UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

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

For the quarterly period ended April 30, 2011

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

Commission File Number: 1-15449

 

STEWART ENTERPRISES, INC.

(Exact name of registrant as specified in its charter)

LOUISIANA (State or other jurisdiction of incorporation or organization)		72-0693290 (I.R.S. Employer Identification No.)
1333 South Clearview Parkway Jefferson, Louisiana (Address of principal executive offices)		70121 (Zip Code)

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

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

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

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

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

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

     The number of shares of the registrant’s Class A common stock, no par value per share, and Class B common stock, no par value per share, outstanding as of May 31, 2011, was 87,509,089 and 3,555,020, respectively.

 

 

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

INDEX

		Page
Part I. Financial Information
Item 1. Financial Statements (Unaudited)
Condensed Consolidated Statements of Earnings — Three Months Ended April 30, 2011 and 2010			3
Condensed Consolidated Statements of Earnings — Six Months Ended April 30, 2011 and 2010			4
Condensed Consolidated Balance Sheets — April 30, 2011 and October 31, 2010			5
Condensed Consolidated Statement of Shareholders’ Equity — Six Months Ended April 30, 2011			7
Condensed Consolidated Statements of Cash Flows — Six Months Ended April 30, 2011 and 2010			8
Notes to Condensed Consolidated Financial Statements			9
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			47
Item 3. Quantitative and Qualitative Disclosures About Market Risk			60
Item 4. Controls and Procedures			60
Part II. Other Information
Item 1. Legal Proceedings			61
Item 1A. Risk Factors			61
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			62
Item 6. Exhibits			62
Signatures			64
EX-31.1
EX-31.2
EX-32.1

PART I. FINANCIAL INFORMATION

Item 1.		Financial Statements

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		Three Months Ended April 30,
		2011				2010
Revenues:
Funeral		$	72,974			$	71,060
Cemetery			56,691				56,973
			129,665				128,033
Costs and expenses:
Funeral			54,926				54,151
Cemetery			49,098				48,802
			104,024				102,953
Gross profit			25,641				25,080
Corporate general and administrative expenses			(6,650	)			(6,116	)
Hurricane related charges, net			(54	)			(32	)
Net loss on dispositions			(400	)			—
Other operating income, net			448				265
Operating earnings			18,985				19,197
Interest expense			(5,732	)			(5,891	)
Loss on early extinguishment of debt			(1,811	)			—
Investment and other income, net			340				36
Earnings from continuing operations before income taxes			11,782				13,342
Income taxes			1,784				4,954
Earnings from continuing operations			9,998				8,388
Discontinued operations:
Earnings from discontinued operations before income taxes			—				4
Income taxes			—				1
Earnings from discontinued operations			—				3
Net earnings		$	9,998			$	8,391
Basic earnings per common share:
Earnings from continuing operations		$	.11			$	.09
Earnings from discontinued operations			—				—
Net earnings		$	.11			$	.09
Diluted earnings per common share:
Earnings from continuing operations		$	.11			$	.09
Earnings from discontinued operations			—				—
Net earnings		$	.11			$	.09
Weighted average common shares outstanding (in thousands):
Basic			90,442				92,113
Diluted			91,066				92,387
Dividends declared per common share		$	.03			$	.03

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		Six Months Ended April 30,
		2011				2010
Revenues:
Funeral		$	146,840			$	142,780
Cemetery			112,089				109,265
			258,929				252,045
Costs and expenses:
Funeral			108,404				106,600
Cemetery			96,529				95,122
			204,933				201,722
Gross profit			53,996				50,323
Corporate general and administrative expenses			(13,289	)			(12,786	)
Hurricane related charges, net			(104	)			(32	)
Net loss on dispositions			(400	)			—
Other operating income, net			681				444
Operating earnings			40,884				37,949
Interest expense			(11,468	)			(12,347	)
Gain (loss) on early extinguishment of debt			(1,811	)			17
Investment and other income, net			364				60
Earnings from continuing operations before income taxes			27,969				25,679
Income taxes			9,927				9,830
Earnings from continuing operations			18,042				15,849
Discontinued operations:
Earnings from discontinued operations before income taxes			—				46
Income taxes			—				17
Earnings from discontinued operations			—				29
Net earnings		$	18,042			$	15,878
Basic earnings per common share:
Earnings from continuing operations		$	.20			$	.17
Earnings from discontinued operations			—				—
Net earnings		$	.20			$	.17
Diluted earnings per common share:
Earnings from continuing operations		$	.20			$	.17
Earnings from discontinued operations			—				—
Net earnings		$	.20			$	.17
Weighted average common shares outstanding (in thousands):
Basic			90,658				92,082
Diluted			91,125				92,332
Dividends declared per common share		$	.06			$	.06

