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, 2012, we owned and operated 217 funeral homes and 141 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 on installment sale contracts for cemetery property 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.

General

For fiscal year 2012, we generated $516.1 million in revenue and $109.7 million in gross profit, our highest revenue and gross profit in four years. We increased cemetery gross profit by 19.5 percent and funeral gross profit by 4.1 percent while expanding cemetery gross profit margin by 250 basis points and funeral gross profit margin by 100 basis points. We produced the highest annual cemetery property and preneed funeral production in five years. Earnings from continuing operations for fiscal year 2012 were $37.5 million, compared to $39.3 million for fiscal year 2011. Fiscal year 2011 results included an after-tax benefit of $7.5 million from our successful settlement of our Hurricane Katrina litigation. Earnings from continuing operations per diluted share were $.43 for fiscal years 2012 and 2011. Our fiscal year 2012 results reflect an increase in cemetery revenue and a reduction in operating expenses associated with our continuous improvement initiative, including successfully integrating our operations and sales organizational structures.

We generated $76.5 million in operating cash flow during fiscal year 2012 and maintained our strong balance sheet with $78.7 million of cash and marketable securities on-hand and no amounts borrowed on our $150.0 million senior secured revolving credit facility at fiscal year end. During fiscal year 2012, we repurchased 4.0 million shares of our outstanding Class A common stock for $27.4 million. These purchases of common stock under our share repurchase program have resulted in a 3.5 percent decrease in total shares outstanding in the last twelve months. Also, during fiscal year 2012 we announced a 14 percent increase in our annual dividend to $.16 per share and returned $13.3 million to our shareholders through the payment of dividends, or $.155 per share.

In fiscal year 2010, we began a program of developing cremation gardens and other cremation projects in our cemeteries. We have successfully completed 31 cremation projects, and we currently have 4 projects under construction and approximately 20 additional projects currently under feasibility review. We spent $8.2 million in fiscal year 2012 on these projects, compared to $4.1 million in fiscal year 2011 and plan to spend approximately $10 to $15 million in fiscal year 2013. Cemetery cremation sales improved 15 percent in fiscal year 2012 compared to fiscal year 2011, highlighting the positive returns on our ongoing cremation initiative. Additional information about our business and strategies can be found in Item 1 "Business."

In the second quarter, we announced an organizational restructuring and workforce reduction. The organizational changes involve a restructure of the sales organization and realignment of our geographic regions and regional management to better integrate operations and sales. The restructure of our sales organization focuses on providing more efficient and effective sales strategy, management, mentoring, training and recruiting with the ultimate goals of improving customer service and increasing sales. The new organization reduces the layers of sales management and is designed to provide increased opportunities for sales employees. During the beginning of fiscal year 2013, we will finalize our sales force restructuring by implementing changes that primarily impact our customer-facing sales force, including changing our compensation structure. Separate from the changes related to the sales organization, we also announced in the second quarter a reduction of our workforce by approximately 60 employees, primarily within our corporate support services. The combined effect of our organizational restructuring and workforce reduction is expected to produce annual savings of approximately $10 million.

Our trust earnings continue to be impacted by the volatility in the financial markets. The adverse financial market conditions throughout the latter part of fiscal year 2008 and the early part of fiscal year 2009 caused a decrease in our revenue from trust activities. From fiscal years 2008 through 2012, we recognized $38.1 million, $29.3 million, $30.7 million, $32.9 million and $34.5 million, respectively, in revenue from trust-related activities. During fiscal years 2008 through 2012, our trust portfolios had total returns of
(29.5) percent, 15.4 percent, 14.2 percent, 4.4 percent and 11.4 percent, respectively, in our preneed trusts and (25.9) percent, 19.9 percent, 15.1 percent, 4.9 percent and 13.2 percent, respectively, in our cemetery perpetual care trusts.

Financial Summary for Fiscal Year 2012

For fiscal year 2012, we reported net earnings of $35.9 million, earnings from continuing operations of $37.5 million, or $.43 per diluted share, total revenue of $516.1 million and total gross profit of $109.7 million. Our net earnings for fiscal year 2012 included a $3.3 million ($2.1 million after-tax) charge due to the organizational restructuring and a separate reduction in workforce occurring primarily in the second quarter of the fiscal year. In addition, during fiscal year 2012 we sold one of our e-commerce businesses resulting in a net loss from discontinued operations of $1.6 million. For fiscal year 2011, we reported net earnings of $38.6 million, earnings from continuing operations of $39.3 million, or $.43 per diluted share, total revenue of $512.7 million and total gross profit of $100.4 million. Our net earnings for fiscal year 2011 included a $12.4 million ($7.5 million after-tax) insurance settlement related to the successful resolution of our litigation related to Hurricane Katrina damages and a $1.9 million ($1.2 million after-tax) charge for the early extinguishment of debt as a result of the refinancing of our senior notes and revolving credit facility in April 2011.

