CARRIAGE SERVICES INC, S-1, 1996-06-07

CARRIAGE SERVICES INC
S-1, 1996-06-07

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON JUNE 7, 1996
REGISTRATION NO. 333-

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
------------------------

FORM S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
------------------------

CARRIAGE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)

DELAWARE
(STATE OR OTHER JURISDICTION
OF INCORPORATION OR ORGANIZATION)

7261 76-0423828
(PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
1300 POST OAK BLVD.
SUITE 1500

HOUSTON, TEXAS 77056
(713) 556-7400
(Address including zip code and telephone number,
including area code, of registrant's principal executive offices)
MELVIN C. PAYNE
PRESIDENT
1300 POST OAK BLVD.
SUITE 1500
HOUSTON, TX 77056
(713) 556-7400
(Name, address, including zip code, and telephone number,
including area code, of agent for service)
COPIES TO:
T. MARK KELLY JOHN F. WOMBWELL
VINSON & ELKINS L.L.P. ANDREWS & KURTH L.L.P.
2300 FIRST CITY TOWER, 1001 FANNIN 4200 TEXAS COMMERCE TOWER, 600 TRAVIS
HOUSTON, TX 77002-6760 HOUSTON, TX 77002
(713) 758-2222 (713) 220-4200

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

APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC: As soon as
practicable after this Registration Statement becomes effective.

If any of the securities registered on this Form are being offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [ ]

If this Form is filed to register additional securities for an offering
pursuant to Rule 462(b) under the Securities Act, please check the following box
and list the Securities Act registration statement number of the earlier
effective registration statement for the same offering. [ ]

If this Form is a post-effective amendment filed pursuant to Rule 462(c)
under the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]

If delivery of the prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]

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

CALCULATION OF REGISTRATION FEE
<TABLE>
<CAPTION>
PROPOSED PROPOSED
TITLE OF EACH CLASS OF MAXIMUM OFFERING MAXIMUM AGGREGATE AMOUNT OF
SECURITIES TO BE REGISTERED PRICE PER SHARE OFFERING PRICE(1) REGISTRATION FEE
- ------------------------------------------------------------------------------------------------------------------
<S> <C> <C>
Class A Common Stock, par value $.01..................... $57,500,000 $19,828
- ------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Calculated pursuant to Rule 457(o) under the Securities Act of 1933.

THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT WHICH SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933 OR UNTIL THE REGISTRATION STATEMENT SHALL BECOME
EFFECTIVE ON SUCH DATE AS THE SECURITIES AND EXCHANGE COMMISSION, ACTING
PURSUANT TO SAID SECTION 8(A), MAY DETERMINE.
<PAGE>
CARRIAGE SERVICES, INC.

CROSS REFERENCE SHEET
PURSUANT TO ITEM 501(B) OF REGULATION S-K

ITEM OF FORM S-1 LOCATION IN PROSPECTUS
------------------------------ -------------------------------

1. Forepart of the Registration
Statement and Outside Front
Cover Page of Prospectus......... Outside Front Cover Page of
Prospectus
2. Inside Front and Outside Back Cover
Pages of Prospectus.............. Inside Front and Outside Back
Cover Pages of Prospectus
3. Summary Information, Risk Factors
and Ratio of Earnings to Fixed
Charges.......................... Prospectus Summary; Risk Factors
4. Use of Proceeds.................... Prospectus Summary; Use of
Proceeds
5. Determination of Offering Price.... Outside Front Cover Page of
Prospectus; Underwriting
6. Dilution........................... Dilution
7. Selling Security Holders........... *
8. Plan of Distribution............... Outside Front Cover Page of
Prospectus; Underwriting
9. Description of Securities to be
Registered......................... Outside Front Cover Page of
Prospectus; Prospectus Summary;
Dividend Policy; Description of
Capital Stock
10. Interests of Named Experts and
Counsel............................ *
11. Information with Respect to the
Registrant......................... Outside Front Cover Page of
Prospectus; Prospectus Summary;
Risk Factors; The Company;
Dividend Policy; Capitalization;
Selected Historical Consolidated
and Pro Forma Financial and
Operating Data; Management's
Discussion and Analysis of
Financial Condition and Results of
Operations; Business; Management;
Certain Transactions; Principal
Stockholders; Description of
Capital Stock; Shares Eligible for
Future Sale; Available
Information; Index to Financial
Statements
12. Disclosure of Commission Position
on Indemnification for Securities
Act Liabilities.................... *

- ------------
* Not applicable.

<PAGE>
******************************************************************************
* *
* INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A *
* REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED *
* WITH THE SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT *
* BE SOLD NOR MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE *
* REGISTRATION STATEMENT BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT *
* CONSTITUTE AN OFFER TO SELL OR THE SOLICITATION OF AN OFFER TO BUY NOR *
* SHALL THERE BE ANY SALE OF THESE SECURITIES IN ANY STATE IN WHICH SUCH *
* OFFER, SOLICITATION OR SALE WOULD BE UNLAWFUL PRIOR TO REGISTRATION OR *
* QUALIFICATION UNDER THE SECURITIES LAWS OF ANY SUCH STATE. *
* *
******************************************************************************

SUBJECT TO COMPLETION
PRELIMINARY PROSPECTUS DATED JUNE 7, 1996

PROSPECTUS
SHARES

[LOGO]

CARRIAGE SERVICES, INC.

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

All 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. (the "Company"). The initial public offering price is expected to
be between $ and $ per share.

Prior to the Offering, there has been no public market for the Class A
Common Stock of the Company. See "Underwriting" for a discussion of the factors
considered in determining the initial public offering price.

The Company has two classes of Common Stock, the Class A Common Stock
offered hereby 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").
The Class A Common Stock offered hereby is entitled to one vote per share. The
Class B Common Stock is entitled to ten votes per share 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 % of the voting power of the outstanding
shares of Common Stock. See "Description of Capital Stock."

The Company has made application for quotation of the Class A Common Stock
on the Nasdaq National Market under the symbol "CRSV."

SEE "RISK FACTORS" BEGINNING ON PAGE 8 FOR A DISCUSSION OF CERTAIN
CONSIDERATIONS RELEVANT TO 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................... $ $ $
- -------------------------------------------------------------------------------
Total(3).................... $ $ $
- -------------------------------------------------------------------------------

(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 $ .

(3) The Company has granted to the several Underwriters an option for 30 days to
purchase up to an 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 Price to
Public, Underwriting Discount and Proceeds to Company will be $ ,
$ and $ , 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 them, subject
to approval of certain legal matters by counsel for the Underwriters and certain
other 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 , 1996.
------------------------
MERRILL LYNCH & CO. THE CHICAGO CORPORATION
------------------------
The date of this Prospectus is , 1996.
<PAGE>
[GRAPHIC OMITTED]

[The map will be of the United States and will depict all Carriage Locations.
The United States will be green, the states will be outlined in black, the
locations are shown as yellow circles, the cemeteries are shown as beige
triangles and headquarters is shown as a star.]

IN CONNECTION WITH THE OFFERING, THE UNDERWRITERS MAY OVER-ALLOT OR EFFECT
TRANSACTIONS WHICH STABILIZE OR MAINTAIN THE MARKET PRICE OF THE COMPANY'S CLASS
A COMMON STOCK AT A LEVEL ABOVE THAT WHICH MIGHT OTHERWISE PREVAIL IN THE OPEN
MARKET. SUCH TRANSACTIONS MAY BE EFFECTED ON THE NASDAQ NATIONAL MARKET, IN THE
OVER-THE-COUNTER MARKET OR OTHERWISE. SUCH STABILIZING, IF COMMENCED, MAY BE
DISCONTINUED AT ANY TIME.
2

PROSPECTUS SUMMARY

THE FOLLOWING SUMMARY IS QUALIFIED IN ITS ENTIRETY BY THE MORE DETAILED
INFORMATION AND FINANCIAL STATEMENTS, INCLUDING THE NOTES THERETO, INCLUDED
ELSEWHERE IN THIS PROSPECTUS. UNLESS OTHERWISE INDICATED, THE INFORMATION IN
THIS PROSPECTUS ASSUMES (A) THE UNDERWRITERS' OVER-ALLOTMENT OPTION IS NOT
EXERCISED AND (B) ALL OUTSTANDING SHARES OF THE COMPANY'S SERIES A, SERIES B AND
SERIES C PREFERRED STOCK ARE CONVERTED INTO CLASS B COMMON STOCK ON THE
EFFECTIVE DATE OF THE REGISTRATION STATEMENT OF WHICH THIS PROSPECTUS IS A PART.
UNLESS OTHERWISE INDICATED, THE INFORMATION IN THIS PROSPECTUS REFLECTS A
- -TO-1 REVERSE STOCK SPLIT EFFECTIVE , 1996. AS USED IN THIS
PROSPECTUS, UNLESS THE CONTEXT INDICATES OTHERWISE, THE TERMS "CARRIAGE" AND
THE "COMPANY" REFER TO CARRIAGE SERVICES, INC., ITS CONSOLIDATED SUBSIDIARIES
AND THEIR RESPECTIVE PREDECESSORS.

THE COMPANY

GENERAL

Carriage Services, Inc. is the sixth largest provider of death care
services and products in the United States based on 1995 revenues. The Company
provides a complete range of funeral services and products to meet families'
needs, including consultation, removal and preparation of remains, sale of
caskets and related funeral merchandise, transportation services and the use of
funeral home facilities for visitation. The Company also offers cemetery
products and services, including rights to interment in cemetery sites,
interment services and related cemetery merchandise. As of May 31, 1996, the
Company operated 60 funeral homes and seven cemeteries in 13 states. Funeral
services constituted approximately 93% of revenues in 1995 and in the first
quarter of 1996.

Since the Company's formation in 1991, management has undertaken a
disciplined approach to growth that has allowed the Company the necessary time
to integrate acquisitions, develop effective operating, administrative and
financial systems and controls, recruit an experienced operating management team
and promote a decentralized, entrepreneurial service culture. From 1992 through
1995, the Company acquired 42 funeral homes and four cemeteries for
consideration ranging from approximately $9 million to $14 million in each of
the four years. The Company believes that the infrastructure it has developed
over the past four years positioned the Company to pursue an accelerated growth
strategy beginning in late 1995. As a result, the Company has acquired 21
funeral homes and four cemeteries for consideration of $29.1 million through the
first five months of 1996. In addition, the Company has entered into letters of
intent to acquire 11 funeral homes and one cemetery for consideration of $20.1
million.

DEATH CARE INDUSTRY

The death care industry has certain 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 20% of the 1995 United States
death care industry revenues are represented by the four largest publicly traded
domestic death care companies. 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. Death rates in the United States are
fairly predictable, which lends stability to the death care industry. The number
of deaths in the United States has increased at a compounded rate of
approximately 1% per year since 1980 and is expected to continue at that rate
through 2010. In the past several years, the industry has witnessed considerable
consolidation. Estate planning issues, increased governmental regulation and a
desire to address management succession concerns have led independent funeral
home owners to pursue opportunities to divest their businesses. Former owners
frequently remain associated with the funeral home in a managerial capacity
after the sale. Management believes consolidation in the industry will continue
to accelerate and that the Company is well positioned to be a major participant
in such consolidation.

3
BUSINESS STRATEGY

The Company's objective is to become the preferred succession planning
alternative for premier funeral homes throughout the United States while
continuing to promote a decentralized, entrepreneurial service culture.
Management believes that the Company's reputation and collaborative operating
style have allowed it to successfully pursue acquisition opportunities. The
Company also has been successful in implementing programs to improve
profitability at newly acquired properties.

Management believes the Company distinguishes itself from other national
death care providers through its decentralized management style and its
incentive-based compensation structure. The Company's management structure
affords local funeral directors autonomy in operating their businesses, while
the utilization of a proprietary personal computer-based system allows senior
management to "manage by exception." In this manner, the Company can obtain
current information on the performance of individual operations and institute
corrective action if necessary. The Company's compensation structure is designed
to maintain or create a sense of ownership by awarding local managers meaningful
cash bonuses and stock options for achieving or exceeding previously established
performance objectives.

The Company's strategy to enhance the profitability of acquired operations
includes improving merchandising and sales training, realizing volume purchase
discounts, centralizing certain financial, accounting, legal, administrative and
employee benefits functions, offering cross-marketing opportunities and
increasing preneed sales in selective markets. Management believes that
significant value can be created by bringing sound business principles to
family-owned businesses, a majority of which do not measure their financial
performance against any annually established parameters. The introduction of
management techniques focused on budgeting and financial performance have proven
to be effective in increasing the profitability of acquired properties.

The Company will continue to aggressively pursue the acquisition of premier
funeral homes that have a strong local market presence and that conduct from 100
to 600 funeral services per year, as well as funeral homes in close proximity to
the Company's existing properties. In addition, although the Company
traditionally has not focused on acquiring cemetery operations, the Company
intends to more aggressively pursue cemetery acquisitions in markets where the
Company operates, or plans to operate, funeral homes to take advantage of
cross-marketing opportunities.

THE OFFERING

Class A Common Stock offered......... shares
Common Stock to be outstanding after
the Offering(1):
Class A Common Stock............ shares
Class B Common Stock............ shares
Total...................... 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
and for working capital purposes,
including the funding of additional
acquisitions. See "Use of Proceeds."
Proposed Class A Common Stock
Nasdaq National Market symbol...... "CRSV"

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

(1) Excludes (i) shares of Class A Common Stock issuable upon exercise of
options,
(ii) shares of Class B Common Stock issuable upon exercise of
options and
(iii) shares of Class B Common Stock issuable upon conversion of
the shares of the Company's convertible redeemable Series D Preferred Stock,
par value $.01 per share (the "Series D Preferred Stock"), each as
outstanding as of May 31, 1996. See "Management Incentive Plans" and
"Description of Capital Stock."

SUMMARY FINANCIAL AND OPERATING DATA

The following table presents summary historical consolidated and pro forma
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 four years ended
December 31, 1995 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,
1995 and 1996 and as adjusted as of March 31, 1996 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 results of operations
for the three months ended March 31, 1996 are not necessarily indicative of the
results that may be expected for the full year. The summary historical financial
data should be read in conjunction with the Consolidated Financial Statements of
the Company and notes thereto and the Unaudited Pro Forma Consolidated Financial
Statements and notes thereto included elsewhere in this Prospectus.

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED MARCH 31,
------------------------------------------ --------------------
1992 1993 1994 1995 1995 1996
--------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues, net:
Funeral.......................... $ 1,803 $ 10,651 $ 17,368 $ 22,661 $ 5,367 $ 7,124
Cemetery......................... -- 614 1,036 1,576 348 511
--------- --------- --------- --------- --------- ---------
Total net revenues........... 1,803 11,265 18,404 24,237 5,715 7,635
Gross profit:
Funeral.......................... 22 917 2,856 3,740 1,192 1,543
Cemetery......................... 113 143 158 250 58 127
--------- --------- --------- --------- --------- ---------
Total gross profit........... 135 1,060 3,014 3,990 1,250 1,670
General and administrative
expenses......................... 600 985 1,266 2,106 399 549
--------- --------- --------- --------- --------- ---------
Operating income (loss)............ (465) 75 1,748 1,884 851 1,121
Interest expense, net.............. 295 1,745 2,671 3,684 878 1,183
--------- --------- --------- --------- --------- ---------
Loss before income taxes........... (760) (1,670) (923) (1,800) (27) (62)
Provision for income taxes......... -- -- 40 694 304 131
--------- --------- --------- --------- --------- ---------
Net loss........................... (760) (1,670) (963) (2,494) (331) (193)
Preferred stock dividends.......... -- (1) -- (1) -- -- -- 10
--------- --------- --------- --------- --------- ---------
Net loss attributable to common
stock.............................. $ (760) $ (1,670) $ (963) $ (2,494) $ (331) $ (203)
========= ========= ========= ========= ========= =========
Loss per common share.............. $ (1) $ (1) $ $ $ $
========= ========= ========= ========= ========= =========
Weighted average number of common
and common equivalent shares
outstanding...................... (1) (1)
========= ========= ========= ========= ========= =========
Supplemental pro forma data(2):
Revenues, net.................... 37,533(2) 10,210(2)
Operating income................. 2,894(2) 865(2)
Net income attributable to common
stock.......................... 677(2) 226(2)
Earnings per common share........ (2) (2)
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period..... 12 25 34 41 34 49
Funeral services performed during
period........................... 389 2,265 3,529 4,414 1,054 1,403
Preneed funeral contracts sold..... 331 489 599 1,667 410 632
Backlog of preneed funeral
contracts.......................... 2,341 4,810 6,221 7,699 6,445 9,335
Depreciation and amortization...... $ 307 $ 1,207 $ 1,854 $ 2,605 $ 576 $ 822
</TABLE>
AS OF
MARCH 31, 1996
AS OF -----------------------
DECEMBER 31, AS
1995 ACTUAL ADJUSTED(3)
------------- --------- -----------
(in thousands)
BALANCE SHEET DATA:
Working capital....................... $ 6,472 $ 6,007 $
Total assets.......................... 62,075 72,916
Long-term debt, net of current
maturities.......................... 42,057 50,072
Redeemable preferred stock............ -- 3,487
Stockholders' equity.................. 9,151 9,285

(FOOTNOTES ON FOLLOWING PAGE)

6
- ------------
(1) Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 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 1992 and 1993, the
entities were subchapter S corporations, and taxes were the direct
responsibility of the owners. Thus, the tax provisions reflected above for
these periods are based on assumptions about what tax provisions (benefits)
would have been if the Company were a taxable entity. In the opinion of
management, no pro forma tax provision (benefit) was appropriate for these
periods because the Company follows a policy of fully reserving its net
operating losses.

(2) The supplemental pro forma data is presented as if: (a) all acquisitions
which took place from January 1, 1995 through May 31, 1996 had occurred on
January 1, 1995; (b) the Company's initial public offering had occurred on
January 1, 1995; (c) the Company's Series A, B and C Preferred Stock had
been converted into their common share equivalents as of January 1, 1995;
and (d) stock options issued within one year of the initial public offering
were exercised as of January 1, 1995. The effect of such stock options has
been calculated using the "treasury stock" method, assuming an estimated
initial public offering price of $ per share, and has been included in the
calculation of historical loss per common share even though the effect of
the assumed exercise of such options is anti-dilutive. The pro forma data
should not be construed as indicative of the Company's results of operations
or financial condition had the acquisitions been consummated on January 1,
1995 and are not intended to project the Company's results of operations or
financial condition for any future period or as of any future date.

(3) As adjusted for the Offering and the application of the net proceeds
therefrom.

RISK FACTORS

IN ADDITION TO THE OTHER INFORMATION IN THIS PROSPECTUS, THE FOLLOWING
FACTORS SHOULD BE CONSIDERED CAREFULLY IN EVALUATING THE COMPANY AND ITS
BUSINESS BEFORE PURCHASING SHARES OF THE CLASS A COMMON STOCK OFFERED HEREBY.

COMPETITION FOR ACQUISITIONS

The Company's operations have expanded principally through the acquisition
of established funeral homes and cemeteries. Acquisitions of funeral homes and
cemeteries in selected markets will continue to be an integral part of the
Company's business strategy. Competition in the acquisition market is intense,
and prices paid for funeral homes and cemeteries have increased substantially in
recent years. In addition, the four largest publicly held North American death
care companies, each of which has significantly greater financial and other
resources than the Company, are actively engaged in acquiring funeral homes and
cemeteries in a number of markets. 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 has entered into letters of intent for the
acquisition of 11 funeral homes and one cemetery. These letters of intent are
non-binding, except for certain provisions relating to confidentiality and
restricting the seller from negotiating a sale with others. Accordingly, no
assurance can be given that such transactions will be successfully completed.
See "Business -- Death Care Industry," "-- Business Strategy" and "--
Competition."

LIMITED OPERATING HISTORY; OPERATING LOSSES

The Company was formed in June 1991 and, consequently, has a limited
operating history. The Company also has grown dramatically in the past year
through the acquisition of a number of funeral homes and cemeteries. A
substantial portion of the funds utilized for such acquisitions has been
obtained through the incurrence of debt, and therefore, the Company has incurred
net losses in each of its five years of operations. There can be no assurance
that the Company will become profitable in the future or will be able to
integrate newly acquired funeral homes and cemeteries successfully into its
existing operations. See "Selected Historical Consolidated and Pro Forma
Financial and Operating Data" and "Management's Discussion and Analysis of
Financial Condition and Results of Operations."

SUBSTANTIAL CAPITAL REQUIREMENTS

The Company has and will have substantial capital requirements for the
acquisition of funeral homes and cemeteries. Historically, the Company has
financed these requirements primarily with the proceeds from debt and the
issuance of preferred stock. While management believes the Company will have
sufficient capital available under its credit facility, from cash flow and from
proceeds from the Offering to fund acquisitions, if revenues or the Company's
borrowing base decrease as a result of operating difficulties or other reasons,
the Company may have limited ability to expend the capital necessary to
undertake or complete future acquisitions. There can be no assurance that
sufficient debt or equity financing or cash generated by operations will be
available to meet these requirements. See "Management's Discussion and Analysis
of Financial Condition and Results of Operations -- Liquidity and Capital
Resources."

DEPENDENCE UPON KEY PERSONNEL

The Company depends to a large extent upon the abilities and continued
efforts of Melvin C. Payne, President and Chief Executive Officer, Mark W.
Duffey, Executive Vice President and Chief Financial Officer, 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 will enter
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; ANTI-TAKEOVER PROVISIONS

Following the Offering, the Company will have shares of Class A Common
Stock outstanding and shares of Class B Common Stock outstanding. The Company's
Amended and Restated Certificate of Incorporation ("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, holders of Class B Common Stock will hold %
of the voting power of the outstanding shares of Common Stock ( % if the
Underwriters' over-allotment option is exercised in full). These stockholders
will be 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."

The Company's Charter and Amended and Restated Bylaws ("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. In addition, the Company's Board of Directors has
adopted a preferred share rights plan. The rights plan, as well as certain
provisions of Delaware law, may also have the effect of discouraging, delaying
or preventing a change in control of the Company or unsolicited acquisition
proposals. It is anticipated that certain holders of Class B Common Stock will
enter 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 without the approval
of 80% of the shares held by such holders. 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 1994, as compared with approximately
10% in 1980. Cremations represented approximately 3% of the Company's funeral
revenues for the year ended December 31, 1995. The Company believes that its low
cremation rate is primarily a result of cultural or religious traditions in the
markets the Company serves. The Company's cremation rate will increase if the
cremation rate in its current markets increases or if the Company enters new
markets where the cremation rate is higher. Compared to traditional funeral
services, cremations have 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

Upon completion of the Offering, the Company will have shares of Class A
Common Stock outstanding and shares of Class B Common Stock outstanding. The
shares of Class A Common Stock offered hereby will be freely tradable without
restriction or further registration under the Securities Act of 1933, as amended
(the "Securities Act"), except for shares sold by persons deemed to be
"affiliates" of the Company or acting as "underwriters," as those terms are
defined in the Securities Act. All shares of Class B Common Stock will be
"restricted securities" within the meaning of Rule 144 under the Securities Act
and will be eligible for resale subject to the volume, manner of sale, holding
period and other limitations of Rule 144. The remaining "restricted" shares will
become eligible for resale pursuant to Rule 144 from time to time thereafter. In
addition, an aggregate of shares of Class A Common Stock and shares of Class B
Common Stock are reserved for issuance to employees and directors of the Company
under the Company's 1995 Stock Incentive Plan, shares of Class A Common Stock
are reserved for issuance to employees under the Company's 1996 Stock Incentive
Plan and shares of Class A Common Stock are reserved for issuance to outside
directors under the 1996 Nonemployee Directors Plan. Currently, options for
shares of Class A Common Stock and shares of Class B Common Stock are issuable
under existing options granted to employees and directors. See "Management --
Incentive Plans," "Description of Capital Stock" and "Shares Eligible for Future
Sale."

Pursuant to a stock registration agreement, the Company may be required,
subject to certain conditions, to register under the Securities Act an aggregate
of up to shares of Class A Common Stock issuable upon conversion of the Class B
Common Stock by the current stockholders. Such stockholders have waived their
registration rights under the stock registration agreement arising in connection
with the Offering. In addition, the holders of Series A, C and D Preferred Stock
have been granted certain registration rights if the Company proposes to
undertake a public offering. Such holders have waived their registration rights
in connection with the Offering.

The Company and the executive officers and directors and certain
stockholders of the Company 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 180 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 in connection with
the Company's stock option plans, provided that such options shall not vest or
become exercisable and such shares shall not be transferable prior to the end of
the 180-day period, and the issuance by the Company of capital stock in
connection with acquisitions of funeral homes and cemeteries, provided that such
shares shall not be transferable prior to the end of the 180-day period. See
"Shares Eligible for Future Sale" and "Underwriting."

NO PRIOR MARKET FOR CLASS A COMMON STOCK

Prior to the Offering, there has been no public market for the Class A
Common Stock. There can be no assurance that an active market for the Class A
Common Stock will develop upon completion of the Offering or, if developed, that
such market will be sustained. The initial public offering price of the Class A
Common Stock will be determined through negotiations between the Company and the
representatives of the Underwriters and may bear no relationship to the market
prices of the Class A Common Stock after the Offering. Prices for the Class A
Common Stock after the Offering may be influenced by a number of factors,
including the liquidity of the market for the Class A Common Stock, investor
perceptions of the Company and the death care industry in general and general
economic and other conditions. Sales of

substantial amounts of Class A Common Stock in the public market subsequent to
the Offering could adversely affect the market price of the Class A Common
Stock. For information relating to the factors to be considered in determining
the initial public offering price, see "Underwriting."

SUBSTANTIAL DILUTION

Investors in the Class A Common Stock offered hereby will experience
immediate and substantial dilution in net tangible book value per share of
$ (assuming an initial public offering price of $ per share). See
"Dilution."

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."

THE COMPANY

The Company was incorporated in Delaware on December 29, 1993. The
Company's principal executive office is located at 1300 Post Oak Blvd., Suite
1500, Houston, Texas 77056, and its telephone number is (713) 556-7400.

USE OF PROCEEDS

The net proceeds to the Company from the sale of the shares of Class A
Common Stock offered hereby are estimated to be approximately $ million
(approximately $ million if the Underwriters' over-allotment option is exercised
in full) assuming an initial public offering price of $ per share, after
deducting the estimated underwriting discount and offering expenses. Of these
net proceeds, $7.8 million will be used to repay borrowings received from Mr. C.
Byron Snyder, Chairman of the Board of Directors and one of the Company's
principal stockholders (the "Snyder Notes"), and $35.1 million will be used to
repay borrowings from Provident Services, Inc. ("Provident"). The remaining
proceeds will be retained by the Company for working capital purposes, including
the funding of additional acquisitions.

The Snyder Notes consist of subordinated notes bearing interest at a
predetermined rate plus 3% (a weighted average rate of 11.34% for the three
months ended March 31, 1996), subject to adjustment under certain conditions.
Interest on the notes is payable annually on December 31 in the form of cash or
the issuance of additional subordinated notes. As of March 31, 1996, a total of
$7.8 million of principal and accrued interest was owed under such notes. The
notes mature in May 2001.

The indebtedness payable to Provident consists of notes, secured by deed of
trust and security agreements covering certain real property and guaranteed by
Messrs. Payne and Duffey. The notes bear interest at the prime rate plus 1.5%
per annum (a weighted average rate of 9.84% for the three months ended March 31,
1996). As of March 31, 1996, a total of $35.1 million was outstanding under
these notes. Such indebtedness is scheduled to mature at various dates through
2001. The funds received from Provident were used by the Company to fund the
acquisition of funeral homes.

DIVIDEND POLICY

The Company has never paid a cash dividend on the Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying a cash dividend on the Common Stock
in the foreseeable future. In addition, following consummation of the Offering,
the Company expects to enter into a new bank credit facility with a commercial
lender which will provide certain restrictions on the payment of dividends on
the 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 annual cash dividends of $.06 per share, $.0625 per share or
$.07 per share depending on the date such shares were issued. Such dividends are
payable quarterly. Through May 31, 1996, cash dividends of $57,148 on the Series
D Preferred Stock were accrued and unpaid. See "Description of Capital Stock."

CAPITALIZATION

The following table sets forth the capitalization of the Company as of
March 31, 1996, and as adjusted to reflect the sale of the shares of Class A
Common Stock offered hereby 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 with the Consolidated Financial Statements and the notes thereto
and the unaudited Pro Forma Consolidated Financial Statements and the notes
thereto included elsewhere in this Prospectus.

AS OF MARCH 31, 1996
-------------------------
ACTUAL AS ADJUSTED
--------- -----------
(IN THOUSANDS)
Current portion of long-term debt....... $ 3,397 $
========= ===========
Long-term debt:
Senior debt........................ $ 40,573 $
Subordinated notes................. 9,387
Other.............................. 112
--------- -----------
Total long-term debt.......... 50,072
--------- -----------
Redeemable preferred stock(1)........... 3,487
--------- -----------
Stockholders' equity:
Preferred Stock, no stated par,
40,000,000 shares authorized;
15,965,000 shares issued and
outstanding; no shares issued or
outstanding, as adjusted.......... 160
Common Stock, par value $.01 per
share, 20,000,000 shares authorized;
5,040,002 shares issued and
outstanding; shares authorized; no
shares issued or outstanding, as
adjusted(2)....................... 50
Class A Common Stock, par value
$.01 per share, no shares
authorized, issued or outstanding;
shares authorized; shares issued
and outstanding, as adjusted...... --
Class B Common Stock, par value
$.01 per share, no shares
authorized, issued or outstanding;
shares authorized, shares issued and
outstanding, as adjusted.......... --
Contributed capital................ 15,370
Unrealized gain on securities
available for sale................ 3
Accumulated deficit................ (6,298)
--------- -----------
Total stockholders' equity.... 9,285
--------- -----------
Total capitalization..... $ 62,844 $
========= ===========
- ------------

(1) The redeemable preferred stock (the Series D Preferred Stock) is convertible
at the holder's option into Class B Common Stock at conversion prices
ranging from $ to $ per share. 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.
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 --
Incentive Plans."

DILUTION

The net tangible book deficit of the Company as of March 31, 1996 was $ per
share of Common Stock. Net tangible book value per share is determined by
dividing total tangible assets less total liabilities of the Company by the
total number of outstanding shares of Common Stock. After giving effect to the
sale of the shares of Class A Common Stock offered hereby (assuming an initial
public offering price of $ per share) and the receipt of the estimated net
proceeds (after deducting the estimated underwriting discount and estimated
expenses of the Offering), the pro forma net tangible book value of the Company
at March 31, 1996 would have been $ per share. This represents an immediate
increase in the net tangible book value of $ per share to existing stockholders
and an immediate dilution (I.E., the difference between the initial public
offering price and the pro forma net tangible book value after the Offering) of
to new investors. The following table illustrates such per share dilution:

Assumed public offering price per
share................................. $
Net tangible book value per share
at March 31, 1996................ $
Increase in net tangible book value
per share attributable to the
Offering......................... $
Pro forma net tangible book value per
share after giving effect to the
Offering.............................. $
Dilution per share to new investors..... $

The following table sets forth, after giving effect to the Offering, the
number of shares of Common Stock purchased from the Company, the total
consideration paid therefor and the average price per share paid by existing
stockholders and by new investors:

SHARES PURCHASED TOTAL CONSIDERATION
--------------- ------------------ AVERAGE PRICE
NUMBER PERCENT AMOUNT PERCENT PER SHARE
--------- --- ------------ --- ------------

Existing stockholders..... % $ % $
New investors.............
--------- --- ------------ ---
Total................ 100.0% $ 100.0%
========= === ============ ===

The foregoing tables assume no exercise of outstanding stock options. As of
the date of this Prospectus, there are shares of Class A Common Stock and shares
of Class B Common Stock issuable upon the exercise of stock options at an
average exercise price of $ per share. See "Shares Eligible for Future Sale."

