SECURITIES AND EXCHANGE COMMISSION
                                              Washington, D.C. 20549


                                                     FORM 10-K


(Mark One)
    [X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
                 SECURITIES EXCHANGE ACT OF 1934 (FEE REQUIRED)
                 For the fiscal year ended December 31, 1997

                                         OR

    [    ]       TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE
                 SECURITIES EXCHANGE ACT OF 1934
                 For the transition period from ____________ to _____________

                                 ---------------------

                            Commission file number _____________

                                 ---------------------

                                 PRIME SUCCESSION, INC.
                  (Exact name of registrant as specified in its charter)
                                              

                     DELAWARE                              13-3904211
          (State or Other Jurisdiction of               (I.R.S. Employer
          Incorporation or Organization)               Identification No.)

           3940 Olympic Blvd., Suite 500                      41018
            Erlanger, Kentucky, U.S.A.                    (Postal Code)
     (Address of principal executive offices)

                                                              
     (Registrant's telephone number, including area code) (606) 746-6800


         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 X No __

     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. [X]

         The  aggregate   market  value  of  shares  of  Common  Stock  held  by
non-affiliates of the registrant was approximately U.S. $0 as of March 19, 1998.

         The number of outstanding  shares of Common Stock as of March 19, 1998,
was 100.

                                        DOCUMENTS INCORPORATED BY REFERENCE

None


<PAGE>


                                                      PART I



Item 1.  Business.

Overview

         Prime  Succession,   Inc.  (the  "Company")  provides  merchandise  and
services  in both the  funeral  home and  cemetery  segments  of the death  care
industry in the United States. In addition to providing merchandise and services
at the time of need,  the Company also makes  funeral,  cemetery  and  cremation
arrangements  on a pre-need basis. As of March 19, 1998, the Company through its
subsidiaries owns and operates 143 funeral homes and 19 cemeteries in 20 states,
primarily in non-urban areas of the United States.

     The Company was  incorporated in Delaware as Prime  Succession  Acquisition
Corp. in May 1996 as a precursor to the acquisition (the "Acquisition") of Prime
Succession  Holdings,  Inc.  (formerly  known as Prime  Succession,  Inc.) ("Old
Prime") by  Blackstone  Capital  Partners II Merchant  Banking Fund L.P. and its
affiliates  (collectively,  "Blackstone") and Loewen Group  International,  Inc.
("Loewen"),  a  subsidiary  of  The  Loewen  Group  Inc.  ("Loewen  Group").  In
connection with the  Acquisition,  which was consummated on August 26, 1996 (the
"Acquisition  Closing  Date"),  the Company (i)  received  all of the assets and
liabilities of, and became a wholly-owned subsidiary of, Old Prime, (ii) entered
into credit  facilities  (collectively,  the "Bank  Credit  Facilities")  with a
syndicate of financial institutions  consisting of a senior secured amortization
extended term loan facility in an aggregate principal amount of $90 million (the
"Bank Term  Facility")  and a senior  secured  revolving  credit  facility in an
aggregate  principal amount of up to $25 million and (iii) privately placed $100
million aggregate principal amount of 10 3/4% Senior Subordinated Notes due 2004
(the "Notes"),  which  subsequently  were  exchanged for $100 million  aggregate
principal amount of publicly-registered notes with identical material terms (the
"Exchange Notes").

         The Company's management ("Management") has identified, and the Company
has  taken,  a number of  initiatives  that  resulted  in  improvements  in both
revenues and operating and general and administrative  expenses.  Over time, the
Company  will  continue to endeavor to increase  revenues and  profitability  by
capitalizing  on the  location and  concentration  of its  properties,  improved
merchandising,  enhanced  pre-need  marketing,  and a management  structure that
encourages an entrepreneurial business culture.

         The Company's  principal  executive offices are located at 3940 Olympic
Boulevard, Suite 500, Erlanger, Kentucky 41018 and its telephone number is (606)
746-6800.

         Funeral Home Operations

         Funeral operations revenue of $78.7 million accounted for approximately
78% of the  Company's  revenues  for the  year  ended  December  31,  1997.  The
Company's   funeral  homes  offer  a  full  range  of  services  to  respond  to
individuals' funeral needs,  including the collection of remains,  certification
of death,  professional  embalming,  use of  funeral  home  facilities,  sale of
caskets, flowers, and related merchandise,  transportation to a place of worship
or funeral chapel for a ceremony celebrating the life and memory of the deceased
and  transportation to a cemetery or crematorium.  The funeral home provides the
public with the opportunity to choose the ceremony that is most appropriate from
both an emotional and financial perspective. The Company offers complete funeral
arrangements  and  merchandise  at prices  ranging  from  approximately  $600 to
$20,000 and averaging  approximately $3,900. In addition,  most of the Company's
funeral  homes  are able to offer  families  the  opportunity  to  conduct  both
visitation  and  religious  services  at  a  non-denominational  chapel  on  the
premises, thereby reducing transportation costs to the Company and inconvenience
to the  families.  In  addition  to  traditional  funeral  services,  all of the
Company's funeral homes offer a complete range of memorialization  and cremation
products and services.

         Although cremation, as a percentage of total funeral services, has been
increasing by  approximately  1% annually over the past five years in the United
States,  the number of caskets sold  (typically  associated  with a  traditional
funeral service) has remained  relatively  constant.  Over the next 10 years the
cremation  rate is expected to continue to increase at the same rate,  while the
number of caskets  sold is expected  to remain  constant.  Cremation  rates vary
dramatically  across regions of the United  States,  at least in part because of
demographic  differences  in religious,  ethnic and  socioeconomic  backgrounds.
While  the  Company  views  cremation  as an  alternative  to earth  burial  and
encourages  the  provision  of  a  traditional   funeral  or  other  appropriate
commemorative service, Management believes a substantial increase in the rate of
cremations  performed  by the  Company  could  adversely  affect  the  Company's
revenues and gross  profits.  In the years ended December 31, 1997 and 1996, 25%
of the services provided ended with cremation.  While cremations often result in
lower average revenue than traditional funeral services,  they generally produce
higher gross profit margins per service.

         The  Company  operates  most of its  funeral  homes and  cemeteries  in
"clusters". Clusters are groups of funeral homes and cemeteries located in close
enough proximity that their operations can be integrated to achieve economics of
scale. Clustered facilities share vehicles, employees, computer systems and some
general  and  administrative  functions,   centralized  embalming  services  and
inventory  management  allow the  Company to decrease  its cost to operate  each
location.  Also clustered facilities create opportunities for more efficient and
effective management of operations.

         Funeral  services,  merchandise and cemetery  property can be purchased
at-need or pre-need. Payments made for pre-need funeral services are recorded as
revenues when such  services are  provided.  Where allowed by state laws, if the
Company has both cemetery and funeral  operations,  it recognizes  revenues from
pre-need funeral  merchandise when the customer  contracts are signed and a down
payment  is  received,  with  concurrent  recognition  of related  costs.  Where
prohibited  by state  laws,  or the  company  has only  funeral  operations,  it
recognizes  revenues from pre-need  funeral  merchandise when the merchandise is
provided.  Allowances for  cancellation  and refunds are provided at the date of
sale based on historical  experience.  Payments made on pre-need  contracts,  in
accordance with applicable state law,  typically are either deposited in a trust
fund by the Company and/or used by the  purchasers of the pre-need  contracts to
purchase  life  insurance  policies  under which the Company is  designated  the
beneficiary.  On the date of performance of a pre-arranged  service, the Company
records as funeral  revenue  all  accumulated  trust  earnings  and  accumulated
insurance benefits.  As of March 19, 1998, the Company operated 143 locations of
which 35 were leased.

         The Company is a party to a casket  supply  agreement  with  Batesville
Casket  Company,  Inc.  ("BCC"),  pursuant  to which the Company  must  purchase
caskets  exclusively from BCC, subject to certain  exceptions,  through December
31, 2004. Following such date, the agreement is terminable by either the Company
or BCC upon 30 days' written notice.  Management believes that the terms of such
supply  agreement  are  favorable  to the  Company.  Pursuant to the terms of an
Administrative  Services  Agreement  between the Company and Loewen,  Loewen may
provide the  Company  with the ability to  purchase  supplies  under  certain of
Loewen's supply agreements with third parties.


         Cemetery Operations

         Cemetery   operations   revenue   of  $22.4   million   accounted   for
approximately  22% of the  Company's  revenues  for the year ended  December 31,
1997. The Company's  cemetery  operations  involve the sale of cemetery property
and related  merchandise,  including  lots,  lawn crypts,  family and  community
mausoleums,  monuments,  memorials  and  burial  vaults,  along with the sale of
burial site openings and closings.  Cemetery  property and merchandise sales are
made at the  time  of  need or on a  prearranged  basis.  The  sale of  cemetery
pre-need  arrangements  is a significant  component of the cemetery  operations,
having represented  approximately 77% of the cemetery revenues in the year ended
December 31,  1997.  The pre-need  sale of  interment  rights and other  related
products  generally  are  recorded as revenue when the  customer  contracts  are
signed and a down  payment is  received  and,  concurrently,  related  costs are
recorded and an allowance is established for customer cancellations and refunds.
The Company also maintains cemetery grounds pursuant to perpetual care contracts
or laws. Although profit margins of cemetery operations typically are lower than
those of funeral  operations,  the Company believes that its cemetery properties
help it to  maintain  market  share,  as  families  often  return to a  cemetery
location where their relatives are buried. In addition, the Company's clustering
and  combined  facilities  strategies  help  to  improve  the  profitability  of
individual  cemetery  locations.  As of March 19,  1998,  the Company  owned and
operated 19 cemeteries.

         Combined Funeral Home and Cemetery Operations. Approximately 42% of the
Company's  cemeteries  have a Company  funeral  home on site that is operated in
conjunction with the cemetery. Many of these facilities are in the Company's key
markets,  including, among others, Fort Lauderdale,  Birmingham and Memphis. The
clustering  effect of combinations  allows for sharing of facilities,  personnel
and equipment which results in lower average  operating costs to the Company and
helps to increase  market  share by allowing  the Company to offer  families the
convenience of complete  funeral home and cemetery  planning and services from a
single location at competitive prices.

         Prearrangements.  The Company  markets death care products and services
on a prearranged basis through a staff of approximately  440 commissioned  sales
counselors. Prearranged funeral planning allows families to determine in advance
and prepay for their funeral service. The merchandise to be used and the cost of
such  merchandise  and services are priced at the time the  agreement is signed,
rather than when the products and services are  delivered.  Prearranged  funeral
plans also permit  families to eliminate  the  emotional  strain of making death
care  decisions  at the  time of  need.  The  Company  believes  that  extensive
marketing of  prearranged  merchandise  and  services  will produce a backlog of
future business and will enhance current as well as future market share.

         Approximately 50% of all prearranged  funeral plans sold by the Company
are funded through  insurance with the balance being funded through trust funds,
depending on the  regulatory  requirements  in the relevant  jurisdiction.  When
trust  funding is used, a percentage  of the sale price (the amount varies among
jurisdictions),  which is often paid in installments,  is placed in a trust fund
and the  remainder  is retained by the  Company to defray  costs  related to the
sale.  When  contracts  are funded by  insurance,  all payments  received by the
Company are used to pay  premiums on  insurance  policies  designed to cover the
future cost of the funeral service.

         Principal  and all earnings or capital  growth on the trust funds,  and
amounts funded through  insurance are withdrawn and recognized as revenue to the
Company when the funeral  service is  performed.  As of December  31, 1997,  the
Company's  backlog of prearranged  funerals totaled  approximately  $147 million
with approximately $86 million funded by life insurance contracts.

         Prearranged  cemetery  merchandise  is generally  funded  through trust
funds  established  by the  Company,  and the  related  principal  and  earnings
generally are available to the Company only when the merchandise is delivered or
when contracts cancel. As of December 31, 1997, the Company's  merchandise trust
funds totaled approximately $4.7 million.

         The Company  funds its  obligation to provide  maintenance  of cemetery
grounds by placing a portion,  generally  10%,  of the  proceeds  from  cemetery
property sales into perpetual care trust funds or escrow  accounts.  Income from
these  funds is  withdrawn  and  used for  maintenance  of the  cemeteries,  but
principal, including in some jurisdictions net realized capital gains, generally
must be held in  perpetuity.  As of December 31, 1997,  the Company's  perpetual
care trust funds totaled approximately $8.3 million.

         The  accounting  methods  used to  reflect  the  Company's  prearranged
funeral,  merchandise  and  perpetual  care  trust  funds  are  complex  and are
described in the notes to the Company's consolidated financial statements.

         Management.  The  Company  has an  experienced  team of  managers.  The
Company's management structure is designed to allow local funeral home directors
and cemetery managers  substantial  flexibility in deciding how their firms will
be managed and their products and services will be priced and  merchandised.  At
the same time, the Company  establishes  financial  goals at the corporate level
and maintains  centralized controls through an area manager network. The Company
provides centralized management and information systems support,  accounting and
payroll through its corporate office.

         Currently, the Company is divided into three operating divisions in the
United  States,  each of which is managed by a division  vice  president.  These
divisions are further divided into regions,  each of which is managed by an area
manager.


  Competition

         In the  funeral  industry,  local  community  competition  is  oriented
towards gaining market share. At the local level, competition primarily is based
on building  goodwill in the community by strengthening  the name and reputation
of each individual  funeral home or cemetery.  Market share  increases  within a
community  are usually  gained  over a long  period of time  because of the high
importance of reputation and superior service.  Modest and tasteful  promotional
programs can help enhance community profile but typically do not increase market
share significantly.

         The Company also faces  competition from large  "consolidators"  in the
industry  which  seek to reap  profits  from an  acquisition  and  consolidation
strategy.  Such  competitors  include  several  large,  publicly-traded  funeral
services companies, including Service Corporation International, Loewen, Stewart
Enterprises,  Inc.  and  Equity  Corporation  International,  as well as various
smaller companies which provide competition with the Company on a regional basis
and, on a local level, from operators who have focused on acquiring funeral home
groupings in concentrated geographic regions of the United States.

         Regulation

         The  Company's  funeral home  operations  are  regulated by the Federal
Trade Commission ("FTC"), which administers the Trade Regulation Rule on Funeral
Industry  Practices (the "Funeral  Rule"),  which became  effective on April 30,
1984 and was revised as of July 19, 1994. The Funeral Rule defines  certain acts
and practices in  connection  with the provision of funeral goods or services as
unfair or deceptive and sets forth various requirements intended to prevent such
unfair or deceptive acts and practices.  The Company also must comply with other
federal   legislation,   including  the  Americans  with  Disabilities  Act  and
regulations administered by the Occupational Safety and Health Administration.

         The  Company's  operations  also are  regulated  at the state and local
level, with a vast majority of jurisdictions requiring licensing and supervision
of individuals who provide  funeral-related  services. A number of jurisdictions
also  regulate  the sale of  pre-need  services  and the  administration  of any
resulting trust funds or insurance  contracts.  In addition,  concerns regarding
lack of competition have led a few jurisdictions to enact  legislation  designed
to encourage  competition by restricting  the common  ownership of funeral homes
and related operations within a specific  geographic region.  State legislatures
and regulatory agencies may propose new laws and regulations,  some of which, if
enacted,  could have a material effect on the death care industry in general and
on the  Company's  operations.  The Company  cannot  predict the  likelihood  of
enactment of any such proposed laws or  regulations  or the effect that any such
enactment might have on the Company or its operations.

         The Company  believes  that it is currently in  substantial  compliance
with the Funeral Rule and all other applicable federal, state and local laws and
regulations.

         Environmental Matters

         Although  Management is aware of some contamination  related to the use
of  underground  storage  tanks and  embalming  materials,  Management  does not
believe that any costs relating to these or other environmental issues will have
a material adverse effect on the Company's financial results.


         Employees

         As of December  31,  1997,  the Company  employed  approximately  1,100
people in funeral and cemetery operations,  approximately 440 commissioned sales
people and 300 telemarketing  staff. None of the employees of the Company or its
subsidiaries  is  covered  by  a  collective  bargaining  agreement.  Management
believes that its relationship with its employees is good.




<PAGE>

<TABLE>
<CAPTION>

ITEM 2.  PROPERTIES.

         Set forth in the table below is the number,  by state, of the Company's
funeral homes and cemeteries:
<S>                                                        <C>                                    <C>
                                                    NUMBER OF                               NUMBER OF
STATE                                             FUNERAL HOMES                            CEMETERIES
Alabama                                                    23                                      8
Arizona                                                     3                                      0
Arkansas                                                    3                                      0
California                                                 15                                      0
Florida                                                    21                                      4
Georgia                                                     6                                      2
Illinois                                                   15                                      0
Indiana                                                     7                                      0
Iowa                                                        1                                      0
Kentucky                                                    3                                      2
Michigan                                                    8                                      0
Minnesota                                                  10                                      0
Missouri                                                    5                                      0
Nebraska                                                    4                                      0
New York                                                    2                                      0
Ohio                                                        1                                      0
Tennessee                                                   7                                      3
Texas                                                       5                                      0
West Virginia                                               3                                      0
Wyoming                                                     1                                      0

                               Total                      143                                     19
</TABLE>

         Of the 143 funeral homes listed above,  108 are owned by the Company or
one of its subsidiaries and 35 are leased. The leases have various terms ranging
from twenty months to twenty  years.  Some of the funeral homes listed above are
located  at the same  site  and are  operated  as  combination  operations.  The
Company's 19  cemeteries  contain an aggregate of  approximately  769 acres,  of
which  approximately  61% are developed.  The Company also owns six crematories,
two of which are located in Illinois and the remaining four of which are located
in California, Florida, Indiana and Tennessee.

         The   Company's   headquarters   share   space  with   their   pre-need
telemarketing call center and together occupy  approximately  20,000 square feet
of office  space in a building in  Erlanger,  Kentucky  under a lease  agreement
which  expires in December  2007;  provided  that the lease may be terminated in
December 2004 by the Company, under certain terms and conditions.





<PAGE>


ITEM 3.  LEGAL PROCEEDINGS.

         Gamble  Settlement.  On  February  26,  1996,  a lawsuit was filed (the
"Alabama  Litigation")  against  the  Company by World  Service  Life  Insurance
Company of America  ("World  Service")  and  Jeffrey M. Gamble  ("Gamble"),  the
former owner of a business located in Alabama which was acquired by a subsidiary
of the Company,  in connection with a pre-need funeral service funding agreement
between the Company and World Service (the  "Alabama  Pre-need  Agreement").  On
February  29, 1996, a lawsuit  (the "Texas  Litigation")  was filed  against the
Company by South Texas Bankers Life Insurance Company ("South Texas") and Gamble
in connection  with a pre-need  funeral service  funding  agreement  between the
Company  and South  Texas (the  "Texas  Pre-need  Agreement"  together  with the
"Alabama Pre-need Agreement", the "Pre-need Agreements").

         On April 11, 1996, the Company  settled the Alabama  Litigation and the
Texas Litigation by entering into a Termination of Pre-need  Funding  Agreements
and Release with World  Service,  Gamble and South Texas (the  "Termination  and
Release").  Pursuant to the Termination and Release, (a) the Pre-need Agreements
were  immediately  terminated,  (b) each of the parties released the others from
all claims under or with respect to the Pre-need  Agreements and (c) the Alabama
Litigation  and  the  Texas   Litigation  were  dismissed  with  prejudice.   As
consideration  for such  termination,  release and  dismissal,  the Company paid
Gamble approximately  $6,300,000,  which was recorded as a charge against income
in the Company's financial statements.

         On the Acquisition  Closing Date, the Company used a portion of the net
proceeds  from the offering of the Notes and the Bank Term  Facility to fund the
remaining  obligation  provided for in the Termination  and Release.  Management
believes that the Company will recover a substantial  portion of the cost of the
settlement  over time  through  higher  commission  rates and  increased  policy
benefits with the purchase of pre-need  insurance  policies from an  alternative
insurance carrier.

