CARRIAGE SERVICES INC, POS AM, 1998-04-29

CARRIAGE SERVICES INC
POS AM, 1998-04-29
PERSONAL SERVICES

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AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON APRIL 29, 1998
REGISTRATION NO. 333-23643
================================================================================

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

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

POST-EFFECTIVE AMENDMENT NO. 3 TO
FORM S-4

REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933

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

CARRIAGE SERVICES, INC.
(EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
<TABLE>
<S> <C> <C>
DELAWARE 7621 76-0423828
(STATE OR OTHER JURISDICTION (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER
OF INCORPORATION OR ORGANIZATION) CLASSIFICATION CODE NUMBER) IDENTIFICATION NO.)
</TABLE>

1300 POST OAK BLVD.
SUITE 1500
HOUSTON, TEXAS 77056
(281) 556-7400
(ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)

MELVIN C. PAYNE
CHIEF EXECUTIVE OFFICER
1300 POST OAK BLVD.
SUITE 1500
HOUSTON, TEXAS 77056
(281) 556-7400
(NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER,
INCLUDING AREA CODE, OF AGENT FOR SERVICE)

COPY TO:

T. MARK KELLY
VINSON & ELKINS L.L.P.
2300 FIRST CITY TOWER, 1001 FANNIN
HOUSTON, TX 77002-6760
(713) 758-2222
(713) 615-5531 (FAX)

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

If any of the securities registered on this Form are being offered in
connection with the formation of a holding company and there is compliance with
General Instruction G, check the following box. [ ]

================================================================================

<PAGE>
PROSPECTUS

CARRIAGE SERVICES, INC.

2,000,000 SHARES OF CLASS A COMMON STOCK, $.01 PAR VALUE

This Prospectus relates to 2,000,000 shares of Class A Common Stock, par
value $.01 per share (the "Class A Common Stock"), of Carriage Services, Inc.
("Carriage" or the "Company"), which may be offered and issued by the Company
from time to time in connection with the acquisition of other businesses or
properties or which may be issued upon conversion of shares of the Company's
preferred stock, par value $.01 per share (the "Preferred Stock"), which may be
offered and issued by the Company from time to time in connection with the
acquisition of other businesses or properties.

The Company anticipates that such acquisitions will consist principally of
additional funeral homes and cemeteries, but, on occasion, an acquired business
may be dissimilar to the historical business of the Company. The consideration
for acquisitions is expected to consist of Class A Common Stock, Preferred
Stock, cash, assumption of liabilities or a combination thereof, as determined
from time to time by negotiations between the Company and the owners or
controlling persons of the businesses or properties to be acquired. In addition,
the Company may lease property from and enter into management, consulting,
employment and noncompetition agreements with the former owners (or their
affiliates) and key executive personnel of the businesses to be acquired.

The terms of an acquisition are determined by negotiations between the
Company's representatives and the owners or controlling persons of the business
or properties to be acquired. In evaluating specific acquisition candidates, 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 at least 100 funeral services per
year. The Company anticipates that shares of Class A Common Stock issued in any
such acquisition and shares of Class A Common Stock issuable upon conversion of
shares of Preferred Stock issued in any such acquisition will be valued at a
price reasonably related to the market value of the Class A Common Stock, either
at the time the terms of the acquisition are tentatively agreed upon, or at or
about the time of closing, or during the period or periods prior to delivery of
the shares.

All of the 2,000,000 shares of Class A Common Stock which may be offered
and issued by the Company as described above may, subject to certain conditions,
be resold pursuant to this Prospectus by the persons who receive such shares in
acquisitions or upon conversion of shares of Preferred Stock received in
acquisitions. See "Resales and Plan of Distribution" for information relating to
such resales.

The Company has two classes of Common Stock, the Class A Common Stock and
Class B Common Stock, par value $.01 per share (the "Class B Common Stock" and,
together with the Class A Common Stock, the "Common Stock"). The Class A Common
Stock 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.

The Class A Common Stock is quoted on the Nasdaq National Market under the
symbol "CRSV." On March 31, 1998, the last reported sales price for the Class A
Common Stock on the Nasdaq National Market was $24.00.

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.

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

The date of this Prospectus is , 1998

<PAGE>
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. 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. believes that it is the fifth largest publicly
traded provider of death care services and products in the United States. 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 December 31, 1997,
the Company operated 120 funeral homes and 20 cemeteries in 20 states. Funeral
services constituted approximately 93% and 84% of revenues in 1996 and 1997,
respectively.

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 developed during
this period positioned the Company to pursue an accelerated growth strategy
beginning in late 1995. As a result, the Company acquired 38 funeral homes and
seven cemeteries for consideration of $68 million during 1996 and 44 funeral
homes and ten cemeteries for consideration of $118 million during 1997. In
addition, as of March 31, 1998, the Company has acquired or had letters of
intent to acquire 18 funeral homes and three cemeteries for consideration of $53
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 21% of the 1996 United States
death care industry revenues are represented by the five 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 over time, which lends stability to the death care industry.
The number of deaths in the United States is expected to increase by
approximately 1% per year 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.

BUSINESS STRATEGY

2
<PAGE>
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 a certain level of autonomy in operating their
businesses, while the utilization of a proprietary personal computer-based
system allows senior management timely access to operating data on the
performance of individual operations so that corrective action can be
implemented, 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 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 has 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 at least
100 funeral services per year, as well as funeral homes in close proximity to
the Company's existing businesses. In addition, although the Company, in the
early years, focused on acquiring funeral homes operations, the Company
aggressively pursues cemetery acquisitions in markets where the Company
operates, or plans to operate, funeral homes to take advantage of
cross-marketing opportunities. The Company is also pursuing larger acquisition
transactions which provide significant strategic benefits to the Company, such
as new market penetration. For example, in January 1997, the Company merged with
CNM, a premier California-based company which operates 10 funeral homes and one
cemetery and in November 1997, merged with the John E. Day Funeral Home in New
Jersey and the Forest Lawn/Evergreen Management Co. of Florida, which together
operate seven funeral homes and three cemeteries. These three transactions
accounted for over 60% of the acquisition spending in 1997. The Company also
seeks to issue, and has been successful in issuing, equity securities to the
previous owners of acquired businesses. From inception through March 31, 1998,
the Company has issued 37,775,608 shares of redeemable preferred stock and
1,023,120 shares of Class A Common Stock in conjunction with acquisition
transactions. As of March 31, 1998, a total of 23,760,823 shares of redeemable
preferred stock have converted into shares of Class A and Class B Common Stock.
Management believes that its success in issuing equity securities in conjunction
with acquisitions reflects in large part previous owners' desires to remain
affiliated with and to be invested in the Company.

3
<PAGE>
SUMMARY FINANCIAL AND OPERATING DATA

The following table presents summary historical financial and operating
data as of the dates and for the periods indicated. The consolidated financial
data of the Company as of and for the five years ended December 31, 1997 set
forth below have been derived from financial statements audited by Arthur
Andersen LLP, independent public accountants. The following information should
be read in conjunction with the Consolidated Financial Statements of the Company
and notes thereto included elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues, net:
Funeral.......................... $ 10,651 $ 17,368 $ 22,661 $ 37,445 $ 64,888
Cemetery......................... 614 1,036 1,576 2,903 12,533
-------- -------- -------- -------- --------
Total net revenues........... 11,265 18,404 24,237 40,348 77,421
-------- -------- -------- -------- --------
Gross profit:
Funeral.......................... 917 2,856 3,740 6,804 16,484
Cemetery......................... 143 158 250 362 2,899
-------- -------- -------- -------- --------
Total gross profit........... 1,060 3,014 3,990 7,166 19,383
General and administrative
expenses........................... 985 1,266 2,106 2,474 5,277
-------- -------- -------- -------- --------
Operating income................... 75 1,748 1,884 4,692 14,106
Interest expense, net.............. 1,745 2,671 3,684 4,347 5,889
-------- -------- -------- -------- --------
Income (loss) before income
taxes.............................. (1,670) (923) (1,800) 345 8,217
Provision for income taxes......... -- (1) 40 694 138 3,726
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................... (1,670) (963) (2,494) 207 4,491
Extraordinary item, net............ -- -- -- (498) (195)
-------- -------- -------- -------- --------
Income (loss) after extraordinary
item............................... (1,670) (963) (2,494) (291) 4,296
Preferred stock dividends.......... -- -- -- 622 890
-------- -------- -------- -------- --------
Net income (loss) attributable to
common stockholders.............. $ (1,670) $ (963) $ (2,494) $ (913) $ 3,406
======== ======== ======== ======== ========
Income (loss) per common share
Basic:
Continuing operations............ $ (.66)(1) $ (.38) $ (.99) $ (.09) $ .35
Extraordinary item............... -- -- -- (.10) (.02)
-------- -------- -------- -------- --------
Net income (loss) per common
share.......................... $ (.66) $ (.38) $ (.99) $ (.19) $ .33
======== ======== ======== ======== ========
Diluted:
Continuing operations............ $ (.66)(1) $ (.38) $ (.99) $ (.09) $ (.34)
Extraordinary item............... -- -- -- (.10) (.02)
-------- -------- -------- -------- --------
Net income (loss) per common
share.......................... $ (.66) $ (.38) $ (.99) $ (.19) $ .32
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent shares
outstanding:
Basic............................ 2,520(1) 2,520 2,520 4,869 10,226
======== ======== ======== ======== ========
Diluted.......................... 2,520(1) 2,520 2,520 4,869 10,485
======== ======== ======== ======== ========
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period..... 25 34 41 76 120
Funeral services performed during
period............................. 2,265 3,529 4,414 7,181 12,131
Preneed funeral contracts sold
during period.................... 644 762 2,610 3,760 4,020
Backlog of preneed funeral
contracts at end of period....... 5,170 6,855 8,676 22,925 34,797
Depreciation and amortization...... $ 947 $ 1,476 $ 1,948 $ 3,629 $ 7,809
</TABLE>

AS OF AS OF
DECEMBER 31, 1996 DECEMBER 31, 1997
------------------ -----------------
BALANCE SHEET DATA:
Working capital.................... $ 5,089 $ 5,823
Total assets....................... 131,308 277,940
Long-term debt, net of current
maturities......................... 42,733 121,553
Redeemable preferred stock......... 17,251 13,951
Stockholders' equity............... 57,043 98,565
- ------------
(1) Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 2,520,000
shares of common stock of the Company effective January 1, 1994.
Accordingly, shares of common stock shown outstanding for these periods
assume the exchange had taken place at the beginning of the periods
presented. In 1993, the entities were subchapter S corporations, and taxes
were the direct responsibility of the owners. Thus, the tax provision
reflected above for this period is based on assumptions about what tax
provisions (benefits) would have been if the Company had been a taxable
entity. In the opinion of management, no pro forma tax provision (benefit)
was appropriate for this period because the Company followed a policy of not
recognizing the benefits associated with net operating losses during such
period.

4
<PAGE>
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 other 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. As of March 31, 1998, the Company has either acquired or
has letters of intent to acquire 18 funeral homes and three cemeteries. 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."

ACQUISITION RISKS

The Company intends to grow primarily through the acquisition of additional
funeral homes and cemeteries. There can be no assurance that the Company will be
able to identify, acquire or profitably manage additional funeral homes and
cemeteries or successfully integrate acquired funeral homes and cemeteries, if
any, into the Company without substantial costs, delays or other operational or
financial problems. Further, acquisitions involve a number of special risks,
including possible adverse effects on the Company's operating results, diversion
of management's attention, failure to retain key acquired personnel and
unanticipated events or liabilities, some or all of which could have a material
adverse effect on the Company's business, financial condition and results of
operations.

FLUCTUATIONS IN OPERATING RESULTS

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

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 common and preferred stock. While management believes the Company
will have sufficient capital available under its credit facility, from cash flow
and from issuances of equity to fund acquisitions, if cash flow or the Company's
borrowing ability 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."

5
<PAGE>
DEPENDENCE UPON KEY PERSONNEL

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

CONTROL BY EXISTING STOCKHOLDERS

The Company's Amended and Restated Certificate of Incorporation (the
"Charter") provides that holders of Class A Common Stock shall have one vote per
share on all matters requiring stockholder approval and that holders of Class B
Common Stock shall have ten votes per share on all matters requiring stockholder
approval. Accordingly, as of December 31, 1997 and assuming conversion of the
Series D Preferred Stock, holders of Class B Common Stock will hold
approximately 90% of the voting power of the outstanding shares of Common Stock.
These stockholders are in a position to exert substantial influence over the
outcome of most corporate actions requiring stockholder approval, including the
election of directors, the future issuance of Common Stock or other securities
of the Company, the declaration of any dividend payable on the Common Stock and
the approval of transactions involving a change in control of the Company. See
"Description of Capital Stock."

CERTAIN ANTI-TAKEOVER PROVISIONS

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

TREND TOWARD CREMATION

There is an increasing trend in the United States toward cremation.
According to industry studies, cremations represented approximately 21% of the
burials performed in the United States in 1996, as compared with approximately
10% in 1980. Cremations represented approximately 7% of the Company's funeral
revenues for the year ended December 31, 1997. The Company believes that its
relatively 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,

6
<PAGE>
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."

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 (281) 556-7400.

7
<PAGE>
PRICE RANGE OF CLASS A COMMON STOCK AND DIVIDEND POLICY

The Company's Class A Common Stock is quoted on the Nasdaq National Market
under the symbol "CRSV." The following table presents the quarterly high and low
sale prices as reported by the Nasdaq National Market since the shares became
publicly traded on August 9, 1996.

HIGH LOW
-------- --------
1996:
Third Quarter (beginning August
9, 1996)........................ $ 22.75 $ 14.25
Fourth Quarter.................. $ 23.50 $ 18.38
1997:
First Quarter................... $ 26.00 $ 18.25
Second Quarter.................. $ 22.75 $ 17.00
Third Quarter................... $ 22.75 $ 16.25
Fourth Quarter.................. $ 19.625 $ 16.50

On March 31, 1998, the last reported sale price of the Class A Common Stock
on the Nasdaq National Market was $24.00 per share. As of March 31, 1998, there
were 6,530,827 shares of Class A Common Stock outstanding held by approximately
194 holders of record. The Company believes there are approximately 2,400
beneficial owners of the Class A Common Stock.

