10-K 1 h65618e10vk.htm FORM 10-K e10vk
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UNITED STATES SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
     
þ   Annual Report Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
For the fiscal year ended October 31, 2008
OR
     
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)
Registrant’s telephone number, including area code: (504) 729-1400

 
SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
     
Title of each Class   Name of Exchange on which registered
Class A Common Stock, No Par Value   The NASDAQ Stock Market LLC
Preferred Stock Purchase Rights   The NASDAQ Stock Market LLC
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

 
     Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes þ No o
     Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ
     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 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. þ
     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. (Check one):
Large accelerated filer þAccelerated filer o 
Non-accelerated filer o
(Do not check if a smaller reporting company)
Smaller reporting company o
     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No þ
     The aggregate market value of the voting stock held by non-affiliates of the registrant as of April 30, 2008, was approximately $558,000,000.
     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 November 30, 2008, was 88,783,127 and 3,555,020, respectively.
DOCUMENTS INCORPORATED BY REFERENCE
     Portions of the proxy statement in connection with the 2009 annual meeting of shareholders are incorporated in Part III of this Report.
 
 

 


 

STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
Index
                 
            Page
PART I            
 
  Item 1.   Business     3  
 
  Item 1A.   Risk Factors     11  
 
  Item 1B.   Unresolved Staff Comments     21  
 
  Item 2.   Properties     22  
 
  Item 3.   Legal Proceedings     22  
 
  Item 4.   Submission of Matters to a Vote of Security Holders     23  
 
      Executive Officers of the Registrant     23  
PART II            
 
  Item 5.   Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities     25  
 
  Item 6.   Selected Financial Data     26  
 
  Item 7.   Management’s Discussion and Analysis of Financial Condition and Results of Operations     29  
 
  Item 7A.   Quantitative and Qualitative Disclosures About Market Risk     56  
 
  Item 8.   Financial Statements and Supplementary Data     57  
 
  Item 9.   Changes in and Disagreements with Accountants on Accounting and Financial Disclosure     127  
 
  Item 9A.   Controls and Procedures     127  
 
  Item 9B.   Other Information     128  
PART III            
 
  Item 10.   Directors, Executive Officers and Corporate Governance     128  
 
  Item 11.   Executive Compensation     128  
 
  Item 12.   Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters     129  
 
  Item 13.   Certain Relationships and Related Transactions and Director Independence     129  
 
  Item 14.   Principal Accounting Fees and Services     129  
PART IV            
 
  Item 15.   Exhibits and Financial Statement Schedules     130  
 
  Signatures         136  
 EX-10.3
 EX-10.4
 EX-10.20
 EX-10.21
 EX-12
 EX-21
 EX-23
 EX-31.1
 EX-31.2
 EX-32.1

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Cautionary Note
               This annual report contains forward-looking statements that are generally identifiable through the use of words such as “believe,” “expect,” “intend,” “plan,” “estimate,” “anticipate,” “project,” “will” and similar expressions. These forward-looking statements rely on assumptions, estimates and predictions that could be inaccurate and that are subject to risks and uncertainties that could cause actual results to differ materially. Important factors that may cause our actual results to differ materially from expectations reflected in our forward-looking statements include those described in Item 1A. “Risk Factors.” 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
Operations
          Founded in 1910, Stewart Enterprises, Inc. (the “Company”) is the second 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, 2008, our operations included 221 funeral homes and 139 cemeteries in 24 states within the United States and in Puerto Rico.
          General. We believe that we operate one or more of the premier 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 110 funerals and 150 burials per year, our facilities perform an average of approximately 270 funerals and 360 burials per year. In addition, approximately 41 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.
          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 reduce 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 operations.
          Funeral operations. 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. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third party insurers when we act as an agent on the sale of the policies. Funeral operations accounted for 54 percent of our revenues for fiscal year 2008.
          Cemetery operations. Our cemetery operations sell cemetery property and related merchandise, including lots, lawn crypts, family and community mausoleums, monuments, markers and burial vaults, and also provide 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 cemetery perpetual care contracts

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and local laws. Cemetery operations accounted for approximately 46 percent of our revenues for fiscal year 2008, which is a significantly larger percentage than either of our two 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 38 percent of our total cemetery acreage is available for future development.
          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 we refer to as a combination operation. We believe combination operations represent a competitive advantage because they offer families the convenience of complete death care services at a single location. A family that is planning a burial in one of our cemeteries often perceives our onsite funeral home to be a more desirable location for funeral services than an unaffiliated offsite funeral home nearby. 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 and personnel, including 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 37 percent of our cemeteries are located within the same market as, and operated in conjunction with, one or more of our nearby funeral homes.
          Third-party affiliations. We have entered into various agreements with faith-based organizations and non-profit entities and plan to pursue more of these types of affiliations. In 1987, we entered into an agreement with the Catholic Archdiocese of New Orleans pursuant to which we constructed and own a mausoleum on one of our cemeteries, and the Archdiocese of New Orleans assists in the promotion of the sale of crypts in the mausoleum to Catholic parishioners of the Archdiocese of New Orleans. The Company pays the Archdiocese of New Orleans a percentage of the revenue from the sale of all crypts in the mausoleum. Additionally, in fiscal year 1994, we constructed a funeral home and mausoleum on the grounds of the New Orleans Cemetery of the Firemen’s Charitable and Benevolent Association, a non-profit organization. We own and operate the funeral home and mausoleum.
          In 1997, we entered into lease agreements with the Archdiocese of Los Angeles whereby we have the right to construct and operate funeral homes on the sites of up to nine cemeteries owned and operated by the Archdiocese. As of October 31, 2008, six of these funeral homes were operating. The leases expire in 2039, and we do not have an option to renew. We account for these leases as operating leases. In October 2007, we further expanded our relationship with the Archdiocese of Los Angeles and entered into a contract to manage the preneed sales at eleven of the Archdiocese cemeteries.
          We have a mausoleum construction and sales business, Acme Mausoleum Corporation (“ACME”), which constructs community mausoleums on third-party cemetery property and assists in the selling effort of these crypts, primarily in Louisiana and Texas. In return for these services, ACME receives a sales commission for the crypts sold and construction revenue. Over the last 50 years, ACME has developed relationships with the Catholic Church in approximately 70 dioceses in 39 states.
          Preneed arrangements. 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. Certain of these preneed sales arrangements are funded by insurance arrangements and some by trust and escrow accounts. We market our preneed properties, services and products domestically through a full-time staff of approximately 1,000 commissioned sales counselors. We estimate that as of October 31, 2008, the future value of our preneed backlog of funeral and cemetery products and services (including estimated future 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 $1.7 billion of revenue to be recognized in the future as these prepaid products and services are

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delivered. Our methods for calculating the future value of our preneed backlog are 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.
          Trusts and escrow accounts. Because preneed services or merchandise will not be provided until the future, most states require that all or a portion of the customer payments under preneed contracts be placed into trust accounts. Generally, the earnings on and principal of the amounts placed in trust are not withdrawn until the underlying service or merchandise is delivered. In addition, pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales (interment rights) is deposited into perpetual care trusts. The income from these trusts is used to defray the cost of maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. Accordingly, we maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Differing state laws govern preneed sales, including matters such as required deposits, permitted withdrawals and customers’ rights regarding contract cancellation, and generally require prudent investment of fund assets. For further discussion of these trusts and escrow accounts, see Notes 4, 5 and 6 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.
          Because of our focus on preneed sales and related trusting activities that accompany selling preneed, our business is impacted by changes in financial markets. During fiscal year 2008, and particularly during our fourth fiscal quarter, the United States and global economies have experienced significant declines. For example, from November 1, 2007 to October 31, 2008, the Standard and Poor’s 500 Index (“S&P 500 Index”) declined 37.5 percent from 1,549.38 to 968.75, and during our fourth fiscal quarter, the S&P 500 Index declined 23.6 percent from 1,267.38 to 968.75. Among other events, during our fourth fiscal quarter of 2008, investment bank Lehman Brothers Holdings, Inc. declared bankruptcy and several financial institutions failed, including Washington Mutual, Inc., the largest bank failure in American history. The United States federal government has provided financing to and invested in a number of financial institutions. Our trust accounts held securities issued by some of these companies that have been rendered worthless or practically worthless by these events, and we have treated these losses as realized. Primarily as a result of these developments, during fiscal year 2008 we realized aggregate net losses of $35.1 million in our preneed funeral and cemetery merchandise and services trusts and recorded a $7.4 million tax valuation allowance. In addition, we realized aggregate net losses of $9.7 million in our cemetery perpetual care trusts. We recorded a related charge for the estimated probable funding obligation to restore net realized losses of $13.3 million in certain of our cemetery perpetual care trusts. In addition, the market values of our trust assets have declined substantially. Unless the market values of our trust assets increase substantially, we expect to report lower earnings and reduced cash flows from our trusts and lower trust management fees. The preneed contracts we manage are long-term in nature, and we believe the trust investments have the potential over the long-term to appreciate in value. However, whether they will appreciate and over what time period are unknown. For additional information, see Item 1A. “Risk Factors.”
          Notwithstanding the decline in the value of our trust portfolio, we believe that the balances in our trusts and escrow accounts, along with expected future earnings on the balances, insurance proceeds and installment payments under contracts will be sufficient to cover our estimated cost of providing the related preneed services and products in the future. For additional information, see Item 1A. “Risk Factors” and Item 7 “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”
          Generally, our wholly-owned subsidiary, Investors Trust, Inc. (“ITI”), a Texas corporation with trust powers, serves as investment advisor for our investment portfolio and for our preneed funeral and cemetery merchandise and services trust and escrow accounts and our cemetery perpetual care trusts and escrow accounts. ITI provides investment advisory services for a fee based on the market value of the assets in the trust. Under state trust laws, we are allowed to charge the trusts a fee for managing the investment of the trust assets. We have elected to perform these services in-house, and the fees are recognized as income as the services are performed. For

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additional information, see Note 21 to the consolidated financial statements included in Item 8. ITI is registered with the Securities and Exchange Commission (“SEC”) under the Investment Advisers Act of 1940. As of October 31, 2008, ITI managed assets with a market value of approximately $637.8 million. Lawrence B. Hawkins, one of our executive officers and a professional investment manager, serves as President of ITI. The Investment Committee of our Board of Directors has adopted an investment policy statement that provides guidance on security selection, emphasizes diversification and balances long-term growth objectives with the need for current income. The long-term objectives are to preserve principal while seeking appropriate levels of current income and capital appreciation in order to provide returns that match or exceed inflation. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
          Customization, personalization and packages. 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, such as designing a funeral service to reflect the special interests or accomplishments of the deceased. We developed a custom funeral planning program that as of 2006 was implemented in all of our funeral homes and is part of our regular training process. 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. We continually evaluate our funeral packages which provides value to our families by simplifying the selection process while enhancing the services we provide. We believe that our product and service offerings have enhanced the experiences provided to families at our funeral homes and have contributed to increased revenues per sale.
          Enhanced cremation and alternative service offerings. In fiscal years 2008, 2007 and 2006, 40 percent, 39 percent and 39 percent, respectively, of the funeral services we performed in our continuing operations were cremations. A significant trend in the United States is an increasing preference of consumers for cremation. According to industry estimates, 34 percent of funeral services in the United States during 2006 resulted in cremations, and cremations are expected to represent 39 percent of funeral services in the United States by the year 2010. All of our funeral homes offer cremation products and services. 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 market our products and services to address the rising demand for cremations. Our 23 alternative service firms are generally located in leased premises and have lower overhead than traditional funeral homes. These firms primarily offer direct cremations with limited additional products and services. Although death care arrangements at these locations are typically less expensive than services at a traditional funeral home, it is not our goal to be the low-price leader in these markets.
          Management. We have an experienced management team. Many of our divisional and regional managers owned and operated their own funeral homes and cemeteries and joined us when we acquired their business. 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.
          As of October 31, 2008, we were divided into two geographic operating divisions in the United States, each of which was managed by a division president and chief financial officer. Our operating divisions are further divided into regions, each of which is managed by a regional vice president. During fiscal year 2008, we named a senior vice president of operations to oversee both geographic operating divisions with the intent to further drive our “Best in Class” initiative and increase focus on improving operations. The division presidents report to the senior vice president of operations. We also have a Corporate division, which manages our corporate services, such as accounting and treasury, information systems, human resources, training and communications, and a Sales and Marketing division responsible for sales teams in all operating divisions. From time to time, we may increase, reduce or realign our divisions and regions.
          Centralized support services. 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, trust administration, contract processing, accounts payable processing, accounts

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receivable collection and other services. It allows us to decrease our costs without diminishing service by creating significant savings on items such as trust administration fees, travel expenses, office supplies, overnight delivery and long distance telephone services. In 2006, we instituted a centralized purchasing department to leverage our size and negotiate more favorable supplier contracts. During 2007, we implemented a new financial software system and in 2008 a new payroll system which have created efficiencies. We are also implementing a new contract processing industry-specific software system in 2009 that is expected to create further efficiencies. 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, we have a centralized formal training program and began implementation of a standardized marketing approach to enhance sales effectiveness.
          Financial information about industry and geographic segments. For financial information about our industry and geographic segments for fiscal years 2008, 2007 and 2006, see Note 21 to our consolidated financial statements included in Item 8.
Business Strategy
          Implement long-term strategic plan. Our long-term business strategy has three components: our “Best in Class” initiative, our “Innovation” initiative and our “Acquisition” initiative. Our focus for fiscal year 2008 was on our “Best in Class” initiative. This initiative aims to improve performance at the rooftop level by giving all managers the same key metrics by which they can measure their performance and by providing tools to facilitate the sharing of best practices by key metric across the organization. For example, one of the key metrics is the change in the number of funeral calls. If funeral calls are below expectations, our program provides various suggestions taken from our best performing locations that the manager can use to help grow funeral calls. We will also seek to strengthen our performance-oriented company culture and to refocus management time and attention on improving field operations. The goal of our “Best in Class” initiative is to generate a higher return on assets and to grow profits and cash flow.
          “Best in Class” focuses on increasing average revenue per event, improving field labor productivity, leaning initiatives to reduce overhead and looking at locations that are not producing acceptable levels of profitability to determine if changes can be made to achieve “Best in Class” results or if divestiture is the more prudent option. We are also focusing more attention on improving cremation profitability. We are allocating resources to train funeral directors with regard to cremation offerings and are focusing on improving product offerings and family presentations. We have restructured our training department to better align our training with our “Best in Class” initiative and the use of empirical data for improvement opportunities. We have established a Continuous Improvement department to coordinate and facilitate the increased focus on improving processes to eliminate waste and inefficiency. Efforts are presently focused on contract processing, which is our largest single company process, with many other initiatives in the pipeline. We are analyzing performance at each rooftop and underperforming businesses will be analyzed for training needs, standardization of processes and implementation of “Best in Class” to improve results. Any potential future divestitures will be determined based on performance, demographics, and proximity to other locations.
          Our “Innovation” initiative seeks to generate new tangential growth opportunities not tied to the growth of our base business. We have begun to lay the ground work for this component of our strategic plan with our investment, along with other industry participants, in an Internet start-up company called Tributes.com. The purpose of this initiative is to capture revenue and profit streams from the creation of meaningful, significant and lasting remembrances that either complement or substitute for obituary notices. Currently, Stewart field locations incur labor costs for the development of obituary notices but do not receive any compensation from the publications that receive a fee for publishing the notice. This initiative is intended to allow us to capture market share in the existing obituary revenue stream in each of the communities in which we operate. While still in start-up mode, we believe this initiative will have significant benefit to both Stewart and the industry. Additionally, we are beginning other initiatives with the goal of generating new revenue and profit sources from web commerce. We have modified web pages for all of our locations to further implement this initiative, and aim to expand our customer base beyond our at-need or preneed customers to their relatives and friends or anyone who reaches our websites or visits our facilities.

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          Our “Acquisition” initiative is to acquire businesses and implement our “Best in Class” initiatives in these newly-acquired businesses. Our “Acquisition” initiative will be ongoing and will proceed as appropriate acquisition opportunities are identified. We deliberately slowed investigation of businesses to acquire while the “Best in Class” initiative was being initially implemented, and plan to focus more attention on this initiative in fiscal year 2009. We will evaluate acquisition opportunities that make sense for our business strategy at prices we believe will result in satisfactory returns.
          Improve key metrics. We continue to believe that increasing cemetery property sales, funeral calls and preneed funeral sales is important to the growth of our business. These goals have been a key focus for the last four fiscal years, and we plan to continue to focus on them as we implement our “Best in Class” initiative.
          We view preneed cemetery property sales as the catalyst for growth in our cemetery segment as they create a customer base for all our businesses. These sales also result in high margins and produce positive cash flow. We have transitioned to personalized selling, and in addition to responding to requests generated by our media campaigns, our sales people have been successful in obtaining referrals from their existing customer base, allowing them to assist new customers with their cemetery and funeral needs.
          We continue to develop and implement strategies to drive at-need and preneed funeral growth throughout our organization. We are using the most successful tactics of our top performing funeral homes to develop strategies to drive funeral call growth throughout our organization with an increased focus on preneed funeral sales. We believe that the continuous addition of preneed funeral contracts to our backlog is a primary driver of sustainable long-term growth in the number of families served by our funeral homes.
          Continue focus on improving cash flow and controlling costs. We plan to continue our focus on improving our cash flow and controlling our costs by, among other things, obtaining volume discounts from suppliers and leveraging our operating costs through clustering and combination operations. Additionally, we have been incentivizing local managers to control costs by aligning their compensation more closely to the profitability of the locations they manage. During 2006, we established a director of purchasing position to leverage our size and negotiate more favorable long-term contracts with our supplier base. In 2007, we completed the sale of $250.0 million of convertible notes which will significantly decrease our future interest payments and improve cash flow. In 2008, we formalized a Continuous Improvement department aimed at creating efficiencies and reducing costs.
          Continue focus on customer and employee satisfaction. Part of our strategic plan focuses on putting people first — customers and employees. We have conducted market research to obtain a clearer understanding of customer service expectations and are measuring the results through one of our key metrics — a customer service rating. We also seek to enhance employee satisfaction through professional growth, which includes the implementation of a mentoring program and succession plan for all key employee positions. We continue to invest in the professional growth of our employees through numerous programs.
          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 balance our preneed sales levels and our cash investments 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 50 years of age are most likely to make these purchases.
          Deploy cash flow. In evaluating our cash flow deployment opportunities, we generally intend to conserve cash until we are able to renew or replace our revolving credit facility which matures in November 2009. As of October 31, 2008, we had $72.6 million in cash and cash equivalents. While we have nothing drawn on our current facility, as of October 31, 2008, we do have $14.6 million in letters of credit and a $30.8 million bond we are required to maintain to guarantee our obligations related to funds we withdrew in fiscal year 2001 from trusts in Florida. We believe that the use of our cash to pay dividends, repurchase debt and stock, construct funeral homes on cemeteries of unaffiliated third parties and make acquisitions of or investments in death care or related business are attractive options. We believe that growing our organization through acquisitions and investments is a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure. For additional information, see “Liquidity and Capital Resources,” in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.

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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 decade of the 1990s witnessed a trend of family-owned firms consolidating with larger organizations, but this trend slowed dramatically in 1999. As the number of consolidators participating in the acquisition market declined, 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. 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. We estimate that our industry, which consists of approximately 22,000 funeral homes and 10,500 cemeteries in the United States, collectively generates approximately $15 billion in annual revenue.
          Large public death care companies have also experienced consolidation. In 1999, The Loewen Group, Inc., at the time the second largest provider and a primary competitor for acquisitions, entered into bankruptcy proceedings. 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 (“SCI”) in 1999. The Loewen Group emerged from bankruptcy as Alderwoods Group, Inc. and was acquired by SCI in November 2006. In June 2008, we received an unsolicited proposal from SCI to acquire all of our outstanding shares for $9.50 per share in cash, which we subsequently rejected. We then received another letter from SCI dated July 21, 2008 offering $11.00 per share in cash for all of our outstanding shares. In October 2008, SCI withdrew its acquisition proposal.
          During the 1990s, we grew rapidly primarily through acquisitions of funeral homes and cemeteries both domestically and abroad, financed by new equity and debt capital. We ceased our acquisition activity in 1999 and developed strategies for improving our cash flow and reducing and restructuring debt. During fiscal year 2000 through fiscal year 2003, we completed our transitional strategies of improving our cash flow, restructuring and reducing our debt and selling our foreign assets. During fiscal years 2004 through 2007, we sold underperforming assets, refinanced and further reduced our debt and implemented new strategies to improve operations. We believe, at the appropriate pricing, that growing our organization through acquisitions can again be a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our existing infrastructure.
          Importance of tradition; barriers to entry. We believe it is difficult for new competitors to enter existing markets successfully by opening new cemeteries. The barriers to entry are lower on the funeral side. Entry into the cemetery market can be difficult due to several factors. Because families tend to return to the same cemetery for multiple generations to bury family members, it is 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 sufficient land for additional plots, whereas land for new cemetery development is often scarce and expensive. 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.
          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, deaths in the United States are 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 2006 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 76.8 million in 2000 to 98.6 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 the most likely group to make preneed funeral and cemetery arrangements.
          Growing demand for cremation. A significant trend in the United States is an increasing preference of consumers for cremations. The trend toward cremations has been a significant concern for traditional funeral home

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and cemetery operators because cremations have typically included few, if any, additional products or services other than the cremation itself. For additional information, including information about our strategies to address this trend, see “Operations—Enhanced cremation and alternative service offerings” above.
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 crematories, and other non-traditional providers of limited services or products. Discount retailers have begun marketing caskets at prices that are sometimes substantially lower than what we offer. Consumers also can now buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet. Market share for funeral services and cemetery property 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. Market share for funeral and cemetery merchandise is largely a function of price. Extensive marketing through media advertising, direct mailings and personal sales calls has increased in recent years, especially with respect to the sale 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 toward cremation and our strategies to address that trend can be found under the heading “Operations—Enhanced cremation and alternative service offerings” above.
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 began reviewing the Funeral Rule in 1999 at which time it conducted hearings to receive input from industry and consumer groups. The FTC has concluded its review and determined that no revisions to the existing regulation are required.
          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.
          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 including our preneed trust activities. 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 frequently propose new laws and regulations, some of which 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
          As of October 31, 2008, we employed approximately 5,400 persons, and we believe that we maintain a good relationship with our employees. Approximately 140 of our employees are represented by labor unions or collective bargaining units.

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Additional Information
          Our business was incorporated as a Louisiana corporation in 1970. Our principal executive offices are located at 1333 South Clearview Parkway, Jefferson, Louisiana 70121, and our telephone number is 504-729-1400. 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 SEC. The SEC also maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The SEC’s website address is www.sec.gov.
Item 1A. Risk Factors
Cautionary Statements
          Our business is subject to significant risks. We caution readers that the following important factors, among others, in some cases have affected, and in the future, could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed in the forward-looking statements in this report and in any other forward-looking statements made by us or on our behalf.
Risks Related to our Business
Our earnings from our trusts can be reduced by declines in stock and bond prices and interest and dividend rates, which can have a significant adverse effect on our gross profit, net earnings and cash flows.
          Because of our preneed sales activities and the related state trusting requirements that accompany preneed sales, our business is impacted by changes in financial markets. We maintain three types of trusts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Our trust assets are generally invested in a mix of equity and fixed-income securities, and dividend and interest earnings and investment gains and losses are affected by financial market conditions that are not within our control. Generally, declines in market performance reduce the earnings in our trusts and reduce our earnings and cash flow. In addition, any significant or sustained investment losses could result in there being insufficient funds in the trusts to cover the cost of delivering services and merchandise in the future and result in there being less funds available to defray the costs of cemetery maintenance. Any such deficiency would have to be covered by operating cash flow, which could have a material adverse effect on our financial position and results of operations. In addition, our subsidiary ITI earns trust management fees based on the fair market value of the trusts managed; therefore, declines in the value of the assets in the trusts decrease the amount of fees we collect and record for trust management.
          In fiscal years 2008, 2007 and 2006, cemetery perpetual care trust earnings, funeral and cemetery merchandise and services trust earnings and ITI trust management fees comprised 7 percent of our revenue and 36 percent, 33 percent and 32 percent of our gross profit, for each respective year. During the fourth quarter of fiscal 2008, as a result of significant declines in the United States markets associated with a rapidly deteriorating economy, we experienced similar sharp declines in the fair market values of the equity investments in our trust portfolios. The value of many corporate bonds and other fixed-income investments also declined. In addition, interest rates have declined, negatively affecting yields available to us for short term fixed-income investments. Unless market conditions improve and the values of our trust investments increase substantially, we expect to report lower earnings and cash flow from our trusts and trust management in future periods. Based on market conditions and realized losses as of October 31, 2008, we believe the decrease in revenue from trust earnings recognized on delivery of preneed services and merchandise, cemetery perpetual care trust earnings and trust management fees for fiscal year 2009 could be as much as $10 million, or approximately 2 percent, of fiscal year 2008 revenue and approximately 10 percent of fiscal year 2008 gross profit. The preneed contracts we manage are long-term in nature, and we believe the trust investments have the potential over the long-term to appreciate in value. However, whether they will appreciate and over what time period are unknown. If market conditions deteriorate or we experience additional realized losses, the decrease would be higher. Additional information regarding our trusts and related risks are described in the risk factors that follow.

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Earnings in preneed funeral and cemetery merchandise and services trusts may be reduced by declines in stock and bond prices and will be reduced by declines in interest and dividend rates, resulting in lower future revenues and cash flows, and potential contract impairment charges.
          Declines in earnings in our preneed funeral and cemetery merchandise and services trusts can cause a decline in our reported future revenues and cash flows. With respect to these trusts, we defer recognition and generally withdrawal of dividends, interest income and realized earnings until the underlying product or service is delivered. Realized gains and losses generally have no immediate impact on our revenues, margins, earnings or cash flow, except to the extent there are tax consequences as described later in these risk factors. Dividends, interest income and realized gains and losses are allocated to the underlying contracts and will affect the amount of future revenue recognized, and cash withdrawn, at the time the specific contract is performed. In our preneed funeral and cemetery merchandise and services trusts, at October 31, 2008, the fair market value of the investments in the trusts of $483.7 million was $253.6 million lower than our original cost basis of $737.3 million. Unrealized gains and losses are not allocated to contracts; however, over time, gains and losses realized are allocated to the underlying contracts and will affect the amount of earnings we recognize and cash we withdraw at the time the contracts are performed. As of October 31, 2008, we had $240.9 million in earnings that have been realized and allocated to contracts that we will recognize when the underlying contracts are performed. Therefore, significant unrealized losses in these trusts, if they do not recover over time, can limit future earnings available to us. For fiscal year 2008, funeral trust earnings amounted to $13.2 million, and cemetery trust earnings amounted to $4.2 million.
          If the fair market value of these trusts were to decline below the estimated costs to deliver the underlying products and services, we would record a charge to earnings to record a liability for the expected losses on the delivery of the associated contract. As of October 31, 2008, no such charge was required. For additional information, see “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Overview of Critical Accounting Policies—Loss Contracts” included in Item 7.
Realized capital losses in preneed funeral and cemetery merchandise and services trusts for which we are the grantor, if we have or expect insufficient offsetting capital gains, can cause increases in our current period effective tax rate and a reduction of our current period reported net earnings and a reduction in operating cash flows in future periods.
          Approximately one-half of the October 31, 2008 fair market value of our preneed funeral and cemetery merchandise and services trusts are trusts for which we are the grantor. For these trusts (unlike the remaining trusts for which the customers are the grantors), we retain the income tax characteristics of all earnings as realized in the trust. For example, capital gains and losses in the trusts are capital gains and losses on our tax returns. In addition, we must recognize these earnings currently for tax purposes, while for book purposes they are deferred until the contract is performed. For fiscal year 2008, the trusts for which we are the grantor realized net losses of $23.5 million, and the trusts for which the customer is the grantor realized net losses of $14.5 million.
          Realized capital losses in the trusts for which we are the grantor, if we have or expect insufficient offsetting capital gains, can require us to record a valuation allowance against the related deferred tax asset (capital loss carryforward), which increases our current period effective tax rate and reduces our current period reported net earnings. During our fourth fiscal quarter of 2008, we recorded a tax valuation allowance of $7.4 million related to capital losses realized in our preneed funeral and cemetery merchandise and services trusts for which we are the grantor for tax purposes. Essentially, the current period valuation allowance reflects the fact that, if we cannot generate capital gains in the future against which to use the tax benefit of the capital loss (which is limited to five years), when we perform the contract, we will recognize more income and pay higher taxes for tax purposes than we will for book purposes. This tax relationship does not occur with respect to trusts for which the customer is the grantor, because all of their earnings are service revenue and thus ordinary income to us, and we do not recognize the revenue for either tax or book purpose until the underlying contract is performed.
          As of October 31, 2008, we have approximately $154 million remaining in unrealized losses in trusts for which we are the grantor; hypothetically, if all of these losses were realized at once, this would have resulted in an additional valuation allowance of approximately $62 million, assuming a projected tax rate of 40 percent. We currently have only a limited amount of embedded capital gains that we can generate in our trusts. Also, we have utilized all previous capital gains recorded in tax year 2008 and prior tax years to offset capital losses carried

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forward from earlier years. Accordingly, if we experience additional realized losses in these trusts and do not have or expect to have future capital gains available (within or outside the trusts) to offset these losses, we would record additional valuation allowances and related reductions of net income.
Earnings in cemetery perpetual care trusts may be reduced by declines in stock and bond prices and will be reduced by declines in interest and dividend rates, resulting in lower current and potentially future revenues and cash flows. In addition, we may be required to fund realized net capital losses in these trusts, which would have a negative effect on our earnings and cash flow.
          Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from these trusts, which have been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal must generally be held by the trust in perpetuity. The statutory provisions that create and regulate these trusts differ from state to state, as do the regulatory interpretations of the provisions. The trusts are reviewed regularly by the state regulatory authorities.
          We currently recognize and withdraw all dividend and interest income earned and, in states where it is permitted, realized net capital gains generated by cemetery perpetual care trusts. The cash is used to defray the costs of cemetery maintenance. Therefore, declines in these eligible distributable earnings in cemetery perpetual care trusts would cause a decline in current revenues and cash flows. Likewise, sustained declines in these earnings would reduce future revenues and cash flows. As a result, we would need to devote more of our cash flow from other sources to continue to maintain our cemeteries at the same level. For fiscal 2008, earnings in these trusts contributed $10.7 million to cemetery revenue, including $3.0 million in capital gains. Unless current market conditions improve substantially, we expect to report lower earnings from the trusts in the future.
          In our cemetery perpetual care trusts, at October 31, 2008, the fair market value of our investments of $172.2 million was $81.0 million lower than our original cost basis of $253.2 million. If we realize losses in our cemetery perpetual care trusts and the fair market value of the trust assets is less than the aggregate amounts required to be contributed to the trust, some states may require us to make cash deposits to the trust to cover the net realized loss or may require us to stop withdrawing earnings until future earnings cover the net realized loss.
          In those states where we have withdrawn realized net capital gains in the past, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. As of October 31, 2008, we have recorded a $13.3 million estimated probable funding obligation as an increase in cemetery costs in fiscal 2008. As of October 31, 2008, we had unrealized losses of $64.4 million in the trusts in these states. Because all of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs.
          In those states where realized net capital gains have not been withdrawn, due to the different laws and our practices in those states, we do not believe that we will be required to replenish the realized net capital loss, and have not recorded a funding obligation; however, it is possible that a regulator may disagree with our conclusion, and future funding obligations may exist. As of October 31, 2008, the realized net capital loss in these trusts was $1.2 million, and the unrealized capital loss was $20.7 million.
Our distributions from cemetery perpetual care trusts include net realized capital gains on investment sales in states where permitted. If regulations in these states are changed to no longer permit withdrawal of realized capital gains, our cemetery perpetual care trust eligible distributable earnings may be reduced in the future, which would reduce our earnings.
          In states where permitted, we withdraw and recognize as revenue net realized capital gains on investment sales in cemetery perpetual care trusts. During fiscal year 2008, we recognized and withdrew $3.0 million of net realized capital gains in cemetery perpetual care trusts. Our portfolio mix in these states is more heavily weighted to investments that potentially generate capital gains, such as equities. In states where we do not withdraw capital gains, our portfolio mix is more heavily weighted to fixed income type securities. If states where capital gains are

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currently permitted to be withdrawn make changes in legislation or regulations to not allow capital gains to be withdrawn, our future revenues and cash flow may be reduced until we are able to replace some or all of the investments that potentially generate capital gains with ones that generate more ordinary income such as fixed income securities. Given current economic conditions and market values, we may not be able to make that shift quickly without triggering capital losses that could require funding obligations.
Reduced market values of preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts will also reduce our trust management fees.
          The fees that our subsidiary, ITI, collects for managing the trusts are based on the fair market value of the trusts as determined by quoted market prices. Thus as market values decline, the earnings ITI collects and the cash we withdraw for managing the trusts is also reduced. To the extent market values do not improve, we will earn less in ITI fees than we have historically earned. During fiscal year 2008, ITI trust management fees collected were approximately $10.0 million.
Our trust portfolio is invested in various sectors, some of which may be more susceptible to additional adverse impact from the current economic crisis.
          As of October 31, 2008, approximately 25 percent of our preneed funeral and cemetery merchandise and services trust portfolios and 40 percent of our cemetery perpetual care trust portfolios are invested in the financials sector. We also have concentrations in the information technology and consumer discretionary sectors, which includes United States automotive manufacturers. The current economic crisis may result in greater declines to the fair market value of our investments in these and other sectors as compared to the performance of our overall trust portfolio and/or market benchmarks, including the S&P 500 Index. Each sector has particular risks associated with it, and depending on our asset allocation, sector mix, company-specific information and future economic events, our portfolio could be at risk for further decline. For additional information on the various sectors comprising our trust portfolio and related risks, see the section titled “Preneed-Backlog, Trust Portfolio and Cash Impact of Sales” included in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7.
A weakening economy could decrease preneed sales. A reduction in discretionary spending could also decrease amounts at-need customers are willing to pay, and could cause third-party insurance providers that fund our insurance-funded preneed funeral contracts to experience financial difficulties.
          A weakening economy that causes customers to reduce discretionary spending could cause, and we believe has caused in the past, a decline in preneed sales, and could also decrease the amounts at-need customers are willing to pay. Declines in preneed cemetery property sales and average revenue per at-need event would reduce current revenue. Declines in preneed funeral and cemetery service and merchandise sales would reduce our backlog and could reduce our future revenues and market share.
          A weakening economy could also impact our customers’ ability to pay, causing increased delinquencies, increased bad debt and decreased finance charge revenue which would reduce future earnings and cash flow. A weakening economy could also increase costs related to sales force turnover and commissions we are unable to recoup as contract cancellation rates increase. If a contract is cancelled before collecting a specified amount, the related commission is charged back to the sales counselor. If the sales counselor is no longer employed by us when the contract is cancelled, we are unable to recoup that commission.
          Some of the preneed funeral contracts we sell are funded by life insurance or annuity contracts issued by third-party insurers. The net amount of these contracts that have not been fulfilled as of October 31, 2008 was $477.1 million. These contracts are not reflected in our consolidated balance sheet, but we include them when we discuss our anticipated “backlog” or anticipated future revenue from preneed funeral sales. Approximately 60 percent of these contracts have been funded by Forethought Life Insurance Company. If Forethought or other insurance companies that have issued policies to our customers experience financial difficulties, our potential future revenue associated with these contracts, and commissions we receive from selling these contracts, could be at risk. For a discussion of our revenue recognition policies for insurance-funded preneed funeral contracts, see Note 2(i) to our consolidated financial statements included in Item 8.