         Other.  The  Company  is a party  to  other  legal  proceedings  in the
ordinary  course of its business but  Management  does not expect the outcome of
any  such  proceedings  to  have a  material  adverse  effect  on the  Company's
financial condition.

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

           None



<PAGE>


                                            PART II

ITEM 5.  MARKET FOR COMMON STOCK AND RELATED STOCKHOLDER MATTERS.

         In connection  with the  Acquisition,  the Company issued 100 shares of
Common Stock to Old Prime,  which shares represent all of the outstanding Common
Stock of the Company.  There is no  established  public  trading  market for the
Common Stock of the Company.

         ITEM 6.  SELECTED FINANCIAL DATA.

         The following table sets forth certain selected consolidated  financial
data for the Company  for and at the end of each of the years in the  three-year
period ended  December 31, 1997,  the period from January 1, 1996 through August
25, 1996 and the period from August 26, 1996  through  December 31, 1996 and the
year ended December 31, 1995. KPMG Peat Marwick LLP ("KPMG") have been appointed
auditors of New Prime (Successor  Company).  The selected  historical  financial
data for the year ended  December  31, 1997 and for the period  from  January 1,
1996  through  August 25,  1996 and the period  from  August  26,  1996  through
December  31, 1996 were  derived from the  financial  statements  of the Company
which  have been  audited by KPMG.  The  selected  financial  data for the three
fiscal years ended  December 31, 1995 were derived from the Company's  financial
statements  which have been  audited by Ernst & Young LLP  ("E&Y"),  independent
auditors of Old Prime (Predecessor Company) through December 31, 1995.



<PAGE>
<TABLE>
<CAPTION>



                                         Successor                            Predecessor
                                          Company                               Company
                                ----------------------------- ---------------------------------------------
                                              For the Period    For the
                                                                Period
                                                   From          From
                                                August 26,    January 1,        Year Ended December 31,
                                    Year           1996          1996
                                                                              -----------------------------
                                   Ended         Through        Through
                                December 31,     December       August
                                                   31,            25,
                                    1997           1996          1996           1995      1994      1993
                                (dollars in millions, except  per share amounts and revenues per funeral
                                                              service)
<S>                                   <C>              <C>         <C>         <C>         <C>      <C>   
Income Statement Data:

Total revenue                         $101.1           $32.7       $ 56.1      $  81.5     $72.2    $ 41.9
Net income (Loss)                        0.1                        (9.5)        (0.7)     (4.3)     (2.3)
                                                       (2.9)
Other Financial Data:
EBITDA, as adjusted(1)                  35.4             8.8         12.7         19.0      14.7       7.4
Cash flows from:
   Operating activities                (7.0)           (2.0)          3.3          6.0       2.7       2.0
   Investing activities                (3.5)           (1.4)        (1.6)        (9.1)    (25.7)    (69.5)
   Financing activities                  9.1             5.0        (1.0)          0.2      22.8      68.6

                                     As of December 31,                            As of December 31,
                                                                              -----------------------------
                                    1997           1996                         1995      1994      1993
Balance Sheet Information:
Total debt and redeemable
preferred stock (2)                   $203.0          $195.0            -      $ 124.6    $123.5    $103.2
Total assets                           395.1           398.8            -        196.1     195.3     163.9

Operating Data:
Number of funeral home
         locations                       143             144          146          143       131       101
Number of funeral
         services                     19,335           7,146       13,827       19,776    17,590    10,889
Total funeral service
         revenues per
         funeral service              $3,896          $3,751       $3,419       $3,470    $3,460    $3,027
Number of cemeteries                      19              16           16           16        16        14

</TABLE>



                                                         

(Footnotes on following page)




<PAGE>


(1) EBITDA,  as adjusted,  is defined as income  (loss) before income taxes plus
interest  expense,  depreciation and amortization  adjusted for (i) the one-time
approximate  $3,500,000  net change in  accounting  estimate  for the year ended
December 31, 1995, and (ii) the approximate  $6,300,000  one-time charge for the
settlement of the Gamble  litigation for the period from January 1, 1996 through
August 25, 1996. These adjustments are described below:

           --In  December  1995,  the  Company   constructed  a  cemetery  vault
           manufacturing  facility in Alabama that allows for the  production of
           vaults at a significantly lower cost than purchasing from independent
           manufacturers.  The lower  cost of sales  from the new  manufacturing
           plant  allowed the Company to recognize a one-time gain of $3,500,000
           by reducing its estimated deferred merchandise liability for pre-need
           cemetery vault sales.

           --The Company settled certain litigation in April 1996 and recorded a
           one-time  charge  of  $6,300,000  in the  first  half of 1996 for the
           present  value of future  cash  payments  due  under  the  litigation
           settlement agreements.

           These two  adjustments  to EBITDA  have  been made  because  both are
           considered infrequent and non-recurring in nature by the Company.

           EBITDA,  as adjusted,  is presented  because (i) Management  believes
           that EBITDA provides  relevant and useful  information,  (ii) it is a
           widely accepted  financial  indicator of a company's ability to incur
           and service debt and (iii) it is the basis on which  compliance  with
           the  financial  covenants  under the  Company's  debt  agreements  is
           determined. However, EBITDA, as adjusted, should not be considered in
           isolation,  as a substitute for net income or cash flow data prepared
           in accordance with generally accepted  accounting  principles or as a
           measure of a company's profitability or liquidity. Also, this measure
           of EBITDA,  as adjusted  may not be  comparable  to similar  measures
           reported by other companies.

(2)  Total debt and redeemable  preferred stock as of December 31, 1995 and 1994
     includes  $2.3  million  and  $2.0  million,  respectively,  of  redeemable
     preferred stock.


<PAGE>


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

Overview

         Prime  Succession,   Inc.  (the  "Company")  provides  merchandise  and
services  in both the  funeral  home and  cemetery  segments  of the death  care
industry in the United States. In addition to providing merchandise and services
at the time of need,  the Company also makes  funeral,  cemetery  and  cremation
arrangements  on a pre-need basis. As of March 19, 1998, the Company through its
subsidiaries owns and operates 143 funeral homes and 19 cemeteries in 20 states,
primarily  in  non-urban  areas  of  the  United  States.  Old  Prime  commenced
operations in 1992 and expanded  rapidly  through the aggressive  acquisition of
funeral homes and cemeteries.  The Company's consolidated revenues and operating
income were $101.1 million and $24.1 million,  respectively,  for the year ended
December 31, 1997. Sales of funeral services of $78.7 million and cemetery sales
of $22.4 million accounted for approximately 77.8% and 22.2%,  respectively,  of
total net sales for 1997.

         The Company had no funeral  homes when it began  operations in 1992 and
grew to 146 funeral homes in 1996. In order to achieve this rapid growth, former
management was primarily focused on identifying funeral homes to be acquired and
consummating  acquisitions of such homes rather than on maximizing profitability
of the funeral homes and cemeteries which it had acquired.  As a result,  former
management  did not take  advantage  of certain  opportunities  to  improve  the
efficiency  and  performance of the funeral homes acquired by it. New Management
substantially  eliminated the Company's  acquisition  program.  In addition,  in
order to improve the Company's present and long-term operating performance,  new
Management took advantage of (i) the quality and size of the Company's portfolio
of properties, (ii) the opportunity to operate more efficiently those properties
located  in close  proximity  to one  another,  (iii)  the  shift in focus  from
acquisitions to profit  maximization at existing locations and (iv) the benefits
at both  local  sites and the  corporate  headquarters  from the  Administrative
Services  Agreement with Loewen. The Company's future results of operations will
depend in large part on the ability of Management to  successfully  maintain its
business strategy.

         The Company  restructured its accounting and information  systems to be
more effective and efficient during 1997. The Company implemented Lawson Insight
Financial Systems during 1997 as the foundation for a major systems upgrade. The
Company is able to  communicate  and  transmit  financial  data with all cluster
operations via data lines and the internet,  thus allowing for timely  reporting
of operating and financial information in a cost effective manner.

         Results of Operations

         1997 (Successor Company) Compared with 1996 (Successor
Company/Predecessor Company Combined)

           Consolidated  revenues increased 13.9% to $101.1 million in 1997 from
$88.8 million in 1996,  with funeral service  revenues  increasing 6.2% to $78.7
million,  and cemetery  revenues  increasing  52.4% to $22.4  million from $14.7
million in 1996.  Consolidated  operating income increased from $12.8 million in
1996,  before the $6.3 million legal  settlement with Jeffrey  Gamble,  to $24.1
million  in  1997.  Funeral  revenues   increased   primarily  as  a  result  of
restructured  pricing,  merchandising  of  merchandise  display areas and from a
commission  of  approximately  $3.1  million on  converting  a funeral  trust to
insurance.  On same-store  business,  excluding 1997  acquisitions,  total calls
decreased  by 516 from 18,583  calls in 1996 to 18,067 calls in 1997 and average
revenue  per call  increased  by $437  from  $3,459  in 1996 to  $3,896 in 1997.
Cemetery revenues increased primarily due to increased pre-need sales efforts in
Alabama, Florida and Tennessee.

         Consolidated  contribution  margin of $38.6 million  increased 35.9% in
1997 from $28.4 million in 1996,  with funeral  contribution  margin of 40.3% in
1997 compared to 32.8% in 1996 and cemetery contribution margin of 30.9% in 1997
compared to 27.7% in 1996.  Contribution  margin is defined as a  percentage  of
funeral revenues or cemetery revenues,  as the case may be, less related cost of
sales (including direct operating expenses).

         Corporate and regional general and administrative  expense decreased to
$3.3 million in 1997 from $6.7 million in 1996. As a percentage of  consolidated
revenue,  general and administrative expense decreased to 3.2% in 1997 from 7.6%
in 1996.  Corporate and regional general and  administrative  expense  decreased
primarily  due  to  elimination  of  corporate  development  staff  as  well  as
restructured and upgraded more efficient information and accounting systems.

           Depreciation and amortization expense increased $2.4 million to $11.2
million in 1997 from $8.8 million in 1996. This increase is primarily the result
of the purchase accounting treatment of the Acquisition.

         Interest  expense of $23.8  million in 1997  increased  by $5.2 million
compared  to  $18.6  million  in  1996,  primarily  as a  result  of  additional
borrowings to finance the  Acquisition  and higher interest rates on borrowings,
principally as a result of the issuance of the Notes referred to below.

         1996 (Successor Company/Predecessor Company Combined) Compared with
1995 (Predecessor Company)

         Consolidated  revenues  increased  8.9% to $88.8  million  in 1996 from
$81.5 million in 1995,  with funeral service  revenues  increasing 8.0% to $74.1
million,  and cemetery revenues increasing 13.9% to $14.7 million.  Consolidated
operating  income  decreased from $14.9 million in 1995 to $6.5 million in 1996,
primarily due to the $6.3 million legal settlement with Jeffrey Gamble.  Funeral
revenues  increased  primarily as a result of a 1996 acquisition and a full year
of  1995  acquisitions.   On  same-store  business,   excluding  1995  and  1996
acquisitions,  total calls  increased by 101 from 18,482 calls in 1995 to 18,583
calls in 1996 and average  revenue per call increased by $76 from $3,383 in 1995
to $3,459 in 1996.  Cemetery revenues  increased due to increased pre-need sales
efforts in Alabama and Florida.

         Consolidated  operating income of $12.8 million before legal settlement
of $6.3 million  increased  13.3% in 1996 from $11.3  million  operating  income
before  change in  accounting  estimate of $3.5  million in 1995,  with  funeral
contribution  margin  of  32.8%  and  cemetery  contribution  margin  of  27.7%.
Contribution  margin is  defined  as  contribution  as a  percentage  of funeral
revenues or cemetery revenues, as the case may be.

         Corporate and regional general and administrative  expense increased to
$6.7 million in 1996 from $6.1 million in 1995. As a percentage of  consolidated
revenue,  general and administrative expense increased to 7.6% in 1996 from 7.5%
in 1995. Corporate and regional general and administrative expense increased due
to additional  corporate and regional staff as well as expenses  associated with
new information and accounting systems.

           Depreciation and amortization  expense increased $4.4 million to $8.8
million in 1996 from $4.4 million in 1995. This increase is primarily the result
of the purchase accounting treatment of the Acquisition.

         Interest  expense of $18.6  million in 1996  increased  by $3.2 million
compared  to  $15.4  million  in  1995,  primarily  as a  result  of  additional
borrowings to finance the  Acquisition  and higher interest rates on borrowings,
principally as a result of the issuance of the Notes referred to below.


         Liquidity and Capital Resources

         The  Company's  primary  sources  of cash  since  1995 have been  funds
provided by operating  activities,  proceeds from additional  long-term debt and
capital  contributions.  In 1997, operating activities used $5.7 million of cash
compared to providing $1.3 million of cash in 1996 and $6.0 million in 1995.

           In 1997,  long-term  debt  proceeds  provided  $1.3  million  of cash
compared  to $190.6  million  in 1996 and $10.0  million in 1995.  In 1997,  the
disposal of assets  provided  cash of $0.3  million  compared to $0.8 million in
1996 and $1.4 million in 1995.  In 1997 proceeds  from  revolving  loan provided
$11.2 million.

         The primary  uses of cash since 1995 have been for the  acquisition  of
funeral homes and cemeteries,  including the Acquisition,  principal payments on
long-term  debt and  capital  expenditures.  In 1997,  the  Company  purchased 1
funeral  home and  three  cemeteries  for an  aggregate  purchase  price of $2.6
million compared to three funeral homes for an aggregate  purchase price of $0.7
million  in 1996.  In 1995,  the  Company  purchased  11  funeral  homes  for an
aggregate  purchase  price of $8.9  million.  In 1997,  the  Company  sold three
funeral homes for $2.0 million.

           In  1997  and  1996,  the  Company  used  $3.2  million  for  capital
expenditures and $1.6 million in 1995. In 1997, the Company paid $4.6 million in
principal  payments on  long-term  debt,  principally  relating to  repayment of
former owner  obligations,  compared to $114.7 million in 1996 which principally
related to the refinancing of the  indebtedness of Old Prime and $7.7 million in
1995.  In  1997  the  company  used  $1.4  million  for  the  acquistion  of the
Predecessor Company compared to $196.3 million in 1996.

           The Company estimates that capital expenditures will be approximately
$1.5  million  in 1998 to be used in part  for the  repair  and  improvement  of
existing  facilities.  The Company  also  expects to invest  approximately  $1.8
million in 1998 for cemetery inventory development.

           Contemporaneously  with the  consummation of the Acquisition in 1996,
the Company  entered into senior  secured  credit  facilities  (the "Bank Credit
Facilities")  with a syndicate  of financial  institutions  and The Bank of Nova
Scotia, as administrative agent.

           The Bank Credit  Facilities  provided the Company with senior secured
amortization  extended  term loan  facilities  (the "Bank Term  Facility") in an
aggregate  principal  amount of $90 million,  the proceeds of which were used to
finance the  Acquisition  and related  transaction  costs,  to pre-fund  certain
capital expenditures and to refinance existing  indebtedness of the Company, and
a senior secured revolving credit facility (the "Bank Revolving Facility") in an
aggregate  principal amount of up to $25 million,  the proceeds of which will be
used for general  corporate  purposes and a portion of which may be extended (as
agreed  upon) in the form of swing  line  loans or  letters  of  credit  for the
account of the  Company.  The Bank Term  Facility  will mature 7 years after the
Acquisition  Closing Date, and the Bank  Revolving  Facility will mature 5 years
after the  Acquisition  Closing  Date.  The Bank Term  Facility  is  subject  to
amortization,  subject to certain conditions, in semi-annual installments in the
amounts of $1 million in each of the first three years after the  anniversary of
the closing date of the Bank Term Facility (the" Bank  Closing");  $4 million in
the fourth year after the Bank  Closing;  $9 million in the fifth year after the
Bank  Closing;  $12.5 million in the sixth year after the Bank Closing and $61.5
million  upon the  maturity  of the Bank Term  Facility.  The  Revolving  Credit
Facility will be payable in full at maturity, with no prior amortization.

           All  obligations  under the Bank Credit  Facilities  and any interest
rate hedging  agreements  entered into with the lenders or their  affiliates  in
connection  therewith are  unconditionally  guaranteed  (the "Bank  Guarantees")
jointly  and  severally,  by Old Prime and each of the  Company's  existing  and
future domestic  subsidiaries  (the "Bank  Guarantors").  All obligations of the
Company  and the  guarantors  under  the  Bank  Credit  Facilities  and the Bank
Guarantees are secured by first priority security  interests in all existing and
future assets (other than real property and vehicles  covered by certificates of
title)  of the  Company  and  the  Guarantors.  In  addition,  the  Bank  Credit
Facilities  are  secured by a first  priority  security  interest in 100% of the
capital stock of the Company and each  subsidiary  thereof and all  intercompany
receivables.

           In  connection  with the  Acquisition,  the Company  also issued $100
million of 10 3/4% Senior  Subordinated  Notes due 2004, which were exchanged in
January 1997 for $100 million of 10 3/4% Senior Subordinated Notes due 2004 (the
"Notes") that were registered under the Securities Act of 1933. The Notes mature
on August 15, 2004.  Interest on the Notes is payable  semi-annually on February
15 and August 15 at the annual rate of 10 3/4%. The Notes are redeemable in cash
at the  option  of the  Company,  in whole  or in part,  at any time on or after
August 15, 2000, at prices ranging from 105.375% with annual  reductions to 100%
in 2003 plus accrued and unpaid  interest,  if any, to the redemption  date. The
proceeds of the Notes were used, in part, to finance the Acquisition.

         The Company  and its  Subsidiaries  are subject to certain  restrictive
covenants contained in the Indenture relating to the Notes,  including,  but not
limited to,  covenants  imposing  limitations  on the  incurrence  of additional
indebtedness;   certain  payments,  including  dividends  and  investments;  the
creation  of liens;  sales of assets  and  preferred  stock;  transactions  with
interested persons; payment restrictions affecting subsidiaries;  sale-leaseback
transactions;  and  mergers and  consolidations.  In  addition,  the Bank Credit
Facilities contain certain restrictive covenants that, among other things, limit
the  ability of the  Company and its  subsidiaries  to dispose of assets,  incur
additional  indebtedness,  prepay  other  indebtedness,  pay  dividends  or make
certain  restricted  payments,  create  liens on  assets,  engage in  mergers or
acquisitions or enter into leases or transactions with affiliates.

           As of December 31, 1997, the Company had $203 million of indebtedness
outstanding and approximately  $9.7 million of borrowing  availability under the
Revolving Credit Facility.  The Company believes that, based upon current levels
of operations and anticipated growth and availability under the Revolving Credit
Facility,  it can  adequately  service its  indebtedness.  If the Company cannot
generate  sufficient  cash flow from  operations  or borrow under the  Revolving
Credit  Facility to meet such  obligations,  then the Company may be required to
take certain actions, including reducing capital expenditures, restructuring its
debt,  selling assets or seeking additional equity in order to avoid an Event of
Default.  There can be no assurance that such actions could be effected or would
be effective in allowing the Company to meet such obligations.

Forward-Looking Statements

           Certain  statements  in  this  Annual  Report  on Form  10-K  include
"forward-looking  statements"  as  defined  in  Section  21D of  the  Securities
Exchange Act of 1934. All statements  other than statements of historical  facts
included  herein,  including,  without  limitation,  the statements under Item 7
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations"  and Item 1 "Business",  and Item 11 "Executive  Compensation",  and
located elsewhere herein regarding the Company's  financial  position,  plans to
increase revenues,  reduce general and administrative expense and take advantage
of synergies, are forward-looking statements. Although the Company believes that
the expectations reflected in such forward-looking statements are reasonable, it
can give no assurance that such expectations will prove to be correct. Important
factors that could cause actual results to differ  materially from the company's
expectations ("Cautionary Statements") are disclosed herein, including,  without
limitation, in conjunction with the forward-looking  statements included herein.
All subsequent written and oral forward-looking  statements included herein. All
subsequent  written  and oral  forward-looking  statements  attributable  to the
Company  (as  defined  herein)  or persons  acting on its  behalf are  expressly
qualified in their entirety by the Cautionary Statements.


