UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

þ		Annual Report Pursuant To Section 13 Or 15(d) Of The Securities Exchange Act Of 1934

		For The Fiscal Year Ended December 31, 2010

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.

Delaware		76-0423828
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)
3040 Post Oak Blvd., Suite 300, Houston, Texas		77056
(Address of principal executive offices)		(Zip Code)

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

Common Stock, $.01 Par Value		New York Stock Exchange
(Title Of Class)		(Name of Exchange on which registered)

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

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933. Yes o No þ

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934. Yes o No þ

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 No o

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 during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes o 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 a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerator filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

(Check one):

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 by Rule 12b-2 of the Securities Exchange Act of 1934.
Yes o No þ

The aggregate market value of the voting and non-voting common equity held by non-affiliates of the registrant as of June 30, 2010 was approximately $70.0 million based on the closing price of $4.66 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 4, 2011 was 18,139,859.

Portions of the definitive proxy statement to be delivered in connection with the 2011 annual meeting of stockholders are incorporated in Part III of this Report.

 

 

CAUTIONARY NOTE

     This annual report contains forward-looking statements of our management regarding factors that we believe may affect our performance in the future. Such statements typically are identified by terms expressing our future expectations or projections of revenues, earnings, earnings per share, cash flow, market share, capital expenditures, effects of operating and acquisition initiatives, gross profit margin, debt levels, interest costs, tax benefits and other financial items. All forward-looking statements, although made in good faith, are based on assumptions about future events and are therefore inherently uncertain, and actual results may differ materially from those expected or projected. Important factors that may cause our actual results to differ materially from expectations or projections include those described under the heading “Forward-Looking Statements” in Item 7. Forward-looking statements speak only as of the date of this report, and we undertake no obligation to update or revise such statements to reflect new circumstances or unanticipated events as they occur.

PART I

ITEM 1. BUSINESS

GENERAL

     We are a leading provider of death care services and merchandise in the United States. We operate two types of businesses: funeral homes, which currently account for approximately 75% of our total revenue, and cemeteries, which currently account for approximately 25% of our total revenue. As of December 31, 2010, we operated 147 funeral homes in 25 states and 33 cemeteries in 12 states. We primarily serve suburban and rural markets, where we primarily compete with smaller, independent operators, and believe we are a market leader (first or second) in most of our markets. We provide funeral and cemetery services and products on both an “at-need” (time of death) and “preneed” (planned prior to death) basis.

     Our operations are reported in two business segments:

•

Funeral Home Operations. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:

	•		demographic trends in terms of population growth and average age, which impact death rates and number of deaths;
	•		our ability to establish and maintain market share positions supported by strong local heritage and relationships;
	•		our ability to effectively respond to increasing cremation trends by packaging complimentary service and merchandise;
	•		our ability to control salary and merchandise costs; and
	•		our ability to exercise pricing leverage related to our at-need business to increase average revenues per contract.

•

Cemetery Operations. Cemeteries are primarily a sales business providing interment rights (grave sites and mausoleums) and related merchandise, such as markers and memorials. Our cemetery operating results are impacted by the size and success of our sales organization, as evidenced by the statistic that approximately 52% of our cemetery revenues during the year ended December 31, 2010 was generated from preneed sales of interment rights and related merchandise and services. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend money on discretionary items) may impact the amount of such cemetery revenues. The current environment of high unemployment and low consumer confidence represents a formidable challenge to the cemetery sales staff. Cemetery revenues generated from at-need service and merchandise sales generally are subject to many of the same key profitability factors as our funeral home business. Approximately 14% of our cemetery revenues during the year ended December 31, 2010 was 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 business strategy is based on strong, local leadership and entrepreneurial principles that we believe drive market share, revenue growth, and profitability in our local markets. On January 1, 2004, we introduced our Standards Operating Model, a more decentralized and entrepreneurial operating model for our funeral homes. On January 1, 2006, we implemented a similar model to our cemetery business. These are models based on standards designed to grow market share and increase profitability developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. To date, our Standards Operating Model has driven significant changes in our organization, leadership and operating practices. We use the Standards Operating Model to measure the sustainable revenue growth and earning power of our portfolio of death care businesses. The Standards Operating Model emphasizes growing market share and improving long-term profitability by employing leadership and entrepreneurial principles that fit the nature of our local, personal service, high value business. Leadership qualities are evaluated using the 4E’s — Energy, Energize Others, Edge and Execution. This model also requires our local and corporate leaders to focus on the drivers of success that create long-term profitability and value for our stockholders. Our Standards Operating Model emphasizes:

	•		decentralized management of our local businesses;
	•		financial and operational standards based upon key drivers of success of our best businesses;
	•		variable compensation that rewards our managers as if they were owners;
	•		finding, developing and retaining the best people in our industry; and
	•		information technology designed to support local businesses and corporate management decisions, measure performance of our businesses against our financial and operational standards, and ensure adherence to established internal control procedures.
	Our business objectives include:
	•		growing market share, creating new heritage, producing consistent, modest revenue growth and sustainable increasing earnings and cash flow;
	•		continuing to improve our operating and financial performance by executing our Standards Operating Model;
	•		upgrading the leadership in our businesses, as necessary; and searching for well-qualified personnel that we feel will lead and excel within our Standards Operating Model; and
	•		executing our Strategic Acquisition Model, a disciplined program that will guide our acquisition strategies, to increase the sustainable earning power profile of our portfolio.

HISTORY

     Carriage Services, Inc. (“Carriage” or the “Company”) was incorporated in the State of Delaware in December of 1993. During the 1990’s, Carriage grew dramatically through acquisitions of funeral homes and cemeteries. A significant amount of debt was incurred in financing these acquisitions. Our business strategy during the four years ended December 31, 2004 focused on increasing operating cash flow and improving our financial condition by reducing debt to lower our interest expense and improve our credit profile. During that same period we initiated a process to identify underperforming businesses and, where appropriate, sold those businesses to reduce our debt. We sold 36 funeral homes and 12 cemeteries along with 20 parcels of excess real estate. We reduced our debt and contingent obligations by approximately $87 million during the period January 1, 2001 through December 31, 2004.

     During January 2005, we refinanced our senior debt by issuing $130 million of Senior Notes due in 2015. The refinancing was the culmination of the effort to reaccess the capital markets and to extend the maturities of our senior debt to gain the flexibility to reinvest our cash flow in our core business. We used the net cash proceeds from the offering and our cash flow from operations to grow the Company through selective acquisitions. From 2005 through 2009 we completed ten acquisitions. During 2010 we completed six acquisitions and are positioned to acquire more funeral and cemetery businesses in the future.

     During 2008 and 2009, we also used our cash to repurchase $10 million of our common stock when the price per share was low due to the weak financial markets in the economic crisis. Beginning in the latter half of 2008 and continuing through the first half of 2009, we completely repositioned the trust fund investment portfolios to take advantage of what management viewed as pricing dislocations in the financial and capital markets, which resulted in returns of 47.4% in 2009 and 18.4% in 2010, and a much higher level of recurring interest and dividend income. During 2009, we also amended and extended the maturity of our revolving bank credit facility to November 2012 in order to provide financing for future acquisitions, if needed.

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 (the statistics included in this report are based on public reports from financial research firms or public websites):

Deaths and Death Rates

     Death rates and the number of deaths in the United States have been relatively stable on a long-term historical basis. The number of deaths in the United States increased at an annual rate of approximately 1% for the period from 1980 to 2000. Beginning in 2001, the number of deaths has trended lower very slightly as the general population is living longer and because of low birth rates in the period from early 1930’s to mid 1940’s during the depression and World War II. Management understands that the number of deaths declined 0.7% in 2010 compared to 2009. The recent trend is projected to reverse in coming years due to the aging of the “baby boomer” generation. Based on data from the National Population Projections released in 2008 by the U.S. Census Bureau, the number of people age 65 and over is expected to increase by approximately 16% from 2010 to 2015, and will increase to 14.4% of the population in 2015 from 13% of the population in 2010.

Cremation

     In recent years, there has been a steady, gradual increase 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 39% of the U.S. burial market in 2010. The proportion of families choosing cremation has increased by approximately 100 basis points annually. Cremation rates can vary significantly based upon geographic, religious and cultural traditions. Direct cremation has been offered as a less costly alternative to a traditional burial. However, cremation is being increasingly accepted as part of a package of funeral services that includes memorials, merchandise and options for the interment of cremated remains. Cremations result in lower absolute revenue dollars, but higher gross margins. Cemeteries are more affected by the increasing cremation trend than funeral homes.

Highly Fragmented Ownership

     We understand that there are approximately 20,900 funeral homes and 10,500 cemeteries in the United States and that the domestic death care industry generates approximately $15 billion of revenue annually. The largest public operators, in terms of revenue, of both funeral homes and cemeteries in the United States are Service Corporation International (“SCI”), Stewart Enterprises, Inc. (Stewart), StoneMor Partners L.P. and Carriage Services, Inc. We believe these four companies collectively represent approximately 10% of death care revenues in the United States. Independent businesses represent the remaining amount of industry revenue, accounting for an estimated 80% share. Within the independent businesses, there are a number of privately-owned consolidators. SCI acquired what was the second largest public company in the industry at the time, Alderwoods Group, in the latter half of 2006. In March 2010, SCI acquired Keystone North America, Inc., another large public operator. During 2010, we acquired five independent businesses and one business from Stewart.

Heritage and Tradition

     Death care businesses have traditionally been family-owned businesses that have built a local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. Given the sensitive nature of our business, we believe that relationships fostered at the local level build trust in the community and are a key driver of market share. While new entrants may enter any given market, the time and resources required to develop local heritage and tradition serve as important barriers to entry.

BUSINESS STRATEGY

     Key elements of our overall business strategy include the following:

     Implement Operating Initiatives. On January 1, 2004, we introduced our Standards Operating Model, a more decentralized and entrepreneurial operating model for our funeral homes. On January 1, 2006, we implemented a similar model to our cemetery business. These models are based on standards designed to grow market share and increase profitability developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. Our managing partners participate in a variable bonus plan in which they earn a percentage of their business’ earnings based upon the actual standards achieved. The model essentially eliminated the use of financial budgets. The operating model and standards, which we refer to as “Being the Best,” focus on what we believe are 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 death care businesses, which then led to the development of our Strategic Acquisition Model during 2006 which guides our acquisition and disposition strategies. Both models, when executed effectively, should drive longer term, sustainable increases in market share, revenue, earnings and free 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.

     Enhancement of Funeral Services. A significant trend is an increasing preference of our client families for cremation. The percentages of funeral services conducted by us for which cremation was chosen as the manner in which to dispose of remains was 42.1% for the year ended December 31, 2009 and 44.1% for the year ended December 31, 2010. For the year ended December 31, 2010, 55.6% of the number of our total cremation services were direct cremations (where no memorial service or visitation is involved, although merchandise may be sold) and 44.4% included services. One of our training initiatives throughout the Company focuses on increasing the percentage of our cremation customers that choose services. All of our funeral homes offer cremation products and services. While the average revenue for a cremation service is generally lower than that of a traditional full-service funeral, we have found that these revenues can be substantially enhanced by our emphasis on offering services and merchandise.

