SEC Info - Carriage Services Inc - ‘424B4’ on 5/22/98

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Carriage Services Inc – ‘424B4’ on 5/22/98

As of: Friday, 5/22/98 · Accession #: 890566-98-1057 · File #: 333-51153

  As Of                Filer                Filing    For·On·As Docs:Size              Issuer               Agent

 5/22/98  Carriage Services Inc             424B4                  1:419K                                   Young Chas P Co/FA

Prospectus — Rule 424(b)(4)
Filing Table of Contents

Document/Exhibit                   Description                      Pages   Size 

 1: 424B4       Prospectus                                           152    740K

Document Table of Contents

Page	(sequential)	\|	(alphabetic)	Top
			Alternative Formats (Word, et al.) Accounts receivable Available Information Business Capitalization Cash and cash equivalents Certain Transactions Class A Common Stock Common Stock Company, The Death Care Industry Delaware Law and Certain Charter Provisions Description of Capital Stock Estimates Experts Forward-Looking Statements Index to Financial Statements Legal Matters Liquidity and Capital Resources Management Management's Discussion and Analysis of Financial Condition and Results of Operations Offering, The Preferred Stock Price Range of Class A Common Stock and Dividend Policy Principal Stockholders Prospectus Summary Regulation Report of Independent Public Accountants Risk Factors Selected Historical Consolidated Financial and Operating Data Series D Preferred Stock Series F Preferred Stock Shares Eligible for Future Sale The Company The Offering Trust Funds Underwriting Use of Proceeds Voting rights
1	1st Page - Filing Submission
"	Class A Common Stock
3	Prospectus Summary
"	The Company
"	Death Care Industry
5	The Offering
8	Forward-Looking Statements
"	Risk Factors
10	Regulation
"	Shares Eligible for Future Sale
12	Price Range of Class A Common Stock and Dividend Policy
"	Use of Proceeds
13	Capitalization
14	Selected Historical Consolidated Financial and Operating Data
16	Management's Discussion and Analysis of Financial Condition and Results of Operations
22	Liquidity and Capital Resources
24	Business
29	Trust Funds
30	Legal Matters
32	Management
38	Certain Transactions
40	Principal Stockholders
42	Description of Capital Stock
"	Common Stock
"	Preferred Stock
43	Series D Preferred Stock
"	Voting rights
"	Series F Preferred Stock
44	Delaware Law and Certain Charter Provisions
47	Underwriting
49	Experts
"	Available Information
51	Index to Financial Statements
60	Report of Independent Public Accountants
66	Cash and cash equivalents
121	Accounts receivable
131	Estimates

424B4 1st Page of 152 TOC ↑Top Previous Next ↓Bottom Just 1st
PROSPECTUS

3,000,000 SHARES

[CARRIAGE SERVICES, INC. -- LOGO]

CLASS A COMMON STOCK
------------------------

All 3,000,000 shares of Class A Common Stock, par value $.01 per share (the
"Class A Common Stock") offered hereby (the "Offering") are being sold by
Carriage Services, Inc. ("Carriage" or the "Company").

The Class A Common Stock is listed on the New York Stock Exchange
("NYSE") under the symbol "CSV." On May 21, 1998, the last reported sale
price of the Class A Common Stock on the NYSE was $22 3/4 per share. See "Price
Range of Class A Common Stock and Dividend Policy."

The Company has two classes of Common Stock: the Class A Common Stock and
Class B Common Stock, par value $.01 per share (the "Class B Common Stock"
and, together with the Class A Common Stock, the "Common Stock"). Each share
of Class A Common Stock offered hereby is entitled to one vote. Each share of
Class B Common Stock is entitled to ten votes and is convertible on a
share-for-share basis into Class A Common Stock. Except with respect to votes
per share and conversion rights, the Class A Common Stock and the Class B Common
Stock are identical. Upon consummation of the Offering, holders of Class B
Common Stock will hold approximately 83% of the voting power of the outstanding
shares of Common Stock. See "Description of Capital Stock."

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
FACTORS THAT SHOULD BE CONSIDERED IN CONNECTION WITH AN INVESTMENT IN THE CLASS
A COMMON STOCK OFFERED HEREBY.
------------------------

THESE SECURITIES HAVE NOT BEEN APPROVED OR DISAPPROVED BY THE SECURITIES AND
EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION NOR HAS THE
SECURITIES AND EXCHANGE COMMISSION OR ANY STATE SECURITIES COMMISSION
PASSED UPON THE ACCURACY OR ADEQUACY OF THIS PROSPECTUS. ANY
REPRESENTATION TO THE CONTRARY IS A CRIMINAL OFFENSE.

-------------------------------------------------------------------------------
-------------------------------------------------------------------------------
PRICE TO UNDERWRITING PROCEEDS TO
PUBLIC DISCOUNT(1) COMPANY(2)
-------------------------------------------------------------------------------
Per Share........ $21.00 $1.05 $19.95
-------------------------------------------------------------------------------
Total(3)......... $63,000,000 $3,150,000 $59,850,000
-------------------------------------------------------------------------------
-------------------------------------------------------------------------------

(1) The Company has agreed to indemnify the several Underwriters against certain
liabilities, including liabilities under the Securities Act of 1933, as
amended. See "Underwriting."

(2) Before deducting expenses payable by the Company estimated at $500,000.

(3) The Company has granted to the several Underwriters an option, exercisable
within 30 days after the date hereof, to purchase up to 450,000 additional
shares of Class A Common Stock at the Price to Public, less Underwriting
Discount, solely to cover over-allotments, if any. If such option is
exercised in full, the total Price to Public, Underwriting Discount and
Proceeds to Company will be $72,450,000, $3,622,500 and $68,827,500,
respectively. See "Underwriting."
------------------------

The shares of Class A Common Stock are offered by the several Underwriters,
subject to prior sale, when, as and if issued to and accepted by the
Underwriters against payment therefor, subject to certain conditions. The
Underwriters reserve the right to withdraw, cancel or modify such offer and to
reject orders in whole or in part. It is expected that delivery of the shares of
Class A Common Stock will be made in New York, New York on or about May 28,
1998.
------------------------

MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
CREDIT SUISSE FIRST BOSTON
RAYMOND JAMES & ASSOCIATES, INC.
------------------------

The date of this Prospectus is May 21, 1998.

424B4 2nd Page of 152 TOC 1st Previous Next ↓Bottom Just 2nd
[MAP]

CERTAIN PERSONS PARTICIPATING IN THIS OFFERING MAY ENGAGE IN TRANSACTIONS
THAT STABILIZE, MAINTAIN OR OTHERWISE AFFECT THE PRICE OF THE CLASS A COMMON
STOCK. SUCH TRANSACTIONS MAY INCLUDE STABILIZING, THE PURCHASE OF CLASS A COMMON
STOCK TO COVER SYNDICATE SHORT POSITIONS AND THE IMPOSITION OF PENALTY BIDS. FOR
A DESCRIPTION OF THESE ACTIVITIES, SEE "UNDERWRITING."

424B4 3rd Page of 152 TOC 1st Previous Next ↓Bottom Just 3rd
PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO, AND
SHOULD BE READ IN CONJUNCTION WITH, THE MORE DETAILED INFORMATION AND FINANCIAL
STATEMENTS, INCLUDING THE NOTES THERETO, APPEARING ELSEWHERE IN THIS PROSPECTUS.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS ASSUMES THAT THE
UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT EXERCISED. UNLESS OTHERWISE
INDICATED, REFERENCES HEREIN TO "CARRIAGE" AND THE "COMPANY" REFER TO
CARRIAGE SERVICES, INC., ITS CONSOLIDATED SUBSIDIARIES AND THEIR RESPECTIVE
PREDECESSORS.

THE COMPANY

GENERAL

Carriage is a leading provider of death care services and products in the
United States. As of March 31, 1998, the Company operated 123 funeral homes and
21 cemeteries in 21 states. The Company provides a complete range of services
relating to funerals, burials and cremations, including the use of funeral homes
and motor vehicles, the performance of cemetery interment services and the
management and maintenance of cemetery grounds. The Company also sells related
products and merchandise including caskets, burial vaults, garments, cemetery
interment rights, stone and bronze memorials, as well as other items. Over the
past five years, the Company's revenues, earnings and profit margins have
increased significantly. From 1993 to 1997, revenues increased from $11.3
million to $77.4 million, operating income increased from $75,000 to $14.1
million and diluted earnings per common share from continuing operations
increased from a loss of $0.66 to a profit of $0.34. For the three months ended
March 31, 1998, the Company's revenues were $28.1 million, operating income was
$6.9 million and diluted earnings per common share from continuing operations
were $0.22 as compared to $0.16 in the same period of 1997.

Since the Company's formation in 1991, management has focused on
distinguishing itself from its competitors by developing an employee driven
organization that emphasizes: (i) providing the highest level of personalized
service to client families, (ii) comprehensive employee training, (iii) a
decentralized management structure, and (iv) incentive compensation and
broad-based employee stock ownership. The Company's success in developing its
operating philosophy, as well as the increasing awareness of the Company in the
death care industry, has resulted in an increasing number of highly attractive
acquisition opportunities. The Company acquired 38 funeral homes and seven
cemeteries for consideration of $68 million in 1996 and 44 funeral homes and 10
cemeteries for consideration of $118 million in 1997. In addition, through April
30, 1998, the Company has either acquired or executed non-binding letters of
intent to acquire 24 funeral homes and four cemeteries for consideration of
approximately $80 million.

DEATH CARE INDUSTRY

The death care industry has attractive fundamental characteristics,
including highly fragmented ownership, barriers to entry and stable, predictable
demand. There are an estimated 22,000 funeral homes and 9,600 commercial
cemeteries in the United States, and less than 25% of the 1997 United States
death care industry revenues are represented by the five publicly traded death
care companies. Death care businesses have traditionally been transferred to
successive generations within a family and in most cases have developed a loyal
clientele and a local heritage and tradition that provide a formidable barrier
to those wishing to enter an existing market. Death rates in the United States
are fairly predictable over time, which lends stability to the industry.

The number of deaths in the United States has increased at a compound rate
of approximately 1% per year since 1980 and is expected to continue to increase
at that rate through 2010. In the past several years, the industry has witnessed
considerable consolidation. Estate planning issues, needs for enhanced service
levels, increased government regulation and a desire to address management
succession concerns have led independent funeral home owners to pursue
opportunities to combine their businesses with larger, national

424B4 4th Page of 152 TOC 1st Previous Next ↓Bottom Just 4th
death care companies. Management believes that the Company is well positioned to
be a major participant in the continued consolidation of the industry.

BUSINESS STRATEGY

The Company's business strategy is to build upon its reputation as a
premier operating company thereby creating attractive opportunities for
acquisitions. The Company seeks to achieve a balance between the need for
superior overall corporate financial performance and the desire to promote
higher levels of personalized service to client families. The commitment of
local management and employees to the Company's decentralized, entrepreneurial
service culture has been a major factor in the Company's ability to deliver
increasing levels of profitability and to attract premier funeral home and
cemetery owners to Carriage.

The Company's operating strategy is focused on increasing the revenues and
profitability of each operating location through a combination of personalized
local service and improved operating efficiencies. In order to maximize the
long-term performance of existing and newly acquired properties and to position
the Company for future growth, management has made significant operating and
infrastructure enhancements over the past 12 months. These enhancements include
strengthening the corporate and operating management teams, improving supplier
arrangements, expanding operating and financial information systems, setting
higher service and financial standards for individual operations, monitoring
more closely the performance of individual operations and developing employee
stock ownership and incentive compensation programs. The Company initiated a
comprehensive Company-wide service training program for its employees and
managers to emphasize and enhance the delivery of personalized service as well
as to improve management skills. The Company has also built a national preneed
sales force to increase its market share and to improve the performance of its
funeral homes and cemeteries.

The Company's acquisition strategy is focused on expanding its funeral home
and cemetery presence into new markets across the United States and increasing
its funeral home and cemetery presence in markets that it currently serves. The
Company aggressively pursues the acquisition of premier funeral homes and
cemeteries that have a strong local market presence. In evaluating specific
acquisition candidates, the Company considers such factors as the property's
reputation, heritage, quality of operating management, competitive market
position, volume of business, location, aesthetics, potential for development or
expansion, pricing structure and profitability potential. In the future, the
Company intends to pursue more cemetery acquisition opportunities than it has in
the past, especially combination funeral home/cemetery properties. Management
believes the development of its national preneed sales organization positions
the Company to compete successfully for cemetery acquisitions and achieve its
targeted returns on cemetery investments. Furthermore, the Company's increased
cemetery presence will partially reduce exposure to declines in the death rate,
improve the Company's position in markets where it already owns funeral homes
and provide cross-marketing opportunities which leverage its preneed sales
organization. Management believes that many independent funeral home and
cemetery owners have chosen to combine their businesses with the Company due to
the attractiveness of the Company's operating philosophy and management style
that encourages individual input and personal growth while providing the
challenge of helping the Company achieve its strategic objectives within their
particular regions. These opportunities provided by the Company have resulted in
certain owners' desire to receive equity securities of the Company as part of
their acquisition consideration.

The Company's principal executive office is located at 1300 Post Oak Blvd.,
Suite 1500, Houston, Texas 77056, and its telephone number is (281) 556-7400.

424B4 5th Page of 152 TOC 1st Previous Next ↓Bottom Just 5th
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THE OFFERING

Class A Common Stock offered......... 3,000,000 shares
Common Stock to be outstanding after
the Offering(1):
Class A Common Stock............... 9,533,327 shares
Class B Common Stock............... 4,624,823 shares
Total......................... 14,158,150 shares
Voting rights........................ Each share of Class A Common Stock is entitled to
one vote per share on all matters requiring
stockholder approval, and each share of Class B
Common Stock is entitled to ten votes per share.
See "Description of Capital Stock."
Conversion of Class B Common Stock... Each share of Class B Common Stock is convertible
at the holder's option into one share of Class A
Common Stock. In addition, each share of Class B
Common Stock automatically converts into one share
of Class A Common Stock upon a sale or transfer to
anyone other than a permitted transferee. In any
event, each share of Class B Common Stock will
automatically convert into one share of Class A
Common Stock on December 31, 2001. See
"Description of Capital Stock."
Use of proceeds...................... To repay outstanding indebtedness incurred
principally to fund acquisitions. See "Use of
Proceeds."
Class A Common Stock NYSE symbol..... "CSV"

------------

(1) Excludes, as of March 31, 1998, (i) approximately 65,000 shares of Class B
Common Stock issuable upon exercise of options, (ii) approximately 1,654,000
shares of Class A Common Stock issuable upon exercise of options, (iii)
74,364 shares of Class B Common Stock issuable upon conversion of 1,682,500
shares of the Company's convertible redeemable Series D Preferred Stock, par
value $.01 per share (the "Series D Preferred Stock"), and (iv) 722,250
shares of Class A Common Stock issuable upon conversion of 12,278,285 shares
of the Company's convertible redeemable Series F Preferred Stock, par value
$.01 per share (the "Series F Preferred Stock"). See "Management" and
"Description of Capital Stock."

424B4 6th Page of 152 TOC 1st Previous Next ↓Bottom Just 6th
SUMMARY HISTORICAL CONSOLIDATED FINANCIAL AND OPERATING DATA

The following table presents summary historical consolidated financial and
operating data as of the dates and for the periods indicated. The consolidated
financial data of the Company as of and for the five years ended December 31,
1997 set forth below have been derived from financial statements audited by
Arthur Andersen LLP, independent public accountants. The consolidated financial
data of the Company as of and for the three months ended March 31, 1997 and 1998
have been derived from unaudited financial statements which, in the opinion of
management, reflect all adjustments (consisting of normal recurring adjustments)
necessary for a fair presentation of the financial data for such periods. The
following information should be read in conjunction with the Company's
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.

[Enlarge/Download Table]

THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

INCOME STATEMENT DATA:
Revenues, net:
Funeral............................. $ 10,651 $ 17,368 $ 22,661 $ 37,445 $ 64,888 $ 15,288 $ 23,243
Cemetery............................ 614 1,036 1,576 2,903 12,533 2,701 4,875
--------- --------- --------- --------- --------- --------- ---------
Total net revenues............. 11,265 18,404 24,237 40,348 77,421 17,989 28,118
--------- --------- --------- --------- --------- --------- ---------
Gross profit:
Funeral............................. 917 2,856 3,740 6,804 16,484 4,668 7,410
Cemetery............................ 143 158 250 362 2,899 475 1,377
--------- --------- --------- --------- --------- --------- ---------
Total gross profit............. 1,060 3,014 3,990 7,166 19,383 5,143 8,787
General and administrative expenses..... 985 1,266 2,106 2,474 5,277 1,021 1,869
--------- --------- --------- --------- --------- --------- ---------
Operating income........................ 75 1,748 1,884 4,692 14,106 4,122 6,918
Interest expense, net................... 1,745 2,671 3,684 4,347 5,889 1,154 2,107
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes....... (1,670) (923) (1,800) 345 8,217 2,968 4,811
Provision for income taxes.............. --(1) 40 694 138 3,726 1,143 2,165
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
item.................................. (1,670) (963) (2,494) 207 4,491 1,825 2,646
Extraordinary item, net................. -- -- -- (498) (195) -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) after extraordinary
item.................................. (1,670) (963) (2,494) (291) 4,296 1,825 2,646
Preferred stock dividends............... -- -- -- 622 890 363 150
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common
stockholders.......................... $ (1,670) $ (963) $ (2,494) $ (913) $ 3,406 $ 1,462 $ 2,496
========= ========= ========= ========= ========= ========= =========
Net income (loss) per common share
Basic:
Continuing operations............... $ (.66) $ (.38) $ (.99) $ (.09) $ .35 $ .16 $ .22
Extraordinary item.................. -- -- -- (.10) (.02) -- --
--------- --------- --------- --------- --------- --------- ---------
Basic net income (loss) per common
share............................. $ (.66 (1) $ (.38) $ (.99) $ (.19) $ .33 $ .16 $ .22
========= ========= ========= ========= ========= ========= =========
Diluted:
Continuing operations............... $ (.66) $ (.38) $ (.99) $ (.09) $ .34 $ .16 $ .22
Extraordinary item.................. -- -- -- (.10) (.02) -- --
--------- --------- --------- --------- --------- --------- ---------
Diluted net income (loss) per common
share............................. $ (.66 (1) $ (.38) $ (.99) $ (.19) $ .32 $ .16 $ .22
========= ========= ========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding:
Basic............................... 2,520(1) 2,520 2,520 4,869 10,226 9,054 11,151
========= ========= ========= ========= ========= ========= =========
Diluted............................. 2,520 2,520 2,520 4,869 10,485 10,586 12,122
========= ========= ========= ========= ========= ========= =========

(TABLE CONTINUED ON FOLLOWING PAGE)

424B4 7th Page of 152 TOC 1st Previous Next ↓Bottom Just 7th
[Enlarge/Download Table]

OPERATING AND FINANCIAL DATA:
Funeral homes at end of period.......... 25 34 41 76 120 97 123
Cemeteries at end of period............. 2 3 3 10 20 12 21
Funeral services performed during
period................................ 2,265 3,529 4,414 7,181 12,131 2,948 4,203
Preneed funeral contracts sold.......... 644 762 2,610 3,760 4,020 1,127 1,568
Backlog of preneed funeral contracts.... 5,170 6,855 8,676 22,925 34,797 26,400 36,425
Depreciation and amortization........... $ 947 $ 1,476 $ 1,948 $ 3,629 $ 7,809 $ 1,563 $ 2,417

AS OF MARCH 31, 1998
-----------------------------
AS OF DECEMBER 31, 1997 ACTUAL AS ADJUSTED(2)
----------------------- ---------- ---------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......................... $ 5,823 $ 5,344 $ 5,344
Total assets............................ 277,940 287,311 287,311
Long-term debt, net of current
maturities............................ 121,553 131,323 71,973
Redeemable preferred stock.............. 13,951 13,951 13,951
Stockholders' equity.................... 98,565 100,861 160,211

------------

(1) Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 2,520,000
shares of common stock of the Company effective January 1, 1994.
Accordingly, shares of common stock shown outstanding for these periods
assume the exchange had taken place at the beginning of the periods
presented. In 1993, the entities were subchapter S corporations, and taxes
were the direct responsibility of the owners. Thus, the tax provision
reflected above for 1993 is based on assumptions about what the tax
provision (benefit) would have been if the Company had been a taxable
entity. In the opinion of management, no pro forma tax provision (benefit)
was appropriate for this period because the Company followed a policy of not
recognizing the benefits associated with net operating losses during such
period.

(2) As adjusted to give effect to the Offering and the application of the
estimated net proceeds to the Company therefrom.

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FORWARD-LOOKING STATEMENTS

This Prospectus contains forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933, as amended (the "Securities Act")
and Section 21E of the Securities Exchange Act of 1934, as amended (the
"Exchange Act"), including without limitation, statements that include the
words "anticipates," "believes," "estimates" and "expects" and similar
expressions and statements relating to the Company's strategic plans, capital
expenditures, industry trends and the Company's financial position. Such
forward-looking statements reflect the Company's current views with respect to
future events and are subject to certain risks, uncertainties and assumptions,
including competition for and availability of funeral home and cemetery
acquisitions, the ability of the Company to manage an increasing number of
funeral homes and cemeteries, the Company's ability to retain key management
personnel and to continue to attract and retain skilled funeral home and
cemetery management personnel, state and federal regulations, changes in the
death rate or acceleration of the trend towards cremation, availability and cost
of capital and general industry and economic conditions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements and information.

RISK FACTORS

PROSPECTIVE INVESTORS SHOULD CAREFULLY CONSIDER THE FOLLOWING FACTORS AS
WELL AS THE OTHER INFORMATION CONTAINED IN THIS PROSPECTUS.

AVAILABILITY, FINANCING AND INTEGRATION OF ACQUISITIONS

The Company has grown rapidly through acquisitions of funeral homes and
cemeteries. Although the Company believes it has an adequate infrastructure,
there can be no assurance that the Company's current management, personnel and
other corporate infrastructure will be adequate to manage the Company's growth.
In addition, to the extent the success of the Company's strategy is contingent
on making further acquisitions, there can be no assurance that the Company will
be able to identify and acquire acceptable acquisition candidates on terms
favorable to the Company or that the Company will be able to integrate such
acquisitions successfully into the Company without substantial costs, delays or
other operational or financial problems. Further, acquisitions involve a number
of special risks, including possible adverse effects on the Company's operating
results, diversion of management's attention, failure to retain key acquired
personnel, risks associated with unanticipated events or liabilities and
amortization of acquired intangible assets, some or all of which could have a
material adverse effect on the Company's business, financial condition and
results of operations. Competition in the acquisition market is intense, and
prices paid for funeral homes and cemeteries have increased in recent years. In
addition, the four other publicly held North American death care companies, each
of which has greater financial and other resources than the Company, are
actively engaged in acquiring funeral homes and cemeteries in a number of
markets. In addition, to the extent the Company is required to writedown
goodwill associated with acquisitions due to a decline in the value of such
acquired businesses, such writedown could have a material adverse effect on the
operating results of the Company.

The Company may finance future acquisitions through the incurrence of
additional bank indebtedness, the utilization of cash from operations, the
issuance of Class A Common Stock or other securities, or any combination
thereof. In the event that the Class A Common Stock does not maintain a
sufficient market value, or potential acquisition candidates are otherwise
unwilling to accept Class A Common Stock or other securities as part of the
consideration for the sale of their businesses, the Company may be required to
utilize more of its cash resources or available funds under the New Credit
Facility (as defined herein) in order to finance future acquisitions. If the
Company does not have sufficient cash resources, its ability to make
acquisitions could be limited unless it is able to obtain additional capital
through debt or equity financings. There can be no assurance that the Company
will be able to obtain all the financing it will need in the future on terms the
Company deems acceptable.

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FLUCTUATIONS IN OPERATING RESULTS

Results for any particular period are not necessarily indicative of the
results that the Company may achieve for any subsequent period. Quarterly or
yearly results may vary materially as a result of the timing and structure of
acquisitions, any writedown of goodwill, the timing and magnitude of costs
related to such acquisitions and fluctuations in the death rate. Such
fluctuations in operating results may adversely affect the market price of the
Class A Common Stock. See "Management's Discussion and Analysis of Financial
Condition and Results of Operations."

DEPENDENCE UPON KEY PERSONNEL

The Company depends to a large extent upon the abilities and continued
efforts of Melvin C. Payne, Chairman of the Board and Chief Executive Officer,
Mark W. Duffey, President, and its other senior management. The loss of the
services of the key members of the Company's senior management could have a
material adverse effect on the Company's continued ability to compete in the
death care industry. The Company has entered into employment agreements with its
principal executive officers. The Company's future success will also depend upon
its ability to attract and retain skilled funeral home and cemetery management
personnel. See "Management."

CONTROL BY EXISTING STOCKHOLDERS

Following the Offering, the Company will have approximately 9.5 million
shares of Class A Common Stock outstanding and approximately 4.6 million shares
of Class B Common Stock outstanding. The Company's Amended and Restated
Certificate of Incorporation (the "Charter") provides that holders of Class A
Common Stock shall have one vote per share on all matters requiring stockholder
approval and that holders of Class B Common Stock shall have ten votes per share
on all matters requiring stockholder approval. Accordingly, following the
Offering and assuming conversion of the Series D Preferred Stock, holders of
Class B Common Stock will hold approximately 83% of the voting power of the
outstanding shares of Common Stock (approximately 82% if the Underwriters'
over-allotment option is exercised in full). These stockholders are in a
position to exert substantial influence over the outcome of most corporate
actions requiring stockholder approval, including the election of directors, the
future issuance of Common Stock or other securities of the Company, the
declaration of any dividend payable on the Common Stock and the approval of
transactions involving a change in control of the Company. See "Description of
Capital Stock."

CERTAIN ANTI-TAKEOVER PROVISIONS

The Company's Charter and Amended and Restated Bylaws (the "Bylaws")
contain certain provisions that may have the effect of discouraging, delaying or
preventing a change in control of the Company or unsolicited acquisition
proposals that a stockholder might consider favorable, including the voting
rights of the Class B Common Stock and provisions authorizing the issuance of
"blank check" preferred stock, providing for a Board of Directors with
staggered, three-year terms, requiring supermajority or class voting to effect
certain amendments to the Charter and Bylaws, limiting the persons who may call
special stockholders' meetings, limiting stockholder action by written consent
and establishing advance notice requirements for nominations for election to the
Board of Directors or for proposing matters that can be acted upon at
stockholders' meetings. Certain holders of Class B Common Stock have entered
into a voting agreement restricting each person's ability to sell their shares
of capital stock of the Company to a competitor and obligating such persons to
vote against any proposal to merge, consolidate or sell all or substantially all
of the Company's assets to a competitor. See "Description of Capital
Stock -- Delaware Law and Certain Charter Provisions."

TREND TOWARD CREMATION

There is an increasing trend in the United States toward cremation.
According to industry studies, cremations represented approximately 21% of the
burials performed in the United States in 1996, as compared with approximately
10% in 1980. Compared to traditional funeral services, cremations have

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historically generated similar gross profit percentages but lower revenues. A
substantial increase in the rate of cremations performed by the Company could
have a material adverse effect on the Company's results of operations. See
"Business -- Death Care Industry."

REGULATION

The Company's operations are subject to regulation, supervision and
licensing under numerous federal, state and local laws, ordinances and
regulations, including extensive regulations concerning trust funds, preneed
sales of funeral and cemetery products and services and various other aspects of
the Company's business. The impact of such regulations varies depending on the
location of the Company's funeral homes and cemeteries.

From time to time, states and other regulatory agencies have considered and
may enact additional legislation or regulations that could affect the death care
industry. For example, some states and regulatory agencies have considered or
are considering regulations that could require more liberal refund and
cancellation policies for preneed sales of products and services, prohibit
door-to-door or telephone solicitation of potential customers, increase trust
requirements and prohibit the common ownership of funeral homes and cemeteries
in the same market. If adopted in the states in which the Company operates,
these and other possible proposals could have a material adverse effect on the
Company's results of operations. See "Business -- Trust Funds" and
"-- Regulation."

SHARES ELIGIBLE FOR FUTURE SALE

As of March 31, 1998, there were 6,533,327 shares of Class A Common Stock
issued and outstanding, and upon the issuance of the 3,000,000 shares of Class A
Common Stock to be issued by the Company and offered for sale in the Offering,
there will be 9,533,327 shares of Class A Common Stock issued and outstanding.
Approximately 5,900,000 shares of Class A Common Stock (which includes
approximately 5,400,000 shares of Class A Common Stock issuable upon conversion
of outstanding shares of Class B Common Stock and outstanding shares of
preferred stock based on conversion rates as of March 31, 1998) held by existing
stockholders of the Company are "restricted securities" within the meaning of
Rule 144 under the Securities Act. The Company believes that substantially all
of these "restricted" shares of Class A Common Stock are currently eligible
for resale subject to the volume, manner of sale and other limitations of Rule
144. See "Shares Eligible for Future Sale." In addition, an aggregate of
approximately 1,954,000 shares of Class A Common Stock and approximately 68,200
shares of Class B Common Stock are reserved for issuance to employees, directors
and consultants of the Company under the Company's option plans. As of March 31,
1998, approximately 1,654,000 shares of Class A Common Stock and approximately
65,000 shares of Class B Common Stock are issuable under existing options
granted to employees, directors and consultants. The Company has registered all
shares of Common Stock issuable pursuant to its option plans pursuant to
registration statements on Forms S-8 filed with the Securities and Exchange
Commission (the "Commission"). See "Management -- Incentive Plans,"
"Description of Capital Stock" and "Shares Eligible for Future Sale." In
addition, the Company has filed a shelf registration statement covering up to
2,000,000 shares of Class A Common Stock that may be issued from time to time by
the Company to fund future acquisitions. As of March 31, 1998, approximately
1,500,000 shares of Class A Common Stock remained available for issuance under
this shelf registration statement. Shares covered by the shelf registration
statement may be issued or resold (as the case may be) and are freely tradeable,
when issued, by the holders thereof (other than "affiliates" of the Company
and in the case of acquisitions, "affiliates" of the businesses acquired).

The Company and its executive officers and directors have agreed not to
sell, offer to sell, contract to sell, pledge or otherwise dispose of or
transfer any shares of Common Stock, or any securities convertible into or
exchangeable or exercisable for or any rights to purchase or acquire Common
Stock for a period of 90 days commencing on the date of this Prospectus without
the prior written consent of the representatives of the Underwriters, other than
the issuance of options to purchase Common Stock or shares of Common Stock
issuable upon the exercise thereof and issuances of capital stock by the Company
in connection with acquisitions of funeral homes and cemeteries, provided that
such options shall not vest and become

424B4 11th Page of 152 TOC 1st Previous Next ↓Bottom Just 11th
exercisable and such shares issuable upon exercise of options or pursuant to
acquisitions shall not be transferable prior to the end of the 90-day period.
See "Shares Eligible for Future Sale" and "Underwriting."

DIVIDENDS

The Company intends to retain its cash for the continued development of its
business and currently does not intend to pay cash dividends on the Common Stock
in the foreseeable future. See "Dividend Policy."

424B4 12th Page of 152 TOC 1st Previous Next ↓Bottom Just 12th
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY

The Company's Class A Common Stock is listed on the NYSE under the symbol
"CSV." The following table presents the quarterly high and low sale prices as
reported by the Nasdaq National Market since the shares became publicly traded
on August 9, 1996 through May 7, 1998 and as reported on the NYSE Composite
Transactions reporting system since May 8, 1998.

HIGH LOW
---- ----
1996:
Third Quarter (beginning August 9,
1996)........................... $22 3/4 $ 14 1/4
Fourth Quarter..................... 23 1/2 18 3/8
1997:
First Quarter...................... 26 18 1/4
Second Quarter..................... 22 3/4 17
Third Quarter...................... 22 3/4 16 1/4
Fourth Quarter..................... 19 5/8 16 1/2
1998:
First Quarter...................... 24 3/4 16 3/4
Second Quarter (through May 21,
1998)........................... 26 22 9/16

On May 21, 1998, the last reported sale price of the Class A Common Stock
on the NYSE was $22 3/4 per share. As of March 31, 1998, there were 6,533,327
shares of Class A Common Stock outstanding held by approximately 195 holders of
record. The Company believes there are approximately 2,400 beneficial owners of
the Class A Common Stock.

The Company has never paid a cash dividend on the Class A or Class B Common
Stock. The Company currently intends to retain earnings to finance the growth
and development of its business and does not anticipate paying any cash
dividends on its Common Stock in the foreseeable future. In addition, certain
provisions of the New Credit Facility provide certain restrictions on the
payment of dividends on the Class A or Class B Common Stock. Any future change
in the Company's dividend policy will be made at the discretion of the Company's
Board of Directors in light of the financial condition, capital requirements,
earnings and prospects of the Company and any restrictions under credit
agreements, as well as other factors the Board of Directors may deem relevant.
See "Management's Discussion and Analysis of Financial Condition and Results of
Operations -- Liquidity and Capital Resources." Holders of shares of the
Company's Series D Preferred Stock are entitled to receive dividends at an
annual rate of $.06 per share or $.07 per share, depending on the date such
shares were issued. Holders of shares of the Series F Preferred Stock are
currently entitled to receive dividends at an annual rate of $.042 per share.
Such dividends are payable quarterly. From January 1, 1996 through March 31,
1998, cash dividends of approximately $918,924 on the Series D Preferred Stock
and $743,370 on the Series F Preferred Stock had been paid. See "Description of
Capital Stock."

USE OF PROCEEDS

The net proceeds to be received by the Company from the Offering are
estimated to be approximately $59.4 million (approximately $68.3 million if the
Underwriter's over-allotment option is exercised in full), after deducting the
estimated underwriting discount and Offering expenses. All of the net proceeds
will be used to repay outstanding indebtedness under the New Credit Facility,
incurred principally to fund acquisitions. As of April 30, 1998, $121.0 million
was outstanding under the New Credit Facility with an average effective interest
rate of 6.85%. Amounts repaid on the New Credit Facility may be reborrowed from
time to time for possible future acquisitions, capital expenditures and other
general corporate purposes.

424B4 13th Page of 152 TOC 1st Previous Next ↓Bottom Just 13th
CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1998 and as adjusted to reflect the sale of the shares of Class A
Common Stock offered hereby (assuming the Underwriters' over-allotment option is
not exercised) and the application of the estimated net proceeds therefrom. The
table should be read in conjunction with "Use of Proceeds," "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
the Consolidated Financial Statements and notes thereto included elsewhere in
this Prospectus.

AS OF MARCH 31, 1998
------------------------
ACTUAL AS ADJUSTED
-------- ------------
(IN THOUSANDS)
Current portion of long-term debt and
obligations under capital leases... $ 2,116 $ 2,116
======== ============
Long-term debt and obligations under
capital leases (excluding current
portion):
Credit facility................. $115,550 $ 56,200
Acquisition debt................ 11,243 11,243
Other........................... 4,530 4,530
Obligations under capital
leases........................ 4,391 4,391
-------- ------------
Total long-term debt and
obligations under capital
leases............................. 135,714 76,364
-------- ------------
Redeemable preferred stock(1)........ 13,951 13,951
-------- ------------
Stockholders' equity(2):
Class A Common Stock, par value
$.01 per share, 40,000,000
shares authorized; 6,533,327
shares issued and outstanding;
9,533,327 shares issued and
outstanding, as adjusted...... 66 96
Class B Common Stock, par value
$.01 per share, 10,000,000
shares authorized; 4,624,823
shares issued and outstanding,
and as adjusted............... 46 46
Contributed capital............. 101,855 161,175
Accumulated deficit............. (1,106) (1,106)
-------- ------------
Total stockholders'
equity................... 100,861 160,211
-------- ------------
Total
capitalization...... $250,526 $250,526
======== ============

------------

(1) The redeemable preferred stock (the Series D Preferred Stock and Series F
Preferred Stock) is convertible at the holder's option into Class A and
Class B Common Stock at a conversion price based upon a ten-day average of
the market price of the Class A Common Stock ($22.625 as of March 31, 1998)
for the Series D Preferred Stock and at a current conversion price of $17.00
per share for the Series F Preferred Stock. On December 31, 2001, the
Company must redeem all shares of Series D Preferred Stock then outstanding
at a redemption price of $1.00 per share, together with all accrued and
unpaid dividends. On December 31, 2007, the Company must redeem all shares
of Series F Preferred Stock then outstanding at a redemption price of $1.00
per share, together with all accrued and unpaid dividends. See "Description
of Capital Stock."

(2) Does not include shares of Common Stock issuable upon exercise of options
outstanding under the Company's stock option plans. See "Management."

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SELECTED HISTORICAL CONSOLIDATED
FINANCIAL AND OPERATING DATA

The following table sets forth selected historical consolidated financial
and operating data as of the dates and for the periods indicated. The
consolidated financial data of the Company as of and for the five years ended
December 31, 1997 set forth below have been derived from financial statements
audited by Arthur Andersen LLP, independent public accountants. The consolidated
financial data of the Company as of and for the three months ended March 31,
1997 and 1998 have been derived from unaudited financial statements which, in
the opinion of management, reflect all adjustments (consisting of normal
recurring adjustments) necessary for a fair presentation of the financial data
for such periods. The following information should be read in conjunction with
"Management's Discussion and Analysis of Financial Condition and Results of
Operations" and with the Company's Consolidated Financial Statements and notes
thereto included elsewhere in this Prospectus.

[Enlarge/Download Table]

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
----------------------------------------------------- --------------------
1993 1994 1995 1996 1997 1997 1998
--------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)

INCOME STATEMENT DATA:
Revenues, net:
Funeral............................. $ 10,651 $ 17,368 $ 22,661 $ 37,445 $ 64,888 $ 15,288 $ 23,243
Cemetery............................ 614 1,036 1,576 2,903 12,533 2,701 4,875
--------- --------- --------- --------- --------- --------- ---------
Total net revenues............. 11,265 18,404 24,237 40,348 77,421 17,989 28,118
--------- --------- --------- --------- --------- --------- ---------
Gross profit:
Funeral............................. 917 2,856 3,740 6,804 16,484 4,668 7,410
Cemetery............................ 143 158 250 362 2,899 475 1,377
--------- --------- --------- --------- --------- --------- ---------
Total gross profit............. 1,060 3,014 3,990 7,166 19,383 5,143 8,787
General and administrative expenses..... 985 1,266 2,106 2,474 5,277 1,021 1,869
--------- --------- --------- --------- --------- --------- ---------
Operating income........................ 75 1,748 1,884 4,692 14,106 4,122 6,918
Interest expense, net................... 1,745 2,671 3,684 4,347 5,889 1,154 2,107
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before income taxes....... (1,670) (923) (1,800) 345 8,217 2,968 4,811
Provision for income taxes.............. --(1) 40 694 138 3,726 1,143 2,165
--------- --------- --------- --------- --------- --------- ---------
Income (loss) before extraordinary
item.................................. (1,670) (963) (2,494) 207 4,491 1,825 2,646
Extraordinary item, net................. -- -- -- (498) (195) -- --
--------- --------- --------- --------- --------- --------- ---------
Income (loss) after extraordinary
item.................................. (1,670) (963) (2,494) (291) 4,296 1,825 2,646
Preferred stock dividends............... -- -- -- 622 890 363 150
--------- --------- --------- --------- --------- --------- ---------
Net income (loss) attributable to common
stockholders.......................... $ (1,670) $ (963) $ (2,494) $ (913) $ 3,406 $ 1,462 $ 2,496
========= ========= ========= ========= ========= ========= =========
Net income (loss) per common share
Basic:
Continuing operations............... $ (.66) $ (.38) $ (.99) $ (.09) $ .35 $ .16 $ .22
Extraordinary item.................. -- -- -- (.10) (.02) -- --
--------- --------- --------- --------- --------- --------- ---------
Basic net income (loss) per common
share............................. $ (.66)(1) $ (.38) $ (.99) $ (.19) $ .33 $ .16 $ .22
========= ========= ========= ========= ========= ========= =========
Diluted:
Continuing operations............... $ (.66) $ (.38) $ (.99) $ (.09) $ .34 $ .16 $ .22
Extraordinary item.................. -- -- -- (.10) (.02) -- --
--------- --------- --------- --------- --------- --------- ---------
Diluted net income (loss) per common
share............................. $ (.66 (1) $ (.38) $ (.99) $ (.19) $ .32 $ .16 $ .22
========= ========= ========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares outstanding:
Basic............................... 2,520(1) 2,520 2,520 4,869 10,226 9,054 11,151
========= ========= ========= ========= ========= ========= =========
Diluted............................. 2,520 2,520 2,520 4,869 10,485 10,586 12,122
========= ========= ========= ========= ========= ========= =========

(TABLE CONTINUED ON FOLLOWING PAGE)

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[Enlarge/Download Table]

AS OF DECEMBER 31,
----------------------------------------------------- AS OF
1993 1994 1995 1996 1997 MARCH 31, 1998
--------- --------- --------- --------- --------- ---------------------
(IN THOUSANDS)
BALANCE SHEET DATA:
Working capital......................... $ (142) $ 4,271 $ 6,472 $ 5,089 $ 5,823 $ 5,344
Total assets............................ 28,784 44,165 61,746 131,308 277,940 287,311
Long-term debt, net of current
maturities............................ 26,270 32,622 42,057 42,733 121,553 131,323
Redeemable preferred stock.............. -- -- -- 17,251 13,951 13,951
Stockholders' equity (deficit).......... (2,626) 3,429 9,151 57,043 98,565 100,861

------------

424B4 16th Page of 152 TOC 1st Previous Next ↓Bottom Just 16th
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company became a public company during the third quarter of 1996. The
Company's focus is on growth through acquisitions and enhancements at facilities
currently owned to increase revenues and gross profit. The Company entered 1997
with the goals (among others) of increasing cash flow from operations;
increasing margins in its funeral home and cemetery operations; substantially
increasing the preneed sales and marketing activities; and filling critical
personnel needs in the finance, corporate development and cemetery operations
areas. The objective of these goals was to build the infrastructure and
stability of the Company as it continued to pursue consolidation opportunities
in the death care industry. The Company successfully met these goals and
achieved profitability in each quarter of 1997, even though death rates were
lower than expected in certain markets.

Cash flow from operations, which the Company defines as earnings before
interest, income taxes, and depreciation and amortization, increased, as a
percentage of net revenues, from 22.6% for 1996 to 29.7% for 1997. This
improvement was largely due to the increased gross profits at the individual
locations. Gross margins for the funeral homes increased to 25.4% in 1997 from
18.2% in 1996 as a result of margin management training for the managers and
directors related to merchandising and memorialization and benefits from cost
containment and clustering, where realizable. Improvements in cemetery gross
profit margins were dramatic in 1997. Fueled by a doubling of the number of
cemeteries during the year and the restructuring of the preneed sales function
in late 1996, cemetery gross profit increased 700% while cemetery revenues
increased 332%. As a percentage of cemetery net revenues, cemetery gross profit
was 23.1% in 1997 compared to 12.5% in 1996. The Rolling Hills Cemetery, which
was acquired in early 1997, contributed 87% of the revenue increase for the
year. Preneed sales and marketing efforts began to have a significant impact in
the latter part of 1997, as revenues and gross profits from cemeteries owned at
least one year increased 66% and 373%, respectively, in the fourth quarter
compared to the same period in 1996.

The Company has experienced significant growth since the end of 1995 when
it owned 44 facilities. During 1996 and 1997, the Company acquired 45 and 54
facilities, respectively. In a deliberate and managed process, the Company
increased personnel and related infrastructure as a function of the increase in
the Company's revenue run rate. As a consequence, general and administrative
expenses increased from $2.1 million in 1995 to $2.5 million in 1996 and to $5.3
million in 1997. However, general and administrative expenses declined as a
percentage of revenues over these years from 8.7% in 1995 to 6.8% in 1997. The
additional personnel filled critical roles in expanding the geographic coverage
of both corporate development and preneed sales and marketing activities, as
well as the financial, data processing and administrative functions needed to
support the growing number of locations operating in a decentralized management
fashion with timely financial and management information. Additionally, near the
end of 1996, the prearranged funeral and cemetery sales organization was
significantly restructured and expanded. The Company has also begun to allocate
more of its resources to cemetery acquisitions to continue to leverage off its
growing preneed sales force and to partially reduce exposure to fluctuations in
the death rate.

