Back to GetFilings.com

Table of Contents

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

FORM 10-K

Commission File Number: 0-19508

STEWART ENTERPRISES, INC.

Registrant’s telephone number, including area code: (504) 837-5880

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
None

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
Class A Common Stock, No Par Value
Preferred Stock Purchase Rights
(Title of Class)

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

     Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. [X]

     Indicate by check mark whether the Registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes [X] No [  ]

     The aggregate market value of the voting stock held by nonaffiliates (affiliates being, for this purpose only, directors, executive officers and holders of more than 5 percent of the Company’s Class A common stock) of the Registrant as of April 30, 2002, was approximately $527,000,000.

     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 January 10, 2003, was 104,533,816 and 3,555,020, respectively.

DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the proxy statement in connection with the 2003 annual meeting of shareholders are incorporated in Part III of this Report.

Table of Contents

Cautionary Note

     This annual report contains forward-looking statements of our management regarding factors that we believe may affect our performance in the future. Such statements typically are identified by terms expressing future expectations or projections of revenues, earnings, earnings per share, cash flow, capital expenditures, acquisition expenditures, internal growth initiatives, gross profit margin, debt levels, tax benefits and other financial items. All forward-looking statements, although made in good faith, are based on assumptions about future events and are therefore inherently uncertain, and actual results may differ materially from those expected or projected. Important factors that may cause our actual results to differ materially from expectations or projections include those described under the heading “Cautionary Statements” in Item 7. 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.

PART I

Item 1. Business

General

     Founded in 1910, we are the third largest provider of funeral and cemetery products and services in the death care industry in the United States. Through our subsidiaries, we provide a complete range of funeral merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of October 31, 2002, our operations included 307 funeral homes and 150 cemeteries in 29 states within the United States and in Puerto Rico.

     During fiscal year 2002, we continued to focus on the initiatives begun in fiscal year 2000 by completing the sale of our foreign operations, reducing our debt, strengthening cash flow and improving the operations of our core businesses. We used the proceeds from the sale of our foreign operations, along with cash flow, to reduce our debt from $950.5 million as of November 1, 2000 to $551.9 million as of October 31, 2002. As we approach our debt target of $500 million, we are positioned to shift to a business model of disciplined and balanced internal and external growth.

     For fiscal year 2002, funeral operations accounted for approximately 59 percent of our total revenues, and cemetery operations accounted for the remaining 41 percent. Our funeral homes offer a wide range of services and products including funeral services, cremation, transportation services, removal and preparation of remains, caskets and flowers. Our cemetery operations sell cemetery property, merchandise and services. Cemetery property includes lots, lawn crypts and family and community mausoleums. Cemetery merchandise includes vaults, monuments and markers. Cemetery services include burial site openings and closings and inscriptions.

     We believe that we operate one or more of the premier death care facilities in each of our principal markets. Our funeral homes and cemeteries are located primarily in the Southern, Western, Mid-Atlantic, and Mid-Western states, generally in large metropolitan areas such as Miami, Orlando, Tampa and St. Petersburg, Florida; Dallas, Fort Worth and Houston, Texas; Los Angeles, San Diego and San Francisco, California; New Orleans, Louisiana; Baltimore, Maryland and the District of Columbia. According to the United States Bureau of the Census, many of these areas have a large population over age 65, which represents a principal target market for our preneed sales program as well as at-need sales. We believe that we are an industry leader in marketing preneed cemetery property and preneed funeral and cemetery merchandise and services, and we consider preneed sales to be an integral part of our long-term business strategy.

     Cemetery operations account for a significantly larger percentage of our total revenues than those of our three largest competitors. We believe cemeteries provide the best foundation for securing long-term market share in our

-2-

Table of Contents

industry. The sale of cemetery property to a family creates a relationship that builds heritage over time, as family members are buried in a plot or mausoleum and as other family members purchase additional cemetery property in order to be buried in the same cemetery. Our relationships with our cemetery property customers allow us to more easily offer related products and services, such as cemetery merchandise and funeral services, at one of our funeral homes located on the cemetery grounds or nearby.

     We believe that our combination operations help to increase market share. By building new funeral homes on existing cemetery property, we are able to offer families the convenience of complete funeral home and cemetery planning and services from a single location at a competitive price at the time of need or on a preneed basis. Approximately 47 percent of our cemeteries have a funeral home onsite that we operate in conjunction with the cemetery. In addition to our combination operations, approximately 38 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes. We frequently organize our operating units in “clusters,” which are geographically integrated groups of funeral homes and cemeteries, allowing us to cost-effectively pool assets, personnel and services and generate higher margins.

     Our business was founded by the Stewart family in 1910, and was incorporated as a Louisiana corporation in 1970. Our principal executive offices are located at 110 Veterans Memorial Boulevard, Metairie, Louisiana 70005, and our telephone number is 504-837-5880. Our website address is www.stewartenterprises.com where all of our public filings are available free of charge on the same day they are filed with the Securities and Exchange Commission.

The Death Care Industry

     Industry consolidation. Death care businesses in the United States have traditionally been relatively small, family-owned enterprises that have passed through successive generations within the family. The last decade witnessed a trend of family-owned firms consolidating with larger organizations. However, this trend slowed in 1999. As industry conditions precipitated a reduction in the number of major consolidators participating in the acquisition market, those that remained generally applied significantly tighter pricing criteria, and many potential sellers withdrew their businesses from the market rather than pursuing transactions at lower prices.

     During the first quarter of 1999, Service Corporation International, one of our primary competitors for acquisitions, announced plans to significantly reduce the level of its acquisition activity. The Loewen Group, Inc., now reorganized as Alderwoods Group, Inc., previously a primary competitor for acquisitions, entered into bankruptcy proceedings on June 1, 1999, after announcing that it had terminated its acquisition activity and was offering a number of its own properties for sale. In addition, Equity Corporation International, previously the fourth largest public death care company and another of our competitors for acquisitions, merged with Service Corporation International.

     Throughout fiscal year 1999, we continually reduced our acquisition pricing multiples. In the third quarter of fiscal year 1999, our acquisition activity began to decrease substantially from prior quarters as many potential sellers were not willing to sell their businesses at the lower prices.

     As the business model shifted, death care consolidators experienced diminishing access to capital. In response to these changes, we developed strategies for improving our cash flow, restructuring our debt and reducing our debt with proceeds from the sale of our foreign assets and with our cash flow. Throughout fiscal years 2000, 2001 and 2002, we focused on liquidity, leverage and cash flow. Additional information can be found below under the heading “Business Strategy — Focus on cash flow.”

     By the end of fiscal year 2002, we had completed our transitional strategies of improving our cash flow, restructuring our debt and selling our foreign assets. We had also substantially reduced our debt. As we approach our debt target of $500 million, we have begun to position ourselves for internal and external growth including potential acquisitions in 2003. Our current strategies are described below in the section entitled “Business Strategy,” and our expectations for 2003 are detailed below in the section entitled “Forward-Looking Statements” included in Item 7.

-3-

Table of Contents

     We estimate that our industry, which consists of approximately 22,000 funeral homes and 10,500 cemeteries in the United States, annually generates approximately $15 billion in revenue. Our industry continues to be characterized by a large number of locally-owned, independent operations, with approximately 80 percent of industry revenue being generated by independently-owned operations.

     Importance of tradition; barriers to entry. We believe it is difficult for new competitors to enter existing markets successfully by opening new cemeteries and funeral homes. Entry into the cemetery market can be difficult due to several factors. Families tend to return to the same cemetery for multiple generations to bury family members making it difficult for new cemeteries to attract families. Additionally, mature markets, including many of the metropolitan areas where our cemeteries are located, are often served by an adequate number of existing cemeteries with land for additional plots, whereas land for new cemetery development is scarce. Regulatory complexities and zoning restrictions also make entry into the cemetery market difficult. Finally, development of a new cemetery usually requires a significant capital investment that takes several years to produce a return. Entry into the funeral home market can be difficult for many of the same reasons. Although families are often willing to move from an existing funeral home to a newer facility developed on the grounds of their preferred cemetery, families tend to choose a funeral home because it previously served their family, and because of the funeral home’s reputation, which must be developed over time.

     Continuing need for products and services; increasing number of deaths. There is an inevitable need for our products and services. Although the number of deaths in the United States will reflect short-term fluctuations, the number of deaths in the United States is expected to increase at a steady, moderate pace over the long-term. According to the United States Bureau of the Census, the number of deaths in the United States is expected to increase by approximately 1 percent per year, from 2.4 million in 2000 to 2.6 million in 2010. Furthermore, the average age of the population in the United States is increasing. According to the United States Bureau of the Census, the United States population over 50 years of age is expected to increase by approximately 2 percent per year, from 76.1 million in 2000 to 97.1 million in 2010. We believe the aging of the population is particularly important because it expands our target market for preneed sales as persons over the age of 50 are most likely to make preneed funeral and cemetery arrangements.

