SEC Filing - Carriage Services, Inc.

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SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-Q

(Mark One)

ý	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2002

o	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 1-11961

CARRIAGE SERVICES, INC.
(Exact name of registrant as specified in its charter)

DELAWARE (State or other jurisdiction of incorporation or organization)		76-0423828 (I.R.S. Employer Identification No.)
1900 Saint James Place, 4^th Floor, Houston, TX (Address of principal executive offices)		77056 (Zip Code)

Registrant's telephone number, including area code: (713) 332-8400

SECURITIES REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:

Common Stock, $.01 Par Value
(Title Of Class)

New York Stock Exchange
(Name of Exchange on which registered)

SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ý No o

The number of shares of the Registrant's Common Stock, $.01 par value per share, outstanding as of August 7, 2002 was 16,978,815.

CARRIAGE SERVICES, INC.

INDEX

				Page
PART I—FINANCIAL INFORMATION
	Item 1. Financial Statements
		Consolidated Balance Sheets as of December 31, 2001 and June 30, 2002		3
		Consolidated Statements of Operations for the Three Months ended June 30, 2001 and 2002 and Six Months ended June 30, 2001 and 2002		4
		Consolidated Statements of Comprehensive Income for the Six Months ended June 30, 2001 and 2002		5
		Consolidated Statements of Cash Flows for the Six Months ended June 30, 2001 and 2002		6
		Condensed Notes to Consolidated Financial Statements		7
	Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations			10
	Item 3. Quantitative and Qualitative Disclosures of Market Risk			19
PART II—OTHER INFORMATION
	Item 1. Legal Proceedings			20
	Item 2. Changes in Securities and Use of Proceeds			20
	Item 3. Defaults Upon Senior Securities			20
	Item 4. Submission of Matters to a Vote of Security Holders			20
	Item 5. Other Information			20
	Item 6. Exhibits and Reports on Form 8-K			22
			Signatures	23

CARRIAGE SERVICES, INC.
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)

				December 31, 2001			June 30, 2002
							(unaudited)
ASSETS
Current assets:
	Cash and cash equivalents			$	2,744		$	2,590
	Accounts receivable—
		Trade, net of allowance for doubtful accounts of $3,515 in 2001 and $3,475 in 2002			15,660			14,669
		Other			773			756

					16,433			15,425
	Assets held for sale, net				2,287			3,297
	Inventories and other current assets				6,983			6,254

			Total current assets		28,447			27,566

Property, plant and equipment, at cost, net of accumulated depreciation of $24,176 in 2001 and $27,261 in 2002					114,217			112,320
Cemetery property, at cost					61,630			63,903
Goodwill					160,576			161,672
Deferred charges and other non-current assets					49,159			60,942
Preneed funeral contracts					219,975			231,098
Preneed cemetery merchandise and service trust funds					40,078			46,380

	Total assets			$	674,082		$	703,881

LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
	Accounts payable and accrued liabilities			$	26,965		$	24,166
	Current portion of long-term debt and obligations under capital leases				2,488			2,512

			Total current liabilities		29,453			26,678
Deferred cemetery revenue and preneed liabilities					89,803			99,686
Deferred preneed funeral contracts revenue					229,380			240,231
Long-term debt, net of current portion					148,508			146,752
Obligations under capital leases, net of current portion					5,093			5,069

			Total liabilities		502,237			518,416

Commitments and contingencies
Minority interest in consolidated subsidiary					209			400
Company-obligated mandatorily redeemable convertible preferred securities of Carriage Services Capital Trust					90,058			90,125
Stockholders' equity:
	Common Stock, $.01 par value; 80,000,000 shares authorized; 16,948,790 issued and outstanding at June 30, 2002				—			170
	Class A Common Stock, $.01 par value; 40,000,000 shares authorized; 16,811,000 issued and outstanding at December 31, 2001				168			—
	Contributed capital				189,449			184,517
	Retained deficit				(107,193	)		(89,156	)
	Unrealized loss on interest rate swaps, net of tax benefit				(846	)		(591	)

			Total stockholders' equity		81,578			94,940

	Total liabilities and stockholders' equity			$	674,082		$	703,881

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

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands, except per share data)

		For the three months ended June 30,				For the six months ended June 30,
		2001		2002		2001		2002
Revenues, net
	Funeral	$	31,148	$	28,832	$	66,035	$	61,539
	Cemetery		9,873		9,018		18,851		17,233

			41,021		37,850		84,886		78,772
Costs and expenses
	Funeral		23,811		21,544		48,657		42,568
	Cemetery		7,448		6,618		14,326		13,132

			31,259		28,162		62,983		55,700

	Gross profit		9,762		9,688		21,903		23,072
General and administrative expenses			2,179		2,329		4,229		4,856

	Operating income		7,583		7,359		17,674		18,216
Interest expense, net			3,286		3,246		6,989		6,349
Financing costs of company-obligated mandatory redeemable convertible preferred securities of Carriage Services Capital Trust			1,641		1,674		3,282		3,348

	Total interest and financing costs		4,927		4,920		10,271		9,697

Income before income taxes			2,656		2,439		7,403		8,519
Provision (benefit) for income taxes			531		962		1,481		(9,518	)

	Net income		2,125		1,477		5,922		18,037
Preferred stock dividends			12		—		32		—

Net income available to common stockholders		$	2,113	$	1,477	$	5,890	$	18,037

Basic earnings per common share		$	0.13	$	0.09	$	0.36	$	1.07

Diluted earnings per common share		$	0.12	$	0.08	$	0.34	$	1.03

Weighted average number of common and common equivalent shares outstanding:
	Basic		16,592		16,942		16,549		16,918

	Diluted		17,651		17,458		17,525		17,458

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

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(unaudited and in thousands)

			For the six months ended June 30,
			2001			2002
Net income			$	5,922		$	18,037
Other comprehensive income (loss):
	Cumulative effect on prior years of the change in accounting principle, net of income tax benefit of $1			1			—
	Unrealized gain (loss) on interest rate swaps arising during period			(633	)		153
		Amortization of accumulated unrealized loss		—			166
	Related income tax (provision) benefit			127			(64	)

Total other comprehensive income (loss)			$	(505	)	$	255

Comprehensive income			$	5,417		$	18,292

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

CARRIAGE SERVICES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(unaudited and in thousands)

				For the six months Ended June 30,
				2001			2002
Cash flows from operating activities:
	Net income			$	5,922		$	18,037
	Adjustments to reconcile net income to net cash provided by operating activities:
		Depreciation			3,152			3,264
		Amortization			5,448			2,065
		Provision for losses on accounts receivable			1,612			765
		Deferred income taxes (benefit)			2,495			(9,957	)
		Other			—			120
	Changes in assets and liabilities, net of effects from acquisitions and dispositions:
		Decrease in accounts receivable			3,007			2,060
		Decrease in inventories and other current assets			1,767			593
		(Increase) in deferred charges and other			(141	)		(201	)
		(Increase) in preneed funeral and cemetery costs			(2,155	)		(1,844	)
		(Increase) in preneed cemetery trust funds			(4,931	)		(1,325	)
		(Decrease) in accounts payable and accrued liabilities			(1,609	)		(2,992	)
		Income tax (payments) refunds, net			—			(71	)
		Increase in deferred revenue and preneed liabilities			1,949			1,539

			Net cash provided by operating activities		16,516			12,053
Cash flows from investing activities:
		Net proceeds from sales of businesses and other assets			7,109			107
		Sale of minority interest in subsidiary			200			200
		Acquisitions			(212	)		(2,159	)
		Capital expenditures			(3,050	)		(3,483	)

			Net cash provided by (used in) investing activities		4,047			(5,335	)
Cash flows from financing activities:
		Proceeds (payments) under bank line of credit			(6,000	)		2,300
		Payments on long-term debt and obligations under capital leases			(10,450	)		(4,202	)
		Proceeds from issuance of common stock			119			319
		Payment of contingent stock price guarantees			(4,935	)		(5,289	)
		Payment of preferred stock dividends			(32	)		—

			Net cash used in financing activities		(21,298	)		(6,872	)
Net decrease in cash and cash equivalents					(735	)		(154	)
Cash and cash equivalents at beginning of period					3,210			2,744

Cash and cash equivalents at end of period				$	2,475		$	2,590

Supplemental disclosure of cash flow information:
			Cash paid for interest and financing costs	$	9,012		$	9,476

			Cash paid for income taxes	$	26		$	198

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

CARRIAGE SERVICES, INC.

CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(unaudited)

1. BASIS OF PRESENTATION

(a): The Company

Carriage Services, Inc., (the "Company") is a leading provider of products and services in the death care industry in the United States. As of June 30, 2002, the Company owned and operated 149 funeral homes and 30 cemeteries in 29 states.

(b): Principles of Consolidation

The accompanying consolidated financial statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

(c): Interim Condensed Disclosures

The information for the three and six month periods ended June 30, 2001 and 2002 is unaudited, but in the opinion of management, reflects all adjustments which are of a normal, recurring nature necessary for a fair presentation of financial position and results of operations for the interim periods. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted pursuant to the rules of the SEC. The accompanying consolidated financial statements have been prepared consistent with the accounting policies described in our annual report on Form 10-K for the year ended December 31, 2001, and should be read in conjunction therewith. Certain amounts in the December 31, 2001 consolidated balance sheet have been classified differently than in the consolidated balance sheet included in our annual report on Form 10-K and on the Form 10-Q for the quarter ended March 31, 2002. Additionally, preneed funeral and cemetery costs have been reclassified from investing activities to operating activities in the June 30, 2001 consolidated statement of cash flows to conform to current year presentation.

(d): Use of Estimates

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

2. ACCOUNTING CHANGES

(a): Goodwill and Other Intangible Assets

The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The provisions also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements.

The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 as of the beginning of the first quarter of 2002. The effect of SFAS No. 142 on the Company is the elimination of the amortization of goodwill, which prior to 2002 was amortized over 40 years, and the testing for impairment of goodwill on an annual basis. Had the adoption of SFAS No. 142 occurred at the beginning of the previous year, the results would have been as follows (in thousands, except per share amounts):

	For the three months ended June 30, 2001		For the six months ended June 30, 2001
Net income before taxes	$	3,750	$	9,669
Net income		3,000		7,735
Diluted earnings per share	$	0.17	$	0.44

See Management's Discussion and Analysis of Financial Condition and Results of Operations for proforma disclosure of this accounting change which additionally incorporates the impact of the change in the tax rate discussed in Note 4 on the reported results for 2001. The Company performed a review of goodwill as of January 1, 2002 by comparing the fair value of the Company's reporting units (funeral home business by region) to the carrying value of the reporting units, and no impairment was recorded at the implementation date of the new accounting standard. Goodwill acquired during the six months ended June 30, 2002, included $1.0 million for performance-based contingent consideration payments on a prior year acquisition and $0.9 million for a funeral home acquisition in the second quarter of 2002.

(b): Impairment of Long-Lived Assets

In August 2001 the Financial Accounting Standards Board issued SFAS No. 144, "Accounting for the Impairment or Disposal of Long-Lived Assets". SFAS No. 144 addresses financial accounting and reporting of long-lived assets, other than goodwill, that are to be disposed by sale or otherwise, and is effective for financial statements issued for fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 144 as of the beginning of the first quarter of 2002 which had no effect on the Company's financial position or results of operations.

3. MAJOR SEGMENTS OF BUSINESS

Carriage conducts funeral and cemetery operations only in the United States. The following table presents external revenue, net income and total assets by segment (in thousands):

		Funeral		Cemetery		Corporate(1)			Consolidated
External revenues:
	Six months ended June 30, 2002	$	61,539	$	17,233		—		$	78,722
	Six months ended June 30, 2001		66,035		18,851		—			84,886
Net income
	Six months ended June 30, 2002	$	11,502	$	2,495	$	4,040		$	18,037
	Six months ended June 30, 2001		5,980		1,795		(1,853	)		5,922
Total assets:
	June 30, 2002	$	523,877	$	163,773	$	16,231		$	703,881
	December 31, 2001		517,889		152,639		3,554			674,082

(1): Net income for the six months ended June 30, 2002 and the change in total assets assigned to Corporate is primarily attributable to the reduction in the deferred tax valuation allowance discussed in Note 4.

4. INCOME TAXES

For 2001, the Company had an effective financial statement tax rate of 20 percent, reflecting the benefit of previously unrecognized tax losses from prior periods related to the Fresh Start restructuring program. When the Company incurred the Fresh Start restructuring costs and write-downs in late 2000 and proceeded to dispose of low performing businesses, it could not be assured that it would generate enough future taxable income to utilize the sizeable tax benefits created by the tax losses on asset sales. To acknowledge this uncertainty at the time, the Company recorded a "valuation allowance" to offset these tax benefits until such time that it could be determined that the Company would be able to deduct them. Based on the positive operating results subsequent to 2000 and management's forecast of future positive operating results, management determined in the first quarter of 2002 that it is more likely than not that the Company will be able to utilize substantially all of these previously unrecognized tax benefits. Accordingly, in the first quarter of 2002 the Company recorded a special one-time tax benefit in the amount of $12.8 million, equal to $0.73 per diluted share, which eliminated substantially all of the valuation allowance. The Company estimates that its effective tax rate will be 38.5 percent for financial statement purposes in 2002. Had the Company also used the 38.5 percent tax rate for the six months ended June 30, 2001, net income for that period, excluding the effect of the change in accounting for goodwill amortization discussed in Note 2, would have been lower by $1,370,000 or $0.08 per diluted share.

Item 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

OVERVIEW

Carriage is a leading provider of death care services and products in the United States. Our historical focus has been on operational enhancements at facilities currently owned to increase revenues and gross profit, as well as growth through acquisitions (although this activity was curtailed significantly beginning in 1999). That focus has resulted in high standards of service, operational performance, and an infrastructure containing measurement and management systems. In 2000, the operating strategy was dramatically shifted to focus upon increasing operating cash flow. In November 2000, we launched a multi-faceted, restructuring program, called "Fresh-Start", which was designed to increase financial and operating performance, improve cash flow, reduce debt, and assist Carriage in fulfilling our mission of being the highest quality funeral and cemetery service organization in the industry. Beginning with the fourth quarter of 2000, we have been focused on executing elements of Fresh Start.

The goals of Fresh Start were and remain restoring credibility to our operating and consolidation model, increasing and better aligning our earnings and cash flow, restoring market credibility to our balance sheet, reducing our debt, and re-accessing the capital markets.

The principal elements of Fresh Start include downsizing our corporate organization; changing our operating leadership; changing our preneed funeral organizational strategy; stratifying by performance our funeral and cemetery portfolios; implementing action plans to improve underperforming businesses; disposing of some underperforming businesses; adjusting the carrying basis of other underperforming businesses; and modifying financial covenants with lenders to facilitate execution of Fresh Start. Most of the elements of Fresh Start have been accomplished and we are seeing the benefits of these actions in our operating results.

Net income totaled $18.0 million in the first six months of 2002, or $1.03 per diluted share. Excluding a $12.8 million, or $0.73 per share special tax benefit, net income was $5.2 million, or $0.30 per diluted share. Two significant accounting events occurred during the six months ended June 30, 2002: the elimination of goodwill amortization in connection with the implementation of SFAS No.142, which totaled $2.3 million in the first six months of 2001, and the change in the Company's tax rate from 20 percent to 38.5 percent. Had those two events occurred at the beginning of 2001, net income and diluted earnings per share would have totaled $5.9 million and $0.34, respectively, for the first six months of 2001.

The full year impact to diluted earnings per share, by quarter, for 2001 of these two events would have been as follows:

	Diluted Earnings per Share
	1st Quarter			2nd Quarter			3rd Quarter			4th Quarter			Full Year
2001 results as previously reported	$	0.22		$	0.12		$	0.03		$	0.14		$	0.51
Adjustment of tax rate from 20% to 38.5%		(0.05	)		(0.03	)		(0.01	)		(0.03	)		(0.12	)
Proforma elimination of goodwill amortization		0.04			0.04			0.04			0.04			0.16

Adjusted 2001	$	0.21		$	0.13		$	0.06		$	0.15		$	0.55

Income from operations, which we define as earnings before interest and income taxes, increased as a percentage of net revenues, from 18.5% for the second quarter of 2001 to 19.4% for the second quarter of 2002 and from 20.8% for the six months ended June 30, 2001 to 23.1% for the six months ended June 30, 2002. This improvement was primarily due to the elimination of amortization for goodwill beginning January 1, 2002. Revenues from funeral homes decreased 7.4% and revenues from cemeteries decreased 8.7% in the second quarter of 2002 compared to the same period in 2001 as a

result of the sale or closing of 24 funeral homes and eight cemeteries during 2001, a decline in same-store revenues period to period, lower preneed insurance commission revenue and lower cemetery preneed property sales. Gross margins for the funeral homes increased from 23.6% in the second quarter of 2001 to 25.3% in the second quarter of 2002. As a percentage of cemetery net revenues, cemetery gross margin was 26.6% in the second quarter of 2002 compared to 24.6% in the second quarter of 2001.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with generally accepted accounting principles. Our significant accounting policies are summarized in Note 1 to the consolidated Financial Statements included in our Annual Report on Form 10-K for the year ended December 31, 2001. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our consolidated financial statements.