SELECTED HISTORICAL CONSOLIDATED AND PRO FORMA
FINANCIAL AND OPERATING DATA

The following table sets forth selected consolidated and pro forma
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 four years ended
December 31, 1995 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 period from inception to
December 31, 1991 and as of and for the three months ended March 31, 1995 and
1996 set forth below 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 results of operations for the three months ended
March 31, 1996 are not necessarily indicative of the results that may be
expected for the full year. The selected consolidated financial data 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 the related notes thereto and Unaudited Pro Forma
Consolidated Financial Statements and notes thereto included elsewhere in this
Prospectus.

<TABLE>
<CAPTION>
PERIOD FROM THREE MONTHS
INCEPTION TO YEAR ENDED DECEMBER 31, ENDED MARCH 31,
DECEMBER 31, ------------------------------------------ --------------------
1991 1992 1993 1994 1995 1995 1996
------------- --------- --------- --------- --------- --------- ---------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues, net:
Funeral............................. -$- $ 1,803 $ 10,651 $ 17,368 $ 22,661 $ 5,367 $ 7,124
Cemetery............................ -- -- 614 1,036 1,576 348 511
------ --------- --------- --------- --------- --------- ---------
Total net revenues................ -- 1,803 11,265 18,404 24,237 5,715 7,635
Gross profit:
Funeral............................. -- 22 917 2,856 3,740 1,192 1,543
Cemetery............................ -- 113 143 158 250 58 127
------ --------- --------- --------- --------- --------- ---------
Total gross profit................ -- 135 1,060 3,014 3,990 1,250 1,670
General and administrative expenses... 208 600 985 1,266 2,106 399 549
------ --------- --------- --------- --------- --------- ---------
Operating income (loss)............... (208) (465) 75 1,748 1,884 851 1,121
Interest expense, net................. -- 295 1,745 2,671 3,684 878 1,183
------ --------- --------- --------- --------- --------- ---------
Loss before income taxes.............. (208) (760) (1,670) (923) (1,800) (27) (62)
Provision for income taxes............ -- (1) -- (1) -- (1) 40 694 304 131
------ --------- --------- --------- --------- --------- ---------
Net loss.............................. (208) (760) (1,670) (963) (2,494) (331) (193)
Preferred stock dividends............. -- -- -- (1) -- -- -- 10
------ --------- --------- --------- --------- --------- ---------
Net loss attributable to common
stock............................... $(208)(1) $ (760)(1) $(1,670)(1) $(963) $ (2,494) $ (331) $ (203)
====== ========= ========= ========= ========= ========= =========
Loss per common share................. $ (1) $ (1) $ (1) $ $ $ $
====== ========= ========= ========= ========= ========= =========
Weighted average number of common and
common equivalent shares
outstanding.........................
====== ========= ========= ========= ========= ========= =========
Supplemental pro forma data(2):
Revenues, net....................... 37,533(2) 10,210(2)
Operating income.................... 2,894(2) 865(2)
Net income attributable to common
stock............................. 677(2) 226(2)
Earnings per common share........... (2) (2)

OPERATING AND FINANCIAL DATA:
Funeral homes at end of period........ -- 12 25 34 41 34 49
Funeral services performed during
period.............................. -- 389 2,265 3,529 4,414 1,054 1,403
Preneed funeral contracts sold........ -- 331 489 599 1,667 410 632
Backlog of preneed funeral
contracts........................... -- 2,341 4,810 6,221 7,699 6,445 9,335
Depreciation and amortization......... $ 2 $ 307 $ 1,207 $ 1,854 $ 2,605 $ 576 $ 822

BALANCE SHEET DATA:
Working capital....................... -$- $ 678 $ (142) $ 4,271 $ 6,472 $ 4,457 $ 6,007
Total assets.......................... 24 13,089 28,784 44,439 62,075 45,139 72,916
Long-term debt, net of current
maturities.......................... 220 12,656 26,270 32,622 42,057 34,408 50,072
Redeemable preferred stock............ -- -- -- -- -- -- 3,487
Stockholders' equity (deficit)........ (208) (958) (2,626) 3,429 9,151 3,262 9,285

</TABLE>
(FOOTNOTES ON FOLLOWING PAGE)

15
- ------------

(1) Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 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 1992 and 1993, the
entities were subchapter S corporations, and taxes were the direct
responsibility of the owners. Thus, the tax provisions reflected above for
these periods are based on assumptions about what tax provisions (benefits)
would have been if the Company were a taxable entity. In the opinion of
management, no pro forma tax provision (benefit) was appropriate for these
periods because the Company follows a policy of fully reserving its net
operating losses.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

The Company was formed in 1991 in order to take advantage of the attractive
fundamentals and significant opportunities to consolidate the death care
industry. Although the Company provides services and products in both the
funeral home and cemetery businesses, the Company has historically focused on
acquiring funeral home businesses. From 1992 through 1995, the Company acquired
42 funeral homes and four cemeteries, for consideration ranging from
approximately $9 million to $14 million in each of the four years. The Company
intentionally took a disciplined, deliberate approach to acquisitions that
allowed management the time to integrate early acquisitions, to develop and
implement systems, including operational procedures, administrative policies,
financial systems and related controls, and to promote a decentralized service
culture. In order to strengthen and bring greater focus to the Company's
operations, the Company recruited Russell W. Allen, Executive Vice President of
Operations, in 1993. During the next two years, two additional operating
executives and related support staff were added. These three operating
executives bring more than sixty years of combined death care industry
experience to the management team.

The Company believes that management's focus on controlled growth while
implementing sophisticated operational, administrative systems and related
controls to effectively manage a highly decentralized management structure
positioned it to pursue an accelerated growth strategy beginning in late 1995.
Since the beginning of 1996, the Company has expanded its corporate development
activities, with Mark W. Duffey becoming responsible for corporate development
and overseeing two additional professionals with full-time responsibility for
identifying and evaluating acquisition candidates. Through the first five months
of 1996, the Company has acquired 21 funeral homes and four cemeteries for an
aggregate consideration of approximately $29.1 million. In addition, the Company
has entered into letters of intent to acquire 11 funeral homes and one cemetery
for an aggregate consideration of approximately $20.1 million. The Company
believes that it will continue to see attractive acquisition opportunities as
further consolidation of the industry occurs.

Upon acquisition, the operations team focuses on increasing historic
operating income by improving the merchandising approach, pricing structure and
marketing strategy of acquired businesses. These enhancements, complemented by
discounts from consolidated purchasing, generally result in improved margins
within the first 12 months.

In certain instances, a review of the marketing strategy of an acquired
business results in increased preneed funeral and cemetery sales efforts to
secure or gain future market share. Preneed funeral sales are effected by
deposits to a trust or purchases of third party insurance products. Since the
Company does not have access to these funds, the sale is not recorded until the
service is performed nor are the related assets and liabilities reflected on the
Company's consolidated balance sheet. The trust income earned and increases in
insurance benefits are also deferred until the service is performed in order to
offset possible inflation in cost to provide the service in the future. Unlike
preneed funeral sales, the Company has access to the funds related to preneed
cemetery sales. Therefore, preneed cemetery sales and the related estimated
costs are recorded at the time of sale. Trust fund requirements relate only to
the estimated costs of providing merchandise and service. Any income from the
merchandise and service trust funds is recorded as cemetery revenue in the
period earned. These earnings are an offset to any inflation in the cost of
providing the merchandise and services in the future. These estimated costs are
reviewed at least annually, and any significant increase in estimated costs are
recorded at that time. Due to the Company's small number of cemetery operations,
the impact of these trust earnings and any inflation in estimated costs have not
historically been significant.

FACTORS AFFECTING HISTORICAL FINANCIAL RESULTS

For 1992, 1993 and 1994, the Company's corporate infrastructure required
only modest additions to support its disciplined approach to acquisitions. As a
result, general and administrative expenses declined as

a percentage of revenues over these years. In anticipation of accelerating its
acquisition activity, the Company began in 1995 to significantly expand its
corporate infrastructure to support more rapid growth. As a result, general and
administrative expenses in 1995 increased as a percentage of revenues over 1994.
Although general and administrative expenses will continue to increase as the
Company grows, these expenses are expected to increase at a lower rate relative
to revenue, and thus, general and administrative expenses as a percentage of
revenues are expected to decline.

Three separate transactions completed by the Company in September 1992,
November 1992 and July 1993 resulted in the acquisition of packages of two,
eight and eight funeral homes, respectively, for a total of 18 funeral homes.
Eight of these funeral homes were acquired from one of the large death care
companies that was divesting these properties to comply with a Federal Trade
Commission order. Since these properties were sold as packages, the Company's
acquisition criteria could not be applied on a location by location basis. While
the poor performance of certain properties was reflected in the purchase price,
certain of the funeral homes had been losing market share prior to the
acquisition or otherwise required significant operational improvements, thus
negatively impacting overall gross margin. Accordingly, as of May 31, 1996, the
Company has divested three of these funeral homes. The Company has also divested
one cemetery which was included in one of these packages.

In response to seller demands, prior to mid-1995, the Company agreed to
contract for, and allocate a portion of the purchase price to, agreements not to
compete, which were amortized over the four-to ten-year period covered by the
agreement. Due principally to changes in tax laws, sellers have agreed to a
higher portion of the acquisition terms being treated as purchase price which is
allocated to names and reputations (which are amortized over 40 years) instead
of covenants not to compete. As a result of this trend, certain operating
expenses, primarily amortization, associated with these acquisitions will be
spread over a longer period.

The Company's future results of operations will depend in large part on the
Company's ability to continue to make acquisitions on attractive terms and to
successfully integrate and manage the acquired properties. See "Risk Factors --
Competition for Acquisitions" and " -- Limited Operating History; Operating
Losses."

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:

<TABLE>
<CAPTION>
THREE MONTHS ENDED
YEAR ENDED DECEMBER 31, MARCH 31,
------------------------------- --------------------
1993 1994 1995 1995 1996
--------- --------- --------- --------- ---------
<S> <C> <C> <C> <C> <C>
Total revenues, net..................... 100.0% 100.0% 100.0% 100.0% 100.0%
Total gross profit...................... 9.4 16.4 16.5 21.9 21.9
General and administrative expenses..... 8.7 6.9 8.7 7.0 7.2
Operating income........................ 0.7 9.5 7.8 14.9 14.7
Interest expense, net................... 15.5 14.5 15.2 15.4 15.5
Net loss................................ (14.8) (5.2) (10.3) (5.8) (2.5)
</TABLE>
18

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

<TABLE>
<CAPTION>
THREE MONTHS
YEAR ENDED DECEMBER 31, ENDED
------------------------------------- MARCH 31,
1993 1994 1995 1996
----- ----- ----- ------------
<S> <C> <C> <C> <C>
Funeral homes at beginning of period.... 14 25 34 41
Acquisitions............................ 11 9 8 9
Divestitures............................ 0 0 1 1
-- -- -- --
Funeral homes at end of period.......... 25 34 41 49
== == == ==
Cemeteries at beginning of period....... 2 2 3 3
Acquisitions............................ 1 1 0 0
Divestitures............................ 1 0 0 0
-- -- -- --
Cemeteries at end of period............. 2 3 3 3
== == == ==
</TABLE>

The following is a discussion of the Company's results of operations for
the three months ended March 31, 1995 and 1996 and the three years ended
December 31, 1993, 1994 and 1995. For purposes of this discussion, funeral homes
and cemeteries owned and operated for the entirety of each period being compared
are referred to as "existing operations." Operations acquired or opened during
either period being compared are referred to as "acquired operations."

THREE MONTHS ENDED MARCH 31, 1996 COMPARED TO THREE MONTHS ENDED MARCH 31,
1995

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

THREE MONTHS ENDED
MARCH 31, CHANGE
-------------------- --------------------
1995 1996 AMOUNT PERCENT
--------- --------- --------- -------

(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations........... $ 5,680 $ 5,666 $ (14) (0.2)%
Acquired operations........... 35 1,969 1,934 *
--------- --------- ---------
Total net revenues....... $ 5,715 $ 7,635 $ 1,920 33.6%
========= ========= =========
Gross profit:
Existing operations........... $ 1,243 $ 1,202 $ (41) (3.3)%
Acquired operations........... 7 468 461 *
--------- --------- ---------
Total gross profit....... $ 1,250 $ 1,670 $ 420 33.6%
========= ========= =========

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

* Not meaningful.

Total net revenues for the three months ended March 31, 1996 increased $1.9
million or 33.6% over the three months ended March 31, 1995. The higher net
revenues reflect an increase of $1.9 million in net revenues from acquired
operations offset by a decrease in net revenues of $14,000 or 0.2% from existing
operations. The decrease in net revenues for the existing operations was due to
a modest decline in funeral services performed as a result of the divestiture of
two funeral homes and the planned divestiture of a third funeral home offset by
a small increase in the average revenue per funeral service. At March 31, 1996,
the Company operated three cemeteries, the net revenues and gross profit of
which were not significant.

Total gross profit for the three months ended March 31, 1996 increased
$420,000 or 33.6% over the first three months of 1995. The higher total gross
profit reflects an increase of $461,000 from acquired operations and a decrease
of $41,000 or 3.3% from existing operations. The decrease in gross profit from
existing operations resulted from the addition of operations personnel and
related expenses to support a higher rate of growth. Total gross margin remained
consistent at 21.9%.

General and administrative expenses for the three months ended March 31,
1996 increased $150,000 over the first three months of 1995 and increased as a
percentage of net revenues to 7.2% for the three months ended March 31, 1996
from 7.0% for the first three months of 1995. These increases resulted primarily
from increased personnel expense necessary to support a higher rate of growth
and increased acquisition activity.

Interest expense for the three months ended March 31, 1996 increased
$305,000 over the first three months of 1995 principally due to increased
borrowings for acquisitions.

Although the Company experienced net operating losses before tax, the
Company's policy to fully reserve operating loss carryforwards created a tax
provision of $131,000 in the three months ended March 31, 1996 and $304,000 in
the three months ended March 31, 1995.

YEAR ENDED DECEMBER 31, 1995 COMPARED TO YEAR ENDED DECEMBER 31, 1994

The following table sets forth certain information regarding the net
revenues and gross profit of the Company during the years ended December 31,
1994 and 1995:

YEAR ENDED
DECEMBER 31, CHANGE
-------------------- --------------------
1994 1995 AMOUNT PERCENT
--------- --------- --------- -------

(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations........... $ 16,593 $ 16,838 $ 245 1.5%
Acquired operations........... 1,811 7,399 5,588 *
--------- --------- ---------
Total net revenues....... $ 18,404 $ 24,237 $ 5,833 31.7%
========= ========= =========
Gross profit:
Existing operations........... $ 2,685 $ 2,792 $ 107 4.0%
Acquired operations........... 329 1,198 869 *
--------- --------- ---------
Total gross profit....... $ 3,014 $ 3,990 $ 976 32.4%
========= ========= =========

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

* Not meaningful.

Total net revenues for the year ended December 31, 1995 increased $5.8
million or 31.7% over 1994. The higher net revenues were due primarily to an
increase of $5.6 million in net revenues from acquired operations. Net revenues
from existing operations increased $245,000 or 1.5% over 1994. The increase in
net revenues from existing operations resulted from a 4.4% increase in average
revenue per funeral service partially offset by a decrease in net revenues due
to fewer funeral services performed primarily as a result of the divestiture of
one funeral home and the planned divestiture of two additional funeral homes. At
December 31, 1995, the Company operated three cemeteries, the net revenues and
gross profit of which were not significant.

Total gross profit for the year ended December 31, 1995 increased $976,000
or 32.4% over 1994. The higher total gross profit reflects an increase of
$869,000 from acquired operations and an increase of $107,000 or 4.0% from
existing operations. The gross profit increase for the existing operations was
due to the efficiencies gained by consolidation and implementation of a new
merchandising strategy. Total gross margin remained relatively consistent.

General and administrative expense for the year ended December 31, 1995
increased $840,000 over 1994 and increased as a percentage of net revenues to
8.7% for 1995 from 6.9% for 1994. These increases resulted primarily from
increased personnel expense necessary to support a higher rate of growth and
increased acquisition activity.

Interest expense for the year ended December 31, 1995 increased $1.0
million over 1994, principally due to increased borrowings for acquisitions.

Although the Company experienced net operating losses before tax, the
Company's policy to fully reserve operating loss carryforwards created a tax
provision of $40,000 in 1994 and $694,000 in 1995.

YEAR ENDED DECEMBER 31, 1994 COMPARED TO YEAR ENDED DECEMBER 31, 1993

The following table sets forth certain information regarding the net
revenues and gross profit of the Company during the years ended December 31,
1993 and 1994:

YEAR ENDED
DECEMBER 31, CHANGE
-------------------- --------------------
1993 1994 AMOUNT PERCENT
--------- --------- --------- -------

(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations........... $ 7,383 $ 7,597 $ 214 2.9%
Acquired operations........... 3,882 10,807 6,925 *
--------- --------- ---------
Total net revenues....... $ 11,265 $ 18,404 $ 7,139 63.4%
========= ========= =========
Gross profit:
Existing operations........... $ 764 $ 1,085 $ 321 42.0%
Acquired operations........... 296 1,929 1,633 *
--------- --------- ---------
Total gross profit....... $ 1,060 $ 3,014 $ 1,954 184.3%
========= ========= =========
- ------------

* Not meaningful.

Total net revenues for the year ended December 31, 1994 increased $7.1
million or 63.4% over 1993. The higher net revenues are primarily due to an
increase of $6.9 million in net revenues from acquired operations. Net revenues
from existing operations increased $214,000 or 2.9% over 1993. The increase in
net revenues from existing operations resulted from a 4.7% increase in average
revenue per funeral service partially offset by a slight decrease in the number
of funeral services performed. At December 31, 1994, the Company operated three
cemeteries, the net revenues and gross profit of which were not significant.

Total gross profit for the year ended December 31, 1994 increased $2.0
million or 184.3% over 1993. The higher total gross profit reflects an increase
of $1.6 million from acquired operations and an increase of $321,000 or 42.0%
from existing operations. The gross profit increase for the existing operations
was due to the efficiencies gained by consolidation and implementation of a new
merchandising strategy. Total gross margin increased from 9.4% in 1993 to 16.4%
in 1994.

General and administrative expense for the year ended December 31, 1994
increased $281,000 over 1993. This increase resulted primarily from increased
personnel expense necessary to support a higher rate of growth and increased
acquisition activity. However, general and administrative expenses decreased as
a percentage of net revenues to 6.9% for 1994 from 8.7% for 1993, primarily due
to increased net revenues from acquisitions without significant additions to
corporate infrastructure.

Interest expense for the year ended December 31, 1994 increased $926,000
over 1993 principally due to increased borrowings for acquisitions.

Although the Company experienced net operating losses before tax, the
Company's policy to fully reserve operating loss carryforwards created a tax
provision of $40,000 in 1994.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $6.3 million at March 31, 1996,
representing a decrease of $1.3 million from December 31, 1995. For the three
months ended March 31, 1996, a negative cash flow of $378,000 resulted from
operations, primarily from payment for agreements not to compete of $218,000 and
a decrease in accrued liabilities of approximately $217,000. Cash used in
investing activities produced a negative cash flow of $12.1 million, due
primarily to acquisitions. Cash flow provided by financing activities amounted
to approximately $11.2 million, consisting of debt incurred and issuance of
preferred stock of approximately $7.5 million and $3.8 million, respectively.

Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of preferred stock. Since January 1, 1996, the Company has
issued 6,036,616 shares of Series D Preferred Stock which can be converted into
Class B Common Stock. The holders of Series D Preferred Stock are entitled to
receive annual cash dividends of $.06, $.0625 and $.07 per share depending upon
when such

shares were issued. Commencing on the second anniversary of the completion of
the Offering, 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 holder's 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.

In connection with the Company's formation in June 1991, the Company's
Chairman, C. Byron Snyder, provided an initial capital commitment of $6 million,
funded in the form of subordinated notes for working capital and acquisitions.
The Snyder Notes bear interest at a predetermined rate plus 3%, subject to
adjustment in certain circumstances, payable annually in the form of cash or
additional subordinated notes. As of March 31, 1996, the aggregate amount
outstanding under the Snyder Notes was $7,841,000. The Company will use a
portion of the proceeds from the Offering to repay the Snyder Notes.

In addition, Provident has provided long-term acquisition financing to the
Company on a senior secured basis (the "Provident Loans"). The Provident Loans
are made pursuant to the Ninth Amended and Restated Loan Agreement, dated as of
August 31, 1994, as amended, and bear interest at prime plus 1.5%. As of March
31, 1996, approximately $35,115,000 was outstanding under the Provident Loans.
The Company plans to use a portion of the proceeds from the Offering to repay
the Provident Loans.

The Company also has in place a senior secured term loan arrangement with
Texas Commerce Bank National Association ("TCB") which bears interest at a fixed
rate of 7.31% through July 1998. As of March 31, 1996, approximately $8,399,000
was outstanding under this loan.

In connection with repaying the debt referenced above with the proceeds of
the Offering, a substantial portion of the deferred debt expense ($445,000 at
March 31, 1996) will be written off in the period in which the debt is repaid.

The Company anticipates that it will enter into a new credit facility with
a commercial lender concurrently with the closing of the Offering. It is
anticipated that the credit facility will contain customary restrictive
covenants, including a restriction on the payment of dividends on the Common
Stock, and will require the Company to maintain certain financial ratios.

At May 31, 1996, the Company had non-binding letters of intent to purchase
11 funeral homes and one cemetery for an aggregate consideration of
approximately $20.1 million. The Company anticipates that the consideration for
future acquisitions will consist of loans from a commercial lender, available
cash and equity securities.

The Company currently expects to incur approximately $1.2 million for
capital expenditures in the remainder of 1996, primarily for upgrading funeral
home facilities. Management believes that cash flows from operations and the
borrowing capacity available under a credit facility should be sufficient to
meet its anticipated capital expenditures and other operating requirements for
the remainder of 1996 and in 1997. However, 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 acquisitions.
Additional debt and equity financings may be required in connection with future
acquisitions.

SEASONALITY

Although the death care business is relatively stable and fairly
predictable, 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.

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. Management estimates that there are
approximately 22,000 funeral homes and 9,600 commercial (as opposed to
religious, family, fraternal, military or municipal) cemeteries in the United
States. Less than 20% of the 1995 United States death care industry revenues are
represented by the four largest 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 provides 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, established firms' 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. Since 1980, the number
of deaths in the United States has increased at a compounded rate of
approximately 1% per year. According to a 1993 report prepared by the U.S.
Department of Commerce, Bureau of the Census, the number of deaths in the United
States is expected to increase by approximately 1% per year between 1996 and
2010. Because the industry is relatively stable, non-cyclical and fairly
predictable, business failures are uncommon. As a result, ownership of funeral
home and cemetery businesses generally have not 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 small death care operations with
large, primarily publicly owned death care providers that can benefit from
economies of scale, improved managerial control and more effective strategic
planning and greater financial resources. This trend appears to result
principally from increased regulation, a desire on the part of small, 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 firms 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 also are increasingly combining funeral home and
cemetery operations at a single site to allow cross-marketing opportunities and
for further 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 staffs 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
1994, as compared to approximately 10% in 1980. Many parts of the Southern and
Midwestern United States and many non-metropolitan communities exhibit
materially lower rates of cremation as a result of religious and cultural
traditions. 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. Since its formation, the Company has focused on
becoming a succession planning alternative to the larger death care providers.
The Company believes that its decentralized operating style, which provides
autonomy and flexibility to local management, is attractive to owners of funeral
homes seeking to sell their operations. Management believes that its operating
style is also a key component in its ability to attract and retain quality
managers. While the Company's management style allows local operators
significant responsibility in the daily operating decisions, financial
parameters jointly established during the budgeting process are monitored by
senior management through the Company's management and accounting systems. This
personal computer based system, CSAS(TM) (the Carriage Services Assistance
System), was specifically designed by the Company for use in its operations and
is linked to most of the Company's funeral home locations. CSAS(TM) enables a
location to function on its own by maintaining accounts receivables and payables
locally, thereby reducing the costs related to maintaining this function
centrally. The information provided by CSAS(TM) to the Company's senior
management also allows the Company, on a timely basis, to access critical
operating and financial data from a site in order to analyze the performance of
individual locations and institute corrective action if necessary.

The Company also has established a compensation structure that is designed
to maintain and create a sense of ownership on the part of local managers. The
Company awards meaningful cash bonuses tied to achieving certain earnings
objectives at a location and issues stock options to local management for
exceptional performance. As a result, local management has the opportunity to
significantly increase their personal net worths through strong local and
corporate performance.

Management also believes that implementing its operating strategy on newly
acquired businesses can lead to enhanced profitability of acquired operations.
The Company has an extensive merchandising and

training program that is designed to educate local funeral home operators about
opportunities to improve marketing of products and services, to share sales
leads and other cross-marketing opportunities and to become familiar with and
adopt the Company's business objectives. The larger size of the Company as
compared to local operations also 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 autonomy are retained at the local level, centralizing
certain financial, accounting, legal, administrative and employee benefit
functions allows for more efficient and cost-effective operations. The Company
also institutes preneed sales programs in selected local markets to maintain or
increase market presence and assure a backlog of future business.

ACQUISITION STRATEGY. The Company believes that significant acquisition
opportunities currently exist in the death care industry that the Company
intends to aggressively pursue. In evaluating specific properties for
acquisition, the Company considers such factors as the property's location,
reputation, heritage, physical size, volume of business, profitability, name
recognition, aesthetics, potential for development or expansion, competitive
market position, pricing structure and quality of operating management. The
Company will continue to focus on acquiring premier funeral homes throughout the
United States that have a strong local presence and that conduct between 100 to
600 funeral services per year. In purchasing the premier location in a
particular market, management believes that the Company is able to attract the
most talented personnel, minimize downside risk of loss of volume to competitors
and provide opportunities for increased profitability when such operations are
coupled with the Company's management techniques. In addition, the Company
generally retains the former owners and other key personnel of acquired funeral
homes and provides them with significant operating responsibility to assure the
continuation of high quality services and the maintenance of the acquired firm's
reputation and heritage. In nearly all cases, acquired funeral homes continue
operations under the same trade names as those of the prior owners. In addition,
the Company views experienced management of certain acquired operations as
potential corporate management candidates. Management believes that this
potential for advancement within the Company combined with the Company's
decentralized operating structure and incentive-based compensation system makes
it a particularly attractive acquiror to some independent owners. The Company
also will continue to analyze the possibility of acquiring additional funeral
homes in present markets so that personnel and vehicles can be shared and profit
margins enhanced.

The Company follows a disciplined approach to acquisitions utilizing
specific operating and financial criteria. 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 it believes is reasonable. The Company
anticipates that the consideration for future acquisitions will consist of a
combination of cash, long-term notes, the assumption of existing indebtedness of
the acquired businesses, and equity. The Company also will typically enter into
management, consulting and non-competition agreements with former owners and key
executive personnel of acquired businesses.

Although the Company traditionally has not focused on acquiring cemetery
operations, management intends to pursue cemetery acquisitions primarily in
markets where the Company operates or plans to operate funeral homes in order to
take advantage of cross-marketing opportunities.

While the Company focuses its efforts on identifying acquisition candidates
with the potential for a negotiated, non-competitive acquisition process, the
Company also competes for more broadly marketed acquisition opportunities. In
many cases, the Company has been successful in acquiring operations where it has
not been the highest bidder because of the Company's reputation, operating
strategy and corporate culture. Management believes that the issuance of equity
securities to fund certain funeral home acquisitions has been, and will continue
to be, attractive to select acquisition candidates.

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

<TABLE>
<CAPTION>
ESTIMATED
ANNUAL FUNERAL
PERIOD CONSIDERATION REVENUES(1) HOMES(2) CEMETERIES(3)
- ----------- ------------- ----------- --------- -------------
(DOLLARS IN THOUSANDS)
<C> <C> <C> <C> <C>
1992................................. $11,832 $ 6,874 14 2
1993................................. 13,843 8,558 11 1
1994................................. 9,073 5,008 9 1
1995................................. 12,191 6,082 8 0
Five Months Ended May 31, 1996....... 29,125 14,146 21 4
------------- ----------- -- -
$76,064 $40,668 63 8
============= =========== == =
- ------------
</TABLE>

(1) Reflects the Company's estimate of annual revenues at the time of
acquisition.

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

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

OPERATIONS

FUNERAL HOME OPERATIONS. The Company's funeral homes are located in Texas,
Ohio, Kentucky, Georgia, Tennessee, Illinois, Michigan, Florida, Kansas, South
Carolina, Washington, Idaho and Alabama. Funeral home operations accounted for
93% of the Company's net revenues for the year ended December 31, 1995 and the
three months ended March 31, 1996.

The Company's funeral home operations are managed by four experienced death
care industry professionals. Although certain financial management and policy
matters are centralized, local funeral home operators have substantial autonomy
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 operation and
to capitalize on its reputation and heritage, while the Company maintains
centralized supervisory controls and provides specialized services at the
corporate level.

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

CEMETERY OPERATIONS. The Company's seven cemeteries are located in Texas,
Kentucky, South Carolina, Florida and Idaho. Cemetery operations accounted for
approximately 7% of the Company's net revenues for the year ended December 31,
1995 and for the three months ended March 31, 1996. As of March 31, 1996, the
Company employed a staff of approximately 35 cemetery sales counselors for the
sale of interment rights and merchandise.

The Company's cemetery products and services include interment services,
the rights to interment in cemetery sites, including grave sites, crypts,
niches, and mausoleums, and related cemetery merchandise such as markers,
monuments, memorials and burial vaults. Cemetery operations generate revenues
through sales of interment rights, markers and memorials; fees for interment and
cremation services and marker and memorial installations; interest income 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
and cemetery interment rights and merchandise 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 agreement 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. Because of the significant market share of most of the Company's funeral
homes in their areas of operation, however, the Company does not aggressively
market preneed funeral contracts. Proceeds from the sale of preneed funeral
contracts are not recognized as revenues until the time the funeral service is
performed. The Company sold 1,667 preneed funeral contracts in the year ended
December 31, 1995 and 632 preneed funeral contracts in the three months ended
March 31, 1996. At March 31, 1996, the Company had a backlog of 9,335 preneed
funeral contracts to be delivered in the future.

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.