     We have also begun using the Internet to create new sales channels and new consumer relationships through technology referred to as CarriageOne. CarriageOne has brought us to a new and modern level of serving our client families with video tributes, stationery items and webcasting. These products are high quality and enable our client families to experience personalization that helps their grieving and healing process. Through these services, we create a culture that puts client families and their experiences first with tools that are technically advanced, informative and easy to use. For the year ended December 31, 2010, approximately $1.5 million, or 2.8% of merchandise revenue, was earned through this channel. We anticipate that our revenue and profits from this activity will increase along with client family satisfaction and local brand loyalty.

     Preneed Funeral Sales Program. We operate under a local, decentralized preneed sales strategy whereby each business location customizes its preneed program to its local needs. Insurance-funded contracts allow us to earn commission income to improve our near-term cash flow and offset a significant amount of the up-front costs associated with preneed sales. Trust funded contracts typically provide cash that is invested in various securities with the expectation that returns will exceed the growth factor in the insurance contracts. The cash flow and earnings from insurance contracts are more stable but are generally lower than traditional trust fund investments. In markets that depend on preneed sales for market share, we supplement the arrangements written by funeral directors with sales sourced by sales counselors and third party sellers.

     Preneed Cemetery Sales Program. A significant portion of our historical cemetery revenues are represented by sales of cemetery property sold by our counselors on a preneed basis and finance charges earned on preneed installment contracts. The current economy and the related declines in consumer confidence and discretionary income have reduced the preneed sales success rate. As a countermeasure, we have increased the number of sales counselors and initiated incentives for our customers so that they do not default on their installment obligations to us. In 2010, we were able to reduce bad debt expense by 14% as compared to 2009.

     Renewed Corporate Development Efforts. We believe that our capital structure positions us to pursue a strategy of disciplined growth, affording us the flexibility to redeploy our cash and cash flow toward selective acquisitions that meet our criteria. We expect to continue to improve our earning power as we invest in businesses that will contribute incremental revenues, earnings and cash flow. Our Strategic Acquisition Model is a primary driver of our acquisition strategy. We use strategic ranking criteria to assess acquisition candidates in order to optimize the sustainable earning power of our death care portfolio.

     Ideal acquisition candidates would be those that are demonstrated market leaders, are larger businesses located in larger and growing markets with high barriers to entry and have field-level operating margins consistent with our best performing properties. In our quest to find ideal candidates, we have analyzed and projected key statistics in the death care industry and believe the following will be true by 2015:

	•		The number of national deaths will begin a long-term rise as the death rate among the baby boomer generation increases, notwithstanding a longer life expectancy.
	•		The aging baby boomers will possess sufficient wealth and the financial flexibility to migrate to attractive retirement and part time second career areas primarily in the Southern and Western states and other select markets.
	•		The general population of the United States will continue to grow and migrate to attractive urban and suburban centers in the Southern and Western states.
	•		Cremation rates will continue to increase and migrate eastward. The accelerating cremation rate will have a significant impact on the revenue base of more traditional death care businesses in the Central and Eastern regions of the United States and a lesser impact on the already high cremation states in the West.

     With the above considerations in mind, our vision over the next ten years is to change the profile of our business to be heavily weighted in about 10-15 major markets that have an especially attractive demographic profile and where, over time, we could acquire or build up a group of operations in each of these markets performing one to three thousand funerals or interments annually. We believe there are large enough markets for us to increase our presence in existing markets by acquisition or enter a new market with a substantial acquisition while leveraging our strong local franchise brands and entrepreneurial leadership. We will use our Standards Operating Model to evaluate acquisition candidates to ensure they can be readily integrated into our portfolio.

OUR STRENGTHS

     Market Leader in Our Suburban and Rural Markets. Our operations are located in principally suburban and rural markets, where we primarily compete with smaller, independent operators. Most of our suburban markets have populations of 100,000 or more. In over 70% of our funeral home markets, we believe that we are either first or second in local market share.

     Partnership Culture. Our funeral homes and cemeteries are managed by individuals that we refer to as Managing Partners, with extensive death care experience, often within their local markets. Our Managing Partners have responsibility for day-to-day operations but are required to follow operating and financial standards that are custom designed for each of four groupings using size of business and cremation rate as specific grouping criteria. This strategy allows each local business to maintain its unique identity within its local market and to capitalize on its reputation and heritage while our senior management maintains supervisory controls and provides support services from our corporate headquarters. We believe our culture is very attractive to owners of premier independent businesses that fit our profile of suitable acquisition candidates.

     Flexible Capital Structure. We have no near-term debt maturity issues. We believe that our capital structure provides us with financial flexibility by allowing us to invest our cash flow in growth initiatives, such as business acquisitions and inventory. Currently, we have four primary components in our capital structure:

	•		the $130 million of fixed rate senior notes which have a 2015 maturity;
	•		a $40 million revolving credit facility, of which $0.6 was drawn at December 31, 2010, described under the heading “Liquidity and Capital Resources” in Item 7;
	•		the convertible junior subordinated 7% debenture payable to our affiliate trust, on which we have the ability to defer payments of interest for up to 20 quarters, with a 2029 maturity; and
	•		our common stock.

     Stable Cash Flow. We have demonstrated the ability to generate strong and stable cash flow. Prior to 2005, our primary use of cash flow was to repay debt. Free cash flow for 2010 (cash flow from operations less maintenance capital expenditures) totaled $18.6 million, for which the primary use was acquisitions. Going forward, we intend to use our cash flow to acquire funeral home and cemetery businesses and to fund internal growth projects, such as cemetery inventory development. Our growth strategy is the primary way we expect to increase stockholder value. We will reassess our capital allocation strategy annually, but at this point we believe that our financial goals will best be achieved by continuing to improve the operating and financial performance of our existing portfolio of businesses while selectively investing our net cash flow in growth opportunities that generate a return on invested capital in excess of our weighted average cost of capital.

     Strong Field-Level Operating Margins. We believe that our field-level operating margins are among the highest reported by the public companies in the death care industry and that this performance is a testament to the success of our business strategies. These strong margins and the ability to control costs are important advantages in a business such as ours that is characterized by a high fixed-cost structure. We will continue to seek ways to improve our financial performance, and we believe that our Standards Operating Model will continue to yield long-term improvement in our financial results.

     Effective Management of Funeral Preneed Sales. We believe our local, decentralized strategy allows us to adapt our preneed sales selectively to best address the competitive situation in our particular markets. In highly competitive markets, we execute a more aggressive preneed sales program. In less competitive markets where we have a strong market position, we deploy a more passive preneed sales program. In certain of our markets, we do not deploy a formal preneed program. This approach allows us to target the investment in preneed sales to markets where we have the opportunity to reinforce our market share. Since approximately 80% of our revenues are generated from at-need sales, we retain significant pricing leverage in our funeral business without having to rely on preneed sales.

     Integrated Information Systems. We have implemented information systems to support local business decisions and to monitor performance of our businesses compared to financial and performance standards. All of our funeral homes and cemeteries are connected to our corporate headquarters, which allows us to monitor and assess critical operating and financial data and analyze the performance of individual locations on a timely basis. Furthermore, our information system infrastructure provides senior management with a critical tool for monitoring and adhering to our established internal controls, which is critical given our decentralized model and the sensitive nature of our business operations.

     Proven Management Team. Our management team, headed by our founder and Chief Executive Officer Melvin C. Payne, is characterized by a dynamic culture that focuses on addressing changing market conditions and emerging trends in the funeral services industry. We believe this culture has been critical to our recent successful efforts and will provide an important advantage as the death care industry evolves. We are committed to continue operating an efficient corporate organization and strengthening our corporate and local business leadership. We believe that our Being the Best Standards Operating Model will ensure this commitment at all levels of the organization. Our businesses are organized into three Regions, each headed by a Regional Partner. This promotes more cooperation and synergy between our funeral and cemetery operations and supports the goal of market-share and volume growth in our most significant markets.

OPERATIONS

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

Funeral Home Operations

     At December 31, 2010, we operated 147 funeral homes in 25 states. Funeral home revenues currently account for approximately 75% of our total revenues. 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 our industry. See Note 21 to the Consolidated Financial Statements for the year ended December 31, 2010 for segment data related to funeral home operations.

     Our funeral homes offer a complete range of services to meet a family’s death care needs, including consultation, the removal and preparation of remains, the sale of caskets and related funeral merchandise, the use of funeral home facilities for visitation and services, and

transportation services. Most of our funeral homes have a non-denominational chapel on the premises, which permits family visitation and services to take place at one location and thereby reduces transportation costs and inconvenience to the family.

     Funeral homes are principally a service business that provides burial and cremation services and sells related merchandise, such as caskets and urns. Given the high fixed cost structure associated with funeral home operations, we believe the following are key factors affecting our profitability:

	•		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.

Cemetery Operations

     As of December 31, 2010, we operated 33 cemeteries in 12 states. The cemetery operations are managed by a team of experienced death care industry and sales professionals. Cemetery revenues currently account for approximately 25% of our total revenues. See Note 21 to the Consolidated Financial Statements for the year ended December 31, 2010 for segment data related to cemetery operations.

     Our cemetery products and services include interment services, the rights to interment in cemetery sites (primarily grave sites, mausoleum crypts and niches) and related cemetery merchandise, such as memorials and vaults. Cemetery operations generate revenues through sales of interment rights and memorials, installation fees, fees for interment and cremation services, finance charges from installment sales contracts and investment income from preneed cemetery merchandise trusts and perpetual care trusts.

     Our cemetery operating results are impacted by the size and success of our sales organization, evidenced by the statistic that 41% of our cemetery revenues was generated from preneed sales of interment rights during the year ended December 31, 2010. An additional 11% of our 2010 cemetery revenues was generated from deliveries of merchandise and services previously sold on preneed contracts. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend money on discretionary items) impacts the success rate of preneed sales and is currently having a significant negative impact on our preneed sales success rate and the industry as a whole. To combat the lower success rate, we embarked on a program in late 2008 to hire approximately 100 additional sales counselors. We completed the hiring phase in the first quarter of 2009. Coming into a more “normal” economy, we have focused more on quality sales counselors rather than quantity. Cemetery revenues generated from at-need services and merchandise sales generally are subject to many of the same key profitability factors as in our funeral home business. Approximately 14% of our cemetery revenue was attributable to investment earnings on trust funds and finance charges on installment contracts during the year ended December 31, 2010. Changes in the capital markets and interest rates affect this component of our cemetery revenues.

Preneed Programs

     As discussed in the preceding sections, 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. 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. Revenue from preneed funeral contracts, along with accumulated earnings, is not recognized until the time the funeral service is performed. The accumulated earnings from the trust investments and insurance policies is intended to offset the inflation in funeral prices. 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).

     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 sales of cemetery interment rights are usually financed through interest-bearing installment sales contracts, generally with terms of up to five years with such earnings 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. Preneed sales of cemetery interment rights are generally recorded as revenue when 10% of the contract amount related to the interment right has been collected. Merchandise and services may similarly be sold on an installment basis, but revenue is recorded when delivery has occurred. Allowances for customer cancellations and refunds are recorded at the date that the contract is executed and periodically evaluated thereafter based upon historical experience.