Funeral and Cemetery Operations

We record the sales of funeral merchandise and services upon performance of the funeral service. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales provisions of Statement of Financial Accounting Standards (SFAS) No 66, "Accounting for Sales of Real Estate". This method provides for the recognition of revenue in the period in which the customer's cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenue from the sales of cemetery merchandise and services are recognized in the period in which the merchandise is delivered or the service is performed. Revenues to be recognized from the delivery of merchandise and performance of services related to contracts that were acquired in acquisitions are typically lower than those originated by the Company and are likely to exceed the cash collected from the contract and received from the trust at maturity.

Allowances for customer cancellations, refunds and bad debts are provided at the date of sale based on our historical experience. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted. When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions are recognized as revenues at the point at which the commission is no longer subject to refund, which is typically one year after the policy is issued.

Preneed Funeral Contracts & Deferred Preneed Funeral Contracts Revenue

Preneed funeral sales are affected by deposits to a trust or purchase of a third-party insurance product. Unperformed guaranteed preneed funeral contracts are included in the consolidated balance sheets as preneed funeral contracts. The balance in this asset account represents amounts due from customer receivables and third-party insurance companies, and the amounts deposited with the trustee and the accumulated earnings on these deposits. A corresponding credit is recorded to deferred preneed funeral contracts revenue. The funeral revenue is not recorded until the service is performed. 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.

Deferred Obtaining Costs

Deferred obtaining costs consist of sales commissions and other direct related costs of originating preneed sales contracts. These costs are deferred and amortized into funeral and cemetery costs and expenses over the expected timing of the performance of the services or delivery of the merchandise covered by the preneed contracts. Effective October 1, 2001, we changed the pattern of the periods over which the costs are recognized to more closely track actuarial statistics, provided by a third party administrator, based on the actual contracts we hold. The effect of this change was to reduce expense in the fourth quarter of 2001 by approximately $0.5 million from that which would have been recorded using the prior methodology.

Goodwill and Other Intangible Assets

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 goodwill. Many of the 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. Goodwill is typically not associated with or recorded for the cemetery businesses. In accordance with SAFS No. 142, we review the carrying value of goodwill at least annually on a regional basis to determine if facts and circumstances exist which would suggest that this intangible asset might be carried in excess of fair value. Fair value is determined by discounting the estimated future cash flows of the businesses in each region at the Company's weighted average cost of capital less debt allocable to the region. The calculation of fair value can vary dramatically with changes in estimates of the number of future services performed, inflation in costs and the Company's cost of capital. If impairment is indicated, then an adjustment will be made to reduce the carrying amount of goodwill to fair value. No impairments were recorded during the six months ended June 30, 2002.

Income Taxes

The Company and its subsidiaries file a consolidated U.S. federal income tax return. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, in accordance with SFAS 109, "Accounting for Income Taxes.

RESULTS OF OPERATIONS

The following is a discussion of the Company's results of operations for the three and six month periods ended June 30, 2001 and 2002. For purposes of the revenue discussion, the Company's funeral home businesses are in three groups, as a result of the stratification of our funeral homes. A "core" group which represents approximately two-thirds of our revenues and cash flow, a second "underperforming" group, and a third group consisting of businesses that are "targeted for sale". Currently none of the cemetery businesses are stratified into these categories and none of the cemeteries are currently held for sale. Additionally, funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "same-store" or "existing operations".

Funeral Home Segment. The following table sets forth certain information regarding the net revenues, field EBITDA (earnings before interest, taxes, depreciation and amortization) and gross profit of the Company from its funeral home operations for the three and six months ended June 30, 2001 compared to the three and six months ended June 30, 2002. Field EBITDA differs from gross profit in that it excludes preneed insurance commissions revenue, corporate overhead allocations and depreciation and amortization.

Three months ended June 30, 2001 compared to three months ended June 30, 2002
(dollars in thousands)

			Three months ended June 30,						Change
			2001			2002			Amount			Percent
Net location same-store revenues:
	Core		$	19,315		$	18,717		$	(598	)	(3.1	)%
	Underperforming			8,856			8,560			(296	)	(3.3	)%
	Targeted for sale			984			960			(24	)	(2.4	)%

		Total same-store revenue	$	29,155		$	28,237		$	(918	)	(3.1	)%
Acquired, sold or discontinued				1,007			181			(826	)	*
Preneed insurance commissions revenue				986			414			(572	)	(58.0	)%

Total net revenues			$	31,148		$	28,832		$	(2,316	)	(7.4	)%

Field EBITDA			$	10,841		$	9,350		$	(1,491	)	(13.8	)%

Field EBITDA margin				35.9	%		32.9	%		(3.0	)%	(8.4	)%
Gross profit:
Same-store			$	6,317		$	6,825		$	508		8.1	%
Acquired, sold or discontinued				34			49			15		*
Preneed insurance commissions revenue				986			414			(572	)	(58.0	)%

Total gross profit			$	7,337		$	7,288		$	(49	)	(0.7	)%

*not meaningful

Six months ended June 30, 2001 compared to six months ended June 30, 2002
(dollars in thousands)

			Six months ended June 30,						Change
			2001			2002			Amount			Percent
Net location same-store revenues:
	Core		$	40,192		$	40,063		$	(129	)	(0.3	)%
	Underperforming			18,548			18,290			(258	)	(1.4	)%
	Targeted for sale			2,151			2,098			(53	)	(2.5	)%

		Total same-store revenue	$	60,891		$	60,451		$	(440	)	(0.7	)%
Acquired, sold or discontinued				2,856			243			(2,613	)	*
Preneed insurance commissions revenue				2,288			845			(1,443	)	(63.0	)%

Total net revenues			$	66,035		$	61,539		$	(4,496	)	(6.8	)%

Field EBITDA			$	24,052		$	22,613		$	(1,439	)	(6.0	)%

Field EBITDA margin				37.7	%		37.3	%		(0.4	)%	(0.1	)%
Gross profit:
Same-store			$	14,837		$	18,077		$	3,240		21.8	%
Acquired, sold or discontinued				253			48			(205	)	*
Preneed insurance commissions revenue				2,288			846			(1,442	)	(63.0	)%

Total gross profit			$	17,378		$	18,971		$	1,593		9.2	%

*not meaningful

Funeral same-store revenues for the three months ended June 30, 2002 decreased 3.1% when compared to the three months ended June 30, 2001, as we experienced a decrease of 4.8% in the number of services and a increase of 1.7% in the average revenue per service for those existing operations. Our second quarter volume comparison to the second quarter of 2001 proved to be particularly difficult because of an unusually high same store volume increase of 4.7% last year. In addition to lower national mortality rates during the first half of the current year, we are losing market share in some of our businesses and are working on stabilizing such losses. The number of funeral services decreased 3.9% for the core group in comparing the second quarter of 2002 to the second quarter of 2001, while the average revenue per service for those existing locations increased 0.8% in comparing those same periods. The number of funeral services performed by the underperforming group decreased 7.2% while the average revenue per service increased 4.1% in comparing the second quarter 2002 to the second quarter of 2001. In addition to the net revenues from funeral location operations above, insurance commission revenues from preneed funeral contract sales totaled $0.4 million for the three months ended June 30, 2002, as compared to $1.0 million for the three months ended June 30, 2001.

Total funeral same-store gross profit for the three months ended June 30, 2002 increased $0.5 million or 8.1% from the comparable three months of 2001. The higher gross profit is primarily due to the combination of the elimination of goodwill amortization which totaled $1.1 million during the three months ended June 30, 2001 partially offset by the decrease in our field EBITDA.