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 typically receives payment of at least 5% of the
sales price at the time the contract is signed. Allowances for customer
cancellations and refunds are accrued at the date of sale based upon historical
experience. Preneed cemetery sales represented approximately 66% of the
Company's net cemetery revenues for the year ended December 31, 1995 and
approximately 76% of the Company's net cemetery revenues for the three months
ended March 31, 1996.

PROPERTIES

At May 31, 1996, the Company operated 60 funeral homes and seven cemeteries
in 13 states. The Company owned the real estate and buildings of 42 of its
funeral homes and all of its cemeteries and leased facilities in connection with
18 of its funeral homes. The seven cemeteries operated by the Company cover a
total of approximately 300 acres. The Company's inventory of unsold developed
lots totaled approximately 37,000 at May 31, 1996. In addition, approximately
140 acres, or approximately 47% 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 following table sets forth certain information as of May 31, 1996
regarding the Company's funeral homes and cemeteries by state:

NUMBER OF
FUNERAL HOMES
------------------
STATE OWNED LEASED(1) CEMETERIES
- ------------------------------------- ----- --------- ----------

Texas................................ 9(2) 1 2
Ohio................................. 9 2 0
Kentucky............................. 6 4 1
Georgia.............................. 3 3 0
Tennessee............................ 3 1 0
Illinois............................. 0 4 0
Michigan............................. 1 2 0
Florida.............................. 2 1 1
Kansas............................... 2 0 0
South Carolina....................... 2 0 1
Washington........................... 2 0 0
Idaho................................ 2(3) 0 2
Alabama.............................. 1 0 0
----- -- -
Total........................... 42 18 7
===== == =
- ------------

(1) The leases with respect to these funeral homes have remaining terms ranging
from two to fifteen years, and the Company generally has a right of first
refusal on any proposed sale of the property where these funeral homes are
located.

(2) One of these funeral homes is located on property contiguous to and operated
in combination with a Company cemetery.

(3) These funeral homes are located on property contiguous to and operated in
combination with Company cemeteries.

The Company's corporate headquarters occupy approximately 11,000 square
feet of leased office space in Houston, Texas.

At March 31, 1996, the Company operated 200 vehicles, of which 150 were
owned and 50 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 major publicly held death care companies, Service
Corporation International ("SCI"), The Loewen Group Inc., Stewart Enterprises,
Inc. and Equity Corporation International, are substantially larger than the
Company and have significantly 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 substantially 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 12 years, which approximates the expected
timing of the performance of the services related to 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 was
approximately $16.2 million as of March 31, 1996.

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 110% of wholesale 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 cancelled. The merchandise and
service trust fund balances, in the aggregate, were approximately $61,000 as of
March 31, 1996.

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 $622,000 as of March 31, 1996.

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 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, 1996, the Company and its subsidiaries employed
approximately 220 full-time employees, 215 part-time employees and 90 preneed
sales counselors. 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.

MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company currently has a Board of Directors composed of four members.
Upon completion of the Offering, the Company will increase the size of the Board
of Directors to seven members and elect three additional directors. In
accordance with the Bylaws of the Company, the members of the Board of Directors
are divided into three classes and are elected for a term of office expiring at
the third succeeding annual stockholders' meeting following their election to
office or until a successor is duly elected and qualified. The Bylaws also
provide 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 1997, 1998 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 titles of the current
directors and executive officers of the Company and, in the case of the
directors, the expiration of their respective terms.

<TABLE>
<CAPTION>
EXPIRATION OF
NAME AGE POSITION WITH THE COMPANY TERM AS DIRECTOR
- ---------------------------------------- --- -------------------------------------------- ----------------

<S> <C> <C> <C>
Melvin C. Payne(1)...................... 53 President, Chief Executive Officer and 1997
Director
Mark W. Duffey(1)....................... 39 Executive Vice President, Chief Financial 1998
Officer and Director
Russell W. Allen........................ 49 Executive Vice President, Operations --
Mary-Lees Payne......................... 47 Vice President, Administration and --
Accounting
Reid A. Millard......................... 37 Vice President, Corporate Development --
C. Byron Snyder(1)...................... 47 Chairman of the Board of Directors 1997
Barry K. Fingerhut(1)(2)................ 50 Director 1998
Stuart W. Stedman(3)(4)................. 38 Director 1999
Robert D. Larrabee(2)(4)................ 60 Director 1997
Ronald A. Erickson(3)(4)................ 59 Director 1999
- ------------
</TABLE>

(1) Member of Executive Committee

(2) Member of Compensation Committee.

(3) Member of Audit Committee.

(4) To be elected following completion of the Offering.

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 President, Chief Executive Officer and a director of the Company since its
inception. Prior to co-founding the Company, Mr. Payne was a co-founder in 1990
of Sovereign Capital Partners, Inc., an investment and management advisory firm
which specialized in restructuring, recapitalizing and acquiring or selling
financially troubled companies. Mr. Payne has 25 years of broad investment,
banking and operating management experience, including positions as Executive
Vice President and director of Wedge Group, Inc., an investment holding company
with multi-industry operations, and with Texas Commerce Bank and Prudential
Insurance Company. Mr. Payne serves on the Board of Trustees of WNL Series
Trust, a mutual fund affiliated with Western National Life Insurance Company and
on the Board of Managers of Sovereign Capital Partners, LC, a private
acquisition company.

MARK W. DUFFEY, one of the three management founders of the Company, has
been Executive Vice President and Chief Financial Officer since the inception of
the Company and in 1995 became a director. Prior to co-founding the Company, Mr.
Duffey was a co-founder of Sovereign Capital Partners, Inc. with Mr. Payne. Mr.
Duffey was previously Chief Operating Officer of a private investment firm in
Houston
31

with interests in energy, real estate and public securities. Prior to 1989, he
held various positions with Mellon Bank over a ten-year period, both in
Pittsburgh and in Houston. He serves on the Board of Managers of Sovereign
Capital Partners, LC.

RUSSELL W. ALLEN joined the Company in June 1993 as Executive Vice
President, 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 of 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.

MARY-LEES PAYNE provided consulting services to the Company during the
initial start-up period beginning in January 1992 and became Controller of the
Company in June 1993 and Vice President, Administration and Accounting in June
1995. From 1984 to 1989, she served as Vice President and Controller for three
start-up companies, two in the death care industry. Prior to 1984, Ms. Payne was
an audit manager in the international accounting firm of Ernst & Young. Ms.
Payne is a certified public accountant and is not related to Melvin C. Payne.

REID A. MILLARD, one of the three management founders, served as Executive
Vice President until November 1993. From November 1993 until June 1996, Mr.
Millard was active in various positions in operations and corporate development.
In June 1996, Mr. Millard became Vice President, Corporate Development 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 owner
relationships. 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 Chairman of the Board of Directors of the Company
since its inception. Mr. Snyder is presently owner and President of Relco
Refrigeration Co., a distributor of refrigeration equipment, which he acquired
in 1992. Prior to co-founding the Company, 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, 1995, GeoCapital managed accounts
having a market value of approximately $1.8 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, media or entertainment industries. Mr. Fingerhut presently is a
director of Millbrook Press, Inc., a publisher of children's non-fiction books,
and Glasser Legal Works, Inc., a niche publisher of legal texts, journals and
seminars. 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.

STUART W. STEDMAN will become a director of the Company upon consummation
of the Offering. 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 Manager of Strand
Energy, L.L.C., a private exploration and production company.

ROBERT D. LARRABEE will become a director of the Company upon consummation
of the Offering. 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. He is the founder,
president and director of Valley Bank, Clarkston, Washington; founder, Chairman
of the Board and President of Purple Cross Insurance Company; and founder of
Lewis-Clark Savings and Loan Association. He also serves on the Board of
Directors of Sterling Savings Association and, until 1995, served on the Board
of Directors of Laurentian Capital Corporation.

RONALD A. ERICKSON will become a director of the Company upon consummation
of the Offering. 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. Mr.
Erickson serves on the Board of Directors of First Bank National Association.

EXECUTIVE COMPENSATION

The following table sets forth information with respect to the President
and Chief Executive Officer of the Company and each of the two other most highly
compensated executive officers of the Company for the year ended December 31,
1995. No other executive officer of the Company had salary and bonus which
exceeded $100,000 in 1995:

SUMMARY COMPENSATION TABLE

ANNUAL COMPENSATION
NAME AND PRINCIPAL POSITION IN THE --------------------- ALL OTHER
COMPANY SALARY BONUS COMPENSATION
- ------------------------------------- ---------- --------- ------------

Melvin C. Payne, President, Chief
Executive Officer and Director..... $ 175,000 -- --
Mark W. Duffey, Executive Vice
President, Chief Financial Officer
and Director....................... $ 150,000 -- --
Russell W. Allen, Executive Vice
President, Operations.............. $ 100,000 $ 20,000 $6,000(1)

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

(1) Represents compensation for automobile allowance.

EMPLOYMENT AGREEMENTS

The Company intends to enter into separate employment agreements with each
of Melvin C. Payne, Mark W. Duffey and Russell W. Allen prior to the Offering.
Each of the employment agreements will have an initial term of five years.
Pursuant to these agreements, Messrs. Payne, Duffey and Allen will be entitled
to receive a salary and bonus to be determined on an annual basis by the Board
of Directors. In addition, each agreement will contain a covenant prohibiting
the employee from competing with the Company during the period they are
receiving compensation under their agreements. In addition, the agreements will
contain customary benefits and perquisites.

COMPENSATION OF DIRECTORS

Following the Offering, it is anticipated that in lieu of cash compensation
each director of the Company who is not an officer or employee of the Company or
any of its subsidiaries (a "nonemployee director") will be entitled to options
as described below and will be reimbursed for expenses incurred in the attending
meetings of the Board of Directors and Committees thereof. The 1996 Nonemployee
Directors' Stock Option Plan (the "Nonemployee Directors' Plan") has been
adopted for the nonemployee directors. Under the Nonemployee Directors' Plan,
each individual who is a nonemployee director as of the date of the Offering,
will receive, as of such date, a nonqualified stock option (an "Initial Option")
to purchase 15,000 shares (which amount shall be increased to 25,000 if the
nonemployee director also serves 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 $ per share. Further, each nonemployee director will receive,
as of the date of each annual meeting of the stockholders of the Company, a
nonqualified stock option (an "Annual Option") to purchase 6,000 shares of Class
A Common Stock. Each Annual Option will have an exercise price equal to the fair
market value of the Class A Common Stock on the date of grant. The exercise
price under an option granted pursuant to the Nonemployee Directors' Plan may be
paid in cash, in shares of Class A Common Stock (valued at fair market value at
the date of exercise), or by a combination

of such means of payment. The number of shares covered by each option and the
exercise price per share will be proportionately adjusted in the event of a
stock split, reverse stock split, stock dividend, or similar capital adjustment
effected without receipt of consideration by the Company. The aggregate number
of shares of Class A Common Stock that may be issued pursuant to the exercise of
options granted under the Nonemployee Directors' Plan cannot, on the date of the
grant of any such option, exceed an amount equal to % of the number of then
outstanding shares of Class A Common Stock. Shares issuable pursuant to the
Nonemployee Directors' Plan may be authorized but unissued shares or reacquired
shares, and the Company may purchase shares required for this purpose.

Options granted under the Nonemployee Directors' Plan will have a maximum
term of ten years. Annual Options will vest immediately. An Initial Option will
vest with respect to one-third of the shares subject to such option in four
equal annual installments beginning on the first anniversary of the date of the
Offering. An Initial Option will vest immediately with respect to the remaining
two-thirds of the shares subject to such option if, within four years after the
date of the Offering, the average of the fair market value of the Class A Common
Stock over twenty consecutive trading days is greater than or equal to $ . "Fair
market value" is defined as the average of the high and low prices for the Class
A Common Stock on the specified date as reported by the Nasdaq National Market.
If the stock price target described above is not timely satisfied, then an
Initial Option will vest with respect to the two-thirds of the shares subject to
such option in four equal annual installments beginning on the fifth anniversary
of the date of the Offering. All options granted under the Nonemployee
Directors' Plan will also become fully vested and exercisable in full upon the
occurrence of a "Change of Control" while a nonemployee director is a member of
the Board of Directors or in the event that a nonemployee director's membership
on the Board of Directors terminates by reason of death or disability. The
Nonemployee Directors' Plan provides that a Change of Control occurs (i) if the
Company is dissolved and liquidated, (ii) if the Company is not the surviving
entity in any merger, consolidation, or reorganization, (iii) if the Company
sells, leases or exchanges, or agrees to sell, lease, or exchange, all or
substantially all of its assets, (iv) if any person, entity or group acquires or
gains ownership or control of more than 50% of the outstanding shares of the
Company's voting stock (based upon voting power), or (v) if, after a contested
election of directors, the persons who were directors before such election cease
to constitute a majority of the Board of Directors. Upon termination of a
nonemployee director's membership on the Board of Directors, the nonemployee
director will have three months (12 months if such termination is by reason of
death or disability) to exercise his or her options, but only to the extent such
options are vested as of the date of such termination.

A nonemployee director will not recognize any taxable income at the time an
option is granted under the Nonemployee Directors' Plan. Ordinary income will be
recognized by a nonemployee director at the time of exercise in an amount equal
to the excess of the fair market value of the shares of Class A Common Stock on
the date of exercise over the option price for such shares. However, if other
shares of Class A Common Stock have been purchased by a nonemployee director
within six months of the exercise of an option, recognition of the income
attributable to such exercise may under certain circumstances be postponed for a
period of up to six months from the date of such purchase of such other shares
of Class A Common Stock due to liability to suit under Section 16(b) of the
Exchange Act. If applicable, one effect of any such postponement would be to
measure the amount of the nonemployee director's taxable income by reference to
the fair market value of such shares at the same time such liability to suit
under Section 16(b) of the Exchange Act no longer exists (rather than at the
earlier date of the exercise of the option). Upon the nonemployee director's
exercise of an option granted under the Nonemployee Directors' Plan, the Company
may claim a deduction for compensation paid at the same time and in the same
amount as ordinary income is recognized by the nonemployee director.

The Nonemployee Directors' Plan is not qualified under section 401(a) of
the Internal Revenue Code of 1986, as amended (the "Code").

Based upon current law and published interpretations, the Company does not
believe the Nonemployee Directors' Plan is subject to any of the provisions of
the Employee Retirement Income Security Act of 1974.

INCENTIVE PLANS

The Company has adopted two incentive compensation plans designed to align
the interests of the executives and employees with those of its stockholders.

1995 STOCK INCENTIVE PLAN. The Company has adopted the 1995 Stock Incentive
Plan (the "1995 Plan"). The maximum number of shares of Common Stock which may
be issued pursuant to such plan is 400,000. Awards under the 1995 Plan made
prior to the date of the Offering will be satisfied in shares of Class B Common
Stock, and awards under the 1995 Plan made on or after the date of the Offering
will be satisfied in shares of Class A Common Stock. Under the 1995 Plan, the
Company may grant incentive stock options intended to qualify under Section 422
of the Code to eligible employees of the Company, and options that are not
qualified as incentive stock options (non-statutory stock options) to any
eligible individual. The exercise price will be determined by the Compensation
Committee and will not be less than the fair market value of the Class A Common
Stock on the date that the option is granted. The exercise price may be paid in
cash, in shares of Class A Common Stock (valued at fair market value at the date
of exercise) or by a combination of such means of payment as may be determined
by the Compensation Committee. The 1995 Plan provides that in the event a holder
pays all or a part of the exercise price of an incentive stock option or a
non-statutory stock option in shares of Class A Common Stock, the Committee may
grant a corresponding "reload option," which is not qualified as an incentive
stock option, for an equal number of shares of Class A Common Stock. Reload
options may be granted concurrently with the award of a stock option or
subsequent to the award of a stock option. Additionally, alternate appreciation
rights may be granted to eligible individuals in conjunction with options.
Alternate appreciation rights give the holder, among other things, the right to
a payment of Class A Common Stock in an amount equal to the difference between
the fair market value of the Class A Common Stock at the date of exercise and
the option exercise price. In conjunction with options and alternate
appreciation rights, "limited rights" may also be granted to eligible
individuals. Limited rights give the holder, among other things, the right to
cash in an amount equal to the difference between the fair market value of the
Class A Common Stock at the date of exercise and the option exercise price.
Limited rights are exercisable for a period of seven months following the date
of a "Change in Control." The 1995 Plan provides that a Change in Control occurs
(i) if the Company is dissolved and liquidated, (ii) if the Company is not the
surviving entity in any merger, consolidation, or reorganization, (iii) if the
Company sells, leases or exchanges, or agrees to sell, lease, or exchange, all
or substantially all of its assets, (iv) if any person, entity or group acquires
or gains ownership or control of more than 50% of the outstanding shares of the
Company's voting stock (based upon voting power), or (v) if, after a contested
election of directors, the persons who were directors before such election cease
to constitute a majority of the Board of Directors. The 1995 Plan also provides
for the issuance of shares of Class A Common Stock which may be subject to
forfeiture under circumstances specified by the Compensation Committee at the
time of the award of such shares ("bonus stock"). Pursuant to a bonus stock
award, shares of Class A Common Stock will be issued to the individual at the
time the award is made without any payment to the Company (other than for any
payment amount determined by the Compensation Committee in its discretion), but
such shares may be, if so specified by the Compensation Committee, subject to
certain restrictions on the disposition thereof and certain obligations to
forfeit such shares to the Company, as determined in the discretion of the
Compensation Committee.

The 1995 Plan provides that the total number of shares covered by each
award will be proportionately adjusted in the event of a stock split, reverse
stock split, or other similar capital adjustment effected without the receipt of
consideration by the Company. Further, the total number of shares covered by the
plan, the exercise price per share under each option, and any other matters
deemed appropriate by the Compensation Committee, may be appropriately adjusted
in event of a stock dividend or distribution, recapitalization, merger,
consolidation, split-up, combination, exchange of shares, or similar
transaction.

Directors, executive officers and other employees of the Company and its
subsidiary and affiliate corporations and former owners of funeral homes or
cemeteries that have been acquired by the Company are eligible to receive awards
under the 1995 Plan. The 1995 Plan is administered by the Compensation
Committee. Subject to the terms of the 1995 Plan, the Compensation Committee is
authorized to select the

recipients of awards from among those eligible and to establish the number of
shares that may be issued under each award.

1996 STOCK OPTION PLAN. The Company has adopted the 1996 Stock Option Plan
(the "1996 Plan") and 600,000 shares of Class A Common Stock have been reserved
for issuance pursuant to such plan. Under the 1996 Plan, the Company may grant
both incentive stock options intended to qualify under Section 422 of the Code,
and options that are not qualified as incentive stock options. The exercise
price will be determined by the Compensation Committee and will be no less than
the fair market value of the Class A Common Stock on the date that the option is
granted. The exercise price may be paid in cash, in shares of Class A Common
Stock (valued at fair market value at the date of exercise) or by a combination
of such means of payment, as may be determined by the Compensation Committee.

The 1996 Plan provides that the total number of shares covered by such
plan, the number of shares covered by each option, and the exercise price per
share under each option will be proportionately adjusted in the event of a stock
split, reverse stock split, stock dividend, or similar capital adjustment
effected without receipt of consideration by the Company.

All employees of the Company and its subsidiary corporations (including an
employee who may also be a director of any such company) are eligible to receive
options under the 1996 Plan. The 1996 Plan is administered by the Compensation
Committee of the Board of Directors. Subject to the terms of the 1996 Plan, the
Compensation Committee is authorized to select the recipients of options from
among those eligible and to establish the number of shares that may be issued
under each option.

FEDERAL INCOME TAX ASPECTS OF THE 1995 PLAN AND THE 1996 PLAN. As a general
rule, no federal income tax is imposed on the optionee upon the grant of a
compensatory non-statutory stock option such as those under the 1995 Plan and
the 1996 Plan (whether or not including a stock appreciation right, an alternate
appreciation right or a limited right) and the Company is not entitled to a tax
deduction by reason of such grant. Generally, upon the exercise of a
non-statutory stock option that has been granted as compensation for services,
the optionee will be treated as receiving compensation taxable as ordinary
income in the year of exercise in an amount equal to the excess of the fair
market value of the shares on the date of exercise over the option price paid
for such shares. In the case of the exercise of a stock appreciation right, an
alternate appreciation right, or a limited right, which has been granted as
compensation for services, the optionee will be treated as receiving
compensation taxable as ordinary income in the year of exercise in an amount
equal to the cash received plus the fair market value of the shares distributed
to the optionee. Upon the exercise of a non-statutory stock option, a stock
appreciation right, an alternate appreciation right, or a limited right, which
has been granted as compensation for services and subject to the application of
Section 162(m) of the Code as discussed below, the Company may claim a deduction
for compensation paid at the same time and in the same amount as compensation
income is recognized to the optionee assuming any federal income tax withholding
requirements are satisfied. Upon a subsequent disposition of the shares received
upon exercise of such award, any appreciation after the date of exercise should
qualify as capital gain. If such shares received upon the exercise of an option,
a stock appreciation right, or an alternate appreciation right are transferred
to the optionee subject to certain restrictions, then the taxable income
realized by the optionee, unless the optionee elects otherwise, and the
Company's tax deduction (assuming any federal income tax withholding
requirements are satisfied) should be deferred and should be measured at the
fair market value of the shares at the time the restrictions lapse. The
restrictions imposed on officers, directors and 10% shareholders by Section
16(b) of the Exchange Act is such a restriction during the period prescribed
thereby if other shares have been purchased by such an individual within six
months of the exercise of a non-statutory stock option, a stock appreciation
right, or an alternate appreciation right.

The incentive stock options under the 1995 Plan and the 1996 Plan are
intended to constitute "incentive stock options" within the meaning of Section
422 of the Code. Incentive stock options are subject to special federal income
tax treatment. No federal income tax is imposed on the optionee upon the grant
or the exercise of an incentive stock option if the optionee does not dispose of
shares acquired pursuant to the exercise within the two-year period beginning on
the date the option was granted or within

the one-year period beginning on the date the option was exercised
(collectively, the "holding period"). In such event, the Company would not be
entitled to any deduction for federal income tax purposes in connection with the
grant or exercise of the option or the disposition of the shares so acquired.
With respect to an incentive stock option, the difference between the fair
market value of the stock on the date of exercise and the exercise price must be
included in the optionee's alternative minimum taxable income. However, if the
optionee exercises an incentive stock option and disposes of the shares received
in the same year and the amount realized is less than the fair market value of
the shares on the date of exercise, the amount included in alternative minimum
taxable income will not exceed the amount realized over the adjusted basis of
the shares.

Upon disposition of the shares received upon exercise of an incentive stock
option after the holding period, any appreciation of the shares above the
exercise price constitutes capital gain. If an optionee disposes of shares
acquired pursuant to his or her exercise of an incentive stock option prior to
the end of the holding period, the optionee will be treated as having received,
at the time of disposition, compensation taxable as ordinary income. In such
event, and subject to the application of Section 162(m) of the Code as discussed
below, the Company may claim a deduction for compensation paid at the same time
and in the same amount as compensation is treated as received by the optionee.
The amount treated as compensation is the excess of the fair market value of the
shares at the time of exercise (or in the case of a sale on which a loss would
be recognized, the amount realized on the sale if less) over the exercise price;
any amount realized in excess of the fair market value of the shares at the time
of exercise would be treated as short-term or long-term capital gain, depending
on the holding period of the shares.

An individual who has been granted bonus stock under the 1995 Plan as
compensation for services will not realize taxable income at the time of grant,
and the Company will not be entitled to a deduction at that time, assuming that
there are restrictions on the stock which constitute a substantial risk of
forfeiture for federal income tax purposes. Upon expiration of any such
forfeiture restrictions (i.e., as shares become vested), a holder who has
received such bonus stock as compensation for services will realize ordinary
income in an amount equal to the excess of the fair market value of the shares
at such time over the amount, if any, paid for such shares, and, subject to the
application of Section 162(m) of the Code as discussed below, the Company will
be entitled to a corresponding deduction. Any dividends paid to such holder in
respect of bonus stock during the period that the forfeiture restrictions apply
will also be compensation to such holder and deductible as such by the Company.
Notwithstanding the foregoing, the recipient of bonus stock that is granted as
compensation for services may elect to be taxed at the time of grant of the
bonus stock based upon the fair market value of the shares on the date of the
award, in which case (a) subject to Section 162(m) of the Code, the Company will
be entitled to a deduction at the same time and in the same amount, (b)
dividends paid to the recipient during the period the forfeiture restrictions
apply will be taxable as dividends and will not be deductible by the Company,
and (c) there will be no further federal income tax consequences when the
forfeiture restrictions lapse.

Section 162(m) of the Code precludes a public corporation from taking a
deduction in a taxable year for compensation in excess of $1 million paid to its
chief executive officer or any of its four other highest-paid officers. However,
compensation that qualifies under Section 162(m) of the Code as
"performance-based" is specifically exempt from the deduction limit. Further,
the regulations issued under Section 162(m) of the Code provide a special
transitional rule for privately held corporations that become publicly held
pursuant to an initial public offering. Pursuant to this transitional rule, the
Code Section 162(m) deduction limit will not apply to any remuneration paid
pursuant to a plan that existed during the period in which the corporation was
not publicly held, to the extent that the prospectus accompanying the initial
public offering disclosed information concerning such plan that satisfied all
applicable securities laws then in effect. This transitional rule may be relied
upon until the earliest of (i) the expiration of the plan, (ii) the material
modification of the plan, (iii) the issuance of all employer stock or other
compensation under the plan, or (iv) the first meeting of stockholders at which
directors are to be elected that occurs after the close of the third calendar
year following the calendar year in which the initial public offering occurred.
The transitional rule will apply to any compensation received pursuant to an
award under the 1995 Plan or the 1996 Plan that is made prior to the earliest of
the dates specified in the preceding sentence. Upon

expiration of the transitional relief, compensation relating to awards
thereafter granted under the 1995 Plan or the 1996 Plan would be subject to the
deduction limitations of Code Section 162(m). However, the Company currently
anticipates that it will amend the 1995 Plan and the 1996 Plan and seek
stockholder approval of the amended plans prior to the expiration of the
transitional relief so that the compensation paid under such plans (other than
perhaps bonus stock awarded under the 1995 Plan) can qualify under Code Section
162(m) as "performance-based."

Neither the 1995 Plan nor the 1996 Plan is qualified under section 401(a)
of the Code.

The comments set forth in the above paragraphs are only a summary of
certain of the Federal income tax consequences relating to the 1995 Plan and the
1996 Plan. No consideration has been given to the effects of state, local, or
other tax laws on the 1995 Plan, the 1996 Plan, the Company or the award
recipients.

Based upon current law and published interpretations, the Company does not
believe the 1995 Plan or the 1996 Plan is subject to any of the provisions of
the Employee Retirement Income Security Act of 1974.

CERTAIN TRANSACTIONS

In connection with the Company's formation in June 1991, C. Byron Snyder,
Chairman of the Board of Directors, provided an initial capital commitment of $6
million. The Snyder Notes bear interest at a predetermined rate plus 3%, subject
to adjustment in certain circumstances, payable annually in the form of cash or
additional subordinated notes. A portion of the proceeds of the Offering will be
used to repay such loans.

The Company has an agreement with ACCO Collection Company ("ACCO") , which
is owned by Mr. Snyder, under which the Company may transfer responsibility for
collection of past due accounts receivable to ACCO in return for a percentage of
the collections received. To date, no payments have been made to ACCO by the
Company.

The Company pays Mr. Snyder a $25,000 annual consulting fee in return for
certain consulting services provided to the Company. In addition, the Company
pays Mr. Snyder $40,000 per year as consideration for Mr. Snyder's guarantee of
a portion of the Company's loan from TCB.

Robert D. Larrabee, a director of the Company and former owner of certain
properties recently acquired by the Company, 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.

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of May 31, 1996, 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.

<TABLE>
<CAPTION>
PERCENT OF
COMMON STOCK
OWNED PERCENT OF
SHARES OF -------------------- VOTING CONTROL
CLASS B BEFORE AFTER AFTER
COMMON STOCK OFFERING OFFERING OFFERING
------------ -------- -------- --------------
<S> <C> <C> <C>
C. Byron Snyder(1)...................... % % %
Melvin C. Payne(2)......................
Mark W. Duffey..........................
Barry K. Fingerhut(3)...................
Reid A. Millard.........................
Stuart W. Stedman.......................
All directors and executive officers as
a group
( persons, including the directors
and executive officers named above)...
- ------------
</TABLE>

(1) Includes shares owned by 1996 Snyder Family Partnership, Ltd.,
shares owned by the C. Byron Snyder 1996 Trust and shares
owned by the Martha Ann Snyder 1996 Trust.

(2) Includes shares owned by 1996 Payne Family Partnership, Ltd.,
shares owned by the Melvin C. Payne 1996 Trust and shares owned by
the Karen P. Payne 1996 Trust.

(3) Includes holdings of Applewood Associates, L.P. and shares held jointly with
Michael J. Marocco.

DESCRIPTION OF CAPITAL STOCK

The authorized capital stock of the Company consists of shares of common
stock ("Common Stock") and 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 , 1996, shares of Class B Common Stock were outstanding and held of
record by persons. Upon completion of the Offering, shares of Class A Common
Stock will be outstanding after giving effect to the sale of shares of Class A
Common Stock offered hereby. In addition, shares of Class B Common Stock will be
outstanding after giving effect to the mandatory conversion of all outstanding
shares of Preferred Stock (other than the Series D Preferred Stock) into shares
of Class B Common Stock. This total excludes
shares of Common Stock issuable upon exercise of outstanding options at ,
1996.

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.

It is anticipated that certain holders of Class B Common Stock will enter
into a voting agreement (the "Voting Agreement"). The parties to the Voting
Agreement will include Messrs. Payne, Duffey, Fingerhut, Millard, Snyder and
Stedman and certain other stockholders. Pursuant to the Voting Agreement, each
stockholder who is a party will agree 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 (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.
At any time when the Board of Directors and the holders of a majority of the
outstanding shares of Class B Common Stock approve the conversion of all of the
shares of Class B Common Stock into shares of Class A Common Stock, then the
outstanding shares of Class B Common Stock will be automatically converted into
shares of Class A Common Stock. In any event, any 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 May 31, 1996, the Company's outstanding Preferred Stock consisted of
7,000,000 shares of Series A Preferred Stock, 555,000 shares of Series B
Preferred Stock, 8,500,000 shares of Series C Preferred Stock and 6,036,616
shares of Series D Preferred Stock. Upon effectiveness of the Registration
Statement, all outstanding shares of Preferred Stock (other than the Series D
Preferred Stock) will have been automatically converted into shares of Class B
Common Stock.

The Company is authorized to issue 40,000,000 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 will provide
flexibility in connection with possible corporate transactions. The issuance of
Preferred Stock, however, could adversely affect the voting power of holders of
Common Stock 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

Through May 31, 1996, the Company has issued 6,036,616 shares of Series D
Preferred Stock in four different transactions. These shares will remain
outstanding following the Offering. 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 is convertible at any time into Class B Common
Stock at an initial conversion base price ranging from $ to $ per share,
subject to adjustment for certain antidilutive events. For the first six months
following consummation of the Offering, the conversion price will be the lesser
of the initial conversion price or the initial price of the Class A Common Stock
to the public in the Offering. Thereafter, the conversion price increases every
six months by $.50 until the last day of the eighteenth month following the
consummation of the Offering, whereupon the conversion price is 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.