The Company has never paid a cash dividend on the Class A or Class B Common
Stock. The Company currently intends to retain earnings to finance the growth
and development of its business and does not anticipate paying any cash
dividends on its common stock in the foreseeable future. In addition, certain
provisions of the Company's bank credit facility provide certain restrictions on
the payment of dividends on the Class A or Class B Common Stock. Any future
change in the Company's dividend policy will be made at the discretion of the
Company's Board of Directors in light of the financial condition, capital
requirements, earnings and prospects of the Company and any restrictions under
credit agreements, as well as other factors the Board of Directors may deem
relevant. See "Management's Discussion and Analysis of Financial Condition and
Results of Operations -- Liquidity and Capital Resources." Holders of shares of
the Company's Series D Preferred Stock are entitled to receive dividends at an
annual rate of $.06 per share, or $.07 per share depending on the date such
shares were issued. Holders of shares of the Series F Preferred Stock are
currently entitled to receive dividends at an initial annual rate of $.04 per
share. Such dividends are payable quarterly. During 1997, cash dividends of
approximately $268,000 on the Series D Preferred Stock and $622,000 on the
Series F Preferred Stock have been paid. See "Description of Capital Stock."

USE OF PROCEEDS

This Prospectus relates to shares of Class A Common Stock which may be
offered and issued by the Company from time to time in the acquisition of other
businesses or properties or which may be issued upon conversion of shares of
Preferred Stock, which may be offered and issued by the Company from time to
time in the acquisition of other businesses or properties. Other than the
businesses or properties acquired, there will be no proceeds to the Company from
these offerings. The Company will receive none of the proceeds from any resales
of the Class A Common Stock by the Selling Stockholders.

8
<PAGE>
SELECTED HISTORICAL CONSOLIDATED
FINANCIAL AND OPERATING DATA

The following table sets forth selected consolidated financial and
operating data as of the dates and for the periods indicated. The consolidated
financial data of the Company as of and for the five years ended December 31,
1997 set forth below have been derived from financial statements audited by
Arthur Andersen LLP, independent public accountants. The following information
should be read in conjunction with "Management's Discussion and Analysis of
Financial Condition and Results of Operations" and with the Company's
Consolidated Financial Statements and the related notes thereto included
elsewhere in this Prospectus.
<TABLE>
<CAPTION>
YEAR ENDED DECEMBER 31,
----------------------------------------------------------
1993 1994 1995 1996 1997
-------- -------- -------- -------- --------
(IN THOUSANDS, EXCEPT PER SHARE AND OPERATING DATA)
<S> <C> <C> <C> <C> <C>
INCOME STATEMENT DATA:
Revenues, net:
Funeral.......................... $ 10,651 $ 17,368 $ 22,661 $ 37,445 $ 64,888
Cemetery......................... 614 1,036 1,576 2,903 12,533
-------- -------- -------- -------- --------
Total net revenues................... 11,265 18,404 24,237 40,348 77,421
-------- -------- -------- -------- --------
Gross profit:
Funeral.......................... 917 2,856 3,740 6,804 16,484
Cemetery......................... 143 158 250 362 2,899
-------- -------- -------- -------- --------
Total gross profit....... 1,060 3,014 3,990 7,166 19,383
General and administrative
expenses............................. 985 1,266 2,106 2,474 5,277
-------- -------- -------- -------- --------
Operating income..................... 75 1,748 1,884 4,692 14,106
Interest expense, net................ 1,745 2,671 3,684 4,347 5,889
-------- -------- -------- -------- --------
Income (loss) before income taxes.... (1,670) (923) (1,800) 345 8,217
Provision for income taxes........... -- (1) 40 694 138 3,726
-------- -------- -------- -------- --------
Income (loss) before extraordinary
item............................... (1,670) (963) (2,494) 207 4,491
Extraordinary item, net.............. -- -- -- (498) (195)
-------- -------- -------- -------- --------
Income (loss) after extraordinary
item................................. (1,670) (963) (2,494) (291) 4,296
Preferred stock dividends............ -- -- -- 622 890
-------- -------- -------- -------- --------
Net income (loss) attributable to
common stockholders.................. $ (1,670) $ (963) $ (2,494) $ (913) $ 3,406
======== ======== ======== ======== ========
Income (loss) per common share
Basic:
Continuing operations............ $ (.66)(1) $ (.38) $ (.99) $ (.09) $ .35
Extraordinary item............... -- -- -- (.10) (.02)
-------- -------- -------- -------- --------
Net income (loss) per common
share............................ $ (.66) $ (.38) $ (.99) $ (.19) $ .33
======== ======== ======== ======== ========
Diluted:
Continuing Operations............ $ (.66)(1) $ (.38) $ (.99) $ (.09) $ .34
Extraordinary item............... -- -- -- (.10) (.02)
-------- -------- -------- -------- --------
Net income (loss) per common
share.......................... $ (.66) $ (.38) $ (.99) $ (.19) $ .32
======== ======== ======== ======== ========
Weighted average number of common and
common equivalent
shares outstanding:
Basic................................ 2,520(1) 2,520 2,520 4,869 10,226
======== ======== ======== ======== ========
Diluted.............................. 2,520(1) 2,520 2,520 4,869 10,485
======== ======== ======== ======== ========
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period... 25 34 41 76 120
Funeral services performed during
period........................... 2,265 3,529 4,414 7,181 12,131
Preneed funeral contracts sold
during period.................. 644 762 2,610 3,760 4,020
Backlog of preneed funeral
contracts at end of period....... 5,170 6,855 8,676 22,925 34,797
Depreciation and amortization.... $ 947 $ 1,476 $ 1,948 $ 3,629 $ 7,809
BALANCE SHEET DATA (AT PERIOD END):
Working capital.................. $ (142) $ 4,271 $ 6,472 $ 5,089 $ 5,823
Total assets..................... 28,784 44,165 61,746 131,308 277,940
Long-term debt, net of current
maturities....................... 26,270 32,622 42,057 42,733 121,553
Redeemable preferred stock....... -- -- -- 17,251 13,951
Stockholders' equity (deficit)... (2,626) 3,429 9,151 57,043 98,565
</TABLE>
- ------------
(1) Prior to January 1, 1994, the Company consisted of three entities whose
owners contributed their equity in these entities in exchange for 2,520,000
shares of common stock of the Company effective January 1, 1994.
Accordingly, shares of common stock shown outstanding for these periods
assume the exchange had taken place at the beginning of the periods
presented. In 1993, the entities were subchapter S corporations, and taxes
were the direct responsibility of the owners. Thus, the tax provision
reflected above for this period is based on assumptions about what tax
provisions (benefits) would have been if the Company had been a taxable
entity. In the opinion of management, no pro forma tax provision (benefit)
was appropriate for this period because the Company followed a policy of not
recognizing the benefits associated with net operating losses during such
period.

9
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

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

Cash flow from operations, which the Company defines as earnings before
interest, income taxes, and depreciation and amortization, increased, as a
percentage of net revenues, from 22.6% for 1996 to 29.7% for 1997. This
improvement was largely due to the increased gross profits at the individual
locations, as general and administrative expenses on the same basis were
comparable. Gross margins for the funeral homes increased from 18% in 1996 to
25% in 1997 as a result of margin management training for the managers and
directors related to merchandising and memorialization and benefits from cost
containment and clustering, where realizable. Improvements in cemetery gross
profit margins were dramatic in 1997. Fueled by a doubling of the number of
cemeteries during the year and the restructuring of the preneed sales function
in late 1996, cemetery gross profit increased 700% while cemetery revenues
increased 332%. As a percentage of cemetery net revenues, cemetery gross profit
was 23% in 1997 compared to 12% in 1996. The Rolling Hills Cemetery, which was
part of the CNM acquisition in early 1997, contributed 87% of the revenue
increase for the year. Preneed sales and marketing efforts began to have a
significant impact in the latter part of 1997, as revenues and gross profits
from cemeteries owned at least one year increased 66% and 373%, respectively, in
the fourth quarter compared to the same period in 1996.

Beginning in late 1995, the Company began identifying infrastructure needs
in anticipation of accelerating its acquisition activity. At the end of 1995,
the Company owned 44 facilities. During 1996 and 1997, the Company acquired 45
and 54 facilities, respectively. In a deliberate and managed process, the
Company increased personnel and related infrastructure as a function of the
increase in the Company's revenue run rate. As a consequence, general and
administrative expenses increased from $2.1 million in 1995 to $2.5 million in
1996 and to $5.3 million in 1997. The additional personnel filled critical roles
in expanding the geographic coverage of both corporate development and preneed
sales and marketing activities, as well as the financial, data processing and
administrative functions needed to support the growing number of locations
operating in a decentralized management fashion with timely financial and
management information.

During 1996, the Company acquired 38 funeral homes and seven cemeteries for
an aggregate consideration of approximately $68 million. Forty-four funeral
homes and ten cemeteries were acquired during 1997 for approximately $118
million. These acquisitions were funded through cash flow from operations,
additional borrowings under the Company's credit facilities and issuance of
preferred and common stock. In addition, as of March 31, 1998, the Company has
either acquired or has letters of intent to acquire 18 funeral homes and three
cemeteries for an aggregate consideration of approximately $53 million. The
Company believes its increased recognition in the death care industry as an
established purchaser of funeral homes and cemeteries has improved its ability
to attract potential acquisitions that are larger, strategic and accretive and
its ability to finance its acquisitions with debt and equity.

Certain matters discussed herein may contain forward-looking statements
that are subject to risks and uncertainties that could cause actual results to
differ materially from those projected. Such risks and uncertainties include,
but are not limited to, the following: the Company's ability to sustain its
rapid

10
<PAGE>
acquisition rate, to manage the growth and to obtain adequate performance from
acquired businesses; the economy and financial market conditions, including
stock prices, interest rates and credit availability; and death rates and
competition in the Company's markets.

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:

YEAR ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
Total revenues, net.................. 100.0% 100.0% 100.0%
Total gross profit................... 16.5 17.8 25.0
General and administrative
expenses........................... 8.7 6.1 6.8
Operating income..................... 7.8 11.6 18.2
Interest expense, net................ 15.2 10.8 7.6
Income (loss) before extraordinary
item............................... (10.3) 0.5 5.8

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

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

The following is a discussion of the Company's results of operations for
1995, 1996 and 1997. For purposes of this discussion, funeral homes and
cemeteries owned and operated for the entirety of each year being compared are
referred to as "existing operations." Operations acquired or opened during
either period being compared are referred to as "acquired operations."

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

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

YEAR ENDED
DECEMBER 31, CHANGE
-------------------- -------------------
1996 1997 AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
Net revenues:
Existing operations....... $ 25,042 $ 24,627 $ (415) (1.7)%
Acquired operations....... 12,403 40,261 27,858 *
-------- -------- -------
Total net revenues... $ 37,445 $ 64,888 $27,443 73.3 %
======== ======== =======
Gross profit:
Existing operations....... $ 4,396 $ 5,675 $ 1,279 29.1 %
Acquired operations....... 2,408 10,809 8,401 *
-------- -------- -------
Total gross profit... $ 6,804 $ 16,484 $ 9,680 142.3 %
======== ======== =======
- ------------
* Not meaningful.

11
<PAGE>
Due to the rapid growth of the Company, existing operations represented
only 38% of the total funeral revenues and only 34% of the total funeral gross
profit for the year ended December 31, 1997. Total funeral net revenues for the
year ended December 31, 1997 increased $27.4 million or 73.3% over 1996. The
higher net revenues reflect an increase of $27.9 million in net revenues from
acquired operations and a decrease in net revenues of $415,000 or 1.7% from
existing operations. The decrease in net revenues for the existing operations
primarily resulted from fewer funeral services being performed, which was
partially offset by a 2.6% increase in the average revenue per funeral service.
Fewer services were performed in 1997 primarily due to lower than usual seasonal
death rates in certain of the Company's markets, especially in East Central
region of the country where the Company has a large number of existing
operations.

Total funeral gross profit for the year ended December 31, 1997 increased
$9.7 million or 142.3% over 1996. The higher total gross profit reflected an
increase of $8.4 million from acquired operations and an increase of $1.3
million or 29.1% from existing operations. Gross profit for existing operations
increased due to the efficiencies gained by consolidation, cost savings,
improved collections experience and the increasing effectiveness of the
Company's merchandising strategy, which were partially offset by lower revenues.
Total gross margin increased from 18.2% for 1996 to 25.4% for the 1997 due to
these factors.

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

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

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

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

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

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

Interest expense for the year ended December 31, 1997 increased $1.5
million over 1996 principally due to increased borrowings for acquisitions. In
August 1996, the Company utilized the net proceeds from its IPO and borrowings
under a credit facility to repay the majority of its outstanding debts. In
September 1997, the Company entered into a new credit facility for an increased
line of credit. In connection with repayments of debt in both years, the Company
recognized an extraordinary loss of approximately $498,000

12
<PAGE>
and $195,000, net of income tax benefits of approximately $332,000 and $159,000,
for the write-off of the deferred loan costs associated with the early
retirement of debts, for the years ended December 31, 1996 and 1997,
respectively. The new credit facility reflects substantially improved terms and
reduced interest rates compared to the previous arrangements.

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

For 1997, the Company provided for income taxes on income before income
taxes and extraordinary item at a combined state and federal tax rate of 45.3%.
The provision for income taxes for 1997 includes a one-time charge in the amount
of $390,000 to revalue the historical deferred tax liability accounts because
the Company's taxable income has grown at which the federal corporate tax rate
increases from 34% to 35%. Amortization of names and reputations related to
stock acquisitions, which is nondeductible, is the primary cause of the
Company's effective rate exceeding 34%. Prior to 1997, the Company experienced
net operating losses and the tax benefits associated with these net operating
loss carryforwards were reserved. The Company continues to analyze the benefits
associated with these losses and adjusts the valuation allowance as appropriate.

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

The following table sets forth certain information regarding the net
revenues and gross profit of the Company from its operations during the years
ended December 31, 1995 and 1996:
<TABLE>
<CAPTION>
YEAR ENDED
DECEMBER 31, CHANGE
----------------------- -----------------------
1995 1996 AMOUNT PERCENT
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Net revenues:
Existing operations............. $ 21,482 $ 20,921 $ (561) (2.6%)
Acquired operations............. 2,755 19,427 16,672 *
-------- -------- -------
Total net revenues......... $ 24,237 $ 40,348 $16,111 66.5%
======== ======== =======
Gross profit:
Existing operations............. $ 3,451 $ 3,481 $ 30 0.9%
Acquired operations............. 539 3,685 3,146 *
-------- -------- -------
Total gross profit......... $ 3,990 $ 7,166 $ 3,176 79.6%
======== ======== =======
</TABLE>
- ------------
* Not meaningful.