During 1996, the Company acquired 38 funeral homes and seven cemeteries for
an aggregate consideration of approximately $68 million. Forty-four funeral
homes and ten cemeteries were acquired during 1997 for approximately $118
million. These acquisitions were funded through cash flow from operations,
additional borrowings under the Company's credit facilities and issuance of
preferred and common stock. In addition, as of April 24, 1998, the Company had
either acquired or had letters of intent to acquire 20 funeral homes and three
cemeteries for an aggregate consideration of approximately $80 million. The
Company believes its increased recognition in the death care industry as an
established operator and purchaser of funeral homes and cemeteries has improved
its ability to attract potential acquisitions that are larger, strategic and
accretive and its ability to finance its acquisitions with debt and equity.

424B4 17th Page of 152 TOC 1st Previous Next ↓Bottom Just 17th
One consequence of the Company's rapid growth through acquisitions in
recent years is a relatively high level of non-cash depreciation and
amortization expense. For the year ended December 31, 1997, depreciation and
amortization expense as a percentage of net revenues was 10.1%. The Company
believes that this percentage was higher than others in the industry due to the
fact that most of the Company's acquisitions have occurred during the past two
years and have been primarily comprised of funeral homes (as compared to
cemeteries which have a large non-depreciable land component). Because all of
the Company's properties have been acquired in these types of transactions in
the past few years, the non-cash charges related to purchase price allocations
resulting from these acquisitions have had a significant impact on the Company's
reported net income.

RESULTS OF OPERATIONS

The following table sets forth certain income statement data for the
Company expressed as a percentage of net revenues for the periods presented:

[Enlarge/Download Table]

THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1995 1996 1997 1997 1998
--------- --------- --------- --------- ---------

Total revenues, net.................. 100.0% 100.0% 100.0% 100.0% 100.0%
Total gross profit................... 16.5 17.8 25.0 28.6 31.3
General and administrative
expenses............................. 8.7 6.1 6.8 5.7 6.6
Operating income..................... 7.8 11.6 18.2 22.9 24.6
Interest expense, net................ 15.2 10.8 7.6 6.4 7.5
Net income (loss) before
extraordinary item................. (10.3) 0.5 5.8 10.1 9.4

The following table sets forth the number of funeral homes and cemeteries
owned and operated by the Company for the periods presented:

THREE
MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------ MARCH 31,
1995 1996 1997 1998
---- ---- ---- ---------
Funeral homes at beginning of
period............................... 34 41 76 120
Acquisitions......................... 8 38 44 4
Divestitures......................... 1 3 0 1
---- ---- ---- ---------
Funeral homes at end of
period........................ 41 76 120 123
==== ==== ==== =========
Cemeteries at beginning of period.... 3 3 10 20
Acquisitions......................... 0 7 10 1
Divestitures......................... 0 0 0 0
---- ---- ---- ---------
Cemeteries at end of period..... 3 10 20 21
==== ==== ==== =========

As of April 30, 1998, the Company had acquired an additional two funeral
homes and had non-binding letters of intent for the acquisition of 18 funeral
homes and three cemeteries.

The following is a discussion of the Company's results of operations for
the three months ended March 31, 1997 and 1998 and the three years ended
December 31, 1995, 1996 and 1997. For purposes of this discussion, funeral homes
and cemeteries owned and operated for the entirety of both periods being
compared are referred to as "existing operations." Operations acquired or
opened during either period being compared are referred to as "acquired
operations."

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THREE MONTHS ENDED MARCH 31, 1998 COMPARED TO THREE MONTHS ENDED MARCH 31, 1997

FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral home
operations for the three months ended March 31, 1997 compared to the three
months ended March 31, 1998.

THREE MONTHS ENDED
MARCH 31, CHANGE
-------------------- ------------------
1997 1998 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations............. $ 12,606 $ 13,669 $ 1,063 8.4%
Acquired operations............. 2,682 9,574 6,892 *
--------- --------- -------
Total net revenues......... $ 15,288 $ 23,243 $ 7,955 52.0%
========= ========= =======
Gross profit:
Existing operations............. $ 3,679 $ 4,121 $ 442 12.0%
Acquired operations............. 989 3,289 2,300 *
--------- --------- -------
Total gross profit......... $ 4,668 $ 7,410 $ 2,742 58.7%
========= ========= =======

------------

* Not meaningful.

Due to the rapid growth of the Company, existing operations for the quarter
ended March 31, 1998 represented only 59% of the total funeral revenues and only
56% of the total funeral gross profit. Total funeral net revenues for the three
months ended March 31, 1998 increased $8.0 million or 52.0% over the three
months ended March 31, 1997. The higher net revenues reflect an increase of $6.9
million in net revenues from acquired operations and an increase in net revenues
of $1.1 from existing operations.

Total funeral gross profit for the three months ended March 31, 1998
increased $2.7 million or 58.7% over the comparable three months of 1997. The
higher total gross profit reflected an increase of $2.3 million from acquired
operations and an increase of $442,000 from existing operations. Gross profit
for existing operations increased due to the efficiencies gained by
consolidation, cost savings, improved collections experience and the increasing
effectiveness of the Company's merchandising strategy. Total gross margin
increased from 30.5% for the first quarter of 1997 to 31.9% for the first
quarter of 1998 due to these factors. Included in the 30.5% gross margin for
1997 is a gain on the sale of property of $276,000, the exclusion of which would
reduce funeral gross margin to 28.7% for the first quarter of 1997.

CEMETERY SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations for the three months ended March 31, 1997 compared to the three
months ended March 31, 1998.

THREE MONTHS ENDED
MARCH 31, CHANGE
-------------------- ------------------
1997 1998 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Total net revenues................... $ 2,701 $ 4,875 $ 2,174 80.5%
========= ========= =======
Total gross profit................... $ 475 $ 1,377 $ 902 189.9%
========= ========= =======

Due to the rapid growth of the Company, existing operations for the quarter
ended March 31, 1998 represented approximately 35% of the cemetery revenues and
approximately 30% of cemetery gross profit as the Company had only 10 cemeteries
in operation at the beginning of the first quarter of 1997 versus 21 at the end
of the first quarter of 1998. As a result, the Company does not believe it is
meaningful to present the results for existing and acquired operations
separately. Total cemetery net revenues for the three months ended March 31,
1998 increased $2.2 million over the three months ended March 31, 1997, and
total cemetery gross profit increased $902,000 over the comparable three months
of 1997. Total gross margin increased from 17.6% for the first quarter of 1997
to 28.2% for the first quarter of 1998. These increases were due primarily to
the Company's acquisition of ten cemeteries during 1997 and increased preneed
marketing efforts.

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General and administrative expenses for the three months ended March 31,
1998 increased $848,000 or 83.1% over the first three months of 1997 due
primarily to the increased personnel expense necessary to support a higher rate
of growth and acquisition activity. However, the increase in general and
administrative expenses as a percentage of net revenues was less than one
percentage point as the expenses were spread over a larger volume of revenue.

Interest expense for the three months ended March 31, 1998 increased
$953,000 over the first three months of 1997 principally due to increased
borrowings for acquisitions. In September 1997, the Company entered into a new
credit facility (the "New Credit Facility") for an increased line of credit.
The New Credit Facility reflects substantially improved terms and reduced
interest rates compared to the previous arrangements.

Preferred stock dividends of $150,000 were subtracted from the $2.6 million
of net income in computing the net income available to common stockholders of
$2.5 million for the three months ended March 31, 1998. The reduction in
preferred stock dividends from 1997 to 1998 is due to conversions of the
preferred stock to common stock.

For the three months ended March 31, 1998, the Company provided for income
taxes on income before income taxes at a combined state and federal rate of 45%
compared with 38.5% for the same period in 1997. The effective tax rate for the
1997 quarter included a 4.5% tax benefit for the utilization of prior year net
operating losses.

YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31, 1996

FUNERAL HOME SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral home
operations during the years ended December 31, 1996 and 1997:

YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ------------------
1996 1997 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations.......... $ 25,042 $ 24,627 $ (415) (1.7)%
Acquired operations.......... 12,403 40,261 27,858 *
--------- --------- -------
Total net revenues...... $ 37,445 $ 64,888 $27,443 73.3%
========= ========= =======
Gross profit:
Existing operations.......... $ 4,396 $ 5,675 $ 1,279 29.1%
Acquired operations.......... 2,408 10,809 8,401 *
--------- --------- -------
Total gross profit...... $ 6,804 $ 16,484 $ 9,680 142.3%
========= ========= =======

------------

* Not meaningful.

Due to the rapid growth of the Company, existing operations represented
only 38% of the total funeral revenues and only 34% of the total funeral gross
profit for the year ended December 31, 1997. Total funeral net revenues for the
year ended December 31, 1997 increased $27.4 million or 73.3% over 1996. The
higher net revenues reflect an increase of $27.9 million in net revenues from
acquired operations and a decrease in net revenues of $415,000 or 1.7% from
existing operations. The decrease in revenues for the existing operations
primarily resulted from fewer funeral services being performed, which was
partially offset by a 2.6% increase in the average revenue per funeral service.
Fewer services were performed in 1997 primarily due to lower than usual seasonal
death rates in certain of the Company's markets, especially in the East North
Central region of the country where the Company has a large number of existing
operations.

Total funeral gross profit for the year ended December 31, 1997 increased
$9.7 million or 142.3% over 1996. The higher total gross profit reflected an
increase of $8.4 million from acquired operations and an increase of $1.3
million or 29.1% from existing operations. Gross profit for existing operations
increased due to the efficiencies gained by consolidation, cost savings,
improved collections experience and the

424B4 20th Page of 152 TOC 1st Previous Next ↓Bottom Just 20th
increasing effectiveness of the Company's merchandising strategy, which were
partially offset by lower revenues. Total gross profit increased from 18.2% for
1996 to 25.4% for 1997 due to these factors.

CEMETERY SEGMENT. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations for the years ended December 31, 1996 and 1997.

YEAR ENDED
DECEMBER 31, CHANGE
-------------------- -----------------
1996 1997 AMOUNT PERCENT
--------- --------- ------ -------
(DOLLARS IN THOUSANDS)
Total net revenues................... $ 2,903 $ 12,533 $9,630 331.7%
========= ========= ======
Total gross profit................... $ 362 $ 2,899 $2,537 700.8%
========= ========= ======

Due to the rapid growth of the Company, existing operations represented
approximately 15% of cemetery revenues and approximately 9% of cemetery gross
profit for the years ended December 31, 1997. As a result, the Company does not
believe it is meaningful to present the results for existing and acquired
operations separately.

Total cemetery net revenues for the years ended December 31, 1997 increased
$9.6 million or 331.7% over 1996 and total cemetery gross profit increased $2.5
million or 700.8% over 1996. Total gross margin increased from 12.5% for the
year ended December 31, 1996 to 23.1% for the year ended December 31, 1997.
These increases were due primarily to the Company's acquisition of ten
cemeteries during 1997 and increased preneed marketing efforts.

As a result of the acceleration of the Company's acquisition program
beginning in 1996, the profit contribution from acquired properties exceeded
that of existing operations even though most were not owned for the entire year.
The acquisition and integration of these new properties received the majority of
the corporate operations group's management focus during the year. During the
fourth quarter of 1996, significant additional management resources were added
to this group to provide assistance in increasing revenue and profit margins
from existing ongoing operations and to more rapidly achieve targeted margins
for acquired businesses.

General and administrative expenses for the year ended December 31, 1997
increased $2.8 million or 113.3% over 1996 due primarily to the increased
personnel expense necessary to support a higher rate of growth and acquisition
activity. However, the increase in general and administrative expenses as a
percentage of net revenues was less than one percentage point as the expenses
were spread over a larger volume of revenue.

Interest expense for the year ended December 31, 1997 increased $1.5
million over 1996 principally due to increased borrowings for acquisitions. In
August 1996, the Company utilized the net proceeds from its initial public
offering (the "IPO") and borrowings under a credit facility to repay the
majority of its outstanding debts. In September 1997, the Company entered into
the New Credit Facility for an increased line of credit. In connection with
repayments of debt in both years, the Company recognized an extraordinary loss
of approximately $498,000 and $195,000, net of income tax benefits of
approximately $332,000 and $159,000, for the write-off of the deferred loan
costs associated with the early retirement of debts, for the years ended
December 31, 1996 and 1997, respectively. The New Credit Facility reflects
substantially improved terms and reduced interest rates compared to the previous
arrangements.

During 1997, the Company issued approximately $20 million of redeemable
preferred stock to fund a portion of its acquisition program. Dividends on this
preferred stock are 4% per annum. Preferred dividends of $890,000 were
subtracted from the $4.5 million of net income before extraordinary item in
computing earnings attributable to common stockholders resulting in a net income
before extraordinary item of $3.6 million for purposes of computing basic and
diluted earnings per common share.

For 1997, the Company provided for income taxes on income before income
taxes and extraordinary item at a combined state and federal tax rate of 45.3%.
The provision for income taxes for 1997 includes a one-time charge in the amount
of $390,000 to revalue the historical deferred tax liability accounts because
the Company's taxable income has grown to the level at which the federal
corporate tax rate increases from 34% to 35%. Amortization of names and
reputations related to stock acquisitions, which is nondeductible, is

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the primary cause of the Company's effective rate exceeding 34%. Prior to 1997,
the Company experienced net operating losses and the tax benefits associated
with these net operating loss carryforwards were reserved. The Company continues
to analyze the benefits associated with these losses and adjusts the valuation
allowance as appropriate.

YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31, 1995

The following table sets forth certain information regarding the net
revenues and gross profit of the Company from its operations during the years
ended December 31, 1995 and 1996:

YEAR ENDED
DECEMBER 31, CHANGE
-------------------- ------------------
1995 1996 AMOUNT PERCENT
--------- --------- ------- -------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations........... $ 21,482 $ 20,921 $ (561) (2.6%)
Acquired operations........... 2,755 19,427 16,672 *
--------- --------- -------
Total net revenues....... $ 24,237 $ 40,348 $16,111 66.5%
========= ========= =======
Gross profit:
Existing operations........... $ 3,451 $ 3,481 $ 30 0.9%
Acquired operations........... 539 3,685 3,146 *
--------- --------- -------
Total gross profit....... $ 3,990 $ 7,166 $ 3,176 79.6%
========= ========= =======

------------

* Not meaningful.

Total net revenues for the year ended December 31, 1996 increased $16.1
million or 66.5% over 1995. The higher net revenues reflect an increase of $16.7
million in net revenues from acquired operations and a decrease in net revenues
of $561,000 or 2.6% from existing operations. The decrease in net revenues for
the existing operations primarily resulted from fewer funeral services being
performed, which was partially offset by a 3.9% increase in the average revenue
per funeral service. Fewer services were performed in 1996 due to the
divestiture of three funeral homes and a longer than normal seasonal decline in
the number of deaths in certain of the Company's markets. This seasonal decline
in the number of services ended in mid-November. At December 31, 1996, the
Company operated 10 cemeteries. The net revenues and gross profit of cemeteries
represented less than eight percent of the Company's total operations and
accordingly are not shown separately.

Total gross profit for the year ended December 31, 1996 increased $3.2
million or 79.6% over 1995. The higher total gross profit reflected an increase
of $3.1 million from acquired operations and an increase of $30,000 or 0.9% from
existing operations. Gross profit for existing operations increased due to the
efficiencies gained by consolidation and the increasing effectiveness of the
Company's merchandising strategy, which was partially offset by lower revenues.
Total gross margin increased from 16.5% for 1995 to 17.8% for 1996 due to these
factors. As a result of the acceleration of the Company's acquisition program in
1996, the profit contribution from acquired properties exceeded that of existing
operations even though most were not owned for the entire year. The acquisition
and integration of these new properties received the majority of the corporate
operations group's management focus during the year. During the fourth quarter,
significant additional management resources were added to this group to provide
assistance in increasing revenue and profit margins from existing ongoing
operations and to more rapidly achieve targeted margins for acquired businesses.

General and administrative expenses for the year ended December 31, 1996
increased $368,000 or 17.5% over 1995 due primarily to the increased personnel
expense necessary to support a higher rate of growth and acquisition activity.
However, general and administrative expenses as a percentage of net revenues
decreased from 8.7% for 1995 to 6.1% for 1996, reflecting economies of scale
realized by the Company as the expenses were spread over a larger operations
revenue base.

Interest expense for the year ended December 31, 1996 increased $663,000
over 1995 principally due to increased borrowings for acquisitions. In August
1996, the Company utilized the net proceeds from the

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IPO and borrowings under the Former Credit Facility (as defined herein) to repay
the majority of its outstanding debts. In connection with repayment of debt, the
Company recognized an extraordinary charge of approximately $498,000, net of
income tax benefit of approximately $332,000, to reflect the write-off of the
deferred loan costs associated with the early retirement of debt. The Former
Credit Facility reflected substantially improved terms and reduced interest
costs compared to the previous arrangements.

During 1996, the Company issued approximately $18 million of redeemable
preferred stock to fund a portion of its acquisition program. Dividends on the
majority of this preferred stock range from 6-7% per annum. Preferred dividends
of $622,000 were subtracted from the $207,000 of income before extraordinary
item in computing earnings attributable to common stockholders resulting in a
net loss of $415,000 for purposes of computing primary earnings per common
share. Approximately $16 million of redeemable preferred stock converted into
Common Stock subsequent to December 31, 1996.

For 1996, the Company provided for income taxes on net income before income
taxes and extraordinary item at a combined state and federal tax rate of 40%.
Prior to 1996, the Company experienced net operating losses. The tax benefits
associated with these net operating loss carryforwards were reserved. The
Company continues to analyze the benefits associated with these losses and will
adjust the recorded valuation allowance as appropriate in future periods.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $0.5 million at March 31, 1998,
representing a decrease of $5.6 million from December 31, 1997. For the three
months ended March 31, 1998, cash provided by operations was $3.6 million as
compared to $2.8 million for the three months ended March 31, 1997. The increase
in net cash provided by operating activities was principally due to the increase
in income from operations, which was partially offset by increases in accounts
receivable and other deferred charges. Cash used in investing activities was
$10.8 million for the three months ended March 31, 1998 compared to $33.1
million for the first three months of 1997, due primarily to the decrease in
acquisitions. In the first three months of 1998, cash flow provided by financing
activities amounted to approximately $1.6 million, primarily due to proceeds
from long-term debt which were used to fund acquisitions.

Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. As of December 31, 1997,
the Company had 1,682,500 shares of Series D Preferred Stock and 12,278,285
shares of Series F Preferred Stock issued and outstanding. The Series D
Preferred Stock is convertible into Class B Common Stock, and the Series F
Preferred Stock is convertible into Class A Common Stock. The holders of Series
D Preferred Stock are entitled to receive cash dividends at an annual rate of
$.06-$.07 per share depending on the date such shares were issued. Commencing on
the second anniversary of the completion of the IPO (August 8, 1998), the
Company may, at its option, redeem all or any portion of the shares of Series D
Preferred Stock then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends. Such redemption is subject to
the right of each holder of Series D Preferred Stock to convert such holders
shares into shares of Class B Common Stock. On December 31, 2001, the Company
must redeem all shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends.

The holders of the Series F Preferred Stock are entitled to receive cash
dividends at the annual rate currently of $.042 per share, with the annual rate
increasing by 5% per year commencing January 1, 1999 until January 1, 2001, at
which time the annual rate becomes fixed at $.0486 per share. On December 31,
2007, the Company must redeem all shares of Series F Preferred Stock, as
discussed above, then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends. The Company does not have the
option to redeem any Series F Preferred Stock prior to December 31, 2007. The
Series F Preferred Stock is convertible at each holders option into an aggregate
of 722,250 shares of Class A Common Stock based on the exercise price in effect
at March 31, 1998.

In conjunction with the closing of the IPO, the Company entered into a
credit facility (the "Former Credit Facility") which provided for a $75
million revolving line of credit with both LIBOR and base rate interest options.
In August 1996, the Company repaid all of its outstanding indebtedness with the
proceeds from the issuance of its Class A Common Stock in connection with the
IPO (see Note 7) and utilization of the Former Credit Facility. The Former
Credit Facility was unsecured with a term of three years and

424B4 23rd Page of 152 TOC 1st Previous Next ↓Bottom Just 23rd
contained customary restrictive covenants, including a restriction on the
payment of dividends on common stock, and required the Company to maintain
certain financial ratios. In September 1997, the Company entered into the New
Credit Facility for a $150 million revolving line of credit. The New Credit
Facility has a five-year term, is unsecured and contains customary restrictive
covenants, including a restriction on the payment of dividends on common stock
and requires the Company to maintain certain financial ratios. Interest under
the New Credit Facility is provided at both LIBOR and prime rate options. In
connection with repayment of debt in August 1996 and the retirement of debt
issued with the New Credit Facility in September 1997, the Company recognized an
extraordinary loss of approximately $498,000 and $195,000, net of income tax
benefit of approximately $332,000 and $159,000 for the write-off of the deferred
loan costs associated with the early retirement of debt for the years ended
December 31, 1996 and 1997, respectively. At April 30, 1998 approximately $121.0
million was outstanding under the New Credit Facility.

The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. At the beginning of 1998, the Company
expected to spend $85 million on acquisitions in 1998. Due to increased
acquisition activity in 1998, as of April 30, 1998, the Company has spent $13
million, has signed non-binding letters of intent for acquisitions totaling $67
million and has increased its estimate of acquisition spending for 1998 to $120
million. In addition, the Company currently expects to incur less than $10
million of capital expenditures during 1998, primarily for upgrading funeral
home facilities. The Company believes that cash flow from operations, borrowings
under credit facilities and issuances of additional debt and equity securities
should be sufficient to fund acquisitions and its anticipated capital
expenditures and other operating requirements for the remainder of 1998.

In March 1997, the Company filed a shelf registration statement relating to
2,000,000 shares of Class A Common Stock to be issued to fund acquisitions. As
of March 31, 1998, approximately 1,500,000 shares remained available for
issuance under this shelf registration. Because future cash flows and the
availability of financing are subject to a number of variables, such as the
number and size of acquisitions made by the Company, there can be no assurance
that the Company's capital resources will be sufficient to fund its capital
needs. Additional debt and equity financing may be required to maintain the
Company's acquisition program. The availability and terms of these capital
sources will depend on prevailing market conditions and interest rates and the
then existing financial condition of the Company.

SEASONALITY

The Company's business can be affected by seasonal fluctuations in the
death rate. Generally, death rates are higher during the winter months. In
addition, the quarterly results of the Company may fluctuate depending on the
magnitude and timing of acquisitions.

INFLATION

Inflation has not had a significant impact on the results of operations of
the Company during the last three years.

YEAR 2000

The Company's information systems management group regularly reviews the
management and accounting software packages for internal accounting and
information requirements to meet with the continued growth of the Company. In
addition, the Company's staff has comprehensively considered existing systems
and equipment that need to be changed as a result of Year 2000 issues. The
Company's staff has determined that some computer software will require
upgrading. Based on current estimates, the costs related to these upgrades are
immaterial. The Company is in contact with its vendors and customers, and no
major problem has been discovered to date.

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BUSINESS

THE COMPANY

DEATH CARE INDUSTRY

Death care companies provide products and services to families in three
principal areas: (i) ceremony and tribute, generally in the form of a funeral or
memorial service, (ii) disposition of remains, either through burial or
cremation and (iii) memorialization, generally through monuments, markers or
inscriptions. The death care industry in the United States is characterized by
the following fundamental attributes:

HIGHLY FRAGMENTED OWNERSHIP. A significant majority of death care
operators consist of small, family-owned businesses that control one or several
funeral homes or cemeteries in a single community. There are an estimated 22,000
funeral homes and 9,600 commercial (as opposed to religious, family, fraternal,
military or municipal) cemeteries in the United States, and less than 25% of the
1997 United States death care industry revenues are represented by the five
publicly traded death care companies.

BARRIERS TO ENTRY. Death care businesses have traditionally been
transferred to successive generations within a family and in most cases have
developed a local heritage and tradition that act as a formidable barrier for
those wishing to enter an existing market. Heritage and tradition afford an
established funeral home or cemetery a local franchise and provide the
opportunity for repeat business. Other difficulties faced by entities desiring
to enter a market include local zoning restrictions, substantial capital
requirements, increasing regulatory burdens and scarcity of cemetery land in
certain urban areas. In addition, an established firm's backlog of preneed,
prefunded funerals or presold cemetery and mausoleum spaces also makes it
difficult for new entrants to gain entry into the marketplace.

STABILITY. The death rates in the United States are fairly predictable,
thereby affording stability to the death care industry. The number of deaths in
the United States has increased at a compound rate of approximately 1% per year
since 1980 and is expected to continue to increase at that rate through 2010.
Because the industry is relatively stable, non-cyclical and fairly predictable,
business failures are uncommon. As a result, ownership of independent funeral
home and cemetery businesses generally have not

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experienced significant turnover, and the aggregate number of funeral homes and
cemeteries in the United States has remained relatively constant.

INCREASED CONSOLIDATION. In the past several years, the industry has
experienced a trend toward consolidation of independent death care operations by
large, primarily publicly owned death care providers that can benefit from
economies of scale, improved managerial control, more effective strategic
planning and greater financial resources. This trend appears to result
principally from increased regulation, a desire on the part of independent,
family operated funeral businesses to address family succession and estate
planning issues, a desire for liquidity, and the increasing competitive threat
posed by the large death care providers. The active acquisition market for
funeral homes and cemeteries provides a source of potential liquidity that was
not as readily available to individual owners in the past. The consolidation
trend has accelerated in recent years as several large death care companies have
expanded their operations significantly through acquisitions.

CLUSTERED OR COMBINED OPERATIONS. The death care industry has also
witnessed a trend by companies to cluster their funeral home and cemetery
operations. Clusters refer to funeral homes and/or cemeteries which are grouped
together in a geographical region. Clusters provide a company with the ability
to generate cost savings through the sharing of personnel, vehicles and other
resources. Firms are also increasingly combining funeral home and cemetery
operations at a single site to allow cross-marketing opportunities and cost
reductions through shared resources. The ability to offer the full range of
products and services at one location or to cluster funeral home and cemetery
operations and cross-market the full range of death care services has proven to
be a competitive advantage which tends to increase the market share and
profitability of both the funeral home and cemetery.

PRENEED MARKETING. In addition to sales at the time of death or on an "at
need" basis, an increasing number of death care products and services are being
sold prior to the time of death or on a "preneed" basis by death care
providers who have developed sophisticated marketing organizations to actively
promote such products and services. At the same time, consumers are becoming
more aware of the benefits of advanced planning, such as the financial assurance
and peace of mind achieved by establishing in advance a fixed price and type of
service, and the elimination of the emotional strain of making death care plans
at the time of need. Effective marketing of preneed products and services
assures a backlog of future business.

CREMATION. In recent years, there has been steady, gradual growth in the
number of families in the United States that have chosen cremation as an
alternative to traditional methods of burial. According to industry studies,
cremations represented approximately 21% of the United States burial market in
1996, as compared to approximately 10% in 1980. Cremation historically has been
marketed as a less costly alternative to interment. However, cremation is
increasingly marketed as part of a complete death care package that includes
traditional funeral services and memorialization.

BUSINESS STRATEGY

OPERATING STRATEGY

The Company's operating strategy is focused on increasing the revenues and
profitability of each operating location through a combination of personalized
service and operating efficiencies. Key elements of the Company's operating
strategy include the following:

424B4 26th Page of 152 TOC 1st Previous Next ↓Bottom Just 26th
PERSONALIZED SERVICE. The Company believes that providing personalized
service results in increased customer satisfaction, increased market share, more
motivated employees and consistently higher levels of profitability. The Company
has placed a great deal of emphasis on communicating to its employees the
linkage between personalized service, customer satisfaction, market share
increases and profitability throughout the organization.

EMPLOYEE TRAINING. Beginning in late 1997, the Company made a significant
commitment of financial and human resources to a Company-wide training effort.
The training is designed to improve the management of and communication between
employees and to develop personalized service that will be of value to clients.
In training employees to deliver personalized service, the Company emphasizes
employee listening and communication skills towards the goal of uniquely
memorializing the life of an individual. Management believes that this long-term
investment in the Company's employees will, over time, lead to increased market
share, resulting in meaningfully higher profitability.

DECENTRALIZED MANAGEMENT STRUCTURE. The Company's decentralized operating
style provides a high level of autonomy and flexibility to local management.
Local operators have significant responsibility for daily operating decisions
and are accountable for operating results. Individual funeral home and cemetery
service and financial goals are jointly developed with corporate management as
part of a rigorous, Company-wide planning process. The corporate office utilizes
an integrated computer system linked to all of the Company's funeral homes to
monitor and access critical operating and financial data in order to analyze the
performance of individual locations on a timely basis and institute corrective
action if necessary.

INCENTIVE COMPENSATION. The Company has established a compensation
structure that is designed to create and maintain an ownership mentality to
align compensation with overall Company performance objectives. Local management
is awarded meaningful cash bonuses and stock options for achieving specified
service, operational and financial performance objectives. The Company has also
implemented a stock option program which awards options to full-time employees
based upon the performance of their local businesses during a two-year period.
As a result, all management and full-time employees have the opportunity to
increase their personal net worth through strong local and corporate
performance.

COST SAVINGS AND OPERATING EFFICIENCIES. The larger size of the Company,
as compared to local operators, allows favorable pricing and terms to be
achieved from vendors through volume discounts on significant expenditures, such
as caskets, vaults, memorials and vehicles. In addition, while operational
functions and management responsibility are retained at the local level,
centralizing certain financial, accounting, legal, administrative and employee
benefit functions allows for more efficient and cost-effective operations.

ACQUISITION STRATEGY

424B4 27th Page of 152 TOC 1st Previous Next ↓Bottom Just 27th
that encourages individual input and personal growth while providing the
challenge of helping the Company achieve its strategic objectives within their
particular regions. These opportunities provided by the Company have resulted in
certain owners' desire to receive equity securities of the Company as part of
their acquisition consideration.

Consideration for acquisitions consists of cash, deferred purchase price,
and preferred and common equity or a combination thereof. The Company develops
pro forma financial statements for acquisition targets reflecting estimates of
revenue and costs under the Company's ownership and then utilizes such
information to determine a purchase price which the Company believes is
consistent with its investment objectives. In many cases, the Company has been
successful in acquiring operations where it has not been the high bidder because
of the Company's reputation, operating strategy and corporate culture. The
Company typically enters into management, consulting and non-competition
agreements with former owners and key executive personnel of acquired
businesses. In nearly all cases, acquired funeral homes continue operations
under the same trade names as those of the prior owners.

The Company has successfully executed this acquisition strategy since its
inception, as demonstrated in the table set forth below.

ACQUISITION FUNERAL
PERIOD CONSIDERATION(1) HOMES(2) CEMETERIES(3)
---------------------------------- ---------------- -------- -------------
(DOLLARS IN THOUSANDS)
1992.............................. $ 11,832 14 2
1993.............................. 13,843 11 1
1994.............................. 9,153 9 1
1995.............................. 12,191 8 0
1996.............................. 68,181 38 7
1997.............................. 118,260 44 10
1998 (through April 30, 1998)(4).. 79,629 24 4
--
---------------- ---
$313,089 148 25
================ === ==

------------

(1) From January 1, 1996 through April 30, 1998, 27.2% of the Company's
aggregate acquisition consideration consisted of common or convertible
preferred stock of the Company.

(2) The Company subsequently divested five of these funeral homes.

(3) The Company subsequently divested one of these cemeteries.

(4) Includes 18 funeral homes and three cemeteries for which the Company has
non-binding letters of intent to acquire for aggregate consideration of
$66.6 million.

OPERATIONS

The Company's funeral home and cemetery operations are managed by
individuals with extensive death care industry experience. Although certain
financial management and policy matters are centralized, local funeral home and
cemetery managers have active involvement in determining the manner in which
their services and products are marketed and delivered and their funeral homes
are managed. The Company believes that this strategy permits each local firm to
maintain its unique style of service and to capitalize on its reputation and
heritage while the Company maintains centralized supervisory controls and
provides specialized services at the corporate level.

FUNERAL HOME OPERATIONS. As of March 31, 1998, the Company operated 123
funeral homes in 21 states. Funeral home revenues accounted for approximately
93% and 84% of the Company's net revenues for the years ended December 31, 1996
and 1997, respectively, and 83% of net revenues in the first quarter of 1998.

The Company's funeral homes offer a complete range of services to meet a
family's funeral needs, including consultation, the removal and preparation of
remains, the sale of caskets and related funeral merchandise, the use of funeral
home facilities for visitation and worship, and transportation services. Most

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of the Company's funeral homes have a non-denominational chapel on the premises,
which permits family visitation and religious services to take place at one
location and thereby reduces transportation costs to the Company and
inconvenience to the family.

CEMETERY OPERATIONS. As of March 31, 1998, the Company operated 21
cemeteries in 11 states. Cemetery revenues accounted for approximately 7% and
16% of the Company's net revenues for the years ended December 31, 1996 and
1997, respectively, and 17% of net revenues in the first quarter of 1998.

The Company's cemetery products and services include interment services,
the rights to interment in cemetery sites (including grave sites, mausoleum
crypts and niches) and related cemetery merchandise such as memorials and
vaults. Cemetery operations generate revenues through sales of interment rights
and memorials, installation fees, fees for interment and cremation services,
finance charges from installment sales contracts and investment income from
preneed cemetery merchandise and perpetual care trusts.

PRENEED PROGRAMS. In addition to sales of funeral merchandise and
services, cemetery interment rights, cemetery merchandise and services at the
time of need, the Company also markets funeral and cemetery services and
products on a preneed basis. Preneed funeral or cemetery contracts enable
families to establish in advance the type of service to be performed, the
products to be used and the cost of such products and services in accordance
with prices prevailing at the time the contract is signed rather than when the
products and services are delivered. Preneed contracts permit families to
eliminate the emotional strain of making death care plans at the time of need
and enable the Company to establish a portion of its future market share.

Preneed funeral contracts are usually paid on an installment basis. The
performance of preneed funeral contracts is usually secured by placing the funds
collected in trust for the benefit of the customer or by the purchase of a life
insurance policy, the proceeds of which will pay for such services at the time
of need. Insurance policies intended to fund preneed funeral contracts cover the
original contract price and generally include built-in escalation clauses
designed to offset future inflationary cost increases. Proceeds from the sale of
preneed funeral contracts are not recognized as revenues until the time the
funeral service is performed.

In addition to preneed funeral contracts, the Company also offers
"preplanned" funeral arrangements whereby a client determines in advance
substantially all of the details of a funeral service without any financial
commitment or other obligation on the part of the client, until the actual time
of need. Preplanned funeral arrangements permit families to avoid the emotional
strain of making death care plans at the time of need and enable a funeral home
to establish relationships with clients that frequently lead to at-need sales.

Preneed cemetery sales are usually financed by the Company through
installment sale contracts, generally with terms of five years. Preneed sales of
cemetery interment rights and other related services and merchandise are
recorded as revenues when the contract is signed, with concurrent recognition of
related costs. The Company always receives an initial payment at the time the
contract is signed. Allowances for customer cancellations and refunds are
accrued at the date of sale based upon historical experience.

Beginning in the fourth quarter of 1996, the Company committed to building
its cemetery operations infrastructure and began to add experienced preneed
marketing professionals at the national and regional levels. This investment in
additional preneed marketing management allowed the Company to increase preneed
sales at existing cemetery properties and positioned the Company to more
effectively integrate future cemetery acquisitions. As of December 31, 1997, the
Company employed a staff of approximately 185 advanced planning representatives
for the sale of preneed products and services and has added 37 additional
advanced planning representatives during the first quarter of 1998.

The Company sold 3,760 and 4,020 preneed funeral contracts in the years
ended December 31, 1996 and 1997, respectively and 1,568 contracts in the first
three months of 1998. At March 31, 1998, the Company had a backlog of 36,425
preneed funeral contracts to be delivered in the future. Preneed cemetery sales
as a percentage of the Company's net cemetery revenues increased from 65% for
the year ended December 31, 1996 to 73% for the first three months of 1998.

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PROPERTIES

At March 31, 1998, the Company operated 123 funeral homes and 21 cemeteries
in 21 states. The Company owns the real estate and buildings of 73% of its
funeral homes and all of its cemeteries and leases facilities in connection with
27% of its funeral homes. The 21 cemeteries operated by the Company cover a
total of approximately 725 acres. The Company's inventory of unsold developed
lots totaled approximately 44,000 and 80,000 at December 31, 1996 and 1997,
respectively. In addition, approximately 359 acres, or approximately 50% of the
total acreage, is available for future development. The Company does not
anticipate any shortage of available space in any of its current cemeteries for
the foreseeable future.

The Company's corporate headquarters occupy approximately 19,700 square
feet of leased office space in Houston, Texas.

At December 31, 1997, the Company operated 465 vehicles, of which 388 were
owned and 77 were leased.

The specialized nature of the Company's business requires that its
facilities be well-maintained; management believes that this standard is met.

COMPETITION

The acquisition environment in the death care industry is highly
competitive. The four other major publicly held death care companies, Service
Corporation International ("SCI"), The Loewen Group Inc., Stewart Enterprises,
Inc. and Equity Corporation International, are larger than the Company and have
greater financial and other resources than the Company. In addition, a number of
smaller companies are actively acquiring funeral homes and cemeteries. Prices
for funeral homes and cemeteries have increased in recent years, and, in some
cases, competitors have paid acquisition prices substantially in excess of the
prices offered by the Company. Accordingly, no assurance can be given that the
Company will be successful in expanding its operations through acquisitions or
that funeral homes and cemeteries will be available at reasonable prices or on
reasonable terms.

The Company's funeral home and cemetery operations generally face
competition in the markets that they serve. Market share for funeral homes and
cemeteries is largely a function of reputation and heritage, although
competitive pricing, professional service and attractive, well-maintained and
conveniently located facilities are also important. The sale of preneed funeral
services and cemetery property has increasingly been used by many companies as
an important marketing tool to build market share. Due to the importance of
reputation and heritage, market share increases are usually gained over a long
period of time.

TRUST FUNDS

GENERAL. The Company has established a variety of trusts in connection
with its funeral home and cemetery operations as required under applicable state
law. Such trusts include (i) preneed funeral trusts; (ii) preneed cemetery
merchandise and service trusts; and (iii) perpetual care trusts. These trusts
are typically administered by independent financial institutions selected by the
Company. The Company also uses independent professional managers to advise the
Company on investment matters.

PRENEED FUNERAL TRUSTS. Preneed funeral sales are facilitated by deposits
to a trust or purchase of a third party insurance product. All preneed funeral
sales are deferred until the service is performed. The trust income earned and
any increase in insurance benefits are also deferred until the service is
performed in order to offset possible inflation in cost when providing the
service in the future. Although direct marketing costs and commissions incurred
for the sale of preneed funeral contracts are a current use of cash, such costs
are also deferred and amortized over the expected timing of the performance of
the services covered by the preneed funeral contracts. Since the Company does
not have access to the trust fund principal or earnings, the related assets and
liabilities are not reflected on the Company's balance sheet. In most states,
the Company is not permitted to withdraw principal or investment income from
such trusts until the funeral service is performed. Some states, however, allow
for the retention of a percentage (generally 10%) of the receipts to offset any
administrative and selling expenses, which the Company defers until the service
is provided. The aggregate balance of the Company's preneed funeral contracts
held in trust and insurance

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contracts was approximately $106.2 million and $113.6 million as of December 31,
1997 and March 31, 1998, respectively.

PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. The Company is generally
required under applicable state laws to deposit a specified amount (which varies
from state to state, generally 50% to 100% of selling cost) into a merchandise
and service trust fund for cemetery merchandise and services sold on a preneed
basis. The related trust fund income is recognized in current revenues as trust
earnings. These earnings are offset by any current period inflation costs
accrued related to the merchandise that has not yet been purchased. Liabilities
for undelivered cemetery merchandise and services, including accruals for
inflation increases, are reflected in the balance sheet net of the merchandise
and service trust balance. The Company is permitted to withdraw the trust
principal and the accrued income when the merchandise is purchased or service is
provided by the Company or when the contract is canceled. The merchandise and
service trust fund balances, in the aggregate, were approximately $9.6 million
and $10.2 million as of December 31, 1997 and March 31, 1998, respectively.

PERPETUAL CARE TRUSTS. In certain states, regulations require a portion,
generally 10%, of the sale amount of cemetery property and memorials to be
placed in trust. These perpetual care trusts provide the funds necessary to
maintain cemetery property and memorials in perpetuity. The related trust fund
income is recognized in current revenues as trust earnings. While the Company is
entitled to withdraw the income from its perpetual care trust to provide for the
maintenance of the cemetery and memorials, they are not entitled to withdraw any
of the principal balance of the trust fund, and therefore, none of the principal
balances are reflected in the Company's balance sheet. The Company's perpetual
care trust balances were approximately $8.4 million and $9.0 million as of
December 31, 1997 and March 31, 1998, respectively.

For additional information with respect to the Company's trusts, see Note 1
of the Consolidated Financial Statements located elsewhere in this Prospectus.

REGULATION

The Company's funeral home operations are subject to substantial regulation
by the Federal Trade Commission (the "FTC"). Certain regulations contain
minimum standards for funeral industry practices, require extensive price and
other affirmative disclosures to the customer at the time of sale and impose
mandatory itemization requirements for the sale of funeral products and
services.

The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the United States Environmental Protection Agency
community right-to-know regulations under Title III of the federal Superfund
Amendment and Reauthorization Act and similar state statutes require the Company
to organize information about hazardous materials used or produced in its
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens. The Company is also subject
to the federal Americans with Disabilities Act and similar laws which, among
other things, may require that the Company modify its facilities to comply with
minimum accessibility requirements for disabled persons.

The Company's operations, including its preneed sales and trust funds, are
also subject to extensive regulation, supervision and licensing under numerous
other federal, state and local laws and regulations. See " -- Trust Funds."

The Company believes that it is in substantial compliance with all such
laws and regulations. Federal and state legislatures and regulatory agencies
frequently propose new laws, rules and regulations some of which, if enacted,
could have a material adverse effect on the Company's operations and on the
death care industry in general. The Company cannot predict the outcome of any
proposed legislation or regulations or the effect that any such legislation or
regulations might have on the Company.

LEGAL MATTERS

The Company and certain of its subsidiaries are parties to a number of
legal proceedings that arise from time to time in the ordinary course of
business. While the outcome of these proceedings cannot be

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predicted with certainty, management does not expect these matters to have a
material adverse effect on the Company.

The Company carries insurance with coverages and coverage limits that it
believes to be customary in the funeral home and cemetery industries. Although
there can be no assurance that such insurance will be sufficient to protect the
Company against all contingencies, management believes that its insurance
protection is reasonable in view of the nature and scope of the Company's
operations.

EMPLOYEES

As of March 31, 1998, the Company and its subsidiaries employed 652
full-time employees, 586 part-time employees and 223 advanced planning
representatives (most of whom are part-time employees). All of the Company's
funeral directors and embalmers possess licenses required by applicable
regulatory agencies. Management believes that its relationship with its
employees is good. No employees of the Company or its subsidiaries are members
of a collective bargaining unit.

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MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company currently has a Board of Directors composed of nine members. In
accordance with the Company's Charter, the members of the Board of Directors are
divided into three classes, designated Class I, Class II and Class III,
respectively, and are elected for a term of office expiring at the third
succeeding annual stockholders' meeting following their election to office and
until their successors are duly elected and qualified. The Charter also provides
that such classes shall be as nearly equal in number as possible. The terms of
office of the Class I, Class II and Class III directors expire at the annual
meeting of stockholders in 2000, 2001 and 1999, respectively. The officers of
the Company are elected by and serve until their successors are elected by the
Board of Directors.

The following table sets forth the names, ages and positions of the current
directors and executive officers of the Company and, in the case of the
directors, the expiration of their respective terms.

