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

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

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)

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

     Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes 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		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act.) Yes 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, 2011, was 87,964,614 and 3,555,020, respectively.

 

 

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

		Page
Part I. Financial Information Page
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings — Three Months Ended January 31, 2011 and 2010			3
Condensed Consolidated Balance Sheets — January 31, 2011 and October 31, 2010			4
Condensed Consolidated Statement of Shareholders’ Equity — Three Months Ended January 31, 2011			6
Condensed Consolidated Statements of Cash Flows — Three Months Ended January 31, 2011 and 2010			7
Notes to Condensed Consolidated Financial Statements			8
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			39
Item 3. Quantitative and Qualitative Disclosures About Market Risk			48
Item 4. Controls and Procedures			49
Part II. Other Information
Item 1. Legal Proceedings			49
Item 1A. Risk Factors			49
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			50
Item 5. Other Information			50
Item 6. Exhibits			50
Signatures			52
EX-10.1
EX-10.2
EX-10.3
EX-10.4
EX-12
EX-31.1
EX-31.2
EX-32.1

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,
		2011				2010
Revenues:
Funeral		$	73,866			$	71,720
Cemetery			55,398				52,292
			129,264				124,012
Costs and expenses:
Funeral			53,478				52,449
Cemetery			47,431				46,320
			100,909				98,769
Gross profit			28,355				25,243
Corporate general and administrative expenses			(6,639	)			(6,670	)
Hurricane related charges, net			(50	)			—
Other operating income, net			233				179
Operating earnings			21,899				18,752
Interest expense			(5,736	)			(6,456	)
Gain on early extinguishment of debt			—				17
Investment and other income, net			24				24
Earnings from continuing operations before income taxes			16,187				12,337
Income taxes			8,143				4,876
Earnings from continuing operations			8,044				7,461
Discontinued operations:
Earnings from discontinued operations before income taxes			—				42
Income taxes			—				16
Earnings from discontinued operations			—				26
Net earnings		$	8,044			$	7,487
Basic earnings per common share:
Earnings from continuing operations		$	.09			$	.08
Earnings from discontinued operations			—				—
Net earnings		$	.09			$	.08
Diluted earnings per common share:
Earnings from continuing operations		$	.09			$	.08
Earnings from discontinued operations			—				—
Net earnings		$	.09			$	.08
Weighted average common shares outstanding (in thousands):
Basic			90,867				92,053
Diluted			91,177				92,234
Dividends declared per common share		$	.03			$	.03

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		January 31, 2011				October 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	64,437			$	56,060
Certificates of deposit and marketable securities			—				10,000
Receivables, net of allowances			50,865				51,170
Inventories			35,619				35,715
Prepaid expenses			9,594				5,480
Deferred income taxes, net			27,222				28,312
Total current assets			187,737				186,737
Receivables due beyond one year, net of allowances			65,467				67,458
Preneed funeral receivables and trust investments			423,740				414,918
Preneed cemetery receivables and trust investments			217,031				209,750
Goodwill			247,038				247,038
Cemetery property, at cost			387,008				386,094
Property and equipment, at cost:
Land			43,726				43,518
Buildings			340,104				338,264
Equipment and other			192,463				191,428
			576,293				573,210
Less accumulated depreciation			289,388				283,637
Net property and equipment			286,905				289,573
Deferred income taxes, net			94,018				98,025
Cemetery perpetual care trust investments			234,630				231,008
Non-current assets held for sale			360				360
Other assets			11,554				11,905
Total assets		$	2,155,488			$	2,142,866

