expense, which amortizes over the lives of the notes. Accordingly, the Company will have a tax benefit of approximately $21,000 over the lives of the senior convertible notes. The sale of the warrants is not expected to have any tax consequences to the Company.
     By selling the warrants, the Company used the proceeds to offset much of the cost of the call options. By simultaneously purchasing the call options and selling the warrants, the Company has effectively increased the conversion premium on the senior convertible notes to 55-65 percent above the market price of the Class A common stock at the time of the offering.
(14)   Income Taxes
     The Company continues to pursue several tax planning strategies. The Company received IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result in the deferral of approximately $70.0 million of taxable income. The combination of these two changes will significantly reduce federal income tax cash payments (approximately $25.0 million) for the next two to three years.
(15)   Subsequent Events
     During February 2010, several of the Company’s facilities in Texas and one facility in Maryland experienced property damage from winter storms but were able to restore operations quickly. The Company is in the process of assessing the damages.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
(Dollars in thousands, except per share amounts)
(15)   Subsequent Events—(Continued)
     As of February 28, 2010, the fair market value of the Company’s preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts increased 1.6 percent, or approximately $12,000, from January 31, 2010.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
     The following Management’s Discussion and Analysis of Financial Condition and Results of Operations (“MD&A”) should be read in conjunction with our MD&A and Risk Factors contained in our Form 10-K for the fiscal year ended October 31, 2009 (the “2009 Form 10-K”), and in conjunction with our consolidated financial statements included in this report and in our 2009 Form 10-K.
     This report contains forward-looking statements that are generally identifiable through the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “project,” “will” and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Risk Factors in our 2009 Form 10-K. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.
Overview
General
     We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States. As of January 31, 2010, we owned and operated 218 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral, cremation and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale. For a more detailed discussion of our accounting for preneed sales and trust and escrow account earnings, see MD&A included in Item 7 in our 2009 Form 10-K.
     As of November 1, 2009, the Company adopted guidance regarding the accounting for our 2014 and 2016 senior convertible notes and applied the change retrospectively for all periods presented. See Note 2 and Note 13 to the condensed consolidated financial statements for further information on the impact of the accounting change in the Company’s statements of earnings and balance sheets.
Financial Summary
     For the first quarter of fiscal year 2010, net earnings increased $2.7 million to $7.5 million from $4.8 million for the first quarter of fiscal year 2009. Revenue increased $5.1 million to $124.4 million for the quarter ended January 31, 2010. Funeral revenue increased $0.4 million to $72.1 million in the first quarter of 2010, primarily due to a $0.5 million increase in funeral trust related activities. The increase in trust earnings was partially offset by a 1.3 percent, or 185 event, decrease in same-store funeral services performed and a 0.6 percent decrease in same-store average revenue per funeral service, including trust earnings. Cemetery revenue increased $4.7 million to $52.3 million for the quarter ended January 31, 2010. This increase is due primarily to a $1.8 million, or 9.8 percent, increase in cemetery property sales, net of discounts, a $1.4 million increase in merchandise delivered and a $0.6 million increase in cemetery trust related activities. Consolidated gross profit increased $2.1 million to $25.2 million primarily due to a $1.2 million increase in cemetery gross profit and a $0.9 million increase in funeral gross profit.
     Corporate general and administrative expenses decreased $1.0 million to $6.5 million for the quarter ended January 31, 2010 largely due to a decrease in information technology costs and a decrease in training costs related to our implementation of a new business system in the prior year. Interest expense decreased $0.9 million to $6.5 million during the first quarter of 2010 primarily due to the significant fiscal year 2009 repurchases of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009. The effective tax