[Enlarge/Download Table]

EXPIRATION OF
NAME AGE POSITION TERM AS DIRECTOR
------------------------------------- ---- ----------------------------------------- -----------------

Melvin C. Payne(1)................... 55 Chairman of the Board, Chief Executive 2000
Officer and Director
Mark W. Duffey(1).................... 41 President and Director 2001
Thomas C. Livengood.................. 42 Executive Vice President, Chief Financial --
Officer and Secretary
Russell W. Allen..................... 51 Executive Vice President of Operations --
Gary O'Sullivan...................... 45 Senior Vice President -- Marketing --
Reid A. Millard...................... 39 Vice President, Corporate Development --
C. Byron Snyder(1)(2)................ 49 Director 2000
Barry K. Fingerhut(1)(2)............. 52 Director 2001
Greg M. Brudnicki.................... 42 Director 2001
Ronald A. Erickson(3)................ 61 Director 1999
Robert D. Larrabee................... 63 Director 2000
Stuart W. Stedman(3)................. 40 Director 1999
Mark F. Wilson....................... 51 Director 1999

------------

(1) Member of Executive Committee.

(2) Member of Compensation Committee.

(3) Member of Audit Committee.

Set forth below is a brief description of the business experience of the
directors and executive officers of the Company.

MELVIN C. PAYNE, one of the three management founders of the Company, has
been Chairman of the Board and Chief Executive Officer of the Company since
December 1996. Prior to then, he had been the President, Chief Executive Officer
and a director of the Company since its inception in 1991. From 1991 to 1993,
Mr. Payne also served as a director and officer of Sovereign Holdings, Inc., RTO
Enterprises, Inc. and various subsidiaries of RTO Enterprises, Inc. Mr. Payne
serves on the Board of Trustees of WNL Series Trust, a mutual fund affiliated
with Western National Life Insurance Company, and the Board of Directors of
Sovereign Business Forms, Inc., a private company in the business forms
manufacturing industry.

MARK W. DUFFEY, one of the three management founders of the Company, has
been President of the Company since December 1996. Prior to then, he had been
Executive Vice President and Chief Financial Officer since the inception of the
Company in 1991 and became a director in 1995. From 1991 to 1993, Mr. Duffey
served as a director and officer of Sovereign Holdings, Inc., RTO Enterprises,
Inc. and various subsidiaries of RTO Enterprises, Inc. He serves on the Board of
Directors of Sovereign Business Forms, Inc., a private company in the business
forms manufacturing industry.

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THOMAS C. LIVENGOOD joined the Company in December 1996 as Executive Vice
President, Chief Financial Officer and Secretary. Mr. Livengood, a certified
public accountant, has responsibility for the financial and administrative
functions of the Company. Prior to joining the Company, he served as Vice
President and Chief Financial Officer of Tenneco Energy, previously the largest
division of Tenneco Inc., a Fortune 100 company, prior to the divestiture of its
diversified businesses. Prior to joining Tenneco Energy in 1988, Mr. Livengood
served in various financial management capacities with USX Corp., Texas Oil &
Gas Corp. and KPMG Peat Marwick, an international CPA firm.

RUSSELL W. ALLEN joined the Company in June 1993 as Executive Vice
President of Operations. Mr. Allen has over 32 years of operational experience
in the funeral home industry. Prior to joining the Company, he was affiliated
with Earthman Funeral Directors and Greenwood-Mount Olivet Funeral Homes and
Cemeteries in Fort Worth, Texas for one and 21 years, respectively, serving most
recently as Executive Vice President of operations with each company. Mr. Allen
recently completed a term of six years as Vice Chairman of the Texas Funeral
Service Commission and as Chairman of the Education and Legislation Committees.
He is also a member of the Texas Cemetery Association and has served on the
Legislative Committees with that organization.

GARY O'SULLIVAN joined the Company in October 1996 as Senior Vice
President -- Marketing. From March 1996 to September 1996, Mr. O'Sullivan was
the Regional Vice President of Sales (Florida) for SCI. Prior to then, Mr.
O'Sullivan was the Vice President of Sales and Marketing for Woodlawn Memorial
Park and Funeral Home from May 1993 to March 1996. He was the Director of Sales
and Marketing for Earthman Funeral Home and Cemeteries from August 1989 to May
1993.

REID A. MILLARD, one of the three management founders of the Company, has
served as the Vice President, Corporate Development of the Company since June
1996. From November 1993 until June 1996, Mr. Millard was active in various
positions with the Company in operations and corporate development. From the
Company's inception in 1991 until November 1993, Mr. Millard served as Executive
Vice President of the Company. Mr. Millard has 21 years of management experience
in the funeral service industry, including spending nine years at SCI, where he
obtained a wide range of experience in operations, marketing, merchandising,
real estate, preneed sales, general management and independent funeral home
ownership relations. He left SCI in 1990 to pursue various entrepreneurial
activities, including the ownership and operation of a funeral home in Jefferson
City, Missouri.

C. BYRON SNYDER has been a director of the Company since 1991, was Chairman
of the Board of Directors of the Company from 1991 to December 1996, and is
currently Chairman of the Executive Committee. Mr. Snyder is the President of
Sterling City Capital, LLC, a Houston-based investment company specializing in
consolidating privately owned businesses simultaneously with an initial public
offering. Mr. Snyder is the Chairman of the Board of Directors of Integrated
Electrical Services, Inc., a publicly traded national provider of electrical
contracting and maintenance services in the commercial, industrial, and
residential markets. Mr. Snyder was the owner and President of Relco
Refrigeration Company, a distributor of refrigeration equipment, which he
acquired in 1992. In February 1998, Relco Refrigeration was merged into
Hospitality Companies, Inc., which provides food equipment and heating/air
conditioning products to the hospitality industry. In connection with the
merger, Mr. Snyder became a member of the Board of Directors of Hospitality
Companies. Prior to 1992, Mr. Snyder was the owner and Chief Executive Officer
of Southwestern Graphics International, Inc., a diversified holding company
which owned Brandt & Lawson Printing Co., a Houston-based general printing
business, and Acco Waste Paper Company, an independent recycling business.
Brandt & Lawson Printing Co. was sold to Hart Graphics in 1989, and ACCO Waste
Paper Company was sold to Browning-Ferris Industries in 1991.

BARRY K. FINGERHUT has been a director of the Company since 1995. Since
1981, Mr. Fingerhut has been associated with, and now serves as President of,
GeoCapital, a registered investment adviser located in New York City which
focuses its investment advice and management on securities of small
capitalization companies. As of December 31, 1997, GeoCapital managed accounts
having a market value of approximately $2.1 billion. Mr. Fingerhut also has
co-founded several investment partnerships that invest primarily in undervalued
publicly traded companies and high growth companies engaged in the
communications,

424B4 34th Page of 152 TOC 1st Previous Next ↓Bottom Just 34th
media or entertainment industries. Mr. Fingerhut presently is a director of
Millbrook Press, Inc., a publisher of childrens non-fiction books, and UOL
Publishing, Inc., an online publisher of academic and corporate texts. He
previously served as a director of La Quinta Inns, Inc., a nationwide lodging
chain, and Lakeshore National Bank, Inc., which was acquired by First Chicago
Corp. in 1994.

GREG M. BRUDNICKI became a director of the Company in November 1997 when
Forest Lawn/Evergreen Management Corp. ("Forest Lawn") merged with a
subsidiary of the Company. Forest Lawn and its affiliate owned and operated
three funeral homes and three cemeteries in Panama City and Fort Walton Beach,
Florida and Dothan, Alabama. Mr. Brudnicki served as the President and Chief
Executive Officer of Forest Lawn from its inception in 1984 until the merger,
when he became the Co-Manager of the Forest Lawn cemeteries and funeral homes
operated by the Company. In connection with the merger, the Company agreed to
increase the Board of Directors by one member and appoint Mr. Brudnicki to fill
the resulting vacancy. Mr. Brudnicki serves as a Trustee for Bay Medical Center,
a non-profit hospital in Panama City, Florida. He also serves on the Board of
Directors of Peoples 1st Community Bank which has locations in 15 Florida
cities.

RONALD A. ERICKSON has been a director of the Company since the Company
went public in August 1996. Mr. Erickson is Chief Executive Officer of Holiday
Companies, Minneapolis, Minnesota, a family business consisting primarily of
convenience stores, supermarkets, sporting goods stores and wholesale food
distribution.

ROBERT D. LARRABEE has been a director of the Company since it went public
in August 1996. Mr. Larrabee is the former owner of a group of four funeral
homes and two cemeteries in the states of Washington and Idaho that the Company
acquired in April 1996. In connection with that transaction, the Company agreed
to undertake to appoint Mr. Larrabee to the Board if the Company went public,
and Mr. Larrabee also became an employee of a subsidiary of the Company. Mr.
Larrabee also is the co-founder and co-owner of Evergreen Estates, a retirement
community in Clarkston, Washington. He is the founding President and past
director of Valley Bank in Clarkston, Washington (now part of U.S. Bank of
Idaho); founding Chairman of the Board and President of Purple Cross Insurance
Company (now part of American Memorial Life); and founder of Lewis-Clark Savings
and Loan Association (now part of Sterling Financial Corporation). He also
serves on the Board of Directors of Sterling Financial Corporation and, until
1995, served on the Board of Directors of Laurentian Capital Corporation.

STUART W. STEDMAN has been a director of the Company since it went public
in August 1996. For the past ten years, Mr. Stedman has been President of Wesley
West Interests, Inc., a management company responsible for various family
holdings, including marketable securities, oil, gas and coal properties, ranch
lands and urban real estate. Mr. Stedman also serves as a Manager of Strand
Energy, L.L.C., a private exploration and production company.

MARK F. WILSON became a director of the Company in January 1997 when CNM
merged with the Company. Mr. Wilson served as the President of CNM from 1988
until its merger with the Company in January 1997, when he became the President
of Carriage Funeral Services of California, Inc., a subsidiary of the Company.
CNM owned and operated nine Wilson & Kratzer Funeral Homes and the Rolling Hills
Memorial Park Cemetery in Alameda and Contra Costa Counties, California. In
connection with the CNM merger, the Company agreed to increase the Board of
Directors to eight members and appoint Mr. Wilson as a director. Mr. Wilson also
serves on the Board of Directors of Mechanics Bank, Richmond, California, and
Hills Newspapers, a publisher of weekly newspapers in Northern California.

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EXECUTIVE COMPENSATION

The following table sets forth information for the years ended December 31,
1997, 1996 and 1995 with respect to the Chairman of the Board and Chief
Executive Officer and each of the four other most highly compensated executive
officers of the Company whose total annual salary and bonus during 1997 exceeded
$100,000 (collectively, the "Named Executive Officers"):

[Enlarge/Download Table]

LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES
---------------------- OTHER ANNUAL UNDERLYING ALL OTHER
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS COMPENSATION(2)
---------------------------------------- ---- -------- ------- --------------- ------------ ---------------

Melvin C. Payne......................... 1997 $225,000 $ -- -- 20,000(3) $ 1,201
Chairman of the Board and 1996 194,292 -- -- 250,000 1,168
Chief Executive Officer 1995 171,576 -- -- -- 1,174
Mark W. Duffey.......................... 1997 $185,000 $ -- -- 16,000(3) $ 1,957
President 1996 162,231 -- -- 150,000 1,901
1995 145,632 -- -- -- 1,889
Russell W. Allen........................ 1997 $145,000 $ -- -- 12,000(3) $--
Executive Vice President 1996 121,634 -- -- 50,000 --
of Operations 1995 93,356 20,000 -- -- 193
Thomas C. Livengood..................... 1997 $175,000 $ -- -- 50,000(3) $ 2,188
Executive Vice President, 1996 (4)
CFO and Secretary
Gary O'Sullivan......................... 1997 $190,496 $ -- -- 60,000(3) $--
Senior Vice President -- 1996 (5)
Marketing

------------

(1) Excludes perquisites and other personal benefits unless the aggregate amount
of such compensation exceeded the lesser of $50,000 or 10% of the total
annual salary and bonus reported for the Named Executive Officer.

(2) Each of the amounts in this column reflect contributions by the Company to
its 401(k) Plan for the executives benefit.

(3) All of the options issued to Messrs. Payne, Duffey, Allen and Livengood, and
30,000 of the options issued to Mr. O'Sullivan, were granted in February
1998. Of the February 1998 option grants, all but 38,000 shares to Mr.
Livengood and 18,000 shares to Mr. O'Sullivan were for 1997 performance.

(4) Mr. Livengood joined the Company in December 1996 and his compensation
during such year did not exceed $100,000.

(5) Mr. O'Sullivan joined the Company in October 1996 and his compensation
during such year did not exceed $100,000.

STOCK OPTION GRANTS IN 1997

The Company has four stock option plans, the 1995 Stock Incentive Plan (the
"1995 Plan"), the 1996 Stock Option Plan (the "1996 Plan"), the 1996
Directors Stock Option Plan (the "Directors' Plan"), and the 1998 Stock Option
Plan for Consultants (the "Consultants Plan"). A total of 950,000 shares of
Class A and B Common Stock are reserved for issuance under the 1995 Plan.
Options issued under the 1995 Plan prior to the Company's initial public
offering in August 1996 are satisfied with shares of Class B Common Stock, but
options issued after that date are satisfied with shares of Class A Common
Stock. 800,000 shares of Class A Common Stock are reserved for issuance under
the 1996 Plan, 200,000 shares of Class A Common Stock are reserved for issuance
under the Directors' Plan, and 100,000 shares of Class A Common Stock are
reserved for issuance under the Consultants Plan. Options issued under the 1995
Plan and the 1996 Plan may be either "Incentive Stock Options" as defined in
Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"), or
non-qualified stock options.

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The following table sets forth information on the grants of options to
acquire shares of Class A Common Stock made during the year ended December 31,
1997 to the Named Executive Officers:

[Enlarge/Download Table]

POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
---------------------------------------------------- AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED(1) IN 1997 ($/SH) DATE 5% 10%
------------------------------------- ----------- ----------- -------- ---------- ---------- ------------

Melvin C. Payne...................... -- -- -- -- -- --
Mark W. Duffey....................... -- -- -- -- -- --
Russell W. Allen..................... -- -- -- -- -- --
Thomas C. Livengood.................. -- -- -- -- -- --
Gary O'Sullivan...................... 30,000 8.9% $ 18.00 2006 $ 858,300 $ 1,334,300

------------

(1) Options granted are for a term of ten years and vest 8.33% per year on the
first through fourth anniversary dates of the grant date and 16.66% per year
on the fifth through eighth anniversary dates of the grant date; provided,
however, the options scheduled to vest in years 5-8 from the grant date
(i.e., 66 2/3% of the total grant) vest immediately if the average of the
daily high and low prices of the Class A Common Stock for 20 consecutive
trading days exceeds $27.99 prior to the fourth anniversary of the grant
date.

(2) These amounts represent certain assumed rates of appreciation based actual
option term and annual compounding from the date of grant. Assumed rates of
appreciation are in accordance with guidelines established by the
Commission. Actual gains, if any, on stock options exercises and Class A
Common Stock holdings are dependent on the future performance of the Class A
Common Stock and overall stock market conditions. There can be no assurance
that the stock appreciation amounts reflected in this table will be
achieved, or that actual gains may be prove to be substantially in excess of
those presented.

1997 OPTION EXERCISES AND YEAR-END OPTION HOLDINGS

The following table sets forth, with respect to the Named Executive
Officers, information concerning the exercise of stock options during the year
ended December 31, 1997, and the year-end value of unexercised options. This
table sets forth options for Class A Common Stock.

[Enlarge/Download Table]

NUMBER OF UNEXERCISED VALUE OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997(1) DECEMBER 31, 1997(2)
ACQUIRED ON VALUE ---------------------------- ----------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
---------------------------------------- ----------- ---------- ----------- ------------- ----------- -------------

Melvin C. Payne......................... -- -- 20,833 229,167 $ 114,581 $ 1,260,419
Mark W. Duffey.......................... -- -- 12,500 137,500 68,750 756,250
Russell W. Allen........................ -- -- 4,166 45,834 22,913 252,087
Thomas C. Livengood..................... -- -- 4,166 45,834 521 5,729
Gary O'Sullivan......................... -- -- 2,500 27,500 2,500 27,500

------------

(2) An option is "in-the-money" if the market value of the Class A Common
Stock exceeds the exercise price of the option. The values of the options
set forth in these columns are based upon the difference between the closing
price of $19.00 on the NASDAQ on December 31, 1997 and any lesser exercise
price.

COMPENSATION OF DIRECTORS

In lieu of cash compensation, each director of the Company who is not an
executive officer of the Company, but who may be an employee (a "qualified
director") is entitled to receive options under the

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Directors' Plan. In addition, qualified directors are reimbursed for expenses
incurred in attending meetings of the Board of Directors and Committees thereof.

Under the Directors' Plan, each individual who was a qualified director as
of the date of the Company's initial public offering in August 1996 received a
nonqualified stock option (an "Initial Option") to purchase 15,000 shares (or
25,000 if the nonemployee director also served on the Executive Committee as of
such date) of Class A Common Stock at an exercise price per share equal to the
initial public offering price of $13.50 per share. C. Byron Snyder and Barry K.
Fingerhut were each serving on the Executive Committee on such date and received
options for 25,000 shares of Class A Common Stock. Each of the Initial Options
granted were for a term of ten years and vest 8.33% per year on the first
through fourth anniversary dates of the grant date and 16.66% per year on the
fifth through eighth anniversary dates of the grant date; provided, however, the
options scheduled to vest in years 5-8 from the grant date (i.e. 66 2/3% of the
total grant) vest immediately if the average of the daily high and low prices of
the Class A Common Stock for 20 consecutive trading days exceeds $27.99 prior to
the fourth anniversary of the grant date.

When a new qualified director is appointed or elected to the Board, such
qualified director will receive an option grant to purchase 15,000 shares of
Class A Common Stock (or 25,000 shares if such director also becomes a member of
the Executive Committee).

Further, each qualified director is automatically granted a nonqualified
stock option (an "Annual Option") to purchase 6,000 shares of Class A Common
Stock on the date of each annual meeting of stockholders. Each Annual Option has
a term of ten years and an exercise price equal to the fair market value of the
Class A Common Stock on the date of grant. The aggregate number of shares of
Class A Common Stock reserved for issuance under the Directors' Plan is 200,000
shares.

In January 1997, Mark F. Wilson became a director of the Company and the
President of a subsidiary of the Company in connection with the acquisition of
certain funeral homes and cemeteries in California. On such date, the Board
granted Mr. Wilson an option to purchase 15,000 shares of Class A Common Stock
under the Directors' Plan.

In November 1997, Greg M. Brudnicki became a director of the Company and an
employee of a subsidiary of the Company in connection with the acquisition of
certain funeral homes and cemeteries in Florida and Alabama. At that time, the
Board granted Mr. Brudnicki an option to purchase 15,000 shares of Class A
Common Stock under the Directors' Plan.

EMPLOYMENT AGREEMENTS

Effective July 1, 1996, the Company entered into separate employment
agreements with each of Melvin C. Payne, Mark W. Duffey and Russell W. Allen.
The employment agreements with Mr. Payne and Mr. Duffey have an initial term of
five years with an evergreen two-year extension continuing after the first three
years of the employment agreements unless either the Company or the employee
gives 90 days notice of termination. The employment agreement with Mr. Allen is
for an initial term of five years. Pursuant to these agreements, Messrs. Payne,
Duffey and Allen are entitled to receive a salary of not less than $225,000,
$185,000 and $145,000, respectively, and a bonus to be determined on an annual
basis by the Board of Directors. Effective February 1, 1998, Mr. Allen's annual
base salary was increased to $165,000. If the executive is terminated without
cause during the term of the agreement, the executive will receive a monthly
severance payment until the end of the term had the executive not been
terminated plus a proportionate amount of the bonus earned for the year of
termination. Such monthly severance payment would be equal to the average
monthly amount (including salary and bonus) earned by the executive during the
three calendar years prior to his termination. During the period that the
executive receives the monthly severance payments, the executive also would be
entitled to participate in any employee benefit plans or programs in which the
executive was participating at the time of his termination. In addition, each
agreement contains a covenant prohibiting the executive from competing with the
Company during the period he is receiving compensation under their agreements,
provided, however, that following termination of employment, the executive may
elect to forego certain severance payments which he would be entitled to

424B4 38th Page of 152 TOC 1st Previous Next ↓Bottom Just 38th
under the employment agreement and thereafter would not be prohibited from
competing with the Company. In addition, the agreements contain customary
benefits and perquisites.

Effective December 13, 1996, the Company entered into an employment
agreement with Thomas C. Livengood for a five year term ending December 31,
2001. Pursuant to this agreement, Mr. Livengood is entitled to receive a salary
of not less than $175,000 and a bonus to be determined on an annual basis by the
Board of Directors. The other terms of Mr. Livengoods employment agreement are
substantially the same as those described above for Messrs. Payne, Duffey and
Allen.

Effective October 8, 1996, the Company entered into an employment agreement
with Gary O'Sullivan for a five year term. Pursuant to this agreement, Mr.
O'Sullivan is entitled to receive a salary of $190,000. Mr. O'Sullivan also is
entitled to receive an annual bonus of (i) $40,000 if the Company's consolidated
net revenues from cemetery activities for such year equals or exceeds a budgeted
amount set each year by the Chief Executive Officer of the Company and (ii)
$25,000 if the Company's consolidated net revenues from funeral activities for
such year equals or exceeds a budgeted amount set each year by the Chief
Executive Officer of the Company. The agreement also provided for Mr. O'Sullivan
to receive options under the 1996 Stock Option Plan for 30,000 shares at an
exercise price of $18.00 per share, subject to vesting requirements similar to
other options granted under such plan. If Mr. O'Sullivan is terminated without
cause during the term of the agreement, he will receive his base salary until
the end of the term. In addition, the agreement contains customary benefits and
perquisites.

CERTAIN TRANSACTIONS

In connection with the acquisition in January 1997 by the Company of CNM,
which was controlled by Mark F. Wilson and others, (i) Mr. Wilson and a
subsidiary of the Company entered into a five-year employment agreement
providing for, among other things, the payment of a base salary to Mr. Wilson of
$150,000 per year, (ii) Mr. Wilson and such subsidiary entered into a
fifteen-year non-competition agreement providing for, among other things, the
payment to Mr. Wilson of $170,000 per year, and (iii) the Company agreed to
appoint Mr. Wilson to the Board of Directors of the Company. In addition, Mr.
Wilson and the other former shareholders of CNM who acquired equity of the
Company entered into a co-sale agreement with Messrs. Snyder, Fingerhut, Payne,
Duffey and certain affiliated stockholders, under which such persons agreed not
to sell a certain level of their stock holdings in a single or related group of
transactions unless the former CNM shareholders were given the opportunity to
participate in the sales transaction, and in which the selling group could
require the other parties to participate in a sales transaction. This
transaction was entered into immediately prior to Mr. Wilson becoming a director
of the Company, and the compensation detailed above does not relate to any
services provided by Mr. Wilson as a director of the Company.

Mr. Wilson also is a party to an arrangement with the Company whereby Mr.
Wilson may receive annual cash consideration if acquisition candidates which he
develops and which are subsequently acquired by the Company attain cash flow in
excess of certain cash flow targets over a ten-year period. Pursuant to this
arrangement, Mr. Wilson may elect to sell back to the Company his share of
excess cash flow during the last three-year period at a predetermined cash flow
multiple. To date, no payments have been made by the Company under this
arrangement.

In connection with the acquisition in November 1997 by the Company of
certain funeral homes and cemeteries in Florida, which were controlled by Greg
M. Brudnicki and another person, (i) Mr. Brudnicki and a subsidiary of the
Company entered into a five year employment contract providing for, among other
things, the payment of a base salary to Mr. Brudnicki of $75,000 per year, (ii)
Mr. Brudnicki became a participant in an incentive compensation plan for certain
key employees of the Company's operations in Panama City, Florida, and (iii) the
Company agreed to appoint Mr. Brudnicki to the Board of Directors of the
Company. This transaction was entered into immediately prior to Mr. Brudnicki
becoming a director of the Company and the compensation detailed above does not
relate to any services provided by Mr. Brudnicki as a director of the Company.

424B4 39th Page of 152 TOC 1st Previous Next ↓Bottom Just 39th
Mr. Brudnicki also is a party to a plan whereby Mr. Brudnicki may receive
cash consideration if acquisition candidates developed by him or other
participants in the plan are subsequently acquired by the Company and attain
cash flow in excess of certain cash flow targets. This plan covers Northern
Florida, Southern Georgia and Alabama. At the election of the participant, the
compensation is payable in cash or in shares of Class A Common Stock. To date,
no payments have been made by the Company to Mr. Brudnicki under the plan.

In July 1996, the Company loaned Russell W. Allen, an executive officer of
the Company, $316,714 to allow Mr. Allen to exercise his options to purchase
shares of Class B Common Stock of the Company and to pay the federal income tax
liability incurred pursuant to such exercise. The loan matures on June 30, 1999,
bears interest at 7% per year payable annually on or before March 31 of each
year and is presently secured by approximately 30% of the Class B Common Stock
purchased by Mr. Allen. In order to pay the interest due March 31, 1997 and
March 31, 1998 on this note, Mr. Allen executed new promissory notes totaling
$39,458 with the same terms as the other note. On July 30, 1997, the Company
agreed to release 7,875 shares of Class B Common Stock from this pledge, and on
April 3, 1998, an additional 5,000 shares were released from the pledge.

In connection with the acquisition by a subsidiary of the Company of three
corporations controlled by Robert D. Larrabee and his wife, which owned and
operated four funeral homes and two cemeteries in Washington and Idaho, (i) the
Company's subsidiary executed a note payable to Mr. Larrabee and his wife in the
original principal amount of $246,000, secured by the land and buildings of one
of the funeral home locations, as seller financing for that location, (ii) Mr.
Larrabee and such subsidiary entered into a five-year employment agreement
providing for, among other things, the payment of a base salary to Mr. Larrabee
of $25,000 per year, (iii) the Larrabees granted to such subsidiary an option to
purchase a five-acre parcel of land adjacent to one of the cemeteries included
in the acquisition for a purchase price of $300,000, and (iv) the Company agreed
to undertake to appoint Mr. Larrabee to the Company's Board of Directors if the
Company went public. This transaction was entered into prior to Mr. Larrabee
becoming a director of the Company, and the compensation outlined above does not
relate to any services provided by Mr. Larrabee as a director of the Company.

Mr. Larrabee also is a party to an arrangement with the Company whereby Mr.
Larrabee may receive annual cash bonuses if acquisition candidates which he
develops and which are subsequently acquired by the Company attain cash flow in
excess of certain cash flow targets over a ten-year period. Pursuant to the
arrangement, Mr. Larrabee may elect to sell back to the Company his share of
excess cash flow during the last three-year period at a predetermined cash flow
multiple. To date, no payments have been made by the Company under this
arrangement, and the Company is currently renegotiating this arrangement with
Mr. Larrabee. In addition, the Company has entered into a letter of intent with
Mr. Larrabee to acquire a 15-acre parcel of land in an arm's length transaction.

424B4 40th Page of 152 TOC 1st Previous Next ↓Bottom Just 40th
PRINCIPAL STOCKHOLDERS

The following table sets forth information as of March 31, 1998, and as
adjusted to reflect the sale of the Class A Common Stock offered hereby, with
respect to the beneficial ownership of Common Stock by each person known by the
Company to be the beneficial owner of more than 5% of outstanding Common Stock,
by each director and executive officer of the Company and by all directors and
executive officers of the Company as a group. Each person named has sole voting
and investment power with respect to the shares indicated except as otherwise
stated in the notes to the table.

[Enlarge/Download Table]

AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF CLASS A AND B
------------------------ COMMON STOCK PERCENT OF
CLASS A CLASS B --------------------------- VOTING CONTROL
COMMON COMMON PRIOR TO THE AFTER THE AFTER THE
BENEFICIAL OWNER STOCK(1) STOCK(2) OFFERING OFFERING OFFERING(3)
---------------------------------------- ----------- ----------- ------------ ---------- --------------

C. Byron Snyder(4)(5)................... 88,083 1,296,311 12.4% 9.7% 23.1%
Barry K. Fingerhut(4)(6)................ 189,133 520,924 6.4 5.0 9.6
Melvin C. Payne(4)(7)................... 50,835 629,769 6.1 4.8 11.2
Mark F. Wilson(8)....................... 495,388 -- 4.4 3.5 *
Mark W. Duffey(4)....................... 92,375 238,625 3.0 2.3 4.4
Stuart W. Stedman(9).................... 143,388 145,223 2.6 2.0 2.8
Reid A. Millard(4)...................... 2,500 201,600 1.8 1.4 3.6
Greg M. Brudnicki....................... 210,494 -- 1.9 1.5 *
Ronald A. Erickson(10).................. 19,650 61,621 * * 1.1
Robert D. Larrabee(11).................. 7,250 66,298 * * 1.2
Russell W. Allen........................ 10,916 55,125 * * 1.0
Thomas C. Livengood..................... 11,980 2,000 * * *
Gary O'Sullivan......................... 2,500 -- * * *
All directors and executive officers as
a group (13 persons).................. 1,324,492 3,217,496 40.7 32.0 59.3

------------

* Indicates less than one percent.

(1) The ownership of shares of Class A Common Stock shown in the table includes
shares which may be acquired within 60 days upon exercise of outstanding
stock options granted one of the Company's stock option plans by each of
the persons and group, as follows: Mr. Snyder -- 2,083 shares; Mr.
Fingerhut -- 2,083 shares; Mr. Payne -- 20,830 shares; Mr. Wilson -- 1,250
shares; Mr. Duffey -- 12,500 shares; Mr. Stedman -- 1,250 shares; Mr.
Millard -- 2,500 shares; Mr. Erickson -- 1,250 shares; Mr.
Larrabee -- 1,250 shares; Mr. Allen -- 4,166 shares; Mr. Livengood -- 4,166
shares; Mr. O'Sullivan -- 2,500 shares; and directors and executive
officers as a group -- 55,828 shares.

(2) Each share of Class B Common Stock has ten votes per share and is
convertible at any time into one share of Class A Common Stock. If not
converted earlier, any outstanding shares of Class B Common Stock will be
automatically converted into shares of Class A Common Stock on December 31,
2001.

(3) This column sets forth the percentage of voting power held by the person
based on the type of securities held. Each share of Class A Common Stock is
entitled to one vote, each share of Class B Common Stock is entitled to ten
votes, each share of Series D Preferred Stock is entitled to 0.0022 votes,
and each share of Series F Preferred Stock is entitled to .0588 votes.

(4) C. Byron Snyder and certain of his affiliates, Melvin C. Payne and certain
of his affiliates, Mark W. Duffey, Barry K. Fingerhut and certain of his
affiliates and business associates and Reid A. Millard have executed a
Voting Agreement dated effective as of August 8, 1996 relating to any
shares of capital stock of the Company held by any of them. These parties
beneficially hold an aggregate of 422,926 shares of Class A Common Stock
and 2,887,229 shares of Class B Common Stock. Under the Voting Agreement,
each party has agreed (i) not to sell or otherwise transfer any shares of
capital stock of the Company held or acquired by such party to any
"competitor" of the Company without the prior written consent of the
holders of at least 80% of the voting power of the shares of capital stock
subject to the Voting Agreement, (ii) unless the holders of at least 80% of
the voting power of the outstanding shares of capital stock of the Company
are in favor of such action, not to vote the

(FOOTNOTES CONTINUED ON FOLLOWING PAGE)

424B4 41st Page of 152 TOC 1st Previous Next ↓Bottom Just 41st
shares of capital stock of the Company held by such party in favor of (x) a
merger, consolidation or similar corporate action involving a
"competitor," other than in connection with an acquisition by the Company
of funeral homes or cemeteries in which the Company is the acquiring or
controlling party, (y) the sale of all or substantially all of the assets
of the Company to a "competitor," or (z) any amendment to Articles V, VI
or VII of the Company's Certificate of Incorporation (which relate to the
classified Board of Directors, the relative rights and powers of the Board
of Directors and the stockholders and the ability of the stockholders of
the Company to act by written consent). A "competitor" is defined in the
Voting Agreement as any person or entity engaged in the funeral service,
cemetery, crematory or related lines of business.

(5) Mr. Snyder's holdings include 367,550 shares of Class B Common Stock owned
by 1996 Snyder Family Partnership, Ltd., 9,005 shares of Class B Common
Stock owned by the C. Byron Snyder 1996 Trust, and 9,005 shares of Class B
Common Stock owned by the Martha Ann Snyder 1996 Trust.

(6) Mr. Fingerhut's holdings include 422,222 shares of Class B Common Stock
held by Applewood Associates, L.P., a limited partnership of which Mr.
Fingerhut is a general partner; 6,111 shares of Class B Common Stock held
by Longboat Key Associates, a general partnership of which Mr. Fingerhut is
a general partner; and 8,333 shares of Class B Common Stock held by Mr.
Fingerhut jointly with Michael J. Marocco.

(7) Mr. Payne's holdings include 119,161 shares of Class B Common Stock owned
by 1996 Payne Family Partnership, Ltd., 2,919 shares of Class B Common
Stock owned by the Melvin C. Payne 1996 Trust, 2,919 shares of Class B
Common Stock owned by the Karen P. Payne 1996 Trust, and 5,555 shares of
Class B Common Stock owned by the Melvin C. Payne, Jr. Pension Plan and
Trust.

(8) Mr. Wilson's holdings include 2,790,772 shares of Series F Preferred Stock
which are presently convertible into 164,163 shares of Class A Common Stock
and have the same number of votes. Of these shares of Series F Preferred
Stock which may be deemed held by Mr. Wilson, 707,700 are held by the
Wilson Trust B U/A/D 9/9/77 by Francis Wilson and 707,700 are held by the
Wilson Trust C U/A/D 9/9/77 by Francis Wilson, bother of which Mr. Wilson
is a beneficiary of and a Co-Trustee.

(9) Mr. Stedman's holdings include (i) 2,689 shares of Class A Common Stock and
31,309 shares of Class B Common Stock which are held by the Betty Ann
Stedman Trust, of which Mr. Stedman is a Trustee, (ii) 1,083 shares of
Class A Common Stock and 8,349 shares of Class B Common Stock which are
held by the Wesley West Descendants Trust, of which Mr. Stedman is a
Trustee, (iii) 292 shares of Class A Common Stock and 3,130 shares of Class
B Common Stock which are held by the Courtney Lynn Meagher Trust, of which
Mr. Stedman is a Trustee, (iv) 239 shares of Class A Common Stock and 3,130
shares of Class B Common Stock which are held by the Evan Everett Meagher
1989 Trust, of which Mr. Stedman is a Trustee, (v) 19,902 shares of Class A
Common Stock and 35,000 shares of Class B Common Stock which are held by
the Wesley West Land Holding Company, of which Mr. Stedman is the President
and an indirect beneficial owner through a trust of which he is a
beneficiary, (vi) 46,056 shares of Class A Common Stock which are held by
the Wesley West Long Term Partnership, a partnership of which Mr. Stedman
serves as the Manager of the General Partner, (vii) 32,850 shares of Class
A Common Stock which are held by the Wesley West Flexible Partnership, a
partnership of which Mr. Stedman serves as the Managing Partner, (viii)
24,350 shares of Class A Common Stock which are held by Wesley West
Investment Company L.L.C., of which Mr. Stedman is the sole Manager, and
(ix) 7,120 shares of Class A Common Stock and 5,218 shares of Class B
Common Stock which are owned jointly by Mr. Stedman and his spouse.

(10) Mr. Erickson's holdings include (i) 4,000 shares of Class A Common Stock
and 44,015 shares of Class B Common Stock which are held by the Alfred and
Rose Erickson Trust f/b/o Ronald A. Erickson, (ii) 1,400 shares of Class A
Common Stock and 17,606 shares of Class B Common Stock which are held by
the Alfred and Rose Erickson Trust f/b/o Donovan A. Erickson, of which Mr.
Erickson is the Trustee, and (iii) 7,000 shares of Class A Common Stock
held by Mr. Erickson's minor son, David S. Erickson.

(11) Mr. Larrabee and his spouse hold an aggregate of 1,500,000 shares of Series
D Preferred Stock, of which 252,410 shares are held by Larrabee Land
Company, Inc. which is owned by Mr. Larrabee and his spouse. Such shares of
Series D Preferred Stock are convertible as of March 31, 1998 into 66,298
shares of Class B Common Stock which are in turn convertible at any time
into 66,298 shares of Class A Common Stock. Also, such shares of Series D
Preferred Stock presently have 3,314 votes.

424B4 42nd Page of 152 TOC 1st Previous Next ↓Bottom Just 42nd
DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of 50,000,000 shares
of common stock and 70,000,000 shares of preferred stock, par value $.01 per
share ("Preferred Stock"). The Common Stock is divided into two classes: Class
A Common Stock and Class B Common Stock. The Class A Common Stock and the Class
B Common Stock are collectively referred to as "Common Stock."

COMMON STOCK

As of March 31, 1998, 11,158,150 shares of Common Stock were outstanding
and held of record by approximately 195 persons. Upon completion of the
Offering, 9,533,327 shares of Class A Common Stock will be outstanding. In
addition, 4,624,823 shares of Class B Common Stock will be outstanding.

The holders of Class A Common Stock are entitled to one vote for each share
held on all matters submitted to a vote of Common stockholders. The holders of
Class B Common Stock are entitled to ten votes for each share held on all
matters submitted to a vote of Common stockholders. The Common Stock does not
have cumulative voting rights, which means that the holders of a majority of the
voting power of shares of Common Stock outstanding can elect all the directors,
and the holders of the remaining shares will not be able to elect any directors.
Each share of Common Stock is entitled to participate equally in dividends, if,
as and when declared by the Company's Board of Directors, and in the
distribution of assets in the event of liquidation, subject in all cases to any
prior rights of outstanding shares of Preferred Stock. The Company has never
paid cash dividends on its Common Stock. The shares of Common Stock have no
preemptive rights, redemption rights or sinking fund provisions. The outstanding
shares of Common Stock are, and the shares of Common Stock offered hereby upon
issuance and sale will be, duly authorized, validly issued, fully paid and
nonassessable.

Certain holders of Class B Common Stock have entered into a voting
agreement (the "Voting Agreement"). The parties to the Voting Agreement
include Messrs. Payne, Duffey, Fingerhut, Millard and Snyder and certain other
stockholders. Pursuant to the Voting Agreement, each stockholder who is a party
has agreed not to sell his shares of Common Stock to a Competitor of the Company
and not to vote in favor of any merger, consolidation or other similar business
combination with a Competitor of the Company. The term "Competitor" is defined
to mean any person or entity who is engaged in the funeral service, cemetery,
crematory or related lines of business that, at the time of any proposed
Disposition (as defined in the Voting Agreement), or at any time within the
12-month period preceding the date of the proposed Disposition, has any
operations within a 50-mile radius of any locations of the Company or an entity
that directly, or indirectly through one or more intermediaries, controls, is
controlled by or is under common control with, the Company, and includes any
other person or entity who directly, or indirectly through one or more
intermediaries, controls, is controlled by or is under common control with any
such person or entity.

Each share of Class B Common Stock is convertible at any time, at the
option of the registered holder thereof, into one share of Class A Common Stock.
In addition, each share of Class B Common Stock automatically converts into one
share of Class A Common Stock upon a sale or transfer to anyone other than a
permitted transferee. In any event, all outstanding shares of Class B Common
Stock will be automatically converted into shares of Class A Common Stock on
December 31, 2001.

PREFERRED STOCK

As of March 31, 1998, the Company's outstanding Preferred Stock consisted
of 1,682,500 shares of Series D Preferred Stock and 12,278,285 shares of Series
F Preferred Stock.

The Company is authorized to issue 70,000,000 shares of Preferred Stock.
The Company's Board of Directors may establish, without stockholder approval,
one or more classes or series of Preferred Stock having the number of shares,
designations, relative voting rights, dividend rates, liquidation and other
rights, preferences and limitations that the Board of Directors may designate.
The Company believes that this power to issue Preferred Stock provides
flexibility in connection with possible corporate transactions. The issuance of
Preferred Stock, however, could adversely affect the voting power of holders of
Common Stock

424B4 43rd Page of 152 TOC 1st Previous Next ↓Bottom Just 43rd
and restrict their rights to receive payments upon liquidation of the Company.
It could also have the effect of delaying, deferring or preventing a change in
control of the Company.

SERIES D PREFERRED STOCK

As of March 31, 1998, the Company had 1,682,500 shares of Series D
Preferred Stock issued and outstanding. The following description is a summary
of the Certificate of Amendment to the Certificate of Designation for the Series
D Preferred Stock, and it is qualified in its entirety by reference to that
document.

DIVIDENDS. The Series D Preferred Stock ranks, with respect to dividend
rights and distribution of assets on liquidation, senior and prior to Common
Stock and junior to, or on parity with, as the case may be, any other stock of
the Company designated as senior to, or on parity with, as the case may be,
Series D Preferred Stock. Holders of Series D Preferred Stock are entitled to
receive cumulative annual cash dividends ranging from $.06 to $.07 per share
payable quarterly, depending upon when such shares were issued. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of Series D Preferred Stock then outstanding will be entitled to
receive an amount of cash per share equal to $1.00, together with all accrued
and unpaid dividends, after any distribution is made on any senior securities
and before any distribution is made on any junior securities, including Common
Stock. As long as any shares of Series D Preferred Stock are outstanding, the
Company may not pay a dividend (other than stock dividends in Common Stock) or
other distribution on or repurchase Common Stock, directly or indirectly, unless
all past due cumulative dividends on the Series D Preferred Stock have been
paid. The terms of Series D Preferred Stock may be amended with the consent of
the holders of a majority of the outstanding shares of Series D Preferred Stock.

REDEMPTION. The Series D Preferred Stock is mandatorily redeemable by the
Company on December 31, 2001 (subject to conversion rights at any time on or
prior to November 30, 2001) at a redemption price of $1.00 per share plus all
accrued and unpaid dividends to the date of redemption. The Series D Preferred
Stock is redeemable, in whole or in part, at the option of the Company at any
time during the period commencing on the second anniversary of the consummation
of the Offering and ending on December 31, 2001 (subject to conversion rights up
to 15 days prior to the redemption date) at a redemption price of $1.00 per
share plus accrued and unpaid dividends to the date of redemption. Partial
redemptions must be pro rata.

CONVERSION. The Series D Preferred Stock is convertible at any time into
Class B Common Stock at a conversion price equal to the average market price for
the ten days preceding the date of delivery of notice of conversion on the
principal securities market on which the Class A Common Stock is then traded. At
March 31, 1998, the conversion price was $22.625, yielding, a total of 74,364
shares of Class B Common Stock that would be issuable upon the conversion of the
1,682,500 shares of Series D Preferred Stock outstanding.

VOTING RIGHTS. The Series D Preferred Stock has general voting rights on
all issues submitted to stockholders. The number of votes to which each share of
Series D Preferred Stock is entitled is a fraction of a vote determined by (i)
dividing $1.00 by the then effective conversion price per share and (ii)
dividing the resulting fraction by 20. The Series D Preferred Stock is entitled,
as a separate class, to vote upon (or consent to) any amendment to the Charter,
Bylaws or Certificate of Designation which would adversely affect the rights or
powers of the Series D Preferred Stock. The requisite vote for approval is a
majority of the shares of Series D Preferred Stock outstanding.

SERIES F PREFERRED STOCK

Through March 31, 1998, the Company has issued 19,999,992 shares of Series
F Preferred Stock in one transaction. A total of 7,721,707 shares have been
converted to Class A Common Stock, leaving 12,278,285 shares outstanding at
March 31, 1998. The following description is a summary of the Certificate of
Designation, as amended, for the Series F Preferred Stock, and it is qualified
in its entirety by reference to that document.

DIVIDENDS. The Series F Preferred Stock ranks, with respect to dividend
rights and distribution of assets on liquidation, senior and prior to Common
Stock and the Series D Preferred Stock (together, the

424B4 44th Page of 152 TOC 1st Previous Next ↓Bottom Just 44th
"Junior Stock") and junior to, or on parity with, as the case may be, any
other stock of the Company designated as senior to, or on parity with, as the
case may be, Series F Preferred Stock. Holders of Series F Preferred Stock are
currently entitled to receive cumulative annual cash dividends of $.042 per
share payable quarterly. Upon any voluntary or involuntary liquidation,
dissolution or winding up of the Company, the holders of Series F Preferred
Stock then outstanding will be entitled to receive an amount of cash per share
equal to $1.00, together with all accrued and unpaid dividends, after any
distribution is made on any senior securities and before any distribution is
made on any junior securities, including Common Stock and Series D Preferred
Stock. As long as any shares of Series F Preferred Stock are outstanding, the
Company may not pay a dividend (other than stock dividends in Junior Stock) or
other distributions on or repurchase Junior Stock, directly or indirectly,
unless all past due cumulative dividends on the Series F Preferred Stock have
been paid. The terms of Series F Preferred Stock may be amended with the consent
of the holders of a majority of the outstanding shares of Series F Preferred
Stock.

