Forward-Looking Statements
In addition to historical information, this Quarterly Report contains forward-looking statements within the safe harbor provisions of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include any projections of earnings, revenues, asset sales, acquisitions, cash balances and cash flow, debt levels or other financial items; any statements of the plans, strategies and objectives of management for future operations; any statements regarding future economic conditions or performance; any statements of belief; and any statements of assumptions underlying any of the foregoing. Forward-looking statements may include the words "may", "will", "estimate", "intend", "believe", "expect", "project", "forecast", "plan", "anticipate" and other similar words.
Cautionary Statements
We caution readers that important factors, in some cases have affected, and in the future could affect, our actual consolidated results and could cause our actual consolidated results in the future to differ materially from the goals and expectations expressed herein and in any other forward-looking statements made by or on behalf of us. Risks associated with our business and the death care industry are presented in Item 1A - Risk Factors in our Annual Report filed on Form 10-K for the year ended December 31, 2008.
OVERVIEW
General
We operate two types of businesses: funeral homes, which account for approximately 75% of our revenues, and cemeteries, which account for approximately 25% of our revenues. Funeral homes are principally service businesses that provide funeral services (traditional burial and cremation) and sell related merchandise, such as caskets and urns. Cemeteries are primarily a sales business that sells interment rights (grave sites and mausoleum spaces) and related merchandise, such as markers and outer burial containers. As of June 30, 2009, we operated 134 funeral homes in 25 states and 32 cemeteries in 11 states within the United States. Substantially all administrative activities are conducted or coordinated through our home office in Houston, Texas.
We have implemented several significant long-term initiatives in our operations designed to improve operating and financial results by growing market share and increasing profitability. We introduced a more decentralized, entrepreneurial and local operating model that included operating and financial standards developed from our best operations, along with an incentive compensation plan to reward business managers for successfully meeting or exceeding the standards. The model essentially eliminated the use of line-item financial budgets in favor of the standards. The operating model and standards, which we refer to as "Being the Best," 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 "Being the Best" operating model and standards have driven significant changes in our organization, leadership and operating practices.
At the end of the third quarter of 2008, we announced the following near-term initiatives to improve revenue and profitability:
• Increase the number and quality of the sales staff at our larger cemeteries to increase preneed cemetery sales and profits.

• Convert direct cremations to cremations with services to increase the average revenue per cremation service.

• Manage costs and expenses lower.

The impact of these initiatives is discussed in Results of Operations.
Funeral Operations
Factors affecting our funeral operating results include: demographic trends in terms of population growth and average age, which impact death rates and number of deaths; establishing and maintaining leading market share positions supported by strong local heritage and relationships; effectively responding to increasing cremation trends by packaging complementary services and merchandise; controlling salary and merchandise costs; and exercising pricing leverage related to our at-need business to increase average revenues per contract. In simple terms, volume and price are the two variables that affect funeral revenues. The average revenue per contract is influenced by the mix of traditional burial and cremation services because our average cremation service revenue is approximately one-third of the average revenue earned from a traditional burial service. Funeral homes have a relatively fixed cost structure. Thus, small changes in revenues, up or down, normally cause significant changes to our profitability.
Our same store volumes have declined gradually each year from 21,568 in 2005 to 20,900 in 2008 (compound annual decline of 1.0%) consistent with a period of weak death rates nationally and the loss of market share in certain markets. Our same store funeral operations have increased revenue steadily from $109.4 million in 2005 to $115.7 million in 2008 (compound annual increase of 1.9%) because we have been able to increase the average revenue per funeral through expanded service offerings and packages. We experienced a dramatic decline of 7.0% in volumes in comparing the first six months of 2009 to the first six months of 2008 because the strong flu season during the first quarter 2008 period did not repeat itself in 2009. As a

result, funeral revenues for the six months ended June 30, 2009 were down 3.7% compared to the six months ended June 30, 2008.
The percentage of funeral services involving cremations has increased from 33.1% for 2005 to 39.8% for 2008, an average increase of 223 basis points per year, and to 41.6% for the first six months of 2009. We expect our average revenue per funeral to increase over time as we seek to provide increased services to our cremation families in order to offset higher cremation rates.
Cemetery Operations
The cemetery operating results are affected by the size and success of our sales organization. Approximately 60% of our cemetery revenues relate to preneed sales of interment rights and mausoleums and related merchandise and services. We believe that changes in the level of consumer confidence (a measure of whether consumers will spend for discretionary items) also affect the amount of cemetery revenues. The current environment of high unemployment and low consumer confidence represents a formidable challenge to the cemetery sales staff. Approximately 10% 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 same store cemetery financial performance from 2005 through 2008 was characterized by fluctuating revenues and slightly declining field level profit margins. Revenues and profits on a same store basis have increased 17.7% and 36.8%, respectively, for the first six months of 2009 compared to the same period of 2008 primarily due to higher preneed property sales. Our goal is to build broader and deeper teams of sales leaders and counselors in our larger and more strategically located cemeteries that can sustain consistent, modest growth in preneed property sales over time and to diversify and substantially increase our cemetery operating and financial results. Additionally, a portion of our capital expenditures in 2009 is designed to expand our cemetery product offerings.
Acquisitions
Our growth strategy includes the execution of the Strategic Acquisition Model. The goal of that model is to build concentrated groups of businesses in ten to fifteen strategic markets. We assess acquisition candidates using six strategic ranking criteria and to differentiate the price we are willing to pay. Those criteria are:
• Size of business

