Exhibit 99.2**Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations****Overview of Fiscal Year 2006**          We are the second largest provider of funeral and cemetery products and services in the deathcare industry in the United States. As of December 29, 2006, we owned and operated 230 funeralhomes and 143 cemeteries in 25 states within the United States and Puerto Rico.          We sell cemetery property and funeral and cemetery products and services both at the time ofneed and on a preneed basis. Our revenues in each period are derived primarily from at-need sales,preneed sales delivered out of our backlog during the period (including the accumulated trust fundearnings or build-up in the face value of insurance contracts related to these preneed deliveries),preneed cemetery property sales and other items such as perpetual care trust earnings and financecharges. We also earn commissions on the sale of insurance-funded preneed funeral contracts thatwill be funded by life insurance or annuity contracts issued by third party insurers when we act asan agent on the sale.          For fiscal year 2006, we had net earnings of $37.6 million compared to a net loss of $143.3million for fiscal year 2005. Contributing to the net loss in 2005 was an after-tax charge of$153.2 million for the cumulative effect of change in accounting principle related to the change inour method of accounting for preneed selling costs, implemented effective November 1, 2004. Fiscalyear 2006 earnings from continuing operations increased by $28.9 million to $37.5 million comparedto $8.6 million for fiscal year 2005. Contributing to the increase were charges for the loss onearly extinguishment of debt in 2005 of $32.8 million related to the refinancing of our seniorsecured credit facility and our 10.25 percent senior subordinated notes. Funeral gross profitincreased $3.9 million, and cemetery gross profit increased $9.0 million. Corporate general andadministrative expenses increased $12.3 million in 2006 due primarily to a $3.6 million increase inprofessional fees associated with our defense of class action litigation, a $2.5 million increasein professional fees related to the amended SEC filings, a $1.5 million increase in expensesrelated to expanded and improved training and a $1.2 million increase due to the adoption of SFASNo. 123R. We also recorded a $1.6 million recovery for net hurricane-related costs compared to a$9.4 million charge in 2005. Further discussion of the effect of the 2005 hurricanes can be foundbelow in Note 22 to the consolidated financial statements included in Item 8.          Funeral revenue increased $9.4 million from $272.9 million in fiscal year 2005 to $282.3million in fiscal year 2006 primarily due to an increase in average revenue per call of 1.9 percentand business interruption insurance proceeds of $2.8 million offset by a 0.2 percent decrease infuneral services performed by same-store businesses. Same-store results include the three funeralhomes impacted by Hurricane Katrina. Excluding these funeral homes, average revenue per callincreased 1.8 percent and same-store funeral call growth increased 0.3 percent. Cemetery revenueincreased $15.8 million from $219.0 million in fiscal year 2005 to $234.8 million in fiscal year2006 due to increases in revenue from the sale of cemetery property, increases in merchandisedeliveries, increases in perpetual care trust earnings and decreases in the reserve forcancellations, offset by a decrease in construction during the year on various cemetery projects.          For fiscal year 2006, we achieved a 12.3 percent increase in preneed funeral sales. We alsoexperienced an eight percent increase in cemetery property sales.          During 2006, our largest funeral operation in New Orleans operated out of a temporaryfacility. Reconstruction of this funeral home began in early fiscal year 2007 and is expected tobe completed by early 2008. The second largest funeral home in New Orleans was not open duringfiscal year 2006 but is expected to open in the second quarter of 2007. The smallest funeral homein New Orleans opened during the third quarter of 2006. Burials occurred in all of our Louisianacemeteries during 2006. We have renovations remaining at one of the mausoleums.          As of October 31, 2006, we had achieved our lowest net debt level in over ten years. Duringfiscal 2006, we used $33.2 million to reduce our debt, including $30.0 million in unscheduledprincipal payments on our Term Loan B. We initiated a quarterly cash dividend of two and one-halfcents per share of common stock in the second fiscal quarter of 2005, and in fiscal year 2006 paid$10.7 million in dividends on our common stock. In addition, we used $22.0 million to repurchaseshares of our Class A common stock pursuant to our recently completed $30.0 million stock repurchase program.
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          We discovered certain adjustments that relate to prior accounting periods while preparing ourquarterly report for the three months ended July 31, 2006 and our annual report for the year endedOctober 31, 2006, which are reflected in this annual report. See Note 2(u) to the consolidatedfinancial statements included in Item 8. We do not believe these adjustments are quantitatively orqualitatively material to our financial position, results of operations and cash flows for the yearended October 31, 2006 or to any of our prior annual or quarterly financial statements. As aresult, we have not restated any prior period amounts.**Preneed — Backlog, Trust Portfolio and Cash Impact of Sales***Overview*          We believe that preneed funeral and cemetery property sales are two of the primary drivers ofsustainable long-term growth in the number of families served by our funeral homes and cemeteries.Our preneed funeral service and merchandise sales and preneed cemetery service and merchandisesales are deferred into our backlog while our preneed cemetery property sales are recognizedcurrently in accordance with SFAS No. 66, “Accounting for Sales of Real Estate” (“SFAS No. 66”).For a detailed discussion of our revenue recognition policies and how we account for our at-needsales, preneed sales and trust earnings, see Notes 2(i), 2(j), 2(k), and Notes 4 through 7 to theconsolidated financial statements included in Item 8.*Backlog*          We estimate that as of October 31, 2006 the future value of our preneed funeral and cemeteryservices and merchandise backlog represented approximately $2.0 billion of revenue to be recognizedin the future as these prepaid products and services are delivered. This represents the face valueof the backlog plus the earnings that are projected on the funds held in trust and the estimatedbuild-up in the face value of insurance contracts. It assumes no future preneed sales and assumesmaturities each year consistent with our experience, with the majority of existing contractsexpected to mature over the next 15 years. As of October 31, 2006, the value of the preneedbacklog, excluding any future earnings on the funds held in trust and any build-up in the facevalue of insurance contracts, but including unrealized earnings and losses on the funds held intrust and realized earnings and losses on the funds held in trust not yet recognized as revenue,was approximately $1.6 billion.*Trust Portfolio*          We maintain three types of trusts and escrow accounts: (1) preneed funeral merchandise andservices, (2) preneed cemetery merchandise and services and (3) cemetery perpetual care. Because aportion of the funds we receive from preneed sales are deposited into the trusts and invested in avariety of debt and equity securities and other investments, the performance of the trusts’investments can affect our current and future revenue streams. We recognize earnings and lossesrealized by preneed funeral and cemetery merchandise and services trusts at the time of delivery ofunderlying products and services. We recognize all earnings and losses realized by our cemeteryperpetual care trusts currently, including capital gains and losses in those jurisdictions wherecapital gains can be withdrawn and used for cemetery maintenance. Because approximately 57 percentof our total trust portfolio is currently invested in a diversified group of equity securities, wewould generally expect our portfolio performance to improve if the performance of the overall stockmarket improves, but we would also expect its performance to deteriorate over time if the overallstock market declines.          From 1991 through 1999, we achieved an overall annual realized return of 8.0 percent to 9.0percent in our domestic trusts. However, the average realized return on our domestic trusts was 5.8percent, 6.3 percent, 4.3 percent, 4.8 percent, 2.6 percent, 4.3 percent and 5.1 percent for fiscalyears 2000, 2001, 2002, 2003, 2004, 2005 and 2006, respectively. These returns represent interest,dividends and realized capital gains or losses but not unrealized capital gains or losses. Forfiscal year 2006, including realized and unrealized gains and losses, we achieved a 12.7 percentreturn on our funeral and cemetery merchandise and services trusts and an 11.0 percent return onour perpetual care trusts, compared to 6.8 percent and 3.5 percent, respectively, for fiscal year2005, and 7.7 percent and 6.5 percent for the last three fiscal years.
