SecProbe.io

CORRESP
1
filename1.htm

corresp

JONES, WALKER, WAECHTER, POITEVENT,

CARRÈRE & DENÈGRE, L.L.P.

201 St. Charles Avenue

Suite 5100

New Orleans, LA 70170

July 19, 2005

VIA EDGAR AND FEDERAL EXPRESS

Securities and Exchange Commission

100 F Street, N.E.

Washington, D.C. 20549

    Attention:

    Ms. Kathryn T. Jacobson

     RE:

    Stewart Enterprises, Inc.

Form 10-K for the Fiscal Year Ended October 31, 2004

Filed January 11, 2005

    Form 10-Q

For the Quarterly Period Ended January 31, 2005

    Form 10-Q

For the Quarterly Period Ended April 30, 2005

Your File No. 1-15449

Ladies and Gentlemen:

     On behalf of Stewart Enterprises, Inc. (“Stewart” or the “Company”), we are submitting this
letter in response to the comments received from the Commission’s staff (the “Staff”) by facsimile
on June 15, 2005 with respect to the above-captioned periodic reports. We have numbered and
reproduced below the full text of the Staff’s comments in italics, each of which is followed by
Stewart’s response.

     As it relates to comments 7, 8 and 9, the Company plans to contact the Staff to set up a telephonic meeting to discuss its views directly with the Staff.  Our independent auditors, PricewaterhouseCoopers LLP, including members of their National Office, have also reviewed our response to those comments and plan to express their views to the Staff.

Securities and Exchange Commission

July 19, 2005

Page 2
 Form 10-K for the Fiscal Year Ended October 31, 2004

Item 1. Business, page 2

    Comment 1.

    We note your response to our prior comment 2.

    Item 2(1)

    •

    Considering that rent payments have not commenced under a sixth lease
agreement with the Catholic Archdiocese of Los Angeles, tell us if you have accrued for
construction period rent. Tell us how you accounted for rent before and after the
construction period. Refer to FTB 85-3.

    •

    Since you paid for the construction of the
funeral homes it appears that you were the owner of the funeral homes
during the construction period based on EITF 97-10. Tell us how the
Archdiocese of Los Angeles became the legal owner of the funeral
homes which you constructed and paid for. Also tell us how you
accounted for the financing and any incentive that you received in
connection with building the funeral homes. Tell us the
consideration given to EITF 97-10 or SFAS 98 as applicable and revise
or advise.

    Item 2(3)

    •

    We note your statement that the mausoleum was intended by the parties to
be used primarily by the Catholic parishioners of the Archdiocese of New Orleans.
Please refer to paragraph 2 of EITF 01-9 which denotes that “vendor consideration may
be given to direct or indirect customers of the vendor.” The cash consideration paid
to the Archdiocese appears to fall within the scope of Issue 1, which presumes that
cash consideration is a “reduction of the selling price of the vendor’s products or
services.” Additionally, you pay the Archdiocese a percentage of the mausoleum sales,
regardless of whether the sale could be attributed to its promotional efforts. Please
revise or advise.

    Response 1.

    The Company’s responses to Comment 1 are set forth as follows:

    Item 2(1)

    •

    The Company’s lease agreement with the Catholic Archdiocese of Los
Angeles with respect to the sixth lease is that rent payments do not commence until the
Company obtains all necessary licenses to operate the location. Further, the agreement
provides that the lease terminates without any rent payments becoming due if the
Company is unable to obtain the necessary licenses after reasonable best efforts.

Securities and Exchange Commission

July 19, 2005

Page 3

    As of April 30, 2005, the Company had not yet obtained all necessary
licenses to operate the location, and although the Company had done
some minor preliminary site work, it had not yet done any substantial
construction work. Therefore, the Company had not yet incurred
construction period rent to the Lessor nor had it accrued for
construction period rent. Any rent expense incurred during the period
of construction will be capitalized as leasehold interests, which is
consistent with our accounting policy. After construction is
completed, future rent payments will be expensed, and the previously
recorded deferred liability will be amortized over the term of the
lease.

    In considering FTB 85-3, the portion of any rent attributable to the
land (less than $20,000 annually) prior to the construction period was
not material and therefore was not accrued on a straight-line basis.

    •

    The Company entered into leases of land and
buildings with the Catholic Archdiocese of Los Angeles (the Lessor).
In accordance with the lease agreements, the Company was responsible
for the construction of the buildings as well as the construction
financing of the project, and the Lessor did not reimburse the
Company for any of the costs of construction. The leases state that
the Lessor shall at all times be the owner of the buildings. If the
Company were to default on the leases (which the Company considers to
be remote), and the leases were terminated by the Archdiocese, the
Company would not be given any consideration for the buildings. Its
investment in the buildings would be forfeited.