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		April 30, 2011				October 31, 2010
ASSETS
Current assets:
Cash and cash equivalents		$	78,310			$	56,060
Certificates of deposit and marketable securities			598				10,000
Receivables, net of allowances			48,836				51,151
Inventories			35,793				35,708
Prepaid expenses			7,671				5,479
Deferred income taxes, net			28,405				28,312
Assets held for sale			—				27
Total current assets			199,613				186,737
Receivables due beyond one year, net of allowances			64,267				67,458
Preneed funeral receivables and trust investments			432,696				414,918
Preneed cemetery receivables and trust investments			226,650				209,287
Goodwill			247,038				247,038
Cemetery property, at cost			387,641				386,004
Property and equipment, at cost:
Land			43,726				43,518
Buildings			342,474				338,237
Equipment and other			194,219				191,428
			580,419				573,183
Less accumulated depreciation			295,205				283,633
Net property and equipment			285,214				289,550
Deferred income taxes, net			92,112				98,025
Cemetery perpetual care trust investments			242,542				230,730
Non-current assets held for sale			—				1,214
Other assets			15,878				11,905
Total assets		$	2,193,651			$	2,142,866

(continued)

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		April 30, 2011				October 31, 2010
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Current maturities of long-term debt		$	5,817			$	5
Accounts payable and accrued expenses			24,175				24,797
Accrued payroll and other benefits			13,406				14,311
Accrued insurance			20,850				20,912
Accrued interest			2,018				4,197
Estimated obligation to fund cemetery perpetual care trust			12,633				13,253
Other current liabilities			9,495				12,132
Income taxes payable			698				2,533
Liabilities associated with assets held for sale			—				8
Total current liabilities			89,092				92,148
Long-term debt, less current maturities			315,891				314,027
Deferred income taxes, net			4,906				4,950
Deferred preneed funeral revenue			242,032				243,520
Deferred preneed cemetery revenue			256,364				258,044
Deferred preneed funeral and cemetery receipts held in trust			591,761				554,716
Perpetual care trusts’ corpus			241,576				229,240
Long-term liabilities associated with assets held for sale			—				714
Other long-term liabilities			20,456				20,023
Total liabilities			1,762,078				1,717,382
Commitments and contingencies
Shareholders’ equity:
Preferred stock, $1.00 par value, 5,000,000 shares authorized; no shares issued			—				—
Common stock, $1.00 stated value:
Class A authorized 200,000,000 shares; issued and outstanding 87,646,189 and 88,739,140 shares at April 30, 2011 and October 31, 2010, respectively			87,646				88,739
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at April 30, 2011 and October 31, 2010; 10 votes per share convertible into an equal number of Class A shares			3,555				3,555
Additional paid-in capital			536,450				547,319
Accumulated deficit			(196,105	)			(214,147	)
Accumulated other comprehensive income:
Unrealized appreciation of investments			27				18
Total accumulated other comprehensive income			27				18
Total shareholders’ equity			431,573				425,484
Total liabilities and shareholders’ equity		$	2,193,651			$	2,142,866

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

						Additional								Unrealized				Total
		Common				Paid-In				Accumulated				Appreciation				Shareholders’
		Stock(1)				Capital				Deficit				of Investments				Equity
Balance October 31, 2010		$	92,294			$	547,319			$	(214,147	)		$	18			$	425,484
Comprehensive income:
Net earnings			—				—				18,042				—				18,042
Other comprehensive income:
Unrealized appreciation of investments, net of deferred tax expense of ($5)			—				—				—				9				9
Total other comprehensive income			—				—				—				9				9
Total comprehensive income			—				—				18,042				9				18,051
Restricted stock activity			84				506				—				—				590
Issuance of common stock			107				500				—				—				607
Stock options exercised			238				810				—				—				1,048
Stock option expense			—				561				—				—				561
Tax benefit associated with stock activity			—				104				—				—				104
Purchase and retirement of common stock			(1,522	)			(7,865	)			—				—				(9,387	)
Dividends ($.06 per share)			—				(5,485	)			—				—				(5,485	)
Balance April 30, 2011		$	91,201			$	536,450			$	(196,105	)		$	27			$	431,573

