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                UNITED STATES SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

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

                                   FORM 10-K

    [X]          ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d)
                     OF THE SECURITIES EXCHANGE ACT OF 1934

                  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: 0-24728

                        EQUITY CORPORATION INTERNATIONAL
             (Exact name of registrant as specified in its charter)

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<S>                                            <C>
                   DELAWARE                                      75-2521141
       (State or other jurisdiction of                        (I.R.S. Employer
        incorporation or organization)                      Identification No.)

      415 SOUTH FIRST STREET, SUITE 210                            75901
                LUFKIN, TEXAS                                    (Zip Code)
</TABLE>

       Registrant's telephone number, including area code (409) 631-8700

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

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      TITLE OF EACH CLASS                  NAME OF EACH EXCHANGE ON WHICH REGISTERED
      -------------------                  -----------------------------------------
<S>                                        <C>
Common Stock, $.01 par value                        New York Stock Exchange
Preferred Share Purchase Rights                     New York Stock Exchange
</TABLE>

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

     Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days.  Yes [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.  [ ]

     As of March 16, 1998, there were 21,229,405 shares of Equity Corporation
International Common Stock, $.01 par value, issued and outstanding, 20,616,841
of which, having an aggregate market value of approximately $490,938,526, were
held by non-affiliates of the registrant.

                      DOCUMENTS INCORPORATED BY REFERENCE

     Portions of the Proxy Statement related to the registrant's 1998 annual
meeting of stockholders are incorporated by reference into Part III of this Form
10-K.

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                               TABLE OF CONTENTS

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<S>       <C>                                                           <C>
Item 1.   Business....................................................    1
          The Company.................................................    1
          The Deathcare Industry......................................    1
          Business Strategy...........................................    3
          Acquisition Program.........................................    3
          Operations..................................................    4
          Competition.................................................    6
          Trust Funds.................................................    7
          Regulation..................................................    8
          Employees...................................................    8
Item 2.   Properties..................................................    8
Item 3.   Legal Proceedings...........................................   10
Item 4.   Submission of Matters to a Vote of Security Holders.........   10
Item 5.   Market for Registrant's Common Equity and Related
            Stockholder Matters.......................................   10
Item 6.   Selected Financial Data.....................................   11
Item 7.   Management's Discussion and Analysis of Financial Condition
            and Results of Operations.................................   13
Item 8.   Financial Statements and Supplementary Data.................   22
Item 9.   Changes in and Disagreements with Accountants on Accounting
            and Financial Disclosure..................................   22
Item 10.  Directors and Executive Officers of the Registrant..........   23
Item 11.  Executive Compensation......................................   23
Item 12.  Security Ownership of Certain Beneficial Owners and
          Management..................................................   23
Item 13.  Certain Relationships and Related Transactions..............   23
Item 14.  Exhibits, Financial Statement Schedules and Reports on
            Form 8-K..................................................   24
</TABLE>

                FORWARD-LOOKING INFORMATION MAY PROVE INACCURATE

     This Form 10-K contains forward-looking statements and information that are
based on management's beliefs as well as assumptions made by and information
currently available to management. When used in this document, the words
"anticipate," "believe," "estimate" and "expect" and similar expressions are
intended to identify forward-looking statements. Such statements reflect the
Company's current views with respect to future events and are subject to certain
risks, uncertainties and assumptions, including competition for and availability
of funeral home and cemetery acquisitions, the ability of the Company to
successfully implement its revenue enhancement and cost containment programs at
acquired funeral homes and cemeteries, the Company's ability to retain key
management personnel and to continue to attract and retain skilled funeral home
and cemetery management personnel, state and federal regulations, changes in the
death rate or acceleration of the trend towards cremation, availability and cost
of capital and general industry and economic conditions. Should one or more of
these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, believed,
estimated or expected. The Company does not intend to update these
forward-looking statements and information.
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                                     PART I

ITEM 1. BUSINESS

THE COMPANY

     Equity Corporation International ("ECI" or the "Company") is the fourth
largest publicly traded provider of deathcare services and products in the
United States, primarily serving communities located in non-metropolitan and
select suburban areas. As of December 31, 1997, the Company operated 259 funeral
homes and 76 cemeteries in 33 states and one Canadian province. For the year
ended December 31, 1997, the Company generated net revenues of $135.1 million.

     The Company's funeral homes perform all of the services related to
funerals, provide funeral facilities and vehicles and sell related merchandise.
The Company's funeral homes are primarily located in communities with
populations ranging from 10,000 to 250,000 residents. The Company's cemeteries
perform all of the services related to interment and sell cemetery interment
rights and services, mausoleum spaces and related merchandise. The Company's
cemeteries are primarily located in communities with populations ranging from
75,000 to 500,000 residents. In order to improve the efficiency and
profitability of its operations, the Company's funeral homes and cemeteries are
generally operated in "clusters" or groups within a given geographic area. The
clustering of funeral homes and the clustering of cemeteries provide
opportunities to share personnel, vehicles and other resources, effect operating
and administrative cost reductions and implement revenue enhancing
cross-marketing programs.

     ECI believes it is differentiated from the other large, national deathcare
companies by its focus on the consolidation of funeral homes and cemeteries in
non-metropolitan areas of the United States. The Company has focused on
non-metropolitan areas in order to take advantage of the unique opportunities
offered by such areas as compared to metropolitan areas, including (i) the
opportunity to establish and maintain higher market shares as a result of the
smaller number of deathcare providers typically found in a non-metropolitan
area, (ii) the relatively lower level of competition for acquisitions in such
areas and (iii) the stronger preference in such areas for traditional funeral
services and burials. ECI has also begun to acquire funeral homes and cemeteries
in select suburban areas which possess characteristics similar to the Company's
traditional non-metropolitan markets.

     As used herein, unless the context indicates otherwise, the terms "ECI" and
the "Company" refer to Equity Corporation International, its consolidated
subsidiaries and their respective predecessors. The Company's principal
executive office is located at 415 South First Street, Suite 210, Lufkin, Texas
75901, and its telephone number is (409) 631-8700.

     For financial information regarding the Company's segments, including the
identifiable assets of the Company by industry segment, see Note 13 to the
consolidated financial statements contained in Item 8 of this Annual Report on
Form 10-K.

THE DEATHCARE INDUSTRY

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

     Fragmented Nature. It is estimated that there are approximately 22,000
funeral homes and 9,600 commercial (as opposed to religious, family, fraternal,
military or municipal) cemeteries in the United States. Many of these properties
are owned by small, family-owned firms that control one or several funeral homes
or cemeteries in a single community. Based upon industry estimates, ECI and the
four other publicly traded providers of deathcare services in the United States
represented less than 21% of the total 1996 United States deathcare industry
revenues.

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          Barriers to Entry. The deathcare industry is characterized by
     significant barriers to the establishment of a new funeral home or cemetery
     in an existing market, the most formidable of which typically is local
     heritage and tradition. Heritage and tradition, particularly in
     non-metropolitan areas where there are fewer market participants, afford an
     established funeral home or cemetery a local franchise which tends to
     foster family loyalty. Other barriers to entry include local zoning
     restrictions, substantial capital requirements, increasing regulatory
     burdens and scarcity of suitable cemetery land in certain areas. In
     addition, established firms' backlog of preneed, prefunded funerals or
     presold cemetery and mausoleum spaces also makes it difficult for new
     entrants to gain a foothold in the marketplace.

          Stability. Death rates in the United States are fairly predictable,
     thereby lending stability to the deathcare industry. The number of deaths
     in the United States has increased at a compound rate of approximately one
     percent per year since 1980 and, according to the Bureau of the Census, is
     expected to increase by approximately one percent per year through 2010. In
     addition, the ownership of funeral home and cemetery businesses has
     traditionally passed from generation to generation within the same family
     and the aggregate number of funeral homes and cemeteries in the United
     States has remained relatively constant.

     Over the past several years, the following trends have developed in the
deathcare industry:

          Consolidation. As the deathcare industry has matured, a trend toward
     consolidation has developed. From the standpoint of individual owners, this
     trend appears to result principally from family succession issues, a desire
     for liquidity, increasing tax and estate planning complexities and the
     increasing competitive threat posed by the large deathcare providers. The
     active acquisition market for funeral homes and cemeteries provides a
     source of potential liquidity that was not as readily available to
     individual owners in the past. From the standpoint of the large deathcare
     providers, the consolidation trend is driven by the benefits derived from
     economies of scale, improved managerial control and more effective
     strategic and financial planning. The consolidation trend has accelerated
     in recent years as several large deathcare companies have expanded their
     operations significantly through acquisitions.

          Clustered Operations. There has also been a trend for firms to cluster
     their funeral homes and cemetery operations. Clusters refer to funeral
     homes and/or cemeteries which are grouped together in a geographical
     region. Clusters provide cost savings to funeral homes and cemeteries and a
     higher level of service to client families through the sharing of
     personnel, vehicles and other resources. In addition, funeral home and
     cemetery clusters provide opportunities for a company to cross-market the
     full range of deathcare services with limited incremental overhead expense.

          Combined Operations. In recent years, there has been an increase in
     the number of firms establishing combined operations. Combined operations
     refer to funeral home and cemetery operations conducted on a single site.
     These operations provide cost savings through shared resources and cross-
     marketing opportunities. The ability to offer the full range of products
     and services at one location has proven to be a competitive advantage which
     tends to increase the market share and profitability of both the funeral
     home and cemetery.

          Preneed Marketing. In addition to sales at the time of death (i.e., on
     an "at need" basis), an increasing number of deathcare products and
     services are being sold prior to the time of death (i.e., on a "preneed"
     basis) by deathcare providers who have developed sophisticated marketing
     staffs that actively promote such products and services. At the same time,
     consumers are becoming more aware of the benefits of advanced planning,
     such as the financial assurance and peace of mind achieved by establishing
     in advance a fixed price and type of service, and the elimination of the
     emotional strain of making deathcare plans at the time of need. Effective
     marketing of preneed products and services ensures a backlog of future
     business.

          Cremation. In recent years there has been steady, gradual growth in
     the number of families in the United States that have chosen cremation as
     an alternative to traditional methods of burial. According to industry
     studies, it is estimated that cremations will represent approximately 25%
     of all dispositions of human remains in the United States by the year 2000,
     as compared with approximately 21% in 1996 and
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     10% in 1980. Many areas of the United States and many non-metropolitan
     communities exhibit materially lower rates of cremation as a result of
     religious and cultural traditions. Cremation historically has been marketed
     as a less costly alternative to interment. However, cremation is
     increasingly marketed as part of a complete deathcare package that includes
     traditional funeral services and memorialization.

BUSINESS STRATEGY

     The Company's strategy is to continue to expand through the aggressive
acquisition of premier funeral homes and cemeteries in non-metropolitan and
select suburban areas of the United States and Canada and to generate increasing
levels of profitability through the implementation of proven revenue-enhancement
and cost-containment programs.

     Acquisitions. The Company's acquisition program is focused on:

     - acquiring premier properties that can serve as anchor locations for new
       clusters;

     - expanding existing clusters with the acquisition of adjacent properties;
       and

     - acquiring cemeteries that complement the Company's existing funeral home
       clusters, and acquiring funeral homes that complement the Company's
       existing cemetery clusters.

     Profitability Enhancement. The Company believes that it can enhance
revenues and reduce costs at its properties, particularly its newly acquired
properties, through, among other things, the following:

     - introducing the Company's funeral merchandising and sales training
       programs at newly acquired funeral homes;

     - implementing professional preneed sales efforts at newly acquired
       cemeteries, which often have had limited historical preneed sales, and
       marketing a broader line of cemetery products and services;

     - improving the revenues and earnings of its established operations by
       assisting local managers with on-going programs to market services more
       effectively and enhance the reputation of their operations in the
       community;

     - sharing sales leads and other cross-marketing opportunities that are
       anticipated to develop as the Company acquires cemeteries that complement
       existing funeral home clusters and funeral homes that complement existing
       cemetery clusters;

     - sharing personnel, vehicles and other resources within funeral home and
       cemetery clusters;

     - realizing favorable pricing and terms from suppliers through volume
       discounts on significant expenditures, such as vehicles, caskets, vaults
       and memorials; and

     - consolidating and centralizing certain administrative and financial
       management functions while retaining critical operational functions at
       the local level.

ACQUISITION PROGRAM

     The Company intends to continue its active acquisition program focused on
premier funeral homes and cemeteries in non-metropolitan and select suburban
areas throughout the United States and Canada. The Company's funeral home
acquisition effort is primarily targeted at markets with approximately 10,000 to
250,000 residents where a single property or cluster of properties can be a
leading or dominant competitor in that market area. The Company's cemetery
acquisition effort is primarily targeted at markets with approximately 75,000 to
500,000 residents that are large enough to support an aggressive preneed sales
effort.

     The Company typically retains the former owners and other key personnel of
acquired funeral homes and, where appropriate, the former owners and other key
personnel of acquired cemeteries, and gives them significant operating
responsibility in an effort to ensure the continuation of high quality services
and the maintenance of the acquired operation's unique reputation, heritage and
long-standing local relationships. In nearly all cases, acquired funeral homes
and cemeteries continue operations under the same tradenames as

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were used by the prior owners. In addition, the Company views the experienced
management of certain acquired operations as potential regional and corporate
management candidates. As a result, the Company believes that it may be regarded
as a particularly attractive acquiror by some independent owners because such
owners may be afforded a greater opportunity for advancement with the Company
than they may be afforded on their own or with the other large deathcare
providers.

     In evaluating specific properties for acquisition, the Company considers
such factors as the property's location, reputation, heritage, physical size,
volume of business, profitability, available inventory, name recognition,
aesthetics, potential for development or expansion, competitive market position,
pricing structure and the quality of operating management. The Company follows a
disciplined approach based on specific financial criteria for determining
acquisition prices. The Company anticipates that the consideration for future
acquisitions will consist of a combination of cash, long-term notes, the
assumption of existing indebtedness of the acquired businesses, and, in some
cases, the issuance of additional shares of the Company's Common Stock. The
Company typically enters into management, consulting and non-competition
agreements with former owners and key executive personnel of acquired funeral
homes and, where appropriate, acquired cemeteries.

     The Company maintains a full-time professional corporate development staff
headed by a senior corporate executive with substantial deathcare industry
experience. The corporate development staff is responsible for identifying,
evaluating, negotiating and closing acquisitions of funeral homes and
cemeteries. Other members of the Company's senior and regional management teams
are also actively involved in the acquisition process.

     The Company is continually evaluating and negotiating potential funeral
home and cemetery acquisitions. The Company typically enters into letters of
intent related to potential acquisitions when an agreement in principle has been
reached between the parties. Such letters of intent are generally intended to be
non-binding and are subject to various contingencies, which may include
completing satisfactory due diligence, negotiating definitive agreements and
obtaining approval of the Company's Board of Directors. The Company is currently
involved in various stages of acquisition negotiations with respect to a number
of funeral homes and cemeteries, and, as of March 5, 1998, had completed or
signed letters of intent relating to the acquisition of 49 funeral homes and
five cemeteries for purchase prices totaling approximately $82.5 million.

OPERATIONS

     Funeral Home Operations. As of December 31, 1997, the Company operated 255
funeral homes in 30 states and 4 funeral homes in one Canadian province. Funeral
home operations accounted for approximately 65%, 60% and 57% of the Company's
net revenues for the years ended December 31, 1997, 1996 and 1995, respectively.
Approximately 33%, 41% and 54% of the Company's funeral home net revenues
(approximately 21%, 26% and 31% of the Company's total net revenues) for the
years ended December 31, 1997, 1996 and 1995, respectively, were attributable to
funeral home operations in Texas.

     In order to improve the efficiency and profitability of its operations, the
Company's funeral homes are generally operated in clusters within a given
geographic area. The clustering of funeral homes provides opportunities to share
personnel, vehicles and other resources, effect operating and administrative
cost reductions and implement cross-marketing programs. The Company's operations
are primarily located in non-metropolitan and select suburban areas, where
clusters typically generate fewer operating economies than in metropolitan areas
principally due to greater distances between properties and lower volumes of
funerals and interments. The Company believes, however, that it achieves
significant economic benefits by clustering its operations.

     The Company's funeral homes are organized geographically into operating
groups, each of which is under the direction of a management team with
substantial funeral home experience. Although certain financial management and
policy matters are centralized, management teams and local funeral home
directors have substantial autonomy in determining the manner in which their
services and products are marketed and delivered and their funeral homes are
managed. The Company believes that this strategy permits each local

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firm to maintain its unique style of operation and to capitalize on its
reputation and heritage, while the Company maintains centralized supervisory
controls and provides specialized services at the corporate level.

     The Company's funeral homes offer a complete range of services to meet
families' funeral needs, including family consultation, the removal and
preparation of remains, the sale of caskets and related funeral products, the
use of funeral home facilities for visitation and worship and transportation
services. Most of the Company's funeral homes have a non-denominational chapel
on the premises, thereby permitting family visitation and religious services to
take place at one location, which reduces transportation costs to the Company
and inconvenience to the family.

     All of the Company's funeral homes offer cremation. Cremations accounted
for approximately 23% of the dispositions performed by the Company in 1997.
Approximately 31% of the Company's cremations for 1997 was attributable to the
Company's Florida operations, a state in which the cremation rate is
substantially higher than the national average. Excluding the Company's Florida
operations, cremations accounted for approximately 18% of the dispositions
performed by the Company in 1997. Cremations are often combined with traditional
funeral services and various types of memorialization. While cremations have
historically generated gross profit margins similar to those for traditional
funeral services, cremations generally result in lower average revenue and gross
profit dollars when compared to traditional funeral services.

     In addition to sales of funeral services and products at the time of need,
the Company also markets funeral services and products on a preneed basis.
Preneed funeral contracts enable families to establish in advance the type of
service to be performed, the products to be used and the cost of such products
and services in accordance with prices prevailing at the time the agreement is
signed rather than when the products and services are delivered. Preneed funeral
contracts permit families to eliminate the emotional strain of making deathcare
plans at the time of need and enable the Company to establish a portion of its
future market share. Because of the nature of the markets served by the
Company's funeral homes, however, the Company does not extensively market
preneed funeral contracts. Nevertheless, the Company will market preneed funeral
contracts in specific markets where the Company deems it necessary to build
current and future market share or in response to sales campaigns launched by
competitors. The Company has historically sold preneed funeral contracts at
prices similar to those obtained for at need funeral services. Proceeds from the
sale of preneed funeral contracts are not recognized as revenues until the time
the funeral service is performed. The Company sold or obtained through
acquisitions 25,471 preneed funeral contracts in the year ended December 31,
1997. At December 31, 1997, the Company had a backlog of 67,369 preneed funeral
contracts to be delivered in the future. Preneed funeral contracts fulfilled as
a percentage of the total funerals performed was approximately 21%, 19% and 19%
for the years ended December 31, 1997, 1996 and 1995, respectively.

     Preneed funeral contracts are paid for by the customer through either
lump-sum payments or on an installment basis. The performance of preneed funeral
contracts is usually secured by placing the funds collected in trust for the
benefit of the customer or by the purchase of a life insurance policy, the
proceeds of which will pay for such services at the time of need. Insurance
policies intended to fund preneed funeral contracts cover the original contract
price and generally include built-in escalation clauses designed to offset
future inflationary cost increases. The Company's selection of trust or
insurance arrangements depends primarily on the individual customer's preference
and the regulatory requirements of the applicable state. In the case of
trust-funded contracts, state law requires that all or a portion of the payments
received by the Company for preneed funeral contracts be placed in trust
accounts established by the Company. See "-- Trust Funds -- Preneed Funeral
Trusts." Insurance-funded contracts are offered principally through third-party
insurance underwriters specializing in preneed funeral contracts. In the event
of cancellation of a preneed funeral contract, the Company complies with its
contractual obligations and applicable state laws, which generally require a
refund of all principal amounts held in trust, and in some cases accrued
interest.

