UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

(Mark One)

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

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

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.)
3040 Post Oak Boulevard, Suite 300, Houston, TX (Address of principal executive offices)		77056 (Zip Code)

     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 þ Noo

     Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes o Noo

     Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See the definitions of “large accelerated filer”, “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Securities Exchange Act of 1934.

Large accelerated filer o		Accelerated filer þ		Non-Accelerated filer o		Smaller reporting company o
				(Do not check if a smaller reporting company)

     Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes o No þ

     The number of shares of the registrant’s Common Stock, $.01 par value per share, outstanding as of August 4, 2010 was 17,705,417.

 

 

CARRIAGE SERVICES, INC.

INDEX

		Page
PART I — FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
Consolidated Balance Sheets as of December 31, 2009 and June 30, 2010			3
Consolidated Statements of Operations for the Three Months and Six Months ended June 30, 2009 and 2010			4
Consolidated Statements of Cash Flows for the Six Months ended June 30, 2009 and 2010			5
Condensed Notes to Consolidated Financial Statements			6
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations			20
Item 3. Quantitative and Qualitative Disclosures About Market Risk			28
Item 4. Controls and Procedures			28
PART II — OTHER INFORMATION
Item 1. Legal Proceedings			29
Item 1A. Risk Factors			29
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds			29
Item 3. Defaults Upon Senior Securities			29
Item 4. [Removed and Reserved]			29
Item 5. Other Information			29
Item 6. Exhibits			29
Signature
EX-11.1
EX-31.1
EX-31.2
EX-32

EX-11.1
EX-31.1
EX-31.2
EX-32

PART I — FINANCIAL INFORMATION

Item 1.		Financial Statements

CARRIAGE SERVICES, INC.

		December 31,				June 30,
		2009				2010
						(unaudited)
ASSETS
Current assets:
Cash and cash equivalents		$	3,616			$	1,338
Accounts receivable, net of allowance for bad debts of $751 in 2009 and $815 in 2010			15,177				14,233
Inventories and other current assets			14,683				12,567
Total current assets			33,476				28,138
Preneed cemetery trust investments			67,901				66,434
Preneed funeral trust investments			75,200				69,227
Preneed receivables, net of allowance for bad debts of $1,158 in 2009 and $1,148 in 2010			16,782				23,843
Receivables from preneed funeral trusts			14,629				22,794
Property, plant and equipment, net of accumulated depreciation of $66,201 in 2009 and $68,387 in 2010			124,800				125,517
Cemetery property			71,661				71,364
Goodwill			166,930				181,502
Deferred charges and other non-current assets			7,536				8,747
Cemetery perpetual care trust investments			40,383				40,145
Total assets		$	619,298			$	637,711
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of senior long-term debt and capital lease obligations		$	558			$	597
Accounts payable and other liabilities			6,877				8,973
Accrued liabilities			14,037				15,027
Total current liabilities			21,472				24,597
Senior long-term debt, net of current portion			131,898				131,981
Bank credit facility			—				3,200
Convertible junior subordinated debentures due in 2029 to an affiliate			93,750				92,858
Obligations under capital leases, net of current portion			4,418				4,352
Deferred preneed cemetery revenue			49,176				48,895
Deferred preneed funeral revenue			26,658				41,454
Deferred preneed cemetery receipts held in trust			67,901				66,434
Deferred preneed funeral receipts held in trust			75,200				69,227
Care trusts’ corpus			40,403				39,985
Total liabilities			510,876				522,983
Commitments and contingencies
Redeemable preferred stock			200				200
Stockholders’ equity:
Common Stock, $.01 par value; 80,000,000 shares authorized; 20,411,000 and 20,794,000 shares issued at December 31, 2009 and June 30, 2010, respectively			204				208
Additional paid-in capital			197,034				198,270
Accumulated deficit			(79,016	)			(73,950	)
Treasury stock, at cost; 3,109,000 shares at December 31, 2009 and June 30, 2010			(10,000	)			(10,000	)
Total stockholders’ equity			108,222				114,528
Total liabilities and stockholders’ equity		$	619,298			$	637,711

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC.

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Revenues:
Funeral		$	31,796			$	32,435			$	66,636			$	68,525
Cemetery			12,754				12,082				23,717				22,839
			44,550				44,517				90,353				91,364
Field costs and expenses:
Funeral			20,452				20,754				41,753				43,089
Cemetery			8,548				7,854				16,507				15,133
Depreciation and amortization			2,385				2,127				4,573				4,233
Regional and unallocated funeral and cemetery costs			1,364				1,750				3,193				3,359
			32,749				32,485				66,026				65,814
Gross profit			11,801				12,032				24,327				25,550
Corporate costs and expenses:
General and administrative costs and expenses			3,533				3,410				7,091				7,567
Home office depreciation and amortization			410				361				826				724
			3,943				3,771				7,917				8,291
Operating income			7,858				8,261				16,410				17,259
Interest expense			(4,660	)			(4,572	)			(9,259	)			(9,125	)
Interest income and other, net			220				252				223				469
Total interest and other			(4,440	)			(4,320	)			(9,036	)			(8,656	)
Income before income taxes			3,418				3,941				7,374				8,603
Provision for income taxes			(1,384	)			(1,642	)			(2,986	)			(3,530	)
Net income			2,034				2,299				4,388				5,073
Preferred stock dividend			4				3				7				7
Net income available to common stockholders		$	2,030			$	2,296			$	4,381			$	5,066
Basic earnings per common share:		$	0.12			$	0.13			$	0.25			$	0.29
Diluted earnings per common share:		$	0.12			$	0.13			$	0.25			$	0.29
Weighted average number of common and common equivalent shares outstanding:
Basic			17,119				17,504				17,235				17,472
Diluted			17,379				17,752				17,410				17,707

The accompanying condensed notes are an integral part of these Consolidated Financial Statements.

CARRIAGE SERVICES, INC

		For the six months ended June 30,
		2009				2010
Cash flows from operating activities:
Net income		$	4,388			$	5,073
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			5,399				4,956
Amortization of deferred financing costs			400				362
Gain on purchase of convertible junior subordinated debentures			—				(316	)
Provision for losses on accounts receivable			1,954				1,903
Stock-based compensation expense			907				949
Deferred income taxes			2,987				765
Other			(108	)			(149	)
Changes in operating assets and liabilities that provided (required) cash:
Accounts and preneed receivables			(3,327	)			(1,306	)
Inventories and other current assets			(21	)			88
Preneed funeral and cemetery trust investments			(2,401	)			(837	)
Accounts payable and accrued liabilities			(2,791	)			2,485
Litigation settlement			(3,300	)			—
Deferred preneed funeral and cemetery revenue			248				601
Deferred preneed funeral and cemetery receipts held in trust			2,616				(57	)
Net cash provided by operating activities			6,951				14,517
Cash flows from investing activities:
Acquisitions			—				(15,519	)
Net proceeds from the sale of assets			655				400
Capital expenditures			(3,812	)			(4,387	)
Net cash used in investing activities			(3,157	)			(19,506	)
Cash flows from financing activities:
Net borrowings under bank credit facility			—				3,200
Payments on senior long-term debt and obligations under capital leases			(413	)			(212	)
Proceeds from the exercise of stock options and employee stock purchase plan			152				348
Purchase of treasury stock			(2,841	)			—
Dividend on redeemable preferred stock			(7	)			(7	)
Payment of loan fees			(94	)			—
Purchase of convertible junior subordinated debentures			—				(576	)
Other financing costs			—				(42	)
Net cash provided by (used in) financing activities			(3,203	)			2,711
Net (decrease) increase in cash and cash equivalents			591				(2,278	)
Cash and cash equivalents at beginning of period			5,007				3,616
Cash and cash equivalents at end of period		$	5,598			$	1,338

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 AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     The Company

     Carriage Services, Inc. (“Carriage” or the “Company”) is a leading provider of deathcare services and merchandise in the United States. As of June 30, 2010, the Company owned and operated 145 funeral homes in 25 states and 33 cemeteries in 12 states.