     Growing demand for cremation. Consumer preferences in the death care industry tend to change slowly. One significant trend in the United States is an increasing preference of consumers for cremations. Industry research indicates that the percentage of cremations has steadily increased and that cremations will represent approximately 39 percent of the burial market in the United States by the year 2010, compared to 26 percent in 2000. Although the percentage of deaths represented by cremations is expected to grow, we believe this growth will come primarily from the expected growth in the number of deaths, and that the number of traditional funerals performed each year should remain relatively constant. Because cremations have typically included few, if any, additional products or services for the family beyond the cremation itself, the trend towards cremation has been a concern for traditional funeral home and cemetery operators. However, industry research has shown that consumers most commonly choose cremation over traditional funerals for reasons other than cost, and we believe this increasing trend toward cremation will provide our company with an opportunity to better serve families by offering an array of additional products and services with an emphasis on customization.

     Growing demand for customization. Our market research and experience indicate a growing demand for increased personalization of our products and services. This trend offers us an opportunity to increase our customer’s satisfaction and our revenue per sale. We believe that our early identification of and response to this trend is a competitive advantage for our company, as described below in “Competitive Strengths.”

Competitive Strengths

     Leading market positions. We are the third largest provider of funeral and cemetery products and services in the United States and have been in business for more than 90 years. We believe that we operate one or more of the premier

-4-

Table of Contents

death care facilities in each of our principal markets, which are primarily in larger metropolitan areas in the Southern, Western, Mid-Atlantic and Mid-Western states. In our view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion. While funeral homes and cemeteries in the United States perform an average of approximately 100 funerals and 165 burials per year, our facilities perform an average of approximately 260 funerals and 375 burials per year. In addition, more than 40 percent of our properties are located in California, Florida and Texas, which are three of the four states with the highest populations over age 65, an age group that represents a large portion of our target market.

     Strong cemetery operations. Our cemetery operations account for approximately 41 percent of our total revenues, which is a significantly larger percentage than any of our three largest competitors. We believe this is a competitive advantage because families generally return to the same cemetery for multiple generations to bury family members. Cemetery property often becomes an important part of a family’s heritage, and family members who relocate are often returned to their home cemetery to be buried. We build on our relationships with our cemetery customers by offering additional cemetery property to related family members and by offering related products and services such as cemetery merchandise and funeral services at one of our funeral homes located on the cemetery grounds or nearby. Approximately 39 percent of our total cemetery acreage is available for future development.

     Emphasis on combination operations. Approximately 47 percent of our cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which we refer to as a combination operation. This is a significantly higher percentage of combination operations than any of our three largest competitors. We believe combination operations represent a competitive advantage because they offer families the convenience of complete death care services at a single location. Our experience indicates that a family planning a burial in one of our cemeteries often perceives our onsite funeral home to be a more desirable location for a funeral service than an unaffiliated offsite funeral home. Thus, the call volume of the funeral home is enhanced by the heritage of the cemetery, and, over time, the volume of cemetery events increases as well. In addition, combination operations enhance our purchasing power, enable us to employ more sophisticated management systems and allow us to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded marketing and sales opportunities. As a result, our combination operations usually generate higher operating margins compared to our stand-alone funeral homes and cemeteries. In addition to our combination operations, approximately 38 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes.

     Expertise in preneed sales; strong backlog. We believe that we are distinguished from our competitors by our strong emphasis on, and more than 60-year history of experience with, preneed sales. Preneed plans enable families to specify in advance and prepay for cemetery property and funeral and cemetery services and products. We market our preneed properties, services and products domestically through a full-time staff of approximately 1,200 commissioned sales counselors. We estimate that as of October 31, 2002, the future value of our preneed backlog of funeral and cemetery products and services (including estimated earnings on funds held in trust and build-up in the face value of third-party insurance contracts, in each case using projected returns) represented approximately $2.1 billion to $2.2 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. Our expertise in preneed sales has historically developed out of, and now complements, our strong cemetery operations. This is because cemetery property, such as a burial plot, is usually the first purchase a family will make when considering preneed arrangements. We build on our relationships with our preneed cemetery property customers by offering them additional preneed products and services such as cemetery merchandise and funeral services. Our focus on preneed cemetery property sales is also important because these sales generate current revenues and higher current cash flows than other types of preneed sales.

     Emphasis on customization and personalization. During 1999 we took steps to gain a competitive advantage by placing our Company at the forefront of product offerings based on consumer preferences. We hired a major consulting firm to assist us in conducting an extensive market study evaluating the changing trends in consumer preferences. With

-5-

Table of Contents

more than 2,400 interviews conducted, we believe this to be the most exhaustive recent study of consumer preferences in our industry. This project provided us with the consumer’s perspective on our operations and facilities. We gained valuable insight into how our employees, business practices and facilities can better meet consumer demand. Our implementation of new products and services based on the findings of this project continue to be positive drivers for our funeral business, and we believe that we have gained a sustainable competitive advantage.

     Among other important findings, our market research indicates that consumer preferences are shifting towards more personalized memorial services and merchandise in the context of both traditional burials and cremations. We have responded to these changing preferences by, among other things, training our funeral arrangers to offer our customers a broad range of options. For example, a funeral service can be designed to reflect the special interests or accomplishments of the deceased. We are also changing the way our product offerings are displayed at our locations, making it easier for our customers to appreciate our wider selection. In our markets where these new business practices have been implemented, we believe that we have further differentiated ourselves from our competitors, increased our customer’s satisfaction and increased our revenues per sale.

     Expertise in enhanced cremation and alternative service offerings. After we acquired Sentinel Cremation Societies, Inc. of California in 1997, which operated thirteen service centers offering cremations and related products and services, we continued to develop our strategies for capturing the increasing market for cremations in the United States. During fiscal year 1998, we acquired Desert Memorial Cremation and Burial Society in Las Vegas, Nevada. During fiscal years 2000 and 2001, we opened several additional alternative service firms, primarily in the western United States. We now operate 35 alternative service locations, which primarily offer value-priced cremation services and are primarily located in California, Oregon and Nevada. Our alternative service firm locations are generally leased and have lower overhead than traditional funeral homes. Although death care arrangements at these locations are typically more cost-effective for the consumer than services at a traditional funeral home, it is not our goal to be the low-price leader in these markets. While the average revenue for a cremation service is generally lower than that of a traditional full-service funeral, we have found that these revenues can be substantially enhanced by our emphasis on customization. For example, in addition to a personalized memorial service to celebrate the life of the deceased, an enhanced cremation may include a casket, an urn and a niche in a mausoleum or columbarium in which to place the remains. We continue to use creative approaches to marketing our products and services to meet the rising demand for cremations.

     Centralized support services; cost controls. Our Shared Services Center, which we opened in 1997, was developed for the standardization and centralization of all of our facilities’ administrative and support processes such as accounting, management reporting, payroll, contract processing, accounts receivable collection and other services. It allows us to decrease our costs in a way that has no impact on the families we serve by creating significant savings on items such as trust administration fees, travel expenses, office supplies, overnight delivery and long distance. We estimate that the centralization of our business support services has saved us $15 million to $20 million per year. As we look at our opportunities for growth, we expect to leverage the efficiencies that we have achieved through our Shared Services Center and expect to manage much of our growth with our existing infrastructure. Additionally, at the beginning of fiscal year 2000 we developed our centralized formal training strategy and began our implementation of standardized marketing programs to enhance sales effectiveness. While our centralization of resources and standardization of processes represent a competitive advantage, our management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in their operations and service to families in an effort to maintain the traditional structure and culture of an individually-owned operation. We believe that this is important in order to maintain the level of caring, personalized service expected by the families we serve.

     Experienced management. We have an experienced management team, many of whom owned and operated their own funeral homes and cemeteries and joined us when we acquired their businesses. Our 10 top executives have an average of 33 years of experience in the death care industry and have served our company for an average of 17 years.

-6-

Table of Contents

Business Strategy

     Our business strategy is to improve and expand operations both internally and externally using our free cash flow, which we define as cash flow from operations less maintenance capital expenditures. Our operating strategies and training initiatives are focused on increasing funeral calls, average revenue and preneed sales, while improving customer and employee satisfaction, and effectively managing costs, internal controls and safety. We have initiated formal processes designed to help our employees provide consistent high standards of service, while also ensuring that every funeral home owned by Stewart Enterprises meets the needs and desires of our customers with regard to caring, personalized service, high quality facilities, and real and perceived value.

     Position for growth. During 2002, as we approached our debt target of $500 million, we began to position our Company for disciplined and balanced internal and external growth. In fiscal year 2003, we plan to explore several growth opportunities that will be funded with free cash flow, including purchasing high-quality firms, building additional combination funeral homes, pursuing operating partnerships and developing alternative service firms and other freestanding funeral home businesses. Our goal is to produce a 15 percent to 20 percent internal rate of return on the deployment of our cash.

     Purchase high-quality firms. We will pursue the acquisition of high-quality funeral homes and cemeteries. We have begun the process of reentering the acquisition arena but expect to move slowly and carefully in order to achieve an attractive internal rate of return and maintain our target liquidity levels. With only approximately 20 percent of the revenue in the death care industry in the United States generated by public consolidators, we believe there is opportunity for growth through acquisitions. While many of the privately-owned businesses are not suitable candidates for acquisition, we believe that a significant number of these businesses would present attractive opportunities for us if they can be acquired at reasonable prices. We will pursue premier firms that can be integrated within existing clusters or serve as a base for the formation of new clusters, and we believe the biggest opportunity resides in the acquisition of multi-location businesses.