Total net revenues for the year ended December 31, 1996 increased $16.1
million or 66.5% over 1995. The higher net revenues reflect an increase of $16.7
million in net revenues from acquired operations and a decrease in net revenues
of $561,000 or 2.6% from existing operations. The decrease in net revenues for
the existing operations primarily resulted from fewer funeral services being
performed, which was partially offset by a 3.9% increase in the average revenue
per funeral service. Fewer services were performed in 1996 due to the
divestiture of three funeral homes and a longer than normal seasonal decline in
the number of deaths in certain of the Company's markets. This seasonal decline
in the number of services ended in mid-November. At December 31, 1996, the
Company operated 10 cemeteries. The net revenues and gross profit of cemeteries
represented less than eight percent of the Company's total operations.

Total gross profit for the year ended December 31, 1996 increased $3.2
million or 79.6% over 1995. The higher total gross profit reflected an increase
of $3.1 million from acquired operations and an increase of $30,000 or 0.9% from
existing operations. Gross profit for existing operations increased due to the
efficiencies gained by consolidation and the increasing effectiveness of the
Company's merchandising

13
<PAGE>
strategy, which was partially offset by lower revenues. Total gross margin
increased from 16.5% for 1995 to 17.8% for 1996 due to these factors. As a
result of the acceleration of the Company's acquisition program in 1996, the
profit contribution from acquired properties exceeded that of existing
operations even though most were not owned for the entire year. The acquisition
and integration of these new properties received the majority of the corporate
operations group's management focus during the year. During the fourth quarter,
significant additional management resources were added to this group to provide
assistance in increasing revenue and profit margins from existing ongoing
operations and to more rapidly achieve targeted margins for acquired businesses.

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

Interest expense for the year ended December 31, 1996 increased $663,000
over 1995 principally due to increased borrowings for acquisitions.

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

For 1996, the Company provided for income taxes (benefits) at a combined
state and federal tax rate of 40%.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $6.1 million at December 31, 1997,
representing an increase of $4.4 million from December 31, 1996. For the year
ended December 31, 1997, cash provided by operations was $ 9.7 million as
compared to $314,000 for the year ended December 31, 1996. The increase in net
cash provided by operating activities was due in part to the net income in 1997
compared to the net loss for 1996. Cash used in investing activities was $75
million for the year ended December 31, 1997 compared to $46 million in 1996,
due primarily to the significant increase in acquisitions and construction of
funeral facilities. In 1997, cash flow provided by financing activities amounted
to approximately $70 million, primarily due to proceeds from long term debt
which were used to fund acquisitions. In 1996, cash flow provided by financing
activities amounted to $40 million primarily due to the proceeds from the IPO.

Historically, the Company has financed its acquisitions with proceeds from
debt and the issuance of common and preferred stock. The Company issued 977,736
shares of Class A Common Stock and approximately 20,000,000 shares of Series F
Preferred Stock and paid $66 million in cash to fund acquisitions in 1997. As of
December 31, 1997, the Company has 1,682,500 shares of Series D Preferred Stock
and 12,278,285 shares of Series F Preferred Stock issued and outstanding. The
Series D Preferred Stock is convertible into Class B Common Stock and the Series
F Preferred Stock is convertible into Class A Common Stock. The holders of
Series D Preferred Stock are entitled to receive cash dividends at an annual
rate of $.06-$.07 per share depending upon when such shares were issued.
Commencing on the second anniversary of the completion of the IPO (August 8,
1998), the Company may, at its option, redeem all or any portion of the shares
of Series D Preferred Stock then outstanding at a redemption price of $1.00 per
share, together with all accrued and unpaid dividends. Such redemption is
subject to the right of each holder of Series D Preferred Stock to convert such
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 conjunction with the closing of the IPO, the Company entered into a
credit facility (the "Former Credit Facility") which provided for a $75 million
revolving line of credit with both LIBOR and base rate interest options. In
August 1996, the Company paid all of its outstanding indebtedness with the
proceeds

14
<PAGE>
from the issuance of its Class A Common Stock in connection with the Company's
IPO (see Note 7) and utilization of the Former Credit Facility. The Former
Credit Facility was unsecured with a term of three years and contained customary
restrictive covenants, including a restriction on the payment of dividends on
common stock, and required the Company to maintain certain financial ratios.
During September, 1997, the Company entered into a new credit facility (the "New
Credit Facility") for a $150 million revolving line of credit. The New Credit
Facility has a five year term, is unsecured and contains customary restrictive
covenants, including a restriction on the payment of dividends on common stock,
and requires the Company to maintain certain financial ratios. Interest under
the New Credit Facility is provided at both LIBOR and prime rate options.

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

The Company expects to continue to aggressively pursue additional
acquisitions of funeral homes and cemeteries to take advantage of the trend
toward consolidation occurring in the industry which will require significant
levels of funding from various sources. In addition, the Company currently
expects to incur less than $10 million of capital expenditures during 1998,
primarily for upgrading funeral home facilities. The Company believes that cash
flow from operations, borrowings under the New Credit Facility and its ability
to issue additional debt and equity securities should be sufficient to fund
acquisitions and its anticipated capital expenditures and other operating
requirements for 1998. In March 1997, the Company filed this shelf registration
statement relating to 2,000,000 shares of Class A Common Stock to be issued to
fund acquisitions. As of March 31, 1998, approximately 1,500,000 shares remained
available for issuance under this shelf registration. Because future cash flows
and the availability of financing are subject to a number of variables, such as
the number and size of acquisitions made by the Company, there can be no
assurance that the Company's capital resources will be sufficient to fund its
capital needs. Additional debt and equity financings may be required to continue
the Company's acquisition program. The availability and terms of these capital
sources will depend on prevailing market conditions and interest rates and the
then-existing financial condition of the Company.

SEASONALITY

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.

INFLATION

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

YEAR 2000

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

15
<PAGE>
BUSINESS

THE COMPANY

Carriage Services, Inc. (the "Company") believes that it is the fifth
largest publicly traded provider of death care services and products in the
United States. 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 December 31, 1997, the Company operated 120 funeral homes and
20 cemeteries in 20 states. Funeral services constituted approximately 93% and
84% of revenues in 1996 and 1997, respectively.

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 21% of the 1996 United States death care industry revenues are
represented by the Company and the four largest publicly traded domestic 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 until 1997, when there was no increase from 1996.
According to a 1996 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 1997 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 has 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.

16
<PAGE>
CLUSTERED OR COMBINED OPERATIONS. The death care industry has also
witnessed a trend by companies to cluster their funeral home and cemetery
operations. Clusters refer to funeral homes and/or cemeteries which are grouped
together in a geographical region. Clusters provide a company with the ability
to generate cost savings through the sharing of personnel, vehicles and other
resources. Firms 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 organizations to actively promote
such products and services. At the same time, consumers are becoming more aware
of the benefits of advanced planning, such as the financial assurance and peace
of mind achieved by establishing in advance a fixed price and type of service,
and the elimination of the emotional strain of making death care plans at the
time of need. Effective marketing of preneed products and services assures a
backlog of future business.

CREMATION. In recent years, there has been steady, gradual growth in the
number of families in the United States that have chosen cremation as an
alternative to traditional methods of burial. According to industry studies,
cremations represented approximately 21% of the United States burial market in
1996, as compared to approximately 10% in 1980. Many parts of the Southern and
Midwestern United States and many non-metropolitan communities exhibit
significantly 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

The Company's objective is to become the most professional, ethical and
highest quality funeral and cemetery service organization in the industry 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 increase
profitability at newly acquired properties.

OPERATING STRATEGY. Since its formation, the Company has focused on
quality service and 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. The Company utilizes computer systems linked to most of the
Company's funeral home locations. These systems enable a location to function on
its own by maintaining accounts receivables and payables locally, at a cluster
processing site, or at the Company's centralized processing center at the option
of the local manager. The same information is provided to the Company's senior
management which 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 has established a compensation structure that is designed to
maintain and create a sense of ownership. Local management is awarded meaningful
cash bonuses and stock options for exceptional performance when achieving
specified earnings objectives. The Company has also structured a stock option
program which awards options to most full-time employees based upon the
performance of their local

17
<PAGE>
business during the period. As a result, all management and most full-time
employees have the opportunity to increase their personal net worth through
strong local and corporate performance.

Management also believes that implementing its operating strategy in newly
acquired businesses leads 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 operators 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 has recently greatly expanded its
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 acquisition candidates,
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 aggressively pursue the acquisition of premier funeral homes that have a
strong local market presence and that conduct 100 to 600 funeral services per
year, as well as funeral homes in close proximity to the Company's existing
businesses. In addition, although the Company, in early years, focused on
acquiring funeral home operations, the Company aggressively pursues cemetery
acquisitions in markets where the Company operates, or plans to operate, funeral
homes to take advantage of cross-marketing opportunities. The Company is also
pursuing larger acquisition transactions which provide significant strategic
benefits to the Company, such as new market penetration. For example, in January
1997, the Company merged with CNM, a premier California-based company which
operates ten funeral homes and one cemetery, and in November 1997, merged with
the John E. Day Funeral Home in New Jersey and the Forest Lawn/Evergreen
Management Co. of Florida, which together operate seven funeral homes and three
cemeteries. These three transaction accounted for over 60% of the acquisition
spending in 1997. The Company also seeks to issue, and has been successful in
issuing, equity securities to the previous owners of acquired businesses. From
inception through March 31, 1998, the Company has issued 37,775,608 shares of
redeemable preferred stock and 1,023,120 shares of Class A Common Stock in
conjunction with acquisition transactions. As of March 31, 1998, a total of
23,760,823 shares of redeemable preferred stock have converted into shares of
Class A and Class B Common Stock. Management believes that its success in
issuing equity securities in conjunction with acquisitions reflects in large
part previous owners' desires to remain affiliated with and to be invested in
the Company.

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 with the Company, combined with the Company's decentralized
operating structure and incentive-based compensation system, makes it a
particularly attractive acquirer to some independent owners. The Company targets
additional funeral homes in present markets so that personnel and vehicles can
be shared and profit margins enhanced.

18
<PAGE>
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, deferred purchase price and preferred and common 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 has not historically focused on acquiring cemetery
operations, as a result of the increased access to capital and the Company's
enhanced profile in the industry, the Company is encountering significant
cemetery acquisition opportunities. The Company will continue to pursue cemetery
acquisitions in markets where they operate funeral homes to take advantage of
cross-marketing opportunities and in markets where a funeral home acquisition
strategy is viable.

While the Company focuses its efforts on identifying individual 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.

FUNERAL
YEAR(3) CONSIDERATION HOMES(1) CEMETERIES(2)
- ------------------------------- ------------- --------- -------------
(DOLLARS IN THOUSANDS)
1992........................... $ 11,832 14 2
1993........................... 13,843 11 1
1994........................... 9,153 9 1
1995........................... 12,191 8 0
1996........................... 68,181 38 7
1997........................... 118,260 44 10
-------- --- --
$233,460 124 21
======== === ==
- ------------
(1) The Company subsequently divested four of these funeral homes.

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

(3) From January 1, 1998 through March 31, 1998, the Company has acquired four
funeral homes and one cemetery for aggregate consideration of $8 million.

19
<PAGE>
OPERATIONS

The Company's funeral home operations, cemetery operations and preneed
programs are managed by service-minded professionals with extensive death care
industry experience. In response to the rapid growth experienced beginning in
1996, the Company increased operations staffing, including a new transition
team, to provide local managers with the additional support and direction needed
during the integration of newly acquired properties.

Although certain financial management and policy matters are centralized,
local funeral home and cemetery managers 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.

FUNERAL HOME OPERATIONS. As of December 31, 1997, the Company operated 120
funeral homes in 20 states. Funeral home revenues accounted for approximately
93% and 84% of the Company's net revenues for each of the years ended December
31, 1996 and 1997. The Company's funeral home operations are managed by a team
of experienced death care industry professionals.

The Company's funeral homes offer a complete range of services to meet
family's funeral needs, including consultation, the removal and preparation of
remains, the sale of caskets and related funeral merchandise, the use of funeral
home facilities for visitation and worship, and transportation services. Most of
the Company's funeral homes have a non-denominational chapel on the premises,
which permits family visitation and religious services to take place at one
location, which reduces transportation costs to the Company and inconvenience to
the family.

CEMETERY OPERATIONS. As of December 31, 1997, the Company operated 20
cemeteries in 10 states. Cemetery revenues accounted for approximately 7% and
16% of the Company's net revenues for each of the years ended December 31, 1996
and 1997.

As a result of a growing number of potential cemetery acquisition
candidates, the Company has made additional investments in the cemetery
operations infrastructure. Beginning in the fourth quarter of 1996, experienced
preneed marketing professionals were added at the national and regional levels.
This investment in additional preneed marketing management allowed the Company
to increase preneed sales at existing cemetery properties and positioned the
Company to more effectively integrate future cemetery acquisitions. As of
December 31, 1997, the Company employed a staff of approximately 144 advance
planning representatives 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, mausoleum
crypts and niches) and related cemetery merchandise such as memorials and
vaults. Cemetery operations generate revenues through sales of interment rights,
memorials and installation, fees for interment and cremation services, finance
charges from installment sales contracts and investment income from preneed
cemetery merchandise and perpetual care trusts.

PRENEED PROGRAMS. In addition to sales of funeral merchandise and services
and cemetery interment rights, merchandise and services at the time of need, the
Company also markets funeral and cemetery services and products on a preneed
basis. Preneed funeral or cemetery contracts enable families to establish in
advance the type of service to be performed, the products to be used and the
cost of such products and services in accordance with prices prevailing at the
time the contract is signed rather than when the products and services are
delivered. Preneed contracts permit families to eliminate the emotional strain
of making death care plans at the time of need and enable the Company to
establish a portion of its future market share. Proceeds from the sale of
preneed funeral contracts are not recognized as revenues until the time the
funeral service is performed. The Company sold 3,760 and 4,020 preneed funeral
contracts in the years ended December 31, 1996 and 1997, respectively. At
December 31, 1997, the Company had a backlog of 34,797 preneed funeral contracts
to be delivered in the future.

20
<PAGE>
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 always receives an initial payment at the time the
contract is signed. Allowances for customer cancellations and refunds are
accrued at the date of sale based upon historical experience. Preneed cemetery
sales represented approximately 67% and 65% of the Company's net cemetery
revenues for the years ended December 31, 1996 and 1997, respectively.