     Principles of Consolidation

     The accompanying Consolidated Financial Statements include the Company and its subsidiaries. All significant intercompany balances and transactions have been eliminated.

     Interim Condensed Disclosures

     The information for the three and six month periods ended June 30, 2009 and 2010 is unaudited, but in the opinion of management, reflects all adjustments which are normal, recurring and necessary for a fair presentation of financial position and results of operations as of and for the interim periods presented. Certain information and footnote disclosures, normally included in annual financial statements, have been condensed or omitted. 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, 2009 and should be read in conjunction therewith.

     Cash and Cash Equivalents

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

     Use of Estimates

     The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate our estimates and judgments, including those related to revenue recognition, realization of accounts receivable, goodwill, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, as there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.

     Business Combinations

     The Company’s growth strategy includes the execution of its Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. The Company assesses acquisition candidates using six strategic ranking criteria and to differentiate the pricing the Company is willing to pay. Those criteria are:

	•		Size of business;
	•		Size of market;
	•		Competitive standing;
	•		Demographics;
	•		Strength of brand; and
	•		Barriers to entry.

     We recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair values as of that date. Goodwill is measured as a residual of the fair values at acquisition date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred. The Company did not acquire any businesses during the six months ended June 30, 2009. Furthermore, no acquisitions were made during the first quarter of 2010. See Note 3 to the Consolidated Financial Statements for information pertaining to the acquisitions made during the three months ended June 30, 2010.

     Stock Plans and Stock-Based Compensation

     The Company has stock-based employee and director compensation plans in the form of restricted stock, performance units, stock options and employee stock purchase plans, which are described in more detail in Note 16 to the Consolidated Financial Statements in our Form 10-K for the year ended December 31, 2009. The Company recognizes compensation expense in an amount equal to the fair value of the share-based awards issued over the period of vesting. Fair value is determined on the date of the grant. The fair value of options or awards containing options is determined using the Black-Scholes valuation model. See Note 12 to the Consolidated Financial Statements herein for additional information on the Company’s stock-based compensation plans.

     Computation of Earnings Per Common Share

     Basic earnings per share are computed using the weighted average number of common shares outstanding during the period. Diluted earnings per share are computed using the weighted average number of common and dilutive common equivalent shares outstanding during the period. Dilutive common equivalent shares consist of stock options.

     Effective January 1, 2009, the accounting changed for unvested share-based payment awards included in the calculation of earnings per share. Share-based awards that contain nonforfeitable rights to dividends or dividend equivalents, whether paid or unpaid, are recognized as participating securities and included in the computation of both basic and diluted earnings per share. Our grants of restricted stock awards to our employees and directors are considered participating securities and we have prepared our earnings per share calculations to include outstanding unvested restricted stock awards in both the basic and diluted weighted average shares outstanding calculation. For the three and six month periods ended June 30, 2009 and 2010, there was no material impact to basic and diluted earnings per share as presented in Exhibit 11.1.

     Preneed Funeral and Cemetery Trust Funds

     The Company’s preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities. In the case of preneed trusts, the customers are the legal beneficiaries. In the case of perpetual care trusts, the Company does not have a right to access the corpus in the perpetual care trusts. For these reasons, the Company has recognized financial interests of third parties in the trust funds in our financial statements as Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus. The investments of such trust funds are classified as available-for-sale and are reported at fair market value; therefore, the unrealized gains and losses, as well as accumulated and undistributed income and realized gains and losses are recorded to Deferred preneed funeral and cemetery receipts held in trust and Care trusts’ corpus in the Company’s Consolidated Balance Sheets. The Company’s future obligations to deliver merchandise and services are reported at estimated settlement amounts. Preneed funeral and cemetery trust investments are reduced by the trust investment earnings that we have been allowed to withdraw in certain states prior to maturity. These earnings, along with preneed contract collections not required to be placed in trust, are recorded in Deferred preneed funeral revenue and Deferred preneed cemetery revenue until the service is performed or the merchandise is delivered.

     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 funds is distributed to Carriage and used to provide care and maintenance for the cemeteries and mausoleums. Such trust fund income is recognized as revenue when realized by the trust and distributable to the Company. The Company is restricted from withdrawing any of the principal balances of these funds.

Fair Value Measurements

     We define fair value as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date for items that are recognized or disclosed at fair value in the financial statements on a recurring basis (at least annually). We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date. Additional required disclosures are provided in Note 9 to the Consolidated Financial Statements. We have not elected to measure any additional financial instruments and certain other items at fair value that are not currently required to be measured at fair value.

     New guidance was issued during early 2009 on how to determine the fair value of assets and liabilities in an environment where the volume and level of activity for the asset or liability have significantly decreased. The new guidance reemphasizes that the objective of a fair value measurement remains an exit price. This guidance is effective for interim reporting periods ending after June 15, 2009 and it has had no effect on our financial position or results of operations.

     New guidance was also issued during early 2009 that modifies the requirements for recognizing other-than-temporary impairment on debt securities and significantly changes the impairment model for such securities. The Company considers an impairment of debt and equity securities other-than-temporary unless (a) the investor has the ability and intent to hold an investment and (b) evidence indicating the cost of the investment is recoverable before the Company is more likely than not required to sell the investment. If impairment is indicated, then an adjustment will be made to reduce the carrying amount to fair

value. This new guidance also modified the presentation of other-than-temporary impairment losses and increased related disclosure requirements. This change is effective for interim reporting periods ending after June 15, 2009 and it has had no effect on our financial position or results of operations.

     In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in fair market values related to outstanding debts and changes in the values of securities associated with the preneed and perpetual care trusts. Management is actively involved in monitoring exposure to market risk and developing and utilizing appropriate risk management techniques when appropriate and when available for a reasonable price. The 7⅞% Senior Notes were issued to the public at par and are carried at a cost of $130 million. At June 30, 2010, these securities were typically trading at a price of approximately $98.00, indicating a fair market value of approximately $127.4 million. The convertible junior subordinated debentures, payable to Carriage Services Capital Trust, pay interest at the fixed rate of 7% and are carried on our Consolidated Balance Sheets at a cost of approximately $92.9 million. The fair value of these securities is estimated to be $60.5 million at June 30, 2010 based on available broker quotes of the corresponding preferred securities issued by the Trust.