     In addition to preneed funeral contracts, the Company also offers
"preplanned" funeral arrangements whereby a client determines in advance
substantially all of the details of a funeral service without any financial
commitment or other obligation on the part of the client until the actual time
of need. Preplanned funeral arrangements permit families to avoid the emotional
strain of making deathcare plans at the time of need and enable a funeral home
to establish relationships with clients that frequently lead to at need sales.

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     Cemetery Operations. As of December 31, 1997 the Company operated 76
cemeteries in 17 states. Cemetery operations accounted for 34%, 38% and 43% of
the Company's net revenues for the years ended December 31, 1997, 1996 and 1995,
respectively.

     The Company's cemeteries are organized geographically into regional
operating groups, each of which is under the direction of an operations director
with substantial cemetery experience. Cemetery marketing efforts are coordinated
by regional sales vice presidents. The Company aggressively markets cemetery
interment rights, merchandise and services on a preneed basis. The Company
believes that consumers throughout the United States increasingly favor
commercial perpetual care cemeteries, such as those operated by the Company,
over non-perpetual care cemeteries, many of which are operated by family,
fraternal and religious organizations. The Company has an extensive training
program for all cemetery sales personnel, including senior sales managers and
entry-level sales counselors. Cemetery sales prospects are generated through the
use of a variety of media, including direct response advertising, direct
mailings, door-to-door surveys, telephone surveys and purchaser referrals.

     The Company's cemetery products and services include interment services and
rights to interment in cemetery sites, including grave sites, crypts, niches,
family and community mausolea and columbaria and related cemetery merchandise
such as markers, monuments, memorials and burial vaults. Cemetery operations
generate revenues through sales of interment rights, markers and memorials; fees
for interment and cremation services and marker and memorial installations;
interest income from installment sales contracts; and investment income from
preneed cemetery merchandise.

     Cemetery interment rights, interment services and merchandise are sold
either on a preneed or at need basis. Preneed cemetery sales are usually
financed by the Company through installment sale contracts, generally with terms
not exceeding five years (or seven years for some of the larger purchases).
Preneed sales of cemetery interment rights and other related services and
products are recorded as revenues when the contract is signed, with concurrent
recognition of related costs. The Company typically receives payment of at least
5% of the sales price at the time the contract is signed. Allowances for
customer cancellations and refunds are accrued at the date of sale based upon
historical experience. Customers generally have the option to cancel a contract
for cemetery products within three days of the date of sale and receive a refund
of amounts paid. After this three-day period, the Company generally does not
refund amounts received under such contracts. Preneed cemetery sales represented
approximately 72%, 69% and 67% of the Company's cemetery net revenues for the
years ended December 31, 1997, 1996 and 1995, respectively.

     The Company is generally required under state laws to deposit in trust a
specified percentage of the current cost of providing cemetery merchandise sold
prior to the time of need. The Company also provides maintenance of cemetery
grounds pursuant to perpetual care contracts and state laws that require the
Company to place a portion of the proceeds from sales of cemetery interment
rights into a perpetual care trust or endowment fund. See "-- Trust
Funds -- Preneed Cemetery Merchandise Trusts" and "-- Trust Funds -- Perpetual
Care Trusts."

COMPETITION

     The Company currently competes for acquisitions with, among others, four
publicly held North American deathcare companies with operations in the United
States, Service Corporation International ("SCI"), The Loewen Group, Inc.,
Stewart Enterprises, Inc. and Carriage Services, Inc., as well as smaller
national and regional consolidators. While a significant amount of acquisition
activity appears to be concentrated on funeral homes and cemeteries in
metropolitan areas, which are not areas of primary interest to the Company, the
Company faces intense competition in the acquisition of funeral homes and
cemeteries in many of the areas in which it has focused its acquisition program.
Prices for funeral homes and cemeteries have increased substantially in recent
years, and in some cases competitors have paid acquisition prices substantially
in excess of those that the Company felt were appropriate. Accordingly, no
assurance can be given that the Company will be successful in expanding its
operations through acquisitions or that funeral homes and cemeteries will be
available at reasonable prices or on reasonable terms.

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     The Company's funeral home and cemetery operations generally face
competition in the markets that they serve. Market share for funeral homes and
cemeteries is largely a function of reputation and heritage, although
competitive pricing, professional service and attractive, well-maintained and
conveniently located facilities are also important. The sale of funeral services
and products and cemetery interment rights and merchandise on a preneed basis
has increasingly been used by many companies as an important marketing tool to
build market share. Due to the importance of reputation and heritage, market
share increases are usually gained over a long period of time.

TRUST FUNDS

     General. The Company has established a variety of trusts in connection with
its funeral home and cemetery operations as required under applicable state law.
Such trusts include (i) preneed funeral trusts, (ii) preneed cemetery
merchandise trusts and (iii) perpetual care trusts. These trusts are typically
administered by independent financial institutions selected by the Company. The
Company also uses independent professional managers to advise the Company on
investment matters.

     Preneed Funeral Trusts. Preneed funeral trusts hold the funds paid by the
purchasers of preneed funeral contracts pending use of the funds at the time of
need. In most states in which the Company operates, a percentage (depending on
applicable state law) of the proceeds from the sale of each preneed funeral
contract can be retained by the Company with the balance deposited in a trust.
In most states, the Company is not permitted to withdraw principal or investment
income from such trusts until the time the funeral service is performed.
Earnings on trust funds increase the amount of cash to be received by the
Company at the time the funeral service is performed and historically have
allowed the Company to adequately cover the inflationary increase in costs of
funeral services. While direct marketing costs and commissions incurred with the
sale of preneed funeral contracts are a current use of cash, such costs are
deferred for financial reporting purposes and recognized over 12 years, which
approximates the expected timing of the performance of services related to
preneed contracts. Proceeds from the sale of preneed funeral contracts and
earnings on such proceeds are not recognized as revenue until the time the
funeral service is performed. All price guaranteed preneed funeral contracts are
included in the Company's consolidated balance sheet as a long-term asset with a
corresponding credit to deferred preneed funeral contract revenues. The
aggregate balance of the Company's preneed funeral contracts held in trust was
approximately $94 million and $59 million as of December 31, 1997 and 1996,
respectively, which was included in preneed funeral contracts in the Company's
consolidated balance sheet.

     Preneed Cemetery Merchandise Trusts. The Company is generally required
under applicable state laws to deposit in preneed cemetery merchandise trusts a
percentage (which varies from state to state) of either the net sales price or
the current cost of providing cemetery merchandise or services purchased by a
customer prior to the time of need. Such amounts are generally deposited in
trust on a pro rata basis as payments are received from the customer. Income on
cemetery merchandise trusts is recognized in cemetery net revenues in the period
the trust earnings accrue. The Company is permitted to withdraw from such trusts
principal and the related investment income when the cemetery merchandise is
purchased by the Company, the services are performed or the merchandise contract
is canceled. The Company's preneed cemetery merchandise trust funds had an
aggregate balance of approximately $26 million and $14 million as of December
31, 1997 and 1996, respectively. The funds contained in the Company's preneed
cemetery merchandise trusts are included in the Company's consolidated balance
sheet as long-term receivables. The cost of preneed cemetery merchandise is
accrued as a liability and included in deferred cemetery costs in the Company's
consolidated balance sheet.

     Perpetual Care Trusts. The purpose of a perpetual care trust is to provide
the funds necessary to maintain cemetery property and memorials in perpetuity.
Pursuant to state law, a portion (which varies from state to state, but is
generally 10%) of the proceeds from each sale of a cemetery interment right is
placed in such a trust. While the Company does not have the right to withdraw
the principal balance at any time, the Company is entitled to withdraw
substantially all of the investment income from its perpetual care trusts to be
used for cemetery and memorial maintenance. The aggregate principal balance in
the Company's perpetual care trusts was approximately $25 million and $16
million as of December 31, 1997 and 1996, respectively, none of which

                                        7
<PAGE>   10

was included in the Company's consolidated balance sheet. Investment income from
the perpetual care trust funds is included in the Company's consolidated
statement of operations when earned.

     For additional information with respect to the Company's trusts, see Notes
1 and 4 to the audited consolidated financial statements contained in Item 8 of
this Annual Report on Form 10-K.

REGULATION

     The Company's funeral home operations are comprehensively regulated by the
Federal Trade Commission ("FTC") under Section 5 of the Federal Trade Commission
Act and a trade regulation rule for the funeral industry promulgated thereunder
(the "Funeral Rule"). The Funeral Rule contains minimum standards for funeral
industry practices, requires extensive price and other affirmative disclosures
to the customer at the time of sale and imposes a mandatory itemization
requirement for the sale of funeral products and services.

     The Company is subject to the requirements of the federal Occupational
Safety and Health Act ("OSHA") and comparable state statutes. The OSHA hazard
communication standard, the United States Environmental Protection Agency
community right-to-know regulations under Title III of the federal Superfund
Amendment and Reauthorization Act and similar state statutes require the Company
to organize information about hazardous materials used or produced in its
operations. Certain of this information must be provided to employees, state and
local governmental authorities and local citizens. The Company is also subject
to the federal Americans with Disabilities Act and similar laws which, among
other things, may require that the Company modify its facilities to comply with
minimum accessibility requirements for disabled persons.

     The Company's operations, including its preneed sales and trust funds, are
also subject to extensive regulation, supervision and licensing under numerous
other federal, state and local laws and regulations. See "-- Trust Funds."

     The Company believes that it is in substantial compliance with all such
laws and regulations. Federal and state legislatures and regulatory agencies
frequently propose new laws, rules and regulations which, if enacted, could have
a material adverse effect on the Company's operations and on the deathcare
industry in general. As discussed above, a significant portion of the Company's
funeral home operations are located in the state of Texas. Any material adverse
change in the regulatory requirements applicable to Texas funeral home
operations could have a material adverse effect on the Company's results of
operations. The Company cannot predict the outcome of any proposed legislation
or regulations or the effect that any such legislation or regulations, if
enacted, might have on the Company.

EMPLOYEES

     As of December 31, 1997, the Company and its subsidiaries employed
approximately 1,450 full-time and approximately 1,050 part-time employees.
Management believes that its relationship with its employees is good. Except for
a small number of maintenance employees in Illinois, no employees of the Company
or its subsidiaries were members of a collective bargaining unit.

ITEM 2. PROPERTIES

     As of December 31, 1997, the Company operated 259 funeral homes and 76
cemeteries in 33 states and one province in Canada. The Company owned the real
estate and buildings of 208 of its funeral homes and 71 of its cemeteries,
leased facilities in connection with 51 of its funeral homes, and operated 5 of
its cemeteries pursuant to management contracts. The leases with respect to
funeral homes leased by the Company have remaining terms ranging from 1 to 10
years, and the Company generally has renewal options or a right of first refusal
on any proposed sale of these funeral homes. Seven of the Company's funeral
homes are located on property contiguous to and operated in combination with a
Company-owned cemetery. The 76 cemeteries operated by the Company cover a total
of approximately 3,200 acres, of which approximately 50% is available

                                        8
<PAGE>   11

for future development. The Company does not anticipate any shortage of
available space in its current cemeteries for the foreseeable future.

     The following table sets forth certain information, as of December 31,
1997, regarding the funeral homes and cemeteries operated by the Company in each
state:

<TABLE>
<CAPTION>
                                                                NUMBER OF      NUMBER OF
                                                              FUNERAL HOMES    CEMETERIES
                                                              -------------    ----------
<S>                                                           <C>              <C>
Alabama.....................................................        14              3
Arizona.....................................................         1             --
Arkansas....................................................         1              1
California..................................................         2              1
Connecticut.................................................         1             --
Florida.....................................................        14              5
Georgia.....................................................         2             15
Illinois....................................................        15              1
Indiana.....................................................        15             --
Iowa........................................................        13              1
Louisiana...................................................         8             --
Maine.......................................................        20             --
Maryland....................................................        --              1
Massachusetts...............................................         1             --
Mississippi.................................................         3             --
Missouri....................................................        17              1
Nebraska....................................................         6             --
New Hampshire...............................................         3             --
New Jersey..................................................         1             --
New Mexico..................................................         5              1
New York....................................................         9             --
North Carolina..............................................         1             17
Ohio........................................................         3             --
Oklahoma....................................................        10              2
Oregon......................................................         4              5
Saskatchewan (Canada).......................................         4             --
South Carolina..............................................        --              4
South Dakota................................................         4             --
Tennessee...................................................        --              6
Texas.......................................................        73              7
Vermont.....................................................         3             --
Virginia....................................................         1              5
West Virginia...............................................         3             --
Wisconsin...................................................         2             --
                                                                   ---             --
          Total.............................................       259             76
                                                                   ===             ==
</TABLE>

     As of December 31, 1997, the Company's corporate headquarters occupied
approximately 36,227 square feet of leased office space in Lufkin, Texas.

     As of December 31, 1997, the Company operated approximately 900 vehicles,
of which 800 were owned and 100 were leased. The Company presently leases two
aircraft.

     The specialized nature of the Company's business requires that its
facilities be well-maintained. Management believes that this standard is met.

                                        9
<PAGE>   12

ITEM 3. LEGAL PROCEEDINGS

     The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company.

     The Company carries insurance with coverages and coverage limits that it
believes to be customary in the funeral home and cemetery industries. Although
there can be no assurance that such insurance will be sufficient to protect the
Company against all contingencies, management believes that its insurance
protection is reasonable in view of the nature and scope of the Company's
operations.

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

     None

                                    PART II

ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     The Company's Common Stock is listed on the New York Stock Exchange under
the symbol "EQU." The following table presents the quarterly high and low sale
prices as reported by the Nasdaq National Market prior to June 6, 1997 and by
the New York Stock Exchange thereafter during each quarterly period shown below.
The sale prices set forth below have been adjusted to reflect a 3-for-2 stock
split in October 1996.

<TABLE>
<CAPTION>
                                                              HIGH      LOW
                                                              ----      ---
<S>                                                           <C>       <C>
1996:
  First Quarter.............................................   20       15 3/8
  Second Quarter............................................   20 1/2   17 5/8
  Third Quarter.............................................   22 1/8   16 3/8
  Fourth Quarter............................................   25 1/2   17 1/4
1997:
  First Quarter.............................................   23 5/8   18 1/2
  Second Quarter............................................   25 1/2   19 3/4
  Third Quarter.............................................   24 11/16 19 7/8
  Fourth Quarter............................................   24 1/2   18 1/2
</TABLE>

     As of March 16, 1998, there were 21,229,405 shares of Common Stock
outstanding held by 171 holders of record and the Company believes there were
approximately 6,200 beneficial owners of the Common Stock.

     The Company has never paid a cash dividend on the Common Stock. The Company
currently intends to retain earnings to finance the growth and development of
its business and does not anticipate paying any cash dividends on the Common
Stock in the foreseeable future. Any future change in the Company's dividend
policy will be made at the discretion of the Company's Board of Directors in
light of the financial condition, capital requirements, earnings and prospects
of the Company and any restrictions under credit agreements, as well as other
factors the Board of Directors may deem relevant. The Company's Credit Facility
permits the payment of dividends only to the extent the Company maintains a
specified minimum net worth (approximately $201.1 million as of December 31,
1997) and certain financial ratios. The Company's net worth as of December 31,
1997 was approximately $226.5 million.

                                       10
<PAGE>   13

ITEM 6. SELECTED FINANCIAL DATA

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------
                                                 1997       1996       1995       1994     1993(1)
                                               --------   --------   --------   --------   -------
                                                      (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                            <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
Net revenues:
  Funeral....................................  $ 87,160   $ 54,854   $ 36,261   $ 27,382   $21,432
  Cemetery...................................    46,239     35,035     27,740     21,919       847
  Other......................................     1,674      2,085         --         --        --
                                               --------   --------   --------   --------   -------
          Total net revenues.................   135,073     91,974     64,001     49,301    22,279
                                               --------   --------   --------   --------   -------
Gross profit:
  Funeral....................................    22,330     15,050      8,819      7,580     6,118
  Cemetery...................................    14,580     10,137      8,477      6,157        47
  Other......................................       750        950         --         --        --
                                               --------   --------   --------   --------   -------
          Total gross profit.................    37,660     26,137     17,296     13,737     6,165
General and administrative expenses..........     7,560      5,848      4,782      3,885     1,521
                                               --------   --------   --------   --------   -------
Income from operations.......................    30,100     20,289     12,514      9,852     4,644
Interest expense.............................     6,331      2,374      2,207      3,178       701
                                               --------   --------   --------   --------   -------
Income before income taxes and extraordinary
  item.......................................    23,769     17,915     10,307      6,674     3,943
Provision for income taxes...................     9,070      7,589      4,071      2,728     1,388
Extraordinary item, net......................        --         --         --       (198)       --
                                               --------   --------   --------   --------   -------
Net income...................................    14,699     10,326      6,236      3,748     2,555
Preferred stock dividends....................        --         --         --         --     1,563
                                               --------   --------   --------   --------   -------
Net income attributable to common stock......  $ 14,699   $ 10,326   $  6,236   $  3,748   $   992
                                               ========   ========   ========   ========   =======
Earnings per share(2):
  Basic:
     Continuing operations...................  $   0.71   $   0.58   $   0.42   $   0.40   $  1.58
     Extraordinary item......................        --         --         --      (0.02)       --
                                               --------   --------   --------   --------   -------
     Net income..............................  $   0.71   $   0.58   $   0.42   $   0.38   $  1.58
                                               ========   ========   ========   ========   =======
     Weighted average number of common shares
       outstanding...........................    20,597     17,781     14,699      9,854       628
                                               ========   ========   ========   ========   =======
  Assuming full dilution:
     Continuing operations...................  $   0.70   $   0.57   $   0.42   $   0.39   $  0.15
     Extraordinary item......................        --         --         --      (0.02)       --
                                               --------   --------   --------   --------   -------
     Net income..............................  $   0.70   $   0.57   $   0.42   $   0.37   $  0.15
                                               ========   ========   ========   ========   =======
     Weighted average number of common and
       equivalent shares outstanding.........    20,952     18,068     14,835     10,002     6,613
                                               ========   ========   ========   ========   =======
</TABLE>

                                       11
<PAGE>   14

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------
                                                 1997       1996       1995       1994      1993
                                               --------   --------   --------   --------   -------
                                                                 (IN THOUSANDS)
<S>                                            <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
  Working capital............................  $ 17,666   $ 19,179   $  9,093   $  4,495   $ 5,973
  Preneed funeral contracts..................   235,891    156,028    102,889     72,318    48,817
  Total assets...............................   717,700    443,891    305,159    211,307    83,095
  Deferred preneed funeral contract
     revenues................................   242,185    161,153    107,969     76,447    51,640
  Long-term debt, net of current
     maturities..............................   171,303     49,197     54,518      4,037     8,244
  Redeemable preferred stock(3)..............        --         --         --         --    20,844
  Total stockholders' equity (deficit).......   226,532    177,464     91,665     84,083      (503)
</TABLE>

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31,
                                               ---------------------------------------------------
                                                 1997       1996       1995       1994      1993
                                               --------   --------   --------   --------   -------
<S>                                            <C>        <C>        <C>        <C>        <C>
OPERATING DATA:
Funeral Operations:
  Funeral homes in operation at end of
     period..................................       259        178        119         95        79
  Funeral services performed.................    19,486     12,483      8,332      6,181     5,127
  Preneed funeral contracts sold or obtained
     through acquisitions....................    25,471     16,176     12,415      6,397     2,124
  Backlog of preneed funeral contracts at end
     of period...............................    67,369     45,978     32,199     21,084    16,103
Cemetery Operations:
  Cemeteries in operation at end of period...        76         64         61         48         3
  Interments performed.......................    11,053      9,137      7,080      6,283       293
</TABLE>

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

(1) The Company's financial and operating data as of and for the year ended
    December 31, 1993 does not reflect the operations of MLI/The Loftis
    Corporation ("MLI"), which were acquired effective January 1, 1994. As a
    result of the MLI acquisition and certain other factors, the Company
    believes that its results of operations for 1993 are not necessarily
    comparable with its results of operations for subsequent periods.