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rate for the three months ended January 31, 2010 was 39.5 percent compared to 41.2 percent for the same period in 2009. We recorded a tax valuation allowance of $0.2 million for the three months ended January 31, 2010, compared to a $0.3 million tax valuation allowance for the same period in 2009. The tax valuation allowance increased income tax expense for both periods by the respective amounts. The tax rate for both the current and prior quarter would have been approximately 37 percent without the tax valuation allowance.
     For the first quarter of 2010, preneed cemetery property sales, net of discounts, increased 9.8 percent compared to the same period of last year, which increased our cemetery revenue as described above. Our net preneed funeral sales decreased 3.3 percent during the first quarter of 2010 compared to the first quarter of 2009. Preneed funeral sales are deferred until a future period and have no impact on current revenue.
     During the first quarter of fiscal 2010, we experienced positive trends in the overall financial markets and in our preneed and perpetual care trusts. Specifically, our preneed funeral and cemetery merchandise and services trusts experienced a total return, including both realized and unrealized losses, of 4.1 percent, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized losses, of 5.0 percent.
     As of January 31, 2010 and October 31, 2009, the fair market value of the investments in our funeral and cemetery merchandise and services trusts were $177.8 million and $192.9 million, respectively, lower than our cost basis. The preneed contracts we manage are long-term in nature, and we believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. As of January 31, 2010 and October 31, 2009, we had $218.5 million and $220.7 million, respectively, in distributable earnings that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.
     In our cemetery perpetual care trusts, as of January 31, 2010 and October 31, 2009, the fair market value of our investments were $51.6 million and $56.7 million, respectively, lower than our cost basis. See Note 5 to the condensed consolidated financial statements for further information on the estimated probable funding obligation.
     The sectors in which our trust investment portfolio is invested have not materially changed from that disclosed in our 2009 Form 10-K.
     Each quarter we perform an analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. When we review our backlog for potential loss contracts, we consider the impact of the market value of our trust assets. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include anticipated future returns on the investments in our analysis. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts in our backlog. Due to the positive margins of our preneed contracts and the trust portfolio returns we have experienced in prior years and deferred on our consolidated balance sheet until delivery, currently there is capacity for additional market depreciation before a contract loss would result.
     For additional information regarding our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included in this report.
     The following table presents our trust portfolio returns including realized and unrealized gains and losses.
                 
    Funeral and Cemetery        
    Merchandise and     Cemetery Perpetual  
    Services Trusts     Care Trusts  
For the quarter ended January 31, 2010
    4.1 %     5.0 %
For the last twelve months ended January 31, 2010
    28.8 %     32.8 %
For the last five years ended January 31, 2010
    (1.3 )%     2.1 %
For the last ten years ended January 31, 2010
    1.9 %     2.7 %
     Our operations provided cash of $2.8 million for the three months ended January 31, 2010, compared to $7.3 million for the corresponding period in 2009. The decrease in the current quarter’s operating cash flow is

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largely due to an increase in working capital, partly driven by a $4.6 million increase in receivables due in part to the improved cemetery property sales during the quarter, which are typically financed. Due to the timing of our insurance, property tax and other annual payments made on or around calendar year end, we have historically had negative to slightly positive cash flow in the first quarter while generating greater amounts of cash in later quarters.
Critical Accounting Policies
     The consolidated financial statements are prepared in accordance with accounting principles generally accepted in the United States of America, which require us to make estimates and assumptions (see Note 1(d) to the condensed consolidated financial statements). Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2009 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2009 Form 10-K.
Results of Operations
     Effective as of the second quarter of fiscal year 2009, we have three operating and reportable segments consisting of a funeral segment, cemetery segment and a corporate trust management segment. For a discussion of our segments, see Note 9 to the condensed consolidated financial statements included herein. Prior period data has been retrospectively adjusted to conform to the new segment presentation. As there have been no material acquisitions or construction of new locations in fiscal years 2010 and 2009, results essentially reflect those of same-store locations.
Three Months Ended January 31, 2010 Compared to Three Months Ended January 31, 2009
Funeral Operations
                         
    Three Months Ended January 31,  
                    Increase  
    2010     2009     (Decrease)  
            (In millions)          
Funeral Revenue:
                       