Funeral same-store revenues for the six months ended June 30, 2002 decreased 0.7% when compared to the six months ended June 30, 2001, as we experienced a decrease of 3.0% in the number of services and a increase of 2.3% in the average revenue per service for those existing operations. The number of funeral services decreased 2.6% for the core group in comparing the six months ended June 30, 2002 to the six months ended June 30, 2001, while the average revenue per service for those

existing locations increased 2.3% in comparing those same periods. The number of funeral services for the underperforming group decreased 4.7% while the average revenue per service increased 3.5% in comparing the six months ended June 30, 2002 to the six months ended June 30, 2001.

Total funeral field EBITDA for the six months ended June 30, 2002 decreased $1.4 million or 6.0% from the comparable six month period in the prior year primarily due to the decline in revenue associated with businesses we sold during 2001. However, through strong cost management we were able to produce a strong EBITDA margin for the six months ended June 30, 2002 of 37.3%, consistent with the prior year period.

Total funeral same-store gross profit for the six months ended June 30, 2002 increased $3.2 million or 21.8% from the comparable six months of 2001 primarily due to the elimination of goodwill amortization which totaled $2.3 million during the six months ended June 30, 2001. The decrease in commission revenues is due primarily to 2001 nonrecurring commissions on rollover transactions. Additionally and because of a shift in the Company's preneed marketing strategy, we expect a decrease of $2.2 million in preneed insurance revenue and funeral gross profit in comparing the full year 2001 to the full year 2002 equal to $0.08 per diluted share.

Cemetery Segment. The following table sets forth certain information regarding the net revenues, field EBITDA and gross profit of the Company from its cemetery operations for the three and six months ended June 30, 2001 compared to the three and six months ended June 30, 2002.

Three months ended June 30, 2001 compared to three months ended June 30, 2002
(dollars in thousands)

	Three months ended June 30,						Change
	2001			2002			Amount			Percent
Total same-store revenue	$	9,740		$	9,018		$	(722	)	(7.4	)%
Acquired or sold		133			—			(133	)	*

Total net revenues	$	9,873		$	9,018		$	(855	)	(8.7	)%

Field EBITDA	$	4,118		$	3,416		$	(702	)	(17.1	)%

Field EBITDA Margin		41.7	%		37.9	%		(3.8	)%	(9.1	)%
Total same-store gross profit	$	2,411		$	2,400		$	(11	)	(0.5	)%
Acquired or sold		14			—			(14	)	*

Total gross profit	$	2,425		$	2,400		$	(25	)	(1.0	)%

*not meaningful

Six months ended June 30, 2001 compared to six months ended June 30,2002
(dollars in thousands)

	Six months ended June 30,						Change
	2001			2002			Amount			Percent
Total same-store revenue	$	18,433		$	17,233		$	(1,200	)	(6.5	)%
Acquired or sold		418			—			(418	)	*

Total net revenues	$	18,851		$	17,233		$	(1,618	)	(8.6	)%

Field EBITDA	$	7,594		$	6,765		$	(829	)	(10.9	)%

Field EBITDA margins		40.3	%		39.3	%		(1.0	)%	(2.5	)%
Total same-store gross profit	$	4,505		$	4,080		$	(425	)	(9.4	)%
Acquired or sold		20			21			1		*

Total gross profit	$	4,525		$	4,101		$	(424	)	(9.4	)%

*not meaningful

Cemetery same-store net revenues for the three months ended June 30, 2002 decreased $0.7 million over the three months ended June 30, 2002, and cemetery same-store gross profit decreased negligibly over the comparable three months of 2001. The lower same-store net revenues resulted primarily from lower preneed property sales and deliveries of merchandise and services. In consequence, this resulted in a similar decline in field EBITDA. Total gross margin increased from 24.6% for the three months ended June 30, 2001 to 26.6% for the three months ended June 30, 2002. Gross margin in the prior year included an employment termination charge of $120,000 and the current year period benefited by the lower bad debt experience.

Cemetery same-store net revenues for the six months ended June 30, 2002 decreased $1.2 million over the six months ended June 30, 2002, and cemetery same-store gross profit decreased $0.4 million over the comparable six months of 2001. Total gross margin decreased slightly from 24.0% for the six months ended June 30, 2001 to 23.8% for the six months ended June 30, 2002.

Other. General and administrative expenses for the quarter ended June 30, 2002 increased $0.2 million as compared to the first quarter of 2001. These expenses, as a percentage of net revenues, increased from 5.3% to 6.2% primarily due to additional insurance costs and a decline in revenues.

Interest expense and other financing costs for the three months ended June 30, 2002 declined slightly compared to the first quarter of 2001 primarily because average debt outstanding during the first six months of 2002 was less than the average debt outstanding in the same period for 2001.

Income Taxes. The following table sets forth the components of the provision (benefit) of income taxes of the Company for the three and six months ended June 30, 2001 compared to the three and six months ended June 30, 2002.

Three months ended June 30, 2001 compared to three months ended June 30, 2002

	Three months ended June 30, 2001				Three months ended June 30, 2002
	Amount		Percent of Pretax Income		Amount		Percent of Pretax Income
Provision for income taxes before the reduction of the deferred tax asset valuation allowance	$	531	20	%	$	962	39.4	%
Reduction of deferred tax asset valuation allowance		—	—			—	—

Total provision (benefit) for income taxes	$	531	20	%	$	962	39.4	%

Six months ended June 30, 2001 compared to six months ended June 30,2002

	Six months ended June 30, 2001				Six months ended June 30, 2002
	Amount		Percent of Pretax Income		Amount			Percent of Pretax Income
Provision for income taxes before the reduction of the deferred tax asset valuation allowance	$	1,481	20	%	$	3,282		38.5	%
Reduction of deferred tax asset valuation allowance		—	—			(12,800	)	(150.3	)%

Total provision (benefit) for income taxes	$	1,481	20	%	$	(9,518	)	(111.8	)%

The Company has a net operating loss carryforward for Federal income tax purposes. Because of the ability to use the net operating loss to offset taxable income and the timing of when revenue and expenses are recognized for tax purpose, we do not expect to pay Federal income taxes in 2002 and 2003.

LIQUIDITY AND CAPITAL RESOURCES

Cash and cash equivalents totaled $2.6 million at June 30, 2002, representing a decrease of $0.2 million from December 31, 2001. For the six months ended June 30, 2002, cash provided by operations was $12.1 million as compared to $16.5 million for the six months ended June 30, 2001. The higher level of cash provided by operations in the first half of 2001 was primarily due to $2.2 million in tax refunds received in 2001 and catch-up trust withdrawals in the 2001 period that normally would have been withdrawn during the 2000 year. Cash used in investing activities was $5.3 million for the six months ended June 30, 2002 compared to cash provided in the amount of $4.1 million for the first six months of 2001, the change being primarily due to the combination of proceeds from the sale of businesses during the first six months of 2001 in the amount of $7.1 million and uses of cash for an acquisition that closed in the second quarter and an earnout related to an acquisition in a prior year totaling $2.2 million in 2002.

The ability to generate free cash flow from operations is particularly important as this measures the cash produced by the businesses which may be used to repay indebtedness or make acquisitions. We define free cash flow from operations as cash flow provided by operations less all capital expenditures. For the six months ended June 30, 2002, free cash flow provided by operations was $8.6 million as compared to $13.5 million for the six months ended June 30, 2001. During the first half of 2002, we paid $6.3 million of remaining contingent acquisition obligations, spent $1.1 million on a new acquisition and reduced our debt by $2 million. Our strong free cash flow from operations is a function of consistently high levels of field EBITDA, improved working capital management, and disciplined spending and capital allocation. As we expect no unusual cash outlays for the balance of

2002, our free cash flow during the second half of the year will be dedicated to reducing our debt to our new goal of $150 million.

The Company's debt at June 30, 2002 totaled $155.4 million, which is $4.1 million less than at the end of the first quarter of 2002, and consisted of $99.3 million in senior debt notes, a $100 million revolving line of credit ($34.3 million outstanding at June 30, 2002) and $21.8 million in acquisition indebtedness and capital lease obligations. The balance sheet category "Assets Held for Sale" is net of debt totaling $1.0 million.

The $99.3 million in senior debt notes are unsecured, mature in tranches of $22.9 million in 2004, $54.1 million in 2006 and $22.3 million in 2008 and bear interest at the fixed rates of 7.73%, 7.96% and 8.06%, respectively.

The Company has a credit facility with a group of banks for a $100 million revolving line of credit. The credit facility, maturing in 2004, is unsecured and contains customary restrictive covenants, including a restriction on the payment of dividends on common stock, and requires that we maintain certain financial ratios. Interest under the credit facility is provided at both LIBOR and prime rate options. As of June 30, 2002, the Company's debt to total capitalization was 45.6 percent.

