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

Liquidity and Capital Resources
Cash and marketable securities of the Company were $36.9 million as of October 31, 1998, an increase of $.6 million from October 31, 1997. The Company provided cash of $18.3 million from its operations for the year ended October 31, 1998, compared to using cash of $15.2 million for fiscal year 1997, due principally to an increase in earnings (excluding the charge for the performance-based stock options) and an increase in accounts payable and accrued expenses offset by an increase in other receivables and other working capital changes.

Long-term debt as of October 31, 1998 amounted to $924.4 million, compared to $558.3 million as of October 31, 1997. The Company's long-term debt consisted of $492.0 million under the Company's revolving credit facilities, $408.4 million of long-term notes including the Remarketable or Redeemable Securities (ROARS) discussed below, and $24.0 million of term notes incurred principally in connection with the acquisition of funeral home and cemetery properties. All of the Company's debt is unsecured, except for approximately $3.0 million of term notes incurred principally in connection with acquisitions.

In April 1998, the Company issued $200 million of 6.40% ROARS due May 1, 2013 (remarketing date May 1, 2003). The ROARS were priced to the public at 99.677% to yield 6.476%. Net proceeds were approximately $203.6 million, including the remarketing payment made to the Company by the remarketing dealer for the right to remarket the securities after five years. The proceeds were used to reduce balances outstanding under the Company's existing revolving credit facilities. The net effective rate to the Company, assuming the securities are redeemed by the Company after five years, is 5.77%. If the securities are remarketed after five years, the net effective rate is expected to be approximately 6.14% over 15 years.

The most restrictive of the Company's credit agreements require it to maintain a debt-to-equity ratio no higher than 1.25 to 1.0. The Company has managed its capitalization within that limit, with a ratio of total debt to equity of 1.1 and .7 to 1.0 as of October 31, 1998 and 1997, respectively. As of October 31, 1998, the Company had $124.7 million of additional borrowing capacity within this parameter, of which $114.1 million was available under its revolving credit facilities.

In July and December 1998, the Company filed shelf registration statements with the Securities and Exchange Commission covering an aggregate of up to $750 million of Class A Common Stock, Preferred Stock, and Debt Securities, including up to 2,000,000 shares of the Company's Class A Common Stock which Frank B. Stewart, Jr., the chairman of the Board of Directors of the Company, and his transferees and successors in interest, may offer and sell from time to time.

In January 1999, the Company filed a prospectus supplement for the proposed sale of 12,500,000 shares of Class A Common Stock (excluding the underwriters' over-allotment option covering 1,875,000 shares), of which 650,000 shares are being offered by the Stewart Revocable Trust, a trust established by Mr. Stewart and his wife. The offering, scheduled to close near the end of January, is expected to generate net proceeds to the Company of approximately $268 million (excluding the over-allotment option) to be used to fund the Company's continuing acquisition program and for general corporate purposes. Pending such use, the Company will use the net proceeds to reduce the balances outstanding on its revolving credit facilities or to invest in short-term interest-bearing securities.

The Company's ratio of earnings to fixed charges was 2.39 (which includes the $76.8 million nonrecurring, noncash performance-based stock option charge), 3.65 (which excludes the cumulative effect of the change in accounting principles), 3.98, 2.72 (which includes the $17.3 million nonrecurring, noncash performance-based stock option charge) and 5.30 for the fiscal years ended October 31, 1998, 1997, 1996, 1995 and 1994, respectively. Excluding the stock option charge, the Company's ratio of earnings to fixed charges would have been 4.02 for fiscal year 1998 and 3.43 for fiscal year 1995. For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretax earnings 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. Fiscal year 1996 and prior amounts reflect the Company's previous accounting methods which were
in effect at the time.

During fiscal year 1998, the Company completed the acquisition of 153 funeral homes and nine cemeteries for purchase prices aggregating approximately $266.3 million, including the issuance of approximately 294,000 shares of Class A Common Stock and $16.2 million of seller-financed acquisition indebtedness. The cash portion of the purchase price of these acquisitions was funded primarily with advances under the Company's revolving credit facilities.

Subsequent to fiscal year-end, the Company completed the acquisition of 18 funeral homes and 3 cemeteries for approximately $34.1 million. As of January 15, 1999, the Company also had agreements in principle or letters of intent to purchase 59 funeral homes and cemeteries for purchase prices aggregating approximately $162.5 million.

Although the Company has no material commitments for capital expenditures, the Company contemplates capital expenditures, excluding acquisitions, of approximately $45 million for the fiscal year ending October 31, 1999, which includes the construction of new funeral homes and refurbishing of funeral homes recently acquired.

Management expects that future capital requirements will be satisfied through the common stock offering referenced to above, internally generated cash flow and amounts available under its revolving credit facilities. Additional debt and equity financing, may be required in connection with future acquisitions. In addition, the Company monitors its mix of fixed- and floating-rate debt obligations in light of changing market conditions and may from time to time decide to alter that mix by, for example, refinancing balances outstanding under its floating-rate revolving credit facility with public or private fixed-rate debt, or by entering into interest rate swaps or similar interest rate hedging transactions.

In December 1998, the Company entered into an interest rate swap agreement on a notional amount of $200 million. Under the terms of the agreement, effective March 4, 1999, the Company will pay a fixed rate of 4.915% and receive 3-month LIBOR. The swap expires on March 4, 2002.