Notes to Consolidated Financial Statements (Dollars in thousands, except per share amounts.)

(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. (b) Use of Estimates The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and 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. (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. Accordingly, the estimates presented herein may not be indicative of the amounts the Company could realize in a current market. The use of different market assumptions or valuation methodologies may have a material effect on the estimated fair value amounts. The carrying amounts of cash and cash equivalents, marketable securities 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 amount of long-term investments is stated at fair value as they are classified as available for sale under the provisions of Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities." The carrying value of the Company's long-term floating-rate debt approximates fair value as it bears interest at rates currently available to the Company for debt with similar terms and maturities. The fair value of the Company's long-term fixed-rate debt is estimated using quoted market prices, where applicable, or discounted future cash flows based on the Company's current incremental borrowing rates for similar types of borrowing arrangements. See Note 11. (d) Inventories Inventories are stated at the lower of cost (specific identification and first-in, first-out methods) or net realizable value. (e) Depreciation and Amortization Buildings and equipment are depreciated over their estimated useful lives, ranging from 19 to 45 years and from three to 10 years, respectively, primarily using the straight-line method. For the fiscal years ended October 31, 1998, 1997 and 1996, depreciation expense totaled approximately $21,094, $17,972 and $13,938, respectively. Goodwill, or costs in excess of net assets of companies acquired, totaled approximately $567,432 and $411,564 as of October 31, 1998 and 1997, respectively, and is amortized principally over 40 years by the straight-line method. The Company continually evaluates the recoverability of this intangible asset by assessing whether the amortization of the goodwill balance over its remaining life can be recovered through undiscounted expected future cash flows. Other intangible assets are amortized over five years by the straight-line method. Accumulated amortization was approximately $43,831 and $29,383 as of October 31, 1998 and 1997, respectively. (f) Foreign Currency Translation In accordance with Statement of Financial Accounting Standards No. 52, "Foreign Currency Translation," all assets and liabilities of the Company's foreign subsidiaries are translated into U.S. dollars at the exchange rate in effect at the end of the period, and revenues and expenses are translated at average exchange rates prevailing during the period. The resulting translation adjustments are reflected in a separate component of shareholders' equity, except for translation adjustments arising from operations in highly inflationary economies. During the first quarter of fiscal year 1997, the Company changed its method of reporting foreign currency translation adjustments for its Mexican operations to the method prescribed for highly inflationary economies. Under that method, foreign currency translation adjustments are reflected in results of operations, instead of in shareholders' equity. This change did not have a material effect on the Company's results of operations for fiscal year 1997 or 1998. As of January 1, 1999, the Mexican economy is no longer considered highly inflationary according to the SEC staff. The functional currency which will be used by our Mexican operations will be the Mexican peso. This change is not expected to have a material effect on the Company's operations or consolidated financial condition and results of operations. (g) Funeral Revenue The Company sells prearranged funeral services and funeral 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 in jurisdictions where such sales are included in funeral and insurance contracts. Commissions and direct marketing costs relating to prearranged funeral services and prearranged funeral merchandise sales are accounted for in the same manner as the revenue to which they relate. Where revenue is deferred, the related commissions and direct marketing costs are deferred and amortized as the funeral contracts are fulfilled. Conversely, where revenues are recognized currently, the related costs are expensed as incurred. Indirect costs of marketing prearranged funeral services are expensed in the period in which incurred. Prearranged funeral services and merchandise generally are funded either through trust funds or escrow accounts established by the Company, or through insurance. Principal amounts deposited in the trust funds or escrow accounts are available to the Company as funeral services and merchandise are delivered and are refundable to the customer in those situations where state law provides for the return of those amounts under the purchaser's option to cancel the contract. Certain jurisdictions provide for nonrefundable trust funds or escrow accounts where the Company receives such amounts upon cancellation by the customer. Under prearranged funeral services and merchandise funded through insurance purchased by customers from third-party insurance companies, the Company earns a commission on the sale of the policies. Commissions, net of related expenses, are recognized at the point at which the commission is no longer subject to refund. Policy proceeds are available to the