     We sold 5,615 and 6,485 preneed funeral contracts during the years ended December 31, 2009 and 2010, respectively. At December 31, 2010, we had a backlog of 79,842 preneed funeral contracts to be delivered in the future. Approximately 19% and 20% of the funeral revenues recognized during the years ended December 31, 2009 and 2010, respectively, originated through preneed contracts. Cemetery revenues that originated from preneed contracts represented approximately 57% and 52% of our net cemetery revenues for 2009 and 2010.

     As of December 31, 2010, we employed a staff of 203 advance-planning and family service representatives for the sale of preneed products and services.

TRUST FUNDS AND INSURANCE CONTRACTS

     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. Trust fund income earned and the receipt and recognition of any insurance benefits are deferred until the service is performed, while trust fund holdings and deferred revenue are reflected currently on our 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. The aggregate balance of our preneed funeral contracts held in trust, insurance contracts and receivables from customers was approximately $315.4 million as of December 31, 2010.

     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 generally permitted to withdraw the trust principal and accrued income when the merchandise is actually purchased, when the service is provided or when the contract is cancelled. Cemetery merchandise and service trust fund balances, in the aggregate, totaled approximately $79.7 million as of December 31, 2010.

     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. While we are entitled to withdraw the income from perpetual care trusts to provide for maintenance of cemetery property and memorials, we are restricted from withdrawing any of the principal balances of the trust fund. Perpetual care trust balances totaled approximately $45.7 million at December 31, 2010.

     For additional information with respect to our trusts, see Notes 6, 8, and 10 to the Consolidated Financial Statements for the year ended December 31, 2010.

COMPETITION

     The operating environment in the death care industry has been highly competitive. Publicly traded companies operating in the United States include SCI, Stewart and StoneMor Partners L.P. 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 face competition in the markets that they serve. Our primary competition in most of our markets is from local independent operators. We have observed 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 merchandise over the internet and non-traditional casket stores in certain markets. These competitors have been successful in capturing a portion of the low-end market and product sales.

REGULATION

     Our operations are subject to regulations, supervision and licensing under numerous federal, state and local laws, ordinances and

regulations, including extensive regulations concerning trust funds, preneed sales of funeral and cemetery products and services and various other aspects of our business. We believe that we comply in all material respects with the provisions of these laws, ordinances and regulations. We operate in the United States under the Federal Trade Commission (“FTC”) comprehensive trade regulation rule for the funeral industry. The rule contains requirements for funeral industry practices, including extensive price and other affirmative disclosures and imposes mandatory itemization of funeral goods and services.

     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.

EMPLOYEES

     As of December 31, 2010, we and our subsidiaries employed 1,943 employees, of whom 930 were full-time and 1,013 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. None of our employees are represented by unions.

AVAILABLE INFORMATION

     We file annual, quarterly and other reports, and any amendments to those reports, and information with the United States Securities and Exchange Commission (“SEC”). You may read and copy any materials we file with the SEC at the SEC’s Public Reference Room at 100 F Street, NE, Washington, DC 20549. You may obtain additional information about the Public Reference Room by calling the SEC at 1-800-SEC-0330. In addition, the SEC maintains an internet site http://www.sec.gov that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, including us.

     Our 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 SEC.

     Also posted on our website, and available in print upon request, are charters for the Company’s Audit Committee, Compensation Committee, Corporate Governance Committee, Executive Committee and Investment 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, we will post on our website any modifications to the charters and any waivers applicable to senior officers as defined in the applicable charters, as required by the Sarbanes-Oxley Act of 2002.

ITEM 1A. RISK FACTORS

RISKS RELATED TO OUR BUSINESS

Marketing and sales activities by existing and new competitors could cause us to lose market share and lead to lower revenues and margins.

     We face competition in all of our markets. Most of our competitors are independently owned, and some are relatively recent market entrants. Certain of the recent entrants are individuals who were formerly employed by us or by our competitors and have relationships and name recognition within our markets. As a group, independent competitors tend to be aggressive in distinguishing themselves by their independent ownership, and they promote their independence through advertising, direct mailings and personal contact. Increasing pressures from new market entrants and continued advertising and marketing by competitors in local markets could cause us to lose market share and revenues. In addition, competitors may change the types or mix of products or services offered. These changes may attract customers, causing us to lose market share and revenue as well as to incur costs in response to competition to vary the types or mix of products or services offered by us.

Our ability to generate preneed sales depends on a number of factors, including sales incentives and local and general economic conditions.

     Declines in preneed sales would reduce our backlog and revenue and could reduce our future market share. On the other hand, a significant increase in preneed sales can have a negative impact on cash flow as a result of commissions and other costs incurred without corresponding revenues.

     As we have localized our preneed sales strategies, we are continuing to refine the mix of service and product offerings in both our funeral and cemetery segments, including changes in our sales commission and incentive structure. These changes could cause us to experience declines in preneed sales in the short-run. In addition, economic conditions at the local or national level could cause declines in preneed sales either as a result of less discretionary income or lower consumer confidence. Declines in preneed cemetery property sales

reduces current revenue, and declines in other preneed sales would reduce our backlog and future revenue and could reduce future market share.

     Preneed sales of cemetery property and funeral and cemetery merchandise and services are generally cash flow negative initially, primarily due to the commissions paid on the sale, the portion of the sales proceeds required to be placed into trust or escrow and the terms of the particular contract such as the size of the down payment required and the length of the contract. As a result, preneed sales reduce cash flow available for other activities, and, to the extent preneed activities are increased, cash flow will be further reduced.

Price competition could also reduce our market share or cause us to reduce prices to retain or recapture market share, either of which could reduce revenues and margins.

     We have historically experienced price competition primarily from independent funeral home and cemetery operators, and from monument dealers, casket retailers, low-cost funeral providers and other non-traditional providers of services or products. New market entrants tend to attempt to build market share by offering lower cost alternatives. In the past, this price competition has resulted in our losing market share in some markets. In other markets, we have had to reduce prices or offer discounts thereby reducing profit margins in order to retain or recapture market share. Increased price competition in the future could further reduce revenues, profit margins and our backlog.

Our ability to execute our growth strategy is highly dependent upon our ability to successfully identify suitable acquisition candidates and negotiate transactions on favorable terms.

     There is no assurance that we will be able to continue to identify candidates that meet our criteria or that we will be able to reach terms with identified candidates for transactions that are acceptable to us. We intend to apply standards established under our Strategic Acquisition Model to evaluate acquisition candidates, and there is no assurance that we will continue to be successful in doing so or that we will find attractive candidates that satisfy these standards.

Increased or unanticipated costs, such as insurance or taxes, may have a negative impact on our earnings and cash flow.

     We may experience material increases in certain costs, such as insurance or taxes, which result from recent Federal legislation or state and local governments raising taxes in an effort to balance budgets. These costs are difficult to quantify in the future and may impair our ability to achieve earnings growth in excess of revenue growth. Our forecast assumes that we will be successful in increasing earnings at a rate that is greater than revenue growth. We can give no assurance that we will be successful in achieving such increases.

Improved performance in our funeral and cemetery segments is highly dependent upon successful execution of our Standards Operating Model.

     We have implemented our Standards Operating Model to improve and better measure performance in our funeral and cemetery operations. We developed standards according to criteria, each with a different weighting, designed around market share, people, and operational and financial metrics. We also incentivize our location Managing Partners by giving them the opportunity to earn a fixed percentage of the field-level earnings before interest, taxes, depreciation and amortization based upon the number and weighting of the standards achieved. Our expectation is that, over time, the Standards Operating Model will result in improving field-level margins, market share, customer satisfaction and overall financial performance, but there is no assurance that these goals will be met. We have learned that success using the model is highly dependent on having Managing Partners who are highly motivated and implement our business plans.

The success of our businesses is typically dependent upon one or a few key employees for success because of the localized and personal nature of our business.

     Death care businesses have built local heritage and tradition through successive generations, providing a foundation for ongoing business opportunities from established client family relationships and related referrals. We believe these relationships build trust in the community and are a key driver to market share. Our businesses, which tend to serve small local markets, usually have one or a few key employees that drive our relationships. We can give no assurance that we can retain these employees or that these relationships will drive market share.

Earnings from and principal of trust funds could be reduced by changes in financial markets and the mix of securities owned.

     Earnings and investment gains and losses on trust funds are affected by financial market conditions and the specific fixed-income and equity securities that we choose to maintain in the funds. We may not choose the optimal mix for any particular market condition. Declines in earnings from perpetual care trust funds would cause a decline in current revenues, while declines in earnings from other trust funds could cause a decline in future cash flows and revenues.

Covenant restrictions under our debt instruments may limit our flexibility in operating and growing our business.

     The terms of our credit facility and the indenture governing our Senior Notes may limit our ability and the ability of our subsidiaries to, among other things: incur additional debt; pay dividends or make distributions or redeem or repurchase stock; make investments; grant liens; make capital expenditures; enter into transactions with affiliates; enter into sale-leaseback transactions; sell assets; and acquire the assets of, or merge or consolidate with, other companies.

     Our credit facility also requires us to maintain certain financial ratios. Complying with these restrictive covenants and financial ratios, as well as those that may be contained in any future debt agreements, may limit our ability to finance our future operations or capital needs or to take advantage of other favorable business opportunities. Our ability to comply with these restrictive covenants and financial ratios will depend on our future performance, which may be affected by events beyond our control. Our failure to comply with any of these covenants or restrictions when they apply will result in a default under the particular debt instrument, which could permit acceleration of the debt under that instrument and, in some cases, the acceleration of debt under other instruments that contain cross-default or cross-acceleration provisions. In the case of an event of default, or in the event of a cross-default or cross-acceleration, we may not have sufficient funds available to make the required payments under our debt instruments. If we are unable to repay amounts owed under the terms of our amended senior secured credit facility, the lenders thereunder may be entitled to sell certain of our funeral assets to satisfy our obligations under the agreement.

Continued economic crisis and financial and stock market declines could reduce future potential earnings and cash flows and could result in future goodwill impairments.

     In addition to an annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, a significant decline in the market value of our stock or debt values, significant underperformance relative to historical or projected future operating results, and significant negative industry or economic trends. If these factors occur, we may have a triggering event, which could result in impairment to our goodwill. Based on the results of our annual goodwill impairment test we performed using August 31, 2010 fair value information, we concluded that there was no impairment of our goodwill. However, if current economic conditions worsen causing deterioration in our operating revenues, operating margins and cash flows, we may have another triggering event that could result in an impairment of our goodwill.

RISKS RELATED TO THE DEATH CARE INDUSTRY

Declines in the number of deaths in our markets can cause a decrease in revenues. Changes in the number of deaths are not predictable from market to market or over the short term.

     Declines in the number of deaths could cause at-need sales of funeral and cemetery services, property and merchandise to decline, which could decrease revenues. Although the United States Bureau of the Census estimates that the number of deaths in the United States will increase in the future, longer life spans could reduce the rate of deaths. In addition, changes in the number of deaths can vary among local markets and from quarter to quarter, and variations in the number of deaths in our markets or from quarter to quarter are not predictable. These variations may cause our revenues to fluctuate and our results of operations to lack predictability.

The increasing number of cremations in the United States could cause revenues to decline because we could lose market share to firms specializing in cremations. In addition, direct cremations produce minimal revenues for cemetery operations and lower funeral revenues.