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

		Six Months Ended April 30,
		2011				2010
Cash flows from operating activities:
Net earnings		$	18,042			$	15,878
Adjustments to reconcile net earnings to net cash provided by operating activities:
Net loss on dispositions			400				—
(Gain) loss on early extinguishment of debt			1,811				(17	)
Premiums paid on early extinguishment of debt			(777	)			—
Depreciation and amortization			13,575				13,194
Non-cash interest and amortization of discount on senior convertible notes			2,636				3,046
Provision for doubtful accounts			2,528				2,406
Share-based compensation			1,661				1,500
Excess tax benefits from share-based payment arrangements			(144	)			(26	)
Provision for deferred income taxes			8,278				8,395
Estimated obligation to fund cemetery perpetual care trust			73				—
Other			(328	)			12
Changes in assets and liabilities:
Decrease in receivables			486				754
Increase in prepaid expenses			(2,193	)			(2,271	)
(Increase) decrease in inventories and cemetery property			(684	)			1,106
Federal income tax refunds			—				1,600
Decrease in accounts payable and accrued expenses			(8,524	)			(11,501	)
Net effect of preneed funeral production and maturities:
Decrease in preneed funeral receivables and trust investments			4,083				5,925
Decrease in deferred preneed funeral revenue			(1,674	)			(2,104	)
Decrease in deferred preneed funeral receipts held in trust			(1,947	)			(6,926	)
Net effect of preneed cemetery production and deliveries:
(Increase) decrease in preneed cemetery receivables and trust investments			(3,901	)			793
Decrease in deferred preneed cemetery revenue			(1,682	)			(5,679	)
Increase in deferred preneed cemetery receipts held in trust			3,935				325
Increase in other			42				45
Net cash provided by operating activities			35,696				26,455
Cash flows from investing activities:
Proceeds from sales of certificates of deposit and marketable securities			10,000				250
Purchases of certificates of deposit and marketable securities			(585	)			(10,661	)
Proceeds from sale of assets			285				—
Purchase of subsidiaries and other investments, net of cash acquired			(1,809	)			—
Additions to property and equipment			(8,762	)			(8,366	)
Other			54				50
Net cash used in investing activities			(817	)			(18,727	)
Cash flows from financing activities:
Proceeds of long-term debt			200,000				—
Repayments of long-term debt			(194,190	)			(847	)
Retirement of common stock warrants			—				(107	)
Issuance of common stock			1,199				471
Retirement of call options			—				107
Purchase and retirement of common stock			(9,387	)			—
Debt refinancing costs			(4,910	)			(38	)
Dividends			(5,485	)			(5,589	)
Excess tax benefits from share-based payment arrangements			144				26
Net cash used in financing activities			(12,629	)			(5,977	)
Net increase in cash			22,250				1,751
Cash and cash equivalents, beginning of period			56,060				62,808
Cash and cash equivalents, end of period		$	78,310			$	64,559
Supplemental cash flow information:
Cash paid (received) during the period for:
Income taxes, net		$	3,281			$	(430	)
Interest		$	11,105			$	9,728
Non-cash investing and financing activities:
Issuance of common stock to executive officers and directors		$	456			$	414
Issuance of restricted stock, net of forfeitures		$	590			$	437

See accompanying notes to condensed consolidated financial statements.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation

     (a) The Company

     Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States and Puerto Rico. Through its subsidiaries, the Company offers a complete line of funeral and cremation merchandise and services, along with cemetery property, merchandise and services, both at the time of need and on a preneed basis. As of April 30, 2011, the Company owned and operated 217 funeral homes and 140 cemeteries in 24 states within the United States and Puerto Rico. The Company has three operating and reportable segments consisting of a funeral segment, cemetery segment and corporate trust management segment.