(2) Basic earnings per share is based on the weighted average number of common
    shares issued and outstanding during the period. Diluted earnings per share
    is based on the weighted average number of common and equivalent shares
    outstanding during the period which takes into consideration (i) for 1997,
    1996 and 1995, the dilutive effect of stock options and restricted stock
    issued under the Company's Incentive Plan based on the treasury stock
    method, (ii) for 1994 and 1993, the issuance of 228,372 shares of Common
    Stock at a price of approximately $6.13 per share in June 1994 reflected
    under the treasury stock method prior to issuance and (iii) for 1993, the
    dilutive effect of a warrant exercisable for common shares held by SCI. The
    redeemable preferred stock dividends are deducted from 1993 net income for
    purposes of calculating earnings per share. In February 1998, the Company
    issued $143.8 million aggregate principal amount of convertible subordinated
    debentures that are convertible into 5,306,386 shares of Common Stock. On a
    pro forma basis, the assumed conversion of these debentures would have an
    antidilutive effect on the Company's diluted earnings per share for all
    periods presented. The weighted average number of common and equivalent
    shares outstanding reflects a 579-for-one stock split in June 1994 and a
    3-for-2 stock split in October 1996.

(3) Effective January 1, 1994, the Company's redeemable preferred stock and a
    warrant exercisable for common shares of the Company held by SCI were
    exchanged for 5,896,860 shares of Common Stock.

                                       12
<PAGE>   15

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

INTRODUCTION

     General. The Company commenced operations in May 1990 through the
acquisition of 71 funeral homes and 3 cemeteries from SCI. Although the Company
acquired 23 additional funeral homes from May 1990 through December 1993 that
complemented existing properties, management's primary focus during this period
was on improving the operating efficiency and profitability of the properties
acquired from SCI. Over this period, the Company disposed of or consolidated 15
funeral homes that, in general, did not meet its growth or financial performance
criteria.

     Beginning in 1994, the Company adopted a growth strategy which emphasizes
an aggressive acquisition program and the implementation of proven
revenue-enhancement and cost-containment programs. As part of this growth
strategy, the Company has significantly expanded its corporate development
capabilities from only one full-time professional to a full-time professional
corporate development staff headed by a senior corporate executive who has
substantial deathcare industry experience. The corporate development staff has
full-time responsibility for identifying, evaluating, negotiating and closing
acquisitions of funeral homes and cemeteries. With the Company's experienced
corporate development staff and management team, the Company believes it is well
positioned to take advantage of the continuing consolidation trend in the
deathcare industry. The Company's future results of operations will depend in
large part on the Company's ability to continue to make acquisitions on
attractive terms and to successfully integrate and manage the acquired
properties.

     The following table sets forth certain income statement data for the
Company in dollar amounts as well as percentages of net revenues for the periods
presented.

<TABLE>
<CAPTION>
                                              YEAR ENDED DECEMBER 31,      YEAR ENDED DECEMBER 31,
                                            ----------------------------   -----------------------
                                              1997      1996      1995     1997     1996     1995
                                            --------   -------   -------   -----    -----    -----
                                                   (IN THOUSANDS)
<S>                                         <C>        <C>       <C>       <C>      <C>      <C>
Net revenues..............................  $135,073   $91,974   $64,001   100.0%   100.0%   100.0%
                                            ========   =======   =======   =====    =====    =====
Gross profit..............................  $ 37,660   $26,137   $17,296    27.9%    28.4%    27.0%
General and administrative expenses.......     7,560     5,848     4,782     5.6      6.4      7.5
                                            --------   -------   -------   -----    -----    -----
Income from operations....................    30,100    20,289    12,514    22.3     22.0     19.5
Interest expense..........................     6,331     2,374     2,207     4.7      2.6      3.4
Provision for income taxes................     9,070     7,589     4,071     6.7      8.2      6.4
                                            --------   -------   -------   -----    -----    -----
          Net income......................  $ 14,699   $10,326   $ 6,236    10.9%    11.2%     9.7%
                                            ========   =======   =======   =====    =====    =====
</TABLE>

     The Company's net revenues increased by 46.9% to $135.1 million in 1997
from $92.0 million in 1996 and income from operations increased by 48.4% to
$30.1 million in 1997 from $20.3 million in 1996. Income from operations
increased to 22.3% of net revenues in 1997 from 22.0% in 1996. The increase in
income from operations as a percentage of net revenues was primarily
attributable to increased economies of scale as the Company's general and
administrative expenses are spread over a larger revenue base, offset in part by
the increased proportion of acquired operations to the Company's total operating
results in 1997 over 1996. Depending on numerous factors including the size of
an acquired operation, the proximity to other Company operations and market
sensitivity, it may take 12 to 36 months before margin improvement is realized
at an acquired operation as a result of the new policies and procedures
implemented by the Company. The increase in interest expense to $6.3 million in
1997 from $2.4 million in 1996 was primarily attributable to higher levels of
acquisition indebtedness.

     The Company's net revenues increased by 43.7% to $92.0 million in 1996 from
$64.0 million in 1995 and income from operations increased by 62.1% to $20.3
million in 1996 from $12.5 million in 1995. Income from operations increased to
22.0% of net revenues in 1996 from 19.5% of net revenues in 1995. The increase
in income from operations as a percentage of net revenues was primarily
attributable to (i) increases in revenues and improved operational efficiencies
at funeral home operations, (ii) the buyout of several long-term licensing and
lease agreements for $2.1 million which generated a gross profit of $1.0 million
in 1996, and (iii) economies of scale realized by the Company as general and
administrative expenses were spread over a

                                       13
<PAGE>   16

larger revenue base. The increase in interest expense to $2.4 million in 1996
from $2.2 million in 1995 was primarily attributable to higher average levels of
acquisition indebtedness partially offset by the repayment of the Credit
Facility with proceeds from the Company's May 1996 equity offering.

     Funeral Home Operations. The following table sets forth the number of
funeral homes operated by the Company for the periods presented.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1997     1996     1995
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Funeral homes operated at beginning of period...............   178      119       95
Acquisitions................................................    84       59       27
Dispositions and consolidations.............................    (3)      --       (3)
                                                               ---      ---      ---
Funeral homes operated at end of period.....................   259      178      119
                                                               ===      ===      ===
</TABLE>

     The Company's funeral home revenues are generated primarily through the
sale of funeral services and merchandise. Proceeds from the sale of funeral
services at the time of need are recorded as revenues in the period of sale.
Proceeds from the sale of preneed funeral contracts are not recognized until the
funeral service is performed. Preneed funeral contracts are funded by the
customer through either lump sum or installment payments placed in trust or
through the purchase of a life insurance policy. Balances in trust accounts and
proceeds from insurance policies are made available to the Company at the time
the related funeral services are performed. Trust principal amounts and the cash
value of insurance policies are refunded to customers upon cancellation of
contracts where required by state law. Preneed funeral trust earnings and
increasing benefits under insurance policies are accrued and deferred until the
related funeral services are performed. Earnings on trust funds increase the
amount of cash to be received by the Company at the time the funeral service is
performed and historically have allowed the Company to adequately cover the
inflationary increase in costs of funeral services. See "Business -- Trust
Funds."

     Commissions and direct marketing costs related to preneed funeral contracts
are also deferred and recognized over 12 years, which approximates the expected
timing of the performance of services related to preneed contracts. All
principal, earnings, receivables and deferred costs associated with price
guaranteed preneed funeral contracts are included in the Company's consolidated
balance sheet as long-term assets with a corresponding credit to deferred
preneed funeral contract revenues.

     Aggressive preneed funeral sales are frequently associated with highly
competitive market areas or are utilized to rapidly build market share. Because
of the significant market share of most of the Company's funeral homes in their
areas of operation, the Company does not extensively market preneed funeral
contracts. The Company does, however, market preneed funeral contracts in
specific markets where it is necessary to build current and future market share
or in response to sales campaigns launched by competitors, but typically does
not sell such preneed funeral contracts at a discount to current at need sales
prices.

     Many of the Company's acquired funeral homes have provided high quality
service to client families for many decades. The resulting client loyalty often
represents a substantial portion of the value of a funeral business. The excess
of purchase price over the fair value of identifiable net tangible assets
acquired in transactions accounted for as a purchase are included in names and
reputations and generally are amortized on a straight-line basis over 40 years.

     Cemetery Operations. The following table sets forth the number of
cemeteries operated by the Company for the periods presented.

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              -----------------------
                                                              1997     1996     1995
                                                              -----    -----    -----
<S>                                                           <C>      <C>      <C>
Cemeteries operated at beginning of period..................   64       61       48
Acquisitions................................................   12        3       13
                                                               --       --       --
Cemeteries operated at end of period........................   76       64       61
                                                               ==       ==       ==
</TABLE>

                                       14
<PAGE>   17

     The Company's cemetery net revenues are generated primarily through the
sale of cemetery interment rights, interment services and related merchandise
which are sold either on a preneed or at need basis. Approximately 72.0%, 68.5%
and 67.3% of the Company's cemetery net revenues for the years ended December
31, 1997, 1996 and 1995, respectively, are attributable to sales made prior to
the time of need. Revenues from preneed cemetery sales are recognized when the
contract is signed, with concurrent recognition of related costs. The Company
typically receives payment of at least 5% of the sales price at the time the
contract is signed. Allowances for customer cancellations and refunds are
accrued at the time of sale based upon historical experience. Costs of cemetery
merchandise are accrued at the time of sale based upon actual costs incurred or
estimated future costs.

     Preneed cemetery sales are usually financed by the Company through
installment sale contracts bearing interest at rates currently ranging from
12.5% to 14.5% per annum. Finance charges are recognized as cemetery revenues
over the terms of the related installment receivables.

     Generally, a portion of the proceeds from the sale of cemetery interment
rights is deposited into perpetual care trusts or endowment funds in accordance
with state law. Principal balances in these trusts (including, in some states,
realized and unrealized capital gains) must generally be held in perpetuity.
Accordingly, the trust fund corpus is not reflected in the Company's
consolidated financial statements. The Company recognizes and withdraws
currently all dividend and interest income earned and, where permitted, any
capital gains realized by the perpetual care trusts to provide for the
maintenance of cemetery properties.

     Additionally, pursuant to state law, a portion of the proceeds from the
sale of preneed cemetery merchandise may also be required to be paid into
cemetery merchandise trusts. Principal held in these trusts is made available to
the Company upon delivery of the merchandise or upon cancellation of the
contract by the customer after three days of the date of sale. These amounts are
reflected in long-term receivables in the Company's consolidated balance sheet.
The Company recognizes income on these trusts when earned.

RESULTS OF OPERATIONS

     The following is a discussion of the Company's results of operations for
the three years in the period ended December 31, 1997. For purposes of this
discussion, funeral homes and cemeteries owned and operated throughout each
period being compared are referred to as "existing operations." Correspondingly,
operations acquired or opened during either period being compared are referred
to as "acquired operations," and operations disposed of during either period
being compared are referred to as "disposed operations."

     YEAR ENDED DECEMBER 31, 1997 COMPARED TO YEAR ENDED DECEMBER 31,
1996. Total net revenues for the year ended December 31, 1997 increased 46.9% to
$135.1 million from $92.0 million for the year ended December 31, 1996. The
increase in net revenues reflects a $38.4 million increase in net revenues
attributable to acquired operations and a $5.9 million or 7.6% increase in net
revenues from existing operations. The increase in revenues from existing
operations was attributable primarily to increases in preneed sales at the
Company's cemetery operations combined with slight increases in average funeral
sales prices, partially offset by slightly lower funeral volumes. Included in
net revenues for the year ended December 31, 1997 is $1.7 million related to the
sale of one of the Company's funeral homes in exchange for a cemetery and
$250,000 in cash. Included in net revenues for the year ended December 31, 1996
is $2.1 million resulting from the Company's sale of several long-term licensing
and lease agreements related to three funeral homes which had previously been
operated by a third party.

     Gross profit for the year ended December 31, 1997 increased 44.1% to $37.7
million from $26.1 million for the year ended December 31, 1996. The increase in
gross profit is due primarily to an $8.6 million increase attributable to
acquired operations and a $3.4 million or 14.6% increase from existing
operations. The increase in gross profit from existing operations was primarily
attributable to increased preneed sales along with improved operational
efficiencies at the Company's cemetery operations.

                                       15
<PAGE>   18

     Funeral Home Segment. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral home
operations during the years ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          DECEMBER 31,             CHANGE
                                                       ------------------    ------------------
                                                        1997       1996      AMOUNT     PERCENT
                                                       -------    -------    -------    -------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>        <C>
Net revenues:
  Existing operations................................  $45,786    $44,714    $ 1,072       2.4%
  Acquired operations................................   41,374      9,273     32,101         *
  Disposed operations................................       --        867       (867)        *
                                                       -------    -------    -------
          Total funeral net revenues.................  $87,160    $54,854    $32,306      58.9%
                                                       =======    =======    =======
Gross profit:
  Existing operations................................  $13,325    $13,003    $   322       2.5%
  Acquired operations................................    9,005      1,862      7,143         *
  Disposed operations................................       --        185       (185)        *
                                                       -------    -------    -------
          Total funeral gross profit.................  $22,330    $15,050    $ 7,280      48.4%
                                                       =======    =======    =======
</TABLE>

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

* Not meaningful

     Total funeral net revenues for the year ended December 31, 1997 increased
58.9% to $87.2 million from $54.9 million for the year ended December 31, 1996,
due primarily to a $32.1 million increase attributable to acquired operations.
Revenues from existing operations increased by 2.4% from the prior year due
primarily to a 3.4% increase in the average revenue per funeral service
performed, offset in part by a 0.8% decrease in the number of funeral services
performed.

     Total funeral gross profit for the year ended December 31, 1997 increased
48.4% to $22.3 million from $15.1 million for the year ended December 31, 1996.
Excluding the effects of the disposed funeral home operations, funeral gross
margin decreased to 25.6% from 27.5% in the prior year due primarily to acquired
operations, which generally have lower gross margins as compared to the
Company's existing operations. Funeral gross margin at existing operations was
29.1% for both years as improvements in the Company's pricing and merchandising
strategies offset the decline in volume discussed above. Gross profit at
acquired operations increased to 21.8% from 20.1% in 1996, reflecting price
improvements and cost containment programs implemented by the Company.

     Cemetery Segment. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations during the years ended December 31, 1997 and 1996.

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          DECEMBER 31,             CHANGE
                                                       ------------------    ------------------
                                                        1997       1996      AMOUNT     PERCENT
                                                       -------    -------    -------    -------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>        <C>
Net revenues:
  Existing operations................................  $38,619    $33,762    $ 4,857     14.4%
  Acquired operations................................    7,620      1,273      6,347         *
                                                       -------    -------    -------
          Total cemetery net revenues................  $46,239    $35,035    $11,204     32.0%
                                                       =======    =======    =======
Gross profit:
  Existing operations................................  $13,005    $ 9,972    $ 3,033     30.4%
  Acquired operations................................    1,575        165      1,410         *
                                                       -------    -------    -------
          Total cemetery gross profit................  $14,580    $10,137    $ 4,443     43.8%
                                                       =======    =======    =======
</TABLE>

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

* Not meaningful
                                       16
<PAGE>   19

     Total cemetery net revenues for the year ended December 31, 1997 increased
32.0% to $46.2 million from $35.0 million for the year ended December 31, 1996,
due to increases attributable to acquired operations along with significant
increases from existing operations. Revenues from existing operations increased
by 14.4% from the prior year due primarily to the full year results of an
aggressive preneed marketing program initiated in the fourth quarter of 1996,
along with improved investment performance from the Company's merchandise
trusts.

     Total cemetery gross profit for the year ended December 31, 1997 increased
43.8% to $14.6 million from $10.1 million in 1996. Cemetery gross margin at
existing operations increased to 33.7% from 29.5% in 1996, reflecting improved
operational efficiencies and operating leverage in the Company's existing
cemetery operations. Cemetery gross margin at acquired operations improved to
20.7% from 13.0% in 1996, due to improved operating efficiencies realized as a
result of the implementation of the Company's preneed sales marketing and cost
containment programs.

     General and administrative expenses for the year ended December 31, 1997
increased $1.7 million or 29.3% over the year ended December 31, 1996. This
increase resulted primarily from increased personnel costs associated with the
expansion of the Company's corporate infrastructure necessary to support a
higher rate of growth. Excluding the effects of nonrecurring items such as the
revenues recorded on the asset exchange and sale of licensing and lease
agreements discussed above, general and administrative expenses as a percentage
of net revenues from continuing operations decreased to 5.7% in 1997 from 6.5%
in the prior year as general and administrative expenses are being spread over a
larger revenue base.

     Interest expense for the year ended December 31, 1997 increased $3.9
million to $6.3 million from $2.4 million for the year ended December 31, 1996,
due primarily to significantly higher debt levels as average indebtedness
outstanding in 1997 increased to $110.9 million from $52.4 million for 1996.
This increase in average indebtedness outstanding is a result of increased
acquisition activity during 1997 along with the payoff in 1996 of $52.7 million
borrowed under the Company's Credit Facility with a portion of the proceeds of
an equity offering in May 1996. Partially offsetting this increase was the
paydown of approximately $13.0 million borrowed under the Company's Credit
Facility with a portion of the proceeds of an equity offering in February 1997.
Interest income of approximately $41,000 and $276,000 related to the temporary
investment of equity offering proceeds has been netted against interest expense
for the years ended December 31, 1997 and 1996, respectively.

     The Company's effective tax rate for the year ended December 31, 1997
decreased to 38.2% from 42.4% in 1996. The Company's effective tax rate for 1997
is lower than its estimated effective tax rate of 39%, due primarily to a
reduction to its income tax provision in the third quarter of 1997 of $200,000,
representing the difference between the Company's estimated and actual tax
liability for the year ended December 31, 1996. The 1996 tax provision includes
a one-time charge of $565,000 to revalue the Company's deferred tax liability
accounts to appropriately reflect an increase in the Company's statutory federal
income tax rate from 34% to 35% as the Company exceeded the taxable income
threshold requiring the higher tax rate during 1996. The Company expects its
effective tax rate for 1998 to approximate 39%.

     YEAR ENDED DECEMBER 31, 1996 COMPARED TO YEAR ENDED DECEMBER 31,
1995. Total net revenues for the year ended December 31, 1996 increased 43.7% or
$28.0 million over 1995. The increase in net revenues reflects a $23.3 million
increase in net revenues attributable to acquired operations and a $2.6 million,
or 4.7% increase in net revenues from existing operations. The substantial
increase in net revenues from acquired operations is due primarily to the full
period results of the 27 funeral homes and 13 cemeteries acquired in 1995 and
the partial period results of the 59 funeral homes and three cemeteries acquired
in 1996. The remainder of the increase in net revenues of $2.1 million results
from the buyout of several long-term licensing and lease agreements related to
three funeral homes which had been previously operated by a third party since
January 1993.