     Our traditional cemetery and funeral service operations face competition from the increasing number of cremations in the United States. Industry studies indicate that the percentage of cremations has increased every year and that trend is expected to continue into the future. The trend toward cremation could cause cemeteries and traditional funeral homes to lose market share and revenues to firms specializing in cremations. In addition, direct cremations (with no funeral service, casket, urn, mausoleum niche, columbarium niche or burial) produce no revenues for cemetery operations and lower revenues than traditional funerals and, when delivered at a traditional funeral home, produce lower profit margins as well.

If we are not able to respond effectively to changing consumer preferences, our market share, revenues and profitability could decrease.

     Future market share, revenues and profits will depend in part on our ability to anticipate, identify and respond to changing consumer preferences. In past years, we have implemented new product and service strategies based on results of customer surveys that we conduct on a continuous basis. However, we may not correctly anticipate or identify trends in consumer preferences, or we may identify them later than our competitors do. In addition, any strategies we may implement to address these trends may prove incorrect or ineffective.

Because the funeral and cemetery businesses are high fixed-cost businesses, changes in revenue can have a disproportionately large effect on cash flow and profits.

     Companies in the funeral home and cemetery business must incur many of the costs of operating and maintaining facilities, land and equipment regardless of the level of sales in any given period. For example, we must pay salaries, utilities, property taxes and maintenance costs on funeral homes and maintain the grounds of cemeteries regardless of the number of funeral services or interments performed. Because we cannot decrease these costs significantly or rapidly when we experience declines in sales, declines in sales can cause margins, profits and cash flow to decline at a greater rate than the decline in revenues.

Changes or increases in, or failure to comply with, regulations applicable to our business could increase costs or decrease cash flows.

     The death care industry is subject to extensive and evolving regulation and licensing requirements under federal, state and local laws. For example, the funeral home industry is regulated by the FTC, which requires funeral homes to take actions designed to protect consumers. State laws impose licensing requirements and regulate preneed sales. Embalming and cremation facilities are subject to stringent environmental and health regulations. Compliance with these regulations is burdensome, and we are always at risk of not complying with the regulations or facing costly and burdensome investigations from regulatory authorities.

     In addition, from time to time, governments and agencies propose to amend or add regulations, which could increase costs or decrease cash flows. For example, federal, state, local and other regulatory agencies have considered and may enact additional legislation or regulations that could affect the death care industry. Several states and regulatory agencies have considered or are considering regulations that could require more liberal refund and cancellation policies for preneed sales of products and services, limit or eliminate our ability to use surety bonding, increase trust requirements and prohibit the common ownership of funeral homes and cemeteries in the same market. If adopted by the regulatory authorities of the jurisdictions in which we operate, these and other possible proposals could have a material adverse effect on us, our financial condition, our results of operations and our future prospects. For additional information regarding the regulation of the death care industry, see “Business — Regulation.”

ITEM 1B. UNRESOLVED STAFF COMMENTS

     None.

ITEM 2. PROPERTIES

     At December 31, 2010, we operated 147 funeral homes in 25 states and 33 cemeteries in 12 states. We own the real estate and buildings for 79% of our funeral homes and lease facilities for the remaining 21%. We own 28 cemeteries and operate five cemeteries under long-term contracts with municipalities and non-profit organizations at December 31, 2010. Eleven funeral homes are operated in combination with cemeteries as these locations are physically located on the same property or very close proximity and under same management. The 33 cemeteries operated by us have an inventory of unsold developed lots totaling approximately 131,500 and 138,982 at December 31, 2009 and 2010, respectively. In addition, approximately 568 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 which management believes we currently meet this standard.

     The following table sets forth certain information as of December 31, 2010, regarding Carriage’s properties used by the funeral homes segment and by the cemeteries segment identified by state:

		Number of
		Funeral Homes								Number of Cemeteries
State		Owned				Leased(1)				Owned				Managed
California			23				3				4				0
Connecticut			7				3				0				0
Florida			6				9				6				3
Georgia			3				0				0				0
Idaho			6				1				3				0
Illinois			1				3				1				0
Kansas			6				0				0				0
Kentucky			8				3				1				0
Maryland			1				0				0				0
Massachusetts			12				0				0				0
Michigan			3				0				0				0
Montana			2				1				1				0
Nevada			2				0				2				1
New Jersey			4				1				0				0
New Mexico			1				0				0				0
New York			1				0				0				0
North Carolina			0				2				1				0
Ohio			5				1				0				1
Oklahoma			1				0				1				0
Rhode Island			4				0				0				0
Tennessee			3				0				0				0
Texas			12				1				7				0
Virginia			3				1				1				0
Washington			1				1				0				0
West Virginia			1				1				0				0
Total			116				31				28				5

     Our corporate headquarters occupy approximately 37,000 square feet of leased office space in Houston, Texas. At December 31, 2010, we owned and operated 634 vehicles and leased 4 vehicles.

ITEM 3. LEGAL PROCEEDINGS

     We and our subsidiaries are parties to a number of legal proceedings that arise from time to time in the ordinary course of our 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. Information regarding litigation is set forth in Part II, Item 8, Financial Statements and Supplementary Data, Note 15 to our Consolidated Financial Statements of this Form 10-K.

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

ITEM 4. [REMOVED and RESERVED]

PART II

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

Market Information

     Our 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:

2010		High				Low
First Quarter		$	4.65			$	3.56
Second Quarter		$	5.18			$	4.27
Third Quarter		$	5.07			$	4.00
Fourth Quarter		$	5.49			$	4.50

2009		High				Low
First Quarter		$	2.59			$	1.10
Second Quarter		$	4.11			$	1.49
Third Quarter		$	4.23			$	2.62
Fourth Quarter		$	4.59			$	3.05

     As of March 4, 2011, there were 18,139,859 shares of our common stock outstanding and the closing price as reported by the New York Stock Exchange was $5.85 per share. The shares of common stock outstanding are held by approximately 250 stockholders of record. Each share is entitled to one vote on matters requiring the vote of stockholders. We believe there are approximately 5,000 beneficial owners of our common stock.

     We have never paid a cash dividend on our common stock. We currently intend to retain earnings to fund the growth and development of our business. Any future change in our policy will be made at the discretion of our Board of Directors in light of our financial condition, capital requirements, earnings prospects and any limitations imposed by lenders or investors, as well as other factors the Board of Directors may deem relevant.

     Prior to March 22, 2010, we had a compensation policy for fees paid to our directors under which the directors could choose to receive their fees either in the form of cash or equity based on the fair market value of our common stock calculated at the closing price published by the New York Stock Exchange on the date the fees were earned. Effective March 22, 2010, and subsequently revised on July 14, 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.

Purchases of Equity Securities by the Issuer

     During June 2008 and November 2008, the Board of Directors approved share repurchase programs authorizing the Company to purchase up to an aggregate of $10 million of our common stock. The repurchases were executed in the open market and through privately negotiated transactions subject to market conditions, normal trading restrictions and other relevant factors. Through December 31, 2008, we repurchased 1,730,969 shares of Common Stock at an aggregate cost of $5,740,442 and an average cost per share of $3.29. During 2009, we repurchased 1,377,882 shares of common stock at an aggregate cost of $4,259,558 and an average cost per share of $3.09. The repurchased shares are held as treasury stock. We did not repurchase any shares of our common stock during 2010.

     The following graph compares the cumulative 5-year total return to shareholders on Carriage Services, Inc.’s common stock relative to the cumulative total returns of the Russell MicroCap index, and a customized peer group of three companies that includes: Service Corp. International, Stewart Enterprises Inc and Stonemor Partners Limited Partnership. The graph tracks the performance of a $100 investment in our common stock, in the peer group, and the index (with the reinvestment of all dividends) from 12/31/2005 to 12/31/2010.

COMPARISON OF 5 YEAR CUMULATIVE TOTAL RETURN*
Among Carriage Services, Inc., the Russell MicroCap Index
and a Peer Group

*     $100 invested on 12/31/05 in stock or index, including reinvestment of dividends.
Fiscal year ending December 31.

		12/05				12/06				12/07				12/08				12/09				12/10
Carriage Services, Inc.			100.00				101.80				176.00				40.20				78.60				97.00
Russell MicroCap			100.00				116.54				107.22				64.57				82.31				106.09
Peer Group			100.00				125.32				172.68				63.38				109.23				124.29

The stock price performance included in this graph is not necessarily indicative of future stock price performance.

PEER GROUP I

Service Corp. International
Stewart Enterprises Inc
Stonemor Partners Limited Partnership

ITEM 6. SELECTED FINANCIAL DATA

     The table on the following page sets forth selected consolidated financial information for us that has been derived from the audited Consolidated Financial Statements of the Company as of and for each of the years ended December 31, 2006, 2007, 2008, 2009 and 2010. These historical results are neither indicative of our future performance, nor necessarily comparable as a result of changes in accounting methods discussed below.

     You should read this historical financial data together with “Management’s Discussion and Analysis of Financial Condition and Results of Operations” included in this report and our Consolidated Financial Statements and notes thereto included elsewhere in this report.

Selected Consolidated Financial Information

		Year ended December 31,
		2006				2007				2008				2009				2010
						(dollars in thousands, except per share amounts)
INCOME STATEMENT DATA:
Revenues:
Funeral		$	113,198			$	123,839			$	134,246			$	131,051			$	138,125
Cemetery			36,159				43,017				42,682				46,576				46,822
Total revenues			149,357				166,856				176,928				177,627				184,947
Gross profit:
Funeral			30,508				36,170				37,170				38,450				37,940
Cemetery			3,943				9,355				5,873				7,668				9,507
Total gross profit			34,451				45,525				43,043				46,118				47,447
General and administrative expenses			12,023				16,015				18,112				16,003				16,806
Operating income			22,428				29,510				24,931				30,115				30,641
Interest expense			(18,508	)			(18,344	)			(18,331	)			(18,498	)			(18,262	)
Litigation settlement			—				—				(3,300	)			—				—
Interest and other income			1,922				1,151				229				228				1,068
Income before income taxes			5,842				12,317				3,529				11,845				13,447
Provision for income taxes			(2,239	)			(4,959	)			(1,725	)			(4,797	)			(5,368	)
Net income from continuing operations			3,603				7,358				1,804				7,048				8,079
Income (loss) from discontinued operations			(5,019	)			921				(1,546	)			—				—
Preferred Stock Dividend			—				—				10				14				14
Net income (loss)		$	(1,416	)		$	8,279			$	248			$	7,034			$	8,065
Earnings (loss) per share
Basic:
Continuing operations		$	0.19			$	0.39			$	0.09			$	0.40			$	0.46
Discontinued operations			(0.28	)			0.05				(0.08	)			—				—
Basic earnings (loss) per share		$	(0.09	)		$	0.44			$	0.01			$	0.40			$	0.46
Diluted:
Continuing operations		$	0.19			$	0.38			$	0.09			$	0.40			$	0.45
Discontinued operations			(0.27	)			0.05				(0.08	)			—				—
Diluted earnings (loss) per share		$	(0.08	)		$	0.43			$	0.01			$	0.40			$	0.45
Weighted average number of common and common equivalent shares outstanding:
Basic			18,545				19,020				19,054				17,573				17,635
Diluted			18,912				19,507				19,362				17,749				17,938
OPERATING AND FINANCIAL DATA:
Funeral homes at end of period			131				139				136				138				147
Cemeteries at end of period			28				32				32				32				33
Funeral services performed			22,468				23,366				25,531				24,362				25,801
Preneed funeral contracts sold			4,998				5,075				4,916				5,615				6,485
Backlog of preneed funeral contracts			56,719				68,909				69,575				72,172				79,842
Average revenue per funeral contract		$	5,120			$	5,207			$	5,154			$	5,296			$	5,266
Cremation rate			34.4	%			35.8	%			39.8	%			42.1	%			44.1	%
Depreciation and amortization		$	8,624			$	9,488			$	10,368			$	10,339			$	9,976
BALANCE SHEET DATA:
Total assets		$	564,996			$	610,807			$	560,293			$	619,298			$	671,012
Working capital			35,755				11,647				9,100				12,004				2,535
Long-term debt, net of current maturities			133,841				132,994				132,345				131,898				132,416
Convertible junior subordinated debenture			93,750				93,750				93,750				93,750				92,858
Stockholders’ equity			96,373				106,900				103,510				108,222				119,673