     Accounting for Income Tax Uncertainties

     The Company analyzes tax benefits for uncertain tax positions and how they are to be recognized, measured, and derecognized in financial statements; provides certain disclosures of uncertain tax matters; and specifies how reserves for uncertain tax positions should be classified on the Consolidated Balance Sheets. The Company has reviewed its income tax positions and identified certain tax deductions, primarily related to business acquisitions that are not certain. Our policy with respect to potential penalties and interest is to record them as “Other” expense and “Interest” expense, respectively. The entire balance of unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. The Company does not anticipate a significant increase or decrease in its unrecognized tax benefits during the next six months.

     The Company has unrecognized tax benefits for Federal and State income tax purposes totaling approximately $6.9 million as of June 30, 2010, resulting from deductions totaling $19 million on federal returns and $18 million on various state returns not considered more likely than not to be recognized. The Company has federal and state net operating loss carryforwards offsetting some of those deductions and has accounted for these unrecognized tax benefits by reducing the deferred income tax asset related to the net operating loss carryforwards by the amount of these unrecognized deductions. For the federal and certain states with net operating loss carryforwards that are inadequate to offset these deductions, the Company has increased its taxes payable.

     The entire balance of unrecognized tax benefits, if recognized, would affect the Company’s effective tax rate. The effects of recognizing the tax benefits of uncertain tax positions for the period ended June 30, 2010 was not material to the Company’s operations. The Company does not anticipate a significant increase or decrease in its unrecognized tax benefits during the next six months. The amount of penalty and interest recognized in the Consolidated Balance Sheets and Consolidated Statement of Operations was not material for the period ended June 30, 2010.

     The Company’s federal income tax returns for 2001 through 2009 are open tax years that may be examined by the Internal Revenue Service. The Company’s unrecognized state tax benefits are related to state returns open from 2002 through 2009.

          Variable Interest Entities

     Effective January 1, 2010, new guidance amended the current practice of accounting for Variable Interest Entities (VIE) requiring an enterprise to perform an analysis to determine whether the enterprise’s variable interest(s) give it a controlling interest in a VIE. This analysis identifies the primary beneficiary of a VIE as the enterprise that has both the power to direct the activities of a VIE that most significantly impact the entity’s economic performance and the obligation to absorb losses of the entity that could potentially be significant to the VIE or the right to receive benefits from the entity that could potentially be significant to the VIE. This new guidance did not have a material impact on our Consolidated Financial Statements. Also refer to Preneed Funeral and Cemetery Trust Funds in Note 1 to the Consolidated Financial Statements herein for additional information on the Company’s VIE entities.

2. RECENTLY ISSUED ACCOUNTING STANDARDS

     Fair Value Measurements

     In January 2010, new guidance was issued which requires additional fair value disclosures to disclose transfers in and out of Levels 1 and 2 and requires gross presentation of purchases, sales, issuances and settlements in the Level 3 reconciliation of the three-tier fair value hierarchy. This guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements related to Level 3 activity. Those disclosures are effective for fiscal years beginning after December 15, 2010 and for interim periods within those fiscal years. The disclosure requirements on transfers between Levels 1 and 2 is effective for the Company as of March 31, 2010. The Company currently does not have any assets that have fair values determined by Level 3 inputs and no liabilities measured at fair value. See Note 9 to the Consolidated Financial Statements herein for additional information on the Company’s fair value disclosures.

3. ACQUISITIONS

     Our growth strategy includes the execution of our Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We assess acquisition candidates using six strategic ranking criteria and to differentiate the pricing we are willing to pay. Those criteria are:

	•		Size of business
	•		Size of market
	•		Competitive standing
	•		Demographics
	•		Strength of brand
	•		Barriers to entry

     During the second quarter of 2010, the Company completed four acquisitions. The consideration paid for those businesses was $15.5 million in cash and the assumption of $0.6 million of liabilities and debt. The company drew $3.2 million from its bank credit facility to buy these businesses. The Company acquired substantially all the assets and assumed certain operating liabilities, including obligations associated with existing preneed contracts. The assets and liabilities were recorded at fair value and included goodwill. The results of the acquired business are included in the Company’s results from the date of acquisition although, since these acquisitions were acquired late in the quarter, the impact to the second quarter operating results was immaterial. Selected information on the acquisitions follows (in millions):

						Assets Acquired
						(Excluding								Liabilities and
Acquisition Date		Type of Business		Market		Goodwill)				Goodwill Recorded				Debt Assumed
April 2010		Cemetery		Kalispell, MT		$	1.2				—				—
June 2010		Two Funeral Homes		Columbia, MT		$	1.0			$	0.2				—
June 2010		Funeral Home		Huntington Beach, CA		$	0.1			$	4.7			$	0.3
June 2010		Five Funeral Homes		Naples, FL		$	4.8			$	9.7			$	0.3

     The effect of the acquisitions on the Consolidated Balance Sheets at June 30, 2010 was as follows (in thousands):

Current assets		$	144
Property, plant & equipment			1,394
Goodwill			14,572
Preneed trust investments			5,562
Current liabilities			(298	)
Assumed debt			(293	)
Deferred preneed funeral revenue held in trust			(5,562	)
		$	15,519

4. GOODWILL

     Many of the acquired funeral homes, former owners and staff 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 excess of the purchase price over the fair value of net identifiable assets acquired, as determined by management in business acquisition transactions accounted for as purchases, is recorded as goodwill.

     The following table presents the changes in goodwill in the accompanying Consolidated Balance Sheet (in thousands):

		June 30, 2010
Goodwill at beginning of year		$	166,930
Acquisitions			14,572
Goodwill at end of period		$	181,502

5. PRENEED TRUST INVESTMENTS

     Preneed Cemetery Trust Investments

     Preneed cemetery trust investments represent trust fund assets that the Company will withdraw when the merchandise or services are provided. The components of Preneed cemetery trust investments in our Consolidated Balance Sheet at December 31, 2009 and June 30, 2010 are as follows (in thousands):

		December 31,				June 30,
		2009				2010
Preneed cemetery trust investments		$	67,901			$	68,234
Less: allowance for contract cancellation			—				(1,800	)
		$	67,901			$	66,434

     Upon cancellation of a preneed cemetery contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, the Company assesses whether it is responsible for replenishing the corpus of the trust, in which case a loss provision would be recorded.

     The cost and fair market values associated with preneed cemetery trust investments at June 30, 2010 are detailed below (in thousands). The Company determines whether or not the assets in the preneed cemetery trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded in Deferred preneed cemetery receipts held in trust. There will be no impact on earnings unless and until such time that this asset is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.