Cemetery revenue improved $4.1 million, or 1.8 percent, to $233.1 million for the year ended October 31, 2012. Cemetery property sales improved $2.4 million, or 2.3 percent, compared to fiscal year 2011. In addition, revenue related to trust activities increased by $2.4 million and merchandise delivered and services performed increased by $1.3 million. These improvements were partially offset by a $2.1 million decline in finance charges as a result of reduced interest rates in this low interest rate environment and a $1.6 million decrease in revenue recognized for cemetery property sales for which the property was not yet constructed or the down payment required for revenue recognition was not yet received. We generated $283.0 million in funeral revenue during fiscal year 2012, a $0.7 million decline from fiscal year 2011. The decrease is primarily due to a 0.9 percent decline in same-store funeral services performed, which we believe is consistent with industry-wide data in our markets. The decline in funeral services was partially offset by a 0.3 percent improvement in same-store average revenue per funeral service. Our net preneed funeral sales increased 10.0 percent during fiscal year 2012 compared to fiscal year 2011. Preneed funeral sales are deferred until a future period and have no impact on current revenue.

Cemetery gross profit increased $6.6 million, or 19.5 percent, to $40.4 million for the year ended October 31, 2012. The increase in gross profit is primarily due to the improvement in revenue, as previously noted, as well as a reduction in operating expenses associated with our continuous improvement initiative, including successfully integrating our operations and sales organizational structures earlier this year. Cemetery gross profit margin improved 250 basis points to 17.3 percent for fiscal year 2012 from 14.8 percent for fiscal year 2011. Funeral gross profit increased $2.7 million, or 4.1 percent, to $69.3 million for fiscal year 2012. The improvement in gross profit is primarily due to a reduction in operating expenses associated with our continuous improvement initiative, including successfully integrating our operations and sales organizational structures earlier this year, as well as an improvement in our insurance claims experience. Funeral gross profit margin improved 100 basis points to 24.5 percent for fiscal year 2012 from 23.5 percent for fiscal year 2011.

During fiscal year 2012, we announced a 14 percent increase in our annual dividend to $.16 per share from $.14 per share. We paid $13.3 million in dividends to our shareholders in fiscal year 2012, compared to $11.8 million in fiscal year 2011. Throughout fiscal year 2012, we repurchased 4.0 million shares of our outstanding Class A common stock for $27.4 million. As of October 31, 2012 we had $16.4 million remaining under our $125.0 million stock repurchase program. Our weighted average diluted shares outstanding decreased to 86.3 million shares for fiscal year 2012 compared to 90.5 million shares for fiscal year 2011. This decrease is primarily a result of our stock repurchase program, which yielded a positive impact on our earnings per share. Purchases of Class A common stock under our share repurchase program have resulted in a 3.5 percent decrease in total shares outstanding in the last twelve months.

Cash flow provided by operating activities for fiscal year 2012 was $76.5 million compared to $86.8 million for fiscal year 2011. The decline in cash flow is primarily due to $11.3 million of the Hurricane Katrina settlement received during the fourth quarter of fiscal year 2011.

During the third quarter of 2012, our Board of Directors appointed Dr. John B. Elstrott, Jr. to the newly created position of lead independent director. Among his primary responsibilities as lead independent director, Dr. Elstrott will act as the principal liaison between the independent directors and the CEO, assist the CEO and the Chairman of the Board with developing Board agendas and preside at Board meetings and executive sessions of the independent directors.

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 the retail land sale provisions of ASC 360-Property, Plant and Equipment. 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, 2012 and 2011 the future value of our preneed funeral and cemetery merchandise and services backlog represented approximately $1.8 billion and $1.7 billion, respectively, of revenue to be recognized in the future as these prepaid products and services are ultimately delivered. This is made up of approximately $1.2 billion from trust and $0.6 billion from insurance as of October 31, 2012 and approximately $1.1 billion from trust and $0.6 billion from insurance as of October 31, 2011. This represents the face value of the backlog taking into account unrealized earnings and losses on the funds held in trust and realized earnings and losses (including impairments) on the funds held in trust not yet recognized as revenue plus the earnings that are projected on the funds held in trust and the current face value of insurance contracts. It assumes no future preneed sales and assumes maturities each year consistent with our historical experience, with the majority of existing contracts expected to mature over the next 15 years. In addition, in fiscal years 2012 and 2011, the analysis assumes a weighted average annual return of approximately 5 percent and 4 percent, respectively, projected from our trusts over the expected life of the contracts and zero percent for increasing death benefits on insurance contracts. Actual results could differ materially 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.