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

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 a service business that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sell interment rights (grave sites and mausoleum spaces) and related merchandise such as markers and outer burial containers. As of December 31, 2010, we operated 147 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 strategy 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 at the location level in favor of the standards. The operating model and its 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 death care businesses, which then led to the development of our Strategic Acquisition Model, described below under “Acquisitions,” during 2006, which 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 death care 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 selling 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 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 23,366 in 2007 to 25,801 in 2010 (compound annual increase of 3.4%). Our funeral operating revenue has increased from $119.2 million in 2007 to $129.7 million in 2010 (compound annual increase of 2.9%). The increases are primarily because of businesses we acquired from 2007 through 2010 and our ability to increase the average revenue per funeral through expanded service offerings and packages. We experienced flat volumes in comparing the year ended December 31, 2010 to the year ended December 31, 2009 on a same store basis, although Funeral operating revenues for the year ended December, 2010 were up 3.7% compared to the year ended December 31, 2009, which resulted primarily from our acquisitions.

     The percentage of funeral services involving cremations has increased from 35.8% for the year ended 2007 to 44.1% for the year ended 2010. A significant portion of that increase is the result of acquiring businesses in high cremation areas. On a same store basis, the cremation rate has risen to 40.7% for the year ended December 31, 2010.

     The cemetery operating results are affected by the size and success of our sales organization. Approximately 52% of our 2010 cemetery revenues relate to preneed sales of interment rights 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. Approximately 14% 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 2007 through 2010 was characterized by fluctuating operating revenues and field level profit margins. Cemetery operating revenue decreased 4.4% over prior year although we experienced a 75.3% increase in trust fund earnings. Also, a 3.0% increase in at need revenues offset the decline in preneed revenue. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries in order to focus on growth of our preneed property sales. Additionally, a portion of our capital expenditures in 2011 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. 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. Revenue from preneed funeral contracts, along with accumulated earnings, is not recognized until the time the funeral service is performed. The accumulated earnings from the trust investments and insurance policies is intended to offset the inflation in funeral prices. 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 with such earnings 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% per annum. Occasionally, we have offered zero percent interest financing to promote sales for limited-time offers. 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.

     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 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 preneed cemetery merchandise and service 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 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 our Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We use six strategic ranking criteria to assess acquisition candidates 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. During 2009, we completed two acquisitions. During 2010, we acquired one cemetery and five funeral home businesses. The consideration paid for these acquisitions was cash, which was generated from our operations.

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 (“MD&A”) is 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. We believe the following critical accounting policies affect our more significant judgments and estimates used in the preparation of our Consolidated Financial Statements.

Funeral and Cemetery Operations

     We record the sales of funeral and cemetery merchandise and services when the merchandise is delivered or service is performed. Sales of cemetery interment rights are recorded as revenue in accordance with the retail land sales accounting principles. This method generally provides for the recognition of revenue in the period in which the customer’s cumulative payments exceed 10% of the contract price related to the real estate. Costs related to the sales of interment rights, which include property and other costs related to cemetery development activities, are charged to operations using the specific identification method in the period in which the sale of the interment right is recognized as revenue. Revenues to be recognized and cash flow from the delivery of merchandise and performance of services related to preneed contracts that were acquired in acquisitions are typically lower than those originated by us.

     Allowances for bad debts and customer cancellations are provided at the date that the sale is recognized as revenue and are based on our historical experience and the current economic environment. We also monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.

     When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions earned by the Company are recognized as revenues when the commission is no longer subject to refund, which is usually one year after the policy is issued. Preneed selling costs consist of sales commissions that we pay our sales counselors and other direct related costs of originating preneed sales contracts and are expensed as incurred.

Goodwill

     The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired in business combinations is recorded as goodwill. Goodwill has not historically been recorded in connection with the acquisition of cemetery businesses. Goodwill is tested for impairment by assessing the fair value of each of our reporting units. The funeral segment reporting units consist of our East, Central and West regions in the United States and we performed our annual impairment test of goodwill using information as of August 31, 2010. In addition, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in the Company’s market capitalization or decline in operating results.

     Our goodwill impairment test involves estimates and management judgment. In the first step of our goodwill testing, we compare the fair value of each reporting unit to its carrying value, including goodwill. We determine fair value for each reporting unit using both a market approach, weighted 70%, and an income approach, weighted 30%. Funeral home selling prices are typically quoted in the marketplace as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Our methodology for determining a market approach fair value utilized recent sales transactions in the industry. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance that may differ from actual future cash flows using a weighted average cost of capital for the Company and other public death care companies. Goodwill impairment is not recorded where the fair value of the reporting unit exceeds its carrying amount. If the fair value of the reporting unit is less than its carrying value, the implied fair value of goodwill is compared to the carrying amount of the reporting unit’s goodwill and if the carrying amount exceeds the implied value, an impairment charge would be recorded in an amount equal to that excess.

     A more complete discussion of the 2010 goodwill impairment testing is included below in Item 7 of this Form 10-K.

Income Taxes

     The Company and its subsidiaries file a consolidated U.S. Federal income tax return and separate income tax returns in the states in which we operate. We record deferred taxes for temporary differences between the tax basis and financial reporting basis of assets and liabilities, and account for uncertain tax positions in our financial statements. The Company records a valuation allowance to reflect the estimated amount of deferred tax assets for which realization is uncertain. Management reviews the valuation allowance at the end of each quarter and makes adjustments if it is determined that it is more likely than not that the tax benefits will be realized.

     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 twelve months.

Stock Plans and Stock-Based Compensation

     The Company has stock-based employee and director compensation plans in the form of restricted stock, stock option and employee stock purchase plans. The Company recognizes compensation expense in an amount equal to the fair value of the share-based awards 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.

Preneed Funeral and Cemetery Trust Funds

     The Company’s preneed and perpetual care trust funds are reported in accordance with 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 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 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.

     Effective January 1, 2009, a noncontrolling interest in a subsidiary, which is sometimes referred to as unconsolidated investment, is an ownership interest in the consolidated entity that is reported as a component of equity in the Consolidated Financial Statements. Consolidated net income is reported at amounts that include the amounts attributable to both the parent and the noncontrolling interest. The net income, on the face of the Consolidated Statements of Operations, is of the amounts of consolidated net income attributable to the parent and to the noncontrolling interest.

Discontinued Operations

     In accordance with the Company’s Strategic Acquisition Model, non-strategic businesses are reviewed to determine whether the business should be sold and the proceeds redeployed elsewhere. A marketing plan is then developed for those locations which are identified as held-for-sale. When the Company receives a letter of intent and financing commitment from the buyer and the sale is expected to occur within one year, the location is no longer reported within the Company’s continuing operations. The assets and liabilities associated with the location are reclassified as held for sale on the balance sheet and the operating results, as well as impairments, are presented on a comparative basis in the discontinued operations section of the consolidated statements of operations, along with the income tax effect. There were no discontinued operations in 2010.

Business Combinations

     Tangible and intangible assets acquired and liabilities assumed are recorded at fair value and goodwill is recognized for any difference between the price of the acquisition and fair value. We recognized the assets acquired, the liabilities assumed and any noncontrolling 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. We customarily estimate related transaction costs known at closing. To the extent that information not available to us at the closing date subsequently becomes available during the allocation period we may adjust goodwill, assets, or liabilities associated with the acquisition.

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 11 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 was effective for interim reporting periods ending after June 15, 2009, and has had no affect 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 Company 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 was effective for interim reporting periods ending after June 15, 2009 and it has had no affect 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 long-term debt 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 December 31, 2010, these securities were typically trading at a price of approximately $100.75, indicating a fair market value of approximately $131.0 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 Sheet at a cost of approximately $92.9 million. The fair value of these securities is estimated to be $66.6 million at December 31, 2010 based on available broker quotes of the corresponding preferred securities issued by the Trust.

Computation of Earnings per Common Share

     New guidance was issued during early 2009 addressing the accounting changes 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 the basic and diluted weighted average shares outstanding calculation. For the three years ended December 31, 2010, there was no material impact to basic and diluted earnings per share in connection with this accounting change.

Subsequent Events

     Management of the Company evaluated events and transactions during the period beginning subsequent to December 31, 2010 through the date the financial statements were issued, for potential recognition or disclosure in the accompanying financial statements covered by this report. There were no subsequent events to disclose.

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 financial 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 entries.

RECENT ACCOUNTING PRONOUNCMENTS AND ACCOUNTING CHANGES

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 was 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 11 to the Consolidated Financial Statements herein for additional information on the Company’s fair value disclosures.

Allowance for Credit Losses on Financing Receivables

     In July 2010, new guidance was issued which increased the disclosure requirements about the credit quality of financing receivables and the allowance for credit losses. The intent of the disclosure is to provide additional information about the nature of credit risks inherent in our financing receivables, how credit risk is analyzed and assessed when determining the allowance for credit losses, and the reasons for the change in the allowance for credit losses. The aggregate balance of non-current, preneed cemetery financing receivables was $16.1 million as of December 31, 2010. The disclosures related to period-end information are required for annual reporting periods ending after December 15, 2010 which is effective for the Company at December 31, 2010. Disclosures of activity that occurs during the reporting period are required for interim periods beginning after December 15, 2010 which will be effective for the Company at March 31, 2011. The additional required disclosures are provided in Note 7 to the Consolidated Financial Statements.

SELECTED INCOME AND OPERATIONAL DATA

     The following table sets forth certain income statement data for Carriage expressed as a percentage of net revenues for the periods presented:

		Year Ended December 31,
		2008				2009				2010
Total revenues			100.0	%			100.0	%			100.0	%
Total gross profit			24.3				26.0				25.7
General and administrative expenses			10.2				9.0				9.1
Operating income			14.1				16.9				16.6
Interest expense			10.4				10.4				9.9

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

		Year Ended December 31,
		2008				2009				2010
Funeral homes at beginning of period			139				136				138
Acquisitions			—				2				10
Divestitures or closures of existing funeral homes			(3	)			—				(1	)
Funeral homes at end of period			136				138				147
Cemeteries at beginning of period			32				32				32
Acquisitions			—				—				1
Divestitures			—				—				—
Cemeteries at end of period			32				32				33

     The following is a discussion of our results of operations for the years ended December 31, 2008, 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 gauging the leveraging performance contribution that a selective acquisition program can have on the total Company’s performance. Depreciation and amortization and regional and unallocated funeral and cemetery costs are not included in operating profit.