• Size of market

• Competitive standing

• Demographics

• Strength of brand

• 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 2007, we completed seven acquisitions. The consideration paid in each of the acquisitions was cash. We have not incurred any debt to buy these businesses. We did not acquire any businesses in 2008 or to date in 2009, but are actively involved in seeking out and evaluating potential acquisitions. Our five year goal is to acquire approximately $10 million of annualized revenue each year.
Financial Highlights
Net income for the three months ended June 30, 2009 totaled $2.0 million, equal to $0.12 per diluted share. Net income from continuing operations for the second quarter of 2008 totaled $43,000, equal to $0.00 per diluted share, and the net loss for the second quarter of 2008 was $1.4 million, equal to $(0.07) per diluted share. We sold two funeral homes, during the three months ended June 30, 2008, at a loss of $1.4 million, which generated the loss from discontinued operations of $0.07 per diluted share. Otherwise, the variance between the two periods was primarily due to higher cemetery revenues and lower general and administrative expenses. Net income for the six months ended June 30, 2008 totaled $4.4 million, equal to $0.25 per diluted share, compared to $1.9 million, equal to $0.10 per diluted share, for the six months ended June 30, 2008. The year over year improvement was due to the absence of the loss from discontinued operations and lower costs and expenses.
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, intangible assets, property and equipment and deferred tax assets. We base our estimates on historical experience, third party data and assumptions that we believe to be reasonable under the circumstances. The results of these considerations form the basis for making judgments about the amount and timing of revenues and expenses, the carrying value of assets and the recorded amounts of liabilities. Actual results may differ from these estimates and such estimates may change if the underlying conditions or assumptions change.

Historical performance should not be viewed as indicative of future performance, because there can be no assurance the margins, operating income and net earnings as a percentage of revenues will be consistent from year to year.
Management's discussion and analysis of financial condition and results of operations are based upon our consolidated financial statements presented herewith, which have been prepared in accordance with accounting principles generally accepted in the United States excluding certain year end adjustments because of the interim nature of the consolidated financial statements. Our significant accounting policies are more fully described in Note 1 to the 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 generally accepted 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. In addition, we monitor changes in delinquency rates and provide additional bad debt and cancellation reserves when warranted.
When preneed funeral services and merchandise are funded through third-party insurance policies, we earn a commission on the sale of the policies. Insurance commissions 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, 2008. 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. We updated the annual impairment test as of December 31, 2008 because the market valuation of the Company declined during the fourth quarter of 2008.
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, which ranged from 6.5 to 9.6 times EBITDA. 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 Carriage and other public deathcare 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. Most recently we conducted a review of the funeral home reporting units using June 30, 2009 data, and concluded that there was no impairment of goodwill.
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 are classified on the balance sheet. We have reviewed our 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.
Preneed Funeral and Cemetery Trust Funds The Company's preneed and perpetual care trust funds are reported in accordance with the principles of consolidating Variable Interest Entities. The investments of such trust funds are classified as available-for-sale and are reported at market value; therefore, an allocation of unrealized gains and losses, income and gains and losses are recorded to Deferred preneed receipts held in trust and Care trusts' corpus in the Company's consolidated balance sheet. 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 are recorded in Deferred preneed funeral and cemetery revenues until the service is performed or the merchandise is delivered.
There is no change in the legal relationships among the trusts, the Company and its customers. 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 trustand Care trusts' corpus.
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 our fair value determination. We customarily estimate our purchase costs and other related transactions 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.
For any business acquired after January 1, 2009, we will recognize the assets acquired, the liabilities assumed and any non-controlling interest in the acquiree at the acquisition date, measured at the fair values as of that date. Goodwill is measured as a residual of the fair values at acquisition date. Acquisition related costs are recognized separately from the acquisition and are expensed as incurred.
Discontinued Operations
In accordance with the Company's strategic portfolio optimization 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.
RESULTS OF OPERATIONS
The following is a discussion of the Company's results of operations for the three and six month periods ended June 30, 2008 and 2009. Funeral homes and cemeteries owned and operated for the entirety of each period being compared are referred to as "same-store" or "existing operations." Funeral homes and cemeteries purchased after January 2005 (date of refinancing our senior debt) are referred to as "acquired."
Funeral Home Segment. The following table sets forth certain information regarding the revenues and operating profit of the Company from its funeral home operations for the three and six months ended June 30, 2008 compared to the three and six months ended June 30, 2009.