REDEMPTION. The Series F Preferred Stock is mandatorily redeemable by the
Company on December 31, 2007 (subject to conversion rights at any time on or
prior to November 30, 2007) at a redemption price of $1.00 per share plus all
accrued and unpaid dividends to the date of redemption. The Company may not
redeem the Series F Preferred Stock prior to December 31, 2007.

CONVERSION. The Series F Preferred Stock is convertible at any time into
Class A Common Stock at a current conversion base price of $17.00 per share,
subject to adjustment for certain antidilutive events. The conversion base price
increases to $18.00 per share on January 1, 1999 and increases by $1.00 per
share each January 1 thereafter until January 1, 2002 at which time the
conversion base price will be equal to the market price of the Class A Common
Stock.

VOTING RIGHTS. The Series F Preferred Stock has general voting rights on
all issues submitted to stockholders. The number of votes to which each share of
Series F Preferred Stock is entitled is a fraction of a vote determined by
dividing $1.00 by the conversion price per share in effect on the record date
for determining stockholders entitled to vote on such matter. The Series F
Preferred Stock is entitled, as a separate class, to vote upon (or consent to)
(i) any amendment to the Charter, Bylaws or Certificate of Designation which
would adversely affect the rights or powers of the Series F Preferred Stock and
(ii) any issuance by the Company of any Preferred Stock or other class or series
of the Company's capital stock that is senior or preferential to the Series F
Preferred Stock in any distribution of the Company's assets in connection with
the liquidation, dissolution or winding up of the affairs of the Company.

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person becomes an interested stockholder unless (a)
before that person became an interested stockholder, the Company's Board of
Directors approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (b) upon completion
of the transaction that resulted in the interested stockholder becoming an
interested stockholder, the interested stockholder owns at least 85% of the
voting stock outstanding at the time the transaction commenced (excluding stock
held by directors who are also officers of the Company and by employee stock
plans that do not provide employees with the right to determine confidentially
whether shares held subject to the plan will be tendered in a tender or exchange
offer); or (c) following the transaction in which that person became an
interested stockholder, the business combination is approved by the Company's
Board of Directors and authorized at a meeting of stockholders by the
affirmative vote of the holders of at least two-thirds of the outstanding voting
stock not owned by the interested stockholder.

Under Section 203, these restrictions also do not apply to certain business
combinations proposed by an interested stockholder following the announcement or
notification of one of certain extraordinary transactions involving the Company
and a person who was not an interested stockholder during the previous

424B4 45th Page of 152 TOC 1st Previous Next ↓Bottom Just 45th
three years or who became an interested stockholder with the approval of a
majority of the Company's directors, if that extraordinary transaction is
approved or not opposed by a majority of the directors who were directors before
any person became an interested stockholder in the previous three years or who
were recommended for election or elected to succeed such directors by a majority
of such directors then in office.

The Company's Board of Directors is divided into three classes. The
directors of each class are elected for three-year terms, with the terms of the
three classes staggered so that directors from a single class are elected at
each annual meeting of stockholders. Stockholders may remove a director only for
cause upon the vote of holders of at least 80% of voting power of the
outstanding shares of Common Stock. In general, the Board of Directors, not the
stockholders, has the right to appoint persons to fill vacancies on the Board of
Directors.

The Charter provides that special meetings of holders of Common Stock may
be called only by the Company's Board of Directors and that only business
proposed by the Board of Directors may be considered at special meetings of
holders of Common Stock.

The Charter provides that the only business (including election of
directors) that may be considered at an annual meeting of holders of Common
Stock, in addition to business proposed (or persons nominated to be directors)
by the directors of the Company, is business proposed (or persons nominated to
be directors) by holders of Common Stock who comply with the notice and
disclosure requirements set forth in the Certificate of Incorporation. In
general, the Charter requires that a stockholder give the Company notice of
proposed business or nominations no later than 60 days before the annual meeting
of holders of Common Stock (meaning the date on which the meeting is first
scheduled and not postponements or adjournments thereof) or (if later) ten days
after the first public notice of the annual meeting is sent to holders of Common
Stock. In general, the notice must also contain information about the
stockholder proposing the business or nomination, the stockholders interest in
the business, and (with respect to nominations for director) information about
the nominee of the nature ordinarily required to be disclosed in public proxy
solicitation statements. The stockholder also must submit a notarized letter
from each of the stockholders nominees stating the nominees acceptance of the
nomination and indicating the nominees intention to serve as director if
elected.

The Delaware General Corporation Law provides generally that the
affirmative vote of a majority of the shares entitled to vote on any matter is
required to amend a corporation's certificate of incorporation or bylaws, unless
the corporation's certificate of incorporation or bylaws requires a greater
percentage. The Charter provides that approval by the holders of at least
66 2/3% of the voting power of the outstanding voting stock of the Company is
required to amend the provisions of the Charter previously discussed and certain
other provisions.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is American Stock
Transfer & Trust Company.

424B4 46th Page of 152 TOC 1st Previous Next ↓Bottom Just 46th
SHARES ELIGIBLE FOR FUTURE SALE

As of March 31, 1998, there were 6,533,327 shares of Class A Common Stock
issued and outstanding, and upon the issuance of the 3,000,000 shares of Class A
Common Stock to be sold by the Company in the Offering, there will be 9,533,327
shares of Class A Common Stock issued and outstanding. In addition, as of March
31, 1998, there were 4,624,823 shares of Class B Common Stock issued and
outstanding. Approximately 5,900,000 shares of Class A Common Stock (which
includes approximately 5,400,000 shares of Class A Common Stock issuable upon
conversion of outstanding shares of Class B Common Stock and outstanding shares
of preferred stock based on conversion rates as of March 31, 1998) held by
existing stockholders of the Company are "restricted securities" within the
meaning of Rule 144 under the Securities Act. The Company believes that
substantially all of these "restricted" shares of Class A Common Stock are
currently eligible for resale subject to the volume, manner of sale and other
limitations of Rule 144.

Approximately 854,000 shares of Class A Common Stock and approximately
68,200 shares of Class B Common Stock are reserved for issuance to employees and
directors of the Company pursuant to the 1995 Stock Incentive Plan, 800,000
shares of Class A Common Stock are reserved for issuance to employees of the
Company pursuant to the 1996 Stock Option Plan, 200,000 shares of Class A Common
Stock are reserved for issuance to eligible directors under the 1996 Directors
Stock Option Plan, and 100,000 shares of Class A Common Stock are reserved for
issuance under the 1998 Stock Option Plan for consultants. As of March 31, 1998,
approximately 1,654,000 shares of Class A Common Stock and approximately 65,000
shares of Class B Common Stock are issuable under existing options granted to
employees, directors and consultants. The Company has filed registration
statements on Form S-8 to register the shares of Common Stock issuable upon
exercise of options granted or to be granted pursuant to these plans.
Accordingly, shares issued upon exercise of such options will be freely
tradeable, except for any shares held by an "affiliate" of the Company.

In addition, the Company has filed a shelf registration statement covering
up to 2,000,000 shares of Class A Common Stock that may be issued from time to
time by the Company to fund future acquisitions. As of March 31, 1998,
approximately 1,500,000 shares of Class A Common Stock remained available for
issuance under this shelf registration. Shares covered by the shelf registration
may be issued or resold (as the case may be) and are freely tradeable, when
issued, by the holders thereof (other than "affiliates" of the Company and in
the case of acquisitions, "affiliates" of the businesses acquired).

In connection with the Offering, the Company and its executive officers and
directors have agreed not to sell, offer to sell, contract to sell, pledge or
otherwise dispose of or transfer any shares of Common Stock, or any securities
convertible into or exchangeable or exercisable for or any rights to purchase or
acquire Common Stock for a period of 90 days commencing on the date of this
Prospectus without the prior written consent of the representatives of the
Underwriters, other than the issuance of options to purchase Common Stock or
shares of Common Stock issuable upon the exercise thereof, and issuances of
capital stock by the Company in connection with acquisitions of funeral homes
and cemeteries, provided that such options shall not become exercisable and such
shares issuable upon exercise of options or pursuant to acquisitions shall not
be transferable prior to the end of the 90-day period.

No prediction can be made as to the effect, if any, that future sales of
Class A Common Stock, or the availability of Class A Common Stock for future
sale, will have on the market price of the Class A Common Stock prevailing from
time to time. Sales of substantial amounts of Class A Common Stock in the public
market subsequent to this Offering could adversely affect the market price of
the Class A Common Stock.

424B4 47th Page of 152 TOC 1st Previous Next ↓Bottom Just 47th
UNDERWRITING

Subject to the terms and conditions set forth in the Purchase Agreement
(the "Purchase Agreement") among the Company and each of the underwriters
named below (the "Underwriters"), the Company has agreed to sell to each of
the Underwriters, and each of the Underwriters, for whom Merrill Lynch, Pierce,
Fenner & Smith Incorporated ("Merrill Lynch"), ABN AMRO Incorporated, Credit
Suisse First Boston Corporation and Raymond James & Associates, Inc. are acting
as representatives (the "Representatives"), severally has agreed to purchase
from the Company, the number of shares of Class A Common Stock set forth
opposite its name below.

NUMBER
UNDERWRITER OF SHARES
------------------------------------- ----------
Merrill Lynch, Pierce, Fenner & Smith
Incorporated............ 600,000
ABN AMRO Incorporated................ 600,000
Credit Suisse First Boston
Corporation.......................... 600,000
Raymond James & Associates, Inc...... 600,000
Goldman, Sachs & Co. ................ 100,000
Morgan Stanley & Co. Incorporated.... 100,000
NationsBanc Montgomery Securities
LLC.................................. 100,000
TD Securities (USA) Inc. ............ 100,000
Wasserstein Perella Securities,
Inc. ................................ 100,000
J.C. Bradford & Co. ................. 50,000
Brean Murray & Co., Inc. ............ 50,000
----------
Total.................. 3,000,000
==========

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Class A Common Stock offered hereby to the public at the
public offering price set forth on the cover page of this Prospectus, and to
certain dealers at such price less a concession not in excess of $.62 per share.
The Underwriters may allow, and such dealers may reallow, a discount not in
excess of $.10 per share to certain other dealers. After the Offering, the
public offering price, concession and discount may be changed.

The Company has granted the Underwriters an option, exercisable by the
Representatives, to purchase up to an aggregate of 450,000 additional shares of
Class A Common Stock at the public offering price set forth on the cover page of
this Prospectus, less the underwriting discount. Such option, which expires 30
days after the date of this Prospectus, may be exercised solely to cover
over-allotments. To the extent that the Representatives exercise such option,
each of the Underwriters will be obligated, subject to certain conditions, to
purchase approximately the same percentage of the option shares that the number
of shares to be purchased initially by that Underwriter bears to the total
number of shares to be purchased initially by the Underwriters.

The Company has agreed to indemnify the Underwriters against certain
liabilities including liabilities under the Securities Act, or to contribute to
payments the Underwriters may be required to make in respect thereof.

The Company and its executive officers and directors have agreed that for a
period of 90 days from the date of this Prospectus they will not, without the
prior written consent of Merrill Lynch, (i) directly or indirectly, offer,
pledge, sell, contract to sell, sell any option or contract to purchase,
purchase any option or contract to sell, grant any option, right or warrant to
purchase or otherwise transfer or dispose of any share of Class A Common Stock
or any securities convertible into or exercisable or exchangeable for Class A
Common Stock or file any registration statement under the Securities Act with
respect to any of the foregoing or (ii) enter into any swap or any other
agreement or any transaction that transfers, in whole or in part, directly or
indirectly, the economic consequence of ownership of the Class A Common Stock,
whether any such swap or transaction described in clause (i) or (ii) above is to
be settled by delivery of Class A

424B4 48th Page of 152 TOC 1st Previous Next ↓Bottom Just 48th
Common Stock or such other securities, in cash or otherwise. The foregoing
restrictions do not apply, however, to the shares of Class A Common Stock being
sold hereunder, any shares of Class A Common Stock issued by the Company upon
the exercise of an option or warrant or the conversion of a security outstanding
on the date hereof and referred to herein, any shares of Class A Common Stock
issued or options to purchase Class A Common Stock granted pursuant to existing
employee benefit plans of the Company, any shares of Class A Common Stock issued
pursuant to any non-employee stock option plan, or any shares of Class A Common
Stock or any securities convertible or exchangeable into Class A Common Stock
issued as payment of any part of the purchase price for funeral homes or
cemeteries (or businesses or capital stock of businesses that operate funeral
homes or cemeteries) which are acquired by the Company, subject to certain
conditions.

Until the distribution of the Class A Common Stock is completed, rules of
the Securities and Exchange Commission may limit the ability of the Underwriters
and certain selling group members to bid for and purchase the Class A Common
Stock. As an exception to these rules, the Representatives are permitted to
engage in certain transactions that stabilize the price of the Class A Common
Stock. Such transactions consist of bids or purchases for the purpose of
pegging, fixing or maintaining the price of the Class A Common Stock.

If the Underwriters create a short position in the Class A Common Stock in
connection with the Offering, i.e., if they sell more shares of Class A Common
Stock than are set forth on the cover page of this Prospectus, the
Representatives may reduce that short position by purchasing Class A Common
Stock in the open market. The Representatives may also elect to reduce any short
position by exercising all or part of the over-allotment option described above.

The Representatives may also impose a penalty bid on certain Underwriters
and selling group members. This means that if the Representatives purchase
shares of Class A Common Stock in the open market to reduce the Underwriters
short position or to stabilize the price of the Common Stock, they may reclaim
the amount of the selling concession from the Underwriters and selling group
members who sold those shares as part of the Offering.

In general, purchases of a security for the purpose of stabilization or to
reduce a short position could cause the price of the security to be higher than
it might be in the absence of such purchases. The imposition of a penalty bid
might also have an effect on the price of a security to the extent that it were
to discourage resales of the security.

Neither the Company nor any of the Underwriters makes any representation or
prediction as to the direction or magnitude of any effect that the transactions
described above may have on the price of the Class A Common Stock. In addition,
neither the Company nor any of the Underwriters makes any representation that
the Representatives will engage in such transactions or that such transactions,
once commenced, will not be discontinued without notice.

LEGAL MATTERS

The validity of the issuance of the shares of Class A Common Stock offered
hereby will be passed upon for the Company by Vinson & Elkins L.L.P., Houston,
Texas. Certain legal matters relating to the Class A Common Stock offered hereby
will be passed upon for the Underwriters by Andrews & Kurth L.L.P., Houston,
Texas.

424B4 49th Page of 152 TOC 1st Previous Next ↓Bottom Just 49th
EXPERTS

The consolidated financial statements of Carriage Services, Inc. and CNM
Group included in this Prospectus and Registration Statement have been audited
by Arthur Andersen LLP, independent public accountants, as indicated in their
reports with respect thereto and are included herein in reliance upon the
authority of said firm as experts in giving said reports.

The financial statements of the Barnett-Larkin-Brown division of 21st
Century Funeral Company, L.C., Barnett-Larkin-Brown Funeral Homes, Inc. and
Redgate Funeral Service Corporation included in this Prospetus and Registration
Statement have been audited by Logan & Schmidt, P.A., independent public
accountants, as indicated in their reports with respect thereto and are included
herein in reliance upon the authority of said firm as experts in giving said
reports.

The financial statements of Allen J. Harden Funeral Home, Inc. included in
this Prospectus and Registration Statement have been audited by David Logan, CPA
PA, independent public accountant, as indicated in his report with respect
thereto and are included herein in reliance upon the authority of said
individual as expert in giving said report.

The financial statements of McNary-Moore Funeral Service, Inc. included in
this Prospectus and Registration Statement have been audited by Bartig, Basler &
Ray, CPAs, Inc., independent public accountants, as indicated in their report
with respect thereto and are included herein in reliance upon the authority of
said firm as experts in giving said report.

The financial statements of Sidun Funeral Group, Inc. included in this
Prospectus and Registration Statement have been audited by Sobel & Co., LLC,
independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said report.

The financial statements of Forest Lawn/Evergreen Management Corporation
and Kent-Thornton Funeral Home, Inc. included in this Prospectus and
Registration Statement have been audited by Saltmarsh, Cleaveland & Gund,
independent public accountants, as indicated in their reports with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said report.

The financial statements of Johnson Mortuary, Inc. included in this
Prospectus and Registration Statement have been audited by Jordahl & Sliter
PLLC, independent public accountants, as indicated in their report with respect
thereto and are included herein in reliance upon the authority of said firm as
experts in giving said report.

AVAILABLE INFORMATION

The Company is subject to the informational requirements of the Exchange
Act, and in accordance therewith, files reports and other information with the
Commission. Such reports and other information may be inspected and copied at
the public reference facilities maintained by the Commission at 450 Fifth
Street, N.W., Room 1024, Washington, D.C. 20549, and at the Commissions regional
offices at 7 World Trade Center, 13th Floor, New York, New York 10048, and at
500 West Madison Street, Suite 1400, Chicago, Illinois 60661, and copies may be
obtained at the prescribed rates from the Public Reference Section of the
Commission at its principal office in Washington, D.C. The Commission maintains
a web site (http://www.sec.gov) that contains reports, proxy and information
statements and other information regarding registrants, such as the Company,
that file electronically with the Commission. The Company's Class A Common Stock
is traded on the NYSE and, as a result, the Company also files reports and
information with NYSE, and such reports and other information are available for
inspection at the offices of the NYSE at 20 Broad Street, New York, NY 10004.

The Company has filed with the Commission a Registration Statement on Form
S-1 (the "Registration Statement") under the Securities Act with respect to
the shares of Class A Common Stock offered hereby. This Prospectus, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. Statements contained in this Prospectus as to

424B4 50th Page of 152 TOC 1st Previous Next ↓Bottom Just 50th
the contents of any document are not necessarily complete, and in each instance
reference is made to the copy of such document filed as an exhibit to the
Registration Statement, each such statement being hereby qualified in all
respects by such reference. The Registration Statement, including the exhibits
and schedules thereto, is on file at the offices of the Commission and may be
obtained upon payment of the fee prescribed by the Commission or may be examined
without charge at the public reference facilities of the Commission described
above.

424B4 51st Page of 152 TOC 1st Previous Next ↓Bottom Just 51st
INDEX TO FINANCIAL STATEMENTS

PAGE
-----
CARRIAGE SERVICES, INC. -- UNAUDITED
CONDENSED PRO FORMA CONSOLIDATED
STATEMENT OF OPERATIONS:
Consolidated Statement of
Operations for the Year Ended
December 31, 1997.............. F-3
CARRIAGE SERVICES, INC. -- UNAUDITED
INTERIM CONSOLIDATED FINANCIAL
STATEMENTS:
Consolidated Balance Sheets as
of December 31, 1997 and March
31, 1998....................... F-5
Consolidated Statements of
Operations for the
Three Months Ended March 31,
1997 and 1998.................. F-6
Consolidated Statements of Cash
Flows for the
Three Months Ended March 31,
1997 and 1998.................. F-7
Notes to Consolidated Financial
Statements..................... F-8
CARRIAGE SERVICES, INC. -- AUDITED
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Public
Accountants.................... F-10
Consolidated Balance Sheets as
of December 31, 1996 and
1997........................... F-11
Consolidated Statements of
Operations for the Years Ended
December 31, 1995, 1996 and
1997........................... F-12
Consolidated Statements of
Changes in Stockholders' Equity
for the Years Ended December
31, 1995, 1996 and 1997........ F-13
Consolidated Statements of Cash
Flows for the Years Ended
December 31, 1995, 1996 and
1997........................... F-14
Notes to Consolidated Financial
Statements..................... F-15
THE CNM GROUP:
Report of Independent Public
Accountants.................... F-30
Balance Sheets as of December
31, 1996 and March 31, 1996.... F-31
Statements of Operations for the
Nine Months Ended December 31,
1996 and the Year Ended March
31, 1996....................... F-32
Statements of Cash Flows for the
Nine Months Ended December 31,
1996 and the Year Ended March
31, 1996....................... F-33
Stockholders' Equity for the
Nine Months Ended December 31,
1996 and the Year Ended March
31, 1996....................... F-34
Notes to Financial Statements... F-35

BARNETT-LARKIN-BROWN DIVISION OF 21ST
CENTURY FUNERAL COMPANY, L.C. AND
BARNETT-LARKIN-BROWN FUNERAL HOMES,
INC.:
Report of Independent Public
Accountants.................... F-41
Balance Sheets as of December
31, 1995, October 31, 1996,
December 31, 1996 and March 31,
1997........................... F-42
Statements of Income for the
Periods Ended December 31,
1995, October 31, 1996,
December 31, 1996 and March 31,
1997........................... F-43
Statements of Cash Flows for the
Periods Ended December 31,
1995, October 31, 1996,
December 31, 1996 and March 31,
1997........................... F-44
Notes to Financial Statements... F-45

REDGATE FUNERAL SERVICE CORPORATION:
Report of Independent Public
Accountants.................... F-47
Balance Sheet as of December 31,
1996........................... F-48
Statement of Income for the Year
Ended December 31, 1996........ F-49
Statement of Cash Flows for the
Year Ended December 31, 1996... F-50
Notes to Financial Statements... F-51

F-1

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PAGE
-----
ALLEN J. HARDEN FUNERAL HOME, INC.:
Report of Independent Public
Accountants.................... F-53
Balance Sheets as of December
31, 1996 and 1995.............. F-54
Statements of Operations and
Retained Earnings for the Years
Ended December 31, 1996 and
1995........................... F-55
Statements of Cash Flows for the
Years Ended December 31, 1996
and 1995....................... F-56
Notes to Financial Statements... F-57

McNARY-MOORE FUNERAL SERVICE, INC.:
Report of Independent Public
Accountants.................... F-60
Balance Sheets as of December
31, 1996 and 1995.............. F-61
Statements of Income and
Retained Earnings for the Years
Ended December 31, 1996 and
1995........................... F-62
Statements of Cash Flows for the
Years Ended December 31, 1996
and 1995....................... F-63
Notes to Financial Statements... F-64

SIDUN FUNERAL GROUP, INC.:
Report of Independent Public
Accountants.................... F-67
Balance Sheets as of December
31, 1996 and 1995.............. F-68
Statements of Income and
Retained Earnings for the Years
Ended December 31, 1996 and
1995........................... F-69
Statements of Cash Flows for the
Years Ended December 31, 1996
and 1995....................... F-70
Notes to Financial Statements... F-71

FOREST LAWN/EVERGREEN MANAGEMENT
CORPORATION:
Report of Independent Public
Accountants.................... F-76
Balance Sheets as of August 31,
1997 and 1996.................. F-77
Statements of Income and
Retained Earnings for the Years
Ended August 31, 1997 and
1996........................... F-78
Statements of Cash Flows for the
Years Ended August 31, 1997 and
1996........................... F-79
Notes to Financial Statements... F-80

KENT-THORNTON FUNERAL HOME, INC.:
Report of Independent Public
Accountants.................... F-87
Balance Sheets as of December
31, 1996 and 1995.............. F-88
Statements of Income and
Retained Earnings for the Years
Ended December 31, 1996 and
1995........................... F-89
Statements of Cash Flows for the
Years Ended December 31, 1996
and 1995....................... F-90
Notes to Financial Statements... F-91

JOHNSON MORTUARY AND CREMATORY, INC.:
Report of Independent Public
Accountants.................... F-95
Balance Sheet as of September
30, 1997....................... F-96
Statement of Income for the Year
Ended September 30, 1997....... F-97
Statement of Retained Earnings
for the Year Ended September
30, 1997....................... F-98
Statement of Cash Flows for the
Year Ended September 30,
1997........................... F-99
Notes to Financial Statements... F-100

F-2

424B4 53rd Page of 152 TOC 1st Previous Next ↓Bottom Just 53rd
CARRIAGE SERVICES, INC.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS

The following table sets forth the unaudited pro forma consolidated
statement of operations of the Company for the year ended December 31, 1997,
after giving effect to acquisitions made in 1997, which included 44 funeral
homes and 10 cemeteries made through the purchase of stock and assets. These
transactions are accounted for as purchases. The unaudited pro forma statement
of operations presents a subtotal column reflecting the acquisitions and
adjustments, and a separate column giving effect to the sale of Class A Common
Stock offered hereby (the "Offering"). These financial statements assume that
these transactions occurred as of January 1, 1997. The acquisitions assume that
the debt and stock used to effect these transactions were outstanding as of
January 1, 1997.

The unaudited pro forma consolidated statement of operations do not assume
any additional profitability resulting from the application of the Company's
revenue enhancement measures or cost reduction programs to the historical
results of the acquired businesses, nor do they assume increases in corporate
general and administrative expenses which may have resulted from the Company
managing the acquired businesses for the year ended December 31, 1997.

The following unaudited pro forma consolidated financial statement should
be read in conjunction with the Consolidated Financial Statements of the Company
and the related notes thereto included elsewhere herein. Such pro forma
information is based on historical data with respect to the Company and the
acquired businesses. The pro forma information is not necessarily indicative of
the results that might have occurred had such transactions actually taken place
at the beginning of the period specified and is not intended to be a projection
of future results.

CARRIAGE SERVICES, INC.
UNAUDITED CONDENSED PRO FORMA CONSOLIDATED STATEMENT OF OPERATIONS
FOR THE YEAR ENDED DECEMBER 31, 1997
(IN THOUSANDS, EXCEPT PER SHARE DATA)

[Enlarge/Download Table]

HISTORICAL ACQUIRED PRO FORMA OFFERING
CONSOLIDATED BUSINESSES(A) ADJUSTMENTS SUBTOTALS ADJUSTMENTS TOTAL
------------ ------------- ----------- --------- ----------- -------

Revenues............................. $ 77,421 $21,251 $-- $ 98,672 $-- $98,672
Gross Profit......................... 19,383 9,038 (405)(B) 28,016 -- 28,016
General & Administrative.. 5,277 6,138 -- 11,415 -- 11,415
Interest Expense..................... 5,889 582 2,327(C) 8,798 (3,557)(E) 5,241
Income before income taxes and
extraodinary item.................. 8,217 2,318 (2,732) 7,803 3,557(E) 11,360
Net income available to common
stockholders....................... $ 3,406 $ 2,133 $(2,332)(D) $ 3,207 $ 1,946(D) $ 5,153
Earnings per share:
Basic................................ .33 .31 .39(F)
Diluted.............................. .32 .31 .38(F)

F-3

424B4 54th Page of 152 TOC 1st Previous Next ↓Bottom Just 54th
NOTES TO UNAUDITED CONDENSED PRO FORMA
CONSOLIDATED STATEMENT OF OPERATIONS

The above unaudited pro forma consolidated statement of operations for the
year ended December 31, 1997, gives effect to the acquisitions and the Offering
as if they took place on January 1, 1997.

(A) Reflects the combined results of operations prior to acquisitions of
the businesses acquired by the Company in 1997 transactions, as if the
businesses had been acquired as of January 1, 1997.

(B) Reflects adjustments for increased depreciation and amortization
expense relative to the Company's new basis in the net assets of businesses
acquired in 1997, as if such acquisitions had been in place as of January 1,
1997.

(C) Reflects additional interest expense for the year ended December 31,
1997 which would have been incurred by the Company assuming the acquisitions
made by the Company during 1997 had been made as of January 1, 1997.

(D) Tax provisions in the unaudited pro forma consolidated financial
statement have been made to reflect normal effective provisions (benefits) as if
the effective rate will be 45.3%.

(E) Reflects the estimated reduction of interest expense for the year
ending December 31, 1997 related to the application of the estimated net
proceeds of the Offering to retire debt.

(F) Basic and dilulted earnings per share are calculated in compliance
with Statement of Financial Accounting Standards No. 128, which was adopted by
the Company in 1997.

F-4

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CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS, EXCEPT SHARE DATA)

[Download Table]

DECEMBER 31, MARCH 31,
1997 1998
------------ -----------
(UNAUDITED)

ASSETS

Current assets:
Cash and cash equivalents.......... $ 6,126 $ 544
Accounts receivable --
Trade, net of allowance for
doubtful accounts of $1,291
in 1997 and $1,170 in
1998....................... 11,617 12,176
Other......................... 1,295 2,042
------------ -----------
12,912 14,218
Inventories and other current
assets............................ 5,691 6,153
------------ -----------
Total current assets.......... 24,729 20,915
------------ -----------
Property, plant and equipment, at cost,
net of accumulated depreciation of
$7,123 in 1997 and $8,081 in 1998..... 85,865 90,880
Cemetery property, at cost.............. 32,154 35,459
Names and reputations, net of
accumulated amortization of $4,480 in
1997 and $5,241 in 1998............... 118,099 121,588
Deferred charges and other noncurrent
assets................................ 17,093 18,469
------------ -----------
$277,940 $ 287,311
============ ===========

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
Accounts payable................... $ 9,022 $ 3,993
Accrued liabilities................ 7,545 9,462
Current portion of long-term debt
and obligations under capital
leases............................ 2,339 2,116
------------ -----------
Total current liabilities..... 18,906 15,571
Preneed liabilities, net................ 7,403 7,154
Long-term debt, net of current
portion............................... 121,553 131,323
Obligations under capital leases, net of
current portion....................... 4,449 4,391
Deferred income taxes................... 13,113 14,060
------------ -----------
Total liabilities............. 165,424 172,499
------------ -----------
Commitments and contingencies
Redeemable preferred stock.............. 13,951 13,951
Stockholders' equity:
Class A Common Stock, $.01 par
value; 40,000,000 shares
authorized; 6,454,000 and
6,533,000 issued and outstanding
at December 31, 1997 and March 31,
1998, respectively................ 64 66
Class B Common Stock; $.01 par
value; 10,000,000 shares
authorized; 4,691,000 and
4,625,000 issued and outstanding
at December 31, 1997 and March 31,
1998, respectively................ 47 46
Contributed capital................ 102,056 101,855
Retained deficit................... (3,602) (1,106)
------------ -----------
Total stockholders' equity.... 98,565 100,861
------------ -----------
$277,940 $ 287,311
============ ===========

The accompanying notes are an integral part of these financial statements.

F-5

424B4 56th Page of 152 TOC 1st Previous Next ↓Bottom Just 56th
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED AND IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1998
--------- ---------
Revenues, net
Funeral......................... $ 15,288 $ 23,243
Cemetery........................ 2,701 4,875
--------- ---------
17,989 28,118
Costs and expenses
Funeral......................... 10,620 15,833
Cemetery........................ 2,226 3,498
--------- ---------
12,846 19,331
--------- ---------
Gross profit............... 5,143 8,787
General and administrative
expenses........................... 1,021 1,869
--------- ---------
Operating income................ 4,122 6,918
Interest expense, net................ 1,154 2,107
--------- ---------
Income before income taxes...... 2,968 4,811
Provision for income taxes........... 1,143 2,165
--------- ---------
Net income........................... 1,825 2,646
Preferred stock dividend
requirements....................... 363 150
--------- ---------
Net income available to common
stockholders................... $ 1,462 $ 2,496
========= =========
Earnings per share:
Basic........................... $ .16 $ .22
========= =========
Diluted......................... $ .16 $ .22
========= =========
Weighted average number of common and
common equivalent shares
outstanding:
Basic........................... 9,072 11,151
========= =========
Diluted......................... 10,586 12,122
========= =========

The accompanying notes are an integral part of these financial statements.

F-6

424B4 57th Page of 152 TOC 1st Previous Next ↓Bottom Just 57th
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED AND IN THOUSANDS)

FOR THE THREE MONTHS
ENDED MARCH 31,
--------------------
1997 1998
--------- ---------
Cash flows from operating activities:
Net income......................... $ 1,825 $ 2,645
Adjustments to reconcile net income
to net cash provided by (used
in) operating activities --
Depreciation and amortization... 1,563 2,417
Provision for losses on accounts
receivable...................... 270 420
Deferred income taxes........... 445 947
Changes in assets and
liabilities, net of effects
from acquisitions:
Increase in accounts
receivable..................... (1,233) (2,604)
Increase in inventories and
other current assets......... (476) (397)
Increase in other deferred
charges...................... (319) (1,247)
Increase in accounts
payable...................... 1,442 233
Increase (decrease) in accrued
liabilities.................. (377) 1,521
Increase (derease) in preneed
liabilities.................. 377 (303)
Other, net...................... (737) --
--------- ---------
Net cash provided by
operating services........... 2,780 3,632
Cash flows from investing activities:
Acquisitions, net of cash
acquired......................... (33,437) (6,252)
Purchase of property, plant and
equipment....................... (1,242) (4,372)
Other, including disposition of
assets.......................... 1,607 (171)
--------- ---------
Net cash used in investing
activities................... (33,072) (10,795)
Cash flows from financing activities:
Proceeds from long-term debt....... 31,969 8,163
Payments on long-term debt and
obligations under capital
leases.......................... (327) (6,459)
Payment of preferred stock
dividends....................... (363) (150)
Exercise of stock options.......... 28 55
Payment of deferred debt charges
and other....................... -- (28)
--------- ---------
Net cash provided by
financing activities......... 31,307 1,581
Net increase (decrease) in cash and
cash equivalents..................... 1,015 (5,582)
Cash and cash equivalents at
beginning of period................ 1,712 6,126
--------- ---------
Cash and cash equivalents at end of
period............................. $ 2,727 $ 544
========= =========
Supplemental disclosure of cash flow
information:
Cash paid for interest............. $ 889 $ 2,001
========= =========
Cash paid for income taxes......... $ -- $ 597
========= =========
Non-cash consideration for
acquisitions..................... $ 25,571 $ 2,056
========= =========

The accompanying notes are an integral part of these financial statements.

F-7

424B4 58th Page of 152 TOC 1st Previous Next ↓Bottom Just 58th
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)

1. BASIS OF PRESENTATION

The accompanying consolidated financial statements include Carriage
Services, Inc. and its subsidiaries (the "Company"). All significant
intercompany balances and transactions have been eliminated.

The information for the three months ended March 31, 1997 and 1998 is
unaudited, but in the opinion of management, reflects all adjustments which are
of a normal, recurring nature necessary for a fair presentation of financial
position and results of operations for the interim periods. The accompanying
consolidated financial statements have been prepared consistent with the
accounting policies described in Note 1 to the Audited Consolidated Financial
Statements, and should be read in conjunction therewith.

2. ACQUISITIONS

During the three months ended March 31, 1998, the Company purchased four
funeral homes and one cemetery. 22 funeral homes and two cemeteries were
acquired during the three months ended March 31, 1997. These acquisitions have
been accounted for by the purchase method, and their results of operations are
included in the accompanying consolidated financial statements from the dates of
acquisition.

The effect of the above acquisitions on the Consolidated Balance Sheets was
as follows:

MARCH 31,
--------------------
1997 1998
--------- ---------
(IN THOUSANDS)
Current assets, net of cash
acquired............................. $ 6,997 $ 647
Cemetery property.................... 18,845 2,305
Property, plant and equipment........ 17,755 1,683
Deferred charges and other noncurrent
assets............................... 400 101
Names and reputations................ 25,685 3,837
Current liabilities.................. (4,119) (211)
Other liabilities.................... (6,555) (54)
--------- ---------
Total acquisitions.............. 59,008 8,308
--------- ---------
Consideration:
Debt................................. -- 2,056
Redeemable preferred stock issued.... 20,000 --
Common stock issued.................. 5,571 --
--------- ---------
Cash used for acquisitions...... 33,437 6,252
========= =========

The following table represents, on an unaudited pro forma basis, the
combined operations of the Company and the above noted acquisitions, as if such
acquisitions had occurred as of January 1, 1997. Appropriate adjustments have
been made to reflect the accounting basis used in recording these acquisitions,
however, these unaudited pro forma results are based on the acquired businesses'
historical financial results and do not assume any additional profitability
resulting from the application of the Company's revenue enhancement measures or
cost reduction programs to the historical results of the acquired businesses.
These pro forma results have been prepared for comparative purposes only and do
not purport to be indicative of the results of operations that would have
resulted had the combinations been in effect on the dates indicated, that have
resulted since the dates of acquisition or that may result in the future.

F-8

424B4 59th Page of 152 TOC 1st Previous Next ↓Bottom Just 59th
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
(UNAUDITED)

THREE MONTHS ENDED
MARCH 31,
--------------------
1997 1998
--------- ---------
(IN THOUSANDS,
EXCEPT PER SHARE
DATA)
Revenues, net........................ $ 26,046 $ 28,439
Net income before income taxes....... 2,723 4,783
Net income available to common
stockholders......................... 1,312 2,481
Earnings per common share:
Basic........................... 0.14 0.22
Diluted......................... 0.14 0.22

3. DEBT

In August 1996, the Company entered into a credit facility (the "Former
Credit Facility") for a $75 million revolving line of credit. The Former Credit
Facility provided for both LIBOR and base rate interest options. That facility
was unsecured and was for a term of three years. During September 1997, the
Company entered into a new credit facility (the "New Credit Facility") for a
$150 million revolving line of credit. The New Credit Facility has a five year
term, is unsecured and contains customary restrictive covenants, including a
restriction on the payment of dividends on common stock, and requires the
Company to maintain certain financial ratios. Interest under the New Credit
Facility is provided at both LIBOR and prime rate options. As of March 31, 1998,
$115.6 million was outstanding under the line of credit.

F-9

424B4 60th Page of 152 TOC 1st Previous Next ↓Bottom Just 60th
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To The Stockholders and Board of Directors of Carriage Services, Inc.:

We have audited the accompanying consolidated balance sheets of Carriage
Services, Inc. (a Delaware corporation) and subsidiaries as of December 31, 1996
and 1997 and the related consolidated statements of operations, changes in
stockholders' equity and cash flows for each of the three years in the period
ended December 31, 1997. These financial statements are the responsibility of
the Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Carriage
Services, Inc., and subsidiaries as of December 31, 1996 and 1997, and the
consolidated results of their operations and their cash flows for each of the
three years in the period ended December 31, 1997 in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
February 10, 1998

F-10

424B4 61st Page of 152 TOC 1st Previous Next ↓Bottom Just 61st
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
----------------------
1996 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents....... $ 1,712 $ 6,126
Accounts receivable --
Trade, net of allowance for
doubtful accounts of
$530 in 1996 and $1,291
in 1997................. 5,665 11,617
Other...................... 673 1,295
---------- ----------
6,338 12,912
Inventories and other current
assets......................... 3,350 5,691
---------- ----------
Total current assets.... 11,400 24,729
---------- ----------
Property, plant and equipment, at
cost:
Land............................ 9,640 21,789
Buildings and improvements...... 31,750 56,153
Furniture and equipment......... 8,817 15,046
---------- ----------
50,207 92,988
Less -- accumulated
depreciation................... (4,095) (7,123)
---------- ----------
46,112 85,865
Cemetery property, at cost........... 4,061 32,154
Names and reputations, net of
accumulated amortization of $2,007
in 1996 and $4,480 in 1997......... 62,568 118,099
Deferred charges and other
non-current assets................. 7,167 17,093
---------- ----------
$ 131,308 $ 277,940
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities:
Accounts payable................ $ 2,192 $ 9,022
Accrued liabilities............. 3,033 7,545
Current portion of long-term
debt and obligations under
capital leases................. 1,086 2,339
---------- ----------
Total current
liabilities........... 6,311 18,906
Preneed liabilities, net............. 3,664 7,403
Long-term debt, net of current
portion............................ 42,733 121,553
Obligations under capital leases, net
of current portion................. 557 4,449
Deferred income taxes................ 3,749 13,113
---------- ----------
Total liabilities....... 57,014 165,424
---------- ----------
Commitments and contingencies
Redeemable preferred stock........... 17,251 13,951
Stockholders' equity:
Class A Common Stock, $.01 par
value; 40,000,000 shares
authorized; 3,990,000 and
6,454,000 issued and
outstanding in 1996 and 1997,
respectively................... 40 64
Class B Common Stock; $.01 par
value; 10,000,000 shares
authorized; 4,502,000 and
4,691,000 issued and
outstanding in 1996 and 1997,
respectively................... 45 47
Contributed capital............. 63,966 102,056
Retained deficit................ (7,008) (3,602)
---------- ----------
Total stockholders'
equity................ 57,043 98,565
---------- ----------
$ 131,308 $ 277,940
========== ==========

The accompanying notes are an integral part of these financial statements.

F-11

424B4 62nd Page of 152 TOC 1st Previous Next ↓Bottom Just 62nd
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED DECEMBER
31,
-------------------------------
1995 1996 1997
--------- --------- ---------
Revenues, net
Funeral......................... $ 22,661 $ 37,445 $ 64,888
Cemetery........................ 1,576 2,903 12,533
--------- --------- ---------
24,237 40,348 77,421
Costs and expenses
Funeral......................... 18,921 30,641 48,404
Cemetery........................ 1,326 2,541 9,634
--------- --------- ---------
20,247 33,182 58,038
--------- --------- ---------
Gross profit.................... 3,990 7,166 19,383
General and administrative
expenses........................... 2,106 2,474 5,277
--------- --------- ---------
Operating income................ 1,884 4,692 14,106
Interest expense, net................ 3,684 4,347 5,889
--------- --------- ---------
Income (loss) before income
taxes and extraordinary
item.......................... (1,800) 345 8,217
Provision for income taxes........... 694 138 3,726
--------- --------- ---------
Net income (loss) before
extraordinary item............ (2,494) 207 4,491
Extraordinary item -- loss on early
extinguishment of debt, net of
income tax benefit of $332 in 1996
and $159 in 1997................... -- (498) (195)
--------- --------- ---------
Net income (loss)............... (2,494) (291) 4,296
Preferred stock dividend
requirements....................... -- 622 890
--------- --------- ---------
Net income (loss) available to
common stockholders........... $ (2,494) $ (913) $ 3,406
========= ========= =========
Basic earnings (loss) per share:
Net income (loss) before
extraordinary item............ $ (.99) $ (.09) $ .35
Extraordinary item.............. -- (.10) (.02)
--------- --------- ---------
Net income (loss)............... $ (.99) $ (.19) $ .33
========= ========= =========
Diluted earnings (loss) per share:
Net income (loss) before
extraordinary item............ $ (.99) $ (.09) $ .34
Extraordinary item.............. -- (.10) (.02)
--------- --------- ---------
Net income (loss)............... $ (.99) $ (.19) $ .32
========= ========= =========
Weighted average number of common and
common equivalent shares
outstanding
Basic........................... 2,520 4,869 10,226
========= ========= =========
Diluted......................... 2,520 4,869 10,485
========= ========= =========

The accompanying notes are an integral part of these financial statements.

F-12

424B4 63rd Page of 152 TOC 1st Previous Next ↓Bottom Just 63rd
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

[Enlarge/Download Table]

CONTRIBUTED NET RETAINED
NO. OF PREFERRED NO. OF COMMON CAPITAL UNREALIZED EARNINGS
SHARES STOCK SHARES STOCK (DEFICIT) GAIN (LOSS) (DEFICIT) TOTAL
--------- --------- --------- ------ ----------- ----------- -------- -------

BALANCE -- DECEMBER 31, 1994......... 7,160 $ 72 2,520 $ 25 $ 6,992 $ (59) $ (3,601) $ 3,429
Net loss -- 1995..................... -- -- -- -- -- -- (2,494) (2,494)
Issuance of preferred stock.......... 8,500 85 -- -- 8,108 -- -- 8,193
Unrealized net gain -- available
for sale securities................ -- -- -- -- -- 23 -- 23
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1995......... 15,600 157 2,520 25 15,100 (36) (6,095) 9,151
Net loss -- 1996..................... -- -- -- -- -- -- (291) (291)
Issuance of preferred stock.......... 555 5 -- -- 540 -- -- 545
Issuance of common stock............. -- -- 3,947 40 47,942 -- -- 47,982
Conversion of preferred stock to
common stock....................... (16,045) (160) 1,980 20 140 -- -- --
Conversion of redeemable
preferred stock to common stock.... -- -- 39 -- 522 -- -- 522
Unrealized net gain -- available
for sale securities................ -- -- -- -- -- 36 -- 36
Purchase of treasury stock........... (170) (2) -- -- (339) -- -- (341)
Exercise of stock options............ -- -- 6 -- 61 -- -- 61
Preferred dividends.................. -- -- -- -- -- -- (622) (622)
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1996......... -- -- 8,492 85 63,966 -- (7,008) 57,043
Net income -- 1997................... -- -- -- -- -- -- 4,296 4,296
Issuance of common stock............. -- -- 978 10 14,714 -- -- 14,724
Conversion of redeemable
preferred stock to common stock.... -- -- 1,658 16 23,276 -- -- 23,292
Purchase of treasury stock........... -- -- (3) -- (60) -- -- (60)
Exercise of stock options............ -- -- 20 -- 160 -- -- 160
Preferred dividends.................. -- -- -- -- -- -- (890) (890)
--------- --------- --------- ------ ----------- ----------- -------- -------
BALANCE -- DECEMBER 31, 1997......... -- $ -- 11,145 $ 111 $ 102,056 $-- $ (3,602) $98,565
========= ========= ========= ====== =========== =========== ======== =======

The accompanying notes are an integral part of these financial statements.