<PAGE>



ITEM 8.  FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA.

         INDEX TO CONSOLIDATED FINANCIAL STATEMENTS AND SCHEDULE


PRIME SUCCESSION, INC. AND SUBSIDIARIES AS OF DECEMBER 31, 1997 AND 1996 AND FOR
THE YEAR ENDED  DECEMBER  31, 1997 AND THE PERIODS  FROM JANUARY 1, 1996 THROUGH
AUGUST 25, 1996 AND FROM AUGUST 26, 1996 THROUGH DECEMBER 31, 1996:

Independent Auditors' Report.................................................15
Financial Statements:
     Consolidated Balance Sheets.............................................16
     Consolidated Statements of Operations.................................. 18
     Consolidated Statements of Shareholders' Equity.........................19
     Consolidated Statements of Cash Flows...................................20
     Notes to Consolidated Financial Statements..............................22


PRIME SUCCESSION, INC. AND SUBSIDIARIES FOR THE YEAR ENDED DECEMBER 31, 1995:

Report of Independent Auditors...............................................38
Financial Statements:
     Consolidated Statements of Operations.................................. 39
     Consolidated Statements of Shareholders' Equity.........................40
     Consolidated Statements of Cash Flows...................................41
     Notes to Consolidated Financial Statements..............................42

Schedule II - Valuation and Qualifying Accounts..............................65



All other schedules have been omitted as not applicable or not required.







<PAGE>




                                  Independent Auditors' Report

Board of Directors
Prime Succession, Inc.:

We  have  audited  the  accompanying   consolidated   balance  sheets  of  Prime
Succession,  Inc. and subsidiaries  (Successor  Company) as of December 31, 1997
and 1996, and the related consolidated  statements of operations,  shareholders'
equity,  and cash flows for the year ended  December 31, 1997 and for the period
from August 26, 1996 through December 31, 1996 (Successor  Company period),  and
the consolidated statements of operations,  shareholders' equity, and cash flows
of Prime Succession,  Inc. and subsidiaries (Predecessor Company) for the period
from January 1, 1996 through August 25, 1996 (Predecessor Company period). 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  generally   accepted  auditing
standards.  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  aforementioned  Successor Company  consolidated  financial
statements present fairly, in all material  respects,  the financial position of
Prime  Succession,  Inc. and  subsidiaries as of December 31, 1997 and 1996, and
the results of their operations and their cash flows for the year ended December
31, 1997 and for the Successor  Company  period,  in conformity  with  generally
accepted  accounting  principles.  Further,  in our opinion,  the aforementioned
Predecessor  Company  consolidated  financial  statements present fairly, in all
material respects,  the results of their operations and their cash flows for the
Predecessor  Company period,  in conformity with generally  accepted  accounting
principles.  Also, in our opinion, the related consolidated  financial schedule,
when considered in relation to the basic consolidated financial statements taken
as a whole, presents fairly, in all material respects, the information set forth
therein for the years ended December 31, 1997 and 1996.

As  discussed  in Note 1 to the  consolidated  financial  statements,  effective
August 26, 1996, all of the outstanding capital stock of the Predecessor Company
was acquired in a business combination  accounted for as a purchase. As a result
of this acquisition, the consolidated financial information for the period after
the  acquisition is presented on a different cost basis than that for the period
before the acquisition and, therefore, is not comparable.

                                                        KPMG Peat Marwick LLP

Cincinnati, Ohio
March 6, 1998



<PAGE>

<TABLE>
<CAPTION>

                                      Prime Succession, Inc. and Subsidiaries
                                            Consolidated Balance Sheets
                                            December 31, 1997 and 1996

                                                                                            December 31
                                                                                     1997               1996
                                    Assets
<S>                                                                                  <C>                 <C>       
Cash and cash equivalents                                                            $1,555,415          $2,985,704
Restricted cash                                                                              --           4,388,837
Receivables:
         Trade, less allowance of $2,647,693 and $2,834,438                          13,073,005          11,286,384
         Other                                                                        4,492,005             785,586
                                                                                ----------------    ----------------
                           Total receivables                                         17,565,010          12,071,970
Inventories:
         Merchandise                                                                  3,836,994           2,951,913
         Cemetery lots and mausoleum spaces                                           1,693,530           1,115,342
                                                                                ----------------    ----------------
                           Total inventories                                          5,530,524           4,067,255
                                                                                ----------------    ----------------
                                                                                                    
Prepaids and other current assets                                                       319,000             354,576
Prepaid fees to shareholders (note 4)                                                        --             375,000
Deferred income taxes (note 9)                                                          723,566             371,249
                                                                                ----------------    ----------------
                                                                                                    
                  Total current assets                                               25,693,515          24,614,591
                                                                                ----------------    ----------------
Property and equipment:
         Land and land improvements                                                  16,190,801          16,101,845
         Buildings and improvements                                                  47,313,605          45,664,076
         Equipment, furniture and fixtures                                            9,051,236           7,363,265
         Accumulated depreciation                                                   (3,165,322)           (741,179)
                                                                                ----------------    ----------------
                  Net property and equipment                                         69,390,320          68,388,007
                                                                                ----------------    ----------------
                                                                                                    
Developed cemetery properties                                                        12,996,135          12,951,162
Undeveloped cemetery properties                                                      31,902,345          30,616,355
Goodwill, less accumulated amortization of $7,482,615 and $1,789,876                222,086,427         228,215,892
Other intangible assets, less accumulated amortization of $5,866,178 and
          $1,548,680                                                                 23,147,315          27,621,587
Long-term receivables, less allowance of $3,288,268 and $2,731,216                    9,318,513           5,584,119
Other assets                                                                            571,615             796,489
                                                                                ----------------    ----------------
                                                                                   $395,106,185        $398,788,202
                                                                                ================    ================


              See  accompanying  notes  to  consolidated  financial statements.


<PAGE>



                                      Prime Succession, Inc. and Subsidiaries
                                            Consolidated Balance Sheets
                                            December 31, 1997 and 1996


                                                                                            December 31
                                                                                     1997                1996
                     Liabilities and Shareholders' Equity
Accounts payable                                                                     $2,679,090          $2,695,283
  Other accrued expenses                                                              8,441,985          11,255,743
  Current installments of obligations under agreements with former owners             2,369,684           3,326,127
(note 5)
  Current installments of long-term debt (note 6)                                     1,389,530           5,253,936
  Due to related party (note 4)                                                          83,333                  --
                                                                                ----------------    ----------------
                                            Total current liabilities                14,963,622          22,531,089
                                                                                ----------------    ----------------
Deferred merchandise liabilities and revenues, less trust fund deposits              17,600,097          19,612,190
  Obligations under agreements with former owners, less current installments         15,259,919          17,568,971
         (note 5)
Long-term debt, less current installments (note 6)                                  201,580,635         189,752,128
Deferred income taxes (note 9)                                                       16,770,180          18,316,831
Other long-term liabilities (note 12)                                                 2,690,510           4,402,013

Shareholders' equity (note 7):
         Common stock, par value $.01 per share, 1,000 shares authorized;
                  100 issued and outstanding shares                                           1                   1
         Additional paid-in capital                                                 129,047,493         129,554,499
         Accumulated deficit                                                         (2,806,272)         (2,949,520)
                                                                                ----------------    ----------------
                                            Total shareholders' equity             126,241,222          126,604,980
                                                                                ----------------    ----------------
Commitments and contingencies (notes 10, 11 and 12)
                                                                                   $395,106,185        $398,788,202
                                                                                ================    ================

                 See  accompanying  notes to consolidated financial statements.


</TABLE>

<PAGE>
<TABLE>
<CAPTION>


                                                        
                                                                         Prime Succession, Inc. and Subsidiaries

                                                                          Consolidated Statements of Operations
                                                         For the year ended December   31, 1997 and periods from January 1,1996
                                                         through August 25, 1996 and from August 26, 1996 through December 31,1996

                                                                             Successor                    Predecessor
                                                                              Company
                                                                                                            Company
                                                                 -----------------------------------     --------------
                                                                                                        
                                                                      Year           August 26,           January 1,
                                                                      Ended         1996 through         1996 through
                                                                  December 31,      December 31,          August 25,
                                                                      1997              1996                 1996
                                                                 ---------------- ------------------     --------------
<S>                                                                 <C>                <C>                <C>        
Revenues:

         Funeral services (note 8)                                   $78,698,491        $26,805,617        $47,281,120
         Cemetery sales                                               22,440,769          5,845,936          8,834,774
                                                                 ---------------- ------------------     --------------
                                                                                 
                                                                     101,139,260         32,651,553         56,115,894
Costs and expenses:
         Funeral homes                                                47,005,645         17,514,919         32,257,977
         Cemetery                                                     15,517,734          4,070,525          6,546,474
                                                                 ---------------- ------------------     --------------
                                                                                  
                                                                      62,523,379         21,585,444         38,804,451
Corporate and regional general and administrative
         expenses                                                      3,250,451          2,089,994          4,637,919
Depreciation and amortization                                         11,241,934          3,483,901          5,341,150
Legal settlement (note 3)                                                     --                 --          6,344,313
                                                                 ---------------- ------------------     --------------
                                                                                  
Operating income                                                      24,123,496          5,492,214            988,061
                                                                 ---------------- ------------------     --------------

Other expenses:
         Interest expense, including amortization of deferred
                  loan costs of $1,792,884, $622,473 and $360,269     23,843,345          8,539,585         10,059,415
         Other                                                                --             98,015             39,315
                                                                 ---------------- ------------------     --------------
                                                                                  
                                                                      23,843,345          8,637,600         10,098,730
                                                                 ---------------- ------------------     --------------
                                                                                  
Income (loss) before income taxes                                        280,151         (3,145,386)        (9,110,669)
Income tax benefit (expense) (note 9)                                   (136,903)           195,866           (364,796)
                                                                 ---------------- ------------------     --------------
                                                                                  
Net income (loss)                                                        143,248         (2,949,520)        (9,475,465)
Redeemable Preferred Stock dividend requirements                              --                 --           (277,111)
                                                                 ---------------- ------------------     --------------
                                                                                  
Net income (loss) attributable to common shareholders                   $143,248        $(2,949,520)       $(9,752,576)
                                                                 ================ ==================     ==============



                   See accompanying notes to consolidated financial statements.

</TABLE>



                                                             



<PAGE>
<TABLE>
<CAPTION>


                                                            Prime Succession, Inc. and Subsidiaries

                                                       Consolidated Statements of Shareholders' Equity

                                        For the year ended  December  31, 1997 and periods  from January 1, 1996 through
                                                 August 25, 1996 and from August 26, 1996 through December 31,1996


                                                   Predecessor
                                                     Company

                                                     Common            Successor
                                                      Stock             Company        Additional                            Total
                                               --------------------
                                               Class A     Class B       Common         Paid-in         Accumulated    Shareholders'
                                                                         Stock          Capital           Deficit          Equity
                                               --------    --------    -----------    -------------    --------------    -----------
<S>                                       <C>          <C>         <C>            <C>              <C>                <C>    
Predecessor Company:
                       
         Balance as of December 31, 1995   $         1  $        9  $           -  $    31,902,729  $    (9,211,524)  $  22,691,215
         Net loss for the period January
         1, 1996 through August 25, 1996             -           -              -                -       (9,475,465)     (9,475,465)
                  
         Accrued dividends on redeemable
                  preferred stock                    -           -              -         (277,111)                -       (277,111)
                                               ========    ========    ===========    =============    ==============   ============
         Balance as of  August 25, 1996    $         1  $        9  $           -  $    31,625,618  $   (18,686,989)  $  12,938,639
                                               ========    ========    ===========    =============    ==============   ============

Successor Company:
         Acquisition of Predecessor
           Company  (note 7)               $         -  $        -  $           1  $   129,999,999  $              -  $ 130,000,000
         Receivable due from parent                  
         company                                     -           -              -         (445,500)                -       (445,500)
         Net loss for the period August
         26, 1996 through December 31, 1996          -           -              -                -       (2,949,520)     (2,949,520)
           
                                               --------    --------    -----------    -------------    --------------   ------------
         Balance as of December 31, 1996             -           -              1      129,554,499       (2,949,520)    126,604,980
         Receivable due from parent
           company (note 4)                          -           -              -         (507,006)                -       (507,006)
         Net income for the year ended
                  December 31, 1997                  -           -              -                -          143,248         143,248
                                               ========    ========    ===========    =============    ==============   ============
         Balance as of  December 31, 1997  $         -  $        -  $           1  $   129,047,493  $    (2,806,272)  $ 126,241,222
                                               ========    ========    ===========    =============    ==============   ============

                   See accompanying notes to consolidated financial statements.

</TABLE>


                                                         



<PAGE>

<TABLE>
<CAPTION>



                                                           
                                                            Prime Succession, Inc. and Subsidiaries

                                                             Consolidated Statements of Cash Flows

                                                 For the year ended December 31, 1997 and the periods from January 1,
                                                 1996 through August 25, 1996 and from August 26, 1996 through December 31, 1996

<S>                                                               <C>                  <C>                    <C>          
                                                                              Successor                    Predecessor
                                                                               Company                       Company
                                                                 ------------------------------------  ---------------------
                                                                       Year            August 26,           January 1,
                                                                       ended          1996 through         1996 through
                                                                   December 31,       December 31,          August 25,
                                                                       1997               1996                 1996
                                                                 ------------------ -----------------  ---------------------
Cash flows from operating activities:


Net income (loss)                                                 $        143,248      $ (2,949,520)          $ (9,475,465)
Adjustments to reconcile net loss to net cash provided by
          (used in) operating activities:
         Depreciation and amortization                                  13,034,818         4,106,374              5,701,419
         Provision for doubtful accounts                                 3,217,492           970,172                991,798
         Provision for deferred income taxes                            (1,898,968)         (141,369)               155,227
         Legal settlement                                                       --                --              6,344,313
         Payment on legal settlement                                            --        (5,344,313)            (1,100,000)
         Changes in operating assets and liabilities
                  net of effects of acquisition of subsidiaries:
                    Receivables                                        (10,444,182)       (3,359,542)              (211,649)
                      Inventories                                       (1,561,711)          493,059                (68,444)
                      Accounts payable and accrued expenses             (3,656,309)        3,037,740                887,452
                      Deferred merchandise liabilities and              (2,005,471)          505,549              2,475,263
                      revenue (net)
                      Other long-term liabilities                       (1,752,945)        1,021,741               (446,222)
                      Other                                               (766,522)         (323,179)            (1,947,562)
                                                                      -------------    --------------         --------------
                                                                                    
Net cash provided by (used in) operating activities                     (5,690,550)       (1,983,288)             3,306,130
                                                                 ------------------ -----------------  ---------------------
Cash flows from investing activities:
         Proceeds from the disposal of assets                              265,731           674,633                152,205
         Purchases of property and equipment                            (3,203,500)       (2,100,108)            (1,087,432)
         Net cash received for sale of business                          2,041,033                --                     --
         Net cash paid for purchase of business                         (2,606,951)                --              (675,000)
                                                                 -----------------    --------------         --------------
Net cash used in investing activities                                   (3,503,687)       (1,425,475)            (1,610,227)
                                                                 ------------------ -----------------  ---------------------

                                                                                                               (Continued)

</TABLE>

<PAGE>

<TABLE>
<CAPTION>

                                                                Prime Succession, Inc. and Subsidiaries

                                                                 Consolidated Statements of Cash Flows

                                                For the year ended December 31, 1997 and the periods from January 1,
                                           1996 through August 25, 1996 and from August 26, 1996 through December 31, 1996

<S>                                                                    <C>             <C>                      <C>        



                                                           
                                                                              Successor                    Predecessor
                                                                               Company                       Company
                                                                 ------------------------------------  ---------------------
                                                                       Year            August 26,           January 1,
                                                                       ended          1996 through         1996 through
                                                                   December 31,       December 31,          August 25,
                                                                       1997               1996                 1996
                                                                 ------------------ -----------------  ---------------------
Cash flows from financing activities:

         Proceeds from long-term debt                                    1,309,782       190,000,000                618,000
         Proceeds from bank indebtedness under revolving loan           11,200,000                --                     --

         Payments on long-term debt                                     (4,621,844)     (111,506,428)            (3,219,194)
         Payments on obligations under agreements with former
                      owners                                            (3,160,498)       (2,346,269)            (1,444,015)
         Capital contributions                                                  --                --              3,000,000
         Issuance of common stock                                               --       129,554,500                     --
         Acquisition of Predecessor Company                             (1,352,329)     (196,335,542)                    --
         Decrease (increase) in restricted cash                          4,388,837        (4,388,837)                    --
                                                                       -------------    --------------         --------------
Net cash provided by (used in) financing activities                      7,763,948         4,977,424             (1,045,209)
                                                                       -------------    --------------         --------------
Net increase(decrease)  in cash and cash equivalents                    (1,430,289)        1,568,661                650,694
Cash and cash equivalents at beginning of period                         2,985,704         1,417,043                766,349
                                                                     -------------    --------------         --------------
Cash and cash equivalents at end of period                          $    1,555,415      $  2,985,704           $  1,417,043
                                                                 ================== =================  =====================
Supplemental cash flow information: Cash paid during the year for:
                  Income taxes                                      $      136,624    $      210,846         $      248,677
                                                                 ================== =================  =====================
                  Interest                                           $  21,906,096     $   4,644,749          $   8,483,810
                                                                 ================== =================  =====================


                 See accompanying  notes to consolidated  financial statements.



</TABLE>

<PAGE>




                                                           
                          Prime Succession, Inc. and Subsidiaries

                         Notes to Consolidated Financial Statements

                                     December 31, 1997

(1)           Acquisition and Description of the Business

              On August  26,  1996  (Closing  Date),  Prime  Succession,  Inc.'s
              (Predecessor   Company)   capital   stock   was   purchased   (the
              Acquisition) by Blackstone  Capital  Partners II Merchant  Banking
              Fund L.P. and affiliates (Blackstone), Loewen Group International,
              Inc. (Loewen) and PSI Management Direct L.P. (PSIM). A new entity,
              Prime Succession,  Inc. (Successor Company), was formed and became
              a  wholly-owned   subsidiary  of  the  Predecessor   Company.   In
              connection with the Acquisition, all of the assets and liabilities
              of the  Predecessor  Company  were  transferred  to the  Successor
              Company.  Collectively,  the  Predecessor  Company  and  Successor
              Company  are  herein  referred  to as  "the  Company".  The  total
              purchase   price  was   approximately   $320   million   of  which
              approximately  $130  million was  contributed  by  Blackstone  and
              Loewen,  and $190 million was financed through bank borrowings and
              the issuance of senior subordinated notes. The purchase accounting
              method  was used to record the  transaction.  The  estimated  fair
              value  of the  acquired  assets,  excluding  goodwill,  aggregated
              approximately  $173  million and  liabilities  assumed  aggregated
              approximately  $85 million.  The excess of the purchase price over
              the fair value of net assets of  approximately  $230  million  was
              established as goodwill and will be amortized over 40 years.

              Since  purchase  accounting  was reflected in the opening  balance
              sheet of the Successor  Company on August 26, 1996,  the financial
              statements  of the  Successor  Company are not  comparable  to the
              financial  statements of the Predecessor Company.  Accordingly,  a
              vertical  black  line  is  shown  to  separate  Successor  Company
              financial  statements  from those of the  Predecessor  Company for
              periods ended prior to August 26, 1996.