     Develop additional combination operations. We create combination operations by (1) building funeral homes on cemetery properties that we own and (2) entering into operating partnerships with third parties in which we construct, own and operate a funeral home and/or mausoleum on the grounds of a cemetery owned by the third party. Partnerships allow us to enjoy the benefits of operating a funeral home in a combination operation without the capital investment of purchasing the cemetery. Our operating partners benefit by being able to compete more effectively with other cemeteries or combination operations in the market, by increased cemetery revenues and by providing a better service to parishioners or other constituencies. In 1997, we entered into an operating partnership with the Archdiocese of Los Angeles to construct and operate funeral homes at the site of up to nine cemeteries owned and operated by the Archdiocese. As of October 31, 2002, five of these funeral homes had been completed, and two have begun the permitting process. Over the last 50 years, through our mausoleum construction business, we have developed relationships with the Catholic Church in approximately 70 dioceses in 39 states. We plan to pursue more of these partnerships with the Catholic Church, other faith-based organizations and non-profit entities.

     Increase enhanced cremation products and services. In fiscal year 2002, 39 percent of the funeral services we performed in the United States and Puerto Rico were cremations, compared to 38 percent and 36 percent in fiscal years 2001 and 2000, respectively. The cremation rate in the United States has been increasing. According to industry estimates, 26 percent of deaths in the United States during 2000 resulted in cremations, and cremations are expected to represent 39 percent of the burial market in the United States by the year 2010. As described above in “Competitive Strengths — Expertise in enhanced cremation and alternative service offerings,” we have been addressing this trend by providing enhanced cremation products and services at all of our funeral homes.

     Maintain backlog through preneed marketing. We consider maintaining our backlog through preneed marketing to be an integral part of our long-term business strategy. Our primary objective is to moderate preneed sales levels to

-7-

Table of Contents

balance our cash investment while maintaining a sustainable and predictable level of growth in our backlog. The aging of the population represents a significant opportunity for us to expand our customer base through preneed marketing as persons over the age of 50 years are most likely to make these purchases.

     Reduce debt. Beginning in 2001, we actively pursued the sale of our foreign assets and, as of October 31, 2002, had sold all of our foreign operations. We have used the net proceeds from these sales, along with cash flow, to reduce debt by $257 million during fiscal year 2001 and $142 million during fiscal year 2002 to $551.9 million as of October 31, 2002. Our goal is to reduce debt to approximately $500 million. With future tax proceeds of approximately $42 million that we expect to realize related to the sale of our foreign operations, we expect to need less than $10 million of our cash flow to achieve our debt reduction target. We expect to achieve our debt target in fiscal 2003 or 2004, depending upon the timing of our realization of the $42 million in tax benefits.

     Focus on cash flow. We plan to continue to focus on our cash flow through a number of initiatives begun in fiscal year 2000, including revenue enhancements, cost controls and continued moderation of our preneed sales activities. In fiscal year 2000, we restructured our preneed sales program to focus on increasing cash flow. We increased finance charges, required larger down payments and shortened installment payment terms, and decreased the overall level of preneed sales but improved the quality of those sales and the associated receivables. We also suspended our dividend and implemented an internal process for reviewing capital expenditures. We plan to continue these initiatives and continue reducing our costs by, among other things, obtaining volume discounts from suppliers, leveraging our operating costs through clustering and combination operations, and identifying facilities with overlapping market share for consolidation of resources as appropriate. Additionally, we have been incentivizing local managers to decrease costs by tying their compensation more closely to the profitability of the locations they manage.

Operations

     General. We believe that we operate one or more of the premier death care facilities in each of our principal markets. In our view, a “premier” facility is one that is among the most highly regarded facilities in its market area in terms of a number of factors such as tradition, heritage, reputation, physical size, volume of business, available inventory, name recognition, aesthetics and/or potential for development or expansion.

     We operate most of our funeral homes and cemeteries in “clusters.” Clusters are groups of funeral homes and cemeteries located close enough to one another that their operations can be integrated to achieve economies of scale. For example, clustered facilities can share vehicles, embalming services, inventories of caskets and other merchandise and, most significantly, personnel, including prearrangement sales personnel; thus, we are able to decrease our costs and expand our sales and marketing effectiveness at each location. By virtue of their proximity to one another, clustered facilities also create opportunities for more integrated and sophisticated management of their operations.

     Funeral operations. Funeral operations accounted for approximately 59 percent of our revenues for fiscal year 2002. Our funeral homes offer a complete range of funeral services and products both at the time of need and on a preneed basis. Our services and products include family consultation, removal and preparation of remains, the use of funeral home facilities for visitation, worship and funeral services, transportation services, flowers and caskets. In addition to traditional funeral services, all of our funeral homes offer cremation products and services. Most of our funeral homes have a non-denominational chapel on the premises, which allows family visitation and religious services to take place at the same location. As of October 31, 2002, we operated 307 funeral homes.

     Cemetery operations. Cemetery operations accounted for approximately 41 percent of our revenues for fiscal year 2002. Our cemetery operations involve the sale of cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, markers and burial vaults, along with the sale of burial site openings and closings and inscriptions. Cemetery property and merchandise sales are made both at the time of need and on a preneed basis. We also maintain cemetery grounds under perpetual care contracts and local laws. As of October 31, 2002, we operated 150 cemeteries.

-8-

Table of Contents

     Combination funeral home and cemetery operations. Approximately 47 percent of our cemeteries have a funeral home onsite that is operated in conjunction with the cemetery, which is a higher percentage of combination operations than any of our three largest competitors. Many of these facilities are in our key markets, including New Orleans, Louisiana; Dallas, Fort Worth and Houston, Texas; Miami, Orlando, Tampa and St. Petersburg, Florida; and Los Angeles and San Diego, California.

     Combination operations help to increase market share by allowing us to offer families the convenience of complete funeral home and cemetery planning and services from a single location at a competitive price at the time of need or on a preneed basis. Our experience demonstrates that a family planning a burial in our cemetery often views our associated funeral home as a more desirable location for a funeral service than an unaffiliated offsite funeral home. Thus, the funeral home’s sales benefit from the heritage of the cemetery, and, over time, the cemetery’s activity increases as well. In addition, combination operations enhance our purchasing power, enable us to employ more sophisticated management systems and allow us to share facilities, equipment, personnel and a preneed sales force, resulting in lower average operating costs and expanded sales and marketing opportunities. Although it generally takes several years before a newly constructed funeral home becomes profitable, our experience with combination operations has demonstrated that the combination of a funeral home with a cemetery can significantly increase the market share and profitability of both.

     We have three primary strategies for growth through the use of combination operations. One strategy is to create combination operations by constructing funeral homes on the grounds of our cemeteries. Another is to enter into operating partnerships in which we construct funeral homes on the grounds of unaffiliated cemeteries, which allows us to enjoy many of the benefits of a combination operation without the capital investment of purchasing the cemetery. Our partners benefit by being able to compete more effectively with other cemeteries or combination operations in the market, by increased cemetery revenues and by providing a better service to their parishioners or other constituencies. The third strategy is to acquire combination operations.

     Through an operating partnership with the Catholic Archdiocese of New Orleans, we constructed a mausoleum for the Catholic Church on the grounds of its combination operation in New Orleans in fiscal year 1987. We own the mausoleum and manage the sales relating to the mausoleum for the Church. Additionally, in fiscal year 1994 through an operating partnership with the Firemen’s Charitable and Benevolent Association, a non-profit organization, we constructed a funeral home and mausoleum on the grounds of its cemetery in New Orleans. We own and operate the funeral home in combination with the cemetery and manage sales for the mausoleum. In 1997, we entered into an agreement with the Archdiocese of Los Angeles to construct and operate funeral homes on land we lease from the Archdiocese at the site of up to nine cemeteries owned and operated by the Archdiocese. As of October 31, 2002, five of these funeral homes have been completed, and two have begun the permitting process.

     Over the last 50 years, through our mausoleum construction business, we have developed relationships with the Catholic Church in approximately 70 dioceses in 39 states. We plan to pursue more of these partnerships with the Catholic Church, other faith-based organizations and non-profit entities. We also plan to develop additional combination operations on our own cemetery properties as well as pursuing the acquisition of privately-owned combination operations.

     Cremation. In fiscal year 2002, 39 percent of the funeral services we performed in the United States and Puerto Rico were cremations. The cremation rate in the United States has been increasing, and by the year 2010 cremations are expected to represent 39 percent of the burial market in the United States according to industry estimates. We have been addressing this trend by providing enhanced cremation products and services at all of our funeral homes, including funeral services and memorialization for families choosing cremation. We are also addressing this trend through our alternative service firm strategy as discussed above in “Competitive Strengths — Expertise in enhanced cremation and alternative service offerings.”

     Preneed arrangements. We market death care products and services domestically on a preneed basis through a full-time staff of approximately 1,200 commissioned sales counselors. Preneed plans enable families to specify in advance

-9-

Table of Contents

and prepay for funeral and cemetery arrangements. Prearrangements spare families the emotional strain of making death care decisions at the time of need. The products and services included in preneed contracts are set at prices prevailing at the time the agreement is signed rather than when the products and services are delivered. As described under the heading “Summary of Current Accounting for Preneed Sales” included in Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” customer payments related to these contracts are generally placed in trust funds and invested or are used to purchase insurance policies to cover the cost of the future delivery of products and services. When the service or merchandise is delivered, we realize the full contract amount plus all accumulated trust earnings associated with that contract or the buildup in the face value of the insurance contract, generally offsetting increases in our costs due to inflation.