We believe that cash flow from operations and borrowings under the credit facility should be sufficient to fund anticipated capital expenditures as well as other operating requirements. Because future cash flows and the availability of financing are subject to a number of variables, such as the Company's operating performance, timing of debt maturities and the number and size of acquisitions made by the Company, there can be no assurance that the Company's capital resources will be sufficient to fund its capital needs. Additional debt and equity financing may be required in the future. 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.

On May 7, 2002, stockholders ratified an amendment to the charter of the Company to reclassify the Class A Common Stock as Common Stock and increase the number of authorized shares of Common Stock to 80,000,000.

ACCOUNTING CHANGES

In June 2001, the Financial Accounting Standards Board issued SFAS No. 141, "Business Combinations" and SFAS No. 142, "Goodwill and Other Intangible Assets". SFAS No. 141 addresses financial accounting and reporting for goodwill and other intangible assets acquired in a business combination at acquisition. SFAS No. 142 addresses how intangible assets that are acquired individually or with a group of other assets (but not those acquired in a business combination) should be accounted for in financial statements upon their acquisition. This Statement also addresses how goodwill and other intangible assets should be accounted for after they have been initially recognized in the financial statements. The provisions of SFAS No. 141 apply to all business combinations initiated after June 30, 2001. The provisions also apply to all business combinations accounted for using the purchase method for which the date of acquisition is July 1, 2001 or later. The adoption of SFAS No. 141 by the Company had no effect on its consolidated financial statements. The provisions of SFAS No. 142 are required to be applied starting with fiscal years beginning after December 15, 2001. The Company adopted SFAS No. 142 as of the beginning of the first quarter of 2002. The effect of SFAS No. 142 on the Company is the elimination of the amortization of goodwill, which prior to 2002 was amortized over 40 years, and the testing for impairment of goodwill on an annual basis. See Note 2 to the Consolidated Financial Statements for proforma disclosure of this accounting change and the change in the tax rate discussed in Note 4 on the reported results for 2001. The Company performed a review of goodwill as of January 1, 2002 by comparing the fair value of the Company's reporting units (funeral home businesses by region) to the carrying value of the reporting units, and no impairment was required to be reported at the implementation date of the new accounting standard.

SEASONALITY

The Company's business can be affected by seasonal fluctuations in the death rate. Generally, death rates are higher during the winter months.

INFLATION

Inflation has not had a significant impact on the results of operations of the Company.

Item 3. Quantitative and Qualitative Disclosures of Market Risk

There has been no material change in the Company's position regarding quantitative and qualitative disclosures of market risk from that disclosed in the Company's 2001 Form 10-K.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

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, we do not expect these matters to have a material adverse effect.

We carry insurance with coverages and coverage limits that we believe to be customary in the funeral home and cemetery industries. Although there can be no assurance that such insurance will be sufficient to protect against all contingencies, we believe that our insurance protection is reasonable in view of the nature and scope of our operations.

Item 2. Changes in Securities and Use of Proceeds

None

Item 3. Defaults Upon Senior Securities

None

Item 4. Submission to Matters to A Vote of Security Holders

The Company's 2002 annual meeting of stockholders was held on May 7, 2002. All director nominees were elected. The voting tabulation was as follows:

Name of Nominee		Number of Votes For		Number of Votes Withheld
Stuart W. Stedman		14,849,107		393,430
Ronald A. Erickson		14,849,107		393,430

The terms of the following other directors continue after the meeting: Melvin C. Payne, Greg M. Brudnicki, Vincent D. Foster and Mark F. Wilson.

The result of the vote to amend the charter of the Company to eliminate all references to the Class B Common Stock, reclassify the Class A Common Stock as Common Stock, increase the number of authorized shares of Common Stock to 80,000,000 and decrease the number of authorized shares of Preferred Stock to 40,000,000 was as follows:

Number of Votes For		Number of Votes Against		Number of Votes Abstaining		Number of Shares Not Voting
9,612,907		101,019		28,985		5,499,626

The amendment to the Charter of the Company was ratified by the stockholders.

Item 5. Other Information

Forward-Looking Statements

In addition to historical information, this Quarterly Report contains forward-looking statements made by the management of Carriage Services, Inc. (the "Company" or "Carriage"). Such statements are typically identified by terms expressing future expectations or goals. These forward-looking statements, although made in good faith, are subject to certain risks and uncertainties that could cause actual results to differ materially from those reflected in these forward-looking statements. Factors that might cause such a difference include Carriage's inability to sell businesses and properties held for sale for their carrying value, to maintain or increase free cash flow from operations, or to achieve internal growth from our businesses; adverse changes in economic and financial market conditions, including

declining stock prices, increasing interest rates, and restricted credit availability; lower death rates; changing consumer preferences; competition in our markets; Carriage's inability to maintain operating ratios within the limits set forth within our financing arrangements; and changes in government regulation of the death care industry. Readers are cautioned not to place undue reliance on these forward-looking statements, which reflect management's opinions only as of the date hereof. We undertake no obligation to revise or publicly release the results of any revision of these forward-looking statements. Readers should carefully review the Cautionary Statements described in this and other documents we file from time to time with the Securities and Exchange Commission, including Annual Reports on Form 10-K and Current Reports on Form 8-K filed by Carriage throughout 2002.

Cautionary Statements

The Company cautions readers that the following important factors, among others, in some cases have affected, and in the future could affect, the Company's actual consolidated results and could cause the Company's actual consolidated results in the future to differ materially from the goals and expectations expressed herein and in any other forward-looking statements made by or on behalf of the Company.

(1) Maintaining or achieving growth in free cash flow from operations depends primarily on achieving anticipated levels of earnings before depreciation, amortization and other non-cash charges, maintaining the amount of expected cash income taxes payable, controlling capital expenditures to budgeted levels, collecting accounts receivable and managing preneed sales origination costs to current or lower levels.

(2) Achieving the Company's revenue goals also is affected by the volume and prices of the products and services sold, as well as the mix of products and services sold. The annual sales targets set by the Company are believed to be achievable, but the inability of the Company to achieve planned volume or prices could cause the Company not to meet anticipated levels of revenue. In certain markets the Company expects to increase prices, but in certain markets prices could be lowered to protect market share. The ability of the Company to achieve volume or price targets at any location depends on numerous factors, including the capabilities of the local operating staff, the local economy, the local death rate, competition and changes in consumer preferences, including cremation.

(3) Revenue also is affected by the level of preneed sales in both current and prior periods. The level of preneed sales may be adversely affected by numerous factors, including deterioration in the economy, which causes individuals to have less discretionary income, changes in consumer spending preferences, as well as changes in marketing approach, commission practices and contractual terms. Future revenue could also be affected by the Company's decision in the latter half of 2000 to eliminate its national preneed sales and marketing organization and to manage future preneed activities at the local business level.

(4) In addition to the factors discussed above, financial performance may be affected by other important factors, including the following:

(a): The ability of the Company to retain or attract key personnel.
(b): The amount and rate of growth in the Company's general and administrative expenses.
(c): Changes in interest rates, which can increase or decrease the amount the Company pays on borrowings with variable rates of interest.
(d): The ability of the Company to stay within the limits of the credit ratios set out in the debt covenants, such as the debt-to-capital ratio, debt-to-EBITDA ratio, and the fixed charge coverage ratio.
(e): Availability and related terms of debt and equity financing to fund operating needs.

(f): Changes in government regulation, including tax rates and their effects on corporate structure.
(g): Changes in inflation and other general economic conditions domestically, affecting financial markets (e.g. marketable security values).
(h): Unanticipated legal proceedings and unanticipated outcomes of legal proceedings.
(i): Changes in accounting policies and practices required by generally accepted accounting principles or the Securities and Exchange Commission, such as write-downs to the asset carrying values for goodwill and other long-lived assets.

The Company also cautions readers that it assumes no obligation to update or publicly release any revisions to forward-looking statements made herein or any other forward-looking statements made by, or on behalf of, the Company.

ITEM 6. Exhibits and Reports on Form 8-K

(a): Exhibits

3.1 — Certificate of Amendment of the Certificate of Incorporation

10.1 — Employment agreement for George J. Klug

11.1 — Statement regarding computation of per share earnings

12 — Computation of Ratio of Earnings to Fixed Charges

(b): Reports on Form 8-K

A report on Form 8-K filed was filed with the SEC on May 20, 2002 in connection with a change in registrant's certifying accountant.