              The  following  represents  the  unaudited  pro forma  results  of
              operations  as if the  acquisition  occurred at the  beginning  of
              1995.
                                                        Year ended December 31,
                                           ------------------------------------
                                                 1995               1996
                                           -----------------   ----------------
                  Revenue               $        85,400,000 $       88,900,000
                                           =================   ================
                  Net loss              $       (11,300,000) $     (18,300,000)
                                           =================   ================

              The unaudited  pro forma results of operations  include 14 funeral
              home  acquisitions  made in 1995 and 1996, as if the  acquisitions
              were  made  at  the  beginning  of  1995.   The  effect  of  these
              acquisitions  increased revenue by $3,900,000 and $100,000 in 1995
              and 1996,  respectively,  and  decreased  net loss by  $300,000 in
              1995. The pro forma results of operations also include adjustments
              for increased  depreciation,  amortization and interest  expenses,
              and reduced  expenses  resulting  from the  elimination of certain
              personnel.  The effect of these adjustments increased the net loss
              by $10,900,000 and $5,600,000 in 1995 and 1996, respectively.
                                                                   (Continued)
<PAGE>

                            Prime Succession, Inc. and Subsidiaries

                  Notes to Consolidated Financial Statements, Continued


(1)           Acquisition and Description of the Business, Continued

              The  unaudited  pro forma  information  presented  above  does not
              purport to be indicative  of the results that actually  would have
              been  obtained  if the  acquisition  had been  consummated  at the
              beginning of 1995 and is not intended to be a projection of future
              results or trends.

              In  1997,  the  Company  purchased  one  funeral  home  and  three
              cemeteries  for an  aggregate  purchase  price of $2.6 million and
              sold three funeral homes for $2.0 million.  The  acquisitions  and
              dispositions   had  an  immaterial   effect  on  the  consolidated
              financial statements for the year ended December 31, 1997.

              The  Company  is  fifth-largest  operator  of  funeral  homes  and
              cemeteries,  on the basis of revenues, in the United States and is
              the largest  privately-held  company in the  funeral and  cemetery
              industry.  The Company owns 143 funeral homes and 19 cemeteries in
              20 states.  The Company was founded in 1991,  began  operations in
              1992 and expanded  rapidly  through the aggressive  acquisition of
              funeral homes and cemeteries,  primarily in non-urban areas of the
              United States. The Company has focused on non-urban areas in order
              to take  advantage  of the  opportunities  offered by such  areas,
              including (i) the  opportunity  to establish and maintain a higher
              market  share as a result  of the  smaller  number  of death  care
              providers  and  (ii)  the  stronger   preference  for  traditional
              full-service  funeral  services  and  burials.  Historically,  the
              Company's primary growth strategy has been to purchase  properties
              that can serve as anchor  locations  and  subsequently  to acquire
              additional funeral homes and cemeteries located near those central
              assets.

(2)           Significant Accounting Policies

                  (a)   Principles of Consolidation

                  The consolidated  financial statements include the accounts of
                  the Company and  subsidiaries.  All  significant  intercompany
                  balances   and   transactions    have   been   eliminated   in
                  consolidation.

                  (b)   Cash and Cash Equivalents

                  All  highly  liquid   investments,   generally  with  original
                  maturities of three months or less,  are considered to be cash
                  equivalents.  Restricted  cash of  $4,388,837  at December 31,
                  1996 was  segregated  from  cash and cash  equivalents  on the
                  balance  sheet as a  separate  caption.  The use of this cash,
                  which was  deposited at several  financial  institutions,  was
                  restricted for the prepayment of certain former owner debt and
                  the  collateralization  of a letter of credit of approximately
                  $3,940,000 and $450,000, respectively.


                                                                     (Continued)
<PAGE>

                             Prime Succession, Inc. and Subsidiaries
                    Notes to Consolidated Financial Statements, Continued

(2)           Significant Accounting Policies, Continued 

                  (c)   Receivables

                  The  Company's receivables represent a combination of amounts
                  due  on  at-need  and  pre-need  installment  contracts.   The
                  Company  frequently extends credit to its  customers  for  the
                  purchase  of   funeral  services  or  cemetery   space.    The
                  customers'  credit  worthiness  is evaluated on a case by case
                  basis and  collateral  is  generally  not  required  on credit
                  sales. Installment  contracts receivable,   arising  primarily
                  from the  sales of  cemetery  property  and merchandise,   are
                  generally  due in monthly installments over periods of one  to
                  six years.  The  contracts  require  cash  down  payments  and
                  generally  include  simple interest, computed at rates ranging
                  from  approximately 6% to 18% per annum, which  is  recognized
                  on the  interest  method  over the contract life.   Allowances
                  include estimates for contract cancellations and uncollectible
                  accounts.

                  (d)   Inventories

                  Inventories of mausoleum spaces, cemetery lots and merchandise
                  are  recorded  principally  at average  cost,  which is not in
                  excess of market.  However,  as  provided  under the  purchase
                  method of accounting,  all  inventories in existence on August
                  26, 1996 were recorded at fair value,  which was not in excess
                  of market.

                  (e)   Derivative Instruments

                  The  Company  enters into  interest  rate swap  agreements  to
                  manage  interest  rate  exposure  on certain of its  long-term
                  debt. The difference  between the amounts paid and received is
                  accrued and accounted for as an adjustment to interest expense
                  over the life of the swap agreements.

                  (f)   Property and Equipment

                  Property  and  equipment  are  recorded at cost.  However,  as
                  provided under the purchase method of accounting, property and
                  equipment  in  existence  on August 26, 1996 were  recorded at
                  fair value, which was not in excess of market. Depreciation of
                  buildings,   improvements  and  equipment  is  provided  on  a
                  straight-line  basis  over the  expected  useful  lives of the
                  respective assets as follows:
                               
                      Land improvements                              15 years
                      Buildings and improvements                15 - 40 years
                      Equipment, furniture and fixtures          5 - 10 years

                     Expenditures  for maintenance and repairs are expensed when
                     incurred.
                                                                     (Continued)
<PAGE>

                             Prime Succession, Inc. and Subsidiaries

                    Notes to Consolidated Financial Statements, Continued


(2) Significant Accounting Policies, Continued

    (g)   Goodwill

     Goodwill,  resulting  from  the  cost  of  assets  acquired  exceeding  the
     underlying net asset value,  is being  amortized on a  straight-line  basis
     over a forty-year period. The Company  periodically  evaluates the carrying
     value of goodwill  to assess its  continued  recoverability  as required by
     Statement of Financial  Accounting  Standard  No. 121,  Accounting  for the
     Impairment of Long-Lived  Assets and for  Long-Lived  Assets to be Disposed
     Of. The determination includes evaluation of factors such as current market
     value,  future asset  utilization,  business  climate and future cash flows
     expected to result from the use of related assets.  The Company's policy is
     to record an impairment  loss in the period when it is determined  that the
     carrying amount of the asset may not be recoverable.

    (h)   Other Intangible Assets

     Other  intangible  assets  include  deferred  loan  costs  which  are being
     amortized using the  straight-line  method over 5 to 8 years, and names and
     reputations  which  represent  the  present  value  of  amounts  due  under
     consultative  and  noncompetition  agreements  as well as  prepaid  amounts
     related to such  contracts.  Amortization  of these assets is provided on a
     straight-line  basis over the terms of the relevant  agreements,  typically
     ten years.

    (i)   Revenue Recognition - Funeral Services and Merchandise

     Funeral services and merchandise sold at the time of need are recognized as
     funeral  revenue  when  contracted.  The  Company  also sells  pre-arranged
     funeral services and merchandise  under contracts that provide for delivery
     of  funeral  services  and  merchandise  at the  time of  death  at a price
     determined at the time the agreement is signed.

     The Predecessor  Company recognized revenues from pre-need funeral services
     and merchandise when the services and merchandise were provided, except for
     caskets and vaults  included on cemetery  contracts in certain  states (see
     Note 2(j)).  Where allowed by state laws, if the Successor Company has both
     cemetery and funeral  operations,  it  recognizes  revenues  from  pre-need
     funeral  merchandise  when the  customer  contracts  are  signed and a down
     payment is received, with concurrent recognition of related costs. Where it
     is  prohibited  by state laws,  or the  Successor  Company has only funeral
     operations,  it recognizes  revenues from pre-need funeral merchandise when
     the  merchandise  is  provided.  Payments  are  typically  used to purchase
     insurance  contracts  on the lives of the patrons or  deposited  into trust
     funds as  required  by state  law,  and are not  shown on the  consolidated
     balance sheet (see Note 8).

                                                                     (Continued)



<PAGE>


Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued


(2)  Significant Accounting Policies, Continued

     (i)   Revenue Recognition - Funeral Services and Merchandise, Continued

     For the Predecessor Company,  trust earnings available for withdrawal prior
     to the delivery of funeral  services,  and  insurance  commissions  paid in
     connection with the insurance  contracts  described above,  were recognized
     currently  as part of funeral  service  revenues.  Direct  obtaining  costs
     related to the sale of pre-need  funeral  services  were  included in other
     assets and were being  amortized over a period of  approximately  20 years.
     For the Successor Company, trust fund investment earnings retained in trust
     and annual insurance benefits, are deferred until the service is performed.
     The  Company  estimates  that trust  fund  investment  earnings  and annual
     insurance  benefits  exceed the increase in cost over time of providing the
     related  services.  Upon performance of the specific  funeral service,  the
     Company will recognize the accumulated  trust earnings and annual insurance
     benefits as funeral revenues. Direct obtaining costs related to the sale of
     prearranged  funeral  services are  included in other assets and  amortized
     over a period of ten  years,  approximating  the period  the  benefits  are
     expected  to be  realized.  Direct  obtaining  costs,  net  of  accumulated
     amortization,  were approximately  $9,300,000 and $4,000,000 as of December
     31, 1997 and 1996, of which  $5,300,000  and $600,000 was deferred,  net of
     amortization, by the Successor Company for the year ended December 31, 1997
     and from August 26, 1996 through December 31, 1996, respectively.  Indirect
     obtaining  costs relating to the sale of prearranged  funeral  services are
     expensed in the period incurred.

     (j)   Revenue Recognition - Cemetery Sales

     The Company  accounts for its cemetery  sales in  accordance  with the full
     accrual  method.  Pre-need  sales of  cemetery  interment  rights and other
     related products (caskets, markers and vaults) and services are recorded as
     revenues when customer contracts are signed and a down payment is received.
     Allowances for customer  cancellations and refunds are provided at the date
     of sale based on historical experience.

     In  compliance  with local laws, a portion of the proceeds from the sale of
     cemetery lots may be required to be paid into  perpetual or endowment  care
     trust funds.  A portion of the proceeds  from the related  pre-need sale of
     other cemetery merchandise may also be required to be paid into merchandise
     trust  funds.  As of  December  31,  1997  and  1996,  the  amount  held in
     merchandise  trust funds was approximately  $9,600,000 and $4,500,000.  The
     Company  recognizes  currently the earnings on amounts withdrawn from these
     trusts;  approximately  $400,000,  $130,000  and $70,000 for the year ended
     December 31, 1997 and for the periods  from January 1, 1996 through  August
     25, 1996 and from August 26, 1996 through  December  31, 1996.  Earnings on
     the  perpetual  or endowment  care trust funds are used to defray  cemetery
     maintenance   costs.  The  principal  amount  of  deposits  placed  in  the
     merchandise  trusts is  available to the Company  when the  merchandise  is
     delivered.

                                                                     (Continued)

<PAGE>

Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued


(2)  Significant Accounting Policies, Continued

     (k)   Income Taxes

     Income  taxes are  accounted  for under  the  asset and  liability  method.
     Deferred  tax  assets and  liabilities  are  recognized  for the future tax
     consequences  attributable to differences  between the financial  statement
     carrying  amounts of existing assets and  liabilities and their  respective
     tax bases and net operating loss and tax credit carryforwards. Deferred tax
     assets and  liabilities  are measured  using enacted tax rates  expected to
     apply to taxable income in the years in which those  temporary  differences
     are expected to be recovered or settled.  The effect on deferred tax assets
     and  liabilities  of a change in tax rates is  recognized  in income in the
     period that includes the enactment date.

     (l)   Disclosures About Fair Value of Financial Instruments

     The  carrying  amounts as of  December  31,  1997 and 1996 of  receivables,
     accounts payable and other accrued  expenses  approximate fair value due to
     the short maturity of these instruments.  See Notes 5 and 6 for disclosures
     regarding the fair value of obligations under agreements with former owners
     and long-termdebt, respectively.

     (m)   Use of Estimates

     The  preparation of the financial  statements in conformity  with generally
     accepted  accounting  principles  requires management to make estimates and
     assumptions  that affect the amounts  reported in the financial  statements
     and accompanying notes. Actual results could differ from those estimates.

     (n)   Reclassifications

     Certain  reclassifications have been made to the 1996 amounts to conform to
     the 1997 presentation.

 (3) Litigation Settlement

     On February 26,  1996,  a lawsuit was filed  against the Company and two of
     its officers by World  Service  Life  Insurance  Company of America  (World
     Service) and Jeffrey M. Gamble, the former owner of an acquired subsidiary,
     alleging,  among other things, breach of a pre-need funeral service funding
     agreement between the Company and World Service.  Immediately preceding the
     filing of the  lawsuit,  the Company  notified  World  Service  that it had
     breached the pre-need funding agreement by charging premiums to the Company
     in excess of those charged to other World Service Customers.

     On April 11, 1996, the parties settled the litigation with the execution of
     a Termination of Pre-Need Funding Agreements and Release. Subsequently, the
     Company paid Mr. Gamble approximately  $6,300,000 in August of 1996 for the
     dismissal  of the  lawsuit  and the  termination  of the  Pre-need  Funding
     Agreements.

                                                                     (Continued)



<PAGE>


    Prime Succession, Inc. and Subsidiaries

    Notes to Consolidated Financial Statements, Continued


 (4)Related Party Transactions

     In October 1996, the Company  entered into  agreements  with certain former
     owners and Loewen to  substitute  Loewen as the borrower and to release the
     Company from any further obligation on its debt of approximately $1,650,000
     to the former owners. In connection with these agreements, the Company paid
     Loewen cash equal to the debt assumed.

     On August 26, 1996,  the Company  entered into an  Administrative  Services
     Agreement (Agreement) with Loewen. The Agreement requires Loewen to provide
     various administrative  services and support to the Company including,  but
     not limited to, licenses to use software packages, legal services,  certain
     employee training and support services,  travel services,  etc. The Company
     pays Loewen $250,000 annually as a prepayment for services. The term of the
     Agreement is eight years and allows for annual  increases up to 2.5% on the
     $250,000 base fee each August 26. The  Agreement  also requires the Company
     to  reimburse  Loewen on a timely  basis  for all out of  pocket  costs and
     expenses  incurred from third  parties in connection  with the provision of
     services described above.

     The Company advances funds to Prime Succession Holdings, Inc. ("Holdings"),
     the parent company, in order to pay an annual monitoring fee to Blackstone,
     board of  directors  fee and related  expenses.  At  December  31, 1997 the
     amount due from parent consists of the 1998 monitoring fee of $250,000, the
     1997 monitoring fee of $167,000  ($83,000 was paid by the Company on behalf
     of  Holdings  in  1996)  and  directors   fees  and  related   expenses  of
     approximately  $90,000.  This  amount is  classified  in the  shareholders'
     equity  section  of  the  consolidated  balance  sheet  as a  reduction  to
     additional paid in capital.

     At December  31,  1996,  the Company  recorded a prepaid  asset of $167,000
     related to the monitoring fee, as the fee is payable in advance.

     This $250,000  monitoring  fee is payable  annually in advance on August 26
     until such time that the Put/Call Agreement is exercised (see Note 7).

     In  connection  with the  Acquisition,  on the  Acquisition  Closing  Date,
     affiliates of Blackstone received fees of approximately  $3,200,000 and the
     Company  reimbursed  Blackstone for all out-of-pocket  expenses incurred in
     connection  with the  Acquisition  and Loewen  received a consulting fee of
     $1,500,000 and was reimbursed for certain  expenses in connection  with the
     Acquisition equal to $1,000,000.





                                                                     (Continued)
<PAGE>
<TABLE>
<CAPTION>

 Prime Succession, Inc. and Subsidiaries

 Notes to Consolidated Financial Statements, Continued

<S>                                                                      <C>                  <C> 
 (5)  Obligations Under Agreements with Former Owners

      The Company has entered in to consultative  and  noncompetition  agreements  (generally for ten years) with
      certain  officers of the Company and former owners and key employees of  businesses  acquired.  Obligations
      under these agreements are as follows:
                                                                            December 31,         December 31,
                                                                                1997                 1996
                                                                          -----------------    -----------------
         Obligations  under  covenants not to compete,  amounts  payable monthly
         with final installments in January 1998 through
            
         December 2010. Obligations have been discounted at 13%           $     13,648,131     $     16,843,386
         Obligations under consulting agreements, amounts payable
         monthly with final installments in February 1999 through
         December 2014.  Obligations have been discounted at 13%                 3,981,472            4,051,712
                                                                          -----------------     -----------------
                                                                                17,629,603           20,895,098
         Less current installments                                               2,369,684            3,326,127
                                                                          -----------------    -----------------
                                                                           $    15,259,919     $     17,568,971
                                                                          =================    =================

              As  of  December  31,  1997  and  1996,  the  carrying  amount  of obligations under agreements with
              former owners  approximates fair value.

              The approximate aggregate maturities on these agreements for the five years ending December 31, 2002
              and thereafter are as follows:

         1998                                                           $        2,369,684
         1999                                                                    2,434,452
         2000                                                                    2,688,354
         2001                                                                    2,731,124
         2002 and thereafter                                                     7,405,989
                                                                          =================
                                                                        $       17,629,603
                                                                          =================

              Certain of  the obligations are  collateralized  by  letters of credit of  approximately $4,100,000
              (see note 6).

              Interest  paid on  obligations  under  agreements  with former owners  was approximately $2,410,000,
              $830,000 and $1,450,000 for the year ended  December  31, 1997 and the periods from  August 26, 1996
              through  December 31, 1996 and January 1, 1996 through  August 25, 1996.


</TABLE>
                                                                     (Continued)



<PAGE>

<TABLE>
<CAPTION>

Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued
<S>                                                                                <C>                   <C>         

 (6)          Long-Term Debt

              Long-term debt consists of:
                                                                               December 31,          December 31,
                                                                                   1997                  1996
                                                                            --------------------  --------------------
      Revolving credit loan payable to bank                                       $  11,200,000      $             --
      Senior  subordinated  notes,  interest  payable  semi-annually   beginning
      February 1, 1997 with maturity date of August 15, 2004. Interest is  fixed
      at 10 3/4%.                                                                   100,000,000           100,000,000
      Term loans, interest payable quarterly and principal payable semi-annually
      from  February  1, 1997  through  August 1, 2003 (8.93% and 8.67% interest
      rate at December 31, 1997 and 1996, respectively).
                                                                                     89,000,000            90,000,000
      Other                                                                           2,770,165             5,006,064
                                                                            --------------------  --------------------
                                                                                    202,970,165           195,006,064
      Less current installments                                                       1,389,530             5,253,936
                                                                            --------------------  --------------------
                                                                                                  

      Long-term debt, excluding current installments                               $201,580,635          $189,752,128
                                                                            ====================  ====================
</TABLE>

     As  of  December  31,  1997,  the  Company  had   $100,000,000   in  Senior
     Subordinated Notes outstanding with various institutional investors from an
     August 20, 1996  private  offering.  The notes,  which mature on August 15,
     2004, require semi-annual interest payments on February 15 and August 15 of
     each year at a rate of 10 3/4%.  The notes were used to  partially  finance
     the  Acquisition  of the Company,  as described in Note 1. In January 1997,
     the Company  exchanged  $100,000,000 of publicly  registered 10 3/4% Senior
     Subordinated  Notes  due  2004  for  the  $100,000,000  outstanding  Senior
     Subordinated Notes due 2004.