F-13

424B4 64th Page of 152 TOC 1st Previous Next ↓Bottom Just 64th
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

FOR THE YEARS ENDED DECEMBER 31,
----------------------------------
1995 1996 1997
---------- ---------- ----------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss)............... $ (2,494) $ (291) $ 4,296
Adjustments to reconcile net
income (loss) to net cash
provided by operating
activities --
Depreciation and
amortization............ 1,948 3,629 7,809
Provision for losses on
accounts receivable..... 488 683 1,025
Loss on early
extinguishment of debt,
net of income taxes..... -- 498 195
Deferred income taxes...... 659 54 2,230
Changes in assets and
liabilities net of effects
from acquisitions:
Increase in accounts
receivable.............. (1,125) (3,440) (4,747)
Decrease (increase) in
inventories and other
current assets.......... 115 (465) (1,223)
Increase in other deferred
charges................. (144) (1,146) (1,884)
Increase (decrease) in
accounts payable........ 45 1,151 1,168
Increase (decrease) in
accrued liabilities..... 1,461 (403) 422
Increase (decrease) in
preneed liabilities..... 44 44 370
---------- ---------- ----------
Net cash provided by
operating
activities......... 997 314 9,661
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash
acquired...................... (12,191) (42,707) (65,607)
Disposition of businesses
formerly owned................ -- 393 --
Purchase of marketable
securities available for
sale.......................... (1,795) -- --
Disposition of marketable
securities available for
sale.......................... 5,312 976 --
Purchase of property, plant and
equipment..................... (3,019) (4,630) (9,163)
---------- ---------- ----------
Net cash used in
investing
activities......... (11,693) (45,968) (74,770)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt.... 11,563 59,849 79,300
Payments on long-term debt and
obligations under capital
leases........................ (2,273) (65,925) (9,196)
Proceeds from sale of preferred
stock......................... 8,192 -- --
Proceeds from issuance of common
stock......................... -- 47,694 566
Preferred stock dividends....... -- (622) (890)
Exercise of stock options....... -- 61 160
Purchase of treasury stock...... -- (341) (60)
Payment of deferred debt
charges....................... (49) (923) (357)
---------- ---------- ----------
Net cash provided by
financing
activities......... 17,433 39,793 69,523
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... 6,737 (5,861) 4,414
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 836 7,573 1,712
---------- ---------- ----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 7,573 $ 1,712 $ 6,126
========== ========== ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid through issuance
of new debt................... $ 644 $ -- $ --
========== ========== ==========
Retirement of debt through
issuance of stock............. $ 500 $ -- $ --
========== ========== ==========
Cash paid for interest.......... $ 3,127 $ 4,466 $ 5,477
========== ========== ==========
Cash paid for income taxes...... $ -- $ -- $ 1,385
========== ========== ==========
Retirement of debt through
disposition of business....... $ -- $ 2,642 $ --
========== ========== ==========
Non-cash consideration for
acquisitions.................. $ -- $ 25,474 $ 52,653
========== ========== ==========

The accompanying notes are an integral part of these financial statements.

F-14

424B4 65th Page of 152 TOC 1st Previous Next ↓Bottom Just 65th
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

BUSINESS

Carriage Services, Inc. (the "Company") was organized under the laws of
the State of Delaware on December 29, 1993. The Company owns and operates
funeral homes and cemeteries throughout the United States. The Company provides
professional services related to funerals and interments at its funeral homes
and cemeteries. Prearranged funerals and preneed cemetery property are marketed
in the geographic markets served by the Company's locations.

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

The financial statements include the consolidated financial statements of
Carriage Services, Inc. and its subsidiaries. In consolidation, all significant
intercompany balances and transactions have been eliminated. Certain prior year
amounts in the consolidated financial statements have been reclassified to
conform with current year presentation.

FUNERAL AND CEMETERY OPERATIONS

The Company records the sale of funeral merchandise and services upon
performance of the funeral service. The Company records the sale of the right of
cemetery interment or mausoleum entombment and related merchandise at the time
of sale. The cost for cemetery merchandise and services sold, but not yet
provided, is accrued as an expense at the same time the cemetery revenue is
recognized. Allowances for customer cancellations, refunds and bad debts are
provided at the date of sale based on the historical experience of the Company.
Accounts receivable-trade, net consists of approximately $4,977,000 and
$7,245,000 of funeral receivables and approximately $688,000 and $4,372,000 of
current cemetery receivables at December 31, 1996 and 1997, respectively.
Non-current cemetery receivables, those payable after one year, are included in
Deferred Charges and Other Non-current Assets on the Consolidated Balance
Sheets.

PRENEED FUNERAL ARRANGEMENTS

Preneed funeral sales are effected by deposits to a trust or purchase of a
third-party insurance product. Since the Company does not have access to these
funds, the sale is not recorded until the service is performed, nor generally,
are the related assets and liabilities reflected on the Consolidated Balance
Sheets. The trust income earned and the increases in insurance benefits on the
insurance products are also deferred until the service is performed in order to
offset inflation in cost to provide the service in the future. The preneed
funeral trust assets were approximately $36,523,000 and $52,931,000 at December
31, 1996 and 1997, respectively, which in the opinion of management, exceed the
future obligations under such arrangements. The type of instruments that the
trusts may invest in are regulated by state agencies.

F-15

424B4 66th Page of 152 TOC 1st Previous Next ↓Bottom Just 66th
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The following summary reflects the composition of the assets held in trust
to satisfy the Company's future obligations under preneed funeral arrangements:

HISTORICAL UNREALIZED
COST BASIS GAIN (LOSS) FAIR VALUE
----------- ----------- ----------
(IN THOUSANDS)
As of December 31, 1996 --
Cash and cash equivalents....... $16,022 $-- $16,022
Fixed income investment
contracts..................... 8,434 -- 8,434
Mutual funds, corporate bonds
and stocks.................... 11,965 102 12,067
----------- ----------- ----------
Total...................... $36,421 $ 102 $36,523
----------- ----------- ----------
As of December 31, 1997 --
Cash and cash equivalents....... $23,891 $-- $23,891
Fixed income investment
contracts..................... 10,638 -- 10,638
Mutual funds, corporate bonds
and stocks.................... 17,960 442 18,402
----------- ----------- ----------
Total...................... $52,489 $ 442 $52,931
=========== =========== ==========

CEMETERY MERCHANDISE AND SERVICE TRUST

The Company is also generally required, by certain states, to deposit a
specified amount into a merchandise and service trust fund for cemetery
merchandise and service contracts sold on a preneed basis. The principal and
accumulated earnings of the trust may be withdrawn by the Company upon maturity
(generally, the death of the purchaser) or cancellation of the contracts. Trust
fund investment income is recognized in current revenues as trust earnings
accrue, net of current period inflation costs recognized related to the
merchandise that has not yet been purchased. Merchandise and service trust fund
balances, in the aggregate, were approximately $1,134,000 and $9,567,000 at
December 31, 1996 and 1997, respectively, and are included in Preneed
Liabilities, net on the accompanying Consolidated Balance Sheets.

PERPETUAL AND MEMORIAL CARE TRUST

In accordance with respective state laws, the Company is required to
deposit a specified amount into perpetual and memorial care trust funds for each
interment/entombment right and memorial sold. Income from the trust fund is used
to provide care and maintenance for the cemeteries and mausoleums and is
periodically distributed to the Company and recognized as revenue upon
distribution. The perpetual and memorial care trust assets were approximately
$2,002,000 and $8,408,000 at December 31, 1996 and 1997, respectively, which, in
the opinion of management, will cover future obligations to provide care and
maintenance for the Company's cemeteries and mausoleums. The Company does not
have the right to withdraw any of the principal balances of these funds and,
accordingly, these trust fund balances are not reflected in the accompanying
Consolidated Balance Sheets.

DEFERRED OBTAINING COSTS

Deferred obtaining costs consist of sales commissions and other direct
marketing costs applicable to preneed funeral sales, net of insurance
commissions received. These costs are deferred and amortized in funeral costs
and expenses over the expected timing of the performance of the services covered
by the preneed funeral contracts.

CASH AND CASH EQUIVALENTS

The Company considers all highly liquid investments with an original
maturity of three months or less to be cash equivalents.

F-16

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MARKETABLE SECURITIES

The Company accounts for marketable securities in accordance with Statement
of Financial Accounting Standards ("SFAS") No. 115, and all of the Company's
investment securities are classified as available for sale securities. At
December 31, 1996 and 1997, the Company had no gross unrealized gains (losses).
The Company does not use derivative financial instruments or participate in
hedging activities.

INVENTORY

Inventory is recorded at the lower of its cost basis (determined by the
specific identification method) or net realizable value.

NAMES AND REPUTATIONS

The excess of the purchase price over the fair value of net identifiable
assets acquired, as determined by management in transactions accounted for as
purchases, is recorded as Names and Reputations. Such amounts are amortized over
40 years. Many of the Company's acquired funeral homes have provided high
quality service to families for generations. The resulting loyalty often
represents a substantial portion of the value of a funeral business. The Company
reviews the carrying value of Names and Reputations at least quarterly on a
location-by-location basis to determine if facts and circumstances exist which
would suggest that this intangible asset may be impaired or that the
amortization period needs to be modified. If indicators are present which
indicate impairment is probable, the Company will prepare a projection of the
undiscounted cash flows of the location and determine if the intangible assets
are recoverable based on these undiscounted cash flows. If impairment is
indicated, then an adjustment will be made to reduce the carrying amount of the
intangible asset to its fair value. At December 31, 1997, no impairment was
deemed to have occurred.

The Company adopted SFAS No. 121, "Accounting for the Impairment of
Long-Lived Assets to be Disposed Of," as of January 1, 1996, and such adoption
did not have a material impact on the Company's consolidated financial position
or results of operations.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are stated at cost. The costs of ordinary
maintenance and repairs are charged to operations as incurred, while renewals
and betterments are capitalized. Capitalized interest was $162,000 and $264,000
in 1996 and 1997, respectively. Depreciation of property, plant and equipment is
computed based on the straight-line method over the following estimated useful
lives of the assets:

YEARS
--------
Buildings and improvements........... 15 to 40
Furniture and fixtures............... 7 to 10
Machinery and equipment.............. 5 to 10
Automobiles.......................... 5 to 7

INCOME TAXES

The Company files a consolidated U.S. federal income tax return. The
Company records deferred taxes for temporary differences between the tax basis
and financial reporting basis of assets and liabilities.

EARNINGS PER COMMON SHARE

In 1997, the Financial Accounting Standards Board issued Statement No. 128,
Earnings per Share, which replaced the calculation of primary and fully diluted
earnings per share with basic and diluted earnings per share. Unlike primary
earnings per share, basic earnings per share excludes any dilutive effects of
options, warrants and convertible securities. Diluted earnings per share is very
similar to the previously

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
reported fully diluted earnings per share. All earnings per share amounts for
all periods presented have been restated to conform to the Statement 128
requirements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

Management believes that carrying value approximates fair value for cash
and cash equivalents and marketable equity securities which are designated as
available-for-sale. Additionally, its floating rate Credit Facility approximates
its fair value. Management also believes that its redeemable preferred stock is
stated at fair value.

USE OF ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

BUSINESS SEGMENTS

In June 1997, the Financial Accounting Standards Board issued Statement No.
131 ("SFAS No. 131"), Disclosures About Segments of an Enterprise and Related
Information. SFAS 131, effective for years beginning after December 15, 1997,
requires segment information to be reported on a basis consistent with that used
internally for evaluating segment performance and deciding how to allocate
resources to segments. The Company will adopt SFAS No. 131 in 1998 and is
evaluating the way segment information is reported.

2. ACQUISITIONS:

During 1997, the Company acquired 44 funeral homes and 10 cemeteries
through the purchase of stock and assets. In 1996, the Company acquired 38
funeral homes and 7 cemeteries through the purchase of stock and assets. These
transactions have been accounted for utilizing the purchase method of
accounting, and the results of operations of the acquired businesses have been
included in the results of the Company from the respective dates of acquisition.

In accordance with APB Opinion 16, purchase prices were allocated to the
net assets acquired based on management's estimate of the fair value of the
acquired assets and liabilities at the date of acquisition. Many of the
Company's acquired funeral homes have provided high quality service to families
for generations. The resulting loyalty often represents a substantial portion of
the value of a funeral business. As a result, the excess of the consideration
paid over the fair value of net tangible and other identifiable intangible
assets is allocated to Names and Reputations. Future adjustments to the
allocation of the purchase price may be made during the 12 months following the
date of acquisition due to resolution of uncertainties existing at the
acquisition date, which may include obtaining additional information regarding
asset and liability valuations.

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The effect of the above acquisitions on the Consolidated Balance Sheets at
December 31, 1996 and 1997 was as follows:

1996 1997
---------- ----------
(IN THOUSANDS)
Current Assets....................... $ 3,532 $ 11,909
Cemetery Property.................... 3,610 28,276
Property, Plant and Equipment........ 22,574 34,830
Deferred Charges and Other
Non-current Assets................. 1,542 1,597
Names and Reputations................ 43,139 55,013
Current Liabilities.................. (1,025) (1,631)
Debt................................. -- (1,072)
Other Liabilities.................... (5,191) (10,662)
---------- ----------
68,181 118,260
Consideration:
Redeemable preferred stock issued.... (17,775) (20,000)
Debt................................. (6,582) (18,210)
Preferred stock issued............... (555) --
Cash acquired in acquisitions........ (274) (556)
Common Stock issued.................. (288) (13,887)
---------- ----------
Cash used for acquisitions...... $ 42,707 $ 65,607
========== ==========

The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during 1996 and 1997 as if
such acquisitions had taken place at the beginning of 1996. Appropriate
adjustments have been made to reflect the accounting basis used in recording
these acquisitions. These pro forma results have been prepared for comparative
purposes only and do not purport to be indicative of the results of operations
that would have resulted had the combination been in effect on the date
indicated, that have resulted since the respective dates of acquisition or that
may result in the future.

1996 1997
---------- ----------
(UNAUDITED AND IN
THOUSANDS)
Revenues, net........................ $ 95,169 $ 98,672
Income (loss) before income taxes and
extraordinary item................. (1,686) 7,803
Net income (loss) available to common
stockholders....................... (2,157) 3,207
Earnings (loss) per share
Basic........................... (.44) .31
Diluted......................... (.44) .31

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DEFERRED CHARGES AND OTHER NON-CURRENT ASSETS:

Deferred charges and other non-current assets at December 31, 1996 and 1997
were as follows (in thousands):

1996 1997
--------- ---------
Agreements not to compete, net of
accumulated amortization of
$1,722 and $2,233 respectively..... $ 3,297 $ 4,034
Deferred debt expense, net of
accumulated amortization of $78
and $23, respectively.............. 511 324
Non-current cemetery and notes
receivable......................... 2,114 9,807
Deferred obtaining costs, net of
accumulated amortization of $44
and $253, respectively............. 1,245 2,928
--------- ---------
$ 7,167 $ 17,093
========= =========

The cost of agreements not to compete with former owners of businesses
acquired are amortized over the term of the respective agreements, ranging from
four to 10 years. Deferred debt expense is being amortized over the term of the
related debt. Non-current cemetery receivables result from the multi-year
payment terms in the underlying contracts. These cemetery receivables are
recorded net of allowances for customer cancellations, refunds and bad debts.

4. LONG-TERM DEBT:

The Company's long-term debt consisted of the following at December 31 (in
thousands):

1996 1997
--------- ----------
Credit Facility, unsecured floating
rate $150 million line, interest is
due on a quarterly basis for prime
borrowings and on the maturity
dates of the eurodollar borrowings
at the applicable eurodollar rate
plus .50% to 1.25% (weighted
average interest rate was 6.8772%
for the quarter ended December 31,
1997), matures in September,
2002............................... $ -- $ 107,500
Credit Facility, unsecured floating
rate $75 million line, interest was
due on a quarterly basis at prime
to prime plus .25% or at the
applicable eurodollar rate plus
.75% to 2.0%....................... 36,500 --
Acquisition debt..................... 6,395 10,817
Other................................ 574 5,219
Less -- Current portion.............. (736) (1,983)
--------- ----------
$ 42,733 $ 121,553
========= ==========

In conjunction with the closing of the initial public offering (the
"IPO") in August 1996, the Company entered into a Credit Facility (the
"Former Credit Facility") which provided for a $75 million revolving line of
credit with both LIBOR and base rate interest options. This Former Credit
Facility was unsecured and was for a term of three years. During September 1997,
the Company entered into a new credit facility (the "New Credit Facility") for
a $150 million revolving line of credit. The New Credit Facility has a five year
term, is unsecured and contains customary restrictive covenants, including a
restriction on the payment of dividends on common stock and requires the Company
to maintain certain financial ratios. The Company was in compliance with all
covenants at December 31, 1997. In August 1996, the Company paid all of its
outstanding indebtedness with the proceeds from the issuance of its Class A
Common Stock in connection with the Company's IPO (see Note 7) and utilization
of the Former Credit Facility. In connection with repayment of debt in August
1996 and the retirement of debt issued by the Former Credit Facility in

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
September 1997, the Company recognized an extraordinary loss of approximately
$498,000 and $195,000, net of income tax benefit of approximately $332,000 and
$159,000 for the write-off of the deferred loan costs associated with the early
retirement of debt for the years ended December 31, 1996 and 1997, respectively.

Acquisition debt consists of deferred purchase prices, payable to sellers.
The deferred purchase price notes bearing interest at 0%, discounted at imputed
interest rates ranging from 6% to 8%, with maturities from 3 to 15 years.

The aggregate maturities of long-term debt for the year ended December 31,
1998 and for the subsequent four years, are approximately $1,983,000,
$2,021,000, $1,196,000, $1,193,000, and $108,744,000, respectively and
$8,399,000 thereafter.

5. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company leases certain office facilities, vehicles and equipment under
operating leases for terms ranging from one to fifteen years. Certain of these
leases provide for an annual adjustment. Rent expense was approximately
$951,000, $924,000 and $1,997,000 for 1995, 1996 and 1997, respectively.

Assets acquired under capital leases are included in property, plant and
equipment on the accompanying Consolidated Balance Sheets.

At December 31, 1997 minimum lease payments were as follows:

MINIMUM LEASE PAYMENTS
-----------------------
OPERATING CAPITAL
LEASES LEASES
---------- --------
(IN THOUSANDS)
Years ended December 31,
1998............................ $1,792 $ 679
1999............................ 1,557 2,632
2000............................ 1,099 230
2001............................ 799 207
2002............................ 1,449 198
Thereafter...................... 2,181 2,716
---------- --------
Total minimum lease payments......... $8,877 6,662
==========
Less: amount representing interest... 1,857
Less: current portion of obligations
under capital leases............... 356
--------
Long-term obligations under capital
leases............................. $ 4,449
========

AGREEMENTS AND EMPLOYEE BENEFITS

The Company has entered into various employment agreements and agreements
not to compete with key employees and former owners of businesses acquired.
Payments for such agreements are not made in advance. These agreements are
generally for one to ten years and provide for future payments annually,
quarterly or monthly. The aggregate payments due under these agreements for the
subsequent five years, are approximately $1,356,000, $1,342,000, $1,101,000,
$924,000 and $845,000, respectively and $2,576,000 thereafter. In conformity
with industry practice, these agreements are not included in the accompanying
Consolidated Balance Sheets.

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The Company sponsors one defined contribution plan for the benefit of its
employees. The expense for this plan has not been significant for the periods
presented. In addition, the Company does not offer any other post-retirement or
post-employment benefits.

LITIGATION

Certain of the funeral homes located in California that were acquired by
the Company in early 1997, along with other death care providers, are defendants
in litigation in the state of California alleging that a flight service
contracted to dispose of cremains failed to properly carry out its duties. While
the litigation is in the early stages, management, with the advice of legal
counsel, believes that there are adequate insurance coverages, indemnities and
reserves such that the results of this litigation will not have a material
effect on the Company's consolidated financial position or result of operations.
Additionally, the Company is, from time to time, subject to routine litigation
arising in the normal course of its business. Management, with the advice of
legal counsel, similarly believes that the results of any such routine
litigation or other pending legal proceedings will not have a material effect on
the Company's consolidated financial position or results of operations.

6. INCOME TAXES:

The provision for income taxes for 1995, 1996 and 1997 consisted of:

1995 1996 1997
--------- --------- ---------
(IN THOUSANDS)
Current
U. S. Federal................... $ -- $ -- $ 1,275
State........................... 35 84 759
--------- --------- ---------
Total current provision.... 35 84 2,034
--------- --------- ---------
Deferred:
U. S. Federal................... 585 48 1,564
State........................... 74 6 128
--------- --------- ---------
Total deferred provision... 659 54 1,692
--------- --------- ---------
Total income tax
provision............... $ 694 $ 138 $ 3,726
========= ========= =========

A reconciliation of taxes to the U.S. federal statutory rate to those
reflected in the Consolidated Statements of Operations for 1995, 1996 and 1997
is as follows:

1995 1996 1997
--------- --------- ---------
Federal statutory rate............... (34.0)% 34.0% 34.0%
Effect of state income taxes, net of
federal benefit at 34%............. (6.0) 4.0 5.3
Effect of nondeductible expenses and
other, net......................... 3.9 57.3 15.9
Effect of valuation allowance........ 74.7 (55.3) (14.5)
Effect of change in statutory rate... -- -- 4.6
--------- --------- ---------
38.6% 40.0% 45.3%
========= ========= =========

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

The tax effects of temporary differences that give rise to significant
deferred tax assets and liabilities at December 31, 1996 and 1997 were as
follows:

1996 1997
--------- ----------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss
carryforwards................. $ 2,369 $ 510
Reserves not currently
deductible.................... 200 509
Accrued liabilities and other... 104 701
Amortization of non-compete
agreements.................... 387 816
--------- ----------
3,060 2,536
Valuation allowance.................. (1,442) (268)
--------- ----------
Total deferred tax
assets.................. $ 1,618 $ 2,268
========= ==========
Deferred tax liability:
Amortization and depreciation... $ (4,893) $ (12,814)
Preneed assets, net............. (170) (1,670)
--------- ----------
Total deferred tax
liabilities............. $ (5,063) $ (14,484)
========= ==========
Net deferred tax liability........... $ (3,445) $ (12,216)
========= ==========
Current net deferred asset........... $ 304 $ 897
Non-current net deferred liability... (3,749) (13,113)
--------- ----------
$ (3,445) $ (12,216)
========= ==========

The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets for which realization is uncertain. The Company
reviews the valuation allowance at the end of each quarter and makes adjustments
if it is determined that it is more likely than not that the NOL's will be
realized. At December 31, 1997, the Company has approximately $584,000 of
federal net operating loss ("NOL") carryforwards which will expire between
2009 and 2011, if not utilized, and $3,826,000 of state NOL carryforwards which
will expire between the years 2000 and 2012, if not utilized. As a result of the
IPO (see Note 7), there may be a limitation placed on the Company's utilization
of its NOL's by Section 382 of the Internal Revenue Code in any one particular
tax year. Deferred tax liabilities were recorded with respect to purchase
accounting transactions during the year ended December 31, 1997 in the
approximate amount of $7,218,000.

7. STOCKHOLDERS' EQUITY:

INITIAL PUBLIC OFFERING

On August 8, 1996 the Company completed its IPO of 3,910,000 shares of its
Class A Common Stock at $13.50 per share for net proceeds of approximately $48
million, after selling commissions and related expenses of approximately $5
million. The net proceeds of the IPO were used to repay outstanding indebtedness
of the Company. In connection with the IPO, the Company performed a
recapitalization of its Common Stock into two classes of Common Stock (Class A
and Class B), provided separate voting rights to each class and converted
existing Common Stock to Class B Common Stock. The holders of Class A Common
Stock are entitled to one vote for each share held on all matters submitted to a
vote of common stockholders. The holders of Class B Common Stock are entitled to
ten votes for each share held on all matters submitted to a vote of common
stockholders. The Series A, B and C Preferred Stocks automatically converted
into Class B Common Stock upon closing of the IPO. Series D Preferred Stock
remained outstanding after the IPO (see Note 8).

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

PREFERRED STOCK

Prior to the IPO, the Company had three classes of preferred stock
outstanding, Series A, B and C. These preferred stocks automatically converted
into shares of Class B Common Stock at the effective date of the IPO (August 8,
1996).

TREASURY STOCK

The Company purchased 3,292 shares of Class B Common Stock for $60,000 and
170,000 shares of Series B Preferred Stock for $341,000, during 1997 and 1996,
respectively. Such shares have been canceled.

STOCK OPTION PLANS

The Company has three stock option plans currently in effect under which
future grants may be issued: the 1995 Stock Incentive Plan (the "1995 Plan"),
the 1996 Stock Option Plan (the "1996 Plan") and the 1996 Nonemployee Director
Stock Option Plan (the "Directors' Plan").

Options granted under the 1995 Plan have a ten year term. All options
granted under the 1995 Plan prior to the IPO vest immediately, while
substantially all of those issued in conjunction with and after the IPO vest
over a four year period at 25% per year. Options issued under this plan prior to
the Company' s IPO are satisfied with shares of Class B Common Stock, but
options issued after that date are satisfied with shares of Class A Common
Stock. A total of 700,000 shares are reserved for issuance under the 1995 Plan
of which 408,449 shares were outstanding at December 31, 1997.

Options granted under the 1996 Plan and the Directors' Plan have ten year
terms and vest 8.33% per year on the first through fourth anniversary dates of
the grant date and 16.66% per year on the fifth through eighth anniversary dates
of the grant date; provided, however, the options scheduled to vest in years 5-8
from the grant date (i.e., 66 2/3% of the total grant) vest immediately if the
average of the daily high and low prices of the Class A Common Stock for 20
consecutive trading days exceeds $27.99 prior to the fourth anniversary of the
grant date. A total of 600,000 shares of Class A Common Stock are reserved for
issuance under the 1996 Plan and 200,000 shares of Class A Common Stock are
reserved for issuance under the Directors' Plan. A total of 560,000 and 130,000
shares were outstanding under the 1996 Plan and Directors' Plan, respectively.

The Company accounts for these plans under APB Opinion No. 25, under which
no compensation cost has been recognized. Had compensation cost for these plans
been determined consistent with SFAS No. 123, the Company' s net income (loss)
and income (loss) per share would have been the following pro forma amounts:

YEAR ENDED DECEMBER 31,
-------------------------------
1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT
PER SHARE DATA)
Net income (loss) available to common
stockholders
As reported..................... $ (2,494) $ (913) $ 3,406
Pro forma....................... (2,721) (1,122) 2,353
Net income (Loss) per share available
to common stockholders:
Basic
As reported..................... (.99) (.19) .33
Pro forma....................... (1.08) (.23) .23
Diluted
As reported..................... (.99) (.19) .32
Pro forma....................... (1.08) (.23) .22

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Each of the plans is administered by a stock option committee appointed by
the Board of Directors. The plans allow for options to be granted as
non-qualified options, incentive stock options, reload options, alternative
appreciation rights and stock bonus options. As of December 31, 1997, only
non-qualified options and incentive stock options have been issued. The options
are granted with an exercise price equal to the then fair market value of the
Company' s Common Stock as determined by the Board of Directors.

A summary of the status of the plans at December 31, 1996 and 1997 and
changes during the year ended is presented in the table and narrative below:

YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997
------------------ ------------------
SHARES WTD AVG. SHARES WTD AVG.
(000) EX PRICE (000) EX PRICE
------ -------- ------ --------
Outstanding at beginning of period.. 50 $ 9.80 850 $13.74
Granted............................. 818 13.9 338 20.18
Exercised........................... (5) 10.43 (23) 11.35
Canceled............................ (13) 10.11 (65) 16.80
------ ------
Outstanding at end of year.......... 850 13.74 1,100 15.40
------ ------
Exercisable at end of year.......... 74 10.34 146 12.41
------ ------
Weighted average fair value of
options granted................... $ 8.00 $ 8.52

All of the options outstanding at December 31, 1997 have exercise prices
between $8.00 and $24.75, with a weighted average exercise price of $15.40 and a
weighted average remaining contractual life of 8.8 years.

The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted-average
assumptions used for grants in 1996 and 1997, respectively: risk-free interest
rates of 6.67% and 6.45%; expected dividend yields of zero percent and zero
percent; expected lives of ten years and five years; expected volatility of
30.45% and 35.90%.

REVERSE STOCK SPLIT

On July 18, 1996, the Company's Board of Directors and stockholders
approved an amendment to the Company's Certificate of Incorporation which
authorized a one for two reverse stock split. The Consolidated Financial
Statements were restated in 1996 as if the reverse stock split had occurred at
the beginning of the earliest period presented. For each two shares of Class B
Common Stock at $.01 par, the stockholder received one share of Class B Common
Stock at $.01 par. Upon completion of the IPO, the Series A, B and C Preferred
Stocks automatically converted into Class B Common Stock. The number of shares
held by each Series A, B and C Preferred stockholder remained the same; however,
the conversion prices for Class B Common Stock on those preferred shares doubled
in conjunction with the above-mentioned reverse stock split. In addition, the
exercise prices on outstanding stock options also doubled related to this
reverse stock split, and the number of shares of Class B Common Stock covered by
such options decreased by 50%.

8. REDEEMABLE PREFERRED STOCK:

The Company has 20,000,000 authorized shares of Series D Preferred Stock
with a par value of $.01 per share, of which approximately 17,253,000 and
1,682,500 shares were issued and outstanding at December 31, 1996 and 1997,
respectively. As of December 31, 1997, these shares can be converted into Class
A Common Stock at the rate of $15.50 per share. The holders of Series D
Preferred Stock are entitled to receive preferential dividends at an annual rate
ranging from $0.06 to $0.07 per share, payable quarterly. Dividends are payable
quarterly as long as the stock is outstanding. The Series D Preferred Stock is
redeemable, in whole or in part, at the option of the Company, at any time
during the period commencing with the second anniversary of the Company's IPO
(August 8, 1998) and ending December 31, 2001. On

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
December 31, 2001, the Company must redeem all shares of Series D Preferred
Stock then outstanding at a redemption price of $1.00 per share, together with
all accrued and unpaid dividends.

Concurrent with every issuance of Series D Preferred Stock, irrevocable
standby letters of credit, issued by a financial institution and guaranteed by
the Company, were given to the holders (or designated beneficiaries) and can be
drawn upon if certain events occur, including the following: the Company has
failed to pay preferred stock dividends, the Company has failed to redeem the
preferred stock shares on the designated mandatory redemption date or a
liquidation, dissolution or winding up of affairs of the Company occurs. As of
December 31, 1997, letters of credit of approximately $1,740,000 were
outstanding relative to Series D Preferred Stock.

During the first quarter of 1997, the Company issued approximately
20,000,000 shares of Series F Preferred Stock with a par value of $.01 per share
to fund a portion of the acquisitions, of which 12,278,285 were outstanding at
December 31, 1997. These shares are convertible into Class A Common Stock at the
rate of $16.00 per share as of December 31, 1997, and increasing to $17.00 per
share on January 1, 1998. The holders of the Series F Preferred Stock are
entitled to receive preferential dividends at the amount of $.04 payable
quarterly, increasing to five percent per year for the period January 1, 1998
until January 1, 2001, at which time the annual rate becomes fixed at $.0486 per
share. On December 31, 2007, the Company must redeem all shares of Series F
Preferred Stock then outstanding at a redemption price of $1.00 per share,
together with all accrued and unpaid dividends.

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EARNINGS PER SHARE:

The following table sets forth the computation of the basic and diluted
earnings (loss) per share for 1995, 1996 and 1997:

1995 1996 1997
--------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE
DATA)
Numerator:
Net income (loss) before
extraordinary item............ $ (2,494) $ 207 $ 4,491
Extraordinary item.............. -- (498) (195)
--------- --------- ---------
Net income (loss)............... (2,494) (291) 4,296
Preferred stock dividends....... -- (622) (890)
--------- --------- ---------
Numerator for basic earnings per
share -- net income (loss)
available to common
stockholders.................. $ (2,494) $ (913) $ 3,406
Effect of dilutive securities:
Preferred stock
dividends............... -- -- --
--------- --------- ---------
Numerator for diluted earnings
per share -- net income
available to common
stockholders after assumed
conversions................... $ (2,494) $ (913) $ 3,406
--------- --------- ---------
Denominator:
Denominator for basic earnings
per share --
weighted-average shares....... 2,520 4,869 10,226
Effect of dilutive securities:
Stock options.............. -- -- 259
--------- --------- ---------
Denominator for diluted earnings
per share --
adjusted weighted-average
shares and assumed
conversions................... 2,520 4,869 10,485
--------- --------- ---------
Basic earnings per share:
Net income (loss) before
extraordinary item............ $ (.99) $ (.09) $ .35
Extraordinary item.............. -- (.10) (.02)
--------- --------- ---------
Net income (loss)............... $ (.99) $ (.19) $ .33
========= ========= =========
Diluted earnings per share:
Net income (loss) before
extraordinary item............ $ (.99) $ (.09) $ .34
Extraordinary item.............. -- (.10) (.02)
--------- --------- ---------
Net income (loss)............... $ (.99) $ (.19) $ .32
========= ========= =========

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CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. MAJOR SEGMENTS OF BUSINESS

The Company conducts funeral and cemetery operations only in the United
States.

FUNERAL CEMETERY CORPORATE CONSOLIDATED
-------- --------- ---------- ------------
(IN THOUSANDS, EXCEPT NUMBER OF OPERATIONS
LOCATIONS)
Revenues:
1997......................$ 64,888 $12,533 $ -- $ 77,421
1996...................... 37,445 2,903 -- 40,348
1995...................... 22,661 1,576 -- 24,237
-------- --------- ---------- -----------
Income from operations:
1997......................$ 16,484 $ 2,899 $ (5,277) $ 14,106
1996...................... 6,804 362 (2,474) 4,692
1995...................... 3,740 250 (2,106) 1,884
-------- --------- ---------- -----------
Identifiable assets:
1997......................$208,833 $57,020 $ 12,087 $ 277,940
1996...................... 117,061 9,285 4,962 131,308
1995...................... 48,847 2,169 10,730 61,746
-------- --------- ---------- -----------
Depreciation and amortization:
1997......................$ 5,195 $ 1,454 $ 1,160 $ 7,809
1996...................... 2,863 129 637 3,629
1995...................... 1,609 72 267 1,948
-------- --------- ---------- -----------
Capital expenditures:(a)
1997......................$ 34,858 $34,653 $ 2,758 $ 72,269
1996...................... 24,737 5,073 1,004 30,814
1995...................... 4,530 100 1,116 5,746
-------- --------- ---------- -----------
Number of operating locations at year
end:
1997...................... 120 20 -- 140
1996...................... 76 10 -- 86
1995...................... 41 3 -- 44

------------

(a) Includes $2,727,000, $26,184,000 and $63,106,000 for the three years ended
December 31, 1997, respectively, for purchases of property, plant and
equipment and cemetery property of acquired businesses.

F-28

424B4 79th Page of 152 TOC 1st Previous Next ↓Bottom Just 79th
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. QUARTERLY FINANCIAL DATA (UNAUDITED):

The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 1996 and 1997 (in thousands, except per share
data):

[Download Table]

FIRST SECOND THIRD FOURTH
--------- --------- --------- ---------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)

1996(A)
Revenues, net........................ $ 7,635 $ 9,290 $ 10,145 $ 13,278
Gross profit......................... 1,670 1,719 994 2,783
Net income (loss) before
extraordinary item................. (193) (468) (414) 1,282
Extraordinary item................... -- -- (498) --
Preferred stock dividend
requirements....................... 10 91 250 271
Net income (loss).................... (203) (559) (1,162) 1,011
Basic earnings (loss) per common
share
Continuing operations........... $ (.08) $ (.22) $ (.11) $ .12
Extraordinary item.............. -- -- (.09) --
--------- --------- --------- ---------
Net income (loss)............... $ (.08) $ (.22) $ (.20) $ .12
--------- --------- --------- ---------
Diluted earnings (loss) per common
share
Continuing operations........... $ (.08) $ (.22) $ (.11) $ .12
Extraordinary item.............. -- -- (.09) --
--------- --------- --------- ---------
Net income (loss)............... $ (.08) $ (.22) $ (.20) $ .12
--------- --------- --------- ---------
1997(A)
Revenues, net........................ $ 17,989 $ 19,061 $ 18,245 $ 22,126
Gross profit......................... 5,143 5,003 3,557 5,680
Net income before extraordinary
item............................... 1,825 1,489 347 830(b)
Extraordinary item................... -- -- (195) --
Preferred stock dividend
requirements....................... 363 174 176 177
Net income (loss).................... 1,462 1,315 (24) 653(b)
Basic earnings per common share:
Continuing operations........... $ .16 $ .13 $ 0.02 $ .06(b)
Extraordinary item.............. -- -- (0.02) --
--------- --------- --------- ---------
Net income...................... $ .16 $ .13 $ -- $ .06(b)
--------- --------- --------- ---------
Diluted earnings per common share:
Continuing operations........... $ .16 $ .12 $ 0.02 $ .06(b)
Extraordinary item.............. -- -- (0.02) --
--------- --------- --------- ---------
Net income...................... $ .16 $ .12 $ -- $ .06(b)
--------- --------- --------- ---------

------------

(a) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
equal the total computed for the year due to stock transactions which
occurred during the periods presented.

(b) Includes a one-time charge of $390,000 (equivalent to $.04 per share) to
revalue historical deferred tax accounts from 34% to 35%.

F-29

424B4 80th Page of 152 TOC 1st Previous Next ↓Bottom Just 80th
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the CNM Group:

We have audited the accompanying balance sheets of the CNM Group as of
December 31, 1996, and March 31, 1996, and the related statements of operations,
stockholders' equity and cash flows for the nine months ended December 31, 1996,
and for the year ended March 31, 1996. These financial statements are the
responsibility of the CNM Group's management. Our responsibility is to express
an opinion on these financial statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the CNM Group as of December
31, 1996, and March 31, 1996, and the results of its operations and its cash
flows for the nine months ended December 31, 1996, and for the year ended March
31, 1996, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
January 17, 1997

F-30

424B4 81st Page of 152 TOC 1st Previous Next ↓Bottom Just 81st
CNM GROUP
BALANCE SHEETS

DECEMBER 31, MARCH 31,
1996 1996
------------ -----------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,039,677 $ 1,975,368
------------ -----------
Accounts receivable --
Trade, net of allowance for
doubtful accounts of
$544,677 and $550,000
at December 31, 1996,
and March 31, 1996,
respectively........... 5,702,153 5,611,358
Other...................... 82,824 104,377
------------ -----------
5,784,977 5,715,735
Inventories and other current
assets......................... 698,708 433,029
------------ -----------
Total current assets.... 7,523,362 8,124,132
PROPERTY AND EQUIPMENT:
Land............................ 2,978,980 2,978,980
Buildings and improvements...... 4,067,481 3,928,245
Furniture and equipment......... 1,505,784 1,488,047
Automobiles..................... 631,729 603,147
------------ -----------
9,183,974 8,998,419
Less -- Accumulated
depreciation................... (3,187,321) (2,994,087)
------------ -----------
5,996,653 6,004,332
CEMETERY PROPERTY, at cost........... 1,774,818 1,307,514
NAMES AND REPUTATIONS, net of
accumulated amortization of
$830,771 and $784,745 at December
31, 1996, and March 31, 1996,
respectively....................... 396,554 442,580
DEFERRED CHARGES AND OTHER NONCURRENT
ASSETS............................. 939,303 970,023
------------ -----------
Total assets............ $ 16,630,690 $16,848,581
============ ===========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 706,320 $ 446,618
Accrued liabilities............. 666,280 1,016,943
Current portion of long-term
debt and obligations under
capital leases................. 226,246 255,571
------------ -----------
Total current
liabilities.......... 1,598,846 1,719,132
PRENEED LIABILITIES.................. 2,733,828 3,114,676
LONG-TERM DEBT, net of current
portion............................ 4,764,093 4,946,902
OBLIGATIONS UNDER CAPITAL LEASES, net
of current portion................. 211,847 211,210
DEFERRED INCOME TAXES................ 207,120 307,643
------------ -----------
Total liabilities....... 9,515,734 10,299,563
COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY................. 7,114,956 6,549,018
------------ -----------
Total liabilities and
stockholders'
equity............... $ 16,630,690 $16,848,581
============ ===========

The accompanying notes are an integral part of these financial statements.

F-31

424B4 82nd Page of 152 TOC 1st Previous Next ↓Bottom Just 82nd
CNM GROUP
STATEMENTS OF OPERATIONS

FOR THE
NINE MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------ --------------
REVENUES, net........................ $8,734,651 $ 11,337,693
COSTS AND EXPENSES................... 6,320,904 8,142,840
------------ --------------
Gross profit.................... 2,413,747 3,194,853
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,094,423 1,143,623
------------ --------------
Operating income................ 1,319,324 2,051,230
INTEREST EXPENSE, net................ 333,354 436,499
------------ --------------
Income before income taxes...... 985,970 1,614,731
PROVISION FOR INCOME TAXES........... 420,032 693,652
------------ --------------
Net income...................... $ 565,938 $ 921,079
============ ==============

The accompanying notes are an integral part of these financial statements.

F-32

424B4 83rd Page of 152 TOC 1st Previous Next ↓Bottom Just 83rd
CNM GROUP
STATEMENTS OF CASH FLOWS

FOR THE
NINE MONTHS FOR THE
ENDED YEAR ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------ ---------------
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 565,938 $ 921,079
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation and amortization... 452,122 575,374
Bad debt expense................ -- 50,000
Deferred income tax benefit..... (100,523) (55,220)
Decrease (increase) in accounts
receivable.................... (63,919) 245,156
Increase in inventories and
other current assets.......... (271,002) (91,945)
Increase (decrease) in accounts
payable....................... 259,702 (15,005)
Decrease in accrued and preneed
liabilities and other......... (732,311) (26,519)
------------ ---------------
Net cash provided by
operating activities.... 110,007 1,602,920
------------ ---------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property and
equipment and cemetery
property...................... (883,269) (1,019,475)
Proceeds from sale of property
and equipment................. 49,068 96,248
------------ ---------------
Net cash used in investing
activities.............. (834,201) (923,227)
------------ ---------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt...... (211,497) (415,250)
------------ ---------------
Net cash used in financing
activities.............. (211,497) (415,250)
------------ ---------------
NET INCREASE (DECREASE) IN CASH AND
CASH EQUIVALENTS................... (935,691) 264,443
CASH AND CASH EQUIVALENTS, beginning
of period.......................... 1,975,368 1,710,925
------------ ---------------
CASH AND CASH EQUIVALENTS, end of
period............................. $1,039,677 $ 1,975,368
============ ===============
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION:
Interest paid................... $ 358,741 $ 487,161
Taxes paid...................... 413,400 664,614

The accompanying notes are an integral part of these financial statements.

F-33

424B4 84th Page of 152 TOC 1st Previous Next ↓Bottom Just 84th
CNM GROUP
STATEMENTS OF STOCKHOLDERS' EQUITY

BALANCE, March 31, 1995.............. $ 5,627,939
Net income...................... 921,079
------------
BALANCE, March 31, 1996.............. 6,549,018
Net income...................... 565,938
------------
BALANCE, December 31, 1996........... $ 7,114,956
============

The accompanying notes are an integral part of these financial statements.