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Continued economic crisis and financial and stock market declines could reduce future potential earnings and cash flows and could result in future goodwill impairments.
          In the fourth quarter of fiscal year 2008, we recorded a goodwill impairment charge of $26.0 million, which eliminated goodwill in our Eastern division cemetery segment. As of October 31, 2008, goodwill amounted to $247.2 million, consisting of $91.1 million in the Eastern division funeral segment, $107.4 million in the Western division funeral segment and $48.7 million in the Western division cemetery segment. Cemetery segments tend to be more sensitive to goodwill impairments with a heavier reliance on preneed sales which are impacted by changes in customer discretionary income. If current economic conditions worsen causing decreased revenues and increased costs or if the current economic conditions result in additional companies in which the trust portfolio is invested in filing for bankruptcy, we may have a triggering event which could result in further goodwill impairments.
Although we do not have any significant outstanding long-term debt maturities until 2013, our senior secured credit facility matures in November 2009. Servicing our debt will require a significant amount of cash. Our ability to generate sufficient cash depends on many factors, some of which are beyond our control.
          Our ability to make payments on and to refinance our debt depends on our ability to generate cash flow. This, to a significant extent, is subject to general economic, financial, competitive, legislative, regulatory and other factors that are beyond our control. In addition, our ability to borrow funds in the future to make payments on our debt will depend on our meeting the financial covenants in our debt agreements. Our business may not generate cash flow from operations, and future borrowings may not be available to us under our senior secured credit facility or otherwise in an amount sufficient to enable us to pay our debt or to fund other liquidity needs. As a result, we may need to refinance all or a portion of our debt on or before maturity. We may not be able to refinance any of our debt on favorable terms, or at all. Any inability to generate sufficient cash flow or refinance our debt on favorable terms could have a material adverse effect on our financial condition.
          Although we do not have any significant outstanding long-term debt maturities until 2013, our senior secured credit facility matures in November 2009. While we have nothing drawn, as of November 30, 2008, we do have $12.0 million in letters of credit and a $30.8 million bond we are required to maintain to guarantee our obligations related to funds we withdrew in fiscal year 2001 from trusts in Florida. We have entered into discussions with various banks to assess commitment levels, pricing and covenant expectations. Given the current credit market conditions, we expect a new revolving credit facility to be more expensive than our existing facility and have tighter covenants, including, potentially, more restrictive conditions on when we can pay dividends and repurchase stock. While we expect to replace or renew the credit facility with acceptable terms, if we are unable to negotiate a facility at acceptable terms, we would be required to cover the letters of credit and may be required to cover the Florida bond with existing cash on hand. As of October 31, 2008, we had sufficient cash and cash equivalents of $72.6 million to cover these funding obligations, but if current economic conditions do not improve and we are unable to secure a new facility, we will be required to continue to impose cost and cash savings strategies, which could result in the elimination of the dividend and a reduction in capital expenditures.
We have experienced a decline in funeral call volume for a number of years due to many factors, such as the number of deaths and competition in our markets, our ability to identify changing consumer preferences and various other factors, some of which are beyond our control.
          We experienced declines in same-store funeral call volumes for a number of years due to many factors described elsewhere herein including the number of deaths, intense competition and our ability to identify changing consumer preferences. From fiscal years 2002 to 2008, we experienced same-store funeral call volume changes of (1.5) percent, (2.6) percent, (1.0) percent, 0.4 percent, (0.2) percent, (2.2) percent and 0 percent, respectively. We can give no assurance that we will be able to increase same-store funeral call volumes over the long term. Declines in same-store funeral calls can adversely affect revenues and profits if not offset by increases in average revenue per call or alternative sources of revenue.
Price competition could reduce market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.

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          Our funeral home and cemetery operations generally face intense competition in local markets that typically are served by numerous funeral homes and cemetery firms. We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products including, in recent years, internet providers. From time to time, this price competition has caused us to lose market share in some markets. In other markets, we have had to reduce prices, thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues, profit margins and backlog and potentially impact our annual goodwill impairment analysis.
          Discount retailers sell caskets at prices substantially lower than prices we offer. Consumers also can now buy caskets in funeral supply stores and directly from manufacturers, as well as over the Internet. Competition from these sources could reduce our casket sales, which could adversely affect funeral revenues and margins.
Increased advertising and better marketing by competitors, as well as increased offering of products or services over the Internet, could cause us to lose market share and revenues or cause us to incur increased costs or to decrease prices in order to retain or recapture market share.
          In recent years, the marketing of preneed funeral services through television, radio and print advertising, direct mailings and personal sales calls has increased. Extensive advertising or effective marketing by competitors in local markets could cause us to lose market share and revenues or cause us to incur increased marketing costs. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue or to incur costs necessary to respond to competition by varying the types or mix of products or services offered by us. Also, increased use of the Internet by customers to research and/or purchase products and services could cause us to lose market share to competitors offering to sell products or services over the Internet.
If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.
          Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. We may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.
Increased preneed sales may have a negative impact on current cash flow and earnings.
          Preneed sales of cemetery property and funeral and cemetery products and services, which are generally paid on an installment basis, are generally cash flow negative initially, primarily due to the commissions and other costs to acquire the sale and the fact that a portion of the sales proceeds is required to be placed into trusts or escrow accounts. We will continue to invest a significant portion of cash flow in preneed acquisition costs, which reduces cash flow available for other activities, and, to the extent preneed activities are increased, cash flow would be further reduced, and our ability to service debt could be adversely affected.
Increased costs may have a negative impact on earnings and cash flows.
          We may not be successful in maintaining our margins and may incur additional costs. For example, we have experienced increased property and casualty insurance costs primarily as a result of Hurricanes Katrina, Wilma and Rita. We have also incurred significant legal costs related to the unanticipated class action litigation, the SEC investigation and an unsolicited acquisition proposal from Service Corporation International, which it later withdrew. We will incur additional costs in fiscal year 2009 in conjunction with improving our business systems. In addition, the cost of certain commodities, particularly copper, which represents a large component of our bronze markers sold in our cemetery business, increased significantly during 2008. Our contract with our major casket supplier expires in October 2009, and our ability to negotiate a new contract at favorable terms could impact future costs. Some of the costs impacting our business are largely beyond our control. To the extent that we are unable to pass these cost increases on to our customers, they will have a negative impact on our earnings and cash flows.

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Our business is subject to the risk of losses due to hurricanes and other natural disasters.
          Our Company is headquartered in the New Orleans metropolitan area, and approximately 75 of our funeral homes and 45 of our cemeteries, along with our mausoleum construction and sales business, ACME Mausoleum, are located near the Gulf Coast in southern Texas, Louisiana, Mississippi, Alabama and Florida, along the eastern coasts of Florida, and North and South Carolina and in Puerto Rico. These areas are periodically threatened by hurricanes, which can damage our properties, interrupt our business and disrupt the lives of our customers and employees. We are also at risk for tornadoes at our locations in the midwestern United States and for earthquakes at our locations along the west coast of the United States.
          In fiscal year 2005, our business was adversely affected by Hurricanes Katrina, Wilma and Rita. A significant portion of the loss we experienced due to Hurricane Katrina was covered by insurance, but we cannot predict the long-term effects on our operations because of the economic conditions currently existing in the New Orleans metropolitan area or the timing and amount of collection of any additional insurance recoveries. In fiscal year 2008, Hurricane Ike impacted our Houston operations resulting in $1.2 million of expense primarily for debris removal, clean-up and repairs. We are currently working on our insurance claim related to Hurricane Ike.
We have a recorded an estimated liability of $7 million primarily related to certain unidentified contracts sold prior to the time we acquired certain businesses, and we may become aware of new information that would require us to increase that estimated liability.
          From time to time, unidentified contracts are presented to us relating to contracts sold prior to the time we acquired certain businesses. In addition, from time to time, we have identified in our backlog, certain contracts in which services or merchandise have already been delivered. Using historical trends, and statistical analyses, we have recorded an estimated liability for these items of approximately $7 million as of October 31, 2008. We are in the process of implementing and testing a new contract processing system, which may cause us to become aware of other such contracts. To the extent we are made aware of contracts that exceed the estimated liability recorded, or cause us to conclude that we should increase the estimated liability recorded, we would have to record a charge to earnings.
Our Chairman may have a significant and disproportionate influence on the outcome of election of directors and other matters presented for a vote of shareholders and this control may be exercised in a manner that may conflict with the interests of other shareholders.
          As of October 31, 2008, our Chairman, Frank B. Stewart, Jr., held 10,815,361 shares (or approximately 8 percent) of our outstanding Class A common stock and all of the 3,555,020 outstanding shares of our Class B common stock. There is no established public trading market for our Class B common stock. Because each share of Class B common stock is entitled to 10 votes on all matters presented for a vote by our shareholders, Mr. Stewart controls approximately 34 percent of our total voting power, while holding approximately 12 percent of our outstanding equity. Accordingly, Mr. Stewart may have a significant and disproportionate influence over the election of directors and other matters requiring the affirmative vote of our shareholders and this control may be exercised in a manner that may conflict with the interest of other shareholders. Additionally, because Louisiana law and our articles of incorporation require the affirmative vote of two-thirds of the voting power present to approve certain major transactions such as mergers and any amendments to our articles of incorporation, Mr. Stewart may have the ability to prevent the consummation of such actions, even if they are recommended by our Board of Directors and favored by a substantial majority of our shareholders.
We may be unable to repurchase our 6.25 percent senior notes and our senior convertible notes when required by the holders, or to pay the cash portion of the conversion value upon conversion of our senior convertible notes. In addition, we are subject to counterparty risk on the call options relating to our senior convertible notes.
          Upon a change of control of our company as defined in the relevant indenture, holders of our 6.25 percent senior notes will have the right to require us to repurchase all or any part of their notes for cash at a price equal to 101 percent of the principal amount of the notes repurchased, plus any accrued and unpaid interest. In addition, upon fundamental change events specified in the relevant indenture, holders of our senior convertible notes may require us to purchase for cash all or a portion of their notes at a price equal to 100 percent of the principal amount

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of the notes plus accrued and unpaid interest. Also, upon conversion of our senior convertible notes, we will be required to deliver to the holders a cash payment equal to the lesser of the principal amount of the notes being converted or the conversion value of the notes. As a result, we may be required to pay significant amounts of cash to holders of the senior convertible notes upon conversion. We cannot assure you that we will have sufficient financial resources to make these payments when due. Any inability to make these payments would constitute an event of default under the indentures governing these notes and would also cause cross-defaults under the terms of our other debt agreements.
          Concurrently with the sale of our senior convertible notes, we purchased call options with respect to our Class A common stock from Merrill Lynch International and sold warrants to Merrill Lynch Financial Markets, Inc. The counterparties’ obligations to us under the call options and warrants are guaranteed by Merrill Lynch & Co., Inc. By simultaneously purchasing the call options and selling the warrants, we have effectively increased the conversion premium on the senior convertible notes to 55-65 percent above the market price of the Class A common stock at the time of the offering. The call options are expected to offset our exposure to dilution from conversion of the senior convertible notes because any shares we would be obligated to deliver to holders upon conversion would be delivered to us by the counterparty to the call options. This obligation is dependent upon the financial viability of the counterparty and guarantor. With the uncertainty in the United States financial markets, there are risks that the counterparty and guarantor may not remain financially viable or may seek bankruptcy protection. If the counterparty and guarantor are relieved of or cannot perform this obligation, then at the time of conversion, we may be required to issue additional shares based upon the initial conversion price of the notes and cause further dilution to our shareholders.
The call options we purchased and the warrants we sold contemporaneously with the sale of our senior convertible notes may affect the trading price of our Class A common stock and the value of the senior convertible notes.
          The counterparties to the call options we purchased and the warrants we sold may engage in hedging activities and modify their hedge positions from time to time prior to the conversion or maturity of our senior convertible notes, and particularly around the time of any conversion of the notes. These hedging activities may include purchasing and selling shares of our Class A common stock, or other of our securities, or other instruments, including over-the-counter derivative instruments. The effect, if any, of these activities on the trading price of our Class A common stock or the senior convertible notes will depend in part on market conditions at the time and cannot be reasonably predicted at this time. Any of these activities could adversely affect the trading price of our Class A common stock and the value of the senior convertible notes. For additional information about the call options we purchased and the warrants we sold, see Note 15 to our consolidated financial statements included in Item 8.
Exercise of the outstanding warrants could dilute the ownership interests of our existing stockholders.
          Concurrently with the sale of our senior convertible notes, we sold warrants expiring in 2014 to purchase approximately 11.3 million shares of Class A common stock at $12.93 per share and warrants expiring in 2016 to purchase approximately 11.3 million shares of Class A common stock at $13.76 per share. The warrants expiring in 2014 may not be exercised prior to the maturity of the senior convertible notes due in 2014, and the warrants expiring in 2016 may not be exercised prior to the maturity of the senior convertible notes due in 2016. The warrants may be settled in cash at our election. Exercise of the warrants could dilute the ownership interests of our existing stockholders. For additional information, see Note 15 to our consolidated financial statements included in Item 8.
The accounting method for our senior convertible notes will change beginning in fiscal year 2010 and will substantially increase our reported interest expense relating to the senior convertible notes.
          In May 2008, the final version of Financial Accounting Standards Board (“FASB”) Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”), was issued, and the new accounting rules will be effective for us beginning November 1, 2009 and must be applied retrospectively to all periods presented. FSP No. APB 14-1 clarifies that: (1) convertible debt instruments that may be settled in cash upon conversion, including partial cash

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settlement, are not considered debt instruments within the scope of APB Opinion No. 14, “Accounting for Convertible Debt and Debt Issued with Stock Purchase Warrants” (“APB No. 14”), and (2) issuers of such instruments should separately account for the liability and equity components of those instruments by allocating the proceeds from issuance of the instrument between the liability component and the embedded conversion option (i.e., the equity component). This allocation is done by first determining the carrying amount of the liability component based on the fair value of a similar liability excluding the embedded conversion option, and then allocating to the embedded conversion option the excess of the initial proceeds ascribed to the convertible debt instrument over the amount allocated to the liability component. That excess is reported as a debt discount and subsequently amortized as interest cost over the instrument’s expected life using the interest method. Thus, the new accounting rules will substantially increase our reported interest expense relating to the senior convertible notes which are currently accounted for under APB No. 14 and will have an adverse effect on our reported earnings, which could be material. However, the new accounting rules will have no impact on cash flows.
Increases in interest rates would increase interest costs on our variable-rate long-term debt and could have a material adverse effect on our net income and earnings per share.
          We have no variable-rate long-term debt agreements besides our senior secured credit facility. Although we have no amounts currently drawn under the credit facility, any amounts borrowed in the future are subject to variable interest rates. Any significant increase in interest rates could increase our interest costs on our variable-rate long-term debt or indebtedness incurred in the future, which could decrease our net income and earnings per share materially.
Our ability to maintain compliance with our covenants under our senior secured credit facility and 6.25 percent senior notes is dependent upon many factors. Covenant restrictions may also limit our ability to operate our business.
          Our senior secured credit facility and the indenture governing the 6.25 percent senior notes contain, among other things, covenants that restrict our and our subsidiaries’ activities. Our senior secured credit facility limits, among other things, our and the guarantors’ ability to: borrow money; pay dividends or distributions; purchase or redeem stock; make investments; engage in transactions with affiliates; engage in sale and leaseback transactions; consummate specified asset sales; effect a consolidation or merger or sell, transfer, lease, or otherwise dispose of all or substantially all of our assets; and create liens on our assets. In addition, our senior secured credit facility contains specific limits on capital expenditures. Furthermore, our senior secured credit facility requires us to maintain specified financial ratios and satisfy periodic financial condition tests. The indenture governing the 6.25 percent senior notes restricts our and the guarantors’ ability to create liens on assets, enter into sale and leaseback transactions and merge or consolidate with other companies. Our and our subsidiaries’ future indebtedness may contain similar or even more restrictive covenants. See Note 15 to the consolidated financial statements included in Item 8 for additional information on our debt covenants.
          These covenants may require that we take action to reduce our debt or to act in a manner contrary to our business objectives. In addition, events beyond our control, including changes in general economic and business conditions, may affect our ability to satisfy these covenants. We might not meet those covenants, and the lenders might not waive any failure to meet those covenants. A breach of any of those covenants could result in a default under such indebtedness. If an event of default under our senior secured credit facility occurs, the lenders could elect to declare all amounts outstanding thereunder, together with accrued interest, to be immediately due and payable. Any such declaration would also result in an event of default under the indenture governing the 6.25 percent senior notes. For additional information, see “Liquidity and Capital Resources” included in Item 7.
The payment of dividends on our common stock in the future is subject to uncertainties.
          The declaration of dividends on our common stock in the future is subject to the discretion of our Board of Directors each quarter after its review of our financial performance. Our ability to pay dividends is restricted under our senior credit facility. See Note 15 to the consolidated financial statements included in Item 8.
Unanticipated litigation or negative developments in pending litigation could have a material adverse effect on our financial statements.

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          We are a defendant in the litigation described in Note 20 to the consolidated financial statements included in Item 8 and other litigation in the ordinary course of business. The outcome of litigation and investigations is inherently uncertain and adverse developments or outcomes can result in significant monetary damages, penalties or injunctive relief against us.
We may not be able to consummate significant acquisitions of or investments in death care or related businesses successfully.
          Although we have not made any significant acquisitions in recent years, we may in the future. Also, our “Innovation” initiative calls for us to seek to generate new tangential growth opportunities but not tied to the growth of our base business. Any such acquisitions and investments have risks. We may fail to identify suitable candidates, and even if we do, we may not be able to successfully complete the transaction or integrate the new business into our existing business. We may not be able to find businesses for sale at prices we are willing to pay. Acquisition activity, if any, will also depend on our ability to enter new markets. Due in part to our lack of experience operating or investing in new areas and to the presence of competitors who have been in certain markets longer than we have, such acquisitions or investments may be more difficult or expensive than we anticipate.
The application of generally accepted accounting principles to our business is complex, and we have had significant changes in the application of generally accepted accounting principles to our business. No assurances can be given that we will not face similar issues in the future.
          Our industry is unusual because we often sell products and services many years prior to the time they are required to be delivered, and we are required by varying state laws to hold customer funds related to these sales in trust until the products and services are delivered. The accounting for these unusual features is complex, and in recent years there have been periodic changes in the application of generally accepted accounting principles to our business. Some of these changes have made it difficult to compare results from one period to the next. Such changes have also increased our administrative costs. We can give no assurances that we will not face similar issues in the future.
Risks Related to the Death Care Industry
Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term, and reliable statistics on deaths in particular markets can be difficult to obtain.
          Declines in the number of deaths could cause at-need sales of funeral and cemetery services, property and merchandise to decline and could cause a decline in the number of preneed sales being delivered, both of which could decrease revenues. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase by approximately 1 percent per year from 2000 to 2010, longer lifespans could reduce the rate of deaths. Changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. However, generally the number of deaths fluctuates with the seasons with more deaths occurring during the winter months primarily resulting from pneumonia and influenza. These variations can cause revenues to fluctuate.
          Our comparisons of the change in the number of families served to the change in the number of deaths reported by the Centers for Disease Control and Prevention (“CDC”) from time to time may not necessarily be meaningful. The CDC receives weekly mortality reports from 122 cities and metropolitan areas in the United States within two to three weeks from the date of death and reports the total number of deaths occurring in these areas each week based on the reports received from state health departments. The comparability of our funeral calls to the CDC data is limited, as reports from the state health departments are often delayed, and the 122 cities reporting to the CDC are not necessarily comparable with the markets in which we operate.
We have experienced an increase in the proportion of lower-priced, non-traditional funeral services and direct cremations, which we believe is part of the continuing national trend toward increased cremation.

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          Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has steadily increased and that cremations will represent approximately 39 percent of deaths in the United States by the year 2010, compared to 34 percent in 2006. In fiscal years 2006, 2007 and 2008, 39 percent, 39 percent and 40 percent, respectively, of the funeral services we performed in our continuing operations were cremations, and 56 percent of those were direct cremations. A full service cremation, which includes a funeral service, a casket and memorialization of the remains in a mausoleum or columbarium niche or a burial of the remains, can result in funeral and cemetery revenue and profit margins similar to those of traditional funeral services and burials, although the cemetery property sale revenue would generally be lower. In contrast, a basic or direct cremation, with no funeral service or casket and no memorialization of the remains, produces no revenues for cemetery operations and lower revenues and profit margins for funeral operations when delivered through a traditional funeral home. During fiscal years 2006, 2007 and 2008, we experienced a reduction in the proportion of full service traditional funeral services and cremations and an increase in the proportion of lower-priced, non-traditional funeral services and direct cremations. A continuation of this trend would adversely affect the revenues and gross profits of our funeral and cemetery businesses. To address this trend, we have been intensifying our efforts to market full service funerals and cremations. In addition, the increasing trend towards cremations in the United States could cause us to lose market share to firms specializing in cremations.
Because the funeral and cemetery businesses are high fixed-cost businesses, positive or negative changes in revenue can have a disproportionately large effect on cash flow and profits.
          Funeral homes and cemetery businesses must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues.
Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.
          The death care industry is subject to extensive regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the FTC, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales including our preneed trust activities. Embalming facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations.
          In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, federal, state, Puerto Rican and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. Several jurisdictions and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, impose or increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations, our cash flows and our future prospects.
Item 1B. Unresolved Staff Comments
          None.

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Item 2. Properties
          The following table shows the number of funeral homes and cemeteries we operated in each of our geographic operating segments as of October 31, 2008:
                     
    Number of        
    Funeral   Number of    
Operating Segment   Homes   Cemeteries   Geographic Areas
 
                   
Western Division — Funeral
    115             Alabama, Arkansas, California, Illinois, Kansas, Louisiana, Mississippi, Missouri, Nebraska, Oregon, Texas, Washington
 
                   
Western Division — Cemetery
            47     Alabama, Arkansas, California, Kansas, Louisiana, Mississippi, Missouri, Nebraska, Oregon, Texas, Washington, Wisconsin
 
                   
Eastern Division — Funeral
    106             Alabama, Florida, Georgia, Maryland, North Carolina, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia and Puerto Rico
 
                   
Eastern Division — Cemetery
            92     Alabama, Florida, Georgia, Kentucky, Maryland, North Carolina, Ohio, Pennsylvania, South Carolina, Tennessee, Virginia, West Virginia and Puerto Rico
 
                   
 
    221       139      
 
                   
          As of October 31, 2008, approximately 77 percent of our 221 funeral home locations were owned by our subsidiaries, and approximately 23 percent were held under operating leases. The leases have terms ranging from one to 14 years, except for one lease that expires in 2032 and six leases with the Archdiocese of Los Angeles that expire in 2039. An aggregate of $0.1 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, 2008, we owned 139 cemeteries covering a total of approximately 9,908 acres. Although approximately 38 percent of the total acreage is available for future development, life spans of our cemeteries can be extended through the mix of cemetery development such as through the construction of mausoleums, niche spaces and other cremation products.
          We own a 98,200 square-foot building in suburban New Orleans that we use for our corporate headquarters, shared services center, human resources, communications, internal audit and information systems departments.
Item 3. Legal Proceedings
          For a discussion of our current litigation, see Note 20 to the consolidated financial statements included in Item 8.
          In addition to the matters described in Note 20, we and certain of our subsidiaries are parties to a number of other legal proceedings that have arisen in the ordinary course of business. While the outcome of these proceedings cannot be predicted with certainty, we do not expect these matters to have a material effect on our consolidated financial position, results of operations or cash flows.
          We carry insurance with coverages and coverage limits that we believe to be adequate. Although there can

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be no assurance that such insurance is sufficient to protect us against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.
Item 4. Submission of Matters to a Vote of Security Holders
               None.
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.
             
Name   Age   Position
 
           
Thomas J. Crawford
    55     President, Chief Executive Officer and Director(1)
 
           
Thomas M. Kitchen
    61     Senior Executive Vice President, Chief Financial Officer and Director(2)
 
           
Brent F. Heffron
    59     Executive Vice President and President—Eastern Division(3)
 
           
Lawrence B. Hawkins
    60     Executive Vice President and President—Investors Trust, Inc.
 
           
G. Kenneth Stephens, Jr.
    47     Executive Vice President and President—Western Division(4)
 
           
Lewis J. Derbes, Jr.
    37     Senior Vice President of Finance(5)
 
           
Kenneth G. Myers, Jr.
    51     Senior Vice President of Operations(6)
 
           
Larry Merington
    54     Senior Vice President of Sales and Marketing(7)
 
           
Martin de Laurèal
    57     Senior Vice President of Corporate Development and Investor Relations(8)
 
           
Lisa T. Winningkoff
    41     Vice President and Senior Administrative Officer(9)
 
           
Angela M. Lacour
    36     Vice President, Corporate Controller and Chief Accounting Officer(10)
 
(1)   Mr. Crawford has served as our President, Chief Executive Officer and a Director since March 31, 2007. Prior to that, he served on behalf of Sorenson Capital Partners, a private equity group, as Chief Executive Officer of Erickson Companies, a regional residential framing company with manufacturing operations in Arizona, California and Nevada. From 2003 to 2004, he was a Senior Consultant to Carew, International, a sales process consulting and training company. He was Chairman, Chief Executive Officer and President of publicly-traded The York Group, Inc., one of the largest casket manufacturers in the United States, from 2000 until its merger with Matthews International Corporation in 2002. From 1997 to 1999, he was Executive Vice President of Sales and Marketing of Lozier Corporation, a manufacturer of retail display fixtures and systems. From 1979 to 1997, he served in various positions with the Batesville Casket Company, a leading manufacturer and supplier of caskets, including Vice President and General Manager — Hardwood Products Group, Vice President of New Business Development, Vice President of Marketing and Vice President of Logistics. Additionally, he held the positions of Director of Corporate Development for both the Batesville Casket Company and its parent company, Hillenbrand Industries.
 
(2)   Mr. Kitchen has served as Senior Executive Vice President since March 31, 2007 and as Chief Financial Officer since December 2, 2004. He has also served as a director since February 18, 2004. From June 30,

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    2006 until Mr. Crawford’s appointment as President and Chief Executive Officer on March 31, 2007, Mr. Kitchen served as acting Chief Executive Officer. From July 2003 until he became our Chief Financial Officer, he served as an investment management consultant with Equitas Capital Advisors, LLC. From 1987 to 1999, he was Chief Financial Officer of Avondale Industries, Inc., a publicly-traded company engaged in the design, construction, system integration and repair of large, complex ships for commercial and government customers. He served as President of Avondale from 1999 to 2002, after Avondale’s acquisition by Litton Industries, which was subsequently acquired by Northrop Grumman Corporation.
 