Funeral Home Locations
  $ 68.0     $ 68.1     $ (.1 )
Corporate Trust Management (1)
    4.1       3.6       .5  
 
                 
Total Funeral Revenue
  $ 72.1     $ 71.7     $ .4  
 
                 
 
                       
Funeral Costs:
                       
Funeral Home Locations
  $ 52.6     $ 53.2     $ (.6 )
Corporate Trust Management (1)
    .3       .2       .1  
 
                 
Total Funeral Costs
  $ 52.9     $ 53.4     $ (.5 )
 
                 
 
                       
Funeral Gross Profit:
                       
Funeral Home Locations
  $ 15.4     $ 14.9     $ .5  
Corporate Trust Management (1)
    3.8       3.4       .4  
 
                 
Total Funeral Gross Profit
  $ 19.2     $ 18.3     $ .9  
 
                 
Same-Store Analysis for the Three Months Ended January 31, 2010 and 2009
                         
Change in Average Revenue   Change in Same-Store    
Per Funeral Service   Funeral Services   Same-Store Cremation Rate
            2010   2009
(.6)% (1)
    (1.3 )%     41.4 %     40.3 %
 
(1)   Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are

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    established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 3 and 6 to the condensed consolidated financial statements included herein for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for the three months ended January 31, 2010 and 2009 were $1.1 million and $0.9 million, respectively. Funeral trust earnings recognized in funeral revenue for the three months ended January 31, 2010 and 2009 were $3.0 million and $2.7 million, respectively.
     Funeral revenue increased $0.4 million, or 0.6 percent, from $71.7 million in the first quarter of 2009 to $72.1 million in the first quarter of 2010. The increase in funeral revenue is primarily due to a $0.5 million increase in funeral trust related activities. During the first quarter of 2010, our same-store funeral operations experienced a decrease in average revenue per traditional funeral service of 0.8 percent, partially offset by an increase in average revenue per cremation service of 1.3 percent. These averages were affected by a shift in mix to lower priced funeral services during the quarter. These averages were also impacted by a quarter-over-quarter increase in funeral trust earnings resulting in an overall decrease in the same-store average revenue per funeral service of 0.6 percent. Same-store funeral services decreased 1.3 percent, or 185 events, or less than one event per funeral home. The cremation rate for our same-store operations was 41.4 percent for the first quarter of 2010 compared to 40.3 percent for the first quarter of 2009.
     Funeral gross profit increased $0.9 million, or 4.9 percent, to $19.2 million for the first quarter of 2010 compared to $18.3 million for the same period of 2009, primarily due to the increase in revenue, as noted above, coupled with a reduction in expenses due to effective cost management.
Cemetery Operations
                         
    Three Months Ended January 31,  
                    Increase  
    2010     2009     (Decrease)  
            (In millions)          
Cemetery Revenue:
                       
Cemetery Locations
  $ 50.5     $ 45.7     $ 4.8  
Corporate Trust Management (1)
    1.8       1.9       (.1 )
 
                 
Total Cemetery Revenue
  $ 52.3     $ 47.6     $ 4.7  
 
                 
 
                       
Cemetery Costs:
                       
Cemetery Locations
  $ 46.1     $ 42.5     $ 3.6  
Corporate Trust Management (1)
    .2       .3       (.1 )
 
                 
Total Cemetery Costs
  $ 46.3     $ 42.8     $ 3.5  
 
                 
 
                       
Cemetery Gross Profit:
                       
Cemetery Locations
  $ 4.4     $ 3.2     $ 1.2  
Corporate Trust Management (1)
    1.6       1.6        
 
                 
Total Cemetery Gross Profit
  $ 6.0     $ 4.8     $ 1.2  
 
                 
 
(1)   Corporate trust management consists of trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by the Company at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of distributable earnings as stipulated by our respective trust agreements that are generated by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 6 to the condensed consolidated financial statements included herein for information