The conversion price at which Series D Preferred Stock is converted prior
to the eighteen month anniversary of the consummation of the Offering is subject
to reduction for certain dilutive issuances and to adjustments for stock
dividends, splits and combinations.

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
Certificate of Incorporation, bylaws or Certificate of Designations which would
adversely effect 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.

REGISTRATION RIGHTS. Until December 31, 2005 or, as to any holder of Series
D Preferred Stock, upon (a) the consent of the holder, (b) the date such holder
owns less than the equivalent of 10,000 shares of fully diluted Class A Common
Stock or Class B Common Stock, or (c) the date on which such holder is able to
dispose of all shares of Class B Common Stock issuable upon conversion of the
Series D Preferred Stock in one three month period under Rule 144, the holders
of Series D Preferred Stock have piggyback registration rights on any offering
by the Company of Common Stock to the public for cash except (i) shares issuable
upon the exercise of employee or director stock options, or (ii) shares issued
in mergers wherein the Company is the surviving corporation. The Company is
required to give holders of Series D Preferred Stock at least 30 days prior
written notice of the filing of a registration statement, including the
estimated price range of the offering. The holders of the Series D Preferred
Stock have waived their registration rights with respect to a Registration
Statement filed by the Company with respect to the Offering.

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's 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 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 Certificate of Incorporation 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 Certificate of Incorporation 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 Certificate of Incorporation 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 stockholder's
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 stockholder's nominees stating the nominee's
acceptance of the nomination and indicating the nominee's 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 Certificate of Incorporation provides that approval by the
holders of at least 66.7% of the voting power of the outstanding voting stock of
the Company is required to amend the provisions of the Certificate of
Incorporation previously discussed and certain other provisions.

TRANSFER AGENT AND REGISTRAR

The transfer agent and registrar for the Common Stock is .

SHARES ELIGIBLE FOR FUTURE SALE

Upon completion of the Offering, the Company will have shares of Class A
Common Stock and shares of Class B Common Stock outstanding. The shares of Class
A Common Stock offered hereby will be freely tradable without restriction or
further registration under the Securities Act, except for shares sold by persons
deemed to be "affiliates" of the Company or acting as "underwriters," as those
terms are defined in the Securities Act. The shares of Class B Common Stock will
be "restricted securities" within the meaning of Rule 144 under the Securities
Act and will be eligible for resale subject to the volume, manner of sale,
holding period and other limitations of Rule 144. The remaining "restricted"
shares will become eligible for resale pursuant to Rule 144 from time to time
thereafter.

In general, under Rule 144, as currently in effect, a person (or persons
whose shares are required to be aggregated) who has beneficially owned, for at
least two years, shares of Common Stock that have not been registered under the
Securities Act or that were acquired from an "affiliate" of the Company is
entitled to sell within any three-month period the number of shares of Common
Stock which does not exceed the greater of one percent of the number of then
outstanding shares or the average weekly reported trading volume during the four
calendar weeks preceding the sale. Sales under Rule 144 are also subject to
certain notice requirements and to the availability of current public
information about the Company and must be made in unsolicited brokers'
transactions or to a market maker. A person (or persons whose shares are
aggregated) who is not an "affiliate" of the Company under the Securities Act
during the three months preceding a sale and who has beneficially owned such
shares for at least three years is entitled to sell such shares under Rule 144
without regard to the volume, notice, information and manner of sale provisions
of such Rule.

An aggregate of shares of Class A Common Stock and
shares of Class B Common Stock are reserved for issuance to
employees and directors of the Company pursuant to the 1995 Stock Incentive
Plan, shares of Class A Common Stock are reserved for issuance to employees and
directors of the Company pursuant to the 1996 Stock Incentive Plan and shares of
Class A Common Stock are reserved for issuance to outside directors under the
1996 Nonemployee Directors Plan. The Company intends to file a registration
statement on Form S-8 covering the issuance of shares of Common Stock pursuant
to the 1996 Stock Incentive Plan. Accordingly, shares issued pursuant to the
1996 Stock Incentive Plan will be freely tradeable, except for any shares held
by an "affiliate" of the Company.

In addition, the holders of Series D Preferred Stock have been granted
certain "piggy-back" registration rights if the Company proposes to undertake a
public offering. Such holders of Series D Preferred Stock have waived their
registration rights in connection with the Offering.

Prior to this offering, there has been no market for the Class A Common
Stock. No predictions can be made of the effect, if any, that market sales of
shares of Class A Common Stock or the availability of such shares for sale will
have on the market price prevailing from time to time. Nevertheless, sales of
significant amounts of Class A Common Stock could adversely affect the
prevailing market price of Class A Common Stock, as well as impair the ability
of the Company to raise capital through the issuance of additional equity
securities.

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") and The Chicago Corporation are
acting as representatives (the "Representatives"), has severally agreed to
purchase from the Company the number of shares of Class A Common Stock set forth
below opposite their respective names. The Underwriters are committed to
purchase all of such shares if any are purchased. Under certain circumstances,
the commitments of non-defaulting Underwriters may be increased as set forth in
the Purchase Agreement.

NUMBER
UNDERWRITER OF SHARES
- ------------------------------------- ------------

Merrill Lynch, Pierce, Fenner & Smith
Incorporated......................................
The Chicago Corporation........................................

Total.....................................................

The Representatives have advised the Company that the Underwriters propose
to offer the shares of Class A Common Stock to the public initially 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 $ per share.
The Underwriters may allow, and such dealers may re-allow, a discount not in
excess of $ per share on sales to certain other dealers. After the initial
public offering, the public price, concession and discount may be changed.

The Company has granted the Underwriters an option, exercisable by the
Representatives, to purchase up to additional shares of Class A Common Stock at
the initial public offering price, 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.

Prior to the Offering, there has been no public market for the Class A
Common Stock. There can be no assurance that an active market for the Class A
Common Stock will develop upon completion of the Offering or, if developed, that
such market will be sustained. The initial public offering price of the Class A
Common Stock will be determined through negotiations between the Company and the
representatives of the Underwriters, and may bear no relationship to the market
prices of the Class A Common Stock after this offering. Prices for the Class A
Common Stock after this offering may be influenced by a number of factors,

including the depth and liquidity of the market for the Class A Common Stock,
investor perceptions of the Company and the death care industry in general, and
general economic and other conditions.

At the request of the Company, the Underwriters have reserved shares of
Class A Common Stock for sale at the initial public offering price to directors,
officers, employees, business associates and other persons with whom the Company
has relationships. The number of shares of Class A Common Stock available for
sale to the general public will be reduced to the extent such persons purchase
such reserved shares. Any reserved shares which are not so purchased will be
offered by the Underwriters to the general public on the same basis as the other
shares offered hereby.

The Chicago Corporation acted as placement agent for the private placement
of $8.5 million of the Company's Series C Preferred Stock, completed in
September 1995, for which The Chicago Corporation received a customary fee.

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.

EXPERTS

The consolidated financial statements 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
included herein in reliance upon the authority of said firm as experts in giving
said reports.

The financial statements for Hennessy Funeral Home, Inc. included in this
Prospectus and Registration Statement have been audited by Kee & Associates,
Inc., independent public accountants, as indicated in their reports with respect
thereto and included herein in reliance upon the authority of said firm as
experts in giving said reports.

AVAILABLE INFORMATION

The Company has not previously been subject to the reporting requirements
of the Securities Exchange Act of 1934, as amended. 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 offer and sale of
Class A Common Stock pursuant to this Prospectus. This Prospectus, filed as a
part of the Registration Statement, does not contain all of the information set
forth in the Registration Statement or the exhibits and schedules thereto in
accordance with the rules and regulations of the Commission and reference is
hereby made to such omitted information. Statements made in this Prospectus
concerning the contents of any contract, agreement or other document filed as an
exhibit to the Registration Statement are summaries of the terms of such
contracts, agreements or documents and are not necessarily complete. Reference
is made to each such exhibit for a more complete description of the matters
involved and such statements shall be

deemed qualified in their entirety by such reference. The Registration Statement
and the exhibits and schedules thereto filed with the Commission may be
inspected, without charge, and copies may be obtained at prescribed rates, at
the public reference facility maintained by the Commission at Judiciary Plaza,
450 Fifth Street, N.W., Washington, D.C. 20549 and at the regional offices of
the Commission located at 7 World Trade Center, 13th Floor, New York, New York
10048 and Citicorp Center, 500 West Madison Street, Suite 1400, Chicago,
Illinois 60621-2511. For further information pertaining to the Class A Common
Stock offered by this Prospectus and the Company, reference is made to the
Registration Statement.

The Company intends to furnish its stockholders with annual reports
containing audited financial statements certified by independent auditors and
quarterly reports for the first three quarters of each fiscal year containing
unaudited financial statements.
46

INDEX TO FINANCIAL STATEMENTS

CARRIAGE SERVICES, INC. - CONSOLIDATED FINANCIAL STATEMENTS
Report of Independent Public Accountants......................... F-2
Consolidated Balance Sheets as of
December 31, 1994 and 1995 and March 31, 1996.................. F-3
Consolidated Statements of Operations for
the Years Ended December 31, 1993, 1994 and 1995
and the Three Months Ended March 31, 1995 and 1996............. F-4
Consolidated Statements of Changes in Stockholders' Equity
for the Years Ended December 31, 1993, 1994 and 1995 and
the Three Months Ended March 31, 1996.......................... F-5
Consolidated Statements of Cash Flows for the Years
Ended December 31, 1993, 1994 and 1995 and the
Three Months Ended March 31, 1995 and 1996..................... F-6
Notes to Consolidated Financial Statements....................... F-7

CARRIAGE SERVICES, INC. - UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Pro Forma Consolidated Balance Sheet as of
March 31, 1996................................................. F-20
Unaudited Pro Forma Consolidated Statements of Operations for the
Year Ended December 31, 1995 and the Three Months
Ended March 31, 1996........................................... F-21
Notes to the Unaudited Pro Forma Consolidated Financial Statements F-22

CFS 1996 GROUP:
Report of Independent Public
Accountants.................................................... F-26
Statements of Operations for the Period from
January 1, 1996 to April 29, 1996, the Years Ended December
31, 1995 and December 31, 1994, and the Three Months Ended
December 31, 1993.............................................. F-27
Statements of Cash Flows for the Period from January 1, 1996
to April 29, 1996, the Years Ended December 31, 1995 and
December 31, 1994, and the Three Months Ended December 31,
1993........................................................... F-28
Statements of Stockholder's Equity for the Period from
January 1, 1996 to April 29, 1996, the Years Ended
December 31, 1995 and December 31, 1994, and the Three
Months Ended December 31, 1993................................. F-29
Notes to Financial Statements.................................... F-30

KUBACH-SMITH FUNERAL HOME, INC.:
Report of Independent Public Accountants......................... F-32
Statement of Operations for the Period from October 1, 1993
to September 6, 1994............................................. F-33
Statement of Cash Flows for the Period from October 1, 1993
to September 6, 1994............................................. F-34
Statement of Shareholders' Equity for the Period from
October 1, 1993 to September 6, 1994.............................. F-35
Notes to Financial Statements..................................... F-36

LUSK FUNERAL HOME, INC.:
Report of Independent Public Accountants.......................... F-38
Statements of Operations for the Years Ended December 31, 1995
and December 31, 1994 and the Three Months Ended
December 31, 1993............................................... F-39
Statements of Cash Flows for the Years Ended December 31, 1995
and December 31, 1994 and the Three Months
Ended December 31, 1993......................................... F-40
Statements of Shareholders' Deficit for the Years Ended
December 31, 1995 and December 31, 1994 and the
Three Months Ended December 31, 1993............................ F-41
Notes to Financial Statements..................................... F-42

F-1

WEST END FUNERAL HOME, INC.:
Report of Independent Public
Accountants..................................................... F-45
Statements of Operations for the Period from January 1, 1995 to
May 10, 1995, the Year Ended December 31,
1994, and the Three Months Ended December 31, 1993.............. F-46
Statements of Cash Flows for the Period from January 1, 1995 to
May 10, 1995, the Year Ended December 31,
1994, and the Three Months Ended December 31, 1993.............. F-47
Statements of Shareholders' Equity for the Period from
January 1, 1995 to May 10, 1995, the Year Ended
December 31, 1994, and the Three Months Ended December 31, 1993. F-48
Notes to Financial Statements..................................... F-49

HENNESSY FUNERAL HOME, INC.:
Report of Independent Public
Accountants..................................................... F-51
Statements of Operations for the Years Ended December 31, 1993,
December 31, 1994, December 31, 1995 and
the Ten Weeks Ended March 8, 1996............................... F-52
Statements of Cash Flows for the Period from December 1, 1995 to
February 29, 1996, and the Years Ended
November 30, 1995 and November 30, 1994.......................... F-53
Notes to Financial Statements....................................... F-54

JAMES E. DRAKE FUNERAL HOME, INC.:
Report of Independent Public Accountants............................ F-57
Statements of Operations for the Period from December 1, 1995 to
February 29, 1996, and the Years Ended
November 30, 1995 and November 30, 1994............................ F-58
Statements of Cash Flows for the Period from December 1, 1995 to
February 29, 1996, and the Years Ended
November 30, 1995 and November 30, 1994............................ F-59
Statements of Stockholders' Equity for the Period from
December 1, 1995 to February 29, 1996, and the
Years Ended November 30, 1995 and November 30, 1994................ F-60
Notes to Financial Statements........................................ F-61

DWAYNE R. SPENCE FUNERAL HOME, INC.:
Report of Independent Public Accountants............................. F-63
Statements of Operations for the Period from January 1, 1996 to
March 29, 1996, the Years Ended December 31, 1995 and December 31,
1994, and the Three Months Ended December 31, 1993................. F-64
Statements of Cash Flows for the Period from January 1, 1996 to
March 29, 1996, the Years Ended December 31, 1995 and
December 31, 1994, and the Three Months Ended December 31, 1993.... F-65
Statements of Shareholder's Equity for the Period from
January 1, 1996 to March 29, 1996, the Years Ended
December 31, 1995 and December 31, 1994, and the
Three Months Ended December 31, 1993............................... F-66
Notes to Financial Statements........................................ F-67

MERCHANT FUNERAL HOME GROUP:
Report of Independent Public Accountants............................. F-70
Statements of Operations for the Period from July 1, 1995 to
April 1, 1996, and the Years Ended June 30, 1995 and June 30, 1994. F-71
Statements of Cash Flows for the Period from July 1, 1995 to
April 1, 1996, and the Years Ended June 30, 1995 and June 30, 1994. F-72
Statements of Shareholders' Equity for the Period from July 1, 1995
to April 1, 1996, and the Years Ended June 30, 1995 and
June 30, 1994...................................................... F-73
Notes to Financial Statements........................................ F-74

F-1(a)

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Carriage Services, Inc.:

We have audited the accompanying consolidated balance sheets of Carriage
Services, Inc., (formerly Carriage Funeral Services, Inc. - a Delaware
corporation) and subsidiaries (the Company) as of December 31, 1994 and 1995 and
the related consolidated statements of operations, changes in stockholders'
equity and cash flows for the three years in the period ended December 31, 1995.
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, 1994 and 1995, and the consolidated
results of their operations and their cash flows for the three years in the
period ended December 31, 1995 in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 31, 1996

F-2

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

<TABLE>
<CAPTION>
December 31, March 31,
-------------------- --------
1994 1995 1996
-------- -------- --------
(UNAUDITED)
ASSETS
<S> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ......................... $ 836 $ 7,573 $ 6,270
-------- -------- --------
Accounts receivable-
Trade, net of allowance for
doubtful accounts of $205 in 1994 and $305
in 1995 ....................................... 2,168 2,637 3,237
Other ........................................... 447 505 260
-------- -------- --------
2,615 3,142 3,497
Marketable securities, available for sale ......... 4,357 864 334
Inventories and other current assets .............. 2,026 2,106 2,236
-------- -------- --------
Total current assets .............. 9,834 13,685 12,337
-------- -------- --------
PROPERTY, PLANT AND EQUIPMENT, at cost:
Land .............................................. 3,594 4,416 5,594
Buildings and improvements ........................ 10,851 14,200 18,320
Furniture and equipment ........................... 3,994 5,365 5,862
-------- -------- --------
18,439 23,981 29,776
Less-accumulated depreciation ..................... (1,329) (2,311) (2,610)
-------- -------- --------
17,110 21,670 27,166
CEMETERY PROPERTY, at cost ........................... 526 496 483
NAMES AND REPUTATIONS, net of accumulated amortization
of $480 in 1994 and $959 in 1995 .................. 13,555 22,559 29,070
DEFERRED CHARGES AND OTHER NONCURRENT ASSETS ......... 3,414 3,665 3,860
-------- -------- --------
$ 44,439 $ 62,075 $ 72,916
======== ======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable .................................. $ 997 $ 1,041 $ 687
Accrued liabilities ............................... 2,179 2,957 1,965
Current portion of long-term debt and
obligations under capital leases .............. 2,387 3,215 3,678
-------- -------- --------
Total current liabilities .......... 5,563 7,213 6,330
CEMETERY PRODUCTS LIABILITY .......................... 433 709 738
LONG-TERM DEBT, net of current portion ............... 32,622 42,057 50,072
OBLIGATIONS UNDER CAPITAL LEASES, net of
current portion ............................ 671 716 530
DEFERRED INCOME TAXES ................................ 1,721 2,229 2,474
-------- -------- --------
Total liabilities .................. 41,010 52,924 60,144
-------- -------- --------
COMMITMENTS AND CONTINGENCIES

REDEEMABLE PREFERRED STOCK ........................... -- -- 3,487

STOCKHOLDERS' EQUITY:
Preferred stock ................................... 72 157 160
Common stock ...................................... 50 50 50
Contributed capital ............................... 6,967 15,075 15,370
Unrealized gain (loss) on securities available for
sale ............................................ (59) (36) 3
Retained deficit .................................. (3,601) (6,095) (6,298)
-------- -------- --------
Total stockholders' equity ......... 3,429 9,151 9,285
-------- -------- --------
$ 44,439 $ 62,075 $ 72,916
======== ======== ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-3

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<TABLE>
<CAPTION>
For the three months
For the years ended December 31, ended March 31,
----------------------------------- --------------------------
1993 1994 1995 1995 1996
---- ---- ---- ---- ----
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
Revenues, net ............................. $ 11,265 $ 18,404 $ 24,237 $ 5,715 $ 7,635

Costs and expenses ........................ 10,205 15,390 20,247 4,465 5,965
-------- -------- -------- ------- -------

Gross profit .......................... 1,060 3,014 3,990 1,250 1,670

General and administrative expenses ....... 985 1,266 2,106 399 549
-------- -------- -------- ------- -------

Operating income ...................... 75 1,748 1,884 851 1,121

Interest expense, net ..................... 1,745 2,671 3,684 878 1,183
-------- -------- -------- ------- -------

(Loss) before income taxes ............ (1,670) (923) (1,800) (27) (62)

Provision for income taxes ................ -- 40 694 304 131
-------- -------- -------- ------- -------

Net (loss) ............................ (1,670) (963) (2,494) (331) (193)

Preferred stock dividend requirements ..... -- -- -- -- 10
-------- -------- -------- ------- -------

Net (loss) attributable to Common stock $ (1,670) $ (963) $ (2,494) $ (331) $ (203)
======== ======== ======== ======= =======

Loss per share:

(Loss) per common and common equivalent
share ................................ $(.32) $(.14) $(.33) $(.05) $(.02)
======== ======== ======== ======= =======

Weighted average number of common and
common equivalent shares outstanding ... 5,152 6,877 7,639 7,152 9,104
======== ======== ======== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-4

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)
<TABLE>
<CAPTION>
For the three months
For the years ended December 31, ended March 31,
---------------------------------- --------------------
1993 1994 1995 1995 1996
-------- -------- -------- ------- --------
(UNAUDITED)
<S> <C> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) attributable to Common stock ......................... $ (1,670) $ (963) $ (2,494) $ (331) $ (203)
Adjustments to reconcile net loss to net cash
provided by operating activities-
Depreciation and amortization ............................... 1,207 1,854 2,605 576 822
Deferred income taxes ....................................... -- 43 449 114 52
Changes in assets and liabilities net of effects
from acquisitions:
Decrease (increase) in accounts receivable ................ (298) (198) (637) 460 (186)
Decrease (increase) in inventories and other
current assets .................................................. (206) (91) 115 237 11
Increase in other deferred charges ........................ -- -- (144) (157) (328)
Increase (decrease) in accounts payable ................... 951 (214) 45 (403) (358)
Increase (decrease) in accrued liabilities ................ 598 1,028 1,571 (727) (217)

Increase (decrease) in cemetery products
liability ................................................. (1) (4) 44 15 29
-------- -------- -------- ------- --------

Net cash provided by (used in) operating
activities .............................................. 581 1,455 1,554 (216) (378)

CASH FLOWS FROM INVESTING ACTIVITIES:
Acquisitions, net of cash acquired .............................. (13,843) (9,073) (12,191) (1,491) (8,524)
Purchase of marketable securities available for sale ............ -- -- (1,795) -- --
Disposal of marketable securities available for sale ............ -- (4,417) 5,312 2,309 569
Purchase of property, plant and equipment ....................... (717) (1,179) (3,019) (434) (4,188)
-------- -------- -------- ------- --------

Net cash used in investing activities ..................... (14,560) (14,669) (11,693) 384 (12,143)

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from long-term debt .................................... 12,750 7,781 11,563 1,448 7,467
Payments on long-term debt, obligations
under capital leases ........................................ (1,171) (2,083) (2,830) -- --
Proceeds from subordinated notes ................................ 2,836 390 -- 428 --
Proceeds from sale of stock ..................................... -- 6,992 8,192 -- 3,785
Payment of deferred debt charges ................................ (166) (45) (49) (14) (34)
-------- -------- -------- ------- --------

Net cash provided by financing activities ................. 14,249 13,035 16,876 1,862 11,218

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 270 (179) 6,737 2,030 (1,303)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 745 1,015 836 836 7,573
-------- -------- -------- ------- --------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 1,015 $ 836 $ 7,573 $ 2,866 $ 6,270
======== ======== ======== ======= ========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid through issuance of new debt ................. $ 275 $ 231 $ 644 $ 644 $ 825
======== ======== ======== ======= ========
Retirement of debt through issuance of stock ............... $ -- $ -- $ 500 $ -- $ --
======== ======== ======== ======= ========
Cash interest paid ......................................... $ 1,187 $ 2,038 $ 3,127 $ 665 $ 970
======== ======== ======== ======= ========
Issuance of stock for acquisitions ......................... $ -- $ 80 $ -- $ -- $ 298
======== ======== ======== ======= ========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-5

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)

Net
Number Preferred Number Common Contributed Unrealized Retained
Of Of Capital Gain
Shares Stock Shares Stock (Deficit) (Loss) Deficit Total
------ ---- ----- --- -------- ---- ------- -------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance - December 31, 1992 ... -- $-- 4,819 $48 $ (38) $-- $ (968) $ (958)

Net loss - 1993 ............... -- -- -- -- -- -- (1,670) (1,670)

Issuance of common stock ...... -- -- 221 2 -- -- -- 2
------ ---- ----- --- -------- ---- ------- -------

Balance - December 31, 1993 ... -- -- 5,040 50 (38) -- (2,638) (2,626)

Net loss - 1994 ............... -- -- -- -- -- -- (963) (963)

Issuance of preferred stock ... 7,160 72 -- -- 7,005 -- -- 7,077

Unrealized net loss - available
for sale securities ........ -- -- -- -- -- (59) -- (59)
------ ---- ----- --- -------- ---- ------- -------

Balance - December 31, 1994 ... 7,160 72 5,040 50 6,967 (59) (3,601) 3,429

Unrealized net gain - available
for sale securities ........ -- -- -- -- -- 23 -- 23

Issuance of preferred stock ... 8,500 85 -- -- 8,108 -- -- 8,193

Net loss - 1995 ............... -- -- -- -- -- -- (2,494) (2,494)
------ ---- ----- --- -------- ---- ------- -------

Balance - December 31, 1995 ... 15,660 157 5,040 50 15,075 (36) (6,095) 9,151

Net loss - three months ended
March 31, 1996 (unaudited) -- -- -- -- -- -- (193) (193)

Issuance of preferred stock
(unaudited) ................ 305 3 -- -- 295 -- -- 298

Unrealized net gain - available
for sale securities
(unaudited) ................ -- -- -- -- -- 39 -- 39

Preferred dividends accrued
(unaudited) ................ -- -- -- -- -- -- (10) (10)
------ ---- ----- --- -------- ---- ------- -------

Balance - March 31, 1996
(unaudited) ................ 15,965 $160 5,040 $50 $ 15,370 $ 3 $(6,298) $ 9,285
====== ==== ===== === ======== ==== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-6

CARRIAGE SERVICES, INC.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

NATURE OF OPERATIONS

Carriage Services, Inc. (the Company - formerly Carriage Funeral Services,
Inc.), 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 performs 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 Company's funeral service locations.

REORGANIZATION AND PRINCIPLES OF CONSOLIDATION

Effective January 1, 1994, the shareholders of three affiliated companies which
had common ownership and management exchanged their stock for Common Stock of
the Company. In this transaction, the assets and liabilities of the affiliated
companies were recorded at historical cost in a manner similar to a
pooling-of-interests. Accordingly, for financial reporting purposes,
consolidated financial statements of the Company reflect the predecessor
entities as if the reorganization had taken place prior to the first period
presented. Thus, the shares of the predecessor are treated as outstanding for
prior years at the equivalent number of Company shares of Common Stock
subsequently recorded at January 1, 1994. The financial statements include the
consolidated financial statements of Carriage Services, Inc. and its
subsidiaries. In consolidation, all significant intercompany balances and
transactions are eliminated.

UNAUDITED INTERIM FINANCIAL STATEMENTS

The unaudited interim condensed financial statements have been prepared pursuant
to the rules and regulations of the Securities and Exchange Commission (SEC).
Certain information and note disclosures normally included in annual financial
statements prepared in accordance with generally accepted accounting principles
have been condensed or omitted pursuant to those rules and regulations, although
the Company believes that the disclosures made are adequate to make the
information presented not misleading. In the opinion of management, all
adjustments necessary for a fair presentation of interim results of operations
(consisting only of normal recurring accruals and adjustments) have been made to
the interim financial statements. Results of operations for interim periods are
not necessarily indicative of results of operations for the respective full
year.

FUNERAL AND CEMETERY OPERATIONS

The Company records the sale of funeral merchandise and services upon
performance. The Company records the sale of the right of cemetery interment or
mausoleum entombment and related merchandise at the time of sale. 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 $2,137,000 and $2,550,000 of funeral receivables
and approximately $31,000 and $87,000 of current cemetery receivables at
December 31, 1994 and 1995, respectively. Noncurrent cemetery receivables, those
payable after one year, are included in Deferred Charges and Other Noncurrent
Assets on the Consolidated Balance Sheet (see Note 3).

Cemetery revenues are less than 7% of the consolidated revenues of the Company
and, accordingly, the Company only operates in one business segment.

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
Sheet.

F-7

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 prearranged
funeral trust assets were approximately $11,106,000 and $14,877,000 at December
31, 1994 and 1995, respectively, which in the opinion of management exceed the
future obligations under such arrangements.

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 services contracts sold on a preneed basis. The principal and
accumulated earnings of the trust may be withdrawn by the Company upon maturity
(generally, 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 $48,000 and $60,000 at December 31, 1994 and 1995,
respectively, and are included in Cemetery Products Liability on the
accompanying Consolidated Balance Sheets.

PERPETUAL AND MEMORIAL CARE TRUST

In accordance with respective state laws, the Company 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 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. The perpetual
and memorial care trust assets were approximately $555,000 and $599,000 at
December 31, 1994 and 1995, respectively which in the opinion of management will
cover future obligations under such arrangements. 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 over 12 years which
approximates the expected timing of the performance of the services related to
the preneed funeral contracts. These amounts were not significant prior to 1995.

CASH AND CASH EQUIVALENTS

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

MARKETABLE SECURITIES

The Company accounts for marketable securities in accordance with Statement of
Financial Accounting Standards No. 115, and the Company's investment securities
are classified as available for sale securities. These securities are stated at
cost adjusted for market value fluctuations. Unrealized gains and losses created
by changes in the market values of these securities are recognized as an
adjustment to and are reported as a separate component of Stockholders' Equity,
net of tax. The specific identification method is used in determining realized
gains and losses from the sale of securities. At December 31, 1994 and 1995, the
Company had gross unrealized gains of approximately $9,000 and $4,000 and gross
unrealized losses of approximately $69,000 and $40,000, respectively. The
Company does not use derivative financial instruments or participate in hedging
activities.

F-8

INVENTORY

Inventory is stated at the lower of its cost basis (fair value at date of
acquisition) or net realizable value.

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. Such amounts are being 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 the
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 assets to their fair value.
The Company does not expect that the adoption of Financial Accounting Standards
No. 121 "Accounting for the Impairment of Long-Lived Assets to be Disposed Of"
will have a material impact on its financial position or results of operations.

PROPERTY, PLANT AND EQUIPMENT

Property, Plant and Equipment are stated at cost at the time of acquisition.
Depreciation of Property, Plant and Equipment is computed based on the
straight-line method over the estimated useful lives of the assets ranging from
three to 40 years. The costs of ordinary maintenance and repairs are charged to
operations, while renewals and replacements are capitalized.

INCOME TAXES

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

LOSS PER COMMON SHARE

Loss per common share is computed by dividing net loss by the weighted average
number of common and common equivalent shares outstanding during each period, as
calculated pursuant to various SEC pronouncements. (See Note 9).

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.

2. ACQUISITIONS:

During 1995, the Company acquired substantially all of the assets and certain
liabilities of eight funeral homes through the purchase of stock and assets. In
1994, the Company also acquired substantially all of the assets and certain
liabilities of nine funeral homes and one cemetery through the purchase of
stock. These transactions have been accounted for utilizing the purchase method
of accounting, and the results of operations are included in the accompanying
consolidated financial statements from the dates of acquisition.

F-9

Relatively few liabilities were assumed in connection with these acquisitions.
Costs 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
of the considerations paid over the fair value of net tangible and identifiable
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 resolutions of uncertainties existing at the
acquisition date. There were no material purchase price allocation adjustments
made during 1994 or 1995.

The following table is a summary of the above acquisitions made during the two
years ended December 31, 1994 and 1995:

1994 1995
------- --------
Number acquired:
Funeral homes .............................. 9 8
Cemeteries ................................. 1 --

The effect of the above acquisitions on the consolidated balance sheet at
December 31, 1994 and 1995 was as follows:

1994 1995
------- --------
(IN THOUSANDS)
Current Assets ...................................... $ 645 $ 291
Cemetery Property ................................... 253 --
Property, Plant and Equipment ....................... 4,516 2,727
Deferred Charges and Other Noncurrent Assets ........ 809 210
Names and Reputations ............................... 3,502 9,349
Current Liabilities ................................. (435) (67)
Debt ................................................ (137) (87)
Other Liabilities ................................... -- (232)
Preferred Stock issued .............................. (80) --
------- --------
Cash used for acquisitions ...................... $ 9,073 $ 12,191
------- --------

The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during the year ended
December 31, 1994 and 1995 as if such acquisitions had taken place at the
beginning of each of the respective periods presented. 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 combinations been in effect on the date
indicated, that have resulted since the date of acquisition or that may result
in the future.