PROPERTIES

At December 31, 1997, the Company operated 120 funeral homes and 20
cemeteries in 20 states. The Company owns the real estate and buildings of 89 of
its funeral homes and all of its cemeteries and leases facilities in connection
with 31 of its funeral homes. The 20 cemeteries operated by the Company cover a
total of approximately 725 acres. The Company's inventory of unsold developed
lots totaled approximately 44,000 and 80,000 at December 31, 1996 and 1997,
respectively. In addition, approximately 359 acres, or approximately 50% of the
total acreage, is available for future development. The Company does not
anticipate any shortage of available space in any of its current cemeteries for
the foreseeable future.

21
<PAGE>
The following table sets forth certain information as of December 31, 1997
regarding the Company's funeral homes and cemeteries by state:

NUMBER OF
FUNERAL HOMES
------------------------
STATE OWNED LEASED(1) CEMETERIES
- ---------------------------------- -------- --------- ----------
Alabama........................... 2 0 0
California........................ 11 2 1
Connecticut....................... 5 2 0
Florida........................... 4 3 4
Georgia........................... 3 3 0
Idaho............................. 5(3) 0 3
Illinois.......................... 0 5 1
Indiana........................... 1 2 1
Kansas............................ 8 0 0
Kentucky.......................... 7 4 1
Michigan.......................... 4 2 0
Montana........................... 1 0 0
New Jersey........................ 3 2 0
North Carolina.................... 1 1 1
Ohio.............................. 13 3 0
Rhode Island...................... 1 0 0
South Carolina.................... 5 0 4
Tennessee......................... 3 1 1
Texas............................. 10(2) 1 3
Washington........................ 2 0 0
-- -- --
Total........................ 89 31 20
== == ==
- ------------
(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) Two of these funeral homes are located on property contiguous to and
operated in combination with Company cemeteries.

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

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

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

COMPETITION

The acquisition environment in the death care industry is highly
competitive. The four major publicly held death care companies, Service
Corporation International, 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

22
<PAGE>
substantially in recent years, and, in some cases, competitors have paid
acquisition prices substantially more than the prices offered by the Company.
Accordingly, no assurance can be given that the Company will be successful in
expanding its operations through acquisitions or that funeral homes and
cemeteries will be available at reasonable prices or on reasonable terms.

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

TRUST FUNDS

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

PRENEED FUNERAL TRUSTS. Preneed funeral sales are facilitated by deposits
to a trust or purchase of a third-party insurance product. All preneed funeral
sales are deferred until the service is performed. The trust income earned and
any increase in insurance benefits are also deferred until the service is
performed in order to offset possible inflation in cost when providing the
service in the future. Although direct marketing costs and commissions incurred
for the sale of preneed funeral contracts are a current use of cash, such costs
are also deferred and amortized over the expected timing of the performance of
the services 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 $36.5 million and $52.9 million as of December
31, 1996 and 1997, respectively.

PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS. The Company is generally
required under applicable state laws to deposit a specified amount (which varies
from state to state, generally 110% of selling price) into a merchandise and
service trust fund for cemetery merchandise and services sold on a preneed
basis. The related trust fund income earned is recognized in current revenues as
trust earnings. These earnings are offset by any current period inflation costs
accrued related to the merchandise and services that have not yet been provided.
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 $1.1 million and $9.6 million December 31, 1996 and 1997,
respectively.

PERPETUAL CARE TRUSTS. In certain states, regulations require a portion,
generally 10%, of the sale amount of cemetery property and memorials to be
placed in trust. These perpetual care trusts provide the funds necessary to
maintain cemetery property and memorials in perpetuity. The related trust fund
income earned 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 $2.0 million and $8.4
million as of December 31, 1996 and 1997, repectively.

23
<PAGE>
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 results of operations. 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 PROCEEDINGS

Certain of the funeral homes located in California that were acquired by
the Company in early 1997, along with other death care providers, are defendants
in litigation in the state of California alleging that a flight service
contracted to dispose of cremains failed to properly carry out its duties. While
the litigation is in the early stages, management, with advice of legal counsel,
believes that there are adequate insurance coverages, indemnities and reserves
such that the results of the litigation will not have a material effect on the
Company's consolidated financial position or result of operations. Additionally,
the Company and 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 December 31, 1997, the Company and its subsidiaries employed 616
full-time employees, 523 part-time employees and 186 advance planning
representatives. 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.

24
<PAGE>
MANAGEMENT

DIRECTORS AND EXECUTIVE OFFICERS

The Company currently has a Board of Directors composed of nine members. In
accordance with the Company's Charter, the members of the Board of Directors are
divided into three classes, designated Class I, Class II and Class III,
respectively, and are elected for a term of office expiring at the third
succeeding annual stockholders' meeting following their election to office and
until their successors are duly elected and qualified. The Charter also provides
that such classes shall be as nearly equal in number as possible. The term of
office of the Class II directors expires at the annual meeting of stockholders
in 1998. The term of the Class I directors expires at the annual meeting of
stockholders in 2000 and the term of the Class III directors expires at the
annual meeting of stockholders in 1999. 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 TERM AS DIRECTOR
- ---------------------------------------- --- --------------------------------------- ----------------
<S> <C> <C>
Melvin C. Payne(1)...................... 55 Chairman of the Board, Chief Executive 2000
Officer and Director
C. Byron Snyder(1)(2)................... 49 Director and Chairman of Executive 2000
Committee
Robert D. Larrabee...................... 63 Director 2000
Mark W. Duffey(1)....................... 41 President and Director 1998
Barry K. Fingerhut(1)(2)................ 52 Director 1998
Greg M. Brudnicki....................... 42 Director 1998
Stuart W. Stedman(3).................... 40 Director 1999
Ronald A. Erickson(3)................... 61 Director 1999
Mark F. Wilson.......................... 51 Director 1999
Thomas C. Livengood..................... 42 Executive Vice President, Chief --
Financial Officer and Secretary
Russell W. Allen........................ 51 Executive Vice President of Operations --
Gary O'Sullivan......................... 45 Senior Vice President -- Marketing --
Reid A. Millard......................... 38 Vice President, Corporate Development --
</TABLE>
- ------------
(1) Member of Executive Committee.

(2) Member of Compensation Committee.

(3) Member of Audit Committee.

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

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

C. BYRON SNYDER has been a director of the Company since 1991, was Chairman
of the Board of Directors of the Company from 1991 until December 1996, and is
currently Chairman of the Executive Committee. Mr. Snyder is the President of
Sterling City Capital, LLC, a Houston-based investment company specializing in
consolidating privately owned businesses simultaneously with an initial public
offering. Mr. Snyder is the Chairman of the Board of Directors of Integrated
Electrical Services, Inc., a

25
<PAGE>
publicly traded national provider of electrical contracting and maintenance
services in the commercial, industrial, and residential markets. Mr. Snyder was
the owner and President of Relco Refrigeration Co., a distributor of
refrigeration equipment, which he acquired in 1992. In February 1998, Relco
Refrigeration was merged into Hospitality Companies, Inc., which provides food
equipment and heating/air conditioning products to the hospitality industry. In
connection with the merger, Mr. Snyder became a member of the Board of Directors
of Hospitality Companies. Prior to 1992, Mr. Snyder was the owner and Chief
Executive Officer of Southwestern Graphics International, Inc., a diversified
holding company which owned Brandt & Lawson Printing Co., a Houston-based
general printing business, and Acco Waste Paper Company, an independent
recycling business. Brandt & Lawson Printing Co. was sold to Hart Graphics in
1989, and Acco Waste Paper Company was sold to Browning-Ferris Industries in
1991.

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

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

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 LLC, a registered investment adviser located in New York City which
focuses its investment advice and management on securities of small
capitalization companies. As of December 31, 1997, GeoCapital managed accounts
having a market value of approximately $2.1 billion. Mr. Fingerhut also has
co-founded several investment partnerships that invest primarily in undervalued
publicly traded companies and high growth companies engaged in the
communications, media or entertainment industries. Mr. Fingerhut presently is a
director of Millbrook Press, Inc., a publisher of children's non-fiction books,
and UOL Publishing, Inc., an online publisher of academic and corporate texts.
He previously served as a director of La Quinta Inns, Inc., a nationwide lodging
chain, and Lakeshore National Bank, Inc., which was acquired by First Chicago
Corp. in 1994.

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

STUART W. STEDMAN has been a director of the Company since it went public
in August 1996. For the past ten years, Mr. Stedman has been President of Wesley
West Interests, Inc., a management company responsible for various family
holdings, including marketable securities, oil, gas and coal properties, ranch

26
<PAGE>
lands and urban real estate. Mr. Stedman also serves as a Manager of Strand
Energy, L.L.C., a private exploration and production company.

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

MARK F. WILSON became a director of the Company on January 7, 1997 when CNM
merged with the Company. Mr. Wilson served as the President of CNM from 1988
until its merger with the Company in January 1997, when he became the President
of Carriage Funeral Services of California, Inc., a subsidiary of the Company.
CNM owned and operated nine Wilson & Kratzer Funeral Homes and the Rolling Hills
Memorial Park Cemetery in Alameda and Contra Costa Counties, California. In
connection with the CNM merger, the Company agreed to increase the Board of
Directors to eight members and appoint Mr. Wilson as a director. Mr. Wilson also
serves on the Board of Directors of Mechanics Bank, Richmond, California, and
Hills Newspapers, a publisher of weekly newspapers in Northern California.

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

RUSSELL W. ALLEN joined the Company in June 1993 as Executive Vice
President of Operations. Mr. Allen has over 33 years of operational experience
in the funeral home industry. Prior to joining the Company, he was affiliated
with Earthman Funeral Directors and Greenwood-Mount Olivet Funeral Homes and
Cemeteries in Fort Worth, Texas for one and 21 years, respectively, serving most
recently as Executive Vice President of Operations with each company. Mr. Allen
recently completed a term of six years as Vice Chairman of the Texas Funeral
Service Commission and as Chairman of the Education and Legislation Committees.
He is also a member of the Texas Cemetery Association and has served on the
Legislative Committees with that organization.

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

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

27
<PAGE>
EXECUTIVE COMPENSATION

The following table sets forth information for the years ended December 31,
1997, 1996 and 1995 for the Company's Chief Executive Officer and the four other
most highly compensated executive officers of the Company during 1997
(collectively, the "Named Executive Officers"):

SUMMARY COMPENSATION TABLE
<TABLE>
<CAPTION>
LONG TERM
COMPENSATION
AWARDS
------------
ANNUAL COMPENSATION SECURITIES ALL OTHER
--------------------- OTHER ANNUAL UNDERLYING COMPENSA-
NAME AND PRINCIPAL POSITION YEAR SALARY BONUS COMPENSATION(1) OPTIONS TION(2)
- --------------------------- --------- ---------- --------- --------------- ------------ ---------
<S> <C> <C> <C> <C>
Melvin C. Payne............ 1997 $ 225,000 -- -- 20,000(3) $ 1,201
Chairman of the Board and 1996 194,292 -- -- 250,000 1,168
Chief Executive Officer 1995 171,576 -- -- -- 1,174
Mark W. Duffey............. 1997 $ 185,000 -- -- 16,000(3) $ 1,957
President 1996 162,231 -- -- 150,000 1,901
1995 145,632 -- -- -- 1,889
Russell W. Allen........... 1997 $ 145,000 -- -- 12,000(3) $ --
Executive Vice President 1996 121,634 -- -- 50,000 --
of Operations 1995 93,356 $ 20,000 -- -- 193
Thomas C. Livengood........ 1997 $ 175,000 -- -- 50,000(3) $ 2,188
Executive Vice President, 1996 (4)
CFO and Secretary
Gary O'Sullivan............ 1997 $ 190,496 -- -- 60,000(3) $ --
Senior Vice-President -
Marketing 1996 (5)
</TABLE>
- ------------
(1) Excludes perquisites and other personal benefits unless the aggregate amount
of such compensation exceeded the lesser of $50,000 or 10% of the total
annual salary and bonus reported for the Named Executive Officer.

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

(3) All of the options issued to Messrs. Payne, Duffey, Allen and Livengood, and
30,000 of the options issued to Mr. O'Sullivan, were granted in February
1998 but are subject to stockholder approval at the 1998 annual meeting of
stockholders.

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

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

STOCK OPTION GRANTS IN 1997

The Company has four stock option plans for its officers, directors,
employees and consultants, the 1995 Stock Incentive Plan (the "1995 Plan"),
the 1996 Stock Option Plan (the "1996 Plan"), the 1996 Directors' Stock Option
Plan (the "Directors' Plan") and the 1998 Stock Option Plan for Consultants
(the "Consultants Plan"). 700,000 shares of Class A and B Common Stock are
reserved for issuance under the 1995 Plan, but the Board has proposed to
increase the shares available under the 1995 Plan to 950,000 shares. Options
issued under the 1995 Plan prior to the Company's initial public offering in
August 1996 are satisfied with shares of Class B Common Stock, but options
issued after that date are satisfied with shares of Class A Common Stock.
600,000 shares of Class A Common Stock are reserved for issuance under the 1996
Plan, but the Board has proposed to increase the shares available under the 1996
Plan to 800,000 shares. 200,000 shares of Class A Common Stock are reserved for
issuance under the Directors' Plan and 100,000 shares of Class A Common Stock
are reserved for issuance under the Consultants Plan. Options issued under the
1995 Plan and the 1996 Plan may be either "Incentive Stock Options" as defined

28
<PAGE>
in Section 422 of the Internal Revenue Code of 1986, as amended (the "Code"),
or non-qualified stock options. Options issued under the Directors' Plan and the
Consultants Plan are non-qualified stock options.

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

OPTION GRANTS IN LAST FISCAL YEAR
<TABLE>
<CAPTION>
POTENTIAL REALIZABLE
INDIVIDUAL GRANTS VALUE
------------------------------------------------------ AT ASSUMED ANNUAL RATES
NUMBER OF % OF TOTAL OF STOCK PRICE
SECURITIES OPTIONS EXERCISE APPRECIATION
UNDERLYING GRANTED TO OR BASE FOR OPTION TERM(2)
OPTIONS EMPLOYEES PRICE EXPIRATION ------------------------
NAME GRANTED(1) IN 1997 ($/SH) DATE 5% 10%
- --------------------------- ----------- ----------- --------- ----------- ---------- ------------
<S> <C> <C> <C> <C> <C> <C>
Melvin C. Payne............ -- -- -- -- -- --
Mark W. Duffey............. -- -- -- -- -- --
Russell W. Allen........... -- -- -- -- -- --
Thomas C. Livengood........ -- -- -- -- -- --
Gary O'Sullivan............ 30,000(1) 8.9% $18.00 2006 $ 858,300 $ 1,334,300
</TABLE>
- ------------
(1) Options granted are for a term of nine and one half-year and vest 8.33% per
year October 8 of 1997, 1998, 1999 and 2000 and 16.66% per year on October 8
of 2001, 2002, 2003 and 2004; PROVIDED, HOWEVER, the options scheduled to
vest in 2001-2004 (i.e., 66 2/3% of the total grant) vest immediately if the
average of the daily high and low prices of the Class A Common Stock exceeds
$27.99 for 20 consecutive trading days prior to the fourth anniversary of
the grant date.