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    regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e., current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $1.2 million and $1.0 million, respectively, and cemetery trust earnings recognized included in cemetery revenue for the three months ended January 31, 2010 and 2009 were $0.6 million and $0.9 million, respectively. Perpetual care trust earnings of $2.4 million and $1.7 million, respectively, are included in the revenues and gross profit of the cemetery segment. See Notes 5 and 6 to the condensed consolidated financial statements included herein for information regarding the cemetery perpetual care trusts.
     Cemetery revenue increased $4.7 million, or 9.9 percent, from $47.6 million for the quarter ended January 31, 2009 to $52.3 million for the quarter ended January 31, 2010. This increase is due primarily to a $1.8 million, or 9.8 percent, increase in cemetery property sales, net of discounts, a $1.4 million increase in merchandise delivered and a $0.6 million increase in revenue related to trust activities, of which $0.7 million of the increase relates to cemetery perpetual care trust earnings.
     Cemetery gross profit increased $1.2 million, or 25.0 percent, to $6.0 million for the first quarter of 2010 compared to $4.8 million for the same period of 2009. The increase in cemetery gross profit is primarily due to the increase in cemetery revenue, as discussed above, partially offset by an increase in property costs and selling costs resulting from the increase in cemetery property sales.
Other
     Corporate general and administrative expenses decreased $1.0 million to $6.5 million for the quarter ended January 31, 2010 largely due to a decrease in information technology costs and a decrease in training costs related to our implementation of a new business system in the prior year.
     Interest expense decreased $0.9 million to $6.5 million during the first quarter of fiscal year 2010 primarily due to the significant fiscal year 2009 repurchases of a portion of our senior convertible notes in the open market that occurred during the last nine months of fiscal year 2009.
     The effective tax rate for the three months ended January 31, 2010 was 39.5 percent compared to 41.2 percent for the same period in 2009. We recorded a tax valuation allowance of $0.2 million for the three months ended January 31, 2010, compared to a $0.3 million tax valuation allowance for the same period of 2009. The tax valuation allowance increased income tax expense for both periods by the respective amounts. The tax rate for both the current and prior quarter would have been approximately 37 percent without the tax valuation allowance.
     Since January 31, 2009, we have repurchased $83.6 million aggregate principal amount of our senior convertible notes in the open market, including repurchases of $1.0 million aggregate principal amount during the first quarter of fiscal year 2010.
     Cash and cash equivalents decreased $10.0 million from October 31, 2009 to January 31, 2010 primarily due to the purchase of $5.0 million in certificates of deposit and $4.3 million in capital expenditure projects. Prepaid expenses increased $4.8 million from October 31, 2009 to January 31, 2010 primarily due to annual premiums paid in the first quarter of fiscal year 2010 for property, general liability and other insurance. Deferred income taxes decreased $3.5 million primarily due to the utilization of net operating losses in the first quarter of 2010 and other timing differences. Preneed funeral receivables and trust investments, preneed cemetery receivables and trust investments, cemetery perpetual care trust investments, deferred preneed funeral and cemetery receipts held in trust and perpetual care trusts’ corpus were all positively impacted by the recent improvement in the market value of our trust assets. For additional information, see Notes 3, 4 and 5 to our condensed consolidated financial statements included herein.
     Accounts payable decreased $4.3 million from October 31, 2009 to January 31, 2010 primarily due to the timing of payables related to professional fees and vendor payments. Accrued payroll decreased $3.3 million from October 31, 2009 to January 31, 2010 due to fiscal year 2009 annual bonuses paid in the first quarter of 2010 and due to the timing of the payroll period at quarter end. Other current liabilities decreased $2.1 million from October