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          We mark our trust portfolio to market value each quarter. Changes in the market value of thetrusts are recorded by increasing or decreasing trust assets included in the preneed funeral and cemeteryreceivables and trust investments line items on the balance sheet, with a corresponding increase ordecrease in the deferred preneed revenue and non-controlling interest line items on the balancesheet. Therefore, there is no effect on current period net income.          We determine whether or not the investment portfolio has an other than temporary impairment ona security-by-security basis. A loss is considered other than temporary if the security has areduction in market value compared with its cost basis of 20 percent or more for a period of sixmonths or longer. In addition, we periodically review our investment portfolio to determine if anyof the temporarily impaired assets should be designated as other than temporarily impaired due tochanges in market conditions or concerns specific to the issuer of the securities. If a loss isother than temporary, the cost basis of the security is adjusted downward to its market value,which is allocated to the non-controlling interests in the trusts. This affects our footnotedisclosure but does not have an effect on our financial statements, since the trust portfolio isalready marked to market value each quarter. The footnotes disclose the adjusted cost basis andhow much of the losses are considered other than temporary. Accordingly, unrealized gains andlosses reflected in the tables in Notes 4, 5 and 6 to the consolidated financial statementsincluded in Item 8 are temporary as the cost basis in these tables have already been adjusted toreflect the other than temporary unrealized losses. Our preneed funeral and cemetery merchandiseand services trusts and escrow accounts had other than temporary declines of $79.4 million and$42.9 million, respectively, as of October 31, 2006, from their original cost basis. They had netunrealized appreciation of $21.5 million and $7.4 million, respectively, as of October 31, 2006resulting from temporary unrealized gains and losses. See Notes 4 and 5 to the consolidatedfinancial statements included in Item 8.          Our cemetery perpetual care trust accounts had other than temporary declines of $32.4 millionas of October 31, 2006, from their original cost basis. They had net unrealized appreciation of$13.1 million as of October 31, 2006 resulting from temporary unrealized gains and losses. SeeNote 6 to the consolidated financial statements included in Item 8. Unrealized gains and losses inthe cemetery perpetual care trusts and escrow accounts do not affect current earnings butunrealized losses could limit the capital gains available to us and could eventually result inlower returns and lower revenues than we have historically achieved from these trusts.          Aggregate unrealized losses for twelve months or longer for temporarily impaired investmentstotaled $11.2 million at October 31, 2006, down from $16.1 million at October 31, 2005. Of the$11.2 million, approximately 69 percent, or $7.7 million, were generated by common stockinvestments in 39 companies of which 37 are included in the Standard and Poor’s 500 Index (“S&P 500Index”). These securities represent approximately 7.7 percent of the securities in our portfolio.Although we cannot predict future stock prices, our management expects that the S&P 500 Index willcontinue to recover and that these stocks may recover along with the overall Index. We also havethe ability and intent to hold these investments for the forecasted recovery period.          Whether or not we classify an investment as temporarily impaired or other than temporarilyimpaired has no effect on our basic consolidated financial statements (i.e., balance sheet,statement of earnings, statement of cash flows and statement of shareholders’ equity) because theinvestments are marked to market value each quarter and are included in the financial statements atcurrent market value in accordance with our accounting under FIN 46R. The classification onlyaffects the footnote presentation. The cost basis of investments classified as other thantemporarily impaired is reduced to market value in the “Adjusted Cost Basis” column in Notes 4, 5and 6, whereas other investments are included in that column at their actual cost basis.          We perform a separate analysis to determine whether our preneed contracts are in a lossposition, which would necessitate a charge to earnings. For this analysis, we determine whichtrusts are in a net loss position by comparing the aggregate market value of the trust’sinvestments with the aggregate actual cost basis of the investments. If the aggregate cost basisexceeds the aggregate market value of the investments, the trust is considered to be in a net lossposition. For trusts in a net loss position, we add the sales prices of the underlying contractsand net realized earnings, then subtract net unrealized losses to derive the net amount of proceedsfor contracts associated with the trusts in question as of that particular balance sheet date. Welook at unrealized gains and losses based on current market prices quoted for the investments, butwe do not include future expected returns on the investments in our analysis. We compare theamount of proceeds to the estimated costs to deliver the contracts, which consist primarily ofmerchandise costs. If a deficiency were to exist, we would record a charge to earnings and acorresponding liability for the expected loss on the delivery of those contracts from our backlog.Due to the margins of our preneed contracts and the trust portfolio returns we enjoyed, there iscurrently substantial capacity for additional market depreciation before a contract loss would result.
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*Cash Impact of Preneed Sales*          The impact of preneed sales on near-term cash flow depends primarily on the commissions paidon the sale, the timing of the tax payments on the sale, the portion of the sale required to beplaced into trust and the terms of the particular contract (such as the size of the down paymentrequired and the length of the contract). We generally pay commissions to our preneed salescounselors based on a percentage of the total preneed contract price, but only to the extent cashis paid by the customer. If the initial cash installment paid by the customer is not sufficient tocover the entire commission, the remaining commission is paid from subsequent customerinstallments. However, because we are required to place a portion of each cash installment paid bythe customer into trust, we may be required to use our own cash to cover a portion of thecommission due on the installment from the customer. Accordingly, preneed sales are generally cashflow negative initially but become cash flow positive at varying times over the life of thecontract, depending upon the trusting requirements and the terms of the particular contract.          Cash expended for the commissions related to preneed funeral and preneed cemetery services andmerchandise sales is expensed as incurred. See Note 3(b) to the consolidated financial statementsincluded in Item 8 for a discussion of the change in accounting for preneed selling costs in fiscalyear 2005.**Overview of Critical Accounting Policies**          The consolidated financial statements are prepared in accordance with accounting principlesgenerally accepted in the United States of America, which require us to make estimates andassumptions (see Note 2(b) to the consolidated financial statements included in Item 8). Webelieve that of our significant accounting policies (discussed in Note 2 to the consolidatedfinancial statements included in Item 8), the following are both most important to the portrayal ofour financial condition and results of operations and require management’s most difficult,subjective or complex judgment.*Deferred Revenue and Revenue Recognition*          Funeral revenue is recognized when funeral services are performed. Our funeral receivablesincluded in current receivables primarily consist of amounts due for funeral services alreadyperformed. We sell price-guaranteed prearranged funeral contracts through various programsproviding for future funeral services at prices prevailing when the agreements are signed. Revenuesassociated with sales of prearranged funeral contracts, which include accumulated trust earningsand increasing insurance benefits, are deferred until such time that the funeral services areperformed (see Note 2(i) to the consolidated financial statements included in Item 8).          Revenue associated with cemetery merchandise and services is recognized when the service isperformed or merchandise is delivered. Revenue associated with preneed cemetery property intermentrights is recognized in accordance with the retail land sales provision of SFAS No. 66. Under SFASNo. 66, revenue from constructed cemetery property is not recognized until a minimum percentage (10percent) of the sales price has been collected. Revenue related to the preneed sale of cemeteryproperty prior to its construction is recognized on a percentage of completion method ofaccounting. Revenue associated with sales of preneed merchandise and services is not recognizeduntil the merchandise is delivered or the services are performed (see Note 2(j) to the consolidatedfinancial statements included in Item 8).          We defer all dividends and interest earned and net capital gains and losses realized bypreneed funeral trust and preneed cemetery merchandise trust accounts until the underlying serviceor the merchandise is delivered.*Variable Interest Entities*          We consolidate our preneed funeral and cemetery merchandise and services trusts and ourcemetery perpetual care trusts. This implementation was as of April 30, 2004 and only affected ourconsolidated balance sheet and had no impact on our second quarter 2004 results of operations orcash flows. In subsequent periods, the implementation of FIN 46R, as it relates to theconsolidation of trusts, affects classifications within the balance sheet, statement of earningsand statement of cash flows, but has no effect on shareholders’ equity, net cash flow or therecognition and reporting of revenues or net earnings. For a more detailed discussion of ouraccounting policies
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after the implementation of FIN 46R, see Notes 2(k) and 4 through 7 to the consolidated financialstatements included in Item 8.*Allowance for Doubtful Accounts*          Management must make estimates of the uncollectibility of our accounts receivable. Weestablish a reserve for uncollectible installment contracts and trade accounts based on a range ofpercentages applied to accounts receivable aging categories. These percentages are based on ananalysis of historical collection and write-off experience. We also establish an allowance forcancellations of insurance commissions based on historical experience for cancellations ofinsurance contracts within the period of refundability. These estimates are impacted by a numberof factors, including changes in the economy and demographic or competitive changes in our areas ofoperation. If circumstances change, our estimates of the recoverability of amounts due to us couldchange by a material amount.*Depreciation of Long-Lived Assets*          Buildings and equipment are recorded at cost and are depreciated over their estimated usefullives, primarily using the straight-line method. Buildings and building improvement items aregenerally depreciated over a period ranging from 10 to 40 years. Equipment (including computerequipment, light equipment, heavy equipment and crematory equipment) is generally depreciated overperiods ranging from three to 20 years. Vehicles are generally depreciated over five to sevenyears. Leasehold improvements are depreciated over the shorter of the term of lease or the life ofthe asset. These estimates of the useful lives may be affected by such factors as changes inregulatory requirements or changing market conditions.*Valuation of Long-Lived Assets*          We review the carrying value of our long-lived assets whenever events or circumstancesindicate that the carrying amount may not be recoverable. This review is based on our projectionsof anticipated undiscounted future cash flows and compares the estimated undiscounted future cashflows to be generated by those assets to the carrying amount of those assets. The net carryingvalue of any assets not fully recoverable would be reduced to fair value. While we believe thatour estimates of undiscounted future cash flows are reasonable, different assumptions regardingsuch cash flows and comparable sales values could materially affect our evaluations.*Valuation of Goodwill*          In our determination of reporting units for goodwill impairment testing purposes, bothqualitative and quantitative characteristics are evaluated. Gross margins are analyzed forpurposes of determining whether or not our operating divisions are considered economically similar.Our division presidents also review a variety of metrics when assessing the performance of ourregions. Qualitative factors include the nature of our products and services, consistency ofproducts and services and the delivering of those products and services in our funeral homes andcemeteries, the similarity of class of customers across all locations and regulations in differentjurisdictions. Based on our evaluation performed, we have 13 reporting units. See Note 2(g) to theconsolidated financial statements included in Item 8 for additional information.          Goodwill of a reporting unit must be tested for impairment on at least an annual basis. Weconduct our annual goodwill impairment analysis during the fourth quarter of each fiscal year. Inaddition to an annual review, we assess the impairment of goodwill whenever events or changes incircumstances indicate that the carrying value of goodwill may be greater than its fair value.Factors we consider important that could trigger an impairment review include significantunderperformance relative to historical or projected future operating results, significant changesin the manner of the use of our assets or the strategy for our overall business and significantnegative industry or economic trends.          In reviewing goodwill for impairment, we first compare the fair value of each of our reportingunits with their carrying amounts (including goodwill). If the carrying amount of a reporting unit(including goodwill) exceeds its fair value, we then measure the amount of impairment of thereporting unit’s goodwill by comparing the implied fair value of the reporting unit’s goodwill withthe carrying amount of that goodwill. The implied fair value of a reporting unit’s goodwill isdetermined in a manner similar to the amount of goodwill determined in a business
