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

Continued from previous page.

Year Ended October 31, 1997 Compared to Year Ended October 31, 1996

Funeral Segment

Funeral revenue increased $72.5 million, or 33%, in fiscal year 1997, as compared with the prior fiscal year. The Company experienced a $6.3 million increase in revenue from Existing Operations as a result of a 5% overall increase in the average revenue per funeral service performed by Existing Operations (4% increase domestically), due to price increases and improved merchandising.

The $1.4 million, or 1%, decrease in funeral costs from Existing Operations resulted principally from the implementation of certain cost control measures, including contract negotiations with certain vendors. Existing Operations achieved improved profit margins resulting primarily from the increased cost control measures, including the Company's centralization and standardization of certain financial and administrative functions in connection with the Company's Shared Services Center, and the increased average revenue per funeral service mentioned above.

The increase in revenue and costs from Acquired Operations resulted primarily from the Company's acquisition or construction of funeral homes in fiscal year 1997 which is not reflected in the 1996 period presented above.

The $6.9 million increase in revenue from prearranged funeral trust funds and escrow accounts was attributable to a 23% growth in the average balance in such trust funds and escrow accounts, resulting primarily from current year customer payments deposited into the funds and funds added through acquisitions, coupled with a slight increase in the yield on the North American funds (excluding those in Mexico), which yield is in line with the Company's goal. The return of the peso-denominated investments of the Company's Mexican subsidiaries, which comprise less than 10% of the Company's total funeral trust portfolio, averaged 20% for the fiscal year ended October 31, 1997. The return on the Mexican funds partially offset the approximate 18% inflation experienced during the year.

Cemetery Segment

Cemetery revenue increased $27.8 million, or 13%, in fiscal year 1997, as compared to fiscal year 1996, due principally to a $16.7 million increase in revenue from Existing Operations, resulting principally from an increase in cemetery sales.

Costs increased during this same period by $9.7 million, of which $6.9 million was attributable to Acquired Operations. The improved profit margin achieved by Existing Operations was attributable principally to a 9% increase in cemetery sales by Existing Operations, the implementation of certain cost control measures, including the Company's undertaking to centralize and standardize certain financial and administrative functions in connection with the Company's Shared Services Center, and the increase in burial site openings and closings.

The increase in revenues and costs associated with Acquired Operations resulted primarily from the acquisition or construction of cemeteries during fiscal year 1997 which is not reflected in the 1996 period presented above.

The $3.1 million increase in revenue from merchandise trust funds and escrow accounts was attributable principally to a 24% growth in the average balance in the merchandise trust funds and escrow accounts, resulting primarily from current year payments deposited into the funds, along with funds added through acquisitions, and a slight increase in the yield on the merchandise trust funds and escrow accounts, which return slightly exceeded the Company's goal of approximately 9%.

Other
Corporate general and administrative expenses increased $1.3 million in fiscal year 1997, to 2.9% of revenue, as compared to 3.3% in fiscal year 1996. The increase in these expenses is the result of activities to support the Company's growth.

Interest expense increased $12.0 million during fiscal year 1997 when compared to fiscal year 1996. The increase resulted from an increase in average borrowings, which was partially offset by a slight decrease in average interest rates from 6.7% in 1996 to 6.6% in 1997. Approximately $312.0 million, or 56%, of the $558.3 million borrowings outstanding as of October 31, 1997 was subject to short-term variable interest rates averaging approximately 6.3%.

Investment and other income decreased $1.4 million during fiscal year 1997 when compared to the prior year, due principally to a $1.6 million gain in fiscal year 1996 on the sale of land that was condemned.

The Company experienced a decrease in its effective tax rate from 37.3% in fiscal year 1996 to 34.5% in fiscal year 1997, principally as a result of elimination of the Puerto Rican interest withholding tax and strategic state tax planning.