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31, 2009 to January 31, 2010 primarily due to a $2.5 million decline in accrued property taxes, as 80 percent of our property taxes are paid in the months of December and January each year.
Preneed Sales into the Backlog
     Net preneed funeral sales decreased 3.3 percent during the first three months of fiscal year 2010 compared to the corresponding period in 2009.
     The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We had $28.3 million in net preneed funeral and cemetery merchandise and service sales (including $16.3 million related to insurance-funded preneed funeral contracts) during the three months ended January 31, 2010 to be recognized in the future as these prepaid products and services are delivered, compared to net sales of $29.5 million (including $16.3 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2009. Insurance-funded preneed funeral contracts which will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected in the condensed consolidated balance sheets.
Liquidity and Capital Resources
General
     We generate cash in our operations primarily from at-need sales, preneed sales that turn at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn at-need, monies collected on preneed sales that are not required to be trusted and cemetery perpetual care trust earnings. Over the last five years, we have generated more than $50.0 million each year in cash flow from operations. We have historically satisfied our working capital requirements with cash flows from operations. We believe that our current level of cash on hand, projected cash flows from operations and available capacity under our $95.0 million senior secured revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future, although we will need to refinance the senior secured revolving credit facility in 2012 and long-term debt becoming due in 2013 through 2016, as described below.
     As of January 31, 2010, we had no amounts drawn on the $95.0 million senior secured revolving credit facility, and our availability under the senior secured revolving credit facility, after giving consideration to $8.8 million outstanding letters of credit and the $24.8 million Florida bond, was $61.4 million. We also have the ability to request the addition of a new tranche of term loans, an increase in the commitments to the senior secured revolving credit facility or a combination thereof not to exceed $30.0 million. Our $200.0 million senior notes mature on February 15, 2013 and are currently redeemable at the redemption prices set forth in the indenture. We also have $166.4 million in senior convertible notes as of January 31, 2010 of which $86.4 million mature in 2014 and $80.0 million mature in 2016. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.
     Beginning in the fourth quarter of fiscal year 2009, we increased our quarterly cash dividend from two and one-half cents per share to three cents per share on our Class A and B common stock, which amounted to $2.8 million for the three months ended January 31, 2010. The declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. We also have a $75.0 million stock repurchase program, of which $26.5 million remains available as of January 31, 2010. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. We have not made open-market stock repurchases under the program since July 2008. During fiscal year 2009, we repurchased $82.6 million aggregate principal amount of our senior convertible notes in the open market at substantial discounts and repurchased an additional $1.0 million aggregate principal amount during the first quarter of fiscal year 2010.
     We plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to pay dividends, construct funeral homes on cemeteries of unaffiliated third parties or in