Three months ended June 30, 2008 compared to three months ended June 30, 2009 (dollars in thousands):

                                                       Three Months Ended
                                                            June 30,                        Change
                                                      2008             2009          Amount           %
Revenues:
Same-store                                         $   26,724        $ 26,819        $    95           0.4 %
Acquired                                                4,752           4,475           (277 )        (5.8 )%
Preneed insurance commissions                             675             502           (173 )           *

Revenues from continuing operations                $   32,151        $ 31,796        $  (355 )        (1.1 )%

Revenues from discontinued operations              $      241        $      -        $  (241 )           *


Operating profit:
Same-store                                         $    8,941        $  9,769        $   828           9.3 %
Acquired                                                1,362           1,521            159          11.7 %
Preneed insurance                                         300              54           (246 )           *

Operating profit from continuing operations        $   10,603        $ 11,344        $   741           7.0 %

Operating profit from discontinued operations      $       88        $      -        $   (88 )           *

* not meaningful

Funeral same-store revenues for the three months ended June 30, 2009 increased $0.1 million, or 0.4%, when compared to the three months ended June 30, 2008 as we experienced a 4.7% decrease in the number of contracts and an increase of 5.3% to $5,534 in the average revenue per contract for those existing operations. The number of traditional burial contracts decreased 3.8% while the average revenue per burial contract increased 3.7% to $7,859. The cremation rate for the same-store businesses rose from 37.2% to 39.3% and the average revenue per cremation contract increased 3.0%.
Total same-store operating profit for the three months ended June 30, 2009 increased $0.8 million, or 9.3% from the comparable three months of 2008, and as a percentage of funeral same-store revenue, increased from 33.5% to 36.4% 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, bad debts, administrative and promotional expenses declined $0.8 million or 6.1%, for the three months ended June 30, 2009, when compared to the three months ended June 30, 2008.
Funeral acquired revenues for the three months ended June 30, 2009 decreased $0.3 million, or 5.8%, when compared to the three months ended June 30, 2008 as we experienced a 4.8% decrease in the number of contracts and a decrease of 1.0% to $3,971 in the average revenue per contract for those acquired operations. The cremation rate for the acquired businesses was 52.2% for the second quarter of 2009, up from 51.2% in the prior year period, as these businesses are located in higher cremation areas compared to the existing locations. Although the number of cremation contracts declined 3.0%, the average revenue per cremation contract increased 3.2% to $2,284 for the second quarter of 2009 compared to the prior year quarter.
Acquired operating profit for the three months ended June 30, 2009 increased $0.2 million, or 11.7%, from the comparable three months of 2008, and as a percentage of revenue from acquired businesses, was 34.0% for the second quarter of 2009 compared to 28.7% for the second quarter of 2008 similarly due to the location managing partners focus on managing their costs and expenses lower. In total, controllable expenses were managed 13.0% lower than last year.
Cremations with services have risen from 35.3% of total cremation contracts in the second quarter of 2008 to 40.4% in the second quarter of 2009.

Six months ended June 30, 2008 compared to six months ended June 30, 2009 (dollars in thousands):

                                                       Six Months Ended
                                                           June 30,                        Change
                                                     2008            2009           Amount           %
Revenues:
Same-store                                         $ 58,028        $ 56,274        $ (1,754 )        (3.0 )%
Acquired                                              9,713           9,272            (441 )        (4.5 )%
Preneed insurance commissions                         1,427           1,090            (337 )           *

Revenues from continuing operations                $ 69,168        $ 66,636        $ (2,532 )        (3.7 )%

Revenues from discontinued operations              $    477        $      -        $   (477 )           *


Operating profit:
Same-store                                         $ 22,152        $ 21,623        $   (529 )        (2.4 )%
Acquired                                              3,093           3,131              38           1.2 %
Preneed insurance                                       680             129            (551 )           *

Operating profit from continuing operations        $ 25,925        $ 24,883        $ (1,042 )        (4.0 )%

Operating profit from discontinued operations      $    144        $      -        $   (144 )           *

* not meaningful

Funeral same-store revenue for the six months ended June 30, 2009 decreased $1.8 million, or 3.0%, when compared to the six months ended June 30, 2008 as we experienced a 7.5% decrease in the number of contracts and a 4.8% increase in the average revenue per contract to $5,593. The number of burial contracts declined 7.0% while the average revenue for burial contracts increased 3.6% to $7,886. The number of cremation contracts decreased 3.2% and the average revenue per cremation contract increased 3.0% to $2,957. The variance in volumes was influenced primarily due to a significant flu season during the first quarter of 2008 compared to practically no flu season to date in the current year. . . .