FOR THE YEARS ENDED DECEMBER 31,
1994 1995
----------------------------
(UNAUDITED AND IN THOUSANDS)
Revenues, net .................................... $ 25,252 $ 26,610
Net (loss) before income taxes ................... (1,510) (1,835)
Net (loss) ....................................... (825) (2,275)
(Loss) per common and common equivalent share .... (.12) (.30)

F-10

3. DEFERRED CHARGES AND
OTHER NONCURRENT ASSETS:

Deferred Charges and Other Noncurrent Assets at December 31, 1994 and 1995, were
as follows:
1994 1995
------ ------
(IN THOUSANDS)
Agreements not to compete, net of accumulated
amortization of $790 and $1,198, respectively ............. $2,449 $2,269
Deferred debt expense, net of accumulated amortization of
$192 and $337, respectively ............................... 439 492
Noncurrent cemetery receivables .............................. 252 443
Deferred income taxes ........................................ 274 329
Deferred obtaining costs ..................................... -- 132
------ ------
$3,414 $3,665
====== ======

The Company has entered into prepaid agreements not to compete with former
owners of businesses acquired that are being amortized over the term of the
agreements ranging from four to 10 years. Deferred debt expense is being
amortized over the term of the related debt, generally five years. Noncurrent
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.

F-11

4. LONG-TERM DEBT:

The Company's long-term debt and subordinated notes at December 31, 1994 and
1995, consisted of the following:
<TABLE>
<CAPTION>
1994 1995
-------- --------
(IN THOUSANDS)
<S> <C> <C>
Notes payable, secured by deed of trust and security agreements covering certain
real property, due in monthly installments ranging from $3,542 to $18,750,
plus interest at prime plus 1-3/4%; prime plus 1-1/2% after April 20, 1994
(10% as of December 31, 1995) through January 1999 .......................................... $ 13,799 $ 13,038
Notes payable, secured by deed of trust and security agreements
covering certain real property, due in monthly installments of $52,000, plus
interest at 7.31%; through July 1998 at which time the interest rate
fluctuates based upon the greater of prime plus 1/2%, the base certificate of
deposit rate plus 1-1/2 % or the federal funds rate plus 1% until maturity in
July 2000 ................................................................................... 8,466 7,842
Note payable, secured by deed of trust and security agreements
covering certain real property, principal due in quarterly installments of
$18,750 and interest due in monthly installments at a rate of the lesser of
prime plus 1%, the base certificate of deposit rate plus 1-1/2% or the
federal funds rate plus 1% until maturity in October 1999 .................................. -- 476
Notes payable, secured by deed of trust and security agreements
covering certain real property, due in monthly installments ranging from
$3,125 to $15,208, plus interest at prime plus 1-1/2% (10% as of December 31,
1995) through December 2000 ................................................................. 5,269 14,960
Subordinated notes payable to stockholder, with interest at a
predetermined rate plus 3% which is subject to adjustment under certain
conditions (11.5% as of December 31, 1995). Interest is payable in the form
of cash if certain conditions are met, otherwise interest is paid in the form
of additional subordinated notes issued annually; these principal and
interest notes are payable in May 2001 ...................................................... 6,371 7,356
Other .......................................................................................... 893 1,202
Less-Current portion ........................................................................... (2,176) (2,817)
-------- --------
$ 32,622 $ 42,057
======== ========
</TABLE>
No principal payments on the subordinated debt may be made until the notes
payable are paid. The notes payable are generally guaranteed by certain
principal stockholders of the Company and secured by Common Stock of the
Company, property, plant and equipment, accounts receivable, inventory and
intangibles. A major stockholder received a $40,000 fee for a guarantee for the
years ended December 31, 1994 and 1995. The guaranteed amount as of December
31,1995, was $2,000,000. The debt agreements contain provisions regarding
minimum net worth and cash flow to debt service ratios, and restrictions
regarding other borrowings, payment of dividends, capital expenditures and
acquisitions. The aggregate maturities of notes payable for the five years
subsequent to December 31, 1995, are approximately: 1996 - $2,818,000; 1997 -
$8,410,000; 1998 - $7,425,000; 1999 - $5,285,000; 2000 - $13,701,000 and
$1,895,000 thereafter. The Company has a $400,000 line of credit which matures
in May 1996; $350,000 was outstanding under such line of credit at December 31,
1995.

As discussed in Note 10, the Company plans to complete an initial public
offering of its Class A common stock during the second half of 1996. When
completed, a substantial portion of the above debt is planned to be retired and
a substantial portion of the then existing Deferred debt expense related to this
debt

F-12

will be written off in the accounting period that the offering is
completed. If the Offering had been completed, and the debt paid off as of March
31, 1996, the write off would have been $445,000.

5. COMMITMENTS AND CONTINGENCIES:

LEASES

The Company leases certain office facilities, vehicles and equipment under
operating leases for one to ten years. Certain of these leases provide for an
annual adjustment to rent for operating expenses in excess of a prescribed
amount or increases due to inflation, as well as options to purchase the assets
at fair market value. Rent expense was approximately $442,000, $734,000 and
$951,000 for the years ended December 31, 1993, 1994 and 1995, respectively.
Assets acquired under capital leases are included in Property, Plant and
Equipment on the accompanying Consolidated Balance Sheets.

Minimum payments over the lease periods will be as follows:

Minimum Lease Payments
----------------------
Operating Capital
Leases Leases
------ ------
Years ended December 31,
1996 ............................................... $ 934 $ 386
1997 ............................................... 926 346
1998 ............................................... 846 237
1999 ............................................... 698 117
2000 ............................................... 534 40
Thereafter ........................................... 2,119 76
------ ------

Total minimum lease payments ......................... $6,057 1,202
======
Less: amount representing interest ................... 176
------
Long-term obligations under capital leases ........... $1,026
======
AGREEMENTS AND EMPLOYEE BENEFITS

The Company has entered into various employment and non-compete agreements not
to compete with key employees and former owners of businesses acquired. 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 five years subsequent to December 31, 1995, are approximately
$778,000, $794,000, $787,000, $735,000 and $601,000, respectively and $2,102,000
thereafter. In conformity with industry practice, these agreements are not
included in the accompanying Consolidated Balance Sheets.

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 post retirement or post
employment benefits.

LITIGATION

The Company is from time to time subject to routine litigation incidental to its
business. Management believes that the results of any litigation or other
pending legal proceedings will not have a materially adverse effect on the
Company's consolidated financial position or results of operations.

F-13

6. INCOME TAXES:

Prior to January 1, 1994, the Company was an S corporation, was not subject to
federal income taxes, and instead, the owners were taxed on the Company's income
in a manner similar to partnerships. On January 1, 1994, the Company became a C
corporation and adopted Statement of Financial Accounting Standards No. 109.
Accordingly, a charge to income taxes in 1994 for approximately $57,000 was made
to establish deferred taxes payable. The Company did not pay any federal taxes
in 1993, 1994 or 1995. The provision (benefit) for income taxes for the years
ended December 31, 1994 and 1995, consisted of:

1994 1995
---- ----
(IN THOUSANDS)
Current:
U. S. Federal .............................................. $-- $--
State ...................................................... 10 35
---- ----
Total current provision ........... 10 35
---- ----

Deferred:
U. S. Federal .............................................. (35) 585
State ...................................................... 8 74
---- ----

Total deferred (benefit) provision ............................ (27) 659
---- ----

Provision resulting from change in tax status ................ 57 --
---- ----
Total income tax provision ........ $ 40 $694
==== ====

A reconciliation of taxes at the federal statutory rate of 34% to those
reflected in the Consolidated Statement of Operations for the years ended
December 31, 1994 and 1995, is as follows:

1994 1995
---- ----
Federal income statutory rate .................... (34.0)% (34.0)%
Effect of state income taxes ..................... (2.6) (6.0)
Effect of nondeductible expenses ................. 6.2 3.9
Effect of valuation allowance .................... 30.3 74.5
Effect of change in tax status ................... 4.4 --
---- ----
4.3% 38.4%
==== ====

F-14

The tax effects of temporary differences that give rise to significant portions
of the deferred tax assets and liabilities at December 31, 1994 and 1995, were
as follows:

1994 1995
------- -------
(IN THOUSANDS)
Deferred tax assets:
Net operating loss carryforwards ............... $ 314 $ 1,536
Book/tax differences relating to reserves .......... 80 117
Accrued liabilities and other .................. 168 130
Amortization of non-compete agreements ......... 178 292
Accrued interest not currently deductible .......... 427 190
------- -------
1,167 2,265
Valuation allowance ................................ (303) (1,517)
------- -------
Total deferred tax assets .......................... $ 864 $ 748
======= =======

Deferred tax liability:
Amortization and depreciation .................. (1,721) (2,229)
------- -------
Total deferred tax liabilities ................. $(1,721) $(2,229)
------- -------

Net deferred tax liability ......................... $ (857) $(1,481)
======= =======

The Company has recorded a valuation allowance to reflect the estimated amount
of deferred tax assets for which realization is uncertain. At December 31,1995,
the Company has approximately $3,910,000 of federal Net Operating Losses (NOL)
carryforwards which will expire between 2009 and 2010, if not utilized and
$5,627,000 of state NOL carryforwards which will expire between the years 2000
and 2010, if not utilized. As a result of the initial public offering (see Note
10), there may be a limitation placed on the Company's utilization of its NOL's
by Section 382 of the Internal Revenue Code. The Company will review the
valuation allowance at the end of each quarter and will make adjustments if it
is determined that it is more likely than not that the NOL's will be realized.

7. STOCKHOLDERS' EQUITY:

COMMON STOCK

The Company has 20,000,000 authorized shares of Common Stock with a par value of
$.01 per share of which approximately 5,040,000 shares were issued and
outstanding at December 31,1994 and 1995. A voting agreement exists between
certain shareholders where such parties agreed to, among other things, vote
their respective shares of Common Stock in an agreed upon manner.

PREFERRED STOCK

The Company is authorized to issue up to 40,000,000 shares of preferred stock,
issuable in series from time to time established by the Board of Directors. The
Company has 7,000,000 authorized shares of Series A Preferred Stock with a par
value of $.01 per share, all of which were issued and outstanding as of December
31, 1994 and 1995. These shares can be converted into shares of Common Stock at
a conversion price of $3.571 per share. The Company also has 2,500,000
authorized shares of Series B Preferred Stock with a par value of $.01 of which
160,000 shares were issued and outstanding as of December 31, 1994 and 1995.
These shares can be converted into Common Stock at various conversion prices
from $4.00 to $4.50 per share. As of December 31, 1995 the Company has 8,500,000
authorized shares of Series C Preferred Stock with a par value of $.01 of which
all 8,500,000 were issued and outstanding. These shares can be converted into
shares of Common Stock at a conversion price of $4.50 per share. The Preferred
Stocks (Series A, B and C) can be converted into shares of Common Stock at the
option of the holder at anytime

F-15

and will automatically convert at the effective
date of the Registration Statement for the initial public offering (See Note
10), or a sale of the Company.

STOCK OPTION PLAN

The Company has a 1995 Stock Incentive Plan (the Plan) which was adopted by the
Board of Directors. The Plan provides for the issuance of up to 500,000 shares
of the Common Stock, subject to 1% annual increases beginning January 1, 1997,
in connection with the exercise of stock options granted under such Plan to
officers and key employees. The Plan is administered by a stock option committee
appointed by the Board of Directors. The Plan allows 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, 1995 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. The
non-qualified and incentive stock options are exercisable six months from the
date of grant and expire ten years from the date of grant unless a shorter
period is provided by the stock option committee. All options granted in 1995
were immediately exercisable.

The following summarizes the stock option activity in the Plan for the year
ended December 31, 1995:
OPTION PRICE
OPTIONS PER SHARE
Outstanding at December 31, 1994
Granted .................................. 99,000 $4.00- $5.00
Exercised ................................ -- --
Canceled ................................. -- --

Outstanding at December 31, 1995 ............. 99,000 $4.00- $5.00
Exercisable at December 31, 1995 ............. 99,000 $4.00- $5.00

Pursuant to a 1993 agreement, the Company intends to repurchase approximately
212,940 shares of Common Stock from an executive officer of the Company at $1.20
per share. Options to purchase these 212,940 shares were granted in 1993 to
several members of the management team, who have no other stock ownership in the
Company, at $1.20 per share which the Board of Directors believes was the fair
market value of the Company's Common Stock at the date of grant.

OTHER

The Company has also entered into a consulting arrangement with a stockholder of
the Company, requiring quarterly payments of $6,250.

8. PROSPECTIVE ACCOUNTING CHANGES:

Financial Accounting Standard (FAS) FAS 123 "Accounting for Stock-Based
Compensation" becomes effective in 1996. FAS 123 permits but does not require a
fair value based method of accounting for employee stock option plans which
results in compensation expense recognition when stock options are granted. The
Company plans to continue the use of its current intrinsic value based method of
accounting for such plan. Management does not believe that the adoption of this
standard would materially affect the Company's consolidated financial position
or results of operations.

F-16

9. LOSS PER SHARE:

Loss per share is calculated based on the weighted average number of common and
common equivalent shares outstanding during the period using guidance provided
by the SEC for companies contemplating an initial public offering. Loss per
common and common equivalent share for the years ending December 31, 1993, 1994
and 1995 was as follows (in thousands, except per share amounts):
<TABLE>
<CAPTION>
1993 1994 1995
------- ------- -------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C>
Net (loss) attributable to Common stock .................. $(1,670) $ (963) $(2,494)
======= ======= =======

Common shares outstanding (a) ............................ 5,040 5,040 5,040
Common equivalent shares:
Stock options, treasury stock method (b) ............. 118 118 118

Assumed conversion of preferred stock (c) ............ -- 1,725 2,476
------- ------- -------

Total weighted average common and common equivalent shares
outstanding ............................................ 5,158 6,883 7,634
======= ======= =======

Net (loss) per common share .............................. $ (.32) $ (.14) $ (.33)
======= ======= =======
</TABLE>
(a) Effective January 1, 1994, the shareholders of three affiliated companies
which had common ownership and management exchanged their stock in those
companies for Common Stock of the Company. In this transaction, the assets and
liabilities were recorded at historical cost in a manner similar to a
pooling-of-interests. Accordingly, loss per share has been presented as if the
Common Stock has been outstanding for all periods presented at the conversion
rate utilized at January 1, 1994.

(b) In accordance with the SEC's Staff Accounting Bulletin No. 83, the loss per
share has been presented assuming that all stock options granted by the Company
within one year of the Company's initial public offering have been outstanding
for all periods presented. The effect of such stock options has been calculated
using the "treasury stock" method, assuming an estimated initial public offering
price of $15 per share and has been included in the calculation of common
equivalent shares outstanding despite the fact that the effect of the assumed
exercise of such options is anti-dilutive.

(c) Pursuant to the terms of their respective agreements, the Company's Series
A, B and C Preferred Stock automatically convert to common stock upon the
Company's initial public offering. Therefore, in accordance with the SEC's
position relative to securities with these conversion characteristics, the
effect of such conversions have been reflected from the respective dates of
issuance of the preferred stocks in common equivalent shares outstanding,
despite the fact that the effect of the assumed exercise of stock options is
antidultive.

If loss per share had been calculated based on the actual common and common
equivalent shares outstanding, rather than utilizing the SEC guidance for IPO
companies, the resulting loss per share would have been $(.33), $(.19) and
$(.49) for the years ended December 31,1993, 1994 and 1995, respectively.

10. EVENTS SUBSEQUENT TO DECEMBER 31, 1995:

ACQUISITIONS

Three funeral homes were acquired in January 1996 for approximately $3.8 million
and six funeral homes were acquired in March 1996 for approximately $8.7
million. In April 1996 nine additional funeral homes, four cemeteries and two
crematories were acquired for approximately $13.6 million. In May of 1996 three
additional funeral homes were acquired for approximately $3.0 million. These
acquisitions were funded through additional debt, issuance of 6,037,000 shares
of Series D Preferred Stock valued at $1.00 per share and available cash. These
acquisitions have been accounted for by the purchase method, and the

F-17

results of operations are included in the accompanying consolidated financial
statements from the dates of acquisition.

The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired subsequent to December 31,
1995 and through May 31, 1996, as if such acquisitions had taken place at the
beginning of each of the respective periods presented. 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 combinations been in effect on the date
indicated, that have resulted since the date of acquisition or that may result
in the future.

Three Months
Year Ended Ended
December 31, March 31,
1995 1996
------------- ------------
(UNAUDITED AND IN THOUSANDS)
Revenues ......................................... $ 35,161 $ 10,210
Net (loss) before income taxes ................... (3,018) (715)
Net (loss) ......................................... (2,895) (675)
(Loss) per common and common equivalent share ...... (.38) (.11)

INITIAL PUBLIC OFFERING

The Company is in the process of filing a registration statement with the SEC on
Form S-1 for an initial public offering of shares of common stock and expects
the transaction to be completed in 1996. In connection with the initial public
offering, the Company plans to perform a recapitalization of its Common Stock
into two classes of Common Stock (Class A and Class B), provide separate voting
rights to each class and convert existing Common Stock to Class B Common Stock.
Additionally under the terms of the Series A, B and C Preferred Stock, they will
automatically convert into Class B Common Stock on the effective date of the
registration statement. Series D Preferred Stock will remain outstanding after
the initial public offering. This recapitalization and a related planned stock
split has not been reflected in the accompanying Consolidated Financial
Statements since the details have not been finalized nor has it occurred.

PREFERRED STOCK SERIES D (UNAUDITED)

In the first quarter of 1996, the Company issued 3,487,000 shares of Series D
Preferred Stock in connection with certain acquisitions. The Company has
10,000,000 authorized shares of Series D Preferred Stock with a par value of
$.01 per share. These shares can be converted into Common Stock at various
conversion prices from $7.50 to $9.00 per share. The holders of Series D
Preferred Stock are entitled to receive preferential dividends at an annual rate
from $0.06 to $0.0625 per share, payable quarterly. Dividends are payable
quarterly as long as the stock is outstanding. 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.

Concurrent with every issuance of Series D Preferred Stock, an irrevocable
standby letter of credit, issued by a financial institution and guaranteed by
the Company, was given to the holder (or a designated beneficiary) and can be
drawn upon if certain conditions are met, such as: the Company has failed to pay
dividends, the Company has failed to redeem the shares on the designated
mandatory redemption date or a liquidation, dissolution or winding up of affairs
of the Company occurs. This stock is classified as Redeemable Preferred Stock in
the Consolidated Balance Sheet of the Company.

F-18

CARRIAGE SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

The following tables set forth the unaudited pro forma consolidated
statements of operations for the Company for the year ended December 31, 1995
and the three months ended March 31, 1996, and the unaudited pro forma
consolidated balance sheet of the Company as of March 31, 1996, after giving
effect to: (i) the acquisitions made during the year ending December 31, 1995
and the period from January 1, 1996 through May 31, 1996 and (ii) the sale of
Common Stock offered hereby (the "Offering") and the application of the net
proceeds therefrom. Excess cash is assumed to be used for working capital
purposes. The unaudited pro forma consolidated statements of operations assume
that these transactions occurred as of January 1, 1995, and the unaudited pro
forma consolidated balance sheet assumes that the transactions occurred as of
March 31, 1996.

The unaudited pro forma consolidated financial statements are based
upon estimates and assumptions related to the accounting for the aforementioned
transactions. The acquisitions of the Company are primarily funded through the
cash received from debt issuances, cash on hand, cash received from issuance of
preferred stock, or a combination thereof. Subsequent to December 31, 1995, the
Company has issued redeemable Series D Preferred Stock in connection with these
acquisitions. The unaudited pro forma consolidated financial statements reflect
adjustments which assume that the debt and the stock which were utilized to
effect these business combinations were outstanding as of January 1, 1995.

The unaudited pro forma consolidated statements of operations do not
assume any additional profitability resultant 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, 1995,
and the three months ended March 31, 1996.

The following unaudited pro forma consolidated financial statements
should be read in conjunction with the Consolidated Financial Statements of the
Company (which also include unaudited information as of and for the three months
ended March 31, 1996), 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.

F-19

CARRIAGE SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET
As of March 31, 1996
(in thousands)

<TABLE>
<CAPTION>
Pro Forma
Historical -----------------------------------------------------------
Consolidated Acquisitions(1) Subtotal Offering(2) Total
------------ --------------- -------- ----------- -----------
ASSETS (Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
CURRENT ASSETS:
Cash and cash equivalents ............................. $ 6,270 ($ 1,847)(A) $ 4,423 $ 9,043(B) $ 13,466
Accounts receivable, net .............................. 3,497 1,851(A) 5,348 -- 5,348
Marketable securities ................................. 334 -- 334 -- 334
Inventories and other ................................. 2,236 246(A) 2,482 -- 2,482
-------- -------- -------- -------- --------
Total current assets ........................... 12,337 250 12,587 9,043 21,630
-------- -------- -------- -------- --------

PROPERTY, PLANT AND EQUIPMENT, net ......................... 27,166 5,961(A) 33,127 -- 33,127
CEMETERY PROPERTY .......................................... 483 1,919(A) 2,402 -- 2,402
NAMES AND REPUTATIONS, net ................................. 29,070 7,515(A) 36,585 -- 36,585
DEFERRED CHARGES AND OTHER ................................. 3,860 225(A) 4,085 (445)(C) 3,640
-------- -------- -------- -------- --------
Total Assets ................................... $ 72,916 $ 15,870 $ 88,786 $ 8,598 $ 97,384
======== ======== ======== ======== ========
LIABILITIES & STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable ...................................... 687 -- 687 -- 687
Accrued liabilities ................................... 1,965 480(A) 2,445 -- 2,445
Current portion of long-term obligations .............. 3,678 704(A) 4,382 (2,243)(B) 2,139
-------- -------- -------- -------- --------
Total current liabilities ...................... 6,330 1,184 7,514 (2,243) 5,271
-------- -------- -------- -------- --------
CEMETERY PRODUCTS LIABILITY ............................... 738 2,294(A) 3,032 -- 3,032
OBLIGATIONS UNDER CAPITAL LEASE ............................ 530 -- 530 -- 530
LONG-TERM DEBT, net of current portion ..................... 50,072 10,892(A) 60,964 (40,714)(B) 20,250
DEFERRED INCOME TAXES ...................................... 2,474 -- 2,474 -- 2,474
-------- -------- -------- -------- --------
60,144 14,370 74,514 (42,957) 31,557
COMMITMENT AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK ................................. 3,487 1,500(A) 4,987 -- 4,987

STOCKHOLDERS' EQUITY:
Preferred stock ...................................... 160 -- 160 (160)(D) --
Common stock ......................................... 50 -- 50 78(B)(D) --
Contributed capital .................................. 15,370 -- 15,370 51,637(B)(C)(D) 67,135
Unrealized gain (loss) on
securities available for sale .................. 3 -- 3 -- 3
Retained earnings .................................... (6,298) -- (6,298) -- (6,298)
-------- -------- -------- -------- --------
Total stockholders' equity ..................... 9,285 -- 9,285 51,555 60,840
-------- -------- -------- -------- --------
Total Liabilities & Stockholders' Equity ....... $ 72,916 $ 15,870 $ 88,786 $ 8,598 $ 97,384
======== ======== ======== ======== ========
</TABLE>
(1) - Assumes the acquisitions which involved the use of debt and stock were
consummated on March 31, 1996

(2) - Assumes the Offering was completed at March 31, 1996

See accompanying notes to the unaudited pro forma consolidated
financial statements

F-20

CARRIAGE SERVICES, INC.
UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands)
<TABLE>
<CAPTION>
Year Ended December 31, 1995
-----------------------------------------------------------------------------
Pro Forma
Historical --------------------------------------------------------------
Consolidated Acquisitions(1) Subtotal Offering(2) Total
------------ --------------- -------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net ...................................... $ 24,237 13,296(AA) 37,533 -- $37,533
Costs and expenses ................................. 20,247 12,406(AA)(BB) 32,653 (120)(FF) 32,533
-------- ------- ------- ------ -------
Gross Profit ................................ 3,990 890 4,880 120 5,000

General and administrative expenses ................ 2,106 -- 2,106 -- 2,106
-------- ------- ------- ------ -------
Operating income ............................ 1,884 890 2,774 120 2,894

Interest expense, net .............................. 3,684 2,143(CC) 5,827 (4,670)(GG) 1,157
-------- ------- ------- ------ -------
Income (loss) before income taxes ........... (1,800) (1,253) (3,053) 4,790 1,737
Provision (benefit) for income taxes ............... 694 (1,885)(AA)(DD) (1,191)(DD) 1,868(HH) 677
-------- ------- ------- ------ -------
Net income (loss) ........................... (2,494) 632 (1,862) 2,922 1,060

Preferred stock dividend requirements .............. -- 383(EE) 383 -- 383
-------- ------- ------- ------ -------
Net income (loss) attributable
to common stock ................... ($ 2,494) 249 (2,245) 2,922 $ 677
======== ======= ======= ====== =======
Earnings (loss) per common share (II) (II)
Weighted average of common and
common equivalent shares outstanding
</TABLE>

Three Months Ended March 31, 1996
-----------------------------------------------------------------------------
Pro Forma
Historical --------------------------------------------------------------
Consolidated Acquisitions(1) Subtotal Offering(2) Total
------------ --------------- ----------- ----------- -----------
(Unaudited) (Unaudited) (Unaudited) (Unaudited) (Unaudited)
<S> <C> <C> <C> <C> <C>
Revenues, net ....................................... $ 7,635 2,575(AA) 10,210 -- 10,210
Costs and expenses .................................. 5,965 2,868(AA)(BB) 8,833 (37)(FF) 8,796
------- ------ ------- -------- ------
Gross Profit ................................. 1,670 (293) 1,377 37 1,414

General and administrative expenses ................. 549 -- 549 -- 549
------- ------ ------- -------- ------
Operating income ............................. 1,121 (293) 828 37 865

Interest expense, net ............................... 1,183 359(CC) 1,542 (1,205)(GG) 337
------- ------ ------- -------- ------
Income (loss) before income taxes ............ (62) (652) (714) 1,242 528
Provision (benefit) for income taxes ................ 131 (409)(AA)(DD) (278)(DD) 484(HH) 206
------- ------ ------- -------- ------
Net income (loss) ............................ (193) (243) (436) 758 322

Preferred stock dividend requirements ............... 10 86(EE) 96 -- 96
------- ------ ------- -------- ------
Net income (loss) attributable
to common stock ......................... ($ 203) (329) (532) 758 $ 226
======= ====== ======= ======== ======
Earnings (loss) per common share (II) (II)
Weighted average of common and
common equivalent shares outstanding
</TABLE>

(1) - Assumes the acquisitions which involved the use of debt and stock were
consummated on March 31, 1996

(2) - Assumes the Offering was completed at March 31, 1996

See accompanying notes to the
unaudited pro forma consolidated financial statements

F-21

CARRIAGE SERVICES, INC.
NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL STATEMENTS

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET ADJUSTMENTS

The accompanying unaudited pro forma consolidated balance sheet as of
March 31, 1996 gives effect to the Offering and certain acquisitions consummated
prior to May 31, 1996, as if such transactions had occurred on March 31, 1996.
The estimated fair market values reflected below are based on preliminary
estimates and assumptions and are subject to revision as more information
becomes available. In management's opinion, the preliminary allocation is not
expected to be materially different from the final allocation.

(A) Reflects the Company's material acquisitions which occurred
subsequent to March 31, 1996 and before May 31, 1996 as if such acquisitions had
occurred on March 31, 1996. The unaudited pro forma consolidated financial
statements include acquistions of funeral homes and cemeteries made during this
period, which were funded by (i) $1,847,000 in cash, (ii) $11,596,000 in debt
and (iii) shares of the Company's Series D Preferred Stock valued at $1,500,000.
In conjunction with each of these acquisitions, the key employees and former
owners of the acquired businesses have entered into employment and non-compete
agreements with the Company. The estimated fair market value of the assets and
liabilities of these acquisitions are as follows:

DESCRIPTION AMOUNT

Net assets acquired --
Accounts receivable, net ................................. $ 1,851,000
Inventories and other .................................... 246,000
Property, plant and equipment, net ....................... 5,961,000
Cemetery property ........................................ 1,919,000
Names and reputations, net ............................... 7,515,000
Deferred charges and other ............................... 225,000
Accrued liabilities ...................................... (480,000)
Cemetery products liability .............................. (2,294,000)
------------
$ 14,943,000
============

Consideration paid --
Cash ........................................................ (1,847,000)
Series D Preferred Stock .................................... (1,500,000)
Long-term debt issued to fund cash for acquisition .......... (11,596,000)
------------
$(14,943,000)
============

In connection with the allocation of the purchase price to identifiable
intangible assets, the Company considered the nature of each business it
acquired, non-compete agreements which key employees and former owners entered
into in connection with the acquisitions, and the economic value attributable to
community loyalty of the businesses acquired. Relative to the non-compete
agreements, management considered the term of the respective agreements. The
purchase price allocated to these agreements is amortized on a straight line
basis over the lives of the respective agreements.

In its consideration of the value attributable to the names and
reputations of acquired businesses, management considered the unique position of
each acquired business within its respective market. Further, management
considered the fact that death care businesses have often been in existence for
an extended period of time, 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. The resulting loyalty has historically represented a
substantial portion of the value of the acquired business. In almost all cases
the names and principal
F-22

facilities of the acquired businesses are left in place.
Although the acquired businesses generally have the ability to extend their
existence indefinitely, the Company believes that the names and reputations
asset is being appropriately amortized on a straight line basis over a 40 year
period. This is consistent with the lives used by the Company's publicly held
competitors within the death care industry.

The Company reviews the carrying value of names and reputations and
other assets 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 assets to their fair value.

(B) Reflects the issuance of _________shares of the Company's Common
Stock, par value $0.01 per share, at an estimated price of $______ per share in
the Offering, resulting in a combined increase to Common Stock and contributed
capital of $52,000,000. The proposed initial public offering is assumed to yield
proceeds to the Company of approximately $57,500,000. Associated transaction
costs are expected to be approximately $5,500,000. Also reflects the application
of the net proceeds of the proposed initial public offering to retire $2,243,000
of current debt and $40,714,000 of long-term debt related to certain of the
Company's lenders. The remaining $9,043,000 will, for earnings per share
purposes, be treated having been used for working capital purposes.

(C) Reflects the write-off of $445,000 of capitalized debt issuance
costs related to certain of the Company's pre-existing outstanding debt which is
expected to be retired with the application of the net proceeds of the proposed
initial public offering.