     As of  December  31,  1997,  the  Company  had  $89,000,000  in term  loans
     outstanding under the Bank Credit Agreement dated August 26, 1996. The term
     loans,  which bear  interest  at the Base Rate or the  Adjusted  Eurodollar
     Rate, as defined in the Bank Credit Agreement dated August 26, 1996 require
     quarterly  interest  payments  and  semi-annual   principal  payments  from
     February  1, 1997  through  August 1,  2003.  The term  loans  were used to
     partially  finance the acquisition of the Company,  as described in Note 1.
     The  Company  has  pledged  substantially  all of its  assets,  except real
     property and vehicles, to secure the term loans.


                                                                     (Continued)



<PAGE>


Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued
     (6) Long-Term Debt, Continued

     In October 1996, the Company  entered into interest rate swap agreements to
     reduce the impact of  changes in  interest  rates on its term loans for the
     period  from  February  26,  1997 to  August  26,  2000.  These  agreements
     effectively  limit the Company's  interest rate exposure on  $72,000,000 of
     its then  $90,000,000  term  loans to a fixed  7.0%  during the term of the
     agreements.  The  Company  is  exposed  to  credit  loss  in the  event  of
     nonperformance  by the other parties to the interest rate swap  agreements.
     However,   the  Company   does  not   anticipate   nonperformance   by  the
     counterparties.

     Under the Revolving Loan section of the Bank Credit  Agreement dated August
     26, 1996,  the Company may borrow up to $25,000,000  for general  corporate
     purposes  until August 26, 2001.  The Revolving  Loans bear interest at the
     Base Rate or the Adjusted  Eurodollar  Rate,  as defined in the Bank Credit
     Agreement.  As of December 31, 1997,  there is a commitment  fee of 0.5% on
     the unused portion of the credit line.  There were  outstanding  letters of
     credit of  approximately  $4,100,000  and  borrowings of $11,200,000 on the
     line of credit  bearing  interest at 2.75% and 8.71%,  respectively.  There
     were  outstanding  letters  of credit of  approximately  $5,400,000  and no
     borrowings on the line of credit as of December 31, 1996.

     The Company is subject to certain restrictive  covenants in connection with
     its Senior  Subordinated  Notes  including,  but not limited to,  covenants
     imposing limitations on the incurrence of additional indebtedness;  certain
     payments, including dividends and investments; the creation of liens; sales
     of assets  and  preferred  stock;  transactions  with  interested  persons;
     payment restrictions affecting subsidiaries;  sale-leaseback  transactions;
     and mergers and  consolidations.  In  addition,  the Bank Credit  Agreement
     contains certain restrictive  covenants that, among other things, limit the
     ability of the Company  and its  subsidiaries  to dispose of assets,  incur
     additional indebtedness,  prepay other indebtedness,  pay dividends or make
     certain restricted payments,  create liens on assets,  engage in mergers or
     acquisitions or enter into leases or transactions with affiliates.

     The Company also has approximately  $2,800,000 and $5,000,000 of other debt
     outstanding as of December 31, 1997 and 1996,  respectively.  Approximately
     $740,000 of this other debt,  as of December 31,  1997,  is due to a former
     owner  with a rate of 9%.  Approximately  $3,900,000  of  other  debt as of
     December  31, 1996 was due to former  owners with rates  ranging from 8% to
     11%.

     In  connection  with the  Acquisition  (see Note 1), the  Company  defeased
     certain of its debt due to former owners for  approximately  $2,000,000 and
     recorded a purchase accounting adjustment of approximately  $200,000. As of
     December 31, 1997 and 1996,  approximately $1,700,000 and $1,800,000 of the
     former owner notes have been extinguished through defeasance, respectively.

     As of December  31, 1997 and 1996,  the carrying  amount of long-term  debt
     approximates fair value.


                                                                     (Continued)



<PAGE>


Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

(6)  Long-Term Debt, Continued

     The approximate  aggregate  principal  maturities of long-term debt for the
     five years ending December 31, 2002 and thereafter are as follows:

                        1998                                      $   1,389,530
                        1999                                          1,275,578
                        2000                                          4,327,440
                        2001                                         20,353,701
                        2002 and thereafter                         175,623,916
                                                                   $202,970,165

     Interest paid on long-term debt was approximately  $19,300,000,  $2,300,000
     and 6,860,000 for year ended  December 31, 1997 and the periods from August
     26, 1996 through  December 31, 1996 and from January 1, 1996 through August
     25, 1996, respectively.

(7)  Shareholders' Equity

     As of December 31, 1997 and 1996, all of the  outstanding  shares of common
     stock  of  the  Company  are  held  by  Prime  Succession  Holdings,   Inc.
     (Holdings), the parent company.

     Pursuant  to an  agreement  executed  by  Blackstone,  Loewen and PSIM,  in
     connection with the Acquisition,  (i) Loewen has a call option, exercisable
     from and after the fourth anniversary of the Acquisition Closing Date until
     but excluding the sixth  anniversary  of the  Acquisition  Closing Date, to
     purchase the shares of common stock of Holdings held by  Blackstone  and/or
     PSIM and (ii) each of  Blackstone  and PSIM has a put  option,  exercisable
     from and after the sixth anniversary of the Acquisition  Closing Date until
     but excluding the eighth  anniversary of the  Acquisition  Closing Date, to
     sell such shares of common stock of Holdings held by Blackstone or PSIM, as
     the case may be, to Loewen. The option price in each case is derived from a
     formula  based  on  earnings  before  interest,   taxes,  depreciation  and
     amortization.  In  addition,  pursuant  to  the  terms  of a  stockholders'
     agreement  entered  into by  Holdings,  Blackstone,  Loewen and PSIM on the
     Acquisition  Closing Date,  neither  Blackstone nor Loewen may transfer its
     shares of Holdings  common stock without the prior  written  consent of the
     other party,  subject to certain exceptions,  and PSIM may not transfer its
     shares of Holdings  common  stock  without the  consent of  Blackstone  and
     Loewen.



                                                                     (Continued)
<PAGE>


Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

(8)   Pre-arranged Funeral Contracts

     The Company enters into  contracts  with  customers to pre-arrange  funeral
     services and  merchandise at a fixed price.  In certain  arrangements,  the
     Company  receives  payment on the contract from the customer.  In turn, the
     Company  invests in a variety of instruments to fund  pre-arranged  funeral
     and cremation services and the related  merchandise sold but not delivered.
     Amounts trusted are invested  primarily in investment grade debt securities
     and time  deposits.  Such  investments  are  subject  to the risk  that the
     current  market value may fall below cost.  The market value of assets held
     in trust as of December 31, 1997 and 1996 was approximately $53,200,000 and
     $47,100,000.  In the state of Alabama,  which does not require pre-arranged
     funeral  trusts,  the Company  invests in insurance  contracts to cover the
     estimated future costs of fulfilling its pre-arranged funeral contracts. As
     of December 31, 1997 and 1996 the amount  invested in  insurance  contracts
     was approximately $9,100,000 and $8,100,000.

     In  December  1997,  the  Company  entered  into an  agreement  to transfer
     approximately  $17,000,000 of assets held in trust to another trustee, that
     will invest the funds in life insurance.  As a result, the Company earned a
     commission  of  approximately  $3,100,000,  which was  recorded  as funeral
     revenue in 1997.

     The Company has other  arrangements  under which the customer  purchases an
     insurance  policy  which is assigned to the  Company.  The Company does not
     have  control of these  policies and is obligated to deliver the service at
     the fixed price only if the customer delivers the policy proceeds.

 (9) Income Taxes

<TABLE>
<CAPTION>

     Income tax expense (benefit) consists of:
                                                                       Successor                 PredecessorCompany
                                     Company
                                                         --------------------------------------  -------------------
                                                                                Period from         Period from
                                                               Year              August 26,          January 1,
                                                              ended             1996 through        1996 through
                                                           December 31,         December 31,         August 25,
                                                               1997                 1996                1996
                                                         -----------------    -----------------  -------------------
         Federal:
<S>                                                         <C>                 <C>                   <C>          
                     Current                                $          --       $           --        $          --
                     Deferred                                          --             (163,330)             138,887
         State:
                     Current                                      136,903              (54,497)             209,569
                     Deferred                                          --               21,961               16,340
                                                         -----------------       -----------------   -----------------
                                                                  $136,903            $(195,866)            $364,796
                                                         =================       =================  ===================

                                                                                                              (Continued)
</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                                Prime Succession, Inc. and Subsidiaries

                                         Notes to Consolidated Financial Statements, Continued

(9)   Income Taxes, Continued

     The  differences   between  income  taxes  provided  in  the   accompanying
     consolidated  statements  of  operations  and the  amounts  which  would be
     computed by applying the U.S. Federal income tax rate of 34% to loss before
     income taxes are as follows:

                                                                      Successor                      Predecessor
                                                                       Company                         Company
                                                         ------------------------------------     ------------------
                                                                              Period from            Period from
                                                               Year            August 26,            January 1,
                                                              ended           1996 through          1996 through
                                                           December 31,       December 31,           August 25,
                                                               1997               1996                  1996
                                                         -----------------  -----------------     ------------------
<S>                                                        <C>                  <C>                    <C>         
     Computed "expected" tax benefit                       $       95,251        $(1,069,431)           $(3,097,627)
     Increase (decrease) in taxes resulting from:
           Goodwill amortization                                1,235,793            536,610                211,146
           State taxes, net of federal income taxes                90,356            (21,474)               149,100
           Valuation allowance                                   (789,571)           338,094              3,197,841
           Purchase price adjustments                            (529,956)                --                     --
           Other                                                   35,030             20,335                (95,664)
                                                         -----------------  -----------------     ------------------
               Actual income tax expense (benefit)          $     136,903       $   (195,866)           $   364,796
                                                         =================  =================     ==================


                                                                                                              (Continued)

</TABLE>


<PAGE>

<TABLE>
<CAPTION>


Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

(9)  Income Taxes, Continued

     The tax  effects of  temporary  differences  that give rise to  significant
     portions of the deferred tax assets and liabilities are presented below:

                                                                                December 31,               December 31,
                                                                                    1997                       1996
                                                                           -----------------------    -----------------------
<S>                                                                                    <C>                        <C>             
         Deferred tax assets:

                  Net operating loss carryfoward                                       $7,641,494                 $6,820,198
                  Allowance for doubtful accounts                                       2,257,810                  1,985,853
                  Covenants not to compete and consulting
                       agreements                                                       1,813,013                  2,004,679
                  Deferred funeral charges                                                977,814                  3,432,676
                  Accrued other expenses                                                  119,462                    747,484
                  Environmental reserve                                                   211,720                    313,500
                  Other                                                                   394,444                    411,310
                                                                           -----------------------    -----------------------
                                    Total gross deferred tax assets                    13,415,757                 15,715,700
                                    Less valuation allowance                            9,619,193                 10,408,764
                                                                           -----------------------    -----------------------
                                    Total deferred tax assets                           3,796,564                  5,306,936
                                                                           -----------------------    -----------------------
         Deferred tax liabilities:
                  Cemetery property, principally due to purchase
                       accounting                                                      11,734,089                 12,016,531
                  Property and equipment, principally due to
                  purchase accounting and differences in depreciation                   6,413,368                  8,376,737
                  Goodwill, principally due to differences in amortization              1,695,721                  1,929,769
                  Prepaid loan costs                                                           --                    735,484
                  Other                                                                        --                    193,997
                                                                           -----------------------    -----------------------
                                    Total deferred tax liabilities                     19,843,178                 23,252,518
                                                                           -----------------------    -----------------------
                                    Net deferred tax liability                        $16,046,614                $17,945,582
                                                                           =======================    =======================
</TABLE>

     The valuation allowance for deferred tax assets as of December 31, 1997 and
     1996 was $9,619,193 and $10,408,764,  respectively. The net change in total
     valuation  allowance  for the year ended  December  31, 1997 and 1996 was a
     decrease  of  $789,571  and an increase  of  $7,457,391,  respectively.  In
     assessing the  realizability of deferred tax assets,  management  considers
     whether it is more likely than not that some portion or all of the deferred
     tax assets will not be realized.  The ultimate  realization of deferred tax
     assets is dependent upon the generation of future taxable income during the
     periods in which these temporary differences become deductible.  Management
     considers the  scheduled  reversal of deferred tax  liabilities,  projected
     future  taxable   income  and  tax  planning   strategies  in  making  this
     assessment.  Based upon these  factors,  management  believes the valuation
     allowance as of December 31, 1997 and 1996 is appropriate.

                                                                     (Continued)
<PAGE>

Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

(9)  Income Taxes, Continued

     Subsequently   recognized  tax  benefits  of  $2,022,489  relating  to  the
     valuation  allowance  for  deferred  tax assets as of December 31, 1997 and
     1996 will be allocated to goodwill.

     As of December  31, 1997 and 1996,  the  Company has a net  operating  loss
     carryforward  of  approximately  $20,110,000  and  $17,950,000  for Federal
     income tax purposes.  If not used to offset future taxable income,  the tax
     loss carryforward will expire in varying amounts from 2006 through 2012.

(10) Leases

     The Company  leases  primarily  funeral home  facilities and vehicles under
     various  noncancellable  operating  lease  agreements.  Approximate  future
     minimum lease payments required under such operating leases with initial or
     remaining  terms in  excess  of one  year as of  December  31,  1997 are as
     follows:

                       1998                                 $         2,785,687
                       1999                                           2,349,665
                       2000                                           2,051,347
                       2001                                           1,626,677
                       2002 and thereafter                            6,135,638
                                                             ==================
                                                            $        14,949,014
                                                             ==================

     The majority of the operating  leases for funeral home  facilities  contain
     one of the following  options:  (a) purchase the property at the fair value
     at  date  of  expiration;  (b)  purchase  the  property  for a  fair  value
     determined at the inception of the lease or (c) renewal of the lease at the
     fair rental value at the end of the primary term of the lease. In addition,
     four  of  the  leases  contain   contingent  rentals  based  upon  revenues
     associated with the location.

     Rent  expense paid under  operating  leases was  approximately  $2,620,000,
     $1,030,000  and  $1,930,000  for the year ended  December  31, 1997 and the
     periods from August 26, 1996 through  December 31, 1996 and from January 1,
     1996 through August 25, 1996, respectively, of which approximately 14%, 14%
     and 15%, respectively,  was paid to former owners currently employed by the
     Company.


                                                                     (Continued)



<PAGE>


Prime Succession, Inc. and Subsidiaries

Notes to Consolidated Financial Statements, Continued

(11) Employee Benefit Plan

     The Company has established a 401(k) plan for the benefit of its employees.
     All employees who have reached the age of 21, have one year of service with
     the  Company and have worked a minimum of 1,000 hours in any given year are
     eligible.  Employees  may  defer a  maximum  of 15% of their  compensation,
     subject to IRS  limitations.  The Company will match 50% of the  employees'
     contribution  up  to a  maximum  of  2%  of  their  salary.  Total  expense
     recognized  by the Company  during the year ended  December 31,  1997,  the
     period from August 26, 1996  through  December 31, 1996 and from January 1,
     1996  through  August 25,  1996 was  approximately  $260,000,  $62,000  and
     $95,000, respectively.

(12) Commitments and Contingencies

     The Company and Batesville Casket Company, Inc. (BCC) entered into a Casket
     Supply Agreement dated January 1, 1992. The agreement, as amended, requires
     the Company to purchase  caskets  solely from BCC at current  market prices
     for the period from April 1, 1995 through March 31, 2000, to the extent BCC
     stocks those caskets required by the Company.  Amounts purchased under this
     agreement were approximately $8,000,000,  $2,300,000 and $5,100,000 for the
     year ended  December  31, 1997 and the periods from August 26, 1996 through
     December  31,  1996 and from  January  1, 1996  through  August  25,  1996,
     respectively.

     The Company has accrued  $537,000  and $825,000 as of December 31, 1997 and
     1996 in other  long-term  liabilities  as their best  estimate of potential
     future environmental  liabilities.  The most significant components of this
     liability  are storage tanks and septic tanks into which  embalming  fluids
     and other contaminants were discharged  resulting in potential  groundwater
     or soil contamination. The Company's current estimated range of costs as of
     December  31, 1997,  for clean-up or removal is $476,000 to $850,000,  with
     $537,000  representing the most probable costs which the Company expects to
     incur within the next five years.

     The Company is a party to legal  proceedings in the ordinary  course of its
     business but does not expect the outcome of any such  proceedings to have a
     material adverse effect on the Company's financial position.





<PAGE>




                                                           






                                             REPORT OF INDEPENDENT AUDITORS

Board of Directors
Prime Succession, Inc. and Subsidiaries

         We have audited the accompanying consolidated statements of operations,
shareholders'  equity and cash flows of Prime Succession,  Inc. and subsidiaries
for the year ended  December 31,  1995.  Our audit also  included the  financial
statement schedule listed in the Index at Item 14(a). These financial statements
and this  schedule  are the  responsibility  of the  Company's  management.  Our
responsibility  is to express an opinion on these financial  statements based on
our audit.

         We conducted our audit in accordance with generally  accepted  auditing
standards.  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 audit provides a reasonable basis for our opinion.  

     In our opinion,  the financial statements referred to above present fairly,
in all material respects, the consolidated results of Prime Succession, Inc. and
subsidiaries  operations  and their cash flows for the year ended  December  31,
1995 in conformity with generally accepted accounting  principles.  Also, in our
opinion the related financial statement schedule, when considered in relation to
the basic financial statements taken as a whole, presents fairly in all material
respects the information set forth therein.

         The accompanying  financial statements have been prepared assuming that
Prime  Succession,  Inc. and subsidiaries  will continue as a going concern.  As
discussed in Note 1, the Company has not complied with certain covenants of loan
agreements  with two of its  lenders.  These  violations  constitute  events  of
default which provide the lenders with the right to demand  immediate  repayment
of the debt and related  accrued  interest.  This condition  raises  substantial
doubt about the Company's ability to continue as a going concern.  The financial
statements do not include any adjustment to reflect the possible  future effects
on  the   recoverability  and  classification  of  assets  or  the  amounts  and
classification  of  liabilities  that  may  result  from  the  outcome  of  this
uncertainty.


                                ERNST & YOUNG LLP


Indianapolis, Indiana,
May 9, 1996,
except for Note 11, as
to which the date is
June 14, 1996




<PAGE>


                                         PRIME SUCCESSION, INC. AND SUBSIDIARIES

                                          CONSOLIDATED STATEMENT OF OPERATIONS

                                                                    Year ended
                                                                   December 31,
                                                                  -------------
                                                                       1995
                                                                  -------------
   Revenues:
            Funeral services                                        $68,623,948
            Cemetery sales                                           12,890,745
                                                                  -------------
                                                                     81,514,693
   Cost of sales:
            Funeral homes                                            11,312,913
            Cemetery                                                  2,479,450
            Cumulative effect of change 
            in accounting estimate (Note 5)                          (3,552,000)
                                                                   ------------
                                                                     10,240,363
   Operating expenses:
            Funeral homes                                            35,765,303
            Cemetery                                                  7,314,657
                                                                   ------------
                                                                     43,079,960

   Corporate and regional general and administrative expenses         6,108,842
   Depreciation and amortization                                      4,440,261
   Covenants not to compete                                           2,770,817
                                                                   ------------
   Operating income                                                  14,874,450

   Other income and expense:
            Interest expense                                         15,401,048
            Other income, net                                          (172,082)
                                                                   ------------
                                                                     15,228,966
   Loss before income taxes                                            (354,516)

   Income tax benefit (expense)                                        (308,624)
                                                                    ------------
   Net loss                                                            (663,140)
   Redeemable Preferred Stock dividend requirements                    (352,260)
                                                                    ============
   Net loss attributable to common shareholders                     $(1,015,400)
                                                                    ============



                                            See accompanying notes.