    Pursuant to EITF 97-10, the Company was considered to be the owner of
the assets during the period of construction and as such, all of the
costs associated with the projects during the construction period were
recorded in property and equipment, including interest that was
capitalized during the construction of the buildings. In addition, to
the extent the Company financed the construction, as opposed to
utilizing cash flow from operations, the amount of financing was
reflected as debt on the Company’s consolidated balance sheet. The
Company did not meet the criteria of a sale and leaseback transaction
as described in SFAS 98. The assets and any related debt remained on
the Company’s books, which assets are being depreciated over their
estimated economic useful lives (which approximate the term of the
respective leases).

Securities and Exchange Commission

July 19, 2005

Page 4

    Item 2(3)

    •

    The Company continues to believe that the relationship it has with the
Archdiocese of New Orleans does not involve either a direct or indirect vendor-customer
relationship within the scope of EITF 01-9. Paragraph 2 of EITF 01-9 states
specifically: “Thus, the scope of Issue 01-9 includes vendor consideration to any
purchasers of the vendor’s products at any point along the distribution chain,
regardless of whether the purchaser receiving the consideration is a direct customer of
the vendor.” The Archdiocese never purchases the Company’s products or services.
Thus, the relationship between the Company and the Archdiocese is different from that
contemplated by EITF 01-9, in that the Archdiocese is never in the chain of
distribution. Also, the Company receives the same price from the customer whether or not the sale had anything to do with the
Archdiocese and whether or not the customer is Catholic. Accordingly,
it seems more appropriate to reflect the full price of the products and
services being sold as revenue, and the amounts paid to the Archdiocese
separately as a cost, instead of treating the amounts paid to the
Archdiocese as a reduction of revenue. The amount the Company paid to
the Archdiocese in fiscal year 2004 was approximately $150,000, or less
than 0.03 percent of the Company’s revenue; therefore, a gross or net
presentation of such arrangement is in the Company’s view not material
to the fair presentation of its consolidated financial statements.

    Management’s Discussion and Analysis of Financial Condition and Results of Operations

    Trust Portfolio, page 21

    Comment 2.

    We note your response to our prior comment 5 and your statement that “a loss is
considered other than temporary if the security has a reduction in market value,
compared with its cost basis, of 20% or more for a period of six months or longer.”
Tell us, and disclose, in future filings the additional qualitative disclosures for
unrealized losses as prescribed in paragraph 18(b) of EITF 03-1. Please also cite
factors that you considered which would negate the rebuttable presumption that an
impairment is considered other than temporary after a one year period. In your case,
the aggregate unrealized losses that were 12 months or greater were approximately $16
million, or over 60% of your unrealized losses.

    Response 2.

    The Company will add additional qualitative disclosure similar to the following
information relating to October 31, 2004 in its Form 10-K for October 31, 2005 and in
subsequent annual reports on Form 10-K:

Securities and Exchange Commission

July 19, 2005

Page 5

    The Company determines whether its investment portfolio has an other than
temporary impairment on a security-by-security basis. A loss is
considered other than temporary if the security has a reduction in market
value compared with its adjusted cost basis of 20 percent or more for a
period of six months or longer. In addition, the Company periodically
reviews its investment portfolio to determine if any of the temporarily
impaired assets should be designated as other than temporarily impaired
due to changes in market conditions or concerns specific to the issuer of
the securities.

    Aggregate unrealized losses for twelve months or longer for temporarily
impaired investments totaled $15.9 million at October 31, 2004. Of that
amount, approximately 94 percent, or $14.9 million, of the losses were
generated by common stock investments in 45 large companies that are
included in the S&P 500 Index. These securities represent less than 9
percent of the securities in the Company’s portfolio. The Company
believes the decline in the value of these stocks is primarily due to the
general decline in the S&P 500 Index over the 2002 to 2003 timeframe.
Since early 2003, the S&P 500 Index has risen significantly. Although the
Company cannot predict future stock prices, its management expects that
the S&P 500 Index will continue to recover and that these stocks will
recover along with the overall Index. The Company also has the ability
and intent to hold these investments for its forecasted recovery period.