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

1997 OPTION EXERCISES AND YEAR-END OPTION HOLDINGS

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

AGGREGATE OPTION EXERCISES IN LAST FISCAL YEAR AND FISCAL YEAR-END OPTION VALUES
<TABLE>
<CAPTION>
NUMBER OF UNEXERCISED VALUES OF UNEXERCISED
OPTIONS HELD AT IN-THE-MONEY OPTIONS AT
SHARES DECEMBER 31, 1997 DECEMBER 31, 1997(1)
ACQUIRED ON VALUE --------------------------- ---------------------------
NAME EXERCISE REALIZED EXERCISABLE UNEXERCISABLE EXERCISABLE UNEXERCISABLE
- --------------------------- ----------- -------- ----------- ------------- ----------- -------------
<S> <C> <C> <C> <C>
Melvin C. Payne............ -- -- 20,833 229,167 $ 114,581 $ 1,260,419
Mark W. Duffey............. -- -- 12,500 137,500 68,750 756,250
Russell W. Allen........... -- -- 4,166 45,834 22,913 252,087
Thomas C. Livengood........ -- -- 4,166 45,834 521 5,729
Gary O'Sullivan............ -- -- 2,500 27,500 2,500 27,500
</TABLE>
- ------------
(1) An option is "in-the-money" if the market value of the Class A Common
Stock exceeds the exercise price of the option. The values of the options
set forth in these columns are based upon the difference between the closing
price of $19.00 on the Nasdaq National Market System on December 31, 1997
and any lesser exercise price.

COMPENSATION OF DIRECTORS

In lieu of cash compensation, each director of the Company who is not an
executive officer of the Company (a "qualified director") is entitled to
receive options under the 1996 Directors' Stock Option Plan (the "Directors'
Plan") provided that such director may not participate in any other stock
incentive plan of the Company. In addition, qualified directors are reimbursed
for expenses incurred in attending meetings of the Board of Directors and
Committees thereof.

29
<PAGE>
Under the Directors' Plan, each individual who was a qualified director as
of the date of the Company's initial public offering in August 1996 received a
non-qualified stock option (an "Initial Option") to purchase 15,000 shares (or
25,000 if the qualified director also served on the Executive Committee as of
such date) of Class A Common Stock at an exercise price per share equal to the
initial public offering price of $13.50 per share. C. Byron Snyder and Barry K.
Fingerhut were each serving on the Executive Committee on such date and received
options for 25,000 shares of Class A Common Stock. Each of the Initial Options
granted were for a term of ten years and vest 8.33% per year on the first
through fourth anniversary dates of the grant date and 16.66% per year on the
fifth through eighth anniversary dates of the grant date; provided, however, the
options scheduled to vest in years 5-8 from the grant date (i.e. 66 2/3% of the
total grant) vest immediately if the average of the daily high and low prices of
the Class A Common Stock for 20 consecutive trading days exceeds $27.99 prior to
the fourth anniversary of the grant date.

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

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

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

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

EMPLOYMENT AGREEMENTS

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

30
<PAGE>
CERTAIN TRANSACTIONS

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

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

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

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

In July 1996, the Company loaned Russell W. Allen, an executive officer of
the Company, $316,714 to allow Mr. Allen to exercise his options to purchase
shares of Class B Common Stock of the Company and to pay the federal income tax
liability incurred pursuant to such exercise. The loan matures on June 30, 1999,
bears interest at 7% per year payable annually on or before March 31 of each
year and is secured by approximately 30% of the Class B Common Stock purchased
by Mr. Allen. In order to pay the interest due March 31, 1997 and March 31, 1998
on this note, Mr. Allen executed new promissory notes totaling $39,457.75 with
the same terms as the other note. On July 30, 1997, the Company agreed to
release 7,875 shares of Class B Common Stock from this pledge and on April 3,
1998, an additional 5,000 shares were released from the pledge.

In connection with the acquisition by a subsidiary of the Company of three
corporations controlled by Robert D. Larrabee and his wife, which owned and
operated four funeral homes and two cemeteries in Washington and Idaho, (i) the
Company's subsidiary executed a note payable to Mr. Larrabee and his wife in the
original principal amount of $246,000, secured by the land and buildings for one
of the funeral home locations, as seller financing for that location, (ii) Mr.
Larrabee and such subsidiary entered into a five-year

31
<PAGE>
employment agreement providing for, among other things, the payment of a base
salary to Mr. Larrabee of $25,000 per year, (iii) the Larrabees granted to such
subsidiary an option to purchase a five-arce parcel of land adjacent to one of
the cemeteries included in the acquisition for a purchase price of $300,000, and
(iv) the Company agreed to undertake to appoint Mr. Larrabee to the Company's
Board of Directors if the Company went public. This transaction was entered into
prior to Mr. Larrabee becoming a director of the Company, and the compensation
outlined above does not relate to any services provided by Mr. Larrabee as a
director of the Company.

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

PRINCIPAL STOCKHOLDERS

The following table sets forth information as of March 12, 1998 with
respect to the beneficial ownership of Class A and B Common Stock (including the
number of shares of Class A and B Common Stock into which the Series D and F
Preferred Stock may be converted) by each person known by the Company to be the
beneficial owner of more than 5% of the Class A and B 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>
AMOUNT AND NATURE OF
BENEFICIAL OWNERSHIP PERCENT OF
------------------------------- CLASS A AND B PERCENT OF
CLASS A CLASS B COMMON STOCK VOTING
BENEFICIAL OWNER COMMON STOCK COMMON STOCK(1) OWNED CONTROL(2)
- ------------------------------------- ------------ --------------- ------------- ----------
<S> <C> <C> <C> <C>
Mark W. Duffy........................ 92,375(3) 238,625(11) 3.0 4.6
Barry K. Fingerhut................... 183,133(3)(4) 520,924(4)(11) 6.3 10.1
Greg M. Brudnicki.................... 210,494 0 1.9 *
Stuart W. Stedman.................... 137,388(3)(5) 145,223(5)(11) 2.5 3.0
Ronald A. Erickson................... 13,650(3) 61,621(6) * 1.2
Mark F. Wilson....................... 489,388(3)(7) 0 4.3 *
Melvin C. Payne...................... 50,835(3) 629,769(8)(11) 6.1 11.8
C. Byron Snyder...................... 82,083(3) 1,296,311(9)(11) 12.3 24.4
Robert D. Larrabee................... 1,250(3) 66,298(10) * *
Thomas C. Livengood.................. 11,980(3) 2,000 * *
Russell W. Allen..................... 10,916(3) 55,125 * 1.0
Gary O'Sullivan...................... 2,500(3) 0 * *
All Directors and Executive Officers
as a group (13 Persons)............ 1,288,492 3,226,398 40.5 62.7
</TABLE>
- ------------
* Indicates less than 1%.

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

(2) This column sets forth the percentage of voting power held by the person
based on the type of securities held. Each share of Class A Common Stock is
entitled to one vote, each share of Class B Common Stock is entitled to ten
votes, each share of Series D Preferred Stock is entitled to .0022 votes,
and each share of Series F Preferred Stock is entitled to .0588 votes.

(3) The ownership of shares of Class A Common Stock shown in the table includes
shares which may be acquired within 60 days upon exercise of outstanding
stock options granted under one of the Company's stock option plans by each
of the persons and group, as follows: Mr Duffy -- 12,500 shares; Mr.
Fingerhut -- 2,083 shares; Mr. Stedman 1,250 shares; Mr. Erickson -- 1,250
shares;

(FOOTNOTES CONTINUED ON FOLLOWING PAGE)

32
<PAGE>
Mr. Wilson -- 1,250 shares; Mr. Payne -- 20,833 shares; Mr. Snyder -- 2,083
shares; Mr. Larrabee -- 1,250 shares; Mr. Livengood -- 4,166 shares; Mr.
Allen -- 4,166 shares; Mr. O'Sullivan -- 2,500 shares; and directors and
executive officers as a group -- 55,831 shares.

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

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

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

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

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

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

(10) Mr. Larrabee and his spouse hold an aggregate of 1,500,000 shares of Series
D Preferred Stock, of which 252,410 shares are held by Larrabee Land
Company, Inc., which is owned by Mr. Larrabee and his spouse. Such shares
of Series D Preferred Stock are presently (as of March 31, 1998)
convertible into 66,298 shares of Class B Common Stock, which are in turn
convertible at any time into 66,298 shares of Class A Common Stock. Also,
such shares of Series D Preferred Stock presently have 3,690 votes.

(11) C. Byron Snyder and certain of his affiliates, Melvin C. Payne and certain
of his affiliates, Mark W. Duffey, Barry K. Fingerhut and certain of his
affiliates and business associates, Stuart W. Stedman and certain of his
affiliates, and Reid A. Millard have executed a Voting Agreement dated
effective as of August 8, 1996 relating to any shares of capital stock of
the Company held by any of them. These parties beneficially hold an
aggregate of 354,716 shares of Class A Common Stock and 3,198,386 shares of
Class B Common Stock. Under the Voting Agreement, each party has agreed (i)
not to sell or otherwise transfer any shares of capital stock of the
Company held or acquired by such party to any

33
<PAGE>
"competitor" of the Company without the prior written consent of the
holders of at least 80% of the voting power of the shares of cpaital stock
subject to the Voting Agreement, (ii) unless the holders of at least 80% of
the voting power of the outstanding shares of capital stock of the Company
are in favor of such action, not to vote the shares of capital stock of the
Company held by such party in favor of (x) a merger, consolidation or
similar corporate action involving a "competitor," other than in
connection with an acquisition by the Company of funeral homes or
cemeteries in which the Company is the acquiring or controlling party, (y)
the sale of all or substantially all of the assets of the Company to a
"competitor," or (z) any amendment to Articles V, VI, or VII of the
Company's Certificate of Incorporation (which relate to the Classified
Board of Directors, the relative rights and powers of the Board of
Directors and the stockholders and the ability of the stockholders of the
Company to act by written consent). A "competitor" is defined in the
Voting Agreement as any person or entity engaged in the funeral service,
cemetery, crematory or related lines of business.

34
<PAGE>
DESCRIPTION OF CAPITAL STOCK

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

COMMON STOCK

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.

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

Each share of Class B Common Stock is convertible at any time, at the
option of the registered holder thereof, into one share of Class A Common Stock.
In addition, each share of Class B Common Stock automatically converts into one
share of Class A Common Stock upon a sale or transfer to anyone other than a
permitted transferee. In any event, 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

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

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.

35
<PAGE>
DIVIDENDS. The Series D Preferred Stock ranks, with respect to dividend
rights and distribution of assets on liquidation, senior and prior to Common
Stock and junior to, or on parity with, as the case may be, any other stock of
the Company designated as senior to, or on parity with, as the case may be,
Series D Preferred Stock. Holders of Series D Preferred Stock are entitled to
receive cumulative annual cash dividends ranging from $.06 to $.07 per share
payable quarterly, depending upon when such shares were issued. Upon any
voluntary or involuntary liquidation, dissolution or winding up of the Company,
the holders of Series D Preferred Stock then outstanding will be entitled to
receive an amount of cash per share equal to $1.00, together with all accrued
and unpaid dividends, after any distribution is made on any senior securities
and before any distribution is made on any junior securities, including Common
Stock. As long as any shares of Series D Preferred Stock are outstanding, the
Company may not pay a dividend (other than stock dividends in Common Stock) or
other distribution on or repurchase Common Stock, directly or indirectly, unless
all past due cumulative dividends on the Series D Preferred Stock have been
paid. The terms of Series D Preferred Stock may be amended with the consent of
the holders of a majority of the outstanding shares of Series D Preferred Stock.

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

CONVERSION. The Series D Preferred Stock is convertible at any time into
Class B Common Stock at a conversion price equals to the average market price
for the ten days preceding the date of delivery of notice of conversion on the
principal securities market on which the Class A Common Stock is traded. On
March 31, 1998, at the current conversion price of $22.63, a total of 74,348
shares of Class B Common Stock would be issuable upon the conversion of the
1,682,500 shares of Series D Preferred Stock outstanding.

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

REGISTRATION RIGHTS. Until December 31, 2005 or, as to any holder of
Series D Preferred Stock, upon (a) the consent of the holder or (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, 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.

SERIES F PREFERRED STOCK

The following description is a summary of the Certificate of Designation,
as amended, for the Series F Preferred Stock, and it is qualified in its
entirety by reference to that document.

DIVIDENDS. The Series F Preferred Stock ranks, with respect to dividend
rights and distribution of assets on liquidation, senior and prior to Common
Stock and the Series D Preferred Stock (together, the "Junior Stock") and
junior to, or on parity with, as the case may be, any other stock of the Company
designated as senior to, or on parity with, as the case may be, Series F
Preferred Stock. Holders of Series F

36
<PAGE>
Preferred Stock are currently entitled to receive cumulative annual cash
dividends of $.042 per share payable quarterly. Upon any voluntary or
involuntary liquidation, dissolution or winding up of the Company, the holders
of Series F Preferred Stock then outstanding will be entitled to receive an
amount of cash per share equal to $1.00, together with all accrued and unpaid
dividends, after any distribution is made on any senior securities and before
any distribution is made on any junior securities, including Common Stock and
Series D Preferred Stock. As long as any shares of Series F Preferred Stock are
outstanding, the Company may not pay a dividend (other than stock dividends in
Junior Stock) or other distributions on or repurchase Junior Stock, directly or
indirectly, unless all past due cumulative dividends on the Series F Preferred
Stock have been paid. The terms of Series F Preferred Stock may be amended with
the consent of the holders of a majority of the outstanding shares of Series F
Preferred Stock.