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		January 31, 2011				October 31, 2010
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	5			$	5
Accounts payable and accrued expenses			20,514				24,797
Accrued payroll and other benefits			13,217				14,313
Accrued insurance			20,365				20,912
Accrued interest			6,142				4,197
Estimated obligation to fund cemetery perpetual care trust			13,116				13,253
Other current liabilities			9,028				12,138
Income taxes payable			3,243				2,533
Total current liabilities			85,630				92,148
Long-term debt, less current maturities			314,951				314,027
Deferred income taxes, net			5,063				4,950
Deferred preneed funeral revenue			242,269				243,520
Deferred preneed cemetery revenue			256,768				258,044
Deferred preneed funeral and cemetery receipts held in trust			572,956				555,152
Perpetual care trusts’ corpus			233,394				229,518
Other long-term liabilities			20,341				20,023
Total liabilities			1,731,372				1,717,382
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 87,843,636 and 88,739,140 shares at January 31, 2011 and October 31, 2010, respectively			87,844				88,739
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at January 31, 2011 and October 31, 2010; 10 votes per share convertible into an equal number of Class A shares			3,555				3,555
Additional paid-in capital			538,805				547,319
Accumulated deficit			(206,103	)			(214,147	)
Accumulated other comprehensive income:
Unrealized appreciation of investments			15				18
Total accumulated other comprehensive income			15				18
Total shareholders’ equity			424,116				425,484
Total liabilities and shareholders’ equity		$	2,155,488			$	2,142,866

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

						Additional								Unrealized				Total
		Common				Paid-In				Accumulated				Appreciation				Shareholders’
		Stock(1)				Capital				Deficit				of Investments				Equity
Balance October 31, 2010		$	92,294			$	547,319			$	(214,147	)		$	18			$	425,484
Comprehensive income (loss):
Net earnings			—				—				8,044				—				8,044
Other comprehensive loss:
Unrealized depreciation of investments, net of deferred tax benefit of $2			—				—				—				(3	)			(3	)
Total other comprehensive loss			—				—				—				(3	)			(3	)
Total comprehensive income (loss)			—				—				8,044				(3	)			8,041
Restricted stock activity			286				26				—				—				312
Issuance of common stock			96				438				—				—				534
Stock options exercised			70				193				—				—				263
Stock option expense			—				311				—				—				311
Tax benefit associated with stock activity			—				28				—				—				28
Purchase and retirement of common stock			(1,347	)			(6,761	)			—				—				(8,108	)
Dividends ($.03 per share)			—				(2,749	)			—				—				(2,749	)
Balance January 31, 2011		$	91,399			$	538,805			$	(206,103	)		$	15			$	424,116

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		Three Months Ended January 31,
		2011				2010
Cash flows from operating activities:
Net earnings		$	8,044			$	7,487
Adjustments to reconcile net earnings to net cash provided by operating activities:
Gain on early extinguishment of debt			—				(17	)
Depreciation and amortization			6,872				6,587
Non-cash interest and amortization of discount on senior convertible notes			1,350				1,521
Provision for doubtful accounts			1,301				1,674
Share-based compensation			1,132				962
Excess tax benefits from share-based payment arrangements			(51	)			(20	)
Provision for deferred income taxes			7,152				3,569
Estimated obligation to fund cemetery perpetual care trust			73				—
Other			(3	)			20
Changes in assets and liabilities:
Increase in receivables			(860	)			(1,648	)
Increase in prepaid expenses			(4,115	)			(4,825	)
(Increase) decrease in inventories and cemetery property			227				(3	)
Decrease in accounts payable and accrued expenses			(5,203	)			(7,204	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments			562				3,031
Decrease in deferred preneed funeral revenue			(1,435	)			(2,240	)
Increase (decrease) in deferred preneed funeral receipts held in trust			199				(3,324	)
Net effect of preneed cemetery production and deliveries:
(Increase) decrease in preneed cemetery receivables and trust investments			(1,220	)			781
Decrease in deferred preneed cemetery revenue			(1,278	)			(3,575	)
Increase (decrease) in deferred preneed cemetery receipts held in trust			2,330				(173	)
Increase in other			157				170
Net cash provided by operating activities			15,234				2,773
Cash flows from investing activities:
Proceeds from sales of certificates of deposit			10,000				—
Purchases of certificates of deposit and marketable securities			(6	)			(5,000	)
Purchase of subsidiaries and other investments, net of cash acquired			(1,809	)			—
Additions to property and equipment			(4,604	)			(4,297	)
Other			28				39
Net cash provided by (used in) investing activities			3,609				(9,258	)
Cash flows from financing activities:
Repayments of long-term debt			(1	)			(846	)
Retirement of common stock warrants			—				(107	)
Issuance of common stock			341				115
Retirement of call options			—				107
Purchase and retirement of common stock			(8,108	)			—
Debt refinancing costs			—				(38	)
Dividends			(2,749	)			(2,794	)
Excess tax benefits from share-based payment arrangements			51				20
Net cash used in financing activities			(10,466	)			(3,543	)
Net increase (decrease) in cash			8,377				(10,028	)
Cash and cash equivalents, beginning of period			56,060				62,808
Cash and cash equivalents, end of period		$	64,437			$	52,780
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net		$	89			$	(44	)
Interest		$	2,482			$	3,191
Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors		$	456			$	414
Issuance of restricted stock, net of forfeitures		$	424			$	1,024

