Better Service - Caring Staff - Added Convenience - Improved Services - Proud
In our business, there is only one opportunity to provide families with the caring service they deserve at a difficult time. There are no second chances. Every day, families come to us and expect to be taken care of -- one at a time -- with services tailored to their special needs. Doing our job well means that those families will turn to us again and again. This is the reason for our existence. It is also good for our business and good for our shareholders.

Founded in 1910, Stewart has had nearly nine decades of experience. Throughout those decades, one of the core principles we have adhered to has been respect for tradition. And yet, because the needs of families are ever-changing, we are continually learning new ways to deliver services. Doing both -- upholding traditions and developing new initiatives -- enables us to serve families better and to position our company for future growth. In fiscal 1998, we served more than 190,000 families -- 40,000 more than the year before (on an annualized basis). In this report, we discuss why we have been successful and how we will build on that success in the future.

The fact that death is inevitable is basic to our society and our business. In the United States, according to Census Bureau projections, the number of deaths will increase steadily. For example, 2.3 million deaths occurred in 1995, and 2.6 million are projected for 2010. Additionally, the segment of the population over 50 years of age, which is our primary target audience, numbered 68 million in 1995 but is projected to be 96 million in 2010. When death occurs, families will turn to someone in our industry to meet their needs. Our mission is to be the company of choice for as many families as possible, and to offer them an unparalleled range of quality products and services.

Better Service Through Global Growth
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Expanding our presence across the map means our services are available to more and more families. At the same time, we learn from each new culture we serve. Often, we are able to introduce ideas from one area of the world into another area, and everyone benefits. Examples of this include cremation-related services, improved merchandising and marketing of prearrangements.

At the end of fiscal 1998, we operated 558 funeral homes and 140 cemeteries in 148 markets around the world. Included in those numbers are a new cemetery we developed and five funeral homes (two stand-alone facilities plus three located on cemetery grounds) we constructed last year, in addition to the 162 funeral homes and cemeteries we purchased.

In seeking out and evaluating potential acquisitions, we consider a range of criteria, but four are especially important -- the quality and prestige of the business; the probability of retaining management; the potential for combined facilities and market clustering; and the acquired business's ability to contribute to Company earnings during the first 12 months.

A good reputation is crucial in our business. When we purchase a firm, we acquire its reputation -- its name on the door, loyal employees, long-standing community relationships and traditions. A good reputation is an indicator that the firm is being managed by people who share our commitment to quality, service and value. Consequently, retention of the established management and staff ensures that the business will continue its high level of personal service.

In evaluating a cemetery business, we consider as well the potential to construct a funeral home on the cemetery's grounds. We have found that this kind of combined operation builds market share for both the new funeral home and the established cemetery. The funeral home immediately becomes a resource for the cemetery's existing base of families, and both facilities become more attractive to new customers who desire the convenience of comprehensive services in one location. Stewart has been an industry leader in developing combination operations. A total of 45% of our cemeteries now operate as combinations. In fiscal 1998, we established three new combination facilities in the United States, maintaining our annual program of building three new funeral homes at existing cemeteries.

Market clustering -- operating multiple businesses that are close to one another geographically -- has long been an important part of our acquisition strategy. Clustering enables us to increase operating efficiencies through the sharing of personnel, equipment and other resources; it also produces economies of scale that help us to negotiate more favorable contracts with suppliers.

The favorable acquisition climate has continued into 1999. Thus far, we have acquired or made a commitment to acquire 102 businesses in seven countries at a cost of $237.7 million. These new acquisitions, which serve 26,000 families, are expected to add $98.0 million in revenue annually.

A Caring Staff, 10,600 Strong
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As we increase our presence both in the United States and internationally, we must be able to retain local management. Our decentralized management structure allows us to make decisions on the local level so that we are able to respond quickly and personally to each family's needs.

For example, in France, the former owner of our newly acquired firm of 36 funeral facilities continues with us as chief operating officer for all of our operations in that country. He reports to our recently established European headquarters located in the Netherlands. Managing local firms with local people is vital in serving communities well, since customs vary greatly from country to country and, within a country, from market to market.

All of our employees are dedicated, caring and knowledgeable about the areas in which they serve. We can rely on them to continue delivering quality service to families in their communities. In addition, we constantly help our employees to improve themselves. Not only do we encourage them to pursue further professional development, but we also continually look for new and better ways of recognizing them for their efforts -- from improved benefit packages to financial incentive programs.