(D) Reflects the conversion of the Company's Series A, B, and C
Preferred Stock into Common Stock concurrent with the Offering. Upon the closing
of the Offering, $160,000 of preferred stock is converted at the specified
conversion prices into the Company's Common Stock, which would represent
increases to combined Common Stock and contributed capital of $160,000. This
adjustment has no profit and loss impact, but it does increase the number of
Common Shares outstanding in the earnings per share calculation.

UNAUDITED PRO FORMA CONSOLIDATED STATEMENTS OF OPERATIONS ADJUSTMENTS

The accompanying unaudited pro forma consolidated statements of operations for
the year ended December 31, 1995, assume in a two step process that (i) all
acquisitions which occurred between January 1, 1995 and May 31, 1996 had been
completed as of January 1, 1995 using the consideration method actually used
(typically cash from debt bearing interest at rates approximately 10%, or stock)
and (ii) the initial public offering was completed as of January 1, 1995 and the
proceeds therefrom used to pay off debt historically outstanding or outstanding
as a result of assumptions in (i) above.

F-23

(i) NOTES (AA) - (EE) REPRESENT ADJUSTMENTS MADE RELATING TO THE ACQUISITIONS
WHICH OCCURRED BETWEEN JANUARY 1, 1995 AND MAY 31, 1996 AS IF THEY OCCURRED
JANUARY 1, 1995.

(AA) Reflects the combined results of operations, prior to acquisition,
of the businesses acquired by the Company, in transactions accounted for as
purchases, subsequent to January 1, 1995, as if the businesses had been acquired
as of the beginning of the respective period.

Year Ended Three Months Ended
Description December 31, 1995 March 31, 1996
- ----------- ----------------- --------------

Revenues, net ........................ $13,296,000 $2,575,000
Costs and expenses ................... 11,289,000 2,682,000
Provision for income taxes ........... 96,000 16,000

The unaudited pro forma consolidated statements of operations do not
assume any additional profitability resulting from the application of the
Company's revenue enhancement or cost containment programs to the results of the
acquired businesses, nor do they include any assumed increases in corporate
general and administrative expenses which may have resulted from the Company
managing the acquired businesses. The historical general and administrative
expenses of the acquired businesses have been included in costs and expenses
consistent with the Company's methodology of including expenses directly related
to the operation of funeral homes, cemeteries and crematories in costs and
expenses.

(BB) Reflects adjustments for increased depreciation and amortization
expense relative to the Company's new basis in the net assets of businesses
acquired after January 1, 1995 as if such acquisitions had taken place as of
January 1, 1995. Pro forma depreciation expense has been recorded based on the
Company's estimate of the useful lives of the acquired assets, using the
Company's depreciation methods and the Company's basis in such assets which is
established at acquisition. Pro forma costs and amortization have been recorded
using the contract lives to reflect the costs related to non-compete agreements
and a 40 year life to reflect amortization of names and reputations associated
with such acquisitions.

Year Ended Three Months Ended
Description December 31, 1995 March 31, 1996
- ----------- ----------------- --------------

Additional depreciation ............. $ 412,000 $ 76,000
Additional costs and amortization ... 705,000 110,000
---------- --------
Total depreciation and
amortization adjustment .......... $1,117,000 $186,000
========== ========

This adjustment is reflected in costs and expenses for the applicable periods.

(CC) Reflects additional interest expense of $2,143,000 for the year
ended December 31, 1995, and $359,000 for the three months ended March 31, 1996,
which would have been incurred by the Company assuming the acquisitions made by
the Company between January 1, 1995 and May 31, 1996, had been made as of the
beginning of January 1, 1995.

(DD) Tax provisions in the pro forma consolidated financial statements
have been made to reflect normal effective provisions (benefits) for these
events as if the effective rate will be 39%. Similarly, management has not
considered the use of any available net operating loss carryforwards in these
unaudited pro forma consolidated statements of operations. This adjustment
reflects a tax benefit of $1,981,000 for the year ending December 31, 1995, and
$425,000 for the three months ending March 31, 1996, in order to derive an
effective rate of 39%, or $1,191,000 for the year ending December 31, 1995, and
$278,000 for the three months ending March 31, 1996, for federal and state taxes
that the Company would have incurred on pro forma basis. Such pro forma
adjustments have been made to give effect to the tax benefit at an effective tax
rate of 39%, which the Company's management believes would

F-24

be indicative of the Company's tax position assuming the acquisitions were made
as of the beginning of the respective period.

(EE) Reflects the pro forma dividend payable on the Company's Series D
Redeemable Preferred Stock actually issued in connection with certain of its
acquisitions consummated subsequent to January 1, 1996 and before May 31, 1996,
as if the related stock issuance had occurred on January 1, 1995. A total of
6,037,000 shares of Series D Redeemable Preferred Stock, which would have
yielded a pro forma cash dividend of $383,000 for the year ending December 31,
1995, and $86,000 for the three months ending March 31, 1996, has been utilized
to fund acquisitions through May 31, 1996. The Series D Redeemable Preferred
Stock is not a common stock equivalent.

(ii) NOTES (FF) - (II) REPRESENT ADJUSTMENTS MADE RELATING TO THE OFFERING.

Assumes that unused proceeds of the Offering ($9,043,000) are used for
working capital purposes, and the full amount of shares offered hereby are
outstanding during the entire period.

(FF) Reflects the reversal of $120,000 for the year ending December 31,
1995, and $37,000 for the three months ending March 31, 1996, of amortization
expense related to deferred financing costs as of the beginning of the
respective period as it is assumed that the net proceeds of the Offering had
been used to retire certain of the Company's debt to which the deferred
financing costs relate as of January 1, 1995.

(GG) Reflects the elimination of interest expense related to the
application of the estimated net proceeds of the Offering to retire $2,243,000
and $40,714,000 of current and non-current long-term debt, respectively, as of
the beginning of the respective period.

(HH) Reflects the provision of federal and state income taxes at an
effective rate of 39% on pro forma adjustments consistent with management's
assumption that this rate would be indicative of the Company's tax position
assuming the acquisitions and the Offering were completed as of the beginning of
the respective period. In its assumption of the effective tax rate, management
has not considered the utilization of net operating losses which the Company has
generated since inception. It has been the Company's policy to fully reserve its
net operating losses.

(II) Earnings (loss) per share are computed based on the weighted
average number of common and common equivalent shares outstanding for the
respective period. Weighted average common and common equivalent shares are
calculated as more fully discussed in Note 9 of the Company's Consolidated
Financial Statements. In summary, pursuant to SEC directives relative to
companies contemplating an initial public offering, all stock options issued
within one year of an initial public offering will be considered outstanding for
all periods presented. In addition, the Company's Series A, B and C Preferred
Stock are considered as common equivalent shares, since their respective dates
of issuance, as they convert to Common Stock concurrent with the initial public
offering. Earnings (loss) per share has not been shown in the unaudited pro
forma consolidated financial statements due to the anticipated recapitalization
and related stock split of the Company.

F-25

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Carriage Services, Inc.:

We have audited the accompanying statements of operations of CFS 1996 Group (see
Note 1) and the related statements of cash flows and stockholder's equity for
the period from January 1, 1996 to April 29, 1996, the years ended December 31,
1995, and December 31, 1994, and the three months ended December 31, 1993. These
financial statements are the responsibility of CFS 1996 Group's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.

As discussed in Note 2, the accompanying financial statements are intended to
present the results of operations, cash flows and stockholder's equity as if CFS
1996 Group was a stand-alone entity; however, as discussed in Note 2, CFS 1996
Group has extensive transactions with Service Corporation International, its
parent, and is allocated certain costs from Service Corporation International.
Because of this relationship, the terms of some or all of the transactions and
allocations between Service Corporation International and CFS 1996 Group
included in the accompanying financial statements are not necessarily indicative
of that which would have resulted if CFS 1996 Group had been a stand-alone
entity.

In our opinion, the financial statements referred to above present fairly, in
all material respects, the results of operations of CFS 1996 Group and its cash
flows for the period from January 1, 1996 to April 29, 1996, the years ended
December 31, 1995, and December 31, 1994, and the three months ended December
31, 1993, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-26

CFS 1996 GROUP

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

1993 1994 1995 1996
----------- ----------- ----------- -----------
<S> <C> <C> <C> <C>
REVENUES ................................. $ 1,010,145 $ 4,614,590 $ 4,637,823 $ 1,710,806

COSTS AND EXPENSES ....................... 784,902 3,436,619 3,598,562 1,620,944
----------- ----------- ----------- -----------

GROSS PROFIT ........................ 225,243 1,177,971 1,039,261 89,862

GENERAL AND ADMINISTRATIVE EXPENSES ...... 182,030 775,861 570,207 317,698
----------- ----------- ----------- -----------

OPERATING INCOME (LOSS) ............. 43,213 402,110 469,054 (227,836)

OTHER (INCOME) EXPENSE ................... (40,726) (4,308) (187,048) 164,584

INTEREST (INCOME) EXPENSE ................ 16,195 49,439 (1,575) 785
----------- ----------- ----------- -----------

INCOME (LOSS) BEFORE INCOME TAX ALLOCATION 67,744 356,979 657,677 (393,205)

INCOME TAX ALLOCATION (NOTE 2) ........... 27,504 143,506 247,287 (153,350)
----------- ----------- ----------- -----------

NET INCOME (LOSS) ........................ $ 40,240 $ 213,473 $ 410,390 $ (239,855)
=========== =========== =========== ===========
</TABLE>

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

F-27

CFS 1996 GROUP

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>

1993 1994 1995 1996
----------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ............................................... $ 40,240 $ 213,473 $ 410,390 $(239,855)
Adjustments to reconcile net income (loss) to net cash
provided by (used in) operating activities-
Depreciation and amortization ............................. 24,004 103,701 122,800 48,125
Increase in accounts receivable ........................... (55,975) (226,229) (118,838) (119,831)
(Increase) decrease in inventories and other current assets 2,052,805 (1,110,152) (269,049) 47,605
Increase (decrease) in accounts payable ................... (9,429) 1,475 20,498 (437)
Increase (decrease) in accrued liabilities ................ (573,769) (387,869) (1,061,582) 655,786
----------- ----------- ----------- ---------

Net cash provided by (used in) operating activities 1,477,876 (1,405,601) (895,781) 391,393
----------- ----------- ----------- ---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ....................... (30,906) (149,633) (58,590) (49,739)
----------- ----------- ----------- ---------

Net cash used in investing activities ............. (30,906) (149,633) (58,590) (49,739)
----------- ----------- ----------- ---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on long-term debt ........................... (1,426,519) 1,788,501 730,308 (263,077)
----------- ----------- ----------- ---------

Net cash provided by (used in) financing activities (1,426,519) 1,788,501 730,308 (263,077)
----------- ----------- ----------- ---------

NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ............... 20,451 233,267 (224,063) 78,577

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 24,352 44,803 278,070 54,007
----------- ----------- ----------- ---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 44,803 $ 278,070 $ 54,007 $ 132,584
=========== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-28

CFS 1996 GROUP

STATEMENTS OF STOCKHOLDER'S EQUITY

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

Balance, October 1, 1993 ............................... $ 2,651,401

Net Income ............................................. 40,240
---------
Balance, December 31, 1993 ............................. 2,691,641

Net Income ............................................. 213,473
---------
Balance, December 31, 1994 ............................. 2,905,114

Net Income ............................................. 410,390
---------
Balance, December 31, 1995 ............................. 3,315,504

Net loss ............................................... (239,855)
---------
Balance, April 29, 1996 ................................ $ 3,075,649
===========

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

F-29

CFS 1996 GROUP

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO APRIL 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

1. ORGANIZATION/NATURE OF OPERATIONS

Effective April 29, 1996, CFS Funeral Services, Inc. (Carriage) purchased four
funeral homes and two cemeteries located in Texas and Florida from Service
Corporation International (the Parent) for aggregate consideration in excess of
the recorded amounts of the net assets of the homes and cemeteries. The four
funeral homes and two cemeteries purchased by Carriage in this transaction are,
hereinafter, collectively referred to as "CFS 1996 Group." CFS 1996 Group
performs personal and professional services related to funerals at its funeral
homes. Prearranged funerals are marketed in the geographic markets served by CFS
1996 Group's funeral service locations.

2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

BASIS OF PRESENTATION

The accompanying financial statements have been prepared from the separate
records of CFS 1996 Group. Certain expenses of a general and administrative
nature, either directly attributable to CFS 1996 Group, or allocations of actual
expenses incurred by the Parent for the benefit of CFS 1996 Group, have been
included in the accompanying statements of operations. Such allocated costs
include, among others, legal, payroll, employee benefits, insurance and
professional services. In addition, CFS 1996 Group is charged interest expense
for amounts payable to the Parent. Management of CFS 1996 Group believes that
such expenses have been allocated on a reasonable basis.

REVENUES

CFS 1996 Group recognizes revenue upon performance of funeral services and sale
of related funeral merchandise. CFS 1996 Group records revenue related to the
right of interment or mausoleum entombment and related merchandise at the time
of sale.

PRENEED FUNERAL TRUST

CFS 1996 Group is generally required by state laws 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 CFS 1996 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 specified service.

CEMETERY MERCHANDISE AND SERVICE TRUST

CFS 1996 Group is also generally required, by certain states, to deposit a
specified amount into a merchandise and service trust for cemetery merchandise
and services sold on a preneed basis. The principal and accumulated earnings of
the trust may only be withdrawn upon maturity (generally, death of purchaser) or
cancellation of the contracts. Trust fund 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.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, CFS 1996 Group considers all
highly liquid investments with a maturity of three months or less to be cash
equivalents.

F-30

INVENTORIES

Inventories are stated at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for major
additions and improvements are capitalized while replacements, maintenance and
repairs which do not improve or extend the life of the related assets are
charged to operations as incurred. Maintenance and repairs amounted to $185,170,
$283,797, $233,591 and $54,891 for the period from January 1, 1996 to April 29,
1996, the years ended December 31, 1995 and December 31, 1994, and the three
months ended December 31, 1993, respectively. Dispositions are removed at cost
less accumulated depreciation.

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

YEARS METHOD
----- -------------
Building and Improvements .................. 25-40 Straight line
Furniture and fixtures ..................... 5-7 Straight line
Other ...................................... 3-7 Straight line

INCOME TAXES

CFS 1996 Group does not file separate federal and state income tax returns since
all income taxes related to CFS 1996 Group are included in the consolidated
federal and state income tax returns of the Parent. The income tax allocations
included in the accompanying statements of operations reflect an estimate of the
income taxes which would have been attributed to CFS 1996 Group had it been a
separate entity. The income tax allocations approximate the Parent's effective
tax rate, or an estimate thereof, for the periods presented and were 39%, 37.6%,
40.2% and 40.6%, respectively.

NAMES AND REPUTATIONS

The excess of the purchase price paid by the Parent over the net assets of CFS
1996 Group is included in CFS 1996 Group's balance sheet as names and
reputations. Names and reputations are amortized on a straight line basis over
40 years. Amortization of names and reputations totaled approximately $4,000,
$12,000, $12,000 and $3,000 for the period from January 1, 1996 to April 29,
1996, the years ended December 31, 1995 and December 31, 1994, and the three
months ended December 31, 1993, respectively.

USE OF ESTIMATES

3. OPERATING LEASES

CFS 1996 Group has entered into certain operating leases for facilities and
equipment used in its business. For the period from January 1, 1996 to April 29,
1996, the years ended December 31, 1995 and December 31, 1994 and the three
months ended December 31, 1993, lease expense approximated $37,000, $112,000,
$93,000 and $17,000, respectively.

F-31

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Kubach-Smith Funeral Home, Inc.:

We have audited the accompanying statement of operations of Kubach-Smith Funeral
Home, Inc. and the related statements of shareholders' equity and cash flows for
the period from October 1, 1993, to September 6, 1994. 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 results of operations of Kubach-Smith Funeral Home,
Inc., and its cash flows for the period from October 1, 1993, to September 6,
1994, in conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-32

KUBACH-SMITH FUNERAL HOME, INC.

STATEMENT OF OPERATIONS

FOR THE PERIOD FROM OCTOBER 1, 1993 TO SEPTEMBER 6, 1994

REVENUES ................................................. $ 1,295,231
COSTS AND EXPENSES ....................................... 1,193,684
---------
GROSS PROFIT .................................... 101,547
GENERAL AND ADMINISTRATIVE EXPENSES ...................... 205,193
---------
OPERATING LOSS ...................................... (103,646)
OTHER INCOME ............................................. 10,083
INTEREST EXPENSE ......................................... 29,952
---------
LOSS BEFORE INCOME TAXES ................................. (123,515)
INCOME TAX BENEFIT ....................................... 21,336
---------
NET LOSS ................................................. $ (102,179)

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

F-33

KUBACH-SMITH FUNERAL HOME, INC.

STATEMENT OF CASH FLOWS

FOR THE PERIOD FROM OCTOBER 1, 1993 TO SEPTEMBER 6, 1994
<TABLE>
<CAPTION>
<S> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss .......................................................... $(102,179)
Adjustments to reconcile net loss to net cash provided by
operating activities-
Depreciation and amortization ............................... 47,620
Decrease in accounts receivable ............................. 76,724
Decrease in prepaid assets .................................. 12,378
Decrease in inventories and other current assets ........... 25,028
Increase in accounts payable ................................ 34,510
Increase in accrued liabilities ............................. 22,613
---------

Net cash provided by operating activities 116,694
---------

CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ......................... (46,051)
---------

Net cash used in investing activities ... (46,051)
---------

CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ........................................ (32,934)

Net cash used in financing activities ... (32,934)
---------

NET INCREASE IN CASH AND CASH EQUIVALENTS ............................ 37,709

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 4,547
---------

CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 42,256
=========

SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:

Interest paid ..................................................... $ 29,952
=========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-34

KUBACH-SMITH FUNERAL HOME, INC.

STATEMENT OF SHAREHOLDERS' EQUITY

FOR THE PERIOD FROM OCTOBER 1, 1993 TO SEPTEMBER 6, 1994

Balance, October 1, 1993 ................................ $ 152,225

Net loss ................................................ (102,179)
---------
Balance, September 6, 1994 .............................. $ 50,046
=========

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

F-35

KUBACH-SMITH FUNERAL HOME, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM OCTOBER 1, 1993 TO SEPTEMBER 6, 1994

1. ORGANIZATION/NATURE OF OPERATIONS

Kubach-Smith Funeral Home, Inc. (the Company), a taxable corporation, was
incorporated in Ohio in 1969. The Company owns and operates four funeral homes
in Ohio. The Company performs personal and professional services related to
funerals. Prearranged funerals are marketed in the markets served by the
Company's funeral service locations.

Effective September 6, 1994, all of the Company's capital stock was sold to
Carriage Funeral Services of Ohio, Inc. for aggregate consideration in excess of
the recorded amounts of the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUES

The Company recognizes revenues upon performance of funeral services and sale of
related funeral merchandise.

TRUST FUNDS

The Company is generally required by state laws 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 Company 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 specified service.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORIES

Inventories are recorded at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for 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. Maintenance and repairs totaled $40,422 for
the period from October 1, 1993 to September 6, 1994. Dispositions are removed
at cost less accumulated depreciation.

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

YEARS METHOD
----- ------------------------
Leasehold Improvements .............. 20-25 Straight line
Furniture and fixtures .............. 5-7 Double-declining balance
Other ............................... 5 Double-declining balance

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes".
Under SFAS No. 109, the Company

F-36

determines deferred tax assets and liabilities
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities.

USE OF ESTIMATES

3. INCOME TAXES

The only significant temporary difference between the Company's financial
statement and tax bases of accounting results from a net operating loss
generated by the Company during the period from October 1, 1993 to September 6,
1994, which management believes will be realized. The income tax benefit for the
period consisted of:

CURRENT DEFERRED TOTAL
-------- -------- --------
U.S. federal ............. $ (8,312) $ (8,532) $(16,844)
State .................... (2,217) (2,275) (4,492)
-------- -------- --------

$(10,529) $(10,807) $(21,336)
======== ======== ========

The Company is an accrual basis taxpayer. The Company is generally subject to a
marginal U.S. federal rate of 15% because of the level of the Company's taxable
income. However, in instances in which the Company's taxable income exceeds a
specified level, it would become subject to a higher U.S. federal marginal tax
rate. The differences in the income taxes recorded by the Company and the amount
determined by applying the U.S. federal statutory rate to loss before income
taxes of the Company for the period from October 1, 1993 to September 6, 1994
are summarized as follows:

U.S. federal income statutory rate ..................................... (15%)
Effect of state income taxes ........................................... (4%)
Effect of non-deductible expenses ...................................... 2%
---
(17%)
===
4. RELATED-PARTY TRANSACTIONS

The Company has a five year lease with a shareholder on certain facilities, with
options to renew for an additional five years. For the period October 1, 1993 to
September 6, 1994, lease expense totaled approximately $79,970. In addition,
interest expense for the period from October 1, 1993 to September 6, 1994,
included approximately $17,000 of interest expense related to a note payable to
a shareholder.

F-37
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Lusk Funeral Home, Inc.:

We have audited the accompanying statements of operations of Lusk Funeral Home,
Inc. and the related statements of cash flows and shareholder's deficit for the
years ended December 31, 1995, and December 31, 1994 and the three months ended
December 31, 1993. 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 results of operations of Lusk Funeral Home, Inc., and
its cash flows for the years ended December 31, 1995, and December 31, 1994 and
the three months ended December 31, 1993, in conformity with generally accepted
accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-38

LUSK FUNERAL HOME, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1995, AND
DECEMBER 31, 1994 AND THE THREE MONTHS ENDED DECEMBER 31,1993

1993 1994 1995
-------- -------- ---------
REVENUES ................................ $ 93,009 $452,390 $ 603,394
COSTS AND EXPENSES ...................... 90,386 355,235 499,403
-------- -------- ---------
GROSS PROFIT ....................... 2,623 97,155 103,991
GENERAL AND ADMINISTRATIVE EXPENSES ..... 10,503 46,351 87,521
-------- -------- ---------
OPERATING INCOME (LOSS) ............ (7,880) 50,804 16,470
OTHER INCOME ............................ 3,339 12,240 11,481
INTEREST EXPENSE ........................ 9,132 35,864 39,460
-------- -------- ---------
INCOME (LOSS) BEFORE INCOME TAXES ....... (13,673) 27,180 (11,509)
INCOME TAX (BENEFIT) PROVISION .......... (2,038) 5,464 (1,369)
-------- -------- ---------
NET INCOME (LOSS) ....................... $(11,635) $ 21,716 $ (10,140)
======== ======== =========

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

F-39

LUSK FUNERAL HOME, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1995, AND
DECEMBER 31, 1994 AND THE THREE MONTHS ENDED DECEMBER 31,1993
<TABLE>
<CAPTION>

1993 1994 1995
-------- -------- --------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ................................................. $(11,635) $ 21,716 $(10,140)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization ............................... 7,633 38,231 27,944
(Increase) decrease in accounts receivable .................. (10,157) (31,977) 17,766
(Increase) decrease in inventories and other current assets . 19,171 5,108 (7,371)
Increase (decrease) in accounts payable ..................... 21,843 (6,649) (5,184)
Increase (decrease) in accrued liabilities .................. (3,628) 14,214 37,915
-------- -------- --------
Net cash provided by operating activities 23,227 40,643 60,930
-------- -------- --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ......................... (21,651) (5,768) (11,341)
-------- -------- --------
Net cash used in investing activities ... (21,651) (5,768) (11,341)
-------- -------- --------
CASH FLOWS FROM FINANCING ACTIVITIES:
Payments on long-term debt ........................................ (3,662) (21,483) (24,195)
-------- -------- --------
Net cash used in financing activities .. (3,662) (21,483) (24,195)
-------- -------- --------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. (2,086) 13,392 25,394
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 17,410 15,324 28,716
-------- -------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 15,324 $ 28,716 $ 54,110
======== ======== ========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 9,132 $ 35,864 $ 39,460
======== ======== ========
Taxes paid ........................................................ $ 3,000 $ 4,200 $ 8,500
======== ======== ========
</TABLE>

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

F-40

LUSK FUNERAL HOME, INC.

STATEMENTS OF SHAREHOLDER'S DEFICIT

FOR THE YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 31, 1994
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

Balance, October 1, 1993 ................................ $(147,410)

Net Loss ................................................ (11,635)
---------
Balance, December 31, 1993 .............................. (159,045)

Net Income .............................................. 21,716
---------
Balance, December 31, 1994 .............................. (137,329)

Net Loss ................................................ (10,140)
---------
Balance, December 31, 1995 .............................. $(147,469)
=========

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

F-41

LUSK FUNERAL HOME, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE YEARS ENDED DECEMBER 31, 1995, AND DECEMBER 31, 1994
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

1. ORGANIZATION/NATURE OF OPERATIONS

Lusk Funeral Home, Inc. (the Company), a taxable corporation, was organized
under the laws of the State of Kentucky on September 29, 1976. The Company owns
and operates two funeral homes in Kentucky. The Company performs personal and
professional services related to funerals at its funeral homes. Prearranged
funerals are marketed in the markets served by the Company's funeral service
locations.

Effective January 4, 1996, all of the Company's stock was sold to Carriage
Funeral Holdings, Inc. for aggregate consideration in excess of the recorded
amounts of the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUES

The Company recognizes revenue upon performance of funeral services and sale of
related funeral merchandise.

TRUST FUNDS

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for major
additions and improvements are capitalized while replacements, maintenance and
repairs which do not improve or extend the life of the related assets are
charged to operations as incurred. Maintenance and repairs totaled $10,836,
$5,923 and $2,336 for the years ended December 31, 1995, and December 31,1994
and the three months ended December 31, 1993 respectively. Dispositions are
removed at cost less accumulated depreciation.

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

YEARS METHOD
Building and Improvements .............. 25 Straight line
Furniture and fixtures ................. 5 Double-declining balance
Other .................................. 3 Straight line

F-42

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 (SFAS No. 109), " Accounting for Income
Taxes". Under SFAS No. 109, the Company determines deferred tax assets and
liabilities based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities.

USE OF ESTIMATES

3. INCOME TAXES

The only significant temporary difference between the Company's financial
statement and tax bases of accounting is related to a net operating loss (NOL)
generated in the three months ended December 31, 1993; that NOL was utilized in
the year ended December 31, 1994. The income tax provision (benefit) for income
taxes for the years ended December 31, 1995, and December 31, 1994 and the three
months ended December 31, 1993 consisted of:

1993 1994 1995
------- ------ -------
Current:
U.S. federal ................................ $ -- $2,705 $(1,081)
State ....................................... -- 721 (288)
------- ------ -------
Total current provision (benefit) ............ $ -- $3,426 $(1,369)
------- ------ -------
Deferred:
U.S. federal .......................... $(1,609) $1,609 $ --
State ................................ (429) 429 --
------- ------ -------
Total deferred provision (benefit) ...... $(2,038) $2,038 $ --
------- ------ -------

Total income tax provision (benefit) .... $(2,038) $5,464 $(1,369)
======= ====== =======

The Company is an accrual basis taxpayer. The Company is generally subject to a
marginal U.S. federal rate of 15% because of the level of the Company's taxable
income. However, in instances in which the Company's taxable income exceeds a
specified level, it would become subject to a higher U.S. federal marginal tax
rate. The differences between the income taxes recorded by the Company and the
income taxes provided for by applying the federal statutory rate to the
Company's pre-tax income for the years ended December 31, 1995, and 1994 and the
three months ended December 31, 1993, are summarized as follows:

1993 1994 1995
------- ----- ------
U.S. federal statutory rate .................. (15%) 15% (15%)
Effect of state income taxes ................. (4) 4 (4)
Effect of non-deductible expenses ............ 4 1 7
---- ---- ----
Total income tax provision (benefit) ............ (15%) 20% (12%)
==== ==== ====

4. EMPLOYEE BENEFIT PLAN

Effective January 1, 1993, the Company began participation in an employee
benefit plan, the Lusk-McFarland Funeral Home, Inc. Profit Sharing Plan (the
"Plan"), which covers substantially all full time

F-43

employees having at least one year of service, subject to certain minimum age
requirements. Total employee/employer contributions may not exceed the lesser of
$30,000 or 25% of eligible compensation per year, subject to limitations imposed
by the Internal Revenue Code. In its sole discretion, the Company can make
contributions to the Plan. Expenses related to the Plan were $24,542, $9,012 and
$0 for the years ended December 31, 1995, and December 31,1994 and the three
months ended December 31, 1993, respectively.

5. RELATED-PARTY TRANSACTIONS

The Company recorded $23,980, $24,696 and $6,174 of interest expense related to
debt owed by the Company to the shareholder for the years ended December 31,
1995, and 1994 and the three months ended December 31, 1993.

6. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into operating leases for certain equipment utilized in
its business. For the years ended December 31, 1995, and December 31, 1994 and
the three months ended December 31, 1993, lease expense totaled $10,692,
$12,151, and $0, respectively.

F-44

REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
West End Funeral Home, Inc.:

We have audited the accompanying statements of operations of West End Funeral
Home, Inc. and the related statements of shareholders' equity and cash flows for
the period from January 1, 1995 to May 10, 1995, the year ended December 31,
1994, and the three months ended December 31, 1993. 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 results of operations of West End Funeral Home, Inc.,
and its cash flows for the period from January 1, 1995 to May 10, 1995, the year
ended December 31, 1994, and the three months ended December 31, 1993, in
conformity with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-45

WEST END FUNERAL HOME, INC.

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1995 TO MAY 10, 1995,
THE YEAR ENDED DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

1993 1994 1995
-------- ---------- ----------
REVENUES ............................... $518,947 $2,265,923 $1,016,164
COSTS AND EXPENSES ..................... 420,390 1,757,797 746,623
-------- ---------- ----------
GROSS PROFIT ...................... 98,557 508,126 269,541
GENERAL AND ADMINISTRATIVE EXPENSES .... 75,062 233,556 172,318
-------- ---------- ----------
OPERATING INCOME .................. 23,495 274,570 97,223
OTHER INCOME ........................... 13,862 66,321 34,935
INTEREST EXPENSE ....................... 7,023 26,678 10,319
-------- ---------- ----------
NET INCOME ............................. $ 30,334 $ 314,213 $ 121,839
======== ========== ==========

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

F-46

WEST END FUNERAL HOME, INC.

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1995 TO MAY 10, 1995,
THE YEAR ENDED DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
1993 1994 1995
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ........................................................ $ 30,334 $ 314,213 $ 121,839
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization ............................... 20,417 91,378 54,611
(Increase) decrease in accounts receivable .................. 23,148 (21,009) 168,344
(Increase) decrease in other current assets ................ 9,339 4,917 (16,436)
Increase (decrease) in accounts payable ..................... 13,542 32,404 (52,523)
Decrease in deferred and other liabilities ................ (6,567) (36,325) (8,971)
Increase (decrease) in accrued liabilities .................. (24,837) 9,634 (22,433)
--------- --------- ---------
Net cash provided by operating activities 65,376 395,212 244,431
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ......................... (5,780) (290,249) (53,274)
--------- --------- ---------
Net cash used in investing activities ... (5,780) (290,249) (53,274)
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on long-term debt ............................. (14,998) 12,353 (67,256)
Shareholder distribution .......................................... (2,454) (140,296) (102,786)
--------- --------- ---------
Net cash used in financing activities ... (17,452) (127,943) (170,042)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................. 42,144 (22,980) 21,115
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ..................... 308,480 350,624 327,644
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ........................... $ 350,624 $ 327,644 $ 348,759
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ..................................................... $ 7,023 $ 26,678 $ 10,319
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-47

WEST END FUNERAL HOME, INC.

STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE PERIOD FROM JANUARY 1, 1995 TO MAY 10, 1995,
THE YEAR ENDED DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

Balance, October 1, 1993 ................................ $ 397,198
Shareholder distribution ................................ (2,454)
Net Income .............................................. 30,334
---------
Balance, December 31, 1993 .............................. 425,078
Shareholder distribution ................................ (140,296)
Net Income .............................................. 314,213
---------
Balance, December 31, 1994 .............................. 598,995
Shareholder distribution ................................ (102,786)
Net Income .............................................. 121,839
---------
Balance, May 10, 1995 ................................... $ 618,048
=========

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

F-48

WEST END FUNERAL HOME, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1995 TO MAY 10, 1995,
THE YEAR ENDED DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31,1993

1. ORGANIZATION /NATURE OF OPERATIONS

West End Funeral Home, Inc. (the Company), a corporation qualified under
Subchapter S of the Internal Revenue Code, was organized under the laws of the
state of Illinois. The Company owns and operates four funeral homes in Chicago,
Illinois and the surrounding area. The Company performs personal and
professional services related to funerals at its funeral homes. Prearranged
funerals are marketed in the markets served by the Company's funeral service
locations.

Effective May 10, 1995, substantially all of the Company's assets were sold to
Carriage Funeral Holdings, Inc. for aggregate consideration in excess of the
recorded amounts of the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUES

The Company recognizes revenue upon performance of funeral services and sale of
related funeral merchandise.

TRUST FUNDS

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for 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. Maintenance and repairs amounted to $4,148,
$29,836 and $4,486 for the period from January 1, 1995 to May 10, 1995, the year
ended December 31, 1994, and the three months ended December 31, 1993,
respectively. Dispositions are removed at cost less accumulated depreciation.

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

YEARS METHOD
----- ------------------------
Leasehold Improvements ............... 10 Double-Declining Balance
Furniture and fixtures ............... 5 Double-Declining Balance
Other ................................ 3-5 Double-Declining Balance

F-49

INCOME TAXES

The Company is organized under subchapter S of the Internal Revenue Code.
Federal and state income taxes for subchapter S corporations are the direct
responsibility of the Company's shareholders. Accordingly, no provision for
income taxes has been reflected in the accompanying financial statements.

USE OF ESTIMATES

3. OPERATING LEASES

The Company leases certain facilities from a shareholder. For the period from
January 1, 1995 to May 10, 1995, the year ended December 31, 1994, and the three
months ended December 31, 1993, lease expense to this shareholder totaled
approximately $84,382, $178,517 and $34,341, respectively.

4. EMPLOYEE BENEFIT PLAN

Effective March 28, 1970, as amended and restated effective January 1, 1989, the
Company began participation in an employee benefit plan, the West End Funeral
Home, Inc. Profit Sharing Plan (the Plan), which covers substantially all full
time employees having at least one year of service. In its sole discretion, the
Company can make contributions to the Plan. Expenses related to the Plan were
$0, $20,000 and $2,345 for the period from January 1, 1995, to May 10, 1995, the
year ended December 31, 1994, and the three months ended December 31, 1993,
respectively.

F-50
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

Hennessy Funeral Home, Inc.
Akron, OH

We have audited the accompanying statements of income, retained earnings, and
cash flows for the years ended December 31, 1993, December 31, 1994, December
31, 1995 and the ten weeks ended March 8, 1996. 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 the
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 the above present fairly,
in all material respects, the results of operations and cash flows for Hennessy
Funeral Home, Inc. for the years ended December 31, 1993, December 31, 1994,
December 31, 1995 and the ten weeks ended March 8, 1996 in conformity with
generally accepted accounting principles.

KEE & ASSOCIATES, INC.

May 31, 1996

F-51

HENNESSY FUNERAL HOME, INC.

STATEMENTS OF OPERATIONS

FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 31, 1994,
DECEMBER 31,1995 AND THE TEN WEEKS ENDED MARCH 8, 1996
<TABLE>
<CAPTION>
1993 1994 1995 1996
-------- ---------- ---------- ---------
<S> <C> <C> <C> <C>
REVENUES .......................... $976,167 $1,001,932 $1,242,716 $ 221,670
-------- ---------- ---------- ---------
COSTS AND EXPENSES: ............... 429,210 429,716 509,087 113,296
-------- ---------- ---------- ---------
GROSS PROFIT ................. 546,957 572,216 733,629 108,374
GENERAL AND ADMINISTRATIVE EXPENSES 508,033 533,282 602,414 114,056
-------- ---------- ---------- ---------
OPERATING PROFIT (LOSS) ...... 38,924 38,934 131,215 (5,682)
INTEREST EXPENSE .................. 18,244 3,646 1,002 356
-------- ---------- ---------- ---------
INCOME (LOSS) BEFORE INCOME TAXES 20,680 35,288 130,213 (6,038)
INCOME TAXES ...................... 7,949 10,248 43,215 813
-------- ---------- ---------- ---------
NET INCOME (LOSS) ................. $ 12,731 $ 25,040 $ 86,998 $ (6,851)
======== ========== ========== =========
RETAINED EARNINGS
BEGINNING RETAINED EARNINGS ....... $604,303 $ 617,034 $ 642,074 $ 729,072
NET INCOME (LOSS) ................. 12,731 25,040 86,998 (6,851)
-------- ---------- ---------- ---------
ENDING RETAINED EARNINGS .......... $617,034 $ 642,074 $ 729,072 $ 722,221
======== ========== ========== =========
</TABLE>

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

F-52

HENNESSY FUNERAL HOME, INC.

STATEMENTS OF CASH FLOWS

FOR THE YEARS ENDED DECEMBER 31, 1993, DECEMBER 31, 1994,
DECEMBER 31,1995 AND THE TEN WEEKS ENDED MARCH 8, 1996
<TABLE>
<CAPTION>

1993 1994 1995 1996
--------- -------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) ........................................................ $ 12,731 $ 25,040 $ 86,998 $ (6,851)
Adjustments to reconcile net income (loss) to net cash provided by
operating activities-
Depreciation and amortization ...................................... 66,560 59,389 56,524 18,654
(Increase) decrease in accounts receivable ......................... 48,979 (21,993) (29,910) (11,686)
(Increase) decrease in inventories and other current assets ......... (1,098) (6,937) (7,045) 3,026
Increase (decrease) in accounts payable ............................ 9,058 (10,708) 57,200 (65,633)
Increase (decrease) in accrued liabilities ......................... 4,160 (7,350) 55,749 (42,169)
--------- -------- --------- ---------
Net cash provided by operating activities ...... 140,390 37,441 219,516 (104,659)
--------- -------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Collections on notes receivable from officer ............................ 8,246 -- -- 0
Purchase of property, plant and equipment ................................ (35,721) (11,454) (109,201) 0
--------- -------- --------- ---------
Net cash used in investing activities .......... (27,475) (11,454) (109,201) 0
--------- -------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Short-term borrowings from shareholder .................................. 0 0 20,315 0
Additional long-term borrowings ......................................... 16,035 0 0 0
Payments on long-term debt ............................................... (85,268) (45,402) 0 0
--------- -------- --------- ---------
Net cash used by financing activities ......... (69,233) (45,402) 20,315 0
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ........................ 43,682 (19,415) 130,630 (104,659)
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ............................ 37,772 81,454 62,039 192,669
--------- -------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .................................. $ 81,454 $ 62,039 $ 192,669 $ 88,010
========= ======== ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ............................................................ $ 18,244 $ 3,646 0 $ 356
========= ======== ========= =========
Taxes paid ............................................................... $ 15,980 $ 4,634 $ 7,581 $ 1,697
========= ======== ========= =========
SUPPLEMENTAL SCHEDULE OF NONCASH INVESTING AND FINANCING ACTIVITIES:

The Company sold an automobile to it's majority shareholder at book value. In
conjuction with the sale the following asset was acquired and liability was
retired:
Note receivable shareholder ................................................. 0 0 0 $ 39,022
========= ======== ========= =========
Note payable shareholder, including accrued interest ........................ 0 0 0 $ 21,673
========= ======== ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-53

HENNESSY FUNERAL HOME, INC.

NOTES TO FINANCIAL STATEMENTS

FOR YEARS ENDED DECEMBER 31,1993, DECEMBER 31, 1994,
AND DECEMBER 31, 1995 AND FOR THE TEN WEEKS ENDED MARCH 8, 1996

1. ORGANIZATION/NATURE OF OPERATIONS

Hennessy Funeral Home, Inc. (the Company), was organized under the laws of the
State of Ohio on October 11, 1973. The Company owns and operates 2 funeral homes
in Ohio. The Company performs personal and professional services related to
funerals at its funeral homes. Prearranged funerals are marketed in the
geographic markets served by the Company's funeral service locations.

Effective March 8, 1996, all of the Company's stock was sold to Carriage Funeral
Holdings, Inc. for aggregate consideration of $2,791,370.74.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:

REVENUES

The Company records the sale of funeral merchandise and services upon
performance.

TRUST FUNDS

The Company is generally required by state laws 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 Company 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 specified service.

CASH AND CASH EQUIVALENTS

For purposes of the statement of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORY

The effect of changes in inventories is included in merchandise costs at the
lower of its cost basis (as determined by the specific identification method) or
market.

PROPERTY, PLANT AND EQUIPMENT

Furniture, leasehold improvements and equipment are capitalized at cost.
Expenditures for major additions and improvements are capitalized while
replacements, maintenance and repairs which do not improve or extend the life of
the related assets are charged to operations as incurred. Maintenance and
repairs amounted to $27,413, $27,414, $33,311, and $7,107, for the years ended
December 31, 1993 and December 31,1994, December 31, 1995 and for the ten weeks
ended March 8, 1996 respectively. Dispositions are removed at cost less
accumulated depreciation.

Depreciation is provided over the estimated useful lives of the depreciable
assets as follows:
YEARS METHOD
Leasehold Improvements .............. 7 - 15 years Straight-line
Furniture and fixtures .............. 5 - 10 years Straight-line
Other ............................... 5 years Straight-line

F-54

Depreciation expense for the years ended December 31, 1993, December 31, 1994,
December 31, 1995, and the ten weeks ended March 8, 1996 were as follows:

1993 ................................................. $65,360
1994 ................................................. 58,189
1995 ................................................. 55,324
1996 ................................................. 18,431

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of
Financial Accounting Standards No. 109 ("SFAS No. 109"), " Accounting for Income
Taxes". Under SFAS No. 109, the Company determines deferred tax assets and
liabilities based on the estimated future tax effects of differences between the
financial statement and tax bases of assets and liabilities.

USE OF ESTIMATES

3. INCOME TAXES:

There are no significant temporary differences between the Company's financial
statement and tax bases of accounting. In addition, the Company's effective tax
rate materially approximates the applicable statutory rate.

Income taxes expensed for the year ended December 31, 1993, December 31, 1994,
and December 31, 1995 and for the ten weeks ended March 8, 1996 consisted of:

1993 1994 1995 1996
------- ------- ------- ----
Current:
U.S. federal ........... $ 3,100 $ 6,418 $32,233 $ 0
State .................. 4,849 3,830 10,982 813
------- ------- ------- ----
$ 7,949 $10,248 $43,215 $813
------- ------- ------- ----

4. RELATED PARTY TRANSACTIONS

The Company leases two funeral homes and adjoining parking areas from its'
shareholders. The terms of these leases are contained in note 5.

The Company also accrued interest at 9% on a note payable to its' majority
shareholder. The $20,314.75 note was dated May 18, 1995. Interest expensed on
this note for the year ending December 31, 1995 was $1,002 and for the ten weeks
ended March 8, 1996 was $356. The note was retired on March 8, 1996.

5. LEASES

The company leases the Akron and Tallmadge funeral homes under operating leases
from its' shareholders.

The Akron funeral home and adjoining parking lots are leased from the Company's
majority shareholder and other family members. The lease is a ten year lease
with options to renew the lease for two additional five year periods. Rent is
payable in monthly installments of $2,754.

F-55

Additional parking space is leased from the majority shareholder under a 5 year
lease dated September 1, 1991. Rent was payable in monthly installments of $785.
This lease included a 5 year option to renew, however as a result of the merger
with Carriage Funeral Services, Inc. (see note 7) a new 10 year lease with 3
five year options to renew was signed with the surviving corporation on March 8,
1996. Monthly rental beginning March 8, 1996 is $943.50.

The Tallmadge funeral home was leased from the Company's shareholders. The lease
dated September 1, 1991 included a 5 year option to renew. Rent was payable in
monthly installments of $3,850. The Tallmadge funeral home was sold by the
shareholders to the surviving corporation as part of the merger with Carriage
Funeral Services, Inc.

Rental expense to the shareholders under the terms of the above leases for the
years ending December 31, 1993, December 31, 1994 and December 31, 1995 and for
the ten weeks ending March 8, 1996 were as follows:

1993 1994 1995 1996
------- ------- ------- ------
Akron funeral home $31,600 $34,400 $33,000 $7,000
Akron lots 8,940 8,940 8,940 2,085
Tallmadge funeral home 46,119 46,119 46,119 8,711
------- ------- ------- ------
$86,659 $89,459 $88,059 17,796
------- ------- ------- ------

Future minimum rental payments applicable to the lease arrangements at March 8,
1996 are as follows:
AKRON FUNERAL HOME AKRON LOTS TALLMADGE
December 31, 1996 ............. $24,786 $ 6,605 $0
December 31, 1997 ............. 33,048 11,322 0
December 31, 1998 ............. 33,048 11,322 0
December 31, 1999 ............. 33,048 11,322 0
December 31, 2000 ............. 33,048 11,322 0
Thereafter .................... 22,032 61,327 0

6. DEFINED CONTRIBUTION PENSION PLAN

The Company provides a Simplified Employee Pension (SEP) defined contribution
plan for its employees. The Company determines its share of the contribution to
the plan annually. The Company's contribution to the plan for the years ending
December 31, 1993, December 31, 1994 and December 31, 1995 and for the ten weeks
ended March 8, 1996 were as follows:

1993 ................................................. $34,862
1994 ................................................. 26,986
1995 ................................................. 43,814
1996 ................................................. 8,576

7. SUBSEQUENT EVENTS

At the close of business on March 8, 1996, the Company merged with Carriage
Funeral Services, Inc. Under terms of the agreement, the Company's shareholders
received approximately 82% of the proceeds in Series D voting preferred stock
with a dividend rate of 6.25% per annum. As structured, the transaction is
intended to qualify as a reverse triangular merger under Internal Revenue Code
Section 368(a)(1)(A) and 368 (a)(2)(E), and appears to meet the requirements for
a tax-free reorganization. Additionally, the surviving corporation acquired the
funeral home located in Tallmadge, Ohio from the Company's shareholders. Also,
the agreement contains covenants not to compete and employment contracts with
the shareholders.

F-56
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
James E. Drake Funeral Home, Inc.:

We have audited the accompanying statements of operations of James E. Drake
Funeral Home, Inc. and the related statements of cash flows and stockholders'
equity for the period from December 1, 1995, to February 29, 1996, and the years
ended November 30, 1995 and November 30, 1994. 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 results of operations of James E. Drake Funeral Home,
Inc., and its cash flows for the period from December 1, 1995, to February 29,
1996, and the years ended November 30, 1995 and November 30, 1994, in conformity
with generally accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-57

JAMES E. DRAKE FUNERAL HOME, INC.

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM DECEMBER 1, 1995, TO FEBRUARY 29, 1996,
AND THE YEARS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994

1994 1995 1996
-------- -------- ---------
REVENUES ................................. $635,070 $698,665 $ 129,304
COSTS AND EXPENSES ....................... 517,039 582,688 128,245
-------- -------- ---------
GROSS PROFIT ........................ 118,031 115,977 1,059
GENERAL AND ADMINISTRATIVE EXPENSES ...... 24,583 30,476 3,706
-------- -------- ---------
OPERATING INCOME (LOSS) ............. 93,448 85,501 (2,647)
OTHER INCOME ............................. 250 2,117 29,466
INTEREST EXPENSE ......................... 51,446 47,651 12,174
-------- -------- ---------
INCOME BEFORE INCOME TAXES ............... 42,252 39,967 14,645
INCOME TAX PROVISION ..................... 13,464 12,598 4,064
-------- -------- ---------
NET INCOME ............................... $ 28,788 $ 27,369 $ 10,581
======== ======== =========

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

F-58

JAMES E. DRAKE FUNERAL HOME, INC.

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM DECEMBER 1, 1995, TO FEBRUARY 29, 1996,
AND THE YEARS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994
<TABLE>
<CAPTION>
1994 1995 1996
--------- --------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ....................................................... $ 28,788 $ 27,369 $ 10,581
Adjustments to reconcile net income to net cash provided by
operating activities-
Depreciation and amortization .............................. 111,303 103,231 12,812
Gain on disposition of asset ............................... -- -- (27,852)
(Increase) decrease in accounts receivable ................. (47,577) 18,536 31,855
(Increase) decrease in inventories ......................... (997) (20,059) 2,334
Decrease in other assets ................................... 45,335 26,415 9,339
Increase (decrease) in accounts payable .................... 24,226 (12,953) (14,952)
Increase (decrease) in accrued liabilities ................. 36,822 4,940 (5,681)
--------- --------- ---------
Net cash provided by operating activities 197,900 147,479 18,436
--------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Disposition (purchase) of property, plant and equipment .......... (142,472) 9,240 58,073
--------- --------- ---------
Net cash provided by (used in) investing activities ... (142,472) 9,240 58,073
--------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on long-term debt ............................ (75,191) 47,432 (73,216)
Dividends paid .................................................. -- (24,000) --
Treasury shares purchased ....................................... -- -- (120,000)
--------- --------- ---------
Net cash provided by (used in) financing activities ... (75,191) 23,432 (193,216)
--------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS ................ (19,763) 180,151 (116,707)

CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD .................... 75,250 55,487 235,638
--------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .......................... $ 55,487 $ 235,638 $ 118,931
========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid .................................................... $ 51,446 $ 47,651 $ 12,174
========= ========= =========
Taxes paid ....................................................... $ 13,000 $ 13,000 $ 4,000
========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-59

JAMES E. DRAKE FUNERAL HOME, INC.

STATEMENTS OF STOCKHOLDERS' EQUITY

FOR THE PERIOD FROM DECEMBER 1, 1995, TO FEBRUARY 29, 1996,
AND THE YEARS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994

Balance, December 1, 1993 ................................. $ 211,755
Net Income ................................................ 28,788
---------
Balance, November 30, 1994 ................................ 240,543
Dividends paid ............................................ (24,000)
Net Income ................................................ 27,369
---------
Balance, November 30, 1995 ................................ 243,912
Treasury shares purchased, at cost ........................ (120,000)
Net Income ................................................ 10,581
---------
Balance, February 29, 1996 ................................ $ 134,493
=========

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

F-60

JAMES E. DRAKE FUNERAL HOME, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM DECEMBER 1, 1995, TO FEBRUARY 29, 1996,
AND THE YEARS ENDED NOVEMBER 30, 1995 AND NOVEMBER 30, 1994

1. ORGANIZATION/NATURE OF OPERATIONS

James E. Drake Funeral Home, Inc. (the Company), a taxable corporation, was
organized under the laws of the State of Kentucky on December 22, 1981. The
Company owns and operates two funeral homes in Kentucky. The Company performs
personal and professional services related to funerals at its funeral homes.
Prearranged funerals are marketed in the markets served by the Company's funeral
service locations.

Effective March 1, 1996, all of the Company's stock was sold to Carriage Funeral
Holdings, Inc. for aggregate consideration in excess of the recorded amounts of
the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUES

The Company recognizes revenue upon performance of funeral services and sale of
related funeral merchandise.

TRUST FUNDS

The Company is generally required by state laws 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 Company 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 specified service.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for major
additions and improvements are capitalized while replacements, maintenance and
repairs which do not improve or extend the life of the related assets are
charged to operations as incurred. Maintenance and repairs totaled $1,243,
$13,525 and $10,188 for the period from December 1, 1995 to February 29, 1996,
and the years ended November 30, 1995 and November 30, 1994, respectively.
Dispositions are removed at cost less accumulated depreciation.

Depreciation is provided over the estimated useful lives of the depreciable
assets as follows:
YEARS METHOD
Building and improvements ........... 10-25 Straight line
Furniture and fixtures .............. 5-7 Double-Declining Balance
Other ............................... 3-5 Double-Declining Balance

F-61

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), " Accounting for Income Taxes."
Under SFAS No. 109, the Company determines deferred tax assets and liabilities
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities.

USE OF ESTIMATES

3. INCOME TAXES

There are no significant temporary differences between the Company's financial
statement and tax bases of accounting. The income tax provision for the period
from December 1, 1995 to February 29, 1996, and the years ended November 30,
1995 and November 30, 1994, consisted of:

1994 1995 1996
--------- --------- --------
Current:
U.S. federal ......................... $10,974 $10,199 $3,198
State ................................ 2,490 2,399 866
------- ------- ------
Total income tax provision ............ $13,464 $12,598 $4,064
------- ------- ------

The Company is an accrual basis taxpayer. The Company is generally subject to a
marginal U.S. federal rate of 15% because of the level of the Company's taxable
income. However, in instances in which the Company's taxable income exceeds a
specified level, it becomes subject to a higher U.S. federal marginal tax rate.
The differences in the income taxes recorded by the Company and the income taxes
provided for by applying the federal statutory rate to the Company's pre-tax
income for the period from December 1, 1995 to February 29, 1996, and the years
ended November 30, 1995 and November 30, 1994, are summarized as follows:

1994 1995 1996
---- ---- ----
U.S. federal statutory rate ............................. 15% 15% 15%
Effect of graduated U.S. federal rate ................... 4 3 --
Effect of state income taxes ............................ 4 4 4
Effect of non-deductible depreciation and amortization .. 9 10 9
---- ---- ----
Total income tax provision ................................. 32% 32% 28%
==== ==== ====

4. COMMITMENTS AND CONTINGENCIES

OPERATING LEASES

The Company has entered into operating leases for certain facilities and
equipment utilized in its business. For the period from December 1, 1995 to
February 29, 1996, and the years ended November 30, 1995 and November 30, 1994,
lease expense totaled $2,014, $9,480 and $8,146, respectively.

LEGAL MATTERS

In the normal course of its operations, the Company has become involved in a
legal dispute. In this case, the Company has been named as one of several
defendants in a suit in which the plaintiff alleges, among other things,
defamation. The Company believes it has meritorious defenses in this case and
believes that a decision adverse to the Company in this dispute would not have a
material effect on the results of operations of the Company.

F-62
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To the Board of Directors of
Dwayne R. Spence Funeral Home, Inc.:

We have audited the accompanying statements of operations of Dwayne R. Spence
Funeral Home, Inc. and the related statements of shareholder's equity and cash
flows for the period from January 1, 1996 to March 29, 1996, the years ended
December 31, 1995 and December 31, 1994, and the three months ended December 31,
1993. 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 results of operations of Dwayne R. Spence Funeral
Home, Inc., and its cash flows for the period from January 1, 1996 to March 29,
1996, the years ended December 31, 1995 and December 31, 1994, and the three
months ended December 31, 1993, in conformity with generally accepted accounting
principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-63

DWAYNE R. SPENCE FUNERAL HOME, INC.

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31,1993
<TABLE>
<CAPTION>
1993 1994 1995 1996
-------- ----------- ----------- ---------
<S> <C> <C> <C> <C>
REVENUES .......................... $309,814 $ 1,167,952 $ 1,141,311 $ 313,941
COSTS AND EXPENSES ................ 265,182 1,069,009 1,031,445 363,288
-------- ----------- ----------- ---------
GROSS PROFIT (LOSS) .... 44,632 98,943 109,866 (49,347)
GENERAL AND ADMINISTRATIVE EXPENSES 8,105 33,414 31,525 7,126
-------- ----------- ----------- ---------
OPERATING INCOME (LOSS) 36,527 65,529 78,341 (56,473)
OTHER (INCOME) EXPENSE ............ 6,575 (8,382) (9,373) (92)
INTEREST EXPENSE .................. 349 7,705 11,590 157
-------- ----------- ----------- ---------
INCOME (LOSS) BEFORE INCOME TAXES . 29,603 66,206 76,124 (56,538)
INCOME TAX PROVISION (BENEFIT) .... 5,624 14,199 17,075 (10,742)
-------- ----------- ----------- ---------
NET INCOME (LOSS) ................. $ 23,979 $ 52,007 $ 59,049 $ (45,796)
======== =========== =========== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-64

DWAYNE R. SPENCE FUNERAL HOME, INC.

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993
<TABLE>
<CAPTION>
1993 1994 1995 1996
-------- --------- --------- ---------
<S> <C> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income (loss) .................................................... $ 23,979 $ 52,007 $ 59,049 $ (45,796)
Adjustments to reconcile net income (loss) to net cash provided by
(used in) operating activities-
Depreciation and amortization .................................. 17,631 73,594 73,200 13,343
(Increase) decrease in accounts receivable ..................... (62,494) 7,770 95,910 6,538
(Increase) decrease in inventories and other current assets ... 21,751 5,099 (32,371) (10,126)
Increase (decrease) in accounts payable ........................ 13,570 (3,014) 35,062 (2,756)
Increase (decrease) in accrued liabilities ..................... 33,025 26,296 (98,971) 31,644
-------- --------- --------- ---------
Net cash provided by (used in) operating activities .. 47,462 161,752 131,879 (7,153)
-------- --------- --------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:

(Purchase of) proceeds from disposition of property, plant and
equipment ................................................... 7,881 (108,458) (26,314) (2,359)
--------- --------- ---------
Net cash provided by (used in) investing activities .. 7,881 (108,458) (26,314) (2,359)
-------- --------- --------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on long-term debt ................................ (69,371) 38,411 (54,149) 26,076
-------- --------- --------- ---------
Net cash provided by (used in) financing activities .. (69,371) 38,411 (54,149) 26,076
-------- --------- --------- ---------
NET INCREASE (DECREASE) IN CASH AND CASH EQUIVALENTS .................... (14,028) 91,705 51,416 16,564
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ........................ 47,719 33,691 125,396 176,812
-------- --------- --------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD .............................. $ 33,691 $ 125,396 $ 176,812 $ 193,376
======== ========= ========= =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ........................................................ $ 349 $ 7,705 $ 11,590 $ 157
======== ========= ========= =========
Taxes paid ........................................................... $ 4,500 $ 20,000 $ 9,000 $ 2,250
======== ========= ========= =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-65

DWAYNE R. SPENCE FUNERAL HOME, INC.

STATEMENTS OF SHAREHOLDER'S EQUITY

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

Balance, October 1, 1993 ................................ $ 424,513
Net Income .............................................. 23,979
---------
Balance, December 31, 1993 .............................. 448,492
Net Income .............................................. 52,007
---------
Balance, December 31,1994 ............................... 500,499
Net Income .............................................. 59,049
---------
Balance, December 31, 1995 .............................. 559,548
Net Loss ................................................ (45,796)
---------
Balance, March 29, 1996 ................................. $ 513,752
=========

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

F-66

DWAYNE R. SPENCE FUNERAL HOME, INC.

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JANUARY 1, 1996 TO MARCH 29, 1996,
THE YEARS ENDED DECEMBER 31, 1995 AND DECEMBER 31, 1994,
AND THE THREE MONTHS ENDED DECEMBER 31, 1993

1. ORGANIZATION /NATURE OF OPERATIONS

Dwayne R. Spence Funeral Home, Inc. (the Company), a taxable corporation, was
organized in 1977 in the state of Ohio. The Company owns and operates two
funeral homes in Ohio. The Company performs personal and professional services
related to funerals at its funeral homes. Prearranged funerals are marketed in
the markets served by the Company's funeral service locations.

Effective March 29, 1996, all of the Company's capital stock was sold to
Carriage Funeral Holdings, Inc. for aggregate consideration in excess of the
recorded amounts of the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUES

The Company recognizes revenue upon performance of funeral services and sale of
related merchandise.

TRUST FUNDS

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for 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. Maintenance and repairs totaled $12,593,
$33,098, $36,370 and $8,197 for the period from January 1, 1996 to March 29,
1996, the years ended December 31, 1995 and December 31, 1994, and the three
months ended December 31, 1993, respectively. Dispositions are removed at cost
less accumulated depreciation.

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

YEARS METHOD
----- ------------------------
Buildings and improvements .......... 10-25 Straight line
Furniture and fixtures .............. 5-7 Double-declining balance
Other ............................... 3-7 Double-declining balance

F-67

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
Under SFAS No. 109, the Company determines deferred tax assets and liabilities
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities.

USE OF ESTIMATES

3. OPERATING LEASES

The Company has entered into operating leases for certain facilities used in its
business. For the period from January 1, 1996 to March 29, 1996, the years ended
December 31, 1995 and December 31, 1994, and the three months ended December 31,
1993, lease expense totaled approximately $35,250, $139,975, $136,430 and
$33,045, respectively. In addition, the Company leases certain equipment from a
shareholder. For the period from January 1, 1996 to March 29, 1996, the years
ended December 31, 1995 and 1994, and the three months ended December 31, 1993,
expense related to this lease totaled $12,827, $29,560, $25,821 and $186,
respectively.

4. INCOME TAXES

There are no significant temporary differences between the Company's financial
statement and tax bases of accounting. The provision (benefit) for income taxes
for the period from January 1, 1996 to March 29, 1996, the years ended December
31, 1995 and December 31, 1994, and the three months ended December 31, 1993
consisted of:

1993 1994 1995 1996
------ ------- ------- --------
Current:
U.S. federal ........................ $4,440 $11,551 $14,031 $ (8,481)

State ............................... 1,184 2,648 3,044 (2,261)
------ ------- ------- --------
Total current provision (benefit) ... $5,624 $14,199 $17,075 $(10,742)
====== ======= ======= ========

The Company is an accrual basis taxpayer. The Company is generally subject to a
marginal U.S. federal rate of 15% because of the level of the Company's taxable
income. However, in instances in which the Company's taxable income exceeds a
specified level, it becomes subject to a higher U.S. federal marginal tax rate.
The differences between the income taxes recorded by the Company and the income
taxes provided by applying the U.S. federal statutory rate of 15% to the
Company's pre-tax income for the period from January 1, 1996 to March 29, 1996,
the years ended December 31, 1995 and December 31, 1994, and the three months
ended December 31, 1993 are summarized below:

1993 1994 1995 1996
---- ---- ---- ----
U.S. federal statutory rate ...................... 15% 15% 15% (15%)

Effect of graduated federal statutory rate ....... -- 2 3 --

Effect of state income taxes ..................... 4 4 4 (4)
---- ---- ---- ----

Total income tax provision (benefit) ............. 19% 21% 22% (19%)
==== ==== ==== ====

F-68

5. EMPLOYEE BENEFIT PLAN

Effective January 1, 1995, the Company participates in an employee benefit plan,
the Dwayne R. Spence Funeral Home, Inc. 401K Pension Plan, which covers
substantially all full-time employees, subject to certain minimum age and length
of service requirements. In its sole discretion, the Company can make
contributions to the plan. This plan replaced a plan in which the Company
participated prior to January 1, 1995. For the period from January 1, 1996 to
March 29, 1996, the years ended December 31, 1995 and 1994, and the three months
ended December 31, 1993, the employee benefit plan expense totaled $ 0, $18,941,
$67,532 and $40,715, respectively.