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

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

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

DELAWARE LAW AND CERTAIN CHARTER PROVISIONS

The Company is a Delaware corporation and is subject to Section 203 of the
Delaware General Corporation Law. In general, Section 203 prevents an
"interested stockholder" (defined generally as a person owning 15% or more of
the Company's outstanding voting stock) from engaging in a "business
combination" (as defined in Section 203) with the Company for three years
following the date that person becomes an interested stockholder unless (a)
before that person became an interested stockholder, the Company's Board of
Directors approved the transaction in which the interested stockholder became an
interested stockholder or approved the business combination; (b) upon completion
of the transaction that resulted in the interested stockholder'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

37
<PAGE>
were directors before any person became an interested stockholder in the
previous three years or who were recommended for election or elected to succeed
such directors by a majority of such directors then in office.

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

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

The Charter provides that the only business (including election of
directors) that may be considered at an annual meeting of holders of Common
Stock, in addition to business proposed (or persons nominated to be directors)
by the directors of the Company, is business proposed (or persons nominated to
be directors) by holders of Common Stock who comply with the notice and
disclosure requirements set forth in the Certificate of Incorporation. In
general, the Charter requires that a stockholder give the Company notice of
proposed business or nominations no later than 60 days before the annual meeting
of holders of Common Stock (meaning the date on which the meeting is first
scheduled and not postponements or adjournments thereof) or (if later) ten days
after the first public notice of the annual meeting is sent to holders of Common
Stock. In general, the notice must also contain information about the
stockholder proposing the business or nomination, the 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 Charter provides that approval by the holders of at least
66- 2/3% of the voting power of the outstanding voting stock of the Company is
required to amend the provisions of the Charter previously discussed and certain
other provisions.

TRANSFER AGENT AND REGISTRAR

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

RESALES AND PLAN OF DISTRIBUTION

This Prospectus may be used by the Company to offer and issue its Class A
Common Stock from time to time in connection with the acquisition of other
businesses or properties or upon conversion of shares of Preferred Stock, which
may be offered and issued by the Company from time to time in connection with
such acquisitions. The Company anticipates that such acquisitions will consist
principally of funeral homes and cemeteries, but an acquired business may be
dissimilar to the historical business of the Company.

This Prospectus may also be used by the persons who receive from the
Company Class A Common Stock covered by the Registration Statement of which this
Prospectus is a part in acquisitions or upon conversion of shares of Preferred
Stock issued in acquisitions and who are entitled to offer such Class A Common
Stock under circumstances requiring the use of a Prospectus (such persons being
referred to herein as "Selling Stockholders"); provided, however, that no
Selling Stockholder will be authorized to use this Prospectus for any offer of
such Class A Common Stock without first obtaining the written consent of the
Company. The Company may consent to the use of this Prospectus by Selling
Stockholders for a limited period of time and subject to conditions and
limitations which may vary as to any given Selling Stockholder.

38
<PAGE>
Agreements with Selling Stockholders permitting use of this Prospectus may
provide that any such offering be effected in an orderly manner through
securities dealers, acting as broker or dealer, selected by the Company; that
Selling Stockholders enter into custody agreements with certain persons with
respect to such shares; and that sales be made only by one or more of the
methods described in this caption, as appropriately supplemented or amended as
required.

The Selling Stockholders may from time to time sell all or a portion of the
shares of Common Stock in transactions on the Nasdaq National Market, in the
over-the-counter market, in negotiated transactions, or a combination of such
methods of sale, at market prices prevailing at the time of sale, at prices
related to such prevailing market prices or at negotiated prices; provided, that
such transactions will not include an underwritten public offering. The shares
of Class A Common Stock may be sold directly or through broker-dealers. If
shares of Class A Common Stock are sold through broker-dealers, the Selling
Stockholders may pay brokerage commissions and charges. The methods by which the
shares of Class A Common Stock may be sold include (a) a block trade (which may
involve crosses) in which the broker or dealer so engaged will attempt to sell
the securities as agent but may position and resell a portion of the block as
principal to facilitate the transaction; (b) purchases by a broker or dealer as
principal and resale by such broker or dealer for its own account pursuant to
this Prospectus; (c) exchange distributions and/or secondary distributions in
accordance with the rules of the Nasdaq National Market; (d) ordinary brokerage
transactions and transactions in which the broker solicits purchasers; and (e)
privately negotiated transactions.

The Selling Stockholders and any broker-dealer participating in the
distribution of the shares of Class A Common Stock may be deemed to be
"underwriters" within the meaning of the Securities Act, and any profit and
any commissions paid or any discounts or concessions allowed to any such
broker-dealer may be deemed to be underwriting discounts and commissions under
the Securities Act. The Selling Stockholders may indemnify any broker-dealer
that participates in transactions involving the sale of shares of Class A Common
Stock against certain liabilities, including liabilities under the Securities
Act.

There can be no assurances that the Selling Stockholders will sell any or
all of the shares of Class A Common Stock offered hereunder.

VALIDITY OF SECURITIES

The validity of the shares of Class A Common Stock have been passed upon by
Vinson & Elkins L.L.P., Houston, Texas.

EXPERTS

The consolidated financial statements and schedules 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.

AVAILABLE INFORMATION

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

39
<PAGE>
available for inspection at the offices of The Nasdaq Stock Market at 1735 K
Street, N.W., Washington, D.C. 20006.

The Company has filed with the Commission a Registration Statement on Form
S-4 (the "Registration Statement") under the Securities Act with respect to
the shares of Class A Common Stock offered hereby. This Prospectus, which
constitutes part of the Registration Statement, omits certain of the information
contained in the Registration Statement and the exhibits and schedules thereto
pursuant to the Securities Act and the rules and regulations of the Commission
thereunder. Statements contained in this Prospectus as to the contents of any
document are not necessarily complete, and in each instance reference is made to
the copy of such document filed as an exhibit to the Registration Statement,
each such statement being hereby qualified in all respects by such reference.
The Registration Statement, including the exhibits and schedules thereto, is on
file at the offices of the Commission and may be obtained upon payment of the
fee prescribed by the Commission or may be examined without charge at the public
reference facilities of the Commission described above.

40
<PAGE>
CARRIAGE SERVICES, INC.
INDEX TO FINANCIAL STATEMENTS

PAGE
--------
CONSOLIDATED FINANCIAL STATEMENTS:

Report of Independent Public
Accountants.................... F-2

Consolidated Balance Sheets as
of December 31, 1996 and
1997........................... F-3

Consolidated Statements of
Operations for the Years Ended
December 31,
1995, 1996 and 1997........... F-4

Consolidated Statements of
Changes in Stockholders' Equity
for the Years Ended December
31, 1995, 1996 and 1997........ F-5

Consolidated Statements of Cash
Flows for the Years Ended
December 31,
1995, 1996 and 1997........... F-6

Notes to Consolidated Financial
Statements..................... F-7

F-1
<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Carriage Services, Inc.:

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

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

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

ARTHUR ANDERSEN LLP

Houston, Texas
February 10, 1998

F-2
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(IN THOUSANDS)

DECEMBER 31,
----------------------
1996 1997
-------- --------
ASSETS
CURRENT ASSETS:
Cash and cash equivalents....... $ 1,712 $ 6,126
Accounts receivable --
Trade, net of allowance for
doubtful accounts of
$530 in 1996 and
$1,291 in 1997.......... 5,665 11,617
Other...................... 673 1,295
-------- --------
6,338 12,912
Inventories and other current
assets......................... 3,350 5,691
-------- --------
Total current
assets............. 11,400 24,729
-------- --------
PROPERTY, PLANT AND EQUIPMENT, at
cost:
Land............................ 9,640 21,789
Building and improvements....... 31,750 56,153
Furniture and equipment......... 8,817 15,046
-------- --------
50,207 92,988
Less -- accumulated
depreciation................... (4,095) (7,123)
-------- --------
46,112 85,865
CEMETERY PROPERTY, at cost........... 4,061 32,154
NAMES AND REPUTATIONS, net of
accumulated amortization of $2,007
in 1996 and $4,480 in 1997......... 62,568 118,099
DEFERRED CHARGES AND OTHER NONCURRENT
ASSETS............................. 7,167 17,093
-------- --------
$131,308 $277,940
======== ========
LIABILITIES AND STOCKHOLDERS' EQUITY
CURRENT LIABILITIES:
Accounts payable................ $ 2,192 $ 9,022
Accrued liabilities............. 3,033 7,545
Current portion of long-term
debt and obligations under
capital leases................. 1,086 2,339
-------- --------
Total current
liabilities........ 6,311 18,906
PRENEED LIABILITIES, net............. 3,664 7,403
LONG-TERM DEBT, net of current
portion............................ 42,733 121,553
OBLIGATIONS UNDER CAPITAL LEASES,
net of current portion............. 557 4,449
DEFERRED INCOME TAXES................ 3,749 13,113
-------- --------
Total liabilities..... 57,014 165,424
-------- --------
COMMITMENTS AND CONTINGENCIES
REDEEMABLE PREFERRED STOCK........... 17,251 13,951
STOCKHOLDERS' EQUITY:
Class A Common Stock, $.01 par
value; 40,000,000 shares
authorized; 3,990,000 and
6,454,000 issued and
outstanding in 1996 and 1997,
respectively................... 40 64
Class B Common Stock; $.01 par
value; 10,000,000 shares
authorized; 4,502,000 and
4,691,000 issued and
outstanding in 1996 and 1997,
respectively................... 45 47
Contributed capital............. 63,966 102,056
Retained deficit................ (7,008) (3,602)
-------- --------
Total stockholders'
equity............. 57,043 98,565
-------- --------
$131,308 $277,940
======== ========

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

F-3
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(IN THOUSANDS, EXCEPT PER SHARE DATA)

FOR THE YEARS ENDED DECEMBER 31,
------------------------------------
1995 1996 1997
-------- -------- --------
REVENUES, net
Funeral............................ $ 22,661 $ 37,445 $ 64,888
Cemetery........................... 1,576 2,903 12,533
-------- -------- --------
24,237 40,348 77,421
COSTS AND EXPENSES
Funeral............................ 18,921 30,641 48,404
Cemetery........................... 1,326 2,541 9,634
-------- -------- --------
20,247 33,182 58,038
-------- -------- --------
Gross profit....................... 3,990 7,166 19,383
GENERAL AND ADMINISTRATIVE EXPENSES..... 2,106 2,474 5,277
-------- -------- --------
Operating income................... 1,884 4,692 14,106
INTEREST EXPENSE, net................... 3,684 4,347 5,889
-------- -------- --------
Income (loss) before income taxes
and extraordinary item........... (1,800) 345 8,217
PROVISION FOR INCOME TAXES.............. 694 138 3,726
-------- -------- --------
INCOME (LOSS) BEFORE EXTRAORDINARY
ITEM.................................. (2,494) 207 4,491
Extraordinary item -- loss on early
extinguishment of debt, net of income
tax benefit of $332 in 1996 and $159
in 1997............................... -- (498) (195)
-------- -------- --------
NET INCOME (LOSS)....................... (2,494) (291) 4,296
Preferred stock dividend requirements... -- 622 890
-------- -------- --------
NET INCOME (LOSS) ATTRIBUTABLE TO COMMON
STOCKHOLDERS.......................... $ (2,494) $ (913) $ 3,406
======== ======== ========
BASIC EARNINGS (LOSS) PER SHARE:
Net income (loss) before
extraordinary item............... (.99) $ (.09) $ .35
Extraordinary item................. -- (.10) (.02)
-------- -------- --------
Net income (loss).................. $ (.99) $ (.19) $ .33
======== ======== ========
Diluted earnings (loss) per share:
Net income (loss) before
extraordinary item............... $ (.99) $ (.09) $ .34
Extraordinary item................. -- (.10) (.02)
-------- -------- --------
Net income (loss).................. ($ (.99) $ (.19) $ .32
======== ======== ========
Weighted average number of common and
common equivalent shares outstanding
Basic.............................. 2,520 4,869 10,226
======== ======== ========
Diluted............................ 2,520 4,869 10,485
======== ======== ========

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

F-4
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(IN THOUSANDS)
<TABLE>
<CAPTION>
CONTRIBUTED RETAINED
NUMBER PREFERRED NUMBER COMMON CAPITAL UNREALIZED EARNINGS
OF SHARES STOCK OF SHARES STOCK (DEFICIT) GAIN (LOSS) DEFICIT TOTAL
--------- --------- --------- -------- ----------- ----------- -------- --------
<S> <C> <C> <C> <C> <C> <C> <C> <C>
BALANCE -- DECEMBER 31, 1994..... 7,160 $ 72 2,520 $ 25 $ 6,992 $ (59) $(3,601) $ 3,429
Net loss -- 1995................. -- -- -- -- -- -- (2,494) (2,494)
Issuance of preferred stock...... 8,500 85 -- -- 8,108 -- -- 8,193
Unrealized net gain -- available
for sale securities............ -- -- -- -- -- 23 -- 23
------- ------ ------ ---- -------- ----- ------- -------
BALANCE -- DECEMBER 31, 1995..... 15,660 157 2,520 25 15,100 (36) (6,095) 9,151
Net loss -- 1996................. -- -- -- -- -- -- (291) (291)
Issuance of preferred stock...... 555 5 -- -- 540 -- -- 545
Issuance of common stock......... -- -- 3,947 40 47,942 -- -- 47,982
Conversion of preferred stock to
common stock................... (16,045) (160) 1,980 20 140 -- -- --
Conversion of redeemable
preferred stock to common
stock.......................... -- -- 39 -- 522 -- -- 522
Unrealized net gain -- available
for sale securities............ -- -- -- -- -- 36 -- 36
Purchase of treasury stock....... (170) (2) -- -- (339) -- -- (341)
Exercise of stock options........ -- -- 6 -- 61 -- -- 61
Preferred dividends.............. -- -- -- -- -- -- (622) (622)
------- ------ ------ ---- -------- ----- ------- -------
BALANCE -- DECEMBER 31, 1996..... -- -- 8,492 85 63,966 -- (7,008) 57,043
Net income -- 1997............... -- -- -- -- -- -- 4,296 4,296
Issuance of common stock......... -- -- 978 10 14,714 -- -- 14,724
Conversion of redeemable
preferred stock to common
stock.......................... -- -- 1,658 16 23,276 -- -- 23,292
Purchase of treasury stock....... -- -- (3) -- (60) -- -- (60)
Exercise of stock options........ -- -- 20 -- 160 -- -- 160
Preferred dividends.............. -- -- -- -- -- -- (890) (890)
------- ------ ------ ---- -------- ----- ------- -------
BALANCE -- DECEMBER 31, 1997..... -- $-- 11,145 $111 $102,056 $-- $(3,602) $98,565
======= ====== ====== ==== ======== ===== ======= =======
</TABLE>
The accompanying notes are an integral part of these financial statements.