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combination. That is, we allocate the fair value of the reporting unit to all of the assets andliabilities of that unit as if the reporting unit had been acquired in a business combination andthe fair value of the reporting unit was the price paid to acquire the reporting unit. The excessof the fair value of the reporting unit over the amounts assigned to its assets and liabilities isthe implied fair value of goodwill. An impairment charge is recorded when the carrying amount ofgoodwill exceeds its implied fair value.          Our goodwill impairment test involves estimates and management judgment using a discountedcash flow valuation methodology. Step two of our impairment test involves determining estimates ofthe fair values of our assets and liabilities. We may obtain assistance from third parties inassessing the fair value of certain of our assets, primarily real estate, in performing our steptwo analysis. If these estimates or their related assumptions change in the future, we may berequired to record further impairment charges for these assets. Goodwill amounted to $273.0million as of October 31, 2006 and 2005.*Accounting for Income Taxes*          As part of the process of preparing our consolidated financial statements, we are required toestimate our income taxes in each of the jurisdictions in which we operate. This process involvesestimating our actual current tax expense together with assessing temporary differences resultingfrom the different treatment of items, such as deferred revenue, for tax and accounting purposes.These differences result in deferred tax assets and liabilities, which are included in ourconsolidated balance sheet. We must then assess the likelihood that our deferred tax assets willbe recovered from future taxable income, and to the extent we believe that recovery is not likely,we establish a valuation allowance. The following items are reviewed to determine if a valuationallowance is required: net operating losses (federal, state and U.S. possessions), capital losscarry forwards and deferred tax assets (federal, state and U.S. possessions). To the extent weestablish a valuation allowance or increase this allowance in a period, we include an expensewithin the tax provision in the statement of earnings.          Significant management judgment is required in determining our provision for income taxes,deferred tax assets and liabilities and any valuation allowance recorded against our net deferredtax assets. In the event that actual results differ from these estimates or we adjust theseestimates in future periods, we may need to change our allowance, which could materially impact ourfinancial condition and results of operations.*Preneed Selling Costs*          On May 31, 2005, we changed our method of accounting for preneed selling costs incurredrelated to the acquisition of new prearranged funeral and cemetery service and merchandise sales toexpense these costs as incurred instead of deferring and amortizing these costs. We have appliedthis change in accounting principle effective November 1, 2004. Therefore, our results ofoperations for the years ended October 31, 2006 and 2005 are reported on the basis of our changedmethod. Prior to this change, commissions and other costs that varied with and were primarilyrelated to the acquisition of new prearranged funeral and cemetery service sales and prearrangedfuneral and cemetery merchandise sales were deferred and amortized in proportion to the preneedrevenue recognized in the period in a manner consistent with SFAS No. 60, “Accounting and Reportingfor Insurance Companies.” We decided to change our accounting for preneed selling costs to expensesuch costs as incurred. We concluded that expensing these costs as they are incurred would bepreferable to the old method because it will make our reported results more comparable with otherpublic death care companies, better align the costs of obtaining preneed contracts with the cashoutflows associated with obtaining such contracts and eliminate the burden of maintaining deferredselling cost records.          As of November 1, 2004, we recorded a cumulative effect of change in accounting principle of$254.2 million ($153.2 million after tax, or $1.40 per diluted share), which represents thecumulative balance of deferred preneed selling costs in the deferred charges line in the condensedconsolidated balance sheet at the time of the change. See Note 3(b) to the consolidated financialstatements included in Item 8 for additional information.*Estimated Insurance Loss Liabilities*          We purchase comprehensive general liability, automobile liability and workers compensationinsurance coverages structured within a large deductible/self-insured retention premium ratingprogram. This program results in the Company being primarily self-insured for claims andassociated costs and losses covered by these policies.
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Historical insurance industry experience indicates some degree of inherent variability in assessingthe ultimate amount of losses associated with the types of claims covered by the program. This isespecially true due to the extended period of time that transpires between when the claim mightoccur and the full settlement of such claim, often many years. We continually evaluate thereceivables due from our insurance carriers as well as loss estimates associated with claims andlosses related to these insurance coverages with information obtained from our primary insurer.          With respect to health insurance that covers substantially all of our employees, we purchaseindividual and aggregate stop loss coverage with a large deductible. This program results in theCompany being primarily self-insured for claims and associated costs up to the amount of thedeductible, with claims in excess of the deductible amount being covered by insurance. Expectedclaims are based on actuarial estimates; actual claims may differ from those estimates. Wecontinually evaluate our claims experience related to this coverage with information obtained fromour insurer.          Assumptions used in preparing these estimates are based on factors such as claim settlementpatterns, claim development trends, claim frequency and severity patterns, inflationary trends anddata reasonableness. Together these factors will generally affect the analysis and determinationof the “best estimate” of the projected ultimate claim losses. The results of these evaluations areused to assess the reasonableness of our insurance loss liability.          The estimated liability on the uninsured legal and employment-related claims are establishedby management based upon the recommendations of professionals who perform a review of both reportedclaims and estimate a liability for incurred but not reported claims. These liabilities include theestimated settlement costs. Although management believes estimated liabilities related touninsured claims are adequately recorded, it is possible that actual results could significantlydiffer from the recorded liabilities.          We also have insurance coverage related to property damage, incremental costs and propertyoperating expenses we incurred due to damage caused by Hurricane Katrina. A significant portion ofthe expenses incurred is expected to be recovered when we negotiate a final settlement with ourinsurance carriers. Our policy is to record such amounts when recovery is probable which generallymeans we have reached an agreement with the insurance company. For additional information, seeNote 22 to the consolidated financial statements included in Item 8.**Results of Operations**          The following discussion segregates the financial results of our continuing operations intoour various segments, grouped by our funeral and cemetery operations. For a discussion ofdiscontinued operations, see Note 12 to the consolidated financial statements included in Item 8.For a discussion of our segments, see Note 20 to the consolidated financial statements included inItem 8. As there have been no material acquisitions or construction of new locations in fiscalyears 2006 and 2005, results from continuing operations reflect those of same-store locations.**Comparison of Fiscal Year 2006 to Fiscal Year 2005***Year Ended October 31, 2006 Compared to Year Ended October 31, 2005—Continuing Operations**Funeral Operations*               **Year Ended October 31,**  **Increase**   **2006**  **2005**  **(Decrease)**       **(In millions)**     Funeral Revenue:            Eastern Division $117.0  $113.8  $3.2 Western Division  147.4   140.2   7.2 Corporate Trust Management (1)  17.9   18.9   (1.0)          Total Funeral Revenue $282.3  $272.9  $9.4                        Funeral Costs:            Eastern Division $98.6  $95.2  $3.4 Western Division  117.6   115.6   2.0 Corporate Trust Management (1)  .6   .5   .1           Total Funeral Costs $216.8  $211.3  $5.5           
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               **Year Ended October 31,**  **Increase**   **2006**  **2005**  **(Decrease)**       **(In millions)**     Funeral Gross Profit:            Eastern Division $18.4  $18.6  $(.2)Western Division  29.8   24.6   5.2 Corporate Trust Management (1)  17.3   18.4   (1.1)          Total Funeral Gross Profit $65.5  $61.6  $3.9                              **Change in Average** **Change in Same-Store** **Same-Store**  **Revenue Per Call** **Funeral Services** **Cremation Rate**          **2006** **2005**Same-Store Analysis (2)                Eastern Division  3.3%  (0.7%)  33.3%  31.0%Western Division  2.0%  1.0%  42.6%  41.9%Total  1.9% (1)  (0.2%)  38.6%  37.3% (1) Corporate trust management consists of the trust management fees and funeralmerchandise and service trust earnings recognized with respect to preneed contracts deliveredduring the period. Trust management fees are established by us at rates consistent withindustry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trustearnings represent earnings realized over the life of the preneed contracts delivered duringthe relevant periods. See Notes 4 and 7 to the consolidated financial statements included inItem 8 for information regarding the cost basis and market value of the trust assets andcurrent performance of the trusts (i.e. current realized gains and losses, interest income anddividends). Trust management fees included in funeral revenue for 2006 and 2005 were $5.5million and $5.4 million, respectively. As corporate trust management is considered aseparate operating segment, trust earnings are included in total average revenue per callpresented, not in the Eastern and Western divisions’ average revenue per call. Funeral trustearnings recognized with respect to preneed contracts delivered included in funeral revenuefor 2006 and 2005 were $12.4 million and $13.5 million, respectively. (2) On August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area andseverely damaged three of our funeral homes located in that area, which is part of our Westerndivision. This same-store analysis includes these three funeral homes which had revenue of$10.2 million and $8.1 million for fiscal years 2006 and 2005, respectively, and performed1,575 and 1,726 funeral services in 2006 and 2005, respectively. Excluding these threefuneral homes, the increase in average revenue per call for the Western division and theCompany was 1.8 percent and 1.8 percent, respectively, and same-store funeral services for theWestern division and the Company increased 1.5 percent and 0.3 percent, respectively.**Consolidated Operations – Funeral**          Total funeral revenue from continuing operations increased $9.4 million, or 3.4 percent, forthe year ended October 31, 2006, compared to the corresponding period in 2005. Our same-storebusinesses achieved a 3.9 percent increase in the average revenue per traditional funeral serviceand a 1.5 percent increase in the average revenue per cremation service. These increases werepartially offset by a decrease in trust earnings recognized upon the delivery of preneed funerals.This resulted in an overall 1.9 percent increase in the average revenue per funeral service for oursame-store businesses. We also recorded $2.8 million in business interruption insurance proceedsrelated to the 2005 hurricanes. We experienced a 0.2 percent decrease in the number of funeralservices performed by our same-store businesses, or 129 events out of the 60,473 total same-storeevents performed, which includes the impact of Hurricane Katrina on our New Orleans funeral homes.Excluding these three funeral homes, same-store funeral services increased 0.3 percent. We believea number of factors contributed to the increases in our average revenue per traditional andcremation service. We believe the primary factors were normal inflationary price increases, moreeffective merchandising and packaging, our focus on training, customized funeral planning andpersonalization and the funeral call incentive compensation program.          Funeral gross profit margin from continuing operations increased from 22.6 percent in the yearended October 31, 2005 to 23.2 percent in the year ended October 31, 2006 due primarily to theincreases in revenues described above. The cremation rate for our same-store operations was 38.6percent for the year ended October 31, 2006 compared to 37.3 percent for the year ended October 31,2005.