     (b) Principles of Consolidation

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

     (c) Interim Disclosures

     The information as of April 30, 2011, and for the three and six months ended April 30, 2011 and 2010, is unaudited but, in the opinion of management, reflects all adjustments, which are of a normal recurring nature, necessary for a fair presentation of financial position and results of operations for the interim periods. The accompanying condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the fiscal year ended October 31, 2010 (the “2010 Form 10-K”).

     The October 31, 2010 condensed consolidated balance sheet data was derived from audited financial statements in the Company’s 2010 Form 10-K, but does not include all disclosures required by accounting principles generally accepted in the United States of America, which are presented in the Company’s 2010 Form 10-K.

     The results of operations for the three and six months ended April 30, 2011 are not necessarily indicative of the results to be expected for the fiscal year ending October 31, 2011.

     (d) Use of Estimates

     The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. The Company’s significant estimates are disclosed in Note 2 in the Company’s 2010 Form 10-K.

     (e) Share-Based Compensation

     The Company has share-based compensation plans, which are described in more detail in Note 19 to the consolidated financial statements in the Company’s 2010 Form 10-K. Net earnings for the three months ended April 30, 2011 and 2010 include $250 and $265, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. Net earnings for the six months ended April 30, 2011 and 2010 include $561 and $540, respectively, of stock option expenses, all of which are included in corporate general and administrative expenses in the condensed consolidated statements of earnings. As of April 30, 2011, there was $2,915 of total unrecognized compensation costs related to nonvested stock options that is expected to be recognized over a weighted-average period of 3.1 years, of which $1,052 of total stock option expense is expected for fiscal year 2011. The expense related to restricted stock is reflected in

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

corporate general and administrative expenses in the condensed consolidated statements of earnings and amounted to $279 and $273 for the three months ended April 30, 2011 and 2010, respectively, and $644 and $546 for the six months ended April 30, 2011 and 2010, respectively. As of April 30, 2011, there was $1,488 of remaining future restricted stock expense to be recognized. Total restricted stock expense for fiscal year 2011 is expected to be $1,340.

     In November 2010, the Company issued 82,160 shares of Class A common stock and paid approximately $114 in cash to the independent directors of the Company. The expense related to this stock grant amounted to $456 and was recorded in corporate general and administrative expenses during the first quarter of fiscal year 2011. In November 2009, the Company issued 90,000 shares of Class A common stock and paid approximately $96 in cash to the independent directors of the Company. The expense related to this stock grant was $414 and was recorded in corporate general and administrative expenses during the first quarter of fiscal year 2010. Each of the shares received has a restriction requiring each independent director to hold the respective shares until completion of service as a member of the Board of Directors.

     The table below presents all stock options and restricted stock granted to employees during the six months ended April 30, 2011:

Weighted

Number of Shares

Average

Grant Type

Granted

Price per Share

Vesting Period

Vesting Condition

Stock options

1,330,000

$

6.24

Equal one-fourth portions over 4 years

Service condition

Restricted stock

518,000

$

6.24

Equal one-third portions over 3 years

Market condition

     The fair value of the Company’s service based stock options granted in fiscal year 2011 is the estimated present value at the date of grant using the Black-Scholes option pricing model with the following weighted average assumptions for the six months ended April 30, 2011: expected dividend yield of 1.9 percent; expected volatility of 41.5 percent; risk-free interest rate of 1.9 percent; and an expected term of 4.8 years. During the six months ended April 30, 2011, the Company granted 518,000 shares of restricted stock with market conditions based on achieving certain target stock prices in the fiscal years 2011, 2012 and 2013. The Company records the expense over the requisite service period. The market condition related to fiscal year 2011 was achieved during the second quarter of fiscal year 2011.

     (f) Receivables and Allowance for Doubtful Accounts

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

     As of April 30, 2011 and October 31, 2010, the Company’s receivables and related allowances were as follows:

		Receivables as of April 30, 2011				Receivables as of October 31, 2010
		Ending Balance Collectively				Ending Balance Collectively
		Evaluated for Impairment				Evaluated for Impairment
Current receivables — at-need funeral		$	9,182			$	9,153
Current receivables — other			45,147				47,736
Receivables, due beyond one year — other			72,199				75,782
Preneed funeral receivables			42,797				42,879
Preneed cemetery receivables			30,980				31,643
Total		$	200,305			$	207,193
Total current receivables			54,329				56,889
Total noncurrent receivables			145,976				150,304
Total		$	200,305			$	207,193