<PAGE>

<TABLE>
<CAPTION>

PRIME SUCCESSION, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENT OF SHAREHOLDERS' EQUITY


                                                            Common Stock                                Retained
                                                       -----------------------
                                                       Class A       Class B        Additional          Earnings
                                                       ---------     ---------
                                                        Amount        Amount         Paid-In            (deficit)
                                                                                     Capital
                                                       ---------     ---------    ---------------     --------------

<S>                                                         <C>           <C>       <C>                <C>         
Balance at January 1,1995                                   $ 1           $ 9       $ 29,254,989       $(8,548,384)
Common stock issued                                           -             -          3,000,000                 -
Net loss                                                      -             -                  -          (663,140)
Accrued dividends on Redeemable Preferred Stock               -             -           (352,260)                -
                                                       =========     =========    ===============     ==============
Balance at December 31, 1995                                $ 1           $ 9       $ 31,902,729       $(9,211,524)
                                                       =========     =========    ===============     ==============



                                                See accompanying notes.
</TABLE>



<PAGE>

<TABLE>
<CAPTION>


PRIME SUCCESSION, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENT OF CASH FLOWS
<S>                                                                                           <C>          

                                                                                         Year ended December 31,
                                                                                       -----------------------------
                                                                                                  1995
Operating activities

Net loss                                                                                       $   (663,140)
Adjustments to reconcile net loss to net cash provided by operating activities:
         Depreciation                                                                             2,549,399
         Amortization                                                                             5,456,104
         Provision for doubtful accounts                                                            973,561
         Provision for deferred income taxes                                                         81,578
         Gain on disposition of business                                                           (207,092)
         Cumulative effect of change in estimate of deferred merchandise liability               (3,552,000)
         Changes in operating assets and liabilities net of effects of acquisitions of
         subsidiaries:
                  Receivables                                                                    (2,103,297)
                  Inventories                                                                       548,877
                  Accounts payable and accrued expenses                                          (1,052,504)
                  Deferred merchandise and revenue (net)                                          2,518,817
                  Other                                                                           1,409,655
                                                                                              --------------
Net cash provided by operating activities                                                         5,959,958

Investing activities
Proceeds from the disposal of assets                                                              1,436,849
Purchases of property and equipment                                                              (1,561,564)
Net cash paid for purchases of businesses                                                        (8,931,865)
                                                                                              --------------
Net cash used in investing activities                                                            (9,056,580)

Financing activities
Proceeds from long-term debt                                                                      9,994,034
Payments on long-term debt                                                                       (7,725,492)
Payments on obligations under agreements with former owners                                      (2,031,248)
                                                                                              --------------
Net cash provided by financing activities                                                           237,294
                                                                                              --------------
Decrease in cash and cash equivalents                                                            (2,859,328)
Cash and cash equivalents at beginning of period                                                  3,625,677
                                                                                              ==============
Cash and cash equivalents at end of period                                                                
                                                                                              $     766,349
                                                                                              ==============

                                                 See accompanying notes.

</TABLE>



<PAGE>


PRIME SUCCESSION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Year Ended December 31, 1995

1. Going Concern

    The  accompanying  financial  statements  have been prepared  assuming Prime
Succession,  Inc.  and  subsidiaries  (the  Company)  will  continue  as a going
concern.  As  discussed  in  Note  7,  the  Company  must  comply  with  certain
restrictive  covenants in connection with its borrowings.  At December 31, 1995,
the principal  lender  notified the Company that it is deemed to be in violation
of certain of these  covenants.  As a result,  the debt with a second  lender is
also in default. Under the agreements, the default situation results in the debt
being callable by the lenders,  however, they have not indicated an intention to
do so. The debt from these lenders,  amounting to  $108,604,361  at December 31,
1995,  has been  classified  as a current  liability,  resulting  in the working
capital of the Company being in a substantial  deficit  position.  The Company's
future  existence  is  contingent  upon  its  ability  to cure the  defaults  or
otherwise   refinance  the  debt.   Management   disagrees   with  the  lender's
interpretation  of certain  events  categorized as defaults and is confident the
defaults  will be cured or they  will be able to locate  alternative  financing.
Therefore,  the financial  statements do not include any  adjustments to reflect
the possible future effects on the  recoverability  and classification of assets
or the  amounts  and  classification  of  liabilities  that may result  from the
outcome of this uncertainty.

2. Litigation settlement

         On February 26,  1996, a lawsuit was filed  against the Company and two
of its  officers  by World  Service  Life  Insurance  Company of America  (World
Service)  and Jeffrey M.  Gamble,  the former  owner of an acquired  subsidiary,
alleging,  among other  things,  breach of a pre-need  funeral  service  funding
agreement  between the  Company and World  Service.  Immediately  preceding  the
filing of the lawsuit,  the Company  notified World Service that it had breached
the pre-need funding  agreement by charging premiums to the Company in excess of
those charged to other World Service customers.

         On  April  11,  1996,  the  parties  settled  the  litigation  with the
execution of a Termination of Pre-need Funding Agreements and Release. Under the
terms of the  settlement,  the Company agreed to pay a total of $9,000,000  over
twenty years to Mr. Gamble in consideration for the dismissal of the lawsuit and
the  termination  of the pre-need  funding  agreement.  The present value of the
future settlement payments was recorded as a charge against income of $6,273,985
in the first  quarter of 1996.  Payments  under the  agreement  are as  follows:
$1,000,000  upon  execution,  $2,000,000 to be paid on or before April 1997, and
monthly  payments of $25,000 over twenty years  beginning  May,  1996.  Upon the
earlier date of the sale of the Company or April 1998, the Company will purchase
an annuity  to fund the  remaining  monthly  payments.  However,  in lieu of the
annuity,  Mr.  Gamble may demand  payment from the Company of an amount equal to
the  purchase  price of the  annuity.  As a result  of the  pending  sale of the
Company  (see Note 11), the  settlement  has been  classified  as current in the
March 31, 1996 unaudited balance sheet.

         The Company believes that it will recover a substantial  portion of the
cost of the settlement over time through higher  commission  rates and increased
policy  benefits  through the purchase of pre-need  insurance  policies  from an
alternative insurance carrier.





<PAGE>

PRIME SUCCESSION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

For the Year Ended December 31, 1995

3. Significant Accounting Policies

    Description of Business

         The Company,  which began operations in 1991, owns and operates funeral
homes and cemeteries throughout the United States.

    Principles of Consolidation

         The  consolidated  financial  statements  include  the  accounts of the
Company  and  subsidiaries  after  elimination  of  intercompany   accounts  and
transactions.

    Receivables

         The Company's  receivables  represent a  combination  of amounts due on
at-need and pre-need  (installment)  contracts.  The Company  frequently extends
credit to its customers for the purchase of funeral  services or cemetery space.
The  customers'  credit  worthiness  is  evaluated  on a case by case  basis and
collateral  is generally  not required on credit  sales.  Installment  contracts
receivable,   arising   primarily  from  the  sales  of  cemetery  property  and
merchandise,  are generally due in monthly  installments  over periods of one to
six years.  The  contracts  require a cash down  payment and  generally  include
simple interest,  computed at rates ranging from 8.0% to 14.3% per annum,  which
is recognized on the interest method over the contract life.  Allowances include
estimates for contract cancellations and uncollectible accounts.

    Inventories

         Inventories  of mausoleum  spaces,  cemetery lots and  merchandise  are
recorded principally at average cost which is not in excess of market.

    Property and Equipment

         Property and equipment is recorded at cost.  Depreciation of buildings,
improvements  and  equipment  is  provided  on a  straight-line  basis  over the
expected useful lives of the respective assets ranging from 3 to 40 years.
Expenditures for maintenance and repairs are expensed when incurred.

    Names and Reputations

         Names and Reputations  represent the present value of amounts due under
consultative and noncompetition agreements as well as prepaid amounts related to
such  contracts.  Amortization  of these  assets is provided on a  straight-line
basis over the terms of the relevant agreements, typically ten years.





<PAGE>


PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                                          For the Year Ended December 31, 1995

3. Significant Accounting Policies--(Continued)

    Goodwill

         Goodwill,  resulting  from the cost of assets  acquired  exceeding  the
underlying net asset value, is being  amortized on a straight-line  basis over a
forty-year  period.  The Company  periodically  evaluates the carrying  value of
goodwill to assess its  continued  recoverability.  The  determination  includes
evaluation of factors such as current  market value,  future asset  utilization,
business  climate,  and future cash flows expected to result from the use of the
related  assets.  The Company's  policy is to record an  impairment  loss in the
period when it is  determined  that the carrying  amount of the asset may not be
recoverable and the future undiscounted cash flows attributable to the asset are
less than its carrying value. The amount of the impairment loss is calculated as
the excess, if any, of the carrying amount of the impaired asset over the future
discounted cash flows  attributable  to the asset.  In March 1995,  Statement of
Financial  Accounting Standards (SFAS) No. 121, Accounting for the Impairment of
Long-Lived Assets and for Long-Lived Assets to be Disposed Of, was issued.  SFAS
No. 121 requires the recognition of impairment  losses on long-lived assets used
in operations and intangible  assets whenever events or changes in circumstances
indicate that the carrying amount of these assets may not be  recoverable.  SFAS
No. 121 also addresses the accounting for long-lived assets that are expected to
be disposed of. As required,  the Company will adopt SFAS No. 121 in 1996. Based
on current  circumstances,  SFAS No. 121 would not have a material impact on the
Company's  consolidated  results  of  operations  or  financial  position  as of
December 31, 1995.

    Other Intangible Assets

         Deferred organization and loan costs have arisen in connection with the
acquisition of various  companies.  These assets are being  amortized  using the
straight-line method over 5 to 7 years. See Note 7 for discussion of a potential
impairment of loan costs at December 31, 1995.

    Funeral Services

         The Company sells  pre-arranged  funeral  services under contracts that
provide  for  delivery  of  funeral  services  at the  time of  death at a price
determined at the time the agreement is signed.

         Revenues from the pre-need  funeral  services are not recognized in the
financial statements until services are provided. Payments are typically used to
purchase insurance contracts on the lives of the patrons or deposited into trust
funds as required by state law,  and are not shown on the  consolidated  balance
sheet.  The payment amounts trusted are available to the Company only as funeral
services are delivered or are refundable to the  purchasers  under certain state
laws that  provide  for return of such  amounts to the  purchasers  under  their
option to cancel the contract.  Earnings on the trust funds are recognized  when
withdrawn from trust, typically as the funeral services are delivered.







<PAGE>


PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                                          For the Year Ended December 31, 1995



3. Significant Accounting Policies--(Continued)

    Funeral Services, Continued

         Funeral  services  sold at the time of need are  recognized  as funeral
revenue when contracted.

         Trust  earnings  available  for  withdrawal  prior to the  delivery  of
funeral services,  as well as insurance  commissions paid in connection with the
insurance contracts described above, are recognized currently as part of funeral
service revenues. Trust earnings recognized in income were $1,478,246 in 1995.

    Cemetery Sales

         The Company accounts for its cemetery sales in accordance with the full
accrual method.  Pre-need sales of cemetery  interment  rights and other related
products  and  services are recorded as revenues  when  customer  contracts  are
signed and a down payment is received, with concurrent accrual of related costs.
Allowances  for  customer  cancellation  and refunds are provided at the date of
sale based on historical experience.

         In compliance  with local laws, a portion of the proceeds from the sale
of cemetery  lots may be required to be paid into  perpetual or  endowment  care
trust funds.  A portion of the proceeds from the related  pre-need sale of other
cemetery  merchandise  may also be  required to be paid into  merchandise  trust
funds.  The Company  recognizes  currently the earnings on amounts  deposited in
these  trusts;  $187,834 in 1995.  Earnings on the  perpetual or endowment  care
trust funds are used to defray cemetery  maintenance costs. The principal amount
of deposits  placed in the  merchandise  trusts is available to the Company when
the merchandise is delivered.

    Use of Estimates

         The  preparation  of  the  financial   statements  in  conformity  with
generally accepted  accounting  principles requires management to make estimates
and assumptions that affect the amounts reported in the financial statements and
accompanying notes. Actual results could differ from those estimates.






<PAGE>

<TABLE>
<CAPTION>


PRIME SUCCESSION, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

For the Year Ended December 31, 1995
4. Acquisitions

During 1995, the Company purchased the following funeral homes:
<S>                            <C>                                           <C>                 <C>        
Date                           Name                                          Location            Entity
April 17, 1995                 Aaron Cremation and Burial                    California          Funeral Home
April 28, 1995                 Brewer-Korisko Mortuary, Inc.                 Nebraska            Funeral Home
August 29, 1995                Grotewald Simi Valley Mortuary, Inc.          California          Funeral Home
                                                                      
October 26, 1995               Weigel Funeral Home, Inc.                     Indiana             Funeral Home
October 27, 1995               Lambert Corporation, Inc.                     West Virginia       Funeral Home
October 27, 1995               J&W, Inc.                                     West Virginia       Funeral Home
October 27, 1995               Spencer Funeral Home                          Ohio                Funeral Home
November 15, 1995              Hertz-Thoma Chapel, Ltd.                      Illinois            Funeral Home
November 27, 1995              Simpson-Meyer Corporation                     Indiana             Funeral Home
November 27, 1995              Simpson Funeral Home, Inc.                    Indiana             Funeral Home
November 27, 1995              Simpson-Volkman Corporation                   Indiana             Funeral Home

</TABLE>

         The total  consideration  paid was approximately  $8,932,000 in 1995 of
which $7,692,000 was financed through borrowings.  In 1995, the Company acquired
assets,   excluding  goodwill,   with  fair  values  aggregating   approximately
$4,413,000  and assumed  liabilities  of $194,000.  All  acquisitions  have been
accounted  for  using  the  purchase  method of  accounting.  The  excess of the
purchase price over the fair value of net assets is established as goodwill. The
results of operations for all  acquisitions  since the dates of acquisition have
been  included  in  the  consolidated  results  of  operations.   The  following
represents  the unaudited pro forma results of operations as if all of the above
noted business combinations had occurred at the beginning of 1995.

                      ;                                Year ended
                                                      December 31,
                                                  ----------------------
                                                          1995
                                                       (Unaudited)
                      Revenues                              $85,386,185
                                                  ----------------------
                      Net Loss                         $        (82,887)
                                                  ======================

         The pro  forma  information  presented  above  does not  purport  to be
indicative  of the  results  that  actually  would  have  been  obtained  if the
acquisitions  had been  consummated at the beginning of 1995 and is not intended
to be a projection of future results or trends.







<PAGE>


PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                                          For the Year Ended December 31, 1995


5. Change In Estimate of Deferred Merchandise Liability

         Effective  in the  fourth  quarter of 1995,  the  Company  revised  its
estimates of the obligation to provide  vaults and to open and close  gravesites
on pre-need  sales of  cemetery  interment  rights in the state of Alabama.  The
Company's 1995 construction of a vault manufacturing  facility allows production
of  vaults  at a  significantly  lower  cost than the  purchase  of vaults  from
independent  manufacturers.  Preparation  of the gravesite  will be performed by
employees, thereby eliminating the use of higher cost outside contractors. These
changes resulted in a reduction of the estimated deferred merchandise  liability
and cost of goods sold in 1995 by approximately $3,552,000.

6. Income Taxes

         Deferred income taxes relate primarily to temporary differences between
the tax basis of  assets  and  liabilities  and their  reported  amounts  in the
financial statements.

         The components of income tax expense (benefit) are as follows:

                                   Year ended
                                  December 31,
                                                            ------------------
                                                                  1995
                                Federal:
                                         Deferred                   $  81,581
                                State:
                                         Current                      227,043
                                                            ------------------
                                                                     $308,624
                                                            ==================

<TABLE>
<CAPTION>

           The differences between the U.S. federal statutory tax rate and the Company's effective rate are as follows:

                                                                                 Year Ended December 31,
                                                                              -------------------------------
                                                                                           1995
<S>                                                                                    <C>          
        Computed income tax at the applicable federal statutory income tax rate         $   (120,535)
        Goodwill amortization                                                                242,755
        Change in estimate of deferred merchandise liability                              (1,207,680)
        State taxes, net of federal benefit                                                  149,848
        Valuation allowance                                                                1,198,463
        Other                                                                                 45,773
                                                                                      ===============
        Income tax expense                                                               $   308,624
                                                                                      ===============

          The Company has net operating loss  carryforwards  for tax  purposes  of   approximately   
          $7,311,000  at  December 31, 1995 which expire in varying  amounts from 2006 through 2010.

</TABLE>
<PAGE>

<TABLE>
<CAPTION>

                                         PRIME SUCCESSION, INC. AND SUBSIDIARIES

                                  NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED

                                          For the Year Ended December 31, 1995
<S>                                                                                                <C>        
7. Long-Term Debt

         Long-term debt is as follows:
                                                                                         December 31, 1995
                                                                                       -----------------------
      Debt in default:
               Acquisition term loans:
               Interest and principal payable quarterly with final installments in 
               July 1998 through October 2002.   Interest at prime rate plus                 
               1.5% (10% at December 31, 1995)                                                   $100,355,242


      Interest payable monthly with principal due at maturity,  May 1996 through
               October 2000. Interest at prime plus 1.75% (10.25% at
               December 31, 1995)                                                                   8,249,119


      Demand notes, interest at lender's prime rate (8.5% at December 31, 1995)                     4,550,000
      Other, principally seller financing of acquired operations                                    9,109,262
                                                                                       -----------------------
                                                                                                   122,263,623

              Less current maturities                                                              113,813,885
                                                                                        ----------------------
                                                                                                $    8,449,738
                                                                                        ======================
</TABLE>

         The  Company  has  a  loan  agreement  with  Provident  Services,  Inc.
(Provident)  which provides for a revolving  credit  facility,  acquisition term
loans and  construction  term loans.  As of December  31,  1995,  no  additional
borrowings are permitted due to the defaults  discussed below.  Borrowings under
the revolving  credit facility are for general working capital use and generally
have  a  final  maturity  date  of two  years  after  the  borrowing  date.  The
acquisition  term  loans are used to fund  acquisitions  and  require  quarterly
payments.  Borrowings under this portion of the agreement require the investment
of additional  capital from the Class A  shareholders  of the Company if certain
debt to equity  ratios are  exceeded.  The  construction  term loans  enable the
borrower to construct facility improvements and require quarterly payments.  All
borrowings bear interest at prime plus 1.5%. Borrowings under the Provident loan
agreement  are secured by  substantially  all of the assets of the Company.  The
loan agreement  contains  various  restrictive  covenants that limit  additional
borrowing, capital expenditures, disposition of assets and payment of dividends.
Additionally,  the Company is required to maintain  specified  financial  ratios
related to cash flow,  total  liabilities  and  working  capital.  There were no
borrowings outstanding under the revolving credit facility at December 31, 1995.

         At December 31, 1995, Provident notified the Company that it deemed the
Company to be in violation  of covenants  pertaining  to (1) the  incurrence  of
additional  indebtedness,   (2)  notifications,   approvals  and  furnishing  of
information regarding  acquisitions not financed by the principal lender and (3)
delivery of audited  financial  statements  within the period  specified  in the
agreement.  Asserted  violations of the indebtedness  covenants also include the
assumption  of  additional  indebtedness  related to  litigation  settled by the
Company in 1996 and extended  payment terms negotiated with one of the Company's
principal  suppliers.  Management disagrees with the lender's assertion that the
extension of payment terms by its vendor  constitutes  prohibited  indebtedness.
Under  the terms of the loan  agreement,  the  lender  may call the loans if the
Company is in violation of any restrictive covenants.  The lender has not waived
any of the claimed  violations,  and accordingly the entire balance of the loans
at December 31, 1995 of $100,355,242  has been included in current  liabilities.
This results in an additional  violation of a covenant  under the loan agreement
regarding  the  maintenance  of  working   capital   ratios.   Included  in  the
consolidated  balance  sheet at December  31, 1995 there is  approximately  $2.3
million of deferred loan costs related to the aforementioned loans. In the event
that the loans are refinanced, the costs will be charged against income as other
expense at the time of refinancing.

