Back to GetFilings.com

Use these links to rapidly review the document
CARRIAGE SERVICES, INC. INDEX
ITEM 7A. QUANTITATIVE AND QUALITATIVE MARKET RISK DISCLOSURE

SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549

FORM 10-K

Commission File Number: 1-11961

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

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

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

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

Indicate by check mark whether the registrant is an accelerated filer as defined in Rule 12b-2 of the Securities Exchange Act of 1934. Yes o    No ý

The aggregate market value of the voting and non-voting common equity held by non-affiliates (affiliates being, for these purposes only, directors, executive officers and holders of more than 5% of Carriage's Common Stock) of the registrant as of June 30, 2003 was approximately $40 million based on the closing price of $3.54 per share on the New York Stock Exchange.

The number of shares of the registrant's Common Stock, $.01 par value per share outstanding as of March 15, 2004 was 17,702,329.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the definitive proxy statement to be delivered in connection with the 2004 annual meeting of stockholders are incorporated in Part III of this Report.

CARRIAGE SERVICES, INC.

INDEX

1

PART I

ITEM 1. BUSINESS

THE COMPANY

        Carriage Services, Inc. (the "Company" or "Carriage") is a leading provider of death care services and products in the United States. As of December 31, 2003, we operated 139 funeral homes and 30 cemeteries in 29 states. Carriage provides a complete range of funeral and cremation services including planning and coordinating personalized funerals, conducting memorial services, performing cemetery interment services and managing and maintaining cemetery properties. We sell products and merchandise including caskets, urns, burial vaults, garments, cemetery interment rights, and monuments and markers. We focus on distinguishing ourselves from our competitors by operating a people development company that emphasizes: (i) a consistent model to serve client families, (ii) comprehensive employee training, (iii) accountability to customers and each other, and (iv) incentive compensation which shares the benefits of growth and profitability with responsible employees.

        From 1996 to 1999, the Company grew rapidly through a significant number of acquisitions. In 1999, the level of acquisition activity was sharply curtailed, growth slowed and Carriage focused on improving operating results. We initiated Fresh Start in 2000 to address the Company's high level of debt. Since then we have sold 37 funeral homes, 12 cemeteries and 14 parcels of excess real estate for approximately $20 million of net proceeds. By applying the net proceeds from dispositions, income tax refunds and cash flow from operations to reduce debt and contingent acquisition obligations, the outstanding balance of such obligations has decreased from $205 million in the fourth quarter of 2000 to $135.5 million at year-end 2003.

        While the primary goals of the Fresh Start initiatives have been achieved, we will continue to focus on operations and the Company's capital structure in order to reposition Carriage for future growth. Our focus over the next two years is to grow the market share and improve the operating and financial performance of our funeral operations; increase preneed property sales and cash flow in our cemetery operations; further reduce debt; and strengthen our capital structure. We will continue to improve our organizational leadership and quality of personnel. We also expect to divest additional businesses in the future, where those businesses are not meeting our standards.

        Carriage is incorporated in Delaware. Our principal executive office is located at 1900 Saint James Place, 4^th Floor, Houston, Texas 77056, and our telephone number is (713) 332-8400.

DEATH CARE INDUSTRY

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

        HIGHLY FRAGMENTED OWNERSHIP.    A significant majority of death care operators consist of small, family-owned businesses that control one or several funeral homes or cemeteries in a single community. Management estimates that there are approximately 22,000 funeral homes and 10,000 cemeteries in the United States. Approximately 20% of the 2002 U.S. death care industry revenues are represented by Carriage and the three other larger publicly traded domestic death care companies.

        HERITAGE AND TRADITION.    Death care businesses have traditionally been transferred to successive generations within a family and in most cases have developed a local heritage and tradition that afford an established funeral home or cemetery a local franchise and provide the opportunity for repeat business. In addition, established firms' backlog of preneed, prefunded funerals or presold cemetery and

2

mausoleum spaces provides a base of future revenue. Since 1999, we have seen new independent competitors capture some local market share. In many cases, these new independent businesses are started by personnel who have left public consolidators or family owned businesses. Often such businesses are attempting to build market share by competing on price rather than heritage and tradition.