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

		Allowance for Doubtful Accounts				Allowance for Doubtful Accounts
		and Cancellations as of				and Cancellations as of
		April 30, 2011				October 31, 2010
		Ending Balance Collectively				Ending Balance Collectively
		Evaluated for Impairment				Evaluated for Impairment
Current receivables — at-need funeral and other		$	(5,493	)		$	(5,738	)
Receivables, due beyond one year — other			(7,932	)			(8,324	)
Preneed funeral receivables			(11,673	)			(11,753	)
Preneed cemetery receivables			(4,093	)			(4,692	)
Total		$	(29,191	)		$	(30,507	)
Total current receivables			(5,493	)			(5,738	)
Total noncurrent receivables			(23,698	)			(24,769	)
Total		$	(29,191	)		$	(30,507	)

		Allowance for Doubtful Accounts and Cancellations Rollforward
		Balance –				Charged to
		October 31,				costs and								Balance –
		2010				expenses				Write-offs				April 30, 2011
Current receivables — at-need funeral and other		$	5,738				1,034				(1,279	)		$	5,493
Receivables, due beyond one year — other		$	8,324				1,494				(1,886	)		$	7,932
		$	14,062			$	2,528			$	(3,165	)		$	13,425

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(1) Basis of Presentation—(Continued)

     The following summarizes the Company’s receivables aging analysis:

		Receivables Aging Analysis
		as of April 30, 2011
														Greater than
		1 to 30 Days				31 to 60 Days				61 to 90 Days				90 Days				Total
Receivables — at-need funeral		$	5,578			$	656			$	366			$	2,582			$	9,182
Receivables — other			94,978				3,245				2,268				16,855				117,346
Preneed funeral receivables			29,127				949				433				12,288				42,797
Preneed cemetery receivables			24,888				976				587				4,529				30,980
		$	154,571			$	5,826			$	3,654			$	36,254			$	200,305

     (g) Reclassifications

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

(2) New Accounting Principles

     In January 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-06, which requires additional fair value disclosures. This guidance requires reporting entities to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The guidance on transfers between Levels 1 and 2 was adopted by the Company as of its second fiscal quarter ended April 30, 2010. The guidance on Level 3 activity is effective for the Company’s fiscal year beginning November 1, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

     In June 2009, the FASB issued guidance which amends the consolidation guidance for variable interest entities. It will require additional disclosures about involvement with variable interest entities and any significant changes in risk exposure due to that involvement. This guidance is effective as of the beginning of the first annual reporting period that begins after November 15, 2009, which corresponds to the Company’s fiscal year beginning November 1, 2010. The adoption of this guidance did not have a material effect on the Company’s financial statements.

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

     In April 2011, the FASB issued ASU No. 2011-02, which clarifies the guidance for identifying restructuring of receivables that constitute a troubled debt restructuring for a creditor. This guidance is effective for the first interim or annual period beginning on or after June 15, 2011 and should be applied retrospectively to the

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(2) New Accounting Principles—(Continued)

beginning of the annual period of adoption, which corresponds to the Company’s fourth fiscal quarter beginning August 1, 2011. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

     In May 2011, the FASB issued ASU No. 2011-04 regarding fair value measurements and disclosures. This new guidance clarifies the application of existing fair value measurement guidance and revises certain measurement and disclosure requirements to achieve convergence with International Financial Reporting Standards. This guidance is effective for the first interim or annual period beginning after December 15, 2011, which corresponds to the Company’s second fiscal quarter beginning February 1, 2012. The Company is currently evaluating the impact the adoption will have on its consolidated financial statements.

(3) Preneed Funeral Activities

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

Preneed Funeral Receivables and Trust Investments

     Preneed funeral receivables and trust investments represent trust assets and customer receivables related to unperformed, price-guaranteed trust-funded preneed funeral contracts. The components of preneed funeral receivables and trust investments in the condensed consolidated balance sheets as of April 30, 2011 and October 31, 2010 are as follows:

		April 30,				October 31,
		2011				2010
Trust assets		$	401,572			$	383,792
Receivables from customers			42,797				42,879
			444,369				426,671
Allowance for cancellations			(11,673	)			(11,753	)
Preneed funeral receivables and trust investments		$	432,696			$	414,918

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     The cost basis and market values associated with preneed funeral merchandise and services trust assets as of April 30, 2011 are detailed below.