SIGNATURE

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	CARRIAGE SERVICES, INC.
August 13, 2002 Date	By:	/s/ TERRY E. SANFORD Terry E. Sanford, Vice President, Controller and Chief Accounting Officer
	By:	/s/ W. CLARK HARLOW W. Clark Harlow, Vice President, Treasurer and Principal Financial Officer

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Exhibit 3.1

Delaware

PAGE 1

The First State

I, HARRIET SMITH WINDSOR, SECRETARY OF STATE OF THE STATE OF DELAWARE, DO HEREBY CERTIFY THE ATTACHED IS A TRUE AND CORRECT COPY OF THE CERTIFICATE OF AMENDMENT OF "CARRIAGE SERVICES, INC.", FILED IN THIS OFFICE ON THE TENTH DAY OF MAY, A.D. 2002, AT 2 O'CLOCK P.M.

A FILED COPY OF THIS CERTIFICATE HAS BEEN FORWARDED TO THE NEW CASTLE COUNTY RECORDER OF DEEDS.


		/s/ HARRIET SMITH WINDSOR Harriet Smith Windsor, Secretary of State
2365833 8100 020300341		AUTHENTICATION: 1771651 DATE: 05-10-02

CERTIFICATE OF AMENDMENT

OF THE

CERTIFICATE OF INCORPORATION

CARRIAGE SERVICES, INC.

* * * * * * * *

CARRIAGE SERVICES, INC., a corporation organized and existing under and by virtue of the General Corporation Law of the State of Delaware (the "Corporation"), DOES HEREBY CERTIFY:

First: That the Board of Directors of the Corporation, at a meeting duly held on February 19, 2002, adopted the following resolution proposing and declaring advisable an amendment to the Certificate of Incorporation of the Corporation, as follows:

NOW, THEREFORE, BE IT RESOLVED, that Article IV of the Certificate of Incorporation of the Corporation be amended in its entirety so that, as amended, said Article IV shall read as follows:

"The total number of shares of stock that the Corporation shall have authority to issue is 120,000,000 shares of capital stock, consisting of (i) 40,000,000 shares of preferred stock, par value $.01 per share ("Preferred Stock"); and (ii) 80,000,000 shares of Common Stock, par value $.01 per share ("Common Stock").

The designations and the powers, preferences, rights, qualifications, limitations and restrictions of the Common Stock and the Preferred Stock are as follows:

1. Provisions Relating to the Common Stock.

(a) Dividends. Subject to the prior rights and preferences, if any, applicable to shares of the Preferred Stock or any class or series thereof, each share of Common Stock shall entitle the holder of record thereof to receive dividends out of funds legally available therefor, when, as and if declared by the board of directors of the Corporation with respect to any of such class of stock.

(b) Liquidation Rights. The holders of Common Stock shall be entitled to participate in the net assets of the Corporation remaining after any dissolution, liquidation or winding up of the affairs of the Corporation, whether voluntary or involuntary, and after payment or provision for the payment of the debts and liabilities of the Corporation and payment of the liquidation preference of any shares of capital stock of the Corporation having such a preference, distributing such proceeds pro-rata among the holders of Common Stock. A dissolution, liquidation or winding-up of the Corporation, as such terms are used in this paragraph (b), shall not be deemed to be occasioned by or to include any consolidation or merger of the Corporation with or into any other company or companies or other entity or a sale, lease, exchange, or conveyance of all or a part of the assets of the Corporation.

(c) Voting Rights. Each share of Common Stock shall entitle the registered holder thereof to one vote on all matters brought before the common stockholders of the Corporation for a vote.

2. Provisions Relating to the Preferred Stock.

(a) The Preferred Stock may be issued from time to time in one or more classes or series, the shares of each class or series to have any designations and powers, preferences, and rights, and qualifications, limitations, and restrictions thereof as are stated and expressed in this Article IV and in the resolution or resolutions providing for the issue of such class or series adopted by the board of directors of the Corporation as hereafter prescribed.

(b) Authority is hereby expressly granted to and vested in the board of directors of the Corporation to authorize the issuance of the Preferred Stock from time to time in one or more classes or series, and with respect to each class or series of the Preferred Stock, to state by the resolution or resolutions from time to time adopted providing for the issuance thereof the following:

(i) whether or not the class or series is to have voting rights, special, or limited, or is to be without voting rights, and whether or not such class or series is to be entitled to vote as a separate class either alone or together with the holders of one or more other classes or series of stock;

(ii) the number of shares to constitute the class or series and the designations thereof,

(iii) the preferences and relative, participating, optional, or other special rights, if any, and the qualifications, limitations, or restrictions thereof, if any, with respect to any class or series;

(iv) whether or not the shares of any class or series shall be redeemable at the option of the Corporation or the holders thereof or upon the happening of any specified event, and, if redeemable, the redemption price or prices (which may be payable in the form of cash, notes, securities, or other property), and the time or times at which, and the terms and conditions upon which, such shares shall be redeemable and the manner of redemption;

(v) whether or not the shares of a class or series shall be subject to the operation of retirement or sinking funds to be applied to the purchase or redemption of such shares for retirement, and, if such retirement or sinking fund or funds are to be established, the periodic amount thereof, and the terms and provisions relative to the operation thereof;

(vi) the dividend rate, whether dividends are payable in cash, stock of the Corporation, or other property, the conditions upon which and the times when such dividends are payable, the preference to or the relation to the payment of dividends payable on any other class or classes or series of stock, whether or not such dividends shall be cumulative or noncumulative, and if cumulative, the date or dates from which such dividends shall accumulate;

(vii) the preferences, if any, and the amounts thereof which the holders of any class or series thereof shall be entitled to receive upon the voluntary or involuntary dissolution of, or upon any distribution of the assets of, the Corporation;

(viii) whether or not the shares of any class or series, at the option of the Corporation or the holder thereof or upon the happening of any specified event, shall be convertible into or exchangeable for the shares of any other class or classes or of any other series of the same or any other class or classes of stock, securities, or other property of the Corporation and the conversion price or prices or ratio or ratios or the rate or rates at which such conversion or exchange may be made, with such adjustments, if any, as shall be stated and expressed or provided for in such resolution or resolutions; and

(ix) any other special rights and protective provisions with respect to any class or series as may to the board of directors of the Corporation seem advisable.

(c) The shares of each class or series of the Preferred Stock may vary from the shares of any other class or series thereof in any or all of the foregoing respects and in

any other manner. The board of directors of the Corporation may increase the number of shares of the Preferred Stock designated for any existing class or series by a resolution adding to such class or series authorized and unissued shares of the Preferred Stock not designated for any other class or series. The board of directors of the Corporation may decrease the number of shares of the Preferred Stock designated for any existing class or series by a resolution subtracting from such class or series authorized and unissued shares of the Preferred Stock designated for such existing class or series, and the shares so subtracted shall become authorized, unissued, and undesignated shares of the Preferred Stock.

3. General.

(a) Subject to the foregoing provisions of this Certificate of Incorporation, the Corporation may issue shares of its Preferred Stock and Common Stock from time to time for such consideration (not less than the par value thereof) as may be fixed by the board of directors of the Corporation, which is expressly authorized to fix the same in its absolute discretion subject to the foregoing conditions. Shares so issued for which the consideration shall have been paid or delivered to the Corporation shall be deemed fully paid stock and shall not be liable to any further call or assessment thereon, and the holders of such shares shall not be liable for any further payments in respect of such shares.

(b) The Corporation shall have authority to create and issue rights and options entitling their holders to purchase shares of the Corporation's capital stock of any class or series or other securities of the Corporation, and such rights and options shall be evidenced by instrument(s) approved by the board of directors of the Corporation. The board of directors of the Corporation shall be empowered to set the exercise price, duration, times for exercise, and other terms of such rights or options; provided, however, that the consideration to be received for any shares of capital stock subject thereto shall not be less than the par value thereof."

Second: That a majority of the outstanding stock entitled to vote on such amendment, and a majority of the outstanding stock of each class entitled to vote thereon as a class, has been voted in favor of such amendment.