     We estimate that as of October 31, 2002, the future value of our preneed backlog (including estimated earnings on funds held in trust and build-up in the face value of insurance contracts, in each case at projected rates) represented approximately $2.1 billion to $2.2 billion of revenue to be recognized in the future as these prepaid products and services are delivered, calculated as discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

     Trust funds and escrow accounts. We maintain three types of trust funds and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) perpetual care. For further discussion of these trust funds and escrow accounts, see Notes 4 and 5 to the consolidated financial statements included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7. As of October 31, 2002, the market value of our preneed funeral merchandise and services trust funds and escrow accounts totaled approximately $421.4 million, the market value of our preneed cemetery merchandise and services trust funds and escrow accounts totaled approximately $167.6 million, and the market value of our perpetual care trust funds totaled approximately $179.2 million.

     We believe that the balances in our trust funds and escrow accounts, along with insurance proceeds, installment payments due under contracts and future earnings on the balances, will be sufficient to cover our estimated cost of providing the related preneed services and products in the future (see “Cautionary Statements” included in Item 7).

     Generally, our wholly-owned subsidiary, Investors Trust, Inc. (“ITI”), a Texas corporation with trust powers, serves as investment advisor on our investment portfolio and our prearranged funeral, merchandise and perpetual care trust funds and escrow accounts. ITI provides investment advisory services exclusively to us. ITI is registered with the Securities and Exchange Commission under the Investment Advisers Act of 1940. As of October 31, 2002, ITI had approximately $809.9 million in assets under management. Lawrence B. Hawkins, one of our executive officers and a professional investment manager, serves as President of ITI. ITI operates with the assistance of third-party professional financial consultants pursuant to a formal investment policy established by the Investment Committee of our Board of Directors. The policy emphasizes conservation, diversification and preservation of principal while seeking appropriate levels of current income and capital appreciation.

     Management. We have an experienced management team, many of whom joined us through acquisitions. Our management structure is designed to allow local funeral home directors and cemetery managers substantial flexibility in deciding how their businesses will be managed and how their products and services will be priced and merchandised. At the same time, financial and strategic goals are established by management at the corporate level. We provide business support services primarily through our Shared Services Center, which opened in 1997 and provides centralized and standardized accounting, management reporting, payroll, contract processing, accounts receivable collection and other services for all of our facilities.

     Currently, we are divided into four operating divisions in the United States, each of which is managed by a division president and chief financial officer. These divisions are further divided into regions, each of which is managed by a regional chief operating officer. We also have a Corporate Division, which manages our corporate services, accounting and financial operations and strategic planning. Early in fiscal year 2000, we formed a Sales and Marketing Division

-10-

Table of Contents

to centralize responsibility for sales teams in all operating divisions and to allow for more comprehensive training and sharing of information. From time to time, we may increase, reduce or realign our divisions and regions.

     Foreign operations. In fiscal year 2001, we began to sell our foreign operations as part of our strategy to reduce debt and focus on our core businesses. During fiscal year 2001, we sold our Mexican, Australian, New Zealand, Belgian and Dutch operations comprised of 94 funeral homes and 2 cemeteries. During fiscal year 2002, we sold our operations in Spain, Portugal, France, Canada and Argentina, which consisted of 196 funeral homes and 8 cemeteries. For fiscal year 2002, our revenues from foreign operations were $42.5 million, or 7 percent of total revenues; our gross profit from foreign operations was $5.2 million, or 4 percent of total gross profit; and our EBITDA (defined as earnings before interest expense, taxes, depreciation and amortization) from foreign operations was $7.0 million, or 4 percent of total EBITDA. The reduction in operating earnings from the sale of these foreign operations from fiscal year 2002 to forecasted operating earnings for fiscal year 2003 is expected to be substantially offset by interest expense savings of approximately $3.3 million resulting from the use of proceeds from these sales to reduce our average debt balance. After adjusting for interest expense savings and income taxes, the earnings contribution to fiscal year 2002 earnings per share from the foreign businesses was approximately $0.02 per diluted share.

     Financial information about industry and geographic segments. For financial information about our industry and geographic segments for fiscal years 2002, 2001 and 2000, see Note 17 to our consolidated financial statements included in Item 8.

Competition

     Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral home and cemetery firms. We also compete with monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of limited services or products. Market share is largely a function of goodwill, family heritage and tradition, although competitive pricing, professional service and attractive, well-maintained and conveniently-located facilities are also important. Because of the significant role of goodwill and tradition, market share increases are usually gained over a long period of time. Extensive marketing through media advertising, direct mailings and personal sales calls has increased in recent years, especially with respect to the sales of preneed funeral services. Traditional cemetery and funeral service operators face competition from the increasing number of cremations in the United States. Additional information about the trend towards cremation and our strategies to address this can be found above under the headings “The Death Care Industry,” “Competitive Strengths” and “Business Strategy.”

Regulation

     Our funeral home operations are regulated by the Federal Trade Commission (the “FTC”) under the FTC’s Trade Regulation Rule on Funeral Industry Practices, 16 CFR Part 453 (the “Funeral Rule”), which went into effect on April 30, 1984, and was revised effective July 19, 1994. The FTC is reviewing the Funeral Rule and has conducted hearings to receive input from industry and consumer groups. At this time, the FTC has not issued any proposed changes to the regulation.

     The Funeral Rule defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. The preventive measures require a funeral provider to give consumers accurate, itemized price information and various other disclosures about funeral goods and services and prohibit a funeral provider from: (1) misrepresenting legal, crematory and cemetery requirements; (2) embalming for a fee without permission; (3) requiring the purchase of a casket for direct cremation; and (4) requiring consumers to buy certain funeral goods or services as a condition for furnishing other funeral goods or services.

     In November 2002, Senator Christopher Dodd (D-CT) introduced the Federal Death Care Inspection and Disclosure Act (the “bill”) to enact and extend certain requirements of the Funeral Rule, to create a private right of action (and

-11-

Table of Contents

statutory minimum damages) for enforcement in addition to the FTC’s enforcement rights, to regulate preneed sales and contracts and to provide grants to states for regulatory enforcement. Congressman Mark Foley (R-FL) introduced similar legislation in the House of Representatives.

     Senator Dodd’s bill would create the position of Coordinator of Funeral, Burial and Disposition Services within the Department of Health and Human Services. The Coordinator would make a survey of the existing state regulatory laws and formulate standards for the registration, inspection and the monitoring of the handling and disposition of human remains. The Coordinator would be required to report to Congress within eight months after the enactment of the legislation. The bill would also provide for federal grants to state agencies responsible for the registration, inspection and monitoring of death care providers. Within 180 days of enactment of the bill, the Coordinator would be required to establish minimum standards, including registration of death care facilities, physical inspections, recordkeeping, licensing and resolution of consumer complaints among other matters.

     The bill would also require certain disclosures with respect to the identity of the service or merchandise provider, itemized prices, the necessity of certain merchandise and services under state law, the identity of state agencies designated to receive consumer complaints and the lack of effectiveness of certain containers to preserve human remains, among other matters. The bill would require that each consumer be provided with an itemized statement of funeral goods and services. The disclosures would be required to be made by any seller of funeral, burial or disposition goods or services offered or purchased, including casket sellers, funeral homes, cemeteries and crematories.

     The bill would prohibit certain deceptive trade practices under the Federal Trade Commission Act including (i) misrepresentations as to the requirements of federal, state or local law or the requirements of a cemetery with respect to the necessity of purchasing certain funeral goods or services; (ii) conditioning the provision of funeral goods and services upon the purchase of other goods and services or the payment of fees not described in the bill; (iii) providing unauthorized services; (iv) making certain representations about the cost of cash advance items, if not true, and failing to disclose that the consumer has the right to arrange for the purchase of the cash advance item himself or herself; and (v) failing to comply with specified prepaid contract requirements, among other practices. The bill would also establish recordkeeping requirements for providers of death care goods and services.

     If enacted, the bill would prohibit unsolicited telephone offers to sell funeral goods and services and door-to-door direct offers for such sales. It would require that a funeral provider state its affiliation with a publicly-traded company. It would establish requirements for prepaid contracts including (i) a statement of the goods and services to be delivered; (ii) a statement that the prices set forth are not guaranteed or that additional payment may be required in the future, when the prices of merchandise and services are not guaranteed; (iii) a statement of what happens if merchandise is not available at the time of delivery; (iv) an explanation of how the purchaser’s funds are being protected to assure the seller’s performance of the prepaid contract; (v) provisions for cancellation or transfer of the contract with no loss of benefits paid by the purchaser along with accrued interest; and (vi) limitations on provisions regarding the irrevocability of such contracts, among other things. It also mandates the establishment of certain consumer disclosures in prepaid contracts.

     The bill also provides that its provisions will not be effective in a state where (i) the state’s agency so requests; (ii) there are already in place state requirements applicable to the provision or regulation; and (iii) the state requirement, enforcement and administration affords to the consumer an overall level of protection that is equal to or exceeds the level of protection afforded by the FTC’s enforcement of such provisions or regulations.