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 (together with the preneed funeral merchandise and services trust, "preneed trusts") 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, 2012, approximately 7 percent of our trust portfolio was invested in cash, 43 percent in equities, 34 percent in fixed-income securities, 9 percent in preferred stock, 2 percent in each of real estate index funds, commodity index funds and master limited partnership index funds and 1 percent in other investments. Our trust portfolios and trust earnings continue to be impacted by volatility in the financial markets and contain a substantial proportion of equity securities. The equity securities have generally experienced increases and decreases in value commensurate with the overall financial markets.

During fiscal year 2008, we realized aggregate net losses of $35.1 million in our preneed 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. At their lowest quarter-end point, our trust portfolios reached a net unrealized loss position of $370.6 million as of January 31, 2009. As of October 31, 2011, we recorded other-than-temporary impairments of $44.7 million in our preneed trusts and $11.0 million in our perpetual care trusts, and reduced the cost basis of the related securities to fair market value. These losses and impairments had no impact on our balance sheet, as the securities and corresponding liabilities are already recorded at fair market value on our balance sheet. However, the losses and impairments in our preneed trusts were allocated to the underlying contracts and will be recognized as the services and merchandise are performed and delivered in the future, reducing the revenues and gross profits we would otherwise have realized related to those contracts. After these losses and impairments and an overall improvement in the market, our net unrealized loss position was $83.1 million as of October 31, 2012.

During late fiscal 2008, we reviewed alternative asset allocation models and selected new asset allocation goals that emphasize diversification and reduce volatility. We have taken advantage of the improvement in the overall markets to adjust our asset allocation towards these goals. Currently, 25 percent of our portfolio is invested in asset classes that were not represented in our trusts just three years ago, including real estate investment trusts, high yield mutual funds and master limited partnerships, among others. We have been investing in proportionately more exchange traded/index funds and fewer individual equities. We continuously evaluate our investment strategies to maintain an asset allocation that provides consistent returns with appropriate risk. 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 inflation plus a reasonable return.

The following table presents the annual realized return in our trusts for fiscal years 2002 through 2012. The returns represent interest, dividends and realized capital gains or losses, but not unrealized capital gains or losses.

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 4.3% 4.8 % 2.6 % 4.3 % 5.1 % 4.8 % (3.3 )% (.4 )% 1.7 % 4.4 % 3.5 %

The following table presents the annual total returns in our trusts for fiscal years 2002 through 2012 including realized and unrealized gains and losses:

2002 2003 2004 2005 2006 2007 2008 2009 2010 2011 2012
(6.4)% 16.1 % 4.1 % 6.0 % 12.2 % 7.7 % (28.5 )% 16.6 % 14.4 % 4.6 % 11.9 %

The following table presents the total returns of our preneed trusts and cemetery perpetual care trusts including realized and unrealized gains and losses for the periods indicated:

                                                                 Cemetery Perpetual
                                           Preneed Trusts           Care Trusts
 For the year ended October 31, 2012                  11.4 %                    13.2 %
 For three years ended October 31, 2012                9.9 %                    11.0 %
 For five years ended October 31, 2012                 1.6 %                     4.0 %
 For ten years ended October 31, 2012                  5.5 %                     6.1 %

During fiscal years 2012 and 2011, we experienced positive trends in the overall market and in our preneed and perpetual care trusts. For the years ended October 31, 2012 and 2011, our preneed trusts experienced a total return, including both realized and unrealized losses, of 11.4 percent and 4.4 percent, respectively, and our cemetery perpetual care trusts experienced a total return, including both realized and unrealized losses, of 13.2 percent and 4.9 percent, respectively.

In our preneed trusts, the fair market value of the investments in the trusts were $68.5 million and $101.1 million lower than our cost basis as of October 31, 2012 and October 31, 2011, respectively. In our cemetery perpetual care trusts, the fair market value of our investments were $14.6 million and $30.7 million lower than our cost basis as of October 31, 2012 and October 31, 2011, respectively. For additional information see Notes 4, 5 and 6 to the consolidated financial statements in Item 8. The cost basis of our trust assets reflect the price we originally paid for the securities, reduced for other-than-temporary impairments we have recorded pursuant to GAAP.

We believe that the trust investments will appreciate in value over the long-term. We continue to monitor our investment portfolio closely. Although we have significant unrealized and unallocated losses in our trust portfolio, as of October 31, 2012 and October 31, 2011, we had $187.1 million and $179.0 million, respectively, in trust earnings, net of losses, that have been realized and allocated to contracts that will be recognized in the future as the underlying contracts are performed.