Third: That this amendment provides for an exchange and reclassification of every share of the Corporation's Class A Common Stock, $.01 par value per share, issued and outstanding immediately prior to the effective date of such amendment and held by all holders of shares of such Class A Common Stock, with and into one (1) share of the Corporation's Common Stock, $.01 par value per share. Notwithstanding that any certificates for shares of Class A Common Stock shall not have been surrendered for cancellation pursuant to such exchange and reclassification, the shares of Class A Common Stock so exchanged and reclassified shall no longer be deemed outstanding and, upon the effective date of such amendment, the holders of certificates representing each share of Class A Common Stock shall have, from and after such date, the rights of holders of one (1) share of Common Stock, $.01 par value per share, and each such holder shall have the right, upon surrender of such certificates, to receive from the Corporation a certificate or certificates representing the identical number of shares of the Corporation's Common Stock, $.01 par value per share, as set forth on such certificate or certificates so surrendered for cancellation.

IN WITNESS WHEREOF, CARRIAGE SERVICES, INC. has caused this Certificate of Amendment to be executed by MELVIN C. PAYNE, the Chief Executive Officer of the Corporation, this 7^th day of May, 2002.

		CARRIAGE SERVICES, INC.
		By:		/s/ MELVIN C. PAYNE MELVIN C. PAYNE, Chief Executive Officer

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Exhibit 3.1

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Exhibit 10.1

EMPLOYMENT AGREEMENT

THIS AGREEMENT, made effective as of the 7th day of May, 2002, is between CARRIAGE SERVICES, INC., a Delaware corporation (the "Company"), and GEORGE J. KLUG, a resident of Kingwood, Texas (the "Employee").

1. Employment Term. The Company hereby continues the employment of the Employee for a term commencing effective on the date first above written and, subject to earlier termination as provided in Section 7 hereof, continuing until December 31, 2004 (such term being herein referred to as the "term of this Agreement"). The Employee agrees to accept such employment and to perform the services specified herein, all upon the terms and conditions hereinafter stated.

2. Duties. The Employee shall serve the Company and shall report to, and be subject to the general direction and control of the Chief Executive Officer of the Company or any other officer designated by him. The Employee shall perform the management and administrative duties of Vice President of Information Systems and Chief Information Officer of the Company. It is anticipated that the Employee shall be responsible for the operation and management of Company's information systems, networks and communications infrastructure. The Employee shall also serve as Vice President of Information Systems and Chief Information Officer of any subsidiary of the Company as requested by the Company, and the Employee shall perform such other duties as are from time to time assigned to him by the Chief Executive Officer as are not inconsistent with the provisions hereof.

3. Extent of Service. The Employee shall devote his full business time and attention to the business of the Company, and, except as may be specifically permitted by the Company, shall not be engaged in any other business activity during the term of this Agreement. The foregoing shall not be construed as preventing the Employee from making passive investments in other businesses or enterprises, provided, however, that such investments will not require services on the part of the Employee which would in any way impair the performance of his duties under this Agreement.

4. Compensation. During the term of this Agreement, the Company shall pay the Employee a salary of $12,500.00 per full calendar month of service completed, appropriately prorated for partial months at the commencement and end of the term of this Agreement. The salary set forth herein shall be payable in bi-weekly installments in accordance with the payroll policies of the Company in effect from time to time during the term of this Agreement. The Company shall have the right to deduct from any payment of all compensation to the Employee hereunder (x) any federal, state or local taxes required by law to be withheld with respect to such payments, and (y) any other amounts specifically authorized to be withheld or deducted by the Employee.

5. Benefits. In addition to the base salary under Section 4, the Employee shall be entitled to participate in the following benefits during the term of this Agreement:

(a) Consideration for an annual performance-based bonus within the sole discretion of the Company, as may be recommended by the Chief Executive Officer and, if applicable, approved by the Compensation Committee of the Company's Board of Directors.

(b) Eligibility for consideration of incentive stock options under the terms of one or more of the Company's stock option plans.

6. Certain Additional Matters. The Employee agrees that at all times during the term of this Agreement and for the two-year period specified in Section 8:

(a) The Employee will not knowingly or intentionally do or say any act or thing which will or may impair, damage or destroy the goodwill and esteem for the Company of its suppliers, employees, patrons, customers and others who may at any time have or have had business relations with the Company.

(b) The Employee will not reveal to any third person any difference of opinion, if there be such at any time, between him and the management of the Company as to its personnel, policies or practices.

7. Termination.

(a) Death. If the Employee dies during the term of this Agreement and while in the employ of the Company, this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate except that the Company shall pay the Employee's estate that portion of the Employee's base salary under Section 4 accrued through the date on which the Employee's death occurred. Such payment of base salary to the Employee's estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not died.

(b) Disability. If during the term of this Agreement, the Employee shall be prevented from performing his duties hereunder by reason of disability, and such disability shall continue for a period of six months, then the Company may terminate this Agreement at any time after the expiration of such six-month period. For purposes of this Agreement, the Employee shall be deemed to have become disabled when the Company, upon the advice of a qualified physician, shall have determined that the Employee has become physically or mentally incapable (excluding infrequent and temporary absences due to ordinary illness) of performing his duties under this Agreement. In the event of a termination pursuant to this paragraph (b), the Company shall be relieved of all its obligations under this Agreement, except that the Company shall pay to the Employee (or his estate in the event of his subsequent death) the Employee's base salary under Section 4 through the date on which such termination shall have occurred, reduced during such period by the amount of any benefits received under any disability policy maintained by the Company. All such payments to the Employee or his estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not become disabled.

(c) Discharge for Cause. Prior to the end of the term of this Agreement, the Company may discharge the Employee for Cause and terminate this Agreement. In such case this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate other than to pay to the Employee (or his estate in the event of his subsequent death) that portion of the Employee's salary accrued through the date of termination. For purposes of this Agreement, the Company shall have "Cause" to discharge the Employee or terminate the Employee's employment hereunder upon (i) the Employee's commission of any felony or any other crime involving moral turpitude, (ii) the Employee's failure or refusal to perform all of his duties, obligations and agreements herein contained or imposed by law, including his fiduciary duties, to the reasonable satisfaction of the Company, (iii) the Employee's commission of acts amounting to gross negligence or willful misconduct to the material detriment of the Company, or (iv) the Employee's breach of any provision of this Agreement or uniformly applied provisions of the Company's employee handbook.

(d) Discharge Without Cause. Prior to the end of the term of this Agreement, the Company may discharge the Employee without Cause (as defined in paragraph (c) above) and terminate this Agreement. In such case this Agreement shall automatically terminate and the Company shall have no further obligation to the Employee or his estate, except that the Company shall continue to pay to the Employee (or his estate in the event of his subsequent death) the Employee's base salary under Section 4, and shall continue to include the Employee in any group health and hospitalization insurance program for a period of 12 months following the date of discharge. All such payments to the Employee or his estate shall be made in the same manner and at the same times as they would have been paid to the Employee had he not been discharged.

8. Restrictive Covenants. If the employment of the Employee is terminated for any reason (including voluntary resignation), then the Employee agrees that for a period of two (2) years thereafter, he will not, directly or indirectly:

(i) alone or for his own account, or as a officer, director, shareholder, partner, member, trustee, employee, consultant, advisor, agent or any other capacity of any corporation, partnership, joint venture, trust, or other business organization or entity, encourage, support, finance, be engaged in, interested in, or concerned with (x) any of the companies and entities described on Schedule I hereto, except to the extent that any activities in connection therewith are confined exclusively outside the Continental United States, or (y) any other business having an office or being conducted within a radius of fifty (50) miles of any funeral home, cemetery or other death care business owned or operated by the Company or any of its subsidiaries at the time of such termination;

(ii) induce or assist anyone in inducing in any way any employee of the Company or any of its subsidiaries to resign or sever his or her employment or to breach an employment contract with the Company or any such subsidiary; or

(iii) own, manage, advise, encourage, support, finance, operate, join, control, or participate in the ownership, management, operation, or control of or be connected in any manner with any business which is or may be in the funeral, mortuary, crematory, cemetery or burial insurance business or in any business related thereto (x) as part of any of the companies or entities listed on Schedule I, or (y) otherwise within a radius of fifty (50) miles of any funeral home, cemetery or other death care business owned or operated by the Company or any of its subsidiaries at the time of such termination.

Notwithstanding the foregoing, the above covenants shall not prohibit the passive ownership of not more than one percent (1%) of the outstanding voting securities of any entity. The foregoing covenants shall not be held invalid or unenforceable because of the scope of the territory or actions subject hereto or restricted hereby, or the period of time within which such covenants respectively are operative, but the maximum territory, the action subject to such covenants and the period of time they are enforceable are subject to any determination by a final judgment of any court which has jurisdiction over the parties and subject matter.