						Unrealized				Unrealized
		Cost				Gains				Losses				Fair Market Value
Cash and money market accounts		$	1,842			$	—			$	—			$	1,842
Fixed income securities:
Corporate debt			29,014				5,917				(439	)			34,492
Other			3				—				—				3
Common stock			25,681				2,807				(795	)			27,693
Mutual funds:
Equity			3,462				—				(3	)			3,459
Trust securities		$	60,002			$	8,724			$	(1,237	)		$	67,489
Accrued investment income		$	745											$	745
Preneed cemetery trust investments														$	68,234
Fair market value as a percentage of cost															113.7	%

     The estimated maturities of the fixed income securities included above are as follows (in thousands):

Due in one year or less		$	—
Due in one to five years			2,938
Due in five to ten years			6,222
Thereafter			25,335
		$	34,495

     Preneed cemetery trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2009 and 2010 are as follows (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Investment income		$	1,002			$	756			$	1,341			$	1,579
Realized gains			262				5,588				317				5,756
Realized losses			(2,359	)			(696	)			(3,557	)			(706	)
Expenses and taxes			(156	)			(196	)			(243	)			(319	)
(Increase) decrease in deferred preneed cemetery receipts held in trust			1,251				(5,452	)			2,142				(6,310	)
		$	—			$	—			$	—			$	—

     Purchases and sales of investments in the preneed cemetery trusts were as follows (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Purchases		$	9,727			$	30,869			$	20,773			$	32,369
Sales			8,908				29,687				17,368				31,186

     Preneed Funeral Trust Investments

     Preneed funeral trust investments represent trust fund assets that the Company expects to withdraw when the services and merchandise are provided. Preneed funeral contracts are secured by funds paid by the customer to the Company. Preneed funeral trust investments are reduced by the trust earnings the Company has been allowed to withdraw prior to performance by the Company and amounts received from customers that are not required to be deposited into trust, pursuant to various state laws. The components of Preneed funeral trust investments in our Consolidated Balance Sheet at December 31, 2009 and June 30, 2010 are as follows (in thousands):

		December 31,				June 30,
		2009				2010
Preneed funeral trust investments		$	75,200			$	71,168
Less: allowance for contract cancellation			—				(1,941	)
		$	75,200			$	69,227

     Upon cancellation of a preneed funeral contract, a customer is generally entitled to receive a refund of the corpus and some or all of the earnings held in trust. In certain jurisdictions, the Company is obligated to fund any shortfall if the amounts deposited by the customer exceed the funds in trust, including some or all investment income. As a result, when realized or unrealized losses of a trust result in the trust being under-funded, the Company assesses whether it is responsible for replenishing the corpus of the trust, in which case a loss provision would be recorded.

     The cost and fair market values associated with preneed funeral trust investments at June 30, 2010 are detailed on the next page (in thousands). The Company determines whether or not the assets in the preneed funeral trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded as a reduction to Deferred preneed funeral receipts held in trust. There will be no impact on earnings unless and until such time that this asset is withdrawn from the trust in accordance with state regulations at an amount that is less than its original basis.

						Unrealized				Unrealized				Fair Market
		Cost				Gains				Losses				Value
Cash and money market accounts		$	11,091			$	—			$	—			$	11,091
Fixed income securities:
U.S. Treasury debt			5,351				171				—				5,522
U.S. Agency obligations			694				46				—				740
Corporate debt			20,673				4,695				(207	)			25,161
Common stock			16,496				2,883				(386	)			18,993
Mutual funds:
Equity			6,252				1				(1,012	)			5,241
Fixed income			4,152				249				(56	)			4,345
Trust securities		$	64,709			$	8,045			$	(1,661	)		$	71,093
Accrued investment income		$	75											$	75
Preneed funeral trust investments														$	71,168
Fair market value as a percentage of cost															110	%

     The estimated maturities of the fixed income securities included above are as follows (in thousands):

Due in one year or less		$	1,461
Due in one to five years			6,217
Due in five to ten years			4,377
Thereafter			19,368
		$	31,423

     Preneed funeral trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2009 and 2010 are as follows (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Investment income		$	876			$	816			$	1,199			$	1,580
Realized gains			468				4,838				697				5,176
Realized losses			(2,721	)			(409	)			(5,607	)			(476	)
Expenses and taxes			(220	)			(323	)			(407	)			(508	)
(Increase) decrease in deferred preneed funeral receipts held in trust			1,597				(4,922	)			4,118				(5,772	)
		$	—			$	—			$	—			$	—

Purchases and sales of investments in the preneed funeral trusts were as follows (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Purchases		$	8,808			$	306			$	22,008			$	2,452
Sales			8,032				14				21,774				2,774

6. RECEIVABLES FROM PRENEED FUNERAL TRUSTS

     The receivables from preneed funeral trusts represent assets in trusts which are controlled and operated by third parties in which the Company does not have a controlling financial interest (less than 50%) in the trust assets. The Company accounts for these investments at cost (in thousands).

		December 31,				June 30,
		2009				2010
Preneed funeral trust funds		$	16,329			$	23,499
Less: allowance for contract cancellation			(1,700	)			(705	)
		$	14,629			$	22,794

7. CONTRACTS SECURED BY INSURANCE

     Certain preneed funeral contracts are secured by life insurance contracts. Generally, the proceeds of the life insurance policies have been assigned to the Company and will be paid upon the death of the insured. The proceeds will be used to satisfy the beneficiary’s obligations under the preneed contract for services and merchandise. Preneed funeral contracts secured by insurance totaled $195.0 million and $200.2 million at December 31, 2009 and June 30, 2010, respectively, and are not included in the Company’s Consolidated Balance Sheets.

8. CEMETERY PERPETUAL CARE TRUST INVESTMENTS

     Cemetery Care trusts’ corpus on the Consolidated Balance Sheet represent the corpus of those trusts plus undistributed income. The components of Cemetery Care trusts’ corpus as of December 31, 2009 and June 30, 2010 are as follows (in thousands):

		December 31,				June 30,
		2009				2010
Trust assets, at fair market value		$	40,383			$	40,145
Pending withdrawals of income from trust			—				(160	)
Obligations due to trust			20				—
Care trusts’ corpus		$	40,403			$	39,985

     The Company is required by state law to pay a portion of the proceeds from the sale of cemetery property interment rights into perpetual care trust funds. The following table reflects the cost and fair market values associated with the trust investments held in perpetual care trust funds at June 30, 2010 (in thousands). The Company determines whether or not the assets in the cemetery perpetual care trusts have an other-than-temporary impairment on a security-by-security basis. This assessment is made based upon a number of criteria, including the length of time a security has been in a loss position, changes in market conditions and concerns related to the specific issuer. If a loss is considered to be other-than-temporary, the cost basis of the security is adjusted downward to its fair market value. Any reduction in the cost basis due to an other-than-temporary impairment is recorded as a reduction to Care trusts’ corpus.

						Unrealized				Unrealized				Fair Market
		Cost				Gains				Losses				Value
Cash and money market accounts		$	1,285			$	—			$	—			$	1,285
Fixed income securities:
Corporate debt			21,053				4,139				(373	)			24,819
Common stock			13,657				866				(1,008	)			13,515
Mutual funds:
Equity			64				—				(30	)			34
Fixed income			15				—				(4	)			11
Trust securities		$	36,074			$	5,005			$	(1,415	)		$	39,664
Accrued investment income		$	481											$	481
Cemetery perpetual care trust investments														$	40,145
Fair market value as a percentage of cost															111.3	%

     The estimated maturities of the fixed income securities included above are as follows (in thousands):

Due in one year or less		$	—
Due in one to five years			2,687
Due in five to ten years			5,153
Thereafter			16,979
		$	24,819

     Perpetual care trust investment security transactions recorded in Interest income and other, net in the Consolidated Statements of Operations (unaudited) for the three and six months ended June 30, 2009 and 2010 are as follows (in thousands).