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**Segment Discussion – Funeral**          Funeral revenue in the Eastern division funeral segment increased primarily due to an increasein the average revenue per funeral service in the same-store businesses of 3.3 percent, partiallyoffset by a 0.7 percent decrease in the number of funeral services performed by the same-store businesses.Funeral revenue in the Western division segment increased primarily due to $2.8 million in businessinterruption insurance proceeds and due to increases in the average revenue per funeral service andthe number of funeral services performed by the same-store businesses of 2.0 percent and 1.0percent, respectively, which includes the impact of Hurricane Katrina on our New Orleans funeralhomes. Excluding these funeral homes, average revenue per same-store funeral service andsame-store funeral services increased 1.8 percent and 1.5 percent, respectively. Funeral revenuein the corporate trust management segment decreased due primarily to a decrease in trust earningsrecognized upon the delivery of preneed funerals of $1.1 million, partially offset by an increasein trust management fees of $0.1 million.          Funeral gross profit margin for the Eastern division funeral segment decreased primarily dueto increased general and administrative expenses. Direct funeral costs (which primarily includesalaries and wages, merchandise costs, selling costs and maintenance) also increased. Funeralgross profit margin for the Western division funeral segment increased due to the increases inrevenue discussed above.          As demonstrated in the table above, the same-store cremation rate increased for both theEastern and Western division funeral segments.*Cemetery Operations*               **Year Ended October 31,**  **Increase**   **2006**  **2005**  **(Decrease)**       **(In millions)**     Cemetery Revenue:            Eastern Division $136.8  $127.5  $9.3 Western Division  88.6   80.3   8.3 Corporate Trust Management (1)  9.4   11.2   (1.8)          Total Cemetery Revenue $234.8  $219.0  $15.8                        Cemetery Costs:            Eastern Division $112.9  $111.8  $1.1 Western Division  72.0   66.3   5.7 Corporate Trust Management (1)  .5   .5   —           Total Cemetery Costs $185.4  $178.6  $6.8                        Cemetery Gross Profit:            Eastern Division $23.9  $15.7  $8.2 Western Division  16.6   14.0   2.6 Corporate Trust Management (1)  8.9   10.7   (1.8)          Total Cemetery Gross Profit $49.4  $40.4  $9.0            (1) Corporate trust management consists of the trust management fees and cemeterymerchandise and service trust earnings recognized with respect to preneed contracts deliveredduring the period. Trust management fees are established by us at rates consistent withindustry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trustearnings represent earnings realized over the life of the preneed contracts delivered duringthe relevant periods. See Notes 5 and 7 to the consolidated financial statements included inItem 8 for information regarding the cost basis and market value of the trust assets andcurrent performance of the trusts (i.e. current realized gains and losses, interest income anddividends). Trust management fees included in cemetery revenue for 2006 and 2005 were $4.9million and cemetery trust earnings recognized with respect to preneed contracts deliveredincluded in cemetery revenue for 2006 and 2005 were $4.5 million and $6.3 million,respectively. Perpetual care trust earnings are included in the revenues and gross profit ofthe related geographic segment.
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**Consolidated Operations – Cemetery**          Cemetery revenue from continuing operations increased $15.8 million, or 7.2 percent, for theyear ended October 31, 2006, compared to the corresponding period in 2005, primarily due toincreases in revenue from the sale of cemetery property, an increase in merchandise deliveryrevenue, an increase in perpetual care trust earnings and a decrease in the reserve forcancellations, offset by a decrease in construction during the year on various cemetery projects.Revenue related to the sale of cemetery property prior to its construction is recognized on apercentage of completion method of accounting as construction occurs. In 2005, we recordedapproximately $1.6 million of increased reserve for cancellations related to the areas affected byHurricane Katrina. Gross cemetery property sales increased 8.0 percent for the year ended October31, 2006 compared to the year ended October 31, 2005 from $100.0 million to $108.0 million. Grosscemetery property sales represent the aggregate contract price of cemetery property sale contractsentered into during the period.          We experienced an annualized average return, excluding unrealized gains and losses, of 4.6percent in our perpetual care trusts for the year ended October 31, 2006 resulting in revenue of$10.1 million, compared to 3.8 percent for the corresponding period in 2005 resulting in revenue of$8.2 million. Perpetual care trust earnings are included in the geographic segments’ revenue andgross profit. See Note 6 and 7 to the consolidated financial statements included in Item 8 forinformation regarding the cost basis and market value of those trust assets and the currentperformance of the trusts (i.e. current realized gains and losses, interest income and dividends).          Cemetery gross profit margin from continuing operations increased from 18.4 percent in theyear ended October 31, 2005 to 21.0 percent in the year ended October 31, 2006. The increase isdue to the increase in revenue described above partially offset by increased costs. Due to thehigh fixed-cost nature of the cemetery business, increases in revenue can have a disproportionateincrease in gross profit.**Segment Discussion – Cemetery**          Cemetery revenue in the Eastern division cemetery segment increased primarily due to increasesin cemetery property sales, merchandise deliveries, perpetual care trust earnings and a decrease inthe reserve for cancellations, offset by a decrease in construction during the year on variouscemetery projects. Cemetery revenue in the Western division cemetery segment increased primarilydue to increases in cemetery property sales and sales and construction revenue and a decrease inthe reserve for cancellations. Cemetery revenue in the corporate trust management segmentdecreased due to a $1.8 million decrease in trust earnings recognized upon the delivery of preneedcemetery merchandise and services.          Cemetery gross profit margin for the Western division and Eastern division cemetery segmentsincreased due to the revenue increases discussed above partially offset by increased costs. Due tothe high fixed-cost nature of the cemetery business, increases in revenue can have adisproportionate increase in gross profit.*Discontinued Operations*          In December 2003, we announced plans to close or sell a number of small businesses, primarilysmall funeral homes, most of which were acquired as part of a group of facilities, that wereperforming below acceptable levels or no longer fit our operating profile. The operating resultsof those businesses that were sold in fiscal years 2005, 2006 and 2007 are reported in thediscontinued operations section of the consolidated statements of earnings. We determined that thecarrying value of these businesses exceeded their fair market value and recorded a noncashimpairment charge in the fourth quarter of fiscal year 2003. Fair value was established based onour best estimate and is subject to revision in future periods as properties are actually closed orsold. Included in discontinued operations for the year ended October 31, 2006 were gains ondispositions, net of impairment losses, of less than $0.1 million compared to $1.2 million that wasrecognized for the year ended October 31, 2005. Revenues for fiscal year 2006 were $1.0 millioncompared to $2.6 million in fiscal year 2005. The effective tax rate for our discontinuedoperations for the year ended October 31, 2006 was a 139.7 percent benefit compared to a 1.2percent expense for the same period in 2005. For additional information, see Notes 12 and 17 tothe consolidated financial statements included in Item 8.
