TRUST AND ESCROW INVESTMENTS
The Company’s funeral and cemetery business includes prearranged sales funded through trust and escrow arrangements, as well as maintenance of cemetery grounds funded through perpetual care funds. Effective November 1, 1998, the Company changed its method of accounting for earnings realized by irrevocable prearranged funeral trust funds and escrow accounts. The Company now defers all of the earnings realized by irrevocable prearranged funeral trust funds and escrow accounts until the underlying funeral service is delivered. Previously, the Company recognized a portion of these earnings and deferred the remainder to offset the estimated future effects of inflation. The accounting change was made principally to match revenue recognition more closely with cash receipts and also to improve the comparability of its earnings with those of its principal competitors. The new method allows the Company to take a longer-term view and increase its flexibility in managing the funeral trust funds. This change generally has resulted in reduced near-term funeral revenue and gross profit, due to the deferral of all of the earnings from funeral trust funds and escrow accounts until the funeral is performed. See Note 3 to the consolidated financial statements.

The Company’s investment strategy for these funds is, among other criteria, partially dependent on the ability to withdraw net realized capital gains from these funds. However, withdrawal of capital gains is not permitted for perpetual care funds in certain jurisdictions in which the Company operates. Accordingly, funds for which net capital gains are permitted to be withdrawn typically are invested in a diversified portfolio consisting principally of U.S. government securities, other interest-bearing securities and preferred stocks rated A or better, “blue chip” publicly-traded common stocks, money market funds and other short-term investments.

Income from funds, especially those invested partially in common stock, can be materially affected by prevailing interest rates and the performance of the stock market. In managing its North American funds (including those in Puerto Rico and excluding those in Mexico), which include investments in common stock, the Company seeks an overall annual yield of approximately 8.5 percent to 9.0 percent. However, no assurance can be given that the Company will be successful in achieving any particular yield.