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) 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, 2011, the Company owned and operated 218 funeral homes and 141 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, 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, 2011, and for the three months ended January 31, 2011 and 2010, 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, 2010 (the “2010 Form 10-K”).

     The October 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2010 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 2010 Form 10-K.

     The results of operations for the three months ended January 31, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2011.

     (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 2010 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 2010 Form 10-K. Net earnings for the three months ended January 31, 2011 and 2010 include $311 and $275, 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, 2011, there was $3,561 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 3.3 years of which $1,154 of total stock option expense is expected for fiscal year 2011. The expense related to restricted stock is reflected in corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $365 and $273 for the three months ended January 31, 2011 and 2010, respectively. As of January 31, 2011, there was $2,359 of

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2011 is expected to be $1,713.

     In November 2010, the Company issued 82,160 shares of Class A common stock and paid approximately $114 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $456 and was recorded in corporate general and administrative expenses during the first quarter of 2011. Each of the shares received has a restriction requiring each independent director to hold the respective shares 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, 2011:

Weighted

Number of Shares

Average

Grant Type

Granted

Price per Share

Vesting Period

Vesting Condition

Stock options

1,326,000

$

6.23

Equal one-fourth portions over 4 years

Service condition

Restricted stock

515,500

$

6.24

Equal one-third portions over 3 years

Market condition

     The fair value of the Company’s service based stock options granted in fiscal year 2011 is the estimated present value at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the three months ended January 31, 2011: expected dividend yield of 1.9 percent; expected volatility of 41.5 percent; risk-free interest rate of 1.9 percent; and an expected term of 4.8 years. In the first quarter of 2011, the Company granted 515,500 shares of restricted stock with market conditions based on achieving certain target stock prices in the years 2011, 2012 and 2013. The Company records the expense over the requisite service period.

     (f) Receivables and Allowance for Doubtful Accounts

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

     As of January 31, 2011, the Company’s receivables and related allowances were as follows:

		Receivables as of January 31, 2011
		Ending Balance Collectively
		Evaluated for Impairment
Current receivables — at-need funeral		$	10,495
Current receivables — other			45,973
Receivables, due beyond one year — other			73,728
Preneed funeral receivables			42,367
Preneed cemetery receivables			30,570
Total		$	203,133
Total current receivables			56,468
Total noncurrent receivables			146,665
Total		$	203,133
		Allowance for Doubtful Accounts and
		Cancellations as of January 31, 2011
		Ending Balance Collectively
		Evaluated for Impairment
Current receivables — at-need funeral and other		$	(5,603	)
Receivables, due beyond one year — other			(8,261	)
Preneed funeral receivables			(11,720	)
Preneed cemetery receivables			(4,419	)
Total		$	(30,003	)
Total current receivables			(5,603	)
Total noncurrent receivables			(24,400	)
Total		$	(30,003	)

     The following summarizes the aging of past due receivables:

		Age Analysis of Past Due
		Receivables as of January 31, 2011
														Greater than
						31 to 60 Days				61 to 90 Days				90 Days Past
		1 to 30 Days				Past Due				Past Due				Due				Total
Receivables — at-need funeral		$	6,783			$	727			$	442			$	2,543			$	10,495
Receivables — other			95,245				5,020				2,490				16,946				119,701
Preneed funeral receivables			28,483				1,029				583				12,272				42,367
Preneed cemetery receivables			23,882				1,090				697				4,901				30,570

     (g) Reclassifications

     Certain reclassifications have been made to the 2010 condensed consolidated statement of earnings in order for these periods to be comparable. These reclassifications had no effect on the Company’s net earnings, total shareholders’ equity or operating cash flows.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles

     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 was adopted by 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 currently evaluating the impact the adoption will have on its consolidated financial statements.

     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 adoption of this guidance did not have a material effect on the Company’s financial statements.

     In July 2010, the FASB issued ASU No. 2010-20, which requires new disclosures on finance receivables and allowance for credit losses. The new disclosures are required for interim and annual periods ending after December 15, 2010, although the disclosures of reporting period activity are required for interim and annual periods beginning after December 15, 2010. In January 2011, the FASB issued ASU No. 2011-01, which delayed indefinitely the effective date of ASU No. 2010-20 for public companies with regard to the disclosures on trouble debt restructurings. The guidance was adopted by the Company as of its first fiscal quarter ended January 31, 2011. See Note 1(f) for the required disclosures. The disclosures of reporting period activity are effective for the Company’s second fiscal quarter beginning February 1, 2011. The adoption of this guidance by the Company did not have a material effect on its consolidated financial statements.

(3) Preneed Funeral Activities

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

Preneed Funeral Receivables and Trust Investments

     Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of January 31, 2011 and October 31, 2010 are as follows:

		January 31,				October 31,
		2011				2010
Trust assets		$	393,093			$	383,792
Receivables from customers			42,367				42,879
			435,460				426,671
Allowance for cancellations			(11,720	)			(11,753	)
Preneed funeral receivables and trust investments		$	423,740			$	414,918

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of January 31, 2011 are detailed below.

		January 31, 2011
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	16,804			$	—			$	—			$	16,804
U.S. Government, agencies and municipalities			1,992				44				(14	)			2,022
Corporate bonds			30,003				1,436				(1	)			31,438
Preferred stocks			56,092				368				(2,691	)			53,769
Common stocks			234,960				2,337				(82,625	)			154,672
Mutual funds:
Equity			26,205				1,169				(1,513	)			25,861
Fixed income			62,479				901				(846	)			62,534
Commodity			23,634				1,149				—				24,783
Real estate investment trusts			5,783				179				—				5,962
Insurance contracts and other long-term investments			14,080				73				(98	)			14,055
Trust investments		$	472,032			$	7,656			$	(87,788	)		$	391,900
Market value as a percentage of cost																			83.0	%
Accrued investment income															1,193
Trust assets														$	393,093

     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2010 are detailed below.

		October 31, 2010
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	26,118			$	—			$	—			$	26,118
U.S. Government, agencies and municipalities			2,224				84				(1	)			2,307
Corporate bonds			44,077				2,887				(1	)			46,963
Preferred stocks			56,297				356				(2,220	)			54,433
Common stocks			234,946				925				(91,593	)			144,278
Mutual funds:
Equity			27,154				185				(2,936	)			24,403
Fixed income			53,444				1,718				(767	)			54,395
Commodity			13,572				1,968				—				15,540
Insurance contracts and other long-term investments			14,171				146				(98	)			14,219
Trust investments		$	472,003			$	8,269			$	(97,616	)		$	382,656
Market value as a percentage of cost																			81.1	%
Accrued investment income															1,136
Trust assets														$	383,792