Securities with unrealized losses totaling $103.3 million at October 31, 2012 were also in a loss position at October 31, 2011, down from $135.2 million at the end of the last fiscal year. For additional information see Notes 4, 5 and 6 to the consolidated financial statements in Item 8.

We perform a separate analysis to determine whether our preneed contracts are in a loss position and whether a charge to earnings to record a liability for any expected losses is required. No charge has ever been required. For additional information, see Note 2(m) to the consolidated financial statements included in Item 8 and "Overview of Critical Accounting Policies."

We generate revenue related to the trusts from investment management fees earned by our subsidiary, ITI. During fiscal years 2008 through 2012, these fees amounted to $10.0 million, $8.0 million, $9.4 million, $10.0 million and $11.7 million, respectively. These fees are based on the fair market value of the investments in the preneed trust portfolio and the cemetery perpetual care trusts. Significant changes in the fair market value of the portfolio impact the fees earned by the Company.

The following table presents the significant sectors in which our trust portfolio is invested and the percentage of each sector to the total trust portfolio as of October 31, 2012 (in millions).

                                            Preneed Trusts                         Cemetery Perpetual Care Trusts
                                   Fair Market           Percentage              Fair Market               Percentage
Sector                                Value             of Portfolio                Value                 of Portfolio
Cash and mutual funds             $        259.5                   44 %       $            122.0                     46 %
Financial Services                $         68.0                   11 %       $             47.5                     18 %
Information Technology            $         50.3                    8 %       $             12.3                      5 %
Healthcare Services               $         47.0                    8 %       $             19.1                      7 %

Issuer specific investments in the financial services sector represented $68.0 million of the fair market value of our preneed trust portfolio as of October 31, 2012, of which 60 percent related to preferred stock, 24 percent related to investments in common stock and 16 percent related to fixed-income securities. Issuer specific investments in the financial services sector represented $47.5 million of the fair market value of our cemetery perpetual care trust portfolio as of October 31, 2012, of which 66 percent related to preferred stock, 21 percent related to fixed-income securities and 13 percent related to investments in common stock.

Issuer specific investments in the information technology sector represented $50.3 million of the fair market value of our preneed trust portfolio as of October 31, 2012, of which 97 percent related to investments in common stock and 3 percent related to fixed-income securities. Issuer specific investments in the information technology sector represented $12.3 million of the fair market value of our cemetery perpetual care trust portfolio as of October 31, 2012, of which 93 percent related to investments in common stock and 7 percent related to fixed-income securities.

Issuer specific investments in the healthcare services sector represented $47.0 million of the fair market value of our preneed trust portfolio as of October 31, 2012, of which 97 percent related to investments in common stock and 3 percent related to fixed-income securities. Issuer specific investments in the healthcare services sector represented $19.1 million of the fair market value of our cemetery perpetual care trust portfolio as of October 31, 2012, of which 90 percent related to investments in common stock and 10 percent related to fixed-income securities.

The following table presents the significant sectors in which our trust portfolio currently has unrealized losses and the percentage of each sector to the total unrealized losses as of October 31, 2012 (in millions). We may have other investments in these sectors through our mutual fund holdings.

                                            Preneed Trusts                           Cemetery Perpetual Care Trusts
                                                       Percentage  of                                     Percentage  of
                                                           Total                                              Total
                                  Unrealized             Unrealized              Unrealized                 Unrealized
Sector                              Losses                 Losses                  Losses                     Losses
Financial Services               $        2.1                        3 %       $           1.1                          5 %
Information Technology           $       32.1                       38 %       $           8.5                         35 %
Healthcare Services              $        5.8                        7 %       $           1.5                          6 %

Risks associated with the financial services sector include risk of failure of various large financial institutions, changing government regulation, interest rates, cost of capital funds, credit losses and volatility in financial markets. The information technology sector risks include overall economic conditions, short product cycles, rapid obsolescence of products, competition and government regulation. The healthcares services sector risks include the failure of research and development products, class-action litigation related to adverse side-effects, changes in the level of U.S. Government funding for Medicare and Medicaid, the loss of patent protection on existing pharmaceutical drugs and the impact of the Patient Protection and Affordable Care Act.

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, whether the sale is funded by trust or insurance, 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 are required to place a portion of each cash installment paid by the customer into trust; therefore, 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 trust sales are generally cash flow negative initially, but may 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. Generally preneed insurance sales are slightly cash flow positive as commissions received generally exceed the commissions paid to sales counselors. 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 included in Item 8.

Overview of Critical Accounting Policies

The consolidated financial statements are prepared in accordance with accounting . . .