Added Convenience for Families
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Making funeral and cemetery arrangements is difficult and emotional. However, the more convenient the process, the less trying it is for the family at the time of a death. One way our company has addressed this issue is through the development of combination operations. A second innovative approach is the marketing of prearrangements.

Stewart has been offering prearrangements for almost a half-century, longer than our major competitors have been in business. Prearranging is planning today for tomorrow's funeral and cemetery needs. This approach gives families the assurance of knowing that they have been able to make carefully considered decisions, and it also helps them avoid unnecessary confusion and financial difficulties later, during an emotionally stressful time. At the close of our fiscal year, our backlog of prearranged funeral services exceeded 397,000 services and represented more than $1.3 billion in future revenue. Over the four elapsed years ending October 31, 1998, our backlog has grown at a compounded annual rate of 21%.

Improved Services and Products
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In recent years, the Company has launched two new internal growth strategies and two initiatives to make our operations more efficient. We made good progress with each of them during fiscal 1998.

The first internal growth strategy involves the alternative-services-firm concept, which addresses the growing cremation market. The Cremation Association of North America reported that U.S. cremations in 1997 equaled 23.6% of all deaths. Because more families are choosing cremation and other alternative services, we made the decision in 1997 to increase our cremation product and service options. Today, our leadership in this emerging market is evident. We opened four new alternative-services firms in California during fiscal 1998, bringing our total number in that state to 18. We also acquired seven new cremation firms in Nevada and Oregon. We believe that we are the leading provider in the alternative-services market. Alternative-services businesses involve significantly lower operating costs than do traditional funeral homes, since they require less leased space and fewer employees. As a result, alternative-services firms represent a cost-effective way for us to enter new markets and expand within existing markets.

The success of our second internal growth strategy -- forming operating partnerships with third parties -- has been outstanding. We announced last year that we had formed an alliance with the Archdiocese of Los Angeles to construct and operate funeral homes on the six largest of their cemeteries. We have broken ground for four of these funeral homes, and expect to start work on the remaining two in 1999. In 1998, we signed three additional agreements with the Archdiocese to construct funeral homes on three of its remaining cemeteries. We also entered into an agreement to construct and operate a funeral home at Wyuka Cemetery, the only state-chartered cemetery in Nebraska. Progress on additional third-party partnerships is continuing.

These two internal growth strategies, together with our others (the development of combination operations and stand-alone facilities), positively impacted the Company's operating and financial results for fiscal 1998. On an annualized basis, our internal growth strategies generated $67 million in revenue; added 5,500 families to our customer base; and increased the backlog of prearranged funerals by 3,000 cases, representing approximately $23 million in future revenue.

The establishment of a Shared Services Center, an initiative to control costs, also positively impacted results. The center began operating in fiscal 1997. This facility, which centralizes all of the accounting and administrative functions for Stewart's U.S. and Puerto Rican operations, is designed to increase customer satisfaction and decrease costs through increased employee efficiency and productivity. In fiscal year 1998, the center's cost to perform its accounting and administrative functions amounted to 1.8% of domestic revenues, as compared to 2.7% in fiscal year 1997. Prior to 1997, the Company's costs to perform these functions constituted 2.9% of domestic revenues. It is projected that in fiscal year 1999, this figure will fall to 1.3%, and in fiscal year 2000, to 1.2%.

Another initiative focuses on our technological capabilities. Last year, we finished development and began the rollout of two information technologies created by our Information Systems Department. These two applications, titled Cemetery and Funeral Enabler (CAFÉ) and Key Information for Sales (KIS), are expected to have a significant effect on future operating efficiencies and expenses. CAFÉ is a PC-based data-capture system that automates the process of arranging for funerals and burials, eliminates duplicate data entry, delivers the latest information to the desktop at all our locations, and generates reports. KIS tracks, processes and presents key sales data and provides management with real-time access to the data. These programs will enhance our ability to provide excellent service.

Proud to Be of Service
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When a death occurs, we have only one chance to provide families with exceptional service. We cannot fall short of the mark they set for us. We must get it right the first time, every time.

In 1998, we were tested many times, from coast to coast and around the world. The stories presented in this report testify to how we got it right.

We are proud of this record of achievement. We also are proud of our sound and prudent acquisition program; our new initiatives, which promise success; and our innovative operational and technical programs, which lead to greater efficiency and better service.

But we are most proud of our 10,600 employees, who care about the families they serve. . . one at a time.

The stories and photographs that appear in this report are from actual families served by the Stewart family of companies. The families involved have given the Company permission to publish the stories and photographs.