     Gross profit for the year ended December 31, 1996 increased 51.1% to $26.1
million from $17.3 million for the year ended December 31, 1995. The increase in
gross profit reflects a $6.1 million increase attributable to acquired
operations and $1.7 million, or 10.7% increase from existing operations. The
increase in gross profit from existing operations was attributable primarily to
increased revenues at both funeral home and cemetery operations as well as
improved operational efficiencies at funeral home operations. The remainder of
the
                                       17
<PAGE>   20

increase in gross profit of $1.0 million relates to the gain recognized on the
buyout of the long-term licensing and lease agreements.

     Funeral Home Segment. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its funeral home
operations during the year ended December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                           YEAR ENDED
                                                          DECEMBER 31,             CHANGE
                                                       ------------------    ------------------
                                                        1996       1995      AMOUNT     PERCENT
                                                       -------    -------    -------    -------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                    <C>        <C>        <C>        <C>
Net revenues:
  Existing operations................................  $32,212    $30,630    $ 1,582      5.2%
  Acquired operations................................   22,642      5,631     17,011         *
                                                       -------    -------    -------
          Total funeral net revenues.................  $54,854    $36,261    $18,593     51.3%
                                                       =======    =======    =======
Gross profit:
  Existing operations................................  $ 9,602    $ 7,758    $ 1,844     23.8%
  Acquired operations................................    5,448      1,061      4,387         *
                                                       -------    -------    -------
          Total funeral gross profit.................  $15,050    $ 8,819    $ 6,231     70.7%
                                                       =======    =======    =======
</TABLE>

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

* Not meaningful.

     Total funeral net revenues for the year ended December 31, 1996 increased
51.3% to $54.9 million from $36.3 million for the year ended December 31, 1995.
The increase in funeral net revenues reflects a $17.0 million increase from
acquired operations and a $1.6 million, or 5.2% increase from existing
operations. The increase in revenues from existing operations is primarily
attributable to a 5.6% increase in the average revenue per regular funeral
service performed partially offset by a decrease of approximately 0.8% in the
number of regular funeral services performed.

     Total funeral gross profit for the year ended December 31, 1996 increased
70.7% to $15.1 million from $8.8 million for year ended December 31, 1995. The
increase in funeral gross profit reflects a $4.4 million increase from acquired
operations and a $1.8 million, or 23.8% increase from existing operations.
Funeral gross margin improved to 27.4% from 24.3%. Funeral gross margin at
existing operations improved to 29.8% from 25.3% primarily as a result of sales
price increases exceeding the cost increases in merchandising and salaries as
well as maximizing the leverage off of allocable fixed operating costs. Funeral
gross margin at acquired operations improved to 24.1% from 18.8% primarily due
to volume improvement, profitability enhancements and cost efficiencies
beginning to be implemented.

     Cemetery Segment. The following table sets forth certain information
regarding the net revenues and gross profit of the Company from its cemetery
operations during the year ended December 31, 1996 and 1995.

<TABLE>
<CAPTION>
                                                            YEAR ENDED
                                                           DECEMBER 31,            CHANGE
                                                        ------------------    -----------------
                                                         1996       1995      AMOUNT    PERCENT
                                                        -------    -------    ------    -------
                                                                (DOLLARS IN THOUSANDS)
<S>                                                     <C>        <C>        <C>       <C>
Net revenues:
  Existing operations.................................  $26,811    $25,750    $1,061      4.1%
  Acquired operations.................................    8,224      1,990     6,234         *
                                                        -------    -------    ------
          Total cemetery net revenues.................  $35,035    $27,740    $7,295     26.3%
                                                        =======    =======    ======
Gross profit:
  Existing operations.................................  $ 8,192    $ 8,322    $ (130)    (1.6)%
  Acquired operations.................................    1,945        155     1,790         *
                                                        -------    -------    ------
          Total cemetery gross profit.................  $10,137    $ 8,477    $1,660     19.6%
                                                        =======    =======    ======
</TABLE>

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

* Not meaningful.

                                       18
<PAGE>   21

     Total cemetery net revenues for the year ended December 31, 1996 increased
26.3% to $35.0 million from $27.7 million for the year ended December 31, 1995.
The increase in cemetery net revenues reflects a $6.2 million increase from
acquired operations and a $1.1 million, or 4.1%, increase from existing
operations. The increase in net revenues from existing operations resulted
primarily from an increase in preneed sales and income recognized on earnings
from merchandise trusts partially offset by a 1.7% decrease in at need sales.
The preneed sales increased as a result of aggressive marketing that occurred
primarily in the fourth quarter. The merchandise trust earnings increased as a
result of higher average balances in such trusts as well as improved investment
performance. The decrease in at need revenues was a result of slightly lower
interment volume with no price increases.

     Total cemetery gross profit for the year ended December 31, 1996 increased
19.6% to $10.1 million from $8.5 million for the year ended December 31, 1995.
The increase reflects a $1.8 million increase from acquired operations partially
offset by a $130,000, or 1.6%, decrease from existing operations. Cemetery gross
margin at existing operations decreased to 30.6% from 32.3%, primarily as a
result of higher selling and fixed operating costs as a percentage of revenue
partially offset by lower maintenance expenses as a percentage of net revenues.
Selling and fixed operating costs as a percentage of net revenues increased
primarily as a result of inefficiencies incurred in connection with the
consolidation of the Company's cemetery corporate operations from Georgia to
Texas as well as the cemetery management transition which occurred in the middle
of 1996. The decrease in maintenance expense as a percentage of net revenues
from 1995 was primarily related to the increase in earnings recognized from
perpetual care trusts. Earnings recognized from perpetual care trusts are used
to defray maintenance and upkeep of the cemetery grounds. Although investments
in perpetual care trusts are primarily conservative interest bearing
instruments, earnings recognized from perpetual care trusts increased due to
improved investment returns as well as to higher average balances in such trusts
as compared to 1995. Cemetery gross margin at acquired operations was 23.7%
primarily because they had not been operated by the Company long enough to fully
implement its preneed marketing programs to enable leveraging off of the
maintenance and fixed operating costs which generally start being incurred
immediately after the acquisition.

     General and administrative expenses for the year ended December 31, 1996
increased $1.1 million, or 22.3% over the year ended December 31, 1995. This
increase resulted primarily from increased personnel costs as well as
professional fees and insurance necessary to support a higher rate of growth
and, to a lesser extent, increased facility and travel expense as a result of
consolidating the cemetery corporate operations from Georgia to the Company's
corporate headquarters in Lufkin, Texas. Additionally, general and
administrative expenses for the year ended December 31, 1996 include $300,000 of
legal fees incurred in connection with an action brought against the Company by
Loewen Group International, Inc. (which has since been dismissed) offset by a
$600,000 gain related to insurance proceeds received on a funeral home facility
which was destroyed by fire. General and administrative expenses as a percentage
of net revenues, excluding the effects of the gain on the aforementioned buyout,
decreased to 6.5% in the year ended December 31, 1996 from 7.5% in the
corresponding period in 1995, reflecting economies of scale realized by the
Company as expenses are spread over a larger revenue base.

     Interest expense for the year ended December 31, 1996 increased $167,000,
or 7.6% from the year ended December 31, 1995. The increase was the result of
overall higher average levels of indebtedness partially offset by a lower
average interest rate on borrowed funds in 1996 as compared to 1995. Although
the average levels of indebtedness for the last half of 1996 were actually lower
than the comparable period in 1995 as a result of the repayment of all amounts
borrowed under the Credit Facility from the proceeds of the May 1996 equity
offering, it did not completely offset the much higher average levels of
indebtedness in the first half of 1996 as compared to the comparable period in
1995. Interest income of approximately $276,000 related to temporary investment
of the May 1996 equity offering proceeds has been netted against interest
expense.

     The Company's effective tax rate for the year ended December 31, 1996 was
42.4% compared to 39.5% for the year ended in December 31, 1995. The higher rate
in 1996 was due primarily to an increase in the Company's statutory federal
income tax rate from 34% to 35% as the Company exceeded the taxable income
threshold requiring the higher tax rate during 1996, and a one-time charge of
$565,000 to revalue the

                                       19
<PAGE>   22

Company's deferred tax liability accounts to appropriately reflect the higher
statutory rate. This was partially reduced by the utilization of state net
operating loss carryforwards.

LIQUIDITY AND CAPITAL RESOURCES

     The Company has historically relied on cash flow from operations and third
party borrowings to finance its operations and on third party borrowings, the
issuance of notes payable and, in certain situations, the issuance of shares of
Common Stock to sellers of funeral homes and cemeteries to finance its
acquisition program. Recently acquired funeral homes typically generate positive
cash flow immediately following acquisition. In contrast, recently acquired
cemeteries typically generate negative cash flow during an approximately three
to nine month start-up period following the introduction of an aggressive
preneed cemetery sales effort, although in some cases this period has exceeded
nine months. This negative cash flow is typically offset by positive cash flow
from mature cemetery operations.

     Cash and cash equivalents totaled $8.0 million at December 31, 1997,
representing a decrease of $4.6 million from December 31, 1996. For the year
ended December 31, 1997, net cash flow provided from operating activities was
approximately $8.0 million, cash used in investing activities totaled
approximately $29.8 million and cash provided from financing activities amounted
to approximately $17.1 million. Significant components of cash flow generated
from operating activities include net income adjusted for non-cash items
partially offset by an increase in receivables of $20.0 million primarily
attributable to a 33.3% increase in preneed cemetery sales which are usually
financed on an installment basis over 36 months. Significant components of cash
used in investing activities included capital expenditures of $12.5 million
related to, among other things, additions and improvements at several funeral
home facilities, the acquisition of professional vehicles and maintenance
equipment and upgrades to computer systems and peripheral equipment.
Additionally, the Company utilized approximately $17.5 million of internal
funds, including funds drawn on the Credit Facility at December 31, 1996, to
consummate funeral home and cemetery acquisitions during 1997. Significant
components of cash provided from financing activities included (i) $22.1 million
of net proceeds received in February 1997 in connection with the sale of the
Company's Common Stock and the use of a portion of these proceeds to pay $13.0
million outstanding under the Company's Credit Facility; (ii) borrowings
totaling approximately $18.9 million which were used for general corporate
purposes including, among other things, tax payments, long-term supply
agreements and refinancings of certain notes payable issued in connection with
the Company's acquisitions; offset by (iii) lump sum payments totaling
approximately $11.4 million to extinguish certain seller financed notes and
normal scheduled debt payments.

     Long-term debt, including current maturities, at December 31, 1997 totaled
$172.2 million as compared to $49.7 million at December 31, 1996. The increase
was principally attributable to increased acquisition activity during 1997,
partially offset by the payoff of $13.0 million outstanding under the Credit
Facility with a portion of the proceeds from the issuance of Common Stock in
February 1997, as described below. Due to increases in recent and projected
acquisition activity, the Company increased its borrowing capacity under the
Credit Facility in September 1997 to $225 million from $100 million. Long-term
debt at December 31, 1997 consisted of $156.7 million drawn under the Credit
Facility and $15.5 million owed under various notes payable to sellers of
funeral homes and cemeteries. As of December 31, 1997, the Credit Facility also
supported letters of credit totaling $3.2 million related to one of the
Company's 1996 acquisitions. The Company obtained a release from these letters
of credit in the first quarter of 1998 and the Company currently has no letters
of credit outstanding. At December 31, 1997, $65.1 million was available for
borrowings under the Credit Facility. Any amounts repaid under the Credit
Facility, including amounts previously supporting the letters of credit
outstanding at December 31, 1997, are available for future borrowings under the
terms of the Credit Facility.

     Borrowings under the Credit Facility bear interest, at the Company's
option, at either (i) the prime rate or (ii) the London Interbank Offered Rate
plus an applicable margin, depending on the Company's Leverage Ratio, as
defined. The weighted average interest rates on amounts borrowed under the
Credit Facility were 6.83% and 6.39% at December 31, 1997 and 1996,
respectively. In addition, the Company pays commitment fees on unused funds
depending on the Company's Leverage Ratio. The Tranche A commitments under the
Credit Facility provide for $150 million of borrowings outstanding at any one
time expiring
                                       20
<PAGE>   23

September 2, 2002. The Tranche B commitments under the Credit Facility provide
for $75 million of borrowings outstanding at any one time expiring September 1,
1998, subject to annual renewal options. The Credit Facility contains customary
restrictive covenants, permits the payment of dividends only to the extent the
Company maintains a specified net worth and requires the Company to maintain
certain financial ratios. The Credit Facility is guaranteed by substantially all
of the Company's subsidiaries and is collateralized by a pledge of the stock of
certain of the Company's subsidiaries.

     In February 1997, the Company received net proceeds of approximately $22.1
million (after selling commissions and related expenses) in connection with the
issuance and sale by the Company of 1,199,178 shares of Common Stock at $19.25
per share pursuant to the underwriters' exercise of an overallotment option
granted by the Company in the registration and sale of shares of Common Stock
owned by SCI.

     Subsequent to December 31, 1997, the Company completed an underwritten
private placement of $143.8 million aggregate principal amount of 4.5%
convertible subordinated debentures (the "Debentures"), including approximately
$18.8 million related to the exercise of the over-allotment option granted by
the Company to the underwriters. The Debentures mature on December 31, 2004, are
convertible into shares of the Company's Common Stock at a conversion price of
$27.09 per share, and may not be redeemed by the Company prior to February 26,
2001. The net proceeds from the private placement totaling approximately $139.8
million (after selling commissions) were used to pay down the Credit Facility.
The selling commissions and related expenses totaling approximately $4.6 million
have been deferred and will be amortized ratably over the term of the
Debentures.

     The Company currently expects to acquire funeral homes and cemeteries for
purchase prices aggregating approximately $150 to $160 million in 1998. The
Company anticipates that the consideration for future acquisitions will consist
of a combination of cash, long-term notes, the assumption of existing
indebtedness of the acquired businesses, and, in some cases, the issuance of
additional shares of the Company's Common Stock. As of December 31, 1997,
approximately 661,000 shares of Common Stock remained available for issuance
pursuant to the Company's acquisition "shelf" registration statement. The
Company anticipates making routine capital expenditures of approximately $11
million in 1998. In addition, the Company anticipates spending approximately $20
million over the next 12 to 18 months for major construction and development
projects, including the construction of six new funeral homes, three of which
will be built on existing Company-owned cemetery property.

     Management believes that cash flow from operations and the borrowing
capacity available under the Credit Facility as a result of the repayment of
such indebtedness with the net proceeds of the Debentures should be sufficient
to meet its anticipated capital expenditures and other operating requirements
and to substantially fund acquisitions through 1998. The Company continually
evaluates alternatives, including additional debt or equity financing, to ensure
adequate funding for its operations, including planned capital expenditures and
projected acquisitions. However, because future cash flows and the availability
of financing at terms favorable to the Company are subject to a number of
variables, such as the number, size and rate of acquisitions made by the
Company, there can be no assurance that the Company's capital resources will be
sufficient to fund planned future levels of capital expenditures and
acquisitions. Additional debt and equity financings may be required in
connection with future acquisitions. The availability of these capital sources
will depend on prevailing market conditions and interest rates and the
then-existing financial condition of the Company.

YEAR 2000

     The year 2000 issue is the result of computer programs using two digits to
define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system which is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.

     As part of the Company's continuing program to update its information
systems in anticipation of future growth, the Company is currently involved in
the installation of year 2000 compliant software for its cemetery corporate
operations and is evaluating software systems for its cemetery operations at the
field level. The
                                       21
<PAGE>   24

Company has also recently purchased year 2000 compliant software to be used for
its funeral corporate and field operations and expects to have year 2000
compliant software in place for substantially all of its operations by mid-year
1999. As part of its initial assessment of its year 2000 exposure, the Company
has identified certain critical path items and has developed a timetable for the
completion of these projects in a timely manner. In the event that year 2000
compliant software is not in place on a timely basis, however, the Company's
results of operations could be adversely affected.

     The Company has also made inquiries of certain of its vendors to determine
what impact, if any, their year 2000 compliance exposure might have on the
Company's operations and has received assurances that the vendors' systems are
or will be year 2000 compliant in a timely manner. Accordingly, the Company does
not expect the year 2000 issue in regard to its vendors' operations to have a
material effect on its financial position, results of operations or cash flows.

SEASONALITY

     Although the deathcare business is relatively stable and fairly
predictable, the Company's results of operations may periodically fluctuate due
to limited seasonality. Revenues from the Company's funeral home operations tend
to be somewhat greater in the first and fourth quarters of each calendar year
while revenues from its cemetery operations tend to be somewhat greater in the
second and fourth quarters of each calendar year.

INFLATION

     Inflation has not had a significant impact on the results of operations of
the Company during the last three years.

RECENT FASB PRONOUNCEMENTS

     In June 1997, the Financial Accounting Standards Board ("FASB") issued
Statement of Accounting Standards ("SFAS") No. 130 "Reporting Comprehensive
Income" and SFAS No. 131 "Disclosures About Segments of an Enterprise and
Related Information". SFAS No. 130 establishes standards for reporting and
display of comprehensive income and its components in a full set of general
purpose financial statements. SFAS No. 131 establishes standards for the way
that public enterprises report segment information in annual financial
statements and requires that those enterprises report selected information about
operating segments in interim financial reports to shareholders. In February
1998, the FASB issued SFAS No. 132, "Employers Disclosures about Pensions and
Other Postretirement Benefits". This statement revises and standardizes
employers' disclosures about pension and other postretirement benefit plans.
These statements are all effective for fiscal years beginning after December 15,
1997. The Company does not believe implementation of SFAS Nos. 130, 131 or 132
will have a material effect on its financial position, results of operation or
cash flows.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

     The financial statements required by this Item 8 are incorporated under
Item 14 in Part IV of this Annual Report on Form 10-K.

ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
        FINANCIAL DISCLOSURE

     None

                                       22
<PAGE>   25

                                    PART III

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

     The information required by this item as to the directors and executive
officers of the Company is hereby incorporated by reference from the information
appearing under the captions "-- Election of Directors -- Directors and Nominees
for Director," "-- Executive Officers" and "Section 16(a) Beneficial Ownership
Reporting Compliance" in the Company's definitive proxy statement which involves
the election of directors and will be filed with the Securities and Exchange
Commission (the "Commission") pursuant to the Securities Exchange Act of 1934,
as amended (the "Exchange Act"), within 120 days of the end of the Company's
fiscal year ended December 31, 1997.

ITEM 11. EXECUTIVE COMPENSATION

     The information required by this item as to the management of the Company
is hereby incorporated by reference from the information appearing under the
captions "Executive Compensation" and "Election of Directors -- Director
Compensation" in the Company's definitive proxy statement which involves the
election of directors and will be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     The information required by this item as to the ownership by management and
others of securities of the Company is hereby incorporated by reference from the
information appearing under the caption "Voting Securities and Principal
Stockholders" in the Company's definitive proxy statement which involves the
election of directors and will be filed with the Commission pursuant to the
Exchange Act within 120 days of the end of the Company's fiscal year ended
December 31, 1997.

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Until February 1997, SCI and its subsidiaries owned approximately 43% of
the shares of the Company's outstanding Common Stock. SCI disposed of all of the
shares of the Company's Common Stock beneficially owned by it and its
subsidiaries in February 1997.

     Additional information required by this item as to certain business
relationships and transactions with management and other related parties of the
Company is hereby incorporated by reference to such information appearing under
the captions "Executive Compensation -- Compensation Committee Interlocks and
Insider Participation" and "Certain Transactions" in the Company's definitive
proxy statement which involves the election of directors and will be filed with
the Commission pursuant to the Exchange Act within 120 days of the end of the
Company's fiscal year ended December 31, 1997.