    Whether or not the Company classifies an investment as temporarily
impaired or other than temporarily impaired has no effect on its basic
consolidated financial statements (i.e., balance sheet, income statement,
statement of cash flows and statement of shareholders’ equity) because the
investments are marked to market each quarter and are included in the
financial statements at current market value in accordance with the
Company’s accounting under FIN 46R. The classification only affects the
footnote presentation. The cost basis of investments classified as other
than temporarily impaired is reduced to market value in the “Adjusted Cost
Basis” column in Notes 4, 5 and 6, whereas other investments are included
in that column at their actual cost basis.

    In support of its approach and its proposed disclosure, the Company
advises the Staff that from October 31, 2004 to June 20, 2005, the loss in
the common stock investments described above that was included in
temporarily impaired assets with losses of 12 months or longer
has

Securities and Exchange Commission

July 19, 2005

Page 6

decreased by approximately $5.2 million, or 33 percent, to approximately
$9.7 million. The periodic assessment of the Company’s investment
portfolio is performed by one of its senior executives who serves as the
Company’s investment portfolio manager, with the assistance of an
independent consultant, and is based upon analyst reports and other market
data that he routinely reviews.

    In support of its disclosure that the Company has the ability and intent
to hold the investments for a period of time sufficient to allow for
recovery, the Company advises the Staff of the following:

    •

    The Company has significant holdings of
cash, money market and other short-term investments within each trust
portfolio (approximately $230 million, or 25.26 percent of the total
trust investments as of October 31, 2004).

    •

    Cash is constantly flowing into the trust
portfolios as customers make payments on preneed contracts.

    •

    The Company is generally not legally
permitted to withdraw funds from the portfolios until the service or
merchandise is delivered. The average life of the Company’s preneed
funeral or merchandise contracts is currently approximately 10 to 15
years. For perpetual care trusts, the principal amounts deposited in
trust must remain in the trust in perpetuity.

    Accordingly, the Company does not believe that it will need to liquidate
the common stock investments in a temporarily impaired position any time
in the foreseeable future, and the Company intends to hold these
investments for a period of time sufficient to allow for the recovery that
the Company anticipates will occur.

    As discussed in the Company’s Response 4 in its letter dated June 3, 2005,
changes in the market value of the trusts are recorded by increasing or
decreasing trust assets included in the preneed funeral and cemetery
receivables and trust investments line items on the balance sheet, with a
corresponding increase or decrease in the deferred preneed revenue and
non-controlling interest line items on the balance sheet. Therefore,
there is no effect on net income. The accounting for changes in market
value of the Company’s trust portfolio was discussed with and agreed to by
the Staff in connection with discussions regarding FIN 46R in April 2004
with the death care industry. A letter documenting the discussions with
the SEC was filed under Form 8-K dated July 27, 2004

Securities and Exchange Commission

July 19, 2005

Page 7

    and was provided to
the Staff as Exhibit 1 to the Company’s response dated June 3, 2005.

    Notes to Consolidated Financial Statements

    (19) Long-term Debt, page 89

    Comment 3.

    We note your response to our prior comment 7 and your statement that EITF 98-14
does “not include the guidance of ‘looking through’ to the intermediary” as prescribed
by EITF 96-19. Both EITF 96-19 and 98-14 cited SFAS 125, subsequently replaced by SFAS
140, as reference material or guidance for implementation in transactions involving loan
syndications or participations.

    •

    Supplementally confirm to us if the
revolving credit facility and Term Loan B were the subject of a loan
syndication or loan participation as defined in paragraphs 102 and
104 of SFAS 140. The nature of the agreement governs as to whether
the consensus in EITF 96-19 would apply. Refer to Exhibit 96-19A for
further guidance. Please revise or advise.

    •

    If you conclude that a debt extinguishment
has occurred, tell us if it meets the conditions in paragraph 16 of
SFAS 140.

    Response 3(a).

    In reviewing paragraphs 102 and 104 of SFAS 140, the Company confirms that
the revolving credit facility and Term Loan B are part of a loan syndication. Both the
revolving credit facility and the Term Loan B include amounts committed or borrowed
from a group of lenders. The Administrative Agent is a lead lender and simply
functions as a servicer of the debt. The Company makes debt repayments to the
Administrative Agent who distributes the payments to the other lenders within the
syndicate.

    Because both the revolving credit facility and Term Loan B are part of a
loan syndication, the Company applied the guidance of EITF 96-19 and EITF
98-14, as applicable.

    Revolving Credit Facility

    In assessing the appropriate treatment for the revolving credit facility,
the Company considered the guidance of EITF 98-14, Debtor’s Accounting for
Changes in Line-of-Credit or Revolving Debt Arrangements to assess the
impact of the “borrowi