		For the three months								For the six months
		ended June 30,								ended June 30
		2009				2010				2009				2010
Undistributable realized gains		$	156			$	2,305			$	179			$	2,542
Undistributable realized losses			(1,307	)			(722	)			(1,967	)			(738	)
Decrease (increase) in Care trusts’ corpus			1,151				(1,583	)			1,788				(1,804	)
		$	—			$	—			$	—			$	—

     Perpetual care trust investment security transactions recorded in Cemetery revenue for the three and six months ended June 30, 2009 and 2010 are as follows (in thousands).

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Investment income		$	628			$	603			$	1,167			$	1,233
Realized gains			—				490				156				850
Expenses			(44	)			—				(94	)			(21	)
Total		$	584			$	1,093			$	1,229			$	2,062

     Purchases and sales of investments in the perpetual care trusts were as follows (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Purchases		$	7,045			$	19,794			$	15,250			$	23,074
Sales			6,548				18,569				13,875				23,562

9. FAIR VALUE MEASUREMENTS

     Fair value is defined as the price that would be received in the sale of an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date applicable for items that are recognized or disclosed at fair value in the financial statements on a recurring basis. We disclose the extent to which fair value is used to measure financial assets and liabilities, the inputs utilized in calculating valuation measurements, and the effect of the measurement of significant unobservable inputs on earnings, or changes in net assets, as of the measurement date.

     The Company evaluated its financial assets and liabilities for those financial assets and liabilities that met the criteria of the disclosure requirements and fair value framework. The Company identified investments in fixed income securities, common stock and mutual funds presented within the preneed and perpetual trust investments categories on the Consolidated Balance Sheets as having met such criteria. The following three-level valuation hierarchy based upon the transparency of inputs is utilized in the measurement and valuation of financial assets or liabilities as of the measurement date:

	•		Level 1—Fair value of securities based on unadjusted quoted prices for identical assets or liabilities in active markets. Our investments classified as Level 1 securities include common stock, certain fixed income securities, and most equity and fixed income mutual funds;
	•		Level 2—Fair value of securities estimated based on quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, and inputs other than quoted market prices that are observable or that can be corroborated by observable market data by correlation. These inputs include interest rates, yield curves, credit risk, prepayment speeds, rating and tax-exempt status. Our investments classified as Level 2 securities include corporate, U.S. agency and state obligation fixed income securities, and certain mutual funds; and
	•		Level 3—Unobservable inputs based upon the reporting entity’s internally developed assumptions which market participants would use in pricing the asset or liability. As of June 30, 2010, the Company did not have any assets that had fair values determined by Level 3 inputs and no liabilities measured at fair value.

     The Company accounts for its investments as available-for-sale and measures them at fair value under standards of financial accounting and reporting for investments in equity instruments that have readily determinable fair values and for all investments in debt securities.

     The table below presents information about our assets measured at fair value on a recurring basis and summarizes the fair value hierarchy of the valuation techniques utilized by us to determine the fair values as of June 30, 2010 (in thousands). Certain fixed income and other securities are reported at fair value using Level 2 inputs. For these securities, the Company uses pricing services and dealer quotes. As of June 30, 2010, the Company did not have any liabilities measured at fair value.

		Quoted Prices in				Significant Other				Significant
		Active Markets				Observable Inputs				Unobservable Inputs
		(Level 1)				(Level 2)				(Level 3)				June 30, 2010
Assets:
Fixed income securities:
U.S. Treasury debt		$	5,522			$	—			$	—			$	5,522
Mortgage backed securities			—				743				—				743
Corporate debt			—				84,472				—				84,472
Common stock			60,201				—				—
Mutual funds:															60,201
Equity			8,734				—				—				8,734
Fixed income			—				4,356				—				4,356
Total Assets		$	74,457			$	89,571			$	—			$	164,028

     There were no significant transfers between Levels 1 and 2 for the three and six months ended June 30, 2010.

10. LONG-TERM DEBT

     The Company has outstanding a principal amount of $130 million of 7⅞% unsecured Senior Notes, due in 2015, with interest payable semi-annually. The Company also has a senior secured revolving credit facility (the “credit facility”) for which borrowings bear interest at prime or LIBOR options with the current LIBOR option set at LIBOR plus 350 basis points and is collateralized by all personal property and by funeral home real property in certain states. At June 30, 2010, $3.2 million was drawn under the credit facility. Additionally, $0.1 million in letters of credit were issued and outstanding under the credit facility at June 30, 2010. Interest is payable quarterly. The credit facility matures on November 4, 2012.

     Carriage, the parent entity, has no material assets or operations independent of its subsidiaries. All assets and operations are held and conducted by subsidiaries, each of which (except for Carriage Services Capital Trust, which is a single purpose entity that holds our debentures issued in connection with the Company’s TIDES convertible preferred securities) have fully and unconditionally guaranteed the Company’s obligations under the 7⅞% Senior Notes. Additionally, the Company does not currently have any significant restrictions on its ability to receive dividends or loans from any subsidiary guarantor under the 7⅞% Senior Notes. In June 2010, the Company repurchased 17,850 shares of these TIDES for approximately $0.6 million and recorded a gain of $0.3 million.

     The Company was in compliance with the covenants contained in the credit facility and the Senior Notes as of June 30, 2009 and 2010.

11. COMMITMENTS AND CONTINGENCIES

     Litigation

     We are a party to various litigation matters and proceedings. For each of our outstanding legal matters, we evaluate the merits of the case, our exposure to the matter, possible legal or settlement strategies, and the likelihood of an unfavorable outcome. We intend to defend ourselves in the lawsuits described herein; however, if we determine that an unfavorable outcome is probable and can be reasonably estimated, we establish the necessary accruals. We hold certain insurance policies that may reduce cash outflows with respect to an adverse outcome of certain of these litigation matters.

     Leathermon, et al. v. Grandview Memorial Gardens, Inc., et al., United States District Court, Southern District of Indiana, Case No. 4:07-cv-137. On August 17, 2007, five plaintiffs filed a putative class action against the current and past owners of Grandview Cemetery in Madison, Indiana—including the Carriage subsidiaries that owned the cemetery from January 1997 until February 2001—on behalf of all individuals who purchased cemetery and burial goods and services at Grandview Cemetery. Plaintiffs claim that the cemetery owners performed burials negligently, breached Plaintiffs’ contracts, and made misrepresentations regarding the cemetery. The Plaintiffs also allege that the claims occurred prior, during and after the Company owned the cemetery. On October 15, 2007, the case was removed from Jefferson County Circuit Court, Indiana to the Southern District of Indiana. On April 24, 2009, shortly before Defendants had been scheduled to file their briefs in opposition to Plaintiffs’ motion for class certification, Plaintiffs moved to amend their complaint to add new class representatives and claims, while also seeking to abandon other claims. The Company, as well as several other Defendants, opposed Plaintiffs’ motion to amend their complaint and add parties. In April 2009, two Defendants moved to disqualify Plaintiffs’ counsel from further representing Plaintiffs in this action. On March 31, 2010, the Court granted the Defendants’ motion to disqualify Plaintiffs’ counsel. In that order, the Court gave Plaintiffs sixty (60) days within which to retain new counsel. In addition, all discovery has been stayed and all pending motions including Plaintiffs’ motion for leave to file an amended complaint and Plaintiffs’ motion

for class certification were dismissed without prejudice to re-file with leave of Court upon retention of new counsel. On May 6, 2010, Plaintiffs filed a petition for writ of mandamus with the Seventh Circuit Court of Appeals seeking relief from the trial court’s order of disqualification of counsel. On May 19, 2010, the Defendants responded to the petition of mandamus. On July 8, 2010, the Seventh Circuit denied Plaintiffs’ petition for writ of mandamus. Thus, pursuant to the trial court’s order, the Plaintiffs have sixty (60) days from July 8, 2010 in which to retain new counsel to prosecute this action on their behalf. Should Plaintiffs retain new counsel, Carriage intends to defend this action vigorously. Because the lawsuit is in its preliminary stages, we are unable to evaluate the likelihood of an unfavorable outcome to the Company or to estimate the amount or range of any potential loss, if any, at this time.