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strategic locations, make acquisitions of or investments in death care or related businesses and repurchase debt and stock are attractive options. We believe that growing our organization through acquisitions and investments is a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure. We have also redesigned our websites to support e-commerce initiatives that will provide new revenue opportunities in the future and are continuing to invest in improving our business processes. We regularly review acquisition and other strategic opportunities, which may require us to draw on our senior secured revolving credit facility or pursue additional debt or equity financing.
     We pursued several tax planning strategies in fiscal year 2009. We received IRS approval in fiscal year 2010 on two pending requests for changes in tax accounting methods, which will result in the deferral of approximately $70 million of taxable income. The combination of these two changes will significantly reduce federal income tax cash payments (approximately $25 million) for the next two to three years. We are continuing to review all of our tax accounting policies to determine opportunities to improve our current tax position. Several possible changes are being considered that could result in potential reductions in future tax payments. At this time, we cannot predict with certainty what, if any, reductions in future tax payments we will obtain. However, we currently do not expect that these potential reductions in future tax payments, if obtained, will be as substantial as those obtained in fiscal year 2009 or to date in fiscal year 2010.
Cash Flow
     Our operations provided cash of $2.8 million for the three months ended January 31, 2010, compared to $7.3 million for the corresponding period in 2009. The decrease in the current quarter’s operating cash flow is largely due to an increase in working capital, partly driven by a $4.6 million increase in receivables due in part to the improved cemetery property sales during the quarter, which are typically financed. Due to the timing of our insurance, property tax and other annual payments made on or around calendar year end, we have historically had negative to slightly positive cash flow in the first quarter while generating greater amounts of cash in later quarters.
     Our investing activities resulted in a net cash outflow of $9.3 million for the three months ended January 31, 2010, compared to a net cash outflow of $6.1 million for the comparable period in 2009. The change is primarily due to $5.0 million in purchases of certificates of deposit in the first quarter of fiscal year 2010. For the three months ended January 31, 2010, capital expenditures amounted to $4.3 million, which included $3.0 million for maintenance capital expenditures, $1.2 million for growth initiatives and $0.1 million related to the implementation of new business systems. For the three months ended January 31, 2009, capital expenditures were $4.8 million, which included $3.1 million for maintenance capital expenditures, $0.4 million for growth initiatives, and $1.3 million related to the implementation of new business systems. We also purchased a cemetery business in the first quarter of fiscal year 2009 resulting in a net cash outflow of $1.6 million.
     Our financing activities resulted in a net cash outflow of $3.5 million for the three months ended January 31, 2010, compared to a net cash outflow of $2.2 million for the comparable period in 2009. The change is primarily due to $0.8 million in repayments of long-term debt during the first quarter of 2010. Also, dividends in the first quarter of 2010 reflect the increased quarterly dividend rate of $0.030 per share, from $0.025 per share, which went into effect in the fourth quarter of fiscal year 2009.

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Contractual Obligations and Commercial Commitments
     We have contractual obligations requiring future cash payments under existing contractual arrangements. The following table details our known future cash payments (in millions) related to various contractual obligations as of January 31, 2010.
                                         
    Payments Due by Period  
            Less than                     More than  
Contractual Obligations   Total     1 year     1 – 3 years     3 – 5 years     5 years  
Long-term debt obligations (1)
  $ 366.5     $     $     $ 286.4     $ 80.1  
Interest on long-term debt (2)
    73.5       17.9       35.8       15.7       4.1  
Operating and capital lease obligations (3)
    29.9       3.4       6.0       3.8       16.7  
Purchase obligations (4)
    2.7       2.7                    
Non-competition and other agreements (5)
    1.4       .3       .5       .2       .4  
 
                             
 
  $ 474.0     $ 24.3     $ 42.3     $ 306.1     $ 101.3  
 
                             
 
(1)   See below for a breakdown of our future scheduled principal payments and maturities of our long-term debt by type as of January 31, 2010.
 
(2)   Includes contractual interest payments for our senior convertible notes, senior notes and third-party debt.
 
(3)   Our noncancellable operating leases are primarily for land and buildings and expire over the next one to 14 years, except for eight leases that expire between 2032 and 2039. Our future minimum lease payments for all operating leases as of January 31, 2010 are $3.4 million, $3.3 million, $2.7 million, $2.1 million, $1.7 million and $16.7 million for the years ending October 31, 2010, 2011, 2012, 2013, 2014 and later years, respectively.
 
(4)   Represents a construction contract for a funeral home.
 
(5)   This category includes payments pursuant to non-competition agreements with prior owners and key employees of acquired businesses and separation pay related to former executive officers.
     The following table details our known potential or possible future cash payments related to the contingent obligations specified below (in millions) as of January 31, 2010.
                                         
    Expiration by Period  
            Less than 1                     More than 5  
Contingent Obligations   Total     year     1 – 3 years     3 – 5 years     years  
Cemetery perpetual care trust funding obligations (1)
  $ 13.6     $ 13.6     $     $     $  
Long-term obligations related to uncertain tax positions (2)
    3.6                         3.6  
 
                             
 
  $ 17.2     $ 13.6     $     $     $ 3.6  
 
                             
 
(1)   In those states where we have withdrawn realized net capital gains in the past from our cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $13.6 million as of January 31, 2010. As of January 31, 2010, we had unrealized losses of $44.8 million in the trusts in these states. Because some of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs. In those states where realized net capital gains have not been withdrawn, we believe it is reasonably possible that additional funding obligations may exist with an estimated amount of approximately $3.1 million.
 