YEAR ENDED DECEMBER 31, 2010 COMPARED TO YEAR ENDED DECEMBER 31, 2009

The following is a discussion of our results of operations for the years ended December 31, 2010 and 2009.

     Net income from continuing operations for the year ended December 31, 2010 totaled $8.1 million, equal to $0.45 diluted share as compared to $7.0 million for the year ended December 31, 2009, or $0.40 per diluted share. Total revenue for the year ended December 31, 2010 was $184.9 million, an increase of 4.1%, compared to $177.6 million for the comparable period in 2009. The variance between the two periods was primarily due to approximately 44% higher financial revenue in the current period. Although we experienced single digit declines in same store operating revenue and profit, our acquired businesses and higher financial revenues drove the overall results higher in 2010 compared to 2009.

     No businesses were sold during 2010 and 2009.

     Funeral Home Segment. The following table sets forth certain information regarding our revenues and operating profit from the funeral home operations for the year ended December 31, 2009 compared to the year ended December 31, 2010.

		Year Ended
		December 31,								Change
		2009				2010				Amount				Percent
		(dollars in thousands)
Revenues:
Same store operating revenue		$	108,513			$	107,351			$	(1,162	)			(1.1	)%
Acquired operating revenue			16,603				22,392				5,789				34.9	%
Preneed funeral insurance commissions			2,024				2,265				241				11.9	%
Preneed funeral trust earnings			3,911				6,117				2,206				56.4	%
Revenues from continuing operations		$	131,051			$	138,125			$	7,074				5.4	%
Operating profit:
Same store operating profit		$	38,977			$	36,035			$	(2,942	)			(7.5	)%
Acquired operating profit			4,809				5,123				314				6.5	%
Preneed funeral insurance commissions			285				876				591				207.4	%
Preneed funeral trust earnings			3,911				6,117				2,206				56.4	%
Operating profit from continuing operations		$	47,982			$	48,151			$	169				0.3	%

     Funeral same store operating revenues for the year ended December 31, 2010 decreased $1.2 million, or 1.1% when compared to the year ended December 31, 2009. We experienced flat volume in the number of contracts year over year and an increase of 0.6%, to $5,610, in the average revenue per contract for those existing operations. The average revenue per contract includes the impact of the funeral trust fund earnings. The number of traditional burial contracts decreased 2.3% while the average revenue per burial contract increased 2.1% to $8,100. The cremation rate for the same store businesses rose from 39.7% to 40.7%. The average revenue per cremation contract increased 2.9% to $3,089 and the number of cremation contracts increased 2.5%. Cremations with services have declined from 46.2% of total cremation contracts in the year ended 2009 to 44.4% in the year ended 2010. The average revenue for “other” contracts, which make up approximately 7.6% of the number of contracts, declined from $2,057 to $2,016. Other contracts consist of charges for merchandise or services for which we do not perform a funeral service for the deceased during the period.

     Same store operating profit for the year ended December 31, 2010 decreased $3.0 million, or 7.5%, from the comparable year ended December 31, 2009, and as a percentage of funeral same store operating revenue, decreased from 35.9% to 33.6% as we have seen operating expenses increase in the year ended December 31,2010. We have experienced increases in all same store controllable expense categories but primarily in salaries and wages and health insurance costs for the year ended December 31, 2010, when compared to the year ended December 31, 2009. Our costs for the self insurance program for property, casualty and general liability risk has remained flat year over year.

     Funeral acquired revenues for the year ended December 31, 2010 increased $5.8 million, or 34.9%, when compared to the year ended December 31, 2009 as we experienced a 33.2% increase in the number of contracts, due to the acquisitions completed in the second half of 2010, and a slight increase of 2.0%, to $4,066, in the average revenue per contract for those acquired operations. The 2010 period includes the results of operations attributable to the two acquisitions that closed in the fourth quarter of 2009 and the five funeral businesses acquired in 2010. The cremation rate for the acquired businesses was 56.2% for 2010, up from 53.1% in the prior year, as these businesses are located in higher cremation areas compared to our existing locations. The average revenue per cremation contract increased 8.1% to $2,465 for 2010 and the number of cremation contracts increased 40.9% compared to 2009.

     Acquired operating profit for the year ended December 31, 2010 increased $0.3 million, or 6.5%, from the year ended December 31, 2009 and, as a percentage of revenue from acquired businesses, was 28.9% for 2009 compared to 22.9% for 2010 as those recently acquired businesses have not fully transitioned into Carriage’s Standard Operating Model.

     The two categories of financial revenue, insurance commissions and trust earnings on matured preneed contracts, had a meaningful impact on funeral revenues and operating profit. On a combined basis, these categories experienced an increase of $2.4 million and $2.8 million in revenue and operating profit, respectively, compared to the year ended December 31, 2009 primarily due to higher realization of interest income, dividends and capital gains that have been allocated to individual maturing contracts and lower preneed expenses.

     Cemetery Segment. The following table sets forth certain information regarding our revenues and operating profit from the cemetery operations for the year ended December 31, 2009 compared to the year ended December 31, 2010:

		Year Ended
		December 31,								Change
		2009				2010				Amount				Percent
		(dollars in thousands)
Revenues:
Same store operating revenue		$	36,021			$	34,211			$	(1,810	)			(5.0	)%
Acquired operating revenue			6,276				6,239				(37	)			(0.6	)%
Cemetery trust earnings			2,747				4,815				2,068				75.3	%
Preneed cemetery finance charges			1,532				1,557				25				1.6	%
Revenues from continuing operations		$	46,576			$	46,822			$	246				0.5	%
Operating Profit:
Same store operating profit		$	7,872			$	7,340			$	(532	)			(6.8	)%
Acquired operating profit			1,441				1,707				266				18.5	%
Cemetery trust earnings			2,747				4,815				2,068				75.3	%
Preneed cemetery finance charges			1,532				1,557				25				1.6	%
Operating profit from continuing operations		$	13,592			$	15,419			$	1,827				13.4	%

     Cemetery same store operating revenues for the year ended December 31, 2010, decreased $1.8 million, or 5.0%, compared to the year ended December 31, 2009. Same store revenue from preneed property sales decreased $1.8 million, or 10.2%, which was primarily a reflection of a 13.9% decrease in the number of interment rights (property) sold. We experienced a 10.9% increase in the average price per interment compared to 2009. The percentage of those we were able to recognize as revenue, because we received at least 10% of the sales price from the customer, decreased from 87.8% to 83.4%. Revenue from deliveries of preneed merchandise and services deliveries decreased $0.1 million, or 0.9%, and same store at-need revenues increased $0.5 million, or 3.6%.

     Cemetery same store operating profit for the year ended December 31, 2010 decreased $0.5 million, or 6.8%. As a percentage of revenues, cemetery same store operating profit decreased slightly from 21.8% to 21.4%. Promotional expenses (primarily preneed sales commissions) decreased $0.7 million in connection with the lower preneed sales volumes and bad debts decreased $0.2 million due to better management of receivables. Overall, controllable expenses such as salaries and benefits, transportation, and general and administrative costs declined $0.2 million, or 1.5%, and the costs of the self insurance program for property, casualty and general liability risks decreased $0.1 million, or 2.4%.

     Cemetery acquired revenues for the year ended December 30, 2010 decreased slightly compared to the year ended December 31, 2009. Revenue from preneed property sales increased 2.2% and preneed revenue from merchandise and services deliveries decreased $0.1 million, or 11.0%. At-need revenues remained flat compared to the same period in 2009. As a percentage of revenues, cemetery acquired operating profit increased from 23.0% to 27.4%.

     The two categories of financial revenue which consist of trust earnings and finance charges on preneed receivables had a meaningful impact on cemetery revenues and operating profit. Total trust earnings increased $2.1 million, or 75.3%, when compared to the year ended December 31, 2009. Earnings from perpetual care trust funds totaled $4.3 million for the year ended December 31, 2010 compared to $2.3 million for the year ended December 31, 2009. Trust earnings recognized upon the delivery of merchandise and service contracts increased $0.2 million, or 41.3%, compared to the same period in 2009. Finance charges on the preneed contracts remained flat year over year.

     Other. General and administrative expenses totaled $16.8 million for the year ended December 31, 2010, an increase of $0.8 million compared to the year ended December 31, 2009. We incurred an additional $0.8 million of incentive compensation costs and approximately $0.9 million of additional costs in our Corporate Development department and the related costs of closing acquisitions. Included in our general and administrative expenses is a $0.7 million credit for the recovery of legal fees from a previously settled lawsuit.

     Interest income and other, net for the year ended December 31, 2010 is primarily interest income on the short-term investments, a gain related to an insurance claim and the gain on the sale of TIDES.

     Income taxes. See Note 16 to the Consolidated Financial Statements for a discussion of the income taxes for 2010 and 2009.

YEAR ENDED DECEMBER 31, 2009 COMPARED TO YEAR ENDED DECEMBER 31, 2008

     The following is a discussion of our results of operations for the years ended December 31, 2009 and 2008.

     Net income from continuing operations for the year ended December 31, 2009 totaled $7.0 million, equal to $0.40 per diluted share as compared to $1.8 million for the year ended December 31, 2008, or $0.09 per diluted share. The variance between the two periods was primarily due to improvement in the results of our cemetery businesses, a decrease in corporate costs and expenses and a class action litigation settlement charge in 2008. Our cemetery businesses experienced a $2.6 million increase in pre-tax operating profit, equal to $0.09 per diluted share. In 2009, corporate costs and expenses decreased $2.1 million from 2008 due primarily to 2008 legal costs and severance expenses which were absent in 2009. In 2008, the Company expensed $3.3 million in conjunction with the litigation settlement, which was funded in 2009.

     Loss from discontinued operations for the year ended December 31, 2008 totaled $1.5 million, equal to ($0.08) per diluted share. Two funeral home businesses were sold during 2008 for approximately $1.0 million from which a pre-tax loss of $2.4 million was recorded. No businesses were sold during 2009.

     Funeral Home Segment. The following table sets forth certain information regarding our revenues and operating profit from the funeral home operations for the year ended December 31, 2008 compared to the year ended December 31, 2009.

		Year Ended
		December 31,								Change
		2008				2009				Amount				Percent
						(dollars in thousands)
Revenues:
Same store operating revenue		$	110,147			$	108,513			$	(1,634	)			(1.5	)%
Acquired operating revenue			16,341				16,603				262				1.6	%
Preneed funeral insurance commissions			2,670				2,024				(646	)			(24.2	)%
Preneed funeral trust earnings			5,088				3,911				(1,177	)			(23.1	)%
Revenues from continuing operations		$	134,246			$	131,051			$	(3,195	)			(2.4	)%
Revenues from discontinued operations		$	476			$	—			$	(476	)			*
Operating profit:
Same store operating profit		$	37,736			$	38,977			$	1,241				3.3	%
Acquired operating profit			4,238				4,809				571				13.5	%
Preneed funeral insurance commissions			982				285				(697	)			(71.0	)%
Preneed funeral trust earnings			5,088				3,911				(1,177	)			(23.1	)%
Operating profit from continuing operations		$	48,044			$	47,982			$	(62	)			(0.1	)%
Revenues from discontinued operations		$	145			$	—			$	(145	)			*

     Funeral same store revenues for the year ended December 31, 2009 decreased $1.6 million, or 1.5%, when compared to the year ended December 31, 2008 as we experienced a 5.4% decrease in the number of contracts and an increase of 3.6%, to $5,605, in the average revenue per contract for those existing operations. The number of traditional burial contracts decreased 6.5% while the average revenue per burial contract increased 3.1% to $7,947. The cremation rate for the same store businesses rose from 37.2% to 39.5%. The average revenue per cremation contract increased 4.3% to $3,022 and the number of cremation contracts increased approximately 0.3%.