     Fuqua, et al., v. Lytle-Gans-Andrews Funeral Home, et al., United States District Court, Southern District of Indiana, Case No. 4:08-cv-00134-DFH-WGH. On July 29, 2008, Kenneth R. Fuqua, II and Elizabeth R. Fuqua filed an action against several Defendants in Indiana Circuit Court, Jefferson County, Indiana, alleging improper handling of remains and improper burial practices by Lytle-Gans-Andrews Funeral Home and Grandview Memorial Gardens, Inc. Carriage has denied these allegations because the burial occurred before Carriage owned Lytle-Gans-Andrews Funeral Home and Grandview Memorial Gardens, Inc. This matter has been resolved and on July 21, 2010, the Court entered an order dismissing all of Plaintiffs’ claims against Carriage.

     Kendall v. Carriage Funeral Holdings, Inc., et al., Indiana Circuit Court, Jefferson County, Indiana, Case No. 39C01-0707-CT-386 (filed July 27, 2007); Lawson v. Carriage Funeral Holdings, Inc., Indiana Circuit Court, Jefferson County, Indiana, Case No. 39C01-0708-CT-429 (filed August 17, 2007); Wiley, et al. v. Carriage Funeral Holdings, Inc., et al., Indiana Circuit Court, Jefferson County, Indiana, Case No. 39C01-0706-CT-287 (filed June 6, 2007). In these individual actions, Plaintiffs allege improper handling of remains or improper burial practices by Vail-Holt Funeral Home in Madison, Indiana and/or Grandview Memorial Gardens, Inc. Carriage has denied these allegations because these burials all occurred before Carriage owned Grandview Cemetery and Vail-Holt Funeral Home. Carriage has moved to dismiss Plaintiffs’ claims with respect to the funeral home because, among other reasons, Carriage purchased only Vail-Holt’s assets under an asset purchase agreement and did not assume its liabilities. Carriage has also moved to dismiss certain claims with respect to Grandview Cemetery because Plaintiffs released Grandview Cemetery from contractual liability pursuant to an exculpatory clause. On February 3, 2010, the Court entered an order relieving Carriage from any liability and dismissing all of Plaintiffs’ claims against Carriage in the Lawson v. Carriage Funeral Holdings, Inc. matter. On May 3, 2010, the Court entered an order relieving Carriage from any liability and dismissing all of Plaintiffs’ cemetery claims against Carriage in the Kendall v. Carriage Funeral Holdings, Inc. matter. The Court has not yet ruled on the remaining funeral home allegations against Carriage in the Kendall matter which are the subject of its motion. Likewise, the Court has not yet ruled on Carriage’s motion in the Wiley matter. The Company intends to defend these actions vigorously. Pending the Court’s ruling, we are unable to evaluate the likelihood of an unfavorable outcome to the Company or to estimate the amount or range of any potential loss, if any, at this time.

12. STOCK-BASED COMPENSATION

     Stock Options and Employee Stock Purchase Plan

     On May 18, 2010, a total of 211,401 stock options were awarded to officers and certain employees. These options will vest in 33⅓% increments over a three year period and expire May 18, 2020. The fair value of the option grant is estimated on the date of grant using the Black-Scholes option pricing model with the following weighted-average assumptions: risk-free interest rates of 3.52%; expected dividend yield of 0% for each year; expected termination rate of 4.39%; expected lives of five years; expected volatility of 50.5%. All other outstanding stock options previously granted have fully vested.

     For the second quarter of 2010, employees purchased a total of 26,057 shares of common stock through the employee stock purchase plan (“ESPP”) at a weighted average price of $3.96 per share. The Company recorded pre-tax stock-based compensation expense for the ESPP and for stock options totaling $46,000 and $66,000 for the three months ended June 30, 2009 and 2010, respectively and $121,000 and $124,000 for the six months ended June 30, 2009 and 2010, respectively.

     The fair value of the right (option) to purchase shares under the ESPP, is estimated on the date of grant associated with the four quarterly purchase dates using the following assumptions:

		2009				2010
Dividend yield			0	%			0	%
Expected volatility			76	%			70	%
Risk-free interest rate			0.09%, 0.27%, 0.31%, 0.35	%			0.08%, 0.18%, 0.31%, 0.45	%
Expected life (years)			.25, .50, .75, 1				.25, .50, .75, 1

     Expected volatilities are based on the historical volatility during the previous twelve months of the underlying common stock. The risk-free rate for the quarterly purchase periods is based on the U.S. Treasury yields in effect at the time of grant (January 1). The expected life of the ESPP grants represents the calendar quarters from the grant date (January 1) to the purchase date (end of each quarter).

     Common Stock Grants

     The Company, from time to time, issues shares of restricted common stock to certain officers, directors and key employees of the Company from its stock benefit plans. The restricted stock issued to officers and key employees vest in either 25% or 33⅓% increments over four or three year periods, respectively. The Company granted 169,595 shares of restricted stock to certain officers and employees during the second quarter of 2010 which vest in 33⅓% increments over three years. Related to the vesting of restricted stock awards previously awarded to our officers and employees, the Company recorded $255,000 and $333,000 in pre-tax compensation expense, included in general, administrative and other expenses, for the three months ended June 30, 2009 and 2010, respectively, and $506,000 and $611,000 in pre-tax compensation expense for the six months ended June 30, 2009 and 2010, respectively.

     In 2009, the Company’s directors could elect to receive all or a portion of their fees in stock. During the three and six months ended June 30, 2009, the Company issued 16,517 and 41,921 shares of unrestricted common stock to directors in lieu of payment in cash for their fees, respectively. Effective March 22, 2010, the Board of Directors approved a new Director Compensation Policy in which the directors no longer have an option to elect to receive all or a portion of their fees in stock. For the three and six months ended June, 2010, all meeting fees were paid in cash. The Company recorded $132,000 and $49,000 in pre-tax compensation expense, included in general, administrative and other expenses, for the three months ended June 30, 2009 and 2010, respectively, and $295,000 and $326,000 in pretax compensation expense for the six months ended June 30, 2009 and 2010, respectively, related to the director stock awards.

     As of June 30, 2010, the Company had $2.6 million of total unrecognized compensation costs related to unvested restricted stock awards, which are expected to be recognized over a weighted average period of approximately 2.2 years.