        DEATH RATES.    The death rates in the United States have been relatively stable on a long-term historical basis. The number of deaths in the United States had increased at a compounded annual rate of approximately 1% for the period 1980 through 2000. However, statistics reported by the Center for Disease Control ("CDC"), as adjusted, indicate that the number of deaths declined by more than 1% in each of the three years from 2001 through 2003. While the number of deaths typically varies from year to year, we believe major medical advances in treating heart, cancer and other major diseases that cause death are resulting in an increase of the average age of the population. This trend is calling into question CDC forecasts of an increasing number of deaths of 0.75% through 2010. Nevertheless, the aging baby-boom generation is expected to cause the number of deaths to increase in the long-term.

        DELEVERAGING.    Until 1999, the industry experienced consolidation of independent death care operations by a few large, primarily publicly owned death care consolidators that sought to benefit from economies of scale, improved managerial control and more effective strategic planning and greater financial resources. None of the publicly traded companies are currently pursuing significant acquisitions at this time. Since 2000, each of the consolidators have been selling selected properties and other assets and using operating cash flow to reduce their debt levels.

        PRENEED MARKETING.    In addition to sales at the time of death or on an "at need" basis, death care products and services are being sold prior to the time of death or on a "preneed" basis. We have developed marketing organizations to actively promote such products and services. Effective marketing of preneed products and services provides a backlog of future business. We believe sales of preneed products and services, including cemetery and interment rights and preneed funeral services, are purchased primarily by people between the ages of 50 and 80. Our preneed funeral sales and marketing program is managed at the local market level by the funeral home managing partner in conjunction with our Director of Preneed Sales. All preneed sales counselors are employed by our local businesses.

        CREMATION.    In recent years, there has been steady, gradual growth in the number of families in the United States that have chosen cremation as an alternative to traditional methods of burial. According to industry studies, cremations represented approximately 10% of the U.S. burial market in 1980, approximately 28% in 2002 and are projected at 40% for 2010. Cremation rates can vary significantly based upon geographic, religious and cultural traditions. Cremation, historically, had been marketed as a less costly alternative to interment. However, cremation is increasingly marketed as part of a complete package that includes funeral services and memorialization. The percentages of funeral services conducted by Carriage in which cremation was chosen as the manner in which to dispose of the remains were 27%, 28% and 30% for each of the three years from 2001 through 2003.

BUSINESS STRATEGY

        During the last three years, Carriage and the other public consolidators have been restructuring their organizations and improving their financial condition, liquidity and balance sheets by reducing debt. Carriage made significant progress in improving operating cash flow and reducing debt under its Fresh Start program. Successful execution of Fresh Start during the last three years has, in our view, positioned the Company as a leader in our industry and improved our financial flexibility.

"FRESH START" PROGRAM.    During the third quarter of 2000, Carriage initiated a multi-faceted restructuring program termed "Fresh Start" in response to its leveraged balance sheet resulting from rapid growth, deteriorating operating results and a challenging industry environment. The program began with a

3

review of the funeral home and cemetery portfolios, operating strategies, organizational structure, and financial covenants under the Company's credit agreements.

        The goals for the restructuring program, announced in November, 2000, were to (1) restore credibility to our operating and consolidation model; (2) increase and better align our earnings and cash flow; (3) restore market value credibility to our balance sheet; (4) reduce our debt; and (5) re-access the capital markets. The principal elements of Fresh Start included the downsizing of our corporate organization, strengthening its corporate and operating leadership, changing our preneed funeral marketing strategy, stratifying by performance the funeral home and cemetery portfolios, implementing action plans to improve or dispose of underperforming businesses, reviewing and adjusting the carrying value of assets, and modifying financial covenants with lenders to facilitate the execution of the program.

        We believe the Fresh Start goals have been substantially accomplished. The five Fresh Start goals, together with their impact on the periods covered by this annual report, as well as their continued relevance to future results are as follows:

1.

Restore credibility to its operating and consolidation model—Carriage is committed to becoming the best, not the biggest, company in its industry. This commitment is driven by a strong culture of service and leadership excellence whose goal is to build a lasting enterprise. As a result, Carriage has raised performance standards and increased accountability for all employees throughout the organization. Recruiting top quality leaders and managers and aligning incentive compensation to our operating strategy have become key elements of our operating strategy.