     Total same store operating profit for the year ended December 31, 2009 increased $1.2 million, or 3.3%, from the comparable period in 2008, and as a percentage of funeral same store revenue, increased from 34.3% to 35.9% as a function of our ability to reduce operating costs across substantially all expense categories. Same store controllable expenses, such as salaries and wages, transportation and administrative expenses declined $2.1 million, or 4.2%, for the year ended December 31, 2009, when compared to the year ended December 31, 2008. Additionally, casket and other merchandise costs declined $0.8 million, and as a percentage of same store revenues from 14.2% in 2008 to 13.8% in 2009.

     Funeral acquired revenues for the year ended December 31, 2009 increased $0.3 million, or 1.6%, when compared to the year ended December 31, 2008 as we experienced a 0.7% decrease in the number of contracts and a decrease of 0.9%, to $3,968, in the

average revenue per contract for those acquired operations. The cremation rate for the acquired businesses was 53.2% for the year ended December 31, 2009, up from 51.3% in the prior year period. The acquired businesses are located in higher cremation areas compared to the existing locations. The number of cremation contracts increased 2.9% and the average revenue per cremation contract increased 7.7% to $2,263 for 2009 compared to the prior year.

     Acquired operating profit for the year ended December 31, 2009 increased $0.6 million, or 13.5%, from the comparable period in 2008, and as a percentage of revenue from acquired businesses, increased from 25.9% to 29.0% also as a function of our ability to reduce operating costs. In total, controllable expenses for acquired funeral home operations were managed $0.5 million lower than last year.

     For the Funeral Home Segment in total, cremation services represented 42.1% of the number of funeral services during 2009, compared to 39.8% for 2008. Cremations with services have grown significantly from 36.1% of total cremation contracts in 2008 to 43.9% in 2009. The average revenue for all burial contracts increased 2.4% to $7,734, while the average revenue for cremation contracts increased 4.8% to $2,841. We have addressed the growing demand for cremation by training the funeral directors to present multiple merchandise and service options to cremation families, resulting in choices that produce higher revenues. The average revenue for “other” contracts, which make up approximately 7.1% of the number of contracts, increased 1.7% to $2,004. Other contracts consist of charges for merchandise or services for which we do not perform a funeral service for the deceased during the period.

     Cemetery Segment. The following table sets forth certain information regarding our revenues and gross profit from the cemetery operations for the year ended December 31, 2008 compared to the year ended December 31, 2009:

		Year Ended
		December 31,								Change
		2008				2009				Amount				Percent
						(dollars in thousands)
Revenues:
Same store operating revenue		$	32,615			$	36,021			$	3,406				10.4	%
Acquired operating revenue			6,082				6,276				194				3.2	%
Cemetery trust earnings			2,328				2,747				419				18.0	%
Preneed cemetery finance charges			1,657				1,532				(125	)			(7.5	)%
Revenues from continuing operations		$	42,682			$	46,576			$	3,894				9.1	%
Operating Profit:
Same store operating profit		$	5,132			$	7,872			$	2,740				53.4	%
Acquired operating profit			1,915				1,441				(474	)			(24.7	)%
Cemetery trust earnings			2,328				2,747				419				18.0	%
Preneed cemetery finance charges			1,657				1,532				(125	)			(7.5	)%
Operating profit from continuing operations		$	11,032			$	13,592			$	2,560				23.2	%

     Cemetery same store revenues for year ended December 31, 2009 increased $3.4 million, or 10.4%, compared to the year ended December 31, 2008. Same store revenue from preneed property sales increased $4.2 million, or 30.4%, which was driven by a 30.3% increase in the number of interment rights (property) sold and a 1.2% increase in the average price per interment. The percentage of those we were able to recognize as revenue, because we received at least 10% of the sales price from the customer, increased from 81.9% to 87.8%. Revenue from preneed merchandise and services deliveries decreased $0.3 million, or 6.3%, and atneed revenues from property, merchandise and services declined $0.2 million, or 1.7%, as the average sale per atneed contract remained flat and the number of interments declined.

     Cemetery same store operating profit for the year ended December 31, 2009 increased $2.7 million, or 53.4% on the strength of the higher revenues. As a percentage of revenues, cemetery same store operating profit increased from 15.7% to 21.8%. Promotional expenses (primarily preneed sales commissions) increased $1.9 million, or 36.9%, as a result of the higher preneed property sales. Tighter management over expenses such as salaries and benefits, transportation, bad debts and general and administrative costs produced a decline of $0.7 million in those expenses.

     Cemetery acquired revenues for the year ended December 31, 2009 increased $0.2 million, or 3.2%, compared to the year ended December 31, 2008. Acquired revenue from preneed property sales remained flat and preneed revenue from merchandise and services deliveries increased $0.3 million while at-need revenues declined $0.1 million. The number of interment rights sold declined 1.9% while the average price per interment increased 4.3% and the percentage of those recognized remained flat.

     Cemetery acquired operating profit for the year ended December 31, 2009 decreased $0.5 million, or 24.7%. As a percentage of revenues, cemetery acquired operating profit decreased from 31.5% to 23.0%. Promotional expenses (primarily preneed sales commissions) increased $0.1 million. Expenses such as bad debts and general and administrative costs were $0.2 million over prior year.

     Financial revenues increased $0.3 million compared to the prior year period. Earnings from perpetual care trust funds totaled $2.3 million for the year ended December 31, 2009 compared to $1.5 million for the year ended December 31, 2008. Finance charges on the preneed contracts declined approximately $0.1 million as we employed zero interest promotions for limited periods to spur sales. Trust earnings from the delivery of merchandise and service contracts declined $0.4 million for the year ended December 31, 2009 compared to the same period in 2008 as a result of realized losses on trust investments in 2009.

     Other. General and administrative expenses decreased $2.1 million for the year ended December 31, 2009 primarily related to charges in 2008 for unusually high legal costs and severance for our former Chief Financial Officer which were absent in the current year.

     Interest income and other, net for the year ended December 31, 2009 is primarily interest income on the short-term investments.

     Income taxes. See Note 16 to the Consolidated Financial Statements for a discussion of the income taxes for 2009 and 2008.

GOODWILL IMPAIRMENT TESTING

     The excess of the purchase price over the fair value of identifiable net assets of funeral home businesses acquired in business combinations is recorded as goodwill. Goodwill has not historically been recorded in connection with the acquisition of cemetery businesses. Goodwill is tested annually for impairment by assessing the fair value of each of our reporting units. Our funeral segment reporting units consist of our East, Central and West regional divisions in the United States. We performed our annual impairment test of goodwill using information as of August 31, 2010.

     Our goodwill impairment test involves estimates and management judgment. In the first step of our goodwill testing, we compare the fair value of each reporting unit to its carrying value, including goodwill. We determine fair value for each reporting unit using both a market approach, weighted 70%, and an income approach, weighted 30%. Funeral home selling prices are typically quoted in the marketplace as a multiple of EBITDA (earnings before interest, taxes, depreciation and amortization). Our methodology for determining a market approach fair value utilized recent sales transactions in the industry, calculated on the basis of EBITDA multiples. Our methodology for determining an income-based fair value is based on discounting projected future cash flows. The projected future cash flows include assumptions concerning future operating performance using a weighted average cost of capital for Carriage and other public death care companies. Goodwill impairment is not recorded where the fair value of the reporting unit exceeds its carrying amount. If the fair value of the reporting unit is less than its carrying value, the implied fair value of goodwill is compared to the carrying amount of the reporting units goodwill and if the carrying amount exceeds the implied value, an impairment charge would be recorded in an amount equal to that excess. Based on our impairment test performed using August 31, 2010 data, we concluded that there was no impairment of goodwill. The West region has the greatest risk of failing the first step of the impairment test in the future. The fair value of the West region exceeded its carrying value by approximately 13%. As of December 31, 2010, $50.9 million of goodwill was recorded in the West region. Should industry sales transactions suffer a decline in the multiple of EBITDA or the results of the West’s operations decline in the future, the risk of goodwill impairment would increase.

     In addition to our annual review, we assess the impairment of goodwill whenever events or changes in circumstances indicate that the carrying value may be greater than fair value. Factors that could trigger an interim impairment review include, but are not limited to, significant adverse changes in the business climate which may be indicated by a decline in the Company’s market capitalization or decline in operating results. The market capitalization of the Company consists of the common stock, Senior Notes and convertible trust preferred securities. No such events or changes occurred between the testing date and year end to trigger a subsequent impairment review.

LIQUIDITY AND CAPITAL RESOURCES

     Carriage began 2010 with $3.6 million in cash and other liquid investments and ended the year with $1.3 million in cash and $0.6 drawn on the bank credit facility. The elements of cash flow for 2010 consisted of the following (in millions):

Cash and liquid investments at beginning of year		$	3.6
Cash flow from operations			25.7
Cash used for business acquisitions			(19.0	)
Cash drawn on the bank credit facility			0.6
Cash used for maintenance capital expenditures			(7.1	)
Cash used for growth capital expenditures — funeral homes			(1.3	)
Cash used for growth capital expenditures — cemeteries			(2.3	)
Other investing and financing activities, net			1.1
Cash at end of year		$	1.3

     For the year ended December 31, 2010, cash provided by operating activities was $25.7 million as compared to $16.1 million for the year ended December 31, 2009. The 2009 period included a $3.3 million litigation settlement. Capital expenditures totaled $10.7 million for the year ended December 31, 2010 compared to $9.3 million for the year ended December 31, 2009. Capital expenditures for the year ended December 31, 2010 included $2.3 million for cemetery inventory development projects.

     The outstanding principal of senior debt at December 31, 2010 totaled $137.3 million and consisted of $130.0 million 7⅞% in Senior Notes maturing in 2015, $0.6 drawn on our credit facility and $6.7 million in acquisition indebtedness and capital lease obligations. Additionally, $0.1 million in letters of credit were issued and outstanding under the credit facility at December 31, 2010.

     The Company has a $40.0 million senior secured revolving credit facility that matures in November 2012 and is collateralized by all personal property and funeral home real property in certain states. The credit facility also contains an accordion provision to borrow up to an additional $20.0 million. Borrowings under the credit facility bear interest at either prime or LIBOR options. At December 31, 2010, the prime rate option was equivalent to 5.75% and the LIBOR option was equivalent to 3.756%, which is set at the 30 day LIBOR rate plus 350 basis points. The Company had the ability to borrow an additional $39.3 million at December 31. 2010.