F-5
<PAGE>
CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(IN THOUSANDS)

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

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

F-6
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

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

BUSINESS

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

PRINCIPLES OF CONSOLIDATION AND BASIS OF PRESENTATION

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

FUNERAL AND CEMETERY OPERATIONS

The Company records the sale of funeral merchandise and services upon
performance of the funeral service. The Company records the sale of the right of
cemetery interment or mausoleum entombment and related merchandise at the time
of sale. The cost for cemetery merchandise and services sold, but not yet
provided, is accrued as an expense at the same time the cemetery revenue is
recognized. Allowances for customer cancellations, refunds and bad debts are
provided at the date of sale based on the historical experience of the Company.
Accounts receivable-trade, net consists of approximately $4,977,000 and
$7,245,000 of funeral receivables and approximately $688,000 and $4,372,000 of
current cemetery receivables at December 31, 1996 and 1997, respectively.
Noncurrent cemetery receivables, those payable after one year, are included in
Deferred Charges and Other Noncurrent Assets on the Consolidated Balance Sheets
(see Note 3).

PRENEED FUNERAL ARRANGEMENTS

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

F-7
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

CEMETERY MERCHANDISE AND SERVICE TRUST

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

PERPETUAL AND MEMORIAL CARE TRUST

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

DEFERRED OBTAINING COSTS

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

CASH AND CASH EQUIVALENTS

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

F-8
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

MARKETABLE SECURITIES

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

INVENTORY

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

NAMES AND REPUTATIONS

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

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

PROPERTY, PLANT AND EQUIPMENT

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

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

INCOME TAXES

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

EARNINGS PER COMMON SHARE

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

F-9
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reported fully diluted earnings per share. All earnings per share amounts for
all periods presented have been restated to conform to the Statement 128
requirements.

FAIR VALUE OF FINANCIAL INSTRUMENTS

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

USE OF ESTIMATES

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

BUSINESS SEGMENTS

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

2. ACQUISITIONS:

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

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

F-10
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

DECEMBER 31,
-----------------------
1996 1997
-------- --------
(IN THOUSANDS)
Current Assets....................... $ 3,532 $ 11,909
Cemetery Property.................... 3,610 28,276
Property, Plant and Equipment........ 22,574 34,830
Deferred Charges and Other Noncurrent
Assets............................. 1,542 1,597
Names and Reputations................ 43,139 55,013
Current Liabilities.................. (1,025) (1,631)
Debt................................. -- (1,072)
Other Liabilities.................... (5,191) (10,662)
-------- --------
68,181 118,260
Consideration:
Redeemable preferred stock issued.... (17,775) (20,000)
Debt................................. (6,582) (18,210)
Preferred stock issued............... (555) --
Cash acquired in acquisitions........ (274) (556)
Common Stock issued.................. (288) (13,887)
-------- --------
Cash used for acquisitions...... $ 42,707 $ 65,607
======== ========

The following table reflects, on an unaudited pro forma basis, the combined
operations of the Company and the businesses acquired during the years ended
December 31, 1996 and 1997 as if such acquisitions had taken place at the
beginning of 1996. Appropriate adjustments have been made to reflect the
accounting basis used in recording these acquisitions. These pro forma results
have been prepared for comparative purposes only and do not purport to be
indicative of the results of operations that would have resulted had the
combination been in effect on the date indicated, that have resulted since the
respective dates of acquisition or that may result in the future.

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

F-11
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

3. DEFERRED CHARGES AND OTHER NONCURRENT ASSETS:

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

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

The cost of agreements not to compete with former owners of businesses
acquired is amortized over the term of the respective agreements, ranging from
four to 10 years. Deferred debt expense is being amortized over the term of the
related debt. 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.

4. LONG-TERM DEBT:

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

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

In conjunction with the closing of the initial public offering (the "IPO")
in August 1996, the Company entered into a Credit Facility (the "Former Credit
Facility") which provided for a $75 million revolving line of credit with both
LIBOR and base rate interest options. This Former Credit Facility was unsecured
and was for a term of three years. During September 1997, the Company entered
into a new credit facility (the "New Credit Facility") for a $150 million
revolving line of credit. The New Credit Facility has a five year term, is
unsecured and contains customary restrictive covenants, including a restriction
on the payment of dividends on common stock and requires the Company to maintain
certain financial ratios. The Company was in compliance with all covenants at
December 31, 1997. In August 1996, the Company paid all of its outstanding
indebtedness with the proceeds from the issuance of its Class A Common Stock in
connection with the Company's IPO (see Note 7) and utilization of the Former
Credit Facility. In connection with repayment of debt in August 1996 and the
retirement of debt issued by the Former Credit Facility in September 1997, the
Company recognized an extraordinary loss of approximately $498,000 and $195,000,
net of income tax benefit of approximately $332,000 and $159,000 for the
write-off of the deferred loan costs associated with the early retirement of
debt for the years ended December 31, 1996 and 1997, respectively.

F-12
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

5. COMMITMENTS AND CONTINGENCIES:

LEASES

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

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

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

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

AGREEMENTS AND EMPLOYEE BENEFITS

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

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

LITIGATION

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

F-13
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

advice of legal counsel, similarly believes that the results of any such routine
litigation or other pending legal proceedings will not have a material effect on
the Company's consolidated financial position or results of operations.

6. INCOME TAXES:

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

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

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

1995 1996 1997
-------- -------- --------
Federal statutory rate............... (34.0)% 34.0% 34.0%
Effect of state income taxes, net of
federal benefit at 34%............. (6.0) 4.0 5.3
Effect of nondeductible expenses and
other, net......................... 3.9 57.3 15.9
Effect of valuation allowance........ 74.7 (55.3) (14.5)
Effect of change in statutory rate... -- -- 4.6
-------- -------- --------
38.6% 40% 45.3%
======== ======== ========

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

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

The Company has recorded a valuation allowance to reflect the estimated
amount of deferred tax assets for which realization is uncertain. The Company
reviews the valuation allowance at the end of each quarter and makes adjustments
if it is determined that it is more likely than not that the NOL's will be
realized. At

F-14
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

December 31, 1997, the Company has approximately $584,000 of federal net
operating loss ("NOL") carryforwards which will expire between 2009 and 2011, if
not utilized, and $3,826,000 of state NOL carryforwards which will expire
between the years 2000 and 2012, if not utilized. As a result of the IPO (see
Note 7), there may be a limitation placed on the Company's utilization of its
NOL's by Section 382 of the Internal Revenue Code in any one particular tax
year. Deferred tax liabilities were recorded with respect to purchase accounting
transactions during the year ended December 31, 1997 in the approximate amount
of $7,218,000.

7. STOCKHOLDERS' EQUITY:

INITIAL PUBLIC OFFERING

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

PREFERRED STOCK

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

TREASURY STOCK

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

STOCK OPTION PLANS

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

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

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

F-15
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

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

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

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

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

YEAR ENDED DECEMBER 31,
------------------------------------------
1996 1997
-------------------- -------------------
SHARES WTD AVG. SHARES WTD AVG.
(000) EX PRICE (000) EX PRICE
-------- -------- -------- --------
Outstanding at beginning of period... 50 $ 9.80 850 $13.74
Granted.............................. 818 13.90 338 20.18
Exercised............................ (5) 10.43 (23) 11.35
Canceled............................. (13) 10.11 (65) 16.80
----- -----
Outstanding at end of year........... 850 13.74 1,100 15.40
----- -----
Exercisable at end of year........... 74 10.34 146 12.41
----- -----
Weighted average fair value of
options granted.................... $8.00 $8.52

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

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

REVERSE STOCK SPLIT

On July 18, 1996, the Company's Board of Directors and stockholders
approved an amendment to the Company's Certificate of Incorporation which
authorized a one for two reverse stock split. The Consolidated Financial
Statements have been restated in 1996 as if the reverse stock split had occurred
at the beginning of the earliest period presented. For each two shares of Class
B Common Stock at $.01 par, the stockholder received one share of Class B Common
Stock at $.01 par. Upon completion of the IPO, the Series A, B and C Preferred
Stocks automatically converted into Class B Common Stock. The number of shares
held by each Series A, B and C Preferred stockholder remained the same; however,
the conversion

F-16
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

prices for Class B Common Stock on those preferred shares doubled in conjunction
with the above-mentioned reverse stock split. In addition, the exercise prices
on outstanding stock options also doubled related to this reverse stock split,
and the number of shares of Class B Common Stock covered by such options
decreased by 50%.

8. REDEEMABLE PREFERRED STOCK:

The Company has 20,000,000 authorized shares of Series D Preferred Stock
with a par value of $.01 per share, of which approximately 17,253,000 and
1,682,500 shares were issued and outstanding at December 31, 1996 and 1997,
respectively. As of December 31, 1997, these shares can be converted into Class
A Common Stock at the rate of $15.50 per share. The holders of Series D
Preferred Stock are entitled to receive preferential dividends at an annual rate
ranging from $0.06 to $0.07 per share, payable quarterly. Dividends are payable
quarterly as long as the stock is outstanding. The Series D Preferred Stock is
redeemable, in whole or in part, at the option of the Company, at any time
during the period commencing with the second anniversary of the Company's IPO
(August 8, 1998) and ending December 31, 2001. On December 31, 2001, the Company
must redeem all shares of Series D Preferred Stock then outstanding at a
redemption price of $1.00 per share, together with all accrued and unpaid
dividends.

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

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

F-17
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. LOSS PER SHARE:

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

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

F-18
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

10. MAJOR SEGMENTS OF BUSINESS

The Company conduts funeral and cemetery operations only in the United
States.
<TABLE>
<CAPTION>
(IN THOUSANDS, EXCEPT NUMBER OF OPERATING LOCATIONS) FUNERAL CEMETERY CORPORATE CONSOLIDATED
- -----------------------------------------------------------------------------------------------------------
<S> <C> <C> <C> <C> <C>
Revenues:
1997................................... $ 64,888 $12,533 $ -- $ 77,421
1996................................... 37,445 2,903 -- 40,348
1995................................... 22,661 1,576 -- 24,237
- -----------------------------------------------------------------------------------------------------------
Income from operations:
1997................................... $ 16,484 $ 2,899 $(5,277) $ 14,106
1996................................... 6,804 362 (2,474) 4,692
1995................................... 3,740 250 (2,106) 1,884
- -----------------------------------------------------------------------------------------------------------
Identifiable assets:
1997................................... $208,833 $57,020 $12,087 $277,940
1996................................... 117,061 9,285 4,962 131,308
1995................................... 48,847 2,169 10,730 61,746
- -----------------------------------------------------------------------------------------------------------
Depreciation and amortization:
1997................................... $ 5,195 $ 1,454 $ 1,160 $ 7,809
1996................................... 2,863 129 637 3,629
1995................................... 1,609 72 267 1,948
- -----------------------------------------------------------------------------------------------------------
Capital expenditures: (a)
1997................................... $ 34,858 $34,653 $ 2,758 $ 72,269
1996................................... 24,737 5,073 1,004 30,814
1995................................... 4,530 100 1,116 5,746
- -----------------------------------------------------------------------------------------------------------
Number of operating locations at year end:
1997................................... 120 20 -- 140
1996................................... 76 10 -- 86
1995................................... 41 3 -- 44
</TABLE>
(a) Includes $2,727, $26,184 and $63,106 for the three years ended December 31,
1997, respectively, for purchases of property, plant and equipment and
cemetery property of acquired businesses.

F-19
<PAGE>
CARRIAGE SERVICES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

11. QUARTERLY FINANCIAL DATA (UNAUDITED):

The table below sets forth consolidated operating results by fiscal quarter
for the years ended December 31, 1996 and 1997 (in thousands, except per share
data):
<TABLE>
<CAPTION>
FIRST SECOND THIRD FOURTH
-------- -------- -------- --------
(IN THOUSANDS, EXCEPT EARNINGS PER SHARE)
<S> <C> <C> <C> <C>
1996(A)
Revenues, net........................ $ 7,635 $ 9,290 $ 10,145 13,278
Gross profit......................... 1,670 1,719 994 2,783
Net income (loss) before
extraordinary item................. (193) (468) (414) 1,282
Extraordinary item................... -- -- (498) --
Preferred stock dividend
requirements....................... 10 91 250 271
Net income (loss).................... (203) (559) (1,162) 1,011
Basic earnings (loss) per common
share
Continuing operations........... $ (.08) $ (.22) $ (.11) $ .12
Extraordinary item.............. -- -- (.09) --
------- ------- ------- -------
Net income (loss)............... $ (.08) $ (.22) $ (.20) $ .12
------- ------- ------- -------
Diluted earnings (loss) per common
share
Continuing operations........... $ (.08) $ (.22) $ (.11) $ .12
Extraordinary item.............. -- -- (.09) --
------- ------- ------- -------
Net income (loss)............... $ (.08) $ (.22) $ (.20) $ .12
------- ------- ------- -------

1997(A)
Revenues, net. $ 17,989 $ 19,061 $ 18,245 $ 22,126
Gross profit......................... 5,143 5,003 3,557 5,680
Net income before extraordinary
item............................... 1,825 1,489 347 830(b)
Extraordinary item................... -- -- (195) --
Preferred stock dividend
requirements....................... 363 174 176 177
Net income (loss).................... 1,462 1,315 (24) 653(b)
Basic earnings per common share:
Continuing operations........... $ .16 $ .13 $ 0.02 $ .06(b)
Extraordinary item.............. -- -- (0.02) --
------- ------- ------- -------
Net income...................... $ .16 $ .13 $ -- $ .06(b)
------- ------- ------- -------
Diluted earnings per common share:
Continuing operations........... $ .16 $ .12 $ 0.02 $ .06(b)
Extraordinary item.............. -- -- (0.02) --
------- ------- ------- -------
Net income...................... $ .16 $ .12 $ -- $ .06(b)
------- ------- ------- -------
- ------------
</TABLE>
(a) Earnings per share is computed independently for each of the quarters
presented. Therefore, the sum of the quarterly per share amounts does not
equal the total computed for the year due to stock transactions which
occurred during the periods presented.