                                       23
<PAGE>   26

                                    PART IV

ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES AND REPORTS ON FORM 8-K

     (a) 1 FINANCIAL STATEMENTS

     The following financial statements and the Report of Independent
Accountants are filed as a part of this report on the pages indicated:

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
Report of Independent Accountants...........................  F-2
Consolidated Balance Sheet as of December 31, 1997 and
  1996......................................................  F-3
Consolidated Statement of Income for the Years Ended
  December 31, 1997, 1996 and 1995..........................  F-4
Consolidated Statement of Changes in Stockholders' Equity
  for the Years ended December 31, 1997, 1996 and 1995......  F-5
Consolidated Statement of Cash Flows for the Years ended
  December 31, 1997, 1996 and 1995..........................  F-6
Notes to Consolidated Financial Statements..................  F-7
</TABLE>

     (a) 2 FINANCIAL STATEMENT SCHEDULES

     The following Financial Statement Schedule and the Report of Independent
Accountants on Financial Statement Schedule are included in this report on the
pages indicated:

<TABLE>
<S>                                                           <C>
Report of Independent Accountants on Financial Statement
  Schedule..................................................  S-1
Financial Statement Schedule
  II -- Valuation and Qualifying Accounts...................  S-2
</TABLE>

     All other schedules are omitted as the required information is inapplicable
or the information is presented in the consolidated financial statements or
related notes.

     (a) 3 EXHIBITS

     The exhibits to this report have been included only with the copies of this
report filed with the Commission. Copies of individual exhibits will be
furnished to stockholders upon written request to the Company and payment of a
reasonable fee.

<TABLE>
<CAPTION>
      EXHIBIT NO,                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
            3.1+         -- Amended and Restated Certificate of Incorporation (filed
                            as Exhibit 4.1 to the Company's Registration Statement on
                            Form S-8 (Reg. No. 33-98052))
            3.2+         -- Amended and Restated Bylaws (filed as Exhibit 4.3 to the
                            Company's Registration Statement on Form S-8 (Reg. No.
                            33-98052))
            4.1+         -- Form of Certificate representing shares of Common Stock
                            (filed as Exhibit 4.1 to the Company's Registration
                            Statement on Form S-1 (Reg. No. 33-82546))
            4.2+         -- Stockholder Rights Agreement, dated October 31, 1994,
                            between the Company and American Stock Transfer & Trust
                            Company, as Rights Agent (filed as Exhibit 4.2 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994)
            4.3+         -- Certificate of Designation of the Series One Junior
                            Participating Preferred Stock (filed as Exhibit 4.2 to
                            the Company's Registration Statement on Form S-8 (Reg.
                            No. 33-98052))
            4.4+         -- First Amendment to Stockholder Rights Agreement, dated
                            September 10, 1996, between the Company and American
                            Stock Transfer & Trust Company, as Rights Agent (filed as
                            Exhibit 6 to the Company's Registration Statement on Form
                            8-A/A (Amendment No. 2)).
</TABLE>

                                       24
<PAGE>   27

<TABLE>
<CAPTION>
      EXHIBIT NO,                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
            4.5+         -- Registration Agreement, dated December 22, 1995, among
                            Equity Corporation International, Investment Capital
                            Corporation and Service Corporation International (filed
                            as Exhibit 4.1 to the Company's Registration Statement on
                            Form S-3 (Reg. No. 33-80841))
           10.1+*        -- Employment Agreement, dated February 1, 1994, between the
                            Company and James P. Hunter, III (filed as Exhibit 10.1
                            to the Company's Registration Statement on Form S-1 (Reg.
                            No. 33-82546))
           10.2+*        -- Employment Agreement, dated March 7, 1994, between the
                            Company and Jack D. Rottman (filed as Exhibit 10.4 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.3+*        -- Employment Agreement, dated July 22, 1994, between the
                            Company and Billy C. Wells (filed as Exhibit 10.5 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.4+*        -- Employment Agreement, dated February 1, 1995, between the
                            Company and W. Cardon Gerner (filed as Exhibit 10.23 to
                            the Company's Annual Report on Form 10-K for the year
                            ended December 31, 1994)
           10.5+*        -- Employment Agreement, dated April 8, 1996 between the
                            Company and William C. McNamara (filed as Exhibit 99.2 to
                            the Company's report on Form 8-K filed on May 3, 1996)
           10.6+*        -- Stockholder's Agreement, dated June 30, 1994, between the
                            Company and Jack D. Rottman (filed as Exhibit 10.7 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.7+         -- Stock Registration Agreement, dated February 1, 1994,
                            among the Company and Investment Capital Corporation,
                            James P. Hunter, III and Robert W. Loftis (filed as
                            Exhibit 10.10 to the Company's Registration Statement on
                            Form S-1 (Reg. No. 33-82546))
           10.8+         -- First Amendment to Stock Registration Agreement, dated
                            September 1, 1994, among the Company and Investment
                            Capital Corporation, Kanawha, L.L.C., James P. Hunter,
                            III and Robert W. Loftis (filed as Exhibit 10.11 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.9+         -- Second Amendment to Stock Registration Agreement, dated
                            May 31, 1995, among the Company and James P. Hunter, III,
                            Investment Capital Corporation, Kanawha, L.L.C., The
                            Loftis Foundation, Inc. and Robert Wayne Loftis (filed as
                            Exhibit 10.12 to the Company's Registration Statement on
                            Form S-1 (Reg. No. 33-92876))
           10.10+*       -- Equity Corporation International Amended and Restated
                            1994 Long-Term Incentive Plan, amended as of October,
                            1996 (filed as Exhibit 10.10 to the Company's Annual
                            Report on Form 10-K for the year ended December 31, 1996)
           10.11*        -- Amendment to Amended and Restated Equity Corporation
                            International 1994 Long-Term Incentive Plan, dated May
                            21, 1997
           10.12+*       -- Form of Incentive Stock Option Agreement for Executive
                            Officers under the 1994 Long-Term Incentive Plan (filed
                            as Exhibit 10.13 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1994)
           10.13+*       -- Form of Non-Qualified Employee Stock Option Agreement for
                            Executive Officers under 1994 Long-Term Incentive Plan
                            (filed as Exhibit 10.14 to the Company's Annual Report on
                            Form 10-K for the year ended December 31, 1994)
           10.14+*       -- Form of Non-Qualified Stock Option Agreement for
                            employees under the 1994 Long-Term Incentive Plan (filed
                            as Exhibit 10.12 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1995)
</TABLE>

                                       25
<PAGE>   28

<TABLE>
<CAPTION>
      EXHIBIT NO,                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
           10.15+*       -- Form of Non-Qualified Employee Stock Option Agreement for
                            employees of the Cemetery Division under the 1994
                            Long-Term Incentive Plan (filed as Exhibit 10.13 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1995)
           10.16+*       -- Form of Non-Qualified Stock Option Agreement for
                            Non-Employee Directors under the 1994 Long-Term Incentive
                            Plan (filed as Exhibit 10.15 to the Company's Annual
                            Report on Form 10-K for the year ended December 31, 1994)
           10.17*        -- Form of Non-Qualified Employee Stock Option Agreement for
                            Executive Officers under the 1994 Long-Term Incentive
                            Plan, dated August 14, 1997
           10.18+*       -- Option #2 of Amendment and Restatement of Agreement
                            between ECI Cemetery Services, Inc. and certain employees
                            concerning replacement of former deferred compensation
                            arrangements with restricted stock award programs (filed
                            as Exhibit 10.15 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1995)
           10.19+*       -- Option #3 of Amendment and Restatement of Agreement
                            between ECI Cemetery Services, Inc. and certain employees
                            concerning replacement of former deferred compensation
                            arrangements with restricted stock award programs (filed
                            as Exhibit 10.16 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1995)
           10.20+        -- Form of Indemnification Agreement with Executive Officers
                            and Directors (filed as Exhibit 10.13 to the Company's
                            Registration Statement on Form S-1 (Reg. No. 33-82546))
           10.21*        -- Form of Executive Severance Agreement dated effective
                            August 14, 1997.
           10.22+*       -- Equity Corporation International 1997 Employee Stock
                            Purchase Plan (filed as Exhibit 4.7 to the Company's
                            Registration Statement on Form S-8 (Reg. No. 333-25303))
           10.23+*       -- Consulting Agreement, dated as of September 12, 1996,
                            between the Company and James P. Hunter, III (filed as
                            Exhibit 10.25 to the Company's Annual Report on Form 10-K
                            for the year ended December 31, 1996)
           10.24+        -- Amended and Restated Credit Agreement, dated September 2,
                            1997, among the Company, the Banks named therein and
                            NationsBank of Texas, N.A., as Agent for the Banks (filed
                            as Exhibit 10.1 to the Company's Quarterly Report on Form
                            10-Q for the quarterly period ended September 30, 1997)
           21.1          -- List of Subsidiaries as of December 31, 1997
           23.1          -- Consent of Coopers & Lybrand L.L.P.
           24.1          -- A power of attorney, pursuant to which amendments to this
                            Report may be filed, is included on the signature page
                            contained in Part IV of this Report
           27            -- Financial Data Schedule
           27.1          -- Restated Financial Data Schedules
</TABLE>

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

+ Incorporated herein by reference to the indicated filing.

* Management contract or compensatory plan.

     (B) REPORTS ON FORM 8-K

     The Company did not file any reports on Form 8-K during the quarter ended
December 31, 1997.

                                       26
<PAGE>   29

                                   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, in the City of Lufkin,
State of Texas on March 27, 1998.

                                            EQUITY CORPORATION INTERNATIONAL

                                            By:  /s/ JAMES P. HUNTER, III
                                              ----------------------------------
                                                     James P. Hunter, III
                                               Chairman of the Board, President
                                                              and
                                                   Chief Executive Officer

                               POWER OF ATTORNEY

     We, the undersigned, directors and officers of Equity Corporation
International (the "Company"), do hereby severally constitute and appoint James
P. Hunter, III and W. Cardon Gerner and each or any of them, our true and lawful
attorneys and agents, with full power of substitution and resubstitution, for
him and in his name, place and stead, in any and all capacities, to sign any and
all amendments to the Company's Annual Report on Form 10-K for the fiscal year
ended December 31, 1997, and to file the same with all exhibits thereto, and all
other documents in connection therewith, with the Securities and Exchange
Commission, granting unto said attorneys and agents, and each or any of them,
full power and authority to do and perform each and every act and thing
requisite and necessary to be done, as fully to all intents and purposes as he
might or could do in person, hereby ratifying and confirming all that said
attorneys and agents, and each of them, or his substitute or substitutes, may
lawfully do or cause to be done by virtue hereof.

     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.

<TABLE>
<CAPTION>
                     SIGNATURES                                       TITLE                    DATE
                     ----------                                       -----                    ----
<C>                                                      <S>                              <C>

              /s/ JAMES P. HUNTER, III                   Chairman of the Board,           March 27, 1998
-----------------------------------------------------      President and Chief Executive
                James P. Hunter, III                       Officer (Principal Executive
                                                           Officer)

                /s/ W. CARDON GERNER                     Senior Vice President -- Chief   March 27, 1998
-----------------------------------------------------      Financial
                  W. Cardon Gerner                         Officer -- (Principal
                                                           Financial and Accounting
                                                           Officer)

               /s/ J. PATRICK DOHERTY                    Director                         March 27, 1998
-----------------------------------------------------
                 J. Patrick Doherty

                 /s/ JACK T. HAMMER                      Director                         March 27, 1998
-----------------------------------------------------
                   Jack T. Hammer

                /s/ THOMAS R. MCDADE                     Director                         March 27, 1998
-----------------------------------------------------
                  Thomas R. McDade

                /s/ KENNETH W. SMITH                     Director                         March 27, 1998
-----------------------------------------------------
                  Kenneth W. Smith

                   /s/ BOB BULLOCK                       Director                         March 27, 1998
-----------------------------------------------------
                     Bob Bullock
</TABLE>

                                       27
<PAGE>   30

                         INDEX TO FINANCIAL STATEMENTS

<TABLE>
<CAPTION>
                                                              PAGE
                                                              ----
<S>                                                           <C>
AUDITED CONSOLIDATED FINANCIAL STATEMENTS:
  Report of Independent Accountants.........................  F-2
  Consolidated Balance Sheet as of December 31, 1997 and
     1996...................................................  F-3
  Consolidated Statement of Income for the Years Ended
     December 31, 1997, 1996 and 1995.......................  F-4
  Consolidated Statement of Stockholders' Equity for the
     Years Ended December 31, 1997, 1996 and 1995...........  F-5
  Consolidated Statement of Cash Flows for the Years Ended
     December 31, 1997, 1996 and 1995.......................  F-6
  Notes to Consolidated Financial Statements................  F-7
</TABLE>

                                       F-1
<PAGE>   31

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Equity Corporation International:

     We have audited the accompanying consolidated balance sheet of Equity
Corporation International and subsidiaries, as of December 31, 1997 and 1996,
and the related consolidated statements of income, stockholders' equity, and
cash flows for each of the three years in the period ended December 31, 1997.
These financial statements are the responsibility of the Company's management.
Our responsibility is to express an opinion on these financial statements based
upon 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 financial statements referred to above present fairly,
in all material respects, the consolidated financial position of Equity
Corporation International and subsidiaries as of December 31, 1997 and 1996 and
the consolidated results of their operations and their cash flows for each of
the three years in the period ended December 31, 1997, in conformity with
generally accepted accounting principles.

                                            COOPERS & LYBRAND L.L.P.

Houston, Texas
March 5, 1998

                                       F-2
<PAGE>   32

                        EQUITY CORPORATION INTERNATIONAL

                           CONSOLIDATED BALANCE SHEET
                         (THOUSANDS, EXCEPT SHARE DATA)

                                     ASSETS

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                              --------------------
                                                                1997        1996
                                                              --------    --------
<S>                                                           <C>         <C>
Current assets:
  Cash and cash equivalents.................................  $  8,039    $ 12,654
  Receivables, net of allowances............................    15,412       9,050
  Inventories...............................................     9,134       6,029
  Other.....................................................     2,181       1,825
                                                              --------    --------
          Total current assets..............................    34,766      29,558
  Preneed funeral contracts.................................   235,891     156,028
  Cemetery properties, at cost..............................   117,087      84,706
  Long-term receivables, net of allowances..................    55,393      37,226
  Property, plant and equipment, at cost (net)..............    94,684      57,263
  Deferred charges and other assets.........................    24,284       7,986
  Names and reputations (net)...............................   155,595      71,124
                                                              --------    --------
          Total assets......................................  $717,700    $443,891
                                                              ========    ========
                       LIABILITIES AND STOCKHOLDERS' EQUITY
Current liabilities:
  Accounts payable and accrued liabilities..................  $ 14,077    $  6,943
  Income taxes payable......................................        51         294
  Deferred income taxes.....................................     2,114       2,605
  Current maturities of long-term debt......................       858         537
                                                              --------    --------
          Total current liabilities.........................    17,100      10,379
  Deferred preneed funeral contract revenues................   242,185     161,153
  Long-term debt............................................   171,303      49,197
  Deferred cemetery costs...................................    27,224      21,268
  Deferred income taxes.....................................    31,106      22,799
  Other liabilities.........................................     2,250       1,631
  Commitments and contingencies
  Stockholders' equity:
     Preferred stock........................................        --          --
     Common stock, $.01 par value; 50,000,000 shares
      authorized; 21,119,362 and 19,322,723 issued and
      outstanding in 1997 and 1996, respectively............       211         193
     Capital in excess of par value.........................   191,902     157,468
     Retained earnings......................................    34,502      19,803
     Foreign currency translation adjustment................       (83)         --
                                                              --------    --------
          Total stockholders' equity........................   226,532     177,464
                                                              --------    --------
          Total liabilities and stockholders' equity........  $717,700    $443,891
                                                              ========    ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       F-3
<PAGE>   33

                        EQUITY CORPORATION INTERNATIONAL

                        CONSOLIDATED STATEMENT OF INCOME
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                 YEAR ENDED DECEMBER 31,
                                                              ------------------------------
                                                                1997       1996       1995
                                                              --------    -------    -------
<S>                                                           <C>         <C>        <C>
Net revenues
  Funeral...................................................  $ 87,160    $54,854    $36,261
  Cemetery..................................................    46,239     35,035     27,740
  Other.....................................................     1,674      2,085         --
                                                              --------    -------    -------
          Total revenues....................................   135,073     91,974     64,001
                                                              --------    -------    -------
Costs and expenses
  Funeral...................................................    64,830     39,804     27,442
  Cemetery..................................................    31,659     24,898     19,263
  Other.....................................................       924      1,135         --
                                                              --------    -------    -------
          Total costs and expenses..........................    97,413     65,837     46,705
                                                              --------    -------    -------
  Gross profit..............................................    37,660     26,137     17,296
General and administrative expenses.........................     7,560      5,848      4,782
                                                              --------    -------    -------
  Income from operations....................................    30,100     20,289     12,514
Interest expense............................................     6,331      2,374      2,207
                                                              --------    -------    -------
  Income before income taxes................................    23,769     17,915     10,307
Provision for income taxes..................................     9,070      7,589      4,071
                                                              --------    -------    -------
          Net income........................................  $ 14,699    $10,326    $ 6,236
                                                              ========    =======    =======
Earnings per share:
  Basic.....................................................  $   0.71    $  0.58    $  0.42
                                                              ========    =======    =======
  Assuming full dilution....................................  $   0.70    $  0.57    $  0.42
                                                              ========    =======    =======
Weighted average number of common and equivalent shares
  outstanding:
  Basic.....................................................    20,597     17,781     14,699
                                                              ========    =======    =======
  Assuming full dilution....................................    20,952     18,068     14,835
                                                              ========    =======    =======
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       F-4
<PAGE>   34

                        EQUITY CORPORATION INTERNATIONAL

           CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS' EQUITY
                       (IN THOUSANDS, EXCEPT SHARE DATA)

<TABLE>
<CAPTION>
                                  COMMON STOCK       CAPITAL IN              CUMULATIVE
                               -------------------   EXCESS OF    RETAINED   TRANSLATION   STOCKHOLDERS'
                                 SHARES     AMOUNT   PAR VALUE    EARNINGS   ADJUSTMENT       EQUITY
                               ----------   ------   ----------   --------   -----------   -------------
<S>                            <C>          <C>      <C>          <C>        <C>           <C>
Balance, December 31, 1994...  14,688,859    $147     $ 80,695    $ 3,241       $  --        $ 84,083
  Net income.................          --      --           --      6,236          --           6,236
  Common stock issued:
     Acquisitions............       8,332      --          119         --          --             119
     Option exercises........     112,500       1        1,167         --          --           1,168
     Other...................      37,560      --           59         --          --              59
                               ----------    ----     --------    -------       -----        --------
Balance, December 31, 1995...  14,847,251     148       82,040      9,477          --          91,665
  Net income.................          --      --           --     10,326          --          10,326
  Common stock issued:
     Equity offering.........   4,335,000      43       72,964         --          --          73,007
     Acquisitions............     113,455       1        2,414         --          --           2,415
     Option exercises........       1,999      --           22         --          --              22
     Other...................      25,018       1           28         --          --              29
                               ----------    ----     --------    -------       -----        --------
Balance, December 31, 1996...  19,322,723     193      157,468     19,803          --         177,464
  Net income.................          --      --           --     14,699          --          14,699
  Common stock issued:
     Equity offering.........   1,199,178      12       22,089         --          --          22,101
     Acquisitions............     571,690       6       11,845         --          --          11,851
     Option exercises........      10,500      --          140         --          --             140
     Other...................      15,271      --          360         --          --             360
  Foreign currency
     translation
     adjustment..............          --      --           --         --         (83)            (83)
                               ----------    ----     --------    -------       -----        --------
Balance, December 31, 1997...  21,119,362    $211     $191,902    $34,502       $ (83)       $226,532
                               ==========    ====     ========    =======       =====        ========
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       F-5
<PAGE>   35