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*Other*          Corporate general and administrative expenses for the year ended October 31, 2006 increased$12.3 million compared to the same period in 2005 primarily due to a $3.6 million increase inprofessional fees associated with the class action lawsuits, a $2.5 million increase inprofessional fees related to the amended SEC filings and a $1.5 million increase in expensesrelated to expanded and improved training. We also recorded $1.2 million in share-basedcompensation costs for the year ended October 31, 2006 due to the adoption of SFAS No. 123R asdiscussed in Note 18 to the consolidated financial statements included in Item 8.          As of October 31, 2006 and 2005, we had recorded net recoveries (charges) of $1.6 million and($9.4) million, respectively, related to Hurricane Katrina. For additional information, see Note22 to the consolidated financial statements included in Item 8.          We reported losses on dispositions of ($0.3) million in continuing operations for the yearended October 31, 2006. In 2005, we recorded $1.2 million in gains on dispositions, net ofimpairment losses. For additional information, see Note 12 to the consolidated financialstatements included in Item 8. The charges are presented in the “Gains on dispositions andimpairment (losses), net” line item in the consolidated statement of earnings.          Interest expense decreased $0.9 million to $29.6 million for the year ended October 31, 2006compared to $30.5 million for the same period in 2005 due primarily to a $24.5 million decrease inaverage debt outstanding partially offset by a 12 basis-point increase in the average interestrate. Approximately $1.7 million of additional interest was incurred in fiscal year 2006 on our6.25 percent senior notes due to our inability to timely complete a required exchange offer. Theadditional interest was eliminated in connection with the expiration of the exchange offer on June5, 2006.          Other operating income, net, was $1.3 million and $1.4 million for the years ended October 31,2006 and 2005, respectively, and primarily included net gains on the sale of assets which were notincluded in our businesses classified as held for sale.          Investment and other income increased $3.0 million from $0.7 million in fiscal year 2005 to$3.7 million in fiscal year 2006. This is primarily due to a $25.2 million increase in the averagecash balance, an increase in the average rate earned on our cash balances from 2.5 percent infiscal year 2005 to 3.8 percent in fiscal year 2006 and $1.0 million of interest income receivablefrom the Internal Revenue Service.          The effective tax rate for our continuing operations for the year ended October 31, 2006 was36.1 percent compared to 27.2 percent for the year ended October 31, 2005. The reduced rate in2005 was due to the greater impact of the dividend exclusion on a reduced level of book income.Excluding non-recurring costs, the effective tax rate for 2005 would have been 35.6 percent whichis comparable to the 2006 rate of 36.1 percent. The 2006 rate is slightly higher as a result ofadditional taxes accrued to recognize pending assessments currently under dispute with state andforeign tax jurisdictions offset by an income tax benefit attributable to a refund received inconjunction with our recently settled federal income tax examination. For additional information,see Note 17 to the consolidated financial statements included in Item 8.          On May 31, 2005, we changed our method of accounting for selling costs incurred related to newpreneed funeral and cemetery service and merchandise sales, effective November 1, 2004. As ofNovember 1, 2004, we recorded a cumulative effect of change in accounting principle of $254.2million ($153.2 million after tax, or $1.40 per diluted share), which represents the cumulativebalance of deferred preneed selling costs in the deferred charges line in the condensedconsolidated balance sheet at the time of the change. See Note 3(b) to the condensed consolidatedfinancial statements for additional information.          As of October 31, 2006, our outstanding debt totaled $376.9 million. Of the total debtoutstanding as of October 31, 2006, approximately 53 percent was subject to fixed rates averaging6.2 percent, and 47 percent was subject to short-term variable rates averaging approximately 7.2percent. On November 19, 2004, we completed the refinancing of our senior secured credit facilityand recorded a charge for early extinguishment of debt of $2.7 million ($1.7 million after tax, or$.02 per share) to write off fees associated with the previous credit facility. On February 11,2005, we completed the private offering of $200.0 million principal amount of our 6.25 percentsenior notes due 2013. We also borrowed $130.0 million in additional term loan debt under oursenior secured credit
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facility. We used the net proceeds from these transactions, together with a portion of ouravailable cash, to repurchase $298.2 million in aggregate principal amount of our 10.75 percentsenior subordinated notes due 2008 and to pay related tender premiums, fees, expenses and accruedinterest of $28.9 million. In the second quarter of fiscal year 2005, we recorded a charge forearly extinguishment of debt of $30.0 million ($19.2 million after tax, or $.18 per share)representing the tender premium, related fees and expenses and the write-off of unamortized fees.In the third quarter of fiscal year 2005, the remaining 10.75 percent senior subordinated noteswere redeemed. We recorded a charge for early extinguishment of debt of $0.1 million representingthe call premium and write-off of remaining unamortized fees on the 10.75 percent seniorsubordinated notes. See Note 14 to the consolidated financial statements included in Item 8 foradditional information.*Preneed Sales into and Deliveries out of the Backlog*          We achieved a 12.3 percent increase in preneed funeral sales for the year ended October 31,2006 compared to the same period in 2005.          The revenues from our preneed funeral and cemetery merchandise and service sales are deferredinto our backlog and are not included in our operating results presented above. We added $183.6million in gross preneed sales to our funeral and cemetery merchandise and services backlog(including $74.9 million related to insurance-funded preneed funeral contracts) during the yearended October 31, 2006 to be recognized in the future (net of cancellations) as these prepaidproducts and services are delivered, compared to gross sales of $171.2 million (including $72.5million related to insurance-funded preneed funeral contracts) for the corresponding period in2005. Deliveries out of our preneed funeral and cemetery merchandise and services backlog,including accumulated trust earnings related to these preneed deliveries, amounted to $152.6million for the year ended October 31, 2006, compared to $147.4 million for the correspondingperiod in 2005, resulting in net increases in the backlog of $31.0 million and $23.8 million forthe years ended October 31, 2006 and 2005, respectively.**Comparison of Fiscal Year 2005 to Fiscal Year 2004****Overview of Fiscal Year 2005**          For fiscal year 2005, we had a net loss of $143.3 million compared to net earnings of $36.7million for fiscal year 2004. Contributing to the net loss was a charge of $153.2 million for thecumulative effect of change in accounting principle related to the change in our method ofaccounting for preneed selling costs, implemented effective November 1, 2004. Fiscal year 2005earnings from continuing operations before the cumulative effect of change in accounting principledecreased by $22.3 million to $8.6 million, compared to $30.9 million for fiscal year 2004.Contributing to the decline were charges for the loss on early extinguishment of debt of $32.8million related to the refinancing of our senior secured credit facility and our 10.25 percentsenior subordinated notes. Also contributing to the decline was a $9.8 million increase in funeralcosts, of which $5.4 million was due to the 2005 change in accounting for preneed selling costs andthe remainder was due primarily to increased health insurance costs. Corporate general andadministrative expenses increased $2.3 million due primarily to increased professional feesassociated with our defense of the class action litigation, the Section 404 internal controlsreview process, the deferred revenue project and additional audit related services. We alsorecorded a $9.4 million charge for net hurricane-related costs. Further discussion of the effect ofthe 2005 hurricanes can be found in Note 22 to our consolidated financial statements in Item 8. Inaddition, cemetery revenues declined $3.5 million primarily due to a decrease in revenue associatedwith the construction of cemetery projects, a decrease in earned finance charges, a decrease inrevenue due to Hurricane Katrina and an increase in the reserve for cancellations resulting fromthe impact of Hurricane Katrina.          Partially offsetting these declines, interest expense decreased by $16.8 million to $30.5million in fiscal year 2005 from $47.3 million in fiscal year 2004, reflecting the results of therefinancing of our senior secured credit facility and 10.75 percent senior subordinated notes atlower rates and a $39.5 million decrease in average debt outstanding. In addition, funeral revenueincreased $2.7 million from $270.2 million in fiscal year 2004 to $272.9 million in fiscal year2005 primarily due to increased same-store funeral call growth of 0.4 percent and an increase inaverage revenue per call of 2.7 percent. Same-store results include the three funeral homesimpacted by Hurricane Katrina. Excluding these funeral homes, same-store funeral call growthincreased 0.9 percent.          For fiscal year 2005, we achieved a 5 percent increase in preneed funeral sales, and a 0.9percent increase in cemetery property sales.