In Carriage's view, the benefit of integrating acquired businesses is to introduce its innovative service and sales strategies to provide the highest quality funeral experience to client families and to introduce its operating model to improve long-term performance. Carriage continues to invest heavily in employee training in order to enable its field operations to better serve families, especially training on personalization of the funeral ritual to create a unique and emotional experience. The result of successful execution of its service and sales strategies will be to increase customer satisfaction, revenue per experience, and market share.

2.

Increase and better align earnings and free cash flow—Since implementing Fresh Start, Carriage has implemented more disciplined controls over its capital expenditures and shifted its preneed funeral marketing strategy from a national to a local focus. The Company transitioned from a national, centralized strategy to a local, decentralized strategy whereby each business location customized a preneed program to its local needs. Accordingly, we eliminated the national funeral sales organization and emphasized using insurance contracts to fund preneed contracts. This allowed us to substantially downsize our administrative support organization. These two factors have been the key drivers to better align earnings and free cash flow. In conjunction with the operating model described above, Carriage believes it will continue to improve and maintain the alignment of earnings and cash flow.



3.

Restore market value creditability to its balance sheet—In reviewing our funeral home and cemetery portfolios, we established consistent performance standards. We will not allow the success of our best businesses, managers and employees to be unfairly diluted by underperforming, weaker businesses. When there are local market share losses or leadership issues, specific action plans were designed to address them. These action plans included the decision to sell the businesses that cannot meet our new standards. Since Fresh Start was initiated in 2000, Carriage has closed one funeral property and has sold 37 funeral properties, 12 cemeteries and 14 parcels of excess real estate for net proceeds of $20 million. A relatively small number of additional properties may be sold in 2004. The carrying values of the businesses targeted for sale were written down to the estimated net realizable value. The significant charges Carriage incurred in 2000 to initiate its Fresh Start Program substantially reduced the Company's book value per share by $8.25 to $4.78 at December 31, 2000. At December 31, 2003, book value

4

per share was $6.04. As Carriage executes its operating model and successfully improves long-term profitability, we expect to continue to increase book value per share.

4.

Re-access the capital markets—In August 2003, Carriage replaced the $75 million bank credit facility with a new $40 million unsecured revolving bank credit facility that matures in March 2006 which should be sufficient for Carriage to meet its working capital needs and retire the Series A maturities of the Senior Notes having a current balance of $22.3 million in July 2004. As of December 31, 2003, Carriage had $21.1 million drawn on its $40 million bank revolving credit facility. Carriage expects that placing the new credit facility was the first step in repositioning its capital structure to facilitate future growth.



5.

Reduce debt—Since Fresh Start was initiated on November 8, 2000, Carriage has reduced its debt and contingent obligations from previous acquisitions by $70 million, or 34%, from $205 million to $135 million at December 31, 2003. In complying with conditions of the new credit facility, Carriage began on September 1, 2003 deferring interest payments on its subordinated debentures held by the Company's affiliated trust. Thus, cash distributions on the TIDES convertible trust preferred securities will be deferred for at least the term of the new credit facility.

FUNERAL OPERATING STRATEGY.    While Fresh Start has been completed, management recognized that to become the best and increase value for the stockholders, Carriage must improve the operating results of its funeral operations by growing market share and increasing internal earnings growth. We recognized that our funeral operating model must be changed.

        During 2003, we made significant changes in our funeral operations. We introduced a more decentralized, entrepreneurial and local operating model. At the same time, we introduced operating and financial standards developed from our best businesses. We also overhauled our incentive compensation structure to align with the new standards. These new standards and incentives will challenge and reward the managing partners who thrive on growing the local business and taking responsibility for results.