                        EQUITY CORPORATION INTERNATIONAL

                      CONSOLIDATED STATEMENT OF CASH FLOWS
                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                  YEAR ENDED DECEMBER 31,
                                                              -------------------------------
                                                                1997        1996       1995
                                                              --------    --------    -------
<S>                                                           <C>         <C>         <C>
Cash flows from operating activities:
  Net income................................................  $ 14,699    $ 10,326    $ 6,236
  Adjustments to reconcile net income to net cash provided
     by operating activities:
     Depreciation and amortization..........................     8,428       4,801      3,458
     Provision for bad debts and contract cancellations.....     6,250       3,742      3,217
     Gain on sale of assets.................................      (750)     (1,489)       (42)
     Deferred income taxes..................................     1,303       1,392        816
  Changes in assets and liabilities, net of effects from
     acquisitions:
     Receivables............................................   (19,982)    (12,382)    (7,482)
     Inventories............................................      (713)        283       (282)
     Other current assets...................................      (284)       (515)       263
     Other long-term assets.................................    (4,514)     (2,636)    (2,998)
     Accounts payable and accrued liabilities...............     2,917       1,601       (998)
     Income taxes payable...................................       (52)       (895)       901
     Preneed funeral contracts and associated deferred
       revenues.............................................       722         (36)       123
                                                              --------    --------    -------
          Net cash provided by operating activities.........     8,024       4,192      3,212
                                                              --------    --------    -------
Cash flows from investing activities:
  Capital expenditures......................................   (12,521)     (8,318)    (7,691)
  Proceeds from sale of assets..............................       139       4,192         68
  Acquisitions, net of cash acquired........................   (17,519)    (21,541)      (906)
  Other.....................................................       113         196        106
                                                              --------    --------    -------
          Net cash used in investing activities.............   (29,788)    (25,471)    (8,423)
                                                              --------    --------    -------
Cash flows from financing activities:
  Net proceeds from issuance of common stock................    22,601      73,029        974
  Borrowings on debt........................................    18,950      11,615     11,123
  Payments on debt..........................................   (24,402)    (56,944)    (6,485)
                                                              --------    --------    -------
          Net cash provided by financing activities.........    17,149      27,700      5,612
                                                              --------    --------    -------
Increase (decrease) in cash and cash equivalents............    (4,615)      6,421        401
Cash and cash equivalents at beginning of year..............    12,654       6,233      5,832
                                                              --------    --------    -------
Cash and cash equivalents at end of year....................  $  8,039    $ 12,654    $ 6,233
                                                              ========    ========    =======
</TABLE>

   The accompanying notes are an integral part of the consolidated financial
                                  statements.

                                       F-6
<PAGE>   36

                        EQUITY CORPORATION INTERNATIONAL

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                (DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

1. CORPORATE ORGANIZATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

     Equity Corporation International ("ECI") and its wholly owned subsidiaries
(the "Company") is a provider of deathcare services and products primarily to
communities located in non-metropolitan and suburban areas of the United States
and Canada. At December 31, 1997, the Company operated 259 funeral homes and 76
cemeteries in 33 states and one Canadian province.

  Principles of Consolidation

     The consolidated financial statements include ECI and all majority-owned
subsidiaries. Significant intercompany balances and transactions have been
eliminated in consolidation. Certain reclassifications of prior years have been
made to conform to current period classifications.

  Use of Estimates in the Preparation of Financial Statements

     The preparation of financial statements in conformity with generally
accepted accounting principles requires management to make estimates and
assumptions that affect the reported amounts of assets and liabilities and
disclosure of contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during the
reporting periods. Actual results could differ from those estimates.

  Funeral Operations

     The Company recognizes revenue on funeral sales at the time the services
are performed. The Company's trade receivables consist primarily of funeral
services already performed. An allowance for doubtful accounts has been provided
for those accounts which management estimates will not be collected in the
future. All price guaranteed preneed funeral sales contracts (including
insurance funded contracts) are included in the accompanying consolidated
balance sheet as a long-term asset with a corresponding credit to deferred
preneed funeral contract revenues. Preneed funeral trust earnings are deferred
until the funeral service is performed. Additionally, increasing benefits under
insurance funded contracts are accrued and deferred until the funeral service is
performed.

  Cemetery Operations

     Sales of cemetery interment rights, interment services and related
merchandise are recorded as revenues when customer contracts are executed with
concurrent recognition of related costs. Costs related to the sales of cemetery
interment rights include cemetery property and costs related to cemetery
development activities and are charged to operations using the specific
identification method. Costs related to sales of interment services and
merchandise are based on actual costs incurred or estimates of future costs.
Allowances for customer cancellations and refunds are provided at the date of
sale based upon historical experience.

     Generally, a portion of the proceeds from the sale of cemetery interment
rights is required by state law to be paid into perpetual care trust funds.
Principal balances in these trusts (including realized and unrealized capital
gains in some states) must generally be held in perpetuity. Accordingly, the
trust fund corpus is not reflected in the Company's consolidated financial
statements. Earnings from these trusts are recognized currently and are intended
to defray cemetery maintenance costs. The amount of perpetual care funds trusted
at December 31, 1997 and 1996 was approximately $24,924 and $16,249,
respectively, and such principal generally cannot be withdrawn by the Company.
Earnings recognized on perpetual care trusts for the years ended December 31,
1997, 1996 and 1995 were approximately $1,525, $1,304 and $934, respectively.
Additionally, pursuant to state law, a portion of the proceeds from the sale of
preneed cemetery merchandise may also be required to be paid into trust funds.
The Company's preneed cemetery merchandise trusts funds

                                       F-7
<PAGE>   37
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

had aggregate balances of approximately $26,194 and $14,316 at December 31, 1997
and 1996, respectively, which approximated fair value. The Company recognizes
income on these merchandise trusts in current cemetery net revenues as trust
earnings accrue. Earnings recognized on merchandise trusts for the years ended
December 31, 1997, 1996 and 1995 were approximately $2,470 $1,113 and $535,
respectively.

  Cash and Cash Equivalents

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

  Inventories

     Inventories, consisting of funeral merchandise (primarily caskets) and
cemetery merchandise (primarily vaults and crypts) are stated at cost, which is
not in excess of market, determined using the first-in, first-out (FIFO) method
for funeral merchandise and the average cost method for cemetery merchandise.

  Property, Plant and Equipment

     Depreciation of property, plant and equipment is provided using the
straight-line method over the estimated useful lives of the various classes of
depreciable assets, ranging from five to thirty-nine years. The Company
periodically reviews its properties for possible impairment whenever events or
changes in circumstance might indicate that the carrying amount of an asset may
not be recoverable. Maintenance and repairs are charged to expense whereas
renewals and major replacements are capitalized. Gains and losses from
dispositions are included in operations. Depreciation expense for the years
ended December 31, 1997, 1996 and 1995, was $4,892, $3,038 and $2,010,
respectively.

  Deferred Obtaining Costs

     Included in "Deferred charges and other assets" are obtaining costs
consisting of sales commissions and other direct marketing costs applicable to
preneed funeral contracts which are deferred and recognized over 12 years, which
approximates the expected timing of the performance of services related to
preneed funeral contracts. The aggregate costs deferred as of December 31, 1997
and 1996 were approximately $1,908 and $1,582, respectively.

  Covenants Not to Compete

     Included in "Deferred charges and other assets" are prepaid noncompetition
agreements entered into with former owners and key employees of businesses
acquired. Noncompetition agreements are amortized using the straight-line method
over the period of the agreement. At December 31, 1997 and 1996, prepaid
covenants not to compete amounted to approximately $6,047 and $4,882,
respectively.

  Names and Reputations

     The excess of purchase price over the fair value of identifiable net
tangible assets acquired in transactions accounted for as a purchase are
included in "Names and reputations (net)" and generally are amortized on a
straight-line basis over 40 years which, in the opinion of management, is not
necessarily the maximum period benefited. Many of the Company's acquired funeral
homes have provided high quality service to client families for many decades.
The resulting client loyalty often represents a substantial portion of the value
of a funeral business. The recoverability of Names and reputations is evaluated
periodically as events or circumstances indicate a possible inability to recover
its carrying amount. Recoverability is then determined by comparing the
undiscounted net cash flows of the assets to which the Names and reputations
applies to the net book value (including the Names and reputations) of those
assets. The accumulated amortization of Names and

                                       F-8
<PAGE>   38
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

reputations, at December 31, 1997 and 1996, was approximately $5,580 and $2,750,
respectively. The amortization charged against income was approximately $2,830,
$1,214 and $640 for the three years ended December 31, 1997, 1996 and 1995,
respectively.

  Foreign Currency Translation

     The functional currency for the Company's Canadian subsidiaries is the
Canadian Dollar. All assets and liabilities of Canadian subsidiaries are
translated into U.S. dollars at exchange rates in effect as of the end of the
reporting period. Income and expense items are translated at average exchange
rates for the reporting period. The resulting translation adjustments are
recorded as a component of stockholders' equity. The effect of exchange rate
changes on cash for the year ended December 31, 1997 was not significant.

  Recent FASB Pronouncements

     In June 1997, the FASB issued SFAS No. 130 "Reporting Comprehensive Income"
and SFAS No. 131 "Disclosures About Segments of an Enterprise and Related
Information". SFAS No. 130 establishes standards for reporting and display of
comprehensive income and its components in a full set of general purpose
financial statements. SFAS No. 131 establishes standards for the way that public
enterprises report segment information in annual financial statements and
requires that those enterprises report selected information about operating
segments in interim financial reports to shareholders. In February 1998, the
FASB issued SFAS No. 132, "Employers Disclosures about Pensions and Other
Postretirement Benefits". This statement revises and standardizes employers'
disclosures about pension and other postretirement benefit plans. These
statements are all effective for fiscal years beginning after December 15, 1997.
The Company does not believe implementation of SFAS Nos. 130, 131 or 132 will
have a material effect on its financial position, results of operation or cash
flows.

2. ACQUISITIONS

     The following table is a summary of acquisitions made during the years
ended December 31, 1997 and 1996:

<TABLE>
<CAPTION>
                                                                1997        1996
                                                                ----        ----
<S>                                                           <C>         <C>
Number acquired:
  Funeral homes.............................................        84          59
  Cemeteries................................................        12           3
Purchase price..............................................  $156,098    $ 65,047
</TABLE>

     The purchase price in both years consisted primarily of combinations of
cash, common stock and debt issued. The excess of purchase price over the fair
value of net assets acquired is included in Names and reputations (net). In
connection with these acquisitions, the Company enters into customary
employment, consulting and noncompetition agreements with certain employees and
former owners of the businesses acquired. In certain situations, the Company
will prepay a portion of the noncompetition agreements and amortize such
prepayments on a straight-line basis over the terms of the agreements. The
purchase prices indicated above do not include $952 and $832 for noncompetition
agreements which were prepaid to individuals related to businesses acquired in
1997 and 1996, respectively. The acquisitions have been

                                       F-9
<PAGE>   39
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

accounted for as purchases and their operating results have been included since
their respective date of acquisition. The effect of acquisitions on the
consolidated balance sheet at December 31, was as follows:

<TABLE>
<CAPTION>
                                                                1997         1996
                                                              ---------    --------
<S>                                                           <C>          <C>
Current assets..............................................  $   7,373    $  3,994
Preneed funeral contracts...................................     66,221      41,365
Cemetery properties.........................................     30,283       6,036
Long-term receivables.......................................      8,536        (319)
Property, plant and equipment...............................     30,058      17,223
Deferred charges and other assets...........................     13,998         603
Names and reputations.......................................     87,136      40,367
Current liabilities.........................................     (3,348)       (624)
Deferred preneed funeral contract revenues..................    (66,668)    (41,561)
Long-term debt..............................................   (127,879)    (40,009)
Deferred cemetery costs.....................................     (6,972)       (803)
Deferred income taxes.......................................     (6,513)       (978)
Noncurrent liabilities......................................       (211)       (465)
Common stock issued.........................................    (11,851)     (2,415)
                                                              ---------    --------
          Total.............................................     20,163      22,414
  Less cash acquired........................................      2,644         873
                                                              ---------    --------
  Cash used for acquisitions................................  $  17,519    $ 21,541
                                                              =========    ========
</TABLE>

     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
1996:

<TABLE>
<CAPTION>
                                                              YEAR ENDED DECEMBER 31,
                                                              ------------------------
                                                                 1997          1996
                                                              ----------    ----------
<S>                                                           <C>           <C>
Net revenues................................................   $159,494      $150,856
Income before income taxes..................................     25,087        20,568
Net income..................................................     15,503        11,854
Earnings per common and equivalent share:
  Basic.....................................................   $   0.74      $   0.64
  Diluted...................................................   $   0.73      $   0.63
</TABLE>

     The pro forma results of operations should not be construed as indicative
of the Company's results of operations had the acquisitions been consummated on
the dates indicated and are not intended to project the Company's results of
operations for any future period.

3. DISPOSITIONS

     During January 1997, the Company acquired one cemetery from Service
Corporation International ("SCI"), a former significant stockholder of the
Company (Note 7), in exchange for one of the Company's funeral home facilities.
This was a strategic business decision as the acquired cemetery is in close
proximity to one of the Company's existing funeral home facilities. In
connection with the transaction, the Company received consideration of $1,674,
including $250 in cash, and recognized a gain of approximately $750 in the first
quarter of 1997.

     During March 1996, the Company conveyed to SCI licensing and lease
agreements related to three funeral home operations which had been previously
operated by an unaffiliated third party for an aggregate

                                      F-10
<PAGE>   40
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

purchase price of $2,085. This amount and $1,135 of related costs and expenses
are included in net revenues and costs and expenses, respectively, for the year
ended December 31, 1996.

4. PRENEED FUNERAL CONTRACTS AND DEFERRED PRENEED FUNERAL CONTRACT REVENUES

     The Company sells preneed funeral contracts through various programs
providing for future funeral services at prices prevailing when the agreement is
signed. These contracts are included in the consolidated balance sheet as
"Preneed funeral contracts". Payments on these contracts are generally placed in
trust (pursuant to state law) or are used to pay premiums on life insurance
policies issued by third party insurers. When the services are performed,
approximately $104,523 and $67,364 will be funded by trusts and approximately
$131,368 and $88,664 will be funded by insurance policies as of December 31,
1997 and 1996, respectively. Accumulated earnings from trust funds and
increasing insurance benefits have been included to the extent that they have
accrued through December 31, 1997 and 1996, respectively. The cumulative total
has been reduced by allowable cash withdrawals for trust earning distributions
and amounts retained by the Company pursuant to various state laws. At December
31, 1997 and 1996, the amounts collected and held in trusts, at cost, which
approximates market, were approximately $93,900 and $59,246, respectively. The
amounts in trusts and all life insurance policies are generally transferred to
the customer upon contract cancellation.

     "Deferred preneed funeral contract revenues" includes the contract amount
of all price guaranteed funeral services and accumulated trust earnings and
increasing insurance benefits earned. The Company defers recognition of trust
earnings and insurance benefits until performance of the funeral service. Upon
performance of the funeral service, the Company will recognize the fixed
contract price and related accumulated trust earnings or increasing insurance
benefits as funeral service revenues.

5. INCOME TAXES

     Deferred taxes are determined based on differences between the financial
reporting and tax bases of assets and liabilities and are measured using the
enacted marginal tax rates.

     Significant components of the Company's deferred tax liabilities and assets
at December 31, were as follows:

<TABLE>
<CAPTION>
                                                                 1997      1996
                                                                -------   -------
  <S>                                                           <C>       <C>
  Developed and undeveloped land..............................  $28,093   $22,231
  Property, plant and equipment...............................    2,950     2,062
  Receivables related to sales of cemetery interment rights
    and related products......................................    3,989     3,751
  Names and reputations.......................................    2,556       669
  Deferred obtaining costs....................................      778       650
  Other.......................................................      408       475
                                                                -------   -------
            Total deferred tax liabilities....................   38,774    29,838
                                                                -------   -------
  Preneed funeral contracts...................................    2,499     2,280
  Allowance for bad debts and cancellation reserves...........    1,926     1,350
  Deferred compensation.......................................      309       181
  Other.......................................................      820       623
                                                                -------   -------
            Total deferred tax assets.........................    5,554     4,434
                                                                -------   -------
  Net deferred tax (assets) liabilities.......................  $33,220   $25,404
                                                                =======   =======
</TABLE>

                                      F-11
<PAGE>   41
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Significant components of the provision for income taxes for the years
ended December 31, were as follows:

<TABLE>
<CAPTION>
                                                            1997      1996      1995
                                                           ------    ------    ------
    <S>                                                    <C>       <C>       <C>
    Current tax expense:
      Federal..........................................    $7,442    $5,399    $2,868
      State............................................       298       798       387
      Foreign..........................................        27        --        --
                                                           ------    ------    ------
              Total current............................     7,767     6,197     3,255
                                                           ------    ------    ------
    Deferred tax expense:
      Federal..........................................     1,216     1,282       738
      State............................................        87       110        78
                                                           ------    ------    ------
              Total deferred...........................     1,303     1,392       816
                                                           ------    ------    ------
              Total tax expense........................    $9,070    $7,589    $4,071
                                                           ======    ======    ======
</TABLE>

     United States income taxes have not been provided on the undistributed
earnings of the Company's Canadian subsidiaries since it is the Company's
intention to reinvest such earnings indefinitely.

     The differences between the federal tax rate and the Company's effective
tax rate at December 31, were as follows:

<TABLE>
<CAPTION>
                                                            1997      1996      1995
                                                           ------    ------    ------
    <S>                                                    <C>       <C>       <C>
    Tax at U.S. statutory rate.........................    $8,319    $6,270    $3,504
    State income taxes, net of federal tax.............       250       590       307
    Increase in federal marginal tax rate..............        --       565        --
    Nondeductible amortization.........................       422       180       139
    Other, net.........................................        79       (16)      121
                                                           ------    ------    ------
                                                           $9,070    $7,589    $4,071
                                                           ======    ======    ======
    Total effective tax rate...........................     38.2%     42.4%     39.5%
</TABLE>

     During the year ended December 31, 1996, the Company exceeded the taxable
income threshold requiring the Company's statutory federal income tax rate to be
increased from 34 percent to 35 percent. As a result, the provision for income
taxes for the year ended December 31, 1996 includes an adjustment to deferred
taxes of $565 related to this increase in the statutory federal income tax rate.

     Income taxes paid during the years ending December 31, 1997, 1996, and 1995
were approximately $8,010, $6,974 and $2,308, respectively.