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

		January 31, 2011
Due in one year or less		$	5,577
Due in one to five years			19,974
Due in five to ten years			7,890
Thereafter			19
		$	33,460

     The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust in order to provide an opportunity for additional income. As of January 31, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $246 and $311, respectively. These covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended January 31, 2011 and 2010, the Company realized trust losses of approximately ($146) and ($235), respectively, related to the covered call program. These trust losses are accounted for in the same manner as other funeral merchandise and services trust earnings and losses and flow through funeral revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the three months ended January 31, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. For the three months ended January 31, 2011 and 2010, these underlying securities appreciated in value by $991 and $3,135, respectively, during the periods 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, convertible 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 purchased within the trusts. The valuation of insurance contracts and partnership investments requires significant management judgment due to the absence of quoted prices, inherent lack of liquidity and the long-term nature of such assets. The fair market value of the insurance contracts is based upon the current face value of the contracts according to the respective insurance companies 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:

						Significant
		Quoted Market				Other				Significant
		Prices in Active				Observable				Unobservable
		Markets				Inputs				Inputs				Fair Market
		(Level 1)				(Level 2)				(Level 3)				Value
Trust investments—January 31, 2011		$	298,288			$	87,229			$	6,383			$	391,900
Trust investments—October 31, 2010		$	272,173			$	103,703			$	6,780			$	382,656

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     The 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,
		2011				2010
Fair market value, beginning balance		$	6,780			$	8,662
Distributions and other, net			(397	)			73
Fair market value, ending balance		$	6,383			$	8,735

     Activity related to preneed funeral trust investments is as follows:

		Three Months Ended January 31,
		2011				2010
Purchases		$	44,289			$	849
Sales			37,757				4,349
Realized gains from sales of investments			2,818				628
Realized losses from sales of investments and other			(99	)			(516	)
Interest income, dividends and other ordinary income			3,336				2,346
Deposits			5,356				8,015
Withdrawals			10,385				11,977

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of January 31, 2011 and October 31, 2010.

		January 31, 2011
		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		$	556			$	(13	)		$	21			$	(1	)		$	577			$	(14	)
Corporate bonds			1,382				(1	)			—				—				1,382				(1	)
Preferred stocks			949				(1	)			32,926				(2,690	)			33,875				(2,691	)
Common stocks			15				(111	)			136,655				(82,514	)			136,670				(82,625	)
Mutual funds:
Equity			—				—				13,592				(1,513	)			13,592				(1,513	)
Fixed income			5,231				(20	)			4,464				(826	)			9,695				(846	)
Insurance contracts and other long-term investments			30				(98	)			—				—				30				(98	)
Total		$	8,163			$	(244	)		$	187,658			$	(87,544	)		$	195,821			$	(87,788	)

		October 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			896				(1	)			—				—				896				(1	)
Preferred stocks			49				(1	)			35,205				(2,219	)			35,254				(2,220	)
Common stocks			(17	)			(136	)			136,483				(91,457	)			136,466				(91,593	)
Mutual funds:
Equity			—				—				20,298				(2,936	)			20,298				(2,936	)
Fixed income			3,575				(3	)			4,550				(764	)			8,125				(767	)
Insurance contracts and other long-term investments			—				—				—				(98	)			—				(98	)
Total		$	4,503			$	(141	)		$	196,557			$	(97,475	)		$	201,060			$	(97,616	)

     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, concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at January 31, 2011, 94 percent, or $82,625, were generated by common stock investments. Most of the common stock investments are part of the S&P 500 Index. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes that it has sufficient liquidity from cash and cash equivalents within the trusts, 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, trust earnings which include 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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

realized. In these trusts, unrealized gains and losses are not allocated to individual contracts. The trust earnings allocated to individual contracts are recognized as components of revenue along with the original contract sales price when the underlying service or merchandise is actually 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, 2011 and October 31, 2010 are as follows:

		January 31,				October 31,
		2011				2010
Trust assets		$	190,880			$	182,789
Receivables from customers			30,570				31,656
			221,450				214,445
Allowance for cancellations			(4,419	)			(4,695	)
Preneed cemetery receivables and trust investments		$	217,031			$	209,750

     The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of January 31, 2011 are detailed below.