<PAGE>

PRIME SUCCESSION, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
                                          For the Year Ended December 31, 1995

7. Long-Term Debt--(Continued)

         The Company also has an agreement with Heller Financial, Inc. for a $35
million loan  facility  which  provides for a revolving  credit  facility and an
acquisition  loan  facility  as well as letter of credit  financing  to  support
certain acquisition-related  obligations. The facility carries a fee of one half
of one percent on the unused portion.  The primary purpose of the facility is to
provide  funds for future  acquisitions.  The loan  agreement  contains  various
restrictive  covenants that require the Company to maintain specified  financial
ratios.  Because the cited  violations of the Provident  loan agreement have not
been waived,  cross default  provisions in this loan  agreement  cause a default
under the Heller  agreement.  These  defaults allow Heller to call its loans and
also preclude the Company from any additional borrowings.  Therefore, the entire
balance of these loans at December 31, 1995 of $8,249,119 has also been included
in current liabilities.

         Interest  paid was  approximately  $14.9  million  for the  year  ended
December 31, 1995.

8. Leases

         At December  31, 1995 the Company had entered  into  several  operating
leases,  which are  primarily  for funeral home  facilities  and  vehicles.  The
majority of the operating leases for funeral home facilities  contain one of the
following  options:  (a)  purchase of the  property at the fair value at date of
expiration; (b) purchase of the property for a value determined at the inception
of the lease or (c) renewal of the lease at the fair rental  value at the end of
the  primary  term  of the  lease.  In  addition,  four  of the  leases  contain
contingent rentals based upon revenues associated with the location.

         Rent expense paid under operating leases was  approximately  $2,469,000
in 1995 of which  approximately 34% was paid to former owners currently employed
by the Company.

9. Contingencies

         The Company is a party to legal  proceedings in the ordinary  course of
its business but does not expect the outcome of any such  proceedings  to have a
material adverse effect on the Company's financial position.

10. Employee Benefits

         The  Company  has  established  a 401(k)  plan for the  benefit  of its
employees.  All full-time  employees who have reached the age of 21 and have one
year of service  with the Company  are  eligible.  Employees  may defer 0-20% of
their compensation. The Company will match 25% of the employee's contribution up
to a maximum of 1% of their  salary.  Total  expense  recognized  by the Company
during 1995 was $145,000, respectively.

11. Subsequent Event

         On June 14, 1996 the Company entered into a purchase  agreement whereby
all  shares of the common  stock of the  Company  will be sold to a new  company
formed by  Blackstone  Capital  Partners II Merchant  Banking  Fund L.P. and The
Loewen Group Inc. for  approximately  $295  million.  The sale of the Company is
expected to be  completed in  mid-September,  1996 and is subject to a number of
conditions, including regulatory approvals and financing.





Item 9.  Changes in and Disagreements with Accountants on Accounting and 


         Financial Disclosure.

         Effective  August 26, 1996,  in connection  with the  engagement by the
Company's  new  Management  of KPMG Peat  Marwick  LLP  ("KPMG")  as its auditor
following the Acquisition,  Ernst & Young LLP ("E&Y"), Old Prime's auditor prior
to the Acquisition,  was dismissed.  The decision to appoint KPMG in replacement
of E&Y as the  Company's  auditor was  approved by the Board of Directors of the
Company.

         E&Y's opinion was  qualified as of and for the year ended  December 31,
1995, in that the financial  statements  were prepared  assuming the Company and
its subsidiaries would continue as a going concern. The Company had not complied
with certain of its covenants in loan agreements with two of its lenders.  These
violations  constituted  events of default  which  provided the lenders with the
right to demand  immediate  repayment of the debt and related accrued  interest.
The demand for  repayment  would raise  substantial  doubt  about the  Company's
ability to continue as a going concern. The financial statements did not include
any adjustments to reflect the possible future effects on the recoverability and
classification  of assets or the amounts and  classification of liabilities that
may have resulted from the outcome of this uncertainty.

         There were no disagreements between the Company and its auditors during
E&Y's appointment as auditor for the Company.

         In planning  and  performing  the audit of the  consolidated  financial
statements of the Company and its  subsidiaries  for the year ended December 31,
1995, and again during their review of the March 31, 1996 consolidated financial
statements,  the auditors noted certain matters  involving the internal  control
structure and its operation at the Alabama subsidiary that they considered to be
reportable  conditions under standards  established by the American Institute of
Certified Public Accountants.

         Specifically,  the auditors found that a number of key  reconciliations
were not  performed  during  the  year at the  Alabama  subsidiary.  Differences
between a  subsidiary  system and the general  ledger  which  affected  accounts
receivable,  deferred revenue,  commission payable and accounts payable were not
quantified  and  corrected  during the  course of the year.  In  addition,  bank
reconciliations  were not prepared  which enabled  significant  errors to remain
undetected for the entire year.

         During the latter half of 1995 and in 1996,  management  of the Company
took steps  designed  to  address  the  concerns  raised by E&Y,  including  the
dedication  of  corporate  personnel to work on site in Alabama to assist in the
processing  and  summarizing of financial  data,  the  replacement of an outside
service  bureau  that  had  previously  been  responsible  for  funeral  service
accounting at most of the Company's  locations  and the  institution  of new and
automated  accounting systems and procedures overall.  Management has undertaken
an extensive  review of the Company's  accounting  controls and  procedures  and
believes  that  appropriate  accounting  controls and  procedures  are now being
utilized.  However,  Management  will continue to monitor the functioning of its
accounting controls and procedures and intends to implement any additional steps
necessary.








<PAGE>

<TABLE>
<CAPTION>


                                                        PART III

Item 10.  Directors and Executive Officers of the Company.

         The current executive officers and directors of the Company,  and their
ages as of March 19, 1998, are as follows:
<S>                                                 <C>       <C>    
                  Name                              Age                          Position

Gary L. Wright.......................................52       President and Chief Executive Officer, Director
Myles S. Cairns......................................43       Chief Financial Officer, Secretary and Treasurer
Gregory M. Hilgendorf................................48       North Central Regional Vice President
Robert G. Salerno....................................55       Western Regional Vice President
Bruce L. Woodard.....................................37       Central Regional Vice President
Joseph E. Franckewitz................................42       Vice President of Pre-Need Sales
    
Warren B. Rudman.....................................67       Director
Howard A. Lipson.....................................34       Director
David I. Foley.......................................30       Director
Chinh E. Chu.........................................31       Director
Peter K. Grunebaum...................................64       Director
Clifford R. Hinkle...................................49       Director

         Mr. John Woodard resigned from the board effective February 12, 1998 for personal reaons.

         Mr. Bruce Woodard and Mr. John Woodard are not related.
</TABLE>

         The  business  experience  of  each  of  such  executive  officers  and
directors is set forth below. References to the "Company" in this Item 10 and in
Item 11 below  refer,  where  applicable,  to the  Company  from and  after  the
Acquisition Closing Date and to Old Prime prior to such date.

Gary L. Wright  joined the Company as President and Chief  Executive  Officer in
August 1996.  Prior  thereto,  Mr.  Wright  served as Loewen's  Divisional  Vice
President for the Southeast  United  States,  overseeing  operations in Alabama,
Georgia,  Florida and Puerto Rico,  managing the  operations of over 100 funeral
home  locations,  since June 1993.  Previously,  he served as Loewen's  Regional
Manager for the Pacific Northwest, managing operations in Washington, Oregon and
Alaska,  from 1989 to 1993. Prior to joining Loewen, Mr. Wright was a partner in
the Price-Helton Funeral Chapel which was acquired by Loewen in 1988. Mr. Wright
is a past President of the Washington State Funeral Directors  Association and a
past  member  of the  Board  of  Governors  of the  National  Funeral  Directors
Association.

Myles S. Cairns  joined the Company as Chief  Financial  Officer,  Secretary and
Treasurer in August 1996.  Prior thereto,  Mr. Cairns served as Vice  President,
Operations Controller of Loewen since October 1994. Previously,  Mr. Cairns held
various positions at Loewen, including Director of Risk Management from November
1993 to October 1994,  Director of Operations  Planning and Control from 1990 to
November 1993 and Corporate Controller from 1985 to 1989.

Gregory M.  Hilgendorf  has served as Eastern  Regional  Vice  President  of the
Company  since 1992,  overseeing  operations  in  Illinois,  Indiana,  Kentucky,
Michigan,  Minnesota  and  Wisconsin.  He also has  served  as a  member  of the
Company's  Advisory  Board and Senior  Management  Team.  Prior to  joining  the
Company,  Mr.  Hilgendorf served as President and owner five Olson Funeral Homes
from 1982 until its acquisition by the Company in 1992.

Robert G. Salerno has served as Western  Regional Vice  President of the Company
since 1993,  overseeing  operations in Arizona,  California,  Texas and Wyoming.
Prior  thereto,  Mr. Salerno  served in various  capacities at Pierce  Brothers,
beginning  in 1960,  including  Manager,  Area Vice  President  and Senior  Vice
President.

Bruce L. Woodard has served as Central  Regional  Vice  President of The Company
since 1992,  overseeing  operations  in  Arkansas,  Iowa,  Michigan,  Minnesota,
Missouri,  Nebraska and New York.  Prior  thereto,  Mr. Woodard was an owner and
General  Manager of  Mason-Woodard  Funeral  Homes,  which operates five funeral
homes in southwest Missouri.

Joseph  E.Franckewitz  joined the Company as Vice President of Pre-Need Sales in
July 1996. Mr. Franckewitz  previously served in various capacities at Gibraltar
Mausoleum  Corporation since 1989,  including Regional Sales Manager in Brandon,
Florida and Regional  Sales  Manager in  Baltimore,  Maryland.

Warren B. Rudman became a partner of Paul, Weiss, Rifkind,  Wharton and Garrison
in 1993 after serving two consecutive  terms as a United States Senator from New
Hampshire, from 1980 through 1992. Senator Rudman was appointed Attorney General
of New Hampshire in 1970 and in 1975,  he was elected  president of the National
Association of Attorneys  General.  Senator Rudman currently serves on the Board
of Directors of the Chubb  Corporation,  Collins & Aikman,  the Raytheon Company
and the Concord Coalition.

Howard A. Lipson is Senior Managing Director of The Blackstone Group L.P., which
he joined in 1988,  and was a Vice  President  from  January 1991 to March 1994.
Prior to  joining  Blackstone,  Mr.  Lipson  was a  member  of the  Mergers  and
Acquisitions  Group of Salomon Brothers Inc. He currently serves on the Board of
Directors of UCAR International Inc., Volume Services, Inc., AMF Group Inc., and
Ritvik Holdings, Inc.

David I. Foley is an Associate of The Blackstone  Group L.P. and currently works
in Blackstone's Principal Investment Group. Prior to joining Blackstone in 1995,
Mr. Foley was with AEA Investors, Inc. and The Monitor Company.

Chinh E. Chu is a Vice President of The Blackstone  Group L.P.,  which he joined
in 1990.  Prior to joining  Blackstone,  Mr. Chu was a member of the Mergers and
Acquisitions Group of Salomon Brothers Inc. from 1988 to 1990.

Peter K.  Grunebaum  has been a Director  of  Fortrend  International  LLC since
February 1996. Prior thereto,  he had been a Director of ICA International since
April 1989.  He currently  serves on the Board of  Directors  of Pre-Paid  Legal
Services, Inc.

Clifford R.  Hinkle has served as  President  and a Director of Flagler  Capital
Corporation  since its founding in 1992, as Chief Executive Officer and Chairman
of the Board of  Directors  of Flagler  Holdings,  Inc.  since its  formation in
January 1996 and as Chairman,  President and Chief Executive Officer of Hinkle &
Co. since 1992. Prior thereto,  he was Executive  Director of the State Board of
Administration  of Florida from 1987 to 1991. Mr. Hinkle also was a Director and
President  and Chief  Executive  Officer of MHI Group,  Inc. from 1993 until its
merger with Loewen Group in 1995. He currently  serves on the Board of Directors
of Commercial Net Lease Realty.

Pursuant to the Stockholders'  Agreement described in Item 13 below,  Blackstone
and  Loewen  designated  five and two  nominees,  respectively,  to the Board of
Directors of Old Prime. Messrs.  Wright, Rudman, Lipson, J. Woodard and Chu were
the nominees designated by Blackstone.  Messrs. Grunebaum and Hinkle (neither of
whom is an officer or a director of Loewen  Group) were the nominees  designated
by Loewen.  Pursuant to the  Stockholders'  Agreement,  Loewen can designate one
additional  nominee.  Each of Blackstone's and Loewen's nominees to the Board of
Directors  of Old Prime  also was  nominated  to the Board of  Directors  of the
Company.  Directors of the Company (other than Directors who are employed by the
Company or  Blackstone)  will  receive  $25,000  annually  for their  service as
Directors plus the reimbursement of expenses.  Such Directors will not receive a
separate fee for service on  committees  of the Board.  Directors of the Company
who are employed by the Company or Blackstone will serve without compensation.



<PAGE>

<TABLE>
<CAPTION>

Item 11.  Executive Compensation.

Summary Compensation Table

         The following  table sets forth for the fiscal year ended  December 31,
1997 the  compensation  paid by the Company to its Chief  Executive  Officer and
each of the other most highly compensated executive officers of the Company.
<S>                                                        <C>        <C>           <C>               <C>   
                                                         Year
                                                        Ended                                    All Other
       Name and Principal Position                   December 31,    Salary           Bonus      Compensation(2)
       Gary L. Wright(1)                                 1997         $225,000       $50,000           $9,055
                President and Chief Executive            1996           82,471            --            2,077
       Officer, Director                                 1995               --            --               --


       Myles S. Cairns(1)                                1997         $225,000       $50,000           $9,535
                Chief Financial Officer,                 1996           81,105            --            2,077
       Secretary, Treasurer                              1995               --            --               --

       Gregory M. Hilgendorf                             1997         $120,000           $--           $   --
                Eastern Regional Vice President          1996           93,462            --           16,048
                                                         1995           85,000       139,471            1,557
                                                                                          --

       Peter D. Cooper                                   1997         $ 84,000           $--           $1,855
                Counsel                                  1996          130,000        55,000              600
                                                         1995          130,000            --              600

       Robert G. Salerno                                 1997          $90,000           $--           $1,855
                Western Regional Vice President          1996           88,846        40,000            2,420
                                                         1995           76,930            --               --

       Bruce L. Woodard                                  1997          $90,769          $ --           $1,855
                Central Regional Vice President          1996           56,462        30,000            2,119
                                                         1995           45,489            --               --

       Joseph E. Franckewitz                             1997         $156,000       $20,000           $9,515
                Vice President, Sales                    1996           66,000        20,000            1,962

 (1)  For  information  concerning  the  compensation  of the current  executive
      officers of the Company, see "Employment Agreements" below.

(2)   All  Other  Compensation  includes  amounts  paid to the  named  executive
      officers  which may be applied to the payment of medical,  dental and life
      insurance benefits.
</TABLE>

Employment Agreements

         The Company has entered into contracts  with Messrs.  Wright and Cairns
regarding  certain terms of their  employment  with the Company.  The agreements
provide  that  Messrs.  Wright and Cairns will be paid a base salary of $225,000
per year,  with annual  increases at the discretion of the Board of Directors of
the  Company  plus an annual  cash  bonus.  In 1996,  such  bonus will be at the
discretion of the Board, and thereafter such bonus will be equal to a percentage
of such executive's salary, which percentage will in turn be based on the extent
to which the Company  achieves a target  EBITDA.  For purposes of the employment
agreements,  EBITDA is  defined  as  Consolidated  Cash Flow (as  defined in the
Indenture  between the Company and the trustee  thereunder  with  respect to the
Notes).  EBITDA is a non-GAAP  measure of cash flow. The agreements will provide
that the target  EBITDA is $34.4  million  and $37.1  million for 1997 and 1998,
respectively. The target for the following years will be set by the Board.

     The 1997 and 1998  targeted  amounts were  derived  from the  stockholders'
review of  Management's  estimates  of  projected  cost  savings and increase in
revenues  following the Acquisition.  The target EBITDA is a performance  target
and is not a  forecast  of  actual  performance  that  will be  realized  by the
Company.  Actual  performance  during  the year may differ  materially  from the
targeted amount.

     The  agreements  further  provide  that  Messrs.  Wright and Cairns will be
entitled to a long-term incentive bonus at any time that Loewen purchases all of
the  shares of common  stock of Old Prime  owned by  Blackstone,  provided  that
certain  EBITDA  targets are  achieved.  Such bonus will equal  $500,000 if such
purchase  occurs  prior to 2002 and will be  increased  by  $100,000  each  year
thereafter up to a maximum of $900,000.

   Other

The  compensation of the executive officers other than Messrs. Wright and Cairns
will be determined by the Board of Directors of the Company.

Item 12.  Security Ownership of Certain Beneficial Owners and Management.

Upon consummation  of the  Acquisition  on August 26, 1996, the company became a
direct,  wholly owned  subsidiary of Old Prime.  The  following  table sets
forth certain information  regarding the beneficial ownership of the Common
Stock of Old Prime:

      Name And Address Of Beneficial Owner    Number Of Shares        Percentage
                                                                 Of Common Stock
                                              ---------------    ---------------

  Blackstone Management Associates II
  L.L.C.(1)                                       764.70589                76.5%
  Loewen Group International, Inc.(2)             235.29411                23.5%
  Gary L. Wright(7)                                    --                     --
  Warren B. Rudman(3)                                  --                     --
  Howard A. Lipson(4)                                  --                     --
  David I. Foley(4)                                    --                     --
  Chinh E. Chu(4)                                      --                     --
  Peter K. Grunebaum(5)                                --                     --
  Clifford R. Hinkle(6)                                --                     --
  Directors and executive officers as a                --                     --
  group(7) (12 persons)

(1)    544.59536,  158.78262  and  54.71026  shares,  respectively,  are held by
       Blackstone  Capital  Partners II Merchant  Banking Fund L.P.,  Blackstone
       Offshore  Capital  Partners  II L.P.  and  Blackstone  Family  Investment
       Partnership II L.P.  Blackstone  Management  Associates II L.L.C., as the
       general  partner  of each of  Blackstone  Capital  Partners  II  Merchant
       Banking  Fund L.P.,  Blackstone  Offshore  Capital  Partners II L.P.  and
       Blackstone  Family Investment  Partnership II L.P.,  exercises voting and
       dispositive  power with  respect to such  shares.  Blackstone  Management
       Associates II L.L.C. is also the sole  stockholder of PSI P&S Corp. ("PSI
       P&S"),  which is the general  partner of PSI  MANAGEMENT  Direct  L.P., a
       Delaware limited  partnership  ("PSIM"),  the holder of 6.61765 shares of
       Old  Prime  Common  Stock.  Blackstone  Management  Associates  II L.L.C.
       disclaims  beneficial ownership of such shares of Old Prime Common Stock.
       The address for the Blackstone entities is c/o Blackstone Group L.P., 345
       Park Avenue, New York, N.Y. 10154.

(2)    The address for Loewen is 3190 Tremont Avenue, Trevose, Pennsylvania 
       19053-6693

(3)    Mr. Rudman's  business  address is c/o Paul,  Weiss,  Rifkind,  Wharton &
       Garrison,  1615 L Street,  N.W., Suite 1300, Washington, D.C. 20038.

(4)    Messrs.  Lipson,  Foley and Chu are  affiliated  with  Blackstone  in the
       capacities  described  in Item 10  above.  Each  such  person's  business
       address is c/o The Blackstone  Group L.P., 345 Park Avenue,  New York, NY
       10154.  Mr. Lipson disclaims  beneficial  ownership of any such shares of
       Common Stock  beneficially owned by Blackstone  Management  Associates II
       L.L.C.

(5)    Mr. Grunebaum's  business address is c/o Fortrend  International LLC, 805
       Third Avenue,  Suite 2300, New York, New York 10022.