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          As of October 31, 2005 we had achieved our lowest net debt level in nine years. In the secondquarter of fiscal 2005, we initiated a quarterly cash dividend of two and one-half cents per shareof common stock, and paid a total of $8.2 million in dividends in fiscal 2005. In addition, infiscal 2005, we used $13.7 million to repurchase shares of our Class A Common stock pursuant to ourstock repurchase programs.          In July 2005, we began to implement a new strategic plan. For a description of the plan, see“Business Strategy” in Item 1. As a result of the strategic planning process, in July 2005, wenamed a new Chief Operating Officer and announced that we were reorganizing our operating divisionsfrom four to two: Eastern and Western, effective for the fourth quarter of fiscal year 2005. Thesechanges were a result of our strategic planning process. For the year ended October 31, 2005, weincurred $1.5 million in charges related to this reorganization.**Results of Operations**          As described above in “Critical Accounting Policies,” on May 31, 2005, we changed our methodof accounting for selling costs incurred related to preneed funeral and cemetery service andmerchandise sales. We have applied this change in accounting principle effective November 1, 2004.Prior to this time, we deferred preneed selling costs and amortized them into expense inproportion to the preneed revenue recognized in the period. We now expense these costs in theperiod incurred. In the discussion below, the amounts presented in the tables for the year endedOctober 31, 2004 reflect historical amounts and therefore are not adjusted for this accountingchange. In order to present results for the year ended October 31, 2004 comparable to those of2005 which include the accounting change, we have also included a discussion of the net preneedselling costs for 2004 and their effect on gross profit. The effect of net preneed selling costsis calculated by removing the amortization of deferred selling costs and including in expense thepreneed selling costs incurred during 2004. The result of that calculation is the net preneedselling costs that would have reduced 2004 gross profit if the accounting change had beenimplemented in fiscal year 2004.*Year Ended October 31, 2005 Compared to Year Ended October 31, 2004—Continuing Operations**Funeral Operations*               **Year Ended October 31,**  **Increase**   **2005**  **2004**  **(Decrease)**       **(In millions)**     Funeral Revenue:            Eastern Division $113.8  $108.1  $5.7 Western Division  140.2   143.4   (3.2)Corporate Trust Management (1)  18.9   18.7   .2           Total Funeral Revenue $272.9  $270.2  $2.7                        Funeral Costs:            Eastern Division $95.2  $88.9  $6.3 Western Division  115.6   112.0   3.6 Corporate Trust Management (1)  .5   .6   (.1)          Total Funeral Costs $211.3  $201.5  $9.8(2)                       Funeral Gross Profit:            Eastern Division $18.6  $19.2  $(.6)Western Division  24.6   31.4   (6.8)Corporate Trust Management (1)  18.4   18.1   .3           Total Funeral Gross Profit $61.6  $68.7  $(7.1) (2)                             **Change in Average**  **Change in Same-Store**  **Same-Store**   **Revenue Per Call**  **Funeral Services**  **Cremation Rate**           **2005**  **2004** Same-Store Analysis (3)                Eastern Division  2.5%  1.9%  31.0%  30.2%Western Division  2.7%  (1.2%)  41.9%  41.1%Total  2.7% (1)  0.4%  37.3%  36.6%
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 (1) Corporate trust management consists of the trust management fees and funeralmerchandise and service trust earnings recognized with respect to preneed contracts deliveredduring the period. Trust management fees are established by us at rates consistent withindustry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trustearnings represent earnings realized over the life of the preneed contracts delivered duringthe relevant periods. See Notes 4 and 7 to the consolidated financial statements included inItem 8 for information regarding the cost basis and market value of the trust assets andcurrent performance of the trusts (i.e. current realized gains and losses, interest income anddividends). Trust management fees included in funeral revenue for 2005 and 2004 were $5.4million and $5.5 million, respectively. As corporate trust management is considered aseparate operating segment, trust earnings are included in the total average revenue per callpresented, not in the Eastern or Western divisions’ average revenue per call. Funeral trustearnings recognized with respect to preneed contracts delivered included in funeral revenuefor 2005 and 2004 were $13.5 million and $13.2 million, respectively. (2) Funeral costs from continuing operations for the year ended October 31, 2004 do notinclude net preneed selling costs of $5.6 million, which would have been expensed if theaccounting change described above had been implemented in fiscal year 2004. Had we includedthese costs in 2004, funeral gross profit from continuing operations for the year endedOctober 31, 2005 would have decreased $1.4 million from $63.1 million for the year endedOctober 31, 2004. (3) On August 29, 2005, Hurricane Katrina struck the New Orleans metropolitan area andseverely damaged three of our funeral homes located in that area, which is part of our Westerndivision. This same-store analysis includes these three funeral homes which had revenue of$8.1 million and $9.4 million for fiscal years 2005 and 2004, respectively, and performed1,726 and 2,054 funeral services in 2005 and 2004, respectively. Excluding these threefuneral homes, the increase in average revenue per call for the Western division and theCompany was 2.8 percent and 2.7 percent, respectively, and the change in same-store funeralservices for the Western division and the Company was (0.3) percent and 0.9 percent,respectively.**Consolidated Operations – Funeral**          Total funeral revenue from continuing operations increased $2.7 million, or 1.0 percent, forthe year ended October 31, 2005, compared to the corresponding period in 2004. Our same-storebusinesses achieved a 3.2 percent increase in the average revenue per traditional funeral serviceand a 4.0 percent increase in the average revenue per cremation service. There was also anincrease in trust earnings recognized upon the delivery of preneed funerals. This resulted in anoverall 2.7 percent increase in the average revenue per funeral service for our same-storebusinesses. We experienced a 0.4 percent increase in the number of funeral services performed byour same-store businesses, or 220 events out of the 60,305 total same-store events performed, whichincludes the impact of Hurricane Katrina on our New Orleans funeral homes. Excluding these threefuneral homes, same-store funeral services increased 0.9 percent. We believe the increase infuneral services can be attributed to the funeral home incentive compensation plan implemented inthe first quarter of 2005 and to the execution of our strategic plan. We believe a number offactors contributed to the increases in our average revenue per traditional and cremation service.We believe the primary factors were normal inflationary price increases, more effectivemerchandising and packaging, our focus on training, customized funeral planning and personalizationand a new program for arranger incentives.          Funeral gross profit margin from continuing operations decreased from 25.4 percent in the yearended October 31, 2004 to 22.6 percent in the year ended October 31, 2005, primarily due to the$9.8 million increase in funeral costs. Funeral costs from continuing operations for the yearended October 31, 2004 do not include $5.6 million of net preneed selling costs associated with theaccounting change as described above. Including these costs, the pro forma funeral gross profitmargin from continuing operations would have been 23.3 percent for the year ended October 31, 2004.The remaining decrease in the funeral margin is primarily due to increased health insurance costsdue to an increase in the number of high-dollar claims in 2005. Direct funeral costs (whichprimarily include salaries and wages, merchandise costs, selling costs and maintenance) declined.The cremation rate for our same-store operations was 37.3 percent for the year ended October 31,2005 compared to 36.6 percent for the year ended October 31, 2004.
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**Segment Discussion – Funeral**          Funeral revenue in the Eastern division funeral segment increased primarily due to an increasein the number of funeral services performed by the same-store businesses of 1.9 percent and anincrease in the average revenue per funeral service in the same-store businesses of 2.5 percent.Funeral revenue in the Western division segment decreased primarily due to a decrease in the numberof funeral services performed by the same-store businesses of 1.2 percent, which includes theimpact of Hurricane Katrina on our New Orleans funeral homes. Excluding these funeral homes,same-store funeral services decreased 0.3 percent. The decrease in funeral services performed waspartially offset by an increase in the average revenue per funeral service in the same-storebusinesses of 2.7 percent. Funeral revenue in the corporate trust management segment increased dueprimarily to an increase in trust earnings recognized upon the delivery of preneed funerals of $0.3million, partially offset by a decrease in trust management fees of $0.1 million.          Funeral gross profit margin for the Eastern division and Western division funeral segmentsdecreased primarily due to the change in accounting principle for preneed selling costs in 2005 anddue to increased health insurance costs. Direct funeral costs (which primarily include salariesand wages, merchandise costs, selling costs and maintenance) declined. The loss in revenue in theWestern division, due in part to the reduction in funeral services performed resulting fromHurricane Katrina, negatively impacted the Western division funeral gross profit margin.          As demonstrated in the table above, the same-store cremation rate increased for both theEastern and Western division funeral segments.*Cemetery Operations*               **Year Ended October 31,**  **Increase**   **2005**  **2004**  **(Decrease)**       **(In millions)**     Cemetery Revenue:            Eastern Division $127.5  $122.0  $5.5 Western Division  80.3   89.9   (9.6)Corporate Trust Management (1)  11.2   10.6   .6           Total Cemetery Revenue $219.0  $222.5  $(3.5)                       Cemetery Costs:            Eastern Division $111.8  $105.1  $6.7 Western Division  66.3   70.7   (4.4)Corporate Trust Management (1)  .5   .6   (.1)          Total Cemetery Costs $178.6  $176.4  $2.2(2)                       Cemetery Gross Profit:            Eastern Division $15.7  $16.9  $(1.2)Western Division  14.0   19.2   (5.2)Corporate Trust Management (1)  10.7   10.0   .7           Total Cemetery Gross Profit $40.4  $46.1  $(5.7) (2)           (1) Corporate trust management consists of the trust management fees and cemeterymerchandise and service trust earnings recognized with respect to preneed contracts deliveredduring the period. Trust management fees are established by us at rates consistent withindustry norms and are paid by the trusts to our subsidiary, Investor’s Trust, Inc. The trustearnings represent earnings realized over the life of the preneed contracts delivered duringthe relevant periods. See Notes 5 and 7 to the consolidated financial statements included inItem 8 for information regarding the cost basis and market value of the trust assets andcurrent performance of the trusts (i.e. current realized gains and losses, interest income anddividends). Trust management fees included in cemetery revenue for 2005 and 2004 were $4.9million and $4.7 million, respectively, and cemetery trust earnings recognized with respect topreneed contracts delivered included in cemetery revenue for 2005 and 2004 were $6.3 millionand $5.9 million, respectively. Perpetual care trust earnings are included in the revenuesand gross profit of the related geographic segment.