        Key elements of our operating strategy and model include the following:

        BALANCED OPERATING MODEL.    Our new funeral operating model, called "Being the Best", is based upon lessons we learned from our best businesses and from Fresh Start. We believe a decentralized structure works best in our industry. The new operating model focuses on key drivers of a successful funeral business, organized around three primary areas—market share, people and operating and financial metrics. Successful execution of the new operating model is highly dependent on strong local leadership, intelligent risk taking, entrepreneurial empowerment 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 growth and profitability. In order to measure reward and recognize success under our new operating model, we had to define it. We analyzed our best businesses (approximately 20% by number) and developed operating and financial standards organized around three primary areas—market share, people and operating and financial metrics. We developed a set of standards for each business by comparing it to our best, taking into consideration size and cremation mix. Each managing partner will participate in a variable bonus plan whereby they will earn a fixed percentage of their business' earnings based upon the actual standards achieved. We believe each managing partner has the opportunity to be compensated at close to the same level as if they owned the business.

        RIGHT LOCAL LEADERSHIP.    Successful execution of the new operating model is highly dependent on strong local leadership, intelligent risk taking and entrepreneurial empowerment. Over time, we expect the managing partner's execution of the operating and financial standards will be a primary performance indicator.

5

        CYCLE OF SERVICE.    The Cycle of Service is a comprehensive approach to the funeral arranging process. It encompasses all of the steps that help build a meaningful and lasting memory picture for our client families. We are reviewing the various steps in the Cycle of Service in order to update and improve it. The process and activities will align with our strategy to build a meaningful and lasting relationship with each client family. We have also developed a "Best Practices" website where innovative new service ideas will be shared.

        PRESENTATION AND PACKAGING OF SERVICES AND MERCHANDISE.    We believe packaging funeral services and merchandise offer both simplicity and convenience for our client families. Well conceived and thoughtful packages eliminate much of the effort and discomfort experienced by client families about matters where they do not have much knowledge during a very stressful and emotional time. While clients will always have the option of purchasing services and merchandise separately, we believe the emphasis on personalized services and appropriate merchandise will be valued by many families.

        MERCHANDISE STRATEGY AND SUPPLIER ARRANGEMENTS.    We are conducting a review of our merchandise strategy for our selection floors. Merchandise selections will be aligned with package options. In addition, the selection floor will be evaluated to determine if it is effective. Key elements of an effective floor would be balanced retail prices with appropriate mark-ups, intelligent layout and choices supported by good presentation. We have entered into updated arrangements with four primary casket suppliers to support our new strategy and control wholesale costs.

        DECREASE OVERHEAD COSTS.    We are performing targeted reviews of our systems and support services with the objective of improving effectiveness and decreasing overhead costs. We recently completed an upgrade of our funeral services system to improve its features and functions. We plan to implement a new cemetery system during 2004. As we implement new systems, we are reviewing and changing corporate processes to improve efficiency and effectiveness.

PRENEED FUNERAL SALES PROGRAM.    Preneed sales frequently require an immediate cash outlay by the seller to fund commissions and promotional expenditures. Beginning in 2000, we moved from a national, centralized marketing strategy to a local, decentralized strategy whereby each business location customized a preneed program to its local needs. We also began selling insurance-funded contracts in most markets that allow us to earn commission income and improve our cash flow. The focus is such that in markets that depend on preneed for market share, we will supplement the arrangements written by funeral directors with sales sourced by sales counselors and third party sellers. We plan to continue using insurance-funded contracts as the main funding vehicle because cash from the commissions earned offsets a significant amount of the up-front costs and because the earnings on the insurance contracts are more stable than traditional trust fund investments.

IMPAIRMENTS AND ASSET DISPOSITION STRATEGY.    Reviews of the businesses that we own are performed annually. Long-term cash flow forecasts are prepared to determine whether we would recover our investment through future operations. In those instances in which our investment in a business exceeds the estimated future cash flows (our estimate of fair value), the investment is written down, through an impairment charge, to the present value of those future cash flows. Annually, beginning in 2002, we test goodwill for impairment under the Statement of Financial Accounting Standards ("SFAS") No. 142, Goodwill and Other Intangible Assets. We determined no impairment existed as a result of those tests during the last two years.

OPERATIONS

        We conduct our funeral and cemetery operations only in the United States. Carriage's operations are divided into two segments: funeral operations and cemetery operations. Information for each of our segments is presented below and in our financial statements set forth herein.

6

        FUNERAL HOME OPERATIONS.    As of December 31, 2003, Carriage operated 139 funeral homes in 29 states. Funeral home revenues accounted for approximately 77% of our net revenues for each of the years ended December 31, 2002 and 2003. The funeral home operations are managed by a team of experienced death care industry professionals and selected region-level individuals with substantial management experience in service industries. See Note 13 to the consolidated financial statements for segment data related to funeral home operations.