		April 30, 2011
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short- term investments		$	17,044			$	—			$	—			$	17,044
U.S. Government, agencies and municipalities			1,990				35				(1	)			2,024
Corporate bonds			27,352				1,582				—				28,934
Preferred stocks			53,748				493				(1,782	)			52,459
Common stocks			231,361				3,513				(77,148	)			157,726
Mutual funds:
Equity			26,045				2,877				(860	)			28,062
Fixed income			55,949				979				(761	)			56,167
Commodity			23,660				2,388				—				26,048
Real estate investment trusts			7,987				771				—				8,758
World bond			9,030				310				—				9,340
Insurance contracts and other long-term investments			13,840				45				(98	)			13,787
Trust investments		$	468,006			$	12,993			$	(80,650	)		$	400,349
Market value as a percentage of cost																			85.5	%
Accrued investment income															1,223
Trust assets														$	401,572

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

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

		April 30, 2011
Due in one year or less		$	4,058
Due in one to five years			19,185
Due in five to ten years			7,697
Thereafter			18
		$	30,958

     The Company is actively managing a covered call program on its equity securities within the funeral merchandise and services trust in order to provide an opportunity for additional income. As of April 30, 2011 and October 31, 2010, the Company had outstanding covered calls with a market value of $76 and $311, respectively. These covered calls are included at market value in the balance sheet line “preneed funeral receivables and trust investments.” For the three months ended April 30, 2011 and 2010, the Company realized trust losses of approximately ($81) and ($17), respectively, related to the covered call program. For the six months ended April 30, 2011 and 2010, the Company realized trust losses of ($227) and ($253), respectively, related to the covered call program. These trust losses are accounted for in the same manner as other funeral merchandise and services trust earnings and losses and flow through funeral revenue in the condensed consolidated statements of earnings. Although the Company realized losses associated with the covered call program for the three and six months ended April 30, 2011 and 2010, it continues to hold the underlying securities against which these covered calls were issued. These underlying securities appreciated in value by $1,383 and $651 for the three months ended April 30, 2011 and 2010, respectively, and $2,374 and $3,786 for the six months ended April 30, 2011 and 2010, respectively.

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

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

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

     The inputs into the fair value of the Company’s preneed funeral merchandise and services trust investments are categorized as follows:

						Significant
		Quoted Market				Other				Significant
		Prices in Active				Observable				Unobservable
		Markets				Inputs				Inputs				Fair Market
		(Level 1)				(Level 2)				(Level 3)				Value
Trust investments—April 30, 2011		$	310,802			$	83,418			$	6,129			$	400,349
Trust investments—October 31, 2010		$	272,173			$	103,703			$	6,780			$	382,656

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

     In connection with its revised trust asset allocation, the Company sold several Level 2 investments including corporate bonds and preferred stocks and increased its holdings in several Level 1 investments such as highly diversified mutual funds invested in commodities, real estate investment trusts and world bonds.

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

		Three Months Ended April 30,								Six Months Ended April 30,
		2011				2010				2011				2010
Fair market value, beginning balance		$	6,383			$	8,735			$	6,780			$	8,662
Total unrealized losses included in other comprehensive income (1)			—				(930	)			—				(930	)
Distributions and other, net			(254	)			73				(651	)			146
Fair market value, ending balance		$	6,129			$	7,878			$	6,129			$	7,878

     Activity related to preneed funeral trust investments is as follows:

		Three Months Ended April 30,								Six Months Ended April 30,
		2011				2010				2011				2010
Purchases		$	27,759			$	14,709			$	72,048			$	15,558
Sales			32,872				18,079				70,629				22,428
Realized gains from sales of investments			1,591				809				4,409				1,437
Realized losses from sales of investments and other			(581	)			(538	)			(680	)			(1,054	)
Interest income, dividends and other ordinary income			3,477				2,542				6,813				4,887
Deposits (1)			4,674				5,590				10,030				13,605
Withdrawals (1)			11,930				10,070				22,315				22,047

     The following tables show the gross unrealized losses and fair value of the preneed funeral merchandise and services trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of April 30, 2011 and October 31, 2010.