     Our operations are also subject to extensive regulation, supervision and licensing under numerous federal, state and local laws and regulations. For example, state laws impose licensing requirements for funeral homes and funeral directors and regulate preneed sales. Our embalming facilities are subject to stringent environmental and health regulations. We have a department that monitors compliance, and we believe that we are in substantial compliance with the Funeral Rule and all such laws and regulations. Federal, state and local legislative bodies and regulatory agencies

-12-

Table of Contents

frequently propose new laws and regulations, some of which, such as the bill proposed by Senator Dodd, could have a material effect on our operations and on the death care industry in general. We cannot predict the outcome of any proposed legislation or regulation or the effect that any such legislation or regulation might have on us.

Employees

     We employ approximately 6,500 persons, and we believe that we maintain a good relationship with our employees. Approximately 112 of our employees are represented by labor unions or collective bargaining units.

Item 2. Properties

     As of October 31, 2002, approximately 72 percent of our 307 funeral home locations were owned by our subsidiaries, and approximately 28 percent were held under operating leases. The leased properties have terms ranging from 1 to 17 years, except for six leases that expire between 2032 and 2039. Generally, we have a right of first refusal and an option to purchase the leased premises. An aggregate of $6.9 million of our term notes are secured by mortgages on some of our funeral homes; these notes were either assumed by us upon our acquisition of the property or represent seller financing for the acquired property.

     As of October 31, 2002, we owned 150 cemeteries covering a total of approximately 10,286 acres. Approximately 39 percent of the total acreage is available for future development.

     Our corporate headquarters occupy approximately 21,500 square feet of leased office space in a building in suburban New Orleans. In addition, we own a 97,300 square foot building in suburban New Orleans that we use for our Shared Services Center, Human Resources, Communications, Internal Audit and Information Systems Departments.

     As of October 31, 2002, we had sold all of our foreign operations. See the section above entitled “Operations — Foreign operations.”

Item 3. Legal Proceedings

     We and certain of our subsidiaries are party to a number of legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, 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 we give no assurance that this 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 4. Submission of Matters to a Vote of Security Holders

     None.

-13-

Table of Contents

Item 4(a). Executive Officers of the Registrant

     The following table sets forth certain information with respect to our executive officers. Each of the following has served in the capacity indicated for more than five years, except as indicated below.

-14-

Table of Contents

PART II

Item 5. Market for Registrant’s Common Equity and Related Shareholder Matters

Market Information

     Our Class A common stock trades on the Nasdaq National Market under the symbol STEI. On January 10, 2003, the closing sale price as reported by the Nasdaq National Market was $5.70. The following table sets forth, for the periods indicated, the range of high and low sale prices, as reported by the Nasdaq National Market. As of January 8, 2003, there were 1,439 record holders of our Class A common stock. Record holders included persons holding Class A common stock on behalf of one or more beneficial owners who are not holders of record.

Dividends

     We declared quarterly dividends of $.02 per share on our Class A and Class B common stock during the first three quarters of fiscal year 2000. On October 5, 2000, our Board of Directors suspended the payment of quarterly dividends on our Class A and Class B common stock. The declaration and payment of dividends in the future is at the discretion of our Board of Directors and will depend upon our results of operations, financial condition, cash requirements, future prospects and other factors deemed relevant by the Board. Our credit agreement and senior subordinated notes restrict our ability to pay dividends on our common stock. See Note 12 to the consolidated financial statements included in this report.

Sales of Unregistered Equity Securities

     During fiscal year 2002, we did not sell any unregistered equity securities.

Item 6. Selected Financial Data

     The following selected consolidated financial data for the fiscal years ended October 31, 1998 through October 31, 2002 are derived from our audited consolidated financial statements. The data set forth below should be read in conjunction with our consolidated financial statements and the notes thereto included in Item 8 and “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in Item 7.

-15-

Table of Contents

Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)

(continued)

-16-

Table of Contents

Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)

Selected Consolidated Operating Data

-17-

Table of Contents

(3)		In the third quarter of 2002, primarily as a result of the significant devaluation of the Argentine peso and the depressed economic conditions in Argentina, we re-evaluated the expected loss on the disposition of assets held for sale, and we incurred a noncash charge of $18.5 million ($11.2 million or $.10 per share after tax). See Note 11 to the consolidated financial statements included in Item 8.
(4)		In the third quarter of 2001, we incurred a noncash charge of $269.2 million ($205.1 million or $1.91 per share, after tax) primarily related to the writedown of assets held for sale to their estimated fair values. See Note 11 to the consolidated financial statements included in Item 8.
(5)		During the third quarter of fiscal year 2001, we incurred an extraordinary charge to earnings for the early extinguishment of debt in connection with our debt refinancing that occurred in June 2001. See Note 12 to the consolidated financial statements included in Item 8.
(6)		Includes a nonrecurring, noncash charge of $76.8 million ($50.3 million, or $.51 per share, after tax) recorded during the second quarter of fiscal year 1998 in connection with the vesting of performance-based stock options.
(7)		The pro forma data presented for fiscal years 1998, 1999 and 2000 are reported as if the 2001 change in accounting principles had occurred at the beginning of each of these years. See “Management’s Discussion and Analysis of Financial Condition and Results of Operations — Overview of Fiscal Year 2002” included in Item 7 for earnings per share for fiscal years 2000, 2001 and 2002 presented on a proforma basis as if SAB No. 101 and SFAS No. 142 were adopted at the beginning of fiscal year 2000 and excluding the losses on assets held for sale and other charges from fiscal years 2001 and 2002.
(8)		During fiscal year 2002, we sold our operations in Spain, Portugal, France, Canada and Argentina, which consisted of 196 funeral homes and 8 cemeteries. As of October 31, 2002, all of our foreign sales had been completed. This resulted in a decrease in assets, the number of funerals and interments performed and the backlog. We used the proceeds from the sales along with cash flow to reduce our long-term debt.
(9)		As of October 31, 2001, assets increased and shareholders’ equity decreased as compared to October 31, 2000 due in part to the 2001 change in accounting principles and the writedown of assets held for sale to their estimated fair values. See Note 3 and Note 11 to the consolidated financial statements. Offsetting the increase to assets from the change in accounting principles was the sale of our operations in Mexico, Australia, New Zealand, Belgium and the Netherlands, which consisted of 94 funeral homes and 2 cemeteries. We used these proceeds, along with cash flow and the proceeds from the sale of some domestic assets, to reduce our long-term debt. The October 31, 2001 long-term debt, less current maturities balance excludes $2.6 million of debt associated with assets held for sale.

-18-

Table of Contents

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Overview of Fiscal Year 2002

     With the sale of our foreign operations completed in fiscal year 2002, our debt restructuring completed in June of 2001, significant progress made in our cash flow initiatives in fiscal years 2000, 2001 and 2002, and our debt target of $500 million approaching, we are now positioned to shift to a business model of disciplined and balanced internal and external growth beginning in 2003.

     During fiscal year 2002, we continued to focus on the initiatives begun in fiscal year 2000 by completing the sale of our foreign operations and using the proceeds from these sales and cash flow to reduce our debt by $142 million. As of October 31, 2002, we had $551.9 million of debt outstanding. We expect to use the future income tax benefits associated with the sale of our foreign operations and less than $10 million of our cash flow to reduce our debt to our target of $500 million during fiscal year 2003 or 2004 depending upon the timing of our realization of the tax benefits.

     In the third quarter of 2001, primarily as a result of writing our foreign assets and other domestic assets held for sale to their estimated fair value, we incurred an aggregate pretax noncash charge to earnings of $269.2 million. During fiscal year 2002, we re-evaluated the expected loss on the disposition of the assets held for sale, primarily as a result of the significant devaluation of the Argentine peso and the depressed economic conditions in Argentina, resulting in an aggregate pretax noncash charge to earnings of $18.5 million in the third quarter of 2002. For our discussion of losses on assets held for sale and other charges, see Note 11 to the consolidated financial statements included in Item 8.

     The comparability of our results for fiscal years 2000, 2001 and 2002 has been affected by several significant items. As described in Note 3 to the consolidated financial statements included in Item 8, SAB No. 101 was adopted at the beginning of fiscal year 2001, and SFAS No. 142 was adopted at the beginning of fiscal year 2002. In our consolidated financial statements included in Item 8, results reported for the year ended October 31, 2002, after the implementation of SFAS No. 142 and SAB No. 101, are compared with the results for the year ended October 31, 2001, as reported, which do not reflect the implementation of SFAS No. 142, and compared with the results for the year ended October 31, 2000, as reported, which do not reflect the implementation of SFAS No. 142 or SAB No. 101. For the year ended October 31, 2001, net earnings also reflect noncash charges for the cumulative effect of the accounting change related to SAB No. 101 and for the early extinguishment of debt in connection with our debt refinancing in June 2001. For a discussion of the debt refinancing, see Note 12 to the consolidated financial statements included in Item 8. Additionally, as discussed above, as part of our strategy to reduce debt and focus on our core businesses, we sold our foreign operations and other domestic assets and recorded losses and other charges in fiscal years 2002 and 2001, as described in Note 11 to the consolidated financial statements included in Item 8.