F-34

424B4 85th Page of 152 TOC 1st Previous Next ↓Bottom Just 85th
CNM GROUP
NOTES TO FINANCIAL STATEMENTS

1. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES:

BASIS OF PRESENTATION/NATURE OF BUSINESS

Effective January 7, 1997, Carriage Funeral Services of California, Inc.
(Carriage), a wholly owned subsidiary of Carriage Services, Inc., acquired the
stock of CNM, Inc., and two of its wholly owned subsidiaries, Rolling Hills
Memorial Park and Wilson & Kratzer Mortuaries (these three entities are
hereinafter referred to as the Group or the CNM Group), for aggregate
consideration in excess of the recorded amount of the net assets of the Group.
The net assets and results of operations of a third subsidiary owned by CNM,
Inc., which was not engaged in the death care industry and which was not
acquired by Carriage, have not been included in the accompanying financial
statements. Based on this presentation, the Group's stockholders' equity has
been presented on an aggregated basis to reflect the equity of the Group rather
than the equity of CNM, Inc.

The Group owns and operates 10 funeral homes and one cemetery in Northern
California. The Group performs personal and professional services related to
funerals and interments at its funeral homes and cemetery. Prearranged funerals
and preneed cemetery products and services are marketed in the geographic
markets served by the Group's locations.

FUNERAL AND CEMETERY REVENUES

The CNM Group records the sale of funeral merchandise and services upon
performance. The Group records the sale of the right of cemetery interment or
mausoleum entombment and related merchandise at the time of sale. State law
requires cash receipts for certain cemetery products and services to be fully
trusted; the revenue for these sales is recognized upon delivery. Provision for
bad debts is recorded at the date of sale and cancellations are recorded in the
period of cancellation.

TRUST FUNDS

The CNM Group is required by state law to deposit amounts in a trust fund
related to prearranged funeral arrangements. The principal and interest earned
is withdrawn when the funeral services are provided. The proceeds of the
original amounts paid by the purchaser of the prearranged funeral contract are
available to the CNM Group only in the event of death of the purchaser and are
refundable to the purchaser under certain state laws that provide for the return
of all or a portion of amounts collected under the purchaser's option to cancel
the prearranged funeral contract. No funeral revenue is recognized on the funds
collected from the purchaser of the prearranged funeral contract, and interest
earned on such funds is deferred, until performance of the specific service. The
prearranged funeral trust assets were approximately $2,223,000 and $2,267,000 at
December 31, 1996, and March 31, 1996, respectively, which exceeds the future
costs under such arrangements. The CNM Group does not have the right to withdraw
any of such balances and, accordingly, these trust fund balances are not
reflected in the accompanying financial statements.

In accordance with respective state laws, the CNM Group is generally
required to deposit a specified amount into perpetual and memorial care trust
funds for each interment/entombment right and memorial sold. Income from such
trust funds is used to provide care and maintenance for the cemeteries and
mausoleums and is periodically distributed to the CNM Group. The CNM Group does
not have the right to withdraw any of the principal balances of these funds,
which were approximately $3,923,000 and $3,788,000 at December 31, 1996, and
March 31, 1996, respectively. Accordingly, these trust fund balances are not
reflected in the accompanying balance sheets.

The CNM Group is also required to deposit a specified amount into a
merchandise and service trust fund for cemetery merchandise and service
contracts sold on a preneed basis. The principal of the trust may be withdrawn
by the CNM Group upon maturity (generally, death of the purchaser) or
cancellation of the

F-35

424B4 86th Page of 152 TOC 1st Previous Next ↓Bottom Just 86th
CNM GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
contract. Accumulated earnings provided by the underlying assets held by the
trust are periodically distributed by the trust and recorded as income when
received. Revenue, as it relates to merchandise and service contracts sold on a
preneed basis, is recognized at the time of service. Merchandise and service
trust fund balances, in the aggregate, were approximately $2,464,000 and
$2,266,000 at December 31, 1996, and March 31, 1996, respectively. The CNM Group
does not have the right to withdraw any of the principal balances on these
funds. Accordingly, these trust fund balances are not reflected in the
accompanying balance sheets.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the CNM Group considers all
highly liquid investments with an original maturity of three months or less to
be cash equivalents.

INVENTORY

Inventory is stated at the lower of its cost basis (as determined by the
specific identification method) or market.

NAMES AND REPUTATIONS

The excess of the purchase price over the fair value of net tangible and
identifiable intangible assets acquired, as determined by management in
transactions accounted for as purchases, is included in the financial statements
as names and reputations of the operations acquired. Such amounts are being
amortized over 20 years.

In March 1995, the Financial Accounting Standards Board issued Statement of
Financial Accounting Standards (SFAS) No. 121, "Accounting for the Impairment
of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." This
statement establishes the recognition and measurement standards related to the
impairment of long-lived assets. SFAS No. 121 was adopted by the Group on April
1, 1996. Such adoption did not have a material effect on the Group's financial
position or results of operations.

PROPERTY AND EQUIPMENT

Property and equipment is recorded at cost. Depreciation of property and
equipment is based on the straight-line method over the estimated useful lives
of the assets. The costs of ordinary maintenance and repairs are charged to
operations, while renewals and replacements are capitalized.

Depreciation is provided over the estimated useful lives of the depreciable
assets as follows:

YEARS
------
Building and improvements............... 10-32
Furniture and fixtures.................. 3-10
Automobiles............................. 3-5

INCOME TAXES

The CNM Group accounts for income taxes in accordance with SFAS No. 109,
"Accounting for Income Taxes." Under SFAS No. 109, the Group determines
deferred tax assets and liabilities based on the estimated future tax effects of
differences between the financial statement basis and tax basis of assets and
liabilities.

USE OF ESTIMATES

F-36

424B4 87th Page of 152 TOC 1st Previous Next ↓Bottom Just 87th
CNM GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
reported amounts of revenues and expenses during the reporting period. Actual
results could differ from those estimates.

2. DEFERRED CHARGES AND OTHER NONCURRENT ASSETS:

Deferred charges and other noncurrent assets at December 31, 1996, and
March 31, 1996, were as follows:

DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
Investment in affiliated entity...... $ 892,247 $ 891,447
Agreements not to compete, net of
accumulated amortization of
$1,086,216 in December 1996 and
$1,054,696 in March 1996........... 44,056 75,576
Other................................ 3,000 3,000
------------ ----------
$ 939,303 $ 970,023
============ ==========

3. LONG-TERM DEBT:

The CNM Group's long-term debt consisted of the following:

DECEMBER 31, MARCH 31,
1996 1996
------------ ----------
Note payable to former stockholder,
secured by deed of trust and
security agreements covering
certain real property, due in
monthly installments of $16,667,
including interest at 8.0% through
May 2003 with a final payment of
approximately $1,632,415 due in May
2003............................... $2,034,250 $2,061,286
Note payable, secured by deed of
trust and security agreements
covering certain real property, due
in monthly installments of $13,901,
including interest at 9.0% through
December 2007...................... 1,679,686 1,690,992
Note payable, secured by deed of
trust and security agreements
covering certain real property, due
in monthly installments of $7,923,
including interest at 9.5% through
July 2010.......................... 724,031 742,993
Note payable, secured by deed of
trust and security agreements
covering certain real property, due
in monthly installments of $2,608,
including interest at 9.25% through
April 2004......................... 166,178 177,671
Notes payable, secured by deed of
trust and security agreements
covering certain real property, due
in monthly installments of $3,144,
including interest at 7.0% through
May 2001........................... 140,655 160,967
Note payable, secured by deed of
trust and security agreements
covering certain real property, due
in monthly installments of $3,144,
including interest at 7.0% through
May 2001........................... 140,655 160,967
Note payable, secured by deed of
trust and security agreements
covering certain real property, due
in monthly installments ranging
from $404 to $5,313, including
interest ranging from 8.0% to
10.25% with payment through October
1996 to September 2008............. 104,884 207,597
Less -- Current portion.............. (226,246) (255,571)
------------ ----------
$4,764,093 $4,946,902
============ ==========

The aggregate maturities of long-term debt for the three-month period ended
March 31, 1997, and the subsequent five years are approximately $77,000,
$228,000, $288,000, $290,000, $316,000, $272,000, respectively, and $3,519,000
thereafter. The debt agreements do not contain any significant restrictive
covenants.

F-37

424B4 88th Page of 152 TOC 1st Previous Next ↓Bottom Just 88th
CNM GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

4. COMMITMENTS AND CONTINGENCIES:

CLAIMS AND LAWSUITS

The Group is subject to certain claims and lawsuits arising in the normal
course of business, relating to employment discrimination, harassment, personal
injury and compensation issues being reviewed by the Labor Board. The Group
maintains various insurance coverages in order to minimize financial risk
associated with the claims. In the opinion of management, uninsured losses, if
any, resulting from the ultimate resolution of these matters will not be
material to the Group's financial position or results of operations.

BENEFIT PLAN

The CNM Group sponsors a defined contribution benefit plan covering
substantially all full-time employees having at least one year of service. In
its sole discretion, the Group can make contributions to the plan. Contributions
to such plan totaled $79,000 and $112,610 for the nine months ended December 31,
1996, and for the year ended March 31, 1996, respectively. These amounts are
included in "Costs and Expenses" in the accompanying statements of operations.

LEASES

The CNM Group leases certain office facilities, vehicles and equipment for
periods from one to seven years with options on some of the facilities for
extended periods. Certain operating leases provide for an annual adjustment to
rent in accordance with changes in relevant pricing indices. Rent expense was
approximately $121,000 and $160,000 for the nine months ended December 31, 1996,
and for the year ended March 31, 1996, respectively.

In addition, the CNM Group leases a mortuary facility under a capital
lease. Accumulated depreciation relating to the leased assets is $67,000 and
$63,000 as of December 31, 1996, and March 31, 1996, respectively.

Minimum payments over the lease periods will be as follows (in thousands):

MINIMUM LEASE PAYMENTS
----------------------
OPERATING CAPITAL
LEASES LEASES
---------- --------
Three months ending 1997............. $ 40 $ 6
Years ending March 31 --
1998............................ 158 24
1999............................ 160 26
2000............................ 160 26
2001............................ 160 26
2002............................ 160 26
Thereafter...................... 861 459
---------- --------
Total minimum lease payments......... $1,699 593
==========
Less -- Amount representing
interest........................... 381
--------
Long-term obligations under capital
leases............................. $ 212
========

F-38

424B4 89th Page of 152 TOC 1st Previous Next ↓Bottom Just 89th
CNM GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

5. INCOME TAXES:

Historically, the CNM Group has been included in the consolidated U.S.
federal income tax return for CNM, Inc. The only significant temporary
differences between the Group's financial statement and tax bases of accounting
relate to accruals made in connection with preneed marker and base sales, and
differences relating to depreciation. Permanent differences relate to tax-exempt
income received from certain trust funds and state income taxes. The income tax
provision for the nine months ended December 31, 1996, and for the year ended
March 31, 1996, consisted of:

FOR THE FOR THE
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------- ----------
Current --
U.S. federal.................... $ 404,103 $573,455
State........................... 116,452 175,417
------------- ----------
520,555 748,872
------------- ----------
Deferred --
U.S. federal.................... (83,003) (39,516)
State........................... (17,520) (15,704)
------------- ----------
(100,523) (55,220)
------------- ----------
$ 420,032 $693,652
============= ==========

The differences in the income taxes provided for and the amounts determined
by applying the federal statutory rate to income taxes of the CNM Group for the
nine months ended December 31, 1996 and for the year ended March 31, 1996, are
summarized as follows:

FOR THE FOR THE
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------- ----------
Federal income statutory rate........ 34.0% 34.0%
Effect of state income taxes, net of
federal benefit.................... 6.2 6.2
Effect of nondeductible expenses and
other.............................. 2.4 2.8
------------- ----------
42.6% 43.0%
============= ==========

The following table sets forth the gross deferred tax assets and
liabilities as of December 31, 1996, and March 31, 1996:

DECEMBER 31, MARCH 31,
1996 1996
------------- ----------
Deferred income tax assets --
Noncurrent...................... $ 53,033 $ 53,033
------------- ----------
Deferred income tax
liabilities --
Noncurrent........................... (260,153) (360,676)
------------- ----------
Net deferred tax liability........... $(207,120) $ (307,643)
============= ==========

F-39

424B4 90th Page of 152 TOC 1st Previous Next ↓Bottom Just 90th
CNM GROUP
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The sources of significant temporary differences and related tax effect
were as follows:

FOR THE FOR THE
NINE MONTHS YEAR
ENDED ENDED
DECEMBER 31, MARCH 31,
1996 1996
------------- ----------
Depreciation and amortization........ $ (9,997) $ 35,306
Preneed marker and bases............. (90,526) (90,526)
------------- ----------
Total deferred income tax benefit.... $(100,523) $(55,220)
============= ==========

6. RELATED PARTIES:

The Group has $24,850 in notes payable to officers of Wilson & Kratzer
Mortuaries originated on September 24, 1996, paying interest at 6.58 percent per
annum. To date, no principal payments have been made.

The Group has paid interest of $4,201 and $7,601 for the nine months ended
December 31, 1996, and the year ended March 31, 1996, respectively, on the
outstanding debt obligations of $57,518 and $79,815 as of the respective
period-end dates to the chairperson of the board for CNM, Inc. and Rolling Hills
Memorial Park. The obligation pays interest at 8.0 percent per annum.

The Group leases a facility owned by a related party which is wholly owned
by members of the board of directors of CNM, Inc., Wilson & Kratzer Mortuaries,
and Rolling Hills Memorial Park. Lease expense of $21,833 and $29,029 was
recognized for the nine months ended December 31, 1996, and the year ended March
31, 1996, respectively, relating to this facility.

Additionally, compensation of $202,500 and $279,000 for the nine months
ended December 31, 1996, and the year ended March 31, 1996, respectively, was
paid in the form of directors' fees and consultation fees to various members of
the respective board of directors and/or related parties.

F-40

424B4 91st Page of 152 TOC 1st Previous Next ↓Bottom Just 91st
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Barnett-Larkin-Brown Funeral Home, Inc.

We have audited the accompanying balance sheets of the Barnett-Larkin-Brown
division of 21st Century Funeral Company, L.C. as of December 31, 1995 and
October 31, 1996 and the related statements of income and cash flows for the
year and ten month periods then ended, and the balance sheets of Barnett-
Larkin-Brown Funeral Home, Inc. as of December 31, 1996 and March 31, 1997, and
the related statements of income and cash flows for the two and three month
periods then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimate made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of the Barnett-Larkin-Brown
division of 21st Century Funeral Company, L.C. as of December 31, 1995 and
October 31, 1996 and the results of its operations for the year and ten month
periods then ended, and of Barnett-Larkin-Brown Funeral Home, Inc., as of
December 31, 1996 and March 31, 1997 and the results of its operations for the
two months ended December 31, 1996 and three months ended March 31, 1997 in
conformity with generally accepted accounting principles.

/s/ LOGAN & SCHMIDT, P.A.

July 9, 1997

1300 North 78th Street, Suite 100 Kansas City, Kansas 66112-2493
(913) 788-5533 Fax (913) 788-9097

F-41

424B4 92nd Page of 152 TOC 1st Previous Next ↓Bottom Just 92nd
BARNETT-LARKIN-BROWN DIVISION OF 21ST CENTURY
FUNERAL COMPANY, L.C.
AND
BARNETT-LARKIN-BROWN FUNERAL HOME INC.
BALANCE SHEETS
FOR THE PERIODS ENDED DECEMBER 31, 1995, OCTOBER 31, 1996,
DECEMBER 31, 1996 AND MARCH 31, 1997

[Enlarge/Download Table]

BARNETT-LARKIN-BROWN
DIVISION OF
21ST CENTURY FUNERAL BARNETT-LARKIN-BROWN
COMPANY. L.C. FUNERAL HOME, INC
--------------------------- -------------------------
DECEMBER 31, OCTOBER 31, DECEMBER 31, MARCH 31,
1995 1996 1996 1997
------------ ----------- ------------ ---------
ASSETS

Current Assets:
Cash in Bank.................... $ 5,780 $ 1,429 $ 55,941 $ --
Inventory....................... 32,577 36,096 36,303 36,303
Accounts Receivable............. 165,184 152,589 195,906 --
Allowance For Uncollectable
Accounts...................... (11,200) (11,200) (11,200)
Reimbursement Receivable........ -- 53 -- 1,303
Prepaid Expenses................ 5,725 -- -- --
------------ ----------- ------------ ---------
Total Current Assets....... 198,066 178,967 276,950 37,606
Fixed Assets:
Leasehold Improvements.......... 103,864 106,297 65,845 65,845
Furniture & Equipment........... 129,658 133,391 191,001 191,001
Vehicles........................ 25,661 49,161 47,170 47,170
Accumulated Depreciation........ (84,588) (123,244) (244,923) (260,222)
------------ ----------- ------------ ---------
Total Fixed Assets......... 174,595 165,605 59,093 43,794
------------ ----------- ------------ ---------
Other Assets:
Sales Tax Bond.................. -- -- 1,000 --
Profit Sharing Bond............. -- -- 100 --
------------ ----------- ------------ ---------
Total Other Assets......... -- -- 1,100 --
------------ ----------- ------------ ---------
Total Assets............... $372,661 $ 344,572 $ 337,143 $ 81,400
============ =========== ============ =========
LIABILITIES AND EQUITY
Current Liabilities:
Accounts Payable................ $ 17,912 $ -- $ 18,551 $ --
Payroll Withholding Payable..... -- 4,463 --
Sales Tax Payable............... 1,552 -- 3,115 --
Income Taxes Payable............ -- 16,700 --
Accrued Property Taxes.......... -- 12,028 -- --
Payable to 21st Century Funeral
Company, L.C.................. -- -- 48,532 --
------------ ----------- ------------ ---------
Total Current
Liabilities............. 19,464 12,028 91,361 --
------------ ----------- ------------ ---------
Stockholders' And Members' Equity:
Members' Equity................. 214,099 280,917 -- --
Stock........................... -- -- 131,001 131,001
Retained Earnings............... -- -- 18,289 114,780
Net Income (Loss)............... 139,098 51,627 96,492 (27,882)
Dividends Paid.................. -- -- -- (136,499)
------------ ----------- ------------ ---------
Total Equity............... 353,197 332,544 245,782 81,400
------------ ----------- ------------ ---------
Total Liabilities And
Equity.................. $372,661 $ 344,572 $ 337,143 $ 81,400
============ =========== ============ =========

See notes to financial statements

F-42

424B4 93rd Page of 152 TOC 1st Previous Next ↓Bottom Just 93rd
BARNETT-LARKIN-BROWN DIVISION OF 21ST CENTURY
FUNERAL COMPANY, L.C.
AND
BARNETT-LARKIN-BROWN FUNERAL HOME INC.
STATEMENTS OF INCOME
FOR THE PERIODS ENDED DECEMBER 31, 1995, OCTOBER 31, 1996,
DECEMBER 31, 1996 AND MARCH 31, 1997

[Enlarge/Download Table]

BARNETT-LARKIN-BROWN
DIVISION OF
21ST CENTURY FUNERAL
COMPANY, L.C. BARNETT-LARKIN-BROWN
--------------------------- FUNERAL HOME. INC.
TEN MONTH -----------------------------
PERIOD TWO MONTH THREE MONTH
YEAR ENDED ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, MARCH 31,
1995 1996 1996 1997
------------ ----------- ------------ -------------

Sales................................ $796,842 $ 661,023 $168,297 $ 219,489
Cost of Sales:
Caskets and Vaults.............. 138,729 116,395 25,860 39,830
Other Funeral Costs............. 22,455 9,931 1,232 12,059
------------ ----------- ------------ -------------
Total Cost of Sales........ 161,184 126,326 27,092 51,889
------------ ----------- ------------ -------------
Gross Profit............ 635,658 534,697 141,205 167,600
Operating Expenses:
Personnel Expense............... 171,928 176,183 36,926 89,236
Vehicle Expenses................ 48,873 40,904 13,155 15,102
Facility Expenses............... 133,522 123,538 25,853 35,621
Advertising Expenses............ 20,362 20,230 3,409 1,397
Business Services............... 27,132 37,769 5,306 71,144
Overhead Expense Allocation..... 81,220 85,154 -- --
------------ ----------- ------------ -------------
Total Operating Expenses... 483,037 483,778 84,649 212,500
------------ ----------- ------------ -------------
Income (Loss) From
Operations............ 152,621 50,919 56,556 (44,900)
Other Income (Expenses):
Other Income.................... 6,314 7,312 2,718 7,343
Bad Debt Expense................ (17,988) (4,646) 592 (268)
Gain (Loss) on Sale of Assets... (1,849) (1,958) 58,126 --
Interest Expense................ -- -- -- (2,157)
------------ ----------- ------------ -------------
Total Other Income (Exp)... (13,523) 708 61,436 4,918
------------ ----------- ------------ -------------
Net Income (Loss) Before Income
Taxes.............................. 139,098 51,627 117,992 (39,982)
------------ ----------- ------------ -------------
Federal and State Taxes on
Earnings........................... -- -- 21,500 (12,100)
------------ ----------- ------------ -------------
Net Income........................... $139,098 $ 51,627 $ 96,492 $ (27,882)
============ =========== ============ =============

See notes to financial statements

F-43

424B4 94th Page of 152 TOC 1st Previous Next ↓Bottom Just 94th
BARNETT-LARKIN-BROWN DIVISION OF 21ST CENTURY
FUNERAL COMPANY, L.C.
AND
BARNETT-LARKIN-BROWN FUNERAL HOME INC.
STATEMENTS OF CASH FLOWS
FOR THE PERIODS ENDED DECEMBER 31, 1995, OCTOBER 31, 1996,
DECEMBER 31, 1996 AND MARCH 31, 1997

[Enlarge/Download Table]

BARNETT-LARKIN-BROWN
OF 21ST CENTURY FUNERAL BARNETT-LARKIN-BROWN
COMPANY. L.C. FUNERAL HOME. INC.
---------------------------- ----------------------------
TEN MONTH TWO MONTH THREE MONTH
YEAR ENDED PERIOD ENDED PERIOD ENDED PERIOD ENDED
DECEMBER 31, OCTOBER 31, DECEMBER 31, MARCH 31,
1995 1996 1996 1997
------------ ------------ ------------ ------------

CASH FLOWS FROM OPERATING ACTIVITIES:
NET INCOME (LOSS).................... $ 139,098 $ 51,627 $ 96,492 $ (27,882)
ADJUSTMENT TO RECONCILE NET INCOME
(LOSS) TO CASH PROVIDED (USED) BY
OPERATING ACTIVITIES...............
DEPRECIATION.................... 34,599 31,782 10,199 15,299
(INCREASE) IN INVENTORY......... (2,711) (3,519) (207) --
(INCREASE) DECREASE IN
RECEIVABLES................... (20,859) 12,542 (43,264) 183,402
DECREASE IN PREPAID EXPENSES.... (2,067) 5,725 -- --
(INCREASE) DECREASE IN BONDS.... -- -- (1,100) 1,100
INCREASE (DECREASE) IN ACCTS.
PAYABLE....................... 17,912 (17,912) 18,551 (18,551)
INCREASE (DECREASE) IN TAXES
PAYABLE....................... 47 10,476 7,578 (7,578)
INCREASE (DECREASE) IN PAYABLE
TO 21ST CENTURY............... -- -- 48,532 (48,532)
(GAIN)/LOSS ON SALE OF ASSETS... 1,849 1,958 (58,126) --
INCREASE (DECREASE) IN INCOME
TAXES PAYABLE................. -- -- 16,700 (16,700)
------------ ------------ ------------ ------------
NET CASH PROVIDED BY
OPERATING ACTIVITIES.... 167,868 92,679 95,355 80,558
------------ ------------ ------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES;
PROCEEDS FROM DISPOSITION OF
EQUIPMENT..................... 4,750 -- -- --
ACQUISITION OF FIXED ASSETS..... (9,663) (33,017) -- --
DIVIDENDS PAID.................. -- -- -- (136,499)
ACQUISITION OF NET ASSETS....... -- -- (48,532) --
PAYMENTS TO PARENT COMPANY...... (148,010) (64,013) -- --
------------ ------------ ------------ ------------
NET CASH USED IN INVESTING
ACTIVITIES.............. (152,923) (97,030) (48,532) (136,499)
------------ ------------ ------------ ------------
CASH FLOWS FROM FINANCING
ACTIVITIES......................... -- -- -- --
INCREASE (DECREASE) IN CASH..... 14,945 (4,351) 46,823 (55,941)
CASH, BEGINNING OF PERIOD....... (9,165) 5,780 9,118 55,941
------------ ------------ ------------ ------------
CASH, END OF PERIOD............. $ 5,780 $ 1,429 $ 55,941 $ --
============ ============ ============ ============

See notes to financial statements

F-44

424B4 95th Page of 152 TOC 1st Previous Next ↓Bottom Just 95th
BARNETT-LARKIN-BROWN DIVISION OF 21ST CENTURY
FUNERAL COMPANY, L.C.
AND

BARNETT-LARKIN-BROWN FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS
FOR THE YEAR ENDED DECEMBER 31, 1995,
THE TEN MONTH PERIOD ENDED OCTOBER 31, 1996,
THE TWO MONTH PERIOD ENDED DECEMBER 31, 1996, AND
THE THREE MONTH PERIOD ENDED MARCH 31, 1997

ORGANIZATION/NATURE OF OPERATIONS:

Barnett-Larkin-Brown consists of two funeral homes in Leavertworth, KS. It
performs personal and professional services related to funerals at its funeral
homes. During the period from January 1, 1995 thru October 31, 1996, it was
owned by and operated as a division of 21st Century Funeral Company, L.C.
Effective November 1, 1996, the division was demerged from 21st Century Funeral
Company, L.C. and operated as a separate independent Corporation. The real
estate (land and buildings) used by the Funeral Homes was owned by the
shareholders and leased to the business.

Effective March 28, 1997, assets and liabilities including cash,
receivables, and all accounts payable were transferred to the stockholders as a
dividend, and the shareholders sold the stock of Barnett-Larkin-Brown Funeral
Home, Inc. to Carriage Funeral Holdings, Inc.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUES -- Revenue is recognized upon performance of funeral services and
sale of related funeral mechandise.

INVENTORIES -- Inventories are stated at cost determined by using the
first-in, first-out (FIFO) method.

FIXED ASSETS -- for the period from January 1, 1995 thru October 31, 1996,
fixed assets were recorded at their estimated fair market values as of March 31,
1993 (the date that they were contributed by Barnett-Larkin-Brown Funeral Home,
Inc. to 21st Century Funeral Company, LC. in exchange for a members interest in
the Limited Liability Company). Depreciation on those assets was computed on a
5-10 year straight line method through October 31, 1996 when the demerger
occurred and the assets were transferred back to Barnett-Larkin-Brown Funeral
Home, Inc. Fixed assets acquired after March 31, 1993 are recorded at their cost
and depreciation is computed on a 5-10 year straight-line method.

On October 31, 1996 fixed assets and other assets were transferred from
21st Century Funeral Company, L.C. to Barnett-Larkin-Brown Funeral Home, Inc. in
exchange for the members interest in the Limited Liability Company. Fixed assets
which Barnett-Larkin-Brown Funeral Home, Inc. owned prior to the merger on March
31, 1993 were recorded at their original cost and depreciation computed on a
5-10 year straight-line method from their original acquisition date. Assets
which had been acquired after the merger in 1993 were recorded at their cost to
21st Century Funeral Company, L.C. and the associated depreciation was recorded
on the books of Barnett-Larkin-Brown Funeral Home, Inc.

Major additions and improvements are capitalized while minor replacements,
maintenance and repairs which do not improve or extend the life of the related
are charged to operations as incurred.

Depreciation expense included in operating expenses for the reported
accounting periods is:

December 31, 1995 $ 34,599
October 31, 1996 31,782
December 3l, 1996 10,199
March 31, 1997 15,299

F-45

424B4 96th Page of 152 TOC 1st Previous Next ↓Bottom Just 96th
BARNETT-LARKIN-BROWN DIVISION OF 21ST CENTURY
FUNERAL COMPANY, L.C.
AND
BARNETT-LARKIN-BROWN FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

INCOME TAXES -- during the period January 1, 1995 thru October 31, 1996 the
Company was a division of 21st Century Funeral Company, L.C. (A limited
liability company). Limited liability companies do not pay income taxes as they
are treated like partnerships and items of income and expense are passed through
to its shareholders. Accordingly, no provision for income taxes has been
reflected in the accompanying financial statements for this period.

Barnett-Larkin-Brown Funeral Home, Inc. is a corporation organized under
subchapter C of the Internal Revenue Code. Federal and State income taxes are
accrued and reflected in the financial statements for the period from November
1, 1996 thru March 31, 1997 at applicable statutory rates.

OPERATING LEASES:

21st Century Funeral Company, L.C. and later Barnett-Larkin-Brown Funeral
Home, Inc. lease the facilities utilized by the two funeral homes from the
shareholders of Barnett-Larkin-Brown Funeral Home, Inc. The lease expires on
March 31, 2003 and requires monthly payments of $6,250. This lease was cancelled
effective March 31, 1997 when the stock of Barnett-Larkin-Brown Funeral Home,
Inc. and the facilities were sold to Carriage Funeral Holdings, Inc.

F-46

424B4 97th Page of 152 TOC 1st Previous Next ↓Bottom Just 97th
INDEPENDENT AUDITORS' REPORT

To The Board of Directors
Redgate Funeral Service Corporation

We have audited the accompanying balance sheets of REDGATE FUNERAL SERVICE
CORPORATION as of December 31, 1996 and the related statement of income and
statement of cash flows for the year then ended. These financial statements are
the responsibility of the Companies' management. Our responsibility is to
express an opinion on these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free from
material misstatement. An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements. An audit
also includes assessing the accounting principles used and significant estimates
made by management, as well as evaluating the overall financial statement
presentation. We believe that our audits provide a reasonable basis for our
opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of REDGATE FUNERAL SERVICE
CORPORATION as of December 31, 1996 and the results of its operations for the
year then ended in conformity with generally accepted accounting principles.

LOGAN & SCHMIDT, P.A

November 20, 1997

F-47

424B4 98th Page of 152 TOC 1st Previous Next ↓Bottom Just 98th
REDGATE FUNERAL SERVICE CORPORATION
BALANCE SHEET
DECEMBER 31, 1996

ASSETS

CURRENT ASSETS:
Cash in Bank.................... $ 22,018
Inventory....................... 15,424
Accounts Receivable............. 120,020
Prepaid Expenses................ 5,322
----------
Total Current Assets....... 162,784
----------
FIXED ASSETS:
Land............................ 136,277
Buildings....................... 333,245
Leasehold Improvements.......... 22,116
Furniture and Equipment......... 84,754
Automotive Equipment............ 148,183
Less: Accumulated
Depreciation................... (336,720)
----------
Total Fixed Assets......... 387,855
----------
OTHER ASSETS:
Loan Fees, Net of $1,374
Accumulated Amortization....... 6,420
Lease Deposit................... 1,000
Goodwill........................ 45,000
----------
Total Other Assets......... 52,420
----------
Total Assets............... $ 603,059
==========
LIABILITIES AND STOCKHOLDERS' EOUITY
CURRENT LIABILITIES:
Accounts Payable................ $ 57,045
Payroll, Sales, and Other
Accrued Taxes.................. 1,573
Current Maturities -- Long-Term
Debt........................... 41,579
----------
Total Current
Liabilities............... 100,197
----------
LONG-TERM DEBT:
Notes Payable -- Vehicles....... 33,464
Note Payable -- Bank............ 11,667
Sewer Assessment -- Payable..... 8,373
Note Payable -- Stockholder..... 47,874
Mortgage Payable................ 468,483
----------
Total Long-Term Debt....... 569,861
----------
STOCKHOLDERS' EQUITY:
Common Stock.................... 17,033
Retained Earnings Beginning of
Year........................... $ 102,004
Net Loss........................ (186,036)
----------
End of Year (Deficit)........... (84,032)
----------
Total Stockholders'
Equity.................... (66,999)
----------
Total Liabilities and
Stockholders' Equity...... $ 603,059
==========

See notes to financial statements.

F-48

424B4 99th Page of 152 TOC 1st Previous Next ↓Bottom Just 99th
REDGATE FUNERAL SERVICE CORPORATION
STATEMENT OF INCOME
FOR THE YEAR ENDED DECEMBER 31, 1996

SALES................................ $ 1,008,680
COST OF SALES:
Caskets and Vaults.............. 154,518
Other Funeral Costs............. 46,130
------------
Total Cost of Sales........ 200,648
------------
GROSS PROFIT......................... 808,032
OPERATING EXPENSES:
Personnel Expense............... 476,101
Vehicle Expense................. 68,117
Facility Expense................ 103,109
Advertising and Promotion....... 24,159
Business Services............... 104,492
------------
Total Operating Expense.... 775,978
------------
INCOME FROM OPERATIONS............... 32,054
OTHER INCOME (EXPENSES):
Trade Embalming................. 121,860
Service Charge Income........... 1,751
Other Income.................... 914
Bad Debt Expense................ (3,464)
Interest Expense................ (57,774)
Covenant Not to Compete
Payments....................... (11,000)
------------
Total Other Income
(Expenses)................ 52,287
------------
Income from Continuing Operations
before Income Taxes................ 84,341
Federal and State Taxes on
Earnings........................... --
------------
Income from Continuing Operations.... 84,341
DISCONTINUED OPERATIONS:
Loss on Disposition of Leasehold
Improvements................... (270,377)
------------
NET LOSS............................. $ (186,036)
============

See notes to financial statements

F-49

424B4 100th Page of 152 TOC 1st Previous Next ↓Bottom Just 100th
REDGATE FUNERAL SERVICE CORPORATION
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996

CASH FLOWS FROM OPERATING ACTIVITIES:
Net Loss........................ $ (186,036)
Adjustments To Reconcile Change
in Net Loss to Net Cash
Provided by Operating
Activities
Depreciation and
Amortization.............. 33,558
Increase in Receivables.... (27,680)
Increase in Inventory...... (216)
Increase in Prepaid
Expenses.................. (1,533)
Decrease in Accounts
Payable................... (2,394)
Decrease in Accrued
Taxes..................... (209)
Loss on Disposition........ 270,377
Decrease in Deposits....... (6,251)
------------
Total Adjustment...... 265,652
------------
Cash Flows Provided by
Operating
Activities........... 79,616
------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from Disposition of
Automobile..................... 19,750
Principal Payments -- Notes
Payable........................ (99,717)
New Borrowing................... 72,987
Sewer Assessment................ 8,890
------------
Cash Flows Required by
Financing Activities...... 1,910
------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions of Property and
Equipment...................... (70,925)
------------
NET INCREASE IN CASH................. 10,601
CASH, Beginning of Year.............. 11,417
------------
CASH, End of Year.................... $ 22,018
============

See notes to financial statements.

F-50

424B4 101st Page of 152 TOC 1st Previous Next ↓Bottom Just 101st
REDGATE FUNERAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996

ORGANIZATION/NATURE OF OPERATIONS:

Redgate Funeral Service Corporation operates two funeral homes: one in
Trumbull, CT and one in Monroe, CT. It performs personal and professional
services related to funerals at its funeral homes.

Effective June 17, 1997, the stock of Redgate Funeral Service Corporation
was sold to Carriage Funeral Holdings, Inc.

SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUES -- Revenue is recognized upon performance of funeral services and
sale of related funeral merchandise.

INVENTORIES -- Inventories are stated at cost determined by using the
first-in, first-out (FIFO) method.

FIXED ASSETS -- Fixed assets are recorded at cost at the date of
acquisition. Major additions and improvements are capitalized while minor
replacements, maintenance and repairs which do not improve or extend the life of
the related assets are charged to operations as incurred. Depreciation of fixed
assets is calculated on the straight-line basis over the estimated useful lives
of the assets as follow:

Buildings............................ 40 years
Improvements......................... 5-31 years
Furniture/Equipment.................. 5-10 years
Automotive Equipment................. 5 years

Depreciation expense included in operating expenses for the year was
$33,247.

INCOME TAXES -- The Company has incurred operating losses in prior years as
well as the year ended December 31, 1996, therefore there is no Federal or State
income taxes due. The Corporation's 1996 income tax return shows a net operating
loss carryover to future years of $379,728.

USE OF ESTIMATES -- The preparation of financial statements in accordance
with generally accepted accounting principles requires management to make
estimates and assumptions that effect the reported amounts and disclosures in
the financial statements. Although actual results could differ from those
estimates, no significant estimates have been made in the preparation of the
Company's financial statements.

COMPENSATED ABSENCES -- Vacation time is paid to all full-time employees
when taken. Unused vacation time is not paid when an employee terminates,
therefore, no accruals are made in the financial statements.

NOTES PAYABLE:
Notes payable to finance companies
secured by automotive equipment
with net book values of $81,417.
Monthly payments of $2,561
(principal and interest) through
2000 are required. Interest rates
on loans are 7.17% to 9.99%........ $ 56,911
Note payable to bank, secured by
personal guarantee of officer.
Monthly payments of $833 plus
interest at 9% through 1999........ 21,667
Note payable to officer, unsecured.
The loan contains no payment
provisions. Payments to the officer
have been made based on available
cash flow. During 1996 the
principal reduction of the loan was
$46,878............................ 47,874
Mortgage note payable to bank,
secured by 1st mortgage on 4 Gorham
P1., Trumbull, CT and personal
guarantee of officer. Monthly
payments of $4,518 (principal and
interest) are required through July
1998 when the loan matures.
Interest adjusts annually based on
U.S. Treasury securities........... 476,615

F-51

424B4 102nd Page of 152 TOC 1st Previous Next ↓Bottom Just 102nd
REDGATE FUNERAL SERVICE CORPORATION
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Principal payments are required in future years as follows:

December 31, 1997.................... $ 41,579
December 31, 1998.................... 37,835
December 31, 1999.................... 21,826
December 31, 2000.................... 15,187
December 31, 2001.................... 11,992
After 2001........................... 426,772

OPERATING LEASES:

The Company has three operating lease obligations.

-- Lease of 1996 Cadillac Hearse requiring monthly payments of $943
through June 1999.

-- Lease of telephone equipment requiring monthly payments of $129 through
February 1998.

-- Lease of land and building for Monroe, CT funeral home from officer. A
formal lease does not exist, the Corporation pays monthly rent to the
officer in the amount of approximately $2,400 per month. The monthly
lease payments equal the officer's monthly loan payment on the real
estate mortgage on the property.

Future years lease obligations are as follows:

December 31, 1997.................... $ 41,664
December 31, 1998.................... 40,374
December 31, 1999.................... 34,458

DISCONTINUED OPERATIONS:

In late 1995, the Company closed the funeral home it operated in Fairfield,
Ct. The Company had made improvements to the facility, which was owned by the
principal stockholders of the Company. The remaining unamortized leasehold
improvements in the amount of $270,377 were written off in 1996. There was no
other income or expense associated with the discontinuation of operations.

F-52

424B4 103rd Page of 152 TOC 1st Previous Next ↓Bottom Just 103rd
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

November 12, 1997

To the Board of Directors
Allen J. Harden Funeral Home, Inc.

We have audited the accompanying balance sheet of Allen J. Harden Funeral
Home, Inc. as of December 31, 1996 and 1995 and the related statements of
operations and changes in retained earnings and cash flows for the years then
ended. These financial statements are the responsibility of Allen J. Harden
Funeral Home, Inc.'s management. Our responsibility is to express an opinion on
these financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Allen J. Harden Funeral
Home, Inc. as of December 31, 1996 and 1995, and the results of its operations
and its cash flows for the years then ended in conformity with generally
accepted accounting principles.

/s/ DAVID LOGAN, CPA PA
David Logan, CPA PA

F-53

424B4 104th Page of 152 TOC 1st Previous Next ↓Bottom Just 104th
ALLEN J. HARDEN FUNERAL HOME, INC.
BALANCE SHEET
DECEMBER 31, 1996 AND 1995

1996 1997
---------- ----------
ASSETS
Current assets:
Cash and cash equivalents....... $ 123,951 $ 74,643
Accounts receivable............. 52,895 56,544
Allowance for doubtful
accounts....................... (15,000) (1,000)
Inventory....................... 9,502 5,124
---------- ----------
Total current assets....... 171,348 135,311
Property and equipment
Furniture & fixtures............ 40,389 39,961
Automotive equipment............ 105,477 46,500
---------- ----------
Total property and
equipment............... 145,866 86,461
Accumulated depreciation........ (37,349) (15,246)
---------- ----------
108,517 71,215
Other assets
Goodwill (Net).................. 45,831 49,500
Non-Compete agreement (Net)..... 5,000 15,000
---------- ----------
Total other assets......... 50,831 64,500
---------- ----------
Total assets............... $ 330,696 $ 271,026
========== ==========
LIABILITIES AND STOCKHOLDER'S EQUITY
Current liabilities:
Accounts payable................ $ 17,304 $ 28,736
Taxes withheld and payable...... 24,833 15,242
Accrued retirement
contribution................... 14,351 13,922
Deferred preneed revenue --
Amount due within one year.... 19,226 8,301
Notes payable-Amount due within
one year....................... 3,900 3,536
---------- ----------
Total current
liabilities............. 79,614 69,737
Long term debt:
Deferred preneed-ITrust
contracts...................... 87,607 25,470
Deferred preneed-STP
contracts...................... 43,498 50,737
Note payable.................... 125,000 125,000
Installment note payable........ 14,967 18,503
Less amounts due within one
year:
Notes payable................. (3,900) (3,536)
Deferred preneed revenue...... (19,226) (8,301)
---------- ----------
Total long term debt....... 247,946 207,873
Stockholder's equity:
Common stock (1,000 shares
authorized, $5 par value, 100
shares issued and
outstanding)................... 500 500
Retained earnings (deficit)..... 2,636 (7,084)
---------- ----------
Total stockholder's
equity.................. 3,136 (6,584)
---------- ----------
Stockholder's equity.... $ 330,696 $ 271,026
========== ==========

The Accompanying Notes are an Integral Part of the Financial Statements

F-54

424B4 105th Page of 152 TOC 1st Previous Next ↓Bottom Just 105th
ALLEN J. HARDEN FUNERAL HOME, INC.
STATEMENT OF OPERATIONS AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

1996 1995
------------ ------------
Sales Revenue........................ $ 670,374 $ 411,478
Direct Expenses...................... 163,874 119,674
------------ ------------
Gross Profit.................... 506,500 291,804
Operating Expenses:
Facilities........................... 46,430 42,970
Automotive........................... 30,048 16,524
Personnel............................ 121,719 128,998
Supplies............................. 9,912 10,396
Business Services.................... 10,653 10,238
Promotion............................ 25,059 20,692
Miscellaneous Expense................ 9,644 3,410
Amortization......................... 13,669 13,667
Interest expense..................... 13,872 10,787
Bad debt expense..................... 14,000 1,000
------------ ------------
Total Operating Expenses... 295,006 258,682
------------ ------------
Net income........................... 211,494 33,122
Retained Earnings-(Deficit)
Beginning............................ (7,084) 70,198
Stockholder Distributions............ (201,774) (110,404)
------------ ------------
Retained Earnings-(Deficit) Ending... $ 2,636 $ (7,084)
============ ============

The accompanying notes are an integral part of the financial statements.