     A total of $92.9 million was outstanding at December 31, 2010 on the convertible junior subordinated debenture. Amounts outstanding under the debenture are payable to our affiliate trust, Carriage Services Capital Trust, bear interest at 7.0% and mature in 2029. Substantially all the assets of the Trust consist of the convertible junior subordinated debentures. In 1999, the Trust issued 1.875 million shares of term income deferrable equity securities (“TIDES”). The rights of the debentures are functionally equivalent to those of the TIDES. 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. In September 2010, the Company converted these preferred shares at the current conversion rate of 2.4465 into shares of common stock equal to 43,670 shares. Immediately upon the exchange, these common shares were cancelled and held in Treasury.

     The convertible junior subordinated debenture payable to the affiliated Trust, and the TIDES, each contain a provision for the deferral of interest payments and distributions for up to 20 consecutive quarters. During any period in which distribution payments are deferred, distributions will continue to accumulate at the 7% annual rate. Also, the deferred distributions themselves accumulate distributions at the annual rate of 7%. During any deferral period, Carriage is prohibited from paying dividends on common stock or repurchasing common stock, subject to limited exceptions. The Company currently expects to continue paying the distributions as due.

     The Company intends to use its cash and credit facility primarily to acquire funeral home and cemetery businesses and for internal growth projects, such as cemetery inventory development. The Company has the ability to draw on our revolving credit facility, subject to customary terms and conditions of the credit agreement.

     We believe our cash on hand, cash flow from operations, and the available capacity under our credit facility described above will be adequate to meet our working capital needs and other financial obligations over the next twelve months.

Balance Sheet Obligations

     The following table summarizes the future payments required for the debt on our balance sheet as of December 31, 2010. Where appropriate we have indicated the footnote to our annual Consolidated Financial Statements where additional information is available.

										Payments By Period
										(in millions)
		Note																												After
		Reference				Total				2011				2012				2013				2014				2015				5 Years
Long-term debt			13			$	132.9			$	0.4			$	1.0			$	0.6			$	0.4			$	130.2			$	0.3
Capital lease obligations, including interest			15				7.9				0.4				0.4				0.4				0.5				0.5				5.7
Convertible junior subordinated debenture (a)			14				92.9				—				—				—				—				—				92.9
Total contractual obligations						$	233.7			$	0.8			$	1.4			$	1.0			$	0.9			$	130.7			$	98.9

Off-Balance Sheet Arrangements

     The following table summarizes our off-balance sheet arrangements as of December 31, 2010. Where appropriate we have indicated the footnote to our Consolidated Financial Statements where additional information is available.

										Payments By Period
										(in millions)
		Note																												After
		Reference				Total				2011				2012				2013				2014				2015				5 Years
Operating leases			15			$	14.9			$	3.7			$	3.6			$	2.8			$	2.4			$	1.5			$	0.9
Interest payments on long-term debt			13				41.0				6.9				6.9				6.8				6.8				6.8				6.8
Noncompete agreements			15				6.7				1.7				1.4				1.0				0.9				0.7				1.0
Consulting agreements			15				1.9				0.7				0.4				0.3				0.3				0.1				0.1
Executive management compensation agreements			15				6.0				2.0				2.0				2.0				—				—				—
Total contractual cash obligations						$	70.5			$	15.0			$	14.3			$	12.9			$	10.4			$	9.1			$	8.8

     The obligations related to our off-balance sheet arrangements are significant to our future liquidity; however, although we can provide no assurances, we anticipate that these obligations will be funded from cash provided from our operating activities. If we are not able to meet these obligations with cash provided for by our operating activities, we may be required to access the capital markets or draw down on our credit facilities both of which may be more likely or more difficult to access.

     Uncertain tax positions recorded at December 31, 2010 total approximately $1.9 million, excluding penalties and interest. The ultimate timing of when those obligations will be settled cannot be determined with reasonable assurance and have been excluded from the tables above. Refer to Note 16 in our consolidated financial statements.

SEASONALITY

     Our business can be affected by seasonal fluctuations in the death rate. Generally, the rate is higher during the winter months because the incidences of death from influenza and pneumonia are higher during this period than other periods of the year.

INFLATION

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

FORWARD-LOOKING STATEMENTS

     In addition to historical information, this Annual Report on Form 10-K 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 operation; 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.

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

     In the ordinary course of business, we are typically exposed to a variety of market risks. Currently, these are primarily related to changes in 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. We are not exposed to any other significant market risks including commodity price risk, nor foreign currency exchange risk.

     We monitor current and forecasted interest rate risk in the ordinary course of business and seek to maintain optimal financial flexibility, quality and solvency. As of December 31, 2010, our outstanding debt is comprised entirely of fixed rate obligations except for the $0.6 million drawn on the line of credit.

     We currently have $0.6 million outstanding under our $40.0 million floating rate line of credit. Any further borrowings against the line of credit or any change in the floating rate would cause a change in interest expense.

     The 7⅞% Senior Notes were issued to the public at par and are carried at a cost of $130 million. At December 31, 2010, these securities were typically trading at a price of approximately $100.75, indicating a market value of approximately $131.0 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 Sheet at a cost of approximately $92.9 million. The estimated fair value of these securities is estimated to be approximately $66.6 million at December 31, 2010 based on available broker quotes of the corresponding preferred securities issued by the Trust.

     Increases in market interest rates may cause the value of these debt instruments to decrease but such changes will not affect our interest costs. The remainder of the our long-term debt and leases consist of non-interest bearing notes and fixed rate instruments that do not trade in a market, nor otherwise have a quoted market value. Any increase in market interest rates causes the fair value of those liabilities to decrease.

     Securities subject to market risk consist of investments held by our preneed funeral, cemetery merchandise and services and perpetual care trust funds. See Notes 6, 8 and 10 to our Consolidated Financial Statements for the estimated fair values of those securities. The sensitivity of the fixed income securities is such that a 0.25% change in interest rates causes an approximate 1.81% change in the value of the fixed income securities.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

CARRIAGE SERVICES, INC.
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS

		Page
CONSOLIDATED FINANCIAL STATEMENTS:
Report of Independent Registered Public Accounting Firm			33
Consolidated Balance Sheets as of December 31, 2009 and 2010			34
Consolidated Statements of Operations for the Years Ended December 31, 2008, 2009 and 2010			35
Consolidated Statements of Changes in Stockholders’ Equity for the Years Ended December 31, 2008, 2009 and 2010			36
Consolidated Statements of Cash Flows for the Years Ended December 31, 2008, 2009 and 2010			37
Notes to Consolidated Financial Statements			38

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders
Carriage Services, Inc.:

We have audited the accompanying consolidated balance sheets of Carriage Services, Inc. and subsidiaries as of December 31, 2010 and 2009 and the related consolidated statements of operations, changes in stockholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2010. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.

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

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Carriage Services, Inc. and subsidiaries of December 31, 2010 and 2009, and the results of its operations and its cash flows for each of the years in the three-year period ended December 31, 2010, in conformity with U.S. generally accepted accounting principles.

We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Carriage Services, Inc.’s internal control over financial reporting as of December 31, 2010, based on criteria established in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated March 8, 2011, expressed an unqualified opinion on the effectiveness of internal control over financial reporting.

Houston, Texas
March 8, 2011

CARRIAGE SERVICES, INC.

		December 31,
		2009				2010
ASSETS
Current assets:
Cash and cash equivalents		$	3,616			$	1,279
Accounts receivable, net of allowance for bad debts of $751 in 2009 and $979 in 2010			15,177				15,587
Inventories and other current assets			14,683				10,828
Total current assets			33,476				27,694
Preneed cemetery trust investments			67,901				79,691
Preneed funeral trust investments			75,200				81,143
Preneed receivables, net of allowance for bad debts of $1,158 in 2009 and $1,236 in 2010.			16,782				24,099
Receivables from preneed funeral trusts			14,629				21,866
Property, plant and equipment, net of accumulated depreciation of $66,201 in 2009 and $71,700 in 2010.			124,800				128,472
Cemetery property			71,661				71,128
Goodwill			166,930				183,324
Deferred charges and other non-current assets			7,536				7,860
Cemetery perpetual care trust investments			40,383				45,735
Total assets		$	619,298			$	671,012
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Current portion of long-term debt and obligations under capital leases		$	558			$	563
Accounts payable and other liabilities			6,877				9,700
Accrued liabilities			14,037				14,896
Total current liabilities			21,472				25,159
Senior long-term debt, net of current portion			131,898				132,416
Convertible junior subordinated debenture due in 2029 to an affiliate			93,750				92,858
Obligations under capital leases, net of current portion			4,418				4,289
Deferred preneed cemetery revenue			49,176				50,125
Deferred preneed funeral revenue			26,658				39,517
Deferred preneed cemetery receipts held in trust			67,901				79,691
Deferred preneed funeral receipts held in trust			75,200				81,143
Care trusts’ corpus			40,403				45,941
Total liabilities			510,876				551,139
Commitments and contingencies
Redeemable Preferred Stock			200				200
Stockholders’ equity:
Common Stock, $.01 par value; 80,000,000 shares authorized; 20,411,000 and 21,311,000 issued in 2009 and 2010, respectively			205				213
Additional paid-in capital			197,033				200,987
Accumulated deficit			(79,016	)			(70,951	)
Treasury stock, at cost; 3,109,000 and 3,153,000 shares at December 31, 2009 and 2010, respectively			(10,000	)			(10,576	)
Total stockholders’ equity			108,222				119,673
Total liabilities and stockholders’ equity		$	619,298			$	671,012

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

CARRIAGE SERVICES, INC.

CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share data)

		Year Ended December 31,
		2008				2009				2010
Revenues:
Funeral		$	134,246			$	131,051			$	138,125
Cemetery			42,682				46,576				46,822
			176,928				177,627				184,947
Field costs and expenses:
Funeral			86,202				83,069				89,974
Cemetery			31,650				32,984				31,403
Depreciation and amortization			8,757				8,748				8,621
Regional and unallocated funeral and cemetery costs			7,276				6,708				7,502
			133,885				131,509				137,500
Gross profit			43,043				46,118				47,447
Corporate costs and expenses:
General, administrative and other			16,496				14,412				15,451
Home office depreciation and amortization			1,616				1,591				1,355
			18,112				16,003				16,806
Operating income			24,931				30,115				30,641
Interest expense			(18,331	)			(18,498	)			(18,262	)
Litigation settlement			(3,300	)			—				—
Interest income and other, net			229				228				1,068
Total interest and other			(21,402	)			(18,270	)			(17,194	)
Income from continuing operations before income taxes			3,529				11,845				13,447
Provision for income taxes			(1,725	)			(4,797	)			(5,368	)
Net income from continuing operations			1,804				7,048				8,079
Loss from discontinued operations, net of tax			(1,546	)			—				—
Net Income			258				7,048				8,079
Preferred stock dividend			10				14				14
Net income available to common stockholders		$	248			$	7,034			$	8,065
Basic earnings (loss) per common share:
Continuing operations		$	0.09			$	0.40			$	0.46
Discontinued operations			(0.08	)			—				—
Net income		$	0.01			$	0.40			$	0.46
Diluted earnings (loss) per common share:
Continuing operations		$	0.09			$	0.40			$	0.45
Discontinued operations			(0.08	)			—				—
Net income		$	0.01			$	0.40			$	0.45
Weighted average number of common and common equivalent shares outstanding:
Basic			19,054				17,573				17,635
Diluted			19,362				17,749				17,938