(3)   Mr. Heffron has served as Executive Vice President and President of our Eastern Division since July 14, 2005. From November 1, 1998 to July 13, 2005, he served as Executive Vice President and President of our Southern Division.
 
(4)   Mr. Stephens has served as Executive Vice President and President of our Western Division since July 14, 2005. From January 31, 2000 to July 13, 2005, he served as Senior Vice President and President of our Eastern Division. From January 1, 1997 to January 30, 2000, he served as Chief Operating Officer of the Southern Region of our Eastern Division.
 
(5)   On July 1, 2008, Mr. Derbes was appointed Senior Vice President of Finance, and continues his positions as Secretary and Treasurer. Prior to that time, he served as Vice President, Secretary and Treasurer of the Company since May 2005. Prior to joining the Company, Mr. Derbes served as Chief Financial Officer of Conrad Industries, a publicly-traded company engaged in the construction and repair of government and commercial marine vessels, from 2002 through 2004 and as Operations Manager of Kirschman’s LLC, a furniture retailer, from late 2004 until joining the Company.
 
(6)   On June 26, 2008, Mr. Myers was appointed Senior Vice President of Operations. Prior to that time, he served as Senior Vice President of Finance of the Company since February 20, 2006. He has also served as a consultant to the Company from February 2005 to February 2006. From July 2004 through February 2006, he provided consulting services specializing in Sarbanes-Oxley compliance. From 2001 to 2004, he was the Chief Executive Officer, President and Director of Conrad Industries, a publicly-traded company engaged in the construction and repair of government and commercial marine vessels. From 1992 to 2001, he served as Vice President of Avondale Industries, Inc., a publicly-traded company engaged in the design, construction, system integration and repair of large, complex ships for commercial and government customers, which was subsequently acquired by Northrop Grumman Corporation.
 
(7)   Mr. Merington was appointed Senior Vice President of Sales and Marketing on September 17, 2007. From 2005 to 2007, he was the Chief Operating Officer of Ace Bayou, a furniture and pet products corporation in Kenner, Louisiana. From 2003 to 2005, Mr. Merington was the Vice President of Business Development at New York Environmental Services, a medical waste company. After the terrorist attack on the United States on September 11, 2001, he was called to active duty for one year as a commander in the United States Air Force in Afghanistan. From 1996-2001, he served in various senior management roles at Browning-Ferris Industries before becoming president of its Gas Services Division.
 
(8)   On November 1, 2007, Mr. de Laurèal was appointed Senior Vice President of Corporate Development and Investor Relations. He joined the Company in 1977 and has held numerous management positions, including serving as Vice President of Corporate Development in the 1990s.
 
(9)   Since December 2005, Ms. Winningkoff has served as Vice President and Senior Administrative Officer. From December 2004 to December 2005, she served as the Company’s Compensation and Benefits Director. From July 2002 through December 2004, she served as the Director of Compliance. She joined the Company in June 1991 and held several financial and accounting positions, including Assistant Treasurer and Director of Financial Reporting.
 
(10)   On July 10, 2006, Ms. Lacour was appointed Vice President, Corporate Controller and Chief Accounting Officer. She joined the Company in February 1997, and has served in a variety of financial and accounting positions including Director of Financial Reporting and, most recently, as Assistant Corporate Controller since March 2001. Prior to joining the Company, Ms. Lacour was an auditor with KPMG LLP for four years.

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PART II
Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities
Market Information
          Our Class A common stock trades on the NASDAQ Global Select Market under the symbol STEI. On November 28, 2008, the closing sale price as reported by the NASDAQ Stock Market was $3.19. The following table sets forth, for the periods indicated, the range of high and low sale prices, as reported by the NASDAQ Stock Market. As of November 30, 2008, there were 1,020 record holders of our Class A common stock. Record holders include persons holding Class A common stock on behalf of one or more beneficial owners who are not holders of record.
                 
    High   Low
Fiscal Year 2008
               
Fourth Quarter
  $ 10.00     $ 4.07  
Third Quarter
    9.46       6.61  
Second Quarter
    7.20       5.37  
First Quarter
    9.08       6.82  
 
               
Fiscal Year 2007
               
Fourth Quarter
  $ 9.13     $ 6.25  
Third Quarter
    8.43       6.79  
Second Quarter
    8.50       7.05  
First Quarter
    7.18       5.88  
          There is no established public trading market for our Class B common stock. As of October 31, 2008, our Chairman, Frank B. Stewart, Jr., was the record holder of all of our shares of Class B common stock. Our Class A and Class B common stock are substantially identical, except that holders of Class A common stock are entitled to one vote per share, and holders of Class B common stock are entitled to ten votes per share. Each share of Class B common stock is automatically converted into one share of Class A common stock upon transfer to persons other than certain affiliates of Frank B. Stewart, Jr. As of October 31, 2008, by virtue of his beneficial ownership of outstanding Class A and Class B common shares, Mr. Stewart controlled approximately 34 percent of our total voting power and held approximately 12 percent of our outstanding equity.
Dividends
          The Company has paid a quarterly cash dividend of two and one-half cents per share for its Class A and Class B common stock since April 2005. Although we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. Our ability to pay dividends is subject to restrictions contained in our senior secured credit facility. See Note 15 to the consolidated financial statements included in Item 8.
Equity Plan Information
          For information regarding compensation plans under which equity securities of the Company are authorized for issuance, see Part III, Item 12.
Purchases of Equity Securities by the Issuer and Affiliated Purchasers
          As indicated by the table below, there were no purchases made by or on behalf of us, or of any “affiliated purchaser” as defined in SEC rules, of our equity securities registered pursuant to Section 12 of the Exchange Act, during the fourth quarter of fiscal year 2008.

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Issuer Purchases of Equity Securities
                                 
                    Total number of     Maximum approximate  
                    shares purchased as     dollar value of shares  
    Total number             part of publicly     that may yet be  
    of shares     Average price paid     announced     purchased under the  
Period   purchased     per share     plans or programs(1)     plans or programs  
August 1, 2008 through August 31, 2008
        $           $  
 
                               
September 1, 2008 through September 30, 2008
        $           $  
 
                               
October 1, 2008 through October 31, 2008
        $           $  
 
                       
Total
        $           $  
 
                       
 
(1)   On September 19, 2007, we announced that our Board of Directors had authorized a new $25.0 million stock repurchase program. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. On December 20, 2007, we announced a $25.0 million increase in this program. On June 19, 2008, we announced an additional $25.0 million increase to the program, which increased the program to $75.0 million. As of October 31, 2008, we had repurchased 6.6 million shares for $48.4 million at an average price of $7.32 per share and have $26.6 million remaining available under this program.
Item 6. Selected Financial Data
Reclassifications
          The following selected consolidated financial data for the fiscal years ended October 31, 2006 through October 31, 2008 are derived from our audited consolidated financial statements included in Item 8. The data for fiscal years 2004 and 2005 have been reclassified to reflect certain businesses as discontinued operations under the provisions of Statement of Financial Accounting Standards (“SFAS”) No. 144, “Accounting for the Impairment or Disposal of Long-Lived Assets” (“SFAS No. 144”), as discussed in footnote 1 to the table below. 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.
Comparability of Information in Selected Consolidated Financial Data Table
          As discussed in more detail in the footnotes to the table below and in the related footnotes to the consolidated financial statements included in Item 8, the following are the main factors that materially affect the comparability of the revenues, gross profits and assets reflected in the selected financial data:
    In fiscal year 2005, we changed our method of accounting for preneed selling costs.
 
    In fiscal year 2006, we adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”).
 
    In fiscal year 2008, we adopted FASB Interpretation No. 48, “Accounting for the Uncertainty in Income Taxes-an Interpretation of FASB Statement No. 109” (“FIN 48”).
 
    All businesses sold in fiscal years 2004 through 2007 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented.

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Selected Consolidated Financial Data
(Dollars in thousands, except per share amounts)
                                         
    Year Ended October 31,(1)  
    2008     2007     2006     2005     2004  
Statement of Earnings Data:
                                       
Total revenues
  $ 527,883     $ 522,817     $ 514,230     $ 488,909     $ 489,626  
Total gross profit
    100,817       112,430       114,613       101,479       114,349  
 
                                       
Earnings (loss) from continuing operations
  $ (3,693 )   $ 39,314     $ 37,580     $ 8,303     $ 30,575  
Earnings from discontinued operations
          499       13       1,551       6,117  
Cumulative effect of change in accounting principle (net of $101,061 income tax benefit in 2005)
                      (153,180 ) (1)      
 
                             
Net earnings (loss)
  $ (3,693 ) (2)(3)(5)(7)   $ 39,813 (4)(5)(6)(7)   $ 37,593 (5)(6)(7)   $ (143,326 ) (5)(6)(7)(8)   $ 36,692 (6)(7)
 
                             
 
                                       
Per Share Data:
                                       
Basic earnings (loss) per common share:
                                       
Earnings (loss) from continuing operations before cumulative effect of change in accounting principle
  $ (.04 )   $ .38     $ .35     $ .08     $ .28  
Earnings from discontinued operations
          .01             .01       .06  
Cumulative effect of change in accounting principle
                      (1.40 )      
 
                             
Net earnings (loss)
  $ (.04 ) (2)(3)(5)(7)   $ .39 (4)(5)(6)(7)   $ .35 (5)(6)(7)   $ (1.31 ) (1)(5)(6)(7)(8)   $ .34 (6)(7)
 
                             
Diluted earnings (loss) per common share:
                                       
Earnings (loss) from continuing operations before cumulative effect of change in accounting principle
  $ (.04 )   $ .38     $ .35     $ .08     $ .28  
Earnings from discontinued operations
          .01             .01       .06  
Cumulative effect of change in accounting principle
                      (1.40 )      
 
                             
Net earnings (loss)
  $ (.04 ) (2)(3)(5)(7)   $ .39 (4)(5)(6)(7)   $ .35 (5)(6)(7)   $ (1.31 ) (1)(5)(6)(7)(8)   $ .34 (6)(7)
 
                             
Dividends declared per common share
  $ .10     $ .10     $ .10     $ .075     $  
 
                             
         
    Year Ended  
    October 31, 2004(9)  
Pro forma amounts assuming 2005 change in accounting principle for preneed selling costs was applied retroactively:
       
Net earnings
  $ 30,739  
 
     
Basic earnings per common share
  $ .28  
 
     
Diluted earnings per common share
  $ .28  
 
     
                                         
    October 31,
    2008   2007   2006   2005   2004
Balance Sheet Data :
                                       
Assets
  $ 2,104,515     $ 2,438,974     $ 2,380,577     $ 2,335,609     $ 2,511,508  
Long-term debt, less current maturities
    450,095       450,115       374,020       406,859       415,080  
Shareholders’ equity
    365,637 (10)     423,318       446,893       439,453       587,978  

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Selected Consolidated Operating Data
                                         
    Year Ended October 31,  
    2008     2007     2006     2005     2004  
Operating Data:
                                       
 
                                       
Funeral homes in operation at end of period
    221       221       229       231       242  
 
                                       
At-need funerals performed
    37,589       38,072       38,937       39,264       42,542  
Prearranged funerals performed
    21,436       21,275       21,799       22,076       23,891  
 
                             
 
                                       
Total funerals performed
    59,025       59,347       60,736       61,340       66,433  
 
                                       
Prearranged funerals sold
    28,390       29,953       30,738       28,967       29,296  
Backlog of prearranged funerals at end of period
    329,085 (11)     329,617       333,592       326,672       337,879  
 
                                       
Cemeteries in operation at end of period
    139       139       143       144       147  
Interments performed
    47,953       49,283       52,255       52,436       53,149  
 
(1)   Effective November 1, 2004, we changed our method of accounting for selling costs incurred related to new preneed funeral and cemetery service and merchandise sales to expense them as incurred, which resulted in a $254.2 million ($153.2 million after tax, or $1.40 per diluted share) charge for the cumulative effect of the change in accounting principle.
 
    Effective November 1, 2005, we implemented SFAS No. 123R, using the modified prospective application transition method. Our financial statements were not retrospectively adjusted to reflect this implementation. Accordingly, the implementation of SFAS No. 123R is reflected in our fiscal year 2008, 2007 and 2006 financial statements but not in our financial statements for fiscal years 2005 and 2004.
 
    Effective November 1, 2007, we implemented FIN 48 and recognized a $1.0 million charge to the November 1, 2007 accumulated deficit balance. For additional information, see Notes 3 and 18 to the consolidated financial statements included in Item 8.
 
    All businesses sold in fiscal years 2004 through 2007 that met the criteria for discontinued operations under SFAS No. 144 have been classified as discontinued operations for all periods presented. The operating data presented represents activity related to our total operations for the respective year.
 
(2)   In the fourth quarter of fiscal year 2008, we recorded a charge for goodwill impairment of $26.0 million. For additional information, see Note 13 to the consolidated financial statements included in Item 8.
 
(3)   In the fourth quarter of fiscal year 2008, we recorded a $13.3 million charge related to our estimated probable obligation to fund the cemetery perpetual care trust investment losses. For additional information, see Note 6 to the consolidated financial statements included in Item 8. In the fourth quarter of fiscal year 2008, we also recorded a $7.4 million tax valuation allowance as a result of realized trust investment losses, as described in Note 18 to the consolidated financial statements included in Item 8.
 
(4)   In the third quarter of fiscal year 2007, we recorded a charge for the loss on early extinguishment of debt of $0.7 million as a result of our senior convertible debt transaction. For additional information, see Note 15 to the consolidated financial statements included in Item 8.
 
(5)   In fiscal year 2008, we recorded ($1.2) million in net expenses related to Hurricane Ike, which struck the Texas Gulf Coast area in September 2008. In fiscal year 2006, we recorded $3.2 million in business interruption insurance proceeds in funeral and cemetery revenue related to Hurricane Katrina, which struck the New Orleans metropolitan area and Mississippi and Alabama Gulf Coasts on August 29, 2005. In fiscal years 2008, 2007, 2006 and 2005, we also recorded ($1.1) million, ($2.5) million, $1.6 million and ($9.4) million, respectively, in net recoveries (expenses) related to Hurricane Katrina. See Note 23 to the consolidated financial statements included in Item 8.

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(6)   During fiscal years 2007 and 2006, we recorded $0.6 million and $1.0 million, respectively, in separation charges related to separation pay of former executive officers and additional reorganization costs for the 2005 restructuring of the divisions. During the fourth quarter of 2005, we restructured our operating divisions and incurred $1.5 million in related severance charges. During fiscal year 2004, we incurred $3.4 million in separation charges related to severance and other costs associated with workforce reductions announced in December 2003 and related to separation pay for former executive officers. See Note 14 to the consolidated financial statements included in Item 8.
 
(7)   In fiscal year 2004, we recorded gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations and $2.4 million in discontinued operations. In fiscal year 2005, we recorded gains on dispositions, net of impairment losses, of $1.3 million in continuing operations and $1.1 million in discontinued operations. In fiscal year 2006, we recorded gains on dispositions, net of impairment losses, of ($0.2) million in continuing operations and ($0.2) million in discontinued operations. In fiscal year 2007, we recorded gains on dispositions, net of impairment losses, of $0.6 million in discontinued operations. In fiscal year 2008, we recorded gains on dispositions, net of impairment losses, of ($0.4) million in continuing operations.
 
(8)   In the first quarter of fiscal year 2005, we completed the refinancing of our senior secured credit facility and recorded a charge for early extinguishment of debt of $2.7 million to write off fees associated with the previous credit facility. In the second quarter of fiscal year 2005, we completed the private offering of our 6.25 percent senior notes and recorded a charge for early extinguishment of debt of $30.0 million representing the bond tender premium, related fees and expenses and the write-off of unamortized fees related to our 10.75 percent senior subordinated notes. In the third quarter of fiscal year 2005, we recorded a charge for early extinguishment of debt of $0.1 million representing the call premium and write-off of remaining unamortized fees on the 10.75 percent senior subordinated notes.
 
(9)   The pro forma data presented for fiscal year 2004 is reported as if the fiscal year 2005 change in accounting principle had occurred at the beginning of fiscal year 2004.
 
(10)   The decline in shareholders’ equity from October 31, 2007 to October 31, 2008 was primarily due to stock repurchases made under our current stock repurchase program which amounted to $48.6 million during fiscal year 2008, along with a net loss of $3.7 million for fiscal year 2008.
 
(11)   Our backlog of preneed funerals is comprised of trust-funded contracts and insurance-funded contracts. As described in Note 2(i) to the consolidated financial statements included in Item 8, insurance-funded preneed funeral contracts are not reflected in our consolidated balance sheets. As of October 31, 2008, our preneed funeral backlog is comprised of 197,837 preneed funeral trust-funded contracts and 131,248 insurance-funded preneed funeral contracts.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Overview
          We are the second largest provider of funeral and cemetery products and services in the death care industry in the United States. As of October 31, 2008, we owned and operated 221 funeral homes and 139 cemeteries in 24 states within the United States and Puerto Rico. We sell cemetery property and funeral and cemetery products and services both at the time of need and on a preneed basis. Our revenues in each period are derived primarily from at-need sales, preneed sales delivered out of our backlog during the period (including the accumulated trust earnings or build-up in the face value of insurance contracts related to these preneed deliveries), preneed cemetery property sales and other items such as perpetual care trust earnings, finance charges and trust management fees. We also earn commissions on the sale of insurance-funded preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers when we act as an agent on the sale.

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Recent Events
          For the fiscal year ended October 31, 2008, we increased our consolidated revenues $5.1 million from $522.8 million in fiscal year 2007 to $527.9 million in fiscal year 2008, primarily due to a $7.3 million increase in funeral revenue, partially offset by a $2.2 million decrease in cemetery revenue. The increase in funeral revenue is primarily due to a 3.0 percent increase in same-store average revenue per funeral service, including trust earnings, while the number of our same-store funeral services remained flat. The decrease in cemetery revenue is primarily due to a decrease in cemetery property sales, net of discounts; however, we are currently promoting various incentive programs to stimulate cemetery property sales in the future. Our cash flow from operations remained strong at $84.5 million for the year ended October 31, 2008. We had $72.6 million in cash on hand at October 31, 2008, and no significant scheduled principal payments on our long-term debt until 2013, although our revolving credit facility matures in November 2009, as discussed below.
          During our 2008 fiscal year, and particularly during our fourth fiscal quarter, the United States and global economies experienced significant declines. For example, from November 1, 2007 to October 31, 2008, the S&P 500 Index declined 37.5 percent from 1,549.38 to 968.75, and during our fourth fiscal quarter, the S&P 500 Index declined 23.6 percent from 1,267.38 to 968.75. The S&P 500 Index closed at 873.59 on December 11, 2008. Among other events, during our fourth fiscal quarter of 2008, investment bank Lehman Brothers Holdings, Inc. declared bankruptcy and several financial institutions failed, including Washington Mutual, Inc., the largest bank failure in American history. The United States federal government has provided financing to and invested in a number of financial institutions. Our trust accounts held securities issued by some of these companies that have been rendered worthless or practically worthless by these events, and we have treated these losses as realized. Primarily as a result of these developments, the value of our trust assets has declined sharply. During fiscal year 2008, we realized aggregate net losses of $35.1 million in our preneed funeral and cemetery merchandise and services trusts and recorded a $7.4 million tax valuation allowance. In addition, we realized aggregate net losses of $9.7 million in our cemetery perpetual care trusts. We recorded a related charge for the estimated probable funding obligation to restore the net realized losses of $13.3 million in certain of our cemetery perpetual care trusts.
          The magnitude of the market decline in such a short time frame, and the failure of several large financial institutions and the resulting substantial realized losses in our trusts were not anticipated. In addition, the realized losses came at a time when we have limited unrealized gains against which to offset the losses. Typically, realized losses in our funeral and cemetery merchandise and services trusts have no immediate impact on our reported results; however, in the fourth quarter of 2008, the realized losses had an impact on our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts, as described above.
          As a result of significant declines in the United States equity markets during our fiscal year 2008, we experienced similar declines in the fair market value of our trust investment portfolios. At October 31, 2008, the fair market value of our total trust investments was $334.6 million less than our original cost basis of $990.5 million. As of November 30, 2008, the fair market value of our total trust investments was $584.8 million. The preneed contracts we manage are long-term in nature, and we believe that the trust investments have the potential over the long-term to appreciate in value. However, whether they will appreciate and over what time period are unknown. As of October 31, 2008, we had $240.9 million in earnings that have been realized and allocated to contracts that we will recognize when the underlying contracts are performed.
          We anticipate that the decline in the value of our trust investments will have several impacts on our Company in the future. Unless the market values of our trusts increase substantially, we expect to report lower earnings from our trusts. In addition, our trust management fees are based on the fair market value of the assets managed; therefore, we expect to report lower trust management fees. In fiscal year 2008, cemetery perpetual care trust earnings, funeral and cemetery merchandise and services trust earnings and trust management fees comprised 7 percent of our revenue and 36 percent of our gross profit. Based on current market conditions and current realized losses, we believe the decrease in revenue from trust earnings recognized on delivery of preneed services and merchandise, cemetery perpetual care trust earnings and trust management fees for fiscal year 2009 could be as much as $10 million, or approximately 2 percent, of fiscal year 2008 revenue and approximately 10 percent of fiscal year 2008 gross profit. If market conditions deteriorate or we experience additional realized losses, the decrease in revenue could be significantly higher. In addition, we expect to report lower cash flow from operations due to our estimated probable funding obligation to restore the net realized losses of $13.3 million related to our cemetery

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perpetual care trusts and reduced earnings and realized gains that we can withdraw from our trusts. We have recorded an estimated probable obligation to restore the net realized losses in our cemetery perpetual care trusts in states where we have previously recognized and withdrawn capital gains. In addition, we may incur additional realized losses with impacts of the nature of those experienced during our fourth quarter. Our portfolio includes investments in the domestic automotive industry as further described in the section titled “Supplemental Trust Portfolio Information” provided below. For a more detailed discussion of risks related to our trust investments, see Item 1A. “Risk Factors.”
          The further weakened economy in the fourth quarter of fiscal year 2008 has negatively impacted cemetery property sales, particularly in our Eastern division. When we performed our evaluation of goodwill during the fourth quarter of 2008, particularly taking into account the reduction in trust earnings, the estimated probable funding obligation related to the cemetery perpetual care trusts and the overall market performance, a noncash goodwill impairment charge of $26.0 million related to the aggregated Northern and Central regions of the Eastern division cemetery operating segment was required, which eliminated the goodwill in our Eastern division cemetery segment. There were no goodwill impairment charges for the years ended October 31, 2007 and 2006. As of October 31, 2008, we had $247.2 million of goodwill, consisting of $107.4 million of goodwill related to the Western division funeral segment, $91.1 million of goodwill related to the Eastern division funeral segment and $48.7 million of goodwill related to Western division cemetery segment. If current economic conditions worsen, causing decreased revenues and increased costs, or if the current economic conditions result in additional companies in which the trust portfolio is invested in filing for bankruptcy, we may have a triggering event which could result in further goodwill impairment. Cemetery segments tend to be more sensitive to goodwill impairments with heavier reliance on preneed sales which are impacted by changes in customer discretionary income. Accordingly, further economic and market declines would be more likely to result in an impairment of goodwill in our Western division cemetery segment. Currently, the fair values of our funeral segments’ reporting units substantially exceed their book value.
          Current economic conditions have impacted our ability to timely close preneed sales. For fiscal year 2008, preneed cemetery property sales, net of discounts, declined 7.3 percent, which decreases our cemetery revenue. In addition, preneed funeral and cemetery service and merchandise sales decreased 3.0 percent for the fiscal year which does not impact current revenue, but reduces our backlog and could reduce our future revenues. Current economic conditions could also decrease prices at-need customers are willing to pay, but we have not seen this trend occur through fiscal year 2008.
          We have no amounts drawn on our $125.0 million revolving credit facility and no significant scheduled principal payments on our long-term debt until fiscal year 2013. We also are not, and do not expect to be, in breach of any of the covenants in our debt agreements. Our current revolving credit facility matures in November 2009. While we have nothing drawn, as of November 30, 2008, we do have $12.0 million in letters of credit and a $30.8 million bond we are required to maintain to guarantee our obligations related to funds we withdrew in fiscal year 2001 from trusts in Florida. We have entered into discussions with various banks to assess commitment levels, pricing and covenant expectations. Given current credit market conditions, we expect a new revolving facility to be more expensive than our existing facility and have tighter covenants, including potentially more restrictive conditions on when we can pay dividends and repurchase stock. While we expect to replace or renew the credit facility with acceptable terms, if we are unable to negotiate a facility at acceptable terms, we would be required to cover the letters of credit and may be required to cover the Florida bond with existing cash on hand. As of October 31, 2008, we had $72.6 million of cash on hand to cover these funding obligations, but if current economic conditions do not improve and we are unable to secure a new credit facility, we will be required to continue to impose cost and cash savings strategies, which could result in the elimination of the dividend and a reduction in capital expenditures. For additional discussion, see the “Liquidity and Capital Resources” section below and Item 1A. “Risk Factors.”
          As a result of the realized capital losses on investments in some of our preneed funeral and cemetery merchandise and services trusts for which we are the grantor, we recorded a charge to tax expense of $7.4 million related to a tax valuation allowance, which increased our reported tax expense by $7.4 million and will reduce future operating cash flow as these contracts mature. If additional capital losses are realized in trusts for which we are the grantor, we may be required to establish additional valuation allowances unless capital gains are generated in the future, reducing our reported net income and future operating cash flow. For additional information, see Item 1A.

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“Risk Factors”, “Overview of Critical Accounting Policies” and Note 18 to our consolidated financial statements.
General
          Our focus for fiscal year 2008 has been our “Best in Class” initiative, which aims to improve performance at the individual locations by giving all managers the same key metrics by which they can measure their performance and by providing tools to facilitate the sharing of best practices by key metric across the organization. We also seek to strengthen our performance-oriented company culture and to refocus management’s time and attention on improving field operations. The goal of our “Best in Class” initiative is to generate a higher return on assets and to grow profits and cash flow at our existing funeral homes and cemeteries. For additional information, see Item 1. “Business.” As part of “Best in Class”, we are also currently implementing continuous improvement initiatives. During the third quarter of 2008, we formalized a Continuous Improvement department which was formed to coordinate and facilitate the increased focus on the strengthening and streamlining of our processes to eliminate waste and inefficiencies.
          Our results can be affected by the number of deaths in our markets. The number of deaths in the United States is expected to increase at a steady, moderate pace over the long-term; however, the number can fluctuate from market to market and period to period. Although we have experienced a decline in funeral service volume for several years, our funeral service volumes have remained flat from fiscal year 2007 to fiscal year 2008. For additional information, see Item 1. “Business.” We are addressing funeral service volumes through our “Best in Class” initiative and enhanced sales and marketing efforts for both at-need and preneed sales.
          Families have been showing an increasing preference for cremation. This trend has been a significant concern for traditional funeral home and cemetery operators like us because cremations have typically included few, if any, additional products or services other than the cremation itself, and can result in lower revenue and profits than traditional services. For additional information, see Item 1. “Business.” To address this trend, we have increased our efforts to market full service funerals and cremations. Other efforts to increase our funeral and cemetery revenue include our funeral package pricing and our emphasis on personalization and customization. For additional information, see Item 1. “Business.” We are also increasing our focus on expanding the types of death care products and services we offer our customers. For the year ended October 31, 2008, we achieved a 2.7 percent increase in our average revenue per traditional funeral service and a 4.1 percent increase in our average revenue per cremation service.
          In addition, the cost of certain commodities, particularly copper, which represents a large component of the bronze markers sold in our cemetery business, increased significantly for most of our fiscal year, although commodity prices began declining in September of the current fiscal year. In the first quarter of 2008, we were impacted by escalating merchandise and energy costs, and we have taken steps to counter this impact. Some of the costs impacting our business are largely beyond our control. To the extent that we are unable to continue to pass these cost increases on to our customers, they will have a negative impact on our earnings and cash flows.
Financial Summary of Fiscal Year 2008
          For the year ended October 31, 2008, net earnings decreased $43.5 million to a net loss of $3.7 million from net earnings of $39.8 million for fiscal year 2007. Earnings from continuing operations for fiscal year 2008 decreased $43.0 million to a net loss of $3.7 million from net earnings of $39.3 million for the prior year.
          Revenue from continuing operations increased $5.1 million to $527.9 million for the year ended October 31, 2008. Funeral revenue from continuing operations increased $7.3 million from $279.3 million in fiscal year 2007 to $286.6 million in fiscal year 2008. For the year ended October 31, 2008, our same-store funeral operations achieved an increase in average revenue per traditional funeral service of 2.7 percent and an increase in average revenue per cremation service of 4.1 percent due primarily to the continued refinement of new funeral packages and pricing. These increases along with a year-over-year increase in funeral trust earnings resulted in an overall increase in our same-store average revenue per funeral service of 3.0 percent. Our same-store funeral services performed remained flat for fiscal year 2008 compared to fiscal year 2007. Cemetery revenue from continuing operations decreased $2.2 million from $243.5 million for the year ended October 31, 2007 to $241.3 million for the year ended October 31, 2008. This decrease is due primarily to an $8.2 million, or 7.3 percent, decrease in cemetery property

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sales, net of discounts, due to current economic conditions. In addition, we experienced a $3.6 million decrease in construction on various cemetery projects. These decreases were partially offset by a $3.2 million, or 3.5 percent, increase in cemetery merchandise delivered and services performed, a $2.8 million increase in cemetery commission income related to a new program to manage the cemetery sales at eleven Archdiocese of Los Angeles cemeteries and a $2.1 million increase related to the leasing of our mineral rights at one of our cemeteries to an outside third party. Consolidated gross profit decreased $11.6 million to $100.8 million primarily due to a $17.0 million decrease in cemetery gross profit, partially offset by a $5.4 million increase in funeral gross profit. Cemetery gross profit decreased primarily due to the $13.3 million charge recorded in the fourth quarter of 2008 for our estimated probable funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts.
          Corporate general and administrative expenses increased $1.5 million to $32.6 million for fiscal year 2008. We incurred $2.3 million in hurricane related charges in fiscal year 2008 compared to $2.5 million in hurricane related charges for fiscal year 2007. Interest expense for the period decreased $1.0 million to $24.1 million for fiscal year 2008. As a result of the $250.0 million senior convertible note transaction in June 2007, we recorded a $0.7 million charge for the loss on early extinguishment of debt during 2007. Our weighted average diluted shares outstanding decreased to 93.8 million shares for the year ended October 31, 2008 compared to 102.7 million shares for 2007, yielding a positive impact on earnings per share.
          For the year ended October 31, 2008, we had a 5.2 percent decrease in net preneed funeral sales and a 7.3 percent decrease in cemetery property sales, net of discounts, compared to the same period of last year due to current economic conditions.
          Goodwill declined $26.0 million due to an impairment charge recorded during the fourth quarter of fiscal year 2008.
          Income tax expense increased $4.3 million due in part to a $7.4 million valuation allowance recorded on the unrealized capital loss carryforward of $18.8 million, attributable to the write-down of investments of certain trusts and due in part to the fact that $25.0 million of the 2008 goodwill impairment charge was not tax deductible.
          Cash flow provided by operating activities for the year ended October 31, 2008 was $84.5 million compared to $81.9 million for fiscal year 2007 primarily due to an increase in net tax refunds in the current year.
          For the year ended October 31, 2008, we spent $48.4 million under our current stock repurchase program.
Preneed-Backlog, Trust Portfolio and Cash Impact of Sales
Overview
          We believe that preneed funeral and cemetery property sales are two of the primary drivers of sustainable long-term growth in the number of families served by our funeral homes and cemeteries. Our preneed funeral service and merchandise sales and preneed cemetery service and merchandise sales are deferred into our backlog while our preneed cemetery property sales are recognized currently in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”). For a detailed discussion of our revenue recognition policies and how we account for our at-need sales, preneed sales and trust earnings, see Notes 2(i), 2(j), 2(k), and Notes 4 through 7 to the consolidated financial statements included in Item 8.
Backlog
          We estimate that as of October 31, 2008 the future value of our preneed funeral and cemetery services and merchandise backlog represented approximately $1.7 billion of revenue to be recognized in the future as these prepaid products and services are delivered. This is made up of approximately $1.1 billion from trust and $0.6 billion from insurance. This represents the face value of the backlog taking into account current realized earnings not yet recognized and current unrealized gains and losses plus the earnings that are projected on the funds held in trust and the estimated 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 expected to mature over the next 15 years. In addition, the analysis assumes a weighted annual return of 5 percent projected from our trusts over the expected life of the contracts and a 2 percent build-up from the insurance contracts. Actual

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results could differ from our assumptions used in the calculation. Proceeds of these insurance policies may be used by customers for other purposes and are portable to other funeral service providers or for completely separate purposes. As of October 31, 2008, 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 unrealized earnings and losses on the funds held in trust and realized earnings and losses on the funds held in trust not yet recognized as revenue, was approximately $1.5 billion.
Supplemental Trust Portfolio Information
          We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise and services, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. The size of the trusts depends primarily upon the level of preneed sales and maturities, the amount of dividend and interest income and investment gains or losses, and funds added through acquisitions, if any.
          As of October 31, 2008, approximately 10 percent of our portfolio was invested in cash, 20 percent in fixed-income securities, 16 percent in preferred stocks and 43 percent in common stock. Because approximately 43 percent of our total trust portfolio is currently invested in common stock, we would generally expect our portfolio performance to improve if the performance of the overall stock market improves, but we would also expect its performance to deteriorate if the overall stock market declines.
          The following table presents the overall annual realized return in our domestic trusts for the years 1991 to 2008.
                                                                         
1991-1999   2000   2001   2002   2003   2004   2005   2006   2007   2008
8-9%
    5.8 %     6.3 %     4.3 %     4.8 %     2.6 %     4.3 %     5.1 %     4.8 %     (3.3 )%
          The above returns represent interest, dividends and realized capital gains or losses but not unrealized capital gains or losses.
          The table below presents our returns including realized and unrealized gains and losses.
                 