(2)   In accordance with the required accounting guidance on uncertain tax positions, as of January 31, 2010, we have recorded $3.6 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate

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    the range of increase and decrease and the timing thereof of any potential cash payments.
     As of January 31, 2010, our outstanding long-term debt balance was $366.5 million, consisting of $86.4 million in 3.125 percent senior convertible notes due 2014, $80.0 million in 3.375 percent senior convertible notes due 2016, $200.0 million of 6.25 percent senior notes and $0.1 million of other debt. There were no amounts drawn on the senior secured revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of January 31, 2010.
                                       
                          Other,        
      Senior                   Principally        
      Secured                   Seller        
      Revolving   Senior             Financing        
      Credit   Convertible     Senior     of Acquired        
Fiscal Years Ending October 31,     Facility   Notes     Notes     Operations     Total  
2010
  $   $     $     $     $  
2011
                           
2012
                           
2013
              200.0             200.0  
2014
        86.4                   86.4  
Thereafter
        80.0             .1       80.1  
 
                           
Total long-term debt
  $   $ 166.4     $ 200.0     $ .1     $ 366.5  
 
                           
Off-Balance Sheet Arrangements
     Our off-balance sheet arrangements as of January 31, 2010 consist of the following items:
  (1)   the $24.8 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed above and in Note 20 to the consolidated financial statements in our 2009 Form 10-K; and
 
  (2)   the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our condensed consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements in our 2009 Form 10-K.
Recent Accounting Standards
     See Note 2 to the condensed consolidated financial statements included herein.
Item 3. Quantitative and Qualitative Disclosures About Market Risk
     Quantitative and qualitative disclosure about market risk is presented in Item 7A in our Annual Report on Form 10-K for the fiscal year ended October 31, 2009, filed with the Securities and Exchange Commission (“SEC”) on December 17, 2009. There have been no material changes in the Company’s market risk from that disclosed in our Form 10-K for the fiscal year ended October 31, 2009. For a discussion of fair market value as of January 31, 2010 of investments in our trusts, see Notes 3, 4 and 5 to the condensed consolidated financial statements included herein.
Item 4. Controls and Procedures
Disclosure Controls and Procedures
     The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC rules and forms, and that such information is accumulated and communicated to the Company’s management, including its Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate to allow timely decisions regarding required disclosure.

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     As of the end of the period covered by this report, the Company carried out an evaluation under the supervision and with the participation of the Company’s Disclosure Committee and management, including the CEO and CFO, of the effectiveness of the Company’s disclosure controls and procedures pursuant to Exchange Act Rule 13a-15(b). Based upon this evaluation, the CEO and CFO concluded that the Company’s disclosure controls and procedures were effective as of the end of the period covered by this report.
Changes in Internal Control over Financial Reporting
     There have been no changes in the Company’s internal control over financial reporting during the quarter ended January 31, 2010 that have materially affected, or are reasonably likely to materially affect, the Company’s internal control over financial reporting.
PART II. OTHER INFORMATION
Item 1. Legal Proceedings
     For a discussion of our current litigation, see Note 7 to the condensed consolidated financial statements included herein.
     In addition to the matters in Note 7, we and certain of our subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material adverse effect on our consolidated financial position, results of operations or cash flows.
     We carry insurance with coverages and coverage limits that we believe to be adequate. Although there can be no assurance that such insurance is sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.
Item 1A. Risk Factors
     There have been no material changes from the risk factors previously disclosed in our 2009 Form 10-K.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
(c) Purchases of Equity Securities by the Issuer and Affiliated Purchasers
Issuer Purchases of Equity Securities
                                 