                                      F-12
<PAGE>   42
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

6. DEBT

     Long-term debt consisted of the following at December 31:

<TABLE>
<CAPTION>
                                                                   1997        1996
                                                                 --------    --------
    <S>                                                          <C>         <C>
    Credit facility..........................................    $156,700    $ 35,000
    Notes payable............................................      14,441      13,914
    Other....................................................       1,020         820
                                                                 --------    --------
                                                                  172,161      49,734
      Less current maturities................................         858         537
                                                                 --------    --------
                                                                 $171,303    $ 49,197
                                                                 ========    ========
</TABLE>

     In September 1997, the Company amended and increased its borrowing capacity
under its revolving credit agreement with a group of banks (the "Credit
Facility") to $225,000 from $100,000. The Tranche A commitments under the Credit
Facility provide for $150,000 of borrowings outstanding at any one time expiring
September 2, 2002. The Tranche B commitments under the Credit Facility provide
for $75,000 of borrowings outstanding at any one time expiring September 1,
1998, subject to annual renewal options. The Credit Facility is used for
acquisition financing and general corporate purposes. Borrowings under the
Credit Facility bear interest, at the Company's option, at either (i) the prime
rate or (ii) the London Interbank Offered Rate plus an applicable margin,
depending on the Company's Leverage Ratio, as defined. In addition, the Company
pays commitment fees on unused funds depending on the Leverage Ratio. The
weighted average interest rates on amounts borrowed under the Credit Facility
were 6.83% and 6.39% at December 31, 1997 and 1996, respectively. At December
31, 1997 and 1996, the Credit Facility also supported letters of credit totaling
$3,152 related to one of the Company's acquisitions in 1996. The Company
obtained a release from these letters of credit in the first quarter of 1998.
The Credit Facility contains customary restrictive covenants requiring the
Company to maintain certain financial ratios, is guaranteed by substantially all
of the Company's subsidiaries and is collateralized by a pledge of the stock of
certain of the Company's subsidiaries. The Credit Facility will permit the
payment of dividends on the Company's Common Stock only to the extent the
Company maintains a specified net worth (approximately $201,054 as of December
31, 1997).

     Notes payable include notes issued by funeral home and cemetery
subsidiaries to financial institutions and individuals with varying maturities
through 2015, collateralized by property and equipment, or in certain instances,
guaranteed by the Company. Interest rates on these notes range from 4.9% to
12.6%.

     Aggregate principal payments on long-term debt for each of the five years
and thereafter subsequent to December 31, 1997 are $858, $10,711, $616, $488,
$156,034 and $3,454, respectively. Interest paid during the years ended December
31, 1997, 1996 and 1995 was approximately $4,422, $2,426 and $1,865,
respectively.

     In February 1998, the Company completed the private placement of $143,750
aggregate principal amount of 4.5% convertible subordinated debentures due 2004
(the "Debentures") including approximately $18,750 related to the exercise of
the over-allotment option granted by the Company to the underwriters. The
Debentures mature on December 31, 2004, are convertible into shares of the
Company's Common Stock at a conversion price of $27.09 per share and may not be
redeemed by the Company prior to February 26, 2001. The net proceeds to the
Company from this private placement of approximately $139,797 (after selling
commissions of approximately $3,953) were used to pay down the Credit Facility.
The selling commissions and related expenses totaling approximately $4,616 have
been deferred and will be amortized ratably over the term of the Debentures
(Note 9).

                                      F-13
<PAGE>   43
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

7. CAPITAL STOCK

  Common Stock

     Holders of the Company's common stock are entitled to receive dividends if,
as and when declared by the Board of Directors of the Company out of funds
legally available only after payment of, or provision for, full dividends on all
outstanding shares of any series of preferred stock and after the Company has
made provision for any sinking funds for any series of preferred stock. The
Company has never paid cash dividends on its common stock.

     On May 1, 1996, the Company completed a public offering of 4,335,000 shares
of its common stock at $18.00 per share, including 585,000 shares sold to the
underwriters pursuant to the overallotment option granted to them, for net
proceeds of approximately $73,007 (after selling commissions and estimated
related expenses of approximately $5,023). The net proceeds were used to pay off
amounts outstanding under the Credit Facility and the remainder was used for
general corporate purposes, including acquisitions.

     On September 10, 1996, the Company's Board of Directors declared a 3-for-2
split of the Company's common stock to be effected as a stock dividend. The
record date for purposes of the stock dividend was September 23, 1996, and the
stock was distributed on October 2, 1996. All share and per share information in
the accompanying consolidated financial statements have been retroactively
restated to reflect the effects of the stock split.

     In February 1997, the Company completed the registration and sale of
7,994,522 shares of Common Stock owned by SCI which represented SCI's total
investment in the Company. SCI received all proceeds and paid all expenses
related to the sale of these shares. The Company received net proceeds of
approximately $22,101 (after selling commissions and related expenses) in
connection with the issuance and sale by the Company of 1,199,178 shares of
Common Stock at $19.25 per share pursuant to the underwriters' exercise of an
overallotment option granted by the Company. Approximately $13,000 of these
proceeds was used to pay down a portion of the Company's Credit Facility and the
remainder was used for general corporate purposes, including acquisitions.

  Preferred Stock

     The authorized capital stock of the Company also consists of 10,000,000
shares of preferred stock, par value $.01 per share, of which 500,000 shares are
designated as the Series One Junior Participating Preferred Stock (the "Series
One Preferred Stock"). No shares of preferred stock were issued as of December
31, 1997. The preferred stock is issuable by the Board of Directors in one or
more series, with the number of shares of each series and the designations,
powers, preferences, qualifications, limitations or restrictions of each series
to be determined by the Board of Directors. Among the specific matters that may
be determined by the Board of Directors are: the annual rate of dividends; the
redemption price, if any; the terms of a sinking fund, if any; the amount
payable in the event of any voluntary liquidation, dissolution or winding up of
the affairs of the Company; conversion rights, if any; and voting powers, if
any. All series of preferred stock will rank equally and be identical in all
respects except as may otherwise be provided in the Certificate of Designations
establishing such series. The Board of Directors of the Company, without
obtaining stockholder approval, may issue shares of the preferred stock with
voting rights or conversion rights that could affect the voting power of the
holders of common stock. The issuance of any shares of preferred stock could be
utilized, under certain circumstances, in an attempt to prevent an acquisition
of the Company. Except in connection with the preferred share purchase rights,
the Company has no present intention to issue any shares of preferred stock.

     On October 11, 1994, the Board of Directors declared a dividend
distribution of one preferred share purchase right (the "Right") for each
outstanding share of common stock on such date and issued thereafter. The Rights
become exercisable in the event of certain attempts to acquire 20% or more of
the common stock of the Company, subject to certain exceptions. Each right
entitles the registered holder to purchase from the

                                      F-14
<PAGE>   44
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

Company one one-hundred fiftieth of a share of Series One Preferred Stock, at a
price of $30.00 per one one-hundred fiftieth of a share, subject to adjustment
under certain circumstances. The Rights expire on October 11, 2004. The Series
One Preferred Stock will rank junior to all other Series of Preferred Stock that
may be established by the Board of Directors with respect to the payment of
dividends and the distribution of assets upon liquidation. In general, the
voting, dividend and liquidation rights of Series One Preferred Stock are
designed so that one one-hundred fiftieth of a share of Series One Preferred
Stock will be the economic equivalent of one share of common stock.

  1994 Long-Term Incentive Plan

     The 1994 Long-Term Incentive Plan, as amended (the "Incentive Plan"),
provides up to 1,950,000 shares of the Company's common stock for issuance to
key employees, consultants and advisors and provides for the granting of stock
options, stock appreciation rights, performance shares, restricted stock,
restricted stock units and other stock-based awards.

     The Incentive Plan is administered by a committee of the Company's Board of
Directors comprised of non-employee directors (the "Committee"). Stock options
granted under the Incentive Plan may be either nonqualified stock options, or
may qualify as incentive stock options. The exercise price of any stock option
may not be less than the fair market value of the underlying common stock as of
the date of grant. Except for the deferred compensation agreements with certain
employees of the Company's cemetery operations (Note 8), incentive stock options
and nonqualified stock options granted under the Incentive Plan are generally
exercisable in one-fifth and one-third increments on each of the first five and
three anniversaries of the date of grant, respectively, or, in the case of
certain options granted to officers of the Company in 1997, based on
predetermined prices for the Company's common stock. The Incentive Plan also
provides for automatic stock option grants to directors who are not otherwise
employed by the Company or its subsidiaries. Upon commencement of service, a
non-employee director will receive a nonqualified stock option to purchase
10,000 shares of common stock and continuing non-employee directors annually
will receive nonqualified options to purchase an additional 5,000 shares of
common stock. Stock options granted to non-employee directors will become
exercisable in one-third increments on each of the first three anniversaries of
the date of grant.

     Stock appreciation rights may be granted in tandem with a stock option, in
addition to a stock option, or freestanding and unrelated to a stock option.
Stock appreciation rights may not be exercisable earlier than six months after
the date of grant or after the expiration of ten years from the date of grant
and may not have an exercise price of less than the fair market value of the
common stock on the date of grant.

     Upon the grant of performance shares, the Committee will establish
performance goals for each performance cycle on the basis of such criteria as
the Committee may select. After the end of a performance cycle, the Committee
will determine the number of performance shares which have been earned on the
basis of performance in relation to the established performance goals. Payment
values of earned performance shares will be distributed either in cash or common
stock.

     The Committee determines the participants to whom restricted stock and
restricted stock units shall be granted, the number of shares of restricted
stock and the number of restricted stock units to be granted to each
participant, the duration of the restricted period during which, and the
conditions under which, the restricted stock and restricted stock units may be
forfeited to the Company, and the other terms and conditions of such awards.
Individual restricted periods may be shortened, lengthened or waived by the
Committee at any time in its discretion.

     The Committee may also grant stock unit awards in the form of common stock
or units, the value of which is based, in whole or in part, on the value of the
common stock. Subject to the provisions of the Incentive Plan, stock unit awards
are subject to such terms and conditions as the Committee may determine.

                                      F-15
<PAGE>   45
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     The Company accounts for its stock-based compensation plans in accordance
with the disclosure requirements of SFAS No. 123 "Accounting for Stock-Based
Compensation" which encourages, but does not require, companies to recognize
compensation expense for grants of stock, stock options and other equity
instruments based on a fair-value method of accounting. The Company has chosen
to continue to recognize compensation expense for its stock-based compensation
using the intrinsic value method prescribed in Accounting Principles Board
Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB 25") and
related interpretations.

     The following table summarizes the activity relating to stock options under
the Incentive Plan for the years ended December 31 (Share amounts in thousands):

<TABLE>
<CAPTION>
                                 1997                        1996                        1995
                       -------------------------   -------------------------   -------------------------
                                WEIGHTED AVERAGE            WEIGHTED AVERAGE            WEIGHTED AVERAGE
                                 EXERCISE PRICE              EXERCISE PRICE              EXERCISE PRICE
                       SHARES      PER SHARE       SHARES      PER SHARE       SHARES      PER SHARE
                       ------   ----------------   ------   ----------------   ------   ----------------
<S>                    <C>      <C>                <C>      <C>                <C>      <C>
Outstanding at
  beginning of
  period.............  1,037         $12.96          683         $10.11         548          $ 8.67
  Granted............    580          22.19          363          18.32         248           12.64
  Exercised..........     11           9.07            2           8.67         113            8.67
  Cancelled..........      4          17.59            7          14.20          --              --
                       -----                       -----                        ---
Outstanding at end of
  period.............  1,602         $16.31        1,037         $12.96         683          $10.11
                       =====                       =====                        ===
</TABLE>

     The following table summarizes information about stock options outstanding
under the Incentive Plan at December 31, 1997. (Share amounts in thousands.)

<TABLE>
<CAPTION>
                                          OPTIONS OUTSTANDING                      OPTIONS EXERCISABLE
                             ----------------------------------------------   ------------------------------
                               NUMBER        WGTD. AVG     WEIGHTED AVERAGE     NUMBER      WEIGHTED AVERAGE
         RANGE OF            OUTSTANDING     REMAINING      EXERCISE PRICE    EXERCISABLE    EXERCISE PRICE
      EXERCISE PRICES        AT 12/31/97   CONTRACT LIFE      PER SHARE       AT 12/31/97      PER SHARE
      ---------------        -----------   -------------   ----------------   -----------   ----------------
<S>                          <C>           <C>             <C>                <C>           <C>
$ 8.67 to $10.17...........       522        6.88 Yrs.          $ 8.95            404            $ 8.85
$14.33 to $20.00...........       534             8.54           17.35            208             16.57
$22.25 to $23.75...........       546             9.60           22.33             --                --
                                -----                                             ---
$ 8.67 to $23.75...........     1,602        8.36 Yrs.          $16.31            612            $11.48
                                =====                                             ===
</TABLE>

     At December 31, 1996, options were outstanding at prices ranging from $8.67
to $19.67 per share, of which approximately 319,000 were immediately
exercisable.

     At December 31, 1995, options were outstanding at prices ranging from $8.67
to $14.33 per share, of which 123,000 were immediately exercisable.

     The fair value of each stock option granted is estimated on the date of
grant using the Black-Scholes option-pricing model with the following
weighted-average assumptions for grants in 1997, 1996 and 1995, respectively:
dividend yield of 0.0% for all years; expected volatility of 21.85% for 1997 and
21.32% for 1996 and 1995; risk-free interest rates are different for each grant
and range from 5.94% to 6.54% for grants made in 1997 and from 5.28% to 6.99%
for grants made in 1996; and the expected lives of the options range from 5 to 6
years for all grants. The weighted average fair value of the options granted
during the years ended December 31, 1997, 1996 and 1995 was $8.05, $5.90 and
$4.05 per share, respectively.

  Employee Stock Purchase Plan

     In May 1997, the stockholders of the Company approved the Equity
Corporation International 1997 Employee Stock Purchase Plan ("ESPP"), whereby
the Company is authorized to issue up to 500,000 shares

                                      F-16
<PAGE>   46
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

of Common Stock to its full-time employees, nearly all of whom are eligible to
participate. Under the terms of the ESPP, employees may choose at the beginning
of each six-month Option Period, as defined, to have up to 10 percent of their
Base Earnings withheld to purchase the Company's Common Stock at a discount by
exercising stock options granted under the ESPP. The purchase price for the
Common Stock is 85 percent of the market value of the Common Stock, as defined.
The Company sold a total of 18,684 shares of Common Stock under the ESPP in 1997
at exercise prices ranging from $17.43 to $19.66 per share. There were no
outstanding options under the ESPP at December 31, 1997.

     The fair value of each stock option granted under the ESPP is estimated on
the date of grant using the Black-Scholes option-pricing model with the
following weighted-average assumptions for grants in 1997: dividend yield of
0.0%; expected volatility of 21.85%; risk-free interest rate at date of grants
of 5.30%; and the expected lives of the options under the ESPP is six months.
The weighted average fair value of the options granted under the ESPP for the
year ended December 31, 1997, was $7.43 per share.

     Had compensation cost for the Company's Incentive Plan and ESPP been
determined in accordance with SFAS 123, the Company's net income and earnings
per share amounts would have been as follows:

<TABLE>
<CAPTION>
                                                            YEAR ENDED DECEMBER 31,
                                                          ---------------------------
                                                           1997       1996      1995
                                                          -------    ------    ------
<S>                                                       <C>        <C>       <C>
Net income..............................................  $13,766    $9,949    $6,222
Earnings per share:
  Basic.................................................  $  0.67    $ 0.56    $ 0.42
  Assuming full dilution................................  $  0.66    $ 0.55    $ 0.42
</TABLE>

     The effects of applying SFAS 123 in this pro forma disclosure are not
indicative of future amounts.

8. INCENTIVE ARRANGEMENTS AND EMPLOYEE BENEFIT PLANS

     The Company has entered into deferred compensation agreements pursuant to
which certain qualified employees of its cemetery operations may earn incentive
cash compensation based upon performance goals established for individual
employees. The incentive amount for each employee vests over a ten-year period,
initially with 30% vesting on the third anniversary of the determination date
and an additional 10% vesting on each anniversary thereafter until full vesting
on the tenth anniversary. All of the deferred compensation agreements were
amended during 1996 and 1995 to provide that vested amounts as of an employee's
determination date in 1995 would be satisfied by a cash payment and unvested
amounts as of such date would be satisfied by the issuance of 62,578 shares of
restricted stock in the aggregate. The restrictions generally lapse over the
employees' original vesting period as discussed above. Additionally, achievement
of performance goals for 1995 and beyond result in a combination of deferred
cash bonus and stock option awards generally vesting after the fourth year of
grant. At December 31, 1997, amounts granted under these deferred compensation
agreements aggregated approximately $1,814, of which approximately $702 was
accrued.

     In addition, certain employees of the Company's funeral operations are
eligible for participation in a bonus program pursuant to which such employees
may earn a bonus of up to 30% of their base salaries if certain annual
performance goals are met, which goals are established annually by the Company's
compensation committee.

     The Company sponsors a retirement savings plan which covers all employees
who have met certain eligibility requirements for the plan. The Company may make
discretionary contributions to the plan. To date, the Company has made no
contributions to the plan.

                                      F-17
<PAGE>   47
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

9. EARNINGS PER SHARE

     The Company adopted the provisions of SFAS No. 128, "Earnings per Share,"
effective January 1, 1997. All prior periods presented have been restated to
conform to the new requirements. A reconciliation of the numerators and
denominators of the basic and diluted per-share computations for net income
follows:

<TABLE>
<CAPTION>
                                                           YEAR ENDED DECEMBER 31,
                                                        -----------------------------
                                                         1997       1996       1995
                                                        -------    -------    -------
<S>                                                     <C>        <C>        <C>
Income (numerator)
  Net income..........................................  $14,699    $10,326    $ 6,236
                                                        =======    =======    =======
Shares (denominator)
  Shares -- basic.....................................   20,597     17,781     14,699
  Options.............................................      333        269        135
  Other...............................................       22         18          1
                                                        -------    -------    -------
  Shares -- diluted...................................   20,952     18,068     14,835
                                                        =======    =======    =======
Earnings per share:
  Basic...............................................  $  0.71    $  0.58    $  0.42
                                                        =======    =======    =======
  Diluted.............................................  $  0.70    $  0.57    $  0.42
                                                        =======    =======    =======
</TABLE>

     Options to purchase an aggregate 546,000 shares of common stock at exercise
prices ranging from $22.25 per share to $23.75 per share were excluded from the
calculation of diluted earnings per share for 1997 because their effect would
have been antidilutive. The options, which expire on dates ranging from May
2007, to December 2007, were still outstanding at December 31, 1997.

     The Debentures issued in February 1998 (Note 6) would have had an
antidilutive effect on diluted earnings per share for all periods presented
assuming conversion on a pro forma basis.

10. SUPPLEMENTARY INFORMATION

     The detail of certain balance sheet accounts, at December 31, was as
follows:

<TABLE>
<CAPTION>
                                                               1997       1996
                                                              -------    -------
<S>                                                           <C>        <C>
Receivables and allowances:
  Trade.....................................................  $15,792    $ 9,053
  Other.....................................................    1,768      1,413
                                                              -------    -------
                                                               17,560     10,466
  Less allowance for bad debts..............................    2,148      1,416
                                                              -------    -------
                                                              $15,412    $ 9,050
                                                              =======    =======
Long-term:
  Installment contracts.....................................  $40,302    $31,096
  Cemetery merchandise receivables..........................   26,194     14,316
                                                              -------    -------
                                                               66,496     45,412
Less:
  Allowance for contract cancellations......................    4,046      2,669
  Unearned finance charges..................................    7,057      5,517
                                                              -------    -------
                                                              $55,393    $37,226
                                                              =======    =======
</TABLE>

                                      F-18
<PAGE>   48
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Interest rates on installment contracts range from 12.5% to 14.5%, at
December 31, 1997.