    Funeral and Cemetery    
    Merchandise and    
    Services Trusts   Perpetual Care Trusts
 
               
For the year ended October 31, 2008
    (29.5 )%     (25.9 )%
For the last three years ended October 31, 2008
    (4.9 )%     (4.4 )%
For the last five years ended October 31, 2008
    (1.0 )%     (1.0 )%
For the last ten years ended October 31, 2008
    1.6 %     1.4 %
          In our preneed funeral and cemetery merchandise and services trusts, at October 31, 2008, the fair market value of the investments in the trusts was $253.6 million lower than our original cost basis. For additional detail, see Notes 4 and 5 to the consolidated financial statements. In our cemetery perpetual care trusts, at October 31, 2008, the fair market value of our investments was $81.0 million lower than our original cost basis. For additional detail, see Note 6 to the consolidated financial statements.
          Of the unrealized losses at October 31, 2008 of $342.0 million, securities representing unrealized losses totaling $254.8 million were also in a loss position at October 31, 2007, up from $119.5 million at the end of last year. The increase in these losses is partly a result of the dramatic declines in the equity markets in the latter part of fiscal 2008. For each of these securities, we evaluate consensus analyst recommendations, ratings from established ratings agencies and overall market performance. Most of our common stocks are part of the S&P 500 Index, and all preferred stocks and corporate bonds had a rating of “A” or better at the time of purchase. We believe that we have sufficient cash and cash equivalents within the trusts and from cash deposits of future preneed sales and cash received from ordinary income to fund future services and allow us to hold these investments until they recover in value. While the unrealized loss has increased, based on review of the individual securities, we do not believe the loss on these securities should be realized. Of the $254.8 million, approximately 16 percent, or $41.0 million, were

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generated by preferred stock investments and 77 percent, or $196.3 million, were generated by common stock investments. The market value of these securities represents approximately 39 percent of the market value of the securities in our trust portfolio. The preferred stocks are primarily in the financial services sector which has experienced a significant decline in market value due to the current economic crisis. Our Investment Committee, which provides oversight for the trust portfolio management, believed that preferred stocks presented an attractive investment layer in our portfolio as they involved less risk than common equities and often produced returns more similar to and higher than fixed-income securities. The vast majority of these companies were rated “A” or better at the time of purchase by S&P, Moody’s or Fitch, and most continue to pay dividends. Although we cannot predict future stock prices, our management expects that the financial services sector and the S&P 500 will recover and that these stocks may recover along with them. We believe we have the ability and intent to hold these investments for the forecasted recovery period.
          The table below presents the sectors in which our trust portfolio is invested and the percentage of each sector in the total trust portfolio as of October 31, 2008.
                                 
    Funeral and Cemetery        
    Merchandise and     Cemetery Perpetual  
    Services Trusts     Care Trusts  
    Fair Market             Fair Market        
    Value in     Percentage     Value in     Percentage  
Sector   Millions     of Portfolio     Millions     of Portfolio  
 
                               
Financials
  $ 119.5       25 %   $ 69.4       40 %
Cash
    59.9       12 %     16.9       10 %
Information Technology
    55.4       12 %     12.4       7 %
Mutual Funds
    42.2       9 %     6.2       4 %
Consumer Staples
    39.4       8 %     13.8       8 %
Consumer Discretionary
    31.2       6 %     16.8       10 %
Healthcare
    34.2       7 %     9.0       5 %
Government
    25.5       5 %     9.5       6 %
Energy
    22.3       5 %     6.0       3 %
Industrials
    18.8       4 %     6.2       4 %
Telecommunications
    15.3       3 %     4.6       3 %
Utilities
    4.6       1 %     0.3        
Materials
    5.4       1 %     1.0        
Mortgage Securities
    0.2             0.1        
Miscellaneous
    9.8       2 %            
 
                           
Total
  $ 483.7             $ 172.2          
 
                           
          Investments in the financials sector represented 25 percent, or $119.5 million of fair market value, of our preneed funeral and cemetery merchandise and services portfolios and 40 percent, or $69.4 million, of our cemetery perpetual care portfolio as of October 31, 2008. This sector has unrealized losses of $80.4 million as of October 31, 2008 in our preneed funeral and cemetery merchandise and services trusts, $30.4 million of which relate to preferred stock investments. With respect to our cemetery perpetual care trust portfolio, the financials sector has unrealized losses of $39.2 million as of October 31, 2008, $24.0 million of which relate to preferred stock investments. Risks associated with the financials sector include recent failures of various large financial institutions, government regulation, interest rates, cost of capital funds, credit losses and volatility in financial markets.
          We also have concentrations in other sectors that may be more susceptible to additional adverse impact from the current economic crisis, primarily the information technology sector and the consumer discretionary sector, which includes the United States automotive manufacturers. The information technology sector has unrealized losses of $76.9 million as of October 31, 2008 in our preneed funeral and cemetery merchandise and services trusts and unrealized losses of $17.6 million as of October 31, 2008 in our cemetery perpetual care trusts. The consumer discretionary sector has unrealized losses of $30.6 million as of October 31, 2008 in our preneed funeral and cemetery merchandise and services trusts and unrealized losses of $12.2 million as of October 31, 2008 in our cemetery perpetual care trusts The information technology sector risks include overall economic conditions, short

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product cycles, rapid obsolescence of products, competition and government regulation. The consumer discretionary sector risks include overall economic conditions, interest rates, consumer confidence and disposable income.
          Included in the consumer discretionary sector in our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts are the United States automotive manufacturers such as General Motors, Chrysler and Ford. Currently, General Motors and Chrysler have asked Congress for funds they say are necessary to avert bankruptcy in the near future, and Ford has stated that it may have longer-term liquidity problems. To date, Congress has refused to act to assist the automakers; however, the United States Treasury Department may provide assistance. The table below represents our original cost basis and the fair market value of the automotive manufacturers and the automotive financial arms in our consumer discretionary sector. For additional information on the potential implications of realized losses in Stewart grantor trusts and customer grantor trusts, and in cemetery perpetual care trusts where we withdraw net realized capital gains and those where we do not, see Item 1. “Risk Factors.”
                                         
    Preneed Funeral and              
    Cemetery Merchandise and              
    Services Trust     Perpetual Care Trusts        
                            Perpetual        
    Stewart     Customer     Perpetual     Care        
    Grantor     Grantor     Care with     without        
    Trusts     Trusts     Gains     Gains     Totals  
    (in millions)     (in millions)     (in millions)     (in millions)     (in millions)  
Automotive manufacturers:
                                       
Original cost basis
  $ 2.8     $ 1.8     $ 4.0     $ 4.0     $ 12.6  
Fair market value as of December 9, 2008
  $ 0.4     $ 0.3     $ 0.6     $ 1.4     $ 2.7  
 
                                       
Automotive financial arms:
                                       
Original cost basis
  $ 5.6     $ 3.8     $ 3.8     $ 3.6     $ 16.8  
Fair market value as of December 9, 2008
  $ 1.9     $ 1.1     $ 1.2     $ 1.2     $ 5.4  
 
                             
 
                                       
Totals:
                                       
Original cost basis
  $ 8.4     $ 5.6     $ 7.8     $ 7.6     $ 29.4  
 
                             
Fair market value as of December 9, 2008
  $ 2.3     $ 1.4     $ 1.8     $ 2.6     $ 8.1  
 
                             
          We perform a separate analysis to determine whether our preneed contracts are in a loss position. For additional information, see Note 2(m) to the consolidated financial statements and “Overview of Critical Accounting Policies” herein.
          We generate revenue related to the trusts from investment management fees earned by our subsidiary, ITI. In fiscal year 2008, these fees amounted to $10.0 million. These fees are based on the fair market value of the investments in the funeral and cemetery merchandise and services trust portfolio and cemetery perpetual care trusts, and significant changes in the fair market value of the portfolio impact the fees earned. To the extent the fair market values of our trust assets continue to be less than those values prevailing during 2008, we will recognize less revenue from ITI fees than we earned in 2008 and than we have historically earned.
Impact of Preneed Sales on Near-Term Cash
          The impact of preneed sales on near-term cash flow depends primarily on the commissions paid on the sale, the timing of the tax payments on the sale, the portion of the sale required to be placed into trust and the terms of the particular contracts 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

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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. Commissions related to preneed funeral and preneed cemetery services and merchandise sales are expensed as incurred.
          Cash flows related to earnings in our trusts, deposits and withdrawals and related matters and our cemetery perpetual care funding obligations are described in Notes 4, 5 and 6 of the consolidated financial statements.
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 included in Item 8. We believe that of our significant accounting policies, 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. See Note 2 to the consolidated financial statements included in Item 8.
Deferred Revenue and Revenue Recognition
          Funeral revenue is recognized when funeral services are performed. Our funeral receivables included in current receivables primarily consist of amounts due for funeral services already performed. We sell price-guaranteed prearranged funeral contracts through various programs providing for future funeral services at prices prevailing when the agreements are signed. Revenues associated with sales of prearranged funeral contracts, which include accumulated trust earnings, are deferred until such time that the funeral services are performed. See Note 2(i) to the consolidated financial statements included in Item 8.
          Revenue associated with cemetery merchandise and services is recognized when the service is performed or merchandise is delivered. Revenue associated with preneed cemetery property interment rights is recognized in accordance with the retail land sales provision of SFAS No. 66. Under SFAS No. 66, revenue from constructed cemetery property is not recognized until 10 percent of the sales price has been collected. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting. Revenue associated with sales of preneed merchandise and services is not recognized until the merchandise is delivered or the services are performed. See Note 2(j) to the consolidated financial statements included in Item 8.
          We defer all dividends and interest earned and net capital gains and losses realized by preneed funeral trust and preneed cemetery merchandise trust accounts until the underlying service or the merchandise is delivered. Unrealized capital gains and losses are not allocated to contracts.
Perpetual Care Funding Obligation
          Certain states allow us to withdraw realized capital gains from cemetery perpetual care trusts, and other states prohibit these withdrawals. These earnings and related funds are intended to defray cemetery maintenance costs and are recorded as revenue. In the event that we have been allowed to withdraw realized gains and there are realized losses in the trust, we may determine we have a funding obligation to restore the net realized losses of the trust. A charge is recorded in the statement of earnings at the time it is considered probable that we will be required to restore the realized losses.
Loss Contract Analysis
          Each quarter we perform an analysis to determine whether our preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, we determine which trusts are in a net loss position by comparing the aggregate market value of the trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost basis exceeds the aggregate market value of the investments, the trust is

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considered to be in a net loss position. For trusts in a net loss position, we add the sales prices of the underlying contracts and net realized earnings, then subtract net unrealized losses to derive the net amount of proceeds for contracts associated with the trusts in question as of that particular balance sheet date. We look at unrealized gains and losses based on current market prices quoted for the investments, but we do not include future expected returns on the investments in our analysis. We compare the amount of proceeds to the estimated direct costs to deliver the contracts, which consist primarily of funeral and cemetery merchandise costs and salaries, supplies and equipment related to the delivery of a preneed funeral contract. If a deficiency were to exist, we would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts from our backlog. Due to the positive margins of our preneed contracts and the trust portfolio returns we have experienced in prior years, there is currently capacity for additional market depreciation before a contract loss would result.
Variable Interest Entities
          We consolidate our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts. For a more detailed discussion of our accounting policies after the implementation of FIN 46R including our policy for determining whether a loss in an investment in our trust portfolio should be considered realized, see Notes 2(k) and 4 through 7 to the consolidated financial statements included in Item 8. Concurrently with the adoption of FIN 46R, we changed our accounting for insurance-funded preneed funeral contracts, which are not recorded on our balance sheet, as described in Note 2(i) to the consolidated financial statements included in Item 8.
Allowance for Doubtful Accounts and Sales Cancellations
          Management must make estimates of the uncollectibility 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 an analysis of historical collection and write-off experience. In addition, we establish a reserve for sales cancellations for cemetery property sales based on historical cancellations and recent write-off activity. This reserve is recorded as a reduction in cemetery revenue. We also establish an allowance for cancellations of insurance and third-party commissions based on historical experience for cancellations of insurance contracts within the period of refundability. These estimates are impacted by a number of factors, including changes in the economy and demographic or competitive changes in our areas of operation. 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, primarily using the straight-line method. Buildings and building improvement items are generally depreciated over a period ranging from 10 to 40 years. Equipment is generally depreciated over the following ranges: light equipment, 5 to 10 years; heavy equipment, 10 years; computer equipment, 3 to 4 years; and crematory equipment, 5 to 20 years. Vehicles are generally depreciated over 5 to 7 years. Leasehold improvements are depreciated over the shorter of the term of the lease or the life of the asset. These estimates of the useful lives may be affected by such factors as changes in regulatory requirements or changing market conditions.
Valuation of Long-Lived Assets
          We review the carrying value of our long-lived assets whenever events or circumstances indicate that the carrying amount may not be recoverable. This review is based on our projections of anticipated undiscounted future cash flows and compares the estimated undiscounted future cash flows expected to be generated by those assets to the carrying amount of those assets. The net carrying value of any assets not fully 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 and comparable sales values could materially affect our evaluations.
Valuation of Goodwill
          In our determination of reporting units for goodwill impairment testing purposes, both qualitative and quantitative characteristics are evaluated. Gross margins are analyzed for purposes of determining whether or not

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our operating divisions are considered economically similar. Our division presidents also review a variety of metrics when assessing the performance of our regions. Qualitative factors include the nature of our products and services, consistency of products and services and the delivering of those products and services in our funeral homes and cemeteries, the similarity of class of customers across all locations and regulations in different jurisdictions. Based on our evaluation, we have 13 reporting units. Because goodwill impairment tests are applied at the reporting unit level, a change in reporting unit can have a material effect on the outcome of the test. See Note 2(g) to the consolidated financial statements included in Item 8 for additional information.
          Goodwill of a reporting unit must be tested for impairment on at least an annual basis. We conduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value of goodwill may be greater than its fair value. Factors we consider important that could trigger an impairment review include 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.
          In reviewing goodwill for impairment, we first compare the fair value of each of our reporting units with their carrying amounts (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, we then measure the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in a manner similar to the amount of goodwill determined in a business combination. That is, we allocate the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value.
          Our goodwill impairment test involves estimates and management judgment. We determine fair value of each reporting unit using a discounted cash flow valuation methodology. From time to time, we may obtain assistance from third parties in our evaluation. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. We test our results by comparing them to the trading multiples of companies in our industry and supplier industries calculated as enterprise value divided by EBITDA. We also reviewed multiples used in recent acquisition transactions. In projecting our cash flows we used growth rates of three to five percent. We adjusted the results for our estimate of the impact of the realized losses in our trusts on our cash flows. For the discount rate, we used 8.3 percent, which reflected our weighted average cost of capital determined based on our industry and our supplier industries and capital structure as adjusted for equity risk premiums and size risk premiums based on our market capitalization. Fair value is calculated as the sum of the projected discounted cash flows of the reporting units over the next five years and terminal value at the end of those five years. The terminal value is calculated as the projected EBITDA at the end of the five year period divided by the discount rate minus terminal growth rates ranging from 2 to 3.5 percent. We considered sensitivities within the terminal values and used the midpoint enterprise value as our best estimate.
          Step two of our impairment test involves determining estimates of the fair values of our assets and liabilities. We may obtain assistance from third parties in assessing the fair value of certain of our assets, primarily real estate, in performing our step two analysis. If these estimates or their related assumptions change in the future, including if we project lower cash flow in the future for a reporting unit than we projected when we performed our fiscal 2008 impairment test, we may be required to record an additional impairment charge.
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

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assets will be recovered from future taxable income, and to the extent we believe that recovery is not likely, we establish a valuation allowance. The following items are reviewed to determine if a valuation allowance is required: net operating losses (federal, state and United States possessions), capital loss carry forwards and deferred tax assets (federal, state and United States possessions). To the extent we establish a valuation allowance or increase this allowance in a period, we include an expense within the tax provision in the statement of earnings.
          Approximately one-half of the October 31, 2008 fair market value of our preneed funeral and cemetery merchandise and services trusts are in trusts for which we are the grantor. For these trusts (unlike the remaining trusts for which the customers are the grantors), we retain the income tax characteristics of all earnings as realized in the trust. For example, capital gains and losses in the trusts are capital gains and losses on our tax returns. In addition, we must recognize these earnings currently for tax purposes, while for book purposes they are deferred.
          Realized capital losses in the trusts for which we are the grantor, if we have or expect insufficient offsetting capital gains, can require us to record a valuation allowance against the related deferred tax asset (capital loss carryforward), which increases our current period effective tax rate and reduces our current period reported net earnings. During our fourth fiscal quarter of 2008, we recorded a tax valuation allowance related to capital losses realized in our preneed funeral and cemetery merchandise and services trusts for which we are the grantor for tax purposes. Essentially, the current period valuation allowance reflects the fact that, if we cannot generate capital gains in the future against which to use the tax benefit of the capital loss (which is limited to five years), when we perform the contract, we will recognize more income and pay higher taxes for tax purposes than we will for book purposes. This tax relationship does not occur with respect to trusts for which the customer is the grantor, because all of their earnings are service revenue and thus ordinary income to us, and we do not recognize the revenue for either tax or book purposes until the underlying contract is performed.
          We adopted FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of Statement of Financial Accounting Standards Statement No. 109” (“FIN 48”) during the first quarter of fiscal year 2008. FIN 48 prescribes a recognition threshold and measurement attribute for a tax position taken or expected to be taken in a tax return and also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. We have reviewed our income tax positions and identified certain tax deductions or revenue deferrals that are not certain.
          With few exceptions, we are no longer subject to U.S. federal, state and local or non-U.S. income tax examinations by tax authorities for fiscal years before 2002. To the extent tax, interest and penalties are not assessed with respect to uncertain tax positions in the future, amounts accrued will be reduced and reflected as a reduction of tax expense, interest expense or “other” expense.
          Significant management judgment is required in determining our provision for income taxes, deferred tax assets and liabilities and any valuation allowance recorded against our net deferred tax assets. In the event that actual results differ from these estimates or we adjust these estimates in future periods, we may need to change our allowance, which could materially impact our financial condition and results of operations.
Estimated Insurance Loss Liabilities
          We purchase comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies but below our deductible. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. We continually evaluate the receivables due from our insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from our primary insurer.
          With respect to health insurance that covers substantially all of our employees, we purchase individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible

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amount being covered by insurance. Expected claims are based on actuarial estimates; actual claims may differ from those estimates. We continually evaluate our claims experience related to this coverage with information obtained from our insurer.
          Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of our insurance loss liability.
          The estimated liability on the uninsured litigation and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.
          We also have insurance coverage related to property damage, incremental costs and property operating expenses we incurred due to damage caused by hurricanes and other natural disasters. Our policy is to record such amounts when recovery is probable, which generally means we have reached an agreement with the insurance company. For additional information, see Note 23 to the consolidated financial statements included in Item 8.
          We accrue for legal costs related to loss contingencies as the services are provided. If a settlement is determined to be probable, then an estimate is recorded for the settlement at that time.
Results of Operations
          The following discussion segregates the financial results of our continuing operations into our various segments, grouped by our funeral and cemetery operations. For a discussion of discontinued operations, see Note 12 to the consolidated financial statements included in Item 8. For a discussion of our segments, see Note 21 to the consolidated financial statements included in Item 8. As there have been no material acquisitions or construction of new locations in fiscal years 2008 and 2007, results from continuing operations reflect those of same-store locations.
Comparison of Fiscal Year 2008 to Fiscal Year 2007
Year Ended October 31, 2008 Compared to Year Ended October 31, 2007—Continuing Operations
Funeral Operations
                         
    Year Ended October 31,  
                    Increase  
    2008     2007     (Decrease)  
            (In millions)          
Funeral Revenue:
                       
Eastern Division
  $ 117.8     $ 117.1     $ .7  
Western Division
    150.5       143.8       6.7  
Corporate Trust Management (1)
    18.3       18.4       (.1 )
 
                 
Total Funeral Revenue
  $ 286.6     $ 279.3     $ 7.3  
 
                 
 
                       
Funeral Costs:
                       
Eastern Division
  $ 98.8     $ 99.3     $ (.5 )
Western Division
    118.7       116.4       2.3  
Corporate Trust Management (1)
    .8       .7       .1  
 
                 
Total Funeral Costs
  $ 218.3     $ 216.4     $ 1.9  
 
                 
 
                       
Funeral Gross Profit:
                       
Eastern Division
  $ 19.0     $ 17.8     $ 1.2  
Western Division
    31.8       27.4       4.4  
Corporate Trust Management (1)
    17.5       17.7       (.2 )
 
                 
Total Funeral Gross Profit
  $ 68.3     $ 62.9     $ 5.4  
 
                 

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    Change in Average   Change in Same-    
    Revenue Per   Store Funeral   Same-Store
Same-Store Analysis   Funeral Service   Services   Cremation Rate
                    2008   2007
Eastern Division
    0.6 %     (0.5 )%     36.2 %     35.1 %
Western Division
    4.7 %     0.3 %     42.7 %     42.5 %
Total
    3.0 %(1)     %     39.8 %     39.3 %
 
(1)   Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms based on the fair market value of assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trusts over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 4 and 7 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for 2008 and 2007 were $5.1 million and $5.9 million, respectively. As corporate trust management is considered a separate operating segment, trust earnings are included in total average revenue per call presented, but not in the Eastern and Western divisions’ average revenue per call. Funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for 2008 and 2007 were $13.2 million and $12.5 million, respectively.
Consolidated Operations—Funeral
          Funeral revenue from continuing operations increased $7.3 million, or 2.6 percent, from $279.3 million for the year ended October 31, 2007 to $286.6 million for the year ended October 31, 2008. Our same-store funeral services performed remained flat with a 15 event decrease to 58,462 events. Our same-store funeral operations achieved a 2.7 percent increase in the average revenue per traditional funeral service and a 4.1 percent increase in the average revenue per cremation service due primarily to the continued refinement of new funeral packages and pricing. These increases along with a year-over-year increase in funeral trust earnings resulted in an overall increase in our same-store average revenue per funeral service of 3.0 percent. The cremation rate for our same-store operations was 39.8 percent for the year ended October 31, 2008 compared to 39.3 percent for the corresponding period in 2007.
          Funeral gross profit increased $5.4 million to $68.3 million for fiscal year 2008 compared to $62.9 million for fiscal year 2007 primarily due to the increase in revenue, as noted above. Funeral gross profit margin increased 130 basis points to 23.8 percent for fiscal year 2008 from 22.5 percent for the same period in 2007.
Segment Discussion—Funeral
          Funeral revenue in the Eastern division funeral segment increased $0.7 million primarily due to a 0.6 percent increase in average revenue per funeral service in same-store operations, partially offset by a 0.5 percent decrease in the number of funeral services performed by same-store operations. Funeral revenue in the Western division funeral segment increased $6.7 million primarily due to a 4.7 percent increase in the average revenue per funeral service in same-store operations and a 0.3 percent increase in the number of funeral services performed by same-store operations. Funeral revenue in the corporate trust management segment decreased $0.1 million primarily due to a $0.8 million decrease in trust management fees, offset by a $0.7 million increase in funeral trust earnings.
          Funeral gross profit for the Eastern division funeral segment increased $1.2 million primarily due to an increase in revenue, as discussed above, and a decrease in expenses. The decrease in expenses is primarily due to a prior year $0.7 million impairment charge related to funeral licenses in the state of Maryland. Funeral gross profit for the Western division funeral segment increased $4.4 million primarily due to an increase in revenue, as discussed above. As demonstrated in the table above, the same-store cremation rate increased for both the Eastern and Western division.

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Cemetery Operations
                         
    Year Ended October 31,  
                    Increase  
    2008     2007     (Decrease)  
    (In millions)  
Cemetery Revenue:
                       
Eastern Division
  $ 130.6     $ 143.2     $ (12.6 )
Western Division
    101.6       90.4       11.2  
Corporate Trust Management (1)
    9.1       9.9       (.8 )
 
                 
Total Cemetery Revenue
  $ 241.3     $ 243.5     $ (2.2 )
 
                 
 
                       
Cemetery Costs:
                       
Eastern Division
  $ 125.2     $ 122.2     $ 3.0  
Western Division
    82.7       71.2       11.5  
Corporate Trust Management (1)
    .9       .6       .3  
 
                 
Total Cemetery Costs
  $ 208.8     $ 194.0     $ 14.8  
 
                 
 
                       
Cemetery Gross Profit:
                       
Eastern Division
  $ 5.4     $ 21.0     $ (15.6 )
Western Division
    18.9       19.2       (.3 )
Corporate Trust Management (1)
    8.2       9.3       (1.1 )
 
                 
Total Cemetery Gross Profit
  $ 32.5     $ 49.5     $ (17.0 )
 
                 
 
(1)   Corporate trust management consists of the trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent the amount of earnings realized by the trust over the life of the preneed contracts and allocated to those products and services delivered during the relevant periods. See Notes 5 and 7 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for 2008 and 2007 were $4.9 million and $5.3 million and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for 2008 and 2007 were $4.2 million and $4.6 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.
Consolidated Operations—Cemetery
          Cemetery revenue from continuing operations decreased $2.2 million, or 0.9 percent, from $243.5 million for the year ended October 31, 2007 to $241.3 million for the year ended October 31, 2008. The decrease is due primarily to an $8.2 million, or 7.3 percent, decrease in cemetery property sales, net of discounts, due to current economic conditions. In addition, we experienced a $3.6 million decrease in construction on various cemetery projects. In the prior year, we experienced growth due to focused efforts to reduce the production backlog in existing cemetery projects. These decreases were partially offset by a $3.2 million, or 3.5 percent, increase in cemetery merchandise delivered and services performed, a $2.8 million increase in cemetery commission income related to a new program to manage the cemetery sales at eleven Archdiocese of Los Angeles cemeteries and a $2.1 million increase related to the leasing of our mineral rights at one of our cemeteries to an outside third party.
          Perpetual care trust earnings for the year ended October 31, 2008 amounted to $10.7 million compared to $10.2 million for the year ended October 31, 2007.
          Cemetery gross profit decreased $17.0 million from $49.5 million in fiscal year 2007 to $32.5 million in fiscal year 2008. The decrease in cemetery gross profit is primarily due to a $13.3 million charge recorded in the fourth quarter of 2008 for our estimated probable funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts, included in cemetery costs. See Note 6 to the consolidated financial statements for additional information.

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Segment Discussion—Cemetery
          Cemetery revenue in the Eastern division cemetery segment decreased $12.6 million primarily due to a $6.8 million decrease in construction on various cemetery development projects and a $7.1 million, or 9.9 percent, decrease in cemetery property sales, net of discounts, due in part to current economic conditions. Cemetery revenue in the Western division cemetery segment increased $11.2 million primarily due to a $3.2 million increase in construction on various cemetery projects, a $2.8 million increase in cemetery commission income related to a new program to manage the cemetery sales at eleven Archdiocese of Los Angeles cemeteries, a $2.1 million increase related to the leasing of our mineral rights at one of our cemeteries to an outside third party and a $1.7 million increase in cemetery merchandise delivered and services performed. Cemetery revenue in the corporate trust management segment decreased $0.8 million due to a $0.4 million decline in trust management fees and a $0.4 million decline in cemetery trust earnings.
          Cemetery gross profit for the Eastern division cemetery segment decreased $15.6 million due to the decrease in cemetery revenue, as discussed above, and an increase in expenses. The increase in expenses is primarily due to the $9.3 million charge related to the estimated probable funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts described above. Cemetery gross profit for the Western division cemetery segment decreased $0.3 million primarily due to an increase in expenses due in part to the $4.0 million charge related to the estimated probable funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts described above.
Other
          Corporate general and administrative expenses increased $1.5 million to $32.6 million for fiscal year 2008. The increase was primarily due to a $2.3 million increase in information technology costs due in part to the implementation of new business systems and a web development project in the current year, a $1.8 million increase in costs related to our evaluation of the unsolicited acquisition proposal received from Service Corporation International in the third quarter of 2008 and a $1.5 million increase in costs related to the continuous improvement initiative that began in the first quarter of 2008. The increases were partially offset by a $2.0 million decrease in professional fees primarily due to a decrease in litigation expense and a $1.0 million decrease in depreciation expense for the year ended October 31, 2008 due to the accelerated depreciation in the prior year of our previous computer software systems associated with the implementation of the new business systems in the prior year.
          We recorded $0.6 million in separation charges during the year ended October 31, 2007 primarily related to separation pay of a former executive officer who retired in the first quarter of 2007.
          As a result of the annual goodwill impairment evaluation performed in the fourth quarter of 2008, we recorded a goodwill impairment charge of $26.0 million for the year ended October 31, 2008. For additional information, see Note 13 to the consolidated financial statements included in Item 8.
          We incurred $2.3 million in hurricane related charges in fiscal 2008 primarily related to Hurricane Ike and Hurricane Katrina. In September 2008, Hurricane Ike struck the Texas Gulf Coast and our facilities in that area were affected resulting in a $1.2 million charge primarily for debris cleanup and repairs. We are in the process of preparing our insurance claim related to Hurricane Ike. The $1.1 million charge in the current year in relation to Hurricane Katrina primarily relates to legal costs associated with ongoing insurance claims. We incurred $2.5 million in hurricane related charges for the same period of 2007 primarily due to repairs at locations damaged by Hurricane Katrina. We are continuing to pursue claims with our insurance carriers as described in Note 23 to the consolidated financial statements.
          Interest expense decreased $1.0 million to $24.1 million for the year ended October 31, 2008 primarily due to a 123 basis-point decrease in the average rate, partially offset by a $52.7 million increase in the average debt outstanding.
          Other operating income, net decreased $0.8 million to $0.9 million for the year ended October 31, 2008. The decrease is primarily due to the sale of excess cemetery property in the Western division in the second quarter of fiscal year 2007 and proceeds related to the sale of an investment during fiscal year 2007.