13. RELATED PARTY TRANSACTIONS

     The Company engaged a law firm in which one of their partners is the spouse of the Company’s Executive Vice President and General Counsel. The firm was used for various legal matters during the three months ended June 30, 2009 and paid the law firm $0.5 million. During the six months ended June 30, 2010, the amount paid to the firm was immaterial.

     The Company consolidates an entity that provides cremation services in accordance with the accounting for Variable Interest Entities. The Company also provides 100% of the financing needs for the entity. Carriage’s Executive Vice President and Chief Operating Officer is a one-third owner in a company that owns 52.8% of this entity. As of June 30, 2010, the entity owed Carriage approximately $1.7 million in the form of a working capital line of credit.

     A member of the Company’s Board of Directors is a key member of management and Chief Investment Officer of an otherwise unrelated company that holds $7.3 million of the Company’s 7⅞% Senior Notes for investment purposes.

14. MAJOR SEGMENTS OF BUSINESS

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

		Funeral				Cemetery				Corporate				Consolidated
Revenues from continuing operations:
Six months ended June 30, 2010		$	68,525			$	22,839			$	—			$	91,364
Six months ended June 30, 2009		$	66,636			$	23,717			$	—			$	90,353
Income (loss) before income taxes:
Six months ended June 30, 2010		$	20,506			$	4,831			$	(16,734	)		$	8,603
Six months ended June 30, 2009		$	19,952			$	4,160			$	(16,738	)		$	7,374
Total assets:
June 30, 2010		$	392,110			$	222,782			$	22,742			$	637,634
December 31, 2009		$	370,058			$	223,743			$	25,497			$	619,298

15. SUPPLEMENTAL DISCLOSURE OF STATEMENT OF OPERATIONS INFORMATION

     The following information is supplemental disclosure for the Consolidated Statements of Operations (in thousands):

		For the three months								For the six months
		ended June 30,								ended June 30,
		2009				2010				2009				2010
Revenues
Goods
Funeral		$	13,146			$	13,054			$	27,496			$	27,651
Cemetery			9,492				8,008				17,002				14,988
Total goods		$	22,638			$	21,062			$	44,498			$	42,639
Services
Funeral		$	17,213			$	17,458			$	35,980			$	36,700
Cemetery			2,244				2,456				4,604				4,772
Total services		$	19,457			$	19,914			$	40,584			$	41,472
Financial revenue
Preneed funeral commission income		$	502			$	497			$	1,090			$	1,185
Preneed funeral trust earnings			935				1,426				2,070				2,989
Cemetery trust earnings			613				1,211				1,347				2,248
Cemetery finance charges			405				407				764				831
Total financial revenue		$	2,455			$	3,541			$	5,271			$	7,253
Total revenues		$	44,550			$	44,517			$	90,353			$	91,364
Cost of revenues
Goods
Funeral		$	11,111			$	11,045			$	22,776			$	23,118
Cemetery			7,074				6,197				13,387				11,848
Total goods		$	18,185			$	17,242			$	36,163			$	34,966
Services
Funeral		$	8,894			$	9,397			$	18,015			$	19,313
Cemetery			1,474				1,657				3,120				3,285
Total services		$	10,368			$	11,054			$	21,135			$	22,598
Financial expenses
Preneed funeral commissions		$	447			$	312			$	962			$	658
Total financial expenses		$	447			$	312			$	962			$	658
Total cost of revenues		$	29,000			$	28,608			$	58,260			$	58,222

     The costs of revenues, for purposes of this supplemental disclosure, include only field costs and expenses that are directly allocable between the goods, services and financial categories in the funeral and cemetery segments. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in this disclosure.

16. SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION

     The following information is supplemental disclosure for the Consolidated Statements of Cash Flows (in thousands):

		For the six months ended
		June 30,
		2009				2010
Cash paid for interest and financing costs		$	8,983			$	8,890
Cash paid for income taxes			163				407
Fair value of stock issued to directors or officers			797				1,097
Restricted common stock withheld for payroll taxes			7				56
Net (deposits) withdrawals (into) from preneed funeral trusts			(250	)			1,269
Net deposits into in preneed cemetery trusts			(1,418	)			(786	)
Net deposits into perpetual care trusts			(866	)			(606	)
Net (increase) decrease in preneed funeral receivables			(266	)			85
Net increase in preneed cemetery receivables			(1,835	)			(433	)
Net (deposits) withdrawals of receivables (into) from preneed funeral trusts			133				(714	)
Net change in preneed funeral receivables increasing deferred revenue			7				910
Net change in preneed cemetery receivables increasing (decreasing) deferred revenue			241				(309	)
Net deposits (withdrawals) into (from) preneed funeral trust accounts increasing (decreasing) deferred preneed funeral receipts			250				(1,269	)
Net deposits in cemetery trust accounts increasing deferred cemetery receipts			1,418				786
Net deposits in perpetual care trust accounts increasing perpetual care trusts’ corpus			948				426

Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Forward-Looking Statements

     In addition to historical information, this Quarterly Report on Form 10-Q contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These statements include any projections of earnings, revenues, asset sales, cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words “may”, “will”, “estimate”, “intend”, “believe”, “expect”, “project”, “forecast”, “plan”, “anticipate” and other similar words. Forward-looking statements are not guarantees of performance. Important factors that could cause actual results to differ materially from our expectations reflected in our forward-looking statements include those risks related to our business and our industry set forth in Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009.

Cautionary Statements

     We caution readers that important factors, in some cases have affected, and in the future could affect, our actual consolidated results and could cause our 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 us. Risks associated with our business and the deathcare business are presented in Item 1A., “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2009.

OVERVIEW

     General

     We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. As of June 30, 2010, we operated 145 funeral homes in 25 states and 33 cemeteries in 12 states within the United States. Substantially all administrative activities are conducted in our home office in Houston, Texas.

     We have implemented long-term initiatives in our operations designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model in 2004 that included operating and financial standards developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. The model essentially eliminated the use of line-item financial budgets in favor of the standards. The operating model and standards, which we refer to as the “Standards Operating Model” focus on the key drivers of a successful operation, organized around three primary areas — market share, people and operating and financial metrics. The model and standards are the measures by which we judge the success of each business. To date, the Standards Operating Model has driven significant changes in our organization, leadership and operating practices. Most importantly, the Standards Operating Model allowed us to measure the sustainable revenue growth and earning power of our portfolio of deathcare businesses, which then led to development of a Strategic Acquisition Model, noted below, during 2006, that guides our acquisition and disposition strategies. Both models, when executed effectively, should drive longer term, sustainable increases in market share, revenue, earnings and cash flow. The standards are not designed to produce maximum short-term earnings because we do not believe such performance is sustainable without ultimately stressing the business, which often leads to declining market share, revenues and earnings. Important elements of the Standards Operating Model include:

• Balanced Operating Model — We believe a decentralized structure works best in the deathcare industry. Successful execution of the Standards Operating Model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial drive and corporate support aligned with the key drivers.

• Incentives Aligned with Standards — Empowering Managing Partners to do the right things in their operations and local communities, and providing appropriate support with operating and financial practices, will enable long-term growth and sustainable profitability. Each Managing Partner participates in a variable bonus plan whereby they earn a percentage of their business’ earnings based upon the actual standards achieved. Each Managing Partner has the opportunity to share in the earnings of the business as long as the performance exceeds our minimum standards.