     The following reconciliation of pro forma diluted earnings per common share to reported diluted earnings (loss) per common share is provided to show the impact on our reported diluted earnings (loss) per common share of the items described in the preceding paragraph. For the year ended October 31, 2000, our pro forma diluted earnings per common share are adjusted to show the effects of SAB No. 101 and the effects of SFAS No. 142, as if both accounting principles had been adopted at the beginning of that year. Likewise, our pro forma diluted earnings per common share for the year ended October 31, 2001 are adjusted on a pro forma basis to show the effects of SFAS No. 142, as if it had been adopted at the beginning of that year.

-19-

Table of Contents

Reconciliation of Pro Forma Diluted Earnings Per Common Share to Reported Diluted Earnings (Loss) Per Common Share

General

     Founded in 1910, Stewart Enterprises is the third largest provider of funeral and cemetery products and services in the death care industry in the United States. As of January 10, 2003, we operated 306 funeral homes and 149 cemeteries in 29 states within the United States and in Puerto Rico.

     As described in “Operations,” we sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust fund earnings or buildup in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care earnings and finance charges.

Preneed Sales

     As described in “Competitive Strengths — Expertise in preneed sales; strong backlog” and “Business Strategy — Maintain backlog through preneed marketing,” we consider maintaining our preneed backlog through preneed marketing and sales to be an integral part of our long-term business strategy. Our primary objective is to produce preneed sales levels sufficient to balance our cash investment with our goal of maintaining a sustainable and predictable level of growth in our preneed backlog. Our current goal is to make four preneed funeral sales for every three we deliver.

     Revenue from preneed sales delivered from our backlog includes accumulated realized trust fund earnings (consisting of dividends, interest and net realized capital gains) or buildup in the face value of insurance contracts related to these deliveries. Additionally, we receive revenue from perpetual care earnings, which is used to fund maintenance of our cemetery grounds. Income from funds, especially those invested partially in common stock, can be materially affected by prevailing interest rates and the performance of the stock market. In managing trust and escrow funds, which include significant investments in common stock, we have historically sought, and from 1991 through 1999 were successful in achieving, an overall annual return of approximately 8.0 to 9.0 percent, which was well

-20-

Table of Contents

in excess of the inflation rate over that period of time. We did not achieve that goal in fiscal years 2000, 2001 or 2002. In fiscal years 2000, 2001 and 2002, our overall realized domestic returns were 5.8 percent, 6.3 percent and 4.3 percent, respectively, which still exceeded the inflation rates in those years. Our goal for fiscal year 2003 is to achieve an overall return of 6.0 percent, and our long-term goal is to return to an 8.0 to 9.0 percent return. No assurance can be given, however, that we will be successful in achieving any particular return.

     As discussed in Note 4 to the consolidated financial statements, preneed funeral and preneed cemetery merchandise trust funds and escrow accounts had net unrealized depreciation of $116.8 million and $60.0 million, respectively, as of October 31, 2002. Unrealized gains and losses in the funeral trust funds and cemetery merchandise trust funds have no immediate impact on our revenues, margins, earnings or cash flow, unless the fair market value of the funds were to decline below the estimated costs to deliver the underlying products and services. If that were to occur, we would record a charge to earnings to record the expected loss currently. Over time, gains and losses realized in the funds are allocated to underlying preneed contracts and affect the amount of trust fund earnings to be recognized when we deliver the underlying product or service. Accordingly, if current market conditions do not improve, the funds may eventually realize losses and our revenues, margins, earnings and cash flow would be negatively affected by the reduced revenue when we deliver the underlying products and services. We estimate that with approximately 3.0 percent to 5.0 percent annual returns in the funds over the estimated lives of the associated preneed contracts, our trust and escrow funds would recover the net unrealized depreciation currently in the funds by the time the underlying products and services are delivered.

     We estimate that as of October 31, 2002 the future value of our preneed backlog represented between $2.1 billion and $2.2 billion of revenue to be recognized in the future as these prepaid products and services are delivered. This represents the face value of the backlog plus the earnings that are projected on the funds held in trust and a build-up in the face value of insurance contracts. It assumes no future preneed sales and assumes maturities each year consistent with our experience, with the majority of existing contracts maturing over the next 15 years. As of October 31, 2002, the value of the preneed backlog, excluding any future earnings on the funds held in trust and any build-up in the face value of insurance contracts, but including earnings and losses realized to date on the funds held in trust, was approximately $1.6 billion.

     Preneed property, products and services are typically sold on an installment basis with terms of approximately three to five years. In fiscal year 2000, we changed the terms and conditions of our preneed sales contracts and commissions, and moderated our preneed sales activities, in order to enhance our cash flow. These changes are described in more detail under the heading, “Results of Operations — Year Ended October 31, 2001 Compared to Year Ended October 31, 2000 — Cemetery Segment” below.

     With respect to the sale of cemetery property, whether preneed or at-need, we are generally required by state law to place into a perpetual care trust, a portion, usually 10 percent, of the proceeds we receive in order to fund maintenance of the cemetery grounds. As payments are received, we generally fund the perpetual care trust in the same proportion as the payment bears to the contract amount; for example, if we receive 20 percent of the contract price, we place in trust 20 percent of the total amount to be placed in trust for that contract. We withdraw realized earnings, including net realized capital gains in some jurisdictions, on these funds to use towards the maintenance of our cemeteries, but principal must generally be held in the trust in perpetuity.

     With respect to the preneed sale of cemetery and funeral products and services, state laws generally require either (1) a portion of the installment payments received be placed into a trust fund or (2) the use of an insurance policy underwritten by an insurance company to provide funds to cover the costs of delivering funeral products and services in the future. With respect to the preneed sale of cemetery merchandise, we are generally required to place in trust 30 to 50 percent of each installment received. With respect to the preneed sale of funeral and cemetery services, we are generally required to place in trust 70 to 90 percent of each installment received. The sale of caskets is treated in some jurisdictions in the same manner as the sale of cemetery merchandise and in some jurisdictions in the same manner as the sale of funeral services for these purposes. When insurance is used, we apply customer payments to pay premiums

-21-

Table of Contents

on the insurance policies. We typically act as agent for the insurance company and earn a commission. Generally, we can withdraw the principal of and earnings on the funds placed in trust only at the time that the related products and services are delivered.

Implementation of Staff Accounting Bulletin No. 101

     Effective November 1, 2000, we implemented Staff Accounting Bulletin No. 101 (“SAB No. 101,”) “Revenue Recognition in Financial Statements,” which resulted in changing our methods of accounting for preneed sales activities. The effect of the change in accounting principles is described in Note 3 to the consolidated financial statements. A description of our current accounting for preneed sales and trust and escrow account earnings after implementation of SAB No. 101 follows.

Summary of Current Accounting for Preneed Sales

     We sell prearranged funeral services and preneed funeral and cemetery merchandise under contracts that provide for delivery of the services and merchandise at the time of death.

     Revenue from preneed sales of services and merchandise is deferred until the period in which the service is performed and the merchandise is delivered. On the balance sheet, the full contract amount is included in prearranged deferred revenue, net (liability). The corresponding receivable due from the customer is reflected in prearranged receivables, net (asset), and the corresponding cash received from the customer is reflected part in prearranged receivables (for the portion placed in trust) and part in cash (for the portion we are allowed to retain). The costs to acquire the sales, primarily commissions and other direct costs, are reflected on the balance sheet as deferred charges (asset) and are charged to expense as the services are performed and products delivered. Indirect costs of marketing preneed services and merchandise are expensed in the period in which they are incurred.

     As the customer makes payments on the preneed contract, the portion of prearranged receivables representing the receivable due from the customer declines, and the portion representing the receivable from the trust increases. We record cash for the amount of cash received that is not required to be placed in trust. Realized earnings on the amounts held in trust represent a debit to prearranged receivables (asset) and a credit to prearranged deferred revenue (liability) and are not recognized as revenue until delivery of the service or merchandise.

     When the service or merchandise is delivered, we recognize as revenue the full contract amount plus all trust earnings associated with that contract, with a corresponding reduction recorded to prearranged deferred revenue (liability). We debit cash with the amount removed from trust that is attributable to the contract (consisting of the customer’s payments and related realized earnings, all of which is withdrawn at that time) and record a corresponding reduction in prearranged receivables (asset). Associated deferred charges (asset) are expensed, and the actual expenses incurred in delivering the services and merchandise are recognized.

     Additional information about our prearranged receivables and prearranged deferred revenue is contained in Note 4 to our consolidated financial statements included in Item 8.

     For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with SFAS No. 66, “Accounting for Sales of Real Estate.” Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sales price has been collected. A portion, generally 10 percent, of the sale proceeds are placed into perpetual care trust funds. We withdraw and recognize realized earnings from these funds on a monthly basis to offset the cost of maintaining our cemetery grounds. The perpetual care trust funds are not reflected on the financial statements because principal must remain in the trust in perpetuity.

     Some of our sales of preneed property, products and services are made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as revenue under the effective interest method over the terms of the related installment receivables.