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          Investment and other income, net decreased $1.0 million to $2.4 million due primarily to a decrease in the average rate earned on our cash balances from 4.75 percent in fiscal year 2007 to 1.67 percent in fiscal year 2008. In light of the current economic and market conditions, we decided to seek stable investments in money-market funds invested in United States treasury securities. These investments realize a lower average rate on cash.
          As a result of the $250.0 million senior convertible note transaction in June 2007, we recorded a $0.7 million charge for the loss on early extinguishment of debt during fiscal year 2007.
          The effective tax rate for continuing operations for the year ended October 31, 2008 was 119.7 percent compared to 31.5 percent for the same period in 2007. The increased rate in 2008 was primarily due to the $26.0 million goodwill impairment charge recorded in the fourth quarter of fiscal year 2008, of which $25.0 million was non-deductible for tax purposes. This increase was coupled with a $7.4 million valuation allowance recorded on the unrealized capital loss carryforward of approximately $18.8 million, net of capital gains, attributable to the write-down of investments of certain trusts which are recognized for tax purposes and deferred for book purposes. We concluded a valuation allowance for the capital loss carryforward was necessary because it was uncertain whether we could generate any taxable capital gains within the carryforward period. The reduced rate in 2007 was primarily caused by a tax benefit of $3.4 million attributable to the utilization of a capital loss carryforward, coupled with a tax benefit of $0.8 million attributable to the completion and settlement of an audit by the Commonwealth of Puerto Rico for tax periods 1999, 2000 and 2001.
          As of November 1, 2007, we adopted FIN 48, which clarifies the accounting and disclosure for uncertain tax positions in accordance with SFAS No. 109, “Accounting for Income Taxes.” We have reviewed our income tax positions and identified certain tax deductions or revenue deferrals that are not certain. The cumulative effect of adopting FIN 48 has been recorded as a $1.0 million increase to the November 1, 2007 opening balance of accumulated deficit, a $3.4 million increase in deferred tax assets and a $4.4 million increase in other long-term liabilities. For additional information on FIN 48, see Notes 3 and 18 to the consolidated financial statements included herein.
          Our weighted average diluted shares outstanding decreased to 93.8 million shares for the year ended October 31, 2008 compared to 102.7 million shares for the same period in 2007. The decrease is primarily due to our $75.0 million stock repurchase program in which we have repurchased $48.4 million, or 6.6 million shares, of our Class A common stock, yielding a positive impact on earnings per share.
          Long-term receivables decreased $12.9 million from October 31, 2007 to October 31, 2008 primarily due to a $10.8 million income tax refund receivable collected during fiscal year 2008. Goodwill declined $26.0 million due to the $26.0 million goodwill impairment charge, discussed above. Deferred income taxes decreased $13.3 million from October 31, 2007 to October 31, 2008 primarily due to a change in income tax accounting methods which resulted in an $8.9 million reduction of deferred tax assets offsetting current taxes payable. See Note 18 to the consolidated financial statements for additional information on income tax related items that occurred in fiscal year 2008. The $13.3 million estimated probable funding obligation to restore the net realized losses in certain of our cemetery perpetual care trusts is discussed in Note 6 to the consolidated financial statements. The $6.6 million increase in other long-term liabilities from October 31, 2007 to October 31, 2008 was primarily due to a $4.4 million charge due to the adoption of FIN 48 in the first quarter of 2008.
          Preneed funeral receivables and trust investments, preneed cemetery receivables and trust investments, cemetery perpetual care trust investments, non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts decreased substantially primarily due to the recent decline in market value of our trust assets due to a broad based decline in the overall financial markets. For additional information, see Notes 4, 5 and 6 to our consolidated financial statements included herein.
Preneed Sales into and Deliveries out of the Backlog
          Preneed funeral sales decreased 5.2 percent for the year ended October 31, 2008 compared to the same period in 2007 due in part to current economic conditions.

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          The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We added $173.9 million in gross preneed sales to our funeral and cemetery merchandise and services backlog (including $76.5 million related to insurance-funded preneed funeral contracts) during the year ended October 31, 2008 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to gross sales of $179.2 million (including $76.9 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2007. Deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $151.4 million for the year ended October 31, 2008, compared to $145.2 million for the corresponding period in 2007, resulting in net increases in the backlog of $22.5 million and $34.0 million for the years ended October 31, 2008 and 2007, respectively.
Comparison of Fiscal Year 2007 to Fiscal Year 2006
Financial Summary of Fiscal Year 2007
          For fiscal year 2007, we had net earnings of $39.8 million compared to a $37.6 million for fiscal year 2006. Fiscal year 2007 earnings from continuing operations increased by $1.7 million to $39.3 million compared to $37.6 million for fiscal year 2006.
          Funeral revenue decreased $0.9 million from $280.2 million in fiscal year 2006 to $279.3 million in fiscal year 2007. During fiscal year 2006 we recorded an increase of $1.6 million in funeral revenue related to an out of period adjustment and $2.8 million of business interruption insurance proceeds related to the 2005 hurricanes. During 2007, our same-store funeral operations experienced an increase in the average revenue per traditional funeral service of 3.4 percent and an increase in average revenue per cremation service of 7.4 percent. The increase in the average revenue per traditional funeral and cremation service were partially offset by a shift in mix to lower-priced cremation services resulting in an overall increase in the same-store average revenue per funeral service of 3.5 percent. We also experienced a decrease in same-store funeral services performed of 2.2 percent. The cremation rate for our same-store operations was 39.3 percent for fiscal year 2007 compared to 38.6 percent for fiscal year 2006.
          Cemetery revenue increased $9.5 million from $234.0 million in fiscal year 2006 to $243.5 million in fiscal year 2007 due to increases in construction during the period on various cemetery projects and an increase in gross cemetery property sales. These increases were partially offset by a decrease in merchandise delivery revenue due in part to a decrease in interments and an increase in the reserve for cancellations, which was due in large part to an improvement in the reserve for cancellations in the prior year following Hurricane Katrina.
          Funeral gross profit decreased $2.3 million due primarily to the decrease in revenue discussed above and a $1.4 million increase in expenses. The increase in expenses is primarily due to an increase in property, casualty and general liability insurance costs along with a $0.7 million impairment charge related to funeral licenses in the state of Maryland. Cemetery gross profit increased $0.1 million.
          There was a $4.1 million increase in hurricane related charges in 2007 over 2006. We recorded a $2.5 million charge for net hurricane related costs in 2007 compared to a $1.6 million recovery in 2006. Interest expense decreased $4.5 million due to a 282 basis-point decrease in the average rate during the year. The decrease in the average rate is primarily due to additional interest incurred in fiscal year 2006 on the Company’s 6.25 percent senior notes as a result of the Company’s inability to timely complete a required exchange offer and due in part to the reduction in interest resulting from the issuance of $250.0 million of senior convertible notes. In June 2007, we issued $125.0 million of 3.125 percent senior convertible notes and $125.0 million of 3.375 percent senior convertible notes, and we prepaid our Term Loan B. As a result of this transaction, we recorded a charge for the loss of early extinguishment of debt of $0.7 million. We recognized tax expenses and benefits during fiscal year 2007. The largest of these was a $4.2 million income tax benefit due to the utilization of a capital loss carry forward and the completion of an audit in the Commonwealth of Puerto Rico, resulting in a lower effective tax rate of 31.5 percent for fiscal year 2007 compared to 36.0 percent for fiscal year 2006.
          Cash flow from operations decreased from $90.1 million for the year ended October 31, 2006 to $81.9 million for the year ended October 31, 2007, due primarily to $14.8 million in unusual trust withdrawals received

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during fiscal year 2006 associated with the deferred revenue project compared to $2.1 million in 2007. In addition, we made net tax payments of $9.3 million during 2007 compared to $4.2 million in 2006 due to a net operating loss carryforward utilized in fiscal year 2006. There were also $1.3 million of net cash inflows recorded related to Hurricane Katrina in 2007 compared to $3.8 million of cash outflows in 2006. Lastly, we received $2.1 million due to the execution of a lease of our mineral rights at one of our cemeteries to an outside third-party.
          During fiscal year 2007, we repurchased 7,698,000 shares of our Class A common stock in connection with the June 2007 senior convertible debt transaction for $64.2 million and paid $10.2 million, or $0.10 per share, in dividends. In addition, in September 2007, the Board approved a new $25.0 million stock repurchase program, and in December 2007 increased the program by an additional $25.0 million.
          For fiscal year 2007, we experienced a 6.2 percent increase in cemetery property sales and a 1.1 percent decrease in preneed funeral sales.
          Reconstruction of our largest funeral operation in New Orleans began in early fiscal year 2007 and was completed in November 2007. Our second largest funeral home in New Orleans reopened in the second quarter of 2007.
Year Ended October 31, 2007 Compared to Year Ended October 31, 2006—Continuing Operations
Funeral Operations
                         
    Year Ended October 31,  
                    Increase  
    2007     2006     (Decrease)  
    (In millions)  
Funeral Revenue:
                       
Eastern Division
  $ 117.1     $ 116.3     $ .8  
Western Division
    143.8       146.1       (2.3 )
Corporate Trust Management (1)
    18.4       17.8       .6  
 
                 
Total Funeral Revenue
  $ 279.3     $ 280.2     $ (.9 )
 
                 
Funeral Costs:
                       
Eastern Division
  $ 99.3     $ 97.9     $ 1.4  
Western Division
    116.4       116.6       (.2 )
Corporate Trust Management (1)
    .7       .5       .2  
 
                 
Total Funeral Costs
  $ 216.4     $ 215.0     $ 1.4  
 
                 
Funeral Gross Profit:
                       
Eastern Division
  $ 17.8     $ 18.4     $ (.6 )
Western Division
    27.4       29.5       (2.1 )
Corporate Trust Management (1)
    17.7       17.3       .4  
 
                 
Total Funeral Gross Profit
  $ 62.9     $ 65.2     $ (2.3 )
 
                 
                                 
    Change in Average   Change in Same-   Same-Store
    Revenue Per   Store Funeral   Cremation Rate
Same-Store Analysis   Funeral Service   Services   2007   2006
Eastern Division
    2.4 %     (1.3 )%     35.1 %     33.3 %
Western Division
    4.1 %     (2.8 )%     42.5 %     42.5 %
Total
    3.5 %(1)     (2.2 )%     39.3 %     38.6 %
 
(1)   Corporate trust management consists of the trust management fees and funeral merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 4 and 7 to the

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consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in funeral revenue for 2007 and 2006 were $5.9 million and $5.5 million, respectively. As corporate trust management is considered a separate operating segment, trust earnings are included in total average revenue per call presented, but not in the Eastern and Western divisions’ average revenue per call. Funeral trust earnings recognized with respect to preneed contracts delivered included in funeral revenue for 2007 and 2006 were $12.5 million and $12.3 million, respectively.
Consolidated Operations—Funeral
          Total funeral revenue from continuing operations decreased $0.9 million, or 0.3 percent, for the year ended October 31, 2007, compared to the corresponding period in 2006. Our same-store businesses achieved a 3.4 percent increase in the average revenue per traditional funeral service and a 7.4 percent increase in the average revenue per cremation service. The increase in the average revenue per traditional funeral and cremation service were partially offset by a shift in mix to lower-priced cremation services. This resulted in an overall 3.5 percent increase in the average revenue per funeral service in our same-store businesses. The cremation rate for our same-store operations was 39.3 percent for the year ended October 31, 2007 compared to 38.6 percent for the year ended October 31, 2006. We also recorded $1.6 million in funeral revenue related to an out of period adjustment and $2.8 million in business interruption insurance proceeds related to the 2005 hurricanes for the year ended October 31, 2006. We experienced a 2.2 percent decrease in the number of funeral services performed by our same-store businesses, or 1,304 events out of the 58,631 total same-store events performed. We believe the primary factors contributing to the increases in our average revenue per traditional and cremation service were normal inflationary price increases, more effective merchandising and packaging, and our focus on training and personalization.
          Funeral gross profit from continuing operations decreased from $65.2 million in the year ended October 31, 2006 to $62.9 million in the year ended October 31, 2007 due primarily to the decreases in revenue discussed above and a $1.4 million increase in expenses. The increase in expenses is primarily due to an increase in property, casualty and general liability insurance costs, along with a $0.7 million impairment charge related to funeral licenses in the state of Maryland. Prior to October 2007, funeral licenses in the state of Maryland were restricted to a specific number that had previously been limited under Maryland law. The law changed in October 2007, and these restrictions are no longer in place; therefore, the value of these assets has been impaired, and an impairment charge was recorded.
Segment Discussion—Funeral
          Funeral revenue in the Eastern division funeral segment increased primarily due to an increase in the same-store average revenue per funeral service of 2.4 percent. The increase in average revenue is partially offset by a 1.3 percent decrease in the number of funeral services performed by our same-store businesses. For fiscal year 2006, funeral revenue in the Western division segment was increased by a $1.1 million out of period adjustment and $2.8 million in business interruption insurance proceeds related to the 2005 hurricanes. The Western division experienced a 2.8 percent decrease in the number of funeral services performed by our same-store businesses, partially offset by an increase in the same-store average revenue per funeral service of 4.1 percent. Funeral revenue in the corporate trust management segment increased $0.6 million primarily due to an increase of $0.4 million in trust management fees and $0.2 million in funeral trust earnings.
          Funeral gross profit for the Eastern division funeral segment decreased primarily due to an increase in expenses. The increase in expenses is primarily due to an increase in property, casualty and general liability insurance costs along with a $0.7 million impairment charge for funeral licenses in the state of Maryland, as described above. Funeral gross profit for the Western division funeral segment decreased primarily due to the decrease in revenue as discussed above without a corresponding decrease in expenses. Expenses for the Western division funeral segment would have decreased more significantly were it not for an increase in property, casualty and general liability insurance.

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          As demonstrated in the table above, the same-store cremation rate increased for the Eastern division funeral segments and was flat for the Western division funeral segment.
Cemetery Operations
                         
    Year Ended October 31,  
                    Increase  
    2007     2006     (Decrease)  
    (In millions)  
Cemetery Revenue:
                       
Eastern Division
  $ 143.2     $ 136.8     $ 6.4  
Western Division
    90.4       87.8       2.6  
Corporate Trust Management (1)
    9.9       9.4       .5  
 
                 
Total Cemetery Revenue
  $ 243.5     $ 234.0     $ 9.5  
 
                 
Cemetery Costs:
                       
Eastern Division
  $ 122.2     $ 112.8     $ 9.4  
Western Division
    71.2       71.3       (.1 )
Corporate Trust Management (1)
    .6       .5       .1  
 
                 
Total Cemetery Costs
  $ 194.0     $ 184.6     $ 9.4  
 
                 
Cemetery Gross Profit:
                       
Eastern Division
  $ 21.0     $ 24.0     $ (3.0 )
Western Division
    19.2       16.5       2.7  
Corporate Trust Management (1)
    9.3       8.9       .4  
 
                 
Total Cemetery Gross Profit
  $ 49.5     $ 49.4     $ .1  
 
                 
 
(1)   Corporate trust management consists of the trust management fees and cemetery merchandise and services trust earnings recognized with respect to preneed contracts delivered during the period. Trust management fees are established by us at rates consistent with industry norms based on the fair market value of the assets managed and are paid by the trusts to our subsidiary, Investors Trust, Inc. The trust earnings represent earnings realized over the life of the preneed contracts delivered during the relevant periods. See Notes 5 and 7 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of the trust assets and current performance of the trusts (i.e. current realized gains and losses, interest income and dividends). Trust management fees included in cemetery revenue for 2007 and 2006 were $5.3 million and $4.9 million and cemetery trust earnings recognized with respect to preneed contracts delivered included in cemetery revenue for 2007 and 2006 were $4.6 million and $4.5 million, respectively. Perpetual care trust earnings are included in the revenues and gross profit of the related geographic segment.
Consolidated Operations—Cemetery
          Cemetery revenue from continuing operations increased $9.5 million, or 4.1 percent, for the year ended October 31, 2007, compared to the corresponding period in 2006, primarily due to an increase in construction during the period on various cemetery projects and an increase in gross cemetery property sales. The increase is due in part to serving customers interested in large cemetery property purchases such as private estates. These increases were partially offset by a decrease in merchandise delivery revenues due in part to a decrease in interments and an increase in the reserve for cancellations, which was due in part to an improvement in the reserve for cancellations in the prior year following Hurricane Katrina. Gross cemetery property sales increased 6.2 percent for the year ended October 31, 2007 compared to the year ended October 31, 2006 from $107.7 million to $114.4 million and represent the aggregate contract price of cemetery property sale contracts entered into during the period. Gross cemetery property sales are deferred until either ten percent is collected or if construction occurs. Cemetery gross profit from continuing operations increased $0.1 million from $49.4 million in fiscal year 2006 to $49.5 million in fiscal year 2007.
          We experienced an average return, excluding unrealized gains and losses, of 4.4 percent in our perpetual care trusts for the year ended October 31, 2007 resulting in revenue of $10.2 million, compared to 4.6 percent for the corresponding period in 2006 resulting in revenue of $10.1 million. Perpetual care trust earnings are included in the

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geographic segments’ revenue and gross profit. See Notes 6 and 7 to the consolidated financial statements included in Item 8 for information regarding the cost basis and market value of those trust assets and the current performance of the trusts (i.e. current realized gains and losses, interest income and dividends).
Segment Discussion—Cemetery
          Cemetery revenue in the Eastern division cemetery segment increased primarily due to an increase in construction during the year on various cemetery projects, partially offset by a decrease in merchandise delivery revenue. Cemetery revenue in the Western division cemetery segment increased primarily due to increases in cemetery property sales, partially offset by a decrease in merchandise delivery revenue. Cemetery revenue in the corporate trust management segment increased $0.5 million primarily due to a $0.4 million increase in trust management fees and a $0.1 million increase in trust earnings recognized upon the delivery of preneed cemetery merchandise and services.
          Cemetery gross profit for the Eastern division decreased primarily due to an increase in expenses associated with the increase in revenue and due to an increase in property, casualty and general liability insurance costs. Cemetery gross profit for the Western division increased due to increases in revenue noted above and due to out of period adjustments in fiscal year 2007 which had a $1.3 million positive impact to gross profit.
Discontinued Operations
          Included in discontinued operations for the year ended October 31, 2007 were gains on dispositions, net of impairment losses, of $0.6 million compared to ($0.2) million recognized for the year ended October 31, 2006. Revenues for fiscal year 2007 were $2.8 million compared to $3.9 million in fiscal year 2006. The effective tax rate for our discontinued operations for the year ended October 31, 2007 was a 38.2 percent expense compared to a 116.3 percent benefit for the same period in 2006. For additional information, see Notes 12 and 18 to the consolidated financial statements included in Item 8.
Other
          For the year ended October 31, 2007, hurricane related charges, net of recoveries, increased $4.1 million from net recoveries of $1.6 million in fiscal year 2006 to net charges of $2.5 million in fiscal year 2007. These charges were due to repairs at locations damaged by Hurricane Katrina. The timing of the receipt of insurance proceeds is not in line with the timing of cash spending related to Hurricane Katrina. For additional information, see Note 23 to the consolidated financial statements included in Item 8.
          Interest expense decreased $4.5 million to $25.1 million for the year ended October 31, 2007 compared to $29.6 million for the same period in 2006 due primarily to a 282 basis-point decrease in the average interest rate during the year. The decrease in the average rate is primarily due to additional interest incurred in fiscal year 2006 on the Company’s 6.25 percent senior notes as a result of the Company’s inability to timely complete a required exchange offer and due in part to the reduction in interest resulting from the issuance of $250.0 million of senior convertible notes.
          The effective tax rate for our continuing operations for the year ended October 31, 2007 was 31.5 percent compared to 36.0 percent for the year ended October 31, 2006. The reduced rate in fiscal year 2007 was primarily caused by a tax benefit of $3.4 million attributable to the utilization of a capital loss carryforward, coupled with a tax benefit of $0.8 million attributable to the completion and settlement of an audit by the Commonwealth of Puerto Rico for tax periods 1999, 2000 and 2001. For additional information, see Note 18 to the consolidated financial statements included in Item 8.
          As of October 31, 2007, our outstanding debt totaled $450.3 million. On June 27, 2007, we issued $125.0 million aggregate principal amount of 3.125 percent senior convertible notes due 2014 and $125.0 million aggregate principal amount of 3.375 percent senior convertible notes due 2016. As part of this debt transaction, we prepaid the remaining balance of our Term Loan B for $164.0 million, sold common stock warrants and purchased call options resulting in a net cash outflow of $16.2 million and recorded debt issuance costs of $6.2 million. We had net debt proceeds of $73.5 million ($250.0 million in proceeds of long-term debt and $176.5 million in repayments of long-

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term debt). Also, as part of this debt transaction, we repurchased approximately 7.7 million shares of our Class A common stock for $64.2 million in negotiated transactions which reduced our shareholder’s equity.
Preneed Sales into and Deliveries out of the Backlog
          Preneed funeral sales decreased 1.1 percent for the year ended October 31, 2007 compared to the same period in 2006. This decrease is primarily due to a decline in preneed funeral sales in our Eastern division due to the selection of a new preneed insurance vendor and increased regulatory requirements for licensing.
          The revenues from our preneed funeral and cemetery merchandise and service sales are deferred into our backlog and are not included in our operating results presented above. We added $179.2 million in gross preneed sales to our funeral and cemetery merchandise and services backlog (including $76.9 million related to insurance-funded preneed funeral contracts) during the year ended October 31, 2007 to be recognized in the future (net of cancellations) as these prepaid products and services are delivered, compared to gross sales of $182.5 million (including $74.5 million related to insurance-funded preneed funeral contracts) for the corresponding period in 2006. Deliveries out of our preneed funeral and cemetery merchandise and services backlog, including accumulated trust earnings related to these preneed deliveries, amounted to $145.2 million for the year ended October 31, 2007, compared to $151.8 million for the corresponding period in 2006, resulting in net increases in the backlog of $34.0 million and $30.7 million for the years ended October 31, 2007 and 2006, respectively.
Liquidity and Capital Resources
General
          We generate cash in our operations primarily from at-need sales, preneed sales that turn at-need, funds we are able to withdraw from our trusts and escrow accounts when preneed sales turn at-need, monies collected on preneed sales that are not required to be trusted and cemetery perpetual care trust earnings. Over the last five years, we have generated more than $50.0 million each year in cash flow from operations. We have historically satisfied our working capital requirements with cash flows from operations. We believe that our current level of cash on hand, projected cash flows from operations and available capacity under our $125.0 million revolving credit facility will be sufficient to meet our cash requirements for the foreseeable future, although we will need to renew or replace our revolving credit facility which matures in November 2009 and will need to refinance long-term debt becoming due in 2013 through 2016, as described below.
          As described above in the section “Overview—Recent Events,” during our 2008 fiscal year and particularly during our fourth fiscal quarter, the United States and global economies experienced substantial declines. The anticipated future effect of these events on our cash flow is described in that section and in Item 1A. “Risk Factors.”
          We have initiated discussions with members of our bank group regarding the renewal of the $125.0 million revolving credit facility which matures in November 2009. While we have nothing drawn as of October 31, 2008, we do have $14.6 million in letters of credit and a $30.8 million bond we are required to maintain to guarantee our obligations related to funds we withdrew in fiscal year 2001 from trusts in Florida. As of October 31, 2008, we had cash and cash equivalents of $72.6 million. Given current credit market conditions, we expect a new revolving credit facility to be more expensive than our existing facility and have tighter covenants, including, potentially, more restrictive conditions on when we can pay dividends and repurchase stock. We have entered into discussions to assess commitment levels, pricing and covenant expectations. While we expect to renew or replace the current credit facility with acceptable terms, if we are unable to negotiate a facility at acceptable terms, we would be required to cover the letters of credit and may be required to cover the Florida bond with existing cash on hand. As of October 31, 2008, we had sufficient cash on hand to cover these funding obligations but if current economic conditions do not improve and we are unable to secure a new credit facility, we will be required to continue to impose cost and cash savings strategies which, for example, could result in the elimination of the dividend, reduced capital expenditures and other cash savings steps. Our availability under the revolving credit facility, after giving consideration to aforementioned outstanding letters of credit and bond, was $79.6 million as of October 31, 2008. Our $200.0 million senior notes are not redeemable by us until February 15, 2009 and mature on February 15, 2013. We also have $250.0 million in senior convertible notes, half of which mature in 2014 and the other half of which mature in 2016. See the table below under “Contractual Obligations and Commercial Commitments” for further information on our long-term debt obligations.

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          We plan to conserve our cash pending the renewal or replacement of our revolving credit facility. Otherwise, we plan to continue to evaluate our options for deployment of cash flow as opportunities arise. We believe that the use of our cash to pay dividends, repurchase debt and stock, construct funeral homes on cemeteries of unaffiliated third parties and make acquisitions of or investments in death care or related businesses are attractive options. We believe that growing our organization through acquisitions and investments is a good business strategy, as it will enable us to enjoy the important synergies and economies of scale from our infrastructure. We regularly review acquisition and other strategic opportunities, which may require us to draw on our revolving credit facility or pursue additional debt or equity financing.
          We currently pay quarterly cash dividends of two and one-half cents per share on our Class A and B common stock, which amounted to $9.4 million for year ended October 31, 2008. Although we intend to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of our financial performance. We also have a $75.0 million stock repurchase program, of which $26.6 million remains available as of October 31, 2008. Repurchases under the program are limited to our Class A common stock, and are made in the open market or in privately negotiated transactions at such times and in such amounts as management deemed appropriate, depending upon market conditions and other factors.
Cash Flow
Comparison of Fiscal Year 2008 to Fiscal Year 2007
          Our operations provided cash of $84.5 million for the year ended October 31, 2008, compared to $81.9 million for the corresponding period in 2007. The increase in operating cash flow is primarily due to $9.3 million in net tax payments made in fiscal year 2007 compared to $4.0 million in net tax refunds received in fiscal year 2008, which included approximately $21.8 million in tax refunds in 2008 compared to $5.8 million in refunds in 2007. We expect to be a cash tax payer in fiscal year 2009. The timing of additional refunds cannot be predicted at this time, although we continually review our tax planning strategies looking for opportunities. These increases are partially offset by $3.2 million of business interruption insurance proceeds and $1.3 million of insurance proceeds, net of expenses, related to Hurricane Katrina, received in fiscal year 2007. In addition, in fiscal year 2007, we withdrew $2.1 million of unusual trust withdrawals related to the deferred revenue project and received $2.1 million due to the execution of a lease of our mineral rights at one of our cemeteries to an outside third party.
          Our investing activities resulted in a net cash outflow of $27.4 million for the year ended October 31, 2008, compared to a net cash outflow of $34.2 million for the comparable period in 2007. The change is primarily due to the fact that we purchased several properties in 2007 resulting in a net cash outflow of $5.2 million compared to $1.4 million in 2008 and due to a decline in capital expenditures related to Hurricane Katrina. For the year ended October 31, 2008, capital expenditures amounted to $27.0 million, which included $17.4 million for maintenance capital expenditures, $1.0 million for growth initiatives, $2.9 million related to Hurricane Katrina and $5.7 million related to the implementation of new business systems. For the year ended October 31, 2007, capital expenditures were $35.3 million, which included $18.9 million for maintenance capital expenditures, $3.5 million for growth initiatives, $8.4 million related to Hurricane Katrina and $4.5 million related to the implementation of new business systems. In the year ended October 31, 2008, there were no insurance proceeds related to hurricane damaged properties compared to $2.5 million in the same period in 2007.
          Our financing activities resulted in a net cash outflow of $56.1 million for the year ended October 31, 2008, compared to a net cash outflow of $20.1 million for the comparable period in 2007. This change is primarily due to net debt proceeds of $73.5 million ($250.0 million in proceeds of long-term debt and $176.5 million in repayments of long-term debt) in 2007. There were $0.2 million in debt repayments in 2008. In June 2007, we issued $250.0 million in senior convertible notes. As part of this debt transaction, we prepaid the remaining balance of our Term Loan B for $164.0 million, sold common stock warrants and purchased call options resulting in a net cash outflow of $16.2 million and recorded debt issuance costs of $6.2 million. Also, as part of this debt transaction, we

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repurchased approximately 7.7 million shares of our Class A common stock for $64.2 million, compared to $48.6 million in cash outflows related to our current stock repurchase program in 2008.
Comparison of Fiscal Year 2007 to Fiscal Year 2006
          Our operations provided cash of $81.9 million for the year ended October 31, 2007, compared to providing cash of $90.1 million for the corresponding period in 2006. The change in operating cash flow is due to cash inflows of $2.1 million of extraordinary trust withdrawals in 2007 compared to cash inflows of $14.8 million for trust withdrawals in 2006 related to the deferred revenue project. Also, $9.3 million of net tax payments were made during the year ended October 31, 2007 compared to $4.2 million of net tax payments for the comparable period in 2006 due to a net operating loss carryforward utilized in fiscal year 2006. There were $1.3 million of net cash inflows recorded related to Hurricane Katrina in 2007 compared to $3.8 million of cash outflows in 2006. The timing of receipt of insurance proceeds does not match the timing of cash spending related to Hurricane Katrina. Lastly, we received $2.1 million due to the execution of a lease of our mineral rights at one of our cemeteries to an outside third party.
          Our investing activities resulted in a net cash outflow of $34.2 million for the year ended October 31, 2007, compared to a net cash outflow of $21.4 million for the comparable period in 2006. For the year ended October 31, 2007, capital expenditures amounted to $35.3 million, which included $18.9 million for maintenance capital expenditures, $3.5 million for growth initiatives, $8.4 million related to Hurricane Katrina and $4.5 million related to the implementation of two new business systems. For the year ended October 31, 2006, capital expenditures amounted to $28.9 million, which included $20.7 million for maintenance capital expenditures, $2.9 million for growth initiatives and $5.3 million related to Hurricane Katrina. We also purchased several properties in fiscal year 2007 resulting in a net cash outflow of $5.2 million. For the year ended October 31, 2007, there was a net cash inflow of $2.5 million for insurance proceeds related to hurricane damaged properties compared to $6.0 million as of October 31, 2006.
          Our financing activities resulted in a net cash outflow of $20.1 million for the year ended October 31, 2007, compared to a net cash outflow of $65.4 million for the comparable period in 2006. This change is primarily due to net debt proceeds of $73.5 million ($250.0 million in proceeds of long-term debt and $176.5 million in repayments of long-term debt) in fiscal year 2007 compared to $33.2 million of debt repayments in fiscal year 2006. A $30.0 million unscheduled Term Loan B payment was made during the second quarter of 2006. In June 2007, we issued $250.0 million in senior convertible notes as described in Note 15 to the consolidated financial statements included in Item 8. As part of this debt transaction, we prepaid the remaining balance of our Term Loan B for $164.0 million, sold common stock warrants and purchased call options resulting in a net cash outflow of $16.2 million and recorded debt issuance costs of $6.2 million. Also, as part of this debt transaction, we repurchased approximately 7.7 million shares of our Class A common stock for $64.2 million, compared to $22.0 million in stock repurchases for the same period in 2006 under our stock repurchase program in effect at that time.
Contractual Obligations and Commercial Commitments
          As of October 31, 2008, our outstanding debt balance totaled $450.1 million. We have contractual obligations requiring future cash payments under existing contractual arrangements. The following table details our known future cash payments (in millions) related to various contractual obligations as of October 31, 2008.
                                         
    Payments Due by Period  
            Fiscal Year     Fiscal Years     Fiscal Years        
Contractual Obligations   Total     2009     2010-2011     2012-2013     Thereafter  
Long-term debt obligations (1)
  $ 450.1     $     $     $ 200.0     $ 250.1  
Interest on long-term debt (2)
    113.2       20.6       41.3       35.0       16.3  
Operating lease agreements (3)
    30.6       4.6       6.0       3.5       16.5  
Non-competition and other agreements (4)
    1.0       .5       .5              
 
                             
 
  $ 594.9     $ 25.7     $ 47.8     $ 238.5     $ 282.9  
 
                             

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(1)   See below for a breakdown of future scheduled principal payments and maturities of our long-term debt by type as of October 31, 2008.
 