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(2) Cemetery costs from continuing operations for the year ended October 31, 2004 do notinclude net preneed selling costs of $4.3 million, which would have been expensed if theaccounting change described above had been implemented in fiscal year 2004. Had we includedthese costs in 2004, cemetery gross profit from continuing operations for the year endedOctober 31, 2005 would have decreased $1.5 million from $42.0 million for the year endedOctober 31, 2004.**Consolidated Operations – Cemetery**          Cemetery revenue from continuing operations decreased $3.5 million, or 1.6 percent, for theyear ended October 31, 2005, compared to the corresponding period in 2004, primarily due to adecrease in revenue associated with the construction of cemetery projects, a decrease in earnedfinance charges, a decrease in revenues as a result of Hurricane Katrina and an increase in thereserve for cancellations as a result of Hurricane Katrina of approximately $1.6 million. Revenuerelated to the sale of cemetery property prior to its construction is recognized on a percentage ofcompletion method of accounting as construction occurs. Gross cemetery property sales increased0.9 percent for the year ended October 31, 2005 compared to the year ended October 31, 2004 from$99.1 million to $100.0 million.          We experienced an annualized average return, excluding unrealized gains and losses, of 3.8percent in our perpetual care trusts for the year ended October 31, 2005 resulting in revenue of$8.2 million, compared to 3.1 percent for the corresponding period in 2004 resulting in revenue of$6.4 million. Perpetual care trust earnings are included in the geographic segments’ revenue andgross profit. See Note 6 and 7 to the consolidated financial statements included in Item 8 forinformation regarding the cost basis and market value of those trust assets and the currentperformance of the trusts (i.e. current realized gains and losses, interest income and dividends).          Cemetery gross profit margin from continuing operations decreased from 20.7 percent in theyear ended October 31, 2004 to 18.4 percent in the year ended October 31, 2005. Cemetery costsfrom continuing operations for the year ended October 31, 2004 do not include $4.3 million of netpreneed selling costs associated with the accounting change as described above. Including thesecosts, the pro forma cemetery gross profit margin from continuing operations would have been 18.8percent for the year ended October 31, 2004. The remaining decrease is due to the decrease inrevenue described above and from increased health insurance costs due to the increase in the numberof high-dollar claims in 2005. Direct cemetery costs (which primarily include cemetery propertycosts, merchandise costs, selling costs, salaries and wages and maintenance) also increased.**Segment Discussion – Cemetery**          Cemetery revenue in the Eastern division cemetery segment increased primarily due to anincrease in revenue associated with the construction of cemetery projects, an increase in cemeteryproperty sales and increased perpetual care trust earnings offset by decreased earned financecharges. Cemetery revenue in the Western division cemetery segment decreased primarily due to adecrease in revenue associated with the construction of cemetery property, a decrease in revenuesas a result of Hurricane Katrina and an increase in the reserve for cancellations of approximately$1.6 million as a result of Hurricane Katrina. Cemetery revenue in the corporate trust managementsegment increased due to a $0.4 million increase in trust earnings recognized upon the delivery ofpreneed cemetery merchandise and services and a $0.2 million increase in trust management fees.          Cemetery gross profit margin for the Western division and Eastern division cemetery segmentsdecreased due to the change in accounting principle for preneed selling costs in 2005 and increasedhealth insurance costs. The Western division cemetery gross profit margin also declined due to theincrease in the reserve for cancellations resulting from Hurricane Katrina. Direct cemetery costs(which primarily include cemetery property costs, merchandise costs, selling costs, salaries andwages and maintenance) also increased.*Discontinued Operations*          In December 2003, we announced plans to close or sell a number of small businesses, primarilysmall funeral homes, most of which were acquired as part of a group of facilities, that wereperforming below acceptable levels or no longer fit our operating profile. The operating resultsof those businesses that were sold in fiscal years 2004, 2005, 2006 and 2007 are reported in thediscontinued operations section of the consolidated statements of earnings. We determined that thecarrying value of these businesses exceeded their fair market value and recorded a
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noncash impairment charge in the fourth quarter of fiscal year 2003. Fair value was establishedbased on our best estimate and is subject to revision in future periods as properties are actuallyclosed or sold. Included in discontinued operations for the year ended October 31, 2005 were gainson dispositions, net of impairment losses, of approximately $1.2 million compared to $2.4 millionthat was recognized for the year ended October 31, 2004. Revenues for fiscal year 2005 were $2.6million compared to $14.1 million in fiscal year 2004. The effective tax rate for our discontinuedoperations for the year ended October 31, 2005 was a 1.2 percent expense compared to a 43.3 percentbenefit for the same period in 2004. For additional information, see Notes 12 and 17 to theconsolidated financial statements included in Item 8.*Other*          Corporate general and administrative expenses for the year ended October 31, 2005 increased$2.3 million compared to the same period in 2004 primarily due to increased professional feesassociated with our Sarbanes-Oxley Section 404 compliance effort and increased legal andprofessional fees relating in part to the class action lawsuits.          As of October 31, 2005, we had recorded net expenses of $9.4 million related to HurricaneKatrina. For additional information, see Note 22 to the consolidated financial statements includedin Item 8.          We recorded charges of $1.5 million for the year ended October 31, 2005 related to thereorganization of our divisions in the fourth quarter of fiscal year 2005. In December 2003, weannounced a reduction and restructuring of our workforce and recorded $2.4 million in relatedcharges during the year ended October 31, 2004. We also recorded a charge of $1.0 million forseparation pay related to a former executive officer during fiscal year 2004. These charges arepresented in the “Separation charges” line item in the consolidated statements of earnings.          During the fourth quarter of fiscal year 2003, we identified a number of small businesses toclose or sell, mostly funeral homes, and determined that their carrying value exceeded their fairvalues. In accordance with SFAS No. 144, we recorded a noncash impairment charge of $31.8 millionduring the fourth quarter of fiscal year 2003, of which $9.6 million was included in continuingoperations. For fiscal year 2004, we evaluated our long-lived assets, recorded impairment chargesof $0.8 million and sold several assets that we held for sale at a net gain of $0.6 million. Thenet effect was that we reported gains on dispositions, net of impairment losses, of ($0.2) millionin continuing operations. In 2005, we recorded $1.2 million in gains on dispositions, net ofimpairment losses. For additional information, see Note 12 to the consolidated financialstatements included in Item 8. The charges are presented in the “Gains on dispositions andimpairment (losses), net” line item in the consolidated statement of earnings.          Total depreciation and amortization was $25.7 million for the year ended October 31, 2005compared to $57.6 million for the same period in 2004. Amortization in fiscal year 2004 included$25.0 million of deferred selling costs. Effective November 1, 2004, we changed our accountingprinciple for selling costs related to preneed funeral and cemetery service and merchandise sales,and we no longer amortize these costs but rather expense them as incurred.          Interest expense decreased $16.8 million to $30.5 million for the year ended October 31, 2005compared to $47.3 million for the same period in 2004 due to a $39.5 million decrease in averagedebt outstanding and a 295 basis-point decrease in the average interest rate.          Other operating income, net, was $1.4 million and $2.1 million for the years ended October 31,2005 and 2004, respectively, and primarily included net gains on the sale of assets which were notincluded in our businesses classified as held for sale.          The effective tax rate for our continuing operations for the year ended October 31, 2005 was27.2 percent compared to 37.0 percent for the year ended October 31, 2004. The change in theeffective tax rate was primarily due to the greater impact of the dividend exclusion related todividends received from our trust income on a reduced level of book income caused by the increasedcosts associated with the early extinguishment of debt as well as costs attributable to HurricaneKatrina. The dividend exclusion relates to dividends received for investments in certain trustsfor which we recognize earnings for tax purposes as earned by the trust. For additionalinformation, see Note 17 to the consolidated financial statements included in Item 8.
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          On May 31, 2005, we changed our method of accounting for selling costs incurred related to newpreneed funeral and cemetery service and merchandise sales. As of November 1, 2004, we recorded acumulative effect of change in accounting principle of $254.2 million ($153.2 million after tax, or$1.40 per diluted share), which represents the cumulative balance of deferred preneed selling costsin the deferred charges line in the condensed consolidated balance sheet at the time of the change.See Note 3(b) to the consolidated financial statements for additional information.*Preneed Sales into and Deliveries out of the Backlog*          We achieved a 5.0 percent increase in preneed funeral sales for the year ended October 31,2005 compared to the same period in 2004.          The revenues from our preneed funeral and cemetery merchandise and service sales are deferredinto our backlog and are not included in our operating results presented above. We added $171.2million in gross preneed sales to our funeral and cemetery merchandise and services backlog(including $72.5 million related to insurance-funded preneed funeral contracts) during the yearended October 31, 2005 to be recognized in the future (net of cancellations) as these prepaidproducts and services are delivered, compared to gross sales of $165.3 million (including $67.3million related to insurance-funded preneed funeral contracts) for the corresponding period in2004. Deliveries out of our preneed funeral and cemetery merchandise and services backlog,including accumulated trust earnings related to these preneed deliveries, amounted to $147.4million for the year ended October 31, 2005, compared to $147.9 million for the correspondingperiod in 2004, resulting in net increases in the backlog of $23.8 million and $17.4 million forthe years ended October 31, 2005 and 2004, respectively.**Liquidity and Capital Resources***Cash Flow***Comparison of Fiscal Year 2006 to Fiscal Year 2005**          Our operations provided cash of $90.1 million for the year ended October 31, 2006, compared toproviding cash of $52.8 million for the corresponding period in 2005. For the year ended October31, 2005, we recorded $25.5 million for premiums paid for the early extinguishment of debt relatedto the debt refinancings in 2005. The remaining increase is primarily due to a reduction ininterest payments of $6.8 million primarily due to a change in the timing of interest paymentdates. These increases in cash flow were partially offset by $3.8 million of cash outflows inexcess of insurance proceeds recorded related to Hurricane Katrina compared to $2.5 million in2005, and cash inflows of $14.8 million for trust withdrawals associated with the deferred revenueproject during the year ended October 31, 2006 compared to $18.7 million for the same period lastyear. The timing of receipt of insurance proceeds does not match the timing of cash spendingrelated to Hurricane Katrina.          Our investing activities resulted in a net cash outflow of $21.4 million for the year endedOctober 31, 2006, compared to a net cash outflow of $12.4 million for the comparable period in2005. In 2006, there was a net cash inflow of $6.0 million for insurance proceeds related tohurricane damaged properties. Net asset sale proceeds were $1.2 million for the year ended October31, 2006 compared to $10.0 million for the same period in 2005. For the year ended October 31,2006, capital expenditures amounted to $28.9 million compared to $22.6 million in the same periodin 2005. The increase in capital expenditures was due primarily to capital expenditures related toHurricane Katrina.          Our financing activities resulted in a net cash outflow of $65.4 million for the year endedOctober 31, 2006, compared to a net cash outflow of $21.4 million for the comparable period in2005. The change was due primarily to debt repayments of $33.2 million in the year ended October31, 2006 (a $30.0 million unscheduled payment on our Term Loan B was made in the second quarter of2006) compared to net repayments of $6.8 million in the comparable period of 2005 ($440.0 millionin proceeds of long-term debt and $446.8 million in repayments of long-term debt). Stock optionexercises in fiscal year 2005 resulting in issuances of common stock amounted to $13.6 millioncompared to $0.4 million in fiscal year 2006. Stock repurchases under our stock repurchase programamounted to $22.0 million and $13.7 million for the year ended October 31, 2006 and 2005,respectively. We also