• The Right Local Leadership — Successful execution of our operating model is highly dependent on strong local leadership as defined by our 4E Leadership Model, intelligent risk taking and entrepreneurial empowerment. Over time, a Managing Partner’s performance is judged according to achievement of the Standards for that business.

     Funeral and Cemetery Operations

     Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional burial and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause significant changes to our profitability.

     Our funeral volumes have increased gradually from 21,665 in 2006 to 24,362 in 2009 (compound annual increase of 3.0%). Our funeral operating revenue has increased from $109.1 million in 2006 to $125.1 million in 2009 (compound annual increase of 3.5%). The increases are primarily because of businesses we acquired in 2007 and 2009 and our ability to increase the average revenue per funeral through expanded service offerings and packages. We experienced an increase of 1.1% in volumes in comparing the first six months of 2010 to the first six months of 2009. Funeral operating revenues for the six months ended June 30, 2010 were up 1.4% compared to the six months ended June 30, 2009.

     The percentage of funeral services involving cremations has increased from 34.3% for 2006 to 42.1% for 2009 and to 42.3% for the first six months of 2010. We expect our average revenue per funeral to increase over time as we seek to provide increased services particularly to our cremation families in order to offset higher cremation rates.

     The cemetery operating results are affected by the size and success of our sales organization. Approximately 50% of our cemetery revenues relate to preneed sales of interment rights and mausoleums and related merchandise and services. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affect the amount of cemetery revenues. The current environment of high unemployment and low consumer confidence represents a formidable challenge to the cemetery sales staff. Approximately 15% of our cemetery revenues are attributable to investment earnings on trust funds and finance charges on installment contracts. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

     Our cemetery financial performance from 2006 through 2009 was characterized by increasing operating revenues and fluctuating field level profit margins. Operating revenue decreased 8.5% while operating profit increased 6.9%, for the first six months of 2010 compared to the same period of 2009, as a result of higher trust fund earnings and higher atneed gross profit. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries that can sustain consistent, modest growth in preneed property sales over time and to diversify and substantially increase our cemetery operating and financial results. Additionally, a portion of our capital expenditures in 2010 is designed to expand our cemetery product offerings.

     Financial Revenue

     We market 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. Preneed contracts permit families to eliminate issues of making death care plans at the time of need and allow input from other family members before the death occurs. We guarantee the price and performance of the preneed contracts to the customer.

     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. Additionally, we generally earn a commission from the insurance company from the sale of insurance-funded policies reflected as Preneed Insurance Commission. The commission income is recognized as revenue when the period of refund expires (generally one year), which helps us defray the costs we incur to originate the preneed contract (primarily commissions we pay to our sales counselors).

     Preneed sales of cemetery interment rights are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years which earnings are reflected as Preneed Cemetery Finance Charges. In substantially all cases, we receive an initial down payment at the time the contract is signed. The interest rates generally range between 9.5% and 12%. Occasionally, we have offered zero percent interest financing to promote sales for limited-time offers.

     We have established a variety of trusts in connection with 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. Independent financial advisors are also used for investment management and advisory services.

     Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. Preneed funeral trust fund income earned and the receipt and recognition of any insurance benefits are deferred until the service is performed. Applicable state laws generally require us to deposit a specified amount (which varies from state to state, generally 50% to 100% of selling price) into a merchandise and service trust fund for cemetery merchandise and preneed sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in a perpetual care trust. The income from these perpetual care trusts provides a portion of the funds necessary to maintain cemetery property and memorials in perpetuity. This trust fund income is recognized, as earned, in cemetery revenues.

Acquisitions

     Our growth strategy includes the execution of the Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We assess acquisition candidates using six strategic ranking criteria and to differentiate the price we are willing to pay. Those criteria are:

	•		Size of business;
	•		Size of market;
	•		Competitive standing;
	•		Demographics;
	•		Strength of brand; and
	•		Barriers to entry.

     In general terms, our price expectations range from four to five times pre-tax earnings before depreciation for “tuck-ins” to six to seven times pre-tax earnings before depreciation for businesses that rank very high in the ranking criteria. We derive the pre-tax earnings amounts based primarily on the size and product mix of the target business applied to our standards-based operating model. In 2009, we completed two acquisitions. We closed four acquisitions in the second quarter of 2010. The consideration paid for those acquired businesses in the second quarter of 2010 was $15.5 million in cash and the assumption of $0.6 million of liabilities and debt.

     Financial Highlights

     Net income for the three months ended June 30, 2010 totaled $2.3 million, equal to $0.13 per diluted share, compared to net income for the three months ended June 30, 2009 which totaled $2.0 million, equal to $0.12 per diluted share. Net income for the six months ended June 30, 2010 totaled $5.1 million, equal to $0.29 per diluted share, compared to $4.4 million, equal to $0.25 per diluted share, for the six months ended June 30, 2009. The variance between the two periods is primarily attributable to higher trust fund earnings. The acquisitions closed in the second quarter of 2010 did not have a material impact on our current results.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

     The preparation of the Consolidated Financial Statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses. On an on-going basis, we evaluate estimates and judgments, including those related to revenue recognition, realization of accounts receivable, inventories, goodwill, other intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change. Historical performance should not be viewed as indicative of future performance, because there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.

     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 accounting principles generally accepted in the United States. Our significant accounting policies are more fully described in Note 1 to our Consolidated Financial Statements. Our critical accounting policies are those that are both important to the portrayal of our financial condition and results of operations and require management’s most difficult, subjective and complex judgment. These critical accounting policies are discussed in MD&A in our 2009 Form 10-K. There have been no significant changes to our critical accounting policies since the filing of our 2009 Form 10-K.

RESULTS OF OPERATIONS

     The following is a discussion of our results of operations for the three and six month periods ended June 30, 2009 and 2010. The term “same-store” or “existing operations” refers to funeral homes and cemeteries acquired prior to January 1, 2006 and owned and operated for the entirety of each period being presented. Funeral homes and cemeteries purchased after January 1, 2006 are referred to as “acquired.” This classification of acquisitions has been important to management and investors in monitoring the results of these businesses and to gauge the leveraging performance contribution that a selective

acquisition program can have on the total company performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.

     Funeral Home Segment. The following table sets forth certain information regarding the revenues and operating profit from the funeral home operations for the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2010.

Three months ended June 30, 2009 compared to three months ended June 30, 2010 (dollars in thousands):

		Three Months Ended
		June 30,								Change
		2009				2010				Amount				%
Revenues:
Same-store operating revenue		$	26,153			$	25,752			$	(401	)			(1.5	)%
Acquired operating revenue			4,206				4,760				554				13.2	%
Preneed funeral insurance commissions			502				497				(5	)			*
Preneed funeral trust earnings			935				1,426				491				52.5	%
Total		$	31,796			$	32,435			$	639				2.0	%
Operating profit:
Same-store operating profit		$	8,956			$	8,561			$	(395	)			(4.4	)%
Acquired operating profit			1,398				1,495				97				6.9	%
Preneed funeral insurance commissions			55				199				144				*
Preneed funeral trust earnings			935				1,426				491				52.5	%
Total		$	11,344			$	11,681			$	337				3.0	%