(2)   Includes contractual interest payments for our senior convertible notes, senior notes and third-party debt.
 
(3)   Our noncancellable operating leases are primarily for land and buildings and expire over the next 1 to 14 years, except for seven leases that expire between 2032 and 2039. In the first quarter of 2008, we entered into a capital lease for equipment with a two-year term for approximately $0.4 million. Our future minimum lease payments as of October 31, 2008 were $4.6 million, $3.5 million, $2.5 million, $2.0 million, $1.5 million and $16.5 million for the years ending October 31, 2009, 2010, 2011, 2012, 2013 and later years, respectively.
 
(4)   We have entered into non-competition agreements with prior owners and key employees of acquired subsidiaries that expire at various times through 2012. During fiscal year 2001, we decided to relieve some of the prior owners and key employees of their obligations not to compete; however, we will continue to make the payments in accordance with the contract terms. This category also includes separation pay related to former executive officers.
          The following table details our known potential or possible future cash payments related to various contingent obligations as of October 31, 2008.
                                         
    Expiration by Period  
            Fiscal Year     Fiscal Years     Fiscal Years        
Contingent Obligations   Total     2009     2010-2011     2012-2013     Thereafter  
Cemetery perpetual care trust funding obligation(1)
  $ 13.3     $ 13.3     $     $     $  
Long-term obligations related to uncertain tax positions(2)
    5.0                         5.0  
 
                             
 
  $ 18.3     $ 13.3     $     $     $ 5.0  
 
                             
 
(1)   In those states where we have withdrawn realized net capital gains in the past from our cemetery perpetual care trusts, regulators may seek replenishment of the realized net capital losses either by requiring a cash deposit to the trust or by prohibiting or restricting withdrawals of future earnings until they cover the loss. The estimated probable funding obligation in the cemetery perpetual care trusts in these states was $13.3 million as of October 31, 2008, and we recorded this as an increase in cemetery costs in fiscal year 2008. As of October 31, 2008, we had unrealized losses of $64.4 million in the trusts in these states. Because all of these trusts currently have assets with a fair market value less than the aggregate amounts required to be contributed to the trust, any additional realized net capital losses in these trusts may result in a corresponding funding liability and increase in cemetery costs.
 
(2)   As discussed in Notes 3 and 18 to the consolidated financial statements included in Item 8, we adopted the provisions of FIN 48 on November 1, 2007. In accordance with the provisions of FIN 48, we recorded $5.0 million of unrecognized tax benefits and related interest and penalties. Due to the uncertainty regarding the timing and completion of audits and possible outcomes, it is not possible to estimate the range of increase and decrease and the timing thereof of any potential cash payments.
          As of October 31, 2008, our outstanding debt balance was $450.1 million, consisting of $250.0 million in senior convertible notes, $200.0 million of 6.25 percent senior notes and $0.1 million of other debt. There were no amounts drawn on the revolving credit facility. The following table reflects future scheduled principal payments and maturities of our long-term debt (in millions) as of October 31, 2008.

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                            Other        
                            Principally        
                            Seller        
    Revolving     Senior             Financing of        
    Credit     Convertible             Acquired        
Fiscal Year Ending October 31,   Facility     Notes     Senior Notes     Operations     Total  
2009
  $     $     $     $     $  
2010
                             
2011
                             
2012
                             
2013
                200.0             200.0  
Thereafter
          250.0             .1       250.1  
 
                             
Total long-term debt
  $     $ 250.0     $ 200.0     $ .1     $ 450.1  
 
                             
Off-Balance Sheet Arrangements
              Our off-balance sheet arrangements as of October 31, 2008 consist of the following two items:
  (1)   the $30.8 million bond we are required to maintain to guarantee our obligations relating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts in Florida, which is discussed in Note 20 to the consolidated financial statements included in Item 8; and
 
  (2)   the insurance-funded preneed funeral contracts, which will be funded by life insurance or annuity contracts issued by third-party insurers, are not reflected in our consolidated balance sheets, and are discussed in Note 2(i) to the consolidated financial statements included in Item 8.
Ratio of Earnings to Fixed Charges
          Our ratio of earnings to fixed charges was as follows:
                 
Years ended October 31,
2008   2007   2006   2005   2004
1.72 (1)
  3.05 (2)   2.83 (3)   1.34 (4)(5)   1.97 (6)
 
(1)   Pretax earnings for fiscal year 2008 include a charge of $2.3 million related to Hurricanes Katrina and Ike, a charge of $26.0 million for impairment of goodwill, a $13.3 million charge related to the estimated probable obligation to fund the cemetery perpetual care trust net realized losses and gains on dispositions, net impairment losses of ($0.4) million.
 
(2)   Pretax earnings for fiscal year 2007 include a charge of $2.5 million related to Hurricane Katrina, a charge of $0.6 million for separation charges primarily related to separation pay of a former executive officer who retired in the first quarter of 2007 and $0.7 million for the loss on early extinguishment of debt related to the June 2007 senior convertible debt transaction.
 
(3)   Pretax earnings for fiscal year 2006 includes a net recovery of $1.6 million related to Hurricane Katrina, business interruption proceeds of $3.2 million related to Hurricane Katrina, a charge of $1.0 million for separation charges related to July 2005 restructuring of our divisions and the retirement of an executive officer and gains on dispositions, net of impairment losses of ($0.2) million.
 
(4)   Pretax earnings for fiscal year 2005 include a charge of $9.4 million for expenses related to Hurricane Katrina, a charge of $1.5 million for separation charges related to the July 2005 restructuring of our divisions, $1.3 million of gains on disposition, net of impairment losses and $32.8 million for the loss on early extinguishment of debt related to the 2005 debt refinancings.
 
(5)   Excludes the cumulative effect of change in accounting principles.
 
(6)   Pretax earnings for fiscal year 2004 include charges of $3.4 million for severance and other costs relating to the workforce reductions announced in December 2003 and separation payments to a former executive officer and ($0.2) million in gains on dispositions, net of impairment losses

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          For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings from continuing operations plus fixed charges (excluding interest capitalized during the period). Fixed charges consist of interest expense, capitalized interest, amortization of debt expense and discount or premium relating to any indebtedness and the portion of rental expense that management believes to be representative of the interest component of rental expense.
Effect of Recent Accounting Standards
          For additional information on changes in accounting principles and new accounting principles, see Note 3 to the consolidated financial statements included in Item 8.
Inflation
          Inflation has not had a significant impact on our operations over the past three years, nor is it expected to have a significant impact in the foreseeable future.
Item 7A. Quantitative and Qualitative Disclosures About Market Risk
          The market risk inherent in our market risk sensitive instruments and positions is the potential change arising from increases or decreases in the prices of marketable equity securities and interest rates as discussed below. Generally, our market risk sensitive instruments and positions are characterized as “other than trading.” Our exposure to market risk as discussed below includes forward-looking statements and represents an estimate of possible changes in fair value or future earnings that would occur assuming hypothetical future movements in equity markets or interest rates. Our views on market risk are not necessarily indicative of actual results that may occur, and do not represent the maximum possible gains and losses that may occur. Actual gains and losses, fluctuations in equity markets, interest rates and the timing of transactions, may differ from those estimated.
          On June 27, 2007, we issued $125.0 million aggregate principal amount of 3.125 percent senior convertible notes due 2014 and $125.0 million aggregate principal amount of 3.375 percent senior convertible notes due 2016. As part of this transaction, we sold common stock warrants and purchased call options. Such transactions were entered into to mitigate the potential dilutive effect of the conversion feature of the senior convertible notes on our common stock. For additional information about these transactions, see Note 15 to our consolidated financial statements included in Item 8.
Marketable Equity Securities
          As of October 31, 2008 and 2007, our marketable equity securities subject to market risk consisted principally of investments held by our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts and escrow accounts and had fair values of $387.4 million and $598.0 million, respectively, which were determined using final sale prices quoted on stock exchanges. Each 10 percent change in the average market prices of the equity securities held in such accounts would result in a change of approximately $38.7 million and $59.8 million, respectively, in the fair value of such accounts.
          Our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts and escrow accounts, all of which are managed by ITI, are further discussed in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” in Item 7, and in Notes 4, 5 and 6 to our consolidated financial statements included in Item 8. ITI operates pursuant to a formal investment policy as discussed in “Operations” included in Item 1.
Interest
          We have entered into various fixed- and variable-rate debt obligations, which are detailed in Note 15 to our consolidated financial statements included in Item 8.

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          As of October 31, 2008, our long-term fixed-rate debt consists of our $200.0 million 6.25 percent senior notes, $125.0 million 3.125 percent senior convertible notes, $125.0 million 3.375 percent senior convertible notes and our third-party debt. On June 27, 2007 we issued the $250.0 million of senior convertible notes. This transaction is further discussed in Note 15 to our consolidated financial statements included in Item 8. As of October 31, 2008 and 2007, the carrying values of our long-term fixed-rate debt, including accrued interest, were approximately $455.1 million and $455.7 million, respectively, compared to fair values of $331.6 million and $457.1 million, respectively. Fair values were determined using quoted market prices. Each approximate 10 percent change in the average interest rates applicable to determine the fair value of such debt, 115 basis points for 2008 and 50 basis points for 2007 would result in changes of approximately $17.6 million and $13.3 million, respectively, in the fair values of these instruments. If these instruments are held to maturity, no change in fair value will be realized.
          In June 2007, we prepaid the remaining balance of our variable-rate Term Loan B using proceeds from the issuance of the senior convertible notes. As of October 31, 2008 and 2007, there were no amounts drawn on the revolving credit facility.
          We monitor our mix of fixed- and variable-rate debt obligations in light of changing market conditions and from time to time may alter that mix by, for example, refinancing balances outstanding under our variable-rate senior secured credit facility with fixed-rate debt or by entering into interest rate swaps.
          As of October 31, 2008 and 2007, our fixed-income securities subject to market risk consisted principally of investments in our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts and escrow accounts and had aggregate quoted market values of $131.5 million and $159.0 million, respectively. Each 10 percent change in interest rates on these fixed-income securities would result in changes of approximately $3.1 million and $3.8 million, respectively, in the fair values of such securities based on discounted expected future cash flows. If these securities are held to maturity, no change in fair value will be realized.
          As of October 31, 2008 and 2007, our money market and other short-term investments subject to market risk, including amounts held in preneed funeral and cemetery merchandise and services trusts, and in our cemetery perpetual care trusts, had carrying values approximating their fair values of $138.6 million and $171.1 million, respectively. Under our current accounting methods, a change in the average interest rate earned by our preneed funeral and cemetery merchandise and services trusts would not result in a change in our current pretax earnings. As such, as of October 31, 2008 and 2007, only $25.3 million and $27.1 million, respectively, of these short-term investments, which includes amounts in the cemetery perpetual care trusts and other short-term investments not held in trust, were subject to changes in interest rates. Each 10 percent change in average interest rates applicable to such investments, 10 basis points for 2008 and 2007, would result in changes of less than $0.1 million for 2008 and 2007 in our pretax earnings.
          The fixed-income securities, money market and other short-term investments owned by us are principally invested in our preneed funeral and cemetery merchandise and services trusts and our cemetery perpetual care trusts and escrow accounts, which are managed by ITI. ITI operates pursuant to a formal investment policy as discussed above.
Item 8. Financial Statements and Supplementary Data
          Index to Consolidated Financial Statements

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Report of Independent Registered Public Accounting Firm
To the Board of Directors and
Shareholders of Stewart Enterprises, Inc.
In our opinion, the consolidated financial statements listed in the accompanying index present fairly, in all material respects, the financial position of Stewart Enterprises, Inc. and its subsidiaries at October 31, 2008 and 2007, and the results of their operations and their cash flows for each of the three years in the period ended October 31, 2008 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of October 31, 2008, based on criteria established in Internal Control — Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements and financial statement schedule, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in Management’s Report on Internal Control Over Financial Reporting appearing under Item 9A. Our responsibility is to express opinions on these financial statements, on the financial statement schedule, and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
As discussed in Note 3 to the consolidated financial statements, the Company changed the manner in which it accounts for uncertain tax positions effective November 1, 2007.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
PricewaterhouseCoopers LLP
New Orleans, Louisiana
December 18, 2008

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(Dollars in thousands, except per share amounts)
                         
    Year Ended October 31,  
    2008     2007     2006  
Revenues:
                       
Funeral
  $ 286,607     $ 279,330     $ 280,237  
Cemetery
    241,276       243,487       233,993  
 
                 
 
    527,883       522,817       514,230  
 
                 
 
                       
Costs and expenses:
                       
Funeral
    218,228       216,375       215,042  
Cemetery
    208,838       194,012       184,575  
 
                 
 
    427,066       410,387       399,617  
 
                 
Gross profit
    100,817       112,430       114,613  
Corporate general and administrative expenses
    (32,611 )     (31,143 )     (31,739 )
Impairment of goodwill
    (25,952 )            
Hurricane related recoveries (charges), net
    (2,297 )     (2,533 )     1,628  
Separation charges
          (580 )     (991 )
Gains on dispositions and impairment (losses), net
    (353 )     (44 )     (153 )
Other operating income, net
    819       1,651       1,333  
 
                 
Operating earnings
    40,423       79,781       84,691  
Interest expense
    (24,115 )     (25,065 )     (29,633 )
Loss on early extinguishment of debt
          (677 )      
Investment and other income, net
    2,406       3,374       3,676  
 
                 
Earnings from continuing operations before income taxes
    18,714       57,413       58,734  
Income taxes
    22,407       18,099       21,154  
 
                 
Earnings (loss) from continuing operations
    (3,693 )     39,314       37,580  
 
                 
Discontinued operations:
                       
Earnings (loss) from discontinued operations before income taxes
          807       (80 )
Income tax expense (benefit)
          308       (93 )
 
                 
Earnings from discontinued operations
          499       13  
 
                 
 
                       
Net earnings (loss)
  $ (3,693 )   $ 39,813     $ 37,593  
 
                 
 
                       
Basic earnings (loss) per common share:
                       
Earnings (loss) from continuing operations
  $ (.04 )   $ .38     $ .35  
Earnings from discontinued operations
          .01        
 
                 
Net earnings (loss)
  $ (.04 )   $ .39     $ .35  
 
                 
 
                       
Diluted earnings (loss) per common share:
                       
Earnings (loss) from continuing operations
  $ (.04 )   $ .38     $ .35  
Earnings from discontinued operations
          .01        
 
                 
Net earnings (loss)
  $ (.04 )   $ .39     $ .35  
 
                 
 
                       
Weighted average common shares outstanding (in thousands):
                       
Basic
    93,795       102,584       106,855  
 
                 
Diluted
    93,795       102,737       106,900  
 
                 
 
                       
Dividends declared per common share
  $ .10     $ .10     $ .10  
 
                 
See accompanying notes to consolidated financial statements.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
                 
    October 31,  
    2008     2007  
ASSETS
               
Current assets:
               
Cash and cash equivalents
  $ 72,574     $ 71,545  
Marketable securities
    55       262  
Receivables, net of allowances
    59,129       60,615  
Inventories
    35,870       36,061  
Prepaid expenses
    7,317       6,355  
Deferred income taxes, net
    8,798       8,621  
 
           
Total current assets
    183,743       183,459  
Receivables due beyond one year, net of allowances
    70,671       83,608  
Preneed funeral receivables and trust investments
    368,412       515,053  
Preneed cemetery receivables and trust investments
    182,141       255,679  
Goodwill
    247,236       273,286  
Cemetery property, at cost
    375,832       373,038  
Property and equipment, at cost:
               
Land
    42,343       42,334  
Buildings
    319,839       310,968  
Equipment and other
    178,589       164,246  
 
           
 
    540,771       517,548  
Less accumulated depreciation
    236,243       213,063  
 
           
Net property and equipment
    304,528       304,485  
Deferred income taxes, net
    179,515       192,859  
Cemetery perpetual care trust investments
    173,090       236,503  
Non-current assets held for sale
    2,873       3,195  
Other assets
    16,474       17,809  
 
           
Total assets
  $ 2,104,515     $ 2,438,974  
 
           
(continued)

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(Dollars in thousands, except per share amounts)
                 
    October 31,  
    2008     2007  
LIABILITIES AND SHAREHOLDERS’ EQUITY
               
Current liabilities:
               
Current maturities of long-term debt
  $ 20     $ 198  
Accounts payable
    27,652       26,606  
Accrued payroll and other benefits
    14,133       16,316  
Accrued insurance
    21,287       21,252  
Accrued interest
    5,864       5,576  
Estimated obligation to fund cemetery perpetual care trust
    13,281        
Other current liabilities
    16,198       17,958  
Income taxes payable
    2,061       4,177  
 
           
Total current liabilities
    100,496       92,083  
Long-term debt, less current maturities
    450,095       450,115  
Deferred preneed funeral revenue
    245,182       256,603  
Deferred preneed cemetery revenue
    275,835       284,507  
Non-controlling interest in funeral and cemetery trusts     475,420       683,052  
Other long-term liabilities
    20,479       13,869  
 
           
Total liabilities
    1,567,507       1,780,229  
 
           
Commitments and contingencies (Note 20)
Non-controlling interest in perpetual care trusts
    171,371       235,427  
 
           
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 88,693,127 and 94,865,387 shares at October 31, 2008 and 2007, respectively
    88,693       94,865  
Class B authorized 5,000,000 shares; issued and outstanding 3,555,020 shares at October 31, 2008 and 2007; 10 votes per share convertible into an equal number of Class A shares
    3,555       3,555  
Additional paid-in capital
    536,902       583,789  
Accumulated deficit
    (263,550 )     (258,902 )
Accumulated other comprehensive income :
               
Unrealized appreciation of investments
    37       11  
 
           
Total accumulated other comprehensive income
    37       11  
 
           
Total shareholders’ equity
    365,637       423,318  
 
           
Total liabilities and shareholders’ equity
  $ 2,104,515     $ 2,438,974  
 
           
See accompanying notes to consolidated financial statements.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
                                                 
                            Unearned              
            Additional             Restricted     Unrealized     Total  
    Common     Paid-In     Accumulated     Stock     Depreciation     Shareholders’  
    Stock (1)     Capital     Deficit     Compensation     of Investments     Equity  
 
                                               
Balance October 31, 2005
  $ 108,670     $ 667,663     $ (336,308 )   $ (569 )   $ (3 )   $ 439,453  
 
                                               
Comprehensive income: net earnings
                37,593                   37,593  
Adoption of SFAS No. 123R
          (569 )           569              
Restricted stock activity
    6       327                         333  
Issuance of common stock
    150       648                         798  
Stock options exercised
    33       149                         182  
Stock option expense
          1,203                         1,203  
Purchase and retirement of common stock
    (3,896 )     (18,100 )                       (21,996 )
Dividends ($.10 per share)
          (10,673 )                       (10,673 )
 
                                   
Balance October 31, 2006
  $ 104,963     $ 640,648     $ (298,715 )   $     $ (3 )   $ 446,893  
 
                                   
                                         
                            Unrealized        
                            Appreciation     Total  
    Common     Additional Paid-In     Accumulated     (Depreciation)     Shareholders’  
    Stock (1)     Capital     Deficit     of Investments     Equity  
 
                                       
Balance October 31, 2006
  $ 104,963     $ 640,648     $ (298,715 )   $ (3 )   $ 446,893  
 
                                       
Comprehensive income:
                                       
Net earnings
                39,813             39,813  
 
                                       
Other comprehensive income:
                                       
Unrealized appreciation of investments, net of deferred tax expense of ($8)
                      14       14  
 
                             
Total other comprehensive income
                      14       14  
 
                             
Total comprehensive income
                39,813       14       39,827  
 
                                       
Restricted stock activity
    531       (144 )                 387  
Issuance of common stock
    213       1,249                   1,462  
Stock options exercised
    411       2,221                   2,632  
Stock option expense
          1,576                   1,576  
Tax benefit associated with stock options exercised
          76                   76  
Purchase and retirement of common stock
    (7,698 )     (56,503 )                 (64,201 )
Purchase of call options, net of tax benefit of $21,000
          (39,000 )                 (39,000 )
Sale of common stock warrants
          43,850                   43,850  
Dividends ($.10 per share)
          (10,184 )                 (10,184 )
 
                             
Balance October 31, 2007
  $ 98,420     $ 583,789     $ (258,902 )   $ 11     $ 423,318  
 
                             
(continued)

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF SHAREHOLDERS’ EQUITY
(Dollars in thousands, except per share amounts)
                                         
                            Unrealized     Total  
    Common     Additional Paid-In     Accumulated     Appreciation     Shareholders’  
    Stock (1)     Capital     Deficit     of Investments     Equity  
 
                                       
Balance October 31, 2007
  $ 98,420     $ 583,789     $ (258,902 )   $ 11     $ 423,318  
 
                                       
Comprehensive income (loss):
                                       
Net loss
                (3,693 )           (3,693 )
 
                                       
Other comprehensive income:
                                       
Unrealized appreciation of investments, net of deferred tax expense of ($15)
                      26       26  
 
                             
Total other comprehensive income
                      26       26  
 
                             
Total comprehensive income (loss)
                (3,693 )     26       (3,667 )
 
                                       
Cumulative effect of adoption of FIN 48
                (955 )           (955 )
Restricted stock activity
    9       440                   449  
Issuance of common stock
    172       1,082                   1,254  
Stock options exercised
    265       1,249                   1,514  
Stock option expense
          1,544                   1,544  
Tax benefit associated with stock options exercised
          181                   181  
Purchase and retirement of common stock
    (6,618 )     (42,009 )                 (48,627 )
Dividends ($.10 per share)
          (9,374 )                 (9,374 )
 
                             
Balance October 31, 2008
  $ 92,248     $ 536,902     $ (263,550 )   $ 37     $ 365,637  
 
                             
 
(1)   Amount includes shares of Class A common stock with a stated value of $1 per share, and includes 3,555 shares (in thousands) of Class B common stock.
See accompanying notes to consolidated financial statements

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Dollars in thousands, except per share amounts)
                         
    Year Ended October 31,  
    2008     2007     2006  
Cash flows from operating activities:
                       
Net earnings (loss)
  $ (3,693 )   $ 39,813     $ 37,593  
Adjustments to reconcile net earnings (loss) to net cash provided by operating activities:
                       
(Gains) on dispositions and impairment losses, net
    353       (565 )     327  
Impairment of goodwill
    25,952              
Loss on early extinguishment of debt
          677        
Depreciation and amortization
    28,275       27,638       25,666  
Provision for doubtful accounts
    7,995       9,756       6,795  
Share-based compensation
    2,819       2,687       2,146  
Excess tax benefits from share-based payment arrangements
    (227 )     (153 )     (11 )
Provision for deferred income taxes
    7,174       4,337       14,281  
Estimated obligation to fund cemetery perpetual care trust
    13,281              
Other
    443       908       2,428  
Changes in assets and liabilities:
                       
(Increase) decrease in receivables
    12,107       (7,795 )     (22,256 )
(Increase) decrease in prepaid expenses
    (1,031 )     73       (2,741 )
Increase in inventories and cemetery property
    (2,509 )     (4,365 )     (4,193 )
Increase in accounts payable and accrued expenses
    2,623       1,741       10,454  
Net effect of preneed funeral production and maturities:
                       
Decrease in preneed funeral receivables and trust investments
    36,604       4,167       4,567  
Decrease in deferred preneed funeral revenue
    (11,067 )     (15,435 )     (15,375 )
Increase (decrease) in funeral non-controlling interest
    (30,642 )     10,867       5,058  
Net effect of preneed cemetery production and deliveries:
                       
Decrease in preneed cemetery receivables and trust investments
    15,910       5,042       3,479  
Increase (decrease) in deferred preneed cemetery revenue
    (8,673 )     (11,807 )     10,235  
Increase (decrease) in cemetery non-controlling interest
    (9,599 )     11,681       11,686  
Increase (decrease) in other
    (1,572 )     2,674       (38 )
 
                 
Net cash provided by operating activities
    84,523       81,941       90,101  
 
                 
 
                       
Cash flows from investing activities:
                       
Proceeds from sales of marketable securities
    20,219              
Purchases of marketable securities
    (19,956 )     (1 )     (53 )
Proceeds from sale of assets, net
    599       3,750       1,218  
Purchase of subsidiaries and other investments, net of cash acquired
    (1,378 )     (5,203 )      
Insurance proceeds related to hurricane damaged properties
          2,529       6,000  
Additions to property and equipment
    (26,995 )     (35,310 )     (28,907 )
Other
    144       49       302  
 
                 
Net cash used in investing activities
    (27,367 )     (34,186 )     (21,440 )
 
                 
 
                       
Cash flows from financing activities:
                       
Proceeds from long-term debt
          250,000        
Repayments of long-term debt
    (198 )     (176,547 )     (33,168 )
Debt issue costs
          (6,217 )      
Proceeds from sale of common stock warrants
          43,850        
Issuance of common stock
    1,845       3,066       368  
Purchase of call options
          (60,000 )      
Purchase and retirement of common stock
    (48,627 )     (64,201 )     (21,996 )
Dividends
    (9,374 )     (10,184 )     (10,673 )
Excess tax benefits from share-based payment arrangements
    227       153       11  
Other
                62  
 
                 
Net cash used in financing activities
    (56,127 )     (20,080 )     (65,396 )
 
                 
 
                       
Net increase in cash
    1,029       27,675       3,265  
Cash and cash equivalents, beginning of year
    71,545       43,870       40,605  
 
                 
Cash and cash equivalents, end of year
  $ 72,574     $ 71,545     $ 43,870  
 
                 
 
                       
Supplemental cash flow information:
                       
Cash paid (received) during the year for:
                       
Income taxes, net
  $ (3,980 )   $ 9,276     $ 4,266  
Interest
  $ 22,120     $ 24,772     $ 27,564  
Non-cash investing and financing activities:
                       
Issuance of common stock to executive officers and directors
  $ 923     $ 1,028     $ 612  
Issuance of restricted stock, net of forfeitures
  $ 162     $ 4,136     $ 35  
See accompanying notes to consolidated financial statements

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(1) The Company
          Stewart Enterprises, Inc. (the “Company”) is a provider of funeral and cemetery products and services in the death care industry in the United States. Through its subsidiaries, the Company offers a complete 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, 2008, the Company owned and operated 221 funeral homes and 139 cemeteries in 24 states within the United States and Puerto Rico. The Company has five operating and reportable segments consisting of a corporate trust management segment and a funeral and cemetery segment for each of two geographic areas: Western and Eastern. Additional information on segments can be found in Note 21.
(2) Summary of Significant Accounting Policies
          (a) Principles of Consolidation
          The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated. A discussion of discontinued operations and assets held for sale can be found in Note 12.
          (b) 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 and these differences could be material.
          (c) Fair Value of Financial Instruments
          Estimated fair value amounts have been determined using available market information and the valuation methodologies described below. However, considerable judgment is required in interpreting market data to develop estimates of fair value. The use of different market assumptions or valuation methodologies could have a material effect on the estimated fair value amounts.
          The Company considers all highly liquid investments with an original maturity of three months or less to be cash equivalents. The Company deposits its cash and cash equivalents with financial institutions. Such balances typically exceed applicable FDIC insurance limits. The carrying amounts of cash and cash equivalents and current receivables approximate fair value due to the short-term nature of these instruments. The carrying amount of receivables due beyond one year approximates fair value because they bear interest at rates currently offered by the Company for receivables with similar terms and maturities.
          The carrying amounts of securities included in preneed funeral trust investments, preneed cemetery trust investments and cemetery perpetual care trust investments are stated at fair value, as described in Note 2(k).
          The fair value of the Company’s long-term variable-rate and fixed-rate debt is estimated using quoted market prices, where applicable, or future cash flows discounted at rates for similar types of borrowing arrangements as discussed in Note 15.
          Pursuant to Emerging Issues Task Force (“EITF”) Issue No. 90-19, “Convertible Bonds with Issuer Option to Settle for Cash upon Conversion,” (“EITF 90-19”), EITF Issue No. 00-19, “Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock,” (“EITF 00-19”), and EITF Issue No. 01-06, “The Meaning of Indexed to a Company’s Own Stock” (“EITF 01-06”), the senior convertible notes issued in fiscal year 2007 are accounted for as a liability with a carrying amount equal to their principal amount in the