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reinstated our dividend program in the second quarter of 2005, therefore, fiscal year 2006 containsfour quarters of dividend payments for a total of $10.7 million compared to only three quarters infiscal year 2005 for a total of $8.2 million.**Comparison of Fiscal Year 2005 to Fiscal Year 2004**          Our operations provided cash of $52.8 million for the year ended October 31, 2005 compared to$93.6 million for the comparable period in 2004. The 2005 amount included a cash inflow of $18.7million for cash withdrawn from trust accounts during the year resulting from the determinationduring the deferred revenue project that those amounts had not been withdrawn in prior periods,even though the related services and merchandise had been delivered in prior periods. The 2005amount also included a cash outflow of approximately $2.5 million related to Hurricane Katrina.The 2004 amount included a $33.2 million tax refund received during the first quarter of 2004resulting from a change in tax accounting methods for cemetery merchandise revenue. In fiscal year2005, we also recorded $25.5 million for premiums paid for the early extinguishment of debt relatedto the debt refinancings occurring in 2005.          Our investing activities resulted in a net cash outflow of $12.4 million for the year endedOctober 31, 2005, compared to a net cash inflow of $0.5 million for fiscal year 2004. The changewas primarily due to $19.8 million in proceeds from asset sales in fiscal year 2004 compared to$10.0 million in fiscal year 2005.          Our financing activities resulted in a net cash outflow of $21.4 million for the year endedOctober 31, 2005, compared to a net cash outflow of $91.3 million for the comparable period in2004. The change was due primarily to repayments of long-term debt of $85.3 million in fiscal year2004 compared to net repayments of $6.8 million ($446.8 million in repayments, net of $440.0million in proceeds) in fiscal year 2005. We used the $33.2 million tax refund included inoperating cash flow to reduce our outstanding Term Loan B in the first quarter of fiscal year 2004.We also used $13.7 million in fiscal year 2005 compared to $19.3 million in fiscal year 2004 torepurchase stock under our stock repurchase program. On March 28, 2005, our Board of Directorsapproved the initiation of a quarterly cash dividend of two and one-half cents per share of commonstock, and we used $8.2 million for dividends payments in 2005.*Contractual Obligations and Commercial Commitments*          As of October 31, 2006, our outstanding debt balance totaled $376.9 million. The followingtable details our known future cash payments (in millions) related to various contractualobligations as of October 31, 2006.                       **Payments Due by Period**       **Fiscal Year**  **Fiscal Years**  **Fiscal Years**    **Contractual Obligations** **Total**  **2007**  **2008 – 2009**  **2010 – 2011**  **Thereafter** Long-term debt obligations (1) $376.9  $2.8  $4.6  $127.7  $241.8 Interest on long-term debt (2)  144.2   25.5   50.3   48.3   20.1 Operating lease agreements (3)  31.9   4.4   6.9   3.5   17.1 Non-competition and other agreements (4)  4.7   2.0   2.2   .4   .1                   $557.7  $34.7  $64.0  $179.9  $279.1                  (1) See below for a breakdown of future scheduled principal payments and maturities ofour long-term debt by type as of October 31, 2006. (2) Includes contractual interest payments for our revolving credit facility, Term LoanB, senior notes and third-party debt. The interest on the revolving credit facility and TermLoan B was calculated based on interest rates in effect as of October 31, 2006. (3) Our noncancellable operating leases are primarily for land and buildings and expireover the next 1 to 12 years, except for six leases that expire between 2032 and 2039. Ourfuture minimum lease payments as of October 31, 2006 were $4.4 million, $3.6 million, $3.3million, $2.5 million, $1.0 million and $17.1 million for the years ending October 31, 2007,2008, 2009, 2010, 2011 and later years, respectively. (4) We have entered into non-competition agreements with prior owners and key employeesof acquired
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  subsidiaries that expire at various times through 2012. During fiscal year 2001, we decided torelieve some of the prior owners and key employees of their obligations not to compete; however,we will continue to make the payments in accordance with the contract terms. This category alsoincludes separation pay related to former executive officers.          In connection with the issuance of the 6.25 percent senior notes in February 2005, we enteredinto a registration rights agreement that required that a registration statement be filed anddeclared effective by the SEC, and that an exchange offer be conducted providing for the exchangeof the unregistered notes for similar registered notes, all within specified times. We were unableto cause the required registration statement to become effective on time and, therefore, wererequired to pay additional interest to the note holders until the default was cured. Additionalinterest began to accrue on June 12, 2005 at a rate of 0.50 percent per annum on the principalamount of the notes for a period of 90 days. The additional interest increased 0.50 percent foreach 90-day period thereafter so long as the default existed, up to a maximum increase of 1.50percent per annum. The additional interest was payable at the regular interest payment dates. Theadditional interest increased to 1.00 percent on September 11, 2005 and increased to 1.50 percenton December 11, 2005. Total additional interest incurred from June 12, 2005 to June 5, 2006 was$2.2 million including $1.7 million for the year ended October 31, 2006. We completed the exchangeoffer on June 5, 2006, and as a result, the additional interest has now been eliminated.          We expect to receive approximately $3.7 million of remaining income tax benefits related tothe sale of our foreign operations by the end of fiscal year 2007.          The following table details our future payments and maturities of long-term debt as of October31, 2006.                                   **Other Principally**                  **Seller Financing**    **Fiscal Year Ending** **Revolving Credit**          **of Acquired**    **October 31,** **Facility**  **Term Loan B**  **Senior Notes**  **Operations**  **Total** 2007 $—  $2.2  $—  $.6  $2.8 2008  —   2.2   —   .2   2.4 2009  —   2.2   —   .1   2.3 2010  —   2.2   —   —   2.2 2011  —   125.5   —   —   125.5 Thereafter  —   41.6   200.0   .1   241.7                 Total long-term debt $—  $175.9  $200.0  $1.0  $376.9                           We also had $13.0 million of outstanding letters of credit as of October 31, 2006, and we arerequired to maintain a bond to guarantee our obligations relating to funds we withdrew in fiscalyear 2001 from our preneed funeral trusts in Florida. We substituted a bond to guaranteeperformance under certain preneed funeral contracts and agreed to maintain unused credit facilitiesin an amount that will equal or exceed the bond amount. The surety company has the right toterminate the bond at any time, and if that were to occur and we were not able to obtain areplacement, we would be required to fund the trusts with cash equal to the bond amount. As ofOctober 31, 2006, the balance of the Florida bond was $41.1 million. We believe that cash flowfrom operations will be sufficient to cover our estimated cost of providing the related prearrangedservices and products in the future.          As of October 31, 2006, there were no amounts drawn on our $125.0 million revolving creditfacility. As of October 31, 2006, our availability under the revolving credit facility, aftergiving consideration to the aforementioned letters of credit and bond obligation, was $70.9million.*Capital Expenditures*          For fiscal year 2006, capital expenditures amounted to $28.9 million, which included $20.7million for maintenance capital expenditures, $2.9 million for growth initiatives and $5.3 millionrelated to Hurricane Katrina. We have no material commitments for capital expenditures in fiscalyear 2007 other than approximately $8 million related to the reconstruction of the Louisianafacilities damaged by Hurricane Katrina and $7 million related to the construction of three newfuneral homes.
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*Off-Balance Sheet Arrangements*          Our off-balance sheet arrangements as of October 31, 2006 consist of the following two items: (1) the $41.1 million bond we are required to maintain to guarantee our obligationsrelating to funds we withdrew in fiscal year 2001 from our preneed funeral trusts inFlorida, which is discussed in Note 19 to the consolidated financial statements included inItem 8; and  (2) the insurance-funded preneed funeral contracts, which will be funded by life insuranceor annuity contracts issued by third-party insurers, are not reflected in our consolidatedbalance sheets, and are discussed in Note 2(j) to the consolidated financial statementsincluded in Item 8.*Ratio of Earnings to Fixed Charges*          Our ratio of earnings to fixed charges was as follows:         **Years ended October 31,****2006** **2005** **2004** **2003** **2002**2.83 (1) 1.36 (2)(3) 1.98 (4) 1.08 (5) 1.27 (3) (6) (1) Pretax earnings for fiscal year 2006 includes a net recovery of $1.6 million relatedto Hurricane Katrina, business interruption proceeds of $3.2 million related to HurricaneKatrina, a charge of $1.0 million for separation charges related to July 2005 restructuring ofour divisions and the retirement of an executive officer and gains on dispositions, net ofimpairment losses of ($0.3) million. (2) Pretax earnings for fiscal year 2005 include a charge of $9.4 million for expensesrelated to Hurricane Katrina, a charge of $1.5 million for separation charges related to theJuly 2005 restructuring of our divisions, $1.2 million of gains on disposition, net ofimpairment losses and $32.8 million for the loss on early extinguishment of debt related tothe 2005 debt refinancings. (3) Excludes the cumulative effect of change in accounting principles.  (4) Pretax earnings for fiscal year 2004 include charges of $3.4 million for severanceand other costs relating to the workforce reductions announced in December 2003 and separationpayments to a former executive officer and ($0.2) million in gains on dispositions, net ofimpairment losses (5) Pretax earnings for fiscal year 2003 include a charge of $11.3 million for the losson early extinguishment of debt in connection with redemption of the ROARS, a noncash chargeof $9.6 million for long-lived asset impairment and a charge of $2.5 million for separationpayments to former executive officers. (6) Pretax earnings for fiscal year 2002 include a noncash charge of $18.5 million inconnection with the write-down of assets held for sale.          For purposes of computing the ratio of earnings to fixed charges, earnings consist of pretaxearnings from continuing operations plus fixed charges (excluding interest capitalized during theperiod). Fixed charges consist of interest expense, capitalized interest, amortization of debtexpense and discount or premium relating to any indebtedness, and the portion of rental expensethat management believes to be representative of the interest component of rental expense.**Effect of Recent Accounting Standards**          For additional information on changes in accounting principles and new accounting principles,see Note 3 to the consolidated financial statements included in Item 8.**Inflation**          Inflation has not had a significant impact on our operations over the past three years, nor isit expected to have a significant impact in the foreseeable future.
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