		January 31, 2011
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	9,119			$	—			$	—			$	9,119
U.S. Government, agencies and municipalities			854				26				(3	)			877
Corporate bonds			3,980				331				(1	)			4,310
Preferred stocks			20,094				141				(1,299	)			18,936
Common stocks			120,753				2,203				(40,633	)			82,323
Mutual funds:
Equity			29,306				251				(5,453	)			24,104
Fixed income			29,865				423				(16	)			30,272
Commodity			14,100				623				—				14,723
Real estate investment trusts			4,894				151				—				5,045
Other long-term investments			612				—				—				612
Trust investments		$	233,577			$	4,149			$	(47,405	)		$	190,321
Market value as a percentage of cost																			81.5	%
Accrued investment income															559
Trust assets														$	190,880

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, 2010 are detailed below.

		October 31, 2010
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short-term investments		$	12,719			$	—			$	—			$	12,719
U.S. Government, agencies and municipalities			5,655				667				(2	)			6,320
Corporate bonds			11,790				950				(13	)			12,727
Preferred stocks			20,132				139				(1,182	)			19,089
Common stocks			122,529				1,223				(45,792	)			77,960
Mutual funds:
Equity			30,291				50				(6,978	)			23,363
Fixed income			21,405				660				(6	)			22,059
Commodity			6,521				966				—				7,487
Other long-term investments			592				3				—				595
Trust investments		$	231,634			$	4,658			$	(53,973	)		$	182,319
Market value as a percentage of cost																			78.7	%
Accrued investment income															470
Trust assets														$	182,789

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

		January 31, 2011
Due in one year or less		$	1,513
Due in one to five years			2,305
Due in five to ten years			1,268
Thereafter			101
		$	5,187

     The Company is actively managing a covered call program on its equity securities within the cemetery merchandise and services trust in order to provide an opportunity for additional income. As of January 31, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $176 and $128, respectively. These covered calls are included at market value in the balance sheet line “preneed cemetery receivables and trust investments.” For the three months ended January 31, 2011 and 2010, the Company realized trust losses of approximately ($90) and ($187), respectively, related to the covered call program. These trust losses are accounted for in the same manner as other cemetery merchandise and services trust earnings and losses and flow through cemetery revenue in the statements of earnings. Although the Company realized losses associated with the covered call program for the three months ended January 31, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. For the three months ended January 31, 2011 and 2010, these underlying securities appreciated in value by $420 and $2,409, respectively, during the periods 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.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

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

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

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

     The inputs into the fair value of the Company’s preneed cemetery 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, 2011		$	166,054			$	24,267			$	—			$	190,321
Trust investments—October 31, 2010		$	144,048			$	38,271			$	—			$	182,319

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

		Three Months Ended January 31,
		2011				2010
Purchases		$	31,872			$	2,046
Sales			28,384				2,320
Realized gains from sales of investments			2,251				423
Realized losses from sales of investments and other			(340	)			(881	)
Interest income, dividends and other ordinary income			1,798				1,152
Deposits			3,701				5,693
Withdrawals			4,607				4,404

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, 2011 and October 31, 2010.

		January 31, 2011
		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		$	111			$	(2	)		$	16			$	(1	)		$	127			$	(3	)
Corporate bonds			819				(1	)			—				—				819				(1	)
Preferred stocks			—				—				13,989				(1,299	)			13,989				(1,299	)
Common stocks			1,609				(121	)			61,944				(40,512	)			63,553				(40,633	)
Mutual funds:
Equity			—				—				20,848				(5,453	)			20,848				(5,453	)
Fixed income			4,279				(16	)			—				—				4,279				(16	)
Total		$	6,818			$	(140	)		$	96,797			$	(47,265	)		$	103,615			$	(47,405	)