-22-

Table of Contents

     Commissions and other direct costs that vary with and are primarily related to the acquisition of new prearranged services and prearranged merchandise sales are deferred and amortized as the contracts are delivered in accordance with SFAS No. 60, “Accounting and Reporting for Insurance Companies.” Indirect costs of marketing prearranged services are expensed in the period in which incurred. All direct costs to acquire the sales of preneed funeral and cemetery merchandise and services are included in deferred charges (asset). The costs to acquire all preneed merchandise and service sales are included in the operating section of the cash flow statement as prearranged acquisition costs.

     Prearranged services and merchandise generally are funded either through trust funds or escrow accounts established by us or through third-party insurance companies. When prearranged services and merchandise are funded through insurance policies purchased by customers from third-party insurance companies, we earn a commission on the sale of the policies. Insurance commissions, net of related expenses, are recognized at the point at which the commission is no longer subject to refund. Policy proceeds including the buildup in the face value of the insurance contracts are available to us as services and merchandise are delivered.

     Prearranged receivables are related to preneed sales of funeral and cemetery merchandise and services. Prearranged receivables represent the funds owed to us (1) from preneed funeral merchandise and services trusts and from preneed cemetery merchandise and services trusts, which represent amounts already paid by customers, and realized earnings on those amounts, (2) from customers and (3) from insurance companies. Prearranged deferred revenue represents the revenue we will recognize upon delivery of the preneed funeral and cemetery merchandise and services at the time of need. The net change in prearranged receivables and prearranged deferred revenue is recognized in the cash flow statement in the operating section as a change in prearranged activity.

     If a preneed funeral product or service contract is cancelled, we generally return to the customer the related principal that was placed in trust and retain the portion not placed in trust. In many jurisdictions, we can withdraw and retain all related earnings in the trust, but in other jurisdictions these earnings must be returned to the customer. If a preneed cemetery property, product or service contract is cancelled, we generally are not required to return any funds to the customer.

     The impact of preneed sales on near-term cash flow depends primarily on the commissions paid on the sale, the portion of the sale required to be placed into trust and the terms of the particular contract (such as the size of the down payment required and the length of the contract). We generally pay commissions to our preneed sales counselors based on a percentage of the total preneed contract price, but only to the extent cash is paid by the customer. If the initial cash installment paid by the customer is not sufficient to cover the entire commission, the remaining commission is paid from subsequent customer installments. However, because we are required to place a portion of each cash installment paid by the customer into trust, we may be required to use our own cash to cover a portion of the commission due on the installment from the customer. Accordingly, preneed sales are generally cash flow negative initially but become cash flow positive at varying times over the life of the contract, depending upon the trusting requirements and the terms of the particular contract.

     Cash expended for preneed funeral and cemetery merchandise and service sales, principally sales commissions, is capitalized in deferred charges on the balance sheet and amortized and expensed as cost of sales as the contracts are delivered.

Summary of Current Accounting for Trust and Escrow Account Earnings

     We have three types of trust funds and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) perpetual care. As described below, earnings on preneed funeral and cemetery merchandise and services trust funds and escrow accounts are accounted for in the same manner. The accounting for earnings on perpetual care trust funds differs from the other two types of trust funds due to the nature of the trusts, as described below.

-23-

Table of Contents

     Preneed funeral merchandise and services trust funds and escrow accounts. We defer recognition of all earnings realized by preneed funeral merchandise and services trust funds and escrow accounts until the underlying funeral service or merchandise is delivered. This accounting method was not affected by the implementation of SAB No. 101. We generally do not withdraw cash (principal and earnings) from these trust funds and escrow accounts until the merchandise or service is delivered. Principal and realized earnings in these funds and escrow accounts are reflected as prearranged receivables, net (asset) on the balance sheet. The full contract amount and realized earnings in these funds and escrow accounts are reflected as prearranged deferred revenue, net (liability) on the balance sheet. Unrealized gains and losses are not reflected on the balance sheet or income statement but are included in Note 4 to the consolidated financial statements included in Item 8.

     Preneed cemetery merchandise and services trust funds and escrow accounts. As discussed above, effective November 1, 2000, we implemented SAB No. 101 and changed our method of accounting for earnings realized by preneed cemetery merchandise and services trust funds and escrow accounts. We now defer all earnings realized by these trust funds and escrow accounts until the underlying merchandise or service is delivered. We generally do not withdraw cash (principal and earnings) from these trust funds and escrow accounts until the merchandise or service is delivered. Principal and realized earnings in these funds and escrow accounts are reflected as prearranged receivables, net (asset) on the balance sheet. The full contract amount and realized earnings in these funds and escrow accounts are reflected as prearranged deferred revenue, net (liability) on the balance sheet. Unrealized gains and losses are not reflected on the balance sheet or income statement but are included in Note 4 to the consolidated financial statements included in Item 8.

     Perpetual care trust funds. Pursuant to perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trust funds. The income from these funds, which have been established in most jurisdictions in which we operate cemeteries, is used for maintenance of our cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. We recognize the earnings on our perpetual care trust funds as they are realized in the trust. This accounting method was not affected by the implementation of SAB No. 101. We generally withdraw the earnings on a monthly basis to offset the cost of maintaining our cemeteries. Principal in these funds is not reflected on the balance sheet because the principal must remain in the trust in perpetuity.

Overview of 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 2(b) to the consolidated financial statements). We believe that of our significant accounting policies (discussed in Note 2 to the consolidated financial statements), the following are both most important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective or complex judgment.

Allowance for Doubtful Accounts

     Management must make estimates of the uncollectability of our accounts receivable. We establish a reserve for uncollectible installment contracts and trade accounts based on a range of percentages applied to accounts receivable aging categories. These percentages are based on historical collection and write-off experience. If circumstances change, our estimates of the recoverability of amounts due to us could change by a material amount.

Depreciation of Long-Lived Assets

     Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, ranging from 19 to 45 years and from 3 to 10 years, respectively, primarily using the straight-line method. These estimates of the useful lives may be affected by such factors as changes in regulatory requirements or changing market conditions.

-24-

Table of Contents

Valuation of Long-Lived Assets

     We periodically review for continued appropriateness the carrying value of our long-lived assets including our prearranged receivables, cemetery property and property, plant and equipment. This review is based on our projections of anticipated undiscounted future cash flows. If indicators of impairment were present, we would evaluate the undiscounted cash flows estimated to be generated by those assets compared to the carrying amount of those items. The net carrying value of assets not recoverable would be reduced to fair value. While we believe that our estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows could materially affect our evaluations. During the fourth quarter of fiscal year 2002, we recorded a valuation allowance of $20.0 million related to our prearranged receivable from our trust funds which resulted in a reduction in prearranged receivables and a reduction in prearranged deferred revenue. See Note 4 to the consolidated financial statements included in Item 8.

Valuation of Intangible Assets and Goodwill

     In June 2001, the FASB issued SFAS No. 142, “Goodwill and Other Intangible Assets.” Although we are not required to implement SFAS No. 142 until the first quarter of fiscal year 2003, we implemented it in the first quarter of fiscal year 2002. See Note 3 to the consolidated financial statements for a discussion of SFAS No. 142 and its impact on our financial condition and results of operations.

     Our evaluation of goodwill for our operations is performed at the funeral and cemetery segment levels, which constitute our reporting units. With the adoption of SFAS No. 142, goodwill of a reporting unit must be tested for impairment on at least an annual basis. Impairment losses are recognized when the estimated fair value of goodwill associated with all of our cemeteries or funeral homes is less than their respective carrying values.

     In addition to an annual review, we assess the impairment of goodwill and other intangible assets whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors we consider important that could trigger an impairment review include the following:

•		significant underperformance relative to historical or projected future operating results;
•		significant changes in the manner of the use of our assets or the strategy for our overall business; and
•		significant negative industry or economic trends.

     When we determine that the carrying value of goodwill and other intangible assets may be greater than fair value, we measure any impairment based on our estimates of current fair value compared to the carrying value of the assets. If these estimates or their related assumptions change in the future, we may be required to record impairment charges for these assets. Goodwill and other intangible assets amounted to $491.8 million as of October 31, 2002 and 2001.

Accounting for Income Taxes

     As part of the process of preparing our consolidated financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating our actual current tax expense together with assessing temporary differences resulting from the different treatment of items, such as deferred revenue, for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included in our consolidated balance sheet. We must then assess the likelihood that our deferred tax assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we must establish a valuation allowance. To the extent we establish a valuation allowance or increase this allowance in a period, we must include an expense within the tax provision in the statement of earnings.

     Significant management judgment is required in determining our provision for income taxes, deferred tax assets

-25-

Table of Contents

and liabilities and any valuation allowance recorded against our net deferred tax assets. Based on estimates of taxable income in each jurisdiction in which we operate and the period over which deferred tax assets will be recoverable, we have not recorded a valuation allowance as of October 31, 2002. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to establish a valuation allowance, which could materially impact our financial condition and results of operations.

Results of Operations

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

Year Ended October 31, 2002 Compared to Year Ended October 31, 2001

Funeral Segment

-26-

Table of Contents

Operations to be Retained for 2002 increased by $1.3 million when compared to the year ended October 31, 2001, and total funeral gross profit for 2002 decreased by $17.5 million when compared to the corresponding period in 2001.