F-55

424B4 106th Page of 152 TOC 1st Previous Next ↓Bottom Just 106th
ALLEN J. HARDEN FUNERAL HOME, INC.
STATEMENT OF CASH FLOWS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

1996 1995
------------ ------------
Cash flows from operating activities:
Cash received from customers.... $ 760,514 $ 458,727
Cash paid to suppliers and
employees...................... (432,619) (298,319)
Interest paid................... (13,872) (10,787)
------------ ------------
Net cash provided (used) by
operating activities........... 314,023 149,621
------------ ------------
Cash flows from investing activities:
Cash payments for the purchase
of property.................... (59,405) (45,102)
------------ ------------
Net cash provided (used) by
investing activities........... (59,405) (45,102)
------------ ------------
Cash flows from financing activities:
Proceeds from issuance of
long-term debt................. 20,000
Principal payments on long-term
debt........................... (3,536) (1,497)
Stockholder distributions....... (201,774) (110,404)
------------ ------------
Net cash provided (used) by
financing activities........... (205,310) (91,901)
------------ ------------
Net increase (decrease) in cash and
equivalents........................ 49,308 12,618
Cash and equivalents, beginning of
year............................... 74,643 62,025
------------ ------------
Cash and cash equivalents, end of
year............................... $ 123,951 $ 74,643
============ ============
Reconciliation of net income to net
cash provided by operating
activities:
Net Income...................... $ 211,494 $ 33,122
------------ ------------
Adjustments to reconcile net
income to net cash provided by
operating activities:
Depreciation and
amortization........... 35,772 24,991
(Increase) decrease in
accounts receivable.... 17,649 (5,556)
(Increase) decrease in
inventories............ (4,378) 61
Increase (decrease) in
accounts payable....... (11,901) 18,936
Increase (decrease) in
accrued liabilities.... 10,489 25,262
Increase (decrease) in
deferred preneed....... 54,898 52,805
------------ ------------
Total adjustments.......... 102,529 116,499
------------ ------------
Net cash provided (used) by
operating activities........... $ 314,023 $ 149,621
============ ============
Non cash investing activity:
Book value of vehicles traded
in............................. $ 8,200 $ 0

The accompanying notes are an integral part of the financial statements.

F-56

424B4 107th Page of 152 TOC 1st Previous Next ↓Bottom Just 107th
ALLEN J. HARDEN FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BUSINESS ACTIVITY -- Allen J. Harden Funeral Home, Inc. (the Company) was
incorporated under the laws of the State of Florida on June 23, 1994. The
Company was originally named Mount Dora Funeral Home, Inc. and the name was
changed to Allen J. Harden Funeral Home, Inc. in July, 1994. The Company
acquired the assets of Joe E. and Anita Humphrey d/b/a Mount Dora Funeral Home
pursuant to a contract for sale and purchase of business dated July 1, 1994.

The Company owns and conducts a funeral home business located at 1704 North
Donnelly Street in Mount Dora, Florida.

USE OF ESTIMATES -- The preparation of financial statements in conformity
with generally accepted accounting principles requires management to make
estimates and assumptions that affect the reported amounts of assets and
liabilities and disclosure of contingent assets and liabilities at the date of
the financial statements and the reported amounts of revenues and expenses
during the reporting period. Actual results could differ from those estimates.

FAIR VALUE OF FINANCIAL INSTRUMENTS -- Management estimates that the fair
value of the Company's financial instruments at December 31, 1996 and 1995 did
not differ materially from the carrying values reported in the accompanying
balance sheets.

CASH EQUIVALENTS -- For purposes of the statements of cash flows, the
Company considers all short-term instruments purchased with a maturity of three
months or less to be cash equivalents. Cash equivalents include money market
accounts.

INVENTORIES -- Inventories are stated at the lower of cost determined on a
first-in, first-out basis or market.

S CORPORATION INCOME TAX STATUS -- The Company, with the consent of its
shareholders, has elected under the Internal Revenue Code to be an S
corporation. In lieu of corporation income taxes, the shareholders of an S
corporation are taxed on their proportionate share of the Company's taxable
income. Therefore, no provision or liability for federal or state income taxes
has been included in the financial statements.

ADVERTISING -- The Company follows the policy of charging advertising costs
to expense as incurred. Advertising expense was $14,102 and $13,937 for the
years ended December 31, 1996 and 1995 respectively.

PROPERTY -- EQUIPMENT AND DEPRECIATION -- Property and equipment are stated
at cost. Depreciation is computed over the estimated useful life of the assets
using the straight line method. Useful lives are as follows:

Furniture and equipment.............. 7 years
Automotive equipment................. 5 years

Depreciation expense amounted to $22,105 and $11,324 for the years ended
December 31, 1996 and 1995 respectively.

GOODWILL AND AMORTIZATION -- Terms of the July 1, 1994 contract for
purchase of the business allocated $55,000 to business goodwill. This amount is
being amortized by the straight line method over 15 years. Amortization of
Goodwill amounted to $3,667 for each of the years ended December 31, 1996 and
1995.

NONCOMPETE AGREEMENT -- Terms of the July 1, 1994 contract for purchase of
the business allocated $30,000 to a noncompete agreement with the previous
owner. The agreement is applicable for three years

F-57

424B4 108th Page of 152 TOC 1st Previous Next ↓Bottom Just 108th
ALLEN J. HARDEN FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
within a radius of 25 miles. The amount is being amortized over three years.
Amortization of the agreement amounted to $10,000 for each of the years ended
December 31, 1996 and 1995.

PRENEED PROGRAMS -- In addition to sales of funeral merchandise and
services at the time of need, the Company also markets funeral services and
products on a preneed basis. Preneed funeral contracts are arrangements where
the Company agrees to furnish funeral merchandise and services in the future for
a fee paid currently.

Proceeds from the sale of preneed funeral contracts are not recognized as
revenues until the time the funeral service is performed. The Company sold 56
and 45 preneed funeral contracts in the years ended December 31, 1996 and 1995,
respectively. At December 31, 1996, the Company had a backlog of 171 preneed
funeral contracts to be delivered in the future (81 of which were assumed from
the previous owner). Deferred preneed revenue does not include amounts
distributed to the previous owner on contracts assumed by the Company.
Management estimates that trusted portion of the contracts will cover the
Company's cost of providing the service.

PRENEED TRUST FUNDS -- Preneed contracts are regulated by Chapter 497 of
Florida Statutes which specify certain minimum trusting requirements under terms
of a revocable trust instrument. Trusting requirements include:

70% of retail services must be trusted.

The greater of 30% of retail or 110% of wholesale cost of merchandise must
be trusted.

100% of cash advance items must be trusted.

The Company has established trusts in connection with the sales of preneed
funeral contracts in accordance with Florida Statutes. Trust earnings are not
recognized until the funeral service is performed. Since the Company does not
have access to the trust fund principal or earnings, the related assets and
liabilities are not reflected on the Company's balance sheet. Trust balances are
as follows:

1996 1995
---------- ----------
Contracts written by Allen J. Harden
Funeral Home, Inc.:
Securities Trust Plan (STP)..... $ 71,194 $ 83,196
Suntrust (I-Trust).............. 120,898 35,419
Contracts written by the previous
owner and assumed by Allen J.
Harden Funeral Home, Inc.:
Securities Trust Plan (STP)..... 69,730 67,924
---------- ----------
Trust balances.................. $ 261,822 $ 186,539
---------- ----------

NOTE 2 -- DEFERRED PRENEED REVENUE

Nontrusted portions of preneed contracts have been distributed to the
Company and are included in cash and cash equivalents. Proceeds are not
recognized as revenue until the funeral service is provided. The following is a
summary of deferred preneed revenue:

1996 1995
---------- ---------
Trust Contracts...................... $ 87,607 $ 25,470
STP Contracts........................ 43,498 50,737
---------- ---------
131,105 76,207
Estimated amount due within one
year............................... 19,226 8,301
---------- ---------
$ 111,879 $ 67,906
---------- ---------

F-58

424B4 109th Page of 152 TOC 1st Previous Next ↓Bottom Just 109th
ALLEN J. HARDEN FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- LONG TERM DEBT

Long term debt consists of the following at December 31:

1996 1995
---------- ----------
Note payable to a bank, payable in 60
monthly installments of $409
including interest at 8.0%,
collateralized by automotive
equipment.......................... $ 14,967 $ 18,503
Note payable to an individual,
interest at 8.0% is payable
quarterly, unsecured, personally
guaranteed by Allen J. Harden note
is due January 1, 2000............. 125,000 125,000
---------- ----------
139,967 143,503
Less amount due within one
year............................ 3,900 3,536
---------- ----------
$ 136,067 $ 139,967
========== ==========

Maturity of long term debt is as follows:

Year ended December 31:
1997............................ 3,900
1998............................ 4,171
1999............................ 4,517
2000............................ 127,379

NOTE 4 -- RETIREMENT PLAN

On December 2, 1995 the Company established a Simplified Employee Pension
Plan for the benefit of eligible employees. Employees must be at least twenty
one years old and worked in at least three of the immediately preceding five
years. Participants may contribute a portion of their compensation, up to 15%,
to the plan. Company contributions are discretionary. Contributions were $8,408
and $13,922 for the years ended December 31, 1996 and 1995 respectively.

NOTE 5 -- LEASE

The Company leases the building under terms of a three year lease dated
July 1, 1994 which provides for an option to extend for an additional two years.
The basic monthly rental amount is $1,656 to which is added sales tax, personal
property taxes, and real estate taxes in excess of $500. The option to extend
was exercised to December 31, 1997 at which time the rent is on a month to month
basis. Rent expense under the lease amounted to $23,035 and $25,054 for the
years ended December 31, 1996 and 1995 respectively. The following is a schedule
of noncancelable lease commitments under the original and extended lease:

Year ended December 31
1997............................ $ 19,872

NOTE 6 -- CONTINGENCY

The Company agreed to assume responsibility for all prepaid funeral
arrangements entered into by the previous owner prior to July 30, 1994.
Management believes that all such arrangements are known and that the trusted
portion of the contracts will cover the Company's cost of providing the service.

NOTE 7 -- SUBSEQUENT EVENT -- SALE OF THE BUSINESS

On June 20th, 1997 the Company and its shareholder entered into an asset
purchase agreement with Carriage Funeral Holdings, Inc. Terms of the contract
provide for transfer of a substantial portion of the Company's assets along with
other assets of the shareholder for a total acquisition amount of $1,592,500.

F-59

424B4 110th Page of 152 TOC 1st Previous Next ↓Bottom Just 110th
AUDITOR'S REPORT

Board of Directors and Stockholders
of McNary-Moore Funeral Service, Inc.
Colusa, California

We have audited the accompanying balance sheets of McNary-Moore Funeral
Service, Inc. (a California corporation) as of December 31, 1996 and 1995, and
the related statements of income and retained earnings and cash flows for the
years then ended. These financial statements are the responsibility of the
Company's management. Our responsibility is to express an opinion on these
financial statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of McNary-Moore Funeral
Service, Inc. as of December 31, 1996 and 1995, and the results of its
operations and its cash flows for the years then ended, in conformity with
generally accepted accounting principles.

BARTIG, BASLER & RAY, CPAs, INC.

July 3, 1997

F-60

424B4 111th Page of 152 TOC 1st Previous Next ↓Bottom Just 111th
MCNARY-MOORE FUNERAL SERVICE, INC.
COMPARATIVE BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

1996 1995
---------- ----------
ASSETS
Current Assets
Cash (Note 2)................... $ 65,130 $ 114,380
Accounts receivable -- Net of
allowance for bad debts (Note
3)............................. 42,271 41,689
Inventory (Note 4).............. 31,803 29,944
Prepaid expense (Note 5)........ 14,431 14,326
---------- ----------
Total Current Assets....... 153,635 200,339
---------- ----------
Fixed Assets
Property and equipment -- Net of
allowance for depreciation
(Note 6)....................... 40,367 41,319
---------- ----------
Other Assets
Memberships..................... 500 500
Goodwill........................ 2,000 2,000
---------- ----------
Total Other Assets......... 2,500 2,500
---------- ----------
Total Assets............ $ 196,502 $ 244,158
========== ==========
LIABILITIES AND STOCKHOLDERS' EQUITY
Current Liabilities
Accounts payable................ $ 8,461 $ 9,642
Taxes payable................... 3,577 5,952
Salaries payable................ 7,668 15,242
Deferred rental income.......... 1,140 690
---------- ----------
Total Current
Liabilities............. 20,846 31,526
---------- ----------
Stockholders' Equity
Capital stock, par value $50,
1,500 shares authorized, 1,200
shares
issued and outstanding........ 60,000 60,000
Additional paid-in capital...... 4,068 4,068
Retained earnings............... 111,588 148,564
---------- ----------
Total Stockholders'
Equity.................. 175,656 212,632
---------- ----------
Total Liabilities and
Stockholders'
Equity................ $ 196,502 $ 244,158
========== ==========

The accompanying notes are an integral part of these financial statements.

F-61

424B4 112th Page of 152 TOC 1st Previous Next ↓Bottom Just 112th
MCNARY-MOORE FUNERAL SERVICE, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
FOR THE YEARS ENDED DECEMBER 31, 1996 AND 1995

[Download Table]

1996 1995
-------------------- -------------------
AMOUNT PERCENT AMOUNT PERCENT
--------- ------- -------- -------

Sales, Net of Discounts Allowed...... $ 360,387 100.0% $395,732 100.0%
Cost of Sales........................ 57,097 15.8 68,766 17.4
--------- ------- -------- -------
Gross Profit on Sales................ 303,290 84.2 326,966 82.6
Operating Expenses................... 244,037 67.7 246,762 62.3
--------- ------- -------- -------
Net Income from Operations........... 59,253 16.5 80,204 20.3
Other Income......................... 11,654 3.2 10,576 2.7
--------- ------- -------- -------
Net Income........................... 70,907 19.7% 90,780 22.9%
======= =======
Retained Earnings, Beginning of
Year............................... 148,564 106,941
Dividends Paid....................... (107,883) (49,157)
--------- --------
Retained Earnings, End of Year....... $ 111,588 $148,564
========= ========

The accompanying notes are an integral part of these financial statements.

F-62

424B4 113th Page of 152 TOC 1st Previous Next ↓Bottom Just 113th
MCNARY-MOORE FUNERAL SERVICE, INC.
STATEMENTS OF CASH FLOWS
FOR THE YEAR ENDED DECEMBER 31, 1996 AND 1995

1996 1995
------------ ----------
Cash Flows from Operating Activities
Net income...................... $ 70,907 $ 90,780
Adjustments to reconcile net
income to net cash provided by
operating activities
Depreciation............... 2,315 2,274
(Increase) decrease in:
Accounts receivable........ (582) (15,477)
Inventory.................. (1,859) (2,962)
Prepaid expenses........... (105) 3,248
Increase (decrease) in:
Accounts payable........... (1,181) 1,772
Taxes payable.............. (2,375) 1,873
Salaries payable........... (7,573) 8,525
Deferred rental income..... 450 (225)
------------ ----------
Net Cash Provided by
Operating
Activities............ 59,997 89,808
------------ ----------
Cash Flows from Investing Activities
Purchase buildings and
improvements.................... (397) --
Purchase of fixtures, furniture
and equipment.................. (967) (7,983)
------------ ----------
Net Cash Flows from
Investing Activities.... (1,364) (7,983)
------------ ----------
Cash Flows from Financing Activities
Dividends paid..................... (107,883) (49,157)
------------ ----------
Net Increase (Decrease) in Cash...... (49,250) 32,668
Cash at Beginning of Year............ 114,380 81,712
------------ ----------
Cash at End of Year.................. $ 65,130 $ 114,380
============ ==========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW
INFORMATION
Cash Paid During the Year
Interest........................ $ -- $ --
Income Taxes.................... -- --

The accompanying notes are an integral part of these financial statements.

F-63

424B4 114th Page of 152 TOC 1st Previous Next ↓Bottom Just 114th
MCNARY-MOORE FUNERAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995

NOTE 1: SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

A. BASIS OF ACCOUNTING

The Corporation's financial records are maintained on the accrual basis of
accounting. Under the accrual basis, revenues are recognized when earned and
expenses are recognized when incurred without regard to when payment is received
or paid.

B. INVENTORY

Inventory is stated at cost using the first-in, first-out method of
valuation.

C. PROPERTY AND EQUIPMENT

Property and equipment are stated at cost. Depreciation is calculated using
the straight-line method over the estimated useful life of the assets.

D. INCOME TAXES/YEAR END

Under the provisions of Subchapter S of the Internal Revenue Code, the
Corporation has elected not to be subject to the federal income tax. As a result
and by consent of the shareholders to the election, the shareholders are liable
for the federal income tax on the income of the Corporation whether distributed
or not. Therefore, no provision has been made in the financial statements for
federal income tax.

The balance in retained earnings represents undistributed income that has
been previously taxed to the shareholders.

E. TRUST FUNDS

The Corporation is liable for performance under prepaid financial
arrangements as evidenced by funds on deposit in savings accounts in the names
of corporate officers and other trustees for McNary-Moore Funeral Service, Inc.
The amounts of $192,191 and $131,617 at December 31, 1996 and 1995,
respectively, represented savings accounts deposits and offsetting liability
accounts to individuals for prepaid funerals. These amounts are considered trust
funds and are not reflected in the balance sheets of the Corporation.

NOTE 2: CASH

1996 1995
--------- ----------
Petty Cash........................... $ 75 $ 75
Cash in bank -- Commercial........... 16,678 27,224
Cash in bank -- Savings.............. 48,377 87,080
--------- ----------
Total........................... $ 65,130 $ 114,379
========= ==========

F-64

424B4 115th Page of 152 TOC 1st Previous Next ↓Bottom Just 115th
MCNARY-MOORE FUNERAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3: ACCOUNTS RECEIVABLE

Accounts receivable on December 31 consisted of the following:

1996 1995
--------- ----------
Accounts receivable.................. $ 37,425 $ 37,434
Accommodation items.................. 4,610 3,949
Sundry accounts receivable........... 236 306
--------- ----------
Total........................... 42,271 41,689
Less allowance for bad debts......... -- --
--------- ----------
Total........................... $ 42,271 $ 41,689
========= ==========

NOTE 4: INVENTORY

Inventory on December 31 consisted of the following:

1996 1995
--------- ---------
Merchandise.......................... $ 30,583 $ 28,424
Supplies............................. 1,220 1,520
--------- ---------
Total........................... $ 31,803 $ 29,944
========= =========

NOTE 5: PREPAID EXPENSES

Prepaid expenses on December 31 consisted of the following:

1996 1995
--------- ---------
Insurance............................ $ 7,604 $ 7,903
Taxes and licenses................... 3,892 3,871
Other................................ 2,935 2,552
--------- ---------
Total........................... $ 14,431 $ 14,326
========= =========

NOTE 6: PROPERTY AND EQUIPMENT

Property and equipment are summarized by major classifications as follows:

1996 1995
---------- ----------
Land................................. $ 24,986 $ 24,986
Buildings and improvements........... 111,988 111,591
Fixtures, furniture and equipment.... 53,900 53,834
Automobiles.......................... 38,267 38,267
---------- ----------
Total........................... 229,141 228,678
Less allowance for depreciation...... (188,774) (187,359)
---------- ----------
Total........................... $ 40,367 $ 41,319
========== ==========

NOTE 7: PENSION PLAN

The Corporation contributes to SEP/IRA plans for substantially all of its
employees. The contributions and costs are determined as 4.5 percent of each
covered employee's salary and totaled $5,633 for the year ended December 31,
1996 and $5,016 for the year ended December 31, 1995.

F-65

424B4 116th Page of 152 TOC 1st Previous Next ↓Bottom Just 116th
MCNARY-MOORE FUNERAL SERVICES, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 8: SUBSEQUENT EVENT

Subsequent to year end, an offer was accepted to sell substantially all the
assets of the Corporation with the exception of certain parcels of real
property. The pending sale and transfer was intended to occur as of July 31,
1997.

F-66

424B4 117th Page of 152 TOC 1st Previous Next ↓Bottom Just 117th
INDEPENDENT AUDITORS' REPORT

To the Board of Directors
Sidun Funeral Group, Inc.
Formerly Known As
John E. Day, Bedle & Braun Funeral Homes
Red Bank, New Jersey

We have audited the accompanying combined balance sheets of Sidun Funeral
Group, Inc., Formerly Known As John E. Day, Bedle & Braun Funeral Homes, as of
December 31, 1996 and 1995 and the related combined statements of income and
retained earnings and cash flows for the years then ended. These financial
statements are the responsibility of the management of Sidun Funeral Group,
Inc., Formerly Known As John E. Day, Bedle & Braun Funeral Homes. Our
responsibility is to express an opinion on these financial statements based on
our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audits to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Sidun Funeral Group, Inc.,
Formerly Known As John E. Day, Bedle & Braun Funeral Homes as of December 31,
1996 and 1995, and the results of its operations and its cash flows for the
years then ended in conformity with generally accepted accounting principles.

SOBEL & CO., LLC
Certified Public Accountants

January 12, 1998

F-67

424B4 118th Page of 152 TOC 1st Previous Next ↓Bottom Just 118th
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
COMBINED BALANCE SHEETS

DECEMBER 31,
--------------------------
1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 330,861 $ 543,744
Accounts receivable (net of
allowance for doubtful accounts
of $24,675 in 1996 and $17,250
in 1995)....................... 400,248 315,623
Marketable equity
securities--available for
sale........................... 51,959 42,014
Inventories..................... 65,861 60,987
Due from officers............... 96,017 96,017
Other current assets............ 6,374 1,800
------------ ------------
Total Current Assets....... 951,320 1,060,185
PROPERTY AND EQUIPMENT, net of
accumulated depreciation........... 1,189,613 924,034
OTHER ASSETS......................... 25,114 25,702
------------ ------------
$ 2,166,047 $ 2,009,921
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term
debt........................... $ 167,878 $ 118,118
Accounts payable and accrued
expenses....................... 171,478 75,852
Accrued pension and
profit-sharing plan
contributions.................. 18,590 39,325
------------ ------------
Total Current
Liabilities............ 357,946 233,295
------------ ------------
LONG-TERM DEBT....................... 740,843 747,856
------------ ------------

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS' EQUITY:
Common stock.................... 3,000 3,000
Unrealized holding gains........ 7,685 4,835
Retained earnings............... 1,316,573 1,280,935
------------ ------------
1,327,258 1,288,770
Less: Treasury stock, at
cost........................... 260,000 260,000
------------ ------------
Total Stockholders'
Equity................. 1,067,258 1,028,770
------------ ------------
$ 2,166,047 $ 2,009,921
============ ============

See notes to combined financial statements.

F-68

424B4 119th Page of 152 TOC 1st Previous Next ↓Bottom Just 119th
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS

FOR THE YEAR ENDED
DECEMBER 31,
--------------------------
1996 1995
------------ ------------
REVENUES............................. $ 4,290,241 $ 3,830,926
DIRECT COSTS......................... 2,004,584 1,601,112
------------ ------------
GROSS PROFIT......................... 2,285,657 2,229,814
GENERAL AND ADMINISTRATIVE
EXPENSES........................... 1,867,228 1,604,180
------------ ------------
INCOME FROM OPERATIONS............... 418,429 625,634
OTHER INCOME......................... 23,946 16,883
INTEREST EXPENSE..................... (72,463) (91,455)
------------ ------------
INCOME BEFORE INCOME TAXES........... 369,912 551,062
------------ ------------
PROVISION FOR INCOME TAXES:
Current......................... (6,862) (13,893)
------------ ------------
(6,862) (13,893)
------------ ------------
NET INCOME........................... 363,050 537,169
RETAINED EARNINGS:
Beginning of Year............... 1,280,935 1,093,766
Dividends Paid.................. (327,412) (350,000)
------------ ------------
End of Year..................... $ 1,316,573 $ 1,280,935
============ ============

See notes to combined financial statements.

F-69

424B4 120th Page of 152 TOC 1st Previous Next ↓Bottom Just 120th
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
COMBINED STATEMENTS OF CASH FLOWS

FOR THE YEAR
ENDED DECEMBER 31,
--------------------------
1996 1995
------------ ------------
CASH FLOWS PROVIDED BY (USED FOR):
OPERATING ACTIVITIES:
Net Income...................... $ 363,050 $ 537,169
Adjustments to reconcile net
income to net cash provided
by operating activities:
Depreciation and
amortization............ 111,723 127,073
Gain on securities......... -- (1,105)
Gain on sale of assets..... (1,688) (2,700)
Changes in certain assets and
liabilities:
Accounts receivable........ (84,625) (47,827)
Inventories................ (4,874) 23,809
Other assets............... (5,637) --
Accounts payable and
accrued expenses........ 95,626 8,121
Accrued pension and
profit-sharing plan
contributions........... (20,735) (27,618)
------------ ------------
Net Cash Provided by Operating
Activities................... 452,840 616,922
------------ ------------
INVESTING ACTIVITIES:
Cash proceeds from the sale of
property....................... 6,500 2,700
Purchases of property and
equipment...................... (380,463) (222,316)
Purchases of marketable equity
securities..................... (7,095) (2,276)
Repayment of advance to
officers....................... -- 84,820
------------ ------------
Net Cash Used for Investing
Activities.............. (381,058) (137,072)
------------ ------------
FINANCING ACTIVITIES:
Proceeds from long-term debt.... 197,000 --
Repayment of long-term debt..... (154,253) (107,148)
Dividends paid.................. (327,412) (350,000)
------------ ------------
Net Cash (Used for)
Financing Activities.... (284,665) (457,148)
------------ ------------
NET (DECREASE) INCREASE IN CASH AND
CASH EQUIVALENTS................... (212,883) 22,702
CASH AND CASH EQUIVALENTS:
Beginning of year............... 543,744 521,042
------------ ------------
End of year..................... $ 330,861 $ 543,744
============ ============

See notes to combined financial statements.

F-70

424B4 121st Page of 152 TOC 1st Previous Next ↓Bottom Just 121st
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995

NOTE 1 -- ORGANIZATION:

The Sidun Financial Group, Inc., Formerly Known As John E. Day, Bedle &
Braun Funeral Homes (the "Companies") provide funeral services from four
locations in Monmouth County, New Jersey.

NOTE 2 -- SUMMARY OF ACCOUNTING POLICIES:

PRINCIPLES OF COMBINATION:

The financial statements include the accounts of John E. Day Funeral Home,
Inc., Braun Funeral Home, Inc. and John E. Day--Bedle Funeral Home, Inc. (see
Note 14). The three companies are related by common ownership. All intercompany
balances and transactions have been eliminated in the financial statements.

CASH EQUIVALENTS:

For purposes of the financial statements, the Companies considered all
highly liquid debt instruments purchased with an original maturity of less than
ninety days to be cash equivalents.

MARKETABLE EQUITY SECURITIES:

Marketable equity securities, which are considered available for sale,
consist primarily of mutual funds and are stated at fair value.

ACCOUNTS RECEIVABLE:

Current earnings are charged and an allowance is credited with a provision
for doubtful accounts based on experience. Accounts deemed uncollectible are
charged against this allowance. Receivables are reported on the balance sheet
net of the allowance.

INVENTORIES:

Inventories consist primarily of burial materials and supplies and are
stated at the lower of cost or market on the first-in, first-out basis.

PROPERTY, PLANT AND EQUIPMENT:

Property, plant and equipment are recorded at cost. For financial
reporting, the straight-line method for depreciation is used based on the
estimated useful lives of the assets.

INTANGIBLE ASSETS:

Intangible assets are recorded at cost and are amortized using the
straight-line method over the estimated useful life of the assets.

INCOME TAXES:

The Companies have elected to be an "S" Corporation, whereby the
stockholders account for their share of the Companies' earnings, losses,
deductions, and credits on their Federal and state income tax returns.
Accordingly, these statements do not include any provision for Federal income
taxes. The Companies are still subject to applicable state income taxes.

The Companies utilize Statement of Financial Accounting Standards (SFAS)
No. 109 "Accounting for Income Taxes". Under SFAS No. 109, deferred tax assets
and liabilities are recognized for the expected future tax consequences of
temporary differences that have been recognized in the Companies' financial

F-71

424B4 122nd Page of 152 TOC 1st Previous Next ↓Bottom Just 122nd
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
statements or tax returns and available net operating loss carryforwards. In
estimating future tax consequences, SFAS No. 109 generally considers all enacted
changes in tax law or rates. Temporary differences result from different book
and tax methods of accounting for depreciation and tax deductibility differences
related to accrued bad debts.

USE OF ESTIMATES:

In preparing financial statements in conformity with generally accepted
accounting principles, management is required to make estimates and assumptions
that affect the reported amounts of assets and liabilities and the disclosure of
contingent assets and liabilities at the date of the financial statements and
revenues and expenses during the reporting period. Actual results could differ
from those estimates.

NOTE 3 -- RELATED PARTY TRANSACTIONS:

Amounts due from officers are non-interest bearing and do not have any
specific repayment terms.

Office facilities are occupied under leases with related parties. See Note
8.

Certain notes payable to related parties are reported in Note 6.

NOTE 4 -- PROPERTY AND EQUIPMENT:

Property and equipment is comprised as follows:

ESTIMATED DECEMBER 31,
USEFUL --------------------------
LIFE 1996 1995
---------- ------------ ------------
Land................................. -- $ 104,100 $ 84,100
Buildings............................ 39 years 491,577 313,968
Vehicles............................. 5 years 476,797 374,362
Furniture and equipment.............. 5-7 years 908,882 887,489
Leasehold improvements............... 31 years 301,679 293,479
------------ ------------
2,283,035 1,953,398
Less accumulated depreciation........ 1,093,422 1,029,364
------------ ------------
$ 1,189,613 $ 924,034
============ ============

NOTE 5 -- INTANGIBLE ASSETS:

Intangible assets are included in other assets and are comprised as
follows:

DECEMBER 31,
AMORTIZATION ---------------------
PERIOD 1996 1995
------------- --------- ----------
Covenant not to compete.............. 5 years $ -- $ 125,000
Unamortized closing costs............ 30 years 24,002 24,002
--------- ----------
24,002 149,002
Less accumulated amortization........ 3,338 127,750
--------- ----------
$ 20,664 $ 21,252
========= ==========

F-72

424B4 123rd Page of 152 TOC 1st Previous Next ↓Bottom Just 123rd
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 6 -- LONG-TERM DEBT:

Long-term debt consists of the following:

DECEMBER 31,
----------------------
1996 1995
---------- ----------
Note payable $3,600 per month plus
interest at 8.1%, originally due
July 1995, refinanced and extended
through July 2000, at which time
the remaining balance of $217,114
is due, collateralized by certain
assets and a first mortgage on real
property owned by a stockholder and
guaranteed by the officers of the
Companies.......................... $ 371,914 $ 415,114
Note payable $2,516 per month plus
interest at 8.5%, originally due
February 1995 extended through
February 2001, collateralized by
land and building owned by the
officers of the Companies.......... 125,770 155,957
Unsecured note payable $1,182 per
month including interest at 8 1/2%
to a party related to the
stockholders of the Companies
through February 2006, and
guaranteed by the Companies'
stockholders....................... 57,596 74,618
Note payable $787 per month including
interest at 6.25% through February
1996, collateralized by an auto.... -- 1,483
Unsecured note payable $2,083 per
month with no interest through
January 1999....................... 52,083 --
Note payable $1,208, per month plus
interest at prime plus 1/2% through
August 1999, at which time the
remaining balance of $146,209 is
due, collateralized by certain
assets and guaranteed by Bedle
Funeral Home, Inc.................. 183,667 198,167
Installment notes collateralized by
certain automobiles, payable in
monthly installments plus interest
at rates ranging from 6.95% to
11.5% as follows:
1997 $33,441, 2000 $19,394 and
1998 $32,245
1998 $32,245, 2001 $627 and
1999 $30,740................... 116,447 16,678
Unsecured note payable $208 per month
plus interest at prime plus 3/4%
through July 1997.................. 1,244 3,957
---------- ----------
908,721 865,974
Less current maturities.............. 167,878 118,118
---------- ----------
$ 740,843 $ 747,856
========== ==========

Long-term debt matures as follows:

YEAR
----------------------------------------
1997.................................... $ 167,878
1998.................................... 169,187
1999.................................... 133,945
2000.................................... 306,395
2001.................................... 111,167
Thereafter.............................. 20,149
----------
$ 908,721
==========

NOTE 7 -- PROFIT SHARING PLAN:

The Companies have a non-contributory profit sharing plan covering
substantially all full time employees. The Companies' discretionary
contributions to the plans are determined by the Board of Directors.

F-73

424B4 124th Page of 152 TOC 1st Previous Next ↓Bottom Just 124th
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

In addition, the Companies have a non-contributory money purchase pension
plan covering substantially all full time employees.

For the years ended December 31, 1996 and 1995, the Companies'
contributions to these plans amounted to $100,000 and $99,274. Included in
current liabilities is $20,050 and $39,325 of contributions owed to the plans.

NOTE 8 -- LONG-TERM LEASES:

The Companies operate from three locations owned by a stockholder and one
owned by a member of the stockholder's family under the terms of operating
leases. The leases provide for minimum annual rents plus contingent escalations
plus other costs such as real estate taxes and repairs and maintenance. Rent
expense paid under these leases amounted to $349,150 and $349,200 in 1996 and
1995, which included minimum rent of $280,800 in each year.

Future minimum rentals required under the terms of these leases are as
follows:

YEAR
-----
1997.................................... $ 72,000

NOTE 9 -- CONCENTRATION OF RISK:

The companies maintain cash balances in several accounts at two banks in
New Jersey. Each account is insured by the Federal Deposit Insurance Corporation
up to $100,000. During the year, the Companies occasionally had balances in
excess of FDIC insured amounts.

NOTE 10 -- COMMITMENTS AND CONTINGENCIES:

Under an agreement with a former officer dated October 29, 1986, the
Company has the following commitments:

(a) To employ the former officer at an annual salary of $31,200 until
August 30, 1996.

(b) Upon termination of the employment, the former officer will be
retained as a consultant for a period of ten years at $10,000 per year.

The above commitments terminate upon the death of the former officer.

In accordance with agreements between each Company and the stockholders,
upon the death of either, the surviving stockholder has the option to purchase
from the decedent's estate all of his shares of the capital stock in the
Company. The purchase price shall be the decedents' percentage of stock
ownership at the time of his death multiplied by an agreed upon aggregate value
of the stock. If the surviving stockholder does not exercise his option within
thirty days, the Company shall be required to purchase all of the decedent's
shares.

The purchase price shall be funded from the proceeds of term life insurance
policies maintained by each stockholder, and the remaining balance, if any, is
to be paid over 120 equal monthly installments. The insurance policies name the
surviving stockholder as the beneficiary.

The agreements further provide that during his lifetime, a stockholder may
not sell his stock without a right of first refusal to the other stockholder at
the lower of the price which the offer or stockholder proposes to sell such
stock or the price stipulated in the stockholders' agreement.

F-74

424B4 125th Page of 152 TOC 1st Previous Next ↓Bottom Just 125th
SIDUN FUNERAL GROUP, INC.
FORMERLY KNOWN AS
JOHN E. DAY, BEDLE & BRAUN FUNERAL HOMES
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 11 -- COMMON STOCK:

At December 31, 1996 and 1995, the common stock of the companies is
comprised as follows:

[Enlarge/Download Table]

PAR AUTHORIZED ISSUED TREASURY OUTSTANDING
---- ----------- ------- --------- ------------

John E. Day Funeral Home, Inc........ No 100 100 90 10
Braun Funeral Home, Inc.............. No 100 100 -- 100
John E. Day -- Bedle Funeral Home,
Inc................................ No 100 100 -- 100

NOTE 12 -- SUPPLEMENTAL CASH FLOWS DISCLOSURE:

In accordance with the provisions of FASB 95, the following information is
provided:

DECEMBER 31,
--------------------
1996 1995
--------- ---------
State income taxes paid.............. $ 16,228 $ 8,836
========= =========
Interest costs paid.................. $ 72,799 $ 92,321
========= =========

NOTE 13 -- MARKETABLE EQUITY SECURITIES:

DECEMBER 31,
--------------------
1996 1995
--------- ---------
Available-for-sale securities:
Mutual Funds, at cost........... $ 44,274 $ 37,179
Gross unrealized gains.......... 7,685 4,835
--------- ---------
$ 51,959 $ 42,014
========= =========

Changes in the unrealized holding gains on investment securities available
for sale during the years ended December 31, 1996 and 1995, and reported as a
separate component of stockholder's equity are as follows

DECEMBER 31,
--------------------
1996 1995
--------- ---------
Beginning balance.................... $ 4,835 $ --
Unrealized holding gains............. 2,850 4,835
--------- ---------
Ending balance....................... $ 7,685 $ 4,835
========= =========

NOTE 14 -- SUBSEQUENT EVENTS:

In June 1997, John E. Day Funeral Home, Inc., John E. Day Bedle Funeral
Home, Inc. and Braun Funeral Home, Inc. merged and the surviving entity was John
E. Day Funeral Home, Inc. Simultaneously with the merger, the name was changed
to Sidun Funeral Group, Inc.

On November 13, 1997, Sidun Funeral Group, Inc.'s stockholders agreed to
sell substantially all assets of the Company, excluding cash, to Carriage
Services, Inc. for an amount in excess of book value. In a separate transaction,
Carriage Services, Inc. also purchased the real estate where the Companies
operate (three locations owned by a stockholder and one owned by a member of the
stockholder's family).

During December 1997, the Board of Directors unanimously elected to
liquidate the Company. All remaining assets were distributed to the stockholders
upon liquidation.

F-75

424B4 126th Page of 152 TOC 1st Previous Next ↓Bottom Just 126th
INDEPENDENT AUDITOR'S REPORT

Board of Directors
Carriage Services, Inc.
Houston, Texas

We have audited the accompanying combined balance sheets of Forest
Lawn/Evergreen Management Corporation (a Florida corporation) and affiliates as
of August 31, 1997 and 1996, and the related combined statements of income,
retained earnings, and cash flows for the years then ended. These combined
financial statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these combined financial statements
based on our audits.

We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the combined financial statements are free of
material misstatement. An audit also includes examining, on a test basis,
evidence supporting the amounts and disclosures in the combined financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audits provide a
reasonable basis for our opinion.

In our opinion, the combined financial statements referred to above present
fairly, in all material respects, the financial position of Forest
Lawn/Evergreen Management Corporation and affiliates as of August 31, 1997 and
1996, and the combined results of their operations and their cash flows for the
years then ended in conformity with generally accepted accounting principles.

As discussed in Note 8 to the financial statements, certain errors
resulting in overstatement and understatement of previously reported assets and
liabilities and revenues and expenses associated with preneed funeral sales as
of August 31, 1995, were discovered by management of the Companies in 1996.
Accordingly, an adjustment has been made to retained earnings as of September 1,
1995, to correct the error.

As discussed in Note 9 to the financial statements, the entities being
reported in the combined financial statements of Forest Lawn/Evergreen
Management Corporation have been modified to exclude LaGrange Funeral Home, Inc.

SALTMARSH, CLEAVELAND & GUND

Panama City, Florida
January 23, 1998

F-76

424B4 127th Page of 152 TOC 1st Previous Next ↓Bottom Just 127th
FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
COMBINED BALANCE SHEETS
AUGUST 31, 1997 AND 1996

RESTATED
1997 1996
-------------- --------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (Notes
1, 4 and 6)..................... $ 589,926 $ 408,324
Accounts receivable -- trade
(Notes 1, 4 and 6)............ 256,390 179,018
Accounts receivable -- other
(Notes 1, 4 and 6)............ 3,627 6,214
Contracts receivable -- current
portion (Notes 1, 4 and 6).... 722,714 515,513
Loan receivable -- current
portion (Note 6).............. 4,088 3,683
Inventory (land at cost)........ 1,585,537 1,567,088
-------------- --------------
Total current assets....... 3,162,282 2,679,840
-------------- --------------
PROPERTY AND EQUIPMENT: (Notes 1 and
2)
Building and improvements....... 1,206,438 1,120,653
Furniture and equipment......... 989,944 953,799
-------------- --------------
2,196,382 2,074,452
Less accumulated depreciation... (1,098,422) (907,418)
-------------- --------------
Net property and equipment...... 1,097,960 1,167,034
-------------- --------------
OTHER ASSETS:
Deposits........................ 2,275 2,275
Investments -- Trust funds
(Notes 1, 6 and 10)........... 5,883,886 4,956,881
Due from affiliates (Note 3).... 178,651 229,918
Contracts receivable -- net of
current portion (Notes 1, 4
and 6)........................ 1,673,376 1,202,863
Loans receivables -- net of
current portion (Note 6)...... 66,106 70,193
FSI receivables (Note 6)........ 573,460 690,256
Deferred obtaining costs (Note
1).............................. 98,452 64,229
Organization costs.............. 0 265
-------------- --------------
Total other assets......... 8,476,206 7,216,880
-------------- --------------
TOTAL ASSETS......................... $ 12,736,448 $ 11,063,754
============== ==============

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 170,844 $ 203,778
Cash deposits from customers....... 80,476 37,350
Line of credit (Note 2)............ 0 51,325
Income taxes payable (Notes l and
5).............................. 173,271 61,160
Current portion of deferred income
taxes (Notes 1 and 5)........... 223,586 304,477
Current portion of long-term debt
(Notes 2 and 6)................. 161,487 146,134
-------------- --------------
Total current
liabilities................ 809,664 804,224
-------------- --------------
LONG-TERM LIABILITIES:
Notes payable (Notes 2 and 6) (net
of current maturities).......... 2,633,141 2,790,975
Accrued cost of presold merchandise
(Notes 1 and 8)................. 2,531,968 2,239,836
Deferred revenue (Note 1).......... 4,933,778 4,387,056
Deferred income taxes (Notes 1 and
5) (net of current portion)..... 277,590 283,914
-------------- --------------
Total long-term
liabilities................ 10,376,477 9,701,781
-------------- --------------
Total liabilities.......... 11,186,141 10,506,005
-------------- --------------
STOCKHOLDERS' EQUITY:
Common stock, authorized, issued
and outstanding, 1,000 shares;
par value of $25.50............. 25,500 25,500
Paid in capital.................... 34,077 34,077
Retained earnings.................. 1,106,434 426,650
Unrealized holding gain on
investment securities (Note
10)............................. 384,296 71,522
-------------- --------------
Total stockholders'
equity..................... 1,550,307 557,749
-------------- --------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................... $ 12,736,448 $ 11,063,754
============== ==============

See independent auditor's report.

F-77

424B4 128th Page of 152 TOC 1st Previous Next ↓Bottom Just 128th
FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
COMBINED STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED AUGUST 31, 1997 AND 1996

RESTATED
1997 1996
------------ ---------
REVENUES............................. $ 4,223,319 $2,862,695
COST OF SALES........................ 1,295,665 755,461
------------ ---------
GROSS PROFIT......................... 2,927,654 2,107,234
------------ ---------
COST OF OPERATIONS:
Selling, general and
administrative expenses........ 1,918,893 1,703,004
Depreciation.................... 191,004 133,794
------------ ---------
Total cost of operations... 2,109,897 1,836,798
------------ ---------
INCOME FROM OPERATIONS............... 817,757 270,436
------------ ---------
OTHER INCOME (EXPENSES):
Interest income................. 304,153 282,979
Interest expense................ (279,986) (228,360)
Provision for cancellation...... (52,983) (88,013)
Bad debt recovery............... 575 879
Gain on sale of assets.......... 0 3,336
Amortization.................... (264) (3,126)
Miscellaneous expense........... (62,489) (77,026)
Other income.................... 41,961 19,405
------------ ---------
Total other income
(expenses)............... (49,033) (89,926)
------------ ---------
NET INCOME BEFORE INCOME TAXES....... 768,724 180,510
------------ ---------
PROVISION FOR INCOME TAXES (NOTES 1
AND 5)............................. 88,940 74,037
------------ ---------
NET INCOME........................... 679,784 106,473
------------ ---------
RETAINED EARNINGS -- BEGINNING OF
YEAR............................... 426,650 1,427,994
PRIOR PERIOD ADJUSTMENTS (NOTE 8).... 0 (1,107,817)
------------ ---------
RETAINED EARNINGS -- BEGINNING OF
YEAR-AS RESTATED................... 426,650 320,177
------------ ---------
RETAINED EARNINGS -- END OF YEAR..... $ 1,106,434 $ 426,650
============ =========

See independent auditor's report.