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

		April 30, 2011
		Less than 12 Months								12 Months or Greater								Total
		Market				Unrealized				Market				Unrealized				Market				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Government, agencies and municipalities		$	—			$	—			$	20			$	(1	)		$	20			$	(1	)
Preferred stocks			—				—				31,268				(1,782	)			31,268				(1,782	)
Common stocks			2,607				(529	)			128,805				(76,619	)			131,412				(77,148	)
Mutual funds:
Equity			—				—				3,163				(860	)			3,163				(860	)
Fixed income			341				(3	)			4,234				(758	)			4,575				(761	)
Insurance contracts and other long-term investments			30				(98	)			—				—				30				(98	)
Total		$	2,978			$	(630	)		$	167,490			$	(80,020	)		$	170,468			$	(80,650	)

		October 31, 2010
		Less than 12 Months								12 Months or Greater								Total
		Market				Unrealized				Market				Unrealized				Market				Unrealized
		Value				Losses				Value				Losses				Value				Losses
U.S. Government, agencies and municipalities		$	—			$	—			$	21			$	(1	)		$	21			$	(1	)
Corporate bonds			896				(1	)			—				—				896				(1	)
Preferred stocks			49				(1	)			35,205				(2,219	)			35,254				(2,220	)
Common stocks			(17	)			(136	)			136,483				(91,457	)			136,466				(91,593	)
Mutual funds:
Equity			—				—				20,298				(2,936	)			20,298				(2,936	)
Fixed income			3,575				(3	)			4,550				(764	)			8,125				(767	)
Insurance contracts and other long-term investments			—				—				—				(98	)			—				(98	)
Total		$	4,503			$	(141	)		$	196,557			$	(97,475	)		$	201,060			$	(97,616	)

     The unrealized losses in the preneed funeral merchandise and services trust portfolio are not considered to be other than temporary. For each of these securities, the Company evaluates consensus analyst recommendations, ratings from established ratings agencies, concerns specific to the issuer of the securities and overall market performance. Of the total unrealized losses at April 30, 2011, 96 percent, or $77,148, were generated by common stock investments. Most of the common stock investments are part of the S&P 500 Index. The Company generally expects its portfolio performance to improve if the performance of the overall financial market improves, but would also expect its performance to deteriorate if the overall financial market declines. The Company believes these investments will recover in value and that it has sufficient liquidity from cash and cash equivalents within the trusts, cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow the Company to hold these investments until they recover in value.

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

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES

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

(3) Preneed Funeral Activities—(Continued)

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

(4) Preneed Cemetery Merchandise and Service Activities

Preneed Cemetery Receivables and Trust Investments

     Preneed cemetery receivables and trust investments represent trust assets and customer receivables for contracts sold in advance of when the merchandise or services are needed. The receivables related to the sale of preneed property interment rights are included in the Company’s current and long-term receivables. The components of preneed cemetery receivables and trust investments in the condensed consolidated balance sheets as of April 30, 2011 and October 31, 2010 are as follows:

		April 30,				October 31,
		2011				2010
Trust assets		$	199,763			$	182,336
Receivables from customers			30,980				31,643
			230,743				213,979
Allowance for cancellations			(4,093	)			(4,692	)
Preneed cemetery receivables and trust investments		$	226,650			$	209,287

     The cost basis and market values associated with the preneed cemetery merchandise and services trust assets as of April 30, 2011 are detailed below.

		April 30, 2011
						Unrealized				Unrealized
		Cost Basis				Gains				Losses				Market
Cash, money market and other short- term investments		$	9,065			$	—			$	—			$	9,065
U.S. Government, agencies and municipalities			1,106				28				(6	)			1,128
Corporate bonds			2,750				333				—				3,083
Preferred stocks			19,967				182				(907	)			19,242
Common stocks			119,246				3,621				(38,579	)			84,288
Mutual funds:
Equity			29,284				950				(4,213	)			26,021
Fixed income			26,633				491				—				27,124
Commodity			14,679				1,427				—				16,106
Real estate investment trusts			6,626				644				—				7,270
World bond			5,230				169				—				5,399
Other long-term investments			437				—				—				437
Trust investments		$	235,023			$	7,845			$	(43,705	)		$	199,163
Market value as a percentage of cost																			84.7	%
Accrued investment income															600
Trust assets														$	199,763