<TABLE>
<CAPTION>
                                                                1997       1996
                                                              --------    -------
<S>                                                           <C>         <C>
Inventories:
  Caskets...................................................  $  4,961    $ 3,364
  Interment rights..........................................       715        456
  Mausolea and lawn crypts..................................       751        759
  Other.....................................................     2,707      1,450
                                                              --------    -------
                                                              $  9,134    $ 6,029
                                                              ========    =======
Property, plant and equipment:
  Land......................................................  $ 18,259    $11,384
  Buildings and improvements................................    64,716     39,135
  Equipment.................................................    26,099     16,691
                                                              --------    -------
                                                               109,074     67,210
  Less accumulated depreciation and amortization............    14,390      9,947
                                                              --------    -------
                                                              $ 94,684    $57,263
                                                              ========    =======
Accounts payable and accrued liabilities:
  Trade.....................................................  $  5,133    $ 2,427
  Compensation..............................................     2,463      1,868
  Interest..................................................     2,119        342
  Other.....................................................     4,362      2,306
                                                              --------    -------
                                                              $ 14,077    $ 6,943
                                                              ========    =======
</TABLE>

11. COMMITMENTS AND CONTINGENCIES

  Lease Commitments

     The Company has entered into various operating leases, whereby it is
generally obligated for an initial term of 10 years, with renewal options
ranging from 5 to 20 years. Certain of the leases contain escalation clauses and
purchase options. Most of the leases require the Company to pay for repairs,
taxes, and insurance expense and include contingent rentals based on varying
percentages of net revenues generated by the related funeral home.

     Rent expense for the years ended December 31, 1997, 1996 and 1995 was
approximately $2,200, $1,541 and $1,658, respectively.

  Agreements

     The Company has entered into various employment, consulting, and
noncompetition agreements with key employees and former owners of businesses
acquired. These agreements are generally for five to fifteen years and provide
for payments either at the date of the agreement or in future annual,
semi-annual, or monthly installments. The aggregate amounts remaining to be paid
in future periods if all such commitments are fulfilled by all parties was
approximately $48,044 at December 31, 1997.

                                      F-19
<PAGE>   49
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

     Future minimum payments under noncancelable operating leases with initial
or remaining terms of one or more years and the employment, consulting and
noncompetition agreements discussed above consisted of the following at December
31, 1997:

<TABLE>
<CAPTION>
                                                              LEASES     AGREEMENTS
                                                              -------    ----------
<S>                                                           <C>        <C>
1998........................................................  $ 1,687     $11,062
1999........................................................    1,570       9,505
2000........................................................    1,426       8,101
2001........................................................    1,123       6,298
2002........................................................      980       3,977
Thereafter..................................................    3,520       9,101
                                                              -------     -------
          Total minimum obligations.........................  $10,306     $48,044
                                                              =======     =======
</TABLE>

     The Company has additionally secured employment agreements with various
officers of the Company. The agreements generally provide for the employee's
annual base salary and bonus participation. The agreements also generally
provide for one year noncompetition agreements and severance payments of up to
one year's salary in the event the employee is terminated without cause. In
August 1997, the Company entered into severance agreements with its executive
officers that provide for certain benefits in the event that an executive
officer is terminated in connection with a Change in Control of the Company, as
defined in the agreements.

  Year 2000

     The year 2000 issue is the result of computer programs using two digits to
define the applicable year rather than four. Any programs that have time
sensitive software may recognize a date using "00" as the year 1900 rather than
the year 2000. A computer system which is not year 2000 compliant would not be
able to correctly process certain data, or, in extreme situations, system
failure could result.

     As part of the Company's continuing program to update its information
systems in anticipation of future growth, the Company is currently involved in
the installation of year 2000 compliant software for its cemetery corporate
operations and is evaluating software systems for its cemetery operations at the
field level. The Company has also recently purchased year 2000 compliant
software to be used for its funeral corporate and field operations and expects
to have year 2000 compliant software in place for substantially all of its
operations by mid-year 1999. As part of its initial assessment of its year 2000
exposure, the Company has identified certain critical path items and has
developed a timetable for the completion of these projects in a timely manner.
In the event that year 2000 compliant software is not in place on a timely
basis, however, the Company's results of operations could be adversely affected.

     The Company has also made inquiries of certain of its vendors to determine
what impact, if any, their year 2000 compliance exposure might have on the
Company's operations and has received assurances that the vendors' systems are
or will be year 2000 compliant in a timely manner. Accordingly, the Company does
not expect the year 2000 issue in regard to its vendors' operations to have a
material effect on its financial position, results of operations or cash flows.

  Litigation

     The Company and certain of its subsidiaries are parties to a number of
legal proceedings that have arisen in the ordinary course of business. While the
outcome of these proceedings cannot be predicted with certainty, management does
not expect these matters to have a material adverse effect on the Company.

                                      F-20
<PAGE>   50
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

12. CREDIT RISK AND FAIR VALUE OF FINANCIAL INSTRUMENTS

  Credit Risk

     The Company maintains cash balances at financial institutions located
throughout the United States which are insured by the Federal Deposit Insurance
Corporation up to $100 at each institution. The Company accounts at these
institutions, at times, may exceed the federally insured limits. The Company has
not experienced any losses in such accounts.

     The Company grants customers credit in the normal course of business and
the credit risk with respect to trade and long-term receivables is generally
considered minimal because of the wide geographic area served. Procedures are in
effect to monitor the credit worthiness of customers and appropriate allowances
have been made.

     Prearranged funeral contracts generally do not subject the Company to
collection risk because customer payments are either placed in state supervised
trusts or used to pay premiums on life insurance contracts. Insurance funded
contracts are subject to supervision by state insurance departments and are
protected in the majority of states by insurance guaranty acts.

  Fair Value of Financial Instruments

     The following estimated fair values of financial instruments have been
determined by the Company using available market information and appropriate
valuation methodologies.

     The carrying amounts of cash and cash equivalents, receivables and accounts
payable approximate fair values due to the short term maturities of these
instruments. The carrying amounts of the Company's fixed rate long-term
borrowings, totaling $15,274 and $13,867 at December 31, 1997 and 1996,
respectively, approximate their fair value, because their interest rates
approximate rates currently available for debt securities with similar terms.

     The carrying amounts under the Company's Credit Facility approximates fair
value because the rate on this agreement is variable, based on current market.
It is not practicable to estimate the fair value of receivables due on cemetery
contracts without incurring excessive costs because of the large number of
individual contracts with varying terms. The carrying amounts of preneed funeral
contracts and the related deferred preneed funeral revenues approximate their
fair value.

13. MAJOR SEGMENTS OF BUSINESS

     The Company conducts its funeral and cemetery operations throughout the
United States and in one Canadian province. The Company's Canadian operations
are not considered material to the Company's funeral operations.

     Operating and financial data for the Company's operating segments follows:

<TABLE>
<CAPTION>
                                            FUNERAL    CEMETERY   CORPORATE   CONSOLIDATED
                                            --------   --------   ---------   ------------
<S>                                         <C>        <C>        <C>         <C>
Net revenues:
  1997....................................  $ 88,834   $ 46,239    $    --      $135,073
  1996....................................    56,939     35,035         --        91,974
  1995....................................    36,261     27,740         --        64,001
Operating expenses:
  1997....................................  $ 65,754   $ 31,659    $ 7,560      $104,973
  1996....................................    40,939     24,898      5,848        71,685
  1995....................................    27,442     19,263      4,782        51,487
</TABLE>

                                      F-21
<PAGE>   51
                        EQUITY CORPORATION INTERNATIONAL

           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)

<TABLE>
<CAPTION>
                                            FUNERAL    CEMETERY   CORPORATE   CONSOLIDATED
                                            --------   --------   ---------   ------------
<S>                                         <C>        <C>        <C>         <C>
Income from operations:
  1997....................................  $ 23,080   $ 14,580    $(7,560)     $ 30,100
  1996....................................    16,000     10,137     (5,848)       20,289
  1995....................................     8,819      8,477     (4,782)       12,514
Identifiable assets:
  1997....................................  $496,267   $207,775    $13,658      $717,700
  1996....................................   294,373    134,229     15,289       443,891
  1995....................................   177,412    119,566      8,181       305,159
Depreciation and amortization:
  1997....................................  $  6,411   $  1,605    $   412      $  8,428
  1996....................................     3,358      1,118        325         4,801
  1995....................................     2,082      1,107        269         3,458
Capital expenditures:
  1997....................................  $  6,717   $  5,090    $   714      $ 12,521
  1996....................................     4,580      2,997        741         8,318
  1995....................................     5,442      1,380        869         7,691
Number of operating locations at:
  December 31, 1997.......................       259         76         --           335
  December 31, 1996.......................       178         64         --           242
  December 31, 1995.......................       119         61         --           180
</TABLE>

14. QUARTERLY FINANCIAL DATA (UNAUDITED)

<TABLE>
<CAPTION>
                                                          FIRST    SECOND     THIRD    FOURTH
                                                         -------   -------   -------   -------
<S>                                                      <C>       <C>       <C>       <C>
1997
  Net revenues.........................................  $32,254   $30,912   $33,151   $38,756
  Gross profit.........................................   10,000     8,335     8,442    10,883
  Net income...........................................    4,490     3,056     3,174     3,979
  Earnings per share:
     Basic.............................................  $  0.22   $  0.15   $  0.15   $  0.19
     Assuming full dilution............................  $  0.22   $  0.15   $  0.15   $  0.19
1996
  Net revenues.........................................  $23,080   $21,526   $21,052   $26,316
  Gross profit.........................................    7,386     6,134     5,243     7,374
  Net income...........................................    2,237     2,645     2,112     3,332
  Earnings per share:(1)
     Basic.............................................  $  0.15   $  0.15   $  0.11   $  0.17
     Assuming full dilution............................  $  0.15   $  0.14   $  0.11   $  0.17
</TABLE>

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

(1) Earnings per share for 1996 quarters reflect the effects of a 3-for-2 stock
    split in October 1996.

                                      F-22
<PAGE>   52

                       REPORT OF INDEPENDENT ACCOUNTANTS

To the Stockholders and Board of Directors of
Equity Corporation International:

     Our report on the consolidated financial statements of Equity Corporation
International and subsidiaries is included on page F-2 of this Form 10-K. In
connection with our audits of such financial statements, we have also audited
the related financial statement schedule listed in Item 14(a) in this Form 10-K.

     In our opinion, the financial statement schedule referred to above, when
considered in relation to the basic financial statements taken as a whole,
presents fairly, in all material respects, the information required to be
included therein.

                                            COOPERS & LYBRAND L.L.P.

Houston, Texas
March 5, 1998

                                       S-1
<PAGE>   53

                        EQUITY CORPORATION INTERNATIONAL

                SCHEDULE II -- VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                                        ADDITIONS
                                                 ------------------------
                                     BALANCE     CHARGED TO   CHARGED TO                 BALANCE AT
                                    BEGINNING    COSTS AND       OTHER                      END
           DESCRIPTION               OF YEAR      EXPENSES    ACCOUNTS(1)   DEDUCTIONS    OF YEAR
           -----------              ---------    ----------   -----------   ----------   ----------
<S>                                 <C>          <C>          <C>           <C>          <C>
Year ended December 31, 1997:
  Allowance for bad debts and
     Contract cancellations.......  $4,085,206   $6,250,451   $1,269,631    $5,411,263   $6,194,025
                                    ==========   ==========   ==========    ==========   ==========
Year ended December 31, 1996:
  Allowance for bad debts and
     Contract cancellations.......  $2,815,081   $3,741,729   $  940,201    $3,411,805   $4,085,206
                                    ==========   ==========   ==========    ==========   ==========
Year ended December 31, 1995:
  Allowance for bad debts and
     Contract cancellations.......  $2,294,843   $3,217,125   $  617,754    $3,314,641   $2,815,081
                                    ==========   ==========   ==========    ==========   ==========
</TABLE>

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

(1) Relates to valuation allowance established at acquired companies on the date
    of acquisitions.

                                       S-2
<PAGE>   54

                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
      EXHIBIT NO,                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
            3.1+         -- Amended and Restated Certificate of Incorporation (filed
                            as Exhibit 4.1 to the Company's Registration Statement on
                            Form S-8 (Reg. No. 33-98052))
            3.2+         -- Amended and Restated Bylaws (filed as Exhibit 4.3 to the
                            Company's Registration Statement on Form S-8 (Reg. No.
                            33-98052))
            4.1+         -- Form of Certificate representing shares of Common Stock
                            (filed as Exhibit 4.1 to the Company's Registration
                            Statement on Form S-1 (Reg. No. 33-82546))
            4.2+         -- Stockholder Rights Agreement, dated October 31, 1994,
                            between the Company and American Stock Transfer & Trust
                            Company, as Rights Agent (filed as Exhibit 4.2 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1994)
            4.3+         -- Certificate of Designation of the Series One Junior
                            Participating Preferred Stock (filed as Exhibit 4.2 to
                            the Company's Registration Statement on Form S-8 (Reg.
                            No. 33-98052))
            4.4+         -- First Amendment to Stockholder Rights Agreement, dated
                            September 10, 1996, between the Company and American
                            Stock Transfer & Trust Company, as Rights Agent (filed as
                            Exhibit 6 to the Company's Registration Statement on Form
                            8-A/A (Amendment No. 2)).
            4.5+         -- Registration Agreement, dated December 22, 1995, among
                            Equity Corporation International, Investment Capital
                            Corporation and Service Corporation International (filed
                            as Exhibit 4.1 to the Company's Registration Statement on
                            Form S-3 (Reg. No. 33-80841))
           10.1+*        -- Employment Agreement, dated February 1, 1994, between the
                            Company and James P. Hunter, III (filed as Exhibit 10.1
                            to the Company's Registration Statement on Form S-1 (Reg.
                            No. 33-82546))
           10.2+*        -- Employment Agreement, dated March 7, 1994, between the
                            Company and Jack D. Rottman (filed as Exhibit 10.4 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.3+*        -- Employment Agreement, dated July 22, 1994, between the
                            Company and Billy C. Wells (filed as Exhibit 10.5 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.4+*        -- Employment Agreement, dated February 1, 1995, between the
                            Company and W. Cardon Gerner (filed as Exhibit 10.23 to
                            the Company's Annual Report on Form 10-K for the year
                            ended December 31, 1994)
           10.5+*        -- Employment Agreement, dated April 8, 1996 between the
                            Company and William C. McNamara (filed as Exhibit 99.2 to
                            the Company's report on Form 8-K filed on May 3, 1996)
           10.6+*        -- Stockholder's Agreement, dated June 30, 1994, between the
                            Company and Jack D. Rottman (filed as Exhibit 10.7 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
           10.7+         -- Stock Registration Agreement, dated February 1, 1994,
                            among the Company and Investment Capital Corporation,
                            James P. Hunter, III and Robert W. Loftis (filed as
                            Exhibit 10.10 to the Company's Registration Statement on
                            Form S-1 (Reg. No. 33-82546))
           10.8+         -- First Amendment to Stock Registration Agreement, dated
                            September 1, 1994, among the Company and Investment
                            Capital Corporation, Kanawha, L.L.C., James P. Hunter,
                            III and Robert W. Loftis (filed as Exhibit 10.11 to the
                            Company's Registration Statement on Form S-1 (Reg. No.
                            33-82546))
</TABLE>
<PAGE>   55

<TABLE>
<CAPTION>
      EXHIBIT NO,                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
           10.9+         -- Second Amendment to Stock Registration Agreement, dated
                            May 31, 1995, among the Company and James P. Hunter, III,
                            Investment Capital Corporation, Kanawha, L.L.C., The
                            Loftis Foundation, Inc. and Robert Wayne Loftis (filed as
                            Exhibit 10.12 to the Company's Registration Statement on
                            Form S-1 (Reg. No. 33-92876))
           10.10+*       -- Equity Corporation International Amended and Restated
                            1994 Long-Term Incentive Plan, amended as of October,
                            1996 (filed as Exhibit 10.10 to the Company's Annual
                            Report on Form 10-K for the year ended December 31, 1996)
           10.11*        -- Amendment to Amended and Restated Equity Corporation
                            International 1994 Long-Term Incentive Plan, dated May
                            21, 1997
           10.12+*       -- Form of Incentive Stock Option Agreement for Executive
                            Officers under the 1994 Long-Term Incentive Plan (filed
                            as Exhibit 10.13 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1994)
           10.13+*       -- Form of Non-Qualified Employee Stock Option Agreement for
                            Executive Officers under 1994 Long-Term Incentive Plan
                            (filed as Exhibit 10.14 to the Company's Annual Report on
                            Form 10-K for the year ended December 31, 1994)
           10.14+*       -- Form of Non-Qualified Stock Option Agreement for
                            employees under the 1994 Long-Term Incentive Plan (filed
                            as Exhibit 10.12 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1995)
           10.15+*       -- Form of Non-Qualified Employee Stock Option Agreement for
                            employees of the Cemetery Division under the 1994
                            Long-Term Incentive Plan (filed as Exhibit 10.13 to the
                            Company's Annual Report on Form 10-K for the year ended
                            December 31, 1995)
           10.16+*       -- Form of Non-Qualified Stock Option Agreement for
                            Non-Employee Directors under the 1994 Long-Term Incentive
                            Plan (filed as Exhibit 10.15 to the Company's Annual
                            Report on Form 10-K for the year ended December 31, 1994)
           10.17*        -- Form of Non-Qualified Employee Stock Option Agreement for
                            Executive Officers under the 1994 Long-Term Incentive
                            Plan, dated August 14, 1997
           10.18+*       -- Option #2 of Amendment and Restatement of Agreement
                            between ECI Cemetery Services, Inc. and certain employees
                            concerning replacement of former deferred compensation
                            arrangements with restricted stock award programs (filed
                            as Exhibit 10.15 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1995)
           10.19+*       -- Option #3 of Amendment and Restatement of Agreement
                            between ECI Cemetery Services, Inc. and certain employees
                            concerning replacement of former deferred compensation
                            arrangements with restricted stock award programs (filed
                            as Exhibit 10.16 to the Company's Annual Report on Form
                            10-K for the year ended December 31, 1995)
           10.20+        -- Form of Indemnification Agreement with Executive Officers
                            and Directors (filed as Exhibit 10.13 to the Company's
                            Registration Statement on Form S-1 (Reg. No. 33-82546))
           10.21*        -- Form of Executive Severance Agreement dated effective
                            August 14, 1997.
           10.22+*       -- Equity Corporation International 1997 Employee Stock
                            Purchase Plan (filed as Exhibit 4.7 to the Company's
                            Registration Statement on Form S-8 (Reg. No. 333-25303))
           10.23+*       -- Consulting Agreement, dated as of September 12, 1996,
                            between the Company and James P. Hunter, III (filed as
                            Exhibit 10.25 to the Company's Annual Report on Form 10-K
                            for the year ended December 31, 1996)
</TABLE>
<PAGE>   56

<TABLE>
<CAPTION>
      EXHIBIT NO,                                DESCRIPTION
      -----------                                -----------
<C>                      <S>
           10.24+        -- Amended and Restated Credit Agreement, dated September 2,
                            1997, among the Company, the Banks named therein and
                            NationsBank of Texas, N.A., as Agent for the Banks (filed
                            as Exhibit 10.1 to the Company's Quarterly Report on Form
                            10-Q for the quarterly period ended September 30, 1997)
           21.1          -- List of Subsidiaries as of December 31, 1997
           23.1          -- Consent of Coopers & Lybrand L.L.P.
           24.1          -- A power of attorney, pursuant to which amendments to this
                            Report may be filed, is included on the signature page
                            contained in Part IV of this Report
           27            -- Financial Data Schedule
           27.1          -- Restated Financial Data Schedules
</TABLE>

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

+ Incorporated herein by reference to the indicated filing.

* Management contract or compensatory plan.