        CEMETERY OPERATIONS.    As of December 31, 2003, we operated 30 cemeteries in 12 states. The cemetery operations are managed by a team of experienced death care industry and sales professionals. Cemetery revenues accounted for approximately 23% of our net revenues for each of the years ended December 31, 2002 and 2003. See Note 13 to the consolidated financial statements for segment data related to cemetery operations.

        PRENEED PROGRAMS.    In addition to sales of funeral merchandise and services, cemetery interment rights and cemetery merchandise and services at the time of need, we also market funeral and cemetery services and products on a preneed basis. Therefore, these services and products apply to both segments of our operations. Preneed funeral or cemetery contracts enable families to establish, in advance, the type of service to be performed, the products to be used and the cost of such products and services, in accordance with prices prevailing at the time the contract is signed, rather than when the products and services are delivered. Preneed contracts permit families to eliminate issues of making death care plans at the time of need and allow input from other family members before the death occurs.

        Preneed funeral contracts are usually paid on an installment basis. The performance of preneed funeral contracts is usually secured by placing the funds collected in trust for the benefit of the customer or by the purchase of a life insurance policy, the proceeds of which will pay for such services at the time of need. Insurance policies, intended to fund preneed funeral contracts, cover the original contract price and generally include an element of growth (earnings) designed to offset future inflationary cost increases. Proceeds from the sale of preneed funeral contracts, along with accumulated earnings, are not recognized as revenue until the time the funeral service is performed. Additionally, we generally earn a commission from the insurance company from the sale of insurance funded contracts. Although direct marketing costs and commissions incurred from the sale of preneed funeral contracts are a current use of cash, such costs are also deferred and amortized on an actuarial method to match the expected maturity of the preneed contracts. The commission income is recognized as revenue when the period of refund expires (generally one year) and helps us defray the costs we incur, which are primarily commissions we pay to our sales counselors.

        In addition to preneed funeral contracts, we also offer "preplanned" funeral arrangements whereby a client determines in advance substantially all of the details of a funeral service without any financial commitment or other obligation on the part of the client until the actual time of need. Preplanned funeral arrangements permit a family to avoid issues of making death care plans at the time of need and enable a funeral home to establish relationships with a client that may eventually lead to an at need sale.

        Preneed cemetery sales are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years. The interest rates generally range between 12% and 14%. Preneed sales of cemetery interment rights are generally recorded as revenue when 10% of the contract amount has been collected. Merchandise and services revenue is recorded when delivery has occurred. Costs related to generating the preneed contracts and delivery of the products and services are recognized concurrent with the related revenue. We always receive an initial downpayment at the time the contract is signed. Allowances for customer cancellations and refunds are accrued at the date of sale and periodically evaluated thereafter based upon historical experience.

        Carriage sold 5,674 and 5,230 preneed funeral contracts during the years ended December 31, 2002 and 2003, respectively. At December 31, 2003, we had a backlog of 62,269 preneed funeral contracts to be delivered in the future. Approximately 18.5% and 19.5% of the funeral revenues recognized during each of

7

2002 and 2003, respectively, originated through preneed contracts. Cemetery revenues that originated from preneed contracts represented approximately 50% of Carriage's net cemetery revenues for both 2002 and 2003.

        As of December 31, 2003, we employed a staff of 205 advance-planning and family service representatives for the sale of preneed products and services.

COMPETITION

        The operating environment in the death care industry has been highly competitive. Publicly traded companies are Service Corporation International, Alderwoods Group, Inc. (formerly known as The Loewen Group, Inc.), and Stewart Enterprises, Inc. In addition, a number of smaller, non-public companies have been active in acquiring and operating funeral homes and cemeteries.

        Our funeral home and cemetery operations usually face competition in the markets that they serve. Our primary competition in most of our markets is from local independent operators. We have observed an increase in new start-up competition in certain areas of the country, which in any one market may have impacted our profitability because of the high fixed cost nature of funeral homes. Market share for funeral homes and cemeteries is largely a function of reputation and heritage, although competitive pricing, professional service and attractive, well-maintained and conveniently located facilities are also important. Because of the importance of reputation and heritage, market share increases are usually gained over a long period of time. The sale of preneed funeral services and cemetery property has increasingly been used by many companies as a marketing tool to build market share.