F-69
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Merchant Funeral Home Group:

We have audited the accompanying statements of operations of Merchant Funeral
Home Group and the related statements of shareholders' equity and cash flows for
the period from July 1, 1995 to April 1, 1996, and the years ended June 30, 1995
and June 30, 1994. 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 results of operations of Merchant Funeral Home Group,
and its cash flows for the period from July 1, 1995 to April 1, 1996, and the
years ended June 30, 1995 and June 30, 1994, in conformity with generally
accepted accounting principles.

ARTHUR ANDERSEN LLP

Houston, Texas
May 28, 1996

F-70

MERCHANT FUNERAL HOME GROUP

STATEMENTS OF OPERATIONS

FOR THE PERIOD FROM JULY 1, 1995 TO APRIL 1, 1996,
AND THE YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994

1994 1995 1996
---------- ---------- -----------
REVENUES .............................. $1,068,304 $1,289,444 $ 1,041,222
COSTS AND EXPENSES .................... 944,882 1,111,945 864,936
---------- ---------- -----------
GROSS PROFIT ..................... 123,422 177,499 176,286
GENERAL AND ADMINISTRATIVE EXPENSES ... 66,453 105,355 127,357
---------- ---------- -----------
OPERATING MARGIN ................. 56,969 72,144 48,929
OTHER (INCOME) EXPENSE ................ 22,859 13,623 (16,582)
INTEREST EXPENSE ...................... 7,680 19,828 7,885
---------- ---------- -----------
INCOME BEFORE INCOME TAXES ............ 26,430 38,693 57,626
INCOME TAX PROVISION .................. 5,174 7,512 11,943
---------- ---------- -----------
NET INCOME ............................ $ 21,256 $ 31,181 $ 45,683
========== ========== ===========

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

F-71

MERCHANT FUNERAL HOME GROUP

STATEMENTS OF CASH FLOWS

FOR THE PERIOD FROM JULY 1, 1995 TO APRIL 1, 1996,
AND THE YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994

<TABLE>
<CAPTION>
1994 1995 1996
--------- -------- ---------
<S> <C> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net income ...................................................... $ 21,256 $ 31,181 $ 45,683
Adjustments to reconcile net income to net cash provided by
(used in) operating activities-
Depreciation and amortization ............................. 46,658 54,901 38,502
(Increase) decrease in accounts receivable ................ 12,412 (30,675) 14,054
(Increase) decrease in inventories and other current assets (139,623) 10,258 143,949
Increase (decrease) in accounts payable ................... (46,646) (9,467) 2,709
Increase (decrease) in deferred and other liabilities ..... 32,207 2,684 (40)
Increase (decrease) in accrued liabilities ................ 15,858 (24,156) (23,660)
--------- -------- ---------
Net cash provided by (used in) operating activities .. (57,878) 34,726 221,197
--------- -------- ---------
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchase of property, plant and equipment ....................... (102,548) (23,876) (1,647)
--------- -------- ---------
Net cash used in investing activities ................ (102,548) (23,876) (1,647)
--------- -------- ---------
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds (payments) on long-term debt ........................... 223,841 3,523 (138,293)
Dividends ....................................................... -- -- (40,104)
--------- -------- ---------
Net cash provided by (used in) financing activities .. 223,841 3,523 (178,397)
--------- -------- ---------
NET INCREASE IN CASH AND CASH EQUIVALENTS .......................... 63,415 14,373 41,153
CASH AND CASH EQUIVALENTS AT BEGINNING OF PERIOD ................... 8,436 71,851 86,224
--------- -------- ---------
CASH AND CASH EQUIVALENTS AT END OF PERIOD ......................... $ 71,851 $ 86,224 $ 127,377
========= ======== =========
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION:
Interest paid ................................................... $ 7,680 $ 19,828 $ 7,885
========= ======== =========
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-72

MERCHANT FUNERAL HOME GROUP

STATEMENTS OF SHAREHOLDERS' EQUITY

FOR THE PERIOD FROM JULY 1, 1995 TO APRIL 1, 1996,
AND THE YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994

Balance, October 1, 1993 ................................ $ 142,620
Net income .............................................. 21,256
---------
Balance, June 30, 1994 .................................. 163,876
Net Income .............................................. 31,181
---------
Balance, June 30, 1995 .................................. 195,057
Dividends paid .......................................... (40,104)
Net income .............................................. 45,683
---------
Balance, April 1, 1996 .................................. $ 200,636
=========

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

F-73

MERCHANT FUNERAL HOME GROUP

NOTES TO FINANCIAL STATEMENTS

FOR THE PERIOD FROM JULY 1, 1995 TO APRIL 1, 1996,
AND THE YEARS ENDED JUNE 30, 1995 AND JUNE 30, 1994

1. ORGANIZATION/NATURE OF OPERATIONS

Merchant Funeral Home Group (the Company) is comprised of three taxable
corporations which own and operate four funeral homes and two cemeteries in
Washington and Idaho. The Company performs personal and professional services
related to funerals and burials at its various locations. Prearranged funerals
are marketed in the geographic markets served by the Company's funeral service
locations.

Effective April 1, 1996, all of the Company's stock was sold to Carriage Funeral
Services, Inc. for aggregate consideration in excess of the recorded amounts of
the Company's net assets.

2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

REVENUES

The Company recognizes revenue upon performance of funeral and interment or
entombment services and sale of related funeral merchandise.

PRENEED FUNERAL TRUST

The Company is generally required by state laws 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 Company 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 specified service.

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 for cemetery merchandise
and services sold on a preneed basis. The principal and accumulated earnings of
the trust may only be withdrawn upon maturity (generally, death of purchaser) or
cancellation of the contracts. Trust fund 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.

CASH AND CASH EQUIVALENTS

For purposes of the statements of cash flows, the Company considers all highly
liquid investments with a maturity of three months or less to be cash
equivalents.

INVENTORIES

Inventories are stated at the lower of cost (as determined by the specific
identification method) or market.

PROPERTY, PLANT AND EQUIPMENT

Property, plant and equipment are capitalized at cost. Expenditures for major
additions and improvements are capitalized while replacements, maintenance and
repairs which do not improve or extend the life of the related assets are
charged to operations as incurred. Maintenance and repairs amounted to $30,351,
$45,726 and $38,516 for the period from July 1, 1995 to April 1, 1996, and the
years ended June 30, 1995 and June 30, 1994, respectively. Dispositions are
removed at cost less accumulated depreciation.

F-74

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

YEARS METHOD
----- ------------------------
Building and improvements ........... 10-25 Straight line
Furniture and fixtures .............. 5-7 Double-Declining Balance
Other ............................... 3-5 Double-Declining Balance

INCOME TAXES

The Company accounts for income taxes in accordance with Statement of Financial
Accounting Standards No. 109 (SFAS No. 109), "Accounting for Income Taxes."
Under SFAS No. 109, the Company determines deferred tax assets and liabilities
based on the estimated future tax effects of differences between the financial
statement and tax bases of assets and liabilities.

USE OF ESTIMATES

3. INCOME TAXES

There are no significant temporary differences between the Company's financial
statement and tax bases of accounting. The income tax provision for the period
from July 1, 1995 to April 1, 1996, and the years ended June 30, 1995 and June
30, 1994 consisted of:

1994 1995 1996
------ ----- -------
Current:
U.S. federal ........................ $4,085 5,933 $ 9,606
State ............................... 1,089 1,579 2,337
------ ----- -------
Total current provision .............. $5,174 7,512 $11,943
------ ----- -------
The Company is an accrual basis taxpayer. The Company is generally subject to a
marginal U.S. federal rate of 15% because of the level of the Company's taxable
income. However, in instances in which the Company's taxable income exceeds a
specified level, it would become subject to a higher U.S. federal marginal tax
rate. The differences in the income taxes recorded by the Company and the income
taxes provided for by applying the U.S. federal statutory rate of 15% to the
Company's pre-tax income for the period from July 1, 1995 to April 1, 1996, and
the years ended June 30, 1995 and June 30, 1994 are summarized as follows:

1993 1994 1995
---- ---- ----
U.S. federal statutory rate ......................... 15% 15% 15%
Effect of state income taxes ........................ 4 4 4
Effect of non-deductible expenses and other ......... 1 -- 2
---- ---- ----

Total income tax provision .................. 20% 19% 21%
==== ==== ====

Cash taxes paid for the period from July 1, 1995 to April 1, 1996, and the years
ended June 30, 1995 and June 30, 1994 were approximately $14,000, $18,000 and
$14,000, respectively.

F-75

4. OPERATING LEASES

The Company has entered into operating leases for certain facilities and
equipment utilized in its business. For the period from July 1, 1995 to April 1,
1996, and the years ended June 30, 1995 and June 30, 1994, lease expense totaled
$102,364, $129,748 and $125,554, respectively. The Company paid approximately
$18,000, $24,000 and $18,000 of facility lease expense for the period from July
1, 1995 to April 1, 1996, and the years ended June 30, 1995 and June 30, 1994,
respectively, to a shareholder.

5. EMPLOYEE BENEFIT PLAN

Effective July 1, 1993, the Company began participation in an employee benefit
plan, the Merchant Funeral Home, Inc. Profit Sharing Plan, which covers
substantially all of the Company's full-time employees, subject to certain
minimum age and length of service requirements. In its sole discretion, the
Company can make contributions to the plan. Expenses related to the plan were
$0, $0 and $24,973 for the period from July 1, 1995 to April 1, 1996, and the
years ended June 30, 1995 and June 30, 1994, respectively.

F-76

NO DEALER, SALESPERSON OR OTHER INDIVIDUAL HAS BEEN AUTHORIZED TO GIVE ANY
INFORMATION OR TO MAKE ANY REPRESENTATIONS, OTHER THAN THOSE CONTAINED IN THIS
PROSPECTUS IN CONNECTION WITH THE OFFERING COVERED BY THIS PROSPECTUS. IF GIVEN
OR MADE, SUCH INFORMATION OR REPRESENTATIONS MUST NOT BE RELIED UPON AS HAVING
BEEN AUTHORIZED BY THE COMPANY. THIS PROSPECTUS DOES NOT CONSTITUTE AN OFFER TO
SELL OR THE SOLICITATION OF AN OFFER TO SELL OR A SOLICITATION OF AN OFFER TO
BUY THE CLASS A COMMON STOCK IN ANY JURISDICTION WHERE, OR TO ANY PERSONS 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 CIRCUMSTANCES,
CREATE AN IMPLICATION THAT THERE HAS BEEN NO 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
Risk Factors.................................... 8
The Company..................................... 11
Use of Proceeds................................. 12
Dividend Policy................................. 12
Capitalization.................................. 13
Dilution........................................ 14
Selected Historical Consolidated and Pro Forma
Financial and Operating Data.................. 15
Management's Discussion and Analysis of
Financial Condition and Results of
Operations.................................... 17
Business........................................ 23
Management...................................... 31
Certain Transactions............................ 38
Principal Stockholders.......................... 39
Description of Capital Stock.................... 39
Shares Eligible for Future Sale................. 43
Underwriting.................................... 44
Legal Matters................................... 45
Experts......................................... 45
Available Information........................... 45
Index to Financial Statements................... F-1

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

UNTIL , 1996 (25 DAYS AFTER THE DATE OF THIS PROSPECTUS), ALL DEALERS
EFFECTING TRANSACTIONS IN THE CLASS A COMMON STOCK, WHETHER OR NOT PARTICIPATING
IN THIS DISTRIBUTION, MAY BE REQUIRED TO DELIVER A PROSPECTUS. THIS DELIVERY
REQUIREMENT IS IN ADDITION TO THE OBLIGATION OF DEALERS TO DELIVER A PROSPECTUS
WHEN ACTING AS UNDERWRITERS AND WITH RESPECT TO THEIR UNSOLD ALLOTMENTS OR
SUBSCRIPTIONS.

[L O G O]

CARRIAGE SERVICES, INC.

CLASS A COMMON STOCK

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

PROSPECTUS

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

MERRILL LYNCH & CO.
THE CHICAGO CORPORATION

, 1996

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

PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION

The expenses of the offering are estimated to be as follows:

Securities and Exchange Commission
registration fee..................... $ 19,828
NASD filing fee...................... 6,250
Nasdaq listing fee................... *
Legal fees and expenses.............. *
Accounting fees and expenses......... *
Blue Sky fees and expenses (including
legal fees).......................... *
Printing expenses.................... *
Transfer Agent fees.................. *
Miscellaneous........................ *
---------
TOTAL........................... $ *
=========
- ------------

* To be provided by amendment.

ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS

The Company, a Delaware corporation, is empowered by Section 145 of the
Delaware General Corporation Law (the "DGCL"), subject to the procedures and
limitations stated therein, to indemnify any person who was or is a party or is
threatened to be made a party to any threatened, pending or completed action,
suit or proceeding by reason of the fact that such person is or was a director,
officer, employee or agent of the Company, or is or was serving at the request
of the Company as a director, officer, employee or agent of another corporation
or other enterprise, against reasonable expenses (including attorneys' fees),
judgments, fines and amounts paid in settlement actually incurred by him in
connection with such action, suit or proceeding, if such director, officer,
employee or agent acted in good faith and in a manner he reasonably believed to
be in or not opposed to the best interests of the Company and, with respect to
any criminal action or proceeding, had no reasonable cause to believe his
conduct was unlawful. The Company is required by Section 145 to indemnify any
person against reasonable expenses (including attorneys' fees) actually incurred
by him in connection with an action, suit or proceeding in which he is a party
because he is or was a director, officer, employee or agent of the Company or is
or was serving at the request of the Company as a director, officer, employee or
agent of another corporation or other enterprise, if he has been successful, on
the merits or otherwise, in the defense of the action, suit or proceeding.
Section 145 also allows a corporation to purchase and maintain insurance on
behalf of any such person against any liability asserted against him in any such
capacity, or arising out of his status as such, whether or not the corporation
would have the power to indemnify him against such liability under the
provisions of Section 145. In addition, Section 145 provides that
indemnification pursuant to its provisions is not exclusive of other rights of
indemnification to which a person may be entitled under any bylaw, agreement,
vote of shareholders or disinterested directors, or otherwise.

Article 10 of the Company's Amended and Restated Certificate of
Incorporation (the "Charter") provides that the Company shall indemnify and hold
harmless any person who was, is, or is threatened to be made a party to a
proceeding by reason of the fact that he or she (i) is or was a director or
officer of the Company or (ii) while a director or officer of the Company, is or
was serving at the request of the Company as a director, officer, partner,
venturer, proprietor, trustee, employee, agent, or similar functionary of
another foreign or domestic corporation, partnership, joint venture, sole
proprietorship, trust, employee benefit plan, or other enterprise, to the
fullest extent permitted under the DGCL. The right to indemnification under
Article 10 of the Charter is a contract right which includes, with respect to
directors and officers,

II-1

the right to be paid by the Company the expenses incurred in defending any such
proceeding in advance of its disposition.

ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES

The shares of Common Stock which have been sold by the Company in the
following transactions will be converted into shares of Class B Common Stock.

On January 1, 1994, the Company sold an aggregate of 5,040,000 shares of
Common Stock to C. Byron Snyder, Melvin C. Payne, Mark W. Duffey and Reid A.
Millard in exchange for shares of capital stock of three entities. The Company
relied on an exemption under Section 4(2) of the Securities Act in effecting
these transactions.

On October 12, 1994, the Company sold one share of Common Stock for $4.00
to a former owner of an acquired funeral home. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting this
transaction.

On December 31, 1994, the Company sold one share of Common Stock in
exchange for one share of the capital stock of a subsidiary. The Company relied
on an exemption under Section 4(2) of the Securities Act in effecting this
transaction.

From January 18, 1994 to February 28, 1994, the Company sold in a private
placement an aggregate of 7,000,000 shares of Series A Preferred Stock. The
Company acted as its own placement agent. Such shares were purchased for $1.00
per share. The Company relied on an exemption under Section 4(2) of the
Securities Act in effecting this placement.

From October 28, 1994 to May 29, 1996, the Company sold an aggregate of
715,000 shares of Series B Preferred Stock, valued at $1.00 per share, to the
former owners of acquired funeral homes. Consideration for such shares consisted
of ownership interests in funeral home businesses and contract rights. The
Company relied on an exemption under Section 4(2) of the Securities Act in
effecting these transactions.

On September 25, 1995, the Company sold in a private placement an aggregate
of 8,500,000 shares of Series C Preferred Stock. The Chicago Corporation acted
as placement agent in connection with this Offering. Such shares were purchased
for $1.00 per share. The Company relied on an exemption under Section 4(2) of
the Securities Act in effecting the placement.

From March 8, 1996 to May 14, 1996, the Company sold an aggregate of
6,036,616 shares of Series D Preferred Stock, valued at $1.00 per share, to the
former owners of acquired funeral homes. Consideration for such shares consisted
of ownership interests in funeral home businesses. The Company relied on an
exemption under Section 4(2) of the Securities Act in effecting these
transactions.

On May 28, 1996, an employee exercised options to purchase 2,000 shares of
Common Stock pursuant to the Company's 1995 Stock Incentive Plan at an exercise
price of $5.00 per share. The Company relied on an exemption under Section 4(2)
of the Securities Act in effecting this transaction.

ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

*1.1 -- Form of Purchase Agreement
*3.1 -- Amended and Restated Certificate of Incorporation of the
Company
*3.2 -- Amended and Restated Bylaws of the Company
*4.1 -- Specimen Class A Common Stock certificate
*5.1 -- Opinion of Vinson & Elkins L.L.P.
*10.1 -- 1995 Stock Incentive Plan, as amended
*10.2 -- 1996 Stock Incentive Plan
*10.3 -- 1996 Nonemployee Directors' Stock Option Plan
*10.4 -- Asset Purchase Agreement dated March 20, 1992 among Carriage
Funeral Services, Inc., Lane Funeral Home, Inc., Lane Funeral
Home, Inc., Wallis & Son Funeral Homes, Inc., The Sentinel
Group, Inc. and SCI Funeral Services of Georgia, Inc.; amended
by Amendment to Asset Purchase Agreement dated November 23,
1992
II-2

*10.5 -- Asset Purchase Agreement dated December 9, 1992 among
CFS Funeral Services, Inc., Lane Funeral Home, Inc.,
Lane Funeral Home, Inc. and Sentinel Group, Inc.
*10.6 -- Asset Purchase Agreement dated November 30, 1992 among
CFS Funeral Services, Inc., Wallis & Son Funeral
Homes, Inc., Ward's Funeral Home, Inc., Sentinel
Group, Inc. and SCI Georgia Funeral Services, Inc.
*10.7 -- Stock and Real Property Purchase Agreement dated
September 6, 1994 among Carriage Funeral Services of
Ohio, Inc., Kubach-Smith Funeral Home, Inc., James B.
and Louise Smith, and Lee K. Smith and Nancy
Smith-Gelvin
*10.8 -- Asset Purchase Agreement dated May 10, 1995 among
Carriage Funeral Holdings, Inc., West End Funeral
Home, Inc., and James C. Hirsch and Cynthia Hirsch
*10.9 -- Agreement and Plan of Merger dated March 8, 1996 among
Carriage Funeral Services, Inc., Hennessy-Bagnoli
Funeral Home, Inc., Hennessy Funeral Home, Inc.,
Terrance P. Hennessy and Lawrence Bagnoli
*10.10-- Real Property Purchase Agreement dated the Closing
Date among Hennessy-Bagnoli Funeral Home, Inc.,
Hennessy and Patricia Hennessy, and Bagnoli and
Brenda Bagnoli
*10.11-- Stock Purchase Agreement dated January 4, 1996 among
Carriage Funeral Holdings, Inc., The Lusk Funeral
Home, Incorporated and Gerald T. McFarland, Jr.
*10.12-- Stock Purchase Agreement dated February 29, 1996 among
Carriage Funeral Holdings, Inc., James E. Drake
Funeral Home, Inc., and James E. Drake and Patricia A.
Drake
*10.13-- Asset Purchase Agreement dated April 10, 1996 between
CFS Funeral Services, Inc. and SCI Texas Funeral
Services, Inc.
*10.14-- Asset Purchase Agreement dated April 10, 1996 between
CFS Funeral Services, Inc. and SCI Funeral Services of
Florida, Inc.
*10.15-- Asset Purchase Agreement dated April 10, 1996 between
CFS Funeral Services, Inc. and Fort Myers Memorial
Gardens, Inc.
*10.16-- Asset Purchase Agreement dated April 10, 1996 between
CFS Funeral Services, Inc. and SCI Funeral Services of
Florida, Inc.
*10.17-- Stock and Real Property Purchase Agreement dated March
29, 1996 among Carriage Funeral Holdings, Inc.,
Dwayne R. Spence Funeral Home, Inc., Dwayne R. Spence,
Patricia Spence and James H. Sheridan
*10.18-- Merger Agreement dated March 22, 1996 among
Carriage Funeral Services, Inc., Carriage Funeral
Services of Idaho, Inc., Merchant Funeral Home, Inc.,
Coeur d'Alene Memorial Gardens, Inc., Lewis Clark
Memorial Park, Inc., Robert D. Larrabee, I. Renee
Larrabee and Larrabee Land Company, Inc.
*10.19-- Real Property Purchase Agreement dated March 22, 1996
among Carriage Funeral Services of Idaho, Inc.,
Robert D. Larrabee, I. Renee Larrabee, Larrabee Land
Company, Inc. and Larrabee Investments, L.L.C.
21.1 -- Subsidiaries of the Company
23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Kee & Associates, Inc.
*23.3 -- Consent of Vinson & Elkins L.L.P. (contained in
Exhibit 5.1 hereto)
23.4 -- Consent of Stuart W. Stedman, as about to be named a
director of the Company
23.5 -- Consent of Robert D. Larrabee, as about to be named a
director of the Company
23.6 -- Consent of Ronald A. Erickson, as about to be named a
director of the Company
24.1 -- Powers of Attorney (included on the signature page to
this Registration Statement)
27.1 -- Financial Data Schedule

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

* To be filed by amendment.

II-3

(b) Consolidated Financial Statement Schedules

All schedules are omitted because the required information is inapplicable
or the information is presented in the Consolidated Financial Statements or
related notes.

ITEM 17. UNDERTAKINGS

Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
Registrant pursuant to the foregoing provisions, or otherwise, the Registrant
has been advised that in the opinion of the Securities and Exchange Commission
such indemnification is against public policy as expressed in the Securities Act
and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the Registrant in the
successful defense of any action, suit or proceeding) is asserted by such
director, officer or controlling person in connection with the securities being
registered, the Registrant will, unless in the opinion of its counsel the matter
has been settled by controlling precedent, submit to a court of appropriate
jurisdiction the question whether such indemnification by it is against public
policy as expressed in the Securities Act and will be governed by the final
adjudication of such issue.

The undersigned Registrant hereby undertakes to provide at the closing
specified in the underwriting agreement certificates in such denominations and
registered in such names as required by the underwriters to permit prompt
delivery to each purchaser.

The undersigned Registrant hereby undertakes that:

(1) For purposes of determining any liability under the Securities
Act, the information omitted from the form of prospectus filed as part of
this Registration Statement in reliance upon Rule 430A and contained in a
form of prospectus filed by the Registrant pursuant to Rule 424(b)(1) or
(4) or 497(h) under the Securities Act shall be deemed to be part of this
Registration Statement as of the time it was declared effective.

(2) For purposes of determining any liability under the Securities
Act, each post-effective amendment that contains a form of prospectus shall
be deemed to be a new registration statement relating to the securities
offered therein, and the offering of such securities at that time shall be
deemed to be the initial bona fide offering thereof.

II-4

SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS REGISTRATION STATEMENT TO BE SIGNED ON ITS
BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED, IN THE CITY OF HOUSTON,
STATE OF TEXAS, ON THE 7TH DAY OF JUNE, 1996.

CARRIAGE SERVICES, INC.
By /s/ MELVIN C. PAYNE
MELVIN C. PAYNE
PRESIDENT AND CHIEF EXECUTIVE OFFICER

KNOW ALL MEN BY THESE PRESENTS, THAT EACH PERSON WHOSE SIGNATURE APPEARS
BELOW CONSTITUTES AND APPOINTS MELVIN C. PAYNE AND MARK W. DUFFEY, OR EITHER OF
THEM, HIS TRUE AND LAWFUL ATTORNEY-IN-FACT AND AGENT, WITH FULL POWER OF
SUBSTITUTION, FOR HIM AND IN HIS NAME, PLACE AND STEAD, IN ANY AND ALL
CAPACITIES, TO SIGN ANY AND ALL AMENDMENTS (INCLUDING POST-EFFECTIVE AMENDMENTS)
TO THIS REGISTRATION STATEMENT AND ANY ADDITIONAL REGISTRATION STATEMENT
PURSUANT TO RULE 462(B), AND TO FILE THE SAME WITH ALL EXHIBITS THERETO, AND
OTHER DOCUMENTS IN CONNECTION THEREWITH, WITH THE SECURITIES AND EXCHANGE
COMMISSION, GRANTING UNTO SAID ATTORNEY-IN-FACT AND AGENT FULL POWER AND
AUTHORITY TO DO AND PERFORM EACH AND EVERY ACT AND THING REQUISITE AND RATIFYING
AND CONFIRMING ALL THAT SAID ATTORNEY-IN-FACT AND AGENT OR HIS SUBSTITUTE OR
SUBSTITUTES MAY LAWFULLY DO OR CAUSE TO BE DONE BY VIRTUE HEREOF.

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS REGISTRATION STATEMENT HAS BEEN SIGNED BELOW BY THE FOLLOWING PERSONS IN
THE CAPACITIES AND ON THE DATES INDICATED.

SIGNATURE TITLE DATE
- ---------------- --------------------------------- ---------------

/s/MELVIN C. PAYNE President, Chief Executive June 7, 1996
MELVIN C. PAYNE Officer, Director
/s/MARK W. DUFFEY Executive Vice President, Chief June 7, 1996
MARK W. DUFFEY Financial Officer, Director
(Principal Financial Officer)
/s/MARY-LEES PAYNE Vice President, Administration and June 7, 1996
MARY-LEES PAYNE Accounting (Principal Accounting
Officer)
/s/C. BYRON SNYDER Chairman of the Board of Directors June 7, 1996
C. BYRON SNYDER
/s/BARRY K. FINGERHUT Director June 7, 1996
BARRY K. FINGERHUT

II-5

EXHIBIT 21.1

SUBSIDIARIES OF THE REGISTRANT

SUBSIDIARY STATE OF INCORPORATION
- ---------- ----------------------
Carriage Funeral Holdings, Inc. Delaware
CFS Funeral Services, Inc. Delaware
Carriage Holding Company, Inc. Delaware
Carriage Funeral Services of Michigan, Inc. Michigan
Carriage Funeral Services of Ohio, Inc. Ohio
CFS Funeral Services of Ohio, Inc. Ohio
The Lusk Funeral Home, Incorporated Kentucky
H.R.E., Inc. Texas
James E. Drake Funeral Home, Inc. Kentucky
Hennessy-Bagnoli Funeral Home, Inc. Ohio
Carriage Funeral Services of Idaho, Inc. Idaho
Dwayne R. Spence Funeral Home, Inc. Ohio
Carriage Funeral Services of Kentucky, Inc. Kentucky
Ceballos-Diaz Funeral Home, Incorporated Texas

EXHIBIT 23.1

CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

As independent public accountants, we hereby consent to the use of our
reports (and to all references to our Firm) included in or made a part of this
registration statement.

ARTHUR ANDERSEN LLP

Houston, Texas
June 7, 1996

EXHIBIT 23.2
CONSENT OF KEE & ASSOCIATES, INC.

As independant public accountants, we hereby consent to the use of our reports
(and to all references to our Firm) included in or made a part of this
registation statement.

KEE & ASSOCIATES, INC.

By: /s/ J. THADDEUS KEE, CPA
Name: J. Thaddeus Kee, CPA
Title: Prsident

Uniontown, Ohio
June 6, 1996

EXHIBIT 23.4

I consent to being named, in the Registration Statement on Form S-1 to be filed
by Carriage Services, Inc., as about to become a director of Carriage Services,
Inc.

/s/ STUART W. STEDMAN
Stuart W. Stedman
June 6, 1996

EXHIBIT 23.5

I consent to being named, in the Registration Statement on Form S-1 to be filed
by Carriage Services, Inc., as about to become a director of Carriage Services,
Inc.

/s/ ROBERT D. LARRABEE
Robert D. Larrabee
June 6, 1996

EXHIBIT 23.6

I consent to being named, in the Registration Statement on Form S-1 to be filed
by Carriage Services, Inc., as about to become a director of Carriage Services,
Inc.

/s/ RONALD A. ERICKSON
Ronald A. Erickson
June 6, 1996

<ARTICLE> 5
<LEGEND>
THE FINANCIAL DATA SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED
FROM THE CONSOLIDATED BALANCE SHEETS AND THE CONSOLIDATED STATEMENTS OF
OPERATIONS AND IS QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL
STATEMENTS.
</LEGEND>
<MULTIPLIER> 1,000
<PERIOD-TYPE> YEAR 3-MOS
<FISCAL-YEAR-END> DEC-31-1995 DEC-31-1996
<PERIOD-START> JAN-01-1995 JAN-01-1996
<PERIOD-END> DEC-31-1995 MAR-31-1996
<CASH> 7,573 6,270
<SECURITIES> 864 334
<RECEIVABLES> 2,942 3,559
<ALLOWANCES> 305 322
<INVENTORY> 1,501 1,698
<CURRENT-ASSETS> 605 538
<PP&E> 23,981 29,776
<DEPRECIATION> 2,311 2,610
<TOTAL-ASSETS> 62,075 72,916
<CURRENT-LIABILITIES> 7,213 6,330
<BONDS> 0 0
0 3
157 157
<COMMON> 50 50
<OTHER-SE> 8,944 9,075
<TOTAL-LIABILITY-AND-EQUITY> 62,075 72,916
<SALES> 24,237 7,635
<TOTAL-REVENUES> 24,237 7,635
<CGS> 20,247 5,965
<TOTAL-COSTS> 20,247 5,965
<OTHER-EXPENSES> 0 0
<LOSS-PROVISION> 0 0
<INTEREST-EXPENSE> 3,684 1,183
<INCOME-PRETAX> (1,800) (62)
<INCOME-TAX> 694 131
<INCOME-CONTINUING> (2,494) (203)
<DISCONTINUED> 0 0
<EXTRAORDINARY> 0 0
<CHANGES> 0 0
<NET-INCOME> (2,494) (203)
<EPS-PRIMARY> (.33) (.02)
<EPS-DILUTED> 0 0

</TABLE>