                    Total number of     Maximum  
                    shares     approximate dollar  
                    purchased as     value of shares that  
    Total number     Average     part of publicly-     may yet be  
    of shares     price paid     announced plans     purchased under the  
Period   purchased     per share     or programs     plans or programs(1)  
November 1, 2009 through November 30, 2009
        $           $ 26,495,706  
 
                               
December 1, 2009 through December 31, 2009
        $           $ 26,495,706  
 
                               
January 1, 2010 through January 31, 2010
        $           $ 26,495,706  
 
                           
 
                               
Total
        $           $ 26,495,706  
 
                           

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(1)   We announced a $25.0 million stock repurchase program in September 2007, which was increased by $25.0 million in December 2007 and June 2008, resulting in a $75.0 million program.
Item 6. Exhibits
     
3.1
  Amended and Restated Articles of Incorporation of the Company, as amended and restated as of April 3, 2008 (incorporated by reference to Exhibit 3.1 to the Company’s Quarterly Report on Form 10-Q for the quarter ended April 30, 2008)
 
   
3.2
  By-laws of the Company, as amended and restated as of September 8, 2008 (incorporated by reference to Exhibit 3.2 to the Company’s Quarterly Report on Form 10-Q for the quarter ended July 31, 2008)
 
   
4.1
  See Exhibits 3.1 and 3.2 for provisions of the Company’s Amended and Restated Articles of Incorporation, as amended, and By-laws, as amended, defining the rights of holders of Class A and Class B common stock
 
   
4.2
  Specimen of Class A common stock certificate (incorporated by reference to Exhibit 3 to the Company’s Registration Statement on Form 8-A/A filed with the Commission on June 21, 2007)
 
   
4.3
  Second Amended and Restated Credit Agreement dated June 2, 2009 by and among the Company, Empresas Stewart-Cementerios and Empresas Stewart-Funerarias, as Borrowers, Bank of America, N.A., as Administrative Agent, Collateral Agent, Swing Line Lender and L/C Issuer and The Other Lenders party hereto (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 3, 2009)
 
   
4.4
  Indenture dated as of February 11, 2005 by and among Stewart Enterprises, Inc., the Guarantors thereunder and U.S. Bank National Association, as Trustee, with respect to the 6.25 percent Senior Notes due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 14, 2005)
 
   
4.5
  Form of 6.25 percent Senior Note due 2013 (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed February 14, 2005)
 
   
4.6
  Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.125 percent Senior Convertible Notes due 2014 (including Form of 3.125 percent Senior Convertible Notes due 2014) (incorporated by reference to Exhibit 4.1 to the Company’s Current Report on Form 8-K filed June 27, 2007)
 
   
4.7
  Indenture dated June 27, 2007 by and among Stewart Enterprises, Inc., the guarantors named therein and U.S. Bank National Association, as Trustee, with respect to 3.375 percent Senior Convertible Notes due 2016 (including Form of 3.375 percent Senior Convertible Notes due 2016) (incorporated by reference to Exhibit 4.2 to the Company’s Current Report on Form 8-K filed June 27, 2007)
 
   
31.1
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer
 
   
31.2
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer
 
   
32.1
  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
SIGNATURES
     Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
         
  STEWART ENTERPRISES, INC.
 
 
March 10, 2010  /s/ THOMAS M. KITCHEN    
  Thomas M. Kitchen   
  Senior Executive Vice President and Chief Financial Officer   
 
     
March 10, 2010  /s/ ANGELA M. LACOUR    
  Angela M. Lacour   
  Vice President Corporate Controller Chief Accounting Officer   

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Exhibit Index
     
31.1
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer
 
   
31.2
  Certification pursuant to Section 302 of the Sarbanes-Oxley Act of Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer
 
   
32.1
  Certification pursuant to Section 906 of the Sarbanes-Oxley Act of Thomas J. Crawford, President and Chief Executive Officer, and Thomas M. Kitchen, Senior Executive Vice President and Chief Financial Officer

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