        There has been increasing competition from providers specializing in specific services, such as cremations, who offer minimal service and low-end pricing. We also face competition from companies that market products and related information over the Internet and non-traditional casket stores in certain markets. We have felt relatively limited impact in our specific markets from these competitors to date.

TRUST FUNDS AND INSURANCE CONTRACTS

        GENERAL.    We have established a variety of trusts in connection with our 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 Carriage. We also use independent financial advisors to consult with us on investment policies and evaluate investment results.

        PRENEED FUNERAL TRUSTS AND INSURANCE CONTRACTS.    Preneed funeral sales generally require deposits to a trust or purchase of a third-party insurance product. All preneed funeral sales are deferred until the service is performed. The trust fund income earned and any increase in insurance benefits are also deferred until the service is performed, in order to offset possible inflation in cost when providing the service in the future. The related assets and deferred revenue are reflected on Carriage's balance sheet. In most states, we are not permitted to withdraw principal or investment income from such trusts until the funeral service is performed. Some states, however, allow for the retention of a percentage (generally 10%) of the receipts to offset any administrative and selling expenses, which we defer until the service is provided. The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from customers was approximately $235 million and $234 million as of December 31, 2002 and 2003, respectively.

        PRENEED CEMETERY MERCHANDISE AND SERVICE TRUSTS.    We are generally required under applicable state laws 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 services preneed sales. The related trust fund income earned is recognized when the related merchandise and services are delivered. We are permitted to withdraw the trust principal and the accrued income when the

8

merchandise is purchased, when service is provided by us or when the contract is cancelled. The merchandise and service trust fund balances, in the aggregate, were approximately $44 million and $48 million as of December 31, 2002 and 2003, respectively.

        PERPETUAL CARE TRUSTS.    In most states, regulations require a portion (generally 10%) of the sale amount of cemetery property and memorials to be placed in trust. The income from these perpetual care trusts provides the funds necessary to maintain cemetery property and memorials in perpetuity. The trust fund income is recognized, as earned, in cemetery revenues. While we are entitled to withdraw the income from our perpetual care trust to provide for the maintenance of the cemetery property and memorials, we are not entitled to withdraw any of the principal balance of the trust fund and therefore, none of the principal balance is reflected in Carriage's balance sheet. The perpetual care trust balances were approximately $27.8 million and $30.7 million at December 31, 2002 and 2003, respectively.

        For additional information with respect to Carriage's trusts, see Note 1 of the Consolidated Financial Statements.

REGULATION

        Our funeral home operations are subject to substantial regulation by the Federal Trade Commission (the "FTC"), as well as other federal, state and local agencies. Certain regulations contain minimum standards for funeral industry practices, require extensive price and other affirmative disclosures to the customer at the time of sale and impose mandatory itemization requirements for the sale of funeral products and services. The FTC is currently reviewing the Trade Rule on Funeral Industry Practices (the "Funeral Rule"), which defines certain acts or practices as unfair or deceptive and contains certain requirements to prevent these acts or practices. We believe we are in substantial compliance with the Funeral Rule.

        We are subject to the requirements of the federal Occupational Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard communication standard, the United States Environmental Protection Agency community right-to-know regulations under Title III of the federal Superfund Amendment and Reauthorization Act and similar state statutes require us to organize information about hazardous materials used or produced in our operations. Certain of this information must be provided to employees, state and local governmental authorities and local citizens.

        Our operations, including our preneed sales activities and the management and administration of preneed trust funds, are also subject to extensive regulation, supervision and licensing under numerous state laws and regulations. We believe that we are in substantial compliance with all such laws and regulations.

EMPLOYEES

        As of December 31, 2003, the Company and its subsidiaries employed 1,995 employees, of whom 1,049 were full-time and 946 part-time. All of our funeral directors and embalmers possess licenses required by applicable regulatory agencies. We believe that our relationship with our employees is good. No employees of Carriage or its subsidiaries are members of a collective bargaining unit.