F-78

424B4 129th Page of 152 TOC 1st Previous Next ↓Bottom Just 129th
FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
COMBINED STATEMENTS OF CASH FLOWS
YEARS ENDED AUGUST 31, 1997 AND 1996

RESTATED
1997 1996
----------- -----------
CASH FLOWS FROM OPERATING ACTIVITIES --
Net income......................... $ 679,784 $ 106,473
Adjustments to reconcile net income
to net cash provided by operating
activities --
Depreciation and
amortization................ 191,268 137,327
Deferred income tax
adjustments................. (87,215) (30,941)
(Gain) loss on disposal of
property.................... (3,336)
(Increase) decrease in
operating assets --
Accounts/contracts
receivable............. (752,499) 25,174
Inventory................ (18,449) (75,874)
Loans receivable......... 3,682 3,317
FSI receivable........... 116,796 167,987
Deferred obtaining
costs.................. (34,223) (3,093)
Increase (decrease) in
operating liabilities --
Accounts
payable -- trade....... (32,934) (43,453)
Deferred revenues........ 546,722 248,527
Accrued merchandise
cost................... 292,132 71,424
Accrued expenses......... 155,237 31,136
----------- -----------
Net cash provided by
operating
activities....... 1,060,301 634,668
----------- -----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets........... (121,930) (660,961)
Proceeds of sale of assets......... 46,170
Purchase of available for sale
securities........................ (614,230) (443,258)
----------- -----------
Net cash used by
investing
activities....... (736,160) (1,058,049)
----------- -----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt......... (193,806) (197,771)
Due from affiliates................ 51,267 (116,024)
Loan proceeds...................... 626,325
----------- -----------
Net cash provided
(used) by
financing
activities....... (142,539) 312,530
----------- -----------
NET INCREASE (DECREASE) IN CASH AND CASH
EQUIVALENTS........................... 181,602 (110,851)
CASH AND CASH EQUIVALENTS AT BEGINNING
OF YEAR............................... 408,324 519,175
----------- -----------
CASH AND CASH EQUIVALENTS AT END OF
YEAR.................................. $ 589,926 $ 408,324
=========== ===========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest...................... $ 258,852 $ 228,360
Income taxes.................. 64,044 0

See independent auditor's report

F-79

424B4 130th Page of 152 TOC 1st Previous Next ↓Bottom Just 130th
FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS
AUGUST 31, 1997 AND 1996

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY'S ACTIVITIES AND ORGANIZATION:

The Companies own and operate funeral homes and cemeteries throughout the
Southeast United States. The Companies perform personal and professional
services related to funerals and interments at its funeral homes and cemeteries.
Prearranged funerals and preneed cemetery property are marketed in the
geographic markets served by the Companies' funeral service locations.

ACCOUNTING METHOD:

The financial statements have been prepared on the accrual basis of
accounting for financial statement presentation.

PRINCIPLES OF COMBINATION:

The accompanying combined financial statements present the combination of
the financial statements of Forest Lawn/Evergreen Management Corporation and its
wholly-owned subsidiaries and the financial statements of its affiliates, Bay
Cemetery Services, Inc. and Forest Lawn Memorial Cemetery, Inc., all of which
are under common control. Material intercompany transactions and balances have
been eliminated in combination.

FUNERAL AND CEMETERY OPERATIONS:

The Companies record the sale of funeral merchandise and services upon
performance of the funeral service. The Companies record the sale of the right
of cemetery interment or mausoleum entombment and related merchandise at the
time of sale. The cost for cemetery merchandise and services sold, but not yet
provided, is accrued as an expense at the same time the cemetery revenue is
recognized.

PRENEED FUNERAL ARRANGEMENTS AND RELATED MERCHANDISE AND SERVICE TRUST
FUNDS/DEFERRED REVENUES:

Preneed funeral sales are affected by deposits to a merchandise trust fund
that is required by state law as a specified portion of each contract. The
Companies have access to these funds only upon maturity (generally, the death of
the purchaser) or cancellation of the contract, therefore, the sale is not
recorded until the service is performed. The trust income earned and the
increases in value of the trust funds are also deferred until the service is
performed in order to offset inflation in cost to provide the service in the
future. For contracts that are delivered in the current period, the interest
revenue and increase in value of the trust fund for that contract are reflected
in the current revenues. The prearranged funeral trust assets were $4,396,085
and $3,529,851 at August 31, 1997 and 1996, respectively, which in the opinion
of management exceed the future obligations under such arrangements. A related
liability has been established for the cost of the merchandise to be delivered
based upon the trust laws of the State of Florida in effect at the date of the
contract. The client also maintains a trust fund held and managed by FSI, a
service company, in which the trust assets held by FSI total $1,487,800 and
$1,427,030 as of August 31, 1997 and 1996, respectively. Total prearranged trust
assets amounted to $5,883,886 and $4,956,881 as of August 31, 1997 and 1996,
respectively.

ACCOUNTS RECEIVABLE:

Accounts receivable represent all current trade receivables incurred upon
performance of the funeral service. Contract receivables represent unperformed
price guaranteed funeral contracts providing for future funeral services and
merchandise at prices prevailing when the agreement is signed. FSI receivables
represent all unperformed price guaranteed funeral contracts negotiated prior to
September 30, 1993 that are maintained by a service company, FSI. The Companies
grant credit to customers, substantially all of whom

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FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
are located in the Southeast United States. Trade accounts receivables are
charged to bad debt as they are deemed uncollectible. At August 31, 1996 and
1997, no allowance for uncollectible trade accounts was considered necessary.
Price guaranteed funeral contracts are written off directly to bad debt expense
as they are deemed uncollectible. As of August 31, 1996 and 1997, no provision
for cancellation was considered necessary.

INVENTORY:

Inventory consists principally of land and is valued at cost.

PROPERTY AND EQUIPMENT:

Property and equipment are recorded at cost. Property and equipment are
being depreciated utilizing the straight-line method over various estimated
useful lives.

Estimated useful lives are generally as follows:

Buildings............................ 30-39 Years
Machinery and equipment.............. 5- 7 Years
Furniture and fixtures............... 5- 7 Years
Vehicles............................. 5-10 Years

DEFERRED OBTAINING COSTS:

Deferred obtaining costs consist of sales commissions applicable to preneed
funeral sales. These costs are deferred and amortized over 12 years which
approximates the expected timing of the performance of the services related to
preneed funeral contracts.

ESTIMATES:

Management uses estimates and assumptions in preparing these financial
statements in accordance with generally accepted accounting principles. Those
estimates and assumptions affect the reported amounts of assets and liabilities,
the disclosure of contingent assets and liabilities, and the reported revenues
and expenses. Actual results could vary from the estimates that were used.

RECLASSIFICATION OF FINANCIAL STATEMENT PRESENTATION:

Certain reclassifications have been made to the 1996 financial statements
to conform to the 1997 financial statement presentation. Such reclassifications
had no effect on net income as previously reported.

INCOME TAXES:

In 1993, the Companies adopted FAS Statement No. 109, Accounting for Income
Taxes, which requires an asset and liability approach to financial accounting
and reporting for income taxes. Deferred income tax liabilities are computed
annually for differences between the financial statement and tax bases of
liabilities that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in which the
differences are expected to affect taxable income. Income tax expense is the tax
payable or refundable from the period plus or minus the change during the period
in deferred tax liabilities.

Deferred income taxes result from temporary differences in reporting income
for tax return purposes.

CASH AND CASH EQUIVALENTS:

For purposes of the statement of cash flows, the Companies consider all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

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FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 2 -- NOTES PAYABLE

Lines of Credit and Short-Term Borrowings:

At August 31, 1996, the Companies had one operating line of credit. The
line of credit was secured by real estate and had an outstanding balance of
$51,235. The line of credit had a variable interest rate at 9.25 percent as of
August 31, 1996, and was paid off at its maturity date of May 21, 1997.

Details of long-term debt were as follows:

[Enlarge/Download Table]

1997 RESTATED 1996
----------------------- -----------------------
DUE IN DUE AFTER DUE IN DUE AFTER
ONE YEAR ONE YEAR ONE YEAR ONE YEAR
--------- ---------- --------- ----------

Notes payable to banks --
Due in monthly payments of $11,291
through October 1, 2000,
interest rate at 8%, secured by
real estate..................... $73,797... $ 730,897 $ 68,142 $ 804,694
Due in monthly payments of $526
through December 30, 1999,
interest rate at 8.75%, secured
by vehicle...................... 5,366 7,913 4,918 13,280
Due in monthly payments of $5,470
through May 19, 2000, interest
rate at 9.125%, secured by real
estate.......................... 21,752 470,838 19,862 491,811
Due in monthly payments of $7,113
through May 19, 2000, interest
rate at 9.125%, secured by real
estate.......................... 28,288 603,747 25,830 629,823
Due in monthly payments of $2,834
through May 19, 2000, interest
rate at 9.125%, secured by real
estate.......................... 11,269 243,937 10,290 254,803
Due in monthly payments of $318
through June 14, 2022, interest
rate at variable rate secured by
real estate..................... 637 37,602 547 38,109
Due in monthly payments of $5,875
through May 19, 2000, then
balloon due of $497,639,
interest rate at 9.125%, secured
by real estate.................. 20,378 538,207 16,545 558,455
--------- ---------- --------- ----------
$ 161,487 $2,633,141 $ 146,134 $2,790,975
========= ========== ========= ==========

Maturities of long-term debt for the next five years as of August 31, 1997,
are as follows:

1998................................. $ 161,487
1999................................. 175,929
2000................................. 2,421,053
2001................................. 818
2002................................. 889
Thereafter........................... 34,452
------------
Total................................ $ 2,794,628
============

NOTE 3 -- RELATED PARTY TRANSACTIONS

The Companies periodically make advances to a company owned by a major
stockholder. These advances are interest free and have no fixed repayment terms.

NOTE 4 -- CONCENTRATIONS OF CREDIT RISK

Significant concentrations of credit risk are as follows:

CONCENTRATION OF CASH ON DEPOSIT AND UNINSURED CASH BALANCES --

The Companies have concentrated their credit risk for cash by maintaining
deposits in financial institutions which may at times exceed amounts covered by
insurance provided by the U.S. Federal Deposit

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FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
Insurance Corporation (FDIC). The maximum loss that would have resulted from
that risk totaled $569,654 and $141,717 at August 31, 1997 and 1996,
respectively, for the excess of the deposit liabilities reported by the banks
over the amounts that would have been covered by federal insurance. The
Companies have not experienced any losses in such accounts and believe they are
not exposed to any significant credit risk to cash.

ACCOUNTS/CONTRACTS RECEIVABLE --

The Companies grant credit, generally without collateral, to customers,
substantially all whom are local residents of the communities serviced.
Consequently, the Companies' ability collect the amounts due from customers is
affected by the economic fluctuations in commercial and industrial markets in
this geographic region.

NOTE 5 -- INCOME TAXES

RESTATED
1997 1996
---------- ----------
Current income tax expense:
Federal............................ $ 151,172 $ 93,221
State.............................. 24,983 11,757
---------- ----------
Current provision for income taxes...... 176,155 104,978
Deferred income tax expense (benefit):
Federal............................ (74,848) (25,947)
State.............................. (12,367) (4,994)
---------- ----------
Total provision for income taxes........ $ 88,940 $ 74,037
---------- ----------

The net deferred tax liabilities in the accompanying balance sheets include
the following components:

Current................................. $ 223,586 $ 304,477
Long-Term............................... 277,590 283,914
---------- ----------
$ 501,176 $ 588,391
========== ==========

As discussed in Note 1, the Companies adopted Statement of Financial
Accounting Standards 109, "Accounting for Income Taxes" (FAS 109). Under the
provisions of FAS 109, an entity recognizes deferred tax assets and liabilities
for future tax consequences of events that have been previously recognized in
the Companies' financial statements or tax returns. The measurement deferred tax
assets and liabilities is based on provisions of the enacted tax law; the
effects of future changes in tax laws or rates are not considered.

NOTE 6 -- FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of financial instruments.

CASH AND SHORT-TERM INVESTMENTS --

The carrying amount approximates fair value because of the short maturity
of those instruments.

LONG-TERM DEBT --

The carrying amount of the notes payable approximates fair values.

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FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

LONG-TERM INVESTMENTS AND RECEIVABLES --

The estimated fair values of the Corporation's long-term investments are as
follows:

[Enlarge/Download Table]

RESTATED
1997 1996
-------------------------- --------------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
------------ ------------ ------------ ------------

Trust Fund Merchandise............... $ 4,396,085 $ 4,396,085 $ 3,529,851 $ 3,529,851
FSI Trust Fund....................... 1,487,800 1,487,800 1,427,030 1,427,030
Loans receivable..................... 70,194 70,194 73,876 73,876
FSI Receivables...................... 573,460 573,460 690,256 690,256
Accounts receivable.................. 256,390 256,390 179,018 179,018
Contracts receivable................. 2,396,090 1,939,909 1,718,376 1,305,966

The estimated fair value amounts have been determined using available
market information and methodologies.

NOTE 7 -- CARE AND MAINTENANCE TRUST

In accordance with respective state laws, the Companies are required to
deposit a specified portion from the sale of cemetery property into care and
maintenance trust funds. Earnings from these trusts are recognized in current
revenues and are intended to defray cemetery maintenance costs. Care and
maintenance funds trusted at August 31, 1997 and 1996, were $884,356 and
$748,693, respectively, which approximates fair market value. The principal of
such care and maintenance trust funds cannot be withdrawn by the Companies and,
therefore, is not included in the balance sheet. For the years ended August 31,
1997 and 1996, the earnings recognized from all care and maintenance trusts were
$80,795 and $65,577, respectively.

NOTE 8 -- PRIOR PERIOD ADJUSTMENTS--CORRECTION OF ERRORS

Certain errors resulting in an overstatement and understatement of assets,
liabilities, and retained earnings were discovered during 1996. The changes to
retained earnings as of September 1, 1995, and the related statement of income,
net of income taxes, for each year are summarized as follows:

[Enlarge/Download Table]

1996 NET 1997 NET
RETAINED EARNINGS INCOME EFFECT INCOME EFFECT
----------------- ------------- -------------

Overstatement of accounts payable.... $ 77,713 $ 0 $ 0
Understatement of accrual for costs
associated with preneed merchandise
contracts.......................... (236,797) 0 0
Error in recording of depreciation
expense, resulting in an
understatement of accumulated
depreciation....................... (2,277) (6,029) (6,290)
Error in recording of preneed funeral
service revenue and its
corresponding costs................ (946,456) (70,440) (46,076)
-----------------
Net prior period adjustment.......... $(1,107,817)
=================

NOTE 9 -- CHANGE IN REPORTING ENTITY

The entities reported in the combined financial statements of Forest
Lawn/Evergreen Management Corporation have been modified since our audit report
dated April 21, 1997, on the consolidated financial statements of Forest
Lawn/Evergreen Management Corporation for the year ended August 31, 1996. The
combined financial statements no longer included the results of operations and
balances held by LaGrange Funeral Home, Inc. This change in reporting entity is
due to select entities of Forest Lawn/Evergreen Corporation being acquired by
Carriage Service, Inc. in a merger dated November 19, 1997. A full year of

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FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)
operations of Emerald Coast Funeral Home, which began operations in August 1996,
is included in the combined statement of income and retained earnings for the
year ended August 31, 1997.

NOTE 10 -- INVESTMENTS -- TRUST FUNDS

INVESTMENTS -- TRUST FUNDS:

Under the provisions of FAS 115, marketable securities considered
available-for-sale are recorded at fair market value if they have a readily
determinable fair value. The corresponding unrealized gain or loss in the fair
market value in relation to cost is accounted for as a separate item in the
stockholders' equity section of the balance sheet and is excluded from earnings.
Management believes that its investments in marketable securities should be
classified as investments that are available-for-sale.

1997 1996
------------ ------------
Marketable securities at cost........ $ 5,499,590 $ 4,885,359
Net unrealized gain.................. 384,296 71,522
------------ ------------
Marketable securities, at market..... $ 5,883,886 $ 4,956,881
============ ============

At August 31, 1997, gross unrealized gains and losses for each trust
account amounted to $407,035 and $22,639, respectively.

At August 31, 1996, gross unrealized gains and losses for each trust
account amounted to $145,562 and $74,040, respectively.

NOTE 11 -- COMMITMENTS AND CONTINGENCIES

The Companies lease a facility under a non-cancelable operating lease from
April 1996 through March 2001. Total rental expense amounted to $47,080 and
$23,540 for the years ended August 31, 1997 and 1996, respectively.

At August 31, 1997, future minimum annual rents under this lease are as
follows:

YEARS ENDING AUGUST 31 AMOUNT
------------------------------------- ----------
1998.......................... $ 47,080
1999.......................... 47,080
2000.......................... 47,080
2001.......................... 27,463
----------
$ 168,703
==========

The Companies are currently undergoing an Internal Revenue Service audit.
An issue has been raised concerning the recognition of installment sales
associated with the right of cemetery interment. The outcome of the audit is yet
to be determined.

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FOREST LAWN/EVERGREEN MANAGEMENT CORPORATION
NOTES TO COMBINED FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 12 -- SUBSEQUENT EVENTS

On November 19, 1997, pursuant to the merger agreement, "Merger of Forest
Lawn/Evergreen Management Corporation into Carriage Services of Florida, Inc.,"
the shareholders of Forest Lawn/Evergreen Management Corporation merged Forest
Lawn Memorial Cemetery, Evergreen Memorial Gardens Cemetery, Garden of Memories
Cemetery, Kent Forest Lawn Funeral, Emerald Coast Funeral Home, and Gulf Coast
Crematory into Carriage Service, Inc. Substantially, all of the assets were
merged into the surviving corporation; however, as a condition of the merger,
certain assets were sold to the shareholders. The following schedule details the
assets that were sold to the shareholders and their respective value included in
the accompanying financial statements as of August 31, 1997.

[Enlarge/Download Table]

BALANCE SHEET COST
DESCRIPTION CLASSIFICATION ACRES BASIS
---------------------------------------- -------------------------- ----- --------

Real Property -- Parcel #1.............. Inventory 3.931 $ 83,260
Real Property -- Parcel #2.............. Inventory 1.45 120,585
Real Property -- Parcels 3 & 4.......... Building and improvements N/A 48,561
Rupert Cleaners note receivable......... Note receivable N/A 70,194
LaGrange Funeral Home receivable........ Due from affiliates N/A 76,487
Kent-Thornton Funeral Home receivable... Due from affiliates N/A 23,850
Shareholders receivable................. Due from affiliates N/A 48,308
--------
Total................................... $471,245
========

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INDEPENDENT AUDITOR'S REPORT

Board of Directors
Carriage Services, Inc.
Houston, Texas

We have audited the accompanying balance sheets of Kent-Thornton Funeral
Home, Inc. (an Alabama corporation) as of December 31, 1996 and 1995, and the
related statements of income, retained earnings, and cash flows for the years
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

In our opinion, the financial statements referred to above present fairly,
in all material respects. The financial position of Kent-Thornton Funeral Home,
Inc. as of December 31, 1996 and 1995, and the results of its operations and its
cash flows for the years then ended in conformity with generally accepted
accounting principles.

/s/ SALTMARSH, CLEAVELAND & GUND
Saltmarsh, Cleaveland & Gund

Panama City, Florida
January 21, 1998

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KENT-THORNTON FUNERAL HOME, INC.
BALANCE SHEETS
DECEMBER 31, 1996 AND 1995

1996 1995
------------ ------------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents (NOTES
1, 4 AND 5).................... $ 21,973 $ 68,014
Cash and cash
equivalents -- merchandise fund
(NOTES 1, 4 and 5)............. 160,323 61,242
Accounts receivable -- trade
(NOTES 1, 4 and 5)............. 62,142 55,995
Inventory (NOTE 1).............. 2,691 10,099
------------ ------------
Total current assets....... 247,129 195,350
------------ ------------
PROPERTY AND EQUIPMENT: (NOTES 1 AND
2)
Land............................ 50,865 50,865
Building and improvements....... 374,097 374,097
Furniture and equipment......... 222,261 194,001
------------ ------------
647,223 618,963
Less accumulated depreciation... (241,578) (212,245)
------------ ------------
Net property and equipment...... 405,645 406,718
------------ ------------
OTHER ASSETS:
Contracts receivable (NOTES 1
AND 5)......................... 214,906 231,463
Deferred obtaining costs (NOTE
1)............................. 47,029 46,182
------------ ------------
Total other assets......... 261,935 277,645
------------ ------------
TOTAL ASSETS......................... $ 914,709 $ 879,713
============ ============
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 21,652 $ 16,220
Cash deposits from customers.... 3,188 2,730
Distributions payable........... 30,000 34,000
Current portion of long-term
debt (NOTES 2 AND 5)........... 30,803 34,737
------------ ------------
Total current liabilities....... 85,643 87,687
------------ ------------
LONG-TERM LIABILITIES:
Notes payable to banks (NOTES 2
AND 5) (net of current
maturities).................... 476,526 480,859
Deferred revenue (NOTE 1)....... 743,430 671,108
Due to affiliates (NOTE 3)...... 37,070 47,745
------------ ------------
Total long-term liabilities..... 1,257,026 1,199,712
------------ ------------
Total liabilities............... 1,342,669 1,287,399
------------ ------------
STOCKHOLDERS' EQUITY (DEFICIT):
Common stock, authorized, issued
and outstanding, 1,000 shares;
par value of $1.00............. 1,000 1,000
Retained deficit................ (428,960) (408,686)
------------ ------------
Total stockholders' equity
(deficit).............. (427,960) (407,686)
------------ ------------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY............................. $ 914,709 $ 879,713
============ ============

See independent auditor's report.

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KENT-THORNTON FUNERAL HOME, INC.
STATEMENTS OF INCOME AND RETAINED EARNINGS
YEARS ENDED DECEMBER 31, 1996 AND 1995

1996 1995
------------ ------------
REVENUES............................. $ 442,277 $ 378,855
COST OF SALES........................ 88,621 72,789
------------ ------------
GROSS PROFIT......................... 353,656 306,066
------------ ------------
COST OF OPERATIONS:
Selling, general and
administration expenses........ 219,481 183,917
Depreciation.................... 33,504 46,538
------------ ------------
Total cost of operations........ 252,985 230,455
------------ ------------
INCOME FROM OPERATIONS............... 100,671 75,611
------------ ------------
OTHER INCOME (EXPENSES):
Interest expense................ (50,567) (54,388)
Bad debt expense................ (40,611) (82,660)
Bad debt recovery............... 231 9,484
Amortization.................... (893)
Other income.................... 2
------------ ------------
Total other income
(expenses)............. (90,945) (128,457)
------------ ------------
Net INCOME (Loss).................... 9,726 (52,846)
Retained Earnings
(Deficit) -- Beginning of Year..... (408,686) (321,840)
DISTRIBUTIONS........................ (30,000) (34,000)
------------ ------------
RETAINED EARNINGS (DEFICIT) -- END OF
YEAR............................... $ (428,960) $ (408,686)
============ ============

See independent auditor's report.

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KENT-THORNTON FUNERAL HOME, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 1996 AND 1995

1996 1995
------------ ------------
CASH FLOWS FROM OPERATING
ACTIVITIES --
NET INCOME (LOSS).................... $ 9,726 $ (52,846)
Adjustments to reconcile net income
to net cash provided by
operating activities --
Depreciation.................... 33,504 46,538
Loss on disposal of property.... 2,979
(Increase) decrease in operating
assets --
Accounts/contracts receivable... 10,410 46,921
Inventory....................... 7,408 (5,746)
Deferred obtaining costs........ (847) (1,460)
Increase (decrease) in operating
liabilities --
Accounts payable -- trade....... 5,432 2,787
Cash deposits................... 458 380
Deferred revenue................ 72,322 72,261
------------ ------------
Net cash provided by operating
activities.................... 141,392 108,835
------------ ------------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of fixed assets........... (35,410) 0
------------ ------------
Net cash used by investing
activities.................... (35,410) 0
------------ ------------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments of long-term debt......... (38,267) (29,398)
Due to affiliates.................. (10,675) 17,094
Loan proceeds................... 30,000
Distributions................... (34,000)
------------ ------------
Net cash used by financing
activities.................... (52,942) (12,304)
------------ ------------
NET INCREASE IN CASH................. 53,040 96,531
CASH AND CASH EQUIVALENTS AT
BEGINNING OF YEAR.................. 129,256 32,725
------------ ------------
CASH AND CASH EQUIVALENTS AT END OF
YEAR............................... $ 182,296 $ 129,256
============ ============
SUPPLEMENTAL DISCLOSURES OF CASH FLOW
INFORMATION:
Cash paid during the period for:
Interest........................ $ 50,567 $ 54,388

See independent auditor's report.

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KENT-THORNTON FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 1996 AND 1995

NOTE I -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

COMPANY'S ACTIVITIES AND ORGANIZATION:

Kent-Thornton Funeral Home, Inc. (the Company), was incorporated on
February 8, 1991 under the laws of the State of Alabama. The Company owns and
operates a funeral home in Dothan, Alabama. The Company performs personal and
professional services related to funerals at its funeral home. Prearranged
funerals are marketed in the geographic markets served by its location.

ACCOUNTING METHOD:

The financial statements have been prepared on the accrual basis of
accounting for financial statement presentation.

FUNERAL OPERATIONS/DEFERRED REVENUES:

Funeral revenue is recognized when the funeral service is performed. The
Company's trade receivables consist primarily of funeral services already
performed. The Company sells price guaranteed preneed funeral contracts
providing for future funeral services at prices prevailing when the agreement is
signed. Payments under these contracts are generally placed in trust.
Unperformed price guaranteed preneed funeral contracts are included in the
balance sheet as long-term assets (contracts receivable) with a corresponding
credit to deferred preneed funeral contract revenue. Preneed funeral trust
earnings are deferred until the service is performed and are intended to cover
future increases in the cost of providing a price guaranteed funeral service.

CONTRACTS AND ACCOUNTS RECEIVABLE:

The Company grants credit to customers, substantially all of whom are
located in the southeast United States. The Company provides an allowance for
doubtful accounts equal to the estimated cancellation losses that will be
incurred in conjunction with preneed funeral contracts. The estimated losses are
based on historical experience coupled with review of the current status of
existing receivables. Allowance for bad debt was $45,597 and $45,835 at December
31, 1996 and 1995.

Trade accounts receivable are charged to bad debt expense, as they are
deemed uncollectible. At December 31, 1996 and 1995, no allowance for
uncollectible trade accounts was considered necessary.

DEFERRED OBTAINING COSTS:

INVENTORY:

Inventories, consisting of funeral merchandise, are stated at cost, which
is not in excess of market, determined using the specific identification method.

PROPERTY AND EQUIPMENT:

Property and equipment are recorded at cost. Property and equipment are
being depreciated utilizing the straight-line method over various estimated
useful lives.

F-91

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KENT-THORNTON FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Estimated useful lives are generally as follows:

Buildings............................ 30 - 39 Years
Machinery and equipment.............. 5 - 7 Years
Furniture and fixtures............... 5 - 7 Years
Vehicles............................. 5 - 10 Years

ESTIMATES:

INCOME TAXES:

The Company has elected under the Internal Revenue Code to be an S
corporation. In lieu of corporation income taxes, the shareholders of an S
corporation are taxed on their proportionate share of the company's taxable
income. Therefore, no provision or liability for federal income taxes has been
included in the financial statements.

CASH AND CASH EQUIVALENTS:

For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with a maturity of three months or less
to be cash equivalents.

CASH AND CASH EQUIVALENTS -- MERCHANDISE FUND:

Although not required by state law, the Company has deposited a specified
amount into a merchandise and service fund for cemetery merchandise and service
contracts sold on a preneed basis. The principal and accumulated earnings of the
fund are not withdrawn by the Company until maturity (generally, the death of
the purchaser) or cancellation of contracts.

NOTE 2 -- NOTES PAYABLE

Details of long-term debt were as follows:

[Enlarge/Download Table]

1996 1995
----------------------- -----------------------
DUE IN DUE AFTER DUE IN DUE AFTER
ONE YEAR ONE YEAR ONE YEAR ONE YEAR
--------- --------- --------- ---------

Notes payable to banks --
Due in monthly payments of $5,045
through June 23, 1999, interest
rate at Treasury Bill rate, plus
1.5%, secured by real estate....... $14,518 $ 455,381 $13,867 $ 469,897
Due in monthly payments of $1,898
through June 23, 1997, interest
rate at 8.5%, secured by real
estate............................. 10,962 0 20,870 10,962
Due in monthly payments of $625
through April 11, 2001, interest
rate at 8.75% secured by vehicle... 5,323 21,145 0 0
--------- --------- --------- ---------
$30,803 $ 476,526 $34,737 $ 480,859
========= ========= ========= =========

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KENT-THORNTON FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

Maturities of long-term debt for the next five years are as follows:

1997................................. $ 30,803
1998................................. 21,531
1999................................. 446,019
2000................................. 6,941
2001................................. 2,035
Thereafter........................... 0
-----------
Total................................ $ 507,329
===========

NOTE 3 -- RELATED PARTY TRANSACTIONS

The Company periodically receives advances from a company owned by a major
stockholder. These advances are interest free and have no fixed repayment terms.

NOTE 4 -- CONCENTRATIONS OF CREDIT RISK

Significant concentrations of credit risk are as follows:

CONCENTRATION OF CASH ON DEPOSIT AND UNINSURED CASH BALANCES --

The Company has concentrated its credit risk for cash by maintaining
deposits in financial institutions which may at times exceed amounts covered by
insurance provided by the U.S. Federal Deposit Insurance Corporation (FDIC). The
maximum loss that would have resulted from that risk totaled $87,495 and $33,413
at December 31, 1996 and 1995, for the excess of the deposit liabilities
reported by the banks over the amounts that would have been covered by federal
insurance. The Company has not experienced any losses in such accounts and
believes it is not exposed to any significant credit risk to cash.

ACCOUNTS RECEIVABLE --

The Company grants credit, generally without collateral, to customers,
substantially all of whom are local residents of the communities serviced.
Consequently, the Company's ability to collect the amounts due from customers is
affected by the economic fluctuations in the commercial and industrial markets
in this geographic region.

NOTE 5 -- FAIR VALUES OF FINANCIAL INSTRUMENTS

The following methods and assumptions were used to estimate the fair value
of financial instruments:

CASH AND CASH EQUIVALENTS --

The carrying amount approximates fair value because of the short maturity
of those instruments.

LONG-TERM DEBT --

The carrying amount of the notes payable approximates fair values.

RECEIVABLES --

The estimated fair values of the Company's receivables are as follows:

1996 1995
---------------------- ----------------------
CARRYING FAIR CARRYING FAIR
AMOUNT VALUE AMOUNT VALUE
-------- ----------- -------- -----------
Accounts receivable....... $ 62,142 $ 62,142 $ 55,995 $ 55,995
Contracts receivable...... 214,906 133,438 231,463 143,720

F-93

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KENT-THORNTON FUNERAL HOME, INC.
NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)

The estimated fair value amounts have been determined using available
market information and appropriate methodologies.

NOTE 6 -- SUBSEQUENT EVENTS

On November 19, 1997, substantially all of the properties, assets, rights
and business of the funeral home were purchased by Carriage Funeral Holding,
Inc. pursuant to an Asset Purchase Agreement. The purchaser agreed to assume,
pay, or discharge all long-term liabilities of the Company as of the purchase
date which are included in the notes payable of $507,329 as of December 31,
1996.

F-94

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Board of Directors
of Johnson Mortuary, Inc.

We have audited the accompanying balance sheet of Johnson Mortuary &
Crematory, Inc. (a Montana corporation) as of September 30, 1997, and the
related statements of income, retained earnings, and cash flows for the year
then ended. These financial statements are the responsibility of the Company's
management. Our responsibility is to express an opinion on these financial
statements based on our audit.

We conducted our audit in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audit provides a reasonable basis for our opinion.

In our opinion, the financial statements referred to above present fairly,
in all material respects, the financial position of Johnson Mortuary &
Crematory, Inc. as of September 30, 1997, and the results of its operations and
its cash flows for the year then ended in conformity with generally accepted
accounting principles.

JORDAHL & SLITER PLLC
Kalispell, Montana
February 13, 1998

F-95

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JOHNSON MORTUARY & CREMATORY, INC.
BALANCE SHEET
SEPTEMBER 30, 1997

ASSETS
CURRENT ASSETS:
Cash............................... $ 119,761
Accounts receivable, less allowance
for doubtful accounts of
$24,080........................... 81,628
Inventory.......................... 38,021
Prepaid expense.................... 6,776
----------
Total current assets.......... 246,186
----------
PROPERTY AND EQUIPMENT, at cost:
Land............................... 20,624
Buildings and improvements......... 260,680
Furniture and fixtures............. 187,075
Motor equipment.................... 252,949
----------
721,328
Less accumulated depreciation...... 523,735
----------
197,593
----------
OTHER ASSETS:
Goodwill, less accumulated
amortization of $21,137........... 1,687
Deposits........................... 7,000
Notes receivable -- shareholder.... 14,672
----------
23,359
----------
TOTAL ASSETS............................ $ 467,138
==========

LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................... $ 13,261
Accrued expenses................... 10,438
----------
Total current liabilities..... 23,699
----------
STOCKHOLDERS' EQUITY:
Common stock ($100 par), 500 shares
authorized, issued and
outstanding....................... 50,000
Retained earnings.................. 393,439
----------
443,439
----------
TOTAL LIABILITIES AND STOCKHOLDERS'
EQUITY................................ $ 467,138
==========

See accompanying notes.

F-96

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JOHNSON MORTUARY & CREMATORY, INC.
STATEMENT OF INCOME
FOR THE YEAR ENDED SEPTEMBER 30, 1997

SALES................................ $ 824,530
----------
COST OF SALES:
Cemetery........................ 33,427
Clothing........................ 1,910
Flowers......................... 9,010
Hair dressing................... 350
Merchandise..................... 117,605
Ministers....................... 9,960
Music........................... 6,350
Opening graves.................. 19,965
Other........................... 8,981
Outside services................ 16,629
Salaries and wages.............. 132,729
Supplies........................ 23,513
Telephone....................... 6,020
Transportation.................. 9,109
----------
395,558
----------
GROSS PROFIT......................... 428,972
----------
GENERAL EXPENSES..................... 309,342
----------
INCOME FROM OPERATIONS............... 119,630
OTHER INCOME:
Interest income................. 2,101
----------
INCOME BEFORE TAXES.................. 121,731
PROVISION FOR TAXES.................. 10
----------
NET INCOME........................... $ 121,721
==========

See accompanying notes.

F-97

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JOHNSON MORTUARY & CREMATORY, INC.
STATEMENT OF RETAINED EARNINGS
FOR THE YEAR ENDED SEPTEMBER 30, 1997

Accumulated Adjustments Accounts:
Balance, October 1, as
previously reported............ $ 167,303
Prior period adjustment......... 22,417
----------
Restated balance, October 1..... 189,720
Taxable Income.................. 122,144
Nondeductible expenses and
timing differences............. (423)
Distributions................... (80,000)
----------
Balance, September 30........... 231,441
Accumulated Earnings and Profits:
Balance, October 1 and September
30............................. 161,998
----------
Total Retained Earnings, September
30................................. $ 393,439
==========

See accompanying notes.

F-98

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JOHNSON MORTUARY & CREMATORY, INC.
STATEMENT OF CASH FLOWS
FOR THE YEAR ENDED SEPTEMBER 30, 1997

CASH FLOWS FROM OPERATING ACTIVITIES:
Net income......................... $ 121,721
Adjustments to reconcile net income
to net cash flows from operating
activities:
Depreciation and
amortization................. 54,222
Bad debt provision............ 12,197
(Increase) decrease in:
Accounts receivable...... (51,989)
Inventory................ (7,695)
Prepaid expense.......... 189
Deposits................. 1,671
Increase in:
Accounts payable and
accrued expenses......... 5,278
----------
NET CASH PROVIDED BY OPERATING
ACTIVITIES............................ 135,594
----------
CASH FLOWS FROM INVESTING ACTIVITIES:
Capital expenditures............... (14,277)
Notes receivable -- shareholder.... 2,133
----------
NET CASH USED BY INVESTING ACTIVITIES... (12,144)
----------
CASH FLOWS FROM FINANCING ACTIVITIES:
Dividends paid..................... (80,000)
----------
NET CASH USED BY FINANCING ACTIVITIES... (80,000)
----------
NET INCREASE IN CASH.................... 43,450
CASH AT BEGINNING OF YEAR............... 76,311
----------
CASH AT END OF YEAR..................... $ 119,761
==========

See accompanying notes

F-99

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JOHNSON MORTUARY & CREMATORY, INC.
NOTES TO THE FINANCIAL STATEMENTS
SEPTEMBER 30, 1997

NOTE 1 -- SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

NATURE OF BUSINESS

Johnson Mortuary & Crematory, Inc. is a licensed funeral home incorporated
in 1960, which grants credit to customers, substantially all of whom are
residents of Northwest Montana.

INVENTORY

The inventory is recorded at the lower of cost (first-in, first-out) or
market.

PROPERTY AND EQUIPMENT

Property and equipment is carried at cost. Depreciation is computed by
using the straight-line method over the following estimated useful lives.

DESCRIPTION USEFUL LIFE
------------------------------------- ---------------
Building and improvements............ 15 - 39 years
Furniture and fixtures............... 5 - 10 years
Motor equipment...................... 3 - 6 years

Maintenance and repairs are charged to expense as incurred, whereas, the
costs of additions and improvements are capitalized.

ESTIMATES

The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amount of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting period. Actual results could differ from those estimates.

AMORTIZATION OF GOODWILL

Goodwill is being amortized by the straight-line method over 40 years.

COMPENSATED ABSENCES

Compensated absences have not been accrued because the amount cannot be
reasonably estimated.

ADVERTISING COSTS

Advertising costs are expensed as incurred. Advertising expense was $22,772
for the year ended September 30, 1997.

INCOME TAXES

The Company elected S Corporation status effective October 1, 1989.
Earnings and losses after that date are included in the personal income tax
returns of the stockholders and taxed depending on their personal tax
strategies. Accordingly, the Company will incur income tax obligations only to
the extent of the "built-in gains" tax at the time of the election.

NOTE 2 -- ACCOUNTS RECEIVABLE:

Trade accounts receivable............... $ 105,708
Less allowance for doubtful accounts.... 24,080
----------
$ 81,628
==========

F-100

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JOHNSON MORTUARY & CREMATORY, INC.
NOTES TO THE FINANCIAL STATEMENTS -- (CONTINUED)

NOTE 3 -- NOTE RECEIVABLE -- SHAREHOLDER:

The note bears interest at 4.5% per annum and has no fixed repayment term.
The note is secured by ten shares of the Company's stock. This note has been
paid subsequent to September 30, 1997.

NOTE 4 -- PROVISION FOR INCOME TAXES:

The provision for income taxes is the applicable state license tax for an S
corporation.

NOTE 5 -- SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION:

Operating activities reflect the following cash paid during the year:

Interest paid........................... $ 240
=========
Income taxes paid....................... $ 10
=========

NOTE 6 -- RETIREMENT PLAN:

The Company has a Simplified Employee Pension Plan, which covers all
employees as they become eligible. Contributions by the Company are at the
discretion of the Board of Directors. The total contribution for the year ended
September 30, 1997 was $12,555.

NOTE 7 -- SUBSEQUENT EVENT:

On December 17, 1997, 100% of the outstanding stock of the Company was sold
to Carriage Services of Houston, Texas.

NOTE 8 -- PRIOR PERIOD ADJUSTMENT:

Effective October 1, 1996, the Company changed its basis of accounting from
the income tax basis to the accrual basis of accounting. The accrual basis of
accounting is a generally accepted accounting principle (GAAP), while the income
tax basis of accounting is another comprehensible basis of accounting used for
income tax reporting. The change is shown as a prior period adjustment to the
beginning balance of the accumulated adjustment account and is made up of the
following:

Conversion of depreciation
Using book lives and methods vs.
tax lives and methods............ $ 36,027
Amortization of goodwill and
organization expenses................. (20,574)
Prepaid insurance....................... 6,964
----------
$ 22,417
==========

F-101

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------------------------------------------------------
------------------------------------------------------
------------------------------------------------------
------------------------------------------------------

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS NOT CONTAINED IN THIS PROSPECTUS. IF
GIVEN OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS
HAVING BEEN AUTHORIZED BY THE COMPANY OR THE UNDERWRITERS. THIS PROSPECTUS DOES
NOT CONSTITUTE AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO BUY, THE CLASS
A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSON TO WHOM, IT IS
UNLAWFUL TO MAKE SUCH OFFER OR SOLICITATION. NEITHER THE DELIVERY OF THIS
PROSPECTUS NOR ANY SALE MADE HEREUNDER SHALL, UNDER ANY CIRCUM-STANCES, CREATE
AN IMPLICATION THAT THERE HAS NOT BEEN ANY CHANGE IN THE FACTS SET FORTH IN THIS
PROSPECTUS OR IN THE AFFAIRS OF THE COMPANY SINCE THE DATE HEREOF.

------------------------

TABLE OF CONTENTS

PAGE
----
Prospectus Summary................... 3
Forward-Looking Statements........... 8
Risk Factors......................... 8
Price Range of Class A Common Stock
and Dividend Policy................ 12
Use of Proceeds...................... 12
Capitalization....................... 13
Selected Historical Consolidated
Financial and Operating Data....... 14
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 16
Business............................. 24
Management........................... 32
Certain Transactions................. 38
Principal Stockholders............... 40
Description of Capital Stock......... 42
Shares Eligible for Future Sale...... 46
Underwriting......................... 47
Legal Matters........................ 48
Experts.............................. 49
Available Information................ 49
Index to Financial Statements........ F-1

3,000,000 SHARES

[CARRIAGE SERVICES, INC. - LOGO]

CLASS A COMMON STOCK

------------------------
PROSPECTUS
------------------------

MERRILL LYNCH & CO.
ABN AMRO INCORPORATED
CREDIT SUISSE FIRST BOSTON
RAYMOND JAMES & ASSOCIATES, INC.

MAY 21, 1998

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Dates Referenced Herein and Documents Incorporated by Reference

		Referenced-On Page
This ‘424B4’ Filing	Date	First	Last	Other Filings

	6/14/22	132
	12/31/07	13	76	10-K, 5
	11/30/07	44
	3/31/03	96		10-Q
	1/1/02	44
	12/31/01	5	102	10-K, 11-K
	11/30/01	43
	4/11/01	142
	1/1/01	22	76
	12/31/00	102		10-K, 11-K
	10/1/00	132
	5/19/00	132
	1/1/00	109
	12/31/99	102		11-K
	12/30/99	132		10-K405
	6/30/99	39		10-Q
	6/23/99	142
	1/1/99	22	44
	12/31/98	71	102	10-K405
	8/8/98	22	75
	5/28/98	1
Filed on:	5/22/98
	5/21/98	1	152
	5/8/98	12
	5/7/98	12
	4/30/98	3	27
	4/24/98	16
	4/3/98	39
	3/31/98	3	59	10-Q, DEF 14A, S-8
	2/13/98	145
	2/10/98	60
	2/1/98	37
	1/23/98	126
	1/21/98	137
	1/12/98	117
	1/1/98	76
	12/31/97	6	109	10-K, 8-K
	12/17/97	151		8-K, 8-K/A
	12/15/97	68
	11/20/97	97
	11/19/97	134	144
	11/13/97	125		8-K, 8-K/A
	11/12/97	103
	9/30/97	52	151	10-Q
	8/31/97	52	136
	7/31/97	116
	7/30/97	39
	7/9/97	91
	7/3/97	110
	6/23/97	142
	6/17/97	101		8-K
	5/21/97	132
	4/21/97	134
	3/31/97	6	96	10-Q
	3/28/97	95		8-K
	1/17/97	80
	1/7/97	85		8-K, 8-K/A
	1/1/97	53	58
	12/31/96	17	144	10-K
	12/13/96	38
	11/1/96	95	96
	10/31/96	51	96
	10/8/96	38
	10/1/96	151
	9/24/96	90		S-8
	8/31/96	52	135
	8/30/96	124
	8/9/96	12		424B1
	8/8/96	40	74	8-A12G/A, S-1/A
	7/18/96	75		S-1/A
	7/1/96	37
	4/1/96	86
	3/31/96	51	90
	1/1/96	12	67
	12/31/95	17	143
	12/2/95	109
	9/1/95	126	134
	8/31/95	126
	3/31/95	84
	1/1/95	95	96
	12/31/94	63
	7/30/94	109
	7/1/94	107	109
	6/23/94	107
	1/1/94	7	15
	12/29/93	65
	9/30/93	130
	3/31/93	95
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Filing Submission 0000890566-98-001057 – Alternative Formats (Word / Rich Text, HTML, Plain Text, et al.)

Carriage Services Inc – ‘424B4’ on 5/22/98

As of: Friday, 5/22/98 · Accession #: 890566-98-1057 · File #: 333-51153

Prospectus — Rule 424(b)(4)Filing Table of Contents

Document Table of Contents

Dates Referenced Herein and Documents Incorporated by Reference

Prospectus — Rule 424(b)(4)
Filing Table of Contents