Company as funeral services and merchandise are delivered. Effective November 1, 1996, the Company changed its method of accounting for prearranged funeral trust earnings. See Note 3. Earnings are withdrawn only as funeral services and merchandise are delivered or contracts are canceled, except in jurisdictions that permit earnings to be withdrawn currently and in unregulated jurisdictions where escrow accounts are used Funeral services sold at the time of need are recorded as funeral revenue in the period the funeral is performed. (h) Cemetery Revenue Effective November 1, 1996, the Company changed its method of accounting for prearranged sales of cemetery interment rights, related products and burial site openings and closings. See Note 3. The Company recognizes income currently from unconstructed mausoleum crypts sold to the extent it has available inventory. Costs of mausoleum and lawn crypts sold but not yet constructed are based upon management's estimated cost to construct those items. In certain jurisdictions in which the Company operates, local law or contracts with customers generally require that a portion of the sale price of prearranged cemetery merchandise be placed in trust funds or escrow accounts. In those jurisdictions where trust or escrow arrangements are neither statutorily nor contractually required, the Company typically deposits on a voluntary basis approximately 110% of the cost of the cemetery merchandise into escrow accounts. The Company recognizes as revenue on a current basis all dividends and interest earned, and net capital gains realized, by prearranged merchandise trust funds or escrow accounts. At the same time, the liability for the estimated cost to deliver merchandise is adjusted through a charge to earnings to reflect inflationary merchandise cost increases. Principal and earnings are withdrawn only as the merchandise is delivered or contracts are canceled. Pursuant to perpetual care contracts and laws, a portion, generally 10%, of the proceeds from cemetery property sales is deposited into perpetual care trust funds or escrow accounts. In addition, in those jurisdictions where trust or escrow arrangements are neither statutorily nor contractually required, the Company typically deposits on a voluntary basis a portion, generally 10%, of the sale price into escrow accounts. The income from these funds, 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. Accordingly, the trust fund corpus is not reflected in the consolidated financial statements, except for voluntary escrow funds established by the Company, which are classified as long-term investments. The Company recognizes and withdraws currently all dividend and interest income earned and, where permitted, capital gains realized by perpetual care funds. A portion of the sales of cemetery property and merchandise is made under installment contracts bearing interest at prevailing rates. Finance charges are recognized as cemetery revenue under the effective interest method over the terms of the related installment receivables. (i) Income Taxes The Company recognizes deferred tax assets and liabilities for the expected future tax consequences of temporary differences between tax bases and financial reporting bases of assets and liabilities. The Company has not provided for possible United States federal income taxes on the undistributed earnings of foreign subsidiaries that are considered to be reinvested indefinitely. (j) Earnings Per Common Share Effective November 1, 1997, the Company adopted Statement of Financial Accounting Standards No. 128 "Earnings Per Share" which requires the presentation of basic and diluted earnings per share. Basic earnings per share is computed by dividing net earnings by the weighted average number of common shares outstanding during each period. Diluted earnings per share is computed by dividing net 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 (in this case, exercise of the Company's time-vest stock options) had been issued during each period. See Note 12. The Company's share and per share amounts have been adjusted for a three-for-two common stock split effective June 21, 1996, and a two-for-one common stock split effective April 24, 1998. (k) Recent Accounting Standards The Company has adopted the disclosure-only provisions of Statement of Financial Accounting Standards No. 123, "Accounting for Stock-Based Compensation," and continues to apply Accounting Principles Board Opinion No. 25 and related interpretations in accounting for its stock-based compensation plans. See Note 14. Statement of Financial Accounting Standards (SFAS) No. 129, "Disclosure of Information about Capital Structure," was adopted during the first quarter of the Company's fiscal year ending October 31, 1998. SFAS No. 130, "Reporting Comprehensive Income," is required to be implemented in the first quarter of the Company's fiscal year 1999. SFAS No. 131, "Disclosure about Segments of an Enterprise and Related Information," is required to be implemented during the Company's fiscal year ending October 31, 1999 and SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities," is required to be implemented in the first quarter of the Company's fiscal year 2000. The effect of these pronouncements on the Company's consolidated financial condition and results of operations is not expected to be material. (l) Reclassifications Certain reclassifications have been made to the 1996 and 1997 consolidated financial statements to conform to the presentation used in the 1998 consolidated financial statements. These reclassifications had no effect on net earnings or shareholders' equity.