     Total funeral revenue decreased $65.1 million for the year ended October 31, 2002 compared to the corresponding period in 2001 primarily due to a decrease in revenue from Closed and Held for Sale Operations, which was partially offset by an increase in revenue from Operations to be Retained. The decline in revenue from Closed and Held for Sale Operations resulted primarily from the sale of our operations in Mexico, Australia, New Zealand, Belgium and the Netherlands in the fourth quarter of 2001 and the sale of our operations in Spain, Portugal, France, Canada and Argentina in fiscal year 2002.

     Funeral revenue from Operations to be Retained increased $6.7 million, or 2 percent, for the year ended October 31, 2002, compared to the corresponding period in 2001. The average revenue per funeral service performed by these businesses increased 3.2 percent, partially offset by a .2 percent decline (120 events) in the number of funeral services performed. We experienced a $3.7 million, or 1 percent, increase in funeral revenue from Existing Operations primarily due to a 3.5 percent increase in the average revenue per funeral service performed, partially offset by a 1.5 percent decline (1,105 events) in the number of funeral services performed by these businesses. The increase in average revenue per funeral service is due primarily to customized funeral planning and personalization.

     We experienced a $3.0 million increase in funeral revenue and a $2.6 million increase in funeral costs from Opened Operations primarily due to the opening of an Archdiocese of Los Angeles facility which was not open for the entirety of both periods presented.

     Funeral gross profit margin from Existing Operations increased from 24.5 percent for the year ended October 31, 2001 to 27.6 percent for the corresponding period in 2002. This increase is due to the elimination of goodwill amortization from the implementation of SFAS No. 142. If we had implemented SFAS No. 142 in 2001, the pro forma funeral gross profit margin from Existing Operations adjusted for the elimination of goodwill amortization would have been 27.6 percent for the year ended October 31, 2001. Goodwill amortization for Existing Operations in the funeral segment amounted to $9.2 million for the year ended October 31, 2001. The cremation rate for our Existing Operations was 38.5 percent for the year ended October 31, 2002.

Cemetery Segment

-27-

Table of Contents

     Total cemetery revenue decreased $20.5 million, or 8 percent, for the year ended October 31, 2002, compared to the corresponding period in 2001. We experienced a $16.5 million, or 7 percent, decrease in revenue from Operations to be Retained primarily due to a reduction in preneed cemetery property sales and merchandise deliveries and a decline in the average return earned on perpetual care trust funds. We experienced an annual average return of 6.0 percent in our perpetual care trust funds for the year ended October 31, 2002, compared to 7.1 percent for the corresponding period in 2001. We also experienced a $4.0 million decline in revenue from Closed and Held for Sale Operations primarily related to the sale of our foreign operations.

     Cemetery gross profit margin from Existing Operations decreased from 25.8 percent for the year ended October 31, 2001 to 24.8 percent for the corresponding period in 2002. The decrease is due to the decline in preneed cemetery property sales and merchandise deliveries and the decrease in perpetual care trust earnings coupled with the high fixed-cost nature of the cemetery business. The decrease was moderated by the elimination of goodwill amortization from the implementation of SFAS No. 142. If we had implemented SFAS No. 142 in 2001, the pro forma cemetery gross profit margin from Existing Operations adjusted for the elimination of goodwill amortization would have been 27.7 percent for the year ended October 31, 2001. Goodwill amortization for Existing Operations in the cemetery segment amounted to $4.8 million for the year ended October 31, 2001.

Other

     Corporate general and administrative expenses for the year ended October 31, 2002 decreased $.8 million compared to the same period in 2001 primarily due to a reduction in professional and consulting fees partially offset by expenses associated with the Stewart Enterprises, Inc. Supplemental Executive Retirement Plan (the “SERP”), which was adopted effective April 1, 2002. The SERP provides retirement benefits to certain executive officers that are intended to supplement the benefits available under the Company’s 401(k) Plan and in part replace other benefits previously available under the executive officers’ employment agreements. Adoption of the SERP resulted in a charge to corporate general and administrative expenses of $1.1 million for fiscal year 2002 and is expected to result in a charge of approximately $1.9 million annually.

     Depreciation and amortization was $56.2 million for the year ended October 31, 2002 compared to $79.2 million for the same period in 2001, which included $19.3 million of goodwill amortization. The decrease in depreciation and amortization is due to the implementation of SFAS No. 142 and the sale of certain of our foreign assets. Domestic depreciation and amortization, which is representative of Operations to be Retained, was $54.5 million for fiscal year 2002 compared to $69.6 million for the same period in 2001, which included $14.4 million of domestic goodwill amortization.

-28-

Table of Contents

     Excluding the loss on assets held for sale and other charges, EBITDA (defined as earnings before interest expense, taxes, depreciation and amortization) was $186.3 million, or 32.0 percent of revenue for the year ended October 31, 2002 compared to $224.7 million, or 33.7 percent of revenue for the same period in 2001. Excluding the loss on assets held for sale and other charges, domestic EBITDA, which is fairly representative of Operations to be Retained, was $179.3 million, or 33.3 percent of domestic revenue for the year ended October 31, 2002 compared to $195.8 million, or 35.5 percent of domestic revenue for the same period in 2001. The decrease in domestic EBITDA is primarily due to decreases in cemetery gross profit, investment income and other income. EBITDA is frequently used by security analysts and is presented here to provide additional information about our operations. EBITDA should not be considered as an alternative to net earnings, as an indicator of our operating performance or as an alternative to cash flow as a better measure of liquidity. EBITDA is a non-GAAP measure and may not be comparable as calculated by us to EBITDA as calculated by other companies.

     Interest expense decreased $1.3 million to $62.3 million for the year ended October 31, 2002 compared to $63.6 million for the same period in 2001. The decrease is due to a $192.9 million decrease in the average debt outstanding during the fiscal year ended October 31, 2002, offset by an approximate 194 basis point increase in our average interest rate. The increase in our average interest rate resulted from higher interest costs associated with debt incurred in our debt refinancing transactions which occurred on June 29, 2001.

     Investment income decreased $4.7 million to $.5 million for the year ended October 31, 2002 compared to the same period in 2001. This decrease is due primarily to a $53.1 million decrease in the average cash and cash equivalents balance and a decrease in the average investment rate earned on our cash and cash equivalent investments from 6.3 percent to 1.8 percent. The 6.3 percent earned for the year ended October 31, 2001 included returns on funds in foreign jurisdictions that earned 9.0 percent. The majority of the funds in foreign jurisdictions were sold with our Mexican operations.

     Other income, net, decreased $5.0 million to $2.1 million during the year ended October 31, 2002 compared to the same period in 2001. The decrease is principally due to the net gains on the sale of excess cemetery property and other domestic assets during 2001.

     As of October 31, 2002, our outstanding debt was $551.9 million. Of the total amount outstanding, including the portion subject to the interest rate swap agreements in effect as of October 31, 2002, approximately 94 percent was fixed-rate debt, with the remaining 6 percent subject to a short-term variable interest rate of approximately 5.1 percent.

     In order to hedge a portion of the interest rate risk associated with our variable-rate debt, effective March 11, 2002, we entered into two interest rate swap agreements, expiring on March 11, 2004 and March 11, 2005, each involving a notional amount of $50.0 million. The agreements effectively convert variable-rate debt bearing interest based on three-month LIBOR plus the applicable margin specified under our senior secured credit facility to fixed-rate debt bearing interest at the fixed swap rate plus such applicable margin. As of January 10, 2003, the effective rate of the debt hedged by the interest rate swaps was 7.025 percent and 7.64 percent on each $50.0 million swapped.

Preneed Sales

     The revenues from our domestic preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results above. We added $169.4 million in preneed sales to our funeral and cemetery merchandise and service backlog during the year ended October 31, 2002 to be recognized in the future as these prepaid products and services are delivered, compared to $162.0 million for the corresponding period in 2001.

Year Ended October 31, 2001 Compared to Year Ended October 31, 2000

     We implemented SAB No. 101 in fiscal year 2001. In the following discussion, the results for the year ended October 31, 2001, as reported after the implementation of SAB No. 101, are compared with the results for the year ended October 31, 2000, as reported, which do not reflect the implementation of SAB No. 101. We have also included a pro forma comparison using the same accounting methods for both years. For the pro forma discussion, the year ended October 31, 2001 is presented as reported after the implementation of SAB No. 101, and the year ended October 31, 2000 is adjusted on a pro forma basis to show the effects of SAB No. 101, as if it had been adopted at the beginning of that year.

-29-

Table of Contents

Funeral Segment

     Funeral revenue decreased $41.6 million, or 9 percent, for the year ended October 31, 2001, compared to the corresponding period in 2000. We experienced a $26.4 million, or 6 percent, decrease due to the effect of implementing SAB No. 101. Additionally, during fiscal year 2001, we sold several of our foreign operations with the remainder held for sale, and several small domestic operations have either been sold or are held for sale. This resulted in a decline in funeral revenue and costs as described below in the section entitled “Year Ended October 31, 2001 Compared to Pro Forma Year Ended October 31, 2000.” Slightly offsetting these decreases was an increase in the average revenue per funeral service performed by Operations to be Retained of 1.4 percent and an increase of 1.1 percent in the number of funeral services performed by Operations to be Retained (821 events).

Cemetery Segment