AVAILABLE INFORMATION

        The Company's website address is www.carriageservices.com. Available on this website under "Investor Relations-Investor Relations Menu—SEC Filings," free of charge, are Carriage's annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, insider reports on Forms 3, 4 and 5 filed on behalf of directors and officers and amendments to those reports as soon as reasonably practicable after such materials are electronically filed with or furnished to the United States Securities and Exchange Commission ("SEC").

9

        Also posted on the Company's website, and available in print upon request, are charters for the Company's Audit Committee, Compensation Committee and Corporate Governance Committee. Copies of the Code of Business Conduct and Ethics and the Corporate Governance Guidelines are also posted on the Company's website under the "Corporate Governance" section. Within the time period required by the SEC and the New York Stock Exchange, Inc., the Company will post on its website any modifications to the Codes and any waivers applicable to senior officers as defined in the applicable Code, as required by the Sarbanes-Oxley Act of 2002.

ITEM 2. PROPERTIES

        At December 31, 2003, we operated 139 funeral homes and 30 cemeteries in 29 states. Carriage owns the real estate and buildings for 79% of our funeral homes and leases facilities for the remaining 21%. Carriage owns 25 cemeteries and operates five cemeteries under long-term contracts with municipalities and non-profit organizations at December 31, 2003. Eleven funeral homes are operated in combination with cemeteries. The 30 cemeteries operated by Carriage have an inventory of unsold developed lots totaling approximately 123,000 and 118,000 at December 31, 2002 and 2003, respectively. In addition, approximately 629 acres are available for future development. We anticipate having a sufficient inventory of lots to maintain our property sales for the foreseeable future. The specialized nature of our business requires that our facilities be well-maintained. Management believes this standard is met.

10

        The following table sets forth certain information as of December 31, 2003, regarding Carriage's properties used by the funeral homes segment and by the cemeteries segment identified by state:

(1)

The leases, with respect to these funeral homes, have remaining terms ranging from one to fifteen years, and, generally, we have the right to renew past the initial terms and a right of first refusal on any proposed sale of the property where these funeral homes are located.

        Carriage's corporate headquarters occupy approximately 32,500 square feet of leased office space in Houston, Texas. At December 31, 2003, we operated 611 vehicles, of which 600 are owned and 11 are leased.

ITEM 3. LEGAL PROCEEDINGS

        Carriage and our 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 on the financial statements.

11

        We carry insurance with coverages and coverage limits consistent with our assessment of risks in our business and of an acceptable level of financial exposure. Although there can be no assurance that such insurance will be sufficient to mitigate all damages, claims or contingencies, we believe that our insurance provides reasonable coverage for known asserted or unasserted claims. In the event the Company sustained a loss from a claim and the insurance carrier disputed coverage or coverage limits, the Company may record a charge in a different period than the recovery, if any, from the insurance carrier.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

        None.

PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES

        Carriage's Common Stock is traded on the New York Stock Exchange under the symbol "CSV". The following table presents the quarterly high and low sale prices as reported by the New York Stock Exchange:

        As of March 15, 2004, there were 17,702,329 shares of Carriage's Common Stock outstanding. The Common Stock shares outstanding are held by approximately 270 stockholders of record. Each share is entitled to one vote on matters requiring the vote of stockholders. We believe there are approximately 4,700 beneficial owners of the Common Stock.

        We have never paid a cash dividend on our Common Stock. Carriage currently intends to retain earnings to finance the growth and development of our business and does not anticipate paying any cash dividends on our Common Stock in the foreseeable future. We are currently prohibited from paying dividends under the terms of our credit agreements and our preferred security agreements as long as distributions are deferred on the preferred securities. Any future change in our dividend policy will be made at the discretion of our Board of Directors in light of the financial condition, capital requirements, earnings and prospects of Carriage and any restrictions under credit and preferred security agreements, as well as other factors the Board of Directors may deem relevant. We are also prohibited in repurchasing any of our outstanding common stock under the terms of our credit agreements.

12

ITEM 6. SELECTED FINANCIAL DATA

        The income statement data presented hereunder for 1999 was prepared using the accounting principles employed prior to the implementation of SAB 101 which was effective January 1, 2000.