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
consolidated balance sheet and the embedded conversion option in the senior convertible notes has not been accounted for as a separate derivative.
          The call options purchased and warrants sold contemporaneously with the sale of the senior convertible notes are equity contracts that meet the paragraph 11(a) scope exception of Statement of Financial Accounting Standards (“SFAS”) No. 133, “Accounting for Derivative Instruments and Hedging Activities,” (“SFAS No. 133”) and hence do not need to be marked-to-market through earnings. In addition, since the call option and warrant transactions are accounted for as equity transactions, the payment associated with the purchase of the call options and the proceeds received from the issuance of the warrants were recorded in additional paid-in capital in stockholders’ equity as separate equity transactions.
          (d) Inventories
          Inventories are stated at the lower of cost (average cost and first-in, first-out methods) or net realizable value. The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. Such estimates are based on the Company’s projected results. Included in inventory are various cemetery construction projects. The Company allocates costs of these construction projects to the number of units in the respective project.
          (e) Buildings and Equipment
          Buildings and equipment are recorded at cost and are depreciated over their estimated useful lives, primarily using the straight-line method. Building and building improvement items are generally depreciated over a period ranging from 10 to 40 years. Equipment is generally depreciated over the following ranges: light equipment, 5 to 10 years; heavy equipment, 10 years; computer equipment, 3 to 4 years; and crematory equipment, 5 to 20 years. Vehicles are depreciated over 5 to 7 years. Leasehold improvements are depreciated over the shorter of the term of the lease or the life of the asset. Maintenance and repairs are charged to expense whereas renewals and major replacements that extend the assets’ useful lives are capitalized. For the fiscal years ended October 31, 2008, 2007 and 2006, depreciation expense totaled $25,456, $25,146 and $22,841, respectively.
          The Company reviews for continued appropriateness the carrying value of its long-lived assets whenever events and circumstances indicate a potential impairment. This review is based on its projections of anticipated undiscounted future cash flows. If indicators of impairment are present, the Company evaluates the undiscounted future cash flows expected to be generated by those assets compared to the carrying amount of those assets. The net carrying value of assets not recoverable are reduced to fair value. While the Company believes that its estimates of undiscounted future cash flows are reasonable, different assumptions regarding such cash flows and comparable sales values could materially affect its evaluations.
          (f) Preneed Selling Costs
          Preneed selling costs related to the acquisition of new prearranged funeral and cemetery service and merchandise sales are charged to expense as incurred. Preneed selling costs related to the acquisition of new prearranged cemetery property sales are deferred in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”).
          (g) Goodwill
          The Company’s evaluation of the goodwill of its operations consists of 13 reporting units. Those reporting units are: corporate trust management; the Western division funeral operating segment comprised of two reporting units (Western-North and Western-South regions aggregated and Midwestern, Southern and Southwestern regions aggregated); the Western division cemetery operating segment comprised of three reporting units (Western-North

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
region, Western-South region and Midwestern, Southern and Southwestern regions aggregated); the Eastern division funeral operating segment comprised of four reporting units (Southern region, Puerto Rico region, Northern region and Central region); and the Eastern division cemetery operating segment comprised of three reporting units (Puerto Rico region, Southern region and Northern and Central regions aggregated).
          Goodwill of a reporting unit must be tested for impairment on at least an annual basis. The Company conducts its annual goodwill impairment analysis during the fourth quarter of each fiscal year. In addition to an annual review, the Company assesses the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors the Company considers important that could trigger an impairment review include significant underperformance relative to historical or projected future operating results, significant changes in the manner of the use of the Company’s assets or the strategy for its overall business and significant negative industry or economic trends.
          The Company’s goodwill impairment test involves estimates and management judgment. The Company determines fair value of each reporting unit using a discounted cash flow valuation methodology. From time to time, it may obtain assistance from third parties in its evaluation. The discounted cash flow valuation uses projections of future cash flows and includes assumptions concerning future operating performance and economic conditions and may differ from actual future cash flows. The Company tests its results by comparing them to the trading multiples of companies in its industry and supplier industries calculated as enterprise value divided by EBITDA. The Company also reviewed multiples used in recent acquisition transactions. In projecting its cash flows, the Company used growth rates of three to five percent. The Company adjusted the results for its estimate of the impact of the realized losses in its trusts on its cash flows. For the discount rate, the Company used 8.3 percent, which reflected its weighted average cost of capital determined based on its industry and supplier industries and capital structure as adjusted for equity risk premiums and size risk premiums based on its market capitalization. Fair value is calculated as the sum of the projected discounted cash flows of the reporting units over the next five years and terminal value at the end of those five years. The terminal value is calculated as the projected EBITDA at the end of the five year period divided by the discount rate minus terminal growth rates ranging from 2 to 3.5 percent. The Company considered sensitivities within the terminal values and used the midpoint enterprise value as its best estimate.
          Step two of the impairment test involves determining estimates of fair values of the Company’s assets and liabilities. The Company may obtain assistance from third parties in assessing the fair value of certain of its assets, primarily real estate, in performing the step two analysis.
          In reviewing goodwill for impairment, the Company first compares the fair value of each of its reporting units with its carrying amount (including goodwill). If the carrying amount of a reporting unit (including goodwill) exceeds its fair value, the Company then measures the amount of impairment of the reporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill with the carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill is determined in the same manner as the amount of goodwill recognized in a business combination is determined. That is, the Company allocates the fair value of the reporting unit to all of the assets and liabilities of that unit as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the price paid to acquire the reporting unit. The excess of the fair value of the reporting unit over the amounts assigned to its assets and liabilities is the implied fair value of goodwill. An impairment charge is recorded when the carrying amount of goodwill exceeds its implied fair value. See Note 13 for a discussion of the 2008 goodwill impairment charge.
          (h) Stock-Based Compensation
          Effective November 1, 2005, the Company adopted SFAS No. 123R, “Share-Based Payment” (“SFAS No. 123R”), using the modified prospective application transition method. Under this transition method, compensation cost for the period includes the portion vesting in the period for (1) all share-based compensation arrangements

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
granted prior to, but not vested as of November 1, 2005, based on the grant date fair value estimated in accordance with the original provisions of SFAS No. 123, “Accounting for Stock Based Compensation” and (2) all share-based compensation arrangements granted subsequent to November 1, 2005, based on the grant date fair value estimated in accordance with the provisions of SFAS No. 123R. See Note 19 for additional information on SFAS No. 123R.
          (i) Funeral Revenue
          The Company sells price-guaranteed prearranged funeral services and merchandise under contracts that provide for delivery of the services and merchandise at the time of death. Prearranged funeral services are recorded as funeral revenue in the period the funeral is performed. Prearranged funeral merchandise is recognized as revenue upon delivery. When a contract turns at-need or the merchandise is delivered, the contract face value along with related trust dividends, interest income and realized gains and losses are included in revenue along with original contract principal. Prior to performing the funeral or delivering of the merchandise, such sales and related trust earnings are deferred. Funeral services and merchandise sold at the time of need are recorded as funeral revenue in the period the funeral is performed or the merchandise is delivered. The Company records cash advance items such as public transportation arranged on behalf of a customer on a net basis. Discounts are also recorded on a net basis in revenue. The Company presents all taxes assessed by governmental authorities on its revenue-producing transactions (i.e., sales taxes) as well as the recoveries from its customers from these taxes on a net basis in its consolidated financial statements.
          Because preneed services or merchandise will not be provided until the future, most states require that all or a portion of the customer payments under these contracts be protected for the benefit of the customers pursuant to applicable law. Some or all of the funds may be required to be placed into trust accounts (“trust-funded preneed funeral contracts”). Alternatively, where allowed, customers may purchase a life insurance or annuity policy from third-party insurance companies to fund their preneed funeral contracts (“insurance-funded preneed funeral contracts”). The funeral goods and services selected at the time of contract origination will be funded by the insurance policy proceeds, which include increasing insurance benefits. Under either customer funding option, the Company enters into a preneed funeral contract with the customer to provide funeral services in the future. See discussion of insurance-funded preneed funeral contracts below.
          When a trust-funded preneed funeral contract is entered into, the Company records an asset (included in preneed funeral receivables and trust investments) and a corresponding liability (included in deferred preneed funeral revenues) for the contract price. Principal amounts deposited in the trust or escrow accounts generally range from 70 percent 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 as the sale of funeral services for trusting purposes. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed funeral revenues into non-controlling interest in funeral and cemetery trusts.
          The Company defers all dividends and interest earned and net capital gains and losses realized by preneed funeral trust or escrow accounts until the underlying service or merchandise is delivered. Unrealized capital gains and losses are not allocated to contracts. When a contract is delivered, the earned interest, dividends and net realized capital gain or loss which have been allocated to the contract are recognized as components of revenue along with the original contract sales price.
          Deferred preneed funeral revenue represents future funeral contract revenues. In addition to amounts receivable from customers and amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed trust-funded preneed funeral contracts where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future funeral contract revenues and

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts.
          Upon cancellation of a trust-funded preneed funeral contract, a customer is generally entitled to receive a refund of the funds held in trust. In many jurisdictions, the Company may be obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust including investment income at the time of cancellation. If the fair market value of the trusts were to decline below the estimated costs to deliver the underlying products and services, the Company would record a charge to earnings to record a liability for the expected loss on the delivery of contracts in the Company’s backlog. Based upon the analysis described in Note 2(m), no loss amounts have been required to be recognized for the years ended October 31, 2008, 2007 and 2006. See Note 2(m) below.
          Insurance-funded price-guaranteed preneed funeral contracts that will be funded by life insurance or annuity contracts issued by third-party insurers are not reflected in the consolidated balance sheet. The net amount of these contracts that have not been fulfilled as of October 31, 2008 and 2007 was $477,069 and $448,735, respectively. With insurance-funded preneed funeral contracts, the Company earns a commission because it acts as an agent on the sale of the policies. Customer payments of premiums on the insurance policies are sent directly to the insurance company, and the insurance premium receivables and related customer payments are not recorded on the Company’s financial statements. Insurance commissions are recognized as revenue as earned, net of an allowance for cancellations. This allowance amounted to $3,299 and $3,295 for October 31, 2008 and 2007, respectively. The costs related to the commissions are expensed as incurred. Proceeds of these policies may be used by customers for other purposes and are portable to other funeral service providers or for completely separate purposes. Nothing more is recorded until the contracted service or merchandise is delivered. At that time, the face amount of the contract and the build-up in the face value of the contract (i.e., the policy proceeds) are recorded as funeral revenue, as well as the related costs to deliver the contract, and a receivable from the insurance company for the policy proceeds is recorded as a funeral receivable.
          (j) Cemetery Revenue
          The Company sells price-guaranteed preneed cemetery merchandise and services under contracts that provide for delivery of the merchandise and services at the time of need. Preneed cemetery merchandise and service sales are recorded as cemetery revenue in the period the merchandise is delivered or service is performed. Prior to that time, such sales are deferred. Cemetery merchandise and services sold at the time of need are recorded as cemetery revenue in the period the service is performed or the merchandise is delivered. Discounts are recorded on a net basis in revenue. The Company presents all taxes assessed by governmental authorities on its revenue-producing transactions (i.e., sales taxes) as well as the recoveries from its customers from these taxes on a net basis in its consolidated financial statements.
          Some or all of the funds received under preneed cemetery contracts for merchandise or services may be required to be placed into trust accounts, pursuant to applicable state law. With respect to the preneed sale of cemetery merchandise, the Company is generally required to place in trust 30 percent to 50 percent of each installment received. With respect to the preneed sale of cemetery services, the Company is generally required to place in trust 70 percent to 90 percent of each installment received. When a trust-funded preneed cemetery contract is entered into, the Company records an asset (included in preneed cemetery receivables and trust investments) and a corresponding liability (included in deferred preneed cemetery revenues) for the contract price. As the customer makes payments on the contract prior to performance by the Company, the Company deposits into the related trust the required portion of the payment and reclassifies the corresponding amount from deferred preneed cemetery revenues into non-controlling interest in funeral and cemetery trusts.
          Deferred preneed cemetery revenue represents future preneed cemetery revenues to be recognized upon delivery of merchandise or performance of services. In addition to the amounts receivable from customers and

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
amounts not required to be trusted, this includes distributed and distributable trust investment earnings associated with unperformed preneed cemetery services or undelivered preneed cemetery merchandise where the related cash or investments are not held in trust accounts (generally because the Company was permitted to withdraw the cash from the trust before performance of the service or delivery of the merchandise). Future contract revenues and non-distributable net trust investment earnings where the related cash or investments are held in trust accounts are included in non-controlling interest in funeral and cemetery trusts.
          When the contract is delivered, the Company records in revenue the original contract sales price along with dividends, interest income and net realized capital gains and losses. Until that time, the Company defers all dividends and interest earned and net capital gains and losses realized by preneed cemetery merchandise and services trust or escrow accounts as a component of non-controlling interest. Unrealized capital gains and losses are not allocated to contracts. Principal and earnings are withdrawn only as the merchandise or services are delivered or contracts are cancelled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used.
          The Company sells price-guaranteed cemetery contracts providing for property interment rights. For preneed sales of interment rights (cemetery property), the associated revenue and all costs to acquire the sale are recognized in accordance with the retail land sales provisions of SFAS No. 66. Under SFAS No. 66, recognition of revenue and costs must be deferred until 10 percent of the property sale price has been collected. Until the 10 percent has been collected, the Company records all payments received as deposits, does not record receivables and continues to report the inventory in its financial statements in accordance with SFAS No. 66. As of October 31, 2008 and 2007, the amount of inventory included in the Company’s consolidated balance sheets on which the 10 percent collection requirement has not been met was $1,122 and $1,662, respectively. Revenue related to the preneed sale of cemetery property prior to its construction is recognized on a percentage of completion method of accounting as construction occurs. The Company measures the percentage of completion by taking the costs incurred to date and dividing that number by the total projected cost of the project.
          Pursuant to cemetery perpetual care contracts and laws, a portion, generally 10 percent, of the proceeds from cemetery property sales is deposited into perpetual care trusts. The income from these trusts, which have been established in most jurisdictions in which the Company operates cemeteries, is used for maintenance of those cemeteries, but principal, including in some jurisdictions net realized capital gains, must generally be held in perpetuity. As payments are received, the Company generally funds the perpetual care trust in the same proportion as the payment bears to the contract amount. For example, if the Company receives 20 percent of the contract price, it places in trust 20 percent of the total amount it is required to place in the cemetery perpetual care trust for that contract. The Company currently recognizes and withdraws all dividend and interest income earned and, where permitted, capital gains realized by cemetery perpetual care funds.
          If the Company realizes net losses in those states that allowed it to withdraw capital gains, these states may require the Company to make cash deposits to the trust to cover the net loss, or may require the Company to stop withdrawing earnings until future earnings cover the net losses.
          Some of the Company’s sales of cemetery property and merchandise are made under installment contracts bearing interest at prevailing rates. Interest rates on cemetery property contracts range from 4.9 percent to 15.0 percent and have a weighted average interest rate of 8.9 percent. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables that are 90 days outstanding or less.
          (k) Preneed Funeral and Cemetery Merchandise and Services Trusts and Cemetery Perpetual Care Trusts
          The Company implemented Financial Accounting Standards Board (“FASB”) Interpretation No. 46, “Consolidation of Variable Interest Entities” (“FIN 46R”) as of April 30, 2004, which resulted in the consolidation

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
of the Company’s preneed funeral and cemetery merchandise and services trusts and the Company’s cemetery perpetual care trusts. The implementation of FIN 46R affected certain line items in the consolidated balance sheet and statement of earnings as described below, but had no impact on net earnings. Also, the implementation of FIN 46R did not result in any net changes to the Company’s consolidated statement of cash flows, but does require disclosure of certain financing and investing activities. See Notes 4, 5 and 6.
          Although FIN 46R required consolidation of the preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts, it did not change the legal relationships among the trusts, the Company and its customers. In the case of preneed funeral and cemetery merchandise and services trusts, the customers are the legal beneficiaries. In the case of cemetery perpetual care trusts, the Company does not have a legal right to the cemetery perpetual care trust assets. For these reasons, upon consolidation of the trusts, the Company recognized non-controlling interests in its financial statements to reflect third-party interests in these trusts. The Company classifies deposits to the funeral and cemetery merchandise and services trusts as non-controlling liability interests and classifies deposits to the cemetery perpetual care trusts as non-controlling interests outside of liabilities.
          All of these trusts hold investments in cash and marketable equity and debt securities, which are reported at fair value, with the related realized and unrealized gains and losses excluded from earnings and initially reported as a separate component of accumulated other comprehensive income or loss in the Company’s consolidated balance sheet. These earnings are then reclassified to non-controlling interest in funeral and cemetery trusts in the Company’s consolidated balance sheet. Dividends, interest income and realized gains and losses are included in the determination of revenue in accordance with the Company’s revenue recognition policy.
          In order to determine if a loss should be considered realized and included as a component of future revenue recorded as contracts turn at need, the Company looks at specific changes in market conditions or concerns specific to the issuer of the securities. In addition, the Company assesses the likelihood that there is sufficient cash and cash equivalents within the trusts from future preneed sales and ordinary income to fund future services which would allow the Company to hold these investments until they are estimated to recover in value. Further, the Company evaluates its intent at the individual trust level with respect to those securities. This evaluation is performed each quarter.
          In the case of cemetery perpetual care trusts, the Company recognizes investment earnings in cemetery revenues when such earnings are realized and permitted to be legally withdrawn by the Company (with a corresponding debit to non-controlling interest in cemetery perpetual care trusts). Certain states allow the Company to withdraw realized capital gains, and other states prohibit these withdrawals. These earnings and related funds are intended to defray cemetery maintenance costs and are recorded as revenue. In the event that the Company has been allowed to withdraw realized gains and there are realized losses in the trust, the Company may determine it has a funding obligation to restore the net realized losses of the trust. A charge is recorded in the statement of earnings at the time it is considered probable that the Company will be required to restore the realized losses.
          See Notes 4, 5 and 6 for fair market value information for the Company’s preneed funeral trust investments, preneed cemetery trust investments and cemetery perpetual care trust investments. The Company has included as realized losses common and preferred stocks issued by companies in bankruptcy or under a Federal rescue program where the securities issued have become worthless or practically worthless as well as certain securities which it considers recovery of value to be remote.
          Cash flows from preneed funeral and cemetery merchandise and services contracts and cemetery perpetual care contracts are presented as operating cash flows in the Company’s consolidated statements of cash flows, with related unrealized gains and losses excluded as they are attributable to non-controlling interests and flow through accumulated other comprehensive income or loss in the Company’s consolidated balance sheet.
          (l) Trust Fee Revenue

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
          Trust management fees related to the preneed funeral and cemetery merchandise and services trusts and cemetery perpetual care trusts are earned by the Company based on the fair market value of the investments in the trusts. These fees are established by the Company at rates consistent with industry norms and are paid by the trusts to the Company’s subsidiary, ITI.
          (m) Loss Contract Impairment Analysis
          Each quarter, the Company performs an analysis to determine whether its preneed contracts are in a loss position, which would necessitate a charge to earnings. For this analysis, the Company determines which trusts are in a net loss position by comparing the aggregate market value of the trust’s investments with the aggregate actual cost basis of the investments. If the aggregate cost basis exceeds the aggregate market value of the investments, the trust is considered to be in a net loss position. For trusts in a net loss position, the Company adds the sales prices of the underlying contracts and net realized earnings, then subtracts net unrealized losses to derive the net amount of proceeds for contracts associated with the trusts in question as of that particular balance sheet date. The Company then looks at unrealized gains and losses based on current market prices quoted for the investments, but does not include future expected returns on the investments in its analysis. The Company compares the amount of proceeds to the estimated direct costs to deliver the contracts, which consist primarily of funeral and cemetery merchandise costs and salaries, supplies and equipment related to the delivery of a preneed funeral contract. If a deficiency were to exist, the Company would record a charge to earnings and a corresponding liability for the expected loss on the delivery of those contracts from its deferred revenue.
          (n) Allowance for Doubtful Accounts and Sales Cancellations
          The Company establishes an allowance for doubtful accounts based on a range of percentages applied to accounts receivable aging categories. These percentages are based on historical collection and write-off experience. The Company establishes a reserve for cancellations for cemetery property sales based on historical cancellations and recent write-off activity. This reserve is recorded as a reduction of cemetery revenue. The Company establishes an allowance for preneed funeral and cemetery merchandise and services trust receivables. This reserve is recorded as a reduction in preneed receivables and preneed deferred revenue. The Company also establishes an allowance for cancellations for insurance and third-party commissions based on historical experience for cancellations of insurance contracts within the period of refundability.
          (o) Income Taxes
          Income taxes are accounted for using the asset and liability method under which deferred income taxes are recognized for the tax consequences of “temporary differences” by applying enacted statutory tax rates applicable to future years to differences between the financial statement carrying amounts and the tax bases of existing assets and liabilities. The effect on deferred taxes for a change in tax rates is recognized in income in the period that includes the enactment date. Management provides a valuation allowance against the deferred tax asset for amounts which are not considered more likely than not to be realized. For additional information see Note 18.
          For the purpose of calculating income taxes for discontinued operations, earnings (loss) from discontinued operations is segregated into two categories: operating results and gain or loss on dispositions. Operating results are tax affected in the ordinary manner (i.e., income tax expense on net operating income, income tax benefit on net operating loss).
          (p) Earnings Per Common Share
          Basic earnings per common share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per common share is computed by dividing net

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
earnings by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued during each period as discussed in Note 17.
          For purposes of calculating the effect of the Company’s senior convertible notes on diluted earnings per share, any shares issuable upon conversion are accounted for under the net share settlement method. The effect of the net share settlement method is that the shares potentially issuable upon conversion of the senior convertible notes are only included in the calculation of earnings per share to the extent the conversion value of the senior convertible notes exceeds their principal amount. In this case, the Company would include in diluted shares the number of shares of Class A common stock necessary to settle the conversion if it occurred at that time. The warrants are included in the calculation of diluted earnings per share to the extent the effect is dilutive using the treasury stock method. The call options are not considered in the diluted earnings per share calculation.
          (q) Purchase and Retirement of Common Stock
          Share repurchases are recorded at stated value with the amount in excess of stated value recorded as a reduction to additional paid-in capital. Share repurchases reduce the weighted average number of common shares outstanding during each period.
          On September 19, 2007, the Company announced a new stock repurchase program, authorizing the investment of up to $25,000 in the repurchase of the Company’s common stock. Repurchases under the program are limited to the Company’s Class A common stock, and can be made in the open market or in privately negotiated transactions at such times and in such amounts as management deems appropriate, depending upon market conditions and other factors. On December 20, 2007, the Company announced a $25,000 increase in this program. On June 19, 2008, the Company announced an additional $25,000 increase to the program, which increased the program to $75,000. As of October 31, 2008, the Company has repurchased 6,618,200 shares of its Class A common stock for $48,429 at an average price of $7.32 per share and has $26,571 remaining available under this program.
          (r) Derivatives
          The Company accounts for derivative financial instruments under SFAS No. 133. The Company had no derivative financial instruments accounted for under SFAS No. 133 during the years ended October 31, 2008, 2007 and 2006.
          (s) Estimated Insurance Loss Liabilities
          The Company purchases comprehensive general liability, automobile liability and workers compensation insurance coverages structured within a large deductible/self-insured retention premium rating program. This program results in the Company being primarily self-insured for claims and associated costs and losses covered by these policies but below our deductible. Historical insurance industry experience indicates some degree of inherent variability in assessing the ultimate amount of losses associated with the types of claims covered by the program. This is especially true due to the extended period of time that transpires between when the claim might occur and the full settlement of such claim, often many years. The Company continually evaluates the receivables due from its insurance carriers as well as loss estimates associated with claims and losses related to these insurance coverages with information obtained from its primary insurer.
          With respect to health insurance that covers substantially all of the Company’s employees, the Company purchases individual and aggregate stop loss coverage with a large deductible. This program results in the Company being primarily self-insured for claims and associated costs up to the amount of the deductible, with claims in excess of the deductible amount being covered by insurance. Expected claims are based on actuarial estimates; actual

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
claims may differ from those estimates. The Company continually evaluates its claims experience related to this coverage with information obtained from its insurer.
          Assumptions used in preparing these estimates are based on factors such as claim settlement patterns, claim development trends, claim frequency and severity patterns, inflationary trends and data reasonableness. Together these factors will generally affect the analysis and determination of the “best estimate” of the projected ultimate claim losses. The results of these evaluations are used to assess the reasonableness of the Company’s insurance loss liability.
          The estimated liability on the uninsured litigation and employment-related claims are established by management based upon the recommendations of professionals who perform a review of both reported claims and estimate a liability for incurred but not reported claims. These liabilities include the estimated settlement costs. Although management believes estimated liabilities related to uninsured claims are adequately recorded, it is possible that actual results could significantly differ from the recorded liabilities.
          The Company also has insurance coverage related to property damage, incremental costs and property operating expenses it incurred due to damage caused by hurricanes and other natural disasters. The Company’s policy is to record such amounts when recovery is probable, which generally means it has reached an agreement with the insurance company.
          The Company accrues for legal costs related to loss contingencies as the services are provided. If a settlement is determined to be probable, then an estimate is recorded for the settlement at that time.
          (t) Dividends
          On March 28, 2005, the Company announced that its Board of Directors approved the initiation of a quarterly cash dividend of two and one-half cents per share of Class A and B common stock. Although the Company intends to pay regular quarterly cash dividends for the foreseeable future, the declaration and payment of future dividends are discretionary and will be subject to determination by the Board of Directors each quarter after its review of the Company’s financial performance. For the years ended October 31, 2008, 2007 and 2006, the Company paid $9,374, $10,184 and $10,673, respectively, in dividends.
          (u) Leases
          The Company has noncancellable operating leases, primarily for land and buildings, that expire over the next 1 to 14 years, with the exception of seven leases that expire between 2032 and 2039. As of October 31, 2008, approximately 77 percent of the Company’s 221 funeral locations were owned by the Company’s subsidiaries and approximately 23 percent were held under operating leases. The Company records operating lease expense for leases with escalating rents on a straight-line basis over the life of the lease, including reasonably assured lease renewals. The Company amortizes leasehold improvements in an operating lease over the shorter of their economic lives or the lease term, including reasonably assured lease renewals.
          (v) Business Interruption Insurance
          The Company has insurance policies that provide coverage for interruption to the business, including lost profits. For the fiscal year 2006, the Company recorded $3,169 in business interruption insurance proceeds related to hurricane damaged properties based on information received from its insurance carrier. This amount is reflected in the funeral and cemetery revenue line items in the consolidated statements of earnings for the year ended October 31, 2006. See Note 23 for additional information.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
          (w) Computer Software
          In fiscal year 2006, the Company began implementing two new computer software systems. Concurrently with the implementation of the new systems, the Company began disposing of the three original software systems. In 2006, the Company revisited the original useful life set for the original software systems based on the fact the Company decided to purchase externally developed software. The Company recorded the change in life of the original software systems as a change in accounting estimate and accounted for the change on a prospective basis. The decision to purchase the software was approved by the Board of Directors in September 2006 with implementation beginning in October 2006. Accordingly, the Company recorded one month of accelerated depreciation in October 2006. Prior to the end of fiscal year 2007, the original software was fully depreciated. In the third quarter of fiscal year 2007, the Company completed the implementation of its Oracle financial software system. In the fourth quarter of fiscal year 2008, the Company completed the implementation of the payroll module of the Oracle software system.
          (x) Out of Period Adjustments
          In 2007 and 2006, the Company discovered adjustments that related to prior accounting periods. The Company does not believe these adjustments were quantitatively or qualitatively material to its financial position, results of operations and cash flows for the years ended October 31, 2007 and 2006 or to any of its prior annual or quarterly financial statements. As a result, the Company did not restate any prior period financial statements. The net impact of the adjustments in 2007 is an increase in gross profit of $1,247 and an increase to net earnings of $843, almost all attributable to the Western division cemetery segment. The errors for 2006 primarily related to the following and the impact on the 2006 financial statements is shown below:
  (1)   The Company overstated deferred revenue primarily at the time of adoption of Staff Accounting Bulletin (“SAB”) No. 101, “Revenue Recognition in Financial Statements,” in fiscal year 2001. The correction of this item resulted in additional cemetery revenue in fiscal year 2006.
 
  (2)   The Company understated accounts payable as of October 31, 2005 because the Company failed to accrue for individually immaterial expenses incurred at the individual funeral home and cemetery locations. The Company protocol was designed to record expenses for a twelve month period and failed to consider the impact of period end cutoff.
 
  (3)   The Company misapplied its accounting policies related to the capitalization of certain fixed assets primarily related to periods prior to 2004 and the depreciable lives used for certain fixed assets.
 
  (4)   The Company incorrectly calculated its estimate of the reserve for cancellations of preneed insurance sales. The reserve is recorded to reflect the estimated effect on commissions recorded for future cancellations of these sales. The Company determined there was an error in this reserve and the correction of this error resulted in an increase to funeral revenue.
 
  (5)   The Company incorrectly calculated its non-compete amortization.
 