(6)    Mr.  Hinkle's  business  address  is c/o  Flagler  Capital  Corporation,
       215  South  Monroe  Street,  Suite  500, Tallahassee, Florida 32301.

(7)    None of the named executive  officers owns any shares of Old Prime Common
       Stock.  Each of the  executive  officers of the  Company  holds a limited
       partnership interest in PSIM, the holder of 6.61765 shares (approximately
       0.7%) of Old Prime Common Stock;  however, such executive officers do not
       have voting or dispositive power with respect to such shares.

<PAGE>

Item 13.  Certain Relationships and Related Transactions.

         The  summaries  of the  Stock  Purchase  Agreement,  the  Stockholders'
Agreement,  the Put/Call Agreement and the Administrative Services Agreement set
forth below do not purport to be complete and are qualified in their entirety by
reference  to  all  the  provisions  of  the  Stock  Purchase   Agreement,   the
Stockholders'  Agreement, the Put/Call Agreement and the Administrative Services
Agreement,   respectively.   Copies  of  the  Stock  Purchase   Agreement,   the
Stockholders'  Agreement, the Put/Call Agreement and the Administrative Services
Agreement are filed as exhibits to the Company's  Registration Statement on Form
S-4 with  respect to the  Exchange  Notes,  which is  incorporated  by reference
herein.

         Stock Purchase Agreement And Acquisition

         On  June  14,  1996,  as a  precursor  to the  Acquisition,  a  company
controlled  by  Blackstone  (the  "Purchaser")  entered  into a  Stock  Purchase
Agreement with Loewen Group and all of the holders of capital stock of Old Prime
(the "Selling Stockholders"),  pursuant to which the Selling Stockholders agreed
to sell to the Purchaser,  and the Purchaser agreed to purchase from the Selling
Stockholders,  all of the shares of Old Prime held by the Selling  Stockholders.
At the closing of the Acquisition,  the Purchaser assigned back to Old Prime its
rights and  obligations as Purchaser  under the Stock Purchase  Agreement,  such
that at the closing Old Prime  repurchased from the Selling  Stockholders all of
their shares in Old Prime.

         In connection with the  Acquisition,  (i)  Blackstone,  Loewen and PSIM
contributed $130 million and all of the common stock of the Company to Old Prime
(the "Blackstone/Loewen Contribution") in exchange for 100% of the capital stock
of Old Prime,  resulting in the Company's  becoming a wholly owned subsidiary of
Old Prime;  (ii) Old Prime  transferred  the shares of all of its directly  held
subsidiaries  and all of its other assets and liabilities to the Company,  (iii)
the Bank Credit Facilities were entered into, (iv) Old Prime (a) repurchased the
shares of its common stock owned by the Selling  Stockholders  and (b) repaid or
defeased existing indebtedness and discharged certain other existing obligations
in an aggregate amount of approximately $126.4 million using the proceeds of the
Blackstone/Loewen  Contribution and a portion of the proceeds of the offering of
the Notes and the Bank Term Facility.

         Stockholders' Agreement

         In connection with the Acquisition, Blackstone, Loewen and PSIM entered
into an agreement with Old Prime (the  "Stockholders'  Agreement") setting forth
certain of their rights and obligations as stockholders of Old Prime.

         The  Stockholders'  Agreement  provides  that,  subject to the Put/Call
Agreement  referred to below, (i) neither  Blackstone nor Loewen is permitted to
transfer any of its  respective  shares of common stock of Old Prime ("Old Prime
Common  Stock")  without the other's prior written  consent,  subject to certain
exceptions,  and (ii) PSIM is not permitted to transfer any of its shares of Old
Prime Common Stock without the consent of Blackstone and Loewen.

         Pursuant  to  the  Stockholders'   Agreement,   Blackstone  and  Loewen
designated  five and two nominees as  directors,  respectively,  to the Board of
Directors  of Old Prime  (Loewen has the right  thereunder  to designate a third
nominee as well). The parties to the Stockholders' Agreement further agreed that
Old Prime  shall  cause the Board of  Directors  of the  Company at all times to
consist of the same  individuals  who  comprise  the Board of  Directors  of Old
Prime.  In addition,  the  Certificate of  Incorporation  and the By-Laws of Old
Prime  provide  that certain  actions by or with respect to Old Prime  require a
supermajority  vote of the Board of  Directors  and/or the  stockholders  of Old
Prime. See "--Certain Matters Subject to Supermajority Vote."

         The  Stockholders'  Agreement will terminate  following the exercise by
either Blackstone or Loewen of its option pursuant to the Put/Call Agreement (as
defined below) or on such other date as Blackstone and Loewen may agree.

         Put/Call Arrangement

         Pursuant to a separate  agreement among Blackstone,  PSIM, Loewen Group
and Loewen (the "Put/Call Agreement"), (i) Loewen has a call option, exercisable
from and after the fourth anniversary of the Acquisition  Closing Date until but
excluding the sixth anniversary of the Acquisition Closing Date, to purchase all
of  Blackstone's  or PSIM's shares of Old Prime Common Stock (the "Call Option")
and (ii) each of  Blackstone  and PSIM has a put  option,  exercisable  from and
after the sixth anniversary of the Acquisition  Closing Date until but excluding
the eighth  anniversary  of the  Acquisition  Closing Date, to require Loewen to
purchase  Blackstone's or PSIM's, as the case may be, shares of Old Prime Common
Stock  (the "Put  Option").  The  option  price in each case is  derived  from a
formula based on EBITDA.  The performance by Loewen of its obligations under the
Put/Call Agreement will be guaranteed by Loewen Group.

              By virtue of the Put/Call Agreement, it is likely that the Company
will  eventually  become a wholly owned  subsidiary  of Loewen.  There can be no
assurance, however, that either the Call Option or Put Option will be exercised.

         Certain Matters Subject To Supermajority Vote

         The  Certificate  of  Incorporation  and/or  the  By-Laws  of Old Prime
provide that (1) amendments to the  Certificate of  Incorporation  or By-Laws of
Old Prime  require the approval of holders of 90% of the issued and  outstanding
Old Prime Common Stock and (2) transactions involving the merger,  consolidation
or sale of  substantially  all of the assets of Old Prime  require the unanimous
approval of both the Board of Directors and the stockholders of Old Prime.




<PAGE>


Administrative Services Agreement

       In connection  with the  Acquisition,  the Company has engaged  Loewen to
provide certain administrative  services and share certain resources (Loewen, in
such capacity,  being the  "Administrative  Services  Provider") pursuant to the
Administrative Services Agreement.  Such services will include the licensing of,
the maintenance of and the provision of training and other support services with
respect to, software,  hardware and other information  systems; the provision of
certain legal services,  training and support services relating to certain types
of regulatory compliance,  risk management services, travel arrangement services
and  assistance  and  support  with  respect  to  environmental  compliance  and
remediation  efforts,  and the granting of access to certain  telecommunications
equipment and services, as well as technical support therefor. In addition,  the
Administrative  Services  Provider  will provide the Company with the ability to
purchase  supplies  under  certain  of  Loewen's  supply  agreements  with third
parties. Also pursuant to the Administrative Services Agreement,  Loewen and the
Company  will  contract  for,  to the  extend  feasible  and  cost-effective  in
particular markets, access to embalming facilities and automobile fleets.

       As compensation for services provided under the  Administrative  Services
Agreement,  the Administrative  Services Provider receives from the Company,  in
cash, a fee (the  "Administrative  Services Fee") payable monthly in arrears and
in an aggregate annual amount equal to $250,000 for the first year following the
Acquisition Closing Date, to be increased by 2.5% for each year thereafter until
the termination of the Administrative  Services  Agreement.  The Company is also
required to reimburse the Administrative Services Provider for all out-of-pocket
costs  and  expenses  incurred  by it from  third  parties  in  connection  with
performing the administrative  services described in the Administrative Services
Agreement.

       The  Administrative  Services  Agreement  is subject to  termination  (i)
automatically  on the eighth  anniversary of the Acquisition  Closing Date, (ii)
automatically  upon closing following the exercise of the Call Option or the Put
Option,  (iii) if required pursuant to a legally binding order of a court or any
other  governmental  agency  with  appropriate  jurisdiction,  (iv)  subject  to
applicable  grace  periods  and an  arbitration  requirement  in the  event of a
dispute,  upon notice by either the Company or Loewen in the event of a material
breach  by the  other  party of any  provision  of the  Administrative  Services
Agreement and (v) at the option of the Company.

Payment of Certain Fees and Expenses

       In connection  with the  Acquisition,  on the  Acquisition  closing Date,
affiliates of Blackstone  received  fees of  approximately  $3.2 million and the
Company  reimbursed  Blackstone  for  all  out-of-pocket  expenses  incurred  in
connection  with the  Acquisition  and Loewen  received a consulting fee of $1.5
million and was reimbursed for certain expenses  incurred in connection with the
Acquisition  equal to $1.0 million.  In addition,  from the Acquisition  Closing
Date until the date on which Loewen or  Blackstone  exercises the Call Option or
the Put Option,  respectively,  pursuant to the Put/Call Agreement, an affiliate
of Blackstone will receive a monitoring fee equal to $250,000 per annum from the
Company.

Formation of PSIM; Loans to Management

       In connection  with the  Acquisition,  on the  Acquisition  Closing Date,
Messrs.  Wright and Cairns and certain other  officers of the Company (the "PSIM
Limited Partners")  subscribed for limited partnership  interest in PSIM and PSI
P&S subscribed for a general partnership interest in PSIM, the proceeds of which
subscriptions  PSIM used to purchase  approximately 0.7% of the Old Prime common
stock (the "PSIM-Owned Stock").

       In order to effect such purchase,  on the  Acquisition  Closing Date, the
Company made a loan to PSIM,  which was evidenced by a note bearing  interest at
an annual rate of 9% and secured by the PSIM-Owned  Stock, the proceeds of which
loan PSIM used to make a loan to each of the PSIM Limited Partners.  The loan to
each of  Messrs.  Wright  and Cairns  was in the  principal  amount of  $97,750,
evidenced by a note bearing  interest at an annual rate of 9% and secured by his
limited partnership interest in PSIM.

Agreements Relating to Former Owners

       In October 1996, the Company  entered into agreements with certain former
owners and  Loewen to  substitute  Loewen as the  borrower  and to  release  the
Company from any further  obligation on its debt of approximately  $1,650,000 to
the former owners. In connection with these agreements,  the Company paid Loewen
cash equal to the debt assumed.

<PAGE>


                                                         PART IV

Item 14.  Exhibits, Financial Statement Schedules, and Reports on Form 8-K.

       (a)  Documents  Filed  as  Part  of the  Report.  Consolidated  financial
statements and schedules of Prime Succession, Inc. and its subsidiaries filed as
part of this report are listed on page 14 of this report.

       (b)    Reports on Form 8-K.   None.

       (c)    Exhibits.


          Exhibit
           Number                                    Document Description

             2*            Stock Purchase  Agreement, dated as of June 14, 1996,
                           by and among Prime Succession, Inc., the  individuals
                           or entities listed  on the  signature pages  thereof,
                           The Loewen Group Inc. and Blackhawk Acquisition Corp.

            3.1*           Certificate of Incorporation of Blackhawk Acquisition
                           Corp.

            3.2*           Certificate  of Amendment of  Certificate of 
                           Incorporation  of Blackhawk  Acquisition Corp.
                           changing its name to Prime Succession
                           Acquisition Corp.

            3.3*           Certificate of Amendment of Certificate  of
                           Incorporation  of  Prime  Succession 
                           Acquisition Corp. changing its name to Prime
                           Succession, Inc.

            3.4*           By-Laws of Prime Succession, Inc.

            4.1*           Indenture dated as of August 15, 1996 between
                           Prime Succession  Acquisition  Corp. and
                           United States Trust Company of New York, as
                           Trustee

            4.2*           Form of 10 3/4% Senior Subordinated Note due 2004
                           (included in Exhibit 4.1)

          10.1(a)*         Casket Supply  Agreement,  dated January 1, 1993, 
                           between  Batesville Casket Company, Inc. and Prime 
                           Succession, Inc.

          10.1(b)*         Amendment  Agreement,  dated August 1994, between 
                           Batesville Casket Company, Inc. and Prime Succession,
                           Inc. (with respect to Casket Supply Agreement)

          10.1(c)*         Amendment 2, dated May 22, 1995,  between  Batesville
                           Casket Company,  Inc. and Prime Succession, Inc.(with
                           respect to Casket Supply Agreement)

            10.2*          Stockholders' Agreement dated as of August 26,
                           1996  among  Prime  Succession,  Inc.  (to  be
                           renamed  Prime  Succession  Holdings,   Inc.),
                           Blackstone   Capital   Partners   II  Merchant
                           Banking Fund L.P., Blackstone Offshore Capital
                           Partners II L.P., Blackstone Family Investment
                           Partnership  II L.P.,  PSI  Management  Direct
                           L.P. and Loewen Group International, Inc.

            10.3*          Administrative   Services Agreement dated as of 
                           August  26,  1996  between  Prime Succession
                           Acquisition Corp. (to be renamed Prime Succession,
                           Inc.) and Loewen Group International, Inc.

            10.4*          Credit  Agreement  dated as of August 26, 1996
                           among Prime  Succession,  Inc.  (to be renamed
                           Prime  Succession   Holdings,   Inc.),   Prime
                           Succession  Acquisition  Corp.  (to be renamed
                           Prime Succession, Inc.), Goldman, Sachs & Co.,
                           as syndication  agent and arranging agent, the
                           financial   institutions  from  time  to  time
                           parties  thereto  as  lenders  and The Bank of
                           Nova Scotia, as administrative  agent for such
                           lenders

            10.5*          Letter Agreement dated August 1, 1996 between Prime
                           Succession  Acquisition  Corp. (to be renamed Prime
                           Succession, Inc.) and Gary Wright.

            10.6*          Letter Agreement dated August 1, 1996 between Prime  
                           Succession  Acquisition  Corp. (to be renamed Prime
                           Succession, Inc.) and Myles Cairns

            10.7*          Put/Call  Agreement, dated as of August  26,  1996,
                           among  Blackstone  Capital   Partners  II  Merchant
                           Banking   Fund   L.P.,  Blackstone Offshore Capital
                           Partners II L.P.,   Blackstone  Family   Investment
                           Partnership  II L.P.,  PSI Management Direct  L.P.,
                           Loewen Group International Inc. and the Loewen Group
                           Inc.

             12            Computation of Ratio of Earnings to Fixed Charges

             16*           Letter from Ernst & Young LLP (independent auditors
                           prior  to  the  Acquisition) concerning  change  in
                           Company's  accountants  delivered  pursuant to Item
                           304(a) of Regulation S-K.

             21*           Subsidiaries of Prime Succession, Inc.(formerly known
                           as  Prime  Succession Acquisition Corp.)

             27            Financial Data Schedule
                  ------------------
  *   Incorporated by reference to the Exhibits to  the  Company's  Registration
      Statement on Form  S-4  (Registration No. 333-14599)  with  respect to the
      Exchange Notes.



<PAGE>


Signatures

         Pursuant to the  requirements  of Section 13 or 15(d) of the Securities
Exchange Act of 1934, the Registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                          PRIME SUCCESSION, INC.

                            /s/ MYLES S. CAIRNS
                         ----------------------------------------------------
                                Myles S. Cairns
    March 19, 1998              Chief Financial Officer, Secretary and Treasurer
-----------------------

         Pursuant to the  requirements  of the Securities  Exchange Act of 1934,
this  report has been  signed  below by the  following  persons on behalf of the
registrant and in the capacities and on the dates indicated.

                            /s/ GARY L. WRIGHT
                          ----------------------------------------------------
                                Gary L. Wright
     March 19, 1998             President, Chief Executive Officer
-------------------------

                            /s/ MYLES S. CAIRNS
                          ------------------------------------
                                Myles S. Cairns
                                Chief Financial Officer, Secretary and Treasurer
     March 19, 1998             (principal financial officer; principal
 -----------------------        accounting officer)
                                            


                           /s/ WARREN B. RUDMAN
                        ------------------------------------
                               Warren B. Rudman
     March 19, 1998            Director
-------------------------

                           /s/ HOWARD A. LIPSON
                        ------------------------------------
                               Howard A. Lipson
     March 19, 1998            Director
-------------------------

                           /s/ DAVID I. FOLEY
                        ------------------------------------
                               David I. Foley
     March 19, 1998            Director
-------------------------

                           /s/ CHINH E. CHU
                         ------------------------------------
                               Chinh E. Chu
     March 19, 1998            Director
-------------------------


                          /s/ PETER K. GRUNEBAUM
                       ------------------------------------
                              Peter K. Grunebaum
     March 19, 1998           Director
--------------------------

                          /s/ CLIFFORD R. HINKLE
                        ------------------------------------
                              Clifford R. Hinkle
      March 19, 1998          Director
-------------------------



<PAGE>

<TABLE>
<CAPTION>


                                        PRIME SUCCESSION, INC. AND SUBSIDIARIES
                                    SCHEDULE II - VALUATION AND QUALIFYING ACCOUNTS
<S>               <C>                      <C>                 <C>                                <C>            <C>       

                                         Balance at      Charged to       Charged to                           Balance at
                                         Beginning         Costs &           Other                               End of
             Description                 of Period        Expenses        Accounts(1)      Deductions(2)         Period
Current - Allowance for
   contract cancellations and
   doubtful accounts:
         Year ended December 31,

                  1997                     $2,834,438          729,762               --           (916,507)      $2,647,693
                  1996                     $2,926,331          371,846          414,900           (878,639)      $2,834,438
                  1995                     $1,929,748          973,561        1,134,613         (1,111,591)      $2,926,331
Due after one year - Allowance for contract cancellations and doubtful accounts:
         Year ended December 31,
                  1997                     $2,731,216        2,487,730               --         (1,930,678)      $3,288,268
                  1996                       $240,704        1,590,125        1,977,607         (1,077,220)      $2,731,216
                  1995                       $213,575               --           27,129                  --        $240,704


(1) Revision of allowance resulting from purchase accounting adjustments.

(2) Write-off of doubtful accounts.

</TABLE>


<PAGE>


                                    Exhibit 12
Prime Succession, Inc. and subsidiaries
Ratio of Earnings to Fixed Charges
(Dollars in Thousands)


<TABLE>
<CAPTION>

                                                          
                                Successor Company

                             Period from Period from
                                 Jan. 1 Aug. 26
                                                                 through       through
                                                                Aug. 25,       Dec. 31,
                                                                   1996             1996
                           1993          1994         1995                                    1997
<S>                          <C>          <C>            <C>        <C>          <C>                <C>
Ratio of  Earnings
    to Fixed
    Charges
Earnings:
  Income (Loss)
    before income

    taxes                     (2,505)      (4,656)        (355)      (9,111)      (3,145)           280
  Add: Fixed
    charges, net               6,650       13,128       16,224       10,691        8,884         24,716
Income before
    income taxes
    and fixed
    charges, net               4,145        8,472       15,869        1,580        5,739         24,996
Fixed Charges:
  Total interest
    expense (1)                6,418       12,422       15,401       10,059        8,540         23,843
  Interest factor
    in rents (2)                 232          706          823          632          344            873
Total fixed
    charges                    6,650       13,128       16,224       10,691        8,884         24,716
Ratio of
    earnings to
    fixed charges                0.6          0.6          1.0          0.1          0.6            1.0
Coverage
    deficiency
    (surplus) (3)              2,505        4,656          355        9,111        3,145           (280)
FN
(1) Total interest expense for each period includes amortization of loan costs.

(2)      Interest factor in rents represents one-third of rent expense, which is
         considered representative of the interest factor.

(3)      The  Company's  earnings are  inadequate to cover fixed charges for all
         periods except 1997 indicated above. Coverage deficiency represents the
         excess of fixed  charges  over  income  before  income  taxes and fixed
         charges,  net. Coverage surplus  represents excess income before income
         taxes and fixed charges, net over fixed charges.

</TABLE>