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

<PAGE>
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS
ON FINANCIAL STATEMENT SCHEDULE

To Carriage Services, Inc.:

We have audited in accordance with generally accepted auditing standards,
the Consolidated Financial Statements of Carriage Services, Inc. and
subsidiaries included in this Form S-4, and have issued our report thereon dated
February 10, 1998. Our audit was made for the purpose of forming an opinion on
the basic financial statements taken as a whole. The schedule listed in Part IV,
Item 14 (a)(2) for Carriage Services, Inc. and subsidiaries is the
responsibility of the Company's management and is presented for purposes of
complying with the Securities and Exchange Commission's rules and is not part of
the basic financial statements. This schedule has been subjected to the auditing
procedures applied in the audit of the basic financial statements and, in our
opinion, fairly states in all material respects the financial data required to
be set forth therein in relation to the basic financial statements taken as a
whole.

ARTHUR ANDERSEN LLP

Houston, Texas
February 10, 1998

F-21
<PAGE>
CARRIAGE SERVICES, INC.
SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS
<TABLE>
<CAPTION>
<S> <C> <C> <C> <C>
===============================================================================================
BALANCE CHARGED TO BALANCE
BEGINNING COSTS AND END OF
DESCRIPTION OF YEAR EXPENSES DEDUCTIONS YEAR
- -----------------------------------------------------------------------------------------------
Year ended December 31, 1995:
Allowance for bad debts and
contract cancellations........... $205 $ 488 $388 $ 305
Year ended December 31, 1996:
Allowance for bad debts and
contract cancellations........... $305 $ 683 $458 $ 530
Year ended December 31, 1997:
Allowance for bad debts and
contract cancellations........... $530 $1,025 $264 $1,291
</TABLE>

F-22

<PAGE>
================================================================================
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................... 2
Risk Factors......................... 5
The Company.......................... 7
Price Range of Class A Common Stock
and Dividend Policy................ 8
Use of Proceeds...................... 8
Selected Historical Consolidated and
Financial and Operating Data....... 9
Management's Discussion and Analysis
of Financial Condition and Results
of Operations...................... 10
Business............................. 16
Management........................... 25
Certain Transactions................. 31
Principal Stockholders............... 32
Description of Capital Stock......... 35
Resales and Plan of Distribution..... 38
Validity of Securities............... 39
Experts.............................. 39
Available Information................ 39
Index to Financial Statements........ F-1

2,000,000 SHARES

CLASS A COMMON STOCK

CARRIAGE SERVICES, INC.

------------------------
PROSPECTUS
------------------------

, 1998

================================================================================
<PAGE>
PART II

INFORMATION NOT REQUIRED IN PROSPECTUS

ITEM 20. 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 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, the right to be paid by the Company the expenses
incurred in defending any such proceeding in advance of its disposition.

II-1
<PAGE>
ITEM 21. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES

(a) Exhibits:

<TABLE>
<CAPTION>
<S> <C>
3.1 -- Amended and Restated Certificate of Incorporation, as
amended, of the Company. Incorporated herein by reference to
Exhibit 3.1 to the Company's Annual Report on Form 10-K for
its fiscal year ended December 31, 1996.
3.2 -- Certificate of Amendment dated May 9, 1996. Incorporated by
reference to Exhibit 10.2 to the Company's Quarterly Report
on Form 10-Q for its fiscal quarter ended September 30,
1997.
3.3 -- Certificate of Decrease, reducing the authorized Series D
Preferred Stock. Incorporated by reference to Exhibit 10.3
to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ended September 30, 1997.
3.4 -- Certificate of Decrease, reducing the authorixzed Series F
Preferred Stock. Incorporated by reference to Exhibit 10.4
to the Company's Quarterly Report on Form 10-Q for its
fiscal quarter ended September 30, 1997.
3.5 -- Amended and Restated Bylaws of the Company. Incorporated
herein by reference to Exhibit 3.2 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.1 -- Loan Agreement between the Company and NationsBank of Texas,
N.A. dated September 9, 1997. Incorporated by reference to
Exhibit 10.1 to the Company's Quarterly Report on Form 10-Q
for its fiscal quarter ended September 30, 1997.
10.2 -- 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. Incorporated herein by
reference to Exhibit 10.9 to the Company's Registration
Statement on Form S-1 (File No. 333-05545).
10.3 -- Real Property Purchase Agreement dated the Closing Date
among Hennessy-Bagnoli Funeral Home, Inc., Hennessy and
Patricia Hennessy, and Bagnoli and Brenda Bagnoli.
Incorporated herein by reference to Exhibit 10.10 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.4 -- Stock Purchase Agreement dated January 4, 1996 among
Carriage Funeral Holdings,
Inc., The Lusk Funeral Home, Incorporated and Gerald T.
McFarland, Jr.
Incorporated herein by reference to Exhibit 10.11 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.5 -- 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.
Incorporated herein by reference to Exhibit 10.12 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.6 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and SCI Texas Funeral Services, Inc.
Incorporated herein by reference to Exhibit 10.13 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.7 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and SCI Funeral Services of Florida,
Inc. Incorporated herein by reference to Exhibit 10.14 to
the Company's Registration Statement on Form S-1 (File No.
333-05545).
10.8 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc. and Fort Myers Memorial Gardens, Inc.
Incorporated herein by reference to Exhibit 10.15 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.9 -- Asset Purchase Agreement dated April 10, 1996 between CFS
Funeral Services, Inc.

II-2
<PAGE>

and SCI Funeral Services of Florida, Inc. Incorporated
herein by reference to Exhibit 10.16 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
10.10 -- 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. Incorporated herein by reference to
Exhibit 10.17 to the Company's Registration Statement on
Form S-1 (File No. 333-05545).
10.11 -- 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.
Incorporated herein by reference to Exhibit 10.18 to the
Company's Registration Statement on Form S-1 (File No.
333-005545).
10.12 -- Real Property Purchase Agreement dated March 22, 1996 among
Carriage Funeral Services, Inc. and Larrabee Investments,
L.L.C. Incorporated herein by reference to Exhibit 10.19 to
the Company's Registration Statement on Form S-1 (File No.
333-05545).
10.13 -- Merger Agreement dated July 3, 1996 among Carriage Services,
Inc., CSI Funeral Services of Connecticut, Inc., C. Funk &
Son Funeral Home, Incorporated and Ronald F. Duhaime and
Christopher J. Duhaime. Incorporated herein by reference to
Exhibit 10.20 to the Company's Registration Statement on
Form S-1 (File No. 333-05545).
10.14 -- Merger Agreement dated July 3, 1996 among Carriage Services,
Inc., CFS Funeral Services of Connecticut, Inc., O'Brien
Funeral Home, Incorporated and Thomas P. O'Brien.
Incorporated herein by reference to Exhibit 10.21 to the
Company's Registration Statement on Form S-1 (File No.
333-05545).
10.15 -- Merger Agreement dated June 26, 1996 among Carriage
Services, Inc. Carriage Funeral Services of South Carolina,
Inc., Forest Lawn of Chesnee, Inc. and shareholders.
Incorporated herein by reference to Exhibit 10.22 to the
Company's Registration Statement on Form S-1 (File No.
333-005545).
10.16 -- Merger Agreement dated October 17, 1996 among Carriage
Services, Inc., Carriage Funeral Services of California,
Inc., CNM and the shareholders of CNM. Incorporated herein
by reference to Exhibit 10.22 to the Company's Current
Report on Form 8-K/A dated January 7, 1997.
10.17 -- Asset Purchase Agreement dated November 13, 1997 among
Carriage Funeral Holdings, Inc., Sidun Funeral Group, Inc.
and Charles D. Sidun. Incorporated herein by reference to
Exhibit 10.17 to the Company's Form 10-K for its fiscal year
ended December 31, 1997.
10.18 -- Merger Agreement dated November 19, 1997 among Carriage
Services, Inc.,
Carriage Services of Florida, Inc., Forest Lawn/Evergreen
Management Corp., Greg M. Brudnicki and Charles E. Kent.
Incorporated herein by reference to Exhibit 10.18 to the
Company's Form 10-K for its fiscal year ended December 31,
1997.
10.19 -- Asset Purchase Agreement dated November 19, 1997 among
Carriage Funeral Holdings, Inc., Kent-Thornton Funeral Home,
Inc., Greg Brudnicki, Charles Kent, Ricky Kent and Jane
Thornton. Incorporated herein by reference to Exhibit 10.19
to the Company's Form 10-K for its fiscal year ended
December 31, 1997.
+10.20 -- Employment Agreement with Melvin C. Payne. Incorporated
herein by reference to Exhibit 10.23 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).

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<PAGE>

+10.21 -- Employment Agreement with Mark W. Duffey. Incorporated
herein by reference to Exhibit 10.24 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
+10.22 -- Employment Agreement with Russell W. Allen. Incorporated
herein by reference to Exhibit 10.25 to the Company's
Registration Statement on Form S-1 (File No. 333-05545).
+10.23 -- Employment Agreement with Gary O'Sullivan. Incorporated
herein by reference to Exhibit 10.26 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1996.
+10.24 -- Employment Agreement with Thomas C. Livengood. Incorporated
herein by reference to Exhibit 10.27 to the Companmy's
Annual Report on Form 10-K for its fiscal year ended
December 31, 1996.
+10.25 -- Amended and Restated 1995 Stock Incentive Plan. Incorporated
herein by reference to Exhibit 10.23 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1996.
+10.26 -- Amended and Restated 1996 Stock Incentive Plan. Incorporated
herein by reference to Exhibit 10.24 to the Company's Annual
Report on Form 10-K for its fiscal year ended December 31,
1996.
+10.27 -- Amended and Restated 1996 Directors' Stock Option Plan.
Incorporated herein by reference to Exhibit 10.25 to the
Company's Annual Report on Form 10-K for its fiscal year
ended December 31, 1996.
21.1 -- Subsidiaries of the Company, incorporated herein by
reference to Exhibit 21.1 to the Company's 1997 Annual
Report on Form 10-K (File No. 1-11961).
*23.1 -- Consent of Arthur Andersen LLP
23.2 -- Consent of Vinson & Elkins L.L.P. incorporated herein by
reference to Exhibit 23.2 to the Company's Registration
Statement on Form S-4 (File No. 333-23643)
24.1 -- Powers of Attorney (included on the signature page to this
Registration Statement)
</TABLE>
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(*) Filed herewith

(+) Management contract or compensation plan.

(b) Consolidated Financial Statement Schedules

All required schedules are presented herein.

ITEM 22. UNDERTAKINGS

The undersigned registrant hereby undertakes:

(1) To file, during any period in which offers or sales are being made, a
post-effective amendment to this Registration Statement: (i) to include any
prospectus required in Section 10(a)(3) of the Securities Act; (ii) to reflect
in the prospectus any facts or events arising after the effective date of the
Registration Statement (or the most recent post-effective amendment thereof)
which, individually or in the aggregate, represent a fundamental change in the
information set forth in the Registration Statement; and (iii) to include any
material information with respect to the plan of distribution not previously
disclosed in the Registration Statement or any material change to such
information in the Registration Statement;

(2) That, for the purpose of determining any liability under the
Securities Act, each such post-effective amendment 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;

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<PAGE>
(3) To remove from registration by means of a post-effective amendment any
of the securities being registered which remain unsold at the termination of the
offering;

(4) To respond to requests for information that is incorporated by
reference into the prospectus pursuant to Items 4, 10(b), 11 or 13 of this Form,
within one business day of receipt of such request, and to send the incorporated
documents by first class mail or other equally prompt means. This includes
information contained in documents filed subsequent to the effective date of the
Registration Statement through the date of responding to the request;

(5) That, prior to any public reoffering of the securities registered
hereunder through use of a prospectus which is a part of this Registration
Statement, by any person or party who is deemed to be an underwriter within the
meaning of Rule 145(c), the issuer undertakes that such reoffering prospectus
will contain the information called for by the applicable registration form with
respect to reofferings by persons who may be deemed underwriters, in addition to
the information called for by the other items of the applicable form;

(6) That every prospectus (i) that is filed pursuant to paragraph (6)
immediately preceding, or (ii) that purports to meet the requirements of section
10(a)(3) of the Securities Act and is used in connection with an offering of
securities subject to Rule 415, will be filed as a part of an amendment to the
Registration Statement and will not be used until such amendment is effective,
and that, for purposes of determining any liability under the Securities Act,
each such post-effective amendment 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; and

(7) To supply by means of a post-effective amendment all information
concerning a transaction, and the company being acquired involved therein, that
was not the subject of and included in the Registration Statement when it became
effective.

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.

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<PAGE>
SIGNATURES

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED, THE
REGISTRANT HAS DULY CAUSED THIS POST EFFECTIVE AMENDMENT NO. 2 TO THE
REGISTRATION STATEMENT TO BE SIGNED ON ITS BEHALF BY THE UNDERSIGNED, THEREUNTO
DULY AUTHORIZED, IN THE CITY OF HOUSTON, STATE OF TEXAS, ON THE 29TH DAY OF
APRIL, 1998.

CARRIAGE SERVICES, INC.

By /s/ MELVIN C. PAYNE
MELVIN C. PAYNE
CHAIRMAN OF THE BOARD AND CHIEF
EXECUTIVE OFFICER

PURSUANT TO THE REQUIREMENTS OF THE SECURITIES ACT OF 1933, AS AMENDED,
THIS POST EFFECTIVE AMENDMENT NO. 3 TO THE REGISTRATION STATEMENT HAS BEEN
SIGNED BELOW BY THE FOLLOWING PERSONS IN THE CAPACITIES AND ON THE DATES
INDICATED.
<TABLE>
<CAPTION>
SIGNATURE TITLE
- ------------------------- ------------------------------------------------------------
<S> <C>

/s/ MELVIN C. PAYNE Chairman of the Board, Chief Executive Officer and Director
MELVIN C. PAYNE

/s/ MARK W. DUFFEY President and Director
MARK W. DUFFEY

/s/ THOMAS C. LIVENGOOD Executive Vice President, Chief Financial Officer and
THOMAS C. LIVENGOOD Secretary (Principal Financial and Accounting Officer)

/s/ C. BYRON SNYDER Director
C. BYRON SNYDER

/s/ ROBERT D. LARRABEE Director
ROBERT D. LARRABEE

/s/ BARRY K. FINGERHUT Director
BARRY K. FINGERHUT

/s/ STUART W. STEDMAN Director
STUART W. STEDMAN

/s/ RONALD A. ERICKSON Director
RONALD A. ERICKSON

/s/ MARK F. WILSON Director
MARK F. WILSON

/s/ GREG M. BRUDNICKI Director
GREG M. BRUDNICKI

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</TABLE>

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
April 29, 1998