9. Confidential Information. The Employee acknowledges that in the course of his employment by the Company he has received and will continue to receive certain trade secrets, lists of customers, management methods, operating techniques, prospective acquisitions, employee lists, training manuals and procedures, personnel evaluation procedures, financial reports and other confidential information and knowledge concerning the business of the Company and its affiliates (hereinafter collectively referred to as "Information") which the Company desires to protect. The Employee understands that the Information is confidential and he agrees not to reveal the Information to anyone outside the Company so long as the confidential or secret nature of the Information shall continue. The Employee further agrees that he will at no time use the Information in competing with the Company. Upon termination of this Agreement, the Employee shall surrender to the Company all papers, documents, writings and other property produced by his or coming into his possession by or through his employment or relating to the Information and the Employee agrees that all such materials will at all times remain the property of the Company. The Employee acknowledges that a remedy at law for any breach or attempted breach of the foregoing provisions of this Section 9 or under Section 8 above will be inadequate, and agrees that the Company shall be entitled to specific performance and injunctive and other equitable relief in case of any such breach or attempted breach.

10. Notices. All notices, requests, consents and other communications under this Agreement shall be in writing and shall be deemed to have been delivered on the date personally delivered or three business days after the date mailed, postage prepaid, by certified mail, return receipt requested, or when sent by telex or telecopy and receipt is confirmed, if addressed to the respective parties as follows:

		If to the Employee:		Mr. George J. Klug 5918 Spring Lodge Kingwood, Texas 77345
		If to the Company:		Carriage Services, Inc. 1900 St. James Place, 4th Floor Houston, Texas 77056 Attn: President

Either party hereto may designate a different address by providing written notice of such new address to the other party hereto.

11. Severability. Whenever possible, each provision of this Agreement shall be interpreted in such manner as to be effective and valid under applicable law but if any provision of this Agreement shall be prohibited by or invalid under applicable law, such provision shall be ineffective to the extent of such provision or invalidity, without invalidating the remainder of such provision or the remaining provisions of this Agreement.

12. Assignment. This Agreement may not be assigned by the Employee. Neither the Employee nor his estate shall have any right to commute, encumber or dispose of any right to receive payments hereunder, it being agreed that such payments and the right thereto are nonassignable and nontransferable.

13. Binding Effect. Subject to the provisions of Section 12 of this Agreement, this Agreement shall be binding upon and inure to the benefit of the parties hereto, the Employee's heirs and personal representatives, and the successors and assigns of the Company.

14. Captions. The section and paragraph headings in this Agreement are for reference purposes only and shall not affect in any way the meaning or interpretation of this Agreement.

15. Complete Agreement. This Agreement represents the entire agreement between the parties concerning the subject hereof and supersedes all prior agreements and arrangements between the parties concerning the subject thereof.

16. Governing Law. A substantial portion of the Employee's duties under this Agreement shall be performed at the Company's corporate headquarters in Houston, Texas, and this Agreement has been substantially negotiated and is being executed and delivered in the State of Texas. This Agreement shall be construed and enforced in accordance with and governed by the laws of the State of Texas.

17. Counterparts. This Agreement may be executed in multiple original counterparts, each of which shall be deemed an original, but all of which together shall constitute one and the same instrument.

IN WITNESS WHEREOF, the parties hereto have executed this Agreement as of the date and year first above written.

		CARRIAGE SERVICES, INC.
		By:		/s/ MELVIN C. PAYNE MELVIN C. PAYNE, Chief Executive Officer
		CARRIAGE SERVICES, INC.
		/s/ GEORGE J. KLUG GEORGE J. KLUG

SCHEDULE I
TO
EMPLOYMENT AGREEMENT
(GEORGE J. KLUG)

1.: The following entities, together with all Affiliates thereof:

Service Corporation International
The Loewen Group Inc.
Stewart Enterprises, Inc.
Keystone Group Holdings, Inc.
Meridian Mortuary Group, Inc.
Cornerstone Family Services, Inc.
Prime Succession, Inc.
Hamilton Group, Inc.
Century Group
Saber Group
Thomas Pierce & Co.

For purposes of the foregoing, an "Affiliate" of an entity is a person that directly or indirectly controls, is under the control of or is under common control with such entity.

2.: Any new entity which may hereafter be established which acquires any combination of ten or more funeral homes and/or cemeteries from any of the entities described in 1 above.
3.: Any funeral home, cemetery or other death care enterprise which is managed by any entity described in 1 or 2 above.

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Exhibit 10.1

EMPLOYMENT AGREEMENT

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EXHIBIT 11.1

CARRIAGE SERVICES, INC.
COMPUTATION OF PER SHARE EARNINGS
(unaudited and in thousands, except per share data)

Earnings per share for the three and six month periods ended June 30, 2001 and 2002 is calculated based on the weighted average number of common and common equivalent shares outstanding during the period as prescribed by SFAS 128. The following table sets forth the computation of the basic and diluted earnings per share for the three and six month periods ended June 30, 2001 and 2002:

		Three months ended June 30,				Six months ended June 30,
		2001		2002		2001		2002
Net income		$	2,125	$	1,477	$	5,922	$	5,237
Preferred stock dividends			12		—		32		—

Net income available to common stockholders for basic EPS computation			2,113		1,477		5,890		5,237
Effect of dilutive securities			12		—		32		—

Net income available to common stockholders for diluted EPS computation		$	2,125	$	1,477	$	5,922	$	5,237

Weighted average number of common shares outstanding for basic EPS computation			16,592		16,942		16,549		16,918
Effect of dilutive securities:
	Stock options		898		516		683		540
	Assumed conversion of preferred stock		161		—		293		—

Weighted average number of common and common equivalent shares outstanding for diluted EPS computation			17,651		17,458		17,525		17,458

Basic earnings per common share		$	..13	$	..09	$	..36	$	1.07

Diluted earnings per common share		$	.12	$	.08	$	.34	$	1.03

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CARRIAGE SERVICES, INC. COMPUTATION OF PER SHARE EARNINGS (unaudited and in thousands, except per share data)

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EXHIBIT 12

CARRIAGE SERVICES, INC.
COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES
(unaudited and in thousands)

		1997		1998		1999		2000*			2001		Six Months Ended June 30, 2002
Fixed charges:
	Interest expense	$	5,889	$	9,720	$	17,358	$	20,705		$	19,585	$	9,697
	Amortization of capitalized expenses related to debt		200		150		242		1,026			759		380
	Rental expense		629		720		876		1,606			1,516		768

Total fixed charges before capitalized interest and preferred stock dividends			6,718		10,590		18,476		23,337			21,860		10,845
Capitalized interest			450		600		686		770			298		100

	Total fixed charges		7,168		11,190		19,162		24,107			22,158		10,945
Preferred stock dividends			1,627		1,082		167		88			46		—

	Total fixed charges plus preferred dividends		8,795		12,272		19,329		24,195			22,204		10,945

Earnings (loss) available for fixed charges:
Earnings (loss) before income taxes, extraordinary item and cumulative effect of change in accounting principle			8,217		17,023		19,361		(101,035	)		11,253		8,519
Add fixed charges before capitalized interest and preferred stock dividends			6,718		10,590		18,476		23,337			21,860		10,845

Total earnings (loss) available for fixed charges		$	14,935	$	27,613	$	37,837	$	(77,698	)	$	33,113	$	19,364

Ratio of earnings (loss) to fixed charges(1)			2.08		2.47		1.97		(3.22	)		1.49		1.77

Ratio of earnings (loss) to fixed charges plus dividends(1)			1.70		2.25		1.96		(3.21	)		1.49		1.77

(1): For purposes of computing the ratios of earnings to fixed charges and earnings to fixed charges plus dividends: (i) earnings consist of income before provision for income taxes plus fixed charges (excluding capitalized interest) and (ii) "fixed charges" consist of interest expensed and capitalized, amortization of debt discount and expense relating to indebtedness and the portion of rental expense representative of the interest factor attributable to leases for rental property. There were no dividends paid or accrued on the Company's Common Stock during the periods presented above.
*: Earnings were inadequate to cover fixed charges. The coverage deficiency was $101,893,000 for 2000.

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EXHIBIT 12

CARRIAGE SERVICES, INC. COMPUTATION OF RATIO OF EARNINGS TO FIXED CHARGES (unaudited and in thousands)