  (6)   The Company also had other immaterial miscellaneous adjustments.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(2) Summary of Significant Accounting Policies—(Continued)
         
    Year Ended  
    October 31, 2006  
    Out of Period Adjustments  
    Increase (Decrease)  
 
       
Revenue:
       
Funeral:
       
Western division
  $ 1,083  
Eastern division
    514  
 
     
Total funeral revenue
    1,597  
 
     
Cemetery:
       
Western division
    636  
Eastern division
    611  
 
     
Total cemetery revenue
    1,247  
 
     
Total revenues
    2,844  
 
     
 
       
Costs and expenses:
       
Funeral:
       
Western division
    2,471  
Eastern division
    3,105  
 
     
Total funeral costs and expenses
    5,576  
 
     
Cemetery:
       
Western division
    705  
Eastern division
    (972 )
 
     
Total cemetery costs and expenses
    (267 )
 
     
Total costs and expenses
    5,309  
 
     
 
       
Gross profit:
       
Funeral:
       
Western division
    (1,388 )
Eastern division
    (2,591 )
 
     
Total funeral gross profit
    (3,979 )
 
     
Cemetery:
       
Western division
    (69 )
Eastern division
    1,583  
 
     
Total cemetery gross profit
    1,514  
 
     
Total gross profit
    (2,465 )
Corporate general and administrative expenses
    (104 )
 
     
Operating earnings
    (2,569 )
Investment and other income, net
    281  
 
     
Earnings from continuing operations before income taxes
    (2,288 )
Income taxes
    (833 )
 
     
Net earnings
  $ (1,455 )
 
     
          (y) Reclassifications
          Certain reclassifications have been made to the 2007 and 2006 consolidated financial statements in order for these periods to be comparable. The reclassifications in themselves had no effect on the Company’s total net income or loss, total shareholders’ equity or the net increase or decrease in cash. The presentation of Notes 4, 5 and 6 have been adjusted to conform to current year presentation.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Change in Accounting Principles and New Accounting Principles
FASB Interpretation No. 48, “Accounting for Uncertainty in Income Taxes — an Interpretation of FASB Statement No. 109” (“FIN 48”)
          In July 2006, the FASB issued FIN 48, which clarifies the accounting and disclosure for uncertain tax positions in accordance with SFAS No. 109, “Accounting for Income Taxes.” This interpretation requires companies to use a prescribed model for assessing the financial statement recognition and measurement of all tax positions taken or expected to be taken in tax returns. FIN 48 also provides guidance on derecognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. This interpretation was adopted by the Company on November 1, 2007. The Company has reviewed its income tax positions and identified certain tax deductions or revenue deferrals that are not certain. As a result of the adoption, the Company recognized a charge of $955 to the November 1, 2007 accumulated deficit balance, a $3,394 increase in deferred tax assets and a $4,375 increase in other long-term liabilities. For additional information, see Note 18.
Other, not yet adopted
          In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements” (“SFAS No. 157”), which establishes a framework for measuring fair value in accordance with generally accepted accounting principles (“GAAP”) and expands disclosures about fair value measurements. This statement is effective for financial assets and liabilities as well as for any assets and liabilities that are carried at fair value on a recurring basis in financial statements as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, which corresponds to the Company’s fiscal year beginning November 1, 2008. In February 2008, the FASB issued a one-year deferral for non-financial assets and liabilities to comply with SFAS No. 157. The Company expects to implement the disclosure requirements of this statement related to financial assets and liabilities carried at fair value on a recurring basis in the first quarter of fiscal year 2009.
          In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities — Including an Amendment of FASB Statement No. 115” (“SFAS No. 159”). This statement permits entities to choose to measure many financial assets and liabilities and certain other items at fair value. The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions. This statement is effective as of the beginning of an entity’s first fiscal year beginning after November 15, 2007, which corresponds to the Company’s fiscal year beginning November 1, 2008. The Company does not anticipate electing the fair value option under SFAS No. 159.
          In December 2007, the FASB issued SFAS No. 141 (revised 2007), “Business Combinations (SFAS 141(R))” (“SFAS No. 141R”). SFAS No. 141R states that all business combinations, whether full, partial, or step acquisitions, will result in all assets and liabilities of an acquired business being recorded at their fair values at the acquisition date. In subsequent periods, contingent liabilities will be measured at the higher of their acquisition date fair value or the estimated amounts to be realized. SFAS No. 141R applies to all transactions or other events in which an entity obtains control of one or more businesses. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. This statement will apply to any future business combinations as of that date.
          In December 2007, the FASB issued SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statement—amendments of ARB No. 51” (“SFAS No. 160”). SFAS No. 160 states that accounting and reporting for minority interests will be recharacterized as noncontrolling interests and classified as a component of shareholders’ equity. SFAS No. 160 applies to all entities that prepare consolidated financial statements, except not-for-profit organizations, but will affect only those entities that have an outstanding noncontrolling interest in one or more subsidiaries or that deconsolidate a subsidiary. This statement is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009. The Company is currently evaluating the impact the adoption of SFAS No. 160 will have on its

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(3) Change in Accounting Principles and New Accounting Principles—(Continued)
consolidated financial statements.
          In May 2008, the FASB issued SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles” (“SFAS No. 162”). This statement identifies sources of accounting principles and the framework for selecting the principles to be used in the preparation of financial statements that are presented in conformity with GAAP in the United States. SFAS No. 162 moves the hierarchy of GAAP sources for non-governmental entities from the auditing literature to the accounting literature. This statement will become effective 60 days following approval by the Securities and Exchange Commission (“SEC”) of amendments made by the Public Company Accounting Oversight Board to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” Any effect of applying SFAS No. 162 should be reported as a change in accounting principle. The Company does not expect this statement to have any impact on its consolidated financial statements.
          In May 2008, FASB Staff Position No. APB 14-1, “Accounting for Convertible Debt Instruments That May be Settled in Cash upon Conversion (Including Partial Cash Settlement)” (“FSP No. APB 14-1”) was issued. FSP No. APB 14-1 states that convertible debt instruments that may be settled in cash upon conversion (including partial cash settlement) are not addressed by paragraph 12 of Accounting Principles Board Opinion No. 14 and that issuers of such instruments should account separately for the liability and equity components of the instruments in a manner that will reflect the entity’s nonconvertible debt borrowing rate when interest cost is recognized in subsequent periods. This opinion is effective as of the beginning of an entity’s first fiscal year beginning after December 15, 2008, which corresponds to the Company’s fiscal year beginning November 1, 2009, and must be applied retrospectively to all periods presented. The Company is currently evaluating the impact the adoption of FSP No. APB 14-1 will have on its consolidated financial statements, but expects to record higher interest expense related to its senior convertible notes beginning in fiscal year 2010.
(4) Preneed Funeral Activities
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 consolidated balance sheet as of October 31, 2008 and 2007 are as follows:
                 
    October 31, 2008     October 31, 2007  
Trust assets
  $ 336,782     $ 477,335  
Receivables from customers
    44,796       48,488  
 
           
 
    381,578       525,823  
Allowances for cancellations
    (13,166 )     (10,770 )
 
           
Preneed funeral receivables and trust investments
  $ 368,412     $ 515,053  
 
           
          The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2008 are detailed below. The cost basis of the funeral merchandise and services trust assets below reflects realized losses in the trust assets of approximately $24,003 as of October 31, 2008 from their original cost basis related to certain securities held that have been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year 2008.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities—(Continued)
                                         
    October 31, 2008  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 35,355     $     $     $ 35,355          
U.S. Government, agencies and municipalities
    11,585       157       (4 )     11,738          
Corporate bonds
    56,661       67       (9,078 )     47,650          
Preferred stocks
    68,300       12       (21,906 )     46,406          
Common stocks
    272,598       1,847       (124,156 )     150,289          
Mutual funds
    35,228       11       (10,764 )     24,475          
Insurance contracts and other long-term investments
    19,645       104       (63 )     19,686          
 
                               
Trust investments
  $ 499,372     $ 2,198     $ (165,971 )   $ 335,599          
 
                                 
Market value as a percentage of cost
                                    67.2 %
 
                                     
Accrued investment income
                            1,183          
 
                                     
Trust assets
                          $ 336,782          
 
                                     
          The estimated maturities and market values of debt securities included above are as follows:
         
    October 31, 2008  
Due in one year or less
  $ 7,753  
Due in one to five years
    27,262  
Due in five to ten years
    24,342  
Thereafter
    31  
 
     
 
  $ 59,388  
 
     
          The cost and market values associated with preneed funeral merchandise and services trust assets as of October 31, 2007 are detailed below.
                                         
    October 31, 2007  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 39,349     $     $     $ 39,349          
U.S. Government, agencies and municipalities
    21,183       192       (46 )     21,329          
Corporate bonds
    54,438       413       (1,334 )     53,517          
Preferred stocks
    69,125       119       (6,103 )     63,141          
Common stocks
    291,119       11,571       (60,646 )     242,044          
Mutual funds
    34,941       2,601       (896 )     36,646          
Insurance contracts and other long-term investments
    19,862       117             19,979          
 
                               
Trust investments
  $ 530,017     $ 15,013     $ (69,025 )   $ 476,005          
 
                                 
Market value as a percentage of cost
                                    89.8 %
 
                                     
Accrued investment income
                            1,330          
 
                                     
Trust assets
                          $ 477,335          
 
                                     

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(4) Preneed Funeral Activities—(Continued)
          Activity related to preneed funeral trust investments is as follows:
                         
    Year Ended October 31,
    2008   2007   2006
Purchases
  $ 18,839     $ 152,126     $ 149,504  
Sales
    24,072       148,309       159,106  
Realized gains
    2,572       13,690       18,196  
Realized losses
    (24,868 )(1)     (1,183 )     (2,910 )
Deposits
    31,520       32,120       29,191  
Withdrawals
    46,403       44,433       50,770  
 
                       
Other comprehensive income:
                       
Reduction (increase) in net unrealized losses
    (109,761 )     3,753       19,290  
Reclassification to non-controlling interest
    109,761       (3,753 )     (19,290 )
 
(1)   Includes realized losses of $24,003 related to certain securities held that have been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year 2008.
          The following table shows 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 October 31, 2008 and 2007.
                                                 
    October 31, 2008  
    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
  $ 1,147     $ (3 )   $ 21     $ (1 )   $ 1,168     $ (4 )
Corporate bonds
    20,609       (2,027 )     21,258       (7,051 )     41,867       (9,078 )
Preferred stocks
    9,055       (6,686 )     36,445       (15,220 )     45,500       (21,906 )
Common stocks
    51,658       (25,033 )     86,718       (99,123 )     138,376       (124,156 )
Mutual funds
    16,624       (8,200 )     7,707       (2,564 )     24,331       (10,764 )
Insurance contracts and other long-term investments
    3,510             58       (63 )     3,568       (63 )
 
                                   
Total
  $ 102,603     $ (41,949 )   $ 152,207     $ (124,022 )   $ 254,810     $ (165,971 )
 
                                   
                                                 
    October 31, 2007  
    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
  $     $     $ 4,271     $ (46 )   $ 4,271     $ (46 )
Corporate bonds
    20,546       (785 )     7,795       (549 )     28,341       (1,334 )
Preferred stocks
    17,861       (1,008 )     35,834       (5,095 )     53,695       (6,103 )
Common stocks
    39,833       (5,772 )     104,555       (54,874 )     144,388       (60,646 )
Mutual funds
    2,975       (16 )     6,294       (880 )     9,269       (896 )
 
                                   
Total
  $ 81,215     $ (7,581 )   $ 158,749     $ (61,444 )   $ 239,964     $ (69,025 )
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) 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 discussed in Note 9. The components of preneed cemetery receivables and trust investments in the consolidated balance sheet as of October 31, 2008 and 2007 are as follows:
                 
    October 31, 2008     October 31, 2007  
Trust assets
  $ 148,533     $ 215,541  
Receivables from customers
    39,868       46,906  
 
           
 
    188,401       262,447  
Allowance for cancellations
    (6,260 )     (6,768 )
 
           
Preneed cemetery receivables and trust investments
  $ 182,141     $ 255,679  
 
           
          The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2008 are detailed below. The cost basis of the cemetery merchandise and services trust assets below reflects realized losses in the trust assets of approximately $13,873 as of October 31, 2008 from their original cost basis related to certain securities held that have been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year 2008.
                                         
    October 31, 2008  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 15,939     $     $     $ 15,939          
U.S. Government, agencies and municipalities
    12,960       647       (5 )     13,602          
Corporate bonds
    12,399       15       (1,859 )     10,555          
Preferred stocks
    25,589       1       (8,828 )     16,762          
Common stocks
    140,654       303       (67,576 )     73,381          
Mutual funds
    30,310             (12,581 )     17,729          
Insurance contracts and other long-term investments
    107             (15 )     92          
 
                               
Trust investments
  $ 237,958     $ 966     $ (90,864 )   $ 148,060          
 
                                 
Market value as a percentage of cost
                                    62.2 %
 
                                     
Accrued investment income
                            473          
 
                                     
Trust assets
                          $ 148,533          
 
                                     
          The estimated maturities and market values of debt securities included above are as follows:
         
    October 31, 2008  
Due in one year or less
  $ 4,691  
Due in one to five years
    12,622  
Due in five to ten years
    6,645  
Thereafter
    199  
 
     
 
  $ 24,157  
 
     

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities—(Continued)
          The cost and market values associated with the preneed cemetery merchandise and services trust assets as of October 31, 2007 are detailed below.
                                         
    October 31, 2007  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 17,120     $     $ (165 )   $ 16,955          
U.S. Government, agencies and municipalities
    15,397       223       (13 )     15,607          
Corporate bonds
    11,563       177       (269 )     11,471          
Preferred stocks
    26,437       38       (2,312 )     24,163          
Common stocks
    146,609       3,731       (34,603 )     115,737          
Mutual funds
    30,269       964       (196 )     31,037          
Insurance contracts and other long-term investments
    68             (4 )     64          
 
                               
Trust investments
  $ 247,463     $ 5,133     $ (37,562 )   $ 215,034          
 
                                 
Market value as a percentage of cost
                                    86.9 %
 
                                     
Accrued investment income
                            507          
 
                                     
Trust assets
                          $ 215,541          
 
                                     
          Activity related to preneed cemetery merchandise and services trust investments is as follows:
                         
    Year Ended October 31,
    2008   2007   2006
Purchases
  $ 16,492     $ 223,437     $ 115,257  
Sales
    12,081       218,808       131,166  
Realized gains
    1,460       10,697       10,296  
Realized losses
    (14,307 )(1)     (302 )     (1,137 )
Deposits
    17,619       18,185       19,630  
Withdrawals
    19,354       20,844       29,330  
 
                       
Other comprehensive income:
                       
Reduction (increase) in net unrealized losses
    (57,469 )     2,774       8,471  
Reclassification to non-controlling interest
    57,469       (2,774 )     (8,471 )
 
(1)     Includes realized losses of $13,873 related to certain securities held that have been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year 2008.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(5) Preneed Cemetery Merchandise and Service Activities—(Continued)
          The following table shows the gross unrealized losses and fair value of the preneed cemetery merchandise and services trust investments aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 31, 2008 and 2007.
                                                 
    October 31, 2008  
    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
  $ 458     $ (3 )   $ 201     $ (2 )   $ 659     $ (5 )
Corporate bonds
    5,371       (312 )     3,819       (1,547 )     9,190       (1,859 )
Preferred stocks
    4,587       (3,128 )     12,069       (5,700 )     16,656       (8,828 )
Common stocks
    18,227       (12,604 )     51,495       (54,972 )     69,722       (67,576 )
Mutual funds
    13,599       (10,201 )     4,130       (2,380 )     17,729       (12,581 )
Insurance contracts and other long-term investments
                40       (15 )     40       (15 )
 
                                   
Total
  $ 42,242     $ (26,248 )   $ 71,754     $ (64,616 )   $ 113,996     $ (90,864 )
 
                                   
                                                 
    October 31, 2007  
    Less than 12 Months     12 Months or Greater     Total  
    Market     Unrealized     Market     Unrealized     Market     Unrealized  
    Value     Losses     Value     Losses     Value     Losses  
Cash, money markets and other short-term investments
  $     $     $     $ (165 )   $     $ (165 )
U.S. Government, agencies and municipalities
                1,389       (13 )     1,389       (13 )
Corporate bonds
    4,035       (172 )     1,061       (97 )     5,096       (269 )
Preferred stocks
    5,955       (362 )     12,921       (1,950 )     18,876       (2,312 )
Common stocks
    25,792       (5,623 )     59,913       (28,980 )     85,705       (34,603 )
Mutual funds
    3,053       (30 )     3,239       (166 )     6,292       (196 )
Insurance contracts and other long-term investments
                14       (4 )     14       (4 )
 
                                   
Total
  $ 38,835     $ (6,187 )   $ 78,537     $ (31,375 )   $ 117,372     $ (37,562 )
 
                                   
(6) Cemetery Interment Rights and Perpetual Care Trusts
          Earnings realized from cemetery perpetual care trust investments that the Company is legally permitted to withdraw are recognized in current cemetery revenues and are used to defray cemetery maintenance costs which are expensed as incurred. Recognized earnings related to these cemetery perpetual care trust investments were $10,660, $10,164 and $10,079 for the years ended October 31, 2008, 2007 and 2006, respectively.
          The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2008 are detailed below. The cost basis of the cemetery perpetual care trusts below reflects realized losses in the trust assets of $13,643 as of October 31, 2008 from their original cost basis related to certain securities held that have been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year 2008.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
                                         
    October 31, 2008  
    Cost Basis     Unrealized Gains     Unrealized Losses     Market          
Cash, money market and other short- term investments
  $ 16,920     $     $     $ 16,920          
U.S. Government, agencies and municipalities
    8,739       292       (96 )     8,935          
Corporate bonds
    44,287       397       (5,709 )     38,975          
Preferred stocks
    67,514             (26,299 )     41,215          
Common stocks
    106,347       3,427       (50,431 )     59,343          
Mutual funds
    8,826             (2,575 )     6,251          
Insurance contracts and other long-term investments
    594       28       (11 )     611          
 
                               
Trust investments
  $ 253,227     $ 4,144     $ (85,121 )   $ 172,250          
 
                                 
Market value as a percentage of cost
                                    68.0 %
 
                                     
Accrued investment income
                            840          
 
                                     
Trust assets
                          $ 173,090          
 
                                     
          The estimated maturities and market values of debt securities included above are as follows:
         
    October 31, 2008  
Due in one year or less
  $ 1,936  
Due in one to five years
    27,126  
Due in five to ten years
    18,287  
Thereafter
    561  
 
     
 
  $ 47,910  
 
     
          The cost and market values of the trust investments held by the cemetery perpetual care trusts as of October 31, 2007 are detailed below.
                                         
    October 31, 2007  
            Unrealized     Unrealized                
    Cost Basis     Gains     Losses     Market          
Cash, money market and other short- term investments
  $ 11,752     $     $     $ 11,752          
U.S. Government, agencies and municipalities
    12,340       159       (116 )     12,383          
Corporate bonds
    44,018       1,155       (504 )     44,669          
Preferred stocks
    64,515       58       (6,944 )     57,629          
Common stocks
    110,150       9,828       (24,675 )     95,303          
Mutual funds
    11,329       1,937       (301 )     12,965          
Insurance contracts and other long-term investments
    825       151       (8 )     968          
 
                               
Trust investments
  $ 254,929     $ 13,288     $ (32,548 )   $ 235,669          
 
                                 
Market value as a percentage of cost
                                    92.4 %
 
                                     
Accrued investment income
                            834          
 
                                     
Trust assets
                          $ 236,503          
 
                                     
          In states where the Company withdraws and recognizes capital gains in its cemetery perpetual care trusts, if it realizes net capital losses (i.e. losses in excess of capital gains in the trust) and the fair market value of the trust

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
assets is less than the aggregate amounts required to be contributed to the trust, some states may require the Company to make cash deposits to the trusts or may require the Company to stop withdrawing earnings until future earnings restore the net realized losses. As of October 31, 2008, the Company recorded a liability for the estimated probable funding obligation to restore the net realized losses as a result of fiscal year 2008 losses of $13,281, which was recognized as a realized loss in the consolidated statement of earnings for the year ended October 31, 2008 in cemetery costs. In those states where realized net capital gains have not been withdrawn, the Company believes it is reasonably possible that additional funding obligations may exist with an estimated range of up to $1,200. See Note 24 for risks and uncertainties related to the Company’s unrealized loss position in the cemetery perpetual care trusts.
          Activity related to preneed cemetery perpetual care trust investments is as follows:
                         
    Year Ended October 31,
    2008   2007   2006
Purchases
  $ 54,315     $ 65,172     $ 63,074  
Sales
    53,902       57,921       54,450  
Realized gains
    4,498       4,173       4,788  
Realized losses
    (14,173 )(1)     (359 )     (1,270 )
Deposits
    8,295       8,158       7,902  
Withdrawals
    10,081       10,536       9,848  
 
                       
Other comprehensive income:
                       
Reduction (increase) in net unrealized losses
    (61,717 )     (77 )     8,277  
Reclassification to non-controlling interest
    61,717       77       (8,277 )
 
(1)   Includes realized losses of $13,643 related to certain securities held that have been rendered worthless or practically worthless during the Company’s fourth quarter of fiscal year 2008.
          During the years ended October 31, 2008, 2007 and 2006, cemetery revenues were $241,276, $243,487 and $233,993, respectively, of which $9,322, $7,748 and $9,396, respectively, were required to be placed into perpetual care trusts and were recorded as revenues and expenses.
          The following table shows the gross unrealized losses and fair value of the cemetery perpetual care trust investments with unrealized losses aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position as of October 31, 2008 and 2007.
                                                 
    October 31, 2008  
    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
  $ 324     $ (1 )   $ 627     $ (95 )   $ 951     $ (96 )
Corporate bonds
    15,652       (2,352 )     12,281       (3,357 )     27,933       (5,709 )
Preferred stocks
    8,752       (6,227 )     32,463       (20,072 )     41,215       (26,299 )
Common stocks
    17,832       (8,252 )     34,352       (42,179 )     52,184       (50,431 )
Mutual funds
    4,759       (2,089 )     1,168       (486 )     5,927       (2,575 )
Insurance contracts and other long-term investments
                (12 )     (11 )     (12 )     (11 )
 
                                   
Total
  $ 47,319     $ (18,921 )   $ 80,879     $ (66,200 )   $ 128,198     $ (85,121 )
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(6) Cemetery Interment Rights and Perpetual Care Trusts—(Continued)
                                                 
    October 31, 2007  
    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
  $ 125     $     $ 2,317     $ (116 )   $ 2,442     $ (116 )
Corporate bonds
    13,401       (330 )     2,782       (174 )     16,183       (504 )
Preferred stocks
    24,479       (2,451 )     26,914       (4,493 )     51,393       (6,944 )
Common stocks
    12,017       (3,031 )     44,339       (21,644 )     56,356       (24,675 )
Mutual funds
    623       (26 )     1,864       (275 )     2,487       (301 )
Insurance contracts and other long-term investments
    40       (8 )     99             139       (8 )
 
                                   
Total
  $ 50,685     $ (5,846 )   $ 78,315     $ (26,702 )   $ 129,000     $ (32,548 )
 
                                   
(7) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts
          The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at October 31, 2008 are as follows:
                                 
                            Non-controlling  
    Non-controlling Interest             Interest in  
    Preneed     Preneed             Perpetual  
    Funeral     Cemetery     Total     Care Trusts  
Trust assets at market value
  $ 336,782     $ 148,533     $ 485,315     $ 173,090  
Less:
                               
Pending withdrawals
    (8,926 )     (4,362 )     (13,288 )     (2,442 )
Pending deposits
    2,131       1,262       3,393       723  
 
                       
Non-controlling interest.
  $ 329,987     $ 145,433     $ 475,420     $ 171,371  
 
                       
          The components of non-controlling interest in funeral and cemetery trusts and non-controlling interest in perpetual care trusts at October 31, 2007 are as follows:
                                 
                            Non-controlling  
    Non-controlling Interest             Interest in  
    Preneed     Preneed             Perpetual  
    Funeral     Cemetery     Total     Care Trusts  
Trust assets at market value
  $ 477,335     $ 215,541     $ 692,876     $ 236,503  
Less:
                               
Pending withdrawals
    (9,551 )     (4,528 )     (14,079 )     (1,907 )
Pending deposits
    2,607       1,648       4,255       831  
 
                       
Non-controlling interest.
  $ 470,391     $ 212,661     $ 683,052     $ 235,427  
 
                       

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(7) Non-Controlling Interest in Funeral and Cemetery Trusts and in Perpetual Care Trusts —(Continued)
Investment and other income, net
          The components of investment and other income, net in the consolidated statement of earnings for the years ended October 31, 2008, 2007 and 2006 are detailed below.
                         
    Year Ended October 31,  
    2008     2007     2006  
Non-controlling interest:
                       
Realized gains
  $ 8,530     $ 28,560     $ 33,280  
Realized losses
    (53,348 )     (1,844 )     (5,317 )
Interest income, dividends and other ordinary income
    30,484       32,478       29,254  
Trust expenses and income taxes
    (10,601 )     (11,253 )     (12,069 )
 
                 
Net trust investment income
    (24,935 )     47,941       45,148  
Non-controlling interest in funeral and cemetery trust investment income
    22,875       (37,635 )     (34,950 )
Non-controlling interest in perpetual care trust investment income
    2,060       (10,306 )     (10,198 )
 
                 
Total non-controlling interest
                 
Investment and other income, net (1)
    2,406       3,374       3,676  
 
                 
Total investment and other income, net
  $ 2,406     $ 3,374     $ 3,676  
 
                 
 
(1)   Investment and other income, net is comprised of interest income primarily on the Company’s cash, cash equivalents and marketable securities not held in trust.
(8) Marketable Securities and Restricted Investments
          The market value of marketable securities as of October 31, 2008 and 2007 was $1,055 and $1,262, respectively, which included gross unrealized gains of $58 and $17 and no gross unrealized losses for fiscal years 2008 and 2007. Of the total marketable securities balances as of October 31, 2008 and 2007, $1,000 is classified as a long-term asset in the line item “Other assets” in the consolidated balance sheets. The Company is required by Texas statutes to maintain a minimal capital level of $1,000, of which 40 percent must be in readily marketable investments.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(9) Receivables
                 
    October 31,  
    2008     2007  
Current receivables are summarized as follows:
               
Installment contracts due within one year
  $ 44,039     $ 44,070  
Income tax receivables
    1,077       1,833  
Trade and other receivables
    14,942       15,114  
Funeral receivables
    9,740       11,102  
Allowance for doubtful accounts
    (7,215 )     (8,142 )
Amounts to be collected for cemetery perpetual care trusts
    (3,454 )     (3,362 )
 
           
Net current receivables
  $ 59,129     $ 60,615  
 
           
 
               
Long-term receivables are summarized as follows:
               
Installment contracts due beyond one year
  $ 87,115     $ 90,453  
Income tax receivables
    77       10,880  
Allowance for doubtful accounts
    (9,689 )     (10,824 )
Amounts to be collected for cemetery perpetual care trusts
    (6,832 )     (6,901 )
 
           
Net long-term receivables
  $ 70,671     $ 83,608  
 
           
          Installment contracts due within one year and due beyond one year include receivables in the Company’s preneed cemetery property sales only. Receivables for preneed funeral and cemetery merchandise and services sales are included in preneed funeral receivables and trust investments and preneed cemetery receivables and trust investments as discussed in Notes 4 and 5.
          The Company’s receivables as of October 31, 2008 are expected to be collected as follows:
         
Years ending October 31,
       
2009
  $ 59,129  
2010
    13,376  
2011
    13,344  
2012
    12,656  
2013
    10,711  
Thereafter
    20,584  
 
     
 
  $ 129,800  
 
     
(10) Inventories and Cemetery Property
          Inventories are comprised of the following:
                 
    October 31,  
    2008     2007  
Developed cemetery property
  $ 12,223     $ 12,518  
Merchandise and supplies
    23,647       23,543  
 
           
 
  $ 35,870     $ 36,061  
 
           

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(10) Inventories and Cemetery Property—(Continued)
          Cemetery property is comprised of the following:
                 
    October 31,  
    2008     2007  
Developed cemetery property
  $ 106,861     $ 104,058  
Undeveloped cemetery property
    268,971       268,980  
 
           
 
  $ 375,832     $ 373,038  
 
           
          The portion of developed cemetery property that management estimates will be used in the next twelve months is included in inventories. Included in the non-current developed portion of cemetery property are $13,860 and $13,589 related to cemetery property under development as of October 31, 2008 and 2007, respectively.
(11) Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes
          The following tables present the condensed consolidating historical financial statements as of October 31, 2008 and October 31, 2007 and for the fiscal years ended October 31, 2008, 2007 and 2006, for the direct and indirect domestic subsidiaries of the Company that serve as guarantors of the Company’s 6.25 percent senior notes and its 3.125 percent and 3.375 percent senior convertible notes, and the financial results of the Company’s subsidiaries that do not serve as guarantors. Non-guarantor subsidiaries of the 6.25 percent senior notes include the Puerto Rican subsidiaries, Investors Trust, Inc. and certain immaterial domestic subsidiaries, which are prohibited by law from guaranteeing the senior notes. The guarantor subsidiaries of the 6.25 percent senior notes are wholly-owned directly or indirectly by the Company, except for three immaterial guarantor subsidiaries of which the Company is the majority owner. The non-guarantor subsidiaries of the senior convertible notes are identical to those of the 6.25 percent senior notes but also include three immaterial non-wholly owned subsidiaries and any future non-wholly owned subsidiaries. The guarantees are full and unconditional and joint and several. In the statements presented within this footnote, Tier 2 guarantor subsidiaries represent the three immaterial non-wholly owned subsidiaries that do not guaranty the senior convertible notes but do guaranty the 6.25 percent senior notes. Non-guarantor subsidiaries represent the identical non-guarantor subsidiaries of the 6.25 percent senior notes and senior convertible notes. In the condensed consolidating statements of earnings and other comprehensive income, corporate general and administrative expenses and interest expense of the parent are presented net of amounts charged to the guarantor and non-guarantor subsidiaries.

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
                                                 
    Year Ended October 31, 2008  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
Revenues:
                                               
Funeral
  $     $ 265,015     $ 1,954     $ 19,638     $     $ 286,607  
Cemetery
          217,123       3,432       20,721             241,276  
 
                                   
 
          482,138       5,386       40,359             527,883  
 
                                   
Costs and expenses:
                                               
Funeral
          203,125       1,217       13,886             218,228  
Cemetery
          189,878       2,927       16,033             208,838  
 
                                   
 
          393,003       4,144       29,919             427,066  
 
                                   
Gross profit
          89,135       1,242       10,440             100,817  
 
                                   
Corporate general and administrative expenses
    (32,611 )                             (32,611 )
Impairment of goodwill
          (25,952 )                       (25,952 )
Hurricane related recoveries (charges), net
    (1,448 )     (1,165 )     316                   (2,297 )
Gains on dispositions and impairment (losses), net
    126       (479 )                       (353 )
Other operating income, net
    101       497       2       219             819  
 
                                   
Operating earnings (loss)
    (33,832 )     62,036       1,560       10,659             40,423  
Interest expense
    3,391       (25,237 )     (155 )     (2,114 )           (24,115 )
Investment and other income, net
    2,219       179             8             2,406  
Equity in subsidiaries
    17,783       548                   (18,331 )      
 
                                   
Earnings (loss) from continuing operations before income taxes
    (10,439 )     37,526       1,405       8,553       (18,331 )     18,714  
Income tax expense (benefit)
    (6,746 )     26,675       464       2,014             22,407  
 
                                   
Net earnings (loss)
    (3,693 )     10,851       941       6,539       (18,331 )     (3,693 )
Other comprehensive income, net
    26                   26       (26 )     26  
 
                                   
Comprehensive income (loss)
  $ (3,667 )   $ 10,851     $ 941     $ 6,565     $ (18,357 )   $ (3,667 )
 
                                   

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STEWART ENTERPRISES, INC.
AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Dollars in thousands, except per share amounts)
(11)   Condensed Consolidating Financial Statements of Guarantors of Senior Notes and Senior Convertible Notes—(Continued)
Condensed Consolidating Statements of Earnings and Other Comprehensive Income
                                                 
    Year Ended October 31, 2007  
            Guarantor     Guarantor     Non-              
            Subsidiaries-     Subsidiaries-     Guarantor              
    Parent     Tier 1     Tier 2     Subsidiaries     Eliminations     Consolidated  
Revenues:
                                               
Funeral
  $     $ 257,783     $ 1,558     $ 19,989     $     $ 279,330  
Cemetery
          218,836       3,193       21,458             243,487  
 
                                   
 
          476,619       4,751       41,447             522,817  
 
                                   
Costs and expenses:
                                               
Funeral
          202,721       1,036       12,618             216,375  
Cemetery
          175,070       2,492       16,450             194,012  
 
                                   
 
          377,791       3,528       29,068             410,387  
 
                                   
Gross profit
          98,828       1,223       12,379             112,430  
Corporate general and administrative expenses
    (31,143 )                             (31,143 )
Hurricane related charges, net
    (4 )     (965 )     (1,564 )                 (2,533 )
Separation charges
    (384 )     (196 )                       (580 )
Gains on dispositions and impairment (losses), net
    4       (45 )           (3 )           (44 )
Other operating income, net
    361       1,054       2       234             1,651  
 
                                   
Operating earnings (loss)
    (31,166 )     98,676       (339 )     12,610             79,781  
Interest expense
    8,718       (31,481 )     (189 )     (2,113 )           (25,065 )
Loss on early extinguishment of debt
    (677 )                             (677 )
Investment and other income, net
    3,266       94             14             3,374  
Equity in subsidiaries
    59,324       530                   (59,854 )      
 
                                   
Earnings (loss) from continuing operations before income taxes
    39,465       67,819       (528 )     10,511       (59,854 )     57,413  
Income tax expense (benefit)
    (348 )     16,041       (186 )     2,592             18,099